Inclusion of Interest in Closing Stock Valuation- By CA. Brijesh Thakar

A question has been raised by many of you whether interest can be included in closing stock valuation?

I would like to reply to this question with reference to AS-2, AS-16 and ASI-1.

As per AS-2, interest can not be included in Cost of inventory, except to the extent permissible under AS-16. AS-16 says that borrowing cost can be capitalized on qualifying asset if recognition criteria given in AS-16 is fulfilled.

As per AS-16, qualifying asset means an asset which necessarily takes substantial period of time to get ready for intended use.

Hence if inventory takes substantial period of time to get ready for intended use, interest can be capitalized on cost of inventory.

Note: As per ASI-1 there is a rebuttable assumption that substantial period of time means a period of more than 12 months.

PHOTOS OF EFFORTS SEMINAR

Dear friends,

The photos of seminar organised by Efforts, at Ambedkar Hall, Sector-12, Gandhinagar on 16th February, are now available online.

To view the album, Click here.

Yes, We have done it. Efforts CS Final Result 100 %.

Team Efforts is extremely pleased to share with all that Efforts first CS Final Batch Result is 100 %. Overall result of India is around 9 % and Ahmedabad Chapter result is around 13 %. This great achievement is a result of dedicated hard work of team members of Efforts.

Efforts is always committed to deliver the best. This is just a beginning. There is a lot to come.

Treatment Of Prior Period Item under Indian Accounting Standard and IFRS- By CA. Brijesh Thakar

As per AS-5, Prior Period Item has been defined as,

“Prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.”

AS-5 requires separate disclosure of prior period item in financial statements of current year, whereas as per IFRS we have to restate comparative figure of prior period in case of prior period item.

Lets take an example to understand the treatment under Indian accounting standard and IFRS.

X ltd is having monthly salary expenditure of Rs. 10000. However due to omission it did not provide for salary expense of March, 2008. This omission was detected in 2008-09. Hence as per Indian Accounting standard, salary expense will be shown in financial statement as

2007-08
Salary Expense 110000 (10000*11)
2008-09
Salary Expense 120000(10000*12)
Prior Period Item 10000

Under IFRS instead of showing Rs. 10000 as prior period item, we will restate the comparative figure of 2007-08. Hence we will show salary expenses of Rs. 120000 in 2008-09 and related comparative figure of 2007-08 will be made Rs. 120000.

Treatment of Extra-ordinary items in case of EPS- By CA. Brijesh Thakar

Many times a question has been asked by students that when there is an extraordinary item in the statement of profit and loss account, whether Earning Per Share should be disclosed including extra ordinary item or excluding extra ordinary item?

This question is of significant importance because profit or loss arising from extra ordinary items may affect investors decision making. Let me explain the significance of this question with the help of an example

Profit/loss attributable to equity share holders 1,000,000 ( 2005-06) 1,500,000(2006-07) 1,575,000 (2007-08)
(before extraordinary item)

Loss due to fire (Extra-ordinary item) - - 1,000,000 (2007-08)

Profit/loss attributable to equity share holders
(after extraordinary item) 1,000,000 ( 2005-06) 1,500,000 (2006-07) 575,000 (2007-08)

Weighted Average No of Shares Outstanding 100,000( 2005-06) 100,000 (2006-07) 100,000 (2007-08)

EPS 10( 2005-06) 15(2006-07) 5.75(2007-08)

In the above mentioned example, EPS in 2007-08 is significantly lower in comparison to previous years. This has happened because of loss due to fire which is an extra ordinary item, which is not expected to recur again. Hence Showing EPS including extra-ordinary item may show a misleading picture.

