Editorial Team – [2024] 169 taxmann.com 429 (Article)

This week’s Global Financial Insights covers significant updates in financial reporting and auditing practices:

1. IASB amends IFRS for Nature-Dependent Contracts: The IASB has amended IFRS 9 and IFRS 7 to improve reporting on nature-dependent electricity contracts, such as PPAs, clarifying ‘own-use’ requirements, allowing hedge accounting, and adding new disclosure rules. These changes take effect from 1 January 2026, with earlier adoption permitted.
2. FRC proposes FRS 101 amendments: The FRC has issued FRED 86 proposing amendments to FRS 101 to streamline reporting and reduce compliance costs for entities applying the standard. Key changes include an exemption from certain IFRS 18 requirements and preventing the dual application of FRS 101 and IFRS 19. The consultation is open until 7 March 2025.
3. FASB proposes environmental credit standards: The FASB has proposed a new Accounting Standards Update (ASU) to improve the accounting and disclosure of environmental credits and related obligations. The update addresses the lack of guidance under GAAP and aims to reduce diversity in accounting practices. Stakeholders can submit feedback on the proposal by April 15, 2025.
4. FRC annual audit inspection: The FRC’s annual inspection report for Tier 2 and Tier 3 audit firms highlights progress and challenges in audit quality, with disparities, especially in the PIE sector. The FRC calls for stronger quality management and faster progress in improving audits. It plans enhanced supervision for Tier 2 firms and targeted support for Tier 3 firms to drive improvements.
5. FRC Draft Strategy 2025-28: The FRC has published its draft strategy for 2025-28, focusing on supporting UK economic growth and enhancing public trust in corporate governance and reporting. The strategy includes initiatives like a revised approach to audit firm supervision and a review of enforcement procedures. A consultation is open to shape future priorities, with plans to minimize costs and strengthen statutory powers.
6. FRC NHS audit market feedback: The FRC’s initial feedback on its NHS audit market study highlights concerns about market capacity, limited auditor choice, and procurement issues. The study includes data on audit fees, firm engagements, and timeliness, with further input invited by 6 February 2025, and a final report due in Spring 2025.

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Ind AS 115 provides detailed guidance on accounting for revenue recognition when control of a product is transferred with a right of return. It specifies that revenue should be recognized for the expected consideration, excluding returns. The standard requires the recognition of a refund liability and an asset for the right to recover returned products. Both the refund liability and the asset must be updated periodically based on changes in return expectations. This document clarifies how return policies impact revenue recognition, refund liabilities, and related asset management, offering businesses clear direction for accounting for sales with or without return rights in accordance with Ind AS 115.

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CA Siddharth Patel – [2024] 169 taxmann.com 286 (Article)

1. Introduction

Ind AS 19 deals with the accounting and disclosure of employee benefits, including defined benefit plans such as pensions and gratuities. When a defined benefit plan is in surplus (i.e., the fair value of plan assets exceeds the present value of defined benefit obligations), it raises the question of how much of that surplus can be recognized as an asset in the financial statements. This is where the concept of the asset ceiling comes into play.

Ind AS 19 mandates an entity to recognize the liability as per the provision of the standard but it does not obligate the entity to have an earmarked fund to settle such liability, considering there are no statutory requirement to create a fund. However, if an entity chooses to fund such liability, it needs to net off it to the extent of funding available in its Financial Statement.

For example, if the defined benefit plan liability recognized under the provisions of Ind AS 19 amounts to Rs. 100, and the entity has an earmarked fund of Rs. 40 to offset this liability, the net defined benefit liability at the end of the reporting period would be Rs. 60 (i.e., Rs. 100 – Rs. 40). Para 8 of Ind AS 19 clarifies the adjustment of asset against the liability through the definition of net defined benefit liability (asset) as explained hereunder: –

The net defined benefit liability (asset) is the deficit or surplus, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling.

The deficit or surplus is:

(a) the present value of the defined benefit obligation less

(b) the fair value of plan assets (if any).

