Applicability of
Accounting Standards
On Corporate Entities(Companies)
And Non Corporate Entities
And
Relates with Tax Audit u/s 44AB
AS of ICAI Vs AS under CAR 2006
AS of ICAI
Applicable
Only to
NCEs
Three
Levels
prescribed
CAR 2006
Applicable
Only to
Companies
Two
Levels
prescribed
Relaxation mainly for disclosures and not for recognition and
measurement
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
The Notified standards
by and large follow the
ICAI standards except for
certain differences
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
a
a
AS 3, 17
a
r
AS 21, 23 and 27 (Only if
regulator requires
consolidation or entity
prepares consolidated
financial statements)
a
a
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
a
a
a
AS 3 and 17
a
r
r
AS 18 and 24
a
a
r
AS 21, 23 and 27 (Only if entity
prepares consolidated financial
statements)
a
r
r
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/ SMC
Enterprises which are not Level I enterprises but fall in
any one or more of the following categories are
classified 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 the
accounting period.
(iii) Holding and subsidiary enterprises of any one of the
above at any time during the accounting
period.
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 of
Companies (Accounting Standards) Rules 2006?
Any impact with the introduction of
Roadmap 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
contract method
Vs
completed
› 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
expenditure
criteria
for
Subsequent
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
Depreciation
value
for
Income
Tax
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
charged off
›
Depreciation rate specifically mentioned
under IT Act
 Distinction between Intangible Asset and
Computer Software
intangibles
to
be
fully
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
Obligation
towards
Asset
Retirement
AS 30,31 and 32 vis-à-vis Tax Audit

Financial Instruments Standards

Fair valuation

Mark to Market Losses
Common pitfalls in reporting

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

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
Common pitfalls in reporting

TDS payable account analysis Vs Chapter XVII-B
disclosures
 Year end provisions Vs during the year
payments

Non-deduction of TDS on outstanding expenses
 Liabilities outstanding under current liabilities
 Year end provisions on estimated basis

Reconciliation of quantitative details
 Raw Materials
 Finished goods