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Ind AS Transition Facilitation Group (ITFG) Clarification Bulletin 9
May, 17th 2017
            Ind AS Transition Facilitation Group (ITFG) Clarification Bulletin 9

`Ind AS Transition Facilitation Group' (ITFG) of Ind AS Implementation Committee 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, raised by preparers, users and other stakeholders. Ind AS Transition
Facilitation Group (ITFG) considered some issues received from members and decided to
issue following clarifications1 on May 15, 2017:

Issue 1:

(i)P Ltd. holds 100% equity shares of S Ltd. i.e. S Ltd. is the wholly-owned subsidiary of
   P Ltd. During the year 2016, S Ltd. paid dividend of INR 100,000 to P Ltd. and paid
   Dividend Distribution Tax (DDT) of INR 20,000 (as per tax laws) to the taxation
   authorities.

      (a) What would be the accounting treatment of the DDT in the consolidated
          financial statement of P Ltd?

      (b) Would the answer be different, if P Ltd. in turn pays dividend of INR 150,000 to
          its shareholders and DDT liability thereon is determined to be INR 30,000.As per
          the tax laws, DDT paid by S Ltd. of INR 20,000 is allowed as set off against the
          DDT liability of P Ltd., resulting in P Ltd. paying INR 10,000 (INR 30,000 ­ INR
          20,000) as DDT to tax authorities.

(ii) Whether deferred tax liability (DTL) on the accumulated undistributed profits of
     the Subsidiary company which may be distributed in the foreseeable future is
     required to be recognised in the consolidated financial statements of the Parent
     company, i.e. P Ltd.

Response:

       It may be noted that the treatment of Dividend Distribution Tax (DDT) in the standalone
       financial statements of the parent entity and its subsidiary has been dealt with in the
       FAQ issued by the Accounting Standards Board (ASB) of ICAI on the treatment of
       Dividend distribution tax.


(i)
       (a) In the consolidated financial statements of P Ltd., the dividend income earned by P
           Ltd. from S Ltd. and dividend recorded by S Ltd. in its equity will both get

1
  Clarifications given or views expressed by the Ind AS Transition Facilitation Group (ITFG) represent the
views of the members of the ITFG and are not necessarily the views of the Ind AS Implementation Committee
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 each clarification is indicated along with
the clarification. The clarification must, therefore, be read in the light of any amendments and/or other
developments subsequent to the issuance of clarifications by the Group

                                                                                                      Page 1 of 7
         eliminated as a result of consolidation adjustments. DDT of INR 20,000 paid outside
         the consolidated Group i.e. to the tax authorities should be charged as expense in the
         consolidated statement of Profit and Loss of P Ltd.

    (b) If DDT paid by the subsidiary S Ltd. is allowed as a set off against the DDT liability
        of its parent P Ltd. (as per the tax laws), then the amount of such DDT should be
        recognised in the consolidated statement of changes in equity of parent P Ltd .
        Accordingly, in the given situation, DDT of INR 30,000 (INR 20,000 of DDT paid
        by S Ltd. and INR 10,000 of DDT paid by P Ltd.) should be recognised in the
        consolidated statement of changes in equity of parent P Ltd.. The basis for such
        accounting would be that due to Parent P Ltd's transaction of distributing dividend
        to its shareholders (a transaction recorded in Parent P Ltd' equity) and the related
        DDT set-off, this DTT paid by the subsidiary is effectively a tax on distribution of
        dividend to the shareholders of the Parent company.





(ii) Paragraphs 39 & 40 of Ind AS 12, Income Taxes states as follows:

39 An entity shall recognise a deferred tax liability for all taxable temporary differences
      associated with investments in subsidiaries, branches and associates, and interests in
      joint arrangements, except to the extent that both of the following conditions are
      satisfied:

   (a) the parent, investor, joint venturer or joint operator is able to control the timing of the
           reversal of the temporary difference; and

      (b) it is probable that the temporary difference will not reverse in the foreseeable
           future.

40 As a parent controls the dividend policy of its subsidiary, it is able to control the timing of
     the reversal of temporary differences associated with that investment (including the
     temporary differences arising not only from undistributed profits but also from any
     foreign exchange translation differences). Furthermore, it would often be impracticable
     to determine the amount of income taxes that would be payable when the temporary
     difference reverses. Therefore, when the parent has determined that those profits will
     not be distributed in the foreseeable future the parent does not recognise a deferred tax
     liability. The same considerations apply to investments in branches.

