Regulatory updates

The Accounting Standards Board has issued an Exposure Draft of amendments in Ind AS 117, Insurance Contracts corresponding to IASB’s amendments in IFRS 17, Insurance Contracts on initial application of IFRS 17 and IFRS 9, Financial Instruments – Comparative Information – (Amendments to IFRS 17)

The draft amendments add a transition option relating to comparative information about financial assets presented where an entity first applies Ind AS 117 and Ind AS 109 at the same time. Amendments have also been proposed to make the classification overlay available to entities that have applied Ind AS 109 before they apply Ind AS 117. For these entities, the classification overlay has been prescribed for the application of paragraph C29 of Ind AS 117 and can be applied only to financial assets derecognised in the comparative period.

These amendments are proposed to be made effective on initial application of Ind AS 117 ².

ICAI has invited comments on the ED up to 10 March 2022

2. Currently, Ind AS 117 is proposed to be made effective from 1 April 2023

To access the text of ICAI ED, please click here

Background

Ind AS 41, Agriculture provides the recognition, measurement, presentation and disclosure requirements for agricultural produce and biological assets relating to agricultural activities.

The Ind AS Implementation Committee has prepared an Educational Material on Ind AS 41 (Educational Material). The Educational Material provides guidance in the form of Frequently Asked Questions (FAQs). FAQs contain various practical matters that the preparers of the financial statements face while applying this Ind AS in the agricultural industry. Some of the key matters discussed in the Educational Material include: 

• Practical examples provided: The Educational Material provides practical examples of activities that may be termed as ‘agricultural activities’ or ‘non-agricultural activities’ in accordance with Ind AS 41. It also provides examples of what would constitute a biological asset, a bearer plant and consumable animals.
• Transitional guidance for first time application of Ind AS 41: Ind AS 101 does not specifically provide any exemption for items covered under Ind AS 41. Accordingly, entities are required to apply requirements of Ind AS 8 for adoption of Ind AS 41. Therefore, a first-time adopter of Ind AS will measure biological assets and agricultural produce in its scope at fair value less costs to sell at the date of transition. Any fair value change on the reporting date will be recognised in the statement of profit or loss for the year. Further, since accounting for bearer plants is scoped out from Ind AS 41 (and is covered under Ind AS 16), first-time adoption exemptions applicable to PPE will apply to bearer plants.
• Accounting treatment of transportation costs as per Ind AS 41: Biological assets are required to be measured at fair value less costs to sell as per Ind AS 41. ‘Costs to sell’ are the incremental costs directly attributable to the disposal of an asset, excluding finance costs and income taxes. The word ‘incremental’ in the definition of ‘costs to sell’ excludes costs that are included in the fair value measurement of a biological asset, such as transport costs. Thus, transport and other costs necessary to get an asset to a market are already considered in the measurement of fair value and are hence excluded from costs to sell. 
• Accounting treatment of impairment loss on a biological asset: Ind AS 36, Impairment of Assets, specifically excludes those biological assets which are measured at fair value less costs to sell from its scope. However, biological assets which are measured at cost less any accumulated depreciation and any accumulated impairment losses would be covered under the scope of Ind AS 36. Accordingly, such biological assets should be tested for impairment and an impairment loss should be recognised (if any) as per the accounting requirements of Ind AS 36.
• Accounting for subsequent expenditure on biological assets: Ind AS 41 does not specify the accounting for subsequent expenditure for biological assets measured at fair value less costs to sell. Since the biological assets are required to be measured at fair value at each reporting date, any subsequent expenditure on such biological assets will not affect the fair value measurement and in turn the carrying value at the reporting date. Accordingly, such expenditure will either be capitalised or recognised in the statement of profit or loss, and be presented in accordance with Ind AS 1, Presentation of Financial Statements.
  As per Ind AS 8, the accounting policy for subsequent expenditure should be applied consistently to each group of an entity’s biological assets. Further, entities should also disclose the selected accounting policy in accordance with Ind AS 1, where such disclosure is relevant to stakeholders.
• Presentation of biological assets and changes in their fair value in the financial statements: Biological assets (other than bearer plants) should be classified as current or non-current assets as per Ind AS 1. Changes in fair value of biological assets (other than bearer plants) are required to be presented in statement of profit or loss. Separation of changes in fair value less costs to sell between the portion attributable to physical changes and the portion attributable to price changes is encouraged but not required by Ind AS 41. Bearer plants are recognised in accordance with Ind AS 16 and should be presented as per the principles of Ind AS 16. 

