ACCOUNTING STANDARDS

OF NON CORPORATE
ENTITIES – AS 22 & AS 29
CA VIJAY TC, FCA, CISA
NON CORPORATE ENTITY

• All Business or Professional Entities,

• other than Companies incorporated under Companies Act and LLPs incorporated under
LLP Act
• are considered to be Non-Corporate entities
 NON CORPORATE ENTITY

• Sole Proprietorship firms

• Hindu Undivided Family
• Partnership firms (Registered/Un-registered)
• Association of Persons
• Society (registered under any law)
• Trusts (public or private) (registered/Un-registered)
• Statutory Corporations, Autonomous bodies and Authorities
• Any form of organisation that is engaged fully or partially in any Business or Professional
activities
ACCOUNTING STANDARDS (AS) PRESCRIBED BY
ICAI FOR ENTITIES OTHER THAN COMPANIES
• AS notified under Companies Act are applicable only to Corporates
• Hence, ICAI announced the scheme for applicability of AS issued by ICAI to Non-
Corporate Entities.
• NCEs are classified in four levels (Level I, II, III & IV)
• Level I non-company entities are required to comply fully with all the AS. Level IV, Level III
and Level II non-company entities are considered as Micro, Small and Medium Sized
Entity (MSMEs) that have been granted certain exemptions/relaxations by the ICAI.
ACCOUNTING STANDARD 22 -
ACCOUNTING FOR TAXES ON INCOME
OBJECTIVE

• to prescribe accounting treatment for taxes on income

• Matching concept : Taxes on Income are accrued in the same period as the revenue and
expenses to which they relate
• taxable income may be significantly different from the accounting income
• divergence between taxable income and accounting income arises due to two main
reasons

there are differences between there are differences between the amount
items of revenue and expenses in respect of a particular item of revenue
or expense
SCOPE

• This Standard should be applied in accounting for taxes on income. This includes the
determination of the amount of the expense or saving related to taxes on income
in respect of an accounting period and the disclosure of such an amount in the
financial statements.
DEFINITIONS

• Accounting income (loss) is the net profit or loss for a period, as reported in the
statement of profit and loss, before deducting income tax expense or adding income tax
saving.
• Taxable income (tax loss) is the amount of the income (loss) for a period, determined
in accordance with the tax laws, based upon which income tax payable (recoverable) is
determined.
• Tax expense (tax saving) is the aggregate of current tax and deferred tax charged or
credited to the statement of profit and loss for the period.
DEFINITIONS

• Current tax is the amount of income tax determined to be payable (recoverable) in

respect of the taxable income (tax loss) for a period.
• Deferred tax is the tax effect of timing differences.
• Timing differences are the differences between taxable income and accounting income
for a period that originate in one period and are capable of reversal in one or more
subsequent periods.
• Permanent differences are the differences between taxable income and accounting
income for a period that originate in one period and do not reverse subsequently.
TIMING DIFFERENCE VS PERMANENT DIFFERENCE

PERMANENT DIFFERENCE TIMING DIFFERENCE

• differences between taxable income and • differences between taxable income and
accounting income which originate in accounting income for a period that
one period and do not reverse originate in one period and are capable
subsequently of reversal in one or more subsequent
periods
• Example : Cash payment in excess of
Rs.10,000. • Example : Depreciation, 43b
Disallowances.
UNABSORBED DEPRECIATION / CARRY FORWARD
LOSSES
• Unabsorbed depreciation and carry forward of losses which can be set- off against future
taxable income are also considered as timing differences and result in deferred tax assets,
subject to consideration of prudence
RECOGNITION

• Standard requires recognition of deferred tax for all the timing differences. This is based on
the principle that the financial statements for a period should recognise the tax effect,
whether current or deferred, of all the transactions occurring in that period
• deferred tax assets should be recognised and carried forward only to the extent that there is
a reasonable certainty that sufficient future taxable income will be available against which such
deferred tax assets can be realised.
• Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws,
deferred tax assets should be recognised only tothe extent that there is virtual certainty
supported by convincing evidence that sufficient future taxable income will be available against
which such deferred tax assets can be realised.
VIRTUAL CERTAINTY

• is a matter of judgement based on convincing evidence and will have to be evaluated on a

case to case basis
• cannot be based merely on forecasts of performance such as business plans
• is not a matter of perception and is to be supported by convincing evidence
• for example, a profitable binding export order, cancellation of which will result in
payment of heavy damages by the defaulting party.
• On the other hand, a projection of the future profits made by an enterprise based on the
future capital expenditures or future restructuring etc., submitted even to an outside
agency, e.g., to a credit agency for obtaining loans and accepted by that agency cannot, in
isolation, be considered as convincing evidence.
MEASUREMENT

