Accounting and tax treatment of assets

Accounting and tax treatment of assets - Printable Version

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Accounting and tax treatment of assets - Queries - 07-01-2009

A guest house of companies director is used both for company(Foreign guest live there) and personal purpose(his family is living there).

Company has installed air conditioner,computers, electrical equipments, furniture at the directors premises and is capitalising all those as fixed asset in their books of accounts. Further company is only allocating those expenses in its books which are related to foreign guestes only.

Would anybody please tell me both the accounting and tax treatment of those items.

- faisal_desperado - 07-01-2009

Please be specific and aboveboard,
What Tax treatment do you expect to be explained by the members ?
Although company is having correct practice of allocating expense, in this regard, what is the ambiguity ?

Regards,

- Queries - 07-02-2009

i wish i could have answered the same in icap papers.

ok i getting specific now

ACCOUNTING TREATMENTS

1. Guest house is used primarily for personal purpose and once or twice in a quarter used for company purposes ( foreign guests). expenses are recorded rightly but what about the assets.

2.is it right to wholly capitalised all those assets (air conditioner,electrical equipments. furniture,land,building in company books.As they are not used specifically for company purpose should we make the following entry Capital Debit Fixed Assets credit.

3.If it is right to wholly capitalise those assets then why only guest related expenses are charged to accounts.other running and maintenance expenses paid by the directors personally should also be charged to company.

4. Lastly if asset is capitalized then how it is probable that future economic benefits will flow to entity..

TAX TREATMENTS

1. Would accomodation or housing provided along with other property and perquisite be treated as salary of director. or

2. proportionate depreciation will be claimed u/s 22. if proportionate depreciation is claimed then how will u determine the proportion used for business and for personal purpose.

3. and lastly what will be the treatment expenses.which expense will be allowable.

i hope members will get my point now.

- faisal_desperado - 07-04-2009

My dear,
Thanks for the explanation,
For Financial reporting purpose, These assets will be capitalized since they must have been bought primarily for business purpose and are also being used for business, some of the assets remain unutilized in busiess for many years, but they are maintained on company's expenditures, depreciation is also charged (And claimed as expenditure for financial reporting purpose) these assets,inspite of the fact whether used in business or not, are shown as property of company in its accounts,as far as the Economic benefits are concerned , these assets add values to the business, being part of networth, and how networth creates value, it does not require any explaination.

For Income Tax purpose
As per section 22(3),Only such proportion of the depreciation will be allowed as deduction, which fairly relates to the business.(As per rates specified in part 1 of Third Schedule)
All those facilities, which are being used by the director will be dealt as per section 149 and be considered as perquisites to the director while calculating his taxable income.
All expense will be claimed, however there would have a differentiation of treatment,if, these expense relates to the director and company claims them, then this will be treated as a perquisite to the director and would increase his(Director's) taxable income.
however, If the expense are fairly relates to the business, then they will be claimed under business expense rather than treating the same as salary expense , as in prior case.

Best Regards,

- Queries - 07-08-2009

Dear faisal i feel ur treatments are in contrast with each other.
In accounting you are saying that all assets should be capitalised but in tax you are saying that these should be treated as salary of director.
if these are treated as assets in accounting then depreciation should be allowed to company in tax as well.why u treating assets as salary of director in tax and as assets in accouting.

- faisal_desperado - 07-08-2009

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Queries
 Dear faisal i feel ur treatments are in contrast with each other.
In accounting you are saying that all assets should be capitalised but in tax you are saying that these should be treated as salary of director.
if these are treated as assets in accounting then depreciation should be allowed to company in tax as well.why u treating assets as salary of director in tax and as assets in accouting.
<hr height="1" noshade id="quote"></blockquote id="quote">

Dear,
Sorry to say, but in my opinion, you need to read my last post again, as i mentioned "All those facilities, which are being used by the director will be dealt as per section 149 and be considered as perquisites to the director while calculating his taxable income"

This means that, all the facilities will be treated as Furnished Accommodation for the purpose of Director's taxable income and be treated accordingly. I have nowhere mentioned that Assets should be treated as salary of the director, as you said.
Remember, Assets will remain the property of company in either case.

Furthermore, for your information, in reply of your last para, (if these are treated as assets in accounting then depreciation should be allowed to company in tax as well) This is not necessesary that if an asset is subject to depreciation for financial reporting purpose, this is also be allowed for Tax purpose and vice versa , some time Tax authority does not recognize an asset for depreciation , also, there is a differentiation of method of depreciation and timing of recognization for Financial reporting and Tax purpose and they can not be complected with each other.

Regards,

- Queries - 07-08-2009

bahi i m not here to quarell with u.i said what i read and understand. u said all those will be dealt with as per section 149(SALARY) in calculating his taxable income.

i think u confusing me further than before. i give u figures u plz solve it.only then i will be able to understand.

A buiding of Rs. 500,000 and land of Rs. 1,000,000 belonging to a company is being used by only director (of a private company) and his family for personal purpose.it is used for business purpose only when foreign visitors come to pak and stay there for 2-3 days. this happens only once or twice in a year.

