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Decoding Due Diligence - Income

Updated: Aug 28


due diligence

Due Diligence of income is important to verify authenticity and accuracy of revenue, assess revenue recognition policies and practices and to evaluate sustainability and scalability of revenue streams. Let’s delve into how due diligence of income is conducted:

Revenue from Operations

  • Revenue Model Analysis: Conduct an in-depth analysis of the revenue model to understand the primary focus areas, target compliance efforts as well as understand the overall product mix, geographic reach, and distribution channels.

  • Trend Analysis: Identifying the trends in revenue patterns assisting in informed decision making. Trend analysis helps to project future revenues with accuracy and assists in making comparisons with industry benchmarks as well as competitors.

  • Indian GAAP And Accounting Standards: Verify whether revenue is measured and recognized in accordance with Indian GAAP and Accounting Standards — AS 9 or Ind AS 115, as applicable.

  • Mapping of Collections: Collection mapping provides accurate understanding on utilization of cash flows, knowledge of customer behaviors, and compliance with financial reporting. This can also help to understand a company's financial health and operational effectiveness.

  • Comparison With Investor's MIS: Management Information Systems (MIS) shared with investors are mapped with the amounts recorded in the books of accounts, to ensure accurate and timely reporting to the investors, facilitate informed decision making and verifying consistency with accounting records.

  • Audited Financial Statement Comparison: Mapping of revenue with audited financial statements ensures accuracy and helps to verify the revenue with previously reported information.

  • Taxes And Discounts: Ensure appropriate reduction of discounts against the revenue reported, thereby helping to assess the top line correctly to present the actual income after reductions. Further, verification of accounting with respect to GST as well as TDS/TCS implications and timely payment to the Government.


Other Sources of Revenue

  • Interest Income: Ensure that interest income is recorded accurately in the books of accounts, aligning precisely with the figures reflected in the fixed deposit statements and interest calculations.

  • Dividend Income: Check whether the dividend income earned and credited in the bank, has been properly recorded in the books of accounts. Further, with respect to registered start-ups, verify compliance with various notifications such as G.S.R. notification 127 (E), which sets out the eligibility criteria for recognized start-ups.

  • Forex Fluctuations: Carefully check that gains or losses from exchange differences arising on any cross-border transactions conducted in foreign currency, and fluctuation differences have been accounted properly in accordance with guidelines of AS 11 or Ind AS 21, as applicable.

  • Gains From Assets Sale: Verify computation of profits or losses on sale of assets, as these transactions do not generally take place in the normal course of business. Further, understand the rationale for such asset disposals, and ensure appropriate disclosures are made as part of the Due Diligence (DD) exercise.

  • Interest On Income Tax Refund: Verify Income Tax Returns and the Income Tax Portal, and ensure interest on refunds, if any, are appropriately recorded in the books of accounts.

Conclusion

As an Indian startup or entrepreneur, ensuring accurate income projection is crucial for attracting investors, making informed decisions, and understanding a business's true financial health. 

At Constellation Blu, we understand the importance of thorough due diligence in capturing every source of income, maintaining compliant records, and presenting a clear financial picture.

Don't let inaccurate income projections hold you back. Partner with Constellation Blu to conduct comprehensive Due Diligences. Reach out to us today to schedule a consultation and take the first step towards a brighter financial future!



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