General Financial Rules (GFR Rules)

The General Financial Rules (GFRs) are the general rules of Government of India (GOI) which are applicable to all Government Ministries/Departments. Exceptions are provided in the Rules. These rules are applicable in matters relating to Public Finance, that is, Matters relating to Revenue and Expenditure of Government.

These rules were first introduced in 1947 and modified thereafter in 1963, 2005 and 2017. A task force was established for comprehensive discussion and review of the GFRs set up. GFR sincludes all effects of Reforms introduced by the Government, for example, Direct Benefit Schemes (DBS), merger of Railway Budget with the General Budget, Introduction of Government e-Marketing Portal, Non-Tax Revenue Portal, etc.

These Reforms were introduced due to the changing Business Environment to promote simplicity and transparency in the Government Financial System and procedures.

The various important Rules are further explained as under:

General Principles Relating to Expenditure and Payment of Money

• In case any expenditure is incurred by any officer, then the following should be observed:
• Vigilance:Every public officer is expected to exercise the same vigilance in respect of expenditure incurred from public moneys as a person of ordinary prudence would exercise in respect of expenditure of his own money and expenditure should not be more than situation demands.

Public Interest:Any authority which is benefiting themselves directly or indirectly from the expenditure should not sanction the expenditure by itself, the expenditure shall not be made for particular person or community unless no special orders received in this regards and it should be in public interest.

• The Duties and responsibilities of a Controlling officer is to ensure,
• That the expenditure does not exceed Budget,
• That incurred only for the funds provided,
• That incurred in public interest,
• That adequate controls are there in the department for prevention of wastage of public money and
• Errors prevention and detection
• In case of certain special matters like, relinquishment of revenue; rights of power, water; grant of land etc. unless the power to issue an order is delegated or approved by the President, a subordinate authority cannot issue an order without the previous order of the Finance Ministry.
• A sanction for any fresh charge shall lapse if it is not renewed and if no payment has been made during a period of twelve months from the date of issue of sanction, provided that,
• When the period of sanction is prescribed in the regulations, then on the expiry of such period
• When the regulations say that the expenditure would be met from the Budget provisions, then at the end of the Financial Year

In case of purchase, the sanction won’t lapse if any tender has been accepted within the period of one year, even if no payment, in whole or in part has been made.

• Notwithstanding anything contained above, any sanction related to addition to a permanent establishment, made from year to year under a general scheme by a competent authority, or an allowance sanctioned for class(s) of government servants, but not drawn by the officer(s) concerned, shall not lapse.
• The Reserve Bank of India (RBI) shall be the Banker to the Government. It shall provide various banking services to the Ministries either through its branches or its agent banks. All payments and all receipts (including tax revenues) shall be made or collected by the RBI through its own offices or through the nominated branches of its agent banks.

Public Financial Management System (PFMS)

PFMS is an integrated Financial Management System of Controller General of Accounts.

Budget Formulation and Implementation

Control of Expenditure Against Budget

To maintain the control of expenditure over sanctioned grants, the CG should follow an effective control as follows:-

