KPMG-September 2017

Accounting
and Auditing
Update
Issue no. 14/2017
September 2017
www.kpmg.com/in
Editorial
© 2017 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.
Sai Venkateshwaran Ruchi Rastogi
Partner and Head Executive Director
Accounting Advisory Services Assurance
KPMG in India KPMG in India
Indian Accounting Standards (Ind AS) mandate of depreciation issued by the Institute of Chartered
preparation of Consolidated Financial Statements (CFS). Accountants of India (ICAI).
An important element of preparing CFS is the accounting
and presentation of Non-Controlling Interests (NCI). Under Ind AS, goodwill arises when there is a business
Though owners of NCI do not control an entity, they still combination. Additionally, under Ind AS, this asset is no
represent equity interest. In this edition of Accounting longer amortised but tested for impairment annually.
and Auditing Update (AAU), we highlight certain practical Impairment testing requires entities to exercise
application areas associated with the accounting considerable judgement and there is a need to use
and presentation of NCI e.g. manner of attribution of assumptions that represent realistic future expectations.
profits and losses, impact of potential voting rights, Additionally, certain disclosures relating to goodwill e.g.
sale/purchase of equity to/from NCI, etc. The article sensitivity analysis and estimate of recoverable amount
also captures the detailed disclosure requirements are most challenging. Therefore, our article elaborates
relating each material subsidiary e.g. presentation of on the key considerations and disclosures that an entity
summarised financial information, significant restrictions should focus while conducting a goodwill impairment
and judgements. test.
Under the Companies Act, 2013 (2013 Act), depreciation We also cover a regular round-up of some recent
accounting is not based on prescriptive rates but regulatory updates in India and internationally along with
provides indicative rates of depreciation and gives an article highlighting key clarifications provided by ICAI
room to entities to apply judgement while estimating in its education material on Ind AS 16, Property, Plant and
the useful lives of the assets. Our article provides an Equipment.
overview of the 2013 Act’s requirements with respect to We would be delighted to receive feedback/suggestions
depreciation and also integrates the guidance provided from you on the topics we should cover in the
in the application guide and guidance note on accounting forthcoming editions of AAU.
Table of contents
Non-controlling interests 01
accounting under Ind AS
Accounting of depreciation 09
under the Companies Act, 2013
Goodwill impairment – 15
key considerations
Educational material on 19
Ind AS 16
Regulatory updates 23
1
Non-controlling interests accounting

under Ind AS
Introduction
The International Accounting Standards Board (IASB) changed the
term ‘minority interest’ to ‘Non-Controlling Interest’ (NCI) in 2008 in
the International Financial Reporting Standards (IFRS). The change in
terminology reflects the fact that an owner of a minority interest in an
entity might control that entity and, conversely, that the owners of a
majority interest in an entity might not control the entity. Therefore, NCI is
This article aims to
a more accurate description than minority interest of the interest of those
–– Provide an overview of the accounting of
owners who do not have a controlling interest in an entity.
non-controlling interests under Ind AS.
Indian Accounting Standards (Ind AS) are converged with IFRS and
therefore, Ind AS 110, Consolidated Financial Statements defines NCI as
equity in a subsidiary not attributable, directly or indirectly, to a parent.
Ind AS 110 requires a parent to present NCI in the Consolidated Financial
Statements (CFS) within equity, separately from the equity of the owners
of the parent. For example, if a parent owns 80 percent of a subsidiary
directly and the remaining 20 percent is owned by a third party, then in the
parent’s CFS the 20 percent interest held by the third party is presented
as NCI in that subsidiary (within equity). This is because existence of NCI
in the net assets of a subsidiary does not give rise to a present obligation,
the settlement of which is expected to result in an outflow of economic
benefits from the group. It represents equity i.e. residual interest in the
assets of the entity after deducting all its liabilities.
On the other hand, Accounting Standards (AS) use the term minority
interest and not NCI. AS 21, Consolidated Financial Statements, defines
minority interest as that part of the net results of operations and of
the net assets of a subsidiary attributable to interests which are not
owned, directly or indirectly through subsidiary(ies), by the parent. AS 21
prescribes that while preparing CFS a parent is required to identify and
present minority interest separately from liabilities and the equity of the
parent’s shareholders. Thus, under AS minority interest is not presented
as part of equity.
NCI can be categorised as:
• Present ownership interests that entitle their holders to a proportionate
share of the entity’s net assets in liquidation (ordinary NCI)
• All other NCI (other NCI) e.g. equity components of convertible bonds
or options under share-based arrangements, etc.
2
Measurement of NCI and further losses are adjusted For example, the parent buys
against the parent’s share, except shares from, or sells shares to,
Ind AS 103, Business Combination
where the minority has a binding NCI or the subsidiary issues new
requires that for each business
obligation to make good such shares or reacquires its shares.
combination, where an acquirer
losses.
does not acquire 100 per cent of a As per Ind AS 110, transactions
subsidiary, then the acquirer can • Potential voting rights and the that result in changes in
elect on a transaction-by-transaction NCI proportion ownership interests while
basis to measure ordinary NCI on As per the requirements of retaining control are accounted
initial recognition either at: Ind AS 110, the determination for as transactions with equity
of control of an entity takes holders in their capacity as
• Fair value at the date of
into account potential voting equity holders. As a result, no
acquisition, which means that
rights that are substantive. gain or loss on such changes
goodwill, or the gain on a bargain
However, Ind AS clarifies that is recognised in profit or loss;
purchase, includes a portion
NCI is generally based on current instead, it is recognised in
attributable to ordinary NCI; or
ownership interests because this equity. Also, no change in the
• The holders’ proportionate corresponds to the economic carrying amounts of assets
interest in the recognised amount interests of the parties. (including goodwill) or liabilities
of the identifiable net assets of is recognised as a result of such
the acquiree, which means that This includes in substance current transactions.
goodwill, or the gain on a bargain ownership interest i.e. as a result
of a transaction that gives it The interests of the parent and
purchase, relates only to the
access to the returns associated NCI in the subsidiary are adjusted
controlling interest acquired.
with an ownership interest. to reflect the relative change in
This accounting policy choice relates In this case, the proportion their interests in the subsidiary’s
only to the initial measurement of allocated to the parent and NCI is equity. As per Ind AS 110, any
ordinary NCI. After initial recognition, determined by taking into account difference between the amount
the option of measuring ordinary NCI the eventual exercise of those by which NCI are adjusted and
at fair value is not available. potential voting rights and other the fair value of the consideration
derivatives that currently give paid or received is recognised
Measurement of other NCI
the entity access to the returns directly in equity and attributed to
The accounting policy choice associated with an ownership the owners of the parent. These
available to ordinary NCI (as interest. principles also apply when a
explained above) does not apply subsidiary issues new shares and
to ‘other NCI’. Such instruments • Calculation of Earnings Per the ownership interests change
are measured as prescribed by the Share (EPS) as a result.
relevant Ind AS. For the purpose of calculating EPS • Non-reciprocal capital
based on CFS, the entity would contribution:
Practical application areas consider profit or loss attributable
to the ordinary equity holders of Sometimes an entity receives
While preparing CFS, a parent may
the parent entity and if presented, amounts from shareholders in
have to consider some practical
profit or loss from continuing the form of capital contributions,
application areas while accounting
operations attributable to those being either cash or other non-
and presenting NCI. Some of the
equity holders. monetary assets, which are
significant areas are as follows:
non-reciprocal - i.e. no financial
• Attribution of profit and losses The Ind AS Transition Facilitation or non-financial obligation exists.
Group (ITFG) of the Institute This may happen, for example,
As per Ind AS 110, an entity is
of Chartered Accountants of when an entity requires additional
required to attribute the profit or
India (ICAI) in its recent bulletin, financing or is in financial difficulty.
loss and each component of other
Bulletin 111 also reiterated that Amounts might be received
comprehensive income to the
while calculating EPS, profit or from all shareholders or only
owners of the parent and to the
loss attributable to the parent certain shareholders. The non-
NCI. Additionally, Ind AS requires
entity refers to profit or loss of the reciprocal capital contributions
an entity to allocate the losses
consolidated entity after adjusting made by a parent to a non-wholly
incurred by subsidiary between
profit attributable to NCI. owned subsidiary should be
the parent and NCI even if it
results in a negative balance of • Sale/purchase of equity allocated proportionately to NCI,
the NCI. Whereas under AS 21, if interest to/from NCI: After a i.e. they should be accounted
the losses attributable to minority parent has obtained control of a for as transactions between
interest in a subsidiary exceed the subsidiary, there may be a change shareholders, which have a direct
minority interest in the equity of in its ownership interest in that impact on equity.
the subsidiary, then such excess subsidiary without losing control.
1. Ind AS Transition Facilitation Group (ITFG) of ICAI issues Clarifications Bulletin 11 dated 1 August 2017
3
For example: Company X makes attributable to NCI would not be and the NCI. If an impairment loss
non-reciprocal capital contribution recognised in the parent’s CFS. attributable to a NCI relates to
of 100 to its subsidiary, Y, in However, in this case, goodwill goodwill that is not recognised in
which it holds a 75 per cent attributable to NCI is included in the parent’s CFS, that impairment
interest. The NCI in Y makes no the recoverable amount of the is not recognised as a goodwill
capital contribution. As per NCI related CGU or group of CGUs. impairment loss. In such cases,
accounting an amount of INR25 only the impairment loss relating
Hence, while conducting
is allocated to NCI and INR75 is to the goodwill that is allocated
impairment testing of goodwill, in
allocated to parent equity directly to the parent is recognised as a
this case, the carrying amount of
in equity in the CFS of X. goodwill impairment loss.
goodwill allocated to such a CGU
• Impairment testing of cash- or group of CGUs is grossed up to Presentation in the financial
generating units with goodwill include the unrecognised goodwill statements
and NCI attributable to the NCI. This In the parent’s CFS, as mentioned
Ind AS 36, Impairment of adjusted carrying amount is then above, NCI are presented within
Assets requires an entity to compared with the recoverable equity, separately from the equity of
test goodwill acquired in a amount of the unit to determine the owners of the parent. Therefore,
business combination each year whether the CGU is impaired. if there are NCI in more than one
for impairment. The testing for This gross-up is not required if subsidiary, then those interests
impairment involves comparing NCI were initially measured at fair are presented in aggregate in the
the recoverable amount of a Cash value. CFS. In the parent’s consolidated
Generating Unit (CGU) with the If a non-wholly owned CGU is statement of profit and loss, the
carrying amount of the CGU. impaired, then impairment losses amount of profit or loss and total
An entity may measure NCI at are allocated between the amount comprehensive income attributable
their proportionate interest in attributable to the parent and to to owners of the parent and NCI
the identifiable net assets of the NCI. Ind AS 36 requires an are shown separately; they are not
the subsidiary (that is a CGU or entity to allocate the impairment presented as an item of income or
group of CGUs) at the date of loss on the same basis as profit expense.
acquisition. Therefore, goodwill or loss is allocated to the parent
The following illustration explains the disclosure

