National Financing Authority issues guidelines for correct disclosure of Accounting Policies
The National Financial Reporting Authority ( “NFRA”) through a circular has issued instances of non-compliance of Indian Accounting Standards (Ind ASs) on Accounting Policies for measurement and disclosure of Revenue from Contracts with Customers and Trade Receivables.
Applicability:
It applies to-
1. Listed companies
2. Unlisted companies specified in Rule 3 of NFRA Rules, 2018 which includes :
a) unlisted public companies having paid-up capital of not less than Rs 500 crores or having annual turnover of not less than Rs 1000 crores or having, in aggregate, outstanding loans, debentures and deposits of not less than Rs 500 crores as on the 31st of March of immediately preceding financial year.
b) insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act for the time being in force.
c) any body corporate or company or person, or any class of bodies corporate or companies or persons, on a reference made to the Authority by the Central Government in public interest.
d) a body corporate incorporated or registered outside India, which is a subsidiary or associate company of any company or body corporate incorporated or registered in India, if the income or net worth of such subsidiary or associate company exceeds 20% of the consolidated income or consolidated net worth of such company or the body corporate.
Key Highlights :
- As per the NFRA Guidelines, companies should disclose the accounting policies in terms of “revenue” in the following manner :
Revenue towards satisfaction of a performance obligation is measured at the amount of transaction price (net of variable consideration) allocated to that performance obligation. The transaction price of goods sold, and services rendered is net of variable consideration on account of various discounts and schemes offered by the Company as part of the contract.
( Note : Companies must avoid providing their disclosure as mentioned below :
Revenue is measured at the fair value of consideration received or receivable taking into account the amount of discounts, incentives, volume rebates, and outgoing taxes on Sales.)
- It is important to note that the ‘transaction’ price defined in Appendix A to Ind AS 115 is different from ‘fair value’ defined in Ind AS 113 and Ind AS 32.
- As per the NFRA Guidelines, companies should disclose the accounting policies in terms of “Trade Receivables” in the following manner :
a. Financial Assets Initial Recognition and Measurement
All financial assets are recognized initially at fair value, plus in the case of financial assets not recorded at fair value through profit or loss (FVTPL), transaction costs that are attributable to the acquisition of the financial asset. However, trade receivables that do not contain a significant financing component are measured at transaction price.
b. Revenue Recognition
Revenue towards satisfaction of a performance obligation is measured at the amount of transaction price (net of variable consideration) allocated to that performance obligation. The transaction price of goods sold, and services rendered is net of variable consideration on account of various discounts and schemes offered by the Company as part of the contract.
( Note : Companies must avoid disclosing their accounting policies in the following manner:
• Financial Assets
Initial Recognition and Measurement
All financial assets are recognized initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of
the financial assets. These include trade receivables, cash and cash equivalents, other bank balances, fixed deposits with banks, investments, loans and other financial assets.
•Revenue Recognition
Revenue is recognized to depict the transfer of promised products or services to customers. Revenue is measured based on the consideration to which the Company expects to be entitled in a contract with a customer and excludes amount collected on behalf of third party.
4. All listed companies and other entities falling with the domain of NFRA which are required to follow Ind ASs are advised to comply with the provisions of lnd AS 115 and Ind AS 109, as discussed above.
5. The auditors of these companies are required to ensure strict compliance, in the performance of their audits, with the provisions of the Ind ASs as brought out above.
