Key Financial Reporting Considerations Amidst the 2nd Wave of COVID-19

Key Financial Reporting Considerations amidst 2nd Wave of COVID-19 (29 May 2021| CA Santosh Maller, CA Vijay Wadhwani)

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01. Second Wave of COVID-19

COVID-19 Second Wave…  CRISIL: “ If second wave peaks by June

end, GDP growth rate is likely to fall to 8.2%”  Moody’s “Revised GDP forecast for FY

2022 to 9.3% from the earlier projection of 13.7% made in February this year.”  S&P: India's second wave has prompted

us to reconsider our forecast of 11% GDP growth this fiscal year. The timing of the peak in cases, and subsequent rate of decline, drive our considerations.

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02. Financial Reporting Issues, Challenges & Possible Approach

Inventory: Key Considerations • Net Realisable Value decline • Absorption of Direct Overhead in inventory valuation – Whether factory fully utilized in current year?

• Physical Stock Verification – Roll forward/backward procedures – Virtual physical verification – is the technology adequate?

• Connection speed, resolution of camera, battery • Who controls the camera? Can we identify location? Can we identify empty boxes? Can we read the labels? Obsolete goods?

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Inventory: Physical Verification - Real Life Examples Reliance Industries Limited Extracts from Financial Results for Year Ended 31 March 2021 Particulars Amount a) Net gain on sale of investments (net of tax) b) Impairment of Assets of Shale Gas Entities Recognition of Deferred Tax Asset relating to Shale Gas Investments

FY2020-21 Amount 4,966 # (15,691)

c) Sale of Marcellus Assets – Chevron JV d) Loss due to substantial fall in oil prices and demand destruction (net of tax) e) Adjusted Gross Revenue dues of Reliance Jio Infocomm Limited f) Provisions for liabilities pertaining to erstwhile subsidiary – GAPCO Total Exceptional Gain / (Loss)

850 *

FY2019-20 Amount -

15,570

-

(4,245)

-

(146)

(53) *

(53)

5,642

(4,444) Copyright 2020 | All Right Reserved

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Inventory: Physical Verification - Real Life Examples Piramal Enterprises Limited Emphasis of Matter Due to the COVID-19 related lockdown, we were unable to observe the Management's year-end physical verification of inventory at certain locations of the Parent in India, amounting to Rs. 217.12 crores (Total Inventory Rs. 423.56 crores). We have performed alternate procedures to audit the existence of inventory as per the guidance provided in SA 501 "Audit Evidence - Specific Considerations for Selected Items", which includes inspection of supporting documentation relating to purchases, production, sales, results of cyclical count performed by the Management through the year and such other third party evidences where applicable, and have obtained sufficient appropriate audit evidence to issue our unmodified opinion on these Consolidated Financial Results. Our report is not modified in respect of this matter.

The Dharamsi Morarji Chemicals Limited Emphasis of Matter We draw your attention to Note 4 to the financial results which explain the uncertainties and the management's assessment of the financial impact due to the lock-downs and other restrictions and conditions related to the COVtD-19 pandemic situation, for which a definitive assessment of the impact in the subsequent period is highly dependent upon circumstances as they evolve. Further, our attendance at the physical inventory verification done by the management was impracticable under the current lock-down restrictions imposed by the government and we have therefore, relied on the related alternative audit procedures to obtain comfort over the existence and condition of inventory at year end.

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Reporting on Impairment: Examples Extracts from FYE 31 Mar 2021 Financial Results of Tech Mahindra Ltd The Company based on the performance of few subsidiaries and relevant economic and market indicators has assessed the recoverable amount of investment in those subsidiaries.

Consequently, the Company has recognised an impairment of Rs.1,439 Million in the statement of profit and loss for the year ended March 31, 2021 (year ended March 31, 2020: Rs. 5,554 Million).

The Company based on its annual impairment assessment of the goodwill outstanding in the books of accounts and the underlying cash generating unit (‘CGU’) to which the goodwill is allocated, assessed the recoverable amount of certain CGUs to be lower than their carrying value. Consequently, the Company has recognized an impairment of Rs. 507 Million in the statement of profit and loss for the year ended March 31, 2021 (year ended March 31, 2020: Rs. 2,175 Million).

