Accounting and Auditing Update Issue 1 Automotive PDF

ACCOUNTING
AND AUDITING
UPDATE
Issue no. 1/2015 | Automotive
IN THIS EDITION
Ind AS - Impact on the automotive sector p1
Conversation with Mr. V S Parthasarathy p11
Identification and accounting of R&D activities p15
Competition regulations - Impact on financial reporting p19
Accounting for product recalls p23
Challenges relating to transfer pricing p27
GST and the automotive sector p33
Regulatory updates p37

Editorial
© 2015 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.
Jamil Khatri Sai Venkateshwaran
Partner and Head Partner and Head
Assurance Accounting Advisory Services
KPMG in India KPMG in India
Starting this month, KPMG in India is introducing Research and development is an important
a new series of the Accounting and Auditing driver of growth, and the automotive sector
Update which will bring to you recent affairs on does invest significantly in this area. In this
accounting, financial reporting and regulatory issue, we explore the accounting requirements
challenges being faced by sectors in India; on research and development costs and discuss
each month’s publication focussing on different key accounting challenges relating to the
sector. This month’s update discusses the capitalisation of development costs.
automotive sector.
The automotive sector also has its share of
Ind AS is bringing about a paradigm shift in legal disputes, contingencies and specific
financial reporting which is going to potentially challenges such as product recalls. We discuss
affect many key metrics of performance. We the accounting requirements, judgements and
highlight four key areas of impact: revenue estimates required for such provisions and
recognition, consolidation, moulds and toolings contingent liabilities.
and embedded leases. Our article explains the
This publication also highlights some salient
new accounting requirements in these areas
taxation related challenges being faced by this
and the expected challenges that are likely to be
sector. In particular, we elaborate on transfer
faced by the sector.
pricing as an area and on the potential impact
We are also introducing an interview section of the Goods and Services Tax (GST) on the
in our publication where we speak with a CFO/ automotive sector.
finance director of a leading company from the
Finally, apart from our regular round up
industry where we explore some of the key
of regulatory updates, this edition of the
accounting and reporting, and topical matters
Accounting and Auditing Update also provides
relevant to this industry. This month’s issue
an overview of the Guidance Note on Internal
features an interview with industry leader Mr.
Financial Controls on Financial Reporting, issued
V S Parthasarathy, Group CFO, Group CIO &
by the Institute of Chartered Accountants of
President (Group Finance and M&A), Mahindra
India recently.
& Mahindra. He shares his perspective and
experience on a wide range of issues. As always, we would be delighted to receive,
any kind of feedback or inputs on the topics that
we cover.
Overview
The performance of the Indian understand the current trends There are many accounting and
automotive sector is often and preferences for products, regulatory challenges faced by the
considered as a litmus test services and innovation. These industry. These challenges stem
to gauge the health of India’s OEMs coordinate with component from various factors, including
economy. The industry is capital suppliers and ancillary units its capital structure, functioning,
intensive, highly competitive, (component manufacturers) at complex master supply
driven by constantly changing the other end of the chain, for agreements, sales agreements,
consumer preferences and subject production of components, parts etc. We will address some of these
to extreme price and market risks. and ancillary products used in challenges in this publication.
With increasing globalisation, the vehicles. The dealer networks
supply and service chain in the spread across geographies serve
automotive industry is becoming as distribution channels for the
progressively technology driven, products and services. Coherent
with an increased focus on and coordinated functioning of
specialisation. At one end of the these three vital exponents of
supply and service chain are the value chain, namely: OEMs,
the principal manufacturer (also component manufacturers and
known as Original Equipment dealers play a crucial role in
Manufacturer or OEMs) who bringing together a special value
actively engage with the market proposition to the end consumers.
and the end consumers to
1
Ind AS - Impact
on the automotive
sector
This article aims to:
–– Provide key impact areas on adoption of Ind

AS.
2
The Ministry of Corporate affairs The adoption of Ind AS is expected

has, in February 2015, laid out a road to be a paradigm shift in financial
map for IFRS convergence in India reporting. As a consequence, the
by notifying the transition plan and reported earnings (net income) and
issuing 39 converged standards financial position (net worth) reported
known as Indian Accounting by companies adopting Ind AS is
Standards or Ind AS. likely to undergo a change. Impact
of this change would vary from
Under the road map, from 1 April
company to company, with some
2016, Ind AS would be mandatory
sectors/companies being significantly
for (a) companies having a net
impacted. We expect the adoption of
worth of INR500 crore or more
Ind AS to lead to changes in the key
and (b) associate companies,
metrics of the automotive sector.
holding, subsidiaries, joint ventures
or associate companies of such
companies.
Further, from 1 April 2017, Ind
AS would be mandatory for (a)
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
and having net worth of less than
INR500 crore (b) unlisted companies
having net worth of INR250 crore or
more but less than INR500 crore; and
(c) associate companies, holding,
subsidiaries, and/or joint venture of
such companies. The notification has
a fairly wide coverage as it impacts
not just the covered entity, but all
entities within the consolidated group
to which the entity belongs.
3
A. Revenue recognition In general, property refers to a person’s

legal right of whatever description. It
Overview is the right to possess, use and enjoy
a determinate thing. Accordingly, it is
Revenue is one of the most important
important to analyse whether either of
metric of performance for any entity.
the two conditions above have been
The automotive sector is also expected
satisfied by the company at the time of
to face various challenges when
sale of an automobile to its customers.
applying the revenue recognition
requirements under Ind AS. Ind AS are In practice, automobile manufacturers
principles-based rather than industry- recognise the full amount of
specific. Accordingly, the standard consideration at the time of transfer
does not provide specific industry of risk and rewards of ownership of
based guidance. the vehicles in accordance with the
terms of sale agreement and make a
Revenue recognition is a complicated
provision towards other performance
area, particularly due to complex
obligation.
sales promotion strategies such
as additional services when selling In India, Ind AS 115, Revenue from
vehicles, warranties, dealer incentives Contracts with Customers is the
and unconditional and conditional standard on revenue recognition that is
repurchase agreements. converged with IFRS 15, Revenue from
Contracts with Customers.
The current Indian GAAP also does not
provide industry specific guidance. The new standard contains a single
The standards under Indian GAAP model that can be applied while
are also principles-based. Paragraph accounting for contracts with
10 of Accounting Standard 9, customers across various industries
Revenue Recognition (AS 9), states including automotive and is expected
that “revenue from sales or service to replace the current guidance under
transactions should be recognised Indian GAAP.
when the requirements as to
performance set out in paragraphs
11 and 12 are satisfied, provided that
at the time of performance it is not
unreasonable to expect ultimate
collection. If at the time of raising of
any claim it is unreasonable to expect
ultimate collection, revenue recognition
should be postponed”.
Paragraph 11 of the AS 9 further states
that in a transaction involving the sale
of goods, performance should be
regarded as being achieved when the
following conditions have been fulfilled:
i. The seller of goods has transferred
to the buyer the property in the
goods for a price or all significant
risks and rewards of ownership have
been transferred to the buyer and
the seller retains no effective control
of the goods transferred to a degree
usually associated with ownership;
and
ii. No significant uncertainty exists
regarding the amount of the
consideration that will be derived
from the sale of the goods.
4
Five-step model (or as) an entity transfers control of

goods or services to a customer at the
As per the new standard, entities will amount to which the entity expects
apply a five-step model to determine to be entitled. To achieve the core
when to recognise revenue, and at principle, the new standard establishes
what amount. The model specifies that a five step model:
revenue should be recognised when
Step Identify the contract (s) with the customer

1 (One or multiple)
Step
Identify the performance obligation in the contract
2 (One obligation or multiple)
Step Determine the transaction price

3 (Total consideration for contract)
Step Allocate the transaction price

4 (Allocate to various performance obligations identified)
Step Recognise revenue

5 (At a point in time or over time)
One of the challenges for India is Currently, under Indian GAAP revenue
whether we are adopting Ind AS on sale of vehicles is generally
115 or the earlier version of IFRS recognised when the risks and rewards
standards i.e. IAS 11, Construction of ownership of vehicles is transferred
Contracts, IAS 18, Revenue, IFRIC 13, by the automobile company to its
Customer Loyalty Programmes, IFRIC dealers.
15, Agreements for the Construction
Under Ind AS 115, revenue would be
of Real Estate, IFRIC 18, Transfer of
recognised as and when the ‘control’
Assets from Customers and SIC-31,
over vehicles is transferred to the
Revenue-Barter Transactions Involving
customer. The standard requires
Advertising Services.
entities to determine whether the
Ind AS 115 implementation is expected control is passed on over a period
to be deferred to 1 April 2018; it is not of time or at a point in time for the
expected to apply from 1 April 2016. purposes of recognising revenue which
In the following paragraphs we will is in contrast to the existing practice of
describe some key impact areas that recognising revenue as and when the
adopting Ind AS is likely to have from risk and rewards are transferred.
a revenue recognition perspective,
particularly with respect to steps 2, 3
and 5 of the new standard.
5
Key impact areas
Dealer incentives (cash dealer), the manufacturer may also Determining whether a sales incentive
rebates, bonuses, free goods) promise to provide additional goods to end customers was offered pre-
or services (such as maintenance) or post-sale to the dealer would be
including reimbursement of to the dealer’s customer. Ind AS 115 challenging for some entities, especially
free maintenance services requires an entity to identify all of the for implied sales incentives where the
given to customers promises, both explicit and implicit, entity has a customary business practice
that are made to the customer as part of offering incentives. The entity would
Sale contracts between automobile
of the contract with that customer. need to assess whether the dealer and
manufacturers and dealers often
Consequently, a promise of a good or customer has an expectation that the
include incentives such as cash
service (such as maintenance) that entity would provide a free service.
rebates, bonuses, free goods
the dealer can pass on to its customer
(such as accessories relating to the
would be a performance obligation if the Discount arrangements and
vehicles) which are contingent upon
promise could be identified (explicitly incentives
specific milestones such as the
or implicitly) in the contract with the
number of vehicles sold in a period. Ind AS defines the transaction price as
dealer. An implicit promise may exist
These also include clauses regarding the amount of consideration to which an
when a car manufacturer has a history
reimbursement of free maintenance entity expects to be entitled in exchange
of offering free maintenance services
services (to dealers) given to customers. for transferring promised goods or
e.g. oil changes and tire rotation for two
This gives rise to the question of services to a customer (excluding
years to customers who have purchased
whether to treat such costs as selling amounts collected on behalf of third
its vehicles from dealers. These services
and distribution/marketing spends or parties) and consist of both fixed and
may not be explicitly stated in the
as a separate component in the sale variable elements. A key challenge is
contract between the manufacturer and
transaction. determining variable element of the
dealers. As the car manufacturer has a
customary business practice of offering transactions price considering that such
Separate performance obligations two-year maintenance incentive, the estimate of variable consideration are
maintenance would therefore be treated included in the transaction price only
Ind AS 115 clarifies that at contract
as a separate performance obligation to the extent that it is highly probable
inception, an entity should assess the
in the sale of the vehicle to the dealer. that the revenue recognised would not
goods or services promised (step 2) in
Revenue from the sale of the vehicle be subject to significant future reversal
a contract with a customer and should
would be recognised when control of as and when the underlying estimate
identify as a performance obligation
the vehicle is transferred to the dealer. is revised. Thus, an entity will have
each promise to transfer to the customer
Revenue from maintenance services to perform a careful assessment to
either:
is recognised when the services are examine the fixed and variable elements
• A good or service (or a bundle of provided to the retail customer. in a transaction price and allocate
goods or services) that is distinct; or the same to separate performance
However, if the car manufacturer does obligation for the purposes of revenue
• A series of distinct goods or services
not have a customary business practice recognition.
that are substantially the same and
of offering free maintenance, and
that have the same pattern of transfer The standard further explains that
instead announces the maintenance
to the customer. the amount of consideration can vary
programme as a limited-period sales
A good or service is distinct from incentive after control of the vehicle (step 3) because of discounts, rebates,
other goods or services, and so is a has been transferred to the dealer, then refunds, credits, price concessions,
performance obligation if it satisfies both the free maintenance would not be incentives, performance bonuses, or
of the following conditions: a separate performance obligation in other similar items including the fact
the sale of the vehicle to the dealer. In that there is an element of contingency
• The customer can benefit from the in the form of the occurrence or non-
this case, the car manufacturer would
good or service either on its own or occurrence of a future event. For
recognise the full amount of revenue
together with other resources that example, an automotive entity may
when control of the vehicle is transferred
are readily available to the customer, provide incentives to a customer as part
to the dealer. If the car manufacturer
and of an arrangement. Examples of sales
subsequently creates an obligation
• The entity’s promise to transfer the by announcing that it will provide incentives offered by a seller include
good or service to the customer is incentives, the car manufacturer would cash incentives, discounts and volume
separately identifiable from other accrue as an expense its expected cost rebates.
promises in the contract. of providing maintenance services on
For example, if a manufacturer sells the vehicles in the distribution channel
a motor vehicle to its customer (a i.e. controlled by dealers when the
programme is announced.
6
Thus, under the Ind AS, cash incentives with a service in addition to the accounting treatment for repurchase
would be considered as a reduction assurance that the product complies agreements may, in some cases, be
from revenue. The concept of variable with agreed-upon specifications. more straight forward under Ind AS 115,
consideration is expected to bring A warranty that only covers the but different from the current practice.
major changes to current practice as compliance of a product with agreed- However, one would need to exercise
the concept is much wider than what is upon specifications (an ‘assurance judgement at contract inception to
currently practiced in India. warranty’) is accounted for under determine whether a customer with a
other relevant guidance e.g. Ind AS put option has a significant economic
Since automotive entities develop
37, Provisions, Contingent Liabilities incentive to exercise its right.
unique sale promotions in order to
and Contingent Assets.
increase their sales, very careful
consideration and judgement is required The assessment of whether a warranty A forward or a call option
to ensure appropriate accounting. provides a customer with a service An entity has executed a repurchase
in addition to the assurance that the agreement if it sells an asset to
Warranties product complies with agreed-upon a customer and promises, or has
specifications is a matter of judgement the option, to repurchase it. If the
Generally, automobile manufacturers which requires a consideration of facts repurchase agreement meets the
include warranty pursuant to a vehicle’s whether the warranty is required by law, definition of a financial instrument, it
sale. Under Ind AS 115, a warranty is the length of the warranty period and is outside the scope of Ind AS 115. If
considered as a performance obligation the nature of the tasks that the entity not, the repurchase agreement is in
if the customer has an option to promises to perform. the scope of the Ind AS 115 and the
purchase the good or service with or accounting for it depends on its type e.g.
without the warranty. The standard If an automobile manufacturer
provides a warranty (or part of it) and forward, call option, or put option and on
explains that the nature of a warranty the repurchase price.
can arise from an assurance that the it is considered to be a performance
related product will function as the obligation, then the automobile The standard explains that under a
parties intended because it complies manufacturer would allocate a portion forward (an obligation) or a call option
with agreed-upon specifications. Other of the transaction price to the service (a right), a customer does not obtain
warranties provide the customer with performance obligation. If an automobile control of the asset because the
a service in addition to the assurance manufacturer provides a warranty that customer is limited in its ability to direct
that the product complies with agreed- includes both an assurance element the use of, and obtain benefits from the
upon specifications. The standard has and a service element and the entity asset even though the customer may
envisaged two alternatives in relation to cannot reasonably account for them have physical possession of it. If an
accounting for warranty costs: separately, then it accounts for both entity expects to repurchase the asset
of the warranties together as a single for less than its original sales price, the
• The customer has an option to performance obligation. entity accounts for the entire agreement
purchase a warranty separately (for as a lease. Conversely, if the entity
example, because the warranty is
Repurchase agreements expects to repurchase the asset for an
priced or negotiated separately): The amount that is greater than or equal to
warranty is a distinct service because Internationally unconditional and the original sale price, it accounts for the
the automobile manufacturer conditional repurchase agreements and transaction as a financing arrangement.
promises to provide the service to the residual value guarantees are a common When comparing the repurchase
customer in addition to the product way for automobile manufacturers to price with the selling price, the entity
that has the functionality described in improve sales of new vehicles. Through considers the time value of money.
the contract. In those circumstances, such arrangements, OEMs sell new cars
an automobile manufacturer would to fleet customers or rental companies In a financing arrangement, the entity
account for the promised warranty as with a commitment to buy them back continues to recognise the asset and
a performance obligation and allocate after a period of time for a fixed or recognise financial liability for any
a portion of the transaction price to formula-driven price. consideration received. The difference
that performance obligation. between the consideration received
Ind AS 115 includes guidance on the from the customer and the amount of
• Customer gets additional services as nature of the repurchase right or consideration to be paid to the customer
part of the warranty: When a warranty obligation and the repurchase price is recognised as interest, and processing
is not sold separately, (e.g. extended relative to the original selling price or holding costs, if applicable. If the
warranty) the warranty or part of the where as, current accounting focusses option expires unexercised, the entity
warranty may still be a performance primarily on whether the risks and derecognises the liability and the related
obligation, but only if the warranty rewards of ownership have been asset, and recognises revenue.
or part of it provides the customer transferred. As a result determining the
7
Put option If the repurchase price of the asset is

