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Accounting and Auditing Update, Issue 5 - Technology PDF

68 Pages·2016·1.7 MB·English
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Accounting and Auditing Update Issue no. 5/2016 | Technology IN THIS EDITION Impact of the new revenue standard on the technology sector p1 Conversation with Mr. Sanjay Puria p11 Key elements of business combinations – contingent consideration, intangible assets and goodwill p19 Share-based payments - key accounting developments p27 Financial Instruments p31 Operating segment p35 Enhanced responsibilities of the audit committee p37 The dilemma of tax exemption for SEZ p41 Base Erosion and Proft Shifting p45 Will GST address the expectations of technology service exporters? p51 Regulatory updates p53 www.kpmg.com/in © 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Editorial Jamil Khatri Sai Venkateshwaran Partner and Head Partner and Head Assurance Accounting Advisory Services KPMG in India KPMG in India In continuance with our revamped series The publication also carries an interview it is coherent and consistent amongst of the Accounting and Auditing Update, section where we speak to a CFO/ countries. Our article summarises the this edition focusses on the technology fnance director of a leading company impact of this guidance with a specifc services sector. from the sector and explore some key reference drawn to the technology accounting and reporting, as well as services sector. Additionally, we The Ind AS (Indian Accounting topical matters relevant to the industry. summarise the expected impact of the Standards) are bringing about a paradigm This month’s issue features an interview Goods and Services Tax requirements on shift in fnancial reporting which is going with Mr. Sanjay Puria, Group Chief the sector. to potentially affect many key metrics of Financial Offcer, WNS. performance. This publication seeks to Finally, apart from our regular round up highlight the expected impact of Ind AS Certain entities in the technology of regulatory updates, this edition of on various topics including how revenue services sector enjoy certain tax the Accounting and Auditing Update recognition would be impacted for a exemptions when they set-up their provides a summary of the concept typical technology services contract facilities in the special economic zones release by the U.S. Securities and on adoption of Ind AS 115, Revenue in India. These tax exemptions affect Exchange Commission on enhanced From Contracts with Customers. Under the computation of current and deferred responsibilities of the Audit Committee business combinations accounting, taxes under Indian GAAP and Ind AS. along with the Indian Exposure Draft on the publication highlights the impact of Our article on this topic highlights the Auditing Standard 260, Communication accounting of contingent consideration, potential impact of such tax exemptions with those charged with governance. types of intangibles recognised in under the new reporting framework. As always we would be delighted to the technology services sector and The sector is also affected by a number receive any kind of feedback or inputs on differences in the approach of goodwill of global developments in the areas of the topics that we have covered. impairment under the current Indian direct and indirect tax. For example, the GAAP, Ind AS and the U.S. GAAP. The Organisation for Economic Co-operation Accounting and Auditing update also and Development issued guidance on discusses accounting of share-based 15 key areas for identifying and curbing payments, fnancial instruments and aggressive tax planning practices (Base segment reporting under Ind AS and Erosion and Proft Sharing) and altering their likely impact on the fnancial the international tax system in a way that statements of companies in this sector. © 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Overview The importance of the technology sector as a critical driver of growth for the Indian economy cannot be overemphasised. The revenue generated from this sector is expected to exceed USD150 billion in in Financial Year (FY) 2015-161, making it one of the largest contributors to the Indian GDP and to employment. The explosive growth witnessed in the e-commerce industry in India over the past couple of years and the emphasis laid on e-governance, ‘Make in India’ as well as the ‘Start-up India’, are aiding the technology sector in India to assume a leading position, even within the domestic industry. Historically, companies that operate in the technology services sector in India have been better aligned in terms of adoption of leading practices in accounting and reporting, governance, etc. Since this sector led the clutch of Indian companies that went public in developed markets such as the U.S., it necessitates compliance with higher accounting, reporting and governance norms. Additionally, many of the global multinational companies (MNCs) in the technology and consultancy sector have made India their second home, employing a huge workforce in their captive centers here, and bringing to the country some of the well-known practices from around the world. The changes introduced by the Companies Act, 2013 and the adoption of Ind AS are developments that are expected to assist companies in the sector to align even more closely with leading practices in the accounting, reporting and governance arena. Recent developments such as the proposed introduction of the Goods and Services Tax and the recently introduced Base Erosion and Proft Shifting Rules, Advance Pricing Agreement, etc. also seem to be in line with global practices in taxation that require companies to carefully review the impact of such legislation on their operations and prepare for a smooth transition/adoption. 1. NASSCOM publication ‘The Information Technology- Business Process Management sector in India – Strategic Review 2015’ © 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1 Impact of the new revenue standard on the technology sector This article aims to: – Highlight key impact areas of the new revenue standard – Highlight key differences between the new standard and the existing IFRS and U.S. GAAP guidance © 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2 What is this about? Recognition and the Technical Guide has recommended to the Ministry of on Revenue Recognition for Software Corporate Affairs (MCA) that Ind AS In May 2014, the International provide guidance on revenue recognition. 