• Bills with proper classification of account should be presented for withdrawal of money.
• All the drawing officers shall maintain registers in Form GFR-5, physically or electronically, for allocation under each minor Head and submit it with the head of the department on the third day of following month. A register shall be submitted irrespective of nil statement or if there are any adjustments like, inward claims.
• A broadsheet of all the receipts shall be maintained in Form GFR-6. The Controlling officer shall ensure that classifications are done properly, expenditure is less than the Grant amount, reason of the increased expenditure shall be properly noted and it is properly signed by the Disbursing officers
• When all the verification is done, the Controlling Officer shall prepare a Statement in Form GFR-7, wherein the Totals from GFR-5, Statement Totals given by the Disbursing Officers and other Total of Adjustments which have not been taken before, should be incorporated. These new adjustments shall also be communicated to the Disbursing Officer.
• The Head of Department shall prepare a consolidated Statement in GFR-8 in which the complete expenditure with its appropriation into various heads shall be mentioned.
• The Head of Department and the Accounts officer shall reconcile the balances maintained by both of them.
• The Disbursing Officer shall maintain a register in Form TR 28-A in which all the Bills presented to the Principal Accounts Officer shall be entered. The Bills should match with the cheques. All the retrenchments shall also be noted in the register.
• The Accounts Officer shall furnish an extract of the expenditure registers to the Disbursing Officers, in which monthly expenditure apportioned into various heads shall be mentioned. The Disbursing Officer shall tally this expenditure with the expenditure in Form GFR-5 and investigate the differences, if any. The book adjustments from the monthly statements shall also furnished in Form GFR-5. After all this is done, the Disbursing officer shall give a confirmation of the figures.
• The Principal Accounts Officer of each Department shall send a monthly statement showing the expenditure in various heads according to the Budget provisions to the Heads of Departments. They shall discuss over the differences between the Statement and GFR-8 and furnish a quarterly report on 15th of second following month after the end of quarters.
• The Heads of Departments shall prepare a statement wherein all the revenue and capital expenditure figures are entered separately by 15th of the following month. The figures shall be taken from Form GFR-8 and these figures should also be posted in other expenditure registers. The Heads of Departments shall also furnish a progress report of all schemes for which they are responsible. The physical progress, Budget provisions as well the reasons for shortfall shall also be reported therein.
• A broadsheet in Form GFR-9 shall also be maintained by the Heads of Departments wherein the prompt receipt of various returns and actions for any defaults should be mentioned.
• The Controlling officer shall maintain liability registers in Form GFR-3 from the liability statements obtained from spending authorities in Form GFR-3A every month starting from October in each financial year.
• The Department of Central Government shall provide the Finance Ministry a detail of savings noticed in the Grants by them. After the acceptance, these funds shall stand lapse at the end of the financial year. These funds shall be returned to the Government.
• No expenditure on a New Service shall be made which is not provided in the Annual Budget, unless there is a supplementary Grant for it.
• The Disbursing officer shall not approve an excess allotment of an expenditure unless he has taken approval from his superior authority. The authorities shall also maintain these excess allotments in the liability register in the Form GFR-3.
• In case of re-appropriation of expenditure from one primary unit to another within a Grant amount, shall be furnished in Form GFR-1.Re- appropriation shall only be made when it is known or anticipated that units from which the funds are to be transferred are not to be utilised in full or savings can be affected in them. Also proper approval from competent authority should be taken.
• In case any need for an unforeseen expenditure for a New Service not provided in the Budget arises and there is no time for voting of the Supplementary Demand, then an advance from the Contingency Fund, set up under Article 267(1) of the Constitution shall be obtained before incurring the expenditure. The procedure for obtaining an advance is laid in the Contingency Fund of India, 1952.
• The Secretary of a Ministry/ Department, who is the Chief Accounting Authority shall be responsible for all the financial matters of his ministry (including control on expenditure, accounting and appropriation, receipts and collection of funds, appearance to parliamentary committee and to his ministry as required)

Defalcation and Losses

• Any loss or shortage of public money, revenue, receipts, or other property held by or behalf of government, shall be immediately reported to the next higher authority, Statutory Audit Officer, and Principal Accounts Officer even if such loss has been made good by the party responsible. However, the following losses need not to be reported:
• Losses due to mistakes in assessments which are discovered too late,
• Assessments due to interpretation of law by the local authority overruled by the higher authority
• Losses not exceeding Rupees ten thousand
• Cases involving serious irregularities should be reported to Financial Adviser or Chief Accounting Officer of the Ministry or Department and the Controller General of Accounts of Ministry of Finance. A Report of loss should be maintained containing
• An initial report, which should be made as soon as the suspicion arises
• The final report, to be sent to higher authorities
• All losses more than Rupees Fifty thousand due to suspected fire, fraud or theft of Government property, shall be reported to Police for investigation as early as possible, similarly all losses of immovable property of more than Rupees Fifty thousand, such as building, due to cyclone, earthquake, fire, flood etc. shall be reported at once by the subordinate authority.

Source: General Financial Rules (GFR Rules) | Auditing Services

New Valuation Regime under Companies Act, 2013

Till now, only an ad-hoc framework for valuation professionals was in place, which is basically governed by the Companies Act, and the government has designated the Insolvency and Bankruptcy Board of India (IBBI) as the authority to implement the new regime of registered valuers.

The move came at a time when stressed companies worth thousands of crores were up for sale under the Insolvency and Bankruptcy Code (IBC) and there was no standardized formula for valuing these assets nor is there a proper regulatory framework governing the valuation profession. Proper valuation of a company is also a crucial part of any merger and acquisition.

Accordingly, the Ministry of Corporate Affairs introduced the Companies (Registered Valuers and Valuation) Rules, 2017 (“Rules“). The Rules inter alia provided for the eligibility criteria which needs to be fulfilled for obtaining a certification for being a registered valuer and the manner in which the certification maybe obtained.

The Rules also provide that the Insolvency and Bankruptcy Board of India (“IBBI“) established under the Insolvency and Bankruptcy Code, 2016 be the “registering authority” which will hold examinations and grant certifications of the designation of a “registered valuer”.

The valuation by a registered valuer applies to valuation of assets, liabilities, shares, etc. required under the Companies Act, 2013 and the rules made thereunder. It does not apply to valuations required under other laws, unless the other laws mandate valuation by a registered valuer. However, certain SEBI Regulations also mandate valuation by RV.