equal to or greater than the original
The guidance in relation to a put option selling price and is more than the
also warrants that at contract inception, expected market value of the asset, the
an entity need to consider whether the contract is accounted for as a financing
customer has a significant economic arrangement. In this case, if the
incentive to exercise that right which option expires unexercised, the entity
would determine the application of the derecognises the liability and the related
stated accounting principles. asset and recognises revenue at the
This requires an entity to consider date on which the option expires.
various factors, including the relationship When comparing the repurchase
of the repurchase price to the expected price with the selling price, the entity
market value of the asset at the date of considers the time value of money.
the repurchase and the amount of time
until the right expires. Accordingly, a
careful assessment needs to be made
Conclusion
in order to determine the recognition of Given the wide scope of the standard
revenue in a repurchase contract. on the timing of revenue recognition,
automobile companies should
If a customer has a significant economic
consider carrying out an assessment
incentive to exercise the put option,
of the potential impacts on revenue
the entity accounts for the agreement
recognition. Such an assessment
as a lease. Conversely, if the customer
involves exercising significant
does not have a significant economic
judgement and would depend on
incentive, the entity accounts for the
the facts and circumstances of each
agreement as the sale of a product with
contract.
a right of return.
8
B. Moulds and tooling • were expected to be used for more One should assess whether the
than one accounting period and had a contribution received from the OEM
OEMs often engage with component limited estimated useful life. for development of the toolings is a
manufacturers to produce automobile pure financing arrangement or for the
parts. These component manufacturers Similarly, under Ind AS 16, Property,
purchase of the tool or towards the
and OEMs produce ‘tools and moulds’ Plant and Equipment, similar
commitment made by the supplier for
or ‘toolings’ which are used in the assessment would be required and
a continuous supply of the products.
manufacturing process for the purpose OEM/component manufacturer
Accordingly, toolings would be
of producing automobile parts as per the would have to assess the contractual
capitalised in the books by the party that
specifications of a vehicle. arrangement.
has control of these assets.
These toolings are usually designed for Under Ind AS 16 property, plant
the production of specific products or and equipment comprises tangible C. Consolidation of structured
models, and their utility generally ceases assets held by an entity for use in
entities
with the discontinuance or modification the production or supply of goods
of the models developed. Toolings or services, for rental to others or The standard on consolidation is another
may be fabricated by component for administrative purposes, that are area in which the adoption of Ind AS
manufacturers themselves or procured expected to be used for more than one is expected to impact the automotive
from an OEM. When the product is period. The definition of property, plant sector. This standard is different in many
phased out, the tooling specific to that and equipment is not restricted to assets respects and has wider concept of
product is also scrapped. The tools and that have an explicit link to an entity’s control in comparison to current Indian
moulds are subject to wear and tear due revenue generating operations, such GAAP standard. Ind AS focusses on
to repeated usage in the manufacturing as a plant used in the manufacturing the concept of control and moves away
process and on an average have a utility of goods for sale, or that which forms significantly from the current Indian
ranging from three to four years. a part of an entity’s administrative GAAP requirements of evaluation of
infrastructure. voting rights and composition of the
There are two key accounting challenges board with respect to consolidation.
associated with toolings. One challenge Ind AS 16 does not prescribe what
relates to whether toolings are an constitutes an item of property, plant Under Ind AS 110 , Consolidated
item in the nature of inventory or and equipment. Therefore, an entity Financial Statements, an investor
property, plant and equipment. This would have to assess whether toolings controls an investee when the investor
assessment is sometimes cumbersome meet the definition of property, plant and is exposed, or has rights, to variable
due to complexities in the underlying equipment. returns from its involvement with the
contractual agreements. However, it investee, and has the ability to affect
The second challenge relating to
is important because the accounting those returns through its power over the
toolings in the automotive sector
consequences differ depending on investee. To have power, the investor
is who should capitalise toolings –
whether the tool will be used (own use) needs to have existing rights that give
whether the OEM or the component
or sold (sale). it the current ability to direct those
manufacturer. Under Ind AS, both OEM
relevant activities which significantly
Under Indian GAAP, the Expert Advisory and the component manufacturer would
affect the investee’s returns. An investor
Committee (EAC or the Committee) of have to understand the underlying
can have power over an investee even
the Institute of Chartered Accountants master supply agreement. A master
if other parties have existing rights to
of India (ICAI) discussed the principles supply agreement is often a multiple-
participate in the direction of the relevant
of classification of an item of machinery component agreement that comprises
activities - e.g. significant influence over
in Query no. 10 published in the a bundle of services that may include
the investee arising from one or more
Compendium of Opinions – Volume developmental activities, construction
contractual arrangements.
XVIII - Accounting treatment of special or acquisition of tools from a third party
tools, jigs and fixtures. Deliberating on and delivery of the final manufactured Under Ind AS, the power is analysed
the facts and views cited by the querist, components. These agreements may with the help of voting rights that are
the EAC opined that in their view, the also include a variety of remuneration substantive, (including substantive
items of machinery discussed in the mechanisms, including upfront potential voting rights), rights arising
query satisfied the requirements of fixed payments, progress payments at key from other contractual arrangements,
assets (property, plant and equipment) milestones and/or payments through the de facto power, and through special
and not inventory. The Committee component price as part of the series relationships e.g., structured entities.
highlighted that their views were based of production. Therefore, each separate
on the fact that the items of machinery: component should be assessed
according to its economic substance
• were not available for sale in the rather than its legal form.
normal course of business, and
9
The control model in Ind AS 10 is might either be positive or negative. The D. Embedded lease
complex and includes numerous examples of returns include
indicators to consider; the investor Another area that would require careful
• dividends or other economic benefits, evaluation is the concept of ‘embedded
would need to reflect upon all the
such as interest from debt securities lease’. The assets of the component
relevant facts and circumstances
and changes in the value of the manufacturer may be customised to
in assessing whether it controls an
investor’s investment in the investee manufacture products only for a specific
investee and no specific hierarchy for
consideration is provided. • remuneration for servicing an OEM.
investee’s assets or liabilities, fees In certain arrangements a component
Under Ind AS 110, understanding the
and exposure to loss arising from manufacturer could set up a factory
purpose and design of the investee is
providing credit or liquidity support in the business park of the OEM.
important, because it can play a role in
the judgement applied by the investor in • tax benefits For example, as per a contractual
all areas of the control model. agreement, component manufacture
• residual interests in the investee’s may agree to supply goods to a
In the automotive sector, the assets and liabilities on liquidation particular OEM as per agreed schedule
relationship between the OEMs and and/or and component manufacturer cannot
component manufacturer would have to supply to any other OEM. In such cases,
• returns that are not available to
be evaluated to consider that contractual the tools used for production could be
other interest holders, such as the
arrangement to understand the owned by the OEM. In case of unutilised
investor’s ability to use the investee’s
purpose and design of the component capacity the OEM may agree to pay a
assets in combination with its own
manufacturer. compensation. Component pricing could
to achieve economies of scale, cost
Assessing the purpose and design also be linked to commodity prices like
savings or other synergies.
of the component manufacturer steel and/or forex rates and are trued up
The contractual arrangement may give or down periodically.
includes considering the risks that the
power to the OEM to take decisions
component manufacturer was designed In some other cases there could be a
about the significant relevant activities
to create and to pass on to the parties clause in the agreement whereby the
of the component manufacturer i.e.
involved in the transaction, and whether OEMs agree to purchase a ‘minimum
may qualify as a structured entity of the
the investor (OEM) is exposed to some agreed’ quantity of production of the
OEM.
or all of those risks. component manufacturer; and on failure,
Generally, the OEMs do not have any OEM agrees to pay the component
The risks considered include both
equity stake but support the component manufacturer an amount that is based
downside risk and the potential for
manufacturer to a great extent by way on agreed upon formulae which includes
upside return. Other items to consider
of working capital. OEMs have power to recovery/return on capital investment
may include:
make component price adjustments, are made by the component manufacturer
• involvement and decisions made involved in the design of the component which is settled either in cash/credit
at the investee’s (component and output specification and in some notes.
manufacturer) inception situations, are involved in procuring
Ind AS 17, Leases, Appendix B provides
land and leasing out to component
• contractual arrangements such as guidance on ‘Evaluating the Substance
manufacturers or alternatively actively
call rights, put rights or liquidation of Transactions Involving the Legal Form
facilitating the land procurement.
rights established at the investee’s of a Lease’.
Often, a component manufacturer’s
(component manufacturer) inception
units may operate exclusively for According to Ind AS, an arrangement
• circumstances in which the relevant an OEM and hence, they may have may contain a lease even though it is not
activities occur e.g. only when substantial decision making rights over in the legal form of a lease. For example,
particular situations arise or events the significant relevant activities of the outsourcing arrangements may contain
occur, and component manufacturer. a lease of the underlying assets. The
assessment of the substance of an
• investor’s (OEMs) commitment to An OEM would be exposed to variable
agreement is carried out at its inception.
ensuring that the investee continues returns through achieving economies of
The assessment depends on whether:
to operate as designed. scale, cost savings or other synergies.
• fulfilment of the arrangement is
Under Ind AS 110, to have control over The concept of control for the
dependent on the use of a specific
an investee, an investor needs to be purposes of consolidation need careful
asset or assets, and
exposed to (have rights to) variable evaluation for the purpose of applying
returns from its involvement with an Ind AS 110 in the automotive sector. A • the arrangement conveys a right to
investee. This exposure is provided collective assessment of all facts and use the asset(s).
when the investor’s returns from its circumstances and other contractual
Fulfillment of the arrangement is
involvement with the investee has the arrangements need to be considered
dependent on the use of a specific asset
potential to vary based on the investee’s in an objective manner before deriving or assets.
performance. The returns of the investee a conclusion on consolidation of
component manufacturers by the
OEMs.
10
The asset under the arrangement E. Other impact areas

may be identified explicitly in the
arrangement or it may be specified In addition to the above, there are
implicitly - e.g. if the supplier owns or several other differences between
leases only one asset with which he/ Indian GAAP and Ind AS which may have
she is to fulfil the obligation and it is not a significant impact on the automotive
economically feasible or practicable for sector after the transition. Some of
the supplier to use alternate assets to these impact areas are:
fulfil the arrangement. • property, plant and equipment
Arrangement conveys a right to use the including any enabling assets
asset(s). capitalised
If a buyer agrees to buy 100 per cent • debt equity classification

of the output of a specified asset and • investments under Ind AS 109,
requires the asset to be operated at Financial Instruments
full capacity, then there is a strong
presumption that the buyer has effective • business combinations
control over the asset and therefore that • mandatory use of fair value
the arrangement is or contains a lease. accounting for share based payment
This presumption can be rebutted transactions
only when the operator, although it • segment reporting disclosures
is obligated to operate at maximum
capacity, retains significant operational • timing of recognition of proposed
flexibility to influence the profitability of dividend
the arrangement e.g. the mix of product • discounting of provisions
quality/composition can be varied at the
operator’s discretion. • additional disclosure on related
parties
Generally, under Ind AS a buyer controls
an asset and a lease exists when the • extensive disclosures on income
buyer is taking substantially all of the taxes (component of taxes, tax rate
output, because others cannot obtain reconciliation)
the output from the specified asset. • government grants
However, an exemption relating to
arrangements in which the price is • restatement of financial statements
either contractually fixed per unit of for prior period errors, etc.
output or equal to the market price per
unit of output at the time of delivery, Sources:
are not accounted for as leases. This 1. Ind AS 115, Revenue Contracts with Customers.
exemption for fixed or market prices 2. IFRS 15, Revenue Contracts with Customers.
should be applied narrowly and only for 3. KPMG’s Germany Publication: Impact of IFRS:
arrangements in which the buyer clearly Automotive, January 2011.
pays for the actual output. 4. KPMG’s Publication: Issues-in-depth Revenue

