voices on reporting · • twelve new income computation disclosure standards: icds (previously...

Voices on Reporting

18 February 2015

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Voices on ReportingWelcome

Series of knowledge sharing callsSeries of knowledge sharing calls

Covering current and emerging reporting issuesCovering current and emerging reporting issues

Look out for our Accounting and Auditing Update, IFRS Notes and First Notes publicationsLook out for our Accounting and Auditing Update, IFRS Notes and First Notes publications

Scheduled towards the end of each monthScheduled towards the end of each month


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Voices on ReportingYour speaker

Madhu Sudan KankaniPartnerAccounting Advisory ServicesKPMG in India

Nirav PatelDirectorAccounting Advisory ServicesKPMG in India


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Voices on ReportingAgenda

Significant impact areas of ICDSSignificant impact areas of ICDS22

Next steps for ICDS implementationNext steps for ICDS implementation33

Overview of Income Computation and Disclosure Standards (ICDS)Overview of Income Computation and Disclosure Standards (ICDS)11


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Voices on ReportingSetting the context

• Twelve new Income Computation Disclosure Standards: ICDS (previously termed as Tax Accounting Standards – TAS) issued on 8 January 2015

• Addresses a significant roadblock in the adoption of Ind AS which to some extent provide stability in tax treatments of various items

• It is expected that ICDS will be applicable from assessment year 2016 – 17 onwards. First time implication is to be analysed before 15 June 2015, it being the due date for first quarter advance tax payment i.e. effective 1 April 2015

• Central Board of Direct Taxes (CBDT) had earlier constituted a committee to study and formulate the accounting standards. The committee concluded on 14 standards being relevant for the computation of taxable income and had issued its recommendation in October 2012 via public domain, inviting comments from stakeholders and the general public

• The updated draft addresses some of the concerns raised by the stakeholders and provides transitional provisions to follow ICDS

• The government had invited comments from stakeholders on the updated draft ICDS by 8 February 2015.


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Voices on ReportingICDS: journey towards adoption

1996

December 2010

October 2012

July 2014

January 2015

The CBDT constituted AS Committee to suggest the following:2

AS to be notified under the Act

Amendments to the Act

Method to determine book profit for MAT purposes on transition to Ind AS.

The central government notified two accounting standards under Section 145(2) of the Income Tax Act, 1961 (the IT Act).2

Final report of the Committee and 14 ICDS published2

Comments invited from the public on the Draft ICDS.

CBDT issued a draft of 12 ICDS, after incorporating suggestions from the stakeholders and providing transitional provisions for these ICDS3

The draft ICDS were open for comments and the comment period ended on 8th February, 2015.

Finance Bill 2014 amended Section 145(2) of the IT Act. ICDS applicable from FY 1 April 20151

ICDS to be notified separately

Compliance expected to be required in 2015 first quarter.


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Voices on ReportingHighlights of the ICDS: A step in the right direction

A significant impediment to the adoption of

Ind AS. Uniform basis of taxable income

computation

One set of books of account with

adjustments for ICDS

ICDS are subordinate to the IT Act

Legislations/Judicial pronouncements

follow thereafter

Addresses issues subject to litigation and

diversity

There are areas of differences between the

ICDS and the current set of Accounting

Standards/Policies

Impact on MAT on adoption of Ind AS

needs to be considered


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Voices on ReportingApproach for the formulation of ICDS

Certain standards were relevant for disclosure purposes only (e.g. AS 17, AS 20)

Act separately contained specific provisions on issues covered by AS (e.g. AS 14)

AS on consolidation were not relevant for tax purposes (AS 21, AS 23, AS 27)

AS on financial instruments are not yet notified; hence not considered (AS 30, AS 31, AS 32).

Committee deliberated on 31 AS issued by the ICAI and notified ICDS equivalent to 12 AS4

Committee shall issue ICDS on the following topics in the future4

Share-based payment

Revenue recognition by real estate developers

Service concession arrangements

Exploration for and evaluation of mineral resources.


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Voices on ReportingRecommendations in the 2012 report

• To maintain harmony with the Act, ICDS to be notified under the Act; may vary from the AS

• ICDS to lay down specific rules that will enable computation of taxable income with certainty and clarity4

• To ensure horizontal equity and uniformity, ICDS should eliminate alternatives, as much as possible4

• No separate books to be maintained for ICDS

• ICDS to apply to all taxpayers

• In case of conflict between ICDS and the Act, the Act will prevail

• Amending form 3CD to include assertion on computation of taxable income as per ICDS

• Suitable amendments to the Act to provide clarity on certain issues, e.g., goodwill amortisation, leases.


