411-420: Accounting and Audit - Accountancy Forum Topics

How Cash Purchase Reduced

Dear All AOA I have problem that our company make many cash purchasing like , spare parts, computer accessories and mess items. In Tax practice only less than 10000/= cash purchasing is allow. In Market no one any want to deduct a witholding tax. Plz give me latest practice about cash purcashing to avoid any add / back in income tax return from ITO. Thanks Muhammad Khurram.

Revenue Recognition (shipment Of Goods)

At what point should revenue be recognized? Scenario: Goods are invoiced to customers on CIF/CPT/DDU basis (Carriage Paid To Named Place, or Delivered Duty Unpaid at Named Place). Under these terms, goods are at the seller’s risk until they arrive. The seller is responsible for the freight (and insurance, if desired) and title passes to the buyer only on arrival. Up to now, we have always recognized revenue at the point of invoicing&despatch. However, our US masters have told me that US GAAP requires revenue recognition at the point where the risk&title passes to the buyer (which means when the goods arrive). I checked on internet for guidance on this point, and to my surprise, I found that IFRS and IAS 18 (para.14) also require this, at least in theory! I would like to hear from other accountants about whether other companies actually do this in practice, i.e. back out invoiced sales, deferring revenue recognition until arrival of goods, for cases where risk&title does not pass from seller to buyer until arrival of goods. In case anybody raises the question of materiality, I will mention that more than half of our sales are exports (= longer shipment times), and a significant part of our business is machines, of which we sell about 10 per year, so sometimes, the whole month’s machine revenue would be pushed into the next month!

New Company Formation

Aoa, I am interested in forming an IT company. Can somebody let me know the requirements and taxation process. regards.

Leases : Calculate Capital And Interest Repayments

Hi - any help would be greatly appreciated. We're leasing equipment at present from a supplier. We have decided to finance the lease through a finance company. We pay our finance company a fixed amount each month for the next 33 months. My problem is that I have to calculate what proportion of the fixed amount is capital and what proportion of the fixed amount is interest for the next 33 months - and post the amounts to the general ledger. I have reviewed the lease agreement from the finance company - there is no interest rate quoted on the agreement. Is there a method to do this? Any help would be greatly appreciated. Thanks

Foreign Exchange Gain/loss

I just want to bring on discussion an issue of practical difficulty to the accountants at exporting units. The members of this forum who are also the students or associate/fellow members of ICAP are specifically requested to comment on the situation. The export sales are normally recognized on disptach of goods to customers i.e. on the bill of lading date by using the foreign currency exchange rate of the said date. In fact, there could be so many exchange rates on a single time as all the banks might have different rates at the same time. Therefore, exporting units recognise the sales by using the rate of the bank from whom E-Form was obtained or where the proceeds are to be received against the shipment either it is on L/C basis or D/A basis. IAS 21 also allows to translate such amounts on week average rates or month average rates to facilitate the practice, if the variation in rates is not enormous. Apparently, there is a time gap between the sale recognition date in the books of account and the realization date against the shipment and this time gap would eventually result in a foreign currency gain or loss to be recognized in the books of account being the difference between amount debited to the export debtor's account against the said sales and the amount actually received therefrom on realization date. IAS 21 (para 52) interalia requires the diclosure of the amount of exchnage difference recognised in profit and loss account. We should also keep in mind, that in this area, IAS 21 deals with translation facet of foreign currency and not the conversion thereof. Where translation is used for reporting purpose and conversion is the actual conversion at the time of realization. The said IAS has not stipulated that in which component of profit and loss account (i.e. Sales or Other Income) such gain or loss should be included. Instead, it simply requires its discloure that could be made by giving merely an explanatary note under any of the components of profit and loss account. This situation leaves the preparer of accounts to use his judgment that where such gain/loss should logically be included. IAS 18 (para 11) explains the term revenue by stipulating that "the amount of revenue is the amount of cash and cash equivalents received or receivable". It means that whether it is a received amount or receivable amount, in both cases, it would be the part of revenue. Further, logically it has only and only arisen due to selling in foreign currency. If the same sales would have been made in local currency, no such gain/loss would have ever arisen. The driving force behind such income is the sales to export debtors in foreign currency. This can lead to include such income in the amount of export sales. Disclosure could be given in an explanatory note to such amount of export sales appearing in the notes to the accounts. Apparently, IAS 21 does not have any explicit objection on this treatment. Why such treatment is desired for exporting units? It is now explained. Taxation under Presumptive Tax Regime (PTR) is made under section 169 of Income Tax Ordinance, 2001 where tax is withheld/dedcuted by the banks at the time of receiving of proceeds against the realization. Realization amount for exporter is the amount that is finally received through bank by the exporter after deduction of due tax that is full and final tax for exporter. If the exchange gain (that is a notional figure and has nothing to do with actual cash and cash equivalent received) is included in other income, the tax authorties would never leave it untaxed. It is commonly known that in Pakistan the so-called tax authorities have nothing to do with common sence and they tax the exporters under Normal Tax Regime (NTR) for whatever income figure that might be appearing in the other income component of the profit and loss account. Such behaviour and very very common practice of tax authorities would call for un-necessary appeals, costs, documentation, explanations and wastage of time for the exporters. This would lead to double taxation of the same income; once under PTR and again under NTR that is totally against the law and is only a burden on the exporters in either way. Now the issue is that the Technical advisory committee of the Institute of Chartered Accountants (ICAP) has issued a selected opinion (volume 1) in 1993 that such gain should be included in OTHER INCOME instead of trading results. I understand that so many pronouncements have changed over the period but selected opinions are never withdrawn because these have no legal effect; these are simply the opnions which can differ from professional to professional. Now IAS 1 after recent revision has even eliminated the requirement to identify the profit from operating activities and profit from other activities. (we are doing this becoz 4th Sch. to CO 84 requires it). It has also eliminated the requirement to identifiy the extra ordinary and ordinary activities etc. Although the said opinions have no legal effect and even ICAP does not take responsibility for such opinions, still, the auditors of the companies in exporting sector require them to follow this opinion while no such requirement could be seen in IAS 21. This is causing practical difficulties to the exporters and tax authorities are charging tax on such gains that are appearing in other income leading to double taxation of same cash and cash equivalent earned. I seek to have the views of the members of this forum on this issue. Best regards, KAMRAN.

