KPMG Accounting and Auditing Update October 2010

ACCOUNTING
AND AUDITING
UPDATE
October 2010
Foreword
It is with great pleasure we bring forth the October edition of the
Accounting and Auditing update.
The history of telephone services in India found its beginning when a 50-
line manual telephone exchange was commissioned in Kolkata in the year
1882. Today, India is the largest market in the world adding up a dramatic
number of about 20 million mobile subscriber lines every month on an
average and qualifies as being the third-largest telecom network in the
world and second-largest among the emerging economies. Such
stupendous growth in this sector has culminated into a wide bouquet of
service offerings which have widespread impact in the financial
statements of a Telecom company. We have in this issue, attempted to
highlight some of the key accounting issues confronting this industry.
Accounting for income taxes, has always been a controversial subject and
was considered to be a 'bitter pill' when it was first introduced in India. As
India progresses towards its planned convergence date with IFRS, an
exposure draft in relation to this subject has been recently published. We
have attempted to provide our perspective on that exposure draft with a
comparison to the existing provisions under Indian GAAP and the
corresponding provisions under US GAAP.
Demystifying the accounting information that is set out in the financial

statements and viewing them from the eyes of the management has
been the crux of the segment reporting requirements. This concept has
been re-emphasized under IFRS with the recently amended IFRS 8 which
has been discussed in this publication.
A recent pronouncement by SEBI requiring media houses to disclose their

financial interests in entities with whom private treaties are entered into a
welcome step to promote transparency and restrict biased journalism.
We hope you enjoy reading these articles. We look forward to receiving

your valuable feedback on what you would like us to cover in our futures
publications at aaupdate@in.kpmg.com
In this issue
Accounting in the
telecommunications
industry
01
Income Taxes
Challenge to IFRS
convergence 10
Operating Segments
Key communication tool to
shareholders
16
Regulatory Updates 24
Accounting in the
telecommunications industry
In its universal quest to achieve technological supremacy
The world economy is currently in a related business, which is set to benefit undertaken by the Government of India
recovery phase from the global economic from the improving global economy, (GOI) such as abolishment of Access
onslaught that was witnessed in the recent making the overall macro-economic outlook Deficit Charge (ADC) charges on
past and it is expected that the buoyant. Further, the recent surge in International calls, downward revision of
telecommunication industry would be a technological inventions seems to make termination charges, etc1.
major driver for the economic recovery for even a mature market like the U.S., highly
The Indian wireless telecommunications1
many countries. The overall economic lucrative for telecom operators. The major
market is currently the fastest growing
dynamics is expected to shift in favour of thrust in this sector comes from within the
telecommunications markets in the world.
this industry, primarily due to its key industry itself, because of the continuous
With the GOI issuing over 120 licenses to
attribute of being a major infrastructure network and product up-gradation by the
new operators and the number of players1
product for both emerging as well as industry players. Increasing demand for
going up from 5/6 per circle to 9/10, the
developed nations. Further, the global technically innovative products has been
future that lies ahead is surely bright. Also,
telecom industry in itself, is witnessing a the silver lining for the telecommunication
the telecom industry is set to witness a
fundamental change in its outlook. industry in an otherwise tough
further significant upside from the
environment. Less than a decade ago, the
In the past, it was voice calls that brought 3G/BWA (Broadband Wireless Access)
telecom operators in the U.S., Western
money to operators, which enabled auctions and the network rollout plans of
Europe, and Japan were upgrading their
equipment manufacturers to concentrate successful bidders. Also there has been
existing networks to high-speed 3G
on voice-enabled devices. Presently, voice considerable foreign participation in the
technologies. Now the world
is taking a backseat, while data and video sector with some of the major foreign
telecommunications industry is talking
have become the core focus areas and as telecom players like Vodafone, MTS,
about the installation of the next-generation
such, new network standards are being Etisalat, Uninor and DoComo gaining
super-fast 4G (4th Generation)
aimed at to ensure faster data connectivity, significant foothold in the Indian market
technologies. India is not far behind in this
quick video streaming with high resolution, thereby bringing in a wave of telecom
foray of technological advances Significant
and rich multimedia applications. Smart- liberalisation, consequently resulting in cut
landscape changes have been witnessed in
phones have become the next-generation
the Indian telecom sector as well, primarily throat competition1.
choice and are increasingly taking over the
emanating from the inherently high
market share from basic mobile handsets.
subscription base, complemented by
One key attribute in the telecom industry is
increasing affordability and the initiatives
that it encompasses a lot of technology-
1 KPMG's Accounting and Auditing Update, October 2010
© 2010 KPMG, an Indian 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
Financial reporting
challenges
Such unprecedented innovation and telecom industry faces significant Company Accounting Basis
transformation in the telecom sector, has accounting and business challenges due to
and will continue to create significant complexities in the schemes offered to Vodafone IFRS
business opportunities, spawning entirely customers, distribution arrangements,
AT&T US GAAP
new business models and related infrastructure sharing arrangements
challenges. The fourth generation of cellular entered by telecom players, etc. Verizon US GAAP
wireless standards (4G), the movement Unfortunately, neither Indian GAAP nor
toward open mobile and the increasing IFRS provide any industry specific SwissCom IFRS
proliferation of mobile internet devices are guidance. Therefore the only authoritative
transforming the telecommunications source for accounting guidance in this China Mobile IFRS
ecosystem. Emphasis on new product sector that remains is US GAAP, which has
Telecom Italia IFRS
development and business model very specific accounting issues concerning
innovations have lead to faster-than-average this sector. In December 2009, the Sprint Nextel Corp US GAAP
operating margin growth, which has research committee of the ICAI had issued
seemingly emulated the accelerated an exposure draft of the 'Technical Guide Alcatel–Lucent IFRS
growth the industry has been witnessing in on Revenue Recognition for
BT Group IFRS
the recent past. Operators constantly Telecommunication Operators' with a view
reinvent themselves in the search of a to provide guidance on peculiar revenue Telenor IFRS
sustainable competitive advantage. Equally, recognition issues in the industry which
the financial reporting landscape continues more or less mirrors US GAAP Telefonica IFRS
to evolve with new standards and requirements. This publication attempts to
pronouncements being issued, and highlight few of the peculiar accounting Deutsche Telekom IFRS
interpreted by preparers, standard setters, issues relation to Telecom sector.
regulators and auditors differently. In the Source: Public filings
wake of such technological transition, the
Revenue recognition
Multiple element offerings
Telecom is a dynamic and evolving sector
where revenue recognition is probably the
most judgmental and complex area of
accounting, as significantly large numbers of
companies provide bundled package offers
comprising handsets, prepaid minutes, would in most cases require extensive
messages, discounts, special offers and other analysis and prove challenging in the
incentives to their customers (also known as application of revenue recognition principles:
‘multiple element contracts’). Demystifying
the underlying business rationale for such Service offerings Possible questions from a revenue
transactions and recording them within a set recognition perspective:
accounting framework, would require in-depth
Equipment plus services Can the equipment sold be used without the
analysis of the transactional basis, coupled
services being delivered? If yes, then how
with a clear understanding of the accounting much should be the amount attributed to
principles. The decision to account for such equipment of the total revenue?
transactions either in entirety or in a
bifurcated manner into various components Activation and connection Can activation fee collected from a customer
could have a significant impact on the fee to connect him to the network be bifurcated
results.For example, separating handset sales from the mobile network service? Can it be
from connection revenues may result in separable?
increased revenues upfront for the sale of
Upgrades / downgrade fee Should a separate fee collected from an
handsets. The following table illustrates few existing customer in the network for upgrade
possible bundled offers by telecoms which get recognised as a separate component?
Source: KPMG's Accounting and Auditing Update, October 2010
2
Although the general revenue recognition entities face is whether the components of Once the appropriate level of accounting
criteria under Indian GAAP and IFRS, a single transaction can be technically and has been identified (i.e. combined or
requires revenue to be recognised at the commercially separated, and if so, what separate), the next step relates to
time of transfer of risks and rewards, Indian would be an appropriate accounting application of revenue recognition
GAAP does not currently provide any treatment that should followed to principles to various components of the
specific guidance on revenue recognition recognise revenue. The IFRIC has agreement, provided certain conditions are
for such multiple element contracts and tentatively agreed that the following satisfied.
hence, inconsistent practices exist indicators would suggest that two or more
IFRS does not provide detailed guidance on
amongst various telecom entities. IFRS on components of an agreement could be
how separate components within an
the other hand requires, in certain linked:
arrangement should be identified and
circumstances, to apply the recognition
• The transactions are entered into at the recognised for revenue recognition
criteria to separately entered agreements
same time or as part of a continuous purposes. An analogy therefore could be
in a combined way and also for identified
sequence and in contemplation of one drawn from IFRIC 18, Transfer of Assets
components in a single transaction in order
another from Customers, which provides
to reflect the economic substance of the
separation criteria in a transaction that
transaction. The questions therefore that • The transactions, in substance, form a
involves transfer of assets from customers.
remain are, when and how does one look single arrangement that achieves or is
This interpretation states, that for
at bundled arrangements in a 'combined' designed to achieve an overall
separation each of the identified
way and when not to? And if they are to be commercial effect
components need to have an economic
analysed separately, are there embedded
• One or more of the transactions, benefit on a 'standalone basis' to the final
components and how should the overall
considered on its own, does not make customer and that they can be fair valued
contract revenue be apportioned amongst
commercial sense, but they do when reliably (which can be a highly complex task
such components (known as multiple
considered together in a given situation). Interpretation of
element contracts)?
standalone value depends on facts and
IFRS provides a generic answer to the first • The contracts include one or more circumstances and would entail exercise of
question, by stating that recognition criteria options or conditional provisions for judgment. However the underlying
is applied to two or more transactions which there is no genuine commercial principle is that the consumer would be in
together, when they are linked in such a possibility that the options or conditional a position to use the delivered component
way that the commercial effect cannot be provisions will not be exercised or without receiving the other elements of the
understood without a reference to the fulfilled arrangement. Further, allocation of revenue
series of transactions as a whole. However, amongst the components of the
• The occurrence of one transaction is
no specific benchmarking is prescribed so transaction can be based on either the
dependent on the other transaction’s
as to allow ease in the determination 'relative fair value' method of the 'residual
occurrence.
process. In the absence of such specific method'.
guidance, the key constraint telecom
“ It is imperative to
have robust systems
and processes to
determine whether two
or more transactions
entered in close
proximity qualify for
being accounted as a
“
linked transaction
3
Following are some of the specific revenue share of the revenues while services being Other factors include an entity's ability to
transactions in the Telecom industry: provided through the network spectrum determine the selling price, control over
operated by the Telecom entity. An area how it completes its part of the
Life time validity prepaid vouchers (for
that often gives rise to revenue accounting arrangement and which entity possess the
incoming services) – generally entitles the
issues is determination of accounting credit risk, Existence of such factors on a
customer obtaining a pre-paid connection
revenues on gross or net basis by the cumulative basis would generally suggest
with life-time validity in return for an initial
Telecom operator. Each entity needs to transaction being recognised at the gross
upfront payment. During the validity period,
determine the appropriate revenue amount. On the contrary, non-existence
he will continue to enjoy incoming services
recognition treatment for its individual may support net reporting, although other
without having to make a separate
circumstances. Historically, the factors will often be more important in this
payment to enjoy uninterrupted services. In
communications industry has accounted determination process.
such transactions, the prepaid vouchers
for traffic flows on a gross basis. From an
typically comprise of two components i.e., Interconnect agreements/Call
accounting perspective, accounting for a
an access fees and a fixed amount of termination charges – are agreements
transaction gross or net depends on
outgoing airtime usage. For example, the that allow operators to transit the traffic on
whether the entity involved is acting as
sale of INR 500 voucher could be another operator's network. The operator
principal or agent. However, determining
bifurcated into INR 400 recharge fees (or on whose network the call originates pays
this is not so straightforward. IAS 18 states
administration charges) and INR 100 terminating charge to the operator on
that 'revenue includes only the gross
towards outgoing airtime. Revenue whose network the call terminates. The
inflows of economic benefits received and
recognition for airtime services would be accounting challenge is whether to record
receivable by the enterprise on its own
recorded by the entity based on the actual such revenue (and also for cost) on gross or
account.' Amounts collected on behalf of
usage, whereas the access fees would be net basis. The industry practice is to record
third parties are not economic benefits
deferred and recognised over the customer such revenue (and cost) on gross basis
which flow to the enterprise and do not
relationship period (also known as the even though there may exist a legal right to
result in increases in equity. In an agency
churn rate). However, there are many offset between the operators (legal right to
relationship, the gross inflows of economic
operators who recognise access fees offset generally exists among the private
benefits include amounts collected on
revenues immediately without deferral on operators only). Further there may be
behalf of the principal which do not result
the contention that the corresponding situations, when the operator may enter
in increases in equity for the enterprise.
direct cost like customer acquisition into an agreement wherein rates and
Therefore amounts collected on behalf of
incurred to acquire the customers are specific units of traffic are to be carried at a
the principal are not revenue. Instead,
higher than the one time access fee earned pre-determined price. In such a case,
revenue is the amount of earned
from the customer. Further these are non- entities may record the transaction on net
commission. The IASB has, as part of its
refundable fees collected. basis as this would represent exchange of
recent improvements included specific
similar items. Also, since such entities deal
Value added services – A prevalent guidance in relation to identification of an
with international operators for terminating
practice in the Telecom sector is to provide entity's role as principal or agent and states
various international incoming/outgoing
end-to-end services to a customer, such as that it is usually dependent on whether the
calls- there would be a possibility of the
ringtones, wallpaper, music, game entity is the primary obligor in the
operators transacting with non-local
downloads, etc,. For any individual end-to- arrangement and therefore takes on the
currency, necessitating recognition of
end transaction, a number of different gross risks and rewards of the transaction
embedded derivatives.
operators may be involved, each earning a or that the entity has only a net interest.
4
The following flowchart illustrates a snapshot of the steps that would be involved in analysing multiple element contracts in order to apply
the revenue recognition principles appropriately:
Step 1: Identify Separate components

