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TAXATION 1254

POSITION PAPER

Suggestions of the Group Constituted to Identify the
Tax Issues Arising Out of Convergence with IFRS to the
Ministry of Corporate Affairs
(Dated 13th December, 2010)

A Group for identifying direct tax issues arising from convergence of Indian Accounting Standards (IAS) with
International Financial Reporting Standards (Ind AS) was constituted by the ICAI, which comprised both of
members of the Council of the Institute and of the CBDT.
Thereafter, the said Group decided to form two sub-groups as follows:
(1) A sub-group under the Chairmanship of CA Mahesh P Sarda, Chairman, International Taxation Committee,
ICAI to study the status of tax provisions in other countries where IFRS has already been implemented.
(2) Another sub group under the Chairmanship of CA Jayant Gokhale, Chairman, Direct Taxes Committee to
study the specific differences arising out of IFRS implementation, in each of the Accounting Standard with
respect to the tax laws.
On the basis of suggestions received from both the sub-groups some major tax issues arising out of
convergence with IFRS were identified in the form of Position Paper. Suggestions were also received from
NACAS & senior government officials. These views have been suitably incorporated in the Position Paper
which was duly considered by the group. The Position Paper is to be submitted to the Ministry to assist the
concerned ministries in policy formulation. It is hoped that this Position Paper would help to put in place the
regulatory framework for facilitating the entire process of convergence of Indian Accounting Standards with
IFRS in accordance with the timelines laid down by the Government. Following is the Position Paper for the
information of the members and other readers.

1. Preparation for 1.2.In July 2009, with a view to desi- industry CFOs, was set-up under
Convergence with IFRS in gning a definitive roadmap for the Chairmanship of Shri T V
India convergence with IFRS and Mohandas Pai, Director, Infosys to
1.1.As per Government policy an- coordinating the process, a Core interact with various stakeholders
nounced in 2008, the Indian Group was set-up under the from business and industry to
Accounting Standards are expected Chairmanship of the Secretary, understand their concerns on the
to be fully convergent with IFRS Ministry of Corporate Affairs with issues of convergence with IFRS,
w.e.f. 1st April, 2011. The Ministry of participation from also Ministry of identify problem areas and ascertain
Corporate Affairs, Government of Finance, C&AG, RBI, SEBI, IRDA, the preparedness of the industry for
India Press Note vide No.1/5/2001- PFRDA, ICAI, NACAS and industry such convergence. Deliberations
CL.V dated 13th May, 2008 states representatives. Further, two Sub- took place in these Groups with
that the initiative for harmonisation groups were also constituted. First a view to lay down the roadmap
of the Indian accounting standards Sub-group was set-under under for the convergence with IFRS
with IFRS, taken up on 2001 and the Chairmanship of Shri Y. H. in India. The second Sub-group
implemented through notification Malegam, Chairman, NACAS with a forwarded its suggestions and
of accounting standards by the view to identifying the various legal recommendations to Sub-Group –
Central Government in 2006, would and regulatory changes required I. Sub-Group – I also submitted its
be continued by the Government for convergence and to prepare a Report to the Core Group.
with the intention of achieving roadmap for achieving the same. 1.3.The Core Group, under the Chair-
convergence with IFRS by 2011. Second Sub-group, comprising of manship of Secretary, Ministry of

114 THE CHARTERED ACCOUNTANT february 2011

2010 after form of Position paper before the investments.As per the roadmap announced countries where IFRS has already d) Unrealised/notional profit may by the Government. Chairman. certain areas of of listed entities and public interest Accounting Standard with respect options still exist. However. meeting of NACAS scheduled on the above-mentioned issues.CA. 3. ICAI to study unrealised profit should not be as AS.The groundwork for Convergence of India. The same was 2. which are not examining the Reports of the Sub. some major tax issues be explored for comparability and estimated to be not more than arising out of convergence with uniformity.1. was constituted in 2006. f) Possibility of revaluation of fixed subsidiaries. 1956. Thereafter. being Group – I. Direct e) For certain accounting Standards companies in three phases starting Taxes Committee to study the (which have tax implications). which are of the Council of the Institute and of by effecting one time changes and converged with IFRS which shall the CBDT. of Accounting Standards (i. the Chairman. laid down the roadmap 10-2010 for its consideration. International profit/notional gain to tax i. group in its meeting held on 18. the Indian Accounting the views of the group before the of Indian Accounting Standards Standards converged with IFRS NACAS in its meeting scheduled with IFRS started in 2001. 2011. the first set been implemented. 2011. wherein it was unrealised profit/gain is likely to referred to as IND AS. 1961 Section 211(3C) of the Companies Financial Reporting Standards b) After identification whether the Act. Chairman.2. available for sale/trading.In the first phase. on account of 3. differences. hereinafter referred to Taxation Committee.2. 2. be routed through Other Com. Convergence with IFRS Corporate Affairs.4. NACAS made certain observations a position paper on Convergence and suggested the Secretary to was issued in 2007. such Companies. such as land and strategic held during January. These entities are groups. with the financial year 1-4-2011. the Chairmanship of CA Mahesh for not subjecting the unrealised including Small and Medium P Sarda. 300 Companies including their IFRS were identified by the sub. 2011. 2010. 3. meeting tax requirements be applicable to other companies. as per the roadmap 22-10-2010 at Mumbai. 1255 TAXATION Corporate Affairs. A thorough entities have to adopt the converged to the tax laws. with IFRS in India so as to meet decided to place its views in the This paper is intended to address the targeted deadline of 1st April. Role of ICAI in identifying the NACAS to adopt the following widely discussed and lead to the direct tax issues arising approach while preparing the present position on Convergence from convergence with IFRS report: through the Ind AS model wherein. 