Extract of Statement of Profit and Loss for the year ended 31 March 2017
Year ended Year ended

Note
31 March 2017 31 March 2016
Profit attributable to owners of the company 5,848 3,738
NCI 19 376 219
Profit for the year 6,224 3,967

Note
31 March 2017 31 March 2016
Other comprehensive income attributable to owners of the 597 553
company
NCI 19 27 22
Other comprehensive income for the year 624 576
Accounting and Auditing Update - Issue no. 15/2017 4

Note
31 March 2017 31 March 2016
Total comprehensive income attributable to owners of the 6,445 4,291
company
NCI 19 403 241
Total comprehensive income for the year 6,848 4.532
(Source: KPMG in India’s publication: Illustrative Ind AS consolidated financial statements – First-time adoption, March 2017 edition)
Disclosure requirements –– Dividends paid to NCI distributions being paid, or

Accumulated NCI of the loans and advances being made
Ind AS 112, Disclosure of Interests ––
subsidiary at the end of the or repaid, to (or from) other
in Other Entities requires that an
reporting period. entities within the group
entity should disclose information
that enables users of its CFS to • Summarised financial –– Nature and extent of protective
understand: information about subsidiaries: rights of NCI that can
For each subsidiary that has NCI significantly restrict the entity’s
• The composition of the group, and ability to access or use the
that are material to the reporting
• The interest that NCIs have in the entity, summarised financial assets and settle the liabilities
group’s activities and cash flows. information about the assets, of the group e.g.
Therefore, following disclosures liabilities, profit or loss and cash * Parent obliged to settle
should be given: flows of the subsidiary that liabilities of a subsidiary
enables users to understand before settling its own
• Each material subsidiary with the interest that NCI have in liabilities, or
NCI: The disclosure should the group’s activities and cash * Approval of NCI is required
include for each of its subsidiaries flows has to be provided. That either to access the assets
that have NCIs that are material information may include but would or to settle the liabilities of
to the reporting entity. These not be limited to, for example, a subsidiary. In particular
disclosures should enable current assets, non-current related to transfer of cash
users of the CFS to understand assets, current liabilities, non- and dividends or other capital
the interests that NCI have in current liabilities, revenue, profit distributions (e.g. in case
the group’s activities and cash or loss and total comprehensive of capital and/or foreign
flows. Materiality assessment income. This summarised exchange controls or other
is important when identifying financial information should be the regulatory limitations).
subsidiaries that NCI that are amounts before inter-company
material to the reporting entity. A eliminations. Additionally, an entity would
reporting entity would provide: need to disclose the carrying
• Significant restrictions: An amounts in the CFS of the assets
–– The name of the subsidiary entity is required to disclose and liabilities to which above
–– The principal place of business the nature and extent of any restrictions apply.
(and country of incorporation significant contractual or statutory
restrictions on an entity’s ability • Statement of cash flows: In
if different from the principal
to access or use the assets and relation to above mentioned
place of business) of the
settle the liabilities of the group disclosure requirement, Ind
subsidiary
such as AS 7, Statement of Cash Flows
–– The proportion of ownership specifically requires disclosure
interests held by the NCI –– Restrictions on the ability of to include, together with the
–– The proportion of voting a parent or its subsidiaries to commentary of management, the
interests held by NCI, if transfer cash or other assets to amount of significant cash and
different from the proportion of (or from) other entities within cash equivalent balances held by
ownership interests held the group the entity that are not available for
–– Guarantees or other use by the group.
–– The profit or loss allocated to
NCI of the subsidiary during the requirements that may restrict
reporting period dividends and other capital
5
• Disclosure of significant • Restate all business combinations the amount by which the NCI is
judgements: Ind AS 112 does that occurred after a particular adjusted and the fair value of the
not clarify whether the NCI date of the first-time adopter’s consideration paid or received,
disclosures should be given choice but before the date of and attribute it to the owners of
at the subsidiary level or at a transition or the parent).
subgroup level for the subgroup c. When there is loss of control
• Do not restate any business
of the subsidiary. The IFRS over a subsidiary, account for it
combinations prior to the date of
Interpretations Committee in accordance with Ind AS and
transition.
clarified that in the context of related requirements of Ind
the disclosure objective of Ind The exemption for past business AS 105, Non-current Assets
AS 1122, materiality should combinations also applies to past Held for Sale and Discontinued
be assessed by the reporting acquisitions of investments in Operations.
entity on the basis of the CFS associates, interests in joint ventures
of the reporting entity. In this and interests in joint operations Additionally, if a subsidiary is being
assessment, a reporting entity in which the activity of the joint consolidated for the first time, then
would consider both quantitative operation constitutes a business. NCI are recognised as part of the
considerations (i.e. the size of Furthermore, the date selected initial consolidation adjustment.
the subsidiary) and qualitative to restate previous business On the other hand, if a first-
considerations (i.e. the nature combination applies equally for all time adopter elects to restate
of the subsidiary). The approach such acquisitions. past business combinations in
chosen by the reporting entity accordance with Ind AS, then
If a first-time adopter opts to avail
should best meet the disclosure the balance of NCI related
the business combination exemption
objective of the Ind AS 112 in to all such restated business
then in such a case the balance of
the circumstances. The IFRS combinations would be determined
NCI under AS is not changed other
Interpretations Committee retrospectively, taking into account
than for adjustments made as part of
observed that this judgement the impact of other elections made
the transition to Ind AS.
would be made separately for as part of the adoption of Ind AS.
each subsidiary or subgroup that With respect to the business
has a material NCI. combinations that are not restated, NCI holding put options3
a first-time adopter should apply Sometimes NCI of an entity’s
Key Ind AS 101 requirements the following requirements of Ind subsidiary are granted put options
Ind AS 101, First-time Adoption of AS 110, in relation to accounting for that convey to those shareholders
Indian Accounting Standards allows NCI, prospectively from the date of the right to sell their shares in that
a first-time adopter to choose to not transition to Ind AS: subsidiary for an exercise price
to apply Ind AS 103 retrospectively (fixed or variable) specified in the
a. An entity should attribute
to past business combinations i.e. option agreement. In the CFS, the
the profit or loss and each
those transactions which occurred put option written by the entity
component of the OCI to the
before the date of transition to represents the group’s obligation
owners of the parent and to the
Ind AS. Additionally, it has been to acquire one class of its own
NCI, even if this results in the NCI
provided that if an entity opts to non-derivative equity instruments
having a deficit balance.
restate any business combination to (shares in subsidiary) by delivering
b. When the proportion of the either cash, or a variable number of
comply with Ind AS 103, then such
equity held by owners of the a different class of its own equity
entity should restate all business
parent and NCI changes (without instruments (shares in parent).
combinations later than the date of
loss of control), an entity should
such business combination. In the absence of direct guidance
adjust the carrying amounts of
in Ind AS 32, Financial Instruments:
Therefore, Ind AS 101 provides the owners of the parent and
Presentation or 109, Financial
following options for business NCI to reflect the changes in
Instruments, we consider that parent
combinations that occurred before their relative interests in the
may elect an accounting policy
the date of transition: subsidiary. Such transactions
based on either of the approaches
would be recognised directly in
• Restate all business combinations provided in subsequent section.
equity (i.e. difference between
2. IFRIC Update, September 2014, IFRS IC Foundation 3. Reference taken from KPMG in India’s publication: Financial Instruments: Application under
Ind AS March 2017 edition
Approach 1 – Put option recognised the put option, on each reporting entity should also evaluate an
separately as a derivative liability date, either in profit or loss or appropriate accounting treatment
equity. for the corresponding impact.
The shares issued by the subsidiary
For example, one alternative
to NCI holders are considered as In accordance with the principles
could be to debit equity since
equity instruments, being ownership of Ind AS 110, the other impact
this represents a cost of its
interests in the consolidated group of this transaction may be
investment in subsidiary. The
and the put option is recognised recognised on the basis of the
equity shares held by NCI would
separately. We consider that the NCI’s present access to the
continue to be classified and
entity may elect to apply one of the returns associated with the
presented as equity instruments.
following two accounting policies underlying shares (participation
Subsequent changes in the fair
for measurement of the put option in fair value changes and rights to
value of the derivative liability
liability: receive dividends). Thus, the NCI
should be recognised in profit or
holders would continue to receive
• Recognise a financial liability loss.
dividends on the shares held
for the present value of the
in subsidiary until the exercise Approach 2 – Classify shares held by
exercise price of the put option:
of the put option. However, the NCI together with the put option as
In accordance with Ind AS 32,
option is exercisable at a fixed financial liabilities
the put option represents a
price that is adjusted for any
contractual obligation for the Under this approach, the entity may
dividends previously paid and the
entity to purchase its own equity apply the guidance in Ind AS 32
NCI holders cannot participate
instruments for cash/another by considering all the contractual
in the subsequent fair value
financial asset. Therefore, the terms and conditions between the
changes in their shares. This
entity should recognise the group and the NCI holders. This
indicates that the NCI does not
present value of the amount would require analysing the shares
have present access to all returns
payable on exercise of the option in subsidiary held by NCI together
associated with an ownership
as a financial liability. with the put option written by parent
interest in the shares. Therefore,
in favour of NCI. On a combined
The IFRS Interpretations the other impact of the put option
analysis of these instruments, the
Committee has considered the transaction should be recognised
substance of the contractual terms
issue of recognition of change in as a debit to NCI (anticipated
states that there is a contractual
the carrying amount of such a put acquisition method) in the CFS.
obligation for the parent entity to
liability and indicated that under
• Recognise put options as deliver cash or a variable number of
IFRS, companies could elect to
derivative liabilities at FVTPL4: shares to the NCI holder at a future
present such changes either in
If the entity elects to apply this date, in exchange for the shares
profit or loss or in equity. If the
accounting policy, it is required held in the subsidiary. Therefore, the
same interpretation were applied
to account for put options shares held by NCI, together with
under Ind AS, then the entity could
separately as derivative liabilities the put option, effectively meet the
elect and consistently adopt an
measured at their FVTPL in definition of a financial liability and
accounting policy for recognising
the CFS. On initial recognition are recognised as such in the CFS.
the change in the present value of
of the derivative liability, the
the amount payable on exercise of
Conclusion
The concept of NCI under Ind AS has many new requirements. The article highlights some of the new
concepts related to NCI accounting. The entities transitioning to Ind AS should consider the facts
and circumstances of the transactions and the economic environment to deliberate the effect of new
accounting requirements.
4. FVTPL - Fair Value Through Profit or Loss
7
Consider this
–– Currently, minority interest arising on consolidation is measured at proportionate
share in the book values of the net assets of the subsidiary. Under Ind AS, minority
interest (referred to as NCI) needs to be measured on the acquisition date at either
their fair value or based on the proportionate share of the fair value of the acquired
entity’s identifiable net assets. This choice can be applied on a case by case basis.
–– Ind AS 110 requires losses relating to subsidiaries to be attributed to NCI even if it
results in a negative balance. Therefore, in such a case, NCI could be a debit balance.
–– The NCI in the balance sheet is classified as equity but are presented separately from
the parent shareholders’ equity.
–– Profit or loss and Other Comprehensive Income (OCI) for the period are allocated
between NCI and the shareholders of the parent.
–– An entity may write a put option in favour of NCI holders in an existing subsidiary
which is exercisable only on the occurrence of uncertain future events that are
outside the control of both parties to the contract. In this case, the entity should
account for the put option only if the terms affecting the exercisability of the option
are genuine.
9
Accounting of depreciation under the

