Month: August 2021

Management Notes

Financial statement Principles

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The cost principle

The cost principle, also known as the historical cost principle, states that virtually everything the company owns or controls (assets) must be recorded at its value at the date of acquisition. For most assets, this value is easy to determine as it is the price agreed to when buying the asset from the vendor. There are some exceptions to this rule, but always apply the cost principle unless FASB has specifically stated that a different valuation method should be used in a given circumstance.

The primary exceptions to this historical cost treatment, at this time, are financial instruments, such as stocks and bonds, which might be recorded at their fair market value. This is called mark-to-market accounting or fair value accounting and is more advanced than the general basic concepts underlying the introduction to basic accounting concepts; therefore, it is addressed in more advanced accounting courses.

Expense Recognition (Matching) Principle

The expense recognition principle (also referred to as the matching principle) states that we must match expenses with associated revenues in the period in which the revenues were earned. A mismatch in expenses and revenues could be an understated net income in one period with an overstated net income in another period. There would be no reliability in statements if expenses were recorded separately from the revenues generated.

Revenue Recognition Principle

The revenue recognition principle directs a company to recognize revenue in the period in which it is earned; revenue is not considered earned until a product or service has been provided. This means the period of time in which you performed the service or gave the customer the product is the period in which revenue is recognized.

There also does not have to be a correlation between when cash is collected and when revenue is recognized. A customer may not pay for the service on the day it was provided. Even though the customer has not yet paid cash, there is a reasonable expectation that the customer will pay in the future. Since the company has provided the service, it would recognize the revenue as earned, even though cash has yet to be collected.

Management Notes

Interim Financial Reporting

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The objective of IAS 34 is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in financial statements presented for an interim period.

The objective of this Standard is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in a complete or condensed financial statements for an interim period. Timely and reliable interim financial reporting improves the ability of investors, creditors, and others to understand an enterprise’s capacity to generate earnings and cash flows, its financial condition and liquidity.

An interim financial report should include, at a minimum, the following components:

(a) Condensed balance sheet

(b) Condensed statement of profit and loss

(c) Condensed cash flow statement

(d) Selected explanatory notes.

Components:

A complete set of financial statements normally includes:

(a) Balance sheet

(b) Statement of profit and loss

(c) Cash flow statement

(d) Notes including those relating to accounting policies and other statements and explanatory material that are an integral part of the financial statements.

In the interest of timeliness and cost considerations and to avoid repetition of information previously reported, an enterprise may be required to or may elect to present less information at interim dates as compared with its annual financial statements.

The benefit of timeliness of presentation may be partially offset by a reduction in detail in the information provided. Therefore, this Standard requires preparation and presentation of an interim financial report containing, as a minimum, a set of condensed financial statements. The interim financial report containing condensed financial statements is intended to provide an update on the latest annual financial statements. Accordingly, it focuses on new activities, events, and circumstances and does not duplicate information previously reported.

This Standard does not prohibit or discourage an enterprise from presenting a complete set of financial statements in its interim financial report, rather than a set of condensed financial statements. This Standard also does not prohibit or discourage an enterprise from including, in condensed interim financial statements, more than the minimum line items or selected explanatory notes as set out in this Standard. The recognition and measurement principles set out in this Standard apply also to complete financial statements for an interim period, and such statements would include all disclosures required by this Standard (particularly the selected disclosures in paragraph as well as those required by other Accounting Standards.

The periods to be covered by the interim financial statements are as follows: [IAS 34.20]

balance sheet (statement of financial position) as of the end of the current interim period and a comparative balance sheet as of the end of the immediately preceding financial year statement of comprehensive income (and income statement, if presented) for the current interim period and cumulatively for the current financial year to date, with comparative statements for the comparable interim periods (current and year-to-date) of the immediately preceding financial year statement of changes in equity cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year statement of cash flows cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year.

Note disclosures

The explanatory notes required are designed to provide an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the last annual reporting date. IAS 34 states a presumption that anyone who reads an entity’s interim report will also have access to its most recent annual report. Consequently, IAS 34 avoids repeating annual disclosures in interim condensed reports. [IAS 34.15].

The main differences between interim and annual statements can be found in the following areas:

  • Some accompanying disclosures are not required in interim financial statements, or can be presented in a more summarized format.
  • The revenues generated by a business may be significantly impacted by seasonality. If so, interim statements may reveal periods of major losses and profits, which are not apparent in the annual financial statements.
  • Accrual basis. The basis upon which accrued expenses are made can vary within interim reporting periods. For example, an expense could be recorded entirely within one reporting period, or its recognition may be spread across multiple periods. These issues can make the results and financial positions contained within interim periods appear to be somewhat inconsistent, when reviewed on a comparative basis.
Management Notes

Long Term Construction Contracts

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Construction workers tend to work based on contractors they make with the owners of property. Traditionally these contractors could choose from a variety of accounting procedures to account for the revenue they received from such contracts.

Long-term contracts are contracts for the building, installation, construction, or manufacturing in which the contract is completed in a later tax year than when it was started. However, a manufacturing contract only qualifies if it is for the manufacture of a unique item for a particular customer or is an item that ordinarily takes more than 1 year to manufacture.

Long term contracts frequently provide that the seller (builder) may bill the purchaser at intervals, as it reaches various points in the project. Examples of long-term contracts are construction-type contracts, development of military and commercial aircraft, weapons-delivery systems, and space exploration hardware. When the project consists of separable units, such as a group of buildings or miles of roadway, contract provisions may provide for delivery in installments. In that case, the seller would bill the buyer and transfer title at stated stages of completion, such as the completion of each building unit or every 10 miles of road. The accounting records should record sales when installments are “delivered.”

