April 2015

ASSESMENT OF THE IMPACT OF IND AS (IFRS) ON E COMMERCE

SECTOR

CA H J MANKAD

MEMBER OF ICAI

M.NO. 154850

SUMMARY From Paragraph

Section1 Introduction IN 1 Section 2 Business Model of E Commerce Industry 2.1 Section 3 Overview of Ind As 101 3.1 Section 4 Accounting for Revenue 4.1 Section 5 Accounting for Private Equity Funding 5.1 Section 6 Accounting for Intangibles 6.1 Section 7 Accounting for Property Plant & Equipment 7.1 Section 8 Accounting for Deferred Tax Asset & Liability 8.1 Section 9 Conclusion 9.1 Appendix 1 References

Section 1 Introduction IN 1 The main objectives of the discussion paper are

1) To highlight the areas of financial reporting which will have a major impact on first IFRS Financial Statement of the E Commerce Companies.

2) To help clients understand the impact of IFRS on the financial reporting process. 3) To help the KPMG Teams to have an overview of the specific accounting issues in E Commerce Sector.

IN 2 Based on the public data & annual reports of the companies in the E Commerce Sector, I have outlined the list of the significant accounting areas to be consider by E Commerce sector while moving to Ind As.

SECTION 2 Business Model of E Commerce Industry1

2.1 The Indian e-commerce market was worth Rs 75,000 crore, in 2013, according to a joint report by KPMG and Internet and Mobile Association of India. India has the potential to double its economic contribution via Internet, from 1.6 percent GDP at present to 2.8 and 3.3 percent by 2015 [MCkensy’2012]. 2.2 The E Commerce sector is classified into four major types, based on the parties involved in the transactions – A. Business-to-Business (B2B), B. Business-to-Customer (B2C), C. Customer-to Business (C2B) and D. Customer-to-Customer (C2C). 2.3 The below figure describes the E Commerce Industry in India .

1 The data has been compiled from the publically available information.

E Commerce Industry in India

Online

Ticketing Online Retail

Online Market

Places Online Deals Online Portals

Make My Trip

Red Bus

Book My Show

Jabong

Yep Me

First Cry

Flipkart

SnapDeal

E Bay

Amazon

Groupon

Times Deal

Naukari.com

Magic

Bricks.com

Market Place

Model B2C Model Market Place

Model

Market Place

Model

B2C Model

2.4 The E Commerce Sector has two business models as under:

2.5 The accounting under the both the models (i.e. Market Place Model & B2C Model) is different as both the

business models have different purpose. For Instance

Particulars Market Place Business Model B2C Business Model

Sales The company earns its revenue from Commissions & Advertisement from the vendors.

The company earns revenue from the sale of the products or service to the customer

Cost of Sale The Cost of Sale includes: 1. Delivery & Logistics Cost 2. Commission Paid to the sellers 3. Cost of maintaining the website 4. Depreciation & Amortization

The Cost of Sale includes: 1. Purchase Cost of the products 2. Cost of maintaining the website 3. Depreciation & Amortization 4. Delivery & Logistics Cost 5. Discount

Inventory There would be no inventories in the books

The inventories shall be valued at Cost or NRV whichever is lower

Sales Returns

Since the company has not recognized sale in the books, the sales return will not be recognized.

The company has to create a provision for the sales returns in the books in the period in which goods are sold & reduce the same from the revenue for the said period.

Business Model followed by E Commerce Sector

Market Place

Model

B2C Model

Where the sellers can directly sell their

products to the customer on the company

website.

For e.g. Flipkart website site is linked to

the seller website & costumer places a

order with the seller.

In this Model the Flipkart pays a

commission/ referral Fees to the seller.

Therefore, Flipkart does not have to

maintain inventory as the seller is directly

selling to the costumer.

Where the costumer places an online

order with the company & the company

needs to purchase the same from vendor

& supply the same to the customer.

For e.g. the costumer places an order of

a Titan watch on the Flipkart website.

Flipkart has to purchase a Titan watch

from the vendor & supply the same to

costumer.

Therefore, Flipkart have to maintain

inventory as the seller is directly selling

to the costumer.

2.6 When the company which uses both the above models, it has to exercise the judgment to record the gross

amount of product sales or net amount earned as commission.

2.7 In India, most of the e commerce entity is privately funded by venture capital funds. The most of these venture

capital investors are foreign investors.

2.8 As per present FDI Policy, the foreign investors cannot invest directly in an e commerce entity which is

domiciled in India. Therefore, the investor invest in the parent of the e commerce entity which is domiciled outside

India.

2.9 The parent company infuses the capital funds into its Indian subsidiary & the Indian subsidiary issues equity

shares to the parent in consideration of the capital infusion.

2.10 The below figure summaries the capital funding structure of the e commerce companies:

1. The Venture Capital Investors infuse funds in the ultimate parent company of the e commerce entity

2. The parent company issues equity shares to venture capital funds or it can be quasi equity or loan

depends on the terms of agreement with the venture capital investor.

3. The parent company infuses the funds into wholly owned e commerce entity

4. The e commerce entity issues equity shares in capital infusion.

Venture Capital

Funds Parent Company of E

Commerce Entity

E Commerce Entity

Domiciled in India

1

2

3 4

SECTION 3 Overview of Ind As 101 3.1 The below figure describes the major points which are relevant for preparing the first Ind As balance sheet.

Explicit & Unreserved Statement on compliance with Ind As

Impact: High

3.2 An entity’s first Ind AS financial statements are the first annual financial statements in which the entity adopts Ind ASs, in accordance with Ind Ass notified under the Companies Act, 2013 and makes an explicit and unreserved statement in those financial statements of compliance with Ind ASs. (Para 3 of Ind As 101) Accounting Policies Impact: High 3.3 An entity shall use the same accounting policies in its opening Ind AS Balance Sheet and throughout all periods presented in its first Ind AS financial statements. Those accounting policies shall comply with each Ind AS effective at the end of its first Ind AS reporting period, except for which an entity has selected the exception from applying Ind As from retrospective application. (Para 7 of Ind As 101) 3.4 An entity shall not apply different versions of Ind ASs that were effective at earlier dates. An entity may apply a new Ind AS that is not yet mandatory if that Ind AS permits early application. (Para 8 of Ind As 101) 3.5 An entity shall, in its opening Ind AS Balance Sheet: (a) Recognise all assets and liabilities whose recognition is required by Ind ASs; (b) Not recognise items as assets or liabilities if Ind ASs do not permit such recognition; (c) Reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with Ind ASs; and (d) Apply Ind ASs in measuring all recognised assets and liabilities. (Para 10 of Ind As 101) 3.6 The accounting policies that an entity uses in its opening Ind AS Balance Sheet may differ from those that it used for the same date using its previous GAAP. The resulting adjustments arise from events and transactions before the date of transition to Ind ASs. Therefore, an entity shall recognize those adjustments directly in retained earnings (or, if appropriate, another category of equity) at the date of transition to Ind ASs. (Para 11 of Ind As 101)

