PRESENTATION ON ACCOUNTING FOR TAXES ON INCOME

Document Sample
PRESENTATION ON ACCOUNTING FOR TAXES ON INCOME Powered By Docstoc
					ACCOUNTING FOR

TAXES ON INCOME


  June 20, 2008
                 AGENDA


   The old story
   Deferred tax: mandatory recognition?
   Losses and deferred taxation
   Tax holidays
   Tax losses under “Capital Gains”
   Deferred tax and MAT
   Deferred tax and amalgamations
   Income statement Vs. balance sheet approach
   Measurement
   Disclosures
   International GAAP
         THE OLD STORY



   ACCRUAL/MATCHING CONCEPTS

   INTER PERIOD TAX ALLOCATION

   TAXABLE Vs. ACCOUNTING INCOME

   TIMING Vs. PERMANENT DIFFERENCES




                                       Contd…..
        THE OLD STORY ….contd


   GUIDANCE NOTE
    -   Accounting for Taxes on Income
    -   Effective 1991
    -   Recommended: Tax Effect Accounting Method
    -   Permitted: Taxes Payable Method
    -   Withdrawn: effective Apr 2001


   ACCOUNTING STANDARD
    - Accounting for Taxes on Income
    - Tax Effect Accounting Method
    - Effective Apr 2001
DEFERRED TAXATION: MANDATORY RECOGNITION?



        ACCOUNTING STANDARD

         - Recognize DT for all timing differences

         - Consideration of prudence for DTA


        BASIS

         - Concept of “Full Provision” and not “Partial Provision”



                                                               Contd…..
DEFERRED TAXATION: MANDATORY RECOGNITION?
                  Contd…

         FULL PROVISION

          - Recognize tax effect of all transactions

          - Whether current or deferred tax


         PARTIAL PROVISION

          - Excludes tax effect of timing differences which
            may not reverse for a considerable period



                                                              Contd…..
DEFERRED TAXATION: MANDATORY RECOGNITION?
                   Contd...


            PARTIAL PROVISION

             - Involves subjective judgments
                  Future time frame
                  Future liability estimation
                  Future profitability
                  Future capital expenditure

             - Rejected internationally
LOSSES AND DEFERRED TAXATION
         a judgmental call

   INDICATORS

    - History of recent losses
    - Existence of carried forward tax losses….


   RECOGNITION

    - Recognize deferred tax assets if:
          Virtual certainty
          Supported by convincing evidence


                                                  Contd…..
 LOSSES AND DEFERRED TAXATION….contd
             a judgmental call

        CONCEPT
         - Virtual certainty: an Indian concept
             x Forecast of performance?
              Convincing evidence: a matter of fact
              Not a matter of perception


        CONCLUSION
         - Check existence of deferred tax liabilities
         - Recognize deferred tax assets:
              if supportable convincing evidence or
              only to the extent of deferred tax liabilities


               PRACTICALLY TOO RESTRICTIVE

AT THE TIME OF REVERSAL, DTL WOULD LEAD TO TAXABLE INCOME
    DEFERRED TAXATION AND TAX HOLIDAYS

    TIMING DIFFERENCES REVERSING DURING TAX
     HOLIDAY

     - No recognition

     - Do not meet the criteria of asset/liability

     - Probably, will not be realized/settled


    TIMING DIFFERENCES REVERSING AFTER TAX
     HOLIDAY

     - Recognize, when they originate


                                                     Contd…..
DEFERRED TAXATION AND TAX HOLIDAYS contd…


           DEDUCTION AVAILABLE (SAY U/S 80IA/IB)
            - Permanent difference


           DIFFERENT TAX TREATMENT OF ITEMS
            - Timing difference


           DURING TAX HOLIDAY
            - Current tax may be nil
            - Deferred tax exists (to reverse after tax holiday)



DIFFERENCES WHICH ORIGINATE FIRST ARE CONSIDERED TO REVERSE FIRST
    TAX LOSSES: “CAPITAL GAINS”

   LOSSES UNDER THE HEAD CAPITAL GAINS
    - Timing difference: if not set off and carried forward

    - Normally not due to operating activities

    - Timing difference only for max. 8 years


   BEING A CRRIED FORWARD LOSS
    - Consideration of prudence

    - Virtual certainty with convincing evidence, e.g.,
         Sale of asset after balance sheet date
         Binding sale agreement


           PRACTICALLY TOO RESTRICTIVE                        Contd…..
TAX LOSSES: “CAPITAL GAINS” contd….



      MEASUREMENT

       - Long term loss (requires long term gain)

       - Short term loss

       - Set off principles
               DEFERRED TAX AND MAT



   IF TAXES UNDER 115 JB


    - Measure DT at regular rates

   IF REVERSALS EXPECTED IN PERIOD COVERED BY 115 JB

    - Measure DT at regular rates




                                                Contd…..
     DEFERRED TAX AND MAT contd…
        WHY NOT USE MAT RATE?


