Ind AS Technical Facilitation Group (ITFG) Clarification Bulletin 18
February, 08th 2019
Ind AS Technical Facilitation Group Clarification Bulletin 18
Ind AS Technical Facilitation Group' (ITFG) of Ind AS Implementation Group has been
constituted for providing clarifications on timely basis on various issues related to the
applicability and /or implementation of Ind AS under the Companies (Indian Accounting
Standards) Rules, 2015, and other amendments finalised and notified till March 2018,
raised by preparers, users and other stakeholders. Ind AS Technical Facilitation Group
(ITFG) considered some issues received from members and decided to issue following
clarifications1 on February 07, 2019:
Issue 1: ABC Ltd. is a first time adopter of Ind ASs and its first Ind AS reporting
period is financial year 2018-19. ABC Ltd. has been exercising the option provided in
paragraph 46/46A of AS 11, The Effects of Changes in Foreign Exchange Rates notified
under the Companies (Accounting Standards) Rules, 2006 and intends to continue to
follow the same accounting policy in accordance with paragraph D13AA of Ind AS 101,
First-time Adoption of Indian Accounting Standards.
As per circular no. 25/2012 dated August 9, 2012 issued by the Ministry of Corporate
Affairs (MCA), paragraph 6 of Accounting Standard (AS) 11 and paragraph 4(e) of AS
16 shall not apply to a company that opts to apply paragraph 46A of AS 11.
Whether the words "may continue the policy adopted for accounting for exchange
differences" appearing in paragraph D13AA of Ind AS 101 include the policy adopted
for accounting for exchange differences that qualify as borrowing costs as per
paragraph 6(e) of Ind AS 23?
Response: Paragraph D13AA of Ind AS 101, First-time Adoption of Indian Accounting
Standards states as follows:
"A first-time adopter may continue the policy adopted for accounting for exchange
differences arising from translation of long-term foreign currency monetary items
recognised in the financial statements for the period ending immediately before the
beginning of the first Ind AS financial reporting period as per the previous GAAP."
Paragraph 46A of AS 11, The Effects of Changes in Foreign Exchange Rates, provides an
irrevocable option to a company to account for exchange differences relating to long-term
foreign currency monetary items in the manner laid down in paragraph 46A rather than
applying the general requirements of the standard relating to treatment of exchange
difference. The said paragraph was inserted into AS 11 in December 2011 and is effective in
Clarifications given or views expressed by the Ind AS Technical Facilitation Group (ITFG) represent the
views of the ITFG and are not necessarily the views of the Ind AS Implementation Group or the Council of the
Institute. The clarifications/views are based on the accounting principles as on the date the Group finalises the
particular clarification. The date of finalisation of this Bulletin is February 07, 2019. The clarification must,
therefore, be read in the light of any amendments and/or other developments subsequent to the issuance of
clarifications by the ITFG. The clarifications given are only for the accounting purpose. The commercial
substance of the transaction and other legal and regulatory aspects has not been considered and may have to be
evaluated on case to case basis.
respect of accounting periods commencing on or after the April 1, 2011. The application of
paragraph 46A by a company requires compliance with certain specified conditions.
Paragraph 6 of AS 11 scopes out exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an adjustment to interest costs (under
paragraph 4(e) of AS 16, Borrowing Costs. As a consequence of insertion of paragraph 46A
into AS 11, the circular issued by the Ministry of Corporate Affairs on August 9 2012
clarified that "Para 6 of Accounting Standard- 11 and Para 4(e) of the Accounting Standard-
16 shall not apply to a company which is applying clause 46-A of Accounting Standard -
Thus, the effect of the circular is that a company that opts to apply paragraph 46A of AS 11
is required to apply the said paragraph 46A (and not AS 16) to those exchange differences
also that arise from long-term foreign currency borrowings and would be regarded as an
adjustment to interest costs under paragraph 4(e) of AS 16.
Paragraph D13AA of Ind AS 101 allows an entity to "continue the policy adopted for
accounting for exchange differences arising from translation of long-term foreign currency
monetary items" under previous GAAP, i.e., under AS 11. Thus, where a company with
financial year 2018-19 as the first Ind AS reporting has applied the accounting treatment laid
down by paragraph 46A in its financial statements for the financial year 2017-18, it can
continue to apply the same accounting policy upon transition to Ind AS. In this regard, it is
noted that a company applying paragraph 46A is required to apply the said paragraph (and
not AS 16) to those exchange differences relating to long-term foreign currency monetary
items also that otherwise qualify as being in the nature of adjustments to interest cost within
the meaning of paragraph 4(e) of AS 16. Thus, a company that wishes to continue to avail of
the exemption provided by paragraph D13AA of Ind AS 101 is not permitted to apply
paragraph6 (e) of Ind AS 23, Borrowing Costs, to that part of exchange differences on such
long-term foreign currency monetary items.
Issue 2: The issue relates to accounting treatment of Dividend Distribution Tax (DDT)
in the consolidated financial statements of a parent where during the period covered by
the financial statements, the parent receives a dividend from a subsidiary on which
DDT has been paid by the subsidiary and the same is available for set off by the parent
upon distribution of dividend by the parent to its shareholders. The distribution of
dividend by the parent requires approval of the parent's shareholders at the annual
general meeting which would take place after the end of the financial year.