Here, I wish to mention two para of AS- 20. First is Para 12 which says that All items of income and expense which are recognised in a period, including tax expense and extraordinary items, are included in the determination of the net profit or loss for the period. Hence EPS should be shown including Extra- ordinary item. Second is para 48 which says that “In addition to disclosures as required by paragraphs 8, 9 and 44 of this Statement, an enterprise should disclose the following:
(i) where the statement of profit and loss includes extraordinary items (within the meaning of AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies), the enterprise should disclose basic and diluted earnings per share computed on the basis of earnings excluding extraordinary items (net of tax expense);

Hence whenever there is an extra ordinary item, EPS should be disclosed including extra ordinary item and excluding extra-ordinary item also.
In the above mentioned example, during the year 2007-08, EPS of Rs. 5.75 (including Extra-ordinary item) as well as EPS of Rs. 15.75 (Exluding Extra-ordinary item) both will be disclosed.

Note: In case of IFRS, this question will not arise because under IFRS concept of Extra-ordinary item is not there.

Accounting of Machine Spares- By CA. Brijesh Thakar

According to Accounting Standard Interpratation-2, there are two types of machine spares. First are those which cannot be used as in connection with a particular item of a fixed asset and whose use is not irregular. This kind of spares are called revenue spares and they should be treated as inventories as per AS-2. The second type of spares are those which can be used only in connection with particular item of fixed asset and whose use is expected to be irregular. Such spares should be accounted for as per AS-10. These spares are called capital spares.

Capital spares should be capitalized separately, whether purchased along with principal fixed asset or purchased subsequently. Depreciation should be charged on these spares on a systematic basis over a period not exceeding the useful life of the asset to which they relate.

Now , here I wish to mention a very specific point raised by recent EAC opinion. In case of accounting for machine spares in addition to para 4 of AS-2 and para 8.2 of AS-10, para- 23 of AS-10 also plays a significant role. According to this para, Subsequent expenditures related to an item of fixed asset should be added to its book value only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance.

Hence, whenever capital spare replaces the worn out part part of particular asset the written down value of the capital spare at the date of replacement should be immediately written off. This is done because replacement of the spare does not increase the future benefits from the existing asset beyond its previously assessed standard of performance.

Let me explain the whole treatment with the help of an example.

X ltd purchased some capital spares on 1st January, 2005 for Rs. 200000. These spares can be used with an item of fixed asset whose outstanding useful life on 1/1/2005 is 10 years. Till 1/1/2008 this spare was not used in the fixed asset. Now suppose on 1/1/2008 this spare was used to replace a worn out part of fixed asset.

In the above mentioned example we can clearly see that annual depreciation on capital spare will be Rs. 20000 (200000/10years). Hence every year X ltd will write off Rs. 20000 to profit and loss account. On 1/1/2008 this spare is used to replace a worn out part in fixed asset. 3 years depreciation on this spare will be Rs 60000 ( 20000*3) On 1/1/2008 WDV of the spare will be Rs. 140000 (200000-60000). This WDV of Rs. 140000 should be written off to profit and loss account on the date on which the capital spare replaces the worn out part i.e. on 1/1/2008. This is done because replacement of the spare does not increase the future benefits from the existing asset beyond its previously assessed standard of performance.

Important Announcement from ICAI

Following Announcement has been made by the ICAI on its web site regarding CA Examination to be held in the month of May 2009: Since the Elections to the Lok Sabha and Legislative Assemblies of some States are likely to be held in the months April and May, 2009, it has been decided to hold the next Chartered Accountants PE-II, PCE, Final (Old and New course), IRM, MAC (Part I), TMC (Part I), CMC (Part I), ITL & WTO Examinations tentatively from 1st to 15th June, 2009 instead of May, 2009. Similarly, the next Common Proficiency Test (CPT) in paper-pencil mode is likely to be held tentatively on Sunday, the 28th June, 2009. The detailed Examination Notification containing the exact date schedule for the various examinations and the examination Centres will be issued shortly and hosted on the Institute's website.

Efforts seminar for commerce students

Efforts is pleased to announce that we have arranged career guidance seminar for commerce students on 16th february, 2009 (monday) at Ambedkar Hall, Sector- 12 at 4.00 pm.