3. (IFRS) was constituted by the ICAI.3. Jayant Gokahle. The meeting of the said Group was c) Clearly identifiable areas where These Standards are hereinafter held on 28th April. a Group for identifying a) Identifying Permanent differences the Ministry of Corporate Affairs direct tax issues arising from between converged Indian agreed for two separate sets of convergence of Indian Accounting Accounting Standards and existing Accounting Standards under Standards (IAS) with International Income-tax Act. As a consequence the task Force on Convergence of companies in phases beginning of the presentation. specific differences arising out of IFRS offer more than one options. at its meeting group and the same was placed in assets.e (2) Another sub group to be formed prehensive Income (OCI) and not Converged Accounting Standards) under the Chairmanship of CA through Profit and Loss A/c will be applied to specified class of Jayant Gokhale. in each of the Nevertherless. The second decided to form two sub-groups as ocuur merely due to following set would comprise of existing follows: of converged Indian Accounting Accounting Standards and would (2) A sub group to be formed under Standards and steps to be taken be applicable to other companies. from 1st April. certain category IFRS implementation. announced by the Ministry of 2. shall be applied to specified class on 22-10-2010. The taken at historical cost and option for achieving the convergence group considered the report and for revaluation may be explored.e. These entities have to THE CHARTERED ACCOUNTANT february 2011 115 . the status of tax provisions in other subjected to tax.First set would comprise of Indian which comprised both of members timing differences can be tackled Accounting Standards.On the basis of inputs received those options and the possibility periods commencing on or after from the members of both the sub. examination may be done of standards (Ind-AS) from accounting 2. of retaining uniform option may 1st April. Government Direct Taxes Committee presented 3.3. Accordingly.1. Now. if any. Chairman.

the Accounting Standard Board of ICAI.(admittedly scaled up per the Exposure Draft of Ind-AS 41 indicating/quantifying the major significantly).(which are applying Ind AS would come to the would be required to be maintained in dealt with in a subsequent part of original tax base as computed under order for the chartered accountant to the note) of the resulting differences the Income-Tax Act for all other tax accurately quantify such differences the broad points of conceptual payers (it had already been concluded on a continuing basis – especially in difference may be noted as under: in the earlier deliberations that under certain items where the effect may a) IND AS (as also the IFRSs) lay more any circumstances different assesses not be restricted to a specific financial emphasis on the balance-sheet having different tax bases would be year but may have implications for disclosures than the profit and loss inequitable and legally questionable). Areas of Tax Impact of standards were differences are likely arising out of Application of 5.It is commonly accepted and upon is that although effect is being could be devised in consultation with appreciated that companies given. than AS. 40a(2) the inventory to be valued by including The presentation of the profit (b).e arriving at the – even though the AS applicable is slightly different . It may be mentioned that have certain differences from contemplated. Another option would be to provide by has consistently been different. This is because of numerous limited scale is already applicable in the is favoured as a conservative statutory deviations that are prescribed case of Section 145A which requires approach in AS. 43B etc. both of which of years and the judiciary has also Income”(OCI). A similar IND AS are inevitable. the necessary format 4. The said IND AS makes a distinction between AS adopted). This could be achieved adjustment is being effected outside the normal incomes and what is by either an in principle approach or a the books of account for a number called the “Other Comprehensive prescriptive approach.especially since original tax base (irrespective of the prescribes differently. on a than on historical cost basis which per se. b) The accounting treatment is based tax base which is the basis of levy of However it will be equally on fair value accounting rather Income tax is independent of the Ass appreciated that similar provision. upon application of fair market value/ Adoption of Common tax base Similarly. it was decided while such a requirement is certainly the financial statements (FS) as that the entire approach is to prescribe possible. there will separate data and making adjustments profit in the profit and loss of each be an additional statement furnished in their computation for giving effect to of the entities which are following by the assessee ( duly verified by these divergent requirements.40(a)(ia). the of valuation of inventory). to implementation of Ind AS for the Ministry and suitable amendments preparing financial statements as the phase I companies no change in requiring filing of such a statement could per the IND AS framework would the existing tax structure are presently be prescribed.This statement inter alia are given hereunder:. The objective is therein the indirect tax component and loss under the AS and IND AS to arrive at status quo i. Such an approach would A policy adopting this approach would an entity is required to explain. 36. However without effecting specific and deduction of depreciation as it also contains other items that are section wise changes in the prescribed under the Companies Act conceptually not treated as part of the Income-tax Act. The basic principle which was agreed given hereunder. Based on the list 4. outside the books of account. successive years (such as in the case account Even under the present Act. such as Sections 35D. the provision requiring tax audit and a financial performance and cash flows. Therefore. 1956 and the Income-tax Act 1961 current year’s operating profits. the quantification mark to market concept. Therefore as the auditor/chartered accountant) approach. and As a result of the above. 