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Published by , 2017-01-24 04:59:32

NLC FINANCE SEMINAR E-SOUVENIR

NLC FINANCE SEMINAR E-SOUVENIR

Best Practices in Financial Management

Contents
ACCOUNTING........................................................................................................................................... 6
IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS - A NEW PARADIGM IN
REVENUE RECOGNITION - A CASE OF TELECOM INDUSTRY ....................................................... 7
INDIAN ACCOUNTING STANDARD (IND AS) 115 - REVENUE FROM CONTRACTS WITH
CUSTOMERS............................................................................................................................................. 13
INTERNAL AUDIT ................................................................................................................................... 22
ROLE OF SAP ERP IN INTERNAL CONTROL SYSTEM..................................................................... 29
RVG AND EVA – A CORPOATE SAGA ................................................................................................ 34

TAXATION ............................................................................................................................................... 37
BUDGET 2017: WILL DIRECT TAXES PROPOSAL CHARGE UP THE GRID? ................................ 38
GST: GAME CHANGER FOR INDIAN ECONOMY? ............................................................................ 44
APPLICABILITY OF GST ON LIQUIDATED DAMAGES ................................................................... 52
GST - KEY ISSUES - INDUSTRY’S PERSPECTIVE ............................................................................. 57
IMPACT OF GST ON ENERGY SECTOR ............................................................................................... 68
IMPACT ON ENTERPRISE RESOURCE PLANNING – TRANSITION TO GST ................................ 73
ACTION POINTS BEFORE GST IMPLEMENTATION ......................................................................... 84
GOODS & SERVICE TAX (GST) - WAY FORWARD & IMPLEMENTATION STRATEGY ............ 90

FINANCIAL MANAGEMENT............................................................................................................... 94
NTPC'S 'GREEN MASALA BOND' ......................................................................................................... 95
COST OF CAPITAL – A REVIEW ......................................................................................................... 101
FINANCIAL MANAGEMENT IN CONSTRUCTION INDUSTRY - WITH FOCUS ON FINANCIAL
MODELING IN REAL ESTATE............................................................................................................ 105
CAPITAL BUDGETING & PROJECT PLANNING .............................................................................. 112
MANAGEMENT TOOLS AND TECHNIQUES FOR EFFECTIVE ENTERPRISE MANAGEMENT119
STUDY OF WORKING CAPITAL MANAGEMENT-PRACTICAL ANALYSIS ............................... 126
TREASURY MANAGEMENT (TM) ...................................................................................................... 151

COST ACCOUNTING........................................................................................................................... 164
COST CONTROL .................................................................................................................................... 165
COST MANAGEMENT IN GENERATION OF ELECTRICITY – SYNOPSIS ................................... 184

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OTHERS.................................................................................................................................................. 187
LETTER OF CREDIT (LC) ..................................................................................................................... 188
INVESTMENT OF HARD EARNED MONEY ................................................................................................ 194
PRADHAN MANTRI GARIB KALYAN YOJANA (PMGKY) ......................................................................... 199
INDIAN STEEL INDUSTRY AND COST REDUCTION. .................................................................... 204
STEP ANALYSIS OF INDIAN AVIATION........................................................................................... 209
STRENGTHENING HUMAN RESOURCE BUILDING THE NATION .............................................. 222
ANALYSIS OF FOREIGN DIRECT INVESTMENT INFLOWS INTO INDIA ................................... 229
CORPORATE FINANCE – A STUDY ON DIFFERENT SOURCES OF FUNDING .......................... 240
MINE PROPERTIES................................................................................................................................ 252
CORPORATE GOVERNANCE IN LISTED COMPANIES WITH SPECIFIC REFERENCE TO
RELATED PARTY TRANSACTIONS ................................................................................................... 263

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Best Practices in Financial Management

ACCOUNTING

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IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS - A NEW PARADIGM
IN REVENUE RECOGNITION - A CASE OF TELECOM INDUSTRY

K. Ch. A. V. S.N. Murthy, CMA
Former Chairman – SIRC., Hyderabad

Business is growing rapidly, and changing as well. Recent developments in technology like
cloud computing, virtualization, distributed computing etc. have changed the business models of
certain technology and telecom companies. All this compels for a revision of accounting
policies, practices and standards.

With respect to the telecommunications industry, for the complicated products and services it
offers, the guidance given by the standards IAS 18 or AS 9 is limited. The emerging concept
“Multiple-Element Arrangement” was not fully covered by these accounting standards. Most of
today’s transactions are bundled i.e., involve the performance obligation of delivery of goods
and services over a period of time and involve multiple elements. The points – ‘How companies
record revenue from customer contracts that are delivered over time?’, ‘How is the allocation of
consideration done in a multi-element customer contract done?’ have seen answers with
sufficient guidance only after the emergence of IFRS-15 in May 2014. Where the standards did
not guide entities, judgmental factors crept in and brought inconsistencies in the comparison of
firms as they followed their own policies. The International Accounting Standards Board (IASB)
and Financial Accounting Standards Board (FASB) have together issued the new standard that
puts a halt to several accounting inconsistencies in place so far.

IFRS 15, Revenue from contracts with customers, that is effective from 1st Jan 2018, replaces
IAS 18 – Revenue, IAS 11 – Construction Contracts, IFRIC 13 – Customer Loyalty Programs,
IFRIC -18 – Transfer of assets from customers, IFRIC 15 Agreements for the Construction of
Real Estate and SIC 31 Revenue – Barter Transaction Involving Advertising Services.