To access the text of ICAI Educational material, please click here

Accounting Standards notified under Companies (Accounting Standards) Rules, 2021 and those issued by the Institute of Chartered Accountants of India (ICAI) are applicable to entities to whom Ind AS are not applicable. However, on the basis of the discussions held at various standard setting forums, it has been decided to revise Accounting Standards (AS). Accordingly, the Accounting Standard Board (ASB) is working on the project of revision of these standards which will be applicable to entities to whom Ind AS are not applicable.

In this regard, ICAI has issued an Exposure Draft (ED) on AS 108, Segment Reporting, keeping existing AS 17, Segment Reporting as the base. Since AS 108 (proposed) is based on existing AS 17, there are no major differences between the two. Amendments proposed to AS 108 (proposed) are pursuant to the issue of revised AS 1, Presentation of Financial Statements, and revised AS 8, Accounting Policies, Changes in Accounting estimates and Errors. The key amendments proposed include:

• Extraordinary item: Currently, as per AS 17, the definition of segment revenue and segment expense specifically excludes extraordinary items as defined in AS 5,Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. Since there is no concept of ‘extraordinary items’ in revised AS 8, the definition of segment revenue and segment expense under AS 108 (proposed) does not include extraordinary items.
• Reporting material line items separately: Currently, AS 17 encourages (but does not require) entities to disclose the nature and amount of any items of segment revenue and segment expense that are of such size, nature or incidence that their disclosure is relevant to explain the performance of the segment for the period. AS 108 (proposed) now requiresentities to disclose the nature and amount of material items of segment revenue and segment expense in accordance with revised AS 1¹.
• Changes in accounting policies: Changes in accounting policies: Currently AS 17 requires entities to refer AS 5 when determining whether they should make changes to accounting policies, and make appropriate disclosures as per AS 5. AS 108 (proposed) requires these assessments and disclosures to be made in accordance with revised AS 8.

ICAI has invited comments on the ED up to 28 May 2022

1. As per revised AS 1, when items of income and expense are material, the entity shall disclose their nature and amount separately.

To access the text of the ED, please click here

On 9 June 2022, the Institute of Chartered Accountants of India (ICAI) issued a Technical Guide on financial statements for noncorporate entities (Technical Guide). Its objective is to deal with the applicability of Accounting Standards (AS) to the noncorporate entities as well as to prescribe the format of financial statements for the non-corporate entities. The Limited Liability Partnerships (LLPs) are scoped out of this Technical Guide¹.

All business or professional entities, other than the companies incorporated under the Companies Act, 2013 and Limited Liability Partnerships incorporated under the Limited Liability Partnership Act, 2008 are considered as non-corporate entities. Some of the most common structures of non-corporate entities are as follows:

1. Sole proprietorship firms
2. Hindu Undivided Family (HUF)
3. Partnership Firms
   1. Registered Partnership Firms
   2. Unregistered Partnership Firms
4. Association of Persons
   1. Partnership firms not covered above
   2. Body of Individuals
   3. Resident Welfare Association
5. Society registered under any law for the time being in force
6. Trust (private or public) registered or unregistered under any law for the time being in force
7. Statutory corporations, autonomous bodies and authorities, and
8. Any form of organisation that is engaged fully or partially in any business or professional activities, unless their activities are fully charitable in nature.

