Monday, November 2, 2015

IASB issues exposure draft on Application of Materiality

International Accounting Standards Board (IASB) has issued exposure draft providing guidance on application of materiality while preparing financial statements as per International Financial Reporting Standards (IFRS).It will help management of company to apply the concept of materiality in preparation and presentation of both annual and interim financial statements of the company. The draft specifies the factors that should be considered at the time of determination of materiality of an information, guidance on presentation and disclosure of material information. It also includes some practical examples to clarify the guidance.

As per the Conceptual Framework for Financial Reporting, an information is said to be material when non-disclosure or omission of the information could influence the decision about the entity taken by users of financial statements on the basis of financial statement. As per the exposure draft on application of concept of materiality, materiality of an information is a matter of judgement. The management of an enterprise make assessment of an information to check whether the information is material or not. While making assessment of materiality management should take into consideration requirements of primary users of financial statements and types of decisions they are taking, nature and size of the information etc. The assessment of materiality should be done on both on individual basis and on collective basis.

The exposure draft states that apart from assessment of materiality, the management of an entity should also use its judgement in deciding way of disclosure and presentation of a material information on the financial statement. Material information should be disclosed in the financial statement in such a way that disclosure of the same would not defeat the objective of financial statement. Any immaterial information should not be disclosed, unless non-disclosure of the same reduce level of understandability of any material information. Further, material information can be aggregated or disaggregated at the time of presentationin financial statement. The management should decide about aggregation or disaggregation of material information and the draft provides guidance to the management thereon. The information can be presented either on face of primary financial statements or in the notes to primary financial statements. An information representing a bulk of other information can be presented on face of primary financial statements, otherwise in the notes.

The disclosure requirements specified in different IFRS are minimum disclosure requirements. Apart from IFRS requirement management can disclose other information if the information is judged as material. At each reporting date, management of an entity should review earlier disclosures.

As pet the draft, if management identified any material misstatements before the issuance of financial statements, the management should amend the financial statement.

Stakeholders can submit their comments on IASB website by 26 Feb 2016.

HC sets aside penalty on ‘Flipkart’ for effecting sales without registering under Kerala VAT Act

CST & VAT: Kerala VAT- ‘Flipkart’ is merely facilitating sales, purchase and delivery of goods, it can’t be considered as dealer of goods under Kerala VAT Act.


a)   ‘Flipkart’ (assessee), being an online service provider facilitating sales or purchases, was registered under service tax law. Notice was issued to ‘Flipkart’ under Kerala VAT Act (KVAT) for neither registering as a dealer nor filing returns. Accordingly, penalty was levied on it for such default.

b)   Flipkart’ argued that it was only a service provider which was not engaged in business of sale or purchase of goods. It merely facilitated transactions of sale or purchase through its online portal and made arrangements for the delivery of goods. Therefore, the provisions of KVAT Act were not applicable to it.

The High Court held as under:

1)  The tenor of notice gave ample implication that the department had made up its mind to impose penalty on assessee without any supported reasons. It did not consider the contentions of assessee that the said transactions were inter-State sales. These sales transactions were effected by sellers who were registered on online portal of ‘Flipkart’ and all sales were inter-State sales on which tax had been paid by seller under the CST Act.

2)  The contention of department that the online portal could be seen as an intangible shop was legally flawed because it is well settled that the situs of a sale is wholly irrelevant to a determination of the issue of whether a sale is inter-State sale or not

3)  The department had imposed penalty on ‘Flipkart’ due to non-filing of returns and due to its failure to maintain true and correct accounts. However, there was no indication in notice as to why the ‘Flipkart’ was to be considered as a dealer and why said transaction was to be treated as local sales against inter-State sales.

4)   The department has proceeded against the assessee without first having ascertained whether these transactions would come under the coverage of Act. The matter must be first referred to the concerned Assessing Officers before invoking penal provisions since no tax can be levied except by authority of law – Flipkart Internet (P.) Ltd. vs. State of Kerala [2015] 62 387 

Land acquired under an agreement not to be held as compulsory acquisition under Sec. 194LA

The question of compulsory acquisition will arise only where the compensation cannot be determined by agreement. In other words when the compensation is based on an agreement between State Government and owner of the land, no more can we say that it is a compulsory acquisition.
The disputed issue is as under:
Whether acquisition of land under an agreement by Karnataka Industrial Area Development Board (a state Government Undertaking) with landowners under the Karnataka Industrial Areas Development Act, 1966 (‘KIA Act’) would be deemed as compulsory acquisition within the meaning of Sec.194LA?”
1)    Section 194LA applies only when there is a compulsory acquisition under law. Under compulsory acquisition, the seller has no option but to sell the land. He cannot even negotiate the price as same is fixed by statute itself.
2)    In the instant case, the land owners and a State Government Undertaking (i.e., assessee) entered into an agreement whereby they mutually agreed for the amount of compensation which was fixed in accordance with Section 29(2) of the KIA Act.
3)    The question of compulsory acquisition will arise only where the compensation cannot be determined by agreement. In other words when the compensation is based on an agreement between State Government and owner of the land, no more can we say that it is a compulsory acquisition.
4)    In the instant case, compensation was based on an agreement between State Government and owner of the land, and, therefore, it could not be said to be a case of compulsory acquisition. Thus, once the acquisition is not considered as compulsory, Sec.194LA of the IT Act will not be applicable.
5)    The matter was remanded back to AO for verification whether in all the cases payment was made under agreement only. Once it was found that the acquisition resulted through an agreement, it would not be considered as compulsory acquisition- Karnataka Industrial Area Development Board v. ITO [2015] 62 393 (Bangalore - Trib.)