ACCOUNTING &
TAXATION - NBFCs
BY
R ANAND
VICE PRESIDENT
(CORPORATE AFFAIRS)
SUNDARAM FINANCE LIMITED
05/08/2004
RBI - PUNE
1
GENERAL
•
MANAGING
BUSINESS
•
COST OF COMPLIANCE & DECLINING MARGINS
•
OVER REGULATION Vs. LIBERLISATION
05/08/2004
ACCOUNTING
RBI - PUNE
vs.
MANAGING
2
ACCOUNTING - COMPANY LAW
REQUIREMENTS
•
COMPLIANCE
WITH
ACCOUNTING
STANDARDS MANDATED - SEC 211(3A).
•
NON ADHERENCE REQUIRES DISCLOSURES
– SEC 211(3B).
•
TRIPARTITE
INVOLVEMENT
IN
FORMULATION – CENTRAL GOVT, NATIONAL
ADVISORY COMMITTEE AND ICAI – SEC
211(3C).
05/08/2004
RBI - PUNE
3
ACCOUNTING –
RBI REQUIREMENTS
•
SEC.45Q UNDER CHAPTER III B OF THE RBI ACT,
1934 OVERRIDES OTHER LAWS
•
RBI
PRUDENTIAL
NORMS
VS.
ACCOUNTING
STANDARDS AND GUIDANCE NOTES - PARA 5 OF RBI
PRUDENTIAL NORMS DIRECTIONS DT.31ST JAN 1998.
•
MANDATORY
ACCOUNTING
STANDARDS
AS
APPLICABLE TO OTHER CORPORATES TO THE
EXTENT
NOT
INCONSISTENT
WITH
RBI’S
DIRECTIONS.
05/08/2004
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4
ACCOUNTING –
INCOME-TAX REQUIREMENTS
• CENTRAL GOVT. HAS GOT POWER TO ISSUE
ACCOUNTING STANDARDS FOR INCOME-TAX PURPOSE
UNDER SEC.145 VIDE AMENDMENT IN 1997
• SO FAR, ONLY 2 STANDARDS WERE ISSUED
(NOTIFICATION NO. SO69(E) DT. 25/01/1996)
-
AS I
-
AS II : DISCLOSURE OF PRIOR PERIOD & EXTRA
ORDINARY ITEMS AND CHANGES IN
ACCOUNTING POLICIES.
05/08/2004
: DISCLOSURE OF ACCOUNTING POLICIES
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5
IMPORTANT STANDARDS
APPLICABLE TO NBFCs
AS 1
Disclosure of Accounting Policies
AS 17 Segment Reporting
AS 3
Cash Flow Statements (revised)
AS 18 Related Party Disclosures
AS 19 Leases
AS 4
AS 5
Contingencies and Events occurring after
the Balance Sheet Date (revised)
AS 20 Earnings Per Share
Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies
(revised)
AS 22 Accounting for Taxes on Income
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 6
Depreciation Accounting (revised)
AS 28 Impairment of Assets
AS 10
Accounting for Fixed Assets
AS 29 Provisions, Contingent Liabilities and
Contingent Assets
AS 11
Accounting for the Effects of Changes in
Foreign Exchange Rates (revised)
AS 13
Accounting for Investments (revised)
05/08/2004
Consolidated Financial Statements
AS 21
Consolidated Financial Statements
AS 23 Accounting for Investments in Associates
AS 27 Financial Reportting of Interest in Joint Ventures
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6
DISCLOSURE OF ACCOUNTING
POLICIES (AS 1)
•
FUNDAMENTAL
ACCOUNTING
ASSUMPTIONS
•
MAJOR CONSIDERATIONS - PRUDENCE, SUBSTANCE
OVER FORM & MATERIALITY
•
CHANGE IN RECOGNITION OF HP INCOME WHETHER AMOUNTS TO CHANGE IN ACCOUNTING
POLICY?
•
BROKERAGE ON DEPOSITS / COMMISSION FROM
DEALERS - ACCOUNTING TREATMENT.
GOING CONCERN, ACCRUAL & CONSISTENCY
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-
7
CASH FLOW STATEMENTS (AS 3)
•
CLAUSE 32 OF THE LISTING AGREEMENT REQUIRES
TO GIVE CASH FLOW STATEMENT ALONG WITH
BALANCE SHEET AND P & L.
•
ACTIVITIES TO BE CLASSIFIED INTO OPERATING,
INVESTING AND FINANCING.
•
STANDARD RECOMMENDS TWO METHODS
REPORTING : i.e., (1) DIRECT ; & (2) INDIRECT.
•
LISTING
METHOD.
•
DIRECT METHOD: RECEIPTS
TAKEN AT FULL VALUE.
•
INDIRECT METHOD: NET PROFIT BEFORE TAX &
EXTRAORDINARY ITEMS IS THE STARTING POINT
AND ADJUSTMENTS ARE MADE THERETO.
05/08/2004
AGREEMENT
MANDATES
RBI - PUNE
&
OF
INDIRECT
PAYMENTS
ARE
8
PROVISIONS, CONTINGENCIES, PRIOR PERIOD &
EXTRAORDINARY ITEMS - AS 4, AS 5 & AS 29
•
PROVISION TO BE MADE FOR PRESENT OBLIGATON AS A
RESULT OF PAST EVENT WHERE PROBABLE OUTFLOW OF
RESOURCES CAN BE RELIABLY ESTIMATED.
•
