FRRB observations on non compliance in Ind AS financial statements

 The article titled, "Non-compliances observed in the Ind AS Financial Statements pertaining to Assets in Balance Sheet," was contributed by the Financial Reporting Review Board (FRRB) of the ICAI. The FRRB conducts reviews of General-Purpose Financial Statements to identify non-compliances with the Indian Accounting Standards (Ind ASs), the Companies Act, 2013, and other relevant statutes.

The article details several non-compliances observed in the presentation and disclosure of Assets in the Balance Sheet under the Ind AS framework, aiming to inform and guide members on critical areas of concern.

Key observations related to assets include:

1. Property, Plant and Equipment (PPE)

   • Non-compliance: Omission of the disclosure of the depreciation method used by the company in its accounting policy was noted.
   • Principle Violated: This omission fails to comply with the requirements of Paragraph 73(b) of Ind AS 16 and Part C of Schedule II to the Companies Act, 2013.

2. Investment Property

   • Incorrect Classification: Items such as furniture & fixtures, plant & equipment, and office equipment were incorrectly included in the disclosure and fair value calculation of Investment Property.
   • Principle Violated: Ind AS 40 defines Investment Property only as the property (land or a building, part of a building or both) held to earn rentals or for capital appreciation, and not items like plant and equipment.
   • Omitted Disclosures: The company failed to disclose amounts recognized in the Statement of Profit or Loss for rental income from investment property and the depreciation method used for it, violating requirements under Paragraphs 75(f) and 79(a) of Ind AS 40.

3. Intangible Assets: Research & Development (R&D) Costs

   • Improper Classification: The company classified R&D expenditure into revenue expenditure (charged to the Statement of Profit and Loss) and capital expenditure (included in Property, Plant and Equipment).
   • Principle Violated: Ind AS 38 requires classifying R&D expenditure into the research phase and development phase, rather than classifying them simply into revenue and capital expenditure. Research expenses must be recognized as expenses (Paragraph 54, Ind AS 38). Development costs should only be capitalized as intangible assets if they meet the specific recognition criteria (Paragraph 57, Ind AS 38), not as property, plant and equipment.

4. Investments

   • Inconsistent Measurement Basis: There was an inconsistency where the company stated an investment in equity shares was measured 'at cost' in one note, but subsequently described the valuation as being at 'amortised cost' in the Fair Value Measurement Hierarchy note.
   • Principle Violated: Investment in equity instruments (other than those covered under Ind AS 27 for group companies) should generally be measured at fair value through profit or loss (FVTPL) or fair value through other comprehensive income (FVOCI), as per Ind AS 109.

5. Financial Assets (FVOCI)

   • Incomplete Accounting Policy: The policy for financial assets measured at Fair Value through Other Comprehensive Income (FVTOCI) was deficient. It stated the objective was achieved by 'collecting contractual cash flows'.
   • Principle Violated: Paragraph 4.1.2A of Ind AS 109 requires that a financial asset must be held within a business model whose objective is achieved by both ‘collecting contractual cash flows’ and ‘selling financial assets’ for it to be classified as FVTOCI. The policy omitted the objective of 'selling financial assets'.

6. Inventory

   • Omission of Disclosure of Cost Formula: The company disclosed its valuation policy (lower of cost and estimated net realisable value) but failed to disclose the cost formula used to determine the cost of inventories.
   • Principle Violated: Paragraph 36(a) of Ind AS 2 requires disclosure of the accounting policies adopted in measuring inventories, including the cost formula used.