What are the restatement adjustments?

Accounting Policy Changes

1. On change of accounting policy, the profits and losses of the earlier years (forming part of restated financial information) should be recomputed. This means recalculating the gains or losses from those previous years to reflect what they would have been under the new policy.
2. This process also applies to the current year when the policy change occurs.
3. For transactions which are accounted prospectively as retrospective accounting is not allowed, one can apply the new accounting rules from the current date onward and no restatement is required for earlier years. (E.g., Hedge Accounting).

Common Restatement Adjustments for Accounting Policy Changes are:

1. Inventory Valuation: Change from one method to another (like to weighted average cost from FIFO) adjust the past financials for restated financial statements accordingly.
2. Revenue Recognition: Changes in policy of revenue recognition revenue (like contract cost amortization), update past records to reflect this new method.
3. Project Costs: Changes in amortization of long-term project costs, adjustment of previous amortization calculations in the restated financials.
4. New Standards: The impact of the new accounting standards, like Ind AS 116 for lease or Ind AS 115 for revenue, have to be adjusted from the earliest period presented.
5. Accounting Improvements: Implement changes from global or local accounting standard updates.
6. Regulatory Changes: Restatement adjustments have to be done if new regulations impact accounting practices.

Prior Period Error

1. Under ICDR Regulations, significant errors from previous years should be corrected in the financial statements for those specific years.
2. In accordance with Ind AS 8 or AS 5, the corrections must be disclosed. In case of any prior period error in any of the years restated, the impact of the error needs to be reflected in the year it belongs to or the earliest period restated, whichever is later. Companies need to understand the impact of such prior period errors and do the proper adjustments in the restated financial statements for IPO.

Here are some common adjustments for prior period errors:

1. Tax Issues: Adjustments in the restatement of financials for any miscomputation in the calculation of current and deferred taxes from earlier years.
2. ESOP Expenses: Adjustments in the restatement of financials for any incorrect recognition of ESOP expenses from past years.
3. Prepaid Expenses: Adjustments to restated financials for any incorrect accounting of prepaid expenses in the previous financial years.
4. Employee Benefits: Adjustments in the restatement of financials for unaccounting of employee benefits like gratuity and leave encashment.
5. Inventory Valuation and Other Adjustments: Adjustments in restatement of financials for errors in inventory valuation during calculation of net realizable value. Incorrect accounting of revenue, incorrect classification of expenses and incorrect accrual of expenses would have to be adjusted in the restatement of financials.

Non-provisioning, Regrouping and Other Adjustments

If there is any non-provisioning of expenses, income, regrouping, or any other adjustments relating to previous years, adjustments shall be made while arriving at the profits or losses for the years to which they relate. Should an expense from a previous year have been reported in the current year, it needs to be accounted in the restated financial statements of the previous year.

Here are common adjustments for non-provisions, regrouping, and other issues:

• Other Income: Adjustments with respect to other income relating to previous years have to be made during restatement of financial statements. For example, insurance claims received in the current year need to be adjusted to the previous year to which the event relates.
• Debtors Provision: Adjustments with respect to bad debt provisions based on new credit risk information and amounts that have been recovered.
• Restatements of provisions: Prior period items by the JV/associates would be adjusted in the share in profit of JV/associates in the restated financial statement.
• Financial Instruments: Restatement adjustment for financial instruments as per mark-to-market rules that were missed in previous years.
• Borrowing Costs: Rectify errors in recognizing borrowing costs that should have been capitalized and amortized in restated financials.
• Intangible Assets: Adjustments by way of write-off on intangible assets capitalized in the three previous years need to be adjusted in the restated financial statements.
• Capital Subsidy: Adjustments for the amount of capitalization and depreciation charge in the restated financial statements for Capital Subsidy received subsequently on items capitalized in the previous years.

Audit Qualifications

1. As part of the restated financials, any audit qualifications shall be quantified or estimated and should be adjusted in the financial statements for the year it relates to or the earliest period restated, whichever is later.
2. For audit qualifications that cannot be quantified or estimated, they should be explained in the notes to the restated financial statements.

Some commonly identified audit qualification items include:

1. Remuneration to Directors: If the remuneration paid to the directors is not in accordance with the Companies Act, 2013, that will result in adjustment in restated financial statements.
2. Other: Any auditor qualification on adequacy of provisions for expenses or indirect taxes needs to be adjusted in restated financial statements.

Change in Estimates

As per the ICDR Regulations, there is no requirement for restatement of financials in the case of changes in accounting estimates.

Some common changes in estimates include:

1. Adjustments for changes in expected sales returns in previous years are not required in the restated financial statements.
2. Changes in borrowers' credit risk and expected credit losses are considered changes in estimates and thus do not have any impact on the restated financial statements.
3. Changes to an asset's useful life are regarded as a change in estimate and do not have any impact on the restated financial statements.
4. No adjustment is required in restated financials in the case of a change in the estimation of long-term incentive for the purpose of actuarial valuation.
5. It should be noted here that there is a difference between the change in estimate and an accounting error in making the estimate. The latter needs to be adjusted in the respective accounting period when the error was made even though the error is discovered in the subsequent period financial statements.

What are the disclosures required in the restated financials?

1. Presentation of reconciliation explaining the difference between the audited CFS and the restated CFS (consolidated financial statements) in a columnar format with respect to changes in equity, profit, and loss after tax.
2. Disclosure of Related parties and all related party transactions of the consolidated entities.

Additionally, as per SEBI (ICDR) Regulations, 2018, Schedule VI:

1. Notes and other disclosures required under the Companies Act 2013 shall form part of the restated financials in case of IPO.
2. Critical accounting policies, the basis of preparation, and the significant judgments and estimates should be disclosed.
3. The changes in significant judgments and estimates should be disclosed.
4. Details on basis of consolidation, accounting standards, and accounting policies should be disclosed.
5. All significant Related party transactions (RPT) should be disclosed, along with RPT policies in the restated financials.
6. Details of contingent liabilities, commitments, and subsequent events should be disclosed.