In accordance with the above, it may be noted that the deferred tax liability (DTL) is not
recognised on the accumulated undistributed profits of the subsidiary company in the
consolidated financial statements of the parent entity, if it is determined that such
accumulated undistributed profits will not be distributed in the foreseeable future.

However, 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

                                                                                      Page 2 of 7
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.

In this regard, it may also be noted that 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 important 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
Ltd.

Issue 2:

As per Appendix C, Business Combinations of Entities under Common Control of Ind AS
103, Business Combinations, in case of common control business combinations, the
assets and liabilities of the combining entities are reflected at their carrying amounts.

(A) For this purpose, should the carrying amount of assets and liabilities of the
    combining entities be reflected as per the books of the entities transferred or the
    ultimate parent in the following situations:

   Situation 1: A Ltd. has two subsidiaries B Ltd. and C Ltd. B Ltd. merges with C
    Ltd.

   Situation 2: B Ltd. is the subsidiary of A Ltd. B Ltd. merges with A Ltd.

(B) Further, also state whether the effect of the above business combination is required
    to be eliminated in the consolidated financial statements of A Ltd.

Response:

(A)Situation 1: Paragraph 9 of Appendix C of Ind AS 103, states as follows:

    "9 The pooling of interest method is considered to involve the following:

           (i) The assets and liabilities of the combining entities are reflected at their carrying
               amounts.

           (ii) No adjustments are made to reflect fair values, or recognise any new assets or
                liabilities. The only adjustments that are made are to harmonise accounting
                policies.



                                                                                       Page 3 of 7
         (iii) The financial information in the financial statements in respect of prior periods
               should be restated as if the business combination had occurred from the
               beginning of the preceding period in the financial statements, irrespective of the
               actual date of the combination. However, if business combination had occurred
               after that date, the prior period information shall be restated only from that
               date."

Further paragraphs 11 and 12 of Appendix C of Ind AS 103 state as follows:

      "11 The balance of the retained earnings appearing in the financial statements of the
           transferor is aggregated with the corresponding balance appearing in the
           financial statements of the transferee. Alternatively, it is transferred to General
           Reserve, if any.

12 The identity of the reserves shall be preserved and shall appear in the financial statements
           of the transferee in the same form in which they appeared in the financial
           statements of the transferor. Thus, for example, the General Reserve of the
           transferor entity becomes the General Reserve of the transferee, the Capital
           Reserve of the transferor becomes the Capital Reserve of the transferee and the
           Revaluation Reserve of the transferor becomes the Revaluation Reserve of the
           transferee. As a result of preserving the identity, reserves which are available for
           distribution as dividend before the business combination would also be available
           for distribution as dividend after the business combination. The difference, if any,
           between the amounts recorded as share capital issued plus any additional
           consideration in the form of cash or other assets and the amount of share capital
           of the transferor shall be transferred to capital reserve and should be presented
           separately from other capital reserves with disclosure of its nature and purpose
           in the notes."




In accordance with the above, it may be noted that the assets and liabilities of the combining
entities are reflected at their carrying amounts. Accordingly, in accordance with paragraph 9
(a) (i) of Appendix C of Ind AS 103, in the separate financial statements of C Ltd., the
carrying values of the assets and liabilities as appearing in the standalone financial statements
of the entities being combined i.e B Ltd. & C Ltd. in this case shall be recognised.

Situation 2:

In this case, since B Ltd. is merging with A Ltd. (ie. parent) nothing has changed and the
transaction only means that the assets, liabilities and reserves of B Ltd. which were appearing
in the consolidated financial statements of Group A immediately before the merger would
now be a part of the separate financial statements of A Ltd. Accordingly, it would be
appropriate to recognise the carrying value of the assets, liabilities and reservespertaining to
B Ltd as appearing in the consolidated financial statements of A Ltd.Separate financial
statements to the extent of this common control transaction shall be considered as a
continuation of the consolidated group.


