Accountancy and Audit Archives

Financial Reporting Dossier

A. KEY GLOBAL UPDATES

1. IASB: ILLUSTRATIVE EXAMPLES ON REPORTING UNCERTAINTIES IN FINANCIAL STATEMENTS

On November 28, 2025, the International Accounting Standards Board, in response to stakeholders’ concerns about the equity of information in financial statements relating to climate-specific and other uncertainties, issued illustrative examples on reporting such uncertainties in the financial statements.

Reporting uncertainties in the financial statements involves the exercise of judgement in determining what needs to be disclosed. This highlights the need for guidance to ensure consistency and sufficiency of disclosures relating to such uncertainties.

The examples highlight the following:

Application of materiality for specific disclosures required by IFRS (Para 31 – IAS 1)
Estimates used to measure recoverable amounts of cash-generating units containing goodwill or intangible assets with indefinite useful lives (Para 134 – IAS 36)
Sources of estimation uncertainty (Para 125 – IAS 1)
Credit Risk (Para 35A – IFRS 7)
Indication of the uncertainties about the amount or timing of those outflows among other disclosures (Para 85 – IAS 37)
Aggregation and disaggregation (Para 41 – IFRS 18)

The above examples reiterate the disclosure requirements prescribed in the above-mentioned standards and do not discuss any new matters.

2. FASB: NEW STANDARD TO IMPROVE INTERIM REPORTING

On December 08, 2025, the Financial Accounting Standards Board, to improve the guidance on interim reporting by improving the navigability of the required interim disclosures and clarifying when the guidance is applicable, issued a Narrow-Scope Improvements through Accounting Standards Update (ASU) – Interim Reporting (Topic 270).

The improvements are issued following feedback from the stakeholders about the challenges and complexity of Topic 270. As per the Financial Accounting Standards Board these challenges is a result of development of the source literature, the initial codification of the historical content, and subsequent amendments to the Topic as new accounting guidance was issued over time necessitating the improvements in Accounting Standards Update (ASU) – Interim Reporting (Topic 270).

The objective of the amendments is to provide clarity about the current requirements, rather than evaluate whether to expand or reduce interim disclosure requirements. These include:

Applicability of Topic 270
Types of interim reporting
Form and content of interim financial statements
Disclosure principle that requires entities to disclose events since the end of the last annual reporting period that have a material impact on the entity

These amendments in the Accounting Standards Update (ASU) – Interim Reporting (Topic 270) are effective for interim reporting periods within annual reporting periods beginning after December 15, 2027, for public business entities and for interim reporting periods within annual reporting periods beginning after December 15, 2028, for entities other than
public business entities. Early adoption is permitted for all entities.

3. FASB: NEW STANDARD TO IMPROVE HEDGE ACCOUNTING GUIDANCE

On November 25, 2025, the Financial Accounting Standards Board, to clarify certain aspects of the guidance on hedge accounting and to address several incremental hedge accounting issues arising from the global reference rate reform initiative, issued a Hedge Accounting Improvements through the Accounting Standards Update (ASU) – Derivatives and Hedging (Topic 815).

The improvements are a follow up to the amendments in the 2019 proposed update, which as per the stakeholders was inadequate in resolving the issues encountered by the stakeholders. Further, a need for update in several areas of the hedge accounting guidance to address the effects of reference rate reform on hedge accounting were identified in 2021 by the stakeholders.

The objective of the updates is to more closely align hedge accounting with the economics of an entity’s risk management activities. The following issues are discussed in the updates

Similar Risk Assessment for Cash Flow Hedges: A group of individual forecasted transactions to have similar risk exposure rather than a shared risk exposure
Hedging Forecasted Interest Payments on Choose-Your-Rate Debt Instruments: A module with simplified assumptions to assess the probability of occurrence of forecasted transactions and hedge effectiveness.
Cash Flow Hedges of Nonfinancial Forecasted Transactions: Allows hedge accounting for eligible components of forecasted spot-market transactions, forward-market transactions, and subcomponents of explicitly referenced components in an agreement’s pricing formula.
Net Written Options as Hedging Instruments: Accommodates differences in the loan and swap markets that resulted from the cessation of the LIBOR reference rate and eliminates the requirement for the net written option test in certain instances.
Foreign-Currency-Denominated Debt Instrument as Hedging Instrument and Hedged Item (Dual Hedge): Eliminate the recognition and presentation mismatch related to a dual hedge strategy (that is, a hedge for which a foreign currency-denominated debt instrument is both designated as the hedging instrument in a net investment hedge and designated as the hedged item in a fair value hedge of interest rate risk).

These amendments in the Accounting Standards Update (ASU) – Derivatives and Hedging (Topic 815) are effective from annual reporting periods beginning after December 15, 2026, and interim periods within those annual reporting periods. For entities other than public business entities, the amendments are effective for annual reporting periods beginning after December 15, 2027, and interim periods within those annual reporting periods. Early adoption is permitted for all entities.

4. FASB: NEW STANDARD TO ADD GUIDANCE ON ACCOUNTING FOR GOVERNMENT GRANTS BY BUSINESSES

On December 04, 2025, the Financial Accounting Standards Board, to improve generally accepted accounting principles (GAAP) by establishing authoritative guidance on the accounting for government grants received by business entities, issued updates relating to accounting for Government Grants received by Business Entities through the Accounting Standards Update (ASU) – Government Grants (Topic 832).

These updates bring in specific authoritative guidance about the recognition, measurement, and presentation of a grant received by a business entity from a government which the GAAP did not provide. The absence of this guidance in the GAAP led the business entities to refer similar but not specific guidance on IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance, Topic 450 – Contingencies (US GAAP) and Subtopic 958-605 – Not-for-Profit Entities—Revenue Recognition. Hence, to reduce diversity in practice and increase consistency among business entities these updates have been issued.

The following amendments are affected to the updates:

Recognition criteria of a government grant received by a business entity if it meets the recognition guidance for a grant related to an asset or a grant related to income and depending upon probability of compliance with the conditions attached to the grant and the receivability of the grant.
A grant related to an asset to be recognized on the balance sheet as a business entity incurs the related costs for which the grant is intended to compensate, either as a Deferred income (the deferred income approach) or as an adjustment to the cost basis in determining the carrying amount of the asset (the cost accumulation approach).
In case of deferred income approach:

Measurement: a systematic and rational basis for income recognition over the periods in which a business entity recognizes as expenses the costs for which the grant is intended to compensate.

Presentation: a general heading such as other income or deducted from the related expense.
In case of cost accumulation approach:

Measurement: no separate subsequent recognition of the government grant proceeds in earnings. Depreciation or subsequent accounting depending upon the carrying amount of the asset.

These amendments in the Accounting Standards Update (ASU) – Government Grants (Topic 832) are effective for annual reporting periods beginning after December 15, 2028, and interim reporting periods within those annual reporting periods. For entities other than public business entities, the amendments are effective for annual reporting periods beginning after December 15, 2029, and interim reporting periods within those annual reporting periods Early adoption is permitted for all entities.

5. IAASB: NARROW-SCOPE AMENDMENTS RELATED TO IESBA’S USING THE WORK OF EXPERTS

On January 05, 2026, the International Auditing and Assurance Standards Board issued a narrow-scope amendments to its standards arising from the International Ethics Standards Board for Accountants’ (IESBA) Using the Work of an External Expert project.

The following standards stands amended:

ISA 620 – Using the work of an auditor’s expert
ISRE 2400 (Revised) – Engagements to Review Historical Financial Statements
ISAE 3000 (Revised) – Assurance Engagements Other than Audits or Reviews of Historical Financial Information
ISRS 4400 (Revised) – Agreed-upon procedures engagements

The amends relates to ethical requirements include provisions related to using the work of an expert, evaluation of competence, capabilities and objectivity of the expert, Prohibition on using the work of an expert if necessary competence or capabilities is not possessed or if no such evaluation is possible.

6. FRC: THEMATIC REVIEW: REPORTING BY THE UK’S SMALLER LISTED COMPANIES

The Financial Reporting Council, to support a high quality of reporting by the UK’s smaller listed companies and by doing so enhance investor confidence in the said companies, issued operational insights in its “Thematic Review: Reporting by the UK’s smaller listed companies”. The review is based on 20 companies with year-ends between September 2024 and April 2025 operating in a range of market sectors listed outside of the FTSE 350.

The publication highlight improvement in the following areas:

Revenue: An accounting policy on revenue recognition for all material revenue streams should be aptly disclosed and should be consistent with the company’s business model. Explanations relating to the timing of satisfaction of performance obligations, determination of the transaction price, agent versus principal considerations, and the associated judgements should also be aptly disclosed as a part of the accounting policy.
Cash flow statements: A clear explanation of specific transactions and the rationale for the classification of such items as operating, investing and financing activities should be provided. Consistency between the amount in the cashflow and other information must be ensured.
Impairment of non-financial assets: Disclosure relating to the impairment reviews of non-financial assets, significant judgements and estimates, key assumptions and sensitivity analysis.
Financial instruments: Company specific accounting policies for more complex financial instruments including initial classification and subsequent measurement should be disclosed.

B. GLOBAL REGULATORS – ENFORCEMENT ACTIONS AND INSPECTION REPORTS

1. THE FINANCIAL REPORTING COUNCIL, UK

a) Sanctions against KPMG LLP and Anthony Sykes

The Financial Reporting Council (FRC) in relation to serious breaches of the International Standards on Auditing (ISAs) in the statutory audit of the financial statements of N Brown Group plc (N Brown) for the financial year ended 26 February 2022 (FY22) by KPMG LLP (KPMG), imposed sanctions against KPMG and the concern Audit Engagement Partner in the Final Settlement Decision Notice (FSDN) under the Audit Enforcement Procedure.

KPMG and the concern Audit Engagement Partner have admitted to these breaches of the International Standards on Auditing (ISAs) in the audit work performed on impairment of non-current assets.

As per the International Accounting Standard 36 (IAS 36) a non-current asset should be tested for impairment if there are indications that the carrying value is more than the highest amount to be recovered through its use or sale by the company. The Auditors are required to determine if these impairment testing are performed in accordance with the standards. Impairment testing helps reflect accurate picture of the company’s financial position, ensuring that the company’s assets are not overstated.

N Brown is one of the UK’s largest online clothing and footwear retailers and at the relevant time was listed on the Alternative Investment Market of the London Stock Exchange. In FY 2022, there was indication of impairment, as the group’s market capitalisation was substantially lower than its net assets. The audit team identified impairment of non-current assets as a significant risk and key audit area for the audit.

The breaches in the audit performed with respect to IAS 36 is as under:

Carrying value of the cash generating unit (CGU).
Impairment model methodology.
Cash flow forecasts.
Discount rate.
Sensitivity analysis.
Reconciliation to market capitalisation
The audit’s team’s overall conclusions.

Even after the breaches mentioned above, the FSDN has not questioned the truth or fairness of the FY 2022 financial statements. Although the inadequate audit work on impairment led to an overstatement of headroom (being the difference between the recoverable amount and carrying value), it has not been alleged that N Brown should have recognised an impairment in FY 2022.

B) FRC IMPOSES SANCTIONS AGAINST BDO LLP AND TWO AUDIT ENGAGEMENT PARTNERS

The FRC, in relation to misconduct by BDO LLP (BDO) and two former audit engagement partners, has imposed sanctions under the Accountancy Scheme against the BDO and its former partners.

The sanctions were imposed following a formal complaint against the respondents in April 2025, which led to an investigation into their conduct under the given circumstances.

In the investigation it was found that a Senior Manager was able to pursue, undetected, a dishonest course of conduct on numerous audits between 2015 and 2019, which included: creating false audit evidence, causing auditor’s reports to be issued without approval from the relevant audit engagement partner, and inserting electronic copies of the audit engagement partners’ signatures in auditor’s reports without their approval.

The outcome of the investigation into the Senior Manager, which provides further details of their Misconduct and the sanctions imposed, was published in November 2024.

The misconduct found in the investigation in the present case is as under:

BDO’s inadequate response to internal reports which raised or should have raised concerns as to the Senior Manager’s honesty and integrity.
Deficiencies in BDO’s systems and controls for ensuring adequate audit supervision by engagement partners, and audit quality in the period 2012-2019.
The failure of the one of the former partners (in the period 2014 – 2019) and the other former partners (in the period 2015 – 2019) to adequately supervise, monitor and oversee 21 and 13 audits respectively, on which the Senior Manager worked, which resulted in each case in an Auditor’s Report being issued without their authority and, in some cases, where inadequate, or no, audit evidence had been obtained.
One of the partner’s issuance of 10 Auditor’s Reports (for financial years ending between 2015-2018) in relation to audits on which the Senior Manager worked, when insufficient audit evidence had been obtained and where it is inferred that he had carried out no, or very limited, review of such evidence (if any) as had been obtained.
BDO’s liability for the Misconduct of the Senior Manager and the former partners.

2. THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (PCAOB)

a) PCAOB Sanctions Audit Firm, an Owner of That Firm, and a Former Audit Manager for Multiple Violations of PCAOB Rules and Standards

On January 13, 2026, The PCAOB, in the case involving violations of PCAOB rules and auditing standards in connection with the integrated audit of a public company – Genie Energy Ltd. (“Genie”) – for the year ended December 31, 2022, announced an order sanctioning to Zwick CPA, PLLC(“Firm”), Jack Zwick (“Zwick”) and (2) Jeffrey Hoskow (“Hoskow”).

Violations Found By the PCAOB

Failure to properly plan, identify, and assess the risks of material misstatement.
Failure to obtain sufficient appropriate audit evidence to support the Firm’s opinion on internal control over financial reporting.
Failure to obtain sufficient appropriate audit evidence as to Genie’s reported revenue and unbilled revenue.
Failure to properly supervise the work of the Firm’s engagement team members.
Failure to prepare audit documentation pursuant to PCAOB standards.

b) PCAOB Sanctions U.S. Audit Firm for Violations Related to Communications Between Predecessor and Successor Auditors

On September 23, 2025, The PCAOB, in the case involving violations of PCAOB rules and auditing standards in connection with its transfer of draft workpapers to the Successor Auditors, announced an order sanctioning to Marcum Asia CPAs, LLP, a New York-headquartered firm formerly known as Marcum Bernstein & Pinchuk LLP (“Marcum BP”).

Violations Found By the PCAOB

Failure to adhere to the PCAOB rules and auditing standards relating to transfer of draft workpapers to the Successor Auditor.
Failure to reach an understanding with the successor auditor as to the use of the draft workpapers, in violation of under AS 2610, “Initial Audits -Communications Between Predecessor and Successor Auditors.”

Due to above violations, the successor auditor improperly used the draft workpapers in its audits and issued an unqualified audit report on the Company’s financial statements for the fiscal year 2015 till 2017. This conduct was the subject of a November 2023 PCAOB enforcement settlement.

c) PCAOB Sanctions Former Audit Partner for Multiple Violations of PCAOB Rules and Standards

On October 25, 2025, The PCAOB, in case of multiple violations of its rules and standards, announced an order imposing sanctions on a former partner in the Lima, Peru, office of Tanaka, Valdivia, Arribas & Asociados Sociedad Civil de Responsabilidad Limitada (“EY Peru”).

The former partner was the partner responsible for EY Peru’s full scope component audit (for the year ended December 31, 2020) of Gilat Networks Peru S.A. (“GNP”), a Latin American subsidiary of an Israel-based provider of satellite-based broadband communications.

Violations Found By the PCAOB

The PCAOB found that during the GNP audit work, the former partner:

Violated its rules and standards in evaluating GNP’s revenue recognition, an identified fraud risk;
Failure to appropriately supervise the GNP engagement team; and
Failure to prepare audit documentation pursuant to PCAOB standards.

d) Deficiencies in Firm Inspection Reports:

K G Somani & Co. LLP

The Public Company Accounting Oversight Board (PCAOB) has issued a report detailing significant deficiencies in the audits conducted by K G Somani & Co. LLP. These deficiencies, which span various aspects of the firm’s audit practices, have raised serious concerns regarding the quality of their audits, compliance with PCAOB rules, and audit independence. Below is an overview of the key findings from the PCAOB inspection report, categorized into several critical areas:

1) Audits with Unsupported Opinions

One of the most concerning findings in the PCAOB inspection report is the firm’s failure to obtain sufficient appropriate audit evidence to support its audit opinions, particularly regarding the financial statements and Internal Control Over Financial Reporting (ICFR). Specific deficiencies identified in this area include:

Issuer A (Information Technology):

Revenue, Accounts Receivable, Cash, Goodwill, and Intangible Assets: The firm did not perform adequate testing of these key areas, including revenue recognition and the valuation of goodwill and intangible assets.
Inadequate Testing of Revenue Transactions: The firm failed to adequately test revenue transactions to ensure they were correctly recorded in accordance with accounting standards.
Failure to Evaluate Key Controls: The audit did not adequately assess controls over critical areas such as journal entries or accounts receivable, which could have flagged material misstatements.
Insufficient Fraud Risk Assessment: The firm did not perform sufficient procedures related to journal entries, which could indicate potential fraud. This failure led to an incomplete evaluation of the fraud risks inherent in the audit.

The deficiencies in obtaining sufficient evidence for these areas have resulted in unsupported audit opinions on the financial statements and ICFR of Issuer A. This raises concerns about the accuracy of the firm’s audit conclusions and whether the financial statements provided to stakeholders were truly reliable.

2) Other Instances of Non-Compliance

The inspection also identified several other areas where the firm did not comply with PCAOB standards, further compromising the reliability of their audits. These non-compliance issues include:

Journal Entries: The firm did not perform sufficient procedures to ensure that the population of journal entries was complete when testing for possible material misstatements due to fraud, as outlined in AS 1105. This lack of thorough testing increases the risk of overlooking fraudulent activity in the audit.
Audit Independence: The firm failed to properly assess the compliance of audit participants with independence requirements, as mandated by AS 2101. This represents a violation of critical PCAOB standards and raises concerns about the objectivity and integrity of the audit process.
Risk Identification: The firm did not adequately inquire with the audit committee and the internal audit function about material misstatement risks, including fraud risks, as required under AS 2110. This failure in communication could have led to an incomplete or inaccurate risk assessment for the audit.
Internal Control Reports: The firm’s internal control report was deficient, as it failed to reference the financial statements for all years included in the Form 10-K, violating AS 2201. This omission raises concerns about the completeness and accuracy of the firm’s reporting on the effectiveness of internal controls over financial reporting.

3) Independence Issues

The inspection report also identified concerns regarding the firm’s audit independence, an area of particular importance for maintaining the integrity of the audit process. Specifically, the firm may have violated SEC and PCAOB rules regarding audit independence. An indemnification agreement between the audit client and the firm impaired the auditor’s independence, violating Rule 2-01(b) of Regulation S-X.

4) Quality Control

While no major criticisms were found regarding the firm’s quality control system, the PCAOB inspection raised concerns about the effectiveness of monitoring activities within the firm. These concerns suggest that there may be gaps in ensuring that audit procedures consistently align with PCAOB standards across all audits, which could increase the risk of non-compliance in future audits.

The deficiencies identified in the PCAOB inspection report reflect significant gaps in K G Somani & Co. LLP’s audit processes, especially in their testing procedures, risk assessments, and compliance with independence rules. The firm’s inability to test key areas adequately, such as revenue recognition, journal entries, and internal controls, may have led to inaccurate or unsupported opinions on the financial statements and ICFR of its clients. These findings underscore the critical need for corrective action to bring the firm’s audit practices into compliance with PCAOB standards.

Additionally, the potential breach of independence requirements due to the indemnification agreement with the audit client needs to be urgently addressed. The firm must also take steps to improve its internal quality control processes to prevent future instances of non-compliance.

The PCAOB has set a 12-month period for the firm to address these deficiencies. Failure to do so will result in public disclosure of any unresolved issues. The firm’s response to the PCAOB draft inspection report will be evaluated to ensure that the necessary corrective actions are taken to comply with PCAOB standards and maintain the integrity of its audits.

3. THE SECURITIES EXCHANGE COMMISSION (SEC)

a) SEC Charges ADM and Three Former Executives with Accounting and Disclosure Fraud

On January 27, 2026, The SEC in the matter of materially inflating the performance of one of the key segments i.e. Nutrition segment of Archer-Daniels-Midland Company (ADM) filed the following:

Charges against ADM and two former executives.
Litigated action against one of its former executives.

As per SEC, the said segment was one that ADM highlighted to its investors as an important driver of the company’s overall growth.

The SEC further highlighted the role of the former executives in directing the ‘adjustments’ to Nutrition segment with other segments of ADM to offset the falling targets in the Nutrition segment in fiscal year 2021 and 2022. These adjustments included retrospective rebates and price change between the Nutrition and Other segment which were not available to other customers thereby passing on the operating profit to Nutrition segment. These transactions thus helped ADM and the executives to show that the Nutrition segment has achieved the desired operating profit of 15% to 20% as promised by the executives to the investors.

The order finds that the above adjustments in annual and quarterly reports of ADM led to false and were misleading as these transactions were inconsistent with the representations by the ADM that intersegment transactions were recorded at amounts “approximating market”.

The former executives of ADM were charged with violating the antifraud provisions of the federal securities laws, reporting, books and records, and internal accounting control provisions of the federal securities laws in case of all the concern executives and aiding and abetting ADM’s violations of the antifraud and failing to reimburse ADM for certain executive compensation as required in case of one of the executive.

The following penal charges are levied:

ADM – civil penalty of $40,000,000
Executive 1 – Disgorgement and prejudgment interest – $404,343, Civil penalty of $125,000, three-year officer and director bar.
Executive 2 – Disgorgement and prejudgment interest – $575,610 and Civil penalty of $75,000
Executive 3 – Permanent injunctions, an officer and director bar, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and reimbursement of certain executive compensation to ADM pursuant to the Sarbanes-Oxley Act.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

As part of the reform process being undertaken by the Government of India, 29 existing labour legislations were consolidated into a unified framework comprising four labour codes, viz., the Code on Wages, 2019, the Code on Social Security, 2020, the Industrial Relations Code, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020, which were made effective from November 21, 2025. The Ministry of Labour & Employment published draft Central Rules and FAQs to enable assessment of the financial impact due to changes in regulations. The ASB of ICAI has also issued FAQs on key accounting implications arising from the New Labour Codes.

Given below are disclosures by a few select companies on the impact of the above Codes in their results for the quarter and 9 months ended 31st December 2025.

Extracts from the Standalone Financial Results for the quarter and nine months ended December 31, 2025

Reliance Industries Limited (₹ in crores)

Particulars Employee Benefits Expense	Quarter ended
	December 31, 2025	September 30, 2025	December 31, 2024
	Unaudited	Unaudited	Unaudited
	2,759	2,321	2,181

The Government of India has consolidated 29 existing labour legislations into a unified framework comprising four labour codes, viz., the Code on Wages, 2019, the Code on Social Security, 2020, the Industrial Relations Code, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020 (collectively referred to as the “Codes”). The Codes have been made effective from November 21, 2025. The Ministry of Labour & Employment published draft Central Rules and FAQs to enable assessment of the financial impact due to changes in regulations.

The incremental impact of these changes, assessed by the Company, on the basis of the information available, consistent with the guidance provided by the Institute of Chartered Accountants of India, is not material and has been recognised in the standalone financial results, of the Company for the quarter and nine months ended December 31, 2025. Once Central / State Rules are notified by the Government on all aspects of the Codes, the Company will evaluate impact, if any, on the measurement of employee benefits and would provide appropriate accounting treatment.

Tata Consultancy Services Limited (₹ in crores)

Particulars Profit before exceptional items and Tax	Quarter ended
	December 31, 2025	September 30, 2025	December 31, 2024
	Audited	Audited	Audited
	16,129	16,094	15,509
Exceptional Items
Re-structuring expenses	(79)	(850)	–
Statutory impact of new Labour Codes (Refer Note 3)	(2,128)	–	–
Provision towards legal claim	(1,010)	–	–
Profit before Tax	12,912	15,244	15,509

Note 3:

On November 21, 2025, the Government of India notified the four Labour Codes – the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020 – consolidating 29 existing labour laws. The Ministry of Labour & Employment published draft Central Rules and FAQs to enable assessment of the financial impact due to changes in regulations. The Company has assessed and disclosed the incremental impact of these changes on the basis of legal opinion obtained and the best information available, consistent with the guidance provided by the Institute of Chartered Accountants of India. Considering the materiality and regulatory-driven, non-recurring nature of this impact, the Company has presented such incremental impact as “Statutory impact of new Labour Codes” under “Exceptional items” in the standalone interim statement of profit and loss for the period ended December 31, 2025. The incremental impact consisting of gratuity of ₹1,816 crore and long-term compensated absences of ₹312 crore primarily arises due to change in wage definition. The Company continues to monitor the finalisation of Central / State Rules and clarifications from the Government on other aspects of the Labour Code and would provide appropriate accounting effect on the basis of such developments, as needed.

Infosys Limited (₹ in crores)

Particulars Profit before exceptional item and Tax	Quarter ended
	December 31, 2025	September 30, 2025	December 31, 2024
	Audited	Audited	Audited
	10,817	10,469	8,844
Exceptional Item
Impact of Labour Codes (Refer to Note c)	(1,146)	–	–
Profit before tax	9,671	10,469	8,844

Note c) Impact of Labour Codes:

On November 21, 2025, the Government of India notified provisions of the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020 (‘Labour Codes’), which consolidate twenty-nine existing labour laws into a unified framework governing employee benefits during employment and post-employment. The Labour Codes, amongst other things, introduces changes, including a uniform definition of wages and enhanced benefits relating to leave. The Company has assessed the financial implications of these changes, which has resulted in an increase in gratuity liability arising out of past service cost and an increase in leave liability by ₹1,146 crore. Considering the impact arising out of the enactment of the new legislation is an event of non-recurring nature, the Company has presented this incremental amount as “Impact of Labour Codes” under “Exceptional Item” in the Condensed Standalone Statement of Profit and Loss for the three months and nine months ended December 31, 2025.The Company continues to monitor the developments pertaining to Labour Codes and will evaluate the impact, if any, on the measurement of the employee benefits liability.

Tata Motors Limited (formerly TML Commercial Vehicles Limited)

(₹ in crores)

Particulars Profit before exceptional items and Tax	Quarter ended
	December 31, 2025	September 30, 2025	December 31, 2024
	Audited	Audited	Audited
	2,318	1,757	1,603
Exceptional Items-loss (net) (refer Note 4)	1,545	2,366	24
Profit/(loss) before tax	773	(609)	1,579

Note 4: Exceptional Items- Net losses/ (gains)

(₹ in crores)

Particulars	Quarter ended
Particulars	December 31, 2025	September 30, 2025	December 31, 2024
	Audited	Audited	Unaudited
Provision for/(reversal of) impairment of investment in subsidiary and associate companies	–	2,355	(1)
Stamp Duty charges	962	–	–
Statutory impact of new Labour Codes (refer Note (iii) below)	574	–	–
Provision for employee pension scheme	8	–	–
Reversal of impairment of property, plant and equipment and provision for Intangible assets under development (net)	–	–	(1)
Employee separation cost	1	1	4
Past Service cost- Post retirement Medicare scheme	–	–	–
Total	1,545	2,366	24

Note (iii):

On November 21, 2025, the Government of India notified the four Labour Codes – the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020 – consolidating 29 existing labour laws. The Ministry of Labour & Employment published draft Central Rules and FAQs to enable assessment of the financial impact due to changes in regulations. The Company has evaluated and disclosed the incremental impact of these changes using the best information currently available, consistent with the guidance provided by the Institute of Chartered Accountants of India. Considering the materiality and regulatory-driven, non-recurring nature of this impact, the Company has presented such incremental impact as “Statutory impact of new Labour Codes” in the financial results for the quarter and nine months ended December 31, 2025. The incremental impact consisting of gratuity of ₹482 crores and long-term compensated absences of ₹92 crores, primarily arises due to change in wage definition. The Company continues to monitor the finalisation of Central / State Rules and clarifications from the Government on other aspects of the Labour Code and would provide appropriate accounting effect on the basis of such developments as needed.

AXIS BANK LTD (₹ in crores)

Particulars Operating expenses (i)+(ii)	Quarter ended
	December 31, 2025	September 30, 2025	December 31, 2024
	Unaudited	Unaudited	Unaudited
	9,636.52	9,956.60	9,044.20
(i) Employees cost (Refer Note 7)	2,771.79	3.117.63	2,984.61
(ii) Other operating expenses	6,864.73	6,838.97	6,059.59

Note 7: On 21st November 2025, the Government of India consolidated 29 existing labour laws into a unified framework of four Labour Codes (including the Code on Social Security, 2020), collectively referred to as the ‘New Labour Codes’. Since Q3FY21, based on an internal policy, the Bank has been consistently provisioning for gratuity liability, in anticipation of the implementation of the Code on Social Security, 2020. In Q3FY26, the Bank has performed a preliminary assessment of the financial impact of the New Labour Codes based on the draft Central Rules and FAQs published by the Ministry of Labour and Employment, in line with the guidance from the Institute of Chartered Accountants of India. The Bank has charged to its Profit and Loss Account for Q3FY26 an amount of ₹25.44 crores towards gratuity, primarily due to changes in the wage definition. As on 31st December 2025, the Bank holds a cumulative provision of ₹434.09 crores towards the New Labour Codes. The Bank will monitor the finalisation of Central and State Rules relating to the New Labour Codes and adjust its estimates and provisions in subsequent reporting periods for gratuity and other aspects of the New Labour Codes, in accordance with applicable accounting standards.

HDFC BANK LIMITED (₹ in crores)

Particulars Operating expenses (i)+(ii)	Quarter ended
	December 31, 2025	September 30, 2025	December 31, 2024
	Unaudited	Unaudited	Unaudited
	18,771.04	17,977.92	17,106.41
(i) Employees cost (Refer Note 12)	7,203.17	6,461.29	5,950.41
(ii) Other operating expenses	11,567.87	11,516.63	11,156.00

Note 12: On November 21, 2025, the Government of India notified four Labour Codes – the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020, collectively referred to as the ‘New Labour Codes’, consolidating 29 existing labour laws. The Ministry of Labour & Employment has published draft Central Rules and FAQs on December 30, 2025, to facilitate assessment of the financial impact arising from these regulatory changes. Accordingly, the Bank has recognised an estimated incremental impact of ₹800.00 crore under ‘Employees cost’ in the Profit and Loss Account during the quarter and nine months ended December 31, 2025, considering best information available. The Bank continues to monitor the finalisation of Central and State Rules and clarifications from the Government on the New Labour Codes and would provide appropriate accounting effect on the basis of such developments, as needed.

LARSEN & TOUBRO LIMITED (₹ in crores)

Particulars Exceptional items before tax	Quarter ended
	December 31, 2025	September 30, 2025	December 31, 2024
	Reviewed	Reviewed	Reviewed
	(1,108.73)	(5,413.00)	–
Current tax	(279.05)	–	–
Exceptional Items (net of tax) (Refer Note ii)	(829.68)	(5,413.00)	–

Note (ii): Effective November 21, 2025, the Government of India consolidated 29 existing labour regulations into four Labour codes, namely, The Code on Wages, 2019, The Industrial Relations Code, 2020, The Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020, collectively referred to as the ‘New Labour Codes’. The New Labour Codes have resulted in a one-time material increase in provision for employee benefits on account of recognition of past service costs. Based on the requirements of New Labour Codes and the ICAI clarification, the Company has assessed and accounted the estimated incremental Impact of ₹829.68 crore (net of tax) as Exceptional Items in the financial results for the quarter and nine months ended December 31, 2025.

BCAJ Admin

The Limit of Long – Range Forecasting in Goodwill Impairment Reliability, Avoiding Optimism Bias and the Discipline of IND AS 36

Under Ind AS 36, assessing goodwill impairment via “value in use” restricts cash flow forecasts to a five-year maximum, unless explicitly justified. Companies often improperly extend and perpetually defer these projected inflows to avoid recognizing impairment. However, the Standard dictates that extended forecasts must be strictly reliable and validated by historical performance. Regulators like ESMA and NFRA emphasize that repeatedly missing past projections destroys forecast credibility. Furthermore, speculative future enhancements cannot be included. Ultimately, perpetually deferred cash flows fail the reliability test, rendering goodwill impairment unavoidable and mandatory.

INTRODUCTION

Impairment testing of goodwill under Ind AS 36 Impairment of Assets hinges on the recoverability of future economic benefits. The Standard allows for value in use (ViU) assessments using forecasted cash flows, but imposes strict conditions, particularly when entities seek to justify forecast periods beyond five years. In practice, many companies operating in high-tech or capital-intensive sectors rely on extended projections, sometime perpetually deferring expected cash flows to avoid impairment. This practice has drawn global and domestic regulatory scrutiny. This article examines a specific impairment issue involving extended forecast periods and repeatedly deferred cash flows, analysed through the framework of Ind AS 36.

THE ACCOUNTING ISSUE

Consider an Entity X operating in a technology-intensive industry, which acquired a business engaged in developing specialised hardware and embedded solutions. At the acquisition date, the acquired business is largely in a development phase, with limited commercial revenues. A substantial portion of the purchase consideration was recognised as goodwill, allocated to a single cash-generating unit (CGU).

For the purpose of annual impairment testing, the entity employed a ViU model. Management prepared explicit cash flow projections covering ten years, asserting that meaningful revenues and operating cash inflows are expected only in the later years of the forecast period. The use of a forecast period exceeding five years is justified on the basis that:

the industry has long development and customer qualification cycles;
commercial success is dependent on future regulatory or legislative changes; and
management has historical experience of products that took several years to generate revenue.

In the initial impairment tests following the acquisition, significant cash inflows were projected in years seven to ten. However, as time progressed, those cash inflows failed to materialise. In each subsequent impairment test, the management preserved the forecast profile but simply shifted the projected inflows forward by one year, effectively deferring them further into the future.

During one intermediate year, the entity recognised a partial impairment of goodwill, driven by changes in macroeconomic assumptions and discount rates. Yet in the years that followed, despite continued delays in achieving forecast revenues, management maintained the ten-year forecast horizon and did not recognise any further impairment. It was only when management revised its assumptions specifically around timing of inflows and reliability of long-range projections that a substantial impairment was finally recognised.

ISSUE

This evolving pattern of forecast deferral leads to a key technical question under Ind AS 36:

Can management continue to justify the use of an extended forecast period for goodwill impairment testing when prior long-term projections have repeatedly failed to materialise? Does such deferral comply with the requirements of Ind AS 36 for reliable and supportable assumptions?

ACCOUNTING ANALYSIS UNDER IND AS 36

Extended Forecast Periods- Justification Required

As per paragraph 33(b) of Ind AS 36, cash flow projections used in measuring value in use must be based on the most recent financial budgets or forecasts approved by management and cover a maximum period of five years, unless a longer period can be justified.

Paragraph 35 cautions that detailed, explicit and reliable financial budgets and forecasts of future cash flows for periods longer than five years are generally not available and are permitted only where management is confident of their reliability and can demonstrate its ability, based on past experience, to forecast cash flows over that longer period.

In the Entity X example above, repeated deferral of cash inflows without ever meeting prior projections strongly suggests that the extended period fails the reliability test.

The Reliability Trap Navigating Long Range Forecasts in Goodwill impairment

A nearly identical conclusion was reached in the European Securities and Markets Authority (ESMA) case – Decision ref EECS/0126-01, published in the 30th Extract from the FRWG (EECS)’s Database of Enforcement. There the enforcer found that repeated use of longer-duration (nine years in that case) forecast horizon, with inflows continually shifted forward, failed to meet the reliability threshold under IAS 36 (which is equivalent to Ind AS 36 in this respect). As a result, the forecast period was reduced to five years, and this adjustment triggered an impairment of goodwill.

Forecast Reliability and Historical Performance

Paragraph 34 of Ind AS 36 requires management to assess the reasonableness of assumptions by, examining the causes of differences between past projections and actual outcomes. This comparison is not optional: it is a direct test of forecast credibility. If historical forecasts have consistently failed to materialise, continued reliance on similar assumptions lacks support under the Standard.

This principle is echoed by the National Financial Reporting Authority (NFRA) in its publication – Audit Committee – Auditor Interactions Series 4 Audit of Accounting Estimates and Judgements Impairment of Non-financial Assets- Ind AS 36, SA 540 etc. NFRA explicitly calls on both auditors and audit committees to challenge management’s assumptions by evaluating past performance:

“Has the auditor tested the reasonableness and reliability of future growth projections, profit margins etc., by evaluating the historical trend of actual performance versus budget?” (Paragraph 46.10 of NFRA Series 4)

In case of Entity X, despite multiple years of underperformance relative to forecasts, management continued to defer project inflows without revisiting the model’s reliability, putting it at odds with both Ind AS 36 and NFRA expectations.

Exclusion of Future Enhancements

Paragraph 44 of Ind AS 36 prohibits the inclusion of cash flows that are expected to arise from future restructurings or from improving or enhancing the asset’s performance, unless those actions are already committed. This provision ensures that cash flow projections reflect the asset’s current condition and performance capability, not speculative or aspirational improvements.

In its Audit Committee – Auditor Interactions Series 4, NFRA directly reinforces this standard by urging auditors to scrutinize the nature of projected cash inflows:

“Has the auditor ensured the cash flow estimates exclude inflows and cost savings from future business or performance enhancements” (Paragraph 46.10 of NFRA Series 4)

In the Entity X scenario, although the model did not explicitly include planned restructurings, it effectively assumed that forecasted cash inflows would eventually materialise despite years of consistent underperformance. This implies an unstated expectation of future enhancements, in direct contradiction to the intent of paragraph 44 and NFRA’s caution against including such assumptions in ViU calculations.

Use of Internal vs. External Evidence

Paragraph 33(a) of Ind AS 36 prioritizes external market evidence over internal assumptions. NFRA flags this as a critical focus area:

“Has the auditor tested reasonableness of weightages given to internal and external data?”(Paragraph 46.10 of NFRA Series 4)

Entity X’s model relied entirely on internal conviction, with little alignment to market or regulatory developments.

CONCLUSION

The broader message is that goodwill cannot be supported indefinitely by cash flows that remain perpetually deferred. When time passes but value does not materialise, the issue ceases to be one of timing and becomes one of reliability and once reliability is lost, impairment becomes unavoidable. Ind AS 36 provides clear guardrails through its five-year forecast threshold and reliability clause. ESMA’s decision and NFRA’s Series 4 guidance reinforces these guardrails from a practical reinforcement perspective.

For preparers and auditors, the core lesson is that once management repeatedly fails to deliver on long-term forecasts, those forecasts lose credibility. At that point, impairment is not a conservative stance; it is required and should have been provided much earlier. Professional judgement must favour realism, supported by evidence, over hopeful deferral ensuring that asset values remain aligned with recoverable benefit.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

In the last few months, a large bank in the private sector has been in the news for alleged management-driven ‘improper’ entries passed in the books to overstate incomes and understate liabilities. Several internal reviews were carried out, and external agencies were appointed to investigate these allegations. The new management also gave impact on these ‘improper’ entries in the financial statements, which were then adopted by the Board of Directors.

Given below are disclosures in the financial statements and the report of the joint auditors for the same.

INDUSIND BANK LIMITED (YEAR ENDED 31ST MARCH 2025)

From Notes forming part of the Standalone Financial Statements

Note 17: Significant Matters and its impact

1. On March 10, 2025, the Bank filed a disclosure under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 stating that it had, during an internal review of process relating to other assets and other liabilities of derivative portfolio, noted discrepancies in these account balances, consequent to which an external firm appointed by the management had carried out an independent review to validate its internal findings. On March 20, 2025, the Board decided to appoint another independent professional firm to conduct a comprehensive investigation, amongst others, to identify the root causes of discrepancies, assess the correctness of accounting treatment and its impact on the financial statements, identify any lapses therein and establish accountability of persons involved. The Bank has since received reports from both the firms. The investigation indicated that from FY 2016 to FY 2024, the Bank entered into several derivative transactions referred to as internal trades, wherein the accounting followed was improper and not in consonance with the accounting guidelines. This incorrect accounting resulted in recognition of notional income in the Profit and Loss Account with a corresponding balance in the other assets account over the years till FY 2023-2024. Based on quantification of accounting discrepancies that were identified and confirmed in the investigation report, other assets amounting to ₹1,959.98 crores, being accumulated notional profits since FY2016, have been written off/ derecognised by way of reduction from other income under Schedule 14 (V) as a prior period item in the current financial year.

2. During the review of other assets and other liabilities by the Internal Audit Department (IAD) of the bank, it was noted that certain incorrect manual entries resulted in an unsubstantiated increase in other assets and other liabilities amounting to ₹595.00 crores. The Bank has determined that these assets need to be set off against corresponding other liabilities. The rectification of these has been carried out. This has no impact on the profit of the Bank for the year ended March 31, 2025.

3. In conducting a review of the Bank’s microfinance portfolio for the nine-month period ended December 31, 2024, the IAD of the Bank noted incorrect recording of cumulative interest income of ₹673.82 crores and fee income of ₹172.58 crores for the said period. This incorrect interest and fee income (net of an interim provision of ₹322.43 crores and actual interest income for this period of ₹101.41 crores) aggregating to ₹422.56 crores has been reversed during the fourth quarter of the current year. This has, however, no impact on the profit of the Bank for the year ended March 31, 2025.

4. In respect of the above matters mentioned in note 17.1, 17.2 and 17.3, the auditors have filed letters u/s 143(12) of the Companies Act, 2013 read with Rule 13(1) to (4) of the Companies (Audit and Auditors) Rules, 2014 with the Bank, followed by Form ADT-4 along with the Bank’s reply to the Central Government, for suspected offence involving fraud. Further, with respect to these matters, the Board of Directors of the Bank suspects the occurrence of fraud against the Bank and the involvement therein of certain employees having a significant role in the accounting and financial reporting of the Bank. Accordingly, the Bank has made a filing to this effect with the stock exchanges on May 21, 2025.

5. The Bank, during its internal review, noted misclassification of certain microfinance loans as ‘standard assets’ along with accrual of interest income based on auditors’ observations. The Bank corrected this classification, resulting in an additional recognition of Non-Performing Advances aggregating to ₹1,885.19 crores. The Bank provided for these at a rate of 95% aggregating to ₹1,791.08 crores. This provision, together with a reversal of interest income of ₹178.12 crores, resulted in an adverse impact of ₹1,969.20 crores on the Profit & Loss Account of the Bank for the fourth quarter of the year ended March 31, 2025.

6. Through its internal financial review, the Bank also identified other instances of incorrect accounting that required rectification and have been rectified during the fourth quarter of the year ended March 31, 2025. These include the following:

Interest payment of ₹99.97 crores on certain borrowing instruments was not recognised in the Profit & Loss Account in earlier years.
A provision of ₹133.25 crores in respect of balances in Other Assets that are not expected to be realised.
Prior period operating expenses of ₹206.00 crores and income of ₹126.75 crores.
The Bank reviewed groupings and classification of the Profit & Loss items to assess compliance with prevailing guidelines. Based on the review, the Bank reclassified the following for the financial year ended March 31, 2025.
₹760.82 crores from interest income to other income.
₹157.90 crores from Provision (other than tax) & Contingencies to Other Operating Expense.

7. As a result of the above matters mentioned in note 17.1 to 17.6, any financial implications arising from past inaccurate regulatory submissions, including those to SEBI, Income Tax authorities, and the RBI, are currently unascertainable.

8. The Whole Time Director & Deputy CEO and Managing Director & CEO of the Bank resigned with effect from close of business hours on April 28, 2025 and April 29, 2025, respectively. The RBI vide its letter dated April 29, 2025, has approved the constitution of a “Committee of Executives” comprising of the Head – Consumer Banking and Chief Administrative Officer as members of the said Committee, to oversee the operations of the Bank under the oversight and guidance of an oversight committee of the Board. Accordingly, the Board appointed the said Committee on April 30, 2025. The Bank has made necessary filings with the stock exchanges in respect of the aforesaid matters.

9. The Board of Directors has taken necessary steps in addressing all the areas of concern and disclosing transparently at the appropriate stage. The Board of Directors initiated a comprehensive internal financial review of all the material financial statement balances. The Bank has given necessary accounting effects for all the identified discrepancies in the accounts and ensured that the financial statements for the current year give a true and fair view and are free from material misstatements, whether due to fraud or error. In this regard, the Bank has received recommendations from various internal and external agencies involved. These recommendations include strengthening policy and procedures, preparation and approval of accounting analysis, control and discipline over reconciliations, minimising manual accounting entries, automating processes, addressing manual overrides of control, etc. These shall be reviewed and implemented under the oversight of the Board.

Also, the Bank is in the process of taking necessary steps to assess roles and responsibilities and fix accountability for persons involved in any of these lapses. The Bank is fully committed towards taking these matters to their conclusion under applicable laws.

EXTRACTS FROM INDEPENDENT AUDITORS’ REPORT

Emphasis of Matters:

We draw attention to schedule 18(17.1) to 18(17.6) to the standalone financial statements, which explain that the Board commissioned an investigation/ review into the alleged discrepancies, covering the following significant matters:

a. Internal Trades Derivative Accounting under the head ‘Other Assets’ amounting to ₹1,959.98 crores, being accumulated notional profits since FY 2015-16, have been written off as a prior period item in the current financial year;

b. Incorrect accounting and subsequent reversal of cumulative interest income of ₹673.82 crore and Fee Income of ₹172.58 crores within the current financial year;

c. Certain incorrect Manual Entries posted in the ‘Other Assets’ and ‘Other Liabilities’ pertaining to prior years amounting to ₹595 crores have been set off during the current financial year.

The resultant findings from the investigation / review reports, in summary, revealed an involvement of senior Bank officials, including former Key Management Personnel (KMP), in overriding key internal controls across the aforesaid functions/ areas, and a concealment from the Board and the statutory auditors of the wrongful accounting practices adopted, over such period of time, as indicated in the respective investigation/ review reports.

Basis our evaluation of the findings in the above mentioned reports, in particular the likely involvement of senior management in the above matters, we have reasons to believe that suspected offences involving fraud may have been committed and thereby we have reported these matters to the Central Government under Section 143(12) of the Companies Act, 2013 read with Rule 13(1) to (4) of the Companies (Audit and Auditors Rules), 2014.

We draw attention to schedule 18(17.9) to the standalone financial statements, which explains that in light of the findings and adjustments noted above, in particular the override of management controls by KMPs, the Board of Directors initiated an internal review of material financial statement account captions and directed the Management and the Internal Audit Department to perform additional procedures such as reconciliations of system reports and listings with balances reflected in general ledger, test checks over such items in the listing and certain digital procedures over and above. Based on the above review, rectifications/ reclassifications, including those relating to prior-period items, were made to the accompanying standalone financial statements.

We draw attention to schedule 18(17.7) and 18(17.9) to the standalone financial statements, which state that the Bank is currently in the process of determining the accountability of the persons involved in the discrepancies and irregularities mentioned in the Emphasis of Matter paragraphs with reference to schedule 18(17.1) to 18(17.6) above and assessing the resultant legal or penal implications, if any, that may arise thereon.

Our opinion on the standalone financial statements is not modified with respect to these matters.

KEY AUDIT MATTERS

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the standalone financial statements for the year ended March 31, 2025. These matters were addressed in the context of our audit of the standalone financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

We have determined the matters described below to be the key audit matters to be communicated in our report. (extracts)

Key Audit Matters	How Was the Key Audit Matter Addressed in our Audit
Detection of Management Override of Controls identified in the investigation/ reviews carried out based on the decision by the Bank
The investigations/ reviews initiated by the Bank during the year identified override of key internal controls by senior management, including Key management personnel, and other material prior period errors. These events raised significant concerns regarding the financial reporting and governance of the Bank. Although the Bank has initiated corrective actions for the identified discrepancies, there remains a risk of unidentified matters due to potential management override of controls.	Our audit procedures included, but were not limited to, the following: Reviewed Board and Audit Committee minutes to understand management and governance responses to identified control breaches. Assessed the appropriateness of the scope and coverage of the investigations/ reviews initiated by the Bank in derivative transactions, micro finance loans and related accounts and Other Assets and Other Liabilities. Evaluated the scope of audit, independence, and competence of the external forensic experts engaged by the management to perform select procedures.
In view of the above, we considered the risk that the management may override system-based/ manual internal controls/ procedures as a Key Audit Matter for the financial year 2024-25.	Obtained a copy of the investigation/ review reports and verified whether the discrepancies noted therein have been rectified in the standalone financial statements as per the applicable Accounting Standards. Basis perusal of the aforesaid reports, we had a discussion with the external forensic expert and the Bank’s Head – Internal Audit for matters requiring clarification in the investigation report and internal review reports respectively. Reassessed audit risks on account of the findings in the external forensic investigation report and internal review reports. Performed enhanced / additional audit procedures, including sending out incremental balance confirmations, performing additional tests of details in response to the reassessed risks. Performed journal entry testing using specific risk-based criteria, with a specific focus on manual entries or involving high-risk accounts to identify material misstatements. Performed an independent reassessment of the valuation of derivatives in respect of additional samples to ensure compliance with the relevant RBI regulations. Perused the confirmations obtained by the Bank from the heads of the various functions/areas within the Bank on verification of certain aspects with respect to the financial reporting to mitigate the risk arising from potential management override of controls. Evaluated the adequacy of disclosures made in the standalone financial statements. The aforesaid audit procedures were inter alia explained as part of our presentation to those charged with the governance.

ANNEXURE A TO THE INDEPENDENT AUDITORS’ REPORT

Report on the Internal Financial Controls with reference to Standalone Financial Statements under Clause (i) of Sub-section 3 of Section 143 of the Companies Act, 2013 (‘the Act’)

Adverse Opinion

In our opinion, because of the possible effects of the material weaknesses described below on the achievement of the objectives of the control criteria, the Bank has not maintained adequate and effective internal financial controls with reference to the standalone financial statements as at March 31, 2025, based on the internal control with reference to financial statements criteria established by the Bank considering the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls over Financial Reporting (‘Guidance Note’)
issued by the Institute of Chartered Accountants of India (‘ICAI’).

We have considered the material weaknesses identified and reported below in determining the nature, timing, and extent of audit tests applied in our audit of the standalone financial statements of the Bank for the year ended March 31, 2025, and these material weaknesses do not affect our opinion on the standalone financial statements of the Bank.

Basis for Adverse Opinion:

As explained in schedule 18(17) on the standalone financial statements for the year ended March 31, 2025, particularly override of controls by erstwhile Key Managerial Personnel and senior bank personnel, the Bank had initiated investigations/ reviews, which led to identification of several deficiencies in the internal controls with reference to maintenance of books of account and preparation of standalone financial statements. These indicate that the control environment was ineffective as of March 31, 2025.

A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial control with reference to standalone financial statements, such that there is a reasonable possibility that a material misstatement of the Bank’s annual or interim standalone financial statements will not be prevented or detected on a timely basis.

EXTRACTS FROM DIRECTOR’S REPORT:

Financial performance and state of affairs of the Bank:

The Board and the Management set forth their desire of maintaining trust in the institution by aspiring for and implementing higher standards of transparency and compliance. In particular, the Bank has taken several measures to understand the root cause of the identified irregularities, ascertain the financial impact and take corrective actions, as well as fix accountability, etc.

Some of the significant matters during the year are listed below:

Internal Trades Derivative Accounting under the head ‘Other Assets’ amounting to ₹1,959.98 crores, being accumulated notional profits since FY 2015-16, have been written off as a prior period item in the current financial year.
In conducting a review of the Bank’s microfinance portfolio for the period ended December 31, 2024, the Internal Audit Department (‘IAD’) of the Bank noted incorrect accounting and subsequent reversal of cumulative interest income of ₹673.82 crore and Fee Income of ₹172.58 crores within the current financial year.
Certain incorrect Manual Entries posted in the ‘Other Assets’ and ‘Other Liabilities’ pertaining to prior years amounting to ₹595 crores have been set off during the current financial year. This has no impact on the financial results of the Bank for the year ended March 31, 2025.
During the internal review, it was noted that misclassification of certain microfinance loans as crop loans has resulted in incorrect classification of such loans as ‘standard assets’ along with accrual of interest income. The Bank has corrected this classification, resulting in an additional recognition of Non-Performing Advances aggregating to ₹ 1,885.19 crores. The Bank made a provision for these at a rate of 95% aggregating to ₹1,791.08 crores and reversed interest of ₹178.12 crores.

System for Internal Financial Controls and its Adequacy:

The Bank operates in a computerised environment with a Core Banking Solution system, supported by diverse application platforms for handling specific business areas such as Treasury, Trade Finance, Credit Cards, Retail Loans, etc.

The process of recording transactions in each of the application platforms is subject to various forms of controls, such as in-built system checks, maker–checker authorisations, independent post-transaction reviews, etc.

Financial statements are prepared based on computer system outputs. The responsibility of preparation of Financial Statements is entrusted to a dedicated unit that is completely independent. This unit does not originate accounting entries except for limited matters such as share capital, taxes, transfers to reserves and period-end closing entries.

Based on the investigation carried out by internal/external agencies of significant matters stated in note 18.17 of the standalone financial statements, override of controls by erstwhile Key Managerial Personnel and senior bank personnel was observed, which led to the identification of several deficiencies in the internal controls with reference to the maintenance of books of account and the preparation of the financial statements. Basis above, the joint statutory auditors have given an adverse opinion on the internal financial controls with respect to the financial statements. The joint statutory auditors have performed audit tests considering the reported weaknesses and basis the tests performed, have opined in their audit report that this has no impact on the true and fair view of the Standalone Financial Statement for the year ended March 31, 2025.

The Board of Directors has taken necessary steps in addressing the areas of concern raised in the various external/internal reports. To further strengthen the internal control environment, the Board of Directors of the Bank has set up a project management office to ensure that necessary steps including strengthening of policy and procedures, preparation and approval of accounting entries & analysis, control and discipline over reconciliation, minimising manual accounting entries, automated process to enhance the design and operating effectiveness controls and report to the Board on an ongoing basis. The Board of Directors has also taken steps to fix the staff accountability

BCAJ Admin

Accounting Treatment Of Expenditure Incurred On Development Of A Pilot / Model Factory Under Ind As 16

The accounting treatment of expenditure incurred on pilot or model factories hinges on whether such costs are “directly attributable” under Ind AS 16 or constitute revenue expenditure. Unlike commercial facilities, pilot plants are often essential for technical validation, testing machinery configuration, and ensuring safety prior to full-scale production. Ind AS 16 (Paragraphs 16(b) and 17(e)) supports capitalising costs necessary to bring an asset to its intended condition, specifically including costs for testing whether the asset is functioning properly. While ICAI EAC opinions vary based on specific facts—rejecting capitalization if assets are already operable—global IFRS guidance clarifies that “functioning properly” denotes technical readiness rather than commercial optimization. Consequently, pilot-phase costs required to resolve technical uncertainties and establish operability should be capitalised, while subsequent costs for fine-tuning or scaling must be expensed once the asset is technically ready.

INTRODUCTION – THE CONCEPT OF A PILOT / MODEL FACILITY

In several capital-intensive and process-driven industries, entities often establish a pilot plant or model factory prior to commissioning a full-scale commercial production facility. Such pilot facilities are not intended for routine commercial exploitation. Rather, they serve as a technical and operational validation mechanism to test machinery configuration, process integration, design assumptions, safety parameters and operational stability.

The costs incurred during this pilot phase are often significant and raise an important accounting question, whether such expenditure represents directly attributable costs necessary to bring an asset to its intended operating condition, warranting capitalisation, or whether they constitute pre-operative or start-up expenses to be charged to profit and loss. This article analyses this issue under Ind AS 16, Property, Plant and Equipment, supported by ICAI Expert Advisory Committee (EAC) opinions and global IFRS interpretative discussions.

2. THE ACCOUNTING ISSUE

The central issue is whether expenditure incurred on the development and operation of a pilot or model factory, such as employee costs, utilities, consumables, trial-run materials, calibration expenses and technical testing costs meets the definition of “directly attributable costs” under Ind AS 16.

The complexity arises particularly where:

(i) The pilot phase is integral to determining whether the production assets can operate as intended;

(ii) The outcome of the pilot directly influences final plant design, configuration, or acceptance of machinery; and

(iii) Commercial production is not feasible or intended until the pilot phase is successfully completed.

3. RELEVANT ACCOUNTING LITERATURE

3.1 Ind AS 16 – Property, Plant and Equipment

Paragraph 7 of Ind AS 16 provides that the cost of an item of PPE shall be recognised as an asset if it is probable that future economic benefits will flow to the entity and the cost can be measured reliably.

Paragraph 16(b) provides that the cost of PPE includes “any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.”

Paragraph 17(e) specifically includes “costs of testing whether the asset is functioning properly” as directly attributable costs. Conversely, paragraph 19 excludes costs of opening a new facility, introducing a new product, or conducting business in a new location.

3.2 ICAI Expert Advisory Committee (EAC) Opinions

In addition to the December 2025 EAC Opinion on capitalisation of employee and trial costs incurred prior to opening of a restaurant outlet, the ICAI EAC has, in earlier opinions, articulated a broader principle relevant to cost incurred for bringing an asset to its present location and condition.

An EAC opinion published in The Chartered Accountant, July 2021 (Volume 70, No. 1) and compiled in the ICAI Compendium of EAC Opinions discusses the accounting treatment of costs incurred on a configuration design study for a plant / project, and directly addresses whether such costs can be capitalised as part of Property, Plant and Equipment under Ind AS 16.

Key points from the Opinion:

The Committee was asked whether expenditure incurred for a configuration design study could be capitalised as part of capital work-in-progress under Ind AS 16.
The EAC held that such costs should be capitalised only if they are directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
The Opinion specifically notes that the costs must be directly attributable to construction and not research or held for some other purpose.
The Committee referenced the Ind AS 16 definitions of directly attributable costs (such as installation, assembly and testing whether the asset is functioning properly) when forming its view.

By contrast, in the December 2025 restaurant-industry opinion, the EAC rejected capitalisation primarily because the assets were already capable of operating and the trials were conducted to achieve consistency of output and customer experience rather than to establish asset operability. This distinction is critical when analysing pilot factories.

(All EAC opinions are advisory in nature and must be read in the context of the specific facts presented.)

3.3 Global IFRS Guidance – IASB and IFRIC Discussions

Although IAS 16 itself mirrors Ind AS 16, the IASB and IFRS Interpretations Committee (IFRIC) have, through agenda decisions and Board discussions, clarified the meaning of “testing whether an asset is functioning properly” and “ready for intended use.”

During IFRIC deliberations on IAS 16, the Committee observed that:

“Functioning properly” refers to technical and physical performance, not to the achievement of targeted production volumes, margins, or commercial optimisation.
Testing activities undertaken to determine whether an asset can operate in accordance with its design specifications form part of bringing the asset to its intended condition.

Further, in the context of the IAS 16 amendments on proceeds before intended use, the IASB reiterated that:

Only costs that are necessary to bring the asset to the condition required for its intended technical operation qualify for capitalisation.
The point at which an asset becomes “available for use” is a matter of substance and technical capability, not merely completion of installation or commencement of output.

While these discussions primarily addressed accounting for proceeds from items produced during testing, the conceptual emphasis remained firmly on technical readiness, reinforcing the boundary between capitalisable testing costs and non-capitalisable operational or optimisation costs.

Given that Ind AS 16 is broadly aligned in principle with IAS 16 , the same interpretative emphasis supports the application of Ind AS 16, particularly paragraph 16(b) (directly attributable costs to bring the asset to the condition necessary to operate as intended) and paragraph 17(e) (costs of testing whether the asset is functioning properly).

4. ANALYSIS – APPLICATION TO A PILOT / MODEL FACTORY

4.1 Pilot Factory as a Technical Necessity

A pilot or model factory is not established to introduce a product to the market or to commence commercial operations in a new location. Its primary objective is to determine whether the production assets, individually and collectively are capable of operating in the manner intended by management.

In many industries, the pilot phase:

Reveals design flaws requiring modification of equipment or layout;
Determines operating tolerances and safety parameters;
Establishes process sequencing and automation logic.

Until these activities are completed, the assets cannot be said to be technically ready for intended use, even if they are physically installed.

4.2 Alignment with Ind AS 16 and IFRS Interpretations

Applying paragraphs 16 and 17 of Ind AS 16, costs incurred during the pilot phase are capitalisable where they:

Are directly attributable to resolving technical uncertainties:
Are necessary to confirm that the asset functions in accordance with its intended design; and
Cease once the asset achieves technical operability, even if further optimisation is undertaken.

The IFRIC discussions reinforce that technical operability and not commercial readiness is the relevant threshold. Accordingly, pilot-phase costs that establish whether the plant can operate as designed fall squarely within the ambit of directly attributable costs.

4.3 Distinguishing from Non-Capitalisable Expenditure

Costs incurred after the pilot phase, such as:

Fine-tuning output quality to meet market preferences
Training production staff for efficiency,
Scaling output to targeted capacity levels,

would fall within paragraphs 19 and 20 of Ind AS 16 and must be expensed. However, this does not negate capitalisation of earlier pilot-phase costs that are essential to asset readiness.

5. CONCLUSION AND VIEW

On a combined reading of Ind AS 16, ICAI EAC opinions and IASB / IFRIC interpretative discussions, the following conclusions emerge:

Expenditure incurred on a pilot or model factory should be capitalised where such expenditure is demonstrably necessary to bring the related assets to the condition required for their intended technical operation.
The restrictive conclusions in certain EAC opinions are fact-specific and do not override the broader principle that technically indispensable testing and validation costs, where directly attributable, should be capitalised.
Global IFRS discussions strongly support a substance-based assessment of technical readiness, rather than a mechanical focus on commencement of output or passage of time.

Accordingly, where a pilot facility is an essential precursor to commissioning the final production plant, capitalisation of pilot-phase expenditure is both conceptually sound and fully aligned with Ind AS 16.

BCAJ Admin

Selling a Business… But What about the Goodwill?

When a company plans to sell a division but doesn’t yet meet Ind AS 105 “held for sale” criteria, a goodwill impairment dilemma arises. Companies face three options: immediate separation for testing (View 1), waiting until disposal (View 2), or reallocating goodwill only if internal reporting structures have changed (View 3). The authors argue View 3 is most appropriate under Ind AS 36. It ensures goodwill follows how management actually monitors the business rather than future intentions. This prevents premature, irreversible impairments while avoiding the masking of losses within a larger group’s performance.

Companies buy businesses and may merge them with other units, and sometimes decide, ‘This bit no longer fits. Let’s sell it.’ When that happens, an important question pops up: If we’re planning to sell part of the business, what happens to the goodwill attached to it? That question gets especially tricky when the sale is planned but not yet near-enough to be classified as ‘held for sale’ under Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations. Let’s look at a simple case study.

ABC: FUTURE SALE AND GOODWILL ACCOUNTING

ABC Tech is a growing technology company. One of its acquired divisions, DataServe, provides cloud data services and has historically been managed as part of the Digital Services Group, a broader cash-generating unit (CGU) that includes several synergistic service lines. Goodwill from past acquisitions is carried on ABC’s balance sheet and is allocated to the Digital Services Group CGU, which includes DataServe.

Later in the year, ABC’s board formulates a plan to dispose of DataServe in the next 12-18 months as part of a strategic refocus. However, as of the March year-end, this plan is still in its early stages with no binding agreement or active sale process in place yet.

DataServe does not meet the Ind AS 105 criteria to be classified as ‘held for sale’, which require the asset to be available for immediate sale and the sale to be highly probable within one year (Paragraphs 7-8 of Ind AS 105). In other words, the idea is on the table, but the formal held-for-sale threshold (management commitment, active marketing, likely sale within 12 months, etc.) hasn’t been crossed.

This situation puts ABC’s finance team in a tough spot for the year-end impairment review. Normally, they would test the Digital Services Group (which includes DataServe) for goodwill impairment as a whole. But with DataServe potentially on the chopping block, questions arise:

View 1: Should they carve out DataServe as a separate CGU and allocate a portion of goodwill to it for impairment testing now?

View 2: Should they leave everything as-is until the sale becomes more certain or is completed?

View 3: Consider if internal management now views DataServe separately, and therefore reallocate goodwill if the internal reporting structure has in fact changed?

Each approach has implications for financial results and compliance. Let’s explore these three views and the accounting consequences.

THE GOODWILL ALLOCATION DILEMMA

At the heart of the issue is goodwill, that arose when ABC acquired businesses in the past. Goodwill is allocated to CGUs for impairment testing purposes, typically at the level at which management monitors the business (Ind AS 36.80). In ABC’s case, all goodwill from the Digital Services Group’s past acquisitions sits with the combined Digital Services CGU (of which DataServe is part). Under Ind AS 36, Impairment of Assets, goodwill must stick to the lowest level at which management monitoring occurs and cannot be arbitrarily moved around. Accounting standards only allow reallocating goodwill in very limited circumstances, mainly when a portion of the business is disposed of, or when the company reorganises its reporting structure.

So, with a sale on the horizon but not yet a done deal, ABC’s finance team faces a judgment call. The challenge is whether to change the impairment testing approach now by isolating DataServe, or to wait until the sale is imminent or complete or to change the level at which goodwill is internally monitored and carry out reallocation of goodwill on that basis. This decision can significantly affect the timing and amount of any impairment charge.

Recognizing an impairment now by separating DataServe could reflect DataServe’s standalone value perhaps revealing a shortfall if its recoverable amount (higher of fair value less costs to disposal and value in use) is below its carrying value including goodwill. On the other hand, keeping goodwill unallocated to DataServe means any weakness in that unit might be masked by the strength of the larger group, potentially deferring any loss recognition until the sale actually occurs. The risk of a misstep is high, a mistimed impairment could either needlessly dent the current year’s profits or, conversely, delay an inevitable write-down that then hits all at once when DataServe is sold.

The Goodwill Dilemma Accounting for a planned Business Sale

With this context in mind, the authors analyse the three views:

View 1: Immediate CGU Separation (Allocate Goodwill to DataServe Now)

Under this view, ABC would treat DataServe as an independent CGU immediately, even though it does not yet meet the criteria of ‘held for sale’ under Ind AS 105. That means-

the splitting off a portion of goodwill from the Digital Services Group (using a reasonable basis such as relative fair values), and
testing DataServe for impairment, separately at year-end.

To support this view, one may argue that the view reflects economic reality. If DataServe is going to be sold, its value should be tested on a standalone basis now. Early testing may avoid a surprise loss later and ensures transparency if DataServe’s recoverable amount is below its carrying value.

However, this view does not strictly meet the requirements of Ind AS 36, which only allows goodwill to be reallocated when:

(i) an operation is disposed of (Paragraph 86 of Ind AS 36),

(ii) the unit is classified as held for sale (arising from paragraphs 6-8, 15 and 38 of Ind AS 105 read with paragraph 87 of Ind AS 36, or

(iii) the internal reporting structure changes (Paragraph 87 of Ind AS 36).

A planned sale on its own is not one of these triggers. If the sale stalls or is significantly delayed, goodwill impairments cannot be reversed (para 124 of Ind AS 36). Thus, this approach risks an irreversible write-down ahead of the requirements of the standards.

View 2 — Keep Goodwill with the Digital Services Group (Wait for Disposal or Ind AS 105 Classification as held for sale)

Here, ABC would do nothing now. DataServe stays inside the existing Digital Services CGU, and goodwill continues to be tested only at the Digital Services CGU until the unit is either:

classified as held for sale (paragraphs 6-8 of Ind AS 105), or
actually disposed of ( paragraph 86 of Ind AS 36).

Ind AS 105 only requires separate measurement once held-for-sale criteria are met and Ind AS 36 requires goodwill to stay with its CGU group until a disposal event occurs or reporting-structure changes. In that case, the downside weaknesses in DataServe may be masked by stronger parts of the Digital Services CGU. This may delay recognition of impairment, leading to a larger loss on disposal when sale eventually happens.

View 3 — Reallocate Goodwill Only If Internal Reporting Has Changed

View 3 focuses on paragraph 87 of Ind AS 36, which requires reallocating goodwill when the internal structure in which goodwill is monitored changes. Under this view, the key question is – Has ABC started monitoring DataServe separately (e.g., standalone KPIs, budgeting, CODM (Chief Operating Decision Maker) review)?

If the answer is yes, then DataServe has effectively become a separate CGU and the goodwill should be reallocated immediately. If the answer is no, the goodwill stays with the Digital Services Group until held-for-sale classification or disposal.

This view avoids both extremes, namely:

It prevents premature impairment (unlike View 1).
It responds to eventual changes in the business (unlike View 2).

View 3 aligns accounting with economic substance and how management actually runs the businesses, which is central to CGU framework under Ind AS 36. In the authors’ view, View 3 is most appropriate under Ind AS framework, as it best reflects the following principles in Ind AS 36 and Ind AS 105:

Paragraphs 80 of Ind AS 36 which ties goodwill allocation to how management monitors the business, not to intentions.
Paragraph 86 of Ind AS 36 and together with paragraphs 6-8, 15 and 38 of Ind AS 105 which trigger allocation to a disposal group only upon disposal or held-for-sale classification.
Paragraph 87 of Ind AS 36 which triggers reallocation only when internal reporting structure changes.

Therefore, goodwill should move only when the reporting structure moves. For ABC, unless DataServe has already been carved out in internal reporting, goodwill stays with the Digital Services Group until classification as held for sale or actual disposal. This approach avoids premature impairment, maintains compliance with Ind AS 36, and ensures stakeholders see losses when they truly arise not before, not after. However, one important flaw of this view is that management may not change the internal monitoring system of goodwill, so that as much as possible, impairment of goodwill is delayed beyond the current year. Therefore, for this view to operate smoothly, management should be above board, and the internal reporting structure should reflect the actual business realty.

ONE SIMPLE LINE TO REMEMBER

Goodwill should follow how the business is really being run, not just what might happen in future. If the way management organises and reports the business changes, goodwill moves too. If that has not changed yet, the goodwill does not move, even if a sale is in early stages of discussion. That is how one avoids both ugly surprises at a later date as well as unnecessary impairment charge, that is irreversible. Overall, all the views have some challenges, though View 3 seems most appropriate under the circumstances.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE:

To unlock value and for infusing funds into specific businesses, corporates are today resorting to demergers of specific business undertakings with regulatory approvals. In most such cases of demerger especially those not under common control, the resultant company uses the principles of Appendix C of Ind AS 103 “Business Combinations” whereas the demerged company uses Appendix A of Ind AS 10 “Distribution of Non-cash Assets to Owners”. Also, in the absence of any specific Ind AS dealing with the accounting of demerger in the books of the transferor under a common control business combination, paras 10-12 of Ind AS 8 on “Accounting Policies, Changes in Accounting Estimates and Errors” is resorted to.

Given below are disclosures for a demerger of an undertaking of a large company having international operations.

Tata Motors Limited (from standalone results (audited) for the period ended 30th September 2025 (demerged company)

From to Results / Notes

1. Standalone audited financial results for the quarter and six months ended September 30, 2025 (‘the Statement’)

Particulars	Quarter ended			Six months ended		Year ended
	September 30, 2025	June 30, 2025*	September 30, 2024*	September 30, 2025	September 30, 2024*	March 31, 2025*
	Audited	Audited	Unaudited	Audited	Unaudited	Audited
Profit/ (loss) for the period after tax from continuing operations	(237)	3,854	15	3,617	1,296	1,538
Profit before exceptional gain and tax for the period from discontinued	–	1,624	1,092	1,624	2,407	5,628
Exceptional gain on disposal of discontinued operations	82,318	–	–	82,318	–	–
Tax expense (net) of discontinued operations	–	212	446	212	893	1,292
Profit for the period after exceptional gain and tax from discontinued operations	82,318	1,412	646	83,730	1,514	4,336
Profit before tax from continuing and discontinued operations (before exceptional gain)	138	6,347	1,410	6,485	4,513	8,004
Profit for the period	82,081	5,266	661	87,347	2,810	5,874

*Re-presented refer note 4

Note 4: Scheme of Arrangement

The Board of Directors has, at its meeting held on August 1, 2024, approved a Composite Scheme of Arrangement amongst Company, Tata Motors Limited (formerly TML Commercial Vehicle Ltd), Tata Motors Passenger Vehicles Limited and their respective shareholders under Section 230-232 of the Company’s Act, 2013 which inter alia provides for:

demerger, transfer and vesting of the commercial vehicles business of Company along with related investments (“Demerged Undertaking”) to Tata Motors Limited on a going concern basis; and
amalgamation of Tata Motors Passenger Vehicles Ltd with the Company with an objective of consolidating the passenger vehicles business.

The Company has received the National Company Law Tribunal (NCLT) order approving the Scheme on August 25, 2025, with appointed date of July 1, 2025. Upon filing with the Registrar of Companies “ROC”, the Scheme became effective from October 1, 2025. Pursuant to the approval and effectiveness of the Scheme:

Demerged Company has transferred all the assets, liabilities and reserves (including other components of equity and general reserve), valuing ₹11,579 crores at their respective carrying amounts, pertaining to Demerged Undertaking as appearing in the books of accounts of the Demerged Company, being transferred on account of demerger. Accordingly, the Demerged Company has reduced from its books of account, the carrying amounts appearing on the appointed date.
Having recorded the transfer of the assets and liabilities, as aforesaid, the Demerged Company has made necessary adjustments for the sake of compliance with Indian Accounting Standards (“Ind AS”) notified under Section 133 of the Companies Act, 2013, specifically Appendix A to Ind AS 10 ‘Distribution of Non cash assets to Owners’, and has created a liability at the fair value of the Demerged Undertaking with gain in the income statement (net of assets and Habllities transferred) with the corresponding debit to the Retained Earnings and extinguishing the liability of ₹82,318 crores. There is no impact on net worth for this gain booked in the results, accordingly the same is not considered for EPS calculations.

Fair value has been derived for each of the companies of Demerged Undertaking separately. Depending on the business and data, we have used discounted cash flows, comparable market multiples and available quoted price to determine the fair value.

Note 5

For the quarter ended September 30, 2025, the profit before tax is ₹138 crores and tax charge is ₹375 crores. Upon effective of the Composite Scheme, the tax losses which were available for set-off in the quarter ending June 30, 2025, are now moved to the Demerged Undertaking leading to a higher tax charge in the demerged entity.

FROM AUDITORS’ REPORT

2. Independent Auditor’s Report on the audit of the Standalone Financial Results

Opinion

We have audited the accompanying standalone quarterly financial results of Tata Motors Passenger Vehicles Limited (formerly Tata Motors Limited) (“the Company”) for the quarter ended 30 September 2025 and the year-to-date results for the period from 1 April 2025 to 30 September 2025, (in which are included interim financial statements / financial information of its joint operation and financial information of a Trust) attached herewith, being submitted by the Company pursuant to the requirement of Regulation 33 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“Listing Regulations”).

In our opinion and to the best of our information and according to the explanations given to us and report of other auditor on separate audited condensed interim financial statements/financial results of its joint operation, these standalone financial results:

a. are presented in accordance with the requirements of Regulation 33 of the Listing Regulations in this regard; and

b. in the context of the overriding effect of the provision in the Composite Scheme of Arrangement as approved by the National Company Law Tribunal (‘NCLT’), regarding accounting for demerger of commercial vehicles business from the specified retrospective appointed date, give a true and fair view in conformity with the recognition and measurement principles laid down in the applicable accounting standards and other accounting principles generally accepted in India, of the net profit and other comprehensive loss / income and other financial information for the quarter ended 30 September 2025 as well as for the year to date results for the period from 1 April 2025 to 30 September 2025.

Emphasis of Matter

a. We draw attention to Note 4 to the standalone financial results, which describes the accounting for the Composite Scheme of Arrangement (‘the Scheme’) amongst the Company, Tata Motors Limited (formerly Tata Motors Commercial Vehicles Limited) (‘TML’) and Tata Motors Passenger Vehicles Limited for demerger of commercial vehicles business from the Company into TML and merger of the Tata Motors Passenger Vehicles Limited into the Company. The Scheme has been approved by the National Company Law Tribunal (‘NCLT’) vide its order dated 25 August 2025 and a certified copy has been filed by the Company with the Registrar of Companies, Maharashtra, on 1 October 2025. Though the appointed date as per the NCLT approved Scheme is 1 July 2025, as per the requirements of Appendix C to Ind AS 103 “Business Combination”, Business Combination (‘the amalgamation of Tata Motors Passenger Vehicles Limited with the Company’) has been accounted for as if it had occurred from the beginning of the preceding period in the standalone financial results.

Accordingly, amounts relating to the quarter and year-to-date ended 30 September 2025 include the impact of the business combination and the amounts for the quarter ended 30 June 2025 and the corresponding amounts as at and for the previous year ended 31 March 2025 and for the quarter and previous year to date ended 30 September 2024 have been restated by the Company after recognising the effect of the business combination as above. The aforesaid note 4 also describes in detail the impact of the business combination on the standalone financial results. Our opinion is not modified in respect of this matter.

b. We draw attention to Note 4 to the standalone financial results, which describes the accounting for the Composite Scheme of Arrangement (‘the Scheme’) amongst the Company, TML and Tata Motors Passenger Vehicles Limited for demerger of commercial vehicles business from the Company into TML and merger of the Tata Motors Passenger Vehicles Limited into the Company. The Scheme has been approved by the National Company Law Tribunal (‘NCLT’) vide its order dated 25 August 2025 and a certified copy has been filed by the Company with the Registrar of Companies, Maharashtra, on 1 October 2025. In accordance with the scheme approved by NCLT, the Company has given effect to the Scheme from the retrospective appointed date specified therein i.e. 1 July 2025 for the demerger of the commercial vehicles business, which overrides the relevant requirement of Appendix A to Ind AS 10 (according to which the scheme would have been accounted for from 25 August 2025 which is the date on which the Scheme has been approved by the NCLT). The financial impact of the aforesaid treatment has been disclosed in the aforesaid note.

Our opinion is not modified in respect of this matter.

From composite scheme of arrangement amongst Tata Motors Limited (demerged company/ amalgamated company) and TML Commercial Vehicles Limited (resulting company) and Tata Motors Passenger Vehicles Limited (amalgamating company) and their respective shareholders under sections 230 to 232 and other applicable provisions of the companies act, 2013 (extracts)

PART I

18. ACCOUNTING TREATMENT

18.1 Accounting treatment in the books of the Demerged Company:

18.1.1 The Demerged Company shall give effect to the Scheme in its books of accounts in accordance with Appendix A to the Indian Accounting Standards 10 notified under Section 133 of the Act read with the Companies (Indian Accounting Standards) Rules, 2015 and the generally accepted accounting principles in India.

18.1.2 Upon the Scheme becoming effective and from the Appointed Date, the Demerged Company shall transfer all the assets and liabilities, at their respective carrying amounts, pertaining to the Demerged Undertaking as appearing in the books of accounts of the Demerged Company, being transferred to and vested in the Resulting Company. Accordingly, the Demerged Company shall reduce from its books of accounts, the carrying amounts appearing on such date in accordance with the provisions of Section 2(19AA) of the Income Tax Act.

18.1.3 Upon the Scheme becoming effective, and from the Appointed Date, the carrying value of Cost of Hedging Reserve and Hedging Reserve (forming part of “Other components of Equity” in the Statement of Changes in Equity) pertaining to Demerged Undertaking as appearing in the books of accounts of the Demerged Company will be reclassified to profit or loss as a reclassification adjustment. The carrying value of fair value reserve in relation to equity instruments carried at fair value through Other Comprehensive Income shall be transferred to retained earnings.

18.1.4 Having recorded the transfer of the assets and liabilities and balances in Other Components of Equity, as aforesaid, the Demerged Company shall make necessary adjustments for the sake of compliance with Indian Accounting Standards (“Ind AS”) notified under Section 133 of the Companies Act, 2013, specifically Ind AS 10 Appendix A ‘Distribution of Non cash assets to Owners’, and shall create a liability at the fair value of the Demerged Undertaking with the corresponding debit to the Retained Earnings.

18.1.5 The book value of net assets derecognised will be adjusted against the liability recognised at above. The difference, if any, shall be recognised in the statement of profit and loss in accordance with Ind AS 10 Appendix A.

18.2 Accounting treatment in the books of the Amalgamated Company

18.2.1 The Amalgamated Company shall give effect to the Scheme in its books of accounts in accordance with the accounting standards specified under Section 133 of the Act read with the Companies (Indian Accounting Standards) Rules, 2015 and the generally accepted accounting principles in India.

18.2.2 Upon the Scheme becoming effective, the Amalgamated Company shall, in accordance with Appendix C to Indian Accounting Standard 103 – Business Combinations, record all the assets, liabilities and reserves pertaining to the Amalgamating Company vested in it pursuant to this Scheme at their respective carrying values as appearing in the books of the Amalgamating Company. Merger Deficit Adjustment Account of the Amalgamating Company will be adjusted against the capital reserve (on merger/sale of business) of the Amalgamated Company.

18.2.3 The difference between (a) excess of carrying values of assets over the carrying values of liabilities of the Amalgamating Company and (b) reserves of the Amalgamating Company shall be credited or debited. as the case may be, to equity and classified as ‘capital reserve’ or any other appropriate component of the equity. The value of existing investment held by the Amalgamated Company in the Amalgamating Company shall be cancelled and the corresponding amount shall be debited to ‘capital reserve’ or any other appropriate component of the equity.

18.2.4 The financial statements of the Amalgamated Company for the prior period shall be restated as if the business combination had occurred from the beginning of the preceding period presented in the financial statements. irrespective of the actual date of the combination.

PART IV

GENERAL TERMS AND CONDITIONS

41. Change of Name of Amalgmated Company and the Resulting Company

41.1 Upon this Scheme becoming effective and subject to Clause 41.3 below, the name of the Amalgamated Company or Demerged Company shall stand changed on and from the Effective date to ‘TATA MOTORS PASSENGER VEHICLES LIMITED’ or such other name which is determined by the Board of the Amalgamated Company …

41.3 Upon Scheme becoming effective and simultaneously with the change of name of the Amalgamated Company, the name of the Resulting Company shall stand changed on and from the effective date to ‘TATA MOTORS LIMITED’ or such other name…

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

Under Section 143(3)(i) of the Companies Act, 2013, an auditor of a company is required to state in his/her audit report whether the company has an adequate internal financial controls (IFC) system in place and the operating effectiveness of such controls. The Institute of Chartered Accountants of India (ICAI) has also issued a Guidance Note for the same.

Given below are excerpts of instances where the auditors have issued qualified reports for the financial year 2024-25 for deficiencies observed in different areas in the Internal Financial Controls.

Ola Electric Mobility Limited (from Consolidated Financial Statements)

REPORT ON THE INTERNAL FINANCIAL CONTROLS

Qualified Opinion:

In conjunction with our audit of the consolidated financial statements of Ola Electric Mobility Limited (formerly known as ‘Ola Electric Mobility Private Limited’) (hereinafter referred to as “the Holding Company”) as of and for the year ended 31 March 2025, we have audited the internal financial controls with reference to financial statements of the Holding Company and such companies incorporated in India under the Act which are its subsidiary companies, as of that date.

In our opinion, except for the possible effects of the material weakness described below in the Basis for Qualified Opinion section of our report on the achievement of the objectives of the control criteria in respect of one of the wholly owned subsidiary company, the Holding Company and such companies incorporated in India which are its subsidiary companies has maintained, in all material respects, adequate internal financial controls with reference to consolidated financial statements and such internal financial controls with reference to consolidated financial statements were operating effectively as of 31 March 2025, based on the internal financial controls with reference to financial statements criteria established by such companies considering the essential components of such internal controls stated in the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by the Institute of Chartered Accountants of India (the “Guidance Note”).

We have considered the material weakness identified and reported below in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements of the Group as at 31 March 2025, and such material weakness does not affect our opinion on the consolidated financial statements.

Basis For Qualified Opinion:

According to the information and explanations given to us and based on our audit, the following material weakness has been identified as at 31 March 2025 in respect of one of the wholly owned subsidiary company:

Such subsidiary company did not have an appropriate internal control system for physical verification of raw material and finished goods located at its Stores and State Distribution Centers which could potentially result in material misstatements in the Group’s inventories, Cost of materials consumed and Change in inventories of finished goods, stock-in-trade and work-in-progress account balances.

A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Ventive Hospitality Limited (Standalone Financial Statements)

REPORT ON THE INTERNAL FINANCIAL CONTROLS

Qualified Opinion:

According to the information and explanations given to us and based on our audit, the following material weakness has been identified as at March 31, 2025:

The Company did not have appropriate Information Technology General Controls (ITGCs) in respect of application software used by the Company, related to managing program changes and managing access, which could potentially result in misstatements to the relevant account captions in the financial statements.

A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial control with reference to standalone financial statements, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

In our opinion, except for the possible effects of the material weakness described above on the achievement of the objectives of the control criteria, the Company has maintained, in all material respects, adequate internal financial controls with reference to these financial statements and such internal financial controls with reference to financial statements were operating effectively as of March 31, 2025, based on the internal control over financial reporting criteria established by the Company considering the essential components of internal control stated in the Guidance Note issued by the ICAI.

TCI Finance Limited (Standalone Financial Statements)

REPORT ON THE INTERNAL FINANCIAL CONTROLS

Qualified Opinion:

According to the information and explanations given to us and based on our audit, the following material weakness have been identified in the operating effectiveness of the Company’s internal financial controls over financial reporting as at March 31, 2025 in respect of financial statements closure and assessment of impairment loss or provision required in respect of investments or financial assets which could potentially result in misstatement in the financial statements.

A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

In our opinion, the Company has, in all material respects, maintained adequate internal financial controls over financial reporting as of March 31, 2025, based on the internal control over financial reporting criteria established by the Company considering the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by the Institute of Chartered Accountants of India, and except for the possible effects of the material weakness described above on the achievement of the objectives of the control criteria, the Company’s internal financial controls over financial reporting were operating effectively as of March 31, 2025.

Hindustan Construction Co. Limited (Standalone Financial Statements)

REPORT ON THE INTERNAL FINANCIAL CONTROLS

Qualified opinion:

According to the information and explanations given to us and based on our audit, the following material weaknesses have been identified in the operating effectiveness of the Company’s internal financial controls with reference to standalone Ind AS financial statements as at March 31, 2025:

a. The Company’s internal financial control system towards estimating the carrying value of its investment in subsidiary company, as explained in Note 32 to the standalone Ind AS financial statements were not operating effectively which could potentially lead material misstatement in the carrying values of investments and dues recoverable from such subsidiary and its consequential impact on the earnings, other equity and related disclosures in the standalone Ind AS financial statements.

b. The Company’s internal financial controls system with respect to assessing the recoverability of deferred tax assets, as explained in Note 9.5 to the standalone Ind AS financial statements, as per Ind AS 12 ‘Income Taxes’ were not operating effectively, which could potentially lead to a material misstatement in the carrying value of deferred tax assets and its consequential impact on the earnings, other equity and related disclosures in the standalone Ind AS financial statements.

A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial controls with reference to the standalone Ind AS financial statements, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim Ind AS financial statements will not be prevented or detected on a timely basis.

In our opinion, the Company has, in all material respects, adequate internal financial controls with reference to the standalone Ind AS financial statements as at March 31, 2025, based on internal control with reference to the standalone Ind AS financial statements established by the Company considering the essential components of internal control stated in the Guidance Note issued by the ICAI, and except for the possible effects of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company’s internal financial controls with reference to standalone Ind AS financial statements were operating effectively as at March 31, 2025.

We have considered the material weaknesses identified and reported above in determining the nature, timing, and extent of audit tests applied in our audit of the standalone Ind AS financial statements of the Company as at and for the year ended March 31, 2025, and these material weaknesses have affected our opinion on the standalone Ind AS financial statements of the Company, and we have issued a qualified opinion on the standalone Ind AS financial statements.

From notes to Financial Statements:

Note 32:

As at March 31, 2025, the Company has investments (including deemed investments) in its wholly owned subsidiary HCC Infrastructure Company Limited (‘HICL’) aggregating ₹1,294.33 crore (March 31, 2024: ₹1,294.45 crore) classified as non-current investment ₹1,159.48 crore (March 31, 2024: ₹1,294.45 crore) and current investment of ₹134.85 crore (March 31, 2024: Nil). While the consolidated net worth of HICL as at March 31, 2025 has been substantially eroded, the management has assessed the fair value of HICL based on a valuation report from an independent valuation expert. The valuation includes significant judgements and estimates in respect of future business plans, expected share of future revenues of subsidiaries sold and outcome of litigations for favourable arbitration awards in a step-down subsidiary. Accordingly, based on aforementioned valuation report and future business plan, the management believes that the recoverable amount of investment in HICL is higher than its carrying value.

Note 9.5:

Movement in components of deferred tax assets and deferred tax liabilities are as follows:

(Rupees in crores)

	Business loss / unabsorbed depreciation / MAT credit entitlements	Impairment allowance on receivables / other assets	Timing difference on tangible and intangible assets depreciation and amortisation	Section 35 Expenses	Expense allowable on payment basis	Others	Arbitration awards	Total
As at April 1, 2023	2,100.17	9.69	35.07	–	166.98	–	(1,569.98)	741.93
(Charged) / credited
– to profit or loss	(131.75)	6.52	6.19	–	69.00	–	(78.80)	(128.8)
– to other comprehensive income	–	–	–	–	–	–	–	0.00*
As at March 31, 2024	1,968.42	16.21	41.26	–	235.98		(1,648.78)	613.09
(Charged) / credited
– to profit or loss (Refer note 9.6)	(867.56)	(3.40)	(12.85)	(2.35)	(18.33)	–	483.63	483.63
– to other comprehensive income	–	–	–	–	–	1.39	–	(420.9)
– to security premium	–	–	–	11.28	–	–	–	11.28
As at March 31, 2025	1,100.86	12.81	28.41	8.93	217.65	1.39	(1,165.15)	204.90

* Represents amount less than ₹1 lakh.

Fusion Finance Limited (Standalone Financial Statements)

REPORT ON INTERNAL FINANCIAL CONTROLS

Basis for Qualified Opinion

According to the information and explanations given to us and based on our audit, the following material weakness has been identified in the Company’s internal financial controls with reference to the financial statements as at March 31, 2025.

The Company has concluded that it was impracticable to evaluate and determine any amounts for retrospective recognition and measurement in those prior periods on account of expected credit loss allowance as explained in note 60 of the financial statements of the Company. As a result, we are unable to determine whether any adjustments were required for prior period(s) relating to the impairment charge recorded for the year ended March 31, 2025.

Because of the deficiency in financial closing and reporting process, in respect of information as aforesaid, we are unable to assess whether or not the current year’s figures are comparable to those of the previous year.

A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial control with reference to the financial statements, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Qualified Opinion

In our opinion, to the best of our information and according to the explanations given to us, except for the possible effects of the material weakness described in the Basis for Qualified Opinion paragraph above on the achievement of the objectives of the control criteria, the Company has maintained, in all material respects, an adequate internal financial controls with reference to the financial statements and such internal financial controls with reference to the financial statements were operating effectively as at March 31, 2025, based on the criteria for internal financial control with reference to financial statements established by the Company considering the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by the Institute of Chartered Accountants of India.

We have considered the material weakness identified and reported above in determining the nature, timing, and extent of audit tests applied in our audit of the financial statements of the Company for the year ended March 31, 2025, and the material weakness does not affect our opinion on the financial statements of the Company.

From Notes to Financial Statements:

Note 60:

During the year ended March 31, 2025, the Company recorded an allowance for Expected Credit Loss (“ECL”) of ₹1,864.91 crore, in respect of loans given, with a corresponding charge to the Statement of Profit and Loss, consequent to a significant increase in credit risk evidenced by slowing and delayed collections. In preparing this statement, the Company has not evaluated whether any of these allowances should have been recognized in any of the prior period presented because of limitations in objectively determining information relating to assumptions and circumstances as it existed in those prior periods. As a result, the Company has concluded that it was impracticable to evaluate and determine any amounts for retrospective recognition and measurement in those prior periods.

Kolte-Patil Developers Limited (Standalone Financial Statements)

INTERNAL FINANCIAL CONTROLS REPORT

Qualified Opinion:

According to the information and explanations given to us and based on our audit, the following material weaknesses have been identified as at March 31, 2025:

The Company’s information technology general controls with respect to manage change process were not operating effectively which could potentially result in material misstatement in the standalone financial statements.
The Company’s internal financial controls over financial statements closure process were not operating effectively which could potentially result in material misstatement in the standalone financial statements.

A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial control with reference to standalone financial statements, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

In our opinion, the Company has maintained, in all material respects, adequate internal financial controls with reference to the standalone financial statements based on the internal control over financial reporting criteria established by the Company considering the essential components of internal control stated in the Guidance Note issued by the ICAI and except for the possible effects of the material weaknesses described above on the achievement of the objectives of the control criteria, such internal financial controls with reference to standalone financial statements were operating effectively as at March 31, 2025.

Reliance Communications Limited (Standalone Financial Statements)

REPORT ON INTERNAL FINANCIAL CONTROLS

Basis for Qualified Opinion

According to the information and explanations given to us and based on our audit, the following material weaknesses and deficiencies has been identified in the operating effectiveness of the Company’s internal financial controls with reference to standalone financial statements as at March 31, 2025:

The Company’s internal process with regard to confirmation and reconciliation of Balances of trade receivables, trade payables & other liabilities and loan & advances which are not providing for adjustments, which are required to be made to the carrying values of such assets and liabilities. (Read with Note no. 2.31) (not reproduced as the note is on Going Concern).
The Company’s internal control process in respect of closure of outstanding entries in Bank Reconciliation Statements which are pending to be reconciled.
In respect of delays in payment of certain statutory dues and filing of certain statutory returns during the year with the respective authorities.
In respect of transactions carried out by Director of foreign subsidiary company without obtaining the adequate approvals from the Management of the Company (Refer Note 2.60).
The Company’s internal financial control with regard to the compliance with the applicable Indian Accounting Standards and evaluation of carrying values of assets and liabilities and other matters, as fully explained in Basis for Qualified Opinion paragraph of our main report, resulting in the Company not providing for adjustments, which are required to be made, to the standalone financial statements.

A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial control with
reference to standalone financial statements, such that there is a reasonable possibility that a material misstatement of the Company’s standalone financial statements will not be prevented or detected on a timely basis.

Qualified Opinion

In our opinion and to the best of our information and according to the explanations given to us, except for the effects / possible effects of the material weaknesses described above under Basis for Qualified Opinion paragraph on the achievement of the objectives of the control criteria, the Company has, in all material respects an adequate internal financial controls with reference to standalone financial statements and such internal financial controls were operating effectively as at March 31, 2025, based on the internal financial control with reference to the standalone financial statements criteria established by the Company considering the essential components of internal control stated in the Guidance Note.

We have considered material weakness identified and reported above in determining the nature, timing, and extent of audit tests applied in our audit of the standalone financial statements of the Company for the year ended March 31, 2025 and these material weaknesses affect our opinion on standalone financial statements of the Company for the year ended March 31, 2025 [our audit report dated May 27, 2025, which expressed an Qualified Opinion on those standalone financial statements of the Company].

BCAJ Admin

Interpreting Guarantees Under Ind As: Determining The Correct Standard By Contract Term

Companies frequently provide guarantees on the obligations of other entities, for example bank loan of a joint venture (JV), performance under a contract of a subsidiary, or payment obligations of an associate. These guarantees can take many forms such as financial guarantees, performance guarantees, credit guarantees, and there has been significant diversity in how these are accounted for. Some entities treated guarantees as mere contingent liabilities with disclosure only, while others recognized liabilities at fair value under Ind AS 109, Financial Instruments. This divergence arose due to ambiguity over which Indian Accounting Standard (Ind AS) applies to a given guarantee.

A recent agenda decision by the IFRS Interpretations Committee (IFRIC) in April 2025 dealing with analogous IFRS standards has provided much needed clarity on the accounting treatment for issued guarantees. Although issued under IFRS, this guidance is relevant for interpreting Ind AS. In this article, the authors discuss the types of guarantees commonly seen, the diversity in practice, the clarifying guidance, and the conclusion reached.

TYPES OF GUARANTEES AND COMMON SCENARIOS

Guarantees can be issued in many forms and for various purposes, such as:

(i) Financial Guarantees: These involve an entity guaranteeing payments of debt obligations of another entity. For example, a parent company may guarantee repayment of a bank loan taken
by its subsidiary or joint venture. If the debtor fails to pay, the guarantor must reimburse the holder of the debt.

(ii) Performance Guarantees: These ensure the performance of contractual obligations. For instance, a company may guarantee that its associate or JV will fulfil the terms of an EPC (engineering, procurement, construction) contract covering completion of a project or meeting certain performance standards. If the obligor fails to perform, the guarantor compensates the affected party which could involve monetary compensation or stepping in to perform the work.

(iii) Other Contractual Guarantees: Variations include guarantees of payment obligations under non-debt contracts (e.g. guaranteeing a minimum revenue or profit to a third party), warranty and service guarantees provided in customer contracts (assuring quality or uptime), and guarantees in partnership agreements (e.g., one partner guaranteeing certain returns to another).

These guarantees may be issued on behalf of different related parties such as a joint venture, an associate, a subsidiary, or even an unrelated third party. The terms and conditions can vary widely, some guarantees cover specific loans or bonds, others cover broader obligations or future losses. The rights and obligations of the guarantor also differ. Some guarantees give the guarantor recourse against the primary obligor, for example, an indemnity from the subsidiary to the parent, while others do not. Some are provided for a fee, others are free of charge often when given to benefit a related party. This variety means that no single Ind AS governs all guarantees, and careful analysis is required for each contract.

THE ACCOUNTING DILEMMA AND DIVERGENCE IN PRACTICE

The core question which arise is which Ind AS applies to a given guarantee? In the absence of explicit guidance, companies interpreted standards differently.

Many companies defaulted to Ind AS 109 for guarantees, especially for explicit financial guarantees of debt. Ind AS 109 contains the definition of a financial guarantee contract (FGC) and specific accounting requirements. According to Ind AS 109, a financial guarantee contract is “a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument”. If a guarantee met this definition (essentially a credit guarantee on a debt obligation), it would clearly fall under Ind AS 109 as a financial instrument. In such cases, Ind AS 109 requires the guarantor to recognize a liability at fair value at inception of the guarantee, and subsequently measure it as per financial instrument guidance (typically at the higher of the initially recognized amount amortized, and the expected credit loss allowance). Many companies did follow this for bank loan guarantees and similar credit guarantees, recording a liability with the offset often treated as an investment in the subsidiary or an expense, depending on the context.

However, when the guarantee related to non-debt obligations or performance risks, practice varied. Some viewed these as not meeting the narrow Ind AS 109 definition, since the trigger was not strictly a ‘debt instrument’ default. For example, a parent guaranteeing to compensate a customer if its JV fails to complete a project on time (a performance guarantee). This type of guarantee does not meet the Ind AS 109 definition of a financial guarantee contract, because it is not a guarantee of payment on a debt instrument. Lacking a clear Ind AS analogy for such insurance-like guarantees, some companies resorted to Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets treating the guarantee as a contingent liability to be disclosed, and only recognized as a provision if payment became probable. Under Ind AS 37, unless an outflow is probable and estimable, only a disclosure is required. This meant many performance guarantees remained off-balance-sheet except perhaps a provision at the tail end if a default was imminent. Other companies, attempting to be conservative, recognized a provision upfront at some estimate of potential loss, citing general prudence. The lack of uniformity was evident, as IFRIC also observed diversity in practice globally with such guarantees.

A few entities, noting the insurance-like nature of performance guarantees, drew analogy to Ind AS 104/Ind AS 117 Insurance Contracts. Ind AS 104 which is based on IFRS 4 was the interim standard for insurance and Ind AS 117 based on IFRS 17 is the new comprehensive insurance standard effective from financial year 2024-25 in India. Under insurance accounting, a performance guarantee (which involves accepting significant risk of a non-financial loss) could be seen as an insurance contract. However, historically this treatment was rare unless the company was itself an insurer. Ind AS 104/117 were typically outside the scope for non-insurance companies, and many firms were unaware that they could consider a guarantee as an insurance contract. In fact, IFRS/Ind AS allowed an option: if an issuer explicitly treated certain guarantees as insurance contracts in the past, it could continue to do so. In Ind AS terms, an issuer who had asserted that its guarantees are insurance could elect to apply Ind AS 117 instead of Ind AS 109 for those contracts.

Guarantees as part of customer contracts: Another grey area was when guarantees were provided to customers as part of a sales or service contract. For example, a construction company might guarantee the performance of a facility for a period (beyond a normal warranty), or a parent entity might guarantee the obligations of its subsidiary to a customer. Some aspects of such guarantees could be viewed as extended warranties or performance bonuses/penalties, possibly falling under Ind AS 115 Revenue from Contracts with Customers as part of the revenue arrangement. Many companies do not segregate these, or they treated any such guarantees as either Ind AS 37 contingencies or simply include any payouts as reductions of revenue when incurred with no liability upfront.

The net result is a lack of comparability. Some companies carry significant guarantee liabilities on their balance sheets under Ind AS 109 while others with similar exposures show nothing but contingent liability disclosures.

IFRIC AGENDA DECISION (APRIL 2025): CLARIFYING GUIDANCE AND ITS IND AS INTERPRETATION

In April 2025, the IFRS Interpretations Committee published an agenda decision titled “Guarantees Issued on Obligations of Other Entities.” This decision, while not introducing new rules, clarified how existing standards should be applied to guarantee contracts. The authors interpret the essence of this guidance in the Ind AS context below, as the underlying principles apply equally to Ind AS 109, 117, 115, and 37 given their alignment with corresponding IFRSs.

No single standard for all guarantees: The IFRIC emphasized that accounting for a guarantee should not be based on the nature of the issuer i.e., whether the company is an insurer, a bank, or a non-financial entity, but on the terms of the contract and the scope definitions in the standards. There is no definition of ‘guarantee’ in the standards and no one Ind AS applies to every type of guarantee. Instead, one must analyze the guarantee’s features and determine which standard’s scope it falls under. In other words, the substance of the guarantee determines the accounting a principle that guides the step-by-step framework described below.

Step 1: Is it a financial guarantee contract under Ind AS 109?

The first assessment is whether the guarantee meets the definition of a financial guarantee contract as per Ind AS 109 (Financial Instruments). As noted earlier, Ind AS 109 defines a financial guarantee contract (FGC) as an obligation to reimburse the holder for loss due to a debtor’s failure to pay a debt when due. Classic examples that do meet this definition include a parent guaranteeing a bank loan of its subsidiary or a corporate guarantee on a bond, in both cases, there is a specified debtor, a debt instrument (loan/bond), and the guarantor pays only if the debtor fails to pay covering the lender’s loss.

If the guarantee does meet this definition, then Ind AS 109 applies unless the company has a prior insurance accounting election. Under Ind AS 109, such guarantees are treated as financial liabilities. The issuer must recognize a liability at fair value when the guarantee is issued even if no fee is charged). This typically results in an immediate debit to an appropriate account (investment in subsidiary if the guarantee benefits a subsidiary, or to P&L expense if it’s for an unrelated party).

Subsequently, the guarantee liability is typically measured at the higher of (a) the amount initially recognized (less any income recognized if a fee was received) and (b) the loss allowance determined as per expected credit loss (ECL) methodology. In practice, for intra-group financial guarantees given for no fee, the initial fair value of the guarantee is often credited to a liability and debited as an increase in the investment in the subsidiary (in separate financial statements), reflecting a capital contribution. Any difference if a fee is charged would be recognized as income over the guarantee period. Importantly, Ind AS 37 would not apply in this case indeed, Ind AS 37 explicitly scopes out provisions for matters covered by Ind AS 109’s financial instruments. Some entities treated financial guarantees as contingencies, but this is incorrect given the Ind AS 109 requirements (a ‘common misconception’ that Ind AS 37 could be used for financial guarantees has been debunked by the guidance).

One nuance: the term ‘debt instrument’ in the definition has been a point of debate. Does it strictly mean a loan or bond, or could it include other payables like a fixed payment obligation under a contract? The IFRIC noted diversity in interpreting debt instrument, and the IASB plans to further examine this definition. Until clarified, companies must apply reasonable judgment with disclosure in determining whether an obligation is a debt instrument under Ind AS 109. If in doubt and the guarantee primarily covers a payment default risk, it’s safer to lean towards treating it as a financial guarantee contract, given that what is being guaranteed is a credit loss.

Exception of insurance accounting election: Ind AS 109 (similar to IFRS 9) provides an option that if an issuer had previously asserted explicitly that certain guarantees are insurance contracts and accounted for them as such, it can continue to do so (on a per contract election basis). This means if a company historically treated its financial guarantees under Ind AS 104/117, it may elect to continue using Ind AS 117 for those contracts, despite them meeting the financial guarantee definition. This is a narrow exception aimed at insurers or special cases and must have been established in prior practice. The election is irrevocable for each contract once made. Few non-insurer Indian companies are likely to have this history. Going forward, new issuers of financial guarantees will apply Ind AS 109 if the contract meets the FGC definition unless they meet any regulatory criteria for not doing so. Such guarantees also need financial instrument disclosures such as credit risk exposure, and other related disclosures as per Ind AS 107.

Lets discuss it with an example:

On 1 April 20X1, Parent ‘P Ltd.’ signs a guarantee in favour of Bank for a credit limit of ₹1,000 crore sanctioned to its joint venture ‘JV’. The facility works like an overdraft. The JV can draw any amount within the limit over three years and repay as it earns cash from the project. No guarantee commission is charged by P Ltd.

Since the JV has not utilised the entire limit on day one, does P Ltd. still recognise a liability?

Analysis under Ind AS:

A financial guarantee contract exists when P Ltd. becomes obligated, not when the JV draws the money. If the JV does not pay when an instalment becomes due, P Ltd. must reimburse the bank. The guarantee protects the bank against credit loss arising from non-payment of a debt.

This meets the definition of a Financial Guarantee Contract under Ind AS 109, because the guarantee is linked to repayment of a debt.

Accounting by P Ltd. (separate financial statements):

(i) On the date the guarantee is issued, P Ltd. recognises a liability at fair value, even if the loan is undrawn or partially drawn.

(ii) After initial recognition, the liability is measured at the higher of:

– the unamortised portion of the initial fair value, and

– the expected credit loss (ECL) on the guarantee.

In other words, P Ltd. recognises a present obligation because the guarantee exposes it to the JV’s credit risk from the moment the guarantee is signed and not from when the JV draws the loan.

Step 2: If not a financial guarantee under 109, is it an insurance contract under Ind AS 117?

If the guarantee does not squarely fall under financial guarantee scope under Ind AS 109 (for instance, it does not involve reimbursing a loss on a debt instrument), the next question is whether it meets the definition of an insurance contract per Ind AS 117. Ind AS 117 defines an insurance contract as an arrangement under which one party (issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects them. ‘Insurance risk’ is essentially any risk other than financial risk (financial risk relates to changes in financial variables like credit risk, market prices, etc.). In the context of guarantees, a pure performance guarantee often entails insurance risk, the uncertain future event could be the failure of the underlying entity to perform some service or deliver a product, which is not a financial variable but an outcome risk. If that failure adversely affects the counterparty (e.g. the customer of the JV or subsidiary), and the guarantor will compensate for that loss, the contract is transferring significant non-financial risk to the guarantor, essentially an insurance arrangement.

Ind AS 117 is applicable to insurance contracts issued regardless of the issuer’s typical business. So even a construction or manufacturing company can issue an ‘insurance contract’ in substance. For example, a parent company’s guarantee to complete a project or pay damages if its JV fails is very much like a performance bond, which economically is an insurance contract (the parent takes on the project completion risk). If such risk is significant and the compensation is linked to an adverse event (project failure), the guarantee meets the insurance contract definition.

If a guarantee qualifies as an insurance contract under Ind AS 117, the issuer has two possibilities:

(a) Mandatory application of Ind AS 117 in general, insurance contracts should be accounted under Ind AS 117, which involves recognition of a liability for remaining coverage and incurred claims, measured using either the general model (fulfilment cash flows plus a contractual service margin) or the simplified premium allocation approach, along with disclosure of risk assumptions, etc. Ind AS 117 is a complex standard and will result in a very different measurement than Ind AS 109. For non-insurers, applying Ind AS 117 could be challenging operationally, but it might better reflect the nature of the obligation (especially if there are many guarantees issued or which extends over multiple periods and the risk is significant).

(b) Elect to apply Ind AS 115 (for service contracts) or Ind AS 109 (for certain credit limits). Ind AS 117 itself provides some scope choices. In particular, if a contract’s primary purpose is the provision of services for a fixed fee (often called the “fixed-fee service contract” scope exception, e.g. certain extended warranty contracts), an entity may choose to account for it under Ind AS 115 instead. Also, as noted earlier, if the contract is essentially a financial guarantee (compensation capped at the amount of the debtor’s obligation), the issuer can choose Ind AS 109 or Ind AS 117. These choices are to be made carefully and consistently for similar contracts, and once made for a portfolio, the choice is irrevocable.

In summary, a guarantee that transfers significant non-financial risk (and is not a financial guarantee of debt) will generally fall under Ind AS 117. The guarantor would account for it much like an insurance company would by recognizing an insurance contract liability, measuring the best estimate of fulfilment cash outflows plus a risk adjustment, and recognizing income as it is released from risk over time (if consideration is received, unearned premium or a similar liability is recognized). If no consideration is received (e.g., a parent gives a free performance guarantee for its JV), under Ind AS 117 the initial recognition would still record a liability for the stand-ready obligation and a corresponding deemed contribution (much as under Ind AS 109 , the entity would record a contribution). The recent guidance essentially reminds companies that not all guarantees are financial instruments, some are insurance contracts in nature and should be accounted for using insurance principles, even by non-insurers. Importantly, this is not an elective treatment as per step 1, this is not a per contract election, and would apply to all contracts of this nature.

Step 3: If neither financial guarantee nor insurance contract, then consider other standards (Ind AS 109, 115, or 37).

If after the above analysis the guarantee doesn’t neatly fit Ind AS 109 or Ind AS 117, then one needs to look at other accounting standards that might capture the substance of the guarantee. In Ind AS context, the remaining possibilities are:

(i) Ind AS 109 (other scopes): Just because a guarantee is not a ‘financial guarantee contract’ by definition, it might still be within Ind AS 109 if it meets another category. For example, loan commitments. Paragraph 2.3 of Ind AS 109 brings some loan commitments (to provide a loan at below-market rates) into its scope. A standby liquidity facility or guarantee to lend money if needed might fall here. In such cases, recognition and measurement principles for financial liabilities of Ind AS 109 would apply.

(ii) Ind AS 115: If the guarantee is issued to a counterparty that is also a customer in a revenue contract, and none of the above standards captures it, Ind AS 115 might come into play. Ind AS 115 excludes financial instruments and insurance contracts from its scope, but if the guarantee doesn’t qualify as those, and it is part of the sales deal, the arrangement could be treated as a performance obligation or a guarantee obligation under the revenue standard. For example, consider a technology vendor that guarantees a certain performance of a product for three years. If that guarantee is beyond a standard warranty (which itself is accounted either as assurance warranty, a cost accrual under Ind AS 37 or service warranty which is a separate performance obligation under Ind AS 115), it may effectively be a separate service that the customer receives (a form of insurance service). Ind AS 115 would then require identifying that performance guarantee as a distinct obligation and allocating some of the transaction price to it (or if free, perhaps recognizing a liability for the obligation to stand ready, akin to an onerous performance obligation). In a parent-subsidiary-customer scenario, like a parent guaranteeing the performance of its subsidiary to the customer, Ind AS 115 could be relevant in the consolidated financial statements of the parent (because from the group’s perspective, the customer contract includes a guarantee feature). In such consolidated accounts, any payout under the guarantee might be treated as a contract cost or a reduction of revenue rather than a separate financial expense. The entities should thus examine if a guarantee given to a customer (directly or implicitly) is actually an element of a revenue arrangement. If so, ensure compliance with Ind AS 115, e.g. recognize a liability for future penalty/compensation obligations as an offset to revenue, if material.

(iii) Ind AS 37: Finally, if none of the above standards governs the guarantee, Ind AS 37 serves as the fallback. Ind AS 37 applies to contingent obligations that are not within the scope of another standard. So, only when a guarantee does not qualify as a financial instrument or insurance contract, the entity account for it under Ind AS 37. In practice, very few guarantees should land here after the above analysis. Under Ind AS 37, if a provision is recognized, it would be measured as the best estimate of the obligation (similar concept to fulfilment cost but without the insurance contract framework of risk adjustment and service margin). If the likelihood of payout is low, it may only be disclosed as a contingent liability. However, entities must be cautious, if a guarantee is a contract that could potentially require payment, usually it does create a present obligation (even if conditional) and if not covered by other standards, Ind AS 37 would demand a provision if the obligation is probable and estimable.

CONCLUSION

The accounting for guarantees on obligations of other entities has evolved from a divergent practice to a more principled approach under Ind AS, made easy by the IFRIC agenda decision of April 2025 which provides clarification. The key is to identify the nature of risk a guarantee covers and apply the appropriate Ind AS, i.e., financial instrument standards for pure credit risk guarantees, insurance standard for performance and other non-financial risk guarantees, revenue standard for customer-related guarantees, and provisions standard only as a last resort. This multi-standard framework may appear complex, but it aligns each type of guarantee with the accounting model that best captures its economics under Ind AS.

In essence, the clarifying guidance (when translated to Ind AS) is that companies must use judgment to determine which Ind AS applies, based on the substance and terms of the guarantee contract, and apply that standard’s recognition and measurement requirements.

BCAJ Admin

The Accounting Dilemma of Extended Producer Responsibility: Indian Battery Waste Regulations

The Battery Waste Management Rules (“Rules”), as amended, impose Extended Producer Responsibility (EPR) obligations on producers that place battery in the market. These obligations require producers to ensure collection, recycling, or refurbishment, of waste batteries equivalent to a fixed percentage of batteries placed by them in market in prior years, based on the prescribed life of different types of batteries. EPR obligations may be discharged either through in-house recycling (where registered) or by purchasing EPR certificates from authorised recyclers.

If a producer fails to meet its EPR targets, it must pay environmental compensation, typically linked to the maximum notified rates of EPR certificates. The Rule 4(6A) provides that, “ In case the Producer stops its operations, the Producer shall have to discharge its Extended Producer Responsibility obligation in respect of Batteries already made available in the market till closure of operations, in accordance with provisions of these rules” This is a key legal feature that significantly drives the accounting analysis.

This regulatory design raises an important question, should producers recognise obligation only toward recycling/ refurbishment required in the current year (linked to the look-back for that year) (for ease referred to as ‘current year obligation’ in this Article), or should they recognise the cumulative liability for all past batteries placed in the market?

The purpose of this article is not to dive deep into the EPR rules, but to explain the accounting consequences with a simplified example. We use a very simple example, to demonstrate the accounting, and do not delve into the complexities of the underlying regulations.

ILLUSTRATIVE EXAMPLE

ABC Ltd is a battery manufacturer. EPR regulations require recycling calculated as 70% of batteries placed in market in the fifth preceding financial year. Assumed cost to meet the obligation ₹12000/ tonne, whether via purchase of EPR certificates or equivalent in-house recycling cost (discounting ignored). ABC is going to discharge its obligation by purchasing EPR certificates from recyclers. A simplified obligation schedule may look like the following:

Recycling/ Obligation year (FY)	Batteries placed in the market in 5^th preceding financial year (in tonnes)		Minimum Collection Target		Expected cost (₹million)
Recycling/ Obligation year (FY)	Year	Quantity (in tonnes)	%*	Obligated Quantity (in tonnes)	Expected cost (₹million)
2025-26	2020-21	10,000	70%	7,000	84
2026-27	2021-22	10,500	70%	7,350	88.2
2027-28	2022-23	11,020	70%	7,714	92.56
2028-29	2023-24	11,570	70%	8,099	97.19
2029-30	2024-25	12,150	70%	8,505	102.06
2030-31	2025-26	12,760	70%	8,932	107.18
Sub-total					571.19
2031-32	2026-27	13,400	70%	9,380	112.56
2032-33	2027-28	14,070	70%	9,849	118.19
2033-34	2028-29	14,770	70%	10,339	124.07
2034-35	2029-30	15,510	70%	10,857	130.28

Note:

(i) At the end of 2025-26, the entity must recycle 70% of 2020-21 batteries placed in the market, i.e., 7,000 tonnes costing to ₹84 million at ₹12,000/tonne.

(ii) All EPR target percentages used in above example are for illustrative purpose only. Actual targets applicable to producers vary by battery type, compliance year, and specific provisions under Rules. Further, obligations are based on batteries placed in the market, & targets differ per battery type (portable, automative, industrial, EV batteries).

The critical question is should the entity recognise a provision of ₹84 million (current years obligation only), or cumulative liability covering all batteries placed in the market, up to the reporting date that eventually need to be recycled (i.e., 2020-21 to 2025-26; ₹571.19 million), assuming financial year ending 31 March, 2026?

COMPETING VIEWS

View 1: Cumulative recognition (all batteries already placed in the market), i.e. ₹571.19 million

A present legal obligation based on past event arises when the battery is placed in the market. Settlement of the obligation then occurs either progressively via ‘5th preceding year’ schedule or in full on closure of the business. Once the product is placed in the market, the producer cannot escape liability. Rule 4(6A) specifically states that even if operation cease, producers must discharge all obligations for products already placed in the market. Because the producer cannot avoid settling the obligation for batteries already placed in the market till date, the obligation exists independently of future actions of the entity and should be recognised for the cumulative liability.

Under the Battery Rules, the closure clause removes the “exit” escape; if a producer stops operations, the producer must discharge all EPR for products already placed in the market. That means the obligation is inescapable once a sale/placement occurs; later events only affect timing (5th preceding year or accelerated on closure).

Ind AS 37 Provisions, Contingent. Assets and Contingent Liabilities anchors-

Paragraph	Principle
Paragraph 14(a)	A provision shall be recognised when an entity has a present obligation (legal or constructive) as a result of a past event	The past event is placement of battery in market, this creates the legal obligation to ensure collection and recycling of batteries.
Paragraph 17	The entity has no realistic alternative to settling the obligation created by the event	Because of the closure clause, the producer has no realistic alternative but to settle obligation for batteries already placed in market.
Paragraph 19	The obligation exists independently of future actions	Continuing market participation does not create the liability; it merely schedules settlement or accelerates it on closure.

Basis above, the Indian Battery Rules legally and inescapably bind the producer to settle the obligation for all past placements of batteries. Though the settlement of the liability is accelerated on closure, it is the past placement of batteries in the market that triggers the recycling liability. Thus, the obligating event is the past placement of batteries in the market itself, not continuing or future participation in the business.

Since, the obligation arises at sale and cannot be avoided, recognition should be cumulative. Using the illustration above, the provision at March 31, 2026 (FY 2025-26) is ₹571.19 million for all batteries placed to date rather than only ₹84 million, that reflects a liability for the batteries placed in the market five year prior.

Views 2: One year recognition -linked to current market participation, i.e. ₹84 million

The main argument for supporting a provision of ₹84 million is that the obligating event is the participation in the market for the financial year 2025-26 (the measurement period). Each year’s obligation is separately determined by applying the prescribed percentage to placement of batteries made five years earlier. Future obligations are contingent on continued participation in the market. Closure of operations is a separate obligating event, not relevant unless and until it occurs. This view aligns with a situation, where the obligating event was participation in the market during the measurement period, not past placement of batteries in the market.

Further, obligating event is defined under Ind AS 37, as “An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.” In the instant fact pattern, can it be said that the obligating event is the cessation of the business that accelerates the liability? This aspect is discussed under final thoughts.

The other argument supporting View 2, are the provisions relating to the Technical Guide referred to below.

Technical Guide on Accounting for Expenditure on Corporate Social Responsibility Activities (Revised July 2025 Edition)

Whether Provision for Unspent Amount is required to be created?

“Other than on going project”

9. Sub-section (5) of section 135 of the Act has been amended by the Companies (Amendment) Act, 2019 whereby, any amount remaining unspent under sub-section (5), pursuant to an activity other than any ongoing project as per section 135(6), the company has to transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.

10. As per the said amendment, the company will have an obligation to transfer the unspent amount of “other than relating to an ongoing project” to a specified fund. Accordingly, a provision for liability for the amount representing the extent to which the amount is to be transferred, needs to be recognised in the financial statements. As the obligation to transfer unspent amount arises only at the financial year end and, during the year CSR spends can be incurred anytime. It may not be necessary that a provision being made towards such unspent amounts on pro-rata basis in interim / quarterly financials.

“On going project”

11. In case of any amount remaining unspent under section 135(5) pursuant to any ongoing project, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.

12. As there is an obligation to transfer the unspent amount to a separate bank account within 30 days of the end of financial year and eventually any unspent amount out of that to a Fund specified in Schedule VII, a provision for liability for the amount representing the extent to which the amount is to be transferred within 30 days of the end of the financial year needs to be recognised in the financial statements. As the obligation to set aside the unspent amount arises only at the financial year end, and during the year CSR spends can be incurred anytime. It may not be necessary that a provision being made towards such unspent amounts on pro-rata basis in interim / quarterly financials.

Basis paragraphs 9, 10, 11 and 12 of the above referred Technical Guide, as the obligation to transfer the unspent amount to a government fund or to set aside the unspent amount in Unspent CSR account arises only at the financial year end, and during the year CSR spends can be incurred anytime, it may not be necessary that a provision is made towards such unspent amounts on pro-rata basis in interim / quarterly financials. In other words, the provision need not be made on day one or pro-rata each quarter, and therefore the debit to profit or loss occurs on a cash outflow basis. Thus, as per the Technical Guide if all of the CSR obligation is spent on the last day of the financial year, or remains unspent, the provision is made on the last day of the financial year.

FINAL THOUGHTS

In our view, the argument for recognising only current year’s obligation (View 2) has little substance. The regulation clearly ties the obligation to all of the past placement of batteries, and not to market participation in a later year. The obligating event is the past placement of batteries and not the closure or liquidation of the business. Closure merely accelerates the settlement of a liability that already exists. Furthermore, the Technical Guide is specific to the creation of a CSR obligation and may not be relevant to interpret the instant facts. Also, one may argue that the Technical Guide view is based on legal position that the entity need not transfer unspent amount if it ceases operation during the year. However, the same is not possible for EPR obligation. Hence, the two positions are not comparable. More importantly, the provisions relating to Ind AS 37 are more authoritative than the Technical Guide. Therefore, the cumulative recognition approach (View 1) is the only appropriate view. The total obligation should be measured with reference to all placement of batteries made in past periods, and a provision (to be discounted as required) recognised accordingly basis the measurement principles in Ind AS 37.

Given the explicit-closure settlement requirement and cycle end 100% rule, Indian Battery EPR is in substance a cumulative obligation. Once batteries are placed in the market, the EPR obligation arises and cannot be avoided. Recognising only one year’s obligation understates the liability and fails to reflect the substance of the rules. By contrast the E-waste regulations, did not contain any specific requirement regarding the closure of the business or liquidation, therefore, the provision to be made with regard to E-waste is restricted only to the period of market participation in a prior year.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

Going Concern is one of the basic assumptions for preparation of financial statements. In case there are circumstances where the auditor believes that the continuation of the activities of the company on Going Concern basis is subject to certain events, industry status, business decisions, continued financial support, etc., he has to include a paragraph on ‘Material Uncertainty over Going Concern” (MUGC). Given below are few instances of large companies where the auditor has reported on MUGC for the year ended 31st March 2025 along with related disclosures in Notes to the financial statements and Directors’ Report

SPICEJET LIMITED

A. Independent Auditor’s Report on Audit of the Standalone Financial Statements

i. Material Uncertainty Related to Going Concern:

Para 5:

We draw attention to Note 2A(a)(iii) to the accompanying standalone financial statement which describes that the Company has earned a net profit (after other comprehensive income) of ₹477.66 million for the year ended March 31, 2025, and, as of that date, the Company’s accumulated losses amount to ₹77,648.13 million and the current liabilities have exceeded its current assets by ₹38,450.67 million. These conditions together with other matters as described in Note 2A(a)(iii), indicates the existence of material uncertainties that may cast significant doubt about the Company’s ability to continue as a going concern. However, based on management’s assessment of future business projections and other mitigating factors as described in the said note, which, inter alia, is dependent on improvement in operational performance of the Company and settlement of dues with vendors and lenders of the Company, the management is of the view that the going concern basis of accounting is appropriate for preparation of accompanying standalone financial Statement.

In relation to the above key audit matter, our audit work included, but was not restricted to, the following procedures:

Obtained an understanding of the management’s process for identification of events or conditions that may cast significant doubt over the Company’s ability to continue as a going concern and the process to assess the corresponding mitigating factors existing against each such event or condition;
Evaluated the design and tested the operating effectiveness of key controls around aforesaid identification of events or conditions and mitigating factors, and controls around cash flow projections prepared by the management;
Obtained the cash flow projections for the next twelve months from the management, basis their future business plans;
Held discussions with the management personnel to understand the assumptions used and estimates made by them for determining the cash flow projections for the next twelve months;
Evaluated the reasonableness of the key assumptions such as expected growth in the revenue, expected optimisation in the costs etc. based on historical data trends, future market trends, existing market conditions, business plans and our understanding of the business and the industry;
Tested the arithmetical accuracy of the calculations and performed sensitivity analysis around possible variation in the above key assumptions; and
Evaluated the appropriateness and adequacy of disclosures in the standalone financial statements with respect to this matter in accordance with the applicable accounting standards.

Our opinion is not modified in respect of this matter.

Key Audit Matters

Para 8:

In addition to the matters described in the Basis for Qualified Opinion and Material Uncertainty Related to Going Concern section…

Report on Other Legal and Regulatory Requirements

Para 20:

Further to our comments in Annexure A, as required by section 143(3) of the Act, based on our audit, we report, to the extent applicable, that:

(e) The matters described in paragraph 3 of the Basis for Qualified Opinion section, paragraph 5 of the Material uncertainty related to Going concern section and paragraph 6 of the Emphasis of Matter section, in our opinion, may have an adverse effect on the functioning of the Company;

B. Notes to Standalone Financial Statements Note 2A – Summary of material accounting policies

(a)(iii) – Going concern assumption:

The Company has earned a net profit (after comprehensive income) of ₹477.66 million during the year ended 31 March 2025, and as of that date, the Company has negative retained earnings of ₹77.648.13 million, and the current liabilities have exceeded its current assets by ₹38,450.67 million. The Company has a positive net worth of ₹6,830.22 million as at 31 March 2025.

On account of its operational and financial position, the Company has not been able to operate its entire fleet of aircrafts and a large part of the same has become non-operational due to non-maintenance. Underutilisation of the fleet during the period has further affected the profitability of the Company. Over this period, the Company has deferred payments to various parties, including lessors and other vendors and its dues to statutory authorities and certain litigations.

The Company continues to implement various measures such as return to service of its grounded fleet, enhancing customer experience, improving selling and distribution, revenue management, fleet rationalization, optimizing aircraft utilization, redeployment of capacity in key focus markets, renegotiation of contracts and other costs control measures, to help the Company establish consistent profitable operations and cash flows in the future. The Company had also issued fresh equity shares and equity warrants on preferential basis in the current year to various investors under non-promoter category with an issue size of ₹10,600 million and qualified institutional buyers by way of qualified institutional placement amounting to ₹30,000 million. During the current year, the Company has also entered into settlements with certain aircraft/engine lessors. The Company is also in the process of regularising payments due to its vendors and is engaged in ongoing discussions with other vendors/lessors and expects some relief from settlement of their outstanding dues. Based on the foregoing business plans and its effect on cash flow projections, the management is of the view that the Company will be able to meet its liabilities as they fall due.

Accordingly, these financial statements have been prepared on the basis that the Company will continue as a going concern for the foreseeable future. The auditors have included ‘Material Uncertainty Related to Going Concern’ paragraph in their audit report in this regard.

C. Board’s Report

Directors’ Responsibility Statement:

In terms of Section 134(5) of the Companies Act, 2013, in relation to the audited financial statements of the Company for year ended March 31, 2025, the Directors of the Company state that:
(iv) the Directors have prepared the Annual Accounts of the Company on a ‘going concern’ basis.

VODAFONE INDIA LIMITED

A. Independent Auditor’s Report on Audit of the Standalone Financial Statements

i. Material Uncertainty Related to Going Concern:

We draw attention to Note 5 to the standalone financial statements, which describes the Company’s financial condition as of March 31, 2025 including its debt obligations due for the next 12 months. The Company’s financial performance has impacted its ability to generate cash flows that it needs to settle/refinance its liabilities as they fall due. The Company’s ability to continue as a going concern is dependent on support from the DoT on the AGR matter, successfully arranging funding and generation of cash flow from its operations that it needs to settle its liabilities as they fall due. Our opinion is not modified in respect of this matter.

ii. Key Audit Matters

In addition to the matter described in the ‘Material Uncertainty Related to Going Concern’ section, we have determined the matters described below to be the key audit matters to be communicated in our report……

iii. Report on Other Legal and Regulatory Requirements

(2) As required by Section 143(3) of the Act, we report, to the extent applicable, that:

(e) The matter described in Material Uncertainty Related to Going Concern paragraph above, in our opinion, may have an adverse effect on the functioning of the Company.

iv. Annexure 1 to the Independent Auditor’s Report – Companies (Audit and Auditors) Rules, 2020
Clause xix:

As referred to in ‘Material uncertainty related to Going concern’ section in our main audit report and as disclosed in Note 5 and 63(A) to the financial statements which also includes the financial ratios and ageing and expected dates of realization of financial assets and payment of financial liabilities, other information accompanying the financial statements, our knowledge of the Board of Directors and management plans and based on our examination of the evidence supporting the assumptions, there exists a material uncertainty that the Company may not be capable of meeting its liabilities, existing at the date of balance sheet, as and when they fall due within a period of one year from the balance sheet date.

We, further state that this is not an assurance as to the future viability of the Company and our reporting is based on the facts up to the date of the audit report and we neither give any guarantee nor any assurance that all liabilities falling due within a period of one year from the balance sheet date, will get discharged by the Company as and when they fall due.

B. Notes to Standalone Financial Statements

i. Note 5

The Company has incurred a loss of ₹274,421 Mn for the year ended March 31, 2025 and net worth stands at negative ₹698,562 Mn at that date.

– As at March 31, 2025, the Company’s outstanding debt from banks (including interest accrued but not due) is ₹23,451 Mn and Deferred payment obligation (including interest accrued but not due) towards Spectrum which is payable over the
years till FY 2044 and towards AGR which is payable over the years till FY 2031 aggregates to ₹1,949,106 Mn.
– The AGR instalment on which moratorium was availed as per the Telecom Reforms Package 2021, falling due during FY 2026 is ₹164,280 Mn (subject to engagement with the GoI as discussed in Note 3 above). Instalments related to deferred payment obligations towards spectrum payable during FY 2026 is ₹25,385 Mn.

– Debt from banks payable during FY 2026 is ₹16,000 Mn (excluding interest and amount reclassified as current on account of not meeting certain covenant clauses).

– The debt from banks include an amount of ₹7,260 Mn reclassified from non-current borrowings to short-term borrowings for not meeting certain covenant clauses under the financial agreements. The Company has exchanged correspondences and continues to be in discussion with the lenders for next steps/waivers.

– As of date, the Company has met all its debt obligations payable to its lenders / banks and financial institutions along with applicable interest. The Company is in discussion with banks to raise additional funds as required.

The Company’s ability to settle the above liabilities is dependent on further support from the DoT on the AGR matter as explained in note 3, fund raise through equity and debt and generation of cash flow from operations. Based on current efforts, the Company believes that it would be able to get DoT support, successfully arrange funding and generate cash flow from operations. Accordingly, these financial statements have been prepared on a going concern basis.

ii. Note 3 – AGR Matter

The Honourable Supreme Court on October 24, 2019 along with supplementary order dated July 20, 2020 delivered its judgement relating to the definition of Adjusted Gross Revenue. The order upheld the principal demand, levy of interest, penalty and interest on penalty as per DoT demands. In its final order of September 1, 2020 (all orders collectively referred as the AGR judgement), the Honourable Supreme Court has inter-alia directed that telecom operators shall after making payment of the first instance, make payment of 10% of the total dues as demanded by the Department of Telecommunications (‘DoT’) by March 31, 2021 and shall thereafter make payment in ten instalments commencing from April 1, 2021 to March 31, 2031, payable by 31st March of every succeeding financial year.

The Union Cabinet on September 15, 2021 announced major structural and process reforms in the telecom sector (“Telecom Relief Package 2021”) and approved deferment up to four years for AGR dues and spectrum auction instalments payable from October 1, 2021 to September 30, 2025 excluding the instalments due for spectrum auction conducted post 2021, without any change in the overall tenure. On October 14, 2021, DoT issued the required notifications giving an option for moratorium of Spectrum instalment and AGR dues to be confirmed by the Company. The Company conveyed its acceptance for the deferment of Spectrum auction instalments & AGR dues by a period of four years. Resultantly, the next AGR instalment of ₹164,280 Mn is due on March 31, 2026.

During the year, the Company’s review petition and a curative petition filed before the Hon’ble Supreme Court in FY22 and FY24 respectively have been dismissed.

Subsequently, in April 2025, the Company represented to the Department of Telecommunications (DoT) seeking certain relief on the AGR matter. Post disposal of the representation, the Company had filed a Writ Petition on May 13, 2025 seeking appropriate relief/direction in the matter before the Hon’ble Supreme Court, which has been dismissed on May 19, 2025. In the Company’s view, this dismissal does not preclude it from further engaging with the Government of India based on its foreseeable cashflows for arriving at an appropriate solution on the AGR matter before the next instalment date including amount disclosed in Contingent liability note 46(A)(ii)(b).

As at March 31, 2025, the net liability towards the AGR judgement amounting to ₹759,452 Mn [net of payment and conversion] of which ₹655,927 Mn is disclosed as deferred payment obligation (DPO) under long term borrowings and the balance of ₹103,525 Mn as short-term borrowings in the financial statements.

iii. Note 46(A)(ii)(b) – Capital and other commitments

Other Licensing Disputes – ₹105,800 Mn (March 31, 2024: ₹97,805 Mn):

Additional demands towards AGR dues till FY 2018-19 (mainly including amounts for the period till FY 16-17 not forming part of the affidavit submitted by the DoT to SC) which are subject to correction/revision on account of disposal of representations and any other outcome of litigations as finally determined by December 31, 2025 (refer note 3).

C. Directors’ Report & Management Discussion and Analysis

Auditors and Audit Reports:

Auditors’ Report and Notes to Financial Statements

The Board has duly reviewed the Statutory Auditors’ Report on the Financial Statements at March 31, 2025. The report does not contain any qualification, disclaimer or adverse remarks.

The Board has duly reviewed the Statutory Auditors’ Report on the Financial Statements including the Para of Material Uncertainty Related to Going Concern relating to the Company’s financial condition as at March 31, 2025 and its debt obligation due for the next 12 months, which has impacted the Company’s ability to generate the cash flow that it needs to settle/refinance its liabilities as they fall due. The Company’s ability to continue as a going concern is dependent on support from DoT on the AGR matter, successfully arranging funding and generation of cash flow from its operations that it needs to settle its liabilities as they fall due.

Note 5 to the financial statements cover the Material Uncertainty Related to Going Concern issue and the comments under para xix of Annexure 1 to the Independent Auditors’ Report, the clarification of which is self-explanatory. The Board believes that the Company’s ability to settle the liabilities is dependent on further support from the DoT on the AGR matter, fund raise through Equity & Debt and generation of cashflow from operations. Based on the current efforts, the Company believes that it would be able to get DoT support, successfully arrange funding and generate cashflow from operations. Hence, these financial statements have been prepared on a going concern basis.

OLA ELECTRIC MOBILITY LIMITED

A. Independent Auditor’s Report on Audit of the Standalone Financial Statements

i. Key Audit Matter

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the standalone financial statements of the current period. These matters were addressed in the context of our audit of the standalone financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

The Appropriateness of Management’s Use of The Going Concern Basis of Accounting:

See Note 2.6 to standalone financial statements

The key audit matter

The Management and Board of Directors of the Company have evaluated the Company’s ability to continue as a going concern in the foreseeable future. This is based on various factors including, inter alia, past history of losses, projections of future operating cash flows, available credit limits with banks, available cash and bank balances and its ability to raise funds.

The Company has incurred losses and has cash outflows for operations during the year. These events and conditions require the Company to consider mitigating circumstances in support of Company’s ability to continue as going concern.

The Company has used certain estimates and judgements to forecast its future cash requirement and its ability to generate future cash flows on a timely basis. These estimates and judgements include expected future operating cash flows of a material subsidiary based on its business projections from expansion of its business operations, projected market share of the Group, improved gross margins, launch of new products and expected operational efficiencies. These are fundamental for us to obtain sufficient appropriate audit evidence regarding the appropriateness of the use of going concern basis of accounting.

The Company has relied on existing liquidity, sufficient future operating cash flows and ability to raise funds to prepare the standalone financial statements on a going concern basis. Due to the judgement involved in this assessment made by the Management and Board of Directors, we have identified the appropriateness of management’s use of the going concern basis of accounting as a key audit matter.

How the matter was addressed in our audit

In view of the significance of the matter, we applied the following audit procedures in this area, amongst others, to obtain sufficient appropriate audit evidence:

Evaluating the design and operating its effectiveness of relevant control over the Company’s forecasting process.
Obtaining an understanding of the estimates and judgements made by the Management in preparing the cash flow projections for next twelve months from the end of the reporting period. Testing the underlying data and evaluating reasonableness of the assumptions used. For this, we compared the estimates with the industry reports. We also assessed consistency thereof with our expectations based on our understanding of the Company’s business.
Comparing the assumptions used in the forecasted statement of profit and loss and cash flows for the twelve months period ending 31st March 2026 with the Group’s business plan approved by the Board of Directors.
Applying sensitivities on the forecasts by considering plausible changes to the key assumptions used in the business plan.
Assessing the reliability of the cash flow forecasts through a retrospective analysis of actual performance subsequent to year-end in comparison to budgets.
Assessing the subsequent funding plan considered by the Management.
Assessing the adequacy of related disclosures in the standalone financial statements.

ii. Annexure A to the Independent Auditor’s Report on the Standalone Financial Statements

Clause xix

We draw attention to Note 2.6 to the standalone financial statements which explains that the Company has incurred a loss of ₹40 crore (31 March 2024: loss of ₹27 crore) resulting in accumulated losses of ₹468 crore as at 31 March 2025 (31 March 2024: ₹402 crore). Further, the Company has negative cash flow from operations during the current year amounting to ₹117 Crore (31 March 2024: ₹312 crore). Further, the Company has provided letters of support to all its subsidiaries indicating the Company’s intent to provide necessary financial support.

Notwithstanding above, the Company’s management believes that the Company will be able to continue to operate as a going concern for the foreseeable future and meet all its liabilities as they fall due for payment based on a) available cash and bank balances; b) available credit limits; c) ability to raise borrowings from the bank and d) expected future operating cash flows of a material subsidiary based on its business projections from expansion of its business operations, increase in gross margins, launch of new products and expected operational efficiencies.

On the basis of the above and according to the information and explanations given to us, on the basis of the financial ratios, ageing and expected dates of realisation of financial assets and payment of financial liabilities, our knowledge of the Board of Directors and management plans and based on our examination of the evidence supporting the assumptions, nothing has come to our attention, which causes us to believe that any material uncertainty exists as on the date of the audit report that the Company is not capable of meeting its liabilities existing at the date of balance sheet as and when they fall due within a period of one year from the balance sheet date.

We, however, state that this is not an assurance as to the future viability of the Company. We further state that our reporting is based on the facts up to the date of the audit report and we neither give any guarantee nor any assurance that all liabilities falling due within a period of one year from the balance sheet date, will get discharged by the Company as and when they fall due.

B. Notes to Standalone Financial Statements

Note 2.6 – Going Concern

The Company has negative cash flow from operations during the current year amounting to ₹117 Crore (31 March 2024: ₹312 crore) which is primarily on account of continued operating losses. Further, the company has provided letters of support to all its subsidiaries indicating the company’s intent to provide necessary financial support, which requires the Company to consider mitigating circumstances, in order to support its operations and meet its continuing obligations.

Accordingly, the Company’s management has carried out an assessment of its going concern assumption and believes that the Company will be able to continue to operate as a going concern for the foreseeable future and meet all its liabilities as they fall due for payment. To arrive at such judgement, the management has considered a) available cash and bank balances; b) expected future operating cash flows of a material subsidiary based on its business projections from expansion of its business operations, increase in gross margins, launch of new products, and expected operational efficiencies; c) available credit limits; and d) ability to raise borrowings from the bank. Further, the Board of Directors of the Company in their meeting dated 22 May 2025 have approved a resolution to raise funds up to ₹1,700 crores through issuance of non-convertible debentures and other eligible debt securities.

Accordingly, these standalone financial statements have been prepared on a going concern basis.

C. Board’s Report

Directors’ Responsibility Statement:

In accordance with the provisions of Section 134(5) of the Act, the Board of Directors to the best of their knowledge and belief confirm and state that:

(d) The directors have prepared the annual accounts on a going concern basis.

JSW BENGAL STEEL LIMITED

A. Independent Auditor’s Report on Audit of the Standalone Financial Statements

i. Material Uncertainty Relating to going concern:

We draw attention to Note 23.14, 23.14(a) and 23.14 (b) in the standalone Ind AS financial Statements, which indicates that there are material uncertainties relating to the allocation of coal and iron ore mines to the Company including its subsidiaries and its consequential impact on the implementation of the project. The events described in the said Note to the financial statements indicate that a material uncertainty exists that may cast a significant doubt on the Company’s ability to continue as a going concern. However, for reasons stated in the said note, the financial statements of the Company have been prepared on a going concern basis.

Our opinion is not modified in respect of this matter.

ii. Report on Other Legal and Regulatory Requirements

(2) As required by Section 143(3) of the Act, we report that:

(e) The matters described above in “Material uncertainty relating to going concern” para, in our opinion, may have an adverse effect on functioning of the Company.

iii. Annexure 1 to the Independent Auditor’s Report on the Standalone Financial Statements

Clause xix:

On the basis of the financial ratios disclosed in note 23.10 to the financial statements, the ageing and expected dates of realization of financial assets and payment of financial liabilities, other information accompanying the financial statements, our knowledge of the Board of Directors and management plans and based on our examination of the evidence supporting the assumptions, the Company has obtained the letter of financial support from the Holding Company, nothing has come to our attention, which causes us to believe that Company is not capable of meeting its liabilities, existing at the date of balance sheet, as and when they fall due within a period of one year from the balance sheet date.

B. Notes to Standalone Financial Statements

i. Note 23.10

Disclosure of Ratios

Sl. No.	Ratio	31^st March 2025	31^st March 2024	% change from March 31, 2024 to March 31, 2025	Remark (Reasons for more than 25% variation in above ratio)
1	Current Ratio	1.76	1.45	31%	Due to receivable from Related party. Viz JSW Cement and JSW Steel. Payment of security deposit amounting ` 2 crores to JSW Cement.
2	Debt Equity ratio	0.01	0.01	0%	–
3	Debt service coverage ratio	0.14	(0.03)	18%	–
4	Return on equity ratio	(0.01)	(0.02)	1%	–
5	Inventory turnover ratio	N/A	N/A	–	–
6	Trade receivable turnover ratio	N/A	N/A	–	–
7	Trade payable turnover ratio	N/A	N/A	–	–
8	Net capital turnover ratio	N/A	N/A	–	–
9	Net profit ratio	N/A	N/A	–	–
10	Return on capital employed	(0.01)	(0.01)	0%	–
11	Return on investment	N/A	N/A	–	–

ii. Note 23.14

Status of the Project

In 2007, the company (together with its subsidiaries) entered into a Development Agreement with the Government of West Bengal and West Bengal Mineral Development and Trading Corporation (WBMDTC) to set up a 10 MTPA integrated steel plant with 1620 MW captive power plant at Salboni in Paschim Medinipur district of West Bengal and accordingly Government of West Bengal agreed to provide necessary assistance and cooperation for implementation of the project, including arrangement and supply of resources. In first phase, the Company obtained various approvals for setting up 3 MTPA steel plant and 300 MW coal-based power plant (Project). The State Government allocated 4102 acres of land necessary for the project on a long-term lease, with all the required approvals e.g., 14Y in place.

The Company had also entered into a long-term coal supply agreement for the Project with West Bengal Mineral Development and Trading Corporation Limited (WBMDTC). However. subsequently, three coal blocks allocated in favor of WBMDTC was cancelled pursuant to the judgment passed by the Hon’ble Supreme Court of India (Writ Petition (Criminal) No. 120 of 2012), vide order dated September 24, 2014 and since then the Company is exploring various alternatives to tie-up long-term coal supply linkages for the Project. The Company has also taken up matter with Government of West Bengal to secure coal supply linkages as per their commitments in the Development Agreement executed on January 11, 2007 for setting up of the Project.

In view of the above, the Project has been put on hold till the Company secure long-term coal and iron ore linkages/ resources required for the Project. However, The Company is committed towards implementing the Project with support of Central and State Governments and hopeful that it will be able to secure coal and iron ore linkages in due course of time. Also, the company is exploring the options for operating the plant based on bought out coal and iron ore, if the long-term linkage of resources form domestic market is not feasible.

Apart from the above efforts, the company as part of its commitment to state government and the local people to set up Project at Salboni and there by opening up avenues of large-scale economic activities amongst the surrounding communities. has subleased/transferred 133 acres of land to JSW Cement Limited, a JSW group company, for setting up of 2.4 MTPA cement plant with a 18 MW coal based Captive Power Plant and also received permission from Government of West Bengal dated 28.02.2022 for assignment of 14.4 acres of land to JSW Energy Ltd. for setting up 3.5 MW Solar Plant.

As a part of the initiative of opening up of the coal sector for commercial coal mining in the country, the Government of India had successfully auctioned 19 coal blocks for commercial mining under 1lth tranche of auction under the Coal Mines (special Provision) Act 2015 and first tranche of auction under Mine and Minerals (Development & Regulation) Act, 1957, auction conducted in November,2020. In light of the New Policy on Commercial Mining of coal blocks and option for coal linkages from Coal India Ltd, the Company is hopeful of securing coal linkages with support of GoWB.

In FY 2023-24, the company has proposed in the plan for conversion of leased property to free hold property and use of its significant portion for establishment of industrial park and commercial properties along with plan for setup of steel manufacturing plant. The company has also proposed an 880 X 4 megawatt Thermal Power Plant during 2024-25. This will foster economic growth for the state. For such conversion and developments there would be infusion of capital by JSW Steel Limited i.e., parent company, through private participation. However, there is a delay in processing the order from the Government of West Bengal and this entire process is anticipated to be completed in FY 2025-26.

JSW Steel Limited, the holding company, vide its letter dated 7th April 2025 confirmed its unconditional financial support to the company to enable it to continue as a going concern till such time the implementation of the project commences.

