KPMG in India is pleased to present Voices on Reporting – a monthly series of knowledge sharing calls to discuss current and emerging issues relating to financial reporting.
On 10 July 2014, the Finance Minister of India announced a roadmap and definite dates for convergence with the International Financial Reporting Standards (IFRS) for Indian companies as part of his Union Budget speech. The Finance Minister proposed to make Indian Accounting Standards (Ind AS) converged with IFRS mandatory for Indian companies from the financial year 2016-17.
He also stated that ‘income computation and disclosure standards’ (tax accounting standards) would be notified separately. The Finance Bill, 2014 proposes that amendments to section 145 sub-section 2 of the Income Tax Act, 1961 which require the use of ‘income computation and disclosure standards’ to take effect from 1 April 2015 and in relation to the assessment year 2015-16 and subsequent years.
This is a significant development and will most likely apply to several companies. We discussed the implementation challenges put forth by the convergence with IFRS and use of tax accounting standards for the corporate India.
The Institute of Chartered Accountants of India (ICAI) had proposed a new roadmap for implementation of Ind AS on 9 April 2014. According to the roadmap, there would be two sets of accounting standards:
• Ind AS
• Existing notified accounting standards (AS).
The ICAI roadmap proposed that the Ind AS would be applied by specified class of companies for preparing consolidated financial statements for financial periods beginning on or after 1 April 2016, along with comparatives for the year ending 31 March 2016. The proposed roadmap was submitted to the Ministry of Corporate Affairs.
On 10 July 2014 the Finance Minister, presented the Union Budget. In his budget speech, the Finance Minister recognised the need to converge existing notified accounting standards under Indian GAAP with the IFRS. Accordingly, Ind AS are proposed to be made mandatory for Indian companies from the financial year 2016-17. Additionally, the companies can opt to adopt Ind AS voluntarily from financial year 2015-16.
The date of implementation of Ind AS for banks and insurance companies will be notified separately by the respective regulators.
The provisions of the Income Tax Act, 1961 govern the computation of taxable profits; however, the Income Tax Act, 1961 does not comprehensively specify accounting principles to be followed for this purpose. In this context, the Central Government, empowered under section 145 sub-section 2 of the Income Tax Act, 1961, had in 1996 notified two accounting standards, one on ‘Disclosure of Accounting Policies’ and other on ‘Disclosure of Prior Period Items and Extraordinary Items and Changes in Accounting Policies’.
The Central Board of Direct Taxes (CBDT) had constituted an Accounting Standard Committee (the Committee) in December 2010 with the objective to harmonise the accounting standards issued by the ICAI and with direct tax laws and suggest tax accounting standards which should be adopted under section 145 sub-section 2 of the Income Tax Act, 1961.
On 26 October 2012, the Committee issued their final recommendations including drafts of 14 individual tax accounting standards for public comments.
With the impending convergence with IFRS in India (Ind AS), this issue assumes greater importance. Accordingly, the Finance Bill, 2014 proposes that amendments to section 145 sub-section 2 of the Income Tax Act, 1961 which require the use of tax accounting standards to take effect from 1 April 2015 and in relation to the assessment year 2015-16 and subsequent years.
The commitment to adoption of Ind AS and tax accounting standards are welcome steps. We discussed the key implementation challenges that are expected to emerge from implementation of Ind AS and tax accounting standards e.g., which class of companies are expected to be impacted, Ind AS to be updated for the various amendments under IFRS, impact of application of Ind AS on the computation of the Minimum Alternate Tax (MAT), need of carve-outs, if any, from IFRS, etc.
Our next Voices on Reporting conference call will be held on Wednesday, 20 August 2014 between 04:00 – 05:00 pm
We look forward to your presence and active participation on this call.
Please click here to access the call recording.