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Voices on Reporting

• No concept of materiality: unrecorded audit adjustments

• No concept of prudence• Significant differences may require multiple record

keeping: system implications• Status of Guidance notes/ASI’s• Incremental differences: Ind AS • Dual transitional approaches: Prospective/

Retrospective• Clarity on standards/principles yet to be announced• Definition of ‘Income’ under the IT Act: concept of

real income• Judicial proceedings and interpretations• Disclosures

Implementation matters


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Voices on ReportingSignificant Impact Areas: A Snapshot

Many industry specific differences could arise

Effects of changes in Foreign Exchange Rates

Provisions, Contingent Liabilities and Contingent Assets

Derivatives treatment

Leases Revenue Recognition and Construction Contracts

Intangible assets

Accounting Policies

Inventories

Government Grants

Securities

Borrowing costs

Tangible Fixed Assets


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Voices on ReportingSignificant Impact Areas (1/9)

No recognition to the concept of ‘Materiality’

Eliminates the concept of ‘Prudence’: disallows recognition of

expected losses or mark to market losses unless specifically

permitted by any other ICDS

No changes in accounting policies without ‘reasonable cause’

No guidance on impact of change in policies on the computation of

income

Treatment and presentation of transactions and events shall be

governed by their substance and not merely by the legal form.4

Accounting Policies

Taxation impact

Mark to market loss unless specifically covered in other ICDS allowed only on settlement.

Transitional provision

All contracts or transactions existing on the first day of April, 2015 or entered into on or after the first day of April, 2015 shall be dealt with in accordance with the provisions of this standard.


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No minimum period required for classification as a qualifying asset,

except inventories

Exchange differences not included as borrowing costs

Specific borrowings: income from temporary deployment of

unutilised funds to be treated as income

Specific formula introduced for capitalisation of general borrowing

cost: updated vis a vis old TAS

Capitalize borrowing cost even if active development is interrupted

.

Borrowing Cost

Taxation impact

Tax impact in line with provisions of the Income Tax Act.

Transitional provision:

Prospective from date of transition after taking into account the borrowing cost capitalised earlier.


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Lessee to be entitled to depreciation in case of finance lease:

suitable amendments may be required to the Act

Joint confirmation for same lease classification

For operating leases with escalation clauses, straight lining of

lease rentals required

An asset given on finance lease would now be considered to have

been sold by the lessor with a corresponding recognition of

revenues and profits. Only the finance income component of the

lease rental would be recognised as income over the lease term

Definition of minimum lease payment does not include residual

value guaranteed by any party other than the lessee: ensures that

there is a uniform lease classification.

.

Leases

Taxation impact

Intention to bring consistency in tax treatment of finance lease.


ICDS to apply to all lease transactions undertaken on or after 1 April, 2015 and the lease transactions undertaken on or before 31 March, 2015 shall continue to be governed by the provisions of the Income Tax Act.


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Retention money recognised using percentage of completion

method: whether it overrides ‘Accrual Income’ concept?

Completed contract method not permitted

Non-recognition of margins permitted up to 25 per cent of stage of

completion

Does not permit recognition of expected losses on onerous

contracts4

Revenue recognition on reasonable certainty of ultimate collection

(updated vis a vis old TAS)

No guidance on principal vs agent

Straight lining for certain contracts

Risk and reward basis of revenue recognition vs IFRS 15/Ind AS.

Construction Contracts and Revenue recognition

Taxation impact

• Deduction for future / anticipated / estimated losses (including onerous contract) not allowed unless actually incurred

• Taxability of service contracts on percentage completion method.


Cumulative catch up of revenue after the date of transition for all open contracts.


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All foreign exchange losses on borrowings to be allowed, except

borrowings used to import fixed assets

An average rate for a week or a month that approximates the

actual rate at the date of the transaction may be used (updated vis

a vis old TAS)

Forward Exchange Contracts for trading/ speculation or to hedge

foreign currency risk of a firm commitment or a highly probable

forecast transaction: premium or discount on contracts shall be

recognized at the time of settlement

Other Forward Exchange Contracts: premium or discount arising

at inception shall be amortised over the life of the contract

Other Derivative contracts: MTM shall not be recognized unless

permitted by other ICDS. MTM deferred till settlement.

