Employee Benefit Accounting : IAS 18 Revised ( The rules for this game have changed !)

Finally employee Benefit accounting seems to be simplified. IAS 18 Revised have introduced some concrete and simple guidelines for accounting for employee benefit plans. Though the terminologies remain the same, new concept of Remeasurements (A broad term which includes actuarial gains and losses) is introduced. These are directly recognized in Other Comprehensive Income (Earlier options like Corridor method etc are no more available).  

Eco friendly ganesha

ONLY BAILOUT WILL NOT HELP

The European Union which came out with a common currency would never have imagined that their future will be so grim and euro zone will ever face such a downturn. Greek economy which is totally devastated and almost bankrupt with industrial production falling by 25% and fiscal deficit as high as 14% of GDP lead the European Union to this crises. Greek is an excellent example of fiscal mismanagement; exorbitant spending and hiding its actual deficit status have landed the whole EU into trouble. Developing investor’s confidence is an essential measure to be taken along with bail out.

 We shouldn’t expect that anything can be achieved through austerity measures, as stringent control over govt. expenditures will result in slowdown in economic activities thus adversely affecting the suffering economies. Bailout of about 1trillion dollars which is expected to help the European economy to come out of this storm will serve as a boomerang in long term if it is not supported by high economic growth. The fiscal deficit has affected adversely because it is not possible for the economies to service the debt and due to this investors have lost confidence in the economy which resulted in expectation of higher rate of interest and thus making the task of raising further funds even more difficult. Bailout will worsen the problem for other European economies specifically for PIIGS who are on the verge of collapse and this will result investors loosing confidence even in other economies and they will be entangled in the vicious circle of fiscal deficit. Thus, along with bailout building investor’s confidence will be a real challenge but an essential one to come out of this crisis. And definitely bailout should be supported by high level out economic growth.

IFRS 13 (Part – 2) Technical Issues

This is in continuation to my previous blog. In this blog I will be discussing about IFRS 13 in much more details. This blog covers some technical questions raised during recent webinar organised by IASB on 23^rd May, 2011. Some technical issues:

• When we talk about principal market does it means the market in which the entity normally trades or do we consider it to be market where market normally trades. As far as this question is concerned principal market means a market where the market often trades and not merely the entity.
• Distress market prices and inputs from distress markets are not to be considered for fair value calculation.
• The most important issue that needs attention is, IFRS 13 requires net risk position to be stated but IAS 32 requires gross presentation thus these two standards sound confusing, more clarification is required on this issue.
• Fair value determination in case of 1 Day transactions which are peculiar in case of banks still remains unaddressed, but IASB is working on this and shortly guidance on this issue will be made available.
• Another important point addressed is about cost as best estimate of fair value. Cost can no longer be the best estimate of fair value. Even if it is difficult to calculate fair value, using level 3 inputs fair value needs to be calculated.

FINANCIAL BHEL: IFRS 13- Fair value measurement (Part -1)

FINANCIAL BHEL: IFRS 13- Fair value measurement (Part -1): " Introduction: IFRS 13 specifies how the fair value is to be measured and not when it is to be measured. Even for the purpose of m..."

IFRS 13- Fair value measurement (Part -1)

  Introduction:

•  IFRS 13 specifies how the fair value is to be measured and not when it is to be measured. Even for the     purpose of measurement it specifies the hierarchy of inputs to be used for fair value measurement, it does not  specify the particular formula or method for calculation.
• It redefines the term fair value in order to make it more concrete and simple to interpret. 
• It provides inputs for fair value measurement where ever other IFRS requires fair value measurement.

            New Definition:

Definition: “Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

Features of this definition:

• Exit price: As per new definition fair value is defined as exit price, the wordings “price that would be received to sell an asset or paid to transfer a liability” specifies this.
• Current price: Fair value is the current price the term “at measurement date” specifies this.
• Normal transaction: The fair value is the value based on normal transaction and not on forced or distress sale the term “orderly transaction” specifies it.

 New terms: principal market and most advantageous market

• Principal Market: It can be explained as market with highest level of transactions or activities.
• Most advantageous Market:  This means the market in which highest returns can be earned for asset and lowest amount will be paid for liability.

             Fair value measurement:

IFRS 13 specifies the ranking for inputs based on which fair value is to be determined; it do not specifies the measurement technique as it will differ from circumstances. The hierarchies of inputs are to be followed in sequence.