(B) Paragraph B86 of Ind AS 110, Consolidated Financial Statements, states as follows:

                                                                                     Page 4 of 7
    "Consolidation procedures

  B86 Consolidated financial statements:

   (a) combine like items of assets, liabilities, equity, income, expenses and cash flows of the
       parent with those of its subsidiaries.
   (b) offset (eliminate) the carrying amount of the parent's investment in each subsidiary
       and the parent's portion of equity of each subsidiary (Ind AS 103 explains how to
       account for any related goodwill).
   (c) eliminate in full intragroup assets and liabilities, equity, income, expenses and cash
       flows relating to transactions between entities of the group (profits or losses resulting
       from intragroup transactions that are recognised in assets, such as inventory and
       fixed assets, are eliminated in full). Intragroup losses may indicate an impairment
       that requires recognition in the consolidated financial statements. Ind AS 12, Income
       Taxes, applies to temporary differences that arise from the elimination of profits and
       losses resulting from intragroup transactions."

In accordance with the above, all intra-group transactions should be eliminated in preparing
consolidated financial statement in accordance with Ind AS 110. The legal merger of a
subsidiary with the parent or legal merger of fellow subsidiaries is an intra-group transaction
and accordingly, will have to be eliminated in the Consolidated Financial Statements of the
Parent.

Accordingly, in both the given situations, the effect of legal merger should be eliminated
while preparing consolidated financial statements of A Ltd.


Issue 3: ABC Co. is a government company and is a first-time adopter of Ind AS. As per
the previous GAAP, the contributions received by ABC Co. from the government
(which holds 100% shareholding in ABC Co.) which is in the nature of promoters'
contribution have been recognised in capital reserve and treated as part of
shareholders' funds in accordance with the provisions of AS 12, Accounting for
Government Grants.

   1) Whether the accounting treatment of the grants in the nature of promoters'
      contribution as per AS 12 is also permitted under Ind AS 20 Accounting for
      Government Grants and Disclosure of Government Assistance. If not, then what
      will be the accounting treatment of such grants recognised in capital reserve as
      per previous GAAP on the date of transition to Ind AS.

   2) What will be the accounting treatment of the grants in the nature of promoters'
      contribution which ABC Co. receives post transition to Ind AS?


                                                                                    Page 5 of 7
Response:

1)Paragraph 2 ofInd AS 20, Accounting for Government Grants and Disclosure of
    Government Assistance, inter-alia,states as follows:

"2 This Standard does not deal with:
 (a)...

(c) government participation in the ownership of the entity."

In accordance with the above, it may be noted that Ind AS 20 specifically scopes out the
participation by the government in the ownership of an entity.

In this fact pattern, Government has 100% shareholding in the entity. Accordingly, the entity
needs to determine whether the payment is provided as a shareholder contribution or as a
government. Equity contributions will be recorded in equity while grants will affect the
statement of profit and loss.

Where it is concluded that the contributions are in the nature of government grant, the entity
shall apply the principles of Ind AS 20 retrospectively as specified in Ind AS 101.
Ind AS 20 requires all grants to be recognised as income on a systematic basis over the
periods in which the entity recognises as expenses the related costs for which the grants are
intended to compensate. Unlike AS 12, Ind AS 20 requires the grant to be classified as either
a capital or an income grant and does not permit recognition of government grants in the
nature of promoter's contribution directly to shareholders' funds.

Where it is concluded that the contributions are in the nature of shareholder contributions are
recognised in capital reserve under previous GAAP,, it is important to note the provisions of
paragraph 10 of Ind AS 101, which states that,

 "10 Except as described in paragraphs 13­19 and Appendices B­D, an entity shall, in
 its opening Ind AS Balance Sheet:

 (a) recognise all assets and liabilities whose recognition is required by Ind ASs;

 (b) not recognise items as assets or liabilities if Ind ASs do not permit such recognition;

 (c) reclassify items that it recognised in accordance with previous GAAP as one type of
 asset, liability or component of equity, but are a different type of asset, liability or
 component of equity in accordance with Ind ASs; and

 (d) applyInd ASs in measuring all recognised assets and liabilities."

Accordingly, as per the above requirements of paragraph 10(c) in the given case,
contributions recognised in the Capital Reserve should be transferred to appropriate category
under `Other Equity' at the date of transition to Ind AS.


                                                                                      Page 6 of 7
(2) The entity shall apply the same principles as mentioned above for accounting the
    contributions received by the entity subsequent to the transition date.


                                      ---------




                                                                         Page 7 of 7

 
 
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