Effects of changes in foreign exchange rates

Taxation impact

• Currently discount / premium is recorded in the Profit and Loss Account and offered / claimed in tax return

• Losses / gains to be deferred in case of contracts overlapping two years.


Prospective from date of transition after taking into account amount recognised as on 31 March 2015, which is carried forward from the PY.


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Excludes all onerous contracts from its scope

ICDS requires recognition of provision only if it is ‘reasonably

certain’ instead of being probable

ICDS requires recognition of contingent assets when inflow of

economic benefits is reasonably certain.

Capital approach for grants not permitted

Initial recognition of grant cannot be postponed beyond the date of

actual receipt4

Non monetary asset grant treatment.

Provisions, contingent liabilities and contingent assets


Prospective from date of transition after taking into account the amount, if any, of the said grant recognised earlier.

Taxation impact

To understand whether purpose test - capital vs. revenue, held by judicial precedents would continue to apply.


Prospective from date of transition after taking into account the amount, if any, for the same, recognised before 31 March 2015.

Taxation impact

Intention appears to bring tax treatment of losses and gains on par.

Government grants


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Excludes goodwill from its scope

Commercial feasibility not a must for capitalisation of development

costs

For internally developed intangible assets, AS 26 requires that in

case the development phase of a project cannot be distinguished

from the research phase, then the entire costs are recognised as

part of research phase and consequently charged as expense. The

ICDS does not provide such guidance4

Assets acquired in exchange: the value of the intangible asset

acquired in such a manner shall be its actual cost.

Intangibles

Taxation impact

ICDS not to impact taxability of goodwill.


Prospective from date of transition after taking into account the amount recognised, if any, for the said asset earlier.


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Covers only securities held as stock–in-trade (also excludes

banks, PFIs and mutual funds)

Comparison of cost and net realisable value for securities held as

stock-in-trade to be assessed category-wise and not for each

individual security4

FIFO Method: cost of securities sold

Unquoted / irregularly quoted securities carried at cost

Securities acquired in exchange: value of the security acquired in

such a manner shall be its actual cost

Securities

Taxation impact

Notional gains arising on year-end valuations could be taxed.


None


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Dispensation of standard cost method

Distribution costs excluded.

Prescribes maintenance of a fixed asset register: all assets for all

years

Capitalisation of exchange differences relating to fixed assets shall

be in accordance with Section 43A and other similar provisions of

the Act, which could be materially different from the provisions of

AS 10, AS 16 and AS 114.

Inventory


Actual cost of fixed assets, acquisition or construction of which commenced before 31 March 2015 but not completed would be accounted for as per revised ICDS.

Taxation impact

Mostly in line with the current provisions of the IT Act.


Prospective from date of transition.

Taxation impact

Tax impact in year of change in inventory valuation

Tangible Assets


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Voices on ReportingNext steps

Final Standards to be

notified

Notify the changes to the

Income Tax Act

Internal implementation

guidelines and training

Impact assessment

Develop an implementation

plan

Bring about changes to the

information systems and

processes

Trainings

Standard Setters Stakeholders


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Voices on Reporting

Q&A


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Voices on ReportingKPMG India IFRS Institute – Re-launched

In addition to proprietary KPMG content, the website provides links to several other sources of information related toIFRS and its implementation. The site can be accessed by all interested parties at no cost. Additionally, the siteprovides the facility to register as a member by providing certain minimal information.

To download KPMG content, become registered members of the website following few easy steps.https://www.in.kpmg.com/IFRS

You can reach us for feedback and questions at [email protected]

KPMG India IFRS Institute website re-launched

KPMG in India is pleased to re-launch IFRSInstitute - a web-based platform, which seeks to actas a one-stop site for information and updates onIFRS implementation in India.

The website provides information and resources tohelp board and audit committee members,executives, management, stakeholders andgovernment representatives gain insight andaccess thought leadership publications on theevolving global financial reporting framework.


