In what could save a cross-section of India Inc from possible sudden fluctuations in net worth as they shift to the International Financial Reporting Standards from April 1, 2011, the government is likely to allow them to keep notional gains arising from certain sources under a separate head called ?other comprehensive income?. The unrealised profits shown as OCI won?t be taxed. As for companies that pay MAT, book profits would be computed on the basis of profit & loss account made before OCI. One-time effect of transition would be tax-neutral.
Obvious beneficiaries of the move include Tata Steel, Sterlite, Hindalco and Reliance Industries which have high exposure to derivatives and foreign currency and, therefore, would have high OCI portfolio.
A position paper discussing the tax implications of IFRS convergence released by the ministry of corporate affairs on Thursday suggested ways for making the tax laws compliant with the proposed Indian Accounting Standards (Ind AS) that converge with IFRS. The release of the 25-page paper prepared by the Institute of Chartered Accountants of India shows the government’s commitment to bring in the new regime as scheduled, despite protests from the industry. Compliance with IFRS was a promise made by PM Manmohan Singh at the G 20 forum.
Ind AS would be based on fair value accounting as opposed to the current standards based on historical cost and would lay more emphasis on balance sheet disclosures rather than profit & loss account. It would bring about a radical change in asset valuation. As per the IFRS road map, about 300 companies would have to converge to IFRS from April 2011. According to sources, the typical items that need to be reflected by companies under the OCI include share purchases, derivatives, re-valuation of property or plant or equipment and acturial gains in the form of employee pensions and provident fund. ?If the notional gain or loss would have been reflected in the P&L account, it could have had several implications including a possible impact on the company’s earning per share (EPS),? director, accounting advisory services of KPMG Sandip Khetan said. An MCA source said that this issue has been a contentious one that has been debated over the last one-year. ?Companies cannot route the notional gain through their P&L account. These gains do not reflect any realistic change in the company’s net worth and so they should not be available for distribution of dividends,? an MCA official said.
Apart from that, the accounting advisory committee has also proposed that a new section be introduced in the Companies Act to recognise the new accounting standard. The committee has also given several options to harmonise tax implications, including bringing about a single amendment through which every company would have to quantify the major differences that have arisen following the shift in accounting standard.
