KPMG Accounting and Auditing Update - November 2014

ACCOUNTING
AND AUDITING
UPDATE
November 2014
In this issue
Mutual funds - accounting and reporting issues p1
Ind AS 16 - accounting for fixed assets p5
The Companies Act, 2013 - deposits p8
Understanding the COSO 2013 Framework p13
Significant influence p15
Regulatory updates p17
Edi torial
2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
The capital markets are at an all-time high

and after a period of strife, it appears that
things are finally looking up for the mutual
fund industry as well. For some time,
this was an industry that was waiting to
explode and grow and finally it looks like
the required platform has been set in
place. A mix of regulatory changes that
have created a level playing field for mutual
funds viz-a-viz the insurance industry,
some much needed industry consolidation
and finally the surge in market valuations
and investments has made this industry
our focus for this months issue of the
Accounting and Auditing Update. Some
challenges continue to remain and as
we highlight some of the more recent
changes that affect the industry and its
accounting and reporting issues; the
fundamental lack of penetration and
participation of a large section of the
population in mutual funds, reflects the
untapped potential of this industry, and
therefore, signals a bright future for this
space.
This month we also examine some of

the key changes that Ind AS application
will have in one of the most pervasive
and common accounting area; that of
fixed assets. We also highlight the key
differences and salient features of the
COSO 2013 framework for internal control
and contrast this with the previous version
i.e. the COSO 1992 framework; this is
particularly relevant as Indian companies
are in the midst of evaluation of various
frameworks for implementation of the
internal financial controls reporting
requirements under the Companies Act,
2013.
We have highlighted the key impacts of
the Companies Act, 2013 in the area of
acceptance of deposits by companies.
We also cover a number of regulatory and
reporting updates this month as well as an
examination of the concept of significant
influence in an accounting context.
As always we would like to remind you
that in case you have any suggestions or
inputs on topics we cover, we would be
delighted to hear from you.
Happy reading!
Jamil Khatri
Sai Venkateshwaran
Deputy Head of Audit, KPMG in India

Global Head of Accounting Advisory Services
Partner and Head,

Accounting Advisory Services, KPMG in India
Mutual funds
accounting and reporting issues
This article aims to

Highlight the accounting and operational
challenges faced by mutual funds industry

arising out of recent regulatory developments.
An overview
The Indian mutual fund industry was one
of the fastest growing and competitive
segments of the financial sector until early
2000. However, till very recent times, it
could not maintain growth momentum
due to various reasons such as economic
down-trends in global markets, increase
in inflation and increasing interest
rates in domestic markets. But more
recently, riding on rising stock markets
and optimism built around the new
governments reforms agenda, mutual
funds have witnessed strong inflows in
the recent months. The industry managed
over INR9.6 trillion of AUM (Asset under
Management) at the end of September
2014.1
It is well acknowledged that mutual funds
offer various benefits to its investors
such as portfolio diversification, access to
equity and debt markets at low transaction
costs, tax efficiency and liquidity, which
are difficult to obtain through other
investment vehicles. However, it also
has its own challenges such as lack of
investor awareness, lack of participation
from a large proportion of the population,
limited incentives for distributors of mutual
fund products as compared to other
financial products, and lack of product
differentiation.
In an industry where products are not
bought but have to be sold and where
dependency on third party distributors
is more than own distribution channels,
discontinuation of entry load considerably
disturbed the economics of mutual funds.
The industry players struggled to strike a
balance between aggressive growth and
profitability.
Realising the needs of the industry
such as enhancing retail participation,
increased need of investors education
especially in smaller cities and towns, etc.,
the Securities Exchange Board of India
(SEBI or Regulator) introduced various
measures to re-energise the industry
through a circular issued in September
2012.
Again, to provide further growth impetus
and to ensure sustainable growth of the
mutual fund industry, the SEBI approved
long term policy proposals in February
2014. The focus of these proposals was
to enhance the reach of the industry, to
recommend additional tax incentives for
investors which could act as a motivation
to channelise more savings into mutual
funds and to define the obligations of
various stake holders.
Financial reporting framework for

mutual funds
As per Regulation 50(3) of the SEBI
(Mutual Funds) Regulations, 1996 (the
SEBI Regulations), mutual funds are
required to follow the accounting policies
and standards as specified in Ninth
Schedule to the SEBI Regulations so
as to provide appropriate details of the
scheme-wise disposition of the assets of
the fund at the relevant accounting date
and the performance during that period
together with information regarding
distribution or accumulation of income
accruing to the unit holder in a fair and
true manner.
As per an opinion3 issued by the Expert
Advisory Committee of the Institute
of Chartered Accountants of India
(ICAI), a mutual fund is required to
comply with the accounting standards
issued by the ICAI generally, except for
those requirements of the Accounting
Standards for which specific accounting
policies and standards have been
prescribed by the SEBI Regulations.
In the following paragraphs, we discuss
various accounting and operational
challenges emerged while implementing
the above regulatory developments.
The Indian
mutual fund
industry
operates in
an economic
landscape which
has undergone
rapid changes
over the past
couple of years.
Additional total expense ratio

(TER) for beyond top 15 cities (B15 cities)
In September 2012, the SEBI permitted
the mutual funds to charge additional
TER up to 30 basis points on daily net
assets of a scheme, if the new unit
capital inflows from beyond top 15 cities
(B-15 cities) are at least (a) 30 per cent
of gross new inflows in the scheme or
(b) 15 per cent of the average assets
under management (year to date) of the
scheme, whichever is higher. In case
inflows from B-15 cities are less than
the higher of (a) or (b) above, additional
TER on daily net assets of the scheme is
allowed on a proportionate lower inflow
basis. Further, the additional TER on
account of inflows from B-15 cities so
charged is to be clawed back in case the
same is redeemed within a period of one
year from the date of investment.
Mutual funds faced teething problems
such as generating requisite data from
Registrar & Transfer Agents (RTA),
tracking unit capital generated from
B-15 cities and redemptions thereof,
adjusting the claw-back commission
due to redemptions taking place within
one year from the date of subscriptions,
identifying expenses incurred in such
B-15 cities and accruing appropriate
additional expense.
There was certain amount of ambiguity
as to whether such additional TER is
a grant or an additional limit given
for raising AUMs from B-15 cities.
Considering the purposes behind this
regulatory provision, it can be reasonably
construed that it is an additional limit
given to mutual funds, provided the
expenditure is actually incurred. Funds
monitor the accrual of such expenses
viz-a-viz actual expenditure incurred at
periodic intervals. Excess accrual, if any,
needs to be reversed in a timely manner.
1. Association of Mutual Funds in India (AMFI) website

2. Expense ratio is the fee charged by a fund house to manage
and operate the fund. These charges include management
fees.
3. EAC opinion volume no XXVIII and query no. 5
Fungibility in TER
Fungibility in TER was another major
development that was introduced in
September 2012. The change aimed at
providing flexibility to the mutual funds
in incurring various expenses incurred by
them, including management fees. Mutual
funds were allowed to charge various
expenses to the schemes within overall
limits specified in Regulation 52(6) of the
SEBI Regulations. Prior to September
2012, regulations provided a sub-limit for
management fees within an overall total
expense limit. Effective October 2012,
the SEBI removed the sub-limits relating
to management fees, thereby creating
flexibility in charging management fees
and other expenses to the schemes.
Fungibility of expenses gave some
much needed flexibility to mutual funds/
asset management companies (AMCs)
in allocating various expenses incurred
by them to the individual schemes.
Depending upon overall expenses incurred
by the schemes; AMCs can charge higher
or lower management fees at periodic
intervals.
While a scheme may accrue expenses
at the expense rate permissible by its
offer document, continuous monitoring is
required to ensure that actual expenses
have been incurred. Constant monitoring
of actual expenses incurred and correct
estimation of probable expenses will allow
AMCs to charge appropriate management
fees on a regular basis and in a timely
manner.
To avoid operational difficulties such
as monitoring the actual expenses
incurred vis--vis the expenses accrued
and the frequent adjustments to the
management fees, there exists another
school of thought which believes primarily
in incurring all expenses by AMC and
charge the requisite management fees
to schemes on a consistent basis. If the
fund house adopts this approach, then
it could entail a change in contractual
arrangements with various service
providers such as custodian, RTA,
bankers, distributors, etc. Under this
approach, AMCs will have to be extremely
cautious in determining the appropriate
differential fees to be charged to direct
and regular plans of the scheme.
Another fundamental reason for adoption
of the above approach by mutual funds
could be the benefit of service tax input
credits. Under the conventional approach,
spill-over of expenses beyond the total
permissible expenses are borne by

