Compulsorily Convertible Debentures (CCDs) are an important source of finance and are used by the companies for raising funds. CCDs are debentures with an underlying characteristic of compulsory conversion into equity after a certain period of time, or on happening of a specified event. Ind AS 32, Financial Instruments: Presentation establishes the principles for classifying CCDs, from the perspective of the issuer, into financial liabilities and equity instruments. Ind AS 32 requires an entity to assess the substance of a contractual arrangement rather than its legal form while determining such classification. Therefore, the topic of classification of CCDs requires a detailed evaluation as it is possible for an instrument that qualifies as equity for legal or regulatory purposes, classifies as a financial liability under Ind AS. Also, the International Accounting Standards Board (IASB) has undertaken a project on Financial Instruments with the Characteristics of Equity. The IASB aims to address challenges identified in IAS 32, Financial Instruments: Presentation, by establishing clearer principles for classifying financial instruments as either financial liabilities or equity, improving the clarity and consistency of the classification requirements for the more complex financial instruments that create a challenge in practice and enhancing the presentation and disclosures about financial liabilities and equity. Considering that Ind AS are largely aligned with the IFRS, the topic of classification of financial instruments with the characteristics of equity would be of relevance in Indian context as well. This edition of the Accounting and Auditing Update (AAU) contains an article on this topic, which highlights key principles from a recent Expert Advisory Committee (EAC) opinion ‘Accounting treatment of CCDs’ issued by the Institute of Chartered Accountants of India (ICAI) relating to guidance on accounting for CCDs.
The publication also cast lens on considerations involved with an audit of group’s financial statements - ISA 600, Special Considerations—Audits of Group Financial Statements (Including the work of component auditors). This standard deals with special considerations that apply to an audit of group financial statements (a group audit), including when component auditors are involved. The International Auditing and Assurance Standards Board (IAASB) has revised the extant ISA 600 to strengthen the auditor’s approach to planning and performance of a group audit and clarify the interaction of ISA 600 to the other ISAs. The revised standard is effective for audits of group financial statements for periods beginning on or after 15 December 2023. A group audit poses various challenges for an auditor specifically when group auditors are required to work with other component auditor(s). The revised standard provides a new risk-based approach to planning and conducting group audits. It will help drive greater focus by the group engagement team on their responsibility to identify and assess the risks of material misstatement of the group financial statements and to design and perform further audit procedures to respond to those risks, in order to obtain sufficient appropriate audit evidence in respect of the group audit as a whole. This is a fundamental responsibility of the group auditor and the standard places an increased emphasis on it.
Our publication also carries a regular synopsis of some recent regulatory updates in India and internationally.
We would be delighted to receive feedback/suggestions from you on the topics we should cover in the forthcoming editions of AAU.