1) Introduction
The
provisions of Section 115JB provide for levy of MAT on basis of "book
profits", i.e., the profit disclosed in profit and loss account prepared
in accordance with provisions of The Companies Act. Ind AS compliant
companies shall be required to bifurcate theirProfit or Loss account
into
following two parts -
| (i) | | Net profit or loss for the year; |
| (ii) | | Net Other Comprehensive Income. |
Now
question arises whether 'Net other comprehensive income' should be
considered for computation of book profit under Section 115JB? On June
8, 2015, the CBDT had constituted a committee to,inter alia, suggest
the framework for computation of book profit for the purpose of levy of
MAT on the Ind AS compliant companies in the year of adoption and
thereafter.
Now
the committee has submitted its report after having consultation with
MCA. Recommendations of committee and other related terms have been
discussed in this article in the form of Q&As.
2) What is IND-AS
India
has adopted the IFRS converged IND-AS with a view to enhance the
acceptability and transparency for the financial statements of Indian
corporates. These IND-AS can be applied voluntarily in preparation of
financial statements from April 1, 2015 and have to be applied
mandatorily from April 1, 2016 by certain entities.
3) Format of Financial Statements
With
adoption of IND-AS, the format of financial statements shall undergo
various changes which can be either change in the nomenclature of any
item or their accounting treatment. One of themajor changes that shall
happen in the format of financial statements after adoption of IND-AS
includeseparate disclosure of "other comprehensive income" in the
Statement of profit or loss.
4) What is 'Other Comprehensive Income'
The
IND-AS promotes the concept of Fair Value Accounting where assets shall
be valued at fair value.'Other comprehensive income'includes, inter-alia, the financial impact arising from reinstatement of underlying assets in accordance with principle of Fair Value Accounting.
To
avoid the distribution of the revaluation profits to the shareholders
by way of dividend or to the managers as managerial remuneration, the
net profits are adjusted with 'Net OCIs'.
OCIs include the following items, which shall be excluded for the purpose of arriving at distributable profits:
| (a) | | Changes in revaluation surplus; |
| (b) | | Re-measurements of defined benefit plans; |
| (c) | | Gains and losses arising from translating the financial statements of a foreign operation; |
| (d) | | Gains and losses from investments in equity instruments designated at fair value; |
| (e) | | Gains and losses on financial assets measured at fair value; |
| (f) | | The
effective portion of gains and losses on hedging instruments in a cash
flow hedge and the gains and losses on hedging instruments that hedge
investments in equity instruments measured at fair value; |
| (g) | | For
particular liabilities designated as at fair value through profit or
loss, the amount of the change in fair value that is attributable to
changes in the liability's credit risk; |
| (h) | | Changes
in the value of the time value of options when separating the intrinsic
value and time value of an option contract and designating as the
hedging instrument only the changes in the intrinsic value; |
| (i) | | Changes
in the value of the forward elements of forward contracts when
separating the forward elements and spot elements of a forward contract
and designating as the hedging instrument only the changes in the spot
element, and changes in the value of the foreign currency basis spread
of a financial instrument when excluding it from the designation of that
financial instrument as the hedging instrument. |
Due
to the concept of OCIs two profits arise - Profit before tax and before
OCIs adjustment and Profit before tax but after OCIs adjustment.
5) MAT Computation
For
computation of Minimum Alternative Tax ('MAT'), the book profit is to
be calculated after making certain adjustments in the net profit as
appearing in the profit and loss account. The book profit shall be
calculated as per following mechanism before and after implementation of
IND-AS:
| Before IND-AS | After IND-AS |
| Profit before Tax | Profit before Tax (including Net OCIs) |
| Add: Adjustment allowed under Section 115JB | Less: Net other comprehensive income |
| Less: Adjustment allowed under Section 115JB | Add: Adjustment allowed under section 115JB |
| | Less: Adjustment allowed under section 115JB |
| Book Profit | Book Profit |
6) Why Net OCIs are excluded
The
'Lohia Committee' constituted on MAT and IND-AS has recommended that no
further adjustments are required to be made to the net profits
(excluding net other comprehensive income) of IND-AS compliant companies
other than those already specified under Section 115JB.
