Ind AS amendment for Financial Year 2020-21

Issued by Ministry of Corporate Affairs in consultation with the National Financial Reporting Authority

On 24th July, 2020 the Ministry of Corporate Affair (MCA) vide notification dated 24th July, 2020 has exercised the powers conferred by section 133 read with section 469 of the Companies Act, 2013, the Central Government, in consultation with the National Financial Reporting Authority, hereby makes the following rules further to amend the Companies (Indian Accounting Standards) Rules, 2015. These amendments have been made keeping in view the current business environment caused by the pandemic. COVID-19 has not only affected the health of people across the globe it has also caused severe disturbances in the global economic environment which has consequential impact on financial statements and reporting.

Read on to know more…

National Financial Reporting Authority (NFRA) 

As these amendments and all other policies on accounting standard and auditing standards are now being recommended in consultation with NFRA. Let us know more about NFRA.

It is an independent regulator to oversee the auditing profession and accounting standards in India under Companies Act 2013. It came on existence in October 2018. After the Satyam scandal took place in 2009, the Standing Committee on Finance proposed the concept of the National Financial Reporting Authority (NFRA) for the first time in its 21st report. Companies Act, 2013 then gave the regulatory framework for its composition and constitution. The Union Cabinet approved the proposal for its establishment on 1st March, 2018. It was constituted on 1st October, 2018 by the Government of India. The establishment of NFRA as an independent regulator for the auditing profession will improve the transparency and reliability of financial statements and information presented by listed companies and large unlisted companies in India.

Further, let us understand about the new amendment, this is more of clarificatory in nature. Also very helpful in clearing the doubt of the industry. Several ambiguities were existed in these standards, for example in Ind AS 1 and Ind AS 8 on Materiality, Ind AS 116 Rent concession due to COVID-19 etc.

SUMMARY OF THE RECENT AMENDMENTS PURSUANT TO NOTIFICATION :

Ind AS 103 (Business Combinations): Have defined “business” in more detail, an optional test to identify concentration of fair value, element of Businesses and Assessing whether an acquired process is substantive.

Ind AS 107 (Financial Instruments: Disclosures):  Disclosures for uncertainty arising from interest rate benchmark reform.

Ind AS 109 (Financial Instruments): Temporary exceptions from applying specific hedge accounting requirements.

Ind AS 116 (Leases): Due to the pandemic COVID- 19 – Related Rent concession, a clarification has been provided on accounting of Rent concessions, whether to treat as a lease modifications or not.

Ind AS 1 and Ind AS 8 (Presentation of Financial Statements and Accounting Policies, Changes in Accounting Estimates and Errors): Change/modification in the definition of “Material”.

Ind AS 10 (Events after the Reporting Period):  Definition for non – adjusting events and its effective date of application.

Ind AS 34 (Interim Financial Reporting): Consequential of the above amendments.

Ind AS 37 (Provisions, Contingent Liabilities and Contingent Assets): Consequential amendment and accounting of restructuring plan.

Below amendments are explained in detail for more clarity.

1. Amendment in Ind AS 103 Business Combination

Sl. No	Existing Ind AS	Recent amendment
1.	In Appendix A, definition of business was Business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. In Appendix B B7 – A business consists of inputs and processes applied to those inputs that have the ability to create outputs. Although businesses usually have outputs, outputs are not required for an integrated set to qualify as a business.	Definition of term “business” has been substituted with  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 customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities. Accordingly, providing goods or services to customers has been added. This amendment is necessary because every business involves providing goods or services to the customers. In Appendix B In paragraph B7, the following shall be substituted, namely: – B7 – A business consists of inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs. The three elements of a business are defined as follows (see paragraphs B8-B12D for guidance on the elements of a business): Consequently, the above changes have been made in the three elements of any business, such as input, process and output. Optional test to identify concentration of fair value For making the above amendment 3 paragraphs have been added after para B7. This is to permit a simplified assessment of whether an acquired set of activities and assets is business or not. An entity may elect to apply, or not apply, the test. An entity may make such an election separately for each transaction or other event. The concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. Elements of a Business and Assessing whether an acquired process is substantive In the practical scenario of the industry, a lot of companies were facing the difficulty for the definition of business. After this amendment, evaluation for business acquisition will be easier.

