Objectives

Accounting Standards and The Companies Act, 1956

AS -17: Segment reporting

AS-18 : Related party disclousers

AS-19 : Lease

AS-20 : Earnings per share

AS-21 : Consolidated financial statements

AS-22 : Accounting for taxes on income

Accounting Standard 24 - Discontinuing Operations

Accounting Standard 25 - Interim Financial Reporting

Accounting Standard 26 - Intangible Assets

Accounting Standard 27- Financial Reporting of Interests in Joint Venture

Accounting Standard 28- Impairment of Assets

as-7 (Revised)
Construction Contracts

Accounting for Taxes on Income

Objective
Matching Concept - taxes on income accrued in the same period as the revenue and the expenses to which they relate. Problem arises when taxable income is different from the accounting income due to certain revenue or expense not considered in computation of taxable income or their amounts differ.

To prescribe accounting treatment for taxes on income.

AS-22 Accounting for Taxes on Income

Scope
This Statement prescribes the method of determination of the amount of expense or saving relating to taxes on income in respect of an accounting period.
This Statement prescribes the disclosure of such an amount in the financial statements.
Does not deal with taxes payable on distribution of dividends.
Taxes on income includes all domestic & foreign taxes on taxable income.

Definitions

• Tax Expense (Tax saving) refers to the aggregate of current tax and deferred tax charged or credited to P&L Account.
• Current tax is the amount of income tax determined to be payable (recoverable) in respect of the taxable income (loss) for a period.
• Deferred tax is the tax effect of timing differences.
• Timing Differences are the differences between taxable & accounting income for a period that originate in one period and are capable of reversal in one or more periods.
• Permanent Differences are the differences between taxable & accounting income for a period that originate in one period and do not reverse subsequently.
• Timing & Permanent differences arise because the period in which some items of revenue or expenses are included in taxable income do not coincide with the period such items are included in accounting income

Recognition
Tax expense (current tax and deferred tax) for the period should be included in the net profit or loss for the period.
Deferred tax should be recognized for all timing differences, but -

• Should be carried forward only to the extent it is reasonably certain that sufficient future taxable income will be available.
• In case of unabsorbed depreciation or carry forward losses, only to the extent there is virtual certainty and convincing evidence are available for future taxable profits.

Measurement
Current tax amount expected to be paid to tax authorities at applicable tax rates and laws.
Deferred tax assets and liabilities to be measured using the tax rates and law that have been enacted or substantively enacted by the Balance Sheet date.
Deferred tax assets or liabilities should not be discounted to their present value
Average tax rates should be used in case of different slab rates.

Reassessment and Review
At each Balance Sheet date, an enterprise to reassess unrecognized deferred tax assets.
Write down the carrying amount of a deferred tax asset to the extent it is no longer reasonably certain.
Any such write down may be reversed to the extent it becomes reasonably certain that sufficient future taxable income will be available.

Presentation
Offset current tax assets and liabilities if it has a legally enforceable right to set off the recognized amount and it intends to settle the asset and the liability on a net basis.

Offset deferred tax assets and liabilities if it has legally enforceable right to set off asset against liabilities representing current tax and the deferred tax assets and liabilities relate to taxes on income levied by the same governing tax laws.

Disclosure

• Deferred tax assets and liabilities should be distinguished from current tax asset and liabilities.
• Deferred tax assets and liabilities should be disclosed under a separate heading in Balance Sheet separately from current assets and liabilities.
• Break up of deferred tax asset and liabilities into major components should be disclosed in the notes to account.
• In case of unabsorbed depreciation or carry forward losses, disclose the nature of evidence supporting the recognition of deferred tax assets.

Transitional Provision
In the first year when the taxes on income are accounted for as per AS-22, recognize the deferred tax balance that has accumulated prior to the adoption of AS-22 as deferred tax asset/liability with a corresponding credit/charge to the revenue reserve. The opening balance of deferred tax assets and deferred tax liabilities should be determined at the rates applicable as on 1st April, 2001.

Practical Application
Deferred Tax Balance Sheet-Calculation of Deferred Tax Asset & Liability

Investments in Associates in Consolidated Financial Statements

Objective
To set out principles & procedures for accounting for effects in the financial position & operating results of the investments in associates.

As-23: Accounting for Investments in Associates in Consolidated Financial Statements

Scope

• Should be applied in the presentation and preparation of consolidated financial statements by an investor
• Does not deal with separate financial statements prepared by an investor

Definitions
An Associate is an enterprise in which the investor has significant influence & which is neither a subsidiary nor a joint venture of the investor.
Significant Influence is the power to participate in the financial and/or operating policy decisions of the investee but not control over those policies. Such significant influence is usually evidenced in the following ways:

• Representation on the Board of Directors or corresponding governing body of the investee
• Participation in policy making processes
• Material transactions between the investor & the investee
• Interchange of managerial personnel
• Provision of essential technical information

Equity Method is the method of accounting whereby the investment is initially recorded at cost, identifying any Goodwill / Capital Reserve arising at the time of acquisition. The carrying amount of investments is adjusted for post acquisition change in the investor's share of net assets in the investee. The consolidated P&L reflects investor's share of results of operation in the investee.

Scope of Equity Method
A subsidiary should be excluded when control is temporary or when it operates under severe long term restrictions.

Accounting Procedure
The Broad Procedure and Concepts underlying the consolidation procedure are similar to those applicable in AS-21 (Consolidated Financial Statements).

Goodwill or Capital Reserve arising on acquisition of associate should be included in the carrying amount of investments but should be disclosed separately.

The carrying amount of investment is to be reduced when there is a decline other than temporary in the value of investment. Such reduction being determined and made for each investment individually.

Disclosure
In accordance with AS-4 (Contingencies and Events Occuring after the Balance Sheet Date), the Investor discloses in the consolidated financial statements.

• its share of the contingencies and capital commitments of an associate for which it is also contingently liable;and
• those contingencies that arise because the investor is severally liable for the liabilities of the associate.

Listing and description of associates including proportion of ownership interest and, if different, proportion of voting power held.

Such investment should be classified as long term investment.\

Investor's share of profit or loss of such investment should be disclosed separately in P&L account.

Investor's share of extraordinary or prior period items should also be reported.

Name of subsidiary of which reporting dates are different from that of the parent's and difference in reporting dates.

Accounting policies same as per AS-21 (Consolidated Financial Statements).

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