ICAI

STUDY ON COMPLIANCE OF

STUDY ON COMPLIANCE OF FINANCIAL REPORTING REQUIREMENTS (IND AS FRAMEWORK)

FINANCIAL REPORTING REQUIREMENTS
(IND AS FRAMEWORK)

ISBN : 978-93-90668-03-8

Financial Reporting Review Board

Study on Compliance of Financial
Reporting Requirements
(Ind AS Frame work)
(Compiled from the records of
Financial Reporting Review Board)

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)
New Delhi
© The Institute of Chartered Accountants of India

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form, or by any means, electronic
mechanical, photocopying, recording, or otherwise, without prior permission,
in writing, from the publisher.

Published in : February, 2021

Committee/Department : Financial Reporting Review Board

E-mail : [email protected]

Website : www.icai.org

Price : ` 350 /-

ISBN : 978-93-90668-03-8

Published by : The Publication Department on behalf of the

Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi - 110 002.

Printed by : Sahitya Bhawan Publications,

Hospital Road, Agra – 282003.
 Foreword
Taking the ICAI‘s legacy forward in regulating and developing the trusted and
independent professionals, I am glad to note that Financial Reporting Review
Board (FRRB) of ICAI has come out with its first publication Study on
Compliance of Financial Reporting Requirements (Ind AS Frame work). As of
today most of our public interest entities present their financial statements
under Ind AS framework. This publication by FRRB brings out the instances
of common non-compliances for information of members and various other
stakeholders to enable them to move towards better quality financial
reporting. This publication also covers non-compliances observed relating to
Schedule II and Schedule III of the Companies Act, 2013, Engagement and
Quality Control Standards (Standards on Auditing) and Companies Auditors
Report Order (CARO), 2016.
The FRRB was constituted by ICAI in 2002 as a proactive mechanism to
improve financial reporting practices in the country. FRRB reviews general
purpose financial statements of various enterprises for compliance with the
generally accepted accounting principles, compliance with the reporting
obligations of the auditor and compliance with disclosure requirements
prescribed by regulatory bodies, statutes and rules and regulations relevant
to the enterprise.
I am sure that this publication will be of tremendous help to the entire
community of Chartered Accountants globally in discharging their duties
more efficiently. I compliment all the members of the Board, particularly, CA.
Aniket Sunil Talati, Chairman of FRRB for their efforts in bringing out this
publication.

January 13, 2021 CA. Atul Kumar Gupta

New Delhi President
iv
 Preface
I have great pleasure in presenting the first ever publication on the commonly
observed non-compliances in Financial Statements prepared under Indian
Accounting Standards (Ind AS) framework. I am sure that not only members
in practice and industry, but various other professionals involved in the
preparation of Financial Statements globally would find this publication of
great utility.
The adoption of Ind AS is a welcome change and will play a key role in
enhancing the comparability of financial statements of Indian companies with
global standards. It has improved the quality of financial reporting and
brought financial statements closer to economic reality. Keeping in line with
the ongoing transition from Indian GAAP to Ind AS, the Board had initiated
the review of financial statements prepared under Ind AS framework under
the able leadership of my preceding Chairman, CA. Shriniwas Yeshwant
Joshi in Council Year 2019-20 which was carried forward by the existing
Board in the current council year. The FRRB has compiled such non-
compliances in financial reporting requirements and brought up this
publication to educate the members of the Institute. This publication would
also be useful across the globe for all preparers of financial statements who
are using IFRS framework. I also wish to place on record my sincere thanks
to all the past Chairmen as well as the past members of the Board for their
valuable inputs based on which we laid the foundation of this publication.
I take this opportunity to thank CA. Atul Kumar Gupta, President of ICAI and
CA. Nihar N Jambusaria, Vice President of ICAI for their continued support
and guidance. I am thankful to my Council colleagues who have been
constant support to the Board during the year CA. Babu Abraham Kallivayalil,
Vice Chairman, CA. Shriniwas Yeshwant Joshi, CA. Charanjot Singh Nanda,
Adv. Vijay Kumar Jhalani (Government Nominee), CA. Ranjeet Kumar
Agarwal, CA. Dheeraj Kumar Khandelwal, CA. Hans Raj Chugh. I am also
thankful to special invitees to the Board Shri. Anil Gupta from C&AG and
Shri. Balaji Venkataramanan from IRDA, who represent their organizations in
our Board.
My special thanks to CA. (Dr.) Sanjeev Kumar Singhal, Central Council
Member, ICAI for reviewing this publication and providing his valuable inputs.
I would also like to place on record my sincere thanks to CA. Achal Jain who
has assisted in preparation of the publication based on the content provided
by the Board for sparing his time from his pressing preoccupations.
I am also thankful to our Technical Reviewers (TRs) and members of
Financial Reporting Review Groups (FRRGs) who continually support the
Board in the review of Financial Statements.
I would also wish to express my gratitude to CA. Aakanksha Khanna Kapoor,
Secretary FRRB, CA. Ankita Mangla, CA. Chetna Gupta, CA. Rohit Ahuja,
CA. Ashish Tiwari and the team of FRRB Secretariat for their efforts in
bringing out this publication.
Date: January 13, 2021 CA. Aniket S Talati
Place: New Delhi Chairman, FRRB

vi
 1
Introduction
The Council of the Institute of Chartered Accountants of India (ICAI), at its
226th meeting, held in July 2002, constituted the Financial Reporting Review
Board (FRRB) as its non-standing committee. Since then, the ICAI is
continuing with its efforts to improve financial reporting practice in the
country through Financial Reporting Review Board (FRRB).
The Board reviews the general purpose financial statements of certain
enterprises and auditor‘s report thereon with a view to determine, to the
extent possible:
(i) Compliance with the generally accepted accounting principles in the
preparation and presentation of financial statements;
(ii) Compliance with the disclosure requirements prescribed by regulatory
bodies, statutes and rules and regulations relevant to the enterprise;
and
(iii) Compliance with the reporting obligations of the auditor.
The Board may take any of the following actions based of the review of the
financial statement with respect to:
(i) Auditors:
In case of material non-compliance, which affect the true & fair view of the
financial statements, such cases are referred to the Director (Discipline) of
the ICAI for initiating appropriate action against the auditor.
If the non-compliance is not of a material nature, the Board issues advisory
to the auditor to help/guide auditors towards best practices & transparency in
reporting of financial statements.
(It also informs Peer Review Board (PRB-ICAI) about the advisory letters
issued so that it may accordingly be considered during the Peer Review.)
(ii) Management of the Enterprises:
Informs irregularity to the regulatory body Ministry of Corporate Affairs
(MCA), Reserve Bank of India (RBI), Securities and Exchange Board of India
(SEBI), Insurance Regulatory and Development Authority (IRDA), Election
Commission of India (ECI) etc. relevant to the enterprise for appropriate
action.
In the last three council years, the Board has covered the review of the
financial statements of the entities pertaining to various sectors, whic h has
been summarized as follow -

The Board, as per its Term of Reference (TOR), also carries out the task of
spreading awareness amongst the members by conducting various seminars/
webinars, releasing the publication, articles in the Journal etc. To further
enhance its outreach among the preparers and auditors of financial

viii
statements, FRRB is also regularly publishing its observations on twitter
platform (https://twitter.com/frrbicai).

Significant features of this publication

This publication has been compiled from the records of FRRB and contains
relevant observations on the compliance aspects of Financial Reporting with
an objective to enhance the quality of the reporting in the financial
statements
It contains common non-compliances in reporting requirements of various
applicable Statues, Indian Accounting Standards (Ind AS), Standards on
Auditing, Companies (Auditor‘s Report) Order (CARO), Schedule III to
Companies Act, 2013 (Schedule III) and Sections of the Companies Act,
2013 as observed by the Board during the review proceedings.
For easy reference, it is written in simple and easy to understand language.
The observations have been classified on the basis of elements of financial
statements and further each observation is divided into three parts viz.
―Matter contained in Financial Statement, Principle (Abstract) and
Observation‖.
It contains graphical presentation on ‗Deficiencies Observed: At a Glance‘. It
summarizes the non–compliances observed Ind AS wise and basis the
elements of financial statement as well.
This publication is intended for general guidance only. These observations
must be read in the light of any subsequent amendments and /or other
developments. Readers are presumed to have a thorough understanding of
the relevant pronouncements and should refer to the text of the
pronouncements, as necessary, in considering particular observations. It is
not a substitute for an understanding of the relevant pronouncements
themselves and the exercise of judgement. It is stressed that the original
pronouncements must be referred to for the exact and complete
requirements. The Institute does not accept any responsibility for loss
occasioned to any person acting or refraining from action as a result of any
material contained in this publication.

‘ ix
 Deficiencies Observed: At a Glance

1.15%
1.15%
13.79%
8.05%
13.79%
2.30%
Summary of non-compliances : Ind AS wise

1.15%
2.30%
1.15%
2.30%
2.30%
5.75%
1.15%
6.90%
4.60%
6.90%
3.45%
3.45%
8.05%
1.15%
9.20%

x
 Deficiency observed : Elements of
Financial Statements
9.85%

3.03%
25.76%

17.42%

3.79%

4.55%
6.06%

29.55%

1 Observations related to Assets

2 Observations related to Equity

3 Observations related to Liabilities

4 Observations related to Components of Profit and Loss

5 Observations related to Statement of Cash Flows

6 Observations related to Other Disclosures

7 Observations related to Auditors’ Report

8 Observations related to CARO, 2016

‘ xi
 Contents
Foreword ................................................................................................ iii
Preface................................................................................................... v
Introduction ........................................................................................... vii
Deficiencies : At a Glance ....................................................................... x

S.no Chapter Page no

1. Observations related to Assets 1
2. Observations related to Equity 41
3. Observations related to Liabilities 48
4. Observations related to Components of Statement 57
of Profit and Loss
5. Observations related to Statement of Cash Flows 105
6. Observations related to Other Disclosures 115
7. Observations related to Auditor‘s Report 143
8. Observations related to CARO, 2016 151
Summary of non-compliances: Elements of Financial statement wise
Chapter no Chapter Topic addressed Observation nos. Reference Page no.
1 Assets Property, Plant and Equipment 1-8 Ind AS 16, 1
Ind AS 23,
Schedule III
1 Assets Leasehold Land 9 Ind AS 8 9
1 Assets Assets not owned by the 10 Ind AS 1 10
Company
1 Assets Intangible Assets 11-13 Ind AS 1 12
Ind AS 38,
Schedule III,
1 Assets Investment Property 14 Ind AS 40 16
1 Assets Investments 15 Schedule III 17
1 Assets Non – Current Investments 16 - 17 Ind AS 1 18
1 Assets Investments in Subsidiaries, 18 Schedule III 21
Associates and Joint Ventures
1 Assets Financial Assets 19-29 Ind AS 1 23
Ind AS 32,
Ind AS 107
Ind AS 111,
 Chapter no Chapter Topic addressed Observation nos. Reference Page no.
Schedule III
SA 505
SA 705
1 Assets Receivables from Related Parties 30 – 31 Schedule III 36
1 Assets Inventories 32 - 33 Ind AS 2 38
Schedule III
1 Assets Cash and Cash Equivalents 34 Schedule III 40
2 Equity Treasury Shares 1 Ind AS 32 41
2 Equity Statement of Changes in Equity 2-3 Schedule III 42
xvi

2 Equity Other Equity 4 Ind AS 1 44

2 Equity Authorized Share Capital 5 Ind AS 1 46
3 Liabilities Financial Guarantees 1 Ind AS 109 48

3 Liabilities Corporate Guarantees 2 Ind AS 32, 49

Ind AS 109,
Schedule III
3 Liabilities Non - Current Borrowings 3 Ind AS 1 51
3 Liabilities Financial Liabilities 4-6 Ind AS 104 52
Ind AS 107,
Ind AS 109,
Chapter no Chapter Topic addressed Observation nos. Reference Page no.
Schedule III
4 Components of Statement Revenue Recognition 1–4 Ind AS 1, 57
of Profit and Loss Ind AS 18
Ind AS 109
4 Components of Statement Presentation of Revenue on Net 5 Ind AS 18, 63
of Profit and Loss Basis Schedule III
4 Components of Statement Interest Income 6 Ind AS 18 64
of Profit and Loss
4 Components of Statement Other Operating Revenue 7 Schedule III 65
of Profit and Loss
4 Components of Statement Gain on Foreign Currency 8 Ind AS 1 66
of Profit and Loss Transactions
4 Components of Statement Fair Value Changes in Financial 9 Schedule III 67
of Profit and Loss Instruments
4 Components of Statement Presentation of Finance Cost 10 Ind AS 1, 69
of Profit and Loss Ind AS 107,
Schedule III
4 Components of Statement Interests on Fixed Deposits 11 Schedule III 70
of Profit and Loss
4 Components of Statement Functional Classification of 12 Ind AS 1 71
 Chapter no Chapter Topic addressed Observation nos. Reference Page no.
of Profit and Loss Expenditure
4 Components of Statement Cost of Material Consumed 13 Schedule III 72
of Profit and Loss
4 Components of Statement Purchases 14 Ind AS 1 73
of Profit and Loss
4 Components of Statement Excise Duty 15 Schedule III 74
of Profit and Loss
4 Components of Statement Employee Benefits 16 -21 Ind AS 1 75
of Profit and Loss Ind AS 19,
Ind AS 37
xviii

4 Components of Statement Borrowing Cost 22 Ind AS 32 83

of Profit and Loss
4 Components of Statement Provision for Expected Credit 23 Ind AS 109 84
of Profit and Loss Loss Schedule III

4 Components of Statement Depreciation 24 Schedule II 85

of Profit and Loss
4 Components of Statement Corporate Social Responsibility 25 Schedule III 87
of Profit and Loss Expenditure
Chapter no Chapter Topic addressed Observation nos. Reference Page no.
4 Components of Statement Income Taxes 26 Ind AS 12 88
of Profit and Loss
4 Components of Statement Items of Other Comprehensive 27 Ind AS 1, 89
of Profit and Loss Income and Tax Effect Thereon Ind AS 12
4 Components of Statement Acquisition Related Cost 28 Ind AS 103 91
of Profit and Loss
4 Components of Statement Foreign Exchange Difference 29-30 Ind AS 21, 92
of Profit and Loss Schedule III
4 Components of Statement Sale of Securities 31 Ind AS 109 94
of Profit and Loss
4 Components of Statement Fair Value Changes in Financial 32 Schedule III 95
of Profit and Loss Instruments
4 Components of Statement Foreign Exchange Contracts 33 Ind AS 109 96
of Profit and Loss
4 Components of Statement Exceptional Items 34 Ind AS 1, 97
of Profit and Loss Schedule III
4 Components of Statement Earnings per Share 35 - 36 Ind AS 33 99
of Profit and Loss
4 Components of Statement Prior Period Items 37 Ind AS 8 102
of Profit and Loss
 Chapter no Chapter Topic addressed Observation nos. Reference Page no.
5 Statement of Cash Flows Increase in Trade Receivables 1 Ind AS 7 105
5 Statement of Cash Flows Repayments of External 2 Ind AS 7 106
Commercial Borrowings
5 Statement of Cash Flows Taxes on Income 3 Ind AS 7 107
5 Statement of Cash Flows Gratuity in Other Comprehensive 4 Ind AS 7 108
Income
5 Statement of Cash Flows Re – Measurement of Define 5 Ind AS 7 109
Benefit Plan
5 Statement of Cash Flows Foreign Exchange Fluctuation 6 Ind AS 1 110
(Net)
xx

5 Statement of Cash Flows Adjustments in Cash Flow 7 Ind AS 7 111

Statements
5 Statement of Cash Flows Capital Expenditure 8 Ind AS 7 113
6 Other Disclosures Basis of Preparation of Financial 1 Ind AS 1 115
Statements
6 Other Disclosures Reference of Companies (Indian 2 Companies (Indian 115
Accounting Standards) Rules Accounting
Standards)
(Amendment)
Rules, 2016
Chapter no Chapter Topic addressed Observation nos. Reference Page no.
6 Other Disclosures Non-disclosure of Accounting 3 Ind AS 1 118
Policy
6 Other Disclosures Reconciliation – Indian GAAP Vs 4-5 Ind AS 101 119
Ind AS
6 Other Disclosures Related Party Disclosure 6-7 Ind AS 1, 121
Ind AS 24,
Ind AS 109

6 Other Disclosures Contingent Liabilities - Corporate 8 Ind AS 109, 124

Guarantee Companies Act,
2013

6 Other Disclosures Contingent Liabilities 9 Schedule III 126

6 Other Disclosures Segment Reporting 10 - 14 Ind AS 108 127
6 Other Disclosures Fair Value Measurement 15 – 16 Ind AS 109 133
Ind AS 113

6 Other Disclosures Financial Risk Management 17 - 19 Ind AS 107 136

6 Other Disclosures Signing of Financial Statements 20 Companies Act, 140
2013
 Chapter no Chapter Topic addressed Observation nos. Reference Page no.
6 Other Disclosures Non-Disclosure of Advances 21 Ind AS 1 141
7 Auditor‘s Report Going Concern 1 SA 570(Revised), 143
Companies Act,
2013
7 Auditor‘s Report Auditor‘s Report on the First 2 SA 700 145
Standalone Ind AS Financial
Statements
7 Auditor‘s Report Emphasis of Matter under 3 SA 705, 147
Auditor‘s Report SA 706
7 Auditor‘s Report Wrong Reference of Note in the 4 SA 700(Revised) 149
xxii

Auditor‘s Report
8 CARO Reporting under CARO 1 CARO, 2016 151
8 CARO Immovable Properties 2 CARO, 2016 152
8 CARO Loans Granted 3-5 Ind AS 109, 153
CARO 2016, SA
580
Companies
Act,2013
8 CARO Statutory Dues 6 CARO, 2016 160
8 CARO Undisputed Statutory Dues 7 CARO, 2016 161
Chapter no Chapter Topic addressed Observation nos. Reference Page no.
8 CARO Disputed Statutory Dues 8 CARO, 2016 162
8 CARO Contingent Liabilities 9 CARO, 2016 163
8 CARO Fraud 10 CARO, 2016 164
8 CARO Managerial Remuneration 11 CARO, 2016 164
8 CARO Preferential Placement of 12 CARO, 2016 166
Preference Shares and
Debentures
 Chapter-1
Observations related to Assets
1. Property, Plant and Equipment
Matter contained in the Financial Statements
The accounting policy for Property, Plant and Equipment read as follows:
―Subsequent expenditure related to an item of PPE is added to its carrying
value only if it increases the future benefits from the existing asset beyond its
previously assessed standard of performance.‖

Principle: Ind AS 16, Property, Plant and Equipment

Paragraph 7 – Recognition
The cost of an item of property, plant and equipment shall be recognized
as an asset if, and only if:
(a) it is probable that future economic benefits associated with the
item will flow to the entity; and
(b) the cost of the item can be measured reliably.
Paragraph 13 –Subsequent Cost
…Under the recognition principle in paragraph 7, an entity recognizes in
the carrying amount of an item of property, plant and equipment the cost
of replacing part of such an item when that cost is incurred if the
recognition criteria are met.

Observation:
It was viewed that as per paragraph 13 of Ind AS 16, subsequent expenditure
would be recognized in the carrying amount of PPE when that cost/ expense
would meet the recognition criteria given in paragraph 7 of Ind AS 16 i.e., it is
Study on Compliance of Financial Reporting Requirements

probable that future economic benefits associated with the item will flow to
the entity and the cost of the item can be measured reliably. There is no
criterion that capitalisation should be done only if there is increase of
future benefits from the existing asset beyond previously assessed
standard of performance‟.
Accordingly, it was viewed that the language of the stated policy is not in line
with the component accounting concepts given in Ind AS 16.

2. Property, Plant and Equipment

Matter contained in the Financial Statements
A company presented Property, Plant and Equipment and Capital Work -in-
Progress as separate line items on the face of its balance sheet and there
was a movement in the balances of Property, plant and equipment and
Capital work-in-progress in the reporting year and the comparative years.
The company had disclosed details of various items of property, plant and
equipment in the notes to the accounts; however, no disclosure regarding
movement in the capital work-in-progress was given.
Principle: Ind AS 16, Property, Plant and Equipment
Paragraph 74 – Disclosure
“The financial statements shall also disclose:
(a) ……….
(b) the amount of expenditures recognized in the carrying amount
of an item of property, plant and equipment in the course of its
construction.‖

Observation:
It was noted from the notes to the accounts that although the details of
various items of property, plant and equipment have been disclosed by the
company by way of a note, however, no disclosures regarding movement in
the capital work-in-progress were given.
It was viewed that since the capital work in progress is also the part of
property, plant and equipment and therefore the amount of expenditures

2
 Observations related to Assets

recognized in the carrying amount of capital-work-in-progress should have

been disclosed by the company in line with the above-stated requirement of
Ind AS 16.
Accordingly, it was viewed that requirement of paragraph 74(b) of Ind AS 16
was not complied with in preparation and presentation of the financial
statements.
Similar view was taken by the ITFG, ICAI under issue 33 given in the
Compendium of ITFG Clarification Bulletins, December 2018 edition.

3. Property, Plant and Equipment

Matter contained in the Financial Statements
The accounting policy for Property, Plant and Equipment reads as follows:-
―…
Depreciation on Leasehold improvements is provided over the primary period
of lease or over the useful lives of the respective fixed assets, whichever is
shorter.‖
Principle: Ind AS 16, Property, Plant and Equipment
Paragraph 50 – Depreciable Amount
―The depreciable amount of an asset shall be allocated on a systematic
basis over its useful life.‖
Paragraph 56 – Depreciable Amount and Depreciation Period
―The future economic benefits embodied in an asset are consumed by an
entity principally through its use. However, other factors, such as
technical or commercial obsolescence and wear and tear while an asset
remains idle, often result in the diminution of the economic benefits that
might have been obtained from the asset. Consequently, all the following
factors are considered in determining the useful life of an asset:
…
(d) legal or similar limits on the use of the asset, such as the expiry dates
of related leases.‖

‘ 3
Study on Compliance of Financial Reporting Requirements

Observation:
It was viewed from the stated accounting policy of a company that
depreciation on leasehold improvements is provided over the primary period
of lease or over the useful lives of the respective fixed assets, whichever is
shorter.
As per paragraph 56 of Ind AS 16, various factors are considered in
determining the useful life of an asset which, interalia, includes legal limits on
the use of asset such as the expiry dates of related asset. Accordingly, it was
viewed that for providing depreciation on leasehold improvement, lease
term should have been considered instead of considering primary
period of lease.
Accordingly, it was viewed that the stated accounting policy is not in line with
the above-stated requirement of Ind AS 16.

4. Property, Plant and Equipment

Matter contained in the Financial Statements
A company classified ―Toll Equipment‖ as an intangible asset in the note to
its financial statements on Intangible Assets. Further, in the accounting policy
on property, plant and equipment, it was noted that depreciation on Toll
Equipment is calculated on a WDV basis over useful life of 7 years.

Principle: Ind AS 16, Property, Plant and Equipment

Paragraph 6 – Definition
―The following terms are used in this Standard with the meanings
specified:
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.‖.

4
 Observations related to Assets

Observation:
It was viewed from the note on Intangible Assets that asset ―Toll Equipment‖
has been classified under Intangible Assets. However, as per the note
regarding accounting policy on property, plant and equipment, it was noted
that depreciation on Toll Equipment is calculated on a WDV basis over useful
life of 7 years.
Considering the stated accounting policy on Property, Plant and Equipment
as well as the fact that ‗Toll Equipment‘ is a tangible asset, it was viewed that
classification of Toll Equipment under Intangible asset is not correct.
Accordingly, it was viewed that the given treatment is not in line with the
above-stated requirement of Ind AS 16.

5. Property, Plant and Equipment

Matter contained in the in the Financial Statements
Abstract of an accounting policy on Property, Plant and Equipment reads as
follows:
―Property, Plant and Equipment (PPE)
…
(ii)All project related expenses viz. civil works, machinery under erection,
construction and erection materials, pre-operative expenditure net of revenue
incidental/attributable to the construction of project, borrowing cost incurred
prior to the date of commercial operations are shown under Capital Work in
Progress (CWIP).‖

‘ 5
Study on Compliance of Financial Reporting Requirements

Principle: Ind AS 16, Property, Plant and Equipment

Paragraph 20 – Measurement at Recognition
―20. Recognition of costs in the carrying amount of an item of property,
plant and equipment ceases when the item is in the location and
condition necessary for it to be capable of operating in the manner
intended by management. Therefore, costs incurred in using or
redeploying an item are not included in the carrying amount of that item.
For example, the following costs are not included in the carrying amount
of an item of property, plant and equipment:
a) costs incurred while an item capable of operating in the manner
intended by management has yet to be brought into use or is
operated at less than full capacity; initial operating losses, such as
those incurred while demand for the item‘s output builds up; and
b) costs of relocating or reorganising part or all of an entity‘s
operations.‖

Observation:
It was noted that all the project related expenses which have been incurred
prior to the date of commercial operations have been capitalised.
As per paragraph 20 of Ind AS 16, recognition of costs in the carrying
amount of PPE ceases when the item is in the location and condition
necessary for it to be capable of operating in the manner intended by
management. Hence capitalising expenses incurred upto the date of
commercial operations is not in line with Ind AS 16.
Accordingly, it was viewed that the above-statement requirement of Ind AS
16 has not been complied with.

6
 Observations related to Assets

6. Property, Plant and Equipment

Matter contained in the Financial Statements
In the note to the financial statements on Property, plant and equipment,
previous year figures were not provided for all the items.

Principle: General Instructions for the Preparation of Financial

Statement of a Company required to comply with Ind AS
Paragraph 6
―Financial Statements shall contain the corresponding amounts
(comparatives) for the immediately preceding reporting period for all
items shown in the Financial Statements including Notes except in the
case of first Financial Statements laid before the company after
incorporation.‖

Observation:
It was noted that the previous year figures have not been provided for all the
items of Property, plant and equipments which was not in line with the above
stated requirements of Schedule III to Companies Act, 2013.
Accordingly, it was viewed that the above stated requirements of Schedule III
to Companies Act, 2013 have not been complied with.

7. Property, Plant and Equipment

Matter contained in the Financial Statements
Abstract of accounting policy on Borrowing Cost read as follows:
―Borrowing Costs directly attributed to the acquisition of fixed assets are
capitalized as a part of the cost of asset up to the date the asset is put to
use. Other Borrowing Costs are charged to the statement of profit and loss
account in the year in which they are incurred.‖

‘ 7
Study on Compliance of Financial Reporting Requirements

Principle: Ind AS 23, Borrowing Costs

Paragraph 8– Recognition
―An entity shall capitalise borrowing costs that are directly attributable to
the acquisition, construction or production of a qualifying asset as par t of
the cost of that asset.‖
Paragraph 22 – Cessation of Capitalisation
―An entity shall cease capitalising borrowing costs when substantially all
the activities necessary to prepare the qualifying asset for its intended
use or sale are complete.‖

Observation:
It was noted from the stated accounting policy of the company that borrowing
costs directly attributable to the acquisition of fixed assets are capitalised. As
per paragraph 8 of Ind AS 23, borrowing costs that are directly attributable to
the acquisition, construction or production of a qualifying asset shall be
capitalised.
In addition, it was noted that borrowing costs were capitalized which were
incurred upto the date the asset is put to use. As per paragraph 22 of Ind AS
23, borrowing costs should be capitalized till the asset is ready for its
intended use or sale. Hence, capitalization of expenses incurred upto the
date the asset is put to use is not in line with Ind AS 23.
Accordingly, it was viewed that the requirements of paragraph 8 & 22 of Ind
AS 23 have not been complied with.