A company satisfies a performance obligation and recognizes revenue over time if at least one of the following three criteria is met:

  • The customer simultaneously receives and consumes the benefits of the seller’s performance as the seller performs.
  • The company’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced.
  • The company’s performance does not create an asset with an alternative use. For example, the asset cannot be used by another customer.

In addition to this alternative use element, at least one of the following criteria must be met:

(a) Another company would not need to substantially re-perform the work the company has completed to date if that other company were to fulfill the remaining obligation to the customer.

(b) The company has a right to payment for its performance completed to date, and it expects to fulfill the contract as promised.

Long-Term Methods of Accounting

There are 2 primary methods of accounting to determine when revenue is recognized for long-term contracts:

  • Completed contract method (CCM)
  • Percentage of completion method (PCM)

Completed Contract Method

Using the completed contract method, the taxpayer does not recognize revenue until the contract is completed and accepted by the customer. Except for home construction contracts, CCM can only be used by small contractors for contracts with an estimated life that does not exceed 2 years. There should be no terms in the contract with the only purpose of deferring tax.

The CCM is required for home construction contracts that are for the construction of residential buildings with 4 or fewer dwelling units, where at least 80% of the estimated cost is for the dwelling units and related land improvements, even if the contract is for longer than 2 years or the contractor is a large contractor. Other types of construction contracts qualify for the completed contract method if they satisfy the general CCM requirements.

Percentage of Completion Method

Except for home construction contracts, large contractors must use the percentage of completion method for long-term contracts. PCM must also be used to determine liability under the alternative minimum tax (AMT) system. Under the PCM, the amount of progress on the project is determined by the total costs actually incurred as compared to the total estimated cost. Hence, revenue in any given year is determined by the actual contract costs incurred for that year divided by the total estimated cost multiplied by the total contract price:

Reportable Income = Contract Price × Annual Contract Cost/Estimated Total Cost

Management Notes

Framework for Preparation of Financial Statements

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Financial Statements are a structured representation of an entity’s financial position, financial performance, and cash flows, prepared to provide information useful to a wide range of users—investors, lenders, employees, regulators, and the public for making economic decisions. Under Ind AS 1, they present the results of management’s stewardship of resources entrusted to it. A complete set comprises the Balance Sheet, Statement of Profit and Loss, Statement of Changes in Equity, Cash Flow Statement, and Notes, including significant accounting policies. Ind AS 1 lays down overall requirements for presentation, structure, and minimum content, ensuring comparability both across periods and across entities globally.

Framework for Preparation of Financial Statements:

1. Objective of the Framework

The Framework for Preparation and Presentation of Financial Statements sets out the concepts underlying the preparation of general-purpose financial statements for external users. It assists standard-setters in developing consistent accounting standards, helps preparers apply standards and deal with topics not yet covered by a specific standard, and aids auditors in forming opinions on compliance. It also helps users interpret financial information and provides those interested in ICAI’s work with insight into its approach to formulating standards. The Framework itself is not an accounting standard and does not override any specific Ind AS in case of conflict between the two.

2. Scope of the Framework

The Framework deals with the objective of financial statements, qualitative characteristics determining usefulness of information, definitions and recognition criteria for the elements of financial statements (assets, liabilities, equity, income, expenses), and concepts of capital and capital maintenance. It applies to financial statements of all commercial, industrial, and business entities, whether in the public or private sector, and covers general-purpose statements including consolidated statements. It does not specifically address special purpose reports, such as prospectuses or computations for tax purposes, though many principles may still apply usefully to such reports where relevant.

3. Objective of Financial Statements

The objective of financial statements is to provide information about the financial position, performance, and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. Financial statements prepared for this purpose meet the common needs of most users, since almost all users are making economic decisions such as whether to buy, hold, or sell an investment, assess management’s accountability, or evaluate the entity’s ability to pay employees and meet obligations. They do not, however, provide all information users may need, as most reflect financial effects of past events only.

4. Underlying Assumptions – Accrual Basis

Financial statements are prepared on the accrual basis of accounting, under which transactions and events are recognised when they occur, not merely when cash is received or paid. They are recorded in the accounting records and reported in financial statements of the periods to which they relate. This basis provides information not only about past transactions involving payment or receipt of cash but also about obligations to pay cash in future and resources representing cash to be received in future, thereby offering the most useful information to users for evaluating past performance and predicting future economic outcomes.

5. Underlying Assumptions – Going Concern

Financial statements are normally prepared on the assumption that an entity will continue in operation for the foreseeable future, without any intention or necessity of liquidation, ceasing trade, or curtailing materially the scale of operations. Where such intention or necessity exists, financial statements may need to be prepared on a different basis, and if so, the basis used must be disclosed. The going concern assumption underlies the classification of assets and liabilities as current or non-current and justifies carrying assets at cost rather than liquidation value, reflecting continuity of business operations in the ordinary course.

6. Qualitative Characteristics – Understandability and Relevance

Understandability requires that information in financial statements be readily comprehensible to users with reasonable business, economic, and accounting knowledge, and a willingness to study the information diligently; complex matters should not be excluded merely because they may be too difficult for some users. Relevance requires that information influence the economic decisions of users by helping them evaluate past, present, or future events, or confirm/correct past evaluations. The relevance of information is affected by its nature and materiality, with materiality depending on the size of the item or error judged in the surrounding circumstances.

7. Qualitative Characteristics – Reliability

Information is reliable when it is free from material error and bias and can be depended upon by users to represent faithfully what it purports to represent. Reliability encompasses faithful representation of transactions, substance over legal form, neutrality (freedom from bias), prudence (exercise of caution in conditions of uncertainty without creating hidden reserves or excessive provisions), and completeness within the bounds of materiality and cost. An omission can cause information to be false or misleading, and thus unreliable and deficient in relevance, making completeness within reasonable cost-benefit limits essential to reliable financial reporting.

