Check all the programmes conducted by Mumbai C.P Study Circle
MUMBAI CENTRAL CPE STUDY CIRCLE OF WIRC
13th Floor, Office No.13, Navjivan Comm. Premises co.op. Society Ltd,
Lamington Road,
Mumbai-400008
Convenor Dy. Convenor
Mr. Sanjay Chokshi
Phone: 23090275
Mobile: 9820333610
Email: schokshi@vsnl.com
MEETINGS
Direct & Indirect Taxes relating to eal Estates (including Accounting & Financial aspects - Wednesday, December 20, 2006
Full Day Seminar - Saturday, December 09, 2006
Issues in Tax Audit Public Charitable Trust – Provisions under BPT Act & Income Tax Act - Friday, September 22, 2006
Seminar on VAT-Audit - Saturday, June 24, 2006
Privileges of Private Limited Companies Service-tax (with special reference to amendments in Form No. ST-1 & ST-3) Disallowance u/s. 40a(ia) - precautions before 31-3-2006 - Monday, March 20, 2006
Use of ‘Excel’ in CA’s Office - Thursday, February 23, 2006
1. AAS No. 30 External Confirmation
2. Internal Audit - Friday, January 20, 2006
Maharashtra Value Added Tax Act, 2002 - Friday, December 16, 2005
Full Day Seminar - Saturday, December 03, 2005
Service Tax (including recent changes) - Monday, November 21, 2005
1. AAS - (No to be announced later)
2. Service Tax - Tuesday, November 08, 2005
Company Audit
Issues under Tax Audit Minimum Alternate Tax - Thursday, October 06, 2005
AS-22 Accounting for Taxes on Income - Friday, September 23, 2005
1. The Science of Joyful Living SSY (Siddha Samadhi Yoga)
2. Code of Conduct & Professional Ethics - Friday, July 08, 2005
NMT School, Nursery Hall, 1st Floor Navjivan, Lamington Road, Mumbai Central, Mumbai 400 008 - Friday, June 17, 2005
Issues under TDS/E-TDS Changes in filing of I.T. Return Pursuant to Amendments in the Finance Act, 2004 (applicable to Assessment year 2005-06) - Friday, May 27, 2005
Issues under TDS/E-TDS Changes in filing of IT. Return Pursuant to Amendments in the Finance Act, 2004 (applicable to Assessment year 2005-06) - Friday, May 13, 2005
Workshop on Maharashtra Value Added Tax Act, 2002 - Friday, April 22, 2005
ACCOUNTING STANDARD 21 & 23 --Posted By Deepesh Vora
(1)
ACCOUNTING STANDARD (AS) – 21CONSOLIDATED FINANCIAL STATEMENTS
APPLICABILITY
A parent enterprise is required to prepare consolidated financial statements of its group in addition to its separate financial statements.
Questions :
1. What is the meaning of parent enterprise ?
A. It is an enterprise having one or more subsidiary
2. How does one enterprise become as subsidiary in terms of AS21?
A. When one enterprise controls directly or indirectly more than 50% of a) Voting power, OR b) Composition of board of Directors / Governing body
Example of Indirect control :
A Ltd. Holds 80% shares in B Ltd. And 25% in C Ltd.
B Ltd. Holds 25.50% in C Ltd.
Thus, both B Ltd. And C Ltd. will be subsidiary of A Ltd.
3. What if one subsidiary has two parents ? One controlling voting power and other controlling composition of Board of Directors ?
A. Both the Holding enterprises should consolidate the financial statements of same subsidiary enterprise. (GC-16/2002)
4. What is the date from which consolidation will start ?
A. If an enterprise purchases shares 2 or more times, then the consolidated financial statements shall be prepared from the date on which holding-subsidiary relationship is ultimately established.
5. What if the parent and subsidiaries have different reporting dates ?
A. If reporting dates of parent and subsidiaries are different and it is not practical to prepare the financial statements of subsidiary of the same date as that of holding, then financial statements can be consolidated by making adjustments for significant transactions that occur between those dates.
6. What if the shares are held as Stock in trade?
A. It means that such shares are held with a view to their subsequent disposal in the near future. Thus, control will be considered as temporary and thus no consolidation required as the case will fall under the exceptions enumerated below (GC-17/2002)
Exceptions
1 When the control / investment is intended to be temporary – to be disposed in the near future.
2 The subsidiary operates under severe long-term restrictions and due to this, its ability to transfer the funds to parent is significantly affected.
Note : Dissimilar activities of parent and its subsidiaries cannot be the ground for non-consolidation. Also, the word used everywhere is “enterprise” and not “company”
(2)
CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements are prepared / presented in the same format as that followed by the parent in the preparation of its separate financial statements
Consolidation Procedure
1) The financial statements should be added / combined on line by line basis by adding the like items of assets, liabilities, income and expense
2) Treatment of cost of investment of parent, corresponding equity of subsidiaries and resultant goodwill / capital reserve and minority interest (See detailed discussion later)
3) Full elimination of Intra-group balances and intra-group transactions and resulting unrealized profit.
4) Unrealised Losses : Unrealised losses from intra-group transactions should also be eliminated if recoverable amount is more than the cost of transactions. For eg. X Ltd. (Holding Co.) Sells goods costing Rs. 5 lacs to its subsidiary Y Ltd for 4 lacs, and on date of consolidation, the recoverable amount of those goods is Rs. 5.5 lacs, then unrealized loss of Rs. 1 lac should be eliminated by adding to stock and Consolidated P & L A/c respectively If, unrealized losses are on account of intra-group sales / purchase of assets, then in that case, recoverable amount shall have the meaning as described in accounting standard on “impairment of assets” (i.e. Net sale price or value in use, whichever is higher)
5) Tax Expense : Tax expense should not be recalculated and should be simply added for the purpose of consolidated financial statements
6) In case the company has an investment in associate, then such investments are to be shown as per “equity method” – [Refer AS – 23]
TREATMENT OF COST OF INVESTMENT OF PARENT, CORRESPONDING EQUITY OF SUBSIDIARIES AND RESULTANT GOODWILL / CAPITAL RESERVE AND MINORITY INTEREST :
While preparing consolidated financial accounts, following items should be eliminated 1) From Parent’s books : Cost of investment of parent in each subsidiary 2) From Subsidiaries books :
(a) Parent’s portion of equity [equity = Share capital (equity & preference) + Reserves and surplus as on date of acquisition on shares + profits/loss upto date of acquisition of shares]
(b) Minority interest in equity = Total equity – (a)
3) If (1) > (2)(a), then balance is shown as “Goodwill on consolidation” on asset side of balance sheet
4) If (2)(a) > (1), then balance is shown as “Capital reserve on consolidation” under the head Reserves and Surplus
(3)
5) The minority share in the net profit shall be charged to Net profit and added to Minority Interest (vice versa for loss). Also, arrears of dividend whether declared or not) on cumulative preference shares held by minority should be charged to Net Profit Thus, Minority interest in Balance Sheet = (2)(b) + Minority share in Net Profit for the year +Arrears of preference dividend belonging to minority. Minority Interest is to be shown as separate item on the liability side of the Balance Sheet
6) Minority Interest is negative : Negative minority interest will not be shown in the balance sheet. It should be adjusted against majority interest. Subsequent losses should be first fully allocated to majority interest until minority share of losses previously absorbed by the majority has been recovered.
7) Successive purchase of shares : If the investment is purchased in two or three stages, then goodwill / capital reserve on consolidation should be determined on step by step basis. However, if small investments are made over a period of time, then the latest major investment, which resulted in control should be considered as date of purchase for all successive purchases and goodwill / capital reserve shall be calculated accordingly.