Thus, from February 01, 2019, only a registered valuer is allowed to undertake valuation required under the Companies Act.
It is interesting to note that under Section 247(2) of the Companies Act, the registered valuer is required to:

• Make an impartial, true and fair valuation of assets which maybe required to be valued;
• Exercise due diligence while performing the functions of a valuer;
• Make the valuation in accordance with such rules as maybe prescribed;and
• Not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during or after the valuation of assets.

Who can be a Registered Valuer?
A person, who aspire to be a registered valuer, is required to possess certain qualifications and experience, obtain membership of a recognized organization of valuers and get itself registered as a valuer with IBBI. The RV Rules sets out in detail the eligibility criteria, educational qualifications (degree), experience, and procedure for registration of a valuer. However, such valuer will not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during a period of three years prior to his appointment as valuer or three years after the valuation of assets was conducted by him.

Different qualifications of registered valuers for different class of assets

• For valuation of land & building, a registered valuer must be a graduate or post graduate in Civil engineering, architecture or town planning with minimum experience of 3 to 5 years
• For valuation of plant & machinery, a registered valuer must be a graduate or post graduate in Electrical or Mechanic Engineering with minimum experience of 3 to 5 years
• For valuation of securities or financial assets, a person must be a member of ICAI, ICSI or Institute of Cost Accountants of India or an MBA with specialization in Finance, with minimum experience of 3 years in the discipline after completing graduation

The registered valuer is responsible for any negligence or misconduct leading to disciplinary action by IBBI and regulatory penalties and fines.

Impact on valuation practice in India
For long, in the absence of a specialized cadre of valuers, valuation services have been usually provided by chartered accountants and merchant bankers, etc. They typically issue valuation certificates for the purpose of compliance under the Companies Act and other laws like SEBI Regulations and even I-T Act. However, the lack of a standardized formula has resulted in too much of subjectivity in the valuation of companies. Now with this rules and IBBI being appointed as responsible authority to administer and perform functions under the said rules, the valuation domain is being well regulated.

Presently more than 900 valuers are registered under IBBI and they are only authority to carry out valuations under different legal framework. Nevertheless the other laws are soon expected to be amended to include the Registered Valuers to carry out Valuations.

The MCA has constituted a committee to recommend the valuation standards and policies for compliance by companies and registered valuers. Given the need of the hour, the ICAI has already established a Valuation Standard Board and formulated ICAI Valuation Standards in June 2018. These ICAI Valuation Standards will remain effective till valuation standards are notified by the MCA.

Though the valuation of a listed company whose shares are actively traded on a nationwide stock exchange in India can be derived from its prevailing market price over a period of time, the valuation of an unlisted company and its shares is the real challenge.

Below is the Ready Reckoner for the valuation transactions covered in case of Private, unlisted Public companies and listed companies under Companies Act 2013, SEBI and Income Tax Act 1961:

Nature of TransactionPrivate CompanyUnlisted Public CompanyListed Public CompanyFresh Issue/ preferential allotment(Rule 13 of SCD Rules, 2014)Yes- by RV(sec 42 and 62 of CA 2013)Yes- by RV(sec 42 and 62 of CA 2013)Not required, if frequently traded shares.If shares not traded frequently, then issue price can be valued by MB or CA

(Reg 76A of ICDR)