8. Qualitative Characteristics – Comparability

Comparability requires that financial statements be prepared and presented consistently over time within the same entity, and consistently across different entities, enabling users to identify trends in financial position and performance and to compare entities’ relative performance. This implies users must be informed of accounting policies used, any changes in those policies, and the effects of such changes, along with corresponding information for preceding periods. Comparability should not, however, be allowed to become an obstacle to the introduction of improved accounting standards, since static consistency should never override genuinely more relevant or reliable financial reporting practices.

9. Elements of Financial Statements

Financial statements portray the financial effects of transactions and events by grouping them into broad classes called elements. Elements directly related to financial position are assets, liabilities, and equity, while elements directly related to performance are income and expenses. Assets are resources controlled by the entity from past events, expected to yield future economic benefits; liabilities are present obligations from past events, expected to result in outflow of resources; equity is the residual interest in assets after deducting liabilities. Income increases economic benefits, while expenses represent decreases, each affecting equity other than owner contributions or distributions.

10. Recognition of Elements

Recognition is the process of incorporating an item in the balance sheet or statement of profit and loss that meets the definition of an element and satisfies two criteria: it is probable that any future economic benefit associated with the item will flow to or from the entity, and the item has a cost or value that can be measured with reliability. An item that fails to meet recognition criteria at one point may qualify later due to subsequent circumstances or events. Items not meeting recognition criteria may still warrant disclosure in notes or explanatory material accompanying financial statements.

Preparation of Financial Statements:

Particular Description
1. Statement of Financial Position Shows assets, liabilities and equity of the entity at the reporting date.
2. Statement of Profit and Loss Shows income, expenses and profit or loss for the reporting period.
3. Other Comprehensive Income Presents items of income and expense recognised outside profit or loss, as required by Ind AS.
4. Statement of Changes in Equity Shows changes in equity, reserves and retained earnings during the reporting period.
5. Statement of Cash Flows Shows cash inflows and outflows from operating, investing and financing activities.
6. Notes to Financial Statements Provides accounting policies, explanations, supporting details and additional disclosures.
7. Comparative Information Comparative figures for the previous period are generally presented to help users understand changes in financial position and performance.
8. Going Concern Financial statements are normally prepared assuming that the entity will continue its operations for the foreseeable future.
9. Accrual Basis Financial statements are generally prepared using the accrual basis of accounting, except for cash flow information.
10. Consistency Presentation and classification of items should be consistent from one period to another unless a change is required or provides more reliable and relevant information.

Financial Statements: Journal entries:

The preparation of financial statements involves transferring balances and recording necessary adjustments. The following are common journal entries relevant to the preparation of financial statements:

Transaction / Adjustment Journal Entry
Closing revenue accounts Revenue A/c Dr.

→ To Statement of Profit and Loss A/c
Closing expense accounts Statement of Profit and Loss A/c Dr.

→ To Expense A/c
Profit for the year Statement of Profit and Loss A/c Dr.

→ To Retained Earnings A/c
Loss for the year Retained Earnings A/c Dr.

→ To Statement of Profit and Loss A/c
Depreciation Depreciation Expense A/c Dr.

→ To Accumulated Depreciation A/c
Outstanding expenses Expense A/c Dr.

→ To Outstanding Expense A/c
Prepaid expenses Prepaid Expense A/c Dr.

→ To Expense A/c
Accrued income Accrued Income A/c Dr.

→ To Income A/c
Income received in advance Income A/c Dr.

→ To Income Received in Advance A/c
Provision for expense Expense A/c Dr.

→ To Provision A/c
Current tax provision Current Tax Expense A/c Dr.

→ To Current Tax Liability A/c
Deferred tax liability Income Tax Expense A/c Dr.

→ To Deferred Tax Liability A/c
Deferred tax asset Deferred Tax Asset A/c Dr.

→ To Income Tax Expense A/c
Transfer to general reserve Retained Earnings A/c Dr.

→ To General Reserve A/c
Dividend declared

Retained Earnings A/c Dr.

→ To Dividend Payable A/c
Management Notes

Public Company reporting requirements

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In June 2018, the Indian government notified the Companies (Significant Beneficial Ownership) Rules, 2018 (the “SBO Rules”) imposing reporting obligations on individuals having significant beneficial ownership in companies However, the SBO Rules did not provide a great deal of clarity on the nature and extent of disclosure, and therefore, the reporting obligation was put on hold.

Pursuant to consultations with various stakeholders, the Indian government has notified the Companies (Significant Beneficial Ownership) Amendment Rules, 2019 the (“SBO Amendment Rules”).  Now, a “significant beneficial owner” will mean any individual (acting alone or together or through one (1) or more persons or a trust) who possesses one (1) or more of the following rights in an Indian company (the “Reporting Company”):

  • Holds indirectly, or along with any direct holdings, at least 10% of the shares;
  • Holds indirectly, or along with any direct holdings, at least 10% of the voting rights in the shares;
  • Holds indirectly, or along with any direct holdings, the right to receive at least 10% of the total distributable dividend or any other distribution in a financial year; or
  • Has the right to exercise or actually exercises significant influence or control other than by virtue of his or her direct shareholding. For this purpose, “significant influence” has been defined as the power to participate in the financial and operating policy decisions of the reporting company.

In respect of the foregoing rights, the SBO Amendment Rules clarify that an individual cannot be considered as a significant beneficial owner if he or she holds the above-mentioned rights or entitlements directly.  Further, the SBO Amendment Rules define the term “indirectly” in respect of each possible category of member of a Reporting Company apart from an individual.  For instance, if the member is a body corporate, the individual must hold either a majority stake in that body corporate or a majority stake in the ultimate holding company of such body corporate.  For this purpose, a “majority stake” will mean holding:

  • More than 50% of the equity share capital of the body corporate;
  • More than 50% of the voting rights in the body corporate; or
  • The right to receive more than 50% of the distributable dividend or any other distribution by the body corporate.

