ICAI released a handbook for auditors to address the mistakes in financial reporting. The ICAI handbook has around 190 number of common mistakes and things to remember. The management team prepare the financial statements and reports. The internal auditor contributes to the preparation of financial reports. The external auditor expresses an opinion after analysing the financial statements. ICAI notified that the opinions mentioned in the document are based on the experience of the members of ICAI. It is not the opinion of the regulatory body or institute. The examples are for the application in the real world with sufficient guidance. The examples in the handbook are not supposed to apply to a layman’s understanding. The examples are to be understood with the consultation of an auditor. The blog intrigues the readers with a glimpse of the details in the ICAI handbook. ICAI radiates auditing professionalism with valuable insights.
Table of contents in the ICAI handbook:
Companies give importance to financial and non-financial information. In modern days, profit and performance are the key drivers in the market. Financial information helps understand the profit and margin of the company. The non-financial information provides insight into the organisational culture. The financial reporting guidance of ICAI provides information about the financial and non-financial information, and industry-specific observations with details of banking, NBFC, insurance, NPO and public sector undertakings.
What is financial information in reporting?
There are 111 items in the financial information division. The financial information mentioned in the ICAI handbook is listed below. Some of the concepts are explained, and the balance is outlined.
Investment property disclosures:
Investment properties include the cost related to the transaction, depreciation and residual value. Depreciation explains the life of the asset. The calculation of depreciation is given in Schedule Two of the Companies Act.
Investment property: Accounting policy:
The auditor calculates the investment property value using the cost model under Paragraph 30 of AS 40. The investment property is calculated based on fair value under paragraph 32 of AS 40.
Disclosure of direct operating expenses:
The operating expenses are the expenses from the repairs and maintenance of the property. The expenses are disclosed irrespective of the fact that they generated the rental income or not.
Performance obligation and its description:
The payment contracts with details of the due date, financing component, and the amount is variable or it is according to Paragraphs 58 and 56.
Accounting policy for revenue recognition:
The five-step model of revenue recognition is as follows: contract identification, identification of performance, performance of parties in the contract, transaction price, Adjust the transaction price and performance obligation.
The extent of risks and rewards transfer:
The ownership transfer of assets shows the transfer of rewards and risks to the owner. The owner accepts the benefits in real terms from the assets.
Disclosures under revenue recognition:
The revenue recognised by the company may undergo reconciliation and the adjustments made because of rebates, discounts, credits, refunds, price concessions, performance bonuses, and incentives are mentioned separately.
Terminology for related party:
The related party are mentioned as a member close to the key managerial personnel.
Related party disclosures:
The relationship with the related party and company is a controlled one. The controlled relationship makes the reporting authority responsible for operating and financial decisions.
Definition of key management personnel:
The related party and the key managerial personnel have the authority to direct, plan, and control along with the director.
Disclosure of transactions with related parties:
According to AS 24 para 18 the entity should disclose the details of the relationship with the related party. The disclosures are in the form of the amount of transactions and the outstanding amount with the related party. The financial information is inclusive of the details of guarantee and secured transactions.
The other concepts related to financial information are given below:
- After completing the balance sheet events that fall under the group of financial information.
- Disclosures related to key managerial personnel
- Cash and cash equivalents
- Disclosure of changes in liabilities – statement of cash flows
- Reporting cash flows on a net basis
- Preparation of statement of cash flows
- Interest and dividends as operating cash flows.
- Reconciliation of cash and cash equivalents
- Effect of obtaining control or losing control of subsidiaries in statement of cash flows
- Dividend distribution tax for financing activities
- Components of cash and cash equivalents
- Exchange earner foreign currency account
- Presentation of deferred tax liability or asset in the consolidated financial statement
- Provision for advance tax.
