Budget may clarify tax implications of IFRS-compliant standards

As the deadline of April 1, 2011, for adopting to new accounting norms based on International Financial Reporting Standards (IFRS) draws closer for 300 companies, the coming Union Budget is likely to clarify the tax implications of new account books that include even notional mark-to-market loss and gains of invested funds in the profit and loss account.

The government may incorporate some provisions in the Finance Bill to permit companies to be under a uniform tax structure, irrespective of the accounting standards they follow from the next financial year. The need for such a clarification has come after the government announced the convergence of Indian accounting standards with that of global accounting norms prescribed under IFRS in a phased manner from 2011-12.

Over 300 companies are expected to change their accounting system in the first phase to the IFRS-compliant mode. This includes all companies that constitute Nifty and Sensex, companies that have securities or shares listed in overseas stock exchanges and all (listed and un-listed) companies with net worth in excess of Rs 1,000 crore. Banking firms, insurance companies and non-banking finance companies are excluded from this list, as they have been given more time to follow the new standards.

With the corporate affairs ministry indicating its preparedness to notify all standards well before the April deadline, industry was worried about its tax implications. The new standards, which rely upon fair value as compared to the traditional computation on a historical cost basis, is certain to alter the final figures in their profit and loss accounts.

According to experts, the presentation of profit and loss under the two standards are different, as the new standard makes a distinction between the normal income and what is called “other comprehensive income”. This contains numerous items arising out of increase/decrease consequent upon application of fair market value/mark-to-market concept. It also contains other items that are conceptually not treated as part of the current year’s operating profits. As a result, certain differences in the quantification of net profit in the profit and loss statements of the companies that follow the new standards are inevitable, they say.