Components
Sale of goods Rendering of services Construction contracts
Step 2: Allocate
consideration Fair values determined based on either:
• Relative fair value method
• Residual method
Sale of goods Rendering of services Construction contracts
Step 3: Recognise
revenue
Effective Effective
control and control and
significant significant
risks and
risks and
rewards
rewards passed on a
passed in continuous
their entirely basis Can the outcome of the transaction
be estimated reliably?
At completion, upon
Recognise revenue to Recognise revenue by
or after delivery
extent of recoverable reference to the stage
expenses recognised of completion
Source: KPMG's Accounting and Auditing Update, October 2010.
Further, application of the recently
pronounced proposed converged revenue
recognition standard in the Telecom
industry could prove challenging and will
require a detailed analysis and mapping of
the principles that are contemplated
therein with the various types of
contracts that Telecoms enter into. The
crux of the standard lies in recognising an
entity's net contractual position with a
customer and attributing a portion of the
consideration received to it, in order to
recognise revenue. The key constraint that
could be encountered in applying such
type of customer interface, but is more
principle is determination and separation of
a performance obligation in a bundled
about the benefits associated with it. Accounting for free
Acknowledging consumer preferences and
offering. Additionally, under the new
standard application of residual method for
delivering rewards in real time for their airtime given to
patronage seems to be the order of the
bifurcating revenue amongst components
would be prohibited and will require the
day. Loyalty program can be in the shape of
presenting specialty discounts for
customers
measurement of fair value in respect of
customers along with the sale of telecom
each performance obligation that has been In addition to the customer loyalty
services. For example, a telecom may
identified. programs, there are also incentives like
award points for amounts spent on airtime
free minutes (talk time) given to an existing
and a customer can redeem those points
customer based on their level of usage.
for money off their monthly bill or to obtain
Currently, Indian GAAP does not permit the
a handset upgrade. From an economic
use of fair valuation as a measurement
Customer loyalty standpoint, such program provides a
separate revenue generating source for the
basis for revenue transactions and requires
revenue to be measured based on the
telecom that requires recognition from an
programs and accounting standpoint to truly reflect the
amount of consideration agreed between
the parties. IAS 18 however, requires
economic reality of the transaction. A
revenue to be measured at the fair value of
other retention strategy recent interpretation IFRIC 13, Customer
consideration received or receivable, less
loyalty programmes, provides a robust
Customer base and its demand for superior the amount of any trade discounts and
framework for accounting programs, which
customer service, has been the backbone volume rebates allowed. Free minutes that
allow customers to earn points and redeem
for this sector's evolutionary process. The are offered as part of the initial talk time
them for free or discounted goods or
ever demanding customers in this industry revenue, would be considered as another
services in future. The IFRIC requires a
seek high-quality services and are willing to medium of customer loyalty program and
portion of the revenue to be deferred in
change the service providers purely based the above mentioned accounting guidance
order to account for the service provider's
on this yardstick. Efficacious use of such for deferral of revenue as per IFRIC 13
future obligations in respect of loyalty
programs could prove successful in the would need to be applied.
points awarded. The amount to be deferred
quest for maximum customer retention in could be measured based on either the
this industry. There may be myriad relative fair value of the primary underlying
promotional offers by telecoms to attract service and the award or could be based on
and retain customers and accounting for an estimation technique of the fair value of
such arrangements has varied significantly. the award credits (residual method as it is
Further extensive analysis has gone into generally known). Such deferred amount is
the debate about how and what type of recognised, either as the telecom fulfills its
loyalty schemes would be most effective, obligations to provide the underlying free or
to enable dynamic interact-action with discounted goods / services or as the
customers that could build and maintain obligation period lapses (provided time is of
profitable relationships. The basic theory the essence).
that emerges is that an effective customer
loyalty program, is not entirely about the
6
Capacity
transaction
Telecoms operate in a capital-intensive IRU, an entity purchasing network capacity Further, there can arrangements that do not
industry in which significant set-up costs obtains the exclusive right to use a specify the asset to be used and only state
are incurred in respect of the network specified amount of capacity for a specified that certain amounts of capacity within the
infrastructure that is required to operate, period of time. Some arrangements convey overall infrastructure get conveyed. The
for example setting up of mobile towers, to the customer the right to use a specific fundamental accounting issue related to an
etc. In the telecom industry, entities which identifiable physical asset, for example by IRU is when to recognise revenue. That
possess excess network capacity often buy transferring to the customer rights overall determination can be quite complex but
and sell capacity of each other's networks, of the capacity associated with it. However, can be boiled down to two basic questions:
often referred to as an indefeasible right to there could be complex arrangements Is the IRU a lease? Or is it a service
use (IRU). Expansion of fiber optic wherein arrangements convey to a telecom contract? Under IFRS, guidance for
communications has increased the the exclusive right to use a particular evaluating existence of lease is covered by
frequency of such transactions involving wavelength or a certain amount of strands IFRIC 4, Determining whether an
"sale" of network capacity. Pursuant to an of capacity on a network system to carry Arrangement contains a Lease, the
its traffic on a particular route. following flowchart illustrates application of
the same for such IRU transactions:
Is a specific asset or specific assets being used?
YES NO
Is a right to use being conveyed, i.e.
Does the customer have Does the customer have the Is the possibility the another
the ability or right to ability or right to the assets, party will take more than an
operate the asset, including while obtaining or insignificant amount of the
to direct how others should controlling more than an asset's output during the
operate the asset, and at NO insignificant amount of the NO term of the arrangement NO
the same time obtain or asset's output? remote?
control more than an
insignificant amount of the
asset's output
No
YES further
analysis
required
Does the customer pay a
contractually fixed price per YES
unit of output?
YES YES
NO
Does the customer pay