8) Disposal of Investment in a subsidiary : Amount received – Carrying amount of assets less liabilities as on date of disposal is recognized as profit / loss on disposal of investments in a subsidiary
OTHER DISCLOSURE REQUIREMENTS
a) List of all subsidiaries b) Proportion of Ownership interest c) Nature of ownership – i.e. whether direct control or control through subsidiaries d) Name of subsidiaries whose reporting dates are different e) The items in which different accounting policies have been followed by holding and
subsidiary. f) If consolidation of any subsidiary is not made on the basis of exceptions, then the facts and the reasons thereof
Following notes / disclosures are not required in consolidated financial statements as they do not have any effect on true and fair view of consolidated financial statements. 1) Source from which bonus shares are issued, eg., Capitalisation of profits or Reserves
or from Share Premium Account 2) SSI Debtors > 1 lacs outstanding for >30 days 3) List of investments 4) Quantative information in respect of raw materials consumed, opening/closing dtock
of goods produced/traded, purchases, licensed capacity, installed capacity, actual production 5) Computation of Net profit u/s 349 with relevant calculation of commission paid to
directors / managers 6) Value of Imports on CIF basis 7) Value of Exports on FOB basis 8) Expenditure in foreign currency 9) Earnings in foreign exchange 10) Value and percentage of imported and indigenous raw materials / spare parts /
components consumed
11) Dividend remitted in foreign currency
(4)
ACCOUNTING STANDARD (AS) – 23ACCOUNTING FOR INVESTMENTS IN ASSOCIATES IN CONSOLIDATEDFINANCIAL STATEMENTS
APPLICABILITY
It is applicable for investments in associates to an investor, who prepares Consolidated financial statements
Associate :
It is an enterprise in which investor has Significant Influence and which is neither a subsidiary nor a joint venture of the investor.
Significant influence : It means power to participate in financial and operating decisions of the associate. Significant influence can be gained by a) Share Ownership : If one holds directly or indirectly 20% or more of voting power, then it
is assumed that he has significant influence. b) Statute c) Agreement
The presence of Significant influence can be identified by one or more of the foll. Criteria Representation in the Board of Directors Participation in policy making body Material transactions between investor and investee Inter-change of managerial personnel Provision of technical information
Note :
a) If, inspite of holding 20% or more of voting power, the investor does not have significant influence, then assumption of criteria of 20% of voting power is null and void. Vice versa is the case when significant influence can be clearly demonstrated.
b) Potential equity shares held by investor should not be taken into account for determining voting power. (GC/8/2002)
Exceptions :
1 When the investment is acquired and held exclusively with a view to its subsequent disposal in the near future.
2 The associates operates under severe long-term restrictions and due to this, its ability to transfer the funds to parent is significantly affected.
3 When investor has no significant influence or ceases the significant influence
4 When consolidated financial statements of investor is not made
Difference between “Control” and “Significant influence “ :
”Significant influence” means power to participate in the financial and operating decisions of the associate, whereas “Control” means power to govern the financial and operating policies of an associate
ACCOUNTING FOR INVESTMENTS
In consolidated financial statements, investment in associates should be accounted for as per “Equity Method”.
In the case of cessation of significant influence, the investment should be accounted as per AS 13 (Accounting for Investments) from the date of cessation. The carrying amount of the
(5)
investment at that date should be regarded as cost thereafter in the consolidated financial statements.
Equity Method Accounting :
The following procedure should be followed. 1) Identify only (do not record accounting entry) for goodwill / capital reserve at the time of acquisition of investment.
2) Carrying amount is identified as follows
Cost of Investment in investor’s books
Add/Less : Goodwill / Capital reserve identified as in (1) above
Add/Less : Share of profits / (Loss) after the date of acquisition
Add/Less : Adjustments in carrying amount of due to changes in
Associate’s equity that have not been included in P & L A/c
(e.g. Revaluation of fixed assets due to forex fluctuations)
Add/Less : Unrealised losses / profits due to inter-co. transactions
Less : Dividends received from associates
Notes : a) Share in Profit / (loss) should be calculated only after adjusting dividend on cumulative preference dividend, whether declared or not. b) Unrealized losses should be eliminated only if recoverable amount is more than the transfer cost. For meaning of “Recoverable amount” – refer AS-28 (impairment of assets) Eg. :X Ltd. (a holding co.) owns 30% of shares of Y Ltd. X Ltd. had sold machinery costing 100000 to Y Ltd. for 80000. Thus, there is unrealized loss of 20000 for X Ltd. As per AS 23, unrealized loss should eliminated to the extent of 6000 (30% of 20000) only when recoverable amount is 100000 or more. c) If, there is permanent decrease in the value of investment in associate, the carrying amount should be reduced by the amount of such permanent reduction d) If the investor’s share of losses in associates equals / exceeds the carrying amount, further losses are not recognized and investment is reported at NIL value e) If reporting dates of investor and associates are different, then adjustments should be made for significant transactions that occur between those dates. f) “Proposed” dividend of associates should not be taken into consideration for calculation investor’s share of profits. (GC-6/2002) g) Adjustments in carrying amount of due to changes in associate’s equity that have not been included in P & L A/c should be directly adjusted in the carrying amount without routing it through consolidated P & L A/c (GC-/2002)
OTHER DISCLOSURE REQUIREMENTS
a) Description of associate including proportion of ownership b) Investments in associates accounted for using the equity method should be classified as long-term investment c) The items in which different accounting policies have been followed by holding and subsidiary, and if practicable, then suitable adjustments should be made d) Difference in reporting dates
ACCOUNTING STANDARD (AS) – 21CONSOLIDATED FINANCIAL STATEMENTS
APPLICABILITY
A parent enterprise is required to prepare consolidated financial statements of its group in addition to its separate financial statements.
Questions :
1. What is the meaning of parent enterprise ?
A. It is an enterprise having one or more subsidiary
2. How does one enterprise become as subsidiary in terms of AS21?
A. When one enterprise controls directly or indirectly more than 50% of a) Voting power, OR b) Composition of board of Directors / Governing body
Example of Indirect control :
A Ltd. Holds 80% shares in B Ltd. And 25% in C Ltd.
B Ltd. Holds 25.50% in C Ltd.
Thus, both B Ltd. And C Ltd. will be subsidiary of A Ltd.
3. What if one subsidiary has two parents ? One controlling voting power and other controlling composition of Board of Directors ?
A. Both the Holding enterprises should consolidate the financial statements of same subsidiary enterprise. (GC-16/2002)
4. What is the date from which consolidation will start ?
A. If an enterprise purchases shares 2 or more times, then the consolidated financial statements shall be prepared from the date on which holding-subsidiary relationship is ultimately established.
5. What if the parent and subsidiaries have different reporting dates ?
A. If reporting dates of parent and subsidiaries are different and it is not practical to prepare the financial statements of subsidiary of the same date as that of holding, then financial statements can be consolidated by making adjustments for significant transactions that occur between those dates.
6. What if the shares are held as Stock in trade?
A. It means that such shares are held with a view to their subsequent disposal in the near future. Thus, control will be considered as temporary and thus no consolidation required as the case will fall under the exceptions enumerated below (GC-17/2002)
Exceptions
1 When the control / investment is intended to be temporary – to be disposed in the near future.
2 The subsidiary operates under severe long-term restrictions and due to this, its ability to transfer the funds to parent is significantly affected.
Note : Dissimilar activities of parent and its subsidiaries cannot be the ground for non-consolidation. Also, the word used everywhere is “enterprise” and not “company”
(2)
CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements are prepared / presented in the same format as that followed by the parent in the preparation of its separate financial statements
Consolidation Procedure
1) The financial statements should be added / combined on line by line basis by adding the like items of assets, liabilities, income and expense
2) Treatment of cost of investment of parent, corresponding equity of subsidiaries and resultant goodwill / capital reserve and minority interest (See detailed discussion later)
3) Full elimination of Intra-group balances and intra-group transactions and resulting unrealized profit.
