DISCUSSION NOTES

ON
ACCOUNTING SATANDARDS

By
CA. PARVEEN SHARMA
B.Com (H), F.C.A., A.C.M.A., C.S.
Post Graduation in Accounting Standards, US GAAP & Certified Valuer
 CONTENTS
AS-11 (Revised): The Effects of Changes in Foreign Exchange Rates 3
AS-19: Leases 11
AS-20: Earning Per Share 29
AS-22: Accounting for Taxes on Income 42
 AS-11
(Revised): The Effects of Changes in
Foreign Exchange Rates

1. This AS should be applied:

(a) in accounting for transactions in foreign currencies; and
(b) in translating the financial statements of foreign operations.

2. Meaning
Foreign currency is a currency other than the reporting currency of an enterprise.

3. Foreign Currency Transactions

(A) Initial Recognition
(i) A foreign currency transaction is a transaction which is denominated in or requires
settlement in a foreign currency.
(ii) A foreign currency transaction should be recorded, on initial recognition in the reporting
currency, by applying to the foreign currency amount the exchange rate between the
reporting currency and the foreign currency at the date of the transaction.
Note: a rate that approximates the actual rate at the date of the transaction is often used.
(B) Reporting at Subsequent Balance Sheet Dates
At each balance sheet date:
(a) foreign currency monetary items should be reported using the closing rate.
However, in certain circumstances, the closing rate may not reflect with reasonable
accuracy the amount in reporting currency that is likely to be realised from. In such
circumstances, the relevant monetary item should be reported in the reporting currency at
the amount which is likely to be realised from, or required to disburse, such item at the
balance sheet date;
(b) non-monetary items which are carried in terms of historical cost denominated in a foreign
currency should be reported using the exchange rate at the date of the transaction; and
4 AS-11 (Revised): The Effects of Changes in Foreign Exchange Rates
(c) non-monetary items which are carried at fair value or other similar valuation denominated
in a foreign currency should be reported using the exchange rates that existed when the
values were determined.
Note: Monetary items are money held and assets and liabilities to be received or paid in fixed or
determinable amounts of money.
Q 1. Journalise
Date Transaction
1/4/2010 Capital Introduced `10,00,000
1/5/2010 Fixed Assets purchased on credit from John, U.S.A $50,000
(Rate 47)
1/6/2010 Purchased Raw Material on credit `200,000 from Ram
1/7/2010 Purchased Raw Material on credit from smith $ 10,000
(Rate 48)
1/8/2010 Paid wages `100,000
1/9/2010 Raised long term loan from USA $ 100,000 (Rate 49)
1/10/2010 Sold goods to Bush $ 15,000 (Rate 50)
1/11/2010 Repaid to John $ 10,000 (Rate 51)
1/12/2010 Paid to smith $ 2,000 (Rate 52)
1/1/2011 Paid Loan U.S.A $ 6,000 (Rate 53)
1/2/2011 Received from Bush $ 7,000 (Rate 54)
& Deposited amount with EEFC Account $ 6,000
on 31/3/2011 Closing Exchange is `56
Journalise & prepare Trial Balance. (FAS11SD01)

4. Recognition of Exchange Differences

Exchange differences arising on the settlement of monetary items or on reporting an enterprise's
monetary items at rates different from those at which they were initially recorded should be
recognised as income or as expenses.
Q 2. A Ltd. purchased fixed assets costing `2,544 lakhs on lst April, 2008 and the same was fully
financed by foreign currency loan in U.S. Dollars, repayable in four equal annual instalments.
Exchange rate at the time of purchase was 1 US Dollar : `42.40. The first instalment was paid on
3lst March, 2009 when 1 US Dollar fetched `45.40. The entire loss on exchange was included in
cost of goods sold of normal business operations. A Ltd. provides depreciation on their fixed
assets at 20%o on WDV basis.
Show the correct accounting treatment with reference to relevant accounting standards.
(November 2010 Old Course; 5 Marks) (FAS11SA02)
 AS-11 (Revised): The Effects of Changes in Foreign Exchange Rates 5
Q 3. Someshwar Ltd. imported a machine on 04.01.1999 for Euros 12,000 on deferred payment
basis; payment in six equal annual instalments at the end of every financial year, commencing
from 31.03.1999 onwards. Use Revised AS-11 provisions irrespective of financial year/date and
determine the exchange differences and carrying amounts of the liability at the end of each
financial year, if the following exchange rates are given. One Euro equals Indian Rupees on
04.01.1999 31.03.1999 31.03.2000 31.03.2001 31.03.2002 31.03.2003 31.03.2004
` ` ` ` ` ` `
50.4872 45.5208 41.8463 41.0175 42.6400 51.4400 53.1000

(RTP; November 2005) (FAS11RT04)

Ans.:
Calculation of Carrying Amounts of Liability

Financial Year ending Euro amount due Closing rate Carrying amount in `
31st March, 1999 10,000 45.5208 4,55,208
31st March, 2000 8,000 41.8463 3,34,770
31st March, 2001 6,000 41.0175 2,46,105
31st March, 2002 4,000 42.6400 1,70,560
31st March, 2003 2,000 51.4400 1,02,880
31st March, 2004 Nil 53.1000 Nil
Calculation of Exchange Differences:
Financial Year ending Exchange differences due to Exchange differences due to
settlement reporting
31st March, 1999 2,000  (50.4872 – 45.5208) = 9,933 10,000  (50.4872 – 45.5208) =
G 49,664 G
31st March, 2000 2,000  (45.5208 – 41.8463) = 7,349 8,000  (45.5208 – 41.8463) =
G 29,396 G
31st March, 2001 2,000  (41.8463 – 41.0175) = 1,658 6,000  (41.8463 – 41.0175) =
G 4,973 G
31st March, 2002 2,000  (41.0175 – 42.6400) = 3,245 4,000  (41.0175 – 42.6400) =
L 6,490 L
31st March, 2003 2,000  (42.6400 – 51.4400) = 17,600 2,000  (42.6400 – 51.4400) =
L 17,600 L
31st March, 2004 2,000  (51.4400 – 53.1000) = 3,320 Nil
L
Note: G indicates Gain (credited to profit and loss account) while L indicates Loss (debited to
profit and loss account) due to exchange differences.

Q 4. A company had imported raw material worth US dollars 250,000 on 15th January, 2002
when the exchange rate was `46 per US dollar. The company had recorded the transaction at that
rate. The payment for the imports was made only on 15th April, 2002 when the exchange rate
was `49 per US dollar. However on 31st March 2002, the rate of exchange was `50 per US dollar.
The company passed an entry on 31st March, 2002 adjusting the cost of raw materials consumed
for the difference between `49 and `46 per US dollar.
(Accounts May 2002) (FAS11SA05)
6 AS-11 (Revised): The Effects of Changes in Foreign Exchange Rates
Similar Question
A company had imported raw materials worth US Dollars 6,00,000 on 5th January, 2005, when
the exchange rate was `43 per US Dollar. The company had recorded the transaction in the
books at the above mentioned rate. The payment for the import transaction was made on 5th
April, 2005 when the exchange rate was `47 per US Dollar. However on 31st March, 2005, the
rate of exchange was `48 per US Dollar. The company passed an entry on 31st March, 2005
adjusting the cost of raw materials consumed for the difference between `47 and' `43 per US
Dollar.
In the background of the relevant accounting standard, is the company's accounting treatment
correct? Discuss.
(November 2006, 4 Marks) (FAS11SA05)
Ans.: (to Ist Part)
Sundry creditors should be valued at the closing rate, i.e. `50 at 31st March, 2002. The difference
of `4 (50-46) per US dollar should be shown as an exchange loss in the profit and loss account. In
the subsequent year, the company would record an exchange gain of `1 per US dollar.
Q 5. Hind Export Ltd. exported goods for $ 2,00,000 in February (exchange rate `48.38). The
amount was received in June (exchange rate `48.43). The company closes books of accounts on
March 31 every year. The exchange rate on 31st March current year was `48.50. Find out the
exchange fluctuation gain/loss on the balance sheet date and on the date of receipt.
(RTP; May 2006) (FAS11RT06)
Ans.:
Hind Export Ltd.
`
Debtors on the date of transaction (2,00,000 × `48.38) 96,76,000
Debtors on the balance sheet date (2,00,000 × `48.50) 97,00,000
—————
Exchange difference gain on balance sheet date 24,000
—————
Amount received on the due date (2,00,000 × `48.43) 96,86,000
Therefore exchange difference loss on the date of receipt
(`97,00,000 - `96,86,000)
—————
14,000
—————
Q 6. A Ltd. purchased fixed assets costing `3,000 lakhs on 1.1.2006 and the same was fully
financed by foreign currency loan (U.S. Dollars) payable in three annual equal instalments.
Exchange rates were 1 Dollar = `40.00 and `42.50 as on 1.1.2006 and 31.12.2006 respectively.
First instalment was paid on 31.12.2006. The entire difference in foreign exchange has been
capitalized.
You are required to state, how these transactions would be accounted for.
(FAS11SM07)
Ans.: As per para 13 of AS 11 (Revised 2003) 'The Effects of Changes in Foreign Exchange
Rates', exchange differences arising on the settlement of monetary items or on reporting an
enterprise's monetary items at rates different from those at which they were initially recorded
during the period, or reported in previous financial statements, should be recognized as income
or expenses in the period in which they arise. Thus exchange differences arising on repayment of
liabilities incurred for the purpose of acquiring fixed assets are recognized as income or expense.
Calculation of Exchange Difference:
Foreign currency loan = `3,000 lakhs ÷ `40 = 75 lakhs
 AS-11 (Revised): The Effects of Changes in Foreign Exchange Rates 7

Exchange difference = 75 lakhs US Dollars × (42.50 – 40.00)

= `187.50 lakhs (including exchange loss on payment of first instalment)
Therefore, entire loss due to exchange differences amounting `187.50 lakhs should be charged to
profit and loss account for the year.

5. Financial Statements of Foreign Operations

(a) The method used to translate the financial statements of a foreign operation depends on
the way in which it is financed and operates in relation to the reporting enterprise. For this
purpose, foreign operations are classified as either "integral foreign operations" or "non-
integral foreign operations".
(b) A foreign operation that is integral to the operations of the reporting enterprise carries on
its business as if it were an extension of the reporting enterprise's operations.
(c) In contrast, a non-integral foreign operation accumulates cash and other monetary items,
incurs expenses, generates income and perhaps arranges borrowings, all substantially in
its local currency. The change in the exchange rate affects the reporting enterprise's net
investment in the non-integral foreign operation rather than the individual monetary and
non-monetary items held by the non-integral foreign operation.
The following are indications that a foreign operation is a non-integral:
(i) the activities of the foreign operation are carried out with a significant degree of
autonomy from those of the reporting enterprise;
(ii) transactions with the reporting enterprise are not a high proportion;
(iii) the activities of the foreign operation are financed mainly from its own operations.

6. Integral Foreign Operations

The cost and depreciation of tangible fixed assets is translated using the exchange rate at the
date of purchase of the asset or, if the asset is carried at fair value or other similar valuation,
using the rate that existed on the date of the valuation. The cost of inventories is translated at the
exchange rates that existed when those costs were incurred.

7. Non-integral Foreign Operations

In translating financial statements of a non-integral foreign use the following procedures:
(a) the assets and liabilities, both monetary and non-monetary, translated at the closing rate;
(b) income and expense items non-integral foreign operation at exchange rates at the dates
of the transactions; and
(c) all resulting exchange differences should be accumulated in a foreign currency
translation reserve.
Q 7. Distinguish between Integral Foreign Operation (IFO) and Non-Integral Foreign Operation
(NFO). (RTP May 2006) (FAS11RT08)
8 AS-11 (Revised): The Effects of Changes in Foreign Exchange Rates
Q 8. Alert Ltd. based in India has branches in London. The Vice-President Accounts is of the
opinion that the net exchange difference of `20 lakhs on the translation of items in financial
statements of London Branches should be credited to the profit and loss account of the company
and disclosed as follows:
Favourable exchange difference on items other than fixed assets `50 lakhs
Less: Unfavourable exchange difference on account of
increase in Term liability on purchase of fixed assets `30 lakhs
Net exchange difference transferred to profit and loss account `20 lakhs
Do you agree with the views of Vice-President Account? Give brief reasons for your answer?
[Advanced Auditing, November 1998, 5 marks] (FAS11SA09)
Ans.: AS 11 (Revised 2003) does not permit capitalization of exchange differences. Further, the
exchange rate for translation depends on whether the foreign operations are integral or non-
integral.

8. Disclosure
(a) the amount of exchange differences included in the net profit or loss for the period; and
(b) net exchange differences accumulated in foreign currency translation reserve as a
separate component of shareholders' funds.