Overview of

Ind As 101

Explicit Unreserved

Statement on

compliance with Ind

As

Accounting

Policies

Opening IFRS

Balance sheet

Comparative

Information &

Reconciliations

Exemption

Exceptions from

retrospective

application

Opening IFRS Balance sheet Impact: High 3.7 The MCA through notification dated 16 February 2015 has issued the Companies (Indian Accounting Standards) Rules, 2015 (Rules) which lay down a roadmap for companies other than insurance companies, banking companies and non-banking finance companies (NBFC) for implementation of Ind AS converged with IFRS. The Rules will come into force from the date of its publication in the Official Gazette. 3.8 The Ind As is applicable to companies as follows:

Particulars Phase 1 Phase 2 Voluntary Adoption

Year of adoption FY 2016-17 FY 2017-18 FY 2015-16

Comparative year FY 2015-16 FY 2016-17 FY 2014-15

Transition Date (Opening IFRS Balance sheet)

01.04.2015 01.04.2016 01.04.2014

Adoption Date (Comparative Financial Statement)

FY 2015-16 FY 2016-17 FY 2014-15

First Reporting Period

FY 2016-17 FY 2017-18 FY 2015-16

Comparative Information & Reconciliations Impact: High 3.9 An entity’s first Ind AS financial a shall include 1) At least three Balance Sheet, 2) Two Statements of profit and loss, 3) Two Statements of cash flows and 4) Two Statements of changes in equity 5) Related notes, including comparative information for all statements presented. 3.10 An entity first Ind AS financial a shall include 1. Reconciliations of its equity reported in accordance with previous GAAP to its equity in accordance with Ind ASs for both of the following dates:

(A) the date of transition to Ind ASs; and (B) the end of the latest period presented in the entity’s most recent annual financial statements in

accordance with previous GAAP.

2. A reconciliation to its total comprehensive income in accordance with Ind ASs for the latest period in the entity’s most recent annual financial statements. The starting point for that reconciliation shall be total comprehensive income in accordance with previous GAAP for the same period or, if an entity did not report such a total, profit or loss under previous GAAP.

Carve Out Ind AS 101, requires an entity to provide comparatives as per the existing notified Accounting Standards. It is provided that, in addition to aforesaid comparatives, an entity may also provide comparatives as per Ind As on a memorandum basis. Entities that provide comparatives would have to provide reconciliations which have to provide reconciliations which are similar to IFRS

Exemption from Ind As Impact: High 3.11 The E Commerce companies can opt for following exemption while preparing the first Ind As balance sheet. (Note: There are 23 exemptions as per Ind As 101, the below mentioned are the relevant exemptions for E Commerce sector) (A) Deemed cost

Exemption 1. Measurement of item of property, plant and equipment at the date of transition to Ind As at its fair value

and use that fair value as its deemed cost at that date. 2. A first-time adopter may elect to use a previous GAAP revaluation of an item of property, plant and

equipment at, or before, the date of transition to Ind ASs as deemed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to:

( a ) fair value; or ( b ) cost or depreciated cost in accordance with Ind ASs, adjusted to reflect, for example, changes in a general or specific price index.

3. As per carve outs Ind AS 101 provides an entity an option to use carrying values of all assets as on the date of transition in accordance with previous GAAP as an acceptable starting point under Ind AS.

Applicability of the Exemption

1. investment property, accounted for in accordance with the cost model in Ind AS 40, Investment Property; and

2. intangible assets that meet: ( i ) the recognition criteria in Ind AS 38 (including reliable measurement of original cost); and ( i i ) the criteria in Ind AS 38 for revaluation (including the existence of an active market). An entity shall not use these elections for other assets or for liabilities.

(B) Cumulative translation differences

Exemption A first-time adopter need not comply with these requirements for cumulative translation differences that existed at the date of transition to Ind As. If a first-time adopter uses this exemption:

(a) the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to Ind ASs; and (b) the gain or loss on a subsequent disposal of any foreign operation shall exclude translation differences that arose before the date of transition to Ind ASs and shall include later translation differences. (C ) Compound financial instruments Exemption Ind AS 32 Financial Instruments: Presentation requires an entity to split a compound financial instrument at inception into separate liability and equity components. If the liability component is no longer outstanding, retrospective application of Ind AS 32 involves separating two portions of equity. The first portion is in retained earnings and represents the cumulative interest accreted

on the liability component. The other portion represents the original equity component. However, in accordance with this Ind AS, a first-time adopter need not separate these two portions if the liability component is no longer outstanding at the date of transition to Ind ASs. (D ) Designation of previously recognised financial instruments Exemption An entity can designate the financial instruments in the first Ind As balance sheet if the recognition criteria laid down in Ind As 109 are met: 1. Any Financial Liability through profit or loss 2. Financial Asset through profit or loss 3. An investment in Equity Instrument at Fair Value through OCI

(E ) Revenue from contracts with customers Exemption 1. A first-time adopter may use one or more of the following practical expedients when applying Ind AS 115

retrospectively:

(a) for completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period;

(b) for completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods; and

(c) for all reporting periods presented before the beginning of the first Ind AS reporting period, an entity need not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.

2. A first-time adopter is not required to restate contracts that were completed before the earliest period presented. A completed contract is a contract for which the entity has transferred all of the goods or services identified in accordance with previous GAAP

(F) Business Combination Exemption

1. A first-time adopter may elect not to apply Ind AS 103 retrospectively to past business combinations (business combinations that occurred before the date of transition to Ind ASs).

2. However, if a first-time adopter restates any business combination to comply with Ind AS 103, it shall restate all later business combinations and shall also apply Ind AS 110 from that same date.

Exception from Retrospective Application of Ind As 101 Impact: High 3.12 The exception from the retrospective application is applicable from the transition date. The exceptions which

are to be applied prospectively from the date of transition.

3.13 Suppose an entity which is covered in the Phase 1 of the roadmap then the date of transition would be

01.04.2015 (Refer Para 2.8),these exceptions will be applicable from 01.04.2015 & therefore, these standards will not be effective for the period prior to 01.04.2015.

(A) Derecognition of financial asset and financial liabilities

Requirement as per Standard

As required by Ind As 109, at the date of transition to Ind As an entity shall apply derecognition criteria laid down Ind As 109 retrospectively, if the information needed to apply Ind AS 109 to financial assets and financial liabilities derecognised as a result of past transactions was obtained at the time of initially accounting for those transactions. Exceptions If the information needed to apply Ind AS 109 to financial assets and financial liabilities derecognised as a result of past transactions is not obtained at the time of initially accounting for those transactions, then the derecognition criteria will apply prospectively.