• 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
• 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.
• Deferred tax assets and liabilities should not be discounted to their present value.
• REVIEW OF DEFERRED TAX ASSETS : The carrying amount of deferred tax assets
should be reviewed at each balance sheet date
RE-ASSESSMENT VS REVIEW

REASSESSMENT REVIEW
• This is a right • This is a Duty
• Related to DTA previously • Relates to DTA previously
UNRECOGNISED RECOGNISED
PRESENTATION AND DISCLOSURE

• An enterprise should offset assets and liabilities representing current tax if the enterprise:
• (a) has a legally enforceable right to set off the recognised amounts; and
• (b) intends to settle the asset and the liability on a net basis.
• An enterprise should offset deferred tax assets and deferred tax liabilities if:
• (a) the enterprise has a legally enforceable right to set off assets against liabilities representing
current tax; and
• (b) the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by
the same governing taxation laws.
PRESENTATION AND DISCLOSURE

• Deferred tax assets and liabilities should be distinguished from assets and liabilities
representing current tax for the period. Deferred tax assets and liabilities should be
disclosed under a separate heading in the balance sheet of the enterprise, separately
from current assets and current liabilities.
• For non-companies entities, Deferred tax assets (net of the deferred tax liabilities, if any,
in accordance with paragraph 29) may be disclosed on the face of the balance sheet
separately after the head ‘Investments’ and deferred tax liabilities (net of the deferred tax
assets, if any, in accordance with paragraph 29) may be disclosed on the face of the
balance sheet separately after the head ‘Unsecured Loans.’
PRESENTATION AND DISCLOSURE

• The break-up of deferred tax assets and deferred tax liabilities into major components of
the respective balances should be disclosed in the notes to accounts.
• The nature of the evidence supporting the recognition of deferred tax assets should be
disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under
tax laws.
TRANSITIONAL PROVISIONS

• On the first occasion that the taxes on income are accounted for in accordance with this
Standard, the enterprise should recognise, in the financial statements, the deferred tax balance
that has accumulated prior to the adoption of this Standard as deferred tax asset/liability with
a corresponding credit/charge to the revenue reserves.
• The amount so credited/charged to the revenue reserves should be the same as that which
would have resulted if this Standard had been in effect from the beginning
• On the first occasion when a non-company entity gets classified as a Micro enterprise (Level
IV non-company entity), the accumulated deferred tax asset/liability appearing in the financial
statements of immediate previous accounting period, should be adjusted against the opening
revenue reserves.
SIMPLE MATHS

• (Accounting income/loss +/- Accounting Profit 1,00,000

Permanent Differences) * Tax Rate Add :
Cash payments in excess of Rs.10,000 12,500
= Current Tax + Deferred Tax 43B Disallowances 17,500
Taxable Profit 1,30,000
Tax on the above @30% 39,000

Current Tax 39,000

Deferred Tax Asset on 43B Disallowance -5,250
Total Tax 33,750

Accounting Profit + Permanent Diff 1,12,500

Tax @30% 33,750
SOME BASIC DEFERRED TAX CONCEPTS

• If Accounting profit > Taxable profit = Deferred Tax Liability

• If Taxable profit > Accounting profit = Deferred Tax Asset
• Carry forward losses and Unabsorbed Depreciation result in
DTA (subject to virtual certainty)
SOME EXAMPLES

• S Enterprises was incurring heavy losses (including unabsorbed depreciation) since the
last several years and the industry in which it was functioning was not expected to
perform better in the next few years. While finalising the accounts for the year ended
31st March 20XX, the Accountant decided to create a deferred tax asset for the tax
benefits that would arise in future years from the earlier years losses and unabsorbed
depreciation that had remained unabsorbed in income tax.
• VIRTUAL CERTAINTY
SOME EXAMPLES

• In the financial Statements of X Enterprises, the income taxes paid (current tax asset) and
provision for income tax (current tax liability) were disclosed as Assets and Liability
respectively. Comment.
• An enterprise should offset assets and liabilities representing current tax if the
enterprise:
(a) has a legally enforceable right to set off the recognised amounts; and
(b) intends to settle the asset and the liability on a net basis.
HENCE should set off and disclose.
ACCOUNTING STANDARD 29 –
PROVISIONS, CONTINGENT LIABILITIES
AND CONTINGENT ASSETS
OBJECTIVE