Companies Act, 2013
Introduction
Under the Companies Act, 2013 (2013 Act), depreciation accounting
assumes a new order, from a regime of prescription based depreciation
rates, the new law now provides only indicative rates and requires
management to exercise judgement in arriving at rates for depreciation
based on the expected usage pattern of assets.
This article aims to Section 123 of the 2013 Act requires that a company declares or pays
–– Provide an overview of the requirements dividends out of the profits of the company for that year which is arrived at
of the Companies Act, 2013 with after providing for depreciation in accordance with Schedule II of the 2013
respect to accounting of depreciation
Act (Schedule II). Similarly, for payment of managerial remuneration to the
–– Highlight the related key guidance Directors, net profits are to be computed after deducting the amount of
comprised in the guidance note and
application guide issued by the Institute depreciation calculated in accordance with Section 123 of the 2013 Act.
of Chartered Accountants of India (ICAI).
Therefore, Section 123 and Schedule II lay down the requirements for
depreciation under the 2013 Act.
To help understand the requirements of the Schedule II, the Institute
of Chartered of Accountants of India (ICAI) has issued an application
guide (Application Guide on Provisions of Schedule II to the 2013 Act)
and a guidance note (Guidance Note on Accounting for Depreciation
in Companies in the context of Schedule II to the 2013 Act) in the past.
Additionally, the ICAI has recently issued an educational material on
the Ind AS 16, Property, Plant and Equipment which provides the key
requirements of the standard and the Frequently Asked Questions (FAQs)
covering the issues which are expected to be encountered frequently
while implementing the standard.
It is important to note that with the revised Accounting Standard (AS)
10, Property, Plant and Equipment and withdrawal of AS 6, Depreciation
Accounting, the requirements of AS and Indian Accounting Standards (Ind
AS) are largely similar now.
This article summarises the provisions governing depreciation under
Schedule II and how they differ from the provisions of the erstwhile
Schedule XIV. Additionally, it also highlights the related key guidance/
clarifications comprised in the application guide and guidance note issued
by the ICAI.
10
Key provisions of the life (higher or lower than specified determined separately. Such an
Schedule II in Schedule II) or a residual value of approach is known as ‘component
more than five percent, the financial accounting’ which is mandatory
Following is an overview of the statements of the company should under the 2013 Act and requires
key provisions for accounting of disclose such difference and provide companies to identify and depreciate
depreciation as provided under the justification duly supported by a significant components with
Schedule II: technical advice. different useful lives separately.
Useful life and residual value Moreover, both AS 10 and Ind AS The application of component
of assets 16, Property, Plant and Equipment accounting could pose significant
Schedule II defines depreciation require that the residual value and challenge for the companies in
as the systematic allocation of the the useful life of an asset should be terms of identification of significant
depreciable amount of an asset over reviewed at least at each financial components of an asset and
its useful life. The definition contains year end and, if expectations differ determining the cost of such
two significant terms – depreciable from previous estimates, the components. The guidance note
amount and useful life. These terms change(s) should be accounted and the application guide provide
have been defined as follows: for as a change in an accounting detailed guidance in these areas.
estimate. Additionally, the Ind AS
a. Depreciable amount of an asset Identification of significant
Transition Facilitation Group (ITFG)
is the cost of an asset or other components
in its Bulletin 111 also clarified
amounts substituted for cost,
that selection of the method of Identification of significant
less its residual value.
depreciation (e.g. SLM or WDV) is components requires a careful
b. Useful life of an asset is the an accounting estimate, and not assessment of facts and
period over which an asset is selection of an accounting policy. circumstances. Such an assessment
expected to be available for would include at a minimum:
use by an entity, or the number Useful life or residual value governed
of production or similar units by other regulatory authority • Comparison of the cost allocated
expected to be obtained from the to the item to the total cost of the
Part B of the Schedule II explicitly
asset by the entity. aggregated Property, Plant and
states that the useful life or residual
Equipment (PPE) and
Therefore, it means that the value of any specific asset as
companies are required to notified for accounting purposes by • Consideration of potential impact
depreciate assets over their useful a regulatory authority constituted of componentisation on the
life after considering the residual under an Act of Parliament or by depreciation expense.
value. the Central Government should
As a company is required to identify
be applied in calculating the
Schedule XIV of the Companies only material/significant components
depreciation to be provided for
Act, 1956 was prescriptive in separately for the purpose of
such asset irrespective of the
nature as it specified the minimum charging depreciation, materiality is
requirements of the Schedule II.
rates of depreciation to be applied a matter of judgement that need to
under Straight Line Method (SLM) Such a provision was not present be decided on the facts of each case.
or Written Down Value (WDV) in the Schedule XIV, except for The guidance note gives indicators
method for different class of assets. the companies engaged in the to assess significant components:
Schedule II, on the other hand generation/supply of electricity
• Determine the threshold value to
provides indicative useful lives for wherein it had been specifically
determine which asset requires
various tangible assets and states clarified2 that the depreciation
componentisation.
that the residual value of an asset charged under the Electricity
should not be more than five per Act, 2003 would prevail over the • Threshold value in percentage of
cent of the original cost of the asset. Schedule XIV for such companies. cost of component to the total
cost of the asset
The guidance note and the Component accounting
application guide clarified that the • Proportion of useful life of that
mandatory
useful life and residual value of part as compared to the useful life
assets (contained in Schedule II) Useful life prescribed under of the asset
are indicative in nature. Therefore, Schedule II is for whole of the asset.
However, where cost of part of • Potential impact on the total
companies may determine different depreciation expenditure.
useful life and residual value of the the asset is significant to total cost
assets which could be higher or of the asset and useful life of that
lower than those specified in the part is different from the useful
Schedule II. However, in case a life of the remaining asset, useful
company uses a different useful life of significant part should be
1. ITFG Clarification Bulletin 11 dated 1 August 2017 issued by the ICAI. 2. General circular dated 31 May 2011 issued by the Ministry of Corporate Affairs (MCA).
11
Companies also need to consider life is permitted only when the that pattern cannot be determined
impact on retained earnings, current management of the company reliably, then the straight-line
year profit or loss and future profit intends to use the component method should be used.
or loss (i.e. when the part would even after the expiry of the useful
On 31 March 20143, the Ministry
be replaced) in order to decide life of the principal asset.
of Corporate Affairs (MCA)
materiality. The application guide
In practice, an issue may arise amended the provisions relating
mentions that companies may
in case of companies that are to determination of useful lives
consider 10 per cent of original
depreciating their PPE based on of intangible assets prescribed
cost of the asset as a threshold to
prescribed regulatory rates. In such in Schedule II. The amendment
determine whether a component is
cases, whether such companies permitted companies to apply
material/significant.
could identify components and revenue-based amortisation,
Determination of cost of significant depreciate them using a different based on the proportion of actual
components rate remains as a moot point. revenue for the year as compared
to the total projected revenue from
With respect to determination of the
Amortisation of intangible the intangible asset during the
cost of such parts, the application
guide and the guidance note
assets concession period for ‘toll road’
Depreciation also includes intangible assets.
prescribe following criteria which
can be used by the companies for amortisation of intangibles as per However, Ind AS 38, specifies
determining the cost of such parts: Schedule II. Schedule II specifically that an amortisation method
mentions that intangible assets based on revenue generated by an
a. Break-up cost provided by the will be amortised as per Ind AS for activity that includes the use of an
vendor companies following Ind AS road intangible asset is presumed to be
b. Cost break-up given by internal/ map. inappropriate, except in very limited
external technical expert circumstances.
Accordingly, Ind AS 38, Intangible
c. Fair values of various Assets specifies that the accounting In order to transition to Ind AS, Ind
components or for an intangible asset is based on its AS 101, First-time Adoption of Indian
d. Current replacement cost of useful life. An intangible asset with Accounting Standards permits
component of the related asset a finite useful life is to be amortised, companies to apply a previously
and applying the same basis on however, an intangible asset with an used amortisation method for such
the historical cost of asset. indefinite useful life is not amortised. toll-road intangibles only to assets
Depreciation of significant Amortisation for an intangible existing at the beginning of the first
components with finite useful life should begin year of adoption of Ind AS.
when the asset is available for This represented an inconsistency
Every significant component which
use, i.e. when it is in the location between the guidance in Schedule II
has a useful life different from
and condition necessary for it to and in Ind AS.
the remaining asset should be
be capable of operating in the
depreciated separately. Therefore, Accordingly, MCA recently
manner intended by management.
two situations could arise and they amended4 Schedule II replacing
Amortisation should cease at the
are as follows: a part of the provision relating to
earlier of the date that the asset is
• Useful life of the component is classified as held for sale (or included intangible assets and provides the
lower than the useful life of the in a disposal group that is classified following:
principal asset as per Schedule II: as held for sale) in accordance with • Companies following Ind AS:
Such lower life should be used for Ind AS 105, Non-current Assets Companies following Ind AS
computing depreciation for the Held for Sale and Discontinued would be unable to apply revenue-
component. Operations and the date that the based amortisation method to toll
asset is derecognised. road related intangible assets that
• Useful life of the component is
higher than the useful life of the Additionally, the amortisation are recognised after the beginning
principal asset as per Schedule II: method used should reflect the of the first year of adoption of Ind
Though a company has a choice pattern in which the asset’s future AS.
of using either the higher or the economic benefits are expected
lower useful life, use of higher to be consumed by the entity. If
3. MCA notification no. G.S.R. 237(E) dated 31 March 2014. 4. MCA notification no. G.S.R 1075(E) dated 17 November 2016 and corrigendum dated 9
December 2016.
• Companies following AS: Schedule II indicates useful life, of However, if the company estimates
Companies that continue to CPP, for example, 25 years for ‘CPP, that the use of the asset for extra
follow AS are permitted to other than those for which special shift would not be on a sporadic
continue applying the exception rates’ has been prescribed in the basis i.e. the extra shift working for
in Schedule II and use a revenue- Schedule II and certain special rates the asset would be on regular or
based amortisation method for for others. continuous basis, it should reassess
their toll road intangibles. its useful life considering its use
The Guidance note and the
on extra shift basis. Hence, the
application guide reiterates that the
Continuous Process Plant reassessed useful life should then
principle of estimation of useful
(CPP)5 and multiple shift be used for the purpose of charging
life and concept of component
depreciation depreciation expense.
accounting are also applicable to a
With useful life and component CPP. Schedule XIV specified substantially
approach guidance, the provisions different requirements of
relating to CPP and multiple shift On the other hand, Schedule XIV,
depreciation. It specified separate
depreciation have been realigned inter alia, specified the general
rates of depreciation for single,
accordingly. rates of 15.28 per cent under WDV
double and triple shift use of assets.
method and 5.33 per cent under
CPP Both under Schedule XIV and
the Straight Line Method (SLM) of
Schedule II, extra shift depreciation
CPP means a plant which is required depreciation for ‘CPP, other than
is applicable only for the actual
and designed to operate for 24-hours those for which special rates’ had
number of days for which the asset
a day. The guidance note specifically been prescribed.
has been operated on double/triple
requires that the term used in the It is important to note that what has shift basis.
definition ‘required and designed to been considered as CPP under the
operate for 24-hours a day’ should Further, it should be noted that
Schedule II is the same as it was
be interpreted with reference to in case the useful life has been
under Schedule XIV i.e. a plant which
the inherent technical nature of the estimated on double/triple shift basis
was not a CPP under Schedule XIV
plant, i.e., the technical design of a at the beginning of the year, the
could not be a CPP under Schedule
CPP should be such that there is a concept of extra shift depreciation
II.
requirement to run it continuously will not apply. In such an instance,
for 24-hours a day. Such a plant Multiple shift depreciation the company will need to evaluate
could be shut down for some time whether there is any change in
The useful lives of assets specified
(for instance due to lack of demand, the circumstances on which the
under Schedule II are based on
maintenance etc.), however such useful life of asset was based or
their single shift working. However,
a shut down does not change the any new developments have taken
where a company estimated the
inherent technical nature of the place which may have impact on
useful life of an asset on a single
plant. It would still be considered as the estimated useful life of the
shift basis at the beginning of the
a CPP and useful life as estimated asset. If there is any such indication,
year but uses the asset on double
would be applicable for providing the company should reassess
or triple shift during the year, then
depreciation. the remaining useful life of the
the depreciation expense would
assets on the basis of the changed
Additionally, it is to be noted that a increase by 50 or 100 per cent as the
circumstances/new developments.
CPP is distinct from the repetitive case may be for that period.
For instance, use of the asset on a
process plant or assembly-line type The guidance note requires that the single shift basis in future.
plants. These plants are not CPP company should determine whether
since such plants do not involve the use of an asset for an extra shift Depreciation on low value
significant shut-down and/or start- was on sporadic basis in the past and items
up costs and are not technically would continue in future also. If the Schedule XIV included specific
required and designed to operate use is on a sporadic basis, then the provision for depreciating assets at
24-hours a day, for example, an depreciation expense for the double the rate of 100 per cent whose actual
automobile manufacturing plant. or triple shift should be increased by cost did not exceed INR5,000. This
Therefore, determination of whether 50 per cent or 100 per cent as the provision was based on the practices
a PPE is a CPP could be subjective case may be for the period of use. followed by the companies based on
and may require technical evaluation.
the materiality of the financial impact
of such charge.
5. CPP means a plant which is required and designed to operate for 24-hours a day.
13
However, since the life of an asset considering the same as PPE is a value prescribed in Schedule II,
is a matter of estimation, therefore, matter of professional judgement companies are required to disclose
Schedule II does not prescribe such which requires careful assessment useful life and/or residual value of
a bright line. A company could have a of facts and circumstances including assets adopted along with the fact
policy to fully depreciate assets up to qualitative aspects. Accordingly, that the adopted useful lives and
certain threshold limits considering individual insignificant assets below residual values are duly supported by
materiality aspect in the year of a certain threshold determined a technical advice.
acquisition. The materiality of such by the management may not be
Keeping in view the estimations
a charge should be considered with recognised as PPE. These may
and assumptions involved around
reference to the cost of the asset be expensed if their cumulative
determination of useful lives/residual
and the size of the company. aggregate cost for that category of
value, disclosure requirements
asset is not material.
Similar issue has been considered prescribed under Schedule II
and clarified in the educational definitely aim to promote best
Disclosures
material on Ind AS 16 and it states practices and transparency.
that determination of an individual In case of deviation from the
item as insignificant and not indicative useful life and/or residual
Consider this
–– Although the provisions of Schedule II offer flexibility to the companies i.e. it allows
companies to follow different useful life/residual value, the management will have to
technically evaluate and make use of judgement for determination of useful life and
identification of significant parts.
–– Accounting of depreciation has an impact on the distributable profits and calculation
of managerial remuneration.
–– Useful life, depreciation method and residual values of the PPE are considered as
accounting estimates.
15
Goodwil impairment –
Key considerations
Application of Ind AS would allow goodwill recognition only when
there is a business combination. Such a goodwill would be an asset
that represents the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and
separately recognised.
Under Accounting Standards (AS), goodwill would arise by application
of erstwhile AS 10, Accounting for Fixed Assets consequent to an asset
purchase, AS 14, Accounting for Amalgamations in respect of mergers
–– Highlight important considerations for
entities conducting goodwill impairment
and AS 21, Consolidated Financial Statements by virtue of equity interests
test under Ind AS. of the reporting entity in other entities.
Goodwill does not generate cash flows independently of other assets or
groups of assets and often contributes to the cash flows of multiple cash-
generating units. Therefore, goodwill can never be a Cash Generating Unit
(CGU) on its own.
An entity must ensure that its assets are carried at no more than their
recoverable amount. According to Ind AS 36, Impairment of Assets when
an asset is carried at more than its recoverable amount i.e. its carrying
amount exceeds the amount to be recovered through use or sale of the
asset, then in this case, the asset is described as impaired and an entity
has to recognise an impairment loss.
Once an entity recognises goodwill arising from a business combination,
Ind AS prescribes specific requirements about how goodwill is tested for
impairment as part of the testing of CGUs.
Background to impairment testing