2011. recognised that such an adjustment contains numerous items arising out if required by law may validly be done of increases/decreases consequent 5. would affect its reported Balance Sheet. certain a single amendment that in all cases all assessees have been submitting differences in the quantification of net where IND AS is followed. how the the Income-tax Act requiring reporting as per Ind AS for the year beginning transition from earlier GAAP to Ind-ASs by way of such statement (similar to on 1st April. would have to be applied (Corresponding to IFRS-1) on First differences that have arisen pursuant in regard to material departures from Time adoption of Ind-AS released by to the application of IND AS rather AS arising out of application of IND AS.1. TAXATION 1256 prepare their Financial Statements of reconciliation statement.1 In principle approach. Possible options on hand: to arise as indicated in the Appendix I IND AS. by way require introduction of a provision in require an amendment introducing 116 THE CHARTERED ACCOUNTANT february 2011 . report in Form 3CD). there could be operational prepared under the AS. Without a methodology whereby the corporates issues of the underlying records that getting into the details .

2011 sequence of the AS currently prescribed suitable records and quantification of and the Direct Taxes Code would by NACAS (Companies Act 1956). These are It has often been mentioned in of maintaining parallel books is indicated to facilitate such changes various public forums that in order to withdrawn. 1961 would impact of compliance with the Ind AS significant change since most of the continue to apply. requirements. 40A. it may be as a transitional arrangement. preparing data outside the books or (MAT) this option could be considered for maintenance of parallel books which is 7. Undoubtedly this will generate and maintain the necessary Bill 2010. To facilitate this process. Further. 115JB. The sections which would to continue this system in parallel to This may enable the income tax require amendment would be. If one were to prepare standalone implemented. They would merely have of accounts for one/more years. the provisions of would not really increase the burden 2011-12. the issues arising maintain parallel set of books/prepare statements as per AS and seek to from convergence could also financial statements which are drawn prepare CFS in accordance with be suitably dealt with in the up in accordance with the presently Ind AS. 43B. Minimum Alternate Tax the reasons mentioned hereunder. be amended extensively to negate the noted that this would not require any the Income-tax Act. (DTC) 2010 in the near future.1 The provisions of MAT were Financial Year 2011-12. 1257 TAXATION a specific reporting requirement as approach may defeat the objective of Therefore. 1961 will have to for the corporates. books. Therefore. in any case required to implement to studies and to gather empirical 43C.3 Since from April. following AS. the resultant variation from the current come into effect from 1st April. 36. corporates covered in phase I would 6. However for the year application of Ind AS only to CFS is If the above-mentioned options 2011-12. This would 6. Chapter apply Ind AS. 2012 Direct harmonise the tax bases by requiring practical aspect is entirely missed Taxes Code is proposed to be the companies adopting IND AS to out. which were considered computing taxable income/book measure. AS. under the tax net who were THE CHARTERED ACCOUNTANT february 2011 117 . in case the above options before taking the policy decision to profit.2. Some of these changes a disclosure of major impact of the 6. with IFRS). 1961 to be effected determination of taxable income as per year only since the same has to be to bring the converged entities to the pre-existing tax base maintenance substituted by Direct Taxes Code the same tax base as entities of parallel books may be prescribed. Such data would then to consolidated financial statements facilitate other policy decisions 5.1 In view of the fact that IFRS is to be comparison has been made in the in any case require the maintenance of implemented w. Prescriptive approach. 50. 43.1 and 5.FY 2011-12 For the sake of completeness – the is required to be disclosed.e. For later years exactly what is being suggested earlier introduced to bring such companies although theoretically possible this in Paragraphs 5. 145. 1st April. it would be a pre-requisite to changes being made in the DTC applicable AS. specifically in resorted to primarily as an ad interim approach.3 Parallel books (CFS).3 respectively. it may be a fairly detailed list of differences likely already have an ERP in place which provided that the entities may be to arise on application of each of the AS is in accordance with the current AS allowed to prepare parallel books presently applied is given hereunder in requirements. 145A. it may be better to apply Ind AS only be available. 32. For the reasons mentioned above. be achieved by maintenance of parallel Finance would not prefer to make Specific changes in the Income. impose an additional burden on the financial data required to prepare CFS companies required to do so. the perceived simplification suggested above and prescribing a introduction of IND AS (or convergence for tax purposes arising out of suitable format say Form 3CX.f. In most cases this would effectively 2012 it is felt that the Ministry of 5. for the financial year As per this option.2 If this is decided upon. of not found suitable would be to apply to Standalone statements. 40. Approach for transition are tabulated in Appendix I as under: change arising out of adoption of Ind AS year. this Therefore. data so that when the option XVIIB dealing with TDS. specific changes are to of Ind AS 1 in the year of transition be identified. Appendix I. as per the requirements illusory and need not be considered. Apart from the conceptual and in regard to adjustments that Another option which could be theoretical arguments against this may be permitted. if parallel are prescribed the Income-tax Act. a specific evaluation being effected if it is decided to adopt ease the situation for direct taxation of probable revenue impact would this policy. sub the changed system which they are department to have certain live section 28. For as per Ind AS. the 6. in order to simplify the amendments in the Act for one tax Act. are adopted. This effectively means 7.

