A. OBSERVATIONS RELATED TO EQUITY
1. BENEFICIAL INTEREST
It was viewed that effectively the beneficial interest in Trust which represents investments in company's own shares, is nothing but treasury shares, and hence should not have been recognized as financial asset rather be deducted from equity in line with the requirements of paragraph AG 36 of Ind AS 32.
2. STATEMENT OF CHANGES IN EQUITY
It was noted that the company, which is preparing financial statements as per Ind AS, inter-alia, is required to prepare and present the Statement of Changes in Equity.
However, in the above-mentioned case, the Statement of Changes in Equity was not prepared which is a mandatory requirement. Further, there was a reference given in the auditor's report that the statement of changes in equity has been audited by them although it was not forming part of the annual report.
3. RE-MEASUREMENT GAINS/(LOSSES) ON DEFINED BENEFIT PLANS
It was noted from note to the financial statements on Other equity that Re- measurement gains/(losses) on defined benefit plans as adjusted/ recognized during the year were taken to OCI (Other comprehensive income).
However, the accumulated remeasurement of defined benefit plans at the end of each reporting period were not disclosed.
Also, a reconciliation of Re- measurement gains (losses) on defined benefit plans was not made, as per the above-stated requirement of the Guidance Note.
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4. NATURE AND PURPOSE OF RESERVES
As per the above stated requirements of Ind AS 1 and Guidance Note on Division II - Ind AS Schedule III to the Companies Act, 2013, the nature and purpose of each reserve is required to be disclosed which was not given by the company.
B. OBSERVATIONS RELATED TO LIABILITIES
1. FINANCIAL GUARANTEE CONTRACT
A significant feature of a letter of comfort and corporate guarantee contract is the contractual obligation to make specified payment in case of default by the credit holder.
As such, the contract may not necessarily be called as financial guarantee contract and it may take any name or legal form, however, the accounting will be same as that of a financial guarantee contract. If a contract legally meets these requirements, then it would be accounted for as the financial guarantee contract as per Ind AS 109.
Accordingly, in the given case, it was viewed that both the letter of comfort and corporate guarantee by their nature, are financial guarantees and therefore, the same should have been recognized as financial guarantee as per the requirement of Ind AS 109.
2. CORPORATE GUARANTEES
Guidance Note on Division II - Ind AS Schedule III to the Companies Act, 2013, Other financial liabilities are required to be presented as a separate line item on the face of the Balance Sheet under Financial Liabilities Items like financial guarantees meet the definition of financial liabilities as per Ind AS 32 and should be presented under other financial liabilities.
3. NON-CURRENT BORROWINGS
It was noted from the notes to the financial statements on Non-Current Borrowings that loans from related parties were classified as non-current. It was viewed that since loans from related parties are interest free and repayment terms have not been stipulated, such loans are callable on demand.
Accordingly, the classification of such loans as non-current was not in line with the above stated requirements of Ind AS 1.
4. DEFAULTS IN THE REPAYMENT OF LOANS
It was noted from the note to the financial statements on Borrowings that there were various defaults in the repayment of loans.
Annexure to the Auditor's Report, the auditor had reported that there has been delay in timely repayment of dues to banks for External Commercial Borrowings (ECB) and to financial institutions for debentures.
It was viewed that the details of defaults remedied before the date of the financial statement was not disclosed, which is not in line with the above stated requirements of paragraph 18 (c) of Ind AS 107 and paragraph 8.2.3.16 of Guidance Note on Division II- Ind AS Schedule III to the Companies Act, 2013.
5. MATURITIES OF LONG-TERM DEBTS
It was further noted from the note on Borrowings that certain amount of External Commercial Borrowings was due in the next 12 months, however, no disclosure was given for current maturities of long-term debts under current liabilities which is not in line with the above stated requirement of paragraph 8.2.10 of Guidance Note on Division II- Ind AS Schedule III to the Companies Act, 2013.
6. INSURANCE CONTRACTS
It was noted that the corporate guarantees given by the company are in the nature of insurance contracts. However, the given policy regarding Corporate Guarantee omits to disclose about liquidity adequacy test. From the information available in financial statements, it appeared that no liability adequacy test was conducted. Accordingly, it was not found to be in line with the requirement of paragraph 15 of Ind AS 104, Insurance Contracts.
Disclaimer: The information contained in this article is based on knowledge obtained from ICAI Publications. It is provided for general guidance to the intended user. I recommend that professional advice is necessary before taking any action on the basis of the article provided.
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