1. CA NIHAR JAMBUSARIA jnihar@rediffmail.com nihar.jambusaria@ril.com
Indian Accounting Standards – Tax Impact
CA NIHAR JAMBUSARIA

2. IND-AS 23 - Borrowing Cost

3. Point of difference
IND AS 23
AS 16
Borrowing cost includes
Borrowing Costs are interest and other costs that an entity incurs in connection with the borrowing of funds
Interest is required to be calculated using the effective interest method as described
in Ind AS 109, Financial Instruments
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.
Borrowing Costs, inter alia, include the following:
(a) interest and commitment charges on bank borrowings and other short-term and long-term borrowings;
(b) amortisation of discounts or premiums relating to borrowings;
(c) amortisation of ancillary costs incurred in connection with the arrangement of borrowings
Cost for processing fees, arranger’s fees or any other fees
Need to be amortised over the period of loan
Charged to P&L

4. EG: Treatment of Interest as per Ind-AS
Particulars
INR
Loan
93,400
Interest 6%
Premium
6600
Processing fee
400
Loan acquired
93,000
Repayment of loan
1,00,000
Year
Discount rate
Discounted cash flows
inflow
93000 1
outflow
-5604
-5221 2
-4865 3
-4532 4
-4223 5
-1,05,604
-74144
Effective interest rate (EIR)
7.33%

5. EG: Treatment of Interest as per Ind-AS
Year
Amortised loan (A)
Outflow (B)
Reported interest cost (C )
Amorisation of premium and processing fee (D)
Amortised Cost at the end of year
A*EIR (7.33%)
C-B
A+D 1
93000
5604
6813
1209
94209 2
6902
1298
95507 3
6997
1393
96900 4
7099
1495
98395 5
7209
1605
100000
Total
28020
35020
7000

6. The amount of exchange difference not exceeding the difference between
Point of difference
IND AS 23
AS 16
Exchange gain/loss
The amount of exchange difference not exceeding the difference between
interest on local currency borrowings and interest on foreign currency
borrowings is considered as borrowings costs and the remaining exchange difference, if any, will be charged to profit and loss account.
As per MCA notification, Para 6 of AS 11 and Para 4(e) of AS 16 shall not apply to a company which is applying Para 46A. In effect, such companies will be allowed to capitalize exchange difference in entirety without separating interest cost referred in Para 4(e) of AS 16.
For borrowings after 31st March, 2016 an entity cannot capitalise the exchange differences.

7. Tax Impact
Scenario 1: When the asset is ready for use and it is put to use
As per IND AS 23 a company will debit INR 6813, INR 6902, INR 6997, INR 7099 and INR for the year 1,2,3,4 and 5 respectively.
However, as per Section 43B of the Income-tax Act, 1961 deduction of interest expenditure of INR 5604 every year would be allowed on actual payment. Therefore, adjustment is required to be made while computing taxable income.
Further, loan processing fee and premium on loan will be allowed as deduction on actual payment in year 1 and year 5 respectively.
Scenario 2: When the asset is ready for use and but it is not put to use
Interest amount calculated at ERR as per IND AS to be added to Net P/L
Capitalise interest cost as per the actual rate i.e. add to the cost of Asset

8. Tax Impact
Scenario 2: When the asset is ready for use and but it is not put to use
Interest amount calculated at ERR as per IND AS to be added to Net P/L
Capitalise interest cost as per the actual rate i.e. add to the cost of Asset.
Scenario 2: When the asset is not ready for use and not put to use
Reduce from the cost of the asset, the interest capitalised as per Ind-AS
Capitalise interest cost as per the actual rate i.e. add to the cost of Asset

9. EG: Treatment of Interest as per Ind-AS
ABC Ltd has taken a loan of USD 10,000 On 1 April 20xx, for a specific project at an interest rate of 5% p.a. payable annually. On April, 20xx, the exchange rate between the currencies was INR 45/ USD. The exchange rate as at yy is INR 48/USD. The corresponding amount could have been borrowed by ABC Ltd in local currency at an interest rate of 11% p.a. as on 1st April 20xx
Particulars
INR
Interest for the period = USD 10000*5%*48
24000
increase in liablity towards the principal amount (48-45)
30000
Interest that would have resulted if the loan was taken in indian currency = USD 10000*45*11%
49500
Difference between interest on local currency borrowing and foreign currency borrowing = INR
25500
Out of the on account of foreign exchange loss , will be Borrowing cost as per IND AS 23 and balance 4500 will be debited to profit and loss account but as per Para 46A of AS 11, entire 30,000 will be capitalized.