   CONCEPT OF FULL PROVISION METHOD


    - Measure all timing differences

    - Avoid substantial assumptions:
           Timing differences that may not reverse for a long period
           Future time frame
           Future liability estimation
           Future profitability
           Future capital expenditure
DEFERRED TAX AND AMALGAMATIONS



       ACCOUNTING STANDARD 14




       NO SPECIFIC GUIDANCE ON DT




                                     Contd…..
DEFERRED TAX AND AMALGAMATIONS contd…


       ALLOCATION OF CONSIDERATION
         - Basis fair value

       VALUATION FOR TAXATION
         - No change (base as applicable to transferor)

       FAIR VALUE ALLOCATION
         - Akin to revaluation for taxation
         - Constitute permanent difference



               INCOME STATEMENT APPROACH                  Contd…..
DEFERRED TAX AND AMALGAMATIONS contd…
     When DTA not recognized by transferor


(A) AMALGAMATION IN THE NATURE OF PURCHASE

   ALLOCATION OF CONSIDERATION: BASIS FAIR VALUES

    - treatment at the time of amalgamation?

    - in first annual accounts after amalgamation?

    - in subsequent periods?


ASSUMPTION: BENEFIT OF DTA IS IN BUILT IN PURCHASE CONSIDERATION

                                                          Contd…..
DEFERRED TAX AND AMALGAMATIONS contd…
     When DTA not recognized by transferor


(B) AMALGAMATION IN THE NATURE OF PURCHASE

   ALLOCATION OF CONSIDERATION: BASIS BOOK VALUES

    - treatment at the time of amalgamation?

    - in first annual accounts after amalgamation?

    - in subsequent periods?


ASSUMPTION: BENEFIT OF DTA IS IN BUILT IN PURCHASE CONSIDERATION

                                                          Contd…..
DEFERRED TAX AND AMALGAMATIONS contd…
     When DTA not recognized by transferor


   (C) AMALGAMATION IN THE NATURE OF MERGER

      ASSETS AND LIABILITIES AT BOOK VALUES

       - treatment at the time of amalgamation?

       - in first annual accounts after amalgamation?

       - in subsequent periods?


  ASSUMPTION: MERGED ENTITIES CONTINUING SINCE BEGINNING
        INCOME STATEMENT
               Vs.
     BALANCE SHEET APPROACH

   “BLOCK OF ASSETS” CONCEPT
     - Depreciation on WDV of block
     - Reduction of sale proceeds from block
     - Results in timing difference

   REVALUATION: THRU BALANCE SHEET
     - Additional depreciation from revaluation reserve
     - Results in timing difference

   IFRS AND US GAAP
     - Balance sheet approach
                MEASUREMENT


   TAX RATES
     - “Enacted” or “substantively enacted”
     - Announcements by the Govt may lead to
       substantive effect

   AVERAGE RATE
     - If different tax rates for different income levels




                                                            Contd…..
     MEASUREMENT contd….


   DISCOUNTING TO PRESENT VALUE
     - Neither required nor permitted

    - Reliable determination of reversal:
           Subjective
           Impracticable
           Complex


    - if permitted but not required:
           May lose comparability
               DISCLOSURES


   SCHEDULE VI PART I
     - Balance sheet format

    - As near thereto as circumstances admit

    - Flow not entirely on liquidity basis

   DISCLOSE SEPARATELY FROM CURRENT
    ASSETS/LIABILITIES


                                               Contd…..
        DISCLOSURES contd…


   DEFERRED TAX ASSETS
     - Normally more liquid compared to fixed
       assets/investments
     - Less liquid compared to current assets
     - Show after investments

   DEFERRED TAX LIABILITIES
     - Show after unsecured loans

   DISCLOSE COMPONENTS
       INTERNATIONAL GAAP


   APPROACH

    - Income statement: focus timing differences

    - Balance sheet: focus temporary differences

    - Certain differences may be “temporary” but
      not “timing”

           Say revaluation of fixed assets



       IFRS/US: BALANCE SHEET APPROACH
                                                   Contd…..
       INDIA: INCOME STATEMENT APPROACH
     INTERNATIONAL GAAP contd…


   LEVEL OF CERTAINTY

    - Reasonable/virtual certainty   INDIA

    - Probable                       IFRS

    - More likely than not           USA
                 AGENDA


   Background and the old story
   Deferred tax: mandatory recognition?
   Losses and deferred taxation
   Tax holidays
   Tax losses under “Capital Gains”
   Deferred tax and MAT
   Deferred tax and amalgamations
   Income statement Vs. balance sheet approach
   Measurement
   Disclosures
   International GAAP (a broad view)
THANK YOU FOR YOUR KIND ATTENTION
 PRESENTOR: Kaushal Kishore

EMAIL: kaushalkishore@kpmg.com

   PHONE: +91 9811103133

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:4
posted:3/7/2012
language:English
pages:30