CONTINGENT LIABILITIES / ASSETS SHOULD NOT BE
RECOGNISED.
•
EVENTS OCCURING AFTER THE BALANCE SHEET DATE
THAT PROVIDE FURTHER EVIDENCE OF CONDITIONS
THAT EXISTED AT THE BALANCE SHEET DATE TO BE
RECKONED.
•
EXTRAORDINARY ITEMS SHOULD
DISCLOSED IN THE P&L ACCOUNT.
BE
SEPARATELY
•
PRIOR PERIOD ITEMS
DISCLOSED IN THE P&L.
BE
SEPARATELY
•
ANY CHANGE IN AN ACCOUNTING POLICY WHICH HAS A
MATERIAL EFFECT SHOULD BE DISCLOSED.
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SHOULD
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9
DEPRECIATION - AS 6
•
SYSTEMATIC BASIS AND USEFUL LIFE ARE THE CRITERIA
FOR CHARGING DEPRECIATION.
•
CONSISTENCY IS THE BASIC PRINCIPLE, BUT CHANGE IN
THE METHOD IS ALLOWED FOR BONA FIDE REASONS.
•
CHANGE IN THE METHOD – RETROSPECTIVE EFFECT WITH
DEFICIENCY / SURPLUS TO BE ACCOUNTED IN THE YEAR OF
CHANGE.
•
IN THE CASE OF REVALUATION, DEPRECIATION IS ON THE
REVALUED AMOUNT OVER THE REMAINING USEFUL LIFE.
•
ADDITION OR EXTENSION, EXCHANGE FLUCTUATION TO BE
DEPRECIATED OVER REMAINING USEFUL LIFE.
•
SCHEDULE XIV RATES ARE TO BE ADOPTED AS THE MINIMUM
LEVEL.
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10
FIXED ASSETS - AS 10
•
•
•
•
•
•
COST OF FIXED ASSETS = PURCHASE PRICE + COST OF
BRINGING THE ASSET TO ITS WORKING CONDITION.
SUBSEQUENT EXPENDITURE SHOULD BE ADDED ONLY IF IT
INCREASES THE FUTURE BENEFITS.
FIXED ASSETS SHOULD BE ELIMINATED UPON ITS DISPOSAL.
GAINS OR LOSSES FROM DISPOSAL OF FIXED ASSETS
SHOULD BE RECOGNISED IN P & L ACCOUNT.
REVALUATION IS PERMITTED FOR A CLASS OF ASSETS OR
SELECTION OF ASSETS ON A SYSTEMATIC BASIS.
DISCLOSURE :
- GROSS & NET BOOK VALUE WITH DETAILS OF ADDITIONLS,
DISPOSALS, ACQUISITIONS & OTHER MOVEMENTS.
- PARTICULARS ABOUT REVALUATION : AMOUNT, METHOD
ETC.
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11
DEPRECIATION ACCOUNTING (AS 6) &
ACCOUNTING FOR FIXED ASSETS (AS 10)
•
•
CAPITALISATION AS FIXED ASSETS BY LESSOR NOT PERMITTED
FROM 01/04/2001.
FOR LEASES PUT THROUGH PRIOR TO 01/04/2001
DISCLOSURE OF LEASED ASSETS IN THE BALANCE
SHEET.
FIXED ASSETS
LESS:ACCUMULATED DEPRECIATION
LESS/ADD: ACCUMULATED LEASE ADJUSTMENT
 DEPRECIATION AS PER SCH.XIV RATES OR AS PER
MANAGEMENT’S ESTIMATE BASED ON USEFUL LIFE OF THE
ASSET
 CONCEPT OF ANNUAL LEASE CHARGE (ALC) FOR LEASES PUT
THRO’ PRIOR TO 01.04.2001
 ALC COMPRISES OF
MINIMUM STATUTORY DEPRECIATION &
LEASE EQUALISATION CHARGE
 REPOSSESSED HP/LEASE ASSETS SHOULD BE SHOWN AS
DISTINCT FROM ‘ASSETS ON LEASE’ OR ‘STOCK ON HIRE’(RBI
CIRCULAR DT. 01.02.2002)
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12
REVENUE RECOGNITION
• INCOME FROM HP & LEASE
FROM 01.04.2001
• RECOGNITION OF HP AND LEASE INCOME FOR BOOKS GOVERNED BY AS 19
• RECOGNITION OF LEASE/HP INCOME - IRR BASIS
PRE 01.04.2001
• LEASE - GOVERNED BY GUIDANCE NOTE
• HP - NO SPECIFIC REQUIREMENT
• OTHER INCOME (AS 9):
INCOME FROM DIVIDENDS TO BE RECOGNISED WHEN
OWNER’s RIGHT TO RECEIVE PAYMENT IS
ESTABLISHED
INTEREST ON LOANS ACCRUES ON TIME BASIS AFTER
CONSIDERING AMOUNT O/S AND RATE APPLICABLE
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13
EFFECT OF CHANGES IN FOREIGN
EXCHANGE RATES – AS 11
•
FOREIGN CURRENCY TRANSACTION TO BE RECORDED AT
THE EXCHANGE RATE ON THE DATE OF TRANSACTION.
•
ON BALANCE SHEET DATE
-
FOREIGN CURRENCY MONETARY ITEMS SHOULD BE
REPORTED USING CLOSING RATE.
-
FOREIGN CURRENCY NON-MONETARY ITEMS TO BE
REPORTED AT THE RATE ON THE DATE OF
TRANSACTION.
•
EXCHANGE DIFFERENCES SHOULD BE RECOGNISED AS
INCOME OR EXPENSES IN WHICH THEY ARISE.
•
PREMIUM OR DISCOUNT ON FORWARD EXCHANGE
CONTRACT SHOULD BE AMORTIZED AS EXPENSE OR
