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Your Queries on Financial Reporting and Assurance

September 12, 2017[2017] 85 taxmann.com 102 (Article)
223 Views

SNAPSHOT OF QUERIES ADDRESSED

Financial Reporting 1 Model Accounting Policy For Government Grants Under IND-AS
2 Presentation of Assets and Liabilities Held for Sale Under USGAAP
3 Accounting For Retirement Benefit Obligations Under IFRS
Assurance 4   Mitigation of Risks Related to Acquisition - Internal Audit Report

Model Accounting Policy For Governmental Grants Under IND-AS

1. DEF Limited is required to prepare its financials for 2017-18 in compliance with Indian Accounting Standards Rules. The company has exposure to governmental grants accounting and the current notes to the financial statements as per AS have been annexed to the query.

We seek your inputs on finalizing an accounting policy for governmental grants as per IND-AS.

A model accounting policy for governmental grants in compliance with the Indian Accounting Standards (IND-AS) provisions is provided herein below.

  Governmental grants are recognized in the financial statements where there is a reasonable assurance that the grants will be received and all associated conditions will be complied with.
  Where the grant relates to an expenditure item, it is recognized as an income in the Statement of Profit and Loss on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed.
  When the grant relates to an asset, it is recognized as an income in equal amounts over the expected useful life of the related asset by way of setting-up a deferred income at initial recognition.
  When the company receives grants of non-monetary assets, the assets and the grants are measured at fair value and released to the Statement of Profit and Loss over the expected useful life in the pattern of consumption of benefits of the underlying asset.
  Governmental grants in the nature of indirect tax incentives are recognized in income in the period in which they become receivable.
  With respect to loans and similar assistance that are provided by the government with an interest rate below current applicable market rate, the loan is initially recognized and measured at fair value and the government grant is measured as the difference between the initial carrying value of the loan and the proceeds received.

Presentation of Assets and Liabilities Held for Sale Under USGAAP

2. JKL Limited prepares its primary statutory financials under AS and at the same time we also present monthly USGAAP MIS financials to our key US investors. As part of a strategic review, the company is curtailing operations in certain areas and is also contemplating consolidating certain strategic areas. It has a potential to create assets and liabilities held for sale in the current year's balance sheet.

We seek your inputs on the presentation of assets and liabilities held for sale under USGAAP.

The presentation requirements of United States Generally Accepted Accounting

Principles (USGAAP) with respect to assets and liabilities held for sale is provided as a snapshot hereinbelow.

  The reporting entity needs to classify long-lived assets or disposal groups to be sold as held for sale in the period in which all these criteria are met:
  Management, having the authority to approve of the action,
  Commits to a plan to sell the asset or disposal group,
  The asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets or disposal groups,
  An active programme to locate a buyer and other actions required to complete the plan to sell the asset or disposal group have been initiated,
  The sale of the asset or disposal group is probable, and
  Transfer of the asset or disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond the entity's control extend the period of time required to sell the asset or disposal group beyond one year,
  The asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and
  Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Accounting For Retirement Benefit Obligations Under IFRS

3. ABC Limited is not part of the second phase of IND-AS. However, the audit committee desires that the company should adopt global best practices in financial reporting before it is mandatory and, accordingly, we are preparing IFRS compliant financials from the current fiscal.

We seek your inputs on the accounting for retirement benefit obligations under IFRS issued by the IASB.

The financial accounting and reporting requirements with respect to retirement benefit obligations under International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) have been discussed hereinbelow.

  The assets and liabilities of defined benefit pension plans are required to be recognized at fair value in the Statement of Financial Position and the operating and financing costs of defined benefit pension plans are required to be recognized in the Statement of Profit or Loss as operating costs and interest costs respectively.
  Variations from expected costs, arising from the experience of the plans or changes in actuarial assumptions need to be recognized immediately in the statement of comprehensive income.
  The cost of providing benefits under the defined benefit plans should be determined separately for each of the company's plans as applicable
  using the projected unit credit method,
  which attributes entitlement to benefits to the current period (to determine current service cost) and
  to the current and prior periods (to determine the present value of defined benefit obligation) and is
  based on actuarial valuation.
  The assets of defined benefit plans need to be recognized at fair value in the statement of financial position and the liabilities are required to be recognized at present value using a high-quality corporate bond rate as the discounting input.
  Contributions to defined contribution schemes are recognized in the income statement in the period in which they become payable.
  The company is permitted to recognize a surplus in schemes where an unconditional right to a refund or benefit available in the form of reduced contribution rates exists subjecting the same to an asset ceiling test.

Mitigation of Risks Related to Acquisition - Internal Audit Report

4. We are a firm of chartered accountants providing, inter-alia, internal audit services for corporate clients. As part of risk profiling of one of our clients, we have identified acquisition related risks as a key risk and are strategizing the inputs for risk mitigation.

As an additional input, we seek your views on a suggested framework for mitigating acquisition related risks for inclusion in our internal audit report.

A suggested template of approach to be recommended to the clients with respect to mitigation of acquisition related risks is provided herein below. It may be noted that the risk mitigation approach suggested is based on potential future acquisitions as well as disposals that could cause the client-company/group to incur substantial acquisition related expenses, divert management attention from other business concerns and may not yield anticipated returns apart from compliance risks and accounting risks.

  The Company/Group needs to rely on a comprehensive, embedded strategic planning process in order to validate target growth markets and technologies.
  The Company/Group needs to adhere to a robust mergers and acquisition integration process tailored to meet overall business and acquisition objectives and goals.
  The company/Group needs to undertake due diligence using internal M&A specialist team as well as using specialist external and independent consultants.
  The Company/Group needs to have adequate training and staff retention measures for personnel and proactive relationship management with clients.
  The Company/Group needs to obtain warranties and indemnities from vendors where applicable.
  Adequate internal control measures on mergers and acquisition screening, evaluation, consummation and integration needs to be put in place along with board monitoring measures.

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