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Ind AS Technical Facilitation Group Clarification Bulletin 19
May, 09th 2019
                Ind AS Technical Facilitation Group Clarification Bulletin 19

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 2019,
raised by preparers, users and other stakeholders. Ind AS Technical Facilitation Group
(ITFG) considered some issues received from members and decided to issue following
clarifications1on May 08, 2019:

Issue 1: Entity A is required to apply Ind ASs in preparing its financial statements for
periods beginning on or after April 1, 2018. Thus, the date of Entity A's transition to
Ind ASs is April 1, 2017.

Entity A has a subsidiary, Entity B, which was formed by it in the year 2009, with
Entity A initially subscribing to 60% of share capital of Entity B. During October 2015,
i.e. before the date of transition to Ind ASs, Entity A acquired additional 25% shares in
Entity B.

As Entity B was formed by Entity A itself as a subsidiary, Entity A's control of Entity
B does not arise from a `business combination' within the meaning of this term under
Ind AS 103, Business Combinations. Consequently, the option available to a first-time
adopter of Ind ASs to restate, or not restate, past business combinations as per Ind AS
103 does not apply in respect of Entity B.

Can Entity A account for the difference between the consideration paid for the
additional 25% shares in Entity B acquired by it in October 2015 and the amount of
reduction in non-controlling interests resulting from the said acquisition directly in
equity while preparing its opening Ind AS balance sheet as at the date of transition to
Ind ASs?

Response: Ind AS 101, First-time Adoption of Indian Accounting Standards, contains
requirements applicable to first Ind AS financial statements of an entity. The provisions of
Ind AS 101 relevant in the above context are as follows:

         Paragraph B7 of Ind AS 101 states that:

          "A first-time adopter shall apply the following requirements of Ind AS 110
          prospectively from the date of transition to Ind ASs:



1
  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 May 08, 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.

                                                       1
             (a) the requirement in paragraph B94 that total comprehensive income is
                 attributed to the owners of the parent and to the non-controlling interests
                 even if this results in the non-controlling interests having a deficit
                 balance;

             (b) the requirements in paragraphs 23 and B96 for accounting for changes in
                 the parent's ownership interest in a subsidiary that do not result in a loss
                 of control; and

             (c) the requirements in paragraphs B97­B99 for accounting for a loss of
                 control over a subsidiary, and the related requirements of paragraph 8A
                 of Ind AS 105, Non-current Assets Held for Sale and Discontinued
                 Operations.

        However, if a first-time adopter elects to apply Ind AS 103 retrospectively to past
        business combinations, it shall also apply Ind AS 110 in accordance with
        paragraph C1 of this Ind AS."

       According to paragraph C1 of Ind AS 101:

        "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 2010."

It is noteworthy that Ind AS 110, Consolidated Financial Statements, applies in respect of
consolidation of not only those subsidiaries that were acquired by way of business
combinations but also those entities which were formed by the parent itself and have been
the parent's subsidiaries ab initio. Paragraphs 23 and B96 of Ind AS 110 apply to changes in
a parent's ownership interest without loss of control of any subsidiary, whether it be a
subsidiary whose control was acquired by the parent in a business combination or a
subsidiary formed by the parent itself.

Paragraph B7 of Ind AS 101 generally prohibits retrospective application of paragraphs 23
and B96 of Ind AS 110 by a first-time adopter. There is nothing in Ind AS 101 to indicate
that the prohibition contained in paragraph B7 on retrospective application of specified
requirements of Ind AS 110 is applicable only in respect of subsidiaries acquired by way of
business combinations and not in respect of subsidiaries formed by the parent itself.
Consequently, if Entity A does not restate its past business combinations (refer paragraph C1
of Ind AS 101), the accounting treatment of purchase of the additional interest in Entity B
carried out by Entity A in accordance with its previous GAAP would continue (i.e., no
adjustments to the same would be made) while transitioning to Ind ASs.

                                             2
Issue 2: A shipping entity is engaged in the business of transporting petroleum
products from one port to another. Contracts between the entity and its customers
typically state that the contract cannot be terminated once the entity takes delivery of
goods from the customers at the port and sails to the designated port of destination.
The period that a vessel takes to reach the port of destination ranges from ten days to
around a month.