INCOME OVER THE LIFE OF THE CONTRACT.
05/08/2004
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14
ACCOUNTING FOR INVESTMENTS
RBI DIRECTIONS & AS 13
•
•
•
•
•
•
•
INVESTMENTS CLASSIFIED AT THE BEGINNING INTO
- CURRENT INVESTMENTS &
- LONG TERM INVESTMENTS
INTER CLASS TRANSFER IS PERMITTED ON HALF YEARLY
BASIS
QUOTED CURRENT INVESTMENTS BE GROUPED INTO EQUITY
SHARES,
PREF.
SHARES
,DEBENTURES&
BONDS,GOVT.
SECURITIES, UNITS OF MUTUAL FUNDS AND OTHERS
QUOTED CURRENT INVESTMENT VALUED AT COST OR MARKET
VALUE, WHICHEVER IS LOWER ON SCRIP-WISE AND CATEGORY
WISE
AGGREGATE MARKET VALUE OF A PARTICULAR CATEGORY IS
LESS THAN THE AGGREGATE COST THEN THE SHORTFALL
SHOULD BE PROVIDED FOR.
SEPARATE TREATMENT FOR UNQUOTED SECURITIES
LONG TERM INVESTMENTS ARE VALUED AT COST AND DECLINE
IN VALUE OF INVESTMENTS, OTHER THAN TEMPORARY TO BE
PROVIDED
05/08/2004
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15
BORROWING COSTS - AS 16
•
BORROWING COST DIRECTLY ATTRIBUTABLE TO THE
ACQUISITION, CONSTRUCTION OR PRODUCTION OF A
QUALIFYING ASSET SHOULD BE CAPITALISED.
•
QUALIFYING ASSET IS AN ASSET THAT TAKES A
SUBSTANTIAL PERIOD OF TIME TO GET READY FOR ITS USE
OR SALE.
TEMPORARY INVESTMENTS OF BORROWING SHOULD BE
REDUCED FROM BORROWING COSTS.
•
•
CAPITALISATION OF BORROWING COSTS BE SUSPENDED
DURING A PERIOD IN WHICH ACTIVE DEVELOPMENT IS
INTERRUPTED.
•
CAPITALISATION OF BORROWING COST SHOULD CEASE
WHEN SUBSTANTIAL ACTIVITIES ON QUALIFYING ASSET ARE
COMPLETE.
•
ACCOUNTING POLICY AND AMOUNT OF CAPITALISATION TO
BE DISCLOSED IN THE FINANCIAL STATEMENTS.
05/08/2004
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16
SEGMENT REPORTING - AS 17
•
•
•
•
•
•
•
•
SEGMENT
REPORTING
HELPS
TO
UNDERSTAND
THE
PERFORMANCE & ASSESS THE RISK AND RETURN OF AN
ENTERPRISE.
LISTED COMPANIES TO PUBLISH SEGMENT REPORTING ON A
QUARTERLY BASIS IN THE FORMAT PRESCRIBED BY SEBI.
TYPES OF SEGMENT: (1) BUSINESS ; & (2) GEOGRAPHICAL.
DISCLOSURE IS ON REPORTABLE SEGMENT.
REPORTABLE SEGMENTS TO SATISFY REVENUE, RESULT AND
ASSET BASED CONDITIONS.
REPORTING FORMAT IS ON PRIMARY SEGMENT & SECONDARY
SEGMENT.
DOMINANT SOURCE AND NATURE OF RISK & RETURNS
GOVERNS PRIMARY SEGEMENT REPORTING FORMAT.
NBFCs ENGAGED PRIMARILY IN FINANCING ACTIVITY IN INDIA
HAS SINGLE REPORTABLE SEGMENT AND HENCE NO
REQUIREMENT TO DISLCOSE SEGMENT INFORMATION [REFER
ASI 20].
05/08/2004
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17
RELATED PARTY DISCLOSURES - AS 18
•
•
•
•
•
•
OBJECTIVE IS TO DISCLOSE RELATED PARTY RELATIONSHIPS &
TRANSACTIONS.
RELATED PARTY RELATIONSHIPS COVERED:
A. ENTERPRISES HAVING CONTROL.
B. ASSOCIATES & JOINT VENTURES.
C. INDIVIDUALS HAVING SIGNIFICANT INFLUENCE.
D. KEY MANAGEMENT PERSONNEL.
E. ENTERPRISES WHERE C & D EXERCISE
SIGNIFICANT INFLUENCE.
NAME OF THE RELATED PARTY & NATURE OF THE RELATIONSHIP
SHOULD BE DISCLOSED IRRESPECTIVE OF ANY TRANSACTIONS
DURING THE YEAR.
EXAMPLES OF RELATED PARTY TRANSACTIONS: PURCHASE,
SALES, SERVICE, LEASING, HP, LICENCE, AGENCIES, FINANCE,
GUARANTEES ETC.
AGGREGATION BY TYPE OF RELATED PARTY IS PERMITTED WITH
EXCEPTIONS.
FORMAT OF DISCLOSURE IS PRESCRIBED BY ICAI.
05/08/2004
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18
ACCOUNTING FOR LEASES – AS 19 APPLICABILITY
•
MANDATORY WITH EFFECT FROM 01.04.2001.
•
HIRE
PURCHASE
COVERED.
•
A FINANCE LEASE TRANSFERS SUBSTANTIALLY
ALL RISKS AND REWARDS OF OWNERSHIP OF
ASSET TO LESSEE.
•
AN OPERATING LEASE IS SIMPLY
AGREEMENT FOR HIRE OF ASSET.
05/08/2004
TRANSACTIONS
RBI - PUNE
ARE
AN
19
AS 19 – LESSEE ACCOUNTING
LESSEE’S BOOKS:
•
FINANCE LEASE:



•
OPERATING LEASE:

05/08/2004
RECOGNISE LEASED ASSET AS ASSET WITH
CORRESPONDING LIABILITY AT FAIR VALUE OF
THE ASSET OR THE PRESENT VALUE OF THE MLP.
ASSET AND LIABILITY SHOULD BE SHOWN
SEPARATELY AND NOT NETTED OFF.
LEASE PAYMENTS = PRINCIPAL + INTEREST
PAYMENT TO BE TREATED AS EXPENSE ON A
STRAIGHT LINE OR SYSTEMATIC BASIS.
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20
AS 19 – LESSOR ACCOUNTING
LESSOR’S BOOKS

FINANCE LEASE:
RECOGNISE ASSET AS
RECEIVABLE AT THE
AMOUNT EQUAL TO NET INVESTMENT .
LEASE RENT = PRINCIPAL + FINANCE INCOME.

OPERATING LEASE :
EXISTING TREATMENT CONTINUES.
05/08/2004
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21
AS 19 - IMPORTANT DISCLOSURES

BY LESSEE
- OWN / LEASED ASSETS TO BE SEGREGATED
- NET CARRYING AMOUNT ( W D V ) FOR EACH CLASS
- LEASE PAYMENTS MATURITY AND THE PRESENT VALUE (DUE IN ONE
YEAR, BETWEEN 1 TO 5 YEARS AND ABOVE 5 YEARS )
- LEASE PAYMENTS RECOGNISED IN THE STATEMENT OF PROFIT AND
LOSS SEGREGATING MLP AND CONTINGENT RENT IN THE CASE OF
OPERATING LEASE.