- Offsetting of deferred tax assets and deferred tax liabilities
- Disclosure of provisions
- Convincing evidence
- Property, plant, equipment -nomenclature
- Disclosure of the risk
- Expenditure during the construction period
- Disclosure of the risk investments in plan assets
- Defined contribution plans
- Director sitting fees
- Defined benefit plans – inappropriate classification
- Intangible assets with an indefinite life
- Disclosure of the amortisation period and the amortization method
- Intangible assets
- Intangible assets under development
- Amortization of intangible assets – terminology
- Research and development expense
- Inappropriate lease disclosures
- Disclosure of maturity analysis
- Short-term leases and low-value leases
- Disclosure of qualitative and quantitative information about leasing activities
- Disclosure regarding leases
- Going concern
- Change in accounting policy
- Corresponding amounts for the immediately preceding reporting period
- Accounting policies – disclosure
- Change in accounting policy
- Disclosures for comparative figures
- Prior period errors
- The risks have quantitative and qualitative disclosures for additional financial information.
- Disclosure of credit risk
- Incorrect categorization of market risk
- De-recognition of investments in equity instruments
- Provision matrix for ECL on trade receivables
- Reclassification of investments in equity instruments
- Assets held for disposal
- Reclassification of financial assets
- Qualifying assets
- Disclosure of borrowing cost
- Date of cessation
- Nondisclosures of discount rate
- Disclosures of cost formula
- Valuation of inventories
- Nature of government grant
- Intragroup transactions
- Different accounting policies
- Disclosure of place of incorporation and proportion of ownership interest
- Change in ownership interest in an associate or joint venture
- Weighted average number of shares
- Bonus shares are not considered for the calculation of earnings per share
- Disclosure regarding the numerator.
- Dividend on cumulative preference shares
- Foreign currency transactions
- DPS for continuing and discontinued operation
- Segment disclosures made in consolidated financial statements
- Segment reporting
- Statement of changes in equity
- Employee share-based payments – disclosures
- Share application money
- Equity share capital disclosures
- Employee stock options outstanding
- Movement in reserves
- Disclosure of the nature of security
- Debentures
- Borrowings
- Loan to subsidiaries
- Borrowings not used for specified purposes
- Loans and advances
- Contingent liabilities and commitments
- Disclosures for loans or advances granted to promoters, directors and related parties
- Cryptocurrency or virtual currency
- Capital work in progress
- Details of immovable property
- Shareholding pattern of promoters
- Disclosure of ratios
- Disclosure of shareholding
- Revaluation of property
- Trade payable ageing schedule
- Basis of ageing schedule for trade receivables and trade payables
- Trade receivables ageing schedule
- Relationship with struck-off companies
- Consistency of information
- Investor education and protection fund
- Impact of amendments on accounting standards
- Rounding off
- Cross-referencing
- Disclosure of registered valuer
- Nomenclature for presentation of quarterly results
- Disclosure of investment made in subsidiaries and joint ventures or associates
- The Code of Social Security, 2020
What is non-financial information in reporting?
The non-financial information are as follows: statement on vision and mission, organization and group structure, strategic objectives, management discussion and analysis, credit rating in board of directors report, board report, contribution to national exchequer, chairman’s statement, risk management and mitigation measures, internal control system, human resource policies, information systems audit, CSR, CSR – impact assessment report, corporate governance compliance certificate, corporate governance report, Date of audit committee meetings, composition of directors as per SEBI LODR, share held by directors and their relatives, compliance with the ethics and business conduct for board and senior management, value creation model, investors presentation, value added statement, integrated reporting, horizontal and vertical analysis, performance analysis for past years, Index of the annual report, sustainability report, colour scheme, website disclosure, Graphs and charts, and website disclosure under SEBI.
Final Thoughts:
The handbook also provides information about the vulnerable concepts in banking, insurance, NBFC, public sector undertakings, and NPOs. The financial and non-financial concepts in financial reporting are examples with a lesson to the auditors. The ICAI handbook is to recheck before completing the financial reports.