2. Amendment in Ind AS 107 and Ind AS 109 Financial Instrument

Hedge accounting is a method of accounting where entries to adjust the fair value of a security and its opposing hedge are treated as one. Hedge accounting attempts to reduce the volatility created by the repeated adjustment to a financial instrument’s value, known as fair value accounting or mark to market. This reduction in volatility is done by combining the instrument and the hedge as one entry, which offsets the opposing movements.

A hedge fund is used to lower the risk of overall losses by assuming an offsetting position in relation to a particular security. The purpose of the hedge fund account is not necessarily to generate profit but instead to lessen the impact of associated losses, especially those attributed to interest rate or exchange rate. This helps lower the perceived volatility associated with an investment by compensating for changes that are not purely reflective of an investment’s performance.

The point of hedging a position is to reduce the volatility of the overall portfolio. Hedge accounting has the same effect except that it is used on financial statements. For example, when accounting for complex financial instruments, adjusting the value of the instrument to fair value creates large swings in profit and loss. Hedge accounting treats the changes in market value of the reciprocal hedge and the original security as one entry so that large swings are lessened.

Hedge accounting is used in corporate bookkeeping as it relates to derivatives. In order to lessen overall risk, derivatives are often used to offset the risks associated with a security. Hedge accounting uses the information from the security and the associated derivative as a single item, lessening the appearance of volatility when compared to reporting each individually.

Changes in fair value of the designated portion of derivatives that qualify as fair value hedges are recognized in Profit or Loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. The fair value adjustment to the carrying amount of the hedged item arising from the hedged risk is amortized to Profit or Loss from that date.

Interest rate benchmark reform: refers to the market-wide reform of an interest rate benchmark, including the replacement of an interest rate benchmark with an alternative benchmark rate.

For hedging relationships to which an entity applies the exceptions set out the certain exception for Uncertainty arising from interest rate benchmark reform.

In the Ind AS 109, the entity shall disclose:

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 (for example, assumptions or judgements about when the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and the amount of the interest rate benchmark-based cash flows); and

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

Following temporary exceptions have also being provided from applying specific hedge accounting requirements:

a) For assessing highly probable requirement for cash flow hedges: For the purpose of determining whether a forecast transaction (or a component thereof) is highly probable as required by paragraph 6.3.3, an entity shall assume that the interest rate benchmark on which the hedged cash flows (contractually or non-contractually specified) are based is not altered as a result of interest rate benchmark reform.

b) Reclassifying the amount accumulated in the cash flow hedge reserve: For the purpose of applying the requirement in paragraph 6.5.12 in order to determine whether the hedged future cash flows are expected to occur, an entity shall assume that the interest rate benchmark on which the hedged cash flows (contractually or non-contractually specified) are based is not altered as a result of interest rate benchmark reform.

c) Assessing the economic relationship between the hedged item and the hedging instrument : For the purpose of applying the requirements in paragraphs 6.4.1(c)(i) and B6.4.4– B6.4.6, an entity shall assume that the interest rate benchmark on which the hedged cash flows and/or the hedged risk (contractually or non-contractually specified) are based, or the interest rate benchmark on which the cash flows of the hedging instrument are based, is not altered as a result of interest rate benchmark reform.

d) Designating a component of an item as a hedged item: Unless paragraph 6.8.8 applies, for a hedge of a non-contractually specified benchmark component of interest rate risk, an entity shall apply the requirement in paragraphs 6.3.7(a) and B6.3.8—that the risk component shall be separately identifiable—only at the inception of the hedging relationship.

In the simple words, Hedge accounting is an alternative to more traditional accounting methods for recording gains and losses. When treating the items individually, such as a security and its associated hedge fund, the gains or losses of each would be displayed individually. Since the purpose of the hedge fund is to offset the risks associated with the security, hedge accounting treats the two line items as one. Instead of listing one transaction of a gain and one of a loss, the two transactions are examined to determine if there was an overall gain or loss between the two and only the net impact is recorded.

Due to this unprecedented situation like COVID-19, the risk of change in the fair value of Assets because of the frequent change in the interest rate is prevalent. Accordingly, the above exceptions have been provided in the current amendment. In this an entity has on option to apply the fair value as per the change in the interest rate.

