Chartered Accountant Finance: [aaykarbhavan] A comparison of Draft and Notified TAS with Accounting Standards

Section 145(2) of the Income-tax Act ('the Act') provides that the Central Government may notify Accounting Standards ('AS') for any class of assessees or any class of income. In 1996, two AS relating to 'disclosure of accounting policies' and 'disclosure of prior period and extraordinary items and changes in accounting policies' were notified.

In December, 2010 the CBDT has constituted the Committee to harmonize the AS issued by the ICAI with the provisions of the Act for the purposes of notification under the Act and to suggest amendments to the Act. The Committee recommended that some of the AS issued by ICAI related to 'disclosure' requirement, whilst some other contained matter are adequately dealt within the Act. In view of this, the Committee formulated the drafts of only fourteen Tax Accounting Standards ('TAS') issued by the ICAI. It submitted its final report along with draft of TAS in August, 2012 which was placed in public domain for comments.

After examining the comments, the CBDT has revised the draft of twelve TAS submitted by the Committee and it has withdrawn draft of TAS which correspond to AS-4 on "Contingencies and Events Occurring After the Balance Sheet Date" and AS-5 on "Net Profit or Loss for the Period, Prior Period Items and changes in Accounting Policies". The Committee reiterates its stand taken in previous report that that the TAS notified under the Act is applicable only for computation of income chargeable under the head "profit and gains of business or profession" or "income from other sources" and not for the purpose of maintenance of books of accounts. It further reiterates that in the case of conflict between the provisions of the Act and these Accounting standards, the provisions of the Act shall prevail to that extent. The CBDT invited comments and suggestions on new draft of standards by February, 8, 2015. The CBDT has now notified the Income Disclosure and Tax Accounting Standards vide notification no. 32/2015, F. No. 134/48/2010-TPL, dated March 31, 2015. Comparative study of Accounting Standard issued by ICAI, Draft TAS and notified TAS has been given hereunder:

Accounting Standards issued by ICAI	Draft Tax Accounting Standard issued in August, 2012	Income Computation and Disclosure Standards (Notified Tax Accounting Standard)¹
AS 1 - DISCLOSURE OF ACCOUNTING POLICIES
A. Deals with
"the disclosure of significant accounting policies followed in preparing and presenting financial statements" [Para 2 of (AS) 1]	"This Tax Accounting Standards deals with significant accounting policies" [Para 1]	No Change (viz-a-viz Draft Tax Accounting Standards)
B. Definition of accounting policies
"The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements" [Para 11]	"The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by the person [Para 4].	No Change (viz-a-viz Draft Tax Accounting Standards)
C. Selection of accounting policies
The primary consideration in the selection of account policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the Profit or loss for the period ended on that date [Para 17]	Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation [Para 5]	No Change (viz-a-viz Draft Tax Accounting Standards)
D. Change in accounting policy
Change in accounting policy should be made only if it is required by statute, accounting standard or if such change will result in more appropriate presentation of financials.	An accounting policy shall not be changed without any reasonable cause	No Change (viz-a-viz Draft Tax Accounting Standards)
E. Substance over form
"The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form." [Para 17]	"The treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form" [Para 5].	No Change (viz-a-viz Draft Tax Accounting Standards)
F. Prudence
"In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realized though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information." [Para 17]	Para 5 provides that "marked to market loss" or an "expected loss" shall not be recognized unless the recognition of such loss is in accordance with the provisions of any other Tax Accounting Standard	No Change (viz-a-viz Draft Tax Accounting Standards)
G. Materiality
"Financial statements should disclose all "material" items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements." [Para 17]	TAS is silent about the concept of materiality. Since the Act does not recognize the concept of materiality for the purpose of computation of taxable income, the same has not been incorporated in the TAS.	No Change (viz-a-viz Draft Tax Accounting Standards)
H. Disclosure of accounting policies
All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. Such disclosure should form part of the financial statements It would be helpful to the reader of financial statements if they are all disclosed as such in one place instead of being scattered over several statements, schedules and notes. [Paras 25 & 26]	All significant accounting policies adopted by a person shall be disclosed. Comment: It is not clear where these accounting policies shall be disclosed. Whether in income-tax return or audit report or elsewhere?	No Change (viz-a-viz Draft Tax Accounting Standards)
I. Transitional Provisions
-		All contract or transaction existing on 01-04-2015 or entered into on or after 01-04-2015 shall be dealt with in accordance with the provisions of this standard after taking into account the income, expense or loss, if any, recognized in respect of the said contract or transaction for the previous year ending on or before 31-03-2015 [Para 10].