Contracts with Customers, September 2014.
Component manufacturers may come
under the purview of the embedded
lease concept and hence could meet
the criteria for financial lease/operating
lease.
11
Conversation with
Mr. V S Parthasarathy
Group CFO, Group CIO & President
(Group Finance and M&A),
Mahindra & Mahindra
12
As per the Ind AS adoption road map, instituted a Corporate Centre of Excellence for should not remain an exercise at the corporate
Mahindra & Mahindra (M&M) would be implementation which acted as an important office level. We are now aiming to build a
adopting Ind AS from 1 April 2016, with toggle to this system. This team conducted a seamless approach, so that the requirements of
the date of transition being 1 April 2015. mammoth task, worked long hours and completed Ind AS financial and reporting requirements are
the entire transition exercise. However, in 2011 incorporated in the IT system, which is in turn
How are you addressing the following
the conversion to IFRS was called off, but we did approved by the auditors.
issues: not want to unwind the work done. Hence, the
Next item on our agenda is managing
i. technical challenges team continued to work on for transition to Ind
expectations of the stakeholders. We have
AS and tasked with instituting all systems and
ii. capacity and infrastructure discussed our transition plan with our Board of
processes ready to make a smooth transition to
challenges such as capacity building Directors. However, each business will have a
the new regime. A dedicated IT team is currently
of the finance department and different impact on the statement of profit and
working to ensure all the IT infrastructure is in
loss and the balance sheet and the same would
creating awareness both internally/ place at all the companies for a smooth transition
have to be understood. Therefore, we plan to
externally, changes to contracts/ to IND-AS.
prepare quarterly financial statements from this
business practices, changes to IT We are a diverse group; each business has year on the basis of Ind AS. Though these Ind
systems/processes different challenges (e.g. IT, time share holidays, AS set of quarterly financial statements would
iii. non-technical challenges such etc.), thus, revenue recognition accounting not be published, they would be available as
for each business is different. Therefore, in comparatives next year. Secondly, as we go
as managing expectations and
implementation of Ind AS, one of key challenges through the process of preparing the Ind AS
communication with stakeholders, is capacity building, i.e. how to equip teams with quarterly financial statements, we would collect
both internal and external. the technical skills, to keep it updated, and to all the expected issues on its implementation
iv. What learnings or insights are you motivate teams to keep working on the transition and discuss their solutions. This exercise will
challenges. help stimulate discussions at the investors’ meet.
developing as you gear up to meet
Hence, we are not waiting for June 2016 quarter
these challenges? As a part of our team upskilling initiatives, we run
to communicate the implications of adopting Ind
a ‘Finance Academy’ where one of the courses is
M&M embarked on the IFRS journey about three AS to the market.
about Ind AS, and finance employees from various
and half years ago. We did a detailed impact businesses attend these trainings. These courses However, we would like to have clear directives
assessment and invested in skilling our teams, have been designed on the basis of the level of from the government on some of the contentious
identifying gaps, creating IT infrastructure, etc. the audience. One very important aspect we are issues like applicability of Ind AS 115, Revenue
In order to implement IFRS, we had developed ensuring is that the knowledge transmission Contracts with Customers, etc. before we start
a parallel system through IT by linking it happens at the ground level staff. They should be having any such conversations with the external
into our ERP system that takes care of about equally excited about the transition to Ind AS; it stakeholders.
120+ companies in a single instance. We
13
The Income Computation and The Companies Act 2013 (2013 Act) We believe that in order to avoid substantial
Disclosure Standards (ICDS) has has introduced Section 134(5)(e) of the workload, approval should be at the principle
been notified and is applicable from 2013 Act which requires the directors’ level of the arrangement rather than an omnibus
Assessment Year 2016-17 onwards. responsibility statement to state that approval, for which in practice, it is difficult
to estimate a cap for the approval limit, e.g. a
The adoption of ICDS is expected to the directors, in the case of listed
multiple of revenue, etc.
significantly alter the way companies companies, have laid down Internal
compute their taxable income, as Financial Controls (IFC) to be followed There are also differences in requirements of the
many of the concepts from the existing by the company and that such internal Securities and Exchange Board of India (SEBI) and
Companies Act, 2013 and we hope, there will be
Indian GAAP have been modified. This controls were adequate and operating
quick alignment in these requirements.
may also require changes to existing effectively. How have you approached
processes and systems. What are the this areas and what have been the
What has been your overall evaluation
key implementation challenges of ICDS key considerations relating to the
of the 2013 Act and are there any
that you foresee? Do you believe that implementation of reporting on IFC?
learnings on how such significant
adequate implementation time and We as a company hold a very high threshold for economic legislation should be
guidance has been provided by the internal control standards. In the year 2003, the implemented for the country?
Government for the same? company received the prestigious Deming Prize by
the Union of Japanese Scientists and Engineers I just want to take a step back and reflect on the
In addition to the accounting records we have process of formulation of laws in our country. I
always maintained additional details for tax (JUSE). This is a globally recognised award
which honors businesses that have successfully would like to put the ideal law making process in
purpose and we are going to continue with this three phases:
practice in the future as well. Before, ICDS was implemented Total Quality Management (TQM)
issued, tax books started with the accounting practices in both financial and non-financial • Participative phase: Companies and trade
base, i.e. starting point was accounting profit and areas. While preparing for the Deming Prize, the bodies like Federation of Indian Chambers of
then after taking certain set of tax adjustments, entire eco system of controls has been developed Commerce and Industry (FICCI), Confederation
we prepared tax profits. and our operational processes continue to deliver of Indian Industry (CII), should collaborate
consistent results. So, we are quite happy and early enough in the process and give their
Introduction of ICDS will change the way the prize provides us with a validation on our valid inputs during the process of law making.
we compute tax, and probably will require process level controls, even in the case of start-up
technological changes like parallel tracking of companies with in our group. • Transition phase: The law makers should
information, etc. Applying ICDS would entail give an adequate transition time to apply the
large number of challenges and these challenges In substance, the group has not just been focusing new laws, accounting standards, etc. It will
are compounded by the fact that there is no on financial reporting controls but also the allow companies to better prepare for the new
precedence (on the application of ICDS). Further, business level operating controls. We did not laws and regulations.
the interaction of ICDS with the Income tax Act, wait for somebody from outside to require us to
establish such controls. • Correction phase: As there is no precedence
the Supreme Court judgements, several positions
to new laws or requirements, the government
taken in the past, etc. would evolve over a period We have implemented a framework called ‘House should form a group of government officials,
of time. When there is precedence, it helps settle of Excellence’ under which we have taken various SEBI, industry bodies, etc. that collects the
many issues by applying the law, rules, as a initiatives to ensure future readiness of our problems and challenges arising during
matter of convention. function. One such initiative is a legal compliance implementation of a new law.
One of the objectives behind the introduction tool, an online tool that monitors compliance with
various laws across the entire group. Unfortunately, historically companies have not
of ICDS was to reduce tax litigation, and there
been very participative in the process. Despite
are some differences between the accounting Hence, we believe that we are well prepared for being given the option to review the exposure
standards and ICDS. However, I do not think the IFC implementation. draft and provide comments, barely few
that the objective is being met, as reflected in
companies comment on it.
ICDS regulations. It appears that the regulations Have there been other areas such as
are drawn with the perspective to further the
related party transaction approvals
tax department’s revenue and that is what is
causing a lot of challenges. For instance, ICDS, in
required under the 2013 Act that have
general do not have prudence as a fundamental been challenging to implement?
assumption, and accordingly, in several situations Our group believes in prudence and it is very
this would result in earlier recognition of income important to be careful and get into only those
or gains, or a later recognition of expenses or transactions that are in the ordinary course of
losses as compared to that under the accounting business and at an arm’s length because we are
standards. This would potentially have a direct holding ourselves to shareholders. In case of
impact on the timing of tax related cash outflows. related party transactions, we make sure that
For example, capitalisation of borrowing costs we take the necessary approvals from the audit
has significant differences from AS 16, Borrowing committee, independent directors and other
Costs standard; ICDS does not address areas such minority partners.
as financial instruments, share-based payments,
etc.
14
Goods and Services Tax (GST) is a path remote rural areas. We also support `Swachh
breaking business reform, and not just a Bharat’ Abhyan, which is an important initiative of
tax reform for India. It is likely to trigger the Government of India. Under this initiative we
a major ‘business transformation’. are constructing a block of 1,000 toilets for girls
in government schools. As part of the Mahindra
Despite the setback of the monsoon
Hariyali project, our afforestation initiative,
session of the parliament which ended our aim is to improve green cover and protect
on 13 August 2015, the general view is bio-diversity in the country. We additionally
that GST will soon become a reality contribute to the livelihood of farmers.
and the target date may not get deferred
One of our important initiatives is our ESOP
by more than a few months. Viewed arrangement, which means Employee Social
from this perspective, how are you Option Programs, where employees volunteer
approaching this area and how are you four days of physical time for a social cause.
framing your plans in order to achieve
significant efficiencies of business and What are the new learning initiatives
even yield a competitive edge in the that the M&M group is undertaking to
market? take as capacity building initiatives in
We are preparing for GST assuming 1 April order to equip its finance department/
2016 as the go live date. However, it is a huge internal auditors/stakeholders/Board of
challenge and, unfortunately, we cannot Directors to build their knowledge base
completely prepare for it ahead of time. The law is areas of change?
needs to be approved first then we will have some
clarity. We are expecting a clarification in three My motto for my team is that they need to
or four months on this topic, following which our unlearn, learn and relearn.
central GST implementation team would be ready We are facilitating this through our ‘Finance
to implement the GST requirements. We have Academy’ which runs various training initiatives
estimated the strategic impact areas based on for the finance team and also for business teams.
various scenarios. However, the GST project will
require precision planning akin to a factory layout Our concept of ‘House of Excellence’ directs new
i.e. step by step layout of the requirements. initiatives by employees and promotes a culture
of innovation. Some of the initiatives that we
have rolled out are:
The government has introduced
mandatory Corporate Social • CFO plus program which helps develop 5 Star
Responsibility (CSR) requirements CFOs who can create value for the business,
in the 2013 Act, which mandates i.e. who are business partners.
companies to spend on social and • We also believe in initiating job rotations at
environmental welfare, making India regular intervals for employees to develop
perhaps one of the very few companies their capabilities.
in the world to have such a law. What
were the key considerations and
challenges your company faced in
implementing this law for the first
time? Could you please elaborate the
CSR programs being undertaken by the
company?
We understand the importance of CSR and
support our communities through various
environment and social initiatives. We strongly
support the need for educating girl child and run a
project called ‘Nanhi Kali’. Mahindra Pride School
that conducts livelihood training programme
for youth from socially and economically
disadvantaged groups. Other projects like Lifeline
Express which is our mobile hospital services,
provides medical interventions and surgeries in
15
Identification
and accounting
of research and
development
activities
–– Provide an overview of the identification and

accounting treatment of various stages of
research and development activities
–– Highlight related key accounting challenges
relating to capitalisation of development
costs.
16
In an industry that is changing • Research on engines with low

