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In June 2022, the Institute of Chartered Accountants of India (ICAI) had issued a Technical Guide on financial statements for non-corporate entities. However, Limited Liability Partnerships (LLPs) are not within the scope of the Technical Guide on financial statements for non-corporate entities. Thus, on 1 July 2022, ICAI issued a Technical Guide on financial statements of the Limited Liability Partnerships (LLPs) (Technical Guide). The objective of the Technical Guide is to provide guidance on the applicability of the Accounting Standards (AS) to the LLPs and to prescribe formats for the preparation of the financial statements for LLPs.

Meaning of an LLP

An LLP is a body corporate formed and incorporated under the Limited Liability Partnership Act, 2008 (LLP Act). It is a corporate business form which gives the benefits of limited liability of a company and the flexibility of a partnership. Since an LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’, it is called a hybrid of a company and a partnership.

Applicability of the Technical Guide

This Technical Guide is recommended for the purpose of preparation of financial statements of the LLPs. However, the non-company entities which follow Ind AS are not required to follow this Technical Guide.

Key considerations
  • Applicability of AS: Recently, the Limited Liability Partnership (Amendment) Act, 2021, has been issued which requires that standards of accounting, as recommended by ICAI may be prescribed by the Central Government in consultation with the National Financial Reporting Authority for a class or classes of LLPs. Currently, the Accounting Standards for LLPs are yet to be notified by the Central Government and, accordingly, for the purpose of preparation and presentation of the financial statements, the LLPs are required to apply Accounting Standards prescribed by the ICAI. For the purpose of determining the applicability of the accounting standards, LLPs have been classified into four levels:
  1. Level I entities (large size entities),
  2. Level II entities (medium size entities),
  3. Level III entities (small size entities), and
  4. Level IV entities (micro entities).

The criteria for entities to be classified as Level I, II, III and IV has been provided in Annexure I of the Technical Guide and applicability of AS and exemptions/relaxations to entities from applicability of certain AS have been given in Annexure 21.

  • Format: The Technical Guide has prescribed a format for the preparation of financial statements for LLPs. It seems to be in line with the format provided by Schedule III (Division I) to the Companies Act, 20132. However, it excludes items which are not relevant for LLPs such as:
  1. Share capital details,
  2. Details of ageing schedule of trade receivables and payables,
  3. Details of cost of goods sold are required to be disclosed instead of details of cost of material consumed, purchase of stock in trade, etc.
  4. Disclosure of ratios, and
  5. Additional regulatory information, etc.

To access the text of the Technical Guide for LLPs, please click here

  1. Level I entities are required to comply with all the Accounting Standards. Level II, Level III and Level IV entities have been granted certain exemptions/relaxations from compliance with the Accounting Standards.
  2. Division I of Schedule III to the Companies Act, 2013 prescribes the format of financial statements for a company required to comply with the Companies (Accounting Standards) Rules, 2021

Action points for auditors

  • The Technical Guide is recommendatory in nature. However, auditors should actively engage with the LLPs and encourage them to understand and adopt the format for reporting and comply with the applicable Accounting Standards. This would help in bringing consistency and comparability in the presentation and disclosure of financial information reported by the LLP entities
  • Audit professionals should also note that this announcement supersedes the earlier announcement of the ICAI on ‘Harmonisation of various differences between the Accounting Standards issued by the ICAI and the Accounting Standards notified by the Central Government’ issued in February 2008, to the extent it prescribes the criteria for classification of Non-company entities (Non-corporate entities) and applicability of Accounting Standards to non-company entities, and the Announcement ‘Revision in the criteria for classifying Level II non-corporate entities’ issued in January 2013.

An interim financial report is a complete or condensed set of financial statements for an interim period which is shorter than a full financial year. Ind AS 34, Interim Financial Reporting prescribes the minimum content of an interim financial report and also specifies the applicable recognition and measurement principles.

On 4 July 2022, ICAI released the Educational Material on Ind AS 34 (Educational Material). The Educational Material provides guidance in the form of Frequently Asked Questions (FAQs) on the practical issues that the preparers of the financial statements face while preparing condensed interim financial reports. Some of the key matters discussed in the Educational Material include:

  • Applicability of Ind AS 34: Ind AS 34 does not specify the category of entities or how frequently the interim financial reports are required to be published. This is generally a matter for the relevant law and government regulations. Therefore, in the absence of any specific regulatory requirement or obligation, an entity is not required to publish interim financial information in compliance with Ind AS 34. However, an entity may choose to prepare the interim financial statements on a voluntary basis. Thus, Ind AS 34 applies only if an entity applying Ind AS in its annual financial statements is required or elects to publish an interim financial report in accordance with Ind AS.
  • Requirement to comply with all principles of Ind AS: An entity’s interim financial report can be described as complying with Ind ASs only if it meets all of the requirements of Ind AS 34. Accordingly, for an interim financial report to be compliant with Ind AS, it should not only apply the recognition and measurement principles of Ind AS in its interim financial report, but also provide all the disclosures required in Ind AS 34
  • Use of different accounting framework for preparing the interim and annual financial statements: There may be cases where a reporting entity prepares its interim financial report that does not comply with either all or some of the requirements of Ind AS, however prepares its year-end financial statements in compliance with the requirements of Ind AS. Since each financial report, annual or interim, is evaluated on its own for conformity to Ind AS3, therefore, in the specified case it does not prevent the entity’s annual financial statements from conforming to Ind AS. Such annual financial statements should be described to be in compliance with the requirements of Ind AS.
  • Condensed statement of cash flows in interim financial report: The interim report should contain all information, explanation of events and transactions that is relevant to understand the changes in financial position and performance of an entity during the interim period. Information about cash flows help users to understand a reporting entity’s operations, evaluate its financing and investing activities, assess its liquidity or solvency and interpret other information about financial performance. Accordingly, a condensed statement of cash flows should include all information that is relevant in understanding an entity’s ability to generate cash flows and the entity’s needs to utilise those cash flows. A three-line presentation of operating, investing and financing activity in a condensed statement of cash flows alone is not expected to meet the requirements of Ind AS 34.
  • Third balance sheet in the interim financial statements: Ind AS 34 does not include the requirements of Ind AS 1, Presentation of Financial Statements in respect of balance sheet as at the beginning of the preceding period when preparing condensed interim financial statements4. As a consequence, in condensed interim financial statements, it is not necessary to provide an additional balance sheet as at the beginning of the earliest comparative period presented (i.e., third balance sheet) where an entity has made a retrospective change in an accounting policy (or a retrospective restatement or a retrospective reclassification). However, an entity may present a third balance sheet on a voluntary basis.
  • Disclosure of additional information in the condensed interim financial statements: As per Ind AS 34, condensed interim financial statements should include, at a minimum, each of the headings and subtotals that were included in its most recent annual financial statements and the selected explanatory notes as required. Any additional information should also be included, if its omission would make the condensed interim financial statements misleading5. However, in deciding how to recognise, measure, classify, or disclose an item for interim financial reporting purposes, materiality should be assessed in relation to the interim period financial data6. If on assessment, the entity considers the information to be material, it should disclose the same irrespective of whether or not the same was presented in its last annual financial statements.
  • Treatment of certain items in an entity’s interim financial statements: The Educational Material has provided clarifications on treatment of certain items in an entity’s financial statements. They are as follows:
  • Revenue received and costs incurred on an uneven basis: Revenues received (such as dividend income) and costs incurred (such as 60 per cent of annual advertising expense incurred in a particular month) on an uneven basis should not be anticipated or deferred as of an interim date if anticipation or deferral would not be appropriate at the end of the entity’s financial year. Accordingly, these expenses and incomes should be recorded in the period in which they have been incurred.
  • Reversal of impairment loss in interim financial statements: Based on a combined reading of Ind AS 34 and Ind AS 36, Impairment of Assets, reversal of impairment of goodwill is prohibited in a subsequent period, be it annual or interim financial statements. However, reversal of impairment loss of other intangible assets is permitted in interim financial statements, provided all other requirements of Ind AS 36 are met.
  • Employee benefit expenses in interim financial statements: An entity should determine the net defined benefit liability (asset) with sufficient regularity that the amounts recognised in the financial statements do not differ materially from the amounts that would be determined at the end of the reporting period. Ind AS 19, Employee Benefits encourages, but does not require, an entity to involve a qualified actuary in the measurement of all material post– employment benefit obligation. For interim reporting purposes, reliable measurement is often obtainable by extrapolation of the latest actuarial valuation (where the actuarial valuation is obtained). The results of valuation are updated for any material transactions and other material changes in circumstances (including changes in market prices and interest rates) up to the end of the reporting period.
  • Income tax expense: Income tax expense for the interim period is accrued using the estimated average annual effective income tax rate applied to the pre-tax income of the interim period. The estimated average annual effective income tax rate is required to be re-estimated on a year-todate basis at the end of each interim reporting period. In arriving at the interim period income tax expense, jurisdictionwise profit before tax (PBT), income categories taxed at different rates need to be considered. The Educational Material has provided certain examples for computation of income tax expenses under different scenarios.

To access the text of the Educational Material, please click here

  1. Paragraph 2 of Ind AS 34
  2. As per paragraph 8 of Ind AS 34, the minimum components of an interim financial report include:
    • a condensed balance sheet
    • a condensed statement of profit and loss
    • a condensed statement of changes in equity
    • a condensed statement of cash flows, and
    • selected explanatory notes
  3. Paragraph 10 of Ind AS 34
  4. Paragraph 23 of Ind AS 34

Action points for auditors

  • The Educational Material provides a wide range of examples and practical scenarios on applicability of Ind AS 34 and issues surrounding the preparation and presentation of condensed interim financial information.

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