VALUATION OF INVENTORY
A. Inventories of service providers
AS-2 has not prescribed any method of valuation of inventories in the case of a service provider.	Inventories of service provider to be valued at cost. Cost of services to consist of labour and costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads [Para 3].	Provision for valuation of inventory in case of service provider has been deleted [Para 3]
B. Techniques for the measurement of the cost of the inventories
AS-2 stipulates that techniques such as the standard cost method or the retail method may be used if the results approximate to the actual cost.	Standard cost method is not allowed.	No Change (viz-a-viz Draft Tax Accounting Standards)
C. Opening inventories
Though the AS – 2 does not mention specifically about the treatment of opening inventory, yet the following treatment is generally accepted: a) The value of the inventory of a business as on the beginning of a previous year shall be the same as the value of inventory at the end of the immediately preceding previous year. b) It shall be nil if business has commenced during previous year	a) The value of the inventory of a business as on the beginning of a previous year shall be the same as the value of inventory at the end of the immediately preceding previous year. b) It shall be nil if business has commenced during previous year	a) The value of the inventory of a business as on the beginning of a previous year shall be the same as the value of inventory at the end of the immediately preceding previous year. b) If business commenced during the previous year, it shall be cost of inventory available on day of commencement of business.
D. Change in method of valuation
AS-2 read with AS-5 provides that the method of valuation of inventories may be changed if it is considered that the change would result in a more appropriate presentation.	The method of valuation of inventory once adopted by a person in any previous year shall not be changed without a reasonable cause.	No Change (viz-a-viz Draft Tax Accounting Standards)
E. Dissolution of partnership firm or AOP or BOI
-	Inventory on the date of dissolution of partnership firm shall be valued at the net realizable value.	Inventory on the date of dissolution of partnership firm or AOP or BOI shall be valued at the net realizable value.
F. Transitional Provisions
-	-	Interest and other borrowing costs, which don't meet criteria for its recognition as a component of cost, but included in the cost of opening inventory as on 01-04-2015, shall be taken into account for determining cost of such inventory for valuation as on close of previous year beginning on or after 01-04-2015 if such inventory continue to remain part of inventory as on close of the previous year beginning on or after 01-04-2015 [Para 25].
EVENTS OCCURRING AFTER THE BALANCE SHEET DATE
A. Exclusions from the scope
a) Liabilities of life assurance and general insurance enterprises arising from policies issued; b) Obligations under retirement benefit plans; and c) Commitments arising from long-term lease contracts.	No exclusions	This standard is withdrawn from notified Tax Accounting Standards.
B. Adjustments
Adjustments required for Events Occurring After the balance sheet date if: (i) they provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date; or (ii) they indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate.	Adjustments required for Events Occurring After the balance sheet date if they provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date. No adjustments for events that indicate Going Concern Assumption is not appropriate	This standard is withdrawn from notified Accounting Standards.
PRIOR PERIOD ITEMS
AS-5 merely provides for separate disclosure of prior period items.	In order to provide certainty and reduce litigation, the TAS provides that Prior period expenses are allowable if the person proves that such expense accrued during the year.	This standard is withdrawn from notified Accounting Standards.