BY LESSOR
- RECONCILIATION BETWEEN MLP AND PV OF MLP
- LEASE RECEIVABLES MATURITY AND PRINCIPAL MATURITY (DUE IN
ONE YEAR BETWEEN 1 TO 5 YEARS AND ABOVE 5 YEARS )
- UNEARNED FINANCE INCOME
- GROSS ASSET COST, ACCUMULATED DEPRECIATION & CHARGE FOR
EACH CLASS IN THE CASE OF OPERATING LEASE.
05/08/2004
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22
EARNINGS PER SHARE – AS 20
•
BASIC AND DILUTED EARNING PER SHARE SHOULD BE
DISCLOSED ON THE FACE OF THE P & L STATEMENT.
•
BASIC EARNING PER SHARE = NET PROFIT OR LOSS
AVAILABLE TO EQUITY SHAREHOLDERS / WEIGHTED
AVERAGE NO. OF EQUITY SHARES OUTSTANDING.
•
DILUTED EARNING PER SHARE MAY ARISE IN THE CASE
OF CONVERTIBLE DEBENTURES, OPTIONS ETC.
•
BASIC & DILUTED EARNING PER SHARE SHOULD BE
ADJUSTED FOR ALL PERIODS PRESENTED IN BONUS,
SHARE SPLIT SITUATIONS.
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23
CONSOLIDATED FINANCIAL
STATEMENTS – AS 21, AS 23 & AS 27
•
PARENT COMPANY SHOULD
FINANCIAL STATEMENTS IN
FINANCIAL STATEMENTS.
PRESENT CONSOLIDATED
ADDITION TO SEPARATE
•
CONSOLIDATION ON THE FOLLOWING BASIS:
-
SUBSIDIARIES – LINE BY LINE CONSOLIDATION (AS 21)
-
ASSOCIATES (20% VOTING INTEREST) –
EQUITY METHOD (AS 23) &
- JOINT VENTURE – PROPORTIONATE CONSOLIDATION
(AS 27)
•
GOODWILL / CAPITAL RESERVE ARE TO BE DETERMINED
AND ACCOUNTED.
•
INTRA-GROUP
ELIMINATED.
05/08/2004
BALANCES
AND
RBI - PUNE
TRANSACTIONS
TO
BE
24
ACCOUNTING FOR TAXES ON INCOME - AS 22
SCOPE & OBJECTIVE
• MATCHING OF TAXES AGAINST REVENUE.
• BRIDGE THE GAP BETWEEN REPORTED INCOME AND
TAXABLE INCOME
• IF THE STANDARD IS APPLICABLE TO AN ENTERPRISE
THEN ALL OTHER ENTERPRISES OF THE GROUP SHALL
FOLLOW THE STANDARD - PROVIDED CONSOLIDATED
FINANCIALS ARE BEING PREPARED.
• IMPORTANT TERMS:
-
TAX EXPENSE (TAX SAVING)
CURRENT TAX
DEFERRED TAX
TIMING DIFFERENCE
PERMANENT DIFFERENCE
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25
AS 22- PERMANENT vs TIMING
•
ORIGINATION AND CAPABLE OF REVERSAL REQUIREMENTS
•
GOING CONCERN CONCEPT VS. ITEM BY ITEM
•
PARTIAL PROVISION VS. FULL PROVISION
RECOMMENDED IN GUIDANCE NOTE]
•
AS 22 RECOGNISES ONLY FULL PROVISION METHOD
•
TIMING DIFFERENCES LEAD
LIABILITIES.
•
DEFERRED TAX ASSETS:
– DISALLOWANCE U/S 43B, PROVISION FOR NON PERFORMING
ASSETS [NBFC]
•
DEFERRED TAX LIABILITIES:
- DIFFERENCE IN WDV BETWEEN BOOK & IT, DEFERRED
IN BOOKS VS FULLY ALLOWED IN IT AND VICE VERSA.
05/08/2004
TO
RBI - PUNE
[BOTH
WERE
DEFERRED TAX ASSETS
/
26
AS –22 RECOGNITION
•
TAX EXPENSE (CURRENT TAX + DEFERRED TAX ) BE INCLUDED IN P
& L ACCOUNT
•
DEFERRED TAX LIABILITIES - TO BE FULLY PROVIDED FOR
•
DEFERRED TAX ASSETS - TO BE RECOGNISED ON THE BASIS OF
“PRUDENCE”
•
PRUDENCE:
- DEFERRED TAX ASSET - REASONABLE CERTAINTY (FAIR/
PREDICTABLE AND SENSIBLE )