The deadline for significant beneficial owners to report significant beneficial ownership interest to their respective Reporting Companies under Form No. BEN-1 has been set as May 9, 2019.  This reporting obligation is not applicable, among others, to alternate investment funds, real estate investment funds and government owned entities or local authorities.  Upon receipt of the disclosure, the Reporting Company will have to comply with obligations of maintaining registers and filing returns as per the SBO Rules.

In our view, the SBO Amendment Rules provide much needed clarity on the meaning of significant beneficial ownership, enabling such owners and Reporting Companies to identify whether their interest is required to be reported. Moreover, while the compliance burden still remains, the streamlining of the definition of indirect holdings has exempted a large number of individuals who were previously considered to be included under the purview of the SBO Rules.

Verification of registered office address

The Indian government has introduced a reporting requirement for verification of the details of the registered office of an Indian company.  Pursuant to the new requirement, all companies incorporated on or before December 31, 2017 will be required to file Form INC-22A on or before April 25, 2019 and provide the following:

  • Latitude and longitude of the registered office address;
  • Photograph of the registered office showing the inside and outside of the building;
  • Photograph of at least one (1) director or key managerial personnel, who will affix his or her signature on the form, while such director or key managerial personnel is inside the registered office;
  • E-mail address of the company; and
  • Details of the current statutory auditors, cost auditors, company secretary, chief financial officer and directors of the company.

This requirement will not apply to companies which:

(i) Have been struck off from the register of companies

(ii) Are in the process of being struck off

(iii) Are under liquidation

(iv) Have been amalgamated or dissolved.

If a company fails to file Form INC-22A before the due date, it will not be permitted to file various other e-forms mandatorily required under the Act until Form INC-22A has been duly filed along with a penalty of INR10,000 (Indian Rupees Ten Thousand).

The objective behind introducting this reporting requirement is to ensure that companies maintain active and operational registered offices.  In our view, this reporting requirement is unlikely to achieve this objective, as practically speaking, there is no way for the authorities to verify whether the address provided by a company actually continues to function as the registered office over a period of time.  Moreover, the requirement for providing photographs of the director and the office building appear to be unnecessary and cumbersome.

Reporting for dealings with MSEs

In November 2018, the Indian government had directed all companies who receive goods or services from MSEs (which are defined based on capital investments and turnover thresholds) and have delayed payments to such MSEs beyond forty-five (45) days from the date of acceptance of such goods or services to file a half-yearly return disclosing the details of such pending dues.

Now, the Indian government has directed all companies to provide details of amounts due to MSEs beyond forty-five (45) days as on January 22, 2019 in MSME Form 1 along with reasons for the delay in payment.  This reporting will have to be made within thirty (30) days of the date on which the Indian government notifies MSME Form 1, which is pending to be notified as on date.

Moreover, companies will also be required to file details of pending dues by October 31 of each year in respect of dues outstanding during the period from April to September and by April 31 for the period from October to March.

This reporting requirement has been introduced to ensure that MSEs, which do not have access to a large amount of capital, receive payment for their goods and services in a timely manner.  However, in our view, the requirement for filing the return every six (6) months will increase the compliance burden on companies.

  Regulations Disclosure Requirements Frequency
1. SEBI (LODR Regulations 2015 read with SEBI (LODR) Regulations, 2018/19 – Regulation 23(9) – latest amendment-

Disclosures of related party transactions are required to be made on consolidated basis in the format specified in the relevant accounting standards for annual results to the stock exchanges and publish the same on its website

 Within 30 days from the date of publication of its standalone and consolidated financial results for the half year.
Regulation 30

The Board of Directors of the listed entity shall authorize one or more Key Managerial Personnel for the purpose of determining materiality of an event or information and for the purpose of making disclosures to stock exchange(s) under this regulation and the contact details of such personnel shall be also disclosed to the stock exchange(s) and as well as on the listed entity’s website.

  

Event Based
Regulation 31A

All entities falling under promoter and promoter group shall be disclosed separately in the shareholding pattern appearing on the website of all stock exchanges having nationwide trading terminals where the specified securities of the entity are listed, in accordance with the formats specified by SEBI.

  

Within 21 days from the end of each quarter.
Regulation 32 (7A)

Where an entity has raised funds through preferential allotment or qualified institutions placement, the listed entity shall disclose every year, the utilization of such funds during that year in its Annual Report until such funds are fully utilized.

  

Every Year
Regulation 33 (3)(g)

The listed entity shall also submit as part of its standalone and consolidated financial results for the half year, by way of a note, statement of cash flows for the half-year.

  

Half Yearly Disclosure is required to be made alongwith submission of Financial Results.
Regulation 36 (5)

The notice being sent to shareholders for an annual general meeting, where the statutory auditor(s) is/are proposed to be appointed/re-appointed shall include the following disclosures as a part of the explanatory statement to the notice:

(a)  Proposed fees payable to the statutory auditor(s) along with terms of appointment and in case of a new auditor, any material change in the fee payable to such auditor from that paid to the outgoing auditor along with the rationale for such change;

(b) Basis of recommendation for appointment including the details in relation to and credentials of the statutory auditor(s) proposed to be appointed.

  Alongwith Explanatory Statement to AGM Notice.
2. SEBI (Prohibition of Insider Trading) Regulations, 2015 (Last amended on September 17, 2019) Notification on Reporting of Code of Conduct Violations a) As per The board of directors of a listed company are required to make a fair disclosure of unpublished price sensitive information by formulating a policy as prescribed under Regulation (2A) read with regulation 8 and schedule A (under code of fair disclosure) to these regulations [Inserted by SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018] Event Based
b) As per Regulation 6 the disclosure is to be made by the concerned person regarding trading of securities which include trading in derivatives and their traded value.