9. Para 46
(i) In respect of accounting periods commencing on or after 7th December, 2006 and
ending on or before 31st March, 2011, at the option of the enterprise
(ii) such option to be irrevocable and to be exercised retrospectively for such accounting
period, from the date this transitional provision comes into force or the first date on
which the concerned foreign currency monetary item is acquired, whichever is later,
and applied to all such foreign currency monetary items,
(iii) exchange differences arising on reporting of long-term foreign currency monetary
items at rates different from those at which they were initially recorded during the
period, or reported in previous financial statements, in
(iv) so far as they relate to the acquisition of a depreciable capital asset, can be added to
or deducted from the cost of the asset and shall be depreciated over the balance life
of the asset,
(v) and in other cases, can be accumulated in a “Foreign Currency Monetary Item
Translation Difference Account” in the enterprise’s financial statements and
amortized over the balance period of such long-term asset/liability but not beyond
31st March, 2011,
(vi) by recognition as income or expense in each of such periods,
(vii) For the purposes of exercise of this option, an asset or liability shall be designated as
a long-term foreign currency monetary item, if the asset or liability is expressed in a
foreign currency and has a term of 12 months or more at the date of organization of
the asset or liability.
 AS-11 (Revised): The Effects of Changes in Foreign Exchange Rates 9
(viii) Any difference pertaining to accounting periods which commenced on or after 7th
December, 2006, previously recognized in the profit and loss account before the
exercise of the option shall be reversed in so far as it relates to the acquisition of
depreciable capital asset by addition or deduction from the cost of the asset and in
other cases by transfer to “Foreign Currency Monetary Item Translation Difference
Account” in both cases, by debit or credit, as the case may be, to the general
reserve.
(ix) If the option stated in this paragraph is exercised, disclosure shall be made of the fact
of such exercise of such option and of the amount remaining to be amortized in the
financial statements of the period in which such option is exercised and in every
subsequent period so long as any exchange difference remains unamortized.
Q 9. Pankaj Ltd .is a company engaged in manufacture of Nuclear Power Stations. The company
usually resorts to long term Foreign Currency borrowings for its fund requirements. The company
had on 1st April, 2005 borrowed U.S.$100 million from Global Fund Consortium based in
Washington, USA. The funds were used by Pankaj Ltd. for purposes OTHER THAN acquiring
'Depreciable Capital Assets'. The loan carries an interest rate of 3 per cent on reducing balance
and is repayable in two installments, the first one due on 1st April, 2010 and the next on 1st April,
2012. The interest due on the loan has been paid in full on 31st March of each year. The
exchange rate on the date of borrowing was 1 U.S. $ =INR 40.
The accounting treatment followed by the Company for the subsequent three years with
exchange rates prevailing on those dates were as under:
Year ended Exchange Rate Accounting Treatment
31st March, 2006 1US $=41 Forex Loss of `10 crore charged
to Profit and Loss account;
31st March, 2007 1US$=39 Forex gain of `20 crore recognized in Profit and
Loss account;
31st March, 2008 1US$= 48 Forex Loss of `90 crore charged to Profit and Loss
account;
Note: Interest payments were charged to Profit and Loss account of each year at transaction
value on payment dates.
Pankaj Ltd. is in the process of finalizing its accounts for the year ended 31st March, 2009 and
understands that A.S. 11 has been amended and opts to follow the Companies (Accounting
Standard) Amendment Rules, 2009.
(a) You are required to show treatment of the Forex Losses/gains in the light of the above
amendment to AS 11 for the years 2005-06; 06-07; 07-08 & 08-09. The exchange rate to
1 US Dollar on 31st March, 2009 is `50. Assuming that the rates of Exchange on 31st
March, 2010 and 31st March, 2011 will be `51 and `52 respectively that accounting for the
Forex Losses/gains may also be shown for these years also.
(b) What are the disclosure requirements to be complied with by Pankaj Ltd. as a result of
having opted to follow the amendment in the Companies (Accounting Standard) Rules,
2006.
(c) Would your answer to (a) above be different of Pankaj Ltd. was not a Company and were
a Co-operative Society.
(November 2009 Old Course) (FAS11SA10)
10 AS-11 (Revised): The Effects of Changes in Foreign Exchange Rates
Q 10. A Ltd. has following Information
Year Exchange Exchange Exchange
Difference on Difference on Difference on
Short term Foreign Long Term Foreign Long term Foreign
Currency Monetary Currency Currency Monetary
Item Monetary Item Item (other items)
(Depreciable
Assets)
05-06 10,000 18,000 26,000
06-07 11,000 19,000 27,000
07-08 12,000 20,000 28,000
08-09 13,000 21,000 29,000
09-10 14,000 22,000 30,000
10-11 15,000 23,000 31,000
11-12 16,000 24,000 32,000
12-13 17,000 25,000 33,000

Apply Para. 46 Depreciation. rate 10%

WDV of asset on 1/4/2008 is `10,00,000. (FAS11SD11)
 AS-19: Leases
Applicable To Entities : ALL
Status : Mandatory

1. Scope
1. This AS should be applied in accounting for all leases other than:
(a) lease agreements to explore oil, gas, timber, metals and other mineral rights; and
(b) licensing agreements for items such as motion picture films, video recordings, plays,
manuscripts, patents and copyrights; and
(c) lease agreements to use lands.

2. Meaning
A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or
series of payments the right to use an asset for an agreed period of time.
1. A finance lease is a lease that transfers substantially all the risks and rewards incident to
ownership of an asset.
2. An operating lease is a lease other than a finance lease.
3. The definition of a lease includes agreements for the hire of an asset which contain a
provision giving the hirer an option to acquire title to the asset upon the fulfillment of agreed
conditions. These agreements are commonly known as hire purchase agreements.
4. Situations which would normally lead to a lease being classified as a finance lease are:
(a) the lease transfers ownership of the asset by the end of the lease term;

(Financed Car)
12 AS-19: Leases

(b) the lessee has the option to purchase the asset at a price sufficiently lower than the fair
value;

(Tata Truck India)

(c) the lease term is for the major part of the economic life of the asset;

(DDA Flats at Mayur Vihar, Delhi are on 99 Yrs Lease)

(d) at the inception of the lease the present value of the minimum lease payments amounts
to at least substantially fair value of the leased asset; and
(e) the leased asset is of a specialised nature such that only the lessee can use it without
major modifications being made.

(Ambulance Interior requires lot of Changes)

 AS-19: Leases 13
Note: Lease classification is made at the inception of the lease. If at any time the lessee and the
lessor agree to change the provisions the revised agreement is considered as a new agreement
over its revised term.

3. Finance Leases in Books of Lessee

The lessee should recognise the lease as an asset and a liability equal to the fair value of the
leased asset or present value of the minimum lease payments from the standpoint of the lessee,
which ever is lower.
Minimum lease payments are the payments over the lease term that the lessee is, to make
excluding contingent rent, together with any residual value guaranteed by or on behalf of the
lessee
Fair value is the amount for which an asset could be exchanged or a liability settled between
knowledgeable, willing parties in an arm’s length transaction.
Guaranteed residual value is in the case of the lessee, that part of the residual value which is
guaranteed by the lessee or by a party on behalf of the lessee (the amount of the guarantee
being the maximum amount that could, in any event, become payable)
Note: 1. Lease payments should be apportioned between the finance charge and the reduction of
the outstanding liability.
2. The depreciation policy for a leased asset should be consistent. If there is no reasonable
certainty that the lessee will obtain ownership by the end of the lease term, the asset should be
fully depreciated over the lease term or its useful life, whichever is shorter.
Disclosures The lessee should, make the following disclosures:
(a) assets acquired under finance lease;
(b) the net carrying amount;
(c) a reconciliation between the total of minimum lease payments at the balance sheet date
and their present value for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(d) contingent rents recognised as expense;
(e) the total of future minimum sublease payments; and
(f) a general description of the lessee’s significant leasing arrangements
Q 1. Ram took one machine an lease whose fair value was `1,00,000. Agreed lease Rentals were
Y0 10,000
Y1 39,000
Y2 26,000
Y3 34,000
14 AS-19: Leases
Guaranteed Residual value on lease was ` 10,000,
Rate of Interest 10% p.a.
Expenses on lease Nil,
Tax Rate 30%
life of machine 3 years
Prepare extracts of Balance Sheet and Profit and Loss account for 3 year.
(FAS19SD01)
Q 2. Fair value of Machine is `70,000
Years Lease Rentals
Y0 20,000
Y1 38,000
Y2 25,000
Y3 23,000
Y4 6,000
Guaranteed Residual value on lease was 5,000, Rate of Interest 10%
Calculate Value of Machine & Finance charges. (FAS19SD02)
Q 3. AS Ltd. Leased a machine to SB Ltd. on the following terms:
(` in Lakhs)
Fair value of the machine 4.00
Lease term 5 years
Lease Rental Per annum 1.00
Guaranteed Residual value 0.20
Expected Residual value 0.40
Internal Rate of Return 15%
Depreciation is provided on straight line method at 10 per cent annum. Ascertain unearned
Financial Income. Necessary Journal entries in the books of the Lessee in first year may be
shown.
(November 2009 Old Course) (FAS19SA04)
Q 4. A Ltd. leased a machinery to B Ltd. on following terms:
• Fair Value of the Machinery = `20 Lakhs
• Lease Term = 5 years
• Lease Rental per annum = `5 Lakhs
• Guaranteed Residual Value = `1 Lakh
• Expected Residual Value = `2 Lakhs
• Internal Rate of Return = 15%
Depreciation is provided on straight-line method at 10% per annum. Ascertain Unearn Financial
Income and necessary entries may be passed in books of Lessee in the First Year.
(November 2004 -Final -A/cs, 8 Marks) (FAS19SA05)
 AS-19: Leases 15

Q 5. S. Square Private Limited has taken machinery on lease from S.K. Ltd. The information is as
under:
Lease term = 4 years
Fair value at inception of lease = `20,00,000
Lease rent = `6,25,000 p.a.
at the end of year
Guaranteed residual value = `1,25,000
Expected residual value = `3,75,000
Implicit interest rate = 15%
Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575
and 0.5718 respectively.
Calculate the value of the lease liability as per AS-19.
(November 2010 New Course; 4 Marks) (FAS19SA06)
Q 6. Lessee Ltd. took a machine on lease from Lessor Ltd., the fair value being `7,00,000. The
economic life of the machine as well as the lease term is 3 years. At the end of each year Lessee
Ltd. pays `3,00,000. Guaranteed Residual Value (GRV) is `22,000 on expiry of the lease. Implicit
Rate of Return (lRR) is 15% p.a. and present value factors at 15% are 0.869, 0.756 and 0.657 at
the end of first, second and third years respectively.
Calculate the value of machine to be considered by Lessee Ltd. and the interest (Finance
charges) in each year. (November 2007; Marks 6) (FAS19SA07)
Q 7. R Ltd. the lessee acquired machinery on lease, when its fair value was `350,000. The lease
term covers the entire economic life of the asset, i.e. 3 years and the lessee pays `150,000 at the
end of each year. The lessee has guaranteed a residual value of `11,400 though the lessor
estimates the salvage value to be `10,000 at the end of the lease term. Compute the value of
machinery to be recognized by the lessee and the finance charges every year. IRR is 15% pa
and PV factor of 15% in three years is 2.283.
(C.A. final November 2001, Marks 10) (FAS19SA08)
Ans.: `3,49,946

4. Operating Leases in books of Lessee

Lease payments under an operating lease should be recognised as an expense in the statement
of profit and loss on a straight line basis over the lease term unless another systematic basis is
more representative of the time pattern of the user’s benefit.
Disclosures The lessee should make the following disclosures:
(a) the total of lease payments for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) the total of future minimum sublease payments expected to be received;
16 AS-19: Leases
(c) lease payments recognised in the statement of profit and loss for the period;
(d) sub-lease payments received;
(e) a general description of the lessee’s significant leasing arrangements.