CONSTRUCTION CONTRACTS
A. Retention money
AS-7 is silent about treatment of accrual of income in respect of the retention money.	Contract revenue in respect of retention money shall be recognized on basis of percentage of completion method.	No Change (viz-a-viz Draft Tax Accounting Standards)
B. Reversal of revenue
AS-7 provides for reversal of revenue on account of uncertainty arising on realisability of contract revenue which was already recognized as income.	Where contract revenue already recognized as income is subsequently written-off in books, it shall be recognized as an expense and not as an adjustment of contract revenue.	No Change (viz-a-viz Draft Tax Accounting Standards)
C. Borrowing costs relating to construction costs
Costs that may be attributable to contract activity in general and can be allocated to specific contracts also includes borrowing costs as per Accounting Standard (AS) 16, Borrowing Costs	Allocated borrowing costs in accordance with TAS shall form part of contract costs	No Change (viz-a-viz Draft Tax Accounting Standards)
D. Pre-construction interest income, dividend income & capital gains
AS 16 provides that in determining the amount of borrowing costs eligible for capitalization during a period, any income earned on the temporary investment of those borrowings is deducted from the borrowing costs incurred.	Such income shall not be reduced from the contract costs but shall be treated and taxed as income in accordance with the applicable provisions of the Act	No Change (viz-a-viz Draft Tax Accounting Standards)
E. Recognition of losses including probable/expected losses
To be recognized fully and not in proportion to the percentage of completion	Future or anticipated losses shall not be allowed unless such losses are actually incurred. Further, the losses incurred shall be allowed only in proportion to the stage of completion.	No Change (viz-a-viz Draft Tax Accounting Standards)
F. Early stages of a contract
Revenue shall not be recognized during early stages of contract. What is "early stages" is not defined in the AS – 7. However, Guidance note on real estate transactions requires that, apart from other mentioned conditions, at least 25% of the total construction and development cost should be incurred before revenue is recognized.	During early stages of a contract, where the outcome of the contract cannot be estimated reliably contract revenue is recognized only to the extent of cost incurred. The early stages of contract shall not extend beyond 25% of the stage of completion.	No Change (viz-a-viz Draft Tax Accounting Standards)
G. Recognition of incentive payments
Only when (i) contract is sufficiently advanced that it is probable that specified performance standards shall be met or exceeded (ii) amount of incentive payment is reliably measurable	TAS omits the requirement that contract is sufficiently advanced that it is probable that specified performance standards shall be met or exceeded. If incentive reliably measurable, same to be recognized as per percentage of completion method	No Change (viz-a-viz Draft Tax Accounting Standards)
H. Recognition of claims
Only when (i) negotiations are sufficiently advanced that it is probable that customer will accept the claim and (ii) amount is reliably measurable	TAS omits the requirement that negotiations are sufficiently advanced that it is probable that customer will accept the claim. If claim reliably measurable, same to be recognized as per POC method	No Change (viz-a-viz Draft Tax Accounting Standards)
I. Transitional Provisions
-	-	Revenue and costs associated with construction contract, which commenced on or before 31-03-2015 but not completed by the said date, shall be recognised as revenue and costs in accordance with this standard. The amount of contract revenue, contract costs or expected loss, if any, recognised for the said contract for any previous year commencing on or before 01-04-2014 shall be taken into account for recognizing revenue and costs of the said contract for previous year commencing on 01-04-2015 and subsequent previous years.
