Accounting for Taxes on Income in Interim
Financial Results in the context of the Finance Bill, 2004
The Hon'ble Finance Minister has introduced the
Finance Bill, 2004, on 8th July 2004. The Bill proposes certain
changes in the tax rates and tax laws including increase in the tax
rate by levy of surcharge of two percent as additional surcharge to be
called education cess on income-tax. Such proposals in the Finance
Bill have an effect on the measurement of the tax expense including
deferred tax expense and amounts of deferred tax liability and
deferred tax assets.
In this regard, an issue is being raised as to
whether these proposals should be taken into consideration for
accounting for taxes on income for preparation of the quarterly
financial results for the quarter ending June 30, 2004.
In respect of the above issue, the following
accounting treatment should be followed:
- The proposals with regard to changes in tax rates and tax laws
announced on July 8, 2004, should not be taken into consideration
while accounting for taxes on income for the quarter ending 30th
June, 2004. Therefore, the tax expense for the quarter ending 30th
June, 2004, should be measured without taking into consideration the
proposals with regard to changes in tax rates and tax laws announced
on July 8, 2004. Similarly, the balance of the deferred tax
liability/asset as on March 31, 2004, is not required to be
remeasured (as per paragraph 21 of AS 22 reproduced in paragraph 4
(ii) below) in the context of such proposals.
- In the quarterly financial results for the period ending 30th
June, 2004, the disclosure of the fact of the proposed changes in
the tax rates and tax laws, to the extent relevant in the
enterprise's context should be made as per the requirement (relating
to disclosure of material event or transactions subsequent to the
end of the quarter) contained in Clause 41 of the Listing Agreement
entered into between stock exchanges and listed enterprises, if the
change in tax rates and tax laws is considered material in the
context of the facts and circumstances of the enterprise
Reasons for prescribing the accounting treatment
The above treatment has been decided on the
- Paragraph 27 of Accounting Standard (AS) 25, Interim Financial
Reporting, provides as follows:
"27. An enterprise should apply the same accounting policies
in its interim financial statements as are applied in its annual
financial statements, except for accounting policy changes made
after the date of the most recent annual financial statements that
are to be reflected in the next annual financial statements.
However, the frequency of an enterprise's reporting (annual,
half-yearly, or quarterly) should not affect the measurement of its
annual results. To achieve that objective, measurements for interim
reporting purposes should be made on a year-to-date basis."
From the above, it may be noted that for the preparation of the
quarterly financial results, the same accounting policies are
applied as those in the annual financial statements.
- With regard to accounting for taxes on income, paragraphs 20, 21
and 22 of AS 22, Accounting for Taxes on Income, provide as below:
"20. Current tax should be measured at the amount expected to
be paid to (recovered from) the taxation authorities, using the
applicable tax rates and tax laws.
21. Deferred tax assets and liabilities should be measured using the
tax rates and tax laws that have been enacted or substantively
enacted by the balance sheet date.
22. Deferred tax assets and liabilities are usually measured
using the tax rates and tax laws that have been enacted. However,
certain announcements of tax rates and tax laws by the government
may have the substantive effect of actual enactment. In these
circumstances, deferred tax assets and liabilities are measured
using such announced tax rate and tax laws."
From the above, it may be noted that for the purposes of the
quarterly financial results, the applicable tax rates and tax laws
(for the measurement of current tax) and enacted or substantively
enacted tax rates and tax laws (for the measurement of deferred tax)
by the reporting date of the relevant quarter are required to be
taken for measurement of tax expense.
- For the purposes of the quarter ending on June 30, 2004, the
proposals with regard to changes in tax rates and tax laws are not
considered as applicable, enacted or substantively enacted tax rates
or tax laws, since the proposals are announced after the reporting
date of the quarter. Further, the announcement of the proposals can
not be considered as event which provide further evidence of
conditions that existed at the reporting date in view of the
requirements of the AS 4, Contingencies and Events Occurring After
the Balance Sheet Date. Accordingly, the amounts of tax expense,
assets or liabilities representing current tax, and deferred tax
assets or liabilities, as on June 30, 2004, are not adjusted by the
proposed changes in tax rates and tax laws announced on July 8,