Value At Risk At Stock Exchange

I am doing MS in finance; I have assignment to write a report on “Value at Risk as Risk management System in Stock exchange”. Security and exchange commission has proposed Value at Risk as new measurement of Risk Management at Stock exchanges. Members of stock exchanges, especially those who target the retail clients and generally handle highly speculative trades fear that the new Risk Management System (RMS) will ask for a much higher exposure margin that cannot be passed on to their client. I did not find related articles on Internet. If you have access to any thing related to this topic, please forward it to me. Regards

Should I Register My Tourism Office?

AOA I wanted to start a office of tourism. for that i need licence. Should I register my company? or I can get the license without registering it. Also a very basic question[:I] if i run office it will be a company or just an office. Plz help. All your suggestions are welcome. waiting...thanx in advance

Pre-operating Expense

Good day to everybody, I just want to ask based on the the New Accounting Standards, what is the proper way or treatment for pre-operating expense. Thanks a lot[:)]

Capitalizing Cost Software Development

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Equity Method Of Accounting - Side Effects

Dears, I again place an issue for professional discussion. Investment in associates is required to be accounted for under Equity Method in accordance with IAS-28 ‘Investments in Associates’ effective from the accounting years commencing from 01 January 2005. In Pakistan it is mandatory for the listed companies to follow the International Accounting Standards in preparation of financial statements. Under equity method, an investor having investment in associates is required to account for the share in the post acquisition profits of the associates in its Profit and Loss account. Whilst the dividend actually received from such associates is deducted from the carrying value of the investments in the associates, instead of recognizing as income in the Profit and Loss account. There has emerged some difference of opinion among various accounting circles in respect of calculation of provision for workers’ participation fund. Some circles accentuate to provide workers’ participation fund on the profit arrived at after accounting for the share in the profit of associates thus ignoring the dividend income that has been deducted from the carrying value of the investment in such associates. They stress that profit is arrived at under various accounting conventions laid down by the Generally Accepted Accounting Principles and only those receipts/incomes could be excluded which have been specifically mentioned in the definition of profit given by section 87C of the Companies Act, 1913. They further stress that no adjustments are required to be made to the profit, which has been arrived at from ordinary activities under the identified accounting framework. At the same time, some other accounting circles are of the view that for the purpose of calculation of provision for workers’ participation fund, the amount of share in profit of associates should be reversed from the ‘net profit before taxation’ and dividend received from such associates should be included in the profit. They emphasize that actually realized income is dividend income whilst the share in profit of the associates is merely an accounting adjustment and would never be realized unless the investment in such associate is disposed of, which is again dependent upon the market value at the time of disposal/sale. They further state that the share of profit from associates accounted for by an investor is already net of the provision of workers participation fund that has been paid by such associates to their own workers and the calculation of provision for workers’ participation fund on the profit including the share from associates would result in twice payment to the workers of two companies on the same profit i.e. the profit that was earned by the associate and the share of such profit accounted for by the investor. They stress that the share of profit in associates does not represent the actual return in the hands of the investor, which infact is represented by the amount of dividend received on such investments in the associates. Accordingly, they opine that the share in the profit of associates should be excluded from the figure of ‘net profit before taxation’ and the dividend earned on investment in such associates should be included in the resultant profit to calculate 5 percent provision for the workers’ participation fund. I seek the valuable views of the forum's members on this issue. Best regards, Kamran