Whether the performance obligation of the entity under a typical contract with
customers is:

    (i) satisfied over time and if so, whether the extent of satisfaction of performance
        obligation can be measured on the basis of number of days the vessel has
        sailed; or

    (ii) satisfied at a point in time?

Response: According to paragraph 31 of Ind AS 115, Revenue from Contracts with
Customers:

  "An entity shall recognise revenue when (or as) the entity satisfies a performance
   obligation by transferring a promised good or service (ie an asset) to a customer. An
   asset is transferred when (or as) the customer obtains control of that asset."

Paragraph 32 of Ind AS 115 (or `the Standard') requires an entity to determine, at contract
inception, whether each performance obligation identified in accordance with the Standard is
satisfied over time or at a point in time. As per the Standard, if an entity does not satisfy a
performance obligation over time, the performance obligation is satisfied at a point in time.

According to paragraph 35 of Ind AS 115:

    "An entity transfers control of a good or service over time and, therefore, satisfies a
    performance obligation and recognises revenue over time, if one of the following
    criteria is met:

         (a) the customer simultaneously receives and consumes the benefits provided by
             the entity's performance as the entity performs (see paragraphs B3­B4);

         (b) the entity's performance creates or enhances an asset (for example, work in
             progress) that the customer controls as the asset is created or enhanced (see
             paragraph B5); or

         (c) the entity's performance does not create an asset with an alternative use to the
             entity (see paragraph 36) and the entity has an enforceable right to payment
             for performance completed to date (see paragraph 37)."

If any of the above criteria is met, consideration of the other criteria is unnecessary. This is
because any one of the above criteria needs to be met to recognise revenue over time.


                                               3
Application of the above criteria in the given case is discussed below.

    Criterion (a)

As regards application of criterion (a), the following extracts from Application Guidance
contained in Appendix B to Ind AS 115 are relevant:

    B3 For some types of performance obligations, the assessment of whether a customer
    receives the benefits of an entity's performance as the entity performs and
    simultaneously consumes those benefits as they are received will be straightforward.
    Examples include routine or recurring services (such as a cleaning service) in which
    the receipt and simultaneous consumption by the customer of the benefits of the entity's
    performance can be readily identified.

    B4 For other types of performance obligations, an entity may not be able to readily
    identify whether a customer simultaneously receives and consumes the benefits from the
    entity's performance as the entity performs. In those circumstances, a performance
    obligation is satisfied over time if an entity determines that another entity would not
    need to substantially re-perform the work that the entity has completed to date if that
    other entity were to fulfil the remaining performance obligation to the customer. In
    determining whether another entity would not need to substantially re-perform the work
    the entity has completed to date, an entity shall make both of the following assumptions:

         (a) disregard potential contractual restrictions or practical limitations that
             otherwise would prevent the entity from transferring the remaining
             performance obligation to another entity; and

         (b) presume that another entity fulfilling the remainder of the performance
             obligation would not have the benefit of any asset that is presently controlled
             by the entity and that would remain controlled by the entity if the performance
             obligation were to transfer to another entity. [Emphasis added]

As per the above, the question to be answered to determine whether the performance
obligation in the given case is satisfied over time or at a point in time is whether another
entity, were it required to transport the goods to the port of destination, would need to
substantially re-perform the work carried out by the entity to date. If that work would not
need to be substantially re-performed, revenue would be recognised over time.






The answer to the question whether the work carried out by a reporting entity to date would,
or would not, need to be substantially re-performed requires assessment in the context of the
specific facts of a case.

    Criterion (b)

Considering the nature of performance obligation of the company (transportation of goods
belonging to the customer to the designated port of destination), the entity's performance
cannot be said to create or enhance an asset that the customer controls as the asset is created
or enhanced.

                                              4
    Criterion (c)

Considering the nature of performance obligation of the company, it is clear that its
performance does not create an asset with an alternative use to the entity. Determining
whether it has an enforceable right to payment for performance completed to date requires
consideration of the detailed requirements and guidance provided in paragraphs 37 and B9-
B13 of Ind AS 115. These paragraphs, inter alia, require an entity to consider the terms of
the contract, as well as any laws that apply to the contract, when evaluating whether it has an
enforceable right to payment for performance completed to date. While the right to payment
for performance completed to date does not need to be for a fixed amount, the entity must be
entitled, at all times throughout the duration of the contract, to an amount that at least
compensates the entity for performance completed to date if the contract is terminated by the
customer or another party for reasons other than the entity's failure to perform as promised.
In assessing the existence and enforceability of a right to payment for performance
completed to date, an entity is required to consider the contractual terms as well as any
legislation or legal precedent that could supplement or override those contractual terms.
Application of the relevant requirements and guidance contained in Ind AS 115 in a
particular case requires consideration of the specific facts and circumstances of the case.