market price per unit of YES
output?
NO
There is an embedded lease
Source: KPMG's Accounting and Auditing Update, October 2010.
7
After applying the above mentioned deducting these payments from the total requirement may prove to be more
requirement of IFRIC 4, if an arrangement payments under the arrangement. challenging, especially for telecoms who
has been determined to contain/embed a However, if a purchaser concludes that it is are set to adopt IFRS at the time of their
lease, the parties (provider/receiver) to the impracticable to separate the payments transition or convergence from their
arrangement would have to apply the reliably, it shall: previous GAAP. Further, the ongoing project
requirements of IAS 17, Leases, for the on convergence for lease accounting
(a) In case of a finance lease
lease element of the arrangement and between IASB and FASB could enhance
Recognise an asset and a liability at an
other applicable accounting literature this challenge as many of the contracts that
amount equal to the fair value of the
determined based on the nature of the do end up being concluded as embedding a
underlying asset that is subject of the
other component in the arrangement. For lease, could be forming part of the
lease. Subsequently the liability shall be
the purpose of applying the requirements statement of financial position as the
reduced as payments are made and an
of IAS 17, payments and other concept of 'operating lease' would be
imputed finance charge on the liability
consideration required by the arrangement passé.
recognised using the purchaser's
shall be separated at the inception of the
“
incremental borrowing rate of interest.
arrangement and those for other elements Indefeasible rights of use
on the basis of their relative fair values. In (b) In case of an operating lease (IRU) are contracts that entitle
some cases, separating the payments for Treat all payments under the
the lease from payments for other companies to buy and/or sell
arrangement as lease payments for the
elements in the arrangement will require purposes of complying with the capacity on networks.
the purchaser to use an estimation disclosure requirements of IAS 17. Accounting for IRUs can be
technique. For example, a purchaser may
estimate the lease payments by reference In determining whether an IRU is lease, complex and vary based on the
to a lease agreement for a comparable
asset that contains no other elements, or
by estimating the payments for the other
elements in the arrangement by reference
generally it is not difficult to determine
whether a 'right to use' is being conveyed
under the agreement. However, difficulties
arise in identifying whether a specific asset
facts and circumstances of
individual contracts. IFRS
conversion will drive a review
“
to comparable agreements and then is being used. Application of this of these IRU contracts
Customer
acquisition costs
and other incentives paid
Customer acquisition costs are the direct the enterprise'. Asset recognition for such be appropriate to capitalise the customer
attributable costs incurred in signing up a costs is therefore permitted, when such acquisition cost. Therefore determination of
new customer into the network. The costs resource are controlled (evidenced by a the appropriate accounting lies in
of adding subscribers to a company's contractual arrangement) by the entity and identifying the nature of the contract which
customer base can be substantial and it is probable that there will be an inflow of can support the accounting decision.
complicated by the type of costs involved, such resources in future and that the cost Although there may be varied features in a
including incentives being provided to of the asset is measureable reliably. The contract they can be broadly categorized
retailers, commissions paid to external issue therefore, is whether the operator into either a fixed-term contract (i.e.
dealers or agents and sales omission to the has the right to control access to future contracts that require a minimum purchase)
telecom's staff. Accounting for costs revenue streams (say under an enforceable or an open-ended contract (i.e. no
incurred in such activity are either service contract), and if the cost can be obligation being included). Generally, an
expensed or capitalised provided certain reliably measured. If these criteria are not intangible asset is recognised only to the
conditions are met. In order to support met, then the customer acquisition costs extent that it arises from a fixed term
capitalisation of costs, both the definition are more akin to a marketing expense and contract that requires minimum
as well the recognition criteria for an asset should be expensed as incurred rather than consideration and in the case of open
needs to be met. An asset is defined as 'a capitalised and amortised over the contract ended contracts, contracts that include a
resource controlled by the enterprise as a life. For example if a customer contract cancellation penalty that the Telecom would
result of past events and from which future was not signed at that time, unless it was have the intent and ability to enforce.
economic benefits are expected to flow to otherwise legally enforceable, it may not
8
Non monetary arrangements Asset Retirement

