Recognizing Export Incentives in FY 2024–25 – A Guide to Avoid Tax Misstatements

By CA Surekha Ahuja

A scheme-wise guide to timing recognition of incentives like Duty Drawback, RoDTEP, PLI, and subsidies – with full impact on FY 2024–25 income tax reporting

Introduction

For export-oriented and manufacturing businesses, government incentives play a pivotal role in financial performance. In Financial Year 2024–25, schemes such as Duty Drawback, RoDTEP, EPCG benefits, Production Linked Incentive (PLI), and various state subsidies are commonly availed.

A recurring question during audit or finalization is:

Should these incentives be accrued as income (provision) in the books, or recognized only upon actual receipt?

This blog presents a clear answer based on Indian Accounting Standards, ICAI guidance, and the practical realities of FY 2024–25.

Key Incentives Relevant in FY 2024–25

The schemes actively availed during FY 2024–25 include:

• Duty Drawback under the Customs Act, 1962

• RoDTEP (Remission of Duties and Taxes on Exported Products)

• EPCG Scheme (Export Promotion Capital Goods)

• PLI (Production Linked Incentive Scheme) across key sectors

• State Subsidies – including electricity, SGST refund, interest reimbursement

• Interest Equalization Scheme for MSME exporters

Note: MEIS/SEIS are discontinued and generally not applicable unless past-year claims are pending.

Applicable Accounting Standards

a. AS 9 – Revenue Recognition (for non-Ind AS entities)
Under AS 9, income can be accrued when it is measurable and collectability is reasonably certain. Uncertainty in entitlement or collection defers recognition.

b. Ind AS 20 – Accounting for Government Grants
For Ind AS-compliant entities, Ind AS 20 permits recognition only when:

• Conditions attached to the grant will be complied with, and

• Receipt of the grant is reasonably assured

ICAI Guidance (Applicable in FY 2024–25)

The ICAI Guidance Note on Accounting for Government Grants supports:

• Accrual of income when entitlement arises, supported by documents or statutory approval

• Deferral of income recognition if any material condition remains unfulfilled

Visual Matrix – Incentive Recognition Logic for FY 2024–25

This decision matrix simplifies the accounting treatment of major incentives under current schemes:

Incentive / Scheme	Eligible Activity Completed	Claim Filed / Documentation	Assurance of Receipt	Recognize Income in FY 2024–25?
Duty Drawback	Yes	Yes	Yes	✅ Accrue (Provision)
RoDTEP	Yes	ICEGATE ledger updated	Yes	✅ Accrue (Provision)
EPCG Scheme (Capital Goods)	Yes	Yes	Not a direct income	❌ No P&L income – amortize benefit
PLI Scheme	Yes	Application filed	Approval pending	❌ Defer till approved
State Subsidy – Revenue	Yes	Sanction letter available	Yes	✅ Accrue (Provision)
Interest Equalization	Yes	Bank confirmation available	Yes	✅ Accrue (Provision)
MEIS / SEIS (Legacy only)	Possibly (prior FY)	Claim pending or litigated	Case specific	⚠️ Recognize only if enforceable

When to Accrue and When to Defer

Accrue income in FY 2024–25 when:

• Export or activity completed

• Claim is filed and trackable

• Reasonable assurance exists (ledger credit, sanction letter, bank endorsement)

Defer income to later year when:

• Verification is pending

• Sanction or approval not received

• Benefit is subject to audit or cancellation risk

• Performance thresholds (e.g., PLI) not yet validated

Disclosure Requirements for FY 2024–25

Entities must ensure proper disclosure in financial statements, including:

• Nature of each government incentive

• Whether recognition is accrual or receipt-based

• Any unfulfilled conditions or clawback clauses

• Accounting policy note in “Significant Accounting Policies”

Audit working papers should include:

• ICEGATE entries for RoDTEP

• Claim forms and acknowledgment receipts

• Sanction letters or email confirmations

• Past-year realization history (where relevant)

Real Example – FY 2024–25

XYZ Exports Pvt Ltd completed eligible exports and capital imports in FY 2024–25. Its incentives:

• ₹12 lakh Duty Drawback – claim filed

• ₹8 lakh RoDTEP – ledger credit reflected by 31 March 2025

• ₹3 lakh power subsidy – sanctioned by state nodal agency

• ₹15 lakh PLI – application submitted, review pending

Accounting Treatment:

• Recognize Duty Drawback, RoDTEP, and Power Subsidy in FY 2024–25

• Defer PLI incentive to FY 2025–26 (subject to approval)

Strategy for FY 2024–25

For Financial Year 2024–25:

• Duty-based and invoice-traceable incentives (e.g., Duty Drawback, RoDTEP) are eligible for provisioning

• Performance-based schemes (e.g., PLI) require a conservative approach

• Documented entitlement and government interface evidence are key

• Align recognition with AS 9 or Ind AS 20 and ICAI's guidance note

• Ensure robust audit trail and transparent disclosure

Navigating the Capitalisation vs Expense Dilemma: Accounting for Recoverable Employee Training Costs under Ind AS

A Critical Analysis of Accounting Treatment of Recoverable Employee Training Costs under Ind AS and Global Norms

"The cost of knowledge is high, but the cost of ignorance is higher. In accounting, this paradox plays out when recoverable training costs are expensed."

The Dilemma

In service contracts requiring substantial employee training, companies often face a critical accounting question: Should recoverable training costs be capitalised as contract assets or expensed immediately? Commercially, these expenses represent investments in enhanced employee capabilities essential for future service delivery and revenue generation. The intuitive business view leans towards capitalisation.

However, Indian Accounting Standards (Ind AS)—particularly Ind AS 115 (Revenue from Contracts with Customers) and Ind AS 38 (Intangible Assets)—draw a distinct boundary, often compelling immediate expensing of these costs, even if reimbursed under contract terms.

Key Question:

If training costs are directly attributable to a contract and recoverable from the customer, why does accounting mandate their immediate expensing?

Legal Framework and Accounting Standards

Ind AS 115: Revenue from Contracts with Customers

Ind AS 115 permits capitalisation of contract fulfilment costs only if:

• The costs relate directly to a specific contract,

• They generate or enhance resources controlled by the entity to satisfy performance obligations, and

• It is expected that the costs will be recovered.

