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Exposure Drafts/consultation papers – India and international

Updates from ICAI

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Certain Indian Accounting Standards (Ind AS) such as Ind AS 102, Share-based Payment, Ind AS 103, Business Combinations and Ind AS 109, Financial Instruments require a capital reserve to be created towards unrealised profits arising from certain transactions or other events. However, currently, there is no specific guidance on their subsequent transfer to retained earnings or other free reserves.

In this regard, on 21 March 2023, ICAI issued an exposure draft of the Guidance Note on Transfer of Capital Reserve (ED). As per the ED, for capital reserves created as per the requirements of an Ind AS or erstwhile Accounting Standards, the amount can be transferred to retained earnings or other free reserves when the following two conditions are met:

  • The company has realised the underlying amount
  • The amount has become available for distribution under the law.

The amount may be transferred either proportionately each or at end on sale of the asset. Specific disclosures are required in the year of transfer.

The ED also clarifies that it would not apply to capital reserves created under any law. Any reserve which is created as per the requirements of the Companies Act, 2013 or other applicable law cannot be transferred to other reserves except as required by the applicable law or by a regulatory requirement. Additionally, few other reserves, which are purely capital in nature – for example, capital profit on reissuance of forfeited shares, cannot be transferred to free reserves/retained earnings as underlying transaction is completed.

It has been proposed that this guidance note would come into effect in respect of the capital reserve appearing in the books of accounts retrospectively.

The last date for submission of comments is 20 April 2023.

To access the text of the ED, please click here

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