Eac 50736 Vol 37

COMPENDIUM OF OPINIONS
COMPENDIUM OF
OPINIONS
Volume XXXVII
ISBN : 978-81-8441-992-4
Volume XXXVII
December | 2020 | P2762 (New) Expert Advisory Committee

The
Institute of The Institute of Chartered Accountants of India
Chartered (Set up by an Act of Parliament)
Accountants
www.icai.org of India New Delhi
COMPENDIUM OF
OPINIONS
Volume XXXVII
Expert Advisory Committee

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)
NEW DELHI
COPYRIGHT © THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
All rights reserved. No part of this publication may be translated, reprinted or

reproduced or utilised in any form either in whole or in part or by any
electronic, mechanical or other means, including photocopying and
recording, or in any information storage and retrieval system, without prior
permission in writing from the publisher.
(This thirty seventh volume contains opinions finalised between February 12,
2017 and February 11, 2018. The opinions finalised upto September 1981
are contained in Volume I. The opinions finalised thereafter upto February
11, 2017 are contained in Volumes II to XXXVI.)
Year of Publication : 2020
Committee/
Department : Expert Advisory Committee
E-mail : [email protected]
Website : www.icai.org
Price : `50/-
ISBN :
Published by : The Publication Directorate on behalf of

The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi – 110 002 (India)
Printed at : Sahitya Bhawan Publications,

Hospital Road, Agra – 282 003
December | 2020 | P2762 (New)
Foreword
Financial reporting conveys to the stakeholders, a depiction of an entity’s
critical financial information, including assets, liabilities, income, expenses,
etc. Financial reporting requires preparation of financial statements in
accordance with generally accepted accounting principles (GAAPs). The
users of financial statements often feel the need of interpreting GAAPs
including Accounting Standards, Ind ASs, Guidance Notes, Pronouncements
issued by ICAI, etc. for applying and implementing them in relevant
situations. GAAPs are ever evolving with constant changes in the world of
accounting. These changes and evolvements sometimes bring complexities,
involving diverse interpretations and application of individual judgements,
thus exposing unseen challenges. An authoritative and accurate guidance is
indispensable at such an hour.
The Council of the Institute has constituted the Expert Advisory Committee to
offer the requisite and appropriate guidance to the members of the Institute
when challenged with strenuous issues on accounting and/or auditing
principles. The Committee came into being in the year 1975 and since then,
has been consistently providing independent and objective guidance in the
form of opinions to the members of the Institute. Over the period, the role of
the Committee has also been acknowledged by various Regulatory and
Government authorities, such as, Ministry of Corporate Affairs (MCA),
Security and Exchange Board of India (SEBI), Comptroller and Auditor
General of India (C&AG), etc. when these are posed with intricate accounting
issues.
With an intention to promulgate the enormous knowledge and research
contained in the opinions issued by the Committee, the volumes of
Compendium of Opinions are issued from time to time. These Volumes act
as a quick reference guide for multiple accounting issues faced by the
accounting professionals. It gives me extreme delight to congratulate CA.
Babu Abraham Kallivayalil, Chairman, CA. M.P. Vijay Kumar, Vice-Chairman
and all members of the Committee for bringing out this Volume.
I am sure that like all the previous volumes, this Volume of Compendium of
Opinions will also be of great relevance and significance to the members of
the profession and others concerned.
New Delhi CA. Atul Kumar Gupta

December 16, 2020 President
Preface
The Expert Advisory Committee (EAC) is absolutely delighted in presenting
the thirty seventh Volume of ‘Compendium of Opinions’. This volume of the
Compendium of Opinions contains opinions that were finalised by the
Committee in the Council Year 2017-18 under the able guidance of CA. Nihar
Niranjan Jambusaria, the then Chairman of the Committee. As the Chairman
of the EAC during this Council Year (2020-21), it is a matter of great delight
that we have been able to issue our opinion timely with no backlog.
This Volume is a compilation of various opinions on diversified subjects
relating to accounting and auditing principles. Some of the noteworthy and
pertinent topics issued by the Committee are as follows:
 Treatment of contribution to Settlement Guarantee Fund under Ind AS;
 Treatment of financial liability under Ind AS 32 and Ind AS 109;
 Amortisation of goodwill in respect of subsidiaries and jointly controlled
entities;
 Treatment of investments in units of equity and debt mutual funds under
Ind AS 109;
 Treatment of disputed Principal and Interest in respect of cases
pending before regulatory authorities;
 Classification of grant related to assets in the statement of cash flows;
 Recognition and valuation of Carbon Emission Reductions (CERs);
 Accounting treatment of temporary income in relation to construction
contract;
 Accounting for software income;
 Amortisation of expenses incurred on business requirements at the time
of formation;
 Making provision for non-approved cost;
 Accounting treatment of CWIP held on behalf of GoI and funds received
from the GoI;
 Accounting treatment of amount invested in LIC’s leave encashment
plan;
 Consideration of Capital Reserve, Risk Fund & Reserve for calculation
of Net Worth;
 Recognition of DTL on Special Reserve created for deduction u/s
36(1)(viii) of the IT Act.
It may be noted that the opinion or views expressed by the EAC represent
the opinion or views of the members of the Committee and not the official
opinion of the Council. The opinions are finalised by the Committee based on
the facts and circumstances of the query as supplied by the querist, the
relevant laws and statutes, and the applicable accounting/auditing principles
prevailing on the date on which a particular opinion is finalised. The date of
finalisation of each opinion is indicated along with the respective opinion. The
opinions must, therefore, be read in the light of any amendments and /or
developments in the applicable laws/statutes and accounting/auditing
principles subsequent to the date of finalisation of the opinions.
EAC answers the queries as per the Advisory Service Rules framed by the
Council which are available on the website of the Institute.
All Volumes of the Compendium of opinions are available under a single link
on the website of the Institute with advance search facility. Opinions on any
subject can be accessed by inserting the relevant key words. EAC opinions
are also available of the Digital learning platform of the Institute. We are sure
these features are a great advantage to our members are other stake
holders.
We recollect with gratitude the able guidance and support to the Committee
by CA. Atul Kumar Gupta, President, ICAI and CA. Nihar Niranjan
Jambusaria Vice-President, ICAI. I wish to place on record the unstinted
support extended by CA. M. P. Vijay Kumar Vice-Chairman EAC without
whose active involvement, we would not have been able to issue our
opinions promptly. We would like to acknowledge the tireless efforts and
great expertise contributed by all the members and special invitees of the
Expert Advisory Committee both past and present in finalization of opinions. I
wish to sincerely thank Council Colleagues in the Committee, viz Shri
Chandra Wadhwa (Government Nominee), CA. Tarun Jamnadas Ghia,
CA. G. Sekar, CA. Anuj Goyal, CA. Dheeraj Kumar Khandelwal,
CA. (Dr.) Debashis Mitra, CA. Prakash Sharma, CA. Prasanna Kumar D.,
CA. Satish Kumar Gupta, CA. Pramod Jain, CA. (Dr.) Sanjeev Kumar
Singhal, CA. Hans Raj Chugh, and CA. Dayaniwas Sharma. We are
privileged to have Ms. Ritika Bhatia, Director Commercial of C&AG as part of
the Committee.
I am also thankful to the Co-opted members and Special Invitees of
the Committee, viz., CA. Nilesh S. Vikamsey (Past President, ICAI),
CA. (Dr.) Girish Ahuja, CA. Vivek Newatia, CA. Piyush Agrawal,
CA. Venkateswarlu S., CA. Siddharth Jain, CA. Mohit Bhuteria, CA. Navneet
Mehta, CA. Venugopal C. Govind and CA. K. Vishwanath for their whole-
hearted support in the activities of the Committee.
I acknowledge the untiring efforts and committed support of CA. Parul Gupta -
Secretary EAC, who ensured efficient and smooth disposal of queries in a
timely manner. She along with CA. Vidhyadhar Kulkarni, Head, Technical
Directorate, and CA. Khushboo Bansal, Sr. Executive Officer were
instrumental in presenting the drafts for the consideration of the Committee
and thereafter finalising it as per the decisions of the Committee.
Hope this volume will be of immense benefit to professional colleagues and
other stake holders in resolving complicated issues in accounting and
auditing.
New Delhi CA. Babu Abraham Kallivayalil

December 14, 2020 Chairman
Expert Advisory Committee
Contents
Foreword
Preface
Part I: Opinions on Indian Accounting Standards
1. Treatment of contribution to Settlement Guarantee 3
Fund/Core Settlement Guarantee Fund in
consolidated financial statements under Ind AS.
2. Treatment of financial liability under Ind AS 32 and 19
Ind AS 109.
3. Amortisation of goodwill in respect of subsidiaries 29
and jointly controlled entities recognised as an
asset in consolidated financial statements.
4. Classification of investments in units of debt mutual 40
funds under Ind AS 109.
5. Treatment of investments in units of equity mutual 52
funds under Ind AS 109.
6. Treatment of disputed amount (Principal and 60
Interest) in respect of cases pending before various
regulatory authorities.
7. Classification of grant related to assets in the 72
statement of cash flows.
Part II: Opinions on Accounting Standards
8. Accounting treatment of revaluation of 81
‘Regeneration expenses’ - Inventories.
9. Recognition and valuation of Carbon Emission 86
Reductions (CERs).
10. Accounting for development fee under Delhi School 102
Education Act and Rules, 1973.
11. Accounting treatment of temporary income in 115
relation to construction contract.
12. Charging of pro rata depreciation. 120
13. Recognition of gross receipt as revenue. 125
14. Accounting for software income. 134
15. Provision for debtors transferred to Franchisee. 144
16. Amortisation of expenses incurred on various 155
business requirements at the time of formation.
17. Making provision for non-approved cost. 163
18. Accounting treatment of capital work-in-progress 173
(CWIP) held on behalf of Government of India (GoI)
and funds received from the GoI.
19. Accounting treatment of amount invested in LIC’s 178
leave encashment plan for meeting the company’s
leave encashment liability.
20. Consideration of Capital Reserve, Risk Fund & 192
Reserve for calculation of Net Worth of a Company.
21. Appropriate disclosure of Competent Authority Land 204
Acquisition (CALA) bank account in the company’s
annual financial statements.
22. Whether transport subsidy can be treated as capital 211
receipt.
23. Clarification regarding recognition of Deferred Tax 220
Liability in respect of Special Reserve created for
the purpose of deduction u/s 36(1)(viii) of the
Income Tax Act, 1961.
Advisory Service Rules 225
PART I:
Opinions on
Indian Accounting Standards
Query No. 1
Subject: Treatment of contribution to Settlement Guarantee Fund/Core
Settlement Guarantee Fund in consolidated financial
statements under Ind AS.1
A. Facts of the Case
1. ABC Ltd. (hereinafter referred to as the ‘company’) is a recognised
stock exchange and offers trading services in equity, equity derivatives, debt
and currency derivatives segments in India. DEF Ltd. is a wholly owned
subsidiary of ABC Ltd. and is a recognised clearing corporation which carries
out the clearing and settlement activities in respect of the trades executed in
various market segments of ABC Ltd., such as, cash market, futures &
options and currency derivatives.
2. On June 20, 2012, Securities Exchange Board of India (‘SEBI’) notified
the Securities Contracts (Regulation) (Stock Exchanges and Clearing
Corporations) Regulations, 2012 (‘the Regulations’) to regulate recognition,
ownership and governance in stock exchanges and clearing corporations in
India. The said ‘Regulations’, inter alia, stated the following:
“39 Fund to guarantee settlement of trades
(1) Every recognised clearing corporation shall establish and
maintain a Fund by whatever name called, for each segment to
guarantee the settlement of trades executed in respective segment of
a recognised stock exchange.
(2)…
(3)…
(4)…
(5) In the event of a clearing member failing to honour his
settlement obligations, the Fund shall be utilised to complete the
settlement.
(6) The corpus of the Fund shall be adequate to meet the
settlement obligations arising on account of failure of clearing
member(s).
1 Opinion finalised by the Committee on 23.8.2017.
3
Compendium of Opinions — Vol. XXXVII
(7) The sufficiency of the corpus of the Fund shall be tested by way
of periodic stress tests, in the manner specified by the Board.”
3. The Regulations required, inter alia, every recognised stock exchange
to transfer 25% of its annual profits every year to a fund (Settlement
Guarantee Fund (‘SGF’)) maintained by the recognised clearing corporation
(subsidiary of the stock exchange), which clears and settles trades executed
on that stock exchange. In order to guarantee settlement of trades, the
Regulations required such recognised clearing corporation to establish and
maintain a Fund, for each market segment, to guarantee the settlement of
trades executed in respective segment of a recognised stock exchange.
4. The Regulations also required a recognised stock exchange to transfer
its required SGF contribution to a recognised clearing corporation which
carries out the clearing and settlement functions of the stock exchange. The
SGF will be utilised by the recognised clearing corporation to settle the
obligations in the event of a default by a clearing member i.e., clearing
member failing to honor its settlement obligations (i.e., trading
defaults/losses).
5. After the notification of the Regulations, SEBI in its Press Release No.
66/2012 dated June 21, 2012, announced the formation of an expert
committee to look, inter alia, into matters relating to feasibility of a single
clearing corporation or interoperability among multiple clearing corporations
and the operational aspects of the same, norms for utilization of profits and
investments by recognised clearing corporations and norms for adequacy of
the core corpus of the SGF and its sourcing, including transfer of profits by
stock exchanges to the SGF in the long run.
6. Subsequently, on August 27, 2014, SEBI, vide its circular no.
CIR/MRD/DRMNP/25/2014, issued granular norms relating to Core
Settlement Guarantee Fund (‘Core SGF’), stress testing and default
procedures to bring greater clarity and uniformity as well as to align with
international best practices while enhancing the robustness of the present
risk management system in the clearing corporations. (Copy of the Circular
has been furnished by the querist for the perusal of the Committee). These
norms are aimed at achieving mainly the following objectives:
(a) create a core fund (called core settlement guarantee fund),
within the SGF, against which no exposure is given and which is
readily and unconditionally available to meet settlement
4
obligations of clearing corporation in case of clearing member(s)

failing to honour settlement obligation,
(b) …
(c) …
(d) harmonise default waterfalls across clearing corporations,
(e) …
(f) ring-fence each segment of clearing corporation from defaults in
other segments, and
(g) bring in uniformity in the stress testing and the risk management
practices of different clearing corporations especially with
regard to the default of members.
7. As can be observed, the norms mentioned in paragraph 6 above
amongst various matters related to stress testing and default waterfalls, also
aimed to create a core fund namely the Core Settlement Guarantee Fund
(Core SGF) within the SGF (emphasis supplied by the querist). Further, as
stipulated, no exposure is to be given and the fund is readily and
unconditionally available to meet settlement obligations of clearing
corporation in case of clearing member(s) failing to honor settlement
obligations.
8. As per the Circular cited in paragraph 6 above, the clearing
corporation (CC) shall have a fund, called Core SGF, for each segment of
each recognised stock exchange (SE) to guarantee the settlement of trades
executed in respective segment of the stock exchange. In the event of a
clearing member failing to honor settlement commitments, the Core SGF
shall be used to fulfill the obligations of that member and complete the
settlement without affecting the normal settlement process.
9. The corpus of the fund should be adequate to meet out all the
contingencies arising on account of failure of any member(s). The risk or
liability to the fund depends on various factors such as trade volume, delivery
percentage, maximum settlement liability of the members, the history of
defaults, capital adequacy of the members, the degree of safety measures
employed by the CC/SE etc. A fixed formula, therefore, cannot be prescribed
to estimate the risk or liability of the fund. However, in order to assess the
5
fair quantum of the corpus of Core SGF, CC should consider the following
factors:
• Risk management system in force
• Current and projected volume/turnover to be cleared and settled
by the CC on guaranteed basis
• Track record of defaults of members (number of defaults,
amount in default)
10. As per the circular cited in paragraph 6 above, the contributions of the
following three contributors to Core SGF in respect of any market segment
shall be as follows:
(a) Clearing Corporation (DEF Ltd.) contribution: Contribution to
Core SGF shall be at least 50% of the Minimum Required
Corpus (MRC). This contribution will be made by clearing
corporation from its own funds.
(b) Stock Exchange (ABC Ltd.) contribution: Stock Exchange
contribution to Core SGF shall be at least 25% of the MRC. This
can be adjusted against transfer of profit by Stock Exchange
under SGF (see paragraph 3 above).
(c) Clearing Member primary contribution: Total contribution
from clearing members shall not be more than 25% of the MRC.
Further, clearing corporation shall have the flexibility to collect
contribution from clearing members either upfront or staggered
over a period of time. In case of staggered contribution, the
remaining balance shall be met by Clearing Corporation to
ensure adequacy of total Core SGF corpus at all times. Such
Clearing Corporation contribution shall be available to the
Clearing Corporation for withdrawal as and when further
contributions from clearing members are received.
11. The management of Core SGF and access to the same are as follows:
 The Defaulter's Committee/SGF utilisation Committee of the
Clearing Corporation shall manage the Core SGF.
 The CCs shall follow prudential norms of Investment policy for
Core SGF corpus and establish and implement policies and
procedures to ensure that Core SGF corpus is invested in highly
6
liquid financial instruments with minimal market and credit risk

and is capable of being liquidated rapidly with minimal adverse
price effect.
 The instruments in which investments may broadly be made are
Fixed Deposit with Banks (only those banks which have a net
worth of more than INR 500 Crore and are rated A1 (or A1+) or
equivalent, Treasury Bills, Government Securities and money
market/liquid mutual funds subject to suitable transaction/
investment limits and monitoring of the same. The CCs shall
further ensure that the financial instruments in which the Core
SGF corpus is invested remain sufficiently diversified at all
times.
 SEBI may prescribe the investment norms in this regard from
time to time.
 CC may utilise the Core SGF in the event of a failure of
member(s) to honour settlement commitment.
12. Subsequently, SEBI, in its Circular No. SEBI/HO/MRD/DRMNP/
CIR/2016/54 dated May 4, 2016, notified that the amounts carried forward in
the ‘Provisions’ in respect of the period up to March 31, 2015 shall be
transferred by the Stock Exchange to the Core SGF maintained by the
Clearing Corporation within one month of the date of issuance of the said
Circular and that the amounts in respect of the period from April 1, 2015 till
the date of amendment of the Regulation 33 of the Regulations shall be
transferred within such time as to be specified by SEBI. (Copy of the Circular
has been furnished by the querist for the perusal of the Committee).
13. Further, as per the Circular cited in paragraph 12 above, “the
unutilized portion of contribution made by the stock exchange towards the
Core SGF, for any segment(s), maintained by the Clearing Corporation, as
available with the Clearing Corporation, shall be refunded to the stock
exchange, in case the stock exchange decides to close down its business or
decides to avail the clearing and settlement services of another Clearing
Corporation for that segment(s), subject to its meeting all dues of the clearing
corporation”. In the latter case, the stock exchange will have to transfer such
amount to another clearing corporation.
14. In ABC Ltd’s standalone financial statements, the company records
the contribution to the Core SGF as an item of expenditure by debiting the
7
same to the statement of profit and loss based on the understanding stated
below:
(1) The sum of money paid by the Stock Exchange to the Core SGF
of the Clearing Corporation is something which has irreversibly
and irretrievably gone out of the control of the Stock Exchange.
(2) Thus, whatever corpus is available with the Fund, it is
completely ring-fenced at all times with both the contributing
parties, namely, the Stock Exchange and the Clearing
Corporation permanently and irrevocably losing their entire
domain and control over the funds contributed by them.
(3) Also, in the Regulations and the SEBI’s Circular, there is no
mechanism by which any contribution made to the Core SGF
can come back to the contributors- whether the contribution is
made by the Stock Exchange or the Clearing Corporation,
except on closure of business as mentioned above.
(4) Another significant feature of the SEBI’s Circular is that the
MRC of Core SGF mentioned in paragraph 10 above can only
go up and can never be lower than the high water mark
reached. To illustrate, if the high water mark is Rs. 100 reached
in (say) February 2015 and Rs.20 is utilized in the month of
March 2015, then not only the utilization has to be made good
but if the MRC is determined at, say, Rs.103 in the next month
not only would Rs. 20 be required to be contributed to make up
for the utilization but Rs 3 added to bring it up to the level
determined by applying the norms prescribed in the Circular.
(5) More pertinently, though the SEBI’s Circular dated May 4, 2016
contemplates a refund if and when a stock exchange closes
down its business; but that is a contingency which arises at the
time when its business is closed and not when it is a going
concern.
(6) In any event, it is SEBI which is the deciding and paramount
authority as to the amount, contributions, investment, utilization
and use of the Core SGF.
(7) The establishment, administration and management of the Core
SGF is in due compliance with the SEBI directives with all the
8
substantive powers such as deciding the structure, the purpose,

the composition and contribution, investment of the funds as
well as the utilization of the funds etc. lying fully with SEBI,
including giving various directives, as SEBI deems it
appropriate, from time to time.
(8) In view of the above, the Core SGF is considered and disclosed
as a separate Fund, independent of its contributing entities and
their own funds, in the financial statements. This is considered
to be befitting and ascribed as a matter of accounting prudence
and conservatism, ABC Ltd. has been charging the contribution
made to the Core SGF to its statement of profit and loss in both
the standalone and consolidated financial statements.
15. The Central Board of Direct Taxes (‘the CBDT’) has notified the Core
SGF set up by DEF Ltd., under clause (23EE) of section 10 of the Income-tax
Act, 1961 (hereinafter referred to as the ‘Act’). Under clause (23EE) of
section 10 of the Act, income by way of contributions received from a
recognised stock exchange, a recognised Clearing Corporation and the
members thereof are exempt from taxation. Further, any specified income of
such Core SGF set up by a recognised clearing corporation in accordance
with the Regulations is also exempt from tax under clause (23EE) of section
10 the Act. As per the above Income-tax regulations:
— The amount of contributions received and related income
accumulated in the Core SGF in DEF Ltd.’s financial statements
from contributions made by ABC Ltd. and members will be
exempt from current taxation;
— DEF Ltd.’s own contribution into the Core SGF is tax deductible
in DEF Ltd.’s standalone financial statements; and
— The SGF contribution paid by ABC Ltd. to DEF Ltd. towards
Core SGF is allowed as a current tax deduction in ABC Ltd.’s
standalone financial statements.
16. The querist has separately clarified the following:
(i) CBDT has specifically notified the Core SGF set up by DEF Ltd.
under clause (23EE) of section 10 of the Act. The purpose and
the idea of notifying the Core SGF, according to the querist,
specifically appears to be with a purpose of treating it as a
9
separate entity independent and regardless of where it is

created and who are its contributors. This understanding gets
further affirmed by the fact that the Finance Act, 2017 has
stipulated that every notified Core SGF is required to obtain a
separate PAN and also to file a separate return of income, again
independent and regardless of where it is created and who are
its contributors.
(ii) It is mandatory to maintain Core SGF as per SEBI guidelines as
long as DEF Ltd. continues to carry on business as a Clearing
Corporation and ABC Ltd. carries on the business as Stock
Exchange. In other words, the clearing corporation and stock
exchange would stand to lose their recognition by SEBI, if Core
SGF Fund is closed. Hence, on a going concern basis, Core
SGF cannot be closed. More importantly, though the SEBI
circular dated May 4, 2016 contemplates a refund, if and when a
stock exchange closes down its business, such closure is a
contingency. However, till such time the Stock Exchange and /or
the Clearing Corporation continues to carry on its business as a
going concern, the contributions made by them to the corpus of
the Core SGF cannot come back, once contributed.
(iii) Since currently Core SGF is not a separate legal entity, the
investments are held in the name of DEF Ltd. This is especially
so, since, it is a regulatory requirement to provide KYC
documents, especially PAN, for such investments. While this
was the situation till March 2017, going forward, post the
obtaining of a separate PAN, a possibility is being explored to
hold the investments pertaining to the Core SGF directly in the
name of Core SGF. Nevertheless, even today, all the funds
pertaining to Core SGF are maintained in separate bank
account designated for the Core SGF in the books of the
clearing corporation. All investments/redemptions pertaining to
the funds of Core SGF are carried out from the designated bank
account only. Also, all investments/funds pertaining to Core
SGF are not only identified separately for accounting purposes
but are also disclosed separately in the financial statements of
the clearing Corporation. This is mainly due to the fact that Core
SGF is completely ring-fenced at all times with all the
10
contributing parties permanently and irrevocably losing domain

and control over the funds contributed by them.
(iv) According to the default waterfall mechanism prescribed in
SEBI’s Circular mentioned in paragraph 6 above, in case where
the Core SGF is not sufficient to meet the settlement default,
then, resources of the Clearing Corporation may be utilised only
with the approval of SEBI. However, there is no such
requirement for Stock Exchange. Accordingly, the resources
available with DEF Ltd. may have to be utilised (post and as
approved by SEBI) in the event the amounts available with Core
SGF are not sufficient to meet the settlement default. However,
it is important to note that ABC Ltd. is not required to utilise any
of its own resources over and above the contributions already
made by ABC Ltd. to the Core SGF.
(v) The entire domain and control regarding Core SGF is with SEBI.
Further, once the contributions are made to the Core SGF, the
contributors completely lose domain and control over the funds
and the amount contributed to the Core SGF can only be utilised
for the object of the fund and cannot be utilised for any other
purpose. It may, therefore, as per the querist, be considered
that the Clearing Corporation manages the Core SGF in a
fiduciary capacity only. It has absolutely no discretion/authority
of its own to manage, utilise, invest, divest, etc. It has to strictly
follow the guidelines issued by SEBI from time to time. In other
words it is merely carrying out the activities, administratively,
with regard to Core SGF on behalf of SEBI.
17. As per the querist, there can be two treatments for the contribution to
SGF/Core SGF in the consolidated financial statements prepared under
Indian Accounting Standards (Ind AS) as described in paragraphs 18 and 19
below.
18. Option I:
 In ABC Ltd’s standalone financial statements, the company
records the contribution to the Core SGF as an item of
expenditure by debiting the same to the statement of profit and
loss based on the understanding stated in points (1) to (8)
mentioned in paragraph 14 above.
11
 With the same principles and understanding, the contribution

towards the SGF/Core SGF is recorded as an expense in ABC
Ltd.’s standalone Ind AS financial statements, as such amount
meets the definition of ‘provision’ under Indian Accounting
Standard (Ind AS) 37, ‘Provisions, Contingent Liabilities and
Contingent Assets’, based on the following:
— there is a present obligation (legal/statutory) to transfer 25%
of profits to the Core SGF maintained in another legal entity
– DEF Ltd., a subsidiary of ABC Ltd.;
— it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation by
paying to DEF Ltd. (cash moves out from ABC Ltd. to DEF
Ltd.); and
— reliable estimate can be made of the amount.
 As per the Regulations, the unutilized portion of contribution into
the Core SGF shall be refunded to the stock exchange only on
closure of business or if stock exchange decides to avail the
clearing and settlement services of another clearing corporation.
In the latter case, the stock exchange will have to transfer such
amount to another Clearing Corporation. The refund event i.e.,
winding up operations/changing Clearing corporation (i.e., DEF
Ltd. in this case) is not considered virtually certain. Accordingly,
no contingent asset shall be recognised.
 The above expense recorded in ABC Ltd.’s standalone financial
statements is not eliminated and continues to be recorded as an
expense in ABC Ltd.’s consolidated financial statements also
(including presentation as Core Settlement Guarantee Fund
balance in the consolidated balance sheet separately between
equity and liability – a mezzanine presentation). This is based on
the premise that the contribution to the Core SGF is regulatory in
nature and has restricted use and purpose i.e., the amounts of
the Core SGF can be utilised for settling the obligations in the
event of a default by clearing member/clearing member failing to
honor its settlement obligations (trading defaults/losses).
 Also, the company has lost its domain and control over the Fund
unless it is assumed that the company is not a going concern
(i.e., funds are refunded to the company on closure of business).
12
 Both ABC Ltd.’s and DEF Ltd.’s contributions accumulated in the

Core SGF balance will be presented as Core Settlement
Guarantee Fund balance separately between equity and liability
i.e., mezzanine presentation on ABC’s consolidated balance
sheet.
ABC Ltd. (Stock Exchange)
100% subsidiary
DEF Ltd.
(Clearing corporation subsidiary)
Core SGF
(Fund within the legal entity)
19. Option II:
a) Under Ind AS 110, ‘Consolidated Financial Statements’,
consolidated financial statements are prepared keeping in view
the economic entity model. This requires recording of assets,
liabilities, equity, income, expenses and cash flows of the parent
and its subsidiaries as those of a single economic entity.
b) Based on the above, intra-group transactions are to be
eliminated in consolidated financial statements. In this regard,
since ABC Ltd., DEF Ltd. and the Core SGF fund are all part of
the consolidated ABC Group (in accordance with all
requirements of Ind AS 110), in ABC’s consolidated financial
statements, the SGF contribution expense recorded by ABC Ltd.
in its standalone financial statements paid/payable to DEF Ltd.’s
Core SGF should be eliminated against the corresponding credit
balance of Core Settlement Guarantee Fund recorded by DEF
Ltd. in its standalone financial statements. This intra-group
transaction does not survive in the consolidated financial
statements as:
1) it is not an expense and liability to an entity outside the
consolidated ABC Group;
2) there exists no present obligating event relating to
13
member losses on account of settlement obligations at

the reporting date (trading defaults/losses) for which any
provision is required. Consequently, the current liability
pertaining to any such contributions payable by ABC Ltd.
towards the Core SGF maintained within DEF Ltd. and
appearing in ABC Ltd.’s standalone financial statements
should also get eliminated in the consolidated financial
statements of ABC Group. There should not be an
expense or a liability payable to a consolidated entity
within the Group as per Ind AS 110. This accounting in
the consolidated financial statements will also be
consistent with the accounting followed by DEF Ltd. in its
standalone financial statements in respect of DEF Ltd.’s
own share of contribution towards the Core SGF. DEF
Ltd. records such contributions as an appropriation from
reserves (and not an expense), since, the Core SGF is a
fund within the legal entity DEF Ltd. (the Core SGF Fund
is not a separate legal entity). DEF Ltd.’s accounting in its
standalone financials statements is considered
appropriate under Ind AS.
c) It is also to be noted that under Ind AS, a credit balance on the
balance sheet would either be classified as equity (see Ind AS
32, ‘Financial Instruments: Presentation’) or as a liability (see
Ind AS 32, Ind AS 109, ‘Financial Instruments’ and Ind AS 37).
There is no conceptual basis to present an item on the balance
sheet between equity and liability (mezzanine) under Ind AS.
For example, under Ind AS, minority interest which could have
earlier been presented as a mezzanine item on the balance
sheet under previous Indian GAAP, is required to be presented
as non-controlling interest within equity under Ind AS.
Thus, ABC Ltd. has charged the contribution made to Core SGF
to the statement of profit and loss and also reported and
disclosed the Core SGF separately in its consolidated financial
statements with the understanding that the Core SGF is
regulatory in nature and the amount pertaining to Core SGF is
required to be ring-fenced at all times from its contributors. Also,
on a going concern basis, the amount contributed to the Core
14
SGF has irreversibly and irretrievably gone out of the control of

the contributors. Both ABC Ltd. and DEF Ltd. have lost domain
and control over the funds once contributed by them to the Core
SGF. Further, as stated above, all the powers related to the
establishment, management and administration of Core SGF
and deciding on the structure, contribution, composition,
investment etc. lie solely with SEBI.
There are two matters which merit attention here in relation to
deferred tax accounting under Option II described in (d) and (e)
below.
d) ABC Ltd. is allowed current tax benefit in its standalone financial
statements in respect of the SGF contribution expense recorded
in its standalone financial statements. Since, this expense gets
reversed and credited in the consolidated profit and loss, ABC
Ltd. will record a corresponding deferred tax liability to the
extent of related current tax benefit in the consolidated financial
statements. This deferred tax liability will get reversed either if
and when trading settlement defaults/losses occur and to the
extent it is in respect of the said losses, the same is recognised
as an expense in the consolidated statement of profit and loss
(as at that time there will be no tax deduction available for such
expense) or when ABC Ltd. discontinues business and the
contributions are refunded to ABC Ltd. resulting in taxable
income.
e) DEF Ltd. is also allowed current tax benefit in its standalone
financial statements. Based on conclusion in (d) above in case
of ABC Ltd., a deferred tax liability will also be recorded for DEF
Ltd.’s own contribution toward Core SGF. This deferred tax
liability will get reversed either if and when and trading
settlement defaults/losses occur and to the extent it is in respect
of the said losses, the same is recognised as an expense in the
consolidated statement of profit and loss (as that time there will
be no tax deduction) or when DEF Ltd. discontinues business at
which time such amounts become taxable.
Based on the above, accounting treatment under Option II is as
described in (f)-(j) below:
15
f) Core SGF expense recorded in ABC Ltd.’s separate financial

statements pertaining to its contribution paid to its subsidiary
DEF Ltd. towards the Core SGF will get eliminated on
consolidation (being an intra-group transaction);
g) Both ABC Ltd.’s and DEF Ltd.’s contributions into Core SGF will
be presented as a special reserve and restricted
cash/investments separately in the consolidated financial
statements. There would be an explanatory note in the financial
statements that such special Core SGF reserve/funds can be
used for specified/restricted purposes (resulting in alignment of
accounting policies within the ABC group);
h) Core SGF contributions received from clearing members will
continue to be presented as current liability (as the amounts are
refundable on demand) and amounts invested from such
contributions will be presented as restricted cash/investments.
i) Upon recognition of expense in the consolidated financial
statements, similar amounts will be appropriated back from the
special reserve to free reserve (both within equity).
j) Deferred tax liability will be recorded in consolidated financial
statements of ABC group and DEF Ltd.’s standalone financial
statements to the extent of current tax benefit availed (see (g)
and (h) above).
B. Query
20. The querist has sought the opinion of the Expert Advisory Committee
on the following issues:
(i) Whether the accounting for contribution to Settlement
Guarantee Fund/Core Settlement Guarantee Fund in the
consolidated financial statements of the company ABC Ltd. as a
charge to the statement of profit and loss will be correct and
consistent with the accounting mentioned in Option I above.
(ii) In case the answer to (i) above is in the negative, then, whether
the company can follow the accounting as explained under
Option II above i.e., elimination of expense related to
contribution to SGF/Core SGF by ABC Ltd. to its subsidiary DEF
Ltd. in the consolidated financial statements of ABC Ltd. under
Ind AS.
16
C. Points considered by the Committee

21. The Committee notes that the basic issue raised in the query pertains
to treatment of the contributions made by ABC Ltd. (hereinafter referred to as
the ‘company’/ ‘Stock Exchange’) to SGF/Core SGF in line with the
Regulations prescribed by SEBI in the consolidated financial statements of
the company in the context of Indian Accounting Standards notified under the
Companies (Indian Accounting Standards) Rules, 2015. The Committee has,
therefore, considered only this issue and has not considered any other issue
that may arise from the Facts of the Case, such as, treatment of contributions
in the financial statements of DEF Ltd. (hereinafter referred to as the
‘subsidiary’/‘Clearing Corporation’), accounting for the company’s share of
income of the SGF/Core SGF, if any, determination of the amount to be
contributed to SGF/Core SGF, legal interpretation of and compliance with
SEBI’s Circulars and provisions of Income-tax Act, 1961, current and
deferred tax accounting, etc. The Committee expresses its views purely from
accounting angle. The Committee notes that the querist has made references
to contributions to both SGF/Core SGF and makes reference to ‘ring-fencing’
in the case of Core SGF, which is mentioned as ‘Fund within SGF’.
22. The Committee notes that the SEBI is the regulatory authority for the
company, which is a recognised Stock Exchange and its subsidiary which is
a recognised Clearing Corporation in the extant case and that the SEBI has
prescribed the Regulations and issued some Circulars applicable for the
company and its subsidiary, certain features of which are as follows:
(i) The company is required to transfer 25% of its annual profits
every year to the SGF maintained by its subsidiary, which is a
Clearing Corporation. The SGF will be utilised by the
recognised Clearing Corporation to settle the obligations in the
event of a default by a clearing member i.e., clearing member
failing to honor its settlement obligations (i.e., trading
defaults/losses). The Committee notes that the legal
requirement of contributing 25% of profits was subsequently
amended to be subject to SEBI's directions as may be
specified from time to time.
(ii) The company, its subsidiary and members of the clearing
corporation are required to contribute to MRC of the Core SGF
maintained by the subsidiary, which is a Clearing Corporation.
17
The sufficiency of the corpus of the Fund shall be tested by

way of periodic stress tests prescribed.
(iii) The company’s contribution to Core SGF can be adjusted
against transfer of profit by it under SGF (see (i) above).
(iv) Against the Core SGF, no exposure is given. The Core SGF is
readily and unconditionally available to meet settlement
obligations of Clearing Corporation in case of clearing
member(s) failing to honour settlement obligation. The Core
SGF is for each segment of the subsidiary, which is ring-fenced
from defaults in other segments.
(v) While the management of the Core SGF rests with the
Defaulter's Committee/SGF utilisation Committee of the
subsidiary, it is fully in compliance with the directives issued by
SEBI. SEBI is the deciding and paramount authority as to the
amount, contributions, investment, utilisation and use of the
Core SGF.
(vi) Unutilised portion of contributions made by the company to the
Core SGF for any segment(s) will be refunded to the company
only when the company decides to close down its business or
decides to avail the clearing and settlement services of another
Clearing Corporation for that segment(s).
From the above features of the Regulations and the Facts of the Case
provided by the querist, the Committee notes that Core SGF is a Fund
maintained by the company’s subsidiary and is managed by a committee of
the subsidiary fully in compliance with the directives of SEBI. The Core SGF
is regulatory in nature and is available for restricted use and purpose. The
company is required to make mandatory transfer to the Fund. The amount
contributed to the Fund goes out of the control of the company. It is not
refundable to the company so long it remains as a going concern. The
possible event of closure of business resulting in refund from the Fund
should be disregarded on ‘going concern’ considerations. Similarly, the
possible switch over to another clearing corporation resulting in refund from
the Fund is a future contingency to be disregarded. MRC is computed on a
monthly basis considering all relevant factors, reflecting the quantum of risk
involved.
18
23. From the above, the Committee is of the view that the company’s
contribution to the Fund represents its share of expenditure in meeting a
statutory obligation. Hence, contribution to the Fund should be expensed in
its stand-alone financial statements. Consequently, the said expense should
be included in its consolidated financial statements also. This expense
cannot be eliminated in the consolidated financial statements.
D. Opinion
24. On the basis of the above, the Committee is of the following opinion on
the queries raised in paragraph 20 above:
(i) Option of accounting for the company’s contribution to
Settlement Guarantee Fund/Core Settlement Guarantee Fund
in the consolidated financial statements of the company i.e.,
ABC Ltd., as a charge to the (consolidated) statement of profit
and loss will be correct.
(ii) In view of the answer (i) above, the question (ii) does not arise.
__________
Query No. 2
Subject: Treatment of financial liability under Ind AS 32 and Ind AS
109.1
1. A company (hereinafter referred to as ‘the company’) is a special
purpose vehicle incorporated by consortium of (i) ABC Ltd., an ABC Group
listed company (ii) XYZ Authority, a Government of Maharashtra undertaking
and (iii) GEF Ltd. (technology partner).
2. Equity share capital of the company is Rs. 512 crore, held by the
members of consortium as under:
ABC Ltd. – 69%
XYZ Authority – 26%
GEF Ltd. – 5%
1 Opinion finalised by the Committee on 10.11.2017 and 11.11.2017.
19
3. The company was awarded the responsibility to undertake the design,

construction, operation and maintenance of the Mass Rapid Transit System
(MRTS) for the Versova – Andheri - Ghatkopar corridor in Mumbai. XYZ
Authority, on 7 th March, 2007 granted the company a concession for a period
of 35 years, for the exclusive rights to construct, operate and charge fares to
users of the Mumbai Metro in accordance with the provisions of the
concession agreement, at the end of which the company must transfer the
rights, title and interest in the Mumbai Metro Project assets, in a serviceable
condition, free of encumbrances to XYZ Authority.
4. The construction of the Metro Rail Project was completed and its
commercial operations had commenced on 8 th June, 2014. The project is
fully operational since then.
5. Original project cost was estimated at Rs. 2,356 crore. However, due
to delays, the project completion cost was escalated to Rs. 4,026 crore. The
increase of Rs. 1,670 crore was financed by ABC Ltd. and a consortium of
banks jointly.
6. As per agreed terms with the consortium of banks, ABC Ltd. was
required to bring in funds towards promoter’s share in increase in the project
cost by way of interest free subordinated-debt (sub-debt). Further,
repayment of this sub-debt can be made only after repayment of entire
Rupee term loans to consortium of banks. The installment repayments to
consortium of banks are scheduled for next 22 years, till 2037.
7. The company has received Rs. 759 crore as interest free
‘subordinated-debt’ from ABC Ltd. till 31 st March, 2016 to fund the project
requirements. (Copy of audited financial statements for financial year (F.Y.)
2015-16 has been provided by the querist for the perusal of the Committee).
The sub-debt is shown under ‘Note 5 – Long Term Borrowings’.
8. The querist has stated that Indian Accounting Standards (Ind ASs)
have come into effect from 1 st April, 2016. The company being a subsidiary
of ABC Ltd. is required to adopt the Ind ASs with effect from 1 st April, 2016.
Sub-debt, being a financial liability, is required to be accounted and disclosed
as per the requirements of Indian Accounting Standard (Ind AS) 32,
‘Financial Instruments: Presentation’. As mentioned earlier, sub-debt is
interest free and repayable after repayment of entire Rupee term loans to
consortium of banks, i.e., after 22 years. The querist has also separately
clarified that subordinated debt is also non-convertible.
20
9. The following accounting treatment has been considered by the

company in respect of accounting treatment of financial liability of Rs.759
crore received as interest free sub-debt from ABC Ltd. (parent/holding
company) in the books of the company:
A. As at 31st March, 2015 (1 st April, 2015), the amount of sub-debt
received from ABC Ltd. aggregated Rs. 715 crore. The querist has fair
valued the same on 31 st March discounting the sub-debt based on the
discounting rate applicable and accounted for the said sub-debt at fair
value of Rs. 42.69 crore (as against the book value of Rs. 715 crore)
since the amounts are estimated to be repayable only after 22 years.
The company has passed the following entry to give effect to the fair
valuation:
Date Particulars Debit Credit
01/04/2015 Subordinate debt from ABC 672.31 cr
Ltd.
To Contribution received 672.31 cr
(Other equity)
(Being fair value recognized
as on 31st March, 2015)
B. Thus, sub-debt is shown at a fair value of Rs. 42.69 crore at the

beginning of the financial year (F.Y.) 2015-16. During the F.Y. 2015-
16, a further sub-debt of Rs. 44 crore was received from ABC Ltd. in 2
installments, which was also fair valued as mentioned above and the
following entries are passed to give effect of the fair valuation:

Ltd.
(Other equity)
(Being fair value of Rs. 1.98
crores recognized as on 30 th
June, 2015 for additional 26
crores received from parent
company)
21

Ltd.
(Other equity)
(Being fair value of Rs. 1.44
crores recognised as on 31 st
March, 2016 for additional
18 crores received from
parent company)
10. The querist has also accounted for the finance costs for the unwinding
of fair value as on 31 st March, 2015 (1st April, 2015); 31 st March, 2016 and
30th June, 2016.
11. Presently, the difference in fair value of the subordinated debt and the
book value is disclosed as ‘Other equity’ under the heading ‘Equity’.
12. Further on the basis of additional information supplied by the querist it
is observed that all financial liabilities classified as subsequently measured at
amortised cost.
B. Query
13. On the basis of the above, the querist has sought the opinion of the
Expert Advisory Committee as to whether the above accounting treatment
and presentation is in line with Ind AS 32 / Ind AS 109. Also whether there is
any other way of presentation for the interest free sub-debt received from the
parent company.
14. The Committee notes that the basic issue raised by the querist relates
to accounting treatment and presentation of interest free sub-debt from the
holding company ABC Ltd. in the books of the company. The Committee has,
therefore, considered only this issue and has not examined any other issue
that may be contained in the Facts of the Case, e.g., accounting for term
loan taken from the consortium of banks, discounting rate applicable for
discounting the sub-debt for arriving at its fair value or amortised cost,
taxation implications including deferred tax etc. At the outset, the Committee
wishes to point out that the opinion expressed, hereinafter is in the context of
financial statements for the financial year 2016-17 and it is presumed from
22
the Facts of the Case that the company has not voluntarily opted for
preparation of financial statements from the financial year 2015-16. Thus, the
date of transition to Ind ASs for the company as per the requirements of Ind
AS 101, First-time Adoption of Indian Accounting Standards is 1.4.2015.
15. The Committee is of the view that based on the facts available in the
extant case, the interest free sub- debt received by the subsidiary company
from the holding company, which is repayable after 22 years, should be
treated as a financial liability. Further, the Committee assumes that there are
no other factors which will render the interest free sub debt into equity or
compound financial instrument.
16. The Committee notes the requirements of Ind AS 109 and Ind AS 113
as follows:
Ind AS 109
“4.2.1 An entity shall classify all financial liabilities as
subsequently measured at amortised cost, except for:
(a) financial liabilities at fair value through profit or loss.
Such liabilities, including derivatives that are
liabilities, shall be subsequently measured at fair
value.
(b) financial liabilities that arise when a transfer of a
financial asset does not qualify for derecognition or
when the continuing involvement approach applies.
Paragraphs 3.2.15 and 3.2.17 apply to the
measurement of such financial liabilities.
…”
5.1.1 2At initial recognition, an entity shall measure a financial
asset or financial liability at its fair value plus or minus, in
the case of a financial asset or financial liability not at fair
value through profit or loss, transaction costs that are
directly attributable to the acquisition or issue of the
financial asset or financial liability.
2This paragraph has been subsequently revised vide Notification No. G.S.R. 310(E)
dated 28 th March, 2018.
23
5.1.1A However, if the fair value of the financial asset or financial

liability at initial recognition differs from the transaction
price, an entity shall apply paragraph B5.1.2A.”
“B5.1.1 The fair value of a financial instrument at initial recognition is
normally the transaction price (ie the fair value of the
consideration given or received, see also paragraph B5.1.2A
and Ind AS 113). However, if part of the consideration given or
received is for something other than the financial instrument,
an entity shall measure the fair value of the financial
instrument. For example, the fair value of a long-term loan or
receivable that carries no interest can be measured as the
present value of all future cash receipts discounted using the
prevailing market rate(s) of interest for a similar instrument
(similar as to currency, term, type of interest rate and other
factors) with a similar credit rating. Any additional amount lent
is an expense or a reduction of income unless it qualifies for
recognition as some other type of asset.”
“B5.1.2A The best evidence of the fair value of a financial instrument at
initial recognition is normally the transaction price (ie the fair
value of the consideration given or received, see also Ind AS
113). If an entity determines that the fair value at initial
recognition differs from the transaction price as mentioned in
paragraph 5.1.1A, the entity shall account for that instrument at
that date as follows:
(a) at the measurement required by paragraph 5.1.1 if that
fair value is evidenced by a quoted price in an active
market for an identical asset or liability (ie a Level 1
input) or based on a valuation technique that uses only
data from observable markets. An entity shall recognise
the difference between the fair value at initial recognition
and the transaction price as a gain or loss.
(b) in all other cases, at the measurement required by
paragraph 5.1.1, adjusted to defer the difference
between the fair value at initial recognition and the
transaction price. After initial recognition, the entity shall
recognise that deferred difference as a gain or loss only
24
to the extent that it arises from a change in a factor