Measurement of Progress towards Complete Satisfaction of a Performance Obligation

Ind AS 115 contains detailed requirements and guidance regarding measurement of progress
towards complete satisfaction of a performance obligation. The standard notes that
appropriate methods of measuring progress include output methods and input methods and
requires an entity to consider the nature of the goods or services that the entity promised to
transfer to the customer in determining the appropriate method for measuring progress. In
case it is concluded that the performance obligation of the entity under its contract with a
customer is satisfied over time, the entity should determine an appropriate method of
measuring progress on the basis of the relevant requirements and guidance contained in Ind
AS 115.

Issue 3: ABC Limited would be applying Ind ASs for the first time when it prepares its
financial statements for the year ended March 31, 2019.

Ind AS 115, Revenue from Contracts with Customers, which has superseded Ind AS 18
and Ind AS 11, is applicable for accounting periods beginning on or after April 1, 2018.
Appendix C to the standard contains transitional provisions. As per paragraph C3 of
Appendix C:

    "An entity shall apply this Standard using one of the following two methods:

         (a) retrospectively to each prior reporting period presented in accordance with
             Ind AS 8, Accounting Policies, Changes in Accounting Estimates and
             Errors, subject to the expedients in paragraph C5; or




                                              5
         (b) retrospectively with the cumulative effect of initially applying this Standard
             recognised at the date of initial application in accordance with paragraphs
             C7­C8."

[The method at (a) above is often referred to as `full retrospective adoption' method
(with some practical expedients). The method at (b) above is often referred to as
`simplified (or modified) transition' method.]

Can ABC Limited Ltd., being a first-time adopter of Ind ASs, apply simplified
transition method provided under Ind AS 115?

Response: Paragraph 7 of Ind AS 101 states the following:

    "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 13­19 and Appendices B­D."

It is clear from the above that the general requirement of Ind AS 101 is retrospective
application of the standards in force at the end of an entity's first Ind AS reporting period.
There are, however, specific optional exemptions from, and some mandatory exceptions to,
this general requirement.

Paragraph 9 of Ind AS 101 states the following:

    "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 B­D."

It is clear from the above that being a first-time adopter, ABC Limited can apply the
transitional provisions contained in Ind AS 115 only to the extent required or allowed to do
so under Appendices B-D of Ind AS 101.

Paragraphs D34 and D35 of Ind AS 101 contain provisions dealing with application of
transitional provisions of Ind AS 115 by a first-time adopter and state the following:

 "D34 A first-time adopter may apply the transition provisions in paragraph C5 of Ind AS
     115. In those paragraphs references to the `date of initial application' shall be
     interpreted as the beginning of the first Ind AS reporting period. If a first-time
     adopter decides to apply those transition provisions, it shall also apply paragraph
     C6 of Ind AS 115.

 D35 A first-time adopter is not required to restate contracts that were completed before the
      earliest period presented. A completed contract is a contract for which the entity has
      transferred all of the goods or services identified in accordance with previous
      GAAP."



                                              6
As per the above, a first-time adopter is allowed (but not required) to apply the transitional
provisions contained in paragraph C5 (along with paragraph C6) of Ind AS 115. Paragraph
C5 (along with paragraph C6) of Ind AS 115 allows an entity to use one or more of the
practical expedients specified therein in carrying out full retrospective adoption of Ind AS
115. Ind AS 101 neither requires nor allows a first-time adopter to apply the transitional
provisions contained in paragraphs C7, C7A and C8 of Ind AS 115. This means that in the
given case, being a first-time adopter, ABC Limited is allowed to apply only the full
retrospective adoption method (with practical expedients) given in Ind AS 115. ABC
Limited does not have the choice of applying the simplified transition method.

Issue 4: ABC Limited has capital work-in-progress (CWIP) of  1,00,000 which meets
the definition of a `qualifying asset' as per Ind AS 23, Borrowing Costs. ABC Limited
capitalises borrowing costs, using capitalisation rate for general borrowings, on 
1,00,000.