REVENUE RECOGNITION
A. Recognition of revenue from service transactions
AS-9 recognizes both the "proportionate completion method" and "completed service contract method" for recognition of revenue from service transactions.	Revenue from service transactions shall only be recognized by following the "percentage completion method". Requirements of TAS for Construction Contracts to apply mutatis mutandis for recognition of revenue and associated expenses for a service transaction.	No Change (viz-a-viz Draft Tax Accounting Standards)
B. Sale of Goods
AS-9 provides that revenue shall be recognized when: a) Risks and rewards are transferred b) Seller doesn't retain any control over goods sold c) No significant uncertainty exists regarding collection	TAS provides that revenue shall be recognized when: a) All significant risks and rewards are transferred b) Property in the goods is transferred for a price c) Seller retains no effective control of goods sold.	No Change (viz-a-viz Draft Tax Accounting Standards) except inclusion of the criteria that revenue shall be recognized when there is reasonable certainty of its ultimate collection. It is further clarified that if transfer of property does not coincide with the transfer of significant risks and rewards, revenue in such a situation will be recognized when significant risk and reward of ownership is transferred to the buyer. Comment: The notified standard is now in line with Accounting Standard 9 – Revenue Recognition.
C. Postponement of revenue recognition
Where the ability to assess the ultimate collection with reasonable certainty is lacking, AS-9 provides for postponement of recognition of revenue in relation to any claim.	In view of the specific provisions in the Act for bad debts, the postponement of revenue due to uncertainty is restricted to claims for price escalation and export incentives.	Recognition of revenue can be deferred if there is an uncertainty in its ultimate collection. The notified standard is now in line with Accounting Standard 9 – Revenue Recognition
D. Recognition of dividend income
AS - 9 lays down the criteria for recognition	As the Act contains specific provisions relating to recognition of income in the nature of dividends, the provisions of AS-9 relating to recognition of dividend is not incorporated in the TAS.	No Change (viz-a-viz Draft Tax Accounting Standards)
E. Transitional Provisions
-	-	The transitional provisions of Standard on construction contract shall apply mutatis mutandis to the recognition of revenue and the associated costs for a service transaction undertaken on or before 31-03-2015 but not completed by the said date. Revenue for a transaction, other than a service transaction referred above, undertaken on or before the 31st day of March, 2015 but not completed by the said date shall be recognised in accordance with the provisions of this standard for the previous year commencing on the 1st day of April, 2015 and subsequent previous year. The amount of revenue, if any, recognised for the said transaction for any previous year commencing on or before the 1st day of April, 2014 shall be taken into account for recognising revenue for the said transaction for the previous year commencing on the 1st day of April, 2015 and subsequent previous years.
TANGIBLE FIXED ASSETS
A. Acquisition of Fixed Assets in exchange for another asset or shares or securities
The fair value of the asset/securities given up or fair value of the asset acquired, whichever is more clearly evident, should be recorded as actual cost.	Lower of the fair value of the asset/securities given up, or the asset acquired shall be recorded as actual cost.	The fair value of tangible fixed assets so acquired shall be its actual cost.
B. Capitalization of expenditure incurred on improvement and repairs
Only those expenses which increase the future benefits from the existing asset beyond its pre-assessed standards of performance should be capitalized	Expenditure for the purpose of preserving or maintaining an already existing tangible fixed asset and which does not bring a new asset into existence or does not result into a new or different advantage that increases the future benefits from the existing asset shall be charged to revenue. Expenditure which does not meet the criteria specified as above to be capitalized.	An expenditure that increases the future benefits from existing asset beyond its previously assessed standard of performance is added to the actual cost. The notified standard is silent about the treatment of such expenditure which does not meet the above specified criteria.
C. Transitional Provisions
-	-	The actual cost of tangible fixed assets, acquisition or construction of which commenced on or before 31-03-2015 but not completed by said date, shall be recognized in accordance with this standard. The amount of actual cost, if any, recognized for the said assets for any previous year commencing on or before the 01-04-2014 shall be taken into account for recognizing actual cost of the said assets for previous year commencing on 01-04-2015 and subsequent previous years.
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
A. Exchange differences - Recognition criteria
AS-11 provides guidance on initial and subsequent recognition of foreign currency transactions and the resultant exchange differences.	TAS expressly provides that these provisions will be subject to Section 43A of the Act and Rule 115 of the Income-tax Rules, 1962.	No Change (viz-a-viz Draft Tax Accounting Standards) except that the notified standard allows use of average rate (i.e., mean of exchange rates in force during a period) if that approximates the actual rate at the date of the transaction. It provides that average rate for a week or a month may be used for all transaction in each foreign currency occurring during that period. However, if exchange rate fluctuates significantly, the actual rate at the date of the transaction shall be used.