Company has installed Air conditioner,computers,equipments,electricial instruments, etc amounting to Rs. 2,000,000 there. The director is drawing a Basic salary of Rs. 125,000 per month.

For sake of simplicity assume all those assets are depreciable assets as per section 22 and tax depreciaton rate on all those assets is 20%.
Accounting profit before depreciation and salary of director is Rs. 9,000,000 and assume accounting depreciation is charged on all those assets at rate of 10%. Further assume that tax and accounting treatment of all other items (except depreciation and salary)is same.

Now would u please calculate following witt justication for each figure

Accounting profit
Tax profit
Taxable income of director

and please dont mind but be specific. dont try to show that u know other things not asked.

- faisal_desperado - 07-09-2009

Dear,
Please Note the following;

Accounting Profit
profit before depreciation and salary -------------Rs. 9,000,000
Director's salary -----------125k * 12-------------Rs.-1,500,000
Accounting Depreciation ------Assumed Figure-------Rs.-1,000,000
Accounting Profit----------------------------------Rs. 6,500,000

Taxable Profit
profit before depreciation and salary -------------Rs. 9,000,000
Director's salary -----------125k * 12-------------Rs.-1,500,000
Tax Depreciation ---------Assumed Figure ----------Rs.-2,000,000
Taxable Profit-------------------------------------Rs. 5,500,000

Taxable Profit of Director
Basic Salary -------------------------------------Rs. 1,500,000
Furnished Accommodation * ------1500000 * 45%----- Rs. 675,000
Director's Taxable Profit--------------------------Rs. 2,175,000

Assumptions and Justifications
Depreciation is assumed figure i.e. rates overlooked.

All those facilities, which are being provided to the director will not effect company's income i.e. if facilities were provided proportionaly (i.e. 50% each to director and Visitors) this would not have effected the company's profit, in each case, company will only charge depreciation as an expense to arrive at its profit.

Visitors come for very few days, hence negligible, had visitors come for 3 month or 6 month in a year then this would have effected the taxable income of director, Proportionate figure of accommodation would have been allocated to the director's income. In either case, Company's taxable profit would have been same, as calculated.

* Higher of annual value of FMR or 45% of MTS or BS, Since, FMR of accommodation is missing , 45% of BS will be included in taxable income as specified u/s 13(12)

Queries will be appreciated.

Best Regards,

- Queries - 07-09-2009

my queries are

1. why didnt u calculated deprecition on each asset as per the rate given in the question. i provided all the detail simply because of Calcuation of depreciation on each assets.

Now assuming that ur assumed figures have taken all assets into account my question are
ACCOUTING

1. if u treating land and building as rent free accomodation to director then why u charging depreciation @ 10% on each asset in calculating accounting profit. since asset is used not for business purpose how can u charge depreciation in the company accounts. how this accomodation will provide any future cash flows to the company.

TAXATION
1. why u treating accomodation provided to director as business asset and charging full year depreciation while calculating taxable profit of company . i quote subsection (1) and (3) of ITO,2001

(1) a person shall be allowed a deduction for the depreciation of the personâs depreciable assets used in the personâs business in the tax year.

(3)Where a depreciable asset is used in a tax year partly in deriving income from business chargeable to tax and partly for another use, the deduction allowed under this section for that year shall be restricted to the fair proportional part of the amount that would be allowed if the asset were wholly used to
3[derive] income from business chargeable to tax

in my view depreciation will be calculated as
500,000 x 20% x 6/365
(assume that visitor stay for 3 days and 2 times a year)
The reason is that building is used for only 6 days for business purpose.

2. I QUOTE SUBSECTION (8) OF SECTION 13

Where, in a tax year, an employer has provided an employee with a perquisite which is not covered by sub-sections (3) through (12), the amount chargeable to tax to the employee under the head âSalaryâ for that year shall include the fair market value of the perquisite, 3[except where the rules, if any, provide otherwise,] determined at the time it is provided, as reduced by any payment made by the employee for the perquisite.

IN MY VIEW air conditioner, equipments, of Rs. 2,000,000 shall also be added to the salary of director keeping in view the above provision.

- faisal_desperado - 07-10-2009

My Dear "unnecessary" Queries.
My last post is still valid inspite of your continuance menaces,however It is finally suggested to you to read the provisions again, again and again, unless you give in, when you really give in, post here, probably(eventually), some one might involve himself in a long debate of your unnecessary queries,

Also,Ask the same question, which you have posted here, from your Tax Consultant,if any.

Best Regards,

- faisal_desperado - 07-10-2009

Dear,
I just would like to rectify you with regards to the following matters,which you quoted, and unfortunately having misunderstanding.

Your question about depreciation calculation
Answer
This is a discussion forum for professional advises by members, and not for basic calculation for depreciation or valuation,which can be solved by the original poster himself by devoting his little time,

Your following questions, "if u treating land and building as rent free accomodation" and "why u treating accomodation provided to director"
Answer
I have already mentioned that these assets are property of company and will be shown to enhance its net worth, whether used by company or any of its employees, it will remain the property of the company and depreciation will also be charged in its accounts.