• Level 1 Inputs: Quoted price for identical asset or liability, if this price is available use it for calculating fair value. Example: In case of listed shares.
• Level 2 inputs: If level 1 inputsare not available we need to consider level 2 inputs for fair value measurement. These inputs include observable inputs other than quoted prices. Example: In case of fixed income securities.
•  Level 3 inputs:  These inputs include non-observable inputs. This is the option of last resolve, if no inputs for level 1 or Level 2 are available level 3 inputs are to be used. Example: In case of Non-current assets (Not always).

The flowchart below explains the requirements of IFRS 13.

Introducing IFRS 10, 11 and 12

IFRS 10, 11 and 12 are new additions to IFRS and accountancy literature, these standards serves as improvements and additions to existing standards. Let’s take a quick look at major changes that these standards propose.

IFRS 10:

      i.            IFRS 10 introduces a new definition of control based on which entities need to be consolidated.

     ii             As per new definition lots of factors need to be considered while ascertaining control, which is different from IAS 27 according to which governing financial and operating policies was the single criteria to be analyzed.

    iii.            IFRS 10 replaces some parts of IAS 27 related to consolidated financial statements and SIC 12 (related to SPE`s) in totality.

  iv.            As per IAS 27 Only currently exercisable potential voting rights were considered for assessing control.

    v.            As per IFRS 10 even Potential voting rights are to be considered if substantial.

IFRS 11 :

         i.            IFRS 11 describes the accounting for arrangements in which there exists a joint control.

       ii.            IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC 13.

      iii.            As per IFRS 11 joint arrangement are to be classified as either a joint venture or a joint operation.

     iv.            Proportionate consolidation (which was required as per IAS 31) is no longer permitted for joint ventures (as newly defined) only equity method is to be used.

       v.            A joint operator is required to recognises in relation to its interest in a joint operation:

a)      its assets, including its share of any assets held jointly;

b)      its liabilities, including its share of any liabilities incurred jointly;

c)       its revenue from the sale of its share of the output of the joint operation;

d)      its share of the revenue from the sale of the output by the joint operation; and

e)      its expenses, including its share of any expenses incurred jointly.

IFRS 12:

         i.            IFRS 12 sets out the disclosure requirements for subsidiaries, joint ventures, associates.

       ii.            IFRS 12 replaces the requirements previouslyincluded in IAS 27, IAS 31, and IAS 28 Investments in Associates related to disclosures.

      iii.            IFRS 12 requires a reporting entity to discloseinformation that helps users to assess the nature and financial effects of the reporting entity’srelationship with other entities.

These IFRS are effective for annual periods beginning on or after 1 January 2013.

IFRS - What shape will it take in future………!!!

IFRS – International financial reporting standards which are been looked upon as the future of accountancy and a effective tool for promoting free movement of capital and promoting transparency, will definitely play its intended role in future. With more than 120+ countries following these standards and Biggies like USA, JAPAN, INDIA and CHINA going for convergence, picture seems to be perfect and efforts on target.

But, what about the motive behind these standards ? Is USA playing its dominating role here too?

After the Norwalk agreement, US planned to go for convergence to IFRS and all the necessary steps were taken, plans where chocked out and everything done. FASB the body that frames US GAAP, got its representative in IASB and along with this got IASB and FASB to work together on every project, don`t know why this did not happened in case of other countries, why they were not actively involved in framing new IFRS`s . Thus, now every new IFRS or changes in existing IFRS requires FASB`s nod.

If this continues IFRS will be a small version of US GAAP in future, even if not atleast will be influenced by US GAAP. I am not saying US GAAP is not effective or its not a set of quality standards.  The question is Why US is given special treatment over other economies, Why aren’t all the countries working together if  we plan for GLOBAL ACCOUNTING STANDARDS “IFRS”. 

Private Equity Funding process (Brief):

Private Equity or Venture Capital funding is Buzz word now. With the success of various funded projects both PE\VC funds and Companies looking for Funds are looking for growth and expansion via this route.

Why is this information essential for me?

Whether you are a member of finance and accounting team, an entrepreneur, a PE consultant or just interested in getting knowledge, knowing this process will be of great help.

What do we mean by Private Equity?

In simple words it (P.E. fund) is a company that invests in your company, provide you with much needed funds for set-up, expansion or diversification. It will stay invested and once your company makes profit and valuations are strong, it will make an exit i.e. sell of its investment and make profits.

Sounds interesting and exciting, but wait!!!!

 Raising funds is not that easy, to understand this we need to step into the shoes of PE fund and answer these questions:

1)   Why shall I invest my money in particular company ?

