Page 9 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes Accounting Standards are applicable to the preparation of general-purpose financial statements
where the taxable income is calculated on the basis of tax treatment of different items. The tax
treatment is primarily guided by the fiscal considerations and other principles of taxations.
There are several areas where tax treatment of an item and the relevant accounting standards are
significantly different and therefore there is marked difference in the reported profit and taxable
income. Some of the areas where significant differences can be noted are: revenue recognition
principle, computation of depreciation, accounting for construction contracts, treatment of research
and development expenses and other intangibles, treatment of borrowing costs, leases, etc.
For example, in case of Finance Lease, the asset is to be shown in the balance sheet of the lessee
and he can charge depreciation on this asset. However, under the Income Tax Act, 1961, the assets
under finance lease are to be shown in the balance sheet of the lessor (being the real owner) and
the depreciation deduction is available to the lessor.
There is a need for harmonising the accounting treatment and tax treatment of several items. In
doing so, the principle of accounting as well as the principles of taxation, both required to be
taken care of it.

!

Caution The Finance Act, 1995 has conferred powers on the Central Government to prescribe
accounting standards for tax purposes. These Tax Accounting Standards (may be called
TAS) are to be followed by any class of assesses or in respect of any class of income. So far,
the Central Government has notified two TAS. These are:
1. TAS – 1: relating to Disclosure of Accounting Policies

2. TAS – 2: relating to Disclosure of Prior period and Extraordinary items and Changes
in Accounting Policies.
These TAS are to be followed by the assesses using mercantile systems of accounting both
corporates in as well as non-corporates.

1.2.3 Accounting Standards and Non-commercial Organisations

The Preface to Accounting Standards provides that the Accounting Standards shall apply to
commercial, industrial and business enterprises in preparation of general-purpose financial
statements issued to the public by such enterprises. So, these Accounting Standards are not
applicable to charitable organisations and co-operative societies. However, if the charitable
organisations and co-operative societies are engaged in any type of commercial activity, then
the Accounting Standards shall apply to their financial statements. The ICAI has clarified that
even if a part of the activities of these enterprises are commercial in nature, then the Accounting
Standards shall apply to all the activities of the enterprise.

Self Assessment

State true or false:
6. Accounting Standards are formulated with a view to harmonise different accounting policies
and practices in use in a country.

7. The Finance Act, 1999 has conferred powers on the Central Government to prescribe
accounting standards for tax purposes.
8. TAS – 1 is related to Disclosure of Accounting Policies.

4 LOVELY PROFESSIONAL UNIVERSITY