AMCs. Reimbursement of such spill-over
expenses do not entail service tax input
credit benefit to AMCs. However, in the
approach described above, since AMCs
incur all the expenses, they may be able
to take the benefit of the service tax input
credits.
Currently, most mutual funds have
stabilised their TER accrual process under
new regime. The expense accrual process
is continuously analysed, actual expenses
incurred are monitored more frequently
and appropriate rectification measures are
taken.
From an auditing standpoint, the following
aspects are key considerations:
understanding reasons for fluctuations
in management fees
appropriate authorisations
compliance with the offer documents
accuracy of fee computations
consideration of service tax related
accounting.
Investors education and awareness

In September 2012, the SEBI permitted
mutual funds to annually set aside
at least two basis points of daily net
assets towards investor education and
awareness initiatives within the maximum
limit of TER.
Although regulation does not specifically
define the activities which will fall within
investor education and awareness
programme, the general understanding is
that all expenses incurred on conducting
seminars related to investor awareness
especially in Tier II and III cities, hoardings,
booklets in various business magazines
and newspapers, etc. promoting investor
awareness may fall within the purview of
such awareness programmes.
It can be challenging to evaluate and
critically examine end-use of such
expenditures and to check whether the
purpose of investors education and
awareness is met at large as opposed
to promoting a particular scheme or a
product.
In case of Fixed Maturity Plans (FMPs)/
close ended schemes, mutual funds
can encounter a situation wherein, an
accrual towards investor education and
awareness has been created in the
books but the schemes term has expired
before the utilisation of such accrued
amounts. Currently, there is no specific
regulatory guidance on the treatment of

such unspent amounts at the maturity
of such schemes. Also, such closed
schemes are usually not subjected to
audits in subsequent periods. This poses
some added responsibillity on AMCs and
trustees of funds to ensure an appropriate
utilisation of unspent balances.
Commission to distributors
Mutual Funds pay various types of
commissions to its distributors such
as upfront brokerage, trail brokerage,
special incentives, Systematic Investment
Plan (SIP) incentives, etc. Commission
to distributors is one of the major
expenditure heads of a scheme.
Various models such as a combination
of upfront and trail commission, high
upfront commissions coupled with limited
or no trail commission for few years and
moderate trail commission thereafter, all
trail commission, etc. are prevalent in the
market. Claw back clauses have become
a part of commission structures in order
to bring in more discipline in selling and
distribution practices and to achieve the
objective of long-term investment by
investors.
After the end of the entry load era and
the lack of traction in transitioning to
an `advisor -investor fee based model,
initial commission to distributors are
largely being paid by mutual funds or its
investment managers.
One of the relevant accounting
considerations is whether the upfront/
advance commission paid should be
expensed immediately or whether such
upfront payments/commission can be
amortised. Generally, such payments
provide an enduring contractual benefit
to the funds and could qualify for
amortisation. In particular, a careful
consideration of facts and circumstances
is required including focussing on lock-in
clauses and claw-back provisions and the
adequacy of expected asset management
fees on the AUM generated which is
directly relatable to the payments made.
The determination of an appropriate
period over which the upfront/advance
commission paid by schemes or AMC are
to be apportioned remains a challenge for
mutual funds. Key areas which are usually
considered in determining amortisation
period are as follows:
nature of services provided by the
distributor
nature and period over which
distributors are required to render

services
contractual arrangement with
distributor specially period of claw back

terms of other commissions (i.e. trail)
paid.
Considering the overall magnitude of
commission expenditures and long period
over which the benefit of distributors
services are availed, in certain cases,
these expenses are paid for investment
managers initially and are recovered from
the schemes over the period of benefit.
Periodic evaluation is required to assess
recoverability from schemes, otherwise
the investment manager will likely need
to recognise such the expenditure in its
books as expenses.
Increase in net worth of AMCs

As per the SEBIs pronouncement4, all
AMCs of mutual funds are required to
have a minimum net worth of INR500
million. As per the SEBI Regulations, net
worth is defined as share capital plus free
reserves. However, free reserves is not

defined in the SEBI Regulations. In the
absence thereof, generally the definition
of free reserves given in the Companies
Act, 1956 was considered by most AMCs.
Considering the definitions under various
sections of the Companies Act, 1956, one
could reasonably argue that securities
premium could be a part of free reserves.
However, in terms of the provisions of
section 2(43) read with section 52(2) of the
Companies Act, 2013, definition of free
reserves specifically excludes securities
premium. Considering that the securities
premium forms a significant part of the net
worth, AMCs may face challenge to meet
net worth criteria. Ideally a clarification
from the SEBI is required in this context
to permit the continued consideration
of securities premium in free reserves
for the limited purpose of its net worth
requirements.
Mis-selling fraudulent
Under the Companies Act, 2013, misselling is considered to be within the
definition of fraud. The Companies Act,
2013 covers the entire spectrum of

securities which include mutual fund
units. If a financial advisor makes a
promise, statement or forecast which
is false or misleading (many of these
factors are very difficult to verify) then
there could be significant consequences
under the Companies Act, 2013. This
is, in addition, to any consequence that
the advisor would face under the SEBI
(Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Market)
(Amendment) Regulations, 2012 which
have been notified in December 2012.
Conclusion
Some of the measures taken by
SEBI should help the mutual fund
industry to move ahead with greater
confidence on its growth trajectory.
However, implementation challenges
continue to be an area of focus for
most mutual funds and the growing
size and complexity of regulations
and compliance requirements are
often a source of tension within such
organisations.
4. Securities and Exchange Board of India (Mutual Funds)

(Amendment) Regulations, 2014 dated 6 May 2014
Ind AS 16
accounting for fixed assets

Provide an overview of the changes associated with Ind AS implementation
in India with respect to property, plant and equipment.

Highlight the areas of difference between Indian GAAP/Ind AS and the
requirements of Tax Accounting Standards (Income Computation and

Disclosure Standards) which are expected to be implemented in India
shortly.
Background and setting the

context
Key impact areas on Ind AS

implementation
Under the current accounting standards

as per Generally Accepted Accounting
Principles in India (Indian GAAP), AS
10, Accounting for Fixed Assets and AS
6, Depreciation, provide the requisite
guidance on accounting for fixed assets.
Under Ind AS, the corresponding standard
for this topic is Ind AS 16, Property, Plant
and Equipment (PPE).
Initial measurement
While both standards are similar in many

aspects, there are areas where either
there are subtle differences or where Ind
AS provides additional guidance which
is not available under Indian GAAP. The
subsequent paragraphs capture the
current accounting practices and how
these would undergo a change once Ind
AS is implemented in India.
Administration and other general
overheads - In general, administration

and other general overheads are
excluded from being capitalised
as part of fixed assets. However,
the current guidance under Indian
GAAP permits capitalisation of these
costs provided they are specifically
attributable to construction of a project,
to the acquisition of a fixed asset or
bringing it to its working condition.
Accordingly, in practice start-up costs
or pre-operative expenses often end
up being capitalised. Under Ind AS,
administration and other general
overhead costs are specifically
excluded from being capitalised as part
of fixed assets and hence, are required
to be charged to the statement of profit
and loss in the year in which they are
incurred.
Foreign exchange differences - To
protect companies from the impact

