1. REVENUE RECOGNITION
It was noted from the accounting policy of revenue that the element of financing has not been considered if the credit term is consistent with market practices.
As per above-stated paragraph of Ind AS 18, it was viewed that when consideration for sale of goods constitutes financing element, the fair value is determined by discounting all future receipts using the imputed rate of interest.
2. FULLY CONVERTIBLE DEBENTURES
It was noted from the notes to the financial statements that consideration towards sale of Debentures was higher against the investment value. Hence, it indicated that the difference should be an income, however, the same was not reflected in the Statement of Profit and Loss as well as the notes to the financial statements.
Accordingly, it was viewed that the requirements of Ind AS 1 have not been complied with in preparation and presentation of the financial statements
3. INTEREST INCOME
An interest income was recognized during the reporting year and the comparative year. Further, the receivables corresponding to the same amount were written off as not recoverable during the reporting year.
As per Ind AS 18 Revenue should be recognized only when it is probable that the economic benefits associated with the transaction will flow to the entity.
The measurement principle is guided by Ind AS 109.
Therefore, it was viewed that when the recoverability of interest income was not certain, the recognition of the same during the reporting year should not have been done, as per the recognition principle of Ind AS 18.
Further, the said principle was found to be neglected during the comparative year as well and no Expected Credit Loss (ECL) was recognized in the previous year as required by Ind AS 109.
4. CONSUMER'S CONTRIBUTION
It was noted that contributions from consumers towards service lines have been treated as capital reserve instead of revenue.
As per paragraph 21 of Appendix C of Ind AS 18, it was viewed that the entity shall recognize revenue at the amount of cash received from the customers.
Accordingly, the accounting treatment followed by the company is incorrect.
5. NETTING OFF
It was noted that purchase of traded power has been netted off from revenue from traded power.
As per Guidance Note on Division II - Ind AS Schedule III to the Companies Act, 2013, it was viewed that there is no provision for netting expenses from revenue. Therefore, netting off purchase of traded power against the income from traded power is not correct.
Accordingly, it was viewed that the above stated presentation by the company has resulted in understatement of revenue and purchases of stock in trade.
Also, it was noted that interest expense has been netted off with interest income.
It was viewed that considering the provision stated under Ind AS 1, Ind AS 107 and Guidance Note on Division II- Ind AS Schedule III to the Companies Act, 2013 interest expense should not have been netted off against the interest income.
6. EFFECTIVE RATE OF INTEREST
Paragraph 30 of Ind AS18 required recognition of interest income using the effective interest rate method as per the details in Ind AS 109 which was viewed as not being applied by the company.
7. OTHER OPERATING REVENUE
It was noted that Out of total Other Operating Revenue, a substantial amount was disclosed as Others for which no details were furnished.
It was viewed that the nature of such Other operating revenue should have been disclosed.
Accordingly, it was viewed that the requirements of Guidance Note on Division II - Ind AS Schedule III to the Companies Act, 2013 have not been complied with.
8. OTHER EXPENSE
Gain on foreign currency transactions has been deducted from other expenses.
It was viewed that since it is an income, it should be shown under other income instead of deducting gain on foreign currency transaction from other expenses.
9. COST OF MATERIAL CONSUMED
In the Statement of Profit and Loss, the cost of material consumed has not been disclosed separately instead it has been clubbed under Purchases of Stock in Trade and Raw Material and Changes in Inventories of Finished goods and Stock-in-trade.
Accordingly, it was viewed that the above stated requirements of Guidance Note on Division II- Ind AS Schedule III to the Companies Act, 2013 have not been complied with.
10. EXCISE DUTY EXPENSE
It was noted that the excise duty expense was presented under the head Other Expenses.
Under Annexure F of the Guidance Note, it was viewed that excised duty paid should have been disclosed on the face of Statement of Profit and Loss under the head Expenses as a separate line item.
11. PROVISION FOR GRATUITY
It was noted from the footnote that provision for gratuity has been made only in respect of those employees who have completed at least five years of service as 15 days salary for every year completed year of service. However, the liability arises when the employee has started providing the services.
As per the requirements of Ind AS 19, provision for gratuity should be made for all employees irrespective of whether they have completed at least five years of service or not.
The company has not made any provision for gratuity for those employees who have not completed at least five years of service which is incorrect.
Further, the disclosures as required under Paragraph 135 of Ind AS 19 have not been disclosed in respect of the same.
12. TERMINATION BENEFITS
It was noted from the accounting policy on VRS that expense on VRS is charged to the Statement of Profit and Loss as incurred.
As per the requirements of Ind AS 19, it was viewed that these expenses should be recognised when the entity can no longer withdraw the offer of those benefits or when the entity recognises costs for a restructuring that is within the scope of Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, and involves the payment of termination benefits, whichever is earlier.