(B) Hedge Accounting

Requirement as per Standard

As required by Ind As 109, at the date of transition to Ind AS an entity shall: (a) Measure all derivatives at fair value; and (b) Eliminate all deferred losses and gains arising on derivatives that were reported in accordance with previous GAAP as if they were assets or liabilities.

Exceptions from

Retrospective Application

Derecognition of

financial asset

and financial

liabilities

Hedge

Accounting

Non-

Controlling

Interest

Classificatio

n &

Measureme

nt of

financial

asset

Impairment of

financial asset

Embedded

Derivative

Government

Loans

Exceptions

1. An entity shall not reflect in its opening Ind AS Balance Sheet a hedging relationship of a type that does not qualify for hedge accounting in accordance with Ind AS 109.

2. Transactions entered into before the date of transition to Ind ASs shall not be retrospectively designated as hedges.

(C) Non- Controlling Interest

Requirement as per Standard

1. Disclosure of the total comprehensive income is attributable to the owners of the parent and to the

non-controlling interest even if this results in the non-controlling interest having a deficit balance.\

2. Accounting for changes in the parent’s ownership interest in a subsidiary that do not result in a loss

of control;

3. Accounting for a loss of control over a subsidiary, and the related requirements of paragraph 8A of

Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations.

Exceptions 1. A first-time adopter has an option to apply these requirement prospectively from the date of

transition. 2. if a first-time adopter elects to apply Ind AS 103 retrospectively to past business combinations, it shall

also apply Ind AS 110 retrospectively.

(D) Classification and Measurement of financial asset

Requirement of Standard

1. An entity shall classify financial assets as subsequently measured at amortized cost, fair value through other comprehensive income or fair value through profit or loss on the basis of both:

(a) The entity’s business model for managing the financial assets and (b) The contractual cash flow characteristics of the financial asset.

Exceptions

1. An entity shall assess whether a financial asset meets the conditions of measuring a financial asset at amortized cost, fair value through other comprehensive income or fair value through profit or loss as per Ind AS 109 on the basis of the facts and circumstances that exist at the date of transition to Ind AS.

(E) Impairment of financial asset

Requirement of Standard

An entity shall recognize a loss allowance for expected credit losses on

1. a financial asset ,

2. a lease receivable,

3. a contract asset or

4. a loan commitment and a financial guarantee contract to which the impairment requirements apply.

Exceptions

1. As on the date of the transition to Ind As, an entity shall use reasonable and supportable information that is available without undue cost or effort to determine the credit risk at the date that financial instruments were initially recognized and compare that to the credit risk at the date of transition to Ind As.

2. In order to determine the loss allowance on financial instruments initially recognized (or loan commitments or financial guarantee contracts to which the entity became a party to the contract) prior to the date of initial application, both on transition and until the derecognition of those items, an entity shall consider information that is relevant in determining or approximating the credit risk at initial recognition.

(F) Embedded Derivatives

Requirement of Standard

If a hybrid contract contains a host that is not an asset within the scope of this Standard, an embedded derivative shall be separated from the host and accounted for as a derivative under this Standard if, and only if:

(i) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host

(ii) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

(iii) the hybrid contract is not measured at fair value with changes in fair value recognised in profit or loss (ie a derivative that is embedded in a financial liability at fair value through profit or loss is not separated).

Exception

1. A first-time adopter shall assess whether an embedded derivative is required to be separated from

the host contract and accounted for as a derivative on the basis of the conditions that existed later of

(i) the date it first became a party to the contract and (ii) date a reassessment required as per Ind As 109

(G) Government Loans

Requirement of Standard

An entity has obtained the loan from the Government below market interest rate, then as per IAS 20,

1. The loan shall be recognized and measured accordance with Ind As 109.

2. The benefit of the below market rate of interest shall be

Initial Carrying Value as per Ind As 109 (A) Rs XXXX

Less: Proceeds received (B) (Rs XXXX)

Benefit/ Government Assistance (A-B) Rs XXXX

3. The benefit shall be recognized in profit or loss on a systematic basis over a periods which the entity

recognizes as expense the related cost for which the grants are intended to compensate.

Exception

1. If the an entity may apply the requirements in Ind AS 109 and Ind AS 20 retrospectively to any government loan originated before the date of transition to Ind ASs, provided that the information needed to do so had been obtained at the time of initially accounting for that loan.

2. If the entity does not have information that is needed at the time of initially accounting for that loan, then the company shall classify the all government loans received as a financial liability or an equity instrument in accordance with Ind As 32.

SECTION 4 Accounting for Revenue

4.1 The E Commerce companies which applies B2C Business Model, shall recognize the revenue on the basis of the

principles laid down in Ind As 115.

4.2 The core principle of the Standard is that an entity shall 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.

Recognition of Revenue at a point in time or over a point in time

Impact: Low

4.3 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. (Para 22 of Ind As 115)

4.4 An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. (Para 31 of Ind As 115)

Impact Areas B2C Business Model

Recognition of Revenue at

a point in time or over a

point in time

Accounting for

Replacements claims &

Refund Claims

Disclosure

Requirements

Accounting for

Warranty

4.5 The below figure describes the example of the performance obligation satisfied at a point in time or over a point in time:

4.6 In case of the sale of the goods to the customer, the revenue shall be recognized when the customer obtains

the control of the asset.

4.7 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; (b) Using the asset to enhance the value of other assets; (c) Using the asset to settle liabilities or reduce expenses; (d) Selling or exchanging the asset; (e) Pledging the asset to secure a loan; and (f) Holding the asset. (Para 33 of Ind As 115) 4.8 In addition, an entity shall consider indicators of the transfer of control, which include, but are not limited to, the following:

(a) The customer has legal title over the asset (b) The entity has transferred physical possession of the asset (c) The customer has significant risk & rewards of ownership of an asset (d) The customer has accepted the asset

4.9 In case of subscription fees, the revenue shall be recognized over the period of subscription.

Satisfaction of Performance

Obligation

Sale of Goods

( Eg.Yep Me.Com)

Subscription Charges

(Naukari.Com)

Performance

Obligation Satisfied at

a point in time

Performance

Obligation Satisfied

over a point in time

4.10 An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes 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;

(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; or

(c) the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date (Para 35 of Ind As 115)

4.11 Since the subscription fees satisfies the condition (a) above, the subscription fees shall be recognized over a point in time. 4.12 The following methods can be used to measure an entity progress towards complete satisfaction of a performance obligation satisfied over time include the following: (a) Output methods; and (b) Input methods Output methods 4.13 Output methods recognize revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. 4.14 Output methods include methods such as 1. Surveys of performance completed to date, 2. Appraisals of results achieved, 3. Milestones reached, 4. Time elapsed and 5. Units produced or units delivered. Input methods 4.15 Input methods recognize revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation. If the entity’s efforts or inputs are expended evenly throughout the performance period, it may be appropriate for the entity to recognize revenue on a straight-line basis.