4) Unrealised Losses : Unrealised losses from intra-group transactions should also be eliminated if recoverable amount is more than the cost of transactions. For eg. X Ltd. (Holding Co.) Sells goods costing Rs. 5 lacs to its subsidiary Y Ltd for 4 lacs, and on date of consolidation, the recoverable amount of those goods is Rs. 5.5 lacs, then unrealized loss of Rs. 1 lac should be eliminated by adding to stock and Consolidated P & L A/c respectively If, unrealized losses are on account of intra-group sales / purchase of assets, then in that case, recoverable amount shall have the meaning as described in accounting standard on “impairment of assets” (i.e. Net sale price or value in use, whichever is higher)
5) Tax Expense : Tax expense should not be recalculated and should be simply added for the purpose of consolidated financial statements
6) In case the company has an investment in associate, then such investments are to be shown as per “equity method” – [Refer AS – 23]
TREATMENT OF COST OF INVESTMENT OF PARENT, CORRESPONDING EQUITY OF SUBSIDIARIES AND RESULTANT GOODWILL / CAPITAL RESERVE AND MINORITY INTEREST :
While preparing consolidated financial accounts, following items should be eliminated 1) From Parent’s books : Cost of investment of parent in each subsidiary 2) From Subsidiaries books :
(a) Parent’s portion of equity [equity = Share capital (equity & preference) + Reserves and surplus as on date of acquisition on shares + profits/loss upto date of acquisition of shares]
(b) Minority interest in equity = Total equity – (a)
3) If (1) > (2)(a), then balance is shown as “Goodwill on consolidation” on asset side of balance sheet
4) If (2)(a) > (1), then balance is shown as “Capital reserve on consolidation” under the head Reserves and Surplus
(3)
5) The minority share in the net profit shall be charged to Net profit and added to Minority Interest (vice versa for loss). Also, arrears of dividend whether declared or not) on cumulative preference shares held by minority should be charged to Net Profit Thus, Minority interest in Balance Sheet = (2)(b) + Minority share in Net Profit for the year +Arrears of preference dividend belonging to minority. Minority Interest is to be shown as separate item on the liability side of the Balance Sheet
6) Minority Interest is negative : Negative minority interest will not be shown in the balance sheet. It should be adjusted against majority interest. Subsequent losses should be first fully allocated to majority interest until minority share of losses previously absorbed by the majority has been recovered.
7) Successive purchase of shares : If the investment is purchased in two or three stages, then goodwill / capital reserve on consolidation should be determined on step by step basis. However, if small investments are made over a period of time, then the latest major investment, which resulted in control should be considered as date of purchase for all successive purchases and goodwill / capital reserve shall be calculated accordingly.
8) Disposal of Investment in a subsidiary : Amount received – Carrying amount of assets less liabilities as on date of disposal is recognized as profit / loss on disposal of investments in a subsidiary
OTHER DISCLOSURE REQUIREMENTS
a) List of all subsidiaries b) Proportion of Ownership interest c) Nature of ownership – i.e. whether direct control or control through subsidiaries d) Name of subsidiaries whose reporting dates are different e) The items in which different accounting policies have been followed by holding and
subsidiary. f) If consolidation of any subsidiary is not made on the basis of exceptions, then the facts and the reasons thereof
Following notes / disclosures are not required in consolidated financial statements as they do not have any effect on true and fair view of consolidated financial statements. 1) Source from which bonus shares are issued, eg., Capitalisation of profits or Reserves
or from Share Premium Account 2) SSI Debtors > 1 lacs outstanding for >30 days 3) List of investments 4) Quantative information in respect of raw materials consumed, opening/closing dtock
of goods produced/traded, purchases, licensed capacity, installed capacity, actual production 5) Computation of Net profit u/s 349 with relevant calculation of commission paid to
directors / managers 6) Value of Imports on CIF basis 7) Value of Exports on FOB basis 8) Expenditure in foreign currency 9) Earnings in foreign exchange 10) Value and percentage of imported and indigenous raw materials / spare parts /
components consumed
11) Dividend remitted in foreign currency
(4)
ACCOUNTING STANDARD (AS) – 23ACCOUNTING FOR INVESTMENTS IN ASSOCIATES IN CONSOLIDATEDFINANCIAL STATEMENTS
APPLICABILITY
It is applicable for investments in associates to an investor, who prepares Consolidated financial statements
Associate :
It is an enterprise in which investor has Significant Influence and which is neither a subsidiary nor a joint venture of the investor.
Significant influence : It means power to participate in financial and operating decisions of the associate. Significant influence can be gained by a) Share Ownership : If one holds directly or indirectly 20% or more of voting power, then it
is assumed that he has significant influence. b) Statute c) Agreement
The presence of Significant influence can be identified by one or more of the foll. Criteria Representation in the Board of Directors Participation in policy making body Material transactions between investor and investee Inter-change of managerial personnel Provision of technical information
Note :
a) If, inspite of holding 20% or more of voting power, the investor does not have significant influence, then assumption of criteria of 20% of voting power is null and void. Vice versa is the case when significant influence can be clearly demonstrated.
b) Potential equity shares held by investor should not be taken into account for determining voting power. (GC/8/2002)
Exceptions :
1 When the investment is acquired and held exclusively with a view to its subsequent disposal in the near future.
2 The associates operates under severe long-term restrictions and due to this, its ability to transfer the funds to parent is significantly affected.
3 When investor has no significant influence or ceases the significant influence
4 When consolidated financial statements of investor is not made
Difference between “Control” and “Significant influence “ :
”Significant influence” means power to participate in the financial and operating decisions of the associate, whereas “Control” means power to govern the financial and operating policies of an associate
ACCOUNTING FOR INVESTMENTS
In consolidated financial statements, investment in associates should be accounted for as per “Equity Method”.
In the case of cessation of significant influence, the investment should be accounted as per AS 13 (Accounting for Investments) from the date of cessation. The carrying amount of the
(5)
investment at that date should be regarded as cost thereafter in the consolidated financial statements.
Equity Method Accounting :
The following procedure should be followed. 1) Identify only (do not record accounting entry) for goodwill / capital reserve at the time of acquisition of investment.
2) Carrying amount is identified as follows
Cost of Investment in investor’s books
Add/Less : Goodwill / Capital reserve identified as in (1) above
Add/Less : Share of profits / (Loss) after the date of acquisition
Add/Less : Adjustments in carrying amount of due to changes in
Associate’s equity that have not been included in P & L A/c
(e.g. Revaluation of fixed assets due to forex fluctuations)
Add/Less : Unrealised losses / profits due to inter-co. transactions
Less : Dividends received from associates
Notes : a) Share in Profit / (loss) should be calculated only after adjusting dividend on cumulative preference dividend, whether declared or not. b) Unrealized losses should be eliminated only if recoverable amount is more than the transfer cost. For meaning of “Recoverable amount” – refer AS-28 (impairment of assets) Eg. :X Ltd. (a holding co.) owns 30% of shares of Y Ltd. X Ltd. had sold machinery costing 100000 to Y Ltd. for 80000. Thus, there is unrealized loss of 20000 for X Ltd. As per AS 23, unrealized loss should eliminated to the extent of 6000 (30% of 20000) only when recoverable amount is 100000 or more. c) If, there is permanent decrease in the value of investment in associate, the carrying amount should be reduced by the amount of such permanent reduction d) If the investor’s share of losses in associates equals / exceeds the carrying amount, further losses are not recognized and investment is reported at NIL value e) If reporting dates of investor and associates are different, then adjustments should be made for significant transactions that occur between those dates. f) “Proposed” dividend of associates should not be taken into consideration for calculation investor’s share of profits. (GC-6/2002) g) Adjustments in carrying amount of due to changes in associate’s equity that have not been included in P & L A/c should be directly adjusted in the carrying amount without routing it through consolidated P & L A/c (GC-/2002)
OTHER DISCLOSURE REQUIREMENTS
a) Description of associate including proportion of ownership b) Investments in associates accounted for using the equity method should be classified as long-term investment c) The items in which different accounting policies have been followed by holding and subsidiary, and if practicable, then suitable adjustments should be made d) Difference in reporting dates
Dipesh Vora-- query
dear members
i have a client (Say Mr. A) who has a Commission
Income of about 1 to 2 lacs (Shown as Business Income)
and Income from other sources shown in his personal
books every year.