fast, companies must continually emission and use of alternate fuels
evolve and bring new products to for greener and cleaner environment.
the markets. New products more
• Improved customer comforts
often than not are drivers of growth
and safety features like auto pilot
and serve as crucial factor for the
technologies.
survival of a company.
At the research stage, the entity may not
The automotive industry is one
be able to identify a project or a product
such sector where Research
and the relationship between the
and Development (‘R&D’) is an
cost being incurred and the expected
important element of growth. It
future benefits. An expenditure on
is directed by changing customer
research (or on the research phase of an
preferences, competition and
internal project) should be recognised
future regulatory norms leading to
as an expense when it is incurred. In
a shorter life span of models and
the research phase, an entity cannot
upgrading of the existing ones.
demonstrate that an intangible asset
Accordingly, intensive research and exists from which future economic
development activity around vehicle benefits are probable. Accordingly, the
components, systems, production expenses incurred are charged to the
processes and new technologies statement of profit and loss.
gives rise to a variety of intangible
In AS 26, ‘development’ is defined as
assets in the automotive sector. As
the application of research findings or
the industry makes high amount
other knowledge to a plan or design for
of investments in R&D activities,
the production of new or substantially
the related costs impact an entity’s
improved materials, devices, products,
earnings and cash flows. Thus,
processes systems or services prior
managing R&D costs is crucial for
to the commencement of commercial
this industry.
production or use.
Accounting of research and Some of the example of developmental

activities can be:
development activities as per
• Use of engineering plastics for
current Indian GAAP
body structure parts to reduce
manufacturing costs
As per Accounting Standard 26,
Intangible Assets (AS 26), ‘research’ • Improvements in brakes,
is defined as an original and planned suspensions and steering for
investigation undertaken with the improving performance and user
prospect of gaining new knowledge comfort
and understanding. The automotive • The design, construction and
sector continuously innovates to bring testing of pre-production or pre-use
down costs, meet the regulatory, safety prototypes and models
requirements as well as to improve
customer comforts and convenience. • The design of tools, jigs, moulds and
A decision to proceed from research to dies involving new technology
the development phase would be taken • The design, construction and
only after considering the results of operation of a pilot plant that is not of
such research. Some of the examples of a scale that is economically feasible
research activities are: for commercial production and
• Use of sintered products/composite • The design, construction and testing
materials for reducing the weight of of a chosen alternative for new
the engine/other body part resulting or improved materials, devices,
in reduced cost and improved fuel products, processes, systems or
efficiency. services.
17
An intangible asset arising from a research ends. However, practically it Cost of outsourced projects to
development (or from the development may require a careful examination and be capitalised
phase of an internal project) should be thorough documentation to be able
recognised if, and only if, an entity can to assess when the research activity In case of an outsourced project there
demonstrate all of the following: has ended and when the development can be two scenario:
activity has commenced. The entire development project has
• The technical feasibility - must be •
explained and substantiated and According to AS 26, if an entity cannot been outsourced.
should be capable of answering the distinguish the research phase from the The entity should specify the rights
question as to whether the project is development phase of an internal project being acquired and state the type of
technically feasible and how it can be to create an intangible asset, the entity control which it has. In such a case
implemented. treats the expenditure on that project as where the cost is easily identified
if it were incurred in the research phase (the purchase price), that the entity
• The intention to complete the
itself. is willing to buy, indicates the future
development activity and use or
sell it can be substantiated by a Once the development activity economic benefits. Accordingly, the
management assessment of the commences, the entity should cost may be capitalised.
project and a project plan detailing the determine whether an identifiable • A part of the project has been
phases of development and the use asset would result from this activity. outsourced.
or sale of the outcome. To meet this criterion, the asset should If the project meets the criteria of
be separable from the entity to be internally generated intangible, the
• The ability to use or sell the result of a
sold, transferred, licenced, rented, etc. outsourced cost should be included
development activity depends on the
Identifiability is critical to figure the in the cost of development as directly
technical capability of the entity since
resource from which/from the use of attributable cost.
in many cases development projects
which, future economic benefits will be
are for internal use.
available to the entity. The asset could
• The expected future economic be with a physical substance (e.g. a Is the cost of the new
benefits can be demonstrated by the prototype) or without (e.g. technical generation product or facelift
anticipated cash flow which may arise know-how). However, even in the case or special edition eligible for
from the development projects. of an asset with a physical substance, capitalisation
the physical element of the asset
• The availability of adequate technical, New generation product
would be secondary to the intangible
financial and other resources to The cost incurred in the development
component - i.e. the know-how which is
complete the development depends phase of a new generation product
present in it.
on the entity’s financial position, would typically be capitalised if it leads
adequately qualified employees and The entity should be able to assess to a completely new product.
sufficient resources. how future economic benefits may be
generated by the asset or by the use of Facelift
The ability to measure the expenditure These are generally minor revisions to
such an asset. This involves considering
attributable to the intangible assets the existing model of a vehicle, so as to
the technical feasibility, an identifiable
during the development phase includes adapt to current trends and customer
market, restrictive regulatory/licencing
all the costs directly attributed or expectations. It does not always result in
barriers, dependencies on direct/
allocated on a reasonable basis. a new product.
indirect input costs, etc. With so many
considerations, estimation of the For accounting, the entity should assess
Specific challenges probable future economic benefits whether the cost of a new generation
Since the R&D expenditure could to the entity would involve exercising product or a facelift meets the criteria for
constitute a significant portion of an judgements and making estimates. capitalisation.
entity’s cash outflows, the accounting of Practically, multiple developmental
projects (some internal and some Special edition
such expenditure may have a substantial
acquired) when in combination with Generally costs relating to special
impact on the financial statements of
each other might result in a marketable editions are not capitalised as there is
the entity. Many challenges arise due to
product. In such cases, the future no technical upgradation. Special edition
judgements being exercised at various
economic benefits may have to be of vehicle contain few special features
stages of R&D. It is essential to be able
estimated for the cash generating unit which are not a part of the standard
to recognise whether the expenditure
as a whole. model.
is being incurred at the research phase
or the development phase. Theoretically
development would start from where
18
Key difference from IFRS/Ind

AS
AS 26 provides a rebuttable presumption
that the useful life of an intangible
asset should not exceed 10 years from
the date on which when the asset is
available for use.
However, in some cases, there may be
persuasive evidence that the use of an
intangible asset will be for a specific
period that is longer than 10 years. In
such scenario, the presumption that the
useful life generally does not exceed 10
years is rebutted and the entity:
a. Amortises the intangible asset over
the best estimate of its useful life
b. Estimates the recoverable amount of
the intangible asset at least annually
in order to identify any impairment
loss
c. Discloses the reasons why the
presumption is rebutted and the
factor(s) that played a significant role
in determining the useful life of the
asset.
On the other hand, IFRS/Ind AS does
not mention a rebuttable presumption
with reference to the useful life of an
intangible asset. An intangible asset may
have an indefinite useful life when, there
is no foreseeable limit to the period over
which the asset is expected to generate
net cash inflows for the entity, after an
analysis of all of the relevant factors has
been done. An intangible asset with a
finite useful life is amortised over its
useful life. An intangible asset with an
indefinite useful life is not amortised but
will be tested for impairment annually
and whenever there is an indication that
the intangible asset may be impaired.
19
Competition regulations -
Impact on financial reporting
–– Highlight accounting and disclosure requirements

with respect to legal or disputed cases.
20
With increasing globalisation, CCI order1 Given the fact that the sector is already
the supply and distribution chain reeling under pressure due to negative
In 2011, a petition was filed before the consumer sentiments, high interest
in the automotive industry is CCI alleging monopolistic practices
becoming technologically driven, costs, and subdued growth in overall
followed by OEMs resulting in controlled business conditions in India and in
with an increased focus on price determination for spare parts and the infrastructure sector in particular,
specialisation and delivering a services against the market forces and the order of CCI could not have come
unique value proposition to the end denial of market access to independent at a time more pressing than this.
consumers. The components and repairs workshops. The Society of Indian Automobile
assembly procurement process in Main grounds of argument were Manufacturers (SIAM) was quick to
addition to the end distribution of that: i) the genuine spare parts of react against the order and termed it as
vehicles in an efficient, effective automotives manufactured by these one that completely ignored consumer
and timely manner can make or OEMs are not freely made available in safety while deciding the matter against
break the competitive positioning the open market, ii) the technological the OEMs2.
of the Original Equipment information, diagnostic tools and
software programmes required to
Manufacturers (OEMs). The supply
maintain, service and repair these high-
and distribution model, therefore, tech vehicles are not readily available to
requires considerable investment independent repairs workshops and iii)
and involvement of OEMs right the OEMs restrict, formally or informally,
through the initiation (conceptual the component manufacturers from
development), and needs the making these products available in the
supply and distribution channel to open market.
stand out and remain ahead of the Remedies were sought for from the
competition. While the structure CCI by holding inquiries against the
has created many advantages (e.g. OEMs and passing necessary orders,
innovation in technology, improved including cease and desist from such
product quality, competitive pricing monopolistic trade practices and
of vehicles, etc.), there are also misusing the dominant position held by
some perceived threats. The recent OEMs and making available spare parts,
technical information, diagnostic tools,
orders of the CCI dated 25 August
software, etc. for repairs, maintenance
2014 and 27 July 2015 brings and servicing to independent repairs
into fore one such threat – the workshops and also in the open market.
operational set up in the aftermarket
sales of spares parts distribution The CCI levied significant penalties on 17
OEMs which was based on a benchmark
and servicing system of the OEMs,
of 2 per cent of average turnover.
component manufacturers and
their dealers; resulting in restrictive The OEMs have sought an injunction/a
and anti-competitive practices. stay on the order of the CCI from the
Delhi High Court on various grounds,
While one could debate and argue
including challenging the jurisdictional
over the validity of the structure
authority of the CCI to undertake such an
and its effects on competition as investigation, which is since then been
enunciated in the CCI order, the granted.
direct implication that the order has
on financial reporting obligations of
the OEMs, cannot be undermined.
1. CCI Order dated August 25, 2014 and 27 July 2015, Case No. 03/2011
2. The Economic Times 11 September 2014, Business Today 11 September 2014
21
Financial reporting analysis not there is an obligating event (non-

compliance of law) arising from a past
The accounting and disclosure event (conduct of business operations
requirements for legal/disputed cases in a manner that is anti-competitive), the
are largely driven by AS 29, Provisions, existence of which is probable.
Contingent Liabilities and Contingent
Assets. Each case presents unique Available evidence and factors such
facts and circumstances and hence, as the progress of the case (including
there cannot be a single answer. While progress after the date of the financial
evaluating each case, companies may statements but before those statements
seek inputs from legal counsel on are issued), the opinions/views of
interpretation of the provisions of law. the legal counsel and other advisers,
the experience of the entity in similar
For any given case (including the one Source: KPMG in India analysis cases as well as those of other entities,
above pertaining to the CCI order), there and any other decision of the entity’s
could be three accounting situations management as to how the entity
depending upon the evaluation of Therefore the next logical step is to
intends to respond to the lawsuit,
conditions and factors that exist at determine whether there is a present
claim, or assessment (for example, a
the balance sheet date – recognise a obligation. AS 29 defines the present
decision to contest the case vigorously
provision, disclose a contingent liability obligation is an obligation, whose
or a decision to seek an out-of-court
or do nothing (i.e. neither recognise existence at the balance sheet date is
settlement), etc. would be key sources
a provision nor disclose a contingent considered probable, i.e. more likely
of information in such determination if
liability). than not. Whereas, when the existence
there is a present obligation. The fact
of an obligation at the balance sheet date
An initial step is to determine whether that legal counsel may be unable to
is considered possible and not probable
the respective case needs recognition express an opinion that the outcome will
(i.e. 50 per cent or less), there exists a
as a provision. As per AS 29, a provision be favourable to the entity should not
possible obligation. In both mentioned
is a defined as a liability which can be necessarily be interpreted to mean that
cases, present or possible obligation,
measured only by using a substantial there exists a present obligation.
the critical evaluation factors are: a) an
degree of estimation. The provision obligating event and b) probability of its
should be recognised when an entity existence at the balance sheet date.
has present obligation as a result of a
past event, it is probable that an outflow An obligating event is one that results
of resources embodying economic in an enterprise having no realistic
benefits will be required to settle the alternative to settling that obligation.
obligation and a reliable estimate can be It may arise due to many factors such
made of the amount of the obligation. as legislation or legal obligations. In
almost all cases it will most often be
Whereas, a contingent liability is defined clear whether a past event has given
as a possible obligation that arises rise to a present obligation. However, in
from past events and the existence a legal case it may be disputed whether
of which will be confirmed only by the certain events have occurred or those
occurrence or non-occurrence of one or events result in a present obligation.
more uncertain future events (not wholly Sometimes, there is an uncertainty
within the control of the enterprise) or over matters regarding questions with
a present obligation that arises from respect to facts or questions of law or
past events for which it is not probable both and the outcome cannot be judged
that an outflow of resources will be with reasonable prediction.
required to settle an obligation or the
amount of obligation that cannot be Situations like the CCI order that is
reliably measured. Thus, a provision/ disputed in the court of law falls into
contingent liability assessment is based such a category. It requires interpreting
on a combination of three factors i.e. the provisions of the Competition Act to
existence of present/possible obligation the underlying business conditions and
arising from past event, probability of operations conducted by the OEMs to
outflow of resources and reliability of determine whether or not a breach of
measurement. law has occurred and hence, whether or
22
Present obligation Possible obligation
Outflow not
Outflow probable probable
Provision Contingent liability

