GAAP Advisors - Enabling Excellence in Financial Reporting in India | Thirty Eighth Edition
CA Manish C. Iyer
Financial Reporting Advisor | Ind AS, IFRS and Indian GAAP | Author | Independent Director
Welcome to Thirty Eighth Edition of?GAAP Advisors?TASK?Weekly newsletter
It gives me immense pleasure welcoming you to the Thirty Eighth edition of?GAAP Advisors?TASK?Weekly newsletter.?Hope you have installed GAAP Advisors Android App and took TASK (Test Accounting Standards Knowledge). If not, request you to?Download and Install GAAP Advisors App and Start TASK.?Readers who do not use android mobile can login / register on?https://gaapadvisors.com?and Start?TASK. This edition of newsletter has the following sections:
+ Why register on?GAAP Advisors
+ Milestones achieved this week
+ From?Issue Repository?– Depreciation on Assets used on Triple Shift Basis
+ Standards Applied for Responding to Issues This Week
+ From?Review Repository?– Long-Term Borrowing Cash Flows
+ From?Accounting Policy Repository
+ From?Key Audit Matters Repository
+ From?Term Repository?- Spot
+ Features of?TASK
+?TASK?Statistics at the time of writing this section of newsletter
+?TASK?Ranker No.1 at the time of writing this section of newsletter
+ Daily winners for this Week
+ Note of Thanks
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Milestones achieved this Week
-???????16000+ question bank in TASK (Test Accounting Standards Knowledge)
?From?Issue Repository?– Depreciation on Assets used on Triple Shift Bases -?Issue Id: 330??- Framework: Accounting Standards (AS):
Facts of the Case as submitted by the querist:
Dear Sir,
A Ltd is a company engaged in the business of manufacturing of textile parts. The company is working on triple shift basis however company do not want to provide depreciation at a rate applicable for triple shift working of plant & Machineries. The relevant year is FY 2016-17.
?Issue/Query as submitted by the querist:
1. Is it compulsory to provide depreciation at higher rate in case of triple shift basis or company can continue with minimum rate applicable in case of single shift basis.?
2. Being auditor what will be reporting/qualification to be mentioned in audit report if company opts for single shift depreciation in case of plant and machinery operating in triple shift basis
GAAP Advisors?Response:
Ministry of Corporate Affairs in exercise of the powers conferred under sub-sections (1) and (3) of section 128, sub-section (3) of section 129, section 133, section 134, sub-section (4) of section 135, sub-section (1) of section 136, section 137 and section 138 read with section 469 of the Companies Act, 2013 further amended the Companies (Accounts) Rules, 2014 to insert Rule 4A by notification dated 4th?September 2015 which states as under:
“4A.?Forms and items contained in financial statements.-?The financial statements shall be in the form specified in Schedule III to the Act and comply with Accounting Standards or Indian Accounting Standards as applicable:
Provided that the items contained in the financial statements shall be prepared in accordance with the definitions and other requirements specified in the Accounting Standards or the Indian Accounting Standards, as the case may be.”
Therefore, depreciation for the purpose of preparing financial statements shall be calculated in accordance with the definitions and other requirements specified in the Accounting Standard (AS) or Indian Accounting Standard (Ind AS), as the case may be.
?Attention is drawn to paragraph 13 of the Guidance Note on Accounting for Depreciation in Companies in the context of Schedule II to the Companies Act, 2013 issued by The Institute of Chartered Accountants of India which states, inter alia, as under:
“… the useful lives as given under Part ‘C’ of Schedule II for various types of assets are indicative only and are not minimum or maximum. Where the useful lives of various specific assets are same as those under Schedule II, the company should use these useful lives. In case the useful life of an asset as estimated by the company, supported by the technical advice, external or internal, differs, i.e., higher or lower from the indicative useful life given under Schedule II, the former should be applied by the company for providing depreciation. The disclosures in this regard should be made as described later in this Guidance Note.”
Paragraph 63 of the Guidance Note on Accounting for Depreciation in Companies in the context of Schedule II to the Companies Act, 2013 issued by The Institute of Chartered Accountants of India states the required disclosures as under:
“Apart from the disclosures required under the accounting standards, Schedule II requires disclosure of useful life and / or residual value, if they are different from those specified under that Schedule. In this regard, following disclosures should be made:
Disclosure of assets along with their useful lives where different from those specified under Schedule II including where the useful life estimated as per double shift / triple shift is different from that as would be estimated on the basis of increase in depreciation by 50% or 100% in case of double shift and triple shift respectively of single shift based depreciation.