He is also a sole proprietor of X & Co. where he
imports, exports, manufactures and trades in goods.
Separate books are maintained for X & Co. (total
turnover below 40 lacs every year including commision
income)
This year his sales has crossed audit limit for the
first time. Thus, I am auditing X & Co's accounts.
Following are my queries.
1) Commission is his business income, but shown in
personal books. So, it will nowhere come in X & Co.'s
books. Then, what will be the scope of my audit? will
I have to cover his personal books also?
2) Also, in annexure 1 to form 3CD, will gross
turnover include commission?.
3) Further, in annexure 1 to form 3CD, in the column
"amount of taxes paid / provided for in books". What
should I mention?(No provision is made in X & Co. and
all taxes paid are from his personal accounts)
4) All the loans exceeding Rs. 20,000/-, although used
for business (one can say that because there are no
much assets in his personal books except capital
balance in X & Co.) are shown in his personal accounts
(all old loans, but addition and repayment is there).
will I have to report the same in 3CD?
5) Whether I have to report any personal income under
clause 13(a) or 13(e) of form 3CD? (business income /
other income not credited to P & l A/c)
please advise
dipesh
i have a client (Say Mr. A) who has a Commission
Income of about 1 to 2 lacs (Shown as Business Income)
and Income from other sources shown in his personal
books every year.
He is also a sole proprietor of X & Co. where he
imports, exports, manufactures and trades in goods.
Separate books are maintained for X & Co. (total
turnover below 40 lacs every year including commision
income)
This year his sales has crossed audit limit for the
first time. Thus, I am auditing X & Co's accounts.
Following are my queries.
1) Commission is his business income, but shown in
personal books. So, it will nowhere come in X & Co.'s
books. Then, what will be the scope of my audit? will
I have to cover his personal books also?
2) Also, in annexure 1 to form 3CD, will gross
turnover include commission?.
3) Further, in annexure 1 to form 3CD, in the column
"amount of taxes paid / provided for in books". What
should I mention?(No provision is made in X & Co. and
all taxes paid are from his personal accounts)
4) All the loans exceeding Rs. 20,000/-, although used
for business (one can say that because there are no
much assets in his personal books except capital
balance in X & Co.) are shown in his personal accounts
(all old loans, but addition and repayment is there).
will I have to report the same in 3CD?
5) Whether I have to report any personal income under
clause 13(a) or 13(e) of form 3CD? (business income /
other income not credited to P & l A/c)
please advise
dipesh
TURNOVER FOR THE PURPOSE OF F & O BUSINESS
Gentlemen,
pl let me know if in case of business of F& O the turnover figure can be taken as the one certified by the broker for STT , if not why.
pl let me know the via media as the record for each script is too voluminous and not maintained. Net profit or loss in the year with broker is booked a.c tallied with broker
pl advise
vikram
pl let me know if in case of business of F& O the turnover figure can be taken as the one certified by the broker for STT , if not why.
pl let me know the via media as the record for each script is too voluminous and not maintained. Net profit or loss in the year with broker is booked a.c tallied with broker
pl advise
vikram
DRAFT INSTRUCTIONS DT. 16TH MAY, 2006
DRAFT INSTRUCTIONS DT. 16TH MAY, 2006
Sub : Circumstances to be considered by the Assessing officers in determining whether a person is a trader in stocks or an investor in stocks
16/5/2006
BUSINESS
SECTION 2(13)
The Central Board of Direct Taxes in its Instruction No. 1827 dated 31-08-1989 had laid down certain tests to distinguish between shares held as stock-in-trade and shares held as investment. CBDT proposes to issue supplementary instructions in this regard to provide further guidelines for determining whether a person is a trader is stocks or an investor in stocks. Before issuing the instructions, CBDT would like to invite comments of all stakeholders.
Comments on the draft instructions may be sent by email or post by 25th May, 2006 to Ms Monica Bhatia, Director (TPL-I), Room No.147D, North Block, New Delhi (e mail : dirtpl1@nic.in).
DRAFT INSTRUCTIONS
Sub : Distinction between shares held as stock-in-trade and shares held as investment - Tests For
The Central Board of Direct Taxes in its Instruction No. 1827 dated 31-08-1989 had laid down certain tests to distinguish between shares held as stock-in-trade and shares held as investment. The following supplementary instructions in this regard will provide further guidelines for determining whether a person is a trader in stocks or an investor in stocks :
(i) Whether the purchase and sale of securities was allied to his usual trade or business/was incidental to it or was an occasional independent activity.
(ii) Whether the purchase is made solely with the intention of resale at a profit or for long term appreciation and/or for earning dividends and interest.
(iii) Whether scale of activity is substantial.
(iv) Whether transactions were entered into continuously and regularly during the assessment year.
(v) Whether purchases are made out of own funds or borrowings
(vi) The stated objects in the Memorandum and Articles of Association in the case of a corporate assessee
(vii) Typical holding period for securities bought and sold
(viii) Ratio of sales to purchases and holding
(ix) The time devoted to the activity and the extent to which it is the means of livelihood.
(x) The characterization of securities in the books of account and in balance sheet as stock in trade or investments.
(xi) Whether the securities purchased or sold are listed or unlisted.
(xii) Whether investment is in sister/related concerns or independent companies.
(xiii) Whether transaction is by promoters of the company.
(xiv) Total number of stocks dealt in.
(xv) Whether money has been paid or received or whether these are only book entries.
The Assessing Officers are also advised that no single criterion listed above is decisive and total effect of all these criteria should be considered to determine the nature of activity.
INSTRUCTION NO. 1827, DT. 31ST AUG., 1989
Subject : Distinction between shares held as stock-in-trade and shares held as investment - Tests For
The question whether a particular assessee is a trader in shares or the shares are held as capital assets sometimes gives rise to disputes and litigation. Over the years the courts have laid down the various tests or factors to be taken into account in determining this question.
2. Certain general principles in this regard were laid down by the Supreme Court in the case of G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC). In this case the Supreme Court was dealing with a question whether the excess sum realised on the sale of certain plots was assessable as income from an adventure in the nature of business. The Supreme Court held that in deciding the character of such transaction, several factors were relevant. For instance :
(i) Whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or were incidental to it.
(ii) The nature and quantity of the commodity purchased and resold—if the
commodity purchased is in very large quantity, it could tend to eliminate the possibility of investment for personal use, possession or enjoyment.
(iii) The repetition of the transaction.
1 The Supreme court observed that the presence of all these factors may be held in the court to draw an inference that a transaction is in the nature of trade' but it is not a matter of merely counting the number of facts and circumstances pro and con what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction.
2 The Supreme Court in this case also discussed the test of intention. It held that in cases where the purchase has been made solely and exclusively with the intention of resale at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying it or using it, the presence of such intention is a relevant factor and unless it is off-set by the presence of other factors, it would raise a strong presumption that a transaction is an adventure in the nature of trade.
3 In the case of H. Mohmed & Co. vs. CIT (1977) 107 ITR 637 (Guj) the Gujarat High Court observed that a stock-in-trade is something in which a trader or a business man deals, whereas his capital asset is something with which he deals. According to the High Court one of the indicators for deciding as to what is stock-in-trade is whether a particular assessee is buying or selling the goods or commodity or whether he has merely invested his money with a view to earning further income or with a view to carrying on his other business. It was further held by the High court that the distinction between stock-in-trade and investment is that of selling outright in the course of the business activity and deriving income from exploitation of one's own assets.
4 These general principles hold good in respect of shares also. However certain specific issues relevant for determining this question with reference to shares have also been decided by the courts. In the case of Sardar Indra Singh & Sons Ltd. vs. CIT (1953) 24 ITR 415 (SC), the Supreme Court was dealing with the case of a company which was incorporated with the object, inter alia of carrying on the business of bankers, financiers, managing agents and secretaries and was also empowered to invest and deal with the monies of the company not immediately required for its business upon such securities and in such manner as might from time to time be determined. It was held by the Supreme Court in this case that to constitute business income, it was not necessary that surplus should have resulted from such a course of dealing in securities as by itself would amount to the carrying on of business or if the realisation of securities is a normal step in carrying on the assessee's business. The Supreme Court observed that the principle applicable in all such cases was well settled and the question always was whether the sales which produced the surplus were so connected with the carrying on of the assessees business that it could fairly be said that the surplus was the profit and gains of such business. On the facts of this case it was held that the surplus resulting from sale of shares and securities constituted business income.