PQR Limited, an unrelated, independent entity, acquires ABC Limited for cash
consideration and merges it into itself. The merger meets the definition of a `business
combination' as per Ind AS 103, Business Combinations. As part of purchase price
allocation (PPA), PQR Limited allocates  1,20,000 to CWIP which still meets the
definition of a qualifying asset.

Post-acquisition, the financial statements of PQR Limited include CWIP at  1,20,000.
For capitalisation of borrowing costs in post-acquisition financial statements of PQR
Limited, should the capitalisation rate be applied on the amount derived based on
PPA, i.e.  1,20,000?

Would the answer be any different if PQR Limited acquires 100% shares and control
of ABC Limited but ABC Limited remains a separate legal entity which is consolidated
by PQR Limited. Post-acquisition, the stand-alone financial statements of ABC
Limited continue to carry CWIP at  1,00,000. However, consolidated financial
statements of PQR Limited carry CWIP at  1,20,000.

Response: As per the facts of the case, upto the date of its acquisition by PQR Limited,
ABC Limited has incurred a cumulative expenditure of  1,00,000 on an asset under
construction (CWIP). While PQR Limited has paid a lump sum consideration for acquisition
of ABC Limited, it has attributed an amount of  120,000 as consideration towards purchase
of the CWIP. For the purpose of the following analysis, it has been assumed that the
allocation of an amount of  120,000 towards purchase of the CWIP is appropriate under the
facts and circumstances of the case.

Scenario I: ABC Limited is merged into PQR Limited

Where ABC Limited is merged into PQR Limited, the CWIP would appear as an asset in the
stand-alone (and consequently, in the consolidated) financial statements of PQR Limited. At
the time of merger, PQR Limited needs to make a fresh, independent assessment as to
whether the CWIP meets the definition of a `qualifying asset' from its perspective. In
determining whether the CWIP is a `qualifying asset' (i.e., an asset that necessarily takes a

                                              7
substantial period of time to get ready for its intended use or sale), PQR Limited would
consider only the remaining time to completion of the asset. It is assumed that it is on the
basis of such fresh, independent assessment that the querist has asserted that the CWIP "still
meets the definition of a qualifying asset"

It is noted that PQR Limited has acquired the CWIP as a part of merger of ABC Limited into
it rather than in a transaction for purchase of the CWIP only. Through the purchase price
allocation exercise carried out by PQR Limited, an amount of  120,000 has been
determined to have been paid towards acquisition of the CWIP. Thus, from the perspective
of the stand-alone (and consequently, consolidated) financial statements of PQR Limited, it
is this amount of  120,000 (and not  100,000) which represents the expenditure incurred
by PQR Limited on the CWIP for purposes of applying the requirements of Ind AS 23
relating to capitalisation of borrowing costs. Likewise, the timing of incurrence of the
aforesaid expenditure of  120,000 on the CWIP is also to be determined from the
perspective of PQR Limited and not from the perspective of ABC Limited. To illustrate,
suppose that PQR Limited acquires ABC Limited and pays cash consideration on July 1,
20XX. In this case, for determining the amount of borrowing costs to be capitalised, the
expenditure of  120,000 would be considered to have been incurred by PQR Limited on
July 1, 20XX; the timing of incurrence of expenditure on CWIP by ABC Limited would not
be relevant from the perspective of the stand-alone (and consequently, consolidated)
financial statements of PQR Limited.

Scenario II: ABC Limited is not merged into PQR Limited

Where PQR Limited acquires 100% shares in (and consequently, control of) ABC Limited
which continues to remain in existence, PQR Limited's consolidated financial statements
(but not its stand-alone financial statements) would include the CWIP as an asset. The
`reporting entity' in respect of consolidated financial statements is the group comprising the
parent (PQR Limited in the instant case) and its subsidiaries (ABC Limited in the given
case). Therefore, for purposes of consolidated financial statements, the determination of
whether an asset meets the definition of a `qualifying asset' as well as the determination of
the amount of expenditure incurred thereon is made from the perspective of the group rather
than from the perspective of the particular member of the group which owns or holds the
said asset. In the given case, the group has incurred an expenditure of  120,000 to acquire
the CWIP from a party outside the group. Consequently, for the purpose of applying the
requirements of Ind AS 23 relating to capitalisation of borrowing costs at the group level
(assuming that the CWIP meets the definition of `qualifying asset' from the group's
perspective), the amount of expenditure on the CWIP would be considered to be  120,000.
Further, the timing of incurrence of the expenditure of  120,000 on the CWIP would also
have to be determined from the perspective of the group rather than from the perspective of
ABC Limited.