(capacity swaps)
Obligations
Another significant monetisation strategy that is in practice is companies ‘swapping’
network capacity (known as capacity swaps). Leveraging on each other's network In the construction of networks, mobile and
amongst peers has lead to the advent of such exchange transactions. In these situations, fixed line operators often build assets on
a careful analysis of the specific facts and circumstances surrounding the transaction leased land or premises where an obligation
would have to be made, in order to appropriate record the same in the financial exists (like under the lease agreement) to
statements of both the parties to the arrangement. In general, IFRS requires that the reinstate the land or premises at the end of
accounting for the exchange of non-monetary assets be measured based on fair value, the agreed term. Provision for such costs is
unless the transaction lacks a commercial substance or that neither the fair value of asset required under IFRS, where they are
received nor the one given up are reliably measurable. referred to as asset retirement obligations
(AROs). The obligation is accounted for by
Commercial substance is assessed by considering the extent to which future cash flows including the present value of the estimated
are expected to change as a result of the transaction, i.e. if the configuration of the cash cost of dismantling and removing the asset
flows of the assets received and transferred are different, or if the entity specific value of as part of the cost of the asset and setting
the portion of the operations affected by the transaction changes as a result of the up a provision for an equivalent amount. The
exchange. Most of capacity swaps would presume existence of a commercial substance discounting of provisions is unwound over
in the arrangement; however the determination of the fair value would pose a challenge. the relevant period and is accounted for as
Further simultaneous exchange of non-monetary assets along with equal amounts of an interest expense.
cash consideration between the parties to an exchange could raise significant
"substance" over "form" questions. When cash consideration is exchanged between the The complexity involved in accounting for
parties to a transaction concurrently with an asset exchange, questions may arise as to AROs is that often it may not be evident
the substance or business purpose of the transaction structure. Capacity swap from the contractual terms that a legally
transactions likely include complex terms that would require a diligent analysis and enforceable obligation exists. It may also be
professional judgment to determine the proper accounting treatment. that the contract is unclear or silent on
restoration requirements at the end of a
contracted period. Even in such cases,
“ “ entities would need to make their 'best

Ascertaining the commercial rationale and estimate' of the cost involved based on past
determining the fair value will be a formidable experience, by applying the principles of
'constructive obligation' as per IAS 37
challenge in the area of accounting for exchange of Provisions, Contingent Liabilities and
Contingent Assets. For instance, obligations
capacities
with respect to cables laid in international
waters on the seabed or on coastal 'landing
stations' may be unclear and inconsistently
enforced.
Income Taxes
Challenge to IFRS convergence
“
Computation of taxable income in Exchange Board of India (SEBI) and
India is governed by the provisions others), convergence with IFRS The converged
of Income Tax Act, 1961. To ensure poses a bigger challenge for India standard will expand the
correct and uniform accounting by Inc. Additionally, these accounting
concept of deferred taxation
all companies, the Institute of challenges will have considerable
Chartered Accountants of India
(ICAI), had issued AS 22, Accounting
for taxes on income, (current AS 22)
which was also notified by the
tax implications.
In our discussion here, we will try to

answer key questions highlighting
“
to areas such as business
combination, equity
transactions, inter company
National Advisory Committee on
major differences between ED on eliminations, etc.
AS 22, the current AS 22 and
Accounting Standard (NACAS). To
accounting for income taxes as per
achieve convergence with
the US GAAP principles. The ED on
International Financial Reporting
AS 22 has been carefully drafted and
Standards (IFRS), the ICAI, inter alia,
there are no major differences with
has issued Exposure Draft (ED) on
the equivalent IAS 12, Income taxes.
AS 22 (Revised 20XX) {ED on AS 22}
We will also emphasize on
which is in line with the International
significant implementation issues
Accounting Standard (IAS 12),
that will arise from adoption of ED
Income taxes, as issued by the
on AS 22 by Indian companies.
International Accounting Standards
Board (IASB).
Since, accounting practices in India,

are also based on various
legislations (including Companies
Act, guidelines issued by Reserve
Bank of India (RBI), Insurance
Regulatory and Development
Authority (IRDA), Securities and
11
Will the approach to accounting of

deferred taxes change?
The ED on AS 22, like IFRS, is based on similar to accounting for income taxes as accounting income nor the taxable
balance sheet approach as compared to per the US GAAP. income; however
current AS 22 which is based on income
As per the current AS 22 deferred tax is the (b) ED on AS 22: Under the exposure draft,
statement approach. The ED on AS 22
tax effect of timing differences. Timing Company A would have to recognise a
defines tax expense (tax income) as the
differences are the differences between deferred tax liability of USD 300 (USD
aggregate amount included in the
taxable income and accounting income for 1,000 temporary difference × 30
determination of profit or loss for the
a period that originate in one period and are percent), with a corresponding debit
period in respect of current tax and
capable of reversal in one or more into the revaluation reserve. This is
deferred tax. Although there is no
subsequent periods. because when the carrying amount of
difference between the two standards with
an asset (the minimum expected future
respect to the way current tax has to be For example:
economic benefits) exceeds its tax base
calculated, there is a prominent distinction During the year, Company A revalues an (the amount that can be deducted for
in the way deferred tax has to be calculated item of property, plant and equipment by tax purposes from those future
under the two standards. This will also lead USD 1,000 to USD 21,000, recognising the economic benefits), the amount of
to recognition of additional items of increase directly in the revaluation reserve taxable economic benefits will exceed
deferred tax assets or liabilities e.g., those within equity. However for the tax the amount that will be allowed as a
arising from revaluation of assets. purposes such revaluation is not allowed deduction for tax purposes. This
for claiming increased depreciation. difference is a taxable temporary
As per ED on AS 22 deferred tax is
Assume the tax rate as 30 percent. difference and the obligation to settle
recognised in respect of temporary
differences between the carrying amounts the resulting income taxes in future
(a) Current AS 22: Under the existing
of assets and liabilities for financial periods is a deferred tax liability.
standard recognition of such revaluation
reporting purposes and the amounts used of assets do not give rise to a ‘timing
for taxation purposes. This treatment is also difference’ because it neither effects the
What is initial recognition

For example:
exemption?
A company acquires an asset that has an economic life of 5 years, Which will be specifically
As per ED on AS 22, it is proposed used for the purpose of R&D activities for a value of USD 100,000. The asset will be solely
that a deferred tax asset or liability is recovered through use. Under the tax laws, such assets qualify for 150 per cent deduction in
not recognised if it arises from the the year of purchase (i.e., the tax base is USD 150,000). The tax rate is 30 percent.
initial recognition of goodwill or an
In this situation under the taxation law, the Company would be eligible to a greater tax
asset or liability in a transaction that
deduction for the differential USD 50,000 as the asset is recovered through use; such
is not a business combination and at
difference in a strict sense is a temporary difference. However, under the ED such differences
the time of the transaction affects
would be considered as ‘exceptions’ from the inventory of originating temporary differences.
neither accounting profit nor taxable
Accordingly, no deferred tax asset would be recognised for such transactions. This is based on
profit. However, deferred tax
the presumption that the parties to the transaction have already factored the greater tax
liabilities are recognised in respect
deductibility as part of their negotiations, and the transaction value truly represents the future
of a subsequent change in the
economic benefit of the asset (without any value being attached to the acquired temporary
carrying amount of goodwill for
differences).
which amortisation is tax deductible.
12
These proposals are new and are not US GAAP, on the other hand, does not have
applicable with respect to current AS 22, an exemption for the initial recognition of
which is based on income statement an asset or liability in a transaction that is
approach. However, the differences not a business combination and at the time
between taxable income and accounting of the transaction affects neither
income for a period that originate in one accounting profit nor taxable profit. Under
period and do not reverse subsequently are US GAAP the deferred tax is determined
defined as permanent differences and no using the ‘simultaneous equation’ method
deferred tax asset and liability is as it is presumed that the consideration
recognised presently with respect to these paid / incurred for the underlying asset /
permanent differences. liability includes an amount that is
attributable to the acquired temporary
differences.
What is the threshold to recognise

deferred tax assets?
Current AS 22 ED on AS 22 US GAAP
As per current AS 22 deferred tax assets As per ED on AS 22, it is proposed that, a Under US GAAP, all deferred tax assets are
should be recognised and carried forward deferred tax asset is recognised only to the recognised and a valuation allowance is
only to the extent that there is a reasonable extent that it is probable that taxable profit recognised to the extent that it is more likely
certainty that sufficient future taxable will be available, against which the than not that the deferred tax assets will not
income will be available against which such deductible temporary differences can be be realised, i.e., deferred tax assets are
deferred tax assets can be realised. utilised. When an entity has unused tax recognised on a gross basis with a
However, where an enterprise has losses, this is strong evidence that future corresponding valuation allowance. Under
unabsorbed depreciation or carry forward of taxable profit may not be available, and US GAAP ‘more likely than not’ is defined as
losses under tax laws, deferred tax assets generally the recognition of a deferred tax a likelihood of more than 50 percent. Like
should be recognised only to the extent that asset is limited to available taxable IFRSs, the existence of cumulative
there is virtual certainty supported by temporary differences or there is convincing accounting losses is negative evidence that
convincing evidence that sufficient future other evidence that sufficient taxable profit future taxable profit may not be available
taxable income will be available against will be available against which the unused that is difficult to overcome, and generally
which such deferred tax assets can be tax losses or unused tax credits can be the recognition of a deferred tax asset is
realised. utilised by the entity. ‘Probable’ is not limited to available taxable temporary
defined in the ED on AS 22, and differences in such cases.
interpretations in practice may vary from
‘more likely than not’ to some higher
threshold.
At what rate deferred tax assets