A CGU is the smallest group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows of other
assets or groups thereof.
In testing for impairment, the carrying amount of an asset or CGU is
compared with its ‘recoverable amount’, which is the higher of:
• the asset’s or CGU’s fair value less costs of disposal; and
• value in use.
‘Fair Value Less Costs of Disposal’ (FVLCD) is the price that would be
received to sell an asset or CGU in an orderly transaction between market
participants at the measurement date, less the costs of disposal.
16
Value in use’ is the present value of synergies or of allocating goodwill goodwill without taking the
the future cash flows expected to and that valuation specialists could segments into consideration. Under
be derived from an asset or CGU. be used for this purpose. The pre- Ind AS, reporting entities would need
Value in use is a valuation concept acquisition analysis of the acquirer to consider the allocation of goodwill
that is specific to Ind AS 36 and not may be useful in allocating the to CGUs while considering the
used in other Ind AS. It combines goodwill to CGUs. This analysis interaction with Ind AS 108.
entity-specific estimates of future may indicate the drivers behind the
Method of impairment assessment
cash flows - from continuing use synergies that are expected to arise
and eventual disposal of the asset from the acquisition and may help There are two scenarios in which
or CGU - with a market participant- in finding an appropriate method goodwill is tested for impairment:
based discount rate. Ind AS 36 for allocating the goodwill between
1. A CGU or a group of CGUs to
includes detailed rule-based CGUs. Examples of methods of
which goodwill has been allocated
requirements on determining value allocation include the with or without
is being tested for impairment
in use method1, allocation in proportion
when there is an indication of
to the relative fair value of the
Key considerations possible impairment, or
identifiable net assets in each CGU
In this article, we aim to elaborate and allocation in proportion to the 2. Goodwill is being tested for
on the important considerations relative fair values of the CGUs. impairment in the annual
that the entities following Ind mandatory impairment testing,
AS should lay emphasis while Measurement of impairment loss without there being an indication
conducting and presenting and interaction with Ind AS 108, of impairment in the underlying
impairment test of goodwill. Operating Segments CGUs.
Goodwill sometimes cannot be In the first scenario (indicator-based
Frequency of goodwill impairment
allocated on a non-arbitrary basis to impairment test), the way in which
Under Ind AS, CGUs to which an individual CGU but only to groups impairment testing is carried out
goodwill has been allocated are of CGUs. Therefore, each unit or depends on whether goodwill has
required to be tested for impairment group of units to which goodwill is been allocated to individual CGUs
annually. In addition, impairment allocated: or to a group of CGUs. If goodwill
tests could be performed by the has been allocated to a group of
• Should represent the lowest
entity as a result of a triggering CGUs, then impairment testing is
level within the entity for which
event. performed in the following steps.
information about goodwill is
While under Accounting Standards, available and monitored for • The first impairment test is
goodwill is tested for impairment internal management purposes, performed at the individual CGU
only when there is a triggering event and level without goodwill (bottom-up
indicating impairment. test), and any impairment loss is
• Should not be larger than an
recognised.
Under Ind AS goodwill is no longer operating segment, determined
amortised but tested for impairment. in accordance with Ind AS 108 • The second impairment test is
before applying the aggregation applied to the collection of CGUs
Basis of allocation of goodwill to criteria of Ind AS 108. to which the goodwill relates (top-
CGUs down test).
Goodwill is allocated to the lowest
As mentioned above, goodwill level at which it is monitored for However, if the goodwill has been
does not generate independent internal management purposes. allocated to an individual CGU,
cash inflows; therefore, the asset This is to avoid the need to develop then there is no need for a two-
needs to be allocated to a CGU or a additional reporting systems to step approach, and the entire CGU
group of CGUs. Therefore, goodwill support goodwill impairment testing. (including goodwill) is tested for
arising in a business combination However, this does not mean that impairment.
is allocated to the acquirer’s CGUs entities can avoid testing goodwill
In the second scenario (annual
that are expected to benefit from at a level lower than an operating
impairment test), the collection of
the synergies of the business segment by simply not monitoring
CGUs to which the goodwill relates
combination in which goodwill arose. goodwill explicitly.
is tested for impairment, and there
This is irrespective of whether other
Under Accounting Standards, the is no requirement for two-stage
assets or liabilities of the acquiree
reporting entities in India that have a (bottom-up and top-down) testing.
are assigned to those units.
matrix organisation could have used
Ind AS 36 does not prescribe any the management approach to define
specific method of identifying CGUs for the purpose of monitoring
1. Based on the difference between the fair value of a CGU before and after the acquisition.
17
Cash flow projections In determining value in use, Value in use