of volatile foreign currency exchange
rates, Indian GAAP provides an option

to add to/deduct from the cost of
a depreciable asset, the exchange
differences arising on restating longterm foreign currency monetary items
that are used to acquire such property,
plant and equipment. Recently, the
Accounting Standards Board (ASB) as
part of its project of revisiting the earlier
carve-outs from Ind AS has proposed
to remove this option. This proposed
amendment is a welcome move as the
scenario has changed with the currency
markets being more stable, and also
this amendment would align the
accounting under Ind AS to the global
practices i.e. IFRS. Once this proposed
amendment is incorporated in the Ind
AS standard and Ind AS is implemented
in India, all companies that would be
covered under the proposed roadmap
of IFRS convergence in India would
have to recognise foreign exchange
differences (except for foreign
exchange differences which are
regarded as an adjustment to interest
costs) to the statement of profit and
loss in the year in which they are
incurred.
Asset retirement obligations - Ind AS
16 requires an estimate of the costs for

dismantling or removing of the asset
or restoration of the site to be included
as part of the initial cost of the asset
with recognition of a corresponding
liability. The amount to be capitalised
on initial recognition is to be computed
by present valuing the expected costs
to be incurred. Subsequent to initial
recognition, the discount is required
to be unwound and charged to the
statement of profit and loss as an
interest expense with a corresponding
increase in the liability amount. Under
Indian GAAP, the illustrations forming
part of AS 29, Provisions, Contingent
Liabilities and Contingent Assets,
state that if an entity has a present
obligation towards decommissioning
and restoration, it should account for
the liability at the best estimate of the
costs expected to be incurred to settle
the obligation. Further, the Guidance
Note on Accounting for Oil and Gas
Producing Activities states that the
costs for abandonment estimated
based on current prices should be
capitalised as part of the cost centre
at the outset as the liability to remove
an installation exists the moment it is
installed. Both AS 29 and the Guidance
note do not require discounting of the
costs to present value. Currently, there
is diversity in practice on recognition
of these obligations with several
companies recognising these only at
the time when they are incurred.
Impact of deferred payment
arrangements - In case of deferred

payment arrangements beyond normal
credit terms, Ind AS requires that the
difference between the cash price
equivalent and the total payment
is recognised as interest over the
period of credit unless such interest is
capitalised in accordance with Ind AS
23, Borrowing Costs. Under the current
accounting practices under Indian
GAAP, the transaction amount is the
amount that is capitalised.
Depreciation
Useful lives Ind AS requires an asset
to be depreciated over its useful life.

The standard defines useful life as the
period over which an entity is expected
to be available for use by an entity or
the number of production or similar
units expected to be obtained from the
asset by an entity. At present under
Indian GAAP, even though accounting

standards require depreciation to be
provided based on useful life, many
companies followed the minimum rates
prescribed under Schedule XIV to the
Companies Act, 1956. This practice has
undergone a change in the current year
with the introduction of the Companies
Act, 2013 which in addition to
prescribing indicative useful lives under
Schedule II also provides the flexibility
of using useful lives of the property,
plant and equipment with appropriate
justification supported by technical
advice. This change introduced by the
Companies Act, 2013 would align the
accounting practices in India with the
requirements of Ind AS.
Component accounting - Ind AS
16 requires each part of the item of

PPE that is significant in relation to
the total cost of the item of PPE to
be depreciated separately based
on their individual useful life. The
determination of whether a component
of an item is significant would require
a careful assessment of the facts and
circumstances and could also relate to
non-tangible activities such as major
inspections or overhauls. A classic
example on component accounting
would be an aircraft which has two
significant components with different
useful lives i.e. the airframe and
the engine. The current accounting
principles under AS 10 encourage
that the total expenditure of an asset
be allocated to its components and
depreciation estimates for such
components be made separately.
However, there is diversity in practice
at present on this topic with not many
companies following this principle and
actually identifying components of
assets for separate capitalisation and
depreciation computation.
This GAAP difference (between Indian
GAAP and Ind AS) is also expected to
be eliminated with the Companies Act
2013 mandating component accounting
from 1 April 2015 (voluntary from 1 April
2014).
Other impact areas In addition to
the above, there are certain other

differences between Indian GAAP and
Ind AS as mentioned below:
A change in method of depreciation
(e.g. from written down value to

straight line or vice versa) is treated
as a change in estimate under Ind
AS and the change would have
a prospective impact. However,

currently under Indian GAAP, a
change in method of depreciation
is treated as a change in accounting
policy which requires a retrospective
application. However, the deficiency
or surplus arising from retrospective
application of the new method
of depreciation is adjusted in the
accounts in the year in which the
method of depreciation is changed.
Ind AS requires the residual value,
useful life estimate and method of

deprecation to be reviewed at least
at the end of each financial year,
with any change to be accounted
on a prospective basis as a change
in estimate. There is no such
requirement currently under Indian
GAAP.
Revaluation model
Under the current Indian GAAP accounting
practices, revaluation is considered as a
substitute for historical cost. It is common
for companies to selectively revalue their
assets and record gains in a separate
revaluation reserve. Ind AS, on the other
hand, provides an accounting policy choice
to follow the revaluation model for a class
of assets and does not permit selective
revaluation of assets within the same
class. However, the deficiency or surplus
arising from retrospective application
of the new method of depreciation is
adjusted in the accounts in the year in
which the method of depreciation is
changed.
Further, under Indian GAAP, the
incremental depreciation charge on
account of the revaluation is recouped
from the revaluation reserve and hence
does not impact the statement of profit
and loss. Under Ind AS, the incremental
depreciation on account of the revaluation
is also required to be charged to the
statement of profit and loss. However, the
incremental depreciation charged is not
allowed to be recouped into the statement
of profit and loss.
Ind AS 16 provides that the revaluation
surplus included in equity in respect of an
item of property plant and equipment may
be transferred to the retained earnings
when the asset is derecognised. This
may involve transferring the whole of
the surplus when the asset is retired or
disposed of. However, some of the surplus
may be transferred as the asset is used
by an entity. In such a case, the amount
of the surplus transferred would be the
difference between the depreciation

based on the revalued carrying amount of
the asset and depreciation based on its
original cost. Transfers from revaluation
surplus to the retained earnings are not
made through the statement of profit
and loss. Thereby, under Ind AS while
revaluation could assist in improving the
net worth of a company, it could also result
in higher depreciation expense in the
subsequent periods compared to current
practice.
Lastly, in case the revaluation method
of accounting is chosen, Ind AS would
also requires the entity to carry out the
revaluation exercise with sufficient
regularity to ensure that the carrying
amount does not differ materially from
the value which would be determined
using fair value at the end of the reporting
period. There is no guidance/requirement
on the frequency of revaluation under
Indian GAAP.
Borrowing costs
Under the current accounting practices,
a qualifying asset is defined as an asset
which takes substantial period of time
to be ready for its intended use or sale.
A period of 12 months is ordinarily
considered as a substantial period of time
unless the contrary can be justified. Under
Ind AS, while the definition of qualifying
asset is the same, the determination of
what constitutes a substantial period of
time is left to management judgement.
At present, capitalisation of borrowing
costs are based on company level
borrowings i.e. standalone financial
statements. However, under Ind AS, the
consolidated groups average borrowing
rate would need to be considered for
capitalisation of the borrowing costs in
the consolidated financial statements.
For example, parent A makes an equity
contribution in its wholly owned subsidiary
B. A has obtained the funding for this
equity contribution at an interest cost of
10 per cent per annum. B has used the
funding obtained from A in financing the
construction of a qualifying asset. In this
case, under current accounting practices
no borrowing costs would be capitalised
in the standalone financial statements of
A or B as for B there is no borrowing cost
incurred and for A there is no qualifying

asset on its books. However, under Ind AS,
in the consolidated financial statements
of A, the borrowing cost incurred can
be attributable to the qualifying asset
held in B and hence, would need to be
capitalised.
Transitional provisions under