10. Tax Impact
Scenario 1 : Foreign Currency Loan Taken after and used to purchase Capital Asset from abroad
Para 46A has been deleted in Ind-AS 23 for loans obtained on or after Therefore, foreign exchange difference on such loans is required to be debited to P/L account.
However, as per ICDS VI read with section 43A of the Income-tax Act, foreign exchange difference at the time of making payment is required to be capitalised. Therefore, adjustment is required to be made while computing total income. Such amount will be added to the Net profit in COI and also to the cost of the asset (on realisation)

11. Tax Impact
Scenario 2 : Foreign Currency Loan Taken after and used to purchase Capital Asset locally
Para 46A has been deleted in Ind-AS 23 for loans obtained after Therefore, foreign exchange difference on such loans is required to be debited to P/L account.
As per ICDS VI, foreign exchange difference arising on account of foreign currency loan taken to purchase asset locally, is required to be recognised in P/L account and, therefore, no adjustment is required to be made while computing taxable income.

12. IND-AS 2 - Inventories

13. Point of difference
AS 2
IND AS 2
Deferred Settlement Terms
Inventories purchased on deferred settlement terms are not explicitly dealt with in the accounting standard on inventories.
Difference between the purchase price of inventories for normal credit terms and the amount paid for deferred settlement terms is recognised as “interest expense”.

14. Tax Impact ICDS is silent on the same.
As per section 2(28A) of the Income-tax Act, 1961, "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.
Therefore, interest paid on account of deferred payment would fall under the meaning of section 2(28A) shall be allowed as deduction while computing total income.

15. Requires an entity to use the same cost
Point of difference
AS 2
IND AS 2
Inventories – cost
formula
It is not expressly mandated to use the same cost formula consistently for all inventories that have a similar nature and use to the entity. The formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition.
Requires an entity to use the same cost
formula for all inventories having a similar
nature and use to the entity. For inventories
with a different nature or use,
different cost formulas may be justified

16. Tax Impact
According to ICDS, in case of dissolution of a partnership firm or association of person or body of individuals, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at the net realizable value.
This is unfair particularly as there is no specific provision for allowing such NRV as the cost to the successor of the business.
Also this is contrary to law settled by Apex court in the case of Sakthi Trading Co. v. CIT (118 Taxman 301 (SC))

17. Inventories – change in method of valuation
Point of difference
AS 2
IND AS 2
Inventories – change in
method of valuation
Change from one cost formula to another constitutes a change in an accounting policy. As such, pursuant to AS 5, a change in method of valuation of inventories should be made only if it is required by statute or for compliance with an AS or if it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise.
Change from one cost formula to another constitutes a change in an accounting policy. A change in an accounting policy can only be made if the change is required by an Ind AS, or results in the financial statements providing reliable and more relevant Information.

18. Tax Impact
As per ICDS II - Method of valuation shall not be changed without reasonable cause. This is also in accordance with ICDS I. However, ‘reasonable cause’ is not defined.
The guidance for the same will need to be taken from judicial precedents.

19. IND-AS 10 – Events after the Reporting period

20. Point of difference
IND AS 10
AS 4
Events occurring after the reporting date - Dividend
Dividends stated to be in respect of the period covered by the financial statements, which are proposed or declared by the enterprise after the balance sheet date but before approval of the financial statements, should be adjusted and will have to be recorded as provision.
Liability for dividend declared to holders of equity instruments are recognised in the period when it is declared and it is a non-adjusting event.

21. Tax Impact
This will bring more clarity with respect to filing the details of AY in challan at the time of paying Dividend Distribution Tax.
Example: If dividend is declared by the company in its AGM to be held in September, out of the profits of the FY (AY ), the DDT becomes payable within 14 days from the date on which dividend is declared or distributed or paid whichever is earlier.
Therefore, in the above example, DDT is payable within 14 days from the date of AGM in September, In the challan the year required to be mentioned is AY
Under Ind-AS as there is specific provision that dividend and tax both are to be recognised on payment basis, both will have to be accounted for in the year of payment.