115 be deferred in line with IFRS 15. Accounting Standards Board (IASB) and In India, Ind AS 115, Revenue from Consequently, on 24 September 2015, Financial Accounting Standards Board Contracts with Customers, is the the Institute of Chartered Accountants (FASB) published their new joint standard standard on revenue recognition that is of India has issued two exposure drafts on revenue recognition - IFRS 15 and converged with IFRS 15. on Ind AS 11, Construction Contracts and FASB Topic 606 Revenue from Contracts Ind AS 18, Revenue, which will form part with Customers, replacing the existing Internationally, under the road map for of the suite of Ind AS standard available revenue guidance in both U.S. GAAP and implementation, the new standard is for adoption. IFRS. effective for annual periods beginning on or after 1 January 2018 for entities The new standard moves away from Five-step model applying IFRS and for annual periods the industry and transaction specifc beginning on or after 15 December 2017 The core principle of the new standard requirements under U.S. GAAP (which for public business entities and certain is that revenue should be recognised are also used by some IFRS preparers in not-for-proft entities applying U.S. GAAP. when (or as) an entity transfers control the absence of specifc IFRS guidance), Early adoption is permitted only under of goods or services to a customer at the and contains a single model that will be IFRS. amount to which the entity expects to applied while accounting for contracts be entitled. To achieve the core principle, with customers across all industries, Ind AS 115 is currently applicable for the new standard establishes a fve including real estate. Under current periods beginning on or after 1 April step model that entities would need to Indian GAAP, AS 7, Construction 2016. The National Advisory Committee apply to determine when to recognise Contracts and AS 9, Revenue on Accounting Standards (NACAS) revenue, and at what amount. Step 1 Step 2 Step 3 Step 4 Step 5 Identify the Identify Determine the Allocate the Recognise contract performance transaction transaction revenue obligations price price Five step model Key requirements Step 1 Contract is considered in scope if it is legally enforceable and certain other criteria such as collectability, commercial substance, rights and obligations are met. Step 2 Performance obligation represents goods or services that are capable of being distinct and are distinct within the context of the contract. Step 3 Transaction price is the consideration the company expects to receive under the contract. This should include an assessment of variable consideration, non-cash consideration, deferred payment terms and amounts payable to the customers. Step 4 Allocate the transaction price to identifed performance obligations in proportion to stand-alone selling prices computed based on observable prices or management estimates. Step 5 Recognise revenue either at a point or over a period of time depending on when the customer obtains control of the transferred goods or services. © 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3 How does this impact you? Example: Accounting for contract Transformation – involves activities revenue and costs under the new pertaining to upgrading the customer’s While the overall principles remain the standard legacy application platforms to the latest same, the new standard is expected to industry standards. This would entail have signifcant impact on the accounting Company X enters into a multi-year of revenue by entities in the technology IT services contract with a customer implementation services, migration, sector, specifcally in view of the detailed developing interfaces and testing the to render transition, transformation, guidance in steps 2 and on identifying end solution. development and support services. separate components and allocating the The broad scope of the services are as Development - involves building certain transaction price. below: computer software (IP which would be owned by customer) to assist What is in this for you? Transition – includes activities to the customer in automating service transfer maintenance of all in-scope This article analyses some of the desk functionalities and other manual applications to company X’s governance frequent service offerings by companies processes. in the technology sector and the impact and delivery model. Deliverables include of Ind AS 115 on accounting for such documentation of existing processes Support – involves maintenance transactions. and defning the new process that will activities (including bug fxes) for all be followed for service delivery during a in-scope applications over the contract steady state. period of three years and adherence to prescribed Service Level Agreements (SLAs). The charges under the contract for the services are as below: Service Amount in INR Service Amount in INR Transition Nil Development 15,000,000 Transformation 10,000,000 Support 40,000,000 Under the terms of the contract, pertains to costs which would have been Accounting for contract company X is also required to set up a incurred irrespective of whether or not modifcations near shore facility from which services the contract was obtained. A contract modifcation may either be would be rendered to the customer. for a change in scope of services or In addition to the above mentioned Step 1 price or both. Under the new standard, a payments, the customer is also required contract modifcation is accounted for as to pay an upfront fee of INR2,000,000, Identifcation of the contract with a separate contract if distinct goods and intended to compensate company X for the customer services are added to the arrangement, the initial set up costs incurred by it to A contract exists if it is considered to and if those goods and services are set up the near shore facility. be legally enforceable and certain other priced at their stand-alone selling Company X has incurred costs criteria