Sandeep Ahuja & Co.

Established in the year 1986, we are a leading chartered accountancy firm based in Delhi & NCR rendering comprehensive professional services which include statutory audit, internal audit, direct tax, transfer pricing, GST, bank audit, propriety audit, cost accounting, internal financial controls and risk advisory.

Friday, June 2, 2017

Applicability of Indian Accounting Standards

Ministry of Corporate Affairs has notified four phases for convergence to IND AS from current accounting standards.
Phase I: Applicability  w.e.f. 1st April 2016
A company shall be mandatorily required to apply IND AS from 1st April 2016 provided :
I. Its Net worth is greater than or equal to INR 500 Crores.
Note
a)      Net worth shall be checked for previous 3 Financial Years i.e.  as on 31.03.2014, 31.03.2015 & 31.03.2016.
b)      Phase I shall be applicable if Net worth of company is more than equal to INR 500 Crores on any of the above dates.

c)      Net Worth  means: [Paid up share Capital+ all reserves created From out of profit* & securities premium account  - accumulated losses, deferred expenditure and miscellaneous expenditure not written off]

* Capital Reserve shall not be included in calculation of Net Worth - (exception: Capital Reserve arising out of Promoters Contribution and Govt Grant Recieved shall be included in calculation of net worth).

Phase II: Applicability  w.e.f. 1st April 2017
A company shall be mandatorily required to apply IND AS from 1st April 2016 provided :
I. It is a listed company. No conditions for net worth or,
II. Its Net Worth  greater than or equal to INR 250 crores but less than INR 500 crores.  

Note: 
Listing status shall be checked as on 31.03.16.
Net worth shall be checked for previous 4 Financial Years i.e.  as on 31.03.2014, 31.03.2015 & 31.03.2016 & as on 31.03.2017. Phase II shall be applicable if Net worth of company is more than equal to INR 250 Crores but less than INR 500 crores  on any of the above dates.

Phase III: Applicability w.e.f. 1st April 2018
Banks, NBFC, Insurance companies shall apply IND as from 1st April 2018
I. NBFC:  NBFC whose net worth is more than or equal to INR 500 crores shall apply IND AS w.e.f. 1st April 2018.
II. Banks & Insurance companies shall apply IND AS w.e.f.  1st April 2018. However, for banking & insurance companies a separate set of IND AS shall be notified by IRDA.
Note: 
a)      NBFC includes Core investment companies, stock brokers , venture capitalists etc.
b)      Net worth to be checked for 3 years i.e. 31.03.2016, 31.03.2017 & 31.03.2018

Phase IV: Applicability w.e.f. 1st April 2019
I. NBFC:  NBFC whose net worth is more than or equal to INR 250 crores but less than 500 crores shall apply IND AS w.e.f. 1st April 2019.
General Note
If IND AS becomes applicable to a company then, IND AS shall be automatically applicable to all Subsidiaries, Holding companies, Joint Ventures irrespective of individual qualification of such companies.
(Ind AS will apply to both consolidated as well as standalone financial statements of a company. While overseas subsidiary, associate or joint venture companies are not required to prepare standalone financial statements under Ind AS, they will need to prepare Ind AS adjusted financial information to enable consolidation by the Indian parent.)
MAT on Financial Statements of Companies Adopting Indian Accounting    Standards.
1. MAT to be calculated on Net Profit Before Other Comprehensive Income(OCI):
Statement of Profit & Loss of Ind AS compliant companies also consists of a Section called "Other Comprehensive Incomes". As per Finance Act, 2017, MAT liability shall be calculated on Net  Profits Before OCI & no adjustments shall be made to such profits other than already specified u/s 115JB of Income Tax Act,1961.
2. MAT Liability in case of First time adoption of Ind AS. 
Transition Requirements to Ind AS as per Ind AS 10:As per Ind AS-101 " First Time Adoption of Indian Accounting Standards", in the first year of adoption of Ind AS, companies are required to prepare:
         i.            Comparative Financial statements for Immediately preceding financial year relevant to the year of application of Ind AS.

