Applicability of Accounting Standards On Corporate Entities(Companies )

1. Applicability of Accounting Standards On Corporate Entities(Companies) And Non Corporate Entities And Relates with Tax Audit u/s 44AB

2. AS of ICAI Vs AS under CAR 2006 CAR 2006 AS of ICAI Applicable Only to NCEs Applicable Only to Companies Three Levels prescribed Two Levels prescribed Relaxation mainly for disclosures and not for recognition and measurement

3. Companies (Accounting Standards) Rules 2006 Central Government, in consultation with NACAS, has issued the Companies (Accounting Standards) Rules, 2006 notifying accounting standards 1-7 and 9-29, effective forCOMPANIES for accounting periods commencing on or after 7 December 2006 The Notified standards by and large follow the ICAI standards except for certain differences ICAI standards would remain applicable for non-corporate entities

4. Applicability – an overview (CAR 2006) Care for applicability of AS 18 Some relaxation on disclosures

5. Applicability – an overview (NCEs) Some relaxation on disclosures AS 15 relaxation for entities with less than 50 employees

6. Level I Enterprises/Non SMC Enterprises which fall in any one or more of the following categories, at any time during the accounting period, are classified as Level I enterprises: (i) Enterprises whose equity or debt securities are listed whether in India or outside India. (ii) Enterprises which are in the process of listing their equity or debt securities as evidenced by the board of directors’ resolution in this regard. (iii) Banks including co-operative banks. (iv) Financial institutions. (v) Enterprises carrying on insurance business.

7. (vi) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crore. Turnover does not include ‘other income’. (vii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 10 crore at any time during the accounting period. (viii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

8. Level II Enterprises/ SMC Enterprises which are not Level I enterprises but fall in any one or more of the following categories are classified as Level II enterprises: (i) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 40 lakhs but does not exceed Rs. 50 crore. Turnover does not include ‘other income’. (ii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 1 crore but not in excess of Rs. 10 crore at any time during the accounting period.

9. (iii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period. Level III Enterprises/SMC Enterprises which are not covered under Level I and Level II are considered as Level III enterprises.

10. Accounting Standards under IT ACT • NAS1 – Significant Accounting Policies • NAS2 – Net Profit or Loss and Changes in accounting policies • If an enterprise complies with NAS1 and NAS2 but does not comply with AS issued by ICAI – What to do?

11. Accounting Standards not applicable to Tax Audit – A myth or reality? General purpose financial statements To be subjected to audit – what about compilation? Subject to audit but not carrying on any Business or Industrial or Commercial activity Concept of Materiality

12. Accounting Standards not applicable to Tax Audit – A myth or reality? What about Not for Profit Organisations? Management or Auditors – who is responsible for compliance? What is the impact of Companies (Accounting Standards) Rules 2006? Any impact with the introduction of Roadmap to IFRS?

13. Form 3CA & 3CB Suggested reporting on Form 3CD • Materiality Concept • Responsibility and Scope Para Particulars given in Form No. 3CD and the Annexures thereto are furnished by the Company’s management. In accordance with the Guidance Note on Tax Audit under Section 44 AB of the Income Tax Act, 1961 issued by the Institute of Chartered Accountants of India our examination is carried out on a test basis to obtain reasonable assurance that the particulars as disclosed in Form No. 3CD and the Annexures thereto together with the notes thereon are free of material misstatement.

14. AS 1 vis-à-vis Tax Audit • AS 1 “Disclosure of Accounting Policies” • Concept of prudence is not fully considered • Certain provisions/ write off not allowed as expenditure

15. AS 2 vis-à-vis Tax Audit • AS 2 “Valuation of Inventories” • Market value Vs Net realisable value • AS 2 does not prescribe valuation method for inventory of shares, debenture etc • Section 145 A of the IT Act • Inclusive method under the IT Act • Exclusive method under AS 2

16. AS 7 vis-à-vis Tax Audit • AS 7 “Accounting for Construction Contracts” • % completion method Vs completed contract method • Accounting for foreseeable future loss • Presumptive taxation u/s 44AD • Present limit Vs limit proposed by DTC

