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In Verse 30, Chapter I of the Bhagavad Gita, on seeing the phalanx of warriors against whom he is set to wage battle, Arjuna laments that he is unable to keep himself composed and that his mind is not steady. Accountants and auditors would be expressing similar sentiments on seeing the series of accounting standards confronting them. After 32 non-converged (AS) and 38 converged Accounting Standards (Ind-AS), a new set called Tax Accounting Standards (TAS) blessed by the Central Board of Direct Taxes ( CBDT) are doing the rounds. The drafts of two accounting standards on construction contracts and government grants have been issued.
Necessity
An elementary question pops up even before we delve into the accounting standards- are TAS necessary? We have lived with differences between AS and tax policies ever since both evolved over a period of time. Sections of the Income tax Act that allow or disallow certain items of income or expenditure are mini-accounting standards by themselves. Accounting standards on deferred taxes ensure that most of these differences find their way in or out of financial statements over a period of time.
TAS seems to be taking the accounting standards on income taxes head-on. Discussion paper on TAS is candid about why the earlier attempt in 2003 was blotched- extensive amendments to the Income-Tax were needed and accounting standards issued by the Institute of Chartered Accountants of India (ICAI) were evolving. The position in 2011 is not very different – amendments would need to be made to the Direct Tax Code (DTC) which has a settled look to it and Ind-As standards have not yet been set in stone. Exposure drafts of standards on consolidation, investment in other entities and agriculture have just been issued by the ICAI. Taking a holistic view, the need for TAS at this point in time does not come across as a dire necessity. The only benefit of TAS would seem to be standards that assist in the preparation of a tax balance-sheet- a necessity as per international accounting standards.
Standards
The choice of construction contracts and government grants as the launch-pad for TAS is an attempt to solve one of issues that the discussion paper raises- in the absence of notification of Accounting Standards under the Act, uncertainty and litigation continues on various accounting related issues such as accounting for construction contracts, foreign exchange fluctuations and government grants.
There are other marquee accounting standards wherein there can be stark differences between accounting and tax profits - Revenue Recognition, Property, Plant and Equipment, Impairment of Assets and Intangible assets stand out as shining examples. The recognition and measurement norms in the draft TAS and present accounting standards are not as different as chalk and cheese. Contract revenue consists of the initial amount of revenue agreed in the contract, including retentions and variations in contract work, claims and incentive payments. In the case of Government grants, the standard stipulates that grants for fixed assets are reduced from the assets while all other grants shall be recognized as income over the same period over which the cost of meeting such obligations is charged to income. The only exception to the above is grant that is receivable as compensation for expenses or losses incurred in a previous financial year or for the purpose of giving immediate financial support to the person with no further related costs which shall be recognised in the year in which it is receivable.
Disclosure norms are a part of the TAS. As both sets of accounting standards in India mandate disclosure norms with the ones in Ind-AS exhaustive, most of the disclosure requirements of TAS would be met making the exercise repetitive. . Legislating all contemplated TAS before the DTC is introduced is a race that is best not run. If introduced, a single document that differentiates TAS from the other accounting standards on recognition and measurement would be par for the course.
(The author is a Bangalore-based chartered accountant.)
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