Considering the above, the Board of Directors are of the opinion that none of its assets is impaired as at 31st March 2025 and the going concern assumption is appropriate.

iii. Note 23.14(a)

Status of project of subsidiary Company -JSW Natural Resources India Ltd. (JSWNRIL)

JSWNRIL has been in the process of setting up coal mines project at Kulti Sitarampur coal blocks in West Bengal, under sole and exclusive Coal Raising Agreement entered with WBMDTC dated March 31, 2010, for raising the coal to be “exclusively used in Integrated Steel Plant Complex at Salboni of district Paschim Medinipur in West Bengal”, being set up by its Holding Company (JSW Bengal Steel limited). However, since the allotment of this coal blocks have been cancelled by order of the Supreme Court read with Schedule I of The Coal Mines (Special Provision) Act 2015, the above-mentioned agreement would no longer be valid. The Company is in the process of exploring certain alternatives to resource the long-term coal supply linkages and has also taken up with Government of West Bengal (GOWB) to resource long-term coal supply linkages as per its commitment in the Development Agreement dated 11th Jan 2007 signed for the Project. In view of the new Policy of Government of India (GOI) on allocation of Coal Blocks and Coal linkages from Coal India Ltd, the Company is hopeful of establishing fresh coal linkages with support of Govt of West Bengal. In view of given circumstances, at this juncture, there is no necessity of impairing the assets and investments as per provisions of Ind AS 36. Pursuant to clause V(l) of the said agreement, the Company had paid interest free Security Deposit of ₹ (Previous Year ₹ 18,750,000 for WBMDTC). However, since the allotment of this coal blocks has been cancelled by order of the Supreme Court, the Coal Raising Agreement for mining of coal from Kulti & Sitarampur Coal Blocks is no more valid and it has been refunded by WBMDTC vide letter dated 31.10.2018. WBMDTC has assured that, once the fund is released by Ministry of Coal on allocation of these coal blocks to successful bidder, they will refund the expenses incurred by the JSWNRIL related to coal blocks.

iv. Note 23.14 (b)

Status of project of subsidiary Company -JSW Energy (Bengal) Ltd. (JSWEBL)

JSW Energy (Bengal) Limited has been in the process of setting up a Captive Power plant for Integrated Steel Plant (ISP) of its Holding Company JSW Bengal Steel Limited at Salboni of district Paschim Medinipur in West Bengal. However, since the Long term linkages of Iron ore & Coal supplies, essential prerequisites for the ISP are still in process, the main erection work of ISP is yet to commence. But field survey of the ROW (Right of Way) for the purpose of identification of the landowners holding such plots of land within the alignment of ROW (water pipeline route) is in progress, for putting up 68 km cross country water pipeline for the project. As advised by Ministry of Environment, Forest and climate change, Government of India, the company has applied for renewal of its Environment Clearance (EC) which has since expired, due to unavoidable delays in the project. The recent proposal to set up the 1 x 660 MW super critical Power Plant (IPP) within the already acquired Project Lands has also not been found feasible with the Govt of West Bengal (GOWB) due to technical reasons. The Company had entered into a Long-Term Coal Supply Agreement for its Power plant project with (WBMDTC). However, since the allotment of this coal block has been cancelled by order of Supreme Court read with Schedule I of The Coal Mines (Special Provisions) second ordinance, 2014, the above-mentioned coal supply agreement would no longer be valid. The Company, along with GOWB, is in the process of exploring certain alternatives to resource the long-term coal supply linkages for the proposed power plant project.

BCAJ Admin

Current Or Non-Current – Decoding The New Rules Under Ind As 1

Ind AS 1, Presentation of Financial Statements sits at the core of how Indian companies communicate financial position and performance. The Companies (Ind AS) Second Amendment Rules, 2025 refine this foundation by tightening when an entity truly has the right at the reporting date to defer settlement, defining what counts as “settlement” for classification purposes, and adding targeted covenant-risk disclosures when non-current classification depends on meeting covenants within the next 12 months.

The amendments draw a clear line in the sand firmly separating what qualifies as current versus non-current, leaving no room for subjective interpretation. A temporary Indian carve-out applies in financial year (FY) 2025-26 allowing a post balance-sheet waiver to avoid current classification (with disclosure). From FY 2026-27 this relief goes and India fully converges with IAS 1 on breaches at period-end where only the rights on the reporting date speak, and everything else is noise.

WHY THE AMENDMENTS MATTER

Under the old wording, preparers often asked: Does a covenant tested after year-end affect classification? Can we rely on a lender’s waiver after the reporting date? What if we intend to settle early? Different interpretations led to inconsistency. The amendments address these by anchoring classification solely to enforceable rights at period-end, regardless of intentions or subsequent actions.

Pre vs. Post Amendment Criteria

Pre-amendments criteria	Pre-amendments criteria
An entity shall classify a liability as current when: (a) It expects to settle the liability in its normal operating cycle,	An entity shall classify a liability as current when: (a) It expects to settle the liability in its normal operating cycle,
(b) It holds the liability primarily for the purpose of trading,(c) The liability is due to be settled within twelve months after the reporting period, or	(b) It holds the liability primarily for the purpose of trading,(c) The liability is due to be settled within twelve months after the reporting period, or
(d) It does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.	(d) It does not have the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period.
An entity shall classify all other liabilities as non-current.	An entity shall classify all other liabilities as non-current.
When an entity presents current and non-current assets, and current and non-current liabilities, as separate classifications in its statement of financial position, it shall not classify deferred tax assets (liabilities) as current assets (liabilities).	When an entity presents current and non-current assets, and current and non-current liabilities, as separate classifications in its statement of financial position, it shall not classify deferred tax assets (liabilities) as current assets (liabilities).

Overview of Key Requirements (Pre vs. Post Amendment Criteria)

Area	Pre-Amendment	Post-Amendment
Paragraph 69(d) – Core definition	Liability classified current if due within 12 months or if no clear right to defer; wording left room for differing interpretations.	Clarified: liability is current if the entity does not have the right, at the reporting date, to defer settlement for ≥12 months. Anchors classification to enforceable rights existing at period-end.
Covenants (paragraph 72A–72B)	No explicit guidance on how covenants affect classification.	New paragraphs added: covenants linked to period-end measures affect period-end classification (even if tested later); covenants tested only after reporting date do not.
Rollover rights (paragraph 73)	Silent; practice varied.	Explicit: liability is non-current only if an unconditional rollover right exists at period-end.
Breach at period-end (paragraph 74)	No clear requirement; diversity in practice.	Two-step change: – FY 2025-26 transitional carve-out: waiver after year-end but before approval can avoid current classification (with Ind AS 107 disclosure). From FY 2026-27: carve-out removed. If breach exists at period-end, liability is current, regardless of waiver. Only a grace period in place at period-end preserves non-current.
Grace period (paragraph 75)	Not expressly codified.	Non-current if, by reporting date, lender provides a grace period extending ≥12 months.
Intent / early settlement (paragraph 75A)	Often debated; some looked to management intent.	Clarified: classification is unaffected by management’s intention or by actual settlement after year-end.
Definition of “settlement” (paragraph 76A–76B)	No definition.	Settlement defined: transfer of cash/other resources or own equity instruments (with an exception for equity components classified under Ind AS 32).
Events after reporting (paragraph 76)	Listed as non-adjusting events (refinancing, waivers, grace, settlement).	Temporarily deleted in 2025 text; reinstated from 2026.

Right to defer settlement

Earlier position (pre-amendment):

Under the pre-amended Ind AS 1, a liability could be classified as non-current only if the entity had an unconditional right to defer its settlement for at least twelve months after the reporting date. In practice, however, most loan agreements contain debt covenants that must be complied with either continuously (e.g., no change in control, no material adverse event) or at frequent intervals (e.g., quarterly or half-yearly debt-equity or current ratio tests). Although borrowers generally expected to comply, these conditions were not entirely within their control. This created uncertainty as to whether such loans met the strict “unconditional right” test. Different interpretations emerged in practice, leading to diversity in reporting and making it difficult for users to compare financial statements.

New position (post-amendment):

Post amendment, the standard no longer refers to an “unconditional right”; instead, it simply requires a right to defer settlement. This means that even a conditional right can support non-current classification of a financial liability or borrowing, provided it is substantive and exists at the reporting date.
A new paragraph also makes clear that, the right to defer settlement may be subject to compliance with covenants in the loan agreement. Only covenants requiring compliance on or before the reporting date are relevant for classification, even if the actual testing takes place after year-end.

Covenants that apply only after the reporting date (i.e., future covenants) do not affect classification. Instead, future covenants must be explained through disclosures in the notes, along with details of the related liabilities.

EXPECTED DEFERRALS AND INTENTIONS TO SETTLE EARLY

The amendments clarify that for a loan liability to be classified as non-current, the entity must hold a right to defer settlement for at least twelve months after the reporting date. Whether the entity actually intends to exercise that right is irrelevant.

The earlier reference to management’s expectations has been deleted, and a new paragraph makes this principle explicit: classification is unaffected by the likelihood of early settlement. Accordingly, if a loan meets the criteria for non-current classification, it remains non-current even if management intends or expects to repay within twelve months, or even if the entity actually repays the loan between the reporting date and the date the financial statements are approved for issue.

In such cases, the entity may need to disclose the timing of settlement in the notes to ensure users understand the impact on liquidity.

The amended standard also clarified that the “expected to be settled in the normal operating cycle” criterion for current classification is intended only for items such as trade payables and operating accruals that are part of working capital. This test does not apply to loans and similar financial liabilities.

IMPACT OF BREACHES TO DEBT COVENANTS – IND AS 1

The final amendments to Ind AS 1 retain a temporary carve-out for FY 2025-26 (periods beginning on or after 1 April 2025):

Material vs. minor breaches: Only a breach of a material covenant of a long-term loan triggers current classification. Breaches of minor provisions do not require reclassification.

Post-reporting date waivers: If there is a breach of a material covenant on or before the reporting date, the loan would normally be current.

However, under Ind AS 1 (FY 2025-26 only), if the lender provides a waiver after the reporting date but before approval of the financial statements, the loan may still be shown as non-current. Such waivers are treated as adjusting events.

From FY 2026-27 (periods beginning on or after 1 April 2026):

Both carve-outs are removed, and Ind AS 1 will be fully converged with IAS 1. That means, no distinction between material and minor breaches, i.e., any breach is relevant and waivers obtained only after the reporting date no longer cure the breach for classification. A liability is current if the breach exists at year-end, unless a grace period extending ≥12 months was already agreed at that date.

This transition means that entities preparing financial statements for FY 2025-26 can still apply the carve-out, but from FY 2026-27 onward, classification will strictly follow the principle that rights must exist at the reporting date.

To make the amendments easier to understand, here are some practical situations that show how classification works under revised Ind AS 1. In each case, the entity has a 31 March year end and a loan of ₹1,000 crores repayable on 31 March 2029.

Scenario 1 – Future covenant tests

The loan agreement requires compliance with debt covenants at the end of each quarter, i.e., 30 June, 30 September, 31 December, and 31 March 2025. The entity has complied with all covenants till 31 March 2025 and expects to comply going forward, but it is not fully within the entity’s control.

Analysis:

At the reporting date, the entity has the right to defer settlement for at least twelve months. Future covenant tests do not affect classification. Since there has been no breach up to 31 March 2025, the loan is classified as
non-current. The same conclusion would apply even if there were uncertainty about future compliance as the classification depends only on the position at the reporting date.

Impact across years:

There is no difference between FY 2025-26 and FY 2026-27 . Since no breach exists at the reporting date, the loan is non-current under both

Scenario 2 – Waiver before year-end

Same facts as Scenario 1 except that the entity anticipated in February 2025 that it might breach its covenant as at 31 March 2025. On 15 March 2025, it entered into an agreement with the lender under which the 31 March covenant test was waived. As a result, no breach on

31 March 2025 would give the lender the right to demand repayment, although future covenant breaches at later test dates could still trigger repayment.

Analysis:

Since the 31 March covenant was waived before the reporting date, there is no non-compliance at year-end. The entity therefore has the right to defer settlement for at least twelve months. Under the amended Ind AS 1, future covenant tests do not affect classification at the reporting date. The loan is classified as non-current.

Impact across years:

Because the waiver was obtained before the reporting date, the position is same under FY 2025-26 and FY 2026-27. Since no breach exists at the reporting date, the loan is non-current under both

Scenario 3 – Breach waived on reporting date

Same facts as Scenario 1 except that in this case, the entity did not comply with the covenant as at 31 March 2025, which gave the lender the right to demand immediate repayment. However, on the same date, the lender agreed to waive the non-compliance and confirmed it would not demand repayment for the breach at 31 March 2025. Future breaches at later covenant test dates could still trigger repayment.

Analysis:

Because the waiver was granted on the reporting date itself, the entity retained the right to defer settlement for at least twelve months. Under the amended Ind AS 1, future covenant tests do not affect classification at the reporting date. Accordingly, the loan is classified as non-current.

Scenario 4 – Short grace period

Same facts as Scenario 1 except that in this case, the entity did not comply with the covenant as at 31 March 2025, giving the lender the right to demand immediate repayment. On the same date, the lender agreed not to demand repayment until 30 April 2025. The lender also stated that if the entity complied with the covenant on 30 April 2025, it would not demand repayment for the 31 March breach. However, the lender retained the right to demand repayment for non-compliance with later scheduled covenant tests.

Analysis:

By agreeing not to act on the 31 March breach, the lender has effectively waived the non-compliance at the reporting date, but introduced an additional covenant test on 30 April 2025. Under the amended Ind AS 1, future covenant tests do not affect classification at the reporting date. Therefore, the entity is considered to have the right to defer settlement for at least twelve months after 31 March 2025. The loan is classified as non-current.

Impact across years:

The scenarios 1 to 4 above, use a 31 March 2025 year-end purely for illustration. The principles, however, apply equally to later periods — whether the reporting date is 31 March 2026 (first year of applying the FY 2025-26 amendments) or 31 March 2027 (first year after the FY 2026-27 convergence). For Scenarios 1 to 4, the outcome is unchanged across both years. Because any waiver (where relevant) exists at the reporting date, the entity clearly has the right to defer settlement for at least twelve months. The loan is therefore non-current under both FY 2025-26 and FY 2026-27 rules.

Scenario 5 – Breach waived after reporting date

Same facts as Scenario 1 except that in this case, the entity did not comply with the covenant as at 31 March 2025, giving the lender the right to demand immediate repayment. On the same date, the lender agreed not to demand repayment for one month (until 30 April 2025). At that point, the lender would reassess the entity’s covenant compliance and decide whether to continue the loan. The lender also retained rights for future covenant breaches at later scheduled dates.

Analysis:

Here, the lender has not waived the breach. Instead, it has only provided a short grace period of one month. Even if the entity complies on 30 April, the lender could still rely on the original 31 March breach to demand repayment. Therefore, the entity does not have a substantive right to defer settlement for at least twelve months. The loan must be classified as current.

Impact across years: The conclusion is the same under both FY 2025-26 and FY 2026-27 rules — a short grace period does not provide the right to defer settlement for twelve months. The loan remains current in both years

Scenario 6 – Intention to repay early

Same facts as Scenario 1, except the entity did not comply with the covenant as at 31 March 2025, giving the lender the right to demand immediate repayment. On 30 April 2025, the lender agreed to waive the non-compliance and confirmed it would not demand repayment for the 31 March breach. The lender still retained rights over future covenant breaches at later scheduled test dates.

Analysis:

At 31 March 2025, the entity did not have the right to defer settlement for at least twelve months — the waiver only came later.

Under IAS 1, such a waiver after the reporting date is a non-adjusting event, so the liability is current.

Under Ind AS 1 for FY 2025-26 (year ending 31 March 2026), India’s carve-out allows a waiver obtained after the reporting date but before approval of the financial statements to be treated as if it existed at year-end. The loan can therefore be shown as non-current.

From FY 2026-27 (year ending 31 March 2027), this carve-out is removed. The same facts will result in the loan being current.

Impact across years:

FY 2025-26: Loan is non-current (carve-out applies).

FY 2026-27: Loan is current (carve-out removed, aligned with IAS 1).

The above examples demonstrate how the amended Ind AS 1 brings clarity to the classification of liabilities as current or non-current. Under the pre-revised standard, treatment of future covenants was not explicitly addressed, which meant entities could arrive at different interpretations in practice. With the new guidance, the principle is clear: classification hinges on the rights that exist at the reporting date, not on expectations or post-date events.

The authors believe that it is therefore essential for entities to revisit past positions and ensure their policies and classifications are aligned with the amended requirements, particularly as the Indian carve-out on covenant breaches will be removed from FY 2026-27 onwards.

Example – Expected Early Settlement of Loan

As at 31 March 2025, an entity has a loan repayable in five years from the reporting date. The entity is planning to prepay this loan within the next three months. The financial statements of the entity for the year ended 31 March 2025 will be approved for issue on 31 May 2025.

In this case, the entity has a right to defer settlement for at least twelve months after the reporting date. The intention to prepay the loan does not affect classification. Hence, the liability is classified as non-current.

Will it make a difference if the entity has prepaid the loan before the financial statements were approved for issue?

The standard is clear that classification is based on the right of the entity at the reporting date. Hence, the loan will still be classified as non-current. However, the entity will be required to disclose the subsequent repayment as a non-adjusting event.

Will the position change if the entity has notified the bank of its intentions but has not entered into an irrevocable commitment to repay the loan within 12 months?

As stated above, the classification is based on the right of the entity at the reporting date. Hence, the loan will still be classified as non-current. However, the entity should make appropriate disclosures regarding its intention to prepay the loan.

What if the entity has entered into a binding agreement with the bank for early settlement before the reporting date and the said agreement is irrevocable?

In this case, the entity no longer has the right to defer settlement for at least twelve months at the reporting date. Accordingly, the loan is classified as current.

SETTLEMENT OF A LIABILITY BY ISSUE OF EQUITY INSTRUMENTS

Before the amendments, Ind AS 1 required that if a liability could be settled at the option of the counterparty by issuing equity instruments, this feature did not affect classification. For example, a convertible instrument repayable in cash after more than twelve months — but which the holder could choose to convert into equity at any time — was classified as non-current, since the cash maturity date was beyond twelve months.

The revised Ind AS 1 removes this clause. Now, settlement through the issue of equity instruments is also treated as settlement for the purpose of classifying a liability as current or non-current. The only exception is when the conversion option itself meets the definition of an equity instrument under Ind AS 32 Financial Instruments: Presentation.

Practical impact:

Many companies have issued convertible instruments that are redeemable only after a fixed period but allow the holder to convert them into a variable number of shares at any time. Prior to amendments, these were shown as non-current. After the amendment, they must be treated as current liabilities, because the counterparty can demand settlement immediately through equity.

Example– Classification of Optionally Convertible Redeemable Preference Shares (OCRPS)

An entity issues OCRPS redeemable after 10 years (either mandatorily or if there is no qualified IPO by the end of year 10). The holder, however, can require conversion into equity shares at any time after issuance. Consider the following conversion formulas:
Scenario 1: OCRPS are convertible into a variable number of shares based on the fair value of equity shares at the conversion date.

Scenario 2: OCRPS are convertible into a fixed number of shares upfront, but with down-round protection (number of shares changes if new shares are issued at a lower price).

Scenario 3: OCRPS are convertible into a fixed number of shares upfront, with no down-round protection or other clauses that change the conversion ratio.

Response:

Earlier position (pre-amendment):

Before the amendments, Ind AS 1 stated that if a liability could, at the option of the counterparty, be settled through the issue of equity instruments, this feature did not affect its classification. In practice, this meant that the holder’s right to demand early conversion into equity was ignored when deciding current versus non-current classification. As a result, in all three OCRPS scenarios discussed, the liability could reasonably have been shown as non-current in the balance sheet for years 1 to 9.

Amended position (post-amendment):

Following the amendments, the option to convert into equity can be ignored only if it qualifies as equity under Ind AS 32. If the conversion feature fails the equity test, it must be considered in classification. Accordingly, the following treatment will apply in the balance sheet for years 1 to 9:

Scenario 1: The OCRPS are convertible into a variable number of shares, determined based on the fair value of the equity shares at the conversion date. Under Ind AS 32, such a conversion feature is classified as a liability, not equity. Because the holder can demand conversion (and therefore settlement) at any time, the entire instrument must be classified as a current liability in years 1 to 9.

Scenario 2: The OCRPS are convertible into a fixed number of shares upfront, but the terms include a down-round protection clause, which can change the number of shares to be issued if new shares are issued at a lower price. Because the host instrument is a financial liability, this conversion option fails the “fixed-for-fixed” test and therefore does not qualify as equity under Ind AS 32. Instead, it is treated as an embedded derivative liability.

Under Ind AS 109, the issuer may measure the whole instrument at fair value through profit or loss (FVTPL) or separate the host liability (at amortised cost) and the embedded derivative (at FVTPL). Regardless of the measurement approach, the conversion feature is not equity. Accordingly, the entire OCRPS must be classified as a current liability in years 1 to 9.

Scenario 3: The OCRPS are convertible into a fixed number of shares upfront, with no down-round protection or other clauses that could change the number of shares to be issued. In this case, the conversion option qualifies as equity under Ind AS 32. The host instrument, however, remains a financial liability. Because the conversion option is treated as equity, it is ignored for classification purposes, and the OCRPS liability is classified as non-current in the balance sheet for years 1 to 9.

In year 10, once redemption falls due within twelve months, the liability becomes current in all scenarios, under both the pre-amended and post-amendment standards. Year 10 treatment:

This example highlights how the amendment fundamentally changes practice: only conversion options that meet the strict “equity” definition under Ind AS 32 are ignored. All others bring the liability into current classification, even if legal maturity is much longer.

NEW DISCLOSURE REQUIREMENTS

The amendments introduce detailed disclosure obligations when a liability from a loan agreement is classified as non-current, but the right to defer settlement depends on compliance with covenants falling due within the next twelve months. Disclosures required include:

(i) Information about the covenants:

(a) The nature of the covenants,

(b) When the entity must comply with them, and

(ii) If facts and circumstances suggests that the entity may face challenges in meeting such covenants, those circumstances must be disclosed. For example- indicate potential difficulty in compliance:

(a) The entity has already taken actions during or after the reporting period to avoid or mitigate a potential breach,

(b) The entity would not have complied with the covenants, if compliance had been assessed based on its circumstances at the reporting date

The authors believe that these disclosure requirements are entirely new for most entities. In the past, such disclosures were not made, both because there was no explicit requirement and because many companies considered covenant-related information to be confidential. With the amendments now in place, entities will have no choice but to comply. For instance, an entity with several loan arrangements and each with multiple covenants, may find itself required to disclose a long list of covenant details. In our view, the first set of disclosures (covering the nature of covenants, timing of compliance, and carrying amounts) will be necessary in all cases where:

(a) a loan liability is classified as non-current, and

(b) there are one or more covenants that require compliance within the next twelve months.

This requirement applies irrespective of whether management expects any difficulty in compliance.

With regard to the second disclosure, entities are expected to assess not only whether they have complied with covenants up to the reporting date, but also whether future difficulties may arise based on information available at that date. If such challenges are foreseen, they must be disclosed in the financial statements.

This requirement can be sensitive. Disclosure of potential difficulties may cause lenders, creditors, and other stakeholders to become more cautious, which in turn could accelerate the very risks being highlighted and reduce the chances of managing them successfully. To balance this, entities may also wish to explain how they plan to mitigate potential breaches. However, such disclosures should be factual, verifiable, and carefully worded to avoid inadvertently providing prospective financial information.

The amendments to Ind AS 1 apply retrospectively. For FY 2025-26 (periods beginning on or after 1 April 2025), companies must adopt the new rules including the temporary carve-out on covenant breaches and restate comparatives. From FY 2026-27 (periods beginning on or after 1 April 2026), this carve-out is removed, and Ind AS 1 is fully aligned with IAS 1. At that point, classification will depend only on rights that exist at the reporting date, and waivers obtained later will no longer change the outcome.

The amendments to Ind AS 1 mark a turning point in liability classification. FY 2025-26 is the clarity year: rights at the reporting date take centre stage, covenants and settlement are defined, and new disclosures improve transparency with a temporary waiver relief for breaches.

FY 2026-27 is the convergence year: the waiver relief ends, events after reporting return as disclosures, and India stands fully aligned with IAS 1. The authors believe that for preparers, the message is simple: focus on the rights that exist at the reporting date, review covenant terms carefully, and be ready to explain them clearly in the notes.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

Given below are relevant extracts from the financial statements and related disclosures for a company wherein auditors issued a qualified opinion in a situation when during the course of inventory verification huge discrepancies were noticed and investigation ordered thereon. In terms of Ind AS 8, a restatement of the financial statements was also carried out.

RAMKRISHNA FORGINGS LTD (YEAR ENDED 31ST MARCH 2025)

FROM NOTES TO STANDALONE FINANCIAL STATEMENTS:

Note 26: Cost of materials consumed

	For the year ended March 31, 2025 (in ` Lakhs)	For the year ended March 31, 2024 (Restated) (Refer note 47 & 52) (in ` Lakhs)
Inventories at the beginning of the year (Refer note 14 & 47)	19,293.37	17,549.76
Additions pursuant to Amalgamation (Refer note 52)	–	96.16
Add: Purchases	1,97,777.21	1,81,903.20
	2,17,070.58	1,99,549.12
Less: Inventories as at end of the year (Refer note 14 & 47)	23,676.07	19,293.37
Cost of Materials Consumed	1,93,394.51	1,80,255.75
Inventories at the beginning of the year (Refer note 14 & 47)	19,293.37	17,549.76

Note 14: Inventories

	As at March 31, 2025 (in ` Lakhs)	As at March 31, 2024 (Restated) (Refer note 47 & 52) (in ` Lakhs)
(Valued at lower of cost or estimated net realisable value)
Raw Materials #	23,676.07	19,293.37
Work in Progress	29,410.79	39,875.79
Finished Goods #	30,341.35	13,723.58
Stores & spares (including packing material) #	23,378.59	21,174.89
Forgings Scrap	2,045.54	2,369.51
Less: Provision for Slow Moving Inventories	(342.23)	(462.23)
Total	1,08,510.11	95,974.91

# Includes goods-in-transit

a) Finished Goods ₹ 19,334.42 lakhs (March 31, 2024: ₹ 5,001.40 lakhs);

b) Raw Materials ₹ 199.84 lakhs (March 31, 2024: ₹ 192.03 lakhs);

c) Stores and Spares ₹ 195.89 lakhs (March 31, 2024: ₹ 94.65 lakhs)

Note 27: Increase in inventories of finished goods, work in progress and scrap

	For the year ended March 31, 2025 (in ` Lakhs)	For the year ended March 31, 2024 (Restated) (Refer note 47 & 52) (in ` Lakhs)
Inventory at the beginning of the year (Refer note 14 & 47)
Work-in-progress	39,875.79	39,456.92
Forgings scrap	2,369.51	3,600.15
Finished goods	13,723.58	10,356.06
	55,968.88	53,413.13
Inventory at the end of the year (Refer note 14 & 47)
Work-in-progress	29,410.79	39,875.79
Forgings scrap	2,045.54	2,369.51
Finished goods	30,341.35	13,723.58
	61,797.68	55,968.88
Inventory loss capitalised on trial run during the year	-1,557.07	-752.35
Additions pursuant to Amalgamation (Refer note 52)	–	580.64
	-7,385.87	-2,727.46

Note 47:

The Company carries out physical verification of inventory once in a year at the time of preparing annual financial statements. During the annual physical verification for the Financial Year ended March 31, 2025, it was noted that Work-In-Progress (WIP) book stock was higher than the physical stock in certain cases. At the request of the statutory auditors, the management of the Company convened an Audit Committee who appointed Independent External Agencies to initiate a joint fact-finding study for ascertaining the discrepancy in Inventory and reasons thereof. The Interim Joint Fact-Finding Report of the Independent External Agencies confirmed that certain erroneous entries/non- recording of rejections at plant resulted in overstatement of WIP / raw material / scrap inventory in the Financial Year ended March 31, 2025 and previous Financial Year ended March 31, 2024 by ₹22,052.43 lakhs and ₹5,022.26 lakhs respectively. The independent external agencies are still in the process of completing their joint fact finding as regards the root cause analysis of the above and final report will be submitted by them within the statutory timelines under the Companies Act, 2013. This matter has been commented upon by the Statutory Auditors in their audit report. The management does not expect any further significant accounting impact on the books of accounts arising out of the balance part of joint fact-finding being carried out by the independent external agencies.

The Company has recorded the impact of the discrepancy in the physical verification in its books of accounts for the year ended March 31, 2025 and restated previous financial year comparative as per Ind AS 8 – Accounting Policies, Changes in Accounting Estimates and Errors as follows:

	Reported as at and for the year ended March 31, 2024 (in ` Lakhs)	Restated as at and for the year ended March 31, 2024* (in ` Lakhs)
Cost of materials consumed	1,78,737.74	1,79,564.42
(Increase)/Decrease in inventories of finished goods, work in progress and scrap	-7,066.03	-2,870.46
Profit Before Tax (PBT)	43,653.35	38,631.10
Profit After Tax (PAT)	32,606.93	27,584.68
Inventories as at March 31, 2024	1,00,350.75	95,328.50
Total Equity as at March 31, 2024	2,67,256.19	2,62,233.94

* without considering the impact of restatement due to merger of ACIL with the Company.

The Company is in the process of strengthening its systems & internal control including enhancing the frequency, scope and coverage of physical verification and scope of the Internal Audit.

FROM INDEPENDENT AUDITOR’S REPORT

Basis for Qualified Opinion

As more fully disclosed in Note 47 to the accompanying standalone financial statements, during our observation of the physical verification, based on testing of sample of work-in-progress inventory with the book records, we noted that book stock was higher as compared to the physical stock and we requested management to initiate an independent investigation. The external agencies’ Interim Joint Fact-Finding Report highlights shortages in work in progress / raw material / scrap inventory quantities as at March 31, 2025 and as at March 31, 2024 which have been valued by the management at ₹22,052.43 lakhs and ₹5,022.26 lakhs respectively. The standalone financial statements for the year ended March 31, 2025 has been adjusted for the above including by way of restatement of the comparative figures for the year ended

March 31, 2024 as disclosed in the aforesaid note. Pending completion of the independent investigation, we are unable to comment on further consequential impact, if any, on the standalone financial statements.

FROM CARO REPORT

(ii) (a) The inventory has been physically verified by the management during the year except for inventories lying with third parties. In our opinion, the frequency of verification by the management and the coverage and procedure for such verification is not appropriate. Inventories lying with third parties have been confirmed by them as at March 31, 2025 and discrepancies were not noticed in respect of such confirmations. As more fully disclosed in Note 47 to the standalone financial statements, discrepancies of 10% or more in aggregate for Work In Progress and Forgings Scrap were noted on such physical verification which have been properly dealt with in the books of accounts. Discrepancy of 10% or more for other class of inventory were not noticed on such physical verification.

(xi) (a) In view of the reasons stated in the Basis of Qualified Opinion paragraph and more fully disclosed in Note 47 to the standalone financial statements, pending completion of the independent investigation, we are unable to comment as to whether there is any fraud by the Company or on the Company noticed or reported during the year.

(xiv) (a) The Company does not have an adequate internal audit system which commensurate with the size and nature of its business.

FROM REPORT ON ICOFR

Disclaimer of Opinion

We are unable to obtain sufficient appropriate audit evidence in respect of internal financial controls of the Company with reference to standalone financial statements, including with respect to the matter described in the Basis for Qualified Opinion paragraph of our auditor’s report on the standalone financial statements, to determine if the Company’s internal financial controls were operating effectively as at March 31, 2025. Accordingly, we do not express an opinion on Internal Financial Controls with reference to these standalone financial statements.

Explanatory paragraph

We also have audited, in accordance with the Standards on Auditing issued by ICAI, as specified under Section 143(10) of the Act, the standalone financial statements of Ramkrishna Forgings Limited, which comprise the Balance Sheet as at March 31, 2025, and the related Statement of Profit and Loss, including the statement of Other Comprehensive Income, the Cash Flow Statement and the Statement of Changes in Equity for the year then ended, and notes to the standalone financial statements, including a summary of material accounting policies and other explanatory information. We have considered the disclaimer of opinion reported above in determining the nature, timing, and extent of audit tests applied in our audit of the March 31, 2025 financial statements of Ramkrishna Forgings Limited and this report affects our report dated May 31, 2025 which expressed a qualified opinion on those standalone financial statements.

FROM DIRECTORS’ REPORT

j) Disclosure

The Auditors noted that during the course of the ongoing physical verification of inventories (being conducted by the management and observed by the Firm), it was discovered that there is a discrepancy in Inventory and requested to appoint an independent external agency for further fact-finding into the recording of production / WIP quantity of inventories and subsequent movement thereof for the period from 1 April, 2024 to 31 March, 2025. They further requested to provide to the Statutory Auditors as per the timelines mentioned in Section 143(12) of the Companies Act, 2013 and rules prescribed thereunder the report of the independent external agency. Based on review of the final report of the Independent External Agency when received, the Audit Committee and the Board shall provide reply/observation to the Auditor within the timelines prescribed under the applicable law.

GENERAL

The Company has not revised any of its financial statements or reports except for the financial statement pertaining to the Financial Year 31st March, 2024 on account of finding of the Interim Joint Fact-Finding Report of the Independent External Agencies on account of discrepancy in the inventory and merger of ACIL Limited & Wholly-owned Subsidiary with the Company w.e.f 19th February 2024.

BCAJ Admin

Corporate Social Responsibility (CSR) Obligation – Whether Day 1 Obligation?

INTRODUCTION

The main provisions of section 135 of Companies Act, 2013, as amended, can be summarised as follows:

Every company having net worth of r 500 crore or more, or turnover of r 1,000 crore or more or a net profit of r 5 crore or more during the immediately preceding financial year is required to spend 2% of the average net profit of the Company made in the immediately preceding 3 years on CSR activities as specified in the relevant schedule.
Earlier, in case of unspent CSR amount, Board of Directors were required to specify the reason for not spending the amount in the Board Report.
Basis subsequent amendments notified in official Gazette, in case of unspent CSR amount, the Companies are required to transfer unspent CSR amount in a separate government fund within six months of the expiry of the financial year, unless that unspent amount pertains to ongoing CSR projects.
In case of unspent CSR amount pertaining to ongoing CSR project, the Companies are required to transfer such amount within a period of 30 days from the end of the financial year to a special account opened with a scheduled bank called as Unspent Corporate Social Responsibility Account and such amount shall be spent by the Company within a period of 3 financial years from the date of such transfer, failing which Companies are required to transfer unspent CSR amount in a separate government fund.
Further, if the Company spends an amount in excess of its obligation in a year, the excess amount so incurred can be set off against the CSR obligation of immediate succeeding 3 financial years, subject to certain conditions.

Basis this amendment, the Company has a clear statutory obligation as at balance sheet date to transfer unspent amount to government fund/special account. Accordingly, a liability for unspent amount needs to be recognised in the financial statements. If the company decides to adjust such excess incurred amount against future obligation, then to the extent of such excess, an asset as prepaid expense needs to be recognised in financial statements.

QUERY

How should the amount required to be spent on CSR in a financial year be accounted for? Can it be recognised evenly over the four quarters or on an as incurred basis or should the obligation be provided for on Day 1 of the financial year?

RESPONSE

For the purposes of responding to this question, it is assumed that there are no contractual obligations incurred by the company.

References

Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets

Definitions under Paragraph 10

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation
Appendix C Levies

1 A government may impose a levy on an entity. An issue arises when to recognise a liability to pay a levy that is accounted for in accordance with Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets.

4. For the purposes of this Appendix, a levy is an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation (i.e. laws and/or regulations), other than:
a. those outflows of resources that are within the scope of other Standards (such as income taxes that are within the scope of Ind AS 12, Income Taxes); and
b. fines or other penalties that are imposed for breaches of the legislation.

8. The obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by the legislation. For example, if the activity that triggers the payment of the levy is the generation of revenue in the current period and the calculation of that levy is based on the revenue that was generated in a previous period, the obligating event for that levy is the generation of revenue in the current period. The generation of revenue in the previous period is necessary, but not sufficient, to create a present obligation.

11. The liability to pay a levy is recognised progressively if the obligating event occurs over a period of time (i.e. if the activity that triggers the payment of the levy, as identified by the legislation, occurs over a period of time). For example, if the obligating event is the generation of revenue over a period of time, the corresponding liability is recognised as the entity generates that revenue

Technical Guide on Accounting for Expenditure on Corporate Social Responsibility Activities (Revised July 2025 Edition)

Whether Provision for Unspent Amount is required to be created?

“Other than on going project”

“On going project”

ANALYSIS

On the basis of paragraph 4, Appendix C Levies, CSR liability is a levy. The obligating event for incurring CSR expenditure occurs on day 1 of the financial year, because if the Company is in existence on that day and had an average net profit in the preceding 3 financial years, the liability is crystalised. The Company is liable to incur the CSR expenditure, even if later during the financial year, it was wound up or merged with another company (as per one legal interpretation) or incurred heavy losses. In other words, if the requisite conditions are triggered on day 1 of the financial year, the company cannot escape the obligation, though the actual cash outflow could occur any time during the financial year, or if not spent, should be transferred to the requisite fund mentioned above, within the stipulated time after the financial year end.

Accordingly, though the CSR expenditure would be incurred throughout the financial year, the obligating event that gives rise to the CSR liability is the existence of the Company on Day 1 of the financial year, and the average net profit of the preceding three financial years of the Company is a positive number. This analysis is clear from a combined reading of Paragraph 8 and 11 of Appendix C Levies.

The expenditure on the CSR liability may occur evenly or unevenly throughout the financial year. That is of no relevance, to the recognition of the liability. The liability will be recognised on Day 1 of the financial year.

Even if a Company does not incur the expenditure in the financial year, it will have to transfer the unspent amount to an appropriate government fund or Unspent CSR account as the case may be. The amounts in the Unspent CSR account shall be spent by the company in pursuance of its obligation towards the CSR Policy within a period of 3 financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.

Basis paragraph 9,10, 11 and 12 of the above referred Technical Guide, as the obligation to transfer the unspent amount to a government fund or to set aside the unspent amount in Unspent CSR account arises only at the financial year end, and during the year CSR spends can be incurred anytime, it may not be necessary that a provision is made towards such unspent amounts on pro-rata basis in interim / quarterly financials. In other words, the provision need not be made on day one or pro-rata each quarter, and therefore the debit to profit or loss occurs on a cash outflow basis. Thus, if all of the CSR obligation is spent on the last day of the financial year, or remains unspent, the provision is made on the last day of the financial year, as per the Technical Guide.

This view may find support if the legal interpretation is that there is no CSR obligation (under Companies Act) if the company were wound up or merged with another company during the financial year. It may however be noted that there is no specific exemption under section 135 of the Companies Act, 1956.

View 2A

The above wordings “it may not be necessary” is ambiguous, suggesting that the Technical Guide allows two views, i.e. provision of unspent amounts each quarter on a pro-rata basis or unspent amount to be provided at the end of the financial year.

CONCLUSION

Currently there appears to be a mixed practice on when a CSR liability is recognised. It appears there are 3 views. Whilst View 1 is based on authors’ interpretation of the accounting standard Ind AS 37, View 2 and 2A are based on the interpretation in the Technical Guide referred to above. It appears that the Technical Guide has created one additional difference between International Financial Reporting Standards (IFRS) and Ind AS.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

Clause XI of CARO 2020, requires an auditor to comment on whether any fraud by the company or any fraud on the Company by its officers or employees has been noticed or reported during the year – the said clause also requires to mention whether any report under sub-section (12) of section 143 of the Companies Act has been filed by the auditors in Form ADT-4 as prescribed with the Central Government and whether the auditor has considered whistle-blower complaints, if any, received during the year by the company.

Given below are few instances of reporting by the statutory Auditor on the said clause for the year ended 31^st March 2025 and other disclosures, if any, in the Notes and Board’s report.

REPORTING ON CLAUSE XI OF CARO 2020

Motilal Oswal Financial Services Limited

a. We have been informed that one of the employees of the Company had carried out fraudulent act for an amount of ₹1.58 crores. FIR has been filed with the police department; the investigations are in progress and that particular employee has been terminated. The Company has also put a claim with the Insurance Company for the stated amount. In the meantime, the Company has accounted loss of ₹1.58 crores towards this matter in its books of accounts;

b. During the year, no report under sub-section (12) of Section 143 of the Act has been filed by secretarial auditor or by us in Form ADT – 4 as prescribed under Rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government. However, for the matter referred in para (xi) (a), we will be filing Form ADT-4 with the central government subsequent to the adoption of these financial statement by the Board of Directors, as certain set of information’s are getting collated by the management in this regard and the timeline to file the form for the matter stated in above para as per the Act still exists;

c. According to the information, explanation and representations given to us, no whistle blower complaint has been received by the Company during the year.

From Board’s Report

Reporting of frauds by Auditors

During the year under review, a fraud incident was identified following a customer complaint, and an internal investigation confirmed that the fraud was committed by an employee in relation to a customer. A police complaint was filed against the employee concerned, and the matter was subsequently brought to the notice of the Statutory Auditors and Secretarial Auditor during their audit. In compliance with Section 143(12) of the Act read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014 (as amended from time to time), the Statutory Auditors reported the incident to the Audit Committee within 2 (Two) days of becoming aware of it.

The Company’s Management further carried out a detailed investigation, including system log reviews, and confirmed that the employee had not engaged in similar misconduct with other customers. A broader verification across teams also revealed no other such instances. The incident has no impact on the Company’s compliance with applicable laws and regulations.

Credit Access Grameen Limited

a. To the best of our knowledge and according to the information and explanation given to us, no fraud by the Company or on the Company has been noticed or reported during the year covered by our audit except for multiple instances of misappropriation of cash by its employees as identified by the management during the year, aggregating to ₹ 2.07 crores as mentioned in Note 43(s) to the accompanying standalone financial statements. The Company has initiated necessary action against the employees connected to such instances including termination of their employment contracts and recovery of these amounts to the extent possible. The Company has recovered ₹ 0.48 crores from its employees and provided for / written off the unrecovered amount of
₹ 1.59 crores during the year ended 31 March 2025;

b. According to the information and explanations given to us including the representation made to us by the management of the Company, no report under sub-section 12 of section 143 of the Act has been filed by the auditors in Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014, with the Central Government for the period covered by our audit;

c. According to the information and explanations given to us, the Company has received whistle blower complaints during the year, which have been considered by us while determining the nature, timing and extent of audit procedures.

From Board’s Report

Details in respect of frauds, if any, reported by auditors:

Pursuant to Section 143(12) of the Act, the Joint Statutory Auditors and the Secretarial Auditors of the Company have not reported any instances of material fraud committed in the Company by its officers or employees. However, a few instances of cash embezzlement are reported under Note No. 43 of the Annual Financial Statements.

Extract of Note 43(s):

Instances of fraud reported during the year ended March 31, 2025 (Amounts in crores)

Instances of fraud reported during the year ended March 31, 2025

Manapurram Finance Limited

a. In our opinion and according to the information and explanations given to us, 166 instances of fraud
on the company has been reported by the management during the year amounting to r 510.47 million. (Refer Note No. 65 in Standalone Financial Statements);

b. A report under sub-section (12) of section 143 of the Act has been filed by us in Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government vide letter dated 27 December 2024;

c. A s represented to us by the Management, there are no whistle blower complaints received by the Company during the year.

From Notes to Financial Statements – Note 65:

From Notes to Financial Statements – Note 65

Aditya Birla Renewables Limited

a. According to the information and explanations provided to us and based on our examination of the records of the Company, a fraud involving misappropriation of funds amounting to ₹ 63.90 Lakhs (gross) by an employee was noticed and reported during the year. Of this amount, ₹ 7.15 Lakhs has been recovered as of the reporting date. The Company has initiated appropriate legal disciplinary actions for the recovery of the remaining balance;

b. The matter referred in “para a” above was reported to the Board of Directors, and appropriate disciplinary action has been initiated. However, since the amount involved is below threshold prescribed under Section 143(12) of the Companies Act, 2013, reporting to the Central Government in Form ADT-4 was not required;

c. As represented to us by the Management, there are no whistle blower complaints received by the Company during the year.

Reliance Power Limited

a. Based on the audit procedures performed by us and according to the information and explanations given to us, a fraud has been committed on the Company and its subsidiary Reliance NU BESS Limited (RNBL) (formerly known as “Maharashtra Energy Generation Limited”) by an entity (including its directors) by providing a fake bank guarantee of ₹ 6,820 lakhs which was submitted for the bidding with Solar Energy Corporation of India Limited (SECI). An amount of ₹ 590 lakhs was paid to the entity as bank guarantee facilitation commission. RNBL has filed a case with Economic Offences Wing (EOW) and the investigation is in progress. Based on the audit procedures performed by us and according to the information and explanations given to us, no material fraud by the Company has been noticed or reported during the year;

b. According to the information and explanations given to us, no report under sub-section (12) of section 143 of the Act has been filed by the auditors in form ADT-4 as prescribed under rule 13 of the Companies (Audit and Auditors) Rules, 2014 with the Central Government;

c. As represented to us by the Management, no whistle-blower complaints have been received by the Company during the year.

Bajaj Auto Limited

a. No fraud by the Company or no material fraud on the Company has been noticed or reported during the year except one case which has been informed to us by the management wherein an employee of the Company was involved in professional misconduct during the period from October 2021 to September 2023 leading to fraud of ₹ 1.71 crore on the Company. The employee has been terminated, and full amount has been recovered by the Company;

b. Report under sub-section (12) of section 143 of the Companies Act, 2013 has been filed by us in Form ADT – 4 as prescribed under Rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government;

c. We have taken into consideration the whistle blower complaints received by the Company during the year while determining the nature, timing and extent of audit procedures.

Grasim Ltd.

a. During the course of our examination of the books and records of the Company and according to the information and explanations given to us, we report that no fraud by the Company or on the Company has been noticed or reported during the year except a fraud on the Company relating to inventory identified by the management aggregating to ₹ 4.50 crore involving erstwhile employee, transporter and warehouse staffs for which the management has taken the appropriate steps;

c. We have taken into consideration the whistle blower complaints received by the Company during the year while determining the nature, timing and extent of audit procedures.

From Board’s Report

During the year, in the course of audit, auditors did not come across any instances of fraud, except a fraud relating to inventory identified by the Management aggregating to r 4.50 crore involving erstwhile employee, transporter and warehouse staff, for which the Management has taken the appropriate steps.

A report under sub-section (12) of Section 143 of the Companies Act, 2013 has been filed by one of the joint auditors of the Company in Form ADT-4 as prescribed under rule 13 of the Companies (Audit and Auditors) Rules, 2014 with the Central Government.

BCAJ Admin

Ind AS 16 – Property, Plant And Equipment Capitalization Of Costs In Case Of A Company Constructing A Single Asset

QUERY

Nuclear Power Corporation Ltd. (NPCL) has been established to construct nuclear plants in India. Typically, constructing a nuclear plant would take anywhere between 7-12 years depending upon the size and complexity of the project. Currently, NPCLs only activity is construction of one nuclear plant, though it plans to build more in the future.

NPCL employs a Chief Financial Officer (CFO), whose responsibilities include preparation of financial statements, overseeing audits, ensuring compliance with commercial regulations, arranging funding, and liaising with the board of directors, government bodies, and various multilateral agencies. At the nuclear plant construction site, NPCL also employs a site accountant and a store-keeper.

Whether the salaries and related employee benefits—such as bonus, gratuity, and employer’s contribution to the provident fund—for the CFO, site accountant, and store-keeper are capitalized as part of the cost of constructing the nuclear plant?

RESPONSE

Ind AS 16 References

Elements of cost

Paragraph 16

The cost of an item of property, plant and equipment comprises:

(a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

(b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

(c) the initial estimate of the costs of dismantling and removing ………….

Paragraph 17

Examples of directly attributable costs are:

(a) costs of employee benefits (as defined in Ind AS 19, Employee Benefits) arising directly from the construction or acquisition of the item of property, plant and equipment;

(b) costs of site preparation;

(c) initial delivery and handling costs;

(d) installation and assembly costs;

(e) costs of testing……; and

(f) professional fees.

Paragraph 19

Examples of costs that are not costs of an item of property, plant and equipment are:

(a) ………..;

(b) …………;

(c) ……………………………….; and

(d) administration and other general overhead costs.

Paragraph 21

Some operations occur in connection with the construction or development of an item of property, plant and equipment, but are not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management. These incidental operations may occur before or during the construction or development activities. For example, income may be earned through using a building site as a car park until construction starts. Because incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognised in profit or loss and included in their respective classifications of income and expense.

DISCUSSION

The guidance from Ind AS 16 can be summarized as follows:

Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management are capitalized.
Salaries paid to staff including related employee benefits such as bonus, gratuity and provident fund, which are directly attributable to construction of the asset are capitalized.
Administration and other general overhead expenses are not capitalized.
A simple example of a directly attributable cost would be the salary of a site engineer engaged in construction; while salaries of unrelated staff, such as sales personnel, would not qualify.
However, in practice, what is directly related to construction of an asset can be tricky and open to interpretation. The broad principle is that these are costs that would have been avoided if the asset had not been constructed. In other words, these are costs that are necessary for the construction of the asset, would not exist if the project didn’t exist, and are integral to bringing the asset to the condition and location necessary for it to operate as intended.

ANALYSIS OF THE FACT PATTERN

One extreme analysis of the fact pattern is that since NPCL’s only activity is constructing a nuclear plant, all of its costs must relate to that activity and should therefore be capitalized. However, this view is not entirely correct. Merely because constructing the nuclear plant is the sole activity of the company does not automatically mean that all costs are directly related to the construction and hence eligible for capitalization.

It is more appropriate to examine the actual functions performed by different employees to assess whether their roles are directly linked to the construction activity.

CFO – Chief Financial Officer – The CFO’s typical responsibilities include strategic financial planning, funding, governance, reporting, and stakeholder coordination. These tasks are generally performed at the head office (although location is not the determining factor). The CFO’s involvement in the actual construction is indirect—such as overseeing budgets or providing financial oversight—rather than participating directly in daily construction activities.

Site accountant – the typical role would involve on-site cost tracking, invoice processing for construction vendors, payroll for site labour, maintaining records for project-related expenses. The location of work would generally be at the construction site. The site accountant would be involved in day-to-day financial management of construction activities and ensure smooth functioning of
the project.

Store-keeper – The typical role of a store-keeper in construction activity would involve

Material Receipt & Inspection:

 Receives construction materials, tools, and equipment.

 Checks delivery against purchase orders and quality standards.

Inventory Management:

 Maintains accurate records of stock — both incoming and outgoing.

 Ensures proper storage to prevent damage/loss.

 Issues materials to various departments (civil, mechanical, electrical, etc.) as needed.

Consumption Monitoring:

 Keeps track of materials consumed vs. stock levels.

 Helps prevent wastage and pilferage, ensuring cost control.

Site Support:

 Coordinates with procurement, engineering, and site teams to ensure timely availability of materials.

 Supports audit and documentation of construction-related inventory.

CONCLUSION

Based on the above discussion, the treatment of salaries and related benefits is summarized as follows:

CFO

Not capitalizable under Ind AS 16, as the CFO’s role does not meet the “directly attributable” criterion.

The CFO’s functions are general and administrative.
These costs would be incurred irrespective of whether the plant was under construction, or if multiple projects were underway.

Site Accountant

Some may argue that the site accountants’ salary and related benefits are in the nature of site overhead and administrative expenses. However, these costs should be Capitalized, as the role is directly related to the construction activity.

The position supports the construction function exclusively by ensuring that funds are available to the project on time on a day-to-day basis. It would not exist in the absence of the project.

Store-keeper

Capitalizable, as the store-keeper’s responsibilities:

Are integral to the construction process.
Would not arise if the project didn’t exist.
Contribute to bringing the asset to the required condition and location for use.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

Standard on Auditing (SA) 701 ‘Communicating Key Audit Matters in the Independent Auditors’ Report’ requires auditors to communicate additional information to intended users of the financial statements to assist them in understanding those matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial statements of the current period. Communicating key audit matters (KAM) may also assist intended users in understanding the entity and areas of significant management judgment in the audited financial statements.

Given below are 3 interesting instances of KAM reported by Auditors for the year ended 31^st March 2025

Notes to Standalone Financial Statements

Note 2.3(e) – Derivative Instruments

Forex Derivatives

Initial recognition and subsequent measurement

The Company uses derivative financial instruments, such as forward, future and currency options contracts to hedge its foreign currency risks. Forex derivative instruments entered by the Company has not been designated as ‘Hedge’ and consequently are categorised as Financial Assets or Financial Liabilities at Fair Value Through Profit or Loss. Such derivative financial instruments are initially recognised at fair value through profit or loss (FVTPL) on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in the fair value of derivative financial instrument are recognised in the statement of profit and loss.

Commodity Contracts

Initial recognition and subsequent measurement

The Company enters into derivative instruments such as commodity future contracts to manage its exposure to risk associated with commodity prices fluctuations, which are accounted for as derivative at fair value through profit and loss.

Commodity Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

Commodity contracts, i.e., contracts for purchase and sale of non-financial assets, that are entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the Company’s own expected purchase, sale or usage requirements are held at cost. (‘own use contracts’). The Company does not recognize contracts entered into for own use in the financial statements, until physical deliveries take place or contracts become onerous. The purchase or sale contracts, which do meet own use exception, are treated as a derivative under Ind AS 109.

At the time of entering into contract, the Company’s management assesses whether the committed purchase and sales contracts should be designated as derivatives measured at fair value through profit and loss, or for own use, based on factors such as operational needs, and priorities, expected price fluctuation in commodity prices and recent trends of settlement on net basis. For contracts initially designated as own use, the management makes a continuous reassessment whether own use designation is appropriate, or they sho uld be designated as derivative based on the factors stated above and if a change is needed, the said change in made prospectively. For contracts initially designated as own use, no reassessment is made.

Refer Note 2.2 (xi) for key judgement and estimation related to Designation and valuation of Commodity Derivatives Contracts.

Note 2.2(xi) – Derecognition and valuation of Commodity

Derivative Contracts

The Company has committed purchase and sale contracts and commodity future contracts for edible and non-edible oils designation of such contracts as derivative contracts based on management’s judgement and assessment done periodically as per the Company’s policy and as per the latest trends of managing portfolio of commodity contracts including settlement of firm commitment contracts on net settlement basis or through delivery. Such commodity derivative contracts are recognised and measured at fair value where the management has made a judgement to designate contracts as financial instruments. In situation when the firm commitment contract no longer meets Ind AS 109 criteria for fair value designation, the Company does not use this designation. As at March 31, 2025, no committed purchase and sales contracts were designated as “Derivatives”.

Estimation of mark to market value of commodity derivative contracts are based on commodity future exchange quotations, broker or dealers quotations or market transactions in either listed or over the-counter (“OTC”) markets with appropriate adjustments for difference in local markets where the Company’s inventories located.

Kesoram Industries Limited (Consolidated Financial Statements)

Group Audit under SA 600

Key Audit Matters	How our audit addressed the key audit matters
Refer note 2 to the consolidated financial statements for the disclosures around basis for consolidation. As detailed in note 43 of the consolidated financial statements, the Holding Company has given effect of the demerger of Cement business from 1st March 2025. Post demerger, Cygnet Industries Limited (‘CIL’) remains the only operational business for the group which is audited by another firm of Chartered Accountants, and whose audit work has been considered by us for opining on the accompanying financial statements using the principles enunciated under SA 600, Using the Work of Another Auditor (‘SA 600’). Also, refer to paragraph 15 below. As on 31st March 2025, the financial information of CIL constitutes a significant portion of the Group’s assets and liabilities in the consolidated balance sheet as at such reporting date. Given its financial significance, the group audit strategy and approach required significant auditor attention in order to comply and ensure sufficient involvement as group auditor in accordance with the principles of SA 600 and accordingly, Group Audit has been identified as a Key Audit Matter for the audit of the current year.	Our audit procedures for auditing the consolidated financial statements and consolidation adjustments included, but were not limited to, the following: Obtained an understanding of the management’s process of preparation of consolidated financial statements comprising the Holding Company and CIL; Developed an overall audit plan to perform work around CIL’s financial information in accordance with the Guidance Note on Audit of consolidated financial statements and SA 600. Communicated the group audit instructions to the component auditor of CIL, including and not limited to materiality, audit risks identified at the Group level, and a questionnaire to understand the procedures performed by the component auditors to mitigate those audit risks and their response to the significant transactions and matters identified at the component level; Assessed the work performed by such component auditor, including discussions with the component auditor to understand their response and findings, as required; Performed additional audit procedures directly on the financial information of CIL as considered appropriate to obtain sufficient and appropriate audit evidence to issue opinion on consolidated financial statements; Obtained the audited financial statements of the components from the management of the Holding Company and traced the information to the consolidation workings provided by management; Reviewed inter-company eliminations, consolidation adjustments, alignment of Group accounting policies, and the resultant tax impacts; and Assessed the adequacy and appropriateness of the disclosures made in accordance with applicable accounting standards in these consolidated financial statements
Other Matter (para 15)
We did not audit the financial statements of one subsidiary, whose financial statements reflect total assets of `530.83 crores as at 31 March 2025, total revenues of `258.76 crores and net cash inflows amounting to `3.65 crores for the year ended on that date, as considered in the consolidated financial statements. The consolidated financial statements also include the Group’s share of net loss (including other comprehensive income) of Nil for the year ended 31st March 2025 in respect of one joint venture, whose financial statements has not been audited by us. These financial statements have been audited by other auditors whose reports have been furnished to us by the management and our opinion on the consolidated financial statements, in so far as it relates to the amounts and disclosures included in respect of these subsidiary and joint venture, and our report in terms of sub-section (3) of section 143 of the Act in so far as it relates to the aforesaid subsidiary and joint venture, are based solely on the reports of the other auditors. Our opinion above on the consolidated financial statements, and our report on other legal and regulatory requirements below, are not modified in respect of the above matters with respect to our reliance on the work done by and the reports of the other auditors.

Notes to Consolidated Financial statements

Note 2.02 – Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Group and entity controlled by the Group i.e. its subsidiary. It also includes the Group’s share of profits, net assets and retained post-acquisition reserves of joint arrangement that are consolidated using the equity method of consolidation, as applicable.

Control is achieved when the Group is exposed to, or has rights to the variable returns of the entity and the ability to affect those returns through its power over the entity.

The results of subsidiary and joint arrangement acquired or disposed off during the year are included in the consolidated statement of profit and loss from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Wherever necessary, adjustments are made to the financial statements of subsidiaries and joint arrangements to bring their accounting policies in line with those used by other members of the Group.

Intra-group transactions, balances, income and expenses are eliminated on consolidation.

Note 43(a)

Pursuant to the Scheme of Arrangement approved by the Board of Directors on November 30, 2023, and sanctioned by the Hon’ble National Company Law Tribunal, Kolkata Bench and Mumbai Bench on November 14, 2024 and November 26, 2024 respectively, the Cement Business of the Parent company was demerged and transferred to UltraTech Cement Limited with effect from the Appointed date of April 1, 2024; the Scheme became effective on March 1, 2025 upon fulfilment of all conditions precedent. In accordance with Clause 10.1 of the Scheme, the Parent company has transferred the assets and liabilities of the Demerged Undertaking at their book values as on the date immediately preceding the Effective Date and derecognized the same from its books; the fair value of such assets and liabilities has been debited to general reserve/retained earnings, representing a distribution of non-current assets to shareholders, and the difference between the book value and fair value has been recognized in the Statement of Profit and Loss. The financial results of the Cement Business have been presented as discontinued operations for all comparative periods as per Ind AS 105.

ITC Limited (Standalone Financial Statements)

Accounting for demerger of hotels business

Key Audit Matters	How our audit addressed the key audit matters
The Company, in the current year, has given effect to the scheme of demerger of Hotels business (demerged undertaking) into ITC Hotels Limited (ITCHL) pursuant to the Scheme of Arrangement (‘Scheme’). The Scheme was approved by the Hon’ble National Company Law Tribunal, Kolkata bench vide its order dated October 04, 2024 and the appointed date and the effective date of the Scheme is January 01, 2025. By virtue of this scheme being effective in the current year, the said demerged undertaking has been disclosed as discontinued operations till the effective date of the demerger. At the appointed and effective date, the Hotels business of the Company (along with all assets and liabilities thereof, excluding ITC Grand Central, Mumbai) and the investments held by the Company in Hospitality entities as defined in the Scheme were transferred to ITCHL on a going concern basis in accordance with the approved Scheme. Demerger is a significant non-routine transaction and requires determination of fair value of demerged undertaking for the purposes of accounting as per Ind AS which involves significant judgements and estimates which are sensitive to underlying assumptions (forecast of future cash flows, growth rate, weighted average cost of capital, discount rates etc). These judgements / estimates could have an impact on the recognition of the amount of liability for assets to be distributed to shareholders at fair value and the consequential gain as recognised in the standalone Ind AS financial statements. Due to the magnitude and complexity of the transaction and considering the assumptions and estimates required to be made by the management for the purpose of accounting and presentation / disclosures in the standalone Ind AS financial statements, this is considered as a key audit matter. Refer Note 29(x) to the standalone Ind AS financial statements.	Our audit procedures included the following: Obtained and read the Scheme and final order passed by the Hon’ble National Company Law Tribunal to understand its key terms and conditions. Evaluated the design and tested the operating effectiveness of the internal financial controls (including management review controls) relevant for recording the impact of the Scheme and related disclosures. Tested the Management’s working for identification of specific assets and liabilities of the demerged undertaking and relevant impact in the reserves as per the Scheme. Assessed the appropriateness of accounting treatment of this demerger and compared with applicable Indian Accounting Standards (Ind AS) and the approved accounting treatment in the Scheme. Obtained the report of the management’s expert for determination of fair value of demerged undertaking. Evaluated the competence and objectivity of the management’s expert. Involved our valuation specialist to review the appropriateness of methodology and key assumptions considered by management to determine fair value of the demerged undertaking. Assessed the adequacy and appropriateness of the disclosures made with respect to the accounting of the transaction as required by the applicable Ind AS.

Key Audit Matters

How our audit addressed the key audit matters

The Company, in the current year, has given effect to the scheme of demerger of Hotels business (demerged undertaking) into ITC Hotels Limited (ITCHL) pursuant to the Scheme of Arrangement (‘Scheme’). The Scheme was approved by the Hon’ble National Company Law Tribunal, Kolkata bench vide its order dated October 04, 2024 and the appointed date and the effective date of the Scheme is January 01, 2025.

By virtue of this scheme being effective in the current year, the said demerged undertaking has been disclosed as discontinued operations till the effective date of the demerger.

At the appointed and effective date, the Hotels business of the Company (along with all assets and liabilities thereof, excluding ITC Grand Central, Mumbai) and the investments held by the Company in Hospitality entities as defined in the Scheme were transferred to ITCHL on a going concern basis in accordance with the approved Scheme.

Demerger is a significant non-routine transaction and requires determination of fair value of demerged undertaking for the purposes of accounting as per Ind AS which involves significant judgements and estimates which are sensitive to underlying assumptions (forecast of future cash flows, growth rate, weighted average cost of capital, discount rates etc). These judgements / estimates could have an impact on the recognition of the amount of liability for assets to be distributed to shareholders at fair value and the consequential gain as recognised in the standalone Ind AS financial statements.

Due to the magnitude and complexity of the transaction and considering the assumptions and estimates required to be made by the management for the purpose of accounting and presentation / disclosures in the standalone Ind AS financial statements, this is considered as a key audit matter.

Refer Note 29(x) to the standalone Ind AS financial statements.

Our audit procedures included the following:

Obtained and read the Scheme and final order passed by the Hon’ble National Company Law Tribunal to understand its key terms and conditions.

Evaluated the design and tested the operating effectiveness of the internal financial controls (including management review controls) relevant for recording the impact of the Scheme and related disclosures.

Tested the Management’s working for identification of specific assets and liabilities of the demerged undertaking and relevant impact in the reserves as per the Scheme.

Assessed the appropriateness of accounting treatment of this demerger and compared with applicable Indian Accounting Standards (Ind AS) and the approved accounting treatment in the Scheme.

Obtained the report of the management’s expert for determination of fair value of demerged undertaking. Evaluated the competence and objectivity of the management’s expert.

Involved our valuation specialist to review the appropriateness of methodology and key assumptions considered by management to determine fair value of the demerged undertaking.

Assessed the adequacy and appropriateness of the disclosures made with respect to the accounting of the transaction as required by the applicable Ind AS.

Notes to Standalone financial statements

Note 29(x)

The Hon’ble National Company Law Tribunal, Kolkata Bench, vide Order dated 4^th October, 2024, sanctioned the Scheme of Arrangement amongst the Company and ITC Hotels Limited (‘ITCHL’) and their respective shareholders and creditors under Sections 230 to 232 read with the other applicable provisions of the Companies Act, 2013 (‘the Scheme’) for demerger of the Hotels Business of the Company (as defined in the Scheme) into ITCHL; certified copy of the Order was received on 16^th December, 2024. Upon fulfilment of all the conditions stated in the Scheme, including filing of the aforesaid Order with the Registrar of Companies, West Bengal, the Scheme became effective from 1^st January, 2025, being the Appointed Date and the Effective Date of the Scheme.

With effect from the Appointed Date, the Hotels Business of the Company (along with all assets and liabilities thereof, excluding ITC Grand Central, Mumbai) and the investments held by the Company in Hospitality entities viz., Fortune Park Hotels Limited, Bay Islands Hotels Limited, Landbase India Limited, Welcom Hotels Lanka (Private) Limited, Srinivasa Resorts Limited, International Travel House Limited, Gujarat Hotels Limited and Maharaja Heritage Resorts Limited were transferred to ITCHL on a going concern basis. Consequently, the carrying / book value of the net assets of the Demerged Undertaking (as defined in the Scheme) amounting to ₹10,694.76 Crores was transferred to ITCHL on a going concern basis.

Pursuant to the Scheme, ITCHL allotted 125,11,71,040 Equity Shares of ₹1/- each on 11^th January, 2025 to the shareholders of the Company (as on the Record Date i.e., 6^th January, 2025) and therefore it has ceased to be a subsidiary of the Company. The Company’s shareholding in ITCHL stands at 39.88% of its paid-up share capital and consequently, ITCHL has become an Associate of the Company.

As provided in the Scheme, the Company has accounted for the aforesaid demerger in its books of accounts in accordance with the Indian Accounting Standards (Ind AS) and generally accepted accounting principles in India. The fair value of the net assets of the Demerged Undertaking distributed to the shareholders of the Company, amounting to ₹22,033.37 Crores has been debited to General Reserve in the Statement of Changes in Equity. For this purpose, Retained Earnings amounting to ₹4,448.06 Crores has been transferred to General Reserve.

The carrying / book value of the net assets of the Demerged Undertaking [refer details in (a) below] to the extent of the Company’s continued holding in ITCHL amounting to ₹4,215.32 Crores has been added to the value of investment in ITCHL (Refer Note 4).

The excess of fair value of the net assets distributed to the shareholders of the Company and addition to the value of investment in ITCHL over the carrying value of net assets of the Demerged Undertaking and consequential adjustments of ₹63.44 Crores [refer details in (b) below] pursuant to the Scheme, has been recognised as an exceptional gain in the Statement of Profit and Loss amounting to ₹15,163.06 Crores [net of demerger related expenses of ₹454.31 Crores (2024 – ₹7.57 Crores)].

In terms of the requirements of Ind AS, the operations of the Hotels Business of the Company (excluding ITC Grand Central, Mumbai) have been classified as ‘Discontinued Operations’ for the year ended 31^st March, 2025 and comparative information in the Statement of Profit and Loss has been presented accordingly.

Brief particulars of the Demerged Undertaking / Discontinued Operations are given as under:

a. Carrying value of net assets of the Demerged Undertaking transferred as on the Appointed Date:

b. Consequential adjustments in ‘Other Equity’

c. Profit from Discontinued Operations (₹ in Crores)

# Figures in relation to operations of the Hotels Business are for the nine-month period from 1st April, 2024 to 31^st December, 2024.

* Tax expenses for the year ended 31^st March, 2025 includes ₹602.79 Crores (2024 – Nil) relating to deferred tax liability recognised on addition to the value of investment in ITCHL.

d. Net Cashflows attributable to the Discontinued Operations (₹ in Crores)

BCAJ Admin

Financial Reporting Dossier

A. KEY GLOBAL UPDATES

1. FRC: PUBLISHES GUIDANCE PROVIDING CLARITY TO AUDIT PROFESSION ON THE USES OF AI

On 26^th June 2025, the Financial Reporting Council (FRC) has published its first guidance on the use of artificial intelligence (AI) in audit, alongside a thematic review of the six largest firms’ processes to certify new technology used in audits.

FRC observed that most firms had well-established processes in place to certify Automated Tools and Techniques (ATT)prior to deployment for use in audits. However, in some cases, these processes were less mature and not supported by documented policies. They identified various examples of good practice across the certification process. This included innovative ways to identify opportunities for using ATTs in audits, guiding audit teams through the ATTs available to them depending on their requirements and targeting required training to relevant users. They also observed good practice across some firms to proactively review ATTs over time to confirm they remain appropriate for use in audits.

As AI tools continue to be utilised in audit, this new guidance outlines a coherent approach to implementing a hypothetical AI-enabled tool, and offers insights into FRC documentation requirements, all designed to support innovation across the audit profession. This guidance should support auditors and central teams at audit firms as they develop and use AI tools in their work, while also providing third-party technology providers with the regulatory expectations for their customer base.

The key features of the guidance, which are fundamental to the delivery of audit quality are as below:

» Two-part structure: Illustrative example of one potential way AI can be leveraged in an audit, as well as principles that are intended to support proportionate and robust documentation of tools that use AI

» Broad and forward-looking AI definition: Encompasses both traditional machine learning and deep learning models, including generative AI

» Balanced documentation expectations: Proportionate approach to prevent over documentation

» Sophisticated view on appropriate explainability: Acknowledges that appropriate levels of explainability vary based on context and usage

» Versatile principles: Illustrates topics, judgements and considerations that have broad applicability to other instances of AI use in audit

» Alignment with Government AI principles: Documentation guidance reflects the UK government’s five AI principles

» Relevant across market: The guidance contains material that clarifies how expectations translate into contexts where a tool is obtained from a third party

While comprehensive in scope, the guidance is not prescriptive and does not introduce new regulatory requirements, instead focusing on supporting innovation while maintaining appropriate standards.

2. FASB: UPDATE TO IMPROVE GUIDANCE ON SHARE-BASED CONSIDERATION PAYABLE TO A CUSTOMER

On 15^th April 2025, the Financial Accounting Standards Board (FASB) published an Accounting Standards Update (ASU) to provide accounting guidance for share-based consideration payable to a customer in conjunction with selling goods or services.

The changes improve financial reporting results by addressing the intersection of the requirements of FASB Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, and Topic 718, Compensation—Stock Compensation.

The amendments affect the timing of revenue recognition for entities that offer to pay share-based consideration (for example, equity instruments) to a customer (or to other parties that purchase the entity’s goods or services from the customer) to incentivize the customer (or its customers) to purchase its goods and services. Specifically, the amendments clarify the requirements for share-based consideration payable to a customer that vests upon the customer purchasing a specified volume or monetary amount of goods and services from the entity.

3. FASB: CLARIFICATION ON GUIDANCE FOR IDENTIFYING THE ACCOUNTING ACQUIRER IN A BUSINESS COMBINATION

On 12^th May 2025, FASB published an ASU that improves the requirements for identifying the accounting acquirer in FASB Accounting Standards Codification Topic 805, Business Combinations.

In a business combination, the determination of the accounting acquirer can significantly affect the carrying amounts of the combined entity’s assets and liabilities.

The ASU will revise current guidance for determining the accounting acquirer for a transaction effected primarily by exchanging equity interests in which the legal acquiree is a variable interest entity that meets the definition of a business. The amendments require an entity to consider the same factors that are currently required for determining which entity is the accounting acquirer in other acquisition transactions.

4. IAASB: REVISES FRAUD STANDARD TO ENHANCE PUBLIC TRUST

On 8^th July 2025, The International Auditing and Assurance Standards Board (IAASB) has revised International Standard on Auditing (ISA) 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. The updated standard responds to global scrutiny and stakeholder concern regarding the auditor’s role in detecting fraud. The revised standard clarifies the auditor’s responsibilities, emphasises a fraud lens in the auditor’s risk identification and assessment and the appropriate responses to assessed risks, and provides greater transparency in the auditor’s reports of publicly traded entities. ISA 240 (Revised) becomes effective for audits of financial statements for periods beginning on or after December 15, 2026, representing a practical and meaningful shift in how auditors assess and respond to fraud risks.

ISA 240 (Revised) incorporates the following key elements:

» Clearer Auditor Responsibilities – Strengthens and clarifies what auditors are expected to do when addressing risks relating to fraud.

» Reinforced Professional Skepticism – Introduces new requirements to elevate the consistency and effective practice of professional skepticism across all stages of the audit.

» Sharper Fraud Risk Assessment – Requires a focused “fraud lens” when identifying and addressing risks, with stronger links to related standards.

» More Effective Fraud Responses – Establishes a new section with clearer, enhanced requirements to guide how auditors respond to identified or suspected fraud.

» Improved Transparency and Communication – Emphasizes timely communication with management and those charged with governance, with clearer disclosures in the auditor’s report.

The revisions also align with ISA 570 (Revised 2024), Going Concern, recognizing that fraud and financial distress are often interrelated risks that must be addressed together to bolster corporate transparency and resilience.

5. IESBA: LAUNCHES PUBLIC CONSULTATION ON AUDITOR INDEPENDENCE FOR AUDITS OF COLLECTIVE INVESTMENT VEHICLES AND PENSION FUNDS

On 31^st March 2025, The International Ethics Standards Board for Accountants (IESBA) issued a Consultation Paper seeking feedback on whether revisions to the International Code of Ethics for Professional Accountants (including International Independence Standards) (the “Code”) are necessary to address the independence of auditors when they carry out audits of Collective Investment Vehicles (CIVs) and Pension Funds (collectively referred to as “Investment Schemes” or “Schemes”).

Investment Schemes enable investors to pool their funds and often rely on external parties (“Connected Parties”) for functions typically managed internally in conventional corporate structures. This structure introduces specific relationships that are highlighted in the Consultation Paper and need to be carefully considered to ensure that any threats to auditor independence are identified and appropriately addressed.

Key areas of focus include:

» The definition of “related entity” in the Code and its applicability to audits of Investment Schemes.

» The Connected Parties that should be considered in relation to the assessment of auditor independence with respect to the audit of an Investment Scheme.

» The application of the Code’s conceptual framework when assessing threats to independence resulting from interests, relationships, or circumstances between the auditor of an Investment Scheme and Connected Parties.

B. GLOBAL REGULATORS- ENFORCEMENT ACTIONS AND INSPECTION REPORTS

I. THE FINANCIAL REPORTING COUNCIL, UK

a) Sanctions against Sean Robert Clark in relation to the operations and investment activities of Thurrock Council

The Executive Counsel of the Financial Reporting Council (FRC) has agreed terms of settlement with Sean Robert Clark, Chief Financial Officer (CFO) of Thurrock Council, following his admission of Misconduct, in relation to his role in the operations and investment activities of Council’s affairs for the financial years ended 31 March 2018 to 31 March 2022.

The following sanctions were imposed on Mr Clark as part of the settlement:

Exclusion as a Member of the Association of Chartered Certified Accountants (ACCA) for a recommended period of 5 years; and
A Severe Reprimand.
In October 2017 Thurrock Council formally approved an Investment and Treasury Management Strategy document which set out an approach for borrowing on a short-term basis, primarily from other local authorities, and using the funds to make longer-term commercial investments (a “debt for yield approach”). Under this approach, short-term borrowing and investments eventually exceeded £1 billion, more than six times the Council’s annual budget.

A number of the investments ran into difficulties from 2020, and the Council reported the investment portfolio lost more than a quarter of its value. In September 2022 the Secretary of State appointed Commissioners to run the Council because of concerns around the “debt for yield” approach and associated governance issues.

In December 2022 the Council gave notice that its expenditure was likely to exceed its resources in that financial year, and extraordinary financial support was received from Central Government. In addition to agreed support in excess of £343 million, the Council has needed to make significant increases to Council Tax bills as well as cutting services, and has reported ongoing uncertainty as to the long-term financial position.

The sanctions reflect the seriousness of the Misconduct and its consequences, but also Mr Clark’s personal circumstances and the fact that he has co-operated with Executive Counsel’s investigation.

b) Sanctions against KPMG LLP and Nick Plumb.

The Executive Counsel to the Financial Reporting Council (FRC) has issued a Final Settlement Decision Notice (FSDN) under the Audit Enforcement Procedure against KPMG LLP (KPMG) and Nick Plumb (audit engagement partner) and imposed Sanctions as a result of the investigation into the Statutory Audit of the financial statements of Carr’s Group plc (Carr’s) for the financial year ended 28 August 2021 (FY21). Carr’s is the parent company of a corporate group operating in the agriculture and engineering sectors. In FY21 it was listed on the main market of the London Stock Exchange and was a Public Interest Entity (PIE).

Mr Plumb and KPMG breached the FRC’s 2019 Ethical Standard (the Ethical Standard) and International Standards on Auditing (ISAs) by failing to ensure compliance with applicable independence requirements. The independence issue arose because the Statutory Audit of Carr’s relied on the work of another firm (a component auditor outside the KPMG network, Firm X) who undertook the Statutory Audit of an associate of Carr’s, in circumstances where the audit engagement partner at Firm X had held the role for longer than five years, and Firm X had provided certain non-audit services to the associate entity.

In this case, whilst the quality of the audit work performed by the two firms is not brought into question, the breaches were serious. KPMG and Mr Plumb missed a number of opportunities in FY21 to establish the facts underpinning the breaches. The breaches in the current case involve the failure to identify bright-line prohibitions designed to secure the independence of the Statutory Auditor. The Respondents’ failings in this regard were of a basic and fundamental nature.

II. THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (PCAOB)

a) PCAOB Sanctions Two Firms for Violations Related to Required Audit Records and Disclosure of Key Information for Investors

On 11^th July 2025, the Public Company Accounting Oversight Board (PCAOB) announced settled disciplinary orders sanctioning two audit firms: one for violating PCAOB rules and auditing standards related to the timely assembly of a complete and accurate record of the work the firm performed and the other for failing to report key information on the PCAOB’s Form 3 within the required timeframe.

Proper audit documentation is essential to the audit process and investor protection, given that documentation serves as the written record that provides support for the representations in the auditor’s report. Form 3 reporting also provides key information for investors and others, including the initiation and conclusion of certain criminal, regulatory, administrative, or disciplinary proceedings against a firm or its personnel.

As detailed in the orders released:

» Goldman & Company, CPA’s, P.C. failed to timely assemble a complete and final set of audit documentation in connection with the audit of a broker-dealer, in violation of AS 1215, Audit Documentation. The order imposes on the firm a censure, $25,000 civil money penalty, and undertakings to review and certify its audit documentation policies and procedures and ensure annual training concerning audit documentation requirements.

» Raymond Chabot Grant Thornton LLP failed to timely report the initiation and conclusion of three proceedings brought against it by a local regulator, in violation of PCAOB Rule 2203, Special Reports. The order imposes on the firm a censure and $30,000 civil money penalty. The order also requires it to comply with its previously revised policies and procedures concerning PCAOB reporting requirements.

Without admitting or denying the findings, the firms settled with the PCAOB and consented to the PCAOB’s orders and disciplinary actions.

b) PCAOB Sanctions Audit Partner for Multiple Audit Failures in Consecutive Audits and Violation of Partner Rotation Requirements

On 12^th March 2025, The Public Company Accounting Oversight Board (PCAOB) announced a settled disciplinary order against Jaslyn Sellers, CPA, in connection with significant audit failures in her role as engagement partner in consecutive audits of issuer NetSol Technologies, Inc. for the fiscal years ended June 30, 2021, and June 30, 2022 (“NTI Audits”). The PCAOB also found that Sellers violated auditor independence requirements by serving as the NTI engagement partner for a sixth consecutive year, beyond applicable partner rotation limits.

Sellers failed during the NTI Audits to obtain sufficient appropriate audit evidence in multiple areas that she had identified as significant risks, including revenue recognition and accounting estimates. In addition, Sellers authorized the issuance of audit reports for each of the NTI Audits, which identified critical audit matters (CAMs). Those CAMs included descriptions of audit procedures intended to address each CAM, but certain of those procedures were not actually performed.

Sellers also failed to appropriately supervise the NTI Audits and violated U.S. Securities and Exchange Commission and PCAOB independence requirements by serving as the NTI engagement partner for a sixth consecutive year.

c) Deficiencies in Firm Inspection Reports:

1) M. S. Madhava Rao:

Deficiency: In an inspection conducted by PCAOB it has identified deficiencies in the financial statement audit related to Litigation, Claims, and Assessments, Revenue, Convertible Debt and Derivative Liabilities.

The firm’s internal inspection program had inspected this audit and reviewed these areas but did not identify the deficiencies below:

» With respect to Litigation, Claims, and Assessments: The firm’s procedures for identifying litigation, claims, and assessments and determining whether the financial accounting and reporting of such matters was complete and accurate consisted solely of obtaining letters of audit inquiry from the client’s lawyers, without evaluating such responses and performing other necessary procedures.

» With respect to Revenue:

i. The firm did not perform procedures to evaluate whether the issuer’s recognition of this revenue was in conformity with FASB ASC Topic 606, Revenue from Contracts with Customers.

ii. The sample size the firm used in its substantive procedures to test this revenue was too small to provide sufficient appropriate audit evidence.

iii. The firm did not identify and evaluate a GAAP departure related to the issuer’s omission of disclosures related to significant payment terms for its customer contracts as required by FASB ASC Topic 606.

» With respect to Convertible Debt, for which the firm identified a significant risk:

i. The issuer reported convertible notes payable with conversion features that were recorded as derivative liabilities.

ii. The firm did not perform any procedures to test certain convertible notes payable.

iii. The firm sent a positive confirmation request to the issuer’s lender for a convertible note payable. The confirmation was returned with an exception, and the firm did not consider the nature of the exception and whether additional evidence was needed.

iv. The firm did not perform any procedures to test the unamortized debt discount related to the convertible notes payable.

» With respect to Derivative Liabilities, for which the firm identified a significant risk:

i. The firm did not perform any procedures to evaluate the accounting treatment of the embedded conversion features as derivative liabilities.

ii. The firm did not perform substantive procedures to test the fair value of the derivative liabilities, beyond obtaining and reading a company-provided memo.

2) Brown Armstrong Accountancy Corporation.

Deficiency: In review, it had identified deficiencies in the financial statement audit related to Revenue and Significant estimates.

» With respect to Revenue, for which the firm identified a fraud risk. The firm’s selected a sample of transactions to test certain revenue. The firm did not perform any procedures to test whether certain of these transactions were appropriately recognized as revenue. Further, for certain other transactions, the firm did not perform sufficient procedures to test the related revenue because it limited its procedures to vouching to cash receipts

» With respect to a Significant Estimate, for which the firm identified a significant risk: The firm’s approach for substantively testing a significant estimate was to test the issuer’s process. The firm did not perform any procedures to evaluate the reasonableness of a significant assumption used by the issuer to develop this estimate, beyond testing the mathematical accuracy of the calculation.

III. THE SECURITIES EXCHANGE COMMISSION (SEC)

a) Charges Georgia-based First Liberty Building & Loan and its Owner for Operating a $140 Million Ponzi Scheme (10^th July 2025)

The Securities and Exchange Commission announced that it filed charges seeking an asset freeze and other emergency relief against Newnan, Georgia-based First Liberty Building & Loan, LLC and its founder and owner Edwin Brant Frost IV in connection with a Ponzi scheme that defrauded approximately 300 investors of at least $140 million.

According to the SEC’s complaint, from approximately 2014 through June 2025, First Liberty and Frost offered and sold to retail investors promissory notes and loan participation agreements that offered returns of up to 18% by representing that investor funds would be used to make short-term bridge loans to businesses at relatively high interest rates. The defendants allegedly told investors that very few of these loans had defaulted and that they would be repaid by borrowers via Small Business Administration or other commercial loans. The complaint also alleges that, while some investor funds were used to make bridge loans, those loans did not perform as represented, and most loans ultimately defaulted and ceased making interest payments. Since at least 2021, First Liberty operated as a Ponzi scheme by using new investor funds to make principal and interest payments to existing investors, according to the complaint. The complaint further alleges that Frost misappropriated investor funds for personal use, including by using investor funds to make over $2.4 million in credit card payments, paying more than $335,000 to a rare coin dealer, and spending $230,000 on family vacations.

The SEC seeks emergency relief, including an order freezing assets, appointing a receiver over the entities, and granting an accounting and expedited discovery. The SEC also seeks permanent injunctions and civil penalties against the defendants, a conduct-based injunction against Frost, and disgorgement of ill-gotten gains with prejudgment interest against the defendants and relief defendants.

b) Charges Three Arizona Individuals with Defrauding Investors in $284 Million Municipal Bond Offering that Financed Sports Complex (1st April 2025)

The Securities and Exchange Commission charged Randall “Randy” Miller, Chad Miller, and Jeffrey De Laveaga with creating false documents that were provided to investors in two municipal bond offerings that raised $284 million to build one of the largest sports venues of its kind in the United States.

As alleged in the SEC’s complaint, in August 2020 and June 2021, Randy Miller’s nonprofit company, Legacy Cares, issued approximately $284 million in municipal bonds through an Arizona state entity to finance the construction of a multi-sports park and family entertainment center in Mesa, Arizona. Investors were to be paid from revenue from the sports complex, and investors were given financial projections for revenue that were multiple times the amount needed to cover payments to investors, according to the complaint. However, the complaint alleges that the defendants fabricated or altered documents forming the basis for those revenue projections, including letters of intent and contracts with sports clubs, leagues, and other entities to use the sports complex. The sports complex opened in January 2022 with far fewer events and much lower attendance and generated tens of millions less in revenue than expected under the false projections, and the bonds defaulted in October 2022, according to the complaint.

The complaint alleges that these defendants used fake documents to deceive municipal bond investors into believing a sports complex would generate more than enough revenue to make payments to bondholders. The SEC will hold accountable individuals who defraud municipal bond investors.

BCAJ Admin

Accounting of Sale of Fertilizers and Related Subsidy

Rourkela Core Fertilizers Ltd (RCF), a fertilizer manufacturing company, sells fertilizers to dealers, who in turn sell to farmers. Under the Direct Benefit Transfer (DBT) scheme, the Government of India provides a fertilizer subsidy to RCF. This subsidy is disbursed based on actual sales made by dealers to the end-users—the farmers, for whom the subsidy is actually directed towards. These transactions are validated using Point-of-Sale (POS) devices at dealer location and authenticated through farmer identification, such as Aadhaar, Voter ID, or Kisan Credit Card.

The subsidy rates are notified by the government and are subject to periodic revisions, either retroactively or prospectively. RCF receives the subsidy upon submission of a valid claim supported by appropriate evidence.

There exists an inherent time lag between the sale of fertilizers by RCF to dealers and the subsequent sale by dealers to farmers. Subsidy entitlement is governed by the law in force at the time the dealer sells the fertilizers to the farmer. RCF recognizes revenue from sales when control of goods is transferred to dealers in accordance with Ind AS 115 – Revenue from Contracts with Customers. Based on the contractual terms and interpretation of Ind AS 115, RCF considers the point of dispatch to dealers as the moment of transfer of control and hence a trigger for revenue recognition. Accordingly, RCF recognizes revenue when goods are dispatched to the dealers.

RCF is evaluating appropriate timing for recognition of subsidy income, and is considering the following three alternative approaches. This note discusses the accounting treatment, excluding presentation aspects of the subsidy income.

View 1: Recognize the revenue when goods are dispatched to the customer at which time control is transferred in accordance with Ind AS 115. The subsidy is recognized as a variable consideration in accordance with Ind AS 115.

View 2: Recognise the revenue when goods are dispatched to the customer at which time control is transferred in accordance with Ind AS 115. The subsidy is recognised in accordance with the principles laid out in Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance. RCF interprets this to mean that the subsidy will be recognised only when the dealer sells the goods to the farmers, which will therefore not coincide with the timing for recognition of revenue on sale of good.

View 3: Recognise the revenue when goods are dispatched to the customer at which time control is transferred in accordance with Ind AS 115. The subsidy is recognised as a grant income in accordance with Ind AS 20. RCF interprets this to mean that the subsidy will be recognized at the time of recognition of the revenue, basis best estimate, which will then be trued up/down in subsequent period if necessary (for e.g., if the subsidy rate is revised).

Accounting Standard References

Ind AS 115 Revenue from Contracts with Customers

“31 An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.”

“47 An entity shall consider the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.”

“50 If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer.”

“87 After contract inception, the transaction price can change for various reasons, including the resolution of uncertain events or other changes in circumstances that change the amount of consideration to which an entity expects to be entitled in exchange for the promised goods or services.”

“98 An entity shall recognise the following costs as expenses when incurred: (a)…(b)…….. (c) costs that relate to satisfied performance obligations (or partially satisfied performance obligations) in the contract (i.e. costs that relate to past performance); and (d) costs for which an entity cannot distinguish whether the cost relate to unsatisfied performance obligations or to satisfied performance obligations (or partially satisfied performance obligations).”

Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance

“3. Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity”.

“7 Government grants, including non-monetary grants at fair value, shall not be recognised until there is reasonable assurance that: (a) the entity will comply with the conditions attaching to them; and (b) the grants will be received.”

“12 Government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate.”

Ind AS 2 Inventories

“9 Inventories shall be measured at the lower of cost and net realisable value.

Cost of Inventories

10 The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.”

“34 When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.”

Discussion

View 1: Recognise the revenue when goods are dispatched to the customer at which time control is transferred as per Ind AS 115. The subsidy is recognised as a variable consideration in accordance with Ind AS 115 and its estimated value is included in the transaction price.

Supporting Rationale:

a) Revenue is recognised on transfer of control of the underlying goods (fertilizers) at the time of dispatch in accordance with the contract with the dealers (para 31).

b) The subsidy received by RCF is a subsidy not to RCF but to the farmers. The subsidy received by RCF is a payment by the government on behalf of the farmers. In other words, RCF receives the consideration largely from the farmers (through the dealers) and partly from the government on behalf of the farmers (see para 47).

c) Since the amount to be received from the government may fluctuate, the provisions relating to variable consideration under Ind AS 115 will kick in. On this basis, variable consideration will be estimated using either the expected value method or the most likely amount method under Ind AS 115 whichever the entity expects to better predict the amount of consideration to which it will be entitled. The entity will constraint the amount determined to an extent that it is highly probable that significant reversal of revenue will not happen in subsequent period. In subsequent period, the variable consideration will be trued up basis the amount received from the government (see para 50 and 87).
d) In addition to the subsidy for which variable consideration is to be applied, variable consideration will also be applied for likely goods that may be returned by the dealers. A simple consequence of this is that the subsidy amount is also not recognized on estimated goods that may be returned by the dealers (see para 50 and 87).

e) This view will allow subsidy income on an estimated basis to be recognized in the same period it transfers control of the underlying goods (fertilizers). However, it is likely to require significant estimates which will get updated in subsequent periods. It is possible that this view would result in significant volatility in margins for each reporting period. Additionally, depending on extent of changes in subsidy rate, the matching principle may not be met in its entirety, as the entire cost of manufacture of fertilizers is booked in one period, while a specific portion of the revenue (resulting from changes in subsidy rates on channel stock, which is happening more frequently) is recognized in another period.

Dissenting opinion

The counter view in the extant case is that there is contract between RCF and the dealer, who is the customer. The ultimate customer is the farmer, who is the customer of the dealer and not of RCF. Apparently, neither the contract between RCF and the dealer nor the contract between the dealer and the farmer specifies that any portion of the consideration is payable to RCF by the government (on behalf of the farmer).

Transaction price under Ind AS 115 is defined as consideration that is paid by a customer to the vendor. Since the subsidy is received from the government who is not the customer of RCF, the fertilizer subsidy does not form part of the variable consideration element of the transaction price and is outside the scope of Ind AS 115.

Consequently, view 1 is not acceptable.

View 2: Recognise the revenue when goods are dispatched to the customer at which time control is transferred in accordance with Ind AS 115. The subsidy is recognized in accordance with the principles laid out in Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance. RCF interprets this to mean that the subsidy will be recognized only when the dealer sells the goods to the farmers, which will therefore not coincide with the timing for recognition of revenue on sale of good. Further, the cost of inventories will be allocated proportionately to the main revenue component and the subsidy element. Since the subsidy revenue is to be recognized in later periods, the proportionate cost of inventories will be carried forward as an asset, and adjusted against the subsidy revenue in subsequent periods.

Supporting Rationale

a) Basis paragraph 3 of Ind AS 20, in the case of RCF, the subsidy received on sale of fertilizers qualifies as a transfer of resources to an entity and hence is a grant under Ind AS 20.

b) The purpose of fertilizer subsidy is to ensure availability of fertilizer at an affordable rate to farmers. Under DBT regime, the Government decides subsidy rate for each season depending on trending of few products like DAP, Urea, MOP and Sulphur which are not having any direct link with cost of production of companies. However, the Government assumes that if above mentioned products are imported today and sold at certain prices, then, the companies require the difference as subsidy to sustain operations. Paragraph 4 of Ind AS 20 reads as, Government assistance takes many forms varying both in the nature of the assistance given and in the conditions which are usually attached to it. The purpose of the assistance may be to encourage an entity to embark on a course of action which it would not normally have taken if the assistance was not provided.

c) DBT regime requires accounting practice which is more aligned to subsidy entitlement under DBT, unlike the earlier scheme where the condition to receive the subsidy was tied to RCF selling the goods, rather than when the goods were ultimately purchased by the farmer. Under DBT regime, subsidy entitlement is final when material is sold to farmer.

d) The volatility on margins would be minimised and matching principle would also be met.

Dissenting View

a) The costs of producing inventories of fertilizers are costs incurred in fulfilling the contract with the customers i.e., dealers, which should be accounted for in accordance with Ind AS 2 and not in accordance with Ind AS 115 (para 9, 10, 34 or Ind AS 2). When such inventories are sold to the dealers, the carrying amount of the same should be expensed in the period in which the related revenue is recognised. No amounts can be recognised or carried forward to be adjusted against subsidy income in future periods.

b) The recognition of subsidy receivable with concurrent recognition of the subsidy income in profit or loss at the time of sale to farmers by the dealers would generally not be appropriate, since the reasonable assurance condition prescribed in paragraph 7 of Ind AS 20 is met when the goods are sold to the dealers, unless proved otherwise. The government is unlikely to renege on its promises and therefore the subsidy income recognition criterion is met at the point in time when the sale to dealers is recognised.

c) Even assuming the reasonable assurance condition that the grant will be received is not met, at the time of sale to dealers, the proportionate cost related to the subsidy cannot be separately treated as an asset. A portion of inventories on goods sold cannot be carried forward (to be adjusted against subsidy income in subsequent periods) and is neither permitted under Ind AS 2 (as discussed above) or Ind AS 20 (see para 12). Neither does Ind AS 115 (see para 98) allows such a cost to be carried forward.

Final recommendation

The correct accounting treatment is set out in View 3 below.

View 3: Recognise the revenue when goods are dispatched to the customer at which time control is transferred in accordance with Ind AS 115. The subsidy is recognized as a grant income in accordance with Ind AS 20. RCF interprets this to mean that the subsidy will be recognised at the time of recognition of the revenue (sale to dealers), basis best estimate, which will then be trued up in subsequent period if necessary (for e.g., if the subsidy rate is revised).

Consequently, the correct accounting treatment is summarised below:
a) Ind AS 115 will apply to sale of fertilizers to dealers and Ind AS 20 (para 3) will apply to subsidy income.

b) The Ind AS 115 revenues will be recognised at the time of transfer of control (see para 31 of Ind AS 115) along with entire cost of inventories (see para 34 of Ind AS 2).

c) The subsidy meets the definition of grant under Ind AS 20 since there is transfer of resources (cash subsidy) from the government to RCF in return for past compliance with a condition i.e., sale of fertilizers to the ultimate customer (viz., farmer) at the rate notified by the government and the grant is a revenue related grant (see para 3 of Ind AS 20).

d) RCF should assess, in its own circumstances, the point of time at which the reasonable assurance condition is met, having regard to factors such as, quantity of non-moving channel stock, if any, past experience in receipt of subsidy etc. In the extant case, the subsidy is intended to either reimburse to RCF a portion of cost of production of goods sold or to compensate RCF for loss of revenue arising on account of sales to the dealers at rates not commensurate with the cost of production. In both the situations, the periods in which the subsidy income should be recognised in profit or loss on a systematic basis will be the periods of sale to the dealers, provided the reasonable assurance condition prescribed in paragraph 7 of Ind AS 20 is met.

View 3 offers the most suitable accounting treatment. It establishes a consistent method for recognising revenue and the corresponding subsidy in line with the relevant Indian Accounting Standards, while also requiring adjustments (either upward or downward) to subsidy income when the government announces revised subsidy rates. Although these future subsidy true-ups may introduce volatility, such fluctuations are appropriate as they accurately reflect changes in government subsidy rates in subsequent periods.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

In the last few weeks, a large bank in India was in the news for several accounting lapses resulting in a discrepancy in its derivatives portfolio, interest income and other matters. The regulators were also actively monitoring the developments for the same. Given below are the relevant disclosures in the financial results of the Bank for the quarter and year ended 31^st March, 2025.

INDUSIND BANK LIMITED

From Independent Auditors’ Report on Standalone Financial Results pursuant to Regulation 33 and Regulation 52 of SEBI (LODR) (extracts)

Emphasis of Matters

4. We draw attention to Notes 12 to 16 to the Statement, which explain that the Board commissioned an investigation/review into the alleged discrepancies, covering the following significant matters:

a. Internal Trades Derivative Accounting under the head “Other Assets” amounting to ₹1,959.98 crores being accumulated notional profits since FY 2015-16 have been written off as a prior period item in the current financial year.

b. Incorrect accounting and subsequent reversal of cumulative interest income of ₹673.82 crore and Fee Income of ₹172.58 crores within the current financial year.

c. Certain incorrect Manual Entries posted in the “Other Assets” and “Other Liabilities” pertaining to prior years amounting to ₹595 crores has been set off during the current financial year.

The resultant findings from the investigation / reviews reports, in summary, revealed an involvement of senior Bank officials, including former Key Management Personnel (KMP), in overriding key internal controls across the aforesaid functions/areas, and a concealment from the Board and the statutory auditors of the wrongful accounting practices adopted, over such period of time, as indicated in the respective investigation/ review reports.

Basis our evaluation of the findings in the above reports, in particular the likely involvement of senior management in the above matters, we have reason to believe that suspected offences involving fraud may have been committed and thereby we have reported these to the Central Government under Section 143 (12) of the Companies Act, 2013 read with Companies (Audit and Auditors Rules), 2014.

5. We draw attention to Note 18 to the Statement, which explains that in light of the findings and adjustments noted above, in particular the override of management controls by KMPs, the Board of Directors initiated an internal review of material financial statement account captions and directed the Management and the Internal Audit Department to perform additional procedures such as reconciliations of system reports and listings with balances reflected in general ledger, test checks over such items in the listing and certain digital procedures over and above. Based on the above review, rectifications/ reclassifications including those relating to prior-period items were made to the accompanying Statement.

6. We draw attention to Notes 17 and 18 to the Statement which states that the Bank is currently in the process of determining the accountability of the persons involved in the discrepancies and irregularities mentioned in paragraph 4 above and assessing the resultant legal or penal implications, if any, that may arise thereon.

Our opinion on the Statement is not modified with respect to these matters.

From Notes to Standalone Financial results (extracts)

12. On March 10, 2025, the Bank filed a disclosure under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 stating that it had, during an internal review of process relating to other assets and other liabilities of derivative portfolio, noted discrepancies in these account balances and that an external firm appointed by the management
was carried out an independent review to validate its internal findings.

On March 20, 2025, the Board decided to appoint another independent professional firm to conduct a comprehensive investigation amongst others to identify the root causes of discrepancies, assess correctness and impact of accounting treatment, identify any lapses and establish accountability of persons involved.

The Bank has since received reports from both the firms. The investigation indicated that from FY 2016 to FY 2024, the Bank entered into several derivative transactions referred to as internal trades wherein the accounting followed was improper and not in consonance with the accounting guidelines. This incorrect accounting resulted in recognition of notional income in the Profit and Loss Account with corresponding balance in assets account over the years till FY 2023-2024.

Based on quantification of accounting discrepancies that were identified and confirmed in investigation report, other assets amounting to ₹1,959.98 crores being accumulated notional profits since FY2016 have been written-off as prior period item in the current financial year.

13. During the review of other assets and liabilities by the Internal Audit Department (IAD), it was noted that certain incorrect manual entries resulted in an unsubstantiated increase in other assets and other liabilities amounting to ₹595.00 crores. The Bank has determined that these assets need to be set off against corresponding other liabilities. The rectification of these have been carried out. This has no impact on the results of the Bank for the year ended March 31, 2025.

14. In conducting a review of the Bank’s microfinance portfolio for the period ended December 31, 2024, the IAD of the Bank noted incorrect recording of cumulative interest income of ₹673.82 crores and fee income of ₹172.58 crores. Reversal of this incorrect recording (net of an interim provision of ₹322.43 crores and actual interest income for this period of ₹101.41 crores) has resulted in an adverse impact of ₹422.56 crores during the quarter ended March 31, 2025.

In respect of the above matters mentioned in note 12, 13 and 14 above, the joint auditors have filed letter u/s 143(12) of the Companies Act, 2013 for suspected offense involving fraud.

15. The Bank during its internal review noted misclassification of certain microfinance loans as ‘standard assets’ along with accrual of interest income. The Bank corrected this classification resulting in an additional recognition of Non-Performing Advances aggregating to ₹1,885.19 crores. The Bank provided for these at a rate of 95% aggregating to ₹1,791.08 crores. This provision together with a reversal of interest income of ₹178.12 crores resulted in an adverse impact of ₹1,969.20 crores to the Profit and Loss Account of the Bank for the quarter and year ended March 31, 2025.

16. Through its internal financial review, the Bank also identified other instances of incorrect accounting that required rectification and have been rectified during the quarter and year ended March 31, 2025. These include the following:

Interest payment of ₹99.97 crores on certain borrowing instruments was not recognised in the Profit & Loss Account in earlier years.
A provision of ₹133.25 crores in respect of balances in Other Assets that are not expected to be realised.
Prior period operating expenses of ₹206.00 crores and income of ₹126.75 crores.

The Bank reviewed groupings and classification of the Profit & Loss items to assess compliance with prevailing guidelines. Based on the review, the Bank reclassified the following for the financial year ended March 31, 2025.

₹760.82 crores from interest income to other income.
₹157.90 crores from Provision (other than tax) & Contingencies to Other Operating Expense.

17. As a result of the above matters mentioned in note 12 to 16, any financial implications arising from past inaccurate regulatory submissions, including those to SEBI, Income Tax authorities, and the RBI, are currently unascertainable.

18. The Board of Directors has taken necessary steps in addressing all the areas of concerns and disclosing transparently at the appropriate stage. The Board of Directors initiated a comprehensive internal financial review of all the material financial statement balances. In this regard, the Bank has received recommendations from various internal and external agencies involved. These recommendations include strengthening policy and procedures, preparation and approval of accounting analysis, control and discipline over reconciliations, minimising manual accounting entries, automating processes, addressing manual overrides of control, etc. These shall be reviewed and implemented under oversight of the Board.

Also, the Bank is in the process of taking necessary steps to assess roles and responsibilities and fix accountability for persons involved in any of these lapses. The Bank is fully committed towards
taking these matters to their conclusion under applicable laws.

19. As per regulation 33(3)(i) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the aggregate effect of material adjustments made for the quarter and year ended March 31, 2025 which pertains to earlier periods, amounted to ₹2,601.94 crores.

BCAJ Admin

Own Use Exception

Ind AS 109 is applicable to commodity contracts / contracts to buy or sell non-financial items that may be settled net. What is the meaning of “net settlement”? In accordance with Ind AS 109, there are various ways in which an entity may be able to net settle a contract to buy or sell a non-financial item. These include:

a) The terms of contract permit either party to settle it net.

b) The contract does not contain any specific terms permitting parties to settle it net. However, the entity has a past practice of settling similar contracts net. For example, net settlement may occur either with the counterparty, or by entering into an offsetting contract or by selling the contract before it is exercised or lapses. Infrequent historical incidences of net settlement in response to events that could not have been foreseen at inception of a contract would not taint an entity’s ability to apply the own-use exception to other contracts; for example, an unplanned break-down in a power plant. However, any regular or foreseeable events leading to net settlements would taint the entity’s ability to apply the own-use exception to other contracts.

c) For similar contracts, the entity has a practice of taking delivery of the underlying and selling it within a short period after delivery to generate a profit from short-term fluctuations in price or dealer’s margin.

d) Non-financial item covered in the contract is readily convertible to cash.

However, it is noted that Ind AS 109 will not apply to all contracts that may be settled net in cash. A contract for purchase or sale of non-financial items will still be scoped out from Ind AS 109, if the entity can demonstrate that the contract was entered into and continue to be held for the receipt / delivery of a non-financial item in accordance with its expected purchase, sale or usage requirements. This is commonly referred to as ‘own use exception’ or ‘normal purchase or sale exception (NPSE)’.
There was always a question around how to apply the own-use exception to renewable energy contracts for which the source for production of the renewable electricity is nature-dependent so that supply cannot be guaranteed at particular times or in particular volumes. Examples of sources include wind-, solar- and hydroelectricity.

Consider the example below.

EXAMPLE

Kleen Co. enters into a power purchase agreement (PPA) with a windmill operator to purchase electricity. Both Kleen and the operator are connected through a common national grid. The PPA obliges Kleen to acquire a 45% fixed share of the wind energy produced by the operator. The price per unit for the energy is fixed in advance and remains stable throughout the contract duration of 25 years. The operator does not guarantee a specific amount of output (energy) but estimates with 80% probability an expected amount. The energy produced is transferred to Kleen through the national grid.

The total energy demand of Kleen by far exceeds both the contracted share of the estimated output and the contracted share of the peak output of the wind park. However, Kleen does not operate its production facilities 24/7 but pauses production during the night times, on weekends and holiday season. There is thus a mismatch between the demand profile of Kleen and the supply profile of the wind park.

Kleen is obliged to acquire the energy of the wind park in the amount (45% of the current production volume) and at the time it is produced. Since Kleen has no feasible option to store the energy, it sells energy that cannot be consumed immediately (e.g., on weekends or overnight) to the spot market and repurchases (at least) the same amount from that market at times when the production facilities are operated. The windmill operator continues to transfer the amounts of energy fed into the grid to the account of Kleen and Kleen has to sell unused amounts from its account to third parties. The process of selling and repurchasing is designed to be an autopilot that acts without the intention of trading to realise profits and has the sole intention to enable the Kleen’s operations. The process of selling and repurchasing is delegated to a service provider.

For the purpose of this discussion, it is assumed that the conditions do not change throughout subsequent periods and that some market transactions become necessary for unused amounts of energy.

Will own-use exception apply in this case, and consequently whether the above PPA is to be treated as a derivative or not?

Kleen has considered aspects relating to whether the PPA is accounted for applying another Ind AS Accounting Standard, for example Ind AS 110 Consolidated Financial Statements, Ind AS 111 Joint Arrangements and / or Ind AS 116 Leases, and believe those do not apply in the extant fact pattern.

RELEVANT REQUIREMENTS OF IND AS 109 FINANCIAL INSTRUMENTS

Paragraph 2.4 of Ind AS 109 states:

This Standard shall be applied to those contracts to buy or sell a non financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments, with the exception of contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non financial item in accordance with the entity’s expected purchase, sale or usage requirements. However, this Standard shall be applied to those contracts that an entity designates as measured at fair value through profit or loss in accordance with paragraph 2.5.

Paragraph 2.6 of Ind AS 109 states:

There are various ways in which a contract to buy or sell a non- financial item can be settled net in cash or another financial instrument or by exchanging financial instruments. These include:

(a) when the terms of the contract permit either party to settle it net in cash or another financial instrument or by exchanging financial instruments;

(b) when the ability to settle net in cash or another financial instrument, or by exchanging financial instruments, is not explicit in the terms of the contract, but the entity has a practice of settling similar contracts net in cash or another financial instrument or by exchanging financial instruments (whether with the counterparty, by entering into offsetting contracts or by selling the contract before its exercise or lapse);

(c) when, for similar contracts, the entity has a practice of taking delivery of the underlying and selling it within a short period after delivery for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin; and

(d) when the non-financial item that is the subject of the contract is readily convertible to cash.

A contract to which (b) or (c) applies is not entered into for the purpose of the receipt or delivery of the non financial item in accordance with the entity’s expected purchase, sale or usage requirements and, accordingly, is within the scope of this Standard. Other contracts to which paragraph 2.4 applies are evaluated to determine whether they were entered into and continue to be held for the purpose of the receipt or delivery of the non financial item in accordance with the entity’s expected purchase, sale or usage requirements and, accordingly, whether they are within the scope of this Standard.

ACCOUNTING FOR THE PPA

On the date of inception of the contract, Kleen regards the sole purpose of the PPA as a contract to buy a non-financial item as it is entered for the purpose of the receipt of energy in accordance with the it’s expected usage requirements as laid out in Ind AS 109.2.4. Kleen does not designate the contract as measured at fair value through profit or loss in accordance with Ind AS 109.2.5. Kleen views the difference in prices (lower prices during night times, on weekends and during holiday season when production is paused vs. higher prices when repurchased on spot markets during peak times) as costs of storage, i.e., it uses the energy spot market as a storage facility. Kleen does not operate as a trading party in the market, the production schedule and the consumption profile dictate spot price transactions.

Kleen further analyses whether the contract can be settled net in cash in accordance with Ind AS 109.2.6.

Kleen is always in a net purchaser position, i.e., it buys more energy from the spot market than it has sold to it based on a monthly view (meaning that for every calendar month, the Kleen has purchased more energy on spot markets than it has sold). The average purchase price exceeds the average sale’s price, so that Kleen incurs expenses for “storing” the energy on sport markets which is part of the fee paid to a service provider involved to sell unused amounts of energy to and repurchase additional demands from the grid/spot markets.

The various views are presented below.

VIEW A

Kleen assesses at the inception of the contract that:

(a) the terms of the contract do not provide for an option to settle net in cash or by exchanging financial instruments.

(b) Kleen has no practice of settling similar contracts net in cash or another financial instrument or by exchanging financial instruments.

(c) Kleen intends to sell unwanted energy out of the contract to the spot market and also intends to purchase at least the same amount of energy at times when it is needed. Kleen uses the spot market as a storage mechanism and does not intend to generate profits from those transactions although it cannot rule out that some transactions will lead to profits or losses. Transactions on the spot market are solely used to store the energy.

(d) Kleen assesses the non-financial item to be readily convertible to cash as there is an active market where unused energy can be sold and purchased at any time.

Kleen concludes that the own-use-exception applies to its contract because it is entered into and continues to be held for the purpose of taking delivery of the non-financial asset (energy) in accordance with the entity’s expected (energy) consumption.

VIEW B

Kleen expects transactions on the spot market already at inception of the contract for the amount of energy it cannot use when it is produced. Under View B this would disqualify the contract from the application of the own-use-exception because the contract was not – in its entirety – being held to the purpose of the receipt of the energy at the specific time of production (Ind AS 109.2.4) but with some anticipated sales transactions.

VIEW C

As Kleen intends to sell unused energy to the spot market, it creates a practice of settling similar contracts on the spot market and therefore the contract is not entered into for the purpose of the receipt of the energy (Ind AS 109.2.6(b)).

VIEW D

Under this View D, the transactions on the spot market may lead to a breach of the requirement set out in Ind AS 109.2.6(c) (generating profit from short term fluctuations in price or dealer’s margin) because Kleen cannot rule out that profit arises from some sales transactions, even though this is not intended.

AMENDMENTS TO IND AS 109

As can be seen above, multiple views were possible. However, Ind AS 109 is now proposed to be amended with respect to contracts referencing nature-dependent electricity that requires an entity to buy and take delivery of the electricity when it is generated. These contractual features expose the entity to the risk that it would be required to buy electricity during a delivery interval in which the entity cannot use the electricity. The entity might also have no practical ability to avoid making sales of unused electricity because the design and operation of the electricity market in which the electricity is transacted under the contract require any amounts of unused electricity to be sold within a specified time. Such sales are not necessarily inconsistent with the contract being held in accordance with the entity’s expected usage requirements. An entity entered into and continues to hold such a contract in accordance with its expected electricity usage requirements if the entity has been, and expects to be, a net purchaser of electricity for the contract period. An entity is a net purchaser of electricity if it buys sufficient electricity to offset the sales of any unused electricity in the same market in which it sold the electricity.

In determining whether an entity is a net purchaser of electricity, the entity shall consider reasonable and supportable information (that is available without undue cost or effort) about its past, current and expected future electricity transactions over a reasonable amount of time. The entity identifies ‘a reasonable amount of time’ by considering the variability in the amount of electricity expected to be generated due to the seasonal cycle of the natural conditions and the variability in the entity’s demand for electricity due to its operating cycle. In determining whether the entity has been a net purchaser, ‘a reasonable amount of time’ shall not exceed 12 months.

An entity shall apply these amendments for annual reporting periods beginning on or after 1st April, 2026. Earlier application is not permitted. Some of the amendments are subject to prospective application and others subject to retrospective application.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

On first time adoption of Ind AS, for accounting for investment in subsidiaries and associates, Ind AS 27 gives an option to record the same at Cost (less impairment, if any). Most companies in India adopted this option when they adopted Ind AS. The normal accounting for the same as per Ind AS 109 is ‘Fair value through Other Comprehensive Income’.

Given below is a case where the company had though earlier adopted the option given under Ind AS 27 to account for its investments in subsidiaries at cost, has now, with retrospective effect, changed the same to ‘Fair value through Other Comprehensive Income’. Ind AS 108 permits such change Such change in policy can be done only in cases where the same can provide more reliable and relevant information about the effects of transactions, other events or conditions on the entity’s financial position and financial performance to the users of financial results/statements.

Tata Steel Ltd. (financial results for the quarter and year ended 31st March, 2025)

Extract from the communication by the company addressed to the Stock Exchanges

Change of Accounting Policy

During the quarter ended 31^st March, 2025, the Company has voluntarily changed its accounting policy in keeping with the provisions of Ind AS 8 on “Accounting Policies, Changes in Accounting Estimates and Errors” to measure its equity investments in subsidiaries in the standalone financial results/statements from cost less impairment as per Ind AS 27 on “Separate Financial Statements” to fair value through other comprehensive income as per Ind AS 109 on “Financial instruments” with retrospective effect.

In the standalone financial results / statements, investments in subsidiaries are now classified as “Fair Value through Other Comprehensive Income (FVTOCI)” with changes in fair value of such investments being recognised through “Other Comprehensive Income (OCI)” as on each reporting date.

The Company’s Management believes that this change in accounting policy provides reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position and financial performance to the users of financial results / statements.

Further details on the rationale and impact of change in accounting policy on the financial statements / results of the Company for quarter and year ended 31^st March, 2025 are provided in notes 6 and 7 forming part of the Financial Results for the quarter and year ended 31st March, 2025 enclosed as Annexure 1.

From Notes to Published financial results for the quarter and year ended 31^st March, 2025

Note 6

Tata Steel Europe Limited (‘TSE”), a wholly owned step-down subsidiary of the Company, is undertaking a transition towards de-carbonised operations and away from the current blast furnace-based production processes across both the UK and Netherlands businesses which would affect the estimates of its future cash flow projections. The technology transition and investments are dependent on financial and policy support of the local governments in the country of operation (refer Note 6c), as well as an overall regulatory regime which incentivises reduction of CO2 emissions in Europe. Management’s assessment is that generally, these potential carbon reduction-related costs would be compensated by a combination of higher steel prices or through public spending or subsidies.

a) On 15^th September, 2023, Tata Steel UK Limited (“TSUK”) which forms the main part of the UK business, announced a joint agreement with the UK Government on a proposal to invest in state-of-the-art electric arc furnace (‘EAF’) steelmaking at the Port Talbot site with a capital cost of £1.25 billion inclusive of a grant from the UK Government of up to £500 million. Consequent to the announcement, TSUK during FY24 had assessed and concluded that it had created a valid expectation among those affected and had accordingly recognised a provision of ₹2,492 crore towards restructuring and closure costs including redundancy and employee termination costs. TSUK had also recognised ₹2,601 crore towards impairment of heavy end assets which are not expected to be used for any significant period beyond 31^st March, 2024. These provisions were also accordingly recognised in the consolidated statement of profit and loss for the Group. During the quarter ended 31^st March, 2025, TSUK has re-assessed the estimate of restructuring provisions in connection with the closure of the heavy end assets, including termination and re-negotiation of certain contracts, and associated transformation activities and has reversed certain provisions not required of ₹260.14 crore (quarter ended 31^st December, 2024: Nil; quarter ended 31^st March, 2024: charge of ₹67.42 crore; twelve months ended 31^st March, 2025: reversal of ₹48.68 crore) which is included within Exceptional item 8(f) in the consolidated financial results. The Grant Funding Agreement (GFA) for the decarbonisation proposal was signed with the UK Government on September 11, 2024. With the UK Government funding available under the GFA and a commitment to infuse equity into TSUK through T Steel Global Holdings Pte. Ltd. (‘TSGH”), a wholly owned subsidiary of the Company, TSUK now has the certainty that funding is available for its decarbonisation proposal from both the UK Government and the Company, in addition to its own cash generation. Accordingly, during the quarter ended 30^th September, 2024 it was concluded that there does not exist any material uncertainty relating to going concern assessment of TSUK and that TSUK has access to adequate liquidity to fund its operations, that continues to hold good as on March 31, 2025.

b) With respect to Tata Steel Netherland (“TSN”) operations, intense discussions between the management and the Netherlands government are ongoing with relation to a “tailor-made approach” for support to address the reduction of carbon emissions and environmental concerns of the local community and authorities. The team from the Ministry of Climate and Green Growth has carried out a detailed diligence of TS N’s integrated plan for decarbonisation and environmental measures. On 20^th February, 2025, the Ministry of Climate and Green Growth submitted a letter to the Dutch parliament on the progress of negotiations including next steps towards a Joint Letter of Intent to be filed before the parliament and the submission of the proposed project to the European Commission. The Company expects to formalise an agreement with the Netherlands Government in the near term. TSN’s transition plan considers that the policy environment in the Netherlands and EU is supportive to the European steel industry including Dutch Policy developments towards energy costs, an effective European Carbon Border Adjustment mechanism, and convergence with other EU countries on climate costs besides the tailor-made support mechanism. In relation to the likely investments required for the decarbonisation, the scenarios consider that the Dutch Government will provide a certain level of financial support, which is the subject of discussions between the Company, TSN and the Dutch government. On 19^th December, 2024, the Environment Agency (EA) of the Netherlands imposed two orders under penalty (“Orders”) on Tata Steel ljmuiden (TSIJ), a wholly owned subsidiary of TSN, for a maximum amount of 239 crore stating alleged non-compliance of emission thresholds for operations of its Coke and Gas Plants (CGP 1 and CGP 2) with a period of 8 weeks for TSIJ to reduce the emissions to a level within the threshold limits. In addition, the EA had also sent a notice on alleged non-compliances regarding certain state of maintenance of its CGP2 plant for which the EA has given TSIJ a period of 12 months to remedy the alleged non- compliances, failing which, the permit for operating CGP 2 can get revoked. With relation to some of the immediate actions, TSIJ has sought and obtained injunctive relief from the court on the notice. At the same time, in constructive discussions with the local provincial authorities, TSN is preparing a future oriented plan including all improvements of the coke and gas plants’ environmental performance, and has also intensified discussions with the EA. The plan includes measures which are part of the discussions with the Netherlands government and will include solutions for outstanding orders or notices. It is also discussing appropriate measurement protocols for the future with the EA. Given the positive and solution-oriented approach being taken, the Company sees no material risk of premature license/permit revocation or possibility of suspension or closure of the coke and gas plants. Furthermore, based on the latest available cash flow and liquidity forecasts and other available measures, TSN is expected to have adequate liquidity to meet its future business requirements. On such basis, the financial statements of TSE have accordingly been prepared on a going concern basis. The Group has assessed its ability to meet any liquidity requirements at TSE, if required, and concluded that its cashflow and liquidity position remains adequate.

c) The fair value of investments held by the Company in T Steel Holdings Pte. Ltd. (‘TSH”), a wholly owned subsidiary of the Company is largely dependent on the operational and financial performance of TSE. This fair value has been primarily assessed based on fair value models for the TSUK and TSN businesses. The fair value computation uses cash flow forecasts based not only on the most recent financial budgets, but more importantly strategic forecasts and future projections taking the analysis on sustainable cash flow reflecting average steel industry conditions (between cyclical peaks and troughs of profitability) out into perpetuity based on a steady state. If any of the key assumptions change, the fair value of the relevant business would increase/decrease and that could lead to change in the carrying amount of investments in TSH.

Both TSUK and TSN are undertaking a broader strategic transformation, triggered by regulatory changes which are driving decarbonisation in Europe. This will necessarily involve gradual closure of legacy assets and replacement by a new production route centred around electric arc furnaces. Future cashflows will be heavily dependent on the impact of evolving regulations on Carbon Border Adjustment, availability/pricing of clean raw materials, energy and associated infrastructure, and assumptions around costs of and market premium for green steel. The Carbon Border Adjustment Mechanism is the European Union and UK’s tool to put a fair price on the carbon emitted during the production of carbon intensive goods and charge this fair price at the point of entry of such goods imported into the territory, so as to provide a level playing field to local producers of such goods who are also incurring equivalent carbon costs. This mechanism would also ordinarily imply an increase in prices of the finished steel relative to other geographies which have not adopted/ have lower CO2 pricing. In addition, there are market expectations of customers being willing to pay additional green steel premia for steel with lower embedded CO2. While both these factors will have significant impact on the future cashflows, the estimates of the extent of this impact are currently uncertain. Further, the businesses are also facing potential lasting changes in the market as a result of tariff and non-tariff barriers to trade, policy responses in Europe (including the EU Steel and Metals Action Plan) and the UK, and supply side changes from other geographies.

The long-term financial forecasts and valuation in both TSUK and TSN are therefore seeing fundamental underlying changes in terms of key business assumptions, significant changes in production methods and assets, raw material and production costs, regulatory impacts, critical policy enablers and future focus market sectors. These changes will play out over the following several years. Implicit in these changes are risks and opportunities facing both businesses which include potential upsides in profitability and value.

However, given these fundamental changes and fast evolving business landscape, and to provide more timely visibility into the performance of invested capital and reflect the true value of its subsidiaries, during the quarter and year ended 31^st March, 2025, the Company has voluntarily changed its accounting policy in keeping with the provisions of Ind AS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” to measure its equity investments in subsidiaries in the standalone financial results/statements from cost less impairment as per Ind AS 27 “Separate Financial Statements” to fair value through other comprehensive income as per Ind AS 109 “Financial instruments” with retrospective effect (refer Note 7 below).

As the investments in the European business are long-term in nature and strategic for the Company, therefore, the Company has opted under Ind AS 109, to reflect the changes in fair value through Other Comprehensive Income. This allows the Company to keep the changes in fair value of investments in these long-term strategic assets distinct from the underlying financial performance of the Company’s regular business activities in the relevant period.

The Company carried out a fair value assessment of its investments held in TSH, which in turn holds investments in TSE through a step-down subsidiary and recognised a fair value loss through Other Comprehensive Income of ₹25,626 crore and ₹24,870 crore during the quarter and year ended 31^st March, 2025 in the standalone financial results / statements.

The Company believes that key assumptions which have been used to undertake the valuation in its balance sheet as of 31^st March, 2025, represent the best view of the future economic landscape and operating model at this time. Going forward, the key assumptions would be kept under review and relevant changes, if any, will be reflected in the financial results/statements from time to time.

Note 7

The majority of investments in the Company’s balance sheet are comprised of investments made in Tata Steel Holdings (reflecting the overseas businesses, mainly in Europe). The Company had so far maintained an accounting policy of carrying investments in subsidiaries at cost less accumulated impairment losses. This has been suitable historically because of a stable landscape in terms of continuing legacy assets, end markets and regulatory framework.

As explained in Note 6 above, during the quarter and year ended 31^st March, 2025, the Company has voluntarily changed its accounting policy in keeping with the provisions of Ind AS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” to measure its equity investments in subsidiaries in the standalone financial results/statements from cost less impairment as per Ind AS 27 “Separate Financial Statements” to fair value through other comprehensive income as per Ind AS 109 “Financial instruments” with retrospective effect.

The Company’s management believes that this change in accounting policy provides reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position and financial performance to the users of financial results/statements. In the standalone financial results/statements, investments in subsidiaries are now classified as “Fair Value through Other Comprehensive Income (FVTOCI)” with changes in fair value of such investments being recognized through “Other Comprehensive Income (OCI)” as on each reporting date.

The impact of change in accounting policy is presented below:

(Notes 2, 3 and 4 not reproduced)

The impact of change in accounting policy is presented below (₹ crore):

Standalone Balance Sheet	March 31, 2024			April 1, 2023
Standalone Balance Sheet	After considering impact of mergers during FY 2024-25 Note (2,3 & 4)	Adjustment	Restated	After considering impact of mergers during FY 2024-25 Note (2,3 & 4)	Adjustment	Restated
Non – current Investment	64,639.30	1,600.70	66,240.00	39,117.49	1,170.95	40,288.44
Total assets	2,46,325.65	1,600.70	2,47,926.35	2,43,248.76	1,170.95	2,44,419.71
Other Equity	1,38,380.17	1,600.70	1,39,980.87	1,36,616.60	1,170.95	1,37,787.55
Total Equity	1,39.628.77	1,600.70	1,41,229.47	1,37,839.00	1,170.95	1,39,009.95
Total Equity and liabilities	2,46,325.65	1,600.70	2,47,926.35	2,43,248.76	1,170.95	2,44,419.71

Standalone Statement of Profit and Loss for the quarter/twelve months (₹ crore):

	Quarter ended on 31.12.2024			Quarter ended on 31.03.2024			Financial year ended on 31.03.2024
	After considering impact of mergers during FY 2024-25 (Note 2,3 & 4)	Adjustment*	Restated	After considering impact of mergers during FY 2024-25 (Note 2,3 & 4)	Adjustment*	Restated	After considering impact of mergers during FY 2024-25 (Note 2,3 & 4)	Adjustment*	Restated
Exceptional items – Provision for impairment of investments/doubtful loans and advances/ other financial assets (net)	(1.96)	–	(1.96)	(10.40)	–	(10.40)	(12,971.36)	10,147.66	(2,823.70)
Profit/(Loss) before tax	5,174.54	–	5,174.54	5,471.29	–	5,471.29	9,357.05	10,147.66	19,504.71
Net Profit/(Loss) for the period	3,878.57	–	3,878.57	4,091.23	–	4,091.23	5,514.19	10,147.66	15,661.85
Other comprehensive income – items that will not be reclassified to profit and loss	(481.13)	(2,376.41)	(2.857.54)	188.07	(347.24)	(159.17)	792.65	(9,717.91)	(8,925.26)
Total comprehensive income for the period	3,503.20	(2,376.41)	1,126.79	4,265.20	(347.24)	3,917.96	6,203.73	429.75	6,633.48
Earnings per equity share – Basic earnings per share (not annualised) in Rupees after exceptional items	3.11	–	3.11	3.28	–	3.28	4.42	8.13	12.55
Earnings per equity share – Diluted earnings per share (not annualised) in Rupees after exceptional items	3.11	–	3.11	3.28	–	3.28	4.42	8.12	12.54

BCAJ Admin

Financial Reporting Dossier

A. KEY GLOBAL UPDATES

1. IASB: UPDATE TO GOING CONCERN EDUCATIONAL MATERIAL

On 13^th May 2025, IFRS Foundation published an updated version of its educational material to support the consistent application of IFRS Accounting Standards related to going concern assessments. This educational material was first published in January 2021 to respond to questions raised by stakeholders during the covid-19 pandemic.

The revision is mainly related to following:

(1) include updated references to the going concern requirements in IFRS Accounting Standards. When the IASB issued IFRS 18 Presentation and Disclosure in Financial Statements, the requirements about an entity’s assessment of its ability to continue as a going concern were moved unchanged from IAS 1 Presentation of Financial Statements to IAS 8 (which was retitled as Basis of Preparation of Financial Statements after the issuance of IFRS 18). IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027.

(2) to remove outdated references to the International Auditing and Assurance Standards Board (IAASB) and its project on Going Concern. In December 2024, the IAASB approved International Standard on Auditing (ISA) 570 (Revised 2024), Going Concern. The ISA is effective for audits of financial statements for periods beginning on or after 15 December 2026.

(3) to remove references to the covid-19 pandemic and the stressed economic environment associated with it.

The companies preparing financial statements using IFRS Accounting Standards are required to assess their ability to continue as a going concern. This educational material brings together the relevant requirements and explains how they might apply to a range of company situations. It is designed to support understanding and consistent application of the Standards but does not change or add to existing requirements.

2. IASB: UPDATE TO THE IFRS FOR SMES ACCOUNTING STANDARD

On 27^th February 2025, the International Accounting Standards Board (IASB) issued a major update to the IFRS for SMEs Accounting Standard, which is currently required or permitted in 85 jurisdictions.

The IFRS for SMEs Accounting Standard was issued in 2009 to address the global demand for a simplified Accounting Standard for SMEs.

This Standard aims to balance the information needs of lenders and other users of SMEs’ financial statements with the resources available to SMEs. The Standard defines SMEs as entities without public accountability that prepare general purpose financial statements.

The update of this Standard is the outcome of a periodic comprehensive review of the Standard. Highlights include:

a) a revised model for revenue recognition.

b) bringing together the requirements for fair value measurement in a single location; and

c) updating the requirements for business combinations, consolidations and financial instruments.

This update is effective for annual periods beginning on or after 1 January 2027, with early application permitted.

3. FASB: PROPOSAL TO IMPROVE ACCOUNTING FOR DEBT EXCHANGES

On 30^th April 2025, the Financial Accounting Standards Board (FASB) a proposed Accounting Standards Update (ASU) that would provide accounting guidance for debt exchange transactions involving multiple creditors.

Under current generally accepted accounting principles (GAAP), when an entity modifies an existing debt instrument or exchanges debt instruments, it is required to determine whether the transaction should be accounted for as:

(1) a modification of the existing debt obligation or

(2) the issuance of a new debt obligation and an extinguishment of the existing debt obligation (with certain exceptions).

The proposed ASU would specify that an exchange of debt instruments that meets certain requirements should be accounted for by the debtor as the issuance of a new debt obligation and an extinguishment of the existing debt obligation. The Board expects this would improve the decision usefulness of financial reporting information provided to investors by requiring that economically similar exchanges of debt instruments be accounted for similarly. It also would reduce diversity in practice in accounting for such debt instrument exchanges.

4. FASB: CLARIFICATION ON GUIDANCE ON THE PRESENTATION AND DISCLOSURE OF RETAINAGE FOR CONSTRUCTION CONTRACTORS

On 01^st April 2025, The Financial Accounting Standards Board (FASB) released an FASB Staff Educational Paper that addresses questions about how to apply revenue recognition guidance about presentation and disclosures to construction contracts that contain retainage (or retention) provisions.

The companies that operate in the construction industry often are subject to contracts that contain retainage provisions. Those provisions generally provide a form of security to the customer by allowing the customer to withhold a portion of the consideration billed by the company until certain project milestones are met or the project is completed.

The educational paper (a) explains the presentation and disclosure requirements in GAAP about retainage for construction contractors and (b) provides example voluntary disclosures of retainage that would provide more detailed information about contract asset and contract liability balances.

5. FASB: PROPOSAL TO IMPROVE FINANCIAL ACCOUNTING FOR AND DISCLOSURE OF ENVIRONMENTAL CREDITS AND ENVIRONMENTAL CREDIT OBLIGATIONS.

On 17^th December 2024, The Financial Accounting Standards Board (FASB) published a proposed Accounting Standards Update (ASU) intended to improve the financial accounting for and disclosure of financial activities related to environmental credits and environmental credit obligations.

The changes are expected to provide investors with additional decision-useful information by improving the:

a) understandability of financial accounting and reporting information about environmental credits and environmental credit obligations and

b) comparability of that information by reducing diversity in practice.

During the FASB’s 2021 agenda consultation project and other outreach, stakeholders noted that entities are increasingly subject to additional government mandates and regulatory compliance programs related to emissions, which often result in obligations that are settled with environmental credits. Additionally, some entities voluntarily purchase environmental credits from third parties. Stakeholders also emphasised that generally accepted accounting principles (GAAP) does not provide specific authoritative guidance on how to recognise and measure this financial activity, resulting in diversity in practice.

The proposed ASU provides recognition, measurement, presentation, and disclosure requirements for all entities that purchase or hold environmental credits or have a regulatory compliance obligation that may be settled with environmental credits.

6. IAASB: STRENGTHENING OF AUDITOR RESPONSIBILITIES FOR GOING CONCERN THROUGH REVISED STANDARD

On 9^th April, 2025, The International Auditing and Assurance Standards Board (IAASB) released its revised International Standard on Auditing 570 (Revised 2024) – Going Concern.

The revised standard responds to corporate failures that raised questions regarding auditors’ responsibilities by significantly enhancing the auditor’s work in evaluating management’s assessment of an entity’s ability to continue as a going concern.

The standard will also increase consistency in auditing practices and strengthen transparency through communications and auditor reporting on matters related to going concern in a consistent manner.

The key changes in ISA 570 (Revised 2024) are as follows:

⇒Robust risk assessment- Auditors must conduct, in a more timely manner, thorough risk assessments to determine whether events or conditions are identified that may cast significant doubt on the entity’s ability to continue as a going concern.

⇒Evaluating Management’s Assessment- Auditors must evaluate management’s assessment of going concern irrespective of whether events or conditions are identified. In doing so, auditors must consider the potential for management bias and evaluate the underlying method, significant assumptions, and data used when management formed its assessment. Additionally, auditors must evaluate whether management’s judgements and decisions indicate potential bias.

⇒Extended date of evaluation period- The auditor’s evaluation period for going concern now extends at least twelve months from the date of approval of the financial statements, contributing to an assessment of more relevant, decision-useful information.

⇒Enhanced transparency- The standard requires clearer communication in the auditor’s report about the auditor’s responsibilities and work related to going concern and strengthened communications with those charged with governance and external parties.

The revised standard is effective for audits of financial statements for periods beginning on or after 15^th December, 2026.

7. FRC: INSPECTION FINDINGS FOR THE TIER 2 AND 3 AUDIT FIRMS

On 16^th December, 2024, the Financial Reporting Council (FRC) has today published its annual inspection findings for Tier 2 and Tier 3 audit firms, which emphasises the importance of delivering consistent levels of audit quality.

The report highlights areas where firms have made progress but also identifies challenges that exist across this part of the market in achieving consistent audit quality, particularly in the Public Interest Entity (PIE) sector.

As noted in the report, while some inspection results demonstrated audits assessed as good or limited improvements required, there remains a disparity across some of the firms. This reflects the ongoing need for firms to embed effective systems of quality management and strengthen their commitment to continuous audit quality improvement.

Summary of findings are as follows:

Sr.No.	Audit Area	Examples of key findings
1.	ECL provisions	Weaknesses in the audit procedures performed to test the methodology, assumptions and data inputs used in ECL calculations, including procedures over significant increases in credit risk criteria, macro-economic scenarios and post model adjustments. In several cases, findings were compounded by shortcomings in audit teams’ oversight of the work of third-party specialists / experts.
2.	Impairment	Weaknesses in the audit procedures performed to corroborate and challenge cash flow forecasts used in management’s impairment assessments of property, plant and equipment, goodwill and other intangible assets.
3.	Journal entry testing	No testing performed over journal entries or any evidence of the audit team’s response to the risk of management override of controls. Inadequate or no corroboration performed to substantiate journals identified as meeting fraud risk criteria.
4.	Revenue	Insufficient procedures to test the effective interest rate calculations on banking audits, including assessment of management’s accounting policy and key inputs and assumptions. For a revenue stream relating to activity performed jointly with third parties, insufficient evidence of the audit team’s understanding of contractual arrangements and the completeness and accuracy of revenue allocations. Weaknesses in the testing of revenue completeness and cut-off, where these areas had been identified as significant risks by audit teams.
5.	Going concern	The audit teams had not sufficiently corroborated and challenged the cash flow forecasts used in management’s forecast assumptions or adequately assessed the impact of related sensitivities on the going concern model.
6.	Partner and staff appraisals	A lack of a clear linkage between audit quality and reward for partners and / or staff, and weaknesses in the consideration of audit quality in individual appraisals.
7.	Partner portfolio management:	Insufficient monitoring of partner and / or staff portfolios to ensure that partners have manageable workloads, engagements are appropriately resourced and that portfolios are aligned to skills and experience and contain an appropriate balance of risk.

B. GLOBAL REGULATORS- ENFORCEMENT ACTIONS AND INSPECTION REPORTS

I. THE FINANCIAL REPORTING COUNCIL, UK

a) Sanctions against Ernst & Young LLP and Richard Wilson (10^th April, 2025)

The Executive Counsel of the Financial Reporting Council (FRC) has issued a Final Settlement Decision Notice under the Audit Enforcement Procedure and imposed sanctions on Ernst & Young LLP (EY) and Richard Wilson (Mr Wilson), audit engagement partner, in relation to the audits of Thomas Cook Group plc (the Company/Thomas Cook) for the financial years ended 30 September 2017 and 30 September 2018.

The sanctions imposed take account of a number of factors, including the seriousness of the breaches and the financial strength of the auditor, as indicated by the turnover of the firm. It is not suggested that the breaches were intentional, dishonest, deliberate or reckless. Further, both EY and Mr Wilson cooperated with Executive Counsel’s investigation.

Thomas Cook’s Goodwill balance was significant as it comprised £2.6 billion across the whole group (approximately 40% of total assets). In both audit years, EY and Mr Wilson failed to approach this audit area with sufficient professional scepticism in order to properly corroborate management’s assumptions and estimates supporting the Goodwill impairment model. The failings for the audit of Goodwill in 2018 were particularly serious given Thomas Cook’s deteriorating trading performance, which heightened the risk that the Goodwill balance could be impaired.

In relation to Going Concern, where there are breaches in the 2018 audit only, EY and Mr Wilson failed to adequately challenge management with regards to sensitivity testing, liquidity and financial covenant headroom, and as such were not in a position to properly conclude on whether a material uncertainty existed that might cast significant doubt upon Thomas Cook’s ability to continue as a Going Concern. This was a key responsibility that EY and Mr Wilson did not fulfil adequately under the relevant auditing standards and was an important matter to users of the financial statements.

The breaches of auditing standards accepted by EY and Mr Wilson relating to the Goodwill impairment and Going Concern work included areas such as risk assessment, the performance of procedures to obtain and evaluate audit evidence, communication with those charged with governance as well as disclosures in the accounts. The breaches include auditing standards dealing with the exercise of professional scepticism, partner supervision and audit documentation which are central to the performance of an audit.

b) Sanctions against Price Waterhouse Coopers LLP and Jonathan Hinchliffe (25^th March, 2025)

The Executive Counsel of the Financial Reporting Council (“FRC”) has issued a Final Settlement Decision Notice under the Audit Enforcement Procedure and imposed sanctions against Price water house Coopers (“PwC”) and Jonathan Hinchliffe (“Mr Hinchliffe”) in relation to the statutory audit of the financial statements of Wyelands Bank plc (“the Bank”) for the financial year ended 30 April 2019 (“the FY2019 Audit”).

PwC and Mr Hinchliffe admitted breaches of Relevant Requirements in relation to six areas of the FY2019 Audit: risk assessment, auditing of the Bank’s compliance with laws and regulations, auditing of the Bank’s related party transactions, auditing of the Bank’s assessment of going concern, auditing of the Bank’s loans and advances, and auditing of the bank’s provision for expected credit loss.

The breaches primarily stemmed from a single common cause: the failure of the audit team to properly understand the Bank’s lending and adequately consider the risks posed by its actual and potential exposure to related parties in the GFG Alliance. The audit team also failed to properly examine concerns raised by the Bank’s regulator, the Prudential Regulation Authority (“PRA”) in that regard. In addition, they failed to exercise appropriate professional scepticism in relation to a number of aspects of the audit.

The FY19 audit opinion was signed in July 2019. Subsequent to the Audit, in September 2019 the PRA required the Bank to limit its exposures to related parties due to concerns that the Bank had an unacceptable concentration of risk. By March 2020 the Bank had stopped entering into new credit transactions and commenced a wind down of its business. In March 2021 the PRA required the Bank to repay its depositors, which it has done.

II. THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (PCAOB)

a) PCAOB Sanctions Former Deloitte Colombia Partner for Issuing Audit Report Before Completing All Necessary Audit Procedures

On 12^th February, 2025, the Public Company Accounting Oversight Board (PCAOB) announced a settled disciplinary order sanctioning Gabriel Jaime López Díez (“López”), a former partner of Colombia-based Deloitte & Touche S.A.S. (the “Firm”), for violations of PCAOB rules and auditing standards in connection with the Firm’s 2016 integrated audit of Bancolombia S.A. (“Bancolombia”). The PCAOB found that López failed to perform necessary audit procedures and failed to obtain sufficient appropriate audit evidence before authorising the issuance of the Firm’s unqualified audit opinions on Bancolombia’s financial statements and internal control over financial reporting.

As described in the order, López and the engagement team improperly altered audit documentation, and, in several instances, obtained supporting audit evidence and performed audit procedures after issuance of the audit opinions, in violation of PCAOB standards. These procedures related to revenue, interest expenses, internal controls, and the fair value of Bancolombia’s loan portfolio and its derivatives.

López also violated PCAOB standards by failing to include in the audit documentation or causing the engagement team not to include information sufficient to comply with audit documentation standards.

Without admitting or denying the Board’s findings, López consented to the PCAOB’s order, which censured him and imposed a $75,000 civil money penalty.

b) PCAOB Sanctions James Pai CPA PLLC and Partner for Audit Failures

On 25^th March, 2025, the Public Company Accounting Oversight Board (PCAOB) announced a settled disciplinary order sanctioning:

James Pai CPA PLLC (the “Firm”) and Yu-Ching James Pai, CPA (“Pai”), the sole owner and partner of the Firm, for violations of multiple PCAOB rules and standards in connection with two audits of one issuer client.
the Firm for violations of PCAOB quality control standards, and
Pai for directly and substantially contributing to the Firm’s violations.

The PCAOB found that, in the audits, the Firm and Pai failed to perform appropriate risk assessments and obtain sufficient appropriate audit evidence in multiple areas, including revenue and related party transactions.

The PCAOB also found that, in the audits, the Firm failed to:

Have engagement quality reviews performed;
Obtain written representations from management;
Comply with requirements concerning critical audit matters, audit committee communications, and audit documentation; and
Establish and implement a system of quality control to provide it with reasonable assurance that the work performed by engagement personnel met applicable professional standards and regulatory requirements.

In settlement with PCAOB, the Firm and partner commit to $40,000 fine, revocation of the Firm’s registration, and partner bar following failure to perform appropriate risk assessments and obtain sufficient appropriate audit evidence in multiple areas.

a) Deficiencies in Firm Inspection Reports:

Bansal & Co LLP. (27^th February, 2025)

Deficiency: In an inspection conducted by PCAOB it has identified deficiencies in the financial statement audit related to Revenue, Goodwill and Intangible Assets, Journal Entries and Equity-Related Transactions.

The firm’s internal inspection program had inspected this audit and reviewed these areas but did not identify the deficiencies below:

» With respect to Revenue for which the firm identified a fraud risk: The firm did not perform any substantive procedures to evaluate whether the issuer met the revenue recognition criteria prior to recognising revenue.

» With respect to Goodwill and Intangible Assets: The firm did not evaluate whether the issuer’s accounting for and disclosures related to goodwill and certain intangible assets were in conformity with GAAP.

» With respect to Journal Entries, for which the firm identified a fraud risk: The firm did not perform any procedures to identify and select journal entries and other adjustments for testing to address the potential for material misstatement due to fraud.

» With respect to Equity-Related Transactions: The firm did not perform procedures to evaluate whether the issuer had a reasonable basis for the significant assumptions used to estimate the fair value of the issuer’s common stock issued in various share-based transactions, beyond obtaining and reading certain issuer-prepared documents

Brown Armstrong Accountancy Corporation. (27^th February, 2025)

Deficiency: In our review, we identified deficiencies in the financial statement audit related to Revenue and Related Accounts, Income Taxes, and Journal Entries.

» With respect to Revenue and Related Accounts, for which the firm identified a significant risk: The firm designed a substantive procedure for testing four types of revenue as a dual-purpose test. The firm performed its substantive procedure using the sample size it determined for its control testing. This sample size was too small to provide sufficient appropriate audit evidence for the substantive procedure because the firm did not use the larger of the sample sizes that would otherwise have been designed for the two separate purposes. In addition, for the selected revenue transactions, the firm did not perform procedures to test whether the issuer satisfied its performance obligations prior to the recognition of revenue, beyond obtaining certain issuer-produced reports and testing the timing of cash receipts. The firm did not perform substantive procedures to test the deferred revenue at year end.

» With respect to Income Taxes, for which the firm identified a significant risk: The firm did not perform procedures to test certain permanent and temporary differences used in calculating the income tax provision, beyond vouching these amounts to issuer-prepared schedules.

» With respect to Journal Entries, for which the firm identified a fraud risk: The firm identified fraud criteria for purposes of identifying and selecting journal entries for testing. The firm did not perform procedures to determine whether any journal entries met one of its fraud criteria. In addition, the firm obtained a listing of journal entries that met certain of the criteria. The firm did not perform sufficient procedures to test the journal entries in this listing, because it limited its procedures to certain entries, without having an appropriate rationale for limiting its testing to those journal entries.

III. THE SECURITIES EXCHANGE COMMISSION (SEC)

a) Charges Three Texans with Defrauding Investors in $91 Million Ponzi Scheme (29^th April 2025)

The Securities and Exchange Commission announced charges against Dallas-Fort Worth residents Kenneth W. Alexander II, Robert D. Welsh, and Caedrynn E. Conner for operating a Ponzi scheme that raised at least $91 million from more than 200 investors.

According to the SEC’s complaint, between approximately May 2021 and February 2024, Alexander and Welsh operated the scheme through a trust controlled by Alexander called Vanguard Holdings Group Irrevocable Trust (VHG). They falsely represented that investors would receive 12 guaranteed monthly payments of between 3% and 6% per month, with the principal investment to be returned after 14 months. The SEC alleges that Alexander and Welsh held VHG out as a highly profitable international bond trading business with billions in assets, and told investors that the monthly returns were generated from international bond trading and related activities.

As alleged, Conner funnelled more than $46 million in investor money to VHG through a related investment program that he operated using Benchmark Capital Holdings Irrevocable Trust (Benchmark), which he controlled. According to the complaint, Alexander, Welsh, and Conner also offered investors the option to protect their investments from risk of loss through the purchase of a purported financial instrument they called a “pay order.”

In reality, VHG had no material source of revenue, the purported monthly returns were actually Ponzi payments, and the protection offered by the “pay orders” was illusory. Alexander and Conner misappropriated millions in investor funds for personal use, such as Conner’s purchase of a $5 million home, according to the complaint.

b) Charges Investment Adviser and Two Officers for Misuse of Fund and Portfolio Company Assets (7^th March, 2025)

The Securities and Exchange Commission filed settled charges against registered investment adviser Momentum Advisors LLC, its former managing partner Allan J. Boomer, and its former chief operating officer and partner Tiffany L. Hawkins, for breaches by Boomer and Hawkins of their fiduciary duties when they misused fund and portfolio company assets.

