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PwC ReportingInBriefMAT Ind AS committee additional recommendations on main issues relating to first-time adoptionAugust 2016

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In brief

The Central Board of Direct Taxes (CBDT) had issued an order on 8 June 2015 to constitute a Committee to suggest a framework for computation of book profit for the purposes of levy of Minimum Alternate Tax (MAT) under section 115JB of the Income-tax Act, 1961 (the Act) for Indian Accounting Standards (Ind AS) compliant companies in the year of adoption and thereafter.

The Committee, on deliberation, had provided its recommendations which were placed in public domain vide press release dated 28 April 2016 for comments/ suggestions. The Committee, after examining the comments/ suggestions received from stakeholders, has now released additional recommendations on the main issues relating to first time adoption raised by the stakeholders.

This Inbrief gives a broad overview of the Committee’s additional recommendations on the main issues.

In detail

While the Committee is examining other issues raised by the stakeholders on the previous recommendations, the CBDT has been given the option to seek public comments on the Committee’s additional recommendations on the main issues. The recommendations of the Committee are as follows:

Sr. No. Issue Concern of stakeholders Recommendation

1 Fixed Assets – Adjustment to retained earnings

On first time adoption of Ind AS, as per Ind AS 101 an entity can opt to measure an item of property, plant and equipment (PPE) on the date of transition at –

i. the recomputed values measured in accordance with Ind AS 16 from inception;

ii. the fair value and use it as its deemed cost;

iii. the carrying value measured as per previous GAAP for all items of PPE and use that as its deemed cost.

The adjustment in carrying value of existing fixed assets, if any, shall be debited/ credited to retained earnings on date of transition.

Previously, it was suggested that those adjustments recorded in retained earnings which would never be subsequently reclassified to the profit and loss account, shall be included in the book profits in the year of first-time adoption of Ind AS.

Stakeholders raised concerns that unrealised gains/ losses would be taxed.

• Currently computation of book profits under section 115JB provides that in case of revaluation of assets, any impact due to revaluation will be ignored for the purpose of computation of book profits.

• Based on the above, the Committee has recommended that the adjustments in retained earnings on first time adoption for items of PPE to be ignored for the purpose of computation of book profits.

• Further retained earnings adjustments to be ignored for following:

– Computation of depreciation

– gain/ loss on realisation/ disposal/ retirement of such assets

• Other adjustments to fixed assets (like decommissioning liability, foreign exchange capitalisation/ decapitalisation, borrowing costs adjustments etc.) on the date of transition to be ignored in a similar manner.

• The same principles shall also apply to intangible assets (Ind AS 38).

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Sr. No. Issue Concern of stakeholders Recommendation

2 Leases – Straight lining of lease rentals

According to Ind AS 17, Leases, lease payments under an operating lease shall not be recognised as an expense/ income on a straight-line basis over the lease term if the payments to the lessor are structured to increase in line with expected general inflation to compensate for the lessor’s expected inflationary cost increases. According to Indian GAAP, AS 19, Leases, require straight lining of such lease rentals and recognition of corresponding lease equalisation liability/ asset, including cases where straight lining is not permitted under Ind AS 17. In such cases any existing lease equalisation liability/ asset shall be adjusted to retained earnings on date of transition.

Previously it was suggested that the adjustments recorded in retained earnings which would never be subsequently reclassified to the profit and loss account, shall be included in the book profits in the year of first-time adoption of Ind AS.

Stakeholders have raised concerns that the impact of this adjustment could be significant in the first year of adoption.

The Committee has identified the following options of which it has recommended option C considering the dual aspects of significant one time charge and simplicity of implementation. The suggested options are as follows -

A. Continue with current recommendation, i.e., retained earnings adjustment to be included in the book profit in the year of first time adoption of Ind AS.

B. The retained earnings adjustment to be included in the book profit over the lease period in the same manner as it would have been included under AS 19.

C. The retained earnings adjustment to be included in the book profit over a period of 3 years starting from the year of first time adoption of Ind AS.

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Sr. No. Issue Concern of stakeholders Recommendation

3 Investments – Fair value adjustments through profit and loss account

According to Ind AS 109, Financial Instruments, an entity shall measure its financial asset/ liability at fair value or at amortised cost. Examples of financial asset/ liability that are recognised at fair value on each reporting date with changes in fair value being recognised in the profit/ loss include –

• Investment in equity shares/ mutual funds carried at fair value through profit/ loss;

• Investment in subsidiaries/ associates/ joint ventures carried at fair value through profit/ loss;

• Investment in preference shares not meeting amortised cost criteria and measured at fair value through profit/ loss;

• Derivative assets and liabilities;

• Any other financial asset/ liability carried at fair value through profit/ loss.

In the above cases, adjustments arising from recognition of these items at fair value on first-time adoption shall be adjusted to retained earnings on the date of transition

Previously, it was suggested that the adjustments recorded in retained earnings which would never be subsequently reclassified to the profit and loss account, shall be included in the book profits in the year of first-time adoption of Ind AS.

Stakeholders have raised concerns regarding the taxation of unrealised gains/ losses for financial assets/ liabilities carried at fair value through profit or loss in the year of first time adoption.

The Committee has identified the following options of which it has recommended option C considering the dual aspects of taxation of unrealised gains/ losses and maintenance of records. The suggested options are as follows -

A. Continuing with the current recommendation i.e., the retained earnings adjustment to be included in the book profit in the year of first time adoption of Ind AS.

B. The retained earnings adjustment to be included in the book profit at the time of realisation.

C. The retained earnings adjustment to be included in the book profit over a period of 3 years starting from the year of first time adoption of Ind AS.

4 Others

Unrealised gains/ losses adjusted in the retained earnings which would never be subsequently reclassified to profit and loss account were proposed to be included in the book profits in the year of first-time adoption of Ind AS. [This is as per para 10(III) of the press release dated 28 April 2016.]

The Committee has suggested that adjustment to the retained earnings to be included in the book profit over a period of 3 years starting from the year of first-time adoption of Ind AS.

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The takeaways

• The CBDT Committee has made some important recommendations specifically in the context of Ind AS transition adjustments to fixed assets, intangible assets, lease equalisation assets/ liabilities and financial assets and liabilities. In the context of fixed assets and intangibles, the recommendation is to simplify the impact by ignoring the impact of transition revaluation adjustments for MAT purposes. This will, of course, require companies to track these adjustments in future until the end of the estimated useful lives of the underlying assets.

• In respect of other transition adjustments, tax under MAT will be determined by spreading the impact of those adjustments in book profits over three years. This adjustment treads fresh ground not seen thus far in tax legislation, and seeks to tax notional income. This may require companies to carefully evaluate the impact of their first time adoption choices for such items.

• Clarity is required on how Ind AS adjustments for the financial year 2015-16 should be considered for computation of MAT in the Financial Year (FY) 2016-17 as the tax return for the year ended 31 March 2016 will be filed considering Indian GAAP numbers.

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