In
other words, the committee recommends that since the distributable
profits (available for distribution of dividend or managerial
remuneration) exclude net comprehensive income, it should also be
excluded from the book profit for computation of MAT.
7) Are Net OCIs always excluded from Book Profit ?
Net
OCIs are the outcome of reinstatement of specified assets (immovable
property, figures appearing in financial statements of foreign
subsidiaries, etc.) at their fair value or other adjustments. These Net
OCIs are capable of reversal in subsequent period and, on reversal,
reclassified into profit & loss account.
Thus,
Net OCIs are proposed to be excluded from the calculation of Book
Profit till these items are not reclassified into profit & loss
account.
However,
the committee recommended adjustment for following items of Net OCIs
which are permanently recorded in reserves and are never reclassified
into the Statement of Profit and Loss:
| (a) | | Changes
in Revaluation Surplus(IND-AS 16 and IND-AS 38) as it is currently
included in book profits at the time of realization/ disposal/
retirement of Asset. |
| (b) | | Re-measurement
of Defined Benefit Plan(IND-AS 19), which should be included in the
Book profits on annual basis when the gains or losses arise. |
| (c) | | Gains
and losses from investments in equity instruments designated at fair
value (IND-AS 109), which should be included in book profits at the time
of realization. |
8) Reversals of Net OCIs
| (a) | | Changes in Revaluation Surplus in case of revaluation of fixed assets |
| | As
per IND-AS 16, 'Property, Plant and Equipment', on revaluation, the
amount of increase in carrying amount of tangible fixed asset is
recognised as other comprehensive income and accumulated as 'revaluation
surplus', whereas, any decrease in the carrying amount of tangible
asset is debited to statement of profit and loss. |
| | Subsequent
increase in carrying amount of such tangible asset shall be recognised
in profit or loss to the extent of decrease in carrying amount of same
asset recognized in earlier years in the profit or loss.In case of
decrease, amount of decrease to the extent of credit balance existing in
revaluation surplus (because of upward revaluation during previous
years) in respect of same asset should be recognised as OCI. |
| | IND-AS 38, 'Intangible Assets' provides similar principles in case of revaluation of intangible assets. |
| | The Committee recommends the same treatment of such revaluation surplus as provided in Explanation 1(j)
to Section 115JB, i.e., inclusion of revaluation surplus in the book
profit in the year of retirement or disposal of asset. |
| (b) | | Re-measurement of defined benefit plans |
| | Re-measurement of defined benefits plans comprises of: |
| ■ | | Actuarial gains or losses; |
| ■ | | Return on plan assets; and |
| ■ | | Change
in effect of asset ceiling (change in present value of any economic
benefits available in form of refunds from plan or reductions in future
contributions to the plan). |
| | As
per IND-AS 19, 'Employee Benefits' re-measurement of defined benefit
plans shall be recognised in other comprehensive income which shall not
be reclassified to profit or loss in any subsequent period. |
| | Since
re-measurement of defined benefit plans is never re-classified to
statement of profit or loss, the Lohia Committee recommended that such
Net OCIs arising should be included in the book profits on annual basis
when the gains or losses arise. |
| (c) | | Gains or losses arising from translating the financial statements of a foreign operations |
| | At
the time of consolidation of results and financial position of foreign
operation with Indian entity, any exchange difference arising on
monetary items forming part of the reporting entity's net investment in
the foreign operation shall be recognised in other comprehensive income
in the combined financial statement. Such exchange difference is
reclassified to profit or loss on disposal of the net investment in the
foreign operation. |
| | The
amount of Net OCIs shall form part of Book profit for computation of
MAT only in the year of re-classification into profit or loss. |
| (d) | | Gains and losses from investments in equity instruments designated at fair value |
| | As
per IND-AS 109, an entity has an option to recognize the changes in the
fair value of an investment in an equity instrument that is neither
held for trading nor contingent consideration recognised by an acquirer
(the entity) in a business combination. Any gains or losses arising on