Efforts will shortly announce detailed schedule and contacts from where entry pass can be obtained.

We crossed Heighest number of students in CA, CS, ICWA Final and inter in Gandhinagar.

We are pleased to announce that efforts has achieved an important milestone of crossing highest number of students in CA, CS, ICWA Final and inter in Gandhinagar. This has been achieved because of the continuous hard work of all team members. Efforts takes an opportunity to thank all its team members and reassures that this is just a beginning, and there is a lot to come.

We are committed to deliver the best professional education.

New Batch For December 2009 and June 2010 Students

New batch for students appearing in December 2009 and June 2010 Final, PCC, IPCC and CPT Exams will be started from 1st February, 2009.

CA Final Result- Expectations, Success, Failure, Celebration and Depression

CA final result has been declared today. I received news of many negative results of my friends and others. I didn’t have surprise on many of them. But when I received result of my sister, I was a little surprised. She cleared her first group but could not clear only one paper of second group. I was surprised because I know that she is brilliant from her school days. She had done very well in PE-I and PE-II and her preparation was also very good in final.

I am not writing this to give any consolation or to analyze her result. But I am writing this to share my views on success and failure. Today, we have made these words very specific. If someone is able to clear examination, he/she is successful and if he/she can’t, she is a failure. This is what our definition is. Actually there is a fundamental mistake in this definition. We forget that those who have failed today have the strength to fight again and they can convert their failure in to success.

We need to understand some basic facts regarding CA examination. We must understand that it is a professional examination and emotions do not work here. Professional examinations can be handled professionally only. The big question is how can we PROFESSIONALLY handle an exam? The simple answer is that we must have a professional strategy for preparation of CA final exam. We have to prepare strategy for each subject.

The fundamental thing is, we should realize that mere clearing an examination is not our sole goal. If we are not logically clear, degree doesn’t work. First of all we should prepare each subject by going to its roots. We should keep in our mind that there is no short cut in CA. We can’t get success or at least a big success by short cuts. In short runs they may work but in long run they will demand replies from us. So my dear friends, whatever you do, please do it by giving your heart to it. If we can give our heart to what we are doing, we will always be satisfied with whatever we are doing. Don’t do anything just for the shake of doing. We should live for our goals. That is the greatest enjoyment of life.

I define success like this- “If we can enjoy what we are doing, we are successful. If we can’t, it is our failure”

I don’t know whether this definition is correct or not in your eyes, but I live by this definition. I firmly believe that our success or failure can’t be decided by one piece of paper. There is nothing called FINAL in life. We can always change the realities if we give our heart to what we are doing. For this purpose it is absolutely essential to decide what we enjoy the most. We have to decide our direction first. But sometimes we concentrate on speed only and we forget the direction. At last we realize that “Oh, this is not the place where I wanted to come.”

Professional degree or money can never be the final goal. We must set goal to be excellent in whatever we are doing. Yes of course, it is difficult, but who wants to do simple things? We have only one life and we can’t afford to waste it in doing simple things. We must accept challenges. In fact, we must love to accept challenges. We can create a strong society if we can teach students to accept challenges.

Lastly, I wish to add that life is a continuous race. We have to run till end. And we are strong enough to accept the challenge of wining this race. Let’s enjoy this race.

CA Final and CPT results Announced

The results for CA Final and CPT examinations held in November 2008 have been announced today.

To go to the result page, click here.

Query on Income Tax By Bharat

Following Query was put on Efforts Blog by Bharat.

One person holds in his name a HP which is SO & his wife buys a HP in her own name & both are living together in one HP, then the other HP is to be considered as SO or Deemed to be let out? And what is the tax effect for both the individuals?

Wednesday, January 07, 2009 1:28:00 PM

CA Brijesh Thakar said...