17. AS 10 vis-à-vis Tax Audit • AS 10 (Revised) “Property, Plant and Equipment” • Ready for the intended use Vs put to use • Whether depreciation claim is optional? • Idle machinery under AS 10 • Recognition criteria for Subsequent expenditure

18. AS 11 vis-à-vis Tax Audit • AS 11 “The effect of changes in foreign exchange rates” • AS 11 controversy still continues even after the introduction of Companies Accounting Standards Rule 2006 • Treatment of unrealised forex loss adjusted in the carrying value for Income Tax Depreciation

19. AS 12 vis-à-vis Tax Audit • AS 12 “Accounting for Government Grants” • If condition attached subsidy can not be fully reduced from the cost as per AS 12 • To be reduced from Cost of asset for IT depreciation computation

20. AS 13 vis-à-vis Tax Audit • AS 13 “Accounting for Investments” • Current Investments to be written down to market value if it is lower • Permanent diminution in value of Long-Term Investments to be provided for • If so provided not allowable under IT Act • Only on disposal

21. AS 15 vis-à-vis Tax Audit • AS 15 “Accounting for Retirement Benefits” • Provision for Gratuity – Sec 40 A (7)/ 43B • Provision for Compensated Absence – 43B • Bonus Vs performance incentives

22. AS 16 vis-à-vis Tax Audit • AS 16 “Borrowing Costs” • Concept of Qualifying Assets • Suspension of borrowing cost whether admissible under the Income Tax Act • Capitalisation of borrowing Costs Vs 36 (1) (iii)

23. AS 18 vis-à-vis Tax Audit • AS 18 “Related Party Transactions” • Divided position of definition of related party • Reconciling and considering the impact of disclosures • AS 18 Vs 40 (A) (2)(b) • Loans to Directors and their relatives

24. AS 19 vis-à-vis Tax Audit • AS 19 “Accounting for Leases” • Depreciation allowability on finance leases • Lessor under the Income Tax Act • Lessee under AS 19

25. AS 22 vis-à-vis Tax Audit • AS 22 “Taxes on Income” • No concept of deferred tax under the IT Act • Reversal of DTA for MAT computation – recent judicial pronouncement

26. AS 26 vis-à-vis Tax Audit • AS 26 “Intangible Assets” • Amortisation over useful economic life • Retirement of intangibles to be fully charged off • Depreciation rate specifically mentioned under IT Act • Distinction between Intangible Asset and Computer Software

27. AS 28 vis-à-vis Tax Audit • AS 28 “Impairment of Assets” • Impairment to be tested at every balance sheet date and loss to be accounted as an expense • Not allowable till the asset is disposed • Reversal of Impairment Loss will not have any impact in IT Computation • Impact on MAT Computation – a grey area

28. AS 29 vis-à-vis Tax Audit • AS 29 “Provisions, Contingent Liabilities and Contingent Assets” • Legal Vs Constructive obligation • Provision towards Asset Retirement Obligation

29. AS 30,31 and 32 vis-à-vis Tax Audit • Financial Instruments Standards • Fair valuation • Mark to Market Losses

30. Common pitfalls in reporting • Changes in Accounting Policy • Whether necessary to be mentioned in the Auditors’ Report even if not material • Forex differences adjusted in carrying value of fixed assets not removed for IT depreciation, if unrealised • Related party transactions not reconciled with 40A (2) (b) disclosures • 43B opening and closing unpaid position Vs Current Liabilities

31. Common pitfalls in reporting • Interest accrued on Loans Vs disclosure under 43B • Funded interest of term loans Vs 43B • Reconciling the excise duty records with financial statement figures (CENVAT/ VAT Disclosures) • Reconciliation of movement in loan accounts with disclosure under 269 SS and 269 T • Share Application money Vs Loan • IFST whether to be disclosed • Security Deposits received

32. Common pitfalls in reporting • TDS payable account analysis Vs Chapter XVII-B disclosures • Year end provisions Vs during the year payments • Non-deduction of TDS on outstanding expenses • Liabilities outstanding under current liabilities • Year end provisions on estimated basis • Reconciliation of quantitative details • Raw Materials • Finished goods

33. Thank you