Study on Compliance of Financial Reporting Requirements

GV March 17, 2025
Study on Compliance of Financial Reporting Requirements & Accounting Standards

Study on Compliance of Financial Reporting Requirements

We are pleased to share a valuable resource titled Study on Compliance of Financial Reporting Requirements, compiled meticulously from the records of the Financial Reporting Review Board (FRRB). This study provides deep insights into the common compliance issues and best practices in financial reporting, making it an essential reference for accounting professionals, auditors, and corporate entities.

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Key Highlights of the Study:

  • Detailed analysis of compliance with financial reporting standards
  • Common deficiencies identified by the FRRB
  • Recommendations for improved reporting practices
  • Useful for Chartered Accountants, auditors, and financial managers

Feel free to download and use this study material to enhance your understanding and ensure better compliance with financial reporting requirements.

Accounting Standards Overview

Emphasizes the prudence principle, requiring the provision for all known liabilities and losses, even if the amount is uncertain. This is highlighted in the context of entities not following AS 30, where they should mark outstanding derivative contracts to market and provide for losses. Paragraph 17 of AS 1 is quoted to explain prudence.

  • Paragraph 11: Defines accounting policies as the specific accounting principles and methods adopted by an enterprise in preparing and presenting financial statements.
  • Examples of disclosed accounting policies:
    • Treatment of sales (net of discounts, including excise duty, excluding VAT/sales tax).
    • Recognition of income from electricity and rentals on an accrual basis.
    • Valuation of Jatropha seeds and biofuel by the Board of Directors.

Requires inventories to be valued at the lower of cost and net realizable value. Paragraph 5 of AS 2 is cited.

  • Paragraph 3.2: Net realizable value is defined as the estimated selling price less estimated costs of completion and sale.
  • Observations: Instances where companies valued inventories at the lower of cost and market value instead of net realizable value, potentially not deducting costs of completion and sale.
  • Paragraph 7: Cost of purchase includes duties and taxes not subsequently recoverable.
  • Paragraph 26 read with paragraph 16: Requires disclosure of accounting policies for measuring inventories, including the cost formula used (FIFO or weighted average). The formula should reflect a fair approximation of the cost incurred.
  • Additional Observations:
    • Valuation of work-in-progress and stores at cost or under.
    • Instances where valuation was stated as "as certified by the management," which could mislead users about the auditor's role.
  • Exclusions: Shares, debentures, and other financial instruments held as stock-in-trade. Footnote 1 to AS 13 indicates their accounting and disclosure are similar to current investments.
  • Paragraph 21: Requires separate reporting of major classes of gross cash receipts and payments from investing and financing activities, with exceptions in paragraphs 22 and 24. The report found netting of loans, deposits, and investments.
  • Paragraph 30: Classifies cash flows from interest and dividends:
    • For financial enterprises: Operating activities.
    • For others: Interest paid (financing), interest/dividends received (investing), dividends paid (financing).
  • Cash Equivalents: Amount in the Cash Flow Statement should agree with the Balance Sheet, excluding items with maturity over three months.
  • Paragraph 15(e): Cash advances and loans to third parties (non-financial) are investing activities. Misclassification as financing activities noted for loans to subsidiaries.
  • Investing Activities: Should reflect gross expenditure for resources generating future benefits. Reimbursements by co-development partners for fixed assets should be under financing activities.
  • Paragraph 37: Requires separate presentation of aggregate cash flows from acquisitions and disposals of subsidiaries, classified as investing activities.
  • Revised Schedule VI: Suggests changing "Cash and cash equivalents" to "Cash and bank balances" to accommodate items not meeting AS 3 definition.

Paragraph 9.2: Requires disclosure of the nature and estimated financial effect of contingent losses not provided for, unless the possibility of loss is remote. If a reliable estimate cannot be made, this fact should be disclosed. A case noted where legal proceedings suggested a contingent loss requiring disclosure.