The fact that the said useful lives / residual values are supported by technical advice.”
Ministry of Corporate Affairs in exercise of the powers conferred by clause (a) of sub-section (1) of section 642 of the Companies Act, 1956 (1 of 1956) read with section 210A and sub-section (3C) of section 211 and of the said Act, in consultation with National Advisory Committee on Accounting Standards, amended the Companies (Accounting Standards) Rules, 2006 by notification dated 30 March 2016. In those amendment rules, it replaced the existing AS 10 (Revised)?Accounting for Fixed Assets?with AS 10?Property, Plant and Equipment.?The response to the issue is given based on the requirements contained in AS 10, Property, Plant and Equipment which became effective from 1 April 2016.
Paragraph 81(c) of AS 10?Property, Plant and Equipment?states as under:
“81(c)??the useful lives or the depreciation rates used. In case the useful lives or the depreciation rates used are different from those specified in the statute governing the enterprise, it should make a specific mention of that fact”
Therefore, the company must estimate the remaining useful life of each item of asset that has been considered as a separate component and calculate depreciation based on the remaining useful life so determined. We do not recommend estimating useful life on single shift basis and then applying a mathematical formula to arrive at useful life on triple shift basis. The remaining useful life should be estimated considering the factors specified in paragraph 58 and 59 of AS 10:
58. The future economic benefits embodied in an asset are consumed by an enterprise principally through its use. However, other factors, such as technical or commercial obsolescence and wear and tear while an asset remains idle, often result in the diminution of the economic benefits that might have been obtained from the asset. Consequently, all the following factors are considered in determining the useful life of an asset:
(a) expected usage of the asset. Usage is assessed by reference to the expected capacity or physical output of the asset.?
(b) expected physical wear and tear, which depends on operational factors such as the number of shifts for which the asset is to be used and the repair and maintenance programme, and the care and maintenance of the asset while idle.?
(c) technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset. Expected future reductions in the selling price of an item that was produced using an asset could indicate the expectation of technical or commercial obsolescence of the asset, which, in turn, might reflect a reduction of the future economic benefits embodied in the asset.?
(d) legal or similar limits on the use of the asset, such as the expiry dates of related leases.
59. The useful life of an asset is defined in terms of its expected utility to the enterprise. The asset management policy of the enterprise may involve the disposal of assets after a specified time or after consumption of a specified proportion of the future economic benefits embodied in the asset. Therefore, the useful life of an asset may be shorter than its economic life. The estimation of the useful life of the asset is a matter of judgement based on the experience of the enterprise with similar assets.
If the remaining useful life estimated by the company based on AS 10 differs from that specified in Schedule II, the company should make a specific mention of the fact that the remaining useful life as estimated by the company and used for calculating depreciation differs from that indicated in Schedule II and disclose the useful life indicated in Schedule II. Further, if the company depreciates the item of property, plant and equipment as required by AS 10 and provides the disclosures as specified above and other disclosures required by AS 10, no modification to independent auditor’s report is required.
Ministry of Corporate Affairs in exercise of the powers conferred by section 133 read with section 469 of the Companies Act, 2013 (18 of 2013) and in supersession of the Companies (Accounting Standards) Rules, 2006, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R. 739 (E), dated the 07th December, 2006 [and amended from time to time vide numbers G.S.R. No. 212(E), dated the 27th March, 2008, G.S.R. 225(E), dated the 31st March, 2009, G.S.R. 378(E), dated the 11th May, 2011, G.S.R. 913(E), dated the 29th December, 2011, G.S.R. 914(E), dated the 29th December, 2011, G.S.R. 364(E), dated the 30th March, 2016 and G.S.R. 569(E) dated the 18th June, 2018], except as respects things done or omitted to be done before such supersession, the Central Government, after consultation with the National Financial Reporting Authority constituted under section 132 of the said Act, has notified Companies (Accounting Standards) Rules, 2021.
The response given above is applicable under AS 10, Property, Plant and Equipment, notified under Companies (Accounting Standards) Rules, 2021.
Standards Applied for Responding to Issues This Week
领英推荐
From?Review Repository?– Presentation of Cash Flows from Financing Activities
The company has presented Repayment of Long-term borrowings on net basis in Statement of Cash Flows.
Paragraph 21 of Ind AS 7, Statement of Cash Flows, states as under:
An entity shall report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that cash flows described in paragraphs 22 and 24 are reported on a net basis.