assessment assessment
Source: KPMG in India analysis
There could be two probable outcomes Whether an entity determines recording Ind AS 1, Presentation of Financial
from such an evaluation, either a present a provision or disclosure of a contingent Statements, would require that the
obligation or a possible obligation (in rare liability, the best estimate of the companies disclose information for the
situations one could argue that there management at which the obligation assumptions made for the future as well
is ‘no’ obligation, e.g. when there is a is expected to be settled needs to be as highlight major sources of estimation
frivolous claim). The decision tree based determined. In practice, the amounts of uncertainty that have a significant risk
on the outcome has been described penalties finally settled and paid could of resulting in material adjustments
above in a diagram. differ from the entities own estimates to the carrying amount of assets and
or the amounts initially demanded by liabilities within the next financial year.
Existence of a present obligation
relevant authorities. An entity needs Such assumptions and other sources
alone does not require a provision
to consider its historical experience of estimation uncertainty relate to the
to be recognised. The next criterion
in settling similar obligations, similar estimates that require management’s
to be met before an entity records a
or relevant industry experience, its most difficult, subjective or complex
provision is whether or not the outflow
assessment of the probability of an judgements.
of resources to settle the obligation
out-of-court settlement, legal advice,
is probable. Again, this assessment Another issue is that the supply
etc. while determining the extent of
needs careful evaluation of various and distribution model followed by
provisions or disclosures to be made.
factors (similar as stated above for the commercial vehicle and two wheeler
The amount may vary compared to
existence of an obligation), including an manufacturers is also very similar
the claim made, based on various
opinion from the legal counsel. When to that followed by passenger car
considerations, e.g. historical
it is more likely than not (probable) that manufacturers against which the CCI
experience in settling similar obligations,
the outflow is required, the provision is up in arms. Do these entities (in the
same or other industry experience,
is recorded (unless a reliable estimate commercial and two wheeler space)
probability of out-of-court settlement,
cannot be made). It is important to note need to consider the judgement and
lawyer’s assessment of superior court’s
that an evaluation of the probability of its effect on their financial statements
judgement of award money, etc.
‘existence’ of the obligation is different though they are not the direct recipient
from the probability of ‘outflow’ for of the judgement? This is worth thinking
Summing up
settling the obligation. over.
Thus, one would see that there is a
On the other hand, when the outflow is
high degree of judgement involved
not probable, it triggers the assessment
in determining the treatment to be
for disclosure of a contingent liability.
followed for the matter pending in
Similarly, when the obligation is
the court due to the uncertainties
determined to be possible (and not
involved. Each case will need a thorough
probable) it triggers the assessment
evaluation of facts, circumstances
for disclosure of a contingent liability. If
and legal opinion to conclude whether
the possibility of an outflow is remote,
it requires recording as a provision
then no disclosure is required by AS 29.
or a mere disclosure of a contingent
This determination (remote possibility)
liability or no mention in the financial
requires a robust assessment and is
statements because there is a remote
expected to occur less often.
possibility of an outflow.
23
Accounting for
product recalls in
the automotive
sector
–– Provide an overview of the the accounting

considerations relating to product recalls in the
financial statements of a manufacturer.
24
Product recalls is one of the key Background The financial impact is generally reduced
commercial obligations for a in case the manufacturer has taken an
Product recall is a request or effort insurance cover in relation to the product
manufacturer, especially for those initiated by the manufacturer to return
which are in the pharmaceutical recall/product liability or has entered
a product sold after the discovery of into an agreement/arrangement with
or automotive industry. With the defects and/or safety issues with the the vendor/supplier for recovering the
intensifying pressure on meeting whole or a part of the product initially cost involved in a product recall due to
the safety and quality standards, the sold, that might put the consumer into an error/issue from the vendor/supplier
focus on and instances of product danger or put the manufacturer/seller at side.
recalls is on the rise. Despite a risk of legal action.
In India, there are no specific
manufacturer’s best efforts to The general perception is that any government regulations governing
produce and sell products which company engaged in manufacturing product recalls. As things stand
meet acceptable quality standards, of a product can never completely rule currently, product recalls do not find
one cannot rule out the possibility out the possibility of an inadvertent any particular mention in the Indian
that products which do not meet shipment of a defective product into the Motor Vehicles Act, 1988. Until recently,
market. However, it can definitely reduce automobile recalls were not a common
those standards may reach the end
the probability thereof. Recalls by a phenomenon in India. However, with
consumer. Failure of these products manufacturer to remove a product from
may cause discomfort and/or an increased focus on customer safety
the market could arise voluntarily or as and quality standards and with the
accidents to the consumer. per the country’s consumer protection roll out of voluntary recall guidelines
Product failures which leads to laws or at a regulator’s request. (Voluntary Code on Vehicle Recall,
Consumer protection laws of a country 2012), released by the Society of Indian
their recall can largely be the result
may have specific requirements with Automobile Manufacturers (SIAM),
of failure in either the product regard to product recalls. Such laws/
design, the manufacturing process, many manufacturers have voluntarily
regulations can include a framework to started announcing policies around
inadequate description of safety determine the amount of cost the maker faulty components resulting in product
features or quality standards. A will have to bear, situations in which a recalls.
recall by manufacturer can give rise manufacturer has to compulsorily recall
to substantial litigation costs, loss of a product or penalties/fines for a failure Further, provisions of the Road Transport
to recall a product. and Safety Bill, 2015, intends to bring
revenue, incurrence of replacement/
into existence an independent regulator
reprocessing cost and most Generally, it is a difficult and an elaborate (i.e. the ‘Motor Vehicle Regulation &
importantly reputational damage. process to determine the cost involved Road Safety Authority of India’) for
in recalling a defective product, which regulation of vehicles with a focus on
have been released to the market/ improving road safety. The bill also
consumer and the economic loss provides a framework around product
resulting from potential bad publicity. recalls like providing this authority the
Product recalls, in many cases, can cost power to recall a vehicle if 100 or more
a company significantly, primarily due people complain about a particular
to costs involved in having to handle the defect in a vehicle that can cause harm
recalled product and as well as due to to occupants or other road users.
the possibility of being held financially
liable for the consequences of the
products called back.
25
Accounting for product recall Contractual claims there would be a situation of supply
cost and the related recoveries disruption. The estimation of such claims
Customer contracts may contain is dependent upon what the expected
Once a product recall is announced, a clause for reimbursement by the losses to the customer due to supply
customers start returning the product manufacturer for any loss incurred by the interruption are, which may pose a
for the defective parts to be replaced. customer due to any supply disruption/ challenge in estimating the loss in the
recalls made by the manufacturer or financial statements.
In such cases, a company would when the customer substitutes the
recognise provision for the related product due to supply disruption/recall
cost at the time of announcement of (cost differential, if product is procured Customer claims
product recall and estimation thereof from other vendor by the customer Recall of a product where there is a
may require a detailed analysis of the due to supply interruptions /recall). reasonable probability that the use of or
particular facts and circumstances and To illustrate, when a mining company exposure to the defective product may
generally is presented as a separate purchases customised trucks from a have a detrimental impact on health or
item of expense in the statement of truck manufacturer, the contract entered possibly death, may trigger end-user
profit and loss. into between the two parties may have claims in the form of class action suits or
If the recoveries of the cost of recall are a compensatory clause to the effect otherwise.
contractually agreed with the vendors that any production loss or loss of
revenue to the mining company arising Depending on the probability of the
then the recoveries are accounted outcome of the legal matter, a provision
as reimbursement under Accounting from the recall of those trucks by the
manufacturer has to be compensated for may be required and thus, again posing
Standard 29,Provisions, Contingent a challenge to estimate a particular claim
Liabilities and Contingent Assets (AS by the manufacturer.
in accordance with the provisions of AS
29). However, if the company recovers This being a contractual claim, 29.
an insurance claim, then the cost of recognition of loss is required from an
recall and insurance claim would be accounting perspective when recall is
presented gross i.e. as other income and announced and if it is expected that
expenses respectively.
26
Disclosure in financial liability on directors of a company,

statements recoverability of deferred tax assets and
minimum alternate tax, etc. Therefore,
Depending on the nature of the recall reassessment of these aspects should
and its impact on the company’s be performed before the finalisation of
business as well as financial statements, the financial statements for that period.
product recalls would require due
considerations for appropriate To conclude, product recalls may
disclosures as required by AS 29. Under pose significant challenges from an
Indian GAAP, the cost of the product accounting perspective in the form of
recall is generally included in ‘other significant estimates, etc., however,
expenses’ in the statement of profit and these can be addressed by performing
loss. a thorough impact assessment of the
event.
Consequential impact
If the product recall is caused by a
serious product defect and expected to
have severe impact on the company’s
performance, it may have consequential
impact on areas where evaluation
is performed on the basis of current
and future business performance
of the company such as impairment
assessment, going concern evaluation,
compliance with laws and regulations,
27
Challenges
relating to
transfer pricing
–– Highlight major Transfer Pricing (TP)

challenges for an entity in this sector
and important updates relevant to the
automotive sector.
28
TP was not a part of an Indian Key TP challenges in the

tax consultants’ everyday jargon automotive sector
till beginning of the twenty-first
century; but since then has Recent proliferation of TP disputes and
completely changed the way several the scale of amounts involved, have
Multinational Enterprises (MNEs) resulted in India being considered as an
look at the Indian direct tax regime. aggressive TP jurisdiction. The scope of
TP has unquestionably emerged transactions on the radar of the Indian
as a critical topic on any CFO’s tax TP legislation has been snowballing.
agenda. The definition of ‘international
transactions’ has been expanded
Unique attributes of the to include guarantee, advances,
business restructuring/reorganisation,
automotive sector
etc. However, there is a lack of clear
This industry is capital and technology guidance on how to benchmark these
intensive, highly competitive and is transactions. There are also grey areas
subject to significant price and market in situations, where a transaction that
risk. The automotive sector players would normally not affect taxable
globally have large fixed costs; make income, fails the arm’s length test.
meaningful investments in research and Then there are transactions between
development each year coupled with unrelated parties that fulfil certain
the creation of significant Intellectual criteria, which can also come under the
Property (IP); have complex supply purview of TP regulations as ‘deemed
chains and undertake high volumes of international transactions’. There are
intragroup cross-border transactions certain domestic transactions1 as well
including those of technology transfers. which have been brought under the
Such intercompany transactions have purview of TP. We have covered certain
extensively been a subject matter of key challenges faced by the automotive
scrutiny by the tax authorities. sector in this article.
When TP meets the Lack of good comparables

automotive sector One of the major hurdles for a robust
The auto sector has been facing high and sustainable TP analysis is the non-
pitched TP assessments in India. availability of relevant and uncontrolled
data for fair comparison. Most of
TP refers to what related entities charge the comparables have ownership
each other in transfer of goods/services arrangements resulting into significant
and an analysis of whether it is akin to a Related Party Transactions (RPTs) that
third party uncontrolled transaction i.e. are not ideally suitable for comparison.
at an arm’s length. The primary objective
of all TP regimes is to ensure that cross-
border transfers between MNEs are
not influenced to unjustly shift taxable
profits from any jurisdiction resulting
in a ‘tax base erosion’. This can best be
achieved by mapping the functional and
risk profile of the taxpayer vis-à-vis the
related parties, and the identification of
comparable uncontrolled transactions
or profitability therefrom; technically
termed as benchmarking. In some
cases, TP is also applied to domestic
transactions within India.
1. ‘Specified Domestic Transactions’ under Section 92BA of the Income-tax

Act, 1961 - TP provisions applicable only where aggregate amount of SDTs
exceeds INR5 crore (INR20 crore from FY 2015-16 onwards)
29
Royalty payments Risk adjustments

The transfer of technology/know-how is Certain auto ancillary companies in India
another common occurrence in many function as risk mitigation contractors/
of the MNEs in the auto sector. Major manufacturers for their foreign affiliates.
Original Equipment Manufacturers These arrangements involve the Indian
(OEMs) develop technology centrally companies manufacturing goods for
and customise it to meet the local the foreign affiliates under a guaranteed
needs for each country. While there are sales arrangement. These companies
relatively simpler supply chains that avoid typically bear low risks, do not own
technology transfer issues (e.g. direct any significant intangibles, and are
sale of finished products), the more compensated on a cost-plus basis. For
sustainable options generally involve facilitating a comparison, uncontrolled
substantive manufacturing in India data of full-fledged manufacturers is
and local product designing activities available, requiring adjustments to the
that customise products for the Indian account for the difference in functions
market. When one obtains technology, and risks. The Indian TP regulations
more often than not it results into royalty provide no guidance on the adjustments
transactions. Benchmarking of royalty which would be accepted and thus
payments along with satisfaction of leading to litigation.
the ‘need, receipt and benefit’ test has
become controversy-prone. Loss-making entities
An auto-sector company, especially
Payment of fees for centralised
in its start-up phase, normally incurs
operations significant operating losses. This
Another key element of this is the situation may continue if there is
centralisation of various functions for the a lower than anticipated demand
MNE as a whole. For instance, central for the particular product leading to
material purchasing, quality control, underutilisation of capacity. Losses/low
logistics management and other support profitability could also be due to a high
services viz. administration, controlling, import content which leads to a sizeable
HR development, etc. This centralisation levy of indirect taxes/duties, market
gives rise to standardisation and penetration pricing, etc. However, tax
economies of scale. The central entity authorities have been presuming that
providing these services usually allocates losses/low profits are attributable to
these costs (at times, with a markup) as transfer pricing which in turn leads to
service charges to all MNE subsidiaries. high pitched tax adjustments. Hence,
These payments from the Indian it is imperative to identify and clearly
taxpayers have been closely scrutinised document the reasons for operating
and challenged by the tax authorities losses/lower profits.
who question the arm’s length pricing
and require satisfaction of the ‘need, Accounting issues
receipt and benefit’ test for such service
Many auto sector entities adopt margin-
payments.
based methods for benchmarking. In
such cases, the effects of the differences
Creation of marketing intangibles in accounting policies (e.g. depreciation)
This concept involves identifying the are common. Furthermore, the
expenditure of the Indian taxpayer uncertainty in an entity’s ability to sustain
on ‘Advertisement Marketing and its TP stand can push it into an uncertain
Promotion’ (AMP), which tax authorities tax position, having an impact on its tax
have been deducing, that it creates or provision and deferred tax disclosures.
improves the value of the brand owned
by its related party (typically registered
outside India). The TP authorities tend
to compare the AMP spends of the
taxpayer with those of the external
comparables; and seek compensation
for any excessive spend with markup,
deeming it to be a service and thus
leading to long drawn litigation.
30
Important updates on TP which July 2013, the Organisation for Economic international operations including those
would be relevant to the auto Co-operation and Development (OECD) in the automotive sector, now have to
members along with the G20 countries adhere to compliance obligations that
sector as well adopted a 15 point action plan to address may be required under the report. The
Base Erosion and Profit Shifting BEPS. India as a part of G20 countries important actions from the action plan
(BEPS) and is actively involved in the action plan. relevant to transfer pricing:
BEPS has been key priority for The MNEs operating in India and Indian
governments around the globe. On 19 headquartered companies having
Action 8 Action 13 that companies should provide