Answer: Definitely for profit. 

2)How much profit I expect?

Answer: Definitely more than what I can earn from other investments.

3)Will I invest in every project that comes to me .

Answer: No, I will invest only in the most profitable project.

And you may even look for other qualities like entry barrier, innovation, future viability etc.

Thus, you yourself gave the answer as to what qualities your project should have to get funding.

The process:

1. Deciding as to whether we should go for PE funding.
2. Preparing a Business plan
3. Deciding on and contacting a P.E. fund that suites our need
4. Presentation of business plan and initial negotiations
5. Business valuation
6. PE fund approves the plan and gives its consent for further processes
7.  Due-diligence
8. Final negotiations
9. Signing the agreement

This process is time consuming and requires around 6 to 12 months for completion.

This blog is a part of series of blogs related to P.E. funding.

Will be coming up with each process in much details, don`t forget to go through these forth coming blogs.

Any queries, suggestions or advice contact : info@adhauassociates.co.in

Income tax on salary earned abroad

By Nonresident and when no taxes paid in abroad

Recently I was working on a particular case for one of my Clients an employee in Merchant Navy. He wanted to prepare his nil Income tax return, as he believed that because his stay in India was less than 182 his income cannot be taxed in India and no tax to be paid either in India or in any other country. He is not the only one, most of us think so. Professionals with knowledge of taxation will also express the same views, as his residential status for income tax purpose is Nonresident.

Is it right to do so?

If someone is earning Income he should definitely pay tax on it either in India or Abroad. The income cannot be exempted in both the countries. Even the Tax authorities in India think so and that’s why the decision given by Authority for Advance Rulings (AAR).

What`s this case about?

Mr. M was working in an Indian company and was a non resident for taxation purpose being out of india for more than 182 days. He was deputed to Norway .When he filed his Income tax return in India he showed this income as exempted and so did not paid any tax in India on that income as services were rendered out of India.

As per the Double taxation avoidance agreement Norway could have taxed the income, but no tax was either deducted by the employer nor paid by the employee in Norway . In such case the assessee cannot claim any relief. The decision is based on expression ‘may be taxed’ used in the treaty. Therefore Tax authorities stated different views as compared to those expressed in case of British Gas (I) Pvt. Ltd (British Gas India (P) Ltd. v CIT [2006] 157 Taxman 225 (AAR)) as here no taxes were paid in Norway. The Authorities stated that if taxes are not paid in other contracting state where services are rendered (i.e. Norway) it can be taxed in contracting state (i.e. India in our case)

Is it fair?

Yes it is fair, but I think some sort of relief should be provided (As deduction U/S 80 RRB - which is no longer applicable)while taxing this sort of income in India as in some countries the cost of living is high and even the salary may not be structured to result in lesser tax liability ( example medical reimbursements, HRA may not be stated and so no benefits can be taken).

In case on queries related to taxation contact me on e-mail ID:  info@adhauassociates.co.in

Double Taxation Avoidance Treaties

What do we mean by double taxation?

As the name suggests it means that the same income is taxed more than once i.e. the person earning the income need to pay tax on same income in two or more different countries. Example:  Warren earned income in UK, therefore he need to pay income tax on that income and therefore income tax was deducted on that income in UK (Withholding), however for tax purpose he is a resident in India, so need to pay tax on that income even in India, thus he ends up paying double tax . If the tax rate applicable is 30% you can imagine the net proceeds in hand (around 40%).

What’s the need for double taxation treaties?

To overcome this problem of same income being taxed twice or more, Economies throughout the globe started entering into double taxation avoidance agreements, different countries have different treaties with different countries. Though these treaties are based on UN model of double tax avoidance agreements; there might be slight differences between every treaty. These treaties guide how the income should be taxed if tax is payable in two or more countries, which country should provide the credit for tax, how the benefits are to be taken etc.

India has entered into double taxation treaties with round 100+ countries. These treaties specify the reliefs that can be taken, how they can be taken etc.The treaties has different provisions for income under different heads e.g  Business profits, salary, interests etc (mentioned as articles). 

Just to begin with...................

Hi,

Really happy to write my first blog. Here you will find articles related to IFRS, Indian Taxation , Corporate laws, Economics and everything and anything related to Finance in India; and hence the name " FINANCE BHEL"
Bhel is a "India fast food, which consists of various ingredients mixed together" and so is this blog which will be a mix of all finance related HOT!!!! and SERIOUS!!!! Topics.