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TMI BlogAnnexure 16: Indian Accounting Standard in the perspective of GSTX X X X Extracts X X X X X X X X Extracts X X X X ..... ISCLOSURE OF ACCOUNTING POLICIES AS 1 deal with the disclosure of significant accounting policies followed in the preparation and presentation of financial statements. It states that an enterprise needs to disclose significant accounting policies followed by it to prepare and present its financial statements. The following are a few examples of the areas in which different accounting policies may be adopted by different enterprises. a) Methods of depreciation, depletion and amortisation b) Treatment of expenditure during construction c) Conversion or translation of foreign currency items d) Valuation of inventories e) Treatment of goodwill f) Valuation of investments g) Treatment of retirement benefits h) Recognition of profit on long-term contracts i) Valuation of fixed assets j) Treatment of contingent liabilities. e.g.1: Supplies on behalf of the principal are not reflected in the financial statements of the agent and only commission is shown as the revenue of the agent. Under the GST Law, such turnover would be treated as part of the agent's turnover also [Ref: Sch I under sec 7]. e.g.2: Disposal of business assets without any consideration - Suppose ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T Act]. For the first three months of 2017-18 revenue would be presented at Gross for Excise Less Excise Duty paid, and for the subsequent period it would be shown only the net. 2. AS 2 / IND AS 2: VALUATION OF INVENTORY As per AS-2 the costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and similar items are deducted in determining the costs of purchase. In the CGST/SGST Act several provisions are there for the availment of input tax credit and refund of input tax credit in specified situations. Thus, to the extent credit is available or refund is available, it would not form part of the cost of inventory. But, in following situations input tax is not available for credit: (i). Input / input services /capital goods are used for other than business purposes. (ii). Tax paid on inward supplies by the composition tax payers. (iii). Restricted credits u/s 17(5) of the CGST/SGST Act; (iv). Depreciation cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or disposal of business assets where input tax credit has been availed on such assets have been termed as an activity to be treated as supply even if made without consideration. Furthermore, where financing activities are concerned, services by way of (a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services) and (b) inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers are exempted from GST. As per the GST Laws, interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. So, acquisition of capital, taking a loan, payment/receipt of interest or dividend will not attract GST, but any service charge or /processing fee incurred at the time of a loan will attract GST. e.g.1: A business firm receives Rs. 10,00,000/- as d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trong case, and the business estimates a Rs. 2 lakh loss if the firm loses the case. Since this liability is estimated, the firm will disclose this liability in its books as a footnote below balance sheet. Product warranties given by the company can also be considered a contingent liability, since there is no certainty about the exact number of units that will be returned by customers for repair or replacement. 5. AS 5/ IND AS 8 : NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES AS 5 mainly deals with the following items: (i). Net Profit or Loss for the Period - These can be categorized into Profit/Loss from ordinary activities and from extraordinary activities. (ii). Prior Period Items - While preparing the financial statements, there are certain items which actually correspond to prior accounting periods. The income or losses due to these items are a result of error or omission in the financial statements of the prior period. By nature, these items are not frequent. Now, Profit or loss from ordinary activities is such which arise in the normal course of business, i.e. they are a part of business and related activities. Examples: Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uggests that although the loss related to prior period, it was not shown and the profit was overstated by such amount i.e. Rs. 40 lakh. While taking the effect of such loss in the current year, this is a prior period item. Thus, such loss will be disclosed in the current year's financial statements as per AS 5. Accordingly, appropriate ITC already enjoyed on such goods is to be reversed as per GST Laws. e.g. 2, the rate of depreciation of a particular asset is changed from 7% to 10% due to a statutory change. The business firm charges depreciation in his books which is inclusive of GST. Such tax portion depreciated is not entitled for ITC. Accordingly in the changed scenario where the depreciation amount will be enhanced as per AS 5, the amount of ITC reversal will also increase as per the GST Laws. 6. AS 6 & 10/ IND AS 16: PROPERTY, PLANT AND EQUIPMENT (PPE) & DEPRECIATION ACCOUNTING AND ACCOUNTING FOR FIXED ASSETS As per AS 6 & 10, at the time of recognition, an item of property, plant and equipment (PPE) that qualifies for recognition as an asset should be measured at its cost. Elements of cost include Purchase cost i.e. purchase price including import duties after deducting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the specific requirement of other Indian accounting standards. From the GST perspective, as per Section 16(3) where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed. In nutshell, Input tax credit shall not be allowed on the tax component of the cost of capital goods and plant and machinery if depreciation on such tax component has been claimed under the provisions of the Income Tax Act, 1961. 