The article broadly covers the following aspects:

•  What is asset ceiling?
• Why does funding exceed the liability?
• Why the asset ceiling restriction?
• How to measure the asset ceiling amount?
• How to account the asset ceiling restriction? and
• Conclusion

2. What is asset ceiling?

There may be cases where an entity has excess funding exceeding the amount of its obligation in which case such excess funding is adjusted against the defined benefit plan liability and the net defined benefit asset is shown in the financial statements. However, there is a limit up to which such excess funding can be adjusted against the liability and this is where the concept of asset ceiling comes into play.

First, let’s understand the definition of asset ceiling as given in paragraph 8 of Ind AS 19.

Asset ceiling: The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

Additionally, attention is drawn to Paragraph 64 of Ind AS 19, which specifies the restriction on recognizing surplus up to the asset ceiling limit. The relevant extract of Paragraph 64 is provided below for reference.

64 When an entity has a surplus in a defined benefit plan, it shall measure the net defined benefit asset at the lower of:

(a) the surplus in the defined benefit plan; and

(b) the asset ceiling, determined using the discount rate specified in paragraph 83.

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This week’s Global Financial Insights covers significant updates in financial reporting and auditing practices:

1. IASB finalizes revised Management Commentary: The IASB has completed the technical work on the revised IFRS Practice Statement 1, set for release in 2025. The update aims to improve reporting on value creation, cash flow, and align with sustainability standards.
2. FRC seeks feedback on TAS 300 revisions: The FRC has proposed revisions to Technical Actuarial Standard 300 to support actuarial work under the new defined benefit funding regime. Stakeholders are invited to a webinar on 14 January to discuss the changes.
3. Sanctions imposed for audit failures in fraud case: The FRC has sanctioned an audit firm and partner for failing to meet audit requirements in a fraud case, leading to investor losses and the company’s delisting from NASDAQ.

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This story provides a detailed overview of revenue recognition under Ind AS 115, with a focus on the complexities faced by a public limited company operating in the shipbuilding industry. It addresses critical concerns such as the appropriate method for measuring progress towards fulfilling performance obligations i.e. whether to apply the output method or the input method, depending on the nature of the goods and services.

The document also discusses the implications of switching between methods for revenue recognition, clarifying whether this constitutes a change in accounting policy or an accounting estimate. Additionally, it provides insights on how to treat costs incurred during the shipbuilding process, specifically when physical progress doesn’t align with financial progress, and the criteria for classifying costs as either contract assets or receivables. The document emphasizes the need for clear and consistent application of these methods while ensuring proper disclosure in financial statements.

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An intangible asset shall be recognized only if it is probable that the asset will generate future economic benefits for the entity, and its cost can be measured reliably.

In this story, we have discussed the accounting treatment for expenses incurred by the company during the research and development phases of internally developed accounting software. It highlights the distinction between the research and development phases, focusing on whether the costs incurred in each phase can be recognized as intangible assets. Specifically, it examines whether costs in the research phase can be capitalized and whether costs in the development phase meet the criteria for recognition as intangible assets.

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CMA(Dr.) Ashish P. Thatte, CMA Puzhakara Sivakumar, Dr. Ranjith Krishnan & CS Anju Panicker – [2024] 169 taxmann.com 103 (Article)

1. Abstract

The 29th session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC), also known as the COP29, was held from 11th November, 2024 to 22nd November, 2024 in Baku, Azerbaijan. The summit held promising turn of events in the form of climate finance for developing countries like India to take a leap forward in combating climate crisis and averting its ill effects. The article explores the outcome of the COP29 and its scope for India. There is also impending scope for CMAs and the Sustainability Standards Board (SSB) of the ICMAI with the changing focus on climate crisis in all levels of the economy, where their expertise would be of immense benefit.

2. COPs: History and Importance

The United Nations Framework Convention on Climate Change (UNFCCC) was adopted in 1992 as an international treaty to combat climate change by keeping check on the average global temperatures and its effects on climate. It currently has 198 Parties to it, and has brought in significant outcomes like the Kyoto Protocol (1997), The Paris Agreement (2016). Its adoption can be seen as the first definite global step towards tackling climate crisis, with the Conference of Parties (COP), its decision-making body bringing countries together for discussions and collective action towards the climate goal. The COP holds yearly meetings, and reviews progress of the adopted steps to prevent climate change and the performance of its Parties in various goals set for the same.