projected future cash flows are
In measuring value in use, cash When a CGU’s recoverable amount
discounted using a pre-tax discount
flow projections should be based is based on its value in use,
rate that reflects:
on reasonable and supportable considerable judgement has to be
assumptions that represent • current market assessments of exercised by the management.
management’s best estimate the time value of money; and Therefore, entities would need to
of the range of future economic provide sufficient CGU-specific
• the risks specific to the asset or
conditions. Ind AS lays greater qualitative and quantitative
CGU.
weight to external evidence with disclosures. The aim of Ind AS 36 is
which management determines The discount rate is based on help users understand the approach
its best estimate of cash flow the return that investors would followed by the management.
projections. Management should require if they were to choose an
For value in use, Ind AS 36 requires
also assess the reasonableness of investment that would generate
management to explain its approach
the assumptions on which cash flow cash flows of amounts, timing and
in determining the values assigned
projections are based by examining risk profile equivalent to those of
to each key assumption by allowing
the causes of differences between the asset or CGU. In other words,
users to understand whether these
past cash flow projections and actual the discount rate is based on a
values are consistent with external
cash flows and ensure consistency market participant’s view of the
sources of information or how and
of the current cash flow projections asset or CGU as at the current date.
why they differ from past experience
with past actual outcomes, provided Therefore, although the cash flows
or external sources of information.
the effects of subsequent events in the value in use calculation are
or circumstances that did not exist entity-specific, the discount rate is Additionally, an entity would need to
when those actual cash flows were not. provide following disclosures:
generated make this appropriate.
In our experience, it is rare that • Each key assumption on which
Detailed, explicit and reliable a discount rate can be observed management has based its
financial budgets/forecasts of future directly from the market. Therefore, cash flow projections for the
cash flows for periods longer than an entity will generally need to build period covered by the most
five years are generally not available. up a market participant discount recent budgets/forecasts.
For this reason, management’s rate that appropriately reflects Key assumptions are those to
estimates of future cash flows the risks associated with the cash which the unit’s (group of units)
are based on the most recent flows of the CGU being valued. In recoverable amount is most
budgets/forecasts for a maximum the absence of a discount rate that sensitive.
of five years. Management may can be observed directly from the
• The period over which
use cash flow projections based on market, Ind AS 36 refers to other
management has projected
financial budgets/forecasts over a starting points in determining an
cash flows based on financial
period longer than five years if it is appropriate discount rate:
budgets/forecasts approved by
confident that these projections are
• the entity’s Weighted-Average management and, when a period
reliable and it can demonstrate its
Cost of Capital (WACC) greater than five years is used for
ability, based on past experience, to
a cash-generating unit (group of
forecast cash flows accurately over • the entity’s incremental borrowing
units), an explanation of why that
that longer period. rate, and
longer period is justified.
Ind AS 36 provides a detailed • other market borrowing rates.
• The growth rate used to
guidance on developing cash flow
extrapolate cash flow projections
projections, including the treatment Key assumptions
beyond the period covered by the
of future cost, capital expenditures,
While performing impairment most recent budgets/forecasts,
restructuring, etc.
analysis, there is a need to use and the justification for using any
assumptions that represent realistic growth rate that exceeds the
Use of discount factor
future expectations. Ind AS 36 long-term average growth rate
As part of the impairment process, requires detailed disclosures on for the products, industries, or
Ind AS 36 requires that future cash estimates used to measure the country or countries in which the
flows are estimated in the currency recoverable amount of CGU to which entity operates, or for the market
in which they will be generated and significant goodwill is allocated. to which the unit (group of units)
then discounted using a discount is dedicated.
rate appropriate for that currency.
• The discount rate(s) applied to the external sources of information, Sensitivity analysis
cash flow projections. and, if not, how and why they
Ind AS 36 calls for disclosures
differ from past experience or
Fair Value Less Costs of Disposal aimed at helping users in assessing
external sources of information.
(FVLCD) the safety margin and evaluating
• The level of the fair value hierarchy how sensitive the assessment
When a CGU’s recoverable amount
(see Ind AS 113 within which is to a change in one or several
is based on its FVLCD, again
the fair value measurement is of key assumptions used when
considerable judgement has to
categorised in its entirety (without determining the recoverable amount.
be exercised by the management
giving regard to the observability Therefore, entities would need
while applying valuation techniques.
of ‘costs of disposal’). to consider the current economic
If FVLCD is not measured using a
environment and make these
quoted price for an identical unit • If there has been a change in
disclosures relevant and include
(group of units), an entity should valuation technique, the change
assumptions such the growth rates,
disclose the following information: and the reason(s) for making it.
the discount rate, the operating
• Each key assumption on which If FVLCD is measured using margin and their impact on revenues
the management has based discounted cash flow projections, an or volume of sales. Additionally,
its determination of FVLCD. entity should disclose the following Ind AS 1, Presentation of Financial
Key assumptions are those to information: Statements requires similar
which the unit’s (group of units) disclosures on assumptions made
• the period over which
recoverable amount is most about the future, and other major
management has projected cash
sensitive. sources of estimation uncertainty,
flows
that have a significant risk of
• A description of management’s
• the growth rate used to resulting in a material adjustment
approach to determining the
extrapolate cash flow projections to the carrying amounts of assets
value (or values) assigned to each
within the next financial year.
key assumption, whether those • the discount rate(s) applied to the
values reflect past experience or, cash flow projections.
if appropriate, are consistent with
In our experience, the disclosures related to goodwill are the most challenging, requiring information
about key assumptions made in estimating recoverable amount and a sensitivity analysis dealing with
key assumptions that might reasonably change and thereby trigger an impairment loss. Additionally,
the entities should check the consistency and reasonableness of the inputs used in various
valuation techniques e.g. Ind AS 36, Impairment of Assets, Ind AS 37, Provisions, Contingent Assets
and Contingent Assets, IAS 19, Employee benefits, etc. while presenting and disclosing financial
statements.
Consider this
–– Estimates of future cash flows in the value in use calculation are specific to the entity,
and need not be the same as those of market participants. The discount rate used in
the value in use calculation reflects the market’s assessment of the risks specific to
the asset or CGU, as well as the time value of money.
–– An impairment loss for a CGU is allocated first to any goodwill and then pro rata to
other assets in the CGU that are in the scope of Ind AS 36.
–– An impairment loss is generally recognised in profit or loss.
–– Reversals of impairment of goodwill are prohibited.
19
Educational material on Ind AS 16,