such type of investment should also be recognised as other comprehensive
income and does not require reclassification to profit or loss. |
| | The
Committee recommended that such Net OCIs should be included in the book
profit for computation of MAT at the time of realization. |
| (e) | | Gains and losses on financial assets measured at fair value |
| | A financial asset shall be measured at fair value through other comprehensive income if following conditions are met: |
| ■ | | the financial asset is held for the purpose of collecting contractual cash flows and selling the financial asset; and |
| ■ | | the
contractual terms of the financial asset give rise to cash flows, on
specified dates, that include payments of principal and interest. |
| | Gains
or losses on such financial asset are treated as other comprehensive
income. When the financial asset is de-recognised form the books the
cumulative gain or loss previously recognised in other comprehensive
income is reclassified from equity to profit or loss. |
| | Such
Net OCIs are recommended to be included in the book profit for
computation of MAT only at the time of re-classification into statement
of profit or loss. |
| (f) | | Gains and losses on hedging instruments |
| | As
per IND-AS 109, in case of cash flow hedge, the portion of the gain or
loss that is offset by the change in the cash flow hedge reserve on the
hedging instrument shall be recognised in other comprehensive income. In
this case the amount recognised in other comprehensive income shall be
reclassified to profit or loss in subsequent periods. |
| | Further,
in case of fair value hedge, the gain or loss on hedging instrument
should be treated as other comprehensive income, if the hedging
instrument hedges an equity instrument for which an entity has elected,
in specified cases, to present changes in fair value in other
comprehensive income. These should not be reclassified to profit or loss
in subsequent periods. |
| | Such
Net OCIs are recommended to be included in the book profit for
computation of MAT only at the time of re-classification into statement
of profit or loss. |
| (g) | | For
particular liabilities designated as at fair value through profit or
loss, the amount of the change in fair value that is attributable to
changes in the liability's credit risk |
| | IND-AS
109 provides that the amount of change in the fair value of the
financial liability that is attributable to changes in the credit risk
of that liability shall be presented in other comprehensive income. This
amount also shall not be reclassified to profit or loss in subsequent
periods.But if this treatment of changes in the fair value of the
financial liability that is attributable to change in the credit risk of
that liability it would create or enlarge an accounting mismatch in
profit or loss, then such gains should be recognised in the profit or
loss account. |
| (h) | | Changes
in the time value of options when separating the intrinsic value and
time value of an option contract and designating as the hedging
instrument only the changes in the intrinsic value |
| | While
separating the intrinsic value and time value of an option contract and
designating it as the hedging instrument only the changes in the
intrinsic value, the changes in the value of the time value of options
shall be recognised in other comprehensive income. Such amount of
changes shall be reclassified to profit or loss when the hedged expected
future cash flows affect profit or loss. |
| | Such
Net OCIs are recommended to be included in the book profit for
computation of MAT only at the time of re-classification into statement
of profit or loss. |
| (i) | | Changes
in the value of the forward elements of forward contracts when
separating the forward element and spot element of a forward contract
and designating as the hedging instrument only the changes in the spot
element, and changes in the value of the foreign currency basis spread
of a financial instrument when excluding it from the designation of that
financial instrument as the hedging instrument |
| | At
the time of separating forward element and spot element of a forward
contract and designating it as the hedging instrument only the changes
in the spot element, any changes in the value of forward element shall
be recognised in other comprehensive income. This amount shall be
reclassified to profit or loss when the hedged expected future cash
flows affect profit or loss. |
| | Such
Net OCIs are recommended to be included in the book profit for
computation of MAT only at the time of re-classification into statement
of profit or loss. |