In ITFG Clarification Bulletin 9, Issue 1, the following was stated:
"....if based on evaluation of facts and circumstances, it is concluded that it is probable
that the accumulated undistributed profits will be distributed in the foreseeable future,
then DTL on accumulated undistributed profits of the subsidiary company should be
recognised in the consolidated statement of profit and loss of the parent company. Where
DDT paid by the subsidiary on distribution of its accumulated undistributed profits is
allowed as a set off against the parent's own DDT liability, then the amount of such DDT
can be recognised in the consolidated statement of changes in equity of parent by
crediting an equivalent amount to deferred tax expense in the consolidated statement of
profit and loss of P Ltd in the period in which the set-off is availed.
Further, the tax credit is not recognised until the conditions required to receive the tax
credit are met. The tax credit on account of DDT paid by the subsidiary is recognised in
the year in which they are claimed against parent's DDT liability. This is im portant
because the payment of dividend by Parent P is decided by its shareholders and, therefore,
not to recognise a DTL or to recognise any tax credit prior to such shareholder actions
may not be appropriate. For example, shareholders of Parent P Ltd may decide not to
distribute or even reduce the amount of dividends proposed by the Board of Directors of P
In the context of the above clarification has been sought as to whether the above
clarification would apply to those situations also where the given facts and
circumstances are such that the parent has reasonable expectation that it will declare
the dividend and will be able to take credit of the DDT paid by the subsidiary.
Response: While dealing with the issue in Bulletin 9, the intention of ITFG was not to
preclude recognition of DDT credit in the consolidated financial statements in the period in
which the parent receives dividend from a subsidiary in circumstances where, based on a
proper evaluation of attendant facts and circumstances, the parent reasonably expects at the
reporting date that it would be able to avail of the DDT credit upon declaration of dividend
at its annual general meeting to be held after the end of the financial year. The response was
directed at situations where, in the context of the attendant facts and circumstances, such
reasonable expectation could not be said to exist at the reporting date. To avoid any doubts,
the views of the ITFG are set out in detail below:
(i) At the time of distribution of dividend by a subsidiary to the parent (and consequent
payment of DDT by the subsidiary), the parent should recognise the associated DDT
credit as an asset to the extent that it is probable that a liability for DDT on distribution
of dividend by the parent will arise against which the DDT credit can be utilised. To the
extent that it is not probable that a liability for DDT on distribution of dividend by the
parent will arise against which the DDT credit can be utilised, the amount of DDT paid
by the subsidiary should be charged to profit or loss in the consolidated statement of
profit and loss.
(ii) At the end of each reporting period, the carrying amount of DDT credit should be
reviewed. The carrying amount of the DDT credit should be reduced to the extent that it
is no longer probable that a liability for DDT on distribution of dividend by the parent
will arise against which the DDT credit can be utilised. Conversely, any such reduction
made in a previous reporting period should be reversed to the extent that it is now
probable that a liability for DDT on distribution of dividend by the parent will arise
against which the DDT credit can be utilised. The corresponding debit (for a reduction)
or credit (for reversal of a previously recognised reduction) should be made to profit or
loss in the consolidated statement of profit and loss.
(iii) At the end of each reporting period, the parent should reassess any unrecognised DDT
credit. The parent should recognise a previously unrecognised DDT credit to the extent
that it has become probable that a liability for DDT on distribution of dividend by the
parent will arise against which the DDT credit can be utilised. The corresponding credit
should be made to profit or loss in the consolidated statement of profit and loss.
(iv) To the extent the DDT credit is utilised to discharge the liability (or a part of the
liability) of the parent for payment of DDT on distribution of dividend to its
shareholders, the DDT credit should be extinguished by corresponding debit to the
parent's liability for payment of DDT.
It would be noted from the above that the accounting treatment of DDT credit depends on
whether or not it is probable that the parent will be able to utilise the same for set off
against its liability to pay DDT. This assessment can be made only by considering the
particular facts and circumstances of each case including the parent's policy regarding
dividends, historical record of payment of dividends by the parent, availability of
distributable profit and cash, etc.
Issue 3: S Ltd. has received an interest free loan from its holding company H Ltd
which it is under obligation to repay at the end of five years. S Ltd. is required by Ind
AS 109, Financial Instruments, to initially recognise the loan at its fair value
determined in accordance with Ind AS 113, Fair Value Measurement. How should the
difference between the loan amount and the fair value of the loan at initial recognition
be accounted for at the time of initial recognition in the books of S Ltd?
Response: In the given case, since the subsidiary is under an obligation to repay the loan
provided to it by the holding company, the loan represents a financial liability of the
subsidiary and should be so recognised. On a consideration of the substance of the
transaction and in the absence of any factors that lead to a different conclusion as to its
nature, the excess of the loan amount over the fair value of the loan at initial recognition
should appropriately be regarded as an equity infusion by the parent and should therefore be
credited directly to equity.