4.16 The subscription fees are received in advance, the same would be initially recognized as a liability & the

revenue shall be recognized when the entity simultaneously performs its performance obligation & the revenue

shall be measured by using Output Method or Input Method.

Accounting for Sales return & Free Replacement

Impact: High

4.17 The E Commerce company has policy relating to the return of the product sold to the customer within a

specified period (i.e. 30 days from date of delivery) & the customer has two options either to take a refund or to

replace the product.

4.18 The below figure provides an overview of the accounting for Sales Returns & Replacement

No Yes Yes No Yes No

Accounting for Sales Return & Refund

Whether the

costumer has right

to return at the

time of the sale?

The requirement of the

Sales Return in Ind As

115 is not applicable.

(Para B20 of Ind As 115)

Whether the

product is defective

& company has

given warranty for

the same?

Apply the warranty

related guidance on Ind

As 115 (Para B27 of Ind

As 115)

Whether the

customer has

exchanged the

product with same

type, quality of the

product?

The requirement of the

Sales Return in Ind As

115 is not applicable.

(Para B26 of Ind As 115)

The requirement of the

Sales Return in Ind As

115 is applicable. (Para

B26 of Ind As 115)

4.18 To account for the transfer of products with a right of return (and for some services that are provided subject to a refund), an entity shall recognize all of the following:

(a) Revenue for the transferred products in the amount of consideration to which the entity expects to be entitled (therefore, revenue would not be recognized for the products expected to be returned);

(b) A refund liability; and (c) An asset (and corresponding adjustment to cost of sales) for its right to recover products from customers

on settling the refund liability. (Para B21 of Ind As 115) 4.19 An entity’s promise to stand ready to accept a returned product during the return period shall not be

accounted for as a performance obligation in addition to the obligation to provide a refund. (Para B22 of Ind As 115)

4.20 The E Commerce companies recognizes the revenue from sale of the goods in which the customer has a right

to return the goods and recognize a provision for sales returns & reduce the provision for sales return from the revenue.

4.21 As per Ind As 115, the company can recognize the revenue to the extent it is probable that it is not reversible.

4.22 The below table summarizes the accounting of sales reversals

Sr No. Particulars Impact

1 Revenue (Para 53 & 56 of Ind As 115)

Initial Recognition of the Variable Consideration An entity shall include in the transaction price some or all of an amount of variable consideration estimated only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Methods of Estimation of variable consideration

1. The Expected Value Method 2. The Most Likely Amount Method

Measurement at each reporting period At the end of each reporting period, the entity shall update its assessment of amounts for which it expects to be entitled in exchange for the transferred products and make a corresponding change to the transaction price and the amount of revenue recognized

2 Refund Liability (Para 55 of Ind As 115)

Initial Recognition & Measurement An entity shall recognize a refund liability if the entity receives consideration from a customer and expects to refund some or all of that consideration to the customer. A refund liability is measured at the amount of consideration received (or receivable) for which the entity does not expect to be entitled (ie amounts not included in the transaction price). The refund liability (and corresponding change in the transaction price and, therefore, the contract liability) shall be updated at the end of each reporting period for changes in circumstances. Measurement at each reporting period An entity shall update the measurement of the refund liability at the end of each reporting period for changes in expectations about the amount of refunds.

Adjustment against Revenue An entity shall recognize corresponding adjustments as revenue (or reductions of revenue). (Para B24 of Ind As 115)

3 Asset (Para B25 of Ind As 115)

Initial Recognition & Measurement An asset recognized for an entity’s right to recover products from a customer on settling a refund liability shall initially be measured by reference to the former carrying amount of the product (for example, inventory) less any expected costs to recover those products(including potential decreases in the value to the entity of returned products). Measurement at each reporting period At the end of each reporting period, an entity shall update the measurement of the asset arising from changes in expectations about products to be returned. Disclosure An entity shall present the asset separately from the refund liability.

Accounting for Warranty Impact: High 4.23 The E Commerce company provides product warranty to the customer which gives a right to the customer to

exchange a defective product with functioning product.

4.24 The below figure summarizes the accounting for warranty

Yes No

Whether the

costumer has

option to buy to

buy warranty

separately?

Warranty is a

separate

performance

obligation

Start

A

Yes No No Yes No

Yes

Whether the

warranty is

required by

law?

Warranty is not a

separate

performance

obligation

Whether the period

covered in warranty

is a longer to cover

the life of the asset?

Warranty is not a

separate

performance

obligation

Whether the nature of

the task performed is in

addition to the to

assurance that the

product complies with

agreed specification?

Warranty is not a

separate

performance

obligation

Warranty is a separate

performance obligation

END

A

4.25 As per the practice followed in the e commerce sector, the customer has no option to buy warranty separately as it is embedded in the selling price of the product. 4.26 The warranty is provided to the customer by virtue of the industry practice & there is no statutory obligation to provide the warranty to the customer. 4.27 The period of the warranty is for initial year only. Therefore, the warranty period is shorter compared to the useful life of the asset. 4.28 The warranty is not a separate performance obligation as per Ind As 115. It shall be accounted as per Ind As 37 “Provisions, Contingent Liabilities and Contingent Assets”. 4.29 As per Ind As 37 the constructive obligation is an obligation that derives from an entity’s actions where: (a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities. 4.30 The providing warranty is a “Constructive Obligation” of the e commerce companies as there is no statutory binding for providing the warranty to customers in India. 4.31 Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation. (Para 45 of Ind As 37) 4.32 The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. (Para 47 of Ind As 37) 4.33 The warranty is an important aspect of financial statements where the significant management judgments are involved. Therefore, the e commerce companies need to use the discount rates & compute the present value of the entity constructive obligation towards the warranty payable to the customers. Disclosures Impact: High 4.34 The following table summarizes the important disclosure requirements under Ind As 115

Sr No.

Particulars Disclosure Requirement

1 Disaggregation of revenue

An entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. In addition, an entity shall disclose sufficient information to enable users of financial statements to understand the relationship between the disclosure of disaggregated revenue and revenue information that is disclosed for each reportable segment, if the entity applies Ind AS 108, Operating Segments.

2 Performance obligations

An entity shall disclose information about its performance obligations in contracts with customers, including a description of all of the following: (a) when the entity typically satisfies its performance obligations (b) the significant payment terms (c) the nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (d) obligations for returns, refunds and other similar obligations; and (e) Types of warranties and related obligations.