Yet, Ind AS 115 refers to other Ind ASs for specific cost types. Employee training costs fall under the purview of Ind AS 38, which has a stricter stance.

Ind AS 38: Intangible Assets

Ind AS 38 explicitly mandates immediate expensing of training costs (para 69(c)) because:

• Enhanced employee skills do not produce a separately identifiable intangible asset,

• The employer does not have control over the economic benefits embedded in the employee's acquired knowledge, and

• Reliable measurement of such “human capital” is not possible within accounting frameworks.

IFRS Perspective

Global IFRS guidance aligns with Ind AS in this regard:

• IFRS 15 (counterpart of Ind AS 115) allows capitalisation of costs only where resources controlled by the entity are enhanced,

• IAS 38 parallels Ind AS 38, requiring immediate expensing of training costs.

Case Studies Illustrating Real-World Application

Case Study 1: L&T Technology Services — Aerospace Contract

L&T incurred ₹2.5 crore in training 120 engineers on specialized aerospace simulation tools under a reimbursable contract with a European client. Initially, they contemplated capitalising these costs. However, audit scrutiny referencing Ind AS 38 resulted in expensing the training cost immediately. The reimbursement was recorded as revenue, but no asset was recognised.

Case Study 2: Accenture Global — IFRS Application

Accenture UK trained 300 consultants on SAP HANA technology for a German automotive client, incurring €1 million reimbursed under contract terms. Despite the direct contract link and reimbursement, costs were expensed per IAS 38, reflecting their global accounting policy.

Case Study 3: Infosys — US Banking Project

Infosys undertook domain-specific training costing ₹1.2 crore for a US mortgage underwriting project. Training costs were expensed immediately, while reimbursements were classified under "Other Income" to distinctly separate them from core service revenue.

Case Study 4: TCS — Japanese Telecom Training

TCS’s multi-year telecom software contract in Japan involved reimbursable training on Japanese telecom regulations. Auditors required expensing per Ind AS 38, despite TCS’s internal capitalisation for management reporting and performance tracking.

Case Study 5: Deloitte US — Federal Contract under US GAAP

Under US GAAP ASC 340-40, Deloitte US deferred federal contract training costs over the contract life, recognising them as deferred contract costs. Contrastingly, Deloitte India, applying Ind AS, expensed similar costs immediately, demonstrating jurisdictional divergence.

Commercial vs. Compliance Conflict: The Crux

Consider an IT firm incurring ₹50 lakh on a 4-week specialized training reimbursed by a client contract. Commercially, this investment directly improves delivery capabilities and is recoverable. However, accounting mandates immediate expensing, creating tension between economic substance and accounting form.

Critical Analysis of Trigger Points and Remedies

Trigger Point	Commercial View	Ind AS / IFRS Treatment	Remedial Action / Planning
Training cost is recoverable	Treated as a capital investment	Expensed immediately	Structure contracts to separately invoice training reimbursements
Training creates future economic benefit	Capitalised as contract asset	No asset recognised	Use internal management capitalisation for performance metrics
Cost directly linked to contract delivery	Part of contract fulfilment cost	No control over resulting ‘asset’	Document clear separation between service fees and reimbursements
Measurability of cost value	Monetary and verifiable	No intangible asset can be reliably measured	Maintain detailed cost tracking and disclosures
Control over asset (employee knowledge)	Economic benefit expected by entity	No control, hence no asset under accounting standards	Educate stakeholders on ‘control’ criteria for asset recognition

Expert Interpretation

Leading accounting bodies,emphasize ‘control’ as the key criterion for capitalisation under Ind AS 38. Despite commercial arguments, employee skills and knowledge are intangible and non-transferable, failing to meet asset recognition tests.

The “asset” created is human capital — inherently beyond corporate control — and hence training costs must be expensed, regardless of reimbursement contracts.

Best Practice Recommendations for Indian Entities

1. Contract Structuring:
   Clearly separate training cost reimbursements from service fees in contracts and invoices. This delineation ensures that reimbursement is not conflated with contract fulfilment costs eligible for capitalisation.

2. Revenue Recognition:
   Recognise training reimbursements distinctly as “Other Income” or separate contract revenue items, while expensing the training costs immediately in financials.

3. Documentation and Disclosure:
   Maintain detailed cost tracking templates and disclose the accounting policy treatment of recoverable training costs in notes to financial statements for transparency and audit readiness.

4. Internal Capitalisation for Management Reporting:
   Companies may maintain internal records capitalising training costs to monitor project profitability and employee development without breaching Ind AS for statutory financials.

5. Auditor Communication:
   Prepare clear communication drafts for auditors outlining the accounting policy and compliance with Ind AS to pre-empt disputes.

Conclusion

The paradox remains: “Not all that is valuable can be capitalised, and not all that is expensed is a waste.” Accounting under Ind AS and IFRS is anchored in the legal principle of control and reliable measurement, not merely economic substance.

Recoverable employee training costs—even when contractually reimbursed—must be expensed immediately, reflecting the boundary between human capital and recognised assets.

For finance professionals, the challenge is to bridge commercial rationale and accounting compliance through smart contract design, clear disclosures, and robust internal controls.

"Accounting is not economics — it is structured logic under defined control."
— A guiding principle for every finance professional navigating the capitalisation-expensing divide.

Tech-Enabled Audits: A Practical Guide to Risk, Ethics, and Peer Review

The auditing landscape has evolved significantly over the past few decades, driven primarily by rapid technological advancements. Statutory audits, long seen as the bedrock of corporate governance, are no longer solely reliant on traditional methods. Today, they are being reshaped by technology, which is enhancing efficiency, accuracy, and transparency. However, the integration of these technological tools raises critical questions about ethics, risk management, and the importance of peer review in maintaining the integrity of the auditing process.

This comprehensive guide seeks to address these aspects, focusing on the real need for technology in statutory audits, the procedural framework for implementing these tools, and a checklist for ensuring readiness. By adopting these strategies, Chartered Accountants (CAs) can embrace the future of audits with greater confidence, aligning with the ethical standards and risk management protocols expected in today's corporate environment.