According to the SEC’s orders, from at least August 2021 through February 2024, Hawkins misappropriated approximately $223,000 from portfolio companies of a private fund she managed with Boomer and that was advised by Momentum Advisors. Specifically, Hawkins misused portfolio company debit cards in more than 100 transactions to pay for vacations, clothing, and other personal expenses, and caused herself to be paid compensation in excess of her authorized salary.

As set forth in the orders, Hawkins concealed her misconduct from Momentum Advisors, from the portfolio companies’ bookkeeper, and from SEC staff, and Boomer failed to reasonably supervise Hawkins despite red flags of her misappropriation. The order against Boomer also finds that he caused the fund to pay a business debt that should have been paid by an entity he and Hawkins controlled, resulting in an unearned benefit to the entity of $346,904, and that Momentum Advisors failed to adopt and implement adequate policies and procedures and to have the fund audited as required.

The orders find that Hawkins and Boomer violated the antifraud provisions of the Investment Advisers Act of 1940, and that Momentum Advisors violated the compliance and custody rule provisions of the Advisers Act. Without admitting or denying the SEC’s findings, Hawkins, Boomer, and Momentum Advisors consented to the entry of cease-and-desist orders. Additionally, Hawkins agreed to pay a $200,000 civil penalty and to be subject to an associational bar; Boomer agreed to pay an $80,000 civil penalty and to be subject to a 12-month supervisory suspension; and Momentum Advisors agreed to a censure and to pay a $235,000 civil penalty.

BCAJ Admin

Indusind Bank – Strict Action Required To Eliminate Trust Deficit

Homo sapiens were neither the strongest species nor capable of flight, yet they outnumbered and outlasted many others. How, you ask? Consider chimpanzees—physically far stronger than humans—whose population remains below 300,000, while humans dominate the planet with 8.2 billion individuals. The key difference? Trust. Chimpanzee groups rarely exceed 200 members because, beyond that number, trust collapses and cooperation ends.

Humans, on the other hand, rely on trust in almost every aspect of life. We trust doctors with our health, auditors with financial integrity, management of the companies we are invested in, and banks, with our hard-earned money. But what happens when that trust is broken, and Jugaad becomes Jugaar? The impact can be catastrophic.

As Warren Buffett famously said, “It takes 20 years to build a reputation and five minutes to ruin it.” When crooks cheat with impunity, without fear of the law, their numbers only grow. If our laws remain weak and forgiving, they risk enabling more criminals to operate without consequences. Without strict action, trust in the system will be permanently eroded, threatening the very foundation on which businesses operate.

INDUSIND BANK – A CASE IN POINT

On 10^th March, 2025, the bank made the following disclosure:

“During internal review of processes relating to Other Asset and Other Liability accounts of the derivative portfolio, post implementation of RBI Master Direction – Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 issued in September 2023, including accounting of Derivatives, applicable from 1^st April, 2024, Bank noted some discrepancies in these account balances. Bank’s detailed internal review has estimated an adverse impact of approximately 2.35 per cent of Bank’s Net worth as of December 2024. The Bank has also, in parallel, appointed a reputed external agency to independently review and validate the internal findings. A final report of the external agency is awaited and basis which the Bank will appropriately consider any resultant impact in its financial statements. The Bank’s profitability and capital adequacy remains healthy to absorb this one-time impact.”

IndusInd Bank’s share price crashed 27 per cent on March 11, hitting the new 52-week low mark, erasing ₹19,000 crore of market capitalisation. The stock hit three lower circuits, one after another, before 10 am on the National Stock Exchange. Imagine, how betrayed investors must have felt. Many questions emerged.

Is this just a tip of the iceberg? Are there more problems yet to be discovered?
What led to this discovery?
Who committed the crime?
Will the perpetrators of the crime, be allowed to continue running the bank?
Is the depositor’s money safe, and could the bank collapse?
Is this an aberration and limited only to IndusInd?

The investor call held by the Bank, clarified a few things:

The difference was accumulated over a period of time
The issue was identified by the Bank (Not clear, who in the Bank flagged it?).
The bank remains financially stable.
An Independent firm has been appointed to ascertain the full impact.
The CFO had resigned a couple of months ago.

Management’s response on the call with regard to the audit, was as follows: “So there are 4 types of audits which happened. So first of all, understand the structure of treasury. They have a front office, a mid-office and a back office and a concurrent audit, which continues to happen. Second, there is an internal audit, which happens. And also, they take support of external agencies before everything to do the audit. Then there is a statutory audit, which happens on these and then a compliance audit and then the RBI audit. All these audits continue to happen on treasury on a regular basis.”

Yet, a crucial question lingers: How was this discrepancy picked up only in the last three months despite multiple layers of audit over the years?

The Management’s response, “Those are questions which we will answer in detail once our review is complete by the external agency because it’s important. Based on this new circular, we did our own internal review. I would say that those questions, we are also, in process of finding out as to where was this missed from. So I’m sorry, I really can’t answer it right now. But once we have those answers, we’ll be absolutely transparent in getting back to you.”

The RBI quickly stepped in assuring depositors that their money is safe. RBI allowed the CEO to continue for another year (rather than 3 years, the board had sought), ensuring that the banks activity is not abruptly disrupted.

A CRISIS OF CONFIDENCE

This shocking revelation led to a flurry of analyst downgrades, exacerbating other concerns as well, such as stress in IndusInd Bank’s microfinance books. Curiously, one analyst still maintains
an outperform rating, which raises eyebrows and warrants an investigation—though that’s a story for another day.

There is significant regulatory overlap in this case. While the RBI is the primary banking regulator, SEBI governs market disclosures and insider trades, NFRA oversees auditors, and SFIO handles financial fraud investigations of a serious nature. They should all come together, though NFRA should spearhead this, as they have the appropriate accounting knowledge and investigative skills. Ultimately, each of these regulators will then have to consider stringent and punitive action, basis their jurisdiction, for e.g., NFRA can take action against the auditors, SEBI on the management for fraudulent practices as well as insider trading. SEBI should also look at the role of the independent directors and take stringent action on them. RBI too will need to coordinate with SEBI and NFRA.

It would be naive to dismiss this as a mere accounting error or attribute it to senior management succumbing to reporting pressures, especially when subsequent media reports highlighted substantial insider trades.

A CALL FOR ACTION

A full-scale and swift investigation is imperative. Not only should senior management be held accountable, but the role of auditors and independent directors must also be thoroughly scrutinized. If those responsible are not severely punished, it will embolden cheaters and criminals. As Mahatma Gandhi once said, “The moment there is suspicion about a person’s motives, everything he does becomes tainted.” The regulators must act decisively to restore faith in the financial system.

Trust is the bedrock of human connections and the very essence of our survival. When trust is violated—especially in financial integrity—it shakes the foundation of coexistence. Each breach is a perilous step toward the potential destruction of our shared economy and society. Upholding trust is not just a moral imperative; it’s a fundamental necessity for the well-being and continuity of our interconnected existence.

In conclusion, regulators must fire on all cylinders to make Indian stock markets safe for all. White-collar crimes should not be treated any differently than physical thefts. Some criminal who smuggles in a couple of gold biscuits, they are imprisoned, and life is made absolutely miserable for them. On the other hand, SEBI allows these white-collar crimes to go literally scot-free. At best there is disgorgement, some penalty, and some ban from the capital market. This is hardly any relief for investors who have lost tons of money, and the loss of trust in capital markets, which is a more serious thing. Moreover, for habitual wrong doers, the disgorgement and penalty is a cost of doing business!!

A system that fails to punish financial wrongdoers swiftly is a society destined for collapse, like the chimpanzees!! As Thomas Jefferson wisely said, “Honesty is the first chapter in the book of wisdom.” It’s time we enforce this principle in action, not just in words.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

Given below is reporting on material weakness in internal controls for a large financial entity headquartered in Europe where it has been reported that the group has not maintained effective internal control over financial reporting based on COSO criteria.

UBS Group AG: (year ended 31^st December, 2024)

From Independent Auditors’ Report:

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of UBS Group AG

Opinion on Internal Control over Financial Reporting

We have audited UBS Group AG and subsidiaries’ internal control over financial reporting as of 31^st December 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the COSO criteria, the UBS Group AG and subsidiaries (“the Group”) has not maintained effective internal control over financial reporting as of 31^st December 2024, based on the COSO criteria.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Group’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment related to the Group’s acquired Credit Suisse business. Prior to the acquisition, Credit Suisse management had identified and disclosed three material weaknesses, one of which related to controls to design and maintain an effective risk assessment process over internal controls. Management concluded that as of 31^st December 2024,changes made to the Credit Suisse risk assessment process were designed effectively, but that additional evidence of operation of the remediated controls, in part due to the broader integration and migration efforts, is required to conclude that these controls are operating effectively on a sustained basis.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Group as of 31^st December 2024 and 2023, the related consolidated income statements, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended 31^st December, 2024, and the related notes. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2024 consolidated financial statements,and this report does not affect our report dated 14^th March, 2025, which expressed an unqualified opinion thereon.

Basis for Opinion

The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit. We area public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

Not reproduced

From Management’s report on internal control over financial reporting:

Management’s responsibility for internal control over financial reporting

The Board of Directors and management of UBS Group AG (UBS) are responsible for establishing and maintaining adequate internal control over financial reporting. UBS’s internal controls over financial reporting are designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with IFRS Accounting Standards, as issued by the International Accounting Standards Board (IASB).

UBS’s internal controls over financial reporting include those policies and procedures that:

– pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets;

– provide reasonable assurance that transactions are recorded as necessary to permit preparation and fair presentation of financial statements, and that receipts and expenditures of the company are being made only in accordance with authorizations of UBS management; and

-provide reasonable assurance regarding the prevention or timely detection of unauthorised acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

UBS management has assessed the effectiveness of UBS’s internal control over financial reporting as of 31st December, 2024 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013 Framework). Based on this assessment for the reasons discussed below, management believes that, as of 31^st December 2024, UBS’s internal control over financial reporting was not effective because of the material weakness described below related to the Credit Suisse business acquired in 2023.

A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a registrant’s financial statements will not be prevented or detected on a timely basis.

Prior to the acquisition, Credit Suisse management had identified and disclosed three material weaknesses, one of which related to controls to design and maintain an effective risk assessment process. Management concluded that as of 31^st December, 2024, changes made to the risk assessment process were designed effectively, but that additional time, in part due to the broader integration and migration efforts underway, is required to conclude that these controls are operating effectively on a sustained basis.

The effectiveness of UBS’s internal control over financial reporting as of 31st December, 2024 has been audited by Ernst & Young Ltd, UBS’s independent registered public accounting firm, as stated in their Report of the independent registered public accounting firm on internal control over financial reporting, which expresses an adverse opinion on the effectiveness of UBS’s internal control over financial reporting as of 31^st December, 2024.

Remediation of Credit Suisse material weaknesses

In March 2023, prior to the acquisition by UBS Group AG, the Credit Suisse Group and Credit Suisse AG disclosed that their management had identified material weaknesses in internal control over financial reporting as a result of which the Credit Suisse Group and Credit Suisse AG had concluded that, as of 31^st December 2022, their internal control overfinancial reporting was not effective, and for the same reasons, reached the same conclusion regarding 31 December 2021. Following the acquisition and merger of Credit Suisse Group AG into UBS Group AG in June 2023, Credit Suisse AG concluded that as of 31^st December 2023 its internal control over financial reporting continued to be ineffective. As permitted by SEC guidance in the year of an acquisition, UBS Group AG excluded Credit Suisse AG from its assessment of internal control over financial reporting for the year ended 31 December 2023 and concluded that its internal control over financial reporting was effective as of such date.

In May 2024, Credit Suisse AG and UBS AG merged with UBS AG as the surviving entity. Although Credit Suisse AG is no longer a separate legal entity, numerous of its booking, accounting and risk management systems remain in use for activities that have not yet been exited or migrated to UBS systems.

The material weaknesses that were identified by Credit Suisse related to the failure to design and maintain an effective risk assessment process to identify and analyse the risk of material misstatements in its financial statements and the failure to design and maintain effective monitoring activities relating to (i) providing sufficient management oversight over the internal control evaluation process to support Credit Suisse internal control objectives; (ii) involving appropriate and sufficient management resources to support the risk assessment and monitoring objectives; and (iii) assessing and communicating the severity of deficiencies in a timely manner to those parties responsible for taking corrective action.

These material weaknesses contributed to an additional material weakness, as the Credit Suisse Group management did not design and maintain effective controls over the classification and presentation of the consolidated statement of cash flows under US GAAP.

Since the Credit Suisse acquisition, we have executed a remediation program to address the identified material weaknesses and have implemented additional controls and procedures. As of 31^st December 2024, management has assessed that the changes to internal controls made to address the material weaknesses relating to the classification and presentation of the consolidated statement of cash flows as well as assessment and communication of the severity of deficiencies are designed and operating effectively.

The remaining material weakness relates to the risk assessment of internal controls. We have integrated the Credit Suisse control framework into the UBS internal control framework and risk assessment and evaluation processes in 2024. In addition, UBS has reviewed the processes, systems and internal control processes in connection with the integration of the financial accounting and controls environment of Credit Suisse into UBS, and implementation of updated or additional processes and controls to reflect the increase in complexity of the accounting and financial control environment following the acquisition.

Management has assessed that the risk assessment process was designed effectively. However, in light of the increased complexity of the internal accounting and control environment, the remaining migration efforts still underway and limited time to demonstrate operating effectiveness and sustainability of the post-merger integrated control environment, management has concluded that additional evidence of effective operation of the remediated controls is required to conclude that the risk assessment processes are operating effectively on a sustainable basis. In light of the above, management has concluded that there is a material weakness in internal control over financial reporting at 31^st December, 2024.

BCAJ Admin

Implications Arising Out of New Format of Financial Statements for Non-Corporate Entities

The Institute of Chartered Accountants of India (ICAI), through its Accounting Standards Board, issued the revised “Format of Financial Statements for Non-Corporate Entities” (Revised 2022), effective from financial year 2024-25 onwards. This move aims to align the reporting practices of Non-Corporate Entities (NCEs) — including sole proprietorships, partnerships, LLPs, trusts, and others to facilitate better presentation, greater and more transparent disclosures, and enhance comparability. This article analyses the implications of the revised format and outlines the challenges and opportunities together with the way forward, both for the NCEs as well as the regulators arising out of its implementation.

INTRODUCTION

India’s financial reporting landscape has significantly evolved in the past decade. While corporate entities governed by the Companies Act, 2013 (“the Act”) have long followed standardised formats for financial reporting in the form of Schedule III (erstwhile Schedule VI), NCEs were governed largely by inconsistent legacy practices or were following formats prescribed by the tax authorities or other regulators like the Charity Commissioner. Considering the large number of such entities and their contribution to the GDP and tax base, a standardised financial reporting framework is desirable.

The Institute of Chartered Accountants of India have prescribed Accounting Standards for different type of entities. These Accounting Standards apply with respect to any entity engaged in commercial, industrial or business activities. For the applicability of Accounting Standards (AS) on entities other than companies, these entities are classified into four categories viz., Level I, Level II, Level III and Level IV non-company entities. Level I, being large size non-company entities, are required to comply fully with all the AS. Level IV, Level III and Level II non-company entities are considered Micro, Small and Medium Sized Entities (MSMEs) that have been granted certain exemptions/relaxations by the ICAI.

Recognising this, the ICAI had earlier released the Technical Guide on “Revised Format of Financial Statements for Non-Corporate Entities (2022)” followed by a Guidance Note on Financial Statements of Non-Corporate Entities in August 2023 (“Guidance Note”), which is applicable to all financial statements from 1^st April, 2024 (i.e. for financial statements from financial year 2024-25 onwards)¹. Since NCEs will have to start preparing financial statements, they must be aware of the implications and challenges and other related matters arising from the adoption of the revised formats.

1   The Technical Guide on Financial Statements of Non-Corporate Entities 
stands superseded by the Guidance Note issued by the ICAI.

SCOPE AND APPLICABILITY

The Guidance Note specifies that all Business or Professional Entities, other than Companies incorporated under the Companies Act and Limited Liability Partnerships incorporated under the Limited Liability Partnership Act, are considered to be Non-Corporate entities. Accordingly, the revised format applies to:

Sole proprietorships
Partnerships
Hindu Undivided Families (HUFs)
Trusts
Association of Persons (AOPs)
Societies (not covered under the Companies Act)

It goes on to state that any formats/principles which are specifically prescribed under a particular statute or by any regulator/authority, e.g. trusts under the Maharashtra Public Trusts Act, 1956 or other autonomous bodies established by the Government can follow the said formats and also specific Guidance Notes / Technical Material issued earlier for educational institutions, political parties, NGOs etc. Accordingly, in the case of Trusts, AOPs and Societies to which there is no regulatory format prescribed, it appears that they have to follow the revised format, which, as indicated later, is almost aligned on the lines of Schedule III of the Act and hence may present challenges. The ICAI can consider issuing a clarification that the formats would apply only to commercial non-corporate entities.

The revised formats are applicable to financial statements prepared for periods beginning on or after 1st April, 2024. As per the ICAI announcement on ‘Clarification Regarding Authority Attached to Documents Issued by the Institute’ amended in August 2023, a member of the ICAI, while discharging his/her attest function, should examine whether the recommendations in a Guidance Note relating to an accounting matter have been followed or not. If the same has not been followed, the member should consider whether, keeping in view the circumstances of the case, a disclosure in his report is necessary in accordance with Engagement Standards. Further, though not expressly mentioned, it is presumed that the formats are applicable to general-purpose financial statements for which the audit needs to be conducted and reports to be issued as per the Standards of Auditing issued by the ICAI.

SALIENT FEATURES OF THE REVISED FORMAT

The revised format is almost entirely aligned with the formats prescribed under Schedule III of the Act, except for minor changes taking into account the operations of NCEs. However, they do not address specific operational features applicable to non-commercial / non-profit NCEs.

The following are certain salient features of the revised format:

Uniform Presentation

The revised format introduces a standardised structure for the Balance Sheet and the Profit & Loss Account, similar to those used by corporate entities under the Act. This ensures a consistent and familiar layout for stakeholders, improving readability, comparison, and analytical evaluation.

Classification of Assets and Liabilities

Entities are now required to distinguish between current and non-current assets and liabilities based on a 12-month operating cycle. This aligns with common accounting standards and helps in better liquidity and solvency assessments. It enhances the understanding of an entity’s short-term vs long-term financial obligations.

Disclosure-Oriented Approach

The revised format includes detailed disclosure requirements, extending beyond basic numerical data to cover related party transactions, contingent liabilities, and significant judgments or assumptions made, amongst other matters.

Notes to Accounts

Narrative and tabular notes are now emphasised. These provide clarity on the accounting policies adopted, detailed breakdowns of figures in the financial statements, and explanations of items such as provisions, asset valuations, and legal contingencies.

Alignment with AS Framework

The financial statements are to be prepared in line with the Accounting Standards issued by ICAI (not Ind AS) whilst maintaining relevance and feasibility for small and medium-sized non-corporate entities not governed by the Companies Act. This makes the standards accessible without being overly complex.

Transparency

Uniform formats encourage fuller and more accurate disclosures, thereby enhancing stakeholder confidence.

Creditworthiness Assessment

With standardised presentation, lenders and financial institutions can more reliably assess the risk profile and repayment capability of non-corporate borrowers, leading to improved access to finance.

Compliance Culture

The revised format will enable non-corporate entities to be ready for more structured and regulatory-compliant operations, facilitating easier transitions to corporate structures or public disclosures if needed in the future.

MAJOR CHANGES AND THEIR IMPACT

The revised format contains some major changes which will have far-reaching impact on non-corporate entities. These are briefly analysed hereunder:

Presentation of Shareholders’ / Owners / Partners Funds

There is a clear distinction between capital contributions, current account balances, and retained earnings which will help in understanding partner interests and fund movements.

Borrowings and Loan Disclosures

All borrowings must be classified as current or non-current and disclosed with details of security, terms of repayment, interest rates and nature (secured/unsecured). This will provide visibility on future commitments and repayment obligations and allow users to evaluate the entity’s leverage and funding structure.

Trade Payables Ageing Schedule

A detailed ageing analysis discloses the time-wise breakup of outstanding payables, specifically distinguishing amounts due to MSMEs. This would provide insights into the payment culture and vendor management practices, as well as working capital management policies. This also promotes compliance with MSME payment timelines and helps assess liquidity pressure.

Trade Receivables Ageing Schedule

Entities are required to present receivables based on due dates (e.g., less than 6 months, over 6 months). This identifies potential bad debts and inefficiencies in collection cycles, aiding in credit risk management.

Revenue and Other Income

Entities are required to provide a clear demarcation between operational revenue and other income streams such as interest, rent, and dividend income. This helps in assessing the core vs ancillary sources of income and facilitates better performance analysis.

Expenses Classification

Expenses must be grouped under predefined heads as per their nature. Further, any major items (exceeding 1% of turnover or ₹1 lakh, whichever is higher) must be individually disclosed. This improves cost transparency and helps in better variance analysis.

Related Party Disclosures

Entities are now required to follow tabular disclosure formats for related party disclosures. Non-corporate entities must reassess their definition of related parties under AS 18, which includes:

Individuals with control or significant influence (e.g., proprietors, partners)
Relatives of such individuals
Entities under common control (including group firms, HUFs, trusts, etc.)

This will formalise the presentation of disclosures, reducing subjectivity and increasing uniformity in reporting across entities and will enhance the depth, clarity, and consistency of related party disclosures and improve the credibility and transparency of financial reporting.

Disclosure of Contingent Liabilities

The new format formalises the disclosure of contingent liabilities via specific note formats, requiring entities to explicitly categorise and quantify such liabilities under the following broad heads, as against scattered and unstructured disclosures earlier.

Claims against the entity not acknowledged as debts
Guarantees provided to banks or third parties
Disputed tax and other statutory demands pending before authorities Entities must now assess the following in terms of AS-29:
Probability of outflow of resources
Reliability of estimation
Legal and contractual basis of such obligations

This would lead to improved comparability across reporting entities and a more accurate representation of financial risk.

BENEFITS AND IMPLEMENTATION CHALLENGES

Benefits

Adopting the revised formats provides several benefits not only for the entities but also for stakeholders, some of which are highlighted below:

Enhanced Credit Access

A clear, standard format makes financial statements more understandable to bankers and investors, improving creditworthiness assessments and enabling faster loan processing.

Improved Tax Compliance

Accurate and detailed reporting reduces mismatches with tax filings and enhances credibility, lowering the chances of tax disputes or penalties during assessment proceedings.

Professional Image

Entities with standardised, audited financials are more likely to attract partners, investors, and vendors, enhancing their brand perception and business prospects.

Better Internal Control

The need for enhanced disclosure and segregation coupled with more granular data collection
enforces tighter financial controls, better record-keeping, and informed decision-making. This would eventually translate into a better Compliance culture.

Challenges

In spite of the above benefits, there are several implementation challenges which can act as hurdles in the effective transition to the new financial reporting regime for such entities, some of which are briefly discussed below:

System and Template Overhaul

Many of these entities operate on basic or customised accounting systems that may not support the new classification and disclosure requirements. Significant effort may be required to update
software or manual reporting templates, the benefits of which may not be commensurate with the cost involved.

Data Availability

Entities may not maintain the level of detail required by the new format. For example, ageing analysis or related party disclosures might require significant historical data reconstruction or adjustments.

Lack of Awareness

Owners and managerial staff may not fully understand the relevance or implications of the new reporting format, leading to resistance or poor adoption.

Audit and Review Complexity

Auditors will need to verify new disclosure items, such as the classification of debtors, related party balances, and security on borrowings, which may involve additional work efforts, audit procedures, and reconciliations. Further, the additional effort and documentation may not result in a commensurate increase in their fees. Finally, the auditors may be exposed to greater scrutiny by the regulators.

WAY FORWARD

For Stakeholders

The new formats will have far-reaching implications primarily for ICAI and other Regulators, Chartered Accountants, Tax authorities, banks and other lenders.

ICAI and Other Regulators

Additional Guidance Notes / Technical Material-

Since non corporate entities take diverse forms and structures, ICAI could consider issuing further guidance on sector-wise illustrative financial statements, especially for non-commercial/non-profit entities, FAQs and implementation guidance to assist preparers and auditors.

Phased Implementation

ICAI and/or the regulators may consider introducing a simplified version of the format or a phase-wise implementation to reduce the initial compliance burden while maintaining reporting integrity.

Capacity Building

ICAI and/or the regulators should undertake capacity-building measures by organising webinars, workshops, and training for small practitioners, especially in Tier 2 and Tier 3 cities, which will enhance the quality of the overall adoption ecosystem.

Regulatory Synchronisation

Efforts should be made to harmonise financial statement formats with those used in tax return forms (ITRs) and other statutory filings like GST, charity commissioner, etc., thereby reducing duplication and reconciling mismatches. Finally, steps should be taken to harmonise the format with the filing under Tax Audit, especially for related party disclosures and contingent liabilities.

Chartered Accountants

CAs will have to play a greater and more proactive attest or advisory role than what is currently done, covering the following aspects:

Helping entities to restructure financial data, align ledgers, understand classification norms, adhere to structured accounting policies and maintain detailed financial and accounting records and MIS, as relevant.
Audit and review procedures will become more detailed and disclosure-focused, and greater emphasis will have to be placed on compliance with accounting and auditing standards and maintaining more robust documentation.

Tax Authorities

Tax officials and banks will benefit from structured and detailed financial statements, enabling quicker assessments and due diligence, reducing the scope for disputes, and promoting transparency in compliance and lending.

Banks and Other Lenders

Banks and others will benefit from structured and detailed financial statements, enabling proper and focused due diligence, reducing the scope for disputes, and promoting transparency in compliance and lending and monitoring the usage of funds

For Non-Corporate Entities

Entities will need to take several far reaching measures to align themselves with and gear up to the new financial reporting regime. The key matters in connection therewith are briefly discussed hereunder:

Transition Planning

Entities should map their existing reporting systems to the new format and create a migration plan, identifying gaps in account groupings and disclosures. Special efforts will be required to compile a master-related party register and revisit inter-firm and family group structures to identify indirect relationships. Similarly, entities would have to create a contingent liability register updated at each balance sheet date and obtain legal or expert opinions where outcome probability is uncertain.

Staff Training

Finance personnel and bookkeepers must be trained in the classification of accounts as per the formats, drafting of notes to accounts and accounting policies as per the Accounting Standards. Similarly, they need to be trained to maintain proper records and to improve the documentation, thereby ensuring accuracy and consistency in reporting. This will assist them in complying with the increased audit requirements.

Use of Technology

Entities will be required to use compliant accounting software or ERP systems to streamline compliance, reduce manual errors, and simplify periodic reporting and audit preparation. In certain cases, this may involve significant one-time implementation costs as well as additional recurring costs for employing persons with relevant skills who understand such systems.

CONCLUSION

The new format for financial statements for non-corporate entities will mark a significant step in the formalisation of India’s financial reporting ecosystem. While the journey to full adoption may be gradual and initially meet with some resistance, the long-term gains in credibility, compliance, and consistency will be substantial. Chartered Accountants, as custodians of financial integrity, have a vital role in driving this transition through proactive engagement, hand-holding of clients, and embedding best practices in the profession. To conclude, any short-term pain always paves the way for long-term gain!

BCAJ Admin

Unravelling The Forensic Accounting And Investigation Standards

1. INTRODUCTION:

Investigations in the corporate landscape are referred to by a multitude of typologies, such as workplace, fraud, forensic or ethics investigations, to name a few and these typologies are representative of the myriad methods, techniques and processes deployed to achieve a singular objective i.e. discovery and determination of facts relating to an alleged violation. Given this context, the Forensic Accounting and Investigation Standards (“FAIS” or “Standards”)¹ issued by the Institute of Chartered Accountants of India (“ICAI”) is a salient endeavor as it seeks to amalgamate a multitude of complex and divergent topics to provide a simple and unified framework for practitioners. However, applying a reductive approach to a complex matter can sometimes introduce unforeseen challenges. This note explores issues which stakeholders ought to consider apropos the services which fall within the ambit of FAIS.

¹ Paragraph 1.2 of the Framework governing Forensic Accounting & Investigation 
(“FAIS Framework”) read with Paragraph 1.2 of FAIS 110 – Nature of Engagement

2. SCOPE:

The FAIS which took effect on 1st July, 2023, comprise of 20 standards addressing core topics such as fraud risk and fraud hypothesis, engagement acceptance, planning, and reporting and apply when a Professional renders services falling within the definition of Forensic Accounting, Investigation or Litigation Support services (“FAIS Services”). The definition of “Professional”² encompasses not only members of ICAI but also other professionally qualified accountants engaged in forensic accounting and investigation. However, while compliance with the FAIS is mandatory for Chartered Accountants (“CA”), whether in practice or employment, it remains voluntary³ for qualified professionals who are not members of the ICAI.

²  Paragraph 3.1 of FAIS Framework

³  Paragraph 3.1.2. of the Implementation Guide on FAIS No 000

3. DEFINING & DISTINGUISHING FAI SERVICES: OVERLAPPING BOUNDARIES AND CONSEQUENCES

Formulating a precise definition can be especially challenging when a term aims to cover a wide range of scenarios or straddles multiple domains. This difficulty is apparent in the FAIS, which seeks to capture all possible subject matter and objectives of investigations, including investigations into financial, operational matters or in connection with litigation. As discussed further, while striving to remain sufficiently broad, these definitions run the risk of being so expansive that they become unwieldy.

3.1. FAIS DEFINITIONS

Forensic Accounting⁴ :This term is defined as “gathering and evaluation of evidence by a professional to interpret and report findings before a Competent Authority⁵” and is further explained as “The overriding objective of Forensic Accounting is to gather facts and evidence, especially in the area of financial transactions and operational arrangements, to help the Professional⁶ report findings, to reach a conclusion (but not to express an opinion) and support legal proceedings”.

⁴ Paragraph 3.2.1 of FAIS Framework read with Paragraph 3.3.1 of FAIS 
Framework

⁵ Competent Authority is defined as “Competent Authority refers to a court of law 
(or their designated persons), an adjudicating authority or any other judicial 
or quasi-judicial regulatory body empowered under law to act as such” - 
Refer Page 155 of FAIS - Glossary of Terms

⁶ Professional is defined as a professionally qualified accountant, 
carrying membership of a professional body, such as the ICAI, 
who undertakes forensic accounting and investigation assignments using accounting, 
auditing and investigative skills. Refer Paragraph 3.1 of the FAIS Framework.

Investigation⁷: Investigation is defined as “the systematic and critical examination of facts, records and documents for a specific purpose” and is explained as “a critical examination of evidences, documents, facts and witness statements with respect to an alleged legal, ethical or contractual violation. The examination would involve an evaluation of the facts for alleged violation with an expectation that the matter might be brought before a Competent Authority or a Regulatory Body⁸”.
```
⁷ Paragraph 3.2.2 of FAIS Framework read with Paragraph 3.3.2 of FAIS Framework.

⁸ Regulatory Body is defined as “Regulatory Bodies are established to govern 
and enforce rules and regulations for the benefit of public at large”.- 
Refer Page 160 of FAIS – Glossary of Terms
```
Litigation Support⁹: While this term is undefined, it has been explained as “may include mediation, alternative dispute resolution mechanisms or the provision of testimony”¹⁰. Litigation is defined as “a process of handling or settling a dispute before a Competent Authority or before a Regulatory Body. Litigation could include mediation and alternative dispute resolution mechanism¹¹”. Examples of Litigation Support include scenarios where a CA is asked to provide evidence in support of the observations made in a forensic report to an Investigation Agency or Competent Authority or a valuation exercise which may be used in settlement negotiations in context of a dispute¹².

⁹ Paragraph 3.2.3 of FAIS Framework – Page 17

¹⁰ Paragraph 1.2.(c) of FAIS 110 – Nature of Engagement

¹¹  Paragraph 3.2.3 of FAIS Framework

¹² Paragraph 5.4 of the Implementation Guide on FAIS 110 –
      Nature of Engagement

While at first blush, Forensic Accounting and Investigation appear to be similar in coverage as they envisage evaluation of evidence in connection with reporting to a Competent Authority. However based on a conjunct reading of FAIS 110¹³ – Nature of Engagement read with the Implementation Guide on FAIS 110¹⁴ it appears that matters involving review of transactions and accounts with a definitive objective to report to a Competent Authority would be classified as Forensic Accounting. The clear implication here is that this exercise should be taken to gather evidence which is admissible in front of a Competent Authority. On the other hand, considering that Forensic Accounting presupposes reporting to a Competent Authority, it appears that any internally initiated exercise including review of financial transactions, would be classified as an Investigation, even though the underlying issue may be subject to the jurisdiction of a Competent Authority or Regulatory Body.

¹³  Paragraph 3.2, 3,3,4.2 & 4.3 of FAIS 110 – Nature of Engagement.

¹⁴  Paragraph 3.2, 3.3 and 3.4 of the Implementation Guide on FAIS 110 – 
Nature of Engagement

However, the examples cited in the FAIS¹⁵ do not appear to support the aforesaid reasoning. For instance, the estimation of loss of assets or profits for an insurance claim or the assessment of pilferage of inventory, which would not necessarily entail reporting to a Competent Authority are classified as Forensic Accounting, whereas alleged manipulation of stock prices or an exercise to identify misutilisation of funds consequent to loan defaults, are placed under the umbrella of Investigations. Furthermore, although the term Litigation Support suggests services where a CA represents a client in legal proceedings, its broad scope and varied applications, as can be inferred from the inclusive meaning and examples, can blur the lines between Litigation Support and Investigation.

¹⁵ Paragraph 5.2 and 5.3 of the Implementation Guide on FAIS 110 –
 Nature of Engagement

In conclusion, the imprecision and overlap in the definitions of Forensic Accounting, Investigation, and Litigation Support create an interpretational haze that is difficult to resolve.. Without more precise and harmonized guidelines, these definitions risk being stretched to a point where they offer little functional clarity, thereby leaving CA uncertain about the exact nature of their engagements and the requirements to be met before a Competent Authority or a Regulatory Body.

3.2. BROADENING THE SCOPE: BEYOND FRAUDULENT ACTS

Although fraud¹⁶ has been defined in the FAIS, the definitions of Forensic Accounting and Investigation (“Forensic Investigation”) do not explicitly reference it. The Implementation Guide on FAIS 110 – Nature of Engagement, which is advisory, notes that an Investigation aims to “uncover potential fraud…” and “check for fraudulent intent…”¹⁷, yet the definition of Investigation, which refers to “legal, ethical or contractual violation”, strongly suggests that fraud is not a predicate element. Collectively this implies that even matters where fraud, misrepresentation, or misappropriation (collectively “Fraudulent Acts”) is not suspected might fall under the FAIS.

¹⁶  Paragraph 3.2.4 of FAIS Framework

¹⁷  Paragraph 3.3 of Implementation Guide on FAIS 110 – Nature of Engagement

The Cambridge dictionary describes the term Forensic as “related to scientific methods of solving crimes”¹⁸. The American Institute of Certified Public Accountant’s Statement on Standards for Forensic Services (“AICPA FS”) specifies wrong doing ¹⁹ as predicate element of an investigation. On a similar note, SEBI’s LODR which mandate reporting of Forensic Audits by listed companies reference an element of wrongdoing by referring to “mis-statement in financials, mis-appropriation / siphoning or diversion of funds” as a prerequisite element²⁰. Collectively, this implies that wrongdoing or misconduct ought to be an essential aspect of a Forensic Investigation.

¹⁸ Cambridge Dictionary, https://dictionary.cambridge.org/dictionary/english/forensic?q=Forensic, 
Last accessed on March 25, 2025.

¹⁹  Para 1 of AICPA FS

²⁰ “Frequently Asked Questions (FAQ) On Disclosure of Information Related 
to Forensic Audit of Listed Entities”, SEBI, https://www.sebi.gov.in/sebi_data/faqfiles/nov-2020/1606474249513.pdf, 
Last Accessed on March 25, 2025.

As such, it appears that FAIS diverges from the norm. To cite an example, the AICPA FS stipulate that valuation exercises not rendered in context of a litigation or investigation, would not be considered as a forensic service²¹. However, the examples cited in the FAIS²² suggest that exercises in nature of valuations and loss estimations are classified as Forensic Accounting, including even where litigation is not anticipated or wrongdoing is not suspected.

²¹ Para 2 of AICPA FS

²² Annexure 1 of FAIS 210 – Engagement Objectives read with Paragraph 5.2

 and 5.3 of the Implementation Guide on FAIS 110 – Nature of Engagement

By not requiring Fraudulent Acts as a starting point and by using undefined terms like “operational arrangements” or broad phrases such as “legal, ethical or contractual violations,” the FAIS potentially and may be inadvertently extend their scope to a wide array of fact-finding engagements. Even routine engagements can fall under the FAIS definition of an Investigation. For instance, if GST authorities flag discrepancies in sales data, hiring a CA to verify these discrepancies, even without any suspicion of wrongdoing could fall within the ambit of FAIS, as it involves a critical examination of records for a potential legal violation. Similarly, if a buyer alleges discrepancies in supply of goods, any assistance provided in evaluating the claims, may qualify as an Investigation, given the alleged breach of contract.

The decision not to explicitly require an allegation or indication of fraudulent activity in the definitions of Forensic Accounting and Investigation under the FAIS has significant practical implications. Although this breadth appears designed to accommodate a wide range of factual inquiries, it can lead to confusion and dissonance among both CAs and stakeholders as to whether a particular engagement would fall within the ambit of FAIS.

CAs are bound to assess whether an engagement falls within the FAIS and report compliance in their reports²³. However, clients would be wary of labelling ordinary fact-finding exercises as a “forensic” exercise as this characterisation may lead to an inference of suspected misconduct triggering governance and reporting obligations as well as potential reputational risks. This approach may translate into more extensive documentation, enhanced reporting standards, and greater administrative overhead, placing a disproportionate burden on clients for lower-risk assignments. The same poses practical challenges which the CAs and client will have to proactively work together to address appropriately.

²³  Paragraph 4.3 of FAIS 510 – Reporting Results

Furthermore, if Fraudulent Acts are not a predicate element, then the application of topical standards relating to fraud (such FAIS 120 – Fraud Risk) would be irrelevant. And since fraud is the predicate theme which binds the various FAIS, this incongruity may lead to potential complexities in the application of the FAIS leading to deficient outcomes.

3.3. DETERMINING FAIS APPLICABILITY

The FAIS ties its applicability to the purpose for which a service is rendered, yet its broad definitions may make it difficult to classify engagements. In particular, the terms “alleged legal, ethical or contractual violations” and “expectation” of litigation remain undefined, allowing multiple interpretations of whether an engagement qualifies as an Investigation or a general fact-finding exercise.

For instance, examining financial records for improper payments can serve markedly different objectives; from a straightforward risk assessment to probing suspected impropriety. If the client’s stated goal is merely to assess risk, the FAIS may not apply. However, if concerns of wrongdoing trigger the exercise, then FAIS could be applicable. In practice, determining which scenario applies can be challenging and, while dependent on the Client’s stated objectives, would also require a CA to assess the potential outcomes which would arise thereon.

Making a consistent and defensible classification often calls for legal expertise to interpret complex facts and predict potential outcomes; tasks that may extend beyond the CA’s traditional skill set. In high-stakes situations with uncertain or evolving circumstances, this lack of clarity poses a significant risk of non-compliance, underlying the need for more precise guidance in the FAIS.

4. INDEPENDENCE – UNREALISTIC PRESCRIPTIONS

The Basic Principles of FAIS (“Principles”) mandate that a CA should be “independent” and should “be free from any undue influence which forces deviation from the truth or influences the outcome of the engagement”²⁴ and that the CA “needs to resist any pressure or interference in establishing the scope of the engagement or the manner in which the work is conducted and reported”²⁵. A CA who is unable to establish the scope or the way the work is conducted would be violating the principle of independence²⁶, which in turn would necessitate a qualification in the CA’s report²⁷ or withdrawal by the CA from the engagement. At the same time ‘FAIS 210 – Engagement Objectives’ indicates that scope should be agreed upon with the client. Based on a conjunct reading, it appears that a CA should primarily determine the scope but with the consent of the client.

This strict independence requirement would be reasonable where the mandate to investigate is derived under law, such as an investigation initiated by regulators like SEBI but would appear to be excessive in case of client-initiated mandates, such as internal investigations, where a CA is rendering a contractual service at the client’s request. It may be noted that he AICPA FS do not prescribe independence as a requisite standard for forensic service²⁸.

²⁴ Paragraph 3.1 of Basic Principles of Forensic Accounting
 and Investigation (“Basic Principles”)

²⁵  Paragraph 3.1 of Basic Principles

²⁶  Paragraph 3.1 of the Basic Principles

²⁷Paragraph 5.3 of the Preface to the Forensic Accounting 
and Investigation Standards (“Preface”)

²⁸  Paragraph 6 of AICPA FS

5. ADHERENCE TO FAIS BY IN-HOUSE CAs

As explained above, the Basic Principles of FAIS (“Principles”) mandate that a CA should be “independent” and “needs to resist any pressure or interference in establishing the scope of the engagement or the manner in which the work is conducted and reported”²⁹. FAIS appear to be mandated for CAs in employment (“CA-E”) and it is obvious demonstrating this extent of independence in an employer-employee relationship is infeasible given the nature of the relationship.

²⁹ Paragraph 3.1 of Basic Principles

CA-Es operate in a different work construct when compared to CAs in practice. In fact, independence standards stipulated in the Code of Ethics issued by the ICAI apply to CAs in practice only. If FAIS are considered to be applicable to CA-Es, the potential conflicts and issues which would arise, may discourage CA-Es in undertaking any task in the nature of a FAIS Service. To illustrate, FAIS presupposes that the lifecycle of a FAIS engagement would be structured starting with engagement acceptance and culminating with a report, a structure which may not be practical or realistic in certain respects in the context of Forensic Investigations performed by a CA-E. As such, FAIS Services rendered by CA-E may be challenged as being non-compliant with FAIS and this deficiency may be used to discredit the outcome or findings of FAIS Services.

6. ATTORNEY CLIENT PRIVILEGE – DISHARMONIOUS CONSTRUCTION

Attorney-client privilege, in the context of investigations, is a legal doctrine that protects communications, including the work product, between a client and their legal counsel from disclosure to third parties including regulators, ensuring that sensitive information exchanged for obtaining legal advice remains confidential. In many Forensic Investigations, a CA may be retained under the direction of legal counsel specifically to maintain this protective umbrella, thus preserving privileged communications and related work products from forced disclosure.

However, the FAIS presupposes that the CA independently determines the scope and procedures of the engagement, without explicitly acknowledging the role of legal counsel over the investigatory process. This oversight can create tension: on one hand, the CA must comply with the FAIS; on the other, she is expected to operate under legal counsel’s instructions to maintain privilege. The resulting ambiguity raises serious questions about whether adherence to FAIS could inadvertently undermine attorney-client privilege, potentially compelling a CA to disclose information that would otherwise remain protected.

While the FAIS provides that CAs should consider the applicability of privilege while sharing evidence, the application of independence standards prescribed under FAIS may mean that umbrella of privilege may not be available, even if the CA is working under the directions of legal counsel. It is suggested that the ICAI should provide clarification that in relation to all work products protected by privilege, CA engaged through legal counsel may heed to the advice of the legal counsel, especially considering the applicable law which confers privilege on persons engaged by advocates under Section 132 (3) of Bhartiya Sakshya Adhiniyam, 2023.

7. SHARING INFORMATION WITH GOVERNMENT AGENCIES: BALANCING OBLIGATIONS AND CONFIDENTIALITY

“FAIS 240 – Engaging with Agencies” (“FAIS 240”) prescribes the standards in connection with interactions with Law Enforcement Agencies³⁰ and Regulatory Bodies³¹ (collectively referred to as “Agencies”) in connection with FAIS Services. FAIS 240 clarifies that testimony³² is a statement provided to a Competent Authority³³ such as a court, and is not included in the scope of FAIS 240. As such, it appears that any interaction with Agencies such as CBI or the ED, which are distinct from a Competent Authority, would fall under the scope of FAIS 240.

FAIS 240³⁴, when read with Implementation Guide on FAIS 240³⁵, appears to stipulate that a CA should provide information and / or clarifications to Agencies in connection with FAIS Services when called upon do so. FAIS 240 also stipulates that CAs should, in their engagement letters³⁶, include clauses relating to sharing of information with Agencies without prescribing any guardrails on the nature or extent of information which is to be shared or any due processes to be followed, such as approval of or communication to the client, before sharing such information.

³⁰ Defined in Paragraph 1.3 of FAIS 240 – Engaging with Agencies as 

“typically Central or State agencies mandated to enforce a particular law with the power to prevent,

 detect and investigate non-compliances with those laws. Their powers may be restricted

 by jurisdiction or by the law they are entrusted to enforce.”

³¹ Defined in Paragraph 1.3 of FAIS 240 -- Engaging with Agencies as

 “established to govern and enforce rules, laws and regulations for the benefit of public at large”

³² Defined in Paragraph 1.3(b) of FAIS 360 – Testifying before a Competent Authority - 

 as “A statement of the Professional whether oral, written or contained in electronic form,

 testifying before the Competent Authority on the facts in relation to a subject matter.”

³³ Defined in Paragraph 1.3(d) of FAIS 360 – Testifying before a Competent Authority as 

“Competent Authority refers to a court of law (or their designated persons), an adjudicating 

authority or any other judicial or quasi-judicial regulatory body empowered under law to act as such.”

³⁴ Paragraph 1.4(b) FAIS 240-Engaging with Agencies

³⁵ Paragraph 3.2 of Implementation Guide on FAIS 240

³⁶ Paragraph 4.4 FAIS 240-Engaging with Agencies

It also appears that FAIS 240 conflicts with the Basic Principles which prohibit the sharing of confidential information without the approval of the client, unless there is a legal or professional responsibility to do so and it can be argued that FAIS 240, which is specific, would take precedence over the Basic Principles, which are generic. Agencies can potentially use this argument to seek information from CAs, including that protected by attorney-client privilege, as refusal to share may be construed as non-compliance with FAIS which would in turn may lead to grounds for initiating disciplinary action against the CA.

It would be beneficial for the FAIS to explicitly provide exemptions for CAs from disciplinary action in situations where they refrain from sharing information to uphold attorney-client privilege, as outlined in FAIS 240. This clarification would further reinforce the principle of client primacy established in the Basic Principles.

8. CONCLUSION

While the FAIS are a laudable initiative to standardize and elevate forensic engagements, certain ambiguities and unrealistic requirements risk creating confusion and compliance challenges. The likely outcome and forum of a FAIS Service is litigation where it would be subject to extensive rigor and scrutiny. However, as discussed, the inherent ambiguities and sometimes, incompatible standards may impact the defensibility of a FAIS Service in a legal setting. Greater precision in defining key terms, a more realistic approach to independence in client-engaged scenarios, explicit accommodation for attorney-client privilege, and clearer guidance for in-house CAs are needed. By addressing these issues, the ICAI can ensure that the FAIS supports effective and credible investigative work.

BCAJ Admin

Disclosure of Climate Related Uncertainties

There was a strong concern from multiple stakeholders regarding information about the effects of climate-related risks in the financial statements, which either were insufficient or appeared to be inconsistent with information entities provide outside the financial statements, particularly information reported in other general purpose financial reports.

To address these concerns, the International Accounting Standards Board (IASB) collaborated with the International Sustainability Standards Board, and issued an Exposure Draft (ED) proposing eight examples illustrating how an entity applies the requirements in IFRS Accounting Standards to report the effects of climate-related and other uncertainties in its financial statements. The examples mostly focus on climate-related uncertainties, but the principles and requirements illustrated apply equally to other types of uncertainties.

The IASB expects that these illustrative examples will help to improve the reporting of the effects of climate-related and other uncertainties in the financial statements, including by helping to strengthen connections between an entity’s general purpose financial reports.

The IASB decided to focus the examples on requirements: (a) that are among the most relevant for reporting the effects of climate-related and other uncertainties in the financial statements; and (b) that are likely to address the concerns that information about the effects of climate-related risks in the financial statements is insufficient or appears to be inconsistent with information provided in general purpose financial reports outside the financial statements.

The eight examples, illustrate the application of various IFRS standards, to the extent they are related to climate related disclosures.

Paragraph 31 of IAS 1 Presentation of Financial Statements states “An entity shall also consider whether to provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.”

Consider the example below.

The entity is a manufacturer that operates in a capital-intensive industry and is exposed to climate-related transition risks. To manage these risks, the entity has developed a climate-related transition plan. The entity discloses information about the plan in a general-purpose financial report outside the financial statements, including detailed information about how it plans to reduce greenhouse gas emissions over the next 10 years. The entity explains that it plans to reduce these emissions by making future investments in more energy-efficient technology and changing its raw materials and manufacturing methods. The entity discloses no other information about climate-related transition risks in its general-purpose financial reports.

In preparing its financial statements, the entity assesses the effect of its climate-related transition plan on its financial position and financial performance. The entity concludes that its transition plan has no effect on the recognition or measurement of its assets and liabilities and related income and expenses because: (a) the affected manufacturing facilities are nearly fully depreciated; (b) the recoverable amounts of the affected cash-generating units significantly exceed their respective carrying amounts; and (c) the entity has no asset retirement obligations.

The entity also assesses whether specific requirements in IFRS Accounting Standards—such as in IAS 16 Property, Plant and Equipment, IAS 36 Impairment of Assets or IAS 37 Provisions, Contingent Liabilities and Contingent Assets—require it to disclose information about the effect (or lack of effect) of its transition plan on its financial position and financial performance. The entity concludes that they do not.

In applying paragraph 31 of IAS 1 [paragraph 20 of IFRS 18], the entity determines that additional disclosures to enable users of financial statements to understand the effect (or lack of effect) of its transition plan on its financial position and financial performance would provide material information. That is, omitting this information could reasonably be expected to influence decisions primary users of the entity’s financial statements make on the basis of those financial statements.

Without that additional information, the decisions users of the entity’s financial statements make could reasonably be expected to be influenced by a lack of understanding of how the entity’s transition plan has affected the entity’s financial position and financial performance. For example, users of the entity’s financial statements might expect that some of its assets might be impaired because of its plans to change manufacturing methods and invest in more energy-efficient technology.

The entity reaches this conclusion having considered qualitative factors that make the information more likely to influence users’ decision-making, including: (a) the disclosures in its general-purpose financial report outside the financial statements (entity-specific qualitative factor); and (b) the industry in which it operates, which is known to be exposed to climate-related transition risks (external qualitative factor).

Therefore, applying paragraph 31 of IAS 1 [paragraph 20 of IFRS 18], the entity discloses that its transition plan has no effect on its financial position and financial performance and explains why.

Other examples, include, the applicability of materiality judgements on disclosures, the disclosure of assumptions on impairment of assets, under different standards, such as IAS 36, Impairment of Assets, IAS 1, and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, disclosure about decommission and restoration provisions, under IAS 37 Provisions, Contingent Liabilities and Contingent Assets and disclosure of disaggregated information under IFRS 18 Presentation and Disclosure in Financial Statements.

There is also an interesting requirement relating to disclosure of credit risks under IFRS 7 Financial Instruments: Disclosures. Entities are exposed to significant credit risks arising from climate change. For e.g., a financial institution may be exposed to significant credit risks from its agriculture focussed lending, because of drought or flood. An entity might disclose: (a) information about the effects of particular risks on its credit risk exposures and credit risk management practices; and (b) information about how these practices relate to the recognition and measurement of expected credit losses.

In determining whether the disclosures are required, and the extent of such disclosures, an entity considers(a) the size of the portfolios affected by climate-related risks relative to the entity’s overall lending portfolio. (b) the significance of the effects of climate-related risks on the entity’s exposure to credit risk compared to other factors affecting that exposure. The effects depend on factors such as loan maturities and the nature, likelihood and magnitude of the climate-related risks. (c) external climate-related qualitative factors—such as climate-related market, economic, regulatory and legal developments—that make the information more likely to influence decisions primary users of the entity’s financial statements make on the basis of the financial statements.

The entity considers what information to provide about the effects of climate-related risks on its exposure to credit risk. This information might include, for example: (a) an explanation of the entity’s credit risk management practices related to climate-related risks and how those practices relate to the recognition and measurement of expected credit losses. The information the entity discloses might include, for example, how climate-related risks affect: (i) the determination of whether the credit risk on these financial instruments has increased significantly since initial recognition; and (ii) the grouping of instruments if expected credit losses are measured on a collective basis.

(b) an explanation of how climate-related risks were incorporated in the inputs, assumptions and estimation techniques used to apply the requirements in Section 5.5 of IFRS 9 Financial Instruments. The information the entity discloses might include: (i) how climate-related risks were incorporated in the inputs used to measure expected credit losses, such as probabilities of default and loss given default; (ii) how forward-looking information about climate-related risks was incorporated into the determination of expected credit losses; and (iii) any changes the entity made during the reporting period to estimation techniques or significant assumptions to reflect climate-related risks and the reasons for those changes.

(c) information about collateral held as security and other credit enhancements, including information about properties held as collateral that are subject to flood risk and whether that risk is insured.

(d) information about concentrations of climate-related risk if this information is not apparent from other disclosures the entity makes.

CONCLUSION

Many entities do not disclose sufficient and relevant information relating to climate related risks and the impact on its financial statements. Mostly, the disclosures if made are boiler plated or are outside the financial statements, which are not subject to any scrutiny. The IASB’s ED is a step in the right direction for ensuring better compliance relating to the disclosure of climate related risks. The ED will be followed by similar requirements in India as well. Hopefully, what will follow is better disclosures and effective compliance. Entities in the meanwhile, should consider the above disclosures, on a voluntary basis, without waiting for the ED to become a standard.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

National Financial Reporting Authority (NFRA) had case issued an order in 2023 against a company wherein it had questioned accounting policies followed for Revenue Recognition and disclosure of Operating Segments. Given below are the disclosures in the financial statements of the company for the same.

Mahindra Holidays & Resorts India Ltd (31^st March, 2024)

From Boards’ Report

Significant and Material Orders passed by the Regulators or Courts

There were no significant and material orders passed by the Regulators / Courts / Tribunals which would impact the going concern status of the Company and its operations in the future. The Company received an order from National Financial Reporting Authority (“NFRA”) (“the Order”) on 29^th March, 2023, wherein NFRA had made certain observations on identification of operating segments by the Company in compliance with the requirements of Ind AS 108 and the Company’s existing accounting policy for recognition of revenue on a straight line basis over the membership period under IND AS 115. In terms of the Order, the Company completed the review of its accounting policies and practices with respect to disclosure of operating segments and timing of recognition of revenue from customers and has taken necessary measures to address the observations made in the Order. Basis the said review, the existing accounting policies, practices and disclosures by the Company are in compliance with the respective Ind AS. Accordingly, the same have been applied by the Company in the preparation of financial results and a report to that effect has been submitted to NFRA.

As at 31^st March, 2024, the Management assessed the application of its accounting policies relating to segment disclosures and revenue recognition. Basis the current assessment by the Company after considering the information available as on date, the existing accounting policies, practices and disclosures are in compliance with the respective Ind AS and accordingly, have been applied by the Company in the preparation of the financial statements for the year ended 31^st March, 2024.

From Independent Auditors’ Report on Standalone Financial Statements

From Key Audit Matters

Directions by the Regulator (See Note 56 to standalone financial statements)

The key audit matter

Pursuant to a complaint made by a customer against the Company, National Financial Reporting Authority (‘NFRA’) passed an order dated 29^th March, 2023 (‘the Order’) providing directions to the Company. As per the order, NFRA has made certain observations in respect of:

the identification and disclosure of segments by the Company; and
Company’s accounting policy for recognition of revenue on a straight-line basis over the period of the membership fees and annual subscription fees. As per the Order, the Company has carried out review of policies and practices in areas of operating segments and timing of recognition of revenue from customers and submitted its response to NFRA.

Given the significance of the findings of NFRA on the policies and practices adopted by the Company, this has been considered as a key audit matter.

How the matter was addressed in our audit

Our procedures included the following:

Reading the Order received by the Company and us from NFRA;
Evaluating the findings in the Order with reference to segment reporting under Ind AS 108 and revenue recognition under Ind AS 115;
Communicating the findings of the Order with those charged with governance;
Inquiring and assessing the Company’s existing practices and policies followed by the Company in respect of the findings made by NFRA;
Reviewing Company’s response to NFRA as required by the Order;
Submitting our report to NFRA, based on our review of Company’s aforesaid response.

Segment Reporting

Inquiring with the Chief Operating Decision Maker (CODM) on the current process of identification of segments;
Obtaining and inspecting the operating results regularly reviewed by Company’s CODM.
Assessing the adequacy of disclosures of operating segments in accordance with Ind AS 108.

Revenue Recognition

Evaluating the accounting policy for recognition of revenue for contracts entered with members against requirements of Ind AS 115 with reference to fulfillment of performance obligations by the Company;
Inspecting and testing, on sample basis, relevant customer contracts and assessing revenue is recognised on satisfaction of performance obligation;
Assessing the adequacy of disclosures in accordance with Ind AS 115.

From Notes to Financial Statements

Note No.56

NFRA order The Company received an order (‘the Order’) from National Financial Reporting Authority (‘NFRA’) on 29^th March, 2023 wherein NFRA had made certain observations on identification of operating segments by the Company in compliance with requirements of Ind AS 108 and the Company’s existing accounting policy for recognition of revenue on a straight-line basis over the membership period. As per the order received from NFRA, the Company was required to complete its review of accounting policies and practices in respect of disclosure of operating segments and timing of recognition of revenue from customers and take necessary measures to address the observations made in the Order. The Company had submitted its assessment to NFRA and will consider further course of action, if any, basis directions from NFRA. As at 31^st March, 2024, the management has assessed the application of its accounting policies relating to segment disclosures and revenue recognition. Basis the current assessment by the Company after considering the information available as on date; the existing accounting policies, practices and disclosures are in compliance with the respective Ind AS and accordingly have been applied by the Company in the preparation of these financial statements.

BCAJ Admin

Digital Assurance

The Securities and Exchange Board of India (SEBI) has recently issued a draft circular, dated 3^rd February, 2025, requiring digital assurance, of financial statement. The first reaction is that this probably relates to IT-related controls or cyber security. That is not the case. SEBI has separate regulations for the same, e.g., Cyber Security and Cyber Resilience Framework for SEBI-regulated entities.

In the circular relating to digital assurance, SEBI states “As a continuous endeavour to enhance the quality of financial reporting being done by listed companies and in order to provide greater investor protection, it is proposed to mandate a separate report on digital assurance of financial statement. The report will increase transparency, improve disclosure standards and enable better enforcement, and thereby provide greater investor protection and trust in the ecosystem.”

The auditor shall conduct an examination in accordance with the “Technical Guide on Digital Assurance” issued by the Institute of Chartered Accountants of India (ICAI). The report shall be prepared by an auditor (Statutory Auditor or Independent Practitioner) who has subjected himself / herself to the peer review process of the Institute of Chartered Accountants of India and holds a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India.

If SEBI issues the circular, reporting on digital assurance shall be applicable to the Top 100 listed entities by market capitalization from Financial Year 2024-25 onwards i.e. for the period ending on or after 31^st March, 2025.

Some examples of external digital information that can be used to corroborate information in the financial statements are the following:

Revenue of an entity can be corroborated with the GST tax portal
Export receivables can be corroborated with the EDPMS report
Import payables can be corroborated with the IDPMS report
Tax deducted at source and advance taxes paid can be corroborated with the traces portal and AIS data
Total contribution to provident fund by employer and employee, can be corroborated with Employee Provident Fund Organization portal
Use of e-way bills to perform a sales cut-off procedure
Traffic data submitted to NHAI can be corroborated with toll revenue.

The ICAIs technical guide was issued some time ago in January 2023. This guide primarily focuses on sources of external audit evidence available and how it can be utilized by the members in their audit procedures. This guide also highlights the importance of reliability and relevance of the source from which the information is being obtained. In addition to using the available source, the members are guided to consider the reliability and relevance of the source and information being used in the audit. This guide also provides various illustrations of available sources of external audit evidence and how they can be used. Some of those examples are given above.

The aforementioned Technical Guide primarily focuses on sources of external audit evidence and information available and how the same can be utilised by the members in their audit procedures. It is noted that the Technical Guide does not require any separate reporting by auditors on these aspects. Further, no responsibility is cast on the management of the listed entity to provide this information obtained from external data repositories to auditors or provide access to such information to auditors. However, rightfully so, SEBI in the draft circular requires management to take responsibility for sharing such information to the auditors of the company.

The ICAI’s stance not to require any separate audit attestation is understandable, because external audit evidence, whether digital or otherwise, is in any case covered under extant auditing standards and audit procedures in the audit of financial statements.

Paragraph 7 of SA 500 requires as under: “When designing and performing audit procedures, the auditor shall consider the relevance and reliability of the information to be used as audit evidence.” Accordingly, the auditor is required to consider the relevance and reliability of information (e.g., information contained in accounting records, information obtained from other sources, information prepared using the work of a management’s expert) which is intended to be used by the auditor as audit evidence.

The reliability of audit evidence is increased when it is obtained from independent sources outside the entity. However, SA 500 rightfully cautions, that there may be exceptions, for e.g., information obtained from an independent external source may not be reliable if the source is not knowledgeable, or a management’s expert may lack objectivity.

According to the Technical Guide, the following factors may be important when considering the relevance and reliability of information obtained from an external information source:

The nature and authority of the external information source, including the extent of regulatory oversight (if applicable)
The “independence” of the data — is the entity able to influence the information obtained The competence and reputation of the external information source with respect to the information, including whether, in the auditor’s professional judgement, the information is routinely provided by a source with a track record of providing reliable information
The auditor’s past experience with the reliability of the information
Market acceptability of the data source
Whether the information has been subject to review or verification
Whether the information is relevant and suitable for use in the manner in which it is being used, including the age of the information and the nature and strength of the relationship between the information and the entity’s transactions, and, if applicable, the information was developed taking into account the applicable financial reporting framework
Alternative information that may contradict the information used
The nature and extent of disclaimers or other restrictive language relating to the information obtained
Information about the methods used in preparing the information, how the methods are being applied including, where applicable, how models have been used in such application, and the controls over the methods
When available, information relevant to considering the appropriateness of assumptions and other data applied by the external information sources in developing the information obtained.

The technical guide emphasises that, the information obtained by the auditor from external sources may reveal inconsistencies with the information obtained by the auditor from other sources (e.g., accounting records, information obtained during the course of audit, etc.). This would help the auditor in performing necessary modifications or additional procedures to resolve the matter. Thus, audit evidence obtained from external sources plays a vital role in the audit process.

SEBI has invited comments and suggestions, by 24^th February, 2025. The author submits as follows:

1. There are numerous auditing standards that require an appropriate use of internal and external audit evidence, in the audit of financial statements, to ensure that they are true and fair. The implementation of these standards and the conduct of appropriate audit procedures are also verified by various peer reviewers, including the NFRA reviewers. Therefore, a separate audit report to certify the same is unwarranted and is an extra burden on the auditors.

Precisely for this reason, the Technical Guide of the ICAI does not require any separate audit report. What may be more appropriate under the circumstances, is that the auditors include a summary work paper in their audit file, which will document all the external evidences that they used to audit the financial statements. This in the normal course will be subjected to a review by various peer reviewers.

2. If the above recommendation is not acceptable to SEBI, they should require the report to be issued by the company’s statutory auditor. It would be incorrect and inappropriate for an independent practitioner to certify the report, as they do not have the same level of knowledge about the client as the statutory auditor. A statutory auditorconducts regular audits, reviews financial statements, and has a deep understanding of a company’s internal controls, compliance framework, and financial history. On the other hand, an independent practitioner, who is engaged for a specific task, lacks this extensive familiarity. For instance, if a company has complex revenue recognition policies, the statutory auditor—being well-versed in past accounting treatments—can provide a more informed certification than an external practitioner with limited exposure to the company’s financial intricacies.

Suppose a company’s revenue figures in its financial statements need to be verified against GST (Goods and Services Tax) returns. The statutory auditor, having audited the company’s financials and tax reconciliations over time, is aware of any past discrepancies, discount or adjustments for returns, or specific reporting nuances, such as aggregating the multiple branches. An independent practitioner, however, would only be reviewing the data at a surface level and may not be aware of historical issues such as classification errors, past rectifications, or timing differences in revenue recognition.

3. The original purpose of digital assurance was to obtain more certification by statutory auditors on various non-GAAP measures in offer documents, which a merchant banker may not be competent, since they are not involved in the audit of financial statements; and may not have a deep understanding of clients databases and controls. Take for example, in the case of Swiggy, there are several non-GAAP measures that are used, such as adjusted EBITDA, quick commerce gross revenue, food delivery gross revenue, etc. Without opining on the relevance of these measures, it is not out of bounds for the statutory auditors to comfort such numbers.

In the offer document, Swiggy also provides industry and market-related data, basis the Redseer Report. Here the merchant banker’s basis their in-house experts or hired consultants should feel comfortable that the source is authoritative, and that it is fairly represented in the offer document, without any cherry-picking of information that suits the issuer, and avoiding those that are adversarial.

Likewise, there could be detailed cost-related data, where comforting by a cost accountant or cost auditor may be appropriate. A geoscientist may be more competent to certify mineral reserves. Information related to attrition rate for services company can be comforted by the statutory auditors, however, since there could be multiple ways of computing the same, the basis of measurement should be clarified by ICAI, so that there is consistency in calculations.

Whilst the merchant bankers are overall responsible for the information contained in the offer document, they should be supported by various professionals. Some of these professionals can be sourced as consultants or employed by the merchant bankers. Information that is closely associated with financial systems and related databases, should be comforted by the statutory auditors. SEBI should ensure that all stakeholders have a collaborative and cooperative approach in this matter, so that the end result is a solid offer document that can form a strong basis for evaluating a company.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

Given below are 3 typical ‘Emphasis of Matter’ paragraphs included in the audit reports for the year ended 31^st March, 2024.

1. Infosys Ltd

Emphasis of Matter regarding Cybersecurity Incidents

From Audit Report on Consolidated Financial Statements

Emphasis of Matter

As described in note 2.24.2 to the Consolidated Financial Statements, certain costs relating to possible damages or claims relating to a cybersecurity incident in a subsidiary are indeterminable as at the date of this report because of reasons stated in the note. Our opinion is not modified in respect of this matter.

From Notes to Consolidated Financial Statements Note 2.24.2: McCamish Cybersecurity incident in November 2023

Infosys McCamish Systems (McCamish), a step-down subsidiary of Infosys Limited, experienced a cybersecurity incident resulting in the non-availability of certain applications and systems. McCamish initiated its incident response and engaged cybersecurity and other specialists to assist in its investigation of and response to the incident and remediation and restoration of impacted applications and systems. By 31^st December, 2023, McCamish, with external specialists’ assistance, substantially remediated and restored the affected applications and systems. Loss of contracted revenues and costs incurred with respect to remediations, restoration, communication efforts, investigative processes and analysis, legal services and others amounted to $38 million (approximately ₹316 crore). Actions taken by McCamish included investigative analysis conducted by a third-party cybersecurity firm to determine, among other things, whether and the extent to which company or customer data was subject to unauthorized access or exfiltration. McCamish also engaged a third-party eDiscovery vendor in assessing the extent and nature of such data. McCamish in coordination with its third-party eDiscovery vendor has identified corporate customers and individuals whose information was subject to unauthorized access and exfiltration. McCamish’s review process is ongoing. McCamish may incur additional costs including indemnities or damages / claims, which are indeterminable at this time. On 6^th March, 2024, a class action complaint was filed in the U.S. District Court for the Northern District of Georgia against McCamish. The complaint arises out of the cybersecurity incident at McCamish initially disclosed on 3^rd November, 2023. The complaint was purportedly filed on behalf of all individuals within the United States whose personally identifiable information was exposed to unauthorized third parties as a result of the incident.

2. Indus Towers Ltd

Emphasis of Matter regarding material uncertainty at one of the largest customers and its consequential impact on the company’s business operations

From Audit Report on Consolidated Financial Statements

Emphasis of Matter

Material uncertainty at one of the largest customers of the Company and its consequential impact on the Company’s business operations. We draw attention to note 48 of the consolidated financial statements, which describes the potential impact on business operations, receivables, property, plant and equipment, and financial position of the Company on account of one of the largest customer’s financial conditions and its ability to continue as a going concern. Our opinion is not modified with respect to the above matter.

From Notes to Consolidated Financial Statements’

48. A large customer of the Group accounts for a substantial part of revenue from operations for the quarter and year ended 31^st March, 2024, and constitutes a significant part of outstanding trade receivables and unbilled revenue as of 31^st March, 2024.

a) The said customer in its latest published unaudited financial results for the quarter and nine months ended 31^st December, 2023, had indicated that its ability to continue as a going concern is dependent on its ability to raise additional funds as required, successful negotiations with lenders and vendors for continued support and generation of cash flow from operations that it needs to settle its liabilities as they fall due. The said customer had also disclosed in the aforesaid results that so far it has met all debt obligations to its lenders/ banks and financial institutions along with applicable interest till date. Further, the said customer had disclosed that one of its promoters has confirmed that it would provide financial support to the extent of ₹20,000 Mn to the said customer.

b) The Group, subject to the terms and conditions agreed between the parties, has a secondary pledge over the shares held by one of the customer’s promoters in the Group and a corporate guarantee provided by said customer’s promoter which could be triggered in certain situations and events in the manner agreed between the parties. However, these securities are not adequate to cover the total outstanding with the said customer.

c) During the quarter ended 30^th June, 2022, through the quarter ended 30^th September, 2022, the said customer had informed the Group that a funding plan was under discussion with its lenders and it had agreed to a payment plan to pay part of the monthly billing till December 2022 and 100% of the amounts billed from January 2023 onwards, which will be adjusted by the Group against the outstanding trade receivables. As regards the dues outstanding as of 31^st December, 2022, the customer had agreed to pay the dues between January 2023 and July 2023. However, the said customer has not made the committed payments pertaining to the outstanding amount due as of 31^st December, 2022. Based on Stock Exchange filings, the said customer (i) concluded its equity fund raise of ₹1,80,000 Mn through the FPO route on 22nd April, 2024, (ii) at its Board meeting held on 6th April, 2024 has, subject to the approval of the shareholders in the Extra-ordinary General Meeting to be held on 8^th May, 2024, approved the issuance of equity share aggregating to ₹20,750 Mn on a preferential basis to one of its promoter group entity, (iii) issued Optionally Convertible Debentures (OCDs) amounting to ₹16,000 Mn to one of its vendors in February 2023 of which ₹14,400 Mn worth of OCDs were converted into equity shares on 23^rd March, 2024, and (iv) is actively engaged with its lenders for tying-up the debt funding, which will follow the equity fund raise. The Group is in discussion with the said customer for a revised payment plan pertaining to the outstanding amount due. (d) As the said customer has been paying an amount largely equivalent to monthly billing since January 2023, hence, the Group continues to recognise revenue from operations relating to the said customer for the services rendered. The Group carries an allowance for doubtful receivables of ₹53,853 Mn as of 31^st March, 2024 relating to the said customer which covers all overdue outstanding as at 31^st March, 2024. (e) Further, as per Ind AS 116 “Leases”, the Group recognises revenue based on straight-lining of rentals over the contractual period and creates revenue equalisation assets in the books of accounts. During the quarter ended 31^st December, 2022, the Group had recorded an impairment charge of ₹4,928 Mn relating to the revenue equalisation assets up to September 30, 2022 for the said customer and presented it as an exceptional item in the statement of profit and loss. Further, the Group had stopped recognising revenue equalisation asset on account of straight-lining of lease rentals from 1^st October, 2022 onwards due to uncertainty of collection in the distant future. (f) It may be noted that the potential loss of the said customer (whose statutory auditors have reported material uncertainty related to going concern in its report on latest published unaudited results, which was issued before funding as mentioned above) due to its inability to continue as a going concern or the Group’s failure to attract new customers could have an adverse effect on the business, results of operations and financial condition of the Group and amounts receivable (including unbilled revenue) and carrying amount of property, plant and equipment related to the said customer.

3. Career Point Ltd.

Emphasis of Matter regarding legal action uncertainties on amounts receivable by the holding company and a subsidiary

From Audit Report on Consolidated Financial Statements

Emphasis of Matter

We draw attention to

a) Note no 49 of the consolidated financial statements which describes Srajan Capital Limited (‘SCL’), a Subsidiary Company has degraded (sub-standard and doubtful) its loans and advances to various parties as on 31st March, 2024 amounting to ₹ 782.63 lakhs (net of provision of ₹4,567.28 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for) (as of 31^st March 2023 ₹721.44 lakhs (net of provision of ₹4,507.38 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for)). During the financial year ended 31^st March, 2024, the related party has made a payment of ₹756.67 lakhs (total ₹1,707.40 lakhs up to 31^st March 2024) to SCL against its outstanding dues, which is treated as income by the subsidiary company. The auditor of the SCL has not modified its opinion in this regard.

b) Note no. 38 of the consolidated financial statements which describes the uncertainties relating to legal action pursued by the Holding Company against Rajasthan Skill and Livelihood Development Corporation (RSLDC) before Hon’ble Arbitrator for invocation of bank guarantee of ₹54.22 lakhs by RSLDC and recovery of the outstanding amount of ₹213.41 lakhs (including ₹159.19 lakhs receivable). Based on its assessment of the merits of the case, the management of the Holding Company is of the view that the aforesaid receivable balances are good and recoverable and hence, no adjustment is required as stated in the note no. 38 of the consolidated financial statements for the amount receivable as stated in the said note. Further, in the opinion of the management of the Holding Company, stated amount is good and full recoverable. Our opinion is not modified in respect of above matters.

From Notes to Consolidated Financial Statements

Note No 38

During the earlier years, the Holding Company has received principal amount of 1^st instalment of ₹216.90 lakhs from Rajasthan Skill and Livelihoods Development Corporation (RSLDC} for the Deen-DayalUpadhyayaGrameenKaushalyaYojana (DDU-GKY) project, against which the Holding Company had incurred ₹371.75 lakhs and Issued bank guarantee of ₹54.22 lakhs in terms of the agreement signed with RSLDC. During the year ended 31st March, 2022, RSLDC has invoked bank guarantee of ₹54.22 lakhs and has also demanded refund amounting to ₹334.76 lakhs (including interest of ₹117.36 lakhs) on termination of the above-stated project. The Holding Company has pursued the invocation of Bank Guarantee and other receivable of ₹213.41 lakhs (including ₹158.19 lakhs receivable) from RSLDC, before the Hon’ble Rajasthan High Court, Jaipur and the Rajasthan State Commercial Court under section 9 of Arbitration & Conciliation Act, 1996. The Hon’ble Rajasthan High Court, Jaipur Bench has appointed the sole arbitrator in the matter. The Holding Company has submitted its application before the Hon’ble Arbitrator. After submission of statement of defence by RSLDC, evidence and arguments, arbitral judge will pronounce the judgement. Based on its assessment of the merits of the case, the management is of the view that it has a creditable case in its favour and the aforesaid receivable balances are good and fully recoverable and hence, no adjustment is required as demanded by the RSLDC at this stage.

Note no 49

One of the Subsidiary Company Srajan Capital Limited (“SCL”), SCL has degraded (sub-standard and doubtful) its loans and advances to various parties as on 31^st March 2024 amounting to ₹782.63 lakhs (net of provision of ₹4,567.28 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for)) (as at 31^st March 2023 ₹721.44 lakhs (net of provision of ₹4,507.38 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for)). During the financial year ended 31^st March 2024, the related party has made payment of ₹756.67 lakhs (Total ₹1,707.40 lakhs upto 31^st March, 2024) to SCL against its outstanding dues and interest, which is treated as income by SCL

BCAJ Admin

Evolution of Audit: From Paper to Pixels

In this article, the evolution of audit practices from paper-based documentation to digital platforms is illuminated, highlighting how technology has revolutionized the approach towards Audit. This Article further explains how this transition to electronic documentation (“E-Documentation”) has helped significantly in improving efficiency, accuracy and transparency in audits. It allows for secure storage, easy retrieval and structured organization of audit files, which enhances internal and external review processes. Digital tools like automated resource management, cost management and certain electronic tools streamline the operations, while advanced data analytics techniques for sampling and journal entry testing bolster audit effectiveness by detecting errors and anomalies with greater precision. Embracing these innovations enables audit firms to elevate their practices, moving from routine tasks to insightful analyses, ensuring consistent and efficient audit procedures in the digital age.

“Change is the only constant”, as rightly quoted by Heraclitus, a Greek philosopher. The field of audit has embraced this notion of believing that change has always been by its side.

From handwritten documentation to digital algorithms, the evolution of audit has been a journey “from paper to pixels”. In this article, we explore the advancements that have shaped the audit scope, exploring how technology has upgraded the way audits are conducted and how professionals navigate to understand the audit processes adopted in the digital age.

As industries adapt to the rapid pace of technological advancement, the audit profession has been at the forefront of innovation, embracing digitalisation to revolutionise its practices. From the rigorous scrutiny of paper documents to the swift analysis of digital data, the evolution of audit has been nothing short of extraordinary.

In this article, we will delve into the importance of the article by discussing the following aspects:

The shift from paper-based to digital audit practices.
Evaluating the risk of the client before accepting a new client or an existing client.
Facilitating communication between the client and the engagement team.
Advanced tools like data analytics which enhance transparency, accuracy and efficiency.

In the field of auditing, the transition from paper-based processes to digital platforms has resulted in exceptional efficiency, accuracy and transparency.

DIGITALISATION OF AUDIT DOCUMENTATION – “E-DOCUMENTATION”

Before digitalisation, audit documentation was primarily done using physical / paper-based methods. This involved extensive manual processes like paperwork, handwritten notes, printed financial statements and physical files for audit engagement. Auditors would manually document their findings, observations and procedures. The process of compiling and organising audit documentation was labour-intensive and time-consuming. Storage and retrieval of paper-based audit files posed significant challenges in terms of space, security, confidentiality and maintaining documents in a systematic way. Overall, the pre-digitalisation era of audit documentation relied heavily on manual processes, paper-based records and physical documentation, which were susceptible to inefficiencies, errors and limitations in terms of accessibility and flexibility.

The era of digitalization paved the way for ‘E- documentation’. E- Documentation stands for Electronic Documentation and refers to securing, maintaining confidentiality and storing the documents electronically. This revolutionary change has proved to be significant for all the professionals pursuing the practice of audit.

The introduction of electronic documentation with various accounting and auditing tools, such as Suvit, facilitates the process of audit documentation. This has various built-in features, such as risk evaluation forms, auto-populated workpapers / questionaries, and communications within the audit team and between the audit team and the management. The auditor can analyze the level of risk for a particular audit engagement as well as it shall also help the auditor to design effective audit procedures to be undertaken for the audit engagement. Moreover, the work performed, findings and reports of an auditor right from the audit planning phase to the conclusion phase can be stored for a prolonged period of seven years as per SA 230 and can be retrieved whenever required. This features robust functionality for maintaining compliance with the maker-checker policy. Additionally, it incorporates a mechanism to imprint immutable timestamps, ensuring the integrity and non-editable nature of the records. E-Documentation serves as a trail for all the actions performed by the auditor during an audit.

Some of the merits of E-Documentation are mentioned below:

Internal review

The cloud-based tool can be accessed by the audit team at any point in time. This facilitates smooth review within the audit team and between the audit team and the Subject Matter Experts (‘SMEs).

External review

Due to the storage of documentation in a structured manner, it helps in efficient reviews by the external person as well (such as a peer reviewer, or any other regulatory body). All the relevant information and data related to the entity being audited is stored in a centralised manner. E- Documentation also ensures retrieval for a prolonged period, which enables any person to review the work done at any point in time.

Roll forward

Apart from the merits mentioned above, the documentation stored in the audit file for a particular year can be utilised in subsequent years by rolling it forward. This process involves transferring audit documentation such as audit memos, workpapers, checklists, auditor’s assessment and conclusion from the previous year to subsequent years. This feature facilitates in planning procedures for subsequent year’s audits.

Standard checklists

E-Documentation tool includes checklists designed to facilitate and support auditors’ work. These checklists feature questions related to audit procedures conducted related to various critical areas such as Going concern, impairment of investments / assets, etc. Audit firms can embed/customize standard checklists on Accounting Standards (AS), Auditing Standards, Company Auditor’s Report Order (CARO), 2020, Internal Financial Control, Companies Act, etc., in the software to ensure uniformity across all the engagements / clients. The audit team uses these checklists to document their actual work performed in the respective areas under examination. Further, these checklists also help in ensuring that any important thing in relation to the audit is not missed out.

Restricted access

Further, access to the E-Documentation tool can be restricted to the audit team until and unless access is granted to the extended team members with prior approvals. This ensures privacy, confidentiality and security of sensitive client information and data. Further, since working papers are the property of the auditor, utmost care should be taken so that the independence of the audit is maintained before access is granted to any external member.

EVALUATING RISKS AT THE FIRM LEVEL — CLIENT ONBOARDING

The client acceptance procedures shall be focused on ensuring that the clients who are chosen to serve should represent an appropriate balance of risk and reward. The firm minimises the exposure to high-risk clients by identifying each before accepting any engagement and then determining whether the firm is willing to manage the exposure. Additionally, internal risk evaluations, annual inspections, practice risk assessment and continuous monitoring are all integral for ensuring that when a firm chooses to serve a client, the firm follows the policies and procedures and meets the industry standards. The client acceptance process shall be workflow-driven and shall be dependent on the type of services warranted by the client and the size of the engagement. It must require more than one level of approval (in terms of maker and checker), each of which shall be generated electronically to avoid any bias.

Apart from assessing a new client, it is equally important to assess the existing client relationships / engagements as well. Hence, evaluating client continuance should be a periodic process due to which the risk parameters of an existing client are revalued/reassessed. Further, the client assessment should also be carried out if there is a significant change in the composition of Those Charged with Governance (TCWG).
Engagement acceptance is required to be performed prior to initiating a new engagement, irrespective of whether the firm has continuously performed the engagement for an existing client or will be performed for a new client. The EAF shall be completed and approved prior to the commencement of an engagement.

Hence, the firm should have these kinds of electronic forms which help in assessing the acceptance of a client or an engagement, and if there is any risk on account of any fraud, litigation, etc., against the TCWG / management, then the tool will populate the risk to the engagement team to evaluate the matter in detail.

EFFICIENT ELECTRONIC DATA EXCHANGE BETWEEN THE CLIENTS AND AUDIT TEAM

As mentioned above, in the pre-digitalisation era, exchanging data within the audit team and between the audit team and the client used to be chaos. Various difficulties were faced with respect to its storage and collation; to a certain extent, this might have hampered the overall quality of the audit. However, the digitalisation of the audit processes has led to better work management.

These tools automate the preparation of detailed requirement lists and facilitate secure file sharing, which enables auditors to manage audits effectively. These tools facilitate a collaborative environment for auditors and the client, ensuring real-time progress tracking and simplifying data management. These tools function as centralized digital platforms that manage and organize documents, making it easier for users to locate and access necessary information by arranging documentation within a unified digital repository. It also facilitates the retention of data and information for a prolonged period.

Due to such pioneering change, since the storage of data is now centralized, it has become easier to streamline the audit.

DIGITAL TOOLS

Let us delve into the use of various digital tools and their purpose, which can be used in the audit processes. Maximising audit effectiveness entails harnessing the power of data analytics to transform traditional auditing practices. By integrating sophisticated data analytical tools and techniques, auditors can revolutionize: Resource and cost management; communicating initial audit requirements to the client; selection of samples & vouching and testing of journal entries (JE).

A. RESOURCE MANAGEMENT

Resource management involves planning, allocation and optimisation of resources efficiently to achieve the goals of the firm. Keeping meticulous track of time spent on engagements is pivotal for preserving the trust and transparency vital to professional relationships. The time spent by the audit team and keeping a record of this is of utmost importance. This helps in demonstration of the time spent by partner and manager on engagements which is paramount in ensuring the success and credibility/quality of the overall audit.

This brings a wealth of experience and expertise to the table, which is essential for maintaining high-quality standards throughout the audit process. Their involvement is crucial in overseeing audit procedures meticulously, analyzing financial statements accurately and drawing well-supported audit conclusions.

Moreover, partners and managers play a pivotal role in managing audit risks effectively by identifying potential issues early on and implementing appropriate responses. Their technical knowledge allows them to address complex accounting matters with precision, ensuring compliance with auditing standards and regulatory requirements. Beyond technical aspects, their interaction with clients fosters clear communication, manages expectations and strengthens client relationships.

Additionally, partners and managers provide rigorous review and oversight of audit work performed by junior staff, ensuring thoroughness and accuracy in audit findings. Ultimately, the time invested by partners and managers in audit engagements not only enhances the quality of audits but also upholds the firm’s commitment to integrity, independence and ethical practices in auditing. By aligning costs with the services provided, clients are assured of fair invoicing, reinforcing confidence in the partnership. Moreover, this practice facilitates efficient resource allocation and project management, empowering firms to evaluate process effectiveness, pinpoint areas for enhancement and refine future resource distribution strategies.

B. EFFECTIVE COST MANAGEMENT

The documentation of work conducted during engagements serves multifaceted purposes. It not only provides a detailed record of audit procedures but also furnishes invaluable support for quality control evaluations. Assigning unique job codes to each engagement streamlines this process, simplifying cost analysis and bolstering accountability by correlating time expenditures with specific client projects or internal endeavours. This systematic methodology not only optimises billing procedures but also fortifies project management structures, culminating in an overall improvement of operational efficacy across the organisation.

C. COMMUNICATING INITIAL AUDIT REQUIREMENTS “PREPARED BY THE CLIENT (PBC)”:

“PBC” stands for “Prepared by Client.” This term refers to the documents and schedules that the client prepares and provides to the auditors as part of the audit process. These documents facilitate the auditors’ examination of the Company’s records and support the information presented in the financial statements. This typically includes reports, schedules, listings, vouchers and reconciliations.

Numerous interactions between clients and auditors make it challenging to track all the requirements and communications. To address this, an electronic PBC tool can be adopted to streamline the process. This tool allows the insertion of agreed timelines for data sharing and ensuring deadlines are met. It provides a robust review mechanism and enables task assignment to team members on both the auditor and the client sides. It also helps in improving collaboration and accountability. Importantly, it allows critical issues to be highlighted for partners or managers efficiently.

Adopting an electronic PBC tool enhances transparency and efficiency in the audit process. It ensures all communications and document submissions are tracked accurately, which reduces the risk of oversight.

This technology fosters a more organized and effective audit, leading to better outcomes and smoother operations for both auditors and the client.

D. SAMPLING AND VOUCHING

Diverse sampling methods in auditing, such as statistical, random, systematic, stratified, block, judgmental and haphazard sampling, offer tailored approaches to the auditor. Each method presents distinctive benefits, ensuring comprehensive, effective and efficient audit.

A FEW OF THE SAMPLING METHODS ARE EXPLAINED BELOW:

Statistical sampling: A method of selecting a subset of items from a population using statistical techniques to ensure that the selected subset is representative of the entire population.

Random sampling: A technique where each item in the population has an equal chance of being selected, eliminating bias and ensuring that the sample is representative of the entire population.

Systematic sampling: A method where items are selected at regular intervals from the entire population, starting from a randomly chosen number and then every 10th item of the entire population.

Stratified sampling: A technique where the population is divided into distinctive sub-groups (strata) based on specific characteristics, and samples are extracted from each sub-group to ensure that the selected sub-group is representative of the entire population.

Block sampling: A method where the population is divided into blocks or clusters, and entire blocks / clusters are selected randomly to form the sample, often used when items within blocks / clusters are more like each other than items in the other blocks / clusters.

Judgmental sampling: A non-random method where the auditor selects items based on professional judgment, often used when specific items are believed to be significant, and the selection will be representative of the entire population.

Haphazard sampling: A non-random method where items are selected without any specific plan or pattern.

Further, for vouching, the audit team can also deploy data analytics, which enhances transaction verification, automates tasks and improves accuracy, thus streamlining processes and conserving resources. Advanced data analytical tools enable efficient cross-referencing of transactions with source documents which further helps in minimising errors.

E. JOURNAL ENTRY (JE) TESTING

JE Testing involves reviewing and verifying the accuracy and validity of financial transactions recorded in the Company’s books of account. Through data-driven approaches, auditors can identify patterns, anomalies and trends within large datasets, allowing for more targeted and efficient sampling methodologies (to a certain extent mentioned in the earlier sections).

Advanced data analytics enable auditors to scrutinise transactions with greater precision, enhance the detection of errors and irregularities, and ensure a more thorough examination of financial transactions, thus providing the outcome efficiently. Further, these data analytical tools help in scrutinising journal entries for accuracy and legitimacy, which facilitates the auditor to flag suspicious entries and provide deeper insights into financial transactions.

VARIOUS TESTS IN JE TESTING ENCOMPASS:

Keyword analysis: Search for specific words or phrases like “bribe” or “charity” within worksheets.
Year-End entries: Analyse journal entries made nearer to year-end dates.
Public holiday entries: Review entries on holidays to detect unusual or large transactions and assess their reasonability.
Weekend entries:Scrutinise entries, especially passed on weekends and evaluate their nature.
Materiality assessment: Review entries above the materiality to identify unusual transactions.
Single entry verification: This means that basic accounting method where each transaction is recorded once rather than using a double-entry system. It is important to ensure that no single entries are mistakenly passed into the books of account.

Incorporating digital tools and data analytics enhances audit effectiveness by optimising resource management, improving cost efficiency and facilitating clear communication of audit requirements. Advanced sampling techniques and JE testing with data analytics further strengthen accuracy and reliability, ensuring thorough scrutiny of financial transactions. These innovations not only streamline processes but also uphold integrity, independence and compliance with auditing standards, ultimately fostering robust audit outcomes and client & regulatory satisfaction.

CONCLUSION

Hence, the suggested tools for audit digitalization and optimization are merely a starting point and not an exhaustive list. These tools exemplify how technology can significantly enhance the audit process, from manual documentation to resource management to risk assessment; effective communication between the client and the engagement team and using Digital tools truly harnesses the benefits of these advancements.

Audit firms and their quality control departments must mandate the use of these digital tools, ensuring consistent, accurate and efficient audit practices.

By embracing these innovations, audit firms can transform their practices from routine tasks to insightful analyses, unlocking new levels of precision and efficiency. The future of auditing is bright and with these tools, firms will be well-equipped to lead the charge into this exciting new era

BCAJ Admin

Key Year End Audit Considerations

Statutory Audit of financial statements is mandatory for all companies under the Companies Act, 2013. Whilst audit process commences well before the close of the financial year, for issuing the audit report attention needs to be paid to certain key matters as at the financial year end. Regulators like SEBI, NFRA, ROC, etc. are also keeping a close watch on the information contained the financial statements and the audit report through inspection of the audit work papers and other documents. The focus areas for the regulators generally cover matters regarding modified audit report, reliance on estimates, fraud risk factors, related party transactions, communication to those charged with governance and compliance with laws and regulations keeping in mind the overarching principle of materiality. Any slippages in these critical areas can make or break the reputation of the audit firms and their personal.

1. INTRODUCTION

Presentation and disclosure in financial statements play an important role in providing transparency to stakeholders. They help users to understand the financial health and performance of a company. Regulators are putting more emphasis on presentation and disclosures in financial statements due to increased stakeholder expectations, higher focus on public interest, and ongoing efforts to enhance global harmonization and prevent financial irregularities and frauds.

In today’s volatile market, every company is grappling with multiple challenges. Uncertainty in laws and regulations and economic volatility have put immense pressure on companies. Whereas earlier the annual reports were a thin booklet, currently, their size has increased manifold, which includes the financial statements and statutory auditors report issued to the members of a company under the Indian Companies Act, 2013 “(the Act”). Further, even though the audit report is addressed to the members since the annual report is mandatorily required to be hosted on the company’s website by listed companies under SEBI guidelines, there is no limit on the public accessibility thereof, making companies more accountable.

Finally, regulators like the Securities and Exchange Board of India (SEBI), Registrar of Companies (RoC), National Financial Reporting Authority (NFRA), etc., are keeping a close watch on the information, especially the audited financial statements and the report thereon which are available in public domain.. These regulators have regulatory powers to conduct inspections to delve into the working papers and documents of an audit firm to check if there is any lacuna in the audit procedures followed by the auditor and whether the auditor has complied with relevant Standards on Auditing (“SAs”).

With the end of the financial year (FY) 2024-25 around the corner, the hustle and bustle of audit have already commenced. This article presents some of the key year-end considerations for the auditors that they should keep in mind while performing the audit.

KEY CONSIDERATIONS PERTAINING TO AUDITOR’S REPORT

On completion of the audit, the auditor is required to issue an audit report to express the audit opinion. The following Standards on Auditing deals with respect to audit conclusions and reporting:

SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements
SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
SA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report
SA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
SA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information

SA 700 (Revised) prescribes the content of an audit report, which should, at a minimum, be forming part of the audit report. The following are certain issues requiring careful consideration:

A. QUANTIFICATION IN QUALIFICATIONS

It is pertinent to note that pursuant to paragraph 21 of SA 705 (Revised) if there is a material misstatement of the financial statements that relate to specific amounts in the financial statements (including quantitative disclosures in the notes to the financial statements), the auditor is required to include in the Basis for Opinion paragraph a description and quantification of the financial effects of the misstatement, unless impracticable. If it is not practicable to quantify the financial effects, the auditor is required to state that fact in this section. Where an accurate quantification is not possible, but a management estimate is available, the auditor performs such audit tests on those management estimates as are possible and clearly indicates that the amount quantified is based on management’s estimate. If it is impracticable for the auditor to quantify or estimate the effect of the misstatement, this fact needs to be included in the Basis for Modified Opinion paragraph.

Therefore, the auditor needs to quantify the financial effects of the misstatement, and only if it is impracticable, the auditor can include the qualification without quantification. The word ‘impracticable’ is not defined in Standards on Auditing but is commonly understood as ‘after making every reasonable effort’ to do so.

B. OTHER MATTER

As per paragraph 10 of SA 706 (Revised), if the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, the auditor is required to include an “other matter” paragraph in the auditor’s report, provided:

That is not prohibited by law or regulation; and
When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report.

An auditor should not include other matter paragraph for matters adequately disclosed in the financial statements. It can be included, for example, to highlight that in case the audit of some of the components of a company has been audited by other auditors, then this fact is required to be presented in the audit report to the consolidated financial statements under the “Other Matters” paragraph. However, in view of the recommendation by NFRA for revision of SA-600 on the lines of ISA 600, it needs to be seen whether the reference to the work of other auditors will be permissible.

C. EMPHASIS OF MATTER VS. QUALIFIED OPINION

Another important area is the use of the ‘Emphasis of matter’ (EOM) paragraph in the auditor’s report.
As per paragraph 8 of SA 706 (Revised), if the auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements, the auditor should include an Emphasis of Matter paragraph in the auditor’s report provided:

The auditor would not be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter; and
When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report.

EOM paragraph should not be included as a substitute for modification. For example, if the company has not provided adequate requisite disclosures in its financial statements, the auditor should evaluate the requirement to express a qualified opinion on the basis of the requirement of SA 705 (Revised) and should not include an EOM paragraph.

Examples of circumstances where the auditor may consider it necessary to include an Emphasis of Matter paragraph are:

Uncertainty relating to the future outcome of exceptional litigation or regulatory action.
A significant subsequent event that occurs between the date of the financial statements and the date of the auditor’s report.
Early application (where permitted) of a new accounting standard that has a material effect on the financial statements.
A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.

KEY CONSIDERATIONS PERTAINING TO ESTIMATES (INCLUDING USING THE WORK OF MANAGEMENT EXPERTS)

The auditor is required to perform adequate procedures to obtain sufficient appropriate audit evidence for estimates and complex transactions. The auditor should maintain documentation in sufficient detail to demonstrate the following:

Competence, capabilities and objectivity of management experts have been determined (the auditor should consider the self-interest threat of the management expert when numerous valuation assignments from other group companies were being performed by the same valuer);
Evaluating for management bias;
Procedures performed in order to determine the reasonableness of the assumptions/methods used by management experts;
Procedures performed by the auditor over management assessment;
Professional judgements made by the auditor in concluding on high-estimate areas;
In case of critical estimates/balances, involve internal experts for determining the appropriateness of the assumptions/methods used for valuation;
In case there are caveats in the valuation report, legal opinions, etc., documentation on how the auditor has dealt with those

KEY CONSIDERATIONS PERTAINING TO COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE (TCWG)

SA 260 (Revised), Communication with TCWG requires the auditor to communicate significant findings from the audit with those charged with governance. This is another key focus area for the regulators. Some of the key considerations are as follows:

TCWG comprises a Board of Directors, Audit Committee and Management. Communication with the Audit Committee is not sufficient.
Auditors should maintain documented evidence for:

– Communication of the planned scope and timing of the audit with TCWG.

– Minutes (“what and when”) of meeting with the TCGW/Audit Committee, including the team’s conclusion on the matters discussed.

– Accounting/auditing matters discussed with TCWG during the initial planning meeting and their final resolution

Critical matters should be communicated to TCWG, and regular discussions with the management should be documented.
Audit committee presentation contains only management’s estimate/representation, does not include audit procedures performed and auditor’s conclusion
Minimum communication with TCWG to ensure compliance with SA 260

– Auditor Independence

– The Auditor’s Responsibilities in Relation to the Financial Statement Audit

– Planned Scope and Timing of the Audit

– Significant Findings from the Audit, including the auditor’s assessment

– Inquiries with TCWG and response thereto

NFRA recently issued “The Auditor-Audit Committee Interactions Series 1”, which draws the attention of the auditors to the potential questions the Audit Committee / Board of Directors (BoD) may ask them in respect of accounting estimates and judgements. The first in the series in this regard includes aspects pertaining to the audit of Expected Credit Losses (ECL) for financial assets and other items as required by Ind AS 109, Financial Instruments.

SA 260 also requires the auditor to communicate with TCWG about qualitative aspects of the accounting practices, policies and disclosures. The reason behind such a communication is that the views of the auditor would be particularly relevant to TCWG in discharging their responsibilities for oversight of the financial reporting process.

This series put forwards some key questions relating to the following topics which the BoD / Audit Committee may ask the auditor regarding the audit of ECL:

Audit of ECL computation
Test of design and operating effectiveness of control mechanism over recognition and measurement of ECL
Audit of methodology used for ECL computation

KEY CONSIDERATIONS RELATED TO INTERNAL CONTROLS OVER FINANCIAL REPORTING (ICFR)

The auditor has to report under section 143(3) of the Act as to whether the company has adequate internal financial controls in place and the operating effectiveness of such controls. As per the Act, the term ‘internal financial controls’ means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to the company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. The Guidance Note on Audit of Internal Financial Controls Over Financial Reporting states that the auditor’s objective in an audit of internal financial controls over financial reporting is to express an opinion on the effectiveness of the company’s internal financial controls over financial reporting and the procedures in respect thereof are carried out along with an audit of the financial statements. Because a company’s internal controls cannot be considered effective if one or more material weakness exists, to form a basis for expressing an opinion, the auditor must plan and perform the audit to obtain sufficient appropriate evidence to obtain reasonable assurance about whether material weakness exists as of the date specified in management’s assessment.

Some of the key areas which require careful consideration are as follows:

Evaluation of controls over management override as part of entity-level controls; the auditor should maintain adequate documentation and procedures for controls around management override (remain cautious that deviation to the process might be a red flag for management override).
Evaluation of management testing of ICFR is critical, and its impact on ICFR conclusion should be documented. Inquiries with the internal auditor and evaluation of the role of the internal auditor, and a review of internal audit reports and the auditor’s conclusion should also be documented.
Adequate testing/focus even on non-critical areas (e.g. PPE)

KEY CONSIDERATIONS RELATING TO SIGNIFICANT UNUSUAL OR HIGHLY COMPLEX TRANSACTIONS

Material misstatement of financial statements, including fraudulent financial reporting, can arise from significant unusual or highly complex transactions, including situations that pose difficult “substance over form” questions, such as transactions not in the ordinary course of business undertaken with related parties. The Standards on Auditing give particular attention to the accounting for and disclosure of such transactions in the context of the auditor’s identification and assessment of risks of material misstatement, whether due to error or fraud and the auditor’s responses thereto.

The auditors are required to exercise professional judgment and maintain professional skepticism throughout the planning and performance of an audit and, among other things, identify, assess and respond to risks of material misstatement, whether due to fraud or error. Accordingly, the auditor plans and performs an audit with professional skepticism, recognising that circumstances may exist that cause the financial statements to be materially misstated. Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the risks of overlooking unusual circumstances. The auditor is required to:

Evaluate whether information obtained about the entity indicates that one or more fraud risk factors are present; for example:

♦ Significant related party transactions not in the ordinary course of business or with related entities not audited or audited by another firm; and

♦ Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult “substance over form” questions

♦ Inquire of management and others within the entity as appropriate about the existence or suspicion of fraud, including, for example, employees involved in initiating, processing or recording complex or unusual transactions and those who supervise or monitor such employees;

♦ Inquire of management and others within the entity, and perform other risk assessment procedures considered appropriate to obtain an understanding of the controls, if any, that management has established to:

♦ authorise and approve significant transactions and arrangements with related parties; and

♦ authorise and approve significant transactions and arrangements outside the normal course of business;

If the auditor identifies significant transactions outside the normal course of business, inquire management about the nature of these transactions and whether related parties could be involved.

Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating effectively. Management override of controls or other inappropriate involvement by management in the financial reporting process may involve such techniques as omitting, advancing or delaying recognition in the financial statements of events and transactions that have occurred during the reporting period or engaging in complex transactions that are structured to misrepresent the financial position or financial performance of the entity. The auditor is required to treat the risk of management override of controls as a risk of material misstatement due to fraud and, thus a significant risk.

COMPLIANCE WITH LAWS AND REGULATIONS

Compliance with laws and regulations is a crucial aspect which engages the attention of auditors for which they need to keep in mind the requirements laid down in SA-250. Auditors are primarily concerned with the non-compliance with Laws and Regulations that materially affect financial statements, which includes the following, amongst others:

Form and content of financial statements, including amounts to be reflected and disclosures to be made (Schedule III, Banking Regulation Act, Insurance Act, SEBI Mutual Fund guidelines, etc.)
Conducting of business including licensing and registration (Banks, Mutual Funds, NBFCs, Pharmaceutical companies, fertilizer companies, etc.), which could have potential going concern issues
Operating aspects of the business (Provisioning, valuation, taxation, safety aspects etc.) with possible financial consequences like fines, penalties, etc.

Adequate and appropriate procedures need to be performed to identify instances of non-compliance:

Inquiries with the Management.
Inspecting correspondence with relevant statutory authorities.
Reading the minutes.
Appropriate Control and Substantive procedures for industry-specific requirements like provisioning, valuation, accrual of expenses for retirement benefits, computation of incentives and subsidies etc.

Following are some of the instances of non-compliance which need to be considered in the context of year-end financial reporting:

Non-payment / delayed payment of statutory dues (CARO reporting).
Non-compliance with certain statutory and procedural requirements under various laws in respect of certain transactions or investigations by government departments resulting in fines and penalties or other demands and consequential disclosure of contingent liabilities or making provisions.
Unsupported transactions, especially with related parties.

KEY CONSIDERATIONS PERTAINING TO MATERIALITY

The concept of materiality is the final test which determines the nature and extent of reporting and the issuance of the final opinion in the audit report as to whether the financial statements present a fair view. It helps to determine the material misstatements. As per SA 320, misstatements are material if they, individually or in aggregate, could reasonably be expected to influence the economic decisions of the users taken on the basis of financial statements. Whilst generally materiality is determined on a quantitative basis, in certain situations, misstatements may be qualitatively material, which needs to be kept in mind during year-end reporting as follows:

Transactions resulting in changing loss into profit and vice versa.
Transactions having an impact on compliance with debt covenants (e.g. current ratio, DSCR, etc.)
Transaction has an impact on contractual agreements.
Transaction has an impact on compliance with regulatory provisions.
Transaction has an effect on variable compensation payable to Key Managerial Person.
Transaction resulting in fraud or omission or commission.

The following are the different stages in the calculation of materiality.

Planning Materiality: It is computed as the overall materiality representing a threshold above which the financial statements could be misstated and would affect the economic decision of the user of the financial statements. It depends on the size of the organization, types of transactions, character of management and auditor’s judgement and is set as a percentage of the profit, assets or net worth depending upon the nature of the entity.
Performance Materiality: It is an amount less than overall materiality and acts as a safety buffer to lower the risk of aggregate uncorrected and undetected misstatements, which could be material for overall financial statements.
Specific Materiality: It is established for a class of transactions, account balances and disclosures.

The materiality must be appropriately calculated since that has a bearing on the aggregate uncorrected and undetected misstatements and the consequential impact on the overall audit opinion.

CONCLUSION

Audit of financial statements is no longer about simply issuing an audit report but demonstrating and documenting the conclusions reached in respect of all auditing standards, as applicable to a particular company, especially in respect of matters requiring modification, reliance on estimates, fraud risk factors and related party transactions, amongst others whilst at the same time ensuring compliance of all relevant laws and regulations keeping in mind the overarching principle of materiality. With the constant inspections to which the auditors are exposed, any material deviations, especially in the aforesaid critical areas, can make or break the reputation and hard work built by the audit firms and the individual partners/proprietors and senior audit team members with severe consequences like fines and penalties and debarring the firm from undertaking audits.

BCAJ Admin

Presentation and Disclosure in Financial Statements

WHAT IS THE ISSUE?

ICAI has issued an exposure draft (ED) — Ind AS 118, ‘Presentation and Disclosure in Financial Statements’ — in response to concerns about the comparability and transparency of entities’ performance reporting. The new requirements introduced in Ind AS 118 will help to achieve comparability of the financial performance of similar entities, especially related to how ‘operating profit or loss’ is defined and the presentation of the income statement. Additionally, the new disclosures required for some management-defined performance measures will also enhance transparency.

It will not affect how companies measure their financial performance and the overall profit figure.

KEY CHANGES

1. Structure of the statement of profit or loss

Ind AS 118 introduces a defined structure for the statement of profit or loss. The goal of the defined structure is to reduce diversity in the reporting of the statement of profit and loss, helping users of financial statements to understand the information and to make better comparisons between companies. The structure is composed of categories and required subtotals.

Categories: Items in the statement of profit or loss will need to be classified into one of five categories: operating, investing, financing, income taxes, and discontinued operations. Ind AS 118 provides general guidance for entities to classify the items among these categories — the three main categories are:

OPERATING CATEGORY

The operating category is the default or residual category for income and expenses that are not classified in other categories and:

includes all income and expenses arising from a company’s operations, regardless of whether they are volatile or unusual in some way. Operating profit provides a complete picture of a company’s operations for the period.
includes, but is not limited to, income and expenses from a company’s main business activities. Income and expenses from other business activities, such as income and expenses from additional activities, are also classified in the operating category, if those income and expenses do not meet the requirements to be classified in any of the other categories.

Ind AS 118 requires a company to present expenses in the operating category in a way that provides the most useful structured summary of its expenses. To do so, a company will present in the operating category expenses classified based on: a) their nature — that is, the economic resources consumed to accomplish the company’s activities, for example, raw materials, salaries, advertising costs; or b) their function — that is, the activity to which the consumed resource relates, for example, cost of sales, distribution costs, administrative expenses.

It requires companies to classify expenses in a way that provides the most useful information to investors, considering, for example: a) what line items provide the most useful information about the important components or drivers of the company’s profitability; and b) what line items most closely represent the way the company is managed and how management reports internally.

Some companies might decide that classifying some expenses by nature and other expenses by function, provides the most useful structured summary of their expenses. The standard also requires companies that present expenses classified by function to disclose the amount of depreciation, amortisation, employee benefits, impairment losses and write-downs of inventories included in each line item in the operating category of profit or loss. Allowing presentation of expenses by function is a significant change and improvement of current Ind AS 1 Presentation of Financial Statements.

INVESTING CATEGORY

This category typically includes:

results of associates and joint ventures;
results of cash and cash equivalents; and
assets that generate a return individually and largely independently of other resources, for example, a company might collect rentals from an investment property or dividends from shares in other companies.

FINANCING CATEGORY

This category includes:

all income and expenses from liabilities that involve only the raising of finance (such as typical bank borrowing); and
interest expense and the effects of changes in interest rates from other liabilities (such as unwinding of the discount on a pension liability).

An entity is required to assess whether it has a specified main business activity that is a main business activity of investing in particular types of assets; or providing financing to customers, for example, insurers and banks. Income and expenses that would otherwise be classified in the investing or financing categories by most companies would form part of the operating result for such companies. Ind AS 118 therefore requires these income and expenses to be classified in the operating category.

Required subtotals:Ind AS 118 requires entities to present specified totals and subtotals: the main change relates to the mandatory inclusion of ‘Operating profit or loss’. The other required subtotal is ‘Profit or loss before financing and income taxes’, with some exceptions.

2. Disclosures related to the statement of profit or loss

Ind AS 118 introduces specific disclosure requirements related to the statement of profit or loss:

Management-defined Performance Measures (‘MPMs’):

This is a subtotal of income and expenses other than those specifically excluded by the Standard or required to be disclosed or presented by Ind ASs, that a company uses in public communications outside financial statements to communicate to investors management’s view of an aspect of the financial performance of the company as a whole. For example, measures that adjust a total or subtotal specified in Ind ASs, such as adjusted profit or loss, are management-defined performance measures.

Other measures (such as free cash flow or customer retention rate) are not management-defined performance measures. For the purpose of identifying MPMs, public communications outside the financial statements include management commentary, press releases, and investor presentations. It does not include oral communications, written transcripts of oral communications, or social media posts.

The standard requires an entity to provide disclosures for all MPMs in a single note, including:

reconciliation between the measure and the most directly comparable subtotal listed in Ind AS 118 or total or subtotal specifically required by Ind ASs, including the income tax effect and the effect on non-controlling interests for each item disclosed in the reconciliation;
a description of how the measure communicates management’s view and how the measure is calculated;
an explanation of any changes in the company’s MPMs or in how it calculates its MPMs; and
a statement that the measure reflects management’s view of an aspect of financial performance of the company as a whole and is not necessarily comparable to measures sharing similar labels or descriptions provided by other companies.

3. Enhanced requirements for aggregation & disaggregation of information

Ind AS 118 requires companies to aggregate or disaggregate information about individual transactions and other events into the information presented in the primary financial statements and disclosed in the notes.

The Standard requires companies to ensure that: a) items are aggregated based on shared characteristics and disaggregated based on characteristics that are not shared; b) items are aggregated or disaggregated such that the primary financial statements and the notes fulfil their roles; and c) the aggregation and disaggregation of items does not obscure material information.

Companies will be specifically required to disaggregate information whenever the resulting information is material. If a company does not present such information in the primary financial statements, it will disclose the information in the notes. To help companies apply the principles, Ind AS 118 provides guidance on grouping items and labelling aggregated items, including which characteristics to consider when assessing whether items have similar or dissimilar characteristics.

The guidance on aggregation and disaggregation has changed compared to Ind AS 1 Presentation of Financial Statements. This will require entities to reconsider their chart of accounts to evaluate whether their existing presentation is still appropriate or whether improvements can be made to the way in which line items are grouped and described in the primary financial statements. In addition, changes in the structure of the statement of profit or loss and additional disclosure requirements might require an entity to make significant changes to its systems, charts of accounts, mappings, investor presentations, etc. The level of operational change required by the new standard should not be underestimated, and entities should start thinking about the operational challenges as soon as possible.

EFFECTIVE DATE

It is proposed that an entity shall apply this Standard for annual reporting periods beginning on or after 1st April, 2027 and when this Standard applies, Ind AS 1 Presentation of Financial Statements, will be withdrawn.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

As per the article in the Financial Times (FT), UK (9 December 2024), ‘Accounting errors force US companies to pull statements in record numbers’. The said article mentions that in the first 10 months of 2024, 140 (up from 122 in previous comparable period) public companies told investors that previous financial statements were unreliable and had to reissue them with corrected figures. It is also mentioned that a single ‘Big’ audit firm was involved in 26 of these cases.

In the US, the said restatements have been carried out in accordance with ASC 250 ‘Accounting changes and error corrections’ and in accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements. (corresponding to IAS 8 / IndAS 8).

Given below are instances and disclosures of 10 cases of companies listed on US markets where restatement has been carried out. (portions in bold highlight the reason and impact of the restatement). For reason of conciseness, tables giving the detailed impact of the restatement are not reproduced.

1. PLBY Group Inc. (Restatement of Interim period ended 30^th June, 2023)

Note 1: Basis of Presentation and Summary of Significant Accounting Policies

Subsequent to the issuance of the condensed consolidated financial statements as of and for the quarter ended 30^th June, 2023 included in the Form 10-Q originally filed with the Securities and Exchange Commission (the “SEC”) on 9^th August, 2023 (the “Original Filing”), the Company identified a correction required to be made in its historical condensed consolidated financial statements and related disclosures as of and for the three and six months ended 30^th June, 2023. The correction relates to the accounting treatment of impairment of a license agreement and the classification of commission expense adjustments related to all contract impairments recorded during the three months ended 30^th June, 2023. In the Company’s Original Filing, the Company impaired a license agreement (which was ultimately terminated in the fourth quarter of 2023) and recorded impairment expense in relation thereto. Additionally, commission expense reversals related to contract impairments were recorded as an offset to the impairment expense.

Pursuant to the Company’s completion of its year-end audit procedures for its 2023 fiscal year, the Company determined that the accounting treatment of the license agreement, as described above, was incorrect. Rather than recording impairment expense of $3.2 million, the Company should have reduced its deferred revenue balance which related to the impaired license agreement. In addition, commission expense reversals of $1.2 million should have been recorded to the Company’s cost of sales, rather than offsetting its impairment expense. Additionally, tax expense was increased by $1.1 million to account for the aforementioned reversal of the impairment expense and changes in jurisdictional location of certain other impairment expenses.

2. Pioneer Power Solutions Inc. (Fiscal Year ended 31^st December, 2022)

Note 2: Restatement Of Previously Issued Consolidated Financial Statements

In connection with the preparation of our consolidated financial statements for the years ended 31^st December, 2023 and 2022, the Company identified errors related to revenue and cost recognition in its previously issued consolidated financial statements as of and for the year ended 31^st December, 2022 included in its Annual Report on Form 10-K for the year ended 31^st December, 2022 (the “Annual Period”).

During 2022 and 2023, the Company recognized revenues associated with customer contracts with performance obligations satisfied over time (“Over Time Contracts”) using labour hours as the measure of progress. The Company’s underlying estimates of total labour hours required to complete Over Time Contracts were materially different from the actual labour hours required, which was determined to represent an error since the information underlying the estimate was known or knowable as of the balance sheet date and, as a result, the percentage of completion used to recognize revenue in the Affected Periods is materially different from the percentage of completion using actual labour hours incurred. As a result, the Company has restated revenues during the Affected Periods to adjust the percentage of completion based upon the actual labour hours incurred to complete each Over Time Contract (the “Revenues Adjustment”).

Additionally, the Company has determined that costs from Over Time Contracts should be recognized as incurred and, as a result, the Company has recorded an adjustment to its consolidated financial statements during the Affected Periods (together with the Revenues Adjustment, the “Restatement Adjustments”), as the Company was previously incorrectly deferring costs incurred to a future period.

The Company evaluated the materiality of these misstatements both qualitatively and quantitatively in accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements, and determined the effect of correcting these misstatements was material to the Affected Periods. As a result of the material misstatements, the Company has restated its consolidated financial statements for the Affected Periods in accordance with ASC 250, Accounting Changes and Error Corrections (the “Restated Consolidated Financial Statements”).

A reconciliation from the amounts previously reported for the Affected Periods to the restated amounts in the Restated Consolidated Financial Statements is provided for the impacted financial statement line items for: (i) the consolidated balance sheet as of 31^st December, 2022; (ii) the consolidated statement of operations for the year ended 31^st December, 2022; (iii) the consolidated statement of changes in stockholders’ equity for the year ended 31^st December, 2022; and (iv) the consolidated statement of cash flows for the year ended December 31, 2022. The amounts labelled “Restatement Adjustments” represent the effects of the Restatement Adjustments.

3. Gatos Silver Inc. (Restatement of Fiscal Year ended 31^st December, 2023)

Note 3: Restatement of Previously Issued Financial Statements

During the preparation of the financial statements for the three months ended 31^st March, 2024, the Company identified that the capital distributions received from its investment in affiliate classified as cash provided by investing activities on the Consolidated Statements of Cash Flows should have been classified as cash provided by operating activities. Based on management’s judgement, the Company considered the declaration of the capital distribution (in its legal form) to be the nature of the activity that generated the cash flow and, therefore, classified capital distributions as cash provided by investing activities on the Consolidated Statements of Cash Flows. On further analysis, it was determined that management should have considered the underlying source of the cash flow at the Los Gatos Joint Venture (“LGJV”) that generated the funds for the capital distributions when determining its classification on the Company’s Consolidated Statements of Cash Flows. The capital distributions received previously classified as cash flow provided by investing activities should have been classified as cash flows provided by operating activities.

The impact of the restatement on the Consolidated Statements of Cash Flows for the year ended 31^st December, 2023, is presented. The Consolidated Balance Sheets and balance of cash and cash equivalents as of 31^st December, 2023, and the Consolidated Statements of Income and Comprehensive Income, Consolidated Statements of Stockholders’ Equity for the year ended 31^st December, 2023, are not impacted by this error.

4. Reviva Pharmaceuticals Holdings, Inc (Fiscal Year ended 31^st December, 2022)

Note 2: Restatement Of Previously Issued Annual Consolidated Financial Statements for The Fiscal Year Ended 31^st December, 2022.

The need for the restatement arose out of the results of certain financial analysis the Company performed in the course of preparing its fiscal year-end 2023 financial statements. Principally, the Company completed a detailed lookback analysis to compare certain estimated accrued clinical trial expenses, specifically investigator fees, from one contract research organization to its actual clinical trial expenses that were incurred for the respective periods for that contract research organization during the Restatement Periods based on review of historical invoices. In the course of its analysis of the actual information gathered through the lookback process, the Company detected differences between the estimated accrued amounts of those clinical trial expenses and the actual expenses recorded due primarily to the Company’s failure to properly review and evaluate expenses incurred in those clinical trial contracts resulting in the Company not properly accruing for clinical trial expenses that were incurred but for which invoices were not yet received. In addition, the Company determined that an effective process for evaluating the completeness of the research and development expense accrual for investigator fees and related costs, for that contract research organization, was necessary. This included estimated patient site visits not yet reported, average site visit costs and average delay in site invoicing. This provides the Company with an effective estimate of the costs incurred as there can be a lag between receiving an invoice for the services provided from that contract research organization. Management and the audit committee of the Company’s board of directors have concluded that, in the ordinary course of closing its financial books and records, the Company previously excluded certain clinical trial expenses and associated accruals from the appropriate periods as required under applicable accounting guidelines. Therefore, the Company misstated research and development expenses, and accrued clinical expenses during the Restatement Periods. The Company received FDA authorisation in early 2022 to begin clinical trials and therefore, no similar error as of 31^st December, 2021, would be expected or identified. Further, management determined that any misstatements to the quarterly periods ended 31^st March, 2022, and 30^th June, 2022, included in its Quarterly Reports on Form 10-Q, were not material.

Therefore, the Company misstated R&D expenses and associated accrued liabilities during the Restatement Periods. The Company principally attributes the errors to a material weakness in our internal control activities due to a failure in the design and implementation of our controls to review clinical trial expenses, including the evaluation of the terms of clinical trial contracts. Specifically, we failed to properly review and evaluate progress of expenses incurred in clinical trial contracts resulting in us not properly accruing for clinical trial expenses that were incurred but for which invoices were not yet received This is disclosed in Item II, Part 9A of this Annual Report on Form 10-K. The Company has commenced procedures to remediate the material weaknesses. However, these material weaknesses will not be considered remediated until the applicable remedial actions have been fully implemented and the Company has concluded that these controls are operating effectively for a sufficient period of time.

5. Paragon 28, Inc (Restatement of Fiscal Year ended 31^st December, 2023)

Note 3: Restatement of Previously Issued Consolidated Financial Statements

Subsequent to the issuance of the Company’s consolidated financial statements as of and for the year ended 31^st December, 2023 and the Company’s unaudited condensed consolidated financial statements as of and for the fiscal quarter ended 31^st March, 2024, the Company identified errors in the calculation of its excess and obsolete inventory reserves, as well as its accounting for inventory variances, which resulted in a net overstatement of Inventories, net as of 31^st December, 2023 and a net understatement in Cost of goods sold for the fiscal year ended 31^st December, 2023. The consolidated financial statements (as restated) reflect the correction of this error and include adjustments to correct certain other previously identified misstatements relating to prior periods, including the fiscal year ended 31^st December, 2022, that the Company had determined to be immaterial both individually and in aggregate.

DESCRIPTION OF MISSTATEMENT ADJUSTMENTS

(a) Inventory Treatment

The Company recorded adjustments to correct the calculation of its excess and obsolete inventory reserve and valuation of purchase price variances. The corrections resulted in a decrease in Inventories, net of $8,016, an increase in the Cost of goods sold of $8,356, and a decrease in the beginning balance of Accumulated deficit of $340, respectively, as of and for the fiscal year ended 31^st December, 2023.

(b) Interest Rate Swap

The Company recorded adjustments to correct certain misstatements related to its interest rate swap previously corrected out of period in Q3 2023. The adjustments recognize the correction to prior periods.

6. ArhausInc (Restatement of Interim Period ended 30^th June, 2023 and 31^st March, 2023)

Note 16: Revision of Previously Issued Condensed Consolidated Financial Statements (Unaudited)

As described in Note 1 – Nature of Business, the Company identified an error within the consolidated balance sheets, related to certain leasehold and landlord improvements prior to showroom completion being incorrectly included in prepaid and other current assets rather than property, furniture and equipment, net. The error resulted in inaccurate cash flows ascribed to operating and investing activities in the consolidated statements of cash flows. The errors impacted the unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of cash flows as of and for the three months ended 31^st March, 2023 and 2022, as of and for the six months ended 30^th June, 2023 and 2022, and the unaudited condensed consolidated balance sheet as of 30^th September, 2022. The Company has evaluated the errors both quantitatively and qualitatively and concluded they were not material, individually or in the aggregate, to such prior period unaudited condensed consolidated financial statements and concluded to revise such prior period unaudited condensed consolidated financial statements.

In connection with the revision of the Company’s unaudited condensed consolidated financial statements, we determined it was appropriate to correct for certain other previously identified immaterial errors. The Company will effect the revision of the unaudited interim condensed consolidated financial information for the first two quarters of 2023 as part of our filing of the 2024 interim Form 10-Qs.

7. BitFarms Limited (Fiscal Years ended 31^st December, 2023)

Note No. 3: Basis of Presentation and Material Accounting Policy Information

Restatement of statement of cash flows:

The statement of cash flows has been restated to reclassify the cash proceeds from the sale of digital assets, which is accounted for as an intangible asset under IAS 38, from cash flows from operations to cash flows from investing activities. The Company has determined that this error was material to the previously issued consolidated financial statements and as such, has restated its consolidated financial statements, as applicable.

Adjustment on accounting for 2023 Warrants:

The Company is correcting an error in the fair value recorded for the 2023 exercises of warrants issued in connection with the private placement financing in 2023 (“2023 Warrants”). The correction resulted in an increase in the share capital and net financial expenses in the restated consolidated financial statements.

8. Cellectar Biosciences, Inc. (Fiscal Years ended December 31, 2023)

Note No. 2: Summary Of Significant Accounting Policies

Restatement of Previously Issued Consolidated Financial Statements — During the third quarter of 2024, and prior to the filing of the Company’s Form 10-Q for the quarter ended June 30, 2024, the Company determined that it was necessary to re-evaluate the Company’s accounting treatment for certain previously issued warrants and preferred stock. Additionally, the Company identified certain operating costs previously as research and development expenses which should have been classified as general and administrative expenses. In accordance with Staff Accounting Bulletins No. 99 (SAB No. 99) Topic 1.M, “Materiality” and SAB No. 99 Topic 1.N “Considering the Effects of Misstatements when Quantifying Misstatements in the Current Year Financial Statements,” the Company assessed the materiality of these errors to its previously issued consolidated financial statements. Based upon the Company’s evaluation of both quantitative and qualitative factors, the Company concluded the errors were material to the Company’s previously issued consolidated financial statements for the fiscal years ended 31^st December, 2023 and 2022. Accordingly, this Form 10-K/A presents the Company’s Restated Consolidated Financial Statements for the fiscal years ended December 31, 2023 and 2022. Additionally, the Company has restated its previously filed unaudited interim condensed consolidated financial statements for the periods ending 31^st March, 2023, 30^th June, 2023, 30^th September, 2023, 31^st March, 2022, 30^th June, 2022, and 30^th September, 2022, contained in its Quarterly Reports on Form 10-Q.
Note No. 14: Restatement Of Previously Issued Financial Statements

As described in Note 2 and detailed below, in July 2024 the Company determined that it was necessary to re-evaluate its accounting treatment for certain previously issued warrants and preferred stock. The Company identified five areas where the historical accounting treatment applied to previously issued warrants and preferred stock required modification:

Contractual terms contained within the agreements governing the warrants issued to its investors in prior periods required further evaluation under Topic 815. After consultation with external advisors and completing an extensive review process, management concluded that the classification of certain previously issued warrants as equity was not consistent with Topic 815 and has restated them as liabilities. This also results in the requirement to account for the change in the fair value of the liability classified warrants through the Consolidated Statements of Operations at each reporting date they remain outstanding. Additionally, upon the issuance of the 2022 common warrants, pre-funded warrants, and common stock, the Company determined the fair value of each security issued and booked a charge for the amount that the fair value exceeded the proceeds received.
Upon the issuance of the Series E Preferred Stock in September 2023, the contractual language required the 2022 Pre-Funded Warrants be reclassified from equity to liability.
The Series D Preferred Stock issued in 2020 was determined to be temporary, or mezzanine equity upon issuance and was so recorded.
The accounting treatment for the Tranche A and B warrants issued as part of the September 2023 financing (See Note 6) continues to be appropriate; however, as part of the work performed for the restatement, the warrant valuation was adjusted to correct prior errors in the valuation.
Certain operating costs previously recorded as research and development expenses were corrected to general and administrative expenses.

The impact on the consolidated financial statements is as follows (lettered for reference to the financial statement adjustments):

A. All the outstanding common warrants were corrected from permanent equity to Warrant Liability, and the Series D Preferred Stock was corrected from permanent equity to Mezzanine Equity as of 31^st December, 2021.

B. The proceeds from the October 2022 financing were adjusted as described in Note 6. Additionally, the cost of the 2022 financing allocated to the issuance of the 2022 Warrants, which was $463,000, was removed from Additional Paid-In Capital and charged to Other Expense.

C. After the issuance of the Series E Preferred in September 2023, the 2022 Pre-Funded Warrants were corrected from Additional Paid-In Capital to Warrant Liability.

D. At each reporting period the warrants accounted for as liabilities were marked to market with the adjustment reflected in Other Income (Expense).

E. Certain operating costs previously recorded as research and development expenses were corrected to general and administrative expenses.

F. Adjusted the balance sheet as of 31^st December, 2021, by reducing additional paid-in capital and increasing the accumulated deficit by $25,300,000 which was the change from the initial fair value amount of the warrants issued in 2017, 2018, and 2020 through 31^st December, 2021

9. Ranger Gold Corp. (Restatement of nine months ended as on December 31, 2023)

Note F: Correction of an Error / Prior Period Restatement

During our 2022 fiscal year-end reconciliation/close-out and subsequent audit, Management discovered that Accounts Payable amounts owed to Vendors and the related expenses incurred were incorrect in 2022. Some vendors had been paid outside of the bank account and directly by the owner which should have been recorded as an addition to the Additional Paid in Capital. In addition, some unpaid vendor invoices were not billed to Accounts Payable. Per ASC 250, since the error correction is material and material to financial statements previously issued, Management promptly corrected the errors and restated previously issued financial statements.
Fiscal Year 2023:

During our most recent reconciliation/close-out and subsequent audit, Management discovered that amounts paid and owed to Vendors and the related expenses incurred were incorrect in 2023. Expenses paid by the owner, which should have been recorded as expenses and as an addition to Accounts Payable and Paid in Capital Contributions were not properly posted. Per ASC 250-10, since the error correction is material and material to financial statements previously issued, Management is promptly correcting the errors and restating previously issued financial statements.

10. Sun Communities, Inc. (Restatement of 3 months ended 31^st March, 2023, 30^th June, 2023 and 30^th September, 2023)

Note No. 22: Quarterly Financial Data (Unaudited and Restated)

Restatement of Prior Quarterly 2023 Financial Statements (Unaudited)

During the course of preparation and review of our financial statements for the year end 31^st December, 2023, it was determined that we did not identify certain factors indicative of triggering events relevant to the valuation of the UK reporting unit, including reduced financial projections and increased interest rates when preparing our previously issued unaudited interim consolidated financial statements (collectively, the “Interim Financial Statements”) as of and for the period ended 31^st March, 2023, as of and for the period ended 30^th June, 2023, and as of and for the period ended September 30, 2023 (collectively, the “Interim Periods”), included in our Quarterly Reports on Form 10-Q for the quarters ended 31^st March, 2023, 30^th June, 2023 and 30^th September, 2023, respectively. Management undertook a full review of the valuations and determined that as of each of 31^st March, 2023, 30^th June, 2023 and 30^th September, 2023. we should have recognized non-cash impairments to goodwill for the UK reporting unit within our MH segment.

Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated these misstatements, and based on an analysis of quantitative and qualitative factors, determined that the impact of misstatements related to goodwill impairments was material to our Interim Periods. Accordingly, we have restated the unaudited consolidated financial statements for the Interim Periods and have included that restated unaudited financial information within this Annual Report.

The restated quarterly unaudited consolidated financial information for the interim periods ended 31^st March, 2023, 30^th June, 2023 and 30^th September, 2023 are provided. These adjustments have no impact on cash flows from operating activities as goodwill impairment is a non-cash adjustment to reconcile net income / (loss) to cash provided by operating activities.

BCAJ Admin

Forensic Accounting & Investigation In Healthcare Industry – Challenges & Opportunities

Forensic Accounting – The word forensic accounting makes you think about frauds, misappropriation, manipulation, embezzlement, illegal activities that can be detected from the examination of financial statements, books of accounts and other such documents with the intention to detect, investigate, or prevent any fraud.
Healthcare activities covers every section of the society. Due to wide spread and complex nature of activities, fraud may occur at any given point in the cycle, starting from patient registration at a healthcare centre or a hospital to the final prescription given to the patient.

INTRODUCTION

Forensic Accounting – The name itself causes you, the reader to promptly think about frauds, misappropriation, manipulation, embezzlement, illegal activities related to finance, etc. Yes, forensic accounting is related to the examination of financial statements, books of accounts and other such documents with the intention to investigate, detect or prevent any fraud. Unlike other audits, statutory or otherwise, the forensic accounting is not mandated under any statute. However, The Institute of Chartered Accountants of India has issued the Forensic Accounting and Investigation Standards on 1^st July, 2023. Also, these standards are mandatorily applicable to all the Forensic Accounting engagements conducted on or after 1^st July, 2023. Hence, mostly, forensic accounting is seen as an audit similar to a statutory audit or a tax audit since it also involves the examination of financial statements and books of accounts. However, it has more facets to it.

Forensic accounting is conducted with the main aim of gathering information and acquiring minute details about the financial matters of an entity or an individual, which can be put forth as admissible evidence in a court of law. As the judicial aspect is involved, forensic accounting goes beyond the step of regular audit, towards investigation. Forensic accounting requires a comprehensive set of skills and investigative techniques to corroborate the evidence of any fraud that has been committed or instances where an entity is prone to fraud. Generally, it is said that an auditor is a ‘watchdog’ and not a ‘bloodhound’. However, it can be said that a forensic accountant is a ‘bloodhound’.

Forensic Accounting covers various areas and industries where different investigative approaches have to be curated that suit the type of industry. The approach decides the investigative techniques to be used while conducting a forensic accounting engagement. Every sector is prone to frauds. In this article I take up the Healthcare industry.

HEALTHCARE INDUSTRY & FRAUDS

Healthcare Industry has several cycles and interactions which are two way — where both provider and recipient interact. Its spread and need is pervasive. One reason for susceptibility for fraud is the cyclical nature of activities. The following may be the normal structure of the cycle:

Patient Registration
Appointments
Patient diagnosis
Utilisation of services
Billing & Coding
Payment
Prescription
Medical Follow-up
Insurance Claim (Reimbursement or Cashless) and back to Step 1

A fraud may occur at any given point in the cycle mentioned above, starting from patient registration at a healthcare centre to the final prescription given to the patient. It is important to note that, unlike cyber frauds where the victim is mostly the consumer, in the case of the healthcare industry, apart from the patient, fraud can be perpetrated on the healthcare provider, health insurance provider, etc., by a frivolous lawsuit, fake claim of insurance, deliberate targeting of a healthcare centre or a hospital with the intention of harming its reputation, etc. Furthermore, healthcare centres or large hospitals are also prone to organisational frauds, leading to reputational embarrassment and loss of credibility.

A number of frauds are being detected in the healthcare industry at various levels, which underlines a worrying truth, i.e., “Wealth is Health”. Frauds are committed with the sole purpose of acquiring money illegally, immorally and at the cost of human health. Frauds are committed over intricate issues which are difficult to detect or prevent without the help of forensic accounting. Even though fraud might have a negative financial impact, it is not the only issue at hand. Major consequences regarding human health are being faced by numerous patients, their relatives, etc. due to frauds perpetrated on them and the dire fact is that the healthcare system in India is under heavy risk of fraud and manipulation. Frauds in the healthcare industry may be characterized into 2 categories:

Deliberate Offences
Offences occurring due to ignorance / over-tolerance / lack of vigilance

Deliberate offences include fraudulent activities carried out in order to defraud an individual or an entity carrying out its operations in the healthcare industry. Fraudulent activities may include providing false information about patients and their diagnosis, mishandling of critical information about patients, false and incorrect claims lodged with insurance companies, fake prescriptions for medicines which are not at all required but made only to claim reimbursement for the same, etc.

Offences occurring due to ignorance are mostly due to the casual approach. It includes cases where medical ethics are not followed, and overbilling is tolerated just because the patient was critical, upcoding of services which were not even prescribed but have been added to the billings, and illegal supply of drugs, medicines, and other medical equipment without proper entries at the medical stores, etc.

These are just some examples which are known and have been discussed later in this article. However, the list is not exhaustive since perpetrators find various ways to commit frauds when it comes to the healthcare industry, and the lack of a strong monitoring and safeguarding system helps them get away with it.

Following are various types of frauds in the healthcare industry that have made it vulnerable and how the number of frauds is growing day by day due to a lack of a standardized and structured forensic accounting procedure, which is adding fuel to the fire.

PATIENT INFORMATION MANAGEMENT

Whenever a person registers as a patient at a healthcare centre or a hospital, his/her critical and personal information is gathered in order to make proper and accurate records. These records not only contain the health issues of the particular person but also contain the medical history of his / her family. The doctor is assisted by this information while prescribing medicines or further medical procedures or tests. Such critical information has to be stored with proper safeguards, and it has to be ensured that there is no unauthorized access to the same. However, perpetrators hack into the system, use fake user IDs to enter the system, attempt to control the system from an undisclosed location, etc., only to gain access to patient records. Once the information is accessed, the same is sold to various companies or parties for hefty prices. Another way to perpetrate the fraud is through an insider. An employee of the healthcare centre or hospital acts in an unethical way in exchange for bribes, a guarantee of promotion, or any other enticement or incentives, etc., when he/she provides access to the records without tampering with the system. In this age of digitization and advanced information technology, one of the most important aspects of human life is data privacy. Hence, data has become more valuable than money and the healthcare industry is an avenue where fraudsters can have a plethora of personal information at their hands. Forensic accounting and investigation provide a comprehensive approach where investigative techniques are used in order to find lacunas with the system or any other technological aspect of the entity which may make it prone to fraud. At the same time, it shall be conducted in a way where the findings shall be admissible as evidence in the court of law.

Furthermore, such information, which is gained unlawfully, is also utilized to make false insurance claims, leading to insurance fraud. Mostly, this is done in order to dupe the insurance companies and acquire funds in an illegal way. Insurance fraud is an area where forensic accounting and investigation can assist companies in verifying whether the claims launched are legitimate and true. A forensic accountant can apply a string of audit and investigative procedures to ensure the legitimacy of a claim, which shall protect the insurance company from falling prey to a fraudulent claim.

PRESCRIPTIONS & MEDICATIONS

In India, chemists and medical shops are allowed to sell both prescribed as well as non-prescribed drugs, medicines, etc. This is another grey area where multiple levels of frauds are perpetrated, and these are difficult to detect since the amounts involved in these frauds are negligible, but overall, they have a huge impact. Fake prescriptions are prepared in order to claim reimbursements; multiple prescriptions are collected from various doctors and medical practitioners in order to gain access to certain prescribed medicines. Once these medicines are purchased on the basis of a fake prescription, the medicines are sold illegally at exorbitant prices without any proper billings. Otherwise, there have been cases where such medicines are used for substance abuse with prescription drugs not being used for their intended medical objective.

Have you ever wondered when you visit a certain doctor / medical practitioner or a hospital, and they provide you with a prescription for medicines, those medicines are available only at the medical stores affiliated with the hospital or which are set up within the hospital premises or only in selected medical shops? One might ponder upon the thought that since these are prescription drugs, they should be available at almost every medical shop. However, this is not the case. The patient has no choice but to purchase medicines from selected medical shops or the ones within the hospital premises. What could be the logic behind this? Why is there a compulsion on the patient to purchase medicines from certain medical shops only? Why are they not provided with an option to purchase medicines from a medical shop of their own choice? It seems that the doctors / medical practitioners or the hospitals have a nexus with the medical shops where the medical shops keep such medicines in their stock in huge quantities, which the doctor/medical practitioner shall prescribe. It is pre-decided as to what brand of the medicine shall be prescribed and only that brand of medicine is ordered in wholesale by the medical shop. Due to this pre-arrangement, a patient is unable to acquire medicines from a medical shop of his/her own choice since that medical shop does not have the stock of the prescribed medicine. This stems to a whole new level of fraud since an illegal nexus has been formed where the patients are being tricked and are given no choice but to buy medicines and other medical items from selected stores only. Forensic accounting function at this level may assist in investigating the types of medicines being prescribed. It may provide a structure to prepare a database which shall duly prompt the auditor to report where a particular brand of medicine is being prescribed frequently. The reasons for the same shall be sought from the management.

Furthermore, a forensic accounting function may provide insights related to the pricing of the medicines where it can be investigated that a doctor / medical practitioner or a healthcare center or a hospital is prescribing expensive medicines in most cases, whereas medicines with similar ingredients for a same diagnosis are available in the market which are priced at lower rates. Another point of malpractice could be the rates of the medicines where certain medical shops provide medicines at their Maximum Retail Prices whereas certain medical shops apply huge discounts for the same medicines. If the patient is not given the option to purchase the medicines from the medical shop of his own choice, he / she might end up paying more since the discount scheme may not be available at the affiliated medical shop or the medical shop within the hospital premises. Yes, there is a National Pharmaceutical Pricing Authority (NPPA), a government agency responsible for setting prices of drugs and ensuring medicines are available across the country. It published an Analysis Report in 2018, which included facts that private hospitals procure medicines and other medical equipment at very low prices and sell them to patients at much higher prices, with profit margins going beyond 500 per cent for some items. However, not everything falls under the ambit of the NPPA. Items such as diagnostic services and devices do not come within the purview of NPPA and, hence, have been found to be overpriced.

In most cases, it was noted that nearly 15% of the total bill was for diagnostic services with the prices being at a higher side. The NPPA reported that profit margins for “Non-Scheduled Devices” such as syringes and catheters were “exorbitant and clearly a case of unethical profiteering in a failed market system”. In the case of a reputed private hospital, as reported by the Economic Times in December 2017 and the report of the NPPA, it was found that certain devices and medical equipment were charged to the patients at a very high price, whereas it was procured by the hospital at a very low price. For example, a bed wet wipe used to clean the patient was procured by the hospital at ₹33 per unit; however, it was charged to the patient at ₹350 per unit with a profit margin of a whopping 960 per cent. Apart from that, disposable syringes without needles used for the treatment was procured by the hospital at ₹13.60 apiece yet it was charged to the patient at ₹200 a piece, an increased markup of 1370 per cent. A thorough forensic accounting and investigation function may help curb such practices and bring to light such instances where patients are required to pay more just because it is the hospital policy to purchase medicines from selected stores only and at the prices stated by the hospitals.

OVERCHARGING FOR MEDICAL PRODUCTS & SERVICES

Generally, treatments provided in private healthcare centres or hospitals or clinics are expensive, and they charge the patients for every single service provided, including accommodation. As per the Analysis Report of the NPPA, it was found that the largest items on the hospital bills were drugs, devices and diagnostics, which comprised nearly 56 per cent of the total bill, which was higher than the charges for medical procedures and room rent which comprised around 23 per cent of the total bill. As per the “Health in India” Report from the 71^st Round of the National Sample Survey, around 58% of households in rural areas and around 68 per cent of households in urban areas prefer private hospitals for in-patient treatments. Hence, the reliance of the public on private hospitals is key for such hospitals to rake up the prices for better services. There is a need for a regulator to keep a check on these issues.

As far as the law is concerned, the NPPA classifies medical items, including medicines and drugs, into 3 categories:

Medicines under Price Control
Medicines not under Price Control
Consumables that are neither under Price Control nor under the country’s list of essential medicines

Here is the interesting part. Scheduled Medicines come under essential medicines, which ultimately are covered under the price control mechanism whereas Non-Scheduled branded medicines are not covered under the price control mechanism. Hence, the drug-making companies often bring into the market new variants of scheduled drugs as “new drugs” or “fixed drugs combinations” in order to escape the price control mechanism. The healthcare centres or the hospitals taking advantage of the same and to earn higher profits, often prescribe Non-Scheduled branded medicines instead of Scheduled Medicines. Hence, this could be another area where an effective Forensic Accounting function can investigate such matters and provide various counter-measures to ensure that instances of overcharging are avoided in the future.

KICKBACK SCHEMES

To start with, kickback in the healthcare industry is defined as an arrangement where a doctor / medical practitioner is paid for patient referrals. This payment may be in cash or kind. Cases have been found where kickbacks include payments in the form of bookings of international flights, overseas vacations, expensive appliances, five-star hoteling, etc. It can be seen in normal cases where an ENT (Ear-Nose-Throat) specialist recommends his/her patient to get certain tests done by a radiologist, a pathologist, or a doctor who recommends each of his/her patients to get their hearts checked out by a heart specialist surgeon for no concrete reason, etc. In most cases, the patients do not ignore such advice being a matter of health. Obviously, in the cases mentioned above, the doctors referring the patients to the latter receive the kickback. These are simple examples of kickback schemes that are being applied mostly in Tier 2 and Tier 3 cities of India on a large scale. Tier 1 cities are no exception either.

However, in spite of such activities, there is no law to regulate and curb such practices. In the state of Maharashtra, a recent case involved a reputed hospital, where its 11 Heads of Departments were found to be operating unauthorized bank accounts. The same was reported by the Times of India in April 2023. The amount involved ran up to ₹6 Crores, and the majority of it was spent on foreign trips, flight bookings and hotels. The inquiry was initiated in 2018 by the then Medical Education Secretary. As per the Times of India report, questionable actions were in departments such as ophthalmology, radiology and surgery. In that, the surgery department was the major recipient of “kickbacks”, with deposits being found which were made by various pharmaceutical companies.

In this background, the Maharashtra State Government had nearly finalised the draft of an Act to curb such practices of kickbacks in the healthcare industry. It was known as “The Prevention of Cut Practices Act, 2017”. However, it never passed the draft stage due to protests from the medical fraternity over the provision of harsh punishments and administrative difficulties over its implementation. Apart from the punishment for kickbacks, the draft Act also contained provisions for punishing fake complainants and those trying to deliberately malign the image of a doctor/medical practitioner. Even then, the draft has not been implemented to date.

Challenges involved in the implementation of Forensic Accounting and Investigation in the healthcare industry:

LACK OF A PROPER STATUTE

Currently, no statute requires a healthcare centre, a hospital or an individual doctor / medical practitioner to get its transactions audited by a Forensic Accountant. Hence, most of the institutions shall resist appointing such an auditor unless there is a statutory requirement to do so. Since forensic accounting is still considered to be a niche sector in India, there is no law governing the implementation of forensic accounting functions. It is recommended in various industries, however, there is no mandatory provision regarding the same.

We have various laws in place for dealing with issues of fraud, such as Section 143(12) of the Companies Act, 2013 requires the auditor to report frauds against the company being committed by the officers or employees of the company to the Central Government within the prescribed time. Apart from that, the Companies (Auditor Report) Order 2020 requires the auditor to report on the events of frauds noticed during the audit period.

Regulation 11C of the SEBI Act, 1992 empowers the SEBI to direct any person to investigate the affairs of Intermediaries or Brokers associated with the securities market whose transactions in securities are being dealt with in a manner detrimental to the investors or the securities market.

Section 43 and Section 44 of the Information Technology Act, 2000 have prescribed penalties for 6 types of offences.

Section 33 of the Insurance Act of 1938 empowers the Insurance Regulatory and Development Authority of India to direct any person (investigating authority) to investigate the affairs of any insurer.

LACK OF PUBLIC AWARENESS

There is a great need to raise public awareness about frauds in the healthcare industry and the impact of forensic accounting functions in such an environment. For that, various finance institutions may conduct public awareness programs where the public is given first-hand information about various types of frauds, their impacts and the tools of forensic accounting to detect and prevent such frauds. The Central Government could also take initiative in this matter. It can establish specialised task forces for regular mentoring of the public throughout the country.

ROLE OF HEALTHCARE PROVIDERS

The healthcare providers of the country should be willing to conduct forensic accounting functions of their medical activities. They should consider preparing a set of robust internal controls which will assist in the prevention of fraudulent activities and the same time, facilitate the conducting of forensic accounting engagement.

DATA PRIVACY CONCERNS

As mentioned earlier, data and information are vital aspects in the age of the digitised healthcare industry. Forensic accounting requires access to critical data related to patients in order to investigate. However, healthcare centres or hospitals might be hesitant to provide access to patient details. Further, the consent from a patient could also be an issue in the effective implementation of forensic accounting procedures.

COMPLEX BILLING STRUCTURE

It is a complex structure since the fees being charged are not for reaching a pre-decided conclusion. A forensic accounting engagement starts with a suspicion or doubt and ends with that suspicion or doubt being proven or otherwise. Hence, it takes a while to negotiate with the management regarding the appropriate fees for conducting the forensic accounting engagement.