Ind AS 101, First-time Adoption
of Indian Accounting Standards
unlike the current accounting practice/
Ind AS requirements, ICDS does not

permit revaluation of fixed assets since
the Income Tax Act, 1961 does not
recognise the concept of revaluation
of assets. Therefore, for the purpose
of computation of taxable income, the
fixed assets will need to be carried at
historical costs and any revaluation
routed through the statement of profit
and loss would be disallowed
Ind AS 101, First Time Adoption of Indian

Accounting Standards provides the
guidance to transition from existing Indian
GAAP to Ind AS. With respect to PPE,
Ind AS 101 permits an entity to continue
using the carrying value of all of its PPE
as per the previous GAAP and use that as
its deemed cost as at date of transition
under Ind AS after making necessary
adjustments for any decommissioning
liabilities that it may need to recognise.
as discussed earlier, foreign exchange
This requirement, if implemented in its

current state could, to a large extent ease
the transition process for Indian entities
but may result in carry forward of certain
amounts as part of PPE which may not
qualify for capitalisation under Ind AS, for
example foreign exchange differences
currently capitalised under Para 46/46A
of AS 11, The Effects of Changes in
Foreign Exchange Rates. This accounting
treatment would also result in differences
from the global accounting practices i.e.
IFRS.
as per both Indian GAAP and Ind AS,
Income Computation and

Disclosure Standard on Tangible
Fixed Assets
The Central Board of Direct Taxes (CBDT)
is in the process of issuing a separate set
of accounting standards referred to as
the Income Computation and Disclosure
Standard (ICDS). These standards would
be applied in computation of taxable
income and are expected to be issued
in their final form in the coming months.
On the topic of fixed assets, a draft ICDS
Tangible Fixed Assets has been issued
which has some significant differences
from the current accounting practices/
Ind AS requirements which are briefly
discussed below:
differences that are currently

capitalised under Indian GAAP would
need to be charged to the statement
of profit and loss under Ind AS. As
per ICDS, capitalisation of exchange
differences related to fixed assets shall
be in accordance with section 43A
(which deals with the changes in rate of
exchange of currency) and other similar
provisions of the Income Act, 1961
where an asset is acquired in exchange
for another asset, shares or securities,
its actual cost shall be determined by
reference to the fair market value of the
consideration given or asset acquired
whichever is more clearly evident. As
per ICDS, the actual cost in such cases
shall be the lower of the fair market
value of the asset acquired or the
assets/ securities given up/ issued.
Once ICDS is implemented in India, it
would bring in a fresh set of challenges as
entities would need to carry out several
adjustments to ascertain the taxable
income.
Conclusion:
Based on the above, it is evident that
Ind AS once implemented in India would
change the way accounting is done
in India across many areas including
for something as common and widely
relevant as fixed assets. Hence, it is
important that corporate India gears up
for this challenge in time to ensure a
smooth and successful transition to the
new reporting framework under Ind AS.
The Companies Act, 2013
deposits
Introduction
The Companies Act, 2013 (2013 Act) has introduced several
measures which are expected to provide protection to
depositors. It has also increased the reporting requirements of
companies accepting deposits by requiring them to file circulars
and statements of deposits with the registrar of companies. In
addition, the 2013 Act also provides for stringent penalties for any
violations in complying with the provisions of this Act.
Applicability

Discuss the key provisions relating to acceptance of
deposits by companies under the Companies Act, 2013.
The provisions of the 2013 Act, relating to acceptance of deposits,

are applicable to all companies except the banking companies,
non-banking financial companies and housing finance companies.
Therefore, the provisions relating to deposits under the 2013 Act
apply to following two categories of the companies:
A company that accepts deposits from its members after
passing a resolution in its general meeting according to the

Rules prescribed and subject to the fulfilment of the specified
conditions (section 73(2) of the 2013 Act)
a company that is eligible to accept deposits from public (i.e.
eligible company as defined in the Rules).

The 2013 Act not only regulates the deposits accepted after the
commencement of the Act but also the deposits accepted before
such commencement.
Key provisions
Definition of deposits
The definition of deposits when read
along with the list of exceptions provided
under the Rules to the 2013 Act is much
wider than that what was provided in the
the Companies Act, 1956 (1956 Act) and
its Rules. Various amounts received by a
company are now considered as deposits
which were earlier excluded from being
considered as deposits.
As per the 2013 Act, deposit includes
any receipt of money by way of deposit
or loan or in any other form by a company,
but does not include such categories of
amounts as have been prescribed in the
Rules to the 2013 Act.
The Rules under the 2013 Act, prescribes
the categories and items which are not
included in the definition of deposits.
Unlike as per the exclusion provided in
the Rules under the 1956 Act, the rules
under the 2013 Act prescribe that amounts
received from members and the relatives
of directors are deposits even in the case
of a private company. Under the 2013 Act,
a private company will have to adhere
to stricter norms in the case of deposits
accepted from its members and it can
not accept deposits from relatives of its
directors, those would be considered to be
public deposits. Further, amounts received
towards subscription to any securities, if
not allotted within 60 days of receipt, shall
be treated as a deposit, if such application
money is not refunded to the subscriber
within 15 days from the end of 60 days of
receipt. However, amounts received from
directors continue to be excluded from the
ambit of deposits, if such amount is not
out of any funds borrowed by the director
by way of loan or accepting deposits.
Also, advances received by a company for
supply of goods or provision of services
shall be considered as deposits if not
appropriated against such supply of
goods or provision of services within 365
days of acceptance of such deposits.
However, security deposits taken for the
performance of a contract for supply of
goods or provision of services shall not
be considered as deposits. Thus, every
private company and a non-eligible public
company will have to settle the advances
against goods or services within 365 days
to comply with the provisions of the 2013
Act.
Any amount received from any other

company shall continue to be excluded
from the definition of deposits. Thus, any
advance received from a company, shall
not be considered as deposit, even if not
appropriated against goods or services
within 365 days.
Only an eligible company can

invite and accept public deposits
A noteworthy provision with regards to
acceptance of deposits is that the 2013
Act and the Rules have prescribed certain
prerequisites for a public company to
invite and accept public deposits. As per
the 2013 Act, only an eligible company
can accept public deposits, it being, a
public company having a net worth not
less than INR1 billion or turnover of not
less than INR5 billion. Further, such
public company should have taken a prior
consent of the company in a general
meeting by way of special resolution.
Thus, all public companies can not invite
and accept public deposits. Consequently,
smaller size public companies not meeting
the eligibility criteria would now face
limitations in accessing public deposits.
Mandatory repayment of
deposits accepted before the
commencement of the 2013 Act
One of the most significant obligations
imposed by the 2013 Act is that, it
requires the companies to repay all
the deposits accepted by them before
the commencement of the 2013 Act
and interest due thereon, within a year
from such commencement or when
they become due, whichever is earlier.
However, the 2013 Act provides that
a company can get a relief by way of
extension of time for repayment if the
Tribunal allows the same, considering
the financial condition of the company,
on application made by the company
to the Tribunal. This provision will help
in streamlining the existing deposits
as per the regulations of the 2013 Act.
However, it might not be an easy task
for all companies to comply with this
requirement. This could impact the cash
flows and liquidity of some companies.
Also, clarification has been provided by
way of an explanation in the Rules that in
case of a company which has accepted
public deposits as per the provisions of
the 1956 Act, and its rules, and has been
repaying such deposits and interest

thereon in accordance to such provisions,
the company need not repay such
deposits within a year, if it complies with
other requirement of the 2013 Act and
Rules and also, if it continues to repay
such deposits and interest thereon on
due dates for remaining period of such
deposits. Thus if a company is an eligible
company within the meaning of the Rules
and complies with other requirements
under the 2013 Act and its Rules, it need
not repay the deposits accepted by it
before the commencement of this Act
within one year.
To illustrate this vide an example, if a
public company having turnover of less
than INR5 bilion and net worth of less
than INR1 billion, has accepted deposits
which are maturing in 2016, the company
will have to repay all the public deposits
within a year i.e. before 31 March, 2015
even though it is making repayments of
deposits and interest duly, as the company
is not an eligible company as per the 2013
Act and Rules there under.
Introduction of deposit insurance