it suggested that changes in MAT provisions as phase I companies. loss account. in order to time effect of transition may also be increase the income in substance. 1961 was either nil or Book profit to be computed on the basis of Profit Modified Book profits to be computed on the and loss account* (as per present Accounting basis of profit and loss account* prepared on negative.4 With the notification of Ind AS by OCI may be divided into two parts.e Ind AS. Thus. It is believed AS is also required. is required to pay tax as per book profit named as ‘Minimum Alternate 7. accounting standards and the methods and rates adopted for calculating and the methods and rates adopted for provisions of the Income-tax Act is depreciation be same as adopted in the annual calculating depreciation be same as adopted less than the tax liability computed accounts placed before the company in its Annual in the annual accounts placed before the General meeting in accordance with Section 210 of company in its Annual General meeting in at the rate of 18 per cent of the book the Companies Act. TAXATION 1258 showing book profits and declaring comparison of the present position so that such gains are not made dividends to the shareholders and proposed position is tabulated available for distribution of dividends. were examined at length. accounting standards The accounting policies. Of the other alternatives over a period. but were not paying any tax as under:.5 would of provisions of MAT in line with Ind valuation (as per Ind AS) may be also have to be effected. imposing a restriction provisions of the Income-tax Act. from time to time in line with the b) the changes arising out of to These include levying tax on different announcement of the new standard application of Ind AS. a corporate.1956 REVISED Schedule VI of Companies Act. tax bases applying Ind AS only to or the corporate practices. the proposed Section on the first part for not making it as to neutralise the effect of certain 115JBX will have to be worded in available for distribution may not be adjustments made in the profit and line with present Section 115JB difficult. which MAT is payable under the Accounting Standards i. the company Act. the reach the objective of coming to the the accounting standards have adjustments may also provide that all original tax base the in principle been developed for determination notional gains/losses arising out of approach suggested in Paragraph of taxable income as well as book fair valuation as per Ind AS would be 5.3 As Ind AS is to be applied to Furthermore. the because the income computed Present Section 115JB Modified Situationt as per provisions of the Income- tax Act. if the tax liability computed on the income under the The accounting policies. the adjustments standards are required to be to be made thereafter in form of Conclusion accounted for while preparing the additions/deductions should Considering the various options that profit and loss account under the take into account the following :. Tax’ (MAT). so 7. The above mentioned changes CFS etc. excluded. standards) the basis of Ind AS which should be before 7.1 seems to be the most practical profit subject to MAT. 118 THE CHARTERED ACCOUNTANT february 2011 . would also need an amendment. A also a restriction may be imposed and complete revenue neutrality.1956 accordance with Section 210 of the Companies profit of the company. 1961. Thereafter. some of the Companies Act. Along with this. harmonisation the gains/losses arising out of fair suggested in Paragraph 7. Thus.1956. solution. the necessary 7. For achieving the said purpose. First part may comprise of reserves computed in accordance with the Section 211 of the Companies Act build out of notional gains/losses provisions of the Companies Act. arrive at equitable position with the excluded from ambit of MAT.2 Accordingly. List of additions a) the existing adjustments to theoretical alternatives which were not and deductions is being expanded book profit and found practical have been eliminated. Further. This book profit is to be NACAS for phase I companies. or profit before OCI. to arrive taken to Other Comprehensive income that in this manner even after at a common base a new Section (OCI) rather than routing the same application of Ind AS there would say 115JBX should be inserted through Profit and Loss account and be equity amongst all companies in the Income-tax Act.5 Further. the present Section Other Comprehensive Income (OCI) 115JB provides that in case of *prepared in accordance with the provisions of Part I *prepared in accordance with the provisions of and Part II of Schedule VI of Companies Act. arising on account of revaluation and For MAT also various additions A new Section say 211(3CB) will second part may contain other and deductions are to be made have to be introduced in order incomes which are required to be for computing the book profit on to recognise IFRS converged taken to OCI due to other factors.1956. which in effect either and should commence from book It is also suggested that one do not go to reduce the profit. though under the accounting existing law. a reconciliation would exclude the items of OCI unless it would appear that in order to between the Income-tax Act and otherwise specified. Also.

