Assume that a bank has to recover money from a third party and pay to the Government. The recoverable and payable entries in the balance sheet will impact capital requirement and compliance with debt covenants. IAS 32 requires offsetting a financial asset and liability, and reporting the net amount in the balance sheet if the entity has a legally enforceable right to offset, and intends to settle on net basis. The International Accounting Standards Board has clarified that offset rights should be legally enforceable in the normal course of business as well as in the event of default, bankruptcy or insolvency of all counterparties to the contract, including the entity itself. To avoid adverse impact from the amendment, an entity preparing IFRS (International Financial Reporting Standards) financial statements should make the necessary changes in its contracts. The amendment applies from January 1, 2014.
Timing for dividend accounting
Under IFRS, dividend is recognised as liability only if it is declared by the year-end. When declared after the year-end, it is not recognised as liability at balance sheet date even when it is declared out of the profit for that year. However, under Indian GAAP, pre-revised Schedule VI and AS 4 required a company to recognise dividend liability at balance sheet date if it was stated for the period covered by the financial statements and was proposed or declared before their approval. To bring dividend accounting in line with IFRS, revised Schedule VI did not specifically require the above treatment. As there is no corresponding amendment in AS 4, companies still have to create liability for dividend proposed before approval of financial statements. To address this anomaly, the Institute of Chartered Accountants of India has issued an exposure draft of proposed changes to AS 4. Last date for comments was October 10, 2012.
Borrowing cost and forex difference
To address concerns over profit-and-loss volatility arising from exchange rate fluctuations, the Ministry of Corporate Affairs has added paragraph 46A in AS 11 to give companies an irrevocable option to capitalise/ defer exchange differences arising on long-term foreign currency items. However, according to paragraph 4(e) of AS 16, a company still had to treat exchange differences in the nature of borrowing cost as borrowing cost, rather than exchange difference. Consequently, it had to charge this difference to profit-and-loss if it could not capitalise borrowing cost under AS 16. The MCA issued a circular clarifying that paragraph 4(e) of AS 16 will not apply to a company that applies paragraph 46A of AS 11.
Consolidated picture of unlisted cos
Currently, the Companies Act does not require companies with subsidiaries to prepare consolidated financial statements. Listed companies have to publish them under clause 32 of the listing agreement. The Companies Bill proposes that a company with one or more subsidiaries should prepare consolidated financial statements. Unlisted and private companies have to gear up to meet the new requirement. This welcome move will help users understand the financial position and performance of a group in its entirety and in achieving convergence with IFRS. However, unlike IFRS, the Companies Bill does not exempt an intermediate unlisted parent from preparing consolidated financial statements.