AS 30 , AS 31 ... two new accounting standard

The Accounting Standards Board of the Institute of Chartered Accountant of India, which sets the standard for the country, has formulated two new Standards on Financial Instruments — AS 30 (Financial Instruments: Recognition and Measurement) and AS 31 (Financial Instruments: Presentation). These standards were placed in public domain as exposure drafts for comments up to March 31, 2007 and are now being finalised. While AS 30 is the equivalent of 

International Accounting Standard IAS 39, AS 31 corresponds to IAS 32. 

Features of AS 30 

The AS 30 is a complex standard and its main objective is to establish principles for recognising and measuring financial instruments whose definition encompass most items of financial assets, financial liabilities in an entity's balance sheet. The introduction of this Standard is likely to affect almost all items in a corporate/bank balance sheet. It deals with recognition/de-recognition and measurement of financial instruments as also derivatives and hedge accounting. 

AS 30 uses a mixed measurement model. Some assets and liabilities are valued at Fair Value and others on cost basis. The concept of fair value is central to the standard as also the concept of symmetry. Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable willing parties in an arm's length transaction. The standard stipulates measurement of assets and liabilities at fair value unless otherwise stated. Rationale for fair value stems from the fact that for financial instruments the most relevant information is the amount that could be realised from disposal. Subsequent measurement of financial assets depends upon their classification at initial recognition into any of the four categories. 

ü Financial assets at fair value through P&L (held for trading) 

ü Held to maturity investments 

ü Loans and receivables 

ü Available for sale financial assets 

Subsequent measurement of financial liabilities classified under fair value through P&L is at fair value and the resulting gains/losses are recognised in the statement of profit and loss. All other financial liabilities are to be measured at amortised cost using the effective interest method. The standard also stipulates restrictions on reclassification between categories. No reclassification of a financial instrument into or out of the category fair value through profit and loss is permitted. The standard however prescribes certain exceptional circumstances under which reclassification between `held to maturity' and `available for sale' categories are permitted. 

The requirements regarding impairment and uncollectability of financial assets constitute an important and significant part of AS 30. Conceptually at each balance sheet date, an entity should assess whether there is any objective evidence that a financial asset or group of financial assets is impaired and if so it should determine the amount of impairment loss and provide for the same. 

Asset is defined as a resource controlled by an entity having future economic benefit. Two key ingredients in this definition are resource controlled by an entity and future economic benefit 

associated with it. If the entity loses control or future economic benefit ceases, there is impairment and it has to be provided. These areas will have significant impact on the financial statements of banks, since they are currently following 90-day delinquency norms for recognition of NPAs and provisioning. 

The standard also stipulates the criteria to qualify for hedge accounting and the recognition and measurement of gains and losses for different types of hedging relationships such as fair value hedges, cash flow hedges and hedge of a net investment in a non-integral foreign operation. Derivatives will be recorded on the balance sheet at fair values and changes in their fair values will be reflected in the profit & loss account unless stringent hedge accounting criteria are satisfied. 

Challenges 

Change in accounting ushered in by the standard can substantially affect the operation of entities. The implementation of AS 30 has the potential to accentuate earnings volatility especially since hedge accounting has been defined very rigorously under the framework and derivatives that do not qualify as hedges will have to be marked to market and resultant gains or losses will have to be routed through the profit & loss account. 

Resorting to fair value measurement would pose a serious challenge in the valuation of financial instruments underpinning the need to develop skills for valuation among accountants, finance professionals and prepare for greater level of transparency through enhanced disclosure requirements and documentation needs prescribed by the standard. 

Appropriate Board oversight and involvement of senior management would be a pre-requisite for the smooth adoption. Further, there is a need to revamp the MIS and technology capabilities of the entities that have to comply with AS 30 for which significant initial investment would have to be earmarked. Migration to fair value accounting has its own challenges but at the same time it brings in enormous amount of opportunities for Indian corporate and financial institutions especially in the context of greater integration of our markets with international markets. 

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Minimum Alternate Tax

Minimum Alternative Tax

Normally, a comapny is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative or insignificant. In such case, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies under the income tax act net, section 115JA was introduced w.e.f assessment year 1997-98. 

According to this section, if the taxable income of a company computed under this Act, in respect of previous year 1996-97 and onwards is less than 30 % of its book profits, the total income of such company is chargeable to tax for the relevant previous year shall be deemed to an amount equal to 30 % of such book profits. 

A new tax credit scheme is introduced by which MAT paid can be carried forward for set-off against regular tax payable during the subsequent five year period subject to certain conditions, as under:-

• When a company pays tax under MAT, the tax credit earned by it shall be an amount which is the difference between the amount payable under MAT and the regular tax. Tegular tax in this case means the tax payable on the basis of normal computation of total income of the company.
• MAT credit will be allowed carry forward facility for a period of five assessment years immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated subject to the five year carry forward limit.
• In the assessment year when regular tax becomes payable, the difference between the regular tax and the tax computed under MAT for that year will be set off against the MAT credit available.
• The credit allowed will not bear any interest.

The Finance Act 2005, introduced from FY 2006-07, Section 115JB that provides if the tax payable on the total income as computed under the Income-tax Act in respect of any previous year relevant to the assessment year commencing on or after April 1 2001, is less than 7.5% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable for the relevant previous year shall be 7.5% of such book profit.

Budget 2010-11 MAT u/s 115JB has been increased to 18%

Official Gazette Of India

Q. What is "the gazette of India ?"
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Ans. this is "the gazette of India"..