This Technical Guide is recommended for the purpose of preparation of the financial statements of the above mentioned noncorporate entities unless any formats/principles are specifically prescribed by the relevant Statute or Regulator or any Authority for a particular class of entities. Also, the non-corporate entities which follow Ind AS are not required to follow this Technical Guide.

Applicability of AS: The AS issued by ICAI as on 1 April 2020 are applicable to non-corporate entities. However, for the purpose of determining their applicability, entities have been classified into four levels:

1. Level I entities (large size entities),
2. Level II entities (medium size entities),
3. Level III entities (small size entities), and
4. Level IV entities (micro entities).

The criteria for entities to be classified as Level I, II, III and IV have been provided in the Annexure I of the Technical Guide and applicability of AS and exemptions/relaxations to entities from applicability of certain as have been given in Annexure 2².

Format: The Technical Guide emphasises that presently,there is diversity in the presentation of financial statements of non-corporate entities, owing to the absence of any specific,well-defined formats. Accordingly, the Technical Guide has prescribed a format for the preparation of financialstatements for non-corporate entities. The format seems to be in line with the format provided by Schedule III (Division I)to the Companies Act, 2013³. However, it excludes items which are not relevant for non-corporate entities such as:

1. Share capital details,
2. Details of ageing schedule of trade receivables and payables,
3. Details of cost of goods sold are required to be disclosed instead of details of cost of material consumed, purchase of stock in trade, etc.
4. Disclosure of ratios, and
5. Additional regulatory information, etc.

1. Limited Liability Partnerships (LLPs) incorporated under the Limited Liability Partnerships Act, 2008, are corporate form of entities, hence, these entities are scoped out of the applicability of the Technical Guide.
2. Level I entities are required to comply with all the accounting standards. Level II, Level III and Level IV non-corporate entities have been granted certain exemptions/relaxations from compliance with the accounting standards.
3. Division I of Schedule III to the Companies Act, 2013 prescribes the format of financial statements for a company required to comply with the Companies (Accounting Standards) Rules, 2021.

To access the text of the Technical Guide on financial statements of Non-Corporate Entities, please click here

To access the text of the Technical Guide for LLPs, please click here

Accounting Standards (AS) notified under the Companies (Accounting Standards) Rules, 2021 and those issued by the Institute of Chartered Accountants of India (ICAI) are applicable to entities to whom Indian Accounting Standards (Ind AS) are not applicable. Based on the discussions held at various standard setting forums, it was decided to revise the AS and in doing so, maintain consistency in numbering of AS with the Ind AS¹. Accordingly, ICAI is working on a project of revision of the AS which will be applicable to the entities to whom Ind AS are not applicable. The revised set of AS would be applicable from a future date as per a road map which would be communicated by ICAI subsequently.

In this regard, ICAI has issued an Exposure Draft (ED) on AS 113, Fair Value Measurement (AS 113 (proposed)), keeping Ind AS 113, Fair Value Measurement as the base. Some of the key amendments between AS 113 (proposed) and Ind AS 113 are as follows:

• Definitions: In Ind AS, the definitions of “market risk” and “credit risk” are included in Ind AS 107, Financial Instruments: Disclosures, and are not covered in Ind AS 113. However, AS 113 (proposed) has included the definitions of these terms, which are as below:

• Market risk: The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk
• Credit risk: The risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation².

• Omission of disclosure requirements for recurring fair value measurements categorised within Level 3³ of the fair value hierarchy: In order to simplify the disclosure requirements for the entities to which Ind AS is not applicable, following disclosures are not included in AS 113 (proposed):

• Narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs, and
• Effect of significant change in fair value due to change in one or more unobservable input, in order to reflect reasonably possible alternative assumptions.

• No reference to Other Comprehensive Income: Since revised AS 1, Presentation of Financial Statements, does not include the concept of Other Comprehensive Income (OCI), reference to OCI has been duly substituted with ‘reserve(s)’ in AS 113 (proposed).