Rights IssueNot Required (sec 62 of CA 2013)Not required (sec 62 of CA 2013)Not required (ICDR)Employee Stock Option SchemeNot Required (sec 62 of CA 2013)Not Required (sec 62 of CA 2013)Not Required (SEBI Reg)Bonus IssueNot RequiredNot RequiredNot RequiredEmployees Stock Purchase Scheme(Rule 16 of SCD Rules)Yes- by RV (sec 67 of CA 2013)Yes- by RV (sec 67 of CA 2013)Not Required (sec 67 of CA 2013)Valuation of Assets Involved in Arrangement of Non cash transactions involving DirectorsIn case of sales or purchases of any asset between the company and directors of the company (or its subsidiary company, holding company or associate company) or a person connected with the director for consideration other than Cash, in this scenario value of transaction will be calculated by the RV. Section 192(2) of CA, 2013.In case of sales or purchases of any asset between the company and directors of the company (or its subsidiary company, holding company or associate company) or a person connected with the director for consideration other than Cash, in this scenario value of transaction will be calculated by the RV. Section 192(2) of CA, 2013.In case of sales or purchases of any asset between the company and directors of the company (or its subsidiary company, holding company or associate company) or a person connected with the director for consideration other than Cash, in this scenario value of transaction will be calculated by the RV. Section 192(2) of CA, 2013.Sweat Equity (rule 8 of SCD Rules)Yes- by RV (sec 54 of CA 2013)Yes- by RV (sec 54 of CA 2013)Yes- by MB (valuation of IP or value addition) or CA (certification that valuation is in accordance with AS)(Reg 8 of SEBI SE Regulations)Buyback of sharesNot required but valuation report can be obtained from MB, CA or RV for justifying the buyback price(rule 17 of SCD Rules, Sec 69 of CA 2013)Not required but valuation report can be obtained from MB, CA or RV for justifying the buyback price(rule 17 of SCD Rules, Sec 69 of CA 2013)Not required but valuation report can be obtained from MB, CA or RV for justifying the buyback price(rule 17 of SCD Rules, SEBI Buyback Reg)Purchase of Minority ShareholdingShares of Minority shareholding can be acquired at price calculated by RV. (Sec 236 of CA 2013)Shares of Minority shareholding can be acquired at price calculated by RV. (Sec 236 of CA 2013)MB as per SEBI CircularsMergers & AmalgamationsYes- by RV (sec 230 of CA 2013 Rule 6(3) of Merger Rules)Yes- by RV (sec 230 of CA 2013 Rule 6(3) of Merger Rules)Yes- by CA(SEBI Circulars)Reverse Merger- Exit price for shareholdersNot ApplicableNot ApplicableYes- by RV (Sec 230(3)(h) of CA 2013)Scheme of Corporate Debt RestructuringYes- by RVYes- by RVYes- by CA (cases not exempt from ICDR) or RV (for cases exempt from ICDR) (Reg 158(7) of ICDR)Conversion of Debt into equity sharesNot requiredNot requiredYes- by CA (cases not exempt from ICDR) or RV (for cases exempt from ICDR) (Reg 158(7) of ICDR)Report on effect of compromiseYes- by RV, MB CA or any other advisor (Sec 232(2)© of CA 2013)Yes- by RV, MB CA or any other advisor (Sec 232(2)© of CA 2013)Yes- by RV, MB CA or any other advisor (Sec 232(2)© of CA 2013)Fairness Opinion on Scheme of Mergers or AmalgamationNot RequiredNot requiredYes- by MB (SEBI circulars)Accounting StandardsIf valuation report is required to be obtained, then such valuation shall be done by RV (s 133 and s 247 of CA 2013)Delisting regulationsNot ApplicableNot ApplicableValuation can be done by RV, CA or MB (s 247 of CA 2013, Reg 23 of SAST)FDI Regulations- Issue of shares/ securities to NRYes- by MB, AC or Cost Acc (Reg 11 of FEMA 20(R))Yes- by MB, AC or Cost Acc (Reg 11 of FEMA 20(R))Yes- as per SEBI reg (Reg 11 of FEMA 20(R))SEBI (REIT) Regulations- valuation of assetsYes- by RV (Reg 2(zz)of SEBI (REIT) Reg)SEBI (INVIT) Regulations- valuation of assetsYes- by RV (Reg 2(zzf)of SEBI (INVIT) Reg)Valuation under IBCYes- by RV (IBBI Circular dated Oct 17, 2018)Under Income Tax Act 1961Fresh Issue and transfer at:

• Face Value
• Premium
• Fair Market Value by DCF
• FMV by NAV

(S 56(2) of IT Act, Rule 11UA)

Not Required Any Valuer (MB/ CA/ RV) MB only Any ValuerNot required Any (MB/ CA/ RV) MB only Any ValuerIt shall only take place in open market at FMV, thus no valuation prescribed for the same.Transfer of shares at less than FMV (u/s 50CA)Any ValuerAny ValuerNot applicablePreferential Allotment (S 56(2)(Rule 11UA)If shares issued at premium, then valuation by any valuer (MB, CA or RV)If shares issued at premium, then valuation by any valuer (MB, CA or RV)If shares issued at premium, then valuation by any valuer (MB, CA or RV)Rights Issue (S 56(2) (Rule 11UA)In case shares issued at premium, valuation may be required by any Valuer (MB, CA or RV).In case shares issued at premium, valuation may be required by any Valuer (MB, CA or RV).In case shares issued at premium, valuation may be required by any Valuer (MB, CA or RV)

However, one can opine that in cases where valuation report by Registered Valuer is mandatorily required under Companies Act, 2013, then it shall also be accepted under Income Tax Act, 1961 (except in cases where MB report is mandatory under DCF) as well as FEMA.

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The Process of Due Diligence Services in India

If you happen to be an entrepreneur or a sale one that has his/her sights on the acquisition of a business, it’s your right to examine the financial records, and research that’s company activity related. Due diligence services in India enters the image at now and ensures that related information is compiled. It also sees if there’s a minimum average which can influence your ultimate decision regarding the acquisition or purchase.