22. IND-AS 37 – Provisions, Contingent Liabilities and Contingent Assets

23. A provision shall be recognised when
Point of difference
IND AS 37
AS 29
Recognition of provisions
A provision shall be recognised when
all of the following conditions are
met:
(a) an enterprise has a present
obligation as a result of a past
event;
(b) it is probable that an outflow of
resources embodying economic
benefits will be required to settle
the obligation; and
(c) a reliable estimate can be made
of the amount of the obligation.
A provision is recognised only when a past
event has created a legal or constructive
obligation, an outflow of resources is probable, and the amount of the obligation can be estimated reliably.

24. Tax Impact
As per ICDS, Provisions shall be recognised if it is reasonably certain that outflow of economic resources will be required.
Provision is not discounted to NPV
The criteria for recognition of provisions on the basis of the test of ‘probable’ (i.e. more likely than not criteria) replaced with the requirement of ‘reasonably certain’.
In the absence of definition and scope of ‘reasonably certain’ criteria, an ambiguity would arise on assessment of ‘reasonably certain’ criteria.
In the Act, there is no specific provision for recognition of provisions. However, provisions are allowed based on accrued liabilities as per ordinary principles of commercial accounting.

25. Tax Impact
Provision for Warranty is allowed as an expenditure upholding the test of ‘probable’ warranty obligation in the following judgments.
Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC) (extract on next slide)
Himalaya Machinery (P) Limited v DCIT 334 ITR 64
CIT vs. Luk India P. Ltd. 52 DTR 117.
Siemens Public communication Networks Limited v CIT
CIT v Indian Transformer Limited. 270 ITR 259

26. Recognition of provisions
Rotork Controls India (P.) Ltd. v. CIT [2009] 180 TAXMAN 422 (SC)
A provision to qualify for recognition, there must be a present obligation arising from past events, settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate of amount of obligation is possible.
If historical trend indicates that in past large number of sophisticated goods were being manufactured and defects existed in some of items manufactured and sold, then provision made for warranty in respect of army of such sophisticated goods would be entitled to deduction from gross receipts under section 37(1), provided data is systematically maintained by assessee.

27. IND-AS 21 – The Effects of Changes in Foreign Exchange Rates

28. Point of difference
IND AS 21
AS 11
Exchange difference Monetary Items
Exchange differences arising on translation or settlement of foreign currency monetary items are recognised in profit or loss in the period in which they arise.
Further, Para 46A cannot be adopted for transitions in foreign currency on or after 1st April, 2016 under IndAS 21
However, as per para 46A, corporate entities have an option to capitalise exchange differences on long-term foreign currency monetary items incurred for acquisition of depreciable capital assets and to amortise exchange differences on other long-term foreign currency monetary items over the life of such items but not beyond the stipulated date.

29. Tax Impact
As per ICDS – VI, in respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognised as income or as expense in that previous year subject to section 43A of the Income-tax Act, 1961 i.e. if the loan is taken in foreign currency to purchase foreign assets, exchange difference will be capitalised as per section 43A of the Income tax Act, 1961.
Therefore, adjustment is required to be made while computing total income in case where foreign loan is taken to acquire foreign asset.
However, in case foreign loan taken to acquire domestic asset, no adjustment is required to be made as section 43A would not apply.

30. Capital monetary items – Not relating to Imported assets
Judicial precedents
Section 43A of the Act was introduced by the Finance (No. 2) Act, 1967 with effect from 1st April, 1967.
In the case Tata Iron & Steel [TISCO - (1998) 231 ITR 285 (SC)] for the case relating to AY and AY (When Section 43A was not introduced), Supreme Court had held that cost of an asset and cost of raising money for purchase of asset are two different and independent transactions and events subsequent to acquisition of assets cannot change price paid for it. Therefore, fluctuations in foreign exchange rate while repaying instalments of foreign loan raised to acquire asset cannot alter actual cost of assets for computing depreciation.

31. Capital monetary items – Not relating to Imported assets
Hence, given that the provisions of Section 43A requiring foreign exchange gain/loss to be adjusted with the cost of the assets, apply only with respect to imported assets, the case of indigenous assets will continue to be governed by the ratio of the Tata Iron & Steel’s decision.
Gains arising on deposits (in foreign currency) are capital receipt as the deposits were in essence loan/capital and not a trading receipt - Shell Company of China Ltd. [22 ITR 1 (CA)]
If the foreign currency is held as a capital asset or as fixed capital, profit or loss to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, would be of capital nature. - Sutlej Cotton Mills Ltd., [(1979) 116 ITR 1 (SC)]

32. Capital monetary items – Not relating to Imported assets
Conclusion
Since ICDS requires recognition in P&L A/c subject to provisions of Section 43A and Section 43A applies only if it relates to imported assets, a controversy may arise, whether such exchange fluctuation gain or loss on capital monetary items (not relating to imported assets) would be taxable as an income or allowable as expense as per ICDS.