The 2013 Act has imposed a new
obligation on companies accepting
deposits by compelling the company
to provide insurance to the depositor,
in respect of both, the principal amount
and interest due thereon. However, the
2013 Act provides that the minimum
aggregate insurance should not be less
than INR20,000 for each depositor. The
Rules, however, have allowed a company
to accept the deposits without deposit
insurance contract till 31 March, 2015. The
amount of insurance premium paid on
the insurance contracts is to be borne by
the company accepting the deposits. This
provision is expected to help in protecting
the interest of small depositors to a certain
extent in case of default by the company.
Cap on interest rates on deposits

The 2013 Act, when read along with the
rules, provides that the rate of interest on
the deposits accepted should not exceed
the maximum rate of interest prescribed
by the Reserve Bank of India (RBI) for
acceptance of deposits by NBFCs. Rules
under the 1956 Act prescribed the ceiling
of 12.5 per cent per annum.
10
Penal provisions
The 2013 Act provides stringent penal
provisions in case of fraudulent invitation
and acceptance of deposits. The 2013 Act
provides that every officer of the company
responsible for the acceptance of deposits
shall be personally responsible, without
any limitation of liability, if it is proved that
such deposits had been accepted with
intent to defraud the depositors.
Other relevant provisions

Limits on acceptance of deposits
Reporting requirements
The 2013 Act and the Rules prescribe

limits on acceptance of deposits from
members and public. In case of an eligible
company other than a government
company, the limit for acceptance of
deposits from members is capped at
10 per cent of the paid-up share capital
and free reserves. Also, the limit for
acceptance of deposits from the public
is limited to 25 per cent of paid-up share
capital and free reserves. A company other
than an eligible company can accept or
renew deposits from its members upto
25 per cent of paid-up share capital and
free reserves. In case of government
companies, the limit is extended to 35
per cent of paid-up share capital and free
reserves.
The 2013 Act prescribes that every eligible

company shall issue a circular containing
information like the credit rating, financial
position of the company and information
related to deposits , etc. This circular
shall be issued as an advertisement in
an Engilsh and vernacular newspaper
and also uploaded on the website of the
company. This is expected to bring more
awareness amongst the depositors and
probable depositors about the financial
condition of a company. Also, every
company shall file a return annually with
the Registrar in a prescribed form with
prescribed information relating to deposits
accepted by the company.
Maintenance of liquid assets

Similar to the provisions of the 1956 Act,
which required a company to maintain
liquid assets by way of making prescribed
deposits or investments, the 2013 Act
also requires a company to deposit a sum
not less than 15 per cent of the deposits
maturing during a financial year and
before the end of the next financial year
in a deposit repayment reserve account
with a scheduled bank. The 2013 Act also
states that the sum in such account shall
not be used for any purpose other than
repayment of the deposits.
Creation of security
The Rules under the 2013 Act prescribes
that all the deposits accepted from the
members in the case of companies
under section 73(2) of the 2013 Act and
secured public deposits accepted by
eligible companies should be secured,
to the extent not covered by the deposit
insurance, by creating a charge on
specified assets excluding intangible
assets. Such deposits are secured for the
principal amount and interest thereon.
Premature repayment
Similar to provisions of the 1956 Act, the
2013 Act also provides that if the deposit
is repaid before its maturity, on request
of the depositor, the interest payable on
such deposits should be reduced by one
per cent except for few conditions like
repayment for complying with other rules,
etc.
Duration of deposits
The provisions related to duration of a
deposit are similar to those in the 1956
Act. The 2013 Act provides that deposits
should not be repayable within six months
or after 36 months of acceptance or
renewal. However, subject to certain
conditions, a company may accept a
deposit repayable within six months but
not within three months from the date of
acceptance or renewal.
Conclusion
The 2013 Act seems to have much
more stringent provisions relating
to the acceptance of deposits as
compared to the 1956 Act. Small public
companies and private companies
might have to bear the brunt of these
new challenges in raising funds
because of the strict provisions in the
2013 Act. Also, companies might have
to settle some advances to comply
with the provisions of the 2013 Act.
This might create new challenges
for such companies as they might
face some unplanned cash outflows.
Nonetheless, inclusion of such stern
provisions gives the impression that the
safety of the depositors has been given
the highest priority by the lawmakers.
Such provisions could go a long way
in helping ensure prompt repayment
of deposits and interest thereon
to depositors and greater public
confidence in such deposits.
11
Understanding the
COSO 2013
Framework
Describe the newly added 17 principles to the COSO
Framework.
In India, this area has attracted a lot of attention recently on

account of the new requirement under the Companies Act,
2013 for companies and auditors to opine on the adequacy and
effectiveness of internal controls. The Institute of Chartered
Accountants of India (ICAI) is in the process of issuing guidance
to the statutory auditors on the audit of internal financial controls.
This guidance is expected to consider the requirements of the
COSO Framework.
The 2013 Framework does not change the definition of internal
controls. Internal control is defined as Internal control is a
process, effected by an entitys board of directors, management,
and other personnel, designed to provide reasonable assurance
regarding the achievement of objectives relating to operations,
reporting, and compliance.
Similarly, the five components of internal control - control
environment, risk assessment, control activities, information and
communication and monitoring activities - continue to remain the
same under 2013 Framework. However, there has been one fine
change; monitoring component has been renamed monitoring
activities. This change is perhaps to highlight the fact that
monitoring component is not to be viewed as a single process but
as a series of activities undertaken individually and also as a part
of the other four components.
The Framework has been enhanced by expanding the financial
reporting category of objectives to include other important forms
of reporting, such as non-financial and internal reporting. The
2013 Framework sets out 17 principles linked to the above five
components that are necessary for effective internal controls.
These principles are not completely new and were implicit in the
1992 framework.
COSO 2013 Framework summary of changes

What is not changing .
Core definition of internal control
Source: Executive Summary - COSO Internal Control Integrated Framework - 2013
The Committee of Sponsoring Organisations of the Treadway

Commission (COSO) had released its integrated framework
on internal controls in 1992. This framework was extensively
adopted as a basis to test the effectiveness of internal control
systems. Due to the changes in the business and operating
environment over the past two decades, COSO updated its
integrated framework on internal controls to enable organisations
to effectively and efficiently develop and maintain systems of
internal control.
The COSO Board announced that the 1992 framework will
be available until 15 December 2014, post which it will be
superseded and replaced by the 2013 Framework. Therefore, all
companies with a year end of 31 December 2014 and thereafter
would apply the 2013 Framework in their upcoming reporting on
internal controls (COSO Framework).
Three categories of objectives and five components of

internal control
Each of the five components of internal control are required
for effective internal control
Important role of judgement in designing, implementing
and conducting internal control, and in assessing its
effectiveness.
What is changing .
Updated for changes in business and operating
environments
Emphasis on governance
Expanded operations and reporting objectives suitable for
other purposes
Implicit fundamental concepts underlying five components
codified as 17 principles
Updated to increased relevance and dependence on IT
Addresses fraud risk assessment and response.
12
Let us consider these 17 formalised