• to ensure that appropriate recognition criteria and measurement bases

are applied to
• provisions and contingent liabilities
• and that sufficient information is disclosed in the notes to the financial
statements to
• enable users to understand their nature, timing and amount
SCOPE

• should be applied in accounting for provisions and contingent liabilities and in dealing
with contingent assets, except
• (a) those resulting from financial instruments2 that are carried at fair value;
• (b) those resulting from executory contracts, except where the contract is onerous;
• (c) those arising in insurance enterprises from contracts with policyholders;
• (d) those covered by another Accounting Standard.
 DEFINITIONS
• A provision is a liability which can be measured only by using a substantial degree of estimation.
• A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected
to result in an outflow from the enterprise of resources embodying economic benefits.
• An obligating event is an event that creates an obligation that results in an enterprise having no realistic
alternative to settling that obligation.
• A contingent liability is:
(a) a possible obligation that arises from past events and the existence of which will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the
enterprise; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; or
(ii) a reliable estimate of the amount of the obligation cannot be made.
DEFINITIONS

• A contingent asset is a possible asset that arises from past events the existence of
which will be confirmed only by the occurrence or non- occurrence of one or more
uncertain future events not wholly within the control of the enterprise.
• Present obligation - an obligation is a present obligation if, based on the evidence
available, its existence at the balance sheet date is considered probable, i.e., more likely
than not.
• Possible obligation - an obligation is a possible obligation if, based on the evidence
available, its existence at the balance sheet date is considered not probable.
RECOGNITION - PROVISION

• A provision should be recognised when:

(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If
these conditions are not met, no provision should be recognised.
PRESENT OBLIGATION

• In almost all cases it will be clear whether a past event has given rise to a present
obligation.
• In rare cases, for example in a lawsuit, it may be disputed either whether certain events
have occurred or whether those events result in a present obligation. In such a case, an
enterprise determines whether a present obligation exists at the balance sheet date by
taking account of all available evidence, including, for example, the opinion of experts.
• The evidence considered includes any additional evidence provided by events after the
balance sheet date
PAST EVENT

• A past event that leads to a present obligation is called an obligating event. For an event
to be an obligating event, it is necessary that the enterprise has no realistic alternative to
settling the obligation created by the event
• no provision is recognised for costs that need to be incurred to operate in the future.
The only liabilities recognised in an enterprise’s balance sheet are those that exist at the
balance sheet date
• It is only those obligations arising from past events existing independently of an
enterprise’s future actions (i.e. the future conduct of its business) that are recognised as
provisions
PROBABLE OUTFLOW OF RESOURCES EMBODYING
ECONOMIC BENEFITS
• liability to qualify for recognition there must be not only a present obligation but also the
probability of an outflow of resources embodying economic benefits to settle that
obligation
• an outflow of resources or other event is regarded as probable if the event is more likely
than not to occur, i.e., the probability that the event will occur is greater than the
probability that it will not
RELIABLE ESTIMATE OF THE OBLIGATION

• use of estimates is an essential part of the preparation of financial statements and does
not undermine their reliability – TRUE IN CASE OF PROVISIONS
• In the extremely rare case where no reliable estimate can be made, a liability exists that
cannot be recognised. That liability is disclosed as a contingent liability
CONTINGENT LIABILITIES

• An enterprise should not recognise a contingent

liability
• A contingent liability is disclosed
• Contingent liabilities may develop in a way not initially expected. Therefore, they are
assessed continually to determine whether an outflow of resources embodying economic
benefits has become probable. If it becomes probable that an outflow of future economic
benefits will be required for an item previously dealt with as a contingent liability, a
provision is recognised
CONTINGENT ASSETS

• Contingent assets usually arise from unplanned or other unexpected events that give rise
to the possibility of an inflow of economic benefits to the enterprise
• Contingent assets are not recognised in financial statements
• A contingent asset is not disclosed in the financial statements
MEASUREMENT

• The amount recognised as a provision should be the best estimate of the expenditure
required to settle the present obligation at the balance sheet date. The amount of a
provision should not be discounted to its present value except in case of
decommissioning, restoration and similar liabilities that are recognised as cost of
Property, Plant and Equipment.
• The risks and uncertainties that inevitably surround many events and circumstances
should be taken into account in reaching the best estimate of a provision
• Future events that may affect the amount required to settle an obligation should be
reflected in the amount of a provision where there is sufficient objective evidence that they
will occur.
REIMBURSEMENTS

