PRESENTED BY:
IQBAL AHMAD ABDAN(FCA)
Friday September 09 2011
ABDAN & CO
Chartered Accountants
2/37,39 Arkay Square Main
Shahrah-e-Liaquat New Challi
Karachi.
Contact # 32424194-32423407
Analysis of Financial Statements
1. IAS relating to Tax Laws
2. Inadmissibility under the tax laws.
3. Tax Depreciation.
4. Gain on Sale of Fixed Assets
5. Conclusion and Question Answer session
Analyzing the Financial Statements
 What does it mean and purpose?
i.
ii.
iii.
Review the fairness and appropriateness.
Comparisons with previous and expected results.
Future strategy.
 Analyzing the financial Statement with the perspective of Income Tax
Ordinance 2001.
 Key Financial Ratio
i.
Balance Sheet Ratio (Current Ratio – Quick Ratio – Debt equity Ratio etc ..)
ii.
Profit & Loss Ratio (Gross Profit Ratio – Net Profit Ratio – Stock turnover etc..)
IAS Relating to Tax Law
Relevant Income Tax Section
IAS
 IAS – 1
Preparation of Financial
Statement
 IAS – 2
Inventories
 IAS – 11
Constructions Contracts
INCOME TAX
 Section – 32 & Section 34
 Section – 35
 Section – 36
 IAS – 12
 Income Taxes
4
(Presentation of Financial Statement)
IAS - I
INCOME TAX (S-32 & 34)
 Objective
 Objective
The Objective of this standard to
prescribe the basis for presentation
of general purpose of financial
statement
the
principle
of
consistency and generally acceptable
accounting principle.
Subject to this ordinance a person’s
income chargeable to tax shall be
computed in accordance with the
method of accounting regularly
employed by such person.
5
METHOD OF ACCOUNTING
IAS - I
INCOME TAX(S 32 & 34)
 Basis of Accounting
 Basis of Accounting
The accounting standard states that an
entity shall prepare its financial
statements, except for cash flow
information, using the accrual basis of
accounting.
A company shall account for income
chargeable to tax under the head
“Income from Business” on accrual
basis”
While other person may account for
such income on cash or accrual basis.
6
Basis of Accounting
Cash Basis
Income recognize when received and
expense when paid.
Accrual Basis
Income and expense are recorded in the
period in which they are due.
7
IAS-2 INVENTORIES
INCOME TAX (S- 35)
IAS -2
The IAS-2
inventories
disclosures.
relates to
valuation
Income tax ordinance 2001 provides the
same basis for valuation of stock as IAS-2
state.
the
and However the following treatment for
valuation have also been prescribed.
If CASH BASIS method of accounting
adopted
Inventories should be valued
lower of cost or net realizable
 Prime Cost Method or
value.
 Absorption cost method
The valuation method may be If accrual Basis method of accounting
adopted absorption cost method will be
applied using FIFO or weighted
followed
average method.
8
Continued…,
IAS
Cost Formulas:The Cost of inventories of items
that
are
not
ordinarily
interchangeable and good or
services
produced
and
segregated for specific project
shall be assigned by using
specific identification of their
individual cost.
INCOME TAX
 Prime Cost Method
The sum of direct material cost
direct labor cost and variable
FOH.
 Absorption Cost Method
The sum of Direct Material Cost
+Direct Labour Cost and
FOH(Fixed plus variable)
9
CONSTRUCTION
CONTRACT
IAS 11
INCOME TAX (S-36)
The objective of this standard is to
prescribe the accounting treatment of
revenue and cost associated with
construction contracts.
 Section
36 “Income from
Business” on an accrual basis
shall compute such income
arising for a tax year on the basis
Contract revenue and cost associated
of the percentage of completion
with the construction contract shall be
recognized by reference to the stage of
method.
completion of the contract activity.
 “Percentage
of
Completion
Method” Means the principle
A fixed price contract is a Construction
contract in which the contractor agrees to a
under which revenue and
fixed contract price or a fixed rate per unit
expenses arising under a longof output, which in some cases is subject to
term contract are recognized by
cost escalation clause.
reference to the stage of
A cost plus contract is a construction
completion of the contracts.
contract in which the contractor is
reimbursed for allowable or otherwise
defined costs, plus a percentage of these
cost or a fixed fee.
10
Income Taxes
IAS-12
 The objective of this standard is to prescribe the accounting treatment
for income Taxes. The principle issue is how to account for the current
and future tax consequences of transaction and other events of the
current period that are recognized in the financial statement.