I understand following facts from your query.
1. There is house no-1 which is owned by husband.
2. His wife purchased another house. i.e. House no-2.
3. Both husband and wife live together in house No-1.
4. Your question is whether house no-2 will be considered as self occupied or deemed let out?

Please note that husband and wife are separate assesses for the purpose of income tax. As per income tax act, when the person occupies more than one house for his own residential purpose, only one house is treated as self-occupied and other houses will be treated as deemed let out.

In your question the point to be considered is whether house no-2 can be considered as " occupied for own residential purpose" by wife when she is living with her husband in house no-1 and she is not living in house no-2?

It was held by Delhi High Court in case of CIT vs. Deepak Seth that A house for residential purpose does not require compulsory residence in that house. It only requires that house should be available for residential purpose of the assessee all time. Where the assessee has retained exclusive control over possession of a house owned by him/her, though he/she may not be actually present in the house, when he/she is away from it, he/she is still in constructive possession of the residential house and as such cannot be denied the benefit under section 23(2).

Hence, House no-2 should be considered as Self occupied. As you have mentioned that house is PURCHASED by wife, section 27 provision regarding deemed ownership will also not be applied. In the absence of information I assume that wife has purchased house from her own income,hence clubbing provisions of Section 64 will also not apply.

Revised definiton of Charitable Purpose

Definition of ‘Charitable purpose’ under section 2(15) of the Income-tax Act, 1961

Section 2(15) of the Income Tax Act, 1961 (‘Act’) defines “charitable purpose” to include the following:-

(i) Relief of the poor

(ii) Education

(iii) Medical relief, and

(iv) the advancement of any other object of general public utility.

An entity with a charitable object of the above nature was eligible for exemption from tax under section 11 or alternatively under section 10(23C) of the Act. However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of ‘charitable purpose’. Therefore, section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states that the ‘advancement of any other object of general public utility’ shall not be a charitable purpose if it involves the carrying on of –

(a) any activity in the nature of trade, commerce or business; or

(b) any activity of rendering any service in relation to any trade, commerce or business;

for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention of the income from such activity.

2. The following implications arise from this amendment –

2.1 The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves the carrying on of commercial activities.

2.2. ‘Relief of the poor’ encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that

(i) the business should be incidental to the attainment of the objectives of the entity,

and

(ii) separate books of account should be maintained in respect of such business.

Similarly, entities whose object is ‘education’ or ‘medical relief’ would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above.

3. The newly inserted proviso to section 2(15) will apply only to entities whose purpose is ‘advancement of any other object of general public utility’ i.e. the fourth limb of the definition of ‘charitable purpose’ contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.

3.1. There are industry and trade associations who claim exemption from tax u/s 11 on the ground that their objects are for charitable purpose as these are covered under ‘any other object of general public utility’. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants.

Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2 (15).

3.2. In the final analysis, however, whether the assessee has for its object ‘the advancement of any other object of general public utility’ is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of ‘general public utility’ will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is ‘charitable purpose’ within the meaning of Section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.

Internal auditor cannot be appointed as Tax auditor

ICAI vide announcement dated 12 December 2008 has clarified that the internal auditor, whether working with the organisation or independently practising as a Chartered Accountant or a firm of Chartered Accountants, cannot be appointed as the tax auditor of an assessee for the purposes of tax audit under section 44AB of Income Tax Act, 1961.

Here is the relevant text of the ICAI announcement:-

"The Council in its 281st meeting held from 3rd October, 2008 to 5th October 2008 at New Delhi considered an issue arising from the Guidance Note on Tax audit under section 44AB of the Income-tax Act,1961 as to "Whether the internal auditor of an assessee, being an individual chartered accountant or a firm of chartered accountants can be appointed as his tax auditor".