Due Diligence Steps

• The Action Plan: all the parties who are concerned with the deal should agree on what information and issues got to be highlighted in order that due diligence is completed effectively. The ambit of the problems and knowledge may or might not include structures within the organization, annual legal reports, shareholding records, personal and company financial records.
• Reviewing the finances: The Due diligence team makes it some extent to carefully undergo the balance sheets of the corporate additionally to annual reports and cash flows too. All the pertinent files are validated with the assistance of an accountant and therefore the tax office.
• Asset inspection: If there’s a plant and machinery involved within the business, the due diligence team views them as assets, ensuring that each one of the above are in good working condition. A stock value is suggested before the day of settlement. Insurance plans and policies should even be checked beforehand.
• Scale of prospects and therefore the supply chain: The Due Diligence Team requests the list of key clients to work out if they’re active buyers. Existing contracts should even be scanned to seek out out if future business is feasible . Suppliers also fall within the gaze of due diligence and that they are verified to ascertain if outstanding payments remain or if there are settlement invoices.
• Level of the competition and reason for sale: As an investor, you’ll be benefited to understand the precise reasons behind the sale of the corporate . this may entail a touch of digging around and also observing the competition from other players in order that a benchmark are often determined. Industry trends should also not be neglected.

Audit under CFR regulations – Code of Federal Regulations

This Article talks about the overview for conducting audit as per Code of Federal Regulations CFR, standards for obtaining consistency and uniformity for the audit of Indian Government and Non-Government social bodies which are granted Aids by Government and Non-Government US agencies.

In context to audits for projects executed by Healthcare and Hospital ‘s related to Research of Antibiotics or Influenza of for any other disease or social cause, the Audit Report must be issued in accordance CFR and GAGAS. Report Emphasis on Fund Accountability Statement, internal controls, statutory compliance requirements, suggested audit procedures, management report and audit reporting requirements.

Social Agencies constantly work 24/7 to protect a nation from health, safety and security threats within and outside the country. Diseases start at home or other country, whether it is chronic or acute or curable or preventable or deliberate attack, it’s team which fights against the disease and supports communities and citizens to do the same.

In the case of US foreign GRANT to Non-Federal Agency where expend is US$ 750,000 or more during Non-Federal Agency Fiscal Year in federal Awards, then specific Audit under CFR needs to be conducted.

US federal and Non-Federal Agencies keep awarding project to different Indian organizations to help implement Global Health Security Agenda projects across the country. Project are mainly in the expansion of various disease detection networks, as well as provide resources needed to help strengthen India in overall preparedness for potential global disease threats like COVID 19 Corona Virus, EBOLA, INFLUENZA, Research on Antibiotic and much more.

In CFR Audit, Auditee responsibilities are:

Auditors Responsibility

Audit Report Submission

The audit must be completed, and the data collection form described in CFR. Audit Report must be submitted within the earlier of nine months after end of the audit period.

Federal Agency Responsibility:

Federal Agency provides technical audit advice and liaison assistance to auditee and auditors. Federal agency to advise auditee while procuring audit services, the objective is to obtain high quality audits. The objective of the audit and scope of the audit must be made clear and the non-federal entity must request a copy of the audit organization’s peer review report which the auditor is required to provide under GAGAS.

For more Details, Visit: https://pkchopra.com/blog/index.php/audit-under-cfr-regulations-code-of-federal-regulations/

Impacts of Covid-19 on Financial Reporting

INTRODUCTION

COVID-19, an infectious disease caused by a novel Coronavirus is exponentially spreading illness and causing deaths to citizens throughout the globe and has been recognized as a global pandemic by the WHO. COVID-19 has not only affected the health of people across the globe and it has also caused severe disturbances in the global economic environment which has consequential impact on financial statements and reporting.

The adverse impact of this global pandemic can vary from nation to nation, industry to industry and above all entity to entity. As the companies in India approach their year-end, there is an urgent need to evaluate the impacts of the outbreak on their accounting and financial reporting. In this regard ICAI issued an advisory to provide light on some important requirements of Indian Accounting standards (IND AS) and Accounting standards (AS) to be considered by preparers of financial statements on how to incorporate effect of COVID 19 on financial statements for the year ending 31/03/2020.

Some of the key accounting and financial reporting considerations for the companies are explained below.

1. GOING CONCERN ASSESSMENTThe Financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. In this regard Management would need to assess whether the current events and conditions cast significant doubt on the company’s ability to continue as a going concern.

While assessing that whether any entity is going concern or not, management should consider all available information about future for at least the period of next 12 months from the end of reporting period. If management decides that due to impact of COVID 19 entity intends to liquidate the entity or cease its business after the end of reporting period, then accounts shall not be prepared on going concern basis. Necessary disclosures as per Accounting Standards shall also be made, such as material uncertainties that might cast significant doubt upon an entity’s ability to continue as a going concern.

2. INVENTORY MEASUREMENTDue to COVID 19 there is a decline in sales, decline in selling price which might lead to obsolescence of inventory and reduction in movement of inventory. Hence management are advised to consider writing off inventory to its Net Realisable Value i.e. NRV. Accounting Standards also provide light on allocation of fixed production overheads on the basis of normal production capacity. The amount of fixed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognised as an expense in the period in which they are incurred.