8. Property, Plant and Equipment

Matter contained in the Financial Statements
In the note to the financial statements of a company on Tangible Assets,
leasehold land was shown having same amounts in the reporting year and
the comparative periods.

8
 Observations related to Assets

Principle: Ind AS 16, Property, Plant and Equipment

Paragraph 43 – Depreciation
―Each part of an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be depreciated
separately.‖
Paragraph 50 – Depreciable amount and depreciation period
―The depreciable amount of an asset shall be allocated on a systematic
basis over its useful life.‖

Observation:
It was noted that leasehold land has not been amortised. As per the
requirements of Ind AS 16, a depreciable asset should essentially have a
limited useful life. Leasehold land by its nature has a limited useful life and
as such, it should be amortised as required under paragraph 43 and 50 of
Ind AS 16.
It was noted that in the given case, the enterprise holds leasehold land,
however, its cost was not amortised. It was viewed that non-
amortisation of leasehold land is against the requirements of Ind AS 16.
Accordingly, it was viewed that the requirements of Ind AS 16 have not been
complied with.

9. Leasehold Land
Matter contained in the Financial Statements
An abstract of the note to the financial statements of a company reads as
follows:
―The lease term in respect of leasehold land is 97 years. The lease term in
respect of land acquired under finance lease is up to 97 years with ability to
opt for renewal of lease term on fulfillment of certain conditions.‖

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Study on Compliance of Financial Reporting Requirements

Principle: Ind AS 8, Accounting Policies, Changes in Accounting

Estimates and Errors
Paragraph 7– Selection and application of accounting policies
―When an Ind AS specifically applies to a transaction, other event or
condition, the accounting policy or policies applied to that item shall be
determined by applying the Ind AS.‖

Observation:
It was noted from footnote given under a note to the financial statements of a
company that the company has acquired a land under finance lease.
However, no accounting policy was disclosed for the same. In the absence
of accounting policy, principles, bases, conventions, rules and
practices applied by the company in preparing and presenting the
disclosures related to finance lease is not clear.
It was viewed that the accounting policy should have been disclosed for the
understanding of the users of the financial statements.
Accordingly, it was viewed that the requirements of Ind AS 8 have not been
complied with.

10. Assets Not Owned by the Company

Matter contained in the Financial Statements
Abstract of Accounting Policy on Property, Plant and Equipment read as
follows:
“Property, Plant and Equipment
……….
(iv)Assets not owned by the Company are amortized over a period of ten
years.‖

10
 Observations related to Assets

Principle: Ind AS 1, Presentation of financial statements

Paragraph 7– Definitions*
―Information is obscured if it is communicated in a way that would have a
similar effect for primary users of financial statements to omitting or
misstating that information. The following are examples of circumstances
that may result in material information being obscured:-
a) information regarding a material item, transaction or other event is
disclosed in the financial statements but the language used is vague or
unclear;
b) information regarding a material item, transaction or other event is
scattered throughout the financial statements;
c) dissimilar items, transactions or other events are inappropriately
aggregated;
d) similar items, transactions or other events are inappropriately
disaggregated; and
e) the understandability of the financial statements is reduced as a result of
material information being hidden by immaterial information to the extent
that a primary user is unable to determine what information is material.―

f) *Notification no GSR 463E dated 24/7/2020

Observation:
It was noted from the above stated abstract of policy on Property, Plan t and
Equipment that the company amortizes, in ten years, the assets which are
not owned by the company. It was noted that no disclosure was made in the
financial statements as to which are these assets that are not owned by the
company.

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Study on Compliance of Financial Reporting Requirements

It was viewed that accounting policy are disclosed for each of the
material items disclosed in the financial statements, however, in the
given case, even though the policy has been disclosed for amortization
of assets not owned by the company, yet, no disclosure was made
regarding nature and details of such assets anywhere in the notes to
accounts. Further, the „basis for ten years period of amortisation‟ has
also not been disclosed.
Accordingly, it was viewed that appropriate disclosures have not been made
by the company with regards to ―Assets not owned by the company‖.

11. Intangible Assets

Matter contained in the Financial Statements
The accounting policies on Research and Development read as follows:
―Research and Development expenditure is charged to revenue under the
natural heads of account in the year in which it is incurred. Research and
Development expenditure on property, plant and equipment is treated in the
same way as expenditure on other property, plant and equipment.‖
―Revenue expenditure on research and development is charged to the
statement of profit and loss in the year in which it is incurred. Capital
expenditure on research and development is treated as fixed assets.‖

Principle: Ind AS 38, Intangible Assets

Paragraph 54 – Research Phase
―No intangible asset arising from research (or from the research phase of
an internal project) shall be recognised. Expenditure on research (or on
the research phase of an internal project) shall be recognised as an
expense when it is incurred.‖
Paragraph 57 – Development Phase
―An intangible asset arising from development (or from the development
phase of an internal project) shall be recognised if, and only if, an entity
can demonstrate all of the following:

12
 Observations related to Assets

a) the technical feasibility of completing the intangible asset so that it

will be available for use or sale.
b) its intention to complete the intangible asset and use or sell it.
c) its ability to use or sell the intangible asset.
d) how the intangible asset will generate probable future economic
benefits. Among other things, the entity can demonstrate the
existence of a market for the output of the intangible asset or the
intangible asset itself or, if it is to be used internally, the usefulness
of the intangible asset.
e) the availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.‖
f) its ability to measure reliably the expenditure attributable to the
intangible asset during its development.‖

Observation:
It was noted from the accounting policy of the company that the expenditure
on research and development is not being classified between research phase
and development phase.
As per Ind AS 38, the expenditure on research and development is classified
into the expenditure on research phase and development phase. As per
paragraph 54 of Ind AS 38, any expenditure on research phase should
be recognised as an expense immediately. Any expenditure on
development phase should be recognised as an intangible asset, if the
recognition criteria given in paragraph 57 of Ind AS 38 are satisfied.
Hence, it was viewed that accounting policy of the company was not in line
with Ind AS 38.
Accordingly, it was viewed that the requirements of Ind AS 38 have not been
complied with.

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Study on Compliance of Financial Reporting Requirements

12. Intangible Assets

Matter contained in the Financial Statements
In note to the financial statements on ‗Intangible Assets‘, the company had
taken the carrying value as on the date of transition to Ind AS as deemed
cost by opting for the deemed cost exemption as per Ind AS 101.

Principle: Guidance Note on Division II - Ind AS Schedule III to the

Companies Act 2013
Paragraph 8.1.1.2 of Guidance Note on Division II of Schedule III to
the Companies Act, 2013
“As per Ind AS 101, para D5 and D6, an entity may elect to measure an
item of property, plant and equipment at the date of transition to Ind AS at
its fair value or use a previous GAAP revaluation as deemed cost.
Further, as per para D7AA of Ind AS 101, an entity may also consider
previous GAAP carrying amount of all its property, plant and equipment
as its deemed cost on the date of transition. In case when a company
applies para D5 or para D7AA, the deemed cost considered on the date
of transition shall become the new ‗gross block‘ and accordingly
presented in the reconciliation statement as required by Ind AS Schedule
III.”
Paragraph 8.1.1.3 of Guidance Note on Division II of Schedule III to
the Companies Act, 2013
“In case if the company wants to disclose information regarding gross
block of assets, accumulated depreciation and provision for impairment
under previous GAAP, the same may only be disclosed as an additional
information by way of a note forming part of the financial statements.”

Observation:
It was noted that the company had taken the deemed cost exemption as
permitted under paragraph D7AA of Ind AS 101 and taken the carrying value

14
 Observations related to Assets

as on the date of transition to Ind AS as deemed cost. However, in case of

Toll Collection Rights under Intangible Assets, the accumulated depreciation
as on the date of transition was not reduced from Gross Block as per the
above stated requirement of the Guidance Note on Division II of Schedule III
to the Companies Act 2013.
Accordingly, it was viewed that the presentation of Toll Collection Rights was
not in line with the above stated requirement of the Guidance Note on
Division II of Schedule III to the Companies Act 2013.

13. Intangible Assets

Matter contained in the Financial Statements
In the note on Capital Work in Progress (CWIP), various expenses were
shown, which were capitalized as CWIP and all of them were taken to
―Intangible assets under development‖.
Further, company had disclosed leasehold land under Tangible Assets.

Principle: Ind AS 1, Presentation of Financial Statements

Paragraph 117– Disclosure of accounting policies
―An entity shall disclose its significant accounting policies comprising:
(a) the measurement basis (or bases) used in preparing the financial
statements, and
(b) the other accounting policies used that are relevant to an
understanding of the financial statements‖

Observation:
It was noted that the company had leasehold land however; the accounting
policy related to the leasehold land was not disclosed by the Company .
It was further observed from note to the financial statements of the company
on Capital Work in Progress (CWIP) that the total CWIP was stated as ―Total
intangible assets under development‖. However, no policy was disclosed
or explanation was given regarding capitalisation of such internally
generated intangible assets.
Accordingly, it was viewed that the requirements of Ind AS 1 have not been

‘ 15
Study on Compliance of Financial Reporting Requirements

complied with.

14. Investment Property

Matter contained in the Financial Statements
―In the note to the financial statem9ents of a company on Investment
Properties, disclosure of investment properties was given. Depreciation on
investment properties was not charged in the reporting year but the
depreciation on such investments properties was charged during the
comparative year.‖

Principle: Ind AS 40, Investment Property

Paragraph 79 – Disclosure
―79. In addition to the disclosures required by paragraph 75, an entity
shall disclose:
(a) the depreciation methods used;
(b) the useful lives or the depreciation rates used;
(c) the gross carrying amount and the accumulated depreciation
(aggregated with accumulated impairment losses) at the beginning
and end of the period;
(d) a reconciliation of the carrying amount of investment property at the
beginning and end of the period, showing the following:
(i) additions, disclosing separately those additions resulting from
acquisitions and those resulting from subsequent expenditure
recognised as an asset;
(ii) additions resulting from acquisitions through business
combinations;
(iii) assets classified as held for sale or included in a disposal group
classified as held for sale in accordance with Ind AS 105 and
other disposals;‖

16
 Observations related to Assets

Observation:
It was noted that the company has investment properties but the depreciation
has not been charged on these properties during the reporting year.
It was viewed that as per the principles of Ind AS 40, an investment property
is measured initially at cost. Under the cost model, investment property is
measured at cost less accumulated depreciation and any accumulated
impairment losses and Fair value is disclosed in notes to accounts.
Accordingly, depreciation should have been charged on these properties and
debited to Statement to Profit and Loss.
Accordingly, it was viewed that the requirements of Ind AS 40 have not been
complied with.

15. Investments
Matter contained in the Financial Statements
In one company under the note to the financial statements on Investments
unquoted investments were disclosed.
While in the note to the financial statements of another company,
classification of investments was not made into quoted or unquoted
investments. Further, fixed deposits with banks having maturity period of
more than 12 months was classified as investments.
In another case, fixed deposits with banks having maturity period of more
than 12 months were classified as investments.

Principle: General Instructions for preparation of Balance Sheet of

Division II – Ind AS Schedule III to the Companies Act, 2013
Paragraph 6A (VI) and (IX) of General Instructions for preparation of
Balance Sheet given under Part I, Division II – Ind AS Schedule III to
the Companies Act, 2013
―VI. Investments:
(ii) The following shall also be disclosed:
(a) Aggregate amount of quoted investment and market value thereof:

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Study on Compliance of Financial Reporting Requirements

(b) Aggregate amount of unquoted investment: and

(c) Aggregate amount of impairment in value of investment.‖
―IX. Bank deposits with more than 12 months maturity shall be disclosed
under ‗Other financial assets‘;‖

Observation:
It was noted from note to the financial statements on Investments that the
investments were classified as unquoted investments; however, as per the
above stated requirement of Schedule III, aggregate amount of unquoted
investments was not disclosed.
Further, it was noted from another note to the financial statements that the
investments were not classified into quoted or unquoted investments and
disclosures as required under Schedule III to the Companies Act, 2013 were
also not made.
Further, it was viewed that the fixed deposits with banks having maturity
period of more than 12 months should have been classified as other bank
balance under financial assets instead of investments.
Accordingly, it was viewed that the requirements of Division II – Ind AS
Schedule III to the Companies Act, 2013 have not been complied with.

16. Non-Current Investments

Matter contained in the Financial Statements
In the note to the financial statements on Non-Current Investments, cost of
investment in equity shares of a company was same as at the end of
reporting year and previous year. However, it was noted that the number of
shares in such investment held at the end of reporting year was more as
compared to the number of shares in such investment held at the end of the
comparative year.

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 Observations related to Assets

Principle: Ind AS 1, Presentation of financial statements

Paragraph 7 – Definitions*
―Information is obscured if it is communicated in a way that would have a
similar effect for primary users of financial statements to omitting or
misstating that information. The following are examples of circumstances
that may result in material information being obscured:-
a) information regarding a material item, transaction or other event is
disclosed in the financial statements but the language used is vague
or unclear;
b) information regarding a material item, transaction or other event is
scattered throughout the financial statements;
c) dissimilar items, transactions or other events are inappropriately
aggregated;
d) similar items, transactions or other events are inappropriately
disaggregated; and
e) the understandability of the financial statements is reduced as a
result of material information being hidden by immaterial information
to the extent that a primary user is unable to determine what
information is material.‘‘
*Notification no GSR 463E dated 24/7/2020

Observation:
It was observed from the note to the financial statements on Non-Current
Investments that the value of investments in equity shares of a company was
same as at the end of reporting year and previous year. However, the
number of shares in such investment held at the end of reporting year had
increased as compared to the number of shares in such investment held at
the end of previous year.

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Study on Compliance of Financial Reporting Requirements

Further, it was noted that the face value of shares in such investment was
Rs.10 per share as at the end of the reporting year as compared to its face
value of Rs. 5 per share as at the end of the previous year.
It was viewed that such investment increased in terms of number of
shares as well as in face value without any change in value of
investments and no explanatory note was provided for the same.
Accordingly, it was viewed that the requirements of Ind AS 1 have not been
complied with.

17. Non-Current Investments

Matter contained in the Financial Statements
In the note to the financial statements of a company on Non-Current
Investments, quoted investments in equity shares of a company and
unquoted investments in equity shares of two companies were disclosed.

Principle: Ind AS 1, Presentation of financial statements

Paragraph 7 – Definitions*
―Information is obscured if it is communicated in a way that would have a
similar effect for primary users of financial statements to omitting or
misstating that information. The following are examples of circumstances
that may result in material information being obscured:-
a) information regarding a material item, transaction or other event is
disclosed in the financial statements but the language used is vague
or unclear;
b) information regarding a material item, transaction or other event is
scattered throughout the financial statements;
c) dissimilar items, transactions or other events are inappropriately
aggregated;
d) similar items, transactions or other events are inappropriately
disaggregated; and

20
 Observations related to Assets

e) the understandability of the financial statements is reduced as a

result of material information being hidden by immaterial information
to the extent that a primary user is unable to determine what
information is material.―
*Notification no GSR 463E dated 24/7/2020

Observation:
It was noted that under note regarding disclosure of Categories of Financial
Instruments, amount of Level 1: Listed Equity Investments and the amount of
Level 3: Unquoted equity instruments was made.
However, it was noted that the total of Financial Assets given under the
notes was less than the amount of total financial assets shown under
disclosure of Categories of Financial Instruments. This difference was due to
double counting of the amount of Unquoted Equity Shares in the total of
financial assets included under disclosure of Categories of Financial
Instruments.
Accordingly, it was viewed that the amount of Financial Assets as given
under note of Categories of Financial Instruments and in the Balance Sheet
was different which gives incorrect picture to the readers of the financial
statements.

18. Investments in Subsidiaries, Associates and

Joint ventures
Matter contained in the Financial Statements
Abstract of the Balance Sheet of a company read as below:
“NONCURRENT ASSETS
Property, plant and equipment
Capital work in progress
Intangible assets
Investment property

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Study on Compliance of Financial Reporting Requirements

Investment in subsidiaries, associates & Joint Venture

Financial assets
Investments
Other financial assets
Other current assets‖

Principle: Guidance Note on Division II – IND AS Schedule III to the

Companies Act, 2013
Paragraph 8.1.8.4
―Investments in Subsidiaries / Associates / Joint Ventures
The terms ‗subsidiary‘, ‗associate‘ and ‗joint venture‘ shall be as defined
in the respective Ind AS. Ind AS 32, Ind AS 107 and Ind AS 109 scope
out those interests in subsidiaries, associates, joint ventures that are
accounted for in accordance with Ind AS 110 Consolidated Financial
Statements, Ind AS 27 Separate Financial Statements or Ind AS 28
Investments in Associates and Joint Ventures. However, such
investments still meet the definition of financial instruments and may be
presented as a separate line item on the face of a company‘s standalone
balance sheet. In any case, the disclosure requirements of Ind AS 107
would not apply to such investments.‖

Observation:
It was noted that the investments in Subsidiaries, Associates and Joint
ventures have been disclosed separately from other than financial assets.
However, as per the above stated para of Guidance Note, it was viewed
that such investment may be shown under the head of financial assets
as a separate line item on the face of the Balance Sheet.
Accordingly, it was viewed that the requirements of Division II – Ind AS
Schedule III to the Companies Act, 2013 have not been complied with.

22
 Observations related to Assets

19. Financial Assets

Matter contained in the Financial Statements
The following disclosures have been made in the notes to accounts:
 Interest accrued was disclosed under the head of Non-financial
Assets.
 Prepaid expenses and Balances with revenue authorities were shown
as Financial Assets.

Principle: Ind AS 32, Financial Instruments Presentation

Paragraph 11 – Definitions
―The following terms are used in this Standard with the meanings
specified:
A financial asset is any asset that is:
a) cash;
b) an equity instrument of another entity;
c) a contractual right:
i. to receive cash or another financial asset from another entity or
ii. to exchange financial assets or financial liabilities with another
entity under conditions that are potentially favorable to the entity
or
d) a contract that will or may be settled in the entity‘s own equity
instruments and is:
i. a non-derivative for which the entity is or may be obliged to
receive a variable number of the entity‘s own equity instruments;
or
ii. a derivative that will or may be settled other than by the
exchange of a fixed amount of cash or another financial asset
for a fixed number of the entity‘s own equity instruments. For
this purpose the entity‘s own equity instruments do not include
puttable financial instruments classified as equity instruments in
accordance with paragraphs 16A and 16B, instruments that
impose on the entity an obligation to deliver to another party a
pro

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Study on Compliance of Financial Reporting Requirements

rata share of the net assets of the entity only on liquidation and are
classified as equity instruments in accordance with paragraphs 16C and
16D, or instruments that are contracts for the future receipt or delivery of
the entity‘s own equity instruments.‖

Observation:
It was noted that the interest accrued has been shown under ―non-financial
assets‖ whereas prepaid expenses and balances with revenue authorities
have been shown under ―Financial Assets‖ in the Financial Statements of the
company.
As per the requirements of paragraph 11 of Ind AS 32, it was viewed that
interest accrued is in the nature of financial asset and hence should be
disclosed under the head of non- financial assets.
Further, prepaid expenses and balances with revenue authorities are in the
nature of non-financial assets and hence it should be shown under the head
of non- financial assets.
Accordingly, it was viewed that the requirements of Division II to the
Schedule III to the Companies Act, 2013 and Ind AS 32 have not been
complied with.

20. Financial Assets - Shares of Other Companies

Matter contained in the Financial Statements
It was noted that investment in shares of listed and unlisted companies have
been shown by the company under ‗Inventories‘ in its financial statements. It
was further noted that this company is not an investment company.
Principle: Ind AS 32, Financial Instruments Presentation
Paragraph 11– Definitions
―The following terms are used in this Standard with the meanings
specified:
A financial asset is any asset that is:
(a) cash;
(b) an equity instrument of another entity;
24
 Observations related to Assets

(b) an equity instrument of another entity;

(c) a contractual right:
(i) to receive cash or another financial asset from another entity or
(ii) to exchange financial assets or financial liabilities with another
entity under conditions that are potentially favorable to the entity
or
(d) a contract that will or may be settled in the entity‘s own equity
instruments and is:
(i) a non-derivative for which the entity is or may be obliged to
receive a variable number of the entity‘s own equity instruments;
or
(ii) a derivative that will or may be settled other than by the
exchange of a fixed amount of cash or another financial asset
….‖

Observation:
It was viewed that investment in shares of other companies are in nature
of financial assets and hence they should be shown under the head
„Financial Assets‟ and should have been accounted for accordingly.
It was viewed that due to incorrect disclosure of investment in shares,
inventories have been overstated and investments have been understated
which does not give true picture of financial position of the company.
Accordingly, it was viewed that the requirements of Division II to the
Schedule III to the Companies Act, 2013 and Ind AS 32 have not been
complied in preparation and presentation of the financial statements.

21. Financial Assets - Joint Operation

Matter contained in the Financial Statements
An abstract of a footnote in the note to the financial statements of a company
on Non-Current Financial Assets read as follows:

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Study on Compliance of Financial Reporting Requirements

“Expenses under Joint operation agreement

The Company along with another company has entered into a ‗Production
Sharing Contract‘, with a Ministry, Government of India. They executed a
‗Joint Operation Agreement‘ whereby the rights and obligations of either
party vis-à-vis the above mentioned ‗Production Sharing Contract‘ were
ascertained. Further in the footnote, the company had disclosed the details
of arrangements and share of assets.

Principle: Ind AS 111, Joint Arrangements

Paragraph 20 – Joint Operations
―A joint operator shall recognise in relation to its interest in a joint
operation:
(a) its assets, including its share of any assets held jointly;
(b) its liabilities, including its share of any liabilities incurred jointly;
(c) its revenue from the sale of its share of the output arising from the
joint operation;
(d) its share of the revenue from the sale of the output by the joint
operation; and
(e) its expenses, including its share of any expenses incurred jointly.‖

Observation
It was noted from the footnote under note to the financial statements on Non -
Current Financial Assets that the company had entered into a joint operation
with another company and has disclosed the details of arrangements and
share of assets. However, the company did not recognise the obligation
for liabilities, expenses and did not account for revenue pertaining to
its joint operations.
Accordingly, it was viewed that the requirements of Ind AS 111 have not
been complied with.

26
 Observations related to Assets

22. Financial Assets - Loans

Matter contained in the Financial Statements
In the notes to the financial statements on Financial Assets (Loans), certain
loans were disclosed.

Principle: General Instructions for preparation of Balance Sheet of

Division II – Ind AS Schedule III to the Companies Act, 2013
Paragraph 6A (VIII) of General Instructions for preparation of
Balance Sheet given under Part I, Division II – Ind AS Schedule III to
the Companies Act, 2013
“Loans
(i) Loans shall be classified as:
(a) Security deposits;
(b) Loans to related parties (giving details thereof); and
(c) Others (specify nature).
(ii) The above shall also be sub-classified as-
(a) Secured, considered good;
(b) Unsecured, considered good; and
(c) Doubtful.‖

Observation
It was noted from the note to the financial statements on Financial
Assets (Loans) that the loans were not classified as per the above
stated requirement specifying whether these loans were secured,
unsecured or doubtful. Further, the nature of other advances was also
not specified as the amount shown under this head was material,
consisting of 86% of total loans and advances.

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Study on Compliance of Financial Reporting Requirements

Accordingly, it was viewed that the above stated requirements of General

Instructions for preparation of Balance Sheet of Division II – Ind AS Schedule
III to the Companies Act, 2013 have not been complied with.

23. Financial assets

Matter contained in the Financial Statements
In note to the financial statements on ‗Financial Asset‘, two receivables -
‗Receivable from Authority‘ and ‗Toll Collection Receivable‘ were presented
under ―Financial Asset- Others‘‘.

Principle: Guidance Note on Division II - Ind AS Schedule III to the

Companies Act 2013
Paragraph 8.1.9
―… A receivable shall be classified as 'trade receivable' if it is in respect
of the amount due on account of goods sold or services rendered in the
normal course of business and the company has a right to an amount of
consideration that is unconditional (i.e. if only the passage of time is
required before payment of that consideration is due). Hence, am ounts
due under contractual rights, other than arising out of sale of goods or
rendering of services, cannot be included within Trade Receivables. Such
items may include dues in respect of insurance claims, sale of Property,
Plant and Equipment, contractually reimbursable expenses, etc. Such
receivables should be classified as "other financial assets" and each such
item should be disclosed nature-wise.‖

Observation:
It was noted that ‗‘Receivable from Authority‖ and ―Toll Collection
Receivable‖ were disclosed under ―Financial Asset- Others‘‘.
It was viewed that ―Toll Collection Receivable‖ and ―Receivable from
Authority‖ is in respect of the amount due on account of services rendered in
the normal course of business and the company had an unconditional right to
these amounts of consideration. Accordingly, Receivable from Authority and

28
 Observations related to Assets

Toll collection receivable were in the nature of trade receivables and should
have been classified as ‗‘Financial Assets -Trade Receivables‖ instead of
―Financial Asset – Others‖.
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.

24. Financial Assets- Non-Current Loans

Matter contained in the Financial Statements
In the Related Party Disclosure, Receivables from redeemable preference
share pertaining to an enterprise controlled by the company (i.e. a related
party) were disclosed.

Principle: Guidance Note on Division II- Ind AS Schedule III to the

Companies Act, 2013 and Ind AS 107, Financial Instruments:
Disclosures
Paragraph 8.1.10 of Guidance Note on Division II
“Non-current Loans
(i) Loans shall be classified as:
a) Security Deposits;
b) Loans to related parties (giving details thereof);
c) Other loans (specify nature).‖
Paragraph 20 of Ind AS 107 – Statement of profit and loss
―An entity shall disclose the following items of income, expense, gains or
losses either in the statement of profit and loss or in the notes:
…
(b) total interest income and total interest expense (calculated using the
effective interest method) for financial assets or financial liabilities that
are not at fair value through profit or loss;‖

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Study on Compliance of Financial Reporting Requirements

Observation:
It was noted from Related Party Disclosure, that Receivable from redeemable
preference share pertains to an enterprise controlled by the company and it
is a related party. However, under note to the financial statements on
Non-Current Loans, „Receivable from redeemable preference shares‟
were not classified as from related party, which is not in line with the
requirement of paragraph 8.1.10 of Guidance Note on Division II- Ind AS
Schedule III to the Companies Act, 2013.
Further, it was noted that closing balance shown under ‗Non-Current Loans‘
as at the end of the year was different from the outstanding balance with
regard to same line item appearing under another note to the financial
statements on ‗Balance outstanding of Related Parties‘. However, the
balances of this line item in the previous years were same under both the
notes - ‗Non-Current Loans‘ and ‗Balance outstanding of Related Parties‘.
Accordingly, it was viewed that there is mismatch in closing balance of
receivable from redeemable preference shares as given under two
different notes in the same financial statements.
Further, it was noted that the Non-Cumulative Redeemable Preference
Shares have been recognized at amortized cost. However, interest received
on investments valued at amortised cost has not been shown
separately, which is not in line with the requirement of paragraph 20 of Ind
AS 107.
Further, it was viewed that the nature of line item “Receivable from
Redeemable Preference Shares” is not clear. For better understanding, it
should have been clearly stated.
Accordingly, it was viewed that requirements of Guidance Note on Division II -
Ind AS Schedule III to the Companies Act, 2013 as well as Ind AS 107 have
not been complied with.

25. Financial Assets -Non-Current Investments

Matter contained in the Financial Statements
In the note to the financial statements of a company on Non-Current
Investments, the Company had designated three investments in equity
shares at fair value through OCI (FVTOCI). However, the disclosure as
required by Ind AS 107 has not been given.

