Application of paragraph 21 of AS 22

Fact of Case:
A company is a public limited company listed with recognised stock exchanges, engaged in manufacturing business. The company follows calendar year. In Union Budget for the financial year 2015-16 presented on 28th February 2015, the Government has revised the surcharge on income tax from 5% to 10%, resulting in increase of effective ‘Corporate Tax’ rate from 33.99% to 34.61%.

Whether Rates announced by finance bill is enacted or substantively enacted

Para 21 of AS 22:- “deferred tax 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 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 is noted that in case certain changes are proposed in tax rates, the term ‘substantively enacted’ should be construed as the tax rate that has the substantive effect of actual enactment. In other words, the process of enactment is substantively complete. The Committee is of the view that whether the process of enactment is substantively complete is a matter of judgement, which should be determined considering the facts and circumstances and various factors, such as, whether or not the remaining stages of the enactment process in past have affected the outcome (i.e., enactment of surcharge in the extant case) and are likely to do so in the present situation, viz., the process remaining to be executed for enactment is more of a procedural formality and is not expected to affect the outcome, etc. For example, in most cases, a tax rate for the purposes of AS 22 is regarded as having been substantively enacted if the Bill containing such changed tax rate has been passed by the LokSabha and is awaiting passage through the RajyaSabha and the President’s assent.

In this regards adequate and appropriate disclosures should be made regarding the tax rate adopted while recognising deferred tax assets and liabilities and the basis for such adoption in the notes to accounts.

For detail refer  EAC opinion Query 17, Volume 35

Accounting for interest earned on fixed deposits made out of idle funds, interest earned on mobilization advance and other miscellaneous income during pre-operative period.

Facts
A company say X ltd borrowed long term -loan of Rs. 100 Cr form ABC Bank Ltd for obtaining/construction of qualifying assets. Out of 100 Cr company made advances to its vendors to the tune of 40 Cr, Rs. 10 Cr kept in bank account for its operation expenses and company made a Fixed deposit for Rs. 50 Cr for short –term.

Q. Interest earned by Company on temporary Fixed deposit /Bank account to be shown as Other Income or to be deducted from Interest expenses of Borrowing Cost?

Ans.As per Para 10 and 11 of AS 16, specifically mentioned the treatment of interest earned on idle funds,If the funds are borrowed specifically for the purpose of qualifying assets, actual interest paid on borrowed funds less any income arise on idle investment/ funds  to be capitalized.

In view of above, we are in the opinion that Interest earned on Fixed deposit made out of borrowed funds should be deducted from the interest cost and it should not be treated as Other income. Interest cost to be capitalized after deducting the interest income.

For detail refer EAC opinion Query 5, Volume 35