B. Conversion at the last date of previous year
AS – 11 provides that: a) Foreign currency monetary items should be reported using the closing rate. If closing rate does not reflect with reasonable accuracy the amount in reporting currency that is likely to be realized from, or required to disburse, e.g., where there are restrictions on remittances or where the closing rate is unrealistic and it is not possible to effect an exchange of currencies at that rate at the balance sheet date, the relevant monetary item should be reported in the reporting currency at the amount which is likely to be realized from, or required to disburse, at the balance sheet date. b) Non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction.	TAS provides that: a) Foreign currency monetary items shall be converted into reporting currency by applying closing rate b) Non-monetary items shall be converted into reporting currency by using the exchange rate at the date of transaction	No Change (viz-a-viz Draft Tax Accounting Standards) except that the notified standard provides that where closing rate does not reflect with reasonable accuracy, the amount in reporting currency that is likely to be realized from or required to disburse, a foreign currency monetary item, owing to restriction on remittances or the closing rate being unrealistic and it is not possible to effect an exchange of currencies at that rate, then the relevant monetary item shall be reported in the reporting currency at the amount which is likely to be realized from or required to disburse such item at the last date of the previous year.
C. Foreign Currency translation reserve
Exchanges differences arising on translation of the financial statements of non-integral foreign operations should be accumulated in a foreign currency translation reserve in the balance sheet	Such exchange differences shall be recognized for the purpose of computation of income.	No Change (viz-a-viz Draft Tax Accounting Standards)
D. Forward contracts
Forward exchange or similar contracts entered into for trading or speculation purposes should be mark-to-market at each balance sheet date and the resultant exchange differences should be recorded in profit or loss.	Since such mark-to- market gains or losses are unrealized in nature, the TAS provides that all gains or losses on such contracts shall be recognized on settlement.	No Change (viz-a-viz Draft Tax Accounting Standards)
E. Transitional Provisions
-	-	All foreign currency transactions existing on 01-04-2015 or undertaken on or after 01-04-2015 shall be recognized in accordance with provisions of this standard.
GOVERNMENT GRANTS
A. Recognition of Government grants
Mere receipt of a grant is not necessarily conclusive evidence that the conditions attached to the grant have been or will be fulfilled.	To reduce litigation and to provide certainty, the TAS (GG) provides that recognition of Government grant shall not be postponed beyond the date of actual receipt.	No Change (viz-a-viz Draft Tax Accounting Standards)
B. Transitional Provisions
-	-	All the Government grants which meet recognition criteria on or after 01-04-2015 shall be recognized for previous year commencing on or after 01-04-2015 in accordance with provisions of this standard after taking into account the amount, if any, of the said Government grant recognized for any previous year ending on or before 31-03-2015.
ACCOUNTING FOR INVESTMENTS / SECURITIES
A. Scope
AS - 13 deals with accounting for current investments, long term investments and investment property but excludes shares, debentures or other securities held as stock-in- trade.	TAS only deals with securities held as stock-in-trade.	No Change (viz-a-viz Draft Tax Accounting Standards)
B. Valuation of securities acquired in exchange
AS – 13 provides that: a) If an investment is acquired by issue of shares or other securities, the acquisition cost is the fair value of the securities issued. b) If an investment is acquired in exchange for another asset, the acquisition cost of the investment shall be the fair value of the asset given up. However, fair value of the investment acquired shall be considered if it is more clearly evident.	TAS provides that: a) If a security is acquired in exchange for other securities, its value shall be lower of fair value of securities issued or securities received b) If a security is acquired in exchange for another asset, its value shall be lower of fair value of securities or fair value of asset given up.	a) Where a security is acquired in exchange for other securities, the fair value of the security so acquired shall be its actual cost. b) Where a security is acquired in exchange for another asset, the fair value of the security so acquired shall be its actual cost.