5 The aforesaid principles laid down by the Supreme Court was followed by Andhra Pradesh High court in the case of State Bank of Hyderabad vs. CIT (1985) 47 CTR (AP) 224 : (1985) 151 ITR 703 (AP). The main business of the SBH was to accept deposits and to advance loans and the money constituted its stock-in-trade. The banking company has to carry on its business in accordance with the provisions of the banking regulation act, 1949. Sec. 24 of the said act requires every banking company to maintain in India either in cash or in the shape of gold or in the shape of unincumbered approved securities, 20% of its total time and demand liabilities at any given point of time. It was held by the High Court that what section 24 of the said Act did was to insist on the observance of a normal prudent banking business practice. If the banking company chooses to invest the money in unincumbered approved securities it is only one mode of keeping a portion of its deposits in ready cash or readily-convertible-into-cash securities. Any income arising from the sale of such securities is, therefore closely connected with the banking business and is business income, it was concluded by the High court.
6 In the case of Karam Chand Thapar & Brothers vs. CIT (1971) 82 ITR 899 (SC) it was held by the Supreme Court that the circumstance that the assessee had shown certain shares as investment in its books as well as its balance sheet was by itself not a conclusive circumstances, though it was a relevant circumstance.
7 The decisions in the CIT vs. Associated Industrial Development Co. Ltd. 1972 CTR (SC) 239 : (1971) 82 ITR 586 (SC) and AR. N. Ramaswami Chettiar & Ors. vs. CIT (1963) 48 ITR 771 (Mad) may also be referred to for guidance.
8 Although the tests laid down by the courts may help determine the issue in particular cases the decision will ultimately turn on the facts of each case.
9 These instructions may please be brought to the notice of the Assessing officers in your region.
[F. No. 181/1/89 - IT(AI) dated 31/08/1989 from Central Board of Direct Taxes]
[F. No. 149/287/2005-TPL]
(2006) 202 CTR (St) 114
Sub : Circumstances to be considered by the Assessing officers in determining whether a person is a trader in stocks or an investor in stocks
16/5/2006
BUSINESS
SECTION 2(13)
The Central Board of Direct Taxes in its Instruction No. 1827 dated 31-08-1989 had laid down certain tests to distinguish between shares held as stock-in-trade and shares held as investment. CBDT proposes to issue supplementary instructions in this regard to provide further guidelines for determining whether a person is a trader is stocks or an investor in stocks. Before issuing the instructions, CBDT would like to invite comments of all stakeholders.
Comments on the draft instructions may be sent by email or post by 25th May, 2006 to Ms Monica Bhatia, Director (TPL-I), Room No.147D, North Block, New Delhi (e mail : dirtpl1@nic.in).
DRAFT INSTRUCTIONS
Sub : Distinction between shares held as stock-in-trade and shares held as investment - Tests For
The Central Board of Direct Taxes in its Instruction No. 1827 dated 31-08-1989 had laid down certain tests to distinguish between shares held as stock-in-trade and shares held as investment. The following supplementary instructions in this regard will provide further guidelines for determining whether a person is a trader in stocks or an investor in stocks :
(i) Whether the purchase and sale of securities was allied to his usual trade or business/was incidental to it or was an occasional independent activity.
(ii) Whether the purchase is made solely with the intention of resale at a profit or for long term appreciation and/or for earning dividends and interest.
(iii) Whether scale of activity is substantial.
(iv) Whether transactions were entered into continuously and regularly during the assessment year.
(v) Whether purchases are made out of own funds or borrowings
(vi) The stated objects in the Memorandum and Articles of Association in the case of a corporate assessee
(vii) Typical holding period for securities bought and sold
(viii) Ratio of sales to purchases and holding
(ix) The time devoted to the activity and the extent to which it is the means of livelihood.
(x) The characterization of securities in the books of account and in balance sheet as stock in trade or investments.
(xi) Whether the securities purchased or sold are listed or unlisted.
(xii) Whether investment is in sister/related concerns or independent companies.
(xiii) Whether transaction is by promoters of the company.
(xiv) Total number of stocks dealt in.
(xv) Whether money has been paid or received or whether these are only book entries.
The Assessing Officers are also advised that no single criterion listed above is decisive and total effect of all these criteria should be considered to determine the nature of activity.
INSTRUCTION NO. 1827, DT. 31ST AUG., 1989
Subject : Distinction between shares held as stock-in-trade and shares held as investment - Tests For
The question whether a particular assessee is a trader in shares or the shares are held as capital assets sometimes gives rise to disputes and litigation. Over the years the courts have laid down the various tests or factors to be taken into account in determining this question.
2. Certain general principles in this regard were laid down by the Supreme Court in the case of G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC). In this case the Supreme Court was dealing with a question whether the excess sum realised on the sale of certain plots was assessable as income from an adventure in the nature of business. The Supreme Court held that in deciding the character of such transaction, several factors were relevant. For instance :
(i) Whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or were incidental to it.
(ii) The nature and quantity of the commodity purchased and resold—if the
commodity purchased is in very large quantity, it could tend to eliminate the possibility of investment for personal use, possession or enjoyment.
(iii) The repetition of the transaction.
1 The Supreme court observed that the presence of all these factors may be held in the court to draw an inference that a transaction is in the nature of trade' but it is not a matter of merely counting the number of facts and circumstances pro and con what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction.
2 The Supreme Court in this case also discussed the test of intention. It held that in cases where the purchase has been made solely and exclusively with the intention of resale at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying it or using it, the presence of such intention is a relevant factor and unless it is off-set by the presence of other factors, it would raise a strong presumption that a transaction is an adventure in the nature of trade.
3 In the case of H. Mohmed & Co. vs. CIT (1977) 107 ITR 637 (Guj) the Gujarat High Court observed that a stock-in-trade is something in which a trader or a business man deals, whereas his capital asset is something with which he deals. According to the High Court one of the indicators for deciding as to what is stock-in-trade is whether a particular assessee is buying or selling the goods or commodity or whether he has merely invested his money with a view to earning further income or with a view to carrying on his other business. It was further held by the High court that the distinction between stock-in-trade and investment is that of selling outright in the course of the business activity and deriving income from exploitation of one's own assets.
4 These general principles hold good in respect of shares also. However certain specific issues relevant for determining this question with reference to shares have also been decided by the courts. In the case of Sardar Indra Singh & Sons Ltd. vs. CIT (1953) 24 ITR 415 (SC), the Supreme Court was dealing with the case of a company which was incorporated with the object, inter alia of carrying on the business of bankers, financiers, managing agents and secretaries and was also empowered to invest and deal with the monies of the company not immediately required for its business upon such securities and in such manner as might from time to time be determined. It was held by the Supreme Court in this case that to constitute business income, it was not necessary that surplus should have resulted from such a course of dealing in securities as by itself would amount to the carrying on of business or if the realisation of securities is a normal step in carrying on the assessee's business. The Supreme Court observed that the principle applicable in all such cases was well settled and the question always was whether the sales which produced the surplus were so connected with the carrying on of the assessees business that it could fairly be said that the surplus was the profit and gains of such business. On the facts of this case it was held that the surplus resulting from sale of shares and securities constituted business income.