principles which are defined under each of
the respective components.
Control environment
It is the set of standards, processes
and structures that provide the basis
for carrying internal control across the
organisation. It lays down the tone on
the importance of internal controls by the
top management including the Board of
Directors. The five principles laid down
under this component are:
1. The organisation demonstrates a
commitment to integrity and ethical
values.
2. The Board of Directors demonstrates
independence from management and
exercises oversight of the development
and performance of internal control.
3. Management establishes, with
board oversight, structures, reporting
lines, and appropriate authorities
and responsibilities in the pursuit of
objectives.
4. The organisation demonstrates a
commitment to attract, develop,
and retain competent individuals in
alignment with objectives.
5. The organisation holds individuals
accountable for their internal control
responsibilities in the pursuit of
objectives.
Risk assessment
Risk assessment involves a dynamic
and iterative process for identifying and
analysing risks to achieving the entitys
objectives, forming a basis for determining
how risks should be managed.
Considering the potential for fraud in the
current environment, one of the principles
specifically requires management to
consider and evaluate the risk of fraud.
The four principles laid down under this
component are:
6. The organisation specifies objectives
with sufficient clarity to enable the
identification and assessment of risks
relating to objectives.
7. The organisation identifies risks to the
achievement of its objectives across
the entity and analyses risks as a basis
for determining how the risks should be
managed.
9. The organisation identifies and

assesses changes that could
significantly impact the system of
internal control.
Control Activities
Control activities are the actions
established by the policies and procedures
and not the policies and procedures
themselves. Considering that information
technology form a significant part of
the control activities, there is a specific
principle over adoption of general
information technology controls to achieve
the objectives of the organisation. The
three principles laid down under this
component are:
10. The organisation selects and develops
control activities that contribute to the
mitigation of risks to the achievement
of objectives to acceptable levels.
11. The organisation selects and
develops general control activities
over technology to support the
achievement of objectives.
12. The organisation deploys control
activities through policies that
establish what is expected and
procedures that put policies into
action.
Information and communication

Information is necessary for the entity to
carry out internal control responsibilities in
support of achievement of its objectives.
Considering the way business is carried
out, one of the principles laid out cover the
communication with third-party service
providers. The three principles laid down
are:
13. The organisation obtains or generates
and uses relevant, quality information
to support the functioning of internal
control.
14. The organisation internally
communicates information, including
objectives and responsibilities for
internal control, necessary to support
the functioning of internal control.
15. The organisation communicates with
external parties regarding matters
affecting the functioning of internal
control.
Monitoring activities
Ongoing evaluations, separate
evaluations, or some combination of the
two are used to ascertain whether each
of the five components of internal control,
including controls to effect the principles
within each component, is present and
functioning.
16. The organisation selects, develops,
and performs ongoing and/or separate
evaluations to ascertain whether the
components of internal control are
present and functioning.
17. The organisation evaluates and
communicates internal control
deficiencies in a timely manner to
those parties responsible for taking
corrective action, including senior
management and the Board of
Directors, as appropriate.
The 2013 Framework presumes that
because the 17 principles are fundamental
concepts of the five components, all 17
are relevant to all entities. Therefore, if it
is noticed that a principle is not present
and functioning in the internal controls
identified by an organisation, it could
signify a material deficiency in their
internal control.
The challenges which are being faced by
organisations in implementing the 2013
Framework mainly relate to linking the
17 principles with the various controls
identified and ensuring that each of the
principles are covered in the effective
internal controls. Also, it is unclear
whether organisations would need
to apply the 2013 Framework in the
preparation of non-financial information.
However, a positive outcome from the
refreshed framework is that organisations
are once again reviewing the controls
identified in detail, which are likely to lead
to identification of redundant controls or
the identification some other efficient
way of achieving control objectives and
better quality documentation. For Indian
companies that have not previously used
or adopted the COSO Framework, the
challenges are much larger as, in many
cases, the basic level of documentation,
identification and testing of controls is not
yet embedded into the organisation. The
call to work for such companies on this
important area is immediate.
8. The organisation considers the

potential for fraud in assessing risks to
the achievement of objectives.
13
Significant influence

Provides an overview of the parameters to assess whether
investor has significant influence over an investee.
14
An investment in an entity can take

various forms depending on the level
of investment and various rights and
obligations attached with the investment.
An investor could have an influence
on an entity as control, joint control, or
significant influence.
While preparing consolidated financial
statements under IFRS, when an entity
has control over another entity then it
applies consolidation standards. Joint
control requires use of equity method of
accounting. Similarly, significant influence
would require use of equity method while
investments that do not fall in the above
categories are recognised under IAS 39,
Financial Instruments: Recognition and
Measurement .
In this article, we discuss the parameters
to assess when an entity considers if its
investment in another entity meets the
definition of significant influence.
Under IFRS, IAS 28, Investments in
Associates, defines significant influence
as the power to participate in the financial
and operating policy decisions of the
investee but is not control or joint control
of those policies.
An associate is an entity over which
the investor has significant influence.
Significant influence may exist over an
entity that is controlled by another party.
More than one party may have significant
influence over a single entity.
According to IAS 28, if an entity holds,
directly or indirectly (e.g. through
subsidiaries), 20 per cent or more of
the voting power of the investee, it is
presumed that the entity has significant
influence, unless it can be clearly
demonstrated that this is not the case.
Conversely, if the entity holds, directly
or indirectly (e.g. through subsidiaries),
less than 20 per cent of the voting power
of the investee, it is presumed that the
entity does not have significant influence,
unless such influence can be clearly
demonstrated. A substantial or majority
ownership by another investor does not
necessarily preclude an entity from having
significant influence.
In determining whether an entity has
significant influence over another entity,
the focus is on the ability to exercise
significant influence. It does not matter
whether significant influence is actually
exercised.
An entity may own potential voting

rights e.g. share warrants, share call
options, debt or equity instruments that
are convertible into ordinary shares, or
other similar instruments that have the
potential, if exercised or converted, to
give the entity additional voting power or
to reduce another partys voting power
over the financial and operating policies
of another entity. The existence and
effect of potential voting rights that are
currently exercisable or convertible,
including potential voting rights held
by other entities, should be considered
when assessing whether an entity has
significant influence. Potential voting
rights are not currently exercisable or
convertible when, for example, they can
not be exercised or converted until a future
date or until the occurrence of a future
event.
The standard does not provide any bright
line as to when an investor would be
considered to have significant influence.
There is a presumption that significant
influence exists when 20 per cent or more
voting power of the investee is held by
an investor either directly or indirectly
through subsidiaries. At the same time,
it is presumed that significant influence
does not exist with a holding of less
than 20 per cent. The standard allows to
rebut these presumption if an entity can
demonstrate its ability, or lack of ability, to
exercise significant influence.
In order to assess significant influence

an investor should assess all the facts
and circumstances i.e. assess the
substance of the relationship with the
investee. No one factor determines
presence or absence of significant
influence. It is important to note that
board representation should imply
meaningful board presence. For example,
a group of shareholders having majority
ownership who operate without regard
to the views of the investor may signify
lack of significant influence by investor.
Significant influence may be evidenced
by a right of veto over significant
decisions, influence over dividend or
re-investment policies, guarantees of
indebtedness, extensions of credit,
ownership of warrants, debt obligations
or other securities or the relative size
and dispersion of the holdings of other
shareholders; however, significant
influence may exist over an entity that is
controlled by another party.
The assessment of significant influence at