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SCOPE OF IFRS -15
IFRS 15 applies to all contracts with customers to provide goods or services in the ordinary
course of business, except for the following contracts which are specifically excluded from the
Scope:

 Lease contracts within the scope of IAS 17 Leases
 Insurance contracts within the scope of IFRS 4 Insurance Contracts
 Financial instruments and other contractual rights or obligations within the scope of IFRS

9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement,
IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27
Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures
 Non-monetary exchanges between entities in the same line of business to facilitate sales
to customers or potential customers

Indian GAAP did not provide any guidance for multiple-arrangement contracts. IFRS 15 also
offers guidance for issues like contract modifications, service revenue, multiple-element
arrangements, non-cash and variable consideration, rights of return and other customer options,
seller repurchase options and agreements, warranties, principal Vs agent, licensing intellectual
property, breakage, non-refundable upfront fee, consignment and bill-and-hold arrangements.

IFRS 15 gives guidance in almost all aspects of the contracts with customers including contract
modifications. The biggest areas of impact because of this standard are the way revenue is
spread, how revenue is measured with the progress of the contract, revenue of bundled services,
split of components in the multiple element arrangement, contract costs, time value of money,
financing components etc.

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FIVE STEP MODEL

IFRS 15 gives a 5 step model in recognizing revenues, especially for the multiple element
arrangements. These are detailed below.

Step 1: Identify the contract with the customer.

A contract can be in writing or oral or in accordance with other customary business
practices. The contract also creates enforceable rights and obligations to be met in the
performance of the contract.

Step 2: Identify the performance obligations

A performance obligation is a promise with a customer to transfer a good or a service at a
predetermined time.

Step-3: Determine the performance obligations

The transaction price is the amount of consideration (for example, payment) to which an
entity expects to be entitled in exchange for transferring promised goods or services to a
customer, excluding amounts collected on behalf of third parties.

Step-4: Allocate the transaction price to the performance obligations

For a contract that has more than one performance obligation, an entity should allocate
the transaction price to each performance obligation in an amount that depicts the amount
of consideration to which the entity expects to be entitled in exchange for satisfying each
performance obligation.
When an entity determines that a contract has more than one performance obligation, it is
required to allocate the transaction price to each performance obligation based on the
relative stand-alone prices.

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Step-5: Recognize revenue when the performance obligations are satisfied.

 Under IAS 18, the focus is on the measuring the fair value of the consideration to be
received, while under IFRS 15 the objective is to recognize revenue equal to the price the
customer would have paid had he paid in cash.

Once the separate performance obligations are identified and the transaction price has been
determined, an entity is required to allocate the transaction price to each performance obligation
on a relative stand-alone selling price basis. Currently, IAS 18 notes that, in some instances,
revenue is recognized for the separate elements identified so as to reflect the substance of a
single transaction.

Industries that are impacted by the adoption of IFRS 15 are software, telecommunications and
the real estate. The timing of revenue and profit recognition are significantly affected by the
adoption of this standard. The amount and timing of a portion of the transaction price could vary,
due to discounts, rebates, refunds, credits, price concessions, incentives, bonuses, penalties or
other similar items. Under IFRS 15, these variable amounts are estimated and included in the
transaction price using either the expected value method or the most likely amount method,
whichever better predicts the consideration to which the entity is entitled. The entity should
apply the selected method consistently throughout the contract and update the estimated
transaction price at the end of each reporting period.

Month-to-month contracts are common in the telecom industry. A month-to-month contract
represents a series of renewal options because the same services continue to be provided until the
customer or telecom entity cancels them. Most telecom entities have sufficient historical data to
estimate the average customer life and may question whether they should consider the average
customer life when applying the standard to month-to-month contracts.

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Wire-line entities frequently offer incentives, such as free products or services to attract new
customers. For example, wire-line entities frequently give new customers free tablets, TVs, a
free month of service or a free premium channel, among other things, in order to entice them to
sign up for services. These free services represent promised goods and services under the
contract and need to be assessed to determine whether they represent separate performance
obligations.

Telecom entities frequently provide their customers with set-top boxes as part of providing video
services to the customer. Under IFRS 15, entities will have to determine if the set-top box is a
revenue element or a leasing element. Assuming that such a set-top box does not meet the
definition of a lease (and, therefore, is within the scope of IFRS 15), a telecom entity will need to
determine whether the set-top boxes (as well as modems and routers) are separate performance
obligations.

Example of a telecom prepayment plan

Mr. X enters into a 12 month telecom plan with his operator, say ABC. The terms of the plan
are fixed fee of Rs. 100 per month and X will be given a handset at the beginning of the
contract.
ABC sells the same handset for Rs. 300 and the same prepayment plan without handset for Rs.
140.
The revenue recognition as per IAS 18 and IFRS 15 is as under:

Parameter IAS-18 IFRS-15

Rs. 0 Rs. 182
(workings given below)
Revenue from sale of (as it is given free; this is treated as customer

handset acquisition cost and debited to P&L account)

Revenue from Rs. 100 a month Rs. 1018
monthly plan (workings given below)

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Workings for IFRS - 15 based revenue recognition

Step-1: Identify the contract 12-month plan

Step-2: Identify all performance 1. Deliver Handset
obligations 2. Deliver network services for 12 months
Step 3: Determine Transaction price
= Rs. 100 * 12 = 1200
Step-4: Allocate transaction price
Revenue for hand set = Rs. 182
Step-5: Recognize revenue when ABC Revenue for service = Rs. 1018
satisfies performance obligations
1. Recognize Rs 182 when handset is given
2. Recognize network charges of Rs. 1018 in 12
months (monthly bill charges)

Stand-

Performance alone % on Revenue
selling Total
(=relative obligation
15.2% 182.00
sellHinagnpdrsiecte *% 300.00 8c4a.l8c%ulated ) 1018.00

Network price 1680.00
services (=140*12)

Total 1980.00 100.0% 1200.00

It is observed that revenue recognition is accelerated compared to the that of IAS 18. Also
implementing IFRS 15 needs a change in the information systems of entities that enable revenue
to recognized early or at a later period depending on the terms of contract with each customer.
All customer contracts have to be revisited and the stand alone prices of multiple elements in a
contract have to be captured. Adequate disclosures are also needed for the contracts with
customers

References:
1) http://www.ifrsbox.com/ifrs-15-vs-ias-18/
2) http://www.bpmcpa.com/RevRecCloud/
3) http://ifrs.wiley.com/standards/13359_IFRS15_Stand- ard_Website.pdf
4) http://www.iasplus.com/en/standards/ifrs/ifrs15

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INDIAN ACCOUNTING STANDARD (IND AS) 115 - REVENUE FROM

CONTRACTS WITH CUSTOMERS

CA. Vinay Nahar
Practicing Chartered Accountant

Introduction

As per the Ministry of Corporate Affairs notification on 16 February 2015 the first stage of
implementation of Ind AS is to begin from 1 April 2016, with comparable for the period ending
31 March 2016.

