Applicability of Accounting Standards

On Corporate Entities(Companies)And Non Corporate Entities

AndRelates with Tax Audit u/s 44AB

AS of ICAI Vs AS under CAR 2006

Relaxation mainly for disclosures and not for recognition and measurement

Applicable Only to

NCEs

ApplicableOnly to

Companies

Three Levels

prescribed

Two Levels

prescribed

AS of ICAI CAR 2006

The Notified standards by and large follow the ICAI standards except for certain differences

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 for COMPANIES for accounting periods commencing on or after 7 December 2006

ICAI standards would remain applicable for non-

corporate entities

Applicability – an overview (CAR 2006)Accounting Standards Non SMCs To SMCs

AS 1 to 14 (except AS 3), 15, 16, 18, 19, 20, 22, 24, 25, 26, 28 and 29

AS 3, 17

AS 21, 23 and 27 (Only if regulator requires consolidation or entity prepares consolidated financial statements)

Some relaxation on disclosures

Care for applicability of AS 18

Applicability – an overview (NCEs)Accounting Standards Level I Level II Level III

AS 1 to 14 (except AS 3), 15, 16, 19, 20, 22, 25, 26, 28 and 29

AS 3 and 17

AS 18 and 24

AS 21, 23 and 27 (Only if entity prepares consolidated financial statements)

Some relaxation on disclosures

AS 15 relaxation for entities with less than 50 employees

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.

(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.

Level II Enterprises/ SMCEnterprises which are not Level I enterprises but fall in any one or more of the following categories areclassified 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 theaccounting period.

(iii) Holding and subsidiary enterprises of any one of the above at any time during the accountingperiod.

Level III Enterprises/SMC

Enterprises which are not covered under Level I and Level II are considered as Level III enterprises.

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?

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

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 ofCompanies (Accounting Standards) Rules 2006?

Any impact with the introduction ofRoadmap to IFRS?

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.

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

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

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

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

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

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

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

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

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)

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

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

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

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

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

AS 29 vis-à-vis Tax Audit

AS 29 “Provisions, Contingent Liabilities and Contingent Assets”

› Legal Vs Constructive obligation

› Provision towards Asset Retirement Obligation

AS 30,31 and 32 vis-à-vis Tax Audit

Financial Instruments Standards

Fair valuation

Mark to Market Losses

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

Common pitfalls in reporting

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

TDS payable account analysis Vs Chapter XVII-B disclosures

Year end provisions Vs during the year payments

Non-deduction of TDS on outstanding expensesLiabilities outstanding under current liabilitiesYear end provisions on estimated basis

Reconciliation of quantitative detailsRaw Materials Finished goods

Common pitfalls in reporting