  • Paragraph 5: All income and expense items recognized in a period should be included in net profit or loss, unless an Accounting Standard requires or permits otherwise. Instances noted of bonus and income tax adjustments debited to Reserves and Surplus.
  • Paragraphs 4.1 and 12: Define ordinary activities as those undertaken as part of the business and related activities.
  • Paragraph 21: When the outcome can be reliably estimated, contract revenue and costs should be recognized by stage of completion. Expected losses recognized immediately.
  • Paragraph 24: Often referred to as the percentage of completion method, matching revenue with costs incurred.
  • Paragraph 38: Requires disclosure of revenue recognized, methods used to determine contract revenue, and stage of completion. A case noted where the method for stage of completion was not disclosed.
  • Paragraph 12: For rendering services, performance should be measured under completed service or proportionate completion method when no significant uncertainty exists. Non-compliance noted in subscription revenue recognition.
  • Paragraph 9.2: Revenue recognition postponed for claims (e.g., escalation, incentives) if ultimate collection is uncertain. Incorrect recognition of insurance claims noted.
  • Paragraph 13: Royalties and dividends recognized when no significant uncertainty exists; dividends when the right to receive payment is established. Dividend income recognized on receipt basis noted.
  • Paragraph 11: Conditions for revenue from sale of goods include transfer of property and risks/rewards. Lack of clarity in disclosed policies noted.
  • Explanation to Paragraph 10: Turnover disclosure (gross and net of excise duty) on profit and loss statement. Sales including other taxes and excise duty not deducted observed.
  • Observation: Adjusting gain/loss on hedging contracts against revenue not aligned with AS 9.
  • Companies revaluing only certain land and buildings without disclosing the basis violated Paragraph 27.
  • Non-disclosure of revaluation details per Paragraph 37(iii) (nature, effective date, independent valuer involvement) noted.
  • Paragraph 18: Depreciation policy for leased assets consistent with owned assets per AS 6. If ownership not certain, fully depreciate over shorter of lease term or useful life.

(No specific details provided in the excerpts beyond its listing).