The stand-alone financial statements of PQR Limited would include the investment in ABC
Limited (rather than individual assets and liabilities of ABC Limited). As this investment is
a financial asset, borrowing costs cannot be capitalised as part of carrying amount of the



                                              8
same in view of paragraph 7 of Ind AS 23 which categorically states that financial assets are
not qualifying assets.

Issue 5: As at March 31, 2018, A Limited, a listed company, has two subsidiaries ­ B
Limited and C Limited. B Limited is a listed company whereas C Limited is an unlisted
company. B Limited has been a subsidiary of A Limited for the last two decades and C
Limited has been a subsidiary of A Limited since January 2016.

During the financial year 2018-19, B Limited merges into A Limited and one of the
divisions of A Limited is transferred to C Limited. As per the scheme approved by the
competent authority in this regard, the appointed date for the merger and the transfer
as aforesaid is October 1, 2018.

The scheme becomes effective prior to the year ended 31 March 2019 as all the
necessary approvals were received before year-end. While preparing the financial
statements for the year ended March 31, 2019, would previous year figures in financial
statements of A Limited and C Limited have to be restated as per paragraph 9 of
Appendix C to Ind AS 103, Business Combinations?

Response:

Accounting for Merger of B Limited into A Limited

Merger of B Limited into A Limited represents merger of a subsidiary into its parent.
Accounting for such a merger is dealt with in ITFG Clarification Bulletin 9 (Issue 2) which
may be referred to.






Accounting for transfer of a division from A Limited to C Limited

Ind AS 103 defines the terms `business' and `business combination' and certain related
terms as follows:

    Business An integrated set of activities and assets that is capable of being conducted
    and managed for the purpose of providing a return in the form of dividends, lower costs
    or other economic benefits directly to investors or other owners, members or
    participants.

    Business combination A transaction or other event in which an acquirer obtains
    control of one or more businesses. Transactions sometimes referred to as `true mergers'
    or `mergers of equals' are also business combinations as that term is used in this Ind
    AS.

    Acquirer The entity that obtains control of the acquiree.

    Acquiree The business or businesses that the acquirer obtains control of in a business
    combination.




                                             9
The following terms defined in Ind AS 103 Appendix C, Business Combinations of Entities
under Common Control, are also relevant:

  Common control business combination means a business combination involving entities
  or businesses in which all the combining entities or businesses are ultimately controlled
  by the same party or parties both before and after the business combination, and that
  control is not transitory.

  Transferor means an entity or business which is combined into another entity as a result
  of a business combination.

  Transferee means an entity in which the transferor entity is combined.

In the following analysis, it is assumed that the division transferred from A Limited to C
Limited constitutes a `business' (or businesses) within the meaning of this term under Ind
AS 103. Based on this assumption, let us examine whether the transfer of the division from
A Limited to C Limited qualifies as a `common control business combination' from the
perspective of C Limited:

        By virtue of the transfer, C Limited obtains control of a business that it did not
        previously control. Thus, transfer of the division meets the definition of a `business
        combination' from the perspective of C Limited.

        The transferee (or the acquirer) in the aforesaid business combination is `C Limited'
        and the transferor (or the acquiree) is the `division' transferred to C Limited. Both
        the combining parties, i.e., C Limited and the said division, are controlled by A
        Limited before the transfer as well as after the transfer.

        As per the facts of the case, C Limited has been a subsidiary of A Limited since
        January 2016. Though not stated specifically in the facts of the case, it seems that the
        division transferred by A Limited to C Limited has been its (i.e., A Limited's) part
        for quite some time. Assuming that this inference is correct, control of A Limited
        over the transferee (C Limited) and the transferor (the transferred division) cannot be
        said to be transitory.

As per the above analysis, from the perspective of C Limited, the transfer of the division to
it qualifies as a common control business combination within the meaning of this term under
Ind AS 103.