(including time) that market participants would take into
account when pricing the asset or liability.”
Ind AS 113
“60 If another Ind AS requires or permits an entity to measure an
asset or a liability initially at fair value and the transaction price
differs from fair value, the entity shall recognise the resulting
gain or loss in profit or loss unless that Ind AS specifies
otherwise.”
“B4 When determining whether fair value at initial recognition equals
the transaction price, an entity shall take into account factors
specific to the transaction and to the asset or liability. For
example, the transaction price might not represent the fair value
of an asset or a liability at initial recognition if any of the
following conditions exist:
(a) The transaction is between related parties, although the
price in a related party transaction may be used as an
input into a fair value measurement if the entity has
evidence that the transaction was entered into at market
terms.
(b) …”
From the above, the Committee notes that at initial recognition, financial
liability is recognized at fair value (plus transaction costs, if any in case of
financial liability not at fair value through profit or loss), which is normally the
transaction price. However, where the transaction price of a financial liability
is different from its fair value, such as, in case of interest free loan, the same
has to be valued at fair value, which, as per above-reproduced paragraph
B5.1.1, can be measured at the present value of all future cash receipts
discounted using the prevailing market rate(s) of interest for a similar
instrument (similar as to currency, term, type of interest rate and other
factors) with a similar credit rating. Further, the subsequent measurement of
such financial liability shall be at amortised cost and interest shall also be
accrued in each reporting period, on such amortised cost calculated on the
basis of effective interest rate.
25
17. With regard to the difference in the fair value at the initial recognition
and transaction price, the Committee notes that paragraph 60 of Ind AS 113
states that if “the transaction price differs from fair value, the entity shall
recognise the resulting gain or loss in profit or loss unless that Ind AS
specifies otherwise.” Further, paragraph B5.1.1 of Ind AS 109, reproduced
above states that “if part of the consideration given or received is for
something other than the financial instrument, an entity shall measure the fair
value of the financial instrument. Any additional amount lent is an expense
or a reduction of income unless it qualifies for recognition as some other type
of asset.” From the above, the Committee is of the view that the difference in
the fair value and transaction price should be recognized as gain or loss in
the statement of profit and loss unless it qualifies for recognition as some
other element. In this context, the Committee notes the definitions of
‘Income’ and ‘Expense’ as per the Framework for the Preparation and
Presentation of Financial Statements in accordance with Indian Accounting
Standards as follows:
“70. The elements of income and expenses are defined as follows:
(a) Income is increases in economic benefits during the
accounting period in the form of inflows or enhancements
of assets or decreases of liabilities that result in increases
in equity, other than those relating to contributions from
equity participants.
(b) Expenses are decreases in economic benefits during the
accounting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in decreases
in equity, other than those relating to distributions to
equity participants.”
The Committee notes from the above that income or expense is any increase
or decrease in economic benefits during the accounting period, other than
those relating to contributions from or distributions to equity participants,
respectively. Thus, the transactions with equity participants cannot be
recognized as income or expense; rather these should be recognized as
equity. In the extant case, the interest-free debt is provided by the parent
company in its capacity as equity participant and accordingly, the Committee
is of the view that at the time of initial recognition and measurement of
interest free subordinated loan provided by the holding company to the
26
subsidiary, the difference between the transaction price and fair value should
be recognized as equity contribution from the holding company rather than
as an income or expense (profit or loss) and should be appropriately
disclosed under ‘other equity’ in the financial statements considering the
requirements of Schedule III to the Companies Act, 2013.
18. The Committee further notes the following paragraphs of Ind AS 101,
First-time Adoption of Indian Accounting Standards, which states as follows:
“6 An entity shall prepare and present an opening Ind AS Balance
Sheet at the date of transition to Ind ASs. This is the starting
point for its accounting in accordance with Ind ASs subject to
the requirements of paragraphs D13AA and D22.”
“Date of The beginning of the earliest period for which
transition to an entity presents full comparative information
Ind ASs under Ind ASs in first Ind AS financial
statements.” (Appendix A to Ind AS 101)
“7 An entity shall use the same accounting policies in its
opening Ind AS Balance Sheet and throughout all periods
presented in its first Ind AS financial statements. Those
accounting policies shall comply with each Ind AS effective
at the end of its first Ind AS reporting period, except as
specified in paragraphs 13–19 and Appendices B–D.”
“9 The transitional provisions in other Ind ASs apply to changes in
accounting policies made by an entity that already uses Ind
ASs; they do not apply to a first-time adopter’s transition to Ind
ASs, except as specified in Appendices B–D.”
“12 This Ind AS establishes two categories of exceptions to the
principle that an entity’s opening Ind AS Balance Sheet shall
comply with each Ind AS:
(a) paragraphs 14–17 and Appendix B prohibit retrospective
application of some aspects of other Ind ASs.
(b) Appendices C–D grant exemptions from some
requirements of other Ind ASs.”
27
“18 An entity may elect to use one or more of the exemptions

contained in Appendices C-D. An entity shall not apply these
exemptions by analogy to other items.”
From the above, the Committee notes that on the date of transition, viz.,
1.4.2015, the company shall prepare an opening Ind AS balance sheet and
use the accounting policies which shall comply with each Ind AS effective at
the end of its first Ind AS reporting period, except as specified in paragraphs
13–19 and Appendices B–D. Accordingly, the Standard requires
retrospective application of accounting policies unless there is specific
exemption/exceptions in the Standard from such retrospective application. In
this regard the Committee notes that the prescriptions in paragraph B8C and
D20 of Ind AS 101 would also be relevant in case it is impracticable for the
company to apply effective interest rate with retrospective effect. Considering
the fact that company has chosen to classify the financial liability as
subsequently measured at amortised cost and the loan transactions of recent
period the Committee assumes that the company has decided not to avail
any exemption/relaxation under Ind AS 101.
D. Opinion:
19. On the basis of above, the Committee is of the opinion that the
company should follow the following accounting treatment:
(a) As stated in paragraph 19 above the difference between the fair
value and transaction price of interest free subordinated debt at
the date of initial recognition shall be taken to other equity.
(b) Interest expense from the date of initial recognition of liability till
Ind AS transition date that would have been recognised using
effective interest rate method shall be debited to retained
earnings as of 01/04/15.
__________
28
Query No. 3
Subject: Amortisation of goodwill in respect of subsidiaries and jointly
controlled entities recognised as an asset in consolidated
financial statements. 1
1. A public limited company (hereinafter referred to as the ‘company’),
which is a wholly owned subsidiary of a listed government company, is in the
business of exploration and production of oil and gas and other hydrocarbon
related activities outside India.
2. The company operates overseas projects directly and/or through
subsidiaries, by participation in various joint arrangements and investment in
associates. Globally, Exploration and Production (E&P) business is carried
out by way of joint arrangements or investments in form of
subsidiaries/associates. The company was following Indian Generally
Accepted Accounting Principles (IGAAPs) (presumably, by IGAAPs, querist
meant Accounting Standards notified under the Companies (Accounting
Standards) Rules, 2006) until 31 st March, 2016. However, in accordance with
the requirement of Ministry of Corporate Affairs (MCA) notification dated 16 th
February, 2015, the company has adopted Indian Accounting Standards (Ind
ASs) with effect from 1 st April, 2016 (Transition Date: 1 st April, 2015).
3. Usually the legal regimes applicable in most of the countries provide
that the ownership of mineral resources (hydrocarbons) is with respective
governments. Accordingly, the host governments grant the rights to explore,
develop and produce hydrocarbons in certain specified geographical areas
within their territories (hereinafter referred to as ‘mineral rights’) to
companies on some equitable consideration under various regimes. The
activities of the company thus include securing such mineral rights and then
to explore, develop and produce hydrocarbons as under:
(a) direct acquisition of mineral rights in properties, exploration
(including prospecting), development and production of oil and
gas solely or in joint operations with some other parties;
(b) indirectly through acquisition of shares in a jointly controlled
entity owning such mineral rights;
29
(c) indirectly through acquisition of shares in a subsidiary owning

such mineral rights.
4. Mineral rights are granted by the host governments in accordance with
the applicable legal and fiscal regime in the host country which are
incorporated into the binding contractual arrangements entered into with the
host governments. Mineral rights can be granted through direct license or
through production sharing agreement (PSA), under which the host
government having ownership rights over the hydrocarbons, grants the rights
to a company or consortium (usually called contractor) subject to certain
obligations/ payments by the contractor including sharing of hydrocarbons,
with the government or its nominated agency as per principles contained in
PSA.
5. The overseas oil and gas operations are generally conducted in joint
arrangements with other partners. Main reason for holding mineral rights
through jointly controlled entities/subsidiaries is because of host country’s
regulations and / or various business considerations (strategic/risk
management/financing etc.). When the project is already in existence
through a corporate structure and the company joins the project later on, the
investment in jointly controlled entities /subsidiaries is a legacy issue.
6. The company has been preparing its consolidated financial statements
for the group comprising of standalone financial statements of the company,
its subsidiaries and jointly controlled entities in accordance with the
applicable Accounting Standards (AS).
Accounting Treatment accorded by the company under IGAAP
7. The querist has stated that under IGAAPs, the company accounted for
the investments in subsidiaries and jointly controlled entities in its standalone
financial statements in accordance with the requirement of Accounting
Standard (AS) 13, ‘Accounting for Investments’. In consolidated financial
statements of the company, the company was consolidating financial
statements of its subsidiaries on a line by line basis following the
consolidation procedures mentioned in paragraph 13 of Accounting Standard
(AS) 21, ‘Consolidated Financial Statements’. Similarly, in its consolidated
financial statements, the company was reporting its interest in jointly
controlled entities using proportionate consolidation as per the requirements
of paragraphs 29 to 39 of Accounting Standard (AS) 27, ‘Financial Reporting
of Interests in Joint Ventures’.
30
8. Further, the company recognised goodwill in respect of subsidiaries

and jointly controlled entities in accordance with the requirements of
paragraph 13(b) of AS 21 and paragraph 36 of AS 27 respectively in its
consolidated financial statements, as according to the querist, there was no
specific guidance in the Accounting Standards issued by the Institute of
Chartered Accountants of India (ICAI) as well as the Guidance Note on
Accounting for Oil & Gas Producing Activities (Revised 2013) regarding the
amortisation of such goodwill under IGAAPs.
9. The company considered that such goodwill mainly arises due to
corporate structure and the line by line consolidation of subsidiaries’ /
proportionate consolidation of jointly controlled entities’ financial statements
prepared on historical costs convention which do not take into consideration
the valuation of underlying oil and gas reserves for which excess amount (i.e.
goodwill calculated as per the relevant AS requirements) has been paid by
the company at the time of acquisition.
10. The company further considered that in oil and gas E&P companies,
the goodwill generated on acquisition of mineral rights either through jointly
controlled entities or subsidiaries, inherently derives its value from the
underlying mineral rights and, accordingly, value of such goodwill depletes as
the underlying mineral resources are extracted.
11. According to the querist, in case of acquisition directly or through joint
operations, the goodwill, so calculated, would have been accounted for as
‘acquisition costs’ as defined in the Guidance Note on Accounting for Oil and
Gas Producing Activities and accordingly would have been amortised over
the life of the reserves using Unit of Production (UOP) method considering
related proved oil and gas reserves.
12. Therefore, taking a prudent approach and considering the above
substance, the company framed the accounting policy under IGAAPs for
amortisation of the goodwill in respect of its subsidiaries/jointly controlled
assets over the life of the underlying mineral rights using UOP method as
under:
“Goodwill Amortisation: The company amortises goodwill (on
consolidation) based on ‘Unit of Production Method’ considering the
related Proved Reserves.”
31
13. This allowed the company to utilise the value of goodwill over the life
of mineral rights and completely charging off the goodwill over the life of the
reserves.
Change under Indian Accounting Standards (Ind ASs) regime
14. The querist has stated that Indian Accounting Standards (Ind ASs), as
notified by the Ministry of Corporate Affairs (MCA), are mandatorily
applicable for periods beginning on or after 1st April, 2016, with
comparatives for the period ending 31st March, 2016. Also, the ICAI has
issued revised ‘Guidance Note on Accounting for Oil and Gas Producing
Activities (Ind AS)’ to align the oil and gas accounting under Ind AS regime.
15. The querist has further stated that the company had availed transition
exemption under Ind AS 101, ‘First-time Adoption of Indian Accounting
Standards’ and has not applied the principles of Ind AS 103, ‘Business
Combinations’ retrospectively and, therefore, did not fair value the acquisition
of shares in joint ventures (jointly controlled entities under IGAAPs) /
subsidiaries which happened before the transition date of 1 st April, 2015. The
carrying amount of goodwill at the date of transition to Ind AS in accordance
with previous GAAPs (IGAAPs) has been taken as carrying value of the
goodwill in the opening Ind AS balance sheet in accordance with the para C4
(g) and (h) contained in Appendix C to Ind AS 101.
16. According to the querist, prospectively from the transition date, i.e., 1st
April, 2015, acquisition of interest/ share in subsidiary will be accounted for in
accordance with Ind AS 103 and acquisition of interest /share in joint venture
/associate will be accounted for in accordance with Ind AS 28, ‘Investments
in Associates and Joint Ventures’.
17. The company understands that paragraph 32(a) of Ind AS 28
specifically prohibits amortisation of goodwill relating to an associate or a
joint venture. It is noticed that there is no such specific prohibition laid down
by Ind AS 103. It is also noticed that paragraph 10 (b) of Ind AS 36,
Impairment of Assets requires testing of goodwill acquired in a business
combination for impairment, annually.
18. Accordingly, as per the querist, by simple reading of the applicable Ind
ASs, it appears that Ind ASs envisage testing of goodwill annually for
impairment rather than its amortisation. This seems to align with the concept
of fair valuation of acquired assets and liabilities and goodwill/capital reserve
being a residual amount. This however may not be the case where goodwill
32
is carried at historical value in the manner as stated above. Accordingly,

considering the substance over form of the goodwill to be in the nature of
‘acquisition costs’ (as discussed in paragraphs 8 to 13 above), the company
intends to continue amortisation of the goodwill recognised under IGAAPs in
respect of its subsidiaries/ joint ventures (jointly controlled entities under
IGAAPs) over the life of the underlying mineral rights using Unit of
Production method, under Ind ASs also post transition date in accordance
with the same accounting policy as under:
“Goodwill amortisation: The company amortises goodwill (on
consolidation) based on ‘Unit of Production Method’ considering the
related proved reserves.”
B. Query
19. In view of the above facts, the opinion of the Expert Advisory
Committee of the Institute of Chartered Accountants of India is sought on the
appropriate accounting treatment under Ind ASs for amortisation of the
goodwill by the company, viz., whether:
(i) the accounting treatment as suggested in paragraph 18 in
respect of amortisation of goodwill by the company is
appropriate; or
(ii) there is any other appropriate accounting treatment for
amortisation of goodwill.
20. The Committee notes that the basic issue raised in the query relates to
amortisation of carrying amount of goodwill under Ind ASs after the date of
transition. Accordingly, the Committee has considered only this issue and
has not examined any other issue that may arise from the Facts of the Case,
such as, initial recognition of goodwill arising on consolidation under
Accounting Standards notified under Companies (Accounting Standards)
Rules, 2006 and its valuation, correctness of determination of goodwill, etc.
At the outset, the Committee wishes to point out that the opinion expressed
hereinafter, is in the context of Indian Accounting Standards (Ind ASs) and
not in the context of Accounting Standards, notified under the Companies
(Accounting Standards) Rules, 2006 and the same is with regard to
accounting treatment in Consolidated Financial Statements of the Company
and not separate Financial Statement. The Committee also wishes to point
out that although the querist has used the terms, ‘jointly controlled entity’,
33
‘joint operations’ and ‘jointly controlled assets’ interchangeably in respect of

joint ventures for foreign based oil and gas operations, it is presumed that
these joint ventures are ‘jointly controlled entities’ in accordance with the
requirements of AS 27. The Committee also presumes from the Facts of the
Case that the acquisitions of mineral rights/business in the extant case is
within the purview of the requirements of Ind AS 103, ‘Business
Combinations’.
21. The Committee notes from the facts of the case that the company has
availed transition exemption under Ind AS 101, First-time Adoption on Indian
Accounting Standards and has not applied Ind AS 103, Business
Combinations principles retrospectively. The Committee further notes that
the following paragraphs of Appendix C, ‘Exemptions for business
combinations’ to Ind AS 101, First-time Adoption of Indian Accounting
Standards would be relevant in this regard:
“C4 If a first-time adopter does not apply Ind AS 103 retrospectively
to a past business combination, this has the following
consequences for that business combination:
…
(c) The first-time adopter shall exclude from its opening Ind
AS Balance Sheet any item recognised in accordance
with previous GAAP that does not qualify for recognition
as an asset or liability under Ind ASs. The first-time
adopter shall account for the resulting change as follows:
(i) the first-time adopter may have classified a past
business combination as an acquisition and
recognised as an intangible asset an item that does
not qualify for recognition as an asset in
accordance with Ind AS 38, Intangible Assets. It
shall reclassify that item (and, if any, the related
deferred tax and non-controlling interests) as part
of goodwill (unless it deducted goodwill directly
from equity in accordance with previous GAAP, see
(g)(i) and (i) below) or capital reserve to the extent
not exceeding the balance available in that
reserve.
…
34
(g) The carrying amount of goodwill or capital reserve

in the opening Ind AS Balance Sheet shall be its
carrying amount in accordance with previous GAAP
at the date of transition to Ind ASs, after the
following two adjustments:
(i) If required by (c)(i) above, the first-time
adopter shall increase the carrying amount
of goodwill or decrease the carrying amount
of capital reserve when it reclassifies an item
that it recognised as an intangible asset in
accordance with previous GAAP. Similarly, if
(f) above requires the first-time adopter to
recognise an intangible asset that was
subsumed in recognised goodwill or capital
reserve in accordance with previous GAAP,
the first-time adopter shall decrease the
carrying amount of goodwill or increase the
carrying amount of capital reserve
accordingly (and, if applicable, adjust
deferred tax and non-controlling interests).
(ii) Regardless of whether there is any
indication that the goodwill may be impaired,
the first-time adopter shall apply Ind AS 36 in
testing the goodwill for impairment at the
date of transition to Ind ASs and in
recognising any resulting impairment loss in
retained earnings (or, if so required by Ind
AS 36, in revaluation surplus). The
impairment test shall be based on conditions
at the date of transition to Ind ASs.
(h) No other adjustments shall be made to the carrying
amount of goodwill / capital reserve at the date of
transition to Ind ASs. For example, the first-time adopter
shall not restate the carrying amount of goodwill / capital
reserve:
35
(i)
(ii) to adjust previous amortisation of goodwill;
…”
(Emphasis supplied by the Committee)
22. The Committee notes from above that Ind AS 101 specifically provides
that if a first-time adopter does not apply Ind AS 103 retrospectively to a past
business combination then the carrying amount of goodwill in the opening Ind
AS balance sheet shall be its carrying amount in accordance with previous
GAAP at the date of transition to Ind ASs and no adjustments apart from as
required by paragraph C4(c)(i) of Ind AS 101 shall be made to such carrying
amount. Further, the company shall apply Ind AS 36 in testing the goodwill
for impairment at the date of transition to Ind ASs, regardless of whether
there is any indication that the goodwill may be impaired (refer paragraph
C4(g)(ii) reproduced above). In this context, the Committee notes paragraph
10 (b) of Ind AS 36, ‘Impairment of Assets’, which provides as follows:
“10 Irrespective of whether there is any indication of
impairment, an entity shall also:
(a) …
(b) test goodwill acquired in a business combination for
impairment annually in accordance with paragraphs
80–99.”
The Committee further notes from paragraph 3 and B86 of Ind AS 110,
‘Consolidated Financial Statements’ that Ind AS 110 does not deal with the
goodwill arising on a business combination; rather refers to Ind AS 103,
‘Business Combinations’. Similarly, the Committee notes that paragraph 3(f)
of Ind AS 38, ‘Intangible Assets’ also states that it does not apply to goodwill
acquired in business combination and refers to Ind AS 103.
23. The Committee further notes the following paragraph of Ind AS 103,
‘Business Combinations’:
“B63 Examples of other Ind ASs that provide guidance on
subsequently measuring and accounting for assets acquired and
liabilities assumed or incurred in a business combination
include:
36
(a) Ind AS 38 prescribes the accounting for identifiable

intangible assets acquired in a business combination. The
acquirer measures goodwill at the amount recognised at
the acquisition date less any accumulated impairment
losses. Ind AS 36, Impairment of Assets, prescribes the
accounting for impairment losses.
…”
From the above, the Committee notes that Ind AS 103 specifically requires
the carrying amount of goodwill or goodwill acquired under business
combination to be tested for impairment. However, the Committee notes that
it does not contain any specific requirement for amortisation of goodwill
arising on acquisition. Similarly, the Committee notes the following
requirements of Ind AS 28, ‘Investments in Associates and Joint Ventures’:
“32 An investment is accounted for using the equity method from the
date on which it becomes an associate or a joint venture. On
acquisition of the investment, any difference between the cost of
the investment and the entity’s share of the net fair value of the
investee’s identifiable assets and liabilities is accounted for as
follows:
(a) Goodwill relating to an associate or a joint venture is
included in the carrying amount of the investment.
Amortisation of that goodwill is not permitted.
(b) Any excess of the entity’s share of the net fair value of
the investee’s identifiable assets and liabilities over the
cost of the investment is recognised directly in equity as
capital reserve in the period in which the investment is
acquired.
Appropriate adjustments to the entity’s share of the associate’s
or joint venture’s profit or loss after acquisition are made in
order to account, for example, for depreciation of the
depreciable assets based on their fair values at the acquisition
date. Similarly, appropriate adjustments to the entity’s share of
the associate’s or joint venture’s profit or loss after acquisition
are made for impairment losses such as for goodwill or property,
plant and equipment.” (Emphasis supplied by the Committee.)
37
From the above, the Committee note that according to Ind AS 28 Goodwill is
not separately accounted rather included as part of carrying amount of
Investment. Further, the Standard specifically clarifies that amortisation of
goodwill relating to a joint venture is not permitted.
24. In the context of joint ventures, the Committee also notes the following
requirements of Ind AS 101, ‘First-time Adoption of Indian Accounting
Standards’:
“D1 An entity may elect to use one or more of the following
exemptions:
(a) …;
…
(r) joint arrangements (paragraphs D31-D31AL);
(s) …”
“Joint ventures - transition from proportionate consolidation to
the equity method
D31AA When changing from proportionate consolidation to the equity
method, an entity shall recognise its investment in the joint
venture at transition date to Ind ASs. That initial investment
shall be measured as the aggregate of the carrying amounts
of the assets and liabilities that the entity had previously
proportionately consolidated, including any goodwill arising
from acquisition. If the goodwill previously belonged to a
larger cash-generating unit, or to a group of cash-generating
units, the entity shall allocate goodwill to the joint venture on
the basis of the relative carrying amounts of the joint venture
and the cash-generating unit or group of cash-generating
units to which it belonged.
D31AB The balance of the investment in joint venture at the date of
transition to Ind ASs, determined in accordance with
paragraph D31AA above is regarded as the deemed cost of
the investment at initial recognition.
D31AC A first-time adopter shall test investment in joint venture for
impairment in accordance with Ind AS 36 at the date of
transition to Ind ASs, regardless of whether there is any
38
indication that the investment may be impaired. Any resulting

impairment shall be recognised as an adjustment to retained
earnings at the date of transition to Ind ASs. …”
From the above, the Committee notes that where an entity elects to use the
exemption provided under paragraphs D31AA to D31AC of Ind AS 101, as
reproduced above also, the Standard requires to test the investment in joint
venture which comprises of goodwill for impairment only and does not
specify for amortisation.
Accordingly, on a holistic reading of the above paragraphs, the Committee is
of the view that the carrying amount of goodwill (arising on consolidation of
subsidiary or jointly controlled entity under the Accounting Standards notified
under the Companies (Accounting Standards) Rules, 2006) on the date of
transition cannot be amortised under Ind ASs.
D. Opinion
the issues raised by the querist in paragraph 19 above:
(i) and (ii) No, the accounting treatment as suggested in paragraph
18 in respect of amortisation of goodwill by the company is
not appropriate. The carrying amount of goodwill (arising
on consolidation of subsidiary or jointly controlled entity
under the Accounting Standards notified under the
Companies (Accounting Standards) Rules, 2006) on the
date of transition cannot be amortised under Ind ASs and
the carrying amount of goodwill or goodwill acquired under
business combination will have to be tested for impairment
periodically.
__________
39
Query No. 4
Subject: Classification of investments in units of debt mutual funds
under Ind AS 109.1
1. X Ltd. is a company incorporated in India and its shares are listed on
Bombay Stock Exchange and National Stock Exchange. It is engaged in
software services and has made investments in financial assets which are
essentially in the form of investments in Fixed Maturity Plans (FMPs), Liquid
Mutual Funds, Equity Mutual Funds, Tax Free Bonds, and Preference
Shares.
2. The classification and accounting treatment of the financial assets is
dealt with in Indian Accounting Standard (Ind AS) 109, ‘Financial
Instruments’. A financial asset can fall into one of the following three
categories (see Section 4.1 of Ind AS 109) based on the entity’s business
model for managing the financial assets and the contractual cash flow
characteristics of the financial asset:
 Measured at amortised cost
 Measured at fair value through other comprehensive income
 Measured at fair value through profit or loss
An entity’s business model for managing financial assets could be holding
the financial assets in order to collect the contractual cash flows or selling
the financial assets or both (see paragraph B4.1.2A of Ind AS 109).
Measured at amortised Cost:
Paragraph 4.1.2 of Ind AS 109 is reproduced below:
“4.1.2 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
40
(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.
Paragraphs B4.1.1-B4.1.26 provide guidance on how to apply
these conditions.”
Although the objective may be to hold financial assets to collect contractual
cash flows, the entity need not hold all of those instruments until maturity.
The business model may be to hold assets to collect contractual cash flows
even if the entity sells financial assets when there is an increase in the
asset’s credit risk (see paragraphs B4.1.3 and B4.1.3A of Ind AS 109).
Measured at fair value through other comprehensive income:
Paragraph 4.1.2A of Ind AS 109 is reproduced below:
“4.1.2A A financial asset shall be measured at fair value through
other comprehensive income if both of the following
conditions are met:
whose objective is achieved by both collecting
contractual cash flows and selling financial assets
and
amount outstanding.
Measured at fair value through profit or loss:
“4.1.4 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
41
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 (see paragraphs
5.7.5-5.7.6).”
As per paragraph 5.7.5 of Ind AS 109, the equity instrument should not be
held for trading, if election is made to present fair value changes in other
comprehensive income.
3. The scope of Ind AS 32, ‘Financial Instruments: Presentation’ includes
financial instruments issued by an entity that meet the definition of an equity
instrument. The following extracts from paragraph 11 of Ind AS 32 are
relevant in this regard:
“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) …
(d) …”
“An equity instrument is any contract that evidences a residual
interest in the assets of an entity after deducting all of its
liabilities.”
Examples of equity instruments include instruments that impose on the entity
an obligation to deliver to another party a pro rata share of the net assets of
the entity only on liquidation. (See paragraph AG13 and paragraphs 16C and
16D of Ind AS 109).
4. X Ltd. has a portfolio of investments in debt mutual funds through
FMP/Liquid/ short-term/ultra short-term schemes. Essentially, the debt funds
carry relatively low to moderate risks. FMPs are close-ended mutual funds,
which are redeemable only on maturity. FMPs seek to generate income by
investing in a portfolio of fixed income securities maturing on or before the
maturity of the scheme and the cash flow which the Asset Management
42
Company (hereinafter referred to as ‘the AMC’) gets is largely for principal

and interest. The AMC invests in relatively safe debt instruments and
generally one can infer the indicative return. The offer document to the
scheme typically provides the maturity period, the investment objective,
investment strategy, the asset allocation pattern, investment associated risks
and strategies to manage the risks. (Sample offer document for a close -
ended debt fund has been furnished by the querist for the perusal of the
Committee).
5. As per the querist, on analysis of the sample offer document, the
FMPs may meet the ‘Hold to Collect contractual cash flows’ test, since, the
investments are largely held to maturity for collecting contractual cash flows
rather than to realise benefits through fair value changes/sale. Though the
payments made by the fund to the holder (in this case X Ltd.) represent
principal and interest and even though there is no pre-agreed contractual
cash flow, the redemption value is dependent on the performance of the
underlying securities and any default in principal or interest could affect the
fair value. The investments in liquid/ultra short-term/ short-term plans also
have the same characteristics except that these are open-ended schemes. X
Ltd. does not hold these investments to maturity but exits depending on the
cash flow requirement and books the resultant profit or loss. Given that the
investment in the debt funds carry similar low to moderate risks, X Ltd. would
like to examine considering them as a single portfolio for the purpose of
classification and application of Ind AS 109. If one were to consider the
investment in debt funds as a single portfolio, cash flow would be generated
both through holding securities until their maturity and trading. Further, the
payments received by the AMC are primarily for the principal and interest,
which finally get distributed to the unitholders (X Ltd. in this case). It is
pertinent to note that the cash flow for the unitholders is primarily through the
contractual cash flows received by the AMC consisting of principal and
interest.
B. Query
as to whether the investments in debt funds (FMPs and liquid/short-term) can
be treated as a single portfolio for the purpose of characterisation and
application of Ind AS 109 and whether in such a case the unrealised gains or
losses on account of fair valuation can be routed through other
43

to classification and treatment of investments in units of certain debt mutual
funds (hereinafter referred to as ‘investments in debt funds’) under Indian
Accounting Standard (Ind AS) 109, ‘Financial Instruments’, notified under the
Companies (Indian Accounting Standards) Rules, 2015 as amended till date
(hereinafter referred to as ‘the Rules’). Further, the Committee presumes that
the querist’s intention in Query in paragraph 6 above is to evaluate possibility
of treating its investments in debt funds as a single portfolio for the purpose
of classifying such investments as subsequently measured at fair value
through other comprehensive income. The Committee has, therefore,
considered only this issue and has not examined any other issue that may be
contained in the Facts of the Case. The Committee notes that investments in
units of mutual funds meet the definition of financial assets given in
paragraph 11 of Ind AS 32, ‘Financial Instruments: Presentation’, notified
under the Rules, (reproduced by the querist in paragraph 3 above). At the
outset, the Committee wishes to point out that Asset Management Company
(hereinafter referred to as ‘the AMC’) and the mutual funds managed by the
AMC are distinct entities. Hereinafter, any reference to AMC should be
understood in the context of relevant funds managed by the AMC. The
Committee presumes that X Ltd. has not designated any investment in the
debt funds in a hedging relationship. Further, the Committee presumes that X
Ltd. has not designated any investment as measured at fair value through
profit or loss to eliminate or significantly reduce a measurement or
recognition inconsistency, as permitted in paragraph 4.1.5 of Ind AS 109.
From the sample offer document furnished by the querist, the Committee
notes that investments in the close-ended debt fund (which is a Fixed
Maturity Plan (‘FMP’)) can be redeemed only at the time of maturity or sold
before that date through the relevant stock exchange on which the units of
the Scheme are listed. ‘Switch-out’ (which, in substance, represents
redemption and reinvestment of the redemption proceeds in another scheme)
is possible only based on ‘Net Asset Value’ (‘NAV’) on the date of maturity.
The Committee also notes that while the sample offer document for the
close-ended debt fund states that the mutual fund or AMC and its
empanelled brokers are prohibited from giving any indicative portfolio and
indicative yield in any communication, as per the querist, generally one can
infer the indicative return. However, the AMC shall, on its website, disclose
portfolio of all Schemes on a monthly basis as on the last day of month, on or
44
before tenth day of the succeeding month. Further, in the case of the close -
ended debt fund, there are two options viz. cumulative option and dividend
option. In the case of dividend option, half-yearly dividend frequency will be
available, subject to the availability of distributable surplus, while the Trustee
at its sole discretion may also declare interim dividend. For open-ended debt
funds, no sample document has been furnished by the querist. However, it is
obvious that in the case of open-ended debt funds, redemption is possible as
and when opted for by the unitholder and dividend frequency (in case of
dividend option) will be as specified in the scheme. Incidentally, as per the
querist, the ‘FMPs’ may meet the ‘Hold to Collect contractual cash flows’ test,
since, the investments are largely held to maturity for collecting contractual
cash flows rather than to realise benefits through fair value changes/sale
(see paragraph 5 above). Here, it appears that the term ‘FMPs’ should read
as ‘investments in FMPs’.
8. The Committee notes that the classifications under Ind AS 109
determine their subsequent measurement. In this regard, paragraph 4.1.1 of
Ind AS 109 is reproduced below:
“4.1.1 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."
From the above, the Committee notes that there are two tests to be
performed for classification of financial assets based on their subsequent
measurement (i.e., measurement after initial recognition) viz. ‘Business
model test’ and ‘Contractual cash flow characteristics test’. The conditions for
subsequent measurement of financial assets at amortised cost, fair value
through other comprehensive income and fair value through profit or loss
based on the assessment of the above two tests are prescribed in
paragraphs of 4.1.2, 4.1.2A and 4.1.4 of Ind AS 109 respectively, reproduced
by the querist in paragraph 2 above, while paragraph 4.1.3 of Ind AS 109
deals with meaning of ‘principal’ and ‘interest’ for the purposes of paragraphs
45
4.1.2 and 4.1.2A of Ind AS 109. Hereinafter, reference to these measurement

bases should be understood in the context of subsequent measurement.
9. The Committee first examines whether the investments in debt funds
meet the business model test prescribed in paragraph 4.1.2 or 4.1.2A of Ind
AS 109. In this regard, the Committee notes the principles elaborated in
paragraphs B4.1.1-B4.1.6 of Ind AS 109. The key aspects that emerge from
the analysis of prescriptions in these paragraphs are summarised below:
(a) An entity’s business model is determined at a level that reflects
how groups of financial assets are managed together to achieve
a particular business objective. The entity’s business model
does not depend on management’s intentions for an individual
instrument. Further, since an entity may have more than one
business model for managing its financial instruments, the
classification need not be determined at the reporting entity
level. The business model is as determined by the entity’s key
management personnel (as defined in Ind AS 24 Related Party
Disclosures).
(b) In some circumstances, it may be appropriate to separate a
portfolio of financial assets into subportfolios in order to reflect
the level at which an entity manages those financial assets. For
example, an entity may hold similar or identical financial assets
and it may classify those assets into subportfolios, some of
which may be portfolios with an objective to hold to collect
contractual cash flows (see paragraph 4.1.2 of Ind AS 109) and
others may be classified into portfolios whose business model
objective is achieved both by holding those assets to collect
contractual cash flows as well as by selling them (see
paragraph 4.1.2A of Ind AS 109).
(c) An entity’s business model for managing financial assets is a
matter of fact and not merely an assertion. It is typically
observable through the activities that the entity undertakes to
achieve the objective of the business model.
(d) Although the objective of an entity’s business model may be to
hold financial assets in order to collect contractual cash flows,
the entity need not hold all of those instruments until maturity.
Therefore, some amount of sales before contractual maturity is
46
permitted even in case of business model whose objective is to

hold financial assets to collect contractual cash flows only.
However, the frequency, value and timing of sales and the
reasons for such sales before maturity are critical factors which
require analysis and use of judgement by the entity’s
management.
The Committee observes from the above analysis that the classification of
financial assets into different portfolios for business model test is based on
the objective of the business model i.e., whether to hold the financial assets
to collect contractual cash flows or to hold the financial assets to collect
contractual cash flows as well as to sell the financial assets or to hold
financial assets for other purposes, for example, to realise cash flows
through the sale of the financial assets. It is not in accordance with the
principles of Ind AS 109 to create single portfolio or a particular subp ortfolio
comprising financial assets which are managed under different business
models. As stated by the querist, investments in FMPs are largely held to
maturity to collect contractual cash flows rather than to realise benefits
through fair value changes/sale. These investments would meet the criteria
for inclusion in a portfolio whose business model objective is achieved by
collecting contractual cash flows only. Thus, these investments meet the
business model test prescribed in paragraph 4.1.2(a) of Ind AS 109. The
investments in liquid/ultra short-term/ short-term plans are not held to
maturity but the entity exits depending on the cash flow requirement and
books the resultant profit or loss. The Committee notes that paragraph
B4.1.4A of Ind AS 109 specifically cites the example of objective of the
business model to manage everyday liquidity needs or to match the duration
of the financial assets to the duration of the liabilities that those assets are
funding and states that to achieve such an objective, the entity will both
collect contractual cash flows and sell financial assets. Hence, the
investments in liquid/ultra short-term/ short-term plans would meet the
criteria for inclusion in a portfolio whose business model objective is
achieved by both collecting contractual cash flows and selling financial
assets. Thus, these investments meet the business model test prescribed in
paragraph 4.1.2A(a) of Ind AS 109. In reaching this conclusion, the
Committee presumes that such investments do not constitute a portfolio of
financial assets that is managed and whose performance is evaluated on a
fair value basis, since, as specifically stated in paragraph B4.1.6 of Ind AS
109, such a portfolio is neither held to collect contractual cash flows nor held
47
both to collect contractual cash flows and to sell financial assets and
consequently, such a portfolio must be measured at fair value through profit
or loss.
Based on the above, the Committee concludes that the objective of business
model of investments in FMPs is different from the objective of business
model of investments in liquid/ultra short-term/ short-term plans.
Consequently, all these investments cannot be grouped into a single portfolio
and classified as subsequently measured at fair value through other
10. In the extant case, though it is not necessary to evaluate compliance
with cash flow characteristics test, the Committee considered it appropriate
to elaborate this as it has relevance for classification these two portfolio
separately. Thus, Committee now examines application of cash flow
characteristics test to investments in close-ended debt funds (FMP). For this
purpose, the Committee is of the view that the company has to ‘look through’
the instruments in which the close-ended debt funds have invested. From the
sample offer document furnished by the querist, the Committee notes that
the investment objective of the scheme is to seek to generate income by
investing in a portfolio of fixed income securities/debt instruments maturing
on or before the maturity of the scheme and that the investments will be in
debt instruments including government securities and money market
instruments. The allocation may vary during the tenure of the scheme
depending on some instances like coupon inflow, calling of or buy-back of
the instrument by the issuer and anticipation of any adverse credit event. In
case of downgrade of a particular instrument, the Fund manager will
endeavour to rebalance the portfolio on a best effort basis. There will be no
exposure to derivatives. While the contractual cash flows from such
instruments are expected to include payments of principal and interest on
principal outstanding, it has to be examined as to whether such cash flows
consist of solely payments of principal and interest on principal outstanding
(hereinafter referred to as ‘SPPI’), having regard to the provisions of
paragraph 4.1.3 and paragraphs B4.1.7-B4.1.26 of Ind AS 109. Some of the
key requirements in this regard are outlined below:
(a) Contractual cash flows that are SPPI are consistent with a basic
lending arrangement. Hence, elements of interest can include
consideration for time value of money, credit risk, other basic
lending risks, for example, liquidity risk, costs associated with
48
holding the financial asset for a particular period of time and

profit margin that is consistent with a basic lending
arrangement.
(b) Principal is the fair value of the financial asset at initial
recognition. This may change subsequently if there are
repayments of principal.
(c) An entity should assess whether contractual cash flows are
SPPI for the currency in which the financial asset is
denominated.
(d) Financial assets with leverage features do not meet the SPPI
test since leverage increases the variability of the contractual
cash flows with the result that they do not have the economic
characteristic of interest.
(e) Contractual terms that change the timing or amount of
contractual cash flows should be analysed to determine whether
they meet the SPPI test. For making this determination, the
entity should assess the contractual cash flows that could arise
both before, and after, the change in contractual cash flows and
nature of contingent event that would change the timing or
amount of contractual cash flows. For example, in case of
prepayment features, the SPPI test is met, if the prepayment
amount substantially represents unpaid amount of principal and
interest on principal outstanding, which may include reasonable
additional compensation for the early termination of the contract.
If the contractual cash flows of the instruments in which the close-ended debt
funds invest meet the ‘SPPI’ test, then, the cash flow characteristics test
prescribed in paragraph 4.1.2(b) of Ind AS 109 is met for investments in
close-ended debt funds. This is because the cash flows from investments in
close-ended debt funds originate from the cash flows of the debt instruments
held by such funds. In this situation, since business model test prescribed in
paragraph 4.1.2(a) of Ind AS 109 is also met (see paragraph 9 above),
investments in close-ended debt funds should be measured at amortised
cost in accordance paragraph 4.1.2 of Ind AS 109. If the cash flow
characteristics test prescribed in paragraph 4.1.2(b) of Ind AS 109 is not met
for the investments in close-ended debt funds in the manner explained
above, then, even though the business model test prescribed in paragraph
49
4.1.2(a) of Ind AS 109 is met, such investments should be measured at fair

value through profit or loss in accordance with paragraph 4.1.4 of Ind AS
109. While making the analysis of cash flow characteristics test, the fact that
the units may be traded on a recognised stock exchange (if the scheme
provides for the facility) should be disregarded. This is because in the case
of close-ended debt funds, redemption and switch-out can occur only on
maturity of the scheme. Hence, contractual cash flows of the instruments
held by such funds and, consequently investments in such funds, are not
affected by the quoted prices for the units in the relevant fund on the
recognised stock exchange.
In respect of investments in open-ended debt funds (liquid/ultra short-term/
short-term plans), the cash flow characteristics test mentioned in paragraph
4.1.2A(b) is not met. The reason is that its redemption value is based on
NAV which is in turn based on future value of the underlying investments
which is not consistent with the basic lending arrangement. Secondly, fund
managers normally have discretion to buy and sell the underlying
instruments to generate better yield/return for unit holders. Therefore, the
NAV/redemption value is likely to include gain or loss on sale of underlying
instruments which is not consistent with the basic lending arrangements.
Consequently, the contractual cash flow characteristics test prescribed in
paragraph 4.1.2A(b) of Ind AS 109 is not met for investments in open-ended
debt funds, even though the business model test prescribed in paragraph
4.1.2A(a) of Ind AS 109 is met for such investments (see paragraph 9
above). Hence, the Committee is of the view that such investments should be
measured at fair value through profit or loss in accordance paragraph 4.1.4
of Ind AS 109.
11. The Committee wishes to point out that investments in units of mutual
funds are not investments in equity instruments as defined in Ind AS 32,
simply because they may represent residual interest in the funds. This is
because irrespective of classification of units by the mutual fund, there is
contractual obligation on the part of the Fund to deliver cash on redemption
of the units or to deliver units of another scheme on ‘switch-out’, which
involves an obligation to deliver cash on behalf of the unitholder to the
management of the other scheme. The units are, therefore, financial
liabilities, having regard to the definition of the term ‘Financial liability’ given
in paragraph 11 of Ind AS 32, which reads as below:
50
“A financial liability is any liability that is:

(a) a contractual obligation:
(i) to deliver cash or another financial asset to another
entity; or
(ii) to exchange financial assets or financial liabilities
with another entity under conditions that are
potentially unfavourable to the entity; or
(b) …
As an exception, an instrument that meets the definition of a
financial liability is classified as an equity instrument if it has
all the features and meets the conditions in paragraphs 16A
and 16B or paragraphs 16C and 16D.
…”
The Committee is of the view that the exception requiring classification of
certain financial instruments meeting the definition of a financial liability as
equity by the issuer in accordance with paragraphs 16A-16D of Ind AS 32
cannot be applied by the holder of such instruments while applying Ind AS
109. This is because Ind AS 109 does not provide for an exception similar to
the exception contained in Ind AS 32. In reaching this conclusion, the
Committee relies on the views of the IFRS Interpretations Committee
published in ‘IFRIC Update’, September 2017, duly supported by paragraph
BC5.21 of International Financial Reporting Standard 9, ‘Financial
Instruments’.
Consequently, the election to recognise fair value changes of particular
investments in equity instruments permitted in paragraph 4.1.4 of Ind AS 109
read with paragraph 5.7.5 of Ind AS 109 is not available for investments in
debt funds.
D. Opinion
12. On the basis of the above, the Committee is of the following opinion
that all investments in (units of) debt funds (FMPs and liquid/short-term)
cannot be treated as a single portfolio for the purposes of assessment of
business model test and consequent classification as fair value through other
comprehensive income under Ind AS 109. They should be measured as
explained in paragraph 10 above.
__________
51
Query No. 5
Subject: Treatment of investments in units of equity mutual funds
under Ind AS 109.1
1. X Ltd. is a company incorporated in India and its shares are listed on
Bombay Stock Exchange and National Stock Exchange. It is engaged in
software services and has made investments in financial assets which are
essentially in the form of investments in Fixed Maturity Plans, Liquid Mutual
Funds, Equity Mutual Funds, Tax Free Bonds, and Preference Shares.
2. The classification and accounting treatment of the financial assets is
dealt with in Indian Accounting Standard (Ind AS) 109, ‘Financial
Instruments’. A financial asset can fall into one of the following three
categories (see Section 4.1 of Ind AS 109) based on the entity’s business
model for managing the financial assets and the contractual cash flow
characteristics of the financial asset:
 Measured at amortised cost
 Measured at fair value through other comprehensive income
 Measured at fair value through profit or loss
An entity’s business model for managing financial assets could be holding
the financial assets in order to collect the contractual cash flows or selling
the financial assets or both (see paragraph B4.1.2A of Ind AS 109).
Measured at amortised Cost:
“4.1.2 A financial asset shall be measured at amortised cost if
both of the following conditions are met:
whose objective is to hold financial assets in order to
collect contractual cash flows and
52

amount outstanding.
Although the objective may be to hold financial assets to collect contractual
cash flows, the entity need not hold all of those instruments until maturity.
The business model may be to hold assets to collect contractual cash flows
even if the entity sells financial assets when there is an increase in the
asset’s credit risk (see paragraphs B4.1.3 and B4.1.3A of Ind AS 109).
Measured at fair value through other comprehensive income:
Paragraph 4.1.2A of Ind AS 109 is reproduced below:
“4.1.2A A financial asset shall be measured at fair value through
other comprehensive income if both of the following
conditions are met:
whose objective is achieved by both collecting
contractual cash flows and selling financial assets
and
amount outstanding.
Measured at fair value through profit or loss:
53