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 Observations related to Assets

Principle: Ind AS 107, Financial Instruments: Disclosures

Paragraph 11Aof Ind AS 107 – Investments in equity instruments
designated at fair value through other comprehensive income
―If an entity has designated investments in equity instruments to be
measured at fair value through other comprehensive income, as
permitted by paragraph 5.7.5 of Ind AS 109, it shall disclose:
a) which investments in equity instruments have been designated to be
measured at fair value through other comprehensive income.
b) the reasons for using this presentation alternative.
c) ….‖

Observation:
It was noted that the Company had designated three investments in equity
shares which were fair valued through OCI (FVTOCI). However, the reason
for using the FVTOCI alternative was not disclosed which is not in line with
the requirement of paragraph 11A(b) of Ind AS 107.
Accordingly, it was viewed that the requirements of Ind AS 107 have not
been complied with.

26. Financial Assets: Investment in Equity Shares

(Subsidiary Company)
Matter contained in the Financial Statements
From the notes to the financial statements on Related Party Disclosures and
Exceptions items, it was noted that an investment in the equity shares of a
company was disclosed as ―subsidiary company‖.
However, in the Form MGT - 9 given under Director‘s Report the same
investment was disclosed as ‗Associate‘.

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Study on Compliance of Financial Reporting Requirements

Principle: Ind AS 1, Presentation of financial statements

Paragraph 7 – Definitions*
―Information is obscured if it is communicated in a way that would have a
similar effect for primary users of financial statements to omitting or
misstating that information. The following are examples of circumstances
that may result in material information being obscured:-
a) information regarding a material item, transaction or other event is
disclosed in the financial statements but the language used is vague
or unclear;
b) information regarding a material item, transaction or other event is
scattered throughout the financial statements;
c) dissimilar items, transactions or other events are inappropriately
aggregated;
d) similar items, transactions or other events are inappropriately
disaggregated; and
e) the understandability of the financial statements is reduced as a
result of material information being hidden by immaterial information
to the extent that a primary user is unable to determine what
information is material―.
*Notification no GSR 463E dated 24/7/2020

Observation:
It was noted that the contradictory information has been disclosed regarding
nature of the relationship in respect of such investment in the same set of
financial statements.
It was further noted that the same entity, under Related party disclosure was
disclosed as fellow subsidiary as well as jointly controlled entity, both. It was

32
 Observations related to Assets

viewed that either an entity can either be a jointly controlled entity or

fellow subsidiary therefore, disclosure of one entity as both is
incorrect.
It was further noted that under Related party disclosure, this investment was
disclosed as fellow subsidiary and under note on Exceptional items, the
same investment was mentioned as wholly owned subsidiary which is
ambiguous.
Accordingly, it was viewed that contradictory disclosures have been
made in same set of accounts regarding the nature of relationship with
that company, as to whether it is a fellow subsidiary or a jointly
controlled entity or an associate. It was viewed that such ambiguous
and incorrect disclosures should be avoided.

27. Financial Assets: Balances Subject to

Confirmation and/or Reconciliation
Matter contained in the Financial Statements
The abstract of note to the financial statements read as follows:
―Certain balances of trade receivable, loan and advances, trade payable and
other liabilities are subject to confirmation and / or reconciliation.‖

Principle: SA 705, Modification to the Opinion in the Independent

Auditor‟s Report
Paragraph 7 of, provides as follows:
―7. The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence,
concludes that misstatements, individually or in the aggregate, are
material, but not pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence
on which to base the opinion, but the auditor concludes that the
possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive.‖

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Observation:
It was noted from the above stated note to the financial statements that
certain balances pertaining to trade receivable, loan and advances, trade
payable and other liabilities were disclosed as subject to confirmation and
reconciliation.
It was viewed that information disclosed as above, is ambiguous. If such
balance confirmations/ reconciliations are not material and does not affect
the true and fair view of the financial statements of the company, then such
information shall not be disclosed in the financial statement as disclosure of
such facts may create doubts in the mind of readers of the financial
statements. However, on the other hand, if such balances are material and
do affect the true and fair view of the financial statements of the entity,
then the auditor should have adequately incorporated these facts in his
report by way of giving a modified opinion.
Further, it was viewed that as per paragraphs 7, 8 and 9 of SA 505, Externa l
Confirmation, the auditor shall maintain control over external confirmation
requests, and in case management refuses the auditor to send a
confirmation request, the auditor shall, interalia, perform alternative audit
procedures designed to obtain relevant and reliable audit evidence.
Accordingly, it was viewed that the requirements of SA 705 and SA 505 have
not been complied with.

28. Financial Assets

Matter contained in the Financial Statements
From the accounting policy of Financial Assets, it was noted that Policy on
Effective Interest Method is included as part of Classification of Financial
Assets.
Observation:
It was viewed that instead of the nomenclature ‗Classification of Financial
Assets‘, correct nomenclature should have been ‗Classification and
measurement of financial assets‘.

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 Observations related to Assets

29. Financial Assets

Matter contained in the Financial Statements
Abstract of accounting policy of Financial Instruments stated as follows:
―Financial Instruments
A financial instrument is any contract that gives rise to a financial asset of
one entity and a financial liability or equity instrument of another entity.
1) Financial Assets
Initial recognition and measurement
…..‖

Principle:-Ind AS 107, Financial Instruments: Disclosures

Paragraph B5– Other disclosure – accounting policies
―Paragraph 21 requires disclosure of the measurement basis (or bases)
used in preparing the financial statements and the other accounting
policies used that are relevant to an understanding of the financial
statements. For financial instruments, such disclosure may include:
…
e) how net gains or net losses on each category of financial instrument
are determined (see paragraph 20(a)), for example, whether the net
gains or net losses on items at fair value through profit or loss
include interest or dividend income.‖

Observation:
The stated accounting policy did not disclose about the treatment of interest
income as to whether it presents interest income on financial assets
measured at FVTPL (Fair Value Through Profit and Loss) as a part of fair
value changes or such interest is presented separately.
It was viewed that the accounting policy as required under Ind AS 107 para
B5(e) has not been disclosed.
Accordingly, it was viewed that the requirements of Ind AS 107 have not
been complied with.

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30. Receivables from Related Parties

Matter contained in the Financial Statements
In the notes to the financial statements on Other Non-Current Financial
Assets and Other Current Assets, ‗interest receivable from related party‘ and
‗advances to related party‘ were disclosed respectively.

Principle: General Instructions for preparation of Financial

Statements of a Company required to comply with Ind AS Division II
– Ind AS Schedule III to the Companies Act 2013
Paragraph 4(ii)
“4(ii) Each item on the face of the Balance Sheet, Statement of Changes
in Equity and Statement of Profit and Loss shall be cross-referenced to
any related information in the Notes. In preparing the Financial
Statements including the Notes, a balance shall be maintained between
providing excessive detail that may not assist users of Financial
Statements and not providing important information as a result of too
much aggregation.”

Observation:
It was noted that in the notes to the financial statements on Other Non-
Current Financial Assets, ‗interest receivable from related party‘ was
disclosed. Similarly, in the notes to the financial statements on Other Current
Assets,‗ advances to related party‘ were disclosed. However, it was noted
from the disclosure of related party transactions made in another note to the
financial statements that no cross-referencing of the interest receivable and
advances to related parties disclosed in respective notes was made by the
company.
It was viewed that for the ease of understanding of the users and better
presentation of the financial statement the cross referencing of the items of
assets and liabilities should be made with the relevant note for the related
party disclosures.

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 Observations related to Assets

31. Receivables from Related Parties

Matter contained in the Financial Statements
Under the note to the financial statements on ‗Other Financial Assets‘, dues
from related parties were disclosed.

Principle: General Instructions for Preparation of Balance Sheet of

Division II Schedule III to the Companies Act, 2013
Paragraph 6(B)
Current Assets
“V. Loans:
(i) Loans shall be classified as:
(a) Security deposits;
(b) Loans to related parties (giving details thereof); and
(c) Others (specify nature).
(ii) The above shall also be sub-classified as-
(a) Secured, considered good;
(b) Unsecured, considered good; and
(c) Doubtful.‖

Observation:
It was noted from note to the financial statements on Other Financial Assets
that dues from related parties were not classified into secured, unsecu red
and doubtful as per the above stated requirement of ‗General Instructions for
preparation of Balance Sheet‘ of Division II, Schedule III to the Companies
Act, 2013.
Accordingly, it was viewed that the requirements of Division II, Schedule III to
the Companies Act, 2013 have not been complied with.

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32. Inventories
Matter contained in the Financial Statements
The value of finished goods as well as stock in trade were given under note
to the financial statements on ‗Inventories‘ and note to the financial
statements on ‗Changes in inventories of finished goods, work-in-progress‘
and the values were different in both these notes.

Principle: General Instructions For Preparation of Financial

Statements of a Company required to comply with Ind As Division II
– Ind AS Schedule III to the Companies Act 2013
Paragraph 4(ii)
“4(ii) Each item on the face of the Balance Sheet, Statement of Changes
in Equity and Statement of Profit and Loss shall be cross-referenced to
any related information in the Notes. In preparing the Financial
Statements including the Notes, a balance shall be maintained between
providing excessive detail that may not assist users of Financial
Statements and not providing important information as a result of too
much aggregation.”

Observation:
It was noted that the value of finished goods as well as stock in trade as
given under note to the financial statements on ‗Inventories‘ and note to the
financial statements on ‗Changes in inventories of finished goods, work -in-
progress‘ were different although it was a compensating error.
It was viewed that information presented in Notes to Accounts was not
consistent and this type of inconsistency should be avoided.

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 Observations related to Assets

33. Inventories
Matter contained in the Financial Statements
The accounting policy for Inventories read as follows:
―Inventories are stated at lower of cost and fair value (except scrap / waste
which are valued at net realizable value) .....‖

Principle: Ind AS 2, Inventories

Paragraph 9 – Measurement
Inventories shall be measured at the lower of cost and net realisable
value.
Paragraph 6–Definition
Net realisable value is the estimated selling price in the ordinary course
of business less the estimated costs of completion and the estimated
costs necessary to make the sale.

Observation:
Paragraph 9 of Ind AS 2 required that inventories should be valued at lower
of cost and net realisable value. Paragraph 6 of Ind AS 2 gives definition of
net realizable value (NRV) and paragraph 9 of Ind AS 113 defines fair value.
The net realizable value is in nature different from the fair value of
inventories. The net realizable value is entity-specific value and may not be
similar to the fair value of the inventory as fair value is not entity -specific.
It was viewed that net realisable value of inventory refers to the net amount
(estimated selling price less estimated cost of completion and estimated cost
of sale) that an entity expects to realise from the sale of inventory in the
ordinary course of business whereas the fair value reflects the price at which
an orderly transaction to sell the same inventory in the principal (or most
advantageous) market for that inventory would take place between market
participants at the measurement date.
The inventories ought to be valued at lower of the cost or net realisable
value and not the fair value.
Accordingly, it was viewed that the above stated policy on inventory valuation
is not in line with the requirements of Ind AS 2.

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34. Cash and Cash Equivalents

Matter contained in the Financial Statements
Under the note to the financial statements on Cash and cash equivalents
substantial amount was disclosed under the line item of other Bank Balance‖.

Principle: General Instructions for preparation of Balance Sheet of

Division II – IND AS Schedule III to the Companies Act, 2013
Paragraph 6B IV
―A company shall disclose the following in the Notes:
B. Current Assets
IV. Cash and cash equivalents: Cash and cash equivalents shall be
classified as
a. Balances with Banks (of the nature of cash and cash equivalents);
b. Cheques, drafts on hand;
c. Cash on hand; and
d. Others (specify nature).‖

Observation:
It was noted that other bank balances were disclosed under the head of
‗Balance with Banks‘. However, the nature of these bank balances had not
been specified as per the above stated requirements.
Further, it was also noted that the amount was material; therefore, the nature
should have been disclosed appropriately for the understanding of the us ers
of the financial statements.
Accordingly, it was viewed that the above stated requirements of General
Instructions for preparation of Balance Sheet of Division II – Ind AS Schedule
III to the Companies Act, 2013 have not been complied with.

40
 Chapter-2
Observations related to Equity
1. Treasury Shares
Matter contained in the Financial Statements
An abstract of the note to the financial statements of a company read as
follows:
―Beneficial Interest in a Trust represent investments in company‘s shares,
associates and other unlisted companies net off borrowings and liabilities
pertaining to investment division of a company transferred to the said trust in
terms of the scheme of amalgamation. Considering that the company‘s
shares are held by an independent trust and are meant for sale in terms of
the High Court order, the beneficial interest (including company‘s shares) has
been treated as financial asset and fair valuation as required in terms of Ind
AS 109 has been carried out by an independent firm of chartered accountant
and the resultant decrease in value thereof, has been adjusted from other
comprehensive income.‖

Principle: Ind AS 32, Financial Instruments Presentation

Paragraph 33– Treasury shares
―If an entity reacquires its own equity instruments, those instruments
(‗treasury shares‘) shall be deducted from equity. No gain or loss shall be
recognised in profit or loss on the purchase, sale, issue or cancellation of
an entity‘s own equity instruments. Such treasury shares may be
acquired and held by the entity or by other members of the consolidated
group. Consideration paid or received shall be recognised directly in
equity.‖
Paragraph AG 36– Treasury shares
―An entity‘s own equity instruments are not recognised as a financial
asset regardless of the reason for which they are reacquired. Paragraph
33 requires an entity that reacquires its own equity instruments to deduct
those equity instruments from equity. However, when an entity holds its
own equity on behalf of others, eg a financial institution holding its own
Study on Compliance of Financial Reporting Requirements

own equity on behalf of others, eg a financial institution holding its own

equity on behalf of a client, there is an agency relationship and as a
result those holdings are not included in the entity‘s balance sheet. ‖

Observation:
It was noted that the company has beneficial interest in a Trust which
represents investments in company‘s own shares, associates and other
unlisted companies net off borrowings and liabilities. This beneficial interest
was treated as financial asset, and accordingly, fair valued as per Ind AS 109
by the company. The impact was taken to other comprehensive income.
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.
Accordingly, it was viewed that the requirements of Ind AS 32 have not been
complied with.

2. Statement of Changes in Equity

Matter contained in the Financial Statements
Financial Statements of the company comprised of Balance Sheet,
Statement of Profit and Loss, Statement of Cash Flow and Notes to Accounts
but Statement of Changes in Equity was not there.
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.
Principle: Companies Act, 2013
Section 2(40)
―Financial Statement‖ in relation to a company, includes—
i) a balance sheet as at the end of the financial year;
ii) a profit and loss account, or in the case of a company carrying on
any activity not for profit, an income and expenditure account for the
financial year;

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 Observations related to Equity

iii) cash flow statement for the financial year;

iv) a statement of changes in equity, if applicable; and
v) any explanatory note annexed to, or forming part of, any document
referred to in sub-clause (i) to sub-clause (iv):
Provided that the financial statement, with respect to One Person
Company, small company and dormant company, may not include the
cash flow statement;

Observation:
It was noted that the company, which is preparing financial statements as per
Ind AS, interalia, is required to prepare and present the Statement of
Changes in Equity.
However, in the abovementioned 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.
Accordingly, it was viewed that non-preparation of Statement of Changes in
Equity is a non-compliance of Section 2 (40) of Companies Act, 2013.

3. Statement of Changes in Equity

Matter contained in Financial Statements
In the note to the financial statements on ‗Other equity‘, ‗Re-measurement
gains/(losses) on defined benefit plans‘ adjusted/ recognized during the year
were taken to Other comprehensive income.
Principle: Guidance Note on Division II - Ind AS Schedule III to the
Companies Act 2013
Paragraph 8.2.2.3
―Reconciliation of items in Other Equity
Reconciliations for each component of other equity are required to be
made in the following manner (to the extent applicable):

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(i) …
Apart from the above items, Ind AS Schedule III states that:
• Re-measurement of defined benefit plans; and …
…Ind AS Schedule III requires ‗re-measurements of defined benefit
plans‘ during the reporting period to be shown as a separate line item in
other comprehensive income.
As per Ind AS Schedule III requirement mentioned above, such re-
measurements of defined benefit plans, when accumulated at the end of
every reporting period, shall be recognized as a part of retained earnings
with separate disclosure of such item along with the relevant amounts in
the Notes to Accounts. Accordingly, a company shall present the
accumulated re-measurements of defined benefit plans at the end of
each reporting period as a part of retained earnings.‖

Observation:
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 re-measurements 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.
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.

4. Other Equity
Matter contained in the Financial Statements
In the notes to the financial statements of a company on Other equity,
various reserves were disclosed like Capital Redemption Reserve, Securities
Premium, General Reserve and Retained Earnings.

44
 Observations related to Equity

Principle: Ind AS 1, Presentation of Financial Statements

Paragraph 79
―An entity shall disclose the following, either in the balance sheet or the
statement of changes in equity, or in the notes:
…
(b) a description of the nature and purpose of each reserve within equity.‖
Paragraph 8.2.2.1 of Guidance Note on Division II – Ind AS Schedule III
to the Companies Act, 2013
―Reserves & Surplus:
…
(c) Other Reserves (specify the nature and purpose of reserve and the
amount in respect thereof):
Every other reserve which is not covered in above paragraphs is to be
reflected as ‗Other Reserves‘. However, since the nature, purpose and
the amount are to be shown, each reserve under ‗Other Reserves‘ is to
be shown separately in Notes to Accounts…..‖

Observation:
It was noted from the note to the financial statements on Other Equity that
there are various reserves with the company however; the nature and
purpose of these reserves were not disclosed by the company in the notes to
accounts.
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.
Accordingly, it was viewed that the requirements of Ind AS 1 and the
Companies Act, 2013 have not been complied with.

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5. Authorized Share Capital

Matter contained in the Financial Statements
Abstract of Note to the financial statements on Equity Share Capital read as
follows:
―Equity Share Capital
(Amount in Lakhs)
Current year Previous
year
Authorised:
550,000,000 Equity Shares of Rs. 10/- each 55,000 55,000
Add:17,250,000 Equity shares of Rs. 10/- 1,725 1,725
each on account of Amalgamation
56,725 56,725

Principle: Ind AS 1, Presentation of financial statements

Paragraph 7 – Definitions
―… Material:
…
Information is obscured if it is communicated in a way that would have a
similar effect for primary users of financial statements to omitting or
misstating that information. The following are examples of circumstances
that may result in material information being obscured:-
a) information regarding a material item, transaction or other event is
disclosed in the financial statements but the language used is vague
or unclear;
b) information regarding a material item, transaction or other event is
scattered throughout the financial statements;
c) dissimilar items, transactions or other events are in appropriately
aggregated;

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 Observations related to Equity

d) similar items, transactions or other events are in appropriately

disaggregated; and
e) the understandability of the financial statements is reduced as a
result of material information being hidden by immaterial in formation
to the extent that a primary user is unable to determine what
information is material…‖
*Notification no GSR 463E dated 24/7/2020

Observation:
It was noted that in previous year, the opening balance of Authorised Share
Capital was Rs.55,000 Lakhs. During the previous year, an amount of Rs.
1,725 lakhs was added on account of amalgamation, and accordingly, the
closing balance of authorized share capital as at the end of the previous year
was Rs. 56,725 Lakhs. However, the opening balance of Authorised Share
Capital for current year was reported at Rs. 55,000 Lakhs and instead of
reporting at Rs. 56,725 Lakhs and same additions have been shown under
current year as well.
It was observed that movement shown in the authorized capital in the
previous year has again been shown in the current year, which is not correct.

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 Chapter-3
Observations related to Liabilities
1. Financial guarantees
Matter contained in the Financial Statements
The contingent liabilities of a company included letter of comfort to banks
against credit facilities / financial assistance availed by subsidiaries and
corporate guarantee given to banks against credit facilities/ financial
assistance availed by its associate company.

Principle: Ind AS 109, Financial Instruments

Appendix A – Defined terms
…
Financial guarantee contract
―A contract that requires the issuer to make specified payments to
reimburse the holder for a loss it incurs because a specified debtor fails
to make payment when due in accordance with the original or modified
terms of a debt instrument...
Appendix B – Application guidance
…
Para B2.5 …
―Financial guarantee contracts may have various legal forms, such as a
guarantee, some types of letter of credit, a credit default contract or an
insurance contract. Their accounting treatment does not depend on their
legal form...‖
 Observations related to Liabilities

Observation:
In accordance with the above, it may be noted that 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.
Similar view was taken by the ITFG, ICAI under issue 64 given in the
Compendium of ITFG Clarification Bulletins, December 2018 edition.

2. Corporate Guarantees
Matter contained in the Financial Statements
From the note to financial statements it was noted that the company had
given corporate guarantees to several banks in respect of funded and non-
funded limits availed by its foreign subsidiary and its associate company.

Principle: Ind AS 32, Financial Instruments: Presentation

…Paragraph AG8 of Appendix A – Application Guidance - Ind AS 32 –
Financial assets and financial liabilities
―The ability to exercise a contractual right or the requirement to satisfy a
contractual obligation may be absolute, or it may be contingent on the
occurrence of a future event. For example, a financial guarantee is a
contractual right of the lender to receive cash from the guarantor, and a
corresponding contractual obligation of the guarantor to pay the lender , if
the borrower defaults. The contractual right and obligation exist because
of a past transaction or event (assumption of the guarantee), even though
the lender‘s ability to exercise its right and the requirement for the
guarantor to perform under its obligation are both contingent on a
future act of default by the borrower. A contingent right and obligation
meet the definition of a financial asset and a financial liability,
even though such assets and liabilities are not always recognised in the

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financial statements. Some of these contingent rights and obligations

may be insurance contracts within the scope of Ind AS 104.‖…
Guidance Note on Division II – IND AS Schedule III to the Companies
Act, 2013
Paragraph 8.2.5.1 - Non-current other financial liabilities
―Ind AS Schedule III requires presenting ‗Other Financial Liabilities‘ as a
separate line item on the face of the Balance Sheet under ‗Financial
Liabilities‘. Items which meet the definition of financial liabilities as per
Ind AS 32, like contingent consideration, derivative contracts, financial
guarantee contracts issued, contractually reimbursable expenses etc.,
should be presented under other financial liabilities.‖
Ind AS 109 – Financial Instruments
Paragraph 4.2.1 – Classification of financial liabilities
―An entity shall classify all financial liabilities as subsequently measured
at amortised cost, except for:
...
c. financial guarantee contracts. After initial recognition, an issuer of
such a contract shall (unless paragraph 4.2.1(a) or (b) applies)
subsequently measure it at the higher of:
i. the amount of the loss allowance determined in accordance with
Section 5.5; and
ii. the amount initially recognised (see paragraph 5.1.1) less, when
appropriate, the cumulative amount of income recognised in
accordance with the principles of Ind AS 115‖
Paragraph 5.5.1 – Impairment
―An entity shall recognise a loss allowance for expected credit losses on
a financial asset that is measured in accordance with paragraphs 4.1.2
or4.1.2A, a lease receivable, a loan commitment and a financial
guarantee contract to which the impairment requirements apply in
accordance with paragraphs 2.1(g), 4.2.1(c) or 4.2.1(d).‖

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 Observations related to Liabilities

Observation:
As per paragraph 8.2.5.1 of 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.
It was viewed that the aforesaid corporate guarantees were in the nature of
financial guarantees and as per the above stated requirements, such
corporate guarantees should have been recognized, measured, presented
and disclosed in line with the above stated requirements of Ind AS 109, Ind
AS 32 and Division II – Ind AS Schedule III to the Companies Act, 2013.
Accordingly, it was viewed that the requirements of Ind AS 109, Ind AS 32,
as well as disclosure requirements given under paragraph 8.2.5.1 of
Guidance note on Division II – Ind AS Schedule III to the Companies Act,
2013 have not been complied with.

3. Non-Current Borrowings
Matter contained in the Financial Statements
In the note to the financial statements of a company on Non-Current
Borrowings, Loans from related parties were classified as non-current. These
loans from related parties were interest free and repayment terms were not
stipulated.

Principle: Ind AS 1, Presentation of Financial Statements

Paragraph 60
An entity shall present current and non-current assets, current and non-
current liabilities, as separate classifications in its balance sheet in
accordance with paragraphs 66-76 …
Paragraph 69
An entity shall classify a liability as current when:
…

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Study on Compliance of Financial Reporting Requirements

d) it does not have an unconditional right to defer settlement of the

liability for at least twelve months after the reporting period. Terms of a
liability that could, at the option of the counterparty, result in its
settlement by the issue of equity instruments do not affect its
classification.

Observation:
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.
Accordingly, it was viewed that the requirement of Ind AS 1 has not been
complied with.

4. Financial Liabilities
Matter contained in the Financial Statements
Abstract of an accounting policy on Financial Assets and Liabilities read as
follows:
“Financial assets and liabilities
…
(v) Financial assets and liabilities at Fair Value Through Profit or Loss
(FVTPL)
Financial instruments which do not meet the criteria of amortised cost or fair
value through other comprehensive income are classified as fair value
through profit or loss.‖

Principle: Ind AS 109, Financial Instruments

Paragraphs 4.2.1
―An entity shall classify all financial liabilities as subsequently
measured at amortised cost…‖

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 Observations related to Liabilities

Paragraphs 4.2.2
―An entity may, at initial recognition, irrevocably designate a
financial liability as measured at fair value through profit or loss
when permitted by paragraph 4.3.5, or when doing so results in
more relevant information…‖

Observation:
It was viewed that the stated accounting policy gives an erroneous
impression that the financial instruments (including financial liabilities) can be
classified as either valued at Amortised Cost or Fair Value through Other
Comprehensive Income (FVOCI). However, the FVOCI classification
category is not available for Financial Liabilities under Ind AS 109.
Accordingly, it was viewed that the requirements of Ind AS 109 has not been
complied with in the stated policy.

5. Financial Liabilities
Matter contained in the Financial Statements
In the note to the financial statements on Borrowings, various defaults in the
repayment of loans were given.
Further, under paragraph (viii) of Annexure to the Auditor‘s Report, the
auditor had reported that there has been delay in timely repayment of dues.
Further, he had reported the status of payment made for these defaults,
before the approval date of the financial statement.

Principle: Guidance Note on Division II- Ind AS Schedule III to the

Companies Act, 2013 and Ind AS 107, Financial Instruments:
Disclosures
Paragraph 8.2.3.16
―Ind AS Schedule III requires separate disclosure for default, as on the
balance sheet date, in repayment of borrowings and interest but does not
require any disclosure of breaches. However, para 18 of Ind AS 107 would
require an entity to disclose only those breaches made during the reporting
period, which permitted the lender to demand accelerated repayment and,
were not remedied on or before the end of the reporting period.‖

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Study on Compliance of Financial Reporting Requirements

Paragraph 8.2.10
―The amounts shall be classified as:
(a) Current maturities of long-term debt;
(b) …
…
Current maturities of long-term debt
Ind AS Schedule III requires presenting ‗current maturities of long-term
debt‘ under ‗Other Financial Liabilities‘ grouped under ‗Current Liabilities‘.
Long term debt is specified in Ind AS Schedule III as a borrowing having
a period of more than twelve months at the time of origination. However,
current maturities of long-term debt are of the nature of a ‗Borrowings‘ but
since Ind AS Schedule III specifically provides a separate line item for
presenting current maturities of long-term debt under Other Financial
Liabilities, it is recommended that companies follow the presentation
requirements of Ind AS Schedule III.‖
Paragraph 18 of Ind AS 107 – Defaults and breaches
―For loans payable recognised at the end of the reporting period, an
entity shall disclose:
…
(c) whether the default was remedied, or the terms of the loans
payable were renegotiated, before the financial statements were
approved for issue.‖

Observation:
It was noted from the note to the financial statements on Borrowings that
there were various defaults in the repayment of loans. Further, under
paragraph (viii) of 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. In
respect of working capital facilities from Banks there has been over drawings
in the accounts during the year as well as at year end. Under ‗Remark‘

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 Observations related to Liabilities

column, the auditor had reported the status of payment made for these
defaults, before the approval date of the financial statement.
It was viewed that the details of defaults remedied before the date of t he
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.
It was further noted from the note on Borrowings that certain amount of ECB
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.
Accordingly, it was viewed that the requirements of Ind AS 107 and Schedule
III to the Companies Act, 2013have not been complied with.

