Several entities have been impacted by the COVID-19 pandemic. As per accounting prospective both Ind AS 36, ‘Impairment of assets’ and AS 28 ‘Impairment of Assets’, require that management consider at each report date whether there is any indication that an asset may be impaired. Ind AS 36 and AS 28 include both internal and external indicators to identify if an impairment review is required. <\/p>\n\n\n\n
Under Ind AS 36 and AS 28, cash flows used for impairment\ntesting should be based on a business plan that reflects the expected and most\ncurrent impacts of COVID-19. All entities may have updated their forecasts and\nplans in response to current conditions. When measuring value in use, an entity\nshould base cash flow projections on the most recent financial\nbudgets\/forecasts approved by management. Reliance on a previously approved\nforecast might not be appropriate in the current market conditions. There\nshould be consistency of assumptions and forecasts applying to impairment tests\nof different assets required by this and other standards. For assumption refer\nInd AS and AS <\/p>\n\n\n\n
Under Ind AS 36 as well as AS 28, the discount rate should\nreflect the current market assessments of time value of money for the periods\nuntil the end of the useful life of the asset\/cash-generating unit (‘CGU’),\nmarket risks, geographic risks, and any other risks specific to the asset\/CGU\nfor which the future cash flow estimates have not been adjusted, as well as\nother factors that market participants would reflect in pricing the expected\nfuture cash flows. As a starting point in calculating such a rate, a company\nmay use the weighted average cost of capital.<\/p>\n\n\n\n
While the established methods for calculating the cost of\ncapital should continue to be used, a re-assessment of each input into the\ncalculation and assessment of the overall result is needed. In the current\nenvironment, certain observable inputs that go into the calculation of the cost\nof capital (such as risk-free rate) have declined. For many companies, the cost\nof debt will have increased, but this needs to be considered on a\ncompany-by-company basis. Reputed companies with good credit ratings might, by\ncontrast, have seen a decline in their cost of debt in line with sovereign\ndebt. At the same time, increased volatility and other indicators point to an\nincrease in the cost of equity. Also, the heightened focus on liquidity might,\nfor some industries, such as real estate, infrastructure and hospitality,\nresult in an optimal capital structure that is more weighted towards equity\nthan in the past.<\/p>\n\n\n\n
All in all, this means that, for most companies and sectors, the\ncost of capital is presently higher than it was in 2019. Companies should\nconsider this when completing impairment assessments in 2020.<\/p>\n\n\n\n
As a consequence of COVID-19, entities might have impairment\nindicators for assets, CGUs and groups of CGUs. The assets and CGUs will then\nbe tested for impairment under Ind AS 36. These CGUs might include goodwill, or\nthey might be part of a larger group of CGUs that include goodwill. A question\narises as to which level an entity tests first for impairment: goodwill and\nthen the underlying CGUs (‘top down’); or the CGUs and then related goodwill\n(‘bottom up’).<\/p>\n\n\n\n
Ind AS 36 requires a ‘bottom up’ approach to impairment testing.\nThe impairment test is a two-step process:<\/p>\n\n\n\n
Step 1<\/strong>: Test the individual asset, or related CGU if the recoverable amount for the individual asset cannot be determined. Any impairment should be recognised at this step, to reduce the carrying amount to the recoverable amount. Testing performed at the CGU level would include goodwill to the extent that goodwill is monitored at this level. The two-stage approach ensures that, where there are indicators\nof impairment, assets and CGUs within a group of CGUs are tested separately for\nimpairment first, with any impairment recognised before the larger group\nincluding goodwill is tested.<\/p>\n\n\n\n Due to the different levels of impairment testing required, it\nis important, under Ind AS 36, that CGUs are correctly identified as the\nsmallest group of assets that generate cash inflows that are largely\nindependent of each other. Impairments should not be masked by incorporating\nadditional assets and cash flows from the same operating segment.<\/p>\n\n\n\n Query<\/strong> During the current financial year\n2013-14, the company has recorded certain amount of unabsorbed depreciation and\nunabsorbed losses in its books of accounts. Deferred Tax Liability (DTL) on\ntiming difference on depreciation of earlier years is also recognized in the\nbalance sheet.<\/p>\n\n\n\n Keeping in view the uncertainty of future\nprofitability and history of recent losses, the company has not created\nDeferred Tax Asset (DTA) on the unabsorbed depreciation and business losses\ncomplying with the provisions contained in AS 22. Whether the company is\ncorrect in not creating DTA for above transaction? If not, what should be the\ncorrect accounting treatment?<\/p>\n\n\n\n Answer<\/strong> As per the provisions contained in para\n8, 15, 17 and 18 of AS 22 Accounting for Taxes on Income, <\/em>unabsorbed\ndepreciation and carry forward of losses which can be set off against future\ntaxable income are considered as timing difference and to be recognized as DTA\non consideration of concept of prudence. Further, DTA should be recognized in\nthe books of accounts only where there is virtual certainty that future taxable\nincome will be realized in future against such DTA.