       ii.            Balance sheet as on the opening date** of comparative financial year as stated in point (i) above restated as per Ind AS.
** such balance sheet shall be deemed to be prepared as on the beginning of the opening date.
As per Ind AS 101, " First Time Adoption of Indian Accounting Standards" all adjustments resulting from transition to Ind AS shall be made to opening Reserves i.e. Other Equity  as on the Date of Transition.
Finance Act 2017 on calculation of MAT:As per Finance Act, 2017 adjustments arising out of transition to Ind AS as on the date of application shall be considered while computing "Book Profits" for the purpose of MAT.
For Example: A company on which is mandatorily required to apply Ind AS from 1.04.2017 shall be required to prepare its comparative Financial Statements as per Ind AS for FY 2015-16 & a Balance sheet as on 31.03.2015 restated as per Ind AS. In such as scenario, all the adjustments arising out of transition to Ind AS as on 31.03.2017 shall be considered for computation of MAT liability for Previous Year 2017-18 (Asst Year 2018-19).
3. Timing at which MAT liability shall arise for Adjustments arising out of Transition to Ind AS. 
(a) Items of Other Comprehensive Incomes Which will be subsequently classified to Statement of  P&L which can be reclassified to P&L shall be added to Book Profits only when such items have been reclassified to P&L account.  



(b) The adjustments arising out of transition to Ind AS shall included in book profits for purpose of MAT Calculation at the following intervals:
S. No.
Items of Adjustment
Point of time when such item will be included in MAT
1.
Effect of Revaluation surplus of (PPE) & Intangible assets.(Ind AS 16 & Ind AS 38)
To be included in book profits at the time of Realization
2.
Gains & losses on Equity instruments recognized at fair value & recorded in Other Comprehensive Income (Ind AS-109)
3.
Remeasurements of defined benefit Plans
To be included in book profits equally over a period of 5 yrs starting from the date of Adoption of Ind AS.
4.
Other Items
When a company is mandatorily required to apply Ind  AS from 1st April 2017 the period of five years over which above  mentioned adjustments shall be added to "Book Profits" proposed above shall be  FY 2017-18, 2018-19, 2019-20, 2020-21 and 2021-22.
4. Impact on Companies which have Proposed  Dividend during FY 2016-17 & required to Comply with Ind AS from 1st April 2017.
(a) Effect of Ind AS -10 "Events Occuring after the date of Reporting Period" on proposed dividend.  
Proposed Dividend not to be recognized as liability at end of a reporting Period: As per  para no. 12 of Ind AS -10, if an entity declares dividend to holders of Equity instrument (As defined in Ind AS -32 "Financial Instruments: Presentation") after the reporting period , the entity shall not recognize those dividends as a liability at the end of reporting period since obligation to pay dividend arises only when it has been finally declared by the shareholders. Thus, under Ind AS, dividend shall be recognized in the books only when it has been declared & finally paid to the shareholders.
5. Impact on Companies which have Debt Restructured during FY 2016-17 & required to Comply with Ind AS from 1st April 2017.
(a) Effect of Ind AS -"Financial Instruments"
Debt Restructured-Reduction in amount of debtor or extinguishment of liability : As per Ind AS -109, an entity ceases to recognize (derecognize) a financial liability when it is extinguished i.e. when it is discharged, obligation cancels, expires or when debtor is legally released from liability legally through creditor agreeing to such  a release.
Mutual Agreement Between Debtor & Lender: In case of debt restructuring the there is a mutual settlement between the debtor & creditor for the reduction of amount of liability. Thus, the reduction in amount of liability due to debt restructuring shall no  longer be appearing in the liabilities of the company. This will lead to profit on reconstruction.
Both Dividend Proposed & Debt Restructured  shall be added equally to book profits over a period of 5years  for calculation of MAT liability  being an item which will never  be reclassified to P&L  Account.
6. Conclusion
(a) Those companies which have proposed dividend during FY 2016-17, will have to record a reversal of the proposed dividend liability on transition to Ind AS & such amount of reversal shall be added back to Book profits for computation of MAT Liability.
(b) For companies which have debt restructured in the previous FY 2016-17, MAT liability would arise. The amount by which debt is reduced after restructuring would be treated as income, increasing a company's book profit over a period of 5years for computation of MAT liability.

(c) MAT shall be levied @18.5% on book profits of the company. In view of above uncertainties regarding effect of proposed dividend & Debt restructuring on MAT liability, introduction of rationalization measures by Ministry of Finance have been a welcome step. Many companies have already made provisions in respect of MAT Liability on Proposed dividend & Debt restructured.  
Contributed by Tanveer Alam at sandeep Ahuja & Co

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