5 The aforesaid principles laid down by the Supreme Court was followed by Andhra Pradesh High court in the case of State Bank of Hyderabad vs. CIT (1985) 47 CTR (AP) 224 : (1985) 151 ITR 703 (AP). The main business of the SBH was to accept deposits and to advance loans and the money constituted its stock-in-trade. The banking company has to carry on its business in accordance with the provisions of the banking regulation act, 1949. Sec. 24 of the said act requires every banking company to maintain in India either in cash or in the shape of gold or in the shape of unincumbered approved securities, 20% of its total time and demand liabilities at any given point of time. It was held by the High Court that what section 24 of the said Act did was to insist on the observance of a normal prudent banking business practice. If the banking company chooses to invest the money in unincumbered approved securities it is only one mode of keeping a portion of its deposits in ready cash or readily-convertible-into-cash securities. Any income arising from the sale of such securities is, therefore closely connected with the banking business and is business income, it was concluded by the High court.
6 In the case of Karam Chand Thapar & Brothers vs. CIT (1971) 82 ITR 899 (SC) it was held by the Supreme Court that the circumstance that the assessee had shown certain shares as investment in its books as well as its balance sheet was by itself not a conclusive circumstances, though it was a relevant circumstance.
7 The decisions in the CIT vs. Associated Industrial Development Co. Ltd. 1972 CTR (SC) 239 : (1971) 82 ITR 586 (SC) and AR. N. Ramaswami Chettiar & Ors. vs. CIT (1963) 48 ITR 771 (Mad) may also be referred to for guidance.
8 Although the tests laid down by the courts may help determine the issue in particular cases the decision will ultimately turn on the facts of each case.
9 These instructions may please be brought to the notice of the Assessing officers in your region.
[F. No. 181/1/89 - IT(AI) dated 31/08/1989 from Central Board of Direct Taxes]
[F. No. 149/287/2005-TPL]
(2006) 202 CTR (St) 114
Accounting of Derivaties
This is the text taken from the BCA REFRENCER 05-06
ACCOUNTING
Accounting of Equity Futures and Options is based on the Guidance Note issued by the Institute. These guidelines are summarized below:
Accounting treatment of future contracts
At the time of inception of contract
Every person is required to pay initial margin determined by the Clearing Corporation/House before entering into the contract of either Stock Future or Index Future. Such initial margin payment shall be debited to the "Initial Margin – Index/S he head "Current Assets". If the initial margin is paid by way of collaterals like TDS, securities, Bank Guarantees etc. entries would be passed in memorandum Banks.
At the time of Daily Settlement
All future contracts are Marked to Market (MTM) on daily basis. This involves payment or receipts of difference in price fluctuation on daily basis. The amount of Marked to Market margin received/paid into/from such accounts should be debited or credited to "Marked to Market Margin Index/Stock Future Account" and will appear as a separate item as "Current Asset" or "Current Liabilities" as the case may be.
Open interest as on Balance Sheet date
At the year end appropriate provision shall be created by a debit to Profit and Loss account for anticipated Loss equivalent to debit balance in "Marked to Market Margin Index/Stock Futures Account." Net amount received which is anticipated profit represented by credit balance in MTM Margin account shall be ignored and no credit shall be taken to Profit and Loss account considering principle of "prudence". For this purpose the net amount paid or received on account of MTM on Open contracts should be determined index wise or scrip wise. Provision so created should be shown as deduction from MTM Margin Index/Stock Future under the head "Current Assets". Proper disclosure is required to be made for the open interest as on the Balance Sheet date in respect of different series of contract.
At the time of Final Settlement
As on date, all future contracts whether Index Future or Stock Future are cash settled on the settlement date. The difference between contract price and the settlement price shall be calculated and recognised in the Profit and Loss account after adjusting provisions created for anticipated loss, if any. Any loss arising out of settlement shall be first charged to such provision account and balance of loss if any shall be charged to Profit and Loss account. If more than one contract in respect of relevant series of equity index future/equity stock future contract to which the square up contract pertains is outstanding, the contract price of the contract so squared up should be determined using Weighted Average Method for calculating Profit or Loss on squaring up.
ACCOUNTING TREATMENT OF OPTION CONTRACT
At the inception of the Contract
In the Books of Buyer
The buyer of the option whether call or put is required to pay premium. In the books of buyer, such premium should be debited to "Index Option Premium Account" or "Stock Option Premium Account" as the case may be.
In the Books of Seller
On receiving the premium the "Index/Stock Option Premium Account" will be credited. However, the seller is also required to pay initial margin to the clearing corporation for entering into contract as in case of futures contracts. Such initial margin is debited to "Index / Stock Option Margin Account".
"Index/Stock Option Premium Account" or "Index/Stock Option Margin Account" shall be shown separately under the head "Current Assets" or "Current Liabilities" as the case may be.
At the time of continuance of Contract
In the books of buyer no entries are required to be passed. In the books of seller/writer, entries will be passed for payment or receipt of marked to market (MTM) margin difference in a similar manner as in case of future contracts.
However, if the contracts are live (open) as on the balance sheet date, appropriate provision has to be made in the books of account by giving effect into Profit and Loss Account.
Open Contracts as on Balance Sheet date
In the Books of Buyer
The maximum loss in Option Contract to the buyer is limited to the premium account. At the time of balance sheet date if the premium prevailing in the market for a contract of similar nature is lower than the premium so paid, then the provision is to be made for the difference. The provision so created shall be credited to "Provision for Loss on Index/Stock Option Account" and shall be reduced from "Index/Stock Option Premium Account" appearing under the head Current Assets.
In the Books of Seller
If the premium received is lower than what is prevailing in the market for a contract of a similar nature, then appropriate provision for loss will be made by debiting profit and loss account and crediting "Provision for Loss Index/Stock Option Account". This account shall appear under the head "Current Liabilities".
In case, if the premium prevailing in the market as compared to premium paid/received renders expected profits, the same shall be ignored considering the principle of prudence.
In case of multiple open options at the year end, the index wise /stock scrip wise provision should be made considering all open options of any strike price and any expiry date pertaining to that index/scrip taken together.
At the time of final settlement
In the Books of Buyer
As on now, the Index Options and the Stock Options both are settled in cash and the accounting entries will also be similar. On exercising the option either at the time of final settlement or at the time of squaring up, the premium will be recognised as expense, net of amount lying in provision account, if any.
In addition to this, the buyer is also entitled for a favourable difference (if any) of settlement price and strike price, and the same shall be recognised as income.
In the Books of Seller
Similar the seller will recognise the premium as income after adjusting provision made in this regards, if any. Payment of actual difference by seller at the time of squaring up will be debited to profit and loss as a loss.
For working out Profit & Loss in case of outstanding multiple options of the same scrip/index with the same strike price at the same expiry date, weighted average method should be followed on final settlement.
Accounting for forward foreign exchange contracts is covered by AS 11.
TAXATION
The Finance Act, 2005 has clarified that equity derivative transactions will not amount to speculation. Section 43 (5) defines a speculative transaction and its provisos provide exceptions to this definition. A new proviso (d) is now added to this sub section and provides that : an eligible transaction in respect of trading in derivatives referred to in Section 2 (aa) of the Securities Contract Regulation Act, 1956 carried out in a recognized stock exchange will not be treated as a ‘speculative transaction’. The transaction is required to be carried out on electronic trading systems through a recognized broker or sub broker and supported by a time stamped contract note which should contain the PAN No and the Unique Identification Number of the assessee.
The amendment as drafted in the Finance Bill does not seek to cover commodity derivatives.
The taxability of persons who are not in the business of securities but have carried out derivative transactions is not covered clearly by the Income-tax Act. It is widely believed by experts that these could be treated as Capital Gains or as Income from Other Sources.
ACCOUNTING
Accounting of Equity Futures and Options is based on the Guidance Note issued by the Institute. These guidelines are summarized below:
Accounting treatment of future contracts
At the time of inception of contract
Every person is required to pay initial margin determined by the Clearing Corporation/House before entering into the contract of either Stock Future or Index Future. Such initial margin payment shall be debited to the "Initial Margin – Index/S he head "Current Assets". If the initial margin is paid by way of collaterals like TDS, securities, Bank Guarantees etc. entries would be passed in memorandum Banks.
