# Application of AS-22 in AS-19

ESHA AGRAWAL , 20 February 2014

Hello everyone thanks for the appreciation for my last article “why AS 22 is applied”, coming with another article application of AS-22 in AS -19 “leases”. I am writing this article to discuss with you all  how AS- 22 deferred taxes is applied in  AS-19

There are two types of lease:

1. Financial lease

2. Operating lease

Financial lease is lease where risk and reward are also transferred to lessee by lessor

Operating lease means lease other than financial lease

In case of financial lease we get the ownership of asset so we charge depreciation on asset but in case of income tax they don’t consider asset on lease as an asset so depreciation and finance charges are not allowed , only lease rentals paid are allowed as expense. So DTA/DTL are created on such difference

ILLUSTRATION

Ram took one machine on lease whose fair value was Rs 100000. Agreed lease rentals were:

Y0       10000

Y1        39000

Y2       26000

Y3       34000

Guaranteed residual value on lease was Rs 10000

Rate of interest 10%, Expenses on lease nil,  Tax rate 30 %, life of machine 3 years

SOLUTION

Calculation of value of machine

Lower of following

1)  Fair value  OR

2)  P.V. of minimum lease payments from standpoint of lessee

Lease rental       discount                     P.V.

Y 0             10000                      1                      10000

Y 1             39000                   0.909                   35451

Y 2              26000                  0.826                    21476

Y 3         44000                       0.751                    33044

TOTAL                                                     99971

So value of machine Rs 99971( lower of fair value rupees 100000 or P.V. of MLP RS 99971)

Calculation of finance charges

Y0    Loan                                     99971            Installment    Interest

Y0   Less:-  paid down payment      10000

Balance:-               89971          39000            8997

Y1                    Less:- paid             30003

Balance:-              59968         26000              5997

Y2                    Less:- paid            20003

Balance:-              39965        44000                   4035(balancing figure)

Y3                     Less:-                 39965

Finance charges is just like a loan account here value of machine is rupees 99971  of which Rs 10000 is down payment so balance payment is Rs 89971 on which interest is levied @ 10% Rs 8997 for 1st year , installment paid at the end of 1st year Rs 39000 so principal payment is Rs 30003. Now the outstanding amount in the second year is Rs 59968 on which interest is levied at the end of 2nd year @ 10% Rs 5997, installment paid Rs 26000 so principal payment is Rs 20003 and so on.

Effects in accounts and taxation

Accounts treatment                     Tax treatment        Timing difference     Deferred tax

Years  finance       depreciation     Installments

charges

1        8997          33324                  49000                     6679                      2004(DTL)

2        5997          33324                 26000                     13321                     1993(DTA)

3         4035          33323                44000                      6642                       1993  (Reversal Of DTA)

For accounting purpose  the lease asset is treated  as asset  so depreciation is charged on asset and finance charges on outstanding loan amount, in the first year total deduction allowed as per accounting purpose is Rs  42321, for tax purpose, lease asset do not consider as asset so depreciation and finance charges are not allowed, only lease rentals are allowed which is Rs 49000, the amount of deduction allowed  for tax purpose exceed the deduction allowed for accounting purpose by Rs 6679 and therefore taxable income is lower  than the accounting income. This gives rise to deferred tax liability is of Rs 2004, in second year deduction for accounting purpose is Rs 39321 and deduction for taxation purpose is Rs 26000, accounting income is more than is more than taxable income, this gives rise to DTA Rs 1993(Rs 3993 minus 2004 opening balance of DTL), 3rd year deduction allowed for taxation purpose exceeds deduction allowed for accounting purpose so DTA created in second year Rs 1993 is reversed in 3rd year.

This is the treatment of AS-22 in AS-19

So I have discussed just a part of this accounting standard, Hope you  enjoyed reading the article and gain some knowledge from this. If you have any queries please ask me i will try to solve it, you can mail me at agrawalesha6@gmail.com.

Esha Agrawal

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