TP aspects of intangibles TP documentation and Country- information relating to CbyC reporting
by-Country (‘CbyC’) reporting starting from FY 2016-172.
The objective of this action plan is to
prevent BEPS that may result from This action plan’s intention is to The guidance on intangible and
the abuse of TP rules related to cross- improve transparency for tax intragroup services would assume
border relocation of intangibles and administrations and increase certainty significance from an Indian
other transactions involving the use and predictability for taxpayers perspective especially considering
of intangibles and also to assure that through improved TP documentation that the Indian TP regulations do not
transfer pricing outcomes are in line and a template for CbyC reporting. contain any specific guidance on
with value creation. The guidance recommends a three TP aspects of intangibles and the
tiered structure to documentation amount of litigation the automotive
Action 10 consisting of a master file, a local file industry has been facing on such
Intragroup services and a CbyC report. issues. At the same time, considering
the requirement of maintaining the
The purpose of this action plan is to This would be applicable for the fiscal
master file, a local file and a CbyC
focus on developing rules to prevent years beginning on or after 1 January
report would indeed increase the
BEPS through the use of transactions 2016. MNEs would be given one
compliance cost and burden on the
(management fees, head office year from the fiscal year end to file
taxpayer.
expenses, etc.) which would not, or their CbyC report. Indian Competent
would only very rarely, occur between Authority has commented that
independent parties. the Indian Government expects
Draft scheme regarding the The following paragraphs explain the Arm’s length requirements
‘Range Concept’ and the ‘Use of requirments in each case: under other Indian legislations
Multiple Year Data’ APA: The APA scheme has proved to The arm’s length requirement is also
be a popular controversy management covered in the recently introduced
The Central Board of Direct Taxes
tool due to the flexibility afforded and Companies Act, 2013 as well as Clause
(CBDT) on 21 May 2015, has issued the
the rational and pragmatic approach 49 of the Equity Listing Agreement [of
draft scheme on the implementation of
of the team. With the introduction of stock markets under the auspices of the
range and multiple year data concepts
the rollback provision, the APA may Securities and Exchange Board of India
for computation of the Arm’s Length
provide protection from litigation for the (SEBI)] (New SEBI Listing Regulations
Price (ALP)3. However, the arithmetic
past four years and future five years. Clause 23(3)(c)). These requirements are
mean concept would continue to apply
The APA can be extended to certain primarily intended to address corporate
where the number of comparables
other jurisdictions through bilateral and governance issues. RPTs also need to
is inadequate. The final rules are yet
multilateral agreements. The results meet the arm’s length requirements
awaited.
have been encouraging with 14 APAs under these norms.
already signed4.
Alternative dispute resolution TP aspects are also applied by the
MAP: The use of MAP under the tax customs authorities while dealing
mechanisms treaties can be invoked as an alternative with imports from related parties.
Considering the ongoing TP dispute resolution mechanism. India For those companies where a cost
controversies in the automotive sector has entered into various double taxation audit is applicable, the cost audit rules
and the fact that the appeal process in treaties to avoid tax disputes, whether require the maintenance of records
India is generally rule-based and time jurisdictional conflicts or matters on for transactions with related parties
consuming, companies can proactively interpretation. In matters pertaining to indicating the transfer price and normal
consider alternative dispute resolution potential double taxation or taxation price (analogous to ALP) along with the
mechanisms such as the Advance not in accordance with a double tax basis for determination of such normal
Pricing Agreement (APA) and the Mutual convention, there is an option available price.
Agreement Procedure (MAP) route to before or after the exhaustion of any
manage controversy. domestic administrative appeals process
to apply for MAP under the relevant tax
treaty.
2. Minutes of Tax officers’ offsite organised by Ministry of Finance and CII’s 4. Press release by the CBDT dated 6 August 2015 http://pib.nic.in/newsite/
presentation at the meeting on 25 November 2014. PrintRelease.aspx?relid=124438
3. http://www.finmin.nic.in/press_room/index.asp?pageid=5
31
Way forward for the auto

MNEs
The automotive sector players need
to speed up on and start planning their
TP policies proactively. A well-defined
TP policy and clear identification and
measurement of risks, functions has
become the need of the hour. It is
worthwhile that thorough TP planning
be carried out before entering into
any new intercompany transactions.
Also, considering the in-depth scrutiny
of royalty and management payouts
by the tax authorities, sufficient
documentation must be maintained to
satisfy the “need, receipt and benefit”
tests.
Considering high pitched assessments,

the importance of a well thought-out
litigation strategy cannot be overstated.
Companies have an option of going
the traditional appeals way via the
Commissioner of Income-tax (Appeals),
Income Tax Appellate Tribunal and so
on. An alternative approach through
the Dispute Resolution Panel route,
provides a timebound process at the
first level and may expedite the overall
litigation process.
For companies who do not wish to

proceed through the tedious litigation
route, an APA provides a prudent
mechanism to achieve tax certainty.
Bilateral APAs could nullify any double
taxation exposures. For past litigations,
MAP (where available) can also provide
a relief from double taxation.
The accounting aspects associated

with related parties should be closely
monitored and accurately reported.
Apart from the tax essentials, the
requirements under the Companies
Act also assume great significance, and
they need to be addressed on priority,
considering the consequences in case
of any defaults.
To sum up, a robust documentation

supporting transfer prices, which is
meticulously put together along with
an appropriate litigation strategy could
go a long way in determining a smooth
ride for the MNEs in the automotive
sector.
32
33
GST and the

automotive
sector
–– Provide an overview of the ‘Goods and Services

Tax’ (GST) with respect to the automotive
sector
–– It highlights key impacts and opportunities

which GST purports to bring in the automotive
sector.
34
The Indian economy is gearing up for the biggest tax change in the country’s history with GST set to replace the
prevailing excise duties, service tax and the state Value Added Tax (VAT). The automotive sector is also expected to be
affected by this significant change.
Would four meter matter anymore

Today passenger vehicles (‘cars’ in common usage) have a differential central
excise duty structure which are as follows:
Vehicle category Excise Duty
Small cars 12.5 per cent
Length>4m but engine capacity less than 1500cc 24 per cent
Length>4m and engine capacity more than 1500cc 27 per cent
SUVs/MUVs (length >4m, engine capacity >1500cc and 30 per cent

Ground clearance >170mm)
Hybrid cars 12.5 per cent
Electric cars, 2W & 3W 6 per cent
Source: The Society of Indian Automobile Manufacturers’ report on excise rate tariffs
As seen from the above table cars of Revamping the distribution Stock transfers made by the OEM from
a smaller engine capacity and length network a factory to a depot does not attract CST.
less than four meters are subjected However, the credit of VAT paid by the
to an excise duty of 12.5 per cent Ordinarily, models of passenger vehicles OEM on its inputs is restricted (called
and this duty almost doubles once and commercial vehicles are structured ‘input tax retention’ in tax parlance) to
the length crosses four meters and differently from tax perspective. Thus some extent and adds to the cost in the
further increases if engine capacity impact on these models differs. supply chain.
goes up. GST is expected to work on More often than not, OEMs sell their GST is expected to replace costs such
the principle of minimum variations passenger vehicles through their dealers as CST and VAT retention as all taxes
in tax rates, somewhat similar to VAT across the country. A concessional paid would be available as credit to
today where all cars are generally taxed Central Sales Tax (CST) paid by the OEM the next person in the supply chain.
at a standard rate, mostly of 12.5 per on such supply at the rate of two per In fact, it is expected that the number
cent. If the rate differential between a cent becomes cost in the supply chain of depots of an OEM may be reduced
less-than-four-meter car (quite often a as dealers do not get any credit for e.g. if currently an OEM has 25 to
hatchback) and longer car (like a sedan) paying such a tax. 30 depots, it may require less than
goes away, the consumer preferences
Commercial vehicles like trucks 10 depots if the business needs are
can suddenly shift in favour of a sedan
generally follow a consignment transfer adequately addressed by such a reduced
from a hatchback which today seems
model wherein, they are moved to number. Taking the example further, a
to enjoy bigger patronage because of
warehouses in different states, and single depot in Gurgaon or Noida may
the lower tax rates and consequently,
from where they are sold to dealers who cover four to five states in the GST
lower prices. Since rates and tariff under
in turn sell to customers in that state. scenario i.e. it may remove the need
GST regulations are not known yet, and
OEMs typically have warehouses in each for more depots that is felt today due
there is no certainty that differential
of the bigger states of India, to enable to tax aberrations. This consolidation is
rates would go away, Original Equipment
supplies to dealers in that state from expected to reduce the overall inventory
Manufacturers (OEMs) need to factor
the depot itself. This helps in minimising level at all depots in totality.
this scenario in their strategic business
plan if they intend to introduce any new the CST cost as any supplies to a dealer
models of their passenger vehicles. from a depot outside the state would
attract such cost.
35
On the flip side, it is expected that Any procurement from outside the state would be a pass through. This exercise
consignment/stock transfers may also would require payment of full GST at the across the value chain will decide if
attract GST at full rate, which might lead rate of 20 per cent as against 12.5 per product pricing will be impacted due
to an increased cash flow lock up. Stock cent excise duty and two per cent CST to GST, how much of the impact would
transfers at present by OEMs, incur a tax today. need to be shared by the players in the
expenditure in the form of excise duty at supply chain and how much of these
An additional cash flow requirement of
12.5 per cent. This cash outgo may go up benefit to be passed on to the final
almost five percentage points on the
to 20 per cent, if that is the GST rate for consumer.
interstate purchases may impact OEMs
commercial vehicles. In such a scenario,
and component manufacturers alike. Needless to say, the consumer, of
OEMs may need to understand the new
Services are likely to attract a higher GST course, would like to avail of all benefits
working capital requirements to make
rate than the current 14 per cent, which across the value chain.
payments for the GST on consignment/
in turn will also impact the cash flows.
stock transfers.
The dates of payment of taxes would Consolidation of
In case of passenger vehicles, the
concessional CST of two per cent would
also be different under GST as compared manufacturing and new
to those of excise, service tax and VAT. vendor development
be replaced by a higher tax outgo on
For example, excise and service tax is
account of a higher rate charged under Many component manufacturers set up
payable to the central government on
GST. Therefore, on one hand the OEMs their plants in the vicinity of the OEMs
the sixth of the following month. If the
will potentially save on CST paid to mainly for the purpose of just in time
GST due date is say fifteenth of the next
vendors from outside the state, but supply. However, in our experience, the
month, then there would be a positive
may have to bear the burden of the cost of two per cent CST is also one
impact on the cash flow requirement for
interest cost on higher working capital of the determinants of such locational
a company. On the other hand, in many
requirement for interstate procurement polices. This often results in component
states VAT is to be paid to the state
and sales. manufacturers ending up with four
government by the twenty-first of the
In totality, it is the net effect of interest following month. A due date of fifteenth to five plants (some have even more
cost and the tax cost savings that the for GST in such a case will result in a than 15) in different auto hubs in India
OEMs will have to work out, which negative impact on the working capital like Pune, Chennai, Sanand, Manesar,
in all likelihood would be positive in requirements. Uttaranchal, Jamshedpur, etc.
the GST scenario. However, OEMs In the GST era, it is at least theoretically,
need to ruminate over this impact Sharing the benefits from GST possible, to have one or more centrally
well in advance, considering different located manufacturing facilities with
tax rate scenarios and revisit these GST will impact the tax cost of the
warehouses (to take care of just in
computations once the tax tariffs are company and also the cost of working
time supply requirements of OEMs), in
known. capital. It together will have a positive or
various auto hubs across India.
negative impact on the finances of the
company. If the analysis hints at a net The logistics industry in India is striving
Cash flow monitoring gain to the OEM, it will have to decide to achieve closer monitoring of the
Today at standard excise1 and VAT rate2, how much of that should be shared fleet and warehouses, better inventory
goods are subject to a tax rate of more with the dealers and customers and in management, reduced transportation
than 26 per cent at the wholesale stage. what manner. The price elasticity of the time, etc. All this can potentially help to
If the standard GST rate is around 20 product and the strategies adopted by reduce lead time and the related costs of
per cent, then the tax impact on the competitors have a big role to play in this logistics. In centralised manufacturing,
final price to the customer is likely to go decision. fixed overheads like capital goods
down, especially with savings in a tax requirement, administrative costs, part
OEMs may also ask their tier I and tier II
cost as explained above. Gains in lower of warehousing costs, etc. can go down.
suppliers to do a net impact analysis and
tax outgo would be partially offset by These two factors together can make
insist on sharing the gains for making
additional cash flow requirements. centralised manufacturing a possible
the product pricing more competitive.
approach in the GST era.
GST on imports at 20 per cent3 would be A similar exercise in the downstream
marginally higher than the current rate of supply chain, may require dealers to For component manufacturers who
approximately 19 per cent4 of additional share gains from such credit of GST on have only one or two plants today,
customs duties Countervailing duty and input services with OEMs. GST can offer an opportunity to scale
Special Additional Duty (CVD and SAD). up their operations at a much reduced
Presently, service tax is largely a cost
cost without having a need to set up
to the dealers but in a GST scenario it
distributed manufacturing facilities.
1. Standard excise rate is assumed to be 12.5 per cent what would be the standard GST rate
2. Standard VAT rate is assumed to be 12.5 per cent though this may differ 4. With 10 per cent basic customs duty and 12.5 per cent CVD and 4 per cent
from state to state SAD, the aggregate customs duty works out to 29.44 per cent and CVD
3. GST rate is assumed at 20 per cent, although there is no clarity currently on and SAD works out to be 18.73 per cent
36
Opportunities might also spring up In the table below, looking at the existing discounts or discounts based on past
on the vendor side of the supply scenario, the manufacturing state performance have been a matter of
chain. OEMs may be able to look at receives INR4.1 as inter-state tax i.e. dispute between the industry and the
vendors away from the plant location, CST is an origin based tax (i.e. revenue government ever since.
if components of appropriate quality would accrue to the manufacturing
GST may help in the settlement of some
are available at acceptable prices within state). In case of the GST scenario
of these disputes but might also rake up
the required time. A canvass of vendor (which is a destination based tax), out of
new issues.
development may spread across India, the total tax of INR10, only INR2 would
making the country a unified market accrue to the manufacturing state and Businesses would need to factor their
place. the balance INR8 would be contributed new provisions of the GST law while
towards interstate tax, accruing to the framing their discount and incentive
Whether component manufacturers also
destination state. Hence, the benefit policies.
find this proposition attractive and would
provided by the manufacturing state
build synergies with these logistics A greater clarity in the law and an easy
by way of incentive schemes might
players, needs to be seen as and when availability of advance ruling can bring
reduce more than 50 percent in the GST
GST is finally rolled out. more certainty in the initial days of GST.
scenario.
The industry and the government will
State incentive schemes Automobile companies might need to have to work in sync to achieve this in
estimate such losses and factor it in the coming days, if the new tax regime
Many auto OEMs and component their future projections. They may also intends to be music to the ears of their
manufacturers could be claiming specific need to discuss with the respective industry.
state tax incentives from the state they state governments on how they would
are located in. At times, all taxes paid be compensated for such losses; either Looking at GST as a business
by the manufacturer to the state for a by increasing the number of years of
specified period of 15 to 20 years are change
receiving the tax exemption or by any
refunded. Such incentives reduce the other means as considered appropriate. GST is a business change and not a
payback period by improving the internal mere tax change. The above are only a
rate of return. few examples of the indicative impact
Discount structure and
The automotive sector generates that GST may bring with it. It is easy to
valuation issues
large number of direct and indirect see that many of the impact areas would
employment opportunities, besides Automobile companies usually have a actually fall in the domain of value chain,
promoting anciliary industries which robust incentive plan for their dealers. operations and strategies of automotive
further increases employment levels. The discounts and incentives are so companies. Each of these may have
Many state governments, therefore, try dynamic that the change itself is the only either a positive or a negative impact
to win over the auto OEMs to their state, constant there. on the profitability of the business.
to start the industrial snowballing effect. Some may open up opportunities for
Many of these discount schemes have
businesses while some may create
Under GST, a state is expected to been part of litigations especially on the
more competition and therefore, further
receive much lesser taxes from such central excise side. Various expenses
threat. It is clear that implementation of
manufacturers than under the current like Pre-Delivery Inspection (PDI) and
GST will be a top priority item for most
VAT regime. This is explained in the free after-sales services cost, advertising
companies.
example below5. undertaken by a dealer, year-end
Current scenario Post GST