5.7.5-5.7.6).”
As per paragraph 5.7.5 of Ind AS 109, the equity instrument should not be
held for trading, if election is made to present fair value changes in other
3. The scope of Ind AS 32, ‘Financial Instruments: Presentation’ includes
financial instruments issued by an entity that meet the definition of an equity
instrument. The following extracts from paragraph 11 of Ind AS 32 are
relevant in this regard:
“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) …
(d) …”
“An equity instrument is any contract that evidences a residual
interest in the assets of an entity after deducting all of its
liabilities.”
Examples of equity instruments include instruments that impose on the entity
an obligation to deliver to another party a pro rata share of the net assets of
the entity only on liquidation. (See paragraph AG13 and paragraphs 16C and
16D of Ind AS 109).
4. Equity mutual funds are open-ended equity schemes which aim to
generate capital appreciation, generally long-term, to unitholders through
investment in equity and equity related securities. The Scheme Information
Document discloses the investment objective, risk factors and other
information about the scheme. (Sample Consolidated Scheme Information
Document for various open-ended equity funds has been furnished by the
querist for the perusal of the Committee). The Asset Management Company
(hereinafter referred to as ‘the AMC’) invests in equity and equity related
54
securities on behalf of mutual fund. A unitholder of the mutual fund

participates in the investment through subscription of units, whose underlying
value is derived from such investments in equities. In a broader economic
sense, investment in equity mutual fund is similar to direct investment in
equity. The investor indirectly carries similar risks as they would carry when
investing directly in equity. However, if one were to limit by the accounting
definition used in Ind AS 32, residual interest in the assets of the entities
invested by the mutual fund would be with the mutual fund and not with the
unitholder. This is, however, a pass through and the residual benefits or
otherwise indirectly flow to the investor in the units (X Ltd. in this case)
eventually. It is important to note that X Ltd. generally holds the investments
in equity mutual funds for capital appreciation rather than benefit out of
trading.
B. Query
as to whether the investments in equity mutual funds can be treated as
investments in equity instruments for the purpose of application of Ind AS
109 and whether in such case the fair value changes of such investments
can be routed through other comprehensive income.
to treatment of investments in units of certain equity mutual funds
(hereinafter referred to as ‘investments in equity funds’) as investments in
equity instruments with possible recognition of fair value changes in other
comprehensive income in accordance with Indian Accounting Standard (Ind
AS) 109, ‘Financial Instruments’, notified under the Companies (Indian
Accounting Standards) Rules, 2015 as amended till date (hereinafter referred
to as ‘the Rules’). The Committee has, therefore, considered only this issue
and has not examined any other issue that may be contained in the Facts of
the Case. The Committee notes that investments in units of mutual funds
meet the definition of financial assets given in paragraph 11 of Ind AS 32,
‘Financial Instruments: Presentation’, notified under the Rules, (reproduced
by the querist in paragraph 3 above). At the outset, the Committee wishes to
point out that Asset Management Company (hereinafter referred to as ‘the
AMC’) and the mutual funds managed by the AMC are distinct entities.
Hereinafter, any reference to AMC should be understood in the context of
55
relevant funds managed by the AMC. The Committee presumes that X Ltd.
has not designated any investment in the equity funds in a hedging
relationship. Further, the Committee presumes that X Ltd. has not designated
any investment as measured at fair value through profit or loss to eliminate
or significantly reduce a measurement or recognition inconsistency, as
permitted in paragraph 4.1.5 of Ind AS 109. From the sample Consolidated
Scheme Information Document for various open-ended equity funds
furnished by the querist, the Committee notes that a portion of investments of
a particular Scheme can be in debt instruments also. (The Committee
presumes that X Ltd. invests in open-ended equity funds only and, hence,
hereinafter, unless otherwise stated, any reference to equity funds is made in
the context of open-ended equity funds only). The options under the
Schemes could be growth option and dividend option with dividend payout
and dividend reinvestment sub-options. Distribution of dividend and the
frequency of distribution will depend, inter-alia, on the availability of
distributable surplus and will be entirely at the discretion of the Trustee.
Redemption and switch-out are possible. ‘Lock-in’ period is applicable only
for Tax Plan under ‘Equity Linked Saving Scheme Guidelines’. Generally,
redemption is at ‘Net Asset Value’ of the units, subject to ‘exit load’, if
applicable.
7. The Committee notes paragraphs 4.1.4, 5.7.5 and 5.7.6 of Ind AS 109,
reproduced below:
5.7.5-5.7.6).”
“5.7.5 At initial recognition, an entity may make an irrevocable
election to present in other comprehensive income
subsequent changes in the fair value of an investment in an
equity instrument within the scope of this Standard that is
neither held for trading nor contingent consideration
56
recognised by an acquirer in a business combination to

which Ind AS 103 applies. (See paragraph B5.7.3 for
guidance on foreign exchange gains or losses.)
5.7.6 If an entity makes the election in paragraph 5.7.5, it shall
recognise in profit or loss dividends from that investment in
accordance with paragraph 5.7.1A.”
Further, the Committee notes the definition of equity instrument given in Ind
AS 32, and reproduced by the querist in paragraph 3 above. In addition, the
Committee notes that as an exception, paragraph 11 of Ind AS 32 requires
certain financial instruments meeting the definition of a financial liability to be
classified as equity instrument by the issuer in accordance with paragraphs
16A-16D of that Standard. (Paragraphs 16A-16B of Ind AS 32 deal with
certain ‘puttable instruments’ while paragraphs 16C-16D of Ind AS 32 deal
with certain instruments imposing a contractual obligation on the issuing
entity to deliver to another entity a pro rata share of its net assets only on
liquidation). Subject to meeting the prescribed conditions, it is possible that
units of equity mutual funds may meet the conditions prescribed by
paragraphs 16A-16D of Ind AS 32 and the mutual fund issuing such financial
instruments should, subject to applicable regulatory requirements, classify
such units as its equity instruments. The term ‘equity instruments’ in
paragraph 4.1.4 of Ind AS 109, reproduced above, is italicised, which means
that it is a defined term. Appendix A of Ind AS 109 makes cross-reference to
paragraph 11 of Ind AS 32 for the definition of that term.
8. The Committee notes that the exceptions given in paragraphs 16A-
16D of Ind AS 32 do not change the fundamental definition of equity
instrument given in that Standard. Paragraph 18(b) of Ind AS 32, which
specifically cites the example of open-ended mutual funds, and paragraph 19
of Ind AS 32 might give an impression as if financial instruments classified as
equity instruments in accordance with paragraphs 16A-16D of Ind AS 32 also
meet the definition of equity instrument. However, this is not conveyed by
paragraph 11 of Ind AS 32, which, inter alia, reads, “As an exception, an
instrument that meets the definition of a financial liability is classified
as an equity instrument, if it has all the features and meets the
conditions in paragraphs 16A and 16B or paragraphs 16C and 16D”.
[Emphasis, supplied by the Committee]. Appendix A to Ind AS 109 (‘Defined
terms’) makes cross-reference to Ind AS 32 for the definition of equity
instrument and states, inter alia, that the term ‘equity instrument’ is used in
57
Ind AS 109 with the meaning specified in Ind AS 32. Accordingly, only
investments that meet the definition of equity instrument of the issuer, as
given in Ind AS 32 can be considered as investment in equity instruments for
the purposes of paragraphs 4.1.4 and 5.7.5 of Ind AS 109. As per paragraph
16 of Ind AS 32, the basic feature of an equity instrument is absence of
contractual obligation to deliver cash or another financial asset to another
entity or to exchange financial assets or financial liabilities with another entity
under conditions that are potentially unfavourable to the issuer. This is in line
with the definition of financial liability given in paragraph 11 of Ind AS 32,
which reads as below:
“A financial liability is any liability that is:
(a) a contractual obligation:
(i) to deliver cash or another financial asset to another
entity; or
(ii) to exchange financial assets or financial liabilities
with another entity under conditions that are
potentially unfavourable to the entity; or
(b) …
As an exception…”
The Committee is of the view that the exception requiring classification of
certain financial instruments meeting the definition of a financial liability as
equity by the issuer in accordance with paragraphs 16A-16D of Ind AS 32
cannot be applied by the holder of such instruments while applying Ind AS
109. This is because Ind AS 109 does not provide for an exception similar to
the exception contained in Ind AS 32. In reaching this conclusion, the
Committee relies on the views of the IFRS Interpretations Committee
published in ‘IFRIC Update’, September 2017, duly supported by paragraph
BC5.21 of International Financial Reporting Standard 9, ‘Financial
Instruments’. Hence, it is not necessary to examine whether in the extant
case, the investments in equity funds answer the description of the financial
instruments mentioned in paragraphs 16A-16B of Ind AS 32 (or paragraphs
16C-16D in case of close-ended equity funds, if any). In the extant case, X
Ltd. invests in the units of the equity funds and not in the equity (shares)
issued by the AMC. The equity funds issue only units and not equity shares.
There is contractual obligation on the part of the equity fund to deliver cash
on redemption of the units or to deliver units of another scheme (which are
58
financial assets) on ‘switch-out’. Even if the units of the equity fund may
represent a right to the residual interest in the assets of the fund available to
the holders of the units (the querist’s discussion in paragraph 4 above on
residual interest in the assets of the entities in which the equity fund has
invested is not relevant) because of the link between redemption and ‘Net
Asset Value’ of the units, the ability of the unitholders to put back the units to
the Fund (subject to ‘lock-in’ period, if applicable in some cases (see
paragraph 6 above)) for cash or units of another scheme (which are financial
assets) in case of switch-out means that the units of the open-ended equity
fund meet the definition of a financial liability from the perspective of the
issuer, given in paragraph 11 of Ind AS 32 (reproduced above), irrespective
of their classification by the issuer. In the case of open-ended funds, mere
fact that contractual obligation on the part of the issuer to deliver cash (or
issue units of another scheme in the case of switch-out) depends on the
exercise of the redemption/ switch-out option by the unitholders does not
mean that the issuer has an unconditional right to avoid such an obligation.
This is equally applicable for units of close-ended equity funds, since,
redemption or switch-out is certain to occur on the maturity date of such
funds. The classification of such units in the financial statements of the funds
is irrelevant. In the case of dividend option, the existence of discretion on the
part of Trustee to declare dividend does not alter the position. This is
because if dividend is not declared, it will be inbuilt in ‘Net Asset Value’ of the
units, which is payable on redemption (either directly or in substance in the
case of ‘switch-out’). Hence, the Committee is of the view that irrespective of
classification of units in the financial statements of the funds, investments in
equity funds cannot be treated as investments in equity instruments by the
holder of mutual fund units for the purposes of Ind AS 109 and,
consequently, the election to recognise fair value changes of particular
investments in equity instruments permitted in paragraph 4.1.4 of Ind AS 109
read with paragraph 5.7.5 of Ind AS 109 is not available for investments in
equity funds, even if the fund itself invests entirely in equity and equity -
related securities. Incidentally, the Committee wishes to point out that in the
case of equity fund schemes, a portion of the investments made by the fund
can be in debt instruments also (see paragraph 6 above). The treatment of
such investments is discussed in paragraph 9 below.
9. The Committee notes that in the extant case investments in equity
funds are held generally for capital appreciation rather than for trading
purposes. However, it is obvious that irrespective of the way such
investments are managed, the contractual cash flows from such investments
59
do not consist of solely payments of principal and interest on the principal

amount outstanding. The contractual cash flows from such investments
depend on the cash flows to the fund from its investments which are mainly
in equity and equity related securities. Hence, such investments cannot be
measured at amortised cost in accordance with paragraph 4.1.2 of Ind AS
109 or at fair value through other comprehensive income in accordance with
paragraph 4.1.2A of Ind AS 109. Further, any embedded derivative in such
investments, even if not closely related to the host contract, cannot be
separated because paragraph 4.3.2 of Ind AS 109, in effect, prohibits
separation of embedded derivatives from assets within the scope of that
Standard and requires application of paragraphs 4.1.4-4.1.5 of that Standard
to the entire host contract. Consequently, entire investments in equity mutual
funds should be measured at fair value through profit or loss (without
separation of any embedded derivatives) in accordance with paragraph 4.1.4
of Ind AS 109, despite the fact X Ltd. generally holds such investments for
capital appreciation rather than for trading purposes.
D. Opinion
10. On the basis of the above, the Committee is of the opinion that
investments in (units of) equity mutual funds cannot be treated as
investments in equity instruments for the purposes of application of exception
permitted in paragraph 5.7.5 read with paragraph 4.1.4 of Ind AS 109 for
particular equity investments. Consequently, the question of routing the fair
value changes of such investments through other comprehensive income
does not arise at all.
__________
Query No. 6
Subject: Treatment of disputed amount (Principal and Interest) in
respect of cases pending before various regulatory
authorities.1
1. The company (hereinafter referred to as the ‘company’) is a central
public sector undertaking under the Ministry of Petroleum & Natural Gas. The
60
company is engaged in engineering consultancy services and execution of

turnkey contracts in the field of petroleum refineries, pipelines, oil & gas
processing, petrochemicals, offshore structures and platforms, ports and
terminals, metallurgy, fertilizers, power, highways and bridges, airports and
intelligent buildings and urban development. The company being a listed
company and having net worth of more than Rs.500 crore, has prepared and
presented its financial statements for the year ended 31 st March 2017 as per
Ind AS.
2. The querist has stated that in the note - 40 forming part of financial
statements of the company for the year ended 31 march 2017, the company
had disclosed the information with respect to contingent liability as on 31
March 2017 (relevant extracts have been separately supplied by the querist
for the perusal of the Committee).
3. The querist has stated that the disclosure with respect to contingent
liability includes:
(a) Income Tax (IT) department is in appeal against tax demand of
Rs. 373.83 Lakhs with Income Tax Appellate Tribunal, against
the Commissioner of Income Tax (Appeals) orders in the
company’s favour for various assessment years detailed below:
Assessment Amount Amount Amount
Year (Rs. in (Rs. in Lakhs) (Rs. in
Lakhs) 31 March Lakhs)
31 March 2016 1 April 2015
2017
2002-03 204.22 204.22 204.22
2004-05 76.07 76.07 76.07
2010-11 - 32.26 32.26
2011-12 50.82 50.82 -
2012-13 42.72 - -
Total 373.83 363.37 312.55
(b) The company has filed a writ petition before Hon’ble Andhra
Pradesh High Court against the VAT assessment order of
commercial tax officer dated 27 August 2016 levying tax of Rs.
6,999.17 Lakhs for the period July 2011 to March 2014.
61
(c) The company has filed an appeal against the order of Additional
Commissioner (Appeal), Mathura before Sales Tax Tribunal,
Agra, which has been subsequently transferred to Sales Tax
Tribunal, Noida, for an amount of Rs. 18.71 Lakhs (previous
year 31 March 2016 and 1 April 2015 : Rs. 18.71 Lakhs) on
account of entry tax for the year 1999-2000 against which the
company has deposited an amount of Rs. 5.01 Lakhs (previous
year 31 March 2016 and 1 April 2015 : Rs. 5.01 lakhs).
4. The querist has informed that during the course of audit of accounts of
the company for the year ended 31 March 2017, Office of the Director
General of Commercial Audit and Ex-officio Member Audit Board-II, New
Delhi has raised observations with respect to contingent liabilities disclosed
as per 3(a, b & c) above.
5. The observations raised by the Comptroller and Auditor General office
(CAG) on 3(a, b & c) are as under:
(a) This includes an amount of Rs. 373.83 Lakhs payable to IT
department for different financial years 2001-02 to 2011-12
pertaining to the disallowance as commission paid to foreign
agents, short grant of advance tax, short grant of Tax Deducted
at Source (TDS) and excess levy of interest. The company has
not included the interest payable of Rs. 548.49 Lakhs on this
disputed amount up to March 2017.
(b & c) Similarly, the above head includes 7012.87 Lakhs payable to
Sales Tax (ST) Department pertaining to entry tax (Rs. 13.70
Lakhs) for the financial year 1999-2000 relating to job work and
VAT payable to Andhra Pradesh ST department for the period
July 11 to March 2014. The company has not included the
interest payable of Rs. 4859.02 Lakhs on this disputed amount
up to March 2017.
Hence, this has resulted in understatement of contingent liabilities by
Rs. 5407.51 Lakhs and by the same extent in the disclosure of the
dues of IT department and sales tax department which was disputed
and shown in Annexure A, point VII(b) of Independent Auditors’
Report.
6. The querist has also informed that management replies with respect to
above observations of CAG are as under:
62
(a) It is submitted that in these cases, the Commissioner of Income Tax

(CIT Appeals) has given order in the favour of the company and
against the order of CIT Appeals, IT department has referred these
cases before the Income Tax Appellate Tribunal (ITAT).
(The copies of assessment order, order of commissioner (appeals) and
notices for referral of cases to ITAT by IT department for assessment
years 2002-03, 2004-05, 2011-12 & 2012-13 have been separately
supplied by the querist).
Although, the case has been decided in favour of the company, since
IT department has moved to ITAT, the company has disclosed an
amount of Rs. 373.83 Lakhs as contingent liability.
Since the cases have already been decided in favour of the company
by the CIT appeals, based on facts and circumstances of the case, the
incurrence of any interest liability on the above account is very remote
and as such is not considered as contingent liability. However, since,
the case is pending in ITAT, the amount of Rs. 373.83 Lakhs has been
disclosed as contingent liability.
(b) With respect to contingent liability on account of VAT assessment
order of Commercial Tax Officer, Kakinada for an amount of Rs.
6999.17 Lakhs, it is submitted that based on orders passed by VAT
authorities, the company has disclosed the order amount as contingent
liability. (The copy of assessment order of commercial tax officer is
separately supplied by the querist). However, the company has filed a
writ petition before Hon’ble High Court of Andhra Pradesh against the
assessment orders. Since the judgment is yet to be delivered by the
Hon’ble High Court of Andhra Pradesh, the contingent liability, if any,
on account of interest etc. is not ascertainable and as such the
assessment order demand amount has been disclosed as contingent
liability.
It is further submitted that transit sales have been allowed in all other
states except Andhra Pradesh and Karnataka, where the company has
executed these types of projects and, as such, it is expected that there
is remote possibility of fructifying the demand.
Regarding the inclusion of interest as contingent liability, it is
submitted that the same shall be reviewed including an opinion of
63
experts shall be taken based on facts and circumstances of the case in

the year 2017-18.
(c) In respect of entry tax demand order of Rs. 13.70 Lakhs by Additional
Commissioner (Appeal) Mathura, the company has filed an appeal
before Sales Tax Tribunal. (The Copies of order of Dy. Commissioner
Commercial Tax, Mathura and Additional Commissioner (Appeal),
Grade-2 have been separately supplied by the querist).
In this regard, it is submitted that in earlier years, there were two
cases involved, wherein the company was in appeal with the tribunal
against the orders of the Commissioner (Appeals), Mathura.
In one of the cases, the ST department was disallowing the transit
sales made by the Company to the project owner. The said cases for
the years 1999-2000 and 2000-2001 have been decided by the
commercial tax tribunal in the favour of company (relevant extract
have been separately supplied by the querist). Since, as per the
decided case of sales tax, the sales tax liability is on account of project
owner and, as such, liability for entry tax as per the provision of law
shall be borne by the project owner. The company, based on the
demand order, has disclosed amount of Rs. 13.70 Lakhs as a
contingent liability, although based on decided case for sales tax, no
liability shall fall on the company.
In view of above, it is submitted that there has been no
understatement of contingent liabilities by Rs. 5407.51 Lakhs and as
such, audit is requested to drop its observations.
7. According to the querist, in terms of Ind AS 37, a contingent liability is
a possible obligation that arises from the past events and whose existence
will be confirmed by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of entity.
On the basis of above, the company, on the basis of orders, etc. passed by
the respective statutory authorities, has made disclosure in the financial
statements of the company. The levy of interest, if any and quantum thereof
shall fructify only on the basis of decision made by the tribunal/court, etc. as
these are not a part of orders passed by statutory authorities. As of date, the
company has in its possession only the order passed by the statutory
authorities and the same has been disclosed as contingent liability in the
financial statements of the company.
64
8. The company has further assured the office of Director General of

Commercial Audit and Ex-officio Member Audit Board-II, New Delhi that
independent expert opinion shall be taken from the Expert Advisory
Committee of the Institute of Chartered Accountants of India.
B. Query
9. Considering the facts as stated above, the company has sought the
opinion of the Expert Advisory Committee of the Institute of Chartered
Accountants of India in respect of the following:
(a) (i) Whether the amount of Rs. 373.83 Lakhs disclosed as
contingent liabilities is correct, although CIT (Appeals)
has given the orders in favour of the company but IT
department has referred these cases to Income Tax
Appellate Tribunal (ITAT).
(ii) If the above disclosure is correct, then :
(1) Whether interest liability on the above amount of
Rs.373.83 Lakhs is required to be computed and
disclosed as contingent liability as on balance
sheet date, although, as such, there is no demand
for it; or
(2) Since, there is no demand for interest on the
company, whether the fact that above amount of
Rs.373.83 Lakhs does not include interest, if any,
is required to be disclosed; or
(3) None of above (1) or (2) is required to be
disclosed.
(b) (i) Whether disclosure of VAT assessment order of
Commercial Tax Officer, Kakinada levying tax of Rs.
6999.17 Lakhs on the company as contingent liability is
correct, although the company has filed writ petition
against the order before Hon’ble Court of Andhra
Pradesh.
(ii) If the above disclosure is correct, then:
(1) Whether the interest liability on above amount of
Rs.6999.17 Lakhs is required to be computed and
65
disclosed as contingent liability as on balance

sheet date, although as such, there is no demand
for it; or
(2) Since there is no demand for interest on the
company, whether the fact that above amount of
Rs.6999.17 Lakhs does not include interest, if any,
is required to be disclosed; or
disclosed.
(c) (i) Whether disclosure of entry tax demand order of Rs.13.70
Lakhs by the Additional Commissioner (Appeals),
Mathura as contingent liability is correct, considering that
as per decided cases of sales tax by the commercial tax
tribunal, the sales tax liability in respect of transit sales
made by the company shall be on account of project
owner and, as such, liability for entry tax as per provision
of law shall also be borne by the project owner.
(ii) If the above disclosure is correct, then:
(1) Whether the interest liability on above account is
required to be computed and disclosed as
Contingent Liability as on balance sheet date,
although as such, there is no demand for it; or
(2) Since there is no demand for interest on the
Company, whether the fact that above amount of
Rs.13.70 Lakhs does not include interest, if any, is
required to be disclosed; or
disclosed.
to whether the disclosure of demand raised in respect of cases pending
before various tax authorities as contingent liability is correct. Further,
whether interest liability that may arise in respect of said cases is also
required to be computed and disclosed as contingent liability. The Committee
66
has, therefore, considered only these issues and has not examined any other
issue that may be contained in the Facts of the Case such as calculation of
demand and interest thereon in respect of cases pending before various
regulatory authorities, adjustments on transition to Ind ASs, etc. Further, the
Committee wishes to point out that its opinion is expressed purely from
accounting point of view and not from any legal perspective. The Committee
also wishes to point out that the opinion expressed hereinafter, is in the
context of Indian Accounting Standards (Ind ASs) notified under the
Companies (Accounting Standards) Rules, 2015 and not in the context of
Accounting Standards, notified under the Companies (Accounting Standards)
Rules, 2006.
11. The Committee notes the following terms as defined in paragraph 10
of Indian Accounting Standard (Ind AS) 37, ‘Provisions, Contingent Liabilities
and Contingent Assets’:
“A provision is a liability of uncertain timing or amount.
A liability is a present obligation of the entity arising from past
events, the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits.
An obligating event is an event that creates a legal or
constructive obligation that results in an entity having no realistic
alternative to settling that obligation.
A legal obligation is an obligation that derives from:
(a) a contract (through its explicit or implicit terms);
(b) legislation; or
(c) other operation of law.
A constructive obligation is an obligation that derives from an
entity’s actions where:
(a) by an established pattern of past practice, published
policies or a sufficiently specific current statement, the
entity has indicated to other parties that it will accept
certain responsibilities; and
(b) as a result, the entity has created a valid expectation on the
part of those other parties that it will discharge those
responsibilities.
67
A contingent liability is:

(a) a possible obligation that arises from past events and
whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events
not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is not
recognised because:
(i) it is not probable that an outflow of resources
embodying economic benefits will be required to
settle the obligation; or
(ii) the amount of the obligation cannot be measured with
sufficient reliability.”
12. The Committee further notes the following paragraphs of Ind AS 37 ,
‘Provisions, Contingent Liabilities and Contingent Assets’:
“14 A provision shall be recognised when:
(a) an entity has a present obligation (legal or
constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying
economic benefits will be required to settle the
obligation; and
(c) a reliable estimate can be made of the amount of the
obligation.
If these conditions are not met, no provision shall be
recognised.
15 In rare cases, it is not clear whether there is a present
obligation. In these cases, a past event is deemed to give
rise to a present obligation if, taking account of all available
evidence, it is more likely than not that a present obligation
exists at the end of the reporting period.
16 In almost all cases it will be clear whether a past event has given
rise to a present obligation. In rare cases, for example in a
lawsuit, it may be disputed either whether certain events have
occurred or whether those events result in a present obligation.
68
In such a case, an entity determines whether a present

obligation exists at the end of the reporting period by taking
account of all available evidence, including, for example, the
opinion of experts. The evidence considered includes any
additional evidence provided by events after the reporting
period. On the basis of such evidence:
(a) where it is more likely than not that a present obligation
exists at the end of the reporting period, the entity
recognises a provision (if the recognition criteria are met);
and
(b) where it is more likely that no present obligation exists at
the end of the reporting period, the entity discloses a
contingent liability, unless the possibility of an outflow of
resources embodying economic benefits is remote (see
paragraph 86).”
“23. For a liability to qualify for recognition there must be not only a
present obligation but also the probability of an outflow of
resources embodying economic benefits to settle that obligation.
For the purpose of this Standard, an outflow of resources or
other event is regarded as probable if the event is more likely
than not to occur, ie the probability that the event will occur is
greater than the probability that it will not. Where it is not
probable that a present obligation exists, an entity discloses a
contingent liability, unless the possibility of an outflow of
resources embodying economic benefits is remote (see
paragraph 86).”
“27 An entity shall not recognise a contingent liability.
28 A contingent liability is disclosed, as required by paragraph 86,
unless the possibility of an outflow of resources embodying
economic benefits is remote.”
“86 Unless the possibility of any outflow in settlement is
remote, an entity shall disclose for each class of contingent
liability at the end of the reporting period a brief description
of the nature of the contingent liability and, where
practicable:
69
(a) an estimate of its financial effect, measured under

paragraphs 36–52;
(b) an indication of the uncertainties relating to the
amount or timing of any outflow; and
(c) the possibility of any reimbursement.”
13. The Committee notes from the above that an element of judgement is
required to determine whether the demand raised in respect of cases
pending before ITAT, Honourable High Court of Andhra Pradesh and Sales
Tax Tribunal should be provided for in the accounts or treated as contingent
liability and disclosed by way of a note to the accounts. It is for the
management of the enterprise to decide and for the auditor to assess,
considering the circumstances of each case, whether the demand raised
warrants recognition of provision or disclosure of contingent liability. The
Committee is of the view that while making such judgement, all facts and
circumstances available on the balance sheet date, including for example,
legal opinion of an expert on the possibility and extent of outcome (success
or failure) of the company’s cases in the court of law, experience of the
company or other enterprises in similar cases, decisions of appropriate
authorities, etc. should be considered. The Committee is further of the view
that mere expert opinion should not be considered in isolation; other factors
prevailing on the balance sheet date, as suggested above should also be
considered while making the judgement. Further, the Committee is also of
the view that in determining whether the demand raised should be provided
for in the accounts or treated as contingent liability and disclosed by way of
notes to the accounts at the balance sheet date or not, events occurring after
the balance sheet date but, before the date of finalization of accounts, sh ould
also be taken into consideration.
14. Further, the Committee is of view, the interest liability that may arise
on demands raised in respect of cases pending before ITAT, Honourable
High Court of Andhra Pradesh and Sales Tax Tribunal, will depend on the
decision taken by respective authorities i.e. whether interest needs to be paid
in addition to the principal amount or not in case the outcome does not result
in favour of the company (which itself is uncertain). The Committee also
wishes to clarify that the fact that no demand has been raised by the
authorities does not necessarily indicate that demand cannot be raised.
Accordingly, whether interest liability that may arise in respect of cases
70
pending before various authorities requires to be disclosed as contingent

liability or not, requires an element of judgement and should be decided by
the management of the company on the basis of all facts and circumstances
available on the balance sheet date such as the past decisions taken by the
taxation and judicial authorities in similar cases etc.
D. Opinion
the issues raised in paragraph 9 above:
(a) The company should, based on all the available evidence,
assess whether there is a present or possible obligation towards the
demand raised in respect of cases pending before ITAT, Honourable
high Court of Andhra Pradesh and Sales Tax Tribunal. If it is
considered probable that a present obligation exists at the
balance sheet date and the said obligation will be settled, of
which a reliable estimate can be made, the company should
recognise a provision for the demand raised. If, however, it is
considered that the recognition criteria for making a provision
are not met, then, the company should instead, disclose the
same as a contingent liability , unless the possibility of an outflow
of resources embodying economic benefits is remote.
(b) Further, the Committee is of the opinion that based on all facts and
circumstances available on the balance sheet date such as the past
decisions taken by the taxation and judicial authorities in similar cases
etc., it should be decided by the management of the company as to
whether the interest liability that may arise in respect of cases pending
before various authorities is required to be computed and disclosed as
a contingent liability or not.
__________
71
Query No. 7
Subject: Classification of grant related to assets in the statement of
cash flows.1
1. A company was incorporated on 16 th August 1984 for procuring,
transmission, processing and marketing of natural gas. The company has an
authorised share capital of Rs. 2,000 crore, out of which Rs.1,691.30 crore is
paid-up share capital. The Government of India (‘GoI’) holds 54% equity of
the company at present. The securities of the company are listed on
National Stock Exchange, Bombay Stock Exchange and London Stock
Exchange. At present, the company owns over 11,000 Kms of pipeline and
currently transmits about 206 MMSCM per day of natural gas. The company
operates six LPG manufacturing plants in different parts of the country with
an installed capacity of 1.04 Million MT of LPG per annum. The company has
an integrated petrochemical plant at Pata, Uttar Pradesh for manufacturing
polymers. The company has world’s longest pipeline from Jamnagar to Loni
for transmission of LPG. The company has integrated its business activities
and operates the City Gas Distribution (‘CGD’), Exploration of Natural Gas,
Wind Power & Solar Power Plant and Telecom Businesses. The company
has formed subsidiaries/associates/joint venture companies for CGD,
Petrochemicals, LNG, Gas Trading, Power Generation and Shale Gas.
2. The company has prepared its accounts as per Indian Accounting
Standards (Ind ASs) w.e.f. 1 st April 2016. In compliance with the Companies
(Indian Accounting Standards) Rules, 2015, the company has prepared its
financial statements for F.Y. 2016-17 with comparative figures for F.Y. 2015-
16. The company has adjusted the impact of transition from Indian Generally
Accepted Accounting Principles to Ind ASs in the opening reserve as on 1 st
April 2015 and in the statement of profit and loss for F.Y. 2015-16. Further,
the holding company, subsidiaries, joint ventures, or associate companies of
the company also need to make transition to Ind ASs w.e.f. 1 st April 2016.
3. The GoI has entrusted with the company the task to execute the 2,600
km. long Jagdishpur Haldia & Bokaro-Dhamra Gas Pipeline Project
connecting the Eastern states of the country to the National Gas Grid. Five
states, viz., Uttar Pradesh, Bihar, Jharkhand, Odisha and West Bengal will
72
benefit from gaining access to natural gas on affordable and equitable basis.
The project work is under progress as per phase-wise schedule. The Cabinet
Committee on Economic Affairs (CCEA), GoI has approved a capital grant of
Rs.5,176 crore being 40% of estimated capital cost of Rs.12,940 crore vide
Notification no. L-14014/44/2006-GP-I (Pt. II) dated 7 th October 2016. The
first instalment of Rs.450 crore was disbursed by the GoI to the company
during F.Y. 2016-17. (Copy of circular separately supplied by the querist)
4. As per the querist, in accordance with the provisions of Indian
Accounting Standard (Ind AS) 20, ‘Accounting for Government Grants and
Disclosure of Government Assistance’, the company has accounted for the
amount of capital grant under the head “Other non-current liabilities”.
Further, the company has classified the amount of capital grant under “Cash
flows from financing activities” in the Cash Flow Statement during F.Y. 2016-
17 in line with the provisions of Ind AS 7, ‘Statement of Cash Flows’.
5. The Comptroller & Auditor General of India (C&AG) has conducted
supplementary audit on the accounts of the company for F.Y. 2016-17 under
section 143(6) of the Companies Act, 2013. While conducting the
supplementary audit of accounts, the C&AG accepted the accounting
treatment made by the company. However, the C&AG has made observation
on classification of capital grant by the company as Financing Activity in the
Cash Flow Statement and opined that it should be classified as an Investing
Activity in the Cash Flow Statement.
6. The company and its statutory auditors are of the opinion that the
capital grant is one of the sources of financing the project expenditure
besides loan and internal generation/equity. The company is of the view that
had the company not received the capital grant, the alternate source for such
financing would be either from equity or borrowings. Thus, in substance,
capital grant is in the nature of a financing activity and, therefore, is correctly
shown as Financing Activity.
7. However, the C&AG has not accepted views of the company/joint
statutory auditors and, instead, is of the view that, since the capital grant was
received specifically for investment and acquisition of long-term asset, the
company should recognise the government grant as deferred income in
accordance with paragraph 24 of Ind AS 20. Accordingly, the amount should
be proportionately taken to income over the period of useful life of pipeline
project. Unlike financing activities, viz., loan and equity on which
73
interest/dividend is payable, the amount received as government grant will be

utilised for investing activities only and, therefore, will not change the
equity/borrowing of the company and should be reflected as an “Investing
activity” in the Cash Flow Statement.
8. The provisional comment of the C&AG and the reply submitted by the
company are as follows:
Provisional Comment Reply
III. Standalone Cash Flow
Statement for the financial year
ended 31 st March 2017
Cash Flow from financing
activities
The above includes Rs. 450 crore It is submitted that the company
towards the capital grant received has received Rs. 450 crore during
from Govt. of India for execution of the year towards capital grant
Jagdishpur-Haldia-Bokaro-Dhamra approved by Cabinet Committee
Pipeline Project (JHBDPL). on Economic Affairs (CCEA),
Government of India for execution
of Jagdishpur Haldia Bokaro
Dhamra Pipeline Project
(JHBDPL).
In this regard, Para 6 of Ind AS 7 The long-term asset will be

states that “Investing activities are constructed by utilising the
the acquisition and disposal of long- Government grant given for a
term assets and other investments specific purpose. The grant
not included in cash equivalents” received, being specific, is source
while “Financing activities are of funds for the creation of the
activities that result in changes in the said asset. If the company would
size and composition of the not have received any grant from
contributed equity and borrowings of GoI, the alternate source for such
the entity”. financing would be either from
equity or borrowings. Thus, in
substance, capital grant is in the
nature of financing activity as per
the provision of Ind AS 7.
However, audit observed that capital It is also submitted that as per
74
grant received from GoI was for Indian GAAP (AS-3), the amount
investment purpose and to meet out of grant was disclosed under
the capital expenditure (acquisition Capital Reserve, which forms part
of long-term assets) of above said of Reserves and Surplus. Further
pipeline project. Thus, the same as per the provisions of Ind AS 7
should have been classified as also, the amount of Grant become
investing activity whereas the part of Non-Current Liabilities.
company has classified this grant Thus, the nature of grant is
under financing activities in Cash financial activities.
flow Statement.
Management / Joint Statutory It is further submitted that the

Auditors replied that if the company expenditures that result in a
would not have received any grant recognised asset in the balance
from GoI, the alternate source for sheet are eligible for classification
such financing would be either from as investing activities, whereas
equity or borrowings. Thus, in the financing activities are related
substance, capital grant is in the to forecast claims on future cash
nature of financing activity. flows by providers of capital to the
entity.
Management’s/Joint Statutory Since the grant received by the

Auditors’ replies are not acceptable company was source of fund for
as govt. grant has been received creation of assets, the company
specifically for investment and has correctly classified the capital
acquisition of long-term asset and grant as financing activities.
the company has to recognise the Further, the user is able to
Government Grant as deferred understand the cash receipts from
income in accordance with Para 24 grant from the disclosure in Cash
of Ind AS 20 which would be Flow Statement. Hence,
proportionately taken to income over Provisional Comment may please
the period of useful life of pipeline not be pursued further.
project. Unlike, financing activities,
viz. loan and equity on which
interest/dividend is payable, the
amount received as Govt. grant will
be utilised for investing activities only
and therefore will not change the
75
equity/ borrowing of the company.

Thus, statement of cash flows is also
deficient to that extent.
9. It is also pertinent to mention that Ind AS 7 does not provide any
guidance on treatment of capital grant received from GoI as described
hereinabove in the Cash Flow Statement as such. In view of the difference
of opinion with the C&AG, it was decided to take the opinion of the Expert
Advisory Committee of the Institute of Chartered Accountants of India on the
said matter.
B. Query
(i) Whether the classification of Rs. 450 crore received as capital
grant from Government of India under ‘Financing activities’ in
the Statement of Cash Flows for FY 2016-17 for the reasons
mentioned in paragraph 6 above is correct as per Ind AS 7.
(ii) In case the answer to (i) above is not in the affirmative, what
should be the appropriate classification of capital grant of such
nature and purpose from Government of India in the Statement
of Cash Flows.
to classification of the receipt of Rs.450 crore by way of grant related to
assets (hereinafter referred to as ‘the grant’) from the Government of India
(hereinafter referred to as ‘the government’) in the statement of cash flows
for the financial year 2016-17 in the context of Indian Accounting Standards
(Ind ASs) notified under the Companies (Indian Accounting Standards)
Rules, 2015 (hereinafter referred to as ‘the Rules’). The Committee notes
from the facts of the case that C&AG has agreed that the amount received is
in the nature of government grant and not shareholder’s contribution. The
Committee has, therefore, considered only the issue raised and has not
examined any other issue that may be contained in the Facts of the Case,
such as amount to be recognised in the balance sheet and statement of profit
and loss, classification, recognition, measurement and accounting treatment
of grant received by the company. Further, the Committee presumes that the
76
pipeline will be owned and controlled by the company and that the company
is not acting only as an implementing/executing agency of the government
and consequently, the pipeline or components thereof, as the case may be,
will be recognised as asset(s) in the company’s financial statements.
12. The Committee notes that the terms ‘Investing activities’ and
‘Financing activities’ are defined in paragraph 6 of Indian Accounting
Standard (Ind AS) 7, Statement of Cash Flows, notified under the Rules, as
below:
“Investing activities are the acquisition and disposal of long-term
assets and other investments not included in cash equivalents.”
“Financing activities are activities that result in changes in the
size and composition of the contributed equity and borrowings of
the entity.”
13. The Committee first examines whether receipt of the grant should be
classified as cash flow from financing activity in the cash flow statement. For
classification as financing activity, the receipt of the grant should result in
change in the size and composition of contributed equity and borrowings.
Although there can be equity contribution otherwise than by way of
subscription to equity shares, in the extant case, the receipt of the grant does
not represent equity contribution from the government neither it is borrowing
from the government.
14. As per paragraph 6 of Ind AS 7 reproduced in paragraph 12 above,
only acquisition and disposal of long-term assets and other investments not
included in cash and cash equivalents should be classified as investing
activities. Hence, at first sight, it may appear that receipt of the grant does
not meet the definition of investing activity, since the resulting cash inflow
does not arise from disposal of any asset. However, in substance, to the
extent of the grant, cost of the pipeline project is borne by the government. In
effect, the cash outflow on the long-term asset, i.e., pipeline, is reduced by
the amount of the grant. This factual position is not changed by the
accounting and presentation requirements of Ind AS 20, ‘Accounting for
Government Grants and Disclosure of Government Assistance’, notified
under the Rules. Accordingly, the Committee is of the view that the receipt
of the grant is an investing activity. This view is strengthened by paragraph
28 of Ind AS 20 which states as follows:
77
“28. 22Thepurchase of assets and the receipt of related grants can

cause major movements in the cash flow of an entity. For this
reason and in order to show the gross investment in assets,
such movements are disclosed as separate items in the
statement of cash flows.”
D. Opinion
(i) The classification of Rs.450 crore received as grant related to
assets from Government of India as part of cash flows from
‘Financing activities’ in the statement of cash flows for the
financial year 2016-17 is not correct.
(ii) The same should be classified as part of cash flows from
‘Investing activities’ in the statement of cash flows for the
financial year 2016-17 as discussed in paragraphs 13 and 14
above.
________
2This paragraph has been subsequently revised vide Notification No. G.S.R. 903(E)
dated 20 th September, 2018.
78
PART II:
Opinions on
Accounting Standards
Query No. 8
Subject: Accounting treatment of revaluation of ‘Regeneration
expenses’ - Inventories.1
1. A company (hereinafter referred to as the ‘company’) is engaged in
improving the productivity of forest areas transferred to it by the forest
department of the state by raising plantations and carrying out silvicultural
activities. The company is predominantly engaged in the selling of forest
produce (termed as Crop-I and Crop-II) that has been obtained from the
silvicultural exploitation operation in the forest areas. The difference between
the two crops is stated below:
(a) Crop-I: Forest areas are transferred by the Forest Department,
Government of Madhya Pradesh (GoMP) to the company. At the
time of transfer of these forest areas, all the forest produce that
was initially present in these forest lands is silvicultured by the
company as per the approved guidelines, under scientific
methods of forestry and approved working plans from the
Government of India (GOI). After silvicultural operations of these
transferred forests, the forest produce that is reaped, i.e.,
teakwood etc. is sold by the company on behalf of Forest
Department, Government of Madhya Pradesh. After deducting
the direct and indirect expenses from the revenue received by
selling these forest produces, the net revenue is given to Forest
Department, GoMP as ‘Lease Rent’. On the total sale of this
forest produce, i.e., Crop I, the company receives 2%
commission from the GoMP. Hence, basically, Crop I is the
revenue generated from the standing crop that is sold by the
company on behalf of the Forest Department, GoMP from the
areas transferred to the company.
(b) Crop-II: The company raises plantations on these exploited
forest areas. These plantations will mature for harvesting only
after around 60 years of plantation in case of teak. Meanwhile,
scientific silvicultural operations, namely, nursery preparation,
spacing, pruning, thinning etc. are periodically performed on
these growing plantations, which yield substantial forest
81
produce and such thinning operations generate substantial

revenue. Thinning operations are performed in the 11 th, 16th,
21st, 26th, 31st, 36th, 41st and 46th year of plantation in case of
Teak and every 4 th year in case of Bamboo. These forest
produces are being sold by the company and the revenue
generated is mentioned as the revenue generated from Crop II
in the final accounts of the company. The entire amount
received by the company by the sale of such silviculture
operation periodically is called as Crop II. Crop II is basically the
crop generated by the company after clear felling in the areas
transferred to the company year after year against its own
plantation done in the previous years. Amount generated from
the sale of Crop II fully pertains to company’s revenue and
nothing is paid to GoMP against the revenue so generated.
The ‘net income’ arising out of sale of Crop-II (i.e., sale of forest produce
grown by the company) is exempt from income tax being ‘Agricultural
Income’. The company is carrying out above operations through its 11
divisions situated in various districts of the State of Madhya Pradesh.
2. The raised plantations are planted and nurtured by the company. All
the expenses, i.e., both direct and indirect (preparation of nurseries,
plantation, weeding, fire protection and other indirect expenses) are incurred
by the company. All the expenses are shown in the balance sheet under
‘Current Assets- Inventories-Regenerations expenses’ as per the original
input cost of Crop II. At the time of final felling of these plantations, i.e., Crop
II, all the expenses, i.e., direct and indirect expenses shall be proportionately
deducted from the net revenue realised in those areas of clear felling which
shall be finally termed as the revenue on sale of Crop II and shall be shown
in the balance sheet as sale of Crop II.
3. The querist has stated that as per the accounting policy consistently
adopted by the company, the expenses incurred on plantation/regeneration
in areas transferred to the company are being depicted under the head
‘Regeneration expenses- current assets- inventories’ in the balance sheet of
the company and are duly disclosed in the ‘Notes to the accounts’ every
year. Though, the method of computation of ‘regeneration expenses’ and
depiction thereof in the accounts is being consistently followed by the
company since last several years, yet such depiction does not reflect the
‘present value’ of these assets. Thus, the above assets of the company are
82
shown in the audited accounts at a substantially suppressed value as

compared to its present value. Consequently, the actual ‘net worth’ of the
company is not appearing in the audited accounts. Present book value of
standing crop ‘regeneration expenses’ as on 31/03/2014 as per the audited
accounts of the company is Rs. 113.38 crore, whereas the present market
value of these assets (inventories) is several times their book value, i.e.,
about Rs. 3,500 crore. The paid up equity capital of the company is Rs.
39.32 crore and, along with reserves of Rs. 183.13 crores, its net worth as on
31/03/2014 is Rs. 222.44 crore, whereas, the plantations raised by the
company alone are valued at more than Rs. 3,500 crore.
4. The querist has further stated that about 7000 hectare area of one of
the divisions, Rampur-Bhatodi Project Division, Betul has recently been
transferred to Satpura Tiger Reserve, Govt. of Madhya Pradesh. The
valuation for this transferred area came to Rs. 1,293.00 crore on the basis of
current net market value (market value of standing crop – expenses on
exploitation). The company sells its produce in open auctions; hence the
valuation of forest produce done on this basis reflects its true market worth.
The company has raised around 2,75,000 hectare plantations since its
inception. Thus, one can imagine the true market worth of the total
plantations raised by the company. The querist has also separately informed
that there is no established practice in the company for the valuation of crop
of teak and bamboo plantations at net realisable value. Although for fixation
of selling price of its forest produce, there is a well established practice for
determining the upset price twice a year (in April and October) which is
based on the average sale price obtained during the previous 12 months.
Further, there is no homogeneous market available in case of forest produce
and there is no substitute for teak log, poles, bamboo, fuel etc. because
these are natural products and are specific/ specified by nature. According
to the querist, there is also no established practice in India or any Accounting
Standard issued by the ICAI for valuation of standing crops.
5. The querist has also stated that in its 40 years of existence, the
company has pioneered in raising of successful plantations and wishes to
utilise its expertise by expansion and diversification of its activities, for which
the company would require massive low-cost funds. The company wishes to
raise these funds via instruments, like Capital Gain Bonds or Infrastructure
Bonds. Since the plantation projects undertaken by the company are typically
of long gestation periods, bank finance would not be a very feasible option. If
83
the company can show its true net worth by revaluing its ‘regeneration
expenses’ to its present worth, it can leverage it to obtain such funds. The
company thus intends to revalue its ‘regeneration expenses’ by depicting the
same as its ‘real asset value’ and increase its net worth by the like amount.
B. Query
6. Based on the above facts, the querist has sought the opinion of the
Expert Advisory Committee regarding the validity of:
(a) Accounting treatment of the proposed revaluation of
‘Regeneration Expenses’ with reference to Crop-II;
(b) Disclosure requirement in respect of proposed revaluation
having regard to the Accounting Standards, issued by the
Institute of Chartered Accountants of India (ICAI) and provisions
of the Companies Act, 2013.
7. The Committee, while answering, has considered only the issues
raised in paragraph 6 above and has not examined any other issue that may
arise from the Facts of the Case, such as, accounting treatment in respect of
Crop I, accounting for various expenses booked as regeneration expenses
under inventory, calculation of net worth of the company, etc.
8. The Committee notes that in the extant case, all the expenses, direct
or indirect (such as preparation of nurseries, plantation, weeding, fire
protection and other expenses), incurred by the company for raising standing
crops in respect of Crop II are being accounted for as ‘regeneration
expenses’ under inventories. Now, the company is proposing to revalue
these regeneration expenses/inventory of the standing crops, at its present
worth/real asset value based on their market value. In this regard, the
Committee notes the following paragraphs of Accounting Standard (AS) 2,
‘Valuation of Inventories’, notified under Companies (Accounting Standards)
Rules, 2006 (hereinafter referred to as ‘the Rules’).
“1. This Standard should be applied in accounting for
inventories other than:
…
(d) producers’ inventories of livestock, agricultural and
forest products, and mineral oils, ores and gases to
84
the extent that they are measured at net realisable

value in accordance with well established practices in
those industries.”
“2. The inventories referred to in paragraph 1 (d) are measured at
net realisable value at certain stages of production. This occurs, for
example, when agricultural crops have been harvested or mineral oils,
ores and gases have been extracted and sale is assured under a
forward contract or a government guarantee, or when a homogenous
market exists and there is a negligible risk of failure to sell. These
inventories are excluded from the scope of this Standard.”
The Committee notes from the above that AS 2 is not applicable to
producers’ inventories of agricultural and forest products to the extent that
they are measured at net realisable value in accordance with well
established practices in those industries. The Committee is of the view that
the scope exclusion paragraph 1 (d) of AS 2 deals with the agricultural
products which are the harvested produces and not standing crops and
therefore, the plantations in the extant case do not fall in the scope exclusion
paragraph 1 (d) of AS 2, notified under the Rules. Accordingly, the
‘regeneration expenses’ with reference to Crop II should be valued at the
lower of historical cost and net realisable value as per paragraph 5 of AS 2,
as reproduced below:
“5. Inventories should be valued at the lower of cost and net
realisable value.”
The Committee further notes the following paragraph from ‘Chapter V-
Valuation of Assets’ of the Monograph on Accounting for Agricultural
Operations, issued by the Research Committee of the ICAI:
“General Principles:
…
3) Standing Crops: The standing crops in a farm are similar to the
work-in-progress in manufacturing industries and the general
accounting principles of valuation of work-in-progress would be
applied for standing crops. Thus, the standing crops would be
valued at the lower of cost and net realizable value. The latter
would be ascertained after making allowance for the expenses
yet to be incurred to make the crop marketable and the
marketing expenses. It may be mentioned that innumerable
85
natural risks are associated with the agricultural operations and

it would be prudent to carefully assess and provide for these
risks while valuing the standing crops.”
On the basis of the above, the Committee is of the view that the inventories
of standing crops in the extant case should be valued at the lower of cost
and net realisable value and accordingly, the proposed revaluation of the
regeneration expenses is not correct.
D. Opinion
(i) The proposed revaluation of ‘regeneration expenses’ with
reference to Crop II is not correct as discussed in paragraph 8
above.
(ii) In view of (i) above, question does not arise.
__________
Query No. 9
Subject: Recognition and valuation of Carbon Emission Reductions
(CERs).1
1. A company (hereinafter referred to as ‘the company’) undertakes
integrated waste management (IWM) and started its operations in the year
2007. It extracts value from all waste streams including biodegradables,
combustibles and inerts (debris, glass, plastic etc.). As a result, compost,
refuse derived fuel (RDF) / combustibles and carbon emission reductions
(CERs) are produced on processing of municipal solid waste (MSW) input.
The company has as on date, seventeen operating composting facilities
across the country with waste handling capacity of 2,750 tonnes per day
(TPD) of MSW.
2. CERs are generated at various facilities of the company during
production of compost and the company has sold these CERs. During the
86
past six years, the company has successfully earned revenue of about Rs.
170 mn by selling 4,67,534 number of CERs as against compost revenue of
Rs. 288 mn.
3. The process involved in generation of CERs is briefly explained by the
querist as below:
(i) Compost can be manufactured by an anaerobic or aerobic
process. Aerobic composting means ‘with oxygen’, and
anaerobic composting means ‘without oxygen’. Aerobic
composting makes MSW project eligible for CERs as per the
United Nation Framework Convention on Climate Change
(UNFCCC) Guidelines. Aerobic process is evaluated at the time
of registration by UNFCCC for determining the eligibility of
CERs benefits during operations. One tonne of methane
mitigation by processing waste in aerobic condition makes
company eligible for one CER.
(ii) In contrast, if the waste is dumped into pits and composting
takes place over a period of time in largely anaerobic conditions
which leads to emission of Green House Gases (GHG -
Methane) in the environment, these facilities are not eligible for
CERs benefits.
(iii) CERs are generated due to the mitigation of methane
generation in the decomposition of waste in an aerobic manner.
The methane generation follows a First Order Decay (FOD)
model, which is reflected in the calculation of CERs on year to
year basis. The FOD is a compounding model, where it is
considered that the previous year’s waste does not decompose
completely in a single year. The various components of MSW
decay values are defined by the Inter-Governmental Panel on
Climate Change (IPCC). Thus, the previous year’s waste would
continue to contribute fractionally towards CER generation in
the subsequent years.
(iv) Aerobic process requires higher capital expenditure and
involves additional operational costs (manpower, vehicle
running, power and fuel, depreciation, interest etc.) at every
stage of the process.
87
4. The process flow of the production of compost, RDF and CERs is

enumerated below:
5. Brief explanations on key segments of the process are as follows:

(i) Pre-Sorting- MSW received in plant is a mixture of bio-
degradables, combustibles and inerts. In the pre-sorting
process, the materials like plastic, wood and inerts of particulars
size are separated to ensure that maximum bio-degradable
material is only transferred to the pad for windrow formation.
This process helps in maximising the compost output and
reducing GHG emission during aerobic composting at the pad.
The segregated material other than inert is used as RDF/
combustibles. To carry out this process, operational cost
towards manpower, equipments, power and fuel etc. is incurred
for loading, segregating and transferring material to the next
stage.
(ii) Windrow formation and Turning- Sorted bio-degradable waste is
brought to the pad and windrows are formed for aerobic
composting. The material is kept on the pad for atleast 4 weeks
and is turned around at regular intervals to ensure proper
oxidation, temperature control and aerobic decomposition. This
88
involved operational costs towards manpower, handling

equipments, monitoring devices, power & fuel etc.
(iii) Monsoon Shed: Once the material is decomposed, it is kept
under shed or any other covered area to further reduce the
moisture content. The material is required to be turned around
at regular intervals for speeding up the drying process. This
process generally takes 5–8 weeks depending on the location of
the processing facility. At this stage also, operational costs are
incurred towards manpower, handling equipments, power & fuel
etc.
(iv) Core-segregation, refinement, storing and packing: Once the
moisture is reduced upto a particular level, then it is required to
screen the material and bring the material upto the size of 4 mm
or below in order to ensure that the material is appropriate to be
used as an agricultural input in farms. Part quantity of material
with size of 4 mm and above is used as RDF/ combustible and
part quantity is sent to reject site. Compost and
RDF/combustible produced are kept under covered shed to
ensure that the emission of GHG is minimised in the
environment.
6. (a) The process stated above very clearly highlights the following
points:
(i) There is requirement of various types of plant and
machinery, equipments, vehicles, civil structure,
monitoring devices etc. to produce compost through
aerobic process.
(ii) There are various operational costs incurred towards
manpower, power & fuel, repair & maintenance, vehicle
hiring, etc. at every stage to produce compost through
aerobic process alongwith CERs and RDF/ combustible
simultaneously.
(b) Pursuant to the company following the aerobic process, it
generates CERs throughout the year at each of its compost
production facilities. They are accounted for on a calendar year
basis.
89
(c) The verification of CERs generated is independently done by a

Designated Operating Entity (DOE) accredited to the UNFCCC
which finalises the number of CERs generated by the project,
based on detailed verification of the compliance process
followed by that project.
(d) The verification and certification reports are uploaded by DOE
on the UNFCCC website capturing the number of CERs
generated by the project during a specific period. The Executive
Board of UNFCCC considers the report and issues the CERs to
the entity. The CER’s verified by DOE are rejected only on
account of fraud, malfeasance or incompetence of the
designated operational entities.
7. Recognition of CERs in the financial statements of the company as per
the Guidance Note on Accounting for Self-generated Certified Emission
Reductions, issued by the Institute of Chartered Accountants of India (ICAI):
(i) The ICAI has issued a Guidance Note on Accounting for Self-
generated Certified Emission Reductions (CERs) (hereinafter
referred to as the Guidance Note), which lays down the
guidance on the matters of applying accounting principles
related to recognition, measurement and disclosure of CERs
generated by an entity through the Clean Development
Mechanism (CDM).
(ii) Recognition of CERs as an ‘asset’:
(a) As per the Guidance Note, a CER is to be recognised as
an ‘asset’ in the financial statements of an entity as it
meets the criterion for recognition as an ‘asset’. For a
CER to be considered as asset, it should be a resource
controlled by the generating entity arising as a result of
past events, and from which future economic benefits are
expected to flow to the generating entity.
(b) At paragraph 17 of the Guidance Note, it has been stated
that CERs come into existence when these are credited
by UNFCCC in a manner to be unconditionally available
to the generating entity. Therefore, CERs should not be
recognised before that stage.
90
(c) The second criterion for recognition of CERs as an asset

is the measurement of the cost incurred for their
generation. The Guidance Note lists out at paragraph 24,
various costs incurred to set up a CDM project activity,
operate a CDM project and generate CERs.
(iii) Valuation of CER Inventory as per Accounting Standard (AS) 2,
’Valuation of Inventories’:
(a) As per paragraphs 21 and 22 of the Guidance Note,
though CERs are intangible assets but they have to be
considered as inventory of the generating entity as they
are generated and held for sale in the ordinary course of
business and should be measured at cost or net
realisable value, whichever is lower.
(b) Further, paragraph 23 mentions that in accordance with
AS 2, “The cost of inventories should comprise all
costs of purchase, costs of conversion and other
costs incurred in bringing the inventories to their
present location and condition”.
(c) Paragraph 24 of the Guidance Note lists out the various
costs incurred to set up CDM project activity as follows :
(i) research costs arising from exploring alternative
ways to reduce emissions;
(ii) costs incurred in developing the selected
alternative as a process/device to reduce
emissions;
(iii) costs incurred to prepare the Project Design
Documents;
(iv) fees paid to DOEs for validation and verification
and to the National Authority for approval;
(v) fees of registering with UNFCCC;
(vi) costs incurred for monitoring the reductions of
emissions;
(vii) costs incurred for certification of CERs; and
(viii) operating costs incurred to run the CDM project.
91
(d) However at paragraph 25, the Guidance Note mentions

that the costs incurred by the generating entity for
certification of CERs are the costs of inventories of CERs.
It mentions that costs incurred on research and
development, costs incurred for preparation of PDD and
registration of CDM project with UNFCCC cannot be
considered for inventory valuation and only costs incurred
for certification should be considered. However,
according to the querist, it is completely silent on the
operating costs incurred on generation of CERs as listed
at paragraph 24.
(Emphasis supplied by the querist.)
8. Views of the company:
The MSW operations of the company are based on mitigating methane
generation through the aerobic composting which generates CERs as an
intrinsic and integral part of compost producing process enumerated above.
The company requires opinion of the Expert Advisory Committee on the
following issues:
(1) Point of recognition of CERs as an ‘asset’
(a) As per paragraph 17 of the Guidance Note, “CERs come into
existence when these are credited by UNFCCC in a manner to
be unconditionally available to the generating entity. Therefore,
CERs should not be recognised before that stage”. But the
querist wishes to apprise the Committee that CERs can be
recognised as assets once the Designated Operating Entity
(DOE) has verified the number of CERs generated in a period
and has uploaded the report at UNFCCC site for the issuance
and need not wait till the approval of issuance by the Executive
Board. In this context, the paragraphs from the Guidance Note
on ‘Methodology for Issuance of CERs issued by UNFCCC’
have been explained by the querist as below:
(i) The DOE shall, based on its verification report, certify in
writing that, during the specified time period, the project
activity achieved the verified amount of reductions in
anthropogenic emissions by sources of green house
gases that would not have occurred in the absence of the
92
CDM project activity. It shall inform the project

participants, parties involved and the Executive Board of
its certification decision in writing immediately upon
completion of the certification process and make the
certification report publicly available.
(ii) The certification report shall constitute a request for
issuance to the Executive Board of CERs equal to the
verified amount of reductions of anthropogenic emissions
by sources of greenhouse gases.
(iii) The issuance shall be considered final 15 days after the
date of receipt of the request for issuance, unless a party
involved in the project activity or at least three members
of the Executive Board request a review of the proposed
issuance of CERs. Such a review shall be limited to
issues of fraud, malfeasance or incompetence of the
designated operational entities and be conducted as
follows:
o Upon receipt of a request for such a review, the
Executive Board, at its next meeting, shall decide
on its course of action. If it decides that the
request has merit, it shall perform a review and
decide whether the proposed issuance of CERs
should be approved;
o The Executive Board shall complete its review
within 30 days following its decision to perform the
review;
o The Executive Board shall inform the project
participants of the outcome of the review, and
make public its decision regarding the approval of
the proposed issuance of CERs and the reasons
for it.
(iv) Upon being instructed by the Executive Board to issue
CERs for a CDM project activity, the CDM registry
administrator, working under the authority of the
Executive Board, shall, promptly, issue the specified
quantity of CERs into the pending account of the
Executive Board in the CDM registry, …
93
(v) However, as per the querist’s view, the CERs should be

recognised as assets in the books post 15 days from the
date of report submission by DOE to Executive Board of
UNFCCC since there is certainty of the same numbers of
CERs to be issued by the Executive Board except in the
extreme circumstances of fraud, malfeasance or
incompetence of the DOE. Past trends confirming that
there is no change in numbers of CERs verified by DOE
and issued by UNFCCC Executive Board in respect of the
company have been provided by the querist for the
perusal of the Committee.
(vi) Further, as per the querist, non-recognition of CERs as
inventory in the financial year in which cost is incurred for
the generation/production of CERs has the following
impact:
o Mismatch in recognition of cost and revenue
towards CERs generation
o The entire cost is loaded to the production of
compost and RDF which leads to undervaluation of
inventory
o Financials of the company do not give true and fair
view of the performance of the respective financial
year
(2) Compost, CERs and RDF are joint products
(a) It may be mentioned that in respect of MSW facilities, due to the
intrinsic and integral nature of activities, CERs and compost /
RDF are produced as joint products.
(b) Based on the above, the costs incurred for monitoring the
reduction of emissions and the operating costs incurred to run
the CER projects are crucial and hence, have to be included in
the costs for the purpose of valuation of inventories and not only
costs incurred for certification of CERs. The cost of production
upto the stage of compost manufacturing should be treated as
joint costs to be allocated between the three products, i.e.,
compost, RDF and CERs.
94
(c) Joint cost is defined as the cost of common resources used to

produce two or more products or services simultaneously. As
per paragraph 10 of AS 2, one of the methodologies of
bifurcating the joint costs is:
“A production process may result in more than one product
being produced simultaneously. … When the costs of
conversion of each product are not separately identifiable, they
are allocated between the products on a rational and consistent
basis. The allocation may be based, for example, on the relative
sales value of each product either at the stage in the production
process when the products become separately identifiable, or at
the completion of production. …”
(d) Accordingly, in respect of MSW projects, production of compost,
RDF and CERs are intrinsic and integral part of the entire
production process which become separately identifiable at the
finished stage of compost production. Aerobic composting is an
activity which gets completed on production of compost. CER
and compost are produced simultaneously and the split-off for
these two products are at the point of compost production.
Thus, for valuation of inventory of compost, RDF/combustibles
and CERs, the company needs to bifurcate joint production cost.
This can be done at their respective net sales realisation.
However, the CER inventory valuation will be carried out at the
lower of cost of production or net realisable value (NRV).
(3) Costs incurred in the process of aerobic composting:
(a) The aerobic composting process efficiency directly impacts
production of CERs which includes close control of various
parameters like temperature, oxygen, moisture etc. that are
controlled through processes like mechanized pre-sorting,
deployment of vehicle and manpower for turning of windrows
and finished compost, various stages of refinement etc. These
combined operational costs incurred towards compost
production and CERs generation include the following:
(i) Manpower cost
(ii) Weighing section
95
(iii) Pre-processing section

(iv) Waste heap pad
(v) Compost refining section
(vi) Vehicle hire charges, diesel and repairs cost
(b) Paragraph 25 of the Guidance Note has apparently not
considered any cost other than costs incurred by the generating
entity for certification of CERs, for the purpose of valuation of
CERs inventories. The Guidance Note appears to be more
based on renewable (Solar, Hydro, Wind) energy projects. In
these projects, CERs are generated from replacement of energy
from fossil fuel generation plants. The operations of these
projects do not involve external inputs beyond that of natural
resources like sunlight, water and wind. The monitoring of such
projects is based on the energy uploaded at the grid inter-
connect point and requires verification of only a single
parameter. On the other hand, MSW processing projects of the
company involves monitoring of large number of parameters in
comparison to renewable projects which requires additional
capital and operational costs. Differences in various renewable
energy processes involved have been provided by the querist
for the perusal of the Committee.
B. Query
9. On the basis of the above, the opinion is sought by company on the
following issues:
(a) Whether CERs inventory can be recognised in the financials of
the company post 15 days of verification report submitted by
DOE to UNFCCC Executive Board for issuance of CERs since
review by Executive Board post verification by DOE is more of
documentation review and issuance is certain except in case of
fraud, malfeasance or incompetence of the DOE.
(b) Whether compost, RDF and CERs are joint products.
(c) Whether for the purpose of CER inventory valuation, the costs
should include all operating expenses upto the stage of compost
production and not be limited to verification and certification
expenses.
96

10. The Committee, while expressing its opinion has examined only the
issues raised in paragraph 8 above and has not examined any other issue
that may arise from the Facts of the Case, such as, inventory valuation of
composts/RDFs, accounting for sale of CERs etc.
11. With regard to the first issue raised by the querist relating to point of
recognition of CERs as assets, the Committee notes the following
paragraphs of the Guidance Note on Accounting for Self-generated Certified
Emission Reductions, issued by the ICAI as follows:
“13. From the above-mentioned definition of ‘asset’ it follows that for a
CER to be considered as an asset of the generating entity, it should be
a resource controlled by the generating entity arising as a result of
past events, and from which future economic benefits are expected to
flow to the generating entity.
14. In order to generate CERs, an entity undertakes a CDM project
activity and thereby reduces carbon emissions. It is mentioned in
paragraph 9 above that various stages are involved in a CDM project
activity to generate CERs. After a successful registration, as the CDM
project is operated, carbon emission reductions are generated and
these continue to be generated over the course of the project.
However, at this stage, i.e., when the emission reductions are taking
place, CERs do not arise. It may be argued that as soon as emission
reductions take place these should be considered as assets since
certification thereof subsequently in the form of CERs is a procedural
aspect. In this regard, it is noted that issuance of CERs is subject to
the verification process, i.e., CERs are applied for and on the expiry of
15 days having received no request for review and after having
satisfied all requirements, a communication is received from UNFCCC
thereby crediting CERs to the generating entity. It is, thus, possible
that emission reductions may not eventually result in to creation of
CERs. Accordingly, at this stage when emission reductions are taking
place, CERs can, at best, be said to be contingent assets as per
Accounting Standard (AS) 29, Provisions, Contingent Liabilities and
Contingent Assets, which defines a contingent asset as “a possible
asset that arises from past events the existence of which will be
confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the
97
enterprise”. This is because when the generating entity reduces

carbon emissions by way of a CDM project, the generating entity
becomes eligible to receive CERs from UNFCCC. However, whether
CERs will actually arise and be received by the generating entity or not
will depend on a future uncertain event, i.e., certification of the same
by UNFCCC.
15. It follows from the above that a CER comes into existence and
meets the definition of an asset only when the communication of credit
of CERs is received by the generating entity. This is because only at
this stage the CER becomes a resource controlled by the generating
entity and therefore leads to expected future economic benefits in the
form of cash and cash equivalents which would arise on the future sale
of CERs. As stated above, at other earlier stages of the CDM project
activity, there is no resource in existence for the generating entity, and
hence the question of ‘resource controlled’ and ‘expected future
economic benefits’ therefore do not arise. Accordingly, CER is an
‘asset’, when it comes into existence as stated aforesaid.”
“17. From paragraph 15 it follows that CERs come into existence when
these are credited by UNFCCC in a manner to be unconditionally
available to the generating entity. Therefore, CERs should not be
recognised before that stage. Further, from the above it follows that for
CERs to be recognised in the financial statements of the generating
entity as assets, the two criteria with regard to probable future
economic benefits flowing from the CERs and CERs possessing a cost
or value that can be measured with reliability should be met as follows:
(a) As regards the probability criterion for recognition of CERs, it
may be mentioned that the concept of probability refers to the
degree of certainty that future economic benefits associated
with CERs will flow to the entity. Therefore, the probability
criterion is said to be met when there is a reasonable assurance
that future economic benefits will flow from the CERs to the
entity. As the market for CERs is relatively new, the future
economic benefits may not always be assured. Thus, an entity
needs to make an assessment for the probability of future
economic benefits. Accordingly, if there is a probable market for
the self-generated CERs ensuring flow of economic benefits in
the future, CERs should be recognised.
98
(b) As regards the criterion for measurement of cost or value, there

are certain costs which are incurred to generate CERs, and
therefore the cost of CERs can be measured reliably. The value
at which CERs are to be measured is discussed in later
paragraphs.
For reasons stated above, the recognition of CERs as an asset at any
earlier or later stage than when they are credited by UNFCCC is not
justified in the following cases:
(a) CERs are recognised upon execution of a firm sale contract for
the eligible credits.
(b) CERs are recognised on an entitlement basis based on
reasonable certainty after making adjustments for expected
deductions.”
From the above, the Committee notes that the Guidance Note specifically
states that CER becomes a resource controlled by the generating entity only
when the communication of credit of CERs is received by the entity.
Accordingly, before that stage and unless other conditions for recogniti on as
an ‘asset’ as discussed in the Guidance Note are fulfilled, it cannot be
recognised as an asset in the financial statements of the generating entity.
The Guidance Note also specifically provides that recognition of CERs at an
earlier stage than when they are credited by UNFCCC on an entitlement
basis based on reasonable certainty is also not justified. Accordingly, the
Committee is of the view that CERs inventory cannot be recognised in the
financials of the company post 15 days of verification report submitted by
DOE to UNFCCC Executive Board for issuance of CERs, as being argued by
the querist.
12. With regard to the second and third issue relating to compost, CERs
and RDF being considered as joint products and relating to CER inventory
valuation, the Committee notes the following paragraphs of the Guidance
Note:
“6. To be eligible for CDM benefits, the proposed project must have
the feature of additionality, i.e., the CDM project must provide
reductions in emissions that are additional to that would occur in the
absence of the project. For example, an entity can generate CERs
under CDM, if it installs a waste heat boiler that saves energy. This is
because reduced fuel use reduces the amount of carbon dioxide
99
emitted. However, if an entity has to undertake the project activity

because of law, for example, if the industry is legally mandated to
have a waste-heat recovery boiler, such a project is generally not
eligible for CDM benefits.”
“23. AS 2 prescribes the composition of cost of inventories as
follows:
“6. The cost of inventories should comprise all costs of
purchase, costs of conversion and other costs incurred in
bringing the inventories to their present location and
condition.”
24. Various costs are incurred by the generating entity to set up a
CDM project activity, operate the CDM project and generate CERs.
These may include the following:
(i) research costs arising from exploring alternative ways to
reduce emissions;
(ii) costs incurred in developing the selected alternative as a
process/ device to reduce emissions;
(iii) costs incurred to prepare the Project Design Documents;
(iv) fees paid to DOEs for validation and verification and to
the National Authority for approval;
(v) fees of registering with UNFCCC;
(vi) costs incurred for monitoring the reductions of emissions;
(vii) costs incurred for certification of CERs; and
(viii) operating costs incurred to run the CDM project.
25. As already mentioned earlier, CERs do not come into existence
and, therefore, do not become the assets of the generating entity till
the UNFCCC certifies and credits the same to the generating entity.
Accordingly, not all costs incurred by the generating entity give rise to
CERs and therefore not all costs can be considered as the costs of
bringing the CERs to existence (i.e., their present location and
condition). For example, the research and development costs as
mentioned above are the pre-implementation costs of the CDM
projects which do not result in CERs. Accordingly, these should be
100
treated as per Accounting Standard (AS) 26, Intangible Assets (refer

also to paragraph 30 below) when they bring into existence a separate
intangible asset such as a patent of a process to reduce carbon
emissions. Similarly, the other costs such as those incurred for
preparation of PDD and registration of the CDM project with UNFCCC,
etc., do not result in CERs coming into existence, and therefore these
costs cannot be inventorised. It is only the costs incurred for the
certification of CERs by UNFCCC which bring the CERs into existence
by way of credit of the same by UNFCCC to the generating entity.
Thus, the costs incurred by the generating entity for certification of
CERs, are the costs of inventories of CERs.”
“35. An entity should disclose the following information relating to
certified emission rights in the financial statements:
a) No. of CERs held as inventory and the basis of valuation.
b) No. of CERs under certification.
c) Depreciation and operating and maintenance costs of
Emission Reduction equipment expensed during the
year.”
From the above, the Committee notes that the Guidance Note although
considers the CERs as an item of inventory since these are held for sale, it
considers them as an ancillary benefit of the CDM project apart from the
main product(s) being produced (for example, compost and RDF in the
extant case) out of the CDM project and not as a joint product. The
Committee also notes that since the Guidance Note requires to recognise the
CERs as asset only when communication of credit of CERs is received by
the entity, the question of recognition of CERs as joint product before that
stage does not arise. Further, with regard to inventory valuation, although the
Guidance Note lists out the costs incurred for monitoring the reductions of
emissions in paragraph 24, it does not consider such costs to be the cost of
inventories of CERs; rather it specifically states that only the costs incurred
by the generating entity for certification of CERs, are the costs of inventories
of CERs. Accordingly, the Committee is of the view that CERs in the extant
case should not be considered as a joint product and the cost of the
inventories of CERs should not include operating expenses upto the stage of
compost production, as being argued by the querist. Incidentally, with regard
101
to querist’s contention regarding mismatch in recognition of cost and revenue

towards CERs generation, the Committee wishes to point out that the same
would be addressed by the disclosure required under paragraph 35 (b) of the
Guidance Note.
D. Opinion
(a) CERs inventory cannot be recognised in the financials of the
company post 15 days of verification report submitted by DOE
to UNFCCC Executive Board for issuance of CERs, as
discussed in paragraph 11 above.
(b) Compost, RDF and CERs are not joint products, as per
requirements of the Guidance Note, as discussed in paragraph
12 above.
(c) For the purpose of CER inventory valuation, the costs should
not include all operation expenses upto the stage of compost
production and should be limited to the cost incurred by the
generating entity for certification of CERs, as discussed in
paragraph 12 above.
__________
Query No. 10
Subject: Accounting for development fee under Delhi School
Education Act and Rules, 1973. 1
1. The querist has stated that schools in Delhi, both aided as well as
unaided are governed by the Delhi School Education Act, 1973 and Rules
framed thereunder (DSE A&R). Various notifications have been issued by
the Government of Delhi or the Department of Education (DoE) from time to
time, under the said Act and Rules. The decisions of the Court of law are
102
also binding principles for the schools and authorities regulating schools. The
schools are generally set up by a trust or a society registered under the
Societies Registration Act. Most of the land allotted to schools in Delhi is by
the land owning agencies, like, Delhi Development Authority (DDA) and Land
and Development Office to such trust/society and the building is constructed
by said trust or society. The schools then get recognition from DoE on
fulfilment of certain conditions. Recognised schools are required to file
annual returns as prescribed under Rule 180 of the DSE Rules, 19 73. Right
to Free and Compulsory Education Act (RTE Act) implemented w.e.f. 2010,
stipulates reserving at least 25% seats at entry level for economically weaker
sections/disadvantage group (EWS/DG) category of students.
2. The issue for consideration here is about accounting treatment for
development fee collected by unaided recognised private school in terms of
DoE’s Order dated 15/12/1999, dated 11/02/2009 and dated 16/04/2016 read
together with the Judgement of Apex Court in the case of Modern School
(2004).
3. The querist has further stated that DSE A&R, 1973 besides prescribing
rules for general management and administration of schools, has also laid
down rules for collection of fee and its accounting. The scheme of
management of schools as prescribed under Rule 59 lays down procedure
for collection and spending of receipts. Some of the relevant sections and
rules of DSE A&R, 1973 governing fee, receipt and expenditure are as under:
(i) Section 17(3) deals with collection of fee and the restrictions
thereof for an unaided recognised school.
(ii) Section 18 lays down the manner in which the receipts should
be accounted for.
(iii) Section 18(4)(b) read with Rule 176 specify that any collection
for specific purpose will have to be spent for specific purpose
only.
(iv) The Directorate of Education (DoE) has the power to regulate
fee of unaided recognised school under section 17(3).
(v) Rules 172 to 179 regulate as to how school’s funds should be
maintained.
The Guidance Note on Accounting by Schools, issued by the Institute of
Chartered Accountants of India is also relevant.
103
4. The DSE Act & Rules were enacted and notified in 1973 and
clarifications/directions have been issued by various Notifications/Circulars/
Orders of DoE. Supreme Court and Delhi High Court have also from time to
time given directions on the basis of and in relation to DSE A&R, 1973 and
notifications issued thereunder. One of the important judgement is that of
Supreme Court in the matter of Modern School vs. Union of India (2004).
DoE’s Order dated 15/12/1999 is also important in context of said judgement.
Copies of relevant sections and rules referred to above and Supreme Court
judgement and notifications have been provided by the querist for the perusal
of the Committee.
5. The matter needing Expert Advisory Committee’s opinion has been
detailed by the querist as below:
(1) Rule 175 refers to manner in which the accounts of an unaided
recognised school are to be maintained. It prescribes that
accounts should exhibit all income accruing by way of fee, fines,
income from building, rent, interest, development fee,
collections for specific purposes, endowments, gifts, donations
etc.
(2) The fee fixation by schools has been a matter of dispute
between parents of students and schools since 1996. The
matter was escalated to legal battles and was thus taken up to
Delhi High Court (HC) and Supreme Court on various
occasions.
(3) (a) In view of representations from parents and on the
recommendation of Delhi HC, DoE appointed a committee
(known as Duggal Committee) chaired by a Retd. High
Court Judge, viz., Justice Smt. Santosh Duggal. Based on
recommendations of the said committee, DoE issued a
Notification dated 15/12/1999 laying down policy
regulations etc., for schools to adhere to. Paragraph 7 of
the said Notification lays down the nature of development
fee and its ceiling at 10% of tuition fee (subsequently
enhanced to 15%). Also, it laid out the manner in which
the tuition fee should be fixed. Development fee has been
defined in the Act & Rules for an aided school only (Rule
151) whereas this was allowed as a legitimate
104
charge/levy by recognised unaided schools vide

Notification dated 15/12/1999 and duly upheld by
Supreme Court in the case of Modern School (2004). The
levy is permitted with certain caveats. As the Act & Rules
were introduced in 1973 and there being no significant
amendment subsequent to that, one may have to rely on
the notifications issued by DoE from time to time.
(b) The Notification dated 15/12/1999 states that
development fee shall be treated as capital receipt and
used for purchase, up-gradation and replacement of
furniture, fixtures and equipment. In effect, it became an
earmarked collection for specific purpose only.
(c) Further, the condition imposed for collection of
development fee is to have a depreciation reserve fund
equal to depreciation charged on assets. Development
fee and depreciation reserve have been termed as
‘Funds’ to be matched up with equivalent security.
Whether depreciation on furniture, fixtures and equipment
and/or on all assets is a component of Income &
Expenditure Account or of Development Fund Account is
not clear as the Order dated 15/12/1999 and Apex Court’s
order in the case of Modern School (2004) are silent on
this part.
(d) Similar directions were repeated in DoE’s Notification
dated 11/02/2009.
(e) The Supreme Court (Justice SH Kapadia) in its
judgement in Modern School (2004) case in paragraph 17
has held that under section 17(3) read with section 18(3)
& (4), the Directorate has the authority to regulate fee
under section 17(3). Thus in effect, vide paragraph 25 of
its judgement, Justice SH Kapadia also held Direction No.
7 of DoE’s Notification dated 15/12/1999 to be
appropriate. Though there is no legislative amendment to
Rule 175, the effect and accounting impact on
development fee being permitted for unaided school, is to
be assessed as change of accounting pattern.
105
(4) Section 18(3) of DSE Act, 1973 mandates that every recognised
unaided school shall maintain a ‘Recognised Unaided School
Fund’ (RUSF) and it shall be credited with all income accruing to
the school by way of fee, fines etc. Similarly, Section 18 (4) (a)
and (b) mandate that collections be spent for educational
purposes only and all collections for specific purposes shall be
utilised for the purpose for which they were received. Reading
Rule 175 of DSE Rules, 1973 is of significance as it refers to the
accounts with regard to the school fund or RUSF as defined in
section 18 of the DSE Act, 1973.
(5) Very recently, as per the querist, DoE vide its Order dated
16/04/16 while requiring schools to furnish annual information
under Rule 180, has reiterated their view of considering
development fee as a capital receipt to be taken directly to
balance sheet as a liability under ‘Designated Fund’ without its
movement through Income and Expenditure Account. Copy of
the Circular has been supplied by the querist for the perusal of
the Committee.
According to the querist, collection of development fee fund has
a pre-condition for its use for specific purpose only and not at
the discretion of management of school to change the purpose
of its utilisation. For accounting purposes, can development fee
collected be credited to Income and Expenditure Account for
change of its use for purpose other than the one prescribed but
for educational purposes. By using the nomenclature for
‘Development Fee Fund’ as ‘Designated Fund’ and not
‘Restricted Fund’, is DoE not implying that development fee be
first credited to revenue account and then designated as a
fund? This aspect needs to be taken into consideration by the
Expert Advisory Committee as there are no corresponding
appropriate heads in income and expenditure account or in
appropriation account in the prescribed formats under Rule 180
for accounting for development fee as such.
6. As for the nature of development fee, the querist has advised that the
Expert Advisory Committee should refer to paragraph 7 of the Notification
dated 15/12/1999, issued by the Department of Education which explains the
fee charge and nature thereof. Since this paragraph 7 has already been held
106
‘appropriate’ by Apex Court in its judgement in the case of Modern School

(2004), the querist is of the view that the Notification is a law as interpreted
by Apex Court. The recent Notification dated 16/04/16 issued by the
Department of Education with regard to presentation of annual accounts has
also been submitted for the perusal of the Committee. In view of the above -
referred notifications, the querist is of the view that the development fee is a
restricted fund to be used for purchase, upgradation and replacement of
furniture, fixture and equipment. Further, as for the periodicity of collection of
development fee, the querist has informed that it is generally collected along
with normal tuition fee as per time table set by respective school. It is either
monthly or quarterly as per option exercised by the parent but with a ceiling
of the cap on the amount of development fee, upto 15% of tuition fee. The
development fee can be accumulated over years depending upon capital
expenditure plans of the school as present law does not prescribe any time
limit for spending development fee.
B. Query
7. On the basis of the facts stated above, the querist has sought the
opinion of the Expert Advisory Committee on the following issues:
(i) (a) Does reading of section 18 read with Rules 175 and 176
for accounting purposes mean that all income accruing to
the school, including development fee, which is declared
by DoE to be treated as capital receipt, should first be
credited to RUSF A/c and thereafter appropriated to
development fee fund account, especially in view of clash
between section 18 read with Rule 175 and the
Notification dated 15/12/1999 treating development fee as
capital receipt.
(b) Would development fee fund appear as balance sheet
item, on liability side, represented by security as asset in
the form of bank balance (in fixed deposit) to the extent of
unspent amount and in form of written down value of
assets to the extent of development fee utilised/spent?
(Refer paragraph 99 of the Guidance Note on Accounting
by Schools, issued by the ICAI.)
(ii) Would accounting principles permit the charge of depreciation
on furniture, fixtures and equipment to development fee fund
107
account or be part of depreciation in income and expenditure

account with corresponding credit to Depreciation Reserve
Account?
(iii) In either of the case, would the fund in the form of a security
have to be maintained to meet the requirement of calling it as
Depreciation Reserve Fund by charge of such depreciation to
revenue account and treated as a cost recoverable against fee?
In effect, would school be rightfully able to accumulate funds for
capital expenditure from two sources, i.e., development fee
collected @15% and depreciation reserve fund funded out of
the surplus of respective year? Will this reserve fund be equal
to the whole of depreciation charged in revenue accounts or
restricted to depreciation of specified assets only?
8. The Committee notes that the basic issues raised in the query relate to
accounting for development fee and presentation of development fee fund,
charge of depreciation on fixed assets acquired out of development fee and
treatment of depreciation reserve fund in the financial statements of a school.
Accordingly, the Committee has examined only these issues and has not
examined any other issue that may arise from the Facts of Case, such as,
accounting in the financial statements of the trust/society running the
schools, etc. At the outset, the Committee wishes to point out that the
Committee has considered the issue purely from accounting perspective,
viz., applying the accounting principles in the context of the requirements of
the laws and regulations governing a school and has examined the issue
without interpreting the requirements of Delhi School Education Act, 1973
and Rules framed thereunder (DSE A & R), various notifications issued from
time to time by the Department of Education or the Government of Delhi and
the Court’s judgements, for determination of nature of development fee.
While expressing the opinion, the Committee has relied upon the view of the
querist that development fee received is of the nature of restricted fund.
9. With regard to the accounting for development fee and charging of
depreciation, the Committee notes the following paragraphs from the
Guidance Note on Accounting by Schools, issued by the Institute of
Chartered Accountants of India:
108
“Restricted Funds are contributions received by the school, the use of

which is restricted by the contributors.”
“99. Restricted funds that represent the contributions received whose
use is restricted by the contributors, are credited to a separate fund
account when the amount is received and reflected separately in the
balance sheet. Such funds may be received for meeting revenue
expenditure or capital expenditure. Where the fund is meant for
meeting revenue expenditure, upon incurrence of such expenditure,
the same is charged to the income and expenditure account
(‘Restricted Funds’ column); a corresponding amount is transferred
from the concerned restricted fund account to the credit of the income
and expenditure account (‘Restricted Funds’ column). Where the fund
is meant for meeting capital expenditure, upon incurrence of the
expenditure, the relevant asset account is debited which is
depreciated as per the recommendations contained in this Guidance
Note. Thereafter, the concerned restricted fund account is treated as
deferred income, to the extent of the cost of the asset, and is
transferred to the credit of the income and expenditure account in
proportion to the depreciation charged every year (both the income so
transferred and the depreciation should be shown in the ‘Restricted
Funds’ column). The unamortised balance of deferred income would
continue to form part of the restricted fund. Any excess of the balance
of the concerned restricted fund account over and above the cost of
the asset may have to be refunded to the donor. In case the donor
does not require the same to be refunded, it is treated as income and
credited to the income and expenditure account pertaining to the
relevant year (‘General Fund’ column). Where the restricted fund is in
respect of a non-depreciable asset, the concerned restricted fund
account is transferred to the ‘General Fund’ in the balance sheet when
the asset is acquired.”
From the above, the Committee notes that in the extant case, the
development fee is a capital receipt to be used for purchase, upgradation
and replacement of furniture, fixtures and equipments, which are depreciable
fixed assets. Therefore, initially the development fee received would be
credited to a separate fund account. Upon incurrence of the expenditure on
acquisition of the asset, the relevant asset account is debited which is
depreciated as per the recommendations in the Guidance Note and the fund
109
so created would be treated as deferred income to the extent of the cost of

the asset and an amount equivalent to depreciation amount is transferred to
the credit of income and expenditure account in proportion to the
depreciation charged every year.
10. With regard to the issue raised by the querist relating to whether
income accruing to the school including development fee should be first
credited to Recognised Unaided School Fund (RUSF) Account and thereafter
appropriated to Development Fee Fund Account considering the
requirements of section 18 read with Rule 175 of DSE A & R, the Committee
notes the requirements of section 18 and the relevant rules of DSE A&R as
follows:
Section 18
“18. (3) In every recognised unaided school, there shall be a fund,
to be called the “Recognised Unaided School Fund”, and there
shall be credited thereto income accruing to the school by way
of –
(a) fees,
(b) any charges and payments which may be realised by the
school for other specific purposes, and
(c) any other contributions, endowments, gifts and the like.
(4) (a) …
(b) Charges and payments realised and all other
contributions, endowments and gifts received by the
school shall be utilised only for the specific purpose for
which they were realised or received.”
Rules
“173 (4) Every Recognised Unaided School Fund shall be kept
deposited in a nationalised bank or a scheduled bank or in a post
office in the name of the school, and such part of the said Fund as
may be specified by the Administrator or any officer authorised by him
in this behalf shall be kept in the form of Government securities and as
cash in hand respectively:
Provided that in the case of an unaided minority school, the proportion
of such Fund which may be kept in the form of Government securities
110
or as cash in hand shall be determined by the managing committee of

such school.
175. Accounts of the school how to be maintained – The
accounts with regard to the School Fund or the Recognised Unaided
School Fund, as the case may be, shall be so maintained as to exhibit,
clearly the income accruing to the school by way of fees, fines, income
from building rent, interest, development fees, collections for specific
purposes, endowments, gifts, donations, contributions to Pupils’ Fund
and other miscellaneous receipts, and also, in the case of aided
schools, the aid received from the Administrator. (Emphasis supplied
by the Committee.)
176. Collections for specific purposes to be spent for that
purpose – Income derived from collections for specific purposes shall
be spent only for such purpose.”
From the above, the Committee notes that in order to meet the requirements
of both section 18 and the Rules, a separate account termed as Recognised
Unaided School Fund Account may be maintained, wherein all receipts by
the school including development fee should be first credited to such account
and then from this account, it may be transferred to the respective account
depending upon the nature of the receipt, for example, development fee may
be first credited to RUSF Account and then transferred to ‘Restricted Fund’
and thereafter the accounting treatment as discussed in paragraph 9 above
may be followed.
11. With regard to presentation of such fund, the Committee notes ‘Part II-
Balance Sheet’ of Appendix III – Formats of Financial Statements of Schools
to the Guidance Note on Accounting by Schools as follows:
“PART II – BALANCE SHEET
FUNDS EMPLOYED
UNRESTRICTED FUNDS
General Fund
…
RESTRICTED FUNDS
Restricted funds are funds subject to certain conditions set out by the
contributors and agreed to by the School when accepting the
111
contribution. This head includes:

(i) Endowment funds.
(ii) Funds related to depreciable/non-depreciable assets in respect
of which assets are still to be acquired.
(iii) Balances of deferred income, e.g., grants and donations in
respect of which specific depreciable assets have been
acquired.
(iv) Funds related to specific items of revenue expenditure not yet
incurred.
Each restricted fund should be reflected separately either on the face
of the balance sheet or in the schedule(s) to the balance sheet.
Notes:
1. ...
2. …
3. Designated/Restricted Funds represented by specifically
earmarked bank balances/investments should be disclosed
separately in respect of each fund.”
From the above, the Committee notes that the funds related to depreciable
assets in respect of which the assets are still to be acquired are to be
presented under the sub-head, ‘Restricted Funds’ under the head ‘Funds
Employed’ in the balance Sheet. Moreover, balances of deferred income, i.e.,
the funds in respect of which specific depreciable assets have been acquired
should also be presented in a similar way under ‘Restricted Funds’ in the
balance Sheet. Further, the restricted funds represented by specifically
earmarked bank balances/investments should be disclosed separately either
on the face of balance sheet or in the schedules to the balance sheet.
12. With regard to creation of depreciation reserve as per the
requirements of the DoE Notification, the Committee is of the view that from
accounting perspective, the school, if so desires, may create a depreciation
reserve equal to the depreciation charged during the year as an
appropriation of profits. However, in order to term such depreciation res erve
as ‘depreciation reserve fund’ the same should be represented by specifically
112
earmarked assets. In this regard, the committee notes the definition of the
term, ‘fund’ as per paragraph 6.15 of the Guidance Note on Terms Used in
Financial Statements 2, issued by the ICAI, which is reproduced as below:
“6.15 Fund
An account usually of the nature of a reserve or a provision
which is represented by specifically earmarked assets.”
13. Further, with regard to the issue raised by the querist relating to
creation of depreciation reserve fund account to the extent of the
depreciation charged in the income and expenditure account or restricted to
depreciation of specified assets only (viz., those acquired out of the
development fee), the Committee notes clauses 7 and 14 of the Notifications
of DoE dated 15 th December, 1999 and dated 11 th February, 2009,
respectively, as follows:
“7. Development fee, not exceeding ten percent of the total annual
tuition fee may be charged supplementing the resources for purchase,
up gradation and replacement of furniture, fixtures and equipment.
Development fee, if required to be charged, shall be treated as capital
receipt and shall be collected only if the school is maintaining a
Depreciation Reserve Fund, equivalent to the depreciation charged in
the revenue accounts and the collection under this head along with the
any income generated from the investment made out of this fund, will
be kept in a separately maintained Development Fund Account.”
“14. Development fee, not exceeding 15% of the total annual tuition
fee may be charged for supplementing the resources for purchase, up
gradation and replacement of furniture, fixtures and equipment.
Development Fee, if required to be charged, shall be treated as capital
receipt and shall be collected only if the school is maintaining a
Depreciation Reserve Fund, equivalent to the depreciation charged in
the revenue accounts and the collection under this head along with
and income generated from the investment made out of this fund, will
be kept in a separately maintained Development Fund Account.”
2Subsequently, on issuance of the ‘Glossary of Terms used in Financial Statements’

by the Research Committee of the ICAI on July 1, 2019, the Guidance Note on
Terms Used in Financial Statements was withdrawn.
113
From the above, the Committee notes that on a harmonious reading of the
above-reproduced requirements, it appears that since the development fee
can be collected only if the school is maintaining a depreciation reserve fund
and the use of development fund is restricted for some specified assets, the
depreciation reserve fund should be maintained equivalent to the
depreciation charged in respect of the specified assets only and not the total
amount of depreciation charged in the income and expenditure account.
D. Opinion
14. On the basis of the above and subject to paragraph 8 above, the
Committee is of the following opinion on the issues raised in paragraph 7
above:
(i) (a) In order to meet the requirements of both section 18 and
the Rules, a separate account termed as Recognised
Unaided School Fund Account may be maintained,
wherein all receipts by the school including development
fee should be first credited to such account and then from
this account, it may be transferred to the respective
account depending upon the nature of the receipt, for
example, development fee may be first credited to RUSF
Account and then transferred to ‘Restricted Fund’, as
(b) Development fee fund to the extent of unspent amount
and the fund in respect of which specific depreciable
assets have been acquired should be presented and
disclosed as per the requirements of the Guidance Note
on Accounting by Schools, as discussed in paragraph 11
above.
(ii) Depreciation on furniture, fixtures and equipment should be
provided as per the recommendations in the Guidance Note on
Accounting by Schools and an amount equivalent to
depreciation amount is transferred from the development fund
account to the credit of income and expenditure account in
proportion to the depreciation charged every year. Depreciation
reserve, from accounting perspective, may be created equal to
the depreciation charged during the year as an appropriation of
profits, as discussed in paragraphs 10 and 12 above.
114
(iii) In order to term the depreciation reserve as ‘depreciation

reserve fund’, the same should be represented by specifically
earmarked assets, as discussed in paragraph 12 above and the
same would also be in accordance with the accounting
principles. As far as the issue of creation of depreciation reserve
fund account to the extent of the depreciation charged in the
income and expenditure account or restricted to depreciation of
specified assets only (viz., those acquired out of the
development fee) is concerned, the depreciation reserve fund
should be maintained equivalent to the depreciation charged in
respect of the specified assets only and not the total amount of
depreciation charged in the income and expenditure account, as
__________
Query No. 11
Subject: Accounting treatment of temporary income in relation to
construction contract. 1
1. A Ltd. is a public sector shipyard under the Ministry of Defence and is
in the business of construction of warships. Indian Navy, Coast Guard and
other customers award contracts to the company on commercial terms. The
contracts are awarded on fixed price basis except certain variable
components, such as, foreign exchange variation and cost of spares etc.
The payment for fixed price part is on the basis of completion of milestones.
The payment for variable component is based on actual cost to the shipyard.
2. The querist has informed that the shipyard recognises revenue on
percentage completion method as per Accounting Standard (AS) 7,
‘Construction Contracts’. The total revenue from a project is the contract
price of the project plus extras as mentioned above.
3. The payment terms for fixed price portion of the contract are generally
spread over 10-12 milestones starting with initial payment of 10% on signing
115
of the contract. As the gestation period of the contracts for shipbuilding is

longer, it so happens that during initial period when the funds are made
available, at times, become temporary surplus funds, which are deployed in
short-term fixed deposits. However, in the later part of execution of the
contract, the cost incurred on the project exceeds the stage payments
received on the vessel leading to a negative cash flow. Further, the last
stage payment of the project is deferred till one year after the delivery of the
vessel.
4. Thus, the interest earned initially on the temporary surplus
compensates to a certain extent for the period of deficit cash flow, especially
at the later part of the execution of the project.
5. The querist has further informed that at present, in the books of
account, the total stage payments, i.e., contract price is taken as operating
revenue and interest earned from the surplus of stage payments is
accounted for under the head ‘Other Income’.
6. In view of the facts mentioned, it is felt that interest earned from such
surplus of stage payments should also be considered under ‘other operating
revenue’ since the interest is inextricably connected to stage payments and
is one of the parameters for contract price.
7. The querist has provided the reasons for inclusion of interest earned
on stage payments under ‘other operating revenue’ for shipyards in brief as
follows:
(a) Shipyards are engaged in long gestation contracts with
operating cycle ranging from 3 to 4 years. The stage payments
for milestone activities are directly linked to physical progress
achieved in each project (sample copy for one of the project has
been supplied by the querist for the perusal of the Committee).
Stage payments are not released in the event of non-completion
of specified milestones. Thus, the stage payments received on
milestone achievement and interest, if any, earned thereon
arises from operations.
(b) If customer had not agreed for stage payments in the existing
manner, the company will have to arrange funds to meet
working capital requirements and cost of working capital would
have been factored in for arriving at contract price. In such a
scenario, the profit arising out of revised contract price would be
116
higher to the extent of such interest factor considered for

quoting the price. Therefore, the interest earned out of stage
payments shall also deserve to be treated as a part of core
business activities and considered under ‘operating revenue’.
(c) The notional interest income arising out of investments from
temporary surpluses of stage payments is considered by the
customer as a negotiating point during the price negotiation of
the contracts.
B. Query
8. Considering the facts submitted as above, opinion of the Expert
Advisory Committee of the Institute of Chartered Accountants of India (ICAI)
is sought on whether interest earned on deposits made out of temporary
surpluses of milestone payments can be considered as ‘other operating
revenue’.
9. At the outset, the Committee notes that although the issue raised is
whether interest earned on deposits made out of temporary surpluses of
milestone payments can be considered as ‘other operating revenue’, the
basic issue raised by the querist relates to presentation of such interest
earned during contract execution under the head ‘other income’ or under
‘other operating revenue’. The Committee has, therefore, considered only
this issue and has not examined any other issue that may be contained in the
Facts of the Case. Further, the opinion being expressed hereinafter is purely
from the perspective of presentation in the financial statements and not from
any other perspective. The Committee also wishes to point out that since the
querist has referred to Accounting Standard (AS) 7, ‘Construction Contracts’,
the opinion has been expressed considering the requirements of Accounting
Standards notified under the Companies (Accounting Standards) Rules, 2006
and not the requirements of Indian Accounting Standards (Ind ASs), notified
under the Companies (Indian Accounting Standards) Rules, 2015.
10. The Committee notes that Note 2(A) to General Instructions for the
Preparation of Statement of Profit and Loss in Part II – Form of Statement of
Profit and Loss of Schedule III to the Companies Act, 2013 requires that in
respect of a company other than a finance company, revenue from
operations shall disclose separately in the notes revenue from (a) sale of
products, (b) sale of services, (c) other operating revenues, and (d) less:
117
excise duty. The Committee further notes the following requirements of the
Guidance Note on Schedule III to the Companies Act, 2013 2, issued by the
ICAI:
“9.1.6 For non-finance companies, revenue from operations needs to
be disclosed separately as revenue from
(a) sale of products,
(b) sale of services and
(c) other operating revenues.
It is important to understand what is meant by the term “other
operating revenues” and which items should be classified under this
head vis-à-vis under the head “Other Income”.
9.1.7 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 the 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. The
classification of income would also depend on the purpose for which
the particular asset is acquired or held. For instance, a group engaged
in manufacture and sale of industrial and consumer products also has
one real estate arm. If the real estate arm is continuously engaged in
leasing of real estate properties, the rent arising from leasing of real
estate is likely to be “other operating revenue”. On the other hand,
consider a consumer products company which owns a 10 storied
building. The company currently does not need one floor for its own
use and has given the same temporarily on rent. In that case, lease
rent is not an “other operating revenue”; rather, it should be treated as
“other income”.’’
“9.2 Other income:
The aggregate of ‘Other income’ is to be disclosed on face of the
Statement of Profit and Loss.
2Subsequently, this Guidance Note was revised in July, 2019 as ‘Guidance Note on
Division I – Non Ind AS Schedule III to the Companies Act, 2013’.
118
9.2.1 As per Note 4 to General Instructions for the preparation of

Statement of Profit and Loss ‘Other Income’ shall be classified as:
(a) Interest Income (in case of a company other than a finance
company);
(b) Dividend Income;
(c) Net gain/loss on sale of investments;
(d) Other non-operating income (net of expenses directly
attributable to such income).
9.2.2 All kinds of interest income for a company other than a finance
company should be disclosed under this head such as interest on fixed
deposits, interest from customers on amounts overdue, etc.”
From the above, the Committee notes that the classification of an item under
“other operating revenue” or “other income” is a matter of judgement
considering the specific facts and circumstances of each case, for example,
considering the nature of activity the company is engaged into, etc. The
Committee also notes that the Guidance Note requires all types of interest
income in case of a company other than finance company to be disclosed
under the head ‘other income’. Accordingly, considering the company’s
business of construction of warships, the Committee is of the view that
interest income from temporary investments of milestone payments cannot
be classified as ‘other operating revenue’; rather the same should be
classified as ‘other income’ only.
D. Opinion
11. On the basis of the above, the Committee is of the view that interest
income from temporary investments of milestone payments cannot be
classified as ‘other operating revenue’; rather the same should be classified
as ‘other income’ only.
__________
119
Query No. 12
Subject: Charging of pro rata depreciation. 1
1. A company (hereinafter referred to as ‘the company’) is a fully owned
Government of Madhya Pradesh (GoMP) company and was incorporated in
May, 2002 after unbundling of erstwhile State Electricity Board (SEB).
However, the commercial operations commenced from 1st June, 2005
pursuant to GoMP Notification No. 226 dated 31st May, 2005.
2. The company is engaged in the business of electricity distribution in
the area of Indore and Ujjain Commissionaire of State of Madhya Pradesh
and is governed by the provisions of the Electricity Act, 2003. The company
is responsible for all activities associated with distribution of power within its
territory, including management of assets, operation and maintenance of
network and supply, technical and financial planning, business development
and management of human resources, legal and regulatory affairs, etc.
3. The querist has stated that as per the accounting policy of the
company, depreciation on addition/ retirement of fixed assets is provided on
‘pro rata basis’ from beginning of quarter in which the asset was put to use.
4. However, while conducting audit of annual accounts of the company
for financial year (F.Y.) 2014-15, the government auditor (C&AG auditor) has
following observation in this regard:
“Depreciation and amortisation expenses
This is overstated by Rs. 2.96 crore due to adoption of depreciation
method for addition to fixed assets during the year on quarterly basis
in deviation to AS 6. As per the accounting policy of the company,
depreciation on addition to fixed assets is provided on pro rata basis.
However, in deviation to its own accounting policy, the company while
calculating the depreciation on addition to fixed assets, worked out on
quarterly basis, i.e., from the beginning of the quarter in which the
asset was put to use, irrespective of the date on which the asset was
actually put to use. Thus, the company in deviation to Accounting
Standard (AS) 6 ‘Depreciation Accounting’ and also its own accounting
policy worked out the depreciation on addition to fixed assets on
120
quarterly basis instead of pro rata basis. This has resulted in

overstatement of Depreciation & Amortisation Expenses and
understatement of fixed asset by Rs.2.96 crore. Consequently, loss for
the year is overstated by similar amount.”
5. In response to above, the company has submitted the following reply:
“CAG audit observed that the company while calculating the
depreciation on addition to fixed assets, worked out on quarterly basis,
i.e., from the beginning of the quarter in which the asset was put to
use, irrespective of the date on which the asset was actually put to
use. Thus, the company is in deviation of Accounting Standard (AS) 6,
‘Depreciation Accounting’.
In this regard, it is stated that depreciation is to be charged on pro rata
basis, however, the meaning of pro rata basis is not defined. Hence,
kind attention is invited on ‘Guidance Note on Accounting for
Depreciation in Companies’ which provides the following accounting
treatment in case of pro rata depreciation:
“24. Note no. 4 in Schedule XIV to the Companies Act, 1956,
prescribes that "where, during any financial year, any addition
has been made to any asset, or where any asset has been sold,
discarded, demolished or destroyed, the depreciation on such
assets shall be calculated on a pro rata basis from the date of
such addition or, as the case may be, up to the date on which
such asset has been sold, discarded, demolished or destroyed".
The Committee is of the view that a company may group
additions and disposals in appropriate time period(s), e.g., 15
days, a month, a quarter etc., for the purpose of charging pro
rata depreciation in respect of additions and disposals of its
assets keeping in view the materiality of the amounts involved.”
It is clearly mentioned above that the company may calculate pro rata
depreciation on 15 days basis, or monthly basis or quarterly basis.
Accordingly, based on the principle of materiality, the company has
grouped the addition of assets on quarterly basis for depreciation on
assets.”
6. The C&AG auditor was also requested to consider the directions given
in Madhya Pradesh Electricity Regulatory Commission (MPERC) (Terms and
Conditions For Determination of Tariff For Supply and Wheeling of Electricity
121
And Methods and Principles For Fixation of Charges) Regulations, 2009 {G -

35 of 2009}. The relevant extracts of the same are reproduced as under:
“30 Depreciation
30(1)(g) Depreciation shall be chargeable from the first Year of
commercial operation. In case of commercial operation of the asset for
part of the Year, depreciation shall be charged on pro rata basis”.
7. Further, an earlier opinion of the Expert Advisory Committee of ICAI on
related subject matter was also submitted to C&AG auditors, in which the
Committee is of the view that a company may group additions and disposals
in appropriate time period(s), e.g., 15 days, a month, a quarter etc., for the
purpose of charging pro rata depreciation in respect of additions and
disposals of its assets keeping in view the materiality of the amounts
involved. However, it was not considered by C&AG auditors.
B. Query
8. In light of the above facts, the querist has requested the Expert
Advisory Committee to provide the opinion that whether the treatment given
by the company of charging depreciation for addition and disposal of fixed
assets during the year pro rata on quarterly basis is correct or not.
appropriateness of the method of charging the depreciation for addition and
disposal of fixed assets during the year pro-rata on quarterly basis. The
Committee has, therefore, considered only this issue and has not examined
any other issue that may arise from the Facts of the Case, such as,
determination of the rates of depreciation, etc. At the outset, the Committee
wishes to point out that the opinion expressed hereinafter is purely from
accounting perspective and not from the perspective of legal interpretation of
various legal enactments such as, MPERC Regulations, Electricity Act, 2003,
etc. Further, as a reference has been made to AS 6, the Committee has not
examined the requirements of Accounting Standards revised vide MCA
Notification dated March 30, 2016 and Indian Accounting Standards (Ind
ASs).
10. At the outset, the Committee notes that the company is charging
depreciation from the beginning of the quarter in which the asset was put to
use whereas as per the requirements of Schedule II to the Companies Act,
122
2013, depreciation should be charged from the date when the asset is
available for use by the company rather than from the date when the asset is
put to use. However, the Committee notes that MPERC Regulations require
depreciation on assets to be charged from the first year of commercial
operation and Part B of Schedule II to the Companies Act, 2013 also state s
that “the useful life or residual value of any specific asset, as notified for
accounting purposes by a Regulatory Authority constituted under an Act of
Parliament or by the Central Government shall be applied in calculating the
depreciation to be provided for such asset irrespective of the requirements of
this Schedule”. Therefore, since whether requirements of MPERC
Regulations would be covered under Part B of Schedule II or not, would
involve interpretation of MPERC Regulations and since the same is also not
the issue raised in the extant case, the Committee has not examined the
issue as to whether in the extant case, the company should charge
depreciation from the date the asset is put to use/commercial operation or
the date when it is available for use by the company. Further, since the
company is not differentiating between these two dates, it is presumed from
the Facts of the Case that these dates are same in the extant case and
accordingly, the Committee has restricted itself to the issue raised of
charging the pro rata depreciation on quarterly basis.
11. The Committee further notes that the company is charging
depreciation from the beginning of the quarter in which the asset was put to
use irrespective of the date on which the asset was actually put to use. In
this regard, the Committee notes the requirements of Note 2 of Schedule II of
the Companies Act, 2013 which states as follows:
“Where, during any financial year, any addition has been made to any
asset, or where any asset has been sold, discarded, demolished or
destroyed, the depreciation on such assets shall be calculated on a
pro rata basis from the date of such addition or, as the case may be,
up to the date on which such asset has been sold, discarded,
demolished or destroyed.”
From the above, the Committee notes that Schedule II requires calculation of
depreciation on pro rata basis for any additions/disposals of assets made
during the year. The Committee notes that the manner of providing pro rata
depreciation has been explained in paragraph 59 of the Guidance Note on
Accounting for Depreciation in Companies in the context of Schedule II to the
123
Companies Act, 2013 22which states as follows:

“Pro-rata Depreciation
59. Note no. 2 in Schedule II prescribes that “where, during any
financial year, any addition has been made to any asset, or where any
asset has been sold, discarded, demolished or destroyed, the
depreciation on such assets shall be calculated on a pro rata basis
from the date of such addition or, as the case may be, up to the date
on which such asset has been sold, discarded, demolished or
destroyed.” The company may group additions and disposals in
appropriate time period(s), e.g., 15 days, a month, a quarter etc., for
the purpose of charging pro rata depreciation in respect of additions
and disposals of its assets keeping in view the materiality of the
amounts involved.”
From the above, the Committee notes that the Guidance Note allows
grouping of assets acquired or disposed of on quarterly basis for providing
pro rata depreciation subject to the considerations of materiality of the
amounts involved. The Committee is of the view that ideally, as a matter of
principle, depreciation should be calculated from the date the asset is
available for use (i.e., on daily basis). However, as a matter of administrative
convenience, the Guidance Note allows grouping of assets acquired or
disposed of on a 15 days/monthly/quarterly basis and calculation of
depreciation on such assets accordingly unless the amounts involved are
material. In other words, the intention behind such grouping is that to the
extent possible, the depreciation so calculated should not be materially
different from the actual depreciation, computed from the date the asset is
available for use. As far as materiality is concerned, it is a matter of
judgement and needs to be considered in the specific facts and
circumstances of the company. Accordingly, the Committee is of the view
that in the extant case, the company may continue to charge pro rata
2 The said Guidance Note was issued in the year 2016, whereas the query relates to
the financial year 2014-15. However, since in the extant case, the requirements of
Companies Act, 2013 are applicable, in the context of which this Guidance Note has
been issued, the same has been referred to. Further, since the erstwhile Guidance
Note on Accounting for Depreciation in Companies (which was in force during the
financial year 2014-15) was in context of Schedule XIV to the Companies Act, 1956
and contained same requirements in respect of pro-rata depreciation, the same has
not been referred to.
124
depreciation on additions and disposal of assets on quarterly basis provided

the amounts involved are not material. However, if the amounts involved for
specific assets are material, the company should consider grouping of
additions and disposals of such assets on some more suitable basis, for
example, on monthly or 15 days period basis, etc.
D. Opinion
12. On the basis of above, the Committee is of the opinion that the
company may continue to charge pro rata depreciation on additions and
disposal of assets on quarterly basis provided the amounts involved are not
material. However, if the amounts involved for specific assets are material,
the company should consider grouping of additions and disposals of such
assets on some more suitable basis, for example, on monthly or 15 days
period basis, etc., as discussed in paragraph 11 above.
__________
Query No. 13
Subject: Recognition of gross receipt as revenue. 1
1. In June 1972, Government of India (GOI) constituted the Space
Commission (SC) and established the Department of Space (DOS) to
formulate and implement space policies and programmes in the country.
2. The Indian Space Research Organisation (ISRO) is the research and
development (R&D) organisation of the DOS and is responsible for executing
the programmes and schemes of the DOS in accordance with the directives
and polices laid down by the SC and the DOS through ISRO centres/ units
and the grant-in-aid institutions.
3. A company (hereinafter referred to as ‘the çompany’) was incorporated
on 28 September, 1992 under the Companies Act, 1956 as a private limited
th
company and is a wholly owned Government of India company under the

administrative control of DOS.
125
4. The company is the commercial arm of ISRO and is mandated to

promote and commercially exploit products and services emanating from the
Indian space programme by utilising the capabilities, capacities,
infrastructure and manpower of ISRO.
5. The company per se does not own any space based assets or
manufacturing facilities except its corporate office. In the year 200 8, the
company was awarded ‘Mini Ratna’ status.
6. The major business areas of the company currently are:
(i) Provisioning of communication satellite transponders to Indian
users;
(ii) Providing satellite launch services to domestic and international
customers;
(iii) Marketing of direct downlinking of data from Indian Remote
Sensing (IRS) satellites to International Ground Stations (IGS)
and data products to Indian and international customers;
(iv) Building and marketing of satellites and satellite sub-systems for
international customers and related services;
(v) Building satellites and establishing associated ground
infrastructure for Indian strategic users;
(vi) Mission support services for foreign satellites.
7. The querist has stated that over the years, DOS/ ISRO has developed
and launched the Indian National Satellite (INSAT) and Geosynchronous
Satellite (GSAT) series of communication satellites; with transponders
operating in C, Extended-C, Ku, UHF and S bands; for broadcasting (TV,
DTH, DSNG) and communication applications (VSAT); and established the
INSAT system. As and when the INSAT system’s transponder capacity was
found to be inadequate to meet the user demands, the company is directed
to identify suitable transponder capacities from foreign satellite operators to
augment the INSAT capacity by leasing. Such leased capacities provided to
users are also considered to be part of INSAT’s transponder capacity.
8. In the financial year 2014-15, the company earned about INR 1171.23
crores as revenue by providing capacities from the INSAT system. Out of
this, the revenue from providing INSAT/GSAT transponders to users is INR
487.07 crores (42%) and revenue from providing foreign satellite capacity to
users is INR 684.16 crores (58%).
126
9. The querist has further stated that the statutory auditor, while auditing
annual accounts of the company for the financial year 2014-15, requested
the company to obtain the opinion of Expert Advisory Committee of the
Institute of Chartered Accountants of India (ICAI), as to whether the existing
practice of “recognising the gross receipt of ‘Space Segment Charges (SSC)’
in respect of INSAT/ GSAT transponder capacity (other than receipts in
respect of foreign satellites capacity) as revenue in the books of the
company”, is in order.
Technical Background:
10. Every communication satellite that is used for transmission of signals
will contain devices called ‘transponders’. In a single satellite, there can be
12 to 60 such transponders. These transponders are mainly used for
broadcasting (DTH, TV), DSNG and telecommunications (Public Switched
Telephone Network and VSAT for closed user groups).
11. The capacity of a satellite is determined by multiplying the number of
transponders on it with frequency bandwidth of each such transponder
measured in ‘Mega Hertz (MHz)’. Each transponder is assigned equal and
specific ranges of frequencies, each with a start frequency and end
frequency, called as up-linking frequency range and down-linking frequency
ranges as explained more elaborately in the following paragraphs. The
difference between the start frequency and end frequency (of either up -link or
down-link) is called the ‘bandwidth’ and is the accepted parameter for
capacity.
12. As per the requirements of different customers, each of them is
allotted a capacity in terms of a particular bandwidth. It is within this range of
frequencies that the customer can throw up/transmit their signals into space.
This activity is called ‘up-linking’. The transponder in the satellite will pick up
the signals thrown up/transmitted by the customers and amplify them so that
the said signals can be retransmitted back on a greater area called the ‘foot
print’. The ground station of the customer will have the equipment to identify
and receive such signals which are thrown back/retransmitted by the
transponders in the specified frequencies. This activity is called ‘down-
linking’.
13. For providing access to the satellite transponders to users so that this
activity of picking up signals, amplifying them and throwing/ retransmitting
them back into the space, the company charges the customers a
consideration called ‘space segment charges (SSC)’.
127
14. The Union Cabinet approved the norms, guidelines and procedures for
implementing the new Satellite Communications (SATCOM) Policy (copy
supplied by the querist for the perusal of the Committee), as intimated by
DOS Note dated 10-10-2000 (copy supplied by the querist for the perusal of
the Committee). As per paragraph 2.3 - Basic Guidelines – “As a baseline
making the INSAT capacity available to the commercial sector should be
based on sound business lines, i.e., this activity should be on a ‘for profit’
basis and at the same time consistent with the Government policies in the
concerned user sectors. As per paragraph 2.6, ‘Commercial and Contractual
Factors’, all the commercial activities of INSAT space segment shall be
carried out by the Department of Space (DOS) which means the organisation
created in DOS for this purpose or the corporate structure meant for
operating the INSAT system, if and when such an organisation is created.
The querist has supplied a copy of SATCOM Policy and DOS Note for the
perusal of the Committee. Since DOS had already incorporated the company
during 1992, no separate corporate structure for operating the INSAT system
was created and the responsibility of commercialisation of the INSAT
capacity was transferred to the company.
15. The activities of billing and revenue collection pertaining to leasing of
the INSAT capacity were transferred from Department of Telecommunication
(DOT) (XYZ Ltd.) to DOS from July 1, 2003 (copy of the communication from
DOT to DOS has been supplied by the querist for the perusal of the
Committee). Prior to this date, the revenue collection and recognition we re
done by XYZ, a corporate entity under DOT based on licence agreement
entered into by DOT. (The querist has supplied a sample copy of the invoice
raised by XYZ Ltd. for the perusal of the Committee.) As per the
understanding of the querist, XYZ Ltd. recognised full amount shown in their
invoice as its revenue and the cost of receiving the service from DOS was
paid for by XYZ Ltd. to DOS. This cost was treated as expenditure in the
books of XYZ Ltd.
16. The existing system of billing and revenue recognition is being
followed in the company consistently since 2003 which is similar to the billing
and revenue recognition adopted by XYZ Ltd. earlier.
17. DOS on behalf of Hon’ble President of India, since 2003, enters into
contracts with the customers for providing ‘Space Segment Capacity (SSC)’
of the INSAT/GSAT systems.
18. The SSC for the INSAT/ GSAT satellites are fixed by the Government
of India and included in the agreements. In contrast, SSC in respect of
128
foreign transponder capacities are negotiated with the satellite operators and
fixed by the company and included in the agreements for these capacities.
As there are inter-departmental involvement in transponder leasing, like
Department of Telecommunication, Department of Space, etc., the
agreement is entered into between DOS and the end customer and not
directly by the company, though negotiated by the company and the
company is responsible for rendering the service of providing space
segment.
19. The company, to fulfil its obligations, obtains the service from the
INSAT/ GSAT satellites of DOS and provides the same to its end customers.
Any tax liability, as per the current provisions of law shall be paid by the
company on both as a service provider as well as recipient of service on
reverse charge basis, if any.
20. The company is required to carry out various activities to render the
service to its customers. Some such activities are provided herewith:
(i) Procure services in the form of space segment from DOS and
arrange leasing of the same to its customers.
(ii) Billing of customers on a monthly / quarterly / annually /
occasional use etc. basis at the rates, terms and conditions of
the individual contracts. (The querist has supplied a copy of an
invoice raised for the perusal of the Committee.)
(iii) Realisation of payments against invoices raised on customers.
(iv) Levying, collection and remittance of service tax to appropriate
authorities, filing of tax returns and maintenance of related
records according to the related tax statutes.
(v) Market INSAT /GSAT space segment capacity both in local and
global markets.
21. The company invoices SSC on monthly/ quarterly/ six monthly/
annually as per the agreements’ terms as per rates prescribed in the
agreements with the customers along with service tax. The company is
registered as a service provider as required under the provisions of Chapter-
V of the Finance Act, 1994 and has been discharging service tax on the
entire amount invoiced by it on INSAT/GSAT SSC and from 16.05.2008 for
foreign satellite SSC. (The querist has supplied illustrative copies of the
returns filed under the Finance Act, 1944 for the said period for the perusal of
the Committee.)
129
22. The cost of service rendered by DOS to the company is based on

agreement (Memorandum of Understanding (MoU)) between DOS and the
company and a fixed percentage of the contracted value with the end
customer is agreed to be the cost of such service. The copy of
Agreement/MoU has been separately provided by the querist for the perusal
of the Committee. (Emphasis supplied by the querist.)
23. Apart from the SSC, the company claims penal interest for delay in
remittance of SSC by the customers as per the terms of the agreements and
the said penal interest is treated as income of the company.
24. The company is currently raising invoices on the customers for SSC
and recognizing the entire amount as revenue in its books of account. The
cost of SSC, based on DOS Order (85%) is booked against each invoice
raised for SSC. Since the invoices are raised based on the price fixed by
GOI, the company cannot negotiate the price with the customers or offer any
discount on INSAT/GSAT SSC.
25. On receipts from customers, the actual receipts of SSC portion of the
INSAT/ GSAT satellites are transferred to DOS and 15% of the SSC is
claimed as the company’s share from DOS on a quarterly basis as per
procedure for sharing of revenue from leasing of INSAT/GSAT satellite
transponder capacity. The company retains the penal interest received and
accounts it as ‘other income’.
26. The querist has also separately informed that the credit risk for the
amount receivable from the customers is borne by the company. The
company provides for doubtful debts in case of dues for more than three
years based on the recommendation of a Debtor Review Committee
constituted on direction by the Board and in accordance with the company’s
accounting policy. The company has also written off bad debts in the past
and hence, the credit risk is borne by the company. Further, legal action
against customers for recovery of dues, wherever required, is also taken by
the company.
B. Query
Committee as to whether inclusion of the gross revenue from operations for
providing the INSAT/GSAT satellite capacity to customers is in order. If not,
whether the company’s share of revenue in respect of these capacities alone
is to be considered as revenue to the company in view of the existing
relationship between the company and Department of Space (DOS).
130

to whether inclusion of gross revenue from operations for providing the
INSAT/GSAT satellite capacity to customers is in order. Therefore, the
Committee has examined only this issue and has not examined any other
issue that may arise from the Facts of the Case, such as, timing of
recognition of costs and revenue, accounting treatment of receipts/SSC in
respect of foreign satellites/transponders capacity or any other income being
earned by the company, etc. Further, the Committee wishes to point out that
its opinion is expressed purely from accounting perspective and not from tax
(income tax or service tax) or legal perspective. Incidentally, the Committee
notes that under the MoU entered into between the Department of Space and
the company, the terms, ‘revenue sharing/share of profits’ or ‘fee’ in lieu of
services rendered by the company to DOS/value of works carried out by the
company, have been used interchangeably; however, the same does not
affect the opinion expressed hereinafter.
29. As regards the issue raised by the querist with regard to recognition of
revenue on gross basis or net basis, the Committee is of the view that the
same would depend upon the capacity in which the company is working vis-
à-vis DOS, viz., whether the company is acting as an agent of the DOS or
not. In this regard, the Committee notes the following from the Memorandum
of Understanding between DOS and the company:
(i) Being commercial arm of ISRO, the company is the only
company charged with the administration of contracts of this
nature with third party clients for provision of space segment
capacity. The company shall interface with the customers and
DOS for administering such agreements, raise invoices, collect
charges for provision of capacity as per agreements and do all
such acts necessary to fulfil its contractual obligations towards
such third party in the regular course of business.
(ii) The company will charge a fee, from DOS for all services
rendered to DOS as part of the contracts entered into between
the company and third parties, for all the functions related to
space segment capacity.
(iii) DOS enters into agreement with Indian and Foreign users for
provision of the INSAT transponder capacity.
131
(iv) The revenue sharing arrangement between DOS/ISRO and the

company for INSAT/VSAT transponder leasing is 85:15. The
revenue sharing arrangement shall be based on estimates of
the value of works carried out by ISRO/DOS and value of works
carried out by the company.
(v) The entire revenue collected by the company on behalf of DOS
has to be first transferred to DOS/Government of India and then
the company may claim their due share on a quarterly basis
from DOS/ Government of India. ... The company’s share of
profit is later remitted by DOS.
(vi) DOS may revise this revenue sharing formula from time to time.
The revenue sharing so finalised is binding on the company.
The Committee also notes from the MOU/Agreement signed between the
DOS and the customer for provision of space segment capacity in the
INSAT/GSAT systems that the company will act as the contract
manager/administrator to administer the MOU/Agreement and all the
services under the contract are actually provided by the DOS/ISRO using
their facilities/assets. Further, all the decisions under the contract, such as,
for any addition/reduction in the capacity provided by the DOS, sub-leasing
of the transponder capacity, termination of contract, forfeiture of caution
deposit, etc. are taken by the DOS. Moreover, the prices/charges to be
charged to the customer and any revision in the same is decided by the
DOS, as per its pricing policy. DOS is also liable to indemnify and hold
customer harmless from any loss, damage, liability, etc. arising from DOS’
exercising use, control or operation of the concerned satellite. The
Committee also notes that although invoices are raised in the name of the
company, the actual contract with the customers is entered into by the DOS.
As far as credit risk is concerned, the Committee notes from the MOU
between the company and the DOS that the revenue sharing between the
DOS and the company shall be on collection after accounting for expenditure
on the activity, taxes and duties, etc. The Committee further notes from the
Exhibit-B, Payment Schedule to the agreement of the DOS with the customer
(a private company), as provided by the querist for the perusal of the
Committee, inter alia, provides that the DOS shall have the right to black out
the provisioned capacity if customer defaults on payments as stipulated in
this agreement and that upon signing of the contract, customer will require to
deposit with the DOS a refundable and interest free ‘Caution Deposit’ which
132
shall be refunded at the end of agreement upon reconciliation of accounts

and remittance of all dues under the agreement. Further, the agreement with
the customer also, inter alia, provides that DOS has the right to terminate the
agreement, including forfeiture of caution deposit, if the customer fails to
make two consecutive periodic payments for space segment capacity. These
clauses indicate that credit risk is not borne by the company as the revenue
sharing will be on collected amount and any non-payment of dues by the
customer shall be adjusted against the caution money deposited. Moreover,
it appears to the Committee that the company claims to be bearing the credit
risk on the ground that the company has provided for and written off bad
debts in the past on the debtors/receivables which the company has
recognised on the basis of gross revenue in its financial statements, as per
the accounting policy followed by it. In this regard, the Committee is of the
view that mere accounting treatment accorded by the company does not
determine whether the company bears the credit risk or not. Further, the
Committee is of the view that bearing of credit risk is not the only relevant
indicator to determine the capacity (viz., principal or agent) in which the
company may be working; rather other factors, such as, control over the
goods/services before these are provided to customers, discretion in
establishing prices, etc. in the specific facts and circumstances of the
company should also be considered.
30. From the above, the Committee is of the view that the company, while
interfacing with the customers for provision of space segment capacity, is
only rendering administrative services as contract manager to the DOS, for
which it is being paid a fixed fee and is, therefore, acting only as an agent of
the DOS. Accordingly, the principle of revenue recognition for agency
relationship as enunciated in the following definition of ‘revenue’ as per
Accounting Standard (AS) 9, ‘Revenue Recognition’, notified under the
Companies (Accounting Standards) Rules, 2006 should be applied in the
extant case:
“4.1 Revenue is the gross inflow of cash, receivables or other
consideration arising in the course of the ordinary activities of an
enterprise from the sale of goods, from the rendering of services,
and from the use by others of enterprise resources yielding
interest, royalties and dividends. Revenue is measured by the
charges made to customers or clients for goods supplied and
services rendered to them and by the charges and rewards
133
arising from the use of resources by them. In an agency

relationship, the revenue is the amount of commission and not
the gross inflow of cash, receivables or other consideration.”
From the above, the Committee is of the view that in the extant case,
revenue for the company is the amount of fees received by it as agent of the
DOS and not the amount of invoice or gross inflow. Therefore, the
accounting treatment followed by the company of inclusion of the gross
revenue from operations for providing the INSAT/GSAT satellite capacity to
customers is not in order and only the fee received from the DOS on this
account should be recognised as revenue of the company, following the
principles of AS 9.
D. Opinion
31. On the basis of the above, the Committee is of the view that the
existing practice of the company to recognise the gross revenue from
operations for providing INSAT/GSAT satellite capacity to consumers is not
in order considering the principles of AS 9; rather the company’s share of
revenue, i.e., the amount of fees received in respect of these capacities
alone is to be considered as revenue to the company in view of the existing
relationship between the company and Department of Space (DOS), as
discussed in paragraphs 29 and 30 above.
__________
Query No. 14
Subject: Accounting for software income. 1
1. A company is into information technology (IT) business. The company
focuses into two major product verticals, viz., network monitoring tools and
cloud computing applications (called as SAAS). Network monitoring tools are
downloadable software products that will be used by network administrators
and IT managers to manage their internal networks. Cloud computing
applications (SAAS) comprise of varied business and office applications
which reside in centralised servers that are accessed by customers across
134
the globe. The querist has stated that the query is on recognition of revenue
for the network monitoring tool product vertical. In this segment, the
customer has two types of licensing options:
(i) Perpetual
(ii) Subscription
2. Perpetual model: In this model, the customer will be able to use the
product perpetually. For perpetual model, the license fee and maintenance
charges are clearly defined in the invoice. The license fee portion is
accounted for as revenue immediately and the maintenance part is defer red
over the period of maintenance. On an average, the license component
works out to 5/6 and the maintenance component is 1/6 of the total.
3. Subscription model: In this model, the customer has the option to
choose the usage period. Generally, the period is for 1 year; however the
customer has the option of subscribing for multiple years. In this case, the
customer is entitled to upgrades to the product, done during the period, free
of cost. The invoice amount would be mentioned as a single line item named
‘subscription license fee’. (The querist has supplied a copy of the invoice
raised under the subscription model for the perusal of the Committee.) Under
this model, the price of the product is divided into license fee and
maintenance charges. Based on the perpetual model, 5/6 th of the amount is
treated as license fee and 1/6 th as maintenance charges. The maintenance
charges are recognised as revenue over the months/years over which the
product is subscribed for. (The querist has supplied a copy of the extracts
from the significant accounting policies of the company forming part of the
Notes to the financial statements for the year ended 31 st March, 2015 for the
perusal of the Committee.)
4. With respect to license fee, the company wants to get an opinion as to
whether the license revenue needs to be deferred over the period of the
contract or be recognised upfront.
5. General terms of contract
The customer who is interested in purchasing the product will have to agree
to the terms of the contract. On purchase of the product, a license key is
sent to the customer. The company has a standard refund policy captured in
the contract. Any customer who does not like the product can claim refund
for the entire amount within 30 days from date of purchase. 100% of the
amount is refunded by the company and no questions are asked.
135
6. Further, with regard to the nature of licence fee charged to the

customers under the subscription model, the querist has clarified that upon
payment of the applicable license fees, the company grants licensee a non-
exclusive, non-transferable, world-wide license to use the licensed software,
including user documentation that licensee has downloaded or received on
media provided by the company, including all updates, where applicable,
provided that such access and use of the license software is in accordance
with the single installation license granted by the company. “Use” means
storing, locating, installing, executing or displaying the licensed software.
“Single Installation License” means that the license keys provided shall not
be used for more than one concurrent ‘Use’. Under the subscription license,
the licensed software is licensed only for the period of subscription
(‘subscription period’). If licensee does not renew the subscription beyond
the subscription period, licensee agrees to stop using the software and
remove the software from licensee’s systems. To continue using the licensed
software beyond the subscription period, licensee must renew the license at
least 10 days before the expiry of the subscription period. As a part of the
subscription license, all updates, upgrades, email support for problem
reporting and online access to product documentation to the licensed
software will be provided to licensee at no additional cost during the
subscription period. According to the querist, the broad terms of the contract
will be as follows:
(a) The seller’s price to the buyer is substantially fixed or
determinable at the date of sale.
(b) The buyer has paid to the seller, or the buyer is obligated to pay
to the seller and the obligation is not contingent on resale of the
product.
(c) The buyer’s obligation to the seller would not be changed in the
event of theft or physical destruction or damage of the product.
(d) The buyer acquiring the product for resale has economic
substance apart from that provided by the seller.
(e) The seller does not have significant obligations for future
performance to directly bring about resale of the product by the
buyer.
(f) The amount of future returns can be reasonably estimated.
136
B. Query
7. On the basis of the above, the querist has sought opinion with respect
to license fees, as to whether the license revenue needs to be deferred over
the period of the contract or be recognised upfront.
to timing of recognition of license fees under the subscription model of
network monitoring tools, viz., whether the same needs to be deferred over
the period of the contract or be recognised upfront. The Committee has,
therefore, considered only this issue and has not examined any other issue
that may arise from the Facts of the Case, such as, accounting treatment of
maintenance charges, accounting treatment of the fee received under
perpetual model, accounting treatment of cloud computing applications, etc.
At the outset, the Committee wishes to point out that since the querist has
supplied the copy of the invoice and the extracts from the financial
statements pertaining to the period before 31 st March, 2016, the Committee
has not examined the applicability of Indian Accounting Standards (Ind ASs)
notified under the Companies (Indian Accounting Standards) Rules, 2015.
9. In the context of the arrangement of subscription license, the
Committee notes the following from the Software License Agreement:
“Upon payment of the applicable license fees, the company grants
Licensee a non-exclusive, non-transferrable, world-wide License to
Use the Licensed Software, including user documentation that
Licensee has downloaded or received on media provided by the
company, including all updates …”
Under the Subscription License, the Licensed Software is licensed
only for the period of subscription (“Subscription Period”). If Licensee
does not renew the subscription beyond the Subscription Period,
Licensee agrees to stop using the software and remove the software
from Licensee’s systems.”
“The company provides support that includes email support for
problem reporting, product upgrades, updates, and online access to
product documentation during the Subscription Period.”
“The company owns all right, title and interest in and to the Licensed
Software.
137
The Licensed Software is only licensed and not sold to Licensee by

the Company.”
“The company may terminate this Agreement in the event that
Licensee is in breach of any of the terms of this Agreement and does
not cure such breach… Upon termination, Licensee shall destroy or
return to the company all copies of the Licensed Software and certify
in writing that all known copies have been destroyed.
…”
“Technical Support:
Perpetual License:
Subscription License: The company provides support that includes
email support for problem reporting, product upgrades, updates, and
online access to product documentation during the /subscription
period.
From the above, the Committee notes that under the subscription
arrangement in the extant case, the right to use of a particular software has
been transferred to the customer for a specified period, which as per the
facts of the case, for 1 year. In this context, the Committee notes the
following paragraphs of Technical Guide on Revenue Recognition for
Software (hereinafter referred to as the ‘Technical Guide’), issued by the
Research Committee of the Institute of Chartered Accountants of India as
follows:
“2.1 Software arrangements range from those that provide a license
for a single software product to those that, in addition to the delivery
of software or a software system, require significant production,
modification, or customisation of software. The principles of AS 9,
Revenue Recognition, are applicable to all types of software
arrangements. …”
“2.8 Generally, revenue is recognised when all the following
conditions are met:
(a) Significant risks and rewards of ownership have been
transferred to the buyer, which in software industry are
generally considered to be transferred when the delivery
has occurred,
138
(b) The seller’s price to the buyer is fixed or determinable,

and
(c) Collection is reasonably assured.”
“2.15 Delivery may be considered to be complete for revenue
recognition purposes upon the commencement of the license term
even if the license is delivered earlier and payment is also received.
…”
“5.1 Many entities offer multiple solutions to their customers’ needs.
Those solutions may involve the delivery or performance of multiple
products, services, or rights to use assets, and performance may
occur at different points in time or over different periods of time. …
5.2 A multiple-element software arrangement is any arrangement
that provides the customer with the right to software along with any
combination of additional software deliverables, services,
postcontract customer support (PCS), and non-software deliverables.
…
5.3 A vendor should evaluate all deliverables in an arrangement to
determine whether they represent separate units of accounting. That
evaluation must be performed at the inception of the arrangement and
as each item in the arrangement is delivered.
5.4 In an arrangement with multiple-deliverables, the delivered
item(s) may be considered as a separate unit of accounting if the
following criteria are met:
 The delivered item(s) has value to the customer on a
standalone basis. That item(s) has value on a
standalone basis if it is sold separately by the vendor or
the customer could resell the delivered item(s) on a
standalone basis.
 Reliable fair values of the undelivered item(s) can be
determined.
 If the arrangement includes a general right of return
relative to the delivered item(s), and delivery or
performance of the undelivered item(s) is considered
probable and substantially in the control of the vendor.”
139
General Guidelines for revenue recognition for multiple-element

arrangements
“5.7 General guidelines for revenue recognition for multiple element
arrangements are as follows:
 Revenue arrangements with multiple deliverables should
be divided into separate units of accounting if the
deliverables in the arrangement meet the separate
identification criteria specified in paragraph 5.4.
 Revenue recognition criteria should be applied to each
separately identifiable component of a single transaction
to reflect the transaction’s substance. However, in
applying those criteria, the delivery of an element is
considered not to have occurred if there are undelivered
elements that are essential to the functionality of the
delivered element, because the customer would not have
the full use of the delivered element. In software industry
reliable determination of fair values for each of the
separately identifiable elements is usually essential to
reasonably determine the price for such elements, which
is one of the conditions for revenue recognition.
 Arrangement consideration should be allocated among
the separate units of accounting based on their relative
fair values or by application of the residual method.”
“5.10 … For revenue to be recorded for the delivered elements, the
amount allocated to delivered elements may not be subject to a future
adjustment. The portion of the fee that is allocated to an element
should generally be recognised as revenue when all of the criteria for
revenue recognition have been met with respect to that element. If
reliable fair value of each of the element does not exist, all revenue
from the arrangement should be deferred until the earlier of when:
(i) Such evidence does exist for each element, or
(ii) All elements have been delivered, or
(iii) The reliable fair values of the undelivered elements can
be determined.
…”
140
“5.32 Upgrade right is the right to receive one or more specified

upgrades or enhancements, even if it is offered on a when-and-if
available basis. If an upgrade right is offered on a when-and-if
available basis then it is considered as Postcontract Customer
Support (PCS).”
“6.1 PCS or maintenance as it is usually called, means right to
receive services (other than services separately accounted for) or
unspecified product upgrades/enhancements (these unspecified
arrangements are PCS only if they are offered on ‘when-and-if
available’ basis) or both offered to customers after the software
license period begins or other time provided for by PCS arrangement.
6.2 PCS may be a separate element, bundled with other products
and services or implicitly included in an arrangement. Regardless of
whether PCS is separately stated in a contract, every software
arrangement should be evaluated for the potential impact of PCS and,
if it proves to be part of an arrangement, it should be considered a
separate element in determining revenue recognition.”
“GENERAL GUIDELINES FOR REVENUE RECOGNITION OF PCS
FOR PERPETUAL LICENSES
6.5 Fees related to PCS, whether sold separately (e.g., renewal
period PCS) or as an element of a multiple-element arrangement,
should generally be recognised as revenue ratably (i.e., on straight
line basis), over the term of the PCS arrangement. If the use of the
straight-line basis does not approximate the timing of when the
software vendor actually incurs the costs, then revenue could be
recognised on pro rata basis based on when the amounts are
expected to be charged to expense.”
“PCS CONSIDERATIONS FOR TERM LICENSES
6.7 The guidance given above contemplates to PCS arrangements
involving perpetual licenses. However, term licenses are becoming
common practice in the arrangements. Term licenses involve a
license to use the software for a specific period, generally one to five
years. Generally, PCS for all or part of the license term will be
bundled together with the term license. In this regard, the following
aspects may be considered:
141
(a) Fair value of PCS in a short-term time-based license