1. The Real Need for Technology in Statutory Audits

The audit process traditionally relied on manual checks and balances, requiring auditors to comb through vast amounts of financial data to identify irregularities, errors, or fraud. This time-consuming process was not only inefficient but also prone to human error.

With advancements in technology, statutory audits are evolving to incorporate tools that improve data handling and analysis, such as:

• Artificial Intelligence (AI): AI enhances the ability to analyze vast datasets quickly, identifying patterns, trends, and anomalies that would be difficult for a human auditor to detect. AI-powered systems can flag unusual transactions or behaviors for further investigation, improving the precision and timeliness of audits.

• Blockchain: By enabling secure, transparent, and real-time recording of transactions, blockchain reduces the risk of fraudulent financial activities and ensures that the integrity of the audit is maintained.

• Data Analytics: Tools that enable data mining, pattern recognition, and predictive analysis are invaluable in auditing, helping auditors understand the financial health of a company and predict future trends based on current data.

• Machine Learning (ML): ML algorithms can continually improve and adapt based on new data, assisting auditors in identifying risks, ensuring compliance, and generating insights in real-time.

These technologies enable auditors to handle complex financial data with greater speed and accuracy, reducing the time spent on repetitive tasks and allowing them to focus on more critical aspects of the audit. Importantly, they provide greater assurance that financial statements are accurate and free of material misstatements.

2. Ethical Considerations in the Tech-Enabled Audit Process

While technology presents tremendous benefits to the auditing process, it also brings about ethical challenges that must be carefully managed. As auditors adopt AI, machine learning, and data analytics, they must ensure that the use of these tools does not compromise the integrity or confidentiality of financial data.

Key ethical considerations include:

• Data Privacy and Security: With the increased use of digital tools, sensitive financial data is more vulnerable to breaches. Auditors must implement stringent cybersecurity protocols to safeguard client data.

• Transparency in AI Decisions: AI models are often perceived as "black boxes" because it can be difficult to explain how they arrive at conclusions. Auditors must ensure that they can explain and justify the decisions made by AI tools, maintaining transparency with clients and regulators.

• Bias and Objectivity: AI and machine learning systems are only as unbiased as the data they are trained on. Auditors must be mindful of any inherent biases in their models that could skew results or lead to unfair conclusions. Ethical auditing practices demand fairness, impartiality, and objectivity at all stages of the audit.

To address these ethical concerns, auditors must establish robust ethical guidelines and continuously review the impact of technology on audit procedures. They must maintain a balance between embracing technological innovation and upholding the core values of the profession.

3. Risk Management in Tech-Enabled Audits

The integration of new technologies into the audit process also introduces potential risks that auditors must manage effectively. These risks include:

• Operational Risks: The introduction of new technology requires training and familiarization. There is a risk of operational disruptions during the transition phase, which could impact the timeliness and accuracy of the audit.

• Compliance Risks: New technologies must be compliant with regulatory standards such as the International Standards on Auditing (ISA) and local laws. Auditors must ensure that their tools and procedures align with these standards.

• Technology Reliability: While technology can significantly enhance the audit process, it is not infallible. There is a risk that technological tools may fail, leading to errors or incomplete audits. Auditors must have contingency plans in place to deal with system failures.

To mitigate these risks, auditors should:

• Regularly Update and Maintain Tools: Ensuring that technology systems are up-to-date with the latest features, security patches, and compliance requirements reduces the risk of operational failures.

• Implement Thorough Testing: Before deploying new audit technologies, auditors should test the systems thoroughly to identify potential vulnerabilities and ensure they meet the required standards.

• Continual Education and Training: Auditors should invest in ongoing training for their teams to stay up-to-date with technological advancements and ensure they are equipped to handle emerging risks.

4. Peer Review in the Tech-Enabled Audit Process

Peer review plays a critical role in maintaining the quality and integrity of audits, particularly as the technology used in auditing becomes more complex. Peer review is essential for validating that the audit process has been carried out correctly, with due diligence, transparency, and adherence to ethical standards.

The role of peer review in the tech-enabled audit process includes:

• Validation of Technology Use: Peer reviewers must assess whether the technology used in the audit was appropriate and effectively integrated into the auditing process. They should ensure that the audit tools employed align with industry standards and that any risks introduced by the technology have been mitigated.

• Ensuring Compliance: Peer review provides an extra layer of oversight to confirm that the audit complies with regulatory requirements, ensuring that the audit findings are not only accurate but legally sound.

• Ethical Oversight: Peer reviewers can also help identify any ethical concerns that may arise from the use of technology in auditing. By reviewing the audit methodology, peer reviewers can flag any areas where ethical guidelines may not have been strictly followed.

5. Mini-Audit Readiness Checklist for Technology Integration

To successfully transition to a tech-enabled audit, auditors can use the following checklist to ensure they are ready:

Step	Action Item
1. Technology Assessment	Evaluate and select suitable audit tools (AI, Blockchain, Data Analytics, etc.).
2. Staff Training	Provide ongoing training to audit staff on new technologies and ethical practices.
3. Compliance Review	Ensure all technological tools comply with relevant regulations and standards.
4. Security Protocols	Implement robust data protection and cybersecurity measures.
5. Peer Review Setup	Establish a peer review process to assess the use of technology and overall audit quality.
6. Ethical Guidelines	Develop and maintain ethical standards for technology use, focusing on fairness and transparency.
7. Risk Management	Identify potential risks and prepare contingency plans to mitigate them.
8. Continuous Improvement	Regularly update technology and processes to keep pace with industry changes.

Conclusion

As statutory audits increasingly rely on technology, it is essential for auditors to balance innovation with ethical responsibility, risk management, and robust peer review. Embracing technology can improve audit efficiency, accuracy, and transparency, but only if the process is approached with careful consideration of the ethical and operational implications.

By following the steps outlined in this guide and utilizing the readiness checklist, auditors can ensure that they are not only keeping up with technological advancements but also maintaining the integrity and trustworthiness that are the hallmarks of the auditing profession. 

Transforming Statutory Audits: The Power of Technology, Ethics, and Risk

A Profession at the Crossroads of Trust and Technology

Audit, once driven by sample-based testing and manual tick marks, has now entered a new era — one marked by real-time analytics, machine-assisted judgment, and digital evidence. But this revolution is not just about speed or accuracy — it is about preserving professional judgment and ethical standards amidst digital transformation.