The Council decided that an internal auditor of an assessee, whether working with the organisation or independently practising chartered accountant or a firm of chartered accountants, cannot be appointed as his tax auditor "

Technical Query from Abhay- Procudure to obtain permission of FIPB

Please Refer Query From Abhay on

PROCEDURES

PROCEDURE UNDER AUTOMATIC ROUTE

FDI in sector/ activities to the extent permitted under automatic route does not require any prior approval either by Government of India or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.

PROCEDURE UNDER GOVERNMENT APPROVAL

FDI in activities not covered under the automatic route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB). Approvals of composite proposals involving foreign investment / foreign technical collaboration are also granted on the recommendations of the FIPB.

Applications for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance.

Applications for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion.

Applications can also be submitted with Indian Missions abroad who forward them to the Department of Economic Affairs for further processing.

Applications can be made in Form FC-IL which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.

Additional Information

GENERAL PERMISSION OF RBI UNDER FEMA

Indian companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned regional office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.

GENERAL PERMISSION TO NRIs/PIOs

Reserve Bank has granted general permission to NRIs/PIOs for undertaking direct investment in Indian companies under the Automatic Route, purchase of shares under Portfolio Investment Schemes, investment in companies and proprietorship/ partnership concerns on non-repatriation basis and for remittances of current income. NRIs/PIOs do not have to seek specific permission for approved activities under these schemes.

The Reserve Bank of India has now further simplified financial transactions by NRIs/PIOs by granting general permissions to:

1. Resident individuals, partnership/proprietorship concerns to avail of interest bearing rupee loans from NRIs/PIOs out of funds remitted by them from abroad or out of funds held in their bank accounts in India, on non – repatriation basis, subject to certain conditions; one of them being that the rate of interest on such loans should not exceed Bank Rate plus two percentage points.

2. NRIs/PIOs to transfer by way of gift shares held by them in Indian companies and to transfer by way of gift immovable property held by them in India subject to compliance with other applicable rules/regulations including the provisions of Foreign Contribution Regulations Act, 1976 by the charitable trust/organisation concerned.

3. All domestic public/private sector mutual funds for issue of units to NRIs/PIOs on both repatriation and non repatriation basis.

4. NRIs/PIOs to place deposits with Indian firms, on non-repatriation basis and with Indian companies on non-repatriation basis out of domestic sources.

5. NRIs/PIOs for sale of shares acquired under direct investment Schemes on stock exchanges in India.

6. NRIs/PIOs for transfer of shares, by way of sale under private arrangement to another NRI or to a resident.

NRIs/PIOs have been granted General Permission to invest in Government Securities and Treasury Bills.

Technical Query from Abhay.

Following Query has been put by Abhay on Efforts Blog by way of comment.

Dear Brijesh,
our client make J.V with Foreign Co. The said foreign company had decided to bring plant & machinery as capital. can it is consider as issue of share in kind? Further whether it is permissible under FEMA ? I don't think that it is permissible. Further please tell the procedure to get approval from FIPB ?

Tuesday, December 30, 2008 5:17:00 PM

CA Brijesh Thakar said...

Dear Abhay,
In your question form of J.V. has not been mentioned. I suppose they are creating a separate JV company. If that JV company issues its shares to foreign company, in consideration of plant and machinery brought by foreign company, it is certainly a case of issue of shares for consideration in kind. As per AS-10, machinery will be shown in the books of JV company either at fair market value machinery or fair market value of shares, whichever is more clearly available. (Refer para 11.2 of AS-10).
I have sent your query relating to FEMA to a company secretary. I will answer as soon as I get his expert opinion on FEMA related query.

CA Final Batch For November-09 and May-10 Students

Accounts, Costing, DT and IDT Lectures for CA Final Students appearing in November-09 and May-10 Exam will be started on 1st January, 2009.

Happy New Year

Wish you all a very happy and prosperous new year...

Dear all

The deadline for completion of CPE hours by CAs holding Certificate of Practice has been extended to 31st January, 2009 from 31st December, 2008.

Note: CAs holding COP are required to complete 20 CPE hours in each calendar year.