Accounting Updates

Amendments issued to Indian Accounting Standards (Ind AS)

The Ministry of Corporate Affairs (MCA) vide notification dated 23 March 2022 issued the Companies (Indian Accounting Standards) Amendment Rules, 2022. These rules notify certain amendments to Indian Accounting Standards (Ind AS). These amendments will come into effect from 1 April 2022.

Most of these amendments have been made to keep the Ind AS converged with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) except for amendment to Ind AS 16,Property, Plant and Equipment .

An overview of the amendments are given below:

Ind AS	Amendments notified
Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets	As per Ind AS 37, a contract is ‘onerous’ when the unavoidable costs of meeting the contractual obligations (i.e. the lower of the costs of fulfilling the contract and the costs of terminating it) outweigh the economic benefits. Ind AS 37 did not define what are the costs of fulfilling a contract. The amendments have clarified that the cost of fulfilling a contract comprise the costs that relate directly to the contract. Costs that relate directly to a contract consist of both: (a) the incremental costs of fulfilling that contract—for example, direct labour and materials; and (b) an allocation of other costs that relate directly to fulfilling contracts— for example, an allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling that contract among others. Transition: An entity shall apply these amendments to contracts for which it has not yet fulfilled all its obligations as at 1 April 2022. The entity should not restate comparative information. Instead, the entity should recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings or other component of equity, as appropriate, at the date of initial application.
Ind AS 103, Business Combinations	The amendments have given reference of Conceptual Framework for Financial Reporting under Ind AS for definition of assets and liabilities. This amendment is applicable to business combinations for which acquisition date is on or after 1 April 2022.
Ind AS 16, Property, Plant and Equipment (PPE) (cont.)	Amendments to Ind AS 16 have clarified the accounting treatment for sale proceeds of items produced by PPE while preparing it for its intended use. These amendments have clarified that excess of net sale proceeds of items produced over the cost of testing, if any, shall not be recognised in the statement of profit or loss, but deducted from the directly attributable costs considered as part of cost of an item of PPE. (Note: This is a carve out from IAS 16,Property, Plant and Equipment, which requires proceeds from selling items before the related item of PPE is available for use to be recognised in the Statement of Profit and loss.)

Ind AS

Amendments notified

Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets

As per Ind AS 37, a contract is ‘onerous’ when the unavoidable costs of meeting the contractual obligations (i.e. the lower of the costs of fulfilling the contract and the costs of terminating it) outweigh the economic benefits. Ind AS 37 did not define what are the costs of fulfilling a contract.

The amendments have clarified that the cost of fulfilling a contract comprise the costs that relate directly to the contract.

Costs that relate directly to a contract consist of both:

(a) the incremental costs of fulfilling that contract—for example, direct labour and materials; and

(b) an allocation of other costs that relate directly to fulfilling contracts— for example, an allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling that contract among others.

Transition: An entity shall apply these amendments to contracts for which it has not yet fulfilled all its obligations as at 1 April 2022. The entity should not restate comparative information. Instead, the entity should recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings or other component of equity, as appropriate, at the date of initial application.

Ind AS 103, Business Combinations

The amendments have given reference of Conceptual Framework for Financial Reporting under Ind AS for definition of assets and liabilities.

This amendment is applicable to business combinations for which acquisition date is on or after 1 April 2022.

Ind AS 16, Property, Plant and Equipment (PPE) (cont.)

Amendments to Ind AS 16 have clarified the accounting treatment for sale proceeds of items produced by PPE while preparing it for its intended use. These amendments have clarified that excess of net sale proceeds of items produced over the cost of testing, if any, shall not be recognised in the statement of profit or loss, but deducted from the directly attributable costs considered as part of cost of an item of PPE.

(Note: This is a carve out from IAS 16,Property, Plant and Equipment, which requires proceeds from selling items before the related item of PPE is available for use to be recognised in the Statement of Profit and loss.)

Membership category
Ind AS 101, First-time Adoption of Indian Accounting Standards	As per the amendment, if a subsidiary adopts Ind AS later than its parent and applies Ind AS 101.D16(a)¹, then a subsidiary may elect to measure cumulative translation differences for all foreign operations at amounts included in the consolidated financial statements of the parent, based on the parent’s date of transition to Ind AS. A similar election is available to an associate or joint venture that uses the exemption in paragraph D16(a).
Ind AS 109, Financial Instruments	This amendment clarifies that for the purpose of performing the ’10 per cent test’ for derecognition of financial liabilities² – in determining those fees paid net of fees received, a borrower includes only fees paid or received between the borrower and the lender, including the fees paid or received by either the borrower or lender on the other’s behalf. This amendment would be applicable to financial liabilities that are modified or exchanged on or after 1 April 2022.
Ind AS 41, Agriculture	The amendment removes the requirement to exclude cash flows for taxation when measuring fair value, thereby aligning the fair value measurement requirements in Ind AS 41 with those in Ind AS 113, Fair Value Measurement. This amendment would be applicable to fair value measurements on or after 1 April 2022.

As per para D16, if a subsidiary becomes a first-time adopter later than its parent, the subsidiary shall, in its financial statements, measure its assets and liabilities at either: (a) the carrying amounts that would be included in the parent’s consolidated financial statements, based on the parent’s date of transition to Ind ASs, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary (this election is not available to a subsidiary of an investment entity, as defined in Ind AS 110, that is required to be measured at fair value through profit or loss);
As per Ind AS 109, an exchange between an existing borrower and lender of debt instruments with substantially different terms or a substantial modification of the terms of an existing financial liability or a part of it shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms of a financial liability (post modification) are considered to be substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability.
As per paragraph 30 of Ind AS 8, when an entity has not applied a new Ind AS that has been issued but is not yet effective, the entity shall disclose:
(a) this fact; and
(b) known or reasonably estimable information relevant to assessing the possible impact that application of the new Ind AS will have on the entity’s financial statements in the period of initial application.
As per paragraph 31 of Ind AS 8, when complying with paragraph 30, an entity considers disclosing:
(a) the title of the new Ind AS;
(b) the nature of the impending change or changes in accounting policy;
(c) the date by which application of the Ind AS is required;
(d) the date as at which it plans to apply the Ind AS initially; and
(e) either: (i) a discussion of the impact that initial application of the Ind AS is expected to have on the entity’s financial statements; or (ii) if that impact is not known or reasonably estimable, a statement to that effect.

To access the text of the MCA notification, please click here

Action points for auditors

The revised Ind AS will be applicable for financial statements prepared for periods beginning on or after 1 April 2022. Auditors will need to consider the revised Ind AS when they audit the quarterly financial results (in accordance with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015) prepared by companies for periods beginning on or after 1 April 2022.
Auditors should also take note of the provisions of paragraphs 30³ and 31⁴ of Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors while finalising the financial statements for the year ended 31 March 2022.

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