Statutory auditors today must not only adapt to technology but also rise as custodians of ethical interpretation — ensuring that the audit does not lose its core purpose: public trust.

This professional guidance note offers:

• A procedural roadmap to embed technology into audit practice

• Practical risk and ethics analysis

• A mini audit checklist in Excel-ready format

• A three-phase firm readiness strategy

• A vision for the Auditor of Tomorrow

1. The Inevitable Shift: From Static Sampling to Dynamic Assurance

The audit profession is undergoing a radical change, driven by:

• Big data (volume and velocity of transactional data)

• AI/ML (automated risk-based selection)

• Blockchain (immutable transaction trails)

• Cloud platforms (real-time reporting and analytics)

Yet, with these enhancements comes a greater ethical responsibility: Can the auditor decipher machine-derived insights within regulatory and moral boundaries? Can professional skepticism survive the convenience of dashboards?

This requires that auditors move from compliance checkers to ethical data interpreters — with both technical skill and value-based judgment.

2. Procedural Model for Tech-Enabled, Ethically-Informed Statutory Audit

Here is an updated audit process lifecycle that integrates technology, ethical reasoning, and professional responsibility:

Step 1: Client Acceptance and Background Screening

Tool Used	Action	Ethical Lens
AI-driven litigation checks	Extract client litigation/insolvency history	Has the client previously violated trust?
MCA data scraping tools	Director defaults, group structure verification	Are any related parties obfuscating control?
AML/KYC tools	UBO validation, PAN/GST matching	Is the beneficial owner transparently identified?

Excel Tab 1: “Client Screening”

Columns: Client Name | Tool Used | UBO Match? | Litigation Found? | Ethical Concerns Flagged | Acceptance Decision

Step 2: Internal Control Evaluation Using ERP and Process Mining

Technology	Purpose	Auditor Judgment
SAP/Oracle ERP Logs	Detect unusual user privileges or access override	Was override authorized or abusive?
Process mining engines	Map actual workflows vs. SOP	Does deviation indicate negligence or fraud?

Excel Tab 2: “Control Evaluation"

Columns: Control Area | Tool | Exception Detected? | Auditor Notes | Management Explanation | Control Gap Rating (1–5)

Step 3: Substantive Testing Enhanced by AI/Analytics

AI Tool Used	Use Case	Auditor’s Ethical Inference
MindBridge/IDEA	Journal Entry analysis	Are recurring entries bypassing policy?
Alteryx/Tableau	Outlier analysis in expenses/revenue	Are patterns reflective of fraud risk?

Excel Tab 3: “Substantive Test Logs

Columns: Test Area | Tool | Flagged Transactions | Manual Sample Crosscheck | Final Audit Conclusion | Material Misstatement?

Step 4: External Confirmations and Evidence Gathering

Platform	Use	Auditor’s Duty
ConfirmOne / DocuSign / Zoho	Digital confirmations and e-signs	Was evidence independently sourced and legally valid?
Cloud Audit Workspace	Store encrypted working papers	Was chain of custody preserved digitally?

Excel Tab 4: “Evidence Log”

Columns: Area | Confirmation Sent To | Mode | Response Received | Independence Verified? | Retention Period

Step 5: Final Opinion, Going Concern, and Fair Presentation

Tool Used	Purpose	Ethical Safeguard
Predictive models	Going concern risk projection	Are assumptions realistic and fair?
Visualization tools (Power BI)	Summarize findings for management	Are key issues being disclosed fully?

Excel Tab 5: “Opinion Summary”

Columns: Area | Audit Risk | Tool Used | Issues Flagged | Opinion Impact | Final Disclosure Made?

3. Unique Ethical Risks in Tech-Driven Audits

Technology Use	Ethical Risk	Mitigation Strategy
Automated exceptions analysis	Risk of false positives or confirmation bias	Independent human review always mandatory
Pre-built dashboards	May hide risk by design or data omission	Customize visualizations with auditor lens
Cloud AI audit tools	Overreliance on outsourced black-box models	Understand logic or do not depend entirely

4. Firm-Level Maturity Framework for Technology and Ethics

Phase	What to Do	Ethics Integration
Phase I – Adoption	Buy tools, basic staff upskilling	Include independence code training
Phase II – Integration	Map tools to firm’s audit SOPs and workflows	Establish an “Ethical Overrides Panel”
Phase III – Maturity	Use tools for assurance, analytics dashboards, board reporting	Annual ethics tech audit by internal QC

5. Mini-Audit Checklist – Summary Format

Area	Tool Used	Risk Detected?	Auditor Judgment Applied?	Final Action
Client Screening	Legal crawler	Yes	Yes	Rejected
Control Evaluation	SAP log analysis	No	Yes	OK
Journal Entry Testing	Mind Bridge	Yes	Yes	Further tested
Going Concern	Predictive model	Yes	Yes	Disclosed

Download Excel Checklist Option: Request an editable version of this checklist with dropdowns, conditional formatting, and audit trail tracking.

6. The Auditor of Tomorrow – A New Archetype

The future auditor is not defined by whether they use AI — but how they govern it. In the emerging landscape, the profession calls for a new breed of auditors:

• Technologically Empowered: Skilled in tools, data, and automation without surrendering control

• Ethically Grounded: Able to challenge, interpret, and resist misdirection from both machines and management

• Professionally Independent: With no conflict of interest — in either human judgment or software vendor influence

• Humanly Accountable: Willing to own opinions, embrace public responsibility, and make decisions when algorithms fall short

“Audit is no longer about ticking boxes — it’s about asking the right questions, even when the system says all is well.”

Conclusion: The Human Mind is Still the Strongest Audit Tool

As audit turns into a hybrid function of man and machine, the need for ethical, professional, and skeptical auditors becomes even more vital. The future will remember not the tools we used, but the judgments we made.

Let us, as Chartered Accountants, remain guardians of trust, interpreters of truth, and architects of a just financial ecosystem — beyond the tick.