3 Significant judgments in the application of this Standard

An entity shall disclose the judgments, and changes in the judgments, made in applying this Standard that significantly affect the determination of the amount and timing of revenue from contracts with customers. In particular, an entity shall explain the judgments, and changes in the judgments, used in determining both of the following: (a) the timing of satisfaction of performance obligations and (b) the transaction price and the amounts allocated to performance obligations

4 Determining the timing of satisfaction of performance obligations

For performance obligations that an entity satisfies over time, an entity shall disclose both of the following: (a) The methods used to recognize revenue and (b) An explanation of why the methods used provide a faithful depiction of the transfer of goods or services. For performance obligations satisfied at a point in time, an entity shall disclose the significant judgments made in evaluating when a customer obtains control of promised goods or services.

5 Determining the transaction price and the amounts allocated to performance obligations

An entity shall disclose information about the methods, inputs and assumptions used for all of the following: (a) Determining the transaction price, which includes, but is not limited to, estimating variable consideration, adjusting the consideration for the effects of the time value of money and measuring non-cash consideration; (b) Assessing whether an estimate of variable consideration is constrained; (c) Allocating the transaction price, including estimating stand-alone selling prices of promised goods or services and allocating discounts and variable consideration to a specific part of the contract (if applicable); and (d) Measuring obligations for returns, refunds and other similar obligations.

Impact Areas in Market Place Business Model

Recognition of Revenue

at a point in time or over

a point in time

Disclosure

Requirement

(Refer Para 4.34)

Recognition of Revenue at a point in time or over a point in time

Impact: High

4.35 The e commerce companies which uses the market based approach, generates revenue from either from

1. Commissions received on sale of the Products or

2. Listing Fees.

4.36 In Market based approach, the website is only a platform that can be utilized by Users to reach a larger base

to buy and sell products or services. E commerce company is only providing a platform for communication and it is

agreed that the contract for sale of any of the products or services shall be a strictly contract between the Seller

and the Buyer.

4.37 E commerce company does not at any point of time during any transaction between Buyer and Seller on the Website come into or take possession of any of the products or services offered by Seller nor does it at any point gain title to or have any rights or claims over the products or services offered by Seller to Buyer.

4.38 At no time E commerce company shall hold any right, title or interest over the products nor shall have any obligations or liabilities in respect of such contract entered into between Buyers and Sellers. E Commerce Company is not responsible for unsatisfactory or delayed performance of services or damages or delays as a result of products which are out of stock, unavailable or back ordered.

4.39 Transaction Price and all commercial terms such as Delivery, Dispatch of products and/or services are as per principal to principal bipartite contractual obligations between Buyer and Seller and payment facility is merely used by the Buyer and Seller to facilitate the completion of the Transaction. Use of the payment facility shall not render E Commerce Company liable or responsible for the non-delivery, non-receipt, non-payment, damage, breach of representations and warranties, non-provision of after sales or warranty services or fraud as regards the products and /or services listed on it's Website.

4.40 The Vendor has specifically authorized E Commerce Company or its service providers to collect, process, facilitate and remit payments and / or the Transaction Price electronically or through Cash on Delivery to and from other Users in respect of transactions through Payment Facility. The Vendor relationship with E Commerce Company is on a principal to principal basis and by accepting these Terms of Use you agree that E Commerce Company is an independent contractor for all purposes, and does not have control of or liability for the products or services that are listed on E Commerce Company Website that are paid for by using the Payment Facility.

4.41The payment facility provided by E Commerce Company is neither a banking nor financial service but is merely a facilitator providing an electronic, automated online electronic payment, receiving payment through Cash On Delivery, collection and remittance facility for the Transactions on the E Commerce Company Website using the existing authorized banking infrastructure and Credit Card payment gateway networks. Further, by providing Payment Facility, E Commerce Company is neither acting as trustees nor acting in a fiduciary capacity with respect to the Transaction or the Transaction Price.

4.42 The E Commerce Company applying the marketplace business model, earns revenue either by way of commission or listing fees from the vendors. The below figure summarizes the revenue earned by E Commerce Company.

4.43 The Performance Obligation of the E Commerce Company in market place business model is:

1. All aspects of order processing and fulfillment.

2. Prepare order forms, process payments, cancellations, and returns, and

3. Handle customer service.

4.44 The Performance obligation is satisfied at a point in time, when the control of the goods are transferred to the

users of the website.

4.45 The transaction price is the listing fees or fixed percentage of commission on sale of the goods.

4.46 Hence the revenue shall be recognized on the basis of the predetermined listing fees or fixed percentage of

commission when the control of the goods are transferred to the users of the website.

Revenue from Market Place Business Model

Listing Fees Commission

The Listing Fees and Payment

Terms in effect on the date of

sale of the item shall paid to

vendors

The fixed percentage of the

selling price is charged as a

commission from the vendor

on the date of sale of an item.

SECTION 5 Accounting for Private Equity Funding

5.1 The E Commerce Company raises the long term funds from venture capital funds through private equity.

5.2 Venture capital (VC) is financial capital provided to early-stage, high-potential, growth startup companies. The venture capital fund earns money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries. The typical venture capital investment occurs after the seed funding round as the first round of institutional capital to fund growth (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a type of private equity.

5.3 There are two stages in which the funding of E Commerce Company is done by venture capital funds:

Stage 1 Funding through Seed Capital

Seed capital is needed to get most businesses off the ground. It is considered a high-risk investment, but one that can reap major rewards if the company becomes a growth enterprise. This type of funding is often obtained in exchange for an equity stake in the enterprise.

Banks and venture capital investors view seed capital as an "at risk" investment by the promoters of a new venture, which represents a meaningful and tangible commitment on their part to making the business a success. Frequently, capital providers will want to wait until a business is a little more mature before making the larger investments that typify the early stage financing of venture capital funding.

Stage 2 Funding at Growth Stage

5.4 Growth capital (also called expansion capital and growth equity) is a type of private equity investment, most often a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.

5.5 Companies that seek growth capital will often do so in order to finance a transformational event in their lifecycle. These companies are likely to be more mature than venture capital funded companies, able to generate revenue and operating profits but unable to generate sufficient cash to fund major expansions, acquisitions or other investments. Because of this lack of scale these companies generally can find few alternative conduits to secure capital for growth, so access to growth equity can be critical to pursue necessary facility expansion, sales and marketing initiatives, equipment purchases, and new product development. Growth capital can also be used to effect a restructuring of a company's balance sheet, particularly to reduce the amount of leverage (or debt) the company has on its balance sheet.

5.6 Growth capital is often structured as preferred equity, although certain investors will use various hybrid securities that include a contractual return (i.e., interest payments) in addition to an ownership interest in the company.