the identification of exempted. Changes in Estimates and Net Profit or loss for the period. return of TDS would also arise since there is no payee. The effect will be reflected in respective income statement. 2010. Plant and Equipment Depreciation Accounting and Accounting for Fixed assets 1. change is made in single result in some practical difficulty. 2. he was offered a price of Rs.(i. IND AS 2 AS-2 Impact Inventories Valuation of Inventories 1. Goods valued on LIFO basis for last five years are to be re-valued at weighted average. The amount be included in the cost of asset. Changes in Estimates and Disclosure of Accounting Policies errors Since This is primarily a disclosure standard it would not have any tax impact except in regard to the fact that statement of OCI would have to be separately prepared as mentioned elsewhere in the note. IND AS 7 AS-3 Impact Statement of Cash Flows Cash Flow Statements This is disclosure Standard and does not have any impact on tax computation. change in accounting policy. year. with adequate disclosures about the stock. “Distribution costs” and distribution costs from the cost of inventories and provides that it is appropriate to recognise them as expenses in the period in which they are incurred. the guidance note on Accounting not yet incurred. Thus. In any case terms is recognised as interest expense over the as cost without any break up. on splitting of purchase costs. If he makes prompt payment. reference may also be made to observations given under AS29) IND AS 8 AS-5 Impact Accounting Policies. Let us say goods on LIFO basis was valued at R5000/. the difference between the Inventories purchased on deferred These differences would result in changes in carrying amount of purchase price of inventories for normal credit settlement terms are not explicitly dealt inventory – which would impact more than one year – depending on terms and the amount paid for deferred settlement with in AS 2. The effect While conceptually they should not result in any difference in taxable opening retained earnings.2010 on credit for three months for R100. Comparatives and prior year are restated against Restatement is not required..e. errors Prior period items and changes in Accounting policies. it is only a timing difference as value of closing stock (inventory) will period of financing. Further. Inventory of last five years would be restated and be The inventory would be shown at R6000/. The issue of TDS on such finance cost not reflecting in the interest for a period of three months. The same would be shown and would be charged to Profit and loss account as as sale. guidance is given for capitalisation of capitalised and therefore the amount eligible for depreciation as per dismantling and site restoration cost. If the goods remain unsold on 31st March 2010. the treatment of the same in the Financial Statements shall be as under:- Under IND AS-2. R1000/5) every year. 1259 TAXATION Based on the above it is to be adopted so that the changes Act. THE CHARTERED ACCOUNTANT february 2011 119 . for Oil and Gas Producing Activities states that entities involved in those activities should capitalise the dismantling and site restoration cost. Example A dealer purchases goods in March. IND AS 10 AS-4 Impact Events after Reporting date Contingencies and events occurring after the Balance Sheet date There is no major impact as the differences between the two standards are not significant (However.and goods on weighted average are now valued at R6000/. the inventory would be Interest shown as payable by the Purchaser would not appear as R98 and R2 would be taken as Finance charges valued at R100/-. Inventory purchased on deferred settlement terms Under IND AS-2. there will be reduction in purchase cost and corresponding reduction in value of inventory.The entire actual cost is taken the period in which the said inventory is consumed/sold. 98/-. The payment is to be made by him in June. IND AS 16 AS-6 and AS-10 Impact Property. is disclosed i. Selling and Distribution costs Ind AS excludes only “Selling costs” and not AS 2 specifically excludes “selling Similar impact as above in regard to inventory valuation. interest during the year will be eligible for deduction to the extent it pertains to the current year.Tax difference would arise due to difference in value of closing increased by R200/. interest receivable in the books of seller. The impact of change difference which is claimable in the relevant financial year could years. unless specifically of change is included in current year income for the previous year / financial year. become opening stock next year and hence revenue neutral over a period. Example:- A dealer of goods opts for change in accounting policy in respect of valuation of its goods. DTC/IT Act (by the Finance suggested that the Government may to be effected in the Companies Ministry) may be harmoniously decide upon the specific approach Act (by MCA) and in the Finance introduced.e. the inventory shall be valued at Under AS-2. Appendix I IND AS-8 AS-1 Impact Accounting Policies. the books under IND AS would be higher and would include costs However. Dismantling Cost Estimated cost of dismantling/restoring the site is to Actual cost is recognised. No general Depreciation claim would be affected significantly.