and liabilities are measured?
No change proposed As per ED on AS 22, it is proposed that However, under US GAAP, deferred tax
deferred tax assets and liabilities are assets and liabilities are measured based on
measured based on the expected manner of an assumption that the underlying asset or
recovery (asset) or settlement (liability). The liability will be settled or recovered in a
rate of tax expected to apply when the manner consistent with its current use in
underlying asset (liability) is recovered the business, unlike IFRSs. The rate of tax
(settled) is based on rates that are enacted expected to apply when the underlying
or substantively enacted at the reporting asset (liability) is realised (settled), is based
date. on rates that are enacted at the reporting
date, unlike IFRS.
13
What to do when there is a

subsequent change in tax rate?
As per the current AS 22 such changes in As per ED on AS 22, like IFRS, a change in Under US GAAP, on initial recognition, the
tax rates are recognised through P&L deferred tax caused by a change in tax rate tax effect of items charged or credited in
account. is recognised in profit or loss in the period other comprehensive income or directly to
that the change is substantively enacted, equity during the current reporting period is
except to the extent that it relates to an item itself charged or credited in other
recognised outside profit or loss in the comprehensive income or directly to equity.
current or in a previous period. The same However, unlike IFRS, subsequent changes
general principle applies when an entity's to deferred tax from changes in tax rates,
tax status changes. tax status, or from assessment of the
recoverability of a deferred tax asset are
recognised in profit or loss.
How to classify deferred tax assets

and liabilities?
As per current AS 22 deferred tax assets Like IFRS, as per ED on AS 1 (Revised), Under US GAAP, unlike IFRSs, deferred tax
and liabilities should be disclosed under a Presentation of financial statements, liabilities and assets, but not the valuation
separate heading in the balance sheet of the deferred tax liabilities and assets are allowance are classified as either current or
enterprise, separately from current assets classified as non-current when a classified non-current according to the classification of
and current liabilities. statement of financial position is presented, the related asset or liability giving rise to the
even though it may be expected that some temporary difference. The valuation
part of the tax balance will reverse within 12 allowance is allocated against current and
months of the reporting date. Further, the non-current deferred tax assets for the
disclosure requirements proposed in the ED relevant tax jurisdiction on a pro rata basis,
on AS 22 are more detailed as compared to unlike IFRS.
current AS 22.
Can deferred tax assets and

liabilities be offset?
The current AS 22 envisaged same As per ED on AS 22, like IFRS, deferred tax Under US GAAP, deferred taxes for each tax-
accounting with respect to offset principles. liabilities and assets are offset if the entity paying component of an enterprise in
has a legally enforceable right to offset and separate tax jurisdiction should present in
the deferred taxes relate to income taxes two classifications a net current asset or
levied by the same taxation authority in the liability and a net noncurrent asset and
case of the liability.
- same taxable entity
Such net presentation is, permitted only if
- in case of different taxable entities when the deferred tax assets and liabilities relate
the entity intends to settle current tax to the same tax jurisdictions or for same tax-
liabilities and assets on a net basis or paying components of an enterprise in a
realise the assets and settle the liabilities specific jurisdiction.
simultaneously for each future periods in
which these differences reverse. Legal enforceability for offset is not required
under US GAAP.
14
How should intercompany Clarification (GC) – 18/2002, Accounting for

taxes on income in the consolidated Example: Entity V sells inventory to
transfers of assets (e.g., sales,
financial statements), no adjustment is fellow subsidiary W for 300, giving rise
contributions, distributions) required with respect to tax expenses to a profit of 50 in V's separate financial
between entities of a group, with appearing in the separate financial statements. V pays current tax of 15 on
different tax jurisdictions that give statements of parent and subsidiaries. the profit. Upon consolidation the profit
Thus, the tax expense to be shown in the of 50 is reversed against the carrying
rise to a temporary difference be
consolidated financial statements will be amount of the inventory of 300.
considered for recognition of the aggregate of the amounts of tax Therefore the carrying amount of the
deferred taxes in consolidated expenses appearing in the separate inventory on consolidation is 250.
financial statements? financial statements of the parent and its However, the carrying amount of the
subsidiaries. inventory for tax purposes will depend
Like IFRS, as per ED on AS 22 it is on the legislation in W's jurisdiction.
proposed that the intra-group transactions As per US GAAP, like IFRSs, intra-group
Assuming that the carrying amount of
are eliminated upon consolidation. Any transactions are eliminated upon
the inventory for tax purposes is 300, a
related deferred tax effects are measured consolidation. However, unlike IFRSs,
deductible temporary difference of 50
based on the tax rate of the purchaser. income taxes paid by the seller on intra-
arises, which should be recognised on
However, the tax effects are not eliminated group profits related to assets that remain
consolidation at W's tax rate, subject to
unless the transacting entities are subject within the consolidated group, including
the general asset recognition
to the same tax rate. the tax effect of any reversing temporary
requirements.
differences in the seller's tax jurisdiction,
However, as per current practice under are deferred.
Indian GAAP, (as clarified by General
“
When should deferred tax with
respect to investment in The converged
subsidiaries recognised? standard eliminates the
Under the current AS 22, there exists no
A close look at consolidated financial simplistic accounting
specific guidance in relation to such
statements of a company that has global
presence, more often than not reveals that
differences. US GAAP on the other hand, model for deferred taxation
contains elaborate guidance in relation to
significant portion of the Group’s
this area and states that a deferred tax
in the consolidated
undistributed earnings reside in a
component / entity that is has a lower tax
jurisdiction than that of the parent. The
parent would suffer a dividend tax in the
event such earnings are repatriated /
liability needs to be recognised for such
differences, unless certain specified criteria
is met.
In order to not recognise a deferred tax, an

financial statements. Inter
company eliminations will
no longer be exempt from
“
distributed to it or a capital gains tax, in the entity needs to categories’ its investments deferred tax accounting
event the investment is sold. Identification into the following, as different recognition
of temporary differences (under the ED) thresholds apply for each category:
implicitly requires an entity to reflect its
intent and manner of recovery of the
underlying asset; therefore when an entity
intends to recover such undistributed
earnings in its subsidiary, either by way of
dividend or sale a consequential temporary
difference arises. Such differences are
sometimes called as ‘outside basis’
temporary differences.
15
Category US GAAP
Domestic subsidiaries No DTL is required if the parent company can recover

such temporary differences in a 'tax free manner'.
Foreign entities (i.e., No DTL is recorded, if the parent company's

subsidiaries or corporate joint investment essentially 'permanent in duration' and
ventures) will not reverse in the foreseeable future (indefinite
reversal criteria).
Determination of 'foreseeable future' should be

evidenced by specific plans for reinvestment of
undistributed earnings of a subsidiary which
demonstrates that remittance of the earnings will be
postponed indefinitely. Significant judgment would
need to be exercised in determination of such a
period and would need to be considered based on
the individual facts and circumstances.
However in the case of equity method IFRS does not change such a requirement,
affiliates, since the investors hold less than however it requires that the decision to
a majority of the voting capital and do not either recognise or not to recognise
enjoy majority voting power, generally it is deferred taxes should culminate from
presumed that they cannot control the existence of 'control' amongst the parent
timing and amounts of dividends, in-kind and investor (either subsidiary or
distributions, taxable liquidations, or other associate). It states that temporary
transactions and events that may result in differences in respect of investments in
tax consequences to investors. subsidiaries, branches, associates and joint
Accordingly, a deferred tax liability is ventures are not recognised only if:
generally recognised based on the
(a) the investor is able to control the timing
expected means of recovery of such
of the reversal of the temporary difference
investments. The only exception relates to
foreign corporate joint ventures where the (b) it is probable that the temporary
investors participate in the management of difference will not reverse in the
the venture and there exist a mutual foreseeable future.
agreement of the investors on the long-
term investment plans of the venture.
Conclusion
As is evident, the ED seems to eliminate