All organizations are required to assess the disclosures due to write down of inventory as per applicable Accounting Standards.

3. LEASES(a) If there are any revision in lease terms and agreement due to COVID 19 such as concession with respect to lease payments etc, these revisions must be incorporated. (anticipated revisions are not to be incorporated).

(b) Discount rate used to determine the present value of new lease liabilities may need to incorporate any risk associated with COVID-19.

(c) If Government grant any compensation to lessor in order to provide concession to lessee. It is advised to consider whether same is to be accounted for as lease modification under IND AS 116 or whether consider assistance received from government as grants under IND AS 20.

(d) Check whether discount rate used to discount value of lease liabilities include the effect of risk of COVID 19.

(e) Check whether any lease contracts have become onerous due to COVID 19.

All the entities on whom AS 19 is applicable need to examine all the same situations as mentioned in IND AS 116 but with respect to AS 19. If any contracts have become onerous, such contracts need to be accounted under AS 29.

4. REVENUEEntities may have to disclose any impact of COVID 19 on nature, amount, timing and uncertainty of revenue as per applicable Accounting Standards. When estimating the amount of revenue to be recognized, factors like increase in sale return, high price discounts etc due to COVID 19 need to be considered. Also, they should consider related impact on recoverability of trade receivables including estimate of expected credit losses.

Such entities might need to defer the recognition of revenue due to collection uncertainty as a result of impacts of COVID 19. Disclosure of such deferment shall also be made according to AS 9.

5. PROVISIONS, CONTIGENT LIABILITIES AND CONTIGENT ASSETS
Entities covered under IND AS 37

(a) Some contracts are bound to become onerous due to COVID 19. If any such contracts are found they should be recognized as per IND AS 37. Before recognizing onerous contract, all assets dedicated to such contracts should be tested for impairment. (Onerous contracts are those contracts in which unavoidable cost of meeting obligation is more than the benefit to be achieved from the contract). It is also advised to disclose if any executory contracts are converted to onerous due to impacts of COVID 19.

(b) Insurance claims may be recorded by entities only if the insurance companies have accepted the claim and recovery is virtually certain.

Due to COVID 19, judgement need to be applied in ascertaining provisions for losses and claims.

Entities covered under AS 29If any contracts are converted into onerous due to COVID 19, then such contracts need to be recognized as per AS 29. If any executory contracts are converted into onerous then such contracts shall be disclosed. If management in unable to analyse whether executory contract is converted to onerous or not due to unavailability of information, then such contracts shall be disclosed as well.

6. INCOME TAXESCOVID-19 could affect future profits and/or may also reduce the amount of deferred tax liabilities and/or create additional deductible temporary differences due to various factors. Entities with deferred tax assets should reassess forecasted profits and the recoverability of deferred tax assets in accordance with Ind AS or AS as applicable on entity, considering the additional uncertainty arising from the COVID-19 and the steps being taken by the management to control it.

7. PROPERTY PLANT AND EQUIPMENT (PPE)
Ind AS 16 and AS 10 require that useful life and residual life of PPE needs revision in annual basis. It may be noted that the standards require depreciation charge even if the PPE remains idle. Further, COVID-19 impact may have affected the expected useful life and residual life of PPE.

The management may review the residual value and the useful life of an asset due to COVID-19 and, if expectations differ from previous estimates, it is appropriate to account for the change(s) as an accounting estimate in accordance with Ind AS 8 or AS 5 whichever applicable on the entity

8. POST BALANCE SHEET EVENTSEntities must disclose significant recognition and measurement uncertainties that might have been created by the outbreak of the COVID -19 in measuring various assets and liabilities. They should also disclose how they have dealt with the impact of COVID -19 on the financial position and financial performance of the entity.

Spending of CSR funds for COVID-19 is an eligible 'CSR activity'

Keeping in view the spread of novel Coronavirus in India, its declaration as pandemic by WHO, and decision of Government to treat it as notified disaster, it has been clarified that spending of CSR funds by companies for COVID-19 cause shall be eligible CSR activity under Companies Act, 2013. Funds may be spent for various activities related to COVID-19 relating to health care, including preventive health care and sanitation, and disaster management.

Supreme Court extends limitation for filing appeals until further order
The Apex Court by taking suo-moto cognisance of situation faced by country on account of Covid-19 pandemic has indefinitely extended the ‘limitation period’ for filing appeals against orders of High Courts or any Tribunal to Supreme Court. To obviate such difficulties and to ensure that lawyers/litigants do not have to come physically to file such 2 proceedings in respective Courts/Tribunals across the country including this Court, it is hereby ordered that a period of limitation in all such proceedings, irrespective of the limitation prescribed under the general law or Special Laws whether condonable or not shall stand extended w.e.f. 15th March 2020 till further order/s to be passed by this Court in present proceedings.