- UNABSORBED DEPRECIATION & CARRY FORWARD LOSSES VIRTUAL CERTAINTY (VERY NEARLY THE THING DESCRIBED)
•
•
VIRTUAL CERTAINTY - SUPPORTED BY CONVINCING EVIDENCE
NATURE OF EVIDENCE TO BE DISCLOSED
•
IAS-12
•
FAS-109 - “MORE LIKELY THAN NOT” APPROACH [ JUST OVER 50%]
05/08/2004
- “PROBABLE” APPROACH [GENERALLY 70% AND ABOVE]
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27
AS-22 - MEASUREMENT & DISCLOSURE
•
DEFERRED TAX ASSETS BE REVIEWED EACH YEAR .
•
CURRENT TAX
•
DEFERRED
TAX
TAX
RATES
ENACTED/
SUBSTANTIVELY ENACTED BY THE BALANCE SHEET
DATE.
NETTING OFF IS PERMISSIBLE.
•
- APPLICABLE TAX RATES
•
DEFERRED TAX ASSETS AND LIABILITIES SHOULD
BE DISCLOSED UNDER A SEPARATE HEADING FROM
CURRENT TAX ASSETS AND LIABILITIES
•
MAJOR COMPONENT WISE BREAK-UP
DISCLOSED IN THE NOTES TO ACCOUNTS.
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TO
BE
28
INTERIM FINANCIAL REPORTING – AS 25
•
CLAUSE 41 OF THE LISTING AGREEMENT
MANDATORY FOR LISTED COMPANIES.
•
RECOGNITION AND MEASUREMENT BY AS 25 AND
DISCLOSURE BY SEBI’S FORMAT IN THE CASE OF LISTED
COMPANIES.
•
SAME ACCOUNTING POLICIES AS ANNUAL TO BE FOLLOWED
IN PREPARING INTERIM REPORTS.
•
MATERIALITY DETERMINES RECOGNITION OF AN ITEM FOR
INTERIM REPORTING.
•
TAX EXPENSE IS DETERMINED ON THE BASIS OF ESTIMATED
AVERAGE ANNUAL INCOME-TAX RATE – INTEGRAL METHOD.
•
APPLICABILITY OF CHANGE IN THE TAX RATES (SUCH AS
EDUCATION CESS) IN THE INTERIM PERIODS – POSITION
CLARIFIED BY ICAI.
05/08/2004
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MAKES
IT
29
INTANGIBLE ASSETS – AS 26
• INTANGIBLE ASSETS SHOULD SATISFY THE TESTS OF
IDENTIFIABILITY, CONTROL & FUTURE ECONOMIC
BENEFITS.
• INTANGIBLE ASSETS SHOULD BE RECOGNISED ONLY IF
FUTURE ECONOMIC BENEFITS WOULD FLOW AND COST
CAN BE MEASURED.
• DEPRECIATION ON INTANGIBLE ASSET SHOULD BE
ALLOCATED ON A SYSTEMATIC BASIS OVER USEFUL LIFE
(REBUTTABLE PRESUMPTION IS LIFE WILL NOT EXCEED
10 YEARS).
• DISTINCTION
BETWEEN
RESEARCH
DEVELOPMENT PHASE IS CRUCIAL.
PHASE
&
• SEPARATE DISCLOSURES TO BE MADE FOR ACQUIRED
AND SELF-GENERATED INTANGIBLE ASSETS.
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30
IMPAIRMENT OF ASSETS – AS 28
•
•
•
•
•
•
IMPAIRMENT TEST TO BE MADE AT EACH BALANCE
SHEET DATE.
BOTH
EXTERNAL
&
INTERNAL
SOURCES
OF
INFORMATION TO BE RESORTED TO DETERMINE
IMPAIRMENT LOSS.
IMPAIRMENT
LOSS
=
CARRYING
AMOUNT
–
RECOVERABLE AMOUNT.
IF ASSET IS NOT INDEPENDENT, THEN IMPAIRMENT
SHOULD BE ASCERTAINED FOR CASH GENERATING
UNIT TO WHICH THE ASSET BELONGS.
IMPAIRMENT LOSS CAN BE REVERSED IN SUBSEQUENT
PERIOD IF NO LONGER EXISTS.
FINANCIAL
ASSETS
EXCLUDED
FROM
ITS
APPLICABILITY – POSITION REGARDING FINANCE
LEASE, HIRE PURCHASE, HYPOTHECATION LOAN ?
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31
TAX ISSUES - DIRECT TAXES