6. Financial Liabilities
Matter contained in the Financial Statements
Abstract of accounting policy of the company regarding Financial Guarantee
Contracts read as follows:
―Financial guarantee contracts other than those which are in the nature of
insurance are those contracts that require a payment to be made to
reimburse the holder for a loss it incurs because the specified party fails to
make a payment when due in accordance with the terms of a debt
instruments. Financial guarantee contracts are recognised initially as a
liability at fair value, adjusted for transaction costs that are directly
attributable to the issuance of the guarantee. Subsequently, the liability is
measured at the higher of the amount of expected loss allowance determined
as per impairment requirements of Ind AS 109 and the amount recognized
less cumulative amortization. Corporate guarantees are in the nature of
insurance contracts.‖

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Study on Compliance of Financial Reporting Requirements

Principle: Ind AS 104, Insurance Contracts

Paragraph 15– Liability adequacy test
―An insurer shall assess at the end of each reporting period whether its
recognised insurance liabilities are adequate, using current estimates of
future cash flows under its insurance contracts. If that assessment shows
that the carrying amount of its insurance liabilities (less related deferred
acquisition costs and related intangible assets, such as those discussed
in paragraphs 31 and 32) is inadequate in the light of the estimated future
cash flows, the entire deficiency shall be recognised in profit or loss.‖

Observation:
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.
Accordingly, it was viewed that the requirements of Ind AS 104 have not
been complied with.

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 Chapter-4
Observations Related to Components
of Statement of Profit & Loss
1. Revenue Recognition
Matter contained in the Financial Statements
Abstract of accounting policy of a company on Revenue recognition read as
follows:
―No element of financing is deemed present as the sales are made with a
credit term which is consistent with market practice.‖

Principle: Ind AS 18, Revenue

Paragraph 9 – Measurement
―Revenue shall be measured at the fair value of the consideration
received or receivable‖
Paragraph 11– Measurement
―In most cases, the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash
equivalents received or receivable. However, when the inflow of cash or
cash equivalents is deferred, the fair value of the consideration may be
less than the nominal amount of cash received or receivable. For
example, an entity may provide interest-free credit to the buyer or accept
a note receivable bearing a below-market interest rate from the buyer as
consideration for the sale of goods. When the arrangement effectively
constitutes a financing transaction, the fair value of the consideration is
determined by discounting all future receipts using an imputed rate of
interest….‖
Study on Compliance of Financial Reporting Requirements

Observation:
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 181, 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. Hence existence of financing component is determined
as per Ind AS 18 and not by comparing the market practices.
Accordingly, it was viewed that the requirements of Ind AS 18 have not been
complied with.

2. Revenue Recognition
Matter contained in the Financial Statements
Abstract note to the financial statements of a company read as follows:
―The company has sold Fully and Compulsorily Convertible Debenture
(FCCD) to a Trust along with encumbrances for which necessary approvals
need to be obtained……‖.
No investment was shown towards FCCD in the annual report of the
company.
No further disclosure was given in the financial statements of the company
regarding the encumbrances taken over.

1 Observations still relevant under Paragraph 61 read with paragraph 63 of Ind AS 115(Revenue from
contracts with Customers)

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 Observations Related to Components of Statement of Profit & Loss

Principle: Ind AS 1, Presentation of Financial Statements

Paragraph 15 – Presentation of True and Fair View and compliance
with Ind ASs
―Financial statements shall present a true and fair view of the financial
position, financial performance and cash flows of an entity. Presentation
of true and fair view requires the faithful representation of the effects of
transactions, other events and conditions in accordance with the
definitions and recognition criteria for assets, liabilities, income and
expenses set out in the Framework. The application of Ind ASs, with
additional disclosure when necessary, is presumed to result in financial
statements that present a true and fair view.‖
Paragraph 82 – Statement of Profit and Loss
―In addition to items required by other Ind ASs, the profit or loss section
of the statement of profit and loss shall include line items that present the
following amounts for the period:
(a) …
(aa) gains and losses arising from the derecognition of financial assets
measured at amortised cost;‖
Paragraph 97– Other comprehensive income for the period
―When items of income or expense are material, an entity shall disclose
their nature and amount separately.‖

Observation:
It was noted from the notes to the financial statements that consideration
towards sale of FCCD was higher against the investment value. On perusal
of the annual report of the company, no additional investment was found
towards FCCD during the year. 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. Further, it was
viewed that had the gain been recognised in the Statement of Profit and
Loss, the profit for the year would have increased significantly. Accordingly,

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Study on Compliance of Financial Reporting Requirements

the profit was understated and hence, it was viewed that requirements of
paragraphs 15, 82 (aa) and 97 of Ind AS 1 are not complied with.
Further, it was also noted that adequate disclosure in respect of
encumbrances taken over were not provided.
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. Revenue Recognition
Matter contained in the Financial Statements
The company had shown an interest income in its financial statements under
Exceptional Item. Such interest income was recognized during the reporting
year and the comparative year. The receivables corresponding to the same
amount were written off as not recoverable during the reporting year.

Principle: Ind AS 18, Revenue

Paragraph 29 – Interest and Royalties
―Revenue arising from the use by others of entity assets yielding interest
and royalties shall be recognised on the bases set out in paragraph 30
when:
a) it is probable that the economic benefits associated with the
transaction will flow to the entity; and
b) the amount of the revenue can be measured reliably.
Paragraph 30 – Interest and Royalties
―Revenue shall be recognised on the following bases:
a) interest shall be recognised using the effective interest method as
set out in Ind AS 109; and
b) royalties shall be recognised on an accrual basis in accordance
with the substance of the relevant agreement.‖

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 Observations Related to Components of Statement of Profit & Loss

Observation:
It was noted from notes to the financial statements on exceptional item that
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 182 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 Para 5.5.1of Ind AS 109.
Accordingly, it was viewed that the requirements of Ind AS 18 and 109 have
not been complied with.

4. Revenue Recognition
Matter contained in the Financial Statements
One of the Company which is engaged in power generation, has disclosed
―contribution from consumers towards service lines‘‘ as ‗‘capital reserve‘‘
under ‗‘other equity‘‘.
Abstract of ‗sub note on ‗‘Other Equity‘‘ reads as follows:
―Based on expert opinion obtained, considering that capital contribution from
consumers toward service lines are not refundable to the consumers, even
after they cease to be consumers, and the underlying assets there against
being under ownership of the Company, such contributions are being treated
as capital reserve.‖

2Observation is still relevant under Paragraph 9(e ) read with definition of Income given under Appendix
of Ind AS 115 (Revenue from Contracts with Customers)

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Principle: Ind AS 18, Revenue

Paragraph 21 of Appendix C to Ind AS 18, Transfer of Assets from
Customers – How should the entity account for a transfer of cash
from its customer?
―When an entity receives a transfer of cash from a customer, it shall
assess whether the agreement is within the scope of this Appendix in
accordance with paragraph 6. If it is, the entity shall assess whether the
constructed or acquired item of property, plant and equipment meets the
definition of an asset in accordance with paragraphs 9 and 10. If the
definition of an asset is met, the entity shall recognise the item of
property, plant and equipment at its cost in accordance with Ind AS 16
and shall recognise revenue in accordance with paragraphs 13–20 at
the amount of cash received from the customer.”

Observation:
It was noted that contribution 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 3, it was viewed that the
entity shall recognise revenue at the amount of cash received from the
customers. Accordingly, the accounting treatment followed by the
company is incorrect.
Accordingly, it was viewed that the requirement of Ind AS 18 has not been
complied with.

3 Observation is still relevant under Paragraph 15 of Ind AS 115 (Revenue from Contracts with
Customers)

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 Observations Related to Components of Statement of Profit & Loss

5. Presentation of Revenue on Net Basis

Matter contained in the Financial Statements of a
company
In the note to the financial statements on revenue recognition, the company
presented purchase of traded power after netting it off from revenue from
traded power.

Principle: Ind AS 18, Revenue and Guidance Note on Division II - Ind

AS Schedule III to the Companies Act, 2013
Paragraph 7 of Ind AS 18, Revenue – Definitions
―Revenue is the gross inflow of economic benefits during the period
arising in the course of the ordinary activities of an entity when those
inflows result in increases in equity, other than increases relating to
contributions from equity participants.‖
Paragraph 9.2 of Guidance Note on Division II - Ind AS Schedule III
to the Companies Act, 2013
―….For other non-operating income, income should be disclosed under
this head net off expenses directly attributable to such income. However ,
the expenses so netted off should be separately disclosed.‖

Observation:
It was noted that purchase of traded power has been netted off from revenue
from traded power.
As per Paragraph 9.2 of 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. This kind of presentation is
available for „Other Non-operating income‟ as per the Guidance Note
and „when entity acts as an agent‟ as per Ind AS 18‟. 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.

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Study on Compliance of Financial Reporting Requirements

Accordingly, it was viewed that the requirements of Ind AS 18 4 and Guidance

Note on Division II - Ind AS Schedule III to the Companies Act, 2013 have
not been complied with.

6. Interest Income
Matter contained in the Financial Statements
Abstract of accounting policy of a company on Interest income read as
follows:
―Interest income is recognized on time proportion basis taking into account
the amount outstanding and the applicable interest rates and is disclosed in
other income. Interest income earned in the course of the Merchanting Trade
undertaken by the company is classified under 'operating income' since the
underlying bank deposits are in-extricable linked with such trade and the
interest Income from such deposits are as much part of the margin from such
trade.‖

Principle: Ind AS 18, Revenue

Paragraph 30 – Interest
―Revenue shall be recognised on the following bases:
(a) interest shall be recognised using the effective interest method as
set out in Ind AS 109;
(b) royalties shall be recognised on an accrual basis in accordance
with the substance of the relevant agreement; and
(c) dividends shall be recognised when the shareholder‘s right to
receive payment is established.‖

Observation:
It was noted from the stated accounting policy of interest income that the
effective interest rate method has not been applied. Paragraph 30 of Ind AS

4 Observation is still relevant under Appendix A read with Para B36 of Ind AS 115

64
 Observations Related to Components of Statement of Profit & Loss

185 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.
Accordingly, it was viewed that the requirements of Ind AS 18 have not
been complied with.

7. Other Operating Revenue

Matter contained in the Financial Statements
In the note to the financial statements on ‗Revenue from operations‘, out of
total ‗‘Other Operating Revenue‘‘, a material amount was disclosed as
‗Others‘ for which no details were furnished.

Principle: Guidance Note on Division II- Ind AS Schedule III to the

Companies Act, 2013
Paragraph 9.1.8
―The term ―other operating revenue‖ is not defined. This would include
Revenue arising from a company‘s operating activities, i.e., either its
principal or ancillary revenue-generating activities, but which is not
revenue arising from sale of products or rendering of services. Whether a
particular income constitutes ―other operating revenue‖ or ―other income‖
is to be decided based on the facts of each case and detailed
understanding of the company‘s activities.―

Observation:
It was noted from the note to the financial statements on ‗Revenue from
operations‘ that out of total ‗‘Other Operating Revenue‘‘, a substantial
amount was disclosed as ‗‘Others‘‘ for which no details were furnished. It
was viewed that nature of such „Other operating revenue‟ should have
been disclosed.

5Observation is still relevant under Paragraph 9(e) read with definition of income given under Appendix
of Ind AS 115 (Revenue from Contracts with Customers) and as per Ind AS 109

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Study on Compliance of Financial Reporting Requirements

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. Gain on Foreign Currency Transaction

Matter contained in the Financial Statements
In the note to the financial statements on Other Expenses, gain on foreign
currency transaction was deducted from other expenses.

Principle: Ind AS 1, Presentation of financial statements

Paragraph 7 – Definitions*
―Information is obscured if it is communicated in a way that would have a
similar effect for primary users of financial statements to omitting or
misstating that information. The following are examples of circumstances
that may result in material information being obscured:-
a) information regarding a material item, transaction or other event is
disclosed in the financial statements but the language used is
vague or unclear;
b) information regarding a material item, transaction or other event is
scattered throughout the financial statements;
c) dissimilar items, transactions or other events are inappropriately
aggregated;
d) similar items, transactions or other events are inappropriately
disaggregated; and
e) the understandability of the financial statements is reduced as a
result of material information being hidden by immaterial
information to the extent that a primary user is unable to determine
what information is material.‖
*Notification no GSR 463E dated 24/7/2020

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 Observations Related to Components of Statement of Profit & Loss

Observation:
It was noted that under note to the financial statements on Other Expenses,
gain on foreign currency transaction 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.
Accordingly, it was viewed that the requirements of Ind AS 1 have not been
complied with.

9. Fair Value Changes in Financial Instruments

Matter contained in the Financial Statements
An abstract of note to the financial statements on Other income reads as
follows:
―Other Income
Current Previous
year year
Dividend Income xxx Xxx
Gain on Mutual Funds xxx Xxx
Gain on fair valuation of derivatives xxx Xxx
Exchange Difference Gain xxx Xxx
Service Tax Refund Received xxx Xxx
Miscellaneous Income xxx Xxx
Total xxx Xxx

Principle: Guidance Note on Division II- Ind AS Schedule III to the

Companies Act, 2013
Paragraph 9.2
―Other income: The aggregate of ‗Other income‘ is to be disclosed on
face of the Statement of Profit and Loss. As per Note 5 of General
Instructions for the Preparation of Statement of Profit and Loss ‗Other
Income‘ shall be classified as:

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Study on Compliance of Financial Reporting Requirements

a) Interest Income;
b) Dividend Income;
c) Other non-operating income (net of expenses directly attributable to
such income).
…Presentation and disclosure of ‗net gains (losses) on fair value
changes‘ should be made as below:
Net gains (losses) on fair value changes
Figures at Figures at
current previous
reporting reporting
period end period end
Investments classified at FVTPL
Investments designated at FVTPL
Derivatives at FVTPL
Other Financial Instruments
classified as FVTPL
Other Financial Instruments
designated at FVTPL
Reclassification adjustments
Realised gain on debt investments
classified as FVOCI

Observation:
It was noted that the Company did not disclose gain on fair valuation of
derivatives as from instruments categorized as FVTPL.
It was viewed that “gain on fair valuation of derivatives‟‟ should be
explicitly disclosed as “gain on fair valuation of derivatives at FVTPL‟‟

68
 Observations Related to Components of Statement of Profit & Loss

under the sub-head Non-Operating Income as per the above stated

requirement of Guidance Note on Division II- Ind AS Schedule III to the
Companies Act, 2013.
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. Presentation of Finance Cost

Matter contained in the Financial Statements
The Company had shown the interest expense netted off with interest income
in the financial statements.

Principle: Ind AS 107, Financial Instruments: Disclosures, Ind AS 1,

Presentation of Financial Statements and Guidance Note on Division
II- Ind AS Schedule III to the Companies Act, 2013
Paragraph 20 of Ind AS 107 – Statement of Profit and Loss
―20. An entity shall disclose the following items of income, expense, gains
or losses either in the statement of profit and loss or in the notes: …
(b) total interest income and total interest expense (calculated using the
effective interest method) for financial assets or financial liabilities that
are not at fair value through profit or loss;‖
Paragraph 32 of Ind AS 1 – Offsetting
―An entity shall not offset assets and liabilities or income and expenses,
unless required or permitted by an Ind AS.‖
Paragraph 9.2 of Guidance Note on Division II- Ind AS Schedule III to
the Companies Act, 2013 – Other income
―The aggregate of ‗Other income‘ is to be disclosed on face of the
Statement of Profit and Loss. As per Note 5 of General Instructions for
the Preparation of Statement of Profit and Loss ‗Other Income‘ shall be
classified as:
(a) Interest Income; …

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Study on Compliance of Financial Reporting Requirements

Paragraph 9.5.5 of Guidance Note on Division II- Ind AS Schedule III

to the Companies Act, 2013 – Finance costs
―As per Note 4 of the General Instructions for the Preparation of the
Statement of Profit and Loss, disclosure of Finance costs is to be
bifurcated under the following:
(A) Interest;
…
(A) Interest expense
This would present the following types of finance charges incurred by the
Company:
(a) Interest cost on financial liabilities measured at amortized cost such
as borrowings from banks and others, on debentures, bonds or similar
instruments etc. calculated as per the effective interest method;.‖

Observation:
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 inte rest
income.
Accordingly, it was viewed that the requirements of Ind AS 107, Ind AS
1 and Guidance Note on Division II- Ind AS Schedule III to the
Companies Act, 2013 have not been complied with.

11. Interest on Fixed Deposits

Matter contained in the Financial Statements
An abstract of CARO read as below:
―viii) In our opinion and according to the information and explanations given
to us company has not defaulted in repayment of dues to a financial
Institution of bank. During the year under consideration, the bank has
charged the company on account of deduction of interest on prematurity of

70
 Observations Related to Components of Statement of Profit & Loss

FDRs, which stands included under interest expense. The company has not
issued debentures.‖

Principle:(Guidance Note on Division II- Ind AS Schedule III to the

Companies Act, 2013)
Paragraph 9.1.8 of Guidance Note on Division II – IND AS Schedule
III to the Companies Act, 2013
―The term ―other operating revenue‖ is not defined. This would include
Revenue arising from a company‘s operating activities, i.e., either its
principal or ancillary revenue-generating activities, but which is not
revenue arising from sale of products or rendering of services. Whether a
particular income constitutes “other operating revenue” or “other
income” is to be decided based on the facts of each case and
detailed understanding of the company‟s activities.”

Observation:
It was noted from CARO report of the company that deduction of interest on
pre-maturity of fixed deposits was included in the finance cost. It was viewed
that the deduction of interest income on prematurity of fixed deposits
should not have been accounted as finance cost rather the interest
income should not be recognized to the extent of the deduction.
It was viewed that interest income on fixed deposits should have been shown
under other income or other operating income based on the related facts of
the entity.
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 in preparation and presentation of the financial
statements.

12. Functional Classification of Expenditures

Matter contained in the Financial Statements
In the Statement of Profit and Loss of a company, expenses include the head
―Administrative Expenses‖.

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Study on Compliance of Financial Reporting Requirements

Principle: Ind AS 1, Presentation of Financial Statements

Paragraph 99 of Ind AS 1 –Other comprehensive income for the
period
―An entity shall present an analysis of expenses recognised in profit
or loss using a classification based on the nature of expense
method.‖

Observation:
It was noted from the Statement of Profit and Loss that expenses
includes the head “Administrative Expenses”. Accordingly, it was
observed that the company has classified the expenses based on
functional classification instead of nature-wise classification as
required by paragraph 99 of Ind AS 1.
Accordingly, it was viewed that the requirements of Ind AS 1 has not been
complied with.

13. Cost of Material Consumed

Matter contained in the Financial Statements
In the abstract of the Statement of Profit and Loss, the company, engaged in
the business of trading and manufacturing of certain goods and having its
own manufacturing facility, clubbed cost of material consumed under
„Purchases of Stock in Trade and Raw Material‟ and „Changes in
Inventories of Finished goods and Stock-in-trade‟ in the Statement of
Profit and Loss.

Principle: Part II, Division II- Ind AS Schedule III to the Companies
Act, 2013 and Guidance Note on Division II- Ind AS Schedule III to
the Companies Act, 2013
REVENUE
Revenue from operations
Other Income
Total Revenue

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 Observations Related to Components of Statement of Profit & Loss

EXPENSES
Cost of Material Consumed
Purchases of Stock in Trade and Raw Material
Changes in Inventories of Finished goods and Stock-in-trade
….‖
Paragraph 9.5.1 of Guidance Note on Division II-Ind AS Schedule III To
The Companies Act, 2013:
“Cost of materials consumed
This disclosure is applicable for manufacturing companies. Materials
consumed would consist of raw materials, packing materials (where
classified by the company as raw materials) and other materials such as
purchased intermediates and components which are ‗consumed‘ in the
manufacturing activities of the company.”

Observation:
It was noted from note to the financial statements on ‗Purchase of Stock in
Trade and Raw Material‘ that the company is engaged in the business of
trading of certain goods and it has its own manufacturing facility. However,
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.

14. Purchases
Matter contained in the Financial Statements
From the accounting policy of Revenue Recognition, it was noted that the
accounting policy of purchases has been disclosed thereat.

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Principle: Ind AS 1, Presentation of financial statements

Paragraph 7 – Definitions*
―Information is obscured if it is communicated in a way that would have a
similar effect for primary users of financial statements to omitting or
misstating that information. The following are examples of circumstances
that may result in material information being obscured:-
a) information regarding a material item, transaction or other event is
disclosed in the financial statements but the language used is vague
or unclear;
b) information regarding a material item, transaction or other event is
scattered throughout the financial statements;
c) dissimilar items, transactions or other events are inappropriately
aggregated;
d) similar items, transactions or other events are inappropriately
disaggregated; and
e) the understandability of the financial statements is reduced as a
result of material information being hidden by immaterial information
to the extent that a primary user is unable to determine what
information is material.―
*Notification no GSR 463E dated 24/7/2020

Observation:
It was viewed that the purpose and relevance of disclosure of policy on
„Purchases‟ under the head of Revenue Recognition is not clear. Also
there is no such requirement under Ind AS 18 as well.
Accordingly, it was viewed that policy for Purchases under Revenue
Recognition is not correct.

15. Excise Duty

Matter contained in the Financial Statements
In the note to the financial statements on Other expenses, ‗Excise duty‘ was
presented.

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Principle: Guidance Note on Division II- Ind AS Schedule III to the

Companies Act, 2013
Paragraph 9.1.4
―On the other hand, recovery of excise duty is an inflow that the entity
receives on its own account. For the manufacturer it is a part of the cost
of production, irrespective of whether the goods are sold or not. The
manufacturer acts as a principal in collecting excise duty and therefore,
revenue should be grossed up to include excise duty. Excise duty paid
should be presented as a separate line item under the „Expenses‟
head on the face of Statement of Profit and Loss.‖

Observation:
It was noted that the excise duty expense was presented under the head
„Other Expenses‟. Considering paragraph 9.1.4 read with Illustrative
Format given 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.
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.

16. Employee Benefits

Matter contained in the Financial Statements
Abstract of accounting policy of a company on Employee benefits read as
follows:
―Defined Contribution Plans such as Provident Fund etc., are charged to the
Statement of Profit and Loss Account as incurred. Further for certain
employees, the monthly contribution for Provident Fund is made to a Trust
administered by the Company. The interest payable by the Trust is notified
by the Government. The Company has an obligation to make good the
shortfall, if any.‖

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Principle: Ind AS 19, Employee Benefits

Paragraph 8 – Definitions
―Defined contribution plans are post-employment benefit plans under
which an entity pays fixed contributions into a separate entity (a fund)
and will have no legal or constructive obligation to pay further
contributions if the fund does not hold sufficient assets to pay all
employee benefits relating to employee service in the current and prior
periods.
Defined benefit plans are post-employment benefit plans other than
defined contribution plans.‖

Observation:
It was noted from the accounting policy of the company on employee benefits
that under defined contribution plans such as provident fund, the company
has an obligation to make good the shortfall, if any.
As per the definition of defined contribution plans, it was viewed that
employer‘s liability to the employee is limited to the amount of contribution &
has no further obligation to pay beyond agreed contribution. Further, as per
the definition of defined benefit plans, it was viewed that employer‘s liability
to the employee is not limited to the amount of contribution and may extend
further to pay beyond agreed contribution.
Accordingly, it was viewed that if the company has an obligation to
make good any shortfall, the said plan cannot be considered as defined
contribution plan as per Ind AS 19.
Accordingly, it was viewed that the requirements of Ind AS 19 have not been
complied with in preparation and presentation of the financial statements.

17. Employee benefits

Matter contained in the Financial Statements
Abstract of footnote given under note to the financial statements of a
company on Employee benefits read as follows:
―The company does not contributed to any Gratuity Fund Scheme. The
provision in respect of the defined benefit plan is however made by the

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company and carried as a liability, to be paid out of the regular cash flows of
the company. The provision is made in respect of every employee who has
completed at least five years of service, as 15 days‘ salary for every
completed year of service. The present value of the obligation is based on
actuarial valuation report‖

Principle: Ind AS 19, Employee Benefits

Paragraph 56 – Recognition and measurement
―Defined benefit plans may be unfunded, or they may be wholly or partly
funded by contributions by an entity, and sometimes its employees, into
an entity, or fund, that is legally separate from the reporting entity and
from which the employee benefits are paid. The payment of funded
benefits when they fall due depends not only on the financial position and
the investment performance of the fund but also on an entity‘s ability, and
willingness, to make good any shortfall in the fund‘s assets. Therefore,
the entity is, in substance, underwriting the actuarial and investment risks
associated with the plan. Consequently, the expense recognised for a
defined benefit plan is not necessarily the amount of the contribution due
for the period.‖
Paragraph 57 – Recognition and measurement
―Accounting by an entity for defined benefit plans involves the following
steps:
a) determining the deficit or surplus. This involves:
i. using an actuarial technique, the projected unit credit method, to
make a reliable estimate of the ultimate cost to the entity of the
benefit that employees have earned in return for their service in the
current and prior periods (see paragraphs 67–69). This requires an
entity to determine how much benefit is attributable to the current
and prior periods (see paragraphs 70–74) and to make estimates
(actuarial assumptions) about demographic variables (such as
employee turnover and mortality) and financial variables (such as
future increases in salaries and medical costs) that will affect the
cost of the benefit (see paragraphs 75–98).
ii. …

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Paragraph 135 of Ind AS 19, Employee Benefits – Disclosures

―An entity shall disclose information that:
a) explains the characteristics of its defined benefit plans and risks
associated with them (see paragraph 139);
b) identifies and explains the amounts in its financial statements
arising from its defined benefit plans (see paragraphs 140–144);
and
c) describes how its defined benefit plans may affect the amount,
timing and uncertainty of the entity‘s future cash flows (see
paragraphs 145–147).‖

Observation:
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.
Accordingly, it was viewed that the requirements of Ind AS 19 have not been
complied in preparation and presentation of the financial statements.

18. Employee Benefits

Matter contained in the Financial Statements
Abstract of accounting policy of a company on Employee benefits read as
follows:
―Voluntary Retirement Scheme (VRS)
Expenditure on VRS is being charged to Statement of Profit and Loss
Account as incurred.‖

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Principle: Ind AS 19, Employee Benefits

Paragraph 165 – Recognition
―An entity shall recognise a liability and expense for termination benefits
at the earlier of the following dates:
a) when the entity can no longer withdraw the offer of those benefits;
and
b) when the entity recognises costs for a restructuring that is within
the scope of Ind AS 37 and involves the payment of termination
benefits.‖

Observation:
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.
Accordingly, it was viewed that the requirements of Ind AS 19 and Ind AS 37
effective have not been complied with in preparation and presentation of the
financial statements.