Relevant terms:
 Accounting Profit & Taxable Profit.
 Deferred Tax.
 Deferred Tax Assets & Deferred Tax Liabilities.
11
Income Taxes
IAS-12
What is Accounting Profit & Taxable Profit ?
Accounting profit is the profit disclosed by an entity in its financial statement however taxable profit
is the profit that is determined applying the relevant tax rules to ascertain the taxable profit.
What is deferred Tax ?
Deferred Tax is any amount of tax that will be payable or deductible in future period when the carry
amount of an assets or liability will be settled in accordance with the prescribed rules relating to
accounting items.

What is Deferred Tax Assets & Deferred Tax Liabilities?
Deferred tax assets
The amounts of income taxes recoverable in future period in respect of carry forwards of unused tax
credits or carry forwards of unused tax losses.
Deferred Tax Liabilities
The amounts of income taxes payable in future period in respect of taxable temporary differences.
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INADMISSIBILITY
UNDER THE TAX LAWS
1.
ONUS OF PROOF
a) Onus on the Taxpayer to prove that deduction claimed,
is admissible under the law.
b) Burden to produce Sec 174 (2)
i) receipt
ii) evidence of transaction
iii) other record
iv) circumstances giving rise to claim of deduction OR.
v) reasonable cause of non-production of any of above
3. Once onus discharge by tax payer, it will be shifted on the
commissioner to prove with the definite information acquired from
audit or otherwise S. 122(5).
4.Expenditure should relate to the tax year according to the method
of accounting employed by the taxpayer. No past or future tax year
relating expenditure is permissible.
5.Deduction allowable only if business carried out during the year in
which expenditure is incurred. Business closed or discontinued
before commencement of tax year, no deduction allowed.
6.Expenditure allowable in computing taxable income only if incurred for
the purpose of taxpayer own business. Expenditure incurred by the
parent company for the benefit of subsidiary company cannot be
allowed except relief available
u/s 59B.
7.Profit of illegal business is taxable, expenditures incurred for carryout
illegal business is also allowable.
8. Revenue expenditure and losses incidental to business and incurred
during the course of business are admissible.
9. Expenditure incurred wholly and exclusively for the
purpose of
business is permissible .
10.Secret Commission whether deductable in order to be entitled to
deduction of payment made to persons whose names are not
disclosed, the assessee has to:
Establish the practice prevailing in that line of business for making
such payment s;
ii) to adduce satisfactory evidence to establish the payment ;and
iii) to satisfy the authorities that the payment were made for the
purpose of business.
i)
(Joshi v CIT , 209 ITR 324, 108 ITR 500, 137 ITR58, 25 ITR 102,
16 ITR 260)
 Section-21
Cess,rate or tax levis on the profits or gain or assessed as
percentage or otherwise of the profit or gain. S.21 (a)
Any amount of tax deducted from the amount derived by the
person , sales of goods, services, execution of contract ,
export,etc. s.21(b)
Default of deduction or payment of tax on salary, rent, brokerage,
Commission, profit on debt, payment to non resident, payment
for service or fee S.21(c)
Entertainment expenses in excess of prescribe limit or
violation of conditions. S.21(d), Rule 10.
Contribution to unrecognized provident fund, unapproved
pension fund, superannuation fund, gratuity fund. S 21(e)
Contribute to employee beneficial fund and failure to make
effective arrangement to secure tax deduction u/s 149 on the
payment out of fund to the employee chargeable to tax s 21(f)
Any fine penalty paid or payable by the persons for the
violation of law, rule or regulation S. 21(g)
Personal expenditure incurred by the person. S.21(h)
Any amount carried to reserve fund or capitalized in any
way S.21(i)
 Any profit on debt, brokerage, commission , Salary or
other remuneration paid by AOP to any member of the
association. s.(21) (j)
Expenditure paid or payable under single account head in aggregate
exceeding Rs. 50,000 paid otherwise than :
Cross Cheque
Cross bank Draft
Cross pay order
Other cross banking instrument s,
Verifiable transfer of payment or
Verifiable credit card payment
Exemption/non applicability.
Expenditure not exceeding Rs. 10,000/Expenditure on account of utility bills.
Any salary paid or payable exceeding Rs. 15,000/-per
month other than cross cheque or direct transfer of fund to
the employee’s bank account S.21 (m)
Any capital expenditure paid or payable other than allowed
under the law. S.21 (n)
Expenditure relating to FTR income.S. 169 (2b).s. 67
apportionment, Rule 13.
Expenditure relating to exempt income.