There are 39 IND AS notified by the Ministry of Corporate Affairs.
One of the Ind AS notified was Ind AS 115 Revenue from Contracts with Customers.

The aspect to be noted is that IASB has made IFRS 15 compulsorily applicable only from
accounting periods beginning on or after 1 January 2018 (earlier application is allowed), but
MCA had gone a step forward and made Ind AS 115 compulsorily applicable to the companies
(as per the road map of convergence to IFRS (Ind AS)) from 1 April 2016.

But as per the MCA notification on 30 March 2016, Ind AS 11 – Construction Contract and Ind
AS 18 – Revenue were made effective and delayed the applicability of Ind AS 115.

Summary of the provisions of Ind AS 115 – Revenue From Contracts with Customers:

Definitions:
The standard has defined “Income” as increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets or decreases of liabilities that result in an
increase in equity, other than those relating to contributions from equity participants.
The standard defines Revenue as “income that arises in the course of ordinary activities”.

Analysis of the definitions above two definitions:

“Inflows result in increases in equity, other than increases relating to contributions
from equity participants”- the first aspect of this sentence means that the inflows generated
will increase the shareholders’ funds by contributing to the profit (or reducing the loss) of the
entity. The second aspect of this sentence means that there can be an increase in the

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shareholders’ funds when they subscribe to new shares issued by the entity, the increase in
shareholders fund from this source will not be termed as revenue.

“Ordinary activity” has not been defined in the standard, but it generally means day to day
activity of the entity. The indicators of an ordinary activity can be derived from the “Main
Objects” mentioned in the Memorandum of Association of an entity. For example an entity
can have “manufacture and selling of Burner Turbine and Generator (BTG)” as one of its
main objective, then income generated from selling BTG will be taken as revenue for that
entity. The other aspect in this situation is a power generation entity whose one of the Main
Objects” is “generating and selling electricity” buys the BTG to generate power. When the
power generating entity sells the BTG, the income generated from it will not be termed as
revenue as it was not generated from its ordinary activity.

The five steps of the revenue recognition process:

1. Identify the contract with the customer.
2. Identify the separate performance obligations.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognize revenue when (or as) a performance obligations is satisfied.

Step 1: Identify the contract with the customer

An entity shall apply this Standard to a contract only if the counterparty to the contract is a
customer.

Customer is a party that has contracted with an entity to obtain goods or services that are an
output of the entity’s ordinary activities in exchange for consideration.

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A counterparty to the contract would not be a customer if, for example, the counterparty has
contracted with the entity to participate in an activity or process in which the parties to the
contract share in the risks and benefits that result from the activity or process (such as
developing an asset in a collaboration arrangement) rather than to obtain the output of the
entity’s ordinary activities

The revenue recognition principles of Ind AS 115 will apply only when a contract meets all
of the following criteria:

• the parties to the contract have approved the contract;
• the entity can identify each party's rights regarding the goods or services in the contract;
• the payment terms can be identified;
• the contract has commercial substance; and
• it is probable that the entity will collect the consideration due under the contract.

Some contracts with customers may have no fixed duration and can be terminated or modified by
either party at any time. Other contracts may automatically renew on a periodic basis that is
specified in the contract. An entity shall apply this Standard to the duration of the contract (ie the
contractual period) in which the parties to the contract have present enforceable rights and
obligations.

In evaluating whether collectability of an amount of consideration is probable, an entity shall
consider only the customer’s ability and intention to pay that amount of consideration when it
is due.

Commercial substance means that the risk, timing or amount of the entity‘s future cash flows is
expected to change as a result of the contract.

Conditions for it to be a valid contract are assessed at the beginning of the contract and, if
the contract meets them, they are not reassessed unless there is a significant change in
circumstances that makes the contract rights and obligations unenforceable.

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If a contract does not initially meet the criteria, it can be reassessed at a later date.

When a contract with a customer does not meet the criteria mentioned in above (Step 1)
and an entity receives consideration from the customer, the entity shall recognize the
consideration received as revenue only when either of the following events has occurred:

• the entity has no remaining obligations to transfer goods or services to the customer and
all, or substantially all, of the consideration promised by the customer has been received
by the entity and is non-refundable; or the contract has been terminated and the
consideration received from the customer is non-refundable.

An entity shall recognize the consideration received from a customer as a liability until
one of the events mentioned above occurs or until the criteria mentioned in above (all
conditions to be a valid contract) are subsequently met.

Depending on the facts and circumstances relating to the contract, the liability recognized
represents the entity’s obligation to either transfer goods or services in the future or
refund the consideration received. In either case, the liability shall be measured at the
amount of consideration received from the customer.

Step 2: Identify performance obligations

Performance obligation is a promise to transfer to a customer:
• a good or service (or bundle of goods or services) that is distinct; or
• a series of goods or services that are substantially the same and are transferred in the
same way.