3. Ind AS 116 Leases

Due to the COVID- 19, and thereafter the lockdown in India, many businesses have been shut or partially opened resulting into adverse impact on Revenue & Cash flow. Accordingly, the lease payment has been affected and the businesses are demanding the rent concession from their vendors.

Now, the question arises how to account for this rent concession in the books of accounts, will it be treated as a lease modification or not?

For the practical expedient, an amendment has been made and the businesses don’t have to treat this as a lease modification. But there are some conditions attached to it. If the below mentioned conditions are fulfilled, then we can treat the Rent concession without lease modification.

But first of all we need to understand what lease modification is and how it is accounted for in the books of accounts.

Ind AS 116 provides detailed guidance on accounting for lease modification,

a) Lease modification is accounted for as a separate lease by lessee and lessor if the modification increases the scope of the lease by adding one or more right-of-use assets.

b) If it is not accounted for as a separate lease, lessee re-measures the lease liability by discounting the revised lease payments using revised discount rate.

Now, let us discuss the amendment in detail.

As a practical expedient, a lessee may elect not to assess whether a rent concession that meets the conditions below is a lease modification. A lessee that makes this election shall account for any change in lease payments resulting from the rent concession in the same way if the change were not a lease modification.

The practical expedient applies only to rent concessions occurring as a direct consequence of the covid-19 pandemic and only if all of the following conditions are met: –

a) the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change;

b) any reduction in lease payments affects only payments originally due on or before the 30 June, 2021 (for example, a rent concession would meet this condition if it results in reduced lease payments on or before the 30th June, 2021 and increased lease payments that extend beyond the 30th June, 2021); and

c) there is no substantive change to other terms and conditions of the lease.

Disclosures in the financial statement.

a) that it has applied the practical expedient to all rent concessions that meet the conditions in paragraph 46B or, if not applied to all such rent concessions, information about the nature of the contracts to which it has applied the practical expedient and

b) the amount recognized in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions to which the lessee has applied the practical expedient.

4. Ind AS 1 and Ind AS 8 Presentation of Financial Statements and Accounting Policies, Changes in Accounting Estimates and Errors

A new definition of material has been introduced by this amendment, this is more refined and also most expected by the industry, some of the examples of circumstances have also been provided for more clarity.

Material: 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 nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements taken as a whole.

Information is obscured if it is communicated in a way that would have a similar effect for primary users of financial statements to omitting or misstating that information. The following are examples of circumstances that may result in material information being obscured: –

a) information regarding a material item, transaction or other event is disclosed in the financial statements but the language used is vague or unclear;

b) information regarding a material item, transaction or other event is scattered throughout the financial statements;

c) dissimilar items, transactions or other events are inappropriately aggregated;

d) similar items, transactions or other events are inappropriately disaggregated; and

e) 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.

Assessing whether information could reasonably be expected to influence decisions made by the primary users of a specific reporting entity`s general purpose financial statements requires an entity to consider the characteristics of those users while also considering the entity ‘s own circumstances.

The primary users to whom general purpose financial statements are directed. Financial statements are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyses the information diligently. At times, even well-informed and diligent users may need to seek the aid of an adviser to understand information about complex economic phenomena.

Consequently, the above changes have been made in the Ind AS 8.

5. Ind AS 10 Events after the Reporting Period

A paragraph 21 of the Ind AS 10 have been substituted, in the amendment 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 have been added.

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.

5. Ind AS 34 Interim Financial Reporting 

Consequential of the above amendments have been notified.

6. Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

Consequential of the above amendments have been notified, and a paragraph below on accounting of restructuring plans have been substituted.

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.

Summary:

Keeping in view the changing scenario of business, due to the pandemic COVID -19, the above amendments have been incorporated, primarily 9-10 standards are amended, essentially most of them tried to cover situations which have arisen due COVID- 19 and better financial reporting.

ICAI, in its endeavor to remain converged with the globally acceptable International Financial Reporting Standards (IFRS Standards) issued by the International Accounting Standards Board (IASB). Also it endeavors to identify the emerging accounting issues that may warrant enforcement actions.

References:

1. MCA amendment dated 24^th July, 2020.

2. MCA issued Ind AS.

(Author can be reached at Mobile Number: 9716598121, Email id: kumarpankaj08@gmail.com)