(ordinarily less than one year) and software revenue
recognition.
The duration of the time-based software license is so
short that a renewal rate or fee for the PCS services
does not generally represent the fair value of the
bundled PCS. In arrangements of this kind, the total
arrangement fee should be recognised ratably over the
PCS period.
…
(b) Fair value of PCS in a multi-year time-based license and
software revenue recognition.
…
6.8 It may be noted that it would not be appropriate to use the fair
value of PCS sold with perpetual licenses as a “surrogate” for the fair
value for PCS in a term license. However, in following type of
indicative situations such values may be considered:
(a) The PCS renewal terms in a perpetual license provide
the fair value of the PCS services element included
(bundled) in the multi-year time-based software
arrangement when the term of the multi-year time-based
software arrangement is substantially the same as the
estimated economic life of the software product and
enhancements during that term.
(b) The fees charged for the perpetual (including fees from
the assumed renewal of PCS for the estimated economic
life of the software) and multi-year time-based licenses
are substantially the same.
6.9 In case PCS is the only undelivered element and the fair value
cannot be reliably determined, the entire fee under the arrangement
is generally recognised ratably over:
 The contractual PCS period (for those arrangements with
explicit rights to PCS); or
 The period during which PCS is expected to be provided
(for those arrangements with implicit rights to PCS).
142
6.10 PCS revenue may be recognised simultaneously with the initial

license fee when software is delivered in the following indicative
situations provided all of the estimated costs of providing the
services, including upgrades and enhancements, must be accrued at
the time when the software is delivered.
 The PCS fee is included with the initial licensing fee.
 The PCS included with the initial license is for one year
or less.
 The estimated cost of providing PCS during the
arrangement is insignificant.
 Unspecified upgrades/enhancements offered during PCS
arrangements historically have been and are expected to
continue to be minimal and infrequent.”
(Emphasis supplied by the Committee.)
From a holistic reading of the above paragraphs, the Committee notes that
the extant case is a multiple-element software arrangement as it provides to
the customer with the right to use of the software alongwith postcontract
customer support (PCS). The Committee further notes that as per the above
requirements, in arrangements with multiple-deliverables, if reliable fair
value of each of the element does not exist, all revenue from the
arrangement should be deferred (refer paragraph 5.10). Further, as per the
requirements of paragraph 6.9, reproduced above, in case of short-term
term-based licenses, if the only undelivered element is Postcontract
Customer Support (PCS) as is the situation in the extant case, and its fai r
value cannot be determined, the entire fee under the arrangement is
recognised ratably over the contractual PCS period in case of arrangements
with explicit rights to PCS. However, if the requirements of paragraph 6.10
are fulfilled, PCS revenue and initial license fee may be recognised
simultaneously when the software is delivered. Accordingly, the Committee
is of the view that recognition of initial license fee in the extant case would
depend upon whether or not the fair value of rights to PCS provided under
the subscription license can be determined as per the requirements of the
Technical Guide and whether the requirements of paragraph 6.10 of the
Technical Guide, as reproduced above are fulfilled.
143
D. Opinion
10. On the basis of above, the Committee is of the opinion that recognition
of license fees under the subscription model would depend upon whether or
not the fair value of rights to PCS provided under the subscription license
can be determined as per the requirements of the Technical Guide and
whether the requirements of paragraph 6.10 of the Technical Guide, as
reproduced above are fulfilled, as discussed in paragraph 9 above.
__________
Query No. 15
Subject: Provision for debtors transferred to Franchisee. 1
1. A company is a fully owned Government of Madhya Pradesh (GoMP)
company and was incorporated in May, 2002 after unbundling of erstwhile
Madhya Pradesh State Electricity Board (MPSEB). However, the commercial
operations commenced from 1st June, 2005 pursuant to GoMP Notification
No. 226 dated 31st May, 2005. The company is engaged in the business of
electricity distribution in the area of Indore & Ujjain Commissionaire of State
of Madhya Pradesh and is governed by the provisions of the Electricity Act,
2003. The company is responsible for all activities associated with
distribution of power within its territory, including management of assets,
operation and maintenance of network and supply, technical and financial
planning, business development and management of human resources, legal
and regulatory affairs etc.
2. The company entered into a Distribution Franchisee Agreement
(hereinafter referred to as “the DFA”) with the successful bidder with an
objective to minimise Aggregate Technical & Commercial Losses, improve
distribution and operational efficiency, minimise billing arrears etc., in the
area of Ujjain city. (Copy of the DFA has been supplied by the querist for the
perusal of the Committee).
3. As per the terms and conditions of the DFA, from the effective date to
expiry date i.e., 15 years from the effective date or date of default (in case of
144
a default made by Franchisee), whichever is earlier, the sundry debtors as on

effective date excluding amounts collected within three months of the last
billing cycle will be handed over to Franchisee. Similarly, on expiry date/date
of default, all sundry debtors excluding amounts collected within three
months of last billing cycle will be handed over by Franchisee to the
company. Accordingly, the company transferred the sundry debtors as on
effective date excluding amounts collected within three months of the last
billing cycle to Franchisee and makes a provision for doubtful debts by
debiting profit and loss account on remaining amount of sundry debtors in the
books of account of the company, because, now, as per the agreement, right
to recover those debtors is transferred to the Franchisee.
4. While conducting audit of Annual Accounts of the company for FY
2014-15, the government auditor (C&AG Auditor) has made the following
observations in this regard:-
“(i) This includes an amount of Rs. 38.84 crore towards the provision
for doubtful debts in respect of sundry debtors of Ujjain City circle as
on effective date i.e.31.07.2014 (on the date of handing over of the
operation to Franchisee). As per terms and conditions of the
Franchisee agreement clause 12.5 (i), from the effective date to the
expiry date, the distribution franchisee shall be responsible to collect
and retain payment of Consumer bills in the Franchisee Area, and as
per clause 12.5(ii), the distribution franchisee shall collect the amounts
due from the Consumers on day to day basis and remit to the
Distribution Licensee on a weekly basis the amount collected against
the Consumer bills for the last Consumer billing cycle immediately
preceding the effective date up-to a period of three (3) months from
the Effective Date.
As per clause 12.5 (iii), on the expiry date, the distribution licensee
shall allow the Distribution Franchisee to collect amounts due from the
Consumers as per the provisions of Article 32.11.2.
As per article 32.11.2, amounts due from the Consumer from the
billing cycle ending on any date prior to the expiry shall be permitted to
be collected by the distribution franchisee up to a maximum period of
three (3) months after the expiry date. Thereafter, any such amount
collected from the consumer by the distribution licensee shall be
retained by the Distribution Licensee and the Distribution Franchisee
shall not be entitled for any claim on such amount.
145
To sum up, as per the above terms and conditions of the agreement,
the sundry debtors as on the effective date excluding the amounts
collected within three months of the last billing cycle will be handed
over to the franchisee. Similarly, on the expiry date, all the sundry
debtors on the expiry date excluding the amounts collected within
three months of the last billing cycle will be handed over to the
distribution licensee i.e., the company. As such, there is no loss of
sundry debtors, it is only transfer of sundry debtors to the Franchisee
for franchise period like any other assets transferred to Franchisee for
operation and on expiry of the franchise period, the company will
receive all the sundry debtors. Hence, booking the loss on account
of sundry debtors which were only transferred to the Franchisee
for franchise period considering it as doubtful is imprudent and
highly objectionable. It should have been shown under other
noncurrent assets as Trade receivable as they will be received on
expiry of the franchise period. Hence, making the provision for
the doubtful debts on sundry debtors who were only transferred
for the franchise period has resulted in overstatement of other
expenses and understatement of sundry debtors by Rs.38.84
crore. Consequently, loss for the year is also understated by
similar amount.”
5. In response to the above, the company submitted the following reply:-
“Audit observed that no provision is required to be made on the
debtors transferred to the Franchisee and, accordingly, there is
understatement of sundry debtors. Here, it is stated that sundry
debtors is an asset. Hence, kind attention is drawn towards the
definition of ‘Asset’ given in the Framework for the Preparation and
Presentation of Financial Statements issued by the Institute of
Chartered Accountants of India, relevant paragraphs of which are
reproduced below:-
“49 (a) An asset is a resource controlled by the enterprise as
a result of past events from which future economic benefits
are expected to flow to the enterprise.”
“88. An asset is recognised in the balance sheet when it is
probable that the future economic benefits associated with it will
flow to the enterprise and the asset has a cost or value that can
be measured reliably.”
146
“96. An expense is recognised immediately in the statement of

profit and loss when an expenditure produces no future
economic benefits. An expense is also recognised to the
extent that future economic benefits from an expenditure do
not qualify, or cease to qualify, for recognition in the
balance sheet as an asset.”
From the above, it may be noted that an item can be recognised as an
asset only if it is a ‘resource controlled by the enterprise’ and future
economic benefit will flow to the enterprise. Thus, it is the control over
the resource that is important for recognising an expenditure as an
asset. An entity that controls a resource can generally deal with it as it
pleases. For example, the entity having control of a resource can
exchange it for other assets, employ it to produce goods or services,
charge a price from others to use it, use it to settle liabilities, or
distribute it to owners. Further, an indicator of control would be that the
entity can restrict the access of others to the benefits derived from that
resource. This view is also supported by the principles enunciated in
paragraph 14 of Accounting Standard (AS) 26, ‘Intangible Assets’,
reproduced below:
“14. An enterprise controls an asset if the enterprise has the
power to obtain the future economic benefits flowing from the
underlying resource and also can restrict the access of others to
those benefits. …”
In the present case, the Discom has transferred the debtors to the
Franchisee. The collection of those debtors shall be done by the
Franchisee and the said collection shall be retained by the Franchisee.
No economic benefits shall be received by the Discom. Hence, the
debtors transferred to Franchisee does not fulfil the definition of an
asset and recognition criteria for an asset. Hence, the Discom made
provision on those debtors and recognised expenses as per the
requirements of para 96 of the ‘Framework’ quoted above.
Audit further observed that at the end of Franchise period, the
company will receive the outstanding debtors of the Franchisee and,
hence, booking the loss on account of sundry debtors which were only
transferred to the Franchisee for the franchise period considering it as
doubtful is imprudent and highly objectionable.
147
Here, in this regard, it is submitted that the transfer of debtors from the
Discom to the Franchisee and from the Franchisee to Discom are two
different transactions and cannot be correlated, because, debtors will
be outstanding at the end of the franchise period of 15 years and no
one can forecast how much amount shall be transferred. Possibility of
outstanding dues in the private operation is very rare and even after
15 years when technology will get change tremendously.
Audit party termed the action of the Discom making provision as
imprudent. Here, kind attention is drawn towards the definition of
‘prudence’ given in AS 1, ‘Disclosure of Accounting Policies’,
reproduced below:
“17. For this purpose,…
a. Prudence
In view of the uncertainty attached to future events, profits are
not anticipated but recognised only when realised though not
necessarily in cash. Provision is made for all known liabilities
and losses even though the amount cannot be determined with
certainty and represents only a best estimate in the light of
available information.”
Discom, while making the provision for debtors transferred to
Franchisee, has duly complied with the principle of prudence quoted
above in the following manner:-
(i) Discom made provision on debtors transferred to Franchisee.
(ii) Discom has not considered the anticipated benefits which may
or may not be received at the end of the franchise period.”
6. However, the CAG audit has not considered the company’s response
and issued the following comments:-
“This includes an amount of Rs.38.84 crore towards provision for
doubtful debts made in respect of sundry debtors of Ujjain City circle
as on 31.07.2014. The company entered into a Distribution Franchisee
Agreement (DFA) on 31.07.2014 with successful bidder with an
objective to minimise Aggregate Technical & Commercial Losses,
improve distribution and operational efficiency, minimise billing arrears
on the date of handing over of the operation to Franchisee. As per
terms and conditions of the Franchisee Agreement from the effective
148
date (31.07.2014) to the expiry date (15 years from the effective date
or in case of a default by the Franchisee ,the date of default whichever
is earlier), the sundry debtors as on effective date excluding the
amounts collected within three months of the last billing cycle will be
handed over to the Franchisee. Similarly, on the expiry date/date of
default, all the sundry debtors excluding the amounts collected within
three months of the last billing cycle will be handed over by the
distribution Franchisee to the distribution licensee, since the debtors
were only transferred to the Franchisee for the specific period but the
ownership and title remained with the company.
Thus, making provision for doubtful debts on sundry debtors which
were only transferred as a temporary measure during agreement
period has resulted in overstatement of other expenses and
understatement of sundry debtors by Rs.38.84 crore. Consequently,
loss for the year is also overstated by similar amount.”
7. The querist has separately clarified the following:
(i) Debtors transferred to the Franchisee amounting to Rs.38.84
crore exclude both the amount collected within three month from
the effective date as well as arrear in litigation. Further, right of
collection and retention of the collected amount was granted to
the Franchisee.
(ii) The company has appointed the distribution Franchisee through
competitive bid process. In the bidding process, all the
conditions were made available to the bidder by way of bid and
bidders were asked to submit to their Price Bid, mentioning the
input rate for input energy for each year of the contract period,
applicable for the energy to be injected by the Distribution
Licensee at the input point(s) in the Franchisee Area. In the
bidding process, the bidder who has offered the maximum
levelised input rate for the input energy to be injected by the
Distribution Licensee at the input point(s) in the Franchisee Area
has been selected. The bidders were required to quote input
rate considering all its obligations and other terms and
conditions mentioned in the bid document. All these terms and
conditions now form part of the Franchisee agreement.
In view of above, as per conditions of bidding/agreement, the
149
Franchisee shall receive payment on the basis of input energy

and quoted rates. These rates were quoted by Franchisee
considering all the conditions. Transfer of arrears is also one of
the conditions of the bidding. No separate consideration is paid
by the distribution Franchisee to the company for transfer of
such arrear.
(iii) After following a transparent bidding process, by way of
agreement, the Franchisee was authorised for collection and
retention of such collected amount from debtors (arrear). Except
this agreement, no other legal deed/instrument was executed. In
substance, beneficial owner of such arrear is the Franchisee.
Such transfer of arrear to the Franchisee results in the following:
(a) it transfers from the company to Franchisee, the
contractual rights to receive the cash flows from the
debtors; and
(b) it transfers from the company to Franchisee substantially
all the risk and rewards relating to such debtors.
(iv) Since the contractual right to receive cash flows has been
transferred to the Franchisee, the arrear amounting to Rs. 38.84
crore does not fulfil the definition of asset in the books of the
company.
(v) The company, by way of legally enforceable agreement, has
transferred the arrear to Franchisee and now the company
cannot dealt with such arrear as it pleases. Therefore, in the
absence of ‘control’, asset should be charged to the profit and
loss account for the period in which the company lost control,
even though some indirect and remote economic benefits are
expected to flow to the enterprise. In this regard, paragraph 56
of AS 26, ‘Intangible Assets’, provides as follows:
“56. In some cases, expenditure is incurred to provide future
economic benefits to an enterprise, but no intangible asset or
other asset is acquired or created that can be recognised. In
these cases, the expenditure is recognised as an expense when
it is incurred. …”
(vi) In the present case, since right of collection from debtors and
retention of the same were transferred to Franchisee, as per
150
‘Prudence’ concept, loss on such transfer should immediately be

recognised, even if any remote or estimated gain is possible.
(vii) While making the provision, the company has not derecognised
the transferred debtors. However 100% provision has been
made on transferred arrear. Even when the company has made
the provision, instead of derecognising the asset, presentation
on the face of the balance sheet is not changed because, in the
balance sheet, debtors is being presented net of provision on
the face of the balance sheet as per provisions of the
Companies Act.
B. Query
(i) Whether the booking of loss upon transfer of debtors is correct
or not as per Generally Accepted Accounting Principles.
(ii) As observed by the C&AG in its comments, the amount of
provision for doubtful debts on such sundry debtors is Rs.38.84
crore against the total turnover of Rs. 8,268.45 crore for the
company. Whether, in the light of principle of materiality, the
treatment given by the company in its books of account is
correct or not.
to booking of loss on transfer of debtors of Rs.38.84 crore to the Franchisee
by way of provision for doubtful debts. The Committee has, therefore,
considered only this issue and has not examined any other issue that may be
contained in the Facts of the Case. The Committee notes from the facts of
the case that the arrears under litigation have not been transferred by the
company to the franchisee and also no provision has been created on
debtors on account of being doubtful of recovery , therefore the Committee
presumes that revenue recognition in respect of the transferred debtors of
Rs.38.84 crore was appropriate and that before the transfer of those debtors,
no portion of the same was impaired/doubtful and, hence, there was no need
for any provision for doubtful debts before the said transfer. The Committee
notes that in paragraph 4 above, there is incorrect reference to
151
understatement of loss for the year which is set right in paragraph 6 above
which makes reference to overstatement of loss for the year. This, however,
does not affect the opinion of the Committee. Further, in paragraph 7(ii)
above, the querist has stated that as per conditions of bidding/agreement,
the Franchisee shall receive payment on the basis of input energy and
quoted rates. The Committee notes that actually Franchisee shall make
payment to the company on the basis of input energy and quoted rates and,
therefore, proceeds on that factual position. The Committee also notes the
statement of the querist in paragraph 5 above that the possibility of
outstanding dues in private operation is very rare whereas in paragraph 7(v)
above it is stated that some indirect and remote economic benefits are
expected to flow to the enterprise. In this regard, the Committee relies on the
statement in paragraph 5 above in preference to the statement in paragraph
7(v) above. Incidentally, the Committee notes the use of the term ‘Discom’ in
paragraph 5 above, which is an acronym of ‘Distribution Company’.
10. The Committee notes that for the transfer of debtors of Rs.38.84 crore
on the effective date, no separate consideration is received by the company
from the Franchisee. Instead, the input rate was quoted by the Franchisee
taking into account the transfer of debtors to the Franchisee and various
obligations undertaken by the Franchisee under the Franchisee agreement.
The Committee is of the view that as the Debtors have been transferred in
the extant case, the same should be derecognized and the carrying amount
of the transferred debtors should be transferred to an appropriate account
(alternate asset). Subsequent clearance from this account should be made in
an appropriate manner taking into account the nature and quantum of
benefits expected to be obtained by the company during the Franchise period
under the Franchisee agreement (for e.g., expected increase in net revenue
during the Franchise period). The Committee does not consider this issue
further, since, this is not an issue raised by the querist. Since the transferred
debtors should be derecognised under the above treatment with concurrent
recognition of another asset for equal amount, the question of making any
loss or provision for doubtful debts does not arise at all in the extant case.
Further, the Committee is of the view that derecognition of the transferred
debtors is appropriate in the extant case, since, irrespective of legal title, the
significant risks and rewards of ownership of the said debtors have been
substantially transferred to the Franchisee. This is due to the fact of tra nsfer
to the Franchisee of the right to collect cash from the transferred debtors and
retain the same, though uncollectible debtors, if any, out of the transferred
debtors at the end of the Franchise period will be retransferred to the
152
company, which is very rare in view of the querist’s statement in paragraph 5

above and having regard to the length of the Franchise period (15 years in
the absence of default by the Franchisee). (See also paragraph 11 below).
11. The Committee agrees with the querist that possible return of the
uncollectible transferred debtors to the company at the end of Franchise
period is a contingent asset. Such possible future return meets the definition
of contingent asset given in paragraph 10.5 of Accounting Standard (AS) 29,
‘Provisions, Contingent Liabilities and Contingent Assets’, notified under the
Companies (Accounting Standards) Rules, 2006, (hereinafter referred to as
the ‘Rules’) which reads as below:
“10.5 A contingent asset is a possible asset that arises from past
events the existence of which will be confirmed only by the
occurrence or nonoccurrence of one or more uncertain future
events not wholly within the control of the enterprise.”
The Committee notes that paragraph 30 of AS 29, notified under the Rules,
prohibits recognition of contingent assets.
12. The Committee does not agree with the querist that derecognition and
provision for doubtful debts, which is offset against gross carrying amount of
debtors, have the same effect on the presentation in the balance sheet.
Derecognition means removal of an item from the balance sheet whereas
offset does not result in such removal. For example, derecognition of an
asset, which is not accompanied by concurrent recognition of another asset
for equal amount, results in a gain or loss whereas offset of a liability or a
valuation allowance or an allowance for impairment loss against an asset
does not result in any gain or loss, though provision for doubtful debts has an
impact on profit, which, however, is not correct in the extant case for the
reasons stated in paragraph 10 above.
13. With regard to the issue raised by the querist in relation to materiality
aspect of the amount involved, the Committee notes that paragraph 4.3 of
the Preface to the Statements of Accounting Standards, issued by Institute
of Chartered Accountants of India, states, inter alia, that “The Accounting
Standards are intended to apply only to items which are material”. The
Committee further notes that paragraph 17(c) of Accounting Standard (AS)
1, ‘Disclosure of Accounting Policies’, explains ‘materiality’ as below:
“c. Materiality:
Financial statements should disclose all “material” items, i.e. items
153
the knowledge of which might influence the decisions of the user of

the financial statements.”
14. From the above, the Committee is of the view that the threshold of
materiality is applicable to all items of financial statements. If information is
not material, on the consideration of materiality as mentioned in the
paragraph 13 above, its accounting would not have any effect on the
decisions of the users of the financial statements. Thus, assessment of
materiality is a matter of judgement and needs to be determined under the
specific facts and circumstances of the company concerned. In the extant
case, on the basis of information available in the facts of the case the
amount appears to be not material, however, the Committee is of the view
that it needs to be determined under the specific facts and circumstances of
the company as to whether the amount involved is material, if not accounted
for appropriately, can influence the decisions of the users of the financial
statements. For this purpose, apart from the volume of transactions and
quantum of turnover, other factors, such as, nature of the item, impact on
profit/loss etc., should also be considered. An entity should assess whether
information either individually or in combination with other information is
material in the context of its financial statements. Moreover, materiality
concept should be seen in totality.
D. Opinion
(i) The booking of loss upon transfer of debtors is not correct. The
correct treatment should be as explained in paragraph 10
above.
(ii) The aforesaid opinion of the Committee would be applicable
only if the amounts involved are material and the considerations
of materiality should be determined in the specific facts and
circumstances of the company. For this purpose, apart from the
volume of transactions and quantum of turnover, other factors
such as nature of the item, impact on profit/loss etc., should
also be considered, as discussed in paragraphs 13 and 14
above.
__________
154
Query No. 16
Subject: Amortisation of expenses incurred on various business
requirements at the time of formation. 1
1. A company was incorporated under the Companies Act in July, 2015
as a Government company. The company was registered with Securities and
Exchange Board of India (SEBI) as an asset management company and
guided by SEBI (Alternate investment Funds) Regulations, 2012. The
company is primarily engaged in the business of asset management in the
infrastructure sector. As on 31st March, 2016, its authorised share capital
was Rs. 100 crore (10,00,000 equity shares of Rs. 1000/- each); and issued,
subscribed and paid-up capital was Rs. 16 crore (1,60,000 equity shares of
Rs.1000 /- each).
2. During November 2015, the company incurred an expenditure of
Rs. 92.92 lakh as preliminary expenses which included the following:
Registrar of Companies (ROC) fee (for authorised share Rs. 76,33,920
capital of Rs. 100 Crore)
Professional fee paid Rs. 12, 97,459
Preliminary expenses paid to lawyers and accountants Rs. 3, 61, 073
Total expenditure involved Rs. 92, 92, 452
3. Thus, the expenditure under the above head consists of mainly
Rs. 76.33 lakh towards fee for ROC and other professional fees paid.
According to the querist, the ROC fee is variable and would have been much
less if the company had proposed for a lesser authorized capital. The amount
was classified under ’Preliminary Expenses’ and shown under ‘Current
Assets’.
4. The querist has stated that considering the nature of expenditure, the
company decided to amortise the preliminary expenses over five years and
show the unamortised expenses of Rs. 74.33 lakh under ‘Current Assets’. An
amount of Rs. 18.58 lakh was charged off (being one fifth) in the first
accounts of the company during the financial year 2015-16. The reasons
considered by the company for amortising the expenses are quoted below:
155
“The expenditure of Rs. 92.92 lakh consists mainly of fee paid to

Ministry of Corporate Affairs. It is classified under ‘other current
assets’ and not under ‘Intangible Assets’. This huge expenditure
would not have been incurred, had the company not issued shares
with authorised capital of Rs. 100 crore. Hence, the expenditure was
solely incurred in connection with issue of shares. It is also noted that
under paragraph 8.7.4 in Guidance Note issued in December 2011 on
the revised Schedule VI, it was suggested that there is no dispute on
the treatment of share issue expenses as ‘Other Current Assets’ to be
amortised over 5 years”.
5. While conducting supplementary audit under section 143(6)(b) of the
Companies Act, 2013, the government auditors from Comptroller & Auditor
General of India (C&AG) opined that the above mentioned expenditure is in
the nature of preliminary expenses and should be charged off in the same
year of incidence.
The preliminary comments of the Accountant General are quoted
below:
“The head includes preliminary expenses of Rs. 74, 33,962 being the
expenses incurred prior to incorporation for the purpose of formation of
the company. As per Accounting Standard (AS) 26, ‘Intangible Assets’
(under paragraph 56), ‘preliminary expenses incurred in establishing a
legal entity such as legal and secretarial cost, expenses to open a new
facility or business’ needs to be recognised as an expense when it is
incurred. Omission to write off the preliminary expenses incurred prior
to incorporation for the purpose of formation of the company resulted
in overstatement of the head by Rs. 74,33,962.”
6. The company contested the audit suggestion on the following grounds:
“The expenditure of Rs. 74.34 Lakhs (unamortized portion) consists
mainly of fee paid to Ministry of Corporate Affairs. It is classified under
other current assets and not under intangible assets. Hence,
guidelines quoted by Government auditors under AS 26 are not
applicable for this asset. This huge expenditure would not have been
incurred, had the company not issued shares with authorised capital of
Rs. 100 Crore. The expenditure was solely incurred in connection with
issue of shares.
156
As per paragraph 8.7.4 of the Guidance Note on Revised Schedule VI

to the Companies Act, 1956 2, issued by the Institute of Chartered
Accountants of India (ICAI), “share issue expenses, discount on
shares, ancillary costs-discount-premium on borrowing, etc., being
special nature items are excluded from the scope of AS 26 Intangible
Assets (Para 5). Keeping this in view, certain companies have taken a
view that it is an acceptable practice to amortize these expenses over
the period of benefit, i.e., normally 3 to 5 years. The Revised Schedule
VI does not deal with any accounting treatment and the same
continues to be governed by the respective Accounting
Standards/practices. Further, the Revised Schedule VI is clear that
additional line items can be added on the face or in the notes. Keeping
this in view, entity can disclose the unamortized portion of such
expenses as “Unamortized expenses”, under the head “other current/
non-current assets”, depending on whether the amount will be
amortized in the next 12 months or thereafter”.
Accordingly, the company has amortised one fifth of the preliminary
expenses in the first year and shown the balance unamortised amount under
‘Other current Assets’ in the balance sheet.
7. In response to the above views of the company, the government
auditors opined that the fee paid is not in the nature of share issue expenses
and can only be termed as preliminary expenses. Their further opinion on the
issue was made on the following grounds:
“However, as per the Guidance Note on Terms Used in Financial
Statements3, issued by the Institute of Chartered Accountants of India
(ICAI), share issue expenses means “Costs incurred in connection
with the issue and allotment of shares. These include legal and
professional fees, advertising expenses, printing costs, underwriting
commission, brokerage, and also expenses in connection with the
issue of prospectus and allotment of shares”. Therefore, fee paid for
authorised share capital is not covered in the definition of ‘share issue
expenses’. Further, as the shares can be issued only after
2 Consequent to promulgation of new Companies Act, viz., the Companies Act,

2013, this Guidance Note was revised.
3 Subsequently, on issuance of the ‘Glossary of Terms used in Financial Statements’
157
incorporation of the company, the Memorandum of Association fees on

authorized share capital incurred in connection with the incorporation
of the company are not in the nature of share issue expenses but pre-
operative costs incurred for establishing the legal entity.
Therefore, the entire amount of preliminary expenses of Rs. 92.92 lakh
incurred should have been fully recognised as an expense in the
statement of profit and loss”. (Emphasis supplied by the querist.)
8. The opinion of the government auditors is not acceptable to the
company on the grounds quoted below:
“The preliminary expenditure under question includes mainly fees paid
to Ministry of Corporate Affairs. AS 26 applicable to intangible assets
is not applicable in the instant case, as the expenditure has been
treated as share issue expenses, and hence classified as current
assets to be amortised over a period of 5 years as stated under the
paragraph 8.7.4 of Guidance Note on Revised Schedule VI to the
Companies Act, 1956, issued by the Institute of Chartered
Accountants of India (ICAI), issued in December 2011. It is also noted
that there is no dispute on the treatment of share issue expenses as
’Other Current Assets’ to be amortised over 5 years, but the moot
point is only whether the higher ROC fees for authorized capital
(during the initial setting up itself) can be classified as share issue
expenses. In this regard the government auditor had quoted the
Guidance Note on Terms Used in Financial Statements, issued by the
ICAI (1983), Share Issue Expenses means “Costs incurred in
connection with the issue and allotment of shares. These include legal
and professional fees, advertising expenses, printing costs,
underwriting commission, brokerage and also expenses in connection
with the issue of prospectus and allotment of shares”. Therefore,
auditor quoted that the fee paid for Authorized Share Capital is not
covered in the definition of ‘Share Issue Expense’.
It is clarified that the Guidance Note, which is non-mandatory is only
clarifcatory. Further, it uses the term “includes” which indicates that
the definition given is not necessarily comprehensive. As regards the
contention that it is a necessary expense for incorporation and
therefore, part of preliminary expenses, it is clarified that such
necessary expenses should be fixed and immutable and not such
158
expenses which vary as per a scale. For instance, the company could
have served its objects with a lower capital requiring lower MOA fee as
per regulatory requirements, but chose to pay higher fees for higher
authorised share capital with a view to capture higher credibility to its
operations in the minds of probable investors to the ‘Infrastructure
Fund’ proposed to be set up by the company. Therefore, such
expenses display a greater nexus to the ‘share issue’ rather than
mandatory incorporation expenses, in our opinion.
The following submissions are also made. While releasing the above terms in
1983, the ICAI preface contained, inter alia, the following statements:
“The objective of this guidance note is to facilitate a broad and basic
understanding of the various terms as well as to promote consistency
and uniformity in their usage. As such it does not purport to provide a
comprehensive or rigid dictionary.”
Thus the definition was provided as guidance 33 years back and not
purported to provide a comprehensive dictionary. Further, the operations of
the Ministry of Corporate Affairs have taken complete changes during last
decades and the accounting also involves various changes with reference to
various new types of fees levied and expenses involved.
It is also submitted that the ICAI, while releasing the above terms, also
stated, inter alia, as follows:
“Over a period of time, many of the terms included in the guidance
note may become obsolete; connotation of many others may undergo
considerable change”.
Hence, it is submitted that the above expenditure cannot be treated as
intangible asset.
It is also pointed out that the Guidance Note issued in 1983 was in the
context of both preliminary expenses and share issue expenses being
amortised over more than one accounting period and therefore the distinction
was not overly significant. However in the context of changes brought by AS
26 issued in 2002, the connotations have indeed changed, as reflected in the
Guidance Note.
Further, with reference to the second part of the comment, suggesting that
the fees paid to the Ministry are of the nature of pre-operative cost, it is
submitted that the relevant expenses are related to the value of shares and
159
vary accordingly. It cannot be termed as pre-operative expense. For

establishing a legal entity, much lesser expenses would have been sufficient.
Taking into consideration various aspects, the company decided to classify
the expenditure as other current assets and amortise over a period of five
years.”
B. Query
9. Under this background, the company has sought the opinion of the
Expert Advisory Committee of the ICAI as to whether under the given
circumstances, the company can amortise the expenses, mainly relating to
fee paid to the Ministry of Corporate Affairs and incidental legal fee,
professional fee etc. paid at the time of formation.
whether the company can amortise the expenses, mainly relating to fee paid
to the Ministry of Corporate Affairs and incidental legal fee, professional fee
etc. paid in connection with authorized capital at the time of formation of the
company. Accordingly, the Committee has examined only this issue and has
not examined any other issue arising from the Facts of the Case, such as,
accounting for expenses incurred on allotment and other share issue
expenses, etc. Further, the opinion of the Committee expressed, hereinafter,
is only from accounting point of view and not from legal viewpoint. The
Committee also wishes to point out that since financial year 2015-16 has
been referred to by the querist in the extant case, the opinion expressed
hereinafter, is in the context of Accounting Standards, notified under the
Indian Accounting Standards (Ind ASs).
11. The Committee has first analysed that which expenses can be termed
as ‘share issue expenses’. In this respect, the Committee notes paragraph 5
of Accounting Standard (AS) 26, ‘Intangible Assets’, notified under the
Companies (Accounting Standards) Rules, 2006 (as reproduced in
paragraph 4 above), which states that this Standard does not apply to
accounting for share issue expenses. The term ‘share issue expenses’,
however, has not been defined in AS 26. The Committee further notes that
the term has been defined in the Guidance Note on Terms Used in Financial
Statements which provides as under:
“Costs incurred in connection with the issue and allotment of shares.
These include legal and professional fees, advertising expenses,
160
printing costs, underwriting commission, brokerage, and also

expenses in connection with the issue of prospectus and allotment of
shares.”
From the above, the Committee notes that although this definition is an
inclusive definition but it specifically states that share issue expenses are
costs incurred in connection with the issue and allotment of shares.
12. The Committee notes that the querist has argued that the expenditure
of Rs. 92.92 lakh mainly includes Rs. 76.33 lakh towards fee for ROC and
other professional fees paid and the ROC fees being variable, would have
been much less if the company had proposed for a lesser authorized capital.
Hence, the expenditure was solely incurred in connection with issue of
shares.
The Committee is of the view that registration of authorised share capital is
a necessary step to set a limit for the paid up capital of a company at any
given point of time and cannot be termed as ‘share issue expense’.
Issuance of shares is a separate independent process subsequent to the
registration of authorised capital and the same can be done at a later stage
as well.
13. As regards accounting for the expenses incurred on ROC Fees,
Professional fees and preliminary expenses paid to lawyers, the Committee
notes the following paragraphs of AS 26:
“6.2 An asset is a resource:
(a) controlled by an enterprise as a result of past
events; and
(b) from which future economic benefits are
expected to flow to the enterprise.”
“56. In some cases, expenditure is incurred to provide future
economic benefits to an enterprise, but no intangible asset or other
asset is acquired or created that can be recognised. In these cases,
the expenditure is recognised as an expense when it is incurred. For
example, expenditure on research is always recognised as an
expense when it is incurred (see paragraph 41). Examples of other
expenditure that is recognised as an expense when it is incurred
include:
161
(a) expenditure on start-up activities (start-up costs), unless

this expenditure is included in the cost of an item of fixed
asset under AS 10. Start-up costs may consist of
preliminary expenses incurred in establishing a legal
entity such as legal and secretarial costs, expenditure to
open a new facility or business (pre-opening costs) …”
From the above paragraphs of AS 26, the Committee notes that if
expenditure does not result into acquisition of an asset, it should be
recognised as an expense as and when incurred. The Committee also notes
that the amount spent towards ROC Fees, professional fees and legal
expenses paid to lawyers, does not give rise to any resource controlled by
the enterprise. In fact, such expenses are in the nature of start-up
costs/preliminary expenses, which are only related to incorporation of the
company and set a limit for the issued/paid-up capital of the company which
does not ensure any flow of funds to the company. Accordingly, it does not
meet the definition of an asset (either an intangible or current asset), as
reproduced above. Thus, the amount aggregating to Rs. 92.92 lakh incurred
towards ROC Fees, professional fees and legal expenses should be
recognised as expense in the statement of profit and loss as per the
requirements of paragraph 56 of AS 26.
D. Opinion
14. On the basis of the above, the Committee is of the opinion that the
expenditure incurred by the company relating to fee paid to the Ministry of
Corporate Affairs and incidental legal fee, professional fee etc. paid at the
time of formation cannot be considered as share issue expenses and should
be treated as expense and charged off in the statement of profit and loss, as
discussed in paragraphs 12 and 13 above.
__________
162
Query No. 17
Subject: Making provision for non-approved cost.1
1. A company (hereinafter referred to as ‘the company’) is a fully owned
Government of Madhya Pradesh (GoMP) company and was incorporated in
May, 2002 after unbundling of the erstwhile State Electricity Board (SEB).
However, the commercial operations commenced from 1st June, 2005
pursuant to GoMP Notification No. 226 dated 31st May, 2005.
2. The company is engaged in the business of electricity distribution in
the area of Indore and Ujjain Commissionaire of the State of Madhya
Pradesh and is governed by the provisions of the Electricity Act, 2003. The
company is responsible for all activities associated with distribution of power
within its territory, including management of assets, operation and
maintenance of network and supply, technical and financial planning,
business development and management of human resources, legal and
regulatory affairs etc.
3. The company X is a transmission licensee and as per provisions of the
Electricity Act, 2003 and Regulations (Terms & Conditions for Determinations
of Tariff) made thereunder, a transmission licensee can charge only such
tariff which is approved by the MP Electricity Regulatory Commission
(MPERC).
4. Accordingly, company X is regularly raising invoices to the company
for the electricity supplied, on monthly basis which contain all approved
charges like transmission charges, incentive charges and true up charges
etc. Apart from above, company X also included one item ‘carrying cost of
true up charges’, which, as per the querist, is not approved by MPERC in its
Tariff order or True-up.
5. Since, the ‘carrying cost of true up charges’ is not elsewhere
approved by MPERC, no provision has been made by the company in its
books of account for the same following the directions issued in MPERC
Regulations (clause-13). However, the amount of ‘carrying cost of true-up
charges’ is being shown as ‘contingent liability’ in the books of account of the
company.
163
6. While conducting audit of annual accounts of the company for the

financial year (F.Y.) 2014-15, the government auditor (C&AG auditor) had
following observations in this regard:
“This does not include an amount of Rs.13.58 crore towards the
carrying cost levied on true up for the financial year 2011-12 by the
company X in transmission bills for the year 2014-15. The monthly bills
of company X include transmission charges, incentive charges, true up
charges, and carrying cost of true up charges. However, while
releasing the payments to the company X, the company has been
deducting the carrying cost on true up and no provision was made for
the same. As the carrying cost on true up was billed by the company X
and there is no evidence that the carrying cost is not payable by the
company, a provision for the liability should have been made in the
accounts. Non-provision of liability has resulted in understatement of
power purchase and transmission charges and understatement of
liability by Rs.13.58 crore. Consequently, loss for the year was also
understated by Rs.13.58 crore.”
7. In response to above, the company submitted the following reply:
“CAG audit observed that the company did not make any provision of
liability towards the carrying cost amount Rs. 13.58 crore levied on
true up for F.Y. 2011-12 by the company X in transmission charges
bills for the year 2014-15.
In this regard, it is stated that the company X is a transmission
licensee and as per provisions of the Electricity Act, 2003 and
regulations made thereunder, a transmission licensee can charge only
tariff approved by the MP Electricity Regulatory Commission. It is
submitted that although company X billed Rs. 13.58 crore towards the
carrying cost on true up for F.Y. 2011-12, however in the true-up order
of F.Y. 2011-12 no amount is approved by the MPERC on account of
carrying cost.
Kind attention is drawn towards section 62 of the Electricity Act, 2003:
“62. (1) The Appropriate Commission shall determine the tariff in
accordance with provisions of this Act for –
a) supply of electricity by a generating company to a
distribution licensee;
164
b) transmission of electricity;
c) wheeling of electricity;
d) retail sale of electricity.
(2) The Appropriate Commission may require a licensee or a
generating company to furnish separate details, as may be
specified in respect of generation, transmission and distribution
for determination of tariff.
(3) The Appropriate Commission shall not, while determining the
tariff under this Act, show undue preference to any consumer of
electricity but may differentiate according to the consumer's load
factor, power factor, voltage, total consumption of electricity
during any specified period or the time at which the supply is
required or the geographical position of any area, the nature of
supply and the purpose for which the supply is required.
(4) No tariff or part of any tariff may ordinarily be amended more
frequently than once in any financial year, except in respect of
any changes expressly permitted under the terms of any fuel
surcharge formula as may be specified.
(5) The Commission may require a licensee or a generating
company to comply with such procedures as may be specified
for calculating the expected revenues from the tariff and
charges which he or it is permitted to recover.
(6) If any licensee or a generating company recovers a price or
charge exceeding the tariff determined under this section, the
excess amount shall be recoverable by the person who has paid
such price or charge along with interest equivalent to the bank
rate without prejudice to any other liability incurred by the
licensee.
Further, clause 13 of the Madhya Pradesh Electricity Regulatory
Commission (Terms and Conditions for Determination of Transmission
Tariff) (Revision-II) Regulations, 2012 provides as under:
“13. Charging of Tariff other than approved
13.1. Any Transmission Licensee found to be charging a Tariff
different from the one approved by the Commission from Beneficiaries
shall be deemed to have not complied with the directions of the
165
Commission and shall be liable to be proceeded against under Section

142 of the Act without prejudice to any other liability becoming due
from the licensee under any other provisions of the Act. In case the
amount recovered exceeds the amount allowed by the Commission,
the excess amount so recovered shall be refunded to the Beneficiaries
who have paid such excess charges, along with simple interest for that
period equivalent to the State Bank of India’s Base Rate as on 1st of
April of that year plus 3.50% besides any other penalty that may be
imposed by the Commission.”
Further kind attention is also drawn towards paragraph 14 of Accounting
Standard 29 which provides as under:
“14. A provision should be recognised when:
(a) an enterprise has a present obligation as a result of a
past event;
obligation; and
obligation.
If these conditions are not met, no provision should be
recognized.”
Since MPERC has not approved any amount towards the carrying cost, there
is no present obligation of the company to pay the same, hence need not
required to be account for.”
8. The company has also requested C&AG auditor that the company has
already shown the amount of ‘carrying cost of true up charges’ as
‘Contingent Liability’ in the books of account and after approval of MPERC,
the same shall be duly recognized in the books of account of the company.
However, the C&AG auditor has not considered the submission of the
company.
9. The querist has also separately supplied the following information for
the perusal of the Committee:
(a) In India, the electricity sector is regulated by the regulators (i.e.
Electricity Regulatory Commission established under Electricity
166
Act, 2003). The prices of supply of power to consumer as well

as conditions of such supply are being decided by the regulator.
Regulators allow licensees to charge rates from their consumers
based on benchmark costs plus a reasonable mark-up.
Components of such costs are interest cost, depreciation,
operating and maintenance.
As per the provisions of the Electricity Act, 2003, no licensees
are allowed to charge prices other than approved by the
Regulatory Commission. In this regulatory framework, there are
two stages of the approval by the regulators.
At the first stage, before commencement of each year, every
licensee is required to file the tariff petition namely, ‘Aggregate
Revenue Requirement (ARR)’ in accordance with the provisions
of the regulation prescribed by the regulator in this regard,
comprising projected revenue and cost. Based on this tariff
petition regulatory commission approves the cost and
determines tariff.
In the second stage, after completion of the financial year,
based on the audited accounts licensee is again required to file
a petition namely, ‘True up petition’. The truing up exercise is
meant to fill the gap between the actual expenses at the end of
the year and the anticipated expenses at the beginning of the
year. Based on this true-up petition and considering the
provision of the regulation, Commission approves final cost of
that year and allows recovery of any unrecovered cost by way of
tariff-setting of subsequent year.
In this regulatory framework, it may happen that costs are
allowed to be recovered from consumers in the period later than
the period in which the costs are actually incurred. Therefore,
regulatory commission based on the prevailing circumstances, if
deemed fit, apart from cost incurred, may allow recovering the
carrying cost also on account of such deferment of recovery of
cost.
The carrying cost is allowed based on the financial principle that
whenever the recovery of cost is deferred, the financing of the
gap in cash flow arranged by the licensee from lenders and/or
167
promoters and/or accruals, has to be paid for by way of carrying

cost. In other words, it can be said that the carrying cost
represent the interest component to compensate the time value
of money for the period between ARR and True-up exercise.
In the present case, the company X has filed the true-up petition
for the respective year. However, MPERC has not approved any
amount under the head of carrying cost and therefore, the
company has not admitted and accounted for the same.
(b) The company has not paid any carrying cost of true up so far.
Further, the company has represented the matter before
company X (copy of the representations made have been
supplied by the querist for the perusal of the Committee).
The company has followed this accounting policy consistently
from the financial year 2013-2014, however, neither statutory
auditor nor C&AG auditor has objected this treatment till F.Y.
2014-15 and the company has duly disclosed the carrying cost
as contingent liability.
Company X has not taken any coercive action against the
company for recovery of carrying cost.
(c) The MPERC has never approved any recovery of such carrying
cost for any financial year till date and as per provisions of the
Electricity Act, no licensee can charge any tariff other than that
approved by MPERC.
(d) As per provisions of the clause 1.30 (Detail to be furnished and
fees payable by licensee or generating company for
determination of tariff and manner of making application) of
MPERC Regulations, 2004 and its amendment, any tariff comes
in effect only after expiry of seven days from the publication of
public notice of tariff order in two newspapers. Therefore, tariff
order of MPREC applies prospectively.
B. Query
10. In the light of the above facts, the querist has requested the Expert
Advisory Committee to provide the opinion that whether the company is
required to make provision towards the ‘carrying cost of true up charges’ as
billed by company X even if the same is not approved by MPERC as required
by Electricity Act, 2003.
168