5. Leases in the Financial Statements of Lessors

The lessor should recognise assets given under a finance lease at an amount equal to the net
investment in the lease.
Net investment in the lease is the gross investment in the lease less unearned finance income.
Gross investment in the lease is the aggregate of the minimum lease payments under a finance
lease from the standpoint of the lessor and any unguaranteed residual value accruing to the
lessor.
Unguaranteed residual value of a leased asset is the amount by which the residual value of the
asset exceeds its guaranteed residual value
Residual value of a leased asset is the estimated fair value of the asset at the end of the lease
term
Guaranteed residual value is in the case of the lessor, that part of the residual value which is
guaranteed by or on behalf of the lessee, or by an independent third party who is financially
capable of discharging the obligations under the guarantee which ever is higher.
Unearned finance income is the difference between:
(a) the gross investment in the lease; and
(b) the present value of
(i) the minimum lease payments under a finance lease from the standpoint of the
lessor; and
(ii) any unguaranteed residual value accruing to the lessor, at the interest rate implicit
in the lease.
Minimum lease payments are the payments over the lease term that the lessee is, to make
excluding contingent rent, together with: any residual value guaranteed to the lessor:
(i) by or on behalf of the lessee; or
(ii) by an independent third party financially capable of meeting this guarantee.
Note: Estimated unguaranteed residual values used in computing the lessor’s gross investment in
a lease are reviewed regularly.
If there has been a reduction in the estimated unguaranteed residual value, the income allocation
over the remaining lease term is revised.
An upward adjustment of the estimated residual value is not made, unless guaranteed.
Disclosures The lessor should make the following disclosures:
(a) a reconciliation between the total gross investment and the present value of minimum
lease payments receivable at the balance sheet date for each of the following periods:
(i) not later than one year;
 AS-19: Leases 17
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) unearned finance income;
(c) the unguaranteed residual values accruing to the benefit of the lessor;
(d) the accumulated provision for uncollectible minimum lease payments receivable;
(e) contingent rents recognised in the statement of profit and loss for the period;
(f) a general description of the significant leasing arrangements of the lessor
Q 8. DDA sold one flat on lease with following conditions
1. Agreed lease rentals of `40,000 p.a. to be paid at Y0, Y1, Y2 and Y3.
2. Expected residual value is `20,000.
3. Guaranteed Residual value on lease obtained by DDA `16,000.
4. Rate of discount 10%.
Prepare Lease Receivable Account for DDA. (FAS19SD09)
Q 9. A transferred to B a machine on lease. Agreed Rentals were
Y0 30,000
Y1 25,000
Y2 33,000
Y3 27,000
Expected residual value `17,000
Guaranteed Residual value on lease `19,000
Rate of Interest 10%
Prepare lease Receivable Account and calculate Unearned Finance Income at Y0, Y1, Y2, and Y3.
Also Calculate Value of Machine & Finance Charges. (FAS19SD10)
Q 10. AS Ltd. Leased a machine to SB Ltd. on the following terms:
(` in Lakhs)
Fair value of the machine 4.00
Lease term 5 years
Lease Rental Per annum 1.00
Guaranteed Residual value 0.20
Expected Residual value 0.40
Internal Rate of Return 15%
Depreciation is provided on straight line method at 10 per cent annum. Ascertain unearned
Financial Income. Necessary Journal entries in the books of the Lessee in first year may be
shown.
(November 2009 Old Course) (FAS19SA11)
18 AS-19: Leases
Q 11. A Ltd. leased a machinery to B Ltd. on following terms:
• Fair Value of the Machinery = `20 Lakhs
• Lease Term = 5 years
• Lease Rental per annum = `5 Lakhs
• Guaranteed Residual Value = `1 Lakh
• Expected Residual Value = `2 Lakhs
• Internal Rate of Return = 15%
Depreciation is provided on straight-line method at 10% per annum. Ascertain Unearn Financial
Income and necessary entries may be passed in books of Lessee in the First Year.
(November 2004 -Final -A/cs, 8 Marks) (FAS19SA12)
Q 12. Global Ltd. has initiated a lease for three years in respect of an equipment costing
`1,50,000 with expected useful life of 4 years. The asset would revert to Global Limited under the
lease agreement. The other information available in respect of lease agreement is:
(i) The unguaranteed residual value of the equipment after the expiry of the lease term is
estimated at `20,000.
(ii) The implicit rate of interest is 10%
(iii) The annual payments have been determined in such a way that the present value of the
lease payment plus the residual value is equal to the cost of asset.
Ascertain in the hands of Global Ltd.
(i) The annual lease payment.
(ii) The unearned finance income
(iii) The segregation of finance income, and also
(iv) Show how necessary items will appear in its profit and loss account and balance sheet
for the various years.
(May 2006, Marks 8) (FAS19SA13)
Q 13. L Ltd. has taken an asset on lease from V Ltd. for a period of 3 years. Annual lease rentals
are `6 lakhs payable at the end of every year. The Residual Value guaranteed by L is `2 lakhs
whereas V expects the estimated salvage value to be `5 lakhs at the end of the lease term. If the
Fair Value of the asset at the lease inception is `15 lakhs and the interest rate implicit in the lease
is 12% then compute the Net Investment in the Lease from the viewpoint of V Ltd.
(RTP; November 05) (FAS19RT14)
Ans.:

Particulars Details `
(1) Minimum Lease Payments (MLP) `6 lakhs  3 years = 18,00,000
(2) Guaranteed Residual Value (GRV) Given = 2,00,000
(3) MLP from the viewpoint of the Lessor (L) MLP as above + GRV 20,00,000
(4) Unguaranteed Residual Value (URV) Total Residual Value – GRV = 3,00,000
(5) Gross Investment in the Lease MLP for Lessor + URV = 23,00,000
 AS-19: Leases 19
Particulars Details `
(6) Present Value of MLP, GRV and URV Discounted @ 12% (Refer note
below) 17,97,040
(7) Unearned Finance Income (5) – (6) 5,02,960
(8) Net Investment in the Lease (5) – (7) 17,97,040

Note: PV of Gross Investment = PV of MLP + PV of (GRV + URV) = `17,97,040, computed as

under:
= (`6,00,000  PVF at 12% for 3 years) [i.e. `6,00,000  (0.8929 + 0.7972 + 0.7118)] = `14,41,140
+ `5,00,000  0.7118 = `3,55,900.
Q 14. 'A' leased a machine from 'B' on the following terms:
(a) The ownership of the machine will be transferred to 'A' on expiry of the lease period at
`8,900.
(b) Installation cost of the machine `5,000 paid by lessor an behalf of lessee
(c) The cost of the machine is `1,09,240.
(d) Lease agreement is signed for 5 years.
(e) Minimum Lease Payment is `28,000 p.a.
(f) First installment is Payable on 01.04.2007.
(g) Depreciation is charged @ 25% p.a. on WDV.
(h) Lease Rent: 5
You are required to show the complete chart of principal amount and implicit rate of interest for 5
years. (FAS19SD15)
Ans.: First for the students is to calculate the implicit rate of return, i.e. the rate of Present Value
at which the PV of Minimum Lease Payment equals to Market Price of the Assets on the date of
lease agreement.
———————————————————————————————————————
Lease Present Value Present Value of Present Value Present Value of
Payment Factor @ 12% Lease Payment Factor @ 14% Lease Payment
———————————————————————————————————————
28,000 1 28,000 1 28,000
28,000 0.893 25,000 0.877 24,561
28,000 0.797 22,321 0.769 21,545
28,000 0.712 19,930 0.675 18,899
28,000 0.636 17,795 0.592 16,578
8,900 0.567 5,050 0.519 4,622
———— ————
118,096 114,206
———— ————
———————————————————————————————————————
20 AS-19: Leases

Installment Opening Interest Principle Closing

Balance Amount Amount Balance
1 114,240 — 28,000 86,240
2 86,240 12,074 15,926 70,314
3 70,314 9,844 18,156 52,158
4 52,158 7,302 20,698 31,460
5 31,460 4,404 23,596 7,864
7,864 1,036 7,864 (0)

6. Operating Leases in books of Lessor

The lessor should present an asset given under operating lease in its balance sheet under fixed
assets.
Lease income from operating leases should be recognised in the statement of profit and loss on a
straight line basis over the lease term, unless another systematic basis is more representative of
the time pattern in which benefit derived from the use of the leased asset is diminished.
Note: The depreciation of leased assets should be on a basis consistent with the normal
depreciation policy.
Disclosures: The lessor should, make the following disclosures:
(a) for each class of assets, gross carrying amount, accumulated depreciation accumulated
impairment losses at the balance sheet date;
(b) the future minimum lease payments under non-cancellable operating leases in the
aggregate and for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(c) total contingent rents recognised as income in the statement of profit and loss for the
period;
(d) a general description of the lessor’s significant leasing arrangements

Q 15. On April 1, 20X2, ABC Limited leases equipment for 4 years to XYZ Limited. The cost of
the equipment is `1,500,000 and has a useful life of 10 years (assume straight line method of
depreciation). The lease payments to be made are as follows:
Year Amount
1 100,000
2 150,000
3 175,000
4 200,000
625,000
 AS-19: Leases 21
The lease is classified as an operating lease. How would this lease be accounted for in the books
of account of the lessee and the lessor? (FAS19RT16)
Ans.: Paragraph 23 of AS 19 requires that (from a lessee's perspective), "Lease payments under
an operating lease should be recognised as an expense in the statement of profit and loss on a
straight line basis over the lease term unless another systematic basis is more representative of
the time pattern of the user's benefit". Similarly, paragraph 40 of AS 19 states that (from a
lessor's perspective), "Lease income from operating leases should be recognised in the
statement of profit and loss on a straight line basis over the lease term, unless another systematic
basis is more representative of the time pattern in which benefit derived from the use of the
leased asset is diminished".
In the absence of a systematic basis which is more representative of the time pattern in which
benefit derived from the use of the leased asset is diminished, the lease rental should be
accounted for on a straight line basis. Accordingly, in the present case the lease should be
accounted for in the books of the lessee and the lessor for the year ended March 31, 20X3 as
follows:
ABC Limited (Lessor)
Debit (`) Credit (`)
March 31, 20X3
Operating Lease Receivable Dr. 156,250
To Lease Rental Income 156,250
(To record operating lease income
receivable in the books - 625,000/4)
Depreciation Dr. 150,000
To Asset 150,000
(To record depreciation expense for the
year- 1,500,000/10)
Bank Dr. 100,000
To Operating Lease Receivable 100,000
(To record lease rental payment received in
accordance with the lease agreement)

The balance in the Operating Lease Receivable Account of `56,250 as on March 31, 20X3,
should be disclosed as a current asset in the balance sheet of ABC Limited (Lessor).
XYZ Limited (Lessee)
The lease should be accounted for as follows in the books of XYZ Limited (Lessee).
Debit (`) Credit (`)
March 31, 20X3
Rent expense Dr. 156,250
To ABC Limited - Operating Lease Rental 156,250
Payable (To record rent expense for the
year in the books - 625,000/4)
ABC Limited - Operating Lease Rental Payable
To Bank Dr. 100,000
(To record lease rental payment made in 100,000
accordance with the lease agreement)
22 AS-19: Leases

The balance in the Operating Lease Rental Payable Account of `56,250, as on March 31, 20X3,
should be shown as a current liability in the balance sheet of XYZ Limited (Lessee).
Similar would be the accounting treatment in the subsequent years.
Q 16. Suraj Limited wishes to obtain a machine costing `30 lakhs by way of lease. The effective
life of the machine is 14 years, but the company requires it only for the first 5 years. It enters into
an agreement with Ashok Ltd., for a lease rental for `3 lakhs p.a. payable in arrears and the
implicit rate of interest is 15%. The chief accountant of Suraj Limited is not sure about the
treatment of these lease rentals and seeks your advise.(June 2009, 5 Marks) (FAS19SA17)
Ans.: As per AS 19 'Leases', a lease will be classified as finance lease if at the inception of the
lease, the present value of minimum lease payment amounts to at least substantially all of the fair
value of leased asset. In the given case, the implicit rate of interest is given at 15%. The present
value of minimum lease payments at 15% using PV - Annuity Factor can be computed as follows:
Annuity Factor (Year 1 to Year 5) 3.36 (approx.)
Present value of minimum lease payments
(for `3 lakhs each year) `10.08 lakhs (approx.)
Thus, present value of minimum lease payments is `10.08 lakhs and the fair value of the machine
is `30 lakhs. In a finance lease, lease term should be for the major part of the economic life of the
asset even if title is not transferred. However, in the given case, the effective useful life of the
machine is 14 years while the lease is only for five years. Therefore, lease agreement is an
operating lease. Lease payments under an operating lease should be recognized as an expense
in the statement of profit and loss on a straight line basis over the lease term unless another
systematic basis is more representative of the time pattern of the user's benefit.