Note: The disclosures are to be maintained by the company for atleast 5 years.

 Event Based
c) Regulation 7 (2)-

– Every promoter, member of promoter group, designated person and director of the company is required to disclose to the company the number of shared acquired/disposed of.

– Every company shall disclosed regarding the above mentioned transaction to the concerned stock exchange

 –    Within trading days of such transaction.

–    Within 2 trading days from the receipt of disclosure/ from becoming aware of such information.
3. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

(Last amended on February 12, 2018)

 a) As per Regulation 57– Letter of offer shall contain all material disclosures as specified in Schedule VIII of these regulations. Event based
b) As prescribed under Regulation 73; the Issuer shall disclose the details of the issue in the explanatory statement to the notice of General Meeting proposed for passing special resolution. Event based
c) As per Regulation 103 read with Schedule XIX; all material disclosures relating to issue of Indian Depository Receipts which are true, correct and adequate so as to enable the applicants to take an informed investment decision are required to be disclosed in prospectus and abridged prospectus. Event Based
4. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [Last amended on July 29, 2019] See circular SEBI/HO/CFD/DCR1/CIR/P/2019/90 dated 07.08.2019 regarding Disclosure of reasons for encumbrance by promoter of listed companies.

– The listed companies shall disclose the contents of Annexure – II on their websites

 – Event Based

– Within two working days of receipt of such disclosure.
5. SEBI (Depositories and Participants) Regulations, 2018 [Last amended on June 04, 2019] Regulation 31- The disclosure requirements and corporate governance norms as specified for listed companies shall mutatis mutandis apply to a depository. Half yearly
Regulation 76(2)-

– Every Issuer shall submit audit report for the purposes of reconciliation of the total issued capital, listed capital and capital held by depositories in dematerialized form, the details of changes in share capital during the quarter and the in-principle approval obtained by the issuer from all the stock exchanges where it is listed in respect of such further issued capital.

– The issuer shall bring to the notice of the depositories and the stock exchanges, any difference observed in its issued, listed, and the capital held by depositories in dematerialised form

 – Quarterly Basis

– immediately on occurrence of such Event
– Schedule 3 – Part C (iv) – Key management personnel of the depository shall disclose as determined by the depository, all their dealings in securities, directly or indirectly, to the governing board/regulatory oversight committee/ Compliance Officer. – on periodic basis(which could be monthly)
– Schedule 3 – Part C (v) – a) All transactions in securities by the directors and their relatives shall be disclosed to the governing board of the depository.

b) All directors shall also disclose the trading conducted by firms/corporate entities in which they hold twenty percent or more beneficial interest or hold a controlling interest, to the regulatory oversight committee.

– Schedule 3 – Part C (vii) – All directors and key management personnel shall disclose to the governing board any fiduciary relationship in any depository participant or RTA; in case shareholding exceeds five percent in any listed company or in other entities related to the securities markets; any other business interests.

 – Not Specified

– Event Based

– upon assuming office and during their tenure in office

– Event Based
6. SEBI (Foreign Portfolio Investor) Amendment Regulations 2019 Regulation 21(3): A foreign portfolio investor shall fully disclose to the Board any information concerning the terms of and parties to off-shore derivative instruments, by whatever names they are called, entered into by it relating to any securities listed or proposed to be listed in any stock exchange in India. Event based
Regulation 28: A foreign portfolio investor, or any of its employees are required to make disclosure of its interest in any security in publicly accessible media including long or short position in the said security has been made. Event based
7. SEBI (Buy-back of Securities) Regulations 2018 [Last amended on July 29, 2019] Regulation 5 (iv) read with Schedule I to these regulations and Section 68(3) of the Companies Act 2013 – Companies are required to disclose all material facts and details relating to buy-back in the explanatory statement to be annexed with  Notice for General Meeting. Event Based
As prescribed under Regulation 16 (iv) companies are required to make disclosures regarding buy-back by making public announcement. Such announcement shall also include disclosures regarding brokers or stock exchange through which the buy-back is to be made. Within two working days from the date of passing of board/special resolution.
8. Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 [Last amended on June 04, 2019] As per Regulation 21– the recognised stock exchange(s) and the recognised clearing corporation(s) shall disclose to the Board(SEBI), in the format specified by the Board, their shareholding pattern on a quarterly basis. Within fifteen days from the end of each quarter.
As prescribed under Regulation 27 (5);

The compensation given to the key management personnel shall be disclosed in the report of the recognised stock exchange or recognised clearing corporation under section 134 of the Companies Act, 2013.

 To be disclosed in Board’s Report.
9. SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 [last amended on October 09, 2018] Regulation 5-

All material disclosures which are necessary for the subscribers of the non-convertible redeemable preference shares are required to be made in offer documents.

  

–   Event Based
Regulation 16 (3)-

Where the issuer has disclosed the intention to seek listing of non-convertible redeemable preference shares issued on private placement basis, the issuer shall forward the listing application along with the disclosures as specified in Schedule I of these regulations to the recognized stock exchange.

  

–   Within fifteen days from the date of allotment of such non-convertible redeemable preference shares.
Regulation 18 (1)

 

The issuer making a private placement of non-convertible redeemable preference shares and seeking listing thereof on a recognized stock exchange shall make disclosures as specified in Schedule I of these regulations accompanied by the latest Annual Report of the issuer.