STANDARD VS CBDT CIRCULAR [ NO. 2 OF 2001 ]

LESSOR CONTINUES TO CLAIM DEPRECIATION

TWO DIFFERENT SETS OF ACCOUNTS REQUIRED

VEHICLE LEASING & DEPRECIATION
- COMMERCIAL VEHICLE ENTITLED TO HIGHER
DEPRECIATION
- MADAN & CO 254 ITR 445 (MAD.)
DEPT. SLP DISMISSED BY SUPREME COURT IN
CIT vs. MGF (INDIA) LTD [2003] 262 ITR 2 [STAT.]

DEPRECIATION ALLOWABLE TO HIRER (CBDT CIRCULAR
NO.9 OF 1943)
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32
TAX ISSUES - DIRECT TAXES[contd]

DUAL METHOD OF RECOGNISING HP INCOME
- CHENNAI TRIBUNAL’S DECISION IN ASHOK
LEYLAND FINANCE CASE -80 ITD 560 (CHE.)

PROVISION FOR NPA AND ITS ALLOWABILITY
- CHENNAI TRIBUNALS’ DECISION IN OVERSEAS
SANMAR DECISION
- AMENDMENT IN 36 (1) (VII)
- WRIT PETITION IN MADRAS HIGH COURT & STAY
ORDER.

INCOME DEFERMENT ON NPA
SEC 43D BENEFIT DEPRIVED
- WRIT PETITION IN MADRAS HIGH COURT & STAY
ORDER.
- RECENT DECISION OF DELHI TRIBUNAL – TEDCO
INVESTMENT & FINANCIALS SERVICES PVT LTD
vs. DCIT [2003] 87 ITD 298 [DEL]
05/08/2004
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33
TAX ISSUES - DIRECT TAXES[contd]
 ADDITIONAL FINANCE CHARGES
NOTIONAL VS. ACTUAL ACCRUAL
 SOFTWARE GIVEN ON LEASE
REVENUE OR DEFERRED REVENUE
 TDS ON HP FINANCE CHARGES
NOT APPLICABLE
INSTRUCTION OF CBDT DATED 16/11/1981.
 TDS ON INTEREST ON HYPOTHECATION LOAN
ALL CATEGORIES OF BORROWERS EXCEPT INDIVIDUALS / HUF
WITH TURNOVER LESS THAN RS.40 LAKHS LIABLE TO DEDUCT
TAX ON INTEREST PORTION OF THE INSTALMENT AT THE
APPLICABLE RATES.
 REPAYMENT OF LOAN IN EXCESS OF RS.20,000/- SHALL NOT BE IN CASH –
BORROWERS TO TAKE CARE OF COMPLIANCE OF SEC 269T.
 TDS ON PUBLIC DEPOSITS
DECLARATION FOR NON-DEDUCTION OF TDS - FORM 15H BY
SENIOR CITIZEN AND FORM 15G BY OTHERS.
DTAA RATES FOR NRIS
05/08/2004
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34
TAX ISSUE - SALES TAX
HIRE PURCHASE

‘DELIVERY’ - AFTER 46TH AMENDMENT

SINGLE POINT LEVY AND LOCALISATION OF `SALE’

INTER-STATE FORMALITIES

WHETHER FINANCE CHARGES FORMS PART OF TURNOVER SC DECISION IN JAI BHARAT CASE (120 STC 001)

USED HP TRANSACTIONS/HYPOTHECATION – SUNDARAM
FINANCE VS STATE OF KERALA – 17 STC 489

REPOSSESSION AND SALE.

RESALE TAX – MAHARASHTRA (0.5%), KARANATAKA (1.5%)
& TAMIL NADU (1%).