7. Sale and Leaseback Transactions

A sale and leaseback transaction involves the sale of an asset by the vendor and the leasing of
the same asset back to the vendor. The lease payments and the sale price are usually
interdependent as they are negotiated as a package. The accounting treatment of a sale and
leaseback transaction depends upon the type of lease involved.
If a sale and leaseback transaction results in a finance lease, any excess or deficiency of sales
proceeds over the carrying amount should not be immediately recognised as income or loss in
the financial statements of a seller-lessee. Instead, it should be deferred and amortised over the
lease term in proportion to the depreciation of the leased asset.
Q 17. A transferred to Bank a machine on sale and lease back basis
Fair value Machine `1,50,000
Book value Machine `1,00,000
Selling price to bank `1,30,000
Implicit rate of Interest 10%
Lease Rentals
`33,000, 21,000, 30,000, 28,000, 26,000, 24,000, 22,000.
 AS-19: Leases 23
Depreciation SLM basis and estimated life of machine is 7 years
Consider Sale and Lease back was Financial in nature.
Journalise for A (FAS19SD18)

8. Sale and leaseback transaction results in an operating lease

If a sale and leaseback transaction results in an operating lease, and it is clear that the
Transaction is established at fair value, any profit or loss should be recognised immediately.
If the sale price is below fair value, any profit or loss should be recognised immediately except
that, if the loss is compensated by future lease payments at below market price, it should be
deferred and amortised in proportion to the lease payments over the period for which the asset is
expected to be used.
If the sale price is above fair value, the excess over fair value should be deferred and
amortised over the period for which the asset is expected to be used.
Note: For operating leases, if the fair value at the time of a sale and leaseback transaction is less
than the carrying amount of the asset, a loss equal to the amount of the difference between the
carrying amount and fair value should be recognised immediately.
Q 18. Journalise in each of following cases assuming transaction is of sale and operating lease
back
1. Fair Value 1,00,000, Book Value 1,00,000. Sale Price 1,00,000
2. Fair Value 1,00,000, Selling Price 1,00,000, Book Value 80,000
3. Fair Value 1,00,000, Selling Price 1,00,000, Book Value 1,20,000
4. Fair Value 1,00,000, Selling Price 1,20,000, Book Value 1,00,000
5. Fair Value 1,00,000, Selling Price 1,20,000, Book Value 80,000
6. Fair Value 1,00,000, Selling Price 1,20,000, Book Value 1,20,000
7. Fair Value 1,00,000, Selling Price 90,000, Book Value 1,00,000
8. Fair Value 1,00,000, Selling Price 80,000, Book Value 90,000
9. Fair Value 1,00,000, Selling Price 80,000, Book Value 70,000
10. Fair Value 1,00,000, Selling Price 80,000, Book Value 1,10,000
(FAS19SD19)
Q 19. Kusum Ltd. sold a machinery to Rajender Ltd. on 31-3-2003 and simultaneously leased
back for 4 years. The sale price is `8 lakhs whereas the fair value is `6 lakhs. The estimated
remaining useful life of the machinery is 10 years. How much deferred gain should be recognised
by Kusum Ltd. for the financial year 2002-03? (FAS19RT20)
Ans: Deferred gain `2 lakhs to be amortised over 4 years.
Q 20. On January 1, 2011, Santa Ltd. sold equipment to Banta Ltd. for `6,14,460. The carrying
amount of the equipment on that date was `1,00,000. The sale was a part of the package under
which Banta Ltd. leased the asset to Santa Ltd. for a ten-year term. The economic life of the
asset is estimated at 10 years. The minimum lease rents payable by the lesser has been fixed at
24 AS-19: Leases
`1,00,000 payable annually beginning December 31, 2011. The incremental borrowing interest
rate of Santa Ltd. is estimated at 10% per annum. Calculate the net effect on the profit and loss
account? [RTP May 2012] (FAS19RT21)
Ans.: The PV of minimum lease payments at 10% discount rate:
= `1,00,000 X 6.1446 = `6,14,460
Santa Ltd. should recognize the asset and the liability at `6,14,460. The excess of sales
proceeds over carrying amount
= `6,14,460 – `1,00,000= `5,14,460
As per para 48 of AS 19 ‘Leases’, if a sale and leaseback transaction results in a finance
lease, any excess or deficiency of sales proceeds over the carrying amount should not be
immediately recognised as income or loss in the financial statements of a seller-lessee.
Instead, it should be deferred and amortised over the lease term in proportion to the
depreciation of the leased asset.
Therefore, assuming that Santa Ltd. has decided to charge depreciation on straight line
basis, AS 19 requires Santa Ltd. to:
(a) Recognize depreciation of `61,446 per annum for 10 years
(b) Allocate excess of `5,14,460 over the lease term at the rate of `51,446 p.a. The net
effect is a debit of (`61,446 – `51,446) `10,000 per annum to the profit and loss
account for 10 years, as covered under the lease term.
Had there been no sale and lease back transaction, the profit and loss account for each
year covered in the lease term would have been charged by (`1,00,000/10) or `10,000,
towards depreciation. Thus, the sale and lease back transaction has no impact on profit
or loss to be reported by the lessee (vendor in the sale transaction) over the lease period.
The deferred income (excess) should be presented as a deduction from the carrying
amount of the asset. Thus, the asset should be presented by Santa Ltd. in its balance
sheet dated December 31, 2011 as follows:
`
Gross Block 6,14,46
Less: Accumulated depreciation (61,446)
Net Block 5,53,014
Less : Deferred Income (5,14,460 – 51,446) (4,63,014)
Net Block 90,000
In effect, the carrying amount of the equipment does not change with the sale and lease
back transaction. In substance, the sale and lease lack transaction is a borrowing
transaction resulting in recognition of a liability in the balance sheet and recognition of
interest expense in the profit and loss account.

9. Tax Effects of Leasing

Q 21. X Ltd. acquired certain pollution control equipment eligible for 100 per cent tax depreciation
at a cost of `100,000 on April 1, 20X2, and immediately leased the same to Y Ltd. on the following
terms:
 AS-19: Leases 25
— Non-cancelable lease term - 3 years (economic life of the asset is also 3 years, no
residual value).
— Lease payments - 3 annual payments of `40,000, which become due at the end of each
year.
As substantially all the risks and rewards incident to ownership of the leased asset are transferred
by X Ltd. to Y Ltd., the lease is classified as a finance lease. Assume tax rate of 30% for both X
Ltd. and Y Ltd. Assume that accounting and taxable income of each enterprise for 3 years, before
the effect of this lease transaction and taxation, is `100,000. Both X Ltd., and Y Ltd., account for
taxes on income in accordance with Accounting Standard (AS) 22 on 'Accounting for Taxes on
Income'. Calculate Profit after Tax of X Ltd. and Y Ltd.
(FAS19SM22)
Ans.: Paragraph 11 of AS 19 states that, "At the inception of a finance lease, the lessee should
recognise the lease as an asset and a liability". Further, paragraph 26 of AS 19 states that the
"lessor should recognise assets given under a finance lease in its balance sheet as a
receivable…."
Central Board of Direct Taxes, vide its Circular No. 2/2001, dated the 9th February, 2001. has
clarified as below:
"It has come to the notice of the Board that the New Accounting Standard on 'Leases' issued
by the Institute of Chartered Accountants of India requires capitalization of the asset by the
lessees in financial lease transaction. By itself, the accounting standard will have no
implication on the allowance of depreciation on assets under the provisions of the Income-tax
Act".
In view of the above Circular, it is apparent that the lessor will continue to avail the depreciation
benefit for tax purposes even though, for accounting purposes as per AS 19, the asset would be
recognised in the balance sheet of the lessee. Hence, difference between accounting and taxable
income arises due to the finance lease transaction. Based on this, the following would be the
accounting treatment.
In the books of X Ltd., the lessor
For accounting purposes, X Ltd. would apply AS 19. As per paragraph 26 of the Statement, "The
lessor should recognise assets given under a finance lease in its balance sheet as a receivable at
an amount equal to the net investment in the lease". Further, paragraph 28 of the Statement
states that, "The recognition of finance income should be based on a pattern reflecting a constant
periodic rate of return on the net investment of the lessor outstanding in respect of the finance
lease".
Accordingly, X Ltd. would recognise the receivable equal to the net investment in the lease. The
interest rate implicit in the lease is 9.70 per cent per annum and is computed as follows:
Year 0 1 2 3
Cash flows (100,000) 40,000 40,000 40,000
Present value factor 1 0.9116 0.8310 0.7575
Present value (100,000) 36,463 33,238 30,299

The net investment in lease would be recognised as `100,000, which is equal to the present value
of the minimum lease payments as well as the fair value of the asset at the inception of the lease.
26 AS-19: Leases
Over the three years of the lease, X Ltd. will recognise the following sums as finance income and
recovery of principal:
(All amounts are in `)

Year Finance Payment Reduction in Outstanding

income principal principal
(net investment
outstanding)
April 1, 20X2 100,000
March 31, 20X3 9,701 40,000 30,299 69,701
March 31, 20X4 6,762 40,000 33,238 36,463
March 31, 20X5 3,537 40,000 36,463 —

Accordingly, the computation of accounting income would be as follows:

March 31, 20X3 March 31, 20X4 March 31, 20X5
Profit before finance
income
and tax expense 100,000 100,000 100,000
Finance income 9,701 6,762 3,537
Accounting income before
tax expense 109,701 106,762 103,537

However, for tax purposes, the asset would have been capitalised and depreciated fully in the
first year, in the books of X Ltd., while lease rentals received in the first year and the subsequent
periods would be taxed as income, this would result in the computation of taxable income as
follows:
Year March 31, 20X3 March 31, 20X4 March 31, 20X5
Profit before lease rental
100,000 100,000 100,000
and depreciation
Lease rental 40,000 40,000 40,000
Depreciation (100,000) — —
Taxable income 40,000 140,000 140,000
Current tax 12,000 42,000 42,000

For applying AS 22 in the situation of a finance lease, a question may arise as to whether, for
computing timing differences, individual items such as finance income for accounting purposes
and depreciation and lease rentals for tax purposes should be considered in isolation or the total
impact of the finance lease transaction on the accounting income and taxable income should be
considered. With a view to reflect the true impact of the lease transaction on accounting income
and taxable income, the lease transaction as a whole should be considered since the individual
items are related. Accordingly, in the present case, to reflect the effect of the lease transaction, a
comparison of taxable income and accounting income is made as follows:
Year March 31, 20X3 March 31, 20X4 March 31, 20X5
Taxable income 40,000 140,000 140,000
Accounting income 109,701 106,762 103,537
Timing Difference (69,701) 33,238 36,463
 AS-19: Leases 27

Year March 31, 20X3 March 31, 20X4 March 31, 20X5
Deferred tax
(20,910) 9,971 10,939
(charge)/credit
Deferred tax
(20,910) (10,939) -
(liability)/asset

Based on the above, the following will be the position in the statements of profit and loss of X Ltd;

Year March 31, 20X3 March 31, 20X4 March 31, 20X5
Accounting
income before tax
expense 109,701 106,762 103,537
Current tax (12,000) (42,000) (42,000)
Deferred tax (20,910) 9,971 10,939
Tax expense (32,910) (32,029) (31,061)
Profit after tax 76,791 74,733 72,476
Tax rate on 30% 30% 30%
accounting
income (Tax
expense/
Accounting income
before tax
expense)

In the books of Y Ltd., the lessee

As per paragraph 11 of AS 19, "At the inception of a finance lease, the lessee should recognise
the lease as an asset and a liability. Such recognition should be at an amount equal to the fair
value of the leased asset at the inception of the lease. However, if the fair value of the leased
asset exceeds the present value of the minimum lease payments from the standpoint of the
lessee, the amount recorded as an asset and a liability should be the present value of the
minimum lease payments from the standpoint of the lessee".
In this case, the present value of minimum lease payments is equal to the fair value of the asset
at the inception of the lease. Accordingly, for accounting purposes, Y Ltd. would record a fixed
asset and corresponding finance lease obligation at the inception of the lease at `100,000.
Subsequent to initial recognition, the asset would be depreciated over the useful life, which is 3
years in this case. It is assumed that Y Ltd., follows straight-line method. The amounts of the
finance charge and the payment towards the principal on the finance lease would be the same as
in the case of X Ltd. Accordingly, the accounting income of Y Ltd. would be as follows:
March 31, 20X3 March 31, 20X4 March 31, 20X5
Profit before finance
100,000 100,000 100,000
charge and depreciation
Finance charge (9,701) (6,762) (3,537)
Depreciation (33,333) (33,333) (33,334)
Accounting income
56,966 59,905 63,129
before tax expense
28 AS-19: Leases
However, for tax purposes, the lessee would only recognise lease payments as an expense. As
the asset would not have been capitalised for tax purposes, no depreciation would be available.
This would result in the computation of taxable income as follows:
Year March 31, 20X3 March 31, 20X4 March 31, 20X5
Profit before lease rental 100,000 100,000 100,000
Lease rental (40,000) (40,000) (40,000)
Taxable income 60,000 60,000 60,000
Current tax 18,000 18,000 18,000
As explained above in the case of lessor, to compute timing differences, a comparison of taxable
income and accounting income is made as follows. It is assumed that for recognition of a deferred
tax asset, the conditions laid down in AS 22 are fulfilled.

Year March 31, 20X3 March 31, 20X4 March 31, 20X5
Taxable income 60,000 60,000 60,000
Accounting income 56,966 59,905 63,129
Timing Difference 3,034 95 (3,129)
Deferred tax
910 29 (939)
(charge)/credit
Deferred tax
910 939 —
(liability)/asset
Based on the above, the following will be the position in the statements of profit and loss of Y
Ltd.:

Year March 31, 20X3 March 31, 20X4 March 31, 20X5
Accounting income
before tax expense 56,966 59,905 63,129
Current tax (18,000) (18,000) (18,000)
Deferred tax 910 29 939
Tax expense (17,090) (17,971) (18,939)
Profit after tax 39,876 41,934 44,190
Tax rate on accounting 30% 30% 30%
income (Tax expense/
Accounting income before
tax expense)

Q 22. Prakash Limited leased a machine to Badal Limited on the following terms:
(` in lakhs)
(i) Fair value of the machine 48.00
(ii) Lease term 5 years
(iii) Lease rental per annum 8.00
(iv) Guaranteed residual value 1.60
(v) Expected residual value 3.00
(vi) Internal rate of return 15%
Discounted rates for 1st year to 5th year are 0.8696, 0.7561, 0.6175, 0.5718 and 0.4972
respectively.
Ascertain Unearned Financial Income.
(5 Marks) (November 2012)
 AS-20: Earning Per Share
Applicable To Entities : ALL
Status : Mandatory

1. Basic Earnings Per Share

Basic earnings per share should be calculated by dividing the net profit or loss for the period
attributable to equity shareholders by the weighted average number of equity shares outstanding
during the period.