<\/p>\n\n\n\n However, in consideration of previous\npronouncements in respect of creation of DTA\/ DTL, a DTA can be created to the\nextent the future taxable income will be available from future reversal of any\nDTL recognized at the balance sheet date. In such a case, it is not necessary\nto consider the virtual certainty with supporting evidence and DTA should be\nrecognized to the extent of future reversal of DTL. The reversal of timing\ndifference can be construed as sufficient future taxable income and\naccordingly, the company should recognize DTA in its books of accounts to the\nextent of DTL which is capable of reversal in future.<\/p>\n\n\n\n Since the company has not recognized the\nDTA in its books of accounts, it will be treated as an error in the preparation\nof financial statements and should be accounted as per AS 5 Net Profit\nor Loss for the Period, Prior Period Items and Changes in Accounting Policies.<\/em> Further,\nthe company should make the required disclosures as contained in para 27 to 32\nof AS 22 and para 15 of AS 5.<\/p>\n\n\n\n References :- <\/strong> EAC opinion\nQuery 24, Volume 34<\/p>\n\n\n\n Query<\/strong> A Ltd. treated the foreign operations\nconducted through overseas subsidiaries as integral foreign operations as per\nAS 11 and accounted accordingly. Whether the accounting treatment adopted by A\nLtd. is correct?<\/p>\n\n\n\n Answer<\/strong> As per para 18 of AS 11, a foreign\noperation may be defined as integral to the operations of reporting enterprise\nif it carries on the business as if it is an extension of reporting\nenterprise’s operation. The change in exchange rate affects the individual\nmonetary items held by foreign operation rather than the reporting entity’s net\ninvestment in that operation. While non- integral foreign operation accumulates\ncash and incurs expense, generates income, all in its local currency. The change\nin the exchange rates affects the reporting enterprise’s net investment in the\nnon- integral foreign operation rather than individual monetary items held by\nforeign operation.<\/p>\n\n\n\n Further, para 20 of standard prescribes\nfew indications for classifying a foreign operation as non- integral foreign\noperation. Many of times, the factual information is not sufficient for\nclassifying each operation and hence, it is a matter of judgment to determine\nthe appropriate classification. Thus, A ltd. should consider the facts and\ncircumstances specific to it and should apply the criteria as specified in the\nstandard to determine whether to classify the foreign operation as integral or\nnon- integral.<\/p>\n\n\n\n References :- <\/strong> EAC opinion Query 37, Volume 34 <\/p>\n","protected":false},"excerpt":{"rendered":" Several entities have been impacted by the COVID-19 pandemic. As per accounting prospective both Ind AS 36, ‘Impairment of assets’ and AS 28 ‘Impairment of Assets’, require that management consider at each report date whether there is any indication that an asset may be impaired. Ind AS 36 and AS 28 include both internal and external indicators to identify if […]<\/p>\n","protected":false},"author":3,"featured_media":338,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_links_to":"","_links_to_target":""},"categories":[17,14],"tags":[81,113,114],"class_list":["post-334","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-assurance","category-general","tag-accounting-standard","tag-as-11","tag-as-22"],"yoast_head":"\n
Step 2<\/strong>: Test the CGU or group of CGUs including goodwill. This second stage is a comparison of the recoverable amount with the restated carrying amount after the step 1 impairment test. <\/p>\n\n\n\nAS 22: Reversal of timing difference can\nbe construed as future taxable income to recognize deferred tax asset<\/strong><\/h3>\n\n\n\n
A Company say, B Ltd. is engaged in the business of petroleum refining and its products are sold in Oil Marketing Companies. The sale price of products depends on the prices prevailing in the international market and applicable foreign exchange rates. The company is incurring business losses from the last two financial years due to external factors like volatility in foreign exchange rates, etc. <\/p>\n\n\n\n
No, the company is not correct in its accounting treatment. <\/p>\n\n\n\nAS 11: Consider the substance of case to\nclassify a foreign operation as integral or non- integral<\/strong><\/h3>\n\n\n\n
A Company say, A Ltd. is engaged in the business of exploration and production of oil and gas and other hydrocarbon related activities outside India. A Ltd. has acquired the Participating Interest (PI) in joint ventures through its wholly owned overseas subsidiary company named B Ltd. to conduct the business activities. B Ltd. operates with a substantial degree of autonomy over its operation and does not affect the day to day functioning of A Ltd. A Ltd. received its share of profit in the form of dividends and the financial statements of B Ltd. are consolidated complying with the provisions contained in AS 21 Consolidated Financial Statements.<\/em> <\/p>\n\n\n\n
In order to determine the accounting treatment of foreign operation, it is important to understand whether it is integral or non- integral foreign operation. The answer to above question can be determined by analyzing the provisions contained in AS 11 The Effects of Changes in Foreign Exchange Rates<\/em>. <\/p>\n\n\n\n