discussed earlier are met. Legal prices. Else, contract modifcations are amounting to INR800,000 to obtain the enforceability may be either through oral accounted for either prospectively or contract. Of this, INR500,000 pertains to or written arrangements, depending on by a cumulative catch-up adjustment. sale commissions paid by the company the customary practice. In this example, No such guidance is provided explicitly to its sales personnel who were company X has signed a contract for in the existing standard on revenue instrumental in securing the contract. services which demonstrates legal recognition. Company X believes that these costs enforceability. Hence, a contract is are capable of being recovered under deemed to be in existence for the the contract. The balance (INR300,000) purposes of this standard. © 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4 Step 2 Identifcation of performance obligations The new standard requires an entity to identify the performance obligations, i.e. the unit of account for revenue recognition. A promised good or service would qualify to be a performance obligation if both the below mentioned criteria are met: Criteria Indicators Capable of being • Sold by the entity separately to other customers distinct • Capable of being used by the customer independently in a manner that generates economic benefts • Capable of being used in conjunction with other goods or services sold separately by the entity or other vendors Distinct within • The entity is not using the services as an input to deliver the output promised under the the context of the contract contract • The services do not signifcantly modify or customise other services promised under the contract • The customer has the ability to procure each service independently without signifcantly affecting the utility of other services promised under the contract If a promised service under the bundled arrangement qualifes to be a of the promised goods and services contract does not qualify to be a performance obligation. under the contract (including implied and separate performance obligation, the customary promises). Please see below Identifcation of a performance obligation entity would need to combine such for an indicative evaluation that company requires signifcant management services with other services until the X could perform to identify performance judgement and entails an assessment obligations: Performance obligation Points for evaluation Transition services • Are the transition deliverables owned by the customer? • Are they robust enough to enable a new service provider to gain an in-depth understanding of the customer’s IT environment? Transformation services • What is the customer’s objective of availing such services? These could include reduction in capital assets, shift of operational responsibility. Are these objectives capable of being met even if other services are not rendered? Transition, transformation, • Does company X in the normal course of business render similar services on a development and support standalone basis to customers? services • Is rendering of the service independent of the other services to be rendered under the scope of the contract? • Is the customer capable of consuming the associated benefts of the service independent of other services under the contract? © 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 5 Comparison with current IFRS current U.S. GAAP. The evaluation no resolved (a downward adjustment). longer depends entirely on whether Under this example, the transaction price Currently, limited guidance is available the entity or another entity sells an is determined to be INR67 million (INR10 under IFRS to account for multiple identical or largely interchangeable million + INR15 million + INR40 million + deliverable contracts and these are good or service separately, or whether INR2 million). accounted for by analogy to the test in the delivered item can be resold by the IFRS Interpretations Committee (IFRIC) Under the new standard, consideration customer, to support a conclusion that 18, Transfer of Assets from Customers. is measured at the amount to which the a good or service is distinct. Therefore, The interpretation provides two entity expects to be entitled, rather than potentially more goods can qualify as indicators (not exhaustive): at fair value. distinct under criterion one than under • the service has stand-alone value to current U.S. GAAP. However, an entity the customer also has to evaluate criterion two. Step 4 • the fair value of the service can be Step 3 measured reliably. Allocation of transaction price In contrast, Ind AS 115 provides Determine the transaction price The standard requires that company X comprehensive guidance on identifying Transaction price is the consideration allocate the transaction price to each performance obligations. In practice, this company X expects to receive under the performance obligation in proportion could result in goods or services being contract. This includes an estimate of to its stand-alone selling prices, i.e. unbundled or bundled more frequently the variable consideration and evaluation the price at which company X would than under current practice. of embedded fnancing components, sell the promised service separately if any. Variable pricing is included in to a customer. See table below for an Comparison with current U.S. the transaction price only if it is highly illustration of the methods used to GAAP probable that a signifcant reversal in determine the stand-alone selling prices. Criterion one (capable of being distinct) is the amount of cumulative revenue similar, but not identical, to the stand- recognised will not occur when the alone value criterion required under associated uncertainty is subsequently Is an observation price available Yes No Use the observable price Estimate price Adjusted market Expected cost plus a Residual approach assessment approach margin approach (only in limited circumstances) Source: KPMG’s publication Issues in Depth – Revenue from Contracts with Customers September 2014 © 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Most books are stored in the elastic cloud where traffic is expensive. For this reason, we have a limit on daily download.