If a promise to transfer a good or service is not distinct from other goods and services in a
contract, then the goods or services are combined into a single performance obligation.
A good or service is distinct if both of the following criteria are met:

1. The customer can benefit from the good or service on its own or when combined with
the customer's available resources; and

2. The promise to transfer the good or service is separately identifiable from other goods
or services in the contract.

A transfer of a good or service is separately identifiable if the good or service:
• Is not integrated with other goods or services in the contract;

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• Does not modify or customize another good or service in the contract; or
• Does not depend on or relate to other goods or services promised in the contract.

Example to identify performance obligations:
1. XYZ Pvt. Ltd. is into the business of construction. It enters into a contract with a
customer for construction of a specific building. The goods and services to be provided in
the contract include procurement, construction, piping, wiring, installation of equipment
and finishing.

Although the goods and services provided by the contractor are capable of being distinct,
they are not distinct in this contract because the goods and services cannot be separately
identified from the promise to construct the building. XYZ Pvt. Ltd. will integrate the
goods and services into the unit, so all the goods and services are accounted for as a
single performance obligation.

2. A software developer, XYZ enters into a contract with a customer to transfer a software
license, perform installation and provide software updates and technical support for five
years. XYZ sells the license, installation, updates and technical support separately. XYZ
determines that each good or service is separately identifiable because the installation
does not modify the software and the software is functional without the updates and
technical support.

The software is delivered before the installation, updates and technical support and is
functional without the updates and technical support, so the customer can benefit from
each good or service on its own. XYZ also has determined that the software license,
installation, updates and technical support are separately identifiable. On this basis, there
are four performance obligations in this contract:

1. Software license 2. Installation service 3. Software updates 4. Technical support.

Step 3: Determine the Transaction Price Page 17
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Transaction price is the amount of consideration to which an entity is entitled in exchange for
transferring goods or services.

The transfer price does not include amounts collected for third parties (i.e. sales taxes or VAT).
The effects of the following must be considered when determining the transaction price:

• The time value of money (the concept of discounting) has to be considered if a
significant financing component in the contract exists. The time value of money does
not need to be considered if the length of the contract is less than one year. A
significant financing component may exist regardless of whether the promise of financing
is explicitly stated in the contract or implied by the payment terms agreed to by the
parties to the contract.

• In the situation where non cash consideration is received, the Fair Value of any non-
cash consideration received is the transaction piece.

• Estimates of variable consideration (“Expected Value” or “Most likely amount” method
depending on the facts of the case).

• Consideration payable to the customer - Consideration payable to the customer is
treated as a reduction in the transaction price unless the payment is for goods or services
received from the customer).

Example involving a “significant financing component”:
On 1 January 2015, XYZ sold furniture to a customer for $4,000 with three years' interest-free
credit. The customer took delivery of the furniture on 1 January 2015. The $4,000 is payable to
XYZ on 31 December 2017. Discount rate 8% **.

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CF at end of 3 years is 4,000.
Discount rate = 8%
Thus PV = 4,000 * (1/1+.08)3 = 3,175 = Sale consideration.
Interest expense - 2015 = 254; 2016 = 274; 2017 = 296.
**an entity shall use the discount rate that would be reflected in a separate financing transaction
between the entity and its customer at contract inception. That rate would reflect the credit
characteristics of the party receiving financing in the contract, as well as any collateral or
security provided by the customer or the entity, including assets transferred in the contract. An
entity may be able to determine that rate by identifying the rate that discounts the nominal
amount of the promised consideration to the price that the customer would pay in cash for the
goods or services when (or as) they transfer to the customer.

Step 4: Allocate Transaction Price
The transaction price is allocated to all separate performance obligations in proportion to the
stand-alone selling price of the goods or services.

Stand-alone selling price is the price at which an entity would sell a promised good or service
separately to a customer.

The best evidence of stand-alone selling price is the observable price of a good or service when
it is sold separately.

The stand-alone selling price should be estimated if it is not observable.

The allocation is made at the beginning of the contract and is not adjusted for subsequent
changes in the stand-alone selling prices of the goods or services.

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Example:
XYZ enters into a contract with a customer to transfer a software license, perform installation,
and provide software updates and technical support for five years in exchange for $240,000.

Standalone SP – License=150,000; Installation=60,000; Update=40,000; Tech support=50,000.

Allocation of 240,000  License=120,000{(150,000/300,000)*240,000}; Installation=48,000;
Update=31,992; Tech support=40,008.
Step 5: Recognize Revenue
Recognize revenue when (or as) a performance obligation is satisfied by transferring a
promised good or service (an asset) to the customer.

An asset is transferred when (or as) the customer gains control of the asset.

The entity must determine whether the performance obligation will be satisfied over time
or at a point in time.

A performance obligation is satisfied over time if one of the following criteria is met:
• The customer receives and consumes the benefits of the entity's performance as the
entity performs (e.g. service contracts, such as a cleaning service or a monthly payroll
processing service).

• The entity's performance creates or enhances an asset that the customer controls as
the asset is created or enhanced (e.g. a work-in-process asset).

• The entity's performance does not create an asset with an alternative use to the entity
(seller) and the entity has an enforceable right to payment for performance
completed to date.

Revenue is recognized over time by measuring progress towards complete satisfaction of the
performance obligation. Output methods and input methods can be used to measure progress
towards completion.

A performance obligation that is not satisfied over time is satisfied at a point in time.

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Revenue should be recognized at the point in time when the customer obtains control of the
asset.
Indicators of the transfer of control include:

• the customer has an obligation to pay for an asset;
• the customer has legal title to the asset ;
• the entity has transferred physical possession of the asset;
• the customer has the significant risks and rewards of ownership;
• the customer has accepted the asset.

Conclusion:
Ind AS 115 deals with recognition or revenue arising from sale of goods and services.
The thought process of revenue recognition in summary is to:

• Identify a contract with a customer.
• Then determine different performance obligations of the seller (service provider) in the

contract.
• Then determine and allocate the transaction price to each performance obligation.
• Then for each performance obligation determine if they will be satisfied over time or at a

point in time and then recognize revenue accordingly for each performance obligation.
Ind AS 115 is significantly different from the “Accounting Standard 9 – Revenue Recognition”.

