The following
Announcement is being issued by the Auditing & Assurance Standards Board
under the Authority of the Council of ICAI.
ANNOUNCEMENT
Manner of Reporting
by the Auditors in respect of RBI’s Circular on Deferred Tax Liability on
Special Reserve created under Section 36(1) (viii) of the Income Tax Act, 1961
1. The Reserve Bank
of India, on 20th December 2013, issued Circular No. DBOD. No.BP.BC.77/21.04.018/2013-14
for all commercial banks (excluding Regional Rural Banks) in respect of Deferred
Tax Liability on Special Reserve created under Section 36(1) (viii) of the
Income Tax Act, 1961.
2. RBI, in its
aforesaid Circular has noted that some banks were not creating deferred tax
liability (DTL) on Special Reserve as per Accounting Standard 22, ‘Accounting
for taxes on Income’ (AS 22) on the grounds that they do not intend to
withdraw from such Reserve in the future. In many cases banks have formalised such
intent by having resolutions passed by their Boards or Committees to this
effect.
3. RBI, vide its
aforesaid Circular, has required that as a matter of prudence, banks should
create DTL on such Special Reserve. Further, for this purpose, banks may take
the following course of action:
a) If the
expenditure due to the creation of DTL on Special Reserve as at March 31, 2013
has not been fully charged to the Profit and Loss account, banks may adjust the
same directly from Reserves. The amount so adjusted may be appropriately
disclosed in the Notes to Accounts of the financial statements for the
financial year 2013-14.
b) DTL for amounts
transferred to Special Reserve from the year ending March 31, 2014 onwards should
be charged to the Profit and Loss Account of that year.
4. RBI Circular
also states that in view of the requirement to create DTL on Special Reserve, banks
may reckon the entire Special Reserve for the purpose of computing Tier-I
Capital.
5. The Council of
ICAI has considered the impact of the accounting dispensation prescribed by RBI
with respect to treatment of expenditure on creation of DTL as at 31st March
2013 (as referred to in paragraph 3.a above) on the report of the banks’
statutory auditors.
6. On a
consideration of the matter, the Council is of the view that any specific
accounting treatment prescribed by a regulator, even if at variance with the
Accounting Standard/s, was an integral part of the financial reporting
framework applicable to the entity falling under the jurisdiction of such regulator
and the entity would be required to follow such prescribed accounting
treatment. Accordingly, the statutory auditors need not modify their audit
opinion in respect of such prescribed accounting treatment. However, the fact
may be brought out by the statutory auditors in their audit report by way of an
“Emphasis of Matter” paragraph in accordance with the Standard on Audit (SA)
706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report”, issued by ICAI, provided the matter of
departure from the requirements of the Accounting Standard/s pursuant to the
aforesaid regulatory requirement is appropriately disclosed, with
quantification, by the entity by way of the notes to the accounts in the
financial statements.
7. An illustrative
“Emphasis of Matter” paragraph is as follows:
“Emphasis of Matter
We draw attention to Note X to the
financial statements, which describes the accounting treatment of the
expenditure on creation of Deferred Tax Liability on Special Reserve under section
36(1)(viii) of the Income Tax Act, 1961 as at 31st March 2013, pursuant to
RBI’s Circular No. DBOD. No.BP.BC.77/21.04.018/2013-14 dated 20th December
2013. Our opinion is not qualified in respect of this matter.”
8. The aforesaid
disclosure in the Notes to the Accounts would normally include the following information
in respect of creation of Deferred Tax Liability (DTL) on Special Reserve for
the following:
·
Amount
of expenditure due to the creation of DTL on Special Reserve as at March 31,
2013 not fully charged to the Profit and Loss Account as adjusted directly
against Reserves
·
Impact
on Profit & Loss Account had the amount of hitherto unprovided DTL been
charged to the Profit and Loss Account instead of Reserves directly as required
by the RBI Circular.
9. An illustrative
Note to Accounts in this regard is as follows:
“Pursuant to Reserve Bank of India’s
(RBI’s) Circular No. DBOD.
No.BP.BC.77/21.04.018/2013-14 dated 20th
December 2013, the Bank has created Deferred Tax Liability on the Special
Reserve under section 36(1)(viii) of the Income-tax Act, 1961. As required by
the said RBI Circular, the expenditure, amounting to Rs. XXXX due to the
creation of DTL on Special Reserve as at March 31, 2013, not previously charged
to the Profit and Loss Account, has now been adjusted directly from the
Reserves. Had this amount been charged to the Profit & Loss Account in
accordance with the generally accepted accounting principles in India, the
amount of Profit for year had been lower/ amount of Loss for the year higher*
by such amount.”
* As the case
may be.
.
.
.
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