Particulars Sales(INR)
Tax rate Tax amount SGST6 Tax rate Tax amount
(INR) (INR)
Within manufacturing state 20 12.50% 2.5 10% 2
Outside manufacturing state 80 2% 1.6 10% 8
Total 100 4.1 10
Tax received by manufacturing state 4.1 2
Source: KPMG in India analysis
5. SGST rate is assumed to be 10 per cent. The CGST component is not 6. All tax rates are assumed for this example
considered here since this would accrue as revenue to the central
government.
37
37
Regulatory
updates
38
ICAI releases revised guidance on Internal Financial Controls Over

Financial Reporting
Background –– Other companies: The Board’s auditor’s opinion on the financial

report to state adequacy of statements does not assure,
Under Section 143(3)(i) of the IFC with respect to financial for example, the future viability
Companies Act, 2013 (2013 Act), an statements. of the entity nor the efficiency
auditor of a company is required to or effectiveness with which the
state in his/her audit report whether management has conducted the
the company has an adequate internal
Criteria to be considered for
affairs of the entity.
financial controls (IFC) system in place developing, establishing and
and the operating effectiveness of reporting on IFC • Globally also, auditor’s reporting on
such controls. Explanation to Section internal controls is together with the
• Similar to the 2013 Act, the reporting on financial statements and
134(5)(e) of the 2013 Act defines IFC
Guidance Note does not prescribe such internal controls reported upon
to include policies and procedures
a particular framework for IFC. relate only to internal controls over
adopted by the company for ensuring
Instead the Guidance Note states financial reporting.
orderly and efficient conduct of its
that a benchmark system of internal
business, accuracy and completeness The Guidance Note states that
control, based on suitable criteria, is •
of the accounting records, and timely consistent with the requirements of
essential to enable the management
preparation of reliable financial the 2013 Act and the Rules as well
and auditors to assess and state the
information. as the practice prevalent globally,
adequacy and compliance of the
The Institute of Chartered Accountants system of internal controls. the term IFC wherever used in the
of India (ICAI) had issued a Guidance Guidance Note in the context of
• In the Indian context, e.g. Appendix the responsibility of the auditor for
Note in November 2014. This Guidance
I ‘Internal Control Components’ reporting on such controls under
Note has been revised subsequently and
of Standards on Auditing (SA) 315 Section 143(3)(i) of the 2013 Act, per
the ICAI issued a revised ‘Guidance Note
-Identifying and Assessing the Risk se implies and relates to IFC - FR.
on Audit of Internal Financial Controls
of Material Misstatement Through
Over Financial Reporting’ (Guidance For the above purpose, the Guidance
Understanding An Entity and Its •
Note) on 14 September 2015. Note defines IFC - FR to mean
Environment, provides the necessary
criteria for IFC over financial reporting a process designed by, or under
Reporting responsibility of the (IFC - FR) for companies. the supervision of, the company’s
management principal executive and principal
• The components of internal controls financial officers, or persons
• Section 134(5)(e) of the 2013 Act under SA 315 takes into account performing similar functions, and
(which deals with the directors’ control environment, entity’s risk effected by the company’s board of
responsibility statement) requires assessment process, control directors, management, and other
directors of listed companies to state activities, information system and personnel, to provide reasonable
whether they had laid down IFC to communication and monitoring of assurance regarding the reliability
be followed by the company and controls. of financial reporting and the
that such IFC are adequate and were preparation of financial statements
operating effectively. Reporting by auditors – for external purposes in accordance
• Rule 8(5)(viii) of the Companies whether same scope as that of with Generally Accepted Accounting
(Accounts) Rules, 2014 (Rules) Principles.
management
requires Board’s report of every
company to state the details in • The auditor’s objective in an audit of
respect of adequacy of IFC with IFC - FR (which is generally carried
reference to the financial statements. out along with an audit of financial
statements) is to express an opinion
• Though not specifically mentioned, on the adequacy and operating
the Guidance Note appears to effectiveness of the company’s IFC
suggest that for: - FR. A company’s internal control
–– Listed companies: The directors’ cannot be considered effective if one
responsibility statement to or more material weakness exists.
state that IFC are adequate and Paragraph A1 of SA 200 -Overall
operating effectively. The Board’s Objectives of the Independent
report to state the adequacy Auditor and the Conduct of an Audit
of IFC with respect to financial in Accordance with Standards on
statements. Auditing,inter alia,states that the
39
39
How to audit IFC - FR objectives and can effectively prevent of IFC - FR would apply even in
or detect errors or fraud that could the case of CFS, for the respective
• Since the SAs do not address the result in material misstatements in components included in the CFS only
auditing requirements for reporting the financial statements. if it is a company under the 2013 Act.
on IFC, though certain portions
of the SAs may still be relevant, • Step3 • Accordingly, in line with the approach
the Guidance Note provides Operating effectiveness adopted by the ICAI in case of certain
supplementary procedures that Operating effectiveness of a control other reporting matters on CFS, the
would need to be considered by the is tested by determining whether reporting on adequacy of IFC would
auditor for planning, performing and the control is operating as designed also be on the basis of the reports
reporting in an audit of IFC - FR under and whether the person performing on Section 143(3)(i) of 2013 Act as
Section 143(3)(i) of 2013 Act. the control possesses the necessary submitted by the statutory auditors
authority and competence to perform of components that are Indian
• The Guidance Note specifically companies under the 2013 Act.
states that since the audit of IFC the control effectively.
is in connection with financial Testing of operating effectiveness
reporting, the concept of materiality Specified date for reporting on
involves planning the nature, timing
will be applicable even in such and extent of procedures to be the adequacy and operating
audits. The auditor should use the performed, assessing findings effectiveness of IFC - FR
same materiality considerations and concluding on operating
• Section 143(3)(i) of the 2013 Act
as would be used in planning the effectiveness.
does not specify whether the
audit of the company’s annual
• Step4 auditor’s report should state if IFC
financial statements as provided in
Reporting existed and operated effectively
SA 320 -Materiality in Planning and
Where there are deficiencies that, during the period under reporting
Performing an Audit.
individually or in combination, result of the financial statements or at the
Though the audit procedures mentioned in one or more material weaknesses, balance sheet date up to which the
in the Guidance Note have been framed the auditor should evaluate the need financial statements are prepared.
for an auditor, these procedures could to express a modified opinion i.e. Paragraph 57(k) of the Statement on
also be used by companies to perform qualified or adverse on the company’s the Companies (Auditor’s Report)
a self-evaluation. The audit procedures IFC - FR, unless there is a restriction Order, 2003 issued by the ICAI,
would typically involve the following on the scope of the engagement in inter alia,states that an auditor is
steps: which case the auditors should either required to assess whether the major
disclaim the opinion or withdraw from weakness, if any, noted by him have
• Step1
the engagement. The auditor should been corrected by the management
Planning
determine the effect of the modified at the balance sheet date.
Under the planning stage, the
auditor is required to establish opinion on IFC - FR has on his • Accordingly, the auditor should report
an overall audit strategy that sets opinion on the financial statements. if the company has adequate internal
the scope, timing and direction Additionally, the auditor should control systems in place and whether
of the audit, and that guides the disclose whether his opinion on the they were operating effectively at the
development of the audit plan. The financial statements was affected by balance sheet date.
planning stage involves identification the modified opinion on IFC - FR.
of significant account balances/ IFC reporting on interim
disclosure items, identification IFC reporting on consolidated financial statements
and understanding significant flow financial statements (CFS)
of transactions, identification of • It may also be noted that an auditor’s
Risk of Material Misstatements • Section 129(4) of the 2013 Act reporting on IFC is a requirement
(RoMM), identification of controls states that provisions of the 2013 specified in the 2013 Act, and
which will address RoMM including Act applicable to the preparation, therefore will apply only in case of
applications, associated IT adoption and audit of the financial reporting on financial statements
environment and general IT controls. statements of a holding company prepared under the 2013 Act and
shall, mutatis mutandis, apply to the reported under Section 143 of the
• Step2 CFS. A strict reading of this Section 2013 Act.
Design and implementation might indicate that the auditor will
be required to report under Section • Accordingly, reporting on IFC will
The auditor should test the design
143(3)(i) of the 2013 Act on the not be applicable with respect to
effectiveness of controls by
adequacy and operating effectiveness interim financial statements, such
determining whether the company’s
of the IFC - FR, even in the case of as quarterly or half-yearly financial
controls, if they are operated as
CFS. statements, unless such reporting
prescribed by persons possessing the
is required under any other law or
necessary authority and competence The Guidance Note has clarified
• regulation.
to perform the control effectively, this by stating that reporting on the
satisfy the company’s control adequacy and operating effectiveness
40
Foreign Direct Investment The MCA modified the version of Form A. Currently, there is a conflict in the
(FDI) – Reporting under the FDI MR - 2 with effect from 14 August 2015. definitions used in the AS and the
The MCA advised the stakeholders to 2013 Act. The MCA has addressed
Scheme on the eBiz platform plan accordingly pursuant to change these concerns and accordingly
The Reserve Bank of India (RBI), through of the version of the above mentioned inserted the above mentioned rule
its circular no. 9, RBI/2015-16/157 A.P. form.
B. Amendments to the above Rules
(DIR Series) dated 21 August 2015, (Source: MCA Notice dated 14 August 2015 on the and Schedule III to the 2013 Act are
has enabled online filing of the Foreign MCA website)
expected to come into force from
Currency Transfer of Shares (FCTRS)
the date of publication in the Official
returns for reporting transfer of shares, The MCA amends norms Gazette.
convertible debentures, partly-paid
relating to the preparation of Accordingly, under the head of ‘Notes:
shares and warrants from a person
resident in India to a person resident financial statements General Instructions for Preparation of
outside India or vice versa. The RBI has The MCA has been issuing various Balance Sheet’, following details relating
enabled online filing to promote ease of amendments and clarifications to the to micro, small and medium enterprises
reporting of transactions under foreign Companies Act, 2013 (2013 Act) and should also be disclosed:
direct investment, under the aegis of the to the corresponding Rules to remove a. The principal amount and the
eBiz project of the Government of India. practical challenges faced by companies interest due thereon (to be shown
The design of the reporting platform while implementing certain provisions separately) remaining unpaid to
enables the customer to login into the of the 2013 Act. Recently, the MCA any supplier at the end of each
eBiz portal, download the reporting amended the Companies (Accounts) accounting year;
form (FCTRS), complete and then Rules, 2014 (Rules) and Schedule III to
the 2013 Act. b. The amount of interest paid by
upload the same onto the portal using
the buyer in terms of Section 16
their digitally-signed certificates. The
of the Micro, Small and Medium
Authorised Dealer Banks (ADs) will be Amendment to definitions Enterprises Development Act,
required to download the completed
The MCA has inserted a new Rule 2006, along with the amount of
forms, verify the contents from the
4A which states that the financial the payment made to the supplier
available documents and if necessary,
statements should be in the form beyond the appointed day during
call for additional information from the
specified in the Schedule III to the each accounting year;
customer and then upload the same for
2013 Act and should comply with the
the RBI to process and allot a Unique c. The amount of interest due and
Accounting Standards (AS) or Ind AS
Identification Number (UIN). The FCTRS payable for the period of delay
as applicable. Therefore, the items
services of the RBI have been made in making the payment (which
contained in the financial statements
operational on the eBiz platform from 24 has been paid but beyond the
should be understood in accordance
August 2015. appointed day during the year)
with the definitions and other
but without adding the interest
Further, the online reporting on the requirements as specified in the AS or
specified under the Micro,
eBiz platform is an additional facility to the Ind AS, as the case may be.
Small and Medium Enterprises
the Indian residents to undertake their
Currently, there is a conflict in the Development Act, 2006;
FCTRS reporting and the manual system
definitions used in the AS and the 2013
of reporting as prescribed in terms of d. The amount of interest accrued
Act. The MCA has addressed these
A.P. (DIR Series) Circular No.6 dated and unpaid at the end of each
concerns and accordingly inserted the
18 July 2014 would continue till further accounting year; and
above mentioned rule.
notice.
e. The amount of further interest
(Source: RBI circular - RBI/2015-16/157 A.P. (DIR Amendments to the above Rules and the
remaining due and payable even
Series) Circular No. 9 dated 21 August 2015) Schedule III to the 2013 Act are expected
in the succeeding years, until
to come into force from the date of
such date when the interest dues
publication in the Official Gazette.
The Ministry of Corporate above are actually paid to the
small enterprise, for the purpose
Affairs (MCA) modified Form Disclosures for micro and small of disallowance of a deductible
MR-2 enterprises in Schedule III to the expenditure under Section 23 of
MR - 2 form is utilised when applying to 2013 Act the Micro, Small and Medium
the Central Government for: Enterprises Development Act,
In the present Schedule III to the 2013 2006.
• approval of appointment or Act, ‘Trade Payables’ is being shown as
reappointment a single line item under the head Current
Liabilities under ‘Equity and Liabilities’.
• remuneration or increase in
remuneration However, as per the recent notification
issued by the MCA dated 4 September
• waiver for excess or over payment 2015, Trade Payables will now be further
to a managing director or whole time categorised into:
director or manager and commission
or remuneration to directors.
41
Others The SEBI issues the SEBI The Listing Regulations is based on the
(Listing Obligations and broad principles for periodic disclosures
Currently, Rule 12(1) of the Companies by listed entities, in line with the
(Accounts) Rules, 2014 requires that Disclosure Requirements) International Organisation of Securities
every company should file their financial Regulations, 2015 (Listing Commission principles.
statements with the Registrar together Regulations)
with Form AOC-4. It also incorporates the principles for
The Securities and Exchange Board corporate governance in line with the
Now the amended Rules requires that of India (SEBI) on 2 September 2015 Organisation for Economic Co-operation
every company should file: notified the SEBI (Listing Obligations and and Development principles.
• the financial statements with the Disclosure Requirements) Regulations,
These principles underline specific
Registrar together with Form AOC-4 2015 (Listing Regulations). For ease of
requirements prescribed in the different
reference, the SEBI has consolidated all
• the consolidated financial statement, chapters of the Listing Regulations.
requirements of the listing agreements
if any, together with Form AOC-4 These general principles can be a
relating to different segments of the
CFS. guide to listed entities in cases where
capital market in a single document.
no specific requirement is available or
The MCA has also issued revised Form These include:
where there is any ambiguity.
AOC-4 and AOC-4 CFS. • equity (including convertibles) issued
by entities listed on the main board of A shortened version of the listing
(Source: Companies (Accounts) Second
Amendment Rules, 2015 and KPMG in India First the stock exchanges agreement (2 pages approximately)
notes dated 9 September 2015) would be prescribed by the SEBI which
• small and medium enterprises (SME)
will be required to be signed by the
listed on the SME exchange and
Amendments to the company getting its securities listed
institutional trading platform
on stock exchanges. Existing listed
Companies (Management and • non-convertible debt securities entities would be required to sign the
Administration) Rules, 2014 • non-convertible redeemable shortened version within six months of
The MCA has made amendments to preference shares the notification of the regulations.
the Companies (Management and • Indian depository receipts (Source: Securities and Exchange Board of India
Administration) Rules, 2014 called (Listing Obligations and Disclosure Requirements)
Regulations, 2015 dated 2 September, 2015)
the Companies (Accounts) Second • securitised debt instruments
Amendment Rules, 2015.
• units issued by mutual fund schemes.
The MCA amended the rule 23 of
The Listing Regulations have been sub-
the Companies (Management and
divided into two parts:
Administration) Rules, 2014, which
states a special notice that needs to a. substantive provisions
be given to the company. This notice incorporated in the main body of
should be signed, either individually or the regulations
collectively by such number of members
b. procedural requirements in
holding not less than one per cent of the
the form of schedules to the
total voting power or holding shares,
regulations.
on which an aggregate sum of not less
than INRfive lakh has been paid-up on
the date of the notice. Now the special Applicability
notice is required to be signed by The Listing Regulations are effective
members holding shares of not more from 2 September 2015. The SEBI has
than INRfive lakh. provided a time period of 90 days for
The MCA also amended Form MGT implementing the regulations. However,
- 7, annual return. The annual returns two provisions of the regulations which
is required to be filed pursuant to are facilitating in nature are applicable
Section 92(1) of the Companies Act, with immediate effect. The two
2013 and Rule 11(1) of the Companies provisions are as follows:
(Management and Administration) • passing of ordinary resolution instead
Rules, 2014. of special resolution in case of all
(Source: The MCA circular, amendments to the material related party subject to
Companies (Management and Administration) related parties abstaining from voting
Rules, 2014 dated 28 August 2015)
on such resolutions, in line with the
provisions of the Companies Act,
2013 (2013 Act)
• re-classification of promoters as
public shareholders under various
circumstances.
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KPMG in India’s IFRS institute
KPMG in India is pleased to re-launch its IFRS institute - a web-based platform, which
seeks to act as a wide-ranging site for information and updates on IFRS implementation
in India.
The website provides information and resources to help board and audit committee
members, executives, management, stakeholders and government representatives gain
insight and access to thought leadership publications that are based on the evolving
global financial reporting framework.
IFRS Notes Missed an issue of Accounting and Auditing