5.7 Preferred stock (also called preferred shares, preference shares) is a type of stock which may have any combination of features not possessed by common stock including properties of both an equity and a debt instrument, and is generally considered a hybrid instrument. Preferred stock are senior (i.e., higher ranking) to common stock, but subordinate to bonds in terms of claim (or rights to their share of the assets of the company) and may have priority over common stock (ordinary shares) in the payment of dividends and upon liquidation. Terms of the preferred stock are described in the articles of association.

5.8 The venture capital investors have following rights, which are not available to equity shareholders of the company:

1. Anti-Dilutive Rights

Traditionally, the anti-dilution provision is used to protect investors (venture capital investors) in the event a company issues equity at a lower valuation then in previous financing rounds. There are two varieties of methods of issuing the new equity shares to the venture capital investors to compensate the loss borne by them:

A. Weighted average anti-dilution and B. Ratchet based anti-dilution

2. Redemption Rights

This typical redemption rights provision provides that a certain percentage of holders of a series of preferred stock have the right, after a certain length of time has passed (five years is common), to cause the company to redeem all shares of that stock for its original purchase price and possibly accrued and unpaid dividends. It thus functions as a put right. The redemption price can also be keyed to another measure, such as the fair market value of the stock at the time of redemption, but this is less common and should be resisted by founders. The redemption price can be required to be paid in a lump sum or in installments over some period of time.

5.9 In India, Foreign Direct Investment (FDI) is not allowed in E Commerce Company. As per the funding structure (Refer Para 2.10 of Research Paper), the venture capital investors invest in the nonresident parent company of E Commerce Company in India. The funding is done in USD.

5.10 The parent of E Commerce Company will invest in its subsidiary in India & subsidiary company will issue the equity shares against the capital inflow from the parent company.

5.11 As per the Section 379 of The Companies Act, 2013, Where not less than fifty per cent. of the paid-up share capital, whether equity or preference or partly equity and partly preference, of a foreign company is held by one or more citizens of India or by one or more companies or bodies corporate incorporated in India, or by one or more citizens of India and one or more companies or bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with the provisions of this Chapter and such other provisions of this Act as may be prescribed with regard to the business carried on by it in India as if it were a company incorporated in India. 5.12 The Flipkart Private Limited (FPL) (Domiciled in Singapore) is a parent company of Flipkart India Private Limited (FIPL). The major shareholders of FPL are Mr. Sachin Bansal & Mr. Binny Bansal, who hold 92%2 of the equity share capital of FPL. 5.13 Therefore, by virtue of section 379 of The Companies Act, 2013, the provisions of The Companies Act 2013 RELATING TO Ind As is applicable to FPL.

2 The data has been compiled from the publically available information.

Note: Accounting Requirement as discussed in this section is applicable to the Parent Company of the

E commerce company.

Accounting for Seed Capital

Impact: Low

5.14 The seed capital is invested against the equity shares of the company. It is generally invested at the early stage of the company. It is generally a nominal amount invested by venture capital investor.

5.15 The E Commerce Company shall recognize the investment of the venture capital investor as an equity.

Accounting for Growth Capital

Impact: High

5.16 The below figure describes the types of the instruments through which funding is done.

Accounting for Debt Instruments

5.17 The mezzanine debt is a form of debt financing, it is considered hybrid capital, since it may also incorporate

equity instruments such as warrants. Other options may also play a role such as call options and rights.

5.18 When these equity instruments and options are embedded in the debt, mezzanine debt behaves more like

stock, allowing for easy conversion of the debt into stock.

5.19 The following steps shall be followed for accounting for Debt Instruments:

Step 1 Classification between Equity & Liability

The Debt Instrument lies between the ceiling of senior secured debt and the floor of equity.

The Debt is a unsecured debt senior to equity

Financial

Instruments

Mezzanine Debt Instruments

(Senior to Equity)

Equity with

Put Options

1. Preferred Stock

2. Hybrid Debt

Securities

As per the term sheet of

Venture Capital Funds, the

investor has an put option in

case they want to exit from

the investment.

As per the definition of financial liability provided in Ind As 32 Financial Instrument: Presentation, a contract that will or may be settled in the entity’s own equity instruments and is a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments.

The debt instruments are in characteristics of non-derivative contract, as the equity shares are not listed on recognized stock exchange & it requires a huge initial investment in the company.

Therefore, the debt instruments are classified as financial liability as per Ind As 32. Step 2 Embedded Derivative (Conversion Option)

The hybrid debt instrument may be embedded with a conversion option to equity shares.

As per Ind As 109, If a hybrid contract contains a host that is not an asset within the scope of this Standard, an embedded derivative shall be separated from the host and accounted for as a derivative under this Standard if, and only if: (A) the economic characteristics and risks of the embedded derivative are not closely related to the

economic characteristics and risks of the host (B) a separate instrument with the same terms as the embedded derivative would meet the definition of a

derivative; and (C) the hybrid contract is not measured at fair value with changes in fair value recognized in profit or loss (ie a

derivative that is embedded in a financial liability at fair value through profit or loss is not separated).

The conversion option is not an embedded derivative because (A) The shares of the company are privately held & they are not listed on stock exchange. Therefore, the

definition of derivative is not satisfied as its value does not change in response to the change in a it’s underlying asset i.e. financial instrument price.

Therefore, the conversion option is not an embedded derivative as per Ind As 109.

Accounting for Equity Instruments with Put Option

5.20 As per Ind As 32, A puttable instrument is a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on the occurrence of an uncertain future event or the death or retirement of the instrument holder. 5.21 As an exception to the definition of a financial liability, an instrument that includes an obligation for the issuer to repurchase or redeem that instrument for cash or another financial asset on exercise of the put.is classified as an equity instrument if it has all the following features:

(A) It entitles the holder to a pro rata share of the entity’s net assets in the event of the entity’s liquidation. (B) The instrument is in the class of instruments that is subordinate to all other classes of instruments. (C) All financial instruments in the class of instruments that is subordinate to all other classes of instruments

have identical features. (D) Apart from the contractual obligation for the issuer to repurchase or redeem the instrument for cash or

another financial asset, the instrument does not include any contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity.

(E) The total expected cash flows attributable to the instrument over the life of the instrument are based substantially on the profit or loss (Para 16A of Ind As 32)

5.22 For an instrument to be classified as an equity instrument, in addition to the instrument having all the above features, the issuer must have no other financial instrument or contract that has:

(a) Total cash flows based substantially on the profit or loss, the change in the recognized net assets or the change in the fair value of the recognized and unrecognized net assets of the entity (excluding any effects of such Instrument or contract) and (b) The effect of substantially restricting or fixing the residual return to the puttable instrument holders. (Para 16B of Ind As 32) 5.23 The equity shares with the put option satisfies the features as mentioned in Para 16A of Ind As 32, Therefore, the equity shares shall be classified as an equity instrument. 5.24 The below figure summarizes the treatment of the financial instruments issued in Growth Capital

Financial

Instruments

Mezzanine Debt Instruments

(Senior to Equity)

Equity with Put

Options

1. Classified as a Financial

Liability

2. Conversion Option is not

an Embedded Derivative

Classified as an Equity as it

satisfies the conditions laid down

in Para 16A & 16B of Ind As 32

SECTION 6 Accounting for Intangibles

6.1 The E Commerce Companies have intangibles asset recognized in the financial statements are Goodwill and

Trademark.