19. Employee Benefits

Matter contained in the Financial Statements
In the notes to the financial statements of a company on Employee benefits,
certain disclosures were given.

Principle: Ind AS 19, Employee Benefits

Paragraph 147 of Ind AS 19, Employee Benefits – Disclosure
―To provide an indication of the effect of the defined benefit plan on the
entity‘s future cash flows, an entity shall disclose:

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a) a description of any funding arrangements and funding policy that

affect future contributions.
b) the expected contributions to the plan for the next annual
reporting period.
c) information about the maturity profile of the defined benefit
obligation. This will include the weighted average duration of the
defined benefit obligation and may include other information about
the distribution of the timing of benefit payments, such as a
maturity analysis of the benefit payments.‖

Observation:
It was noted that although certain disclosures were given with regard to
employee benefits, however, expected contribution to the defined benefit
plan for the next financial year has not been disclosed as required by
paragraph 147 of Ind AS 19.
Accordingly, it was viewed that the requirement of Ind AS 19 has not been
complied with.

20. Employee Benefits

Matter contained in the Financial Statements
In the notes to the financial statements of a company on Employee benefits
under Actuarial assumptions, disclosure of mortality rate was not found.

Principle: Ind AS 19, Employee Benefits

Paragraph 144– Disclosure
―An entity shall disclose the significant actuarial assumptions used to
determine the present value of the defined benefit obligation. Such
disclosure shall be in absolute terms (eg as an absolute percentage, and
not just as a margin between different percentages and other variables).
….‖

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Paragraph 57(a)(i)– Recognition and measurement

―Accounting by an entity for defined benefit plans involves the following
steps:
(a) determining the deficit or surplus. This involves:
i. using an actuarial technique, the projected unit credit method, to
make a reliable estimate of the ultimate cost to the entity of the
benefit that employees have earned in return for their service in the
current and prior periods (see paragraphs 67–69). This requires an
entity to determine how much benefit is attributable to the current
and prior periods (see paragraphs 70–74) and to make estimates
(actuarial assumptions) about demographic variables (such as
employee turnover and mortality) and financial variables (such as
future increases in salaries and medical costs) that will affect the
cost of the benefit (see paragraphs 75–98)..‖

Observation:
It was viewed that the disclosure of mortality rate constitutes a part of
the actuarial assumptions, however, the same has not been given,
which is required to be disclosed as per paragraph 147 read with para
57 (a) (i) of Ind AS 19.
Accordingly, it was viewed that the requirements of Ind AS 19 have not been
complied with.

21. Employee Benefits

Matter contained in the Financial Statements
An abstract of note to the financial statements on Gratuity and Other Post -
Employment benefits plans was as under:
“Amounts for the Current and previous four period are as follows”
Particulars Current year Previous year
Rs. Rs.
Gratuity … …
…
‖

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Principle: Ind AS 1, Presentation of financial statements

Paragraph 7– Definitions*
―Information is obscured if it is communicated in a way that would have a
similar effect for primary users of financial statements to omitting or
misstating that information. The following are examples of circumstances
that may result in material information being obscured:-
a) information regarding a material item, transaction or other event is
disclosed in the financial statements but the language used is
vague or unclear;
b) information regarding a material item, transaction or other event is
scattered throughout the financial statements;
c) dissimilar items, transactions or other events are inappropriately
aggregated;
d) similar items, transactions or other events are inappropriately
disaggregated; and
e) the understandability of the financial statements is reduced as a
result of material information being hidden by immaterial
information to the extent that a primary user is unable to determine
what information is material.‖
*Notification no GSR 463E dated 24/7/2020

Observation:
It was noted from the note to the financial statements on Gratuity and Other
Post-Employment benefits plans that heading was mentioned as ―Amounts
for the Current and previous four period‖ whereas disclosure was made
only for current and previous year.

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22. Borrowing Cost

Matter contained in the Financial Statements
Note to the financial statements of a company on Fair Value reads as
follows:
―Amount due to/from related companies, approximate their fair values as the
interest rates charged to / by related companies are approximately equivalent
to interest rate prevailing in the market or re-priced regularly.‖
From the Related Party Disclosure, it was noted that the amount due to
related party pertaining to loan was disclosed in current year as well as in
previous year.

Principle: Ind AS 32, Financial Instruments

Paragraph 31-32 of Ind AS 32:
“31.
…when the initial carrying amount of a compound financial instrument is
allocated to its equity and liability components, the equity component is
assigned the residual amount after deducting from the fair value of the
instrument as a whole the amount separately determined for the lia bility
component. …The sum of the carrying amounts assigned to the liability
and equity components on initial recognition is always equal to the fair
value that would be ascribed to the instrument as a whole. No gain or
loss arises from initially recognising the components of the instrument
separately.‖
32.
… first determine the carrying amount of the liability component by
measuring the fair value of a similar liability that does not have an
associated equity component. The carrying amount of the equity
instrument is then determined by deducting the fair value of the financial
liability from the fair value of the compound financial instrument as a
whole.‖

Observation:
It was observed that the company has not accounted for any borrowing cost
(whether expensed or capitalised) in current year as well as in previous year.
In such case, there may be two possibilities:

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(a) 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.
(b) 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, loan would include components of both
Equity and Financial liability. These components should be separately
recognised and accounted for in the financial statements.
Considering the above, it was viewed that the requirements of Ind AS 32
have not been complied with.

23. Provision for Expected Credit Loss

Matter contained in the Financial Statements
In the note to the financial statements of a company on Trade Receivables,
no provision for doubtful trade receivables was created.

Principle:-Ind AS 109, Financial Instruments

Paragraph 5.5.7 of Ind AS 109, Financial Instruments – Recognition
of Expected Credit Losses
―If an entity has measured the loss allowance for a financial instrument at
an amount equal to lifetime expected credit losses in the previous
reporting period, but determines at the current reporting date that
paragraph 5.5.3 is no longer met, the entity shall measure the loss
allowance at an amount equal to 12-month expected credit losses at the
current reporting date.
Paragraph 5.5.8 of Ind AS 109, Financial Instruments – Recognition
of Expected Credit Losses
―An entity shall recognise in profit or loss, as an impairment gain or loss,
the amount of expected credit losses (or reversal) that is required to
adjust the loss allowance at the reporting date to the amount that is
required to be recognised in accordance with this Standard.‖

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Division II to the Schedule III to the Companies Act

Paragraph 6B III (ii) of General Instruction for the Preparation of
Balance Sheet:
―(ii) Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.‖‖

Observation:
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
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.
Accordingly, it was viewed that the requirements of Division II to the
Schedule III to the Companies Act, 2013 as well as Ind AS 109 have not
been complied with.

24. Depreciation
Matter contained in the Financial Statements
Abstract of accounting policy of a company on Depreciation of Property,
Plant and Equipment read as follows:
―Depreciation on property, plant & equipment (PPE) is provided on Straight
Line Method over their useful lives and in the manner specified in Schedule II
to the Companies Act, 2013. However, in respect of certain Plant &
Machineries and Electric Installations, depreciation is provided as per
their useful lives assessed on the basis of technical evaluation by the
external valuer, ranging from 20 to 40 years.‖

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Principle: Schedule II to the Companies Act, 2013

Note 3 given under Schedule II to the Companies Act, 2013 provides
as follows:
―The following information shall also be disclosed in the accounts,
namely –
i. depreciation methods used; and
ii. the useful lives of the assets for computing depreciation, if they are
different from the life specified in the Schedule.‖

Observation:
It was noted from the stated policy on depreciation of Property, Plant and
Equipment (PPE) that although the company has used the useful lives given
under Schedule II to the Companies Act, 2013 for the purpose of charging
depreciation on PPE, however, in respect of certain plant & machineries and
electric installations, the useful lives as determined by external valuer have
been used.
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 deprecation 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 us eful
lives as estimated by the external valuer.
Accordingly, it was viewed that the requirements of Schedule II regarding
disclosure of useful lives have not been complied with.

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25. Corporate Social Responsibility Expenditure

Matter contained in the Financial Statements
In the financial statements, no disclosure was made about the CSR activities.

Principle:- (General Instructions for preparation of Statement of Profit

and Loss given under Part II, Division II – Ind AS Schedule III to the
Companies Act, 2013and Guidance Note on Division II- Ind AS Schedule
III to the Companies Act, 2013)
Paragraph 7 (j) of General Instructions for preparation of Statement of
Profit and Loss given under Part II, Division II – Ind AS Schedule III to
the Companies Act, 2013
―Additional Information: A Company shall disclose by way of notes, additional
information regarding aggregate expenditure and income on the following
items:
1. in case of companies covered under section 135, amount of expenditure
incurred on corporate social responsibility activities; and‖.
Paragraph 11.5 of Guidance Note of Division II – Ind AS Schedule III to
the Companies Act, 2013
a) ―From the perspective of better financial reporting and in line with the
requirements of Schedule III in this regard, it is recommended that all
expenditure on CSR activities, that qualify to be recognized as expense
should be recognised as a separate line item as ‗CSR expenditure‘ in the
statement of profit and loss. Further, the relevant note should disclose
the break-up of various heads of expenses included in the line item ‗CSR
expenditure‘.
b) The notes to accounts relating to CSR expenditure should also contain
the following:
1. Gross amount required to be spent by the company during the
year.
2. Amount spent during the year on:
i. Construction/acquisition of any asset
ii. On purposes other than (i) above

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The above disclosure, to the extent relevant, may also be made in

the notes to the cash flow statement, where applicable.
c) Details of related party transactions, e.g., contribution to a trust
controlled by the company in relation to CSR expenditure as per Ind
AS 24, Related Party Disclosures.
d) Where a provision is made in accordance with paragraph above the
same should be presented as per the requirements of Schedule III to
the Act. Further, movements in the provision during the year should
be shown separately.‖

Observation:
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
11.5 of Guidance Note of Division II – Ind AS Schedule III to the Companies
Act, 2013 were disclosed.
Accordingly, it was viewed that the above stated requirements of
General Instructions for preparation of Statement of Profit and Loss of
Division II – Ind AS Schedule III to the Companies Act, 2013 read with
Paragraph 11.5 of Guidance Note of Division II – Ind AS Schedule III to
the Companies Act, 2013 have not been complied with in preparation
and presentation of the financial statements.

26. Income Taxes

Matter contained in the Financial Statements
Abstract of accounting policy of a company on Taxation read as follows:
―The income tax expense or credit for the period is tax payable on the
taxable income of the current period based on the applicable income tax
rates at the balance sheet date adjusted by changes in deferred tax assets
and liabilities attributable to temporary differences and to unused tax losses.‖

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Principle: Ind AS 12, Income Taxes

Paragraph 5 – Definitions
―Deferred tax liabilities are the amounts of income taxes payable in
future periods in respect of taxable temporary differences.
Deferred tax assets are the amounts of income taxes recoverable in
future periods in respect of:
a) deductible temporary differences;
b) the carry forward of unused tax losses; and
c) the carry forward of unused tax credits.‖

Observation:
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; and
(c) the carry forward of unused tax credits.
Accordingly, it was viewed that the stated policy of the company is not
in line with requirements of Ind AS 12.

27. Items of Other Comprehensive Income and

Tax Effect Thereon
Matter contained in the Financial Statements
In the Statement of Profit and Loss of a company ―re-measurement of
defined benefits plans not reclassified to profit or loss in subsequent
periods‖, was shown under Other Comprehensive Income (OCI). However,

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no tax impact was shown in the statement of profit and loss in respect of
such re-measurement of defined benefits plans under OCI.

Principle: Ind AS 1, Presentation of Financial Statement and Ind AS

12, Income Taxes
Paragraph 96 Ind AS 1 – Other comprehensive income for the period
―Reclassification adjustments do not arise on changes in revaluation
surplus recognized in accordance with Ind AS 16 or Ind AS 38 or on
remeasurements of defined benefits plans recognized in accordance with
Ind AS 19. These components are recognized in other comprehensive
income and are not reclassified to profit or loss in subsequent periods…‖
Paragraph 61A of Ind AS 12, Income Taxes – Items recognized
outside profit or loss
―Current tax and deferred tax shall be recognised outside profit or loss if
the tax relates to items that are recognised, in the same or a different
period, outside profit or loss. Therefore, current tax and deferred tax that
relates to items that are recognised, in the same or a different period:
a) in other comprehensive income, shall be recognised in other
comprehensive income (see paragraph 62).
b) directly in equity, shall be recognised directly in equity (see
paragraph 62A).‖

Observation:
As per the requirements of paragraph 61A of Ind AS 12, current tax and
deferred tax, relating to items that are recognized in other
comprehensive income, shall be recognized in other comprehensive
income. In other words, as re-measurement of defined benefit plans has
been recognized in other comprehensive income and are not reclassified to
profit or loss in subsequent periods, therefore, its tax impact should also b e
disclosed under the same head i.e., OCI.
Accordingly, it was viewed that the requirements of Ind AS 12 have not been
complied with.

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28. Acquisition Related Cost

Matter contained in the Financial Statements
Abstract of accounting policy on business combinations read as follows:
―Acquisitions of businesses are accounted for using the acquisition method.
The consideration transferred in a business combination is measured at fair
value, which is calculated as the sum of the acquisition-date fair values of the
assets transferred by the Company, liabilities incurred by the Company to the
former owners of the acquiree and the equity interests issued by the
Company in exchange for control of the acquiree. Acquisition-related costs
are generally recognised in statement of profit or loss as incurred.‖

Principle: Ind AS 103, Business Combinations

Paragraph 53 – Acquisition-related costs
―Acquisition-related costs are costs the acquirer incurs to effect a
business combination. Those costs include finder‘s fees; advisory, legal,
accounting, valuation and other professional or consulting fees; general
administrative costs, including the costs of maintaining an internal
acquisitions department; and costs of registering and issuing debt and
equity securities. The acquirer shall account for acquisition-related costs
as expenses in the periods in which the costs are incurred and the
services are received, with one exception. The costs to issue debt or
equity securities shall be recognised in accordance with Ind AS 32 and
Ind AS 109.‖

Observation:
It was noted from the adopted policy on business combinations that the
acquisition related costs are generally recognized in 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.
Accordingly, it was viewed that the adopted policy is not in line with the
requirements of Ind AS 103.

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29. Foreign Exchange Difference

Matter contained in the Financial Statements
Amount of exchange rate difference realized during the current year was
negative and shown under the sub-head ‗Sale of products‘ under the main
head ‗Revenue from Operations‘.
Further, in the previous year, amount of exchange difference realized was
positive and shown under the sub-head ‗Sale of products‘ under the main
head ‗Revenue from Operations‘.

Principle: Guidance Note on Division II- Ind AS Schedule III to the

Companies Act, 2013
Paragraph 9.1.1
―Note 3 of General Instructions for the Preparation of Statement of Profit
and Loss require that revenue from operations is to be separately
disclosed in the notes, showing revenue from:
a) Sale of products (including Excise Duty);
b) Sale of services; and
c) Other operating revenues‖
Paragraph 9.1.2
―As per the definition of Revenue in Ind AS 18, ―revenue is the gross
inflow of economic benefits during the period arising in the course of the
ordinary activities of an entity when those inflows result in increases in
equity, other than increases relating to contributions from equity
participants.‖

Observation:
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.

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It was further noted that in previous year, there was income from exchange
difference realized and the same was presented under the head ‗Sale of
products‘ as Revenue from Operations. It was viewed that the same should
have been classified under the head ‗Other income‘ instead of ‗Revenue from
Operation‘.
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.

30. Foreign Exchange Difference

Matter contained in the Financial Statements
Abstract accounting policy of a company on Employee benefits read as
follows:
―Exchange differences on monetary items receivable from or payable to a
foreign operation for which settlement is neither planned nor likely to occur
(therefore forming part of the investment in the foreign operation), are
recognised initially in other comprehensive income (OCI) and reclassified
from equity to the statement of profit and loss on repayment of the monetary
items.‖

Principle: Ind AS 21, The Effects of Changes in Foreign Exchange

Rates
Paragraph 32 – Recognition
―….. In the financial statements that include the foreign operation and the
reporting entity (eg consolidated financial statements when the foreign
operation is a subsidiary), such exchange differences shall be recognised
initially in other comprehensive income and reclassified from equity to
profit or loss on disposal of the net investment in accordance with
paragraph 48.‖

Observation:
It was noted from the stated accounting policy that the exchange difference
on monetary items related to foreign operations are initially recognised in
OCI and reclassified from equity to Statement of Profit and Loss on
repayment of monetary items.

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It was viewed that as per paragraph 32 of Ind AS 21, reclassification

from equity to statement of Profit and Loss should have been made on
disposal of net investment instead of reclassifying the same on
repayment of the monetary items.
Accordingly, it was viewed that the requirements of Ind AS 21 have not been
complied with.

31. Sale of Securities

Matter contained in the Financial Statements
Abstract of accounting policy of a company on Sale of securities read as
follows:
―The premium or discount arising at the inception of forward exchange
contacts (other than contracts against firm commitments) is amortised and
recognised as an expense/income over the life of the contract. Exchange
differences on such contracts are recognised in the statement of profit and
loss in the period in which the exchange rates changes. Any profit or loss
arising on cancelation or renewal of such forward exchange contract is also
recognised as income or expense for the period.‖

Principle: Ind AS 109, Financial Instruments

Paragraph 4.1.4– Classification of financial assets
―A financial asset shall be measured at fair value through profit or loss
unless it is measured at amortised cost in accordance with paragraph
4.1.2 or at fair value through other comprehensive income in accordance
with paragraph 4.1.2A. However an entity may make an irrevocable
election at initial recognition for particular investments in equity
instruments that would otherwise be measured at fair value through profit
or loss to present subsequent changes in fair value in other
comprehensive income.‖

Observation:
It was noted from the stated policy on Sale of Securities that company was
still following the requirements of Accounting Standard 11 notified under
Companies (Accounting Standards) Rules, 2006 to recognize foreign
exchange contracts and hedging contracts. It was viewed that company
should have followed the hedge accounting principles of Chapter 6

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 Observations Related to Components of Statement of Profit & Loss

(Hedge Accounting) of Ind AS 109 or else such contracts should have

been accounted for as per the policy applicable for derivatives.
Accordingly, it was viewed that the requirements of Ind AS 109 have not
been complied with.

32. Fair Value Changes in Financial Instruments

Matter contained in the Financial Statements
In the note to the financial statements on Other income, ‗Fair value changes
of investments designated as FVTPL‘ was presented.

Principle: Guidance Note on Division II- Ind AS Schedule III to the

Companies Act, 2013
Paragraph 9.2
―Other income
The aggregate of ‗Other income‘ is to be disclosed on face of the
Statement of Profit and Loss. As per Note 5 of General Instructions for
the Preparation of Statement of Profit and Loss ‗Other Income‘ shall be
classified as:
a) Interest Income;
b) Dividend Income;
c) Other non-operating income (net of expenses directly attributable
to such income).
…
Presentation and disclosure of ‗net gains (losses) on fair value changes‘
should be made as below:
Net gains (losses) on fair value changes
As per Ind AS 107 para 20(a), the fair value gains or losses (net) on
financial assets which are measured at FVTPL should be present under
‗Other non-operating income‘ …

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Observation:
It was noted that ‗Fair value changes of investments designated as FVTPL‘
was disclosed as a constituent of ‗Other income‘.
It was viewed that it should have been disclosed under the sub-head
„Non-Operating Income‟ as per the above stated requirement of
paragraph 9.2 of Guidance Note on Division II- Ind AS Schedule III to the
Companies Act, 2013.
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.

33. Foreign Exchange Contracts

Matter contained in the Financial Statements
Abstract of accounting policy of a company on Sale of securities read as
follows:
―Gain/loss from trading in derivatives has been recognised only upon
settlement of trade. The Mark to Market margins have not been charged to
revenue.‖

Principle: Ind AS 109, Financial Instruments

Paragraph 4.1.4– Classification of financial assets
―A financial asset shall be measured at fair value through profit or loss
unless it is measured at amortised cost in accordance with paragraph
4.1.2 or at fair value through other comprehensive income in accordance
with paragraph 4.1.2A.However an entity may make an irrevocable
election at initial recognition for particular investments in equity
instruments that would otherwise be measured at fair value through profit
or loss to present subsequent changes in fair value in other
comprehensive income.‖

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Observation:
It was noted from the stated policy that any gain/ loss from trading in
derivatives was recognized only upto settlement. Any gain/ loss on MTM
(Marked to market) transactions was also not charged to the Statement of
Profit and loss.
As per the requirements of Ind AS 109, all derivatives, other than those
parts of hedging, which do not meet the criteria for classification as
subsequently measured at Amortised Cost or Fair Value through Other
Comprehensive Income (FVOCI) are measured at fair value at each
reporting date and all gains and losses are recognised in the Statement
of Profit or Loss.
Accordingly, it was viewed that the stated policy of the company is not in line
with Ind AS 109.

34. Exceptional Items

Matter contained in the Financial Statements
The Abstract of note to the financial statements on Exceptional items read as
follows:
―(a) Exceptional items includes Gain / (Loss) (net) on translation / segment
of foreign currency monetary items (including borrowing), gain / (loss)
upon marked to market of derivatives contracts, gain / (loss) on
forward cover cancellation.
(b) Exceptional items include amount written off / provided (including
provision) being non recoverable from certain parties.
(c) Exceptional items include on account of written-off of interest
receivable on loans to two subsidiary companies.
(d) Exceptional items include on account of provision against FSA
charges for earlier periods provided in view of the decision of Hon‘ble
Supreme Court.‖

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Principle: Guidance Note on Division II- Ind AS Schedule III to the

Companies Act, 2013, Ind AS 1: Presentation of Financial
Statements
Paragraph 9.6
―The term ‗Exceptional items‘ is neither defined in Ind AS Schedule III nor
in Ind AS. However, Ind AS 1 has reference to such items in paras 85,
86, 97and 98.
Para 85 states that additional line items, headings and subtotals in the
statement of profit and loss shall be presented, when such presentation
is relevant to an understanding of the entity‘s financial performance.
Further, para 86 states that disclosing the components of financial
performance assists users in understanding the financial performance
achieved and in making projections of future financial performance. An
entity considers factors including materiality and the nature and function
of the items of income and expense.
Para 97 states that when items of income or expense are material, an
entity shall disclose their nature and amount separately.
Para 98 gives certain circumstances that would give rise to the separate
disclosure of items of income and expense:
a) write-downs of inventories to net realisable value or of property, plant
and equipment to recoverable amount, as well as reversals of such
write-downs;
b) restructurings of the activities of an entity and reversals of any
provisions for the costs of restructuring;
c) disposals of items of property, plant and equipment;
d) disposals of investments;
e) discontinued operations;
f) litigation settlements; and
g) other reversals of provisions.”
Paragraph 7 of Ind AS 1: Presentation of Financial Statements
7. Material Omissions or misstatements of items are material if they
could, individually or collectively, influence the economic decisions that
users make on the basis of the financial statements. Materiality depends
on the size and nature of the omission or misstatement judged in the
surrounding circumstances. The size or nature of the item, or a
combination of both, could be the determining factor.‖

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Observation:
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.
It was viewed that, as per the above stated requirement of the 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.
It was further noted that the question number 32 of Educational Material on
Ind AS 1 issued by the ICAI, also addresses the issues on exceptional items.
In light of the above, it was viewed that, in the given case, none of the
items disclosed under the note on Exceptional items qualifies to be
reported as exceptional item considering the size and nature of given
items.

35. Earnings Per Share

Matter contained in the Financial Statements
In the notes to the financial statements of a company, the disclosure related
to Earnings Per Share was given as under:
a. Number of shares that were issued during the year were considered
as the weighted average number of shares while calculating the EPS.
b. Net profit after tax was considered for the calculation of EPS.

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Principle: Ind AS 33, Earnings Per Share

Paragraph 10– Measurement
―Basic earnings per share shall be calculated by dividing profit or loss
attributable to ordinary equity holders of the parent entity (the numerator)
by the weighted average number of ordinary shares outstanding (the
denominator) during the period.‖
Paragraph 19– Shares
―For the purpose of calculating basic earnings per share, the number of
ordinary shares shall be the weighted average number of ordinary shares
outstanding during the period.‖
Paragraph 70 – Disclosures
―An entity shall disclose the following:
a. the amounts used as the numerators in calculating basic and
diluted earnings per share, and a reconciliation of those amounts
to profit or loss attributable to the parent entity for the period. The
reconciliation shall include the individual effect of each class of
instruments that affects earnings per share.
b. the weighted average number of ordinary shares used as the
denominator in calculating basic and diluted earnings per share,
and a reconciliation of these denominators to each other. The
reconciliation shall include the individual effect of each class of
instruments that affects earnings per share.‖

Observation:
The following observations were noted from the note to the financial
statements on Earnings Per Share (EPS):
1. 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.
2. Net profit after tax was considered for the calculation of EPS. However,
as per the requirements of paragraph 10 of Ind AS 33, profit attri butable
to ordinary equity holders shall be considered for the calculation of EPS.

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 Observations Related to Components of Statement of Profit & Loss

In the given case, net profit after tax including impact of OCI, was
divided by number of shares issued during the year. Both numerator as
well as denominator used for EPS calculation was incorrect.
3. Further, the disclosures as required under paragraph 70 (a) and (b) of
Ind AS 33 were also not given in the notes to the financial statements.
Accordingly, it was viewed that the requirements of Ind AS 33 have not
been complied with.

36. Earnings Per Share

Matter contained in the Financial Statements
In the notes to the financial statements of a company, from the disclosure
related to Earnings Per Share it was noted that the company has disclosed
two Earnings Per Share (EPS) i.e. including Regulatory income/ expense and
excluding Regulatory income/ expense.‖

Principle: Ind AS 33, Earnings Per Share

Paragraph 9– Measurement
―An entity shall calculate basic earnings per share amounts for profit or
loss attributable to ordinary equity holders of the parent entity and, if
presented, profit or loss from continuing operations attributable to those
equity holders.‖
Paragraph 10– Measurement
―Basic earnings per share shall be calculated by dividing profit or loss
attributable to ordinary equity holders of the parent entity (the numerator)
by the weighted average number of ordinary shares outstanding (the
denominator) during the period.‖
Paragraph 73
“If an entity discloses, in addition to basic and diluted earnings per
share, amounts per share using a reported component of the
statement of profit and loss other than one required by this
Standard, such amounts shall be calculated using the weighted average
number of ordinary shares determined in accordance with this Standard.
Basic and diluted amounts per share relating to such a component shall
be disclosed

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with equal per share are before tax or after tax. If a component of the
statement of profit and loss is used that is not reported as a line item in
the statement of profit and loss, a reconciliation shall be provided
between the component used and a line item that is reported in the
statement of profit and loss.‖

Observation:
It was noted that the company has disclosed two Earnings Per Share (EPS)
i.e. including Regulatory income (expense) and excluding Regulatory income
(expense). It was observed that EPS [including Regulatory income
(expense)] was computed by using numerator after considering Other
Comprehensive Income. It was viewed that other comprehensive income
should not be included while computing EPS.
EPS excluding Regulatory income (expense) was computed by using a
numerator which is not a line item in the Statement of Profit and Loss.
Accordingly, as per the above stated paragraph 73 of Ind AS 33, a
reconciliation statement should have been given, but such reconciliation
statement was not given by the company.
Accordingly, it was viewed that the requirement of Ind AS 33 has not
been complied with.

37. Prior Period Items

Matter contained in the Financial Statements
In the note to the financial statements of a company on Other Expenses,
Prior period items were shown during the current year and comparative year.
Further, the disclosures regarding prior periods were not found in the
financial statements. It was further noted that this is entity‘s first Ind AS
financial statement.