TRAINING & EDUCATION

In most of healthcare centres or hospitals, the medical staff is not aware of the frauds happening in the healthcare industry, or they are simply unaware of the facts as to what is a malpractice, or a healthcare fraud is. Healthcare centres or hospitals need to train their staff in the operation of various types of fraudulent activities and urge them to avoid the same and to come forward if they witness certain fraudulent activities. An effective whistleblowing policy is recommended so that employees do not resist from reporting issues related to frauds and fraudulent activities. Simultaneously, they also need to be made aware of forensic accounting functions along with their impact on the business of the healthcare centre or hospital.

A standardized structure or an audit plan may assist in lowering certain challenges for a successful implementation of forensic accounting functions.

Opportunities for conducting forensic accounting engagement in the healthcare industry:

SUPPLIERS’ FRAUD

Healthcare centres or hospitals deal with various suppliers for medical devices, equipment, and other related services. Forensic accounting can examine contracts with suppliers, invoices, payment terms and other conditions to detect kickbacks, instances of inflated prices, excess supply or conflicts of interest arising due to the business transactions.

MEDICAL DEVICE FRAUD

With the increasing use of medical devices, there is a risk of fraud related to their procurement, usage and maintenance. Forensic accounting functions can assess the procurement process, inspect the actual usage of the device along with the price charged to the patients, and verify the ratio of stock turnover in order to get a clear idea of whether excess supply is being procured by the management.

PATIENT RECORDS MANIPULATION

Healthcare providers or hackers may alter patient records to justify unnecessary and complicated medical procedures. Forensic accounting function can assist in the analysis of electronic health records of patients for unauthorised access, tampering, or inconsistencies in documentation or prescribed medication.

DATA SECURITY BREACHES

With the digitisation of healthcare data, there is an increased risk of data breaches and unauthorised access to sensitive patient information. The auditor could provide various insights related to the maintenance of critical data of patients via data analytics, the use of Artificial Intelligence to detect and prevent frauds and to enhance the reliability of the internal controls installed by the management.

FRAUDULENT PRACTICES IN CLINICAL TRIALS

Clinical research is integral to the healthcare industry; however, fraudulent practices such as data fabrication or manipulation can compromise the integrity of clinical trials. A forensic accounting function can assist in examining trial protocols, data collection methods and participant recruitment processes to ensure compliance with ethical standards and regulatory requirements.

GOVERNMENT HEALTHCARE PROGRAMS

Government-funded healthcare programs like Ayushman Bharat face challenges related to fraud, waste and abuse. Forensic accounting can evaluate program implementation, eligibility criteria, actual existence of the patient with actual requirement for a treatment and claims processing to prevent misuse of public funds. Recently, a multi-speciality hospital¹ in Ahmedabad allegedly misused Ayushman Bharat Pradhan Mantri Jan ArogyaYojana (PM-JAY) and performed unnecessary surgeries to get benefits under this scheme.

1.http://www.hindustantimes.com/cities/others/ahmedabad-crime-branch-busts-ayushman-card-fraud-linked-to-khyati-hospital-101734452205203.html

GHOST PATIENTS AND PHANTOM BILLING

Some healthcare providers may engage in phantom billing by charging for services not rendered or billing for fictitious patients. Forensic accounting function can identify discrepancies between patient records, appointment schedules, actual treatment with medicines or further procedures prescribed and billing invoices to detect such fraudulent activities.

ANTI-MONEY LAUNDERING (AML) COMPLIANCE

Healthcare centres or hospitals are susceptible to money laundering schemes, wherein illicit funds are disguised as legitimate healthcare transactions. Forensic accounting can prove to be a game changer since it can investigate and assess transactional data, monitor financial activities, and implement AML controls to prevent money laundering and terror financing.

FRAUDULENT RESEARCH GRANTS

Academic institutions and research organisations receive grants for conducting medical research and to provide valuable insights on various issues in the healthcare industry; however, there is a possibility of misuse of funds or they may engage in research misconduct. Forensic accounting functions can thoroughly examine grant expenditures, rigorous implementation of research protocols and publication records to verify the integrity and reliability of research activities and ensure proper accountability for research grant funds.

WHISTLEBLOWER ALLEGATIONS

Whistleblowers within healthcare centres or hospitals may report concerns about fraud, corruption, illegal activities or regulatory violations. Forensic accounting function can investigate whistleblower allegations, protect whistleblower confidentiality and provide evidence for legal proceedings or regulatory enforcement actions, which shall be considered as admissible in a court of law. In various whistleblower cases, it is noted that the findings are not admissible in the court since the employment provisions of the employee prevent him/her from disclosing information about the employer, or it is deemed as a conflict of interest. In some cases, a non-disclosure clause is also added to the contract of employment to prevent the employee from whistleblowing. In such cases, a forensic accounting function can go leaps and bounds to protect the rights of whistleblower employees and bring to light any fraudulent activities being carried out at healthcare centres or hospitals.

CONCLUSION

After getting through with various implications of the forensic accounting function in the healthcare industry, it can be concluded that current practices and policies are increasingly putting Wealth over Health, and that is a serious concern for the industry since almost the entire populace is integrated with the healthcare industry.

However, it may also be noted that black ships are in every profession. For a few such scrupulous people, the entire profession gets a bad name. Forensic Accounting function, in a way, helps to protect the reputation of the profession by exposing malpractices and wrong people. Lastly, forensic accounting engagement should not be visualised as a tool or a measure which has limited utility. It has the ability to go beyond the strides of frauds and ensure a healthcare industry so effective and transparent that it sets a global benchmark.

BCAJ Admin

Proposed Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IASB has published an Exposure Draft (ED), to make certain changes to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Similar changes should be anticipated for Ind AS standards as well. In this article we discuss some of the important changes and an example of how the ED relates to climate commitments, with a simple example.

The IASB’s proposed amendments aim to clarify the requirements for the present obligation criterion, and to change the timing of the recognition of some provisions, in particular, levies. The IASB has proposed to update the definition of a liability to match the 2018 Conceptual Framework for Financial Reporting (Conceptual Framework). The updated wording would replace the current requirement for an obligating event with three distinct conditions: obligation, transfer and past-event.

The proposed amendments include separate sections of requirements to support each of the conditions. The proposed amendments would also replace the requirements in IFRIC 21 Levies, which would be withdrawn. The accounting for levies would be aligned with the general requirements for provisions. However, new requirements are proposed for levies when they are triggered only after two or more specific actions (or events) or once a specific threshold is exceeded.

Entities would need to recognise a provision after the first action or event if they have no practical ability to avoid the second event. The proposed amendments would supersede the requirements in IFRIC 6 Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment, which would be withdrawn. The proposed amendments would clarify the requirements for restructuring provisions in order to eliminate potentially misleading terminology. Nevertheless, they are not intended to change the outcome of applying the requirements for restructuring provisions.

Change in definition of provision

Existing provision

Proposed Amendment

A provision is a liability of uncertain timing or amount.

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.

A liability is a present obligation of the entity resource to transfer an economic resource as a result of past events.

The following paragraphs have been added.

Paragraph 14A

The first criterion for recognising a provision is that an entity has a present obligation (legal or constructive) to transfer an economic resource as a result of a past event.

This criterion (the present obligation recognition criterion) comprises three conditions: (a) an obligation condition — the entity has an obligation (paragraphs 14B —14H); (b) a transfer condition — the nature of the entity’s obligation is to transfer an economic resource (paragraphs 14I–14L); and (c) a past-event condition — the entity’s obligation is a present obligation that exists as a result of a past event (paragraphs 14M–14U).

Obligating condition

Paragraph 14B

The first condition for meeting the present obligation recognition criterion is that the entity has an obligation. An entity has an obligation if:

(a) a mechanism is in place that imposes a responsibility on the entity if it obtains specific economic benefits or takes a specific action; (b) the entity owes that responsibility to another party; and (c) the entity has no practical ability to avoid discharging the responsibility if it obtains the specific economic benefits or takes the specific action.

Paragraph 14C reiterates the obligation can be legal or constructive.

Paragraph 14D

The economic benefits the entity obtains could be, for example, cash, goods or services. The action the entity takes could be, for example, operating in a specific market, causing environmental damage or other harm to another party, owning specific assets on a specific date, or constructing an asset that will need to be decommissioned at the end of its useful life.

Paragraph 14E (this is derived from the current standard)

An obligation is always owed to another party. It is not necessary for an entity to know the identity of the party to whom the obligation is owed. The other party could be a person or another entity, a group of people or other entities, or society at large

Paragraph 14F

An entity has no practical ability to avoid discharging a responsibility:

(a) in the case of a legal obligation, if: (i) the other party has a legal right to act against the entity if the entity fails to discharge the responsibility — for example, to ask a court to enforce settlement, charge the entity a financial penalty or restrict the entity’s access to economic benefits; and (ii) as a result of that right, the economic consequences for the entity of not discharging the responsibility are expected to be significantly worse than the costs of discharging it; or

(b) in the case of a constructive obligation, if the entity’s pattern of past practice, published policy or sufficiently specific current statement creates valid expectations in other parties that the entity will discharge the responsibility

14G (this is derived from current standard)

If details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted as drafted. In this Standard, such an obligation is treated as a legal obligation. Variations in circumstances surrounding enactment make it impossible to specify a single event that would make the enactment of a law virtually certain. In many cases it will be impossible to be virtually certain of the enactment of a law until it is enacted

14H (this is derived from current standard)

An obligation requires an entity to have no practical ability to avoid discharging a responsibility. Therefore, a management or board decision does not give rise to a constructive obligation at the end of the reporting period unless the decision has been communicated before the end of the reporting period to those affected by it in a sufficiently specific manner to create a valid expectation in those affected that the entity will discharge its responsibility.

Transfer condition

14I

The second condition for meeting the present obligation recognition criterion is that the nature of the entity’s obligation is to transfer an economic resource. To meet this condition, the obligation must have the potential to require the entity to transfer an economic resource to another party.

14J

For that potential to exist, it does not need to be certain, or even likely, that the entity will be required to transfer an economic resource — the transfer may, for example, be required only if a specified uncertain future event occurs.

14K

Consequently, the probability of a transfer does not affect whether an obligation meets the present obligation recognition criterion — an obligation can meet that criterion even if the probability is low. However, the probability of a transfer could affect: (a) whether the obligation meets one of the other criteria for recognising a provision — a provision is recognised only if it is probable (more likely than not) that the entity will be required to transfer an economic resource to settle the obligation (see paragraphs 14(b) and 23); and (b) whether the entity discloses a contingent liability if the obligation does not meet all the criteria for recognising a provision (see paragraph 23).

14L

An obligation to exchange economic resources with another party is not an obligation to transfer an economic resource to that party unless the terms of the exchange are unfavourable to the entity. Accordingly, the obligations arising under an executory contract — for example, a contract to receive goods in exchange for paying cash — are not obligations to transfer an economic resource unless the contract is onerous.

Past-event condition

14M

The third condition for meeting the present obligation recognition criterion is that the entity’s obligation is a present obligation that exists as a result of a past event.

14N

An entity’s obligation becomes a present obligation that exists as a result of a past event when the entity: (a) has obtained specific economic benefits or taken a specific action, as described in paragraphs 14B and 14D; and(b) as a consequence of having obtained those benefits or taken that action, will or may have to transfer an economic resource it would not otherwise have had to transfer.

14O

If the economic benefits are obtained, or the action is taken, over time, the past-event condition is met, and the resulting present obligation accumulates, over that time.

14P

In some situations, an entity has an obligation to transfer an economic resource only if a measure of its activity in a period (the assessment period) exceeds a specific threshold. In such situations, the action that meets the past event condition is the activity that contributes to the total activity on which the amount of the transfer is assessed. At any date within the assessment period, the present obligation is a portion of the total expected obligation for the assessment period. It is the portion attributable to the activity carried out to date. The entity recognises a provision if the recognition criteria in paragraphs 14(b) and 14(c) are met — that is, if: (a) it is probable that the entity’s activity will exceed the threshold and the entity will be required to transfer an economic resource (see paragraph 14(b)); and (b) a reliable estimate can be made of the amount of the obligation (see paragraph 14(c)).

14Q

In some situations, an entity has an obligation to transfer an economic resource only if it takes two (or more) separate actions, and the requirement to transfer an economic resource is a consequence of taking both (or all) these actions. In such situations, the past-event condition is met when the entity has taken the first action (or any of the actions) and has no practical ability to avoid taking the second action (or all the remaining actions).

14R

A decision to prepare an entity’s financial statements on a going concern basis implies that the entity has no practical ability to avoid taking an action it could avoid only by liquidating the entity or by ceasing to trade.

Interactions between the obligation and past-event conditions

14S

The enactment of a new law is not in itself sufficient to create a present legal obligation for an entity. A present legal obligation arises only if, as a consequence of obtaining the economic benefits or of taking the action to which the law applies, the entity will or may have to transfer an economic resource it would not otherwise have had to transfer (see paragraph 14N).

14T

Similarly, having an established pattern of past practice, publishing a policy or making a statement is not in itself sufficient to create a present constructive obligation for an entity. A present constructive obligation arises only if, as a consequence of obtaining the economic benefits or of taking the action to which the practice, policy or statement applies, the entity will or may have to transfer an economic resource it would not otherwise have had to transfer (see paragraph 14N).

14U

[Derives from former paragraph 21] An action of the entity that does not give rise to a present obligation immediately might do so at a later date,

because a mechanism is introduced that imposes new responsibilities on the entity — a new law might be enacted, an existing law might be changed or the entity might establish a pattern of practice, publish a policy or make a statement that gives rise to a constructive obligation. For example, if an entity causes environmental damage, it might have no obligation to remedy the damage at the time of causing it. However, the causing of the damage will be the past event that has created a present obligation if, at a later date, a new law requires the existing damage to be rectified, or if the entity accepts responsibility for rectification in a way that creates a constructive obligation.

Example 15 — Climate-related commitments

In 20X0 an entity that manufactures household products publicly states its commitments: (a) to gradually reduce its annual greenhouse gas emissions, reducing them by at least 60 per cent of their current level by 20X9; and (b) to offset its remaining annual emissions in 20X9 and in later years by buying carbon credits and retiring them from the carbon market.

To support its statement, the entity publishes a transition plan setting out how it will gradually modify its manufacturing methods between 20X1 and 20X9 to achieve the 60 per cent reduction in its annual emissions by 20X9. The modifications will involve investing in more energy-efficient processes, buying energy from renewable sources and replacing petroleum-based product ingredients and packaging materials with lower-carbon alternatives.

Management is confident that the entity can make all these modifications and continue to sell its products at a profit. In addition to publishing the transition plan, the entity takes several other actions that publicly affirm its commitments. Having considered all the facts and circumstances of the entity’s commitments — including the actions it has taken to affirm them — management judges that the entity’s statement has created a valid expectation in society at large that the entity will fulfil the commitments, and hence that it has no practical ability to avoid doing so (paragraph 14F(b)).

The entity is preparing financial statements for the year ended 31^st December, 20X0. Present obligation to transfer an economic resource as a result of a past event three conditions specified in paragraph 14A of IAS 37 are not all met:

Obligation condition	Met	The entity’s public statement of its commitments imposes on the entity responsibilities: (a) to operate in the future in a way that reduces its annual greenhouse gas emissions; and (b) to offset its remaining emissions if it emits greenhouse gases in 20X9 and later years (paragraph 14B(a)). The entity owes those responsibilities to society at large (paragraph 14B(b)). The entity has no practical ability to avoid discharging its responsibilities (paragraph 14B(c)). The obligations meet the definition of a constructive obligation (paragraph 10).
Transfer condition	Not met	Obligation to reduce emissions The entity’s obligation to operate in the future in a way that reduces its greenhouse gas emissions is not an obligation to transfer an economic resource. Although the entity will incur expenditure in changing the way it operates, it will receive other economic resources — for example, property, plant and equipment, energy, product ingredients or packaging materials — in exchange, and will be able to use these resources to manufacture products it can sell at a profit (paragraph 14L).
Transfer condition	Met	Obligation to offset remaining emissions The entity’s obligation to offset its remaining annual greenhouse gas emissions in 20X9 and later years is an obligation to transfer an economic resource. The entity will be required to buy and retire carbon credits without receiving any economic resources in exchange (paragraph 14I).
Past event condition	Not met	Obligation to offset remaining emissions The entity has not yet taken the action (emitting gases in 20X9 or in a later year) as a consequence of which it will have to buy and retire carbon credits it would not otherwise have had to buy or retire (paragraph 14N).

Conclusion — No provision is recognised at 31^stDecember, 20X0.

If the entity emits greenhouse gases in 20X9 and in later years, it will incur a present obligation to offset these past emissions when it emits the gases. If, at that time, the entity has not settled the present obligation and it is probable that it will have to transfer an economic resource to do so, the entity will recognise a provision for the best estimate of the expenditure required.

Although the entity does not recognise a provision for its constructive obligations at 31^st December, 20X0, the actions it plans to take to fulfil the obligations could affect the amounts at which it measures its other assets and liabilities (for example, its property, plant and equipment), and the information it discloses about them, as required by various IFRS Accounting Standards.

As can be seen from the above example, the ED provides much more clarity on whether a provision is required and in a very methodical and step-by-step manner. Similar changes can be expected under Ind AS.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

I. Interesting Key Audit Matters in Independent Auditors’ Report:

Assessing Carrying value of Inventory Oberoi Realty Limited (31^st March 2024)

Key audit matters

How our audit addressed the key audit matter

Assessing the carrying value of Inventory

(as described in note 1.2.15 of the standalone financial statements)

As at March 31, 2024, the carrying value of the inventory of ongoing and completed real-estate projects is Rs. 9,18,507.87 lakhs. The inventories are held at the lower of the cost and net realisable value (“NRV”).

The determination of NRV involves estimates based on prevailing market conditions and taking into account the stage of completion of the inventory, the estimated future selling price, cost to complete projects and selling costs.

We identified the assessment of the carrying value of inventory as a key audit matter due to the significance of the balance to the standalone financial statements as a whole and the involvement of estimates and judgement in the assessment.

Our audit procedures included, among others:

• We evaluated the design and operation of internal controls related to testing recoverable amounts with carrying amount of inventory, including evaluating management processes for estimating future costs to complete projects.

• As regards NRV, for a sample of selected projects, compared costs incurred and estimates of future cost to complete the project with costs of similar projects and compared NRV to recent sales or to the estimated selling price.

MATERIAL ACCOUNTING POLICIES

1.2.15 INVENTORIES

i. Construction materials and consumables

The construction materials and consumables are valued at lower of cost or net realisable value. The construction materials and consumables purchased for construction work issued to construction are treated as consumed.

ii. Construction work in progress

The construction work in progress is valued at lower of cost or net realisable value. Cost includes the cost of land, development rights, rates and taxes, construction costs, borrowing costs, other direct expenditure, allocated overheads and other incidental expenses.

iii. Finished stock of completed projects

Finished stock of completed projects and stock in trade of units is valued at lower of cost or net realisable value.

iv. Food and beverages

Stock of food and beverages are valued at lower of cost (computed on a moving weighted average basis, net of taxes) or net realisable value. Cost includes all expenses incurred in bringing the goods to their present location and condition.

II. Business Combination – Acquisition of business from Raymond Consumer Care Limited

Godrej Consumer Product Limited (GCPL) (31^st March 2024)

Key audit matters

Business Combination – Acquisition of business from Raymond Consumer Care Limited

(refer Note 55 to standalone financial statements)

How our audit addressed the key audit matter

The Company has completed the acquisition of FMCG business of Raymond Consumer Care Limited effective 8^th May 2023 pursuant to a business transfer agreement at a total consideration of ` 2,825 crores.

The Company has accounted for such acquisition as a business combination as per Ind AS 103 ‘Business Combinations’ by recognizing identifiable assets and liabilities at fair value.

The measurement of the identifiable assets and liabilities acquired at fair value is inherently judgmental.

Fair value of brands was determined by the Company with the assistance of an external valuation expert using income approach (royalty relief method), considering the assets being measured.

Given the complexity and judgement involved in fair value measurements and magnitude of the acquisition made by the Company, this is a key audit matter.

Our audit procedures included:

• We have read the business transfer agreement to understand the key terms and conditions of the acquisition;

• We have evaluated the accounting treatment followed by the Company with reference to Ind AS 103;

• We have evaluated the design and implementation and tested the operating effectiveness of key internal controls related to the Company’s valuation process;

• We have involved our valuation specialists;

• to gain an understanding of the work of the experts by examining the valuation reports.

• to critically evaluate the key assumptions (including revenue projections, royalty rate, terminal growth rate and discount rate) and purchase price allocation adjustments.

• to evaluate the valuation of acquired tangible and intangible assets based on our knowledge of the Company and the industry.

• We have assessed the adequacy of the Company’s disclosures in respect of the acquisition in accordance with the requirements of Ind AS 103.

NOTE 55: BUSINESS COMBINATION

ACQUISITION OF RAYMOND CONSUMER CARE BUSINESS

On 8^th May, 2023, the Company acquired the FMCG business of Raymond Consumer Care Limited (“RCCL”) through a slump sale for consideration of ₹2,825 crores which included the intellectual property rights of brands like ‘Park Avenue’ and ‘Kamasutra’.

The acquisition date is determined to be 8^th May, 2023, i.e. The date on which the Company obtained control of the business since the consideration was transferred and the business transfer agreement was executed on 8^th May, 2023.

The acquisition was in line with company’s strategy to build a sustainable and profitable personal care business in India by leveraging the categories of personal grooming and sexual wellness. RCCL was one of the key players in these categories with brands such as ‘Park Avenue’ and ‘Kamasutra’ which comprised of a wide product portfolio.

The acquisition had been accounted for using the acquisition accounting method under IND AS 103- “Business Combinations”. All identified assets acquired, and liabilities assumed on the date of acquisition were recorded at their fair value.

The transactions cost of ₹87.83 crores that were not directly attributable to the identified assets are included under exceptional items in the standalone statement of profit and loss comprising mainly stamp duty expenses, legal fees and due diligence costs.

For eleven months ended 31^st March, 2024, the RCCL acquired business contributed revenue from sales of products of ₹466 crores. If the acquisition had occurred on 1^st April, 2023, the management estimates that combined standalone revenue from sales of products would have been ₹8,336.04 crores. In determining these amounts management has assumed that the fair value adjustments, determined provisionally, that arose on the date of acquisition would have been the same if the acquisition had occurred on 1^st April 2023. The profit or loss since acquisition date and combined standalone profit or loss from the beginning of annual reporting period cannot be ascertained as the acquired business is already integrated with the existing business of the company, thereby making it impracticable to do so.

a. Purchase consideration transferred:

The total consideration was ₹2,825 crores which was cash settled. (Net of cash acquired)

b. Details of major assets acquired, and liabilities assumed:

Particulars	Amounts (In Crores)
Specified Tangible Asset
Property, Plant and Equipment
Owned Assets	4.10
Specified Intangibles Assets
Brands	2,199.69
Other Assets
Trade and other receivables	62.70
Inventories	44.30
Cash and cash equivalents	95.86
Bank Balances other than cash and cash equivalents	12.85
Others	18.40
Total identifiable assets (A)	2,437.90
Specified liabilities
Trade payables	70.60
Other liabilities	47.38
Other Provisions	61.22
Total identifiable liabilities (B)	179.20
Total identifiable net assets acquired (A)-(B)=(C)	2,258.70
Total Consideration (D)	2,825.00
Goodwill (D-C)	566.30

c. Measurement of fair values:

i. Specified Intangible Assets – Brands:

Brands were valued based on an independent valuation using the relief from royalty approach, which values the intangible asset by reference to the discounted estimated amount of royalty the acquirer would have had to pay in an arm’s length licensing arrangement to secure access to the same rights.

ii. Inventories:

The fair value is determined based on the estimated selling price in the ordinary course of business less the estimated cost of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventory.

iii. Acquired Receivables:

The gross contractual value and fair value of trade and other receivables as at the dates of acquisition amounted to R62.70 crores which is expected to be fully recoverable.

d. Goodwill:

Goodwill amounting to ₹566.30 crores arising from acquisition has been recognised as the difference between total consideration paid and net identifiable assets acquired as shown above.

The goodwill is mainly attributable to the expected synergies to be achieved from integrating the business into the Company’s existing personal care business. None of the goodwill recognised is expected to be deductible for tax purposes.

III. The direct access of certain overseas foreign agents to fund collected on account of freight and other charges

Shipping Corporation of India Limited (31^st March, 2024)

Key audit matters

How our audit addressed the key audit matter

The direct access of certain overseas foreign agents to fund collected on account of freight and other charges:

Liner division of the Company has been carrying out its vessel’s operations and container marketing activities at various ports in India and abroad through its agency network. Agents perform various activities such as marketing, booking, clearing of cargo, port calls of vessels & also collection of freight on behalf of the Company.

The Company depends on its agents for the operation of Liner segment business.

Since all the activities are performed by the agents, there is a requirement of funds. The collection of income is done directly by agents and subsequently remitted to the Company. Therefore, it involves a risk on the part of the Company and hence is identified as a Key Audit Matter

We assessed the Company’s process to evaluate Agents on timely basis to identify the impact on the revenue and collection of funds.

• The Company has obtained bank guarantee from major agents & also reviewed the same periodically to confirm its validity and completeness with respect to risk exposure on revenue due to direct access to agents.

• The Company has provided Statement of Account (SOA) obtained from these foreign agents for confirmation of transactions and closing balance.

IV. Assessing the recoverability of carrying value of Inventory and advances paid towards land procurement (including refundable deposits paid under JDA)

Brigade Enterprises Limited (31^st March, 2024)

Key audit matters

How our audit addressed the key audit matter

Assessing the recoverability of carrying value of Inventory and advances paid towards land procurement (including refundable deposits paid under JDA)

As at 31^stMarch, 2024, the carrying value of the inventory of real estate projects is ₹395,591 lakhs and land advances/deposits is ₹39,944 lakhs respectively.

The inventories are carried at lower of cost and net realisable value (‘NRV’). The determination of the NRV involves estimates based on prevailing market conditions and taking into account the estimated future selling price, cost to complete projects and selling costs.

Deposits paid under joint development arrangements, in the nature of non-refundable amounts, are recognised as land advance under other assets and on the launch of the project, the same is transferred as land cost to work-in-progress. Further, advances paid by the Company to the seller/ intermediary towards outright purchase of land is recognized as land advance under other assets during the course of transferring the legal title to the Company, whereupon it is transferred to land stock under inventories.

The aforesaid deposits and advances are carried at the lower of the amount paid/payable and net recoverable value, which is based on the management’s assessment including the expected date of commencement and completion of the project and the estimate of sale prices and construction costs of the project.

We identified the assessment of the carrying value of inventory and land advances/deposits as a key audit matter due to the significance of the balance that involves estimates and judgement.

Our procedures in assessing the carrying value of the inventories and land advances/deposits included, among others, the following:

• We read and evaluated the accounting policies with respect to inventories and land advances/deposits.

• We assessed the Company’s methodology applied in assessing the carrying value under the relevant accounting standards including current market conditions in assessing the net realisable value
having regard to project development plan and expected future sales.

• We made inquiries with management with respect to inventory of properties on test check basis to understand key assumptions used in determination of the net realisable value/ net recoverable value.

• We enquired from the management regarding the project status and verified the underlying documents for related developments in respect of the land acquisition, project progress and expected recoverability of advances paid towards land procurement (including refundable deposits paid under JDA) on test check basis.

• We obtained and tested the computation involved in assessment of carrying value and the net realisable value/ net recoverable value on test check basis.

V. Accounting and valuation of Hedging Instrument

Dishman Carbogen Amcis Limited (31^st March, 2024)

Key audit matters

How our audit addressed the key audit matter

Accounting and valuation of Hedging Instrument

The Company hedges its foreign currency risk and interest rate risk through derivative instruments and applies hedge accounting principles for derivative instruments as prescribed by Ind AS 109. Receivable pertaining to derivative instruments as at March 31, 2024 is amounting to R9.69 Crores and debit balance of Cash Flow Hedge Reserve of R28.09 Crores as on that date.

These contracts are recorded at fair value and cash flow hedge accounting is applied, such that gains and losses arising from fair value changes are deferred in equity and recognised in the standalone statement of profit and loss when hedges mature and / or when the hedge item occurs.

The valuation of hedging instruments and consideration of hedge effectiveness has been identified as a key audit matter as it involves a significant degree of complexity and management judgment and are subject to an inherent risk of error.

Our procedures included the following:

• Obtained understanding of the Company’s overall hedge accounting strategy, forward contract valuation and hedge accounting process from initiation to settlement of derivative financial instruments including assessment of the design and implementation of controls and tested the operating effectiveness of those controls.

• Assessed Company’s accounting policy for hedge accounting in accordance with Ind AS.

• Tested the existence of hedging contracts by tracking to the confirmations obtained from respective counter parties.

• Tested management’s hedge documentation and contracts, on sample basis.

• Involved our valuation specialists to assist in reperforming the year end fair valuations of derivative financial instruments on a sample basis and compared these valuations with those records by the Company including assessing the valuation methodology and key assumptions used therein.

• Assessed the relevant disclosures of hedge transactions in the financial statements.

VI. Jai Balaji Industries Limited

Key audit matters

How our audit addressed the key audit matter

Accounting Software and Audit Trail

Proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 for maintaining books of account using accounting software which has a feature of recording audit trail (edit log) facility is applicable to the Company with effect from April 1, 2023, and accordingly, reporting under Rule 11(g) of Companies (Audit and Auditors) Rules, 2014.

We have examined that the company is using customised software and audit trail is enabled but the software and its trail need to be strengthen more.

The Company is in process of implementing more advance and latest ERP Software which will prove to be more efficient and effective for the company. with those records by the Company including assessing the valuation methodology and key assumptions used therein.

• Assessed the relevant disclosures of hedge transactions in the financial statements.

GMR Airports Infrastructure Limited

Key audit matters

How our audit addressed the key audit matter

Accounting for Business combination – composite scheme of amalgamation and arrangement among GMR Airports Limited (GAL), GMR Infra Development Limited (‘GIDL’) and the Company

(refer note 2.2(u) for the accounting policy and note 48 for disclosures of the accompanying standalone financial statements)

Subsequent to year end, the composite scheme of amalgamation and arrangement (the ‘Scheme’) amongst GAL, GIDL and GIL as under Sections 230 to 232 of the Companies Act, 2013 (“Scheme”) was approved by the Hon’ble National Company Law Tribunal (‘NCLT’), Chandigarh bench (‘‘the Tribunal’’) vide its order dated 11^th June 2024 (formal order received on 2^nd July 2024). Such NCLT order was filed with the Registrar of Companies by GAL, GIDL and GIL on 25^th July, 2024 thereby making the Scheme effective from such date.

Pursuant to the NCLT order, GAL and GIDL have been merged with the Company and all the assets, liabilities, reserves and surplus of the transferor companies have been transferred to and vested in the Company. Considering, the transaction is a common control business combination, these Standalone Financial Statements have been prepared by giving effect to the Scheme in accordance with Appendix C of Ind AS 103 by restating the financial statements from the earliest period presented consequent to receipt of approval to the Scheme from NCLT, as further disclosed in Note 48.

The determination of appropriateness of the accounting treatment and the complexities with respect to the control assessment and implementation of the terms of the approved Scheme required significant auditor attention. Accordingly, this matter is identified as a key audit matter for the current year audit.

Further, owing to the significant and pervasive impact of the merger on the accompanying standalone financial statements as disclosed in Note 48, the matter is also considered fundamental to the understanding of the users of the accompanying standalone financial statements.

Our audit procedures to assess the appropriateness of the accounting treatment of the business combination, included, but were not limited to the following:

• Obtained and read the Scheme and final order passed by the NCLT and submitted with the ROC to understand its key terms and conditions.

• Evaluated the design and tested the operating effectiveness of the internal financial controls relevant for recording the impact of the Scheme and related disclosures.

• Assessed the appropriateness of accounting policy of business combination of entities under common control by comparing with applicable accounting standard and that approved in the Scheme which involved assessment of control pre and post-merger.

• Tested the management’s computation for arriving at the value of fully paid-up equity shares to be issued and treatment of reserves as per the Scheme;

• Tested the management’s computation of the amount determined to be recorded in the amalgamation adjustment reserve; and

• Assessed the adequacy and appropriateness of the disclosures made with respect to the accounting of the transaction under the Scheme in note 48 to the accompanying standalone financial statements, as required by the applicable Indian Accounting Standards.

Material Accounting Policies

Note 2.2(u): Revised financial statements after approval of scheme of merger

The standalone financials of the Company for the year ended 31^st March, 2024 were earlier approved by the Board of directors at its meeting held on 29^th May, 2024 and reported upon by the statutory auditors vide their report dated 29^th May, 2024. The said standalone financial statement did not include the effect of scheme of merger of GAL with GIDL followed by merger of GIDL with the Company which was approved by the Hon’ble National Company Law Tribunal, Chandigarh bench (“the Tribunal”) vide its order dated 11^th June, 2024 (Certified copy of the order received on 2nd July, 2024). The said Tribunal order was filed with the Registrar of Companies by GAL, GIDL and the Company on 25^th July, 2024 thereby the Scheme becoming effective on that date from the appointed date of 1^st April, 2023 for merger. As a result, the aforesaid standalone financial statements have been revised by the Company so as to give effect to the Composite scheme of amalgamation and arrangement (‘Scheme’) in accordance with Appendix C of Ind AS 103 “Business Combination” from the earliest period presented consequent upon receipt of approval to the Scheme from National Company Law Tribunal (NCLT). Further, the subsequent events so in far it relates to the revision to the standalone financial statements are restricted solely to the aforesaid matter relating to the scheme and no effects have been given for any other events, if any, occurring after 29^th May, 2024 (being the date on which standalone financial statements were first approved by the board of directors of the company). Also refer note 48 to the standalone financial statements.

Note 48: Business Combination – Common control transaction

a. The Board of directors in its meeting held on 19^th March, 2023 had approved, a detailed Scheme of Merger of GAL with GIDL followed by merger of GIDL with the Company referred herein after as Meger Scheme. Subsequent to year ended 31^st March, 2024, the Merger Scheme has been approved by the Hon’ble National Company Law Tribunal, Chandigarh bench (“the Tribunal”) vide its order dated 11^th June, 2024 (Certified copy of the order received on 2^nd July, 2024). The said Tribunal order was filed with the Registrar of Companies by GAL, GIDL and the Company on 25^th July, 2024 thereby the Scheme becoming effective on that date.

Accordingly, GAL merged with GIDL and merged GIDL stands merged into the Company with an appointed date of 1^st April, 2023 and the standalone Financial Statements of the Company have been prepared by giving effect to the Composite scheme of amalgamation and arrangement in accordance with Appendix C of Ind AS 103 “Business Combination” from the earliest period presented consequent upon receipt of approval to the Scheme from National Company Law Tribunal (NCLT). The difference between the net identifiable assets acquired and consideration paid on merger has been accounted for as capital reserve on merger.

Pursuant to the Scheme of amalgamation, 3,41,06,14,011 equity shares and 65,111,022 Optionally Convertible Redeemable Preference Shares (OCRPS) will to be issued to Groupe ADP by the Company. These equity shares was presented under equity share capital pending issuance and OCRPS pending issuance respectively for the current period and comparative period. As part of the Scheme, the equity shares held by the Company in merged GIDL stands cancelled.

Accounting of amalgamation of the Merged GIDL with the Company

i. On the Scheme becoming effective on 25^th July, 2024 (“Effective Date”), the Company has accounted for the amalgamation in accordance with “Pooling of interest method” laid down by Appendix C of Ind AS 103 (Business combinations of entities under common control) notified under the provisions of the Companies Act, 2013.

ii. The cumulative carrying amount of investments held by the company in Merged GIDL in form of equity shares and OCRPS shall stand cancelled together with the cumulative corresponding unrealised gain recognised in FVTOCI reserve, and related deferred tax liability.

iii. The Company has recorded all the assets, liabilities and reserves of the Merged GIDL, vested in the Company pursuant to the Scheme, at their existing carrying amounts.

iv. The loans and advances or payables or receivables or any other investment or arrangement of any kind, held inter se, between the Merged GIDL and the Company have been cancelled.

v. The difference between the book value of assets, liabilities and reserves as reduced by the face value of the equity shares and OCRPS issued by the Company and after considering the cancellation of inter-company investments was recorded in other equity of the Company.

The book value of assets, liabilities and reserves acquired from Merged GIDL as at 1^st April, 2023 were:

Particulars	Amount (In Crores)
ASSETS
Non-current assets
Property, plant and equipment	2.43
Capital work-in-progress	46.49
Right of use assets	3.62
Financial assets
Investments	47,082.91
Loans	808.10
Other financial assets	37.16
Income tax assets (net)	22.73
Deferred tax assets (net)	107.28
Other non-current assets	20.01
Total	48,130.73
Current assets
Financial assets
Investments	445.45
Trade receivables	74.80
Cash and cash equivalents	41.20
Bank balances other than cash and cash equivalents	4.86
Loans	147.82
Other financial assets	222.89
Other current assets	33.17
Total	970.19
	49,100.92
LIABILITIES
Non-current liabilities
Financial liabilities
Borrowings	1,949.99
Lease liabilities	3.71
Other financial liabilities	143.39
Provisions	9.54
Deferred tax liabilities (net)	9,198.74
Other non current liabilities	20.67
Total	11,326.04
Current liabilities
Financial liabilities
Borrowings	3,122.18
Lease liabilities	0.07
Trade payables	102.75
Other financial liabilities	494.04
Other current liabilities	50.27
Provisions	4.46
Total	3,773.77
Total liabilities	15,099.81
Net assets acquired	34,001.11
Less: Investment in merged entity (net off fair valuation and deferred tax effect thereon)	-4,456.57
	29,544.54

Particulars	(` in crore)
Represented by:
Fair valuation through other comprehensive income (’FVTOCI’)	33,207.01
Special  Reserve  u/s  45IC of  Reserve Bank  of  India  (’RBI’)  Act	81.05
Securities Premium	1,251.36
Retained earnings	-2,228.82
Capital reserve	0.23
Equity share pending issuance	341.06
OCRPS pending issuance	260.44
Amalgamation adjustment deficit account	-3,367.81

b. The Board of Directors of the Company vide their meeting dated 17^th March, 2023 had approved the settlement regarding Bonus CCPS B, C and D between the Company, erstwhile GMR Airports Limited (GAL) and Shareholders of erstwhile GAL wherein cash earnouts to be received by Company were agreed to be settled at ₹550.00 crore, to be paid in milestone linked tranches and conversion of these Bonus CCPS B, C and D will take as per the terms of settlement agreement. Further, the Company, erstwhile GAL and Shareholders of erstwhile GAL had also agreed on the settlement regarding Bonus CCPS A whereby erstwhile GAL will issue such number of additional equity share to the Company and GMR Infra Developers Limited (‘GIDL’) (wholly owned subsidiary of the Company) which will result in increase of shareholding of Company (along with its subsidiary) from current 51 per cent to 55 per cent in erstwhile GAL. The settlement was subject to certain conditions specified in the settlement agreements. As part of the settlement agreement, the Company has received 4 tranches of ₹400.00 crore towards the sale of these CCPS till 31^st March, 2024. Subsequent to balance sheet date, on completion of conditions precedent the Company has received last tranche of ₹150.00 crore towards the sale of these CCPS. On 17^th July, 2024 the board of directors of erstwhile GAL has approved the conversion of CCPS A, B, C and D into equity shares of erstwhile GAL.

c. On 10^th December, 2015, the Company had originally issued and allotted the 7.5 per cent Subordinated Foreign Currency Convertible Bonds (FCCBs) aggregating to US$ 300 Mn due 2075 to Kuwait Investment Authority (KIA) and interest is payable on annual basis.

Pursuant to the Demerger of the Company’s non-Airport business into GMR Power and Urban Infra Limited (GPUIL) during January 2022, the FCCB liability was split between the Company and GPUIL. Accordingly, FCCBs aggregating to US$ 25 Mn. were retained and redenominated in the Company and FCCBs aggregating US$ 275 Mn. were issued to KIA by GPUIL. As per applicable RBI Regulations and the terms of the Agreements entered into between KIA and the Company, the Company had the right to convert the said FCCBs into equity shares at a pre-agreed SEBI mandated conversion price. Upon exercise of such conversion right, KIA would be entitled to 1,112,416,666 equity shares of the Company.

Subsequent to 31^st March, 2024, the US$ 25 Mn. 7.5 per cent Subordinated Foreign Currency Convertible Bonds (FCCBs), issued by the Company to KIA have been transferred by KIA to two eligible lenders i.e., Synergy Industrials, Metals and Power Holdings Limited (“Synergy”) (US$ 14 Mn) and to GRAM Limited (“GRAM”) (US$ 11 Mn).

The 7.5 percent US$ 25 Mn. FCCBs have been converted dated 10^th July, 2024 into 111,24,16,666 number of equity shares of ₹1/- each, proportionately to the above-mentioned two FCCB holders, as per the agreed terms and basis receipt of a conversion notice from the said FCCB holders. As the FCCB holders are equity investors, and as a part of the overall commercials between the parties, the outstanding interest on the FCCB’s of ₹100.43 crore was waived.

BCAJ Admin

Climate Change and Its Impact on Financial Statement

This article explores the critical intersection of climate change and corporate finance. As the world grapples with the urgent need to address climate change, driven by the UN Sustainable Development Goals (SDGs) and the growing emphasis on Environmental, Social, and Governance (ESG) factors, companies are increasingly recognising the financial implications of their environmental impact. From rising operational costs and disrupted supply chains to changing consumer preferences and increased regulatory scrutiny, climate change poses significant risks and opportunities for businesses. This article will delve into how these climate-related factors can impact a company’s financial statements, highlighting the crucial role of ESG reporting frameworks like the Business Responsibility and Sustainability Reporting (BRSR) in navigating this evolving landscape.

WHAT IS CLIMATE CHANGE?

Our planet is experiencing a dramatic shift in its climate, largely due to human activities over the past couple of centuries. By burning fossil fuels like coal, oil, and gas, we’ve released a massive amount of greenhouse gases into the atmosphere. These gases act like a blanket, trapping heat and causing our planet to warm up. This warming trend isn’t just about rising temperatures. It’s disrupting our weather patterns, leading to more intense heatwaves, stronger storms, and a significant rise in sea levels as glaciers and ice caps melt. These changes threaten our ecosystems and have devastating consequences for people and economies around the world.

India, unfortunately, is particularly vulnerable to these impacts. We’re already seeing a surge in extreme weather events like floods, droughts, and scorching heatwaves. These events disrupt lives, damage infrastructure, and threaten our agricultural productivity. To tackle this crisis, we need a two-pronged approach:

Mitigation: We must drastically reduce our greenhouse gas emissions to prevent further warming.
Adaptation: We must also adapt to the changing climate by implementing measures to protect our communities and infrastructure from the inevitable impacts.

The effects of climate change are not confined to the environment. They are deeply intertwined with our financial systems. Extreme weather events can devastate businesses, damaging assets, disrupting supply chains, and increasing operational costs. The transition to a low-carbon economy also presents challenges, such as the need for significant investments in renewable energy and the risk of stranded assets. Recognising these risks, financial regulators and standards-setting bodies are now demanding greater transparency around climate-related issues. The International Accounting Standards Board (IASB), for example, recently issued an exposure draft addressing the disclosure of climate risks in financial statements underscoring their relevance to financial stability.

By understanding and disclosing these risks, companies can better manage them and make more informed decisions. It’s time for businesses to acknowledge their role in addressing climate change and to embrace sustainable practices that safeguard their long-term viability.

CLIMATE-RELATED RISKS AND OPPORTUNITIES

Climate related financial information has an increased demand for decision making by the investors, lenders, insurance underwriters and other stakeholders. However, the improved disclosures of the climate-related information would assist the investors, lenders, insurance underwriters and other stakeholders to analyse the potential financial impacts due to climate change. These improved disclosures would include climate-related risks and opportunities which will be the handbook to evaluate such disclosures.

The TCFD (Task Force on Climate-Related Financial Disclosures) has identified that there are several frameworks for climate-related disclosures in different jurisdictions to favour the growing demand of such information disclosure, however, it is significant to have a standardised framework that will align all the jurisdictions including G20 and other existing regimes and look for an opportunity to provide the common framework for climate-related disclosures.

The important elements of such climate-related disclosure framework is the categorisation of the disclosures into climate-related risks and opportunities. Hence, the TCFD has defined their categories. These recommendations has resulted in encouraging the businesses to make such disclosures as a part of their annual reports highlighting issues that are more pertinent to their business activities.

The main climate-related risks and opportunities are given below followed by their brief descriptions:

1. Climate-related Risks

The TCFD has divided the Climate-related Risks in two sub-categories each having further divisions in its type of risk. The two major sub-categories of risks are: (a) risks related to the transition to a lower- carbon economy, and (b) risks related to the physical impacts of climate change. Further, the detailed sub-categories are as under:

(a) Transition Risks

Transition to a lower-carbon economy can have extensive policy & legal, technology, market and reputational changes to adopt the mitigation and adaptation requirements related to the climate changes. These transitional risks can result in varying levels of financial and reputations risk to the organisation depending on the nature, speed, and focus of these changes.

(i) Policy and Legal Risks:

The policy and legal risks refers to the challenges that are faced by the companies due to the changes in the policies, regulations, frameworks and other legal changes that are aimed at addressing the climatic challenges. These kind of risks arise from governmental and regulatory bodies as they are the ones who implement these new laws, standards and policies to transit towards a low-carbon economy and mitigate the impact of climate changes. In case of failure to comply and adopt these changes, it will lead to financial losses, legal liabilities, and reputational damages.

Policy Risks are the ones that are linked to changes in governmental policies and regulatory frameworks related to climate change mitigation and adaptation. Some of these examples include: Stricter Limitations on Emissions, Subsidy Reforms, Energy Efficiency Regulations, Carbon Pricing and Taxes, Ban on Certain Activities, etc.

Legal Risks are the fines / penalties imposed on the businesses due to non-compliance with evolving climate-related regulations or failure to meet disclosure and sustainability standards. Such legal risks includes litigation for non-compliance, increased disclosure requirements, contractual obligations, securities fraud or misrepresentation, liability for environmental harm, etc.

(ii) Technology Risk

Such risks refer to the potential disruptions and challenges due to shifts in technology aiming towards reduction in carbon emissions and enhancing sustainability. These risk arises when the companies transit towards low-carbon energy-efficient technologies to adhere to the regulatory changes, market demands, or several environmental objectives.

Technology Risks includes certain key aspects, such as: Use of outdated technology, investment cost for adopting greener technologies, and competitive market in terms of adapting climate-friendly technologies, temporary operational disruptions while introducing new technologies, changing regulatory requirements, etc.

Managing such risks requires strategic planning, investment in innovation, and staying aware of technological and regulatory developments.

(iii) Market Risk

Financial impact that arises from the shift in supply and demand due to the transition to low-carbon economy are identified as the Market Risks. Under this factor, the transitions to low-carbon economy are driven by the factors such as new climate policies, technological advancements, or changes in consumer behaviour.

The key components of market risks includes: Demand shifts, changes in prices of commodities, devaluation of assets, fluctuation in investor behaviour, supply chain impacts, etc.

(iv) Reputation Risk

This risk has a potential harm to a Company in terms of damage to public image, brand value, or stakeholder trust due to its perceived or lack of response to climate change and sustainability expectations. This occurs when companies fail to address climate-related demands from customers, regulators, investors, or the general public, which can negatively affect Company’s reputation and market positioning.

The manifested reputation risks includes: Failure to adapt to regulatory changes, environmental negligence, changes in customer preferences, greenwashing accusations, investors’ pressure, etc.

(b) Physical Risks

Physical Risks are the potential harm or disruptions to the businesses, economies, and ecosystems caused by the physical impacts of climate change. There risks resulting from climate changes can either be event drive (acute) or longer-term shifts (chronic) in climate patterns. They can significantly affect the operations, assets, supply chains, and financial performance of the Company.

(i) Acute Physical Risk

These risks are the immediate or short-term consequences of the extreme weather events that are caused due to climate change. Such risks includes sudden and severe climate- related incidents, such as: Floods, Storms, Hurricanes, Heatwaves, Wildfire, etc.

Acute Risks can disrupt company operations, harm supply chains, damage assets, and affect the communities. To face and mitigate such risks, companies shall plan for resilience, disaster recovery, and other mitigation strategies to manage the potential impacts.

(ii) Chronic Physical Risk

Chronic Risk refers to the long-term changes in environmental and climatic conditions that could affect the businesses, its infrastructure, and societies. Unlike acute physical risks, that are associated with short-term, severe weather events, chronic physical risks are gradual and has persistency in climate patterns that can disrupt normal operations and productivity.

These risks include examples such as: Rising global temperatures, long-term droughts or shift in rainfall, sea-level rise, soil degradation, etc.

2. Climate-related Opportunities

Climate-related Opportunities refer to the potential benefits and positive impacts that the companies get which arise from the transition to a low-carbon economy and from proactive approaches to managing climate risks. Companies that recognise and leverage these opportunities can enhance their competitiveness, drive innovation, and contribute to sustainability.

Climate-related Opportunities are further classified as under:

(a) Resource Efficiency

Resource Efficiency under climate-related opportunities refers to effective utilisation of resources such as energy, water, material and land, in a way that it minimises waste generation and reduces negative environmental impact while maximising the productivity and profitability.

Embracing the resource efficiency could provide various benefits such as: Lower operation cost, gain competitive advantage, risk mitigation, adoption of innovative technologies, improved brand image, complying with environmental regulations, etc.

(b) Energy Source

Energy Source can be referred to the potential benefits that occurs from a transition to cleaner, renewable, and more efficient energy solutions to reduce the negative environmental impact and other greenhouse gas emissions.

The Companies that invest in the sustainable solutions can benefit from financial, operational, and reputational advantages. The transitional journey may include key aspects such as: Adoption of Renewable Energy Sources, Implementing Energy-efficient Technologies, Investing in Clean Energy Solutions, Offering Green Products in the Market, etc.

(c) Products & Services

Products & services refers to the creation, innovation, and adaptation of sustainable practices in the business offerings that helps the businesses and customers to transit to low-carbon sustainable economy. Such sustainable offerings benefits the businesses in generating new revenue streams by addressing the environmental risks and challenges.

The key examples here includes, development of low-carbon products, sustainable packaging, green financial products, adapting renewable energy services, energy efficiency solutions, carbon credits and reforestation programs, etc.

(d) Markets

The new or growing sectors, regions, and types of assets where businesses can gain a competitive advantage by adapting the practices to transit to low-carbon economy can be referred to as Markets. These markets offer potential growth and diversification by aligning with sustainability and decarbonisation goals.

The key aspects of these markets include: Sustainable Financing like investing in Green Bonds, Impact Investing; Low-Carbon Infrastructure, Renewable Energy Production, Collaborations with Governments & Development Banks, Carbon Trading & Offsetting Markets, etc.

(e) Resilience

It is a business’s ability to adapt and withstand to climate change challenges. This is merely focused on transitioning the climate-related risks to climate-related opportunities by minimising disruptions and enhancing adaptive capacity. Opportunities that are related to resilience includes, efficiency improvements, innovative products / processes, supply chain adaptation and investment in long-term sustainability projects, etc.

FINANCIAL IMPACTS OF POTENTIAL CLIMATE-RELATED RISKS

The financial impacts are basically the economic consequences faced by the companies due to both transition and physical risks posed by climate change. These impacts includes effects on the company’s operations, liabilities, assets and costs in several ways.

Below are the key areas where financial impacts may arise:

Type

Climate-Related Risks

Potential Financial Impacts

Transition Risks

Policy and Legal

Increased costs related to greenhouse gas (GHG) emissions pricing

• Increased obligations for emissions reporting

• Regulatory mandates on existing products and services

• Heightened risk of litigation

Higher operating expenses, including compliance costs and increased insurance premiums

• Asset write-offs, impairments, or early retirements due to policy shifts

• Elevated costs or reduced demand for products and services as a result of fines and legal judgments

Technology

Replacement of current products and services with lower-emission alternatives

• Unsuccessful investments in developing or adopting new technologies

• Expenses incurred in transitioning to low- emission technologies

• Asset write-offs and premature retirement of existing infrastructure

• Decline in demand for current products and services

• Increased research and development (R&D) expenses for new and alternative technologies

• Capital investments and cost required for developing new technologies and adopting & implementing new practices and processes

Market

• Shifts in customer preferences and behavior

• Uncertainty in market trends and signals

• Rising costs of raw materials

• Declining demand for products and services as consumer preferences shift

• Higher production costs due to fluctuating input prices (e.g., energy, water) and stricter output regulations (e.g., waste management)

• Sudden and unforeseen increases in energy costs

• Altered revenue streams and mix, potentially leading to lower overall revenues

• Revaluation of assets such as fossil fuel reserves, land, and securities

Reputation

• Changes in consumer preferences

• Negative perception or stigmatisation of the industry

• Heightened stakeholder concerns or adverse feedback from stakeholders

• Decline in revenue due to reduced demand for goods and services

• Loss of revenue from disruptions in production capacity (e.g., delays in planning approvals or supply chain interruptions)

• Decreased revenue from challenges in workforce management, such as difficulties in attracting and retaining employees

• Limited access to capital due to increased exposure to physical risks

Physical Risks

Acute

Heightened intensity of extreme weather events, including cyclones and floods.

Chronic

• Alterations in precipitation patterns and increased variability in weather conditions

• Increasing average temperatures

• Rising sea levels

Reduced revenue from diminished production capacity (e.g., challenges in transportation and supply chain disruptions)

• Decreased revenue and elevated costs due to adverse workforce impacts (e.g., health risks, safety issues, and absenteeism)

• Asset write-offs and early retirement of existing assets resulting from damage in “high-risk” locations

• Increased operating costs due to insufficient water supply for hydroelectric plants or cooling systems for nuclear and fossil fuel plants

• Heightened capital expenditures driven by facility damage

• Lower revenues resulting from decreased sales and output

• Rising insurance premiums and potential restrictions on coverage for assets situated in “high-risk” areas

FINANCIAL IMPACTS OF POTENTIAL CLIMATE-RELATED OPPORTUNITIES

Though the companies navigate the challenges / risks posed by climate-change, it also identifies significant opportunities to drive growth and enhance resilience. These opportunities can lead to various positive financial impacts, such as:

Type

Climate-related Opportunities

Potential Financial Impacts

Resource Efficiency

Adoption of more energy-efficient transportation methods

• Implementation of streamlined production and distribution processes

• Increased focus on recycling and resource recovery

• Transition to energy-efficient and sustainable buildings

• Reduction in water consumption and improved water management practices

• Lower operating costs achieved through efficiency improvements and cost reductions

• Enhanced production capacity, leading to higher revenues

• Increased asset value, such as energy-efficient buildings with higher ratings

• Positive impact on workforce management, including improved health, safety, and employee satisfaction, resulting in reduced costs

Energy Source

• Adoption of low-emission energy sources

• Utilisation of supportive policy incentives

• Integration of innovative technologies

• Participation in carbon trading markets

• Transition to decentralised energy generation systems

• Lower operating cost through cost-effective emissions reduction measures

• Reduced vulnerability to future increases in fossil fuel prices

• Decreased exposure to GHG emissions, minimising sensitivity to carbon pricing changes

• Enhanced returns on investments in low- emission technologies

• Improved access to capital as investors increasingly prioritise low-emission businesses

• Reputational gains leading to higher demand for products and services

Products

& Services

• Expansion and innovation in low-emission products and services

• Creation of climate adaptation and insurance risk management solutions

• Development of new offerings through research, development, and innovation

• Opportunities to diversify business operations

• Capitalising on shifting consumer preferences toward sustainable products and services

• Increased revenue driven by growing demand for low-emission products and services

• Revenue growth from offering innovative solutions to climate adaptation needs (e.g., insurance and risk management products)

• Enhanced competitive advantage by aligning with evolving consumer preferences, leading to higher revenues

Markets

• Entry into new markets and expansion opportunities

• Utilisation of regulatory incentives and support

• Access to new assets and locations requiring insurance coverage

• Increased revenue opportunities through entry into new and emerging markets (e.g., collaborations with governments and development banks)

• Enhanced diversification of financial assets (e.g., investments in green bonds and sustainable infrastructure)

Resilience

• Engagement in renewable energy initiatives and implementation of energy-efficiency strategies

• Diversification and substitution of resources

• Enhanced market valuation through strategic resilience planning (e.g., infrastructure, land, and buildings)

• Greater supply chain reliability and operational continuity under diverse conditions

• Increased revenue from new products and services designed to support resilience and adaptability

EFFECTS OF CLIMATE-RELATED MATTERS ON FINANCIAL STATEMENTS

Ind AS Standards

Impact

Ind AS – 1

Presentation of Financial Statements

• Companies must disclose significant climate-related matters that could materially impact their financial performance. This includes uncertainties related to future cash flows, asset impairment, and decommissioning obligations. These disclosures should help investors understand the potential impact of climate change on the company’s financial health.

• Disclose key assumptions and judgments used in financial reporting, particularly those related to climate-related uncertainties. This includes how climate-related factors are considered in areas like impairment testing, the determination of cash-generating units, and the estimation of future cash flows.

• Disclose the sensitivity of financial results to different climate-related scenarios. This helps investors understand how changes in climate conditions or policy responses could impact the company’s financial performance.

• Assess and disclose the company’s ability to continue as a going concern, considering the potential impact of climate-related risks. This includes evaluating the potential impact of climate change on the company’s operations, market demand, and access to resources.

Ind AS – 2

Inventories

• Climate-related events can significantly impact the value of a company’s inventory. For example, extreme weather events can damage inventory, rendering it obsolete. Changes in consumer preferences due to climate change can also reduce the selling price of inventory or increase the costs associated with completing and selling it.

• When the cost of inventory is no longer recoverable, IAS 2 requires companies to write down the inventory to its net realisable value. Net realisable value represents the estimated selling price of the inventory in the current market, minus the estimated costs of completion and sale.

• Companies must use the most reliable evidence available to estimate the net realisable value of their inventory. This may include market prices, recent sales data, and expert opinions.

Ind AS – 12

Income Taxes

• Ind AS 12 allows companies to recognise deferred tax assets for tax losses and temporary differences that can be used to reduce future tax bills. However, these assets can only be recognised if it’s likely that the company will generate enough future taxable profits to utilise these tax benefits.

• Climate-related issues can significantly impact a company’s future taxable profits. For example, extreme weather events can disrupt operations, leading to lower profits and potentially preventing the company from utilising its deferred tax assets. Conversely, climate change mitigation efforts, such as investments in renewable energy, can impact future tax liabilities and therefore the value of deferred tax assets.

Ind AS – 16

Property, Plant and Equipment &

Ind AS – 38

Intangible Assets

• Climate change can significantly impact a company’s research and development (R&D) activities. This may lead to increased expenditures on developing new technologies, such as renewable energy solutions, or adapting existing products to mitigate climate risks. These R&D costs may be capitalised as assets under certain accounting standards, depending on their nature and expected future benefits.

• Companies must disclose the amount of R&D costs recognised as an expense during each reporting period. These expenses may be impacted by climate-related changes, such as increased spending on climate-related R&D projects or adjustments to existing R&D programs due to changing market conditions or regulatory requirements.

• Companies are required to regularly review and adjust the estimated useful lives and residual values of their assets. This includes considering the potential impact of climate change. For example, climate-related events like extreme weather can shorten the useful life of certain assets, while changing regulations related to greenhouse gas emissions can render some assets obsolete.

• Companies must disclose the expected useful lives of each class of asset and any changes to these estimates. These disclosures should include the impact of climate-related factors, such as asset obsolescence or changes in regulatory requirements, on the estimated useful lives and residual values of assets.

Ind AS – 36

Impairment of Assets

• Companies are required to regularly assess whether their assets, such as goodwill, property, plant and equipment, and intangible assets, have lost value. Climate-related factors, such as reduced demand for products that emit greenhouse gases or significant environmental changes, can signal potential impairment. For example, changes in environmental regulations or shifts in consumer preferences towards more sustainable products can lead to a decline in the value of certain assets.

• When assessing asset impairment, companies must estimate the future cash flows that the asset is expected to generate. These estimates should consider the potential impact of climate-related factors on the company’s future operations and market conditions. It’s crucial to base these projections on reasonable and supportable assumptions that reflect management’s best estimate of future economic conditions, taking into account potential climate-related risks.

• IAS 36 prohibits the inclusion of cash flows arising from future restructuring or performance enhancement activities in the impairment assessment. This ensures that the impairment test reflects the intrinsic value of the asset under normal operating conditions.

• Companies must disclose the events and circumstances that led to any impairment losses.
This includes disclosing the impact of new legislation on emission reductions, changes in consumer preferences, or other climate-related factors. Additionally, companies must disclose the key assumptions used in their impairment assessments and the potential impact of reasonably possible changes to these assumptions.

Ind AS – 37

Provisions, Contingent Liabilities and Contingent Assets and Appendix “C” Levies

• Climate change can significantly impact a company’s liabilities. This includes potential liabilities arising from government fines for failing to meet climate-related targets, costs associated with environmental remediation, and expenses related to restructuring efforts to adapt to a low-carbon economy. Additionally, existing contracts may become onerous due to changes in climate-related legislation or regulations.

• IAS 37 requires companies to disclose the nature of provisions and contingent liabilities. This includes any uncertainties related to the timing and amount of expected future cash outflows. Companies must also disclose the major assumptions made about future events when determining the amount of provisions, particularly when these assumptions are significantly influenced by climate-related factors.

Ind AS – 107

Financial Instruments

• Ind AS – 107 requires companies to disclose information about their financial instruments and the associated risks. Climate change can significantly impact these risks, such as by affecting the likelihood of borrowers defaulting on loans (credit risk) or by impacting the value of investments in sectors vulnerable to climate change. Companies must disclose how these climate-related factors may affect their financial instruments.

• For companies holding investments in other companies, Ind AS – 107 requires disclosure of investments by industry or sector. This helps investors understand the company’s exposure to industries that may be more vulnerable to the effects of climate change, such as those heavily reliant on fossil fuels or those operating in regions prone to extreme weather events.

Ind AS – 109

Financial Instruments

• Climate change can significantly impact the accounting for financial instruments. For example, loan agreements may include clauses that link interest rates or repayment schedules to a company’s progress in meeting climate-related targets. This can complicate the accounting for these loans, as lenders need to carefully assess whether the cash flows received are solely interest payments or include performance-based components.

• Climate-related factors can increase the risk of borrowers defaulting on loans. Extreme weather events like wildfires or floods can disrupt a borrower’s operations, impacting their ability to repay debt. Changes in climate regulations can also significantly impact a borrower’s financial performance, increasing the risk of default. Additionally, the value of collateral used to secure loans may be diminished due to climate change impacts, such as the inaccessibility or non-insurability of certain assets.

• When assessing the likelihood of borrowers defaulting on loans (credit risk), lenders must consider all relevant factors, including climate-related risks. Ind AS – 109 requires the use of all reasonable and supportable information in estimating expected credit losses. This means that lenders must incorporate potential climate-related impacts into their economic forecasts and credit risk assessments.

Ind AS – 113

Fair Value Measurement

• Climate change can significantly impact the fair value of a company’s assets and liabilities. For example, the introduction of new climate-related regulations can change how market participants perceive the value of certain assets or liabilities, potentially impacting their market price.

• Fair value measurements, particularly those based on less observable inputs (Level 3 of the fair value hierarchy), are highly sensitive to underlying assumptions. These assumptions must consider the potential impact of climate-related risks, such as the likelihood of extreme weather events, changes in consumer preferences, and shifts in regulatory landscapes.

• Ind AS – 113 mandates companies to disclose the key inputs used in their fair value measurements, especially for assets and liabilities classified within Level 3 of the fair value hierarchy. They must also explain how changes in these unobservable inputs, including those related to climate change, could significantly affect the fair value measurement.

IFRS 17

Insurance Contracts

(Ind AS 117 is yet to be issued)

• Climate change can significantly impact insurance companies. As climate change intensifies, we can expect to see more frequent and severe weather events, such as hurricanes, floods, and wildfires. This increases the likelihood and severity of insured events like property damage, business interruptions, and health claims, which in turn can impact the insurance company’s financial obligations.

• IFRS 17 requires insurance companies to accurately measure and disclose their insurance liabilities. Climate change introduces significant uncertainties into these calculations. Companies must carefully consider how climate change may impact the frequency and severity of insured events when determining their liabilities.

• Companies must disclose significant judgments made in applying IFRS 17. This includes how they account for the potential impact of climate change on the likelihood and severity of insured events. They must also disclose how they manage the risks associated with these climate-related events and how sensitive their insurance liabilities are to changes in these risks.

PROPOSED ILLUSTRATIVE EXAMPLES

The International Accounting Standards Board (IASB) has recently issued an Exposure Draft titled “Climate-related and Other Uncertainties in the Financial Statements.” This draft introduces eight illustrative examples to enhance the application and disclosure of climate-related and other uncertainties in financial statements. These examples aim to improve the quality and consistency of climate-related disclosures by providing practical guidance on how to apply existing International Financial Reporting Standards (IFRS) to various scenarios. Two of the examples are given below, for reference:

Example 1 – Materiality Judgements Leading to Additional Disclosures (IAS 1/IFRS 18)

Scenario: A manufacturer with a climate-related transition plan, including investments in energy-efficient technology and changes in manufacturing methods.

Disclosures: The entity discloses that its transition plan has no material effect on its current financial position and financial performance.

Basis for Disclosure

The entity determined that the transition plan does not currently impact the recognition or measurement of assets, liabilities, income, and expenses.
However, the entity recognises that the absence of this information could mislead users, as they might expect some financial impact from the planned changes.
Considering the detailed disclosure of the transition plan outside the financial statements and the industry’s known exposure to climate-related transition risks, the entity concludes that this disclosure is necessary to provide a complete picture to financial statement users.

Example 2 – Disclosure of Assumptions: Specific Requirements (IAS 36)

Scenario: A company operates in an industry with significant greenhouse gas emissions and is subject to existing and anticipated future emissions regulations.

Disclosures: The entity discloses that future emission allowance costs are a key assumption in its impairment testing of a cash-generating unit.

Basis for Disclosure:

IAS 36 requires disclosure of key assumptions used in impairment testing, particularly those with a significant impact on the recoverable amount.
Future emission allowance costs are identified as a key assumption due to their potential impact on the cash flows of the cash-generating unit.

CONCLUSION

Climate change is no longer just an environmental issue; it’s a significant financial risk that companies cannot afford to ignore. The increasing frequency and severity of extreme weather events, growing pressure from regulators, and shifting consumer preferences are all impacting businesses. These factors directly affect a company’s bottom line, influencing revenues, costs, and the value of its assets.

As companies are increasingly required to disclose climate-related risks and opportunities in line with regulations like SEBI LODR and other frameworks, it’s crucial to connect this information to their financial performance. Simply put, companies need to understand how climate change impacts their finances. ESG reporting provides a structured way to do this, helping companies bridge the gap between their environmental and social impacts and their financial performance.

This approach aligns with the principles outlined in IFRS S2, which emphasises the importance of connecting financial and non-financial information. By understanding how climate risks and opportunities influence both their financial performance and broader sustainability objectives, companies can gain deeper insights into their overall business health. Embracing ESG principles allows companies to navigate this evolving landscape more effectively, building long-term resilience and positioning themselves for sustainable success.

REFERENCES

https://www.ifrs.org/content/dam/ifrs/supporting-implementation/documents/effects-of-climate-related-matters-on-financial-statements.pdf
https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf
https://www.cpaaustralia.com.au/-/media/project/cpa/corporate/documents/tools-and-resources/environmental-social-governance/guide-to-climate-change-and-financial- reporting.pdf
https://assets.bbhub.io/company/sites/60/2022/ 10/2022-TCFD-Status-Report.pdf
https://www.ifrs.org/content/dam/ifrs/project/climate-related-other-uncertainties-fs/iasb-ed-2024-6-climate-uncertainties-fs.pdf

BCAJ Admin

Auditor’s Report on Special Purpose Financial Statements

Special Purpose Financial Statements (SPFS) are prepared to meet the information needs of specified users. In February 2024, the Institute of Chartered Accountants of India (ICAI) issued the revised Standards on Auditing (SAs): SA 800 dealing with SPFS; SA 805 dealing with Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial statement and SA 810 dealing with auditor’s report on summary financial statements. This article provides an overview of the requirements of SA 800 (revised) and explains the key aspects of special purpose financial statements.

An entity generally prepares general purpose financial statements as per the general purpose framework. A general purpose framework is designed to meet the common financial information needs of a wider range of users, e.g. financials prepared as per applicable Generally Accepted Accounting Principles for tax filing purposes; financial statements prepared under the Companies Act, 2013. The general purpose framework, i.e. Indian Accounting Standards and Accounting Standards, are used for the preparation and presentation of the financial statements and such financial statements are called statutory financial statements (i.e. prepared pursuant to a regulation or statute).

However, under certain circumstances, an entity would be required to submit financial statements as per a special purpose framework or an audited financial statement, specific elements, accounts, or items of a financial statement to meet the requirements of a specific category of stakeholders, e.g. shareholders, investors, lenders. Financial service entities such as asset managers or management companies may also be required to prepare financial statements for a specific purpose or for specific users. Such financial statements are often called as special purpose financial statements.

Special purpose financial statements can often be more relevant and less costly to prepare than financial statements that are fully GAAP compliant, depending on the intended use of the financial statements. The audits of such special purpose financial statements are required to be conducted in accordance with special consideration standards issued by the ICAI. In February 2024, the Institute of Chartered Accountants of India (ICAI) issued the revised Standards on Auditing (SAs): SA 800 (Revised), “Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks; SA 805 (Revised), “Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement”; SA 810 (Revised), “Engagements to Report on Summary Financial Statements”. These Standards will be applicable to audits/engagements for financial years beginning on or after 1st April, 2024, i.e., these Standards will be applicable to audits / engagements for the financial year 2024-25 and onwards.

The objective of this article is to provide an overview of the requirements of the revised SA 800 issued by the ICAI and to explain the key aspects of special purpose financial statements. It is important to understand why special purpose financial statements are prepared and the underlying reporting framework for the preparation of such special purpose financial statements. For example, if the company is required to get a special audit of the financial statements based on a regulatory order, it is important to understand the reporting framework followed for the preparation of such financial statements. If financial statements have been prepared as per the general purpose framework, the auditor will apply the requirements in SAs 100 to 700 series and not SA 800. It is the primary responsibility of the management to prepare financial statements. In order to do so the management should understand the purpose for which such financial statements are being prepared and its intended users.

SA 800 deals with special consideration in the application of the SAs (100-700 series) to an audit of financial statements that are prepared in accordance with a special purpose framework. SA 800 is written in the context of a complete set of financial statements prepared in accordance with a special purpose framework. However, in addition to the application of all SAs (SA 100 to SA 700 series), an auditor is also required to comply with these special considerations specified in SA 800. Therefore, it is important to understand whether the reporting framework in accordance with which financial statements have been prepared is a ‘special purpose framework’ or not.

SA 805 deals with special considerations in the application of the SAs (100-700 series) to an audit of a single financial statement or a specific element, account or item of a financial statement.

In 2016, ICAI issued the revised auditor’s reporting standards, i.e. Revised SA 700 — ‘Forming an Opinion and Reporting on Financial Statements’, Revised SA 705 — ‘Modifications to the Opinion in the Independent Auditor’s Report’ and Revised SA 706 — ‘Emphasis of Matter Paragraphs and Other Matter Paragraph in the Independent Auditor’s Report’. These standards are effective for audits of financial statements for periods beginning on or after 1^st April, 2018. The auditor’s reporting requirements for SA 800 and SA 805 engagements are linked directly to the reporting requirements in SA 700 (Revised).

What are special purpose financial statements?

Special purpose financial statements are prepared to meet the information needs of specified users. As a result, the special purpose financial statements are prepared using an applicable special purpose framework that meets those users’ needs.

A special purpose framework, as defined by SA 800, is a financial reporting framework designed to meet the financial information needs of specific users. The financial reporting framework may be a fair presentation framework or a compliance framework¹.

The special purpose framework may comprise the financial reporting provisions of a contract. For example, for the purpose of establishing the value of net assets of a company at the date of its sale, the vendor and the purchaser agree that very prudent estimates of allowances for uncollectible accounts receivable are appropriate for their needs, even though such financial information is not neutral when compared with financial information prepared in accordance with a general purpose framework. In this case, the special purpose framework meets the needs of the specified users².

1 Refer paragraph 7 of SA 700 for definition of fair presentation framework and compliance framework. 
2 Refer paragraph A8 of SA 800.

It is important to note that when financial statements are prepared based on the needs of a regulator, e.g. audit of an overseas subsidiary of an Indian company, which is not required in the host jurisdiction but required under Indian regulations, e.g. pursuant to FEMA regulations (filing of Annual Performance Report), it should not be construed that such financial statements are special purpose financial statements if the underlying framework is general purpose framework. Special purpose financial statements are financial statements with a special purpose framework which is designed to meet the financial information needs of specific users.

Other examples wherein special purpose financial statements may be prepared include:

The cash receipts and disbursements basis of accounting for cash flow information that an entity may be requested to prepare for creditors.
The financial reporting provisions established by a regulator to meet the requirements of that regulator.
The financial reporting provisions of a contract, such as a bond indenture, a loan agreement, or a project grant.
Combined financial statements prepared for submission to lenders or investors³;

³  Refer Guidance Note on Combined and Carve-Out Financial Statements issued by ICAI.

There may be circumstances when a special purpose framework is based on a financial reporting framework established by an authorised or recognised standards-setting organisation or by law or regulation but does not comply with all the requirements of that framework. In such a case, the special purpose framework will not be a fair presentation framework since it does not comply with all the requirements of the financial reporting framework that are necessary to achieve a fair presentation of the financial statements, e.g. all disclosures required by accounting standards, have not been made by a company.

Therefore, it will be inappropriate for the description of the applicable financial reporting framework in the special purpose financial statements (and in the auditor’s report) to imply full compliance with the financial reporting framework established by the authorised or recognised standards setting organisation or by law or regulation.

For example, a contract may require financial statements to be prepared in accordance with most, but not all, of the Accounting Standards. In this case, it is preferable that the description of the applicable financial reporting framework refers to the financial reporting provisions of the
contract (and may also refer to management’s description of those provisions in the disclosures to the financial statements) rather than make any reference to accounting standards.

Under SA 800, financial statements prepared on an accrual basis of accounting as per applicable Indian GAAP for filing with income tax authorities are considered to be general purpose financial statements and not special purpose financial statements.

Key considerations for acceptance of an engagement to express an opinion on special purpose financial statements

In deciding whether to accept an engagement to express an opinion on special purpose financial statements, the auditor should determine whether the special purpose framework applied in the preparation of the financial statements is acceptable. The auditor should obtain an understanding of –

the purpose for which the financial statements are prepared;
the intended users;
the steps taken by management to determine that the applicable financial reporting framework is acceptable in the circumstances.

Such a special purpose reporting framework may comprise financial reporting standards established by an authorised or recognised standard-setting organisation. If so, these standards may be presumed acceptable if the organisation follows an established and transparent process involving deliberation and consideration of the views of relevant stakeholders. It could also be a special purpose framework prescribed by the jurisdiction to be used in the preparation of special purpose financial statements for a certain type of entity.

Forming an opinion and reporting considerations

The standard setter retained the approach in extant SA 800 and SA 805, whereby the reporting requirements in SA 700 (Revised) and other SAs are not repeated in SA 800 (Revised) and SA 805 (Revised). Therefore, SA 700 (Revised) contains the overarching reporting requirements applicable for auditor’s reports on special purpose financial statements and single financial statements, or elements of a financial statement, with additional requirements and guidance as considered necessary in SA 800 (Revised) and SA 805 (Revised). Therefore, when forming an opinion and reporting on special purpose financial statements, the auditor is required to apply the requirements in SA 700 (Revised).

Reference may be made to Illustrative auditor’s reports in the Appendix of SA 800 (Revised) and Appendix 2 of SA 805 (Revised).

Key revisions in SA 800 and SA 805 as compared to extant SA 800 and SA 805 include the following:

Refinements to the requirements and corresponding application material in the standard, where applicable, to clarify the reporting responsibilities of the auditor in light of new concepts established by the new and revised Auditor Reporting Standards (i.e. SA 700, SA 705 and SA 706).
New application material relating to Going concern, key audit matters, Other information and inclusion of the name of the Engagement Partner.
Update illustrative auditor’s report that:

⇒Align with the reporting requirements in SA 700 (revised) in terms of the layout and content, including the ordering of elements (for example, the Opinion section is now positioned first) and use of heading and terminologies consistent with SA 700.

⇒Include more fulsome descriptions of the circumstances that are assumed for each of the illustrative auditor’s reports and indicate the applicability of the auditor’s reporting enhancements.

It is important to note that SA 800 makes reference to SA 700 for forming an opinion and reporting on special purpose financial statements, i.e. the auditor is required to apply the requirements in SA 700 (Revised).

Inclusion of restriction on use paragraph in auditor’s report

When an auditor’s report on special purpose financial statements is intended for the use of specified users, a restriction on use paragraph for the specific users’ needs to be included in the auditor’s report to avoid any unintentional reliance on our auditor’s report by others. For example, a financial reporting framework that is specified in a purchase agreement for the preparation of financial statements of an entity to be acquired may be acceptable, but only with respect to the needs of the parties to the agreement. In this case, the auditor restricts the use of the report to the parties to the agreement. The auditor informs management and those charged with governance, in writing, that the auditor’s report is not intended for use by non-specified parties. Such restriction on use paragraph is included in the auditor’s report as the auditor may not have any control over the distribution of the auditor’s report.

Emphasis of Matter paragraph

When preparing an auditor’s report, the auditor recognises that the special purpose financial statements may be used for purposes other than those for which they were intended; for example, a regulator may require certain entities to place the special purpose financial statements on public record. To avoid misunderstandings, auditors alert users of the auditor’s report by including an Emphasis of Matter paragraph explaining that the financial statements are prepared in accordance with a special purpose framework and, therefore, may not be suitable for another purpose. The auditor describes the purpose for which the financial statements are prepared and, if necessary, the intended users or refers to a note in the special purpose financial statements that contains that information.

Illustrative Emphasis of Matter — Basis of accounting

“We draw attention to Note X to the financial statements, which describes the basis of accounting. The financial statements are prepared to assist [Name of entity] to meet the requirements of [name of regulator]. As a result, the financial statements may not be suitable for another purpose. Our opinion is not modified in respect of this matter.”

The auditor may expand the Emphasis of Matter paragraph to include the restriction on use (instead of adding a separate Other Matter paragraph), and the heading in the auditor’s report can be modified accordingly (refer below).

Emphasis of Matter — Basis of accounting and restriction on use

We draw attention to Note X to the financial statements, which describes the basis of accounting. The financial statements are prepared to assist [Name of entity] in complying with the financial reporting provisions of the contract referred to above. As a result, the financial statements may not be suitable for another purpose. Our auditor’s report is intended solely for the information and use of [Name of entity] and [Name of other contracting party] and should not be used by parties other than [Name of entity] or [Name of other contracting party]. Our opinion is not modified in respect of this matter.

Inclusion of a Reference to the Auditor’s Report on the Complete Set of General Purpose Financial Statements

SA 800 states that the auditor may deem it appropriate to refer, in an Other Matter paragraph in the auditor’s report on the special purpose financial statements, to the auditor’s report on the complete set of general purpose financial statements or to matter(s) reported therein. For example, the auditor may consider it appropriate to refer in the auditor’s report on the special purpose financial statements to a Material Uncertainty Related to Going Concern section included in the auditor’s report on the complete set of general purpose financial statements.

Adequate disclosures in the financial statements

The management should ensure that the special purpose financial statements contain adequate disclosures to enable the intended users to understand the information contained in the financial statements.

Concluding remarks

Financial statements prepared under a special purpose framework or special circumstances are specific engagements that provide specific information relevant to a specified group of users. Therefore, it is imperative for the management and the auditor to understand the requirements of such specific users. As the audit reports of general purpose financial statements and special purpose financial statements are governed by two separate sets of auditing standards, i.e. SA 700 and SA 800, an auditor should understand the difference between the two frameworks. Also, the auditors should exercise professional judgement while accepting such engagements and issuing opinions, as it helps maintain stakeholder confidence in the assurance.

BCAJ Admin

Financial Reporting Dossier

A. KEY GLOBAL UPDATES

1. IASB: Improvements to Requirements for Provisions

On 12th November, 2024, the International Accounting Standards Board (IASB) has published consultation for improving the requirements for recognising and measuring provisions on company balance sheets.

The proposed amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets would clarify how companies assess when to record provisions and how to measure them. The proposals would most likely be relevant for companies that have large long-term asset decommissioning obligations or are subject to levies and similar government-imposed charges.

The proposed amendment is to improve the following areas:

Areas of IAS 37

Proposed amendment

(a) one of the criteria for recognising a provision— the requirement for the entity to have a present obligation as a result of a past event (the present obligation recognition criterion);

(a) change the timing of recognition of some provisions. The amendments would affect provisions for costs, often levies, that are payable only if an entity takes two separate actions or if a measure of its activity in a specific period exceeds a specific threshold. Provisions for some of these costs would be accrued earlier and progressively instead of at a later point in time, to provide more useful information to users of financial statement.

(b) Entities that are subject to levies and similar government-imposed charges are among those that are likely to be most significantly affected by the proposed amendments.

(b) the costs an entity includes in estimating the future expenditure required to settle its present obligation; and

(a) proposes to specify that this expenditure comprises the costs that relate directly to the obligation, which include both the incremental costs of settling that obligation and an allocation of other costs that relate directly to settling obligations of that type.

(a) some entities use risk-free rates whereas others use rates that include ‘non-performance risk’ — the risk that the entity will not settle the liability. Rates that include non-performance risk are higher than risk-free rates and result in smaller provisions.

(b) proposes to specify that an entity discounts a provision using a risk-free rate — that is, a rate that excludes non-performance risk

(c) The entities most affected are likely to be those with large long-term asset decommissioning or environmental rehabilitation provisions — typically entities operating in the energy generation, oil and gas, mining and telecommunications sectors

The IASB is inviting feedback on these amendments. The comment period is open until 12th March, 2025.

2. IASB: Proposal for Improvements for the Equity Method of Accounting

On 19th September, 2024, in the Exposure Draft of Equity Method of Accounting, the International Accounting Standards Board (IASB) proposed to amend IAS 28 Investments in Associates and Joint Ventures.

The Exposure Draft sets out proposed amendments to IAS 28 to answer application questions about how an investor applies the equity method to:

a) changes in its ownership interest on obtaining significant influence;

b) changes in its ownership interest while retaining significant influence, including:

i. when purchasing an additional ownership interest in the associate;

ii. when disposing of an ownership interest in the associate; and

iii. when other changes in an associate’s net assets change the investor’s ownership interest—for example, when the associate issues new shares;

c) recognition of its share of losses, including:

i. whether an investor that has reduced its investment in an associate to nil is required to ‘catch up’ losses not recognised if it purchases an additional interest in the associate; and

ii. whether an investor that has reduced its interest in an associate to nil recognises its share of the associate’s profit or loss and its share of the associate’s other comprehensive income separately;

d) transactions with associates — for example, recognition of gains or losses that arise from the sale of a subsidiary to its associate, in accordance with the requirements in IFRS 10 Consolidated Financial Statements and IAS 28;

e) deferred tax effects on initial recognition related to measuring at fair value the investor’s share of the associate’s identifiable assets and liabilities of the associate;

f) contingent consideration; and

g) the assessment of whether a decline in the fair value of an investment in an associate is objective evidence that the net investment might be impaired.

The Exposure Draft also sets out proposals to improve the disclosure requirements in IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements to complement the proposed amendments to IAS 28, along with a reduced version of those proposed disclosure requirements for entities applying IFRS 19 Subsidiaries without Public Accountability: Disclosures.

3. FASB: Proposed Clarifications to Share-Based Consideration Payable to a Customer.

On 30th September 2024, The Financial Accounting Standards Board (FASB) today published a proposed Accounting Standards Update (ASU) to improve the accounting guidance for share-based consideration payable to a customer in conjunction with selling goods or services.

The proposed changes are expected to improve financial reporting results by requiring revenue estimates to more closely reflect an entity’s expectations. In addition, the proposed changes would enhance comparability and better align the requirements for share-based consideration payable to a customer with the principles in Topic 606, Revenue from Contracts with Customers.

The proposal would affect:

a) the timing of revenue recognition for entities that offer to pay share-based consideration (for example, equity instruments) to a customer (or to other parties that purchase the entity’s goods or services from the customer) to incentivise the customer (or its customers) to purchase its goods and services.

b) revenue recognition would not be delayed when an entity grants awards that are not expected to vest. Specifically, the proposed amendments would clarify the requirements for share-based consideration payable to a customer that vest upon the customer purchasing a specified volume or monetary amount of goods and services from the entity.

4. FASB: Issue of Standard that Improves Disclosures About Income Statement Expenses

On 4th November, 2024, The Financial Accounting Standards Board (FASB) published an Accounting Standards Update (ASU) that improves financial reporting and responds to investor input by requiring public companies to disclose, in interim and annual reporting periods, additional information about certain expenses in the notes to financial statements.

The investors observed that expense information is critically important in understanding a company’s performance, assessing its prospects for future cash flows, and comparing its performance over time and with that of other companies. They indicated that more granular expense information would assist them in better understanding an entity’s cost structure and forecasting future cash flows.

The current proposal requires the companies in the notes to financial statements, specified information about certain costs and expenses at each interim and annual reporting period. Specifically, they will be required to:

Disclose the amounts of (a) purchases of inventory; (b) employee compensation; (c) depreciation; (d) intangible asset amortisation; and (e) depreciation, depletion, and amortisation recognised as part of oil- and gas-producing activities (or other amounts of depletion expense) included in each relevant expense caption.
Include certain amounts that are already required to be disclosed under current generally accepted accounting principles (GAAP) in the same disclosure as the other disaggregation requirements.
Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.
Disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses.

The amendments in the ASU are effective for annual reporting periods beginning after 15th December, 2026, and interim reporting periods beginning after 15th December, 2027. Early adoption is permitted.

5. FASB: Targeted Improvements to Internal-Use Software Guidance

On 29th October, 2024, the Financial Accounting Standards Board (FASB) today published a proposed Accounting Standards Update (ASU) to update the guidance on accounting for software.

The proposed ASU would remove all references to a prescriptive and sequential software development method (referred to as “project stages”) throughout Subtopic 350-40, Intangibles — Goodwill and Other — Internal-Use Software.

The proposed amendments would specify that a company would be required to start capitalising software costs when both of the following occur:

a) Management has authorised and committed to funding the software project.

b) It is probable that the project will be completed, and the software will be used to perform the function intended (referred to as the “probable-to-complete recognition threshold”).

In evaluating the probable-to-complete recognition threshold, a company may have to consider whether there is significant uncertainty associated with the development activities of the software.

The proposed amendments also would require a company to separately present cash paid for capitalised internal-use software costs as investing cash outflows in the statement of cash flows.

6. FRC: Thematic Review On IFRS 17 ‘Insurance Contracts’ Disclosures in the First Year of Application (5th September, 2024)

The Corporate Reporting Review (CRR) team of the Financial Reporting Council (FRC) carried out a review of disclosures in companies’ first annual reports and accounts following their adoption of IFRS 17 ‘Insurance Contracts’

They reviewed the annual reports and accounts of a sample of ten entities, three of which had also been included in our interim thematic. The companies selected covered both life and general insurers, including larger listed companies, as well as smaller and private insurers.

Overall, the quality of IFRS 17 disclosures provided by the companies in their sample of annual reports and accounts was good. While some further areas for improvement were identified in the annual reports and accounts in our sample, many of the issues identified related to areas that are commonly raise with
companies as part of their routine reviews, such as judgements and estimates, and alternative performance measures (APMs).

The companies are expected to consider the examples provided in the thematic review of good disclosure and opportunities for improvement and to incorporate them in their future reporting, where relevant and material. The companies should:

a) Continue to provide high quality disclosures, which meet the disclosure objective of IFRS 17 and enable users to understand how insurance contracts are measured and presented in the financial statements, while avoiding boilerplate language.

b) Ensure that accounting policies are sufficiently granular and provide clear, consistent explanations of accounting policy choices, key judgements and methodologies, particularly where IFRS 17 is not prescriptive.

c) Where sources of estimation uncertainty exist, provide information about the underlying methodology and assumptions made to determine the specific amount at risk of material adjustment and provide meaningful sensitivities and / or ranges of reasonably possible outcomes.

d) Provide quantitative and qualitative disclosures of the CSM, including how coverage units are determined, the movement in CSM during the period, and quantification of the expected recognition of CSM in appropriate time bands.

e) Provide appropriately disaggregated qualitative and quantitative information to allow users to understand the financial effects of material portfolios of insurance (and reinsurance) contracts.

f) Meet the expectations set out in our previous thematic reviews on the use of APMs, including commonly used measures such as premium metrics, and claims and expense ratios.

7. FRC: Thematic Review on Offsetting in the Financial Statements (5th September, 2024)

Offsetting (also known as ‘netting’) classifies dissimilar items as a single net amount.

Inappropriate application of the offsetting requirements can mask the full extent of the risks relating to a company’s income and expense, assets and liabilities, or cash flows.

IFRS Accounting Standards (IFRSs) require or permit offsetting only in specific situations. Determining when to offset can be challenging, because the requirements are complex and not all located in one place in IFRS.

Certain IFRSs contain explicit guidance on offsetting while others rely on the offsetting principles in IAS 1, ‘Presentation of Financial Statements’. Applying these requirements may require management to make significant judgements, especially when accounting for complex arrangements.
Although the requirements for offsetting are reasonably well established, the Corporate Reporting Review (CRR) team of the Financial Reporting Council (FRC) regularly identifies material errors in this area through its routine monitoring work, even in fairly straightforward scenarios.

The key findings include:

Cash flows should be presented gross, unless otherwise required or permitted.
Bank overdrafts and positive bank balances that form part of a cash pooling arrangement are offset in the statement of financial position only when there is an intention to exercise a legally enforceable right to set off period-end bank balances.
High quality disclosures are important where financial instruments have been offset or are subject to a master netting arrangement or similar agreement.
A reimbursement asset is required to be separately presented from the associated provision. Any reimbursement rights that satisfy the contingent asset requirements of IAS 37 should also be appropriately disclosed.

Companies are expected to consider the areas of good practice and opportunities for improvement and to incorporate them in their future reporting, where relevant and material. The companies should:

Disclose material accounting policy information relating to offsetting, ensuring all relevant aspects of any offsetting conditions are included.
Disclose significant judgements made in relation to offsetting income and expenses, assets and liabilities or cash inflows and outflows.
Present cash inflows and outflows within investing and financing activities on a gross basis in the cash flow statement, except in limited cases where netting is either required or permitted.
Consider whether to exclude overdrafts from cash and cash equivalents in the cash flow statement when the overdrafts remain overdrawn over several reporting periods.
Consider the terms and conditions of cash pooling arrangements when determining whether to offset positive bank balances and overdrafts that form part of such an arrangement in the statement of financial position. For example, whether they provide a legal right of set off that is currently enforceable, are notional or zero balancing arrangements and how the timing of any cash sweeps relates to the reporting date.
Demonstrate an intention at the reporting date to physically transfer the period-end balances of positive bank balances and overdrafts that form part of a cash pooling arrangement to one account to satisfy the intention criterion of the Offsetting Criteria in IAS 32.
Provide high quality offsetting disclosures where financial instruments: a) have been offset, or b) form part of a master netting arrangement or similar agreement.
Present a reimbursement asset separately from the associated provision. Any reimbursement rights that satisfy the contingent asset requirements of IAS 37 should be appropriately disclosed.

B. GLOBAL REGULATORS— ENFORCEMENT ACTIONS AND INSPECTION REPORTS

I. The Financial Reporting Council, UK

a) Sanctions against Ernst & Young LLP

The Financial Reporting Council (FRC) has issued a Final Settlement Decision Notice to Ernst & Young LLP (EY UK) under the Audit Enforcement Procedure and imposed sanctions in respect of a breach of the FRC’s Revised Ethical Standard 2019, namely exceeding the 70 per cent fee-cap on non-audit services. The breach relates to the Statutory Audit of the Financial Statements of Evraz plc for the year ended 31st December, 2021.

Evraz is a multi-national mining group, headquartered in Moscow but incorporated in London and listed as a FTSE 100 company. Its shares have been suspended from trading on the London Stock Exchange since March 2022. EY UK audited Evraz since it was listed in the UK in 2011 until its resignation as auditor in November 2022 following the imposing of new UK Government sanctions against the Russian Federation in response to the invasion of Ukraine.

The Revised Ethical Standard 2019, which reflects the requirements of UK law, imposes restrictions on the amount of non-audit services that an audit firm may provide to a Public Interest Entity. The cap on non-audit work is 70 per cent of the average of the fees paid to the audit firm over the previous three consecutive years. The cap applies at both Network level (i.e., members of the global EY network) and at Firm level (EY UK). EY UK tested the fee ratio at Network level but not at Firm level, and so accepted and carried out non-audit work in breach of the 70% fee cap. This breach was not intentional or dishonest.

Sanctions were imposed against all.

II. The Public Company Accounting Oversight Board (PCAOB)

a) PCAOB Sanctions De Visser Gray LLP for Violations of Rules and Standards Related to Quality Control

In 2019, PCAOB inspection staff conducted an inspection of the Firm. In connection with the inspection, PCAOB inspection staff informed the Firm of its findings regarding significant deficiencies in the Firm’s system of quality control. In particular, PCAOB inspection staff noted that the Firm had obtained its audit methodology and audit practice materials from external service providers. It informed the Firm that the guidance used was only in accordance with Canadian Auditing Standards (“CAS”), rather than PCAOB auditing standards.

In 2022, PCAOB inspection staff conducted another inspection of the Firm. In connection with the inspection, PCAOB inspection staff informed the Firm of its findings regarding significant deficiencies in its system of quality control related once again to its use of an external service provider and its audit practice materials. Specifically, PCAOB inspection staff informed the Firm that certain of this guidance, including Professional Engagement Guide (“PEG”) audit programs, was only in accordance with CAS, rather than PCAOB auditing standards and rules.

In addition, it noted that the Firm had not established policies and procedures to ensure that when engagement teams use the PEG audit programs on issuer audit work, they will address the requirements in PCAOB standards that were not addressed in the PEG audit programs. As a result, for certain audits, the Firm used audit methodology that failed to consider the requirements of PCAOB standards.

Despite being on notice of these deficiencies, the Firm continued to use the audit methodology and audit practice materials that were not compliant with PCAOB auditing standards and other regulatory requirements.

De Visser Gray therefore failed to establish policies and procedures sufficient to provide it with reasonable assurance that the work performed by the Firm and its engagement personnel complied with applicable professional standards and regulatory requirements, in violation of QC Section 20.

PCAOB fines the firm $60,000 and requires the firm to undertake remedial measures.

b) Deficiencies in Firm Inspection Reports:

BDO USA, P.C.

Deficiency: In an inspection conducted by PCAOB it has identified deficiencies in the financial statement audit related to Revenue and Warrants.

The firm’s internal inspection program had inspected this audit and reviewed these areas but did not identify the deficiencies below:

With respect to Revenue: The issuer recorded revenue at the time its services were provided to its customers. The firm did not perform any substantive procedures to test whether the performance obligation had been fully satisfied before revenue was recognised. The firm used information produced by the issuer in its testing of transaction prices, but did not perform any procedures to test, or test any controls over, the accuracy and / or completeness of certain of this information.
With respect to Warrants: During the year, the issuer issued warrants that were recorded as liabilities. The firm did not identify and evaluate misstatements in the fair value measurement of these warrants.

In connection with the inspection, the issuer re-evaluated its accounting for these warrants and concluded that misstatements existed that had not been previously identified. The issuer subsequently corrected these misstatements in a restatement of its financial statements, and the firm revised and reissued its report on the financial statements.

Grant Thornton LLP

Deficiency: In an inspection conducted by PCAOB it has identified deficiencies in the financial statement and ICFR audits related to Revenue, for which the firm identified a fraud risk, and Inventory.

With respect to revenue and inventory: In determining the extent to which audit procedures should be performed, the firm did not evaluate:-

i. the materiality of these business units in the current year and;

ii. whether the risks of material misstatement, including the fraud risk related to this revenue, that the firm identified for the business units subject to more extensive audit procedures also applied to these business units.

iii. The firm did not perform any substantive procedures to test revenue and inventory for these business units.

IT Controls: The firm selected for testing a control that included the issuer’s annual physical count of the inventory. The following deficiencies were identified:

i. The firm did not test the aspects of this control that addressed whether an accurate and complete count had occurred.

ii. The firm did not evaluate whether the issuer had appropriately investigated and resolved differences between the physical counts and the quantities recorded in the issuer’s inventory system.

iii. The firm did not evaluate whether the IT-dependent aspects of this control would be effective given the significant deficiency related to this IT system discussed above.

iv. The firm did not perform sufficient substantive procedures to test the existence of this inventory because the firm did not assess the effectiveness of the methods the issuer used to conduct its inventory counts.

III. The Securities Exchange Commission (SEC)

a) Charges for Negligence in FTX Audits and for Violating Auditor Independence Requirements (17th September, 2024)

The SEC alleges that Prager misrepresented its compliance with auditing standards regarding FTX. According to the SEC’s complaint, from February 2021 to April 2022, Prager issued two audit reports for FTX that falsely misrepresented that the audits complied with Generally Accepted Auditing Standards (GAAS). The SEC alleges that Prager failed to follow GAAS and its own policies and procedures by, among other deficiencies, not adequately assessing whether it had the competency and resources to undertake the audit of FTX. According to the complaint, this quality control failure led to Prager failing to comply with GAAS in multiple aspects of the audit — most significantly by failing to understand the increased risk stemming from the relationship between FTX and Alameda Research LLC, a crypto hedge fund controlled by FTX’s CEO. Because Prager’s audits of FTX were conducted without due care, for example, FTX investors lacked crucial protections when making their investment decisions. Ultimately, they were defrauded out of billions of dollars by FTX and bore the consequences when FTX collapsed.

The SEC’s complaint charges Prager with negligence-based fraud. Without admitting or denying the SEC’s findings, Prager agreed to permanent injunctions, to pay a $745,000 civil penalty, and to undertake remedial actions, including retaining an independent consultant to review and evaluate its audit, review, and quality control policies and procedures and abiding by certain restrictions on accepting new audit clients. The settlement is subject to court approval.

The SEC’s complaint alleged that, between approximately December 2017 and October 2020, the Prager Entities improperly included indemnification provisions in engagement letters for more than 200 audits, reviews, and exams and, as a result, were not independent from their clients, as required under the federal securities laws.

b) Fraud: Now-defunct digital pharmacy Medly Health Inc. raised over $170 million based on fake prescriptions and fraudulently inflated revenue. (12th September, 2024)

The Securities and Exchange Commission charged now-defunct digital pharmacy startup, Medly Health Inc’s. co-founder and former CEO, Marg Patel, former CFO, Robert Horowitz, and former Head of Rx Operations, Chintankumar Bhatt, with defrauding investors in connection with capital raising efforts that netted the company over $170 million.

According to the SEC’s complaint, from at least February 2021 through August 2022, Patel and Horowitz provided financial information to existing and prospective investors that fraudulently overstated Medly’s revenue due in part to millions of dollars’ worth of fake prescriptions entered into the company’s systems by Bhatt. The SEC’s complaint alleges, among other things, that Patel and Horowitz knew of, but failed to correct, significant accounting irregularities and were aware of several reports and complaints by employees that the revenue reported in Medly’s financial statements to investors was inaccurate.

The alleged facts of this case demonstrate significant corporate malfeasance. Startups that seek to raise capital from investors through deceitful conduct remain a continued focus for the Commission.

The SEC’s complaint, filed in the U.S. District Court for the Eastern District of New York, charges Patel, Horowitz, and Bhatt with violating the antifraud provisions of the securities laws and charges Bhatt with aiding and abetting Patel’s and Horowitz’s primary securities law violations. The complaint seeks permanent injunctions, civil money penalties, disgorgement, prejudgment interest, and officer-and-director bars against all three defendants.

BCAJ Admin

From Published Accounts

Compiler’s Note

Key Audit Matters regarding:

Uncertainties on outcome of investigation conducted by SEBI and MCA
Litigation for termination of merger co-operation agreement
Litigation with Star India Private Limited for the ICC Contract

ZEE Entertainment Enterprises Ltd (31^st March, 2024)

From Independent Auditors’ Report

Key Audit matters

Key Audit Matter

How our audit addressed the key audit matter

Uncertainties on the ultimate outcome of the ongoing investigation being conducted by the Securities and Exchange Board of India (‘SEBI’) and the inspection being conducted by the Ministry of Corporate Affairs under Section 206(5) of the Act

(Refer to notes 56 of the standalone financial statements)

The Company, one the current KMP and one of its subsidiaries is involved in the ongoing investigation being conducted by the Securities and Exchange Board of India (‘SEBI’) with respect to certain transactions in earlier years with the vendors of the Company and one of the subsidiary companies. Pursuant to the above, SEBI has issued various summons and sought comments / information / explanations from the Company, its subsidiary and certain directors (including former directors), KMPs who have provided or are in process of providing the information requested.

The Company had also received a follow-up communication from the Ministry of Corporate Affairs (‘MCA’)

for the ongoing inspection under section 206(5) of the Companies Act, 2013 against which the Company had submitted its response.

The management has informed the Board that based on its review of records of the Company / subsidiary, the transactions (including refunds) relating to the Company / subsidiary were against consideration for valid goods and services received.

The Board of Directors of the Company continues to monitor the progress of aforesaid matters and have also appointed Independent advisory committee to review the allegations.

Based on the available information, the management does not expect any material adverse impact on the Company/ Subsidiary with respect to the above and accordingly, believes that no adjustments are required to the accompanying statement.

Considering the uncertainty associated with the ultimate outcome of the investigation / findings of independent advisory and significance of management judgement involved in assessing the future outcome and determining the required disclosure, this was considered to be a key audit matter in the audit of the standalone financial statements.

Further, the aforementioned matter as fully explained in Note 56 to the standalone financial statements is also considered fundamental to the user’s understanding of the standalone financial statements.

Our audit included, but was not limited to, the following procedures:

• Obtained understanding of management process and controls relating to identification and evaluation of proceedings and investigations at different levels in the Company;

• Evaluated the design and tested the operating effectiveness of key controls around above process;

• Obtained and reviewed the various show cause notices, orders, letters, summons and follow up requests from SEBI and MCA;

• Obtained and evaluated the response, information and documents submitted by the Company, its subsidiary, directors and KMPs;

• Reviewed the documents in hand (agreements, MOUs, purchase orders, invoices, bank statements, Board approvals and other required approvals) for transactions highlighted in the show cause notice and summons at Company/subsidiary level;

• Reviewed the work performed by Internal auditors on the agreed scope;

• Verified the conclusion of the erstwhile auditors and internal auditors including Advisory report submitted by SEBI based on Examination carried out in earlier years on the same transactions in earlier years;

• Obtained and evaluated the scope of work agreed with Independent Advisory Committee and the conclusions of the committee;

• Reviewed the legal opinion obtained by the management on the ongoing regulatory actions against the Company concluding that the investigation is at fact finding stage and no conclusion has been formed; and

• Evaluated the adequacy of disclosures given in the standalone financial statements with regard to regulatory action.

(ii)

Litigation for termination of Merger Co-operation agreement (Refer notes 30 and 55 of the standalone financial statements)

The Board of Directors of the Company, on 21st December, 2021, had approved the Scheme of Arrangement under Sections 230 to 232 of the Companies Act, 2013 (Scheme), whereby the Company and Bangla Entertainment Private Limited (BEPL) an affiliate of Culver Max Entertainment Private Limited (Culver Max). Both the parties had been engaged in the process of obtaining the necessary approvals for completing the merger. The Company has incurred expenses aggregating to ` 2,784 million during the year (and aggregating to ` 4,618 million upto date) pursuant to such scheme of merger which have been disclosed under exceptional items in the relevant period.

However, on 22nd January, 2024, Culver Max and BEPL have issued a notice to the Company purporting to terminate the Merger co-operation Agreement (‘MCA’) and sought termination fee of USD 90,000,000 (United States Dollars Ninety Million) and alleged breaches by the Company of the terms of the MCA, they have also initiated arbitration for the same before the Singapore International Arbitration Centre (SIAC) and is currently pending as at reporting date.

The Management, based on legal tenability, progress of the arbitration and relying on the legal opinion obtained from independent legal counsel has determined that the above claims against the Company including towards termination fees is not tenable and does not expect any material adverse impact on the Company with respect to the above and accordingly, no adjustments are required to the accompanying standalone financial statement.

and needs careful evaluation and significant judgement to be applied by the management, this matter is considered to be a key audit matter for the current period audit. Further, the aforementioned matter as fully explained in Note 55 to the standalone financial statements is also considered fundamental to the user’s understanding of the standalone financial statements.

Our audit included, but was not limited to, the following procedures:

• Obtained understanding of management process and controls relating to implementation of the Merger Scheme and evaluated the design and tested the operating effectiveness of key controls around above process;

• Obtained and reviewed the terms and conditions mentioned in the MCA and Company’s compliance position with those terms and conditions;

• Obtained and reviewed the correspondence (including termination notice, arbitration notice, replies, NCLT filings, SIAC filings) between the Company, Culver Max and BEPL to corroborate our understanding of the matter;

• Reviewed the legal opinion from independent legal counsel obtained by the management with respect to termination of MCA;

• Assessed management decision to continue to classify the excluded entities in the MCA as Non-current assets held for sale in accordance with Ind AS 105 – Non-Current Assets Held for Sale and Discontinued Operations on its intention to continue with merger;

• Tested on sample basis the merger cost recorded as exceptional items in the standalone financial statements; and

• Evaluated the adequacy of disclosures given in the standalone financial statements with regard to litigation.

(iii)

Litigation with Star India Private Limited for the ICC Contract (Refer notes 37 of the standalone financial statements)

On 26^th August, 2022, the Company had entered into an agreement with Star India Private Limited (“Star”) for setting out the basis on which Star would be willing to grant sub-license rights in relation to television broadcasting rights of the International Cricket Council’s (ICC) Men’s and Under 19 (U-19) global events for a period of four years (ICC 2024-2027) on an exclusive basis (‘Alliance Agreement’). The performance of the Alliance Agreement was subject to certain conditions precedent including submission of financial commitments, provision of bank guarantee and corporate guarantee and pending final ICC approval for sub-licensing to the Company.

Till date, the Company has accrued ` 721 million for Bank Guarantee Commission and interest expenses for its share of Bank Guarantee and Deposit as per the alliance agreement.

During the year, Star has sent letters to the Company through its legal counsel alleging breach of the Alliance agreement on account of non-payment of dues for the rights in relation to first instalment of the rights fee aggregating to USD 203.56 million (` 16,934 million) along-with the payment for Bank Guarantee commission and deposit interest aggregating ` 170 million and financial commitments including furnishing of corporate guarantee/ confirmation as stated in the Alliance Agreement.

On 14^th March, 2024, Star initiated arbitration proceedings against the Company under the Arbitration Rules of the London Court of International Arbitration and sought to specific performance of the Alliance Agreement (or alternatively, to pay damages).

Based on the legal advice, the management believes that Star has not acted in accordance with the Alliance Agreement, and has failed to obtain necessary approvals, execution of necessary documentation and agreements. The management also believes that Star by its conduct has breached the Alliance Agreement and is in default of terms thereof and consequently, the contracts stands repudiated and accordingly, the Company does not expect any material adverse impact with respect to the above and hence no adjustments were required to the accompanying standalone financial statements.

Considering the amounts involved are material and the application of accounting principles as given under Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, in order to determine the amounts to be recognised as liability or to be disclosed as a contingent liability or not, is inherently subjective and needs careful evaluation and significant judgement to be applied by the management, this matter is considered to be a key audit matter for the current period audit.

Further, the aforementioned matter as fully explained in Note 37 to the standalone financial statements is also considered fundamental to the user’s understanding of the standalone financial statements.

Our audit included, but was not limited to, the following procedures:

• Obtained an understanding of the Alliance agreement along with the conditions mentioned therein and management’s compliance with those conditions;

• Obtained and reviewed the correspondence between the Company and Star along with the letters sent through legal counsel and the arbitration application filed;

• Evaluated the response received from the external legal counsel to ensure that the conclusions reached are supported by sufficient legal rationale;

• Involved Auditor’s expert to corroborate conclusions reached by the external legal counsel;

• Verified the invoices received for interest cost on deposits and bank guarantee and also verified the payment made by the Company against those invoices; and

Evaluated the adequacy of disclosures given in the standalone financial statements with regard to litigation.

From Notes to Financial Statements

EXCEPTIONAL ITEMS

#During the year, as part of the restructuring, the employee termination related cost aggregating to `220 Million have been recorded as an exceptional item.

The Company has accounted R2,564 Million (R1,762 Million) for certain employee and legal expenses pertaining to proposed Scheme of Arrangement (refer note 55).

Previous Year

The Company had settled the dispute with Indian Performing Rights Society Limited (IPRS) in relation to the consideration to be paid towards royalty for the usage of literary and musical works. On 6^th March, 2023, the Company entered into the agreement with IPRS for settling its old disputes in light of the impending merger. The agreement entails settlement of the dues for the period 1^stApril, 2018 to 31^st March, 2023. Accordingly, all the legal cases and proceedings filed by IPRS at various forums stands withdrawn.

The Company recorded an additional liability of `270 Million pertaining to earlier years as an ‘Exceptional Item’ by virtue of this settlement.

*In an earlier year, the Company had purchased 650 unlisted, secured redeemable non-convertible debentures (NCDs) of Zee Learn Limited (ZLL or issuer) guaranteed by the Company for an aggregate amount of `445 Million. The entire NCD were to be redeemed in phased manner by 31^st March, 2024. The principal outstanding is `255 Million.

National Company Law Tribunal (NCLT), Mumbai bench has admitted Corporate Insolvency petition under Section 7 of The Insolvency and Bankruptcy Code filed by Yes Bank Limited against ZLL vide its Order dated 10^th February, 2023 which was subsequently stayed by National Company Law Appellate Tribunal (NCLAT). On account of the uncertainties with respect to recoverability of the balances and delays during the year in receipt of instalments, the Company had made provision for the principal outstanding during year ended 31^st March, 2023 and has disclosed same as part of ‘Exceptional items’.

On 26^th August, 2022, the Company had entered into an agreement with Star India Private Limited (‘Star’) for setting out the basis on which Star would be willing to grant sub-license rights in relation to television broadcasting rights of the International Cricket Council’s (ICC) Men’s and Under 19 (U-19) global events for a period of four years (ICC 2024-2027) on an exclusive basis (Alliance Agreement). The Company / Board had identified this acquisition of strategic importance ensuring the Company is present in all 3 segments of the media and entertainment business. The performance of the Alliance Agreement was subject to certain conditions precedent including submission of financial commitments, provision of bank guarantee and corporate guarantee and pending final ICC approval for sub-licensing to the Company.

Till date, the Company has accrued R721 Million for bank guarantee commission and interest expenses for its share of bank guarantee and deposit as per the Alliance Agreement.

During the year ended 31^st March, 2024, Star has sent letters to the Company through its legal counsel alleging breach of the Alliance agreement on account of non-payment of dues for the rights in relation to first instalment of the rights fee aggregating to USD 203.56 million (R16,934 Million) along with the payment for bank guarantee commission and deposit interest aggregating R170 Million and financial commitments including furnishing of corporate guarantee / confirmation as stated in the Alliance agreement. Based on the legal advice, the Management believes that Star has not acted in accordance with the Alliance Agreement and has failed to obtain necessary approvals, execution of necessary documentation and agreements. The Management also believes that Star by its conduct has breached the Alliance agreement and is in default of the terms thereof and consequently, the contract stands repudiated. The Company has already communicated to Star that the Alliance Agreement cannot be proceeded with for the reasons set out above and has also sought refund of R685 million paid to Star.

During the year ended 31^st March, 2024, Star initiated arbitration proceedings against the Company through its Notice of Arbitration dated 14^th March, 2024 (Arbitration Notice) by which it has sought specific performance of the Alliance agreement by the Company or in the alternative compensate Star for damages suffered which have not been quantified. The Company has taken necessary steps to defend Star’s claim in the Arbitration.

The Board continues to monitor the progress of aforesaid matter. Based on the available information and legal advice, the Management believes that the Company has strong and valid grounds to defend any claims. Accordingly, the Company does not expect any material adverse impact with respect to the above as in its view the contract has been repudiated and no adjustments are required to the accompanying statements.

The Board of Directors of the Company, at its meeting on 21^st December, 2021, had considered and approved the Scheme of Arrangement under Sections 230 to 232 of the Companies Act, 2013 (Scheme), whereby the Company and Bangla Entertainment Private Limited (BEPL) (an affiliate of Culver Max Entertainment Private Limited (Culver Max) (formerly known as Sony Pictures Networks India Private Limited) shall merge in Culver Max in accordance with terms of Merger Corporation Agreement (MCA). After receipt of requisite approvals / NOC’s from shareholders and certain regulators including NSE, BSE, SEBI, CCI, ROC, etc., the Scheme was sanctioned by the Hon’ble National Company Law Tribunal, Mumbai (NCLT) on 10^th August, 2023. Both the parties had been engaged in the process of obtaining the balance regulatory approvals, completion of closing formalities for the merger to be effective as per MCA.

Post expiry of the long stop date on 21^st December, 2023, as per the terms of the MCA, the Company initiated good faith discussions with Culver Max to agree on revised effective date. On 22^nd January, 2024, Culver Max and BEPL issued a notice to the Company purporting to terminate the MCA entered into by the parties in relation to the Scheme and have sought termination fee of USD 90,000,000 (United States Dollars Ninety Million) on account of alleged breaches by the Company of the terms of the MCA and initiated arbitration for the same before the Singapore International Arbitration Centre (SIAC).

Based on legal advice, during the year, the Company issued a reply to Culver Max and BEPL specifically denying any breach of its obligations under the MCA and reiterating that the Company has made all commercially reasonable efforts to fulfil its closing conditions precedents and obligations in good faith. The Company believes that the purported termination of the MCA is wrongful and the claim of termination fee by Culver Max and BEPL is legally untenable and the Company has disputed the same. The Company reserves its right to make claims including counter claims against Culver Max / BEPL for breaches of the MCA at the appropriate stage.

Further, Culver Max and BEPL sought emergency interim reliefs from an Emergency Arbitrator appointed by the SIAC requesting to injunct the Company from approaching the Hon’ble NCLT for implementation of the Scheme which was heard by SIAC and no relief was granted to Culver Max and BEPL vide the order rejected by the Emergency Arbitrator by an award dated 4^th February, 2024.

The Company had filed an application before the Hon’ble NCLT seeking directions to implement the Scheme as approved by the shareholders and sanctioned by the Hon’ble NCLT on 12^th March, 2024. Subsequent to the year end, the Company decided to withdraw the said application since despite all its efforts to implement the Scheme, Culver Max was opposing the same by filing multiple applications. Hon’ble NCLT has heard the application dated 17^th April, 2024, filed by the Company seeking to withdraw the implementation application, for which the order is reserved.

The Board of Directors continue to monitor the progress of aforesaid matters. Based on legal opinion, the management believes the above claims against the Company including towards termination fees are not tenable and does not expect any material adverse impact on the Company with respect to the above and accordingly, no adjustments are required to the accompanying statement.

The Securities and Exchange Board of India (SEBI) had passed an ex-parte interim order dated 12^th June 2023 and Confirmatory Order dated 14^th August, 2023 (SEBI Order) against one of the current KMP of the Company for alleged violation of Section 4(1) and 4(2)(f) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices (FUTP) relating to Securities Market) Regulations, 2003.

On 30^th October, 2023, the Hon’ble Securities Appellate Tribunal (SAT) set aside the above order passed by SEBI granting relief to the current KMP. The SAT order also recorded that the SEBI will continue with the investigation.

Pursuant to the above, SEBI has issued various summons and sought comments / information / explanation from Company, its subsidiary, directors under period of consideration and KMPs who have been providing information to SEBI from time to time, as requested.

With respect to the ongoing enquiry being conducted by SEBI, a writ petition challenging the same has been filed by an ex-director before the Hon’ble Bombay High Court against SEBI during the quarter wherein the Company has been impleaded as a respondent. The Company has filed its reply to the writ petition. The final adjudication of the petition is pending.

The management has informed the Board of Directors that based on its review of records of the Company / subsidiary, the transactions (including refunds) relating to the Company / subsidiary were against consideration for valid goods and services received.

On 23^rd February, 2024, the Company has constituted an “Independent Investigation Committee” (Committee) headed by and under the chairmanship of Former Judge, Allahabad High Court and comprising of 2 independent directors of the Company, to review the allegations against the Company with a view to safeguard interest of the shareholders against widespread circulation of misinformation, market rumours, etc. The Committee is currently in progress of taking necessary steps as per aforesaid terms of reference.

The Board of Directors continues to monitor the progress of aforesaid matters. Based on the available information the management does not expect any material adverse impact on the Company with respect to the above and accordingly, believes that no adjustments are required to the financial statements.

The Company had also received a follow-up communication from the Ministry of Corporate Affairs (MCA) for the ongoing inspection under section 206(5) of the Companies Act, 2013 against which the Company had submitted its response.

From Directors’ Report

Composite Scheme of Arrangement

The Board of Directors of the Company, at its meeting held on 21^st December, 2021 had considered and approved a Scheme of Arrangement under Sections 230 to 232 and other applicable provisions of the Companies Act, 2013, amongst the Company, Bangla Entertainment Private Limited (‘BEPL’) and Culver Max Entertainment Private Limited (formerly known as Sony Pictures Networks India Private Limited) (‘CMEPL’) (collectively, the ‘Parties’) and their respective shareholders and creditors (‘Scheme’). The Parties also executed a Merger Co-operation Agreement (‘MCA’) to record their mutual understanding and agreement in relation to the Scheme. The Scheme received the requisite approvals / no-objections from shareholders and regulatory authorities including Competition Commission of India (‘CCI’), Regional Director (Western Region), the BSE Limited (‘BSE’), National Stock Exchange of India Limited (‘NSE’) and Official Liquidator; and was sanctioned by the Hon’ble National Company Law Tribunal, Mumbai (‘NCLT’) vide its orders dated 10^th August, 2023, and 11^th August, 2023.

On 22^nd January, 2024, CMEPL and BEPL, (i) issued a notice to the Company purporting to terminate the MCA and seeking a termination fee of US$90 million on account of alleged breaches by the Company of the terms of the MCA; (ii) initiated arbitration against the Company before the Singapore International Arbitration Centre (‘SIAC’); (iii) sought emergency interim reliefs from an Emergency Arbitrator appointed by the SIAC.

On 23^rd January, 2024, the Company issued a reply to CMEPL and BEPL, denying the contents of their letter dated 22^nd January, 2024, and stating that the purported termination of the MCA was wrongful and the claim for termination fee was legally untenable. On 24^th January, 2024, the Company filed an application before the NCLT seeking directions to implement the Scheme as approved by the shareholders and sanctioned by the NCLT. On 4^thFebruary, 2024, the Emergency Arbitrator appointed by SIAC, passed an award rejecting the emergency interim reliefs sought by CMEPL and BEPL.

On 17thApril, 2024, the Company based on legal advice filed an application before the NCLT seeking to withdraw its earlier application for implementation of the Scheme. On 23^rd May, 2024, based on legal advice, the Company issued a notice to CMEPL and BEPL, terminating the MCA on account of their non-compliance/ omission to fulfil their obligations and hence, their breach of the MCA. On 24^th June, 2024, the NCLT allowed the application filed by the Company to withdraw its application seeking implementation of the Scheme with liberty to the Parties to pursue their respective remedies as and when warranted and in accordance with law.

Meanwhile, on 22^nd April, 2024, a three-member arbitral tribunal (‘Tribunal’) was constituted by SIAC. On 27^th July, 2024, the Company filed an application before the Tribunal seeking certain directions in relation to the arbitration proceedings. While the disputes between the Parties were pending before the Tribunal, on 27^th August, 2024, pursuant to approval of the Board of Directors of the Company, the Company entered into a Settlement Agreement with CMEPL and BEPL, inter alia, to (i) settle all disputes in relation to, arising out of or in connection with the Transaction Documents entered into by and amongst the Parties in respect of the Scheme, (ii) mutually terminate all such Transaction Documents, (iii) withdraw all application(s), claim(s), and / or counterclaim(s) before SIAC and relinquish all rights to file claim(s) and/or counterclaim(s) against each other in relation to and arising out of the Transaction Documents, including their termination and implementation, all claims for the US$90 million termination fee, damages, litigation and other costs incurred etc., and (iv) release each other from any and all claims in relation to the Transaction Documents entered into by the Parties in respect of the Scheme. The fact of the above settlement was also disclosed by the Company to the NSE and BSE on 27^th August, 2024.

On 29^th August, 2024, the Company filed an application before the NCLT seeking recall of the sanction order dated 10th August, 2023, and withdrawal of the Scheme. CMEPL and BEPL also filed a similar application seeking recall of the sanction order dated 11^th August, 2023, and withdrawal of the Scheme. Thereafter, on 30^th August, 2024, CMEPL and BEPL sent an email to the Registrar, SIAC, intimating SIAC that the Parties have entered into the Settlement Agreement, withdrawing their claim(s) and requesting that the Tribunal be discharged, and the arbitration proceedings be concluded. The Company also sent an email to the Registrar SIAC, confirming the contents of the above email sent by CMEPL and BEPL, relinquishing all rights to file claim(s) and / or counterclaim(s), withdrawing all pending application(s) and requesting SIAC to declare that the arbitration proceedings are concluded in light of the settlement. The above was also intimated by the Company to the BSE and NSE on 30^th August, 2024.

On 30^th August, 2024, CMEPL and BEPL also sent an email to the Tribunal informing them of the settlement between the parties and requesting the Tribunal to terminate the arbitration proceedings. The Company sent an email to the Tribunal on the same date, confirming the settlement.

On 30^th August, 2024, the Company also took the following steps in terms of the Settlement Agreement:

(i) sent an email to the CCI, attaching a letter dated 30^th August, 2024, informing the CCI that the MCA has been mutually terminated by the parties and the Company; (ii) sent a letter to the Ministry of Information and Broadcasting, Government of India (‘MIB’), informing the MIB that the MCA has been mutually terminated by the parties and therefore, the Scheme cannot be made effective; (iii) filed Form INC-28 with the Registrar of Companies, Mumbai (‘RoC’), informing the RoC that the Parties have mutually terminated the Transaction Documents entered into in connection with the Scheme and therefore, the Scheme cannot be made effective; and (iv) sent an email to the Collector of Stamps, Enforcement I, Mumbai (‘Stamp Authority’) attaching a letter dated 30^th August, 2024, informing them that the Scheme cannot be made effective. Similar intimations were also made by CMEPL and BEPL to the CCI, MIB, RoC and the Stamp Authority.

On 5^th September, 2024, the NCLT passed an order allowing the withdrawal of the Scheme and recalling the order dated 10^th August, 2023 by which the Scheme was sanctioned. On 17^th September, 2024, the Tribunal passed an order terminating the arbitration proceedings. Separately, on 9^th October, 2024, the NCLT passed an order in the application filed by CMEPL and BEPL allowing the withdrawal of the Scheme and recall of the order dated 11^th August, 2023.

Additionally, the appeals filed by Axis Finance Limited, IDBI Bank Limited, and IDBI Trusteeship Services Limited against the order dated 10^th August, 2023 were listed before National Company Law Appellate Tribunal (‘NCLAT’) on 20^th September, 2024. In view of the order passed by the NCLT on 5^th September, 2024, the Appellants sought permission to withdraw their respective appeals, which was allowed by the NCLAT and the appeals were dismissed as withdrawn by order dated 20^th September, 2024 passed by the NCLAT.

Separately, certain applications were filed by Phantom Studios India Private Limited (‘Phantom Studios’), a shareholder of the Company, seeking directions for implementation of the Scheme, and pending the disposal of its implementation application, restraining CMEPL and BEPL from taking actions contrary to the sanction of the Scheme. By order dated 9^th July, 2024, the Hon’ble NCLT reserved the aforesaid applications for orders.

Given that (i) the Company, CMEPL and BEPL have mutually terminated all Transaction Documents in relation to the Scheme; (ii) the arbitration proceedings have been terminated; and (iii) the sanction orders passed by the NCLT have been recalled and the Scheme withdrawn from the NCLT, the aforesaid legal proceedings have no impact whatsoever on the Company. Any pending proceedings are now infructuous in light of the aforesaid circumstances, and nothing survives therein.

BCAJ Admin

Segment Disclosures under Ind AS 108

Recently the IFRS Interpretations Committee (IFRIC) clarified on a few issues relating to segment disclosures required under Ind AS 108 Operating Segments.

An entity is required to report a measure of total assets and liabilities for each reportable segment, if such amounts are regularly provided to the chief operating decision maker (CODM). Further specific disclosures are required, of certain items, for each reportable segment, if those amounts are included in the measurement of the segment profit or loss, reviewed by the CODM or if those items are regularly provided to the CODM, even if those items were not included in measuring the segment profit or loss.

Paragraph 23 of Ind AS 108 which sets out the above requirement is reproduced below:

An entity shall report a measure of profit or loss for each reportable segment. An entity shall report a measure of total assets and liabilities for each reportable segment if such amounts are regularly provided to the chief operating decision maker. An entity shall also disclose the following about each reportable segment if the specified amounts are included in the measure of segment profit or loss reviewed by the chief operating decision maker, or are otherwise regularly provided to the chief operating decision maker, even if not included in that measure of segment profit or loss:

a) revenues from external customers;

b) revenues from transactions with other operating
segments of the same entity;

c) interest revenue;

d) interest expense;

e) depreciation and amortisation;

f) material items of income and expense disclosed in accordance with paragraph 97 of Ind AS 1, Presentation of Financial Statements;

g) the entity’s interest in the profit or loss of associates and joint ventures accounted for by the equity method;

h) income tax expense or income; and

i) material non-cash items other than depreciation and amortisation.

An entity shall report interest revenue separately from interest expense for each reportable segment unless a majority of the segment’s revenues are from interest and the chief operating decision maker relies primarily on net interest revenue to assess the performance of the segment and make decisions about resources to be allocated to the segment. In that situation, an entity may report that segment’s interest revenue net of its interest expense and disclose that it has done so.

IFRIC reiterated that paragraph 23 of Ind AS 108 requires an entity to disclose the specified amounts for each reportable segment when those amounts are:

included in the measure of segment profit or loss reviewed by the CODM, even if they are not separately provided to or reviewed by the CODM, or
regularly provided to the CODM, even if they are not included in the measure of segment profit or loss.

The other clarification provided was with respect to materiality in the context of segment disclosures.

Before we jump to the issue, let us first quote certain important paragraphs under Ind AS 1 Presentation of Financial Statements:

PARAGRAPH 7: MATERIALITY

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

Materiality depends on the nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements taken as a whole.

Information is obscured if it is communicated in a way that would have a similar effect for primary users of financial statements to omitting or misstating that information. The following are examples of circumstances that may result in material information being obscured: (a) information regarding a material item, transaction or other event is disclosed in the financial statements but the language used is vague or unclear; (b) information regarding a material item, transaction or other event is scattered throughout the financial statements; (c) dissimilar items, transactions or other events are inappropriately aggregated;(d) similar items, transactions or other events are inappropriately disaggregated; and (e) the understandability of the financial statements is reduced as a result of material information being hidden by immaterial information to the extent that a primary user is unable to determine what information is material.

Assessing whether information could reasonably be expected to influence decisions made by the primary users of a specific reporting entity’s general purpose financial statements requires an entity to consider the characteristics of those users while also considering the entity’s own circumstances.

PARAGRAPHS 30–31: AGGREGATION

30. Financial statements result from processing large numbers of transactions or other events that are aggregated into classes according to their nature or function. The final stage in the process of aggregation and classification is the presentation of condensed and classified data, which form line items in the financial statements. If a line item is not individually material, it is aggregated with other items either in those statements or in the notes. An item that is not sufficiently material to warrant separate presentation in those statements may warrant separate presentation in the notes.

30A When applying this and other Ind ASs an entity shall decide, taking into consideration all relevant facts and circumstances, how it aggregates information in the financial statements, which include the notes. An entity shall not reduce the understandability of its financial statements by obscuring material information with immaterial information or by aggregating material items that have different natures or functions.

31 Some Ind ASs specify information that is required to be included in the financial statements, which include the notes. An entity need not provide a specific disclosure required by an Ind AS if the information resulting from that disclosure is not material except when required by law. This is the case even if the Ind AS contains a list of specific requirements or describes them as minimum requirements. An entity shall also consider whether to provide additional disclosures when compliance with the specific requirements in Ind AS is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

PARAGRAPH 97: DISCLOSURE REQUIREMENTS

97 When items of income or expense are material, an entity shall disclose their nature and amount separately.

A question arises as to the meaning of ‘material items of income and expense’ in the context of paragraph 97 of Ind AS 1 as referenced in paragraph 23(f) of Ind AS 108.

MATERIAL ITEMS OF INCOME AND EXPENSE

Paragraph 23(f) of Ind AS 108 sets out one of the required ‘specified amounts’, namely, ‘material items of income and expense disclosed in accordance with paragraph 97 of Ind AS 1’. Paragraph 97 of Ind AS 1 states that ‘when items of income or expense are material, an entity shall disclose their nature and amount separately’.

Definition of ‘Material’

Paragraph 7 of Ind AS 1 defines ‘material’ and states ‘information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial reports make on the basis of those financial statements, which provide financial information about a specific reporting entity’.

Paragraph 7 of Ind AS 1 also states that ‘materiality depends on the nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements taken as a whole’.

Aggregation of information

Paragraphs 30–31 of Ind AS 1 provide requirements about how an entity aggregates information in the financial statements, which include the notes. Paragraph 30A of Ind AS 1 states that ‘an entity shall not reduce the understandability of its financial statements by obscuring material information with immaterial information or by aggregating material items that have different natures or functions’.

Applying paragraph 23(f) of Ind AS 108 – material items of income and expense

IFRIC clarified that, when Ind AS 1 refers to materiality, it is in the context of ‘information’ being material. An entity applies judgement in considering whether disclosing, or not disclosing, information in the financial statements could reasonably be expected to influence decisions users of financial statements make on the basis of those financial statements.

IFRIC clarified, in applying paragraph 23(f) of Ind AS 108 by disclosing, for each reportable segment, material items of income and expense disclosed in accordance with paragraph 97 of Ind AS 1, an entity:

a) applies paragraph 7 of Ind AS 1 and assesses whether information about an item of income and expense is material in the context of its financial statements taken as a whole;

b) applies the requirements in paragraphs 30–31 of Ind AS 1 in considering how to aggregate information in its financial statements

c) considers the nature or magnitude of information—in other words, qualitative or quantitative factors — or both, in assessing whether information about an item of income and expense is material; and

d) considers circumstances including, but not limited to, those in paragraph 98 of Ind AS 1.

Furthermore, paragraph 23(f) of Ind AS 108 does not require an entity to disclose by reportable segment each item of income and expense presented in its statement of profit or loss or disclosed in the notes. In determining information to disclose for each reportable segment, an entity applies judgement and considers the core principle of Ind AS 108 — which requires an entity to disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.

BCAJ Admin

Audit Trail Compliance in Accounting Software

The article covers the Audit Trail requirements in accounting software as mandated by the companies act, 2013. It covers how the auditor can check the compliance of the Audit Trail requirements when the client is using the most used accounting software Tally. The Article covers the comparison of different Tally versions, user access for Audit trail compliance, Frequently Asked Questions from Auditor’s perspective and action points by Auditors for the purpose of reporting. Let’s dive-in.

INTRODUCTION

In today’s digital landscape, maintaining the integrity and transparency of financial data is more crucial than ever. With increasing regulatory scrutiny, Companies must ensure compliance with audit trail requirements as mandated under the Companies Act, 2013. TallyPrime, a leading accounting software, offers a robust feature (called Edit Log) that facilitates the implementation of audit trails, enabling organisations to track changes and maintain comprehensive records of all transactions. This capability not only enhances accountability but also supports businesses in meeting their compliance obligations effectively.

As companies navigate the complexities of financial reporting and regulatory requirements, it is imperative for companies, as well as auditors, to understand how to leverage TallyPrime for audit trail compliance. This article will explore the significance of audit trails in TallyPrime, detailing the software’s features that support compliance, the steps necessary for effective implementation, various reports available for auditors, and best practices for maintaining an accurate audit trail.

We shall discuss the Audit trail compliance in TallyPrime by dissecting in following parts.

Audit Trail compliance requirements as per Companies Act, 2013
Overview of Audit Trail compliance in TallyPrime
Edit Log in TallyPrime
User Access in TallyPrime
Frequently Asked Questions
Conclusion

AUDIT TRAIL REQUIREMENTS AS PER THE COMPANIES ACT, 2013

The introduction of audit trail requirements under the Companies Act, 2013 marks a significant step towards enhancing transparency and accountability in corporate governance. Effective from 1^st April, 2023, these requirements apply to all companies, including small companies and not-for-profit organisations. Here’s an overview of the audit trail requirements and their implications. We will examine the Audit trail requirements from the software compliance perspective only.

Definition of Audit Trail

An audit trail is a chronological record that captures all transactions and changes made within an accounting system. This includes details such as:

When changes were made (date and time).
What data was changed (transaction reference)?
Who made the changes (user ID)?

This systematic recording is essential for tracing errors, ensuring compliance, and maintaining the integrity of financial records.

Applicability

The audit trail requirements apply to all types of companies registered under the Companies Act, including:

Private limited companies
Public limited companies
One Person Companies (OPCs)
Section 8 companies (not-for-profit)
Nidhi companies etc.

However, these requirements do not extend to
Limited Liability Partnerships (LLPs) or other non-company entities.

Key Requirements in Accounting Software

Mandatory Implementation: All companies (including small private limited companies) must use accounting software that has a built-in mechanism to record an audit trail for every transaction. This includes creating an edit log for each change made in the electronically maintained books of account.
Non-Disabling Feature: The audit trail feature must be configured in such a way that it cannot be disabled or tampered with. This ensures that the integrity of the audit trail is maintained throughout the financial year.

Compliance and Responsibilities

Management Responsibility: It is the responsibility of the management to implement the audit trail feature effectively. This includes ensuring that the software used for accounting complies with the audit trail requirements.
Auditor’s Role: Auditors must verify the implementation of the audit trail feature in accounting software and report on its effectiveness in their audit reports. They should also ensure that the audit trail is preserved as per statutory requirements.
Reporting Obligations: Auditors are required to report:

♦ Whether the company is using accounting software with an audit trail feature

♦ Whether this feature was operational throughout the year, and

♦ Whether the audit trail covers all transactions.

Overview of Audit Trail Compliance in TallyPrime

Considering the Audit Trail requirements, Tally has given “Edit Log” features in TallyPrime. The Edit Log feature in TallyPrime has been designed with the necessary controls in place to eliminate any scope of tampering with the trail of accounting transactions. These controls are designed as a default feature of the “TallyPrime Edit Log.”

The Edit Log feature is introduced in TallyPrime Edit Log Release 2.1 and TallyPrime Release 2.1. This means there are now 2 products of TallyPrime. One is called “TallyPrime Edit Log”, and the other is called “TallyPrime”. Both the products have the same set of features, including Edit Log. However, only the TallyPrime Edit Log meets the Audit Trail compliance requirements. (Note: Edit log feature is available in TallyPrime Release 2.1 and onwards.)

The following table helps to better understand the difference between “TallyPrime Edit Log” and “TallyPrime.”

Hence, as an auditor, the first task is to check whether the company is using “TallyPrime Edit Log” or “TallyPrime”. If the Company is using only “TallyPrime”, one can simply say it is not complying with the Audit trail requirements as mandated by the Companies Act. (Reason: In TallyPrime, the Edit Log can be disabled.)

How to check which product you are using?

There are various ways in which one can check which product he is using.

Once you start TallyPrime, Click on F1: Help → About→Under Product Information. Check the “Application”

In the case of TallyPrime, it shows “Application: TallyPrime.”

In the case of the TallyPrime Edit Log, it shows “Application: TallyPrime Edit Log (EL).”

2. When you start TallyPrime, check the top left-side corner of the screen.

3. Check the shortcut Icon of TallyPrime; if it shows the word “EL”, it is TallyPrime Edit Log

Edit Log in “TallyPrime Edit Log”

Having understood the different products of TallyPrime and how to check the product you are using, let us now discuss the Edit Log functionality.

Edit Log is a view-only (display) report that maintains track of all activities with your vouchers and masters, like creation, alteration, deletion, and so on,
without the need for any additional controls to restrict access. This means that at any given point, a user can ONLY view the Edit Log report to understand the trail of activities.

The underlying design principle of Edit Log enables users to view the logs and compare them with their previous version, thereby providing more specific insights on the updates done to the vouchers and masters. Additionally, if a user attempts to open the Edit Log using a TallyPrime non-Edit Log version, a log gets created keeping track of this activity. This helps auditors check if any user has opened the Edit Log in any other non-Edit Log version of TallyPrime. Such inbuilt controls designed in TallyPrime make the Edit Log data much more reliable and tamper-proof.

Edit log is available at 3 levels viz. Company level, Master Level, and entry (transaction) level.

Edit log for Company.

The Edit log report at the company level consists of all the activities in the Company data that may affect the existing Edit Logs for transactions and masters.

To view this report, the user needs to follow the below-mentioned steps:

Open the company data
Press Alt + K
Go to “Edit Log”

Once you go into the “Edit log” report at the company level, the sample report appears as follows:

By observing the above report, the auditor can know the various activities affecting the Tally data. E.g., In the above data, one can observe that data was moved from TallyPrime on 20^th November, 2024, at 15.21. Kindly note that the above is a sample report.

Edit Log for Masters

Edit log is provided for three masters. Ledgers, groups, and stock items. The activities such as creation, alteration, or deletion in these masters can change the financial reports in the company data. For other masters like cost center or payroll, an edit log is not available. The reason is that these masters do not affect the financial reports like Trial balance, Profit & Loss Account, and Balance sheet.

Let us take the example of a ledger and understand how to view the edit log.

One may be making changes in the ledgers as per requirement. Edit Log tracks all such changes made. One can view the details of changes made in the selected version of the ledger as compared to its previous version, which TallyPrime highlights in red text. Similarly, one can drill down to any version and view the comparison between it and its previous version.

Open the required Ledger.

Press Alt+G(Go To) → type or select Chart of Accounts and press Enter → select Ledger and press Enter.

The Ledger Alteration screen appears.

2. Press Alt+Q (Edit Log).

Alternatively, press Ctrl+O (Related Reports) →Edit Log and press Enter.

The Edit Log report displays the Version, Activity, Username, and Date & Time.

One can observe that the ledger was created by the user “Urmi” on 7-Feb-23, and the ledger was altered by the user “asap” on 20-Nov-24. If one clicks enter on “Altered”, it will show the detailed comparison of Version 1 of the ledger and Version 2 of the ledger, and differences shall be highlighted in Red text.

Edit log for the Groups and Stock item masters works in a similar manner.

Edit Log for Transactions

The Edit Log report for transactions provides you with an idea of the nature of the activity that a particular user performed at a specific time. This helps you monitor the activities and have better internal control over your Company data.

To access the edit log report of any transaction, one can go inside the transaction in Alter mode or view mode (Alt + Enter) and select “Related reports” from the right-side bar (Press Ctrl + O) and press enter on edit log.

The Edit Log reports for transactions (sample report) are shown below.

One can view the details of changes made in the selected version of the entry as compared to its previous version, which TallyPrime highlights in red text. Similarly, one can drill down to any version and view the comparison between it and its previous version.

Consolidated reports for Altered entries / Cancelled Entries / Deleted Entries

Many times, an auditor needs a list of entries that are altered or deleted during the period. This report is available in the daybook.

To view the report, follow the below steps:

1. Go to the daybook (from Gateway of Tally →Display more reports → Day book. Alternatively, the day book can be accessed from “Go To”)

2. Select the required period Alt + F2

3. Once the daybook report is open, click on “Basis of Values” or press Ctrl + B

4. The following screen appears

5. In the option “Show report for”, press enter and select “Altered Vouchers.”

6. Press enter and accept the screen

7. A list of altered entries shall appear

8. In the same way, if you select the option “Include Deleted Vouchers” as “Yes”, Along with altered entries, deleted transactions shall appear.

9. One can go inside the deleted entries and check the edit log in deleted entries also.

User-based Access

After understanding the Edit Log functionality in Tally, Let us now answer the “Who” part of the Audit trail requirement, i.e. Who made the changes (user ID).

Tally offers a comprehensive user access management system that allows businesses to define roles and permissions for different users on a need-to-know basis. This feature is crucial for maintaining control over who can view or modify financial data.

For Audit trail compliance, the company needs to ensure that user access is enabled and that all users are given distinct user IDs. This shall help in answering the “Who” part of the question i.e., who made the changes.

There are detailed configurations possible in user-based access in the company data, including restriction to view reports, passing entries based on nature of work or location, implementing password policy, and locking the data backdated, etc.; however, that can be discussed in a separate note. Here, we shall only discuss how the auditor can check whether the company has enabled user-based access or not. User-based access is discussed from the perspective of the audit trail requirements only.

Once you open the company data, click on Alt + K → Users and Passwords.

Once you enter the above report, a list of users and passwords shall appear. This will ensure that the company has activated user-based access.

Note: The above navigation is available only from the Admin login ID of the Tally data.

As an auditor, one should apply the audit techniques and check whether all the users who are required to access Tally data have been granted username and password.

FREQUENTLY ASKED QUESTIONS (FAQS)

These FAQs are designed based on the common queries faced by auditors.

(Caution: A few FAQs may sound basic to the more advanced users of Tally)

Q: Does Tally.ERP9 comply with the Audit trail requirements?

A: No, it does not comply with the Audit trail requirements.

Q: The client has done the customisation in Tally.ERP9, which reports on What, When, and Who of the Audit trail requirements? Does it comply with the Audit trail requirements?

A: No, it still does not comply with the Audit trail requirements. One of the key requirements of the accounting software is that the Audit trail features should be “non-disabling”. So even if some customisation is done in Tally.ERP9 for audit trail requirements does not comply with the requirements as per the Companies Act since any customisation done in Tally can always be disabled by the admin user.

Q: The client is using TallyPrime (Non-Edit Log version) and has enabled the edit log and has used it for the entire reporting period. Does it comply with the Audit trail requirements?

A: In the above scenario, although the entire audit trail is available for all the Masters and transactions, strictly speaking, it cannot be said that it is compliant with the audit trail requirements. One of the requirements of the Audit trail-enabled software is that the Audit trail feature cannot be disabled or tampered with. In case the
client is using TallyPrime (Non-Edit log version), the Edit log can be disabled. (Whether it is disabled or not is irrelevant).

Q: The client is using TallyPrime, and CA is using TallyPrime Edit Log. What if CA calls the data of the client and restores it in the TallyPrime Edit Log? Does it comply with the Audit trail requirements?

A: No, it does not comply with the Audit trail requirements. One of the requirements of an Audit trail is it should be operated throughout the reporting period. Hence it is not in compliance with the requirements.

Q: Do I need to buy a new license for the TallyPrime Edit Log?

A: No, the Same license works for both the products simultaneously, TallyPrime and TallyPrime Edit Log.

Q: Can we restrict users from viewing the Edit Log reports?

A: Yes, one can define the appropriate user access rights and restrict the users from viewing the Edit Log reports.

Q: If a company is using TallyPrime Edit Log, Can the Edit Log data be completely removed or deleted from the Company data?

A: No, it is not possible to remove or delete the Edit Log data of transactions and masters in the TallyPrime Edit Log Product.

Q: How is the Edit log created when we import the data from Excel to Tally?

A: Edit Log will show Created due to import along with date and time.

Q: How is the Edit log created when we sync the data from one Tally to another Tally?

A: Edit Log will show Created due to sync along with date and time.

Q: Are Tally Audit features and Edit Log features the same thing?

A: No, both are different features. Tally Audit is an old feature available in Tally.

Q: Can we use Tally Audit features and Edit Log features in the same company Tally data?

A: Yes, one can use both the features at the same time in the company data.

Q: Does the TallyPrime Edit Log provide one single report for all the changes made by the user?

A: No, it does not provide such a report, and it is also not required as per Audit trail compliance requirements. However, the said report can be customised. Alternatively, one can view the list of all altered vouchers or deleted vouchers from the daybook. To check what is altered at the entry-level, one needs to go inside the entry in alter mode or view mode (Alt + Enter) and check “Related reports”.

Q: Where can we learn more about the TallyPrime Edit log?

A: Tally has given on its website the details of the TallyPrime Edit Log. One can refer to the link “https://help.tallysolutions.com/tally-prime/edit-log/tracking-modifications/”

CONCLUSION

In the beginning, we understood the basic requirements of the Audit trail-enabled software. To summarise, the software used should be able to answer the following questions:

When changes were made (date and time)
What data was changed (transaction reference)
Who made the changes (user ID)

Apart from the above, it is required that the Audit trail features need to be mandatory, and they cannot be disabled or tampered with.

Also, it is the responsibility of the management to adopt and implement the accounting software that is compliant with the Audit trail requirements. Auditors’ responsibility is to verify and report whether the company has implemented such software or not in compliance with the Audit trail requirements.

When the company is using Tally as Accounting software, As an Auditor, one needs to check the following points before reporting:

The company is using the “TallyPrime Edit Log” and not “TallyPrime” or “Tally.ERP9”.
The company has been using the “TallyPrime Edit Log” from the beginning of the reporting period. (Check Edit Log for Company).
There is no migration of company data from/back in the “TallyPrime Edit log” during the period under Audit.
User access is enabled, and users are given a distinct user ID to access the company Tally data.

Once the above points are checked, the auditor shall be able to report confidently on Audit trail compliance requirements.

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE

Standard on Auditing (SA) 600 ‘Using the work of another Audior’ (issued in 2002 by ICAI) and revision thereof in view of changes in ISA 600 has been a matter of hot debate in last few weeks. NFRA has, besides issuing a consultation paper on 17^th September, 2024 for proposed revision of SA 600 (with detailed reasons for the change), also issued a circular on 3^rd October, 2024 for ‘Responsibilities of Principal Auditor and Other Auditors in Group Audits’. The circular is applicable on immediate basis and debate is on whether the same would apply to audits / reviews already completed / in progress.

In India, auditors have, so far, applying the existing SA 600 and SA 706, included an “Other matters” paragraph in their report, where reference is given to reliance placed on work of other auditors and details of the assets, revenues and cash flows for such reliance.

The compiler believes that based on the aforesaid NFRA circular and the revised SA 600 (when promulgated), the audit planning and reporting by the auditors can undergo a drastic change.

Given below are few instances of audit reporting on consolidated financial statements for the year ended 31^st March, 2024 in large companies having multiple subsidiaries, associates and join ventures. For ease of understanding, a summary table is given at end of each company (which is not part of the audit report).