Expenditure in violation of section 174(2).
Capital losses other than allowed by the law,
damage or destruction of capital assets, premium on
redemption of debt, discount on issue of shares, loss
on the sale of business, expenditure or losses before
the commencement or after the closure or
discontinue.
That pre-commencement expenditures are allowed in
accordance with section 25
Expenditure relating to any other head of income
Anticipated future or contingent expenses or losses
Depreciation allowances S.22, 23, 23A
Amortization of intangible S.24
Amortization of pre-commencement expenditures. S.25.
TAX DEPRECIATION
 “Depreciable asset” means any tangible movable property
immovable property (other than unimproved land),, or structural
improvement to immovable property, owned by a person that:•
Has a normal useful life exceeding one year ;
•
Is likely to loose value as result of normal wear and tear, or
obsolescence; and
•
Is used wholly or partially by the person in deriving income from
business chargeable to tax, except the assets entire cost of which
has been allowed as deduction in any other head.
Section 23(5).
Eligible depreciable assets means a depreciable assets OTHER THANAny road transport vehicle unless the vehicle is playing for hire,
Any furniture including fittings.
Any plant machinery used previously in Pakistan,
Any plant and machinery whose entire cost has been allowed as
deduction under any other section in tax year of acquisition.
Normal depreciation allowances.S.22
Initial depreciation allowancesS.23
First year depreciation allowances S.23A
Accelerated depreciation to alternate energy
project.S23B.
Section 23.
Initial allowance in the year in which eligible depreciable assets is
used for the purpose of business for the first time or the tax year in
which commercial production is commenced which ever is later,
shall be allowable.
 Initial Allowances shall be computed by applying 50% rate to the
Cost of the assets.
 In case of leasing company initial allowance shall be available to
the extent of lease rental received in respect of such assets .
Section 23A.
Plant, machinery and equipments installed by the Industrial
undertaking set up in the specified rural and under developed
Area .
Industrial undertaking is owned and managed by the Company
 First year allowances shall be computed at rate of 90% of the cost
of the eligible depreciable asset put to use after July 1 2008,
 Federal Government may notify the specified area for the
purpose of this allowance.
 First year allowance shall be lieu of initial allowance u/s 23.
Depreciation allowances confined to person’s depreciable
assets used in the persons business in the tax
year.(owned and used in the tax year).s.22(1)
Computation: Depreciation allowances shall be computed
by applying the rate specified in part 1 of third schedule
against the written down value of the asset at the
beginning of the years. 22
Where asset partly used for business and partly for private
or personal purposes proportionate amount of depreciation
Attributable to business use of the assets is allowed. 22(3)
No depreciation if asset is disposed of during the tax year .s. 22(8)
No depreciation for assets with one year normal life,
however, allowed as revenue expenditures.
Total Deduction allowed to a person during the ownership of a
depreciable assets shall not exceed the cost of the assets .S .22(7)
WDV of New purchased depreciable assets in beginning of
a) First Tax year: sec 22 (5a) cost of the asset to the person as
reduced by the initial allowances u/s 23 / 23A (initial
allowances are computed by applying prescribe rate on the
original cost and normal allowances are computed by
applying the prescribe rate on the WDV (Cost-Initial
allowances).
b) WDV of depreciable asset at the beginning of the subsequent
year of years.Sec.22(5b) cost of the assets less total
depreciation deduction including initial allowances allowed
in the previous tax years.
Section 22(6)
 WDV of the depreciable asset partly used for business
and partly for other purposes , shall be computed on the
basis that the assets has been solely used to derived income
from business chargeable to tax.
The leasing Company investment bank, a Moradabad Schedule
bank or a development
finance Institution are entitled to
depreciation allowance in respect of assets owned and leased out
to an other person only against the lease rental derived in respect
of such assets. Leased shall be treated to be used by such lesser
entiltled.s.22(12).
GAIN ON SALE OF FIXED
ASSETS
Gain on Sale of Fixed Assets
 Gain on disposal of depreciable asset is chargeable to tax under the
income from business in year of disposal.(Gain is computed by
deducting the WDV of the asset at the begging of the disposal tax year
from the proceeds received.
 Gain or loss of depreciable asset which is partly used for business and
partly is used for other purpose is computed in the same manner except
the normal WDV is increased by the amount depreciation not allowed
attributed to other than business purposes.
38
Sec 22(8)
Gain on the disposal of depreciable of assets is chargeable to tax
under the income from business in year of disposal. (Gain is
computed by deducting by deducting the WDV of the asset at the
beginning of the disposal tax year from the disposal consideration or
proceeds received.
