29 October 2012

EY Tax Alert
Final report of Accounting Standards Committee of CBDT

Executive summary
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This Tax Alert summarizes the key recommendations in the final report
issued in August 2012 by the Accounting Standards Committee
(Committee) constituted by the Central Government (CG) in December
2010. The CG published the report on 26 October 2012.
Section 145 of the Indian Tax Laws (ITL) gave the power, effective
from tax year 1996-97, to the CG to notify Tax Accounting Standards
(Tax AS) to be followed by any class of taxpayers or in respect of any
class of income.
In view of significant developments in convergence to International
Financial Reporting Standards (IFRS), the CG constituted the
Committee in December 2010, comprising officials of the Tax
Authority and professionals. The terms of reference of the Committee
were to study harmonization of accounting standards issued by the
Institute of Chartered Accountants of India (ICAI AS) with the ITL and
to suggest accounting standards for tax compliance under the ITL and
also to deal with the issue of the tax impact of convergence to IFRS.
The Committee has recommended notification of 18 Tax AS for
compliance with the ITL on the issue of harmonization of ICAI AS with
the ITL and has also provided drafts of 14 Tax AS.
The CG has invited comments/suggestions on the recommendations of
the Committee and draft Tax AS by 26 November 2012.

Given the uncertainty surrounding

convergence to IFRS, the Committee has
recommended that the status of transition to
IFRS should be carefully monitored and
appropriate amendments in the ITL,
especially relating to computation of
Minimum Alternate Tax (MAT), should be
considered based on developments in the
future.

Background

Section 145 of the ITL provides that the

taxable income of the taxpayer under the
heads profit and gains of business or
profession (Business head) or income
from other sources (Other sources head)
shall be computed in accordance with
either cash or mercantile system of
accounting that is regularly employed by
the taxpayer. It further provides that the
CG may notify in the Official Gazette,
from time to time, Tax AS to be followed
by any class of taxpayers or in respect of
any class of income.
The object behind introducing a provision
to notify separate Tax AS was that ICAI
AS provides flexibility of alternative
accounting treatments, which make it
possible for a taxpayer to avoid payment
of correct taxes by choosing a particular
system. Therefore, an urgent need was
felt to standardize one or more of the
alternatives in various standards so that
income for tax purposes could be
computed precisely and objectively.
Since the introduction of this provision in
the ITL, the CG has notified two Tax AS in
1996[1] viz., (a) Accounting Standard I,
relating to disclosure of accounting
policies (b) Accounting Standard II,
relating to disclosure of prior period and
extraordinary items and changes in
accounting policies. These standards are
largely comparable to the corresponding
ICAI AS[2].

Constitution of the
Committee
Vide an Order[3] dated 20 December 2010,
the CG constituted the Committee,
comprising officials of the Tax Authority and
professionals, with the following terms of
reference:

To study the harmonization of ICAI AS

with the ITL and to suggest accounting
standards for tax compliance under the
ITL, with relevant modifications.

To suggest a method for determination

of tax base (book profit) for the purpose
of MAT in case of companies migrating to
IND AS[4] in the initial year of adoption
and thereafter.

To suggest appropriate amendments to

the ITL in view of transition to IND AS
regime.

Interim report of the

Committee
The Committee submitted its interim reports
in August 2011 and May 2012. The first
interim report of August 2011 and drafts of
Tax AS on Construction Contracts and
Government Grants were published for public
comments in October 2011.[5]

Final report of the

Committee
The Committee submitted its final report in
August 2012 along with drafts of 14 Tax AS.
After examining the existing set of 31 ICAI
AS, the Committee has recommended an

3
4
5

1
2

Notification No. 9949 dated 25 January 1996

AS-1 and AS-5 of the ICAI

Order No. 134/48/2010-SO(TPL)

Indian Accounting Standards converged to IFRS

Refer EY Tax Alert dated 20 October 2011 Central Government issues

Discussion paper on Tax Accounting Standards as also EY Tax Alert
dated 10 November 2011 Memorandum of Ernst & Young views on
proposed Tax Accounting Standards

approach of notifying independent set of Tax

AS with the object of bringing certainty and
clarity, eliminating alternatives (to the extent
possible) as also to ensure horizontal equity
and uniformity.
A summary of the significant
recommendations of the Committee are as
follows:

Appropriate modification should be

made in the return of income to ensure
compliance with Tax AS. For tax audit
cases, the tax audit report should also
be modified so that a tax auditor is
required to certify that the computation
of taxable income is made in accordance
with the provisions of Tax AS.