TATA STEEL LIMITED

We did not audit the financial statements / financial information of fifteen subsidiaries, whose financial statements / financial information reflect total assets of ₹80,061.72 crores and net assets of ₹13,061.31 crores as at 31^st March, 2024, total revenue of ₹88,124.27 crores, total net (loss) after tax of ₹(19,506.59) crores, total comprehensive income (comprising of net loss and other comprehensive income) of ₹(22,934.77) crores and net cash flows amounting to ₹(7,738.62) crores for the year ended on that date, as considered in the consolidated financial statements. The consolidated financial statements / financial information of these subsidiaries also includes their step-down associate and companies jointly controlled entities constituting ₹15.66 crores and ₹28.58 crores respectively of the Group’s share of total comprehensive income for the year ended 31^st March, 2024. The consolidated financial statements also include the Group’s share of total comprehensive income (comprising of profit and other comprehensive income) of ₹75.05 crores for the year ended 31^st March, 2024, as considered in the consolidated financial statements, in respect of one associate company and three jointly controlled entities, whose financial statements / financial information have not been audited by us. These financial statements/financial information have been audited by other auditors whose reports have been furnished to us by the other auditors/Management, and our opinion on the consolidated financial statements insofar as it relates to the amounts and disclosures included in respect of these subsidiaries, associate company and jointly controlled entities and our report in terms of sub-section (3) of Section 143 of the Act including report on Other Information insofar as it relates to the aforesaid subsidiaries, associate company and jointly controlled entities, is based solely on the reports of the other auditors.

We did not audit the financial statements / financial information of thirteen subsidiaries, whose financial statements/financial information reflect total assets of ₹10,151.93 crores and net assets of ₹5,339.33 crores as at 31^st March, 2024, total revenue of ₹635.91 crores, total net profit after tax of ₹62.89 crores, total comprehensive income (comprising of net profit and other comprehensive income) of ₹182.74 crores and net cash flows amounting to ₹1.54 crores for the year ended on that date, as considered in the consolidated financial statements. The consolidated financial statements also include the Group’s share of net (loss) after tax and total comprehensive income (comprising of loss and other comprehensive income) of ₹(0.28) crores and ₹(0.28) crores respectively for the year ended 31^st March, 2024 as considered in the consolidated financial statements, in respect of three associate companies and one jointly controlled entity respectively, whose financial statements/financial information have not been audited by us. These financial statements / financial information are unaudited and have been furnished to us by the Management, and our opinion on the consolidated financial statements insofar as it relates to the amounts and disclosures included in respect of these subsidiaries, associate companies and jointly controlled entity and our report in terms of sub-section (3) of Section 143 (including Rule 11 of the Companies (Audit and Auditors) Rules, 2014) of the Act including report on Other Information insofar as it relates to the aforesaid subsidiaries, associate companies and jointly controlled entity, is based solely on such unaudited financial statements/financial information. In our opinion and according to the information and explanations given to us by the Management, this financial statements / financial information are not material to the Group.

In the case of one subsidiary, three associate companies and one jointly controlled entity, the financial statements / financial information for the year ended 31^st March, 2024, is not available. In absence of the aforesaid financial statements/financial information, the financial statements / financial information in respect of aforesaid subsidiary and the Group’s share of total comprehensive income of these associate companies and jointly controlled entity for the year ended 31^st March, 2024, have not been included in the consolidated financial statements. Accordingly, we do not report in terms of sub-section (3) of Section 143 (including Rule 11 of the Companies (Audit and Auditors) Rules, 2014) of the Act including report on Other Information insofar to the extent these relate to the aforesaid subsidiary, associate companies and jointly controlled entity. In our opinion and according to the information and explanations given to us by the Management, this financial statements / financial information are not material to the Group. Our opinion on the consolidated financial statements, and our report on Other Legal and Regulatory Requirements below, is not modified in respect of the above matters with respect to our reliance on the work done and the reports of the other auditors and the financial statements / financial information certified by the Management or not considered for the purpose of preparation of these consolidated financial statements.

Summary of above paras:

(₹in Crores)

Relationship with Holding Company	Audited/ unaudited	Number of entities	Total Assets	Total revenue	Net cash inflows/ (Outflows)
Subsidiaries	Audited	15	80,061.72	88,124.27	-7,738.62
Associate		1
Jointly controlled entity		1

Subsidiaries	Unaudited	13	10,151.93	635.91	1.54
Associates		3
Jointly controlled entity		1

Subsidiary	Data not available	1	Not available
Associates		3
Jointly controlled entity		1

As per consolidated financial statements of Holding Company (31^st March, 2024)			2,73,423.50	2,29,170.78	-5,047.76

RELIANCE INDUSTRIES LTD

The Consolidated Financial Statements include the financial statements / financial information of 197 subsidiaries, whose audited standalone / consolidated financial statements / financial information reflect total assets of ₹8,55,098 crore as at 31^st March, 2024, total revenues of ₹2,40,609 crore and net cash inflows amounting to ₹2,863 crore for the year ended on that date. The Consolidated Financial Statements also include the Group’s share of net profit of ₹37 crore for the year ended 31^st March, 2024, as considered in the Consolidated Financial Statements, in respect of 10 associates and 14 joint ventures. This financial statements / financial information have been audited by one of us either individually or jointly with other auditors.

We did not audit the financial statements / financial information of 143 subsidiaries, whose standalone / consolidated financial statements / financial information reflect total assets of ₹383,059 crore as at 31^st March, 2024, total revenues of ₹627,516 crore and net cash inflows amounting to ₹11,360 crore for the year ended on that date, as considered in the Consolidated Financial Statements. The Consolidated Financial Statements also include the Group’s share of net profit of ₹91 crore for the year ended 31^st March, 2024, as considered in the Consolidated Financial Statements, in respect of 77 associates and 19 joint ventures, whose financial statements / financial information have not been audited by us. These financial statements / financial information have been audited by other auditors whose reports have been furnished to us by the Management and our opinion on the Consolidated Financial Statements, in so far as it relates to the amounts and disclosures included in respect of these subsidiaries, joint ventures and associates, and our report in terms of sub-section (3) of Section 143 of the Act, in so far as it relates to the aforesaid subsidiaries, joint ventures and associates is based solely on the reports of the other auditors.

We did not audit the financial statements / financial information of 9 subsidiaries, whose standalone / consolidated financial statements / financial information reflect total assets of ₹43 crore as at 31^st March, 2024, total revenues of ₹35 crore and net cash outflows amounting to ₹98 crore for the year ended on that date, as considered in the Consolidated Financial Statements. The Consolidated Financial Statements also include the Group’s share of net profit of ₹259 crore for the year ended 31^st March, 2024, as considered in the Consolidated Financial Statements, in respect of 38 associates and 28 joint ventures, whose financial statements / financial information have not been audited by us. This financial statements / financial information are unaudited and have been furnished to us by the Management and our opinion on the Consolidated Financial Statements, in so far as it relates to the amounts and disclosures included in respect of these subsidiaries, joint ventures and associates, is based solely on such unaudited financial statements / financial information. In our opinion and according to the information and explanations given to us by the Management, this financial statements / financial information are not material to the Group.

Our opinion on the Consolidated Financial Statements above and our report on Other Legal and Regulatory Requirements below, is not modified in respect of the above matters with respect to our reliance on the work done and the reports of the other auditors and the financial statements / financial information certified by the Management.

Summary of above paras:

(₹in crores)

Relationship with Holding Company	Audited/ unaudited	Number of entities	Total Assets	Total revenue	Net cash inflows/ (Outflows)
Subsidiary	Audited by Principal Auditor	197	8,55,098.00	2,40,609.00	2,863.00
	Audited	143	3,83,059.00	6,27,516.00	11,360.00
	Unaudited	9	43.00	35.00	-98.00

Associates	Audited	77	Not available
Joint Ventures	Audited	19

Associates	Unaudited	38
Joint Ventures	Unaudited	28
As per consolidated financial statements of Holding Company (31^st March, 2024)			17,55,986.00	9,14,472.00	27,841.00

MAHINDRA & MAHINDRA LTD

We did not audit the financial statements of 109 subsidiaries, whose financial statements reflect total assets (before consolidation adjustments) of ₹146,449 crores as at 31^st March, 2024, total revenues (before consolidation adjustments) of ₹40,502 crores and net cash inflows (before consolidation adjustments) amounting to ₹406 crores for the year ended on that date, as considered in the consolidated financial statements. The consolidated financial statements also include the Group’s share of net profit after tax (and other comprehensive income) (before consolidation adjustments) of ₹391 crores for the year ended 31^st March, 2024, in respect of 24 associates and 18 joint ventures, whose financial statements have not been audited by us. These financial statements have been audited by other auditors whose reports have been furnished to us by the Management and our opinion on the consolidated financial statements, in so far as it relates to the amounts and disclosures included in respect of these subsidiaries, joint ventures and associates, and our report in terms of sub-section (3) of Section 143 of the Act, in so far as it relates to the aforesaid subsidiaries, joint ventures and associates is based solely on the reports of the other auditors. Our opinion on the consolidated financial statements, and our report on Other Legal and Regulatory Requirements below, is not modified in respect of the above matter with respect to our reliance on the work done and the reports of the other auditors.

The financial statements of 15 subsidiaries, whose financial statements reflect total assets (before consolidation adjustments) of ₹3,255 crores as at 31^st March, 2024, total revenues (before consolidation adjustments) of ₹2,777 crores and net cash outflows (before consolidation adjustments) amounting to ₹0 crores for the year ended on that date, as considered in the consolidated financial statements, have not been audited either by us or by other auditors. The consolidated financial statements also include the Group’s share of net profit after tax (and other comprehensive income) (before consolidation adjustments) of ₹90 crores for the year ended 31^st March, 2024, as considered in the consolidated financial statements, in respect of 8 associates and 6 joint ventures, whose financial statements have not been audited by us or by other auditors. These unaudited financial statements have been furnished to us by the Management and our opinion on the consolidated financial statements, in so far as it relates to the amounts and disclosures included in respect of these subsidiaries, joint ventures and associates, and our report in terms of sub-section (3) of Section 143 of the Act in so far as it relates to the aforesaid subsidiaries, joint ventures and associates, is based solely on such unaudited financial statements. In our opinion and according to the information and explanations given to us by the Management, these financial statements are not material to the Group. Our opinion on the consolidated financial statements, and our report on Other Legal and Regulatory Requirements below, is not modified in respect of this matter with respect to the financial statements certified by the Management.

Summary of above paras:

(₹in crores)

Relationship with Holding Company	Audited/ unaudited	Number of entities	Total Assets	Total revenue	Net cash inflows/ (Outflows)
Subsidiary	Audited by Principal Auditor	197	8,55,098.00	2,40,609.00	2,863.00
Subsidiary	Audited	143	3,83,059.00	6,27,516.00	11,360.00

Associates	Audited	77	Not available
Joint Ventures	Audited	19

Associates	Unaudited	38
Joint Ventures	Unaudited	28
As per consolidated financial statements of Holding Company (31^st March, 2024)			17,55,986.00	9,14,472.00	27,841.00

GRASIM INDUSTRIES LTD

a) The consolidated financial statements include the audited financial statements of:

i. 53 subsidiaries whose financial statements / financial information reflect total assets (before consolidation adjustments) of ₹2,82,585.45 crore as at 31^st March, 2024, total revenue (before consolidation adjustments) of ₹40,748.16 crore, and net cash outflow (before consolidation adjustments) of ₹158.42 crore for the year ended on that date, as considered in the consolidated financial statements, which have been audited singly by one of us or other auditors whose reports have been furnished to us by the management and our opinion on the consolidated financial statements, in so far as it relates to the amounts and disclosures included in respect of these subsidiaries, and our report in terms of sub-section (3) of Section 143 of the Act, in so far as it relates to the aforesaid subsidiaries, is based solely on the report of other auditors.

ii. 8 joint ventures and 8 associates whose financial statements / financial information include the Group’s share of total net profit after tax (before consolidation adjustments) of ₹250.43 crore for the year ended 31^st March, 2024, as considered in the consolidated financial statements, which have been audited singly by one of us or other auditors whose reports have been furnished to us by the management and our opinion on the consolidated financial statements, in so far as it relates to the amounts and disclosures included in respect of these joint ventures and associates, and our report in terms of sub-section (3) of Section 143 of the Act, in so far as it relates to the aforesaid joint ventures and associates, is based solely on the report of such auditors.

Our opinion on the consolidated financial statements, and our report on Other Legal and Regulatory Requirements below, is not modified in respect of above matters with respect to our reliance on the work done and the reports of the one of the joint auditors of the Parent and other auditors.

b) 2 of the joint venture is located outside India whose financial statements / financial information have been prepared in accordance with accounting principles generally accepted in their respective countries and which have been audited by other auditors under generally accepted auditing standards applicable in their respective countries. The Parent Company’s management has converted the financial statements of such joint ventures located outside India from accounting principles generally accepted in their respective countries to accounting principles generally accepted in India. We have audited these conversion adjustments made by the Parent Company’s management. Our opinion in so far as it relates to the balances and affairs of such joint venture located outside India is based on the report of other auditor and the conversion adjustments prepared by the management of the Parent and audited by us.

c) The consolidated financial statements include the unaudited financial statements / financial information of:

i. 6 subsidiaries, whose financial statements/ financial information reflect total assets (before consolidation adjustments) of ₹14.49 crore as at 31^st March, 2024, total revenue (before consolidation adjustments) of ₹Nil crore and net cash flows (before consolidation adjustments) of ₹1.92 crore for the year ended on that date, as considered in the consolidated financial statements.

ii. 5 joint ventures and 4 associates whose financial statements/ financial information reflect Group’s share of total net loss after tax (before consolidation adjustments) of ₹147.27 crore for the year ended 31^st March, 2024, as considered in the consolidated financial statements.

d) These unaudited financial statements/financial information have been furnished to us by the Management and our opinion on the consolidated financial statements, in so far as it relates to the amounts and disclosures included in respect of these subsidiaries, joint ventures and associate and our report in terms of sub-section (3) of Section 143 of the Act in so far as it relates to the aforesaid subsidiaries, joint ventures and associate, is based solely on such unaudited financial statements / financial information. In our opinion and according to the information and explanations given to us by the Management, this financial statements / financial information are not material to the Group. Our opinion on the consolidated financial statements, and our report on Other Legal and Regulatory Requirements below, is not modified in respect of above matter with respect to the financial statements/financial information certified by the Management.

Summary of above paras:
(₹in crores)

Relationship with Holding Company	Audited/ Unaudited	Number of entities	Total Assets	Total revenue	Net cash inflows/ (Outflows)
Subsidiaries	Audited	53	2,82,585.45	40,748.16	158.42
	Unaudited	6	14.49	–	1.92
Associates	Audited	8
Joint Ventures	Audited	8

Associates	Unaudited	4
Joint Ventures	Unaudited	5

As per consolidated financial statements of Holding Company (31^st March, 2024)			4,12,539.08	1,30,978.48	75.65

ITC LTD

We did not audit the financial statements and other financial information, in respect of twenty-four subsidiaries, whose financial statements include total assets of ₹8,009.91 crores as at 31^st March, 2024, and total revenues of ₹3,666.49 crores and net cash inflows of ₹43.60 crores for the year ended on that date. These financial statement and other financial information have been audited by other auditors, which financial statements, other financial information and auditor’s reports have been furnished to us by the management. The consolidated Ind AS financial statements also include the Group’s share of net profit of ₹27.61 crores for the year ended 31^st March, 2024, as considered in the consolidated Ind AS financial statements, in respect of nine associates and three joint ventures, whose financial statements, other financial information have been audited by other auditors and whose reports have been furnished to us by the management. Our opinion on the consolidated Ind AS financial statements, in so far as it relates to the amounts and disclosures included in respect of these subsidiaries, joint ventures and associates, and our report in terms of sub-section (3) of Section 143 of the Act, in so far as it relates to the aforesaid subsidiaries, joint ventures and associates, is based solely on the reports of such other auditors.

Certain of these subsidiaries are located outside India whose financial statements and other financial information have been prepared in accordance with accounting principles generally accepted in their respective countries and which have been audited by other auditors under generally accepted auditing standards applicable in their respective countries. The Holding Company’s management has converted the financial statements of such subsidiaries located outside India from accounting principles generally accepted in their respective countries to accounting principles generally accepted in India. We have audited these conversion adjustments made by the Holding Company’s management. Our opinion in so far as it relates to the balances and affairs of such subsidiaries located outside India is based on the report of other auditors and the conversion adjustments prepared by the management of the Holding Company and audited by us.

Summary of above paras:
(₹in crores)

Relationship with Holding Company	Audited/ unaudited	Number of entities	Total Assets	Total revenue	Net cash inflows/ (Outflows)
Subsidiary	Audited	24	8,009.91	3,666.49	43.60
Associate		9	Not Available
Joint Ventures		3	Not Available
As per consolidated financial statements of Holding Company (31^st March, 2024)			91,826.16	76,840.49	190.67

Our opinion above on the consolidated Ind AS financial statements, and our report on Other Legal and Regulatory Requirements below, is not modified in respect of the above matters with respect to our reliance on the work done and the reports of the other auditors.

INFOSYS LIMITED

The company has several subsidiaries and associates. There is no ‘other matters’ para in the Auditors’ report on Consolidated Financial Statements.

BCAJ Admin

Accounting for Coaching Fees

Educational institutions receive fees from students for an entire financial year, though the coaching is imparted over an academic year, which may be shorter, let’s say, 10 months, followed by a two-month vacation. An interesting question arises, whether the student fees are recognised equally over 10 months or 12 months. It appears there are mixed practices on how the fees are recognised. Whilst the fact pattern discussed herein relates to coaching or tuition fees, similar question arises in numerous other service industries, for example, sports and broadcasting services or provision of maintenance services in IT and construction industries. Both the views are discussed herein, followed by author’s view on the more appropriate view.

QUERY

With respect to an educational institution:

(a) Students attend the educational institution for approximately 10 months of the year (academic year) and have a summer break of approximately two months;

(b) During the summer break, the school’s academic staff take a four-week holiday and use the rest of the time:

(i) to wrap-up the school year just ended (for example, marking tests and issuing certificates); and

(ii) to prepare for the next school year (for example, administering re-sit exams for students who failed in the previous school year and developing schedules and teaching materials); and

(i) the academic staff continue to be employed by, and receive salary from, the educational institution but they provide no teaching services and do not undertake other activities relating to the provision of educational services;

(ii) non-academic staff of the educational institution provides some administrative support, for example, responding to email enquiries and requests for past records; and

(iii) the educational institution continues to receive and pay for services such as IT services and cleaning.

What should be the period over which the educational institution recognises revenue — that is, evenly over the academic year (10 months), evenly over the financial year (12 months) or a different period?

RESPONSE

Accounting Standard References

(These are provided in Annexure 1)

DISCUSSION

There are two differing views on the matter:
(View 1) General education revenue should be recognised over an academic year that starts and ends on dates determined by the school calendar (approximately 10 months).

Revenue from general education services should be recognised in accordance with Ind AS 115 Revenue from Contracts with Customers, paragraph 2, which requires an entity to “recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In the case under consideration, the promised service to be transferred to customers is the general education, and the consideration to which the entity expects to be entitled in exchange for this service is the tuition fees receivable from students. Ind AS 115, para. 31, states that “An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer.” Since the general education service is transferred over school semesters, related revenues should be recognised over that period (i.e., 10 months), as required by paragraphs 35–37.

The educational institution does not transfer to customers a significant good or service that is distinct or that can be integrated with other services as required by Ind AS 115 that are directly related to the contracted general education services during the summer vacation. The fact that a student remains enrolled in the school during the summer vacation or that a school maintains student files during that vacation does not constitute a performance.

The entity does not deliver during the summer vacation significant education services closely related to the general education service promised and delivered during the academic year. Further, an entity satisfies its promise to transfer the education service during the academic year independently of the services delivered during the summer vacation (if any); no part of the transaction price should be allocated to the vacation.

For the obligation of an entity to administer a re-sit exam for a student who fails in final exams, it is a rare case and is de minimis relative to the education service arrangement as a whole, and it may be ignored. Alternatively, an entity should be able to estimate the number of those students based on historical information and can allocate a portion of the transaction price received from contracts in respect of those students who are required to re-sit examinations, in proportion to its efforts to satisfy the performance obligation of administering the re-sit exam, normally at the beginning of the next school year.

The delivery of the general education service necessitates preparation activities before students coming back from their vacation and starting the school year (for example, preparation of classrooms and development of school schedules and work papers at the beginning of the school year). It, also, necessitates closing activities of the school year (for example, examination paper marking, determining results and preparing academic certificates). Hence, these activities can be seen as an integral part of the performance obligation (general education service) stated in the contract that is satisfied during the academic year. Consequently, they are not distinct and should not be treated as separate performance obligations.

Since the academic staff is contracted only to deliver the general education service over the school year, their remuneration during their vacation should be considered as a cost to be charged to the same period in which revenue from the related general education service is recognised (i.e., over the academic year, i.e., 10 months).

(View 2) General education revenue should be recognised on a straight line basis over the financial year, including the summer vacation after related academic year (12 months).

Para. 16 of Ind AS 115 requires an entity to recognise the consideration received from a customer as a liability until one of the events in paragraph 15 occurs; i.e., the contract has been terminated or the entity has no remaining obligations to the customer. In the case under consideration, the contract with the customer has not been terminated at the end of the school year. In addition, the contractual relationship and provided services are not restricted to teaching activities that are carried out inside classrooms and concluded at the end of the academic year. Rather, they include following services that are provided after the end of the academic year (throughout the financial year):

(a) Marking examinations
(b) Administering re-sit exams,
(c) Issuing certificates and announcing results
(d) Delivering certificates
(e) Delivering student (customer) files when requested

An entity is obligated to provide to customers above services throughout the financial year, not just by the end of the academic year. Hence, the contractual relationship and obligations of the entity towards a customer exist during the whole financial year. Para. 27(a) defines a good or service that is promised to a customer as a good or service that “the customer can benefit from on its own or…”. In the case under consideration, the assumption that the provided service is restricted to teaching activities that are concluded by the end of the academic year and the customer can benefit from such service on its own is not correct since the customer needs to receive, among other services, certificates and files which are delivered after the end of the academic year and throughout the whole financial year.

Applying paras. 29–30, the provided service is not restricted to teaching activities and it is inseparable from other services (certificates, examinations, etc.). Consequently, requirement in para. 30 applies (the entity accounts for all the goods or services promised in a contract as a single performance obligation).

Applying paras. 31–33 that require an entity to recognise revenue when the customer obtains control of the asset, the customer in the general education industry should receive the academic certificate and student files and move on to the following grade in the same or another educational institution, failing which the customer would not be able to obtain the service (control) in full.

In accordance with para. 33 that explains the use of an asset by and the transfer of benefits to a customer, to obtain benefits from the asset in the case under consideration, the student (customer) should receive the academic certificate and student file to deliver them to another education entity or use them in joining the labour market or enrolling in a university.

For all reasons above, teaching activities are not separable from subsequent services (certificates and files) and, consequently, teaching activities alone, without such services, do not enable the customer to obtain control of the asset.

CONCLUSION

Both Views 1 and 2 appear to be based on certain arguments that may find support in the standard. However, View 1 appears to be a more appropriate view, keeping in mind that the main service provided in the contract is the coaching of the students, and other things, such as correcting the papers, and providing a mark sheet, are incidental to the coaching services provided. Therefore, the author supports View 1 only.

ANNEXURE 1

Paragraph 2
…the core principle of this Standard is that an entity shall recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Paragraph 15
…the entity shall recognise the consideration received as revenue only when either of the following events has occurred: (a) the entity has no remaining obligations to transfer goods or services to the customer and all, or substantially all, of the consideration promised by the customer has been received by the entity and is non-refundable; or (b) the contract has been terminated and the consideration received from the customer is non-refundable.

Paragraph 16
An entity shall recognise the consideration received from a customer as a liability until one of the events in paragraph 15 occurs….

Paragraph 27
A good or service that is promised to a customer is distinct if both of the following criteria are met: (a) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct); and (b) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the good or service is distinct within the context of the contract).

Paragraph 29
Factors that indicate that an entity’s promise to transfer a good or service to a customer is separately identifiable (in accordance with paragraph 27(b) include, but are not limited to, the following: (a) the entity does not provide a significant service of integrating the good or service with other goods or services promised in the contract into a bundle of goods or services that represent the combined output for which the customer has contracted. In other words, the entity is not using the good or service as an input to produce or deliver the combined output specified by the customer; (b) the good or service does not significantly modify or customise another good or service promised in the contract; (c) the good or service is not highly dependent on, or highly interrelated with, other goods or services promised in the contract. For example, the fact that a customer could decide to not purchase the good or service without significantly affecting the other promised goods or services in the contract might indicate that the good or service is not highly dependent on, or highly interrelated with, those other promised goods or services.

Paragraph 30
If a promised good or service is not distinct, an entity shall combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. In some cases, that would result in the entity accounting for all the goods or services promised in a contract as a single performance obligation.

Paragraph 31
An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e., an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.

Paragraph 33
…Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by:

(a) using the asset to produce goods or provide services (including public services); (b) using the asset to enhance the value of other assets; ….

Paragraph 35
An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time if one of the following criteria is met: (a) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs (see paragraphs B3–B4); (b) the entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced (see paragraph B5); (c) or the entity’s performance does not create an asset with an alternative use to the entity (see paragraph 36) and the entity has an enforceable right to payment for performance completed to date (see paragraph 37).

Paragraph 36
An asset created by an entity’s performance does not have an alternative use to an entity if the entity is either restricted contractually from readily directing the asset for another use during the creation or enhancement of that asset or limited practically from readily directing the asset in its completed state for another use. The assessment of whether an asset has an alternative use to the entity is made at contract inception. After contract inception, an entity shall not update the assessment of the alternative use of an asset unless the parties to the contract approve a contract modification that substantively changes the performance obligation. Paragraphs B6–B8 provide guidance for assessing whether an asset has an alternative use to an entity.

Paragraph 37
An entity shall consider the terms of the contract, as well as any laws that apply to the contract, when evaluating whether it has an enforceable right to payment for performance completed to date in accordance with paragraph 35(c). The right to payment for performance completed to date does not need to be for a fixed amount. However, at all times throughout the duration of the contract, the entity must be entitled to an amount that at least compensates the entity for performance completed to date if the contract is terminated by the customer or another party for reasons other than the entity’s failure to perform as promised. Paragraphs B9–B13 provide guidance for assessing the existence and enforceability of a right to payment and whether an entity’s right to payment would entitle the entity to be paid for its performance completed to date.

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE

Accounting for real estate projects, joint development agreements and related inventory is governed by Ind AS 115. Companies follow varied policies for such accounting. Looking to the nature of activities in the industry and uncertainties, auditors also mention the above matters in Key Audit Matters in their reports. Given below are illustrations of disclosures in three large companies for the year ended 31st March, 2024 for the above.

DLF LIMITED

From Auditors’ Report

From Material accounting policies (extracts)

Revenue from contracts or services with customers and other streams of revenue

Revenue from contracts with customers is recognised when control of the goods or services is transferred to the customer at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company has generally concluded that it is the principal in its revenue arrangements because it typically controls the goods and services before transferring them to the customers.

The disclosures of significant accounting judgements, estimates and assumptions relating to revenue from contracts with customers are provided in note 2.2(bb).

i. Revenue from Contracts with Customers:

Revenue is measured at the fair value of the consideration received / receivable, taking into account contractually defined terms of payment and excluding taxes or duties collected on behalf of the government, and is net of rebates and discounts. The Company assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent. The Company has concluded that it is acting as a principal in all of its revenue arrangements.

Revenue is recognised in the statement of profit and loss to the extent that it is probable that the economic benefits will flow to the Company and the revenue and costs, if applicable, can be measured reliably.

The Company has applied a five-step model as per Ind AS 115 ‘Revenue from contracts with customers’ to recognise revenue in the standalone financial statements. The Company satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

a) The customer simultaneously receives and consumes the benefits provided by the Company’s performance as the Company performs; or

b) The Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or

c) The Company’s performance does not create an asset with an alternative use to the Company and the entity has an enforceable right to payment for performance completed to date.

For performance obligations where any of the above conditions is not met, revenue is recognised at the point in time at which the performance obligation is satisfied.

Revenue is recognised either at a point of time or over a period of time based on various conditions as included in the contracts with customers.

Point of Time:

Revenue from real-estate projects

Revenue is recognised at the Point in Time w.r.t. sale of real estate units, including land, plots, apartments, commercial units, development rights including development agreements as and when the control passes on to the customer which coincides with handing over of the possession to the customer.

Incremental cost of obtaining contract

The incremental cost of obtaining a contract with a customer is recognised as an asset if the Company expects to recover those costs subject to other conditions of the standard being met. These costs are charged to statement of profit and loss in accordance with the transfer of the property to the customer.

Over a period of time:

Revenue is recognised over period of time for following stream of revenues:

Revenue from Co-development projects

Co-development projects where the Company is acting as contractor, revenue is recognised in accordance with the terms of the co-developer agreements. Under such contracts, assets created do not have an alternative use for the Company, and the Company has an enforceable right to payment. The estimated project cost includes construction cost, development and construction material, internal development cost, external development charges, borrowing cost and overheads of such project.

The estimates of the saleable area and costs are reviewed periodically and effect of any changes in such estimates is recognised in the period in which such changes are determined. However, when the total project cost is estimated to exceed total revenues from the project, the loss is recognised immediately.

Construction and fit-out projects

Construction and fit-out projects where the Company is acting as contractor, revenue is recognised in accordance with the terms of the construction agreements. Under such contracts, assets created do not have an alternative use, and the Company has an enforceable right to payment. The estimated project cost includes construction cost, development and construction material and overheads of such project.

The Company uses cost-based input method for measuring progress for performance obligation satisfied over time. Under this method, the Company recognises revenue in proportion to the actual project cost incurred as against the total estimated project cost. The management reviews and revises its measure of progress periodically and is considered as change in estimates and accordingly, the effect of such changes in estimates are recognised prospectively in the period in which such changes are determined. However, when the total project cost is estimated to exceed total revenues from the project, the loss is recognised immediately.

As the outcome of the contracts cannot be measured reliably during the early stages of the project, contract revenue is recognised only to the extent of costs incurred in the statement of profit and loss.

Revenue from golf course operations

Income from golf course operations, capitation, sponsorship, etc., is fixed and recognised as per the management agreement with the parties, as and when Company satisfies performance obligation by delivering the promised goods or services as per contractual agreed terms.

Rental and Maintenance income

Revenue in respect of rental and maintenance services is recognised on an accrual basis, in accordance with the terms of the respective contract as and when the Company satisfies performance obligations by delivering the services as per contractual agreed terms.

Other operating income

Income from forfeiture of properties and interest from banks and customers under agreements to sell is accounted for on an accrual basis except in cases where ultimate collection is considered doubtful.

ii. Volume rebates and early payment rebates

The Company provides move in rebates / early payment rebates / down payment rebates to the customers. Rebates are offset against amounts payable by the customer and revenue to be recognised. To estimate the variable consideration for the expected future rebates, the Company estimates the expected value of rebates that is likely to be incurred in future and recognises the revenue net of rebates and the refund liability for expected future rebates.

Inventories

Land and plots other than area transferred to constructed properties at the commencement of construction are valued at lower of cost / as re-valued on conversion to stock and net realisable value. Cost includes land (including development rights and land under agreement to purchase) acquisition cost, borrowing cost if inventorisation criteria are met, estimated internal development costs and external development charges and other directly attributable costs.
Construction work-in-progress of constructed properties other than Special Economic Zone (SEZ) projects includes the cost of land (including development rights and land under agreements to purchase), internal development costs, external development charges, construction costs, overheads, borrowing cost if inventorisation criteria are met, development / construction materials and is valued at lower of cost / estimated cost and net realisable value.
In case of SEZ projects, construction work-in-progress of constructed properties includes internal development costs, external development charges, construction costs, overheads, borrowing cost if inventorisation criteria are met, development / construction materials and is valued at lower of cost / estimated cost and net realisable value.
Development rights represent amount paid under agreement to purchase land / development rights and borrowing cost incurred by the Company to acquire irrevocable and exclusive licenses / development rights in the identified land and constructed properties, the acquisition of which is either completed or is at an advanced stage. These are valued at lower of cost and net realisable value.
Construction / development material is valued at lower of cost and net realisable value. Cost comprises purchase price and other costs incurred in bringing the inventories to their present location and condition.
Stocks for maintenance facilities (including stores and spares) are valued at cost or net realisable value, whichever is lower.

Cost is determined on weighted-average basis.

Net realisable value is the estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale.

MACROTECH DEVELOPERS LIMITED

From Auditors’ Report

Key audit matters	How our audit addressed the key audit matter
Revenue Recognition for Real Estate Projects
Refer Note 1(III)(11) of standalone financial statements with respect to the accounting policies followed by the Company for recognising revenue from sale of residential and commercial properties. The Company applies Ind AS 115 “Revenue from contracts with customers” for recognition of revenue from sale of commercial and residential real estate, which is being recognised at a point in time / over the time depending upon the Company, satisfying its performance obligation under the contract with the customer, and the control of the underlying asset gets transferred to the customer. Significant judgement / estimation is involved in identifying performance obligations for revenue recognition under point in time and over the time methods. Determining when control of the asset underlying the performance obligation is transferred to the customer and estimating stage of completion, basis which revenue is recognised as per Ind AS 115, has been considered as a key audit matter	Our audit procedures in respect of this area, among others, included the following: • Read the Company’s revenue recognition accounting policies and evaluated the appropriateness of the same with respect to principles of Ind AS 115 and their application to the significant customer contracts; • Obtained and understood the Company’s process for revenue recognition including identification of performance obligations and determination of transfer of control of the property to the customer; • Evaluated the design and implementation and verified, on a test check basis, the operating effectiveness of key internal controls over revenue recognition, including controls around transfer of control of the property and calculation of revenue recognition, which is based on various factors including contract price, total budgeted cost and actual cost incurred; • Obtained and read the legal opinion taken by the Company and provided to us to determine timing when the control gets transferred in accordance with the underlying agreements. • Verified the sample of revenue contract for sale of residential and commercial units to identify the performance obligations of the Company under these contracts and assessed whether these performance obligations are satisfied over time or at a point in time based on the criteria specified under Ind AS 115; • Verified, on a test check basis, revenue transaction with the underlying customer contract, Occupancy Certificates (OC) and other documents evidencing the transfer of control of the asset to the customer based on which the revenue is recognised; • Verified, on a test check basis, budgeted cost of certain projects, actual cost incurred, balance cost to be incurred and recomputed stage of project completion based on which the revenue is recognised; and • Assessed the adequacy and appropriateness of the disclosures made in standalone financial statements in compliance with the requirements of Ind AS 115 ‘Revenue from contracts with customers’.
Inventory Valuation
Refer Note 1(III)(5) to the standalone financial statements which includes the accounting policies followed by the Company for valuation of inventory. The Company’s properties under development and completed properties are stated at the lower of cost and NRV. As of 31^st March, 2024, the Company’s properties under development and inventory of completed properties amount to ₹2,92,454 million and ₹34,883 million, respectively. Determination of the NRV involves estimates based on prevailing market conditions, current prices, and expected date of commencement and completion of the project, the estimated future selling price, cost to complete projects and selling costs. The cost of the inventory is calculated using actual land acquisition costs, construction costs, development-related costs and interest capitalised for eligible project. We have considered the valuation of inventory as a key audit matter on account of the significance of the balance to the standalone financial statements and involvement of significant judgement in estimating future selling prices and costs to complete the project.	Our audit procedures in respect of this area, among others, included the following: • Obtained an understanding of the Management’s process and methodology of using key assumptions for determining the valuation of inventory as at the year-end; • Evaluated the design and implementation and verified, on a test check basis, operating effectiveness of controls over preparation and update of NRV workings and related to the Company’s review of key estimates, including estimated future selling prices and costs of completion for property development projects; • Assessed the appropriateness of the selling price estimated by the management and verified the same on a test check basis by comparing the estimated selling price to recent market prices in the same projects or comparable properties; • Compared the estimated construction cost to complete the project with the Company’s updated budgets; and • Assessed the adequacy and appropriateness of the disclosures made in the standalone financial statements with respect to inventory in compliance with the requirements of applicable Indian Accounting Standards and applicable financial reporting framework.

From Material Accounting Policies

Revenue Recognition (extracts)

The Company has applied five-step model as set out in Ind AS 115 to recognise revenue in this financial statement. The specific revenue recognition criteria are described below:

i. Income from Property Development

Revenue is recognised on satisfaction of performance obligation upon transfer of control of promised goods (residential or commercial units) or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services.

The Company satisfies the performance obligation and recognises revenue over time, if one of the following criteria is met:

The customer simultaneously receives and consumes the benefits provided by the Company’s performance as the Company performs; or
The Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or
The Company’s performance does not create an asset with an alternative use to the Company and an entity has an enforceable right to payment for performance completed to date.

For performance obligations where any one of the above conditions is not met, revenue is recognised at the point in time at which the performance obligation is satisfied. Revenue is recognised either at the point of time or over a period of time based on the conditions in the contracts with customers. The Company determines the performance obligations associated with the contract with customers at contract inception and also determines whether they satisfy the performance obligation over time or at a point in time.

The Company recognises revenue for performance obligation satisfied over time only if it can reasonably measure its progress towards complete satisfaction of the performance obligation.

In respect of contracts with customers which do not meet the criteria to recognise revenue over a period of time, revenue is recognised at the point in time with respect to such contracts for sale of residential and commercial units as and when the control is passed on to the customers which is linked to the application and receipt of occupancy certificate.

Revenue is recognised net of discounts, rebates, credits, price concessions, incentives, etc. if any.

ii. Sale of Materials, Land and Development Rights

Revenue is recognised at the point in time with respect to contracts for sale of Materials, Land and Development Rights as and when the control is passed on to the customers.

iii. Others Operating Revenue

Revenue from facility management service is recognised at value of service on accrual basis as and when the performance obligation is satisfied

Inventories

Stock of Building Materials and Traded Goods is valued at lower of cost and NRV. Cost is generally ascertained on a weighted average basis.

Finished Stock is valued at lower of Cost and NRV.

Land and Property Development Work-in-Progress is valued at lower of estimated cost and NRV.

Cost for this purpose includes cost of land, shares with occupancy rights, Transferrable Development Rights, premium for development rights, borrowing costs, construction / development cost and other overheads incidental to the projects undertaken.

NRV is the estimated selling price in the ordinary course of business, less estimated cost of completion and the estimated cost necessary to make the sale.

SHRIRAM PROPERTIES LIMITED

From Auditors’ Report:

Key Audit Matters

Revenue recognition for real estate projects

The Company applies Ind AS 115 ‘Revenue from Contracts with Customers’ for recognition of revenue from real estate projects. Refer notes 1.2(g), 23 and 45 to the standalone financial statements for accounting policy and related disclosures.

For the sale of constructed properties, revenue is recognised by the Company as per the requirements of Ind AS 115 over a period of time and is being recognised in the financial year when sale deeds are registered with the revenue authorities of the prevailing State as the management considers that the contract becomes binding on both the parties only upon registering the sale deed, as until such registration, the customer has the right to cancel the contract without compensating the Company for the costs incurred along with a reasonable margin (as specified in Ind AS 115).

Significant judgments are required in identifying the contract obligations, determining when the obligations are completed and recognising revenue over a period of time. Further, for determining revenue using percentage of completion method, budgeted project cost is a critical estimate, which is subject to inherent uncertainty as it requires ascertainment of progress of the project, cost incurred till date and balance cost to be incurred to complete the project.

For revenue contract forming part of Joint Development Arrangements (JDA), the arrangement comprises sale of development rights in lieu of construction services provided by the Developer and transfer of constructed area and / or revenue sharing arrangement based on the standalone selling price, which is measured at the fair value of the estimated construction service. Significant estimates are used by the Company in determining the fair value of ‘non-cash consideration’, i.e., receipt of development rights in lieu of the construction service and recognising revenue using percentage of completion method.

Considering the significance of management judgement involved and the materiality of amounts involved, revenue recognition was identified as a key audit matter for the current year audit.

Our audit procedures included but were not limited to the following:

• Evaluated the appropriateness of accounting policy for revenue recognition of the Company in terms of principles enunciated under Ind AS 115;

• Evaluated the design and implementation of Company’s key financial controls in respect of revenue recognition around transfer of control and tested the operating effectiveness of such controls for a sample of transactions;

On sample basis, we have performed the following procedures in relation to revenue recognition from sale of constructed properties:

• Read, analysed and identified the distinct performance obligations in the customer contracts;

• Assessed management evaluation of determining revenue recognition from sale of constructed property over a period of time in accordance with the requirements under Ind AS 115;

• Inspected sale deeds evidencing the transfer of control of the property to the customer based on which revenue is recognised;

• Tested costs incurred and accrued to date on the balance sheet by examining underlying invoices and signed work orders and compared it with budgeted cost to determine percentage of completion of the project;

• Reviewed management’s internal budgeting approvals process, on a sample, for cost to be incurred on a project and for any changes in initial budgeted costs; and

• Discussed exceptions, if any, to the revenue recognition policy of the management and obtained appropriate management approvals and representations regarding the same.

For projects executed during the year through JDA, we have performed the following procedures on a sample basis:

• Evaluated estimates involved in determining the fair value of development rights in lieu of construction services in accordance with principles under Ind AS 115;

• Evaluated whether the accuracy of revenue recognised by the Company based on ratio of constructed area or revenue sharing arrangement as agreed in the revenue sharing arrangement as entered with the Developer over a period of time is in accordance with the requirements under Ind AS 115;

• Compared the fair value of the estimated construction service to the project cost estimates and mark up considered by the management; and

• Ensured that the disclosure requirements of Ind AS 115 have been complied with.

Revenue recognition in development management arrangements

The Company renders development management (DM) services involving multiple performance obligations such as Sales and Marketing, Project Management and Consultancy (PMC) services, Customer Relationship Management (CRM) Services and Financial Management services to other real estate developers pursuant to separate Development Management Arrangements executed with them.

Refer notes 1.2(g), 23 and 45 to the standalone financial statements for accounting policy and revenue recognised during the year.

The assessment of such services rendered to customers involves significant judgment in:

• Identifying different performance obligations;

• Allocating transaction price to these performance obligations;

• Assessing whether these obligations are satisfied over a period of time or at the point in time for the purposes of revenue recognition;

• Assessing whether the transaction price has a significant financing element; and

• Assessing for any liability arising on guarantee contracts entered by the Company.

Considering the significance of management judgements involved as mentioned above and the materiality of amounts involved, we have identified this as a key audit matter.

Our audit procedures included, but were not limited to the following:

• Evaluated the appropriateness of the accounting policy for revenue recognition of the Company in terms of principles enunciated under Ind AS 115;

• Evaluated the design and implementation of the Company’s key financial controls in respect of revenue recognition for DM contracts and tested the operating effectiveness of such controls for a sample of transactions;

On a sample of contracts, we have performed the following procedures in relation to revenue recognition in DM contracts:

• Read, analysed and identified the distinct performance obligations in these contracts

• Assessed the Management’s evaluation of identifying different performance obligations, allocating transaction price (adjusted with financing element) and determining timing of revenue recognition, i.e., over a period of time or at the point in time in accordance with the requirements under Ind AS 115;

• On a sample basis, inspected the sale agreements entered with respect to sale of units in DM projects;

• Recomputed the amount to be billed in terms of DM contract and compared that with amount billed and investigated the differences if any and held discussions with management;

• Reviewed communications between the Company and DM customers regarding construction progress for contract obligations that involve recognising revenue over a period of time; and

• For contracts modified during the period without change in the scope of services such as incentives, we have reviewed whether
the accounting for contract modification is made in accordance with the principles of Ind AS 115; and

• Ensured that the disclosure requirements of Ind AS 115 have been complied with.

Assessing the recoverability of advances paid for land purchase and refundable deposit paid under JDAs

As of 31^st March, 2024, the carrying value of land advance is R19,602 lakhs and refundable deposit paid under JDA is ₹4,914 lakhs.

Advances paid by the Company to the landowner / intermediary towards purchase of land is recognised as land advance under other assets
on account of pending transfer of the legal title to the Company, post which it is recorded as inventories.

Further, for land acquired under joint development agreement, the Company has paid refundable deposits for acquiring the development rights.

The aforesaid deposits and advances are carried at the lower of the amount paid / payable and net recoverable value, which is based on the management’s assessment which includes, among other things, the likelihood when the land acquisition would be completed, expected
date of completion of the project, sale prices and construction costs of the project.

Considering the significance of the amount and assumptions involved in assessing the recoverability of these balances, the aforementioned areas have been determined as
a key audit matter for the current
year audit.

Our audit procedures included, but were not limited to, the following procedures:

• Evaluated the design and implementation of the Company’s key financial controls in respect of recoverability assessment of the advances and deposits and tested the operating effectiveness of such controls for a sample of transactions;

• Obtained and tested the computation involved in the assessment of carrying value of advances;

• Obtained status of the project / land acquisition from the management and enquired for the expected realisation of deposit amount;

• Assessed the appropriateness and adequacy of the disclosures made by the management in accordance with applicable Ind AS.

Assessing the recoverability of carrying values of inventories

The accounting policies for Inventories are set out in Note 1.2 (h) to the Standalone financial statements.

As of 31^st March, 2024, inventory of the Company comprises properties held for development, properties under development, properties held for sale and as referred in note 10 to the standalone financial statements and represents 14 per cent of the Company’s total assets.

Inventory is valued at cost and NRV, whichever is less. In case of properties under development and properties held for sale, determination of the NRV involves estimates based on the prevailing market conditions, current prices, expected date of completion of the project, the estimated future selling price, cost to complete projects and selling costs. For NRV assessment, the estimated selling price is determined for a phase, sometimes comprising multiple units.

We have identified the assessment of the carrying value of inventory as a key audit matter due to the significance of the balance to the standalone financial statements as a whole and the involvement of estimates and judgement in the NRV assessment.

Our audit procedures included, but were not limited to, the following procedures:

• Assessed the appropriateness of the Company’s accounting policy by comparing with applicable Ind AS;

• Evaluated the design and implementation of the Company’s key financial internal controls related to testing recoverable amounts with carrying amount of inventory, including evaluating the Company’s management processes for estimating future costs to complete projects and tested the operating effectiveness of such controls for a sample of transactions. We carried out a combination of procedures involving inquiries and observations and inspection of evidence in respect of operation of such key controls;

• Performed re-computation of NRV and compared it with the recent sales or estimated selling price (usually contracted price) to test inventory units are held at the lower of cost and NRV;

• Compared the estimated construction costs to complete each project with the Company’s updated budgets; and

• Assessed the appropriateness and adequacy of the disclosures made by the management in accordance with applicable Ind AS.

FROM MATERIAL ACCOUNTING POLICIES

Revenue recognition (extracts)

Revenue from contracts with customers

Revenue from contracts with customers is recognised when control of the goods or services is transferred to the customer at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Revenue is measured based on the transaction price, which is the consideration, adjusted for discounts and other credits, if any, as specified in the contract with the customer. The Company presents revenue from contracts with customers net of indirect taxes in its statement of profit and loss.

The Company considers whether there are other promises in the contract that are separate performance obligations to which a portion of the transaction price needs to be allocated. In determining the transaction price, the Company considers the effects of variable consideration, the existence of significant financing components, non-cash consideration and consideration payable to the customer (if any).

a) The customer simultaneously receives and consumes the benefits provided by the Company’s performance as the Company performs; or

b) The Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or

c) The Company’s performance does not create an asset with an alternative use to the Company, and the entity has an enforceable right to payment for performance completed to date.

For performance obligations where any of the above conditions is not met, revenue is recognised at the point in time at which the performance obligation is satisfied.

Revenue is recognised either at a point of time or over a period of time based on various conditions as included in the contracts with customers.

i. Sale of constructed / developed properties

Revenue is recognised over the time from the financial year in which the registration of sale deed is executed based on the percentage-of-completion method (POC method) of accounting with cost of project incurred (input method) for the respective projects determining the degree of completion of the performance obligation.

The revenue recognition of real estate property under development requires forecasts to be made of total budgeted costs with the outcomes of underlying construction contracts, which further require assessments and judgments to be made on changes in work scopes and other payments to the extent they are probable and they are capable of being reliably measured. In case, where the total project cost is estimated to exceed total revenues from the project, the loss is recognised immediately in the Statement of Profit and Loss.

Further, for projects executed through joint development arrangements not being jointly controlled operations, wherein the landowner / possessor provides land and the Company undertakes to develop properties on such land and in lieu of landowner providing land, the Company has agreed to transfer certain percentage of constructed area or certain percentage of the revenue proceeds, the revenue from the development and transfer of constructed area / revenue sharing arrangement in exchange of such development rights / land is being accounted on gross basis on launch of the project. Revenue is recognised over time using input method, on the basis of the inputs to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation.

The revenue is measured at the fair value of the land received, adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the land received cannot be measured reliably, the revenue is measured at the fair value of the estimated construction service rendered to the landowner, adjusted by the amount of any cash or cash equivalents transferred. The fair value so estimated is considered as the cost of land in the computation of percentage of completion for the purpose of revenue recognition as discussed above.

For contracts involving sale of real estate unit, the Company receives the consideration in accordance with the terms of the contract in proportion of the percentage of completion of such real estate project and represents payments made by customers to secure performance obligation of the Company under the contract enforceable by customers. Such consideration is received and utilised for specific real estate projects in accordance with the requirements of the Real Estate (Regulation and Development) Act, 2016. Consequently, the Company has concluded that such contracts with customers do not involve any financing element since the same arises for reasons explained above, which is other than for provision of finance to / from the customer.

ii. Sale of services

Development management fees

The Company renders development management services involving multiple elements such as Sales and Marketing, PMC services, CRM Services and financial management services to other real estate developers. The Company’s performance obligation is satisfied either over a period of time or at a point in time, which is evaluated for each service under development management contract separately. Revenue is recognised upon satisfaction of each such performance obligation.

Administrative income

Revenue in respect of administrative services is recognised on an accrual basis, in accordance with the terms of the respective contract as and when the Company satisfies performance obligations by delivering the services as per contractual agreed terms.

iii. Other operating income

Income from transfer / assignment of development rights

The revenue from transfer / assignment of development rights is recognised in the year in which the legal agreements are duly executed and the performance obligations thereon are duly satisfied and there exists no uncertainty in the ultimate collection of consideration from customers.

Maintenance income

Revenue in respect of maintenance services is recognised on an accrual basis, in accordance with the terms of the respective contract as and when the Company satisfies performance obligations by delivering the services as per contractual agreed terms.

Others

Interest on delayed receipts, cancellation / forfeiture income and transfer fees, etc., from customers are recognised based upon underlying agreements with customers and when reasonable certainty of collection is established.

Unbilled revenue disclosed under other financial assets represents revenue recognised over and above the amount due as per payment plans agreed with the customers. Progress billings which exceed the costs and recognised profits to date on projects under construction are disclosed under other current liabilities. Any billed amount that has not been collected is disclosed under trade receivables and is net of any provisions for amounts doubtful of recovery.

Inventories

Properties held for development

Properties held for development represent land acquired for future development and construction and is stated at cost including the cost of land, the related costs of acquisition and other costs incurred to get the properties ready for their intended use.

Properties under development

Properties under development represent construction work in progress which are stated at the lower of cost and NRV. This comprises cost of land, construction-related overhead expenditure, borrowing costs and other net costs incurred during the period of development.

Properties held for sale

Completed properties held for sale are stated at the lower of cost and NRV. Cost includes cost of land, construction-related overhead expenditure, borrowing costs and other costs incurred during the period of development.

NRV is the estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale.

BCAJ Admin

Contingent Features and SPPI Test

IASB has amended IFRS 9 and IFRS 7 with respect to contingent features, which will take effect from reporting periods beginning on or after 1st January, 2026. We can expect similar amendments in Ind AS in the near term, probably taking effect from 1st April, 2026. The amendments provide some leeway, such that the SPPI test will be considered met even if there are contingent features in an instrument, that alter the contractual cash flows. The amendments were introduced to provide some relief in situations where contractual cash flows are altered because of reduction in carbon emissions. The amendments will apply to all contingent features including those relating to carbon emissions. In this article, the author has provided the existing requirements and the amendments in a very simplified question and answer format.

FINANCIAL ASSETS AND AMORTISED COST

Which are the financial assets that can be classified under the ‘amortised cost’ category?

A ‘debt instrument’ can be measured at the amortised cost if both the following conditions are met:

(a) The asset is held within a business model whose objective is to hold assets for collecting contractual cash flows, and

(b) Contractual terms of the asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

Financial assets included within this category are initially recognised at fair value plus transaction costs that are directly attributable to the acquisition of the financial asset and subsequently measured at amortised cost. The following diagram explains the classification requirements.

FVTOCI is Fair Value through Other Comprehensive Income.

FVTPL is Fair Value through Profit and Loss.

CONTRACTUAL CASH FLOWS

ANALYSIS — SPPI TEST

After assessing the business model, the entity should assess whether the asset’s contractual cash flows represent solely payments of principal and interest (SPPI). This test is also referred to as the ‘SPPI’ test.

What is the relevance of SPPI test for deciding classification of financial assets?

SPPI test is required to decide whether an instrument structured as ‘debt instrument’ actually has the ‘basic loan features’. Ind AS 109 allows amortisation or FVTOCI measurement categories only for the debt instruments which satisfy the SPPI test. All other debt instruments need to be classified as at FVTPL, irrespective of the business model.

The SPPI is designed to weed out financial assets on which the application of the effective interest rate (EIR) method either is not viable from a pure mechanical standpoint or does not provide decision useful information. Since the EIR is a mechanism to allocate interest over time, Ind AS 109 allows measurements requiring the use of this methodology only for the instruments having low variability such as traditional unleveraged loans and receivables and ‘plain vanilla’ debt instruments. Thus, the SPPI test is based on the premise that contractual cash flows should give the holder a return which is in line with a ‘basic lending arrangement’.

Are the terms ‘principal’ and ‘interest’ defined for SPPI test?

Ind AS 109 provides the following definitions to help management in making a preliminary assessment of whether contractual cash flows represent SPPI:

Principal: is the fair value of the financial asset at initial recognition. However, that principal amount may change over the life of the financial asset, e.g., if there are repayments of principal.

Interest: Is typically the compensation for the time value of money and credit risk. However, interest can also include consideration for other basic lending risks (for example, liquidity risk) and costs (for example, servicing or administrative costs) associated with holding the financial asset for a period of time, as well as a profit margin.

Consider that contractual provisions of a debt instrument contain clauses which may modify the cash flows of an instrument. How should an entity assess the impact of modifications? Does it mean that SPPI test will not be met?

Ind AS 109 requires that if contractual provisions of an instrument contain elements that modify the time value of money, the entity should compare the financial asset under assessment to a standard/ benchmark instrument without any modification in the time value of money. If cash flows of the two instruments are significantly different, the instrument under assessment fails the SPPI test. If the cash flows of the two instruments are not significantly different, the instrument with modified cash flows will also meet the SPPI test.

The standard clarifies that it will be not necessary for an entity to perform a detailed quantitative assessment if it is clear with little or no analysis that cash flows of the instrument under assessment and those of the benchmark instrument are or are not significantly different.

The standard does not provide any specific guidance or bright-lines to be used for deciding whether cash flows of two instruments are ‘significantly different’. This will require entities to exercise judgment. For example, less than 5 per cent difference in cash flows in each reporting period as well as cumulatively over the life of the asset may not be significant. However, 20 per cent difference either in a reporting period or cumulatively over the life of the asset is likely to be significant.

Is an entity required to consider all features of the instruments while performing SPPI test?

In performing SPPI test, an entity can ignore de minimis features and non-genuine features.

The de minimis threshold is about magnitude of modification. To be considered de minimis, the impact of feature on the cash flows needs to be de minimis in each reporting period as well as cumulatively over the life of the asset. For example, a feature will not be considered de minimis if it could lead to a significant increase in cash flows in one period and a significant decrease in another period and the amounts offset each other on a cumulative basis. Similarly, if the impact of the feature on the cash flows of each individual period is always de minimis but its cumulative effect over time is more than de minimis; such a feature cannot be considered de minimis.

Ind AS 109 does not specify whether an entity should perform qualitative or quantitative analysis to determine whether a feature is de minimis. The author believes that in most cases, an entity should be able to conclude this without a quantitative analysis.

If a ₹10 million loan contains an early repayment clause which, if exercised, requires repayment of outstanding principal and interest plus ₹100, the additional ₹100 would have only a de minimis impact to cash flows in all circumstances. It is clearly trivial and negligible.

When assessing if a feature is de minimis an entity is not permitted to take into account the probability that the future event will occur, unless the contingent feature is not genuine. De minimis must be assessed at the individual financial asset level and not at some higher level, for example at a portfolio or entity level, because what is not de minimis at the financial instrument level may be de minimis at the portfolio level. Additionally, the assessment should be made by reference to all the cash flows of an instrument (principal and interest).

Non-genuine features are contingent features. A contingent feature is not genuine if it affects the instrument’s contractual cash flows only on the occurrence of an event that is extremely rare, highly abnormal and very unlikely to occur. This implies that although a non-genuine feature can potentially lead to cash flows to significant changes in cash flows, its existence in the contract provisions will not fail the SPPI test. Disregarding non-genuine features also means that classification requirements cannot be overridden by introducing a contractual non-genuine cash flow characteristic to achieve a specific accounting outcome. A clause should not be considered ‘not genuine’ just because historically the relevant event has not occurred. If a clause is ‘not genuine’ the fair value and pricing of the instrument would also be expected to be the same regardless of whether or not the clause is included.

A contract issued at par permits the issuer to repay the debt instrument, or the holder to put the debt instrument back to the issuer before maturity at par, when the BSE 100 index reaches a specific level. When the contingent event takes place, it results in a pre-payment that represents unpaid amounts of principal and interest on the principal amount outstanding. Does this always pass the SPPI test?

Yes. The contingent event (the BSE100 index reaching a specific level) changes the timing of the cash flows, but it still results in the redemption of the debt for an amount equal to par plus accrued interest. Therefore, it will always pass the SPPI test, because the cash flows still represent solely payments of principal and interest on the principal amount outstanding. If, on the other hand, the debt instrument was issued at a discount, but it is repayable at par, this may represent compensation to the issuer for the BSE 100 achieving the target level, which is inconsistent with SPPI.

Ve Co borrows ₹100 million from a bank. The borrowing agreement permits the bank to demand early repayment if Ve’s credit rating falls by more than two notches compared with the credit rating at origination. Is the SPPI test met in this case?

The contingent feature within the early repayment term is consistent with a return of principal and interest on the principal outstanding because the contingent event is directly linked to the credit risk of the borrower, i.e. the prepayment option is designed to provide the lender with the protection from the adverse changes in credit quality of the borrower. The credit risk of the borrower is a risk that is reflected in a basic lending arrangement. Therefore, SPPI test is met.

IFRS 9 AND IFRS 7 AMENDMENTS

The amendments introduce an additional test for financial assets with contingent features to meet SPPI test if contingent feature does not change in basic lending risks or costs, e.g. the interest rate on a loan is adjusted by a specified amount if the borrower achieves a contractually specified reduction in carbon emissions. Under this example, returns have changed due to a contingent event and credit risks (lending risk) of borrower will remain unchanged.

While the amendments may allow certain financial assets with contingent features to meet the SPPI criterion, companies may need to perform additional work to prove this. Judgement will be required in determining whether the new test is met.

IASB has introduced following additional SPPI test:

IASB has prescribed corresponding additional disclosures for financial instruments with a contingent feature that is not measured at fair value through profit and loss:

a qualitative description of the nature of the contingent event
quantitative information about the range of possible changes to contractual cash flows that could result from those contractual terms
the gross carrying amount of financial assets and the amortised cost of financial liabilities subject to those contractual terms.

BCAJ Admin

Ind AS 117 – Insurance Contracts

INTRODUCTION

We have got used to the Ministry of Corporate Affairs (MCA) introducing new Accounting Standards at the end of a financial year. Both Ind AS 115 — Revenue from Contracts with Customers and Ind AS 116 — Leases were announced in the end of March. One would have thought that the same pattern would play out for the implementation of Ind AS 117 — Insurance Contracts. However, the MCA pulled a surprise on 12th August, 2024 by not only announcing the Standard but also making it applicable for the Financial Year 2024–25. Ind AS 117 is a much more detailed and comprehensive standard than Ind AS 104 – Insurance Contracts. Ind AS 117 takes into account that the insurance and banking industries provide services that complement each other. Ind AS 117 acknowledges this and takes us back to Ind AS 109 wherever there is a trace of a financial instrument in an insurance contract. Ind AS 117 is a detailed standard: the standard has 132 main paragraphs, 154 paragraphs of application guidance, 22 definitions and 57 paragraphs on transition provisions.

SCOPE

Ind AS 117 defines an insurance contract as “A contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder”. By definition, it is clear that Ind AS 117 would apply to plain-vanilla insurance contracts such as fire, life, theft, damage, product liability, professional liability, life-contingent annuities or pensions and medical costs, etc. However, by interpretation of the definition, Ind AS 117 would also apply to product warranties issued by another party on behalf of the manufacturer, surety, fidelity and catastrophe bonds and insurance swaps. (Para B 26 of Ind AS 117).

GROUPING OF CONTRACTS

IND AS 117 requires entities to identify portfolios of insurance contracts, which comprises contracts that are subject to similar risks and managed together. Contracts within a product line would be expected to have similar risks and hence would be expected to be in the same portfolio if they are managed together. Each portfolio of insurance contracts issues shall be divided into a minimum of three cohorts: onerous contracts, contracts that could not turn onerous and a residuary category. An entity is not permitted to include contracts issued more than one year apart in the same group.

RECOGNITION

An entity shall recognise a group of insurance contracts it issues from the earliest beginning of the coverage period, the date when the first payment from a policyholder in the group becomes due or for a group of onerous contracts, when the group becomes onerous.

MEASUREMENT

Ind AS 117 provides three methods to measure insurance contracts:

1. General Measurement Model or Building Block Approach: the default method

2. Premium Allocation Approach: an optional method for certain specific type of contracts

3. Variable fee approach: a specific method for direct participating contracts.

BUILDING BLOCK APPROACH

Ind AS 117 mandates that on initial recognition, an entity shall measure a group of insurance contracts at the total of the fulfilment cash flows (FCF) and a contractual service margin (CSM). FCFs are an explicit, unbiased and probability-weighted estimate (i.e., expected value) of the present value of the future cash outflows minus the present value of the future cash inflows that will arise as the entity fulfils insurance contracts, including a risk adjustment for non-financial risk.

Risk adjustment for non-financial risk

The estimate of the present value of the future cash flows is adjusted to reflect the compensation that the entity requires for bearing the uncertainty about the amount and timing of future cash flows that arises from non-financial risk.

Contractual service margin

The CSM represents the unearned profit of the group of insurance contracts that the entity will recognise as it provides services in the future. This is measured on initial recognition of a group of insurance contracts at an amount that, unless the group of contracts is onerous, results in no income or expenses arising from:

(a) the initial recognition of an amount for the FCF,

(b) the derecognition at that date of any asset or liability recognised for insurance acquisition cash flows, and

As a simple mathematical example, assume that over a three-year insurance contract, an insurance company estimates discounted cash inflows to be ₹1,000, discounted outflows to be ₹200, risk adjustment for non-financial risk to be ₹150 and the CSM to be ₹100, the value of the insurance contract at initial measurement would be ₹1,050.

Subsequent measurement

On subsequent measurement, the carrying amount of a group of insurance contracts at the end of each reporting period shall be the sum of:

(a) the liability for remaining coverage comprising:

(i) the FCF related to future services, and

(ii) the CSM of the group at that date;

(b) the liability for incurred claims, comprising the FCF related to past service allocated to the group at that date.

Onerous contracts

Taking a cue from Ind AS 37, Ind AS 117 states that an insurance contract is onerous at initial recognition if the total of the FCF, any previously recognised acquisition cash flows and any cash flows arising from the contract at that date are a net outflow. An entity shall recognise a loss in profit or loss for the net outflow, resulting in the carrying amount of the liability for the group being equal to the FCF and the CSM of the group being zero. On subsequent measurement, if a group of insurance contracts becomes onerous (or more onerous), that excess shall be recognised in profit or loss.

As a simple mathematical example, assume that over a three-year insurance contract, an insurance company estimates discounted cash inflows to be ₹1,000, discounted outflows to be ₹1,200 and risk adjustment for non-financial risk to be ₹150. The net outflow of ₹350 would be recognised in the profit or loss account. CSM would always be Nil for onerous contracts.

PREMIUM ALLOCATION APPROACH

An entity may simplify the measurement of the liability for remaining coverage of a group of insurance contracts using the Premium Allocation Approach (PAA) on the condition that at the inception of the group:

(a) the entity reasonably expects that this will be a reasonable approximation of the general model, or

(b) the coverage period of each contract in the group is one year or less.

Where, at the inception of the group, an entity expects significant variances in the FCF during the period before a claim is incurred, such contracts are not eligible to apply the PAA.

Using the PAA, the liability for remaining coverage shall be initially recognised as the premiums, if any, received at initial recognition, minus any insurance acquisition cash flows. Subsequently, the carrying amount of the liability is the carrying amount at the start of the reporting period plus the premiums received in the period, minus insurance acquisition cash flows, plus amortisation of acquisition cash flows, minus the amount recognised as insurance revenue for coverage provided in that period, and minus any investment component paid or transferred to the liability for incurred claims.

VARIABLE FEE APPROACH

The Variable Fee Approach (VFA) is a modified model for insurance contracts with direct participation features. The VFA defines a variable fee as the entity’s share of the underlying items as a fee for the services it provides. The value of the variable fee changes based on the value of the assets.

REINSURANCE CONTRACTS HELD

The requirements of the standard are modified for reinsurance contracts held.

In estimating the present value of future expected cash flows for reinsurance contracts, entities use assumptions consistent with those used for related direct insurance contracts. Additionally, estimates include the risk of reinsurer’s non-performance.

The risk adjustment for non-financial risk is estimated to represent the transfer of risk from the holder of the reinsurance contract to the reinsurer.

On initial recognition, the CSM is determined similarly to that of direct insurance contracts issued, except that the CSM represents net gain or loss on purchasing reinsurance. On initial recognition, this net gain or loss is deferred, unless the net loss relates to events that occurred before purchasing a reinsurance contract (in which case, it is expensed immediately).

Subsequently, reinsurance contracts held are accounted similarly to insurance contracts under the general model. Changes in reinsurer’s risk of non-performance are reflected in profit or loss, and do not adjust the CSM.

MODIFICATION OF AN INSURANCE CONTRACT

If the terms of an insurance contract are modified, an entity shall derecognise the original contract and recognise the modified contract as a new contract if there is a substantive modification, based on meeting any of the specified criteria.

The modification is substantive if any of the following conditions are satisfied:

(a) if, had the modified terms been included at contract’s inception, this would have led to:

(i) exclusion from the Standard’s scope;

(ii) unbundling of different embedded derivatives;

(iii) redefinition of the contract boundary; or

(iv) the reallocation to a different group of contracts; or

(b) if the original contract met the definition of direct par insurance contracts, but the modified contract no longer meets that definition, or vice versa; or

DERECOGNITION

An entity shall derecognise an insurance contract when it is extinguished, or if any of the conditions of a substantive modification of an insurance contract are met.

Presentation in the statement of financial position

An entity shall present separately in the statement of financial position the carrying amount of groups of:

(a) insurance contracts issued that are assets;

(b) insurance contracts issued that are liabilities;

(d) reinsurance contracts held that are liabilities.

Recognition and presentation in the statement(s) of financial performance

An entity shall disaggregate the amounts recognised in the statement(s) of financial performance into:

(a) an insurance service result, comprising insurance revenue and insurance service expenses; and

(b) insurance finance income or expenses.

Income or expenses from reinsurance contracts held shall be presented separately from the expenses or income from insurance contracts issued.

Insurance service result

An entity shall present in profit or loss revenue arising from the groups of insurance contracts issued, and insurance service expenses arising from a group of insurance contracts it issues, comprising incurred claims and other incurred insurance service expenses. Revenue and insurance service expenses shall exclude any investment components. An entity shall not present premiums in the profit or loss if that information is inconsistent with revenue presented

Insurance finance income or expenses

Insurance finance income or expenses comprises the change in the carrying amount of the group of insurance contracts arising from:

(a) the effect of the time value of money and changes in the time value of money; and

(b) the effect of changes in assumptions that relate to financial risk; but

(c) excluding any such changes for groups of insurance contracts with direct participating insurance contracts that would instead adjust the CSM.

An entity has an accounting policy choice between including all of insurance finance income or expense for the period in profit or loss or disaggregating it between an amount presented in profit or loss and an amount presented in other comprehensive income (OCI).

Under the general model, disaggregating means presenting in profit or loss an amount determined by a systematic allocation of the expected total insurance finance income or expenses over the duration of the group of contracts. On derecognition of the groups, amounts remaining in OCI are reclassified to profit or loss.

Under the VFA, for direct par insurance contracts, only where the entity holds the underlying items, disaggregating means presenting in profit or loss as insurance finance income or expenses an amount that eliminates the accounting mismatches with the finance income or expenses arising on the underlying items. On derecognition of the groups, the amounts previously recognised in OCI remain there.

DISCLOSURES

An entity shall disclose qualitative and quantitative information about:

(a) the amounts recognised in its financial statements that arise from insurance contracts;

(b) the significant judgements, and changes in those judgements, made when applying IND AS 117; and

IRDAI

Now that Ind AS 117 has been issued, insurance companies would be looking forward to final formats and instructions from their regulator, Insurance Regulatory and Development Authority of India (IRDAI). In the past, IRDAI has had committees to suggest formats and guidelines for the implementation of Ind AS. A report of an erstwhile Committee was received in 2018 but since there were a few revisions made to IFRS 17, a new committee was formed in early 2024. IRDAI would need to implement the suggestions made by the Committee when its report is received.

IMPLEMENTATION ISSUES

Given the short time provided to insurance companies to implement the standard, they could face a few implementation issues. The fact that most of these companies have also not implemented Ind AS 109 – Financial Instruments further adds to their implementation issues since Ind AS 117 refers to Ind AS 109 quite frequently. The European Insurance and Occupational Pensions Authority (EIOPA) has published a report on the impact of IFRS – 17 and the challenges in implementation of the standard. The challenges were divided into four categories: understanding the standard, getting the data, interpreting the financial statements and building the systems. In India, there could be a further challenge in terms of impact on GST and income tax. GST laws would not recognise concepts such as CSM and risk adjustments while the Income Computation and Disclosure Standards (ICDS) have still not been upgraded to deal with any of the Ind AS accounting standards. Skilling the finance and accounts team on the nuances of the Standard through training programs would probably be the first priority for insurance companies.

BCAJ Admin

Financial Reporting Dossier

A. KEY GLOBAL UPDATES

1. IASB: ILLUSTRATIVE EXAMPLES TO IMPROVE REPORTING OF CLIMATE-RELATED AND OTHER UNCERTAINTIES IN FINANCIAL STATEMENTS

On 31st July, 2024, the International Accounting Standards Board (IASB) published a consultation document, proposing eight examples to illustrate how companies apply IFRS Accounting Standards when reporting the effects of climate-related and other uncertainties in their financial statements.
These examples are developed based on feedback received from the investors wherein the investors had expressed concerns that information about climate-related uncertainties in financial statements was sometimes insufficient or appeared to be inconsistent with information provided outside the financial statements.
The eight illustrative examples focus on areas such as materiality judgments, disclosures about assumptions and estimation uncertainties, and disaggregation of information. These illustrative examples do not add to or change the requirements of IFRS Accounting Standards.
Key highlights of these eight examples are as follows:

The IASB will consider stakeholders’ feedback and decide whether to proceed with the proposed illustrative examples to accompany IFRS Accounting Standards.

2. IASB: PROPOSE AMENDMENTS FOR TRANSLATING FINANCIAL INFORMATION INTO HYPERINFLATIONARY CURRENCIES

On 25th July, 2024, the International Accounting Standards Board (IASB) published proposals in an Exposure Draft to address accounting issues that affect companies that translate financial information from a non-hyperinflationary currency to a hyperinflationary currency
In the situations considered, the reporting entity or the reporting entity’s foreign operation has a functional currency that is the currency of a non-hyperinflationary economy. And in both situations, the reporting entity’s presentation currency is the currency of a hyperinflationary economy. Applying the requirements in IAS 21, the entity translates income, expenses and comparative amounts at historical exchange rates. The IASB observed that in a hyperinflationary economy, money loses purchasing power at such a rapid rate that information is generally useful only if amounts are expressed in terms of a measuring unit current at the end of the most recent reporting period.
The IASB is seeking feedback on the proposed amendments from interested or affected stakeholders.

3. IASB: ISSUES ANNUAL IMPROVEMENTS TO IFRS ACCOUNTING STANDARDS

On 18th July, 2024, the International Accounting Standards Board (IASB) issued narrow amendments to IFRS Accounting Standards and accompanying guidance as part of its regular maintenance of the Standards.
These amendments, published in a single document Annual Improvements to IFRS Accounting Standards—Volume 11, include clarifications, simplifications, corrections and changes aimed at improving the consistency of several IFRS Accounting Standards.
The amended Standards are:

– IFRS 1 First-time Adoption of International Financial Reporting Standards;

– IFRS 7 Financial Instruments: Disclosures and its accompanying Guidance on implementing IFRS 7;

– IFRS 9 Financial Instruments;

– IFRS 10 Consolidated Financial Statements; and

– IAS 7 Statement of Cash Flows.

The amendments are effective for annual periods beginning on or after 1st January, 2026, with earlier application permitted.

4. IASB: REVIEW OF IMPAIRMENT REQUIREMENTS RELATING TO FINANCIAL INSTRUMENTS

On 4th July, 2024, the International Accounting Standards Board (IASB) concluded and published its Post-implementation Review (PIR) of the impairment requirements in IFRS 9 Financial Instruments—Impairment.
The overall feedback shows that the impairment requirements in IFRS 9 are working as intended and provide useful information to users of financial instruments. In particular, the IASB concluded that:

♦ there are no fundamental questions (fatal flaws) about the clarity or suitability of the core objectives or principles in the requirements.

♦ in general, the requirements can be applied consistently. However, further clarification and application guidance is needed in some areas to support greater consistency in application.

♦the benefits to users of financial statements from the information arising from applying the impairment requirements in IFRS 9 are not significantly lower than expected. However, targeted improvements to the disclosure requirements about credit risk are needed to enhance the usefulness of information for users.

♦the costs of applying the impairment requirements and auditing and enforcing their application are not significantly greater than expected.

Based on the above feedback, the IASB decided the following:

Matters to be added to the research pipeline

Improvement to Credit risk disclosures:

Post-model adjustments or management overlays,

sensitivity analysis,

significant increases in credit risk forward-looking information; and

the reconciliation of the expected credit loss allowance and changes in gross carrying amounts

Matters to be considered at the next agenda consultation

Financial guarantee contracts:

mainly on the inclusion of financial guarantee contracts under the ECL model

Matters on which no further action is required

Requirements for recognising expected credit losses on loan commitments
Intersection between the impairment requirements in IFRS 9 and other IFRS Accounting Standards

5. IASB: AMENDMENTS TO CLASSIFICATION & MEASUREMENT REQUIREMENTS FOR FINANCIAL INSTRUMENTS

On 30th May, 2024, the International Accounting Standards Board (IASB) issued amendments to the classification and measurement requirements of IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures. The amendments will address diversity in accounting practice by making the requirements more understandable and consistent.
These amendments are done to address the following concerns raised earlier:

Clarifying the classification of financial assets with environmental, social, and corporate governance (ESG) and similar features

ESG-linked features in loans could affect whether the loans are measured at amortized cost or fair value. The concern was how such loans should be measured based on the characteristics of the contractual cash flows. To resolve any potential diversity in practice, the amendments clarify how the contractual cash flows on such loans should be assessed.

Settlement of liabilities through electronic payment systems

The challenge was on the derecognition of a financial asset or financial liability in IFRS 9 on settlement via electronic cash transfers. The amendments clarify the date on which a financial asset or financial liability is derecognised. The IASB also decided to develop an accounting policy option to allow a company to derecognise a financial liability before it delivers cash on the settlement date if specified criteria are met.

With these amendments, the IASB has also introduced additional disclosure requirements to enhance transparency for investors regarding investments in equity instruments designated at fair value through other comprehensive income and financial instruments with contingent features, for example, features tied to ESG-inked targets.
The amendments are effective for annual reporting periods beginning on or after 1st January, 2026.

6. PCAOB: STRENGTHENING ACCOUNTABILITY FOR CONTRIBUTING TO FIRM VIOLATIONS

On 12th June, 2024, the PCAOB approved the adoption of an amendment to PCAOB Rule 3502, previously titled Responsibility Not to knowingly or Recklessly Contribute to Violations. The rule, originally enacted in 2005, governs the liability of an associated person of a registered public accounting firm who contributes to that firm’s violations of the laws, rules, and standards that the PCAOB enforces.
An associated person is “any individual proprietor, partner, shareholder, principal, accountant, or professional employee of a public accounting firm, or any independent contractor or entity that, in connection with the preparation or issuance of any audit report (1) shares in the profits of, or receives compensation in any other form from, that firm; or (2) participates as agent or otherwise on behalf of such accounting firm in any activity of that firm.
For decades under PCAOB and predecessor auditing standards, auditors have been required to exercise reasonable care any time they perform an audit, and the failure to do so constitutes “negligence”.
Previously, however, Rule 3502 allowed the PCAOB to hold associated persons liable for contributing to a registered firm’s violation only when they did so “recklessly” — which represents a greater departure from the standard of care than negligence. This means even when a firm commits a violation negligently, an associated person of that firm who directly and substantially contributed to the firm’s violation could be sanctioned by the PCAOB only if the PCAOB were to show that the associated person acted recklessly.
As adopted, the updated rule changes Rule 3502’s liability standard from recklessness to negligence, aligning it with the same standard of reasonable care auditors are already required to exercise anytime they are executing their professional duties. Similarly, the U.S. Securities and Exchange Commission already has the ability to bring enforcement actions against associated persons when they negligently cause firm violations.
The amendment to Rule 3502 is subject to approval by the U.S. Securities and Exchange Commission (SEC). If approved by the SEC, the amended rule will become effective 60 days after such approval.

7. PCAOB: PROPOSAL ON SUBSTANTIVE ANALYTICAL PROCEDURE

On 12th June, 2024, the PCAOB issued a proposal to replace its existing auditing standard related to an auditor’s use of substantive analytical procedures with a new standard: AS 2305, Designing and Performing Substantive Analytical Procedures. If adopted, the new standard would strengthen and clarify the auditor’s responsibilities when designing and performing substantive analytical procedures, increasing the likelihood that the auditor will obtain relevant and reliable audit evidence — ultimately improving overall audit quality and leaving investors better protected.
A substantive analytical procedure involves comparing a recorded amount (by the company) or an amount derived from the recorded amount (the “company’s amount”) to an expectation of that amount developed by the auditor to determine whether there is a misstatement.
The proposed standard would do the following:

♦ Strengthen and clarify the requirements for determining whether the relationship(s) to be used in the substantive analytical procedure is sufficiently plausible and predictable;

♦ Specify that the auditor develops their own expectation and not use the company’s amount or information that is based on the company’s amount (so-called circular auditing);

♦ Strengthen and clarify existing requirements for determining when the difference between the auditor’s expectation and the company’s amount requires further evaluation;

♦ Strengthen and clarify existing requirements for evaluating the difference between the auditor’s expectation and the company’s amount. This includes determining if a misstatement exists as well as specifying requirements for certain situations the auditor may encounter when evaluating a difference;

♦ Clarify the factors that affect the persuasiveness of audit evidence obtained from a substantive analytical procedure;

♦ Clarify the elements of a substantive analytical procedure, including the distinction between substantive analytical procedures and other types of analytical procedures; and

♦ Modernise the standard by reorganising the requirements and more explicitly integrating the standard with other Board-issued standards — ultimately making it easier for auditors to follow.

Along with proposed AS 2305, the proposal also includes amendments to AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement.

8. PCAOB: AUDITOR’S RESPONSIBILITIES WHEN USING TECHNOLOGY-ASSISTED ANALYSIS

On 12th June, 2024, the PCAOB adopted amendments to two PCAOB auditing standards, AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement, addressing aspects of audit procedures that involve technology-assisted analysis of information in electronic form.
These changes, which grew out of the Board’s ongoing research project on the use of data and technology, are designed to provide additional detail and clarity around the responsibilities auditors have when performing procedures using technology-assisted analysis. The detail and clarity provided by these amendments should serve to reduce the risk that auditors who use technology-assisted analysis in the audit may issue an opinion without obtaining sufficient appropriate audit evidence. The additional clarity also should address some auditors’ reluctance, which the PCAOB has observed, to use technology-assisted analysis at all under existing standards.
The changes adopted today bring greater clarity to auditor responsibilities in the following areas:

Using reliable information in audit procedures: Technology-assisted analysis often involves analysing vast amounts of information in electronic form. The adopting release emphasises auditors’ responsibilities when evaluating the reliability of such information used as audit evidence.

Using audit evidence for multiple purposes: Technology-assisted analysis can be used to provide audit evidence for various purposes in an audit.

Performing tests of details: When performing tests of details, auditors may use technology-assisted analysis to identify transactions and balances that meet certain criteria and warrant further investigation.

9. PCAOB: QUALITY CONTROL STANDARD

On 13th May, 2024, the PCAOB adopted a new standard designed to lead registered public accounting firms to significantly improve their quality control (QC) systems. The new standard would require all PCAOB-registered firms to identify their specific risks and design a QC system that includes policies and procedures to guard against those risks.
The new standard strikes a balance between a risk-based approach to QC (which should drive firms to proactively identify and manage the specific risks associated with their practice) and a set of mandates (which should assure that the QC system is designed, implemented and operated with an appropriate level of rigour).
All PCAOB-registered firms would be required to design a QC system that complies with the new standard. Firms that perform audits of public companies or SEC-registered brokers and dealers would be required to implement and operate the QC system they design, monitor the system, and take remedial actions where policies and procedures are not operating effectively, creating a continuous feedback loop for improvement.
Those firms would be required to annually evaluate their QC system and report the results of their evaluation to the PCAOB on new Form QC, which would be certified by key firm personnel to reinforce individual accountability.
Firms that audit more than 100 issuers annually would be required to establish an external oversight function for the QC system, referred to as an External QC Function (EQCF), composed of one or more persons who can exercise independent judgment related to the firm’s QC system. In response to comments, the new standard clarifies that the EQCF’s responsibilities should include, at a minimum, evaluating the significant judgments made and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of its QC system.
The new standard and related amendments will take effect on 15th December, 2025.

10. FASB: PROPOSED DERIVATIVES SCOPE REFINEMENTS

On 23rd July, 2024, the Financial Accounting Standards Board (FASB) today published a proposed Accounting Standards Update (ASU) to address stakeholder feedback related to:

the application of derivative accounting to contracts with features based on the operations or activities of one of the parties to the contract; and

the diversity in accounting for a share-based payment from a customer that is considered for the transfer of goods or services.

For Derivative accounting, the amendments in this proposed Update would expand the scope exception for certain contracts not traded on an exchange to include contracts for which settlement is based on operations or activities specific to one of the parties to the contract. This improvement is expected to result in more contracts and embedded features being excluded from the scope of Topic 815 Derivatives and Hedging.
For Share-Based Payment, the amendments in this proposed Update would clarify that an entity should apply the guidance in Topic 606, including the guidance on noncash consideration in paragraphs 606-10-32-21 through 32-24, to a contract with a share-based payment (for example, shares, share options, or other equity instruments) from a customer that is consideration for the transfer of goods or services. Accordingly, under Topic 606, the share-based payment should be recognised as an asset measured at the estimated fair value at contract inception under Topic 606 when the entity’s right to receive or retain the share-based payment from a customer is no longer contingent on the satisfaction of a performance obligation.

B. GLOBAL REGULATORS- ENFORCEMENT ACTIONS AND INSPECTION REPORTS

I. THE FINANCIAL REPORTING COUNCIL, UK

a) Sanctions against MacIntyre Hudson LLP, Deborah Weston, and Geeta Morgan (9th July, 2024)

The Company was incorporated on 3rd May, 2018 in order to issue bonds to raise finance for its parent company, a business focused on natural resources with interests in agribusiness, logistics and technology.
MHA and Ms Weston (in relation to the FP2018 Audit) and MHA and Ms Morgan (in relation to the FY2019 Audit) have admitted that there were numerous breaches of Relevant Requirements in the audit work completed.
The primary breach in each audit year was the failure during the audit acceptance and continuance processes to ultimately identify (and so conduct the audits on the basis) that the Company was a Public Interest Entity because although it had not listed its shares, it had listed the bonds on the London Stock Exchange debt market. The failure to gain an adequate understanding of the Company, and the regulatory framework applicable to it, led directly to further breaches of Relevant Requirements, including, in both years, the provision of prohibited non-audit services and a failure to ensure that an Engagement Quality Control Review was performed before the Audit Report was signed.
The FRC’s investigation also identified additional breaches of Relevant Requirements concerning the application of the correct accounting standards and documentation, audit work on confirmation of bank balances, a loan to the parent company, and the going concern assumption.
The sanctions were imposed against all.

II. THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (PCAOB)

a) Sanctions against three auditors for failures relating to audit evidence, skepticism and other violations (7th May, 2024)

The PCAOB announced three settled disciplinary orders sanctioning two former Liggett & Webb, P.A. (“Liggett & Webb”) partners, Jessica Etania, CPA and Arpita Joshi, CPA, and engagement quality reviewer Robert Garick, CPA (collectively, “Respondents”).
The PCAOB found the following:

♦ Etania and Joshi, the engagement partners on the Innovative Food audits, (1) failed to obtain sufficient appropriate audit evidence to support the issuance of Liggett & Webb’s Innovative Food opinions, and (2) failed to evaluate whether Innovative Food’s revenue was properly valued and presented fairly in Innovative Food’s financial statements.

♦ Etania, the engagement partner on the Luvu audits, failed to evaluate whether Luvu’s revenue was presented fairly in Luvu’s financial statements.

♦ Joshi and Garick – while serving as engagement quality reviewers on the 2020 Luvu audit and 2020 Innovative Food audit, respectively — failed to exercise due professional care and professional skepticism, and therefore, lacked an appropriate basis to provide their concurring approvals of issuance of Liggett & Webb’s audit reports.

PCAOB bars engagement partners, impose practice limitations on engagement quality review partners, and imposes $130,000 in total fines

b) Deficiencies in Firm Inspection Reports:

Deloitte Touche Tohmatsu CPA LLP (23rd May, 2024)

♦ Deficiency: In an inspection carried out by PCAOB, it has identified deficiencies in the financial statements and ICFR audits related to Revenue and Related Accounts, Variable Interest Entities, and Short-Term Investments.

♦ Revenue and Related Accounts: The firm did not identify and test any controls over the satisfaction of a performance obligation, accuracy and completeness of system-generated data, etc.

♦ Variable Interest Entities: The firm did not identify and test any controls over the issuer’s review of the legal opinion prepared by the company’s specialist, which described uncertainties regarding the interpretation and application of current laws and regulations related to the structure of the VIE, and evaluation of the effect of such uncertainties on its ability to consolidate the VIE.

♦ Short-Term Investment: The firm selected for testing a control over short-term investments that consisted of the issuer’s review of the fair value calculation of the investments, including the expected rate of return. The firm did not evaluate the review procedures that the controlling owner performed, including the procedures to identify items for follow-up and the procedures to determine whether those items were appropriately resolved.

Ernst & Young Hua Ming LLP (23rd May, 2024)

Deficiency: In an inspection carried out by PCAOB, it has identified deficiencies in the financial statements and ICFR audits related to Goodwill and Variable Interest Entities.

Goodwill: The firm selected for testing a control that consisted of the issuer’s review of the determination of the reporting units. The firm did not test an aspect of this control that addressed the considerations for the aggregation of the two components into one reporting unit, including the similarity of the economic characteristics of the components and various qualitative factors, as required by FASB ASC Topic 350, Intangibles – Goodwill and Other, etc.
Variable Interest Entities: The firm did not sufficiently evaluate the relevance and reliability of the work performed by the company’s specialist and whether the specialist’s findings support or contradict the issuer’s rights and obligations related to the consolidation of the VIEs.

III. THE SECURITIES EXCHANGE COMMISSION (SEC)

a) Charges for misleading investors about the Compliance Program (1st July, 2024)

The Securities and Exchange Commission charged Silvergate Capital Corporation, its former CEO Alan Lane, and former Chief Risk Officer (CRO) Kathleen Fraher with misleading investors about the strength of the Bank Secrecy Act / Anti-Money Laundering (BSA/AML) compliance program and the monitoring of crypto customers, including FTX, by Silvergate’s wholly owned subsidiary, Silvergate Bank. The SEC also charged Silvergate and its former Chief Financial Officer, Antonio Martino, with misleading investors about the company’s losses from expected securities sales following FTX’s collapse.
According to the SEC’s complaint, from November 2022 to January 2023, Silvergate, Lane, and Fraher misled investors by stating that Silvergate had an effective BSA/AML compliance program and conducted ongoing monitoring of its high-risk crypto customers, including FTX, in part to rebut public speculation that FTX had used its accounts at Silvergate to facilitate FTX’s misconduct. In reality, Silvergate’s automated transaction monitoring system failed to monitor more than $1 trillion of transactions by its customers on the bank’s payments platform, the Silvergate Exchange Network.
Without admitting or denying the allegations, Silvergate agreed to a final judgment, ordering it to pay a $50 million civil penalty and imposing a permanent injunction to settle the charges

b) Cybersecurity Related Control Violations (18th June, 2024)

The Securities and Exchange Commission announced that R.R. Donnelley & Sons Company (RRD), a global provider of business communication and marketing services, agreed to pay over $2.1 million to settle disclosure and internal control failure charges relating to cybersecurity incidents and alerts in late 2021.
Data integrity and confidentiality were critically important to RRD’s business. Because client data was stored on RRD’s network, its information security personnel and the third-party service provider RRD hired were responsible for monitoring the network’s security. However, according to the order, RRD failed to design effective disclosure controls and procedures to report relevant cybersecurity information to management with the responsibility for making disclosure decisions and failed to carefully assess and respond to alerts of unusual activity in a timely manner. The order further finds that RRD failed to devise and maintain a system of cybersecurity-related internal accounting controls sufficient to provide reasonable assurances that access to RRD’s assets — its information technology systems and networks — was permitted only with management’s authorisation.
RRD agreed to cease and desist from committing violations of these provisions and to pay a $2,125,000 civil penalty.

c) Fraud: Charges against raising more than $184 million through Pre-IPO Fraud Schemes

The Securities and Exchange Commission charged three individuals with fraud for selling unregistered membership interests in LLCs that purported to invest in shares of pre-IPO companies, first on behalf of StraightPath Venture Partners LLC, the subject of the Commission’s emergency action in May 2022, and, later, on behalf of Legend Venture Partners LLC, the subject of the Commission’s emergency action in June 2023.
In this new action, the SEC alleges that New York residents Mario Gogliormella, Steven Lacaj, and Karim Ibrahim directed an unregistered sales force of more than 50 callers in boiler rooms to pressure investors into making investments without telling them that the shares had been substantially marked up — between approximately 19 and 105 per cent on average above the prices that StraightPath or Legend had paid for the underlying shares. As a result of these tactics, the defendants and their sales force allegedly pocketed more than $45 million in fees from unsuspecting investors from 2019 to 2022. Charges were imposed.

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE

Accounting for business combinations (mergers, amalgamations, etc.) is governed by Ind AS 103, including the Appendix thereof which governs mergers under Common Control. As per the Companies Act, 2013, the schemes also require approval from the National Company Law Tribunal (NCLT). Given below are illustrations of disclosures in a few large companies.

ASIAN PAINTS LIMITED (31ST MARCH 2024)

From Notes to Consolidated Financial Statements Mergers, Acquisitions, and Incorporations

a) Equity infusion in Weatherseal Fenestration Private Limited (Weatherseal):

During the previous year on 14th June, 2022, the Parent Company subscribed to 51 per cent of the equity share capital of Weatherseal for a cash consideration of ₹18.84 crores. Accordingly, Weatherseal became a subsidiary of the Parent Company. Weatherseal is engaged in the business of interior decoration / furnishing, including manufacturing PVC windows and door systems. The acquisition will enable the Group to widen its offerings in the home decor space and is a step forward in the foray of being a complete home decor solution provider.

In accordance with the Shareholders Agreement and Share Subscription Agreement, the Parent Company has agreed to acquire a further stake of 23.9 per cent in Weatherseal from its promoter shareholders, in a staggered manner. The Parent Company has also entered into a put contract for the acquisition of a 25.1 per cent stake in Weatherseal. Accordingly, on the day of acquisition, a gross obligation towards acquisition is and recognized for the same, initially measured at ₹18.08 crores. On 31st March, 2024, the fair value of such gross obligation is ₹9.53 crores (on 31st March, 2023 — ₹21.46 crores). A fair valuation gain of ₹11.93 crores is recognized in the Consolidated Statement of Profit and Loss for the year ended 31st March, 2024 (Previous Year — fair valuation loss of ₹3.38 crores).

b) Acquisition of stake in Obgenix Software Private Limited

The Parent Company entered into a Share Purchase Agreement and other definitive documents (agreement) with the shareholders of Obgenix Software Private Limited (popularly known by the brand name of ‘White Teak’) on 1st April, 2022. White Teak is engaged in designing, trading, or otherwise dealing in all types and descriptions of decorative lighting products and fans, etc. The acquisition will enable the Group to widen its offerings in the home decor space and is a step forward in the foray of being a complete home decor solution provider.

During the previous year, on 2nd April, 2022, the Parent Company acquired 49 per cent of the equity share capital of White Teak for a cash consideration of ₹180 crores along with an earn-out, payable after a year, subject to achievement of mutually agreed financial milestones. Accordingly, White Teak became an associate of the Group. On 31st March, 2023, the fair value of the earn-out was ₹58.97 crores.

During the year, on 23rd June, 2023, the Parent Company further acquired 11 per cent of the equity share capital of White Teak from the existing shareholders of White Teak for a consideration of ₹53.77 crores. The Parent Company holds 60 per cent of the equity share capital of White Teak, by virtue of which White Teak has become a subsidiary of the Parent Company. On such date, the fair value of earn out stood at ₹59.45 crores which was paid to the promoters of White Teak. Fair valuation loss towards earn out paid of ₹0.48 crores has been recognized in the Consolidated Statement of Profit & Loss (Previous Year — ₹5.17 crores).

In accordance with the agreement, the remaining 40 per cent of the equity share capital would be acquired in FY 2025–26. Accordingly, on the day of acquisition, gross obligation towards further stake acquisition is recognized for the same, initially measured at ₹225.92 crores. On 31st March, 2024, the fair value of such gross obligation is ₹186.22 crores. A fair valuation gain of ₹39.70 crores is recognized in the Consolidated Statement of Profit and Loss for the year ended 31st March, 2024.

(₹in crores)

Assets acquired and liabilities assumed on acquisition date:	30th June, 2023
Property, plant, and equipment	9.13
Intangible Assets	220.06
Right-of-Use Assets	34.06
Income Tax Assets (Net)	0.01
Deferred Tax Assets	2.21
Inventories	24.54
Financial Assets
Trade Receivables	7.47
Cash and bank balances	0.72
Other Financial Assets	4.43
Other Current Assets	4.03
Total Assets	306.66
Provisions	1.63
Deferred Tax Liabilities	1.09
Financial Liabilities
Borrowings	13.86
Lease Liabilities	35.11
Trade payables and other liabilities	7.92
Other payables	2.35
Total Liabilities	61.96
Net assets acquired	244.70

Trade receivables of ₹7.47 crores represent the gross contractual amounts. There are no contractual cash flows expected to be collected on the acquisition date.

(₹in crores)

Goodwill arising on the acquisition of a stake in White Teak	30th June, 2023
Cash consideration transferred (i)	53.77
Net Fair Value of Derivative Asset and Liability (ii)	2.27
Fair Value of 49 per cent stake in White Teak, as one of the acquisition dates (iii)	256.11
Total consideration transferred [(iv) = (i)+(ii)+(iii)	312.15
Fair Value of identified assets acquired (v)	244.70
Group share of Fair Value of identified assets acquired (vi)	146.82
Group share of Goodwill arising on acquisition White Teak [(iv)-(vi)]	165.33

The goodwill of ₹165.33 crores comprises the value of the acquired workforce, revenue growth, future market developments, and expected synergies arising from the business combination.

A gain of ₹33.96 crores on re-measurement of the fair value of 49 per cent stake held in White Teak is recognized under Other Income in the Consolidated Statement of Profit and Loss.

(₹in crores)

Net cash outflow on acquisition	30th June, 2023
Cash consideration transferred	53.77
Less: Cash and cash equivalent acquired (including overdraft)	(7.92)
Net cash and cash equivalent outflow	61.69

The amount of non-controlling interest recognised at the acquisition date was ₹97.88 crores, measured at no controlling interest’s proportionate share in the recognised amounts of White Teak’s identifiable net assets.

Impact of acquisition on the results of the Group:

Revenue from operations of ₹107.46 crores and Profit after tax of ₹1.22 crores of White Teak has been included in the current year’s Consolidated Statement of Profit and Loss. If the acquisition had occurred on 1st April, 2023, the consolidated revenue of the Group would have been higher by ₹25.96 crores, and the consolidated profit of the Group for the year would have been higher by ₹0.59 crores.

No material acquisition costs were charged to the Consolidated Statement of Profit and Loss for the year ended 31st March, 2024.
.
e) Acquisition of stake in Harind Chemicals and Pharmaceuticals Private Limited:

On 20th October, 2022, the Parent Company entered into Share Purchase Agreements and other definitive documents with shareholders of Harind Chemicals and Pharmaceuticals Private Limited (‘Harind’), for the acquisition of a majority stake in Harind, in a staggered manner, subject to fulfilment of certain conditions precedent. Harind is a specialty Chemicals Company engaged in the business of nanotechnology-based research, manufacturing, and sale of a range of additives and specialized coatings. Nanotechnology has the potential to be the next frontier in the world of coatings, and the acquisition will enable the Group to manufacture commercially viable high–performance coatings and additives with this technology.

Upon fulfilment of the conditions precedent for acquisition of the first tranche, the Parent Company has acquired 51 per cent of the equity share capital of Harind for consideration of ₹14.28 crores on 14th February, 2024. Accordingly, Harind and Nova Surface-Care Centre Private Limited, a wholly owned subsidiary of Harind, have become subsidiaries of the Parent Company. Further, the Parent Company has agreed to acquire a further 39 per cent stake in Harind in a staggered manner, over the next 3 years period. Accordingly, gross obligation towards acquisition is recognized at ₹48.88 crores as of 31st March, 2024.

(₹in crores)

Assets acquired and liabilities assumed on acquisition date:	31st Jan, 2024
Property, plant, and equipment	1.47
Right-of-Use Assets	0.34
Deferred Tax Assets (Net)	0.11
Inventories	3.18
Financial Assets
Trade Receivables	6.72
Cash and bank balances	0.97
Other Balances with Banks	9.12
Other Financial Assets	0.24
Other Current Assets	0.18
Total Assets	22.33
Financial Liabilities
Lease Liabilities	0.37
Trade payables	3.68
Other Financial Liabilities	0.37
Other Current Liabilities	0.55
Provisions	0.42
Income Tax liabilities	0.65
Total Liabilities	6.04
Net assets acquired	16.29

Trade receivable with a fair value of ₹6.72 crores had gross contractual amounts of ₹6.74 crores. The best estimate on the acquisition date of the contractual cash flows not expected to be collected is ₹0.02 crores.

Goodwill arising on the acquisition of a stake in White Teak	31st Jan, 2024
Cash consideration transferred (i)	14.28
Fair Value of Derivative liability (ii)	11.90
Total consideration transferred [(iii) = (i)+(ii)]	26.18
Fair Value of identified assets acquired (iv)	16.29
Group share of fair value of identified assets acquired (v)	8.31
Group share of Goodwill arising on the acquisition of Harind [(iii)-(v)]	17.87

The goodwill of ₹17.87 crores comprises the value of the acquired workforce, revenue growth, future market developments, and expected synergies arising from the business combination.

(₹in crores)

Net cash outflow on acquisition	31st Jan, 2024
Cash consideration transferred	14.28
Cash and cash equivalents acquired	0.97
Net cash and cash equivalent outflow	13.31

The amount of non-controlling interest recognized at the acquisition date was ₹7.98 crores, measured at non-controlling interest’s proportionate share in the recognized amounts of Harind’s identifiable net assets.

Impact of acquisition on the results of the Group:

Revenue from operations of ₹6.49 crores and Profit after tax of ₹1.60 crores of Harind has been included in the current year’s Consolidated Statement of Profit and Loss. If the acquisition had occurred on 1st April, 2023, the consolidated revenue of the Group would have been higher by ₹28.50 crores, and the consolidated profit of the Group for the year would have been higher by ₹4.00 crores.

No material acquisition costs were charged to the Consolidated Statement of Profit and Loss for the year ended 31st March, 2024.

f) Amalgamation of Sleek International Private Limited and Maxbhumi Developers Limited:

The Board of Directors at their meeting held on 28th March, 2024 had approved the Scheme of Amalgamation (‘the Scheme’) of Maxbhumi Developers Limited and Sleek International Private Limited, wholly owned subsidiaries of Asian Paints Limited
(Parent Company) with the Parent Company in accordance with the provisions of the Companies Act, 2013 and other applicable laws with the appointed date of 1st April 2024. The Scheme is subject to necessary statutory and regulatory approvals, including approval of the Hon’ble National Company Law Tribunal, Mumbai. There is no impact of the Scheme on the Consolidated Financial Statements

CRISIL LIMITED (31ST MARCH 2024)

From Notes to Consolidated Financial Statements

Business Combinations

Business combinations are accounted for using the acquisition accounting method as at the date of the acquisition, which is the date at which control is transferred to the Group. The consideration transferred in the acquisition and the identifiable assets acquired and liabilities assumed are recognised at fair values on their acquisition date. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred over the net identifiable assets acquired and liabilities assumed.

Merger of CRISIL Irevna US LLC and Greenwich Associates LLC

The Board of Directors of CRISIL Irevna US LLC and Greenwich Associates LLC vide board resolution dated 21st October, 2022 had approved a scheme of amalgamation. The scheme has received approval from the competent authorities and accordingly, Greenwich Associates LLC has been merged with CRISIL Irevna US LLC with effect from 1st April, 2023. The merger has no impact on the consolidated financial results of the Group. In accordance with Appendix C to Ind AS 103 ‘Business Combination’, the financial information of CRISIL Irevna US LLC in the consolidated financial statements in respect of the prior period has been restated as if the business combination had occurred from the beginning of the preceding period.

The merger of CRISIL Risk and Infrastructure Solutions Limited (CRIS) and Pragmatix Services Private Limited (PSPL)

i) The Board of Directors of the Company has approved the arrangement for the amalgamation of two wholly owned subsidiaries (CRISIL Risk and Infrastructure Solutions Limited and Pragmatix Services Private Limited — Transferor Company) with the Company in its Board meeting held on 13th December, 2021. The Company filed necessary applications to the National Company Law Tribunal (NCLT) on 27th December, 2021. The Scheme has been sanctioned by the National Company Law Tribunal (NCLT) with the appointed date as 1st April 1, 2022 and the Scheme became effective on 1st September, 2022. The merger has no impact on the consolidated financial results of the Group.

ii) The authorized equity share capital of the Company has been increased by the authorized equity share capital of the former CRIS and PSPL in accordance with the Scheme of Merger vide Board resolution dated 13th December, 2022.

Acquisition of Bridge To India Energy Private Limited

The Company completed the acquisition of a 100 per cent stake in ‘Bridge To India Energy Private Limited’ (Bridge To India) on 30th September, 2023. Bridge To India is a renewable energy (RE) consulting & knowledge services provider to financial and corporate clients in India. The acquisition will augment CRISIL’s existing offerings and bolster our market positioning in the renewable energy space. The transaction is at a total consideration of R721 lakh. Accordingly, Bridge To India became a wholly owned subsidiary of the Company with effect from the said date.

Assets acquired, and liabilities assumed are as under:

Particulars	(₹ In lakhs)
Total identifiable assets (A)	550
Total identifiable liabilities (B)	293
Goodwill (C)	464
Total net assets (A-B+C)	721

Acquisition of Peter Lee Associates Pty. Limited

CRISIL Limited, through its subsidiary, CRISIL Irevna Australia Pty Limited has completed the acquisition of a 100 per cent stake in Peter Lee Associates Pty. Limited (Peter Lee) on 17th March, 2023.

Peter Lee is an Australian research and consulting firm providing benchmarking research programs to the financial services sector. Peter Lee conducts annual research programs across Australia and New Zealand in various areas of banking, markets, and investment management. The acquisition will complement CRISIL’s existing portfolio of products and expand offerings to new geographies and segments across financial services including commercial banks and investment management. The deal will accelerate CRISIL’s strategy in the APAC region to be the foremost player in the growing market.

The total consideration is ₹3,421 lakh (AUD 6.18 million), which includes upfront and deferred consideration.

Assets acquired, and liabilities assumed are as under:

Particulars	(₹ In lakhs)
Total identifiable assets (A)	2,746
Total identifiable liabilities (B)	1,019
Goodwill (C)	1,694
Total net assets (A-B+C)	3,421

HINDUSTAN UNILEVER LIMITED

(31ST MARCH 2024)

From Notes to Consolidated Financial Statements

Business Combinations

As per Ind AS 103, Business combinations are accounted for using the acquisition accounting method as at the date of the acquisition, which is the date at which control is transferred to the Group. The consideration transferred in the acquisition and the identifiable assets acquired and liabilities assumed are recognised at fair values on their acquisition date. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets acquired and liabilities assumed. The Group recognizes any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are recognised in the consolidated statement of profit and loss.

Transaction costs are expensed in the consolidated statement of profit and loss as incurred, other than those incurred in relation to the issue of debt or equity securities which are directly adjusted in other equity. Any contingent consideration payable is measured at fair value at the acquisition date. Subsequent changes in the fair value of contingent consideration are recognized in the consolidated statement of profit and loss.

Business combinations under common control entities

Business combinations involving companies in which all the combining companies are ultimately controlled by the same holding party, both prior to and after the business combination are treated as per the pooling of interest method.

The pooling of interest method involves the following:

(i) The assets and liabilities of the combining entities are reflected in their carrying amounts.

(ii) No adjustments are made to reflect fair values or recognize any new assets or liabilities.

(iii) The financial information in the financial statements in respect of prior periods is restated as if the business combination had occurred from the beginning of the preceding period in the financial statements, irrespective of the actual date of the combination.

The identity of the reserves is preserved, and they appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company. The difference, if any, between the consideration and the amount of share capital of the transferor company is transferred to capital reserve.

The merger of Ponds Exports Limited (‘PEL’) and Jamnagar Properties Private Limited (“JPPL’’) with Unilever India Exports Limited (‘UIEL’)

Pursuant to a scheme of arrangement, the below entities were merged with Unilever India Exports Limited (‘UIEL’), a wholly owned subsidiary of HUL w.e.f. 13th February, 2024:

i. Pond’s Export Limited (‘PEL’), a subsidiary of HUL, where HUL held 90 per cent and UIEL held 10 per cent of share capital;

ii. Jamnagar Properties Private Limited, a wholly-owned subsidiary of HUL.

PEL and JPPL had no business activity.

As part of the ‘Merger Order’ from NCLT vide order dated 16th January, 2024, the consideration to each equity shareholder of PEL and JPPL is:

a) 1 equity share of the merged entity of ₹10 each, against 1,99,00,147 paid-up equity shares of ₹1 each of PEL

b) 1 equity share of the merged entity of ₹10 each, against 50,00,000 paid-up equity shares of ₹10 each of JPPL

Since the merger is of entities under common control, it is accounted for using the pooling of interest method as per Ind AS 103.

In the current financial year, ₹7 crores have been transferred from retained earnings to capital reserves, on account of the merger of PEL and JPPL with UIEL under common control as per IND AS 103.

Acquisition of Zywie Ventures Private Limited

On 10th January, 2023, the Holding Company acquired a 53.34 per cent stake (51.00 per cent on a fully diluted basis) in ZVPL, an unlisted company incorporated in India and engaged in the business of Health and well-being products under the brand name of ‘OZiva’.

As part of the Shareholders Agreement (‘SHA’), Holding Company has acquired substantive rights that give control over relevant activities of the business and the right to variable returns through inter alia composition of Board, decision-making rights, management control, and hence ZVPL is treated as a subsidiary.

A) Purchase consideration transferred

The amount of consideration transferred on acquisition is ₹264 crores in cash.

B) Financial liability on the acquisition

On the acquisition date, the Holding Company acquired a stake in ZVPL through equity shares and compulsorily convertible preference shares (‘CCPS’), and forward rights on the non-controlling interests (‘NCI’) by way of Share Subscription and Share Purchase Agreement (‘SSSPA’). In respect of this, the Group has recognized a financial liability for the forward rights on the non-controlling interests at its estimated present value. The said financial liability was recognized through a corresponding impact to Other Equity of ₹375 crores. Subsequent measurement of this liability is at Fair value through Profit and Loss and currently stands at ₹265 crores.

C) Assets acquired, and liabilities assumed are as under:

	Amount
Total identifiable assets (A)	605
Total identifiable liabilities (B)	225
Total identifiable net assets acquired [(A) – (B)]	380

D) Acquisition of brand OZiva

The Holding Company also acquired the OZiva brand, as part of the acquisition deal. The brand was valued at ₹361 crores using the multi-period excess earnings method.

E) Goodwill

	Amount
Upfront cash consideration transferred	264
Non-controlling interest on the date of acquisition	185
Less: Total identifiable net assets acquired	(380)
Goodwill	69

Goodwill of ₹69 crores was recognized on account of synergies expected from the acquisition of ZVPL.

Amalgamation of GlaxoSmithKline Consumer Healthcare Limited

On 1st April, 2020, the Holding Company completed the merger of GlaxoSmithKline Consumer Healthcare Limited [‘GSK CH’] via an all-equity merger under which 4.39 shares of HUL (the Holding Company) were allotted for every share of GSK CH. With this merger, the Holding Company acquired the business of GSK CH including the Right to Use assets of brand Horlicks and Intellectual Property Rights of brands like Boost, Maltova, and Viva. The Holding Company also acquired the Horlicks intellectual property rights, being the legal rights to the Horlicks brand for India from GlaxoSmithKline Plc.

The scheme of merger (‘scheme’) submitted by the Holding Company was approved by the Hon’ble National Company Law Tribunal by its order dated 24th September, 2019 (Mumbai bench) and 12th March, 2020 (Chandigarh bench). The Board of Directors approved the scheme between the Holding Company and GSK CH, on 1st April, 2020. The scheme was filed with the Registrar of Companies on the same date. Accordingly, 1st April, 2020 was considered as the acquisition date, i.e., the date at which control is transferred to the Holding Company.

The merger had been accounted for using the acquisition accounting method under Ind AS 103 – Business Combinations. All identified assets acquired and liabilities assumed on the date of the merger were recorded at their fair value.

A) Purchase consideration transferred:

The total consideration paid was ₹40,242 crores which comprised of shares of the Holding Company, valued based on the share price of the Holding Company on the completion date. Refer to the details below:

As per the scheme, the Holding Company issued its shares in favour of existing shareholders of GSK CH such that 4.39 of the Holding Company’s shares were allotted for every share of GSK CH as below.

	Amount
Total number of GSK CH shares outstanding	4,20,55,538
Total number of Holding Company’s shares issued to GSK CH shareholders i.e.,4.39 of Company’s shares per share of GSK CH	18,46,23,812
Value of the Holding Company share (closing price of the Company share on NSE as of 1^st April, 2020)	2,179.65
Total consideration paid to acquire GSK CH ( ₹ crores)	40,242

(a) Total costs relating to the issuance of shares amounting to ₹44 crores as recognized against equity.

(b) Transaction cost of ₹146 crores that were not directly attributable to the issue of shares was included under exceptional items in the consolidated statement of profit and loss.

B) Assets acquired, and liabilities assumed is as under:

	Amount
Total number of GSK CH shares outstanding	4,20,55,538
Total number of Holding Company’s shares issued to GSK CH shareholders i.e.,4.39 of Company’s shares per share of GSK CH	18,46,23,812
Value of the Holding Company share (closing price of the Company share on NSE as of 1^st April, 2020)	2,179.65
Total consideration paid to acquire GSK CH ( ₹ crores)	40,242

The main assets acquired were Right to use Horlicks and Boost brand which were valued using the income approach model by estimating future and cash flows generated by these assets and discounting them to present value using rates in line with a market participant expectation.

In addition, as applicable, Property plant & equipment have been valued using the market comparison technique and replacement cost method.

C) Acquisition of Horlicks Brand:

The Holding Company also acquired the Horlicks Intellectual Property Rights (IPR), being the legal rights to the Horlicks brand for India from GlaxoSmithKline Plc for a consideration of ₹3,045 crores. The transaction has been accounted as an asset acquisition in line with Ind AS 38 (Intangible assets).

The Holding Company incurred a transaction cost of ₹91 crores for the above asset acquisition which was capitalised along with Horlicks IPR. A total value of ₹3,136 crores is recognised under Intangible assets in the consolidated financial statements.

TECH MAHINDRA LIMITED

(31ST MARCH, 2024)

Notes forming part of the Consolidated Financial Statement for the year ended 31st March, 2024

Business Combinations

Acquisition during the year ended 31st March, 2024

Pursuant to a share purchase agreement on 19th February, 2024 the Company through its wholly owned subsidiary, V Customer Phillippines Inc., acquired100 per cent stake in Orchid Cybertech Services Inc. (OCSI) for a consideration of AUD 5 million (₹296 Million) of which AUD 5 million (₹290 million) was paid upfront. Contractual obligation as of 31st March, 2024 AUD 0.1 million (₹6 Million).

OSCI is primarily engaged in Information Technology call center operations.

Particulars	OCSI
Particulars	AUD in million	₹ in million
Fair value of net assets / (liabilities) as of the date of acquisition	3	153
Customer Relationship	3	143
The fair value of net assets / (liabilities)	5	296
Purchase Consideration	5	296

For the one month ended 31st March, 2024 Orchid Cybertech Services Incorporated contributed revenue of ₹379 million and profit of ₹83 million to the Group’s results. If the acquisition had occurred on 1st April, 2023, management estimates that the consolidated revenue of the Group would have been ₹521,607 million, and the consolidated profit of the Group for the year would have been ₹24,098 million. The pro forma amounts are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated or that may result in the future.

Details of acquisition during the year ended 31st March, 2024

Pursuant to a share purchase agreement, the Company acquired a 100 per cent stake in Thirdware Solution Limited and its subsidiaries, on 3rd June, 2022, for a consideration of ₹7,838 million out of which ₹6,708 million was paid upfront. The agreement also provides for contingent consideration linked to the financial performance of the financial year ending 2022 to 2024. As of 31st March, 2023, contractual obligation towards the said acquisition amounts to ₹735 million (31st March, 2024 ₹150 million)

Thirdware Solution Limited offers consulting, design, implementation, and support of enterprise applications services with a focus on the Automotive industry.

The summary of PPA is:

Particulars	Thirdware Solutions Limited
Fair value of net assets / (liabilities)as of the date of acquisition	5,397
Customer Relationship	1,005
Goodwill	1,436
Fair value of net assets / (liabilities)including Goodwill	7,838
Purchase Consideration	7,838

The aforesaid said purchase price allocation was determined provisionally and has been finalized in the current year.

For the ten months ended 31st March, 2023, Thirdware Solution Limited contributed revenue of ₹2,838 million and profit of ₹564 million to the Group’s results. If the acquisition had occurred on 1st April, 2022, management estimates that the consolidated revenue of the Group would have been ₹533,366 Million, and the consolidated profit of the Group for the year would have been ₹48,749 million. The pro-forma amounts are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated or that may result in the future.

ULTRATECH CEMENT LIMITED

(31ST MARCH, 2024)

Notes to Consolidated Financial Statements

Acquisition of the Cement Business of Kesoram Industries

The Board of Directors has approved a Composite Scheme of Arrangement between Kesoram Industries Limited (“Kesoram”), the Company, and their respective shareholders and creditors, in compliance with sections 230 to 232 and other applicable provisions of the Companies Act, 2013 (“Scheme”). The Scheme, inter alia, provides for:

(a) Demerger of the Cement Business of Kesoram into the Company; and

(b) Reduction and cancellation of the preference share capital of Kesoram.

The Appointed Date for the Scheme is 1st April, 2024. The Cement Business of Kesoram consists of 2 integrated cement units at Sedam (Karnataka) and Basantnagar (Telangana) with a total installed capacity of 10.75 mtpa and a 0.66 mtpa packing plant at Solapur, Maharashtra. The Company will issue 1 (one) equity share of the Company of face value ₹10 each for every 52 (fifty-two) equity shares of Kesoram of face value ₹10 each to the shareholders of Kesoram as on the record date defined in the Scheme.

The Competition Commission of India has by its letter dated 19th March, 2024 approved the proposed combination under Section 31(1) of the Competition Act, 2002. The Scheme is, inter alia, subject to receipt of requisite approvals from statutory and regulatory authorities, including from the stock exchanges, the Securities and Exchange Board of India (SEBI), the National Company Law Tribunals, and the shareholders and creditors of the Company.

The merger of UltraTech Nathdwara Cement Limited (UNCL) (a wholly-owned subsidiary of the Company) and its wholly-owned subsidiaries viz. Swiss Merchandise Infrastructure Limited and Merit Plaza Limited (Ind AS 103).

The National Company Law Tribunal (“NCLT”), Mumbai and Kolkata Benches have by their order dated 18th December, 2023 and 3rd April, 2024 approved the Scheme of Amalgamation (“Scheme”) of UltraTech Nathdwara Cement Limited (UNCL)(a wholly-owned subsidiary of the Company) and its wholly-owned subsidiaries viz. Swiss Merchandise Infrastructure Limited (“Swiss”) and Merit Plaza Limited (“Merit”) with the Company. The Appointed date of the Scheme is 1st April, 2023. The said scheme has been made effective from 20th April, 2024. Consequently, the above-mentioned wholly owned subsidiaries of the Company stand dissolved without winding up.

Since the amalgamated entities are under common control, the accounting of the said amalgamation in the Standalone Financials has been done applying the Pooling of Interest method as prescribed in Appendix C of Ind AS 103 ‘Business Combinations’. While applying the Pooling of Interest method, the Company has recorded all assets, liabilities, and reserves attributable to the wholly owned subsidiaries at their carrying values as appearing in the consolidated financial statements of the Company.

The aforesaid scheme has no impact on the Consolidated Financial Statements of the Group since the scheme of amalgamation was within the parent company and wholly owned subsidiaries.

Consequent to the amalgamation of the wholly owned subsidiaries into the Company, the Company has not recognized Deferred Tax Assets on the unabsorbed Depreciation, business losses, and other temporary differences since the scheme was made effective from 20th April, 2024. Costs related to amalgamation (including stamp duty on assets transferred) have been charged to Statement of Profit and Loss, shown under exceptional item during the year.

Business Combination (Ind AS 103)

A) During the previous year, the Company had entered into a Share Sale and Purchase Agreement on 29th January, 2023 with Seven Seas Company LLC and His Highness Al-Sayyid Shihab Tariq Taimur Al Said for the acquisition of 70 per cent equity share of Duqm Cement project International LLC Located in Oman. The Company is mainly in the business of mining and extracting limestone. The acquisition allows the Company to secure raw materials for the growing requirements of India Operations and create value for shareholders.

B) Fair value of the consideration transferred

As per Ind AS 103 — Business combinations, purchase consideration has been allocated on the basis of fair valuation determined by an independent value. Total enterprise value works out to ₹159.47 crores. The effective purchase consideration of ₹111.62 crores. The Fair value of identifiable assets acquired, and liabilities assumed as of the acquisition date are as under:

Particulars	R in crores
Capital Work in Progress	11.30
Mining Reserve	148.16
Cash and Bank	0.04
Total Assets	159.50
Other Current liabilities	0.04
Fair Value of Assets	159.46

C) Fair value of the consideration transferred

Particulars	R in crores
Fair value of the consideration (70 per cent)	111.62
Total Enterprise Value	159.47
Less: Fair value of net assets acquired	159.46
Goodwill	0.01

BCAJ Admin

Date of Capitalisation of Property, Plant and Equipment

The date of capitalisation is very significant in the case of property, plant and equipment. This is the date on which the assessment of useful life and residual value is made, and depreciation commences. Other than in accounting, it has tremendous significance with respect to determining depreciation for tax purposes as well. Consider a simple situation, Mr X purchased a car but is unable to drive it, because he does not yet have a driving license. It takes him a year, to get a driving license, after which he starts running the car, which was lying idle till then. The question is whether the depreciation should commence on date of purchase of the car or the date when Mr X starts running the car. This article deals with this basic and other related questions.

QUERY

Energy Limited (Energy) has one engine that is part of a bigger machine and is being used to produce energy for the plant. Energy has a stand-by engine which is a backup to the first engine. The stand-by engine will be put to use only if the first engine fails or is otherwise rendered out of service. Though the stand-by engine is necessary to ensure continuity of production in the event of failure of the first engine; it is less likely that it will ever be put to use or used immediately on the date of its purchase. The useful life of the bigger machine is 50 years, and the first engine is 20 years. The useful life of the stand-by engine is likely to be much greater than 20 years, even after factoring technological obsolescence, because it will remain mostly idle — let’s say 25 years. Both the engines are of the same type and cost ₹2,50,000 each.

Further, assume, though the first engine was expected to be used for 20 years, it could be used only for 15 years due to some exceptional incident. After 15 years, the first engine was replaced with the stand-by engine.

Further, the first engine had no significant value and would have to be scrapped (the scrap value is ignored because it is immaterial). Energy uses the Straight-Line Method (SLM) of depreciation. The exceptional incident does not warrant any review or change in the useful life of the stand-by engine.

With these simple facts, Energy has the following questions?

1. What is the date of capitalisation of the stand-by engine and when does the depreciation commence? Should the depreciation commence when the first engine fails and the stand-by engine is installed and used within the bigger machine?

2. How is the first engine accounted for and depreciated?

3. How is the replacement of the first engine with the stand-by engine accounted for at the end of 15 years?

RESPONSE

Accounting Standard References in Ind AS 16 Property, Plant and Equipment

Definitions

Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period.

Useful life is: (a) the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by an entity.

Paragraph 8

Spare parts and servicing equipment are usually carried as inventory and recognised in profit or loss as consumed. However, major spare parts, stand-by equipment and servicing equipment qualify as property, plant and equipment when an entity expects to use them for more than one period.

Paragraph 13

Parts of some items of property, plant and equipment may require replacement at regular intervals. For example, a furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe. Items of property, plant and equipment may also be acquired to make a less frequently recurring replacement, such as replacing the interior walls of a building, or to make a non-recurring replacement. Under the recognition principle in paragraph 7, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard.

Paragraph 55

Depreciation of an asset begins when it is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with Ind AS 105 and the date that the asset is derecognised. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production.

Analysis and Conclusions

It may be noted that both the first engine and the stand- by engine are equipment in their own right. Since both the engines are used to generate electricity (as part of a bigger machine) and have a useful life beyond more than one accounting period, they will be classified as property, plant and equipment in accordance with the definition of property, plant and equipment and paragraph 8 enumerated above.

For the purposes of depreciation, both the first engine and stand-by engine are treated as separate equipment as suggested in paragraph 13 of the Standard and will be depreciated as per their respective useful life. A point to be noted is that though the first engine and the stand- by engine are the same, they have different useful lives depending on the purpose and how they are used.

Now let us proceed to answer the questions raised.

Ind AS 16 defines property, plant and equipment as tangible items that: (i) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and (ii) are expected to be used during more than one period. However, it is not necessary that their use should be regular. Therefore, stand-by engine should be capitalised and depreciated from the date it becomes available for use (i.e., when it is in the location and condition necessary for it to be capable of being operated in the manner intended by the management).

In this case, intended use of the standby-engine is to act as back-up for the first engine. Hence, the company should start depreciating stand-by engine from the day it is ready for the use as back-up. The company cannot postpone the commencement of depreciation till the date stand-by engine is actually put to use for producing energy. Since the stand-by engine is available for use immediately, its depreciation should start from the date of purchase itself.

The stand-by engine will be depreciated over its useful life which is 25 years starting from the date of purchase. Therefore, each year it will be depreciated by ₹10,000 (250,000/25), starting from the date of purchase. This is in accordance with paragraph 55 of the Standard enumerated above.

The first engine will be depreciated over its useful life, i.e., 20 years, which works out to ₹12,500 (250,000/20) each year. A point to be noted is that though the first engine and the stand-by engine are the same, they have different useful lives and will be depreciated according to their respective useful lives.

From the facts as stated in the case, the first engine is replaced by the stand-by engine at the end of 15 years, due to some exceptional situation. The written down value of the first engine at the end of 15 years is ₹62,500 (250,000 less 12,500 * 15 years). In accordance with paragraph 13 of the Standard, this amount will be derecognised and debited to the profit or loss account.

The stand-by engine will continue to be depreciated at ₹10,000 each year, assuming there is no change in the assumption regarding its useful life.

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE

The Companies Act, 2013 does not require any mandatory transfer to Reserves based on quantum of dividend declared by a company. Companies may now want to utilise such Reserves (created based on provisions of the earlier Companies Act, 1956) for payment of dividend or other purposes. Given below are instances of two companies who have obtained the approval of the National Company Law Tribunal (NCLT) or have filed an application for the same for such transfer from General Reserve to Retained Earnings.

NESTLE INDIA LIMITED (15 MONTHS ENDED 31ST MARCH, 2024)

Disclosures for Scheme of Arrangement in Standalone Financial Statements:

A) From Director’s Report

Scheme of Arrangement

The Board of Directors, at its meeting held on 28th July, 2021, had approved the Scheme of Arrangement between the Company and its members under Section 230 of the Companies Act, 2013 as amended (“the Act”) read with other applicable provisions of the Act and Rules made thereunder (“the Scheme”), which envisaged transfer of the entire balance of ₹8,374.3 million standing to the credit of the General Reserves to Retained Earnings. Your Company had filed an application with Hon’ble National Company Law Tribunal, Delhi Bench (Hon’ble NCLT) on 22nd March, 2022, for the sanction of Scheme. After requisite formalities, the Hon’ble NCLT, vide its Order dated 15th September, 2023, had sanctioned the Scheme. Certified copy of the Order sanctioning the Scheme was filed with the Registrar of Companies, Delhi, and the Scheme became effective from 19th October, 2023. Accordingly, the entire amount of ₹8,374.3 million standing to the credit of the General Reserves of the Company was reclassified and credited to the ‘Retained Earnings’ of your Company and constitute accumulated profits of your Company for the previous financial years, arrived at after providing for depreciation in accordance with the provisions of the Act and remaining undistributed in the manner provided in the Act and other applicable laws. Pursuant to the Scheme, the amount so transferred is available for utilization and payout in accordance with the terms of the Scheme.

B) From Statement of Changes in Equity

a) Other Equity

	Reserves and Surplus				Items of Other Comprehensive Income		Total
	General Reserves	Share-based Payment	Capital Reserve	Retained Earning	Equity Instrument through Other Comprehensive Income	Effective portion of Cash Flow Hedges	Total
Balance as on 31^st December, 2021	8,374.3	–	(250.8)	10,694.9	(330.0)	11.2	18,499.6
Profit after tax	–	–	–	23,905.2	–	–	23,905.2
Other comprehensive income	–	–	–	1,139.2	(17.7)	(2.1)	1,119.4
Total comprehensive income	–	–	–	25,044.4	(17.7)	(2.1)	25,024.6
Transfer of Equity Instruments through other	–	–	–	(347.7)	347.7	–	–
Comprehensive income to Retained Earnings
Dividend (Refer note 43)	–	–	–	(20,247.3)	–	–	(20,247.3)
Share-based Payment Expense	–	143.7	–	–	–	–	143.7
Recognition of liability towards Share Based Payments	–	(143.7)	–	–	–	–	(143.7)
Other changes in net assets of Pet Food Business	–	–	350.6	–	–	–	350.6
Balance as on 31^st December, 2022	8,374.3	–	99.8	15,144.3	–	9.1	23,627.5
Profit after tax	–	–	–	39,328.4	–	–	39,328.4
Other comprehensive income	–	–	–	(429.0)	–	(0.4)	(429.4)
Total comprehensive income	–	–	–	38,899.4	–	(0.4)	38,899.0
Transfer of General Reserve to Retained Earnings*	(8,374.3)	–	–	8,374.3	–	–	–
Dividend (Refer note 43)	–	–	–	(30,081.8)	–	–	(30,081.8)
Share Based Payment Expense	–	206.8	–	–	–	–	206.8
Recognition of liability towards Share Based Payments	–	(206.8)	–	–	–	–	(206.8)
Balance as on 31^st March, 2024	–	–	99.8	32,336.2	–	8.7	32,444.7

* The Shareholders of the Company had, at the Court Convened Meeting held on 25th July, 2022, approved the Scheme of Arrangement (‘Scheme’) which envisages transfer of the entire balance of ₹8,374.3 million standing to the credit of the General Reserves to Retained Earnings. The Company had accordingly filed a petition for sanction of the Scheme with the Hon’ble National Company Law Tribunal, New Delhi Bench (“Hon’ble NCLT”). The Hon’ble NCLT, vide its order dated 15th September, 2023 (“Order”), has sanctioned the Scheme. The Appointed Date as fixed in the Scheme is 1st January, 2022. The Scheme has been made effective on and upon filing of the certified copy of the Order with the Registrar of Companies.

C) From Notes to Accounts: Note 17: Other Equity

a) Nature and description of reserve

(i) General Reserve: General reserve are free reserves of the Company which are kept aside out of Company’s profits to meet the future requirements as and when they arise. The Company had transferred a portion of the profit after tax (PAT) to general reserve pursuant to the earlier provisions of the erstwhile Companies Act, 1956. It is not mandatory to transfer the profit to reserve under the provisions of the Companies Act, 2013 (“Act”).

The Shareholders of the Company had, at the Court Convened Meeting held on 25th July, 2022, approved the Scheme which envisages transfer of the entire balance of ₹8,374.3 million standing to the credit of the General Reserves to Retained Earnings. The Company had accordingly filed a petition for sanction of the Scheme with the Hon’ble National Company Law Tribunal, New Delhi Bench (“Hon’ble NCLT”). The Hon’ble NCLT, vide its order dated 15th September, 2023 (“Order”), had sanctioned the Scheme. The Appointed Date as fixed in the Scheme is 1st January, 2022, and the Scheme became effective from 19th October, 2023, the date on which the certified copy of the order was filed with the concerned Registrar of Companies.

VEDANTA LIMITED – YEAR ENDED 31ST MARCH, 2024

A) From Director’s Report

Scheme of Arrangement between Vedanta Limited and its Shareholders under Section 230 and other applicable provisions of the Companies Act, 2013

The Board of Directors of the Company, basis the recommendation of the Audit & Risk Management Committee and Committee of Independent Directors of the Company, at its meeting held on 29th October, 2021, approved the Scheme between the Company and its shareholders under Section 230 and other applicable provisions of the Act. The Scheme provides for capital reorganisation of the Company, inter alia, providing for transfer of amounts standing to the credit of the General Reserves (as defined in the Scheme) to the Retained Earnings (as defined in the Scheme) of the Company with effect from the Appointed Date.

The NCLT, Mumbai Bench vide its order dated 26th August, 2022 (“NCLT Order”), inter alia, directed the Company to convene meeting of its equity shareholders to seek their approval to the Scheme; and file consent affidavits of all the secured creditors and unsecured creditors of at least value of 90% of unsecured creditors, at the time of filing the Company Scheme Petition.

In this regard, a meeting of the equity shareholders of the Company was held on 11th October, 2022, and the proposed Scheme was approved by the equity shareholders with requisite majority. The Company is in the process of complying with the further requirements specified in the NCLT Order.

Pursuant to the Scheme, the Company will possess greater flexibility to undertake capital-related decisions and reflect a much efficient balance sheet of the Company. The Scheme is in the interest of all stakeholders including public shareholders.

B) From Notes to Accounts: Note 15: Other equity

a) General reserve: Under the erstwhile Companies Act, 1956, general reserve was created through an annual transfer of net income at a specified percentage in accordance with applicable regulations. The purpose of these transfers was to ensure that if a dividend distribution in a given year is more than 10% of the paid-up capital of the Company for that year, then the total dividend distribution is less than the total distributable reserves for that year. Consequent to introduction of Companies Act, 2013 (“Act”), the requirement to mandatorily transfer a specified percentage of the net profit to general reserve has been withdrawn.

The Board of Directors of the Company, on 29th October, 2021, approved the Scheme of Arrangement between the Company and its shareholders under Section 230 and other applicable provisions of the Act (“Scheme”). The Scheme provides for capital reorganisation of the Company, inter alia, providing for transfer of amounts standing to the credit of the General Reserves to the Retained Earnings of the Company with effect from the Appointed Date.

Post the requisite approvals obtained from Stock Exchanges and pursuant to the National Company Law Tribunal (“NCLT”), Mumbai Bench Order dated 26th August, 2022 (“NCLT Order”), the proposed scheme was approved by the shareholders with requisite majority on 11th October, 2022.

The Company is in the process of complying with the further requirements specified in the NCLT Order.

HINDUSTAN UNILEVER LIMITED – FY 2018–19

A) Director’s Report

Scheme of Arrangement

The Members of the Company, had, at the Court Convened Meeting held on 30th June, 2016, approved the Scheme for transfer of the balance of R2,187 crores standing to the credit of the General Reserves to the Profit and Loss Account. The Company had accordingly filed the petition for sanction of the Scheme of Arrangement with the Hon’ble High Court of Mumbai (jurisdiction later changed to NCLT). The Hon’ble NCLT, Mumbai Bench, vide its order dated 30th August, 2018, has sanctioned the aforesaid Scheme. With Scheme becoming effective, the balance of R2,187 crores standing to the credit of the General Reserves has been transferred to the Profit and Loss Account.

B) Statement of changes in equity

	Reserves and Surplus							Items of Other Comprehensive Income (OCI)		Total
	Capital reserve	Capital Redemption Reserve	Securities Premium	Employee Stock Options Outstanding Account	General Reserve	Retained Earnings	Other Reserves	Remeasurements of net defined benefit plans	Debt instruments through OCI	Total
As on 31^st March, 2017	4	6	116	30	2,187	3,953	9	(32)	1	6,274
Profit for the year	–	–	–	–	–	5,237	–	–	–	5,237
Other comprehensive income for the year	–	–	–	–	–	–	–	(11)	(1)	(12)
Total comprehensive income for the year	–	–	–	–	–	5,237	–	(11)	(1)	5,225
Dividend on equity shares for the year (Note: 37)	–	–	–	–	–	(3,896)	–	–	–	(3,896)
Dividend distribution tax (Note: 37)	–	–	–	–	–	(755)	–	–	–	(755)
Issue of equity shares on exercise of employee stock options	–	–	11	(11)	–	–	–	–	–	–
Equity settled share-based payment credit	–	–	–	11	–	–	–	–	–	11
As on 31^st March, 2018	4	6	127	30	2,187	4,539	9	(43)	0	6,859
Profit for the year	–	–	–	–	–	6,036	–	–	–	6,036
Other comprehensive income for the year	–	–	–	–	–	–	–	(4)	1	(3)
Total comprehensive income for the year	–	–	–	–	–	6,036	–	(4)	1	6,033
Dividend on equity shares for the year (Note: 37)	–	–	–	–	–	(4,546)	–	–	–	(4,546)
Dividend distribution tax (Note: 37)	–	–	–	–	–	(913)	–	–	–	(913)
Transfer to retained earnings (refer note b below)	–	–	–	–	(2,187)	2,187	–	–	–	–
Issue of equity shares on exercise of employee stock options	–	–	15	(15)	–	–	–	–	–	–
Equity settled share-based payment credit	–	–	–	10	–	–	–	–	–	10
As on 31^st March, 2019	4	6	142	25	–	7,303	9	(47)	1	7,443

C) The Shareholders of the Company, had, at the Court Convened Meeting held on 30th June, 2016, approved the Scheme for transfer of the balance of ₹2,187 crores standing to the credit of the General Reserves to the Profit and Loss Account. The Company had accordingly filed a petition for sanction of the Scheme with the Hon’ble High Court of Mumbai [jurisdiction later changed to NCLT). The Hon’ble NCLT, Mumbai Bench, vide its order dated 30th August, 2018, has sanctioned the aforesaid Scheme. The Company has received the said Order on 27th September, 2018 and filed the Order and the Scheme with Registrar of Companies (ROC) on 5th October, 2018 and has subsequently reclassified the amount standing to the credit of the General Reserves to the Retained Earnings.

D) Note 18: Other Equity

(a) General Reserve: The Company had transferred a portion of the net profit of the Company before declaring dividend to general reserve pursuant to the earlier provisions of Companies Act, 1956. Mandatory transfer to general reserve is not required under the Companies Act, 2013. During the year, the Company has reclassified the amount standing to the credit of the General Reserves to the Retained Earnings subsequent to approval by Hon’ble NCLT on the Scheme.

BCAJ Admin

Ind AS 2023 Amendments – Ind AS 1 Presentation of Financial Statements

DISCLOSURE OF ACCOUNTING POLICY INFORMATION

Ind AS 1 Presentation of Financial Statements is amended to require disclosure of material accounting policy information, instead of disclosure of significant accounting policies. Because ‘significant’ is not defined in Ind AS Standards, entities can have difficulty assessing whether an accounting policy is ‘significant’ and understanding the difference, if any, between ‘significant’ and ‘material’ accounting policies. Because ‘material’ is defined in Ind AS Standards and is well understood by stakeholders, the standard setters decided to require entities to disclose their material accounting policy information instead of their significant accounting policies.

Accounting policy information is material if, when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of those financial statements. An entity shall apply the change for annual reporting periods beginning on or after
1st April, 2023.

Accounting policy information that relates to immaterial transactions, other events or conditions is immaterial and need not be disclosed. Accounting policy information may nevertheless be material because of the nature of the related transactions, other events or conditions, even if the amounts are immaterial. However, not all accounting policy information relating to material transactions, other events or conditions is itself material.

Accounting policy information is expected to be material if users of an entity’s financial statements need it to understand other material information in the financial statements. For example, an entity is likely to consider accounting policy information material to its financial statements if that information relates to material transactions, other events or conditions and:

(a) the entity changed its accounting policy during the reporting period and this change resulted in a material change to the information in the financial statements;

(b) the entity chose the accounting policy from one or more options permitted by Ind ASs;

(c) the accounting policy was developed in accordance with Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors in the absence of an Ind AS that specifically applies;

(d) the accounting policy relates to an area for which an entity is required to make significant judgements or assumptions in applying an accounting policy, and the entity discloses those judgements or assumptions in accordance with paragraphs 122 and 125 of Ind AS 1; or

(e) the accounting required for them is complex and users of the entity’s financial statements would otherwise not understand those material transactions, other events or conditions — such a situation could arise if an entity applies more than one Ind AS to a class of material transactions.

Since the above list is not exhaustive, entities also need to consider if there are any other qualitative factors that would make accounting policy information material to the financial statements. For example, an entity could act as a principal in some classes of transactions and as an agent in other similar transactions depending on whether it controls the goods or services before transferring them to the customer or not. In such instances, in addition to the disclosures about significant judgements, a primary user could require accounting policy information explaining the two situations and the accounting policy differences to understand the related information in the financial statements.

Accounting policy information that focuses on how an entity has applied the requirements of the Ind ASs to its own circumstances provides entity-specific information that is more useful to users of financial statements than standardised information, or information that only duplicates or summarises the requirements of the Ind ASs.If an entity discloses immaterial accounting policy information, such information shall not obscure material accounting policy information. An entity’s conclusion that accounting policy information is immaterial does not affect the related disclosure requirements set out in other Ind ASs. For example, if an entity applying the amendments decides that accounting policy information about intangible assets is immaterial to its financial statements, the entity would still need to disclose the information required by Ind AS 38 Intangible Assets that the entity had determined to be material.

An entity shall disclose, along with material accounting policy information or other notes, the judgements, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

In many cases, information about the measurement basis (or bases) used in preparing the financial statements is material. However, in some cases, the measurement basis (or bases) used for a particular asset or liability would not be material and, therefore, would not need to be disclosed. For example, information about a measurement basis might be immaterial if:

(a) an Ind AS Standard required an entity to use a measurement basis—in which case an entity would not apply choice or judgement in complying with the Standard; and

(b) information about the measurement basis would not be needed for users to understand the related material transactions, other events or conditions.

In assessing whether accounting policy information is material to its financial statements, an entity considers whether users of the entity’s financial statements would need that information to understand other material information in the financial statements. An entity makes this assessment in the same way it assesses other information: by considering qualitative and quantitative factors. The diagram below illustrates how an entity assesses whether accounting policy information is material and, therefore, shall be disclosed.

Entity-specific qualitative factors include the involvement of related parties, uncommon or non-standard features in transactions, other events or conditions and unexpected variations or changes in trends. The context in which the entity operates could also impact the relevance of information to the primary users; this is referred to as external qualitative factors. Examples include geographical locations, industry sector, and the state of the economy in which the entity operates. Sometimes the absence of an external qualitative factor is relevant, for example, if the entity is not exposed to a certain risk to which many other entities in its industry are exposed, information about that lack of exposure could be material information

Determining whether accounting policy information is material

Paragraph 117B of Ind AS1 includes examples of circumstances in which an entity is likely to consider accounting policy information to be material to its financial statements. The list is not exhaustive but provides guidance on when an entity would normally consider accounting policy information to be material.

Paragraph 117C of Ind AS 1 describes the type of material accounting policy information that users of financial statements find most useful. Users generally find information about the characteristics of an entity’s transactions, other events or conditions—entity-specific information—more useful than disclosures that only include standardised information or information that duplicates or summarises the requirements of the Ind AS Standards. Entity-specific accounting policy information is particularly useful when that information relates to an area for which an entity has exercised judgment—for example, when an entity applies an Ind AS Standard differently from similar entities in the same industry.

Although entity-specific accounting policy information is generally more useful, material accounting policy information could sometimes include information that is standardised, or that duplicates or summarises the requirements of the Ind AS Standards. Such information may be material if, for example:

a. users of the entity’s financial statements need that information to understand other material information provided in the financial statements. Such a scenario might arise when an entity applying Ind AS 109 Financial Instruments has no choice regarding the classification of its financial instruments. In such scenarios, users of that entity’s financial statements may only be able to understand how the entity has accounted for its material financial instruments if users also understand how the entity has applied the requirements of Ind AS 109 to its financial instruments.

b. an entity reports in a jurisdiction in which entities also report applying local accounting standards.

c. the accounting required by the Ind AS Standards is complex, and users of financial statements need to understand the required accounting. Such a scenario might arise when an entity accounts for a material class of transactions, other events or conditions by applying more than one Ind AS Standard.

Paragraph 117D of Ind AS1 states that if an entity discloses immaterial accounting policy information, such information shall not obscure material information.

Example A—making materiality judgements and focusing on entity-specific information while avoiding standardised (boilerplate) accounting policy information

Background

An entity operates within the telecommunications industry. It has entered into contracts with retail customers to deliver mobile phone handsets and data services. In a typical contract, the entity provides a customer with a handset and data services over three years. The entity applies Ind AS 115 Revenue from Contracts with Customers and recognises revenue when, or as, the entity satisfies its performance obligations in line with the terms of the contract.

The entity has identified two performance obligations and related considerations:

(a) the handset—the customer makes monthly payments for the handset over three years; and

(b) data—the customer pays a fixed monthly charge to use a specified monthly amount of data over three years.

For the handset, the entity concludes that it should recognise revenue when it satisfies the performance obligation (when it provides the handset to the customer). For the provision of data, the entity concludes that it should recognise revenue as it satisfies the performance obligation (as the entity provides data services to the customer over the three-year life of the contract).

The entity notes that, in accounting for revenue it has made judgements about:

a. the allocation of the transaction price to the performance obligations; and

b. the timing of satisfaction of the performance obligations.

The entity has concluded that revenue generated from these contracts is material to the reporting period.

Application

The entity notes that for contracts of this type it applies separate accounting policies for two sources of revenue, namely revenue from:

(a) the sale of handsets; and

(b) the provision of data services.

Having identified revenue from contracts of this type as material to the financial statements, the entity assesses whether accounting policy information for revenue from these contracts is, in fact, material.

The entity evaluates the effect of disclosing the accounting policy information by considering the presence of qualitative factors. The entity noted that its revenue recognition accounting policies:

(a) were unchanged during the reporting period;

(b) were not chosen from accounting policy options available in the Ind AS Standards;

(c) were not developed in accordance with Ind AS8 Accounting Policies, Changes in Accounting Estimates and Errors in the absence of an Ind AS Standard that specifically applies; and

(d) are not so complex that primary users will be unable to understand the related revenue transactions without standardised descriptions of the requirements of Ind AS 115.

However, some of the entity’s revenue recognition accounting policies relate to an area for which the entity has made significant judgements in applying its accounting policies—for example, in deciding how to allocate the transaction price to the performance obligations, and the timing of revenue recognition.

The entity considers that in addition to disclosing the information required by paragraphs 123–126 of Ind AS 115 about the significant judgements made in applying Ind AS 115, primary users of its financial statements are likely to need to understand related accounting policy information. Consequently, the entity concludes that such accounting policy information could reasonably be expected to influence the decisions of the primary users of its financial statements. For example, understanding:

(a) how the entity allocates the transaction price to its performance obligations is likely to help users understand how each component of the transaction contributes to the entity’s revenue and cash flows; and

(b) that some revenue is recognised at a point in time, and some is recognised over time is likely to help users understand how reported cash flows relate to revenue.

The entity also notes that the judgements it made are specific to the entity. Consequently, material accounting policy information would include information about how the entity has applied the requirements of Ind AS 115 to its specific circumstances.

The entity, therefore, assesses that accounting policy information about revenue recognition is material and should be disclosed. Such disclosure would include information about how the entity allocates the transaction price to its performance obligations and when the entity recognises revenue.

Example B—making materiality judgements on accounting policy information that only duplicates requirements in the IFRS Standards

Background

Property, plant and equipment are material to an entity’s financial statements.

The entity has no intangible assets or goodwill and has not recognised an impairment loss on its property, plant or equipment in either the current or comparative reporting periods.

In previous reporting periods, the entity disclosed accounting policy information relating to the impairment of non-current assets which duplicates the requirements of Ind AS 36 Impairment of Assets and provides no entity-specific information. The entity disclosed that:

“The carrying amounts of the group’s intangible assets and its property, plant and equipment are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill and intangibles with an indefinite useful life, the recoverable amount is estimated at least annually.

An impairment loss is recognised in the statement of profit or loss whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.

The recoverable amount of assets is the greater of their fair value less costs to sell and their value in use. In measuring value in use, estimated future cash flows are discounted to present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to that cash-generating unit and then to reduce the carrying amount of the other assets in the unit on a pro-rata basis.