Issue 4: XYZ Ltd. is a first-time adopter of Ind ASs with date of transition being April
1, 2017. A scheme of amalgamation was implemented in the year 2011-12 under the
order of the High Court. As per the scheme, a particular item of the transferor
company was capitalised by the transferee company. However, under Ind ASs, this
item does not meet the definition of an asset and needs to be charged to profit or loss.
XYZ Ltd. wishes to retrospectively restate the above business combination in
accordance with Ind AS 103, Business Combinations. Other than the amalgamation
referred to above, XYZ Ltd has not effected any business combination in the past.
Should the company consider the court scheme in carrying out retrospective
restatement of the business combination?
Response: As has been clarified in the ITFG Clarification Bulletin 16 (Issue 5), accounting
treatment of a transaction as required under an order of a court or tribunal (or other similar
authority) overrides the accounting treatment that would otherwise be required to be
followed in respect of the transaction and it is mandatory for the company concerned to
follow the treatment as per the order of the court/tribunal.
Furthermore, the Companies (Indian Accounting Standards) Rules, 2015 provide as follows:
A. General Instruction. - (I) lndian Accounting Standards, which are specified, are intended
to be in conformity with the provisions of applicable laws. However, if due to subsequent
amendments in the law, a particular lndian Accounting Standard is found to be not in
conformity with such law, the provisions of the said law shall prevail and the financial
statements shall be prepared in conformity with such law.
Paragraph C1 of Ind AS 101 states that, "A first-time adopter may elect not to apply Ind AS
103 retrospectively to past business combinations (business combinations that occurred
before the date of transition to Ind ASs). However, if a first-time adopter restates any
business combination to comply with Ind AS 103, it shall restate all later business
combinations and shall also apply Ind AS 110 from that same date."
For example, if a first-time adopter elects to restate a business combination that occurred
on 30 June 2010, it shall restate all business combinations that occurred between 30 June
2010 and the date of transition to Ind ASs, and it shall also apply Ind AS 110 from 30 June
Based on the above, the position may be explained as follows:
Where a business combination occurs on or after the date of transition by the entity
to Ind ASs but the scheme approved by the relevant authority (Court or the National
Company Law Tribunal) prescribes a treatment that differs from the treatment
required as per Ind AS 103, the treatment prescribed under the scheme would
override the requirements of Ind AS 103.
Where a business combination occurred before the date of transition of the entity to
Ind ASs but the scheme approved by the relevant authority (Court or the National
Company Law Tribunal) prescribed a treatment that differs from the treatment
required as per Ind AS 103, the issue whether the restatement of a business
combination upon transition to Ind ASs is legally permissible requires a careful
evaluation of the exact stipulations contained in the scheme. As the schemes
approved by the relevant authorities have varying stipulations, each case requires a
separate consideration of the issue of legal permissibility of restatement based on its
specific facts. Where it is evaluated that under law, the scheme approved by the
relevant authority does not preclude restatement upon transition to Ind ASs, the
restatement is permissible subject to complying with the conditions laid down in this
behalf in Ind AS 101.
In accordance with the above, if the company wishes to retrospectively apply Ind AS 103 to
the business combination referred to in the query, the company needs to independently
examine the legal permissibility of the proposed restatement in the specific facts of its case.
Issue 5: As at the end of its financial year 2017-18, Company A Limited had a wholly
owned subsidiary, Company B Private Limited. Company A was covered in phase I of
the Ind AS applicability and accordingly had prepared its first Ind AS financial
statements for the year ended March 31, 2017 and thereafter for year ended March 31,
2018. Company B Private Limited being a subsidiary of Company A Limited had also
prepared its financial statements for the aforesaid financial years as per Ind ASs even
though it did not on its own meet the net worth criterion for applicability of Ind ASs.
During the financial year 2018-19, Company A Limited undertook a restructuring
exercise, pursuant to which it transferred its shareholding in Company B Private
Limited to its promoters who are individuals and therefore not required to comply
with Ind ASs. Subsequent to the transfer, the promoters converted Company B Private
Limited from a company to a Limited Liability Partnership (LLP), Entity B LLP
following the due process of law.
Whether the LLP needs to continue to prepare its financial statements under Ind AS
from the financial year 2018-19 and onwards?
Response: The Companies (Indian Accounting Standards) Rules, 2015 (`the Rules') have
been issued by the Central Government pursuant to powers conferred on it by section 133
read with section 469 of the Companies Act, 2013 (`the Act'). Subject to certain exceptions,
the Rules require a company falling in any of classes of companies specified in this behalf in
the Rules to follow Indian Accounting Standards (that are part of the Rules) in preparation
of its financial statements under section 129 of the Act.
A limited liability partnership is governed by the provisions of the Limited Liability
Partnership Act, 2008 and the Rules made thereunder.
Once a company gets converted from a company into a limited liability partnership, the
Companies Act 2013 and the Rules framed thereunder cease to apply to it. As a limited
liability partnership, it is instead governed by the provisions of the Limited Liability
Partnership Act 2008 and the Rules framed thereunder. Consequently, in the given case,
upon conversion of Company B Private Limited into an LLP, Ind ASs cease to apply to it.