VAT & ITS EFFECT ON HIRE PURCHASE.
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TAX ISSUES - SALES TAX LEASE

INCIDENCE OF TAX –TAXABLE EVENT – ‘TRANSFER OF
RIGHT TO USE GOODS

TAXABLE EVENT – EXECUTION OF AGREEMENT IN CASE OF
ASCERTAINED GOODS OR DELIVERY IN THE CASE OF
UNASCERTAINED GOODS.

INTER-STATE AND IMPORT LEASE TRANSACTION – NOT
LIABLE FOR TAX UNDER THE STATES SALES TAX LAWS.

SALE AFTER TERMINATION - ANY SALE MADE ON NORMAL/
FORECLOSURE OF THE CONTRACT IS A SALE MADE BY THE
FINANCE COMPANY TAXABLE, IF NOT SUFFERED LOCAL TAX
ALREADY - SALE TO BE MADE NORMALLY TO NOMINEE OF
LESSEE

CONSEQUENT UPON RECENT CST AMENDMENT, INTERSTATE LEASE TRANSACTION EXIGIBLE TO CST.

C FORMS CAN BE ISSUED FOR THE PURPOSE OF PURCHASE
OF ASSET FOR LEASING.
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TAX ISSUES - SERVICE TAX
•
LEVY APPLICABLE TO HIRE PURCHASE & LEASE TRANSACTION
W.E.F 16/07/2001.
SEC 65 (72) (ZM) OF THE FINANCE ACT 1994 & TRU
INSTRUCTION DATED 09/07/2001
•
LEVY AT 8% (PROPOSED 10% + CESS 2%) ON FINANCE
CHARGES, PROCESSING FEE, DOCUMENTATION CHARGES,
LEASE MANAGEMENT FEE.
•
PAYABLE ON RECEIPT BASIS.
•
WRIT PETITIONS FILED CHALLENGING THE CONSTITUTIONAL
VALIDITY OF LEVY AND STAY OBTAINED.
-
SIHPA & ELAI – STAY IN FORCE
-
ALFS & MADRAS HP ASSN – STAY VACATED
•
SC DECISION IN TAMIL NADU KALYANA MANDAPAM ASSN. VS.
UNION OF INDIA [2004] 267 ITR 9 [SC] - SUPPORTS OUR
ASSOCIATIONS’ CLAIM.
•
LOANS ARE BROUGHT INTO THE TAX NET BY THE FINANCE
(NO.2) BILL, 2004. BUT INTEREST SPECIFICALLY EXCLUDED.
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KELKAR’s TASK FORCE REPORT –
DIRECT TAXES
•
•
•
•
•
TASK FORCE REPORT ON FRBM ACT, 2003, RELEASED ON
16.07.2004.
BASIS FOR NEXT YEAR BUDGET PREPARATION.
TWO ALTERNATE SETS OF POLICY MEASURES ON CORPORATE
TAX REFORM.
MAIN DIFFERENCE BETWEEN THE TWO SETS OF MEASURES
IS:
- OPTION 1: GRANDFATHER TREATMENT IN THE CASE OF
EXEMPTIONS / DEDUCTIONS FOR EXISTING
UNITS
ON
1ST SEPTEMBER 2004 & DIVIDEND DISTRIBUTION
TAX
CONTINUES.
- OPTION 2: EXEMPTIONS FOR DEDUCTIONS TO BE
PHASED OUT OVER A PERIOD OF 2 YEARS & NO DIVIDEND
DISTRIBUTION TAX.
COMMON MEASURES – CORPORATE TAX RATES TO BE
REDUCED TO 30% FOR DOMESTIC COMPANIES & 35% FOR
FOREIGN COMPANIES.
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KELKAR’s TASK FORCE REPORT –
INDIRECT TAXES
• AN INTEGRATED GOODS AND SERVICES TAX [GST] IS
RECOMMENDED.
• GST WILL REPLACE EXCISE DUTY, SERVICE TAX, SALES
TAX, OCTROI, ENTRY TAX, STAMP DUTIES ETC.
• UNDER GST BOTH CENTRE & STATES EXERCISE
CONCURRENT BUT INDEPENDENT JURISDICTION (GRAND
BARGAIN).
• THREE TYPES OF RATE STRUCTURES PRESCRIBED i.e.
STANDARD, FLOOR & HIGHER RATE.
• STANDARD RATE SHOULD NOT EXCEED 12% & 8% FOR
CENTRAL - GST & STATE – GST.
• SEPARATE SCHEME OF TREATMENT FOR FINANCIAL
SERVICES INDUSTRY WHICH INCLUDES ALL REGULATED
FINANCE COMPANIES REGISTERED WITH RBI.
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THANK YOU
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