 Loss on disposal of depreciable assets is allowed as deduction in
computing the person’ s income chargeable to tax in the year of
disposal. Loss
is excess
of WDV over the disposal
consideration/proceeds and computed by deducting the disposal
proceed from the WDV of the asset.
 Gain or loss of depreciable assets which is partly used for business
and partly is used for other purpose is computed in the same
manner except the normal WDV is increased by the amount of
depreciation not allowed attributed to other than business
purpose. 22.(9)
Where depreciable asset used in Pakistan is exported or
transferred out of Pakistan, shall be treated to have been
disposed of at the time of export or transfer and consideration
shall be treated to have been received equal to cost of the
assets.s.22(14)
Section 76
Purchased assets (Consideration given , fair market value of consideration in kind ,
incidental expenses on acquisition and disposal, alteration and improvement cost).
Personal assets applied to business used. (Fair market value)
 Self construction of assets (cost of production, incidental,
alteration and improvement)
 Assets finance by foreign currency loan.(currency fluctuation gain or loss during the
year for liability)
 Partial purchase of assets.(fair market value appointment)
 Acquisition of assets subject tax or exemption, cost shall be amount so charged or
exempt plus amount paid by the person.
 Deduction or exclusion.(grant, subsidy, commission or other assistance to the extent
not chargeable to tax) S.76
Section 77.
Total amount received or fair market value of the assets sold which ever is higher,
including fair market value of any consideration received in kind.
Compensation, indemnity or damages received under insurance policy, indemnity
settlement, judicial decision or other agreement in case of assets loss or destroyed
Assets discarded, ceased or applied to personal use, Fair market value of assets at
the time.
Residual value in case of leasing company except the residual value and amount
realized value during the term of lease toward cost of the assets is not less than the
original cost of the assets.
In case of collective disposal of two or more asset in single consideration to be
received apportioned according to their fair market value of each disposed of
assets.
(Section 22(13) (d)).
 Where the consideration received on the disposal of immovable
property exceed the cost of the property , the consideration
shall be treated as the cost of the property .
EXAMPLE MR. C Purcahsed a Computer on 01-07-2008 at 80,000 which isused 80% for his
business and20% fo his private. Mr. C sold this computer on 05-07-2010 for Rs.
50,000. Calculate tax gain or loss under business Income
Answer
Tax Year 2009
Cost on 1st July 2008
Intial Allowance @ 50%
Dep. Allowable
(80% business Use)
Depreciation for the year @ 30%
(40,000*30%)=
Closing WDV
RUPEES
80,000
(40,000)
40,000
(12,000)
28,000
Tax Year 2010
Opening Tax WDV
Depreciation for the Year @ 30%
(28,000*30%)=
Closing WDV
28,000
(8,400)
19,600
(80,000*50%)=
Tax Year 2011
Opening Tax WDV
Add: Depreciation Disallowed for non-business use
In the Tax Year 2009(12,000-9600)= 2,400
In the Tax Year 2009(8,400-6,720)= +1,680
Total WDV
Less: Sale Proceed
Tax gain on dis[posal
40,000
(12000*80/100)=
9,600
(8,400*80/100)=
6,720
19,600
4,080
23,680
(50,000)
26,320
Example 2
Mr. A Purcahsea CAR OF Rs. 1,800,000 restricted cost Rs. 1,500,000) on 01-07-2009 for his
business and soodl this car on 31-07-2010 for Rs 1,650,000. Calculate tax depreciation for
the year 2010 and tax gain or loss on disposal of the car in the atx year 2011.
Answer
Cost of the Car Rs. 1,800,000
Cost restricted to
Tax depreciation @ 15% in the tax year 2010
Opening tax WDV for the Tax Year 2011
Sale Proceed (1,500,000/1,800,000)*1,650,000=
IAS Relating to Tax Law
Tax gain on dis[posal of car in the tax yer 2011
1,500,000
(225,000)
1,275,000
(1,375,000)
100,000
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Example Mr Z purchjased a Factory Building for his business for 800,000 and upto to 30.06.2010
he has claimed tax depreciation of 563,804 on the buildin. On 31.08.2010 he sold his
factory building for Rs 2,800,000. Calculate tax gain or loss on disposal of the factory
building
Answer
Sale proceed of building
Cost of Building
2,800,000
Less: Tax Depreciation upto 30.06.2010 563,804
Tax WDV
Tax gain on disposal
I
2,800,000
(2,236,196)
563,804
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THANK YOU
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