7. AS 7/ IND AS 11: CONSTRUCTION CONTRACT AS 7 Construction Contract describes the accounting treatment of the revenue and of a construction contract. There are different types of construction contract like fixed price contract, cost-plus contract etc. Fixed price contract is very common where the contract between the contractee and contractor is agreed against a fixed price. In some cases, there may be a clause of escalation in the contract which is mutually agreed for various reasons like increase of the cost of raw materials, delay in completion etc. Divisible contract and indivisible contract: In di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contractor received an incentive of Rs.55 Lakh due to completion of construction project before the agreed time. Whether it will be part Turnover in GST? Then which type of supply is this? Yes, it will form part of turnover in GST, since there is a supply of service. But, this is not any construction service. This is nothing but 'agreeing to the obligation to do an act' which is a kind of service as per 5 (e) of Sch. II under sec 7 of the CGST/SGST Act. e.g.4: There may be a situation when the contractee may claim a penalty from the contractor for various reasons like delay in completion, inferior quality of works, construction machinery used not as per specification of the agreement etc. Whether this penalty will also be part of turnover in GST? If so, then what kind of service is it and who is the supplier of service? Yes, it will form part of turnover in GST, since there is a supply of service. But, this is not any construction service. This service is nothing but 'agreeing to the obligation to tolerate an act' which is a kind of service as per 5 (e) of Sch. II under sec 7 of the CGST/SGST Act. The contractee is the supplier of such service to the contractor in this case. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it facility which has not been utilized. So, acquisition of capital, taking a loan, payment/receipt of interest or dividend will not attract GST, but any service charge or /processing fee incurred at the time of a loan will attract GST. 9. AS 15/ IND AS 19: EMPLOYEE BENEFITS The objective of this Standard is to prescribe the accounting treatment and disclosure for employee benefits in the books of employers except employee share-based payments. Employee benefits are all forms of consideration given by an enterprise in exchange for service rendered by employees. This may be in the form of long/short term employee benefits, post-employment benefits, termination/retirement benefits etc. Now, as per entry no. 1 of Schedule III, Services by an employee to the employer in the course of or in relation to his employment, is an activity which is treated neither as a supply of goods nor as a supply of services. Thus the employee benefits provided to an employee and recorded as per AS 15, does not come under the purview of GST. e.g. 1, Mr. A receives an arrear payment of Rs. 70,000/- after retiring from Company X. Here, the expense will be recorded as post-employment benefit as per AS 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on foreign exchange have already been made in Paras 3 & 9 respectively. 11. AS 17/ IND AS 108: SEGMENT REPORTING The objective of this Standard 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. If a single financial report contains both consolidated financial statements and the separate financial statements of the parent, segment information needs to be presented only on the basis of the consolidated financial statements. Here, the concept of related person and distinct person comes in under the GST Laws. As per entry no. 2 of Schedule I, Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business is an activity to be treated as supply even if made without any consideration. In the explanation provided to Section 15(5) of the CGST/SGST Act(s), persons will be "related" if: * such persons are officers or directors of one another's businesses; * such persons are legally recognised partners in business; * such persons are e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butories according to their respective rights. Now, as per S. 2(52) of the CGST/SGST Acts, "goods'' means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. Thus, dividend Income may be treated as not being in the ambit of GST as such is a money income and money is excluded from goods. Also, Section 17(3) of the CGST/SGST Act provides that the value of exempt supply under Section 17(2) shall be as prescribed and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. It is pertinent to note that Section 2(101) of the said Acts provides that "securities" shall have the same meaning as assigned to it in Section 2(h) of the Securities Contracts (Regulation) Act. The term 'dividend' in itself is not included in the said definition. However, it becomes relevant to examine if the earning of dividend on account of holding shares (qualifying as 'se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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