*****

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INTERNAL AUDIT

ROVISIONS OF SECTION 138 (1) – Companies Act, 2013
 Companies Act 2013 prescribes Internal Audit

This section states that certain classes of Companies shall be required to appoint an internal
auditor who shall either be a Chartered Accountant, Cost Accountant or such other
professional as may be decided by the Board to conduct internal audit of the functions and
activities of the Company.

This is a new Section wherein Internal Audits have been made mandatory for certain
categories of Companies.

 Key Aspects
 Every listed Company is mandatorily required to appoint an Internal Auditor or firm of
Internal Auditors
 Private & Unlisted public companies meeting “any” of the following criteria is required
to appoint an Internal Auditor or firm of Internal Auditors

CRITERIA UNLISTED PUBLIC COMPANY PRIVATE LIMITED CO.,
Paid up Share capital INR Fifty crore or more during the
preceding financial year No Share capital criteria
Turnover
INR Two hundred crore or more INR Two hundred crore or
Outstanding during the preceding financial year more during the preceding
borrowings from financial year
Banks or public Exceeding INR One hundred
financial institutions Exceeding INR One hundred
Crore at any point of time during the
Outstanding Deposits preceding financial year Crore at any point of time
during the preceding financial
INR Twenty five crore rupees or year
more at any point of time during the
preceding financial year No deposit criteria

The above class of companies shall be required to appoint an internal auditor, who shall
either be a Chartered Accountant or a Cost Accountant, or such other professional as may
be decided by the Board. The Audit Committee of the Company or the Board shall, in

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the owners, creditors, employees, shareholders and all other interested parties where as the
former is solely depended upon the operating profits and only external costs are given by much
importance . EVA as a performance indicator is very useful. The calculation shows how and
where a company created wealth, through the inclusion of balance sheet items. This forces
managers to be aware of assets and expenses when making managerial decisions.

However, the EVA calculation relies heavily on the amount of invested capital, and is best used
for asset-rich companies that are stable or mature. It may not suit for the companies having high
level of intangible assets.

RVG: Now If we take a look into RVG, i.e. Relative value of growth, it is another handy
financial tool to the financial managers while making a tradeoff between margin and revenue.
This approach helps in strategic decision making whether to concentrate of cost cutting measures
or to improve the revenues from the market. In general, this measure is represented as a ratio
between value created through revenue growth and value created though margin improvement
(i.e., cost cuts): that is, the value of revenue growth is relative to the value of margin
improvements.

The formula given by Mass is as follows

Relative Value of Growth = Value of Revenue Growth
Value of Margin Improvement

Further Value of revenue growth and Vlaue of Margin improvement are to be calculated as
follows

Value of Revenue Sustainable Cash Flow* – Current Firm

Growth = WACC – Investors’ Growth Expectations – 1% Value

(*) For a business to survive, it must generate sustainable cash flows. Sustainable cash flows do

not include cash flows from one-time changes in cash flows.

Current Revenue x 1% x (1 – Tax Rate %)

Value of Margin Improvement =

WACC – Investors’ Growth Expectations

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A normal thinking is that operating margin and adding a point of growth are synonyms and
donate uniformly to the share Holder’s value. Margin improvements hit the bottom line
immediately, while growth compounds value over time. The thought of the modern managers are
different. Growth often is far more valuable than managers think. Using basic balance sheet and
income sheet data, managers can determine their companies' RVGs, as well as those of their
competitors. Calculating RVGs gives managers insights into which corporate strategies are
working to deliver value and whether their companies are pulling the most powerful value-
creation levers. It tries to balance growth and profitability at both the corporate and business unit
levels.

Conclusion

Thus EVA and RVG are two powerful weapons readily available in the hands of our financial
managers to fuel the share holder’s value. The basic thought behind this concept is nothing but
aligning the mission with increase in profit as well as share value. There will be increase in
returns as there will be psychological shift towards ‘our businesses’. It also leads to a consistency
in strategic approach of the managers as there exists balance between the weights of both cost
and revenue generation factors

With more subjective objectives, financial managers have greater potential to make emotional or
impulsive decisions that could lead to high costs and poor business results. In contrast to general
goals like "becoming an industry leader" or "helping to better the world," maximizing
shareholder wealth is a very objective, impassive business goal. Managers typically make
decisions after choppy numbers, weighing rewards and risks and analyzing any available data.

Though some criticism are there from the side of community activists saying that contribution
towards community like CSR hurts under the shadow of wealth maximization, EVA and RVG
contribute a lion’s share in the Share holder’s wealth creation.

*****

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TAXATION

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BUDGET 2017: WILL DIRECT TAXES PROPOSAL CHARGE UP THE GRID?

Bharathi Krishnaprasad & Sumitha Krishnan
Lakshmikumaran&Sridharan, Attorneys

Sector Overview:

‘One Nation - One Grid - One Price’ is the new mantra for the power sector in India.
Working towards this goal, this sector was bestowed with a prominence, which eventually
upgraded its global outlook from negative to stable1because of augmentation in coal production.
The immediate offshoot of this positive news is an anticipated increase in the investments,
reaping the same through 100% FDI permitted under automatic route2.

Quoting the view of International Energy Agency (IEA) - ‘Coal will continue to make the
largest contribution to electricity generation in India through to 2040” Known to be a nation
primarily focusing on thermal power generation, India is also now eyeing to switch more
towards power generation through renewable sources of energy in its endeavor to become a
nation having 24 X 7 seamless power supply. Giving strength to this objective, the National
Electricity Policy was revised to concentrate on exploitation of non-conventional sources of
energy like solar, wind etc., for additional power generation capacity.