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Reporting on Impairment: Examples Extracts from FYE 31 Mar 2021 Financial Results of Tata Motors Ltd.

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Going Concern Assumption Some factors to be considered while assessing Going Concern Assumption Impact on the economy and asset prices in general.

Impact of various measures taken by RBI for improving liquidity, government assistance including economic package Whether the entity is operating in a highly impacted sector Whether the entity has the liquidity to continue to meet its obligations as they fall due Whether the entity has sufficient existing/ potential borrowing facilities to meet its short-term needs Whether the entity has plans and ability to restructure their debt obligations if required to ensure solvency Assessing the financial health of key customers/ vendors and their impact on entity’s operations Impact of contractual covenants and commitments

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Going Concern: Real-life Example Extracts from FYE 31 Mar 2021 Fin. Results of EIH Associated Hotels Ltd The hotel business has been severely impacted during the year on account of outbreak of global pandemic COVID-19. The Company witnessed softer revenues due to the lockdown imposed during the first six months of the year. With the unlocking of the restrictions, hotels have been opened and business has gradually improved across all hotels. During the second half of the year, the Company witnessed some signs of recovery of demand.

Whilst there has been a second wave of the COVID-19 pandemic in the last month in some States, there has also been increased vaccination drive by the Government and the Company continues to closely monitor the situation.

Management based on its assessment does not foresee stress on liquidity, owing to the availability of liquid funds in the form of cash and cash equivalents, other bank balances (other than earmarked accounts) and investments in mutual funds amounting to Rs. 5,788.20 lakhs as on 31st March, 2021 and also has access to sanctioned borrowing facilities for working capital requirements worth Rs. 2,000 lakh which were unutilised as on 31st March, 2021.

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Employee Benefits  Under both Ind AS 19 and AS 15 defined benefit obligations are recognized in balance sheet equal to net of:  Present value of defined benefit obligation  Fair value of the plan assets at the end of the reporting period.

 Due to COVID 19, there may be an impact on the fair value of the plan assets as well as the discount rate used to present value the defined benefit obligation.  Termination benefits are recognised at the earlier of (i) when the entity can no longer withdraw the offer; and (ii) the entity recognises costs for a restructuring and involves payment of such benefits.  Adjustments to accumulated compensatory leave of employees; for determining employee’s leave obligation at the BS date end, leave credits allowed/ leaved adjusted during lock down period, etc. also need to be considered  With changes required in valuations assumptions due to change in business forecasts/ projections, valuation of existing employee stock option plans (ESOPs) and new ESOPs will need careful evaluation by entities and auditors.

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Real Life Examples: Employee Benefits Extracts from FYE 31 Mar 2021 Financial Results Britannia Industries Ltd. Exceptional item for the above reported periods pertain to Voluntary Retirement & retrenchment costs incurred in one of the subsidiaries of the Company.

Extracts from FYE 31 December 2020 Financial Statements ABB India Ltd. During the year ended 31 December 2020, the Company announced and executed a voluntary retirement scheme for its employees in one of the division of Industrial Automation segment. The Company recorded an additional cost of Rs.13.5 Crores towards this scheme in the statement of profit and loss as “Employee costs”.

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Real Life Examples: Employee Benefits Extracts from FYE 31 Dec 2020 Financial Statements Castrol India Ltd. Redundancy cost include one time cost of Rs. 19.50 crore towards Organisation Transformation and Restructuring Programme implemented during the year.

Extracts from FYE 31 Mar 2021 Financial Results Tata Communications Ltd. As part of its initiative to enhance the long-term efficiency of the business, the Company undertook organisational changes to aCompany becoming redundant.

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Contract Termination Penalties  Companies may incur significant penalties for terminating contracts.  For example, many conferences and events are being cancelled, which can result in loss of deposits and/or require penalties to be paid.  These non-recurring costs will need to be appropriately recognized, measured, presented, and disclosed in financial statements.  Even when an entity has not made a decision to cancel an event, consideration will have to be given to the issues related to deposits and potential penalties if the event cancellation is probable in the future.  It’s important that the contracts are reviewed for termination and force majeure clauses.  Such assessment needs to be especially done as per AS 29/ Ind AS 37 for all executory agreements that are likely to become onerous.

