The COVID-19 has not only affected the health of people across the globe, it has also caused severe disturbances in the global economic environment which has consequential impact on financial statements and reporting. Keeping in view the current business environment caused by the pandemic, the Ministry of Corporate Affairs on July 24, 2020 notified the Companies (Indian Accounting Standards) Amendment Rules, 2020, thereby amending the Rules of 2015.
The amendment introduces following changes to the Rules:
A.Amendment in Ind AS 103 [Business Combination]
An entity shall determine whether a transaction or other event is a business combination by applying the definition of Business given in Ind AS 103, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition. Following Amendment has been made with respect to Business Combination:
Definition of a business,” shall be substituted as follows: “An integrated set of· activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities. Accordingly, providing goods or services to customers has been added to the definition of business.
The three elements of a business are defined for guidance on the elements of a business. This is to permit a simplified assessment of whether an acquired set of activities and assets is business or not.
Optional test to identify concentration of fair value: The concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.
A.Amendment in Ind AS 107 [Disclosures to be made in respect of financial instruments] & Ind AS 109 [financial reporting of financial assets and financial liabilities]
Hedge accounting is a method of accounting where entries to adjust the fair value of a security and its opposing hedge are treated as one. Hedge accounting attempts to reduce the volatility created by the repeated adjustment to a financial instrument’s value, known as fair value accounting or mark to market. This reduction in volatility is done by combining the instrument and the hedge as one entry, which offsets the opposing movements.
Interest rate benchmark reform refers to the market-wide reform of an interest rate benchmark, including the replacement of an interest rate benchmark with an alternative benchmark rate. For hedging relationships to which an entity applies, the exceptions set out the certain temporary exception for uncertainty arising from interest rate benchmark reform as follows.
a) For assessing highly probable requirement for cash flow hedges : For the purpose of determining whether a forecast transaction is highly probable, an entity shall assume that the interest rate benchmark on which the hedged cash flows (contractually or non-contractually specified) are based is not altered as a result of interest rate benchmark reform.
b) Reclassifying the amount accumulated in the cash flow hedge reserve: In order to determine whether the hedged future cash flows are expected to occur, an entity shall assume that the interest rate benchmark on which the hedged cash flows (contractually or non-contractually specified) are based is not altered as a result of interest rate benchmark reform.
c) Assessing the economic relationship between the hedged item and the hedging instrument: An entity shall assume that the interest rate benchmark on which the hedged cash flows and/or the hedged risk (contractually or non- Article STUDENT COMPANY SECRETARY | AUGUST 2020 3 contractually specified) are based, or the interest rate benchmark on which the cash flows of the hedging instrument are based, is not altered as a result of interest rate benchmark reform.
d) Designating a component of an item as a hedged item: For a hedge of a noncontractually specified benchmark component of interest rate risk, the risk component shall be separately identifiable only at the inception of the hedging relationship.
Further, the following disclosure should be in the financial statement made by the reporting entity:
a) the significant interest rate benchmarks to which the entity ‘s hedging relationships are exposed;
b) the extent of the risk exposure the entity manages that is directly affected by the interest rate benchmark reform;
c) how the entity is managing the process to transition to alternative benchmark rates;
d) a description of significant assumptions or judgements the entity made in applying these paragraphs
e) the nominal amount of the hedging instruments in those hedging relationships.
Amendment in Ind AS 109 [Accounting for Leases]
Many businesses have been shut or partially opened resulting into adverse impact on Revenue & Cash flow due to the COVID- 19 pandemic and the lockdown in India. As a result, the lease payment has beenaffected and the businesses are demanding the rent concession from their vendors.
An amendment has been made as per which businesses is not required to treat the rent concession as a lease modification subject to following conditions. If the below mentioned conditions are fulfilled, the rent concession may be treated without lease modification.
a) the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change;
b) any reduction in lease payments affects only payments originally due on or before the 30 June, 2021, and
c) there is no substantive change to other terms and conditions of the lease.
The following Disclosures to be made in the financial statement by the reporting entity
a) it has applied the practical expedient to all rent concessions that meet the conditions or, if not applied to all such rent concessions, information about the nature of the contracts to which it has applied the practical expedient and
b) the amount recognized in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions to which the lessee has applied the practical expedient.
Amendment in Ind AS 1 [Presentation of Financial Statements and Accounting Policies] & Ind AS 8 [Changes in Accounting Estimates and Errors]
A new definition of material has been introduced by this amendment as follows “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”
Materiality depends on the nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements taken as a whole.
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.
Assessing whether information could reasonably be expected to influence decisions made by the primary users of a specific reporting entity`s general purpose financial statements requires an entity to consider the characteristics of those users while also considering the entity ‘s own circumstances.
E. Amendment in Ind AS 10 [Events after the Reporting Period]
An amendment has been made by adding the disclosure for any non- adjusting events that could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements which provide financial information about a specific reporting entity.
Accordingly, the following disclosure to be provided:
a) the nature of the event; and
b) an estimate of its financial effect, or a statement that such an estimate cannot be made.
F. Amendment in Ind AS 37 [Provisions, Contingent Liabilities and Contingent Assets]
An accounting of restructuring plans has been substituted as follows: A management or board decision to restructure taken before the end of the reporting period does not give Article STUDENT COMPANY SECRETARY | AUGUST 2020 5 rise to a constructive obligation at the end of the reporting period unless the entity has, before the end of the reporting period
a) started to implement the restructuring plan; or
b) announced the main features of the restructuring plan to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will carry out the restructuring.