C. Valuation of securities held as stock-in trade at the end of previous year
AS-13 indicates that though it does not apply to stock-in-trade, the manner in which they are accounted for is quite similar to current investments. In case active market exists for an investment than it may provide evidence of the fair value. For investments where active market does not exist, other means are used to determine fair value.	a) Valuation of securities listed and quoted on a recognized stock exchange - At actual cost initially recognized or NRV, whichever is lower; b) Valuation of unlisted securities and listed securities not quoted with regularity - At actual cost initially recognized	No Change (viz-a-viz Draft Tax Accounting Standards)
BORROWING COSTS
A. Borrowing cost eligible for Capitalization
AS-16 provides that judgment should be used for determining whether general borrowings have been utilized to fund Qualifying Assets The capitalization rate should be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset	TAS provides following formula for capitalizing borrowing costs relating to general borrowings: A x B C Where A= Borrowing cost incurred during the previous year except on borrowings directly relatable to specific purposes B= Average cost of qualifying asset (except which are directly funded out by specific borrowing) as appearing on the first and last day of previous year. C= Average cost of total asset (except which are directly funded out by specific borrowing) as appearing on the first and last day of previous year.	No change in formula for capitalizing borrowing cost (viz-a-viz draft Tax Accounting Standard). However, it provides for determination of 'B' in certain situations as under : a) If qualifying asset does not appear in the balance sheet on the first day or both on the first day and the last day of previous year - 50% of cost of qualifying asset b) If qualifying asset does not appear in the balance sheet on the last day of previous year – the average cost of qualifying asset as appearing in the balance sheet on first day of previous year and on date of put to use or completion of asset.
B. Transitional Provisions
-	-	All the borrowing costs incurred on or after 01-04-2015 shall be capitalized for the previous year commencing on or after 01-04-2015 in accordance with the provisions of this standard after taking into account the amount of borrowing costs capitalized, if any, for the same borrowing for any previous year ending on or before 31-03-2015.
LEASES
A. Scope
Application of AS-19 could result in a different classification of a lease by the lessor and the lessee.	For ensuring uniformity of classification of a lease by the lessor and lessee, the TAS provides for uniformity of definitions and requires a joint confirmation regarding consistency of classification between the lessor and the lessee.	Removed from the notified Tax Accounting Standards
B. Finance Lease
Where lessor is a manufacturer/dealer, AS-19 provides for adjustment in the sale price only in the cases of artificially low rate of interest.	In order to bring uniformity of treatment for artificially low and high rate of interest, the TAS provides for adjustment in case of artificially high rate of interest as well.	Removed from the notified Tax Accounting Standards
INTANGIBLE ASSETS
A. Recognition of Intangible Asset acquired in exchange for shares/other assets
Fair value of the asset/securities given up or fair value of the asset acquired, whichever is more clearly evident, should be recorded as actual cost.	Fair value of securities issued or assets given up shall be considered as the cost of intangible asset so acquired.	Removed from the notified Tax Accounting Standards
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
A. Scope
AS-29 provides for recognition of a contingent asset when the realization of related income is virtually certain.	This TAS replaces the condition of "virtually certain" with "reasonably certain" for recognition of income and the related asset.	No Change (viz-a-viz Draft Tax Accounting Standards)
B. Transitional Provisions
-	-	All the provisions or assets and related income shall be recognised for the previous year commencing on or after 01-04-2015 in accordance with the provisions of this standard after taking into account the amount recognised, if any, for the same for any previous year ending on or before 31-03-2015.

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DT - Secs. 43A & 145

1. Word 'Income Computation and Disclosure Standards (ICDS)' has been substituted for 'Accounting Standards' by the Finance (No. 2) Act, 2014 wef 01-04-2015