  

 

–   Event Based
10. SEBI (Delisting of Equity Shares) Regulations, 2009 – [last amended on July 29, 2019] Regulation 7(1)(d)

In a case falling under clause (a) of regulation 6 (Delisting from only some of the recognised stock exchanges); the fact of delisting shall be disclosed in the first annual report of the company prepared after the delisting

  

–   In first Annual report of the company after delisting.
Regulation 8 (1A)

Prior to granting approval under clause (a) of sub-regulation (1) for delisting of shares, the Board of Directors of the company shall,-

(i)    make a disclosure to the recognized stock exchanges on which the equity shares of the company are listed that the promoters/acquirers have proposed to delist the company;

(ii)  appoint a merchant banker to carry out due-diligence and make a disclosure to this effect to the recognized stock exchanges on which the equity shares of the company are listed;

 On occurrence of event.
11. Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 [Last amended on May 07, 2019] Regulation 19 (3) –

Where the issuer has disclosed the intention to seek listing of debt securities issued on private placement basis, the issuer shall forward the listing application along with the disclosures specified in Schedule I (of the said regulations) to the recognized stock exchange.

 –   Within fifteen days from the date of allotment of such debt securities.
Regulation 23(2) –

Every rating obtained by an issuer shall be periodically reviewed by the registered credit rating agency and any revision in the rating shall be promptly disclosed by the issuer to the stock exchange(s) where the debt securities are listed.

 – On occurrence of event
12. Other Disclosures through various circulars and notifications issued by SEBI recently a) Every listed company is required to disclose the default done by the company vide circular no. LIST/COMP/29/2019-20 dated 24.09.2019 – Event based in terms of Regulation 30(1) and 30(2) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 and all amendments and circulars issued thereunder.
b)      Every listed company is required to disclose the defaults on payment of interest/ repayment of principal amount on loans from banks/ financial institutions and unlisted debt securities vide circular No. SEBI/HO/CFD/CMD1/CIR/P/2019/140 dated November 21, 2019 – The disclosure shall be made promptly, but not later than 24 hours from the 30th day of such default.

Management Notes

Revenue recognition Certain Customer Right’s & Obligations

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IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers.

IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after 1 January 2018. On 12 April 2016, clarifying amendments were issued that have the same effective date as the standard itself.

Contracts with customers will be presented in an entity’s statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity’s performance and the customer’s payment.

A contract liability is presented in the statement of financial position where a customer has paid an amount of consideration prior to the entity performing by transferring the related good or service to the customer.

Where the entity has performed by transferring a good or service to the customer and the customer has not yet paid the related consideration, a contract asset or a receivable is presented in the statement of financial position, depending on the nature of the entity’s right to consideration. A contract asset is recognised when the entity’s right to consideration is conditional on something other than the passage of time, for example future performance of the entity. A receivable is recognised when the entity’s right to consideration is unconditional except for the passage of time.

Contract assets and receivables shall be accounted for in accordance with IFRS. Any impairment relating to contracts with customers should be measured, presented and disclosed in accordance with IFRS 9. Any difference between the initial recognition of a receivable and the corresponding amount of revenue recognised should also be presented as an expense, for example, an impairment loss.

Disclosures

The disclosure objective stated in IFRS 15 is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Therefore, an entity should disclose qualitative and quantitative information about all of the following:

  • Its contracts with customers;
  • The significant judgments, and changes in the judgments, made in applying the guidance to those contracts;
  • Any assets recognised from the costs to obtain or fulfil a contract with a customer.

Entities will need to consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the requirements. An entity should aggregate or disaggregate disclosures to ensure that useful information is not obscured.

In order to achieve the disclosure objective stated above, the Standard introduces a number of new disclosure requirements.

Management Notes

Revenue recognition: 5 Step approach to Revenue Recognition

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The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting in contrast revenues are recognized when cash is received no matter when goods or services are sold.

The revenue recognition principle states that one should only record revenue when it has been earned, not when the related cash is collected.

Cash can be received in an earlier or later period than obligations are met (when goods or services are delivered) and related revenues are recognized that results in the following two types of accounts:

  • Accrued revenue: Revenue is recognized before cash is received.
  • Deferred revenue: Revenue is recognized when cash is received.

Revenue realized during an accounting period is included in the income.

Accounting for Revenue Recognition

If there is doubt in regard to whether payment will be received from a customer, then the seller should recognize an allowance for doubtful accounts in the amount by which it is expected that the customer will renege on its payment. If there is substantial doubt that any payment will be received, then the company should not recognize any revenue until a payment is received.

Also, under the accrual basis of accounting, if an entity receives payment in advance from a customer, then the entity records this payment as a liability, not as revenue. Only after it has completed all work under the arrangement with the customer can it recognize the payment as revenue.

Under the cash basis of accounting, you should record revenue when a cash payment has been received.

Conditions for Revenue Recognition

According to the IFRS criteria, for revenue to be recognized, the following conditions must be satisfied:

  • Risks and rewards of ownership have been transferred from the seller to the buyer.
  • The seller loses control over the goods sold.
  • The collection of payment from goods or services is reasonably assured.
  • The amount of revenue can be reasonably measured.
  • Costs of revenue can be reasonably measured.

Steps in Revenue Recognition from Contracts

The five steps for revenue recognition in contracts are as follows:

  1. Identifying the Contract

All conditions must be satisfied for a contract to form:

  • Both parties must have approved the contract (whether it be written, verbal, or implied).
  • The point of transfer of goods and services can be identified.
  • Payment terms are identified.
  • The contract has commercial substance.
  • Collection of payment is probable.
  1. Identifying the Performance Obligations

Some contracts may involve more than one performance obligation. For example, the sale of a car with a complementary driving lesson would be considered as two performance obligations the first being the car itself and the second being the driving lesson.

