GAAP Advisors TASK Weekly Newsletter | 97th Edition

Welcome to 97th Edition of GAAP Advisors TASK Weekly newsletter

It gives me immense pleasure welcoming you to the 97th 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 Solo.?Readers who do not use android mobile can login / register on?https://gaapadvisors.com?and Start?TASK Solo.

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This edition of newsletter has the following sections:

+ Why register on?GAAP Advisors

+ Scholarship for CA Students securing Rank 1 in TASK Solo

+ 17th TASK Room

+ From?Issue Repository?– Capital Advance

+ Standards Applied for Responding to Issues This Week

+ From?Review Repository?– Non-compliance with Ind AS 19

+ From?Accounting Policy Repository

+ From?Key Audit Matters Repository

+ Note of Thanks

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From Issue Repository – Capital Advance -Issue Id: 2725 - Framework: Indian Accounting Standards:

Facts of the Case as submitted by the querist:

We had made capital advances of ?1000 in 2012-13 and have not purchased any fixed asset for such advance up until 2017-18 due to financial constraints. Capital Advances are recorded in 17-18 at ?1000

The supplier is not of view to reverse the advance to us.

Issue/Query

1. How should such capital advance be treated?

2. As it is not a Financial Asset, will it be recorded at cost only or Amortized cost?

3. Whether impairment will be recorded in 2017-18 or Provision for Onerous contract as per Paragraph 66 of Ind AS 37??

4. Also is it a Prior Period Error as we failed to recognize Impairment / Provision (whichever was the correct treatment in above case)?

GAAP Advisors Response:

The querist has stated that the company had given a capital advance in 2012-13 against which the company has not received any assets till date. Further, there is a high probability that neither the assets nor cash will be received. Capital advance is not a financial asset. Capital advance will be measured at cost less impairment. Therefore, the company must test the recoverability of the advance in accordance with Ind AS 36?Impairment of Assets.?Paragraph 9 of Ind AS 36 states as under:

“9???????? An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.”

There is an indication that the company will not be able to recover the capital advance. Therefore, the entity must estimate the recoverable amount. Paragraph 66 of Ind AS 36 states as under:

“66?????? If there is any indication that an asset may be impaired, recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the cash generating unit to which the asset belongs (the asset’s cash generating unit).”

Therefore, the company must estimate the recoverable amount of the capital advance which will be NIL. As it is possible to estimate the recoverable amount of capital advance, the company is not required to determine the recoverable amount of the cash generating unit to which the capital advance belongs. Paragraph 59 of Ind AS 36 states as under:

“59?????? If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.”

Therefore, the company shall reduce the carrying amount of the capital advance to NIL. The reduction of ?1000 is an impairment loss.

Paragraph 60 of Ind AS 36 states as under:

“60?????? An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard (for example, in accordance with the revaluation model in Ind AS 16). Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard.”

Paragraph 10 of Ind AS 101?First-time Adoption of Indian Accounting Standards?states as under:

“Except as described in paragraph 13-19 and Appendices B-D, an entity shall, in its opening Ind AS Balance Sheet:

1. Recognise all assets and liabilities whose recognition is required by Ind ASs;
2. Not recognise items as assets or liabilities if Ind ASs do not permit such recognition;
3. 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 assets, liability or component of equity in accordance with Ind ASs; and
4. Apply Ind ASs in measuring all recognised assets and liabilities.”

Therefore, the company should have measured the capital advance at NIL at the transition date. The querist has not indicated the transition date. It is assumed that the transition date was 1 April 2015.

Paragraph 5 of Ind AS 8?Accounting Policies, Changes in Accounting Estimates and Errors?defines prior period error as under:

“Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:

1. Was available when financial statements for those periods were approved for issue; and
2. Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

Such errors include the effect of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretation of facts, and fraud.”

The company has omitted to recognise the impairment loss on transition date. Accordingly, the company has made an error. Paragraph 42 of Ind AS 8?Accounting Policies, Changes in Accounting Estimates and Errors?states as under:

“Subject to paragraph 43, an entity shall correct material prior period errors retrospectively in its first set of financial statements ????? approved for issue after their discovery by:

1. Restating the comparative amounts for the prior period(s) presented in which the error occurred; or
2. If the error occurred before the earliest prior period presented, restating the opening balance of assets, liabilities and equity for the earliest prior period presented.”

Therefore, the company must rectify the error retrospectively by restating the capital advance and Retained Earnings on 1 April 2016.

Standards Applied for Responding to Issues Submitted on https://gaapadvisors.com this Week

·?????? Ind AS 32 – Financial Instruments: Presentation

o?? Total Issues in Issue Repository: 363

·?????? AS 29 – Provisions, Contingent Liabilities and Contingent Assets

o?? Total Issues in Issue Repository: 19

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From Review Repository – Non-compliance with Ind AS 19

Components Impacted: Statement of Profit and Loss, Statement of Changes in Equity, Statement of Cash Flows and Notes

The company has disclosed the following in its accounting policy on Long-term employee benefits:

(iii) Long term employee benefits:

The obligation for long term employee benefits like long term compensated absences is recognized in the similar manner as in the case of defined benefit plans as mentioned in (ii) (b) above.

Paragraph 156 of Ind AS 19, Employee Benefits, states as follows:

“For other long-term employee benefits, an entity shall recognise the net total of the following amounts in profit or loss, except to the extent that another Ind AS requires or permits their inclusion in the cost of an asset:

(a)?service cost?(see paragraphs 66–112?and paragraph 122A);

(b) net interest on the net defined benefit liability (asset) (see paragraphs?123–126); and

(c) remeasurements of the net defined benefit liability (asset)?(see paragraphs 127–130).”