Principle: Ind AS 8, Accounting Policies, Changes in Accounting

Estimates and Errors
Paragraph 42 – Errors
―Subject to paragraph 43, an entity shall correct material prior period
errors retrospectively in the first set of financial statements approved for

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retrospectively in the first set of financial statements approved for issue

after their discovery by:
a. restating the comparative amounts for the prior period(s) presented
in which the error occurred; or
b. if the error occurred before the earliest prior period presented,
restating the opening balances of assets, liabilities and equity for the
earliest prior period presented.‖
Paragraph 49 – Disclosure of prior period errors
―In applying paragraph 42, an entity shall disclose the following:
a. the nature of the prior period error;
b. for each prior period presented, to the extent practicable, the amount
of the correction:
(i) for each financial statement line item affected; and
(ii) if Ind AS 33 applies to the entity, for basic and diluted earnings
per share;
c. the amount of the correction at the beginning of the earliest prior
period presented; and
d. if retrospective restatement is impracticable for a particular prior
period, the circumstances that led to the existence of that condition
and a description of how and from when the error has been
corrected.
Financial statements of subsequent periods need not repeat these
disclosures.‖

Observation:
It was noted that the Prior period items have been disclosed under th e 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.

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In 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.
Accordingly, it was viewed that the requirements of Ind AS 8 have not been
complied with.

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 Chapter-5
Observations related to Statement of
Cash Flows
1. Increase in Trade Receivable
Matter contained in the Financial Statements
In the cash flow statement of a company, certain amount was reported as a
change in working capital due to ―increase in trade receivables‖. The
difference between the outstanding balances of trade receivables, shown in
the note to the financial statements of the company on Trade Receivables,
as at the end of the current year and previous year showed an amount
different from what was reported in the cash flow statement.

Principle: Ind AS 7, Statement of Cash Flows

Paragraph 20 – Reporting cash flows from operating activities
―Under the indirect method, the net cash flow from operating activities is
determined by adjusting net profit or loss for the effects of:
a) changes during the period in inventories and operating receivables
and payables;‖

Observation:
It was noted from the note to the financial statements of the company on
Trade Receivables that there is an increase in trade receivables while
comparing the outstanding balance as at the end of the previous year and
the current year. However, in the Cash Flow Statement of the company,
reported amount of „increase in trade receivables‟ did not match with
the figures reported under the note of Trade Receivable. It was viewed
that the difference in amounts reported raises doubt on correctness of Cash
Flow Statement of the company.
Study on Compliance of Financial Reporting Requirements

2. Repayment of External Commercial

Borrowings
Matter contained in the Financial Statements
In the cash flow statement of a company, certain amount was reported as
repayments of External Commercial Borrowings under the head ‗Cash Flow
from Financing Activities‘. It was noted that the balances of ‗External
Commercial Borrowings‘ reduced from previous year to current year.

Principle: Ind AS 7, Statement of Cash Flows

Paragraph 43– Non-cash transactions
―Investing and financing transactions that do not require the use of cash
or cash equivalents should be excluded from a cash flow statement. Such
transactions should be disclosed elsewhere in the financial statements in
a way that provides all the relevant information about these investing and
financing activities.‖

Observation:
It was noted from notes to the financial statements of a company on ‗Non-
Current Borrowings‘ and ‗Other Current Financial Liabilities‘ that balances of
‗External Commercial Borrowings‘ shown under both Non-current borrowings
and Other current financial liabilities reduced from previous year to current
year. As per the notes, the reduction indicated repayment during the year.
However, in the Cash Flow Statement under the head ‗Cash Flow from
Financing Activities‘, the amount of repayments of External Commercial
Borrowings reported was different from what should have been done as
compared to the reduction disclosed in the notes to the financial statements.
It was viewed that if the difference in the amounts reported in the cash
flow statement and what should have been reported as per the notes to
the financial statements were due to any repayment in a mode other
than cash then the same should have been disclosed separately as
required in paragraph 43 of Ind AS 7 but no such disclosure was made.

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Accordingly, it was viewed that the requirements of Ind AS 7 have not been
complied with.

3. Taxes on Income
Matter contained in the Financial Statements
In the Statement of Profit and Loss of a company, income tax expense
relating to current year and tax adjusted for earlier years was shown. Exact
amount was disclosed by the company as income tax paid in its cash flow
statement.

Principle: Ind AS 7, Statement of Cash Flows

Paragraph 35 – Taxes on income
―Cash flows arising from taxes on income shall be separately disclosed
and shall be classified as cash flows from operating activities unless they
can be specifically identified with financing and investing activities.‖
Paragraph 36
―Taxes on income arise on transactions that give rise to cash flows that
are classified as operating, investing or financing activities in a statement
of cash flows. While tax expense may be readily identifiable with
investing or financing activities, the related tax cash flows are often
impracticable to identify and may arise in a different period from the cash
flows of the underlying transaction. Therefore, taxes paid are usually
classified as cash flows from operating activities. However, when it is
practicable to identify the tax cash flow with an individual transaction that
gives rise to cash flows that are classified as investing or financing
activities the tax cash flow is classified as an investing or financing
activity as appropriate. When tax cash flows are allocated over more than
one class of activity, the total amount of taxes paid is disclosed.‖

Observation:
It was noted that the income tax expense as disclosed under Statement of
Profit and Loss was same as disclosed in cash flow statement as income tax
paid.

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Considering the balances of provision for taxation and advance tax

appearing in balance sheet, it was viewed that both the amounts could not be
same. In the Statement of Cash Flow, actual amount of income tax paid by
the company should have been disclosed.
Accordingly, it was viewed that the requirements of Ind AS 7 have not been
complied with.

4. Gratuity in Other Comprehensive Income

Matter contained in the Financial Statements
In the Cash Flow Statement of a company, adjustment was made in the profit
or loss in respect of gratuity, which was part of other comprehensive income,
while reporting net cash flows from operating activities.

Principle: Ind AS 7, Statement of Cash Flows

Paragraph 20 – Reporting cash flows from operating activities
―Under the indirect method, the net cash flow from operating activities is
determined by adjusting profit or loss for the effects of:
a) changes during the period in inventories and operating
receivables and payables;
b) non-cash items such as depreciation, provisions, deferred taxes,
unrealized foreign currency gains and losses, and undistributed
profits of associates; and
c) all other items for which the cash effects are investing or
financing cash flows.
Alternatively, the net cash flow from operating activities may be
presented under the indirect method by showing the revenues and
expenses disclosed in the statement of profit and loss and the changes
during the period in inventories and operating receivables and payables.‖

Observation:
It was noted from the Cash Flow Statement that the net cash flow from
operating activities was derived by adjusting profit or loss for the effects of

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non-cash items which includes gratuity under other comprehensive income

(OCI).
It was viewed that while determining the net cash flow from operating
activities, profit before tax has been taken and therefore, the
adjustment made in OCI should not be considered.
Accordingly, it was viewed that adjustment of provision of gratuity made
through OCI in Profit before Tax is not in accordance with the requirements
of Ind AS 7.

5. Re-Measurement of Defined Benefit Plan

Matter contained in the Financial Statements
In the Cash Flow Statement of a company, the net profit before tax was used
to derive cash flow from operating activities. The re-measurement of the
defined benefit plan was deducted under ‗‘Other Comprehensive Income‘‘.
Principle: Ind AS 7, Statement of Cash Flows
Paragraph 20 – Reporting cash flows from operating activities
―Under the indirect method, the net cash flow from operating activities is
determined by adjusting profit or loss for the effects of:
a) changes during the period in inventories and operating
receivables and payables;
b) non-cash items such as depreciation, provisions, deferred
taxes, unrealized foreign currency gains and losses, and
undistributed profits of associates; and
c) all other items for which the cash effects are investing or
financing cash flows.
Alternatively, the net cash flow from operating activities may be
presented under the indirect method by showing the revenues and
expenses disclosed in the statement of profit and loss and the changes
during the period in inventories and operating receivables and
payables.‖

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Observation:
It was noted that re-measurement of the defined benefit plan has been
deducted under ‗‘Other Comprehensive Income (OCI)‘‘.
It was further noted that under Cash Flow Statement, the net profit before
tax has been used to derive cash flow from operating activities,
however, „‟re-measurement of the defined benefit plan‟‟ has been
adjusted here. It was viewed that since it is part of OCI, so it should not
be adjusted to the net profit before tax while calculating the cash flow
from operating activities.
Accordingly, it was viewed that the requirement of Ind AS 7 has not been
complied with.

6. Foreign Exchange Fluctuation (Net)

Matter contained in the Financial Statements
Contradictory figures were reported for Foreign Exchange Fluctuation in the
cash flow statement vis a vis Notes forming part of accounts.

Principle: Ind AS 1, Presentation of financial statements

Paragraph 7 of Ind AS 1 – Definitions*
…―Information is obscured if it is communicated in a way that would have
a similar effect for primary users of financial statements to omitting or
misstating that information. The following are examples of circumstances
that may result in material information being obscured:-
(a) information regarding a material item, transaction or other event is
disclosed in the financial statements but the language used is
vague or unclear;
(b) information regarding a material item, transaction or other event is
scattered throughout the financial statements;
(c) dissimilar items, transactions or other events are inappropriately
aggregated;
(d) similar items, transactions or other events are inappropriately
disaggregated; and
(e) the understandability of the financial statements is reduced as a
result of material information being hidden by immaterial

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result of material information being hidden by immaterial

information to the extent that a primary user is unable to determine
what information is material.―
…
*Notification no GSR 463E dated 24/7/2020

Observation:
It was noted that under note to the financial statements on Other Expenses,
amount of Net gain on foreign currency transactions reported (deducted) was
different from the amount of Foreign Exchange Fluctuation (Net) adjusted in
the Cash Flow Statement under the heading of Cash flows from Operating
Activities.
Accordingly, it was viewed that the figures of items should be same
across the financial statements, else it would be construed as a non-
compliance under Ind AS 1.

7. Adjustments in Cash Flow Statement

Matter contained in the Financial Statements
In the Cash Flow Statement of a company various adjustments were made
which were not in line with the requirements of Ind AS 7.

Principle: Ind AS 7, Statement of Cash Flows

Paragraph 10– Presentation
―The statement of cash flows shall report cash flows during the period
classified by operating, investing and financing activities.‖
Paragraph 11
―An entity presents its cash flows from operating, investing and financing
activities in a manner which is most appropriate to its business.
Classification by activity provides information that allows users to assess
the impact of those activities on the financial position of the entity and the
amount of its cash and cash equivalents. This information may also be
used to evaluate the relationships among those activities.‖
Paragraph 44A to 44 E of Ind AS 7 – Changes in liabilities arising
from financing activities
―44A- An entity shall provide disclosures that enable users of financial

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statements to evaluate changes in liabilities arising from financing

activities, including both changes arising from cash flows and non-cash
changes.
44BTo the extent necessary to satisfy the requirement in paragraph
44A,an entity shall disclose the following changes in liabilities arising
from financing activities:
a) changes from financing cash flows;
b) changes arising from obtaining or losing control of subsidiaries or
other businesses;
c) the effect of changes in foreign exchange rates;
d) changes in fair values; and
e) other changes.
44C Liabilities arising from financing activities are liabilities for which
cashflows were, or future cash flows will be, classified in the statement of
cash flows as cash flows from financing activities. In addition, the
disclosure requirement in paragraph 44A also applies to changes in
financial assets (for example, assets that hedge liabilities arising from
financing activities) if cash flows from those financial assets were, or
future cash flows will be, included in cash flows from financing activities.
44D One way to fulfil the disclosure requirement in paragraph 44A is by
providing a reconciliation between the opening and closing balances in
the balance sheet for liabilities arising from financing activities, including
the changes identified in paragraph 44B. Where an entity discloses such
a reconciliation, it shall provide sufficient information to enable users of
the financial statements to link items included in the reconciliation to the
balance sheet and the statement of cash flows.
44EIf an entity provides the disclosure required by paragraph 44A in
combination with disclosures of changes in other assets and liabilities, it
shall disclose the changes in liabilities arising from financing activities
separately from changes in those other assets and liabilities.‖

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Observation:
Following discrepancies were observed relating to the statement of Cash
Flow:
a) There was no depreciation debited to Statement of Profit and Loss,
however, the same was erroneously adjusted in cash flow statement.
b) The fair value adjustment on interest free ICD received from holding
company were shown under cash flow from financing activities as
repayment.
c) The proceeds from long term borrowings – Financial institution which
was shown under cash flow from financing activities was contrary to its
presentation under note on the Financial liabilities where it was classified
as short-term borrowing. Thus, contrary information was provided in the
financial statements.
d) The Company did not disclose changes in the financing activities arising
from cash and non-cash changes as required by paragraph 44 A to 44E
of Ind AS 7.
Accordingly, it was viewed that the requirements of Ind AS 7 have not
been complied with.

8. Capital Expenditure
Matter contained in the Financial Statements
In the cash flow statement of a company, a cash outflow was reported as
‗capital expenditure‘ under Cash Flows from Investing Activities.

Principle: Ind AS 7, Statement of Cash Flows

Paragraph 16– Presentation
―The separate disclosure of cash flows arising from investing activities is
important because the cash flows represent the extent to which
expenditures have been made for resources intended to generate future
income and cash flows. Only expenditures that result in a recognized
asset in the balance sheet are eligible for classification as investing
activities. Example of cash flows arising from investing activities are:

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a) Cash payments to acquire property, plant and equipment, intangibles

and other long-term assets. These payments include those relating to
capitalized development cost and self-constructed property, plant and
equipment.‖

Observation:
It was noted from the cash flow statement that a cash outflow has been
reported as ‗capital expenditure‘. The capital expenditure was on account of
cash paid to acquire property, plant and equipment. It was viewed that such
cash outflow should have been reported using the proper description of
the line item viz. „acquisition of property, plant and equipment‟ rather
than as „capital expenditure‟ in line with the above mentioned requirements
of paragraph 16(a) of Ind AS 7.
Accordingly, it was viewed that the description given while presenting the
cash outflow on acquisition of property, plant and equipment was no t in line
with the above-stated requirement of Ind AS 7.

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 Chapter-6
Observations related to Other
Disclosures
1. Basis of Preparation of Financial Statements
Matter contained in the Financial Statements
The Abstract of an accounting policy on the basis of preparation of the
financial statements read as follows:
―…
ii) The Financial Statements have been prepared on a historical cost
basis, except the following:
 Certain financial liabilities that are measured at fair value,
 Defined benefits plans- plant assets measured at fair value.‖

Principle: Ind AS 1, Presentation of financial statements

Paragraph 7 of Ind AS 1 – Definitions*
…―Information is obscured if it is communicated in a way that would have
a similar effect for primary users of financial statements to omitting or
misstating that information. The following are examples of circumstances
that may result in material information being obscured:-
(a) information regarding a material item, transaction or other event is
disclosed in the financial statements but the language used is vague
or unclear;
(b) information regarding a material item, transaction or other event is
scattered throughout the financial statements;
(c) dissimilar items, transactions or other events are inappropriately
aggregated;
(d) similar items, transactions or other events are
Study on Compliance of Financial Reporting Requirements

(e) the understandability of the financial statements is reduced as a

result of material information being hidden by immaterial information
to the extent that a primary user is unable to determine what
information is material.‖
…
*Notification no GSR 463E dated 24/7/2020

Observation:
It was noted from the disclosure given under basis of preparation that in
exception to historical cost basis, it was stated that certain financial liabilities
are measured at fair value. However, it was noted from the disclosure
regarding financial instruments by category, that all financial liabilities have
been measured at amortised cost. It was further noted that certain financial
assets viz. equity instruments and mutual funds have been measured at fair
value.
Accordingly, it was viewed that accounting policy on “Basis of
Preparation” should have been stated correctly.

2. Reference of Companies (Indian Accounting

Standards) Rules
Matter contained in the Financial Statements
In the notes to the financial statements of a company on Segment reporting
and Employee benefits, following disclosures were given:
Segment reporting
―… under Ind AS 108 on Segment Reporting specified in Companies
(Accounting Standard) Rules, 2006 as the Company is having the income
from license fees received for the usage of its domain name, trademark etc.‖
Employee benefits
―The requirements of IND AS 19 on Employee Benefits specified in
Companies (Accounting Standard) Rules, 2006 are not applicable on the
company since there was no employee employed by the company during the
year.‖

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Principle: Companies (Indian Accounting Standards) Rules, 2015

4. Obligation to comply with Indian Accounting Standards (Ind AS)
1. The Companies and their auditors shall comply with the Indian
Accounting Standards (Ind AS) specified in Annexure to these rules in
preparation of their financial statements and audit respectively, in the
following manner, namely:-
i. any company may comply with the Indian Accounting Standards
(Ind AS) for financial statements for accounting periods beginning
on or after 1stApril, 2015, with the comparatives for the periods
ending on31st March, 2015, or thereafter;
ii. the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or
after 1st April, 2016, with the comparatives for the periods ending
on 31st March, 2016, or thereafter, namely:-
a. companies whose equity or debt securities are listed or are
in the process of being listed on any stock exchange in India
or outside India and having net worth of rupees five hundred
crore or more;
b. companies other than those covered by sub-clause (a) of
clause (ii) of sub- rule (1) and having net worth of rupees five
hundred crore or more;
c. holding, subsidiary, joint venture or associate companies of
companies covered by sub-clause (a) of clause (ii) of sub-
rule (1) and sub-clause (b) of clause (ii) of sub- rule (1) as
the case may be; and...‖
The Companies (Indian Accounting Standards) Rules, 2015 were
amended by the Companies (Indian Accounting Standards) (Amendment)
Rules, 2016, which were issued by the MCA (Ministry of Corporate
Affairs) by way of notification G.S.R. 365 (E) dated 30th March, 2016.

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Observation:
It was noted from the notes to the financial statements that while describing
the applicability and disclosure requirements of Ind AS 108, Operating
Segment and Ind AS 19, Employee Benefits, respectively, a reference has
been made to Companies (Accounting Standards) Rules, 2006.
It was viewed that in the given case the applicable rules on the company are
Companies (Indian Accounting Standards) (Amendment) Rules, 2016. It was
viewed that the Companies (Accounting Standards) Rules, 2006 are not
applicable on company and therefore, their reference in the given notes
is incorrect.

3. Non-disclosure of Accounting Policy

Matter contained in the Financial Statements
A company has given a note regarding mining operation which read as
follows:
―The company‘s mining operations at the lease mine remained suspended
during the year owing to the ban imposed by the regulatory authority. The
company‘s investments in the said cash generating unit consists of Trucks,
Trippers, material handling equipment, and similar movable assets and also
a long-term lease premium was paid in respect of the said land and the mine
development expenses were incurred by the company. These assets
continue to be carried at cost less accumulated depreciation and
amortization, and depreciation/amortization expense for the current year has
been charged to the Statement of Profit and Loss. The said treatment is
owing to the management expectation of re-starting with the mining activity
and the fact that the transportation vehicles are otherwise being used for
other business purposes of the company‖.
Principle: Ind AS 1, Presentation of Financial Statements
Paragraph 117– Disclosure of accounting policies
―An entity shall disclose its significant accounting policies comprising:
(a) the measurement basis (or bases) used in preparing the financial
statements, and
(b) the other accounting policies used that are relevant to an
understanding of the financial statements.‖

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Observation:
It was noted from the financial statements of the company that the
accounting policies of impairment of assets and segment reporting, being
significant accounting policies, have not been disclosed.
It was noted from note to the financial statements regarding mining
disclosures that the company‘s mining operation was suspended. It was
viewed that the management was required to make judgment whether it is
discontinued operation of major component of an entity as per Ind AS 105 or
there is indication about the impairment of assets as per Ind AS 38.
Accordingly, it was viewed that the accounting policy of the same should
have been disclosed. With regard to segment reporting, it was noted that the
company is in diversified business. Accordingly, the accounting policy for the
same is also significant.
Both accounting policies have been considered as significant
accounting policies which are relevant to the understanding of the
financial statements and hence, should have been disclosed as per the
above stated requirements of Ind AS 1.
Accordingly, it was viewed that the requirements of Ind AS 1 have not been
complied with.

4. Reconciliation – Indian GAAP Vs Ind AS

Matter contained in the Financial Statements
In the financial Statements of a company, Statement of Ind AS Adjustments
showing Reconciliation of Indian GAAP Vs Ind AS was not given. It was
further noted that this is entity‘s first Ind AS financial statements.

Principle: Ind AS 101, First Time Adoption of Ind AS

Paragraph 25– Reconciliations
―The reconciliations required by paragraph 24(a) and (b) shall give
sufficient detail to enable users to understand the material adjustments to
the Balance Sheet and Statement of profit and loss. If an entity presented
a Statement of cash flows under its previous GAAP, it shall also explain
the material adjustments to the Statement of cash flows.‖

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Observation:
It was noted that the Ind AS Adjustments reconciliation of Indian GAAP Vs
Ind AS were not given for all the items reported in Balance Sheet, which is
not in line with the requirements of paragraph 25 of Ind AS 101.
Accordingly, it was viewed that the requirements of Ind AS 101 have not
been appropriately complied with.

5. Reconciliation – Indian GAAP Vs Ind AS

Matter contained in the Financial Statements
In the financial Statements of a company, the explanatory note for
reconciliation as per previous GAAP and the Ind AS was given by disclosing
gain on fair value measurement. It was further noted that this is entity‘s first
Ind AS financial statement.

Principle: Ind AS 101, First Time Adoption of Ind AS

Paragraph 23– Explanation of transition to Ind AS
―An entity shall explain how the transition from previous GAAP to Ind -ASs
affected its reported Balance Sheet, financial performance and c ash
flows.
Paragraph 24– Explanation of transition to Ind AS
―To comply with paragraph 23, an entity‘s first Ind-AS financial
statements shall include:
Reconciliation of its equity reported in accordance with Ind AS to its
equity in accordance with previous GAAP on the date of transition to IND-
AS.
a. significant differences between previous GAAP and Ind-AS in respect
of its total comprehensive income (or if it did not report such a total,
profit or loss).
b. if the entity recognised or reversed any impairment losses for the
first-time in preparing its opening Ind-AS Balance Sheet, the
disclosures that Ind AS 36 Impairment of Assets would have required
if the entity had recognised those impairment losses or reversals in
the period beginning with the date of transition to Ind-ASs.
c. where however, an entity decides to provide one year comparative
information in accordance with paragraph 21(b)of this Ind-AS then
instead of disclosures in (b) above such an entity shall provide-

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i. a reconciliation of its equity in accordance with Ind AS as at deemed

date of transition, i.e, beginning of the comparative financial year for
which an entity presents financial information under Ind-ASs to its
equity reported in accordance with previous GAAP;
ii. a reconciliation of its equity in accordance with Ind AS as at the end
of the comparative period presented to its equity reported in
accordance with previous GAAP; and
iii. a reconciliation of its total comprehensive income in accordance with
Ind-AS compiled on a memorandum basis to its total comprehensive
income (or if it did not report such a total, profit or loss) in
accordance with previous GAAP for the comparative period.‖

Observation:
It was noted that although the explanatory note for reconciliation as per
previous GAAP and the Ind AS by disclosing gain on fair value was given.
However, these explanatory notes are silent as to how the transition
from previous GAAP to Ind AS affected the reported Balance Sheet,
financial performance and cash flows which was also required as per
the above stated requirement.
Accordingly, it was viewed that the requirements of Ind AS 101 have not
been appropriately complied with.

6. Related Party Disclosure

Matter contained in the Financial Statements
In the disclosure related to Related Party transactions, holding company
gave following disclosure:
―Holding company has issued Corporate Guarantees as a security for loan
availed by subsidiary company.‖

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Principle: Ind AS 24, Related Party Disclosures

Paragraph 18– Disclosures
―If an entity has had related party transactions during the periods covered
by the financial statements, it shall disclose the nature of the related
party relationship as well as information about those transactions and
outstanding balances, including commitments, necessary for users to
understand the potential effect of the relationship on the financial
statements. These disclosure requirements are in addition to those in
paragraph 17. At a minimum, disclosures shall include:
a) the amount of the transactions;
b) the amount of outstanding balances, including commitments, and:
i. their terms and conditions, including whether they are secured, and
the nature of the consideration to be provided in settlement; and
ii. details of any guarantees given or received;
c) provisions for doubtful debts related to the amount of outstanding
balances; and
d) the expense recognised during the period in respect of bad or
doubtful debts due from related parties.‖

Observation:
It was noted that a subsidiary company had received borrowings from
financial institutions but the details and terms of the borrowings were not
available in the financial statements of that subsidiary company. Further,
financial statements of the holding company were referred for additional
details.
As per the financial statements of holding company, it was noted that holding
company had issued corporate guarantees as a security for loan availed by
the subsidiary company from financial institutions.
However, neither the guarantee commission was recognised as per Ind
AS 109 nor the disclosures required by Ind AS 24 were made in the
financial statements of subsidiary company.
Accordingly, it was viewed that the requirements of Ind AS 24 read with Ind
AS 109 have not been complied with by the subsidiary company.

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7. Related Party Disclosure

Matter contained in the Financial Statements
In the note to the financial statements of a company on Exceptional Items,
the exceptional items included waiver of interest receivables from a related
party. No disclosure in this regard was given under related party disclosures.
Further, the items reported under exceptional items included expense on
account of waiver of regulatory accrual, however, the nature of such expense
was not clear.

Principle: Ind AS 24, Related Party Disclosures

Paragraph 18– Disclosures
―If an entity has had related party transactions during the periods covered
by the financial statements, it shall disclose the nature of the related
party relationship as well as information about those transactions and
outstanding balances, including commitments, necessary for users to
understand the potential effect of the relationship on the financial
statements. These disclosure requirements are in addition to those in
paragraph 17. At a minimum, disclosures shall include:
a) the amount of the transactions;
b) the amount of outstanding balances, including commitments, and:
i. their terms and conditions, including whether they are secured,
and the nature of the consideration to be provided in settlement;
and
ii. details of any guarantees given or received;
c) provisions for doubtful debts related to the amount of outstanding
balances; and
d) the expense recognised during the period in respect of bad or
doubtful debts due from related parties.‖

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Observation:
It was viewed that expense on account of waiver of an interest receivable is
a bad debt. As the expense pertains to a related party, it requires
disclosure under Related Party Disclosure as per paragraph 18 (d) of
Ind AS 24. However, under related party disclosure, no disclosure was
given in this regard.
Further, an item can be classified as an exceptional item only if the
criteria mentioned in paragraphs 97 and 98 of Ind AS 1 has been met.
Accordingly, it was viewed that the requirements of Ind AS 24 have not been
complied with.

8. Contingent Liabilities - Corporate Guarantee

Matter contained in the Financial Statements
In the note to the financial statements on ‗Contingent Liabilities and
Commitments‘, the company showed a corporate guarantee given to bank for
credit facility availed by its subsidiary company. It was further noted that
the amount of corporate guarantee was more than the previous year‟s
net worth of parent company. Such Corporate guarantees were treated
as insurance contracts by the entity.
Further, the company did not disclose the purpose for which guarantee was
proposed to be utilised by the recipient of the guarantee.