border line cases e.g. when the investor
holds investment closer to 20 per cent
(for example, between 18 to 22 per cent)
of voting rights becomes an area which
requires careful assessment of facts and
circumstances.
The standard also provides qualitative
indicators of the existence of significant
influence. They are as following:
a. representation on the Board of
Directors or equivalent governing body
of the investee
b. participation in policy-making
processes, including participation in
decisions about dividends or other
distributions
c. material transactions between the
entity and its investee
d. interchange of managerial personnel
e. provision of essential technical
information.
15
Regulatory
updates
The MCA rationalises norms
relating to consolidated
financial statements and
internal financial controls
system
The Companies Act, 2013 (the Act) was
largely operationalised from 1 April 2014.
The Ministry of Corporate Affairs (MCA)
vide notifications dated 14 October 2014
has amended/clarified provisions relating
to:
the preparation of consolidated financial
statements (CFS) by an intermediate
wholly-owned subsidiary in India
amended to provide an exemption
that an intermediate wholly-owned
subsidiary company incorporated in
India would not be required to prepare
CFS. However, the requirements to
prepare CFS remain unchanged for
those intermediate wholly-owned
subsidiary company whose immediate
parent is a company incorporated
outside India.
statements which are not to be

repeated in CFS.
The amendments/clarifications are
applicable from 14 October 2014.
For an overview of these amendments,
please refer to KPMG in Indias First Notes
dated 16 October 2014.
(Source: MCA notifications dated 14 October 2014)
The RBI reviews guidelines

on joint lenders forum and
corrective action plan
The Reserve Bank of India (RBI) on 30
January 2014 had released a Framework
for Revitalising Distressed Assets in the
Economy (the Framework) effective
from 1 April 2014. The Framework lays
down guidelines for early recognition of
financial distress, taking prompt steps
for resolution, and thereby attempting
to ensure fair recovery for lending
institutions.
the preparation of CFS by companies

that does not one or more subsidiary
but have just an associate or a
joint venture amended to grant a
transition period for the financial year
commencing 1 April 2014 and ending
on 31 March 2015. After 31 March
2015, this relief will not be available.
For operationalising the above Framework,

the RBI has issued various notifications
that provide guidelines on refinancing
of project loans, sale of non-performing
assets by banks, guidelines on formation
of joint lenders forum, adoption of
corrective action plan and other regulatory
measures.
reporting on the internal financial

control systems by auditors, mandatory
for financial years commencing on or
after 1 April 2015 amended to grant a
transition period.
The RBI has received representations

from banks and the Indian Banks
Association stating that difficulties
are being faced by them in effective
implementation of the Framework.
Therefore, on 21 October 2014, the RBI
has introduced certain changes in the
Framework and its guidelines.
the Schedule III-related disclosures

made in stand-alone financial
Following are some of the important

changes in the Framework and its
guidelines:
Accelerated provisioning would apply
only on the bank having responsibility
to convene JLF and not on all the
lenders in consortium/multiple banking
arrangement
In cases where repayment proceeds
not appropriated to lenders as per
agreed terms, account in the books of
the escrow maintaining bank would
have following repercussions:
it would attract the asset classification
which is lowest among the lending
member banks
it would be subject to accelerated
provision instead of normal provision
and such accelerated provision will be
applicable for a period of one year from
the effective date of provisioning or till
rectification of the error, whichever is
later.
Clarified reporting requirements of cash
credit and overdraft accounts
Banks that they do not wish to commit
additional finance will have an exit
option only by arranging their share of
additional finance to be provided by a
new or existing creditor.
For an overview of these changes, please
refer to KPMG in Indias First Notes dated
30 October 2014.
(Source: RBIs circular dated 21 October 2014
RBI/2014-15/271)
16
Working group on harmonising

IRDA corporate governance
guidelines and disclosures with
the Companies Act, 2013
The Insurance Regulatory and
Development Authority (IRDA) has
decided to constitute a working group for
harmonising IRDAs corporate governance
guidelines and disclosures with the
Companies Act, 2013 (2013 Act). The
working group will, inter-alia:
recommend changes, if any, to
be made to insurance regulations
especially on a) corporate social
responsibility b) related party
transactions c) financial statements
undertake comprehensive review
of the IRDAs guidelines on
corporate governance especially
on a) composition of board and its
committees b) provisions relating to
independent directors c) appointment
and responsibility of directors,
auditors, company secretary and
other key management personnel d)
disclosure and reporting requirements
e) provisions relating to remunerations
of CEO, managing director/whole-time
directors
undertake comprehensive review of
the IRDAs guidelines on appointment
of auditors and on registration,
accounting, amalgamation and
issuance of capital by insurance
companies
make any other recommendations as it
may deem fit.
The group should complete the task
within four months from the date of its
formation.
(Source: IRDAs order: IRDA/F&A/CG/ORD/225/10/2014
dated 14 October 2014)
Amendment to Schedule VII of

the Companies Act, 2013
Schedule VII of the Companies Act,
2013 list various activities which may be
included by companies in their Corporate
Social Responsibility Policies. The MCA
has amended Schedule VII to include
following additional activities:
Contribution to the Swach Bharat Kosh
set up by the central government for
promotion of sanitation
Contribution to the Clean Ganga Fund
set up by the central government for
rejuvenation of river Ganga.
The notification comes into force from 24

October 2014.
(Source: MCA notification dated 24 October 2014)
IFRS Convergence: ICAI

issues exposure drafts on
financial instruments, revenue
recognition and first time
adoption of Indian Accounting
Standards
As part of the initiatives towards Indias
convergence with IFRS from 2016-17,
the Accounting Standards Board of the
Institute of Chartered Accountants of India
(ICAI) has recently issued exposure drafts
on Ind AS 109, Financial Instruments, Ind
AS 115, Revenue from Contracts with
Customers and Ind AS 101, First-time
Adoption of Indian Accounting Standards.
continuous period of three financial years

can not be re-appointed as a director of
that company or any other company for
a period of five years from the date on
which the said company fails to do so.
Thus, in addition to the above extension of
the scheme, the MCA has clarified that for
companies who have filed balance sheets
and annual returns on or after 1 April 2014
but before the scheme became effective
i.e. 15 August 2014, the disqualification
under the aforesaid section will apply only
for prospective defaults, if any, by such
companies.
(Source: MCAs General circular No. 40/2014 dated 15
October 2014 and General circular No. 41/2014 dated
15 October 2014)
While the exposure drafts on Ind AS 115

and 109 are in line with the requirements
of the corresponding International
Financial Reporting Standards (IFRS) (IFRS
9, Financial Instruments and IFRS 15,
Revenue from Contracts with Customers),
the Ind AS 101 has certain India specific
transition requirements such as deemed
cost of property, plant and equipment,
leases and non-current assets held for sale
and discontinued operations etc. from the
IFRS 1, First time adoption of International
Financial Reporting Standards, as issued
by the International Accounting Standards
Board.
[Source: Exposure Draft Indian Accounting Standard
(Ind AS) 109, Financial Instruments, Exposure Draft
Indian Accounting Standard (Ind AS) 115, Revenue
from Contracts with Customers and Ind AS 101,
First-time Adoption of Indian Accounting Standards as
released by the ICAI]
Extension of the Company

Law Settlement Scheme and
disqualification of directors
In order to grant relief to the companies
who had defaulted in filing their annual
returns and financial statements within
the prescribed time limit, the MCA on 12
August 2014 had decided to introduce
Company Law Settlement Scheme, 2014
(scheme) to be effective from 15 August
2014 to 15 October 2014. On consideration
of requests received from various
stakeholders, the MCA has now extended
the scheme up to 15 November 2014.
Further, section 164(2)(a) of the
Companies Act, 2013 provides that a
person who is or has been a director of
a company which has not filed financial
statements or annual returns for any
17
SEBI (Share Based Employee