Sebi further relaxes compliance norms for listed entities
SEBI, vide circular no SEBI/HO/CFD/CMD1/CIR/P/2020/38 dated March 19, 2020 had provided relaxation from compliance with certain provisions of the LODR. It has been decided to grant the following further relaxations from the LODR.
Regulation and associated filing:

1. Regulation 40(9) relating to Certificate from Practicing Company Secretary on timely issue of share certificates (half yearly): Extended to May 31, 2020
2. Regulation 44(5) relating to holding of AGM by top 100 listed entities by market capitalization for FY 19–20 (annual) : Extended to September 30, 2020

Bill for direct overseas listing of firms tabled
The Centre has introduced the Companies Amendment Bill 2020 in the Lok Sabha to decriminalise procedural and technical lapses and to allow direct listing of securities by Indian firms in permissible foreign jurisdictions.

The Bill has also laid down rules for incorporation, registration, amalgamation, and functioning of producer companies, apart from paving the way for conversion of interstate cooperatives into producer companies.

The proposed amendmen t is in line with the government´s aim to streamline the functioning of farmer producer organisations in order to achieve the goal of promoting 10,000 new FPO in the next five years.

A host of activities have been included into the ambit of producer companies that include financing the need of primary producers largely farmers.

Labour Ministry amends EPF norms in event of Covid-19 outbreak
The notification GSR 225(E) issued by Ministry of Labour and Employment amending the EPF Scheme 1952 allows withdrawal of non-refundable advance by EPF members in the wake of COVID -19 pandemic in the country. The notification permits withdrawal not exceeding the basic wages and dearness allowance for three months or upto 75% of the amount standing to member’s credit in the EPF account in the event of outbreak of epidemic or pandemic.

FM announces Rs 1.70 Lakh Cr. relief package for poor to fight battle against Corona Virus
The Union Finance & Corporate Affairs Minister Smt. Niramla Sitharaman today announced Rs 1.70 Lakh Crore relief package under Pradhan Mantri Garib Kalyan Yojana for the poor to help them fight the battle against Corona Virus. While addressing the press conference here today, Smt. Sitharaman said “Today’s measures are intended at reaching out to the poorest of the poor, with food and money in hands, so that they do not face difficulties in buying essential supplies and meeting essential needs.”

Detailed comparison of CARO 2016 with CARO 2020

In pursuance of its objective of strengthening the corporate governance framework under the Companies Act, 2013 to attain the national objective of becoming a $ 5 Trillion economy, powers conferred under sub-section (11) of section 143 of the Companies Act, 2013 and in supersession of the Companies (Auditor’s Report) Order, 2016, the Central Government has notified the Companies (Auditor’s Report) Order, 2020 (CARO 2020) on 25th Feb, 2020.

The CARO, 2020 is applicable for an audit of financial statements of eligible companies for the financial years commencing on or after the 1st April 2019. The criteria of eligibility of companies on which the CARO, 2020 shall be applicable has not been changed and hence it shall be applicable to all those companies on which CARO, 2016 was applicable. CARO 2020 would necessitate enhanced due diligence and disclosures on the part of auditors of eligible companies and has been designed to bring in greater transparency in the financial state of affairs of such companies.

The CARO, 2020 includes certain additional clauses, as compared to CARO, 2016, and the existing clauses of CARO, 2016 have been re-drafted to elicit detailed comments from the auditors. A brief analysis is given below:

1. Fixed Assets:

• In clause (i)(a): The word “Fixed assets” is replaced by “Property, Plant and Equipment” and “Intangible asset” separately.
• New clause (i)(a)(B) has been inserted to report whether proper records have been maintained showing full particulars of intangible assets.
• New clause (i)©: A specific format has been provided for reporting the details of such immovable properties (other than properties where the company is the lessee and the lease agreements are duly executed in favor of the lessee) whose title deeds are not held in the name of the company but are disclosed in the financial statements.

Description of propertyGross carrying valueHeld in the name ofWhether promoter, director or their relative or employeePeriod held — indicate range, where appropriateReason for not being held in the name of the company

• New clause (i)(d): will be applicable if there is revaluation of fixed asset by registered valuer. Amount to be specified if deviation is 10% or more.
• New clause (i)(e): Disclosure of details of proceedings against the company for holding Benami Property and whether the company has disclosed the details in its financial statements.

2. Inventory

• Clause (ii)(a) Expanded: Auditor is required to comment on coverage and procedure of inventory verification by management.

Also Materiality has been defined as 10% or more in each class of Inventory.

• New clause(ii)(b): If the company has any working capital facility against current assets in excess of Rs. 5 crores at any time during the year, then the auditor has to confirm whether the quarterly submissions made to the lenders are in conformity with the books of accounts or not.