Performance obligations must be distinct from each other. The following conditions must be satisfied for a good or service to be distinct:

  • The buyer (customer) can benefit from the goods or services on its own.
  • The good or service is separately identified in the contract.
  1. Determining the Transaction Price

The transaction price is usually readily determined; most contracts involve a fixed amount. For example, a price of Rs.20,000 for the sale of a car with a complementary driving lesson. The transaction price, in this case, would be Rs.20,000.

  1. Allocating the Transaction Price to Performance Obligations

The allocation of the transaction price to more than one performance obligation should be based on the standalone selling prices of the performance obligations.

  1. Recognizing Revenue in Accordance with Performance

Recall the conditions for revenue recognition. Conditions (1) and (2) state that revenue would be recognized when the seller has done what is expected to be entitled to payment. Therefore, revenue is recognized either:

  • At a point in time;
  • Over time

GAAP Revenue Recognition Principles

The Financial Accounting Standards Board (FASB) which sets the standards for U.S. GAAP has the following 5 principles for recognizing revenue:

  • Identify the customer contract
  • Identify the obligations in the customer contract
  • Determine the transaction price
  • Allocate the transaction price according to the performance obligations in the contract
  • Recognize revenue when the performance obligations are met
Management Notes

SEC Reporting Requirements

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The Indian Accounting Standards (Ind AS) shall be applicable to the companies as follows:

  1. On voluntary basis for financial statements for accounting periods beginning on or after April 1, 2015, with the comparatives for the periods ending 31st March, 2015 or thereafter.
  2. On mandatory basis for the accounting periods beginning on or after April 1, 2016, with comparatives for the periods ending 31st March, 2016, or thereafter, for the companies specified below:
  • Companies whose equity and/or debt securities are listed or are in the process of listing on any stock exchange in India or outside India and having net worth of Rs. 500 Crore or more.
  • Companies other than those covered in (2.) (a) above, having net worth of Rs. 500 Crore or more.
  • Holding, subsidiary, joint venture or associate companies of companies covered under (2.) (a) and (2.) (b) above.
  1. On mandatory basis for the accounting periods beginning on or after April 1, 2017, with comparatives for the periods ending 31st March, 2017, or thereafter, for the companies specified below:
  • Companies whose equity and/or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of less than rupees 500 Crore.
  • Companies other than those covered in paragraph (2.) and paragraph (3.)(a) above that is unlisted companies having net worth of rupees 250 crore or more but less than rupees 500 Crore.
  • Holding, subsidiary, joint venture or associate companies of companies covered under paragraph (3.) (a) and (3.) (b) above.
  • However, Companies whose securities are listed or in the process of listing on SME exchanges shall not be required to apply Ind AS. Such companies shall continue to comply with the existing Accounting Standards unless they choose otherwise.
  1. Once a company opts to follow the Indian Accounting Standards (Ind AS), it shall be required to follow the Ind AS for all the subsequent financial statements.
  2. Companies not covered by the above roadmap shall continue to apply existing Accounting Standards prescribed in Annexure to the Companies (Accounting Standards) Rules, 2006.
  3. Banks:
  • Scheduled commercial banks (excluding regional rural banks) will be required to prepare Ind AS based financial statements for accounting periods beginning from 1 April 2019 onwards. Ind AS will be applicable to both consolidated and individual financial statements.
  • Holdings, subsidiaries, joint ventures or associate companies of scheduled commercial banks (excluding regional rural banks) will be required to prepare Ind AS based financial statements for accounting periods beginning from 1 April 2019 onwards.
  • Urban cooperative banks and regional rural banks are not required to apply Ind AS and will continue to comply with the current accounting standards applicable to them.
  1. Non-banking financial companies:
  • Phase I companies required to prepare Ind AS based financial statements for accounting periods beginning from 1 April 2019 onwards (consolidated and individual financial statements) are:
  • Non-banking financial companies having net worth of Rs. 500 crores or more; and holdings, subsidiaries, joint ventures or associate companies of the companies above other than those companies already covered under the general corporate roadmap.
  • Phase II companies required to prepare Ind AS based financial statements for accounting periods beginning from 1 April 2019 onwards (consolidated and individual financial statements) are:
  • Non-banking financial companies whose equity and/or debt securities are listed or are in the process of listing on any stock exchange in India or outside India and having net worth less than Rs .500 crores; non-banking financial companies that are unlisted companies, having net worth of Rs. 250 crores or more but less than Rs. 500 crores; and holdings, subsidiaries, joint ventures or associate companies of the companies above other than those companies already covered under the general corporate roadmap.
  • Non-banking financial companies having net worth below Rs. 250 crores and not covered under the above provisions shall continue to apply the current accounting standards applicable to them.
  1. Insurers: Insurance companies will be required to prepare Ind AS based financial statements for accounting periods beginning from 1 April 2020 onwards. Ind AS will be applicable to both consolidated and individual financial statements.
Management Notes

Statement of Changes in Equity, Reasons, Preparation

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The Statement of Changes in Equity is an important component of financial statements under Ind AS 1. It explains how the equity of an entity has changed during the reporting period. Equity generally includes share capital, reserves, retained earnings and other components of equity. The statement presents the total comprehensive income for the period and shows transactions with owners in their capacity as owners, such as issue of shares and dividends. It also provides a reconciliation of the opening and closing balances of each component of equity. This statement helps shareholders and other users understand the reasons for changes in the entity’s net assets and ownership interests during the reporting period.

Reasons of Changes in Equity:

1. Profit or Loss for the Period

Profit or loss is one of the main reasons for changes in equity. When an entity earns a profit, it generally increases retained earnings and therefore increases total equity. Conversely, a loss reduces retained earnings and total equity. The profit or loss is determined through the Statement of Profit and Loss for the reporting period. After considering applicable tax and other adjustments, the resulting profit or loss is transferred to retained earnings. Therefore, the financial performance of an entity directly affects its equity position. Users can understand this change through the Statement of Changes in Equity.