Property, Plant and Equipment
The Institute of Chartered Accountants of India (ICAI), on 14 August
2017, issued educational material on Ind AS 16, which summarises the
key requirements in Ind AS 16 and accounting issues that are expected
to arise while implementing Ind AS 16 in the form of Frequently Asked
Questions (FAQs). Key clarifications provided in the FAQs on significant
implementation issues are as follows:
Recognition
–– Summarise the guidance provided by • Assets not considered to be material: Ind AS 16 does not prescribe
the educational material on Ind AS 16 on the unit of measure for recognition of assets, and entities need
key topics.
to exercise judgement when applying the recognition criteria to
Property, Plant and Equipment (PPE). Accordingly, ICAI clarified that
entities should determine whether an individual item is insignificant
and may not be recognised as PPE based on a careful assessment
of facts and circumstances including consideration of materiality.
Consequently, individual assets below a certain threshold determined
by management may not be recognised as PPE, or be fully depreciated
in the year of acquisition, provided their cumulative aggregate cost for
that category of asset is not material.
• Capitalisation and depreciation of spares: The ICAI clarified that
machinery spares that are held for use in the production of goods
and are expected to be used for more than one period meet the
definition of PPE. Therefore, such spares should be capitalised as
PPE, irrespective of whether they have been procured at the time of
purchase of the equipment or subsequently. However, where spares
are not expected to be used for more than one annual period, although
they may be used in two financial years, they would not meet the
criteria for capitalisation as PPE.
• Expenses incurred for aesthetic purposes: Tangible items purchased
for aesthetic purposes (such as paintings and sculptures at
entrance hall and conference rooms), are considered to be held for
administrative purposes. Items held for administrative purposes qualify
as PPE as per the definition in Ind AS 16. If these items are expected to
be used during more than one period, then they should be capitalised
as PPE.
The ICAI further clarified that where an entity holds a rare piece of art or
antique paintings that are protected by legal or contractual rights such
as copyrights (e.g. signature of painter), it should evaluate whether
such items are tangible or intangible assets. Where it is probable that
the future economic benefits are expected to be derived from the
intangible element, such items may be capitalised and disclosed as a
separate class of intangible asset.
20
• Assets with an intangible Initial measurement intends to demolish the building

element: Where an entity after acquisition. The existing
• Expenditure incurred by an entity
procures tangible assets with building would not be utilised
to obtain regulatory permission
an intangible element (e.g. for any of the entity’s business
to set-up a factory: The ICAI
procurement of technical know- activities. The ICAI clarified that
clarified that such expenses
how for designing and installation in this situation, the entity should
should be capitalised in the cost
of a plant), it should exercise capitalise the amount paid for the
of the factory building if these are
judgement to determine which building in the cost of the land
directly attributable to bringing
element of the asset is more (irrespective of the fact that the
the factory building to the location
significant - the PPE or the fair values of land and building are
and condition necessary for use
intangible element. Where the available separately).
and if management considers
intangible element is integral
it probable that the relevant • Interruption in construction
to the larger asset, it should be
permission will be granted. of building: The ICAI clarified
capitalised as PPE as a directly
Else, these expenses should be that when construction of a
attributable cost of acquisition
charged to the statement of profit building is interrupted due
or construction of the asset.
and loss and cannot be capitalised to abnormal delays, such as
However, if the intangible part is
subsequently. protests by farmers for additional
a separate asset in its own right,
compensation for an indefinite
it should be capitalised as an • Expenses incurred for welfare of
period, then costs incurred during
intangible asset. employees: The ICAI considered
the period of interruption should
a situation where an entity has
• Consumables used in the process not be capitalised. This is because
incurred non-obligatory expenses
of manufacture: The ICAI analysed the interruption is not in a nature
to construct/develop a tangible
the classification of process of a temporary delay and not a
asset, e.g. a school (over which
chemicals or consumables used in necessary part of the process of
it does not have ownership
the process of manufacturing, e.g. bringing the asset to the location
rights) close to its refinery. The
catalysts used to manufacture and condition necessary for its
school is available for use by
chemicals. It clarified that the intended use.
its employees and the general
classification of catalysts used
public. The ICAI clarified that • Accounting for demurrage:
in the process of manufacturing,
such expenditure would not be Demurrage generally represents
as PPE or inventory, would
considered directly attributable to an abnormal cost and hence,
depend on whether they facilitate
bringing the refinery to its working should not be included as an
the process of manufacture or
condition for its intended use. element of cost of PPE. The
are consumed in the process.
Therefore, the expense incurred ICAI, therefore, clarified that
Accordingly, following situations
on developing the school should demurrage incurred on account of
summarise the accounting:
not be capitalised as PPE. a nationwide transporters strike,
–– Catalyst facilitates the represented an abnormal cost,
• Cancellation fees on contract:
manufacturing process: If a and should not be capitalised to
Entities may pay penalties or
catalyst with a life (or charge) of determine the cost of imported
cancellation fees for terminating
more than one year facilitates PPE. However, incurrence of
a contract to procure PPE from
the manufacturing process, demurrage may sometimes
one vendor, and instead procure
such that it can be reused, then represent a normal cost
it from another. The ICAI clarified
it is considered to increase considering the specific facts and
that such penalties or cancellation
the future economic benefits circumstances of the case.
fees are not directly attributable
and output efficiency of the
to bringing the asset to the • Discounts and rebates on PPE:
plant. It would accordingly be
location and condition necessary Ind AS 16 requires trade discounts
capitalised as PPE.
for it to be capable of operation and rebates to be reduced from
–– Catalyst is consumed in the in the manner intended by the cost of PPE. The ICAI has
manufacturing process: If a management. Hence, these costs clarified that it does not matter
catalyst with a life (or charge) should not be capitalised as PPE. whether such discounts or
of more than one year is in rebates are received from the
• Acquisition of land with an
the nature of a supply to be vendor directly or indirectly
existing building: Ind AS 16
consumed in the production through a broker. For example,
states that land and buildings
process, it is considered commission passed on by a
are separable assets and are
as a consumable. It would broker to induce an entity to
accounted for separately, even
accordingly be classified as an purchase an item of PPE would
when they are acquired together.
inventory. be in the nature of trade discounts
In this context, ICAI considered a
and rebates received by the entity,
scenario where an entity acquires
which is deducted from the cost
land with an existing building, and
of acquisition of the item.
21
Component accounting lease and owned assets of Hence, these liquidated damages
similar nature and use should be should not be deducted from the
Major periodic inspection and
classified as one class of assets cost of the related PPE.
repairs: Certain items of PPE may be
and revaluation principles would
required to undergo major periodic • Liquidated damages for
apply to the entire class of assets.
inspections and repairs, e.g. ships construction delays by contractor:
need to undergo dry docking at an The treatment of liquidated
Depreciation
interval of three years as per statute. damages received on delays in
The cost of major inspections and • Useful life of PPE: The ICAI completion of construction by the
replacements of parts should be clarified that determination of contractor depends on the facts
recognised in the carrying amount useful life and residual value of and circumstances:
of the PPE if the recognition criteria PPE is a matter of judgement and
–– Liquidated damages are directly
are satisfied. In the example above, may be decided on a case to case
identifiable with the project and
the entity should account for the dry basis. If an entity has adequate
mitigate extra project costs to
docking cost as below: internal technical expertise, it may
be incurred by the entity would
be appropriate for it to rely on the
• Cost of replacing parts: If the be capitalised as part of the
judgement of internal experts.
costs of replacing parts meets the cost of the asset.
Such advice should be supported
recognition criteria in Ind AS 16,
by adequate documentation –– Other liquidated damages
the entity should capitalise those
including the criteria and should be recognised as
parts in the carrying amount of the
assumptions involved in making income.
ship as a separate component and
the determination of useful lives
derecognise the replaced parts.
and residual value. Enabling assets
These parts will be depreciated
over their useful life, i.e. three • Depreciation on spares: Ind AS • The ICAI clarified that the
years. 16 states that depreciation of an construction cost of enabling
asset begins when it is available assets e.g. railway siding, road
• Major inspection costs: Major
for use, and does not cease and bridge constructed by an
inspection costs should also be
when the asset becomes idle or entity to facilitate construction
recognised in the carrying amount
is retired from active use unless of a main plant (e.g. refinery),
of the ship and be depreciated
the asset is fully depreciated. should be considered as the cost
over the period remaining until the
Accordingly, the ICAI clarified that of construction of the refinery.
next dry-docking.
depreciation on spares recognised Accordingly, expenditure incurred
as PPE should begin from the date on enabling assets should be
Revaluation
of their purchase. allocated and capitalised as part of
• Revaluation on business the PPE. Though the entity cannot
combination: Ind AS 103, Liquidated damages restrict the access of others from
Business Combinations requires using the enabling assets, the
• Liquidated damages payable
an entity acquiring another entity reason for capitalisation of these
subsequent to commissioning of
to measure the identifiable items is that they are incurred
plant: An entity may be entitled to
assets acquired and the liabilities in order to get future economic
receive liquidated damages for a
assumed at their acquisition-date benefits from the project as a
construction contractor’s failure
fair values. The ICAI clarified that whole. Therefore, the project as
to meet performance conditions
the fair value measurement of a whole can be considered as the
in terms of the desired quality
assets acquired is just an initial unit of measure for the purpose of
and level of output subsequent
recognition of the asset at cost capitalisation of the expenditure
to commissioning of a plant. The
by the acquirer and does not on enabling assets.
ICAI clarified that such liquidated
tantamount to adoption of a
damages arise as a result of
revaluation model for existing
inefficiencies on the part of the
assets within the same class.
contractor and are directly linked
• Revaluation of assets under to performance parameters
finance lease: The ICAI clarified for the plant subsequent to
that assets held under a finance commissioning of the plant.
23
Regulatory updates
MCA issued clarification for payments banks and small