ICAI has invited comments on the ED up to 18 October 2022.

To access the text of the ED, please click here

1. The entire set of revised Accounting Standards will consist of 32 standards, including a standard on transition from existing AS to Revised AS which are at various stages of formulation. So far, 28 Revised AS have been developed and approved by the Council of ICAI after due process.
2. The definitions of market risk and credit risk as included in AS 113 (proposed) is in line with the definition of these terms in Ind AS 107.
3. Level 3 inputs refer to the unobservable inputs for an asset or a liability

The Institute of Chartered Accountants of India (ICAI), from time to time, suggests amendments¹ to the Indian Accounting Standards (Ind AS) for ensuring convergence with the requirements of the International Financial Reporting Standards (IFRS). In this regard, on 30 December 2022, ICAI issued Exposure Drafts (EDs) of the amendments to Ind AS 1, Presentation of Financial Statements and Ind AS 116, Leases. The EDs are open for comments up to 30 January 2023. Some of the key amendments specified by the EDs are discussed below:

• A.   Amendments to Ind AS 1, Presentation of Financial Statements : The ED has proposed following amendments to Ind AS 1:

• Classification of liabilities as current or non-current: The ED has proposed the following amendments to Ind AS 1:
  1. Right to defer settlement Under the existing requirements of Ind AS 1, companies classify a liability as current when they do not have an unconditional right to defer the settlement for at least 12 months after the reporting date. Through the ED, ICAI has now removed the requirement for a right to be unconditional, i.e., a liability would be classified as non-current, even if the right to defer settlement is subject to some underlying conditions (covenants). As per the ED, the right to defer settlement must exist at the reporting date. Accordingly, only the covenants with which an entity is required to comply on or before the reporting date and which have substance would affect the classification of a liability as current or non-current.
  2. Non-current liabilities subject to future covenants
     Covenants with which a company must comply after the reporting date (i.e. future covenants) do not affect a liability’s classification at that date. However, when noncurrent liabilities are subject to future covenants, it has been proposed that such companies would be required to disclose information to help users understand the risk that those liabilities could become repayable within 12 months after the reporting date.
  3. Liabilities that can be settled in a company’s own shares
     The terms of a liability may include a conversion option that when exercised by the counterparty could result in the settlement of the liability by issuance of a company’s own equity instruments, for example, convertible debentures. Such a conversion option could either be recognised as an equity instrument, recognising it separately from the host liability, or it could be recognised as a liability. The ED now clarifies that when a company classifies the host liability as current or non-current, it can ignore only those conversion options that are recognised as equity.
  4. Removal of carve-out
     Currently, Ind AS 1 is not in line with International Accounting Standard (IAS) 1, Presentation of Financial Statements , since it has a carve out with regard to classification of a long-term loan arrangement for which there has been a breach of a material provision either on or before the end of the reporting period². Under Ind AS 1, such an arrangement will be classified as a non-current liability as long as the breach has been condoned by the lender after the reporting period (but before the financial statements are approved). However, IAS 1 requires such an arrangement to be classified as a current liability because, at the end of the reporting period, the entity does not have the right to defer its settlement for at least 12 months after the reporting date. The ICAI has reconsidered the carve-out and has proposed to remove the same (and thereby make Ind AS consistent with IAS 1).

The amendments introduced by the ED are consistent with the recent amendments made by the International Accounting Standards Board (IASB) to IAS 1 in January 2020 and in October 2022.