2. Earnings - Basic
The net profit or loss for the period attributable to equity shareholders should be the net profit
or loss for the period after deducting preference dividends and any attributable tax thereto for the
period.
Note 1: All items of income and expense which are recognised in a period, including tax
expense and extraordinary items, are included in the determination of the net profit or loss.
Note 2: The amount of preference dividends that is deducted is:
(a) any preference dividends on non-cumulative preference shares provided; and
(b) the full amount of preference dividends for cumulative preference shares, whether or not
the dividends have been provided for.

3. Per Share - Basic

The number of equity shares should be the weighted average number of equity shares
outstanding during the period.
Q 1. Profit after Tax for the year 2005-06 — `10,00,000
On 1.4.05, Equity Shares — 10,000 shares of Face Value
`10 Fresh issue 2000 shares fully paid up on 1.10.2005
Calculate BEPS for 2005-06. (FAS20SD01)
Ans.: `90.91.

4. Partly Paid Share

Partly paid equity shares are treated as a fraction of an equity share to the extent that they were
entitled to participate in dividends.
30 AS-20: Earning Per Share

Q 2. Calculate Basic Earning per share for 10-11

Earnings attributable for
equity shareholders (10-11) `10,00,000
Equity Shares opening Balance 1/4/2010 16,500 shares of
`10 each 7 paid up
Public Issue 1/7/2010 10,000 shares of
`10 each 6 paid up
Received calls on 1/10/2010 16,400 shares
`3 per share
Received calls on 1/11/2010 10,000 shares `4 per share
(FAS20SD02)
Ans.: `49.60.

5. Bonus Shares
In case of a bonus issue or a share split, equity shares are issued to existing shareholders for no
additional consideration. The number of equity shares is adjusted as if the event had occurred at
the beginning of the earliest period reported.
Q 3. Calculate BEPS for the year 2005-06
Earnings attributable to Equity Shareholders for the year
2004-05 — `10,00,000
Earnings attributable to Equity Shareholders for the year
2005-06 — `12,00,000
Equity shares as on 1-4-04 — 10,000 shares
of FV `10
Issued 5,000 and 3000 equity shares on 1-1-05 and 1-7-05 respectively and shares fully
subscribed and paid up .1:1 Bonus issue on 1-12-05 (FAS20SD03)
Ans.: `89 & `34.
Q 4. As a statutory auditor for the year ended 31st March, 2002, how would you deal with the
following: As on 31st March, 2001, the equity share capital of Q Ltd is `10 crores divided into
shares of `10 each. During the financial year 2001/02, it has issued bonus shares in the ratio of
1:1. The net profit after tax for the years 31st March 2001 and 31st March 2002 is `8.50 crores
and `11.50 crores respectively. The EPS disclosed in the accounts for two years is `8.50 and
`5.75 respectively. (Auditing November 2002) (FAS20SA04)
Ans.:

31 March 2002 31 March 2001

(a) Net profit (`lakhs) 1150 850
(b) Share capital (Nos in lakhs) 200 100
(c) Adjusted share capital to preempt bonus effect 200 200
(d) EPS per share (a/c) 5.75 4.25
 AS-20: Earning Per Share 31
Q 5. Kevin Industries Ltd. has a Paid Up Capital of `20 Crores divided into Equity Shares of `10
each as on 31st March 2003. During the financial year 2003-04 it has issued bonus ratio 1:1. The
Net Profit after Tax for the years 31.03.2003 and 31.3.2004 is `10 Crores and `15 Crores
respectively. The Earnings Per Share (EPS) disclosed in the Statements for the above two years
is `5.00 and `3.75 respectively. Is the disclosure correct? (FAS20SA05)
(November 2004 - Final - Auditing - 5 Marks) (Similar to November 2002)
Ans.: In the instant case, the adjusted EPS for the previous year should he `2.50 after
considering Bonus issue and not `5.00 as disclosed in the Accounts.
Q 6. Calculate BEPS for the year 2005-06.
Earnings attributable to Equity Shareholders for the year
2004-05 — `10,00,000
Earnings attributable to Equity Shareholders for the
year 2005-06 — `12,00,000
Equity shares as on 1-4-04 — 10,000 shares of
Face value `10

On 1-10-04, fresh issue of 5000 equity shares of FV `10 and `6 paid up.
On 1-7-05, issued 5000 equity shares of FV `10 and received `4 per share.
On 1-11-05, issued 5000 bonus shares of face value `10 (FAS20SD06)
Ans.: `8.70 per Re and `6.15.
Q 7. Explain the concept of ‘weighted average number of equity shares outstanding during the
period’. State how would you compute, based on AS-20, the weighted average number of equity
shares in the following case:
No. of shares
1st April, 2010 Balance of equity shares Equity 7,20,000
31st August, 2010 shares issued for cash Equity 2,40,000
1st February, 2011 shares bought back 1,20,000
31st March, 2011 Balance of equity shares 8,40,000
(FAS20SA07)
Ans. As per para 16 of AS 20, “Earnings Per Share”, the weighted average number of equity
shares outstanding during the period reflects the fact that the amount of shareholders’ capital
may have varied during the period as a result of a larger or less number of shares outstanding at
any time.
For the purpose of calculating basic earnings per share, the number of equity shares should be
the weighted average number of equity shares outstanding during the period.
Weighted average number of equity shares
7,20,000 X 5/12 = 3,00,000 shares
9,60,000 X 5/12 = 4,00,000 shares
8,40,000 X 2/12 = 1,40,000 shares
————————
= 8,40,000 shares
————————
32 AS-20: Earning Per Share

Q 8. Compute adjusted earning per share and basic EPS based on the following information:
Net profit 2009-10 `7,20,000
Net profit 2010-11 `24,00,000
No. of equity shares outstanding until 31st December, 2010 8,00,000
Bonus issue on 1st January, 2011, 2 equity shares for each equity share outstanding at 31st
December, 2010. [RTP May 2012] (FAS20RT08)
Ans. Equity per share
Basic EPS 2010-11 `24,00,000/24,00,000 = `1
Adjusted EPS 2009-10 `7,20,000/24,00,000 = `0.30
Since the bonus issue is an issue without consideration, the issue is treated as if it had
occurred prior to the beginning of the year 2009-10, the earliest period reported.

6. Right Shares
A rights issue usually includes a bonus element.
Treatment of Right Shares:
Following steps are applied:
Step 1: Calculate TMP[ER] if not available. Such price is I.V. of shares
Formula
[Fair Value (before right) × No. of share (pre-right)] + Right proceeds
Total shares post right

Step 2: Calculate paid-up part in Right issue

Profit Proceeds
Paid - up Part Market Price as per Step 1

Step 3: Calculate Bonus part in Right

Bonus  Right Share - paid part as per Step 2
Step 4:
→ Paid part should be adjusted from the date of receipts of amount.
→ Bonus part should be considered price beginning
→ Previous Year EPS will be readjusted because of Bonus elements.
Q 9. X Co. Ltd. supplied the following information. You are required to compute the Basic EPS.
(Accounting year 1.1.2002 - 31.12.2002)
Net Profit for the accounting years `20,00,000 and
 AS-20: Earning Per Share 33
2002 and 2003 `30,00,000
No. of shares outstanding prior to Right Issue 10,00,000 shares
Rights Issue One new share for each four
shares outstanding i.e.,
2,50,000 shares.
Terms Right Issue Price `20; Last date for exercise of rights is 31.3.2003.
Fair Rate of one Equity Share immediately
prior to exercise of right on 31.3.03 `25
(November 2004 - Final - Accounts, 8 Marks) (FAS20SA11)
Ans.: Basic EPS for the current year `30,00,000 ÷ 11,97.917 =
`2.50.
EPS for the previous year as originally reported `20,00,000 ÷ 10,00,000 = `2.00.
Adjusted EPS for the previous reporting period `20,00,000 ÷ (10,00,000 × 1 .042) = `1 .92

7. Mix
Q 10. Calculate Basic Earning per share
Earnings attributable for Equity shareholders for 10-11 `12,00,000
1/4/2010 Balance of Shares Nos. 1,00,000
1/7/2010 Public Issue 40,000 shares
1/9/2010 Bonus Issue 30,000 Shares
1/12/2010 Right Issue 50,000 @ 30each
Fair value Ex Right 40 each.
(FAS20SD12)
Q 11.
Profit after Tax (10-11) 15,00,000
Profit after Tax (11-12) 20,00,000
1/4/2010 Balance 2,50,000 shares
1/7/2010 Public 50,000 of `10 each 7 paid up (issue price `27/-)
1/10/2010 Call received `3/-
1/8/2011 Bonus issue 70,000 of `10/- each 10 paid up
1/9/2011 Right issue 40,000 share of `10 each @ 70 each fair value before right 90
each
On 1/4/2010 Company had 12% Preference share capital of `5,00,000 Dividend
Distribution Tax 10%
34 AS-20: Earning Per Share
For company it is mandatory to transfer `2,00,000 to general reserve.
Profit after Tax of both years are calculated before adjusting extraordinary loss of `30,000
(Tax Rate 30%)
Calculate Basic Earning per share 10-11
Basic Earning per share 11-12
Restated Basic Earning per share 10-11 (FAS20SD13)

8. Amalgamation in nature of Purchase

Equity shares issued as part of the consideration in an amalgamation in the nature of purchase
are included as of the date of the acquisition.
Q 12. Calculate BEPS for the year 2005-06.
Earnings attributable to Equity Shareholders for the year
2004-05 — `10,00,000
Earnings attributable to Equity Shareholders for the year
2005-06 — `12,00,000
Equity shares as on 1-4-04 — 10,000 shares
of FV of `10
On 1-10-05 Issued 10,000 shares as Purchase consideration for amalgamation in the nature of
purchase.
(FAS20SD14)
Ans.: `100 and `80.

9. Amalgamation in nature of Merger

Equity shares issued during the reporting period as part of the consideration in an amalgamation
in the nature of merger are included from the beginning of the reporting period.
Q 13. On June 30 20X1, B Limited merged into A Limited. The amalgamation was accounted for
in accordance with the pooling of interests method described in Accounting Standard (AS) 14 on
'Accounting for Amalgamations'.
The following is the relevant information for the year ended 31st March, 20X2:
Particulars A Limited B Limited
Net profit (Rs)
Until Merger 500,000 200,000
After Merger to year end (March 31, 20X2) 800,000
Number of shares (`10 each)
At the start of the year 6,000 4,000
On date of merger 6,000 4,000
 AS-20: Earning Per Share 35
Particulars A Limited B Limited
At year end (March 31, 20X2) 10,000

Compute the EPS of A Ltd. at the year end, i.e., March 31, 20X2. (FAS20SA16)
Ans.:
Basic EPS for A Limited for the year ended March 31, 20X2 would be `150 (`1,500,000/10,000).

10. Absolute Differential Dividend Rights

An enterprise should present basic and diluted earnings per share on the face of the
statement of profit and loss for each class of equity shares.
Q 14. Calculate BEPS.
Earnings attributable to Equity Shareholders — 6,00,000
ESC1 — 3,00,000 (30,000 shares of Face Value `10)
ESC2 — 4,00,000 (50,000 shares of Face Value `8)
ESC1 is entitled to 3% extra dividend in comparison to ESC2.
(FAS20SD18)
Ans.: 8.74 for ESC1, 6.75 ESC2.
Q 15. Calculate BEPS for each class
Following is capital structure of a company (` in Lakh)
No. of outstanding shares
Of `10 each fully paid up-Class A 200,00,000
Of `25 each fully paid up-Class B 100,00,000
Of `5 each fully paid up-Class C 600,00,000
Profit after tax 1500,00,000
Dividend %
— Class A Normal as declared
— Class B 1% above normal
— Class C 2% above normal

(FAS20SD19)
Ans.: Class, A 1.89, B 4.97 C 1.04.