13. BORROWING COST
It was observed that the company has not accounted for any borrowing cost (whether expensed or capitalised) in the current year as well as in previous year. In such case, there may be two possibilities:
Borrowing from Related Party is Interest bearing
In this case, the company has not accounted for the borrowing cost on such borrowing availed throughout the current year as well as previous year.
Borrowing from Related Party is Interest-free
In this case, the company has not classified borrowing as Compound Financial Instrument in accordance with Ind AS 32.
Further, according to paragraphs 31 & 32 of Ind AS 32, loans would include components of both Equity and Financial liability. These components should be separately recognised and accounted for in the financial statements.
14. DOUBTFUL TRADE RECEIVABLES
It was noted from the note on trade receivables that the trade receivables have been shown as doubtful. It was viewed that when trade receivables are shown as doubtful, the company shall disclose the amount of credit loss that is expected on those receivables.
As per Ind AS 109, the company is required to recognize a loss allowance i.e., Impairment for expected credit losses on financial assets including trade receivables.
Loss allowance is presented as a separate line item as deduction from gross carrying amount of trade receivable. It was noted that the provision for expected credit loss has not been created for doubtful trade receivables.
15. DEPRECIATION ON PLANT & MACHINERIES
As per the requirements of Schedule II to the Companies Act, 2013, it was viewed that when different useful lives have been used by the company for the purpose of charging depreciation on PPEs, such useful lives shall be specifically disclosed by the company by way of notes to the accounts.
In the above stated disclosure, the company has stated that useful lives range from 20 years to 40 years.
It was viewed that proper disclosures regarding the useful lives of plant & machineries and electrical installations should have been made identifying the items of plant & machineries and electrical installations with their respective useful lives as estimated by the external valuer.
16. CSR DISCLOSURE
It was noted from the financial statements that no disclosure was made about the CSR activities.
It was viewed that neither the amount spent as per the above stated requirements nor other details as required under Paragraph
17. DEFERRED TAX ASSET / LIABILITIES
It was noted that the accounting policy erroneously mentions that both deferred tax assets and liabilities are attributable to temporary differences and unused tax losses.
As per the definitions of deferred tax assets and deferred tax liabilities given under Ind AS 12, it was noted that deferred tax liabilities are recognised for taxable temporary differences and deferred tax assets are recognised for: -
(a) deductible temporary differences.
(b) the carry forward of unused tax losses.
(c) the carry forward of unused tax credits.
18. ACQUISITION COSTS
It was noted from the adopted policy on business combinations that the acquisition-related costs are generally recognized in the statement of profit or loss as incurred.
As per paragraph 53 of Ind AS 103, it was viewed that the acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received.
Accordingly, it was viewed that the wordings generally should not have been used.
19. EXCHANGE RATE DIFFERENCE
It was noted that the Exchange rate difference realised was deducted from the head Revenue from Operations.
It was viewed that being an expense item, loss on exchange rate difference should have been shown under the head other expenses instead of reducing it from revenue.
20. EXCEPTIONAL ITEMS
It was noted from the note to the financial statements on Exceptional items that following items were disclosed as exceptional items by the company:
- foreign currency gain/loss;
- recoverable written off;
- interest receivable written off etc.
It was further noted that the amount of above items was not material.
Guidance Note on Schedule III (Division II), in order to categorize an item of income or expense as exceptional item and disclose as such in the financial statement, size as well as the nature of such item should be considered.
In the given case, none of the items disclosed under the note on Exceptional items qualifies to be reported as exceptional items considering the size and nature of given items.
21. EARNING PER SHARE (EPS)
The following noted from the note to the financial statements on Earnings Per Share (EPS):
a. Number of shares that were issued during the year were considered as the weighted average number of shares while calculating the EPS and not the weighted average number of ordinary shares outstanding during the period. Hence, the calculation of EPS was incorrect.
b. Net profit after tax was considered for the calculation of EPS. However, as per the requirements of paragraph 10 of Ind AS 33, profit attributable to ordinary equity holders shall be considered for the calculation of EPS.
In the given case, net profit after tax including impact of OCI, was divided by the number of shares issued during the year. Both numerator as well as denominator used for EPS calculation was incorrect.
22. PRIOR PERIOD ITEMS
It was noted that the Prior period items have been disclosed under the head of other expenses.
It was viewed that as per Ind AS, prior period items should be adjusted either by restating the comparative amounts for the period in which error occurred or restating the opening balances of assets, liabilities and equity for the earliest prior period presented.
In the given case, it was viewed that the company has not corrected the prior period errors retrospectively in its first set of Ind AS financial statements. Further, the disclosures as required under paragraph 49 have also not been made by the company.
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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