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