11. Proportionate Differential Dividends Rights

Q 16. XYZ Limited has the following different classes of equity shares of `10 each, outstanding as
at March 31, 2002, having disproportionate rights with respect to voting and dividends:
Number of shares Rights as to share in net profit to the
extent of capital
100,000 "A" class equity shares Proportionate to capital
36 AS-20: Earning Per Share
Number of shares Rights as to share in net profit to the
extent of capital
30,000 "B" class equity shares In the proportion of 3:2 with respect to
"A" class shares
 AS-20: Earning Per Share 37
Number of shares Rights as to share in net profit to the
extent of capital
30,000 "C" class equity shares In the proportion of 5:2 with respect to
"A" class shares
40,000 "D" class equity shares In the proportion of 3: 1 with respect
to "A" class shares

Profit for the year ended March 31, 2002 was `800,000. As paragraph 8 of the Statement requires
an enterprise to present basic and diluted earnings per share on the face of the statement of
profit and loss account for each class of equity shares that has a different right to share in the net
profit for the period, the company calculates and discloses Basic EPS as follows:
The Company believes that net profit is to be shared in the ratio of 2:3:5:6, as derived from their
rights to share net profit.
Net Profit No. of Basic EPS
Class Calculation
(Rs) shares (Rs)
Class A `800,000 * 2/16 100,000 100,000 1.00
Class B `800,000 * 3/1 6 150,000 30,000 5.00
Class C `800,000 * 5/1 6 250,000 30,000 8.33
Class D `800,000 * 6/1 6 300,000 40,000 7.50

Is the calculation of EPS by the company correct? (FAS20SM22)

Ans.:

Class Apportioned Net Profit (Rs) No. of shares Basic EPS (Rs)
Class A 235,294 100,000 2.35
Class B 105,882 30,000 3.53
Class C 176,471 30,000 5.88
Class D 282,353 40,000 7.06
Q 17. Calculate BEPS.
Earnings attributable to Equity Shareholders — `6,00,000
ESC1 — `3,00,000 (30,000 shares of Face Value `10)
ESC2 — `4,00,000 (50,000 shares of Face Value `8)
ESC1 is entitled to dividend in the ratio of 2:1 in comparison to ESC2.
(FAS20SM23)
Ans.: 12 & 4.80.

12. Diluted Earnings Per Share

For the purpose of calculating diluted earnings per share, the net profit or loss for the period
attributable to equity shareholders and the weighted average number of shares outstanding
during the period should be adjusted for the effects of all dilutive potential equity shares.
38 AS-20: Earning Per Share
A potential equity share is a financial instrument or other contract that entitles, or may
entitle, its holder to equity shares.
Examples of potential equity shares are:
(a) debt instruments or preference shares, that are convertible into equity shares;
(b) share warrants;
(c) options including employee stock option plans under which employees of an enterprise
are entitled to receive equity shares as part of their remuneration and other similar plans;
and

13. Dilutive or Non Dilutive

Potential equity shares should be treated as dilutive when, and only when, their conversion
to equity shares would decrease net profit per share from continuing ordinary operations.
(Para 39)
Note 1: An enterprise uses net profit from continuing ordinary activities as “the control figure”
that is used to establish whether potential equity shares are dilutive or anti-dilutive.
The net profit from continuing ordinary activities is the net profit from ordinary activities after
deducting preference dividends and any attributable tax thereto and after excluding items relating
to discontinued operations.
Note 2: Potential equity shares are anti-dilutive when their conversion to equity shares would
increase earnings per share from continuing ordinary activities or decrease loss per share from
continuing ordinary activities.

14. Partly Paid shares without Dividend Rights

Q 18. Calculate Basic Earning per share & Diluted Earning per share
Earnings attributable for Equity shareholders (10-11) `10,00,000
1/4/2010 shares 1,00,000 of 10/- fully paid
1/4/2010 shares 50,000 of 10/- 6 paid up
(not entitled to dividend)
On 1/7/2010 call was received for 4/- per shares. Now share are entitled for dividend.
(FAS20SD26)

15. Mix
Q 19. Calculate Basic & Diluted EPS
PBIT (10-11) `10,00,000
Equity Share 1/4/2010 80,000 shares of `10 each
Public issue 1/7/2010 5000 shares of `10 each
Bonus issue 1/8/2010 6000 shares of `10 each
Right share 1/9/2010 7000 shares of `10 each @ `40 each fair value before right 50
 AS-20: Earning Per Share 39
It also had following instruments
1/4/2010 7% convertible debentures `5,00,000 to be converted into 10,000 shares
1/7/2010 share warrant 15000 to be converted in to shares on 1/1/2011
PBIT includes extra ordinary income of `1,00,000 and Profit from discontinuing operations
`60000. Income Tax Rate 30%. (FAS20SD27)
Q 20. Net profit for the current year `1,00,00,000
No. of equity shares outstanding 50,00,000
Basic earnings per share `2.00
No. of 12% convertible debentures of `100 each 1,00,000
Each debenture is convertible into 10 equity shares
Interest expense for the current year `12,00,000
Tax relating to interest expense (30%) `3,60,000
Compute Diluted Earnings Per Share. (FAS20SM31)
Ans.: Adjusted net profit for the current year
(1,00,00,000 + 12,00,000 – 3,60,000) = `1,08,40,000
No. of equity shares resulting from conversion of debentures:
10,00,000 Shares
No. of equity shares used to compute diluted EPS:
(50,00,000 + 10,00,000) = 60,00,000 Shares
Diluted earnings per share: (1,08,40,000/60,00,000) = `1.81
Q 21. From the information given below, calculate the diluted earnings per share on 31.3.2003.
Profit available for appropriation `375 crores
Number of shares outstanding as on 1.4.2002
(Equity shares of `10 each fully paid) 25 crores
Number of loan bonds issued by the company convertible
into 100 equity share of `10 each for each loan bond 5.25 lakhs
Number of Equity Shares likely to arise on conversion of Series III
Debentures 3.90 lakhs
Interest on loan bonds `5 crores
Potential equity shares on account of stock appreciation and options 1.15 crores
(RTP - May 2004) (FAS20SM32)
Ans.:
Profit available for appropriation `375 crores
Add: Interest savings on loan convertible into equity shares `5 crores
`380 crores
Total shares (as per working) 31,43,90,000
Diluted earnings `12.08 per share
40 AS-20: Earning Per Share

Working Notes:
Shares as on 1.4.2002 25,00,00,000
Add: Potential equity shares on conversion of
bonds (5.25 lakhs × 100) 5,25,00,000
Add: Potential equity shares on conversion of III series debentures 3,90,000
Add: Potential equity shares on account of stock options and
appreciation 1,15,00,000
Q 22. Modur Ltd. has equity capital of `40,00,000 consisting of fully paid equity shares of `10
each. The net profit for the year 2004-05 was `60,00,000. It has also issued 36,000, 10%
convertible debentures of `50 each. Each debenture is convertible into five equity shares. The tax
rate applicable is 30%. Compute the diluted earnings per share.
(November 2006, 8 Marks) (FAS20SA33)
Q 23. From the following information of Beta Ltd. calculate Earning Per Share (EPS) in
accordance with AS-20:
(`)
YE 31.3.08 YE 31.3.07
1. Net profit before tax 3,00,000 1,00,000
2. Current tax 40,000 30,000
Tax relating to earlier years 24,000 (13,000)
Deferred tax 30,000 10,000
———— ————
3. Profit after tax 2,06,000 73,000
———— ————
4. Other information:
(a) Profit includes compensation from central
Government towards loss on account of
Earthquake in 2005 (non-taxable) 1,00,000 NIL
(b) Outstanding convertible 6% Preferenceshares 1,000 issued and paid on 30.9.06. Face
value `100, Conversion ratio 15 equity shares for every preference share.
(c) 15% convertible debentures of `1,000 each total face value `1,00,000 to be converted into
10 Equity shares per debenture issued and paid on 30.6.06.
Total no. of Equity shares outstanding as on 31.3.08, 20,000 including bonus shares issued on
1.1.08 of 10,000 shares, face value `100.
(November 2008; Marks 8) (FAS20SA34)
Q 24. From the Books of Bharati Ltd., following informations are available as on 1.4.2005 and
1.4.2006:
(1) Equity Shares of `10 each 1,00,000
(2) Partly paid Equity Shares of `10 each `5 paid 1,00,000
(3) Options outstanding at an exercise price of `60
for one equity share `10 each. Average Fair Value
of equity share during both years `75 10,000
 AS-20: Earning Per Share 41
(4) 10% convertible preference shares of `100 each.
Conversion ratio 2 equity shares for each preference share 80,000
(5) 12% convertible debentures of `100. Conversion ratio
4 equity shares for each debenture 10,000
(6) 10% dividend tax is payable for the years ending
31.3.2007 and 31.3.2006.
(7) On 1.10.2006 the partly paid shares were fully paid up
(8) On 1.1.2007 the company issued 1 bonus share for 8 shares held on that date.
Net profit attributable to the equity shareholders for the years ending 31.3.2007 and 31.3.2006
were `10,00,000. Assume Tax rate at 30% for both the years.
Calculate:
(i) Earnings per share for years ending 31.3.2007 and 31.3.2006.
(ii) Diluted earnings per share for years ending 31.3.2007and 31.3.2006.
(iii) Adjusted earnings per share and diluted EPS for the year ending 31.3.2006, assuming
the same information for previous year, also assume that partly paid shares are eligible
for proportionate dividend only. May 2005 14 Marks (FAS20SA35)
Q 25. With the help of following information pertaining to Meetu Ltd. compute the diluted EPS for
the year ending 31-3-2003:
1-4-2002 Equity shares outstanding
Face value `100 fully paid up 1,00,000 No.
12% convertible debentures
Face value `1,000, fully paid up 10,000 No.
(Convertible into 8 equity shares each)
PAT `5,00,000
Basic EPS `5
Tax rate 35%
Assume all the convertible debentures are convertible into equity shares on the first
day of the next year (FAS20SM36)
Ans: Diluted EPS = `7.111
Net Profit (adjusted) = 12,80,000
No. of equity shares outstanding (after conversion) = 1,80,000

16. ESOP
Q 26. Net profit for the year 2005 `12,00,000
Weighted average number of equity shares outstanding during
the year 2005 5,00,000 shares
Average fair value of one equity share during the year 2005 `20.00
42 AS-20: Earning Per Share
Weighted average number of shares under option during
the year 2005 1,00,000 shares
Exercise price for shares under option during the year 2005 `15.00
Compute Basic and Diluted Earnings Per Share. (FAS20SM38)
Ans.:
Computation of earnings per share
—————————————————————————————————————
Earnings/ Shares Earnings
Share
` `
—————————————————————————————————————
Net profit for the year 2005 12,00,000
Weighted average no. of shares during year 2005 5,00,000
Basic earnings per share 2.40
Number of shares under option 1,00,000
Number of shares that would have been issued at
fair value (100,000 × 15.00) ÷ 20.00 (75,000)
————
Diluted earnings per share 12,00,000 5,25,000 2.29
————— ———— ————
———————————————————————————————————————
Q 27. From the information furnished you are required to compute the Basic and Diluted EPS
(earrings per share) for accounting year 01-04-2011 to 31-03-2012 and adjusted EPS for the year
01-04-2010 to 31-03-2011.
Net Profit for year ended 31-03-2011 `75,50,000
Net Profit for year ended 31-03-2012 `1,00,25,000
No. of Equity shares as on 01-04-2011 50,00,250
Bonus issue on 01-01-2012 1 share for every 2 held
No. of 12% Convertible Debentures of `100 1,00,000
each issued on 01-01-2012
Conversion Ratio of Debentures 10 shares per debenture
Tax Rate 30 percent
(May, 2012) (FAS20SA39)
17. Disclosures
An enterprise should disclose the following:
(i) the enterprise should disclose basic and diluted earnings per share computed on the
basis of earnings excluding extraordinary items also and
(ii) (a) the amounts used as the numerators in calculating basic and diluted earnings per
share, and a reconciliation;
(b) the weighted average number of equity shares used as the denominator in
calculating basic and diluted earnings per share, and a reconciliation; and
(c) the nominal value of shares along with the earnings per share figures.
 AS-22: Accounting for
Taxes on Income
Applicable To Entities : ALL
Status : Mandatory

1. Definitions
1. Accounting income (loss) is the net profit or loss for a period, as reported in the statement
of profit and loss, before deducting income tax expense or adding income tax saving.
2. Taxable income (tax loss) is the amount of the income (loss) for a period, determined in
accordance with the tax laws, based upon which income tax payable (recoverable) is determined.
3. Tax expense (tax saving) is the aggregate of Current tax and Deferred tax charged or
credited to the statement of profit and loss for the period.
4. Current tax is the amount of income tax determined to be payable (recoverable) in respect
of the taxable income (tax loss) for a period.
5. Deferred tax is the tax effect of timing differences.
6. Timing differences are the differences between taxable income and accounting income for
a period that originate in one period and are capable of reversal in one or more subsequent
periods.
7. Permanent differences are the differences between taxable income and accounting income
for a period that originate in one period and do not reverse subsequently. Permanent differences
do not result in deferred tax assets or deferred tax liabilities.