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Real Life Example: Contractual Commitment Interglobe Aviation Limited: Extracts Sep 2020 Financial Results The Group has certain agreements with an Original Equipment Manufacturer (OEM} for supply of new engines, spare engine support and provision of maintenance services.

The supplier has raised invoice, on the Group amounting to Rs. 2,519.55 till 30 September 2020 for spare engine charges, which management, considering its assessment of the contractual terms and conditions and basis advice from legal counsel, believes that it is not entitled to pay and accordingly has not recorded any provisions for the same, in the books of account. Further, the Group has also raised certain claims on the OEM due to issues noted with the engines supplied by the OEM. Basis the contractual terms and legal counsel view, the management believes that it is entitled to these claims from OEM. The amount claimed by the Group far exceeds the amount being claimed by the supplier from the Group. Given the uncertainty involved in determination and collection of the final arnount, the Group has not recognized such claim amount as a contingent asset. The Group is in discussions with the OEM to reach a settlement on the contract.

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Real Life Example: Onerous Contracts / Restructuring provision Tata Motors: Extracts 31 March 2021 Financial Results

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Real Life Example: Expected Credit Loss Provision Extracts from FYE 31 Dec 2020 Financial Statements of ACC Ltd Impairment loss on trade receivable has increased primarily on account of increase in expected credit loss in Ready Mix Concrete business which is mainly due to slowdown in view of COVID-19 pandemic.

During the current year, in view of the management re-assessing the expected recovery period for incentives receivables from the State Government, a charge of Rs.128.92 Crore due to time value of money computed based on the expected credit loss method is included in Other Expenses.

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Real Life Example: Expected Credit Loss Provision Extracts from FYE 31 Mar 2021 Financial Results of Mahindra Finance Ltd In accordance with the Board approved moratorium policy read with the Reserve Bank of India (RBI) guidelines dated 27 March 2020, 17 April 2020 and 23 May 2020 relating to 'COVID 19 Regulatory Package', the Company had granted moratorium up to six months on the payment of installments which became due between 01 March 2020 and 31 August 2020 to all eligible borrowers. This relaxation did not automatically trigger a significant increase in credit risk. The Company continued to recognize interest income during the moratorium period and in the absence of other credit risk indicators, the granting of a moratorium period did not result in accounts becoming past due and automatically triggering Stage 2 or Stage 3 classification criteria.

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Real Life Example: Expected Credit Loss Provision Extracts from FYE 31 Mar 2021 Financial Results of Mahindra Finance Ltd (contd.)

The impact of COVID-19 on the global economy and how governments, businesses and consumers respond is uncertain. This uncertainly is reflected in the Company's assessment of impairment loss allowance on its loans which are subject to a number of management judgements and estimates….

Taking Into consideration the impact arising from the COVID-19 pandemic on the economic environment. the Company has, during the year, continued to undertake a risk assessment of its credit exposures and in addition to the model determined ECL, provision, it has recorded a total additional ECL overlay of Rs 906.36 crores as on March 31, 2021 (as on 31 March 2020 Rs. 574.01 crores) in the Standalone Balance sheet and Rs.1.093.111 crores (as on 31 March 2020: Rs.728.63 mores)….

The management will continue to closely monitor the material changes in the macroeconomic factors impacting the operations of the Company, Copyright 2020 | All Right Reserved

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Amendment to Ind AS 116 Leases: Examples Extracts from FYE 2020-21 Financial Statements of Mahindra Holidays & Resorts India Ltd. During the year ended March 31, 2021, the Company has renegotiated with certain lessors on the rent reduction/ waiver due to COVID 19 pandemic which is short term in nature. Accordingly, the Company in the statement of standalone profit and loss has recognised an amount of Rs 863.31 Lakhs during the quarter ended March 31, 2021 and Rs 3,074.87 Lakhs for the year ended March 31, 2021, as part of Other Income. Further in the statement of consolidated profit and loss an amount of Rs 1,322.72 Lakhs has been recognised during the quarter ended March 31, 2021 and Rs 4,320.99 Lakhs for the year ended March 31, 2021, as part of Other Income.

