Regulator pulls up companies, auditors for flouting Ind As norms
April 3, 2023 06:00 IST
In a circular issued after a recent review, the regulator listed out instances of non-compliance “for the urgent attention of the company managements, audit committees and the statutory auditors”.
The National Financial Reporting Authority (NFRA) has pulled up a section of India Inc, including “a large listed firm”, for not complying with Indian Accounting Standards (Ind AS) regarding measurement of “revenue from contracts” with customers and trade receivables. The regulator noted that these firms continue to account for these two inflows at “fair value”, while Ind AS requires them to be recognised in many cases at transaction value.
In a circular issued after a recent review, the regulator listed out instances of non-compliance “for the urgent attention of the company managements, audit committees and the statutory auditors”.
NFRA monitors compliance with accounting standards by companies as part of its review of published financial statements of companies.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a given date.
“The transaction value could be significantly different from the fair value in many cases, as the actual transaction may take place later, sometimes with considerable delays. Ind As requires such change in value to be recognised at the initial stage of accounting itself,” said Ved Jain, noted chartered accountant and former president of Institute of Chartered Accountants of India.
The NFRA said many companies “wrongly state” that revenue is recognised and measured at fair value of the consideration received or receivable. “Para 46 of Ind AS 115 (concerning accounting of) ‘revenue from contracts’ with customers requires that the entity shall recognise as revenue the amount of the transaction price, excluding the estimates of variable consideration that is allocated to that performance obligation,” it said.
While many listed companies follow the correct policy, the NFRA said that a large listed firm too has followed erroneous accounting policy, but did not divulge the name of the company.
Further, the regulator noted that many companies in their accounting policies erroneously state that the trade receivables are initially recognised (or measured) at fair value, which is contrary to the requirements of Ind AS 109.
Trade receivables are financial assets within the scope of measurement requirements, the NFRA said, adding that all financial assets are required to be initially measured at fair value plus or minus the transaction costs.
However, as an exception to these principles, financial assets in the form of trade receivables, shall be initially measured (initial recognition amount) at their transaction price (as defined in Ind AS 115) unless it contains a significant financing component determined in accordance with Ind AS 115 (or when the entity applies the practical expedient in accordance with para 63 of Ind AS 115).
“The above instances of wrong accounting policies by a few companies reflect inadequate understanding of the measurement and disclosure requirements of the relevant Ind AS,” the NFRA said, adding that all listed companies and other entities falling with the domain of NFRA which are required to follow Ind AS are hereby advised to comply with the provisions of Ind AS 115 and Ind AS 109.
The auditors of these companies are required to ensure strict compliance, in the performance of their audits, with the Ind AS provisions as brought out above, it further said.
Set up in 2018, NFRA regulates auditors of listed and large firms and has auditors of over 8,000 companies under its jurisdiction.
[The Financial Express]