2. Preparation of Profit & Loss Account

Q 1. Prepare Profit and Loss account of X ltd.
Sale 5,00,000
Sundry exp. 2,00,000
Cost of goods sold 1,00,000
Included in Sundry Expenses are
Bonus not yet paid `40,000
Provision for bad debts `10,000
Donations `5,000
(against which deduction under 80G is allowed `1,000.)
44 AS-22: Accounting for Taxes on Income
X Ltd. had purchased one machine for research purpose `30,000 on which deprecation have
not been claimed. Assume life is 3 years
As per Income Tax 100% Depreciation is allowed in year of Purchase.
Rate of Tax is 30% + Surcharge 1%
Application of AS 22 is required (FAS22SD01)
Q 2. Following information is of X Ltd.
Sale 20,00,000
Cost of goods sold 11,00,000
Income from other 1,00,000
(Bank Interest) sources
Sundry Expenses.
Salary 1,00,000
Provisions for legal damages 40,000
Interest to bank (not yet paid) 30,000
Service Tax (not yet paid) 50,000
X Ltd purchased during the year one Machine for Scientific Research for `120000 whose life is 3
years and is 100% tax deductible during the year
X Ltd also made contribution to national Laboratory `10000 on which weighted deduction of 125%
is allowed..
Effective Rate of Tax 32.33%
Prepare Profit and Loss Account (FAS22SD02)

3. Unabsorbed depreciation and carry forward of losses

Unabsorbed depreciation and carry forward of losses which can be set-off against future
taxable income are also considered as timing differences and result in deferred tax assets,
subject to consideration of prudence.
Q 3. Prepare profit and Loss account
Sale 25,00,000
Cost of goods sold 18,00,000
Salary 3,00,000
Bonus (unpaid) 50,000
Interest (unpaid) 1,00,000
Donation 2,00,000
Other expenses 4,50,000
Rate of Tax 30% (FAS22SD04)
 AS-22: Accounting for Taxes on Income 45

4. Prudence Limits: Virtual certainty

10. Deferred tax should be recognised for all the timing differences, subject to the
consideration of prudence in respect of deferred tax assets as set out in paragraphs 15-18.
11. Except in the situations stated in paragraph 17, deferred tax assets should be recognised
and carried forward only to the extent that there is a reasonable certainty that sufficient future
taxable income will be available against which such deferred tax assets can be realised. (Para
15)
12. Where an enterprise has unabsorbed depreciation or carry forward of losses under tax
laws, deferred tax assets should be recognised only to the extent that there is virtual certainty
supported by convincing evidence that sufficient future taxable income will be available against
which such deferred tax assets can be realised. (Para 17)
Explanation as per NACAS 7-12-2006
1. Determination of virtual certainty that sufficient future taxable income will be available is a
matter of judgment based on convincing evidence and will have to be evaluated on a case
to case basis.
2. Virtual certainty refers to the extent of certainty, which, for all practical purposes, can be
considered certain.
3. Virtual certainty cannot be based merely on forecasts of performance such as business
plans. Virtual certainty is not a matter of perception and is to be supported by convincing
evidence.
4. Evidence is a matter of fact. To be convincing, the evidence should be available at the
reporting date in a concrete form, for example, a profitable binding export order,
cancellation of which will result in payment of heavy damages by the defaulting party.
5. On the other hand, a projection of the future profits made by an enterprise based on the
future capital expenditures or future restructuring, etc., submitted even to an outside
agency, e.g., to a credit agency for obtaining loans and accepted by that agency cannot, in
isolation, be considered as convincing evidence.
Q 4. PQR Ltd's accounting ends on 31-03-2001. The company made a loss of `200,000 for the
year ending 31-03-2001. For the years ending 31-03-2002 and 31-03-2003, it made profits of
`100,000 and `120,000 respectively. It is assumed that the loss of a year can be carried forward
for eight years and tax rate is 40%. By the end of 31.03.2001, the company feels that there will be
sufficient taxable income in the future years against which carry forward loss can be set-off.
There is no difference between taxable income and accounting income except that the carry
forward loss is allowed in the years ending 2002 and 2003 for tax purposes. Prepare a statement
of profit and loss for the years ending 2001, 2002 and 2003.
(November 2003 Accounts) (FAS22SA05)
Ans.: Loss 1,20,000, Profit 60,000 and 72,000.
Q 5. XYZ Ltd., prepares its accounts annually on 31st March. The company has incurred a loss of
`1,00,000 in the year 2001 and made profits of `50,000 and 60,000 in year 2002 and year 2003
respectively. It is assumed that under the tax laws, loss can be carried forward for 8 years and tax
rate is 40% and at the end of year 2001, it was virtually certain, supported by convincing
evidence, that the company would have sufficient taxable income in the future years against
which unabsorbed depreciation and carry forward of losses can be set-off. It is also assumed that
46 AS-22: Accounting for Taxes on Income
there is no difference between taxable income and accounting income except that set-off of loss
is allowed in years 2002 and 2003 for tax purposes. Calculate Deferred Tax. (FAS22SA06)
Ans.: Deferred Tax Asset `40,000, Reversal `20,000 and `20,000.
Q 6. Trimurthy Pan Masala was incurring heavy losses in the last several years since it could not
withstand the competition in the market. The state in which the Company had its Registered
Office and also its major sales, had moved a bill in the State Assembly to ban manufacture and
sale of all kinds of Pan Masalas in the State. While finalizing the accounts for the year ended
31.3.2004, the CFO of the Company created a Deferred Tax Assets for the tax benefits that
would arise in future year from the earlier years losses that had remained unabsorbed in Income-
Tax. Comment.
(November 2004 – Final – Auditing, 4 Marks) (FAS22SA07)
Ans.: As per Para 17 of AS 22, where an enterprise has unabsorbed depreciation or carry forward
of losses under tax laws, DTA should be recognized only to the extent that there is virtual
certainty supported by convincing evidence that sufficient future taxable income will be available
against which such DTA can be realized. In this case, the Company may not be in a position to
carry out its activities on account of the possible banning of its Pan Masala Sales, by the State's
legislation. Since the Virtual Certainty condition of Para 1 7 and ASI-9 is not satisfied. The
Company should not recognize any D'I'A on the unabsorbed losses. Hence the Company's
accounting treatment is improper.
Q 7. As a statutory auditor for the year ended 31st March 2002, how would you deal with the
following: S Ltd., a listed company, was incurring heavy losses since the last several years and
the industry in which it was functioning was not expected to perform better in the next few years.
While finalising the accounts for the year ended 31st March 2002, the CFO of the company
decided to create a deferred tax asset for the tax benefits that would arise in future years from the
earlier years losses that had remained unabsorbed in Income Tax.
(Auditing November 2002) (FAS22SA08)
Ans.: In the absence of virtual certainty, the creation of deferred tax asset would be incorrect and
would therefore require qualification by the auditor or an adverse opinion as appropriate in
respect of the true and fair view. Also the auditor will have to qualify compliance with mandatory
accounting standards, namely AS-22.

5. Capital Loss
Explanation as per NACS 7-12-2006
(a) As per the relevant provisions of the Income-tax Act, 1961 (hereinafter referred to as the
"Act'), the 'loss' arising under the head 'Capital gains' can be carried forward and set-off in
future years, only against the income arising under that head as per the requirements of
the Act.
(b) Where an enterprise's statement of profit and loss includes an item of 'loss' which can be
set-off in future for taxation purposes, only against the income arising under the head
'Capital gains' as per the requirements of the Act, that item is a timing difference to the
extent it is not set-off in the current year and is allowed to be set-off against the income
arising under the head 'Capital gains' in subsequent years.
In respect of such 'loss', deferred tax asset is recognised and carried forward subject to the
consideration of prudence. Accordingly, in respect of such 'loss', deferred tax asset is
 AS-22: Accounting for Taxes on Income 47
recognised and carried forward only to the extent that there is a virtual certainty, supported
by convincing evidence, that sufficient future taxable income will be available under the
head 'Capital gains' against which the loss can be se-off as per the provisions of the Act.
6. Re-assessment of Unrecognised Deferred Tax Assets
At each balance sheet date, an enterprise re-assesses unrecognised deferred tax assets.

7. Measurement
Current tax should be measured at the amount expected to be paid to (recovered from) the
taxation authorities, using the applicable tax rates and tax laws.
Deferred tax assets and liabilities should be measured using the tax rates and tax laws that
have been enacted or substantively enacted by the balance sheet date.
Q 8. Ram has Profit before Tax ` 8,00,000
Bonus not yet paid `20,000
Provision for doubtful debts `30,000
Tax Rate
upto 1,80,000 Nil
next 1,20,000 10%
next 2,00,000 20%
next 30%
Surcharge 10%
Prepare profit and Loss account (FAS22SD09)

8. Definitions Application of MAT

Explanation as per NACAs 7-12-2006
(a) The payment of tax under section 115JB of the Income-tax Act, 1961 (hereinafter referred
to as the 'Act') is a current tax for the period.
(b) In a period in which a company pays tax under section 115JB of the Act, the deferred tax
assets and liabilities in respect of timing differences arising during the period, tax effect of
which is required to be recognised under this Standard, is measured using the regular tax
rates and not the tax rate under section 115JB of the Act.
(c) In case an enterprise expects that the timing differences arising in the current period
would reverse in a period in which it may pay tax under section 115JB of the Act, the
deferred tax assets and liabilities in respect of timing differences arising during the current
period, tax effect of which is required to be recognised under AS 22, is measured using
the regular tax rates and not the tax rate under section 115JB of the Act.
Q 9. X Ltd. has
Book Profit for MAT purpose `10,00,000
Accounting Income `11,00,000
Taxable Income `2,00,000
(regular computation)
48 AS-22: Accounting for Taxes on Income
Rate of Tax Regular 30%
Mat 18%
Calculate Current Tax (FAS22SD10)
Q 10. Book Profit `10,00,000
Accounting Income `2,00,000
Regular Tax Rate 30%
Taxable Income `1,50,000
Difference between Accounting Income & Taxable Income is due to timing Difference
Mat Rate 18%
Prepare Extracts of Profit and Loss account and Balance Sheet (FAS22SD11)
Q 11. From the following details of ABC Ltd. for the year ending 31.3.2003, calculate the deferred
tax asset/liability and tax expense for the year having regard to the requirements of AS-22:
(`'000)
Book Profit as per MAT 700
Accounting Profit 800
Taxable Profit 100
Tax Rate 35%
MAT Rate 7.5%
(RTP May 2002) (FAS22RT12)
Ans.: Current Tax is higher of Tax as per Income-Tax Act and Tax under MAT = `52,500
Deferred Tax Liability (tax effect on timing difference at regular rates) = `2,45,000.
Tax Expenses = `2,97,500.

9. Discounting
Deferred tax assets and liabilities should not be discounted to their present value.

10. Review of Deferred Tax Assets

The carrying amount of deferred tax assets should be reviewed at each balance sheet date.

11. Presentation and Disclosure

An enterprise should offset assets and liabilities representing tax if the enterprise:
(a) has a legally enforceable right; and
(b) intends to settle the asset and the liability on a net basis.
 AS-22: Accounting for Taxes on Income 49

19. Deferred tax assets and liabilities should be disclosed under a separate heading in the
balance sheet of the enterprise, separately from current assets and current liabilities.
Explanation as per NACAS 7-12-2006
Deferred tax assets (net of the deferred tax liabilities) is disclosed on the face of the balance
sheet separately after the head 'Investment's and deferred tax liabilities (net of the deferred tax
assets), is disclosed on the face of the balance sheet separately after the head 'Unsecured
Loans'.
20. The break-up of deferred tax assets and deferred tax liabilities into major components of the
respective balances should be disclosed in the notes to accounts.
21. The nature of the evidence supporting the recognition of deferred tax assets should be
disclosed.

Q 12. The following details are available in the books of Gangotri Ltd.
Particulars ` in lakhs
Provision for tax:
For 2002-2003 200
For 2003-2004 300
For 2004-2005 250
Advance tax paid:
For 2002-2003 175
For 2003-2004 350
For 2004-2005 270

Gangotri Ltd. estimates its Deferred Tax Liabilities to be `100 lakhs and its Deferred Tax Assets to
be `20 lakhs. How will the above be disclosed?
(RTP; November 05) (FAS22RT13)
Ans.: Disclosure of Current and Deferred Tax balances will be on the basis of principles laid
down in AS 22. These are:
(a) Current tax assets and liabilities can be set off, if the enterprise has a legally enforceable
right to set off the recognized amounts and intends to do settle them on a net basis.
(b) Deferred tax assets and liabilities can be set off, if the items relates to taxes on income
levied by the same governing taxation laws.
Applying these principles, the required disclosures will be as follows:
(` in lakhs)

Liabilities Assets
Deferred tax liabilities 100 Current assets, loans and
advances
Less: Deferred tax assets 20 80 Advance tax paid 795
Less: Provisions 750 45
50 AS-22: Accounting for Taxes on Income
Q 13. T Ltd. an Indian company, subject to Indian Income tax Act, 1961, discloses advance
Income-tax paid (Current tax asset) and provision for Income-tax (Current tax liability), separately
in Balance Sheet for the year ended 31-3-2010, i.e., it do not offset the amount. Comment.
[Auditing, May 2010, 5 Marks] (FAS22SA14)
Ans. This problem is based on AS 22 on 'Accounting for Taxes on Income'. AS 22 provides that
an enterprise should offset assets and liabilities representing current tax if the enterprise:
(a) has a legally enforceable right to set off the recongised amount; and
(b) intends to settle the asset and the liability on a net basis.
It further provides that an enterprise will normally have a legally enforceable right to set off an
asset and liability representing current tax when they relate to income taxes levied under the
same governing taxation laws and the taxation laws permit the enterprise to make or receive a
single net payment.
Based on the above, T Ltd. should off set the advance income-tax paid and provision for income-
tax for the year ended 31-3-2010 since there is a legal right to set off the advance tax with
provision for income-tax and also the enterprises settle the asset and the liability on a net basis.