TAXATION 1260 Example Site restoration costs to be incurred by Telecom Companies in connection with its towers. total payment is recognised as interest over the period Generally. 7. a higher rate of depreciation. 120 THE CHARTERED ACCOUNTANT february 2011 . financing element is not • Change in capitalisation value. this issue is relevant and covered by Section 115JB. 3. plant and equipment as replacement if the books of account. Component Approach The asset is to be valued component wise and Component-wise approach is not adopted The amount of depreciation could differ significantly as the assets depreciation is to be charged accordingly. However. tax neutral but MAT implications could be significant. NACAS was of the view that option should not be curtailed. It is also suggested that OCI may be divided into two parts. the recognition criteria are met. and depreciation is to be charged on the useful life would be broken up for different components with some whole asset together. This is because as per the AS. Therefore.g. of credit (unless such interest is recognised in the separated from the total price paid even if carrying amount of qualifying asset) payment is deferred beyond normal credit terms. IND AS 11 AS-7 Impact Construction contracts Construction contracts Revenue is recognised on completed contracts Revenue is recognised on percentage of IND AS 11 is being modified to be in line with current AS-7. Compensation for Impairment or Loss Compensation from third parties for impairment/ No specific requirement The approach adopted may not be different from Income Tax insurance claim or loss of items of property. Cost and Written down to be recognised in the carrying amount of the item value under Income-tax Act need to be computed independent of of property. there would be no impact on income tax computation as in income tax. If the specifying treatment of fixed assets • Imputed interest is recognised in the books of the purchaser payment is deferred beyond normal credit terms. theft. in case policy of systematic intervals revaluation is adopted under IND AS. the notional gain or loss arising out of the revaluation of investment property should be included in Other Comprehensive Income (OCI) and not Profit and Loss A/c. Cost of Major Inspection or Overhauls Cost of each major inspection or overhaul is required Generally expensed when incurred Impact shall be same as mentioned above. However. it is mandatory to follow block of asset concept. Assets acquired on deferred settlement basis The cost of property. However. etc. Thereafter. but interest receivable is not shown in the books of seller. Companies Act. 4. the entire hit would go to the profit and loss account bringing down the book profits significantly. Even at present. and equipment are included in profit or loss when the compensation becomes receivable. The reimbursements by Insurance Companies after the impairment or loss of a tangible fixed asset. Physical replacement in whole or in part of an impaired or loss asset 6. It may be noted that this would have direct impact on Profit and loss account which has significant MAT implications. First part may comprise of reserves built out of notional gains/losses arising on account of revaluation and second part may contain other incomes which are required to be taken to OCI due to other factors. 5. Valuing investment property (Land / Building – held to earn rentals/capital appreciation) Investment property to be valued at cost or fair Investment property is usually at cost. Depreciation and revaluations Depreciation amount allocated based on the useful Minimum rates are prescribed as per Generally. life on a systematic basis. 2. the residual value and useful lives are reviewed at each incremental depreciation is matched by an equivalent credit taken Balance sheet date No requirement of review at regular from the revaluation reserve. e. cash price equivalent at the recognition date. permitted. due to natural disasters. no significant difference is forseen except on issue of point of time of recognition of revenue which is arising out of AS-9. in the case of revalued assets. As per a recent Council decision. plant and equipment is the There is no guidance under AS 10 • Depreciation claim is affected. plant Department’s views.e. a restriction on the first part may be imposed so that no part of the same is made available for distribution of dividends. Ministry of Corporate Affairs was considering the doing away of the value (optional) However. Depreciation method. difference between the cash price equivalent and the • Year of chargeability would differ. the acquired on deferred settlement terms. Examples:- 1. revaluation with disclosures is option of revaluation as it leads to non-comparability and disparity. of the components having a shorter anticipated life i. 2. completion method. Recognition of the cost of overhaul/inspection in profit or loss is not permitted. basis.

Revenue is measured by the charges • Interest income is recognised in different years.737 4. the Sale value as reflected in FS As per current AS the sale price would be • Difference in timing of recognition of revenue is R4.184 75.340 13.711 3.000 with annual instalments of R20. THE CHARTERED ACCOUNTANT february 2011 121 . the same can be amended to meet any specific issue. In these circumstances.00. Example – Sale by Deferred Consideration An enterprise sells an item of equipment for R100.00.184 - Recognition-Sale of Goods Revenue from the sale of goods should be Revenue from the sale of goods should recognised when all the following conditions have be recognised when all the following been satisfied: conditions have been satisfied: • Transfer of significant risk and reward of • Completion of Performance ownership to the buyer.000.000 End of Yr 3 49.529 20.000? fees received to be recognised in two subsequent • The levy. Example: -Cost to be measured reliably Warranty Cost should generally be estimated and accrued. 