At the time of Daily Settlement
All future contracts are Marked to Market (MTM) on daily basis. This involves payment or receipts of difference in price fluctuation on daily basis. The amount of Marked to Market margin received/paid into/from such accounts should be debited or credited to "Marked to Market Margin Index/Stock Future Account" and will appear as a separate item as "Current Asset" or "Current Liabilities" as the case may be.
Open interest as on Balance Sheet date
At the year end appropriate provision shall be created by a debit to Profit and Loss account for anticipated Loss equivalent to debit balance in "Marked to Market Margin Index/Stock Futures Account." Net amount received which is anticipated profit represented by credit balance in MTM Margin account shall be ignored and no credit shall be taken to Profit and Loss account considering principle of "prudence". For this purpose the net amount paid or received on account of MTM on Open contracts should be determined index wise or scrip wise. Provision so created should be shown as deduction from MTM Margin Index/Stock Future under the head "Current Assets". Proper disclosure is required to be made for the open interest as on the Balance Sheet date in respect of different series of contract.
At the time of Final Settlement
As on date, all future contracts whether Index Future or Stock Future are cash settled on the settlement date. The difference between contract price and the settlement price shall be calculated and recognised in the Profit and Loss account after adjusting provisions created for anticipated loss, if any. Any loss arising out of settlement shall be first charged to such provision account and balance of loss if any shall be charged to Profit and Loss account. If more than one contract in respect of relevant series of equity index future/equity stock future contract to which the square up contract pertains is outstanding, the contract price of the contract so squared up should be determined using Weighted Average Method for calculating Profit or Loss on squaring up.
ACCOUNTING TREATMENT OF OPTION CONTRACT
At the inception of the Contract
In the Books of Buyer
The buyer of the option whether call or put is required to pay premium. In the books of buyer, such premium should be debited to "Index Option Premium Account" or "Stock Option Premium Account" as the case may be.
In the Books of Seller
On receiving the premium the "Index/Stock Option Premium Account" will be credited. However, the seller is also required to pay initial margin to the clearing corporation for entering into contract as in case of futures contracts. Such initial margin is debited to "Index / Stock Option Margin Account".
"Index/Stock Option Premium Account" or "Index/Stock Option Margin Account" shall be shown separately under the head "Current Assets" or "Current Liabilities" as the case may be.
At the time of continuance of Contract
In the books of buyer no entries are required to be passed. In the books of seller/writer, entries will be passed for payment or receipt of marked to market (MTM) margin difference in a similar manner as in case of future contracts.
However, if the contracts are live (open) as on the balance sheet date, appropriate provision has to be made in the books of account by giving effect into Profit and Loss Account.
Open Contracts as on Balance Sheet date
In the Books of Buyer
The maximum loss in Option Contract to the buyer is limited to the premium account. At the time of balance sheet date if the premium prevailing in the market for a contract of similar nature is lower than the premium so paid, then the provision is to be made for the difference. The provision so created shall be credited to "Provision for Loss on Index/Stock Option Account" and shall be reduced from "Index/Stock Option Premium Account" appearing under the head Current Assets.
In the Books of Seller
If the premium received is lower than what is prevailing in the market for a contract of a similar nature, then appropriate provision for loss will be made by debiting profit and loss account and crediting "Provision for Loss Index/Stock Option Account". This account shall appear under the head "Current Liabilities".
In case, if the premium prevailing in the market as compared to premium paid/received renders expected profits, the same shall be ignored considering the principle of prudence.
In case of multiple open options at the year end, the index wise /stock scrip wise provision should be made considering all open options of any strike price and any expiry date pertaining to that index/scrip taken together.
At the time of final settlement
In the Books of Buyer
As on now, the Index Options and the Stock Options both are settled in cash and the accounting entries will also be similar. On exercising the option either at the time of final settlement or at the time of squaring up, the premium will be recognised as expense, net of amount lying in provision account, if any.
In addition to this, the buyer is also entitled for a favourable difference (if any) of settlement price and strike price, and the same shall be recognised as income.
In the Books of Seller
Similar the seller will recognise the premium as income after adjusting provision made in this regards, if any. Payment of actual difference by seller at the time of squaring up will be debited to profit and loss as a loss.
For working out Profit & Loss in case of outstanding multiple options of the same scrip/index with the same strike price at the same expiry date, weighted average method should be followed on final settlement.
Accounting for forward foreign exchange contracts is covered by AS 11.
TAXATION
The Finance Act, 2005 has clarified that equity derivative transactions will not amount to speculation. Section 43 (5) defines a speculative transaction and its provisos provide exceptions to this definition. A new proviso (d) is now added to this sub section and provides that : an eligible transaction in respect of trading in derivatives referred to in Section 2 (aa) of the Securities Contract Regulation Act, 1956 carried out in a recognized stock exchange will not be treated as a ‘speculative transaction’. The transaction is required to be carried out on electronic trading systems through a recognized broker or sub broker and supported by a time stamped contract note which should contain the PAN No and the Unique Identification Number of the assessee.
The amendment as drafted in the Finance Bill does not seek to cover commodity derivatives.
The taxability of persons who are not in the business of securities but have carried out derivative transactions is not covered clearly by the Income-tax Act. It is widely believed by experts that these could be treated as Capital Gains or as Income from Other Sources.
VERIFICATION OF PAN
Very offen it so happens that we commit errer in wriing PAN, particularly when it it dectated on phone. This is the best link to check whether the PAN is right or wrong. By inserting PAN one can find the name of the assessee
ACCOUNTING STANDARD 17-- SEGMENT REPORTING
I. Criteria for classification of enterprises
a.
Level I Enterprises
Enterprises which fall in any one or more of the following categories, at any time during the accounting period :
i. Whose equity or debt securities are listed, whether in India or outside India.
ii. Which are in the process of listing their equity or debt securities as evidenced by the board of directors’ resolution.
iii. Banks including co-operative banks.
iv. Financial Institutions.
v. Carrying on insurance business.
vi. All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceeding accounting period on the basis of audited financial statements exceeds Rs. 50 crore. Turnover does not include ‘other income’.
vii. All commercial, industrial and business reporting enterprises having borrowings , including public deposits, in excess of Rs. 10 crore at any time during the accounting period.
viii. Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
b. Level II EnterprisesEnterprises which are not Level I but fall in one or more of the following categories:
i. All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceeding accounting period on the basis of audited financial statements exceeds Rs. 40 lakhs but does not exceed Rs. 50 crore. Turnover does not include ‘other income’.
ii. All commercial, industrial and business reporting enterprises having borrowings , including public deposits, in excess of Rs. 1 crore but not in excess of Rs. 10 crore at any time during the accounting period.
iii. Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
c. Level III EnterprisesEnterprises which are not covered under Level I and Level II.
Accounting Standard 17: Segment Reporting
• Requires reporting of financial information about different types of products and services an enterprise provides and different geographical areas in which it operates.
• A business segment is a distinguishable component of an enterprise providing a product or service or group of products or services that is subject to risks and returns that are different from other business segments.
• A geographical segment is distinguishable component of an enterprise providing products or services in a particular economic environment that is subject to risks and returns that are different from components operating in other economic environments.
• Internal organizational management structure, internal financial reporting system is normally the basis for identifying the segments.
• The dominant source and nature of risk and returns of an enterprise should govern whether its primary reporting format will be business segments or geographical segments.
• A business segment or geographical segment is a reportable segment if revenue from sales to external customers and from transactions with other segments exceeds 10% of total revenues (external and internal) of all segments; or segment result, whether profit or loss, is 10% or more of (i) combined result of all segments in profit or (ii) combined result of all segments in loss whichever is greater in absolute amount; or segment assets are 10% or more of all the assets of all the segments. If there is reportable segment in the preceding period (as per criteria), same shall be considered as reportable segment in the current year.
• If total external revenue attributable to reportable segment constitutes less than 75% of total revenues then additional segments should be identified, for reporting.
• Under primary reporting format for each reportable segment the enterprise should disclose external and internal segment revenue, segment result, amount of segment assets and liabilities, cost of fixed assets acquired, depreciation, amortization of assets and other non cash expenses.