11. The Committee notes that the basic issues raised by the querist relate
to whether the company is required to make a provision towards the ’carrying
cost of true up charges’ as billed by company X even if the same is not
approved by MPERC, as required by Electricity Act, 2003. The Committee
has, therefore, considered only this issue and has not examined any other
issue that may arise from the Facts of the Case, such as, accounting in the
books of account of company X, etc. Further, the opinion expressed
hereinafter is purely from accounting perspective and not from the
perspective of legal interpretation of the terms of the MPERC Regulations or
Electricity Act, 2003, etc. The Committee also wishes to point out that since
the query pertains to financial year 2014-15, the opinion expressed
hereinafter is in the context of Accounting Standards notified under the
Indian Accounting Standards (Ind ASs) notified under the Companies
(Accounting Standards) Rules, 2015.
12. With regard to issue raised, the Committee notes the following
paragraphs from Accounting Standard (AS) 29, ‘Provisions, Contingent
Liabilities and Contingent Assets’, notified under the Companies (Accounting
Standards) Rules, 2006:
“10.1 A provision is a liability which can be measured only by
using a substantial degree of estimation.
10.2 A liability is a present obligation of the enterprise arising
from past events, the settlement of which is expected to result in
an outflow from the enterprise of resources embodying economic
benefits.
10.3 An obligating event is an event that creates an obligation
that results in an enterprise having no realistic alternative to
settling that obligation.
10.4 A contingent liability is:
(a) a possible obligation that arises from past events and
the existence of which will be confirmed only by the
occurrence or non-occurrence of one or more
uncertain future events not wholly within the control
of the enterprise; or
169
(b) a present obligation that arises from past events but

is not recognised because:
(i) it is not probable that an outflow of resources
embodying economic benefits will be required
to settle the obligation; or
(ii) a reliable estimate of the amount of the
obligation cannot be made.”
“10.6 Present obligation - an obligation is a present obligation if,
based on the evidence available, its existence at the balance
sheet date is considered probable, i.e., more likely than not.
10.7 Possible obligation - an obligation is a possible obligation if,
based on the evidence available, its existence at the balance
sheet date is considered not probable.”
“14. A provision should be recognised when:
(a) an enterprise has a present obligation as a result of
a past event;
obligation; and
obligation.
If these conditions are not met, no provision should be
recognised.
15. In almost all cases it will be clear whether a past event has given
rise to a present obligation. In rare cases, for example in a lawsuit, it
may be disputed either whether certain events have occurred or
whether those events result in a present obligation. In such a case, an
enterprise determines whether a present obligation exists at the
balance sheet date by taking account of all available evidence,
including, for example, the opinion of experts. The evidence considered
includes any additional evidence provided by events after the balance
sheet date. On the basis of such evidence:
(a) where it is more likely than not that a present obligation exists at
the balance sheet date, the enterprise recognises a provision (if
the recognition criteria are met); and
170
(b) where it is more likely that no present obligation exists at the

balance sheet date, the enterprise discloses a contingent
liability, unless the possibility of an outflow of resources
embodying economic benefits is remote (see paragraph 68).”
“22. For a liability to qualify for recognition there must be not only a
present obligation but also the probability of an outflow of resources
embodying economic benefits to settle that obligation. For the purpose
of this Standard, an outflow of resources or other event is regarded as
probable if the event is more likely than not to occur, i.e., the
probability that the event will occur is greater than the probability that it
will not. Where it is not probable that a present obligation exists, an
enterprise discloses a contingent liability, unless the possibility of an
outflow of resources embodying economic benefits is remote (see
paragraph 68).”
13. The Committee notes from the above that an element of judgement is
required to determine whether a liability for carrying cost of true up charges
should be provided for in the accounts or treated as a contingent liability and
disclosed by way of a note to the accounts. It is for the management of the
enterprise to decide and for the auditor to assess, considering the
circumstances of each case, whether the said liability warrants recognition
of provision or disclosure of contingent liability. The Committee is of the
view that while making such judgement, all the evidences available as on
the balance sheet date, including for example, opinion of an expert on the
possibility and extent of outcome of the decision of the appropriate authority,
experience of the company or other enterprises in similar cases, decisions
of appropriate authorities, etc. should be considered. The Committee is
also of the view that since in the extant case, as per the querist, appropriate
authority (MPERC) has never approved the recovery towards carrying cost
of true up charges till date, this in itself, indicates that there is no sufficient
clarity as to whether a present obligation exists which may require
recognition of a provision. However, the Committee is of the view that
whether or not a present obligation exists for the carrying cost of true up
charges and accordingly, whether the company may be required to create a
provision or not does not merely depend on whether the regulator has
already allowed/approved the recovery of carrying cost or not in the past;
rather it depends on whether based on all the evidences available in the
facts and circumstances of the company (as discussed above) as on the
171
balance sheet date, there exists an obligation which can be considered

probable (i.e., more likely than not) arising from a past event. Further, for
recognising a provision, other conditions as per paragraph 14 of AS 29
should also be fulfilled, viz., it is probable that an outflow of economic
resources embodying economic benefits will be required to settle the
obligation and a reliable estimate can be made of the amount of such
obligation.
14. The Committee is further of the view that based on certain facts
available with us such as, non approval of carrying cost of true up charges
till date, no order has been issued by MPERC in the past approving/allowing
the recovery of such carrying cost, no explicit statement in the Act indicating
whether such charges would be approved or not in future, no legal action
initiated by Company X for non payment of carrying cost of true up charges
by the Company, it appears that there is no present obligation or a probable
obligation that an outflow of resources embodying economic benefits will be
required to settle the obligation towards the carrying cost of true up charges
at the balance sheet date. Accordingly, the company should not make a
provision; rather in this situation, the company should disclose the same as
a contingent liability, with relevant disclosures in this regard as per AS 29,
until any further contrary facts emerge which indicates that a present or
probable obligation towards carrying cost of true up charges exists at the
balance sheet date.
D. Opinion
company should, based on all the available evidences in its own facts and
circumstances, assess whether there is a present obligation or a possible
obligation towards the carrying cost of true up charges. However, on the
basis of certain facts and circumstances presently known and as discussed
in paragraph 14 above, the company should disclose the same as a
contingent liability, with relevant disclosures in this regard as per AS 29, until
the possibility of an outflow of resources embodying economic benefits is
remote and unless any further contrary facts emerge which indicates that a
present or probable obligation towards carrying cost of true up charges exists
at the balance sheet date.
__________
172
Query No. 18
Subject: Accounting treatment of capital work-in-progress (CWIP) held
on behalf of Government of India (GoI) and funds received
from the GoI.1
1. A company (hereinafter referred to as the ‘company’) was incorporated
on 18th July, 2014 under the Companies Act, 2013 as a public sector
undertaking (PSU) fully owned by the Government of India (GoI) under the
administrative Ministry of Road Transport & Highways (MoRTH) with
authorised capital of Rs.10 crore. It has started functioning in September
2014 with the objective to develop national highways (NH) and other
infrastructure at fast pace in the North East and strategic areas of the country
sharing international borders. The company has been entrusted the task of
developing and improving road connectivity in length of 10,000 km including
the international trade corridor in the North Eastern region of India on behalf
of the GoI. The company has formulated a vision to become an instrument
for creation and management of infrastructure of the highest standard while
contributing significantly towards nation building. Being a professional
company, its mission is to design and develop infrastructure projects in a
time bound, most efficient and transparent manner with maximum benefits to
all the stakeholders. The company has adopted a business model that relies
on outsourcing of a number of activities including design, construction and
supervision of national highways, rather than undertaking all such activities
through its own employees. This has thus helped the company in
maintaining a lean organisational structure to facilitate faster operational
decision-making. Within a short period, the company has set up its corporate
office and twelve offices in Assam, Arunanchal Pradesh, Jammu and
Kashmir, Manipur, Nagaland, Tripura, Uttarakhand, Mizoram, Meghalaya,
Sikkim, A & N Islands and Nepal for monitoring and supervising the NH
projects entrusted to it.
2. The querist has stated that infrastructure is an important component in
the development of any economy, more so, in case of India because of its
demographic profile. Infrastructure projects have large capital requirements
and also long gestation periods. A typical highways project has a
construction period of two-three years, during which it does not generate any
cash flows.
173
3. The querist has further stated that the Government of India (GoI)
through Notification entrusted the company the job of construction a nd
development of the highways and other infrastructure projects. The
ownership of land acquired for the same remains vest with the GoI.
Presently, the company is executing the national highways and other
infrastructure projects on behalf of the Government of India (GoI) out of the
funds provided by MoRTH and entitled to receive agency commission as per
the defined rate on the expenditure incurred. The national highways
stretches entrusted to the company are at different stages of planning and
development and are likely to be completed in next couple of years.
4. According to the querist, since the company has been incorporated
only in mid 2014, it started its activities of the project effectively from the
financial year 2015-16 as per the financial model adopted. The financial
model includes that all the funds for the execution of the roads and
infrastructure projects are being financed by the Government of India on the
basis of yearly budget allocations and released to the company on yearly
basis. The company, out of the funds received from the GoI for the project
execution, regularly spends the amount and has been generating asset as
defined by the MoRTH. Accordingly, upto 31.03.2016, Rs. 2819 crore have
been released to the company by the GoI and capital work-in-progress
(CWIP) of Rs. 1579 crore has been generated.
5. Therefore, the major activities of the company are to build the roads
and infrastructure on behalf of the GoI. Other than that, the company has to
incur the establishment expenditure towards payment of salary, rent and
other establishment expenses, which are nominal in nature, and are being
paid out of the agency commission being received against project executions
and some interest income.
6. The querist has stated that considering the above financial model and
activities of the company, it may be appreciated that a prudent and accepted
accounting policy and disclosure procedures are required for accounting for
work-in-progress generated and cumulative fund received from the MoRTH in
the books of account. Since the financial impact of these activities are
substantial in nature as compared to the other activities of the company,
these two financial heads require a proper disclosure in the final accounts
and financial statement of the company. So far as the accounting standards
of the Institute of Chartered Accountants of India (ICAI) are concerned, there
is no such clarity to disclose these items in the financial statements. If these
174
two heads are not depicted in the financial statement considering tha t the
company is not the owner of the work-in-progress and funds, then it may not
be justified in respect to the transparency and true & fair view of balance
sheet. The querist has separately provided a copy of specimen contract
made entered in with third parties wherein the contract is entered in the
name of “The President of India through the Ministry of Road Transport &
Highways, Government of India”.
B. Query
7. Therefore, the querist has requested the Expert Advisory Committee of
the ICAI to advise the company, the report policy to be adopted to disclose
the following heads in the books of account:
(i) Work-in-progress generated out of the funds provided by the
GOI and corresponding work-in-progress generated on behalf of
the GOI.
(ii) Cumulative amount of funds released to the company by the
MoRTH for project as per the yearly budgetary allocation.
to accounting treatment of work-in-progress generated out of the funds
provided by the GOI and generated on behalf of the GoI and accounting
treatment of the amount of funds released to company by the MoRTH (GoI)
for project as per the yearly budgetary allocation in the books of account of
the company. Therefore, the Committee has considered only these issues
and has not considered any other issue that may arise from the Facts of the
Case, such as, accounting for agency commission received by the company
and any expenditure incurred by the company out of such commission, etc.
Further, the opinion expressed, hereinafter, is purely from accounting
perspective and not from any legal perspective. At the outset, the Committee
wishes to point out that since the querist has referred to financial year 2015-
16 in the Facts of the Case, the opinion expressed hereinafter is from the
perspective of the Accounting Standards notified under the Companies
(Accounting Standards) Rules, 2006 and not from the perspective of Indian
Accounting Standards (Ind ASs) notified under the Companies (Indian
Accounting Standards) Rules, 2015.
9. At the outset, the Committee notes from the Facts of the Case that
the Government of India (GoI) through Notification entrusted the company
175
the job of construction and development of the highways and other

infrastructure projects, but the ownership of land acquired for the same
remains vested with the GoI only. Further, the company is executing the
national highways and other infrastructure projects on behalf of Government
of India (GoI) and all the funds for execution of these projects are being
financed by the GoI on the basis of yearly budget allocations. Moreover, the
company is only entitled to receive agency commission as per the defined
rate on the expenditure incurred. Hence, the Committee is of the view t hat it
would not be incorrect to consider the company as an agent of the
Government of India for execution of the said project and not a contractor
for construction of the project. The Committee also notes paragraph 4 of AS
7, notified under the ‘Rules’, which states that “for the purposes of this
Standard, construction contracts include, contracts for the rendering of
services which are directly related to the construction of the asset, for
example, those for the services of project managers and architects;”,
therefore, on the basis of facts available with the Committee such as agency
commission being paid, the contract with the third parties are made in name
of the Government of India, it is evident that the principles of AS 7 are
applicable to the extent of revenue earned by the company for such
arrangements viz. agency commission in the extant case.
10. With regard to the issue raised, the Committee notes the term ‘asset’
as defined in paragraph 49(a) of the ‘Framework for the Preparation and
Presentation of Financial Statements’, issued by the Institute of Chartered
Accountants of India as follows:
“(a) An asset is a resource controlled by the enterprise as a result of
past events from which future economic benefits are expected
to flow to the enterprise.”
From the above, the Committee is of the view that so far as the company is
concerned, the project assets do not meet the definition of ‘asset’. This is
because the future economic benefits from the project assets are not
expected to flow to the company as it is specifically mentioned by the querist
that the company is not the owner of the work-in-progress and the funds
received from the GoI. The project assets are not even funded by the
company; rather these are funded by the GoI. Accordingly, the project assets
or work-in-progress during the project execution should not be recognised by
the company in its books of account.
11. As regards the issue raised by the querist relating to the accounting
treatment of funds received by the company from the MoRTH (GoI), the
176
Committee is of the view that these funds are received by the company not
for its own activities; rather for execution of the project on behalf of the GoI
and therefore, these are of the nature of ‘asset held in trust’. Accordingly, th e
asset and liability in respect thereof should be recognised in the books of
account of the company. As and when the expenditure is incurred, the ‘asset
held in trust’ should be credited with corresponding debit to the related
liability. Further, considering the nature of company’s role in the extant case,
the company may, if it so desires, disclose in the notes forming part of
accounts, project assets/capital work-in-progress and project liabilities with
an appropriate disclosure of their nature.
D. Opinion
(i) The work in progress generated out of the fund provided by
MoRTH (GOI) and corresponding work in progress generated on
behalf of GOI should not be recognised in the books of account
of the company, as discussed in paragraph 10 above. However,
considering the nature of company’s role in the extant case, the
company may, if it so desires, disclose in the notes forming part
of accounts, project assets/capital work-in-progress with an
appropriate disclosure of their nature.
(ii) As regards the cumulative amount of funds released to the
company by MoRTH (GoI) for project as per the yearly
budgetary allocation, the Committee is of the view that these
funds are received by the company not for its own activities;
rather for execution of the project on behalf of the GoI and
therefore, these are of the nature of ‘asset held in trust’.
Accordingly, the asset and liability in respect thereof should be
recognised in the books of account of the company. As and
when the expenditure is incurred, the ‘asset held in trust’ should
be credited with corresponding debit to the related liability, as
__________
177
Query No. 19
Subject: Accounting treatment of amount invested in LIC’s leave
encashment plan for meeting the company’s leave
encashment liability. 1
1. A company (hereinafter referred to as ‘the company’), as per terms
and conditions of employment, has a long term compensated absence
scheme under which employees are entitled to certain quantum of paid
annual leave (AL) and paid half pay leave (HPL), every year, while in service.
They can also encash the AL (subject to certain limits) while in service and
can encash AL and HPL on resignation / retirement (subject to certain
conditions and limits).
2. As per the querist, the above being a defined benefit scheme, the
company in line with the requirements of the Accounting Standard (AS) 15
and Indian Accounting Standard (Ind AS) 19, ‘Employee Benefits’ with effect
from the financial year (F.Y.) 2016-17, has been accounting for the liability
based on actuarial valuation. The scheme is an unfunded scheme and the
amount of liability is retained in the company’s books.
3. As a part of good corporate governance, the company has, during the
F.Y. 2015-16, decided to segregate the amount required to meet the above
liability from the company’s common pool of funds and deposit the amount
representing the liability in a separate identifiable and dedicated asset.
4. Accordingly, the company has, during F.Y. 2015-16 deposited the
amount of Rs. 241.06 crore (representing an amount of liability on 31 st
March, 2015) in New Group Leave Encashment Plan of the Life Insurance
Corporation of India (LIC). Also, an amount equivalent to incremental liability
will be deposited in the above scheme each year. A copy of the scheme has
been supplied by the querist for the perusal of the Committee. The querist
has separately informed that no separate trust is created to
administer/manage the funds maintained in respect of amount invested in
LIC’s new group leave encashment plan for meeting company’s leave
encashment liability.
178
Accounting treatment of the amount deposited with the LIC and inte rest
earned thereon
5. As informed by the querist, the company has deposited the amount
equivalent to the leave encashment liability with the LIC. The amount
deposited with the LIC has been grouped under non-current investment in
the financial statements and the corresponding liability towards leave
encashment is grouped under long-term/short-term provisions (as
applicable).
6. The interest earned on the investment has been credited to
incremental expense to be booked against leave encashment liability and
hence, netted off under employee benefit expenses.
7. The reason for the above classification / accounting treatment is
explained below:
Reason for retention of leave encashment liability in the books of account:
As per paragraph 55 of Accounting Standard (AS) 15, ‘Employee Benefits’
(revised 2005), “The amount recognised as a defined benefit liability
should be the net total of the following amounts:
(a) the present value of the defined benefit obligation at the
balance sheet date;
(b) minus any past service cost not yet recognised;
(c) minus the fair value at the balance sheet date of plan assets
(if any) out of which the obligations are to be settled
directly.”
Thus, the company should recognise present value of the obligation in
respect of leave encashment liability at the balance sheet date and this value
can be reduced to the extent of fair value of a plan asset (if any).
Accordingly, as per provisions of AS 15 (revised 2005), the company would
be able to adjust the leave encashment liability against the investment made
to meet the liability, only if the instrument in which the amount is invested
qualifies as a plan asset which is defined as follows in AS 15:
“Plan assets comprise:
(a) assets held by a long-term employee benefit fund; and
(b) qualifying insurance policies.”
179
As the company has invested the amount in an insurance policy, the test of
whether the investment made by the company qualifies as a plan asset
would be whether the policy taken is a qualifying policy. As per AS 15
(Revised), a qualifying insurance policy would be required to meet the
following conditions:
 can be used only to pay or fund employee benefits under a
defined benefit plan; and
 are not available to the reporting enterprise’s own creditors (
even in bankruptcy) and cannot be paid to the reporting
enterprise, unless either:
(i) the proceeds represent surplus assets that are not
needed for the policy to meet all the related employee
benefit obligations; or
(ii) the proceeds are returned to the reporting enterprise to
reimburse it for employee benefits already paid.
In the extant case, the policy taken by the company does not satisfy the
above conditions due to incorporation of the following clauses in the policy:
 The Grantees and the Corporation reserves the right to
terminate the scheme by giving three months notice to either
party. In that event, the Life Cover Benefit under this Policy shall
terminate forthwith and the benefit available under this policy
shall be as per Schedule IV. (Clause 17 of General Conditions)
 The Policy can be surrendered by the Grantees at any time by
giving an advance notice of three months. (Point 8 of Schedule
IV to the Policy)
Therefore, as the condition for plan asset as specified in AS 15 (revised) is
not met by LIC’s New Group Leave Encashment Plan, the company has
treated the investment as a non-plan asset and accordingly, not reduced the
fair value of the investment from the present value of obligation in respect of
leave encashment liability as on 31 st March, 2016.
Reason for adjustment of interest earned out of investment against
incremental leave encashment liability instead of showing it as interest
income:
As per paragraph 61 of AS 15 (revised 2005), an enterprise while arriving at
the amount to be recognised in the statement of profit and loss can reduce
180
from the current service cost and interest cost, the expected return on any
plan assets and on any reimbursement rights.
As per paragraph 103 of AS 15 (revised 2005), in the statement of profit and
loss, the expense relating to a defined benefit plan may be presented net of
the amount recognised for a reimbursement (emphasis supplied by the
querist). Since interest earned by the company every year on the investment
is credited to Policy account periodically (Refer Schedule II) and the interest
so credited is adjusted against the incremental liability each year in order to
arrive at the net amount payable to LIC, the interest earned for the year on
investment is in nature of reimbursement of the money to the company. In
view of this, the interest income earned for the year under the LIC policy is
adjusted against the incremental liability (for the year) as determined by the
actuary and the net amount is recognised in the statement of profit and loss.
B. Query
Expert Advisory Committee on the following issues:
(i) Whether the company is right in considering the investment
made in New Group Leave Encashment Plan of Life Insurance
Corporation of India towards meeting its leave encashment
liability as a Non-Plan investment.
(ii) Whether the company is right in accounting the leave
encashment liability in its books and the corresponding amount
deposited with LIC under ‘Non-current Investment’.
(iii) Whether the company is right in recognising the net amount
(i.e., incremental liability for the year as determined by actuary
less interest income earned for the year under the LIC Policy)
as the leave encashment liability in the statement of profit and
loss.
9. The Committee notes that the basic issues raised in the query relate to
(i) whether the investment made in New Group Leave Encashment Plan of
Life Insurance Corporation of India (LIC Policy) towards meeting its leave
encashment liability should be considered as a ‘qualifying insurance
policy/plan asset’ and accordingly, whether it should be disclosed as a
separate asset or as a deduction from the related leave encashment liability
181
in the financial statements and (ii) whether the expense recognized in the
statement of profit and loss (referred to as ‘incremental liability’ by the
querist) in respect of leave encashment liability for the current year as per
the requirements of AS 15 should be recognized net of interest income
earned for the year on such LIC Policy. Accordingly, the Committee, while
answering the query, has considered only these issues and has not
examined any other issue that may arise from the Facts of the Case, such
as, measurement of employee benefit obligations/liability and the
investments (LIC Policy) made in relation thereto, accounting for any other
employee benefit other than leave encashment liability, nature and type of
the employee benefits and benefit plans as per the requirements of AS 15,
viz., short term/long-term/other long-term employee benefits and the defined
contribution or defined benefit plans etc. The Committee also wishes to point
out that although at one place, the querist has made a reference of Ind AS
19, but since throughout the facts of the case, the querist has referred to the
requirements of AS 15 (revised) and the financial year being referred to in
the extant case is financial year 2015-16, the Committee has expressed its
opinion in the context of accounting standards notified under the Companies
(Accounting Standards) Rules, 2006 (hereinafter referred to as the ‘Rules’)
and not Ind ASs.
10. At the outset, the Committee wishes to clarify that leave encashment
is not a post- employment benefit plan; rather it will be other short-term
employee benefits or other long-term employee benefits depending on the
terms and condition. The Committee further notes that the company has
taken a comprehensive LIC policy in respect of life cover benefit and leave
encashment benefit for its employees, some of the significant features of
which are as follows:
General Conditions
“10 As soon as a Member or a beneficiary becomes entitled to
receive the benefits under the scheme, the Grantees shall send
the relevant particulars to the Corporation whereupon the
Corporation shall pay to the Grantees appropriate benefits.”
“13 Notwithstanding anything herein contained to the contrary, the
Corporations’ liability to the Grantees under this policy shall be
limited to the Life Cover Benefit under this plan effected in
respect of the Members subject to the terms and condition
182
applicable to them and Policy Account Value standing to the

credit of the Grantees.
14 The Corporation shall issue the Grantees as the policyholder at
the end of each financial year a statement of the Policy Account
showing various transactions during the financial year.”
“17 The Grantees and the Corporation reserves the right to
terminate the scheme by giving three months notice to either
party. In that event, the Life Cover Benefit under this Policy shall
terminate forthwith and the benefit available under this policy
shall be as per Schedule IV.”
“20. The LIC’s New Group Leave Encashment Cash Accumulation
Plan is a Non Participating Variable Insurance Plan and will not
participate in the profits of the Corporation.”
Schedule – I
16. Policy Account Policy Account shall mean the account to

be maintained by the Corporation in
favour of the Grantees to which will be
credited the Contribution (as described in
Schedule – II). Leave Encashment
Benefits shall be paid out of Policy
Account.
Schedule II – Contribution and Management of Policy Account
1. Contributions: Such amount as is required to secure the Life
Cover Benefit and Leave Encashment Benefits in respect of the
members of the scheme. The amount payable towards past
service Leave Encashment Benefit may be wholly paid on the
date of entry and partly on Annual Renewal Date as specified in
the scheme rules and amount payable every year as required to
secure the Leave Encashment Benefit relating to the current
year service as per AS – 15 (Revised).
…
2. Management of policy Account: All the Contributions paid
by the Grantees will be credited to the maintained Policy
Account.
183
A single Policy Account shall be maintained in respect of all

contributions received from Grantees.
Member’s Leave Encashment Benefits shall be paid out of the
Policy Account of the scheme on the happening of the events as
described in the scheme rules.
3. Interest payable on Policy Account:
The following types of interest rates shall be provided on the
Policy Account Value:
(a) Minimum Floor Rate (MFR): MFR is a guaranteed interest
rate that Policy Account shall earn during the entire policy
term. This plan offers a Minimum Floor Rate (MFR) of
0.5% p.a.
(b) Additional Interest Rate (AIR): In addition to MFR, the
Corporation shall also declare a non zero-positive
Additional Interest Rate (AIR) at the beginning of every
financial quarter on the Policy Account and AIR shall
remain guaranteed for that financial quarter. This AIR
shall remain guaranteed for that quarter.
(c) Residual Addition (RA): Starting from the fifth policy
anniversary, in addition to MFR and AIR, the Corporation
may also declare a non zero-positive Residual Addition
(RA) on Policy Account at the end each policy year.
…
The interest amount earned by way of MFR and AIR will be
credited to the Policy Account at the end of each quarter/at the
time of exit. The interest amount earned by way of RA, if any,
will be credited to the Policy Account at the end of each policy
year starting from policy year 5.
Schedule III - Benefits
6. The benefits payable on various events are as follows:
a. Benefits payable on death of Member before Normal
Retirement Age:
On death of a Member whilst in service before Normal
Retirement Age, the benefit payable will be equal to the
sum of following:
184
(i) Sum assured

(ii) Leave Encashment Benefit as per the scheme
rules.
However, for the Leave Encashment Benefit, the
Corporation’s liability towards the Policyholder shall be
limited to the Policy Account Value remaining in the
Policy Account.
b. Benefits payable on retirement/Leaving Service:
On retirement of a Member, the Leave Encashment
Benefit shall be payable as specified in the scheme rules.
However, the Corporation’s liability towards the
policyholder shall be limited to the Policy Account Value
remaining in the Policy Account.
Schedule IV – Discontinuance of Contributions
8. Surrender: The Policy can be surrendered by the Grantees at
any time by giving an advance notice of 3 months. The benefit
available on surrender shall be higher of Guaranteed Surrender
Value and Special Surrender Value. The policy will terminate on
surrender. The Life Cover Benefit effected in this policy
carries no Surrender Value.
Guaranteed Surrender Value:
The Guaranteed Surrender Value shall be equal to the 90% of
the total Contributions (net of Mortality charges and Policy
Administration Charges already deducted till date) paid less all
the benefits paid since the inception of the policy.
Special Surrender Value:
The Special Surrender Value shall be equal to the policy
Account Value on the day of surrender less the applicable
surrender charges, less Market Value Adjustment, if any, as
mentioned in Para 4(iv) of Schedule II
...”
11. With regard to the first issue raised by the company relating to
whether the investment made in New Group Leave Encashment Plan of Life
Insurance Corporation of India towards meeting its leave encashment
185
liability can be considered as a ‘plan asset’, the Committee notes from the
facts of the case that the company is not treating the investments as a plan
asset. The Committee further notes the following paragraphs of Accounting
Standard (AS) 15, ‘Employee Benefits’, notified under the Rules:
“7.14 Plan assets comprise:
(a) assets held by a long-term employee benefit fund;
and
(b) qualifying insurance policies.
7.15 Assets held by a long-term employee benefit fund are
assets (other than non-transferable financial instruments issued
by the reporting enterprise) that:
(a) are held by an entity (a fund) that is legally separate
from the reporting enterprise and exists solely to pay
or fund employee benefits; and
(b) are available to be used only to pay or fund employee
benefits, are not available to the reporting
enterprise’s own creditors (even in bankruptcy), and
cannot be returned to the reporting enterprise, unless
either:
(i) the remaining assets of the fund are sufficient
to meet all the related employee benefit
obligations of the plan or the reporting
enterprise; or
(ii) the assets are returned to the reporting
enterprise to reimburse it for employee benefits
already paid.
7.16 A qualifying insurance policy is an insurance policy issued
by an insurer that is not a related party (as defined in AS 18
Related Party Disclosures) of the reporting enterprise, if the
proceeds of the policy:
(a) can be used only to pay or fund employee benefits
under a defined benefit plan; and
(b) are not available to the reporting enterprise’s own
creditors (even in bankruptcy) and cannot be paid to
186
the reporting enterprise, unless either:

(i) the proceeds represent surplus assets that are
not needed for the policy to meet all the related
employee benefit obligations; or
(ii) the proceeds are returned to the reporting
enterprise to reimburse it for employee benefits
already paid.”
12. From the above, the Committee notes that plan assets comprise
assets held by a long-term employee benefit fund and qualifying insurance
policies. In the extant case, there is a comprehensive LIC policy covering
both life cover benefits and leave encashment benefits, but no separate fund
exists solely to pay or fund the leave encashment benefits. The Committee
notes that as per the definition of plan assets (assets held by a long -term
employee benefit fund and qualifying insurance policy), the assets held by
the fund/ proceeds of such insurance policy can be only to pay or fund
employee benefits and are not available to the reporting enterprise’s own
creditors and cannot be paid to the reporting enterprise except in certain
circumstances as described in the definition. In this context, the Committee
notes from the terms of the LIC policy reproduced in paragraph 11 above that
whenever an employee (who is a member or a beneficiary as per the policy)
becomes entitled to receive the benefits under the scheme, the company
(grantees) shall send the relevant particulars to the insurer (Corporation)
whereupon it shall pay to the Grantees appropriate benefits. Thus,
apparently, the insurer pays to the company, appropriate benefits on its
becoming due to the employee on intimation sent by the company and not
only to reimburse the company for employee benefits already paid by it.
Further, the Policy gives a right to the company to terminate insurance policy
at any time and in that case, the insurer would pay a specified amount to the
company as per the terms of the Policy. The Committee is of the view that
the existence of such a right implies that the company can use the proceeds
of the Policy for other than to pay or fund employee benefits under the plan
i.e. the company has the ability to use such funds for any other purpose than
to pay or fund employee benefits under a defined benefit plan. The
Committee further notes the requirements of AS 15 in this regard as follows:
“103. When, and only when, it is virtually certain that another
party will reimburse some or all of the expenditure required to
187
settle a defined benefit obligation, an enterprise should recognise

its right to reimbursement as a separate asset. The enterprise
should measure the asset at fair value. In all other respects, an
enterprise should treat that asset in the same way as plan assets.
In the statement of profit and loss, the expense relating to a
defined benefit plan may be presented net of the amount
recognised for a reimbursement.”
“105. When an insurance policy is not a qualifying insurance policy,
that insurance policy is not a plan asset. Paragraph 103 deals with
such cases: the enterprise recognises its right to reimbursement under
the insurance policy as a separate asset, rather than as a deduction in
determining the defined benefit liability recognised under paragraph
55; in all other respects, including for determination of the fair value,
the enterprise treats that asset in the same way as plan assets.
Paragraph 120(f)(iii) requires the enterprise to disclose a brief
description of the link between the reimbursement right and the related
obligation.”
“107. The expected return on plan assets is a component of the
expense recognised in the statement of profit and loss. The
difference between the expected return on plan assets and the
actual return on plan assets is an actuarial gain or loss.”
On the basis of the above, the Committee is of the view that although, the
LIC policy is not a plan asset, the same should be recognised as a
reimbursement right in the financial statements as a separate asset and not
as a deduction in determining the defined benefit liability in respect of leave
encashment plan as per the requirements of paragraph 55 of AS 15. Further,
for classification and presentation of the said insurance policy, the
Committee is of the view that the company should also follow the
requirements of Schedule III to the Companies Act, 2013 in this regard.
13. With regard to the issue raised by the querist relating to treatment of
interest income on the said insurance policy in the extant case, the
Committee notes the following requirements of AS 15:
“61. An enterprise should recognise the net total of the following
amounts in the statement of profit and loss, except to the extent
that another Accounting Standard requires or permits their
inclusion in the cost of an asset:
188
(a) current service cost (see paragraphs 64-91);

(b) interest cost (see paragraph 82);
(c) the expected return on any plan assets (see paragraphs
107-109) and on any reimbursement rights (see paragraph
103);
(d) actuarial gains and losses (see paragraphs 92-93);
(e) past service cost to the extent that paragraph 94 requires
an enterprise to recognise it;
(f) the effect of any curtailments or settlements (see
paragraphs 110 and 111); and
(g) the effect of the limit in paragraph 59 (b), i.e., the extent to
which the amount determined under paragraph 55 (if
negative) exceeds the amount determined under paragraph
59 (b).”
“92. Actuarial gains and losses should be recognised
immediately in the statement of profit and loss as income or
expense (see paragraph 61).
93. Actuarial gains and losses may result from increases or
decreases in either the present value of a defined benefit obligation or
the fair value of any related plan assets. Causes of actuarial gains and
losses include, for example:
(a) unexpectedly high or low rates of employee turnover, early
retirement or mortality or of increases in salaries, benefits (if the
terms of a plan provide for inflationary benefit increases) or
medical costs;
(b) the effect of changes in estimates of future employee turnover,
early retirement or mortality or of increases in salaries, benefits
(if the terms of a plan provide for inflationary benefit increases)
or medical costs;
(c) the effect of changes in the discount rate; and
(d) differences between the actual return on plan assets and the
expected return on plan assets (see paragraphs 107-109).”
189
“120. An enterprise should disclose the following information

about defined benefit plans:
(a) the enterprise’s accounting policy for recognising actuarial
gains and losses.
…
(c) a reconciliation of opening and closing balances of the
present value of the defined benefit obligation showing
separately, if applicable, the effects during the period
attributable to each of the following:
(i) current service cost,
(ii) interest cost,
(iii) contributions by plan participants,
(iv) actuarial gains and losses,
(v) foreign currency exchange rate changes on plans
measured in a currency different from the enterprise’s
reporting currency,
(vi) benefits paid,
(vii) past service cost,
(viii) amalgamations,
(ix) curtailments, and
(x) settlements.
…
(g) the total expense recognised in the statement of profit and
loss for each of the following, and the line item(s) of the
statement of profit and loss in which they are included:
(i) current service cost;
(ii) interest cost;
(iii) expected return on plan assets;
(iv) expected return on any reimbursement right
recognised as an asset in accordance with paragraph
103;
190
(v) actuarial gains and losses;

(vi) past service cost;
(vii) the effect of any curtailment or settlement; and
(viii) the effect of the limit in paragraph 59 (b), i.e., the
extent to which the amount determined in accordance
with paragraph 55 (if negative) exceeds the amount
determined in accordance with paragraph 59 (b).
…”
From the above, the Committee notes that the Standard requires that unless
otherwise required by any other accounting standard, the company should
recognize in the statement of profit and loss, expected return and not actual
return on the reimbursement rights and the difference between the actual
return and expected return on reimbursement rights as actuarial gains and
losses. Thus, the return on reimbursement rights is to be recognized as two
separate elements in the statement of profit and loss rather than as a single
element.
D. Opinion
(i) and (ii) Yes, the company is correct in not considering the
investment made in New Group Leave Encashment Plan of
Life Insurance Corporation of India towards meeting its
leave encashment liability as a ‘plan asset’ as per the
requirements of AS 15 discussed in paragraph 12 above.
The same should be recognised as a reimbursement right in
the financial statements as a separate asset and not as a
deduction in determining the defined benefit liability in
respect of leave encashment plan as per the requirements
of paragraph 55 of AS 15. Further, for classification and
presentation of the said LIC policy, the company should also
follow the requirements of Schedule III to the Companies
Act, 2013 in this regard, as discussed in paragraph 12
above.
(iii) While recognising the amount in respect of leave
encashment liability, the company should recognize in the
191
statement of profit and loss, expected return and not actual

return on the reimbursement rights (LIC Policy) and the
difference between the actual return and expected return on
reimbursement rights as actuarial gains and losses as per
the requirements of AS 15. Thus, the return on
reimbursement rights (LIC Policy) is to be recognized as two
separate elements in the statement of profit and loss rather
than as a single element, as discussed in paragraph 13
above.
_________
Query No. 20
Subject: Consideration of Capital Reserve, Risk Fund & Reserve for
calculation of Net Worth of a Company. 1
1. A company (hereinafter referred to as the ‘company’), is an ISO
9001:2008 certified Government of India (GoI) enterprise working under
Ministry of Micro, Small and Medium Enterprises (MSME). The company is
engaged in the business of promotion and development of the micro, small
and medium sector industries in India, which is done by way of financial
assistance, marketing of their produce, procurement of raw materials,
training, and a host of other related activities. Also, in exercise of the powers
conferred on the Reserve Bank of India (RBI) by section 45 IA of the Reserve
Bank of India Act, 1934, the Company has been granted certificate of
registration to commence / carry on the business of non-banking financial
institution (NBFC) without accepting public deposits.
2. The Querist has stated that all central public sector
enterprises (CPSEs) (holding as well as subsidiaries), without exception, are
required to sign Memorandum of Understanding (MoU); while the
apex/holding companies will sign MoUs with their administrative
Ministries/Departments, the subsidiary companies will sign MoUs with their
respective apex/holding companies on the same lines as MoU is signed
between a CPSE and Government of India. Those CPSEs who do not stick to
192
Department of Public Enterprises (DPE) schedule for signing of MoU will

have their MoU performance rated as “Poor”.
3. The Querist has informed that annual targets of the CPSEs are set at
the beginning of the year wherein financial targets (static parameters) and
non-financial targets are determined. Financial parameters and targets in
MoU are fixed using DPE's definitions as appearing in guidelines issued by
DPE. The non-financial targets are specific, measurable, attainable, results-
oriented, tangible. One of the parameters in the MoU involves the calculation
of net worth for PAT/Net Worth and (earning before interest and tax)
EBIT/Average capital employed.
4. The Querist has also informed that evaluation of MoU of the CPSE is
done at the end of the year on the basis of actual achievements vis-à-vis the
MoU targets by DPE. CPSEs (holding as well as subsidiaries) are required to
submit performance evaluation reports on the basis of audited data to DPE,
after approval of the board of CPSE and through the administrative
Ministries/Departments within the stipulated time period.
The abstract of DPE Guidelines for MoU for the year 2015-16 for Central
Public Sector Enterprises as provided by the querist:
5. As per DPE Guideline No. M-03/0012/2014-DPE(MoU) dated
07.10.2014,
Net Worth: Net worth means the aggregate value of the paid-up share
capital and all reserves created out of the profits and securities
premium account, after deducting the aggregate value of the
accumulated losses, deferred expenditure and miscellaneous
expenditure not written off, as per the audited balance sheet, but does
not include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation. Reserve for the purpose means
Reserves and Surplus.
Capital Employed: Capital employed shall comprise of net worth and
long term borrowings but excluding Capital Work-in-Progress (CWIP)
and all investments made. However, deferred tax assets (net) shall not
be form part of Capital Employed.
6. Company’s Views
(i) Since the activities are for promotion and development of the
small and medium sector industries in India, the Central and
193
State Governments provide grants and subsidies to the

company:
(a) For purchasing capital assets to be used in training
centers for promotion and development of the small and
medium sector industries in India or their respective
regions.
(b) To meet revenue expenses for promotion and
development of the small and medium sector industries in
India or their respective regions.
(ii) The querist has mentioned that in accordance to the Accounting
Standards notified under the Companies (Accounting
Standards) Rules, 2006 (hereinafter referred to as the ‘Rules'):
which are mandatory to be followed by companies to prepare
their financial accounts under section 211 (3C) of Companies
Act, 1956/ Section 129 of Companies Act, 2013:
Any amount released by the GoI towards purchase of any fixed
assets in the corporation is treated as “Grants of the nature of
Promoters’ contribution” in terms of provisions of AS 12 on
‘Accounting for Government Grants’. This has been stated in
the accounting policies at s.no. 14 of the annual accounts,
wherein it is mentioned that “the grant to the extent of
expenditure incurred is recognised as income in the statement
of income and expenditure. In case of capital grant the
expenditure incurred is reduced from the recognised income by
creating capital reserve”. This is appropriately depicted in the
balance sheet under ‘Shareholders funds’.
AS-12 on ‘Accounting for Government Grants’ of ICAI stipulates
two broad approaches to be followed for accounting treatment
for government grants i.e. capital approach and the income
approach.
Capital approach inter-alia includes grants in the nature of
promoter’s contribution whereas income approach inter-alia
includes grants related to specific fixed assets nature or
revenue nature.
It is pertinent to mention that in both the approaches the grant
amount should be recognised in the profit and loss statement on
194
a systematic and rational basis over the useful life of the assets.
Further, such grants should be allocated to income over the
periods and in the proportion in which depreciation on these
assets is charged. The net effect of charging depreciation and
recognition of grant amount is nil in the profit & loss statement.
It automatically follows that no depreciation is chargeable on
such assets to the extent of the subsidy or grant.
It was also pointed that even in accordance to section 43 (1) of
the Income Tax Act 1961 (which is reproduced here under for
ready reference), enjoins a company to reduce the cost of an
asset to the extent of grant or subsidy received from any other
person or authority for acquiring such asset, either in full or part.
“(1) “actual cost” means the actual cost of the assets to
the assessee, reduced by that portion of the cost thereof,
if any, as has been met directly or indirectly by any other
person or authority”
It automatically follows that no depreciation is chargeable on
such assets to the extent of the subsidy or grant.
The Central Board of Direct Taxes, under the specific power
granted to it under sub-section (2) of section 145 of the Income
Tax Act 1961 has notified the income computational &
disclosure standards vide notification no. SO 892(E), dated
March 31, 2015.
In accordance to paragraphs 5 to 10 of the Income Computation
and Disclosure Standard VII relating to the treatment of
government grants and subsidies the grants relating to assets
shall be deducted from actual cost of the asset or written down
value of the block of assets.
Further where the grants not directly relatable to an asset
acquired, then such grant shall be deducted on proportionate
basis from the actual cost of the assets.
No depreciation is allowable on such assets to the extent of the
subsidy or grant.
Therefore, the company, for the purposes of transparency and
safeguarding the assets under its custody, has adopted the
following procedure:
195
Record the acquisition of assets in its books under the

classification “Assets acquired out of government grants”, on the
debit side.
At the same time record the contra credit effect by creating a
“Capital Reserve”.
However it will be evident from the foregoing that they are not
surpluses created out of its earnings. Further, at the same time
they are not liabilities payable by the company to third parties.
Thus, they cannot be included in the non-current or current
liabilities in the balance sheet.
Therefore, the company, in order to balance the value of
“Assets acquired out of government grants” shown on the
assets side has included both these reserves in the balance
sheet under the grouping of ‘Reserves & Surplus’.
In this manner the company has complied with the requirements
of law and at the same time achieved the objective of keeping a
track of the assets acquired out of grants in its financial
statements.
It has already been stated herein above that the company
acquires capital assets fully out of grants granted by the
government and other agencies.
It can be said that the company is holding the assets acquired
from grants more in the capacity of a trustee for the purpose for
which the grant was given.
(iii) The company is in its ordinary course of business/activities
grants financial assistance to MSMEs for their purchase of
capital assets and raw materials etc.
It needs no elaboration that any person engaged in grating
financial assistance has to invariably face certain delinquencies
/ bad debts. These are also referred to as Non Performing
Assets (NPA).
The prudential norms, for those engaged financing activity
requires provision to be created, for delinquencies which is a
normal feature.
It is gathered that this is similar to the provisioning required
under section 45-IB of the Reserve Bank of India Act by non-
banking financial companies.
196
Accordingly the company has created a ‘Risk Fund’ in its

accounts.
The company faced with the same problem as in the case of
assets acquired out of grants, has depicted the ‘Risk Fund’,
which is primarily a provisioning for meeting delinquencies,
under the heading of Reserves & Surplus.
In these circumstances it can be concluded that the “Risk Fund”,
is in fact a provision to meet anticipated liabilities and is not a
free Reserve that can be distributed as profits or dividends.
(iv) Further, the querist has mentioned that the companies are
required to create a Deferred Tax Liability / Asset in accordance
to Accounting Standard AS 22.
The deferred tax liability/asset are deemed as contingent
liabilities / assets. The contra effect of the deferred tax
liability/asset is given to reserves.
In accordance to the Accounting Standard (AS) 22, while it is
obligatory to create the deferred tax liability, it is not so for
deferred tax asset. This is due to the accounting principle of
prudence that while the contingent liabilities are to be
recognised, it is not prudent to recognise a contingent asset.
Since the company had a deferred tax asset –the realisation of
which was not probable in the near future.
However the Comptroller and Auditor General of India (CAG)
insisted on its creation, despite the fact that there is no certainty
of its recovery / realization in the near future.
Therefore, the company had perforce created a deferred tax
asset of Rs. 47.65 crores in the year ended on 31-3-2015, and
hereby increased its profits to that extent by a contingent profit.
The Income tax Act does not recognize this as anything but of
contingent nature.
(v) As per Section 123 of Companies Act, 2013,
- No dividend shall be declared or paid by a company for
any financial year except out of the profits of the company
for that year arrived at after providing for depreciation.
197
- No dividend shall be declared or paid by a company from

its reserves other than free reserves.
The above referred reserves (Capital Reserves, Risk Fund and
on account of Deferred Tax asset) are not to be considered as
free or distributable reserves under the Companies Act. The
primary reason for it is that they are not reserves created out of
actual profits earned.
It is in this context the definition of Net Worth is given in sub-
section 57 of section 2 of the Companies Act 2013 is termed,
which is reproduced hereunder for ready reference:
“(57) "net worth" means the aggregate value of the paid-
up share capital and all reserves created out of the profits
and securities premium account, after deducting the
aggregate value of the accumulated losses, deferred
expenditure and miscellaneous expenditure not written
off, as per the audited balance-sheet, but does not
include reserves created out of revaluation of assets,
write-back of depreciation and amalgamation”
It will be observed from the above definition that it excludes
certain types of reserves which by their nature are those
reserves, which are not distributable to the shareholders.
Accordingly, the reserves not belonging to the shareholders as
distributable are to be excluded.
7. The querist has referred to the views of the Hon’ble Supreme Court in
the case of CIT Vs J H Gotla (1985) 156 ITR 323 on to the matter of
interpretation of Statutes. Relevant portion beginning from page 339, is
reproduced hereunder for ready reference:
“In the case of Varghese v. ITO [1981]131 ITR 597, emphasized that a
statutory provision must be so construed, if possible, that absurdity
and mischief may be avoided.
Where the plain literal interpretation of a statutory provision produces
a manifestly unjust result which could never have been intended by the
Legislature, the court might modify the language used by the
Legislature so as to achieve the intention of the Legislature and
produce a rational construction. The task of interpretation of a
198
statutory provision is an attempt to discover the intention of the