differences between the current AS 22 and
the international GAAP. Although, it is a
step in the right direction and many of the
provisions are broadly similar to that of
IFRS, areas such as accounting for
business combination, undistributed
earnings of subsidiaries and equity method
investees and other consolidation entries
(such as intercompany profit elimination)
would prove to be significant
implementation deterrents at the time of
convergence.
16
Operating Segments
Key communication tool to shareholders
For entities that operate in a variety of classes of business,

geographical locations, regulatory or economic environments or
markets, segmental information is an essential management tool. It
enables management to monitor performance, allocate resources and
devise business and market strategies.
International Accounting Standards Board how the entity is structured to reflect • Reduced comparability between entities
(IASB) published IFRS 8 ‘Operating the risks and opportunities that because entity-specific measures
Segments’ to replace IAS 14, “Segment management believe are important override ‘normal’ measurement
Reporting”, for annual periods beginning on requirements. But this risk may be
• Ability to see segment information
or after 1 January 2009 with earlier offset by the comparability that should
'through the eyes of management'
application permitted. IFRS 8 achieves be gained from entity-wide disclosure
enhances users' ability to predict
close convergence with the requirements requirements about products and
actions or reactions of management
of the US Accounting Standard SFAS 131 services, geographical areas and major
that can significantly affect the entity's
‘Disclosures about Segments of an customers, which have never been
prospects for future cash flows
Enterprise and Related Information’. required
• Segment information is more consistent
IFRS 8 sets out the requirements for • Potential to highlight sensitive
with information reported elsewhere in
disclosure of information of the entity’s information to competitors as well as
the annual report, for example in a
operating segments using the other users of financial statements.
management commentary
management approach, both in regards to There is no exemption from the
the identification of reportable segments • Incremental cost of producing segment disclosures on the grounds that
and the measures disclosed for those information is lower because it is based management may consider the
segments. The benefits of adopting on the information already presented to segment information sensitive or that
management approach are: management its disclosure may cause 'competitive
harm’.
• Consistency between what is reported However, there are some risks resulting
to users and what is reported internally from moving to a management approach
to management, enabling users to see such as:
Determining reportable segments
The process for determining operating segments and identifying which of those are
reportable separately is summarised in the flow chart below:
Identify the chief operating

decision maker (CODM)
Identify which component of the

businesses are operating
segments
Identify which operating Disclose segment information

segments require separate using measures reported to
disclosure as reportable management and reconcile to
segments financial statements
Provide entity-wide disclosures
Step 1 - Identify the CODM The identification of the CODM in an entity made about how resources will be
with a complex organisational structure allocated so that other levels of
The term CODM refers to a function, rather
might be difficult. Decisions about an management can execute those operating
than to a specific title. The function of the
entity's overall resource allocation to the decisions. An entity cannot have more than
CODM is to allocate resources to the
different components of the entity normally one CODM.
operating segments of an entity and to
are made at the highest level of
assess the operating segments The mere existence of an executive
management (e.g., CEO or COO). Certain
performance. The CODM usually is the committee, management committee or
operating and resource allocation decisions
highest level of management (e.g., CEO or other high-level committee does not
may be made by lower levels of
COO), but the function of the CODM may necessarily mean that one of those
management when more detailed
be performed by a group rather than by one committees constitutes the CODM.
disaggregated information is provided and
person (e.g., board of directors, an
used. However, for the purpose of applying
executive committee or a management
IFRS 8, the CODM will be the highest level
committee).
of management at which decisions are
18
Step 2 - Identify which component of Consequently, the following components of

businesses are operating segments business may be identified as operating
segments if discrete financial information is
IFRS 8 makes it clear that it is not
available and the operating results are
necessary for a component of a business
regularly reviewed by the CODM.
to actually earn revenues in order to be
identified as an operating segment. The
component merely needs to be capable of
earning revenue or incurring expenses
either currently or in the future.
Start-up operations Despite lack of revenue, a start-up operation may qualify as an operating segment.
Corporate functions If the head office function undertakes treasury function and the revenue earned is more than
incidental to the activities of the entity then it may be treated as an operating segment.
However, if head office function undertakes finance and accounting, information technology and
human resource then it will not be an operating segment.
Components with outputs In case the component transfers all its output to another component without charging any
transferred exclusively to other transfer price, it can be identified as operating segment, as long as the other criteria as specified
segments in Para 5 of IFRS 8 are met.
Research and development (R&D) An R&D activity or function may qualify as an operating segment if the R&D activity is not
incidental to the entity i.e. it is capable of earning external revenues from running projects for
external customers and sufficient and discrete financial information exist and is reviewed by the
CODM.
Interest in Joint Ventures (JV) In case of jointly controlled operations, if the CODM of the investor regularly reviews the results
and performance of the JV to decide the resources to be allocated to the JV and how to manage
the JV, then the JV can be identified as an operating segment.
Interest in associates In an associate, the investor does not control how the resources are used within that associate.
However, if the CODM of the investor reviews the operating results and performance of the
associate to assess whether to hold or sell the investment, it could be argued that this hold or
sell decision meets the resource allocation part of the definition of an operating segment.
Discontinued operations A discontinued operation can meet the definition of operating segment, if it continues to engage
in the business activities during the period it is classified as held for sale.
Post-employment benefit These are specifically excluded from being identified as operating segments.
schemes
Step 3 - Identify which operating (3) if they are similar in each of the following
segments require separate disclosure as respects:
reportable segments
- the nature of the production processes
Aggregate operating segment
- the type or class of customer for their
Under IFRS 8, two or more operating
products and services
segments may be aggregated into a single
operating segment when the operating - the methods used to distribute their
segments have characteristics so similar products or provide their services
that they can be expected to have
essentially the same future prospects. - if applicable, the nature of the
Aggregation is permitted only if: regulatory environment, e.g., banking,
insurance or public utilities.
(1) it is consistent with the core principle of
IFRS 8
(2) the segments have similar economic