Accounting, Taxation, and Disclosure of Futures & Options (F&O) Transactions

Futures and Options (F&O) transactions demand a structured and professional approach to ensure accurate accounting, tax compliance, and optimal tax treatment. Given the complexity and dynamic nature of F&O trading, meticulous attention to detail is crucial when finalizing financial statements. Below is an exhaustive guide, incorporating best practices for F&O transactions, with analytical insights into critical aspects of accounting and taxation.

1. Accounting for Futures & Options (F&O) Transactions

(i) At the Inception of a Contract:

When entering into an F&O contract, the initial margin paid must be recorded to establish the contractual obligation. This step is fundamental as it impacts the liquidity position of the entity and influences subsequent margin calls and settlements.

Journal Entry:

• When the initial margin is paid:

  Account	Debit (₹)	Credit (₹)
  Initial Margin - Equity Index Futures Account	Amount	Bank Account

Additional margin payments, if required by the exchange or broker, should be recorded similarly.

Balance Sheet Treatment:

• The Initial Margin is classified as Current Assets since it represents a cash outflow that is recoverable once the contract is settled.
• Excess margin paid can be treated as a Deposit under Current Assets, allowing for transparency in liquidity planning.
• When margins are lodged in the form of securities or guarantees, this should be disclosed clearly in the Notes to Accounts, highlighting potential risks and contingent liabilities.

(ii) Daily Settlement (Mark-to-Market Adjustments):

The daily fluctuations in the value of open F&O positions require mark-to-market (MTM) adjustments. Proper MTM accounting is essential for determining the net exposure and understanding potential gains or losses at any given point.

Journal Entry:

• When MTM margin is paid or received:

  Account	Debit (₹)	Credit (₹)
  Mark-to-Market Margin - Equity Index Futures Account	Amount	Bank Account

• For a lump-sum MTM margin deposit:

  Account	Debit (₹)	Credit (₹)
  Deposit for Mark-to-Market Margin Account	Amount	Bank Account

• Subsequent payments to the MTM account:

  Account	Debit (₹)	Credit (₹)
  Mark-to-Market Margin - Equity Index Futures Account	Amount	Deposit for MTM Margin Account

Balance Sheet Treatment:

• The Deposit for MTM Margin Account is disclosed under Current Assets.
• Any debit or credit balance in the Mark-to-Market Margin - Equity Index Futures Account should be disclosed as Current Assets or Current Liabilities, depending on whether the balance is positive or negative.

(iii) Open Positions at Year-End:

At the year-end, the entity must assess the open F&O positions to determine whether provisions for anticipated losses or unrealized gains are required.

Provision for Anticipated Losses:

• Debit balances in the MTM account represent unrealized losses, which require a provision for anticipated losses to ensure that the financial statements reflect a true and fair view of the entity’s financial position.

Journal Entry:

Account	Debit (₹)	Credit (₹)
Profit & Loss Account	Amount	Provision for Loss Account

Note on Unrealized Profits:

• Unrealized profits should not be recognized in the financial statements, aligning with the conservative accounting principle. These profits must only be recorded when they are realized through settlement or squaring off of the positions.

(iv) Final Settlement/Squaring Off of Contracts:

The final settlement of F&O positions marks the conclusion of the contract, at which point all outstanding balances must be cleared, and any resulting profit or loss must be recognized.

Journal Entry for Profit/Loss:

• At final settlement (Profit or Loss):

  Account	Debit (₹)	Credit (₹)
  Mark-to-Market Margin - Equity Index Futures Account	Amount	Profit & Loss Account

Release of Initial Margin:

• Upon contract closure, the initial margin is refunded:

  Account	Debit (₹)	Credit (₹)
  Bank Account	Amount	Initial Margin - Equity Index Futures Account

FIFO Method for Squaring Off:

• The FIFO method (First In, First Out) is the recommended approach for determining the sequence of contract closings, especially in situations where multiple contracts are open at the same time. FIFO ensures that the oldest positions are closed first, offering a consistent approach for valuation and taxation.

2. Provision and Disclosure in Financial Statements at Finalization of Open Transactions

When finalizing open F&O positions, the following considerations must be addressed:

1. Provision for Losses:

   • Debit balance in the MTM account signifies that losses are expected to materialize in the future. A provision must be created for anticipated losses to reflect a conservative estimate of the entity’s exposure.

2. Unrealized Gains:

   • Unrealized gains should not be recognized in the income statement, as the realization of profits is contingent on the closure of open positions. However, these must be disclosed in the Notes to Accounts as contingent gains.

Disclosure in Notes to Accounts:

• Detailed disclosures should be made regarding the open positions, the rationale behind provisions for anticipated losses, and the treatment of unrealized gains. This provides transparency to auditors, regulators, and stakeholders.

3. Calculation of Turnover for Tax Purposes

F&O turnover plays a critical role in determining tax liability and ensuring compliance with tax audit requirements. The turnover for F&O transactions is calculated by summing up the absolute values of profits, losses, premiums received, and reverse trades.

Transaction Type	Turnover Calculation
Profits from F&O transactions	Absolute value of profits from contracts
Losses from F&O transactions	Absolute value of losses from contracts
Premium received on option writing	Total premium received
Reverse trades	Difference between purchase and sale price of contracts

Example:

Description	Amount (₹)
Profit on contract A	50,000
Loss on contract B	40,000
Premium on option writing	10,000
Total Turnover	1,00,000

4. Taxability of F&O Transactions

F&O transactions are taxed as business income (non-speculative), and losses can be set off against other heads of income (excluding salary). Key tax considerations include:

Aspect	Details
Nature of Income	Business income (non-speculative)
Set-off and Carry Forward	Losses can be set off against any other income (except salary) and carried forward for 8 years
Deduction for STT Paid	Not deductible under Sections 36 or 37 of the Income Tax Act
Tax Audit Threshold (AY 2024-25)	₹10 crores for 95% or more digital transactions; otherwise ₹1 crore

Example of Loss Set-Off:

Description	Amount (₹)
Business Income	5,00,000
Loss from F&O	2,00,000
Net Taxable Business Income	3,00,000

Unutilized losses can be carried forward for up to 8 assessment years.