12. Tax Holiday

Explanation as per NACAs 7-12-2006
(a) The deferred tax in respect of timing differences which reverse during the tax
holiday period is not recognised.
(b) Deferred tax in respect of timing differences which reverse after the tax holiday
period is recognised in the year in which the timing differences originate.
However, recognition of deferred tax assets is subject to the consideration of
prudence as laid down in paragraphs 15 to 18.
(c) For the above purposes, the timing differences which originate first are
considered to reverse first
Q 14. X Ltd. has tax holiday for 5 years. It purchased one plant & Machine for `1,00,000 at
beginning of year 1.
Rate of Depreciation. 10% p.a. SLM as per Companies Act 1956. Rate of Depreciation as
per Income Tax 30% p.a. WDV
Rate of Tax 25%
Calculate Deferred Tax Asset/Deferred Tax Liability for 12 years.
(FAS22SD15)
Q 15. Y Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second
year of its operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is
`200 lakhs and `400 lakhs respectively. From the third year it is expected that the timing
difference would reverse each year by `10 lakhs. Assuming tax rate of 40%, find out the deferred
tax liability at the end of the second year and any charge to the Profit and Loss account.
4 Marks (May 2010 New Course) (FAS22SA16)
 AS-22: Accounting for Taxes on Income 51
Q 16. Aditi Ltd. has set up an Industrial unit which is eligible for tax holiday under section 10A of
the Income-tax Act. For the year 2008-09, it provides you with the following information:
`crores
Timing differences originating and reversing during the tax holiday period 50
Timing differences originating during the tax holiday period but reversing
after the tax holiday period is over 70*
* Prudence demands that out of `70 crores, no deferred tax assets be recognised in respect of
`30 crores.
With reference to AS 22, state on what amount deferred tax asset be created during the year
2008-09. (FAS22SD17)
Ans: `40 crores (`70 crores – `30 crores)
Q 17. Miltion Ltd. is a full tax free enterprises for the first 10 year of its existence and is in the
second year of its operations. Depreciation timing difference resulting in a deferred tax Liability in
years 1 and 2 is `200 lakhs and 400 lakhs respectively. From the 3rd year onwards, it is expected
that the timing difference would reverse each year by `10 lakhs. Assuming tax rate @ 35% find
out the deferred tax liability at the end of the second year and any charge to the profit and loss
account. (May 2006, Marks 4) (FAS22SA18)
Q 18. The income before depreciation and tax of an enterprise for 15 years is `1000 Lakhs per
year, both as per the books of accounts and for income Tax purposes. The enterprise is subject
to 100 % tax holiday for the first 10 years under section 80IA. Tax rate is assumed to be 30%. At
the beginning of the year 1 the enterprises has purchased one machine for `1500 Lakhs. Residual
value is nil. For the accounting purposes, the enterprise follows an accounting policy to provide
depreciation on the machine over 15 years on SLM basis. For the tax purpose, the depreciation
rate relevant to the machine is 25% on WDV basis. Ignore the provisions of section 115JB (MAT)
in this regard. Calculate Deferred Tax Asset or Liability.
(ASI on Accounting Standard issued by ICAI) (FAS22SM19)
Q 19. Your client is a full tax free enterprise for the first 10 years and is in the second year of
operations. Depreciation timing difference resulting in a deferred tax liability in year 1 & 2 is `100
million and `200 million respectively. From the 3rd year and onwards it is expected that the timing
difference would reverse each year by `5 million. Determine deferred tax liability at the end of 2nd
year and the charge to the P&L a/c if any. Assume tax rate @35%.
(RTP November 2002) (FAS22RT20)
Ans.: In case of tax free companies, deferred tax liability is not recognised in respect of timing
differences that originate and reverse in the tax holiday period. Deferred tax liability (or asset) is
created in respect of timing difference that originate in a tax holiday period but are expected to
reverse after the tax holiday period. For this purpose, adjustments are done in accordance with
the FIFO method. Of the `100 million, `10 million will reverse in the tax holiday period. Therefore,
deferred tax liability will be created on `60 million at the tax rate of 35%, i.e., `20 million. In the
second year, the entire `200 million will reverse only after the tax holiday period therefore,
deferred tax charge in the profit and loss account will be `70 million (200*35%) and deferred tax
liability in the balance sheet will be `91 million (70+21).
52 AS-22: Accounting for Taxes on Income

13. Contrators
Q 20. Omega Limited is working on different projects which are likely to be completed within 3
years period. It recognizes revenue from these contracts on percentage of completion method for
financial statements during 2006, 2007 and 2008 for `11,00,000, `16,00,000 and `21,00,000
respectively. However, for Income-tax purpose, it has adopted the completed contract method
under which it has recognized revenue of `7,00,000, `18,00,000 and `23,00,000 for the years
2006, 2007 and 2008 respectively. Income-tax rate is 35%. Compute the amount of deferred tax
asset/liability for the years 2006, 2007 and 2008.
(Study Material) (FAS22SM21)
Ans. Omega Limited.
Calculation of Deferred Tax Asset/Liability
Year Accounting Taxable Timing Difference Deferred Tax
Income Income (balance) Liability (balance)
2006 11,00,000 7,00,000 4,00,000 1,40,000
2007 16,00,000 18,00,000 2,00,000 70,000
2008 21,00,000 23,00,000 NIL NIL
48,00,000 48,00,000

14. Depreciation
Q 21. Rama Ltd. Started business on 1st April 1998. The following details are available from the
books of accounts and other records of Rama Ltd.
Profit before depreciation and taxes. `
1998-1999 14,45,500
1999-2000 18,20,200
2000-2001 24,56,560
2001-2002 30,22,280
The company purchased the following machines:
Date of purchase Amount (`)
1.4.1998 3,45,000
1.4.1999 2,75,000
1.4.2000 10,00,000
1.4.2001 3,62,000
The Company charges depreciation on machines @ 15% p.a. whereas the rates as per tax is
25% p.a. Tax rates for five years is 50%, 45%, 40% 35% and 35 % respectively.
You are required to prepare the profit and loss statement showing the provision for taxes under
the AS-22. (FAS22SD23)
 AS-22: Accounting for Taxes on Income 53
Q 22. ABC Ltd. prepares its accounts annually on 31st March. On 1st April' 2001, it purchases a
machine at a cost of `1,50,000. The machine has a useful life of three years and an expected
scrap value of zero. Although it is eligible for a 100% first year depreciation allowance for tax
purposes, the straight-line method is considered appropriate for accounting purposes. ABC Ltd.
has profits before depreciation and taxes of `2,00,000 each year and the corporate tax rate for
2002, 2003 and 2004 are 40%, 35% and 38% respectively. Show the profit and loss account and
pass the journal entries as per Accounting Standard-22.
(FAS22SD24)
Ans.: Deferred Tax Liability `40,000 , `17,500 and `Nil.
Q 23. Rama Ltd. has the provided the following information:
Depreciation as per accounting records = `2,00,000
Depreciation as per income-tax records = `5,00,000
Unamortised preliminary expenses as per tax records = `30,000
There is adequate evidence of future profit sufficiency. How much deferred Tax asset/liability
should be recognized as transition adjustment? Tax rate 50%. (May 2011, 5 marks)
(FAS22SA25)
Q 24. Company A has a block of assets with a written down value of `100,000 on April 1, 20X I for
tax purposes. The book value of the assets for accounting purposes is also `100,000. The assets
are depreciated on written down value basis at 25 per cent per annum for both accounting and
tax purposes. Of the entire block, assets costing `5,000 on April 1, 20X1, were sold for `10,000 on
March 31, 20X3. Compute the deferred tax asset/liability assuming tax rate of 40 per cent.(FAS22SM26)
Ans.: Depreciation for income tax purposes is computed on block of assets, rather than for
individual assets. Further, as per section 50 of the Income tax Act, 1961, the entire sale
consideration received on sale of fixed assets be reduced from the written down value of the
relevant block. For example, if the block had a written down value of `10,000 and an asset costing
`2,000 was sold for `3,000, the block would be reduced by `3,000 rather than by `2,000.
Conversely, if the asset had been sold for `1,000 the block would have been reduced by `1,000
and not by `2,000.
It may be noted that Appendix 1 to AS 22 gives examples of timing differences. One of the
examples is "Differences in method of calculation e.g. calculation of depreciation with reference
to individual assets in the books but on block basis for tax purposes... ..."
In view of the above, in the case of Company A in question, the following computations will be
made:
20X1-X2
In this year, depreciation for both accounting and taxation purposes would be `25,000 (25 per
cent of `100,000). Accordingly no timing difference arises on this account.
20X2-X3
Depreciation for the year would be `18,750 (25 per cent of `75,000) as per the books of account,
while for tax purposes it would be `16,250 as sale proceeds of `10,000 would be reduced from the
block of assets prior to the computation of depreciation. Accordingly, the following timing
differences arise:
 Depreciation for tax purposes is `16,250 and for accounting purposes `18,750 giving rise
to a timing difference of `2,500
 Profit on sale of fixed asset amounting to `7,188 (`10000 - `2812 being the WDV of the
54 AS-22: Accounting for Taxes on Income
asset as on 31st March 20X3) is recognised for accounting purposes. However, for tax
purposes this income is not considered. This will result in a timing difference of `7,188.
The net timing difference would be `4,688 by which the accounting income would exceed the
taxable income, thus requiring creation of a deferred tax liability of `1,875 (4,688*0.4).
The difference of `4,688 would reverse in future years when depreciation for accounting purposes
would be higher as compared to depreciation for tax purposes because depreciation for
accounting purposes would be computed on a higher carrying amount of fixed assets as
compared to carrying amount of those assets for tax purposes. `4,688 is also the difference
between the accounting and tax. written down values of the assets as on March 31, 20X3 [i.e.,
assets for accounting purposes of `53,438 (75,000 - 18,750 - 2,812) less assets for tax purposes
of `48,750 (75,000 - 10,000 - 16,250).
Q 25. Ultra Ltd. has provided the following information:
Depreciation as per accounting records = `2,00,000
Depreciation as per tax records = `5,00,000
Unamortised preliminary expenses as per tax record = ` 30,000
There is adequate evidence of future profit sufficiency. How much deferred tax asset/liability
should be recognized as transition adjustment. Tax rate 50%.
(FAS22SM27)
Ans.:
Calculation of difference between taxable income and accounting income
———————————————————————————————————————
Particulars Amount (`)
———————————————————————————————————————
Excess depreciation as per tax (5,00,000 – 2,00,000) 3,00,000
Less: Expenses provided in taxable income 30,000
————
Timing difference 2,70,000
————
———————————————————————————————————————
Tax expense is more than the current tax due to timing difference. Therefore deferred tax liability
= 50%*2,70,000 = `1,35,000

15. Mix
Q 26. Classify the following as "Timing Difference" and "Permanent Difference"
(i) Interest on loans payable to Scheduled Banks not paid during current year but accounted
as an expenditure in the books.
(ii) Difference in Depreciation rates as per Income Tax and as per Books.
(iii) Unabsorbed losses.
(iv) Revaluation Reserve. (RTP November 2006) (FAS22RT30)
Ans.: Classification of the items into timing and permanent differences is as under:—
 AS-22: Accounting for Taxes on Income 55
(i) Interest paid to bank is a timing difference.
(ii) Difference in depreciation rates is a timing difference.
(iii) Unabsorbed losses is a timing difference.
(iv) Revaluation Reserve is a permanent difference.
Q 27. Distinguish between "Timing differences" and "Permanent differences" referred to in AS-22
on accounting for Taxes, giving 2 examples of each.
(Advance Accounting November 2005; 4 Marks) (FAS22SA31)
Q 28. Goodwill Limited is a full tax free enterprise for the 1st, 12 years of its existence and is in
third year of operations. Depreciation timing difference resulting in a deferred tax liability in 1st,
2nd and 3rd year is ` 200 lakhs, ` 300 lakhs and ` 400 lakhs respectively. From the 4th year
onwards it is expected that the timing difference would reverse each year by ` 10 lakhs.
Assuming tax rate @ 35%, find out the deferred tax liability at the end of 3rd year and any charge
to the Profit and Loss Account.
(5 Marks) (November 2012)