characteristics
19
A significant amount of judgement is Determine reportable segments combined reported profit of all operating
required when applying the aggregation IFRS 8 includes quantitative thresholds for segments that did not report a loss and
tests. The ability to demonstrate similar determining the reportable segments. (ii) the combined reported loss of all
economic characteristics might provide the Entity shall report separate information operating segment that did report a loss
biggest challenge to management when about an operating segment that meets
(3) Assets are 10 percent or more of the
applying the aggregation provisions of IFRS any of the following criteria:
combined assets of all operating
8. This is because of the analysis that often
(1) Reported revenue (including both sales segment.
will be necessary in evaluating economic
similarity. In addition, in making this to external customers and inter
Entities must make sure that the total
evaluation, management needs to consider segment sales or transfer) is 10 percent
external revenue of the identified
the logic for an operating segment being or more of the combined revenue,
reportable segments constitutes 75
reported separately to the CODM while at internal and external, of the combined
percent or more of total consolidated
the same time believing that the operating operating segment
revenue. If not, additional operating
segment is similar enough to be (2) The absolute amount of reported profit segments are required to be reported
aggregated with other operating segments or loss is 10 percent or more of the separately until at least 75 percent of total
for external financial reporting purposes. greater, in absolute amount, of (i) the consolidated revenue is accounted for by
the reportable segments.
Reporting segment that do not If the management believes that information about the segment(s) would be useful to users of
meet the reportable threshold the financial statements, e.g. start up segment that is expected to exceed the threshold in the
future and make a significant contribution to the future success of the entity can be considered
as a separate reportable segment and disclosed.
Combining operating segment Once the first stage aggregation has been completed and the reportable segments identified, an
that individually do not meet the entity has a limited further opportunity to aggregate some segments that are not individually
quantitative thresholds reportable.
An entity may combine information about operating segments that do not meet the quantitative
thresholds for reportable segments with information about other operating segments of the
same status if and only if the operating segments concerned have similar economic
characteristics and share a majority of the aggregation criteria. This new aggregation may be
used to identify additional reportable segments. As noted, for the purpose of combining
segments in these circumstances only a majority of the aggregation criteria need to be met. This
is slightly less restrictive than the first stage aggregation for which all the criteria must be met.
Combining a reportable segment Not permissible unless aggregation is consistent with the core principles, the segments are
with a segment that does not economically similar, and meet all of the aggregation criteria.
meet the quantitative thresholds
Combining reportable segment Generally, reportable segment cannot be combined. However, IFRS 8 states that there may be a
practical limit to the number of reportable segments that an entity separately discloses beyond
which segment information may become too detailed. In such a case aggregation may be
needed and only segments that meet the majority of the aggregation criteria can be aggregated.
Single customer satisfies Information may be separately reported to the CODM for the business conducted with a major
thresholds for a reportable customer. If the customer qualifies as a reporting segment using the normal IFRS 8 criteria, then
segment the segment information for this customer should be separately disclosed. The identity of the
customer need not be given but the segment should be appropriately described
CODM is presented with more IFRS 8 does not explicitly state as to which measure of profitability or of assets should be used
than one measure for segment for the purpose of the threshold test. However, using the management approach, it would seem
profitability and/or assets logical to use the measure most relied upon by the CODM for assessing performance and
deciding on the allocation of resources. If this does not give a clear answer, the measure that is
most consistent with the measurement principles used elsewhere in the entity's financial
statements should be used.
CODM uses different profitability In such circumstances management should determine a reasonable and consistent basis to
or asset measures for different compare segments for the 10 percent result or asset test.
segments
20
Step 4 - Disclose segment information (c) the total of the reportable segment included in the measure of segment
assets to the entity's assets profit or loss, but the entity's financial
Once the reportable segments have been
statements reflect only actual interest
determined, specific components of (d) the total of the reportable segment
expense)
segment assets, segment liabilities and liabilities to the entity's liabilities
segment operating results are required to (c) amounts reported by the entity in the
(e) the total of the reportable segment
be disclosed if they are reported to the group's financial statements for
amount for every other material item of
CODM. The amount of each segment item consolidated revenue, consolidated
information disclosed to the
disclosed may be determined using profit or loss before income tax, or
corresponding amount for the entity.
accounting policies different from those consolidated assets that do not qualify
applied in the financial statements. Reconciling items usually will result from for inclusion in the ‘all other’ category of
the following: the segment disclosure (e.g., corporate
IFRS 8 requires reconciliations of:
headquarters are unlikely to meet the
(a) different accounting policies used to
(a) the total of the reportable segment definition of an operating segment and
determine amounts reported by the
revenues to the entity's revenue therefore would not be included in ‘all
operating segment compared to the
other’ category)
(b) the total of the reportable segment accounting policies used to prepare the
measures of profit or loss to the entity's entity's financial statements (e.g., FIFO (d) elimination and consolidation
profit or loss before tax expense (tax inventory costing for the segment adjustments.
income) and discontinued operations. compared to weighted average
However, if an entity allocates to inventory costing for the group)
reportable segment items such as tax
(b) allocation methods (e.g., a cost of
expense (tax income), the entity may
capital is computed by corporate
reconcile the total of the segments
headquarters and charged to each
measures of profit or loss to the entity's
operating segment, the amount is
profit or loss after those items
21
Step 5 – Entity-wide disclosure included already in the segment

disclosures. Additionally, in our view, entity-
Entity-wide disclosures about products and
wide disclosures are required only for
services, geographical areas and major
annual reporting periods.
customers for the entity as a whole are
required, regardless of whether the The entity-wide disclosures should be
information is used by the CODM in based on the same financial information
assessing segment performance. Those that is used to produce the entity's
disclosures apply to all entities subject to financial statements (i.e., not based on the
IFRS 8, including entities that have only management approach). Accordingly, the
one reportable segment. However, revenue reported for these disclosures
information required by the entity-wide should agree to the entity's total revenue.
disclosures need not be presented if it is
Currency in which to report Segment information sometimes is reported internally, for use by the CODM, in a currency that
segment information is different from the presentation currency used in the entity's financial statements. In our view,
it would be more useful to the users if segment information is disclosed using the same
presentation currency as the entity's financial statements, even if a different currency is used for
internal management reporting.
Changes in segment measures An entity might change its internal reporting structure such that the segment measures provided
to, and used by, the CODM for purposes of assessing performance and making resource
allocation decisions are different from the segment measures previously provided and used.
IFRS 8 does not explicitly require the entity to restate segment information for previous periods,
including interim periods, for changes in segment measures. To enhance comparability with other
periods presented, when a change in segment measure occurs, the entity could either:
• restate segment information for previous periods, including interim periods, using the new
segment measure
• quantify and disclose the effects of the change in segment measure in the current period and
all future periods until all periods presented use the new segment measure
Restatement of previously Operating segments

reported information
Segment information for earlier periods, including interim periods, is required to be restated to
conform to the current year presentation in the following circumstances:
• the year of adoption of IFRS 8
• changes in the composition of operating segments
• changes in reportable operating segments.
Entity-wide disclosures
IFRS 8 does not provide guidance on whether prior year amounts in entity-wide disclosures need
to be restated if there is a change in the current year. In our view, the prior year information
should be restated, if practicable, so that the disclosures from year to year are comparable.
“ Operating
segment disclosures
provide a bird's eye
view of the information
and communication “
process surrounding the
resource allocation
within an enterprise
Summary of major differences between IFRS 8 and SFAS 131
As part of the convergence programme between IASB and FASB, an attempt has been made to harmonise the two accounting frameworks
(i.e. IFRS and US GAAP). However certain differences still continue conceptually and in practical implementation.
Difference IFRS 8 SFAS 131
‘Non-current assets’ versus ‘long-lived ‘Non-current assets’ under IFRSs include ‘Long-lived assets’ implies hard assets that
assets’ intangible assets, therefore they are cannot be readily removed, which would
required to be disclosed if regularly appear not to include intangible assets;
provided to and / or considered by the therefore there is no explicit requirement
CODM. to disclose intangible assets.
Segment liabilities Segment liabilities are disclosed if regularly No requirement to disclose segment
provided to and / or considered by the liabilities.
CODM.
Entities with a matrix form of organisation Operating segments are determined based Operating segments are determined based
on the core principle of IFRS 8. on products and services.
Extraordinary items The concept of extraordinary items was Extraordinary items are required to be
eliminated from IFRSs in 2003. disclosed, if regularly provided to and / or
considered by the CODM.
Summary of the major differences between IFRS 8 and IAS 14

Difference IFRS 8 IAS 14
Reporting segments • Identification of segment based on the • Identification of segment based on

manner in which the management views industry types and geographical areas
the business - Management approach expected to have differing risk and
rewards - Risk and reward approach
• Includes components of entity that sell • Includes those that earn majority of its
primarily or exclusively to other revenues from sales to external
components customers
Measurement Measures reported to management Measures used in the financial statements
Disclosure Requires disclosure on an entity-wide basis Requires disclosure of secondary segment

even in case of entity with a single information for either industry or
reportable segment geographical segments, to supplement the
information given for the primary segment
23
Summary of major differences between IFRS 8 and AS 17

(Indian GAAP)
Difference IFRS 8 AS 17
Reporting segments Identification of segment based on the AS 17 requires entity to identify two sets of
manner in which the management views segments (business and geographical),
the business - Management approach using a risk and rewards approach, with the
enterprises system of internal financial
reporting to key management personnel
serving as the starting point for the
identification of such segments.
Measurement Measures used while reporting to Measures used in the financial statements
management
Disclosure Requires disclosure on an entity-wide basis Requires disclosure based on classification

even in case of entity with a single of segments as primary or secondary.
reportable segment Disclosure requirements for secondary
reporting format are less detailed than
those required in primary reporting
formats.
Conclusion
IFRS 8 warrants a word of caution -

those who regard it as ‘just’ a
disclosure standard may
underestimate the effort needed to
make it part of a coherent set of
financial statements. This standard
requires judgements that are
critical to shaping the disclosures,
in particular, when to aggregate
units into a single ‘reportable’
segment - and when not to. One
must be careful not to
underestimate the thoughts and
efforts required to comply with
IFRS 8.
24
Regulatory Updates
• Exposure due to hedging positions may disclosures on hedging positions

