Companies (Indian Accounting Standards) Amendment Rules, 2020*

The COVID 19 has not only affected health of people across the globe, but it also caused severe disturbance in global economic environment which consequentially created an impact on financial statements and reporting. Keeping in view all these drastic changes MCA on July 24, 2020, notified the Companies Amendment Rules.

Following changes proposed:

  • IND AS 103 – Business Combination.
  • IND AS 107 – Disclosure to be made in respect of financial instruments.
  • IND AS 109 – Financial reporting of financial assets and liabilities.
  • IND AS 116 – Accounting for Leases
  • IND AS 1 & 8 – Presentation of Financial Statements and Accounting Policies, Changes in Accounting Estimates and Errors.
  • IND AS 10 – Events after the Reporting Period.
  • IND AS 37 – Provisions, Contingent Liabilities and Contingent Assets.

Amendment in IND AS 103 [Business Combination]

An entity shall determine whether a transaction is a business combination or not by applying the definition of, “Business” given in IND AS 103 (which requires that the assets acquired and liabilities assumed constitute a Business). If the assets acquired are not a BUSINESS, then the reporting entity shall account for the transaction or other event as an ASSET ACQUISITION. Following amendment has been made in respect of BC:

  • Definition of Business.

Business – An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to the customer;

Generating investment income;

Generating other income from ordinary activities.

  • Three elements of business

These are defined for guidance on elements of business (what included and what not).

  • Optional test to identify concentration of fair value

This test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable assets or a group of similar identifiable assets.

Amendment in IND AS 107 [Disclosures to be made in respect of financial instruments] & IND AS 109 [financial reporting of financial assets and financial liabilities]

the following disclosure should be in the financial statement made by the reporting entity:

a) the significant interest rate benchmarks to which the entity ‘s hedging relationships are exposed;

b) the extent of the risk exposure the entity manages that is directly affected by the interest rate benchmark reform;

c) how the entity is managing the process to transition to alternative benchmark rates;

d) a description of significant assumptions or judgements the entity made in applying these paragraphs

e) the nominal amount of the hedging instruments in those hedging relationships.

Amendment in IND AS 116 [Accounting for Leases]

Many businesses have been shut or partially opened resulting into adverse impact on Revenue & Cash flow due to the COVID- 19 pandemic and the lockdown in India. As a result, the lease payment has been affected and the businesses are demanding the rent concession from their vendors An amendment has been made as per which businesses is not required to treat the rent concession as a lease modification. If the below mentioned conditions are fulfilled, the rent concession may be treated without lease modification.

  • The change in lease payments results in revised consideration for the leases.
  • Any reduction in lease payments affects only those payments which are due or made before 30th June 2021.
  • There is no substantive change to the terms and conditions of the lease.

Few disclosures to be made by reporting entity in their financial statements;

  • It has applied the practical expedient to all rent concession that met the conditions, if not applied to all such rent concession , information about the nature of the contracts to which it has applied the practical expedient,
  • The amount recognized in the P&L for the reporting period.

Amendment in IND AS 1 [Presentation of Financial Statements and Accounting Policies] & IND AS 8 [Changes in Accounting Estimates and Errors]

A new definition of material has been introduced by this amendment as follows

“Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”

Materiality depends on the information; on its nature, magnitude or both. An entity assess whether information is material in the context of its financial statements, taken as whole.

Information is not easy to see if it is communicated in a way that it would have similar effect for prime users of financial statements. Following are the examples of circumstances that may result in whether an information is obscured or not;

  • Information regarding a material item, transaction or other event is disclosed in the financial statements but the language used is vague or unclear.
  • Information regarding a material item, transaction or other event is scattered throughout the financial statements.
  • Dissimilar items, transactions or other events are inappropriately aggregated.
  • Similar items, transactions or other events are inappropriately disaggregated.
  • The understandability of the financial statements is reduced as a result of material information being hidden by immaterial information to the extent that a primary user is unable to determine what information is material.

Amendment in IND AS 10 [Events after the Reporting Period]

An amendment has been made by adding the disclosure for any non- adjusting events that could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements which provide financial information about a specific reporting entity.

Accordingly, the following disclosure to be provided:

a) The nature of the event; and

b) An estimate of its financial effect, or a statement that such an estimate cannot be made

Amendment in IND AS 37 [Provisions, Contingent Liabilities and Contingent Assets]

An accounting of restructuring plans has been substituted as follows: A management or board decision to restructure taken before the end of the reporting period does not give rise to a constructive obligation at the end of the reporting period unless the entity has, before the end of the reporting period;

a) Started to implement the restructuring plan; or

b) Announced the main features of the restructuring plan to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will carry out the restructuring.

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