CA Vivekanand Pote
Sec. 145 (2) of Income tax Act empowers Central Government to issue Accounting Standards for computation of income.Earlier the Ministry of Finance has notified two accounting standards ‘Disclosure of Accounting Policies’ and ‘ Disclosure of Prior Period Items and Extraordinary Items and Changes in Accounting Policies’. In order to bring clarity on computation of taxable income CBDT constituted Accounting Standard Committee in December 2010.
Ministry of Finance has issued 14 Draft TAS.
Key Recommendations
- TAS modify the existing AS to achieve harmony with the provisions of Income tax Act
- No requirement to maintain separate set of accounts under TAS
- In case of conflict between the Act and TAS, the Act would prevail.
- For compliance of TAS, Form 3CD ( tax Audit Report Form ) and Return of Income ( ITR 6 ) should be modified in accordance with TAS
- TAS should apply to all taxpayers without specifying any thresholds
Significant points under TAS
Accounting Policies
1. Prudence is the basic concept in mercantile accounting. The whole edifice of accounting is based on prudence. The TAS clearly eliminates the concept of prudence and disallows recognition of expected losses or mark to market losses unless specifically permitted by any other TAS.
- TAS does not permit changes in accounting policies without a ‘reasonable cause’. There is no clarity on reasonable cause but would involve exercise of judgement by management and the tax authorities.
Valuation of Inventories
- TAS specifies that opening stock opening stock will be valued as at the close of the immediately preceding previous year. It means though there is a change in basis of valuation of closing stock, opening stock carries the same value as at the end of the previous year.
Events occurring after the end of previous year
- TAS allows adjustment for events till the date of approval of the financial statements by BOD. However the committee has removed this provision as such disclosures do not directly impact the computation of income.
Prior Period Expenses
5. In line with current practice prior period expenses shall not be allowed as deduction in current year while prior period income is subject to tax in the current year.
Revenue Recognition
6. As per TAS on Revenue Recognition in case of sale of goods, the revenue shall be recognised when the seller has transferred to the buyer property in goods for a price and all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control. When there is no reasonable certainty at the time of raising any claim for escalation of price and export incentives, recognition in respect of the claim shall be postponed to the extent of uncertainty involved.
Tangible Assets
- As per TAS capitalisation of exchange differences relating to fixed assets shall be in accordance with Sec. 43A and other provisions of the Act. Depreciation shall be computed as per provisions of the Act TAS prescribes maintenance of a Fixed Asset Register with specific disclosures.
Effects of changes in foreign exchange rates
8. TAS requires exchange differences on translation of non-integral foreign operations to be recognised as income or expense, instead of recognition in the foreign currency translation reserve.
9. Any premium or discount arising at the inception of a forward exchange contract shall be amortised as expense or income over the life of the contract. Exchange differences on such a contract shall be recognised as income or as expense in the previous year in which the exchange rates change. Any profit or loss arising on cancellation or renewal shall be recognized as income or as expense for the previous year. Unlike AS 11, income on account of exchange differences is also recognised.
- Premium, discount or exchange difference on contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction shall be recognised at the time of settlement.
Intangible Assets
11. As per TAS intangible assets shall be recognised as per the criteria specified in existing AS. Intangible asset shall be recognised at actual cost. Depreciation shall be determined in accordance with the Act. TAS prescribes specific disclosures w.r.t. intangible asset.
Provisions, contingent liabilities and contingent assets
- AS 29 provides for recognising losses on onerous executory contracts when the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.Under TAS, unavoidable future losses can not be recognised.
- AS 29 requires the recognition of a provision if its existence is considered probable ( more likely than not ).Under TAS the recognition of provision is mandated when the existence is reasonably certain.
- As per AS 29 and fundamental principle of prudence, contingenmt assets are not recognised. However, under TAS contingent assets are recognised when it is reasonably certain that an inflow of economic benefits will arise.
Legal Status of TAS
These are draft Tax Accounting Standards.
(Author is Working as Finance Professional in Automobile Industry and can be contacted at vcpote@rediffmail.com )
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