Review of norms for not be included in the above mentioned undertaken through futures, options and
investment and limits subject to certain conditions as swaps, etc.
mentioned in the circular
disclosure by Mutual (source: Circular No. Cir/IMD/DF/11/2010 issued
• Mutual Funds may enter into plain by SEBI, dated 18 August, 2010)
Funds in derivatives vanilla interest rate swaps for hedging
In order to have prudential limits for

purposes. The counter party in such Mandatory disclosures by the
transactions has to be an entity media of its stake in the corporate
derivative investments by mutual funds and
recognised as a market maker by the
to bring in transparency and clarity in the sector
RBI. Further, the value of the notional
related disclosure to investors, SEBI vide
principal in such cases must not exceed In view of media groups entering into
circular dated 18 August 2010 has modified
the value of respective existing assets ‘private treaties’ with listed companies or
the norms for investment by mutual funds
being hedged by the scheme. Exposure companies coming out with a public offer,
in derivatives and its dislosure.
to a single counterparty in such SEBI had made recommendations to the
The revised norms come into force with transactions should not exceed 10 Press Council of India regarding disclosure
effect from 1 October 2010 for all existing percent of the net assets of the by the media group of its stake in corporate
mutual fund schemes and will also be schemes sector.This is probably the first time a
applicable to all new mutual fund schemes fiduciary duty has been cast on 'public
• Exposure due to derivative positions
launched after 18 August 2010. media', to curb any potential conflicts of
taken for hedging purposes in excess of
As per the Circular the key changes in interest and protect the right to information
the underlying position against which
exposure limits are as follows: for the consumer. The Press Council of
the hedging position has been taken,
India vide a press release dated 2 August
shall be treated under the limits
• The cumulative gross exposure through 2010 has issued the following guidelines:
mentioned for the total exposure
equity, debt and derivative positions
related to the option premium. • Disclosures regarding the stake held by
should not exceed 100 percent of the
net assets of the scheme the media company should be made in
Disclosures the news report/article/editorial in
• Mutual Funds shall not write options or newspapers/television relating to the
purchase instruments with embedded The manner of disclosure of derivatives company in which the media group
written options position in half yearly portfolio disclosure holds such stake
reports has not been specified in the SEBI
• The total exposure related to option • Disclosure on the percentage of stake
(Mutual Funds) Regulations, 1996 and the
premium paid must not exceed 20 held by media groups in various
disclosures being currently made are not
percent of the net assets of the companies under such 'private treaties'
uniform across the industry. In order to
scheme on the website of media groups should
ensure uniformity in disclosure of
investments in derivative instruments by be made
• Cash or cash equivalents with residual
maturity of less than 91 days may be Mutual Funds in various periodic reports
• Any other disclosures relating to such
treated as not creating any exposure (e.g. half yearly / annual), the circular has
agreements such as any nominee of
prescribed certain detailed disclosure
the media group on the board of
requirements. These include specific
25
directors of the company, any The plant had been constructed by the The committee is of the view that such
management control or other details company under build-own-operate scheme expenditure cannot be said to be
which may be required to be disclosed (‘BOO scheme’). Therefore, in the view of attributable to bringing the plant to its
and which may be a potential conflict of the committee, the provisions related to working condition for its intended use as it
interest for the media group, should self-constructed assets would apply in the is not attributable to the construction
also be mandatorily disclosed. present case (based on interpretation form activity or is in the nature of price
Para 20 read with Para 21 of AS 10 adjustment to the cost of a fixed asset the
(source: Press release no: PR/3/10-11-PCI issued
by Press Council of India dated 2 August, 2010)
Accounting for Fixed Assets). liquidated damages payable cannot be
treated as deferred revenue expenditure to
The Committee noted that paragraph 10.1
be amortised over a period of three to five
Expert Advisory Committee of AS 10 Accounting for Fixed Assets
years after commencement of commercial
(‘EAC’) Opinion provides that in arriving at the gross book
production. The committee is of the view
value of self-constructed fixed assets, the
that the liquidated damages are more in
Summarised below is the opinion given by same principles apply as those described in
the nature of a penalty resulting from non-
the Expert Advisor Committee (‘the paragraphs 9.1 to 9.5. The Committee is of
fulfillment of the terms of the agreement,
Committee’ or ‘the EAC’) of the Institute. the view that paragraph 9.1 is relevant to
in this case, the target date of
the case under consideration which states,
commencement of gas supply. Liquidated
Treatment of liquidated damages “The cost of an item of fixed asset
damages are more in the nature of
payable for delay in the comprises its purchase price, including
compensation for loss of revenue on
import duties and other non-refundable
commissioning of plant (ICAI account of non-supply of gas by the
taxes or levies and any directly attributable
Journal September 2010) company. Accordingly, such expenditure
cost of bringing the asset to its working
cannot be capitalised and should be
condition for its intended use; any trade
The querist had sought the opinion of the expensed by way of charge to the profit
discounts and rebates are deducted in
committee as to whether the amount to be and loss account as no future benefit is
arriving at the purchase price. Examples of
paid by the company on account of expected from the same.
directly attributable costs are:
liquidated damages due to delay in
commencement of supply of gases to the (I) site preparation
customer consequent upon delay in
bringing their plant to its working condition (ii) initial delivery and handling costs
on the appointed target commencement
(iii) installation cost, such as special
date, be capitalised as an additional cost
foundations for plant
attributable to the project. If the liquidated
damages are not allowed to be capitalised (iv) professional fees, for example fees of
whether it can be treated as deferred architects and engineers.
revenue expenditure (amortised over a
The cost of a fixed asset may undergo
period of three to five years after the
changes subsequent to its acquisition or
commencement of commercial
construction on account of exchange
production).
fluctuations, price adjustments, changes in
duties or similar factors”
kpmg.com/in
The information contained herein is of a general nature and is not intended to address the circumstances of any particular © 2010 KPMG, an Indian Partnership and a member
individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that firm of the KPMG network of independent member
such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one firms affiliated with KPMG International Cooperative
should act on such information without appropriate professional advice after a thorough examination of the particular (“KPMG International”), a Swiss entity. All rights
situation. reserved.
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ACCOUNTING

Demystifying the accounting information that is set out in the financial

A recent pronouncement by SEBI requiring media houses to disclose their

We hope you enjoy reading these articles. We look forward to receiving

1 KPMG's Accounting and Auditing Update, October 2010

Source: KPMG's Accounting and Auditing Update, October 2010

Step 1: Identify Separate components

Sale of goods Rendering of services Construction contracts

Sale of goods Rendering of services Construction contracts

Source: KPMG's Accounting and Auditing Update, October 2010.

Is a specific asset or specific assets being used?

Is a right to use being conveyed, i.e.

Does the customer pay

There is an embedded lease

Source: KPMG's Accounting and Auditing Update, October 2010.

Non monetary arrangements Asset Retirement

“ “ entities would need to make their 'best

In our discussion here, we will try to

Since, accounting practices in India,

Will the approach to accounting of

What is initial recognition

What is the threshold to recognise

At what rate deferred tax assets

What to do when there is a

How to classify deferred tax assets

Can deferred tax assets and

How should intercompany Clarification (GC) – 18/2002, Accounting for

In order to not recognise a deferred tax, an

Domestic subsidiaries No DTL is required if the parent company can recover

Foreign entities (i.e., No DTL is recorded, if the parent company's

Determination of 'foreseeable future' should be

As is evident, the ED seems to eliminate

For entities that operate in a variety of classes of business,

Identify the chief operating

Identify which component of the

Identify which operating Disclose segment information

Provide entity-wide disclosures

Step 2 - Identify which component of Consequently, the following components of

(2) the segments have similar economic

Step 5 – Entity-wide disclosure included already in the segment

Restatement of previously Operating segments

• changes in the composition of operating segments

• changes in reportable operating segments.

Difference IFRS 8 SFAS 131

Summary of the major differences between IFRS 8 and IAS 14

Reporting segments • Identification of segment based on the • Identification of segment based on

Measurement Measures reported to management Measures used in the financial statements

Disclosure Requires disclosure on an entity-wide basis Requires disclosure of secondary segment

Summary of major differences between IFRS 8 and AS 17

Disclosure Requires disclosure on an entity-wide basis Requires disclosure based on classification

IFRS 8 warrants a word of caution -

• Exposure due to hedging positions may disclosures on hedging positions

In order to have prudential limits for

KPMG and the KPMG logo are registered trademarks

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