33. IND-AS 16 –Property Plant and Equipment

34. Point of difference
IND AS 16 – Property plant & equipment
AS 10 –Fixed Assets
Cost of dismantling
Considered as change in accounting estimate and the new method is applied prospectively
Considered as accounting policy and requires retrospective calculation of depreciation
Discounting in case payment is deferred beyond normal credit terms
If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest over the period of credit
Does not contain such requirement
Cost of major inspections
Each major inspection is capitalised with consequent derecognition of any previous amount.
All inspections are charged to P/L

35. Tax Impacts
As Ind-AS 16 does not prescribe retrospective change in the amount of depreciation, depreciation to be debited to Profit & loss account will be higher.
As Ind AS 16 prescribes to capitalise the cost of dismantling and cost of inspection which will affect depreciation amount debited to Profit & loss account.
In case of discounting when the payment is deferred beyond normal credit term. The amount that will be capitalised will be less. (e.g. in the next slide)

36. Discounting in case payment is deferred beyond normal credit terms
Cost of asset is 2,00,000 – 2 years interest free period - discount rate is 10%
Normal credit period – 3 months
BOOK
Asset a/c ……. dr
Interest payable a/c …….dr
To Creditor
165000
35000
200000
Interest …………dr
To Interest payable
16500
18500

37. In the above example, the difference between cash price equivalent / discounted amount and total payment is called interest payable, accounted over a period of credit unless it is eligible for capitalisation.

38. IND-AS 38 –Intangible Assets

39. Point of difference
IND AS 38 – Intangible Assets
AS 26 –Intangible Assets
Recognition
An entity can choose revaluation model or cost model as its accounting policy.
Revaluation model can only be chosen if there is active market for those assets
After initial recognition, an intangible asset should be carried at its cost less accumulated depreciation. Revaluation is prohibited
Amortization
Classified as finite or indefinite life
Finite life – amortised during the useful life
Indefinite – not amortised
At each balance sheet date review the useful life of the asset having indefinite life
Classified as legal life or without legal life
Legal life – over the legal period
Without legal life – amortised for 10 years
Payment deferred beyond normal credit terms
If payment for an intangible asset is deferred beyond normal credit terms, the difference is recognised as an interest expense.
Not Applicable

40. IND AS 38 – Intangible Assets AS 26 –Intangible Assets
Point of difference
IND AS 38 – Intangible Assets
AS 26 –Intangible Assets
Goodwill
No amortization
This Ind AS prescribes annual impairment test or more frequently when there is impairment indication.
Goodwill arising on amalgamation in the nature of purchase is amortised over a period not exceeding 5 years.
Separately acquired Intangibles
In the case of separately acquired intangibles, the criterion of probable inflow of expected future economic benefits is always considered  satisfied, even if there is uncertainty about the timing or the amount of the inflow.
No such Provision
Method
Change in the method of amortisation is a change in accounting estimate.
Change in the method of amortisation is a change in accounting policy.

41. Tax Impacts
Increase in book value of asset on revaluation, credit to P/L will increase book profit. In subsequent years higher write-off will reduce book profit, if asset is finite.
Assets with indefinite life will not be amortised. However depreciation is allowable in COI.
SC in case of Smifs securities [2012] 24 taxmann.com 222, held that goodwill is an asset under explanation 3(b) to section 32(1) i.e. ‘any other business or commercial rights of similar nature’, and thus is eligible for depreciation.
Due to accounting of interest component beyond normal credit terms, cost of the asset will decrease but finance charge will increase. However under computation of income under Income Tax Act such interest component is required to be added back and it will be added to the cost of asset as per section 43(1) and depreciation can be claimed on such adjusted cost.

42. Example Mr A buys an asset cost of which is say INR 1,00,000 and interest component is say INR 20,000 credit term 3 years
IND AS
Income Tax Act
Asset will be recorded at INR 80,000
Asset will be recorded at INR
Interest will be debited to profit and loss account
Interest will be added to profit as per P/L while computing income as per the Act.
Depreciation on 80,000
Depreciation on 1,00,000.