Given the uncertainty surrounding

convergence to IFRS, the Committee has
recommended that the status of
transition to IFRS should be carefully
monitored and appropriate amendments
in the ITL, especially relating to
computation of MAT, should be
considered based on any such
developments in the future.

General

Since it is intended that Tax AS should

be in harmony with the ITL, it should be
expressly provided in the Tax AS that, in
case of conflict, provisions of the ITL
shall prevail over Tax AS[6].

Tax AS should be made applicable only

to the computation of taxable income
and a taxpayer need not maintain
separate sets of books of account on the
basis of Tax AS [7]. To set at rest any
future controversy in this regard,
appropriate amendments should be
made to the ITL.

Broadly, the governing principles while

framing Tax AS are reduction of
litigation, minimization of
alternatives and giving certainty to
issues.

Tax AS should be made applicable to all

classes of taxpayers, irrespective of
quantum of turnover/income, with a
view to bring certainty on the issues
covered by Tax AS.

Transitional provisions, wherever

required, should also be notified along
with Tax AS to ensure that there is no
double taxation or non-taxation of any
income in pre and post Tax AS period.

Amendments to the ITL

on specific issues

Suitable amendments be made to the ITL

to provide certainty on the following
issues:

Tax AS on areas not

covered by ICAI AS

To reduce litigation and provide

certainty, Tax AS covering the following
areas which are presently not covered by
ICAI AS[8] may also be considered for
notification under the ITL:

Incidentally, preamble of each draft Tax AS contains a clarification that,

in case of conflict between provisions of the ITL and Tax AS, provisions of
the ITL shall prevail
7

Incidentally, preamble of each draft Tax AS contains a clarification that

it applies for computation of income chargeable under Business head or
Other Sources head and not for the purpose of maintenance of books of
accounts

Allowability of depreciation on goodwill

arising on amalgamation.
Allowability of the provision made for
the payment of pension on retirement or
termination of an employee.

Share-based payment.
Revenue recognition by real estate
developers.
Service concession arrangements (e.g.,
Built Operate Transfer agreements).
Exploration for and evaluation of
mineral resources.

8
The ICAI has issued Guidance Notes on these matters. However,
Guidance Notes are recommendatory in nature and do not have the
same mandatory effect as accounting standards

Areas where separate

Tax AS is not necessary

Tax AS need not be notified in respect of

17 ICAI AS which are listed at Annexure
A to this Tax Alert for reasons specified
therein.

Suggested drafts of Tax

AS

The Committee has suggested drafts of

14 Tax AS. A summary of significant
changes made in each draft Tax AS vis-avis the corresponding ICAI AS, as
explained by the Committee in its report,
is provided in Annexure B to this Tax
Alert.

Comments
The publication of the final report
and draft Tax AS for inviting public
comments represents the
continuation of a commendable
consultative approach adopted by
the CG in the recent past before
introducing any new significant tax
law. This provides an opportunity
to all stakeholders to make
representations on the possible
adverse impacts and/or for making
improvements to address
unintended consequences. It is
necessary for all stakeholders to
carry out an in-depth analysis of
each Tax AS to assess impact on
their taxable income and/or
compliance burden and provide
their recommendations with
support reasons within the time
allowed by the CG viz., 26
November 2012.

Annexure A
Areas identified by the Committee
where separate Tax AS is not
necessary
A. ICAI AS which merely prescribe
disclosure requirements not
affecting computation of taxable
income.

Cash Flow Statements (ICAI AS-3).

Segment Reporting (ICAI AS-17).
Discontinuing Operations (ICAI AS-24).
Earning Per Share (ICAI AS-20).
Consolidated Financial Statements (ICAI
AS-21).
Accounting for Investments in
Associates in Consolidated Financial
Statements (ICAI AS-23).
Interim Financial Reporting (ICAI AS25).

B. ICAI AS whose subject matter is

covered by specific provisions
under the ITL

Accounting for Amalgamations (ICAI AS14).

Employee Benefits (ICAI AS-15).
Segment Reporting (ICAI AS-17).
Related Party Disclosures (ICAI AS-18).
Depreciation Accounting (ICAI AS-6).
Impairment of Assets (ICAI AS-28)

C. ICAI AS issues whereof are

covered by other Tax AS and/or
not relevant under the ITL

Financial Reporting of Interests in Joint

Ventures (ICAI AS-27).
Accounting for Taxes on Income (ICAI
AS-22).