An impairment loss in respect of goodwill is not subsequently reversed. For other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount, but only to the extent that the new carrying amount does not exceed the carrying amount that would have been determined, net of depreciation and amortisation, if no impairment loss had been recognised.”

Application

Having identified assets subject to impairment testing as being material to the financial statements, the entity assesses whether the accounting policy information for impairment is, in fact, material.

As part of its assessment, the entity considers that an impairment or a reversal of an impairment had not occurred in the current or comparative reporting periods. Consequently, accounting policy information about how the entity recognises and allocates impairment losses is unlikely to be material to its primary users. Similarly, because the entity has no intangible assets or goodwill, information about its accounting policy for impairments of intangible assets and goodwill is unlikely to provide its primary users with material information.

However, the entity’s impairment accounting policy relates to an area for which the entity is required to make significant judgements or assumptions, as described in paragraphs 122 and 125 of Ind AS1. Given the entity’s specific circumstances, it concludes that information about its significant judgements and assumptions related to its impairment assessments could reasonably be expected to influence the decisions of the primary users of the entity’s financial statements. The entity notes that its disclosures about significant judgements and assumptions already include information about the significant judgements and assumptions used in its impairment assessments.

The entity decides that the primary users of its financial statements would be unlikely to need to understand the recognition and measurement requirements of Ind AS36 to understand related information in the financial statements.

Consequently, the entity concludes that disclosing a summary of the requirements in Ind AS36 in a separate accounting policy for impairment would not provide information that could reasonably be expected to influence decisions made by the primary users of its financial statements. Instead, the entity discloses material accounting policy information related to the significant judgements and assumptions the entity has applied in its impairment assessments elsewhere in the financial statements.

Although the entity assesses some accounting policy information for impairments of assets as immaterial, the entity still assesses whether other disclosure requirements of Ind AS 36 provide material information that should be disclosed.

Example C — Disclosures of the accounting policies on revenue recognition

Background information

V-Trade is an AC retailer. As per local law, V-Trade is required to repair any damages to the AC up until 12 months after delivery, to the extent that the damage relates to defects existing at the delivery date (“assurance warranty”). Each AC sold also includes an obligation for V-Trade to perform specific services beyond the mandatory warranty requirements for a period of three years (extended warranty).

V-Trade does not sell extended warranties separately, but the sales contracts for the ACs explicitly identify which services are included. V-Trade’s competitors do not bundle such service plans into their sale of cars by default but offer similar extended warranty as an option for an extra price. V-Trade concludes that the extended warranty meets the Ind AS 115 definition of a service-type warranty.

Customers are charged the total contract price upon delivery of the AC, which includes the extended warranty. V-Trade recognises revenue when, or as, it satisfies its performance obligations. It has identified two performance obligations in the contracts: (1) the AC and (2) the extended warranty. Consequently, V-Trade allocates the transaction price to each performance obligation and recognises revenue, separately, as it satisfies each performance obligation.

V-Trade determines that its performance obligation for an AC is satisfied at the point in time when the AC is delivered to the customer (and at the same time recognises an obligation for the mandatory warranty). The performance obligation for the extended warranty is satisfied over the three-year service period. At year-end 31 March 20×1, V-Trade concluded that revenues from both AC sales and extended warranty are material in its financial statements.

Question

V-Trade is preparing its financial statements for the year ending 31 March 20X1. Should accounting policy information on revenue recognition be disclosed?

Answer

V-Trade observes that:

the accounting policies were unchanged during the year;
the accounting policies applied are not chosen from an available set of alternatives;
accounting policies for revenue recognition are described in Ind AS, and not derived by V-Trade from paragraphs 10–12 of Ind AS 8; and
the accounting policies are not very complex.

However, V-Trade observes that the revenue amounts are material to the financial statements and that judgment has been used in applying the accounting policies, for example in:

identification of performance obligations, in particular concluding that its extended warranty service is distinct from the sale of the AC even though they are not sold separately;
determining if any significant financing component exists in the prepaid warranty plan;
allocating the contract price to the performance obligations; and
determination of when the performance obligation for the extended warranty (service-type warranty) is satisfied.

Consequently, to sufficiently understand the amounts presented, primary users of V-Trade’s financial statements might need information about how the accounting policies for revenue recognition have been applied by V-Trade.

Hence, entity-specific information about accounting policies for revenue recognition would likely be disclosed, in addition to the disclosures of significant judgements made in the application of paragraphs 123–125 of Ind AS 115
and other relevant disclosure requirements in Ind AS 115.

Measurement of operating segment profit or loss, assets and liabilities

The accounting policy information about policies of the operating segments is the same as those described as part of the significant accounting policy information, except that pension expense for each operating segment is recognised and measured on the basis of cash payments to the pension plan. Diversified Company evaluates performance on the basis of profit or loss from operations before tax expense not including non-recurring gains and losses and foreign exchange gains and losses.

Transition and comparative information

The amendments affect the disclosure of narrative and descriptive information. Comparative information is only required for narrative and descriptive information if it is ‘relevant to understanding the current period’s financial statements’ (paragraph 38 of Ind AS 1). Providing comparative accounting policy information would be unnecessary in most circumstances because
if the accounting policy:

(a) is unchanged from the comparative periods, the disclosure of the current period’s accounting policy is likely to provide users with all the accounting policy information that is relevant to an understanding of the current period’s financial statements; or

(b) has changed from the comparative periods, the disclosures required by paragraphs 28–29 of Ind AS 8 are likely to provide any information about the comparative period’s accounting policies that relevant to an understanding of the current period’s financial statements.

BCAJ Admin

Is Surplus in Profit and Loss Account a Free Reserve?

When I pose this question, the immediate answer is, “Any Doubt?” If we see the provisions of the Companies Act, 2013 (CA 2013) as well as the previous Act (CA 1956), one will note that the answer is not free from doubt.

CA 2013 contains several provisions where limits under the sections are calculated as per cent of Paid up Capital and Free Reserves such as section 68 (Buy Back of shares), section 73 (Acceptance of Deposits), section 180 (Borrowing Powers of the Board), section 186 (Loans and Investments by companies). If these calculations are incorrectly made by including an item wrongly in Free Reserves, it can involve a violation under CA 2013.

Let us, therefore, see some of the related provisions of the CA 1956/2013, and related rules and seek a reply to our query regarding surplus in the Profit and Loss Account.

I. PRESENTATION OF SURPLUS IN BALANCE SHEET

Let us have a look at the provisions of Schedule III Part I for the presentation of Reserves and Surplus.

Reserves and Surplus:

i) Reserves and Surplus shall be classified as: (a) Capital Reserves; (b) Capital Redemption Reserve; (c) Securities Premium; (d) Debenture Redemption Reserve; (e) Revaluation Reserve; (f) Share Options Outstanding Account; (g) Other Reserves — (specify the nature and purpose of each reserve and the amount in respect thereof);

(h) surplus, i.e., balance in Statement of profit and loss disclosing allocations and appropriations such as dividend, bonus shares and transfer to/from reserves etc. (Additions and deductions since last Balance Sheet to be shown under each of the specified heads) (ii) A reserve specifically represented by earmarked investments shall be termed as a ‘fund’. (iii) Debit balance of statement of profit and loss shall be shown as a negative figure under the head ‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after adjusting the negative balance of surplus, if any, shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure is negative.

We thus note that surplus is referred to as Balance in the Statement of profit and loss Account and stands on a different footing as compared to Reserves which are mentioned in (a) to (g) above.

II. FREE RESERVES UNDER COMPANIES ACT, 1956 (CA 1956)

CA 1956 did not have the definition of Free Reserves in the definition chapter. However, for the limited purpose of its section 372A, the term ‘Free Reserves’ was defined as under:

“372A. Explanation (b)— ‘Free reserves’ means those reserves which as per latest audited balance sheet of the company are free for distribution as dividend and shall include balance to the credit of the securities premium account but shall not include share application money.”

This definition is not exhaustive. The term ‘Free Reserves’ is also defined in other enactments and rules. Under rule 2(d) of the Companies (Acceptance of Deposits) Rules, 1975 (AODR 1975), it is defined as under:

‘Free reserves’ include the balance in the share premium account, capital and debenture redemption reserves and any other reserves shown or published in the balance sheet of the company and created by appropriation out of the profits of the company, but does not include the balance in any reserve created: (i) for repayment of any future liability or for depreciation in assets or for bad debts; (ii) by the revaluation of any assets of the company.”

It is interesting to note that Section 372A was introduced in the statute book by the Companies (Amendment) Act, 1999 w.e.f. 31st October, 1998. Therefore, till then, one needed to refer to the definition of Free Reserves for the limited purpose of AODR 1975. These rules dealt with the Acceptance of Deposits, and for the said purpose, limits were prescribed based on Paid Up Capital and Free Reserves. A clarification was sought from MCA regarding Free Reserves and MCA clarified as under:

Rule 2(d): Whether amount of surplus in the profit and loss account forms part of “free reserve” as defined in the rules?

After re examination of the matter in detail, it has since been decided that the amount of “surplus” shown in the profit and loss account carried forward under the heading “Reserve and Surplus” appearing in the balance sheet of company, may be treated as part of “free reserve”, as defined under the Rules, subject, of course, its satisfying condition that it arises by appropriation out of the profits of the company. [LETTER NO. 3/1/80 CL X, DATED 3rd, February, 1982.]

In fact, this clarification is also conditional, and one needs to look into the highlighted portions at the beginning, which indicates that this clarification is given on re-examination. (Does it mean that there was a contrary view before?) The closing condition that surplus arises out of appropriation of profits is further confusing. But be that as it may, this clarification is for a limited purpose of AODR 1975 and speaks very less and confuses more.

III. RESERVE AND SURPLUS AS DEFINED IN GUIDANCE NOTE* ON TERMS USED IN FINANCIAL STATEMENTS

Para 14.04 Reserve: The portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability. The reserves are primarily of two types: capital reserves and revenue reserves.

Para 15.21 Surplus: Credit balance in the profit and loss statement after providing for proposed appropriations, e.g., dividend or reserves.

*Although this Guidance note is withdrawn later on.

Thus, we note that both the terms are not used interchangeably. In fact, one will have to keep in mind a basic premise of how the Reserve comes into existence. The reserve comes into existence with the appropriations from the Profit and loss Account (i.e., surplus), whereas a surplus is the Balance remaining after appropriations. Surplus is a balancing figure, unlike reserves. Thus, the Reserve is an end result arising from the source, which is a Surplus in the Profit and loss Account.

IV. DEFINITION OF FREE RESERVES UNDER CA 2013

As mentioned before, the term Free Reserves is now defined in the Definitions Chapter in the CA 2013. Section 2(43) of CA 2013 defines Free Reserves as:

Section 2(43) ― free reserves means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend:

Provided that — (i) any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or (ii) any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves;

If we paraphrase this definition, one notes following essential elements:

Definition is exhaustive.
Only Reserves are included (such reserves).
Such reserves are as per the latest audited balance sheet.
Such reserves are available for distribution as dividend.
Proviso carves out an exception as to few notional gains etc.

If we look at the essential elements of this definition, prima facie surplus in the profit and loss account does not satisfy the condition because it is not a reserve created from the profit and loss account. It represents a balance in the profit and loss account after appropriations. It satisfies a latter condition of being available for the distribution of dividends, but it is not a reserve.

At this stage, it will not be out of place to note the observation of Mumbai Tribunal in the matter of LIC Housing Finance limited vs. DCIT 2(2), Mumbai (180 ITD 45). The tribunal has observed as under in Para 2.4 of the order:

2.4 We have carefully considered the rival submissions and deliberated on cited decision of the Tribunal. As per the provision of Sec 36(1)(viii), certain specified assesses are eligible to claim deduction to the extent of 40% from profit derived from specified business upon creation of special reserve. As per the proviso, if the amount carried to such special reserve account, from time to time, exceeds twice the amount of the paid-up share capital and of the general reserves, no allowance under this clause shall be made in respect of such excess. The expression used in the proviso is the general reserves. The term general reserves have been used in plural sense and preceded by the words which would indicate that it carries special meaning and connotes general reserves only to the exclusion of other. In our considered opinion, the reserves are created as an appropriation out of Profit & Loss Account and the terms Profit & Loss Account & General reserves as mentioned in the proviso could not be equated with each other, in the manner, as suggested by Ld. AR by relying upon the letter* of Department of Company Affairs. The said circular, in our considered opinion, would have limited applicability in the context of which it has been issued and designed to apply in certain specific situation only. The expression used in the proviso are quite clear which mandates the inclusion of only the general reserves and nothing else. As per doctrine of literal interpretation, when the wordings in the statute are clear, the same has to be given the full effect. Therefore, we are unable to accept the arguments raised by Ld.AR, in this regard. Our view is duly supported by the cited decision of the Tribunal rendered on identical set of facts and circumstances. The coordinate bench has confirmed the stand of learned first appellate authority in excluding the balances in Share premium account, Profit & Loss Account and special Reserve account while computing the general reserves. Nothing on record would suggest any change in facts or as to how the said ruling is not applicable to the facts of the case.

* LETTER NO. 3/1/80 CL X, DATED 3rd February, 1982, is referred in Para 2.3 of the order which is referred in Part II of this article above.

We are reading this judgment only to note the observation that reserves are created out of the Profit and loss Account. In my view, reserves do not come into existence on their own but derive their existence from the source from which they are created.

V. PAYMENT OF DIVIDEND OUT OF RESERVES

As per the provisions of section 123 of CA 2013, dividends can be paid from the following sources:

1(a) out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2), or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or out of both; or

The Second and third proviso to sub-section 1 of Section 123 reads as under:

Provided further that where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividends out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf:
Provided also that no dividend shall be declared or paid by a company from its reserves other than free reserves:

We thus note that dividends can be paid from current or past profits as well as from the reserves. However, when dividends are declared out of Free Reserves, The Companies (Declaration and Payment of Dividend) Rules, 2014 (DP Rules, 2014) apply. The crucial words in the second proviso are underlined. This indicates that if there is a balance in the profit and loss account, then provisions of DP Rules, 2014 do not apply since word and is used.

This view is supported by the clarification from ICSI in its Guidance Note on Dividends. The clarification reads as under:

This is to clarify that the declaration of Dividend out of profits for previous year which are disclosed under the head ‘Surplus’ in the Financial Statements will not tantamount to declaration of Dividend out of reserves and accordingly will not attract the statutory requirements relating to declaration of Dividend out of reserves.

So, this is another instance where the legislature itself has distinguished between Free “Reserves” and “Surplus in profit and loss account”.

An interesting proposition was introduced by a few large companies such as Nestle India, and HUL, who have reclassified Reserves and transferred a balance standing in the Reserves to the Profit and Loss account and after that distributed larger dividends.

If we take the case of HUL, the scheme of arrangement was approved by the shareholders and thereafter endorsed by NCLT.

What did HUL achieve in this case?

Rationale and Significant Benefits of the Scheme

The Board of Directors have clarified that “the Company has built up significant reserves from its retained profits by way of transfer to General Reserves. Although the excess reserves can be profitably utilised for overall growth strategy, however, the Board of Directors is of the view that even after considering the foreseeable investments required for such opportunities over the next few years, the funds represented by the General Reserves are in excess of the Company’s current and anticipated operational needs.”

The Board further clarified that the “Company has strong cash flow delivery and the accumulated General Reserves being more than what is needed to fund growth. Further, with a view to providing greater flexibility for the utilisation of such funds, the Company proposes to transfer the amount lying in the credit of General Reserves to the head of the Profit and Loss Account.

Pay-out of Surplus Funds to Members

Upon the Scheme becoming effective, the amount so credited shall be paid out to the Members of the Company, from time to time, by the Board of Directors, at its sole discretion, in such manner, quantum and at such time as the Board of Directors may decide.”

Since HUL desired to make pay-out to its shareholders by reclassifying 100 per cent General Reserves to Profit & Loss Account it was necessary to create a Scheme of Arrangement.

Why it was necessary to frame the Scheme of Arrangement

In terms of the provisions of Section 123 of the Companies Act, 2013, a company generally transfers a certain percentage of profits to the reserves before declaring any dividend during a financial year. Based on that, HUL has created its reserves by transferring profits from time to time.

Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 provides that in the event of inadequacy or absence of profits in any year, a company may declare dividends out of free reserves provided, amongst others, that the total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up Share Capital and Free Reserves as appearing in the latest audited financial statement. It means that during any financial year dividends can be declared from Free Reserves only in case of inadequacy or absence of profits and only to the extent of 10 per cent of the paid-up capital and free reserves.

Since HUL desired to make a pay-out to its shareholders by reclassifying 100 per cent General Reserves to Profit & Loss Account and a combined reading of the above provisions puts restrictions for the same, it was necessary to create a scheme of Arrangement. Framing a Scheme of Arrangement was the only option for HUL to reclassify General Reserves to Profit & Loss Account.

All the above discussion will show that one needs to strike a correct balance while transferring profits to reserves. If you transfer more than the required, dividends cannot be freely distributed. If you leave more balance in the Profit and Loss Account, one can pay larger dividends, but such balance may not be treated as the free reserve for certain purposes. This also supports the view that a surplus in the Profit and Loss Account is not a reserve created.

VI. WHY THIS DISCUSSION ON FREE RESERVES IS IMPORTANT

We find several references in the Act to Free Reserves and a few of them are given hereunder:

Section	What does it cover	Remarks
2(43)	Definition.
63	Issue of Bonus Shares.	Out of Free Reserves permitted.
68	Power of the company to purchase its own securities.	Power to buy back out of free reserves.
73	Prohibition on acceptance of deposits from the public.	Limit is w.r.t. Paid up Capital and Free Reserves.
123	Declaration of dividend.	Criteria for declaration of dividends out of Free Reserves.
180	Restrictions on powers of the Board.	Borrowing up to aggregate of paid-up capital, Free Reserves, and securities premium account.
186	Loan and investment by the company.	Criteria for loans and investments tied with Free Reserves being one of the components for determination.

Sections 2(43), 73 (Acceptance of Deposits) and 123 of CA 2013 are already discussed above. As regards sections 180 and 186 of CA 2013, they do not pose a threat because limits can be enhanced by resolution/s passed at AGM. This leaves us with the most popular section of the corporate world regarding Buy Back of Shares.

Section 68 prescribes various sources from which buy back can be made, namely Free Reserves / The Securities Premium / Proceeds of the issue. Sub-section 1 of Section 68 gives these sources as separate sources [sub-section 1(a) to (c)]. However, Explanation II to Section 68 provides that for the purposes of this section (section 68), “free reserves” includes securities premiums. The said explanation thus does not mention about the surplus in the profit and loss account being included in Free Reserves. It is therefore advisable to exercise caution in the matter of buy back, especially when one has a large component of profit and loss account under Reserves and Surplus.

Therefore, having discussed relevant provisions / rules as applicable, one cannot conclusively say that surplus in profit and loss account forms part of free reserves for all purposes. In fact, the discussion made above will lead to the conclusion that Free Reserves do not include a surplus in the profit and loss account. Wherever legislature wanted to clarify that surplus is to be included in Free Reserves, it has done so. However, if one does not come across such a clarification, a caution is advised.

VII. CONCLUDING REMARKS AND SUMMARY AND SUGGESTIONS

A surplus in the Profit and Loss Account is presented separately in Financials under Reserves and Surplus, and the Surplus denotes a balancing figure before appropriations.
Free Reserves were not defined under CA 1956 except for a limited purpose of section 372A of the CA 1956. In respect of AODR 1975, MCA specifically issued a clarification to state that Free Reserves included surplus in the Profit and Loss Account only for a limited purpose of rule 2(d) of AODR 1975.
Guidance Note on Terms used in Financial Statement also clarified that surplus in the Profit and Loss Account only represents a balancing figure and reserves come into existence only from appropriations.
The definition of Free Reserves under CA 2013 is exhaustive. Mumbai tribunal has succinctly brought out a difference between surplus in Profit and Loss Account and Reserves.
Payment of dividends out of Reserves Rules 1975 and DP Rules, 2014 both do not apply to the payment of dividends from surplus in the Profit and loss Account since surplus in the Profit and Loss Account is not a General Reserve.
Treating surplus in the Profit and Loss Account as part of Free Reserves may lead to unwanted complications with the regulators in the absence of clarity in the matter of interpretation.
If one is confronted with such a situation of huge surplus in the Profit and Loss Account, one may call for an AGM / EGM and explore the possibility of transfer to Reserves so as to serve one’s purpose. At least that is not restricted presently. This situation can be common these days since the transfer of Profits to Reserves is not mandated under any rules, even in the case of dividend-paying companies.

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE

As per the amendments to the Companies Act, 2013 and Rules thereto, for Financial Years commencing on or after 1st April, 2023, i.e., audit reports issued for FY 2023–24, the auditor needs to report on whether the accounting software used by a company has a feature of recording audit trail (edit log) facility and whether the same has been operated throughout the year and it has not been tampered. To assist auditors on this new reporting requirement, ICAI has, in February 2024, issued an Implementation Guide on Reporting on Audit Trail under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 (Revised 2024) Edition.

Given below are instances of modified reporting on the above for the year ended 31st March, 2024. (One such instance was also given in June 2024 issue.)

HINDUSTAN UNILEVER LIMITED

Report on Other Legal and Regulatory Requirements

As required by Section 143(3) of the Act, we report that:

(b) In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books, except for certain matters in respect of audit trail as stated in the paragraph 2B(f) below;

….

f) The modifications relating to the maintenance of accounts and other matters connected therewith in respect of audit trail are as stated in the paragraph 2A(b) above on reporting under Section 143(3)(b) of the Act and paragraph 2B(f) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.

With respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us:

f) Based on our examination which included test checks and in accordance with requirements of the
Implementation Guide on Reporting on Audit Trail under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014, except for the instances mentioned below, the Company has used accounting software for maintaining its books of account, which have a feature of recording audit trail (edit log) facility and the same has operated throughout the year for all relevant transactions recorded in the respective software:

(i) The feature of recording audit trail (edit log) facility was not enabled at the database layer to log any direct data changes for the accounting software used for trade scheme masters;

(ii) We are unable to comment if the audit trail (edit log) facility was enabled at the database layer to log any direct data changes for accounting software operated by a third-party service provider and used for maintaining purchase orders in absence of independent auditor’s report in relation to controls at the third-party service provider;

(iii) For one accounting software, changes to the application layer by a super user does not have feature of a concurrent real time audit trail.

Further, where audit trail (edit log) facility was enabled and operated throughout the year, we did not come across any instance of audit trail feature being tampered with during the course of our audit.

The back-up of audit trail (edit log) maintained on the server physically located in India for the financial year ended 31st March, 2024, except for the back-up of audit trail (edit log) of trade scheme masters (maintained on servers physically in India from 1st January, 2024 onwards) and for back up of audit trail (edit log) of purchase orders (not maintained on servers physically in India).

TATA CONSUMERS PRODUCTS LIMITED

Report on Other Legal and Regulatory Requirements

As required by Section 143(3) of the Act, based on our audit, we report that:

b) In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books, except for not complying with the requirement of audit trail to the extent stated in (i) and (vi) below.

……

f) The modification relating to the maintenance of accounts and other matters connected therewith is as stated in paragraph (b) above.

……

i) With respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, as amended, in our opinion and to the best of our information and according to the explanations given to us;

vi. Based on our examination, which included test checks, the Company, has used accounting software systems for maintaining its books of account for the financial year ended 31st March, 2024 which have a feature of recording audit trail (edit log) facility and the same has operated throughout the year for all relevant transactions recorded in the software systems, except in respect of maintenance of records of a hospital which was maintained in an accounting software system in which the audit trail feature did not operate from 1st April, 2023 till 31st August, 2023.

Further, during the course of our audit, we did not come across any instance of audit trail feature being tampered with, in respect of accounting softwares for the period for which the audit trail feature was operating.

As proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 is applicable from 1st April, 2023, reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 on preservation of audit trail as per the statutory requirements for record retention is not applicable for the year ended 31st March, 2024.

AMBUJA CEMENTS LIMITED

Report on Other Legal and Regulatory Requirements

As required by Section 143(3) of the Act, we report, to the extent applicable, that:

b) In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books, except for the matters stated in the paragraph (vi) below on reporting under Rule 11(g);

…..

h) The modification relating to the maintenance of accounts and other matters connected therewith are as stated in the paragraph (b) above on reporting under Section 143(3)(b) and paragraph (vi) below on reporting under Rule 11(g).

……

vi. Based on our examination which included test checks, the Company has used accounting software and a payroll application for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has operated throughout the year for all relevant transactions recorded in the software / application. However, audit trail feature is not enabled for certain direct changes to data when using certain access rights at the application level for the accounting software; and at the database level for the accounting software and payroll application, as described in Note 70 to the financial statements. Further, during the course of our audit we did not come across any instance of audit trail feature being tampered with in respect of the accounting software and payroll application.

From Notes to Accounts

Note 70 – Audit Trail

The Company uses an accounting software and a payroll application for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has operated throughout the year for all relevant transactions recorded in the accounting software and the payroll application, except that a) audit trail feature is not enabled for certain direct changes to the data for users with the certain privileged access rights to the SAP application and b) audit trail feature is not enabled at the database level for the payroll application and HANA database. Further, no instance of audit trail feature being tampered with was noted in respect of the accounting software and payroll application.

Presently, the log has been activated at the application and the privileged access to HANA database continues to be restricted to a limited set of users who necessarily require this access for maintenance and administration of the database.

SULA VINEYARDS LIMITED

Report on Other Legal and Regulatory Requirements

Further to our comments in Annexure I, as required by section 143(3) of the Act based on our audit, we report, to the extent applicable, that:

b) In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books; except for the matter stated in paragraph 17(h)(vi) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 (as amended);

…..

f) The qualification relating to the maintenance of accounts and other matters connected therewith are as stated in paragraph 17(b) above on reporting under section 143(3)(b) of the Act and paragraph 17(h)(vi) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 (as amended);

…..

h) With respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014 (as amended), in our opinion and to the best of our information and according to the explanations given to us:

vi. As stated in Note 49 to the accompanying standalone financial statements, and based on our examination which included test checks, except for instance mentioned below, the Company in respect of financial year commencing on 1st April, 2023, has used accounting software for maintaining its books of accounts which have a feature of recording audit trail (edit log) facility and the same have been operated throughout the year for all relevant transactions recorded in the software. Further, during the course of our audit we did not come across any instance of audit trail feature being tampered with in respect of the accounting software where such feature is enabled.

Nature of exception noted	Details of exception
Instance of accounting software for maintaining books of account which did not have a feature of recording audit trail (edit log) facility.	The accounting software (OnePos and IDS) used for maintenance of sales records for the hospitality services of the Company did not have a feature of recording audit trail (edit log) facility.

From Notes to Accounts

Note 49: Audit Trail

The Ministry of Corporate Affairs (MCA) has prescribed a new requirement for companies under the proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 inserted by the Companies (Accounts) Amendment Rules 2021 requiring companies, which use accounting software for maintaining its books of accounts, to use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in the books of accounts along with the date when such changes were made and ensuring that the audit trail cannot be disabled.

The Company uses accounting software (SAP ECC 6.0 and HROne) for maintaining its books of account which has a feature of recording audit trail (edit log) facility, and the same has operated throughout the year for all relevant transactions recorded in the accounting software.

The Company also uses accounting software (OnePos and IDS) for maintaining sales records of the hospitality services which does not have a feature of recording audit trail (edit log) facility. Based on management assessment, the non-availability of audit trail functions will not have any impact on the performance of the accounting software, as management has all other necessary controls in place which are operating effectively.

ICICI LOMBARD GENERAL INSURANCE COMPANY LIMITED

Report on Other Legal and Regulatory Requirements

As required by paragraph 2 of Schedule C to the IRDAI Financial Statement Regulations read with Section 143(3) of the Act, in our opinion and according to the information and explanations given to us, we report to the extent applicable that:

b) Proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books except for the matters stated in the paragraph 2 (j) (vi) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014;

…..

h) The observation relating to the maintenance of accounts and other matters connected therewith are as stated in the paragraph 2 (b) above on reporting under Section 143(3)(b) of the Act and paragraph 2 (j) (vi) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.

…..

j) With respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us:

vi. As stated in Note 5.2.30 to the financial statements and based on our examination which included test checks on the software applications, except for instances mentioned below, the Company, in respect of the financial year commencing on 1st April, 2023, has used software applications for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated throughout the year for all relevant transactions recorded in the respective software applications. Further, during the course of our audit, we did not come across any instance of audit trail feature being tampered with.

Instance of accounting software for maintaining books of account which did not have a feature of recording audit trail (edit log) facility.	In case of one of the policy and claim administration applications, discontinued w.e.f. 31^st October, 2023, used for maintaining policy and claim records related to the insurance business demerged from Bharti Axa General Insurance Company Limited and forming part of the Company’s business, we are unable to test whether the audit trail feature was enabled or tampered with.
Instances of accounting software for maintaining books of account for which the feature of recording audit trail (edit log) facility was not operated throughout the year for all relevant transactions recorded in the software.	The audit trail feature was not enabled up to 15^th March, 2024, at the database level for accounting software used for maintenance of commission and reinsurance records by the Company to log any direct database level changes.

From Notes to Accounts

The Company has implemented a framework to identify relevant applications from the overall IT universe as “Books of account” as per the Companies Act 2013. The Company’s books of account maintained in the electronic mode comply with the requirements to the Companies Act 2013, read with relevant rules and notifications, except:

The Company follows a specific procedure for direct database changes in a controlled environment which includes logging of changes into a ticketing approval tool with an integrated approval process. This tool records all the specific details regarding audit trail requirements for capturing timing, the executor and the details of the change. Further, this information was available for the entire fiscal year. In respect of Applications used for maintenance of commission and reinsurance records, the Company has implemented logs at the application level to record audit trail (edit logs) of transactions directly impacting the database from the backend, starting 15th March, 2024.

The Company has discontinued one of the policy and claim administration applications (used for maintenance of policy and claim records of business demerged from Bharti Axa General Insurance Company Limited and forming part of the Company) on 31st October, 2023 and all open transactions have been migrated to its other policy and claim administration applications. As of 31st March, 2024, access to this specific application and its database is no longer available to the Company to demonstrate the audit trail feature in a live environment.

ARCHEAN CHEMICALS INDUSTRIES LIMITED

Report on Other Legal and Regulatory Requirements

As required by Section 143(3) of the Act, we report that:

k) In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books except for the matters stated in paragraph (h)(vi) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.

…..

g) The observation relating to the maintenance of accounts and other matters connected therewith are as stated in the paragraph (b) above on reporting under Section 143(3)(b) and paragraph (h)(vi) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.

h) With respect to the other matters to be included in the Auditors’ Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us:

vi) Relying on representations / explanations from the Company and based on our examination which includes test checks on the software application, the Company has used accounting software (ERP) for maintaining its books of account, which has a feature of recording audit trail (edit log) facility and the same has operated throughout the year for all relevant transactions recorded, and we did not come across any instance of audit trail feature being tampered with during the course of our audit.

However, audit trail was not enabled to log any direct data changes at database level both in application layer and database layer of the accounting software.

INDIAN HOTELS COMPANY LIMITED

Report on other Legal and Regulatory Requirements

As required by Section 143(3) of the Act, we report that:

b) In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books except for the matter stated in the paragraph 2B(f) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.

…..

f) The modification relating to the maintenance of accounts and other matters connected therewith are as stated in the paragraph 2A(b) above on reporting under Section 143(3)(b) and paragraph 2B(f) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.

With respect to the other matters to be included in the Auditors’ Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us:

f. Based on our examination which included test checks, except for the instances mentioned below and as explained in note 47 of the standalone financial statements, the Company has used accounting software for maintaining its books of account, which has a feature of recording audit trail (edit log) facility and the same has operated throughout the year for all relevant transactions recorded in the respective software:

i. The feature of recording audit trail (edit log) facility was not enabled, for a portion of the year at the application layer of the accounting software used for maintaining general ledgers for master fields and direct data changes to transactions; the audit trail feature was enabled in a phased manner between June 2023 and July 2023.

ii. In case of the accounting software used for maintaining general ledger for one of its hotel units, the audit trail (edit log) facility for data changes performed by users having privileged access was enabled from 21st December, 2023 onwards at the application layer and accordingly, such audit trail feature was not enabled for the period from 1st April, 2023 to 20th December, 2023.

iii. The feature of recording audit trail (edit log) facility was not enabled at the database level to log any direct data changes for the accounting software used for maintaining the books of accounts. Further, for the periods where audit trail (edit log) facility was enabled and operated for the respective accounting software, we did not come across any instance of the audit trail feature being tampered with.

From Notes to Accounts

Note 47 – Audit Trail

In the ERP, audit trail at transaction level on application layer has an embedded audit trail in sub-ledger accounting tables which creates unique events for every transaction along with dates of creating and updating transactions with the identity of users. General ledger journals are not allowed to be modified after posting and the date and creator of journals are tracked. This feature cannot be disabled. Additionally, audit trail was enabled for masters and transactions in a phased manner from June to July 2023. Audit trail feature with respect to application layer changes in accounting software has worked effectively during the year. PMS and POS (Property Management and Point of Sales software) has inbuilt audit trail feature from 1st April, 2023. Post publication of ICAI implementation guide, direct database level changes was also included in audit trial scope. In respect of ERP, access to direct database level changes is available only to privileged users and for PMS and POS, it is not available to any of the Company personnel. However, the software product owners have confirmed that there is no audit trail enabled for database level changes.

VIVRITI CAPITAL LIMITED

Report on Other Legal and Regulatory Requirements

As required by Section 143(3) of the Act, we report that:

b) In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books except for the matters stated in the paragraph 2B(f) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.

…..

f) The qualification relating to the maintenance of accounts and other matters connected therewith are as stated in the paragraph 2A(b) above on reporting under Section 143(3)(b) and paragraph 2B(f) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.

f. Based on our examination which included test checks, except for the instances mentioned below, the Company has used accounting software for maintaining its books of account, which has a feature of recording audit trail (edit log) facility and the same has been operating throughout the year for all relevant transactions recorded in the software:

With respect to one accounting software, the feature of recording audit trail (edit log) facility was not enabled at the database layer for the period from 1st April, 2023 to 28th November, 2023. Further, the feature of audit trail (edit log) was not enabled in full at the application layer of such core accounting software in respect of account payable and payment interface. With respect to maintaining loan management information, the feature of recording the audit trail (edit log) has not been enabled.

Further, for the periods where audit trail (edit log) facility was enabled for the respective accounting software, we did not come across any instance of the audit trail feature being tampered with.

BCAJ Admin

Amendment to Ind AS 12 – Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction

WHAT IS THE ISSUE?

MCA issued amendments to Ind AS 12 Income Taxes in order to address potential issues of inconsistency and interpretation by users in respect of the initial recognition exemption (“IRE”) detailed in paragraphs 15 and 24 of Ind AS 12 (for deferred tax liabilities and assets respectively).

Ind AS 12 contains exceptions from recognising the deferred tax effects of certain temporary differences arising on the initial recognition of some assets and liabilities, generally referred to as the ‘initial recognition exception’ or ‘IRE’. Prior to amendment views differed on whether (and to what extent) the IRE applied to transactions and events, such as leases, that lead to the recognition of an asset and a liability.

The amendments introduce an exception to the initial recognition exemption in Ind AS 12. Additional exclusions have been added to the IRE, detailed in paragraphs 15(b)(iii) and 24(c) for deferred tax liabilities and assets respectively. Applying this exception, an entity does not apply the initial recognition exemption for transactions that give rise to equal taxable and deductible temporary differences – such that deferred taxes are calculated and booked for both temporary differences, both at initial recognition and subsequently. Only if the recognition of a lease asset and lease liability (or decommissioning liability and decommissioning asset component) give rise to taxable and deductible temporary differences that are not equal, would the IRE be applied.

Example

An entity (Lessee) enters into a five-year lease of a building.
The annual lease payments are ₹100 payable at the end of each year.
Advance lease payments and initial direct costs are assumed to be nil.
The interest rate implicit in the lease cannot be readily determined. Lessee’s incremental borrowing rate is 5 per cent per year.
At the commencement date:
Lessee recognises a lease liability of ₹435 (measured at the present value of the five lease payments of ₹100, discounted at the interest rate of 5 per cent per year) ,
Lessee measures the right-of-use asset (lease asset) at ₹435, comprising the initial measurement of the lease liability (₹435).

Tax law:
The tax law allows tax deductions for lease payments when an entity makes those payments.
Economic benefits that will flow to Lessee when it recovers the carrying amount of the lease asset will be taxable.
A tax rate of 20 per cent is expected to apply to the period(s) when Lessee will recover the carrying amount of the lease asset and will settle the lease liability.
After considering the applicable tax law, Lessee concludes that the tax deductions it will receive for lease payments relate to the repayment of the lease liability.

Deferred tax on the lease liability and related component of the lease asset’s cost:

At the inception:
The tax base of the lease liability is NIL because Lessee will receive tax deductions equal to the carrying amount of the lease liability (₹435).
The tax base of the related component of the lease asset’s cost is also NIL because Lessee will receive no tax deductions from recovering the carrying amount of that component of the lease asset’s cost (₹435).
The differences between the carrying amounts of the lease liability and the related component of the lease asset’s cost (₹435) and their tax bases of nil result in the following temporary differences at the inception:
a taxable temporary difference of ₹435 associated with the lease asset; and
a deductible temporary difference of ₹435 associated with the lease liability.
IRE does not apply because the transaction gives rise to equal taxable and deductible temporary differences.
Lessee concludes that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised.
Lessee recognises a deferred tax asset and a deferred tax liability at inception, each of ₹87 (₹435 × 20 per cent), for the deductible and taxable temporary differences.

TRANSITIONAL PROVISIONS

98J Deferred Tax related to Assets and Liabilities arising from a Single Transaction, amended paragraphs 15, 22 and 24 and added paragraph 22A. An entity shall apply these amendments in accordance with paragraphs 98K–98L for annual reporting periods beginning on or after 1st April, 2023.

98K An entity shall apply Deferred Tax related to Assets and Liabilities arising from a Single Transaction to transactions that occur on or after the beginning of the earliest comparative period presented.

98L An entity applying Deferred Tax related to Assets and Liabilities arising from a Single Transaction shall also, at the beginning of the earliest comparative period presented:

(a) recognise a deferred tax asset — to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised — and a deferred tax liability for all deductible and taxable temporary differences associated with:

(i) right-of-use assets and lease liabilities; and

(ii) decommissioning, restoration and similar liabilities and the corresponding amounts recognised as part of the cost of the related asset; and

(b) recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at that date.

EXAMPLE

Entity X recognised a provision for the decommissioning of a nuclear plant in 2011 for ₹9,00,00,000; it capitalised the associated expenses as an asset and depreciated this over the 60-year expected period of use until decommissioning is required. The tax rules allow for deduction of these expenses on a cash basis. At the time of the transaction, Entity X applied the IRE to both the asset and liability separately, therefore, no deferred tax has ever been accounted for in relation to this transaction. The decommissioning provision has been discounted in accordance with Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets. The table below shows the associated carrying values of the provision and asset at relevant dates:

Date	Carrying value of provision (₹) in million	Deferred tax asset at 20 per cent (₹) in million	Carrying value of asset (₹) in million	Deferred tax liability at 20 per cent (₹) in million
1^st April, 2011	90.0	18.0	90.0	18.0
1^st April, 2022	170.8	34.2	73.6	14.7

Entity X adopts the Ind AS 12 amendments in its financial statements for the year ended 31st March, 2024, with the
beginning of the earliest period presented being 1st April, 2022. The required accounting entry on the date of transition (1st April, 2022) is:

Dr deferred tax asset ₹34.2m

Cr deferred tax liability ₹14.7m

Cr retained earnings ₹19.5m

If Entity X had, instead, previously recognised deferred tax on a net basis (i.e., assessed the temporary differences net), then, brought forward, as at 1st April, 2022 it would already be carrying a deferred tax asset of ₹19.5m. In which case, the required accounting entry on transition (1st April, 2022) is:

Dr deferred tax asset ₹14.7m

Cr deferred tax liability ₹14.7m

That is, there would be nil impact on opening retained earnings.

BCAJ Admin

NFRA Digest

(Editorial Note: Given the increasingly important role played by NFRA in the context of auditing, BCA Journal, will be continuing with reporting on NFRA developments. This new feature titled NFRA DIGEST will cover orders, reports, circulars, notifications, rules, inspection reports, discussion papers, etc. BCAJ seeks to bring to light some of the important changes affecting the profession of audit with a view that members and readers can learn from these developments. The aim is to enable members to improve their audit processes and reduce their audit risk by improving quality and governance frameworks mandated by applicable standards and regulatory expectations. In this context, we are pleased to bring this new feature NFRA Digest to our readers, covering NFRA updates. This is another in a row and will cover the circulars issued by NFRA to date and NFRA orders post-December 2023)

BACKGROUND ABOUT NFRA ORDERS/CIRCULARS:

The National Financial Reporting Authority (“NFRA”) was constituted on 1st October, 2018, by the Government of India under section 132(1) of the Companies Act, 2013 (“the 2013 Act”). Since its inception, the NFRA has issued 67 orders till today highlighting significant deficiencies in the audit process, reporting by the auditors and other matters in relation to the audit of listed entities.

Our previous issues have covered, in detail, the structure of NRFA Orders and Powers of NFRA under Section 132(4)(c) of the 2013 Act with respect to the imposition of monetary penalties and debarment of the member or/and firm, where the professional or other misconduct is proved, key learnings from NFRA orders issued till 31st December, 2023.

In addition to these orders, the NFRA has also issued certain circulars on specific matters based on its findings during the proceedings or on its regular reviews. The NFRA has also issued an order highlighting significant deficiencies in an engagement other than audit engagements.

NFRA CIRCULARS

As per Sub-section 2(b) of section 132 of the Companies Act 2013 read with rule 4(2)(c) of the NFRA Rules 2018, the NFRA is mandated to monitor and enforce compliance with accounting and auditing standards. Further, NFRA is required by sub-section 2(d) of section 132 of the Act read with rule 4(2) of NFRA Rules, to perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties. NFRA monitors compliance with accounting standards by the companies as part of its review of published financial statements.

Based on these reviews, since inception, the NFRA has issued circulars on three important topics:

Topics

Non-accrual of interest on borrowings

Date and Applicability of circular

20^th October, 2022

Applicability:

(a) All Listed companies (b) Unlisted companies specified in Rule 3 of NFRA Rules 2018 (c) Auditors of these companies

Summary of NFRA circular

Issue highlighted:

• The company had been classified as Non-Performing Asset (NPA) by the lender banks and was negotiating one-time settlements with the banks. The company had discontinued accrual/recognition of interest expense on these borrowings.

• The company’s discontinuation of the recognition of accrual of interest while calculating the amortised cost of the borrowings was in violation of Effective Interest Method and Effective Interest Rate (EIR) principles.

• The Statutory Auditors failed to identify and question the company on this change in accounting treatment and report on non-compliance with Ind AS.

Requirement as per Ind-AS:

• As per para B3.3.1, a financial liability is extinguished only when the borrower is legally released from primary responsibility for the liability (or part of it) either by the process of law or by the creditor.

• In the present case, the bank had not released the company from the liability of the borrowings as well the interest. The discontinuation of interest expense recognition on financial liability solely based on the Non-accrual of interest on borrowings borrowing company’s expectation of loan/interest waiver/concession without evidence of the legally enforceable contractual documents is non-compliance with Ind-AS. Hence, the company should have continued the accrual/recognition of interest expenses.

Direction by NFRA:

• All the companies required to follows Ind-AS and their audit committee are advised not to discontinue the recognition of principal and interest based on management expectation of likely settlement with or without concession from the banks. The auditors are required to ensure strict compliance with this circular.

Topics

Accounting policies for Revenue from Contract with Customers and Trade Receivables

Date and Applicability of circular

29^th March, 2023

Applicability:

(a) All Listed companies (b) Unlisted companies specified in Rule 3 of NFRA Rules 2018 (c) Auditors of these companies

Summary of NFRA circular

Issue highlighted:

• Revenue recognition: In many companies, it has been noticed that the significant accounting policies disclosed wrongly state that revenue is recognised and measured at fair value of the consideration received or receivable.

• Trade Receivables: In many companies it has been noticed that their accounting policy, either stating separately or as part of the policy for financial assets including trade receivables, wrongly stating that the trade receivables are initially recognised at fair value.

Requirement as per Ind-AS:

• Revenue recognition: As per para 46 of Ind AS 115, Revenue from contracts with customers requires that the entity shall recognise as revenue the amount of transaction price, excluding the estimates of variable consideration that is allocated to that performance obligation. Under Ind AS 115, the application of fair value is relevant only in a limited set of situations like fair value of consideration in form of other than cash.

• Trade Receivables: As per para 5.1.3 of Ind AS 109, the financial assets in the form of trade receivables, shall be initially measured at their transaction price unless those contain a significant financing component determined in accordance with Ind AS 115.

Direction by NFRA:

• The illustrative examples of correct accounting policies with respect to revenue recognition and trade receivables are mentioned in the circular.

• All the listed companies and other entities falling with the domain of NFRA which are required to follow Ind-AS are hereby advised to comply with Ind AS 115 and Ind AS 109, as discussed above. The auditors of these companies are required to ensure strict compliance, in the performance of their audits, with the provision of the Ind ASs as brought out above.

Topics

Fraud Reporting- Statutory Auditors’ responsibilities

Date and Applicability of circular

26^th June, 2023

Applicability:

(a) Auditors of entities regulated by NFRA

Summary of NFRA circular

Issue highlighted:

• NFRA has noticed that auditors are not fulfilling their statutory responsibilities relating to reporting fraud as mandated under the Companies Act 2013 read with relevant rules and applicable Standards on Auditing (SAs).

• The Hon’ble Supreme Court of India in a recent judgement has held that the consequence of section 140(5) will be applicable also to those auditors who resign from their audit engagements without reporting fraud/suspected fraud.

Requirement under different provisions:

• Section 143(12) of CA 2013 and related rules lays down certain reporting responsibilities on the auditor in relation to fraud. Rule 13 of the Companies (Audit and Auditors) Rules 2014, prescribes detailed steps that need to be followed by auditors in relation to reporting of fraud.

• SA 240- The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements elaborately deals with the auditors’ responsibilities relating to fraud in an audit of financial statements. The guidance in SA 240 also details the communication to the management, TCWG and Regulatory & Enforcement authorities regarding reporting of fraud/suspected fraud.

Direction by NFRA:

• The Statutory Auditors is duty bound to submit Form ADT-4 to the Central Government u/s 143(12) even in cases where the Statutory Auditors is not the first person to identify the fraud/suspected fraud.

• Resignations does not absolve the Auditor of his responsibilities to report suspected fraud or fraud as mandated by law.

NFRA ORDERS:

A) On Statutory Audit Engagements: The observations summarised below relates to the orders issued by NFRA during the period from 01st January, 2024 to 30th April, 2024. Further, the issues covered in this publication represent additional/new observations other than those covered in the previous issues.

1. Despite of giving multiple communications by NFRA to submit the audit files through speed-post, e-mail communications and letters, EP did not respond. (Order No. 002/2024 dated 5th January, 2024)

2. Failure to evaluate the management’s assessment of the entity’s ability to continue as a Going concern despite the presence of significant indicators like defaults in repayment of Cash credit facilities and term loans, uncertainties relating to recoverability of trade receivables, continuing and increasing losses, negative operating cash flows, long delay in completion of many projects etc. (Order No. 003/2024 dated
08th January, 2024)

3. Failure to obtain sufficient appropriate audit evidence relating to revenue recognition and failure to evaluate the risk of fraud in revenue recognition. (Order No. 003/2024 dated 08th January, 2024)

4. Failure to perform physical verification or any alternate audit procedures to determine the existence and condition of inventory and also to modify his audit opinion with respect to inventory. (Order No. 003/2024 dated 08th January, 2024)

5. Failure to determine Materiality for the financial as a whole while establishing the audit strategy and to determine performance materiality for the purpose of assessing the risk of material misstatements and determining the timing, nature and extent of further audit procedures. (Order No. 003/2024 dated
08th January, 2024)

6. Failure to communicate in writing significant deficiencies in internal control with TCWG and with management on a timely basis. (Order No. 003/2024 dated 08th January, 2024)

7. Recognition of interest cost on borrowing rate at a rate lower than loan agreement for FY 2014–15 & 2015-16, disclosing balance interest liability as a contingent liability and non-recognition of interest at all for FY 2016–17 due to ongoing negotiations for restructuring of NPA accounts resulting into understatement of losses. (Order No. 005/2024 dated 22nd February, 2024)

8. Failure to obtain sufficient appropriate audit evidence for the verification of revenue. (Order No. 005/2024 dated 22nd February, 2024)

9. False reporting in CARO with respect to loans given to related parties. (Order No. 005/2024 dated 22nd February, 2024)

10. Violation of the Responsibilities as Joint Auditor. (Order No. 008/2024 dated 12th April, 2024)

11. Indulged in self-review by preparing material information for the financial statements of the Company, which subsequently became the subject matter of audit opinion, and this violated the Code of Ethics and Standards on Auditing. (Order No. 008/2024 dated 12th April, 2024)

12. Failure to analyse the contradictory evidence. (Order No. 008/2024 dated 12th April, 2024)

13. Failure to obtain sufficient appropriate audit evidence regarding the reasonability of estimate of Expected Credit Loss (ECL) on Financial Assets. (Order No. 008/2024 dated 12th April, 2024)

14. Acceptance of Audit Engagement before receipt of NOC from predecessor auditor (Order No. 012/2024 dated 26th April, 2024)

15. Not obtaining sufficient appropriate audit evidence of significant matters (fraud reported by previous auditors as the reason for resignation) reported by the previous auditor before acceptance of engagement and also during the course of audit and reporting.

B) On Other Engagements:

Date of order

3^rd January, 2024

Nature of Engagement

Reports u/s 80 JJAA of the Income Tax Act, 1961

Observations by NFRA

In the order, NFRA highlighted following significant deficiencies in the Form 10DA issued u/s 80JJAA of the Income-tax Act, 1961:

a. Failure to verify reorganization of business with various parties

b. Failure to exclude employees whose contribution was paid by the Government

c. Lapses in reporting additional employees

d. Failure to verify payment of additional employee cost by account payee cheque/draft/electronic means

e. Failure to verify the salary limit of ₹25,000 per month for new employees

Based on the above, NFRA concluded that the
concerned CA has failed to exercise due diligence in the conduct of professional duties and has also failed to obtain sufficient information which is necessary for the expression of an opinion, or its exceptions are sufficiently material to negate the expression of an opinion.

Key Takeaways

The implementation of these circulars issued by NFRA on various matters will be reviewed for scrutiny by them in subsequent inspections of the entities or audit firms. Therefore, it is imperative that the audit firms should create adequate documentation in respect of their audit procedures and diligence applied to ensure compliance of the same either by an entity or themselves.

The NFRA’s recent action on certification engagement of listed entities carried out by CA firms is also one of its kind. The CAs in practice and specially engaged by listed entities for statutory audit or other engagements should exercise a greater degree of professional scepticism.

“It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.” Warren Buffett

BCAJ Admin

Financial Reporting Dossier

A. KEY GLOBAL UPDATES

1. IASB: COMPREHENSIVE REVIEW OF ACCOUNTING FOR INTANGIBLES

On 23rd April 2024, the International Accounting Standards Board (IASB) announced that it will comprehensively review the accounting requirements for intangibles.
This review is mainly based on concerns raised relating to all aspects of IAS 38 Intangible Assets, including its scope, its recognition and measurement requirements (including the difference in the accounting for acquired and internally generated intangible assets), and the adequacy of the information companies are required to disclose about intangible assets.
The project will assess whether the requirements of IAS 38 remain relevant and continue to fairly reflect current business models or whether the IASB should improve the requirements.

2. IASB: AMENDMENTS FOR RENEWABLE ELECTRICITY CONTRACTS

On 8th May 2024, the International Accounting Standards Board published an Exposure Draft proposing narrow-scope amendments to ensure that financial statements more faithfully reflect the effects that renewable electricity contracts have on a company. The proposals amend IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures. The IASB’s swift action responds to the rapidly growing global market for these contracts.
Renewable electricity contracts aim to secure the stability of and access to renewable electricity sources. However, renewable electricity markets have unique characteristics. Renewable electricity sources depend on nature and its supply cannot be guaranteed. The contracts often require buyers to take and pay for whatever amount of electricity is produced, even if that amount does not match the buyer’s needs at the time of production. These distinct market characteristics have created accounting challenges in applying the current accounting requirements, especially for long-term contracts.
To address these challenges, the IASB is proposing some targeted changes to the accounting for contracts with specified characteristics. The proposals would:
address how the ‘own-use’ requirements would apply;
permit hedge accounting if these contracts are used as hedging instruments; and
add disclosure requirements to enable investors to understand the effects of these contracts on a company’s financial performance and future cash flows.

3. IASB: IFRS 18- AID INVESTOR ANALYSIS OF COMPANIES’ FINANCIAL PERFORMANCE:

On 9th April 2024, the International Accounting Standards Board completed its work to improve the usefulness of information presented and disclosed in financial statements. IFRS 18 introduces three sets of new requirements to improve companies’ reporting of financial performance and give investors a better basis for analysing and comparing companies:
Improved comparability in the statement of profit or loss (income statement): Currently there is no specified structure for the income statement. IFRS 18 introduces three defined categories for income and expenses—operating, investing and financing to improve the structure of the income statement, and requires all companies to provide new defined subtotals, including operating profit. The improved structure and new subtotals will give investors a consistent starting point for analysing companies’ performance and make it easier to compare companies.
Enhanced transparency of management-defined performance measures: Many companies provide company-specific measures, often referred to as alternative performance measures. However, most companies don’t currently provide enough information to enable investors to understand how these measures are calculated and how they relate to the required measures in the income statement.

IFRS 18 therefore requires companies to disclose explanations of those company-specific measures that are related to the income statement, referred to as management-defined performance measures. The new requirements will improve the discipline and transparency of management-defined performance measures and make them subject to audit.

More useful grouping of information in the financial statements: Investor analysis of companies’ performance is hampered if the information provided by companies is too summarised or too detailed. IFRS 18 sets out enhanced guidance on how to organise information and whether to provide it in the primary financial statements or in the notes. The changes are expected to provide more detailed and useful information. IFRS 18 also requires companies to provide more transparency about operating expenses, helping investors to find and understand the information they need.

4. FASB: ACCOUNTING GUIDANCE RELATED TO PROFIT INTEREST AWARDS

On 21st March 2024, the Financial Accounting Standards Board (FASB) published an Accounting standard update that improves generally accepted accounting principles (GAAP) by adding illustrative guidance to help entities determine whether profits interest and similar awards should be accounted for as share-based payment arrangements within the scope of ASC 718, Compensation–Stock Compensation.
Certain entities, typically private companies, provide employees and other non-employees with profits interest and similar awards to align compensation with the company’s operating performance and provide those holders with the opportunity to participate in future profits and/or equity appreciation of the company. The Private Company Council and other stakeholders noted the diversity in practice in accounting for these awards as share-based payment arrangements.
The amendment will apply to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in the grantor’s own operations or provides consideration payable to a customer by either of the following:

a. Issuing (or offering to issue) its shares, share options, or other equity instruments to an employee or a non-employee.

b. Incurring liabilities to an employee or a non-employee that meet either of the following conditions:

1. The amounts are based, at least in part, on the price of the entity’s shares or other equity instruments. (The phrase at least in part is used because an award of share-based compensation may be indexed to both the price of an entity’s shares and something else that is neither the price of the entity’s shares nor a market, performance, or service condition.)

2. The awards require or may require settlement by issuing the entity’s equity shares or other equity instruments.

5. FRC: REVISIONS TO UK & IRELAND ACCOUNTING STANDARDS

On 27th March 2024, the Financial Reporting Council issued comprehensive improvements to financial reporting standards applicable in the UK and the Republic of Ireland.
The amendments are designed to enhance the quality of UK financial reporting and help support the access to capital and growth of the businesses applying them. The most significant changes apply to leases and revenue recognition to align with recent changes to international financial reporting standards. The changes will provide better information to users of financial statements including current and potential investors and lenders. In response to stakeholder feedback, the FRC has made improvements to the proposals for lease accounting and revised the recognition exemption for leases of low-value assets to clarify that the focus is to ensure that the most significant leases are recognised in the balance sheet.
Whilst there will be some implementation costs, the FRC has been mindful of the need for changes to be proportionate and to remove any unnecessary reporting burdens. During the extensive stakeholder engagement period many stakeholders, including those representing preparers, generally supported the updates to the accounting model for revenue recognition.

6. PCAOB: STANDARDIZING DISCLOSURE OF FIRM AND ENGAGEMENT METRICS

On 9th April 2024, the PCAOB issued a proposal regarding public reporting of standardized firm and engagement metrics and a separate proposal regarding the PCAOB framework for collecting information from audit firms.
It would require PCAOB-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer to publicly report specified metrics relating to such audits and their audit practice.
The proposal sets out standardized firm- and engagement-level metrics that PCAOB believes would create a useful dataset available to investors and other stakeholders for analysis and comparison. The proposed metrics cover (1) partner and manager involvement, (2) workload, (3) audit resources (4) experience of audit personnel, (5) industry experience of audit personnel, (6) retention and tenure, (7) audit hours and risk areas (engagement-level only), (8) allocation of audit hours, (9) quality performance ratings and compensation (firm-level only), (10) audit firms’ internal monitoring, and (11) restatement history (firm-level only).

7. IESBA: FIRST GLOBAL ETHICS STANDARDS ON TAX PLANNING

On 15th April 2024, the International Ethics Standards Board for Accountants (IESBA) launched the first comprehensive suite of global standards on ethical considerations in tax planning and related services, incorporated in the IESBA Code of Ethics.
The standards establish a clear framework of expected behaviours and ethics provisions for use by all professional accountants and respond to public interest concerns about tax avoidance and the role played by consultants in light of revelations in recent years such as the Paradise and Pandora Papers.
These standards are especially relevant in the context of rising public scrutiny of tax avoidance schemes which can harm companies’ credibility and corporate reputation, as well as risking litigation and harming the public interest. Responding to increased public interest concerns, the fundamental goal of these standards is to ensure an ethical, credible basis for advising on tax planning arrangements, thereby restoring public and institutional trust on a topic that is core to the social contract between corporations and the market which supports them.

B. GLOBAL REGULATORS— ENFORCEMENT ACTIONS AND INSPECTION REPORTS

I. THE FINANCIAL REPORTING COUNCIL, UK

a) Sanctions against Grant Thornton UK LLP (8th April 2024)

The FRC’s Enforcement Committee (Committee) has found that Grant Thornton UK LLP failed to comply with the Regulatory Framework for Auditing in its audit of a local authority’s pension fund for the year ended 31st March 2021.
The Committee found failures in the reviewed audit, which it considered represented a significant departure from the standards expected of a Registered Auditor and had the potential to affect the public, employees, pensioners or creditors. These included two uncorrected material errors which appeared in the version of the pension fund’s audited financial statements that were included in the local authority’s annual report (these errors did not appear in the pension fund’s own financial statements) and insufficient audit evidence obtained that the value of investments was materially accurate.
The Committee considered that it is necessary to impose a Sanction to ensure that Grant Thornton UK LLP’s Local Audit Functions are undertaken, supervised and managed effectively.
The Committee issued a Notice of Proposed Sanction proposing a Regulatory Penalty of £50,000, adjusted by a discount of 20 per cent for co-operation and other mitigating factors to £40,000. The Sanction has been accepted by Grant Thornton UK LLP.

II. THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (PCAOB)

a) Sanctions against Deloitte Indonesia, Deloitte Philippines & KPMG Netherlands (10th April 2024)

The Public Company Accounting Oversight Board (PCAOB) announced five settled disciplinary orders sanctioning Imelda & Raken (“Deloitte Indonesia”), Navarro Amper & Co. (“Deloitte Philippines”), the latter’s former National Professional Practice Director, Wilfredo Baltazar (“Baltazar”), KPMG Accountants N.V. (“KPMG Netherlands) and its former head of Assurance, Marc Hogeboom for violations of PCAOB rules and quality control standards relating to the firms’ internal training programs and monitoring of their systems of quality control.
At all the firms, quality control deficiencies resulted in widespread answer sharing on internal training tests.
The audit partners and other personnel were engaged in widespread answer sharing — either by providing answers or using answers – or received answers without reporting such sharing in connection with tests for mandatory firm training courses.
On at least six occasions, the third-party vendor, in his capacity as the partner responsible for e-learning compliance, shared answers to training assessments with other audit partners at the firm.
The sanctions are as follows:
Deloitte Philippines: $1 Million civil penalty
Deloitte Indonesia: $1 Million civil penalty
Wilfredo Baltazar: $10,000 civil money penalty
KPMG Netherlands: $25 Million civil penalty
Marc Hogeboom: $1,50,000 civil money penalty and a permanent bar

b) Sanctions against Singapore firm for Quality Control Violations (9th April 2024)

The Public Company Accounting Oversight Board (PCAOB) announced a settled disciplinary order sanctioning Singapore-based audit firm Pan-China Singapore PAC (“the firm”) for violations of PCAOB rules and quality control standards.
The PCAOB found that the system of quality control at the firm failed to provide reasonable assurance that it:

1. Used an audit methodology, guidance materials, and practice aids designed to comply with PCAOB auditing standards and other regulatory requirements;

2. Ensured that staff participated in relevant training;

3. Met requirements with respect to audit documentation;

4. Made all required communications to issuer audit committees; and

5. Timely and accurately filed Form APs.

The sanction: $75,000 civil money penalty on the firm and requiring the firm to conduct training for all audit staff.

c) Sanctions against three partners of KPMG China for violations of Audit Standards (20th March 2024)

The Public Company Accounting Oversight Board (PCAOB) today announced a settled disciplinary order sanctioning CHOI Chung Chuen (“Choi”), MA Hong Chao (“Ma”), and DONG Chang Ling (“Dong”) (collectively, “Respondents”), partners of mainland China-based KPMG Huazhen LLP (the “Firm”), for violations of PCAOB standards.
The PCAOB found that each of the Respondents violated PCAOB standards in connection with the Firm’s audit of the 2017 financial statements of Tarena International, Inc., a mainland China-based education service provider listed in the United States. In 2019, Tarena restated its 2017 financial statements for, among other things, intentional revenue inflation and improper charges against accounts receivable.
Specifically, the PCAOB found that Choi and Ma, the engagement partner and a second partner on the 2017 audit, respectively, failed to obtain sufficient appropriate audit evidence to support Tarena’s reported revenue. In evaluating Tarena’s revenue, Choi and Ma planned to rely on the company’s internal controls, including information technology-related controls (“IT Controls”). However, after learning of numerous unremediated deficiencies in Tarena’s IT Controls, Choi and Ma improperly continued to rely on those controls to support their audit conclusions as if those controls were effective.

Sanctions are as follows:

a. Imposes civil money penalties in the amounts of $75,000 on Choi, $50,000 on Ma, and $25,000 on Dong;

b. Bars Choi and Ma from being associated persons of a registered public accounting firm with a right to petition the Board for consent to associate with a registered public accounting firm after one year;

c. Limits Dong from acting in certain roles on issuer audits for a one-year period;

d. Requires that Choi and Ma each complete continuing professional education before filing any petition for Board consent to associate with a registered public accounting firm; and

e. Requires that Dong complete additional continuing professional education over the next year.

d) Deficiencies in Firm Inspection Reports:

Centurion ZD CPA & Co. (29th March 2024)

Deficiency: In an inspection carried out by PCAOB it has identified deficiencies in the financial statement and ICFR audits related to Revenue, Related Party Transactions, a Significant Account, the Financial Reporting Process and Journal Entries, and Information Technology General Controls (ITGCs).

a. Revenue: The firm did not identify and test any controls that address whether the relevant revenue recognition criteria were met prior to recognizing revenue.

b. Related Party Transactions: The firm did not identify and test any controls over the issuer’s (1) identification of related parties and relationships and (2) accounting for, and disclosure of, related party transactions.

c. Significant Account: The issuer engaged an external specialist to develop an estimate related to this significant account. The firm did not identify and test any controls over the assumptions used by the company’s specialist. The firm’s approach for substantively testing this estimate was to test the issuer’s process, and the firm engaged another external specialist to perform a review of the company’s specialist’s report.

d. Financial Reporting Process and Journal Entries: The firm did not identify and test any controls over journal entries and other adjustments made in the period-end financial reporting process. In addition, the firm did not perform any substantive procedures to examine material adjustments made while preparing the financial statements.

• Salles Sainz- Grant Thornton, S.C.

(29th March 2024)

Deficiency: In an inspection carried out by PCAOB it has identified deficiencies in financial statement audit related to Intangible Assets, Long-Lived Assets, and Right of Use Assets.

a. Intangible Assets: The issuer determined that it had a single cash-generating unit (“CGU”) for purposes of evaluating intangible and long-lived assets for possible impairment and used a discounted cash flow method to determine the recoverable amount of this CGU in its annual impairment analysis. The firm’s approach for substantively testing the impairment of an intangible asset was to review and test the issuer’s process.

They did not sufficiently evaluate whether the method the issuer used to determine the recoverable amount of the CGU was in conformity with the applicable financial reporting framework and standards. Also, they did not perform any procedures to evaluate the reasonableness of certain significant assumptions used by the issuer to determine the recoverable amount of the CGU.

b. Long-Lived Assets and Right of Use Assets: The firm did not perform procedures to evaluate whether there were indicators of potential impairment for certain long-lived assets and right-of-use assets beyond reading the issuer’s impairment policy.

III. THE SECURITIES EXCHANGE COMMISSION (SEC)

Sanctions Audit firm BF Borgers and its owner with massive fraud affecting more than 1,500 SEC filings (3rd May 2024)

The Securities and Exchange Commission today charged audit firm BF Borgers CPA PC and its owner, Benjamin F. Borgers (together, “Respondents”), with deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards in its audits and reviews incorporated in more than 1,500 SEC filings from January 2021 through June 2023. The SEC also charged the Respondents with falsely representing to their clients that the firm’s work would comply with PCAOB standards; fabricating audit documentation to make it appear that the firm’s work did comply with PCAOB standards; and falsely stating in audit reports included in more than 500 public company SEC filings that the firm’s audits complied with PCAOB standards.

They failed to adequately supervise and review the work of the team performing the audits and reviews; did not properly prepare and maintain audit documentation, known as “work papers;” and failed to obtain engagement quality reviews, without which an audit firm may not issue an audit report.

The SEC’s order further finds that, at Benjamin Borgers’s direction, BF Borger’s staff copied work papers from previous engagements for their clients, changing only the relevant dates, and then passed them off as work papers for the current audit period. As a result, the order finds, BF Borgers’s work papers falsely documented work that had not been performed. Among other things, the work papers regularly documented purported planning meetings — required to discuss a client’s business and consider any potential risk areas — that never occurred and falsely represented that both Benjamin Borgers, as the
partner in charge of the engagement, and an engagement quality reviewer had reviewed and approved the work.

Charges against record keeping and other failures (3rd April 2024)

The Securities and Exchange Commission today announced charges against registered investment adviser Senvest Management LLC for widespread and longstanding failures to maintain and preserve certain electronic communications. The SEC also charged Senvest with failing to enforce its code of ethics.

Senvest employees at various levels of authority communicated about company business internally and externally using personal texting platforms and other non-Senvest messaging applications in violation of the firm’s policies and procedures. Senvest also failed to maintain or preserve the off-channel communications as required under the federal securities laws and the firm’s policies and procedures. In one instance, three senior employees engaged in off-channel communications on personal devices that were set to automatically delete messages after 30 days. Additionally, the order finds that certain Senvest employees failed to adhere to provisions of the firm’s code of ethics requiring them to obtain pre-clearance for all securities transactions in their personal accounts.

False and misleading statements about their use of Artificial Intelligence (18th March 2024)

The Securities and Exchange Commission announced settled charges against two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making false and misleading statements about their purported use of artificial intelligence (AI). The firms agreed to settle the SEC’s charges and pay $400,000 in total civil penalties.

According to the SEC’s order against Delphia, from 2019 to 2023, the Toronto-based firm made false and misleading statements in its SEC filings, in a press release, and on its website regarding its purported use of AI and machine learning that incorporated client data in its investment process. For example, according to the order, Delphia claimed that it “put[s] collective data to work to make our artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else.” The order finds that these statements were false and misleading because Delphia did not in fact have the AI and machine learning capabilities that it claimed. The firm was also charged with violating the Marketing Rule, which, among other things, prohibits a registered investment adviser from disseminating any advertisement that includes any untrue statement of material fact.

The SEC’s Office of Investor Education and Advocacy has issued an Investor Alert about artificial intelligence and investment fraud.

BCAJ Admin

From Published Accounts

Compilers’ Note

Given below is an instance of modified reporting on the above.

TCS Ltd – 31st March 2024

From Auditors’ Report on Consolidated Financial Statements

Report on Other Legal and Regulatory Requirements

1 …

2A) As required by Section 143(3) of the Act, we report, to the extent applicable, that:

a) …

b) In our opinion, proper books of account as required by law relating to preparation of the aforesaid consolidated financial statements have been kept so far as it appears from our examination of those books except for the matters stated in paragraph 2(B)(f) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014;

…

2(B) With respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us:

a) …

b) …

c) …

d) …

e) …

f) The reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 is applicable from 1st April, 2023.

Based on our examination which included test checks, and as communicated by the respective auditor of three subsidiaries, except for the instances mentioned below, the Holding Company and its subsidiary companies incorporated in India have used accounting softwares for maintaining its books of account, which have a feature of recording audit trail (edit log) facility and the same has operated throughout the year for all relevant transactions recorded in the respective softwares:

i) In case of the Holding Company and its three subsidiary companies incorporated in India, the feature of recording audit trail (edit log) facility was not enabled at the database level to log any direct data changes for the accounting softwares used for maintaining the books of account relating to payroll and certain non-editable fields/tables of the accounting software used for maintaining general ledger;

ii) In case of the Holding Company, the feature of recording audit trail (edit log) facility was not enabled at the database level to log any direct data changes for the accounting software used for maintaining the books of account relating to consolidation;

iii) In case of the Holding Company and its three subsidiary companies incorporated in India, the feature of recording audit trail (edit log) facility was not enabled at the application layer of the accounting softwares relating to revenue, trade receivables and general ledger for the period from 1st April, 2023 to 13th November, 2023 and relating to property, plant and equipment for the period from 1st April, 2023 to 14th December, 2023. Further, in case of a subsidiary incorporated in India, the feature of recording audit trail (edit log) facility was not enabled at the application layer of the accounting software relating to payroll for the period from 1st April, 2023 to 15th February, 2024;

iv) In case of a subsidiary incorporated in India, as communicated by the auditor of such subsidiary, the feature of recording audit trail (edit log) facility of the accounting software used for maintaining general ledger was not enabled for the period from 1st April, 2023 to 30th April, 2023.

Further, for the periods where audit trail (edit log) facility was enabled and operated throughout the year for the respective accounting softwares, we did not come across any instance of the audit trail feature being tampered with.

From Auditors’ Report on Standalone Financial Statements

Report on Other Legal and Regulatory Requirements

1 …

2A)

a) …

2B) With respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us:

a) …

b) …

c) …

d) …

e) …

f) The reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 is applicable from 1st April, 2023.

Based on our examination which included test checks, except for the instances mentioned below, the Company has used accounting softwares for maintaining its books of account, which have a feature of recording audit trail (edit log) facility and the same has operated throughout the year for all relevant transactions recorded in the respective software:

i. The feature of recording audit trail (edit log) facility was not enabled at the database level to log any direct data changes for the accounting softwares used for maintaining the books of account relating to payroll, consolidation process and certain non-editable fields/tables of the accounting software used for maintaining general ledger;

ii. The feature of recording audit trail (edit log) facility was not enabled at the application layer of the accounting softwares relating to revenue, trade receivables and general ledger for the period 1st April, 2023 to 13th November, 2023 and relating to property, plant and equipment for the period 1st April, 2023 to 14th December, 2023.

Further, for the periods where audit trail (edit log) facility was enabled and operated throughout the year for the respective accounting software, we did not come across any instance of the audit trail feature being tampered with.

BCAJ Admin

Ind AS 2023 Amendments

Ind AS 8 — ACCOUNTING POLICIES, CHANGES TO ACCOUNTING ESTIMATES AND ERRORS

The amendments to Ind AS 8 Accounting Policies, Changes to Accounting Estimates and Errors, introduce a new definition of accounting estimates. The amendments are designed to clarify the distinction between changes in accounting estimates changes in accounting policies and the correction of errors.

DEFINITION OF AN ACCOUNTING ESTIMATE

The current version of Ind AS 8 does not provide a definition of accounting estimates. Accounting policies, however, are defined. Furthermore, the standard defines the concept of a “change in accounting estimates”. A mixture of a definition of one item with a definition of changes in another has resulted in difficulty in drawing the distinction between accounting policies and accounting estimates in many instances. In the amended standard, accounting estimates are now defined as, “monetary amounts in financial statements that are subject to measurement uncertainty”.

To clarify the interaction between an accounting policy and an accounting estimate, paragraph 32 of Ind AS 8 has been amended to state that: “An accounting policy may require items in financial statements to be measured in a way that involves measurement uncertainty – that is, the accounting policy may require such items to be measured at monetary amounts that cannot be observed directly and must instead be estimated. In such cases, an entity develops an accounting estimate to achieve the objective set out by the accounting policy”. Accounting estimates typically involve the use of judgements or assumptions based on the latest available reliable information.

The amended standard explains how entities use measurement techniques and inputs to develop accounting estimates and states that these can include estimation and valuation techniques. The term “estimate” is widely used in accounting and may sometimes refer to estimates other than accounting estimates. Therefore, the amended standard clarifies that not all estimates will meet the definition of an accounting estimate, but rather may refer to inputs used in developing accounting estimates.

CHANGES IN ACCOUNTING ESTIMATES

Distinguishing between a change in accounting policy and a change in accounting estimate is, in some cases, quite challenging. To provide additional guidance, the amended standard clarifies that the effects on an accounting estimate of a change in input or a change in a measurement technique are changes in accounting estimates if they do not result from the correction of prior period errors.

The previous definition of a change in accounting estimate specified that changes in accounting estimates may result from new information or new developments. Therefore, such changes are not corrections of errors. The standard-setters felt that this aspect of the definition is helpful and should be retained. For example, if the applicable standard permits a change between two equally acceptable measurement techniques, that change may result from new information or new developments and is not necessarily the correction of an error.

ILLUSTRATIVE EXAMPLE

Applying the definition of accounting estimates—Fair value of a cash-settled share-based payment liability

FACT PATTERN

On 1st April, 20X0, Entity A grants 100 share appreciation rights (SARs) to each of its employees, provided the employee remains in the entity’s employment for the next three years. The SARs entitle the employees to a future cash payment based on the increase in the entity’s share price over the three-year vesting period starting on 1st April, 20X0.

Applying Ind AS 102 Share-based Payment, Entity A accounts for the grant of the SARs as cash-settled share-based payment transactions—in doing so it recognises a liability for the SARs and measures that liability at its fair value (as defined by Ind AS 102). Entity A applies the Black–Scholes–Merton formula (an option pricing model) to measure the fair value of the liability for the SARson 1st April, 20X0 and at the end of the reporting period.

At 31st March, 20X2, because of changes in market conditions since the end of the previous reporting period, Entity A changes its estimate of the expected volatility of the share price—an input to the option pricing model—in estimating the fair value of the liability for the SARs at that date. Entity A has concluded that the change in that input is not a correction of a prior period error.

APPLYING THE DEFINITION OF ACCOUNTING ESTIMATES

The fair value of the liability is an accounting estimate because:

a. the fair value of the liability is a monetary amount in the financial statements that is subject to measurement uncertainty. That fair value is the amount for which the liability could be settled in a hypothetical transaction—accordingly, it cannot be observed directly and must instead be estimated.

b. the fair value of the liability is an output of a measurement technique (option pricing model) used in applying the accounting policy (measuring a liability for a cash-settled share-based payment at fair value).

c. to estimate the fair value of the liability, Entity A uses judgements and assumptions, for example, in:

i. selecting the measurement technique—selecting the option pricing model; and

ii. applying the measurement technique—developing the inputs that market participants would use in applying that option pricing model, such as the expected volatility of the share price and dividends expected on the shares.

In this fact pattern, the change in the expected volatility of the share price is a change in an input used to measure the fair value of the liability for the SARson 31st March, 20X2. The effect of this change is a change in accounting estimates because the accounting policy—to measure the liability at fair value —has not changed.

Feedback on the draft amendments expressed a concern that measurement techniques might meet the definition of accounting policies—for example, a valuation technique is a measurement technique but could also be seen as a practice and, therefore, meet the definition of an accounting policy. Accordingly, there is a risk that the effects of a change in a measurement technique could be seen as both a change in accounting estimate and a change in accounting policy. To avoid this risk, the standard-setter specified in paragraph 34A that the effects of a change in measurement technique are changes in accounting estimates unless they result from the correction of prior period errors.

The amendments also specified that measurement techniques an entity uses to develop accounting estimates include estimation techniques and valuation techniques. Specifying this avoids ambiguity about whether the effect of a change in an estimation technique or a valuation technique is a change in accounting estimate. The terms ‘estimation techniques’ and ‘valuation techniques’ appear in Ind AS Standards—for example, Ind AS107 Financial Instruments: Disclosures uses the term ‘estimation techniques’ and Ind AS 113 Fair Value Measurement uses the term ‘valuation techniques’.

The amendments state that the term ‘estimate’ in the Standards sometimes refers not only to accounting estimates but also to other estimates. For example, it sometimes refers to inputs used in developing accounting estimates. The amendments specified that the effects on an accounting estimate of a change in input are changes in accounting estimates.

SELECTING INVENTORY COST FORMULAS

The standard-setter proposed clarifying that, for ordinarily interchangeable inventories, selecting a cost formula (that is, first-in, first-out (FIFO) or weighted average cost) in applying Ind AS 2 Inventories constitutes selecting an accounting policy. However, some felt that selecting a cost formula could also be viewed as making an accounting estimate. Since paragraph 36(a) of Ind AS 2 already states that selecting a cost formula constitutes selecting an accounting policy, this issue was not revisited. It was observed that entities rarely change the cost formula used to measure inventories and, accordingly, there would be little benefit in the standard-setter doing so.

EFFECTIVE DATE AND TRANSITION

The amendments become effective for annual reporting periods beginning on or after 1st April, 2023 and apply to changes in accounting policies and changes in accounting estimates that occur on or after the start of that period.

BCAJ Admin

Sustainability Reporting – Limited Assurance versus Reasonable Assurance

INTRODUCTION

The word “sustainability” is creating a buzz around the world these days. Everyone, including corporates, are echoing about adopting sustainable practices in conducting their business that creates sustainable, long-term shareholder, employee, consumer, and societal value by pursuing responsible environmental, social, economic and or governance strategies. There is an increasing need for companies to act more responsibly in sustainability-related issues due to pressures from their stakeholders. This increased pressure comes with a corresponding need for companies to report on their actions. As the stakeholders of companies do not have the opportunity to assess the credibility of the reporting themselves, the responsibility falls upon a third party to give assurance on the contents of the report. The assurance as such will be an important part in providing reliability to sustainability reporting. Regulators across various jurisdictions are coming up with requirements for sustainability reporting and assurance on sustainability reporting with different timelines.

REPORTING AND ASSURANCE FRAMEWORKS

On perusal of most annual reports, it can be sensed that the theme is increasingly based on sustainability. Not only is there focus on sustainability in the message from the Chairman, CEO and the senior management, but also there is a dedicated section wherein it is disclosed at length on how the business is getting impacted by climate change and vice versa. The “net-zero” commitment statement is used often these days in the statutory reporting. International Federation of Accountants in its vision statement has stated “Sustainability-related disclosure is finally taking its rightful place within the corporate reporting ecosystem, through global and jurisdiction-specific initiatives. Climate, human capital, and other ESG matters are becoming decision critical. The way forward is clear—with the establishment of the International Sustainability Standards Board and support from public authorities like The International Organization of Securities Commissions (IOSCO)—for a system that delivers consistent, comparable, and reliable information.”¹

1. https://www.ifac.org/_flysystem/azure-private/publications/files/IFAC-Vision-Sustainability-Assurance.pdf

There are many reporting standards basis which companies are presenting sustainability disclosures, viz., Sustainability disclosure standards issued by Global Reporting Initiative (GRI), IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2, Climate-related Disclosures issued by International Sustainability Standards Board (ISSB) and European Sustainability Reporting Standards (ESRS) to name a few.

The stakeholders analyse sustainability disclosures from their own lens. The investor focus is experiencing a gradient shift from the conventional financial metrics to the novel non-financial metrics reported by the companies. The State of Play: Sustainability Disclosure and Assurance benchmarking studies by the International Federation of Accountants (IFAC) and American Institute of Certified Public Accountants (AICPA) & Chartered Institute of Management Accountants (CIMA) captures and analyses the extent to which the largest global companies are reporting and obtaining assurance over their sustainability disclosures, which assurance standards are being used, and which companies are providing the assurance service.² This study updates understanding based on financial year (FY) 2022 reporting of market practice by 1,400 companies across 22 jurisdictions (including India). As per this study, 98 per cent of the companies reviewed for FY 2022 reported some level of detail on sustainability whereas 69 per cent of the companies that reported sustainability disclosures obtained assurance on at least some of their sustainability disclosures. Further, 82 per cent of these companies have obtained limited level of assurance.³

2. https://www.ifac.org/knowledge-gateway/contributing-global-economy/discussion/state-play-sustainability-assurance
3. https://ifacweb.blob.core.windows.net/publicfiles/2024-02/IFAC-State-Play-Sustainability-Disclosure-Assurance-2019-2022_0.pdf

To standardise the assurance practices, standard-setting bodies across the globe have issued their own version of sustainability reporting assurance standards. In conducting the assurance engagements, professional accountants use standards set in the public interest — including quality management, ethics, and independence — developed by the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA). As per The State of Play: Sustainability Disclosure and Assurance benchmarking study, 92 per cent of the firms applied ISAE 3000 (Revised), Assurance Engagements Other Than Audits or Reviews of Historical Financial Information issued by IAASB.3

CURRENT STATE IN INDIA

In India, too, sustainability has grabbed the attention of corporates and regulators. The Securities and Exchange Board of India (SEBI) has mandated the disclosure of attributes relating to ESG parameters in the Business Responsibility and Sustainability Report (BRSR) for the top 1,000 listed entities (by market capitalisation) from FY 2022–23 onwards. To instil investor confidence in the reporting, SEBI has further mandated the assurance of BRSR Core, a subset of BRSR and a collection of nine ESG attributes of BRSR, for the top 150 listed entities (by market capitalisation) from FY 2023–24 onwards. The requirement of mandatory reasonable assurance will increase to the top 1,000 listed entities (by market capitalisation) from FY 2026–27 onwards in a phased manner. The regulator has gone a step ahead and notified that the top 250 listed entities (by market capitalisation) need to disclose ESG attributes with respect to their value chain from FY 2024–25 on a comply-or-explain basis. Further, these disclosures pertaining to the value chain are required to be assured on a comply-or-explain basis from FY 2025–26. It is pertinent to note that SEBI in its circular has differentiated between the level of assurance that a listed entity needs to obtain for ESG disclosures in the BRSR Core and for the disclosures made in respect of value chain — reasonable assurance for the former and limited assurance for the latter.⁴

4. https://www.sebi.gov.in/legal/circulars/jul-2023/brsr-core-framework-for-assurance-and-esg-disclosures-for-value-chain_73854.html

Further, SEBI clarified that the assurance provider may appropriately use a globally accepted assurance standard on sustainability / non-financial reporting such as ISAE 3000 (Revised) or assurance standards issued by The Institute of Chartered Accountants of India (ICAI), such as Standard on Sustainability Assurance Engagements (SSAE) 3000, Assurance Engagements on Sustainability Information or Standard on Assurance Engagements (SAE) 3410, Assurance Engagements on Greenhouse Gas Statements.⁵

5. https://www.sebi.gov.in/sebi_data/faqfiles/aug-2023/1691500854553.pdf

Globally, except for a few regions, assurance on non-financial disclosure is voluntary. Wherever this is mandatory, the requirement is usually of ‘limited’ assurance. In India, the regulator has prescribed ‘reasonable’ assurance of ESG disclosure for listed companies, initially for top tier, and then progressively increased the coverage, i.e., reasonable assurance for the top 1,000 listed companies based on market capitalisation in a phased manner and limited assurance for value chain entities. Most of the companies in India were obtaining limited assurance on a voluntary basis. With the mandatory reasonable assurance, it is important to understand the difference between limited assurance and reasonable assurance⁶.

6. SEBI has recently issued a Consultation paper containing ‘Recommendations of the Expert Committee for Facilitating Ease of Doing Business with respect to Business Responsibility and Sustainability Report (BRSR)’ whereby one of the recommendations proposes that the term “assurance” shall be substituted with “assessment” in LODR Regulations and SEBI circulars on BRSR. The last date for submission of comments is 12th June, 2024.

LIMITED VS REASONABLE ASSURANCE

Limited assurance and reasonable assurance are two levels of assurance that can be provided on reported figures and disclosures. Reasonable assurance provides a positive affirmation on the statements being made by the company as compared to limited assurance which only gives a negative form of assurance that nothing has come to the attention of the assurance provider that the information is not fairly stated. A reasonable assurance engagement, therefore, involves deeper assessment of systems, processes and controls as well as the performance of many more tests on large number of samples in arriving at the conclusion.

Following are few important elements on which reasonable assurance and limited assurance can be distinguished:

	Limited Assurance	Reasonable Assurance
Level of Assurance	Lower — Negative Assurance	Higher — Positive assurance
Level of Assurance	Conclusion — “Based on our procedures and the evidence obtained, we are not aware of any material modifications that should be made to the subject matter in order for it to be in accordance with the Criteria”	Opinion — “In our opinion the subject matter is presented, in all material respects, in accordance with the criteria”
Subject Matter Understanding on which assurance will be given	Sufficient to identify areas where a material misstatement is likely to arise	Sufficient to identify and assess the risks of material misstatement
Understanding and evaluating the design of internal controls	Obtain an understanding about (a) the control environment; (b) the information system; (c) the results of the entity’s risk assessment process	Additionally, obtain understanding to assess the risks of material misstatement at the assertion level and monitoring of controls
Testing of Controls	Typically, do not test controls	Perform test of controls to reach a conclusion about their operating effectiveness in control reliance strategy
IT and IT General Controls (ITGCs)	Typically, do not test or rely on ITGCs	When assurance provider decides to place reliance on controls established by the management, we test and determine whether management has effective ITGCs in place.
Procedures	Analytical, inquiry procedures. Examples include observation, variance analysis, ratio analysis	Substantive testing, test of controls, test of detail. Examples include reperformance, recalculation, confirmation, statistical sampling Refer to the Appendix for an illustrative list of procedures.
Report	Report includes conclusion whether we are aware of any material modifications that should be made to the subject matter for it to be in accordance with the criteria.	Report includes opinion whether the subject matter is in accordance with the criteria, in all material respects, or the assertion is fairly stated, in all material respects.

IAASB has issued Non-Authoritative Guidance on Applying ISAE 3000 (Revised) to Extended External Reporting (EER) Assurance Engagements⁷ in April 2021. For examples of considerations relating to an entity’s process to prepare the subject matter information, and the internal control over that preparation, reference can be made to ‘Appendix 3 Limited and Reasonable Assurance Engagements – EER Illustrative Table of the aforesaid guidance’. The report formats are also given in the EER guidance:

Illustration I: Unmodified Reasonable Assurance Report Reasonable assurance engagement on Sustainability Information included within the Annual Report
Illustration II: Unmodified Limited Assurance Report Limited assurance engagement on Sustainability Information included within the Annual Report

7. Refer Non-Authoritative Guidance on Applying ISAE 3000 (Revised) to Extended External Reporting

Having mentioned the above, there are few elements which are common to both reasonable and limited assurance engagement such as planning of the engagement, determining of appropriate materiality benchmarks, etc.

IAASB is in the process of issuing a new global standard specific to sustainability assurance called the “International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements. This is a principle-based standard and currently, it is an exposure draft. The standard setter has received various comments from different stakeholders on the exposure draft and the final standard may undergo revision basis consideration of such comments. The standard is expected to be released by September 2024. Assurance practitioners can use this standard upon its issuance as final standard.

PREPARER RESPONSIBILITIES

While the assurance provider is responsible for providing assurance, preparers also have unique and vitally important responsibilities. Only they can implement the systems, processes, controls and governance that are key to preventing material misstatements in their financial reporting — versus detecting them. Some of the important questions that companies should focus on while they gear up for obtaining assurance on the sustainability reporting are as follows:

What systems and processes have the management put in place to ensure they are gathering, analysing and measuring the relevant data?
How does the management ensure the data’s reliability and what controls do they have around this data?
Which criteria do the board use for the selection of the sustainability assurance provider?
Who is responsible for sustainability reporting? Are the sustainability reporting accountabilities clear?
Is the management using the same / consistent assumptions and estimations for financial and sustainability reporting?
How is the company challenging management to ensure all information that is material to the company is disclosed?
Is internal audit (IA) department involved in the company’s ESG transformation, and how?
Are all assurance providers (internal and external) coordinating their work and ensuring that proper controls are in place and that there are no significant gaps?

BOTTOM LINE

Reasonable assurance is a much higher level of assurance and requires collaboration of subject matter skills (like carbon emission / other non-financial KPIs) and assurance skills to perform detailed control testing and substantive procedures. There is a need for collaboration of the subject matter experts and the assurance experts to provide high-quality assurance on BRSR Core and other sustainability reporting to enhance credibility of such information. While global and Indian standards exist for assurance providers, there is a need for the regulators to issue detailed methodology / work programs for assurance providers on various KPIs included in BRSR core and guidance for companies as well for the smooth implementation of the requirements.

APPENDIX A

The objective of this appendix is to expand on the procedures for reasonable assurance by way of examples:

Procedures for reasonable assurance

Inquiry and/or observation	Analytical procedures	Test of controls	Test of details / Inspection / recalculation / reperformance / confirmation
Performing walkthroughs of the significant reporting processes to obtain understanding and then inquiring the process owners about whether our understanding of the process and relevant key controls is accurate. Observe whether those who make and review the controls are performing functions and using inputs as we understand they do. Observe whether the process owners, or others, act upon deviations from the expectations for the estimates.	Detailed analytical procedures are performed in response to assessed risks of material misstatement which involve developing expectations of quantities or ratios or trends that are sufficiently precise to identify material misstatements.	Designing tests of controls for key controls in the significant reporting process to evaluate the operating effectiveness of the control to address the risks. Examining sample controls by obtaining evidence of its design, implementation and operation.	Inspecting and examining records or documents or sites to provide direct evidence of existence or valuation on sample basis. We determine whether to perform external confirmation procedures, to obtain relevant and reliable assurance evidence from external third parties. Assessing whether the different locations being aggregated use the same definitions, the same units to express sustainability performance and the same measurement, sampling and analysis techniques.

While reference should be made to assurance standard followed by assurance provider in accordance with SEBI circular read with FAQs on BRSR Core, given below are few examples of reasonable assurance procedures for few KPIs included in BRSR Core.

Green-house gas (GHG) footprint — Greenhouse gas emissions may be measured in accordance with the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard.

Illustrative procedures for Scope 1 emission

1. Obtain an understanding of the entity’s business and operations to identify sources of Scope 1 emission (Diesel / Petrol for vehicles, DG sets, etc.) and the reporting process with respect to data collection and aggregation.

2. Basis the understanding obtained in point no. 1 above, assess the completeness of the data to ensure all sources and all units / sites / plants / offices (within the defined Reporting Boundary) have been included.

3. Verify the accuracy and completeness of the energy / fuel consumption data with the data reported under Principle 6, Question 1 (energy consumption). Verify the completeness and accuracy of other sources (other than energy) of scope 1 emissions such as fire extinguisher, refrigerants, etc. by checking the supporting documents on a sample basis.

4. Verify the conversion and emission factors used for calculating the scope 1 emissions.

5. Where estimation has been used by the management, obtain a note on the estimation methodology, assumptions used and evaluate whether they are appropriate and have been applied consistently.

6. Verify if the meters are calibrated periodically (as may be applicable) where computation is based on meter readings.

7. Verify if the data is reported for the relevant reporting period only.

8. Check the presentation and disclosure of the data is in line with the BRSR Core criteria and guidance issued.

Illustrative procedures for Scope 2 emissions

1. Obtain an understanding of the entity’s business and operations to identify sources of Scope 2 emission and the reporting process with respect to data collection and aggregation.

3. Verify the accuracy and completeness of the energy consumed from purchased electricity and other sources of scope 2 emissions with the data reported under Principle 6, Question 1 (energy consumption).

4. Verify the conversion and emission factors used for calculating the scope 2 emissions.

5. Where estimation has been used by the management, obtain a note on the estimation methodology, assumptions used and evaluate whether they are appropriate and have been applied consistently.

6. Verify if the meters are calibrated periodically (as may be applicable) where computation is based on meter readings.

7. Verify if the data is reported for the relevant reporting period only.

8. Check the presentation and disclosure of the data is in line with the BRSR Core criteria and guidance issued.

BCAJ Admin

From Published Accounts

Accounting Policy on Revenue Recognition for a Company in Information Technology

Disclosure thereof in Financial Statements
Considered as a Key Audit Matter by Statutory Auditor

Infosys Ltd – 31st March, 2024

1.4 Critical accounting estimates and judgments

a. Revenue recognition

The Company’s contracts with customers include promises to transfer multiple products and services to a customer. Revenues from customer contracts are considered for recognition and measurement when the contract has been approved, in writing, by the parties to the contract, the parties to the contract are committed to performing their respective obligations under the contract, and the contract is legally enforceable. The Company assesses the services promised in a contract and identifies distinct performance obligations in the contract. Identification of distinct performance obligations to determine the deliverables and the ability of the customer to benefit independently from such deliverables, and allocation of transaction price to these distinct performance obligations involves significant judgement.

Fixed price maintenance revenue is recognized rateably on a straight-line basis when services are performed through an indefinite number of repetitive acts over a specified period. Revenue from fixed price maintenance contract is recognized rateably using a percentage of completion method when the pattern of benefits from the services rendered to the customer and the Company’s costs to fulfil the contract is not even through the period of the contract because the services are generally discrete in nature and not repetitive. The use of a method to recognize the maintenance revenues requires judgment and is based on the promises in the contract and the nature of the deliverables.

The Company uses the percentage-of-completion method in accounting for other fixed-price contracts. Use of the percentage-of-completion method requires the Company to determine the actual efforts or costs expended to date as a proportion of the estimated total efforts or costs to be incurred. Efforts or costs expended have been used to measure progress towards completion as there is a direct relationship between input and productivity. The estimation of total efforts or costs involves significant judgment and is assessed throughout the period of the contract to reflect any changes based on the latest available information.

Contracts with customers include subcontractor services or third-party vendor equipment or software in certain integrated services arrangements. In these types of arrangements, revenue from sales of third-party vendor products or services is recorded net of costs when the Company is acting as an agent between the customer and the vendor, and gross when the Company is the principal for the transaction. In doing so, the Company first evaluates whether it obtains control of the specified goods or services before they are transferred to the customer. The Company considers whether it is primarily responsible for fulfilling the promise to provide the specified goods or services, inventory risk, pricing discretion and other factors to determine whether it controls the specified goods or services and therefore, is acting as a principal or an agent.

Provisions for estimated losses, if any, on incomplete contracts are recorded in the period in which such losses become probable based on the estimated efforts or costs to complete the contract.

2.18 REVENUE FROM OPERATIONS

Accounting Policy

The Company derives revenues primarily from IT services comprising software development and related services, cloud and infrastructure services, maintenance, consulting and package implementation, and licensing of software products and platforms across the Company’s core and digital offerings (together called “software related services”). Contracts with customers are either on a time-and-material, unit-of-work, fixed-price or on fixed-time frame basis.

Revenues from customer contracts are considered for recognition and measurement when the contract has been approved in writing, by the parties, to the contract, the parties to the contract are committed to performing their respective obligations under the contract, and the contract is legally enforceable. Revenue is recognized upon transfer of control of promised products or services (“performance obligations”) to customers in an amount that reflects the consideration the Company has received or expects to receive in exchange for these products or services (“transaction price”). When there is uncertainty as to collectability, revenue recognition is postponed until such uncertainty is resolved.

The Company assesses the services promised in a contract and identifies distinct performance obligations in the contract. The Company allocates the transaction price to each distinct performance obligation based on the relative standalone selling price. The price that is regularly charged for an item when sold separately is the best evidence of its standalone selling price. In the absence of such evidence, the primary method used to estimate standalone selling price is the expected cost plus a margin, under which the Company estimates the cost of satisfying the performance obligation and then adds an appropriate margin based on similar services.

The Company’s contracts may include variable considerations including rebates, volume discounts and penalties. The Company includes variable consideration as part of transaction price when there is a basis to reasonably estimate the amount of the variable consideration and when it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.

Revenue on time-and-material and unit of work-based contracts, are recognized as the related services are performed. Fixed price maintenance revenue is recognized ratably either on a straight-line basis when services are performed through an indefinite number of repetitive acts over a specified period or ratably using a percentage of completion method when the pattern of benefits from the services rendered to the customer and Company’s costs to fulfil the contract is not even through the period of contract because the services are generally discrete in nature and not repetitive. Revenue from other fixed-price, fixed-timeframe contracts, where the performance obligations are satisfied over time is recognized using the percentage-of-completion method. Efforts or costs expended are used to determine progress towards completion as there is a direct relationship between input and productivity. Progress towards completion is measured as the ratio of costs or efforts incurred to date (representing work performed) to the estimated total costs or efforts. Estimates of transaction price and total costs or efforts are continuously monitored over the term of the contracts and are recognized innet profit in the period when these estimates change or when the estimates are revised. Revenues and the estimated total costs or efforts are subject to
revision as the contract progresses. Provisions for estimated losses, if any, on incomplete contracts are recorded in the period in which such losses become probable based on the estimated efforts or costs to complete the contract.

The billing schedules agreed upon with customers include periodic performance-based billing and / or milestone-based progress billings. Revenues in excess of billing are classified as unbilled revenue while billing in excess of revenues is classified as contract liabilities (which we refer to as “unearned revenues”).

In arrangements for software development and related services and maintenance services, by applying the revenue recognition criteria for each distinct performance obligation, the arrangements with customers generally meet the criteria for considering software development and related services as distinct performance obligations. For allocating the transaction price, the Company measures the revenue in respect of each performance obligation of a contract at its relative standalone selling price. The price that is regularly charged for an item when sold separately is the best evidence of its standalone selling price. In cases where the Company is unable to determine the standalone selling price, the Company uses the expected cost plus margin approach in estimating the standalone selling price. For software development and related services, the performance obligations are satisfied as and when the services are rendered since the customer generally obtains control of the work as it progresses.

Certain cloud and infrastructure services contracts include multiple elements which may be subject to other specific accounting guidance, such as leasing guidance. These contracts are accounted in accordance with such specific accounting guidance. In such arrangements where the Company is able to determine that hardware and services are distinct performance obligations, it allocates the consideration to these performance obligations on a relative standalone selling price basis. In the absence of a standalone selling price, the Company uses the expected cost-plus margin approach in estimating the standalone selling price. When such arrangements are considered as a single performance obligation, revenue is recognized over the period and a measure of progress is determined based on promise in the contract.

Revenue from licenses where the customer obtains a “right to use” the licenses is recognized at the time the license is made available to the customer. Revenue from licenses where the customer obtains a “right to access” is recognized over the access period.

Arrangements to deliver software products generally have three elements: license, implementation and Annual Technical Services (ATS). When implementation services are provided in conjunction with the licensing arrangement and the license and implementation have been identified as two distinct separate performance obligations, the transaction price for such contracts are allocated to each performance obligation of the contract based on their relative standalone selling prices. In the absence of standalone selling price for implementation, the Company uses the expected cost-plus margin approach in estimating the standalone selling price. Where the license is required to be substantially customized as part of the implementation service the entire arrangement fee for license and implementation is considered to be a single performance obligation and the revenue is recognized using the percentage-of-completion method as the implementation is performed. Revenue from client training, support and other services arising due to the sale of software products is recognized as the performance obligations are satisfied. ATS revenue is recognized rateably on a straight-line basis over the period in which the services are rendered.

A contract modification is a change in the scope price or both of a contract that is approved by the parties to the contract. A contract modification that results in the addition of distinct performance obligations is accounted for either as a separate contract if the additional services are priced at the standalone selling price or as a termination of the existing contract and creation of a new contract if they are not priced at the standalone selling price. If the modification does not result in a distinct performance obligation, it is accounted for as part of the existing contract on a cumulative catch-up basis.

The incremental costs of obtaining a contract (i.e., costs that would not have been incurred if the contract had not been obtained) are recognized as an asset if the Company expects to recover them.

Certain eligible, nonrecurring costs (e.g. set-up or transition or transformation costs) that do not represent a separate performance obligation are recognized as an asset when such costs (a) relate directly to the contract; (b) generate or enhance resources of the Company that will be used in satisfying the performance obligation in the future; and (c) are expected to be recovered.

Capitalized contract costs relating to upfront payments to customers are amortized to revenue and other capitalized costs are amortized to expenses over the respective contract life on a systematic basis consistent with the transfer of goods or services to the customer to which the asset relates. Capitalized costs are monitored regularly for impairment. Impairment losses are recorded when the present value of projected remaining operating cash flows is not sufficient to recover the carrying amount of the capitalized costs.

The Company presents revenues net of indirect taxes in its Statement of Profit and Loss.

Revenue from operations for the year ended 31^st March, 2024 and 31^st March, 2023 is as follows:

Particulars	Year ended March 31,
	2024	2023
Revenue from software services	128,637	123,755
Revenue from products and platforms	296	259
Total revenue from operations	128,933	124,014

Products & platforms

The Company derives revenues from the sale of products and platforms including Infosys Applied AI which applies next-generation AI and machine learning.

The percentage of revenue from fixed-price contracts for the Year ended 31^st March, 2024, and 31^st March, 2023, is 56 per cent and 55 per cent respectively.

Trade receivables and Contract Balances

The timing of revenue recognition, billing and cash collections results in receivables, unbilled revenue, and unearned revenue on the Company’s Balance Sheet. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g. monthly or quarterly) or upon achievement of contractual milestones.

The Company’s receivables are rights to consideration that are unconditional. Unbilled revenues comprising revenues in excess of billings from time and material contracts and fixed price maintenance contracts are classified as financial assets when the right to consideration is unconditional and is due only after a passage of time.

Invoicing to the clients for other fixed-price contracts is based on milestones as defined in the contract and therefore the timing of revenue recognition is different from the timing of invoicing to the customers. Therefore unbilled revenues for other fixed-price contracts (contract assets) are classified as non-financial assets because the right to consideration is dependent on the completion of contractual milestones.

Invoicing in excess of earnings is classified as unearned revenue.

Trade receivables and unbilled revenues are presented net of impairment in the Balance Sheet.

During the year ended 31^st March, 2024 and 31^st March, 2023, the company recognized revenue of ₹4,189 crore and ₹4,391 crore arising from opening unearned revenue as of 1^st April, 2023 and 1^st April, 2022 respectively.

During the year ended 31^st March, 2024 and 31^st March, 2023, ₹6,396 crore and ₹5,378 crore of unbilled revenue pertaining to other fixed price and fixed time frame contracts as of 1^st April, 2023 and 1^st April, 2022, respectively has been reclassified to Trade receivables upon billing to customers on completion of milestones.

Remaining performance obligation disclosure

The remaining performance obligation disclosure provides the aggregate amount of the transaction price yet to be recognized as at the end of the reporting period and an explanation as to when the Company expects to recognize these amounts in revenue. Applying the practical expedient as given in Ind AS 115, the Company has not disclosed the remaining perforated obligation-related disclosures for contracts where the revenue recognized corresponds directly with the value to the customer of the entity’s performance completed to date, typically those contracts where invoicing is on time-and-material and unit of work-based contracts. Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue that has not materialized and adjustments for currency fluctuations.

The aggregate value of performance obligations that are completely or partially unsatisfied as of 31^st March, 2024, other than those meeting the exclusion criteria mentioned above, is ₹80,334 crore. Out of this, the Company expects to recognize revenue of around 53.7 per cent within the next one year and the remaining thereafter. The aggregate value of performance obligations that are completely or partially unsatisfied as of 31^st March, 2023 is ₹70,680 crore. The contracts can generally be terminated by the customers and typically include an enforceable termination penalty payable by them. Generally, customers have not terminated contracts without cause.

From Auditors’ Report

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the Standalone Financial Statements of the current period. These matters were addressed in the context of our audit of the Standalone Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined the matters described below to be the key audit matters to be communicated in our report.

Sr. No.

Key Audit Matter

Auditor’s Response

Revenue recognition

The Company’s contracts with customers include contracts with multiple products and services. The Company derives revenues from IT services comprising software development and related services, maintenance, consulting and package implementation, licensing of software products and platforms across the Company’s core and digital offerings and business process management services. The Company assesses the services promised in a contract and identifies distinct performance obligations in the contract. Identification of distinct performance obligations to determine the deliverables and the ability of the customer to benefit independently from such deliverables involves significant judgement.

In certain integrated services arrangements, contracts with customers include subcontractor services or third-party vendor equipment or software. In these types of arrangements, revenue from sales of third-party vendor products or services is recorded net of costs when the Company is acting as an agent between the customer and the vendor, and gross when the Company is the principal for the transaction. In doing so, the Company first evaluates whether it obtains control of the specified goods or services before it is transferred to the customer. The Company considers whether it is primarily responsible for fulfilling the promise to provide the specified goods or service, inventory risk, pricing discretion and other factors to determine whether it controls the products or service and therefore, is acting as a principal or an agent.

Fixed price maintenance revenue is recognized ratably either on (1) a straight-line basis when services are performed through an indefinite number of repetitive acts over a specified period or (2) using a percentage of completion method when the pattern of benefits from the services rendered to the customer and the Company’s costs to fulfil the contract is not even through the period of contract because the services are generally discrete in nature and not repetitive. The use of method to recognize the maintenance revenues requires judgment and is based on the promises in the contract and nature of the deliverables.

As certain contracts with customers involve management’s judgment in (1) identifying distinct performance obligations, (2) determining whether the Company is acting as a principal or an agent and (3) whether fixed price maintenance revenue is recognized on a straight-line basis or using the percentage of completion method, revenue recognition from these judgments were identified as a key audit matter and required a higher extent of audit effort.

Refer Notes 1.4 and 2.18 to the Standalone Financial Statements.

Principal Audit Procedures Performed included the following:

Our audit procedures related to the (1) identification of distinct performance obligations, (2) determination of whether the Company is acting as a principal or agent and (3) whether fixed price maintenance revenue is recognized on a straight-line basis or using the percentage of completion method included the following, among others:

•We tested the effectiveness of controls relating to the (a) identification of distinct performance obligations, (b) determination of whether the Company is acting as a principal or an agent and (c) determination of whether fixed price maintenance revenue for certain contracts is recognized on a straight-line basis or using the percentage of completion method.

•We selected a sample of contracts with customers and performed the following procedures:

– Obtained and read contract documents for each selection, including master service agreements, and other documents that were part of the agreement.

– Identified significant terms and deliverables in the contract to assess management’s conclusions regarding the (i) identification of distinct performance obligations (ii) whether the Company is acting as a principal or an agent and (iii) whether fixed price maintenance revenue is recognized on a straight-line basis or using the percentage of completion method.

Revenue recognition – Fixed price contracts using the percentage of completion method

Fixed price maintenance revenue is recognized ratably either (1) on a straight-line basis when services are performed through an indefinite number of repetitive acts over a specified period or (2) using a percentage of completion method when the pattern of benefits from services rendered to the customer and the Company’s costs to fulfil the contract is not even through the period of contract because the services are generally discrete in nature and not repetitive. Revenue from other fixed-price, fixed-timeframe contracts, where the performance obligations are satisfied over time is recognized using the percentage-of-completion method.

Use of the percentage-of-completion method requires the Company to determine the actual efforts or costs expended to date as a proportion of the estimated total efforts or costs to be incurred. Efforts or costs expended have been used to measure progress towards completion as there is a direct relationship between input and productivity. The estimation of total efforts or costs involves significant judgment and is assessed throughout the period of the contract to reflect any changes based on the latest available information. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on the estimated efforts or costs to complete the contract.

We identified the estimate of total efforts or costs to complete fixed price contracts measured using the percentage of completion method as a key audit matter as the estimation of total efforts or costs involves significant judgement and is assessed throughout the period of the contract to reflect any changes based on the latest available information. This estimate has high inherent uncertainty andrequires consideration of the progress of the contract, efforts or costs incurred to date and estimates of efforts or costs required to complete the remaining contract performance obligations over the term of the contracts.

This required a high degree of auditor judgment in evaluating the audit evidence and a higher extent of audit effort to evaluate the reasonableness of the total estimated amount of revenue recognized on fixed-price contracts.

Refer Notes 1.4 and 2.18 to the Standalone Financial Statements.

Principal Audit Procedures Performed included the following:

Our audit procedures related to estimates of total expected costs or efforts to complete for

fixed-price contracts included the following, among others:

• We tested the effectiveness of controls relating to (1) recording of efforts or costs incurred and estimation of efforts or costs required to complete the remaining contract performance obligations and (2) access and application controls pertaining to time recording, allocation and budgeting systems which prevents unauthorised changes to recording of efforts incurred.

We selected a sample of fixed price contracts with customers measured using percentage-of-completion method and performed the following:

– Evaluated management’s ability to reasonably estimate the progress towards satisfying theperformance obligation by comparing actual efforts or costs incurred to prior year estimates of efforts or costs budgeted for performance obligations that have been fulfilled.

– Compare efforts or costs incurred with the Company’s estimate of efforts or costs incurred to date to identify significant variations and evaluate whether those variations have been considered appropriately in estimating the remaining costs or efforts to complete the contract.

–Tested the estimate for consistency with the status of delivery of milestones and customer acceptances and signed off from customers to identify possible delays in achieving milestones, which require changes in estimated costs or efforts to complete the remaining performance obligations.

BCAJ Admin

Adjustment of Knock-On Errors

Fact Pattern

Entity A granted a fixed Ind AS 19 Employee Benefits cash-bonus to its executive officers on 1^st April 20X1. Payment of the bonus is conditional upon reaching a determined level of Ind AS 115 (Revenue from Contracts with Customers) – revenues in the 20X1-X2 Ind AS financial statements. Based on the revenues determined for the financial statements of 20X1-20X2, the revenue target was met and Entity A records the following entry:

31^st March, 20X2

Dr. Compensation expense

Cr. Bonus payable

Entity A is legally entitled, and has an obligation, to clawback the bonus paid in the event the revenue target is no longer met as a result of a restatement made in accordance with Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors. During 20X2-X3, a material error was detected in the prior-year financial statements and consequently the 20X1-X2 revenues were restated in the 20X2-X3 financial statements. Based on the restated revenues, the revenue target was not met. The error was identified before the bonus was paid out in cash. Entity A will not pay the bonus.

QUERY

Do you agree that the compensation expense (knock-on error) and provision for the bonus as of 31^st March 20X2 (and the corresponding income taxes) should be adjusted retrospectively as part of the revenue error correction?

RESPONSE

Accounting Standard References

Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Paragraph 5

Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.

Paragraph 10

In the absence of an Ind AS that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is: relevant to the economic decision-making needs of users; and reliable, in that the financial statements: (i) represent faithfully the financial position, financial performance and cash flows of the entity; (ii) reflect the economic substance of transactions, other events and conditions, and not merely the legal form; (iii) are neutral, ie free from bias; (iv) are prudent; and (v) are complete in all material respects.

Paragraph 11

In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order: (a) the requirements in Ind ASs dealing with similar and related issues; and (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.

Paragraph 12

In making the judgement described in paragraph 10, management may also first consider the most recent pronouncements of International Accounting Standards Board and in absence thereof those of the other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11.

Paragraph 42

Subject to paragraph 43, an entity shall correct material prior period errors retrospectively in the first set of financial statements approved for issue after their discovery by: (a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or (b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented

Paragraph 43

A prior period error shall be corrected by retrospective restatement except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error.

US GAAP ASC 250-10-45-8

Retrospective application shall include only the direct effects of a change in accounting principle, including any related income tax effects. Indirect effects that would have been recognised if the newly adopted accounting principle had been followed in prior periods shall not be included in the retrospective application. If indirect effects are actually incurred and recognised, they shall be reported in the period in which the accounting change is made.

View A — Yes, the adjustments should be made retrospectively

According to Ind AS 8 paragraph 5, a retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.”

If the 20X1-X2 revenues had not been overstated, it would have been evident that the revenue target was not met and that the bonus would not have been awarded. As a result, the entity would not have recognised the bonus provision and corresponding personnel expense in the 20X1-X2 financial statements.

Moreover, the guidance on implementing Ind AS 8 (Example 1) includes an example where the costs of goods sold that were originally recognised were too low. As part of the costs of goods sold restatement, the income taxes are also retrospectively adjusted. This might be understood to demonstrate that the restatement should also extend to correcting related impacts of the underlying consequential errors (i.e. indirect errors).

It is not impracticable (see paragraph 43 above) to determine the effects of the revenue error on the accounting for the cash bonus in 20X1-X2. Therefore, the financial statements of the period in which the revenue error was identified 20X2-X3 should include a restatement to the comparative period / opening balance sheet for the Ind AS 19 accounting (and the resulting effect on the income taxes).

View B — No, the adjustments should only be made in the period in which the revenue error is identified

The requirement in IAS 8.42 relates to the correction of the error itself (i.e. the incorrect revenue recognised) but there is nothing in Ind AS 8 that specifically requires the retrospective correction for the knock-on implications of that error (i.e. the fact that an employee is no longer entitled to a bonus). In the absence of specific guidance, IAS 8.12 requires entities to consider other similar standards. The US GAAP equivalent of Ind AS 8 includes more specific guidance (ASC 250-10-45-8) on this point and does not adjust for indirect impacts retrospectively.

In this view, the compensation award is an indirect effect of the revenue error. The Ind AS 19 accounting itself was not erroneous in 20X1-X2 and is therefore not adjusted retrospectively. It is only when the entity has a right to cancel the award, as a result of the separate employee agreement / clawback policy, that it no longer has an employee related expense. If the entity does not have a right to cancel / clawback the promise, the expense continues to be a valid expense for the entity. Therefore, the ability to reverse the expense is not as a result of the revenue error but rather the right established through the clawback mechanism. That right, established by the clawback agreement, only kicks-in when the error in the financial statements is discovered.

The trigger for recognition of the reversal of the employee expense should be the discovery of the revenue error. Because the employee expense is an indirect impact of the revenue error, the reversal is recognised as a separate transaction in the period in which the revenue error is identified. In other words, in 20X2-X3 financial statements, a reversal will be made, but will not be carried out as a retrospective restatement.

View C — Accounting policy choice.

As there is no clear guidance in Ind AS 8 regarding the scope of an error correction, the Ind AS 19 accounting can be adjusted retrospectively as part of the revenue error correction (View A) or the impact of the revenue error correction on the rights and obligations associated with the compensation agreement can be regarded as separate transaction (View B).

CONCLUSION

The author believes that View A is the most appropriate response, since Example 1 in Ind AS 8 contains a clear guidance where knock-on effects are also adjusted when correcting past errors.

BCAJ Admin

NFRA DIGEST

BACKGROUND ABOUT NFRA ORDERS

The National Financial Reporting Authority (“NFRA”) was constituted on 1st October, 2018 by the Government of India under section 132(1) of the Companies Act, 2013 (“the 2013 Act”). The NFRA had issued its first order on 22nd July, 2020 and since then has issued 58 orders till December 31, 2023.

As mentioned in our March 2024 issue (Page 67), these orders are issued generally when irregularities are noticed by some regulators e.g. Serious Fraud Investigation Officer (SFIO), Securities Exchange Board of India (SEBI), Director General of Income Tax (Investigation), Central Economic Intelligence Bureau (CEIB), Ministry of Finance, Media Reports, Ministry of Corporate Affairs (MCA) regarding irregularities observed by FRRB except in case of DHFL matter wherein NFRA has initiated the investigation on Suo Moto. Orders are normally concluded with debarment and imposition of penalty.

Our previous issue also covered, in detail, the structure of NRFA Orders and Powers of NFRA under Section 132(4)(c) of the 2013 Act with respect to imposition of monetary penalties and debarment of the member or / and firm, where the professional or other misconduct is proved

KEY LEARNINGS FROM NFRA ORDERS

The Statutory Auditors, including the Engagement Partners (‘EPs’ hereafter) and the Engagement Team that conduct the Audit are bound by the duties and responsibilities prescribed in the 2013 Act, the rules made thereunder, the Standards on Auditing (‘SAs’ hereafter), including the Standards on Quality Control (‘SQC’ hereafter) and the Code of Ethics. Violation of any of these constitutes professional or other misconduct and is punishable with penalty prescribed under section 132(4)(c) of the 2013 Act.

These NFRA orders have highlighted observations / lapses on the part of Statutory Auditors in relation to compliance with SAs and other applicable regulatory requirements.

For the purpose of better understanding and learning perspective of the reader, the observations/lapses in these orders are classified into following key themes of accounting and auditing:

1. Independence requirements

2. Engagement Quality Control Reviewer (EQCR)

3. Audit Evidence and Documentation

4. Performing Risk Assessment and Audit Execution

5. Audit Reporting

6. Related Party (RP) Relationship, Transactions and Disclosures

7. Going Concern (GC) assessment

8. Auditing of Accounting Issues

9. Non-compliance with laws and regulations

10. Presentations and Disclosures

11. Professional Misconducts

Major observations / lapses in each of the above-mentioned themes are as follows:

Sr. No.	Themes	Observations/Lapses
1.	Independence requirements	● Engagement Partner (EP) accepted the audit engagement despite owning the shares of the auditee Company through a Company which was wholly-owned by him and his family members and thereby violating applicable laws and Standard relating to conflict of interest and independence. (Order No- 65/2023) ● EP, proprietorship firm, had provided audit and non-audit services to 29 entities belonging to the concerned Group including its promoters. The audit firm of EP’s daughter had provided audits as well as non-audit services to 27 entities of the concerned Group. Further, her firm was actively participating in making presentations etc. on behalf of EP’s firm and a partner of her firm as partner of EP’s firm in the Audit Committee meetings of the company. All these audit firms operate from the same address. (Order No. 23/14/2022) ● The firm was found to have either directly or indirectly provided prohibited services to the auditee or its holding company. (Order No. 20012/1/2020)
2.	Engagement Quality Control Reviewer (EQCR)	● No evidence in the file regarding the work performed by the EQCR partner. Further, having a checklist in file with response “Yes” and “No” is not sufficient audit procedures by EQCR partner. Para 25 of SA 220 that stipulates to document the reason and basis for conclusion. (Order No. 64/2023) ● Failure to have formal appointment of EQCR Partner even though the Company was listed. (Order No. 20012/2/20222) ● Acceptance of appointment as EQC reviewer without experience and authority i.e. 2 years’ experience professional was assigned as EQCR to review the work of 32 years’ experience EP which demonstrated that EQCR was without adequate experience and authority as reviewer. (Order No. 30/2023) ● Non-availability of EQCR in the firm as the firm was proprietary. NFRA considered his firm to be ineligible to carry out statutory audits of listed companies in absence of EQCR. (Order No. 023/2023) ● EQCR also failed to: (Order No. 20012/1/2020) – review selected working papers related to significant judgements, – perform objective evaluation of the significant judgements made by engagement team – document his work properly and separately from the work of the audit team, to independently analyse and question the engagement team regarding the issues arising out of RBI inspections and directors etc. – prepare proper documentation related to discussion between the EQCR team and EP.
3.	Audit Evidence and Documentation	● No evidence as to who performed the work, who reviewed it and the date and extent of such review. (Order No. 62/2023) ● Failure to document discussion of significant matters with Those Charged With Governance (TCWG). (Order No. 62/2023) ● Failure to document allocation and division of work between joint auditors. (Order No. 20012/2/20222) ● No communication with TCWG regarding responsibilities of auditors, overview of planned scope of work etc. (Order No. 023/2023) ● No evidence at all of work performed on Internal Financial Control over financial reporting. (021/2023) ● Not seeking external confirmations for balances of debtors and creditors. (Order no. 23/05/2021) ● Misconduct in relation to the role of engagement partner due to non-availability of evidence of EP’s review in file, designating other partner as EP in audit file instead of signing partner, no evidence of EQCR performed. (Order No. 20012/1/2020) ● Non-availability of engagement letter in the audit file. (Order No. 023/2023) ● Lack of documentation with regard to recoverability assessment of security deposits given several years back. (Order No. 58/2023) ● Failure to prepare documentation regarding Auditor’s responsibilities relating to fraud in an Audit of Financial Statements (“FS). (Order no. 62/2023)
4.	Performing Risk Assessment and Audit Execution	● Failure to perform Analytical Procedures in spite of substantial decrease in key financial parameters like revenue, PBT etc. (Order No. 62/2023) ● Failure to conduct branch audit, reliance by EP on the work of illegally appointed branch statutory auditors. (Order No. 63/2023) ● Failed to identify the deficiencies in internal control relating to the appraisal and sanction of loans. (Order No. 63/2023) ● Lapses in fulfilling auditor’s responsibilities relating to fraud even though the auditor was aware about FIR due to fraud against managerial personal of the auditee company. (Order No. 30/2023) ● Failure to perform audit work for physical verification and valuation of PPE due to miscommunication between joint auditors. (Order No. 20012/2/2022) ● Non-assessment of risk of material misstatement in balance of Trade Receivables even though the previous auditor had issued a qualified opinion. (Order No. 29/2023)
		● Failure to question the accounting policies related to trade receivables, improper disclosure, non-disclosure of credit risk profile of trade receivables and also to obtain external confirmation of outstanding trade receivables. (Order No. 21/2023) ● Failure to perform risk assessment, determine materiality, analytical procedures, communicate with TCWG, reporting on fraud etc. (Order No. 21/2023) ● Failure to report fraudulent loan transactions, fraudulent understatement of loan and evergreening of loans through structured circulation of funds. (Order No. 23/14/2022) ● Failed to understand the nature of business and comprehend that a company which was a shell company used by promoters for financial manoeuvres and there was no operation in the company since its incorporation. (Order No. 23/14/2022/05) ● Failed to understand the rational for interest free loan given to a group company without business rationale. (Order No. 23/14/2022/05) ● Misconduct in evaluation of Risk of Material Misstatements – not considering certain serious RBI non-compliance while doing risk assessment. (Order No. 20012/1/2020)
5.	Audit Reporting	● Issuing qualified opinions on SFS and CFS with 11 and 15 qualifications respectively despite the fact that the nature and effect of qualifications were material and pervasive to the FS instead of issuing Adverse Opinion or Disclaimer of Opinion. (Order No. 65/2023) ● Issuing a qualified opinion instead of adverse opinion for non-consolidation of the subsidiary. The assets & liabilities of the subsidiary constituted 19.20% and 28.96% respectively of the assets and liabilities of Parent. (Order No. 62/2023) ● Audit report not modified with respect to reporting on Unilateral extinguishment of trade payables and non-compliance with valuation of finished goods inventory. Included only as KAM without communicating these matters to TCWG. (Order No. 59/2023) ● Misuse of Emphasis of Matters for issuing a modified audit opinion. The auditor reported various matters under EOM para which by its nature requires modification in auditor’s report due to non-availability of sufficient appropriate audit evidence. (Order No. 27/2023) ● False reporting by auditor in independent auditor’s report – this mainly includes non-inclusion of cash flow in FS and annual report uploaded on BSE, wrongly reporting the company as NBFC in CARO report though the Company was into the business of media and content syndication and not an NBFC, missing disclosures regarding SBN in FS but auditor’s report states that it is included in FS. Lapses in audit conclusion since none of the above transactions were modified by the auditor in its audit opinion. (Order No. 23/30/2021) ● Non-consideration of observations of Internal audit reports wherein it was reported that management had not carried out any physical verification of PPE whereas the auditor in its report stated that it was carried out by management. (Order No. 29/2023)
6.	Related Party (RP) Relationship, Transactions and Disclosures	● Lapses in understanding the nature of RP relationship and transactions, failure in testing the completeness of RPs and transactions, failure in evaluating management override of controls, failure in verifying arm’s length basis of RP transactions and failure to report these in CARO 2016. (Order No. 63/2023) ● Failure to report non-disclosure of RP Loans on gross basis (Order No. 62/2023) ● Failure to report outstanding balance of capital advances to a wholly owned subsidiary under RP disclosure. (Order No. 021/2023) ● Failure to identify RP and RP transactions even through 100% sales were made to RP. (Order No. 23/30/2021/2) ● Charged with failure to exercise professional skepticism while performing audit of fraudulent transactions with its subsidiary. (Order no. 23/14/2022) ● Charged with recording of certain repayment cheques received from subsidiary to reduce the loan at year end without encashing these cheques. Further, the subsidiary’s bank account does not have sufficient balance to clear the cheques. (Order No. 23/14/2022) ● Failure to exercise professional judgement while performing the audit of RP transactions and balances, various items of cheques received but not realised and cheques issued but not cleared (as there were no sufficient bank balances available). This indicates the intention to suppress true balances of borrowings from RPs and present a sound financial position. Further, external party payments were done using NEFT or RTGS whereas the cheques were used only for RP transactions indicating additional factor of fraud. (Order no. 23/14/2022) ● Failure to identify suspected fraudulent diversion of funds given as land advances to RPs which was outstanding at the beginning of the financial year and completely recovered during the year without purchasing any land. Release of huge amounts to RPs on the pretext of land advances, title disputes of land for which money is advanced and return of advances on the flimsy explanation of non-suitability of land, were required to be evaluated by auditors with professional scepticism. (Order no. 23/14/2022) ● Failed to understand the rational for interest free loan given during the year which in turn was given to the personal account of the promoter and his relatives. (Order No.23/14/2022/05)
		● Failure to detect fraudulent diversion of funds through various RPs in the form of loans and advances. (Order No. 28/2023) ● Failure to exercise professional skepticism during verification of advance to subsidiary wherein the amount of advance granted was significantly higher as compared to the actual transactions. (Order No. 23/14/2022) ● Charged with failure to exercise due diligence with respect to capital advances given to one group entity and the lapses include no board approval in place u/s 188 for such advances. (Order No.23/14/2022)
7.	Going Concern (GC) assessment	● Non-assessment of GC or lapses relating to GC basis of accounting in spite of current period and accumulated losses, negative net worth, negative working capital, defaults in repayment of borrowings, discontinuation of many divisions etc. (Order no. 63/2023, 20012/2/20222, 23/14/2022/05, 20012/1/2020)
8.	Auditing of Accounting Issues	● Consolidated financial statements (“CFS”) materially misstated due to non-consolidation of the subsidiary in CFS considering the investment is temporary in nature, relying blindly on the opinion of experts. (Order No. 63/2023) ● Lapses in evaluation of unilaterally writing back of substantial liabilities and subsequent recognition of the amounts involved as gains. (Order No. 59/2023) ● Failure in evaluation and attendance at physical verification of inventories and to report on incorrect accounting policy for valuation of inventories. (Order No. 59/2023) ● Failure to report non-provisioning of land advances given. (Order No. 58/2023) ● Failure to report on non-provisioning on dues outstanding for more than 3 years. (Order no. 58/2023) ● Failure to perform Impairment testing under Ind AS 36 for investments in subsidiaries even though these subsidiaries were loss making. (Order No. 20012/2/2022) ● Failure to report non-recognition of Interest Cost on Borrowings classified as NPAs but was only disclosed in notes to accounts. (Order No. 29/2023) ● Allowing recognition of deferred tax assets in absence of virtual certainty supported by convincing evidence for sufficient future taxable income. Considering the company was making consistent losses, the assets should not have been recognised. (Order No. 27/2023) ● Note to the FS states that provision for gratuity funds and leave encashment has been made on ad hoc basis whereas accounting policy states that provision is made based on valuation by independent actuary resulting in contradictory disclosures. (Order No. 27/2023) ● Failed to report non-provision of Interest Costs on Borrowings from Bank and NBFCs resulting in understatement of loss eight times of reported loss. (Order No. 23/2023) ● Non-provisioning for trade receivables- Unsecured, Considered Doubtful comprising 22% of total assets. (Order No. 23/2023) ● Wrong amortization of certain expenses like Preliminary expenses, Listing expenses etc. which do not meet the definition of non-current assets as no future benefit is expected to flow. (Order No. 23/2023) ● Outstanding foreign currency loan liabilities were carried at transaction date exchange rate and not re-evaluated using closing date exchange rate. (Order No. 20/2023) ● Inflation of Revenue and Purchase by recording Open position Commodity Market Future Trading on daily basis instead of recording once on settlement date. (Order No. 23/05/2021) ● Lapses in audit of inappropriate recognition of finance cost which was an extraordinary item since the underlying borrowings were not used for business purpose but shown as ordinary items in FS. (Order No. 23/14/2022) ● Failure to carry out impairment testing even though there were consistent losses, erosion of net worth and defaults in repayment of loans taken from financial institutions. (Order No. 29/2023)
9.	Non- compliance with laws and regulations	● Not considering flagged significant potential violations in National Housing Board (NHB) inspection reports issued under NHB directions. (Order no. 63/2023) ● Failure to report full particulars of loan to RP – Section 186(4) of the Companies Act, 2013 (Order No. 62/2023) ● Non-evaluation of utilisation of IPO proceeds- CARO 2016 even though approx. 44% of IPO proceeds were paid to one of its RP. (Order No. 59/2023) ● Erroneous Application of Financial Reporting Framework by the Company- the company has erroneously applied the provisions of Companies Act, 2013 while the Companies Act, 1956 was applicable for the reporting period. (Order No. 27/2023) ● The FS has been prepared under Accounting Standards instead of Indian Accounting Standards resulting in revision of audit report and full FS. (Order No. 20012/1/2022)
10.	Presentations and Disclosures	● Failure to report non-disclosure of Trade Payable covered under the Micro, Small and Medium Enterprises Development Act, 2006 (Schedule III of the Companies Act, 2013) (Order No. 62/2023) ● Inadequate disclosure in CARO due to failure to report the period of defaults in repayment of loans or
		borrowings to banks and FIs and dues to debenture holders. (Order No. 20012/2/2022) ● Non-evaluation of Income tax orders for demand resulted in non-provision or disclosure in the FS. (Order No. 25/2023) ● Multiple non-compliance with the format of FS not meeting the requirements of Division I of Schedule III. (Order No. 23/2023) ● Assets given on lease were wrongly shown under PPE as tangible assets instead of showing as receivable as per Schedule III. (Order no. 20/2023) ● Misstatement in cash flow statement- increase in short-term borrowing were shown as operating activity instead of financing activity, loans and advances to RPs should be shown as Investing activity but shown under operating activities. (Order No. 23/14/2022) ● Lapses in evaluation of corporate guarantee and creation of charge – non-disclosure of contingent liability given by the Company for corporate guarantee given in respect of loans taken by family members of promoters from banks and other private companies. Further, these transactions were not disclosed under RP note. (Order No. 23/14/2022)
11.	Professional Misconducts	● Failure to maintain audit file and co-operate with NFRA. The auditor did not respond to NFRA emails seeking audit file and SQC policy despite several extensions of time. (Order No. 27/2023) ● Charged with tampering of audit files during the period NFRA asked to submit the audit file to the actual date of submission of audit file including creation of new Audit work papers during the said period. (Order No. 23/14/2022, 23/14/2022/05)

(Order No. as mentioned against each observations indicates the respective NFRA orders in which the above lapses have been stated)

KEY TAKEAWAYS FOR FUTURE

The observations/lapses highlighted by the NFRA clearly highlights that the audit quality remains a persistent concern across all the types of companies and the statutory auditors. The CAs in practice and specially engaged in the statutory audit of companies covered by NFRA should consider this as an opportunity and ensure the compliance of the Standard on Auditing (SAs) in the engagements carried out by them. The auditing errors can only be minimised and not totally eliminated but should be reduced to acceptable levels.

The NFRA in collaboration with the Institute of Chartered Accountants of India (ICAI) may also consider publishing sample audit manuals with minimum documentation requirements. For mid-sized firms, this may be especially useful as they could use this document as a reference point for their audit documentation.

“Audit work documentation, if performed in true spirit, leads to ‘thinking audit’ rather than ‘ticking audit’.”

– Dr Ajay Bhushan Pandey – NFRA Chairperson

BCAJ Admin

Financial Reporting Dossier

A. KEY GLOBAL UPDATES

1. IASB: PROPOSAL TO IMPROVE REPORTING OF ACQUISITIONS

On 14^th March 2024, the international accounting Standards Board published Exposure Draft Business Combinations — Disclosures, Goodwill and Impairment aimed at enhancing the information companies provide to investors about acquisitions.

The exposure draft published responds to stakeholder feedback that reporting on acquisitions poses difficulties for both investors and companies:

Investors lack sufficient and timely information about acquisitions and post-acquisition performance.
Companies seek to provide useful information to investors but see risks and costs in providing some information, particularly commercially sensitive information that could be used by competitors.

The stakeholders have also expressed concern about the effectiveness and complexity of the impairment test for operations which have been allocated goodwill.

The Exposure Draft proposes amendments to:

IFRS 3 Business Combinations — in particular, to improve the information companies disclose about the performance of business combinations; and
IAS 36 Impairment of Assets — in particular, amendments to the impairment test of cash-generating units containing goodwill.

The proposed amendments would require companies to report the objectives and related performance targets of their most important acquisitions, including whether these are met in subsequent years. Companies would also be required to provide information about the expected synergies for all material acquisitions. However, companies would not be required to disclose information that could compromise their acquisition objectives. The comment period for the Exposure Draft Business Combinations — Disclosures, Goodwill and Impairment is open until 15th July, 2024.

2. IASB: IFRS 18- Presentation & Disclosure in Financial Statements

On 5^th February, 2024, the International Accounting Standards Board (IASB), provided an overview on IFRS 18 Presentation & Disclosures in Financial Statements, the forthcoming IFRS Accounting Standard, that will set out the overall requirements for presentation and disclosures in the financial statements. This new Standard responds to investors’ demand for better information about companies’ financial performance. It will affect all companies and all investors.

IFRS 18 arises from the IASB’s work on the Primary Financial Statements project. This will introduce three sets of new requirements:

•The first set of requirements create structure in the statement of profit or loss by requiring companies to present two new defined subtotals. This will provide a consistent and comprehensive starting point for investors’ analysis and help investors compare performance between companies. In particular, using the subtotal for operating profit, which will now be defined and therefore more comparable.
The second set of requirements is that companies will be required to disclose information about some non-GAAP measures in a single note to the financial statements. These are called management-defined performance measures. This will help companies to complement information provided using the new structure for the statement of profit or loss, with company specific information about performance and provide investors with greater transparency about those measures. Since the same will be disclosed in the financial statements they will be subject to audit.
The third set of requirements enhances guidance on grouping of information, also known as aggregation and disaggregation, in the financial statements. This will help ensure that investors receive material information, making financial statements more understandable and more useful. IFRS 18 will also provide guidance for a company to determine whether information should be presented in the primary financial statements or disclosed in the notes.

IFRS 18 is expected to be issued in April 2024. The effective date for IFRS 18 will be 1^st January, 2027. IFRS 18 will replace IAS 1 Presentation of Financial Statements.

3. FASB: CONCEPTUAL FRAMEWORK OF MEASUREMENT

On 21^st December, 2023, the Financial Accounting Standards Board (FASB) proposed a new chapter of its Conceptual Framework related to the measurement of items recognised in financial statements. The proposed chapter provides concepts for the Board to consider when choosing a measurement system for an asset or liability recognised in general purpose financial statements. It describes (a) Two relevant and representationally faithful measurement systems: the entry price systems and the exit price systems and (b) considerations when selecting a measurement system.

4. IAASB: AUDITOR’S RESPONSIBILITIES RELATED TO FRAUD

On 6^th February, 2024, the International Auditing & Assurance Standards Board proposed significant strengthening of its standard on auditor’s responsibilities relating to fraud.

The proposed revisions to International Standards on Auditing 240 (Revised)- The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, include:

Clarified auditor responsibilities relating to fraud in an audit.
Emphasised professional skepticism to ensure auditors remain alert to possible fraud and exercise professional skepticism throughout an audit.
Strengthened identification and assessment of risks of material misstatement due to fraud.
Clarified response to fraud or suspected fraud identified during the audit.
Increased ongoing communication with management and those charged with governance about fraud.
Increased transparency about auditors’ responsibilities and fraud-related procedures in the auditor’s report.
Enhanced audit documentation requirements about fraud-related procedures.

The exposure draft is open for comments till 5^th June, 2024.

5. IAASB: AMENDMENT TO ISQMS, ISAS AND ISRE 2400

On 8^th January, 2024, the International Auditing and Assurance Standards Board launched a consultation process on proposed narrow scope amendments to achieve greater convergence with International Ethic’s Standards Board for Accountants’ (IESBA) International Code of Ethics for Professional Accountants (including independence Standards).

These proposed revisions have two key objectives (a) aligning definitions and requirements in IAASB Standards with new definitions for publicly traded and public interest entities in the IESBA Code, (b) amendments would extend the applicability of existing differential requirements for listed entities to meet heightened stakeholder expectations regarding audits of public interest entities (PIE).

Key proposed revisions include extending thescope of the entities included under the International Standards on Quality Management and theInternational Standards on Auditing such that they will be subject to:

Engagement quality reviews;
Providing transparency in the auditor’s report on specific aspects of the audit, including auditor independence, communicating key audit matters, and the engagement partner’s name; and
Communicating with those charged with governance to help them fulfill their responsibility overseeing the financial reporting process, (e.g., communicating about quality management and auditor independence).

6. FRC: UPDATE ON ETHICAL STANDARD FOR AUDITORS

On 15^th January, 2024, the FRC updated the Ethical Standard for Auditors. The update does three main things:

First, the FRC has simplified the existing ethical standard and provided additional clarity in a limited number of areas to respond to helpful feedback from auditors.
Second, the new standard considers recent revisions made to the international IESBA Code of Ethics. This aligns the UK with international standards and helps to ensure high standards of independence and ethical behaviour are applied consistently by UK audit firms and their networks.
Third, the FRC has added a new targeted restriction on fees from entities related by a single controlling party. This is in response to issues identified through FRC audit inspection and enforcement cases.

The high-quality ethical standards for auditors enhance trust in the quality of financial information that drives investment in the UK. This is balanced with ensuring that any requirements are targeted and proportionate.

7. FRC: REVISION OF UK CORPORATE GOVERNANCE CODE

On 22^nd January, 2024, the FRC announced important revisions to the UK Corporate Governance Code (the Code) that enhance transparency and accountability of UK plc and help support the growth and competitiveness of the UK and its attractiveness as a place to invest.

In a significant move aimed at promoting smarter regulation, the FRC has kept changes to the Code to the minimum that are necessary. The FRC is conscious that the expectations for effective governance must be targeted and proportionate.

Given stakeholder support for the importance of good corporate governance, the FRC has prioritised revisions to the Code in one significant area- Internal Controls. As signalled on 7th November, the FRC has dropped its earlier proposals for revisions to the Code related to the role of audit committees on environmental, social and governance issues; expanding diversity and inclusion expectations; over-boarding provisions, and expectations on Committee Chairs’ engagement with shareholders.

In relation to Internal Controls, the existing expectations in the Code will remain. Namely that the Board should monitor the company’s risk management and internal control framework and, at least annually, carry out a review of its effectiveness. The existing Code also includes the provision that monitoring and review should cover all material controls, including financial, operational, reporting and compliance controls. The main substantive changes the FRC is now making is asking Boards to explain through a declaration in their Annual Reports how they have done this and their conclusions.

A small number of other more minor changes have been made to the Code that aim to better streamline the expectations or clarify the language. This relates to the Code provisions on malus and clawback and audit committee minimum standards.

8. FRC: THEMATIC REVIEW OF REPORTING BY THE UK’S LARGEST PRIVATE COMPANIES

On 31^st January, 2024, the FRC published the review of reporting by the UK’s largest private companies. This review looked at the annual report and accounts of 20 UK companies.

The key findings that company and their auditors should consider for future annual reports are:

The best strategic report disclosures focused on the matters that are key for an understanding of the company. These were explained in a clear, concise and understandable way that was consistent with the disclosures in the financial statements. Good quality reporting does not necessarily require greater volume.
Better examples of judgement and estimates disclosures included detail of the specific judgement involved and clearly explained the rationale for the conclusion. The significance of estimation uncertainty was much more apparent when sensitivities were quantified.
Accounting policies for complex transactions and balances were often untailored, providing boilerplate wording. Entity-specific policies are particularly critical for revenue, where the better examples explain the nature of each significant revenue stream, the timing of recognition and how the value of revenue was determined.

9. FRC: ANNUAL REVIEW OF COMPETITION IN THE AUDIT MARKET

On 14^th December, 2023, the FRC published an updated overview of competition in the UK’s audit market for public interest entities (PIE).

While the report shows a small increase in market share for challenger audit firms, the audit market remains highly concentrated. The Big Four accounting firms continue to dominate, earning 98 per cent of FTSE 350 audit fees in 2022, resulting in limited choices for businesses and ongoing concerns about resilience. The audit fees paid by FTSE 100 increased by 15 per cent in 2022 and FTSE 350 by 13 per cent.

Over the past year, and with a focus on addressing concerns in the quality of PIE audits among smaller firms, the FRC has pursued a range of initiatives targeting different aspects of market competition. These include publishing a standard for audit committees in relation to their role on the external audit, launching the FRC’s Scalebox to assist smaller firms’ entry in the PIE audit market, and exploring barriers to growth for smaller audit firms.

10. IESBA: NEW ETHICAL BENCHMARK FOR SUSTAINABILITY REPORTING AND ASSURANCE

On 29^th January, 2024, the International Ethics Standards Board for Accountants (IESBA) announced the launch of two Exposure Drafts (EDs):

International Ethics Standard for Sustainability Assurance (including International Independence Standards) (IESSA) and ethics standards for sustainability reporting proposes a clear framework of expected behaviors and ethics provisions for use by all sustainability assurance practitioners regardless of their professional backgrounds, as well as professional accountants involved in sustainability reporting. The goal of these standards is to mitigate greenwashing and elevate the quality of sustainability information, thereby fostering greater public and institutional trust in sustainability reporting and assurance.
The Exposure Draft on Using the Work of an External Expert proposes an ethical framework to guide professional accountants or sustainability assurance practitioners, as applicable, in evaluating whether an external expert has the necessary competence, capabilities and objectivity in order to use that expert’s work for the intended purposes. The proposals also include provisions to aid in applying the Code’s conceptual framework when using the work of an external expert.

These proposed ethics (including independence) standards are especially relevant in a context where sustainability information is increasingly important for capital markets, consumers, corporations and their employees, governments and society at large, and when new providers outside of the accounting profession play a prominent role in sustainability assurance.

B. GLOBAL REGULATORS- ENFORCEMENT ACTIONS AND INSPECTION REPORTS

I. THE FINANCIAL REPORTING COUNCIL, UK

a) SANCTIONS AGAINST KPMG LLP AND AUDIT PARTNER (4^th March, 2024)

On 4^th March, 2024, the FRC imposed sanctions against KPMG & Adrian Wilcox (the audit engagement partner) in respect of their statutory audit of M&C Saatchi plc for the financial year ended 31^st December, 2018.

The FRC investigation was launched following M&C Saatchi’s discovery of accounting errors, announced in 2019, which ultimately led to a restatement of the FY 2018 profit in the FY 2019 annual accounts. The investigation looked at a number of elements of the audit, including revenue recognition, journal entries, and the year-end consolidation process.

KPMG and Mr. Wilcox have admitted breaches of relevant requirements in the following areas:

A failure to audit with sufficient professional skepticisms the release of WIP credits (a type of client payment on account), which increased revenue by £1,200,000. These releases, processed as UK sub-consolidation adjustments, were subsequently reversed in the FY2019 annual accounts.
Failures to properly audit journal entries across a number of subsidiary companies, including a lack of any journals-testing at all for two subsidiaries, and a failure to identify potentially high-risk journals for testing across a number of entities.
A failure to document the auditors’ reasoning, or complete their inquiries with management, in relation to the retention of rebates under a contract which, on its face, appeared to require such rebates to be passed back to a client. The level of professional skepticism was insufficient.

The sanctions were a financial sanction of £2,250,000 on KPMG and financial sanction of £75,000 on Mr. Wilcox.

II. THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (PCAOB)

a) Imposing $2 million in fines for pervasive Quality Control Violations Involving SPAC Audits

On 21^st February, 2024, PCAOB announced a settled disciplinary order sanctioning WithumSmith+Brown, PC (“the firm”) for violations of PCAOB rules and quality control standards.

From January 2020 through December 2021, WithumSmith+Brown, PC accepted a substantial number of special purpose acquisition company (SPAC) audit clients, resulting in a dramatic increase in its issuer audit practice and putting a significant strain on its quality control system.

In 2021, for example, the firm’s issuer audit practice increased almost 500 per cent, from approximately 80 audit reports to almost 450. Yet the number of partners assigned to these audits increased by only 50 per cent (from 15 to 23). The firm’s quality control system failed to provide reasonable assurance that its personnel complied with applicable professional standards and regulatory requirements, including those related to appropriately staffing issuer audits.

The PCAOB found that the firm’s system of quality control failed to provide reasonable assurance that the firm would:

Undertake only those issuer engagements that the firm could reasonably expect to be completed with professional competence and appropriately consider the risks associated with providing professional services in the particular circumstances;
Ensure that partner workloads were manageable to allow sufficient time for engagement partners to discharge their responsibilities with professional competence and due care;
Ensure that personnel were consulting with individuals within or outside the firm, when appropriate, when dealing with complex issues;
Perform sufficient procedures to test estimates, including sufficiently evaluating the reasonableness of certain significant assumptions underlying the estimate;
Make all required communications to issuer audit committees;
Perform sufficient procedures to determine whether certain matters were critical audit matters;
Perform sufficient procedures to test journal entries.

The firm settled with the PCAOB, without admitting or denying the findings, and consented to a disciplinary order imposing a $2 million civil money penalty on the firm.

On this, PCAOB Chair Erica Y. Williams said “Growth must not come at the expense of quality. The PCAOB will hold firms accountable for upholding quality control systems that protect investors.”

b) Sanctions audit firms for violating PCAOB rules and standards related to audit committee communications

On 20^th February, 2024, PCAOB announced settled disciplinary orders sanctioning four audit firms for violating PCAOB rules and standards related to communications that firms are required to make to audit committees.

These firms failed to make certain required communications with audit committees, as required by Auditing Standards (AS) 301, Communications with Audit Committees. These firms includes (a) Baker Tilly US, LLP – $80,000; (b) Grant Thornton Bharat LLP (India) – $40,000; (c) Mazars USA LLP – $60,000; and (d) SW Audit (Australia) – $60,000.