Paragraph 22 of Ind AS 7, Statement of Cash Flows, states as under:
Cash flows arising from the following operating, investing or financing activities may be reported on a net basis:
(a) cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity; and
(b) cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short.
Paragraph 24 of Ind AS 7 states –
Cash flows arising from each of the following activities of a financial institution may be reported on a net basis:
(a) cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date;
(b) the placement of deposits with and withdrawal of deposits from other financial institutions; and
(c) cash advances and loans made to customers and the repayment of those advances and loans.
Therefore, repayment of long-term borrowing reported as cash flows from financing activities cannot be presented on net basis.
Paragraph 7 of Ind AS 1, Presentation of Financial Statements, explains -
Information is obscured if it is communicated in a way that would have a similar effect for primary users of financial statements to omitting or misstating that information. The following are examples of circumstances that may result in material information being obscured:-
In the given case, it is unclear as to what the company means by adding the word ‘net’ as suffix to Repayment of long-term borrowings when paragraph 21 of Ind AS 7 requires presentation on gross basis. Thus, the information is presented in a manner as if the statement of cash flows has been misstated. Therefore, such presentation is obscuring for a reader of financial statements. The presentation could be said to be not in accordance with paragraph 21 of Ind AS 7. However, no information is available to a user of financial statement to confirm non-compliance with paragraph 21 of Ind AS 7 in absence of any qualification in independent auditors’ report.
Components Impacted:?Statement of Cash Flows
From?Accounting Policy Repository?– Segment Reporting -?Policy Id:?7546 - Applicable Standards:?Ind AS 108, Segment Reporting
As reported by Company:
The Chairman of the Company has been identified as the Chief Operating Decision Maker (CODM) as defined by Ind AS 108, “Operating Segments.
Operating segments are reported in a manner consistent with the internal reporting provided to the CODM. The accounting policies adopted for segment reporting are in conformity with the accounting policies adopted for the Company. Revenue and expenses have been identified to segments on the basis of their relationship to the operating activities of the segment. Income/Costs which relate to the Company as a whole and are not allocable to segments on a reasonable basis, have been included under Unallocated Income/Costs. Interest income and expense are not allocated to respective segments (except in case of Financial Services segment).
In accordance with Ind AS 108 ‘Operating Segments’, segment information has been given in the consolidated financial statements of the Company, which are presented in the same annual report and therefore, no separate disclosure on segment information is given in these financial statements.”
From?Key Audit Matters Repository?- Key Audit Id: 2240 – Impairment loss allowance on loans and investment pertaining to finance business - As reported:
Key Audit Matter:
Charge to the statement of profit and loss of ?NIL
Provision: ?246.08 Crores as at March 31, 2022
[Refer to Note 2(a)(vii), 2(b)(iii) and 47(f) to the standalone financial statements]
The Company as part of its financial services segment offers long-term and short-term wholesale lending primarily to the real estate and infrastructure sector. Loans and investment portfolio in the finance business are measured at amortised cost less impairment allowance for losses. The Company applies the expected credit loss (ECL) model for recognising impairment loss.
The Company’s assessment of expected credit loss involves use of judgements and estimates, such as determination of probability of default (PD), determination of the staging, loss given default (LGD), exposure at default (EAD), estimating Management overlay for economic uncertainty expected to result from COVID 19 pandemic, forward-looking information, and macroeconomic factors, in computing the ECL on loans and investments.
We identified impairment of loan and investment portfolio in finance business as a key audit matter because the Company exercises significant judgement in calculating the expected credit losses.
How was the matter addressed by auditor?:
We performed the following key audit procedures:
We held discussions with the Management and evaluated management’s assessment of the ECL provision at each stage including assessment of COVID-19 impact, to determine if the provision was reasonable considering the Company’s portfolio, risk profile, credit risk management practices and the macroeconomic environment.
We evaluated the design of internal controls relating to the computation of ECL provision, the key assumptions (i.e. staging, EAD, PD and LGD rates) and other inputs used therein, including macro-economic factors.
We selected a sample of loan contracts and tested the operating effectiveness of controls over computation of ECL provision, the key assumptions and inputs used therein, through inspection of evidence of performance of these controls or independently re-performing the control.
Through a sample of loan contracts, we performed substantive procedures, to evaluate adequacy of ECL provisioning made.
From?Term Repository?– Spot:
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TASK?Statistics at the time of writing this section of newsletter
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