Paragraph 120 of Ind AS 19 states as follows:

“An entity shall recognise the components of defined benefit cost, except to the extent that another Ind AS requires or permits their inclusion in the cost of an asset, as follows:

(a)?service cost?(see paragraphs 66–112?and paragraph 122A) in profit or loss;

(b) net interest on the net defined benefit liability (asset)?(see paragraphs 123–126) in profit or loss; and

(c) remeasurements of the net defined benefit liability (asset)?(see paragraphs 127–130) in other comprehensive income.”

The accounting for other long-term employee benefits is similar to that of defined benefit plans except for the remeasurement of net defined benefit liability. In case of post-employment benefits which are defined benefit plans, the remeasurement of net defined benefit liability is recognised in other comprehensive income whereas in case of other long-term employee benefits, the remeasurement of net defined benefit liability is recognised in profit or loss. Therefore, the accounting policy disclosed by the company on long-term employee benefits is not in accordance with Ind AS 19. Due to this, Statement of Profit and Loss, Statement of Changes in Equity, Statement of Cash Flows and Notes have been impacted.

From Accounting Policy Repository – Internally generate Intangible Assets - Policy Id: 7577

As reported by Company:

Internally generated intangibles, excluding capitalised development costs, are not capitalised and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred.

Analysis:

The company shall disclose the policy on internally generated intangible assets from accounting periods beginning on or after 1 April 2023 only if meets the test of material accounting policy information. This could be a case where the recognition of internally generated intangible assets involves significant judgements or assumptions that the company has disclosed in accordance with paragraph 122 or 125 of Ind AS 1.

From Key Audit Matters Repository - Key Audit Id: 2304 – Going concern assessment (as reported by component auditor for one of the associate) – Views of readers are invited):

Key Audit Matter:

Refer Significant Accounting Policies and notes 2 to the consolidated financial statements

Stelis (an associate of the Group) has recorded a loss amounting to ?7,998.30 Million for the year ended March 31, 2023.

The management of Stelis has concluded that the going concern basis is appropriate in preparing the special purpose consolidated financial information of Stelis. Stelis has evaluated its ability to continue as a going concern based upon an assessment of the following:

? monetizing the value of the intangibles/intangibles under development by way of obtaining marketing rights from regulatory authorities and licensing them;

? generating increased revenues from CDMO operations;

? divestment of one of the manufacturing facilities to a potential customer on a slump sale basis;

? Stelis’s plans for refinancing a portion of the debt, if and as may be required;

? infusion of capital by current shareholders to the extent of partly paid shares;

? continuing financial support from promoter shareholders.

This required the exercise of significant judgement, particularly in forecasting the Stelis’s ability to meet all its obligations as on when it falls due. The management of Stelis has also considered that the majority of the Stelis’s borrowings are backed by the corporate guarantees of Strides Pharma Science Limited (‘Strides’), an entity having significant influence over the Company.

The management of Stelis concluded that there are no material uncertainties related to events or conditions which, individually or collectively, may cast significant doubt on the Stelis’s ability to continue as a going concern.

It is considered to be a key focus area by the component auditor considering the significance of the area to the overall financial statements.

How was the matter addressed by auditor?

The principal audit procedures performed by the Component auditor, among other procedures included:

? Gaining an understanding and assessing the design, implementation and operating effectiveness of Stelis’s key internal controls over preparation of cash flow forecasts to assess its liquidity;

? Compared the forecasted cash flows with the Stelis’s business plan approved by the board of directors;

? Evaluating the key assumptions in the cash flow forecasts with reference to historical information, current performance, future plans, and market and other external available information;

? Performing a retrospective review to assess the reasonableness of Stelis’s past projections by comparing historical forecasts to actual results;

? Assessing the underlying supporting documents including corporate guarantee agreements provided by Strides on behalf of Stelis to its lenders and confirmation received from Strides to extend necessary support, contracted licensing and manufacturing service agreements, proposed debt refinancing agreements (as may be required) and nonbinding agreement with one of the potential customer for divestment of one of the manufacturing facilities;

? Assessing the pending infusion by the current shareholders towards partly paid-up shares and financial support from the promoters;

? Performing sensitivity analysis on the forecasted cash flows by considering plausible changes to the key assumptions adopted by Stelis;

? Assessing the adequacy of the disclosures related to application of the going concern assumption.

Note of Thanks

GAAP Advisors?thanks all 12300+ subscribers on LinkedIn and other readers of newsletter for taking their time out in knowing how ?GAAP Advisors?enables?Excellence in Financial Reporting in India. I request all subscribers to kindly provide feedback as to what made you subscribe this newsletter, what sections of the newsletter you read the most and what changes you would like to have in the newsletter by adding your comments to the post publishing this newsletter.?GAAP Advisors?thanks all subscribers of repositories for contributing to support the mission of spreading the knowledge and awareness of financial reporting standards in?Collaborative Manner Creating Value For All.?GAAP Advisors?thanks all participants of?TASK?for spending time in learning financial reporting in India.?GAAP Advisors?also thanks all?2700+?registrants?for their faith in the repository services rendered by?GAAP Advisors. A humble request to all readers of this newsletter. Kindly reflect on the knowledge obtained through the newsletter. If you consider the newsletter has created value, please contribute your desired amount by scanning the QR Code towards the value created by the newsletter.

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