5. Disclosures in Income Tax Return (ITR)

To ensure compliance with tax laws, traders must report F&O transactions accurately in their income tax return. Key forms and schedules for disclosure include:

Schedule/Form	Details to be Reported
ITR-3 or ITR-4	F&O transactions as business income
Schedule BP	Profit/loss from F&O transactions
Schedule P&L	Breakup of income and expenditure related to F&O
Balance Sheet	Margins paid, receivable, and payable balances
Tax Audit Report	Report turnover, profit/loss, and adherence to accounting standards (Form 3CD)

6. Compliance with Maintenance of Books of Accounts

F&O traders must maintain proper books of accounts to ensure compliance with tax laws and prevent disputes during audits.

Category	Requirement
Turnover < ₹10 lakhs & Income < ₹1.2 lakhs	Exempt from maintaining books under Section 44AA(2)
Above thresholds	Mandatory to maintain books (cash book, ledger, etc.)

7. Key Considerations for Optimal Tax Treatment

Key Consideration	Details
Audit Requirements	Ensure compliance with tax audit based on turnover thresholds
Loss Utilization	Plan to set off F&O losses against other income to minimize tax liability
Separate Accounts	Maintain clear, separate accounts for F&O transactions to simplify the audit process
Advance Tax Payments	Properly estimate F&O business income to avoid penalties under Sections 234B and 234C
Digital Transactions	Leverage digital transactions to take advantage of higher tax audit thresholds

8. Accounting Software for F&O Transactions

To streamline accounting and ensure seamless tax reporting, F&O traders can leverage specialized accounting software.

Software	Features
Tally ERP 9/Prime	Customizable ledgers, automated P&L reports, integration with broker statements
Zoho Books	Cloud-based, real-time transaction tracking, GST compliance
QuickBooks	Expense tracking, reconciliation features for SMEs

Forward Exchange Contracts: Legal, Accounting, and Tax Implications with Practical Examples in INR

 "A contract is only as effective as its compliance with legal and financial standards."

Forward Exchange Contracts (FECs) are critical financial instruments for businesses dealing with foreign exchange. They mitigate risks from currency fluctuations while adhering to legal and accounting frameworks. Let’s explore the provisions, treatments, and examples in Indian Rupees (INR) to contextualize the practical applications.

Key Abbreviations and Glossary

Abbreviation/Term	Meaning
FEC	Forward Exchange Contract: Agreement to buy or sell foreign currency at a future date and fixed rate.
MTM	Mark-to-Market: Valuation of contracts at the prevailing market rate on a reporting date.
HPFT	Highly Probable Forecast Transaction: A likely but not yet contracted future transaction.
ICAI	Institute of Chartered Accountants of India.
AS	Accounting Standard, issued by ICAI.
Ind AS	Indian Accounting Standard, aligned with international standards.
ICDS VI	Income Computation and Disclosure Standard VI for tax computation of foreign exchange.

Purpose and Legal Uses of Forward Exchange Contracts

1. Hedging

Forward contracts hedge against adverse currency movements, ensuring cost predictability.

Example – Exports in INR:
Ashu, an exporter, sells goods worth USD 50,000 when the spot rate is ₹80/USD. His receivable is ₹40,00,000. Fearing a drop in the rate, he enters an FEC to sell USD at ₹79/USD in 3 months, fixing his receivable at ₹39,50,000.

Example – Imports in INR:
Vandana agrees to import machinery worth EUR 1,00,000. The spot rate is ₹90/EUR, but she fixes her cost at ₹91/EUR through a forward contract. Her liability is now ₹91,00,000, irrespective of market fluctuations.

2. Speculation

FECs may be used to speculate and profit from currency rate changes.

Example – Trading in INR:
Sandeep enters an FEC to sell USD 20,000 at ₹82/USD. If the market rate at the settlement date falls to ₹80/USD, he earns a speculative gain of ₹40,000 [(₹82 - ₹80) × 20,000].

3. Anticipated Transactions (HPFTs)

Used for hedging uncertain but likely transactions.

Example in INR:
Ashu anticipates needing USD 30,000 for project expenses in 6 months. He enters an FEC at ₹81/USD, fixing his outflow at ₹24,30,000.

Comparative Analysis of Accounting Standards for FECs

Aspect	AS 11 (Accounting Standards)	Ind AS 109 (Indian Standards)	ICDS VI (Tax Computation)
Premium/Discount	Amortized over the contract’s life.	Not accounted separately.	Amortized over the contract’s life.
MTM Valuation	Required for trading purposes.	Mandatory for all contracts.	Not permitted, except for recognized exposures.
Firm Commitments (FC)	MTM per ICAI Guidance Note.	MTM compulsory.	Settlement basis only.
HPFTs	Allowed with specific disclosure.	MTM valuation compulsory.	Recognized only on settlement.
Speculative Contracts	MTM gains/losses recognized.	MTM valuation compulsory.	Recognized only on settlement.

Illustrative Accounting Treatment in INR

1. Under AS 11 (Accounting Standards)

Example in INR:
Ashu locks in an FEC to sell USD 40,000 at ₹76/USD when the spot rate is ₹75/USD. The premium of ₹1/USD (₹76 - ₹75) totals ₹40,000, amortized over the contract period.

At the reporting date, the rate rises to ₹77/USD. The MTM loss of ₹40,000 [(₹77 - ₹76) × 40,000] is booked in the profit and loss account.

2. Under Ind AS 109 (Indian Standards)

Example in INR:
Vandana enters an FEC to buy EUR 50,000 at ₹88/EUR. On the reporting date, the market rate is ₹90/EUR.

• MTM Loss: ₹1,00,000 [(₹90 - ₹88) × 50,000].
• Recognized immediately in profit or loss as per fair valuation principles.

3. Under ICDS VI (Tax Computation)

Example in INR:
Sandeep locks in an FEC to sell GBP 20,000 at ₹100/GBP, while the current rate is ₹102/GBP.

• Premium is ₹40,000 [(₹102 - ₹100) × 20,000], amortized over the contract.
• No MTM adjustments unless the exposure is recognized in books.

Tax Implications

1. Recognized Exposures

Premiums, discounts, and exchange gains/losses are taxable in the year recognized.

Example in INR:
Ashu earns an exchange gain of ₹1,20,000 from an FEC settlement, included in taxable income for the year.