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Principle: Companies Act, 2013 and Ind AS 109: Financial

Instruments
Section 186 (4) of the Companies Act, 2013
―The company shall disclose to the members in the financial statement
the full particulars of the loans given, investment made or guarantee
given or security provided and the purpose for which the loan or
guarantee or security is proposed to be utilised by the recipient of the
loan or guarantee or security.‖
Paragraph 2.1 (e) of Ind AS 109: Financial Instruments
... Moreover, if an issuer of financial guarantee contracts has previously
asserted explicitly that it regards such contracts as insurance contracts
and has used accounting that is applicable to insurance contracts, the
issuer may elect to apply either this Standard or Ind AS104 to such
financial guarantee contracts (see paragraphs B2.5–B2.6). The issuer
may make that election contract by contract, but the election for each
contract is irrevocable…‖

Observation:
It was noted from the note to the financial statements on ‗Contingent
Liabilities and Commitments‘ that the company had given a corporate
guarantee to bank for credit facility availed by its subsidiary company.
It was observed that the amount of corporate guarantee was2.63 times
of previous year‟s net worth of the parent company. However, the
company did not disclose the purpose for which guarantee is proposed to be
utilised by the recipient of the guarantee, which was not in line with the
above stated requirement of the Companies Act, 2013.
Accordingly, it was viewed that the requirements of Companies Act,
2013 have not been complied with.

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9. Contingent Liabilities
Matter contained in the Auditor‟s Report and Financial
Statements
In the note to the financial statements on Contingent Liabilities, corporate
guarantees, in the nature of counter guarantees, which were issued to banks
and financial institutions were disclosed.

Principle: Guidance Note on Division II, Schedule III to the

Companies Act, 2013 and Guidance Note on the Companies
(Auditor's Report) Order, 2016
Paragraph 8.2.14.1 of Guidance Note on Division II, Schedule III to
the Companies Act, 2013
―A contingent liability in respect of guarantees arises when a company
issues guarantees to another person on behalf of a third party e.g. when
it undertakes to guarantee the loan given to a subsidiary or to another
company or gives a guarantee that another company will perform its
contractual obligations. However, where a company undertakes to
perform its own obligations, and for this purpose issues, what is called a
"guarantee", it does not represent a contingent liability and it is
misleading to show such items as contingent liabilities in the Balance
Sheet…‖

Observation:
It was noted from note to the financial statements on Contingent Liabilities
that corporate guarantees, in the nature of counter-guarantees‖ issued to
banks and financial institutions were disclosed, however, it was observed
from the aforesaid requirement that such "counter-guarantee" is not really a
guarantee at all, but is an undertaking to perform what is in any event the
obligation of the company. Hence, such performance guarantees and counter
guarantees should not have been disclosed as contingent liabilities.
Accordingly, it was viewed that the requirements of Division II,
Schedule III to the Companies Act, 2013 have not been complied with.

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10. Segment Reporting

Matter contained in the Financial Statements
Abstract of accounting policy of a company on Segment reporting read as
follows:
―The company is primarily engaged in the business of Jewellery. This
represents a primary segment‖
Also, in the notes on disclosure of Segment reporting the company identified
business segment as the primary segment.

Principle: Ind AS 108, Operating Segments

Paragraph 11 –Reportable segments
―An entity shall report separately information about each operating
segment that:
a) has been identified in accordance with paragraphs 5–10 or results
from aggregating two or more of those segments in accordance with
paragraph 12, and
b) exceeds the quantitative thresholds in paragraph 13. Paragraphs 14 –
19 specify other situations in which separate information about an
operating segment shall be reported.‖

Observation:
It was noted from accounting policy for segment reporting and notes to the
financial statements on Segment disclosures that the company has identified
business segment as primary segment which was required in Indian GAAP
(AS 17. Also, the segment disclosure is given as per Indian GAAP (AS 17)
and these are not in line with the requirement of Ind AS 108.
It was viewed that as per the above stated requirements of Ind AS 108, the
company needs to identify operating segments and report information for
each operating segment.

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Further, following discrepancies were noted in the disclosure of segments:

a. For the comparative period, total amount of segment assets and
unallocated assets as per the segment disclosure was not matching
with the total of assets side of balance sheet.
b. For the comparative period, total amount of segment liabilities and
unallocated liabilities as per the segment disclosure was not matching
with the total of liabilities side of balance sheet.
c. The company has incorrectly labeled the un-allocated liabilities as
unallocated assets.
Accordingly, it was viewed that the requirements of Ind AS 108 have not
been complied with.

11. Segment Reporting

Matter contained in the Financial Statements
Abstract of note to the financial statements on Segment Reporting read as
follows:
“Segment Reporting
As per Ind AS 108 Operating Segment, segment information has been
provided in notes to consolidated financial statement.‖

Principle:-Ind AS 108, Operating Segments

Paragraph 20 – Disclosure
―An entity shall disclose information to enable users of its financial
statements to evaluate the nature and financial effects of the business
activities in which it engages and the economic environments in which it
operates.‖
Paragraph 21
―To give effect to the principle in paragraph 20, an entity shall disclose
the following for each period for which a statement of profit and loss is
presented:
(a) general information as described in paragraph 22.
……….‖

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Paragraph 22
―An entity shall disclose the following general information:
a) factors used to identify the entity‘s reportable segments, including
the basis of organisation (for example, whether management has
chosen to organise the entity around differences in products and
services, geographical areas, regulatory environments, or a
combination of factors and whether operating segments have been
aggregated);
aa) the judgements made by management in applying the
aggregation criteria in paragraph 12. This includes a brief
description of the operating segments that have been
aggregated in this way and the economic 237 indicators that
have been assessed in determining that the aggregated
operating segments share similar economic characteristics;
and
b) types of products and services from which each reportable
segment derives its revenues.‖

Observation:
It was noted that while giving disclosure for segment reporting the
information required under paragraph 20 read with paragraph 21(a) and 22 of
Ind AS 108 has not been given.
It was viewed that sufficient disclosures should have been made by the
company in order to enable the users of the financial statement understand
and evaluate the nature and financial effect of activities carried out by the
company in various segments. In other words, adequate disclosures of
factors used to identify the reportable segment, judgments made by the
managements in applying aggregation criteria etc. should have been
clearly made by the company.
Accordingly, it was viewed that the requirements of Ind AS 108 have not
been complied with.

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12. Segment Reporting

Matter contained in the Financial Statements
Abstract of note to the financial statements on Segment Reporting read as
follows:
“Segment Information
The Company is engaged in the business of Branding, Manufacturing,
Processing, Selling and Distribution of ―Consumer Products‖ which
constitutes a single reporting segment. Hence there is no separate reportable
segment under Indian Accounting Standard on Ind AS 108 ‗Operating
Segment‘.
Geographic Information
There are no revenues or non-current operating assets from external
customers outside India.‖

Principle:-Ind AS 108, Operating Segments

Paragraph 32 of Ind AS 108 – Information about products and
services
―An entity shall report the revenues from external customers for each
product and service, or each group of similar products and services,
unless the necessary information is not available and the cost to develop
it would be excessive, in which case that fact shall be disclosed. The
amounts of revenues reported shall be based on the financial information
used to produce the entity‘s financial statements.‖

Observation:
It was noted that although the company is engaged in the single reporting
segment but paragraph 32 of Ind AS 108 is applicable on single segment
entities also, however, the required disclosures were not given by the
Company.
Accordingly, it was viewed that the requirements of Ind AS 108 have not
been complied with.

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13. Segment Reporting

Matter contained in the Financial Statements
Abstract of note to the financial statements on Operating Segment read as
follows:
“Operating Segment
The Company‘s business activity falls within a single primary business
segment viz. "Readymade Garments and Accessories". The disclosure
requirement of Ind AS 108 "Operating Segment" is not applicable. Further,
the Company does not meet the quantitative threshold as mentioned in Ind
AS 108 and hence separate disclosure is not required.‖

Principle: Ind AS 108, Operating Segments

Paragraph 5 – Operating segments
―An operating segment is a component of an entity:
(a) That engages in business activities from which it may earn revenues
and incur expenses (including revenues and expenses relating to
transactions with other components of the same entity),
(b) Whose operating results are regularly reviewed by the entity‘s chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance, and
(c) For which discrete financial information is available.
An Operating Segment may engage in business activities for which it has
yet to earn revenues, for example, startup operations may be operating
segments before earning revenues.‖

Observation:
In the note on Operating Segments it was stated that the Company does not
meet the quantitative threshold as mentioned in Ind AS 108 and hence
separate disclosure is not required. However, it was observed that the
quantitative threshold is not the only criteria, rather three
characteristics as described in paragraph 5 of Ind AS 108 should be
considered to identify operating segments.

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Further, it was observed that the requirements of Paragraph 31-34 of Ind AS

108 should be complied with if the Company‘s business activity falls within a
single reportable segment.
Accordingly, it was viewed that the requirements of Ind AS 108 have not
been complied with.

14. Segment Reporting

Matter contained in the Financial Statements
Abstract of note to the financial statements on Segment Information read as
follows:
“Segment Information:
The Company is engaged in both, domestic as well as overseas trade. In
addition, the company has acquired wind mills for generation of power and is
also undertaking prospecting and extraction of mineral and ores.‖
Abstract of footnote on Segment Information read as follows:
―1. The merchandise trading Segment facilities the Securities trading
segment, hence separate results, assets, liabilities cannot be worked out…‖
Further, the segment revenue, segment result, segment assets and segment
liabilities were disclosed, however, certain details were not disclosed.

Principle: Ind AS 108, Operating Segments

Paragraph 21– Disclosure
―To give effect to the principle in paragraph 20, an entity shall disclose
the following for each period for which a statement of profit and loss is
presented:
a) general information as described in paragraph 22;
b) information about reported segment profit or loss, including specified
revenues and expenses included in reported segment profit or loss,
segment assets, segment liabilities and the basis of measurement,
as described in paragraphs 23–27; and
c) reconciliations of the totals of segment revenues, reported segment
profit or loss, segment assets, segment liabilities and other material
segment items to corresponding entity amounts as described in
paragraph 28.

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Reconciliations of the amounts in the balance sheet for reportable

segments to the amounts in the entity‘s balance sheet are required for
each date at which a balance sheet is presented. Information for prior
periods shall be restated as described in paragraphs 29 and 30.‖

Observation:
It was noted that while giving disclosures for the segment revenue, segment
result, segment assets and segment liabilities, the following details were
omitted:
1. Reconciliations of the totals of segment revenues, reported segment
profit or loss, segment assets, segment liabilities and other material
segment items to corresponding entity amounts.
2. Reconciliations of the amounts in the balance sheet for reportable
segments to the amounts in the entity‘s balance sheet are required for
each date at which a balance sheet is presented.
Further, it was also noted from footnote given under note on Segment
Information that the merchandise trading segment facilitates the securities
trading segment. However, it was viewed that the trading segment and
securities segment were separate segments and segment results, assets and
liabilities of both segments should be separable at least to the extent of
revenue and therefore, should have been disclosed accordingly.
Accordingly, it was viewed that the requirements of Ind AS 108 have not
been complied with.

15. Fair Value Measurement

Matter contained in the Financial Statements
From the note to the financial statements of a company on Fair Value
Measurement, it was noted that all the financial assets and liabilities of the
company were grouped under Level 2 hierarchy.

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Principle: Ind AS 113, Fair Value Measurement

Paragraph 93 (d)– Disclosure
―To meet the objectives in paragraph 91, an entity shall disclose, at a
minimum, the following information for each class of assets and liabilities
(see paragraph 94 for information on determining appropriate classes of
assets and liabilities) measured at fair value (including measurements
based on fair value within the scope of this Ind AS) in the balance sheet
after initial recognition:
…
d. for recurring and non-recurring fair value measurements categorized
within Level 2 and Level 3 of the fair value hierarchy, a description of
the valuation technique(s) and the inputs used in the fair value
measurement. If there has been a change in valuation technique (eg.
changing from a market approach to an income approach or the use
of an additional valuation technique), the entity shall disclose that
change and the reason(s) for making it….‖

Observation:
As per paragraph 93 (d) of Ind AS 113, the information about the valuation
technique and the inputs used for the fair value measurement are
required to be disclosed but the same was not found to be disclosed.
Therefore, the disclosure was not found to be in line with the requirement of
paragraph 93 (d) of Ind AS 113.
Accordingly, it was viewed that the requirement of Ind AS 113 has not been
complied with.

16. Fair Value Measurement

Matter contained in the Financial Statements
From the notes to the financial statements of a company on Non-current
financial assets and Current financial assets, it was noted that the company
has investments in mutual funds.

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Principle: Ind AS 109, Financial Instruments

Paragraph 4.1.1– Classification of financial assets
―Unless paragraph 4.1.5 applies, an entity shall classify financial assets
as subsequently measured at amortised cost, fair value through other
comprehensive income or fair value through profit or loss on the basis of
both:
a) the entity‘s business model for managing the financial assets and
b) the contractual cash flow characteristics of the financial asset.‖
Paragraph 4.1.2– Classification of financial assets
―A financial asset shall be measured at amortised cost if both of the
following conditions are met:
a. the financial asset is held within a business model whose objective is
to hold financial assets in order to collect contractual cash flows and
b. the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding.―
Paragraph 4.1.2A– Classification of financial assets
―A financial asset shall be measured at fair value through other
comprehensive income if both of the following conditions are met:
(a) the financial asset is held within a business model whose objective is
achieved by both collecting contractual cash flows and selling
financial assets and
(b) the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding.‖

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Observation:
It was viewed that as per the requirements of Ind AS 109, financial assets
are initially measured at fair value. Subsequent to initial recognition, these
should be measured at amortised cost, fair value through other
comprehensive income (FVOCI) or Fair Value through Profit and Loss
(FVTPL). Amoritsed cost classification is permissible for debt instruments
only if they meet both business model test and the contractual cash flow
characteristics test. Similarly, in Ind AS 109, there are conditions for financial
assets in case if they are valued at FVOCI or FVTPL.
However, in the given case, it was viewed that the disclosure with respect
to the fair value with regard to financial assets at amortized cost,
financial assets valued at Fair value through profit and loss and
financial assets valued at fair value through other comprehensive
income has not been provided in the financial statements. Also, the
measurement whether at cost or fair value through profit and loss or
fair value through other comprehensive income has not been defined.
Accordingly, it was viewed that the requirements of Ind AS 109 have not
been complied with.

17. Financial Risk Management

Matter contained in the Financial Statements
In the note to the financial statements of a company on Financial Assets,
trade receivables from related parties constituted significant amount with
respect to total trade receivables.
From the disclosure regarding Financial Risk Management, it was noted that
major amount of trade receivable pertains to its holding company, for which it
was only stated that no credit risk is involved.

Principle: Ind AS 107, Financial Instruments: Disclosures

Paragraph 35M – Credit risk exposure
―To enable users of financial statements to assess an entity‘s credit risk
exposure and understand its significant credit risk concentrations, an entity
shall disclose, by credit risk rating grades, the gross carrying amount of

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financial assets and the exposure to credit risk on loan commitments and
financial guarantee contracts. This information shall be provided
separately for financial instruments:
a. for which the loss allowance is measured at an amount equal to 12-
month expected credit losses;
b. for which the loss allowance is measured at an amount equal to
lifetime expected credit losses and that are:
i. financial instruments for which credit risk has increased
significantly since initial recognition but that are not credit-
impaired financial assets;
ii. financial assets that are credit-impaired at the reporting date (but
that are not purchased or originated credit impaired); and
iii. trade receivables, contract assets or lease receivables for which
the loss allowances are measured in accordance with paragraph
5.5.15 of Ind AS 109.
c. that are purchased or originated credit-impaired financial assets.‖

Observation:
It was noted from the above stated disclosure on Financial Risk Management
that the trade receivables consisted of significant amount of receivable from
the Holding company, for which it was only stated that no credit risk is
involved.
It was viewed that information as required by paragraph 35M of Ind AS
107 regarding the 12-month expected credit losses or lifetime expected
credit losses have not been disclosed.
Accordingly, it was viewed that the requirements of Ind AS 107 have not
been complied with.

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18. Financial Risk Management

Matter contained in the Financial Statements
In the note to the financial statements on Financial Risk Management, the
disclosure with regard to credit risk, liquidity risk and market risk were made.
However, disclosure for liquidity risk is not complete.
Further, the total of financial liabilities (except Financial Guarantee
{Contingent Liability}) given under this note did not match with the total of the
financial liabilities as per the Balance sheet.

Principle: Ind AS 107, Financial Instruments: Disclosures

Paragraph B11E – Quantitative liquidity risk disclosures
―Paragraph 39(c) requires an entity to describe how it manages the
liquidity risk inherent in the items disclosed in the quantitative disclosures
required in paragraph 39(a) and (b). An entity shall disclose a maturity
analysis of financial assets it holds for managing liquidity risk (eg
financial assets that are readily saleable or expected to generate cash
inflows to meet cash outflows on financial liabilities), if that information is
necessary to enable users of its financial statements to evaluate the
nature and extent of liquidity risk.‖

Observation:
The following discrepancies were noted with regard to disclosure of financial
risk and financial liabilities:
a) It was noted that the disclosure with regard to credit risk, liquidity risk
and market risk were made. However, while giving ―exposure to
liquidity risk‖, maturity analysis of financial assets held by
company for managing liquidity risk, was not disclosed. It is,
therefore, not in line with the requirement of paragraph B 11 E of Ind
AS 107.
b) It was further noted that under note to the financial statements on
Financial Risk Management, the company‘s financial liabilities at the
reporting date were disclosed and classified on the basis of remaining
contractual maturities of financial liabilities. However, the total of

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financial liabilities (except Financial Guarantee {Contingent Liability})

given under this note did not match with the total of the financial
liabilities as per the Balance sheet for all the three years presented in
the financial statements. Such difference in amount reported raised
doubt regarding the correctness of the information given in the
financial statements.
Accordingly, it was viewed that the requirements of Ind AS 107 have not
been complied with.

19. Financial Risk Management

Matter contained in the Financial Statements
The financial statements of a company included Trade Payables and Other
Financial Liabilities, however, certain disclosures were not given in this
regard.

Principle:-Ind AS 107, Financial Instruments: Disclosures

Paragraph 39 – Liquidity risk
―An entity shall disclose:
a) a maturity analysis for non-derivative financial liabilities(including
issued financial guarantee contracts) that shows the remaining
contractual maturities.
b) a maturity analysis for derivative financial liabilities. The maturity
analysis shall include the remaining contractual maturities for those
derivative financial liabilities for which contractual maturities are
essential for an understanding of the timing of the cash flows (see
paragraph B11B).
c) a description of how it manages the liquidity risk inherent in (a) and
(b).‖

Observation:
It was noted that under Note on Financial Risk Management while giving
disclosure of liquidity risk, the Company did not disclose the interest
bearing and the average settlements days for each item of financial
liabilities as required by paragraph 39 of Ind AS 107.

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Accordingly, it was viewed that the requirements ofInd AS 107 have not been
complied with.

20. Signing of Financial Statements

Matter contained in the Financial Statements
An abstract of Balance Sheet, Statement Profit & Loss, Statement of
Changes in Equity and Cash Flow Statement was as follows:
―For and on behalf of the Board of Directors
Sd/-
Director
DIN:‖

Principle: Companies Act, 2013

Section 158 of the Companies Act, 2013
―Every person or company, while furnishing any return, information or
particulars as are required to be furnished under this Act, shall mention
the Director Identification Number in such return, information or
particulars in case such return, information or particulars relate to the
director or contain any reference of any director.‖

Observation:
It was noted from the financial statements that one of the directors of the
company signed the Balance Sheet, Statement Profit and Loss, Statement of
Changes in Equity and Cash Flow Statement without incorporating his full
name and DIN (Director Identification Number).
It was viewed that the director should incorporate his full name and
DIN, below his signature in order to identify his authentication.
Accordingly, it was viewed that the requirements of Section 134 read with
section 158 of Companies Act, 2013 have not been complied with.

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21. Non-Disclosure of Advances

Matter contained in the Financial Statements
Abstract of note to the financial statements on Investments reads:
―The Company with a view to consolidate the business model, appointed
reputed firm of consultants to advise on future business model and
restructuring of domestic and overseas subsidiaries. Based on the
recommendations, as part of restructuring of overseas subsidiaries, the
Holding company has plans of disinvestment in equity share of three of the
foreign subsidiaries to its another overseas wholly owned subsidiary namely
ABC Ltd. As part consideration for restructuring, the company had received
an advance in earlier year from ABC Ltd. The Company has not yet
completed the restructuring process. The company is reconsidering the
proposed restructuring which may include refunding the advance received.”

Principle: Ind AS 1, Presentation of financial statements

Paragraph 7 – Definitions*
―Information is obscured if it is communicated in a way that would have a
similar effect for primary users of financial statements to omitting or
misstating that information. The following are examples of circumstances
that may result in material information being obscured:-
(a) information regarding a material item, transaction or other event is
disclosed in the financial statements but the language used is vague
or unclear;
(b) information regarding a material item, transaction or other event is
scattered throughout the financial statements;
(c) dissimilar items, transactions or other events are inappropriately
aggregated;
(d) similar items, transactions or other events are inappropriately
disaggregated; and
(e) the understandability of the financial statements is reduced as a
result of material information being hidden by immaterial information
to the extent that a primary user is unable to determine what
information is material.―
*Notification no GSR 463E dated 24/7/2020

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Observation:
It was noted from the above stated note that the company received advance
in earlier year from ABC Limited as part of consideration for restructuring.
However, the company did not specify under which heading the said amount
has been reported.
To enhance the readability and understanding of financial statements, it
was viewed that the company should have disclosed that under which
note the said amount has been disclosed.

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 Chapter-7
Observations related to Auditor‟s
Report
1. Going Concern
Matter contained in the Auditor‟s Report and Financial
Statements
An abstract of Emphasis of Matter given in the auditor‘s report was as under:
“Emphasis of Matter
We draw attention to Note XX to the standalone financial statements which
more fully describe that uncertainty faced by the company in signing PPA
and various factors affecting the progress of the project resulted in stoppage
of work. However, management is confident that current situation is
temporary and does not have any going concern issue. Our opinion is not
qualified in respect of the above matters.‖
An abstract of the related note to the financial statements on Going Concern
reads as under:
“Going Concern
The company incorporated a SPV for developing Hydroelectric Power Project
on BOOT basis. The project involved the development of a Hydroelectric
Power Project on a river. Concession period for the project was 35 years
from the date of COD (Commencement of Distribution). Though the project
received all major clearances and approvals including environmental
clearances and all major contracts for the project were awarded, but Power
purchase agreement was yet to be signed. Over a period of time, the
scenario in power sector changed substantially and in absence of financial
closure funding of the project had been a major issue leading to frequent
stoppages at work. The proposed Hydro Power Policy was eagerly awaited
which will hopefully bring more opportunity in this sector. The company was
hopeful that power purchase agreement would be signed under the new
policy which will also enable the financial closure to be done. Policy
initiatives taken by Government to address key concern facing the power
sector will enable the sector to keep pace with the growing demand. The
Study on Compliance of Financial Reporting Requirements

management was of the view that the present situation in power business
was temporary and does not foresee any need for impairment.‖

Principle: SA 570(Revised), Going Concern and the Companies Act,

2013
Paragraph 22 – Use of Going Concern basis of accounting is
appropriate but a Material Uncertainty exists
―If adequate disclosure about the material uncertainty is made in the
financial statements, the auditor shall express an unmodified opinion and
the auditor‘s report shall include a separate section under the heading
―Material Uncertainty Related to Going Concern‖ to: (Ref: Para. A28–A31,
A34)
a) Draw attention to the note in the financial statements that discloses
the matters set out in paragraph 19; and
b) State that these events or conditions indicate that a material
uncertainty exists that may cast significant doubt on the entity‘s
ability to continue as a going concern and that the auditor‘s opinion is
not modified in respect of the matter.‖
Section 143(3)(f) of the Companies Act, 2013
―The auditor‗s report shall also state:
(f) the observations or comments of the auditors on financial transactions
or matters which have any adverse effect on the functioning of the
company.‖

Observation:
It was observed that the separate section on going concern was not
reported by the auditor as required by SA 570 (Revised) although there
were certain events as evident from the note on Going Concern given in
financial statements of the company, which could cast material
uncertainty about going concern.
It was further noted that the auditor did not comment as per section 143(3)(f)
of the Companies Act, 2013 in his report.

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Accordingly, it was viewed that the requirements of SA 570(Revised) Going

Concern as well as the Companies Act 2013 have not been complied with.

2. Auditor‟s Report on the First Standalone Ind

AS Financial Statements
Matter contained in the Auditor‟s Report and Financial
Statements
An abstract of Auditors‘ Report read as under:
“Introductory paragraph
We have audited the accompanying standalone Ind AS financial statement;
of ABC Limited which comprise the Balance Sheet as at 31March XX, the
Statement of Profit and Loss, the Cash Flow Statement for the year then
ended, and a summary of the significant accounting policies and other
explanatory information…
Opinion paragraph
In our opinion and to the best of our information and according to the
explanations given to us, the aforesaid standalone Ind AS financial
statements give the information required by the Act in the manner so
required and gives true and fair view in conformity with the accounting
principles generally accepted In India, of the state of affairs of the Company
as at 31 March XX, and its profit and its cash flows for the year ended or,
that date.‖
Principle: SA 700 - Prescribed format of Auditor‟s Report given
under Annexure I of Implementation Guide on Auditor‟s Report
under IND AS for transition phase
Annexure I
Illustrative Format of Independent Auditor‟s Report on the First
Standalone Ind AS Financial Statements of a Company under the
Companies Act, 2013 and the Rules Thereunder
“INDEPENDENT AUDITOR’S REPORT
Report on the Standalone Ind AS Financial Statements

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We have audited the accompanying standalone Ind AS financial

statements of ABC Company Limited (―the Company‖), which comprise
the Balance Sheet as at 31st March, 2017, and the Statement of Profit
and Loss (including Other Comprehensive Income), the Cash Flow
Statement and the Statement of Changes in Equity for the year then
ended, and a summary of the significant accounting policies and other
explanatory information, …
Opinion
In our opinion and to the best of our information and according to the
explanations given to us, …and its profit/loss (financial performance
including other comprehensive income), its cash flows and the changes
in equity for the year ended on that date.‖

Observation:
It was noted from the introductory paragraph and opinion paragraph given in
Auditor‘s Report that the auditor has commented on the Balance Sheet, the
Statement of Profit and Loss, the Cash Flow Statement for the year then
ended, and a summary of the significant accounting policies and other
explanatory information.
However, it was noted that after the implementation of Ind AS in standalone
financial statements, the financial statements included the Balance sheet,
Statement of Profit and loss (including the other comprehensive income),
statement of cash flow and the statement of change in equity. However, the
phrase “including the other comprehensive income” and “statement of
change in equity” were not given by the auditor in his audit report.
Accordingly, it was viewed that the Auditor‘s Report is not in line with the
requirements of SA 700 Forming an Opinion and Reporting on Financial
Statements read with Annexure I of Implementation Guide on Auditor‘s
Report under Ind AS for transition phase.