• Interest expense (on operating liabilities) identified to a particular segment (not of a financial nature) will not be included as part of segment expense. However, interest included in the cost of inventories (as per AS 16) is to be considered as a segment expense (ASI-22).
• Reconciliation between information about reportable segments and information in financial statements of the enterprise is also to be provided.
• Secondary segment information is also required to be disclosed. This includes information about revenues, assets and cost of fixed assets acquired.
• When primary format is based on geographical segments, certain further disclosures are required.
• Disclosures are also required relating to intra-segment transfers and composition of the segment.
• AS disclosure is not required, if more than one business or geographical segment is not identified However, the fact that there is only one 'business segment' and 'geographical segment' should be disclosed by way of a note. (ASI-20 Revised).
Accounting Standards Interpretation (ASI) 20 (Revised)Accounting Standards Interpretation (ASI) 20 (Revised), Disclosure of Segment Information, Accounting Standard (AS) 17, Segment Reporting
ISSUE
1. Whether an enterprise, which has neither more than one business segment nor more than one geographical segment, is required to disclose segment information as per AS 17.
CONSENSUS
2. In case by applying the definitions of ‘business segment’ and ‘geographical segment’, contained in AS 17, it is concluded that there is neither more than one business segment nor more than one geographical segment, segment information as per AS 17 is not required to be disclosed. However, the fact that there is only one ‘business segment’ and ‘geographical segment’ should be disclosed by way of a note.
BASIS FOR CONCLUSIONS
3. The paragraph of AS 17 dealing with ‘Objective’ provides as under:
“The objective of this Statement is to establish principles for reporting financial information, about the different types of products and services an enterprise produces and the different geographical areas in which it operates. Such information helps users of financial statements:
a. better understand the performance of the enterprise;
b. better assess the risks and returns of the enterprise; and
c. make more informed judgements about the enterprise as a whole.
Many enterprises provide groups of products and services or operate in geographical areas that are subject to differing rates of profitability, opportunities for growth, future prospects, and risks. Information about different types of products and services of an enterprise and its operations in different geographical areas - often called segment information - is relevant to assessing the risks and returns of a diversified or multi-locational enterprise but may not be determinable from the aggregated data. Therefore, reporting of segment information is widely regarded as necessary for meeting the needs of users of financial statements.”
In case of an enterprise, which has neither more than one business segment nor more than one geographical segment, the relevant information is available from the balance sheet and statement of profit and loss itself and, therefore, keeping in view the objective of segment reporting, such an enterprise is not required to disclose segment information as per AS 17. The disclosure of the fact that there is only one ‘business segment’ and ‘geographical segment’ and, therefore, the segment information is not provided by the concerned enterprise is useful for the users of the financial statements while making a comparison among various enterprises.
a.
Level I Enterprises
Enterprises which fall in any one or more of the following categories, at any time during the accounting period :
i. Whose equity or debt securities are listed, whether in India or outside India.
ii. Which are in the process of listing their equity or debt securities as evidenced by the board of directors’ resolution.
iii. Banks including co-operative banks.
iv. Financial Institutions.
v. Carrying on insurance business.
vi. All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceeding accounting period on the basis of audited financial statements exceeds Rs. 50 crore. Turnover does not include ‘other income’.
vii. All commercial, industrial and business reporting enterprises having borrowings , including public deposits, in excess of Rs. 10 crore at any time during the accounting period.
viii. Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
b. Level II EnterprisesEnterprises which are not Level I but fall in one or more of the following categories:
i. All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceeding accounting period on the basis of audited financial statements exceeds Rs. 40 lakhs but does not exceed Rs. 50 crore. Turnover does not include ‘other income’.
ii. All commercial, industrial and business reporting enterprises having borrowings , including public deposits, in excess of Rs. 1 crore but not in excess of Rs. 10 crore at any time during the accounting period.
iii. Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
c. Level III EnterprisesEnterprises which are not covered under Level I and Level II.
Accounting Standard 17: Segment Reporting
• Requires reporting of financial information about different types of products and services an enterprise provides and different geographical areas in which it operates.
• A business segment is a distinguishable component of an enterprise providing a product or service or group of products or services that is subject to risks and returns that are different from other business segments.
• A geographical segment is distinguishable component of an enterprise providing products or services in a particular economic environment that is subject to risks and returns that are different from components operating in other economic environments.
• Internal organizational management structure, internal financial reporting system is normally the basis for identifying the segments.
• The dominant source and nature of risk and returns of an enterprise should govern whether its primary reporting format will be business segments or geographical segments.
• A business segment or geographical segment is a reportable segment if revenue from sales to external customers and from transactions with other segments exceeds 10% of total revenues (external and internal) of all segments; or segment result, whether profit or loss, is 10% or more of (i) combined result of all segments in profit or (ii) combined result of all segments in loss whichever is greater in absolute amount; or segment assets are 10% or more of all the assets of all the segments. If there is reportable segment in the preceding period (as per criteria), same shall be considered as reportable segment in the current year.
• If total external revenue attributable to reportable segment constitutes less than 75% of total revenues then additional segments should be identified, for reporting.
• Under primary reporting format for each reportable segment the enterprise should disclose external and internal segment revenue, segment result, amount of segment assets and liabilities, cost of fixed assets acquired, depreciation, amortization of assets and other non cash expenses.
• Interest expense (on operating liabilities) identified to a particular segment (not of a financial nature) will not be included as part of segment expense. However, interest included in the cost of inventories (as per AS 16) is to be considered as a segment expense (ASI-22).
• Reconciliation between information about reportable segments and information in financial statements of the enterprise is also to be provided.
• Secondary segment information is also required to be disclosed. This includes information about revenues, assets and cost of fixed assets acquired.
• When primary format is based on geographical segments, certain further disclosures are required.
• Disclosures are also required relating to intra-segment transfers and composition of the segment.
• AS disclosure is not required, if more than one business or geographical segment is not identified However, the fact that there is only one 'business segment' and 'geographical segment' should be disclosed by way of a note. (ASI-20 Revised).
Accounting Standards Interpretation (ASI) 20 (Revised)Accounting Standards Interpretation (ASI) 20 (Revised), Disclosure of Segment Information, Accounting Standard (AS) 17, Segment Reporting
ISSUE
1. Whether an enterprise, which has neither more than one business segment nor more than one geographical segment, is required to disclose segment information as per AS 17.
CONSENSUS
2. In case by applying the definitions of ‘business segment’ and ‘geographical segment’, contained in AS 17, it is concluded that there is neither more than one business segment nor more than one geographical segment, segment information as per AS 17 is not required to be disclosed. However, the fact that there is only one ‘business segment’ and ‘geographical segment’ should be disclosed by way of a note.
BASIS FOR CONCLUSIONS
3. The paragraph of AS 17 dealing with ‘Objective’ provides as under:
“The objective of this Statement is to establish principles for reporting financial information, about the different types of products and services an enterprise produces and the different geographical areas in which it operates. Such information helps users of financial statements:
a. better understand the performance of the enterprise;
b. better assess the risks and returns of the enterprise; and
c. make more informed judgements about the enterprise as a whole.
Many enterprises provide groups of products and services or operate in geographical areas that are subject to differing rates of profitability, opportunities for growth, future prospects, and risks. Information about different types of products and services of an enterprise and its operations in different geographical areas - often called segment information - is relevant to assessing the risks and returns of a diversified or multi-locational enterprise but may not be determinable from the aggregated data. Therefore, reporting of segment information is widely regarded as necessary for meeting the needs of users of financial statements.”
In case of an enterprise, which has neither more than one business segment nor more than one geographical segment, the relevant information is available from the balance sheet and statement of profit and loss itself and, therefore, keeping in view the objective of segment reporting, such an enterprise is not required to disclose segment information as per AS 17. The disclosure of the fact that there is only one ‘business segment’ and ‘geographical segment’ and, therefore, the segment information is not provided by the concerned enterprise is useful for the users of the financial statements while making a comparison among various enterprises.
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