The present Government, with a view to achieve its laid out objectives, have come out with
certain reforms in this sector. Prominent among them include:

a) Ujwal DISCOM Assurance Yojna (UDAY)– a financial restructuring scheme for bleeding
distribution companies (16 states have signed MoUs so far and 5 have conveyed in principle
approval).

b) Issuance of UDAY Bonds worth Rs. 1 lakh crore in 2015-16 (8 states were sanctioned
permission to issue bonds to the tune of USD 23.04 billion).

1http://economictimes.indiatimes.com/industry/energy/power/moodys-changes-power-sector-outlook-from-negative-to-
stable/articleshow/56502588.cms
2100% is allowed under automatic route in power sector from generation from all sources (except atomic energy, transmission
and distribution of electric energy and power trading subject to all the applicable regulations and laws.

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c) Unnath Jyothi by Affordable LED for All (UJALA) – a scheme to replace 770 million
incandescent domestic bulbs with energy efficient LED bulbs in the country.

d) Deendayal Upadhyay Gram Jyothi Yojna (DDUGJY) and Integrated Power Development
Scheme (IPDS) – a scheme to provide the States with capital subsidy to strengthen transmission
and distribution networks in rural and urban areas3.

Further, the ministry has also commenced tapping the smart phone using community by
launching numerous applications to provide people with information about progress made in the
sector. Some of these applications include Gramin Vidyutikaran – to track rural electrification,
UJALA App – to track real time LED distribution, Vidyut PRAVAH – to provide real time info
of electricity price and availability.

No reform is a good reform if it is provided in one hand and taken away from the other in
the garb of taxes. Surely, the success or otherwise of the previously mentioned reforms would
depend on the tax reforms that are put in place. This article focuses on the present direct tax
regime with respect to power sector and discussed the future reforms that could be made to help
the sector in realizing its full potential.

Power Sector and current Direct tax regime:

As generally applicable to every company established in India, the corporate tax rate for
companies engaged in the generation/transmission/distribution of power is presently 30% plus
cess and surcharge. A new manufacturing firm shall however be provided with an option to be
taxed at 25% plus surcharge and cess subject to conditions that restrict the claim of certain
deductions/exemptions.

Incentives in the direct tax regime are presently at two levels – Expenditure linked and
Profit/Income Based. A brief overview of the two classes of incentives are as stated below:

Profit/Income Based incentives: Page 39

3 http://www.makeinindia.com/sector/thermal-power

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a. Section 80-IA of the Income Tax Act, 1961 provides for 100% deduction of profits to an
undertaking which is engaged in the business of generation or generation and distribution of
power, starts transmission or distribution by laying a network of new transmission or
distribution lines or undertakes substantial renovation and modernization of the existing
network of transmission or distribution lines within a time frame prescribed under the Act.
This benefit is available for a period of 10 consecutive assessment years out of 15 years
beginning from the year in which the undertaking begins to operate any infrastructure
facility.

b. Section 10(23F) of the Act provides that any income by way of dividends or long term
capital gains of a venture capital fund or a venture capital company from investments made
by way of equity shares in a venture capital undertaking is exempted. Venture capital
undertaking is defined to also mean such domestic company whose shares are not listed in a
recognized stock exchange in India and which is engaged in the business of generation or
generation and distribution of electricity or any other form of power.

c. Section 10(40) exempts any income of any subsidiary company (by way of grant or
otherwise received for settlement of dues in connection with reconstruction or revival of an
existing power generation business) from an Indian holding company which is engaged in the
business of generation or transmission or distribution of power.

Expenditure linked incentives:

a. Section 32(1) (iia) of the Act permits an entity engaged in the business of generation or
generation and distribution of power to claim additional depreciation at the rate of 20% over
and above the rates prescribed in the New Appendix I of the Income Tax Rules, 1962. It is
also worthy to note that from Assessment year 2017-18, the rates of depreciation in new
Appendix I have been restricted to a maximum of 40%4.

4 Notification S.O.3399 (E) dated November 7,2016 Page 40

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b. Section 32AC(IA) provides to an entity engaged in power sector, in addition to depreciation,
an investment allowance of 15% on the cost of new assets acquired and installed before 31st
day of March 2017 if the aggregate amount of the actual cost of the asset exceeds 25 crore
Rupees.

c. Section 35 incentivizes Research and Development and grants the following weighted
deductions with respect to power sector:

i. 100% of expenditure not being in the nature of capital expenditure laid out or
expended on scientific research related to the business. Deduction for capital
expenditure is subject to conditions laid down in sub-section (2) to Section 35.

ii. 175% of amounts paid to any research association, university, college or other
institution to be used for scientific research.

iii. 125% of amounts paid to a company to be used by it for scientific research subject to
fulfillment of certain conditions.

iv. 200% of capital and revenue expenditure (except for expenditure incurred on land and
building) incurred on in-house research and development facility approved by
Department of Scientific and Industrial Research (DSIR).

What to expect from Budget 2017?

It is clear that a radical up-liftment of the power sector is one of the main agendas charted by the
Government. While numerous reforms are conceptualized and being implemented, some of
which have been highlighted already in this article, a supportive tax reform would be imperative
for its complete success.

Before discussing on the tax reforms that one can expect for the power sector, it is pertinent to
note the action plan proposed by the Government in the Budget Speech of the Hon’ble Finance
Minister in 2015.

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“Press Release issued by CBDT dated 20.11.2015

The Finance Minister in his Budget Speech, 2015 has indicated that the rate of corporate tax will
be reduced from 30% to 25% over the next four years along with corresponding phasing out of
exemptions and deductions. This is a step towards simplification of tax laws, which is expected to
bring about transparency and clarity.

The Government proposes to implement this decision in the following manner:

 Profit linked, investment linked and area based deductions will be phased out for both
corporate and non-corporate tax payers.

 The provisions having a sunset date will not be modified to advance the sunset date.
Similarly, the sunset dates provided in the Act will not be extended.