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3. Emphasis of Matter under Auditor‟s Report

Matter contained in the Auditor‟s Report and Financial
Statements
An abstract of Auditors‘ Report read as under:
“Emphasis of Matter
We draw attention towards paragraphs 1, 2 and 3 to the relevant note
describing:
a) Paragraph 1; Estimation involved in determination and valuation of stock
of metal owned by the company. The stocks of metal are lying with the
company since earlier periods and hence included in the opening value
of inventories and no addition to the same have been made and no
evidence as to their non-marketability has been found.
b) Paragraph 2: The fact that several balances (debit as well as credit
balances) outstanding as at the year-end being subject to confirmation
by parties.
c) Paragraph 3: The fact that the company's mining operations stand
suspended since last more than 12 months, owing to a statutory ban on
mining activities in the State has been reported by the Company. The
company is following the historical cost {less depreciation /amortization)
in respect of the assets of the said segment.
Our opinion is not modified in respect of the above matters.‖

Principle: SA 705, Modifications to the Opinion in the Independent

Auditor‟s Report
Paragraph 6 - Circumstances When a Modification to the Auditor’s
Opinion is Required
―The auditor shall modify the opinion in the auditor‘s report when:
(a) The auditor concludes that, based on the audit evidence obtained,
the financial statements as a whole are not free from material
misstatement; or (Ref: Para. A2–A7)
(b) The auditor is unable to obtain sufficient appropriate audit evidence
to conclude that the financial statements as a whole are free from
material misstatement. (Ref: Para. A8– A12).‖

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Paragraph 7 – Qualified opinion

―The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence,
concludes that misstatements, individually or in the aggregate, are
material, but not pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence
on which to base the opinion, but the auditor concludes that the
possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive.‖

Observation:
The following non-compliances were observed:
1. With regard to paragraph (a) given under EOM (Emphasis of Matter)
regarding valuation of metal, it was noted that that the value of stock is
material. It was further noted that since sufficient information is not given
under Note 1, the auditor cannot draw Emphasis of matter based on this
note. Hence, it was viewed that if the effect is material, then the auditor
should have qualified his report instead of giving EOM on the same.
2. With regard to paragraph (b) regarding the confirmation of outstanding
balances, it was noted that with regard to debit balances (including trade
receivables), the company had not recognized expected credit losses on
financial assets including trade receivables. Further, it was stated that
the balance of trade receivables which was disclosed as good was
subject to confirmation from parties. Trade receivable would have
material effect on the assets side of the balance sheet as it constituted
more than 50% of total assets size. Further, with regard to credit
balances, it was noted from another note to the financial statements that
the amount of trade payables was 85% of total liabilities. As per the
definition of trade payables, it is in respect of amount due on account of
goods purchased or services rendered in the normal course of business
and expected to be settled in the company‘s normal operating cycle or
due to be settled within twelve months from the reporting date. However,
in the given case, material items of trade receivable and credit balances
have been stated to be ―subject to confirmation of parties‖ which raises

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doubt on its timely settlement. Hence, considering the materiality of

above stated items, auditor should have given the qualified opinion.
3. With regard to paragraph (c) regarding suspension of mining operations,
it was viewed that the financial impact of such suspension in operation
was not disclosed in the said note. Accordingly, it was viewed that the
auditor cannot draw emphasis of matter as sufficient information was not
disclosed in the financial statements. Therefore, the auditor should have
expressed qualified opinion on the same in accordance with
requirements of SA 705 instead of giving EOM.
Accordingly, it was viewed that the requirements of SA 705
Modifications to the Opinion in the Independent Auditor's Report and
SA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in
the Independent Auditor's Report have not been complied with.

4. Wrong Reference of Note in the Auditor‟s

Report
Matter contained in the Auditor‟s Report and Financial
Statements
An abstract of Independent Auditor‘s Report of a company read as follows:
―Report on Other Legal and Regulatory Requirements
8. As required by Section 143 (3) of the Act, we report that:
…
iv)The company has provided requisite disclosures in its Ind AS financial
statements as to holdings as well as dealings in Specified Bank Notes (SBN)
during the period from November 8,2016 to December 30,2016...―
Further, a reference to a note to the financial statements was given.

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Principle: SA 700 (Revised), Forming an Opinion and Reporting on

Financial Statements
Paragraph 71 –Supplementary information
―A71. SA explains that the auditor‘s opinion covers supplementary
information that is an integral part of the financial statements because of
its nature or how it is presented. This evaluation is a matter of
professional judgment. To illustrate:
• When the notes to the financial statements include an explanation or
the reconciliation of the extent to which the financial statements
comply with another financial reporting framework, the auditor may
consider this to be supplementary information that cannot be clearly
differentiated from the financial statements. The auditor‘s opinion
would also cover notes or supplementary schedules that are cross-
referenced from the financial statements…‖

Observation:
It was noted that the auditor had given reference of Note 35 for the
disclosure on SBNs.
It was observed that the disclosure of SBNs was given under Note 36, hence,
reference to Note 36 of the financial statements should be drawn in the
auditor‘s report as against the currently drawn reference to Note 35. The
references to the financial statements and the related information should be
drawn appropriately so as to enable the reader of the financial statements
understand the contents in an appropriate manner.
Accordingly, it was viewed that the reference in the auditor‟s report was
incorrect, such mistakes should be avoided.

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 Chapter-8
Observations related to CARO, 2016
1. Reporting under CARO
Matter contained in the Auditor‟s Report
Abstract of paragraph (ii) and (iii) given under Annexure I to the Auditor‘s
Report read as below:
―(ii)… As informed, no material discrepancies were noticed on physical
verification carried out during the year.
(iii) As informed, the company….‖

Principle: Guidance Note on the Companies (Auditor's Report)

Order, 2016
Introduction - Paragraph 3
―… and the auditors should exercise their professional judgement and
experience on various matters on which they are required to report under
the Order.‖
Comments on Form of Report
…
―60. It is important to note that replies to many of the requirements of the
Order will involve expression of opinion and not necessarily statement of
facts. It is necessary, therefore, that this is indicated when making the
report under the Order. This can be done in either of the following ways:
(a) By a general preface to the comments under the Order on the
following lines: ―In terms of the information and explanations sought
by us and given by the company and the books and records
examined by us in the normal course of audit and to the best of our
knowledge and belief, we state that..............................‖
or
(b) by a preface to individual comments, for example, ―In our opinion‖ or
―In our opinion and according to the information and explanations
given to us during the course of the audit...‖
Study on Compliance of Financial Reporting Requirements

Observation:
It was observed that while reporting in pursuance to the requirements of
paragraph (ii) and (iii) of CARO, 2016, the auditor appears to have reported
based on information received from management only. As per the above
stated guidance under CARO, 2016, the auditor should exercise his
professional judgement and experience on various matters to be
reported under CARO. However, from the given reporting it appears that
the same has not been done by the auditor.
Accordingly, it was viewed that the requirements of CARO, 2016 read with
Guidance Note on the Companies (Auditor's Report) Order, 2016 have not
been complied with.
2. Immovable Properties
Matter contained in the Auditor‟s Report
Abstract of Auditor‘s report under CARO read as follows:
According to the information and explanations given to us and the records
examined by us, in case of properties earlier held by merged entity we report
that the title deeds of immovable properties are yet to be transferred in t he
name of the reporting company. In respect of few land pieces procedure for
transfer in the name of the company are yet to be completed. The company
has clear title in respect of other immovable properties.

Principle:- Companies (Auditor's Report) Order, 2016 and Guidance

Note on the Companies (Auditor's Report) Order, 2016
Paragraph 3 (i) (c)
―Whether the title deeds of immovable properties are held in the name of
the company. If not, provide the details thereof.‖
Paragraph 36 (k) of Guidance Note on CARO 2016
―The reporting under this paragraph, where the title deeds of the
immovable property are not held in the name of the Company, may be
made incorporating following details, in the form of a table or otherwise:
a. In case of land:-
total number of cases,
whether leasehold / freehold,
gross block and net block, (as at Balance Sheet date), and
remarks, if any ...”

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Observation:
The auditor reported that the title deeds of immovable properties of merged
entity are yet to be transferred in the name of the reporting company, and in
respect of few land pieces, procedure for transfer in the name of the
company are yet to be completed.
It was observed that the auditor has not reported the details of
immovable properties where the title deeds are not in the name of the
reporting company, i.e. total number of cases, whether leasehold /
freehold, gross block and net block, (as at Balance Sheet date), and
remarks, if any which is required as per the above stated requirement.
Accordingly, it was viewed that the requirements of CARO, 2016 read with
Guidance Note on the Companies (Auditor's Report) Order, 2016 have not
been complied with.

3. Loans Granted
Matter contained in the Auditor‟s Report and Financial
Statements
Paragraph (iii) and (viii) of auditors report under CARO read with Disclosure
of Loans to Subsidiaries, Associates and Others, abstract of Balance Sheet
and Note on Current Loans stated as follows:
―(iii) The Company has granted unsecured loans, to companies, firms,
Limited Liability Partnership or other parties covered in the register
maintained under Section 189 of the Companies Act, 2013. These loans are
Interest free and there is no stipulation as to repayment of the loan. In our
opinion and according to the information and explanation given to us, the
terms and conditions of the loans given by company are prima facie not
prejudicial to the interest of the company for the reasons fully explained in
relevant notes to the standalone Ind AS financial statements.
―(viii) Based on our audit procedures and as per the information and
explanation given to us by the management, during the year there has been
delay in timely repayment of its dues to banks for ECB and to financial
institution for debentures. In respect of working capital facilities from Banks
there has been over drawings in the accounts during the year as well as at
year end. Accounts were overdrawn as at end of the reporting year.‖

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Note: Disclosure of Loans to Subsidiaries, Associates and Others

―...Considering that the subsidiaries overseas and domestic have been
formed for promoting company‘s business, the above Loans to its various
subsidiaries are interest free and carry no stipulation as to repayment.
The Company has not given loans for a term exceeding 7 years. Accordingly,
the terms and conditions of these loans are not prejudicial to the interest of
the company and the management is of the opinion that these are compliant
with the provisions of sec 185 of the Companies Act 2013.Some of these
loans were given under the provisions of Section 372 of the Companies Act
1956.These loans are not in conformity with the provision of Section 186 of
the Companies Act 2013.In respect of few of its subsidiaries, efforts are
being made to recover the loans, however due to financial weakness of those
subsidiaries they are unable to repay and regularize the Loans.
Under the aforesaid circumstances, the holding company is looking at
various options to regularize the loans.
Auditors have relied on the Management‘s representation.‖

Principle: Guidance Note on Division II, Schedule III to the

Companies Act, 2013, Guidance Note on the Companies (Auditor's
Report) Order, 2016, Ind AS 109, Financial Instruments and SA 580,
Written Representations
Paragraph 3 (iii) (a) of CARO 2016
―Whether the terms and conditions of the grant of such loans are not
prejudicial to the company‘s interest.‖
Paragraph 38 (c) of Guidance Note on CARO 2016 - Audit
procedures and reporting
―… In determining whether the terms of the loans are prejudicial, the
auditor would have to give due consideration to the other factors
connected with the loan, including its ability to lend, terms of its
borrowings, borrower‘s financial standing, credit rating, if available, the
nature of the security, rate of interest and so on.
Further, for the purpose of reporting under this paragraph, the auditor
may consider paragraph (7) of Section 186 of the Companies Act, 2013,
wherein it is specified that no loan, covered under this section, shall be
given at a rate of interest lower than the prevailing yield of one year,

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given at a rate of interest lower than the prevailing yield of one year,
three year, five year or ten year government security closest to the tenor
of the loan.‖
Paragraph 5.5.1 of Ind AS 109, Financial Instruments - Impairment
―.. An entity shall recognise a loss allowance for expected credit losses
on a financial asset that is measured in accordance with paragraphs
4.1.2 or 4.1.2A, a lease receivable, a contract asset or a loan
commitment and a financial guarantee contract to which the impairment
requirements apply in accordance with paragraphs 2.1(g), 4.2.1(c) or
4.2.1(d).‖
Paragraph 3 of SA 580, Written Representation
―Although written representations provide necessary audit evidence, they
do not provide sufficient appropriate audit evidence on their own abou t
any of the matters with which they deal. Furthermore, the fact that
management has provided reliable written representations does not affect
the nature or extent of other audit evidence that the auditor obtains about
the fulfillment of management‘s responsibilities, or about specific
assertions.‖

Observation:
The following discrepancies were noted with regard to auditor‘s reporting
under the paragraph3 (iii) (a):
i) As per the Guidance Note on CARO, 2016, the auditor while providing
his opinion about whether the terms and conditions of the loans are
prejudicial or not to the interest of the Company, has to consider many
factors such as borrower‘s financial standing, nature of the security,
rate of interest rate etc.
In the given case, it was noted that the company has provided loans to
subsidiaries and associates without interest. Further, it was noted that
under Note on Disclosure of Loans to Subsidiaries, Associates and
Others, the Company had stated about financial weakness in few of its
subsidiaries and that the company was exploring various options to
regularize the said loans. It was also observed from the balance sheet
that the company had borrowings towards which interest is being paid.

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Further, it was noted from Paragraph (viii) of CARO 2016 that the
company had defaulted in repayment of principal and interest in
respect of the borrowings.
It was viewed that providing interests free loans without repayment
period read together with the facts stated in note on Disclosure of
Loans to Subsidiaries, Associates and Others, it can reasonably be
concluded that such loans are prejudicial to the interest of the
company. Considering such facts and circumstances, it was also
viewed that since section 186 of Companies Act, 2013 has not been
complied with, it is incorrect to state that loans given by the company
are prima facie not prejudicial to the interest of the company.
ii) Further, as stated in note on Disclosure of Loans to Subsidiaries,
Associates and Others, the financial condition of some of the
subsidiaries is weak, which indicates that under Ind AS 109, loans to
those entities are impaired and an expected credit loss should have
been made in the books. However, no provision was made for
expected credit loss on these financial assets. It was not in line with
the requirement of paragraph 5.5.1 of Ind AS 109, Financial
Instruments.‖
iii) It was noted that under note on Disclosure of Loans to Subsidiaries,
Associates and Others, it was stated that ‗the auditors have relied on
the Management‘s representation‘. It appears from this statement that
the information reported under this note has been reported on the
basis of the information provided by the company only and that the
same have been relied upon by the auditor viz. name of subsidiaries
and associates to whom the interest free loans have been provided,
that the terms and conditions of these loans are not prejudicial to the
interest of the company, these loans are in compliant with the
provisions of Section 185 of the Companies Act 2013, the efforts are
being made to recover the loans from subsidiaries and that the
company is looking at various options to regularize the loans etc.
It was viewed that usage of the phrase ‗Auditors have relied on the
Management‘s representation‘ may lead the users of financial
statements to believe that the auditor has merely relied on the
information provided by the management without applying appropriate
audit procedures to verify the information with regard to loans given to
subsidiary and associate companies. It was not in line with the
requirements of SA 580.

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iv) Further, it was noted that under the note on ‗Current loans‘; loans
have been classified as considered good even though as per note on
Disclosure of Loans to Subsidiaries, Associates and Others, some
loans were not recoverable. Accordingly, it was viewed that classifying
all the current loans as ‗considered good‘ was not correct.
Accordingly, it was viewed that requirements of CARO 2016, Ind AS 109,
Standards on Auditing and Companies Act, 2013 have not been
complied with.

4. Loans Granted
Matter contained in the Auditor‟s Report
Abstract of Auditor‘s Report under CARO read as follows:
―(iii) The company has granted loans to 3 (Three nos.) parties covered in the
register maintained under section 189 for some part of the year:
a....
b. There are no overdue more than rupees one lakh in respect of the loan
granted to the bodies corporate listed in the register maintained under
section 189 of the Companies Act, 2013.‖

Principle: Companies (Auditor's Report) Order, 2016

Paragraph 3 (iii) (a)
―Whether the company has granted any loans, secured or unsecured to
companies, firms, Limited Liability Partnerships or other parties covered
in the register maintained under section 189 of the Companies Act, 2013,
If so,
a) Whether the terms and conditions of the grant of such loans are not
prejudicial to the company‘s interest;
b) Whether the schedule of repayment of principal and payment of
interest has been stipulated and whether the repayments or receipts
are regular;

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c) If the amount is overdue, state the total amount overdue for more
than 90days, and whether reasonable steps have been taken by the
company for recovery of the principal and interest.‖

Observation:
It was noted that the auditor reported as ―there is no overdue for more
than rupees one lakh in respect of the loan granted to the bodies
corporate listed in the register maintained u/s 189 of the Act.” However,
as per the above stated requirement, it was viewed that the auditor is
required to report on the amount overdue over 90 days. It was viewed
that there is no monetary limit that has been stipulated under requirements of
CARO, 2016.
Accordingly, it was viewed that the requirements of CARO, 2016 have not
been complied with.

5. Loans Granted
Matter contained in the Auditor‟s Report
Abstract of CARO of a company read as follows:
―In our opinion and according to information and explanation given to us, the
company has complied with the provision of Section 186 of the Act with
respect to its Investments. The company has given guarantees and security
in compliance with section 185 and 186 of the Act. The company has granted
Loans and advances u/s. 185 and 186 of the Act which as per the information
and explanations given by the company to us and as described in the
financial statements are interest free and given to promote the interest of the
company are not in conformity of the provision of Section 186 of the
Companies Act 2013. We are informed that, due to bad financial position,
some of these subsidiaries are unable to regularize the advances given
earlier as described in the note to the standalone Ind AS financial
statements.‖
Principle: Companies (Auditor's Report) Order, 2016
Paragraph 3 (iv)
―In respect of loans, investments, guarantees, and security whether
provisions of section 185 and 186 of the Companies Act, 2013 have been
complied with. If not, provide the details thereof.‖

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 Observations related to CARO, 2016

Paragraph 39 B (c) of Guidance Note on CARO 2016

―B. Compliance of Section 186 of the Companies Act 2013: Loan and
investment by company
Relevant Provisions …
c) …
Non-compliance may be reported incorporating following details:-.‖
S. Non-compliance of Section 186 Remarks,
No. Name of Amount Balance if any
Company/ Involved as
Party at
Balance
Sheet
Date
1. Investment through more
than two layers of
investment companies
2. Loan given or guarantee
given or security
provided or acquisition of
securities exceeding the
limits without prior
approval by means of a
special resolution
3. Loan given at rate of
interest lower than
prescribed
4. Any other default

Observation:
It was noted that the auditor has reported that section 186 of
Companies Act, 2013 has not been complied with, however, the details
of non-compliance of section 186 were not given which is not in line with
the requirement of paragraph 39 (B) (c) of Guidance Note on CARO, 2016.

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Accordingly, it was viewed that the requirements of CARO, 2016 have not
been complied with.

6. Statutory Dues
Matter contained in the Auditor‟s Report
Abstract of Auditor‘s report under CARO read as follows:
…
vii (a) The company is regular in depositing with appropriate authorities
undisputed statutory dues including investor education protection fund
,income tax ,sales tax, wealth tax ,service tax & custom duty and other
material statutory dues applicable to it. According to the information and
explanations given to us , no undisputed amounts payable in respect of
provident fund , income tax ,sales tax, wealth tax, custom duty, VAT, Cess
and other material statutory dues were in arrears as at 31st March 20XX for
a period of more than six months from the date they became payable.
(b) As the information and explanations given to us and on the basis of the
verification of the records of the company, the details of statutory dues which
have not been deposited on account of disputes are given in Annexure
hereto.
…

Principle: Companies (Auditor's Report) Order, 2016

Paragraph 3 (vii) (a)
―Whether the company is regular in depositing undisputed statutory dues
including Provident Fund, employees‘ State Insurance, Income-tax,
Sales-tax, Service Tax, duty of customs, duty of excise, value added tax,
Cess and any other statutory dues to the appropriate authorities and if
not, the extent of the arrears of outstanding statutory dues as on the last
day of the financial year concerned for a period of more than six months
from the date they became payable, shall be indicated.‖

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Observation:
It was noted that the auditor did not report whether the company is
regular in depositing dues of provident fund, employees state
insurance, duties of excise, value added tax and cess. Further reporting
included investor education and protection fund and wealth tax whi ch was
not in line with the requirements given under paragraph 3 (vii) (a) CARO
2016.
Further, it was noted that the annexure as stated above was not provided for
reporting under paragraph 3 (vii) (b) with this report.
Accordingly, it was viewed that the requirements of CARO, 2016 have
not been complied with.

7. Undisputed Statutory Dues

Matter contained in the Auditor‟s Report
Abstract of Auditor‘s report under CARO read as follows:
―According to the information and explanation given to us and records of the
company examined by us, in our opinion, the Company is generally regular in
depositing undisputed statutory dues including Provident Fund, employee‘s
state insurance fund, wealth tax, custom duty, excise duty, cess and any
other statutory dues with the appropriate authorities. There are no
undisputed statutory dues payable for a period of more than six month from
the date they become payable as at the year end.‖
Principle: Companies (Auditor's Report) Order, 2016
Paragraph 3 (vii) (a)
―whether the company is regular in depositing undisputed statutory dues
including provident fund, employees' state insurance, income-tax, sales-
tax, service tax, duty of customs, duty of excise, value added tax, cess
and any other statutory dues to the appropriate authorities and if not, the
extent of the arrears of outstanding statutory dues as on the last day of
the financial year concerned for a period of more than six months from
the date they became payable, shall be indicated‖

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Observation:
It was noted that the auditor reported about the regularity of undisputed dues
namely Provident Fund, employee‘s state insurance fund, wealth tax, custom
duty, excise duty and cess. However, the auditor did not comment with
respect to sales tax, service tax and value added tax while reporting in
pursuance to the above stated requirement of CARO, 2016.
Accordingly, it was viewed that the requirements of CARO, 2016 have not
been complied with.

8. Disputed Statutory Dues

Matter contained in the Auditor‟s Report
Abstract of Auditor‘s Report under CARO read as follows:
―(vii)…
(b) According to the Information and Explanations given to us, there are no
dues of Sales Tax, Service Tax/GST and Value added tax which have not
been deposited with the appropriate authorities on account of any dispute
except for the following dues of Income Tax:
As informed to us, the Company does not have any dues on account of duty
of Customs and duty of Excise.‖

Principle: Companies (Auditor's Report) Order, 2016

Paragraph 3 (vii) (b)
―Where dues of income tax or sales tax or service tax or duty of customs
or duty of excise or value added tax have not been deposited on account
of any dispute, then the amounts involved and the forum where dispute is
pending shall be mentioned. (A mere representation to the concerned
Department shall not be treated as a dispute).‖

Observation:
It was noted from Paragraph (vii) of CARO, 2016 wherein the auditor
reported that there were no dues of Sales Tax, Service Tax/GST and Value

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 Observations related to CARO, 2016

added tax which have not been deposited with the appropriate authorities on
account of any dispute ―except for the following dues of Income Tax‖.
However, it was observed that no further details were reported by the auditor
on income tax related disputes as per the above stated requirements of
CARO 2016.
Accordingly, it was viewed that the requirements of CARO, 2016 have
not been complied with.

9. Contingent Liabilities
Matter contained in the Auditor‟s Report and Financial
Statements
The Contingent Liabilities included a disputed income tax demand which
remained the same for the last three years and same amount was reported
by the auditor while reporting under paragraph 3(vii) (a) of CARO, 2016.

Principle: Guidance Note on the Companies (Auditor's Report)

Order, 2016
Paragraph 42 (j)
―It may be noted that penalty and/or interest levied under the respective
laws would be covered within the term ―amounts payable‖.

Observation:
It was noted from note on the Contingent Liabilities that there is a disputed
income tax demand which remained same for the last three years. The same
amount was reported by the auditor while reporting under paragraph 3(vii) (a)
of CARO, 2016 which implies that interest component on the said amount
was ignored.
As per the above stated requirements of Guidance Note on CARO 2016,
penalty and/or interest levied under the respective laws gets covered
within the term “amounts payable”.
Accordingly, it was viewed that the requirements of Guidance Note on CARO
2016 have not been complied with.

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10. Fraud
Matter contained in the Auditor‟s Report
Abstract of the Auditor‘s Report stated as follows:
―During the course of our examination of the books and records of the
Company, carried out in accordance with the generally accepted auditing
practices in India, and according to the information and explanations given to
us, we have neither come across any instance of material fraud by the
Company or on the Company by its officers or employees, noticed or
reported during the year, nor have we been informed of any such case by the
Management.‖

Principle: Companies (Auditor's Report) Order, 2016

Paragraph (x)
―Whether any fraud by the company or any fraud on the company by its
officers or employees has been noticed or reported during the year; If
yes, the nature and the amount involved is to be indicated.‖

Observation:
It was noted that the nomenclature “Material Fraud” has been used by
the Company instead of “any frauds”. It was viewed that the auditor has
to report on all frauds whether material or not as required by paragraph
(x) of CARO, 2016.
Accordingly, it was viewed that the requirements of CARO, 2016 have not
been complied with.

11. Managerial Remuneration

Matter contained in the Auditor‟s Report and Financial
Statements
Abstract of Auditor‘s report under CARO read as follows:
―xi. In our opinion and according to information and explanation given to us,
the company has paid/provided Managerial remuneration during the year as

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 Observations related to CARO, 2016

per the Board resolution which is subject to approval by the shareholders in

the forthcoming meeting, as fully explained in Note to the standalone Ind AS
financial statements.‖
In the Note to the financial statements on ‗Particulars of Remuneration to
Managing Directors & Executive Director during the year‘, information was
given for Managing Director and Independent Directors as under:
The computation of Net profit under section 198 of the Companies Act 2013
was not given since no commission was paid or payable to any director
during the current year. The Managing Director‘s remuneration was approved
by the Shareholders in the shareholders meeting for a period of five years.
The Board of directors approved enhanced remuneration to Managing
Director for the remaining period, keeping all other terms and conditions
unchanged. For the current financial year, the remuneration was in excess.
The increase in remuneration was subject to subsequent approval and
ratification by the shareholders of the Company in the Next General Meeting.

Principle: Companies (Auditor's Report) Order, 2016

Paragraph 3 (xi)
―Whether managerial remuneration has been paid or provided in
accordance with the requisite approvals mandated by the provisions of
section 197 read with Schedule V to the Companies Act? If not, state the
amount involved and steps taken by the Company for securing refund of
the same;‖

Observation:
It was noted that in pursuance to the aforesaid requirement the auditor has
reported that the company has paid/provided Managerial remuneration
during the year as per the Board resolution which is subject to approval by
the shareholders in the forthcoming meeting.
It was viewed that the auditor did not explicitly report as to whether the
managerial remuneration is paid in accordance with the provision of
section 197 read with Schedule V to the Companies Act, 2013. The
auditor only gave reference to the Note explaining the managerial
remuneration, without commenting about the compliance with the aforesaid
provisions.

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Study on Compliance of Financial Reporting Requirements

Further, it was noted that under note to the financial statements on

‗Particulars of Remuneration to Managing Directors & Executive Director
during the year‘ it was reported that computation of net profit under section
198 of the Companies Act, 2013 was not given since no commission was
paid or payable to any director during the year. It was viewed that as
section 198 of Companies Act, 2013 not only covers commission
payable but include total managerial remuneration, therefore, the
reporting under this note was not correct.
Accordingly, it was viewed that requirements of paragraph CARO 2016 have
not been complied with.

12. Preferential Placement of Preference Shares

and Debentures
Matter contained in the Auditor‟s Report
Abstract of paragraph (xiv) of Annexure ‗A‘ to the Independent Auditor‘s
Report read as follows:
―According to the information and explanations given to us and based on our
examination of the records of the Company, the Company has made
preferential placement of preference shares and debentures.‖

Principle: Companies (Auditor's Report) Order, 2016

Paragraph (xiv)
―whether the company has made any preferential allotment or private
placement of shares or fully or partly convertible debentures during the
year under review and if so, as to whether the requirement of section 42
of the Companies Act, 2013 have been complied with and the amount
raised have been used for the purposes for which the funds were raised.
If not, provide the details in respect of the amount involved and nature of
non-compliance.‖

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 Observations related to CARO, 2016

Observation:
It was noted that even though the auditor reported that preferential
allotment of preference shares and debentures was made by the
company yet he omitted to comment on compliance of section 42 of the
Companies Act, 2013 as well as the utilization of amount raised for the
purpose for which funds were raised.
Accordingly, it was viewed that incomplete reporting has been done by the
auditor under paragraph (xiv) of CARO, 2016.

‘ 167