The Hindu Business Line : Numbers need to make sense in financial reports

PATEL Co incurred an inventory loss in the second quarter owing to a fall in market price. However, it is expected that the price would return to previous level by the end of the year. While preparing interim income statements, the company wonders when it should report the loss.

Now, push that problem at the back of your mind and answer this: "Conceptually, interim financial statements emphasise: a) timeliness over reliability; b) reliability over relevance; c) relevance over comparability; d) comparability over neutrality."

Which one? Next, look at the problem of Arid Lands Co. It is engaged in extensive exploration for water in the desert (or, in Chennai?) If upon discovery of water the company does not recognise any revenue from water sales until the sales exceed cost of exploration, what is the basis of revenue recognition: production; cash (or collection); sales (or accrual); or sunk cost (or cost recovery)?

Jawahar Lal has answers to these and more problems in Corporate Financial Reporting Theory and Practice. Catch up with reporting.

Law for lenders and borrowers

FOR lenders who are stuck with troublesome borrowers there is help in the form of thee new securitisation regime. M. R. Umarji's book titled Law relating to Securitisation & Reconstruction of Financial Assets & Enforcment of Security Interest, also called SARFAESI, provides a section-wise commentary on the important legislation.

The author also speaks of the need to have `a just practice code for lenders' as also `code of conduct for borrowers'. Banks and financial institutions are not permitted to create special purpose entities (SPEs) for undertaking securitisation transactions, notes Umarji in his preface. "Recent crises in the US, involving use of SPEs to conceal huge losses and other liabilities, has already triggered a total review of their system."

The book discusses an allied piece of legislation, the Recovery of Debts due to Banks Act. And case laws are woven into the commentary. For instance, in the Vijay Ramniklal case it was held that if an employee committed fraud and misappropriated money, the amount recoverable from him was not debt.

Whether you are a borrower or a lender, you owe it to yourself to be familiar with securitisation law.

Get to know TDS

A DO-IT-YOURSELF guide on tax deduction at source is TDS: How to meet your obligations. The first chapter is on what all employees detest, TDS on salary. Though the book cannot reduce your tax liability through some magic, it can make the sting understandable. That's because legal provisions have been lucidly paraphrased, appropriate references to precedents and circulars given, and to rub in the theory, there are illustrations.

You would know the basics too — such as that deduction is to be made when salary is `actually' paid, current employer can deduct tax for salary received from former employer, and when employee gives his employer proof of investments made the latter cannot probe into the source of investments because that would fall within the domain of the assessing authority.

Try answering these questions: Is there any TDS when an ad agency makes payment to artists, actors and models? Is it the responsibility of the e-TDS intermediary to ensure accurate transmission of e-TDS return to the e-filing administrator?

If interest of Rs 1 lakh is to be paid to a non-resident individual free of tax, compute the grossed up sum? One last question: Are you sufficiently motivated to study about TDS?

On seizures when searches happen

WE ARE all seekers, philosophers would say. However, when the taxman engages in such an exercise in right earnest, it goes by what people call `raid', so much so the Kelkar Committee noted: "In public perception, the identity of the Income-tax Department is `raids'." So, "to explain the otherwise unpalatable and complex provisions," here is a book titled, Search Seizure and Survey.

It all starts with the `behind the screen' investigation by the Department. Then comes the `front door' entry which signals the commencement of search operations. Culmination is the seizure of books of account, documents and assets. If that reads like a story, that's what the book tries to lead readers through, by laying out the law and concepts, explanations and judgments.

Interestingly, the 1922 Act did not originally contain any provision for search and seizure. Things changed by 1938 and an amendment was moved for the purpose, but there was stiff opposition. Then came the big war and war-widows, but a whole category of people called war-profiteers emerged. The process that started then saw its fruition when in 1956 the search and seizure power got its place in the I-T Act.

Search for the book when you go shopping the next time.

Building blocks of company

YOU have a great idea and want to set up shop. How to form a Private Company/ Public Company/ Producer Company, by V. L. Iyer, can guide you right from the basics, such as different forms of business organisation, advantages of company form, nuts and bolts of formation, naming business, preparing the Memorandum of Association and Articles, filing documents and so on, right up to amalgamation and merger.

Producer company is a new arrival in the family of business forms. Check if you know the terms that are specific to such companies.

For instance, `limited return' is the maximum dividend as specified by the Articles; `patronage bonus' refers to payments made by the company out of its surplus income to members in proportion to their `patronage'; and `producer' is not somebody who finances movies but `any person engaged in any activity connected with or relatable to any primary produce'. Essential dose of company law before you find yourself in a company.

(Books courtesy: Taxmann Allied Services P Ltd, www.taxmann.com)

Tailpiece

"The poor have a problem of counting, because they never get to see big numbers."

"And the rich?"

"Their problem is of accounting the big numbers."

ReadingRoom@TheHindu.co.in

D. Murali

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