ACCA workshop on tax implications of adoption of Financial Reporting Standards

Tuesday, 20 May 2014 00:03 - - {{hitsCtrl.values.hits}}

ACCA Sri Lanka recently held a workshop on the tax implications of the adoption of the Sri Lanka Financial Reporting Standards and the Sri Lanka Accounting Standards.

Addressing the workshop, Department of Inland Revenue International Tax Policy Senior Commissioner Gamini Wijesinghe stated, “The conversion process of Sri Lanka Accounting Standards with International Financial Reporting Standards (IFRS) has given an opportunity to raise confidence of stakeholders and promote good accounting practices.” He emphasised that using IFRS as a basis is a step in the right direction; although its implementation will likely be challenging and said “IFRS provides detailed guidance on recognition, measurement and disclosure requirements for financial instruments. It requires all financial instruments to be initially recognised at fair value, while some instruments are re-measured at fair value at each reporting date. This will result in increased volatility in the income statement and/or equity.” “In addition, the classification rules between equity and liability instruments would result in certain instruments, such as a plain-vanilla preference share, being classified as debt instruments instead of equity, thereby adversely affecting debt-to-equity and profitability ratios. Business indicators and bank loan covenants may require review due to changes in reporting of income, classification of assets and liabilities. A reclassification will immediately breach a debt/equity or even a current asset to current liability ratio covenant in the loan agreement.” Wijesinghe also outlined the Income Tax computations and explained that Profit for Income Tax is as per the IRA, which is a statutory provision, and a change in accounting standards does not change as well as the application of well established tax principles. Current/ Long term investments and Current/ Long term liabilities will be mainly carried at cost whilst, Loans & Receivables(L&R), Fair Value Through Profit or Loss (FVTPL) and Available For Sale(AFS) will be carried at market value . He pointed out the proposed formats for Tax compliance that included areas such as profit for the year, OCI Balance, Impairment Charge, any adjustments made to equity, Total income for the year and taxable profit as well as net profit before Tax and also explained the details that should be included by first time adopters. Wijesinghe said that Tax payers should disclose all changes in accounting estimates, the basis of computation and the statement to which it is charged as well as furnish IRD with all deferred tax disclosures as per the standard. He also outlined the additional schedules to be provided with tax compliance pertaining to property, plant and equipment, leases revenue and employee benefits. Other areas covered during the workshop also consisted of accounting for government grants and disclosure of government assistance .He also touched on the effects of change in foreign exchange rates, borrowing costs, accounting and reporting of retirement benefit plans, impairment of assets and intangible assets and share based payments. It was said in conclusion that Irrespective of the segmentation criteria adopted by the taxpayer, only segmentation based on lines of trade or business shall be acceptable for tax purposes. In the Inland Revenue Act, separate computation of tax is mandatory as long as the trade or business differs.In line with the existing Sri Lankan tax laws, separate income taxes is computed and charged on every line of business or subsidiary. Assets, Liabilities and Income of a joint operation shall be subject to tax in the books of the joint operation and Assets, Liabilities and Income of a joint venture shall be taxed in the hands of the joint ventures. Ranjith Samarasinghe of BDO and Gayathri Thuraisamy of KPMG Sri Lanka also shared their expertise knowledge in respect to this subject Outlining her thoughts on this initiative, ACCA Head Nilusha Ranasinghe stated, “These standards would be required to be used by most of the business organisations in preparing and presenting their financial statements and said that this had been the main aim of the workshop.”