6.2 The below mentioned figure lays down the impact areas of Ind As 38:

Impact Areas

Recognition Amortization

Subsequent

Measurement

AS 26 The overheads that are necessary to generate the asset and that can be allocated on a reasonable and consistent basis to the asset Ind As 38 The overheads cannot be allocated to the cost of the intangible asset.

AS 26

The company has to

measure the

intangible asset as

per cost model

Ind As 38

The company has a

choice to follow the

Cost Model or

Revaluation Model

For subsequent

measurement.

Finite Life Infinite Life

AS 26

There is a rebuttable

presumption that the

useful life of the

intangible asset is 10

years.

Ind As 38

An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or number of production or similar units constituting, that useful life.

AS 26

There is no guidance

relating to intangible

assets with indefinite life

Ind As 38

An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which

the asset is expected to

generate net cash inflows

for the entity.

Cost of Internally

Generated

Intangible Asset

Cost of the Internally Generated Intangible Asset

Impact: High

6.4 The cost of an internally generated intangible asset is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria & prohibits reinstatement of expenditure previously recognized as an expense. 6.5 The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. Examples of directly attributable costs are:

(a) Costs of materials and services used or consumed in generating the intangible asset; (b) Costs of employee benefits (as defined in Ind AS 19) arising from the generation of the intangible asset; (c) Fees to register a legal right; and (d) Amortization of patents and licenses that are used to generate the intangible asset. (e) Ind AS 23 specifies criteria for the recognition of interest as an element of the cost of an internally

generated intangible asset. (Para 66 of Ind As 38) 6.6 The companies can allocate overheads that are necessary to generate the asset and that can be on a reasonable and consistent basis to the asset which was allowed as per AS 26 “Intangible Asset”. Subsequent Measurement Impact: High

6.7 An entity shall choose either the cost model or the revaluation model as its accounting policy. If an intangible asset is accounted for using the revaluation model, all the other assets in its class shall also be accounted for using the same model, unless there is no active market for those assets. Cost model 6.8 After initial recognition, an intangible asset shall be carried at its cost less any accumulated amortization and any accumulated impairment losses. Revaluation model 6.9 After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortization and any subsequent accumulated impairment losses. (Para 74 of Ind As 38) 6.10 For the purpose of revaluations, fair value shall be measured by reference to an active market. Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value. (Para 75 of Ind As 38) 6.11 The accounting policy choice of Revaluation model was not available under AS 26.

Amortization Method- Finite Useful Life Impact: Low 6.12 The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. 6.13 Amortization shall begin when the asset is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. 6.14 Amortization shall cease 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 derecognized. 6.15 The amortization method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method shall be used. 6.16 These methods include the (A) Straight-line method, (B) The diminishing balance method and (C) The units of production method. The method used is selected on the basis of the expected pattern of consumption of the expected future economic benefits embodied in the asset and is applied consistently from period to period, unless there is a change in the expected pattern of consumption of those future economic benefits. Intangible Asset with the indefinite useful life Impact: High 6.17 An intangible asset with an indefinite useful life shall not be amortized. (Para 107 of Ind As 38) 6.18 In accordance with Ind AS 36, an entity is required to test an intangible asset with an indefinite useful life for impairment by comparing its recoverable amount with its carrying amount (a) Annually, and (b) Whenever there is an indication that the intangible asset may be impaired. (Para 108 of Ind As 38)

Note:

The company has an option to avail an exemption of the deemed cost under Ind As 101 for Intangible

Asset as on transition date.

As per Carve outs to Ind As the deemed cost is the “carrying value” of the intangible asset as on the

date of transition.

SECTION 7 Accounting for Property Plant & Equipment

7.1 The below mentioned figure lays down the impact areas of Ind AS 16

Componentization of Fixed Asset

Impact: High

7.2 As per Ind As 16, The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: (a) It is probable that future economic benefits associated with the item will flow to the entity; and (b) The cost of the item can be measured reliably. (Para 7 of Ind As 16) 7.3 The Standard does not prescribe the unit of measure for recognition, i.e. what constitutes an item of property, plant and equipment. Thus, judgment is required in applying the recognition criteria to entity specific circumstances. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies, to apply the criteria to the aggregate value. (Componentization) (Para 9 of Ind As 16) 7.4 Therefore, Ind As 16, the principle of componentization is applicable which was not permitted as per AS 10. 7.5 The e commerce companies needs to exercise the judgment in the case of the componentization of the fixed asset is applicable & determine the useful life of that component of fixed asset & depreciate it separately from the main asset. Impact of Deferred Payment Terms Impact: High 7.6 The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognized as interest over the period of credit unless such interest is capitalized in accordance with Ind AS 23. (Para 23 of Ind As 16) 7.7 As per AS 10, the principle of measuring the cost is not cash price equivalent, therefore, the difference between the cash price equivalent and the total payment is capitalized in the cost of fixed asset.

Impact Areas

Foreign Exchange

Differences Componentization

of the fixed asset Impact of Deferred

Payment

arrangements

Foreign Exchange Differences Impact: High 7.8 As per Para 46A of AS 11, at the option of the entity, the exchange differences arising on reporting of long term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases, can be accumulated in a ‘‘Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and amortized over the balance period of such long term asset or liability, by recognition as income or expense in each of such periods. 7.9 As per Para 28 of Ind As 21, exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognized in profit or loss in the period in which they arise. 7.10 When monetary items arise from a foreign currency transaction and there is a change in the exchange rate between the transaction date and the date of settlement, an exchange difference results. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognized in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognized in each period up to the date of settlement is determined by the change in exchange rates during each period. 7.11 The A first-time adopter may continue the policy adopted for accounting for exchange differences arising from translation of long-term foreign currency monetary items recognized in the financial statements for the period ending immediately before the beginning of the first Ind AS financial reporting period as per the previous GAAP. (Para D13AA of Ind As 21) 7.12 The company has a choice to continue with the existing policy as per Para 46A of AS 11 as on transition date, but company shall comply with the Ind As 21, after the transition date.

Note:

The company has an option to avail an exemption of the deemed cost under Ind As 101 for Intangible

Asset as on transition date.