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Voices on ReportingSources

1. The Finance Bill, 2014 2. The ITAT website: http://www.itatonline.org/info/wp-content/files/tax_accounting_standards_draft_cbdt.pdf3. Draft Income computation and disclosure standards as issued by Ministry of Finance on 8 January 2015 4. Link: http://www.kpmg.com/IN/en/services/Tax/FlashNews/Tax-Accounting-Standards-12.pdf

1. The Finance Bill, 2014 2. The ITAT website: http://www.itatonline.org/info/wp-content/files/tax_accounting_standards_draft_cbdt.pdf3. Draft Income computation and disclosure standards as issued by Ministry of Finance on 8 January 2015 4. Link: http://www.kpmg.com/IN/en/services/Tax/FlashNews/Tax-Accounting-Standards-12.pdf


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Voices on ReportingIntroducing IFRS Notes

Issue 2015/01Issue 2015/01

Government announces a roadmap for implementation of Ind ASOn 2 January 2015, the Ministry of Corporate Affairs issued a press release announcing a revised roadmap for the implementation of Indian Accounting Standards (Ind AS), converged with International Financial Reporting Standards (IFRS). This roadmap is applicable to companies other than banking companies, insurance companies and non-banking finance companies.In this issue of IFRS Notes, we have provided an overview of the revised roadmap of implementation of Ind AS along with our points of view.

Government announces a roadmap for implementation of Ind ASOn 2 January 2015, the Ministry of Corporate Affairs issued a press release announcing a revised roadmap for the implementation of Indian Accounting Standards (Ind AS), converged with International Financial Reporting Standards (IFRS). This roadmap is applicable to companies other than banking companies, insurance companies and non-banking finance companies.In this issue of IFRS Notes, we have provided an overview of the revised roadmap of implementation of Ind AS along with our points of view.

Issue 2014/02Issue 2014/02

IFRS Convergence: ICAI issues exposure drafts on financial instruments and revenue recognitionAs part of the initiatives towards India’s convergence with IFRS from 2016-17, the Accounting Standards Board of the Institute of Chartered Accountants of India has recently issued exposure drafts on Ind AS 109, Financial Instruments (ED on financial instruments) and Ind AS 115, Revenue from Contracts with Customers (ED on revenue). In this issue of IFRS Notes, we have provided an overview of these exposure drafts along with key impact areas.

IFRS Convergence: ICAI issues exposure drafts on financial instruments and revenue recognitionAs part of the initiatives towards India’s convergence with IFRS from 2016-17, the Accounting Standards Board of the Institute of Chartered Accountants of India has recently issued exposure drafts on Ind AS 109, Financial Instruments (ED on financial instruments) and Ind AS 115, Revenue from Contracts with Customers (ED on revenue). In this issue of IFRS Notes, we have provided an overview of these exposure drafts along with key impact areas.


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Voices on ReportingTopics discussed in AAU and First Notes

Accounting and Auditing

update

January 2015 Government announces roadmap for implementation of Ind AS The Ministry of Finance issues revised drafts on tax computation

standards Liquor industry in India AICPA’s national Conference 2014 on current SEC and PCAOB

developments Guidance note on derivative contracts Income taxes – the mystery of uncertainties Revisions in the NBFC framework: an overview of key revisions Regulatory updates

First Notes

The Ministry of Corporate Affairs had earlier announced a roadmap for transition to Indian Accounting Standards (Ind AS) from 1 April 2011. To address lack of clarity of tax implications on the adoption of Ind AS by companies, the Central Board of Direct Taxes (CBDT) constituted a committee to harmonise the accounting standards issued by the Institute of Chartered Accountants of India with the provisions of the Act. In August 2012, the committee, after deliberations issued 14 draft tax accounting standards. These accounting standards are now termed as Income Computation and Disclosure Standards (ICDS). Considering the draft ICDS (2012) by the CBDT had significant differences with generally accepted accounting principles, the Ministry of Finance reworked on the standards and on 8 January 2015 issued revised drafts of 12 ICDS (2015) for public comments. Our First Notes provides an overview of key revisions made in the revised draft ICDS (2015).


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Voices on ReportingOthers

Coming up next

February 2015

New issue of:• Accounting and Auditing Update

• First Notes

• IFRS Notes

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Auditing Update?

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The views and opinions expressed herein are those of the presenters to the topics covered in today’s ‘Voices on Reporting’ knowledge sharing call and do not necessarily represent the views and opinions of KPMG in India. The information contained in the slide pack is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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Feedback/queries can be sent to [email protected]

Madhu Sudan KankaniPartner, Accounting Advisory Services,KPMG in IndiaE-mail: [email protected]

Nirav PatelDirector, Accounting Advisory Services,KPMG in IndiaE-mail: [email protected]

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