43. Accounting Polices, Changes in Accounting Estimates and Errors
IND AS 8
Accounting Polices, Changes in Accounting Estimates and Errors

44. Change in accounting policies
Point of difference
IND AS 8
AS 5
Change in accounting policies
Change in accounting policies should be accounted for with retrospective effect except to the extent where it is impracticable to determine either the period-specific effects or cumulative effect of the change.
If the change in accounting policy has no material effect on the financial statements for the current period but is expected to have a material effect in later period s the same should be appropriately disclosed.
AS 5 does not provide any guidance on whether the change to be applied prospectively or retrospectively. In the absence of guidance, different policies are followed.

45. Point of difference
IND AS 8
AS 5
Rectification of prior period item is done prospectively in P/L( separately disclosed)
Rectification of prior period error should be retrospectively by adjusting opening equity and restating comparatives unless impractical .
Material prior period errors are corrected retrospectively by restating the comparative amounts for prior periods presented in which the error occurred or if the error occurred before the earliest period presented , by restating the opening statement of financial position.
Rectification of prior period item is done prospectively in P/L( separately disclosed).
Prior period items are included in determination of net profit or loss for the period in which error pertaining to a prior period is discovered and are separately disclosed in the statement of profit and loss in the manner that the impact on current profit or loss can be perceived.

46. Revenue From Contract With Customers
IND AS 115
Revenue From Contract With Customers

47. Scope Point of difference IND AS 115 AS 7
It applies to contract with customers and establishes principles on reporting the nature, amount and timing and uncertainty of revenue and cash flows arising from contract with customer.
It provides that contract is an agreement between two or more parties that creates enforceable rights and obligations, can be either written, oral or implied by an entity’s customary practices. It deals with all types of performance obligation contract with customer.
AS7 deals with construction contracts and prescribes the method of accounting i.e. revenue from consideration received/ receivable.

48. Point of difference
IND AS 115
AS 7
Identification of contracts
A contract is identified under this standard when following conditions are met:
The contract has commercial substance (i.e. the risk timing or amount of entity’s future cash flows is expected to change as a result of contract).
The parties to the contract have approved and are committed to perform respected obligation.
Each party’s rights regarding the goods or services to be transferred can be identified .
Payment terms can be identified for the goods or services to be transferred
It is probable that the entity will collect the consideration to which it expects to entitle.
A construction contract specifically negotiated for the construction of asset or combination of assets that are closely inter related or interdependent in terms of design technology and function of their ultimate purpose or use.

49. Revenue is recognised when the control is transferred to the customer.
Point of difference
IND AS 115
AS 7
Recognition
Revenue is recognised when the control is transferred to the customer.
AS 9 - Revenue is recognised when significant risks and rewards of ownership is transferred to buyer
AS 7 – revenue is recognised when the outcome of a construction contract can be estimated reliably, contract revenue recognised by reference to the stage of completion of the contract activity at reporting date.
Measurement
Revenue is measured at transaction price i.e. the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amount collected on behalf of third parties.
AS 9 - Revenue is measured by charges made to customers or client for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them
AS7 – Revenue from construction contract is measured at consideration received/ receivable and to be recognised as revenue as construction progresses, if certain conditions are met.

50. Treatment of more than a single contract
Point of difference
IND AS 115
AS 7
Treatment of more than a single contract
If an entity undertakes two or more contracts with the same customer, at or around the same time, It can be considered as one contract with following conditions.
Contracts are negotiated as a package.
Consideration to be paid in one contract depends upon the price and performance of the other contract
the goods or services promised in the contracts are single performance obligation.
A group of contract are treated as a single construction contract when these are negotiated together, contracts are closely interrelated and contracts are performed concurrently or in a continuous sequence

51. Tax Impacts – ICDS
Under ICDS contract revenue is to be recognized when there is reasonable certainty of its ultimate collection. Hence now under ICDS recognition of contact revenue may be preponed.
ICDS provides that when outcome of the contract cannot be reliably estimated, early stage of contract shall not exceed 25% of the stage of completion.i.e if the outcome of the contract cannot be reliably measured, contract revenue is recognised only to the extent of cost incurred.
An Amendment to the contract to include construction of an additional asset is treated as a separate contract when asset significantly differs in design technology or function or asset covered by original contract or price is negotiated without having reference to original contract price.

53. Thank You