Your following quote, "a person shall be allowed a deduction for the depreciation of the personâs depreciable assets used in the personâs business in the tax year", shows your misunderstanding with regards to the aforesaid,
It mean that Depreciation is allowed on depreciable assets, used by the person for his own business.
There is only one person.( do not treat it as "Two or more" person, if it is mentioned more than one time)

Your question regarding partial use of depreciable asset
Answer
Nevertheless, asset shall be treated to have been property of another,except company(in this case), If a company provides a car or accommodations to its employees then, these shall never be treated as asset of employee, rather they will always be treated as company's assets.
In this question, there is no concept of partial use of asset.

Your question regarding your views, "in my view depreciation will be calculated as
500,000 x 20% x 6/365"
Remember dear, Laws are never based on "your views" furthermore, this method( which you have mentioned) has been omitted by Finance Act 2004.( Exhibit the bottom line of the same page , from where you quote, i.e. page 38 of ITO 2008, available at FBR's website)

At last your question "I QUOTE SUBSECTION (8) OF SECTION 13"
Answer
There is again misunderstanding of your concepts,
This para indicates that "if an asset has been provided by a company to its employee at concession, then only such part shall be included in taxable income of employee, which has actually been borne by the company i.e. An asset of worth 10,000 has been given by a company to its employee at Rs. 2,000 then Rs. 8,000 ( bore by company)will be included in taxable income of employee.

Queries, not debate, will be appreciated

Very best regards,and very sorry, if any of my act hearted you.
Faisal Javaid.

- Queries - 07-10-2009

" have already mentioned that these assets are property of company and will be shown to enhance its net worth, whether used by company or any of its employees, it will remain the property of the company and depreciation will also be charged in its accounts."

Our problem is that we are not willing to listen to anybody and always trying to assert our orders.

i have said 100 times that this is private company having only one director.which means it is a single member company and its director is also its owner. when a capital(asset) is introduced into the business by its owner we make following entry
ASSET DR.
CAPITAL CR.
these assets have always been the property of director who introduced it as capital.they are never the property of the company.

now that they are not used for business purpose then as i said before they will be treated as

CAPITAL DR.
ASSET CR.

BUT instead of quoting or mentioning any IFRS sections u keep on saying i have said,i have mentioned etc etc. who ever u r and whatever ur qualification is keep ur orders to urself.dont try to assert it over others.

is adami ko sawal samjata samjata aik week ho gia ha.plz somebody else come and help me.

he is trying to be a professional aur believes that depreciation calculate karna sa is ki azat ma koi faraq par gai ga. Depreciation professional calculate nai karta tu kia chaprasi calculate karta ha.

i know this is a professional forum but i advise u to read professional ethics for accountants (of whichever body u belong too) time and agian.

i am here to increase my knowledge through different queries.i m not competing with u.whoever u r and whatever ur quaiification is,it does not matter to me.have patience or plz dont reply.

"At last your question "I QUOTE SUBSECTION (8) OF SECTION 13"
Answer
There is again misunderstanding of your concepts,
This para indicates that "if an asset has been provided by a company to its employee at concession, then only such part shall be included in taxable income of employee, which has actually been borne by the company i.e. An asset of worth 10,000 has been given by a company to its employee at Rs. 2,000 then Rs. 8,000 ( bore by company)will be included in taxable income of employee."

once again although i wrongly quoted as subsection (8) of section 13 instead of subsection (13) of 13 but i completely pasted the whole subsection 13 in my earlier post.

This clearly proves that u r just trying to find faults in others post and not using this forum constructively.u r even not bothering to completely read the others post.hahahahahha.

- faisal_desperado - 07-10-2009

My dear Unnecessary queries,
I am really very sorry that i disrurbed you so much, i did not anticipate that my post will create as much disturbance for you,

I never post over those topics, where embarrassment may be created just due to the differentiation of views of different people, although, i just have intensions to wipe yor misunderstanding off, but you negatively treated my replies, and probably thought that i am proving my self to be the superior over you,
No one is superior my dear, every one is a learner and remain learner throughout the life and ultimately get away toward the actual life,

My dear, your never revealed in any earlier post that there is only one director or this is SMC, if you had ever revealed the detail of the company, my replies would have been changed ,

However,
I wish , someone may remove your ambiguities regarding these matters and make you satisfy for every of your matters.

Please Forgive me ,if any of my words hearted you.
Best Regards,

- Queries - 07-10-2009

"My dear, your never revealed in any earlier post that there is only one director or this is SMC"
Faisal bahi i just dont know what to say.u advise me to read sections again and again but problem is that u never read urself carefully.

please read my question very carefull which i posted on july o8 at 9.30

A buiding of Rs. 500,000 and land of Rs. 1,000,000 belonging to a company is being used by only director (of a private company) and his family for personal purpose.it is used for business purpose only when foreign visitors come to pak and stay there for 2-3 days. this happens only once or twice in a year.

i had specifically written "only director of a company".what does this mean.as per law a private company must have two directors.sice this company only has one director this means it is a single member company.

i m afraid u cant deny written proof.