D. ICAI AS which are currently

voluntary and primarily get

covered by Tax AS on Disclosure
of Accounting Policies[9]

Financial Instruments (Recognition and

Measurement, Presentation and
Disclosure) (ICAI AS-30,31 and 32).

Annexure B

Summary of significant changes as

explained in the report of draft Tax
AS suggested by the Committee
from ICAI AS.
Tax AS for Accounting Policies
(Corresponding to ICAI AS-1).

Expected losses or mark-to-market

losses shall not be recognized unless
permitted by any other Tax AS.
Concept of materiality for selection of
accounting policies is omitted as it is not
recognized by the ITL for the purpose of
computation of taxable income.
Accounting policies shall not be changed
without a reasonable cause.[10]

Tax AS for Events occurring after

the End of Tax Year
(Corresponding to ICAI AS-4)

Since ICAI AS-2 does not specifically

prescribe the method of valuation of
inventories of a service provider, the
same should be incorporated in Tax AS
based on international best practices.
Use of standard cost method as a
technique for measurement of cost is
not recommended.

Disclosures relating to events occurring

after the end of the tax year do not
directly impact the computation of
income. Hence, these provisions have
been removed in Tax AS.

Tax AS for Prior Period Expense

(Corresponding to ICAI AS-5)

Tax AS for Valuation of

Inventories (Corresponding to
ICAI AS-2)

To reduce litigation, Tax AS specifically

incorporates the well-established
principle that the value of inventory of a
business as on the beginning of a tax
year shall be the same as the value of
inventory at the end of the immediately
preceding tax year.
Method of valuation of inventory once
adopted by a taxpayer in any tax year
shall not be changed without a
reasonable cause.
Inventory on the date of dissolution of a
partnership firm, association of persons
and body of individuals shall be valued
at net realizable value.

The ITL does not distinguish

extraordinary items from ordinary items.
Hence, provisions relating to separate
disclosure of extraordinary items are not
included in Tax AS[11].
Prior Period Expense shall not be
considered as an allowable deduction in
the tax year in which it is recorded
unless the taxpayer proves that such
expense accrued during the said tax
year [12].

Tax AS on Construction
Contracts (Corresponding to ICAI
AS-7)

Retention money shall be recognized for

computing revenue based on percentage
of completion method.

The Committee has, however, recommended close monitoring of the

mandatory status of these ICAI AS and notification of appropriate Tax AS
based on any developments in the future.

12

ICAI AS-1 permits change if it is considered that the change would

result in a more appropriate presentation

income.

10

11

Currently, notified Tax AS-II requires such separate disclosure.

There is no Tax AS proposed to deal with treatment of prior period

Before reversal of revenue already

recognized as income on account of
uncertainty arising on realizability of
contract revenue, the sum shall be
written off in the books of account in
line with the provisions of the ITL
relating to bad debts.
Pre-construction income in the nature of
interest, dividend and capital gains shall
not be reduced from the cost of
construction but shall be taxed as
income in accordance with the
applicable provisions of the ITL.
Contract costs relating to future activity
shall be recognized as an asset and if
such costs are not realizable then the
same may be allowed under the
provisions of the ITL.
Condition of non-recognition of contract
revenues, if it is not possible to reliably
measure the outcome of a contract, is
not incorporated in Tax AS since it is
subjective in nature and has resulted in
litigation and postponement of tax
liability.
Losses incurred on a contract shall be
allowed only in proportion to the stage
of completion. Future or anticipated
losses shall not be allowed unless such
losses are actually incurred.
Once a contract crosses 25% of the
completion stage, the revenue in respect
of such contract shall be required to be
recognized.

Tax AS for Revenue Recognition

(Corresponding to ICAI AS-9)

Tax AS for Effects of Changes in

Foreign Exchange Rates
(Corresponding to ICAI AS-11)

In case of acquisition of an asset in

exchange for another asset, shares or
other securities, lower of the fair value
of the asset/securities given up or the

Initial and subsequent recognition of

foreign currency transactions and
resultant exchange differences will be
subject to specific provisions of the ITL
and Income-tax Rules, 1962.
Since the ITL does not distinguish
between integral and non-integral
foreign operations, exchange differences
on non-integral foreign operations shall
be recognised for the purpose of
computation of income [14].
Since mark-to-market gains or losses are
unrealized in nature, all gains or losses
on forward exchange or similar
contracts entered into for trading or
speculation contracts shall be
recognized only on settlement

Tax AS for Government Grants

(Corresponding to ICAI AS-12)

Revenue from service transactions shall

be recognised by following only
percentage completion method.
In view of specific provisions in the ITL
for bad debts, the postponement of
revenue recognition due to uncertainty
in ultimate collection shall be restricted
to claims for price escalation and export
incentives.