 In case of tax incentives with no terminal date, a sunset date of 31.3.2017 will be
provided either for commencement of the activity or for claim of benefit depending upon
the structure of the relevant provisions of the Act.

 There will be no weighted deduction with effect from 01. 04.2017.

While the above has to be borne in mind before setting the expectations for Budget 2017, in the
light of the reforms being put in place, it would not be unreasonable to visualize the below
mentioned aligning tax reforms for the sector.

a. DISCOMS (Distribution Companies) in the country have been ailing with huge
Aggregate Technical and Commercial losses (AT&C). The implementation of UDAY
sets an objective of reducing the losses from 0.64 paise per unit of electricity to 0.28
paise by FY 2018-19 which would eventually turn around DISCOMS into profit making
entities. Considering the policy, DISCOMS and transmission companies may be
conferred with Section 80-IA or any other similar profit linked incentive, which is
currently not available to them under the Act.

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b. If DISCOMs are to be provided profit linked incentives, clarity on manner of set off of
the huge accumulated losses would be required. A more liberal approach is also required
to be provided to DISCOMs by making the incentive time bound beginning with the year
of making profit.

c. The entities in renewable energy sector can expect the benefit of profit linked incentives
to be extended to a further period. It will be beneficial to the Sector if deductions in the
form of depreciation are retained at the previous rate (80%) instead of limiting the same
to 40%. Additionally, investment allowance can also be extended for a further period
from the existing sunset clause under the Act.

d. UDAY Bonds can be expected to be notified as tax free Bonds and if this is put in place,
it would be subject to applicability of provisions of Section1 14A read with Rule 8D.

e. Considering the present FDI policy permitting 100% FDI in power sector, it would be an
appreciable initiative if the Government extends the exemption from capital gains to FIIs
who invest in unlisted companies engaged in the generation/transmission/distribution of
renewable sources of energy.

f. It would also be a good tax reform if the weighted incentives for research and
development are continued at existing levels for entities in the renewable energy space.
With these above expectations, the industry has to keep its fingers crossed until 1st week
of February.

****

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GST: GAME CHANGER FOR INDIAN ECONOMY?

Srinuvasa Raju. B, CMA
Dy.Manager (F&A), RINL

Taxes - Direct and Indirect Taxes play a very important role in nation building. The Government
has, while appreciating the significant role of revenue collection in the growth and development
of the country, also stressed that tax policy should be aimed towards creating a competitive,
predictable, and clean tax policy environment which is non-adversarial in its approach.

The importance and criticality of Indirect taxes to kitty of the exchequer and robustness of fiscal
health can be garnered from the share of Indirect Taxes to GDP ratio, which is expected to be
5.20 per cent in the FY 2016-17.

One of the thrust policy initiatives of the government is the Make in India project that would
enable India to become a manufacturing hub as it will create employment / job opportunities for
the burgeoning youth of the country.

In order to make India a manufacturing hub, it is imperative that the foreign investors or
companies find it conducive to do business here. One of the major impediments to a smooth
business, especially in the manufacturing sector, is the uncertain and unpredictable Indirect tax
Regime.

Against this backdrop, it is imperative to look into the phenomenon of Goods and Services Tax
(GST), which has and continues to grip the imagination of the economists, industry and the
government.

The genesis of the introduction of GST in the country was laid down in the Budget Speech of
2006. Thereafter, there has been a constant endeavor for the introduction of the GST in the
country whose culmination has been the Constitution (One Hundred and First Amendment) Act,
2016.

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Why GST

Presently, the Central Government levies tax on manufacture (Central Excise duty), provision of
services (Service Tax), inter-state sale of goods (levied by the Centre but collected and
appropriated by the States) and states levy tax on retail sales (VAT), entry of goods in the State
(Entry Tax), Luxury Tax, Purchase Tax etc.

Thus, the extant multi-staged tax structure has charges from the State and Union governments
separately, leading to cascading effect of taxes. There are taxes at different rates and at multiple
points.

It is clearly discernible that this fractured mandate of taxation between the Central and State
Governments leaves a lot of gaps in the supply chain.

Further, the variety of VAT tax laws in the country with disparate tax rates and dissimilar tax
practices divides the country into separate economic spheres. Creation of tariff and non- tariff
barriers such as Octroi, entry Tax, Check posts etc. hinder the free flow of trade throughout the
country.

Besides that, the large number of taxes created high compliance cost for the taxpayers in the
form of number of returns, payments etc. In fact, it is said that our tax laws have created a
situation where business decisions are based on tax considerations rather than logical economical
factors.

All these issues created a need for one tax that will be able to mitigate number of these problems
to a large extent.

GST is the most significant tax reform since independence for India which is now Asia’s third
largest economy. The GST subsumes India’s messy plethora of indirect taxes, duties, surcharges
and cesses into a single tax. It is expected to ease a cumbersome tax system, help goods move
seamlessly across state borders, curb tax evasion, improve compliance, raise revenues, spur
growth, stimulate investment and make investing and doing business in India easier and
smoother.

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The advent of GST is significant because it will impact the tax structure, tax incidence, tax
computation , tax payment , compliance, credit utilization and reporting , leading to a complete
overhaul of the current indirect tax system.

GST will have a far-reaching impact on almost all the aspects of the business operations in the
country, for instance, pricing of products and services, supply chain optimization, IT, accounting,
and tax compliance systems etc,. That is the reason why GST Bill has been described as a reform
measure of unparalleled importance in independent India.

Advantages of GST:

A) Advantage to the Government and Economy:
 The GST will decisively take the Indian economy to the next level for the better. As the
Prime Minister outlined in an interview, the GST will increase the resources available for
poverty alleviation and development of the country. This will happen indirectly as the tax
base becomes more buoyant and as the overall resources of the Central and State
governments increase. But it will also happen directly because the resources of the
poorest States — for example, Uttar Pradesh, Bihar, and Madhya Pradesh — who happen
to be large consumers will increase substantially.