Benefits) Regulations, 2014
On 28 October 2014, the Securities
and Exchange Board of India (SEBI) has
notified Securities and Exchange Board
of India (Share Based Employee Benefits)
Regulations, 2014 (regulations). These
regulations replace the existing SEBI
(Employee Stock Option Scheme and
Employee Stock purchase Scheme)
guidelines, 1999 (erstwhile guidelines).
The regulations will become applicable
from the date of their publication in
the Official gazette (28 October 2014).
Following are the key highlights of the
regulations:
As compared to the erstwhile guidelines,
the new regulations are also applicable
to a) stock appreciation rights schemes
b) general employee benefits schemes
c) retirement benefit schemes in addition
to employee stock option schemes and

employee stock purchase schemes.
expands due to capital expansion

undertaken by the company.
The regulations contain detailed

requirements in case of implementation of
schemes through trusts for example:
The regulations provide that any company

implementing any of the share base
schemes should follow the requirements
of the Guidance Note on accounting
for employee share based payments
or accounting standards as may be
prescribed by the Institute of Chartered
Accountants of India, including disclosure
requirements prescribed therein.
minimum provisions to be included in

the trust deed
appointment of trustees
voting by trustees
requirements for secondary acquisition
of shares by the trust, etc.
The requirement of composition of
compensation committee has been
aligned with that of the Companies Act,
2013.
The regulations have specified provisions

to transition to the regulations.
(Source: SEBI (Share Based Employee Benefits)
Regulations, 2014 as issued by SEBI on 28 October
2014)
Additional items requiring shareholders

approval have been specified including
secondary acquisition for implementation
of the schemes and secondary acquisition
by the trust in case the share capital
18
KPMG in India offices

Ahmedabad
Commerce House V
9th Floor, 902 & 903
Near Vodafone House,
Corporate Road, Prahlad Nagar
Ahmedabad - 380 051.
Tel: +91 79 4040 2200
Fax: +91 79 4040 2244
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Maruthi Info-Tech Centre
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Koramangala, Bengaluru 560 071
Tel: +91 80 3980 6000
Fax: +91 80 3980 6999
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8-2-618/2
Reliance Humsafar, 4th Floor
Road No.11, Banjara Hills
Hyderabad 500 034
Tel: +91 40 3046 5000
Fax: +91 40 3046 5299
Kochi
Syama Business Center,
3rd Floor, NH By Pass Road,
Vytilla, Kochi 682019
Tel: +91 484 302 7000
Fax: +91 484 302 7001
Chandigarh
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Tel: +91 172 393 5777/781
Fax: +91 172 393 5780
Kolkata
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Tower 1,Godrej Waterside,
Sector V,Salt Lake,
Kolkata 700091
Tel: +91 33 44034000
Fax: +91 33 44034199
Chennai
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Nungambakkam
Chennai 600 034
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Fax: +91 44 3914 5999
Mumbai
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Tel: +91 20 3058 5764/65
Fax: +91 20 3058 5775
www.kpmg.com/in
19
20
Introducing IFRS Notes

IFRS Convergence: ICAI issues exposure drafts on financial instruments and revenue recognition
As part of the initiatives towards Indias convergence with IFRS from 2016-17, the Accounting Standards
Board of the Institute of Chartered Accountants of India has recently issued exposure drafts on Ind AS
109, Financial Instruments (ED on financial instruments) and Ind AS 115, Revenue from Contracts with
Customers (ED on revenue).
These exposure drafts are in line with the requirements of the corresponding International Financial
Reporting Standards (IFRS) (IFRS 9, Financial Instruments and IFRS 15, Revenue from Contracts with
Customers), the International Accounting Standards Board has recently issued.
In this issue of IFRS Notes, we have provided an overview of these exposure drafts along with key
impact areas.
Missed an issue of Accounting and Auditing Update or First Notes?

October 2014
The October 2014
edition of the
Accounting and
Auditing Update
provides insights
into the microfinance
sector in India and
its distinct story of a
turnaround, continuing
challenges and
opportunities.
We cover an article on the Companies Act,
2013 reporting on internal financial controls
and highlight some of the critical aspects of
these requirements. This month we have
covered some additional perspectives on
related party transactions.
This issue also covers recent changes to
the tax audit report and key accounting and
reporting issues associated with the foreign
direct investment in the retail cash and carry
sector.
As is the case each month, we cover key
regulatory developments during the recent
past including a summary of the proposed
amendments to Ind AS relating to carve-outs/
ins from IFRS.
The RBI reviews

guidelines on joint
lenders forum and
corrective action plan
The Reserve Bank of
India (RBI) on 30 January
2014 had released
a Framework for
Revitalising Distressed
Assets in the Economy
(the Framework)
effective from 1 April 2014. The Framework lays
down guidelines for early recognition of financial
distress, taking prompt steps for resolution, and
thereby attempting to ensure fair recovery for
lending institutions.
For operationalising the above Framework, the
RBI has issued various notifications that provide
guidelines on refinancing of project loans, sale
of non-performing assets by banks, guidelines
on formation of joint lenders forum, adoption
of corrective action plan and other regulatory
measures.
The RBI has received representations from
banks and the Indian Banks Association stating
that difficulties are being faced by them in
effective implementation of the Framework.
Therefore, on 21 October 2014, the RBI has
introduced certain changes in the Framework
and its guidelines.
Feedback/Queries can be sent to aaupdate@kpmg.com

Back issues are available to download from:
www.kpmg.com/in
KPMG in India is
pleased to present
Voices on Reporting
a monthly series of
knowledge sharing
calls to discuss current and emerging issues
relating to financial reporting.
On September 24, 2014 we covered two topics:
1. Amendments relating to tax audit reports
in India: There are a number of significant
amendments to the Form No. 3CD Due to
the amendments made in the Form No. 3CD,
the reporting responsibilities of the assessee
and the auditor have increased considerably.
2. Recent amendments to the clause 49 of the
Equity Listing Agreement: To address the
concerns industry associations, companies
and other market participants and to help the
listed companies to ensure compliance with
the provisions of the revised clause 49, the
Securities and Exchange Board of India (SEBI)
vide circular dated 15 September 2014 has
amended some of the requirements of the
revised clause 49.
In our call, we discussed these amendments
and developments.
Latest insights and updates are now available on the KPMG India app.
Scan the QR code below to download the app on your smart device.

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely
information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without
appropriate professional advice after a thorough examination of the particular situation.
2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss
entity. All rights reserved.
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ACCOUNTING

The capital markets are at an all-time high

This month we also examine some of

Deputy Head of Audit, KPMG in India

Partner and Head,

This article aims to

challenges faced by mutual funds industry

Financial reporting framework for

Additional total expense ratio

1. Association of Mutual Funds in India (AMFI) website

permissible expenses are borne by

Investors education and awareness

regulatory guidance on the treatment of

nature and period over which

distributors are required to render

distributor specially period of claw back

Increase in net worth of AMCs

reserves. However, free reserves is not

2013 covers the entire spectrum of

4. Securities and Exchange Board of India (Mutual Funds)

accounting for fixed assets

This article aims to

in India with respect to property, plant and equipment.

requirements of Tax Accounting Standards (Income Computation and

Background and setting the

Key impact areas on Ind AS

Under the current accounting standards

While both standards are similar in many

Administration and other general

overheads - In general, administration

protect companies from the impact

rates, Indian GAAP provides an option

Asset retirement obligations - Ind AS

16 requires an estimate of the costs for

arrangements - In case of deferred

to be depreciated over its useful life.

Indian GAAP, even though accounting

16 requires each part of the item of

the above, there are certain other

(e.g. from written down value to

a prospective impact. However,

useful life estimate and method of

difference between the depreciation

incurred and for A there is no qualifying

Transitional provisions under

unlike the current accounting practice/

Ind AS requirements, ICDS does not

Ind AS 101, First Time Adoption of Indian

as discussed earlier, foreign exchange

This requirement, if implemented in its

as per both Indian GAAP and Ind AS,

Income Computation and

differences that are currently

The Companies Act, 2013

This article aims to

deposits by companies under the Companies Act, 2013.

The provisions of the 2013 Act, relating to acceptance of deposits,

passing a resolution in its general meeting according to the

eligible company as defined in the Rules).

Any amount received from any other

Only an eligible company can

repaying such deposits and interest

Introduction of deposit insurance

Cap on interest rates on deposits