Other Examples: • Wipro Ltd. • TCS Ltd. • Infosys Ltd. • Trent Ltd. • Shoppers’ Stop Ltd. • Future Retail Ltd. • Indian Hotels Ltd. • Tata Motors Ltd. • Tata Chemicals

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Non-Deductibility of Goodwill: Finance Act 2021 • Goodwill of a business or profession shall not be considered as a depreciable asset and hence, depreciation under section 32 of IT Act shall not be allowed on the same.

• Goodwill shall be considered as Capital Asset and in case the Goodwill is purchased from previous owner, the Purchase Price paid shall be considered as the Cost of Acquisition and in any other case it shall be n considered as NIL.

Where a company has been claiming depreciation on Goodwill in the past, shall derecognize the deferred tax asset and recognize deferred tax expense in P&L. 24

Reporting on Non-Deductibility of Goodwill: Example Extracts from FYE 31 Mar 2021 Financial Results of HCL Technologies Ltd Current tax expense for the three months ended 31 March 2021 includes 419 crores being the tax impact of goodwill taken out of purview of tax depreciation w.e.f. 1 April 2020 by Finance Bill enacted in March 2021. Also deferred tax expense for the three months and year ended 31 March 2021 includes 914 crores and 1,222 crores respectively being the Deferred Tax Liabilities recognized by the Company on difference between book basis and tax basis of goodwill consequent upon enactment of above provisions.

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Amendments related to Corporate Social Responsibility Each covered company shall spend at least 2% of avg net profits during immediately preceding FYs

CSR is now a Statutory Obligation Provision shall be created for unspent CSR at 31/3/2021

Unspent CSR Report in Board report

CSR liability Not fully spent

Ongoing CSR project?

Yes

Within 30 days from end of FY

Deposit in UCSR bank A/c If unspent within 3 years

No

Trf to Sch VII notified fund Within 30 days for ongoing projects/6 months for other cases 26

Transfer of CSR Assets CSR spent for creation/acquisition of a capital asset is required to be held by:

(a) a company established under section 8 of the Act; or (b) beneficiaries of the CSR project (self-help groups, collectives, entities); or

(c) a public authority.

Extracts from FYE 31 Mar 2021 Financial Statements of Infosys Consequent to the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (“the Rules”), the Company intends to transfer its CSR capital assets created prior to January 2021 to a controlled subsidiary (referred to as “ the Subsidiary” ) to be established in accordance with Section 8 of the Companies Act, 2013 for charitable objects. The transfer will be undertaken upon obtaining the required approvals from regulatory authorities.

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Reporting on Non-Deductibility of Goodwill: Example Extracts from FYE 31 Mar 2021 Financial Results of Macrotech Developers Ltd (Lodha Developers) Pursuant to amendment to Section 32 of the Income Tax Act, 1961 introduced by the Finance Act, 2021, depreciation on Goodwill of a business will not be allowed as a deductible expenditure effective 01April-20. Consequently, in accordance with the requirements of Ind AS 12 "Income Taxes", the Group has recognised one time additional deferred tax liability of $10,097.46 lakh and charged to statement of profit and loss as deferred tax expense being the difference between the book base and tax base of NIL of Goodwill.

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Internal Financial Controls over Financial Reporting  Due to the impact of COVID-19, there could be additional considerations that need to be taken care of:  Need to implement new internal controls or modify existing internal controls over financial reporting  Evaluate whether any of the controls is not operating effectively on account of absence of concerned person due to illness/quarantine/ working from home/isolation/travel inaccessibility.  Identify alternate controls.  Ability to close financial reporting process in time.  Due to COVID 19 with limited supervision, oversight, few board meetings, limited cyber security and internal reporting; there are possibilities of unintentional override of designed controls or even of planned frauds.  Therefore, it is imperative that both auditors and entity should remain alert to any such indicators of override of internal controls.

 The auditors should gather sufficient and appropriate audit evidence before issuing their audit opinion.

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Data Confidentiality and Cyber Security  With limited connectivity, data transfer taking place using personal hotspots internet

connections and use of personal e- mail ids by employees and other stakeholders, there is an increased risk of compromising on data confidentiality and cyber security.  Organisations should issue written detailed standard procedures to all to ensure that flow Period of of information Holding

and work is happening with minimised information technology risks.

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