finance banks to comply with the Ind AS Rules
The Ministry of Corporate Affairs (MCA) through its notification
dated 16 February 2015 laid down the road map for implementation
of Indian Accounting Standards (Ind AS) by companies other than
banking companies, insurance companies and Non-Banking Financial
Companies(corporate road map).
On 11 February 2016, the Reserve Bank of India (RBI) issued a circular
(RBI/2015-16/315) which requires holding, subsidiary, joint venture or
associate companies of scheduled commercial banks (excluding regional
rural banks) to comply with Ind AS for accounting periods beginning from
1 April 2018 onwards, with comparatives for periods ending on or after 31
March 2018.
New development
The MCA through a circular (no. 10/2017) dated 13 September 2017
clarified that in case a holding company covered under the corporate road
map of Ind AS has payments bank or small finance bank as its subsidiary,
then the holding company should continue to follow the corporate road
map. However, the payments bank or the small finance bank should
follow the banking sector road map as prescribed by RBI.
Therefore, according to the clarification (in case of holding company
covered under phase II of the corporate road map has a subsidiary as
a payment bank or a small finance bank, then it would comply with the
following timelines:
• Holding company: Follow Ind AS from 1 April 2017 with comparatives
for the period ending on or after 31 March 2017
• Payments bank or small finance bank (subsidiary company): Follow
Ind AS from 1 April 2018 with comparatives for the period ending on or
after 31 March 2018. However such a subsidiary would need to provide
Ind AS financial data to its holding company for the period ending on or
after 31 March 2018.
Please refer KPMG in India’s IFRS Notes dated 18 September 2017 which
provides an overview of the recent MCA notification.
(Source: MCA circular no. 10/2017 dated 13 September 2017)
24
MCA issued clarification in New development of ‘accounting estimates’ and