Three of these firms also violated additional PCAOB rules and standards:

Baker Tilly US, LLP failed to document pre-approval of statutory audit services, in violation of AS 1215, Audit Documentation.
Grant Thornton Bharat LLP failed to ensure that an issuer client’s audit committee received a copy of management’s representation letter, in violation of AS 1301 and AS 2805, Management Representations.
SW Audit failed to satisfy independence requirements in violation of PCAOB Rule 3520, Auditor Independence, and PCAOB Rule 3524, Audit Committee Pre-Approval of Certain Tax Services, by failing to obtain audit committee pre-approval of tax compliance and other services and by engaging an issuer audit client pursuant to an indemnification agreement. SW Audit also violated PCAOB quality control standards in failing to maintain effective policies and procedures with respect to independence and audit documentation.

c) Sanctions Audit firm & Partner for Violating PCAOB Audit & Quality Control Standards

On 24^th January, 2024, the PCAOB announced a settled disciplinary order sanctioning Jack Shama (the “firm”) and Jack Shama, CPA (“Shama”), the sole proprietor of the firm, for numerous and repeated violations of various PCAOB rules and standards in connection with nine audits.

The PCAOB found that, among other violations, Shama and his firm

failed to exercise due professional care and professional skepticism during the nine audits,
failed to obtain sufficient appropriate audit evidence to support the firm’s opinions and failed to properly assemble and retain audit documentation.
Violated PCAOB standards by failing to have an engagement quality review performed for any of the nine audits.

The PCAOB also found that the firm violated PCAOB quality control standards because it failed to design and implement adequate policies and procedures to provide reasonable assurance that (1) the work performed by engagement personnel would meet applicable professional standards and regulatory requirements, (2) the work was assigned to personnel with the required technical training and proficiency, and (3) the firm would only undertake engagements that it could reasonably expect to complete with professional competence.

The PCAOB permanently revoked the firm registration and permanently barred Shama from being an associated person of a registered public accounting firm.

d) Sanctions Haynie & Company and Four of Its Current and Former Partners for Audit and Quality Control Violations

PCAOB announced three settled disciplinary orders sanctioning Haynie & Company (“Haynie”); Haynie partner Tyson Holman, CPA (“Holman”) and former Haynie partner Anna Hrabova, CPA (“Hrabova”); and Haynie partner Steven Avis, CPA (“Avis”) and former Haynie partner Richard Fleischman, CPA (“Fleischman”) (collectively, “Respondents”).

PCAOB’s findings include the following:

Holman and Avis — the engagement partners on the George Risk and Investview audits, respectively — failed to exercise due professional care and professional skepticism, failed to obtain sufficient appropriate audit evidence to support Haynie’s opinions, and failed to evaluate whether the financial statements were presented in conformity with the applicable financial reporting framework. With respect to George Risk’s investments, Holman was aware of deficiencies in his testing approach identified during the PCAOB’s inspection of Haynie’s audit of George Risk’s 2017 financial statements. Despite this awareness, he followed a similar deficient testing approach during the 2019 George Risk audit.
Hrabova and Fleischman, while serving as engagement quality review partners on the 2019 George Risk and Investview audits, respectively, failed to exercise due professional care and professional skepticism. Therefore, they lacked an appropriate basis to provide their concurring approvals of issuance of Haynie’s audit reports.

The PCAOB further determined that Haynie violated PCAOB QC standards because it failed to (1) effectively implement policies and procedures to provide reasonable assurance that the work performed by engagement personnel met applicable professional standards and regulatory requirements; and (2) establish policies and procedures to provide reasonable assurance that Haynie’s quality control policies and procedures were suitably designed and were being effectively applied, and that its system of quality control was effective.

e) Deficiencies identified in Inspection Reports:

1) Grant Thornton (Dublin, Ireland) (11^th December, 2023)

Deficiency: In an inspection carried out by PCAOB it has identified (a) deficiency in financial statements audit related to revenue. The firm did not performed procedures to test, or test any controls over, the accuracy of certain data used in its substantive testing of the issuer’s revenue disclosures, (b) the firm did not include all relevant work papers in the final set of audit documentation it was required to assemble, Non-compliant with AS 1215 Audit Documentation, (c) the firm did not make certain required communications to the issuer’s audit committee related to name, location and planned responsibilities of other accounting firms that performed audit procedures in the audit, uncorrected misstatements, other material written communications with management, non-compliant with AS 1301 communications with Audit Committees, (d) did not provide the copy of Management representation letter to the issuer’s audit committee.

2) Grassi & Co., CPAs, P.C. (21^st December, 2023)

Deficiency: In an inspection report carried out by PCAOB it has identified (a) deficiency in the financial statement audit related to Revenue & Related Accounts and a Business Combination, (b) the firm when testing journal entries for evidence of possible material misstatement due to fraud, did not perform procedures to determine whether journal entry population from which it made its selections was complete, non-compliant with AS 1105 Audit evidence, (c) the firm did not assess the risks of Material Misstatement related to certain significant accounts and disclosures, non-compliant with AS 2110 Identifying and Assessing Risks of Material Misstatements.

3) KCCW Accountancy Corp., California (11^th December, 2023)

Deficiency: In an inspection report carried out by PCAOB it has identified (a) deficiency in the financial statement audit related to Revenue, Financial Statement Presentation and Disclosures, and Related Party Transactions, (b) the firm did not communicate to the issuer’s audit committee certain critical accounting estimates, significant risks identified through its risk assessment procedures, certain critical accounting policies and practices, (c) did not include certain matters that were communicated or required to be communicated, to the issuer’s audit committee while performing procedures to determine whether or not matters were critical audit matters.

III. THE SECURITIES EXCHANGE COMMISSION (SEC)

a) Violation of Foreign Corrupt Practices Act (FCPA) (10^th January, 2024)

The SEC announced charges against global software company SAP SE for violations of the Foreign Corrupt Practices Act (FCPA) arising out of bribery schemes in South Africa, Malawi, Kenya, Tanzania, Ghana, Indonesia, and Azerbaijan.

SAP violated the FCPA by employing third-party intermediaries and consultants from at least December 2014 through January 2022 to pay bribes to government officials to obtain business with public sector customers in the seven countries mentioned above. According to the SEC’s order, SAP inaccurately recorded the bribes as legitimate business expenses in its books and records, despite the fact that certain of the third-party intermediaries could not show that they provided the services for which they had been contracted. The SEC’s order finds that SAP failed to implement sufficient internal accounting controls over the third parties and lacked sufficient entity-level controls over its wholly owned subsidiaries.

The company agreed to monetary sanctions of nearly $100 million in disgorgement and prejudgment interest to settle the SEC’s charges.

b) Fraud in Block Trading Business (12th January, 2024)

The SEC charged investment banking giant Morgan Stanley & Co. LLC and the former head of its equity syndicate desk, Pawan Passi, with a multi-year fraud involving the disclosure of confidential information about the sale of large quantities of stock known as “block trades.” The SEC also charged Morgan Stanley with failing to enforce its policies concerning the misuse of material non-public information related to block trades.

A block trade generally involves the sale of a large quantity of shares of an issuer’s stock, privately arranged and executed outside of the public markets. According to the SEC’s orders, from at least June 2018 through August 2021, Passi and a subordinate on Morgan Stanley’s equity syndicate desk disclosed non-public, potentially market-moving information concerning impending block trades to select buy-side investors despite the sellers’ confidentiality requests and Morgan Stanley’s own policies regarding the treatment of confidential information. The SEC’s orders find that Morgan Stanley and Passi disclosed the block trade information with the understanding that those buy-side investors would use the information to “pre-position” by taking a significant short position in the stock that was the subject of the upcoming block trade. According to the SEC orders, if Morgan Stanley eventually purchased the block trade, the buy-side investors would then request and receive allocations from the block trade from Morgan Stanley to cover their short positions. This pre-positioning reduced Morgan Stanley’s risk in purchasing block trades.

SEC censures the firm, and orders it to pay approximately $138 million in disgorgement, approximately $28 million in prejudgment interest, and an $83 million civil penalty. The SEC’s order concerning Passi finds that he willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, orders him to pay a $250,000 civil penalty, and imposes associational, penny stock, and supervisory bars.

c) Violation of Whistleblower Protection Rule (16^th January, 2024)

The SEC announced settled charges against J.P. Morgan Securities LLC (JPMS) for impeding hundreds of advisory clients and brokerage customers from reporting potential securities law violations to the SEC. JPMS agreed to pay an $18 million civil penalty to settle the charges.

According to the SEC’s order, from March 2020 through July 2023, JPMS regularly asked retail clients to sign confidential release agreements if they had been issued a credit or settlement from the firm of more than $1,000. The agreements required the clients to keep confidential the settlement, all underlying facts relating to the settlement, and all information relating to the account at issue. In addition, even though the agreements permitted clients to respond to SEC inquiries, they did not permit clients to voluntarily contact the SEC.

The SEC’s order finds that JPMS violated Rule 21F-17(a) under the Securities Exchange Act of 1934, a whistleblower protection rule that prohibits taking any action to impede an individual from communicating directly with the SEC staff about possible securities law violations.

d) Fraud: ‘HyperFund’, Crypto Asset Pyramid Scheme (29^th January, 2024)

The SEC charged Xue Lee (aka Sam Lee) and Brenda Chunga (aka Bitcoin Beautee) for their involvement in a fraudulent crypto asset pyramid scheme known as HyperFund that raised more than $1.7 billion from investors worldwide.

According to the SEC’s complaint, from June 2020 through early 2022, Lee and Chunga promoted HyperFund “membership” packages, which they claimed guaranteed investors high returns, including from HyperFund’s supposed crypto asset mining operations and associations with a Fortune 500 company. As the complaint alleges, however, Lee and Chunga knew or were reckless in not knowing that HyperFund was a pyramid scheme and had no real source of revenue other than funds received from investors. In 2022, the HyperFund scheme collapsed and investors were no longer able to make withdrawals.

The SEC’s Office of Investor Education and Advocacy directs investors to resources on detecting and avoiding pyramid schemes.

e) Fraud: Misappropriation with Revenue (6^th February, 2024)

The SEC announced settled accounting fraud charges against Cloopen Group Holding Limited, a China-based provider of cloud communications products and services whose American depositary shares formerly traded on the New York Stock Exchange.

Two senior managers who led Cloopen’s strategic customer contracts and key accounts department orchestrated a fraudulent scheme from May 2021 through February 2022 to prematurely recognise revenue on service contracts. The order finds that, facing pressure to meet strict quarterly sales targets, the two senior managers directed their employees to improperly recognise revenue on numerous contracts for which Cloopen had either not completed work or, in some instances, not even started work. As a result of this misconduct and other accounting errors, Cloopen overstated its unaudited financial results for the second and third quarters of 2021 and its announced revenue guidance for the fourth quarter of 2021.

Within a few days of starting an internalinvestigation, Cloopen self-reported the accounting violations to the SEC.

f) Failure to Disclose Influencer’s Role in connection with ETF Launch (16^th February, 2024)

The SEC announced that registered investment adviser Van Eck Associates Corporation has agreed to pay a $1.75 million civil penalty to settle charges that it failed to disclose a social media influencer’s role in the launch of its new exchange-traded fund (ETF).

According to the SEC’s order, in March 2021, Van Eck Associates launched the VanEck Social Sentiment ETF to track an index based on “positive insights” from social media and other data. The provider of that index informed Van Eck Associates that it planned to retain a well-known and controversial social media influencer to promote the index in connection with the launch of the ETF. To incentivise the influencer’s marketing and promotion efforts, the proposed licensing fee structure included a sliding scale linked to the size of the fund so, as the fund grew, the index provider would receive a greater percentage of the management fee the fund paid to Van Eck Associates. However, as the SEC’s order finds, Van Eck Associates failed to disclose the influencer’s planned involvement and the sliding scale fee structure to the ETF’s board in connection with its approval of the fund launch and of the management fee.

BCAJ Admin

From Published Accounts

Compilers’ Note:

Many companies publish information on the steps taken to alleviate the possible climate impact of their business. Details of all such steps are normally stated in the Sustainability Reporting under various frameworks. The effect of such possible climate impact on the financial results and financial statements is also an important aspect of financial reporting. Given below are instances where such disclosure is given in the Notes to the Financial Statements which are subjected to audit by the Statutory Auditors.

Hindustan Zinc Limited (year ended 31^st March, 2023)
From Notes to Standalone Financial Statements
Significant management estimates and judgements

a) Restoration, rehabilitation and environmental costs

Provision is made for costs associated with restoration and rehabilitation of mining sites as soon as the obligation to incur such costs arises. Such restoration and closure costs are typical of extractive industries and they are normally incurred at the end of the life of the minefields. The costs are estimated on an annual basis on the basis of mine closure plans and the estimated discounted costs of dismantling and removing these facilities and the costs of restoration are capitalised when incurred reflecting the Company’s obligations at that time. The Company has not considered salvage value for the estimates of provision for decommissioning calculated as at 31^st March, 2023.

The provision for decommissioning liabilities is based on the current estimate of the costs for removing and decommissioning producing facilities, the forecast timing of settlement of decommissioning liabilities and the appropriate discount rate.

b) Climate change

The Company aims to achieve net carbon neutrality by 2050 or sooner & committed to reduce its GHG emissions (Scope- 1 & 2) by 14 per cent by 2026 & Scope 3 by 20 per cent by 2026 from 2017 baseline, five times water positive by 2025 from the current 2.41 times, etc. as part of their climate mitigation and adaptation efforts and sustainability strategy. The Company conducted a climate risk assessment and outlined its risks and opportunities in the Task Force on Climate-Related Financial Disclosures (“TCFD”) report. Climate change may have various impacts on the Company in the medium to long term. These impacts include the risks and opportunities related to the demand of products, impact due to transition to a low-carbon economy, disruption to the supply chain, risk of physical harm to the assets due to extreme weather conditions, regulatory changes, etc. The accounting related measurement and disclosure items that are most impacted by our commitments, and climate change risk more generally, relate to those areas of the financial statements that are prepared under the historical cost convention and are subject to estimation uncertainties in the medium to long term.

The potential effects of climate change may be on assets and liabilities that are measured based on an estimate of future cash flows. The main ways in which potential climate change impacts have been considered in the preparation of the financial statements, pertain to (a) inclusion of capex in cash flow projections, (b) recoverable amounts of existing assets, (c) review of estimates of useful lives of property, plant and equipment, (d) assets and liabilities carried at fair value, etc.

The Company’s strategy consists of mitigation and adaptation measures and is committed to reduce its carbon footprint by limiting its exposure to coal based projects and reducing its GHG emissions through high impact initiatives such as investment in Renewable Energy (450 MW Power delivery agreement (‘PDA’) signed on a group captive basis, fuel switch, electrification of vehicles and mining fleet and energy efficiency opportunities. However, renewable sources have limitations in supplying round the clock power, so existing power plants would support transition and fleet replacement is part of normal life cycle renewal. We have also taken certain measures towards water management such as commissioning of zero liquid discharge plants, sewage treatment plants, dry tailing plants, rainwater harvesting, thus reducing freshwater consumption. These initiatives are aligned with the Company’s ESG strategy and no material changes were identified to the financial statements as a result.

As the Company’s assessment of the potential impacts of climate change and the transition to a low-carbon economy continues to mature, any future changes in the Company’s climate change strategy, changes in environmental laws and regulations and global decarbonisation measures may impact the Company’s significant judgments and key estimates and result in changes to financial statements and carrying values of certain assets and liabilities in future reporting periods. However, as of the balance sheet date, the Company believes that there is no material impact on carrying values of its assets or liabilities.

Vedanta Ltd (year ended 31^st March, 2023)
From Significant management estimates and judgements

Climate Change

The Company aims to achieve net carbon neutrality by 2050, has committed reduction in emission by 25 per cent by 2030 from 2021 baseline, net water positivity by 2030 as part of its climate risk assessment and has outlined its climate risk assessment and opportunities in the ESG strategy. Climate change may have various impacts on the Company in the medium to long term. These impacts include the risks and opportunities related to the demand of products and services, impact due to transition to a low-carbon economy, disruption to the supply chain, risk of physical harm to the assets due to extreme weather conditions, regulatory changes etc. The accounting related measurement and disclosure items that are most impacted by our commitments, and climate change risk more generally, relate to those areas of the financial statements that are prepared under the historical cost convention and are subject to estimation uncertainties in the medium to long term. The potential effects of climate change may be on assets and liabilities that are measured based on an estimate of future cash flows. The main ways in which potential climate change impacts have been considered in the preparation of the financial statements, pertain to (a) inclusion of capex in cash flow projections, (b) review of estimates of useful lives of property, plant and equipment, (c) recoverable amounts of existing assets, (d) assets and liabilities carried at fair value. The Company’s strategy consists of mitigation and adaptation measures. The Company is committed to reduce its carbon footprint by limiting its exposure to coal-based projects and reducing its GHG emissions through high impact initiatives such as investment in Renewable Energy (1,826 MW on a group captive basis), fuel switch, electrification of vehicles and mining fleet and energy efficiency opportunities. Renewable sources have limitations in supplying round the clock power, so existing power plants would support transition and fleet replacement is part of normal life cycle renewal. The Company has also taken certain measures towards water management such as commissioning of sewage treatment plants, rainwater harvesting, and reducing freshwater consumption. These initiatives are aligned with the group’s ESG strategy and no material changes were identified to the financial statements as a result. As the Company’s assessment of the potential impacts of climate change and the transition to a low-carbon
economy continues to mature, any future changes in the Company’s climate change strategy, changes in environmental laws and regulations and global decarbonisation measures may impact the Group’s significant judgments and key estimates and result in changes to financial statements and carrying values of certain assets and liabilities in future reporting periods. However, as of the balance sheet date, the Group believes that there is no material impact on carrying values of its assets or liabilities.

From notes to financial statements

The Ministry of Environment, Forest and Climate Change (“MOEF&CC”) has revised emission norms for coal-based power plants in India. Accordingly, both captive and independent coal-based power plants in India are required to comply with these revised norms for reduction of sulphur oxide (SO2) emissions for which the current plant infrastructure is to be modified or new equipment have to be installed. The Company is required to comply with the norms by 31^st December, 2026 via MoEF&CC’s notification dated 5^th September, 2022.

BCAJ Admin

Ind AS/IGAAP — Interpretation and Practical Application

Activities that represent efforts by a service provider in fulfilling the performance obligations, and which trigger revenue recognition, sometimes can be lumpy and unpredictable; whereas the cash received from the customer can be time-based, smooth and predictable. Therefore, the question is whether revenue recognition can follow a smooth pattern, rather than get recognized in a lumpy manner. Very often, stock markets reward more stable and predictable earnings per share (EPS), rather than a highly volatile EPS each quarter. Most entities, therefore, prefer to have a smooth revenue recognition pattern. The big question is whether such smoothing is possible under Ind AS 115 Revenue from Contracts with Customers. This question is addressed through a simple fact pattern.

QUERY

Repair Company Ltd (RepCo) provides repair and maintenance (R&M) services as well as overhaul and relining of crusher machines that are used in mining operations. The contract is for a period of six years. At the end of the second, fourth and sixth year, RepCo does a complete relining and overhaul of the crusher. Additionally, RepCo also provides R&M services for the crusher on a continuous basis, and for this purpose, it will have two of its mechanics located at the customer’s site on a full-time basis for a period of 6 years, along with certain stores and spares that would be required for relining, overhaul and regular R&M.

For the next six years, the customer will pay RepCo a consideration at the end of each month. The consideration is variable and is dependent upon the usage of the crusher determined at the end of each month; however, the customer will pay a basic minimum amount, even if the crusher was idle through the period. The customer does not pay separately for the relining and overhaul, and that consideration is embedded in the monthly payments.

For the sake of simplicity, consider that typically the R&M involves 40% effort and the relining and overhaul involves 60% effort.

RepCo, wants to recognize revenue, in line with the payment by the customer, i.e., recognize as revenue, the consideration paid by the customer at the end of each month. Is that permissible under Ind AS?

RESPONSE

Ind AS 115 Revenue from Contracts with Customers

22 At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either: (a) a good or service (or a bundle of goods or services) that is distinct; or (b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer (see paragraph 23).

23 A series of distinct goods or services have the same pattern of transfer to the customer if both of the following criteria are met: (a) each distinct good or service in the series that the entity promises to transfer to the customer would meet the criteria in paragraph 35 to be a performance obligation satisfied over time; and (b) in accordance with paragraphs 39–40, the same method would be used to measure the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.

29 In assessing whether an entity’s promises to transfer goods or services to the customer are separately identifiable in accordance with paragraph 27(b), the objective is to determine whether the nature of the promise, within the context of the contract, is to transfer each of those goods or services individually or, instead, to transfer a combined item or items to which the promised goods or services are inputs. Factors that indicate that two or more promises to transfer goods or services to a customer are not separately identifiable include, but are not limited to, the following: (a) the entity provides a significant service of integrating the goods or services with other goods or services promised in the contract into a bundle of goods or services that represent the combined output or outputs for which the customer has contracted. In other words, the entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer. A combined output or outputs might include more than one phase, element or unit. (b) one or more of the goods or services significantly modifies or customises, or are significantly modified or customised by, one or more of the other goods or services promised in the contract. (c) the goods or services are highly interdependent or highly interrelated. In other words, each of the goods or services is significantly affected by one or more of the other goods or services in the contract. For example, in some cases, two or more goods or services are significantly affected by each other because the entity would not be able to fulfil its promise by transferring each of the goods or services independently.

46 When (or as) a performance obligation is satisfied, an entity shall recognise as revenue the amount of the transaction price (which excludes estimates of variable consideration that are constrained in accordance with paragraphs 56–58) that is allocated to that performance obligation.

56 An entity shall include in the transaction price some or all of an amount of variable consideration estimated in accordance with paragraph 53 only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

84 Variable consideration that is promised in a contract may be attributable to the entire contract or to a specific part of the contract, such as either of the following: (a) one or more, but not all, performance obligations in the contract (for example, a bonus may be contingent on an entity transferring a promised good or service within a specified period of time); or (b) one or more, but not all, distinct goods or services promised in a series of distinct goods or services that forms part of a single performance obligation in accordance with paragraph 22(b) (for example, the consideration promised for the second year of a two-year cleaning service contract will increase on the basis of movements in a specified inflation index).

85 An entity shall allocate a variable amount (and subsequent changes to that amount) entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation in accordance with paragraph 22(b) if both of the following criteria are met: (a) the terms of a variable payment relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the distinct good or service (or to a specific outcome from satisfying the performance obligation or transferring the distinct good or service), and (b) allocating the variable amount of consideration entirely to the performance obligation or the distinct good or service is consistent with the allocation objective in paragraph 73 when considering all of the performance obligations and payment terms in the contract.

86 The allocation requirements in paragraphs 73–83 shall be applied to allocate the remaining amount of the transaction price that does not meet the criteria in paragraph 85.

Ind AS 108 Operating Segments

27 An entity shall provide an explanation of the measurements of segment profit or loss, segment assets and segment liabilities for each reportable segment. At a minimum, an entity shall disclose the following: (a) ………. (b) the nature of any differences between the measurements of the reportable segments’ profits or losses and the entity’s profit or loss before income tax expense or income and discontinued operations (if not apparent from the reconciliations described in paragraph 28). Those differences could include accounting policies and policies for the allocation of centrally incurred costs that are necessary for an understanding of the reported segment information.

28 An entity shall provide reconciliations of all of the following: (a) ………. (b) the total of the reportable segments’ measures of profit or loss to the entity’s profit or loss before tax expense (tax income) and discontinued operations. However, if an entity allocates to reportable segments items such as tax expense (tax income), the entity may reconcile the total of the segments’ measures of profit or loss to the entity’s profit or loss after those items.

ANALYSIS

RepCo will apply paragraph 29, to identify the different performance obligations in the six-year contract. There are three promises, namely, (a) performing thrice the relining and overhaul services during the contract period (b) supplying spares as and when required (c) stand-ready obligations towards R&M.

The relining and overhaul service is distinct from the daily R&M service, as (a) the two services are not integrated with each other (b) the two promises do not modify each other (c) the two services are not highly interdependent or highly interrelated.

On the other hand, the stand-ready obligation to R&M, and to provide the necessary spares to deliver such a service is to be treated as one performance obligation. The customer has contracted with RepCo to provide daily R&M service, and in doing so, RepCo would need to use the services of mechanics or spares. In other words, the use of spares is an input to providing the service of daily R&M services.

Therefore, in accordance with the requirements of paragraph 29, the contract comprises two performance obligations, namely, the (a) three relining and overhaul services and (b) daily R&M service.

Paragraphs 22 and 23 contain requirements with respect to a series of distinct goods and services. An entity may provide a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Examples could include services provided on an hourly or daily basis, such as cleaning services or security services. This requirement was incorporated in the standard to simplify the model and promote consistent identification of performance obligations in cases when an entity provides the same good or service over a period of time. Without the series requirement, applying the revenue model would have presented operational challenges because an entity would have to identify multiple distinct goods or services, allocate the transaction price to each distinct good or service on a stand-alone selling price basis and then recognise revenue when those performance obligations are satisfied.

A series of distinct goods or services has the same pattern of transfer to the customer if both of the following criteria are met:

(i) each distinct good or service in the series that the entity promises to transfer to the customer would meet the criteria to be a performance obligation satisfied over time; and

(ii) the same method would be used to measure the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.

The series guidance requires each distinct good or service to be “substantially the same”. The promise to provide daily R&M services and stand ready for the same fulfils the series requirement. This is because the entity is providing the same service of “standing ready to provide R&M” each moment, even though some of the underlying activities may vary each day (for e.g., some days may involve more work and other days may not involve any R&M). The distinct service within the series is each time increment of performing the service (for example, each day or month of service).

The consideration in the contract is variable to the usage of the crusher, for e.g., the number of hours the crusher was in operation or volume crushed. At the inception of the contract, RepCo will have to estimate the variable consideration. In accordance with paragraphs 46 and 56, variable consideration is allocated to a performance obligation, only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

In accordance with paragraphs 84–86, RepCo considers the underlying distinct goods or services in the contract, rather than the single performance obligation identified under the series requirement, when applying the requirement with respect to allocation of variable consideration. Consider a 5-year service contract that includes fixed annual fees plus a bonus (variable consideration) upon completion of a milestone at the end of year two. If the entire service period is determined to be a single performance obligation, comprising a series of distinct services, the entity may be able to conclude that the bonus should be allocated directly to its efforts to perform the distinct services up to the date the milestone is achieved (e.g., the underlying distinct services in years one and two). This would result in the entity recognizing the entire bonus amount, if earned, at the end of year two. In contrast, if the entity determines that the entire service period is a single performance obligation that is composed of non-distinct services, the bonus (after applying constraint) would be included in the transaction price and recognized based on the measure of progress determined for the entire service period. For example, assume the bonus becomes part of the transaction price at the end of year two (when it is probable to be earned and not subject to a revenue reversal). In that case, a portion of the bonus would be recognized at the end of year two based on performance completed to date and a portion would be recognized as the remainder of the performance obligation is satisfied. As a result, the bonus amount would be recognized as revenue through to the end of the five-year service period. The series requirement does not apply to the allocation of variable consideration; therefore, in this example, the bonus will be recognized at the end of year two.

The above analysis can be summarised as follows:

1. RepCo will determine the total consideration including the variable consideration to be allocated to the two performance obligations, namely (a) fulfilment of the promise to provide three overhaul and relining services and (b) the provision of daily R&M services.

2. The transaction price will include the basic minimum amount and the variable consideration to the extent that it is highly probable that a significant reversal in cumulative revenue recognized will not occur. Variable consideration is included in the transaction price when the uncertainty associated with the variable consideration is subsequently resolved.

3. The series requirement will apply separately to both, the relining/overhaul services and the daily R&M services. However, as discussed above the series requirement is not applied for the allocation of variable consideration. In other words, with respect to the daily R&M, if the usage of the crusher in the first month is greater than the usage in the following month, the variable consideration to the extent it is crystallized at the end of the first month, is recognized in that month.

4. Overhaul and relining service revenue will be recognized thrice when those services are performed. The overhaul and relining service revenue recognized at the end of the 2nd, 4th and 6th year, will be determined by the consideration received in years 1 & 2, years 3 & 4 and years 5 & 6, respectively.

5. Therefore, in accordance with the above analysis applied to the fact pattern, each month, when consideration is crystallized, 40% of revenue is recognized as relating to R&M, and 60% is carried forward to be recognized once the overhaul and relining services are provided.

CONCLUSION

RepCo will be unable to smoothen revenue as it desires because the relining and overhaul revenue gets recognised at the end of years 2, 4 and 6, and therefore it would result in lumpy revenue in those quarters. However, RepCo can soften the impact of such lumpy revenue, by doing the following:

1. Educate the investors and analysts on why there is lumpy revenue in certain quarters, and low revenue in other quarters.

2. Ensure that contracts are entered into and executed in a manner, that the lumpy revenue arises in each quarter, and the impact of lumpy revenue is therefore minimized. We see that typically happening in real estate contracts and other entities whose revenue is impacted by seasons, e.g., air conditioners. To achieve this objective, RepCo will have to carry out appropriate planning, scheduling and forecasting, such that each quarter will have an equal amount of relining and overhaul work, from different contracts.

3. RepCo can follow a different policy for the purposes of segment results, and to that extent the investors and analysts can be provided with a revenue pattern based on the cash flows received each month. Appropriate reconciliation between RepCo’s profit or loss and the segment profit or loss shall be disclosed in the financial statements (see paragraphs 27 & 28 of Ind AS 108)

4. Additional analysis can be provided over investor calls post the quarter results to mitigate the impact of lumpy revenue. This will ensure that RepCo’s earnings multiply and consequently the valuation of the share price is not adversely affected.

BCAJ Admin

The Bookkeeping in Electronic Mode

Bookkeeping is a way of recording a company’s financial transactions in an organised manner. Bookkeeping creates a trail of all the transactions and serves as evidence for financial reporting. This practice of bookkeeping or maintaining books of account is not an option; multiple laws, like the Companies Act, 2013, Income Tax Act, and Good and Service Tax (GST), mandate maintenance and retention of the books of account in a prescribed manner.

As maintenance of books of account has transitioned from physical record-keeping to electronic mode, the bookkeeping laws have evolved. Section 128 (1) of the Companies Act, 2013 stipulates that every company shall prepare and keep its books of account and other relevant books, papers, and financial statements annually. It also mentions that these books can be kept in electronic mode. While Section 128(1) mentions the allowance for maintaining books in electronic mode, the specific requirements for electronic bookkeeping, like format, accessibility, and security, are provided in the rules made under the Act. For example, the Companies (Accounts) Rules, 2014, especially Rule 3, provides detailed requirements for maintaining books of account in electronic form.

Most of the provisions related to physical books apply to books maintained in electronic mode. The common points between manual and digital books are as follows:

– The statutory laws recognise both physical and digital books of account.

– Both manual and digital books must always be accessible in India.

– The physical books and digital books are subject to inspection.

– Both manual and digital books must be accurate and complete.

– The time period for retention of manual and digital books is the same.

Key requirements that are unique to digital books of account as per the provision of the Companies Act, 2013 are as listed below:

Particulars	Requirement
Maintenance	Given the nature of digital books and the maturity of accounting systems, it is mandatory that the data from books maintained outside India should be always accessible in India.
Retention	The books of account and other important books and papers shall be retained in the original format in which they have been generated, sent, or received or in a format that will present the information generated, transmitted, or received accurately. The information must remain complete and unaltered.
Branch Office	The branch can maintain proper books of account to record transactions effected at the branch and periodic summarised returns have to be sent to the registered office. The information received from the branch office shall not be altered and shall be kept in a manner that depicts the information initially received from the branches and the backup shall be kept in servers physically located in India on a daily basis.
Storage	There shall be a proper system for displaying, storing, retrieving, or printing electronic records as the audit committee/board of directors may deem appropriate. Unless expressly allowed by the law, the records shall not be disposed of or rendered unusable for disposal.
Backup	The electronic copies of account books and other relevant documents, even if stored overseas, the backup must be kept on a daily basis on physical servers situated in India.
Service Provider (Outsourced Vendor maintaining accounts)	At the time of filing financials annually, the company must inform the Registrar of Companies: – the name of the service provider – the IP address of the service provider – the location of the service provider (wherever applicable) – if maintained in the cloud, then the address as given by the service provider

Recent amendments in the Companies Act, 2013 and rules made thereunder:

Maintenance:

The books of account and other relevant books and papers maintained in electronic mode shall remain accessible in India, at all times. Before the amendment it was only accessible in India, however now the words at all times have been added.

Backup:

The backup of books of account and other books and papers of the company, which is maintained in electronic mode, even if stored at a place outside India shall be kept in servers physically located in India on a daily basis. Before the amendment, it was on a periodic basis and no specific time was prescribed.

Audit trail in the accounting software:

For the financial year commencing on or after the period 1st April, 2023, every company that uses accounting software to maintain books of account shall use only such accounting software that can record an audit trail of each and every transaction as per MCA notification. This will help create an audit log with the changes made and the date when the changes are made. Also, it must be ensured that the audit trail cannot be disabled at any point of time during the year.

Service provider outside India:

If the service provider is outside India, then the company must inform the Registrar of Companies, of the name and address of the person in control of the books of accounts and books and papers in India.

The above amendments in light of the digital evolution in bookkeeping have given rise to the below-mentioned challenges for the companies:

– When books are maintained outside India, daily data backup poses a challenge for companies where the data backup is centralised outside India and servers are physically located outside India.

– For data from outside India to be accessible in India at all times, there must be seamless integration and real-time transfers. This can be challenging for companies with multiple locations outside India.

– Section 128 (5) of the Companies Act, 2013 requires that the books of account must be maintained for eight financial years immediately preceding the financial year, and accordingly, the backup must also be held for eight years. Hence, the company must have the facility to store the backups safely or upload them to cloud storage.

COMPLIANCE CHECKLIST & AUDIT PROCEDURES

To comply with all the provisions of Rule 3, the company needs a robust system in place, and auditors need to check the system in place to certify total compliance. A compliance checklist and audit procedures as given below will ensure that there are no lapses in audit documentation and provide a basis for appropriate conclusion on the maintenance of books of account as prescribed.

Sr. no.	Requirement	Complied (yes/no)	Remarks
1.	If the books of account and other relevant books and papers are maintained in electronic mode, – whether it is always accessible in India for its subsequent use?
2.	From 1^st April, 2023, whether the accounting software has a feature of: – recording the audit trail of each and every transaction, – creating an edit log of each change made in books of account along with the date when such changes were made, and – ensuring that the audit trail cannot be disabled?
3.	Whether it is ensured that the books of account are – entirely retained in the format in which they were originally generated, sent, or received, or in a format which shall present accurately the information generated, transmitted, or received, and – the information contained in the electronic records remains complete and unaltered.
4.	Is it ensured that the information received from branch offices is not altered and is kept in a manner that depicts what was originally received from the branches?
5.	Is it ensured that the information can be displayed in a legible form?
6.	Is it ensured that there is a proper system for: – storage, – retrieval, – display or – printout of the electronic records
7.	Is there a proper system to ensure that such records are not disposed of or rendered unusable unless permitted by law?
8.	Is it ensured that the backup is taken daily?
9.	Is it ensured that the server on which the backup is maintained is physically located in India?
10.	Has the company intimated the following information to RoC? – the name of the service provider, – the IP address of the service provider, – the location of the service provider (wherever applicable), – where the books of account and other books and papers are maintained on the cloud, such address as provided by the service provider, – where the service provider is located outside India, the name and address of the person in control of the books of account and other books and papers in India?

Suggested audit procedures:

1. Obtain the list of books and other records maintained in electronic mode from the IT team of the company and document the process of access rights, maintenance of servers, backup policy, IT controls, etc.

2. Assess the need for IT experts for IT General Control (ITGC) testing based on the accounting software used, nature and size of the company.

3. Obtain the information w.r.t. the compliance of Rule 3 and provision of Companies Act, 2013 for maintenance of books of account from the company Secretary of the company.

4. Information Provided by Entity (IPE) testing shouldbe performed on the reports generated from the accounting software to verify the completeness of the information.

5. Understand and document the process of storage, backup, and retrieval from the IT team of the company.

6. In respect of audit trail and maintenance of daily backup, obtain the reports from the IT team and perform test checks to validate the compliance requirements.

7. Obtaining a report or management’s representation in respect of the use of audit trail features throughout the year.

8. With respect to the maintenance of books of account, Form AOC-4 and AOC-5 submitted by the company to the ROC can be verified along with the date of submission and the other relevant information.

COMPARISON BETWEEN VARIOUS ACTS

The following table summarises requirements pertaining to the maintenance of books of account per the Companies Act, 2013, Income Tax Act, 1961, and Central Goods and Services Act, 2017.

Sr. No	Particulars	Companies Act, 2013	Income Tax Act, 1961	GST Act, 2017
1	Maintenance	At the registered office. If maintained elsewhere, notice to the Registrar to be given within seven days (Section 128(1))	Where any person carries on business or profession other than specified professions mentioned in Section 44AA(1), then he is required to maintain books of account if income from business or profession exceeds R1,20,000 or total sales/turnover/gross receipts exceed R10 lakh in any of the three years immediately preceding the previous year. However,	At the principal place of business (Rule 56 of CGST Rules 2017)
			in case the Assessee is an individual or HUF, such limits should be read as R2,50,000 and R25 lakhs, respectively. Or where the business or profession is newly set up, the income from the business or profession is likely to exceed the threshold limits.
2	Scope of transactions to be recorded	All transactions of registered and branch offices (Section 128(1))	As may enable computation of total income (Sections 44AA(1), 44AA(2))	Production/manufacture, supply, stock of goods, input tax credit, output tax payable/paid, etc. (CGST 2017)
3	Basis of accounting	Accrual basis and double-entry system (Section 128(1))	Cash or Accrual	Not specifically mentioneds
4	Intimation requirement if maintained outside registered office	File notice within seven days with the Registrar (Section 128(1))	Not specifically mentioned	Not specifically mentioned
5	Mode of maintenance	Can be maintained in electronic mode as prescribed (Section 128(1))	Not specifically mentioned	As per Section 35(1) and Rule 56(7) of CGST Rules, 2017, the registered person may keep and maintain such accounts and other particulars in electronic form.
6	Branch office compliance	Maintain at branch office; summarized returns to registered office to be sent (Section 128(2))	Not specifically mentioned	As per Section 35(1), where more than one place of business is specified in the certificate of registration, the accounts relating to each place of business shall be kept at such places of business.
7	Retention Period	For eight financial years or all preceding years if less than eight (Section 128(5))	For six years from the end of the relevant assessment year i.e., for a total period of eight previous years (prescribed by rules (Section 44AA(4)))	For at least 72 months (6 years) from the due date of annual return (Section 36 CGST Act 2017)
8	Definition of Books and Papers	Includes books of account, deeds, vouchers, writings, documents, minutes, and registers in paper or electronic form (Section 128(12))	Specific books of account to be maintained for Legal, Medical, Engineering, Architectural, Accountancy, Technical Consultancy, Interior Decoration	Not specifically mentioned
9	Other records included	Receipts and payments, purchases and sales, assets and liabilities, and cost items as prescribed (Section 128(13))	Not specifically mentioned	Manufacture of goods, inward and outward supply, stock of goods, input tax credit, output tax payable and paid, etc. (CGST 2017)

CONCLUSION

Digitalisation brings in its wake both solutions and unique challenges. The recent amendments prevent the unique challenges from becoming vulnerabilities and hence, implement stringent measures. Companies and auditors need to adapt to the bookkeeping in the digital age and ensure total compliance with respective applicable laws.

BCAJ Admin

Limited Liability Partnerships — Relevant Auditing and Accounting Considerations

A Limited Liability Partnership (LLP) is a hybrid entity that combines features of a corporation and allows the flexibility of organizing its internal structure as a partnership based on a mutually arrived agreement. The agreement is not required to follow the strict form that applies to a company.

Talking about the key characteristics of an LLP, an entity structured as an LLP will enjoy a separate legal identity, limited liability for the partners, and perpetual succession. An LLP enjoys management and organisational flexibility regarding economic rights, which are freely transferable, and non-economic rights (management participation) which are non-transferable.

The contribution to LLP’s capital can be in cash or in kind. Receipt of consideration in ‘kind’ will entail determining its valuation to be able to determine the proportionate entitlement of the partners.

As stated above, the LLP provides enough flexibility to partners to enter into an LLP agreement, which shall govern the rights and duties of the partners. The LLP Agreement and any changes made therein shall be filed with the Registrar of LLPs. In the absence of agreement as to any matter, the mutual rights and the duties of the partners and the mutual rights and the duties of the LLP and the partners shall be determined by the provisions set out in the First Schedule of the LLP Act.

One may also believe that making changes in the LLP deeds may be comparatively simpler and / or less costly as compared to making changes to the memorandum /articles of association. This may particularly be true where the main deed allows operations-related changes to be carried as part of the Annexure which may be subjected to minimal approvals and is not construed to be leading to a change in the main deed and is accordingly not required to be filed with the Registrar. However, this should strictly be determined in consultation with a legal expert.

LLP as a vehicle has emerged as a great model for Chartered Accountant firms, consulting firms and for structuring joint ventures by corporates.

In this article, we will take a look at the recent regulatory changes that impact these forms of entities with a specific focus on reporting and audit consideration.

FINANCIAL REPORTING CONSIDERATION

Section 34(1) of the LLP Act requires that the LLP shall maintain such proper books of accounts as may be prescribed relating to its affairs for each year of its existence on a cash basis or accrual basis and accordingly, to double entry system of accounting and shall maintain the same at its registered office for eight years. Compared to a company, this flexibility for small businesses comes in handy.

Sub-section (2) of section 34 further prescribes that within a period of six months from the end of each financial year, prepare a Statement of Account and Solvency for the said financial year as of the last day of the said financial year in Form 8 with Registrar, and such statement shall be signed by designated partners of the LLP. Sub-section 4 of section 34 requires that the accounts of limited liability partnerships shall be audited in accordance with sub-rule 8 of rule 24 LLP Rules.

It is observed that timely filing of financial information with the Registrar has been one of the noted areas of non-compliance and thus professionals are expected to keep themselves abreast of key forms and their filing deadlines.

In accordance with section 34A of the LLP Act, the National Financial Reporting Authority (NFRA) would specify the accounting standards and standards on auditing for LLPs as recommended by the Institute of Chartered Accountants of India (ICAI).

In 2023, ICAI issued an exposure draft for the proposed accounting standards on limited liability partnerships (LLPs). As per the said exposure draft Accounting Standards 1 to 5, 7, 9 to 19 and 21 to 29, as notified under Companies (Accounting Standards) Rules, 2021, shall be applicable to the LLPs. AS 20 Earning Per Share shall be exempted from the LLPs.

For applicability of Accounting Standards, ICAI’s exposure draft states that LLPs shall be classified into four categories, viz., Level I, Level II, Level III and Level IV. Level I LLPs will be Large size Limited Liability Partnerships, Level II LLPs will be Medium size Limited Liability Partnerships, Level III LLPs will be Small size Limited Liability Partnerships and Level IV LLPs will be Micro size Limited Liability Partnerships. Level IV, Level III and Level II LLPs shall be referred to as Micro, Small and Medium-sized Limited Liability Partnerships (MSMLLPs).

As clarified in the exposure draft since the LLP Act permits a cash basis of accounting, therefore, if an LLP is following a cash basis of accounting, it shall apply Accounting Standards (read together with the exemptions in II and VIII as may be available) to the extent applicable in the context of a cash basis of accounting.

Considering the present practice and the fact that the exposure draft continues to propose applicability of Companies (Accounting Standards) Rules, 2021 for LLPs, the likelihood of applying Ind-AS remains remote and is contingent upon notification from regulators. Accordingly, there is likely to be a situation where LLP prepares Ind-AS compliant financial statements specifically for the purposes of consolidation as required by the parent company or Joint Venturer who otherwise is required to follow Companies (Indian Accounting Standards) Rules, 2015. Thus, at the time of conversion of financial statements from one GAAP to another GAAP, matters like fair value accounting, deferred tax, business combination etc. require significant consideration.

Guidance Note on Financial Statements of Limited Liability Partnerships: The Accounting Standards Board (ASB) of the ICAI, in June 2022, issued a Technical Guide on Financial Statements of Limited Liability Partnerships to prescribe guidance for the applicability of Accounting Standards to LLPs and to recommend the formats of the financial statements for standardisation of presentation of the financial statements by LLPs.

The ASB has subsequently issued the Guidance Note on Financial Statements of Limited Liability Partnerships. The Guidance Note will enable the LLPs to communicate their financial performance and financial position in standardised formats thereby enhancing their comparability. This Guidance Note is effective for financial statements covering periods beginning on or after 1^st April, 2024. The Technical Guide on Financial Statements of Limited Liability Partnerships stands superseded by this Guidance Note.

The Illustrative formats for Financial Statements included in the Guidance Note on Financial Statements for Limited Liability Partnerships have also been given in the Excel file.

AUDITING CONSIDERATIONS

In the absence of any specific auditing standards that may apply to the audit of an LLP, the existing set of Standards on Auditing issued by the ICAI will continue to be applicable mutatis mutandis (with necessary modifications to the audit procedures in the context of an LLP).

The auditing will continue to envisage planning,execution and reporting as its key steps. As an auditor, professional membersshould carefully read andtake necessary notes about important aspects ofthe LLP deed, specifically those in relation to thenature of the business, Profit sharing Ratio, formand manner of capital contribution, valuation(if any), rights, restrictions and obligations of individual partners.

Although one would assume that doing an audit of smaller entities structured as LLP may be relatively easy, however, the same may not always be true. Vide one of the recent amendments, the government has become more conscious of ensuring transparency and has accordingly mandated LLPs to disclose Significant Beneficial Ownership.

Pursuant to the recent amendment Limited Liability Partnership (Third Amendment) Rules, 2023 which are effective from 27^th October, 2023, LLPs are required to maintain a register of partners at their registered office.

Another important amendment was in the context of the declaration regarding beneficial interests in any contribution. The Amended Rules make it mandatory for people to declare the nominee or registered holder-beneficial owner relationships (including any changes in the beneficial interest).

MCA also notified the Limited Liability Partnership (Significant Beneficial Owner) Rules, 2023 (SBO Rules) with effect from 9th November, 2023. As per the Rules “Significant beneficial owner” means an individual, who acting alone or together or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting LLP, namely —

holds indirectly or together with any direct holdings not less than 10 per cent of the contribution;
holds indirectly or together with any direct holdings, not less than 10 per cent of the voting rights in respect of the management or policy decisions in such LLP;
has the right to receive or participate in not less than 10 per cent of the total distributable profits or any other distribution, in a financial year through indirect holdings alone or together with any direct holdings;
has the right to exercise or actually exercises significant influence or control, in any manner other than through direct holdings alone.

In the case of LLPs, the determination of SBO has to be based on the holding of capital contribution, voting rights in respect of management or policy decisions of LLP, and with respect to the right to receive or participate in distributable profits and thus it becomes all the more important for the auditor to assess the same in the context of the LLP deed.

Further, the determination of indirect holding is likely to pose a significant challenge for the auditor since it has to be determined based on the individual’s relationship with the non-individual member of the reporting LLP. For instance, where the member is a Hindu Undivided Family (HUF), the Karta of the HUF shall be considered to be holding indirect right or entitlement in the reporting LLP. Similarly in case where the member is a Trust (through a trustee), an individual’s right or entitlements in a reporting LLP shall be considered to be held indirectly if he is a trustee/settlor/author depending upon the nature of the trust. Auditors are accordingly expected to examine necessary regulatory filings made by LLP / SBOs in this regard.

Other areas that are likely to pose similar audit risks are complex related party relationships and transactions with related parties; accounting estimates, assessment of the use of going concern basis in an evolving geopolitical environment, fraud risk assessment, etc.

At the time of reporting, an auditor needs to ensure that necessary changes are made to the audit report format as illustrated in Standards on Auditing 700, Forming an Opinion and Reporting on Financial Statements, to ensure factual accuracy since the report is to be issued for a separate form of entity. The auditor is expected to consider the key areas that need to be imbibed as part of the audit report as a result of the differing legal and regulatory requirements. Some of the required changes to the audit report are listed below:

All references to ‘company’ as stated in the illustrative format of Standards on Auditing 700 Forming an Opinion and Reporting on Financial Statements, need to be amended to ‘limited liability partnership’.
All references to ‘directors’ need to be amendedand the recommended term to use is ‘designated partner’ as that is the term that is used in the LLP Act/LLP Deed. The references to the ‘Companies Act 2013’ need to be amended to the Limited Liability Partnership Act 2008 (as amended) read along with LLP Rules.
The audit report of an LLP is addressed to the ‘Designated Partner’.
The opinion paragraph describes the financial statements, including specifying the titles of the primary statements. However, it is important that the titles of the primary statements precisely match those used by the entity. The opening paragraph of the ‘opinion’ section needs to reflect the financial reporting framework.
The audit opinion needs to be amended as follows:
In our opinion, the financial statements:
give a true and fair view of the state of the limited liability partnership’s affairs as of [date] and of its [profit/loss] for the year then ended.
have been properly prepared in accordance with the accounting standards issued by the Institute of Chartered Accountants of India and other accounting principles generally accepted in India; and
gives information as required by the LLP Act.
The ‘Basis for opinion’ will continue to mention the facts that the audit was done in accordance with the Standards on Auditing (SAs) and other applicable authoritative pronouncements issued by the Institute of Chartered Accountants of India (including those related to ethics and independence). Basis ofopinion will also state that the auditor believes that the audit evidence we have obtained issufficient and appropriate to provide a basis for the opinion.
Other information: The Designated Partner of the LLP is not required to prepare an annual report. Accordingly, the requirement for reporting on such other information does not arise.
In respect of the signature on the audit report the requirements for LLPs are effectively the same as for companies and the audit report is required to be signed by the statutory auditor, for and on behalf of the audit firm along with the other compliances like UDIN.

WHAT’S AWAITED?

Recently IAASB issued the much-awaited International Standard on Auditing for Less Complex Entities (ISA for LCE). The standard is effective for audits beginning on or after 15th December, 2025, for jurisdictions that adopt or permit its use. It recognizes the importance of smaller businesses and their specific audit needs.

It is a standalone standard that is proportionate & tailored to the specific needs of an audit of less complex entities, which makes it easier to navigate for those practitioners who support these types of engagements. It provides the same level of assurance as an audit performed under the ISAs i.e., reasonable assurance. Considering this being of global relevance we may soon have a similar standard for less complex entities in India. However, the same would require regulatory backing from ICAI and NFRA. In November 2023, an exposure draft was issued proposing the applicability of all 35 standards on Auditing for limited liability partnerships (LLPs).

As noted from MCA’s Annual Report (2022–23) as of 31^st October, 2022, the number of LLPs registered in the country was 2,86,377, and out of those 2,57,944 LLPs were active. During the period from 1^st December, 2021, to 30^th October, 2022, a total of 31,349 LLPs were incorporated.

The statistics clearly indicate that with the extension of tax benefits, the ease of FDI norms, LLP form of structure has gained a lot of momentum recently. With LLPs likely to dominate the constitutional form, more and more professional opportunities would emerge ranging from incorporation to auditing.

BCAJ Admin

NFRA Digest

(Editorial Note: Given the increasingly important role played by NFRA in the context of auditing, BCA Journal will be continuing with reporting on NFRA developments. In February 2024, an article was published on the 5 NFRA inspection reports of 2023. This new feature titled NFRA Digest will cover orders, reports, circulars, notifications, rules, inspection reports, discussion papers, etc. BCAJ will cover some of these developments affecting the profession of audit with a view that members and readers can learn from these developments. The aim is to enable members to improve their audit processes and reduce their audit risk by improving quality and governance frameworks mandated by applicable standards and regulatory expectations. In this context, we are pleased to bring this new feature NFRA Digest to our readers, covering NFRA updates. This first few NFRA Digests will carry a condensed coverage of past NFRA publications to bring readers up to speed till December 2023.)

BACKGROUND ABOUT NFRA, ITS POWERS AND DOMAIN

The National Financial Reporting Authority (“NFRA”), constituted on 1st October, 2018 by the Government of India under section 132(1) of the Companies Act, 2013 (“the Act”), is an independent regulator set up to oversee the auditing profession and the Indian Accounting Standards (“Ind AS”) under the Act. Though this section was enacted with the rest of the Act, it was ultimately notified only in 2018, after the PNB scam came to light. NFRA’s functions are laid down by sub-section 2 of section 132 covering:

a. Making recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or their auditors. Accounting and auditing standards are now to be prescribed by Rules made under the Act by the Central Government, based on the recommendations of the ICAI, in consultation with and after examination of the recommendations of the NFRA;

b. Monitoring and enforcing compliance with accounting and auditing standards in such manner as may be prescribed;

c. Overseeing the quality of service of the professions associated with ensuring compliance with such standards, and suggesting measures required for improvement in the quality of services; and

d. Performing such other functions relating to clauses (a), (b) and (c), as described above, as may be prescribed.

The Central Government has notified the NFRA rules 2018 using its powers under the aforesaid section.

Rule 4 lays down that the NFRA shall protect the public interest and the interest of investors, creditors and others associated with the companies or bodies corporate under NFRA’s purview by establishing high-quality standards of accounting and auditing and exercising effective oversight of accounting functions performed by the companies and bodies corporate and auditing functions performed by auditors.

In addition, sub-section (4) of section 132 vests NFRA with the power to investigate professional misconduct by any auditor of any of these companies. When such misconduct is proved, NFRA is empowered to impose monetary penalties up to 10 times the fees received and also to bar the auditor from being appointed as auditor or internal auditor of any company or body corporate for up to 10 years.

In order to remove any chance of regulatory overlap, the said sub-section very unambiguously provides that where the NFRA has initiated an investigation, no other institute or body shall initiate or continue any proceedings in such matters of misconduct.

Rule 3 specifies what class of companies would fall under the purview of the NFRA. Other rules laydown what procedures should be followed in discharging the functions specified in the Act, 2013, some details about the internal administration of the NFRA, etc.

NFRA’s jurisdiction covers all listed companies, unlisted public companies with either turnover, or share capital or borrowing above certain specified thresholds, all banking, insurance and electricity generation and supply companies, foreign subsidiaries of these entities of certain size, etc.

In addition, the Central Government can make reference to the NFRA, for actions in respect of any other company, or class of companies, in the public interest.

Keeping the above objective in mind, NFRA till31st December, 2023 has issued following:

FRQR REPORTS

The FRQR focuses on the role of preparers, i.e., those responsible for the preparation of financial statements and reports in accordance with the applicable accounting standards. Therefore, the FRQR evaluates how well the Chief Financial Officer, and the rest of the Management, and the Audit Committee, as well as the Board of Directors of the Company, have performed in preparing financial statements that show a true and fair view as required under the Companies Act, and in accordance with the applicable accounting standards.The FRQR concludes with an advisory to the preparers, highlighting the matters that need improvement. In case there are violations of accounting standards and the law that require action to be taken under the law, the matter is reported to the authorities who can take action.

NFRA has issued four such reports so far, and the companies which were reviewed by NFRA include PSP Projects Limited, ISGEC Heavy Engineering Limited, Prabhu Steel Industries Limited and KIOCL Limited.

AQR AND INSPECTION REPORTS

The AQR / Inspection Reports, on the other hand, have the objective of verifying compliance by the Audit Firm with the requirements of Standards on Auditing relevant to the performance of the Engagement. The AQR / Inspection Reports also have the objective of assessing the Quality Control system of the Audit Firm and the extent to which the same has been complied with in the performance of the engagement. NFRA completes his review and publishes the report as mandated by law.

MAJOR OBSERVATIONS BY NFRA IN ITS AQR REPORTS

As stated above, since its inception, NFRA has issued total seven reports which include one Supplementary AQR (“SRQR”). The firms to which such reports are issued include Deloitte Haskins & Sells, LLP, BSR & Associates LLP, Rajendra K Goel&Co. and SRBC & Co LLP.

Major observations include:

• In almost all reports, appointment is considered to be illegal or void due to violation of section 143(3)(e) (subsisting business relationships on the date of appointment) and section 141(3)(i) (provision of non-audit services directly or indirectly) of the Companies Act, 2013.

• Compromise in independence due to non-audit services for substantial fees and absence of Audit Committee approval for such services.

• Violation of SQC-1 and SA 220 by naming two partners as Engagement Partners leading to loss of accountability.

• Not adequately challenging the going concern assumptions.

• Non-determination of the persons comprising those charged with governance (“TCWG”), non-communication of audit matters, independence matters, etc., to TCWG.

• The EQCR, as said to have been carried out, has been shown to have been a complete sham, and has been found to be inadequate or a complete travesty of the EQCR process by appointing the EP himself as its EQCR partner.

• Gross violation of independence requirements due to non-audit services provided technically by a network-firms under the same brand claimed to be different firms but indirectly provided by same network firms.

• Independent Auditor’s Report is misleading due to non-identification of transactions, violative of accounting and auditing standards. The impact is both material and pervasive.

• No satisfactory rebuttal of the presumption of ROMM due to fraud in respect of revenue recognition and management override of controls, ultimately resulting in several violations of applicable provisions of Ind AS and SAs.

• Non-identification and assessment of Risk of Material Misstatements (ROMM) through understanding the entity and its environment, including its internal control. No ROMM procedures performed at the assertion level.

• Non-evaluation of work done by management’s expert.

MAJOR OBSERVATIONS BY NFRA IN ITS INSPECTION REPORTS

NFRA issued Audit Quality Inspection Guidelines in November 2022, which cover the objective, criteria for selection, scope of review, methodology for selection of audit firms and individual audit assignments, the inspection cycle, the inspection reports including its structure and timelines for responses by audit firms. Keeping these guidelines in mind, NFRA has issued five inspection reports from 22nd December to 29th December, 2023. (Refer to BCAJ Articles on Page 21, February 2024, and Page 25 in this issue for summary of major observations.)

ORDERS / DEBARMENTS

Orders are issued generally when irregularities are noticed by some regulators, e.g., Serious Fraud Investigation Officer (SFIO), Securities Exchange Board of India (SEBI), Director General of Income Tax (Investigation), Central Economic Intelligence Bureau (CEIB), Ministry of Finance, Media Reports, Ministry of Corporate Affairs (MCA) regarding irregularities observed by FRRB except in case of DHFL matter wherein NFRA has initiated the investigation on Suo Moto. Orders are normally concluded with debarment, if required and imposition of penalty.

The NFRA orders are generally structured as below:

1. Executive Summary,

2. Introduction & Background,

3. Issue of jurisdiction and procedures,

4. Major lapses in the Audit and Charges in the Show Cause Notice (SCN),

5. Finding on the article of Charges of Professional Misconduct,

6. Penalty & Sanctions.

Section 132(4)(c) of the Act, 2013, provides that NFRA shall, where professional or other misconduct is proved, have the power to make order for:

A. Imposing penalty of (I) not less than one lakh rupee, but which may extend to five times of the fees received, in case of individual and (II) not less than five lakh rupees, but which may extend to ten times of the fees received, in case of firms;

B. Debarring the member or the firm from (I) being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and the activities of any company or body corporate or (II) performing any valuation as provided under section 247, for a minimum period of six months or such higher period not exceeding 10 years as may be determined by NFRA.

Considering the above provision of the Act, 2013, NFRA has debarred the individual or firms and imposed penalties in most of the orders. The debarment period of individual professional ranges from six months to 10 years and firms from two to four years. The financial penalties, in the case of individual professional ranges from ₹1 lakh to ₹25 lakhs, and in the case of firms from ₹10 lakhs to ₹200 lakhs.

The upcoming NFRA Digests will cover NFRA orders, circulars, consultation papers, etc., issued till December 2023, to enable the reader to read not just the chronology but their classification under key themes.

BCAJ Admin

From Published Accounts

Compilers’ Note:

Illustration of disclosure and reporting for compliances to be carried out as directed by the Reserve Bank of India (RBI) regarding authorisation to setup payment system by a Subsidiary and strengthening of KYC / AML process of an Associate. The RBI had subsequently imposed restrictions on certain business operations to be carried out by the said Subsidiary and the Associate.

ONE 97 COMMUNICATIONS LIMITED (QUARTER AND 9 MONTHS ENDED 31ST DECEMBER, 2023)

From Notes to Unaudited Consolidated Financial Results

7. Notes given by the subsidiary and associate in their respective Unaudited Special Purpose Interim Condensed Financial Statements/Information:

a) Paytm Payments Services Limited (Subsidiary): “The Company filed an application for authorization to set up Payment System (‘PA application’) under sub-section (1) of Section 5 of the Payment and Settlement Systems Act, 2007 with the Department of Payment and Settlement Systems, Reserve Bank of India (“RBI”) on 8th January, 2021, in response to which, the Company received a letter from the RBI on 25th November, 2022. As per the letter, the Company was required to obtain necessary approval for past downward investment from its parent company, One 97 Communications Limited (“OCL”), in compliance with Foreign Direct Investment (“FDI”) Guidelines and resubmit the PA application within 120 calendar days. Pursuant to the aforesaid, the Company had applied to the requisite government authorities seeking approval for the past downward investment made by OCL on 14th December, 2022, which is still under process. Further, the Company had received an extension of time from RBI, vide its letter dated 23rd March, 2023, for resubmission of the application. As per RBl’s letter, the Company can continue with the online payment aggregation business (except that the Company cannot on board new merchants), while it awaits approval from Government of India (‘GoI’) for past downward investment from OCL into the Company and needs to resubmit the PA application within 15 days of receipt of the approval from GoI and to inform RBI immediately, if any adverse decision is taken by the Gol. Management has assessed that this does not have a material impact on the financial results and the business and revenues since the communication from R.81 is applicable only to on boarding of new merchants. Accordingly, no adjustment has been made in these financial results.”

b) Paytm Payments Bank Limited (Associate): “During FY 2022, pursuant to a supervisory process, RBl directed the Bank to stop the on boarding of new customer’s w.e.f. 11th March, 2022. During FY 2023, RBI appointed an external auditor for conducting a comprehensive systems audit of the Bank. On 21st October, 2022, the Bank received the final report thereof from RBI outlining the need for continued strengthening of IT outsourcing processes and operational risk management, including KYC / AML at the Bank. Pursuant to a supervisory engagement thereafter, RBI recommended remediating action steps (including further steps to be taken by the Bank) in a time-bound manner. The Bank has submitted the compliance to these instructions of RBI. Further, the Bank as per RBl’s communication received in October 2023, is continuously engaged with RBI in closing out of all persisting deficiencies. The Bank is in the process of complying with all remedial actions with respect to the supervisory engagement with the RBI in respect of the above communication and restrictions imposed on onboarding of new customers since 11th March, 2022. The RBI has levied a penalty amounting to ₹ 5.39 Crores on the Bank in respect of above vide RBI order dated12th October, 2023.”

From Auditors’ Report

EMPHASIS OF MATTERS

We draw attention to Note 7(a) to the Financial Results which describes that the Company’s subsidiary application for authorization to set up Payment System, to the Department of Payment and Settlement Systems, Reserve Bank of India (“RBI”), is in process due to the reasons stated in the said note. Accordingly, no adjustment has been made by the management in these Unaudited consolidated financial results. Our conclusion is not modified in respect of this matter.

We draw attention to Note 7(b) to the Financial Results regarding progress on the Comprehensive Systems IT Audit (RBI) report received during the year ended 31st March, 2023, recommending strengthening of KYC/AML at the Paytm Payments Bank Limited, an Associate of the Company. A penalty as stated in the said note has been levied by the RBI and the supervisory engagement with the RBI is still in progress in respect of communications received in October 2023, restrictions imposed on the on boarding of new customers since 11th March, 2022 and compliance with related remedial actions. Our conclusion is not modified in respect of this matter.

BCAJ Admin

Accounting Of Losses in an Associate

BACKGROUND

Hold Co has a 25 per cent investment in Low Co. Hold Co accounts for investment in Low Co as an associate in its consolidated financial statements (CFS) because it has representation on the board of Low Co and exercises significant influence.

Low Co has incurred significant losses, far exceeding the equity of the owners. In the CFS, Hold Co has absorbed its proportion of the losses to the extent of the cost of investment, making it zero, and the remaining unabsorbed losses are not accounted for, as equity-accounted investments cannot be negative. This is in compliance with the requirements of paragraph 38 of Ind AS 28 Investments in Associates and Joint Ventures.

Low Co has prepared its business plan and it requires further capitalisation by all the equity owners in proportion to their shareholding. Hold Co would also like to further invest in Low Co, considering the strategic benefits arising out of investments in Low Co.

Consider the following simple example:

1. Hold Co has 25 per cent equity share in Low Co. Other investors own the remaining 75 per cent equity.

2. Hold Co had invested ₹100 million for the 25 per cent equity shares.

3. At the end of the financial year, Low Co had incurred a cumulative loss of ₹500 million.

4. Hold Co’s share of losses is ₹125 million. In the CFS, Hold Co has absorbed losses to the tune of ₹100 million, and ₹25 million loss remains unabsorbed.

5. Accordingly, the value of the equity-accounted investment in the CFS is zero.

6. Hold Co makes an additional equity investment of R60 million, just a little before the end of the financial year. Other investors contribute their share proportionately.

7. The prospects for Low Co are extremely bright, and there is no objective evidence of any impairment.

ISSUE

What should be the accounting of investment of further equity by Hold Co in Low Co? Should the unabsorbed losses be allocated to the new investment, i.e.

Option 1

Should the unabsorbed losses of ₹25 million be immediately allocated to the new equity investment of ₹60 million, and consequently, the equity accounted investment is determined to be ₹35 million?

Option 2

The unabsorbed losses should not be allocated to the new investment, and accordingly, the new investment should be reflected as ₹60 million, and the earlier investment at zero value?

RESPONSE

Accounting Standard References

Ind AS 28 – Investments in Associates and Joint Ventures

Paragraph 3 – Definitions

The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its share of the investee’s other comprehensive income.

10. Under the equity method, on initial recognitionthe investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The investor’s share of the investee’s profit or loss is recognised in the investor’s profit or loss. Distributions received from an investee reduce the carrying amount of the investment.

19. When an entity has an investment in an associate, a portion of which is held indirectly through a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure that portion of the investment in the associate at fair value through profit or loss in accordance with Ind AS 109 regardless of whether the venture capital organisation has significant influence over that portion of the investment. If the entity makes that election, the entity shall apply the equity method to any remaining portion of its investment in an associate that is not held through a venture capital organisation.

24. If an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate, the entity continues to apply the equity method and does not remeasure the retained interest.

25. If an entity’s ownership interest in an associate or a joint venture is reduced, but the entity continues to apply the equity method, the entity shall reclassify to profit or loss the proportion of the gain or loss that had previously been recognised in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be required to be reclassified to profit or loss on the disposal of the related assets or liabilities.

26. Many of the procedures that are appropriate for the application of the equity method are similar to the consolidation procedures described in Ind AS 110. Furthermore, the concepts underlying the procedures used in accounting for the acquisition of a subsidiary are also adopted in accounting for the acquisition of an investment in an associate or a joint venture.

38. If an entity’s share of losses of an associate or a joint venture equals or exceeds its interest in the associate or joint venture, the entity discontinues recognising its share of further losses.

39. After the entity’s interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that the entity has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. If the associate or joint venture subsequently reports profits, the entity resumes recognising its share of those profits only after its
share of the profits equals the share of losses not recognised.

40. After application of the equity method, including recognising the associate’s or joint venture’s losses in accordance with paragraph 38, the entity applies paragraphs 41A-41C to determine whether there is any objective evidence that its net investment in the associate or joint venture is impaired.

AUTHOR’S VIEWS

As per paragraph 38, if an entity’s share of losses of an associate or a joint venture equals or exceeds its interest in the associate or joint venture, the entity discontinues recognising its share of further losses.

As per paragraph 39, after the entity’s interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that the entity has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. If the associate or joint venture subsequently reports profits, the entity resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.

Since the associate is likely to do very well in future, paragraph 40 is not of any concern.

Unfortunately, the standard does not provide a straightforward solution to the questions raised in the query. There are two possible views, both of which are supported by using analogies from the accounting standard references in Ind AS 28.

Option 1

Under option 1, the entity records the unabsorbed losses of ₹25 million, which is immediately allocated to the new equity investment of ₹60 million, and consequently, the equity-accounted investment at the end of the financial year is determined to be ₹35 million.

In this view, the entire investment in the associate is treated as one equity investment. In other words, a distinction is not made between the initial investment and the subsequent investment.

Option 1 can be supported by the following arguments:

• The definition in paragraph 3, “The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets.” The definition along with paragraph 10 may be interpreted to support Option 1 or 2. One interpretation is that the losses post the acquisition of the associate are to be considered, including any additions made to the investment post the initial acquisition of the associate. In other words, the entire investment in the associate is treated as one, rather than two separate units, one the initial investment and two the subsequent addition.

• Paragraph 25 seems to support a retrospective approach; therefore, on this basis, the past losses would have to be absorbed by the fresh additional investment.

• When fresh investment is made in a subsidiary that has losses beyond the equity value, the losses continue to remain absorbed. If this analogy was used, then Paragraph 26 would require absorption of past losses for the additional investment made in the associate.

Option 2

Under option 2, the unabsorbed losses are not allocated to the new investment, and accordingly, the new investment is reflected as ₹60 million, and the earlier investment of ₹100 million is recorded at zero value.

• The definitions in paragraph 3 and paragraph 10 may be interpreted to mean that each investment in the associate is tracked separately. Therefore, on the second tranche past losses are not absorbed, but only future losses incurred after the acquisition of the second tranche are to be considered.

• Paragraph 19 allows an investment in an associate to be split into two, one for equity accounting and the other for fair value accounting by the venture capitalist and similar entities. Taking support from this, in the given situation, the investment can be split into two for the purpose of absorbing the losses.

• Paragraph 24 supports the continuation of equity accounting, rather than fair valuation of retained interest. Likewise, the additional investment in the associate could be accounted as a separate unit, and past losses shall in no way impact the additional investment made in the associate.

CONCLUSION

The author believes that both views are tenable in the absence of any clarity in the standards. It may also be noted that similar issues arise when an associate is acquired in stages. In such situations, multiple approaches have emerged in practice, such as the cost accumulation approach and the fair value approach. Within the cost accumulation approach, different variations can be applied.

Whichever approach is followed by the entity, appropriate disclosure of the accounting policy applied should be made and the accounting policy chosen should be consistently followed.

BCAJ Admin

Recycling Of Wastes – An Accounting Conundrum?

Old mobile phones. Plastic wrapper of a chocolate bar. Used tyres. Most people would think of this kind of detritus as a future landfill, as the bulk of these wastes goes unprocessed. The ever-growing pile of waste is causing irreversible damage to the environment.

But not anymore. Indian lawmakers are waking up and passing / amending Rules under the Environment (Protection) Act, 1986, to enforce Extended Producer Responsibility for certain entities. These Rules cast an obligation on producers / brand owners / importers for environmentally sound management of their products that have reached their end of life and are now considered a waste. Extended Producer Responsibility includes collection / recycling of waste as prescribed in the Rules.

Based on the ‘Polluter-Pays Principle’ the purpose of these Rules is neither to transfer public expenditure to these entities nor to penalise them, but to set appropriate signals in place in the economic system so that environmental costs are incorporated in the decision-making process and hence arrive at sustainable development that is environment-friendly. These Rules have continuously been expanded to cover major categories of wastes and include manufacturers and importers irrespective of the selling technique used, such as dealers, retailers, e-retailers,etc (i.e. producers) and online platforms / market places and supermarkets/retail chains (i.e., brand owners). Following is a high-level summary of some of the key Rules:

These Rules raise certain fundamental questions regarding accounting for the cost of fulfilling the legal obligation to recycle / collect waste. Some of them are discussed below:

WHEN IS THE OBLIGATING EVENT?

A provision under Ind AS 37 is recognised when an entity has a present obligation (legal / constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised.

The definition of a legal obligation refers to an obligation that derives from a contract (through its explicit or implicit terms), legislation or other operation of law. It is worth mentioning that the concept of an obligating event is open to interpretation and requires the exercise of significant judgement, as the obligating event is not always easy to identify. The following views are possible in the extant case:

View I – Sale of goods is the obligating event

The proponents of this view believe that the sale of goods is the event which triggers compliance under the Rules. The timing of recognition of the cost of fulfilment should be contemporaneous with the timing of revenue recognition. Provision should be made for all unfulfilled obligations emanating from historical sales as well as sales made during the current year (for which obligation to recycle would occur in subsequent years). The proponents argue as follows:

The minimum recycling targets, as summarised above, are generally based on the products ‘placed in the market’ or products ‘purchased / manufactured / imported’ previously. A product is placed on the market when it is made available for the first time on the market, i.e. when it is first supplied for distribution, consumption or use on the market in the course of a commercial activity, whether in return for payment or free of charge. Thus, the placing of a product in the market occurs on its sale to customers. A similar connotation is relevant where products are purchased, imported, etc.

The Rules aim to recycle end-of-life (i.e., waste) products and reduce the consequential damage to the environment. The expiration of the life of the product and the damage to the environment potentially begins when the customer starts using the products. Accordingly, the sale of products is the foundational tenet of these Rules.
Going concern basis envisages that the financial statements would continue for the foreseeable future. Thus, these entities would be economically compelled to incur the cost of recycling of all products sold to date, including sales made in the current year.
Analogy can be drawn from a similar situation where a lessor is obligated to return the leased premise in the same state that existed at the inception of the lease. For example, if an entity has erected partitioning in a leasehold building and the partitioning must be removed at the end of the lease term, then provision is made for this cost at the time of putting up the partition wall.

View II – Existence of the producer on the measurement date is the obligating event

This view is based on the premise that the cost associated with the fulfilment of Extended Producer Responsibility is akin to a levy as described in Appendix C to Ind AS 37. Proponents of this view argue that the obligation can be avoided if the entity ceases to exist on the measurement date. Under this approach, any unfulfilled obligation in relation to historical sales should be provided for. No provision is required for sales made in the current year (for which the obligation to recycle would occur in subsequent years). The following are the relevant arguments:

A levy is an outflow of resources embodyingeconomic benefits imposed by Governments (including Government agencies) other than those covered under other Ind AS e.g. income taxes under Ind AS 12 and fines or other penalties imposed for legislationbreaches. As long as the payments are required by law, they are generally considered to be imposed by the government.

Under the Rules, the obligation should be met through authorised recycling agencies, which will inter alia provide the certificates of recycled quantity to the entities. Instead of paying a charge directly to the Government for recycling the waste products, the charge would be paid to the Government’s agents. Thus, the payment made for the purchase of certificates from Government authorised recycling agencies is in the nature of a levy. Appendix C is specific guidance for the accounting of levies that builds on the principles of Ind AS 37. Thus, the assessment of the obligating event of wastes should be based on Appendix C to Ind AS 37.

Under Appendix C, the obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by the legislation. For example, if the activity that triggers the payment of the levy is the generation of revenue in the current period and the calculation of that levy is based on the revenue that was generated in a previous period, the obligating event for that levy is the generation of revenue in the current period. The generation of revenue in the previous period is necessary, but not sufficient, to create a present obligation.

Under the above Rules, the payment to recyclers will arise only if the producer exists during the measurement period. For example, a producer would be obligated to meet the obligation in FY 2023-2024 only if the producer is in operation in such year. Since the activity that triggers the payment of the levy is the existence of the producer in the current period and the calculation of that levy is based on the products sold in a previous period, the obligating event for that levy is the existence of the entity in the current period. The sale of products in the previous period is not the activity that triggers the payment of the levy but only affects the measurement of the liability.

Merely preparing financial statements under the going concern assumption does not imply that the entities have a present obligation to pay a levy triggered by operating in a future period.

Closing entries:

It would be appropriate to follow View II. The accounting policy of a listed company provides as follows:

Provision for E-Waste/Plastic-Waste management costs is recognized when the liability in respect of products sold to customers is established in accordance with E-waste Management Rules, 2016, as notified by the Government of India. Initial recognition is based on liability computed based on Extended Producer Responsibility as promulgated in said Rules, including the cost to comply with the said regulation and as reduced by the expected realisation of collectable waste. The Company has assessed the liability to arise on a year-to-year basis.

View II would also be in line with global practices such as the European Union’s Directive on Waste Electrical and Electronic Equipment. The Directive prescribes that the cost of waste management for equipment should be borne by producers of that type of equipment that is in the market during the period specified in the applicable legislation. The manufacturers have to contribute to costs in proportion to their respective share of the market by type of equipment.
The International Financial Reporting Interpretations Committee (IFRIC), as set up by the International Accounting Standards Board, has issued certain guidance on the manner of recognition of liability under the above Directive. ¹IFRIC 6 concludes that the event that triggers liability recognition is participation in the market during the measurement period. The measurement period is a period in which market shares are determined for the purposes of allocating waste management costs. IFRIC 6 states that this date, rather than the date of production of the equipmentor incurrence of costs, is the triggering event for liability

1   IFRIC on Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment

Measurement of obligation

The above Rules mandate entities to purchasecertificates from authorised recyclers to meet their Extended Producer Responsibility. The cost of obligation is derived basis the target quantity multiplied by the rate per unit as agreed with the authorised recycler. For example, if an entity is required to recycle 100MT of plastics and the authorised recycler charges ₹10 per MT; then an expense of INR 1,000 should be recognised at the end of the current year. The amount of unfulfilled obligation, if any, should be classified as a provision in the Balance Sheet.

Closing entries:

Making a reliable estimate is one of pre-conditions for recognition of a provision under Ind AS 37. The Standard takes the view that a sufficiently reliable estimate can almost always be made for a provision except for extremely rare cases. In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised.
In certain cases, entities face significant challenges in measuring the obligation. These challenges can stem from the non-availability of certificates with the authorised recyclers or the lack of necessary information to estimate the amount of cash outflow required to recycle a particular category of waste. Relevant extracts from the financial statements of a listed company are as follows:

On 21st July, 2022, the Ministry of Environment, Forest and Climate Change issued notification containing Regulations on Extended Producer Responsibility (EPR) for Waste Tyre applicable to Tyre manufacturers and Recyclers. As per the notification, the Company has a present legal obligation as at31st March, 2023, to purchase EPR certificates online from Recyclers of waste tyre registered with the Central Pollution Control Board to fulfil its obligations,which is determined based on a certain percentage of the quantity of tyres manufactured in the year ended 31st March, 2021.

Currently, the modalities of the above regulations are dynamic. They would be fine-tuned in line with the changing requirements, including measurement of obligation and timeline for achieving compliance by tyre manufacturing companies in consultation with the Industry forum of Tyre companies. Accordingly, the Company has not recognised any provision towards EPR obligation for the year ended 31st March, 2023.

BCAJ Admin

Overview of NFRA Inspection Reports of 2023 on Audit Firms– II

This is the second and final article to cover an overview of the first five NFRA inspection reports. The inspection process, timelines and the structure of the inspection reports were covered in the February 2024 issue of The BCAJ on page 21, including the summary of NFRA observations related to governance and leadership structures or lack / non-disclosure thereof, international and domestic network / affiliations. The article also covered issues pointed out by NFRA related to non-audit services provided to audit clients and SQC 1.

This second part is on the remaining observations of NFRA on audit quality control systems, independence, engagement quality control and points arising from the review of engagement files based on selected areas. From these two articles, one will be able to draw practical nuances relating to Standards on Auditing and other applicable laws and regulations.

At the cost of repetition, the purpose of this compilation is to enable auditors and audit firms to understand the focal points and key issues arising from these inspections. By understanding key features, firms can take the necessary steps to be compliant with applicable regulations.

The five reports covered are as below and referred to with the last two digits to identify the reports:

PART B OF REPORTS

The subheadings in all five reports are different in both sequence and content. Excluding leadership, structure, and Independence matters, which are covered in The BCAJ, vide article of February 2024 on page 21, let us consider Documentation, Engagement Quality Control and some observations arising from the review of the audit files.

FIRM WIDE AUDIT QUALITY CONTROL SYSTEM

1) EQCR Partner: The firm’s procedures fall short of SA 220 and SA 230 and the Firm’s Policy. Two samples selected contained incomplete work papers without sufficient evidence of EQC review done. (Para 30, Report No 01)

2) The practice of deleting all review comments should be reviewed as they may constitute a discussion between the Engagement Team and EQCR, which is mandatory under SQC 1 and SA 220. (Para 31, Report No 01)

3) Evidence of performance of EQCR, i.e., the EQCR docket (summary of EQCR work performed) was not made part of the Engagement Management System (EMS). However, EQCR clearance was obtained prior to the issuance of the audit report. This is despite the firm’s Policy of generating the EQCR docket via the EQCR portal to be incorporated in the EMS. (Para 26 & 27, Report No 02)

4) There was an instance of lack of reassessment of audit risk upon finding some suspicious transactions, etc., which was not in accordance with Para 31 of SA 315 and Firm’s Policy Manual. This matter led to reporting under Section 143(12) to the central government, adverse opinion and eventual resignation from audit later that year whereas suspicious transactions were noticed in the second quarter itself. (Para 18–22, Report No 02)

5) Consultation was taken, a decision taken on that basis, but the rationale was not recorded which is not in accordance with Para 56 of SQC1, which is not in accordance with the firm’s own Policy Manual. (Para 30–32 Report No 02)

6) Engagement Management System (EMS) required annual and engagement level independence confirmations. However, EMS permitted access to audit without obtaining the engagement level independence confirmations (which is an additional control), which is in violation of the Audit Firm’s Policy Manual and Para 18 of SQC 1. (Para 17 Report No 02)

7) An Independence compliance audit done by a network firm partner identified that “35% of the Partners, the sole Executive Director, 55% of the Directors and 38% of the Sr. Manager/Managers had not reported the financial relationships, required to be reported in accordance with the Firm’s independence policies”. Such high rates of non-compliance with the firm’s own independence policies were of serious concern to the NFRA. Despite such significant violations, the sample size was reduced compared to the prior year. The firm failed to provide the complete Independence Compliance Audit Report for FY 2020–21. A sample test of five audit engagements revealed that independence confirmations were absent in the case of some members of the engagement team and in some cases, independence declarations were obtained after the issue of the audit report. The Independence Compliance Tool is not aligned with Indian laws. (Para 22–26 Report No 03)

8) EQCR needs to be a partner who is a member of the ICAI as per SA 220 and SQC 1. However, the Firm’s EQCR Policy did not specify that EQCR shall be a member of the ICAI. (Para 23 Report No 04)

9) There is no document explaining the rationale or criteria for the selection of engagement files for internal quality inspection and specific areas for review by the inspection team. (Para 30 Report No 04)

10) Firm persons interviewed by the NFRA inspection team did not have much clarity on how to choose the value of assurance factor for the desired level of testing so far as sampling was concerned. (Para 28 Report No 04)

11) The Firm had a policy of doing background checks of the auditee company from the database of the network entity. In some cases, background check reports were not positive and yet the firm did not carry out alternative tests to assess client integrity for accepting / continuing. The firm’s reliance solely on a single source (network entity database) was found insufficient and not in accordance with Para 28 of SQC 1. (Para 25 Report No 05)

12) No audit documentation was found in relation to the evaluation of the competence and capabilities of the audit firm to undertake the engagement. (Para 27 Report No 05)

13) Audit documentation by EQCR is not fully compliant with Para 25, SA 220. (Para 28 Report No 05). Working papers had no documentation of the work done by EQCR. (Para 30 Report No 05)

AUDIT DOCUMENTATION

1) The firm’s policies and procedures to ensure integrity of its electronic audit documentation were not fully in accordance with the requirements of SQC 1 (Para 77, 79, 80). (Para 13 Report No 01)

2) The audit evidence, which is reviewed and signed as final, can be edited, altered or modified subsequently without affecting the previously provided signoff. While a report gives information about edits, it doesn’t identify the exact changes made in the document. (Para 13 Report No 01). Such weakness can lead to signing a blank folder and then allowing the engagement team to add documents before archival.

3) The electronic documentation system does not meet the requirement of Para 9 of SA 230. Neither the preparer nor reviewer date marks the completion of an audit procedure.

4) The archival process of the firm’s electronic work papers lacks integrity as the copy of the achieved file is editable while it is used for other post-archival purposes and, therefore, does not serve the purpose of audit documentation under Para 3 of SA 230. (Para 15, Report No 1)

5) Audit Work papers can be modified after sign-off. The application supports multiple sign-offs by the same and / or different people. It does not mandate modifier sign-off after the modification. A blank paper after sign-off can be filled out later without affecting sign-off. In the instances sighted by NFRA, there was no evidence of why and when documents were modified and who made and reviewed the changes. This was in non-compliance with Para 79 of SQC 1 and Para 8, 9 and 13 of SA 230. NFRA noted that “sufficient appropriate audit evidences are not obtained before issue of audit report as evidenced from large scale modification of AWPs post issue of audit report and without signing off AWPs after such modification.”(Para 29–30, Report No 3)

6) Signing partner is not the same as Engagement Partner in violation of Para 46 and 56 of SA 700 and 6.b of SQC 1. In FY 2020–21, there were 40 cases where Engagement Partners did not sign the audit reports. (Para 32, Report No 3)

7) The firm needs to put in place policies to deal with complaints and allegations about non-compliance with professional standards, regulatory compliance or legal requirements or the firm’s system of QC to ensure compliance with Para 101 of SQC 1. (Para 34, Report No 3)

8) NFRA desired that there should not be paper files and electronic files and all papers should be scanned and kept in electronic files. (Para 26, Report No 4)

9) Physical files are neither scanned nor incorporated by electronic files via cross-referencing of paper files with electronic files. Files lacked integrity prior to archival. (Para 12, Report No 5)

10) Sources of audit documents — whether from clients, etc., — were not available. This is a potential risk under SA 500, SA 540 and SA 550. (Para 13, Report No 5)

PART C OF REPORTS — NFRA OBSERVATIONS ON REVIEW OF INDIVIDUAL AUDIT FILES

NFRA selected a few Engagement Files for review (Refer to page 21, The BCAJ, February 2024) and selected three significant audit areas in respect of those selected engagements: Revenue, Trade Receivables and Investments.

1) The Audit Engagement team did not document its judgment for not recognising applicable types of revenue, revenue transactions and assertions as a fraud risk as necessitated by SA 240 to determine the risk of material misstatement due to fraud in the audit of revenue. (Para 32, Report No 1)

2) Audit Evidence in respect of year-end balance was not found in work papers and was obtained from the custodian during the course of the NFRA review. (Para 34, Report No 2)

3) Existence Assertion in respect of Investments at year-end, being 1 per cent, was necessary to be obtained at year-end and not obtaining such evidence was not in conformity with the firm’s policy manual and SA 230. (Para 35-36, Report No 2)

4) NFRA appreciated Non-Audit Services (NAS) guidelines voluntarily issued by the firm with effect from 1st April, 2020. At the same time, the firm delivered tax services related to DRP to an audit client in respect of years when such an entity was not an audit client. The firm had in place certain safeguards where the tax and these fell under transitional provisions of its internal NAS Guidelines. (Para 37–42, Report No 2)

5) In the case of two company audits, the financial statements did not disclose full particulars of the loans given, the investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security was proposed to be utilised by the recipient of the loan or guarantee or security, thus not complying with Section 186(4) of the Companies Act 2013. The auditor did not report on it in CARO para (iv) despite its reporting responsibility. (Para 36, Report No 3)

6) Final financial statements (FS) and independent auditors’ report (IAR) were not available on the audit file and the draft FS and IAR that were on the file were different from those on the website of BSE in violation of Para 30 of SA 330. The firm accepted this as an inadvertent error. (Para 37, Report No 3)

7) In respect to 3 out of 5 selected companies, the firm was found deficient in performing appropriate audit evidence in respect to impairment of investments. (Para 38–42, Report No 3)

a. In respect of one auditee company, uponacquisition of a group of companies under Ind AS 103 Business Combinations, the firm relied on a two-year-old valuation report in respect of the subsidiary and did not perform any audit procedures for identification of impairment indicators. There was also no working in respect of how the amount in respect of investment was arrived at.

b. In respect of the same auditee, the firm wrongly concluded that no impairment loss was required to be recognised:

i. On the grounds that the subsidiary was in the process of issuing shares to an unrelated MNC which will increase the share price in the near future.

ii. On the grounds that the subsidiary was a dividend paying company and 100 per cent subsidiary, therefore, it did not perform impairment testing.

iii. Since it involved the work of a valuation specialist engaged by another audit team which audited that subsidiary was not evaluated.

c. In respect of another auditee, the audit firm wrongly presumed a subsidiary as 100 per cent owned whereas it was 84.18 per cent owned. NFRA stated that had the correct percentage of investment been considered, the impairment value would have been material to be recognised. The detailed enterprise value relied upon by the firm was also not available on the audit file.

d. In the case of another auditee, the Firm concluded that no impairment was required to be recognised for the investment in an associate, on the basis that the associate company had issued shares to unrelated market participants at a value higher than the carrying value. However, the Firm did not perform any audit procedure to check that the referred market participants were not related to the auditee company.

8) The Audit Firm’s Information System Audit Team identified certain deficiencies in the IT Control Environment, i.e., Access to Programs and Data, Entity level controls and Period-end Financial Reporting. The audit firm did not issue a modified audit opinion in respect of the IFC report despite these critical inadequacies and deficiencies. The audit file did not contain any work paper concluding that a modified opinion was not required. (Para 40–41, Report No 4)

9) The Engagement Team’s selection of a sample size of only 25 was not commensurate with the risk level. (Para 40–41, Report No 4)

10) ET had planned to obtain a ‘Low’ level of substantive evidence despite the significantly weak IT General Control environment identified by the Information Systems Audit Team. The total monetary value of transaction testing was ₹19.5 crores, which was 2.09 per cent of Total Revenue of ₹930.14 crores. As a result, the ET did not have sufficient appropriate audit evidence to support its unmodified opinion on the financial statements. The Audit Firm’s response was not accepted as it was not in accordance with the SA 530. (Para 44–47, Report No 4)

11) ET did not perform any substantive audit procedure to check the accuracy and correctness of the ‘price details’ applied to the actual invoices generated. (Para 48–49, Report No 4)

12) The entity’s significant accounting policy in respect to the recognition and measurement of revenue at the fair value of the consideration received or receivable was not in accordance with the Ind AS 115. (Para 50–51, Report No 4)

13) The Engagement Team’s audit in respect of verifying and ensuring the entity’s recognition and measurement for impairment loss allowance in accordance with the ECL approach of Ind AS 109 was inadequate and inappropriate (Para 8(a), A13, Para 8(c), A24, A25 and Para19 of SA 5409).

a. The account policy followed was not in accordance with the accounting policy disclosed.

b. The ET did not check how the management had adjusted the historically observed default rates to forward-looking estimates.

a. The entity had not made the disclosures required as per Para 35M and 35N of Ind AS 107 in respect to the credit risk exposure of Trade Receivables.

(Para 52, Report No 4)

14) Invoice-wise matching of customer collections which had an impact on the aging report was not done. This had a direct consequence on the calculation of impairment loss allowance for Trade Receivables. (Para 54, Report No 4)

15) Although the actual PBT benchmark for calculating materiality was significantly lower than planned materiality levels based on the past 3–5 years PBT, the overall materiality and performance materiality were not changed. This was a non-compliance with SA 450. (Para 56–59, Report No 4)

16) While evaluating the impact of misstatements identified during the audit, the ET had, while computing the uncorrected misstatements as a percentage of PBT, considered the number of uncorrected misstatements net of tax instead of gross of tax, leading to erroneous computation of the impact of uncorrected misstatements and the extent of audit procedures. (Para 60, Report
No 4)

17) The audit file did not have the auditee company’s policy on related party transactions. There was no evidence of obtaining a complete list of related parties at the start of the audit and the audit team having verified management assertion that RPT had taken place at arm’s length. The engagement team was, therefore, in violation of SA 550 (Para 24). In one case, the firm also stated that since the RPT were with subsidiaries, they did not pose an elevated risk. NFRA specifically stated that such presumption was not appropriate. (Para 61–63, Report No 4)

18) For evaluating impairment of investments, the audit firm did not independently evaluate significant assumptions of the auditee. Such assumptions of the auditee were found to be not appropriate and in excess. (Para 32, Report No 5)

19) The assessment of the auditor regarding the forward contract to acquire remaining shares from NCI is not separately traceable from the audit file. The disclosures in the financial statements for FY 2020–21 (year reviewed by NFRA) and 2019–20 in respect of the forward contract to acquire additional shares at a future date and the related contingent consideration arrangements are not in compliance with the requirements of Para B64(g) of Ind AS 103. A disclosure of the arrangement and basis of determining contingent consideration was necessary in the CFS of both years. (Para 33–35, Report No 5)

20) There was non-compliance with Section 186 of the Companies Act, 2013 and Companies (Number of layers) Rules as there was no evidence that the auditee met the criteria of CIC-ND-SI NBFC when it had 92 subsidiaries and 52 associates. The audit firm should have reported this in CARO, which was not done. (Para 36–37, Report No 5)

21) The EP failed to consider the possible effects of misstatements on financial statements, which were material and pervasive and, thus, required consideration of Adverse or Disclaimer Opinion as per SA 705. The possible effect was not only confined to investments but also to other balances such as loans and advances, provisions etc., which indicate their pervasiveness. (Para 38–40, Report No 5)

22) An auditee company having 286 subsidiaries out of which 255 were loss-making. Although there were indicators of impairment, the firm had relied on a management representation letter stating that there was no impairment loss and there was no assessment on AWP. (Para 41–42, Report No 5)

23) AWP did not have sufficient appropriate audit evidence of KAM in respect of the going concern assumption. (Para 43–44, Report No 5)

Part D contained a chronology of events. The appendix at the end of each report carried the actual responses given by each firm.

All five inspection reports make a good read considering they are part of the first set. We can expect several more inspection reports in the coming months and years on the next set of audit firms. I am sure the NFRA reports with time will also become uniform and nuanced and an annual summary of all points brought out during a year will make a good collection for users of such inspection reports. We can expect NFRA to receive a ‘follow up action taken’ from audit firms inspected as a desirable outcome.

BCAJ Admin

Financial Reporting Dossier

This article provides: (a) key recent updates in the financial reporting space globally; (b) Global Regulators’ Actions – FRC and PCAOB; (c) SEC reports on audit, accounting and fraud matters.

A. KEY GLOBAL UPDATES:

1. IASB — ACCOUNTING FOR COMPOUND FINANCIAL INSTRUMENTS

On 29th November, 2023, the International Accounting Standards Board (IASB), based on feedback received from the Investors, proposed amendments to address the challenges in companies’ financial reporting on instruments that have both debt and equity features. The proposed amendment would amend the IAS 32, IFRS 7 Financial Instruments: Disclosures, and IAS 1 Presentation of Financial Statements.

IAS 32 Financial Instruments: Presentation sets out how a company that issues financial instruments should distinguish debt instruments from equity instruments. The distinction is important because the classification of the instruments affects the description of a company’s financial position and performance. The proposed amendment mainly to (i) clarify the underlying classification principles of IAS 32 to help companies distinguish between debt and equity; (ii) to require companies to disclose information to further explain the complexities of instruments that have both debt and equity features; and (iii) to issue new presentation requirements for amounts—including profit and total comprehensive income. The comments are to be received by 29th March, 2024.

2. IASB — REPORTING OF CLIMATE RELATED AND OTHER UNCERTAINTIES IN FINANCIAL STATEMENTS

On 20th September, 2023, the International Accounting Standards Board (IASB) decided to explore targeted actions to improve the reporting of climate-related and other uncertainties in the financial statements. Currently, IFRS Accounting Standards do not refer explicitly to climate-related matters. In July 2023, the IASB republished Education Material on Effects of climate-related matters on financial statements which provides examples illustrating when IFRS Accounting Standards may require companies to consider the effects of climate-related matters in applying the principles in several Standards.

For e.g. IAS-2- Inventories- Climate-related matters may cause a company’s inventories to become obsolete, their selling prices to decline or their costs of completion to increase. If, as a result, the cost of inventories is not recoverable, IAS 2 requires the company to write down those inventories to their net realisable value.

The possible actions include development of educational materials, illustrative examples and targeted amendments to IFRS Accounting Standards to improve application of existing requirements.

3. IASB — ACCOUNTING REQUIREMENTS IN CASE CURRENCY NOT EXCHANGEABLE

On 15th August, 2023, the International Accounting Standards Board (IASB) issued an amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates that will require companies to provide more useful information in their financial statements when currency cannot be exchanged into another currency.

These amendments will require companies to apply a consistent approach in assessing whether a currency can be exchanged for another currency and, when it cannot, in determining the exchange rate to be used and the disclosures to be provided.

The amendments will become effective for annual reporting periods beginning on or after 1st January, 2025. Early application is permitted.

4. FASB — ACCOUNTING FOR AND DISCLOSURE OF CERTAIN CRYPTO ASSETS

On 13th December, 2023, the Financial Accounting Standards Board (FASB) published an Accounting Standards Update (ASU) intended to improve the accounting for, and disclosure of certain Crypto Assets. The amendments in the ASU improve the accounting for certain crypto assets by requiring an entity to measure those crypto assets at fair value each reporting period with changes in fair value recognized in net income. The amendments also improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosures about significant holdings, contractual sale restrictions, and changes during the reporting period.

It will provide investors and other capital allocators with more relevant information that better reflects the underlying economics of certain crypto assets and an entity’s financial position while reducing cost and complexity associated with applying current accounting.

The amendments in the ASU apply to all assets that meet all the criteria:- (a) Meet the definition of intangible asset as defined in the FASB ASC (b) Do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets (c) are created or reside on a distributed ledger based on block chain or similar technology (d) are secured through cryptography (e) are fungible and (f) are not created or issued by the reporting entity or its related parties.

The amendments in the ASU are effective for all entities for fiscal years beginning after 15th December, 2024, including interim periods within those fiscal years. Early adoption is permitted.

5. FASB — NEW SEGMENT REPORTING GUIDANCE

On 27th November, 2023, the Financial Accounting Standards Board (FASB) issued a final Accounting Standards Update (ASU) on Segment Reporting. It is based on the FASB’s extensive outreach with stakeholders, including investors, who indicated that enhanced disclosures about a public company’s segment expenses would enable them to develop more decision-useful financial analyses. The key amendments are:

Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss.
Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss.
Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by FASB Accounting Standards Codification® Topic 280, Segment Reporting, in interim periods.
Clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements.
Require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.
Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures in Topic 280.

The ASU applies to all public entities that are required to report segment information in accordance with Topic 280. All public entities will be required to report segment information in accordance with the new guidance starting in annual periods beginning after 15th December, 2023.

6. FASB — INDUCED CONVERSIONS OF CONVERTIBLE DEBT INSTRUMENTS

On 14th September, 2023, the Emerging Issues Task Force (EITF) reached a consensus-for-exposure to amend the induced conversions guidance to improve its relevance. The Task force reached a consensus-for-exposure to (a) Pursue the preexisting contract approach for induced conversion assessment. Under this approach, only conversions that include the issuance of all the consideration (in form and amount) pursuant to conversion privileges included in the terms of the debt at issuance would be accounted for as induced conversions. (b) Include clarifications that, under the preexisting contract approach, when evaluating whether the amount of cash (or combination of cash and shares) issuable under the original conversion privileges is preserved by the inducement offer, (1) an entity should determine the amount of cash and number of shares that would be issued based on the fair value of the entity’s shares as of the offer acceptance date (2) if within a year leading up to the offer acceptance date the debt has been exchanged or modified without being deemed to be substantially different, then the debt terms that existed a year ago should be used in place of the terms of the debt at issuance. (c) Apply induced conversion accounting to all convertible debt instruments, including instruments that are not currently convertible, so long as those instruments contained a substantive conversion feature as of the time of issuance and are within the scope of the guidance in Subtopic 470-20, Debt—Debt with Conversion and Other Options.

7. FASB — ACCOUNTING FOR AND DISCLOSURE OF SOFTWARE COSTS

On 6th June, 2023, the Financial Accounting Standards Board (FASB) provided input about potential financial reporting improvements for software costs, including the development of a single model to account for costs to internally develop, modify, or acquire software. The project objectives are to (a) modernize the accounting for software costs and (b) enhance transparency about an entity’s software costs, noting the prevalence and continuous evolution of software. The FASB supported additional disclosures to provide transparency about software costs, given the judgement involved in the accounting and the nature of software costs incurred. Some investors and other allocators of capital expressed the importance of having information that enables them to understand a company’s technology spend and the expected return on that investment.

There were mixed views on the Recognition & Measurement of Software costs requiring capitalization at the time when it is probable that a software project will be completed, whereas some suggested refinements to the indicators to help apply the threshold, some questioned whether probability is a workable threshold and the rest advised that the current GAAP is sufficient.

Also, it was advised to have distinction between maintenance & enhancement costs since costs incurred for Maintenance activities should be expensed as incurred.

For Presentation & Disclosures, information about total software costs would be useful, information that differentiates between types of software such as revenue-generating & non-revenue generating, etc., information for potential additional disclosures would be feasible. Some practitioner council members stated that some of the potential disclosures could be challenging to audit due to the high level of management judgement involved in preparing them.

8. FASB — JOINT VENTURE FORMATIONS

On 23rd August, 2023, the Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) intended to (1) provide investors and other allocators of capital with more decision-useful information in a joint venture’s separate financial statements and (2) reduce diversity in practice in this area of financial reporting. Currently, there has been no specific guidance in the Codification that applies to the formation accounting by a joint venture in its separate financial statements, specifically the joint venture’s recognition and initial measurement of net assets, including businesses contributed to it. The proposed update provides decision-useful information to a joint venture’s investors and reduces diversity in practice by requiring that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurements that are consistent with the business combinations guidance). The said amendments in this ASU are effective prospectively for all joint ventures with a formation date on or after 1st January, 2025, and early adoption is permitted.

9. IAASB — NEW STANDARD FOR AUDIT OF LESS COMPLEX ENTITIES

On 6th December, 2023, the International Auditing & Assurance Standards Board (IAASB) published the International Standard on Auditing for Audits of Financial Statements of Less Complex Entities, known as the ISA for LCE. The ISA for LCE is a standalone global auditing standard designed specifically for smaller and less complex businesses and organizations. Built on the foundation of the International Standards on Auditing (ISAs), audits performed using this standard provide the same level of assurance for eligible audits: reasonable assurance. The standard is effective for audits beginning on or after 15th December, 2025 for jurisdictions that adopt or permit its use. The ISA for LCE underscores the IAASB’s commitment to ensuring the credibility and reliability of financial reporting for entities of all sizes.

10. IAASB — AUDITOR’S REPORT TRANSPARENCY ON INDEPENDENCE

On 12th October, 2023, the International Auditing and Assurance Standards Board (IAASB) has released amendments aimed at bolstering transparency and providing auditors with a clear mechanism to action changes to the International Ethics Standards Board for Accountants’ (IESBA) Code of Ethics for Professional Accountants (including International Independence Standards). The IAASB amended International Standard on Auditing 700 (Revised), Forming an Opinion and Reporting on Financial Statements and ISA 260 (Revised), Communication with Those Charged with Governance. The IESBA Code now requires firms to publicly disclose when a firm has applied the independence requirements for public interest entities in an audit of the financial statements of an entity. The IAASB’s amendments provide a clear and practical framework for implementing this new requirement through appropriate communication in the auditor’s report and with those charged with governance.

11. FRC — REVISED ISA (UK) 505 EXTERNAL CONFIRMATIONS

On 3rd October, 2023, the FRC published revised ISA (UK) 505 External Confirmations. The revisions to the standard reflect recent enforcement findings as well as ensuring that modern approaches to obtaining external confirmations are considered, with additional material in respect of digital means of confirmation, enhanced requirements in relation to investigating exceptions and a prohibition on the use of negative confirmations.

There are following revisions:

Definitions

External Confirmation: Audit evidence obtained as a direct written response to the auditor, or by the auditor directly, from a third party (the confirming party), in paper form, or by electronic or other medium. Electronic or other mediums could include auditors directly accessing information held by third parties through web portals, software interfaces or other digital means.
Negative Confirmation Request: A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request. The use of negative confirmations is prohibited in an audit conducted in accordance with ISAs (UK). Accordingly, the requirements and related application material in this ISA (UK) relating to negative confirmations are not applicable.

Requirements

External Confirmation Procedure: Designing the confirmation requests, including determining that requests are appropriately designed to provide evidence relevant to the assertions identified in accordance with ISA (UK) 330, are properly addressed and contain return information for responses to be sent directly to the auditor.

12. FRC — THEMATIC REVIEW OF AUDIT SAMPLING

On 24th November, 2023, the FRC published its thematic review of Audit Sampling. Audit sampling is a fundamental tool for auditors, allowing the auditor to draw conclusions about a population based on the sample selected. The FRC reviewed the sampling methodologies of the largest audit firms to identify areas of good practice and to highlight any concerns.

The review found all audit firms should:

Ensure that they provide engagement teams with sufficient guidance and training to support their use of professional judgement in audit sampling; and
Update their methodologies and guidance to drive better documentation of key professional judgements in this area.
Audit Committees should understand how auditors obtain audit evidence to support their choice of auditor when tendering and to aid understanding of how their auditor takes the audit.

13. PCAOB — NEW STANDARD: MODERNIZING REQUIREMENTS FOR AUDITOR’S USE OF CONFIRMATION

On 28th September, 2023, the Public Company Accounting Oversight Board (PCAOB) adopted a new standard to strengthen and modernize the requirements for the auditor’s use of confirmation- the process that involves verifying information about one or more financial statement assertions with a third party.

Among its key provisions, the new standard:

Includes a new requirement regarding confirming cash and cash equivalents held by third parties or otherwise obtaining relevant and reliable audit evidence by directly accessing information maintained by a knowledgeable external source;
Carries forward the existing requirement regarding confirming accounts receivable, while addressing situations where it is not feasible for the auditor to perform confirmation procedures or otherwise obtain relevant and reliable audit evidence for accounts receivable by directly accessing information maintained by a knowledgeable external source;
States that the use of negative confirmation requests alone does not provide sufficient appropriate audit evidence;
Emphasizes the auditor’s responsibility to maintain control over the confirmation process and provides that the auditor is responsible for selecting the items to be confirmed, sending confirmation requests, and receiving confirmation responses; and
Identifies situations in which alternative procedures should be performed by the auditor.

Subject to approval by the Securities and Exchange Commission, the new standard will take effect for audits of financial statements for fiscal years ending on or after 15th June, 2025.

B. GLOBAL REGULATORS’ ENFORCEMENT ACTIONS AND INSPECTION REPORTS

I. THE FINANCIAL REPORTING COUNCIL, UK

a) Sanctions against audit firm, audit plc and two former partners

On 12th October, 2023, the FRC has issued two Final Settlement Decision Notices under the Audit Enforcement Procedure and imposed sanctions against KPMG LLP, KPMG Audit Plc, and two former audit partners following the conclusion of her investigations into the audits of Carillion plc (“Carillion”).

Decision 1:

Prior to going into liquidation in January 2018, Carillion was a leading UK based multinational construction and facilities management services company. KPMG audited the financial statements of Carillion and its group companies for the financial years 2014, 2015, and 2016. In each of these years, KPMG provided an unqualified audit opinion that the financial statements gave a true and fair view of Carillion’s affairs. The audit opinion for the financial year 2016 was dated 1st March, 2017. In July and September 2017, Carillion announced expected provisions totalling £1.045 billion, primarily arising from expected losses on a number of its contracts, and a goodwill impairment charge of £134 million.

The outcome of the investigation was that this very large public company, which had multiple large contracts with public authorities, was not subject to rigorous, comprehensive, and reliable audits in the three years leading up to its demise. In particular, in 2016, KPMG and Mr Meehan’s work in respect of going concern and Carillion’s financial position generally was seriously deficient. KPMG and Mr Meehan failed to respond to numerous indicators that Carillion’s core operations were lossmaking and that it was reliant on short term and unsustainable measures to support its cash flows.

KPMG failed to gather sufficient appropriate audit evidence to enable it to conclude that the financial statements were true and fair and also failed to conduct its audit work with an adequate degree of professional skepticism. Instead of consistently challenging and scrutinising such audit evidence as it gathered, KPMG failed to subject Carillion’s management’s judgements and estimates to effective scrutiny, even where those judgements and estimates appeared unreasonable and/or appeared to be inconsistent with accounting standards and might suggest potential management bias.

Additionally, audit procedures in a range of areas were not completed until more than six weeks after the date of the audit report was signed and records of the preparation and review of working papers were unreliable and, in some cases, misleading.

Decision 2:

The investigation related to transactions entered into by Carillion in 2013, that involved changing its provider of outsourced IT and business process services. At the same time as entering into a contract for those services with the new provider, Carillion concluded other agreements, with the same counterparty, involving the assignment of certain IP rights for a significant sum, as well as receiving a further sum as a contribution to ‘exit fees’ payable to the former outsourcing provider. Each of these transactions was treated in Carillion’s financial statements as being independent of each other and this treatment resulted in a significant increase in Carillion’s reported profit for 2013.

b) FRC – Inspection findings for tier 2 & 3 audit firms

On 13th December, 2023, the FRC published its annual inspection findings for Tier 2 and Tier 3 audit firms, alongside the actions these firms must prioritise to deliver high quality audits and contribute to a more resilient audit market.

As part of the FRC’s 2022-2023, the inspection programme of Tier 2 and Tier 3 firms, which audit Public Interest Entities (PIEs), the FRC inspected 13 audits at 11 of these firms. Only 38 per cent of audits reviewed required no more than limited improvements, 24 per cent required more than limited improvements and a further 38 per cent required significant improvements. Tier 2 and Tier 3 firms must prioritise audit quality improvements and respond swiftly.

Some of the key observations in the report are as follows:

audit teams not demonstrating sufficient professional skepticism in the areas involving significant levels of management judgement and the potential for bias;
weaknesses in the audit procedures to evaluate the underlying going concern assessments and supporting evidence provided by management.
weaknesses in the planned audit approach and the linkage of this to the audit team’s fraud risk assessment.
shortcomings in processes for the archiving of audit files in line with the requirements of the auditing standards.
lack of a policy and formal process, driven by a risk-based assessment, for accepting new clients and re-accepting existing clients.

II. THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (PCAOB)

a) Light on rising audit deficiencies related to engagement quality reviews

On 12th October, 2023, PCAOB published a report which revealed that 42 per cent of firms the PCAOB inspected in 2022 had a quality control criticism related to engagement quality reviews (EQRs), up from 37 per cent in 2020. The report focuses on the PCAOB-mandated EQR process, in which a reviewer who is not part of the engagement team evaluates significant judgements made by the audit engagement team. The EQR reviewer should (1) hold discussions with the engagement partner and other members of the engagement team and (2) review the engagement team’s audit documentation.

Common deficiencies related to EQR’s are:

Failing to identify certain Engagement Level Performance Deficiencies in the Audit.
Failing to provide competent, knowledgeable EQR reviewer.
Failing to properly document EQR.
Failing to provide Concurring Approval.
Failing to provide an EQR.

b) Sanctions on audit firms for violating PCAOB rules and standards related to audit committee communications

On 16th November, 2023, PCAOB announced settled disciplinary orders sanctioning six audit firms for violating PCAOB rules and standards related to communications with audit committees. The firms were sanctioned as part of a sweep, which enabled the PCAOB to collect information on potential violations from a number of firms at the same time.

Specifically, all six firms failed to make certain required communications with audit committees related to the planned participation of other firms and individuals in the audit, as required by AS 1301.10, Communications with Audit Committees.

In addition, UHY LLP failed to obtain audit committee pre-approval in connection with providing non-audit services to an issuer audit client, in violation of PCAOB Rule 3520, Auditor Independence, and PCAOB Rule 3524, Audit Committee Pre-Approval of Certain Tax Services.

RH CPA also failed to file an accurate Form AP in violation of PCAOB Rule 3211, Auditor Reporting of Certain Audit Participants.

c) Historic sanctions on China-based audit firms

On 30th November, 2023, PCAOB announced the first major enforcement settlements with mainland Chinese and Hong Kong firms since securing historic access to inspect and investigate firms headquartered in China and Hong Kong in 2022 in accordance with the Holding Foreign Companies Accountable Act (HFCAA).

The settled disciplinary orders sanction three China-based firms and four individuals a total of $7.9 million and include the highest civil money penalties the PCAOB has imposed against a China-based firm and some of the highest penalties it has imposed against any firm around the globe.

The firms are:

PwC China
PwC Hong Kong
Shandong Haoxin & four of its auditors

PwC China and PwC Hong Kong violated the integrity and personnel management elements of the PCAOB quality control standards by failing to detect or prevent extensive, improper answer sharing on tests for mandatory internal training courses.

Shandong Haoxin and four of its auditors falsified an audit report, failed to maintain independence from their issuer client, and improperly adopted the work of another accounting firm as their own.

d) Deficiencies identified in inspection reports

1. ASA & Associates LLP (16th November, 2023)

Deficiency: In an inspection carried out by PCAOB, (a) when at the time of issuing audit report(s) the firm had not obtained sufficient appropriate audit evidence to support its opinion(s) on the issuer’s financial statements and/ or ICFR, (b) Instances of non-compliance with PCAOB standards or rules, (c) Instances of potential non-compliance with SEC rules or with PCAOB rules related to maintaining independence.

2. Baker Newman & Noyes, P.A. Limited Liability Company (16th November, 2023)

Deficiency: In an inspection carried out by PCAOB, (a) the firm used confirmations to test the existence of loans. The sample size did not provide sufficient appropriate audit evidence because it was based on a level of reliance on other substantive procedures that was not supported given the nature and scope of those other substantive procedures (b) the firm used negative confirmations to substantively test the existence of certain types of loans. The firm’s use of negative confirmations did not reduce audit risk to an acceptable level because the population of such loans did not comprise a large number of small balances.

3. T R CHADHA & CO LLP (28th September, 2023)

Deficiency: In an inspection carried out by PCAOB, (a) the firm did not perform any substantive procedures to evaluate the reasonableness of certain significant assumptions developed by the company’s specialist (b) did not perform any substantive procedures to test the fair value of certain other accounts (c) The firm did not perform any procedures to identify and select journal entries and other adjustments for testing.

III. THE SECURITIES EXCHANGE COMMISSION (SEC)

a) Violations of the anti-bribery, books and records, and internal accounting controls (10th January, 2024)

SEC announced charges against global software company SAP SE for violations of the Foreign Corrupt Practices Act (FCPA) arising out of bribery schemes in South Africa, Malawi, Kenya, Tanzania, Ghana, Indonesia, and Azerbaijan. SAP employed third-party intermediaries and consultants from at least December 2014 through January 2022 to pay bribes to government officials to obtain business with public sector customers in the seven countries mentioned above. SAP inaccurately recorded the bribes as legitimate business expenses in its books and records, despite the fact that certain third-party intermediaries could not show that they provided the services for which they have been contracted. SAP failed to implement sufficient internal accounting controls over the third parties and lacked sufficient entity-level controls over its wholly owned subsidiaries.

b) Medical Device Startup Fraud (19th December, 2023)

The SEC charged Laura Tyler Perryman, the former CEO and co-founder of Florida-based medical device startup Stimwave Technologies Inc., with defrauding investors out of approximately $41 million by making false and misleading statements about one of the company’s key medical device products. The medical device comprised several components, one of which was a fake, non-functional component that was implanted into patients’ bodies.

During capital fundraising events from 2018 through 2019, Perryman made material misrepresentations about Stimwave’s peripheral nerve stimulation device, or PNS Device, which purported to treat chronic nerve pain by delivering electrical signals to targeted nerves. The device consisted of three key components: (1) a transmitter; (2) a receiver; and (3) an electrode array. The transmitter was worn by patients in a pouch outside the body and sent a wireless signal into the body. A receiver and electrode array were implanted inside patients’ bodies and were together supposed to receive the signal and convert it into electrical currents that stimulated target nerves. As alleged, Stimwave included two receivers of different sizes with the PNS Device, the smaller of which was designed to be used when the larger receiver was too big to implant.

The SEC’s complaint alleges that Perryman knew, or was reckless in not knowing, that the smaller receiver was, in reality, fake and nothing more than a piece of plastic. According to the complaint, Perryman misrepresented to investors that the PNS Device was approved by the U.S. Food and Drug Administration and was the only effective device of its kind on the market. The complaint also alleges that Perryman made false and misleading statements to investors about Stimwave’s historical revenues, revenue projections, and business model.

After Perryman’s fraud unraveled in the fall of 2019, Stimwave voluntarily recalled the PNS Devices and eventually filed for bankruptcy.

c) Fraud: Inflation of Financial Performance (19th December, 2023)

The SEC found that Mmobuosi Odogwu Banye a/k/a Dozy Mmobuosi spearheaded a scheme to fabricate financial statements and other documents of the three entities of which he is the CEO- Tingo Group Inc., Agri-Fintech Holdings Inc., and Tingo International Holdings Inc. and their Nigerian operating subsidiaries, Tingo Mobile Limited and Tingo Foods PLC to defraud investors worldwide. The SEC has obtained emergency relief including a temporary restraining order: (1) freezing Mmobuosi’s assets; (2) prohibiting TIH, OTC-traded Agri-Fintech and Nasdaq-listed Tingo Group from transferring money or property or issuing shares to Mmobuosi; (3) enjoining Defendants from selling or otherwise disposing of their respective holding in Agri-Fintech and/or Tingo Group stock; (4) prohibiting Defendants and their agents from destroying, altering, or concealing records and documents; and (5) ordering Defendants to show cause why a preliminary injunction continuing the relief set forth in any temporary restraining order as well as ordering repatriation of proceeds and a sworn accounting should not be entered.

d) Fraud: Misappropriation with Invoice (22nd December, 2023)

The SEC announced fraud charges against Brooge Energy Limited, a publicly-traded energy company located in the United Arab Emirates, the company’s former CEO, Nicolaas Lammert Paardenkooper, and its former Chief Strategy Officer and Interim CEO, Lina Saheb.

Before and after going public through a special purpose acquisition transaction, Brooge, whose securities trade on NASDAQ, misstated between 30 and 80 percent of its revenues from 2018 through early 2021 in SEC filings related to the offer and sale of up to $500 million of securities. The order finds that Brooge created false invoices to support inflating revenues from its oil facilities in Fujairah, UAE by over $70 million over three years, and that Paardenkooper and Saheb knew, or were reckless in not knowing, of the fraud. The SEC order also finds that Brooge provided these false invoices to its auditors to conceal the inflated revenue.

Brooge agreed to settle the SEC’s charges that found the company violated the antifraud, proxy statement, reporting, and books and records provisions of the federal securities laws and to pay a $5 million penalty. Paardenkooper and Saheb also agreed to settle the charges, to each pay $100,000 civil penalties, and to permanent officer and director bars.

According to the order, Brooge agreed during the SEC’s investigation not to issue the $500 million in securities. In April 2023, the company announced a restatement of its audited financial statements from 2018 through 2020.

e) Violation of Internal Accounting Controls (2nd November, 2023)

The SEC’s order finds that, from 2008 through 2020, Royal Bank of Canada’s accounting controls failed to ensure that the firm accurately accounted for its internally developed software project costs. The order finds that, for a portion of its internally developed software projects, Royal Bank of Canada applied a single rate to determine how much of those projects’ costs to capitalize, but it lacked a reliable method for determining the appropriate rate to apply, in part because it could not adequately differentiate between capitalizable and non capitalizable costs. This resulted in, among other things, the bank using the same capitalization rate each year without a sufficient basis and capitalizing certain costs that were ineligible under the appropriate accounting methodology.

Royal Bank of Canada has agreed to cease and desist from committing or causing any violations or any future violations of these provisions. Royal Bank of Canada also agreed to pay a $6 million civil penalty, offset by amounts paid to Canadian regulatory authorities as a result of the same conduct. The SEC considered Royal Bank of Canada’s remedial acts in determining to accept the settlement.

f) Representation of Material Misstatements (28th November, 2023)

SEC issued a suspension order against Daniel Rothbaum, CPA who as a controller for a subsidiary of UniTek Global Services Inc., was among others responsible for UniTek materially overstating its earnings in public filings with the Commission. The misstatements arose from the premature recognition of revenue using the percentage of completion accounting model based on goods and services purportedly purchased from subcontractors. Rothbaum did not fully understand the relevant accounting principles with respect to this issue and, along with UniTek’s Chief Accounting Officer and Corporate Controller, provided incorrect accounting advice to others and improperly relied on receipt of subcontractor invoices rather than receipt of the related goods and services to conclude when recognition of revenue was appropriate.

g) Misleading Investors about Sales Performance (29th September, 2023)

The SEC charged Newell Brands Inc., a Georgia-based consumer products company and its former CEO, Michael Polk, with misleading investors about Newell’s core sales growth, a non-GAAP (Generally Accepted Accounting Principles) financial measure the company used to explain its underlying sales trends. From Q3 2016 through Q2 2017 (the “Relevant Period”), Newell announced core sales growth rates that were misleading because Newell did not also disclose that its publicly disclosed core sales growth rate was higher as the result of actions taken by Newell that were unrelated to its actual underlying sales trends. Internal communications during this period recognized that Newell’s sales were disappointing and had fallen short of management’s goals. In response, Newell’s then-CEO, Polk, approved plans to pull forward sales from future quarters, asked employees to examine accruals established for customer promotions in order to determine if they could be reduced, and agreed with decisions to reclassify consideration payable to customers that resulted in the value of that consideration not being deducted as required by generally accepted accounting principles (GAAP).

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE

Illustration of disclosure and reporting for disputed income tax purposes regarding deductions claimed. Also, for the first time, NFRA after examining the process followed by 2 Chartered Accountants (other than the auditor) who certified the said deductions and passed an adverse order commenting on the verification process followed by the said Chartered Accountants. On an appeal to the Delhi High Court by the said Chartered Accountants, the Show Cause Notice of NFRA levying penalty on the said Chartered Accountants has been stayed till date of next hearing.

Quess Corp Ltd (31st March, 2023)

From Notes to Financial Statements

INCOME TAX MATTERS

During the year that ended 31st March, 2023, the Company received assessment order (‘Order’) under section 143(3) read with section 144C(13) of the Income Tax Act after completion of Dispute Resolution Panel (‘DRP’) proceedings for fiscal 2017-2018 resulting in disallowances primarily relating to deduction under section 80JJAA of the Income Tax Act and depreciation on goodwill. The Company has filed an appeal with the Income Tax Appellate Tribunal relating to these disallowances. Further, during the year ended 31st March, 2023, the Company also received a draft assessment order for fiscal 2018-2019 under section 144C(1) of the Income Tax Act in which a primary deduction under section 80JJAA of the Income Tax Act and depreciation on goodwill has been disallowed. The Company has filed objections before the DRP against the draft assessment order.

The Company intends to vigorously contest its position and interpretative stance of these sections on merits, including judicial precedents, and believes it can strongly defend its position through the legal process as defined under the Income Tax Act. Based on its internal evaluation, the Company has disclosed a contingent liability of R740 million for fiscal 2017-2018 and fiscal 2018-2019, excluding interest and penalties, if any. The contingent liability will be updated as developments unfold in future.

The Company continues to maintain its stand on the manner of claiming the 80JJAA deduction, and accordingly, 80JJAA deduction of R1,824.01 million is claimed for the year ended 31st March, 2023, respectively. The Company believes that such deduction, including its quantum, has been validly and consistently claimed, in conformity with its interpretation of the statute.

From Auditors’ Report

EMPHASIS OF MATTERS

We draw attention to Note 37.4 of the standalone financial statements relating to disallowance by the Income Tax authorities primarily relating to depreciation on goodwill and deduction under section 80JJAA of the Income Tax Act, 1961 for financial year ended 31st March, 2018 and 2019, and Company’s evaluation relating to these disallowances. Our opinion is not modified in respect of these matters.

EXTRACT FROM EXECUTIVE SUMMARY OF ORDER PASSED BY NFRA (ORDER DATED 3RD JANUARY, 2024)

In August 2022 the Director General of Income Tax (Investigation), Bengaluru (IT department) shared information about claim of deduction under section 80 JJAA of Income Tax Act totalling R1135.41 crores by Quess based on form 10 DA issued by two chartered accountants for Financial Years 2016-17, 2017-18, 2018-19, 2019-20 & 2020-21. NFRA Suo motu initiated action under Section 132(4) of the Companies Act 2013 (‘Act’ hereafter) to look into the professional conduct of the chartered accountants and their firms involved in the said certification.

NFRA’s investigations inter alia revealed that the CA failed to exercise due diligence and obtain sufficient information before issuing reports under the Income Tax Act. The CA failed to apply the necessary checks, e.g.,

(a) verify reorganisation of business with various parties;

(b) exclude employees whose EPS contribution was paid by the Government;

(c) correctly report the number of additional employees during FY 2020-21;

(d) verify that payment of additional employee cost was made by account payee cheque/draft/electronic means; and

(e) verify salary limit of ₹25,000 per month for new employees, etc.

Based on investigation and proceedings under section 132 (4) of the Companies Act 2013 and after giving the CA an opportunity to present their case, NFRA found the CA, who issued reports under Income Tax Act to Quess Corp Ltd, guilty of professional misconduct and imposes through this Order a monetary penalty of ₹ fifty (50) lakhs which take effect from a period of 30 days from issuance of this Order.

BCAJ Admin

Can Negative Revenue Be Reclassified to Expense?

In recent months, global regulators have become active on the topic of reclassification of negative revenue to expenses under IFRS 15 Revenue from Contracts with Customers (Ind AS 115 Revenue from Contracts with Customers). The purpose of this article is to help address this question and to clarify the authors’ view under Ind AS. This issue will require significant judgement and therefore formal consultation is desirable.

Payments to customers can take many different forms, including payments made by an entity to current customers (such as compensation for delays paid by an airline to its passengers), and payments or discounts provided by an entity to its customers’ customers. This issue is, therefore, closely linked to:

Principal versus agent considerations;
Determining who is(are) the current customer(s) (and the customer’s customer); and
Whether payments or discounts granted to a customer’s customer are the result of contractual or implied promises to one’s direct customer (and, therefore, in the scope of Ind AS 115).

All of these have the potential to be judgemental assessments and will depend on the facts. Therefore, the application of the same requirements might look different between entities.

AUTHOR’S VIEW

Ind AS 115.70 requires payments to customers that are not in exchange for a distinct good or service to be treated as a reduction of the transaction price. Therefore, in light of the words in the standard, we believe it is acceptable for an entity to present payments to a customer in excess of the transaction price that are not in exchange for a distinct good or service within revenue (i.e., not reclassify to expense). This would be the most preferred treatment.

However, the author believes it might also be acceptable, in certain circumstances, to reclassify negative revenue to expense in an entity’s income statement. For example, if an entity demonstrates that characterisation of consideration payable to a customer as a reduction of revenue results in negative revenue for a specific customer on a cumulative basis (i.e., since the inception of the financial year between the entity and the customer or inception of the relationship with the customer and considering anticipated future contracts), then the amount of the cumulative negative revenue for a financial year could be reclassified to expense.

Ideally, whether cumulative negative revenue exists for a specific customer, revenues from all contracts with that customer recognised by all entities within the consolidated group that includes the entity paying the consideration to the customer needs to be considered (i.e., revenues recognised from sales to the customer from all of the consolidated entities needs to be considered). However, that could be very restrictive and not practical, and therefore a more practical approach in this regard may be acceptable. There could be situations, where some contracts with a customer result in positive revenue whereas other contracts with that customer result in negative revenue. Even in such circumstances, the author believes that the positive revenue and negative revenue need not be set off against each other for presentation purposes, and the negative revenue could be presented as an expense and the positive revenue presented as revenue. To justify this position, the entity shall have to demonstrate that each of these contracts with the customer were negotiated based on independently fair terms, and the contracts that resulted in negative revenue were entered into due to the exigencies involved and keeping in mind the market situation and nature of the product sold or service delivered at that time.

HOW DOES AN ENTITY MAKE THE ASSESSMENT?

An entity needs to use its judgement to make the assessment relating to the presentation of negative revenue. The answers to the questions below may provide an insight into the analysis for negative revenue and the degree of complexity involved.

Is the entity the principal or the agent in relation to specified goods or services in the contract and, therefore, who are its current customers? Note: the focus of this discussion is current customers (not former or potential customers)
Does the entity make payments to its identified customer(s) and / or other entities in the distribution chain for that contract (i.e., a customer’s customer)? Such payments are in the scope of the requirements for consideration payable to a customer in Ind AS 115.
Are any payments or discounts made to end-consumers (i.e., a customer’s customer) outside the distribution chain that are a contractual or implied promise to the entity’s direct customer? Such payments are also in the scope of the requirements for consideration payable to a customer in Ind AS 115.
If there is more than one customer (e.g., the merchants and end-consumers are both customers), to which customers do the payment or discount relate? i.e., understand to which customer relationship the consideration payable to a customer relates. This is important because, as noted above, it might not automatically relate to the party to whom it is paid (e.g., if it is paid by the entity on behalf of a customer to another party, who also happens to be a customer of the entity).

ILLUSTRATIVE EXAMPLE

This illustrative example is provided to assist in understanding this guidance. However, it is not intended to limit the types of fact patterns to which this guidance relates (e.g., the above guidance equally applies to direct payments to customers, arrangements involving more than one customer (e.g., where an end-consumer is also a customer), entities arranging other goods or services through websites, apps etc. (e.g., food delivery, taxi rides) for only a single merchant or several merchants).

Entity A operates a platform that facilitates the booking of air travel from various airlines through its website. Entity A has determined that it is the agent and that its performance obligation is to facilitate the sale of air travel on behalf of the airlines. For the sake of simplicity, assume that the airlines are Entity A’s only customers.

Even though the airlines set the prices for the tickets, Entity A has discretion in determining what price it charges the end-consumers. Therefore, Entity A is able to discount the amounts end-consumers pay, while still having to pay the full price to the airlines. It offers discounts to end-consumers to increase their use of the platform. However, it has determined that these payments are an implied promise to its customers (the airlines). That is, its customers have a valid expectation that the payment will be made to the end-consumer based on reasonably available information about the entity’s incentive program, including written or oral communications and any customary business practices of the entity.

As Entity A is an agent and its customers are the airlines, the assessment of cumulative negative revenue on a customer relationship basis would be with the individual airlines (and its group companies), not with each individual end-consumer.

Assume Entity A has two Airlines as customers (B and C). In each case, Entity A determines that these discounts:

Are not outside the scope of Ind AS 115 – while they might be paid to anyone, they are an implied promise to their customer (each Airline) and, therefore, the consideration payable to a customer,
Are not within the scope of other requirements in Ind AS 115 – e.g., they are not in settlement of a refund (or other) liability,
Are not in exchange for a distinct good or service – while they are intended to drive traffic to the website, that is not sufficient to conclude they are providing a distinct marketing service (or similar) to the entity.

Therefore, Entity A calculates total cumulative revenue (including consideration paid or payable to the customer) from all transactions with each Airline (and their group companies) across past, current, and anticipated future customer contracts or for a particular financial year.

Scenario 1: Net amount is not negative on a cumulative basis [Customer Airline B]

Entity A has earned, and expects to earn from current and anticipated contracts, revenue from Airline B that is sufficient to exceed any current discounts provided to Airline B’s customers (the end-consumers). Therefore, it treats the current discounts as a reduction of revenue and does not reclassify any amounts in the current period (even if it causes revenue in the current period to be negative for this customer).

However, as discussed above the entity may have good reasons to classify with regards to Airline B, all the negative revenue as the expense and all positive revenue as revenue, depending upon facts and circumstances, which are discussed earlier.

Scenario 2: Net amount is negative on a cumulative basis [Customer Airline C]

Entity A has earned, and expects to earn from current and anticipated contracts, revenue from Airline C that is not sufficient to exceed any current discounts provided to Airline C’s customers (the end-consumers). That is, the entity performed a thorough review of all past, current and anticipated contracts with Airline C, and all revenues from and payments to that customer recognised by all entities within the consolidated group that includes the entity paying the consideration to the customer and determining that there is a cumulative negative revenue for Airline C.

Therefore, the entity can reclassify the cumulative negative revenue (not the current period shortfall) to expense. However, the entity is not mandatorily required to do so; i.e., negative amounts could remain in revenue in accordance with Ind AS 115.70.

CONCLUSION

There are multiple ways of addressing the presentation of negative revenue, in the absence of specific guidance under Ind AS 115 on this topic. The presentation of negative revenue can be extremely complex under Ind AS and formal consultation on the matter is always desirable.

BCAJ Admin

Overview of NFRA Inspection Reports of 2023 on Audit Firms – I

(Editorial Note: Given the increasingly important role played by NFRA in the context of auditing, BCA Journal will be commencing reporting on NFRA developments. This reporting will cover orders, reports, circulars, notifications, rules, inspection reports, discussion papers, etc. BCAJ seeks to bring to light some of the important changes affecting the profession of audit via the NFRA with a view that members and readers can learn from some of these developments. The aim is to enable members to improve their audit processes and reduce their audit risk by improving quality and governance frameworks mandated by applicable standards and regulatory expectations. In this context, you will be pleased to read this article as a prelude to the NFRA Digest, a new feature to cover NFRA updates.)

BACKGROUND

Section 132 (2) of the Companies Act, 2013 (the Act) empowers the National Financial Reporting Authority (NFRA) to oversee the quality of service of the professions associated with ensuring compliance with such standards (previously stated in sub-clause (b)) and suggest measures required for improvement in quality of service and such other related matters as may be prescribed.

The NFRA issued a press release on 11th November, 2022, giving about three pages of Audit Quality Inspection Guidelines (AQIG). The said guidelines (about 2.5 pages of content) state “audit quality inspections are a key tool with the Regulator to fulfil its statutory obligations.” The AQIG also laid out the criteria for such inspections to cover:

Provisions in the Act, Rules and amendments thereof
SQC1 including the Code of Ethics
Standards of Auditing
Policies, guidelines, manuals, etc., of the firm
Ind-AS as may be applicable to selected individual audit engagements
Relevant circulars / directions of other regulators, as applicable
Directions issued by internal quality boards / committees and QRB, ICAI, as may be applicable

The AQIG also specified the inspection process:

a. Inspections will be carried out on site;

b. Questionnaires may be issued to ensure readiness;

c. Entry meeting with senior management and heads of different verticals;

d. Enquiry meeting with audit engagement team of selected audits;

e. Execution cycle will comprise site visits, interviews, review of controls, substantive testing, issue of queries and observations and follow-up of previously issued observations (to be relevant in case of recurring inspections);

f. Inspected Audit Firm / Auditor will be required to provide written responses / confirmations to queries and observations raised by NFRA;

g. Inspection will close with a meeting with the senior management of the firm or auditor;

h. NFRA will then issue a draft report to obtain responses;

i. Responses to be given within 30 days from the draft report;

j. Issuance of final report.

These NFRA guidelines are somewhat akin to the lines of PCAOB Inspection Procedures¹. The Public Company Accounting Oversight Board (PCAOB), USA, has been issuing inspection reports of firms worldwide since the year 2004. It may be noted that in year 1, it issued four reports, but in the year 2005, it issued 172 reports. PCAOB also has cycles and an interesting “deficiency rate”. “This data point indicates, as a percentage of the number of audits reviewed in a particular inspection, the number of audits with respect to which the inspection identified audit deficiencies of such significance that it appeared that the firm, at the time it issued its audit report, had not obtained sufficient appropriate audit evidence to support its opinion on the issuer’s financial statements and/or internal control over financial reporting.”

1. https://pcaobus.org/oversight/inspections/inspection-procedures

Coming back to the NFRA mandate, the Audit Quality Inspections objective² was to evaluate the compliance of the Firm / Auditor with Auditing Standards and Other Regulatory and Professional requirements, and the sufficiency and effectiveness of Quality control systems of the Audit Firm / Auditor, including:

(a) adequacy of the governance framework and its functioning;

(b) effectiveness of the firm’s internal control over audit quality; and

2 AQIG, Dated 11th November, 2022, Para No 2

2023 INSPECTION REPORTS

Here are the common salient features of these first set of inspection reports³:

a. These are the first set of NFRA Inspection Reports.

b. The choices of the firms are based on the extent of public interest involved as evidenced by the size, composition, and nature of the audit firm, the number of audit engagements carried out during the year, the complexity and diversity of preparer companies and other risk indicators.

c. Inspection Reports

d. Engagements covered were statutory audits for FY ended 31st March, 2021.

e. Audit areas selected for each engagement were Revenue, Trade Receivables and Investments due to their “inherent higher risk of material misstatement”.

f. Other details of this round of inspections are as follows:

Report Number	Name of the Firm	# of Pages	Engagements Selected
132.2-2022-01	SRBC & Co LLP (SRBC)	19	Five
132.2-2022-02	Deloitte Haskins and Sells LLP (DHS)	17	Five
132.2-2022-03	BSR & Co LLP (BSR)	15	Five
132.2-2022-04	Price Waterhouse Chartered Accountants LLP (PWC)	22	Four
132.2-2022-05	Walker Chandiok & Co. LLP (WCCL)	20	Five

Note: In the overview presented further down, the last two digits are referred to identify the report.

3. https://nfra.gov.in/document-category/inspection-reports/

TIMELINES (PART D)

a. The NFRA initiated inspections in November / December 2022;

b. The entry meetings were held with each of the firms between 23rd November, 2022 and 7th December, 2022;

c. Inspection time taken was about 30 to 43 days based on start and end dates given;

d. All on-site inspections were completed in January 2023;

e. Final inspection reports were issued between 22nd December, 2023, to 29th December, 2023.

It is worth noting that the time between the initiation of inspection and the issuance of the final report has taken more than one year. A detailed chronology of events / correspondence forms part of the report in Part D.

STRUCTURE OF INSPECTION REPORTS

Each report is made of Parts A, B, C and D. Part A carries an executive summary, overview, inspection approach, methodology, firm profile and acknowledgement. Part B is on Firm-wide Audit Quality Control System. Part C is on Individual Audit Engagement Files with a focus on selected areas. Part D is on the Chronology of Inspection. Reports end with an Annexure that carries the Firm’s response to the final Inspection Report.

The inspection covered a review of firm-wide quality controls, adherence to Standard on Quality Control (SQC)-1, Code of Ethics, applicable laws and rules and a review of individual Audit Engagement Files for the annual statutory audit of financial statements 31st March, 2021. The 2022 inspection emphasised crucial aspects of the Firms’ quality control systems, including leadership responsibilities, auditor independence, the acceptance and continuation of audit clients, engagement quality control and the internal quality inspection program of the Audit Firms.

CAVEAT AND GUIDANCE

NFRA has given an important statement: “Inspections are, however, not designed to review all aspects and identify all weaknesses in the governance framework or system of internal control or audit risk assessment framework; nor are they designed to provide absolute assurance about the Audit Firm’s quality of audit work. In respect of selected audit assignments, inspections are not designed to identify all the weaknesses in the audit work performed by the auditors in the audit of the financial statements of the selected companies.” Further, the NFRA has clarified that these reports are neither marketing tools nor are they a rating of any sort. The report also states that “selected sample of five individual audit engagements is not representative of the Firm’s total population of the audit engagements completed by the Firm for the year under review.”

It emphatically states that reports are “intended to identify areas and opportunities for improvement in the Audit Firm’s system of quality control.”

FIRM PROFILE, STRUCTURE, NETWORK AND INDEPENDENCE (PART B, C)

1) Each Audit Firm was a member of a domestic network bearing the same / similar name.

2) The flagship firm selected for NFRA review carried the identical / similar / abridged name of the network.

3) Many members of the domestic network were firms bearing similar names and in some cases different names.

4) Each Audit Firm was a member of an international network.

5) Non-provision of domestic network details / agreement to NFRA (para 11, Report No. 01), (para 11, Report No. 03).

6) Provision of domestic network agreement registered with ICAI to NFRA (para 10, Report No. 04), (para 23 and 24, Report No. 02).

7) Denial of part of a network as envisaged by SQC 1 clause 6(k) although registered with ICAI as a domestic network (para 15 (viii), Report No. 05).

8) Provision of international network agreements — whether asked or given is not clear from the NFRA Report.

9) Leadership / Governance Structure of Domestic Network:

a) Through the LLP Format (para 12, Report No. 03), however, NFRA observed that “Firm could not provide sufficient evidence about Leadership, Governance and Management structure to demonstrate compliance to element 1 of SQC 1 regarding Leadership Responsibilities for Quality within the Firm”.

b) Common Leadership Team / Assurance Leadership Team, consisting of partners of domestic network firms; however, no documentation was there between individual firms or network agreement that delineated the leader’s duty, responsibility and accountability (para 19 and 20, Report No. 01). The charter of the leadership team seemed to be a recently drawn-up document without authenticity. NFRA pointed out that “there was no clarity on the assignment of responsibilities, authority with individuals claimed to be part of the leadership structure, reporting hierarchy, and accountability of the leaders and their respective legal entities.”

c) The Audit Firm did not have a Board to oversee the Network as stated in the Networking Agreement signed by the Audit Firm (para 23, Report No. 02).

d) Partner Oversight Committee had oversight over the domestic network firms and for coordination / alignment with global network standards and policies. However, it did not have management control (para 18, Report No. 04). The domestic network had an advisory committee with each member having different roles, with a minimum of two registered Chartered Accountants. The advisory committee provided assistance, etc., to the non-executive chair on various matters (Para 16, Report No 04).

10) Information provided about Indian entities of Global Network (para 12, Report No. 04). Other reports do not carry such information.

11) Partners in Audit Firms were also partners in other network firms (para 11, Report No. 04).

12) One Audit Firm displayed inconsistency in reporting to PCAOB about its two network firms. The audit firm said that it had no audit-related affiliation, membership, or similar arrangement with any other entity; it was part of the Indian network of two firms bearing same / similar names. At the same time, another Indian firm (having connected names) told PCAOB that it was affiliated with the Audit Firm (para 15, Report No. 5).

13) There were references to a common brand traced from quality control policies and e-audit software, although the audit firm denied network arrangement as per SQC 1 (para 16 (i), Report No. 5).

14) The Audit firm’s relationship with the global network was not recognised in the independence policies. NFRA observed that such relationships are included in the definition of Network (Para 25, Report No. 1).

15) The Audit firm’s Indian clients were provided with non-audit services by global network firms in India to the auditee group in violation of Sections 144 and 141 of the Companies Act, 2013 (Para 25, Report No. 1).

16) A possible disqualification of the audit firm as auditor was observed in two samples under Section 141(3)(e) of the Companies Act, 2013, due to global network relationship (Para 26, Report No. 1).

17) The Audit Firm did not provide the details of non-audit services provided by its International network’s India entities to the Audit Firm’s audit clients during the course of the on-site inspection (Para 15, Report No 03).

18) The Audit Firm had made its association with the International network’s India entities clear to PCAOB; it did not fully disclose global network entities to the NFRA (Para 16, Report No 03) .

19) The international network’s India entity partners were designated as the Audit Firm’s partners in the audit firm’s audit files (Para 17, Report No 03).

20) International Network’s India entity’s audit work is performed by the Audit Firm’s personnel as per the PCAOB website (Para 18, Report No 03).

21) An audit firm which maintained that it was independent of a global network, and disclosed one entity of the global network in India subsequently, had several indicators to demonstrate the audit firm’s dependence on the global network such as inter-relationship of leadership, common control and governance structure, global network’s India entity accepting audit on behalf of the audit firm, use of global network’s domain name by audit executive team and sharing core functions (Para 17, Report No 03).

22) Inspection noted that the Audit Firm was not independent of International network’s India entities, who are member entities of the international network (Para 19, Report No 03).

23) As per reporting to PCAOB, the audit firm and global network’s India entities carried out audits where part of the audit was carried out by the global network’s India entity and ICAI registered domestic network (Para 18, Report No 03).

24) During the inspection, the Audit Firm did not provide details of International network entities and non-audit services provided by those entities to audit clients. Therefore, the NFRA team was unable to determine whether there was compliance with the fundamental requirements of the Code of Ethics (Para 20, Report No 03). However, the Audit Firm responded that it had decided that all India entities of the International network will not provide non-audit services to the firm’s NFRA-regulated clients from 1st January, 2024 (Para 21, Report No 03).

25) The Audit Firm disclosed that each network firm was distinct, not an agent of the other firms or the international network. The Indian network had signed an admission and license agreement. The global membership provided various resources, methodologies, etc. (Para 13, Report No 04).

26) NFRA appreciated the steps taken by the Audit Firm and advised to take further steps to avoid the provision of non-audit services to holding companies by network entities, whose subsidiary is under purview of NFRA in India (Para 34, Report No 04).

This is the first in the line of articles that cover an overview of the first five NFRA inspection reports. The inspection process, timelines and structure of inspection reports have been covered. This article also covers important NFRA observations on audit firms relating to governance and leadership structures or lack / non-disclosure thereof, international and domestic networks / affiliations. It also covers some issues in that context by NFRA such as non-audit services provided to audit clients and issues related to SQC 1.

This compilation is done with a view to enable auditors and audit firms to understand the focal points and key issues in these NFRA inspections. These key features will help firms take necessary steps to be compliant with applicable regulations.

The next article will cover NFRA observations on audit quality control systems, independence, engagement quality control and points arising from the review of engagement files based on selected areas. From that subsequent article, one will be able to draw practical nuances relating to Standards on Auditing and other applicable laws and regulations.

BCAJ Admin

From Published Accounts

Compilers’ Note:

Illustration of accounting treatment and disclosures for a proposed scheme of arrangement under implementation and pending regulatory approvals.

Zee Entertainment Enterprises Ltd (31st March, 2023)

From Auditors’ Report

(₹ million)

Key audit matter

How our audit addressed the key audit matter

Proposed Merger with Sony Pictures Networks India Private Limited (Refer to note 30, 40 and 58 of Standalone financial statements):

The company has entered into a proposed Scheme of arrangement with Sony Pictures Networks India Private Limited in the current year. The Company has obtained approvals from stock exchanges, the Competition Commission of India (CCI), Shareholders of the Company and the Registrar of Companies (ROC) for the proposed scheme of arrangement and the draft scheme is currently pending for final approval with NCLT as at 31^st March, 2023.

As per the above approvals and condition precedents of the Merger Co-Operation Agreement (MCA), the management is in the process of either liquidating or selling the components not forming part of the aforesaid Scheme of the merger. Accordingly, investment and other balances in relation to these components are classified as Non-current Assets held for sale / disposal in accordance with IND AS 105 (Non-current Assets Held for Sale and Discontinued Operations). Considering these assets are held for sale, the assets have been recorded at their realisable value and an impairment loss of R3,313 million has been recorded in the financial statements which has been disclosed as an exceptional item.

Further, to expedite the merger process, the company settled certain objection applications / insolvency proceedings

Our audit included, but was not limited to, the following procedures:

• Obtained an understanding of management’s process to identify key financial reporting elements of the Scheme of arrangement, Merger Cooperation agreement;

• Evaluated the design, implementation and tested the operating effectiveness of key controls that the Company has in relation to the aforesaid process;

• Evaluated the orders received from BSE, NSE, NCLT and CCI;

• Obtained and examined the details of objection filed against the merger in the NCLT, reply filed by the Company and settlement agreement entered into by the Company;

• Assessed the trigger to classify the excluded entities as business held for sale in line with management action and NCLT approval as Non-current assets held for sale in accordance with Ind AS 105 — Non-current Assets Held for Sale and Discontinued Operations;

• Tested on a sample basis the merger cost recorded as exceptional items in the standalone financial statements;

• Evaluated the adequacy of

filed by operational creditors and bankers for a total amount of ₹2,230 million (₹1960 million already provided). Accordingly, an additional charge of ₹270 million has been recorded as an exceptional item.