3. Loans granted

• Modified clause(iii) of CARO, 2020: Details of all loans granted, advances in the nature of loans granted, guarantees/ security given to any entity has to disclosed. This will not be applicable to companies whose principal business is to give loans.
• Details of loans which were renewed, extended or fresh loans are granted to settle overdue of existing loans given to same parties to be given. Inter alia percentage of such loans to aggregate loans granted is also to be given.
• Details of all loans or advances which are repayable on demand or without any stipulated period of repayment has to be disclosed.

4. Loans, investments, guarantees, and security (Section 185 and 186 of Companies Act, 2013) : There is no change in CARO 2016

5. Deposits: There is no change in CARO 2016

6. Cost records: There is no change in CARO 2016

7. Statutory Dues: There is no change in CARO 2016

8. Default in repayment of loan or borrowings:

• Modified clause (ix)(a): Defaults in repayment of principal or interest portion of ANY loan or other borrowings are now to be reported. Earlier defaults in loans from specified lenders like financial institutions, banks, Government or debenture holders were to be reported.

A specific format below has been prescribed to report the period and the amount of default by the company in repayment of loans or other borrowings or in the payment of interest thereon to any lender:

Nature of borrowing including debt securitiesName of lenderAmount not paid on due dateWhether principal or interestNo. of days delay or unpaidRemarks, if any

• Newly inserted:
• Clause(ix)(b): Auditor has to report if the company is declared a WILFUL DEFAULTER by the bank, financial institution or any other lender.
• (ix)© Auditor to report whether term loans are applied for the purpose for which they were obtained
• (ix)(d) Auditor to report if funds raised for short term have been utilized for long term purposes.
• (ix)(e) If the company has taken any funds on account of meeting the liabilities of subsidiaries, joint ventures or associates, then such transaction details are to be reported.
• (ix)(f) Auditor to report if the company has availed loans on pledge of securities held in its subsidiaries, joint ventures or associates.
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9. Public offer: Clause (xiv) of CARO 2016 regarding preferential allotment of shares has been merged in clause (x)(a) of CARO 2020

10. Fraud by/on company: Modified Clause (xi)

(a) Earlier, auditor had to report on any fraud on the company done by its officer or employee. This specification has been removed. Now ANY fraud by the company or on the company has to be reported by the auditor.

(b) If any reporting of fraud has been filed by the auditor under 143(12) of the Companies Act, 2013 then such reporting has to be disclosed here also.

© Auditor has to disclose if he considered any whistle blower complaint received by the company during the year.

11. Managerial Remuneration: Clause (xi) of CARO 2016 has been removed in CARO 2020.

12. Nidhi Company: Defaults in repayment of principal or interest portion of deposits now to be reported in newly inserted clause (xii)©

13. Related Party Transactions: There is no change in CARO 2016

14. Internal Audit: New clause(xiv) inserted under which auditor has to report whether-

(a) Company has internal audit system commensurate to the size of the company.

(b) Such internal audit report has been considered by the auditor to reach his Opinion

15. Non-cash Transactions: There is no change in CARO 2016

16. RBI Registration: New clause (xvi) has been inserted in CARO 2020. Accordingly, auditor has to comment if the company has done any NBFC activity without valid registration from RBI.

Whether the company is fulfilling the criteria of Core Investment Company (CIC) or exempted CIC, is to be reported by the auditor

If the company has more than one company as part of the group, then the number of CICs which are part of the group are to be reported.

17. Cash losses: New clause (xvii) has been inserted in CARO 2020.

If the company has incurred cash losses for 2 consecutive years, then the amount of such cash losses are to be reported.

18. Resignation of auditor: Newly inserted clause (xviii)

The current auditor to report if he has taken into consideration the issues, objections or concerns raised by the outgoing auditor, in case the outgoing auditor had resigned during the year.

19. Material uncertainty: Newly inserted clause (xix)

Auditor has to comment whether material uncertainty with regards to company meeting its liabilities is existing at the Balance Sheet date as and when they fall due for the next one year on the basis of:

(a) Financial ratios

(b) Ageing & expected realization dates of financial assets & liabilities

© Other information accompanying the financial statements

(d) Knowledge of the Board and Management Plans

20. Corporate Social Responsibility: Newly inserted clause (xx) regarding transfer of unspent CSR funds to a specified fund within 6 months from the expiry of the F.Y. is to be reported.

21. Qualifications or adverse remarks by auditor in CFS: clause(xxi)

Auditor has to report whether there have been any qualifications or adverse remarks by the respective auditors in the Companies (Auditor’s Report) Order (CARO) reports of the companies included in the consolidated financial statements and details of those companies thereof.

Closing Thoughts

The CARO, 2020 is expected to significantly improve the overall quality of reporting by the Auditors on the financial statements of the Companies and thereby lead to greater transparency and faith in the financial affairs of the companies. This is automatically expected to bring greater inflow of investment by and in Indian companies.

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