Regulatory updates

During the recent review conducted by the National Financial Reporting Authority (NFRA) of the published financial statements of companies, various instances of non-compliance with the principles of Ind AS in significant areas like revenue recognition and initial measurement of trade receivables were observed. Accordingly, NFRA, vide a circular dated 29 March 2023 (the circular), highlighted the non-compliances with Ind AS with regard to accounting policies for measurement of revenue from contracts with customers and measurement of trade receivables. The issues highlighted in the circular include:

• Revenue from contracts with customers – recognition and measurement: Para 46 of Ind AS 115, Revenue from Contracts with Customers , requires an entity to recognise as revenue, the amount of the transaction price (net of variable consideration) that is allocated to the performance obligation. However, NFRA observed that the significant accounting policies disclosed by many companies incorrectly state that revenue is recognised and measured at the fair value of consideration received or receivable. The circular has further clarified that the transaction price defined in Ind AS 115 is different from the ‘fair value’ defined in Ind AS 32, Financial Instruments: Presentation³. It is to be noted that under Ind AS 115, the application of fair value is relevant in a limited set of situations. For example, under para 66 of Ind AS 115, where the customer promises consideration in a form other than cash, an entity should measure the non-cash consideration at fair value.

• Trade receivables – initial measurement:Trade receivables are financial assets within the scope of the measurement requirements of Ind AS 109, Financial Instruments. All financial assets are required to be initially measured at fair value plus or minus the transaction costs. However, financial assets classified as 'fair value through profit or loss' are required to be measured at fair value. Further, as an exception to these principles, financial assets in the form of trade receivables, should be initially measured at their transaction price (unless they contain a significant financing component, or when the entity has applied the practical expedient in accordance with the principles enunciated in Ind AS 115). However, it was observed that many companies in their accounting policy have erroneously stated that the trade receivables are initially recognised (or measured) at fair value. Further, there have also been instances of inconsistency between the accounting policy for initial measurement of trade receivables and the accounting policy for measurement of corresponding revenue, resulting in misleading and confusing information to the users of the financial statements.

To access the text of the circular, please click here