The Company has also incurred expenses aggregating to R1,762 million pursuant to such scheme of merger which has also been disclosed under exception items.

Considering the uncertainty of the impact on standalone financial statements because of the entire merger process including approvals from various regulatory authorities, the outcome of various litigations and materiality of the amount allocated for expenses in relation to the merger, the above matter has been considered as a Key Audit Matter for the current period audit.

disclosures given in the standalone financial statements with regard to the merger.

From Notes to financial statements

30. EXCEPTIONAL ITEMS

(₹ million)

	Mar–23	Mar–22
Provision for trade and other receivables (Refer note 43(d)(ii)A)	1,068	527
Provision for diminution in value of investments classified as held for sale (Refer note 40)	3,313	–
Provision for diminution in value of investment *	255	–
Other exceptional expenses #	2,032	744
Total	6,668	1,271

# During the previous year, the Board of Directors approved payment of a one-time bonus as part of the Talent Retention Plan, payable in two tranches. Accordingly, an amount aggregating ₹671 million was accounted for during the previous year.

Further, during the year, the Company has accounted for ₹1,762 million (₹73 million) for certain employee and legal expenses pertaining to the proposed Scheme of Arrangement. The said amount is disclosed as a part of ‘Exceptional items’ (Refer to note 54).

During the year, the Company has settled the dispute with Indian Performing Rights Society Limited (IPRS) in relation to the consideration to be paid towards royalty for the usage of literary and musical works. On 6th March, 2023, the Company entered into agreement with IPRS to settle its old disputes in light of the impending merger. The agreement entails the settlement of the dues for the period 1st April, 2018 to 31st March, 2023. Accordingly, all the legal cases and proceedings filed by IPRS at various forums stand withdrawn. During the year ended 31st March, 2023, the Company has recorded an additional liability of 270 million pertaining to earlier years as an ‘Exceptional Item’ by virtue of this settlement.

40. NON-CURRENT ASSET CLASSIFIED AS HELD FOR SALE

(₹ million)

	Mar–23	Mar–22
Investment in subsidiary and others #	3,850	–
Less: Provision for diminution in value of investment	3,313	–
	537	–
Receivables from subsidiary#	372	–
Freehold land and building $	573	–
Total	1,482	–

# The Management as part of its portfolio rationalisation initiative and conditions of impending merger; is in the process of either liquidating / discontinuing / selling certain entities (primarily Margo Networks Private Limited). Based on the same, the Management has classified the investment in relation to these entities as Non-current Assets held for sale / disposal under IND AS 105 (‘Non-current Assets Held for Sale and Discontinued Operations’). Considering these assets are held for sale, the assets have been recorded at their realisable value. Accordingly, the Company recorded an impairment of ₹3,313 million on such assets which has been disclosed as an exceptional item.

$ The Company has entered into a memorandum of understanding for the disposal of freehold land which it no longer intends to use and the sale transaction is in progress and is expected to be completed in the next 12 months. Accordingly, the same has been classified as a Non-current asset classified as held for sale.

58. The Board of Directors of the Company, at its meeting on 21st December, 2021, has considered and approved the Scheme of Arrangement under Sections 230 to 232 of the Companies Act, 2013 (Scheme), whereby the Company and Bangla Entertainment Private Limited (an affiliate of Culver Max Entertainment Private Limited (formerly known as Sony Pictures Networks India Private Limited)) shall merge in Culver Max Entertainment Private Limited. After receipt of requisite approvals / NOCs from shareholders and certain regulators including SEBI, CCI, ROC etc., the Company has filed a petition with NCLT for approval of the Scheme which shall be effective NCLT approval and balance regulatory approvals / completion formalities.

From Directors’ report

8. COMPOSITE SCHEME OF ARRANGEMENT

The Board of Directors of the Company at its Board Meeting held on 21st December, 2021 had considered and approved (subject to requisite approvals consents) the Scheme of Arrangement under Sections 230 to 232 and other applicable provisions of the Act amongst the Company, Bangla Entertainment Private Limited (BEPL) and Culver Max Entertainment Private Limited (formerly known as Sony Pictures Networks India Private Limited) (CMEPL) and their respective shareholders and creditors (Scheme). The Scheme provides for, inter alia, the merger of the Company and BEPL into CMEPL; the consequent issue of equity shares of CMEPL to the shareholders of the Company and BEPL, in accordance with Sections 230 to 232 of the Act; dissolution without winding up of the Company and BEPL; appointment of Mr. Punit Goenka, Managing Director & Chief Executive Officer of CMEPL on the terms set out in the Scheme; and amendment of the Articles of Association of CMEPL. The Scheme is sanctioned/approved by:

The BSE Limited and the National Stock Exchange of India Limited vide their observation letters dated 29th July, 2022;
The Competition Commission of India vide its letter dated 4th October, 2022;
Shareholders of the Company at the meeting held on 14th October, 2022 convened under the directions of the National Company Law Tribunal, Mumbai Bench (‘NCLT’);
The Official Liquidator by way of report dated 3rd January, 2023 on the Scheme, inter alia, stating that the affairs of the Company have been conducted in a proper manner and raising no objections to the Scheme;
The Regional Director, Western Region, Ministry of Corporate Affairs, by way of the report dated 10th January, 2023, inter alia, stating that he did not have any objections to the Scheme; and
On the basis of the above no-objections and approvals, the NCLT by order dated 10th August, 2023 sanctioned the Scheme.

The Company is in the process of making an application with the Ministry of Information and Broadcasting for the transfer of the licenses relating to the up-linking and down-linking of television channels obtained by the Company to CMEPL, pursuant to the Scheme.

The Scheme shall become effective upon fulfilment of all the conditions and precedents mentioned in the Scheme.

The Scheme is in the interest of the shareholders, creditors, and all other stakeholders of the Company, CMEPL, BEPL and the public at large.

BCAJ Admin

Streaming Arrangements

Mining companies (also referred to as producers) use metal streaming arrangements to raise funds. The Producer enters into a metal streaming arrangement with a streaming company (the “Investor) where the Producer may receive an upfront cash payment plus ongoing predetermined per unit payments for part or all of the metal production and sometimes by-product metals (e.g., silver extracting from zinc ores). This enables the Producer to access funding by monetizing the product or by-product metal. The Investor too is assured of a supply of metals without having to develop or operate the mine. The accounting of such arrangements can be extremely complex and is dealt with below.

QUERY

Hindustan Metal (HM), owns iron ore mines. HM enters into a streaming arrangement with the Investor. HM commits to deliver 60 per cent of the iron ore production of the mine over the life of the mine in exchange for an upfront advance of $100 million and the lesser of, $120 and the market price per tonne of iron ore, for each future tonne or iron ore delivered. The upfront advance funds generally will be used to finance capital expenditures in the development of the mine project for which HM holds the mineral rights. When the market price exceeds $120 / tonne, the notional drawdown of the upfront advance funds is based on the difference between the market price of iron ore at the time of delivery and the actual amount received (i.e., the $120 / tonne.). Even if the advance is reduced to zero, HM is still contractually obligated to deliver iron ore over the remaining term of the arrangement and will receive the lesser of $120 / tonne and the market price. The balance of the upfront advance may be reimbursable (in cash, usually without interest) to the Investor at a specified date or the end of the life of the mine if the amount has not previously been reduced to zero. How is the arrangement recorded in the books of HM?

RESPONSE

Streaming arrangements may be accounted for by the Producer in a number of ways based on an analysis of all of the relevant facts and circumstances. Potential methods of accounting for these streaming arrangements by the Producer include, but are not necessarily limited to be discussed after the accounting standard references below:

ACCOUNTING STANDARD REFERENCES

Ind AS 109 Financial Instruments

Paragraph 2.4

This Standard shall be applied to those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments, with the exception of contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements. However, this Standard shall be applied to those contracts that an entity designates as measured at fair value through profit or loss in accordance with paragraph 2.5.

Paragraph 2.6

There are various ways in which a contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by exchanging financial instruments. These include:

(a) when the terms of the contract permit either party to settle it net in cash or another financial instrument or by exchanging financial instruments;

(c) when, for similar contracts, the entity has a practice of taking delivery of the underlying and selling it within a short period after delivery for the purpose of generating a profit from short term fluctuations in price or dealer’s margin; and

(d) when the non-financial item that is the subject of the contract is readily convertible to cash.

A contract to which (b) or (c) applies is not entered into for the purpose of the receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements and, accordingly, is within the scope of this Standard. Other contracts to which paragraph 2.4 applies are evaluated to determine whether they were entered into and continue to be held for the purpose of the receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements and, accordingly, whether they are within the scope of this Standard.

RESPONSE

Following are some of the factors (not an exhaustive list) to be considered when making an assessment of the appropriate accounting for streaming arrangements:

The settlement mechanism of the upfront advance (e.g., through delivery of the commodity, cash or other financial assets)? Settlement through the delivery of commodity may suggest that own-use exemption may apply.
When settlement happens fully or partly using cash or another financial asset, the following aspects may need to be considered:
Contingent settlement provisions, whereby the Producer is required to pay cash only under certain conditions and the genuineness of those conditions;
Provisions which allow the Investor the right or option to receive cash instead of commodity;
The right of the Investor to cancel the arrangement and require the Producer to make a lump sum cash payment or transfer other financial assets;
Reimbursement of the upfront advance at a specified date or the end of the life of the mine if the upfront advance has not been reduced to zero and whether such an amount could be significant.
When settled through delivery of the commodity, will it always be obtained from the Producer’s operations or expected to be purchased from the open market or a third party? Own-use exemption may not apply when settlement is the basis of the purchase from an open market or third party, which may be suggestive of a derivative contract. Other related factors to consider may be:
The amount of the commodity required to settle the arrangement compared to expected future production from the Producer’s operation and estimated mineral quantity;
The timing of expected future production from the operation compared to any specific delivery dates per the arrangement;
The past business practice of the producer for similar arrangements;
The term of the arrangement in relation to the expected life of the mine;
Understanding how the risks are shared between the Producer and the Investor if the output of the mine is not as expected or changes in government policy regulating mines?
Which party bears the price risk of the underlying commodity?
Which party bears the risk that the cost of developing the mine is higher than anticipated?
Whether the Producer or the Investor controls the mines and who has the right to take significant decisions relating to the operation of the mine, such as a go or no-go area?
Can the commodity be readily converted to cash? Is the commodity indexed to a quoted price?
Provisions relating to defaults, e.g., the right of the Investor to levy a penalty on the Producer for not delivering the commodity as per the agreed schedule. Such a right may be suggestive that the risks relating to the mine are not shared by the Investor, and therefore, the arrangement may not qualify as a part sale of assets. It would mean that such arrangements are commodity arrangements and assessment would be required to determine if an own-use exemption applies.
Is there an explicit or implicit and significant financing component (e.g., rate of interest) in the arrangement?

COMMODITY ARRANGEMENT

This arrangement may qualify as a commodity arrangement that is outside of the scope of Ind AS 109 provided the streaming arrangement is determined to be an executory arrangement to deliver an expected amount of the commodity to the Investor from the Producer’s own operation (i.e., it meets the “own-use” exemption as set out in paragraph 2.4 of Ind AS 109). For the “own-use exemption” to apply, the arrangement must always be settled through the delivery of the commodity which has been obtained by the Producer as part of its own operations.

If the own-use exemption applies, then the arrangement is treated as an executory arrangement to be fulfilled on an ongoing basis, and the upfront advance received by the Producer is accounted as an advance payment (unearned revenue) related to the future sale of commodities. Care is needed when analysing all the terms of the arrangement to determine whether they give rise to separable embedded derivatives (such as caps, floors and collars) that need to be separated and accounted for as derivatives.

DERIVATIVE CONTRACT

If the “own-use exemption” does not apply, the streaming arrangement may qualify as a derivative under Ind AS 109. When the commodity is readily convertible to cash, or either party can settle net in cash or has a past practice of doing so, and delivery will not be made with the Producer’s own production, the arrangement would qualify as a derivative. If the streaming arrangement is considered a derivative, it would be measured at fair value through profit and loss (“FVTPL”). In such an assessment, the upfront advance made under the streaming arrangement would make the derivative partially pre-paid.

FINANCIAL LIABILITY

The arrangement may qualify as a financial liability (i.e., debt) in accordance with Ind AS 109 when the streaming arrangement establishes a contractual obligation for the Producer to deliver cash or another financial asset. An example of net settlement in cash is where a commodity producer enters into a contract to supply a specified amount of a commodity and, in addition, pays or receives an amount in cash based on the difference between the market price of the commodity on the date of its supply and the price stated in the contract. Settlement may be part or the entire contract can be paid in cash, instead of through the physical delivery of the commodity.

When the streaming arrangement is classified as a financial liability, the commodity-linked principal (and interest) may be separated from the host debt instrument and accounted for at FVTPL because it is exposed to dissimilar risks and would not be closely related. Alternatively, a company could elect for the entire instrument to be measured at FVTPL. A call, put, or prepayment option embedded in a host debt instrument should be reviewed to determine if separation is required. Caution needs to be exercised when analysing all the terms of the arrangement to determine whether they give rise to other embedded derivatives and/or if they are important in the assessment of the classification of the streaming arrangement.

SALE OF A MINERAL INTEREST AND A CONTRACT TO PROVIDE SERVICES

Such an arrangement may qualify as a sale of a mineral interest and a contract to provide services — such as extraction, refining, etc., in accordance with Ind AS 16 Property, Plant and Equipment and Ind AS 115 Revenue from Contracts with Customers when the streaming arrangement meets the criteria under Ind AS 115 for a sale.

Under the sale of the mineral interest classification, an argument might be made that the upfront advance relates to the sale of a portion of the mineral interest, and the price per unit payments made by the Investor as the commodity is delivered in the future relates to the cost of the services (e.g., extraction, refining, etc.) provided by the Producer to the Investor.

The service portion of the arrangement may include a “cap” or “out-of-the-money floor” on the selling price of a commodity that may need to be accounted for separately as an embedded derivative. Caution needs to be exercised to determine whether such features give rise to embedded derivatives or if they are determinative in the assessment of the classification of the streaming arrangement.

CONCLUSION

Determining the appropriate accounting approach is not an accounting policy choice but rather an assessment of the specific facts and circumstances. Examples of additional terms that can be found in these arrangements include a cap on the price per tonne, interest-bearing upfront advance, a commitment to deliver a minimum quantity within a specified limit, time-bound arrangements, buy-back rights of the producer, etc. Some arrangements may include by-products only, e.g., fines (pieces of iron ore) rather than the iron ore.

The determination of how to account for a streaming arrangement requires significant judgment and careful consideration of the facts and circumstances, as discussed above. Globally, it appears that there is a mixed practice for the accounting of streaming arrangements.

BCAJ Admin

Key Amendments to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

SEBI had issued Consultation Papers in November 2022 and February 2023 for amending the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. SEBI had invited comments on these consultation papers and finally issued the amendments by way of Notification No. SEBI/LAD-NRO/GN/2023/131 dated 14th June, 2023. These amendments majorly relate to enhancing disclosure and governance requirements of listed entities.

EFFECTIVE DATE OF THE AMENDMENTS

The amendments are effective on the 30th day of publication in the official gazette i.e., 14th July, 2023, except for some of the requirements which were effective from 14th June, 2023, e.g., approval requirements in case of sale, lease or disposal of an undertaking outside scheme of arrangement.

The objective of this article is to provide an overview of the key amendments and provide the brief analysis of the amendments. Reference should be made to SEBI notification dated 14th June, 2023, and amended SEBI LODR Regulations, 2015 for a detailed understanding of the entire set of amendments.

TIMELINE FOR SUBMISSION OF FINANCIAL RESULTS SUBSEQUENT TO THE FIRST-TIME LISTING

Clause (j) has been added to the Regulation 33(3) of Chapter IV, Obligations of a listed entity which has listed its specified securities and non-convertible debt securities, to provide clarity on the submission of financial results for the entity listed for the first time. The entity subsequent to the listing, is required to submit its financial results for the quarter or the financial year immediately succeeding the period for which the financial statements have been disclosed in the offer document for the initial public offer, as per the below timeline:

period specified in Regulation 33(3)(a) i.e., within 45 days from the end of each quarter other than the last quarter; or
period specified in Regulation 33(3)(d) i.e., within 60 days from the end of the Financial Year (in case of the March quarter);
within 21 days from the date of listing;

Whichever is later.

This amendment is applicable to the issuers whose public issues open on or after these regulations come into effect.

DISCLOSURE OF MATERIAL EVENTS/INFORMATION UNDER REGULATIONS 30 – INTRODUCTION OF QUANTITATIVE CRITERIA FOR DETERMINING MATERIALITY

The qualitative criteria governing disclosure of material events/information as per Regulation 30(4) is where the omission in discourse of such event/information is likely to result in:

discontinuing or altering an event or information already available publicly; or
significant market reaction if the said omission came to light at a later date.

Sub-regulation (4) of Regulation 30 has been amended and new quantitative criteria by way of threshold has been included for determining the materiality of events/ information as below:

The omission of an event or information, whose value or the expected impact in terms of value, exceeds the lower of the following:

2 per cent of the turnover as per the last audited consolidated financial statements of the listed entity;
2 per cent of the net worth as per the last audited consolidated financial statements of the listed entity except in case the arithmetic value of the net worth is negative;
5 per cent of the average of absolute value of profit or loss after tax, as per the last 3 audited consolidated financial statements of the listed entity.

The thresholds are based on the last audited consolidated financial statements of the listed entity. Considering that the present financial year is the first year of applicability, the thresholds will need to be determined based on the consolidated financial statements as on 31st March, 2023. In case of profit related parameters, average needs to be computed for the last three financial years i.e., 2022-23, 2021-22, 2020-21.

Turnover has been defined under Companies Act, 2013 as the gross amount of revenue recognised in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year.

‘Absolute value of profit or loss after tax’ means to take absolute figures of profit / loss i.e., without netting off in case the company has losses in any of the financial year. The threshold for profit/loss is to be computed by taking the absolute values of profit or loss after tax, for the immediately preceding three financial years.

The amended regulations require the materiality policy to be framed in a manner so as to assist the relevant employees in identifying potential material events or information. The listed entity will have to ensure that the policy formulated by the listed entity for determining the materiality cannot dilute any requirement specified under the provisions of these regulations, and is required to assist the relevant employees in identifying any potential material event or information and reporting the same to authorised KMP for determining the materiality of such events or information and for making necessary disclosures to the stock exchange.

The new quantitative threshold would require listed entities to make timely disclosures of material information without exercising their judgement on whether they are required to be disclosed.

TIME PERIOD FOR DISCLOSURE OF MATERIAL EVENTS/ INFORMATION:

The disclosure of the material event or information to the stock exchange is required to be not later than the following:

30 minutes from the closure of Board Meeting where the decision regarding the event/ information is taken.
12 hours from the occurrence of event or information if such event or information emanates from within the listed entity.
24 hours from the occurrence of event or information if such event or information emanates NOT within the listed entity.

In case of delay in such disclosure, explanation for the same need to be disclosed. In case the timelines for the disclosure of events are specified in Part A of Schedule III of the regulations, such timelines need to be followed.

AMENDMENT IN PART A OF SCHEDULE III OF THE REGULATIONS IN RELATION TO EVENTS WHICH NEEDS TO BE DISCLOSED BASIS THE GUIDELINES FOR MATERIALITY

The following events have been added which need disclosure basis the guidelines for materiality:

Arrangements for strategic, technical, manufacturing, or marketing tie-up.
Adoption of new line(s) of business.
Closure of operation of any unit, division or subsidiary (in entirety or in piecemeal).
Pendency of any litigation(s) or dispute(s) or the outcome thereof which may have an impact on the listed entity.
Frauds or defaults by employees of the listed entity which has or may have an impact on the listed entity.
Delay or default in the payment of fines, penalties, dues, etc. to any regulatory, statutory, enforcement or judicial authority.

DISCLOSURE OF EVENTS/INFORMATION IRRESPECTIVE OF MATERIALITY

Para A of Part A of Schedule III has been amended to include certain events which need to be disclosed to the Stock Exchange(s) without any application of guidelines for materiality as specified in Regulation 30(4) as follows:

A. Events relating to fraud/ default in repayment / arrest of certain persons

The following events need to be disclosed:

Fraud or defaults by a listed entity, its promoter, director, key managerial personnel, senior management or subsidiary; or
Arrest of key managerial personnel, senior management, promoter or director of the listed entity, whether occurred within India or abroad.

‘Fraud’ is defined under Regulation 2(1)(c) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. ‘Default’ means non-payment of the interest or principal amount in full on the date when the debt has become due and payable.

In the case of revolving facilities like cash credit, an entity would be considered to be in ‘default’ if the outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for more than thirty days.

Default by a promoter, director, key managerial personnel, senior management, subsidiary means the default which has or may have an impact on the listed entity.

B. Event relating to restructuring / amalgamation (Amendments have been highlighted in bold)

The following events need to be disclosed:

Details relating to acquisition(s) (including agreement to acquire), Scheme of Arrangement (amalgamation, merger, demerger or restructuring), sale or disposal of any unit(s), division(s), whole or substantially the whole of the undertaking(s) or subsidiary of the listed entity, sale of stake in associate company of the listed entity or any other restructuring.

C. Events relating to resignation of certain persons

The following needs to be disclosed to the Stock Exchange(s) within 7 days from the date resignation comes into effect:

resignation of key managerial personnel, senior management, Compliance Officer or director other than an independent director,
the letter of resignation along with detailed reasons for the resignation.

D. Events relating to non-availability of certain persons

The following needs to be disclosed to the Stock Exchange(s):

The event where MD or CEO was indisposed or unavailable to fulfil the requirements of the role in a regular manner for more than 45 days in any rolling period of 90 days.
Reason for such indisposition or unavailability.

E. Event relating to voluntary revision of financial statements or Directors’ report

Voluntary revision of financial statements or the report of the board of directors of the listed entity under section 131 of the Companies Act, 2013.

Communication/ order from regulatory, statutory, enforcement or judicial authority – Disclosure under Regulation 30 (13).

Action(s) initiated, or orders passed by all regulatory, statutory, enforcement authority or judicial bodies against the listed entity or its directors, KMPs, senior management, promoter or subsidiary, in relation to the listed entity requires disclosure. The following events require disclosure:

search or seizure; or
reopening of accounts under section 130 of the Companies Act, 2013; or
investigation under the provisions of Chapter XIV of the Companies Act, 2013;

In case of an action/order, the following details pertaining to the actions initiated, taken or orders passed will be required to be disclosed within 24 hours:

(i) name of the authority; (ii) nature and details of the action(s) taken, initiated or order(s) passed; (iii) date of receipt of direction or order, including any ad-interim or interim orders, or any other communication from the authority; (iv) details of the violation(s)/contravention(s) committed or alleged to be committed; (v) impact on financial, operation or other activities of the listed entity, quantifiable in monetary terms to the extent possible.

Action(s) taken, or orders passed by any of the above mentioned authority against the listed entity or its directors, KMPs, senior management, promoter or subsidiary, in relation to the listed entity, is also required to be disclosed; following details are required:

(i) suspension; (ii) imposition of fine or penalty; (iii) settlement of proceedings; (iv) debarment; (v) disqualification; (vi) closure of operations; (vii) sanctions imposed; (viii) warning or caution; or any other similar action(s) by whatever name called.

Disclosure of Agreements impacting listed entities – New regulation

A new Regulation 30A has been inserted in Chapter IV, Obligations of a listed entity which has listed its specified securities & non-convertible debt securities which requires disclosures of agreements specified in the newly inserted clause 5A of para A of part A of schedule III. There are numerous agreements that are entered into by shareholders e.g., SHAs, SPAs, performance related agreements etc. These may be entered into between investors, joint venture partners, family members etc. These agreements may or may not be having the listed entity as a party or even a confirming party. However, these agreements pertain to management or control of the listed entity and therefore, may require disclosure in terms of Clause 5A.

Who is required to make the above disclosures?

If the shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel and employees of a listed entity or of its holding, subsidiary and associate company are parties to the above-mentioned agreement and the listed entity is not a party to such agreement.

The above mentioned person needs to inform the listed entity about the agreement within 2 working days of entering into such agreements or signing an agreement to enter into such agreements. In case the above agreements subsist on the date of notification of clause 5A to para A of part A of schedule III, then the above mentioned person needs to make disclosure to the listed entity on that date only. The listed entity in turn is required to disclose the information to the stock exchange and on its website within the timelines specified by the Board.

Information/ agreements specified in clause 5A of part A of Schedule III

Agreements entered into by the shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel, employees of the listed entity or of its holding, subsidiary or associate company, among themselves or with the listed entity or with a third party, solely or jointly, which, either directly or indirectly or potentially or whose purpose and effect is to, impact the management or control of the listed entity or impose any restriction or create any liability upon the listed entity, need to be disclosed to the Stock Exchanges, including disclosure of any rescission, amendment or alteration of such agreements thereto, whether or not the listed entity is a party to such agreements:

Disclosure of such information in Annual Report for FY 2022-23 and FY 2023-24

Number of agreements that subsist as on the date of notification of clause 5A to para A of part A of schedule III, their salient features, including the link to the webpage where the complete details of such agreements are available.

Information disclosed under clause 5A of paragraph A of Part A of Schedule III needs to be disclosed in the Annual Report.

This amendment seeks to address information disparity and increases transparency and will also enable the listed entity to be made aware of the obligations that have been imposed upon it by the parties to such agreements.

Circumstances in which disclosure of such information to stock exchange is not required

If such agreements entered into by a listed entity in the normal course of business unless:

they, either directly or indirectly or potentially or whose purpose and effect is to impact the management or control of the listed entity; or
they are required to be disclosed in terms of any other provisions of the LODR Regulations.

The term “directly or indirectly” includes agreements creating obligations on the parties to such agreements to ensure that listed entities shall or shall not act in a particular manner.

BUSINESS RESPONSIBILITY AND SUSTAINABILITY REPORT (BRSR) – MANDATORY REASONABLE ASSURANCE

Vide Circular No. SEBI/HO/CFD/CFD-SEC-2/P/CIR/2023/122 dated 12th July, 2023, SEBI has mandated reporting of ESG disclosures by top 1000 listed companies (by market capitalisation) from FY 2023-24 onwards in the revised BRSR format. The revised format has added some additional questions in Section C, Principle Wise Performance Disclosures besides making some Leadership indicators as Essential Indicators. To enhance the reliability of disclosures in BRSR, SEBI has mandated the reasonable assurance of BRSR Core to top 150 listed entities (by market capitalisation) from FY 2023-24 onwards which will be extended to top 1000 listed entities (by market capitalisation) by FY 2026-27 in a phased manner vide amendment in Regulation 34(2)(f) of SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015 (LODR Regulations). BRSR core is a subset of BRSR.

In addition, KPIs for value chain needs to be disclosed by the top 250 listed entities (by market capitalisation) from FY 2024-25 on a comply-or-explain basis. Limited assurance on the same is required to be obtained with effect from FY 2025-26. For this purpose, the value chain encompasses the top upstream and downstream partners of a listed entity, cumulatively comprising 75 per cent of its purchases / sales (by value) respectively. SEBI also released a set of FAQs wherein it provided an indicative list of activities which the assurance provider cannot undertake besides clarifying that assurance of BRSR Core is profession agnostic.

Regulators and Investors are increasingly focussing on the ESG disclosures and their accuracy. Companies need to gear up for providing adequate information in their sustainability report. As reporting and assurance of sustainability related disclosures evolves audit committees have a critical role to play in expanding their existing oversight responsibilities for financial reporting and compliance to sustainability-related disclosures.

REPORTED INFORMATION IN THE MAINSTREAM MEDIA – NEW REQUIREMENT

Regulation 30 (11) of SEBI (LODR) Regulation, 2015 had been amended requiring top 100 and 250 listed companies to confirm, clarify or deny any reported event or information in the mainstream media which is not general in nature and which indicates that rumours of an impending specific material event or information, in terms of the provisions of LODR regulation, are circulating amongst the investing public, as soon as reasonably possible and not later than twenty four hours from the reporting of the event or information. If the listed entity confirms the reported event or information, it shall also provide the current stage of such event or information. SEBI has also defined what constituted mainstream media in that Notification vide amendment in Regulation 2 (1)(ra).

Recently, SEBI vide Notification dated 9th October, 2023, has omitted the timelines and deferred the applicability of the above-mentioned provisions indefinitely. The three industry associations, viz. ASSOCHAM, CII and FICCI, have come together to form Industry Standards Forum (ISF) under the aegis of the Stock Exchanges on a pilot basis. ISF has taken up verification of market rumours as one of the pilot projects for formulating standards. The effective date for the aforesaid requirement would be specified by the SEBI, after reviewing the standards submitted by ISF¹.

1 . Source: SEBI Board Meeting - Extension of timeline for verification of market rumours by listed entities – Amendment to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

WAY FORWARD

The Amendment Regulations have attempted to strengthen corporate governance standards and disclosure requirements of listed companies. These changes reflect SEBI’s commitment to create a more robust regulatory framework and promote investor confidence. The changes introduced can be considered as a step in the right direction as it has the effect of empowering the shareholders of listed companies by way of enhanced transparency and additional disclosures.

BCAJ Admin

Purchase-As-Produced Contracts – Whether Derivative or Not?

ISSUE

Kleen Co. enters into a power purchase agreement (PPA) with a windmill operator to purchase electricity. Both Kleen and the operator are connected through a common national grid. The PPA obliges Kleen to acquire a 45 per cent fixed share of the wind energy produced by the operator. The price per unit for the energy is fixed in advance and remains stable throughout the contract duration of 25 years. The operator does not guarantee a specific amount of output (energy) but estimates with 80 per cent probability an expected amount. The energy produced is transferred to Kleen through the national grid.

Kleen is obliged to acquire the energy of the wind park in the amount (45 per cent of the current production volume) and at the time it is produced. Since Kleen has no feasible option to store the energy, it sells energy that cannot be consumed immediately (e.g., on weekends or overnight) to the spot market and repurchases (at least) the same amount from that market at times when the production facilities are operated. The windmill operator continues to transfer the amounts of energy fed into the grid to the account of Kleen and Kleen has to sell unused amounts from its account to third parties. The process of selling and repurchasing is designed to be an autopilot that acts without the intention of trading to realize profits and has the sole intention to enable Kleen’s operations. The process of selling and repurchasing is delegated to a service provider.
For the purpose of this discussion, it is assumed that the conditions do not change throughout subsequent periods and that some market transactions become necessary for unused amounts of energy.

Will own-use exemption apply in this case, and consequently, whether the above PPA is to be treated as a derivative or not?

Kleen has considered aspects relating to whether the PPA is accounted for applying another Ind AS Accounting Standard, for example, Ind AS 110 Consolidated Financial Statements, Ind AS 111 Joint Arrangements, and/or Ind AS 116 Leases, and believes that those do not apply in the extant fact pattern.

RELEVANT REQUIREMENTS OF IND AS 109 FINANCIAL INSTRUMENTS

Paragraph 2.4 of Ind AS 109 states:

This Standard shall be applied to those contracts to buy or sell a non financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments, with the exception of contracts that were entered into and continue to be held for the purpose of the receiptor delivery of a non financial item in accordance withthe entity’s expected purchase, sale or usage requirements. However, this Standard shall be applied to those contracts that an entity designates as measured at fair value through profit or loss in accordance with paragraph 2.5.

Paragraph 2.6 of Ind AS 109 states:

There are various ways in which a contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by exchanging financial instruments. These include:

(a) when the terms of the contract permit either party to settle it net in cash or another financial instrument or by exchanging financial instruments;

(d) when the non-financial item that is the subject of the contract is readily convertible to cash.

ACCOUNTING FOR THE PPA

On the date of inception of the contract, Kleen regards the sole purpose of the PPA as a contract to buy a non-financial item as it is entered for the purpose of the receipt of energy in accordance with its expected usage requirements, as laid out in Ind AS 109.2.4. Kleen does not designate the contract as measured at fair value through profit or loss in accordance with Ind AS 109.2.5. Kleen views the difference in prices (lower prices during night times, on weekends and during the holiday season when production is paused vs. higher prices when repurchased on spot markets during peak times) as costs of storage, i.e., it uses the energy spot market as a storage facility. Kleen does not operate as a trading party in the market, the production schedule and the consumption profile dictate spot price transactions.Kleen further analyses whether the contract can be settled net in cash in accordance with Ind AS 109.2.6.

Kleen is always in a net purchaser position, i.e., it buys more energy from the spot market than it has sold to it based on a monthly view (meaning that for every calendar month, the Kleen has purchased more energy on spot markets than it has sold). The average purchase price exceeds the average sale price, so that Kleen incurs expenses for “storing” the energy on spot markets which is part of the fee paid to a service provider involved to sell unused amounts of energy to and repurchase additional demands from the grid/spot markets.

The various views are presented below:

View A

Kleen assesses at the inception of the contract that

(a) the terms of the contract do not provide for an option to settle net in cash or by exchanging financial instruments.

(b) Kleen has no practice of settling similar contracts net in cash or another financial instrument or by exchanging financial instruments.

(d) Kleen assesses the non-financial item to be readily convertible to cash as there is an active market where unused energy can be sold and purchased at any time.

Kleen concludes that the own-use-exemption applies to its contract because it is entered into and continues to be held for the purpose of taking delivery of the non-financial asset (energy), in accordance with the entity’s expected (energy) consumption.

View B

Kleen expects transactions on the spot market already at the inception of the contract for the amount of energy it cannot use when it is produced. Under View B this would disqualify the contract from the application of the own-use-exemption because the contract was not – in its entirety – being held to the purpose of the receipt of the energy at the specific time of production (Ind AS 109.2.4) but with some anticipated sales transactions.View C

Under this View D, the transactions on the spot market may lead to a breach of the requirement set out in Ind AS 109.2.6(c) (generating profit from short-term fluctuations in price or dealer’s margin) because Kleen cannot rule out that profit arises from some sales transactions, even though this is not intended.CONCLUSION

Under View A, the PPA would be treated as a normal purchase of an electricity contract. However, Views B-D would all result in recognising the contract as a derivative financial instrument.

As laid out above, there are several ways to interpret the requirements of Ind AS 109.2.4 and .2.6 which give rise to diversity in practice. Failure to meet the requirements of the own-use-exemption results in a mandatory recognition as a financial derivative at fair value. Given PPA durations of 25 years and above, the fair value of such PPA is both difficult to measure and subject to enormous volatility and likely leads to massive effects on the financial statements and financial performance when changes in the fair value are recognized in profit or loss. It would also decouple the effects of Kleen’s efforts to secure its supply of energy from the operating results as the fair value changes will occur and be presented before the consumption of the energy, the production phase and the sale of the output manufactured using this energy.

There is a need for clarification on how Ind AS 109 isto be applied in the circumstances described above. The author believes that the economic purpose and the intention of Kleen when entering the contract are not adequately reflected by the treatment of such contracts as derivative financial instruments, solely because there is no feasible way to store the quantities of energy involved and Kleen has to use the spot market as a storage mechanism.

The author also questions whether accounting for such contracts as derivative financial instruments would adequately depict the operating performance of Kleen, since energy costs would affect the operating profit at their spot prices, and the effect of the PPA containing fixed prices would occur as a measurement adjustment in periods different from the period of consumption.

When the standards are not absolutely clear, it is essential to understand the intention of the standard-setters, and what the standard is trying to achieve. In the present case, Kleen’s objective is not to trade in electricity or profit from short-term fluctuations in the prices. On the contrary, the unwanted electricity is sold at a price lower than the fixed price per unit under the PPA. The average purchase price exceeds the average sale price, so that Kleen incurs expenses for “storing” the energy on spot markets which is part of the fee paid to a service provider involved to sell unused amounts of energy to and repurchase additional demands from the grid/spot markets.

Furthermore, in totality, Kleen is always a net purchaser rather than a net seller, i.e., it buys more energy from the spot market than it has sold to it based on a monthly view (meaning that for every calendar month, Kleen has purchased more energy on spot markets than it has sold).

Based on the above discussion, the author believes that View A is the most appropriate view, and reflects the intention of Kleen as well as the standard-setter and the overall economics of the PPA.

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE:

Post Covid, companies are undertaking several mergers and acquisitions. Accounting for the same is primarily governed by Ind AS 103 and the schemes as approved by NCLT. Given below are disclosures by two companies on mergers and acquisitions for the year ended 31st March, 2023.

Asian Paints Ltd

MERGERS, ACQUISITIONS AND INCORPORATIONS

(a) Scheme of amalgamation of Reno Chemicals Pharmaceuticals and Cosmetics Private Limited with the Parent Company:

On 2nd September, 2021, the National Company Law Tribunal, Mumbai approved Scheme of amalgamation (“the Scheme”) of Reno Chemicals Pharmaceuticals and Cosmetics Private Limited (“Reno”), a wholly owned subsidiary of the Parent Company, with the Parent Company. Pursuant to the necessary filings with the Registrars of Companies, Mumbai, the Scheme has become effective from 17th September, 2021 with the appointed date of 1st April, 2019. There is no impact of amalgamation on the Consolidated Financial Statements. The accounting treatment is in accordance with the approved scheme and Indian accounting standards.

(b) Scheme of amalgamation of Asian Paints (Lanka) Ltd. with Causeway Paints Lanka (Pvt) Ltd:

On 1st April, 2021, the Registrar General of Companies in Sri Lanka approved the Scheme of amalgamation of Asian Paints (Lanka) Ltd. with Causeway Paints Lanka (Pvt) Ltd., subsidiaries of Asian Paints International Private Limited (‘APIPL’). APIPL is a wholly owned subsidiary of Asian Paints Limited. This is a common control transaction and has no impact on the Consolidated Financial Statements.

The Parent Company entered into a Shareholders Agreement and Share Subscription Agreement with the promoters of Weatherseal Fenestration Private Limited (“Weatherseal”) on 1st April, 2022. Weatherseal is engaged in the business of interior decoration/furnishing, including manufacturing uPVC windows and door systems. The Parent Company subscribed to 51 per cent of the equity share capital of Weatherseal for a cash consideration of Rs.18.84 crores on 14th June, 2022. Accordingly, Weatherseal became a subsidiary of the Parent Company. Further, in accordance with the Shareholders Agreement and the Share Subscription Agreement, the Parent Company has agreed to acquire a further stake of 23.9 per cent in Weatherseal from its promoter shareholders, in a staggered manner, over the next 3 year period. The Parent Company has also entered into a put contract for the acquisition of a 25.1 per cent stake in Weatherseal. Accordingly, on the day of acquisition, a gross obligation towards acquisition is recognised for the same, initially measured at fair value amounting to Rs.18.08 crores. On 31st March, 2023, the fair value of the derivative asset / liability (net) was Rs.21.46 crores. Fair valuation impact of Rs.3.38 crores is recognised in the Consolidated Statement of Profit and Loss for the year ended 31st March, 2023 towards gross obligation.

Rs. In crores

Assets acquired and liabilities assumed on acquisition date:	14^th June, 2022
Property, plant and equipment	0.92
Intangible assets	12.98
Current Assets
Inventories	1.68
Trade Receivables	1.87
Cash and bank balances	18.85
Other receivables and repayments	1.65
Total Assets	37.95
Current Liabilities
Trade Payables and other liabilities	4.96
Other payables	14.14
Total Liabilities	19.10
Net Assets Acquired	18.85

Goodwill arising on acquisition of stake in Weatherseal	14^th June, 2022
Cash consideration transferred (i)	18.84
Net Fair Value of Derivative Asset and Liability (ii)	1.86
Total consideration transferred [(iii) = (i)+(ii)]	20.70
Fair Value of identified assets acquired (iv)	18.85
Group share of fair value of identified assets acquired (v)	9.61
Group share of Goodwill arising on acquisition of Weatherseal [(iii)-(v)]	11.09

Net cash inflow on acquisition	14^th June, 2022
Cash consideration transferred	18.84
Cash and cash equivalent acquired	18.85
Net cash and cash equivalent inflow	0.01

Impact of acquisition on the results of the Group: Revenue from operations of Rs.24.74 crores and Loss after tax of Rs.3.34 crores of Weatherseal has been included in the current year’s Consolidated Statement of Profit and Loss.

(d) Investment in Obgenix Software Private Limited:

The Parent Company entered into a Share Purchase Agreement and other definitive documents with the shareholders of Obgenix Software Private Limited (popularly known by the brand name of ‘White Teak’) on 1st April, 2022. White Teak is engaged in designing, trading or otherwise dealing in all types and descriptions of decorative lighting products and fans, etc. In accordance with the agreement, the remaining 51 per cent of the equity share capital would be acquired in a staggered manner. The Parent Company acquired 49 per cent of the equity sharecapital of ‘White Teak’ on 2nd April, 2022 for a cash consideration of Rs.180 crores along with an earn-out, payable after a year, subject to achievement of mutually agreed financial milestones. Accordingly, White Teak became an Associate of the Group. On the day of acquisition, the Parent Company estimated and recognised gross obligation towards earn-outfor acquiring 49 per cent stake amounting to Rs.37.71 croresand derivative asset / liability (net) for acquiring the remaining 51 per cent stake in White Teak at fair value with a corresponding adjustment in the cost of investment amounting to Rs.1.32 crores. On 31st March, 2023, the fair value of earn-out is Rs 58.97 crores and that of derivative asset / liability (net) is Rs 3.85 crores. Fair valuation impact of Rs.21.26 crores and Rs.5.17 crores is recognised in the Consolidated Statement of Profit and Loss for the year ended 31st March, 2023 towards earn out and derivative contracts respectively.

(e) Incorporation of Asian Paints (Polymers) Limited:

On 11th January, 2023, the Parent Company incorporated a wholly owned subsidiary named Asian Paints (Polymers) Private Limited (‘APPPL’) for manufacturing of Vinyl Acetate Monomer and Vinyl Acetate Ethylene Emulsion in India. The Parent Company invested Rs.200 crores in the equity share capital of APPPL in the current year, thus subscribing to 20 crore equity shares of APPPL having a face value of Rs.10 each.

(f) Agreement for the acquisition of a stake in Harind Chemicals and Pharmaceuticals Private Limited:

The Parent Company entered into a Share Purchase Agreement and other definitive documents with the shareholders of Harind Chemicals and Pharmaceuticals Private Limited (‘Harind’) on 20th October, 2022 for the purchase of a majority stake over a period of five years, subject to fulfilment of certain conditions precedent in a staggered manner. Harind is a speciality chemicals company engaged in the business of nanotechnology-based research, manufacturing, and sale of a range of additives and specialized coatings. On fulfilment of the pre-condition, the acquisition would happen in the following manner: (i) First tranche of 51 per cent would be acquired for a consideration of 12.75 crores (approx.); and (ii) Second tranche of 19 per cent and third tranche of 20 per cent would be acquired during the FY 2023-24 and FY 2027-28, respectively, on such consideration as agreed between the Parent Company and the existing shareholders based on achievement of certain financial targets.

(g) Incorporation of Asian White Cement Holding Limited:

The Parent Company has incorporated a subsidiary Company – Asian White Cement Holding Limited (‘AWCHL’) along with other partners in Dubai International Financial Centre, UAE on 2nd May, 2023 as the holding Company for the purpose of setting up an operating Company in Fujairah, UAE. The Parent Company is currently in the process of infusing capital in AWCHL and will hold a 70 per cent stake.

Tata Steel Ltd

BUSINESS COMBINATIONS

i. On 26th July, 2022, the Company completed the acquisition of itemised assets of Stork Ferro Alloys and Mineral IndustriesPrivate Limited (‘SFML’) to produce ferro alloys. The asset acquisition will provide aninorganic growth opportunity for Tata Steel Limited to augment its ferro alloys processing capacities. The asset acquisitionwas carried out for a purchase considerationof Rs1155.00 crore. The acquisition has been accountedfor in accordance with Ind AS 103 – ‘Business Combinations’. Fair value of identifiable assets acquired, and liabilities assumed as on the date of acquisition is as below:

Rs. In crores

	Fair value as on acquisition date
Non-current assets Property, plant and equipment	138.55
Right-of-use assets	17.94
Total assets [A]	156.49
Non-Current liabilities Lease liabilities	4.56
Other Liabilities	0.15
Total liabilities [B]	4.71
Fair value of identifiable net assets acquired [C=A-B]	151.78

	Fair value as on acquisition date
Cash consideration paid	130.00
Deferred consideration	25.00
Total consideration paid [D]	155.00
Goodwill [D-C]	3.22

ii. Goodwill is attributable to the benefit of expected synergies, revenue growth and future market developments. These benefits are not recognised separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets.

iii. From the date of acquisition, SFML has contributed Rs.28.42 crore to revenue from operations and a loss of Rs.16.07 crore to profit before tax. Had the acquisition been effected at 1st April, 2022, the revenue of the Company would have been higher by Rs.13.24 crore and profit would have been lower by Rs.6.50 crore.

The Board of Directors of the Company had considered and approved the amalgamation of Tata Steel Long Products Limited (‘TSLP’), Tata Metaliks Limited (‘TML’), The Tinplate Company of India Limited (‘TCIL’), TRF Limited (‘TRF’), The Indian Steel & Wire Products Limited (‘ISWP’), Tata Steel Mining Limited (‘TSML’) and S & T Mining Company Limited (‘S & T Mining’) into and with the Company by way of separate schemes of amalgamation and had recommended a share exchange ratio / cash consideration. The equity shareholders of the entities will be entitled to fully paid up equity shares of the Company or cash consideration in the ratio as set out in the scheme. As part of the scheme of amalgamations, equity shares and preference shares, if any, held by the Company in the above entities shall stand cancelled. No shares of the Company shall be issued, nor any cash payment shall be made whatsoever by the Company in lieu of cancellation of shares of TSML and S & T Mining (both being wholly owned subsidiary companies). The proposed amalgamations will enhance management efficiency, drive sharper strategic focus and improveagility across businesses based on the strong parental support from the Company’s leadership. The amalgamations will also drive synergies through operational efficiencies, raw material security and better facility utilisation. As part of the defined regulatory process, the schemes of TSLP into and with the Company, TCIL into and with the Company, TML into and with the Company, TRF into and with the Company and ISWP into and with the Company have received approval(s) from stock exchanges and Security Exchange Board of India. Further, the schemes have been filed and are pending with the Hon’ble National Company Law Tribunal.

The Board of Directors of the Company had considered and approved the scheme of amalgamation of Angul Energy Limited (‘AEL’) into and with the Company by way of a scheme of amalgamation and had recommended a cash consideration for every fully paid-up equity share held by the shareholders (except the Company) in AEL as set out in the scheme. Upon the scheme coming into effect, the entire paid-up share capital of AEL shall stand cancelled in its entirety. The amalgamation will ensure the consolidation of all power assets under a single entity, which will increase system agility for power generation and allocation. It will help the Company to improve its plant reliability, ensuring a steady source of power supply while optimising cost. Further, such restructuring will lead to the simplification of group structure by eliminating multiple companies in similar operations, optimum use of infrastructure, and rationalisation of cost in the areas of operations and administrative overheads, thereby maximising shareholder value of the Company post-amalgamation. The scheme is subject to a defined regulatory approval process, which would require approval by stock exchanges and the Hon’ble National Company Law Tribunal.

BCAJ Admin

Tightening the Book-Keeping Requirements: Amendments to the Companies (Accounts) Rules, 2014

Companies are required to maintain their books of account as prescribed in the Companies Act, 2013 (the ‘Act’). MCA issued an amendment to Rule 3 of Companies (Accounts) Rules, 2014 (‘Account rules’) relating to the maintenance of electronic books of account and other relevant books and papers to make the existing requirements more stringent. With this amendment issued in August 2022, Indian Government authorities seek to always have access to books of accounts of Indian companies, even if such books are maintained in electronic form on servers located outside India. The amendment was issued on 5th August, 2022, with no applicability date. The amended rules are effective from the date of their publication in the Official Gazette.

While the first year of the applicability of the amended rule is over, it is important for the companies as well as the auditors to understand the implications of this amendment. Non-compliance with this requirement may constitute non-compliance with the requirement of law in terms of Section 128 and impact the auditor’s assertion in ‘Report on other legal and regulatory requirement’ in Section 143 (3)(b) on maintenance of proper books of account as required by Section 128 of the Act.

Certain multinational companies have refused to provide government authorities access to financial data of Indian entities stored in servers outside India, which may have prompted the government to amend the Accounts Rules.

This amendment includes:

Books of accounts should remain accessible in India at all times so as to be usable for subsequent reference.
Back-ups of books of account and other relevant books and papers maintained in electronic mode (within or outside India) to be kept in servers physically located in India on a daily basis (Earlier: periodic basis).
Disclose annually to ROC the name and address of the person in control of the books of account and other books and papers in India (where the service provider is located outside India).

The above amendment is aimed at preventing any manipulation of the books of account of a company and to ensure that the same are readily accessible and backed up on a daily basis, where required.

ICAI has also issued an announcement, ‘Amendment in the Companies (Accounts) Rules, 2014 relating to the availability of books of account and other relevant books and papers maintained in electronic mode at all times and also details of person in control, if the service provider is located outside India’ in this regard which provides a comparison between the previous and revised requirements.

This article provides specific considerations for the companies and the auditors to comply with the revised requirements of the Act read with rules.

IDENTIFICATION OF RELEVANT BOOKS OF ACCOUNT

The first step is that the companies should identify and back up the documents which qualify as books of account and other relevant books and papers basis the definition under section 2 of the Companies Act, 2013.

Books of Account as per Section 2(13) of the Companies Act, 2013 includes records maintained in respect of –

all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;
all sales and purchases of goods and services by the company;
the assets and liabilities of the company; and
the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section;

Books and papers and books or papers as per section 2(12) of the Companies Act, 2013 include books of account, deeds, vouchers, writings, documents, minutes, and registers maintained on paper or in electronic form.

It is important to note that the backup should include all the documents including underlying support maintained in electronic mode.

The companies will be required to take steps to ensure that there is a server physically located in India for taking the backup of books of account on a daily basis.

CONTROLS TO BE IMPLEMENTED AND OPERATED BY THE COMPANY

It is also important for the companies to ensure that adequate controls have been established for backup to be taken on a daily basis:

Controls to ensure that backups are taken digitally on the designated server physically located in India.
Controls to ensure that backups are taken locally in India and not overseas.
Controls to ensure that backups taken are in a readable format and can be displayed or read when required.
Controls to ensure access to the backup logs is restricted to appropriate individuals.
Controls to ensure that appropriate actions are taken in case of a backup failure.

OTHER CONSIDERATIONS

The requirements prescribed under Rule 3 are applicable to all companies having their servers in India or outside India. Offline media of backups such as tapes, CDs, drives, etc. may not meet the requirements of the amended provisions of the rules.

The hard copy printouts of such backup or retaining back in pdf (or similar format) will not meet the requirements of the amended Rules.

The backup of books of account and other books and papers maintained under the proviso to Rule 3(5) should be maintained for at least 8 preceding financial years in line with the requirements under section 128(5) of the Companies Act, 2013.

AUDITORS’ CONSIDERATIONS

Considering there is no applicability date given in the amendment rules except that the amended rules are effective from their date of publication in the official gazette, auditor reporting obligation is triggered for financial statements which include any period on or after the effective date of the amendment i.e.,5th August, 2022.

The revised requirements will not trigger reporting requirements in cases the period covered by financial statements has ended before the effective date even if the auditor’s report date is after the effective date.

Section 143(3)(a) to the Companies Act, 2013 provides that the auditor’s report should state whether proper books of account have been kept by the company and also state any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith [Section 143(3)(h)].

The expression ‘proper’ means appropriate, in the required manner, fit, suitable, apt.

The auditors will be required to check whether backups of the books of account and other books and papers of the company maintained in electronic mode have been retained on a server located in India with backups taken on a daily basis instead of back-ups on a periodic basis — as provided earlier.

The auditors may test the IT General controls such as security and access, computer operations, system development and system changes basis the guidance provided under SA 315, ‘Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment’ and SA 330, ‘The Auditor’s Responses to Assessed Risks’ and Guidance Note issued by ICAI on Audit of Internal Financial Controls Over Financial Reporting.

The auditors may also perform tests of controls over computer operations which could include:

evaluating the backup and recovery processes,
reviewing the process of identifying and handling computer operations, and
if applicable, control over job scheduling which directly/ indirectly impacts the periodicity of backups.

Auditors should also test the IT environment maintained by a third-party service provider in case the books of accounts of the company are maintained by such service providers.

KEY ASSERTIONS THAT ARE TO BE EVALUATED AS PART OF TESTING

Backups are taken daily.
Backups are taken on the server. Copies of printouts / PDFs as backups will not meet the requirements.
Backups are taken on the server physically located in India.
Backups are readable as books of accounts and records in a legible form. This means that a front end would be required to display in readable/legible form.

THIRD-PARTY SERVICE PROVIDER

Some companies may employ third-party service providers to maintain their books of accounts in electronic mode, for example, on cloud is also covered by the new requirement.

Rule 3(6) of account rules requires the company to intimate the following to the RoC on an annual basis at the time of filing of financial statements:

the name of the service provider;
the internet protocol address of the service provider;
the location of the service provider (wherever applicable);
where the books of account and other books and papers are maintained on the cloud, such as the address as provided by the service provider.
details of the name and address of the person in control of books of account and other books and papers in India.

NON-COMPLIANCE IMPLICATIONS

Section 128(6) provides for the penalty on the specified persons if the requirements of section 128 are not met. For example, not taking daily backups, books of accounts not accessible in India on a daily basis,etc. The company needs to determine the penal provisions and the auditor may consider the reporting implications.

If the auditor identifies an exception, the auditor should report such a matter under section 143(3)(b) under the heading ‘Report on other legal and regulatory requirements’ of the Act. For example, backups are not taken on a daily basis but taken at the year-end or on the date of the auditor’s report.

APPLICABILITY TO REPORTING ON CONSOLIDATED FINANCIAL STATEMENTS

The auditor is required to comment on this matter both in the case of standalone financial statements and consolidated financial statements. However, while reporting on consolidated financial statements, the auditor may observe that certain components included in the consolidated financial statements are (a) either not companies under the Act, or (b) some components are incorporated outside India. The auditors of such components are not required to report on these matters since the provisions of the Act do not apply to them. ICAI has issued similar guidance in its implementation guide on Reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.

ILLUSTRATIVE REPORTING

The auditors of various listed companies in the audit report for the year ended 31st March, 2023, have included a comment in the Auditor’s report under the heading ‘Report on other legal and regulatory requirements’ in case of non-compliance with the aforesaid requirements. Some of the examples are as below:

MODIFIED REPORTING – STANDALONE AUDITOR’S REPORT

“In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books except that the backup of all books of account and other books and papers maintained in electronic mode has not been maintained on servers physically located in India on a daily basis.”

MODIFIED REPORTING – CONSOLIDATED AUDITOR’S REPORT

In our opinion, proper books of account as required by law relating to the preparation of the aforesaid consolidation of the financial statements have been kept so far as it appears from our examination of those books and reports of the other auditors, except that with respect to certain entities as disclosed in note XX to the consolidated financial statements, the back-up of books of account was not kept in servers physically located in India on a daily basis as stated in Note XX to the consolidated financial statements.

UNMODIFIED REPORTING

In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books [and proper returns adequate for the purposes of our audit have been received from the branches not visited by us].

BACKUP REQUIREMENTS FOR AUDIT TRAIL (EFFECTIVE FROM 1ST APRIL, 2023, ONWARDS)

The Companies Accounts Rules, 2014 have also been amended to introduce the requirement of an audit trail. Effective 1st April, 2023, onwards, every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of the recording audit trail of each and every transaction, creating an edit log of each change made in the books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.

The Companies (Audit and Auditor) Rules, 2014 have been correspondingly amended wherein auditors are now required to report, as part of the auditor’s report (in the section ‘Report on Other Legal and Regulatory requirements’, as to whether,

(a)the accounting software used by the company being audited has the feature of recording audit trails (edit logs),

(b)the audit trail feature was operational throughout the financial year and had not been “tampered” with, and

(c)such audit trails have been retained for the period as statutorily prescribed.

The MCA has notified that the aforesaid amendments will be effective from 1st April, 2023, which implies that the accounting software employed by companies will need to be compliant with the Accounts Rules from FY 2023-24 onwards.

The revised requirements for back up of books of account and other books and papers of the company maintained in electronic mode may include audit trail records as well since an audit trail is required for books of account records and the audit trail records would fall under the definition of books of account and other books and papers. While ICAI or MCA may issue a clarification on this aspect, reference may be made to paragraph 20 of the Implementation Guide on Reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 which requires that the company should establish controls to ensure that periodic backups of the audit trails are taken and archived as per the statutory period specified under Section 128 of the Act.

BOTTOM LINE

The rules have been amended with a view to giving more stimuli to the accessibility of books and papers maintained in electronic mode by companies. The auditor should also assess the requirement as part of their assessment of Non-compliance with laws and regulations and reporting requirements under Standards on Auditing.

BCAJ Admin

GAPs in GAAP

Accounting Standards

The implementation of IFRS required a well coordinated
approach among various regulators. Understanding this need, the Ministry of
Company Affairs (MCA) set up a high powered group comprising of various
stakeholders such as NACAS, SEBI, RBI, IRDA, ICAI, IBA and CFOs. The core group
was supported by two sub-groups. The sub-groups will have further meetings with
regard to the roadmap for banking and insurance companies which is still under
discussion.

The author completely supports the roadmap. This is a
historic event — one that would catapult India, its entities and finance
professionals to much greater heights.

Under the roadmap, there would be two separate sets of
Accounting Standards u/s 211(3C). The first set would comprise of standards that
are converged with IFRS and would apply to specified companies in phases. The
second set, comprising of existing Indian accounting standards, would apply to
all other companies, including SMEs.

Phase 1 companies will prepare their opening IFRS balance
sheets on 1 April, 2011. Phase 1 would apply to listed and non-listed companies
with a net worth of greater than Rs 1000 crores, and to companies whose
securities are listed on a foreign stock exchange. If one has a calendar year,
then the opening IFRS balance sheet will be prepared not on 1 April, 2011 but 1
January, 2012. The listing requirement will be with regard to securities and
will include a lot of listings in addition to shares, such as ADR, GDR, FCCB,
etc.

Phase 2 companies will prepare their opening IFRS balance
sheets on 1 April, 2013. Phase 2 would apply to listed and non listed companies
with a net worth of greater than Rs 500 crores.

Phase 3 companies will prepare their opening IFRS balance
sheets on 1 April, 2014. Phase 3 would apply to all other listed companies. IFRS
standards will not apply to non-listed companies with a net worth of less than
500 crores and to SMCs, though they can voluntarily apply to IFRS.

The draft of Companies (Amendment) Bill proposing changes to
the Companies Act is under preparation. The amendment is required to make the
Companies Act consistent with the requirements of IFRS. These changes include
section 391, 394, 78, 100, Schedule VI, Schedule XIV, etc. A new section will
also be introduced to make consolidation mandatory under the Companies Act, even
for non-listed companies.

IFRS standards will be notified by 30 April, 2010. The author
does not expect any carve-ins or carve-outs, and it would be possible for Indian
entities to provide a dual statement of compliance both under IFRS, as adopted
by India, and IFRS, as issued by IASB. However, one should be prepared for any
elimination of alternate accounting treatments provided under IFRS standards.
For example, in the case of long-term employee benefits, it is possible that
actuarial gains and losses may have to be recognized in the P&L account in full,
and the corridor approach or full recognition in ‘Reserves’, allowed under IFRS
of IASB, is not allowed under IFRS as adopted in India.

Net worth has not been defined, but probably it means what we
have always been used to: share capital and free reserves. It would include
securities premium but not fixed asset revaluation reserve. P&L debit balance
should be subtracted from share capital and reserves. Net worth would be based
on Indian GAAP stand-alone account of the entity.

To determine applicability, the net worth for which balance
sheet date should be considered? Theoretically, it could be 31 March 2009, 2010
or 2011 or all three. It is unlikely to be 31 March, 2011 for practical reasons.
Doing the net worth test based on the balance sheet date of 31 March, 2011, will
leave entities with little or no time to prepare for IFRS for the year 2011-12
(actually the first quarter of 2011-12 for listed entities). Therefore, in the
author’s view, the test should be done based on the balance sheet on 31 March,
2009. The MCA should confirm this by way of guidance.

Questions have been raised on whether IFRS comparative
numbers are required from 2010-11. Whilst this will be clarified in further
guidance, it would make enormous sense to prepare IFRS comparatives for the
following reasons:

1. IFRS comparatives (2010-11), instead of Indian GAAP
comparatives, would make 2011-12 IFRS financial statements meaningful to all
stakeholders

2. Preparing IFRS from 2010-11 will enable one to be ready
for robust IFRS reporting in the first quarter of 2011-12

3. The 2011-12 IFRS financial statements will be compliant
both with Indian law and IFRS, as issued by IASB. Hence dual statements of
compliance can be made by entities.

4. If 2010-11 IFRS comparatives are not prepared, then
effectively 2011-12 IFRS statements become comparatives for 2012-13 IFRS
statements. Under IFRS 1 framework, the comparative year’s accounting policy
should be consistent with the first IFRS financial statements. This may mean
that the already prepared and published numbers of 2011-12 IFRS financial
statements may undergo a change subsequently to make them consistent with the
2012-13 IFRS accounting policies.

Therefore, from practical considerations, the transition date
should be 1 April, 2010, instead of 1 April, 2011.

There may be good news for early preparers, but one that
needs endorsement by further guidance from the MCA. If an entity has already
prepared/published IFRS financial statements, then on 1 April, 2011 one does not have to reconvert again. In other words under IFRS,
an entity can be a first time adopter only once.

Another related question is whether entities not covered at all in any of the phases can adopt IFRS or those covered in later phases can apply IFRS in earlier phases. The roadmap is clear that a company which is not covered under any of the phases may adopt IFRS on a voluntary basis. The author believes that similarly, a company covered in later phases should be allowed to apply IFRS early. Since the issue is an important one, the MCA should provide guidance on the matter as soon as possible. Allowing voluntary adoption of IFRS will help a subsidiary, joint- venture or associate of a company covered under the roadmap to use their IFRS accounts prepared for group reporting and consolidation purposes, and for stand-alone statutory financial reporting also.

Changes in various other legislations would be required, e.g., SEBI will need to change the require-ments relating to interim financial statements to make them compliant with IAS 34. The RBI will need to look at its prudential norms, incorporate appropriate prudential filters, etc., as and when IFRS becomes mandatory for banks and so on.

A key concern has been the IFRS implications with regard to income-tax. Recently a committee has been set up by CBDT to look into the impact of IFRS on income tax computation and income tax legislation. The Indian tax authorities will certainly need some time to look into this whole aspect as well as to make appropriate changes to the Income Tax Act, if required. It is, therefore, likely that for some years Indian GAAP may continue as the base for determining taxable income. Besides, it is almost unlikely that some assessees in India will be taxed based on IFRS numbers and others on Indian GAAP numbers. In simple words, for some years to come, an entity’s ERP system should enable generation of both Indian GAAP and IFRS numbers: IFRS for statutory reporting and Indian GAAP for income -tax purposes. Similarly, there would be indirect tax issues. For example, under IFRS, revenue numbers would change and that may have impact on the license fees that telecom companies pay or VAT, etc.

The MCA should provide immediate guidance on these various issues. There will be many challenges, but they come with exciting opportunities. With IFRS, India can aspire to become the accounting hub of the world. Finally, a quote from Charles Darwin: “It is not the strongest of the species that survives, nor the most intelligent, but the most responsive to change”.

BCAJ Admin

Gaps in GAAP

Accounting Standards

Can an entity be consolidated when the ‘parent’ has the
ability in practice, but not the legal right to exercise control over the
entity ? e.g., Entity A owns 40% of the voting power in Entity B
and the remaining 60% of shares are widely dispersed, such that Entity A may
exercise de facto control.

‘Control’ is defined in IAS 27 as : “the power to govern
the financial and operating policies of an entity so as to obtain benefits from
its activities”. It follows from this definition that control involves :
(a) decision-making ability that is not shared with others; and (b) the ability
to give directions with respect to the operating and financial policies of the
entity concerned, with which directions the entity’s directors are obliged to
comply. In order to meet the definition of control, an investor must govern the
financial and operating policies of an entity for the purpose of obtaining
benefits from the entity’s activities. A trustee or other fiduciary with
decision-making powers that are limited to directing the on-going activities of
an entity for the benefit of others does not meet the IAS 27 definition of
control.

In order to have the ability to govern the financial and
operating policies of an entity, an investor must be able to hold the management
of the entity accountable. It is therefore unlikely that de facto control
over an entity can exist unless the investor has the power to appoint and remove
a majority of its governing body (i.e., normally the board of directors
in the case of a company). This power is normally exercisable by holders of the
voting shares in general meeting.

Since the concept of control is defined in terms of
decision-making ability and not how power is actually exercised,
it is theoretically possible for control to be exercised passively as well as
actively. However, any determination of whether de facto control
exists will always have to be made based on the particular circumstances and
it is unlikely to be sufficiently certain that de facto control exists
until actions have been taken that provide evidence of control, i.e.,
control must have been actively exercised.

This will be evidenced by participation and voting at the
Annual General Meeting, where strategic decisions are put to the vote – e.g.,
director nominations. Evidence will be required that the entity was able to vote
in a director of their choice or make decisions that indicated an alignment with
their own business and purpose. In general, the more the legal or
contractually-based powers that are held in relation to an entity fall short of
50% of the total, the greater will be the need for evidence of actively
exercised de facto control.

In practice, de facto control is most likely to be
evidenced where a minority voting interest holder is able to (re) nominate its
nominee to an entity’s board of directors and its votes exceed 50% of the votes
typically cast in the entity’s election of directors. For example, if typically
only 70% of the eligible votes are cast on resolutions for the appointment of
directors, a minority holding of 40% might give de facto control,
provided that if the remaining shares are widely held (such that, for example,
no party has an interest of sufficient size either of itself or with a small
number of others to block decisions).

The October 2005 issue of IASB Update states, “an entity
holding a minority interest can control another entity in the absence of any
formal arrangements that would give it a majority of the voting rights. For
example, control is achievable if the balance of holdings is dispersed and the
other shareholders have not organised their interests in such a way that
they exercise more votes than the minority holder.”

At this moment it appears that there is a mixed practice with
regards to consolidation based on de facto control under IFRS. This is
because the IASB has not come up with any detailed guidance on this issue. Until
such time as the IASB issues detailed guidance to assist preparers in exercising
the judgment required to apply the control concept, there will be differences in
how IAS 27 is applied.

In India, under Indian GAAP, the general practice is not to consolidate
entities based on de facto control. That may change once India adopts
IFRS.

levitra

BCAJ Admin

The beginning of the end of US GAAP

Accountant Abroad

There is an increasing indicative trend that US accounting
standards — which were once considered sacrosanct for accountants the world over
— have begun to decline in terms of importance. Instead, the International
Finance Regulatory Standard (IFRS) are emerging as the most popular accounting
standard internationally.

The Financial Accounting Standards Board and the Financial
Accounting Foundation of USA plan to host a public forum in June 2008 to discuss
a new national blueprint for moving the United States to International Financial
Reporting Standards.

The forum will include participation by the American
Institute for Certified Public Accountants, the Internal Revenue Service, the
Securities and Exchange Commission, the Public Company Accounting Oversight
Board, business representatives, educators, and lawyers, who will discuss the
stumbling blocks on the way to setting up international accounting standards.

FASB Chairman noted that the board continues to work with the
International Accounting Standards Board (IASB) on their convergence project to
create “something better than either U.S. GAAP or IFRS alone.”

Developing an ‘improved version of IFRS will be a complex
process,’ and that ‘a smooth transition will not occur by accident.’ As a
result, the blueprint looks to ‘identify the most orderly, least disruptive, and
least costly approach’ to move U.S. public companies to IFRS.

Those changes include getting rid of ‘carve-outs,’ local rule
exceptions adopted by some countries that deviate from the version of IFRS that
is sanctioned by the IASB. Another adjustment supported by FASB Chairman would
be to strengthen IASB’s position as an independent standard setter by
establishing a sustainable source of funding. (It currently is supported by
private-sector donations.)

One idea is to require countries that adopt IFRS to fund the
organisation. In 2002, the Sarbanes-Oxley Act boosted FASB’s independence by
requiring government funding for the board and its parent, the FAF. Before that,
funding came from the private sector.

The call for a single set of global accounting standards will
mostly likely require a single standard setter, and that organisation may
probably not be FASB. Indeed, last week FASB member Thomas Linsmeier said the
“least important question [regarding the switch to IFRS] is what happens to FASB.”
Linsmeier, speaking at an industry conference sponsored by Pace University’s
Lubin School of Business, said that from a broad perspective, FASB’s survival
should not be what motivates the decision about moving to IFRS.

Before a transition to IFRS becomes a reality, however, other
issues will have to be addressed, including how to change the CPA exam to
coincide with IFRS, and how to rework accountant training, education, and
auditing standards to put the American system in sync with international rules.
What’s more, the industry will have to evaluate how adoption of IFRS may change
SEC policy and legal arrangements that are based on U.S. GAAP.

Next month’s blueprint meeting will also be a good
opportunity to work out which road companies eventually will take to become
compliant with IFRS. The most pressing question is whether to operate dual
accounting systems and have companies choose their adoption date within a
specified window of time, or have FASB set a specific deadline for all companies
to make the jump to IFRS.

Whichever path is taken, a few big accounting-practice issues
will have to be settled between FASB and IASB before U.S. companies adopt the
global standards. They include defining liabilities and equity, reworking
financial statement presentations, and revamping lease accounting and
revenue-recognition rules.

In the meantime, FASB will continue to work on wringing
complexity out of GAAP. For example, by the end of June, FASB’s staff is due to
release proposals on hedge accounting to resolve practice issues and make
disclosures easier to understand. Further, the staff expects to issue proposals
to eliminate qualified special-purpose entities from the accounting literature
by revising FAS 140, and improve FIN 46R, the rule on consolidating
variable-interest entities.

The SEC is also committed to moving U.S. companies to IFRS.
The commission’s chief accountant said that ‘theme’ at the SEC continues to be
to move toward international accounting standards. To quote the chief accountant
“I think to compete in the future, we will have to move to IFRS.”

(Source : CFO.Com/US)

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BCAJ Admin

The beginning of the end of US GAAP

Accountant Abroad

The International Federation of Accountants (IFAC) has voiced
strong opposition to what it sees as attempts to radically change or suspend the
use of fair value accounting without proper due process.

The federation warns against making changes at a national or
regional level which would worsen reporting differences and further confuse
financial markets, resulting in a lessening of confidence in financial
reporting. This would be exact opposite of what is required in current
circumstances. Reducing transparency is not the answer . . . . and it will not
serve the interests of investors.

IFAC believes the additional guidance from the International
Accounting Standards Board (IASB) and the United States Financial Accounting
Standards Board, as well as the International Auditing and Assurance Standards
Board in its Staff Audit Practice Alert, Challenges in Auditing Fair Value
Accounting Estimates in the Current Market Environment, has been very
valuable and will contribute to the public interest through more consistent
application of the standards.

Investors require a single set of accounting rules but a
current European Commission review of fair value accounting threatens to
undermine transparency and comparability. The Commission is due to host a
meeting in Brussels to discuss accounting reform, including further relaxation
to fair value.

Transparency, comparability and consistency in financial
reports is of utmost importance to the investor. In the view of the Investment
Management Association, making changes suggested by the Commission by the end of
October poses a risk that this may not be maintained and that such changes could
result in unhelpful reporting. Even though the current credit crisis requires
swift measures by governments and regulators, fundamental changes in accounting
should be implemented only after due process and the involvement of all
stakeholders.

The International Accounting Standards Board agreed to rush
through changes that allowed some valuations of some financial instruments —
securities — to duck a fair value calculation by being reclassified from ‘held
for sale’ to ‘held for investment. The European Commission eventually endorsed
this move in mid week, but only after considering pushing through changes that
would have allowed financial institutions to reclassify a much wider spectrum of
financial assets, including derivatives.

The US Securities and Exchange Commission is to take
mark-to-market accounting to task in a series of roundtables that will examine
the role fair value played in the current market turmoil.

The first roundtable takes place on 29 October and consists
of two panels, one discussing the relationship between fair value and the
financial crisis that has enveloped the major banks and the second examining
potential changes to the current accounting models.

Fair value has been lambasted by financial figureheads and
politicians in the US, UK and Europe for intensifying the effects of the credit
crunch, with many calling for the model to be suspended during the current
turmoil.

(Source : www.accountancyage.com)

levitra

BCAJ Admin

GAPs in GAAP

Accounting Standards

Revenue Recognition for Telecommunication Operators

The Research Committee of the Institute of Chartered
Accountants of India has issued an Exposure Draft – “Technical Guide on Revenue
Recognition for Telecommunication Operators” for comment. In this article, we
take a look at some of the contentious issues, and inconsistencies with
International Financial Reporting Standards (IFRS), particularly keeping in mind
that India will adopt IFRS from 2011-12 and onwards.

Whether revenue should be recognized on a gross basis or net
basis could be a very challenging issue for many telecom companies. For example,
a telecom operator may provide share price coverage via SMS as part of its
service offering. The stock exchange provides the data to the telecom operator.
Assuming revenue is Rs100 and payment to the stock exchange is Rs60, a question
arises as to whether the operator recognizes revenue of Rs100 and a cost of
Rs60, or merely recognizes Rs40 as its revenue. The answer to this question
depends on whether the operator acts as a principal or an agent in this
transaction. US GAAP provides guidance on this subject, which has been used in
the Technical Guide. As per the guidance, this decision is based on a cumulative
assessment of a number of factors such as: (a) whether the operator is the
primary obligor in the arrangement? (b) whether the operator has the ability to
control the selling price? (c) whether the operator changes the product or
performs part of the service? (d) who bears the credit risk? (e) whether the
product or service specification is determined by the operator?, etc. It may be
noted that the above criteria are not the same as those contained in IAS 18.
Hence, the answer arrived at based on the Technical Guide/US GAAP may not be the
same as the one arrived at under IFRS.

For most operators, interconnect charges represent the
largest single operating cost and second largest source of revenue. Mobile
operators enter into a number of interconnect agreements with other operators.
These agreements allow them to terminate a particular call or transit the
traffic on another operator’s network. This, essentially, uses network of
contracting parties to facilitate and provide the end-to-end connections
required by customers. The Technical Guide states that accounting of revenue on
gross basis may not be appropriate where net settlement and the legal right of
offset exists between operators. However, in the authors’ view, this is contrary
to industry practice. Industry practice is that interconnect revenues are booked
gross on the basis that the carriers are exposed to the gross risk of the
transaction. Interconnect agreements usually allow carriers to settle on a net
basis, which does not normally change the appropriateness of
recognizing transactions gross, even if periodic cash settlement may be made on
a net basis. For example, the operator may bear the gross credit risk for
non-payment and be obliged to make payments under interconnect arrangements,
irrespective of the level of reciprocal revenues due.

The term Indefeasible Rights of Use (IRU) is very common in
the telecom business. IRU means an exclusive, unrestricted, and indefeasible
right to use the relevant capacity (including equipment, fibres or capacity).
Under Indian GAAP, in many cases, these type of contracts may have been
accounted for as service contracts between the buyer and seller rather than
lease contracts. The technical guide requires evaluation of the IRU contract as
to whether it contains a lease arrangement based on AS-19. Unfortunately, AS-19
does not contain any guidance on the same. Under IFRS standards, this issue is
separately covered under IFRIC 4
Determining whether an
arrangement contains a lease.
Therefore, in the authors’ view, the technical guide with regard to this matter
can be practically implemented, if and only if an IFRIC 4 interpretation is
issued under Indian GAAP. Also it would be inappropriate to apply the
requirements of IFRIC 4 selectively to telecom companies. It may be noted that
IFRIC 4 has a wider application – for example, it would have impact on
outsourcing contracts, power purchase agreements, etc.

Multiple element contracts are pretty common in the case of
telecom business. For example, in the case of mobile operators, the package may
include hand set, talk time, SMS, ring tones, etc. The technical guide basically
requires the allocation of the consideration to the various components based on
the relative fair values of the components. It may be noted that currently, IFRS
does not have any detailed guidance on accounting for multiple element
contracts. However, IASB has recently issued a discussion paper (DP) on the
proposed new standard on revenue recognition – “Discussion
Paper – Preliminary views on Revenue Recognition in contract with customers“.
As per this DP, customer consideration is allocated to the vendor’s contractual
performance obligations on a relative standalone selling price basis, and
revenue is recognized as each performance obligation is satisfied. Where the
standalone selling price is not observable, an entity would estimate them. As
per the DP, suitable estimation methods include (but not limited to) (a)
expected cost plus margin (b) adjusted market assessment approach. Consequently
the Technical Guide and the proposed IFRS standard may result in significant
difference in accounting for multiple element contracts. Telecom operators that
may be required to follow the Technical Guide for Indian GAAP purposes and
subsequently IFRS, will have to unnecessarily undergo change in revenue
recognition accounting twice. This clearly appears unwarranted.

The Technical Guide prohibits recognition of revenue on a
component if the same is contingent upon delivery of additional items. This is
explained using the following example in the Technical Guide.

Example:
A customer purchases an annual contract, offering a free handset and 1,000
minutes (fair value is Rs. 1,500 per month) and 150 free texts (fair value is Rs.
300 per month), for a monthly fee of Rs. 1,500. The handset could be purchased
separately for Rs. 15,000. The allocation of revenue for the entire contract
period should be as follows:

Cash

Total
FV

Relative
FV

FV restricted by contingent

consideration

Handset

–

15,000

7,377

–

Airtime
contract

18,000

Talk time

18,000

8,852

15,000

Text

3,600

1,771

3,000

Total

18,000

36,600

18,000

The relative fair value of the equipment is Rs. 7,377. However, the recognition of this amount should be limited to the amount which is not contingent upon the delivery of additional items (i.e. airtime contract). As a result, the relative fair value allocable to the equipment is reduced to Rs. nil, being the cash consideration, and the difference reallocated to the elements within the airtime contract. It may be noted that under IFRS, there is no such restriction and it is possible to recognize revenue on the handset.

In another example, the Technical Guide prohibits recognition of revenue on hand set in certain circumstances. For example, consider a customer enters into a 12 month tariff plan priced at Rs 2400/- and includes 200 minutes of talk time per month and free hand set worth Rs 2000/-. The Technical Guide prohibits recognition of any revenue on the delivery of the handset, since it is provided free and requires recognition of revenue of Rs 200/-per month for the talk time. In this example, it is unclear from the Technical Guide as to how the accounting is done, if the company would have stated that Rs 2,400/- is received for both the talk time and the handset. Will the accounting change? Under IFRS, it would be possible to recognize revenue on handset, even if the company claims that the same is provided free of cost. This is because under IFRS, the entire consideration would be allocated to different components – in this example, it would be allocated to the handset and the talk time irrespective of the operators’ claim that some of the components are provided free of cost (basically there is no free lunch).

The Technical Guide is more based on US GAAP and may provide results that are different from those under existing or proposed IFRS standards.

Given that India is adopting IFRS, and US itself is looking at IFRS seriously, it does not make any sense to base the Technical Guide on US GAAP. It is recommended that standard setters start a dialogue with the IFRS standard setters and influence the IFRS exposure drafts, rather than rock the boat. It is also inappropriate to have any guidance that is inconsistent with IFRS, since that may require Indian entities to change revenue recognition accounting twice in a short span of time, ie, once to comply with Indian GAAP and in 2011-12 when adopting IFRS.

BCAJ Admin

Miscellaneous

From Published Accounts

1 Change in Accounting Policy for Toolings Pursuant to
Opinion of EAC of ICAI

Vesuvius India Limited — (31-12-2009)

From Significant Accounting Policies :

Fixed Assets :

(a) Cost :

Fixed assets are stated at cost of acquisition (net of CENVAT)
less accumulated depreciation/amortisation. Cost of acquisition includes taxes,
duties, freight and other costs that are directly attributable to bringing
assets to their working condition for their intended use. Spares that can be
used only with particular items of plant and machinery and such usage is
expected to be irregular are capitalised.

During the year, the Company has changed its accounting
policy for toolings to comply with the opinion of the Expert Advisory Committee
of the Institute of Chartered Accountants of India in this regard. Consequent to
such change, toolings used for the production of finished goods have been
recognised as fixed assets. Depreciation for the year on such toolings have been
provided for based on their estimated useful lives of 3 years. Hitherto, such
toolings were considered as inventories and were being amortised over their
estimated useful lives of 3 years. Consequently, during the year :

— Cost of acquisition aggregating Rs.140,561 (previous year
Rs.106,886) of toolings that had not been fully amortised till the previous
year-end has been added to gross block of fixed assets as at the beginning of
the year.

— Amortised Cost aggregating Rs.92,644 (previous year
Rs.65,751) of toolings that had not been fully amortised till the previous
year-end has been added to accumulated depreciation at the beginning of the
year.

— Cost of acquisition of toolings purchased during the year
aggregating Rs.18,005 (previous year Rs.33,675) has been recognised as addition
to fixed assets

— Depreciation for the year on toolings Rs.27,904 (previous
year Rs.26,893) has been provided for based on their aforesaid useful lives.

Had the Company continued to recognise toolings as inventory
:

— inventory of toolings at the year-end would have been
higher by Rs.38,018 (previous year Rs.47,917) and net block of fixed assets at
the year-end and at the previous year-end would have been lower by corresponding
amounts.

— toolings consumed during the year would have been higher by
Rs. 27,904 [previous year Rs.26,893] and depreciation charge for the year and
the previous year would have been lower by corresponding amounts.

The above reclassification had no impact on profit after tax
for the year.

2 Approval pending for transactions covered u/s.297 of
Companies Act, 1956

Castrol India Limited — (31-12-2009)

From Notes to Accounts
:

The Company has
entered into transactions for rendering of services and secondment of personnel
with two private limited companies incorporated in India, which are a part of
the BP group of companies worldwide. The said agreements attracted the
provisions of Section 297 of the Companies Act, 1956 as there were common
Directors between the Company and the two private limited companies. The Company
is applications to the Regional Director (Ministry of Corporate Affairs) for
necessary approvals. The Regional Director (Ministry of Corporate Affairs) has
sought clarifications and requested the Company to make fresh applications with
additional information. The Company has made fresh applications in relation to
both the private limited companies to the Regional Director (Ministry of
Corporate Affairs) and is currently awaiting approval.

Non-provision of impairment loss

Ciba India Limited — (31-3-2009)

From Notes to Accounts :

13. The Company has fixed assets on the leased
premises at Goa. The carrying value of the fixed assets at the said leased
premises Rs.120,633 including the assets which cannot be moved is Rs.70,177 as
at the year-end. The lease of the premises expired on August 31, 2008 and
pending the final outcome of the Company’s negotiations in respect of the same,
no impairment is assessed on the fixed assets at the leased premises and
depreciation on these assets is provided as per the Company‘s policy. The
company has relied on independent valuation report of January, 2008 and as the
value of assets is more than the carrying value, no impairment is deemed
necessary.

From Auditors’ Report

5. As more fully described in Note 13 to the
financial statements, pending the final outcome of the Company’s negotiations in
respect of premises leased to it, the Company has not assessed the fixed assets
at the said premises for impairment, if any. The carrying value of fixed assets
at the said leased premises is Rs.120,633 thousands including immovable assets
of Rs.70,117 thousands as identified by the Company. We are unable to comment
the effect of adjustments, if any, had such assessment for impairment been
carried out.

6. Further to our comments in the Annexure referred
to in para 3 above, and except for matter referred to in para 4 above, we report
that :

(vi) In our opinion and to the best of our
information and according to the explanations given to us except for matter
referred to in para 4 above, the said accounts give the information required by
the Companies Act 1956, in the manner so required and give a true and fair view
in conformity with the accounting principles generally accepted in India

levitra

BCAJ Admin

Miscellaneous

4. Revenue recognition for income from wind mills

Madras Cements Ltd. — (31-3-2009)

Significant Accounting Policies :

1. Under wheeling and banking arrangement :

Units generated from windmills are adjusted against the consumption of power at our factories. The monetary value of the units so adjusted, calculated at the prevailing EB rates net of wheeling charges has been included in power and fuel. The value of unadjusted units as on the Balance Sheet date has been included in Advances recoverable in cash or in kind under the schedule loans and advances.

2. Under power purchase agreement :

Units generated from windmills are sold to State Electricity Board at agreed rates and the income is included in value of power generated from wind mills.

5. CFS not prepared since subsidiary held for taking over for a specific purpose

Kirloskar Oil Engines Ltd. — (31-3-2009)

From Notes to Accounts :

The Company has promoted and incorporated a wholly-owned subsidiary in the name of Kirloskar Engines India Limited on 12 January 2009. The said Company will be used for the purpose of taking over the Engine and Auto Component business of demerged company on a going-concern basis pursuant to the proposed Scheme of Arrangement.

As such investment in subsidiary is held exclusively for such a purpose, in view of para 11(a) of Accounting Standard (AS-21) ‘Consolidated Financial Statement’ prescribed by the Companies (Accounting Standards) Amendment Rules, 2009, the consolidated accounts have not been prepared.

Moreover, first financial year of the subsidiary company is from 12 January 2009 to 31 March 2010. In view of the extended financial year of the subsidiary, its accounts are not attached in this Annual Report as required under Section 212 of the Companies Act, 1956.

6. Scheme for Demerger of Passive Infrastructure at Nil value to a subsidiary, and loss arising therefrom adjusted against ‘Reserve for Business Restructuring’

IDEA Cellular Ltd. — (31-3-2009)

From Notes to Accounts :

A Scheme of Arrangement was filed with the High Court of Gujarat at Ahmedabad to de-merge Passive Infrastructure (PI) assets in the telecom service areas of Andhra Pradesh, Delhi, Gujarat, Uttar Pradesh (both East & West including Uttaranchal), Harayana, Kerala, Rajasthan and Mumbai at nil consideration with an appointed date of 1st January 2009 to Idea Cellular Towers Infrastructure Limited (ICTIL), a 100% subsidiary of Aditya Birla Telecom Limited (ABTL). ABTL is a 100% subsidiary of the company. The High Court of Delhi at New Delhi and the High Court of Gujarat at Ahmedabad approved the scheme on 3rd August 2009 and 31st August 2009, respectively. The scheme became effective on 29th September 2009. As per the scheme :

(i) PI assets having book value of Rs.16,227.76 Mn. as on 31st December 2008 has been debited to the Profit & Loss Account.

(ii) Investment in ABTL has been increased by the book value of PI assets vested with ICTIL as part of this scheme, by creating ‘Reserve for Business Restructuring’.

(iii) An amount equal to net book values of PI assets as per point (i) above, has been withdrawn from ‘Reserve for Business Restructuring’ recognised as per point (ii) above.

Had the scheme not mandated the above accounting treatment, the value of investment in ABTL would not have included the book values of Rs.16,227.76 Mn. of the PI assets de-merged to ICTIL but would have remained at Rs.100.00 Mn. Consequently, there would have been no creation of ‘Reserve for Business Restructuring’ of Rs.16,227.76 Mn. and withdrawal of the same to the credit of P&L.

7. Disclosures regarding changes due to Migration to ERP system

BEML Ltd. — (31-3-2009)

From Notes to Accounts :

ERP System :

(i) Change in costing methodology consequent to introduction of ERP

With the introduction of ERP system, stage level production orders are opened vis-à-vis batch work orders under the Legacy system. The valuation of such stage level production orders is done on standard cost basis. There is a provision to review the cost and revise the same to bring it as close as possible to actual cost. Thus the closing stock of work-in-progress and finished goods though valued at standard cost are adjusted to nearly the actual cost and the difference, if any, is not material. Variances arising on account of difference between standard cost and the actual cost, on account of change in the nature of inputs from bought-out to internally manufactured or vice versa, timing difference between standard cost and actual occurrence during the financial period and fluctuations in the material prices and the exchange rate, is adjusted in the Cost of Production in order not to carry forward period variances to subsequent financial period. Cost redistributions between work orders have been made to reduce the impact of material variances between standard cost and actual cost.

(ii) Provision towards Obsolescence is made as per provisioning norms consistently followed and is based on ageing of inventory as per ERP.

iii) Physically verified and reconciled inventory balances have been uploaded in ERP at the time of migration to ERP. Physical verification has been done on a perpetual basis while reconciliation of the physical balance with ERP balance could not be online. No significant discrepancies have been noticed on subsequent reconciliation of physical balances as per stock verification with ERP balances to the extent identified.

iv) Balances with Government Departments are subject to reconciliation and consequential adjustment, if any.

v) Consequent to migration from Legacy to ERP system covering all Regional offices, District offices and Marketing divisions at KGF and Mysore during Financial year 2008-09, the date of entry of transactions including sale of spares in certain cases is after 31-3-2009 though the transactions have occurred on or before 31-3-2009.

BCAJ Admin

Miscellaneous

From Published Accounts

5 Audit Report in case of a
company where in earlier years, manipulations admitted by the erstwhile
management and previous years’ audit reports withdrawn by earlier auditors

Satyam Computer Services
Ltd. — (31-3-2009)

Appointment :

1. We have been appointed as
statutory auditors of SATYAM COMPUTER SERVICES LIMITED (‘the Company’) for the
year ended March 31, 2009 by the Board of Directors of the Company (hereinafter
referred to as the ‘Board’) subject to the ratification by the shareholders of
the Company, pursuant to the order of the Honourable Company Law Board (CLB),
dated October 15, 2009. This report is addressed to the members of the Company,
subject to the ratification of our appointment.

Report on the Financial
Statements :

2. We have audited the
attached Balance Sheet of the Company as at March 31, 2009, the Profit and Loss
Account and the Cash Flow Statement of the Company for the year ended on that
date, both annexed thereto.

Management’s responsibility for
the Financial Statements :

3. These financial
statements are the responsibility of the Company’s Management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

Auditors’ responsibility :

4. Subject to the matters
discussed in this report, we conducted our audit in accordance with the auditing
standards generally accepted in India. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and the disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by the Management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

Companies (Auditor’s Report)
Order, 2003 (CARO) :

5. As required by the
Companies (Auditor’s Report) Order, 2003 (CARO) issued by the Central Government
in terms of S. 227(4A) of the Companies Act, 1956 (‘the Act’) we give in the
Annexure a statement on the matters specified in paragraphs 4 and 5 of the said
Order, which is subject to the matters discussed in this report.

Basis for opinion :

6. As stated in Note 3 of
Schedule 18 :

(a) On January 7, 2009, in a communication (‘the letter’) addressed to the then-existing Board of Directors of the Company and copied to the Stock Exchanges and Chairman of Securities and Exchange Board of India (‘SEBI’), the then Chairman of the Company, Mr. B. Ramalinga Raju (‘the erstwhile Chairman’) admitted that the Company’s Balance Sheet as at September 30, 2008 carried inflated cash and bank balances, non-existent accrued interest, understated liability and overstated debtors position. As per the letter, the gap in the Company’s Balance Sheet had arisen purely on account of inflated profits over a period of last several years. Consequently, various regulators have initiated their investigations and legal proceedings, which are ongoing and are more fully described in the said Note.

(b) The Government-nominated Board of Directors appointed an independent counsel (‘Counsel’) to conduct an investigation of the financial irregularities that would enable preparation of the financial statements of the Company. The Counsel appointed forensic accountants to assist in the investigation (referred to as ‘forensic investigation’) and preparation of the financial statements. The forensic accountants have expressed certain reservations and limitations in their investigation process, which are more fully described in the said Note.

(c) Pursuant to the investigations conducted by the Central Bureau of Investigation (‘the CBI’)/other regulatory authorities, most of the relevant documents in the possession of the Company were seized by the CBI/other authorities and partial access was granted to the Company including for taking photo-copies of the relevant documents as may be required in the presence of the CBI officials.

(d) The former statutory auditors of the Company vide their letter dated January 13, 2009 to the Board of Directors have indicated that their reports and opinions in relation to the financial statements of the Company from the quarter ended June 30, 2000 until the quarter ended September 30, 2008 should no longer be relied upon.

(e) As confirmed by the order of the CLB, and in accordance with Accounting Standard 5 — ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, adjustments resulting from financial irregularities and errors relating to periods prior to April 1, 2008, to the extent identified, have been accounted for as ‘Prior Period Adjustments’ in these financial statements.

(f) As per the assessment of the Management, based on the forensic investigation carried out through an independent counsel/forensic accountants, and the information available at this stage, all identified/required adjustments/disclosures arising from the financial irregularities, have been made in these financial statements.

The Management is of the view that since matters relating to several of the financial irregularities are sub judice and various investigations are ongoing, any further adjustments/disclosures to the financial statements, if required, would be made in the financial statements of the Company as and when the outcome of the above uncertainties is known and the consequential adjustments/disclosures are identified.

In view of the above, we are unable to comment on the adjustments/disclosures which may become necessary as a result of further findings of the ongoing investigations and the consequential impact, if any, on these financial statements.

7. As stated in Note 3.3(ii) of Schedule 18, the Company has, based on the forensic investigation, accounted for the opening balance differences (net debit) of Rs.11,221 million as at April 1, 2002, other differences (net debit) of Rs.166 million during the period from April 1, 2002 to March 31, 2008 and Rs.7 million relating to the period from April 1 to December 31, 2008 aggregating Rs.11,394 million under ‘Unexplained Differences Suspense Account (Net)’ under Schedule 12 due to non-availability of complete information. These net debit amounts aggregating Rs.11,394 million have been fully provided for on grounds of prudence.

In the absence of complete/required information, we are unable to comment on the accounting treatment/ disclosure for the aforesaid unexplained amounts accounted under ‘Unexplained Differences Suspense Account (Net)’ in these financial statements.

8. As stated in Note 6.1 of Schedule 18, the alleged advances amounting to Rs.12,304 mil-lion (net) have been presented separately under ‘Amounts Pending Investigation Suspense Account (Net)’ in the Balance Sheet. In this regard, there are certain claims by thirty-seven companies seek-ing repayment of the amounts allegedly paid by them to the Company as temporary advances which were earlier not recorded in the books of ac-count of the Company. These companies have also claimed damages/compensation/interest on these amounts. Further, these companies have also filed recovery suits/petitions against the Company. The details of these claims are more fully described in the said Note. The Company has not acknowledged any liability to any of the thirty-seven companies and has replied to the legal notices stating that the claims are legally untenable.

The Directorate of Enforcement (‘ED’), Govern-ment of India, is conducting an investigation under the Prevention of Money Laundering Act, 2002 on the amounts allegedly advanced by the aforesaid parties and has directed the Company not to return the amounts until further instructions from the ED.

The Management has represented that since the matter is sub judice and the investigations by various Government agencies are in progress, the Management, at this point of time is not in a position to predict the ultimate outcome of the legal proceedings initiated by these thirty-seven companies.

In view of the above, we are unable to determine whether any adjustments/disclosures will be required in respect of the aforesaid alleged advances amounting to Rs.12,304 million (net) and in respect of the non-accounting of any damages/compensation/interest in these financial statements.

9. As stated in Note 6.3 of Schedule 18, sub-sequent to the letter by the erstwhile Chairman of the Company relating to various financial irregularities in the Company’s financial statements, a number of persons claiming to have purchased the Company’s securities have filed class action lawsuits in various courts in the United States of America. These class action suits are more fully described in the said Note. Based on the legal advice obtained by the Company, the Company is contesting the above lawsuits.

Since the matter is sub judice, the outcome of which is uncertain at this stage, we are unable to comment on the consequential impact, if any, on these financial statements.

10. As stated in Note 8.1(vi) of Schedule 18, an amount of Rs.674 million has been paid as interim dividend for the year 2008-09. Since there are no profits for the purpose of declaring dividend, there is a non-compliance of S. 205 of the Act. Further, as stated in Note 8.1(vii) of Schedule 18, the consequen-tial transfer of the stipulated minimum amounts of profits to General Reserves in accordance with the Companies (Transfer of Profits to Reserves Rules), 1975, has also not been effected due to inadequate balance in the Profit and Loss Account. The Management is proposing to make an application to the appropriate authority for condoning these non-compliances. Refer to paragraph 17 below also.

The possible impact of these non-compliances in the event the Company’s condonation requests are not granted has not been determined or recognised in these financial statements.

11. Attention is invited to the following matters:

(a) As stated in Note 9.2 of Schedule 18, in the absence of certain documents/information, adjustments required in respect of the opening balances as at April 1, 2008 (including the adjustments consequent to the assessment of consistent application of accounting policies) have been carried out to the extent feasible by the Management, based on available alternate evidences/information.

In the absence of the aforesaid documents/ information for the periods prior to April 1, 2008, we could not perform some of the required auditing procedures on the opening balances to the extent deemed necessary by us. Furthermore, due to inadequate records, we are unable to fully assess whether the Company’s accounting policies have been applied on a basis consistent with that of the preceding period.

(b) As stated in Note 9.3 of Schedule 18, certain reconciliations between the sub-systems/sub-ledgers and the general ledger could not be performed completely due to non-availability of all the required information. The Company has identified certain amounts aggregating Rs.27 million (net debit), comprising of Rs.494 million (gross debits) and Rs.467 million (gross credits) appearing in the general ledger, for which complete details are not available and, hence, these amounts have been accounted under ‘Unexplained Differences Suspense Account (Net)’ under Schedule 12 and the Management has made provision for the net unexplained debit amounts aggregating Rs.27 million as at March 31, 2009 on grounds of prudence. Further, there are certain differences in data between inter-connected sub-systems, ultimately interfaced to the general ledger, for which complete details are not available.

In the absence of the required information, we are unable to determine the additional impact, if any, of such unexplained amounts/ differences on these financial statements.
(c) Responses were not received in 3,047 number of cases out of our total sample of 3,746 number of requests sent out for confirmations of balances/other details in respect of parties reflected under Sundry Debtors, Loans and Advances, Current Liabilities, etc. Further, confirmations could not be sent in 47 number of cases due to the non-availability of complete records/ addresses relating to these parties. Refer Note 9.4 of Schedule 18.

Had all the confirmations been received and reconciled, there may have been additional adjustments required to these financial statements which are not determinable, at this stage.

12. Attention is invited to the following matters:

(a) Further to our comments in paragraph 8 above, the amounts received during the year and shown under ‘Amounts Pending Investigation Suspense Account (Net)’ has been presented in the cash flow statement separately since the Management could not identify the nature of the same and, hence, could not categorise the same as operating, investing or financing cash flows.

This is not in accordance with Accounting Standard (AS) 3 — Cash Flow Statements.
(b) Identification of companies/firms/other parties covered in the Register maintained u/s. 301 of the Act, companies under the same management within the meaning of S. 370(1B) of the Act, firms/ private limited companies in which a director is a member or a partner, the non-scheduled banks where a director of the Company is interested and the related parties as required under AS-18 — Related Party Disclosures as stated in Notes 19(iv) and 30 of Schedule 18 has been done by the Management based on available information. For the reasons stated in the said Notes, there may be additional related parties whose relationship would not have been disclosed to the Company, and, hence, not known to the Management.

We are unable to comment on the completeness/correctness of the above-referred details in the absence of all the required information.

(c) As stated in Note 12.4 of Schedule 18, the Company has given as finance lease, vehicles to the employees under the Associates Car Purchase Scheme, the gross original cost of which aggregates Rs.654 million (net book value Rs.382 million as at March 31, 2009), which have not been accounted for as finance leases in accordance with AS-19 — Leases in the absence of complete/adequate information.

In the absence of complete/adequate information, we are unable to determine the extent to which fixed assets and depreciation have been overstated and the impact of the non-compliance with AS-19 — Leases on these financial statements.
(d) As stated in Notes 14.5 and 37 of Schedule 18, the Company has not maintained proper records of its inventories during the year though the required adjustments to account for the inventory in the books of account were made based on the available information with the Management as at the year end. Further, the Company has not disclosed the quantitative details of purchase and sale of hardware equipment and other items as required under Schedule VI of the Act in the absence of complete information.

13. The Management has evaluated and accounted for certain transactions/made the relevant disclosures based on and to the extent of the information available with the Company in respect of the following Notes of Schedule 18:

(a)   Adjustment of unapplied receipts against Sundry Debtors, classification of Sundry Debtors and provisioning for doubtful debts as stated in Note 14.1.
(b)   Accounting for contracts under percentage of completion method and unbilled revenue as stated in Notes 14.2 and 14.3.
(c)   Accounting for multiple deliverable elements, hardware equipments and other items, etc., as stated in Notes 14.4 and 14.5.

(d) Accounting for unearned revenue as stated in Note 14.7.
(e) Accounting for reimbursements/recoveries from customers as stated in Note 14.9.

In the absence of the required information, we are unable to determine the additional impact, if any, of the above matters on these financial statements.

14. As stated in Note 6.6(vi) of Schedule 18, the Company is carrying a total amount of Rs.4,371 million (net of payments) as at March 31, 2009 towards provision for taxation which was made primarily on the basis of the past financial statements. Considering the effects of financial irregularities, status of disputed tax demands, appeals/claims pending before the various authorities, the consequent uncertainties regarding the outcome of these matters and the significant uncertainties in determining the tax liability, the Company has been professionally advised that it is not appropriate to make adjustments to the outstanding balance of tax provision as at March 31, 2009.

In view of the above, we are unable to comment on the adequacy or otherwise of the provision for taxation carried in these financial statements.

15. In view of the matters described in paragraph 6 above and as stated in Note 39 of Schedule 18, information relating to the previous year has been provided only for the purpose of statutory requirements and the same cannot be used for any comparison purposes or otherwise.

16. Without qualifying our opinion, we invite attention to the following Notes of Schedule 18 relating to various claims and contingencies:

(a) Note 6.2 regarding the settlement amount of Rs.3,274 million (equivalent to USD 70 million) deposited into the escrow account payable to Upaid Systems Limited.
(b) Note 6.4 regarding the Division of Enforcement of the United States Securities and Exchange Commission conducting a formal investigation into misstatements in the financial statements of the Company for the prior years pursuant to the letter of the erstwhile Chairman and recommending enforcement action against the Company.

(c) Notes 6.6 to 6.8 regarding the various demands/disputes raised by the direct and indirect tax authorities both in India as well as overseas jurisdictions.

As stated in Note 6.13 of Schedule 18, the Company has made appropriate provision for contingencies as at March 31, 2009 which, in the opinion of the Management, is adequate to cover any probable losses in respect of the above litigations and claims.

17. Without qualifying our opinion, we invite attention to the following Notes of Schedule 18 relating to certain regulatory non-compliances/breaches:

(a)   Note 8.1 regarding various non-compliances with the provisions of the Act.
(b)   Note 8.2 regarding certain non-compliances of the guidelines issued by the SEBI with respect to allotment of stock options to the employees.
(c)   Note 8.3 regarding certain non-compliances of the provisions of the Foreign Exchange Management Act, 1999.
(d)   Note 8.5 regarding certain non-compliances of the provisions of the Income-tax Act, 1961.

(e) Note 8.6 regarding delay in filing of tax returns in overseas jurisdictions.

The Management has represented that:

(i) the various non-compliances and breaches by the Company of the statutory requirements which have been noticed/observed, duly considering the findings of the forensic investigation/other ongoing regulatory investigations have been summarised in the aforesaid Notes.

(ii) the Company is proposing to make an application to the appropriate authorities, where applicable, for condoning these non-compliances and breaches relatable to the Company.

(iii) the possible impact of these non-compliances and breaches in the event the Company’s condonation requests, where applicable, are not granted has not been determined or recognised in these financial statements.

18. Without qualifying our opinion, we invite attention to the following Notes of Schedule 18 relating to certain accounting and other matters:

(a) Note 9.1 regarding the Management’s identification of several deficiencies in the Company’s internal control over financial reporting as at March 31, 2009 along with certain remediation action taken subsequently.

(b) Note 9.5 regarding various risks and uncertainties relevant to the Company’s financial condition as identified by the Management.

(c) Note 12.8 regarding adjustments that may be required on account of the physical verification of fixed assets conducted subsequent to the year end.

(d) Note 13.9 regarding the provisions made for the diminution in the value of investments and Note 19(iii) regarding the provision made for the dues from the subsidiaries.

19. Without qualifying our opinion, we invite attention to Note 22 of Schedule 18 regarding provision for statutory audit fees of Rs.57 million (including for the audit of prior period items) debited to the profit and loss account which is subject to the approval of the shareholders.

Opinion:

20.   Further to our comments in the Annexure referred to in paragraph 5 above and paragraphs 16 to 19 above and subject to our comments in paragraphs 6 to 15 above, we report that:
(a)   we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit;
(b)   in our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books;
(c)   the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report are in agreement with the books of account;
(d)   in our opinion, the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report are in compliance with the Accounting Standards referred to in S. 211(3C) of the Act;
(e)   in our opinion and to the best of our information and according to the explanations given to us, the said Accounts, read together with the notes thereon, give the information required by the Act in the manner so required and, subject to the consequential effects of our comments in paragraphs 6 to 15 above which are not quantifiable, give a true and fair view in conformity with the accounting principles generally accepted in India:

(i) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2009;

(ii) in the case of the Profit and Loss Account, of the loss of the Company for the year ended on that date; and

(iii) in the case of the Cash Flow Statement, of the cash flows of the Company for the year ended on that date.

Reporting requirements relating to S. 274(1)(g):

21. Since all the Directors as on March 31, 2009 were Government nominees, the reporting requirement relating to S. 274(1)(g) of the Act does not arise.

Compiler’s Note:

The other disclosures in the Notes to Accounts referred to in the audit report are voluminous and hence not reproduced here. The same can be made available by the compiler on request.

BCAJ Admin

Miscellaneous

From Published Accounts

1 Disclosures in respect of
derivative losses, corporate debt restructuring, winding up petitions, etc.

WOCKHARDT LIMITED — (15
months ended 31st March 2010)

From Significant Accounting
Policies :

Derivative Financial
Instruments :

The Company uses derivative
financial instruments such as option contracts and interest rate swaps to hedge
its risk associated with foreign currency fluctuations and interest rates.

As per the Institute of
Chartered Accountants of India (ICAI) Announcement, accounting for derivative
contracts, other than those covered under AS-11, are marked to market on a
portfolio basis, and the net loss is charged to the income statement. Net gains
are ignored.

From Notes to Accounts :

32. Corporate Debt
Restructuring (CDR) Scheme is effective from April 15, 2009. The outstanding
liabilities of the Company are being restructured under the aegis of Corporate
Debt Restructuring (CDR) Scheme. As required under the Scheme, the Master
Restructuring Agreement (MRA) and other necessary documents have been executed
and effected. The CDR Scheme comprehensively covers the FCCB liabilities and
crystallised derivatives/hedging liabilities.

35. CONTINGENT LIABILITIES
NOT PROVIDED FOR :

(e) Certain
derivative/hedging contracts have been unilaterally cancelled by the banks. The
Company has treated the demand of ‘8,483.22 million (previous year — ‘4,895.24
million) as a contingent liability and has not acknowledged the same as debt,
since the liability cannot be currently ascertained even on a best-effort basis
till the final outcome of the matter.

The Company is of the view
that these are contingent liabilities as these arise from past events and
existence of which will be confirmed only by the occurrence or non-occurrence of
one or more uncertain future events not wholly within control of the Company and
therefore, has not acknowledged these claims against Company as debts.

36. Winding-up petitions are
filed by certain lenders/banks in the Bombay High Court and the Company has
filed affidavit in reply. ICICI Bank, as empowered by CDR and Employee Union
have filed intervention application against the winding-up. The matter is sub-judice
and outcome of which cannot be currently ascertained.

From Auditors’ Report :

5. Without qualifying our
opinion, we draw attention

(a) to Note 32 of the
financial statements, wherein as explained, the Company’s outstanding
liabilities are being restructured under the aegis of Corporate Debt
Restructuring Scheme (CDR) with effect from April 15, 2009 and as required
by the Scheme, the Master Restructuring Agreement (MRA) and other necessary
documents have been executed and are effective.

(b) to Note 36 of the
financial statements, wherein as explained, certain lenders have filed
winding-up petitions against the Company in the Bombay High Court and the
Company has filed affidavit in reply. The matter is sub-judice and outcome
of which cannot be currently ascertained.

The Company’s ability to
continue as a going concern is dependent on the Company being able to
successfully implement the actions proposed in the CDR Scheme and outcome of the
winding-up petitions in favour of the Company.

6. (a) With regard to
outstanding derivative contracts as on March 31, 2010, the premiums
aggregating ‘1,843.79 million are unconfirmed and we are informed that the
relevant documents are being put in place. The consequential effect of
subsequent adjustment/s — if any — on relevant assets and liabilities and
loss for the period is not ascertainable.

(b) In respect of
crystallised derivative losses of ‘11,303.80 million forming part of
‘exceptional items’, we have relied on appropriate written representations.

7. As explained in Note
35(e) to the financial statements, the Company had, on certain derivative
contracts with banks, stopped payment of margins called by the banks. The banks,
based on the Early Termination clause in the agreement, terminated these
contracts and claimed an amount of ‘8,483.22 million, being the loss incurred on
termination of such contracts, which the Company has disputed and not
acknowledged as debt. No provision has been made in the accounts for the above
amount, which has been considered as contingent liability. The consequential
impact upon relevant assets and liabilities and loss for the period is not
ascertainable.

8. In our opinion, and to
the best of our information and according to the explanations given to us,
subject to the matter included in paragraph 6 and 7 above, the effect of which
cannot be currently ascertained, the said accounts give the information required
by the Act in the manner so required and also give a true and fair view in
conformity with the accounting principles generally accepted in India.

From Annexure to Auditor’s
Report :

(vii) In our opinion,
the Company has an internal audit system commensurate with the size and
nature of its business, except that scope needs to be enlarged in respect of
Treasury Operations.

(ix)(a) In our opinion and according to the information and explanations given to us, considering the loan liabilities being re-structured under the aegis of Corporate Debt Restructuring (CDR) Scheme and Master Restructuring Agreement being signed by lenders, as per the terms of CDR Scheme, there has been no default in repayment of principal and interest to CDR lenders.

b) With respect to Foreign Currency Convertible Bonds aggregating ‘4,464.02 million which were due for repayment in October 2009, no repayment has been made and as informed, CDR Scheme comprehensively covers FCCB liabilities.

c) As informed, the Company is in dispute with certain lenders whose liabilities as per books of accounts aggregate ‘1,490.70 million. Further, as stated in Note 35(e), the Company has not acknowledged as debt the demand raised on account of unilateral termination of certain derivative contracts. We are unable to comment in respect of such liabilities whether there has been any default in view of the dispute.

From Directors’ Report?:

With regard to qualification and emphasis of matter contained in the Auditors’ Report, explanations are given below?:

a) Point 5(a) of Auditor’s Report — Note 32 of Notes to Accounts to the financial statements?:
Corporate Debt Restructuring (CDR) Scheme is effective from April 15, 2009. The Outstanding liabilities of the Company are being restructured under the aegis of Corporate Debt Restructuring Scheme. As required under the Scheme, the Master Restructuring Agreement (MRA) and other necessary documents have been executed and effective. The CDR Scheme comprehensively covers the FCCB liabilities and crystallised derivatives/ hedging liabilities.

b) Point 5 (b) of Auditor’s Report — Note 36 of Notes to Accounts to the financial statements?:
Winding-up petitions are filed by certain lenders/banks in the Bombay High Court and the Company has filed affidavit in reply. ICICI Bank, as empowered by CDR and Employee Union have filed intervention application against the winding-up. The matters are sub-judice and outcome of which cannot be currently ascertained.

c) Point 6 of Auditor’s Report?:
The Company has charged the crystallised derivative losses to the Profit & Loss Account and some of the documentation trail is being corelated, for which the Company has formed a task force and necessary actions are being taken.

d) Point 7 of Auditor’s Report?:
Certain derivatives/hedging contracts have been unilaterally cancelled by banks. The Company has treated the demand of ‘8,483.22 million as a contingent liability and has not acknowledged as debt, since the liability cannot be currently ascertained even on a best-effort basis till the final outcome of the matter. The Company is of the view that these are contingent liabilities as these arise from past events and existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within control of the Company and therefore, has not acknowledged these claims against the Company as debts.

e) Point (vii) of Annexure to Auditor’s Report?:
The Company has an internal audit system which it believes to be commensurate to the size of its operations. The Company has already commenced the process of further strengthening the internal audit system to enlarge its scope in respect of Treasury Operations. Further, as per the CDR Scheme the Company cannot execute any new derivative transactions (excluding forwards strictly for hedging purposes for a maximum period of 180 days) without prior approval of CDR Empowered Group and accordingly the treasury operations of the Company have been significantly reduced.

BCAJ Admin

Miscellaneous

Creation of business reconstruction reserve to adjust impairment of fixed assets, goodwill on consolidation and other costs

Hindalco Industries Ltd.

— (31-3-2009) (standalone)

From Notes to Accounts :

(a) The Company has formulated a scheme of financial restructuring to deal with various costs associated with its organic and inorganic growth plan. The recent economic downturn particularly in the commodity space is also expected to result in impairment/diminution in value of certain assets/investments. Accordingly, as per a scheme of Arrangement under Sections 391 to 394 of the Companies Act 1956 (‘the Scheme’) between the Company and its equity shareholders approved by the High Court of Judicature of Bombay, a separate reserve account titled as Business Reconstruction Reserve (‘BRR’) has been created by transferring balance standing to the credit of Securities Premium Account of the Company for adjustment of certain expenses as prescribed therein. Accordingly, Rs.8,647.37 crores has been transferred to BRR and following expense incurred during the year have been adjusted against the same as per the Scheme :

(i) Impairment of fixed assets amounting Rs.66.80 crores, net of deferred tax of Rs.34.40 crores (refer Note no. 24 in this schedule).

(ii) Certain costs amounting to Rs.0.18 crores in connection with the Scheme.

(b) Had the Scheme not prescribed aforesaid treatment, the impact would have been as under:

(i) in the Profit and Loss Account

From Auditors’ Report:

6. Without qualifying our opinion, attention is drawn to the following:

b) As per Scheme of Arrangement u/ s.391 to 394 of the Companies Act 1956 approved by the Honourable High Court of Mumbai vide its Order dated 29th June, 2009 the company has been allowed to create Business Reconstruction Reserve by transferring balance standing to the credit of Securities Premium Account for adjusting certain expenses as defined in the scheme. Accordingly, the management of the Company, during the year has identified and adjusted Impairment of Fixed Assets amounting to Rs.66.80 crores (Net of Tax) and certain expenses amounting to Rs.0.18 crores against Business Reconstruction Reserve. This has resulted in the profit before tax and profit after tax for the year being higher by Rs.101.38 crores and Rs.66.98 crores respectively and deferred tax asset being lower by Rs.34.40 crores. Refer Note No. 22 in Schedule 19.

From Directors’ Report:

Scheme of arrangement:

The Company has formulated a scheme of financial restructuring to deal with various costs associated with its organic and inorganic growth plan. The recent economic downturn particularly in the commodity space is also expected to result in impairment/diminution in value of certain assets/investments. The Board of Directors of the Company at its meeting held on 14th February, 2009 had approved said Scheme of Arrangement. Accordingly, as per the Scheme of Arrangement under Sections 391 to 394 of the Companies Act 1956 (‘the Scheme’) between the Company and its equity shareholders approved by the High Court of Judicature of Bombay, a separate reserve account titled as Business Reconstruction Reserve (‘BRR’) has been created by transferring balance standing to the credit of Securities Premium Account of the Company for adjustment of certain expenses as prescribed therein. Accordingly, Rs.8,647 crares has been transferred to BRR and Rs.67 crores in standalone accounts and Rs.4,617 crores in Consolidated accounts have been adjusted against the same as per the Scheme during the year.

HINDALCO INDUSTRIES LTD. – (31-3-2009) (consolidated)

From Notes to Accounts:

8.(a) The Company has formulated a scheme of financial restructuring to deal with various cost!’ associated with its organic and inorganic growth plan: The recent economic downturn particularly in the commodity space is also expected to result in impairment/ diminution in value of certain assets Zinvestments, Accordingly, as per a scheme of Arrangement under sections 391 to 394 of the Companies Act 1956 (‘the Scheme’) between the Company and its equity shareholders approved by the High Court of judicature of Bombay, a separate reserve account titled as Business Reconstruction Reserve (‘BRR’) has been created by transferring balance standing to the credit of Securities Premium Account of the Company for adjustment of certain expenses as prescribed therein. Accordingly, Rs.8,647.37 crores has been transferred to BRR and following expenses incurred during the year have been adjusted against the same as per the Scheme:

i) Impairment of goodwill amounting Rs.3,597.30 crores arises on consolidation of Novelis Inc. while preparing consolidated accounts of the Company.

ii) Impairment of fixed assets amounting Rs.111.30 crores (net of deferred tax of Rs.34.40 crares).

iii) Interest and Finance Charges amounting Rs.544.47 crores on loan taken by A. V. Minerals (Netherlands) B. V., subsidiary of the Company, for acquisition of Novelis Inc. by the Company.

iv) Costs amounting to Rs.363.62 crores in connection with exiting business.

v) Certain costs amounting to Rs.0.18 crores in connection with the Scheme.

b) Had the Scheme not prescribed aforesaid treatment, the impact would have been as under:

i) in the Profit and Loss Account

From Auditors’ Report:

5. Without qualifying our opinion, attention is drawn to the following:

c) As per Scheme of Arrangement u/s.391 to 394 of the Companies Act 1956 approved by the Honourable High Court of Mumbai vide its Order dated 29th June, 2009 the company has been allowed to create Business Reconstruction Reserve by transferring balance standing to the credit of Securities Premium Account for adjusting certain expenses as defined in the scheme. Accordingly, the management of the Company, during the year has identified and adjusted Impairment of Goodwill in a subsidiary amounting to Rs. 3,597.30 crores, Impairment of Fixed Assets amounting to Rs. 111.30 crores (Net of Tax) and certain expenses amounting to Rs. 908.27 crores against Business Reconstruction Reserve. This has resulted in loss for the year before tax being understated by Rs. 4,651.27 crores and profit for the year after tax of Rs.485.31 crores of the group would have been converted in a loss for the year of Rs. 4,165.96 crores. Refer Note No. 8 in Schedule 20.

BCAJ Admin

Section B : Miscellaneous

New Page 1

Suggestion of Expert Advisory Committee of ICAI for AS-22 not
followed pending revision of AS-22 by ICAI

Power Finance Corporation Ltd.

— (31-3-2008)

From Notes to Accounts :

20. The Deferred Tax Assets/Liabilities have been created
in terms of the Accounting Standard 22 issued by the Institute of Chartered
Accountants of India (ICAI) since the year it became applicable to the
company, i.e., 2001-02 except on account of ‘Special reserve created
and maintained under Section 36(1)(viii) of the Income Tax Act’ on which the
DTL was created by debiting profit & loss account for 2004-05 and by charging
revenue reserve for 2001-02 to 2003-04. However, PFC has taken up the issue
for total withdrawal of DTL on Special Reserve with the ICAI and with the
Ministry of Corporate Affairs. The Institute in its letter dated 4-4-2007
stated that the Accounting Standard Board examined AS-22, Accounting for Taxes
on Income, in the light of the opinion of the Expert Advisory Committee. It is
further stated that “the Board decided to take up the revision of the standard
on the lines of the corresponding IAS, namely, IAS-12, Income taxes, as a part
of its convergence with IFRS project. It was argued that since IAS-12 is based
on the ‘balance sheet approach’ as against ‘income statement approach’ on
which the existing AS-22 is based, the problem being encountered by the
company may not arise”. The Ministry of Corporate Affairs also endorsed the
letter issued by ICAI to PFC.

In view of this, rectification as suggested by the ICAI
vide their letter dated 31-1-2006 regarding creation of DTL on Special Reserve
created and maintained under Section 36(1)(viii) of the Income-tax Act, 1961
for the period 2001-02 to 2003-04 by charging to P&L Account and crediting the
reserves by Rs.539.39 crores has not been carried out and pending revision of
AS-22, the Company has maintained status quo and continued the practice
of creating the DTL on the Special Reserve created and maintained under
Section 36(1)(viii) of the Income-tax Act, 1961.

From Auditors’ Report :

Attention is drawn to the following Notes in Schedule 18 :

(j) Note No. 20 regarding the suggestion of the Expert
Advisory Committee of the ICAI suggesting the rectification by creating the
Deferred Tax Liability on ‘Special Reserve created and maintained’ under
Section 36(1)(viii) of the Income-tax Act, 1961 for the period 2001-02 to
2003-04, by charging the Profit & Loss Account (Prior Period Items) and
crediting the Reserves by Rs.539.39 crores, has not been carried out by the
Company pending the decision of the ICAI on the Company’s request for total
withdrawal of provision of AS-22 regarding creation of Deferred Tax Liability
for the Special Reserve Created and Maintained under Section 36(1)(viii) of
the Income-tax Act, 1961. Pending the decision of the ICAI, the Company has
not given effect to the suggestion of the Expert Advisory Committee of the
ICAI.

Intangible assets, etc. acquired under a Business Transfer
Agreement adjusted against General Reserve pursuant to High Court Order

Blue Star Ltd. — (31-3-2008)

From Notes to Accounts :

7. The Company has acquired the electrical contracting business of Naseer Electricals Private Ltd. (NEPL) under a business purchase agreement on a slump sale basis for Rs.48,09.77 lakhs (including Rs.5,00.00 lakhs held in Escrow account till the conditions stipulated in the said agreement are fulfilled) with effect from January 24, 2008. After adjusting the value of tangible fixed assets acquired of Rs.1,16.65 lakhs, the balance consideration along with the incidental expenses have been allocated towards various intangible assets and goodwill as valued by an independent valuer as detailed hereunder :

8. As per the Scheme of Arrangement approved by the shareholders at the Extra-ordinary General Meeting held on March 4,2008 and duly approved by the Hon’ble High Court at Bombay vide its order dated April 11, 2008, the Company has, in accordance with the accounting treatment prescribed therein, adjusted the following amounts against the General Reserve of the Company:

(a) The intangible assets of Rs.41,18.62 lakhs and Goodwill of Rs.8,32.32Iakhs arising on acquisition of electrical contracting busi-ness of NEPL.

(b) Loss of Rs.35.10 lakhs on sale of 3,98,000 equity shares of Blue Star Design & Engineering Ltd.

3. Qualification in Auditors’ Report on Consolidated Financial Statements

NAVIN FLUORINE INTERNATIONAL LTD. – (31-3-2008)

From Auditors’ Report:

5. Attention is invited to the following in Schedule 17, out of which points i and ii were also the subject matter of our report similarly modified in the previous year:

(i) Note 3.a, regarding accounts of the joint venture company not having been consolidated which is in contravention of the provisions of AS-27, ‘Financial Reporting of Interests in Joint Ventures’.

(ii) Note 16, regarding non-accounting of rent/ recovery of expenses of Rs.Nil; aggregate to date as at the year end, Rs.108.83 lacs (previous year, Rs.Nil; aggregate to date as at the previous year end, Rs.108.83 lacs);.

(iii) Note 12, regarding recognition of deferred tax asset of Rs.285.94 lacs (previous year, Rs.Nil) by the associate in respect of unabsorbed depreciation and carry-forward losses.

We further report that without considering item 5(i) above, the effect of which on the financial statements for the year ended 31st March 2008 and on the corresponding figures in the previous year ended 31st March, 2007, could not be determined, had the observation made by us in item 5(ii) and (iii) been considered, there would have been a loss of Rs.145.53 lacs, as against the reported profit of Rs.56.83 lacs (previous year, a profit of Rs.1,719.09 lacs, as against the reported figure of profit of Rs.1622.47 lacs), reserves and surplus would have been Rs.18,091.65 lacs, as against the reported figure of Rs.18,294.01 lacs (as at 31st March, 2007, Rs.18,450.90 lacs, as against the reported figure of Rs.18,354.28 lacs), investments would have been 1,464.55 lacs, as against the reported figure of Rs.1,750.49 lacs, loans and advances would have been Rs.6,227.21 lacs, as against the reported figure of Rs.6,118.38 lacs (as at 31st March, 2007, Rs.3,124.99lacs, as against the reported figure of Rs. 3,016.16 lacs) and provisions would have been Rs. 842.52 lacs, as against the reported figure of Rs.817.27lacs (as at 31st March, 2007, Rs.880.65 lacs, as against the reported figure of Rs.868.44 lacs).

Subject to the foregoing………….

BCAJ Admin

Miscellaneous

Qualifications in Audit Report on Consolidated Financial Statements (CFS)

Significant Accounting Policies :

Particulars of consolidation :

(ii) Borg Warner Morse TEC Murugappa Private Limited ceased to be a Joint Venture with effect from 30th September 2008, consequent to the sale of shares held in them by the Company. Accordingly, the Unaudited financial statements/information from 1st January 2008 to 30th September 2008 available with the Management have been considered for the purpose of the Consolidated Financial Statements.

From Notes to Accounts (CFS) :

Joint Ventures :

8(a) Provisioning for Standard Assets and Capital Reduction :

Considering the overall economic environment, CDFL has reviewed its past practice of provisioning for its loan portfolio and, as against the practice hitherto followed and, having regard to the principle of prudence and conservatism, has decided to voluntarily create a Provision for Standard Assets in respect of the Standard Assets in the Books of Account as at 31st March 2009 and apply such provisioning norms for the Standard Assets, suo moto, on an ongoing basis, though statutorily not required under the Non-Banking Financial (Non-deposit Accepting or Holding) Companies ‘Prudential Norms (Reserve Bank) Directions, 2007.

Pursuant to the Capital Reduction Proposal under Sections 78, 100 to 103 of the Companies Act, 1956 as approved by the shareholders of CDFL through postal ballot and the Capital Reduction Proposal confirmed by the Hon’ble High Court of Judicature at Madras on 29th April 2009, whose Order and minute dated 20th April 2009 was registered with the Registrar of Companies on 30th April 2009, an amount of Rs.323.53 Cr. (Share of the Group Rs.100.08 Cr.), being the balance in the Securities Premium Account of CDFL as at 31st March 2008 has been withdrawn for meeting the specific purposes as indicated below.

According to the Capital Reduction Order as approved by the Hon. High Court of Judicature at Madras, the following can be utilised/adjusted/set off against the balance of Rs.323.53 Cr. (Share of Group Rs.100.08 Cr.) available in the Securities Premium Account of CDFL as at 31st March 2008 :

Utilisation towards creation of Provision for Standard Assets for an amount not exceeding Rs.200 Cr. (Share of the Group Rs.61.87 Cr.) in respect of the existing standard assets in the books of account of CDFL as at 31st March 2009 based on the provisioning norms approved by the Management for various categories of loan portfolios.

Adjustments of the write-off of the bad debts/loan losses/other non-recoverable assets, if any, existing in the books of account of CDFL as at 31st March 2009, whether provided for or not, for an amount not exceeding Rs.100 Cr. (Share of the Group Rs.30.93 Cr.). Provisions existing for such bad debts/loan losses/other non-recoverable assets, if available, as at 31st March 209 will be credited back to the Profit and Loss Account on such write-off of bad debts/loan losses/other non-recoverable assets.

Setting off of the provision for diminution, other than temporary, if any, in the value of the investments made by CDFL in one of its subsidiary companies, M/s. DBS Cholamandalam Distribution Limited, and setting off the provision for doubtful receivables, if any, from the said subsidiary in the books of account of CDFL as at 31st March 2009 for an amount not exceeding Rs.23.53 Cr. (Share of the Group Rs.7.28 Cr.).

Such utilisation/adjustment/set-off has been made by withdrawal of such sums from the Securities Premium Account of CDFL to the Provision for Standard Assets Account, Loss Assets Written Off Account and Provision for Diminution in the Value of Investments Account in the Profit and Loss Account.

Hence, for the year ended 31st March 2009, such Provision for Standard Assets amounting to Rs.200 Cr. (Share of the Group Rs.61.87 Cr.), Write-off of the Bad Debts/Loan Losses amounting to Rs.100 Cr. (Share of the Group Rs.30.93 Cr.) and Provision for Diminution in the Value of the Investments amounting to Rs.23.53 Cr. (Share of the Group Rs.7.28 Cr.), as determined by the Management, have been debited to the Profit and Loss Account and such sums have been withdrawn from the Securities Premium Account and credited to the Profit and Loss Account into the respective heads of account.

The said adjustments are not in accordance with the Accounting Standards notified by the Government of India under Section 211(3C) of the Companies Act, 1956 and other relevant Pronouncements of the Institute of Chartered Accountants of India.

Had CDFL not made Provision for Standard Assets in accordance with its revised provisioning policy and had the aforesaid adjustments to Securities Premium not been effected, the consequent impact on the consolidated results of the Group would have been as indicated in the table below under the head ‘Proforma Results of the Group’ :

b) Bank reconciliation :

There are certain outstanding open items in some of the bank reconciliations of CDFL (Bank Cash Credit Accounts – Net total excess of book balance over the bank statement balance as at 31.3.2009-Rs.63.35 Cr. : and Bank Current Accounts – Net total excess of book balance over the bank statement balance as at 31.3.2009 – Rs.6.74 Cr.), which CDFL is in the process of resolving. The Management of CDFL is of the opinion that adjustments, if any, arising out of clearance of such reconciling items should not have a material impact on the reported amount of assets, liabilities, income and expenses and, consequently, on the financial statements of CDFL as well as the Consolidated Financial Statements for the year ended 31st march 2009.

c) Assets de-recognised – Share of the Group:

Notes:
(i) During the current year, the Gujarat High Court, in the case of Kotak Mahindra Bank v. O.L. of M/s. APS Star India Limited, held that Banks are prohibited from transferring or purchasing debts. Consequent to the above, the petitioners have filed a Special Leave Petition (SLP) with the Supreme Court. In its interim order, the Supreme Court has held that in the event of dismissal of the SLP, the assignment deals entered into by banks would be deemed not to have materialised.

However, CDFL is hopeful (If a favourable outcome to the aforesaid Special Leave Petition (SLP) filed in the Supreme Court given: that such deals are widely prevalent in the banking and financial services industry and the RBI has itself issued specific guidelines in respect of Securitisation transactions and hence, no adjustments to the financial statements have been considered necessary at this stage by the Management in this regard.

ii) There have been no Securitisation of Receivables during the current year as well as the previous year and hence the disclosure requirements under RBI Circular No. DBOD. NO.BP.BC.60/21.04.048/2005-06 have not been given. The details given above relate to Securitisation transactions prior to 31st March 2007.

d) Change in Accounting Estimates for Non-Performing Assets Provisions:

During the year, the Management of CDFL has reviewed the provisioning norms applied for Non-Performing Assets and has streamlined the same duly taking into account the stipulated minimum provisioning requirements of the Reserve Bank of India (RBI), the current economic environment and the voluntary Provision for Standard Assets of Rs.200 Cr. (Share of the Group Rs.61.87 Cr.) as at 31st March 2009 [Refer Note 8(a) above]. Such changes in the provisioning estimates by the Management used for the year ended 31st March 2009 in respect of assets identified for 100% provision as compared to the previous year ended 31.3.2008 has resulted in the share of the Group in the Provision for Non-Performing Assets for the current year being lower by Rs.20.70 Cr. and, consequently, the profit before tax for the year ended 31.3.2009 of the Group is higher by that amount.

e) Exceptional items:

The year 2008-2009 saw a global financial crisis, both in terms of liquidity and volatile interest movement. The schemes of DBS Chola Mutual Fund also were impacted as there were redemption pressures at various points of time. Therefore to protect the interest of unit holders, one of the subsidiaries of CDFL – DBS Cholamandalam Asset Management Limited absorbed the losses of Rs16.12 Cr. on account of securities (including loss of Rs.8.37 crores on Non-Convertible Debentures purchased and sold back to Mutual Fund Schemes) to correct the valuation of the securities. Accordingly the Group’s share of .such losses amounting to Rs.4.99 Cr. has been shown under Exceptional Items in the Consolidated Financial Statements.

From Auditors’ Report on CFS :

4. As stated in Note 2(ii) of Schedule 17, in the case of one of the JVs which ceased to be a JV with effect from 30.9.2008, the figures used for the consolidation are based on the unaudited financials statements/information available with the management. The Company’s share of total revenues and net profit after tax for the period 1.01.2008 to 30.9.2008 relating to the said JV considered in the Consolidated Financials Statements is Rs.6.75 crores and Rs.0.12 crores, respectively.

5. In the case of one of the joint ventures of the Company, M/ s. Cholamandalam DBS Finance Limited (CDFL) :

a) Attention is invited to Note 8(b) of Schedule 18 regarding certain outstanding open items in some of the Bank Reconciliations of CDFL, which CDFL is in the process of resolving. The Management of CDFL is of the opinion that adjustments, if any, arising out of clearance of such reconciling items should not have a material impact on the reported amounts of assets, liabilities, income and expenses and, consequently, on the financial statements for the year. Pending clearance of such outstanding open items and completion of the said Reconciliations we are unable to form an opinion in the matter.

b) Without qualifying our report, we invite attention to Note 8(a) of Schedule 18 on capital reduction by CDFL regarding utilisation/ adjustment/set-off of the Securities Premium Account towards creation of Provision for Standard Assets for an amount of Rs.200 crores, adjustment of write-off the bad debts/loan losses and other non-recoverable assets for an amount of Rs.I00 crores and setting off of the provision of diminution, other than temporary, in the value of investments in one of CDFL’s subsidiaries, M/ s. DBS Cholamandalam Distribution Limited amounting to Rs.23.53 crores, by withdrawal of such sums from the Securities Premium Account to the Profit and Loss Account of CDFL, made in accordance with the Capital Reduction Proposal under Sections 78, 100 to 103 of the Companies Act, 1956 and confirmed by the Hon. High Court of Judicature at Madras on 29th April 2009, whose Order and minute dated 20th April 2009 was registered with the Registrar of Companies, Chennai on 30.4.2009. This is not in accordance with the Accounting Standards referred to in Section 211(3C) of the Companies Act, 1956 and the relevant Pronouncements of the Institute of Chartered Accountants of India.

As stated in the aforesaid Note, had CDFL not made Provision for Standard Assets in accordance with its revised provisioning policy and had the aforesaid adjustments to Securities Premium not been effected, the profit after tax of the Group for the year would have been Rs.16.22 crores as against the profit after tax of the Group of Rs.54.43 crores.

c) Without qualifying our report, we invite attention to Note 8(d) of Schedule 18 regarding the change in the provisioning norms of certain loan portfolios of CDFL during the year ended 31 March 2009 by the Management of CDFL for the reasons stated therein.

6. In the case of one of CDFL’s subsidiaries, M/ s. DBS Cholamandalam Asset Management Limited (DCAML):

Without qualifying our report, we invite attention to Note 8(e) of Schedule 18 regarding the Group’s share of loss of RS.2.59 crores relating to the purchase and sale back of securities to the Mutual Fund Schemes by DCAML for the reasons stated therein.

7. In the case of one of the subsidiaries, M/ s. Cholamandalam MS General Insurance Company Limited (CMSGICL), the other auditors’ report on its financial statements for the year ended 31.3.2009 includes the following matters:

a) The actuarial valuation in respect of Incurred But Not Reported (IBNR) Claims and Incurred But Not Enough Reported (ffiNER) Claims, included under Sundry Creditors in the financial statements as at 31.3.2009, is the responsibility of the subsidiary’s appointed actuary. The actuarial valuation of liabilities as at 31.3.2009 has assumptions considered by him for such valuation are appropriate and are in accordance with the requirements of Insurance Regulatory and Development Authority (IRDA) and Actuarial Society of India in concurrence with IRDA. The auditors have relied upon the actuary’s certificate in this regard.

b) Without qualifying the opinion, attention is invited to Note 1(n) of Schedule 18 regarding a fire claim repudiated by the Company and accordingly no provision is considered necessary based on legal opinion.

8. We report that the Consolidated Financial Statements have been prepared by the Company’s Management in accordance with the requirements of Accounting Standard 21 Consolidated Financial Statements and Accounting Standard 27 Financial Reporting of Interests in Joint Ventures and on the basis of the separate audited financial statements of the Company, its subsidiaries and joint ventures included in the Consolidated Financial Statements except for the unaudited financial statements in the case of one of the joint ventures as indicated in Para above.

9. Subject to our comments in paragraphs 5(a) above and the consequential effects thereof, if any, which are not determinable at this stage, based on our audit and on consideration of the reports of the other auditors on the separate financial statements and other financial information of the entities referred to in paragraph 3 above and read with our comments in paragraphs 4, 5(b), 5(c), 6 & 7 above, and to the best of our information and according to the explanations given to us, we are of the opinion that the aforesaid Consolidated Financial Statements give a true and fair view in conformity with the accounting principles generally accepted in India.

BCAJ Admin

Exploration and development costs

New Page 1GAIL (INDIA) LTD. — (31-3-2007)

5. Exploration and development costs :

‘Successful Efforts Method’ is being followed for accounting
of oil and gas exploration and production activities which include :

(a) Survey costs are expensed in the year in which these
are incurred.

(b) Cost of exploratory wells is carried as ‘Exploratory
wells in progress’. Such exploratory wells in progress are capitalised in the
year in which the producing property is created or is expensed in the year
when determined to be dry/abandoned.

(c) All wells appearing as ‘Exploratory wells in progress’
which are more than two years old from the date of completion of drilling are
charged to Profit and Loss Account except those wells which have proved
reserves and the development of the fields in which the wells are located has
been planned. Such wells, if any, are written back on commencement of
commercial production.

Revenue recognition :

12. Sale proceeds are accounted for, based on the consumer
price inclusive of statutory levies and charges up to the place where ownership
of goods is transferred.

13. The interest allocable to operations in respect of assets
commissioned during the year is worked out by adopting the average of debt
equity ratios at the beginning and closing of that year and applying the average
ratio of debt thus worked out to the capitalised cost.

14. Pre-project expenditure relating to projects which are
considered unviable/closed is charged off to revenue in the year of
declaration/closure.

levitra

BCAJ Admin

Exploration and Development Costs

New Page 1Hindustan Oil Exploration Company Ltd. — (31-3-2007)

2. Exploration and Development Costs :

The Company generally follows the ‘Successful Efforts Method’
of accounting for its exploration and production activities as explained below :

(i) Cost of exploratory wells, including survey costs, is
expensed in the year when determined to be dry/abandoned or is transferred to
the producing properties on attainment of commercial production.

(ii) Cost of temporary occupation of land, successful
exploratory wells, development wells and all related development costs,
including depreciation on support equipment and facilities, are considered as
development expenditure. These expenses are capitalised as producing
properties on attainment of commercial production.

(iii) Producing properties, including the cost incurred on
dry wells in development areas, are depleted using ‘Unit of Production’ method
based on estimated proved developed reserves. Any changes in reserves and/or
cost are dealt with prospectively. Hydrocarbon reserves are estimated and/or
approved by the management committees of the joint ventures, which follow the
International Reservoir Engineering Principles.

Explanatory Notes :

1. All exploration costs including acquisition of geological
and geophysical seismic information, licence and acquisition costs are initially
capitalised as ‘Capital Work in Progress-Exploration Expenditure’, until such
time as either exploration well(s) in the first drilling campaign is determined
to be successful, at which point the costs are transferred to ‘Producing
Properties’ or it is unsuccessful in which case such costs are written off
consistent with para 2 below.

2. Exploration costs associated with drilling, testing and
equipping exploratory well and appraisal well are initially capitalised as
‘Capital Work in Progress — Exploration Expenditure’, until such time as such
costs are transferred to ‘Producing Properties’ on attainment of commercial
production or charged to the Profit and Loss Account, unless :

(a) such well has found potential commercial reserves; or

(b) such well test result is inconclusive and is subject to
further exploration or appraisal activity like acquisition of seismic, or
re-entry of such well, or drilling of additional exploratory/step out well in
the area of interest, such activity to be carried out no later than 2 years
from the date of completion of such well testing;

Management makes quarterly assessment of the amounts included
in ‘Capital Work in Progress-Exploration Expenditure’ to determine whether
capitalisation is appropriate and can continue. Exploration well(s) capitalised
beyond 2 years are subject to additional judgment as to whether facts and
circumstances have changed and therefore the conditions described in (a) and (b)
no longer apply.

Site restoration :

Estimated future liability relating to dismantling and
abandoning producing well sites and facilities whose estimated producing life is
expected to end during next ten years is expensed in proportion to the
production for the year and remaining estimated proved reserves of hydrocarbons
based on latest technical assessment available with the Company.

Revenue recognition :

(i) Revenue from the sale of crude oil and gas net of
Government’s share of Profit oil and Value Added Tax is recognised on transfer
of custody to refineries/others.

(ii) Sale is recorded at the invoiced price, which is
subject to the approval of the Government of India, Ministry of Petroleum &
Natural Gas (MOP&NG). The difference between the invoiced price and the final
approved price, if any, is adjusted in the year in which the aforesaid
approval is received.

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BCAJ Admin

Miscellaneous

CARO Audit Report in case of a company where in earlier years, manipulations admitted by the erstwhile management and previous years audit reports withdrawn by earlier auditors

Satyam Computer Services Ltd. — (31-3-2009)

Compiler’s Note:

The main Audit Report of the Company was published in February 2011 (pages 87-92) issue of BCAJ. Given hereunder are relevant extracts from the CARO report. Since disclosures in the Notes to Accounts referred to in the audit report are voluminous, the same are not reproduced here. The same can be made available by BCAS on request.

Annexure to the Auditors’ Report:

(Referred to in paragraph 5 of our report of even date)

(i) Having regard to the nature of the Company’s business/activities/result/transactions, etc., clauses (viii), (xii), (xiii), (xiv), (xix) and (xx) of CARO are not applicable.

(ii) In respect of its fixed assets:

(a) The Company has maintained records of fixed assets showing particulars, including quantitative details and situation of the fixed assets situated within India except that quantitative details, asset description, etc., in respect of some of the fixed assets, need to be updated in the Fixed Assets Register. According to the information and explanations given to us, in respect of the fixed assets situated at the overseas branches of the Company, the Company has not maintained complete records showing the quantitative details and situation of fixed assets.

(b) The fixed assets were not physically verified during the year by the Management. Refer to paragraph 18(c) of the Auditors’ Report also.

(c) The fixed assets disposed of during the year, in our opinion, do not constitute a substantial part of the fixed assets of the Company and such disposal has, in our opinion, not affected the going concern status of the Company.

(iii) In respect of its inventory:

(a) As explained to us, the inventories were not physically verified during the year by the Management.

(b) Since no physical verification was conducted, reporting on the procedures followed by the Management does not arise.

(c) In our opinion and according to the information and explanations given to us, the Company has not maintained proper records of its inventories during the year, though the required adjustments to account for the inventory in the books of account were made based on the information available with the Management as at the year end. Refer to Paragraph 12(d) of the Auditors’ Report also.

(iv) Subject to the comments in paragraphs 8 and 12(b) of the Auditors’ Report, in respect of loans, secured or unsecured, granted by the Company to companies, firms or other parties covered in the Register u/s.301 of the Act :

(a) With respect to the transactions recorded for the period from 1st April to 31st December, 2008, as the Register maintained by the Company (updated as at that date) has been seized by the Income Tax Department, only photocopies were made available for our verification. Subject to our reliance on such photocopies, the Company has not granted or taken any loans, secured or unsecured, to/from companies, firms or other parties covered in the Register maintained in pursuance of section 301 of the Act, during the period from 1st April to 31st December, 2008.

(b) According to the information and explanations given to us, the Company has not granted or taken any loans, secured or unsecured, to/from companies, firms or other parties covered in the Register maintained in pursuance of section 301 of the Act for the period from 1st January to 31st March, 2009.

(v) In our opinion and according to the information and explanations given to us, there was no adequate internal control system commensurate with the size of the Company and the nature of its business with regard to purchases of inventory and fixed assets and the sale of goods and services. During the course of our audit, we have observed several major weaknesses in such internal control system. Refer to paragraph 18(a) of the Auditors’ Report also.

(vi) Subject to the comments in paragraphs 8 and 12(b) of the Auditors’ Report, in respect of contracts or arrangements entered in the Register maintained in pursuance of section 301 of the Act, to the best of our knowledge and belief and according to the information and explanations given to us and subject to our reliance on the photocopies of the Register for the period from 1st April to 31st December, 2008 [Refer Item (iv)(a) above]:

(a) The particulars of contracts or arrangements referred to in section 301 of the Act that needed to be entered in the Register maintained under the said section have been so entered.

(b) There were no transactions in excess of Rs.5 lakhs in respect of any party.

(vii) Subject to our comments in paragraph 8 of the Auditors’ Report, according to the information and explanations given to us, the Company has not accepted any deposit from the public during the year.

(viii) In our opinion, read with our comments in paragraph 18(a) of the Auditors’ Report, the Company did not have an internal audit system commensurate with its size and nature of its business.

(ix) According to the information and explanations given to us in respect of statutory dues:

(a) Whilst the Company has been generally regular in depositing undisputed dues relating to Investor Education and Protection Fund, Wealth Tax and other material statutory dues applicable to it with the appropriate authorities, there were significant delays in depositing undisputed dues in respect of Provident Fund, Employees’ State Insurance, Tax Deducted at Source, Sales Tax/VAT, Works Contract Tax and Service Tax.

(b) There were no undisputed amounts payable in respect of Provident Fund, Investor Education and Protection Fund, Employees’ State Insurance, Wealth Tax, Sales Tax/VAT, Service Tax, Cess and other material statutory dues in arrears as at 31st March, 2009 for a period of more than six months from the date they became payable except in respect of Tax Deducted at Source amounting to Rs.171,945 and certain overseas taxes amounting to Rs.866,456. As regards to income tax, we are unable to comment on the dues in arrears as on 31st March, 2009 for a period of more than six months from the date they became payable in view of the matters described under paragraph 14 of the Auditors’ Report.

c) Details of dues of Income Tax, Sales Tax, Service Tax and Cess which have not been deposited as on 31st March, 2009 on account of disputes are given below:
(not reproduced here)

x) The accumulated losses of the Company at the end of the financial year have exceeded the net worth of the Company. Further, the Company has incurred cash losses in the financial year ended 31st March, 2009. For the reasons stated in paragraph 15 of the Auditors’ Report, we are unable to comment on the cash losses for the immediately preceding financial year.

xi) In our opinion and according to the explanations given to us, the Company has not defaulted in the repayment of dues to banks. The Company does not have any dues to financial institutions and has not issued any debentures.

xii) In our opinion and according to the information and explanations given to us, the terms and conditions of the guarantees given by the Company for loans taken by some of its sub-sidiaries from banks and financial institutions, as made available to us for our verification, are not prima facie prejudicial to the interests of the Company considering the nature of the guarantees, purposes and needs.

xiii) In our opinion and according to the information and explanations given to us, term loans have been applied for the purposes for which they were obtained, other than temporary deployment pending application.

xiv) In view of our comments in paragraph 8 of the Auditors’ Report, we are unable to comment whether the funds raised on short-term basis have been used during the year for long-term investment.

xv) The Company has not made any preferential allotment of shares to parties and companies covered in the Register maintained u/s.301 of the Companies Act, 1956 during the year.

xvi)To the best of our knowledge and according to the information and explanations given to us, the details of fraud on or by the Company noticed or reported during the year are given below:

a) As stated in paragraph 6 of the Auditors’ Report, there were various financial irregularities which are more fully described in Note 3 of Schedule 18.

b) Various other instances of fraud noticed by the Management involving the employees of the Company/vendors of the Company, the amounts whereof were not material and the same have been suitably dealt with in the financial statements of the Company.

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