Tax AS for Tangible Fixed Assets

(Corresponding to ICAI AS-10)

asset acquired shall be recorded as

actual cost of the asset[13].
Revaluation of assets is not incorporated
in Tax AS as the ITL does not recognize
the concept of revaluation of assets.
The ITL contains specific provisions
relating to retirement and disposal of
tangible fixed assets. Hence, same are
not incorporated in Tax AS.

13
14

Government grants should either be

treated as revenue receipt or should be
reduced from the cost of fixed assets
based on the purpose for which such
grant or subsidy is given.
Recognition of Government grants shall
not be postponed beyond the date of
actual receipt.

As against whichever value is more evident as per ICAI AS-10

As against accumulation in foreign currency translation reserve in

Balance Sheet as prescribed under ICAI AS-11

 Tax AS for Securities

(Corresponding to ICAI AS-13)

Since Tax AS deals with computation of

income under Business head or Other
sources head, Tax AS only deals with
securities held as stock-in-trade.
Securities should be valued at lower of
cost or net realizable value (NRV).
Comparison of cost and NRV shall be
done category-wise (and not for each
individual security) for which securities
shall be classified into the following
categories: (a) Shares (b) Debt securities
(c) Convertible securities (d) Any other
securities not covered above.
Unlisted or thinly traded securities shall
be valued at cost.
Cost which cannot be ascertained by
specific identification shall be
determined on the basis of first-in-firstout (FIFO) method.

Tax AS for Borrowing Costs

(Corresponding to ICAI AS-16)

Specific pro-ration formula is provided for

capitalizing borrowing costs relating to
general borrowings.

Income on temporary investments of

borrowed funds cannot be reduced from
borrowing costs eligible for capitalization.

Condition of suspension of capitalization

during interruption of active development
is removed in Tax AS.

Tax AS for Leases (Corresponding

to ICAI AS-19)
For ensuring uniformity of classification
of a lease as operating lease or finance
lease by both lessor and lessee, Tax AS
provides for uniformity of definitions and
requires a joint confirmation regarding
consistency of classification of lease
between lessor and lessee.

In the case of finance leases, depreciation

will be allowed to the lessee even though
the asset is owned by the lessor. The
Committee has recommended
amendment in the provisions of the ITL
relating to depreciation, ownership, block
of assets, transfer etc., to align with this
requirement.

Borrowing cost will not include exchange

differences arising from foreign currency
borrowings[15].

As against the criterion of substantial

period of time for classifying an asset as
qualifying asset under ICAI AS-16, the
definition of qualifying asset is modified
under Tax AS to mean:

15

Land, building, machinery, plant or

furniture, being tangible assets;
Know-how, patents, copyrights,
trademarks, licenses, franchises or any
other business or commercial rights of
similar nature, being intangible assets;
Inventories that require a period of 12
months or more to bring them to a
saleable condition.

ICAI AS-16 includes such differences to the extent that they are

regarded as an adjustment to interest costs

The Committee has also recommended

necessary amendment to address cases
where after sale and lease back
transaction, the resulting lease is an
operating lease.

Tax AS on Intangible Assets

(Corresponding to ICAI AS-26)
In case of acquisition of an intangible
asset in exchange for another asset,
shares or other securities, lower of fair
value of the asset/securities given up or
the asset acquired shall be recorded as
actual cost of the asset [16].

16

As against whichever value is clearly evident as prescribed under ICAI

AS-26

 As the ITL contains specific provisions

relating to amortization, retirement and
disposal of intangible assets (including
those acquired on amalgamation), same
are not incorporated in Tax AS.

Tax AS for Provisions, Contingent

Liabilities and Contingent Assets
(Corresponding to ICAI AS-29)
A provision can be recognized when it is
reasonably certain that an outflow of
economic resources will be required to
settle an obligation[17].
A contingent asset can be recognized
when the realization of related income is
reasonably certain[18].

17
18

As against condition of probable under ICAI AS-29

As against condition of virtual certainty under ICAI AS-29

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