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TO MY mind, cost accounting should be married with financial accounting. Yet the accounting standards do not aim for this. Why? -- S. Sridhar, Hyderabad

Integrated accounts have always been talked of. In fact, for the purposes of internal control, enlightened managements do insist upon detailed accounting that at once classifies expenses into their nature as well as by the cost/profit centre for which it enures. The cost/profit centre-wise booking is possible when an expense can be allocated. But when it has to be apportioned such apportionment is not built into a voucher but is done periodically.

Yes, accounting standards, except the one on segment reporting, do not insist upon cost-centre-wise reporting. And there is a reason for it — a shareholder for whom the annual accounts is meant would be inundated in the details if he is supplied with surfeit of information.

In fact, many shareholders are already complaining of information overload in the US with annual reports containing a mass of verbiage that a lay shareholder cannot sift. But I do concede the importance of costing information. I for one feel, the shareholders would, for example, find the classification as to fixed and variable cost quite useful.

Small car

OUR company is thinking of buying/hiring cars with cubic engine capacity not exceeding 1.6 litres (small car) for senior executives who can use the same both for official and personal purposes. Running and maintenance expenses will have to be borne by the employees. Suppose a senior executive prefers a big car and is prepared to take on the additional cost through recovery in instalments from his salary, will it impact on the tax treatment of perk on this account? Can a similar scheme, this time round, for two-wheelers, be introduced for junior executives? -- T. A. P. Krishanan, e-mail

Since the car is proposed to be owned or hired by the employer and would be maintained by the employee, the taxable value of the perquisite would be Rs 400 or Rs 600 a month according as the car is small or big. The fact that the extra cost incurred on a big car vis-à-vis the small car is going to be recovered from the employee is of no consequence.

I take it that the senior executives so volunteering to take on the additional burden would have secured a commitment from the employer for sale to them of the car in a couple of years. But whether such a commitment has or has not been obtained does not alter the tax treatment of this perk. The existence of such a commitment, however, renders accounting for such recovery easy — advance towards eventual sale. Recovery sans such commitment would result in the actual cost being whittled down resulting in grant of lower depreciation to the employer.

As far as a similar scheme with reference to two-wheelers, well the income-tax rules contain no specific rule to deal with this. Therefore, one has to invoke the residuary rule 3(8) which says the value of all other benefits would be evaluated on the basis of cost to the employer. Since the scooter would be maintained by the employee, the only benefit he is getting from the employer is depreciation.

In other words, annual depreciation of the two-wheeler would become the taxable value of the perk for the employee concerned. While the income-tax rule has as a rule of thumb provided for a 10 per cent depreciation on actual cost for cars for the purposes of evaluating perks, it has not provided any for two-wheelers.

Forex forest

I AM A student, and I want to know the meaning of the term `forex'? -- P. Prashant Nair, Bangalore

`Forex' is a shorthand expression to denote foreign exchange. Simply put, to a layman, it refers to foreign currency and the strength of the economy for policymakers, including the RBI. As an Indian, you would be familiar with Indian rupees, which is the medium of transactions inside India.

But while transacting with a person outside India, Indian rupees cannot be the medium. The US dollar has almost an universal acceptability, though lately its invincibility is being challenged by the euro. Be that as it may, India right now has roughly around $75 billion, which includes money which can be withdrawn anytime. This category is mainly represented by NRI deposits (lured by higher rates of interest vis-à-vis the ones abroad) and the money brought into India by foreign institutional Investors (FIIs) for investment in the Indian bourses and which is freely repatriable.

Sceptics believe that bulk of our forex reserves comprise `hot money', money which can be withdrawn anytime and, therefore, there is nothing to crow about. A country can derive satisfaction if its forex reserves are constituted in the main from foreign trade surplus and foreign direct investment (FDI).

You would appreciate FDI is the most durable because equity is the most permanent form of investment. The best situation would be when the Indian rupee itself gains universal acceptability, thus rendering accumulation of US dollars redundant. But admittedly this would remain a pipe dream for a long time as of now.

Related party

WOULD the following two transactions need compliance with AS-18 (Related Party Transactions): i) contribution to a trust of which the key trustee is the managing director of the reporting enterprise; and ii) transaction with an enterprise which is de jure controlled by a relative of the MD of the reporting enterprise who effectively controls the former enterprise as well? -- Badhri, Coimbatore

Your doubts perhaps stem from the language of para 3 of AS-18 which draws the contours of the sweep of the standard. One of the situations contemplated is transaction with key management personnel and relatives of such personnel. In the two situations envisaged by you, the dealings are not directly with the management personnel or relatives but with the enterprises they control.

I think this hardly makes any difference because if you read the definition of `related party' given in the standard, the accent is on the ability of one party to control the other. This is the key touchstone.

If two enterprises allow each other to be influenced to a significant extent, then they expose themselves to AS-18 reporting requirements as well.

(ASK! Send in your queries on accounting, auditing, corporate law and taxation to ask@thehindu.co.in)

S. Murlidharan

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