With arresting global warming at the root of the COP, the Kyoto Protocol and the Paris Agreement were its landmark outcomes, with these legally binding treaties setting definite achievable goals on its Parties and reviewing progress on a yearly basis. Though the action to be taken towards climate change still remains the need of the hour and the effort needs to be greatly increased in this direction, initiatives under the Kyoto Protocol as well as the Paris Agreement, among other things, have fueled a positive response to low-carbon solutions and establishing carbon neutrality goals in micro and macro levels. The recently concluded COP29, held from 11th November, 2024 to 22nd November, 2024 in Baku, Azerbaijan, also comprised of the 19th session of the meeting of the Parties to the Kyoto Protocol, and the 6th session of the meeting of the Parties to the Paris Agreement.

3. The Kyoto Protocol

The Kyoto Protocol, though adopted on 11th December, 1997 in Kyoto, Japan, came into force on 16th February, 2005 owing to the complex ratification process. 192 countries are Parties to this at present. Its adoption is a milestone in the efforts towards reducing greenhouse gas (GHG) emissions, and places a commitment on the developed nations to stabilize GHG emissions under the principle of “common but differentiated responsibility and respective capability”, rightly identifying these economies are the largest contributors to the high emissions levels. Binding targets were set on developed countries and economies in transition for reducing emissions, with flexibility for each nation in designing the mechanisms for achieving these targets. The first commitment period from 2008 to 2012 aimed for a target to reduce emissions to an average of five percent against the 1990 levels, and the second commitment period from 2013 to 2020 targeted a reduction of 18 percent against this level.

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This week’s Global Financial Insights covers significant updates in financial reporting and auditing practices:

1. The IFRS Interpretations Committee met on 26 November 2024, discussing topics such as hyperinflationary economies (IAS 29), intangible assets related to climate expenditure (IAS 38), and cash flows for variation margin calls (IAS 7). The committee decided not to add standard-setting projects on these issues, citing no material diversity in practice.
2. The Financial Reporting Council (FRC) has updated its factsheets to help stakeholders implement the revised FRS 102 following the 2024 amendments. The updates include new guidance on lease accounting, revenue recognition, and business combinations, with three new factsheets introduced.
3. The FASB has proposed an Accounting Standards Update (ASU) to simplify credit loss measurement for private companies and certain non-profits, addressing challenges in applying the ECL model to short-term receivables. The proposal introduces a practical expedient and accounting policy election to reduce complexity.
4. The FRC’s 2024 Audit Market and Competition update reveals that challenger firms increased their share of FT350 audits to 13%, while audit fees in the PIE market reached £1.4 billion. The FRC is promoting competition and improving audit quality through initiatives like the Big Four’s operational separation and the Scalebox program for smaller firms.

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This document provides a detailed analysis of the accounting treatment for changes in a defined benefit retirement plan, specifically focusing on the recognition of past service cost and adjustments in the defined benefit obligation.

It explains the proper approach for recording these changes under AS 15 – Employee Benefits, including the necessary journal entries for actuarial gains and losses. Additionally, it addresses the calculation of the net defined benefit liability and the corresponding impact on the balance sheet and profit & loss account.

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When a company transfers a financial asset, it must evaluate whether the transfer meets the criteria for derecognition (i.e., removing the asset from the balance sheet). If the transfer does not qualify for derecognition, the contractual rights or obligations associated with the transferred asset are not recognized separately. In such cases, these rights or obligations are treated as part of the overall transaction and not as distinct financial instruments.

In this story, we have discussed the presentation and disclosure of investments in PTCs and securitization borrowings in the Balance Sheet under Indian Accounting Standards (Ind AS). It explores whether the company’s investments in PTCs and the related securitization borrowings (financial liabilities) should be recognized as distinct financial instruments. Additionally, it examines the possibility of offsetting PTC investments against securitization borrowings in the financial statement disclosures.

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