 The GST will facilitate ‘Make in India’ by bringing India on a single tax platform. The
current tax structure is fragmenting Indian markets along State lines. These distortions
are caused by three features of the current system:

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1. The Central Sales Tax (CST) on interstate sales of goods;
2. Numerous intra-State taxes; and
3. The extensive nature of countervailing duty exemptions that favours imports over

domestic production.

In one fell dive, the GST would rectify all these distortions. The CST would be
eliminated; most of the other taxes would be subsumed into the GST; and because the
GST would be applied on imports, the negative protection favouring imports and dis-
favouring domestic manufacturing would be eliminated.

 Another significant benefit is that the GST would improve tax governance in two ways.

The first relates to the self-policing incentive inherent to a value added tax. To claim
input tax credit, each dealer has an incentive to request documentation from the dealer
behind him in the value-added/tax chain. Provided the chain is not broken through wide-
ranging exemptions, especially on intermediate goods, this self-policing feature can work
very powerfully in the GST.

The second relates to the dual monitoring structure of the GST — one by the States
and the other by the Centre. The division of jurisdiction between the Centre and States
will pave way for tax assessment based on the reach and capabilities of their respective
tax authorities. The agreement between the Central and Statement Governments as to the
threshold turnover for determining their jurisdictions remained elusive for now. An early
consensus on this issue is vital for rollout of GST before 16th September, 2016 deadline.
Critics and taxpayers have viewed the dual structure with some anxiety, fearing two
sources of interface with the tax department and hence two potential sources of
harassment.

 Will help to create a unified common national market for India, giving a boost to
foreign investment and “Make in India” campaign.

 Will improve environment of compliance as all returns to be filed online, input credits to
be verified online, encouraging more paper trail of transactions.

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 Uniform State Goods and Services Tax (SGST) and Integrated Goods and Services Tax
(IGST) rates will reduce the incentive for evasion by eliminating rate arbitrage between
neighboring States and that between intra and inter-state sales.

 Electronic matching of input tax credits all -across India thus making the process more
transparent and discourages mere ‘invoice shopping’.

 Common procedures for registration of taxpayers, refund of taxes, uniform formats of tax
return, common tax base, common system of classification of goods and services will
lend greater certainty to the taxation system.

 Greater use of IT will reduce human interface between the taxpayer and the tax
administration, which will go a long way in reducing corruption.

B) Advantages to Trade and Industry:
 Simpler tax regime with fewer exemptions.
 Reductions in the multiplicity of taxes that are at present, governing our indirect tax
system leading to simplification and uniformity.

 Reduction in compliance costs - No multiple records keeping for a variety of taxes - so
lesser investment of resources and manpower in maintaining records.

 Various tax barriers such as check posts and toll plazas lead to a lot of wastage for
perishable items being transported, a loss that translates into major costs through higher
need of buffer stocks and warehousing costs as well. A single taxation system could
eliminate this roadblock for them.

 GST’s successful implementation would give a strong signal to the foreign investors
about India’s ability to support ease of doing business.

Impact on Common Man

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As the GST reaches its final stages, the historic legislation promises to unify the tax system for
the nation and increase the GDP by 2 per cent. In doing so, while services could get more
expensive, it’s a mixed bag for consumers for goods.

Goods today are typically taxed at 12.5 per cent (excise duty) plus 5-15 per cent (VAT) which is
invariably passed on to the end customer. If the standard rate of GST is capped at 18 per cent as
recommended by Chief Economic Advisor to Finance Minister, there exists a scenario where
prices of goods can significantly reduce for the customer. This is because procurement costs will
also go down for a business and some of the profit can be passed on to the end of the chain.

As the states are expected also to decide service tax rates, your phone bill could see escalation of
taxes. Accordingly, services consumed by a common man such as telecom, rail, transportation,
banking, air travel, etc may become expensive, whereas small cars, FMCG products etc., may
become cheaper.

The work on IT infrastructure for GST- GST Network (GSTN) that will provide a common
system to States, Centre and taxpayers, is almost complete. Working of GST Network will be
tested in January and February this year.

Some analysts have pointed out certain concerns with regard to the implementation of GST from
April this year. One such concern is that certain numbers of items are exempt from the tax, e.g.,
petroleum and petroleum products and electricity will not be under GST. States and the Centre
will continue to levy taxes on them. However, few experts justify these exemptions on the
ground that these exceptions — in the form of permissible additional excise taxes on special
goods (petroleum and tobacco for the Centre, petroleum and alcohol for the States) — will
provide the requisite fiscal autonomy to the States. Indeed, even if they are brought within the
scope of the GST, the States will retain autonomy in being able to levy top-up taxes on these
goods.

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Commodities not inluded in GST at all

Alchol for human Electricity Real Estate
consumption

The GST Law is being keenly awaited by domestic and foreign investors as well as global rating
agencies have, as it would promote Ease of Doing Business and cut down on internal tariff
barriers put-up by each State Government.

What next before the introduction of GST

 Centre to enact two legislations, one related with CGST and

another related with IGST.
 States and Union Territories with legislature to enact a law

related with SGST.
 These are ordinary laws and can be enacted by simple majority

in Parliament/State Legislatures.

The International Monetary Fund (IMF) in its October 2016 World Economic Outlook update
said that the advent of GST would boost India’s medium term growth prospects. Noting that it is
positive for trade and investment, the IMF report said, “This tax reform and the elimination of

poorly targeted subsidies are needed to widen the revenue base and expand the fiscal envelope to
support investment in infrastructure, education and healthcare.”

It can be concluded that the real success of GST lies on the impact on the common Indian
consumer. The essence of GST is that all goods and services be taxed at moderate rate. “One
Nation, One Tax” proves to be a game changer in a positive way and proves to be beneficial not

only to the common man, but to the country as a whole. As and when a new law is imposed, it

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