1261 TAXATION IND AS 18 AS-9 Impact Revenue Recognition Revenue Recognition Revenue has to be recognised at fair value. revenue is deferred until the amount of such expenses can be more reliably estimated or have been incurred. currency into reporting currency which may or may not be significant.000 End of Yr 4 34.660 20. • Taxability of forex gains/loss in regard to highly probable forecast transactions treated as cash flow hedge will be reflected in OCI. • Translation gain/loss on conversion into presentation currency taken to OCI may lead to significant variation. the yearly service cost of a car amounts to R25.026 20.419 20. Since that is not the amount of consideration is recognised as interest Revenue is recognised at the nominal focus of the current note – this issue is not addressed in detail – even income using the effective interest method. such that seller retains no • The amount of revenue can be measured effective control of goods.50. it is part of delegated legislation.000 is the advance service R5.000 due for five years under zero% financing arrangement Year Principal Amount O/s Interest elements @ 10 per cent Principal Total payment element End of Yr 1 75. The change in value of sale as recognised in the books would also The difference between the fair value and the nominal have a significant impact on indirect taxation.000 or R4. receipts using an imputed rate of interest.581 12.816 100.974 15. amount of consideration receivable. Difference in treatment between current AS and Income-tax Act.397 6.000 TOTAL 24.50. Fair value of revenue from sale of goods and services made to customers for goods supplied • Postponement of revenue on account of adoption of discounted when the inflow of cash and cash equivalents is and services rendered to them and by the value and consequent timing differences. • Functional currency approach could have significant implications on profitability if the reporting currency (say R) is not the functional currency.818 18. reliably. Let us say normally. deferred is determined by discounting all future charges and rewards arising from the use • Head of income may change.000 IND AS AS Tax implication Sale 75. value and year of levy of service tax on warranty cost years.000 End of Yr 5 18. any consideration already received from the sale of goods is recognised as a liability. Since.000.816 7. A car seller offers free service for two years at the time of sale of a car which is worth R5. IND AS 21 AS-11 Impact The Effects of changes in Foreign Exchange Effects of changes in Foreign Exchange Rates rates Functional Currency approach is adopted There is no concept of functional • Arithmetical differences may arise while changing the functional currency. of resources by them. • Collectability Not unreasonable to expect ultimate collection at the time of sale.182 1. would be different.000 End of Yr 2 63.00. If such cost cannot be estimated reliably.1961 already exist and will persist. though a policy in this regard is extremely important. • Measurability • Probability of inflow of economic benefits.000 • Whether to charge GST on R5. Present.471 16. No significant uncertainty Cost Incurred or to be incurred can be measured exists regarding amount of reliably.00. consideration.816 1. As per Ind AS. Rule 115 of Income Tax Rules addresses this issue.000 and R50. Transfer of property or significant • No managerial involvement or effective risk and reward of ownership control over goods.182 20.000 Deferment of interest income Interest income 24. Deductibility for tax despite of Supreme Court decision in Woodword Governor is often a matter of litigation even presently.

2. IFRS-3 AS-14 Impact Business Combinations Accounting for Amalgamations Accounting and tax treatment are vastly different. the impact could be attached with the grant would be fulfilled over a material. Properties held by a broker dealing in buying treated as distributable and/or taxable for MAT. • Difference in point of recognition Expenditure account or OCI 2. Grants in kind to be included in income at fair 2. not liable for MAT in view of the proposed amendment in 2. on a associated with the transaction will flow to the time proportion basis taking into account entity and the amount outstanding and the rate • The amount of the revenue can be measured applicable. reliably Usually. This would result in a divergences between interest debited under IND AS and the amount allowable as a deduction under the income tax provisions. The investment properties held for trading are for sale and held to maturity to make adjustments at fair value. are allowed.1961 dealing with treatment of losses post-amalgamation. The Government gave a grant of R5 crore to Cotex with a condition that at least 200 artisians from the village should be rehabilitated within three years of the commencement of the operations when the facilities are re-built. IND AS 23 AS-16 Impact Accounting of Borrowing Costs Borrowing Costs Interest income is recognised using the effective Interest income is recognised only interest method when: when no significant uncertainty as to • It is probable that the economic benefits measurability or collectability exists. IND AS 19 AS-15 Impact Employee benefits Employee Benefits Actuarial gains and losses may be recognised Actuarial gains and losses should be Impact will be only if OCI follows allowability of such expenses. the conditions cases however where such situation exists. The investment properties available for sale are Section 115JB. 1961 differ today immediately in other comprehensive income. Computation would result in controversy and Issue does not arise as no notional debits • Difference in rate adopted may lead manipulation. • Assessees following different frameworks would result in items not corresponding with each other . Although. An option is available to the corporate in respect of assets held 1. • Point of commencement and cessation/suspension of interest capitaisation for qualifying asset as well as what is qualifying asset is different in IT Act and AS However these differences exist even under the present AS and therefore are not treated as arising out of IND AS application. there should be in no issue for taxing the same. therefore – the divergence arising in the accounting treatment may is to spend the money. Hence the grant should be recognised on a systematic basis and not upon receipt of the grant. to be allowed. IND AS 40 AS-13 Impact Investment Properties Accounting for Investments Investment property is a property held for deriving The Investments are valued at lower or The impact may be significant and may actually lead to non-realised revenue benefit but not like Plant and machinery for cost or realisable value. Cotex is a company exporting cottage industry products. So. and selling flats. Adjustment to cost of asset is • Significant impact on MAT Everything has to be routed through Income and permitted. or recognised recognised immediately in the statement Provision in Section 40A(7) of the Income-tax Act. marked to market and are dealt with in Profit The adjustments will be part of other comprehensive income and and Loss A/c whether realised or not. assets held for trading. The Government released the first instalment of R1 crore immediately. IND AS. gains or losses. 