Important Question and Answers on Accounting Standards (Part-III)

 What are the principles for recognition of deferred taxes under AS-22

         Taxable income is calculated in accordance with tax laws. In some circumstances the requirements of these laws to compute taxable income differ from the accounting policies applied to determine accounting income. This results in a difference between the taxable and the accounting income. Such differences are classified into Permanent and Timing differences. The tax effect of the timing differences is known as Deferred Tax and is included as tax expense in the statement of profit and loss and as deferred tax assets or as deferred tax liabilities, in the balance sheet.

        Prudence would dictate that deferred tax liabilities are provided for without exception, even in situations where an enterprise is incurring losses. Deferred tax assets should be recognized and carried forward only to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax asset can be realized. Reasonable certainty can be demonstrated by providing robust and realistic estimates of profits for the future. A company with a track record of losses with no immediate visibility of a turnaround should not recognize a deferred tax asset as a matter of prudence. In the case of an un-absorbed depreciation and carry forward losses under the tax laws, the recognition principles are more stricter, i.e. deferred tax asset should be recognized only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax asset can be realized. The existence of un-absorbed depreciation or carry forward of losses under tax laws is strong evidence that future taxable income may not be available.

       In that situation there has to be convincing evidence that sufficient future taxable income will be available against which such deferred tax asset can be realized. This is a matter of judgement and the conclusion would depend on facts and circumstances of each case.

X Co. Limited purchased goods at the cost of Rs.40 lakhs in October, 2005. Till March, 2011, 75% of the stocks were sold. The company wants to disclose closing stock at Rs.10 lakhs. The expected sale value is Rs.11 lakhs and a commission at 10% on sale is payable to the agent. Advise, what is the correct closing stock to be disclosed as at 31.3.2011.
       As per Para 5 of AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of cost and net realizable value. 

        In this case, the cost of inventory is Rs.10 lakhs. The net realizable value is 11,00,000 ´ 90% = Rs.9,90,000. So, the stock should be valued at Rs.9,90,000.

        Explain the ‘Accounting of Revaluation of Assets’ with reference to AS 10.
       As per Para 30 of AS 10 “Accounting for Fixed Assets”, an increase in net book value arising on revaluation of fixed assets should be credited to owner’s interests under the head of ‘revaluation reserve, except that, to the extent that such increase is related to and not greater than a decrease arising on revaluation previously recorded as a charge to the profit and loss statement, it may be credited to the profit and loss statement. A decrease in net book value arising on revaluation of fixed assets is charged directly to profit and loss statement except that to the extent such a decrease is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilized , it may be charged directly to that account.
      Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of sale is, payment of consideration in 14days and in the event of delay interest is chargeable @ 15% per annum. The Company has not realized interest from the dealers in the past. However, for the year ended 31.3.2006, it wants to recognize interest due on the balances due from dealers.
     The amount is ascertained at Rs.9 lakhs. Decide whether the income by way of interest from dealers is eligible for recognition as per AS 9.   
        As per AS 9 “Revenue Recognition”, where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, the revenue recognition is postponed to the extent of uncertainty inverted. In such cases, the revenue is recognized only when it is reasonably certain that the ultimate collection will be made.

      In this case, the company never realized interest for the delayed payments make by the dealers. Hence, it has to recognize the interest only if the ultimate collection is certain. The interest income hence is not to be recognized.

        Explain the treatment of Refund of Government Grants as per AS-12
        As per para 11 of AS 12‘Accounting for Government Grants’, government grant that becomes refundable is       treated as an extraordinary item.

      The amount refundable in respect of a government grant related to revenue is first applied against any unamortised deferred credit remaining in respect of the grant.

        The amount refundable in respect of a government grant related to a specific fixed asset is recorded by increasing the book value of the asset or by reducing the capital reserve or the deferred income balance, as appropriate, by the amount refundable.

      Where a grant which is in the nature of promoters’ contribution becomes refundable, in part or in full, to the government on non- fulfillment of some specified conditions, the relevant amount recoverable by the government is reduced from the capital reserve.

      Briefly explain disclosure requirements for Investments as per AS-13. 

      The disclosure requirements as per para 35 of AS 13 are as follows:

(i)         Accounting policies followed for valuation of investments.

(ii)        Classification of investment into current and long term in addition to classification as per Schedule VI of Companies Act in case of company.

(iii)       The amount included in profit and loss statements for

(a)       Interest, dividends and rentals for long term and current investments, disclosing therein gross income and tax deducted at source thereon;
(b)       Profits and losses on disposal of current investment and changes in carrying amount of such investments;
(c)       Profits and losses and disposal of long term investments and changes in carrying amount of investments.
(iv)      Aggregate amount of quoted and unquoted investments, giving the aggregate market value of quoted investments;
(v)       Any significant restrictions on investments like minimum holding period for sale/disposal, utilisation of sale proceeds or non-remittance of sale proceeds of investment held outside India.

(vi)      Other disclosures required by the relevant statute governing the enterprises.

Important Question and Answers on Accounting Standards (Part-I)
Important Question and Answers on Accounting Standards (Part-II) 

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