As per Carve outs to Ind As the deemed cost is the “carrying value” of the tangible assets as on the

date of transition.

The Company has an option to apply for an exemption by applying an accounting policy as per Para

46A of AS 11 on transition date.

SECTION 8 Accounting for Deferred Tax Asset & Liability

Impact: High

8.1 Tax expense comprises current and deferred taxes. 8.2 Current tax is the amount of tax payable on the taxable income for the year as determined in accordance with the provisions of the Income Tax Act, 1961. Current tax is net of credit for entitlement for Minimum Alternative Tax (MAT). 8.3 Deferred tax is recognized, on timing differences, being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods. Deferred tax assets in respect of unabsorbed depreciation and carry forward of losses are recognized if there is virtual certainty that there will be sufficient future taxable income available to realize such losses. Other deferred tax assets are recognized if there is reasonable certainty that there will be sufficient future taxable income to realize such assets. 8.4 Deferred tax assets and liabilities are measured based on the tax rates that are expected to apply in the period when asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. 8.5 In respect of the deferred tax asset/liability arising due to tax holidays availed by the entity, AS 22 provides the guidance of the accounting relating to deferred tax asset/liability.

Accounting as per Ind As 12 & Income Computation and Disclosure Standards (ICDS)

8.6 The recognition of the deferred tax asset/liability under Ind As 12 would be a temporary difference rather than

timing difference.

8.7 Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Temporary differences may be either:

(a) Taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or

(b) Deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. (Para 5 of Ind As 12)

Major Impact

Areas

Applicability of

ICDS Standards

Balance sheet

approach instead of

Income approach

No Guidance for

tax holiday units

Tax Base in

Consolidation

financial Statement

8.8 The taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable (recoverable). (Para 5 of Ind As 12) 8.9 The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. 8.10 The CBDT has recently issued Income Computation and Disclosure Standards (ICDS) which comprises of 12 standards & it would be applicable from AY 2016-17 (i.e. PY 2015-16). The taxable profit would be computed with respect to ICDS Standards. 8.11 The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount. (Para 7 of Ind As 12) 8.12 The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods. In the case of revenue which is received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods.(Para 8 of Ind As 12) 8.13 The tax base of the asset would be determined as per ICDS Standards issued by CBDT. Recognition of Deferred Tax Asset & Liability Impact: High 8.14 A deferred tax liability shall be recognized for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) The initial recognition of goodwill; or (b) The initial recognition of an asset or liability in a transaction which:

(i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit

8.15 A deferred tax asset shall be recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that:

(a) is not a business combination; and

(b) at the time of the transaction, affects neither accounting profit nor taxable profit Measurement of Deferred Tax Asset & Liability Impact: Low 8.16 Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. (Para 47 of Ind As 12) 8.17 The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. (Para 51 of Ind As 12) 8.18 Deferred tax assets and liabilities shall not be discounted. (Para 53 of Ind As 12)

Reassessment of Deferred Tax Asset Impact: High 8.19 As per AS 22, Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognized only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be

realized. (Para 17 of AS 22)

8.20 The carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period. An entity shall reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available. (Para 56 of Ind As 12) 8.21 Virtual certainty refers to the extent of certainty, which, for all practical purposes, can be considered certain. Virtual certainty cannot be based merely on forecasts of performance such as business plans. Virtual certainty is not a matter of perception and is to be supported by convincing evidence.

8.22 The probable refers to the lesser extent of certainty then required in AS 22 which, for all practical purposes, can be considered certain. Recognition of the deferred tax asset & liability outside profit or loss account Impact: High 8.23 Deferred tax shall be recognized outside profit or loss if the tax relates to items that are recognized, in the same or a different period, outside profit or loss. Therefore, current tax and deferred tax that relates to items that are recognized, in the same or a different period: (a) In other comprehensive income, shall be recognized in other comprehensive income. (b) Directly in equity, shall be recognized directly in equity 8.24 There is no option available in AS 22. Tax Base in Consolidated Financial Statement Impact: Low 8.25 In the Consolidated Financial Statement, the parent company consolidates the financials line to line basis. AS22 does not have any guidance on the recognition of the deferred tax asset and liability in the consolidated financial asset & liability. 8.26 The tax base is determined by reference to the tax returns of each entity in the group. In some jurisdictions, in consolidated financial statements, temporary differences are determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the appropriate tax base. The tax base is determined by reference to a consolidated tax return in those jurisdictions in which such a return is filed. (Para 11 of Ind As 12) 8.27 The e commerce companies in India, which are parent companies are not required to file consolidated financial statements with Income Tax Department. Therefore, the e commerce companies can follow the line by line method of consolidation of deferred tax asset or liability. 8.28 The offsetting requirement under Ind As 12 is in same lines with AS 22.

SECTION 9 Conclusion

9.1 The following points shall be of the significant importance in IFRS Convergence:

Paradigm shift in financial reporting

The adoption of Ind AS would entail a significant change in the financial reporting framework used by Indian

companies to report their financial results. As a consequence, the reported earnings (net income) and financial

position (net worth) reported by all these companies would undergo a change. Impact of this change would vary

from sector to sector and company to company, with some sectors/companies being significantly impacted.

Benefits of the move to Ind AS The move to Ind AS standards will significantly enhance the quality of and transparency in financial reporting by Indian companies. It will also enhance the international comparability of financial statements of Indian companies and make the Indian capital markets more attractive. It will also reduce capital costs and facilitate international fund-raising by Indian companies. First to adopt certain global standards With these Ind AS standards, India will be adopting some of the latest global standards before the rest of the world does. While India has been working on IFRS convergence, IFRS itself, as a body of standards, continues to evolve. Recently, the International Accounting Standards Board (IASB) issued new standards on revenue recognition and financial instruments, and these standards are mandatorily applicable internationally only from 2017 and 2018 respectively. The notified Ind AS standards are converged with these newer standards, including those on revenue and financial instruments, considering the timing of India’s move to IFRS. Early adoption of these standards as compared to the global adoption timelines, would not only ensure that our standards remain current with or ahead of their IFRS equivalents, but also provide a stable platform of reporting for Indian companies for a period of time after they move to Ind AS. If these standards are not early adopted, Indian companies would have to adopt these newer standards a year or two after they move to Ind AS, potentially hampering comparability and increasing cost of compliance. 9.2 The below figure describes the overview of Ind As Conversion Process*.

*Source: KPMG First Notes

Appendix 1 References

1. Annual Report of the following companies A. Amazon B. Info Edge (India) Ltd C. Groupon D. TV 18 Broadcast Pvt Ltd

2. Ind As notified by Ministry of Corporate Affairs (MCA) 3. Carveouts notified by Ministry of Corporate Affairs (MCA) 4. Accounting Standards issued by ICAI 5. Guidance Notes issued by ICAI