1. Example:- A village in Tamil Nadu with a flourishing cottage industry was completely devastated due to flood. Grants in kind to be valued at R1 market value. As regards. immediately in profit and loss. at the moment the tax implications have not been crytalised. the adjustments taken to Other comprehensive income (OCI) consequent to fair value is to be credited to the profit and loss account (not as other Comprehensive income) and the same will be part of distributable profits. However since the tax treatment is largely independent of the treatment in books. The amount of R5 crore should be recognised over The AS does not recognise such Such situations are not very common in a commercial context and a period of three years within which the company amortisation. the amount of not be considered very important in the present context. period of three years. Imputed interest rate may arise without any • Problems of allowability under Section 36 (1) (iii) may arise as borrowing but applying current value and fair value there is no capital borrowed which is a prerequisite for interest method.leaving scope for divergence/possible manipulation. 122 THE CHARTERED ACCOUNTANT february 2011 . Ministry may consider whether this should be eg. hence. litigation. or of profit and loss as an income or also hence not treated as a difference arising out of application of Deferred up to a maximum with any excess of 10 per expenses. discount or premium on debt securities held is treated as though it were accruing over the period to maturity. However attention is drawn to Section 72A of the Income-tax Act. In certain R1 crore is received immediately. cent of the greater of the defined benefit obligation or the fair value of the plan assets at the end of the previous reporting period being recognised over the expected average remaining lives of the participating employees or other accelerated basis. IND AS 20 does not permit direct credits to equity. TAXATION 1262 IND AS 20 AS-12 Impact Accounting for Government Grants and Government Grants Disclosure of Government Assistance 1. • Deduction of tax at source may not be possible as in case of notional interest there is no payee.

the asset can be impaired/amortised is to be determined and asset is to be 6 & 10 r. Contaminated land – enterprise has no legal obligations arising from normal practice.20. the matter was not dealt with elaborately. Where the life of the asset is indefinite. The discount rate does not reflect risk for which future cash flow estimates have been adjusted. as the same is not shown as income in the books of account of the associate concern. AS-17. AS-21. contingent liabilities and contingent Provisions.Provide for the expected obligation. plant and equipment. Employs statistical notion of expected IND AS the area of divergence with taxation would possibly reduce. the asset cannot be amortised. provisions may be needed in respect of Many of these issues revolve primarily upon the facts of the case. IND AS 37 AS-29 Impact Provisions. of a past event. E. Life of the asset Effects will be similar to those of property. Recognition of provision A provision is recognised when an entity has a Present obligation and not constructive Income-tax recognises only legally enforceable liability. n THE CHARTERED ACCOUNTANT february 2011 123 . between the accounting and tax treatment may persist. depreciated in all cases. contingent liabilities and assets contingent assets 1. manner. AS-22 -Accounting for taxes on income Except for MAT there is no major impact IND AS 38 AS-26 Impact Intangible Assets Intangible assets Goodwill is not depreciated.23.g. which are virtually certain to be enacted soon after the year end. IND AS 16. but meets widely publicised clean-up custom and a desire to maintain good application of IND AS the differences may be accentuated on policy – Provide for constructive obligation. • Gross or net of discount element? obligation. Since a more elaborate and scientific method is prescribe d under guidelines. current market assessment of time value of money and risk specific to the liability. these are matters of presentation and the impact of fair value/ mark to market treatment is already dealt with in this note under respective standards. associates etc. lease incentives There are differences between the accounting and tax treatment have to be recognised by both the lessor and even under the present AS and therefore the impact arising out of the lessee as a reduction from rental income and application of IND AS is not separately considered as differences expense. Such interest would be debited as per IND AS (thereby reducing book profits – and in absence of specific amendment also the taxable income) and as per AS.25 These are disclosure standards and do not have any tax impact. no other issues are specifically addressed in this regard. Provision is based on best estimate with detailed Provision is based on best estimate. IND AS 17 AS-19 Impact Leases Leases Under IFRS converged standards. – AS is definite. interest in joint venture. 2. If the life of the asset Goodwill is depreciated. respectively.27 These three standards deal with presentation in Consolidated Financial Statements.18. Discounting of liabilities is not permitted • Timing of allowability of discount the amount of provision is the present value of the and provisions are carried at their fair • TDS issues expenditure expected to be required to settle the value. However. Particularly. Provision would be made in respect of interest which is not payable. There are present obligation (legal or Constructive) as a result obligation is the basis though some issues even presently in regard to deductibility of certain provisions. value in estimating the settlement value. Hence except MAT impact . business relations or to act in an equitable account of recognition of constructive obligations.g. depending upon the determination of its useful life. • Provisions should be reviewed at each balance sheet date The discount rate is pre-tax rate that reflects the and adjusted to reflect current best estimates. Hence. E. Contaminated land – enterprise cleans up to meet legal requirements. upon obligation.w. Discounting Where the effect of time value of money is material. 1263 TAXATION Example:- • Similar issue would arise in case of a listed company following IND AS which takes loan from its associate concern at cheaper rate. over the lease term.