respect to appointment of removes the definition of ‘a
On 12 September 2017, the IASB
change in accounting estimate.’
an independent director proposed amendments to IAS 8 by
issuing an Exposure Draft ED/2017/5 Accounting estimates have been
The MCA through its circular dated
Accounting Policies and Accounting defined in the ED as ‘judgements
5 July 2017 amended Rule 4 of
Estimates (ED). The ED is expected or assumptions used in applying
the Companies (Appointment and
to help entities distinguish an accounting policy when,
Qualification of Directors) Rules
accounting policies from accounting because of estimation uncertainty,
and provided that an unlisted
estimates. an item in financial statements
public company which is a joint
cannot be measured with
venture, a wholly owned subsidiary Overview of the amendments precision.’
or a dormant company will not be
required to appoint Independent The ED proposes following The definition includes reference
Directors. amendments to IAS 8: to the inability to measure items
• Change in the definition of an in financial statements with
However, the term ‘joint venture’ is
accounting policy: Currently, precision. In this context, IASB
not defined in the 2013 Act.
IAS 8 defines accounting policies noted that the level of precision
New development as ‘the specific principles, associated with accounting
bases, conventions, rules and estimates would vary with certain
The MCA clarified the meaning
practices applied by an entity in cases having a relatively high level
of the term ‘joint venture’ for the
preparing and presenting financial of precision.
purposes of availing exemption
under Rule 4 through its statements.’ • Clarification for items that
notification dated 5 September The ED proposes to remove cannot be measured with
2017. Accordingly, a joint venture the terms ‘conventions’ and precision: The ED recognises that
would mean a joint arrangement, ‘rules’ as their meanings are not the selection of an estimation or
entered into in writing, whereby the clear and these terms are not valuation technique to measure an
parties that have joint control of the used elsewhere in International item in the financial statements
arrangement, have rights to the net Financial Reporting Standards that cannot be measured with
assets of the arrangement. (IFRS). Additionally, it proposes precision, involves the use of
to add the term ‘measurement’ judgements or assumptions in
(Source: MCA circular no. 9/2017
before bases in the above applying the accounting policy for
dated 5 September 2017)
definition in accordance with that item.
IASB issued an exposure the paragraph 35 of IAS 8 which Therefore, the ED clarifies that
draft to clarify how to states that a change in the selection of such an estimation or
distinguish accounting measurement basis applied is a valuation technique constitutes
change in an accounting policy. making an accounting estimate.
policies from accounting
estimates Accordingly, post amendment, • Clarification for inventories:
an accounting policy would be The ED clarified that in applying
Background defined as ‘the specific principles, IAS 2, Inventories, selecting the
International Accounting Standard measurement bases, and First-In, First-Out (FIFO) cost
(IAS) 8, Accounting policies, practices applied in preparing and formula or the weighted average
Changes in Accounting Estimates presenting financial statements.’ cost formula for interchangeable
and Errors contains different • New definition of an accounting inventories would be selection of
requirements on how to account estimate: Currently, IAS 8 an accounting policy.
for changes in accounting policies defines ‘accounting policies’ and
and for changes in accounting Selecting one of the two
a ‘change in accounting estimate’ cost formulas prescribed by
estimates. However, the IFRS but does not define ‘accounting
Interpretations Committee observed paragraphs 25 - 27 of IAS 2
estimates’. for ordinarily interchangeable
that the definitions of ‘accounting
policies’ and ‘changes in accounting The IASB observed that the inventories does not involve the
estimates’ are not sufficiently clear combination of a definition of one use of judgement or assumptions
resulting in diversity in the way item (i.e. accounting policies) with to determine the sequence in
entities distinguish accounting a definition of changes in another which those inventories are sold.
policies from accounting estimates. item (i.e. changes in accounting For this reason, selecting that
estimates) obscures the cost formula does not constitute
Therefore, the International distinction between accounting making an accounting estimate,
Accounting Standards Board (IASB) policies and accounting estimates. it constitutes selecting an
initiated a project to amend IAS 8 in In order to make the distinction accounting policy.
order to provide further clarity on this clear, the ED proposes a definition
subject.
25
• Others: The ED also proposes applicable to following preferential SEBI approved amendments
to delete an example from the issues, subject to condition to the SEBI (Infrastructure
guidance on implementing IAS mentioned under the amended
8. The example deals with the regulations:
Investment Trusts)
following two simultaneous Regulations, 2014 and SEBI
• Preferential issues of equity (Real Estate Investment
changes for property, plant and
shares is made in terms of
equipment:
rehabilitation scheme approved
Trusts) Regulations, 2014
a. Adopting the revaluation model under the Sick Industrial In order to facilitate growth of
and Companies (Special Provisions) Infrastructure Investment Trusts
Act, 1985 or against resolution (InvITs) and Real Estate Investment
b. Applying a components
plans which are approved by the Trust (REITs), SEBI in its board
approach more fully for
Tribunal under the Insolvency meeting held on 18 September 2017,
depreciation purposes.
and Bankruptcy Code, 2016, has approved certain changes in
Applicability whichever is applicable. the SEBI (Infrastructure Investment
Trusts) Regulations, 2014 and SEBI
The ED proposes that an entity • Earlier the provision relating
(Real Estate Investment Trusts)
should apply the amendments only to preferential issue was not
Regulations, 2014. The changes,
to changes in accounting policies applicable where preferential
which, inter alia, include the
and changes in accounting estimates issues made by companies to
following:
that occur on or after the start of the consortium of banks and financial
first annual period in which the entity institutions. However, with the a. Allowing REITs and InvITs to
applies the amendments. amendment, the provisions raise debt capital by issuing debt
would not be applicable where securities
(Source: IASB Exposure Draft preferential issues made to
ED/2017/5 Accounting Policies and b. Introducing the concept of
lenders pursuant to conversion
Accounting Estimates (ED) dated 12 ‘strategic investor’ for REITs on
of their debt, as part of a debt
September 2017 and KPMG in India’s similar lines of InvITs
restructuring scheme will be
IFRS Notes dated 20 September covered. (Regulation 70(5) of c. Allowing single asset REIT on
2017) ICDR Regulation) similar lines of InvIT
SEBI amends ICDR • Earlier the provision relating d. Allowing REITs to lend to
to preferential issue was not underlying Holdco/Special
Regulations applicable where preferential Purpose Vehicle (SPV)
The Securities Exchange Board of issues were made to other
e. Amending the definition of valuer
India (SEBI) through its notification secured lenders (apart from
for both REITs and InvITs.
dated 14 August 2017 issued SEBI the consortium of lenders
(Issue of Capital and Disclosure mentioned above) who opt to join Further, SEBI after deliberations,
Requirements) (ICDR) (Fourth the strategic debt restructuring decided to have further consultation
Amendment) Regulations, 2017 scheme, with the amendment, with the stakeholders on a proposal
to amend SEBI ICDR Regulations, The amended regulation includes of allowing REITs to invest at least
2009. The amendments are with lenders who received securities 50 per cent of the equity share
respect to Chapter VII of the ICDR as part of the debt restructuring capital or interest in the underlying
Regulations which relates to scheme and are selling those Holdco/SPVs, and similarly allowing
preferential issue. Regulation 70 securities to specified persons. Holdco to invest with at least 50 per
of ICDR Regulations specifies the (Regulation 70(6) of ICDR cent of the equity share capital or
situations where the provisions of Regulation) interest in the underlying SPVs.
Chapter VII are not applicable.
(Source: SEBI notification No.SEBI/ (Source: SEBI press release PR No.:
The notification amends Regulation LAD-NRO/GN/2017-18/016. dated 14 57/2017 dated 18 September 2017)
70 of ICDR Regulations and provides August 2017)
that the ‘preferential issues’ chapter
of the ICDR Regulations will not be
CBDT extended the due date The Rules provide the procedures • The officer authorised by the
for filling of return of income that companies would be required to central government or the regional
follow while making an application director or the Registrar of
and various reports of audit to the NCLT/NCLAT along with the Companies (ROC) or the official
The Central Board of Direct Taxes manner in which the cases would be liquidator shall be an officer not
(CBDT) through its notification disposed of by the NCLT/NCLAT. below the rank of Junior Time
dated 31 August 2017 in respect Scale or company prosecutor.
Section 432 of the 2013 Act and
of all the assessees covered under
Rule 63 of the NCLAT Rules provide Additionally, the provisions of
Explanation 2(a) to Section 139 (1) of
that a party to any proceeding or Section 212(8), 212(9) and 212(10)
the Income-tax Act, 1961 (IT Act) has
appeal before the NCLT/NCLAT, as have been made effective from 24
extended the due date prescribed
the case may be, may either appear August 2017. These relate to the
therein for filing the return of income
in person or authorise one or more procedure for arrest and subsequent
as well as various reports of audit
Chartered Accountants (CAs) or presentation to the Magistrate’s
prescribed under IT Act which are
Company Secretaries (CSs) or cost office of a person found guilty of
required to be filed by the said due
accountants or legal practitioners or committing fraud (Section 447 of
date from 30 September 2017 to 31
any other person to present his case the 2013 Act) by a Serious Fraud
October 2017.
before NCLT/NCLAT. Investigation Office appointed by the
(Source: Order under Section 119 of central government.
New development
the IT Act dated 31 August 2017)
(Source: MCA notification G.S.R.
The MCA through its notification
1061(E) and S.O. 2751(E) dated 24
MCA issued National dated 29 June 2017 issued the
August 2017)
Company Law Appellate National Company Law Appellate
Tribunal (Amendment) Rules, 2017 to
Tribunal (Amendment) Rules amend the National Company Law
2017 Appellate Tribunal Rules, 2016. The
The MCA on 21 July 2016 has amendment added following to the
notified the rules corresponding to current provisions which provides
the sections relating to NCLT/NCLAT. that:
They are as follows: • The central government, the
1. National Company Law Tribunal regional director or the registrar
Rules, 2016 (NCLT Rules) and companies or official liquidator
may authorise an officer or an
2. National Company Law Appellate advocate to represent in the
Tribunal Rules, 2016 (NCLAT proceedings before the NCLAT.
Rules).
Notes:
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IFRS Notes First Notes

IASB issues an exposure draft to clarify how to
distinguish accounting policies from accounting
estimates SEBI mandates disclosures of defaults on
repayment of loans from banks by listed entities
20 September 2017 16 August 2017
On 12 September 2017, The SEBI, through its circular
the IASB proposed dated 4 August 2017 has
amendments to IAS 8 mandated listed entities who
by issuing an Exposure have defaulted in payment
Draft ED/2017/5 of interest/instalment
Accounting Policies and obligations on loans
Accounting Estimates from banks and financial
(ED). International institutions, debt securities
Accounting Standard (including commercial Voices on Reporting
(IAS) 8, Accounting paper), etc. to provide a KPMG in India invites you to join us for a LIVE webinar
policies, Changes in disclosure of defaults to on Wednesday, 4 October 2017 between 04:00
Accounting Estimates and Errors contains different the stock exchanges within – 05:00 PM to discuss key financial reporting and
requirements on how to account for changes in one working day from the date of the default in the regulatory matters that are expected to be relevant for
accounting policies and for changes in accounting manner prescribed in the circular. stakeholders as they approach the quarter ending 30
estimates. However, the IFRS Interpretations
Committee observed that the definitions of This circular is effective from 1 October 2017. September 2017.
‘accounting policies’ and ‘changes in accounting This First Notes provides an overview of the new In this session of our Voices on Reporting webinar,
estimates’ are not sufficiently clear resulting in SEBI disclosure requirements for listed entities in we will cover updates from the Ministry of Corporate
diversity in the way entities distinguish accounting case of default in repayment of loans taken from Affairs (MCA), the Institute of Chartered Accountants
policies from accounting estimates. banks and financial institutions. of India (ICAI), the Securities and Exchange Board of
India (SEBI), etc.
Therefore, the International Accounting Standards
Board (IASB) initiated a project to amend IAS 8 in We look forward to your presence and active
order to provide further clarity on this subject. participation at this webinar.
The ED is expected to help entities distinguish Kindly RSVP your confirmations.

accounting policies from accounting estimates.
Comments on the ED may be submitted to the
IASB by 15 January 2018.
This issue of IFRS Notes provide an overview of the
amendments proposed to IAS 8.
Previous editions are available to

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Accounting

Non-controlling interests accounting

The following illustration explains the disclosure

Year ended Year ended

Year ended Year ended

Year ended Year ended

Disclosure requirements –– Dividends paid to NCI distributions being paid, or

4. FVTPL - Fair Value Through Profit or Loss

Accounting of depreciation under the

Background to impairment testing

Cash flow projections In determining value in use, Value in use

Educational material on Ind AS 16,

• Assets with an intangible Initial measurement intends to demolish the building

MCA issued clarification for payments banks and small

MCA issued clarification in New development of ‘accounting estimates’ and

Chennai Kolkata Vadodara

IFRS Notes First Notes

The ED is expected to help entities distinguish Kindly RSVP your confirmations.

Previous editions are available to

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