2. Firm Commitments or HPFTs

Recognized only upon settlement.

Example in INR:
Vandana incurs an MTM loss of ₹2,00,000 on an FEC to hedge imports. Tax treatment occurs on settlement.

3. Speculative Contracts

Taxable on settlement, regardless of MTM movements.

Example in INR:
Sandeep’s speculative gain of ₹50,000 is taxable in the year of settlement.

Critical Observations and Recommendations

1. Alignment with Purpose: Clearly document the intent of the FEC (hedging or speculation).
2. Accurate Accounting: Follow the prescribed accounting standard (AS 11, Ind AS 109, or ICDS VI) to ensure compliance.
3. Tax Reconciliation: Reconcile accounting treatments with tax computations to avoid discrepancies.
4. Legal Documentation: Maintain robust documentation for all FECs, including contract terms, MTM valuations, and settlement details.

Identifying and Addressing Window Dressing in AS 115: A Strategic Guide for Startups and Investors

"Financial integrity is the cornerstone of lasting growth and investor confidence. Without it, success is but a fleeting illusion."

In the high-stakes world of startups, accurate revenue recognition is essential for both financial integrity and investor confidence. The application of Ind AS 115 (Revenue from Contracts with Customers) plays a central role in ensuring that revenue is recognized in the correct periods, reflecting the actual performance delivered to customers. However, during funding rounds, the temptation to engage in window dressing—manipulating financial results to create a more favorable image—can lead to significant issues. Misapplication of AS 115 can mislead investors and affect the long-term viability of the business.

This guidance note aims to help startups correctly apply Ind AS 115, while providing investors with tools to detect potential misapplications by critically analyzing financial statements. We’ll explore how startups can avoid common revenue recognition pitfalls and how investors can ensure accurate financial reporting during due diligence.

Understanding Revenue Recognition and Its Importance in Financial Statements

Revenue is one of the most critical figures in a company’s financial statement, as it directly impacts profitability, taxation, and the overall financial health of the business. Ind AS 115 aligns revenue recognition with the transfer of control over goods and services to the customer, providing a consistent approach for recognizing revenue.

Key components influenced by AS 115 include:

• Income Statement: Revenue figures impact net income and profitability. Misapplication of AS 115 can inflate revenue, creating a misleading picture of financial health.
• Balance Sheet: Revenue recognition impacts accounts receivable and deferred revenue, which should reflect unearned income for goods or services not yet delivered.
• Cash Flow Statement: Proper revenue recognition ensures that cash flows align with recognized revenue, providing an accurate picture of financial health.

Key Areas Where Misapplication of AS 115 Can Lead to Window Dressing

1. Premature Revenue Recognition

Revenue should only be recognized when control of goods or services passes to the customer. Startups often make the mistake of recognizing revenue too early, such as when a contract is signed, without delivering on the agreed performance obligations.

• Impact on Financial Statements:
  • Inflated revenue in the income statement.
  • Misleading profitability and potential tax implications.
  • Accounts receivable may be overstated if cash has not been received for prematurely recognized revenue.

2. Incorrect Allocation of Transaction Price

When a contract includes multiple performance obligations (e.g., software delivery and post-sale services), revenue should be allocated based on the relative standalone selling prices of each obligation.

• Impact on Financial Statements:
  • Misleading revenue recognition over time.
  • Deferred revenue (unearned income) may be misstated if services are ongoing but not properly recognized.

3. Failure to Account for Variable Consideration

Revenue should reflect variable consideration such as discounts, rebates, or bonuses. If startups fail to adjust for these changes, revenue may be overstated.

• Impact on Financial Statements:
  • Overstated revenue and net income.
  • Misaligned accounts payable/receivable.

4. Incorrect Timing of Revenue Recognition

Revenue should be recognized when the customer gains control over the product or service. Recognizing revenue too early or too late can distort profitability.

• Impact on Financial Statements:
  • Distorted profitability and potential mismatch with cash flows.
  • Incorrectly recognized unearned revenue leading to timing mismatches.

Red Flags for Investors: How to Read Financial Statements and Detect Window Dressing

Investors need to conduct careful due diligence to ensure startups are applying AS 115 correctly. Here’s how to spot potential window dressing in financial statements:

Red Flag	What It Means	What Investors Should Look For
Unexplained Revenue Spikes	A sudden increase in revenue without corresponding increases in contracts or services delivered.	Compare revenue growth with customer contracts and services delivered. Revenue spikes without clear explanation may indicate premature recognition.
Opaque Revenue Segmentation	Performance obligations not clearly separated, leading to distorted recognition.	Ensure separate identification of performance obligations (e.g., software vs. services) and verify recognition for each.
Inconsistent Recognition Policies	Frequent changes in revenue recognition policies without explanation.	Investigate reasons for any changes, as frequent adjustments may signal potential manipulation.
Overly Complex Contracts	Vague contracts with unclear performance obligations.	Ensure contracts specify performance obligations and recognition points.
Failure to Adjust for Variable Consideration	Lack of adjustments for discounts, rebates, or bonuses.	Ensure revenue is adjusted for variable consideration such as refunds, rebates, or bonuses.
Inconsistent Timing of Recognition	Revenue recognized too early or too late.	Ensure timing of recognition aligns with when control passes to the customer.

Due Diligence Checklist for Identifying AS 115 Non-Adherence

Use this checklist to examine a startup’s financials during due diligence:

Due Diligence Area	Checklist Item	Why It Matters
Performance Obligations Review	Does the startup clearly separate performance obligations (e.g., software delivery and customer support services)?	Clear separation ensures that revenue is recognized only when each obligation is completed.
Transaction Price Allocation	Is the transaction price allocated to each performance obligation based on standalone selling price?	Ensures that each obligation is properly allocated, preventing misallocation of revenue.
Variable Consideration Review	Does the startup adjust revenue for expected refunds, rebates, or bonuses?	Reflects the actual transaction price, preventing overstatement of revenue.
Revenue Recognition Policies	Are the revenue recognition policies aligned with AS 115 standards?	Verifies consistency in application of revenue recognition.
Contract Clarity and Timing	Are contracts clear regarding the delivery of goods/services and the point of revenue recognition?	Ensures revenue is recognized when control passes to the customer, not prematurely.
Historical Revenue Trends	Have there been sudden, unexplained changes in revenue or mismatches between recognized revenue and customer delivery?	Identifies possible manipulation or misapplication.