  • Paragraph 14: Grants related to specific fixed assets presented as a deduction from gross value or deferred income over useful life. Instances noted where grants taken to Capital Reserve and amortized to P&L.
  • Paragraph 15: Revenue grants recognized systematically in P&L to match costs, shown under 'other income' or deducted from expense.
  • Paragraph 23(ii): Disclosure of nature and extent of grants, including non-monetary assets at concessional rates. Inadequate disclosure noted.
  • Paragraph 16: Grants as promoters’ contribution credited to capital reserve. Policy treating capital subsidies as income upon sanction noted.
  • Incorrect policies valuing long-term investments at cost with provision for diminution only "in the perception of management" or "permanent diminution." Objective assessment needed.
  • Current investments valued at lower of cost and fair value, determined individually or by category per Paragraph 31.
  • Paragraph 26: Distinct classification as current and long-term.
  • Paragraph 35(e): Disclosure of quoted and unquoted investments’ aggregate amounts and market value of quoted investments.
  • Provision for decline other than temporary made individually.
  • Paragraph 3.1: Investments defined as assets for income, appreciation, or benefits, excluding stock-in-trade. Contributions for guarantees incorrectly classified.
  • Footnote 1: Shares, debentures held as stock-in-trade accounted similarly to current investments.
  • General Instructions to Revised Schedule VI require separate disclosure of other income items like interest, dividends, and net gain on sale of investments.
  • AS 27 Paragraph 31: Interests in severely restricted jointly controlled entities accounted for as investments under AS 13.
  • Paragraph 38: Goodwill amortized systematically over useful life, not exceeding five years unless justified. Non-systematic amortization noted.
  • Paragraph 43: Disclosures required in first financial statements post-amalgamation.
  • Paragraph 44: Additional disclosures for pooling of interests method, including shares issued and treatment of differences. Incomplete disclosures noted.
  • Paragraph 42: Statutory treatment of reserves followed with specific disclosures if differing from standard.
  • Paragraphs 73, 75, 76: Actuarial assumptions for defined benefit plans unbiased and compatible; valuation not exceeding three years.
  • Applicable to all employer-employee relationships, regardless of formal agreements, e.g., seconded employees from holding company.
  • Paragraph 120(g): Disclosure of total expense in P&L and line item(s).
  • Auditors need not qualify deviations from AS 15 for RBI prudential treatment if disclosed and quantified, using Emphasis of Matter (SA 706).
  • Paragraph 3: Defines borrowing costs.
  • Paragraph 3.2: Defines a qualifying asset as one taking substantial time to get ready for use or sale.
  • Paragraphs 6, 19, 23: Capitalization of borrowing costs attributable to qualifying assets. Weighted average rate for general borrowings. Policy should specify rate.
  • Observations: Net cost of derivative transactions added to borrowing cost; policy silent on capitalization rate for general borrowings.
  • Paragraph 40: Disclosure of segment revenue, result, assets, liabilities, acquisition costs, depreciation/amortization, and significant non-cash expenses.
  • Paragraph 48(b) and (c): Total carrying amount of segment assets and cost to acquire segment assets. Non-disclosure noted.
  • Paragraph 38: Single segment entities should disclose this fact. Non-compliance noted.
  • Paragraph 4: Segment information based on consolidated statements if both consolidated and separate statements presented.
  • Observation: Company with revenue from different activities considered single segment.
  • Paragraph 23: Disclosure of related party name, relationship, transaction nature, volume, outstanding items, and provisions. Omissions noted in 'Related Party Disclosures' section.
  • Paragraph 27: Aggregation of similar transactions allowed unless obscuring significant transactions. Inappropriate aggregation noted.
  • Paragraph 24: Examples include guarantees and management contracts. Non-disclosure of corporate/personal guarantees noted.
  • Paragraph 3: Defines related parties, including holding companies, subsidiaries, associates, and key personnel.
  • Observations: Mixed units of measurement (e.g., USD, Rupees) and misleading "certified by management" descriptions noted.
  • Paragraph 17: Disclosure of future minimum lease payments under non-cancellable operating leases.
  • Paragraph 18: Depreciation policy for leased assets consistent with owned assets per AS 6. If ownership uncertain, depreciate over shorter of lease term or useful life.
  • Paragraph 26: Diluted EPS adjusts profit and shares for dilutive potential equity shares. Incorrect calculations noted.
  • Paragraph 41: Anti-dilutive potential equity shares ignored in diluted EPS.
  • Paragraphs 4.4, 4.5: Define potential equity shares and share warrants.
  • Paragraph 8: Basic and diluted EPS presented with equal prominence. Non-disclosure of diluted EPS when different from basic noted.
  • Paragraph 48(a) and (b): Disclosure of numerators and denominators for EPS. Incorrect terminology noted.
  • Paragraph 13: Line-by-line combination of parent and subsidiaries’ financial statements. Inconsistencies noted.
  • Paragraph 22: Subsidiary results included until relationship ceases. Lack of disclosure noted.
  • Paragraph 29(a): List of subsidiaries with name, country, ownership, and voting power. Incomplete disclosure noted.
  • Paragraph 27: Deferred tax assets/liabilities recognized for timing differences, subject to prudence (paragraphs 15-18).
  • Observation: Direct adjustment of hedge gains/losses to reserves net of deferred tax questioned.
  • Guidance Note on MAT credit: Presented under 'Loans and Advances' with evidence of realization.
  • Paragraph 7: Equity method used except for near-term disposal or severe restrictions.
  • Paragraph 3.8: Equity method adjusts carrying amount for post-acquisition changes.
  • Observation: Investments in associates disclosed under Non-current Investments without equity method.

(No specific details provided beyond listing in context of a slump sale).

  • Paragraph 41: No recognition of intangible assets from research; expense when incurred.
  • Paragraph 44: Criteria for recognizing development phase intangible assets.
  • Paragraph 62: Carried at cost less amortization and impairment.
  • Paragraph 63: Amortization over useful life, presumed not to exceed ten years.
  • Observation: Capitalizing perpetual "Right of Way" without amortization incorrect.
  • Paragraph 31: Severely restricted jointly controlled entities accounted under AS 13.
  • Paragraph 28: Proportionate consolidation in consolidated statements.
  • Observation: Joint ventures disclosed under Non-current Investments instead of proportionate consolidation.
  • Paragraph 14: Provisions recognized for present obligations with probable outflow and reliable estimate.
  • Paragraph 10.6: Present obligation probable based on evidence.
  • Observation: Bank-claimed liabilities incorrectly shown as contingent.
  • Paragraph 68: Disclosure of contingent liabilities’ nature and financial effect unless remote.
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