Effective date: The above specified amendments are proposed to be made applicable for annual reporting periods beginning on or after 1 April 2024

To access the text of the ED, please click here

• B.   Amendments to Ind AS 116, Leases: A sale and leaseback is a transaction for which a company sells an asset and leases that same asset back for a period of time from the new owner. Currently, Ind AS 116 includes requirements on how to account for a sale and leaseback at the date the transaction takes place. However, the ED has now prescribed a subsequent measurement requirement for such transactions, particularly in a leaseback that includes variable lease payments that do not depend on an index or a rate – because these payments are excluded from ‘lease payments’. The ED confirms:

• On initial recognition: On initial recognition, the seller-lessee should include variable lease payments in measuring a lease liability arising from a sale-andleaseback transaction.
• After initial recognition: After initial recognition, the seller-lessee should apply the general requirements for subsequent accounting of lease liability and not recognise any gain or loss relating to the Right of Use (RoU) that is retained.

The ED has proposed that a seller-lessee may adopt different approaches that satisfy the new requirements on subsequent measurement.

The requirement proposed by the ED is consistent with the recent amendments made by IASB to IFRS 16, Leases in September 2022.

Effective date: The amendments are proposed to be made effective for annual reporting periods beginning on or after 1 April 2024.

1. ICAI suggests amendments to MCA, which ultimately notifies the amendments.
2. Carve out has been made in paragraph 74 of Ind AS 1

To access the text of the ED, please click here

In March 2021, non-company entities were classified in the following four categories for the purpose of applicability of accounting standards, viz., Level I, Level II, Level III and Level IV¹ Level I entities were large size entities, Level II entities were medium size entities, Level III entities were small size entities and Level IV entities were micro entities. This classification dictated the level of compliance required with the accounting standards by each category of non-company entities.

In November 2024, the Institute of Chartered Accountants of India (ICAI) announced a revised criteria for classifying non-company entities to determine the applicability of accounting standards. Effective for accounting periods beginning on or after 1 April 2024, the new classification divides non-company entities into two categories:

1. Micro, Small, and Medium Enterprises (MSMEs)

2. Large entities

MSMEs are defined as non-company entities that:

• Are not listed on any stock exchange, whether in India or abroad.
• Are not banks, financial institutions, or insurance companies.
• Have a turnover (excluding other income) not exceeding INR250 crore in the immediately preceding accounting year.
• Have borrowings not exceeding INR50 crore at any time during the immediately preceding accounting year.
• Are not holding or subsidiary entities of non-MSME entities.

Large entities are any non-company entities that do not qualify as MSMEs.

Large entities are required to fully comply with all accounting standards, whereas MSMEs are granted certain exemptions and relaxations as follows:

Full exemptions for MSMEs:

• AS 3: Cash Flow Statements
• AS 17: Segment Reporting
• AS 20: Earnings per Share
• AS 24: Discontinuing Operations
• AS 18: Related Party Disclosures (exemptions to MSMEs is subject to certain conditions)
• AS 28: Impairment of Assets (exemptions to MSMEs is subject to certain conditions )

Partial exemptions for MSMEs from certain paragraphs of the following standards:

• AS 10: Property, Plant, and Equipment
• AS 11: The Effects of Changes in Foreign Exchange Rates
• AS 15: Employee Benefits
• AS 19: Leases
• AS 22: Accounting for Taxes on Income
• AS 26: Intangible Assets
• AS 28: Impairment of Assets
• AS 29: Provisions, Contingent Liabilities, and Contingent Assets

MSMEs should disclose their status and the exemptions they have availed in their financial statements. Entities required to apply accounting standards under other regulatory requirements are not eligible for these exemptions.

Movement of entity from MSME to non-MSME and vice versa

• An entity that subsequently becomes an MSME, cannot avail of the exemptions/relaxations available to an MSME until the entity remains as an MSME for two consecutive years.
• Where an MSME had qualified for any exemption/relaxation previously but no longer qualifies for the relevant exemption/relaxation in the current accounting period, figures for the corresponding period (for which exemption had been availed) need not be revised merely by reason of its having ceased to be an MSME. The fact that it was an MSME in the previous period and had availed of the exemptions/ relaxations should be disclosed in the notes to the financial statements, and also the fact that the comparatives are not restated should be disclosed.

To access the text of the ICAI announcement, please click here