2. Other Comprehensive Income

Other Comprehensive Income (OCI) includes items of income and expense that are recognised outside profit or loss, as required by specific Ind AS. Examples include certain changes in the fair value of financial assets, remeasurements of defined benefit plans and certain exchange differences. OCI may increase or decrease equity depending on the nature and amount of the items recognised. These amounts are generally accumulated in specific reserves within equity. The Statement of Changes in Equity shows the effect of OCI on each relevant component of equity. Thus, OCI is an important reason for changes in an entity’s equity during the reporting period.

3. Issue of Shares

Issue of new shares increases the equity of an entity because the company receives consideration from shareholders. The amount received may be recognised as share capital and, where applicable, securities premium. For example, when shares are issued for cash, the bank balance increases and the corresponding amount is recognised within equity. A fresh issue of shares can therefore increase the company’s share capital and total equity. The Statement of Changes in Equity presents such transactions separately because they represent transactions with owners in their capacity as owners. This information helps users understand changes arising from additional capital contributed by shareholders.

4. Dividend Distribution

Dividend distribution causes a reduction in equity because it represents a distribution of accumulated profits to shareholders. When a dividend is declared or recognised in accordance with applicable requirements, the amount is generally adjusted against retained earnings or another appropriate component of equity. Once paid, the company’s cash balance also decreases. Dividends are not treated as an expense in determining profit or loss because they represent a distribution to owners. The Statement of Changes in Equity separately presents distributions to owners. This enables shareholders and other users to understand how much of the entity’s accumulated earnings has been distributed rather than retained for future business activities.

5. Transfer Between Reserves

Transfer between reserves can change the balance of individual components of equity without changing total equity. For example, an entity may transfer an amount from retained earnings to a general reserve or another reserve when permitted or required. Such a transfer represents an internal movement within equity and does not constitute income or expense. The Statement of Changes in Equity provides information about these movements so that users can understand changes in each component of equity. Although total equity remains unchanged, the allocation among different reserves changes. Therefore, transfers between reserves are an important component of equity reconciliation under Ind AS 1.

6. Changes in Accounting Policies

A change in an accounting policy can affect equity when the change is required or permitted under the applicable Ind AS and is applied retrospectively, where required. The adjustment may affect opening retained earnings or another relevant component of equity. Comparative amounts may also need to be adjusted in accordance with the applicable requirements. Such changes are not simply treated as current period income or expenses when retrospective application is required. The Statement of Changes in Equity helps users identify the effect of such adjustments on opening and closing equity. Proper disclosure is also necessary to explain the nature and financial effect of the change.

7. Correction of Prior Period Errors

Correction of a material prior period error can result in a change in opening equity. Under applicable Ind AS requirements, material prior period errors are generally corrected retrospectively by restating comparative amounts and adjusting the opening balances of assets, liabilities and equity, where appropriate. Such corrections are not normally included in the current period’s profit or loss. The Statement of Changes in Equity therefore helps show the effect of these adjustments on retained earnings or another relevant equity component. Proper disclosure of the nature and amount of the correction improves transparency and enables users to understand changes that relate to earlier reporting periods.

8. Share Based Payments

Share based payment transactions can affect equity when an entity receives goods or services in exchange for equity instruments or based on equity linked arrangements, where applicable under Ind AS 102. The recognised amount may be recorded as an expense or included in the cost of an asset, with a corresponding increase in equity for equity settled arrangements. This can therefore increase a particular component of equity without an immediate cash contribution from shareholders. The Statement of Changes in Equity reflects the resulting movement in equity. Proper recognition and measurement are necessary to present the financial effect of share based payment transactions accurately.

9. Changes in Ownership Interest

Changes in ownership interest in a subsidiary that do not result in loss of control are generally treated as transactions with owners in their capacity as owners. Such transactions may increase or decrease the equity attributable to owners of the parent. The difference between the consideration and the relevant adjustment to non controlling interests is recognised directly in equity, where applicable. These transactions do not normally affect profit or loss. The Statement of Changes in Equity helps users identify such movements separately. This provides a clear picture of how changes in ownership interests have affected the equity structure of the group.

10. Capital Restructuring

Capital restructuring can result in changes to the components of equity. It may include transactions such as alteration of share capital, reduction of capital, conversion of securities or other legally permitted restructuring activities. Depending on the nature of the transaction, one component of equity may increase while another decreases, or total equity may change. The accounting treatment depends on the specific transaction and applicable legal and accounting requirements. The Statement of Changes in Equity provides a reconciliation of these movements. Proper disclosure enables shareholders and other users to understand how capital restructuring has affected the entity’s equity during the reporting period.

Statement of Changes in Equity:

The Statement of Changes in Equity (SoCE) is a financial statement required under Ind AS 1. It explains the changes in an entity’s equity between the beginning and end of the reporting period. It provides a reconciliation of each component of equity, including share capital, reserves and retained earnings.

Main Elements of SoCE:

Component Explanation

Opening Balance

Shows the equity balance at the beginning of the reporting period.

Profit or Loss

Shows the profit or loss attributable to owners during the period.

Other Comprehensive Income

Shows changes recognised in OCI and accumulated in relevant equity components.

Total Comprehensive Income

Represents profit or loss plus other comprehensive income.

Issue of Shares

Shows increase in equity arising from shares issued during the period.

Dividends

Shows distributions made to owners, which reduce equity.

Transfer Between Reserves

Shows movements between different components of equity.

Changes in Ownership Interest

Shows changes arising from transactions with owners that do not result in loss of control.

Other Adjustments

Includes applicable retrospective adjustments, such as corrections of material prior period errors.

Closing Balance

Shows the total equity and individual components at the end of the reporting period.
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