Appendix C to Ind AS 103 requires a common control business combination to be accounted
for by the acquirer as per the `pooling of interest method' as described in detail therein.
Accordingly, C Limited would be required to account for the transfer of the division in its
financial statements by applying the pooling of interests method. As per paragraph 9 of
Appendix C to Ind AS 103:

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

              .......................

                                              10
             (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."

In accordance with paragraph 9(iii) above, C Limited is required to prepare its financial
statements (including comparative information presented therein) for the year ended March
31, 2019 as if the transfer of the division had occurred from the beginning of the
comparative period presented in the financial statements for the year ended 31 March 2019
i.e., April 1, 2017, notwithstanding the appointed date of 1 October 2018 specified in the
scheme.

Issue 6: ABC Limited is an unlisted company that was required to apply Ind ASs from
financial year beginning April 1, 2017 due to its meeting the net worth criterion laid
down in sub-clause (b) of clause (iii) of sub-rule (1) of rule 4 of the Companies (Indian
Accounting Standards) Rules, 2015 as amended till date. During the financial year
ended March 31, 2018, it had an unlisted subsidiary, PQR Limited, having net worth of
about  50 crore. Both ABC Limited and PQR Limited prepared their annual financial
statements for the financial year ended March 31, 2018 as per Ind ASs.

During the financial year ended March 31, 2019, ABC Limited sold off substantially all
of its investment in PQR Limited to an unrelated third party, XYZ Limited, which is
an unlisted company. Prior to acquiring the majority stake in PQR Limited, XYZ
Limited did not meet any of the criteria for mandatory application of Ind ASs.

After the sale of its shareholding in PQR Limited by ABC Limited as described above,
PQR Limited does not qualify as a subsidiary or an associate or a joint venture
company of ABC Limited. The net worth of PQR Limited still hovers around  50
crore.

Are PQR Limited and XYZ Limited required to apply Ind ASs?

Response: Rule (9) of the Companies (Indian Accounting Standards) Rules, 2015, states the
following:

    "Once a company starts following the Indian Accounting Standards (Ind AS) either
    voluntarily or mandatorily on the basis of criteria specified in sub-rule (1), it shall be
    required to follow the Indian Accounting Standards (Ind AS) for all the subsequent
    financial statements even if any of the criteria specified in this rule does not
    subsequently apply to it."

In view of the above, PQR Limited is required to continue to follow Ind ASs even though it
does not meet the net worth criterion or the listing criterion and is no longer a subsidiary (or



                                              11
a holding or an associate or a joint venture company) of a company meeting the listing or the
net worth criterion.

As regards the issue of applicability of Ind ASs to XYZ Limited, Rule 4(1) of the
Companies (Indian Accounting Standards) Rules 2015 as amended till date inter-alia states
as follows:

    "(i)...

    (ii) ...

    (iii) the following companies shall comply with the Indian Accounting Standards (Ind
          AS) for the accounting periods beginning on or after 1st April, 2017, with the
          comparatives for the periods ending on 31st March, 2017, or thereafter, namely:-

               (a) companies whose equity or debt securities are listed or are in the process
                   of being listed on any stock exchange in India or outside India and having
                   net worth of less than rupees five hundred crore;

               (b) companies other than those covered in clause (ii) of sub-rule (1) and sub-
                   clause (a) of clause (iii) of sub-rule (1), that is, unlisted companies having
                   net worth of rupees two hundred and fifty crore or more but less than
                   rupees five hundred crore.

               (c) holding, subsidiary, joint venture or associate companies of companies
                   covered under sub-clause (a) of clause (iii) of sub-rule (1) and sub-clause
                   (b) of clause (iii) of sub-rule (1), as the case may be:"

It would be noted from the above that where a company does not meet both the listing
criterion [clause (a)] and the net worth criterion [clause (b)], it is required to apply Ind ASs
if, and only if, it is holding, subsidiary, joint venture or associate company of a company that
meets the listing or the net worth criterion. In the given case, XYZ Limited meets neither the
net worth criterion nor the listing criterion. Further, though XYZ Limited is holding
company of PQR Ltd, the latter (i.e., PQR Limited) does not meet the net worth or the
listing criterion. Hence, XYZ Limited is not required to apply Ind ASs (though it can elect to
apply Ind ASs voluntarily).

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