IND AS
This query is : Resolved
21 December 2020
A private company has its Net worth exceeded Rs 250 Crore during FY 19-20.
When will IND AS be applicable from?
When will IND AS be applicable from?
26 December 2020
All NBFCs whose Net worth is more than or equal to INR 250 crore but less than INR 500 crore shall have IND AS mandatorily applicable to them with effect from 1st April 2019.
https://cleartax.in/s/applicability-ind-as
https://cleartax.in/s/applicability-ind-as
28 December 2020
Will provision for taxation be included within the ambit of reserve to calculate net worth for applicability of IND AS?
01 August 2024
The provision for taxation is an important consideration when calculating net worth for the applicability of Ind AS (Indian Accounting Standards). Net worth is a critical determinant for the applicability of Ind AS, especially for certain thresholds that decide whether a company needs to adopt these standards. Here's an analysis of whether the provision for taxation is included within the ambit of reserves to calculate net worth:
### Calculation of Net Worth
As per the Companies Act, 2013, the term "net worth" is defined under Section 2(57) as follows:
> **"Net worth" means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure, and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation."**
### Components of Net Worth Calculation
1. **Included in Net Worth:**
- Paid-up share capital.
- All reserves created out of profits.
- Securities premium account.
2. **Excluded from Net Worth:**
- Accumulated losses.
- Deferred expenditure.
- Miscellaneous expenditure not written off.
- Reserves created out of revaluation of assets, write-back of depreciation, and amalgamation.
### Provision for Taxation
The provision for taxation is an amount set aside out of profits to meet the tax liability of a company. Here’s how it fits into the calculation of net worth:
1. **Provision for Taxation vs. Reserves:**
- Provision for taxation is not considered a reserve. Instead, it is a liability reflecting the estimated tax payable for a given period.
- Reserves are appropriations of profits, whereas provisions are amounts set aside to cover specific liabilities or losses.
2. **Impact on Net Worth Calculation:**
- Since the provision for taxation is a liability and not a reserve, it does not get added to the net worth.
- However, the profit used to create the provision for taxation affects the reserves. The profits transferred to reserves are after accounting for the provision for taxation.
### Practical Example
Suppose a company has the following simplified balance sheet components:
- **Paid-up Share Capital:** ₹50 lakhs
- **Securities Premium:** ₹10 lakhs
- **Reserves (excluding revaluation, write-back of depreciation, and amalgamation reserves):** ₹40 lakhs
- **Provision for Taxation:** ₹5 lakhs
- **Accumulated Losses:** ₹10 lakhs
The net worth calculation would be:
\[ \text{Net Worth} = \text{Paid-up Share Capital} + \text{Securities Premium} + \text{Reserves} - \text{Accumulated Losses} \]
\[ \text{Net Worth} = ₹50 \text{ lakhs} + ₹10 \text{ lakhs} + ₹40 \text{ lakhs} - ₹10 \text{ lakhs} \]
\[ \text{Net Worth} = ₹90 \text{ lakhs} \]
The provision for taxation of ₹5 lakhs does not directly affect this calculation but would have been deducted from the profits before arriving at the reserve figures.
### Conclusion
The provision for taxation is not included within the ambit of reserves for the calculation of net worth under Ind AS applicability criteria. It is treated as a liability, and the reserves considered for net worth calculation are the amounts left after setting aside such provisions. The net worth is thus calculated based on paid-up share capital, securities premium, and reserves created out of profits, after deducting accumulated losses, deferred expenditure, and miscellaneous expenditure not written off.
### Calculation of Net Worth
As per the Companies Act, 2013, the term "net worth" is defined under Section 2(57) as follows:
> **"Net worth" means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure, and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation."**
### Components of Net Worth Calculation
1. **Included in Net Worth:**
- Paid-up share capital.
- All reserves created out of profits.
- Securities premium account.
2. **Excluded from Net Worth:**
- Accumulated losses.
- Deferred expenditure.
- Miscellaneous expenditure not written off.
- Reserves created out of revaluation of assets, write-back of depreciation, and amalgamation.
### Provision for Taxation
The provision for taxation is an amount set aside out of profits to meet the tax liability of a company. Here’s how it fits into the calculation of net worth:
1. **Provision for Taxation vs. Reserves:**
- Provision for taxation is not considered a reserve. Instead, it is a liability reflecting the estimated tax payable for a given period.
- Reserves are appropriations of profits, whereas provisions are amounts set aside to cover specific liabilities or losses.
2. **Impact on Net Worth Calculation:**
- Since the provision for taxation is a liability and not a reserve, it does not get added to the net worth.
- However, the profit used to create the provision for taxation affects the reserves. The profits transferred to reserves are after accounting for the provision for taxation.
### Practical Example
Suppose a company has the following simplified balance sheet components:
- **Paid-up Share Capital:** ₹50 lakhs
- **Securities Premium:** ₹10 lakhs
- **Reserves (excluding revaluation, write-back of depreciation, and amalgamation reserves):** ₹40 lakhs
- **Provision for Taxation:** ₹5 lakhs
- **Accumulated Losses:** ₹10 lakhs
The net worth calculation would be:
\[ \text{Net Worth} = \text{Paid-up Share Capital} + \text{Securities Premium} + \text{Reserves} - \text{Accumulated Losses} \]
\[ \text{Net Worth} = ₹50 \text{ lakhs} + ₹10 \text{ lakhs} + ₹40 \text{ lakhs} - ₹10 \text{ lakhs} \]
\[ \text{Net Worth} = ₹90 \text{ lakhs} \]
The provision for taxation of ₹5 lakhs does not directly affect this calculation but would have been deducted from the profits before arriving at the reserve figures.
### Conclusion
The provision for taxation is not included within the ambit of reserves for the calculation of net worth under Ind AS applicability criteria. It is treated as a liability, and the reserves considered for net worth calculation are the amounts left after setting aside such provisions. The net worth is thus calculated based on paid-up share capital, securities premium, and reserves created out of profits, after deducting accumulated losses, deferred expenditure, and miscellaneous expenditure not written off.
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