Legislature from the language used. It is necessary to remember that
language is at best an imperfect instrument for the expression of
human intention. It is well to remember the warning administered by
judge Learned Hand that one should not make a fortress out of the
dictionary but remember that statutes always have some purpose or
object to accomplish and sympathetic and imaginative discovery is the
surest guide to their meaning.”
If the purpose of a particular provision is easily discernible from the
whole scheme of the Act, which in this case is to counteract the effect
of the transfer of assets so far as computation of income of the
assessee is concerned, then bearing that purpose in mind, we should
find out the intention from the language used by the Legislature and if
strict literal construction leads to an absurd result, i.e., a result not
intended to be sub-served by the object of the legislation found in the
manner indicated before, then if another construction is possible apart
from strict literal construction, then that construction should be
preferred to the strict literal construction. Though equity and taxation
are often strangers, attempts should be made that these do not remain
always so and if a construction results in equity rather than in injustice,
then such construction should be preferred to the literal construction.
Furthermore, in the instant case, we are dealing with an artificial
liability created for counteracting the effect only of attempts by the
assessee to reduce tax liability by transfer. It has also been noted how
for various purposes the business from which profit is included or loss
is set off is treated in various situations as the assessee's income. The
scheme of the Act as worked out has been noted before.”
Taking a cue from what principle the Hon’ble Supreme court has held in
above case, if the reserves which are not distributable or are reserves
(Capital Reserves) created to give contra effect to assets acquired from
grants and subsidies, which should have been made nil in accounts as per
the Companies Act and the income tax act or provisions (Risk Fund) loosely
grouped as reserves are to be excluded.
Then only one can arrive at the correct or true net worth.
8. Computation of net worth from capital plus free reserves (reserves
after excluding reserves that are not available for distribution as dividends) is
199
as under, on the basis of the audited balance sheet as on 31 st March 2016 of

the company is as under:
PARTICULARS Rs in lakhs
a) Capital 53,298.80
b) Reserves & Surplus 22,608.54
c) Total Shareholder funds 75,907.34
Less Non -distributable reserves
d) Capital Reserves 1,414.97
e) Risk Fund 1,077.04
f) Reserve created for Deferred
Tax Assets 5,228.48 7,720.49
g) Net Worth 68,186.85
Now let us consider the ordinary meaning of net worth which, is the value by
which, the value of all owned assets exceed the value of liabilities to
outsiders or third parties.
Accordingly, the total of the assets after excluding the miscellaneous
expenses and losses (to the extent not written off) and the aggregate of
liabilities to outsiders will be the net worth.
Further any assets, which are not realisable, or are held as funds held in
trust are to be excluded.
9. Computation of net worth by excluding liabilities to outsiders from
assets value is as under, on the basis of the audited balance sheet as on 31 st
March 2016 of the company is as under:
PARTICULARS Rs in lakhs
a) Total assets side of Balance sheet 355,319.37
Less
b) Assets created out of Grants, which were
required to be made Nil as per the
Companies Act and Income Tax Act but
kept on assets side by giving contra effect 1,414.97
c) Deferred Tax Assets -which are contingent
assets -not realisable in near future 5,228.48
200
d) Reduction in value of advances as

financial assistance / Risk fund created
under Govt. directions to CPSEs as
provisioning for delinquencies 1,077.04
7,720.49
f) Sub- total (a less (b+c+d)) 347,598.88
Less Outside liabilities
g) Non Current liabilities 11,523.33
h) Current liabilities 267,888.70 279,412.03
i) Net Worth (f less (g+h) 68,186.85
The above computation of net worth by both methods demonstrate this

beyond doubt that the non-free/ non-distributable reserves described herein
above have to be excluded for the reasons stated, as it will be observed that
by both methods the net worth comes to the same amount.
10. It has been separately confirmed by the querist that the query would
be answered only in the context of accounting principles and the Committee
will lay down only the accounting principles for determination / computation
of net worth and not compute the net worth as such.
B. Query
Committee on the following issues:
(a) Whether capital reserve, risk fund and reserve made on account
of recognising deferred tax asset appearing in the balance sheet
of the company are to be considered as a part of its net worth or
are to be excluded.
(b) Further what will be the company’s net worth on the basis of its
latest available audited accounts as of 31 st March 2016?
12. The Committee notes from the Facts of the Case that the query is with
regard to whether capital reserve, risk fund and reserve made on account of
recognising deferred tax asset are to be considered as a part of networth.
The Committee has, therefore, considered only this issue and has not
examined any other issue that may arise from the Facts of the Case, such
201
as, accounting treatment of grant received, reserves created, creation of

deferred tax asset etc. The Committee has also not considered the need and
rationale for creation of various reserves as mentioned in the query and
whether capital reserve, risk fund and reserve made on account of
recognising deferred tax asset can be considered and classified as free
reserve or distributable reserve under Companies Act, 2013, etc. The
Committee would like to highlight that in the facts of the case many aspects
have been referred to such as accounting treatment of grants received from
the Government, creation of risk fund, creation of provision for doubtful
debts, creation of deferred tax liability/asset etc. which may require separate
and detailed examination from compliance point of view. However, since the
querist is not seeking opinion on these aspects and sufficient facts are also
not available with regard to these aspects, the Committee has not examined
that whether comments made by the querist are in conformity with the
relevant Accounting Standard(s) or applicable guidelines have been complied
with or not. The Committee wishes to point out that the opinion expressed
hereinafter is purely from the perspective of accounting principles, viz.,
Indian GAAP and not from legal perspective, such as, interpretation of the
terms of DPE Guidelines or various Court judgments, as referred to by the
querist or Companies Act, 2013 or Reserve Bank of India Act, Income Tax
Act, etc. Further, the Committee can lay down only the accounting principles
for determination of networth and not calculate the net worth as such. T he
Committee also wishes to point out that net worth may be defined by different
authorities/regulators for different purposes and, accordingly, the term
defined for one purpose may not be relevant for other purpose.
13. At the outset, the Committee notes the definition of the following terms
from the ‘Guidance Note on Terms Used in Financial Statements 2’, issued by
the Institute of Chartered Accountants of India (ICAI):
“11.01 Net Assets
The excess of the book value of assets (other than fictitious
assets) of an enterprise over its liabilities. This is also referred
to as net worth or shareholders’ funds.”
“11.08 Net Worth
See Net Assets”
2Subsequently, on issuance of the ‘Glossary of Terms used in Financial Statements’

202
From the above, the Committee notes that the term, ‘net worth’ has been
defined in terms of net assets which is excess of the book value of assets
over liabilities. Thus, it does not exclude any kind of reserve – capital reserve
or risk fund or reserve made on account of recognising deferred tax asset.
Accordingly, the Committee is of the view that purely from accounting
perspective, net worth includes all reserves, whether capital or revenue.
However, the Committee wishes to point out that whether a particular item
(for example, capital reserve) is to be included or not in net worth would
depend on the purpose for which such net worth is being computed, for
instance, from the Companies Act, 2013 perspective, some specific reserves
are excluded from the definition of net worth. Similarly, for some other
specific purposes, the net worth may be defined by specifically considering
the purpose for which it is to be used.
D. Opinion
(i) Without examining the issue from legal perspective, such as,
interpretation of the terms of DPE Guidelines, Companies Act,
2013, Reserve Bank of India Act, Income Tax Act, etc., as
discussed in paragraph 12 above, the Committee is of the view
that purely from accounting perspective, net worth should
include reserves, as discussed in paragraph 13 above.
(ii) As mentioned in paragraph 12 above the Committee can lay
down only the accounting principles for determination of
networth and not calculate the net worth as such, therefore this
cannot be answered by the Committee.
__________
203
Query No. 21
Subject: Appropriate disclosure of Competent Authority Land
Acquisition (CALA) bank account in the company’s annual
financial statements. 1
1. A company (hereinafter referred to as the ‘company’) was incorporated
on 18th July 2014, under the Companies Act, 2013 as public sector
undertaking (PSU) fully owned by the Government of India (GoI) under the
administrative control of the Ministry of Road Transport & Highways
(MORTH) with authorised capital of Rs. 10 crore. It has started functioning in
September 2014 with the objective to develop national highways (NH) and
other infrastructure at fast pace in the North East and strategic ar eas of the
country sharing international borders. The company has been entrusted with
the task of developing and improving road connectivity in length of 10,000 km
including the international trade corridor in the North Eastern region of India
on behalf of the GoI. The company has formulated a vision to become an
instrument for creation and management of infrastructure of the highest
standard while contributing significantly towards nation building. Being a
professional company, its mission is to design and develop infrastructure
projects in a time bound, most efficient and transparent manner with
maximum benefits to all the stakeholders. The company has adopted a
business model that relies on outsourcing of a number of activities including
design, construction, supervision of national highways, rather than
undertaking all such activities through its own employees. This has thus
helped the company in maintaining a lean organisational structure to
facilitate faster operational decision-making. Within a short period, the
company has set up its corporate office and twelve offices in Assam,
Arunanchal Pradesh, Jammu and Kashmir, Manipur, Nagaland, Tripura,
Uttarakhand, Mizoram, Meghalaya, Sikkim, A & N Islands and Nepal for
monitoring and supervising the NH projects entrusted to it.
2. The querist has stated that infrastructure is an important component in
the development of any economy specially for the developing country like
India. Infrastructure projects have large capital requirements and also long
gestation periods. A typical highway project has a construction period of two-
three years.
204
3. The querist has further stated that the Government of India (GoI)
through Notification entrusted the company the job of construction and
development (including widening) of the highways and other infrastructure
projects. For widening and for other facilities, GoI acquires land under the
NH Act, 1956 in its favour through the company. Revenue Authorities of the
concerned state are being appointed as Competent Authorities under section
3(a) of NH Act 1956 as independent authority agency for land acquisition
work, commencing from issue of notification regarding intent to do so, to
award the compensation, its disbursement to the land owners whose land
were acquired and to hand over the possession of land acquired for
development to the company.
4. The Land Acquisition (LA) compensation amount is being deposited
with Competent Authority-Land Acquisition (CALA) in a specific bank account
of CALA and GM (Project) of the company jointly for onward disbursement
under section 3H of NH Act for land acquired. The CALA account is being
operated by Competent Authority for disbursement of land compensations.
The responsibility of the payment of LA compensation amount lies with the
CALA alone. GM (P), of the company may only render assistance if any,
requested by CALA. The querist has separately confirmed that CALA
Account is not in the name of the company; rather is a joint bank account in
the name of CALA and the GM (P) of the company and that GM (P) is only a
joint signatory. Therefore, in substance, all the decisions for operating this
account are taken by CALA only. The querist has also informed that funds
required for land acquisition are first transferred by MoRTH to the company
and then the same are transferred to CALA Bank Account. In order to acquire
land through State Government/Competent Authority, the amount as
requested by CALA is being deposited in a separate bank account in the
name of CALA in order to disburse the amount by CALA. Therefore, it is a
routing account for the company for the purpose of acquiring land and to pay
land compensation. With regard to the accounting treatment being followed
by the company, the querist has informed that the amount transferred to suc h
CALA account for the land acquisition is presently shown by the company as
Deposit-Competent Authority Land Acquisition & Other agencies. The
amount utilised by CALA towards compensation is being debited to project in
progress account (CWIP held on behalf of GoI) on the basis of utilisation
certificates issued by CALA.
205
5. However, there is also an opinion from audit to show this CALA bank
account as ‘cash and bank balance’ of the company in the balance sheet.
6. According to the querist, the opinion of the company on the subject is
as follows:
Presently as per accounting principles, the bank accounts which have
been opened exclusively in the name of the company with the approval
of Board of Directors have been shown under the head ‘cash and bank
balances’ as per the format prescribed in Companies Act.
The amount released to CALA bank account, is neither in the name of
the company nor at the disposal of the company alone. It is being
operated by CALA as independent authority.
The amount of land compensation payable to land owners, as
determined under section 3G of NH Act, 1956, awarded by CALA is
required to be deposited with CALA in such manner as may be laid
down by rules made in this behalf by the concerned State Government
before taking the possession of the land. Concerned GM (P) of the
company renders the necessary assistance, as requested by CALA.
Hence the undisbursed amount with CALA has been shown under the
head ‘Long-term loans and advances’ as Deposit with Competent
Authority Land Acquisition and other agencies, so that the company
can monitor the disbursement progress of CALA bank account from
time to time.
Also, as per Guidelines for transfer of compensation to CALA accounts
stated in the Compendium of Land Acquisition Circulars, Provisions
and Guidelines of National Highways Authority of India (NHAI) (an
autonomous body of Ministry of Road Transport and Highways),
“Amount deposited in the joint account for LA is accounted under
“CWIP – Land” and joint account shall not be part of books of account
of NHAI”.
Considering the above financial model and activities of the company,
it may be appreciated that a prudent and accepted accounting policy
and disclosure procedures are required for the CALA bank account in
the company’s books of account. Since the financial impact of land
acquisition compensation amount is substantial in nature as compared
to the other activities of the company, this financial head requires a
proper disclosure in the final accounts and financial statements of the
company.
206
7. The querist has informed separately that the interest received in CALA
accounts is returned to the company by CALA authorities after all
disbursements from that account are made. Further, after the disbursal has
been made by the company into the CALA account, any unutlised portion at
the year end remain in the CALA account. However, at the year end, CALA
provides the company the utilisation certificate of the amount utilized from
CALA account. The company, on the basis of the utilization certificate,
books the entry in the accounts. Any unspent amount in CALA account is
returned back to the company after full and final settlements are made by
CALA alongwith reconciliation statement. The querist has further informed
that any interest / unspent amount in CALA account which is refunded back
to the company is payable to MoRTH. The querist has also separately
supplied a copy of the circular of Ministry of Road Transport & Highways, GoI
containing guidelines for payment of agency charges to the company for
various activities (DPR preparation, land acquisition, etc.) undertaken on
behalf of the Ministry. It has also been informed that the provisions of Ind AS
are not applicable to the company as per its latest audited financials.
B. Query
8. In order to disclose appropriately the CALA bank account in the
company’s annual financial statements, the querist has requested the Expert
Advisory Committee (EAC) of the Institute of Chartered Accountants of India
(ICAI) to give its opinion on:
(i) whether the company should disclose the undisbursed amount
lying in CALA account under the head ‘Long term Loans and
Advances’ as ‘Deposit-Competent Authority Land Acquisition &
Other agencies’; or
(ii) whether to disclose the undisbursed amount lying in the CALA
bank account under the head ‘cash and bank balance’ of the
company; or
(iii) Any other manner, which Expert Advisory Committee of the ICAI
deems fit under the circumstances explained above.
to disclosure of undisbursed amount/funds lying in the Competent Authority
Land Acquisition (CALA) bank account in the company’s annual financial
207
statements. Therefore, the Committee has considered only this issue and
has not considered any other issue that may arise from the Facts of the
Case, such as, accounting for the funds received from the GoI/MoRTH
utilised for acquisition of land and for other project related activities,
accounting for agency charges, etc. Further, the opinion expressed,
hereinafter, is purely from accounting perspective and not from any legal
perspective. At the outset, the Committee wishes to point out that the opinion
expressed hereinafter is from the perspective of the Accounting Standards
notified under the Companies (Accounting Standards) Rules, 2006 and not
from the perspective of Indian Accounting Standards (Ind ASs) notified under
the Companies (Indian Accounting Standards) Rules, 2015.
10. At the outset, the Committee notes from the Facts of the Case that the
Government of India (GoI) through Notification entrusted the company the
job of construction and development (including widening) of the highways
and other infrastructure projects. For widening and for other facilities, GoI
acquires land under the NH Act, 1956 in its favour through the company, i.e.,
the ownership of land acquired remains vested with the GoI only. Revenue
Authorities of the concerned state are being appointed as Competent
Authorities u/s 3(a) of NH Act 1956 as independent authority agency for land
acquisition work, commencing from issue of notification regarding intent to do
so, to award the compensation, its disbursement to the land owners whose
land were acquired and to hand over the possession of land acquired for
development to the company. In this regard, the Committee also notes the
provisions of the Circular of the Ministry containing guidelines for payment of
agency charges to the company for various activities (DPR preparation, land
acquisition, etc.) undertaken on behalf of the Ministry as follows:
“5. …agency charges of 1% of the amount payable for Land
Acquisition would be paid to the company since it is not provided with
any budgetary support for meeting administrative/establishment
expenses for supervising the work of land acquisition, shifting of
utilities and obtaining all mandatory clearances etc.”
6. In order to link the payment of 1% Agency charges to the
company to the final outcome and make it performance linked, the
company would be permitted to retain 1% as Agency charges, only on
the basis of actual disbursement made to CALA against LA
compensation and various other executive agencies for forest
clearance, utility shifting etc. subject to the following conditions:
208
(i) The company shall co-ordinate all land acquisition related

activities such as preparation of 3(a), 3A, 3D and 3G
Notifications in the gazette.
(ii) The company completes preparation of estimates for land
acquisition, forest clearance, utility shifting etc.
(iii) Funds are released to the Competent Authorities for Land
Acquisition (CALA) after the approval of 3G notification and
other executing agencies for forest clearances, utility shifting
etc.
(iv) The company liasoning with CALAs for fast tracking the
distribution of compensation to the authentic land
owners/beneficiaries with forest authorities for tree cutting and
timely shifting of other utilities.
(v) The company taking over the possession of land, so acquired by
CALA, and ensure its availability to the contractors before the
appointment date for timely start of projects.
(vi) Reconciliation of the funds released to CALA vis-à-vis its
disbursement to the beneficiaries is done by the company.
(vii) The company co-ordinates and completes all activities involved
in obtaining various statutory and mandatory clearances
required for smooth execution of the projects.
The above amount to the company shall be payable from the
respective total project cost.
From the above, the Committee notes that the role of the company in the
activity of land acquisition is that of an agent of the Ministry/GoI for
facilitating the activities related to acquisition of land for which the company
is only entitled to receive agency commission.
11. With regard to the issue raised, the Committee notes that the first
issue to be examined is whether the item (viz., undisbursed amount/funds
lying in the CALA bank account) meets the definition of the term ‘asset’, as
defined in paragraph 49(a) of the ‘Framework for the Preparation and
Presentation of Financial Statements’, issued by the Institute of Chartered
Accountants of India as follows:
“(a) An asset is a resource controlled by the enterprise as a result of
past events from which future economic benefits are expected
to flow to the enterprise.”
209
The Committee notes from the Facts of the Case (refer paragraph 4 above)
that the funds disbursed by the Ministry towards land acquisition (LA)
compensation amount is being deposited with Competent Authority-Land
Acquisition (CALA) in a specific joint bank account of CALA and GM (Project)
of the company for onward disbursement for land acquired. The company is
not a joint account holder and the company does not have any control over
the funds lying in the said account. All decisions for operating the account
are taken by CALA only in accordance with the rules of individual State
Governments. It is only a routing account to the company for the purpose of
acquiring land and to pay land compensation. Further, the interest accrued
on deposit balance in the joint bank account will be to the Ministry’s benefits
and any unused funds will have to be transferred to the Ministry after the
land acquisition process is over. Further, since the amount of compensation
as awarded/determined by CALA is required to be deposited with the CALA
in the joint bank account, apparently, the money lying in such account cannot
be used for ordinary business of the company and the company has no right
to utilise such money except for land acquisition for the Ministry. From this,
the Committee notes that the company does not have any right to use the
amount lying in the joint bank account and therefore, no control is exercised
by the company on such account. Further, since the balance of funds in the
joint account with CALA can be used only for the acquisition of land which
will be owned and controlled by the Ministry, no future economic benefits
from such funds arise to the company. Accordingly, the Committee is of the
view that the funds lying in the joint account is not an ‘asset’ of the company
and therefore, and should not be recognised by the company in its books of
account either as ‘Deposit- with Competent Authority Land Acquisition and
other agencies under ‘long term loans and advances’ or as ‘cash and bank
balance’. However, considering the role of the company as an
agent/facilitator of the Ministry/GoI for acquisition of land and since the
company has also to do reconciliation of the funds released to CALA vis -à-
vis its disbursement to the beneficiaries, the Committee is of the view that
such funds lying in the bank account may be disclosed in the notes to
accounts giving details of nature of funds, the purpose and restrictions
imposed and its relationship with the Ministry/GoI.
D. Opinion
210
(i) The undisbursed amount lying in CALA account should not be

disclosed under the head ‘Long term Loans and Advances’ as
‘Deposit-Competent Authority Land Acquisition & Other
agencies’ as discussed in paragraph 11 above.
(ii) The undisbursed amount lying in the CALA bank account should
not be disclosed under the head ‘cash and bank balance’ of the
company as discussed in paragraph 11 above.
(iii) The undisbursed amount lying in CALA account may be
disclosed in the notes to accounts giving details of nature of
funds, the purpose and restrictions imposed and its relationship
with the Ministry/ GoI, as discussed in paragraph 11 above.
__________
Query No. 22
Subject: Whether transport subsidy can be treated as capital receipt. 1
1. The querist has stated that the partnership firm (hereinafter referred to
as ‘firm’) is engaged in the business of manufacture of cement in the state of
Assam. Being located in the North Eastern Region (NER) the firm is enjoying
/ availing various subsidies and incentives under the North East Industrial
Policy 1997, North East Industrial and Investment Promotion Policy (NEIIPP),
2007, Industrial Policy of Assam 2008 and Industrial and Investment Policy of
Assam 2014.
2. The firm has been treating the subsidies and incentives in the natu re
of Transport Subsidies as revenue receipts till the Financial Year 2015-16.
However, in the Financial Year 16-17, the concern has treated the incentive
(Transport Subsidy) as capital receipts by transferring the same to Capital
Reserve, relying upon the following case / judgement:
 Shiv Shakti Flour Mills Pvt. Ltd. V/s. C.I.T. (2017) 390 ITR 346
(Gauhati) holding transport subsidy as capital receipt.
211
3. The querist has also stated that as per AS 12 “Government grants

related to revenue should be recognised on a systematic basis in the
profit and loss statement over the periods necessary to match them
with the related costs which they are intended to compensate. Such
grants should either be shown separately under 'other income' or
deducted in reporting the related expense.”
B. Query
4. (a) The querist has sought the opinion of the Expert Advisory
Committee of the Institute of Chartered Accountants of India
(ICAI) that “Whether the firm can treat the said subsidy
(transport subsidy) as capital receipt?”
(b) In case it cannot be treated as capital subsidy, then whether the
querist needs to qualify / give observations in their report (Form
3CB) or do they refer to the notes on accounts wherein the
management discloses the facts and consequences of the
change in the accounting policies.
whether the transport subsidy received by the firm can be treated as a capital
receipt? In case it is not a capital receipt then does the querist need to
qualify/give observations in their report (Form 3CB) or refer to the notes to
accounts wherein the management discloses the facts and consequences of
the change in the accounting policies. The Committee has, therefore,
considered only these issues and has not considered any other issue that
may arise from the facts of the case. The Committee wishes to point out that
its opinion is expressed purely from accounting perspective and not from the
perspective of interpretation of court orders etc. Further, the Committee also
wishes to point out that since AS 12 has been referred to in the facts of the
case, the Committee has expressed its views, hereinafter in the context of
Rules, 2006 and not in the context of Indian Accounting Standards (Ind ASs).
6. With regard to the issue raised, the Committee notes the following
extracts of “New Industrial Policy and other concession in the North Eastern
Region’ 1997” as follows:
Transport Subsidy Scheme:
212
6. Details of the Scheme

(i) A transport subsidy will be given to industrial unit located in the
selected areas in respect of raw materials which are bought into
and finished goods which are taken out of such areas.
(iv) *In the case of North-Eastern region comprising the States of
Assam, Meghalaya, Nagaland, Manipur, Tripura and the Union
Territories of Arunachal Pradesh and Mizoram the transport
subsidy will be given on the transport costs between Siliguri and
the location of the industrial unit in these States/Union
Territories. While calculating the transport costs of raw materials
the cost of movement by rail from Siliguri to the railway station
nearest to the location of the industrial and thereafter the cost of
movement by road to the location of the industrial unit will be
taken into account. Similarly, while calculating the transport
costs of finished goods the costs of movement by road from the
location of industrial unit to the nearest railway station and
thereafter the cost of movement by rail to Siliguri will be taken
into account. In the case of North-Eastern region, for raw
materials moving entirely by road or other mode of transport the
transport costs will be limited to the amount which the industrial
unit might have paid had the raw materials moved from Siliguri
by rail upto railway station nearest to the location of the
industrial unit and thereafter by road. Similarly in the case of
movement of finished goods moving entirely by road or other
mode of transport in the North-Eastern region, the transport
costs will be limited to the amount which the industrial unit might
have paid had the finished good moved from the location of the
industrial units to the nearest railway station by road and
thereafter by rail to Siliguri.
(vii) + Freight charges for movement by road/sea will be determined
on the basis of transport/transhipment rates fixed by the Central
Government/State government/Union Territory Administration
concerned from time to time or the actual freight paid, whichever
is less.
(viii) £ Costs of loading or unloading and other handling charges
such as from railway station to the site of industrial unit will not
213
be taken into account for the purpose of determining transport

costs.
(ix) £ All New Industrial units located in the selected areas will be
eligible for transport subsidy equivalent to 50 per cent or the
transport costs of both raw materials as well as finished goods.
(x) £ Existing industrial units in the selected areas are also eligible
for transport subsidy in respect of addition transport costs of raw
materials and finished goods arising as result of substantial
expansion or diversification effect by them after the
commencement of the Scheme. Transport Subsidy in such
cases will be restricted to 50 per cent of the transport costs of
the addition raw materials required and finished goods produced
as a result of the substantial expansion or diversification.
(xi) + Transport subsidy will also cover 50 per cent of the transport
charges for movement of steel from Guwahati Stockyard of M/s
Hindustan Steel Limited to the site of the industrial unit in the
North-Eastern region and for movement of industrial raw
materials from the State Corporation’s depot situated in the hill
districts of Uttar Pradesh to the sites of the industrial units
located in the hill districts of the State.
(xii) *£ The State government/Union Territory Administration will set
up a committee consisting of the Directors of Industries, a
representative each of State Industries Department and the
State Finance Department etc. on which a representative of the
Ministry of Industrial Development will also be nominated. The
committee will operate at the State/Union Territory level and
scrutinise and settle all claims of transport subsidy arising in the
State/Union Territory. The claimants should be asked to provide
proof of raw materials, ‘imported’ into and finished goods
‘exported’ out of the selected State/Union Territory/areas where
the unit is situated from the registered chartered accountants.
The committee may also lay down the production of any other
documents which in their opinion is necessary to decide the
eligibility of claimant for the transport subsidy. However, in the
case of small units with a capital investment of Rs 1 lakh or less
the requirement of production of certificate from Chartered
214
Accountants may be waived subject to the condition that such

claims are properly verified by the State government authorities
before the subsidy is sanctioned/disbursed. After having
scrutinised and settled the claims, the amount disbursed to
industrial unit should first be adjusted against the outstanding
ways and means of advances made to State government/Union
Territory Administration for Centrally Sponsored Scheme in
accordance with the procedure outlined in the Ministry of
Finance letter No. 2(17) PII/58 dated 12.5.1958 and the
balance, if any, shall be paid in cash to the State
government/Union Territory Administration.
Provided that in case of small units with a capital investment of
Rs 1,00,000 and less, the requirement of production of proof of
import of raw material and export of finished products from
registered Chartered Accountants will be substituted by an
appropriate verification by the State Government authorities.
* Amended vide Notification No. F. 6(26)/71-IC dated 28.2.1974.
+ Renumbered and amended vide Notification No. 6/3/75-RD
dated 19.7.1978.
£ Renumbered vide Notification No. 6/3/75-RD dated 19.7.1978.
*£ Amended vide Notification No. F. 6(26)/71-IC dated 28.2.1974.
7. Also, the Committee notes the following extracts of “North East
Industrial and Investment Promotion Policy (NEIIPP), 2007” as follows:
(xiv) Transport Subsidy Scheme
The Transport Subsidy Scheme would continue beyond 31.3.2007, on
the same terms and conditions. However, an early evaluation of the
scheme will be carried out with a view to introducing necessary
safeguards to prevent possible leakages and misuse.
8. Further, the Committee notes the following paragraphs of Accounting
Standard (AS) 12, ‘Accounting for Government Grants’ notified under the
Companies (Accounting Standards) Rules, 2006 as follows:
“3.2. Government grants are assistance by government in cash
or kind to an enterprise for past or future compliance with certain
conditions. They exclude those forms of government assistance
215
which cannot reasonably have a value placed upon them and

transactions with government which cannot be distinguished
from the normal trading transactions of the enterprise.”
“Accounting Treatment of Government Grants
5. Capital Approach versus Income Approach
5.1 Two broad approaches may be followed for the accounting
treatment of government grants: the ‘capital approach’, under which a
grant is treated as part of shareholders’ funds, and the ‘income
approach’, under which a grant is taken to income over one or more
periods.
5.2 Those in support of the ‘capital approach’ argue as follows:
(i) Many government grants are in the nature of promoters’
contribution, i.e., they are given with reference to the total
investment in an undertaking or by way of contribution
towards its total capital outlay and no repayment is
ordinarily expected in the case of such grants. These
should, therefore, be credited directly to shareholders’
funds.
(ii) It is inappropriate to recognise government grants in the
profit and loss statement, since they are not earned but
represent an incentive provided by government without
related costs.
5.3 Arguments in support of the ‘income approach’ are as follows:
(i) Government grants are rarely gratuitous. The enterprise
earns them through compliance with their conditions and
meeting the envisaged obligations. They should therefore
be taken to income and matched with the associated
costs which the grant is intended to compensate.
(ii) As income tax and other taxes are charges against
income, it is logical to deal also with government grants,
which are an extension of fiscal policies, in the profit and
loss statement.
(iii) In case grants are credited to shareholders’ funds, no
correlation is done between the accounting treatment of
the grant and the accounting treatment of the expenditure
to which the grant relates.”
216
“8.1 Grants related to specific fixed assets are government grants

whose primary condition is that an enterprise qualifying for them
should purchase, construct or otherwise acquire such assets. Other
conditions may also be attached restricting the type or location of the
assets or the periods during which they are to be acquired or held.
8.2 Two methods of presentation in financial statements of grants
(or the appropriate portions of grants) related to specific fixed assets
are regarded as acceptable alternatives.
8.3 Under one method, the grant is shown as a deduction from the
gross value of the asset concerned in arriving at its book value. The
grant is thus recognised in the profit and loss statement over the
useful life of a depreciable asset by way of a reduced depreciation
charge. Where the grant equals the whole, or virtually the whole, of the
cost of the asset, the asset is shown in the balance sheet at a nominal
value.
8.4 Under the other method, grants related to depreciable assets
are treated as deferred income which is recognised in the profit and
loss statement on a systematic and rational basis over the useful life of
the asset. Such allocation to income is usually made over the periods
and in the proportions in which depreciation on related assets is
charged. Grants related to non-depreciable assets are credited to
capital reserve under this method, as there is usually no charge to
income in respect of such assets. However, if a grant related to a non-
depreciable asset requires the fulfillment of certain obligations, the
grant is credited to income over the same period over which the cost
of meeting such obligations is charged to income. The deferred
income is suitably disclosed in the balance sheet pending its
apportionment to profit and loss account. For example, in the case of a
company, it is shown after ‘Reserves and Surplus’ but before ‘Secured
Loans’ with a suitable description, e.g., ‘Deferred government grants’.
8.5 The purchase of assets and the receipt of related grants can
cause major movements in the cash flow of an enterprise. For this
reason and in order to show the gross investment in assets, such
movements are often disclosed as separate items in the statement of
changes in financial position regardless of whether or not the grant is
deducted from the related asset for the purpose of balance sheet
presentation.”
217
“9.1 Grants related to revenue are sometimes presented as a credit

in the profit and loss statement, either separately or under a general
heading such as ‘Other Income’. Alternatively, they are deducted in
reporting the related expense.”
“13. Government grants should not be recognised until there is
reasonable assurance that (i) the enterprise will comply with the
conditions attached to them, and (ii) the grants will be received.”
“15. Government grants related to revenue should be
recognised on a systematic basis in the profit and loss statement
over the periods necessary to match them with the related costs
which they are intended to compensate. Such grants should
either be shown separately under ‘other income’ or deducted in
reporting the related expense.
16. Government grants of the nature of promoters’ contribution
should be credited to capital reserve and treated as a part of
shareholders’ funds.”
9. On the holistic reading of the above paragraphs, the Committee is of
the view that in the extant case, the government grant (transport subsidy)
received from the Government are for meeting specific expenditure of the
firm, and not granted with reference to the total investment in an undertaking
or by way of contribution towards its total capital outlay (as in the case of
grants of the nature of promoters’ contribution). Accordingly, the transport
subsidy received by the firm, should be recognised on a systematic basis in
the profit and loss statement over the periods necessary to match them with
the related costs which they are intended to compensate. Such grants should
either be shown separately under ‘other income’ or deducted in reporting the
related expense.
10. The Committee further notes the following paragraphs of SA 705,
‘Modifications to the Opinion in the Independent Auditor’s Report’2 and SA
706, ‘Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report’ 3:
2 Standard on Auditing (SA) 705 has although been revised in May 2016, the revised
Standard is effective for audits of financial statements for periods beginning on or
after April 1, 2018.
3 Standard on Auditing (SA) 706 has although been revised in May 2016, the revised
Standard is effective for audits of financial statements for periods beginning on or

after April 1, 2018.
218
SA 705:
“Qualified Opinion
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.”
SA 706:
“Emphasis of Matter Paragraphs in the Auditor’s Report
6. If the auditor considers it necessary to draw users’ attention to a
matter presented or disclosed in the financial statements that, in the
auditor’s judgment, is of such importance that it is fundamental to
users’ understanding of the financial statements, the auditor shall
include an Emphasis of Matter paragraph in the auditor’s report
provided the auditor has obtained sufficient appropriate audit evidence
that the matter is not materially misstated in the financial statements.
Such a paragraph shall refer only to information presented or
disclosed in the financial statements.”
11. From the above, the Committee notes that whether the auditor needs
to give qualified opinion or emphasis of matter paragraph in the auditor’s
report is a matter of judgement which needs to be exercised by the auditor
considering various factors such as materiality, etc.
D. Opinion
12. On the basis of the above, the Committee is of the following opinion:
(a) The transport subsidy received by the firm should not be treated
as a capital receipt. The same should be treated as revenue and
should be recognised on a systematic basis in the profit and
219
loss statements over the period necessary to match them with

the related costs which they are intended to compensate. The
transport subsidy received by the firm should either be shown
separately under ‘other income’ or deducted in reporting the
related expenses.
(b) Further, whether the auditor needs to give qualified opinion or
emphasis of matter paragraph in the auditor’s report is a matter
of judgement which needs to be exercised by the auditor
considering various factors such as materiality, etc.
__________
Query No. 23
Subject: Clarification regarding recognition of Deferred Tax Liability in
respect of Special Reserve created for the purpose of
deduction u/s 36(1)(viii) of the Income Tax Act, 1961. 1
1. In order to encourage the Banks to undertake long term funding to
specified sectors, Section 36(1)(viii) of the Income Tax Act has facilitated tax
exemption to the extent of 20% of profit derived from long term finance to
infrastructure, industrial, agriculture and housing development sectors -
provided equivalent amount is transferred to special reserve.
Section 36(1) (viii) of the Income Tax Act reads as follows:
“in respect of any special reserve created and maintained by a
specified entity, an amount not exceeding twenty per cent of the
profits derived from eligible business computed under the head profits
and gains of business or profession (before making any deduction
under this clause) carried to such reserve account”.
2. The Querist has stated that Accounting Standard (AS) 22, ‘Accounting
for Taxes on Income’ (hereinafter referred as AS 22) envisages recognition
of deferred tax assets/deferred tax liabilities for the timing differences. As per
the said Standard:
220
“Timing differences are the differences between taxable income

and accounting income for a period that originate in one period
and are capable of reversal in one or more subsequent periods.”
“Permanent differences are the differences between taxable
income and accounting income for a period that originate in one
period and do not reverse subsequently.”
3. The Querist has also stated that section 41(4A) of the Income Tax Act
reads as follows:
“Where a deduction has been allowed in respect of any special
reserve created and maintained under clause (viii) of sub-section (1) of
section 36, any amount subsequently withdrawn from such special
reserve shall be deemed to be the profits and gains of business or
profession and accordingly be chargeable to income-tax as the income
of the previous year in which such amount is withdrawn”.
4. The Querist has informed that Reserve Bank of India (RBI), vide its
circular dated 20 th December 2013 advised all the banks to recognize
deferred tax liability (DTL) on special reserve. The extract of the Circular is
as follows:
“The matter regarding creating of DTL on special reserve has been
examined and banks are advised that, as a matter of prudence, DTL
should be created on special reserve”.
Accordingly, the Bank has recognised the deferred tax liability (DTL) on the
outstanding balance of special reserve. The RBI Circular on recognition of
DTL has been supplied separately by the querist. .
5. According to the querist, the above presumption of treating the
creation of special reserve as timing difference holds good when there is a
liberty to withdraw the special reserve. The Reserve Bank of India (RBI) vide
circular dated 20 th September 2006, has instructed the banks that without
prior permission of RBI, no reserve can be withdrawn which includes special
reserve also. The RBI circular in this regard has been supplied separately by
the querist. The relevant extract of the RBI Circular is as follows:
“In order to ensure that their recourse to drawing down the Statutory
Reserve is done prudently and is not in violation of any of the
regulatory prescriptions, banks are advised in their own interest to take
prior approval from the Reserve Bank before any appropriation is
221
made from the statutory reserve or any other reserves.” (Emphasis

supplied by the querist.)
6. The querist informed that as the advances made to specified sectors
viz Industrial, Infrastructure, Housing and Agriculture purposes are under
stress and banks are required to make huge amount of provisions, the bank
had requested RBI for utilisation of special reserve by banks but the request
has been turned down. The querist has separately provided a copy of the
request made by the bank to RBI and the communication received from the
RBI in this regard.
According to the querist, since RBI has denied withdrawal of special reserve
and Banks are not allowed to withdraw any reserve without prior permission
of the Reserve Bank of India, in terms of Accounting Standard (AS) 22,
transfer of special reserve and claiming tax benefit have become ‘Permanent
Difference’.
B. Query
7. The Querist has requested the Expert Advisory Committee to clarify
whether transfer of special reserve could be considered as “permanent
difference” in terms of the Accounting Standard 22.
whether transfer to special reserve created under section 36(1)(viii) of the
Income –tax Act, 1961 could be treated as ‘permanent difference’ for the
purpose of accounting treatment under AS 22 and has not considered any
other issue that may arise from the facts of the case. The Committee also
wishes to point out that since AS 22 has been referred to in the facts of the
case, the Committee has expressed its views, hereinafter in the context of
Rules, 2006 and not in the context of Indian Accounting Standards (Ind ASs)
Companies (Indian Accounting Standards) Rules 2015.
9. The Committee notes section 36(1)(viii) of the Income-tax Act, 1961,
as reproduced in paragraph 1 above and the definition of the term ‘timing
differences’, as reproduced in paragraph 2 above.
10. The Committee notes that there are two essentialities for timing
differences to arise:
222
(i) There should be difference between taxable income and

accounting income originating in one period; and
(ii) The difference so originated should be capable of reversal in
one or more subsequent periods.
The Committee notes that there is no condition of any limitation of the
period for reversal of such differences, i.e., as per the definition of ‘timing
differences’, the reversal of the difference can take place at any time in
future.
11. The Committee notes that in the period in which special reserve is
created, the accounting income remains unaffected as the same is created
below the line. However, the taxable income for the same year gets reduced
by the amount of the special reserve thus, resulting into lesser tax liability.
Thus, a difference arises between the accounting income and the taxable
income for that period. The Committee also notes that this difference
is capable of reversal in the period in which the special reserve is utilised
or withdrawn as in the year of utilisation or withdrawal, the amount of special
reserve would be added to taxable income (Section 41(4A) of the Income-
tax Act, 1961) thus, resulting into a higher taxable income than the
accounting income of that period (emphasis supplied by the Committee).
Therefore, the Committee is of the view that the creation of special rese rve
results into timing differences as per AS 22. Accordingly, a deferred tax
liability is required to be created in this regard.
12. The Committee also notes paragraph 14 of AS 22 which states as
below:
“14. This Standard requires recognition of deferred tax for all the
timing differences. This is based on the principle that the financial
statements for a period should recognise the tax effect, whether
current or deferred, of all the transactions occurring in that period.”
(Emphasis supplied by the Committee.)
13. From the above, the Committee notes that the difference between the
accounting income and the taxable income for that period should be
recognised as timing difference if it is capable of reversal at any time in
future. Thus, deferred tax is to be provided for all timing differences.
Accordingly, the Committee is of the view that in the present case, as long
as the utilisation/withdrawal is capable of taking place, the creation of
special reserve results into timing differences for which deferred tax liability
should be provided.
223
14. With regard to the arguments advanced by the querist in paragraphs

5 and 6 above, the Committee is of the view that RBI’s rejection of the
querist’s request to utilise the special reserve, does not necessary imply that
it is permanent policy.
D. Opinion
transfer to special reserve created and maintained under section 36(1)(viii)
of the Income-tax Act, 1961 cannot be considered as ‘permanent difference’
since the same is capable of reversal resulting into the difference between
accounting income and taxable income (i.e., timing difference).
__________
224
ADVISORY SERVICE RULES OF THE EXPERT ADVISORY COMMITTEE

(Applicable w.e.f. 1st July, 2017)
1. Queries should be stated in clear and unambiguous language. Each
query should be self-contained. The querist should provide complete
facts and in particular give the nature and the background of the
industry or the business to which the query relates. The querist may
also list the alternative solutions or viewpoints though the Committee
will not be restricted by the alternatives so stated.
2. The Committee would deal with queries relating to accounting and/or
auditing principles and allied matters and as a general rule, it will not
answer queries which involve only legal interpretation of various
enactments and matters involving professional misconduct.
3. Hypothetical cases will not be considered by the Committee. It is not
necessary to reveal the identity of the client to whom the query relates.
4. Only queries received from the members of the Institute of Chartered
Accountants of India will be answered by the Expert Advisory
Committee. The membership number should be mentioned while
sending the query.
5. The fee charged for each query is as follows:
(i) Where the queries relate to enterprises whose equity or debt
securities are listed on a recognised stock exchange:
(a) enterprises having an annual turnover exceeding Rs. 500
crores based on the annual accounts of the year immediately
preceding the date of sending of the query
Rs. 200,000/- plus taxes (as applicable) per query
(b) enterprises having an annual turnover of Rs.500 crores or
less based on the annual accounts of the year immediately
(ii) Where the queries relate to enterprises whose equity or debt
securities are not listed on a recognised stock exchange:
225
(a) enterprises having an annual turnover exceeding Rs. 500

crores based on the annual accounts of the year immediately
(b) enterprises having an annual turnover of Rs.500 crores or
less but more than Rs. 100 crores based on the annual
accounts of the year immediately preceding the date of
sending of the query
(c) enterprises having an annual turnover of Rs.100 crores or
less based on the annual accounts of the year immediately
The fee is payable in advance to cover the incidental expenses.
Payments should be made by crossed Demand Draft or cheque payable
at Delhi or New Delhi drawn in favour of the Secretary, The Institute of
Chartered Accountants of India or may be made online using the link
given below:
https://easypay.axisbank.co.in/easyPay/makePayment?mid=MzUxNDY
%3D
6. Where a query concerns a matter which is before the Board of
Discipline or the Disciplinary Committee of the Institute, it shall not be
answered by the Committee. Matters before an appropriate department
of the government or the Income-tax authorities may not be answered
by the Committee on appropriate consideration of the facts.
7. The querist should give a declaration to the best of his knowledge in
respect of the following:
(i) whether the equity or debt securities of the enterprise to which the
query relates are listed on a recognised stock exchange;
(ii) the annual turnover of the enterprise to which the query relates,
based on the annual accounts of the accounting year immediately
preceding the date of sending the query;
226
(iii) whether the issues involved in the query are pending before the
Board of Discipline or the Disciplinary Committee of the Institute,
any court of law, the Income-tax authorities or any other
appropriate department of the government.
8. Each query should be on a separate sheet and one copy thereof, duly
signed should be sent. The Committee reserves the right to call for
more copies of the query. A soft copy of the query should also be sent
through E-mail at [email protected]
9. The Committee reserves its right to decline to answer any query on an
appropriate consideration of facts. If the Committee feels that it would
not be in a position to, or should not reply to a query, the amount will be
refunded to the querist.
10. The right of reproduction of the query and the opinion of the Committee
thereon will rest with the Committee. The Committee reserves the right
to publish the query together with its opinion thereon in such form as it
may deem proper. The identity of the querist and/or the client will,
however, not be disclosed, as far as possible.
11. It should be understood clearly that although the Committee has been
appointed by the Council, an opinion given or a view expressed by the
Committee would represent nothing more than the opinion or view of
the members of the Committee and not the official opinion of the
Council.
12. It must be appreciated that sufficient time is necessary for the
Committee to formulate its opinion.
13. The queries conforming to above Rules should be addressed to the
Secretary, Expert Advisory Committee, The Institute of Chartered
Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha
Marg, New Delhi-110 002.
227
Notes
………………………...................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
..........……………………………………………….........
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
......................................................……………………
…………………………...............................................
...................................................................................
........................................………………......................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
......................................……………………………..…
.……………................................................................
...................................................................................
...................................................................................
Notes
………………………...................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
..........……………………………………………….........
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
......................................................……………………
…………………………...............................................
...................................................................................
........................................………………......................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
......................................……………………………..…
.……………................................................................
...................................................................................
...................................................................................
COMPENDIUM OF OPINIONS
ISBN : 978-81-8441-992-4
Volume XXXVII
December | 2020 | P2762 (New)
T
Inst
Cha
Acco
www.icai.org of

Eac 50736 Vol 37

Uploaded by

Copyright:

Available Formats

Eac 50736 Vol 37

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Eac 50736 Vol 37

Uploaded by

Copyright:

Available Formats

COMPENDIUM OF OPINIONS

December | 2020 | P2762 (New) Expert Advisory Committee

Expert Advisory Committee

All rights reserved. No part of this publication may be translated, reprinted or

Year of Publication : 2020

Published by : The Publication Directorate on behalf of

Printed at : Sahitya Bhawan Publications,

New Delhi CA. Atul Kumar Gupta

New Delhi CA. Babu Abraham Kallivayalil

1 Opinion finalised by the Committee on 23.8.2017.

obligations of clearing corporation in case of clearing member(s)

liquid financial instruments with minimal market and credit risk

substantive powers such as deciding the structure, the purpose,

separate entity independent and regardless of where it is

contributing parties permanently and irrevocably losing domain

 With the same principles and understanding, the contribution

 Both ABC Ltd.’s and DEF Ltd.’s contributions accumulated in the

member losses on account of settlement obligations at

SGF has irreversibly and irretrievably gone out of the control of

f) Core SGF expense recorded in ABC Ltd.’s separate financial

C. Points considered by the Committee

The sufficiency of the corpus of the Fund shall be tested by

1 Opinion finalised by the Committee on 10.11.2017 and 11.11.2017.

3. The company was awarded the responsibility to undertake the design,

9. The following accounting treatment has been considered by the

B. Thus, sub-debt is shown at a fair value of Rs. 42.69 crore at the

30/06/2015 Subordinate debt from ABC 24.01 cr

31/03/2016 Subordinate debt from ABC 16.56 cr

5.1.1A However, if the fair value of the financial asset or financial

to the extent that it arises from a change in a factor

“18 An entity may elect to use one or more of the exemptions

1 Opinion finalised by the Committee on 10.11.2017 and 11.11.2017.

(c) indirectly through acquisition of shares in a subsidiary owning

8. Further, the company recognised goodwill in respect of subsidiaries

is carried at historical value in the manner as stated above. Accordingly,

‘joint operations’ and ‘jointly controlled assets’ interchangeably in respect of

(g) The carrying amount of goodwill or capital reserve

(a) Ind AS 38 prescribes the accounting for identifiable

indication that the investment may be impaired. Any resulting

1 Opinion finalised by the Committee on 4.1.2018.

(b) the contractual terms of the financial asset give rise

at initial recognition for particular investments in equity

Company (hereinafter referred to as ‘the AMC’) gets is largely for principal

C. Points considered by the Committee

4.1.2 and 4.1.2A of Ind AS 109. Hereinafter, reference to these measurement

permitted even in case of business model whose objective is to

holding the financial asset for a particular period of time and

4.1.2(a) of Ind AS 109 is met, such investments should be measured at fair

“A financial liability is any liability that is:

1 Opinion finalised by the Committee on 4.1.2018.

payments of principal and interest on the principal

through profit or loss to present subsequent changes in fair

securities on behalf of mutual fund. A unitholder of the mutual fund

recognised by an acquirer in a business combination to

do not consist of solely payments of principal and interest on the principal

1 Opinion finalised by the Committee on 4.1.2018.

company is engaged in engineering consultancy services and execution of

(a) It is submitted that in these cases, the Commissioner of Income Tax

experts shall be taken based on facts and circumstances of the case in