Best Practices for Startups to Ensure AS 115 Compliance

Startups should follow these best practices to safeguard their financial health and credibility:

1. Clearly Define and Separate Performance Obligations: Ensure contracts clearly define when each performance obligation is completed and allocate revenue accordingly.
2. Accurate Revenue Allocation: Allocate the total contract value based on the standalone selling prices of each performance obligation, ensuring revenue is recognized at the appropriate time.
3. Account for Variable Consideration: Adjust revenue for any discounts, rebates, or bonuses that are expected to affect the transaction price.
4. Implement Strong Internal Controls: Develop internal controls to ensure that revenue recognition aligns with the timing of performance obligations. Regular audits will help maintain compliance.
5. Transparent Reporting: Clearly communicate the timing and method of revenue recognition in financial statements, making it easier for investors to understand.

Conclusion: Ensuring Long-Term Growth Through Accurate Financial Reporting

The accurate application of Ind AS 115 is more than a regulatory requirement—it is essential for financial transparency that builds investor trust and supports sustainable growth. Startups must adopt best practices for revenue recognition, ensuring that their financial statements reflect the true nature of their business operations.

For investors, understanding and scrutinizing the application of Ind AS 115 in the financials of startups is key to due diligence. By identifying potential issues like window dressing early, investors can make better, informed decisions that protect their investments and contribute to the startup’s long-term success.

Promoting financial integrity and adhering to AS 115 will ensure that the financial reporting is not only accurate but reflective of the true value of the business, laying a foundation for sustained growth and trust in the market.

Investing in Tomorrow- Accounting for Free Sample Distribution under Ind AS

"In the race for relevance, the seeds of success are often sown in what you give, not what you take."

In the highly competitive business world, strategies like distributing free samples are increasingly utilized to generate brand awareness, foster customer trust, and create future demand. However, beyond the marketing impact, it is crucial for companies to apply accurate accounting practices to these promotional activities under Ind AS standards.

This article explores the accounting treatment for free sample distribution, providing an analytical overview and offering practical illustrations to highlight the importance of transparency and compliance in financial reporting.

Why Accounting for Free Samples is Crucial

1. Transparent Reporting: Reflects the true cost of promotional activities without inflating revenues.
2. Stakeholder Confidence: Ensures compliance with Ind AS, building trust among investors, regulators, and other stakeholders.
3. Strategic Insights: Allows businesses to assess the impact of marketing strategies on profitability and long-term growth.

Key Standards Governing Free Sample Distribution

Standard	Provision	Application to Free Sample Distribution
Ind AS 115	Revenue can only be recognized when there is a contract with enforceable rights and obligations.	Not applicable, as free samples involve no consideration or contractual obligation to deliver goods or services.
Ind AS 38	Expenditures that do not create a recognizable intangible asset must be expensed immediately.	Applicable, as free sample costs are promotional expenses aimed at building brand recognition and future demand.

The Ind AS 38 Perspective

Nature of Free Sample Distribution:

• Objective: Drive awareness, encourage trials, and cultivate customer loyalty.
• Expenditure Type: Includes costs for manufacturing, packaging, and delivery of samples.
• Timing of Recognition: Expensed immediately upon incurrence, as there are no deferred benefits under Ind AS 38.

Illustrative Accounting Treatment

Case: Orion Biotech Limited distributes 8,000 free sample packs of their new line of protein supplements, with a total cost of ₹4,00,000 (₹50 per pack).

Journal Entry:

Particulars	Debit (₹)	Credit (₹)
Marketing Expense	₹4,00,000
Inventory/Finished Goods		₹4,00,000

This entry ensures that the marketing expenditure is accurately classified and immediately recognized in the financial statements.

Why Ind AS 115 Does Not Apply

Criteria for Revenue Recognition	Reason for Exclusion in Free Sample Distribution
Presence of an enforceable contract	Free samples are distributed without any contractual obligations.
Fulfillment of performance obligations	There is no obligation fulfilled to receive consideration.
Receipt of monetary consideration	Free samples are given at no cost, excluding them from any revenue recognition criteria.

Impact of Free Sample Distribution on Financial Statements

Immediate Financial Impact

Statement	Impact
Profit & Loss	Marketing expenses increase, reducing net profit.
Balance Sheet	Reduction in inventory value as samples are distributed.

Long-Term Benefits

While the immediate impact on profitability is negative, free sample distribution can lead to:

• Stronger brand recognition: Increasing brand awareness and customer loyalty.
• Increased future sales: Boosting sales through customer trials and repeat purchases.

Case Study: Orion Biotech Limited

Activity	Details
Nature of Promotion	Distributed 8,000 free sample packs of protein supplements.
Cost Per Pack	₹50 per pack.
Total Cost	₹4,00,000.
Accounting Treatment	Classified as marketing expense under Ind AS 38.

Strategic Insights for Due Diligence and Stakeholders

1. Marketing Efficiency:
   Properly recording these expenses allows companies to assess the effectiveness of their marketing campaigns and their future revenue potential.

2. Transparency and Compliance:
   Following Ind AS 38 ensures that the cost of promotional activities is appropriately captured, increasing transparency and building stakeholder confidence.

3. Investor Perspective:
   Investors benefit from understanding how these short-term expenditures contribute to long-term growth and profitability.

Conclusion: Laying the Foundation for Future Success

Accounting for free samples under Ind AS 38 ensures the transparent reporting of promotional expenses and helps businesses like Orion Biotech Limited comply with regulatory requirements. By recognizing these costs immediately as marketing expenses, companies provide a clear picture of their investments in market development, which can lead to greater customer engagement and future profitability.

Key Takeaways:

• Free samples are treated as promotional costs and expensed immediately under Ind AS 38.
• Revenue recognition under Ind AS 115 does not apply as there is no consideration received.
• Although these expenses reduce short-term profitability, they are crucial for long-term brand growth and customer retention.

"What you give today in the form of free samples becomes tomorrow’s stepping stone to sustained success."