Devarajan Swaminathan & Co.

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Some Observations on Exposure Draft on Tax Accounting Standards

Why TAS is needed?

We need to understand a fundamental difference between TAS and IndAS.

The former is for computation of income, the latter is for investor iinformation. The purpose, as is obvious, different.

Further, prior period items and its later adjustements requires, Ind AS to make changes retrospectively, where as such changes would be effective prospectively in case of TAS.

They have done correctly in providing a guidance in the form of TAS on how income should be computed with a very clear caveat that TAS must not be used for Accounting purposes.

So it does make sense to have TAS, just as CBEC has a very limited purpose CAS 4 for calculating cost of goods despatched, exclusively for Central Excise purposes. The only difference is that CAS 4 is issued by ICWAI, TAS’s are issued by CBDT.

I would like to suggest to base the cost principles in Construction Contracts and Government Grants as provided in the Tax Accounting Standards on the Generally Accepted Cost Accounting Principles (GACAP) AND Cost Accounting Standards (CAS) as issued by The Institute of Cost and Works Accountants of India (ICWAI).

Below are some observations in the treatment as provided in TAS and the comparision in its treatment as suggested in the GACAP and CAS.

Government Grants:

GACAP:
Any Subsidy / Grant / Incentive and any such payment received / receivable with respect to the input cost is reduced from cost for ascertainment of the cost of the cost object to which such amount pertains.

TAS:

Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfillment of certain obligations, the grant shall be recognized as income over the same period over which the cost of meeting such obligations is charged to income.

Construction Contracts:

TAS:

Contract Costs
11. Contract costs shall comprise of :
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated to the contract;
(c) such other costs as are specifically chargeable to the customer under the terms of the contract; and
(d) allocated borrowing costs in accordance with the Tax Accounting Standard on Borrowing Costs.

These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that is not included in contract revenue.

12. Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract.
13. Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract. Costs that are incurred in securing the contract are also included as part of the contract costs, provided
(a) they can be separately identified; and
(b) it is probable that the contract shall be obtained.

When costs incurred in securing a contract are recognised as an expense in the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period.

14. Contract costs that relate to future activity on the contract are recognised as an asset. Such costs represent an amount due from the customer and are classified as contract work in progress.

GACAP:
The above contract cost should be based on CAS and GACAP.

According to TAS, Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract, instead the concept in PARA 6 and PARA 8 of GACAP on Application Guidance of Admin O/H may be applied.

PARA 6 of GACAP application guidance on Administration Ovedheads:
The use of the terms “share of administrative overheads relating to production” and “share of administrative overheads relating to selling” in the erstwhile Cost Accounting Record Rules has led to arbitrary practices in some entities to assign all administrative overheads on an arbitrary ratio say 60:40 between production and selling. These terms can only refer to administrative costs of functions attached to production or selling. There will be a residuary head of “Administrative Overheads” which cannot be assigned to production or selling functions representing costs of policy making and strategic management and are to be treated as period costs. Also included in this category are expenses such as Directors sitting fees, audit fees, filing fees and other corporate expenses. Paragraph 6.3 in Cost Accounting Standard 3 on overheads should be interpreted in the light of the above discussions.

PARA 8 of GACAP application guidance on Administration Ovedheads:
The assignment of as much of the administrative overheads as possible based on identified cost drivers is recommended. The balance of administrative overheads can only be assigned to cost centres or objects based on capacity or sales value. It is usual in textile industry to charge corporate office cost to mills based on installed spindle capacity.

For Treatment of Borrowing Costs, GACAP on Interest and Finance Charges may be applied.

Is there a TAS on Borrowing Costs, Para 11 d above??. Here GACAP on Interest and Finance Charges should be used.

Interest and Finance Charges have come to be included in cost of sales though not in cost of production. Such costs are also assigned to products before arriving at margins by product.

PAGE 41 of GACAP.

Should there be a GACAP on Risk Cost also?
Risk is also factored in cost before arriving at Margins. So, in my opinion, there must be a GACAP for risk cost.

ICWAI must come up with a MAG on arriving at Cost of Capital. The earlier this is done, the better.

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