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
Ram took one machine on lease whose fair value was Rs 100000. Agreed lease rentals were:
Guaranteed residual value on lease was Rs 10000
Rate of interest 10%, Expenses on lease nil, Tax rate 30 %, life of machine 3 years
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
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
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 firstname.lastname@example.org.
Thanks for reading!