• Where some or all of the expenditure required to settle a provision is expected to be

reimbursed by another party, the reimbursement should be recognised when, and only
when, it is virtually certain that reimbursement will be received if the enterprise settles
the obligation. The reimbursement should be treated as a separate asset. The amount
recognised for the reimbursement should not exceed the amount of the provision
• In the statement of profit and loss, the expense relating to a provision may be presented
net of the amount recognised for a reimbursement
CHANGES IN PROVISIONS

• Provisions should be reviewed at each balance sheet date and adjusted to reflect the
current best estimate. If it is no longer probable that an outflow of resources embodying
economic benefits will be required to settle the obligation, the provision should be
reversed
DISCLOSURE

• For each class of provision, an enterprise should disclose:

(a) the carrying amount at the beginning and end of the period;
(b) additional provisions made in the period, including increases to existing provisions;
(c) amounts used (i.e. incurred and charged against the provision) during the period; and
(d) unused amounts reversed during the period.
Level IV, III and II non- company entities ARE EXEMPT
DISCLOSURE

• An enterprise should disclose the following for each class of provision:

(a) a brief description of the nature of the obligation and the expected timing of any resulting
outflows of economic benefits;
(b) an indication of the uncertainties about those outflows. Where necessary to provide
adequate information, an enterprise should disclose the major assumptions made concerning
future events, as addressed in paragraph 41; and
(c) the amount of any expected reimbursement, stating the amount of any asset that has been
recognised for that expected reimbursement.
Level IV, III and II non- company entities ARE EXEMPT
DISCLOSURE

• Unless the possibility of any outflow in settlement is remote, an enterprise should

disclose for each class of contingent liability at the balance sheet date a brief description
of the nature of the contingent liability and, where practicable:
(a) an estimate of its financial effect, measured under paragraphs 35-45;
(b) an indication of the uncertainties relating to any outflow; and
(c) the possibility of any reimbursement
Where any of the information required AS ABOVE is not disclosed because it is not
practicable to do so, that fact should be stated.
DISCLOSURE

• In extremely rare cases, disclosure of some or all of the information required by

paragraphs 66-70 can be expected to prejudice seriously the position of the enterprise in
a dispute with other parties on the subject matter of the provision or contingent liability.
In such cases, an enterprise need not disclose the information, but should disclose the
general nature of the dispute, together with the fact that, and reason why, the information
has not been disclosed.
EXAMPLES : WARRANTIES

• A manufacturer gives warranties at the time of sale to purchasers of its product. Under
the terms of the contract for sale the manufacturer undertakes to make good, by repair
or replacement, manufacturing defects that become apparent within three years from the
date of sale. On past experience, it is probable (i.e. more likely than not) that there will
be some claims under the warranties.
• Conclusion - A provision is recognised for the best estimate of the costs of making good
under the warranty products sold before the balance sheet date (see paragraphs 14 and
23).
EXAMPLE : REFUNDS POLICY

• A retail store has a policy of refunding purchases by dissatisfied customers, even

though it is under no legal obligation to do so. Its policy of making refunds is
generally known.
Present obligation as a result of a past obligating event - The obligating event is the sale of the
product, which gives rise to an obligation because obligations also arise from normal business
practice, custom and a desire to maintain good business relations or act in an equitable manner.
An outflow of resources embodying economic benefits in settlement - Probable, a proportion of
goods are returned for refund.
Conclusion - A provision is recognised for the best estimate of the costs of refunds
EXAMPLE - PROVISION

• Under new legislation, an enterprise is required to fit smoke filters to its

factories by 30 September 2023.The enterprise has not fitted the smoke
filters as at the balance sheet date of 31 March 2023
Present obligation as a result of a past obligating event - There is no obligation because
there is no obligating event either for the costs of fitting smoke filters or for fines under
the legislation.
Conclusion - No provision is recognised for the cost of fitting the smoke filters
 EXAMPLE : PROVISION

• Under new legislation, an enterprise is required to fit smoke filters to its factories by 30
September 2022. The enterprise has not fitted the smoke filters as on 31 March 2023
Present obligation as a result of a past obligating event - There is still no obligation for the costs of fitting smoke
filters because no obligating event has occurred (the fitting of the filters). However, an obligation might arise to
pay fines or penalties under the legislation because the obligating event has occurred (the non-compliant
operation of the factory).
An outflow of resources embodying economic benefits in settlement - Assessment of probability of incurring
fines and penalties by non-compliant operation depends on the details of the legislation and the stringency of the
enforcement regime.
Conclusion - No provision is recognised for the costs of fitting smoke filters. However, a provision is recognised
for the best estimate of any fines and penalties that are more likely than not to be imposed
QUESTIONS?
THANK YOU
VIJAY TC

9790914074 / [email protected]