The IASB proposes clarifications to the new Update or First Notes?
revenue standard
7 August 2015
ICAI releases revised KPMG in India is pleased
On 30 July 2015, the to present Voices on
guidance on Internal
International Accounting Reporting – a monthly
Financial Controls Over
Standards Board (IASB) series of knowledge
Financial Reporting
published for public sharing calls to discuss
consultation proposed 16 September 2015 current and emerging
clarifications with respect issues relating to
Under Section 143(3)(i) of the
to the following topics: financial reporting
Companies Act, 2013 (2013
a) Identifying Act), an auditor is required KPMG in India is pleased to present Voices on
performance obligations to state in their audit report Reporting – a monthly series of knowledge sharing
whether the company has calls to discuss current and emerging issues relating to
b) Principal vs agent
an adequate internal financial financial reporting.
considerations
controls (IFC) system in
c) Licencing, and place and the operating In this month’s call, we will cover key financial reporting
effectiveness of such controls. Explanation to Section and regulatory matters that are expected to be relevant
d) Transitional relief. for stakeholders as they approach the quarter ending
134(5)(e) of the 2013 Act defines IFC to include policies
The IASB’s deadline for receiving comments is 28 and procedures adopted by the company for ensuring 30 September 2015.
October 2015. orderly and efficient conduct of its business, accuracy Our call will include updates from the Ministry of
and completeness of the accounting records, and Corporate Affairs (MCA), the Securities and Exchange
Our issue of IFRS Notes provides an overview of
timely preparation of reliable financial information. Board of India (SEBI), the Reserve Bank of India (RBI),
key clarifications proposed by the IASB to IFRS
the Institute of Chartered Accountants of India (ICAI),
15, Revenue from Contracts with Customers and The Institute of Chartered Accountants of India (ICAI)
the International Accounting Standards Board, etc.
also highlights what the FASB is proposing to do in had issued a Guidance Note in November 2014. This
Some of the recent emerging issues on which we will
these areas. guidance note was revised subsequently and the ICAI
provide an update on the call are as follows:
issued a revised ‘Guidance Note on Audit of Internal
Financial Controls Over Financial Reporting’ (Guidance i. Foreign exchange volatility and its accounting
Note) on 14 September 2015. implication
Our First Notes provides an overview of the Guidance II. One time relaxation from preparation of
Note issued by ICAI. consolidated financial statements for unlisted
companies
III. The Ministry of Corporate Affairs clarification
relating to definitions in the Accounting Standards
and Ind AS vis-à-vis the Companies Act, 2013
IV. New Listing Regulations issued by the Securities
and Exchange Board of India
V. The recently released guidance note on Audit of
Internal Financial Controls over Financial Reporting
issued by the ICAI Controls over Financial
Reporting.
Post the call, we will be sharing with you a brief
publication that will summarise important topics that
will be discussed on the call for your reference.
Our Voices on Reporting conference call will be held
on Wednesday, 23 September 2015 between 04:00 -
05:00 PM.
We look forward to your presence and active
participation on this call.
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© 2015 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
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Accounting and Auditing Update Issue 1 Automotive PDF

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ACCOUNTING

Ind AS - Impact on the automotive sector p1

Conversation with Mr. V S Parthasarathy p11

Identification and accounting of R&D activities p15

Competition regulations - Impact on financial reporting p19

Accounting for product recalls p23

Challenges relating to transfer pricing p27

GST and the automotive sector p33

Regulatory updates p37

–– Provide key impact areas on adoption of Ind

The Ministry of Corporate affairs The adoption of Ind AS is expected

A. Revenue recognition In general, property refers to a person’s

Five-step model (or as) an entity transfers control of

Step Identify the contract (s) with the customer

Step Determine the transaction price

Step Allocate the transaction price

Step Recognise revenue

Key impact areas

Put option If the repurchase price of the asset is

The asset under the arrangement E. Other impact areas

If a buyer agrees to buy 100 per cent • debt equity classification

pays for the actual output. 4. KPMG’s Publication: Issues-in-depth Revenue

–– Provide an overview of the identification and

In an industry that is changing • Research on engines with low

Accounting of research and Some of the example of developmental

Key difference from IFRS/Ind

–– Highlight accounting and disclosure requirements

Financial reporting analysis not there is an obligating event (non-

Present obligation Possible obligation

Provision Contingent liability

Source: KPMG in India analysis

–– Provide an overview of the the accounting

Disclosure in financial liability on directors of a company,

–– Highlight major Transfer Pricing (TP)

TP was not a part of an Indian Key TP challenges in the

When TP meets the Lack of good comparables

1. ‘Specified Domestic Transactions’ under Section 92BA of the Income-tax

Royalty payments Risk adjustments

Action 8 Action 13 that companies should provide

Way forward for the auto

Considering high pitched assessments,

For companies who do not wish to

The accounting aspects associated

To sum up, a robust documentation

GST and the

–– Provide an overview of the ‘Goods and Services

–– It highlights key impacts and opportunities

Would four meter matter anymore

Vehicle category Excise Duty

Small cars 12.5 per cent

Length>4m but engine capacity less than 1500cc 24 per cent

Length>4m and engine capacity more than 1500cc 27 per cent

SUVs/MUVs (length >4m, engine capacity >1500cc and 30 per cent

Electric cars, 2W & 3W 6 per cent

Current scenario Post GST

Outside manufacturing state 80 2% 1.6 10% 8

Total 100 4.1 10

Tax received by manufacturing state 4.1 2

Source: KPMG in India analysis

ICAI releases revised guidance on Internal Financial Controls Over

Background –– Other companies: The Board’s auditor’s opinion on the financial

IFRS Notes Missed an issue of Accounting and Auditing

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