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EQUITY METHOD OF ACCOUNTING - SIDE EFFECTS PART II - kamranACA - 03-09-2007
Dears,
I hope I am not creating mess in this forum. Despite my expectations, I feel that a very little number of qualified people visit this forum on regular basis. If, we have to improve our professional knowledge through this forum, we must contribute something to our fellows through positive discussion and for this purpose, I request the qualified guys and the respectable students, to allocate some of their time to this forum. This will off course contribute so much for the enhancement of professional knowldge and development.
I am pleased to highlight another issue attached to EQUITY METHOD OF ACCOUNTING for investments in associates, suggested by IAS 28. I have already placed another similar issue for members' discussion pertaining to workers' participation fund act, 1968. The current issue is related to workers' welfare fund ordinance, 1971.
Previously, Worekers' Welfare Fund (WWF) was charged @ 2 percent of taxabale income on those companies that were filing income tax returns under Normal Tax Regime (NTR). The companies filing statements under section 115 (4) of Income Tax Ordinance, 2001, under Presumptive Tax Regime (PTR), were not subject to WWF. Members may know that WWF has been correlated with taxation and was always determined by taxation authorities at the time of finalization of assessments becoz taxable income was finalized at the time of finalization of assessments.
The Feberal Government of Pakistan, through Budget/Finance Act for the year 2006-2007, has recently changed some provisions of WORKERS' WELFARE FUND, 1971. From this year the companies/organizations that were being taxed under Presumptive Tax Regime (PTR) have also been brought under the ambit of WORKERS' WELFARE FUND, 1971. The amendment states that WWF will be charged @ 2 percent to such companies on their total income and total income means
a) Profit as per accounts before taxation; or
b) 4 percent of total receipts against sales as per statement filed under section 115 (4) of Income tax Ordinance, 2001,
WHICHEVER IS HIGHER.
In case, if (a) is higher than the (b), WWF is required to be provided in the accounts at 2 percent of the profit before taxation as per accounts.
Finance Act. 2006 did not provide any exemption/relaxation to above rule and is silent about income exempt from tax or notional incomes that are included in such profit before taxation as per accounts. I understand that WWF is not a tax but it was always based on taxable income. Even if we ignore the inclusion of exempt incomes in accounting profit, it would be extremely difficult to ignore the PROFIT FROM ASSOCIATES UNDER EQUITY METHOD accounted for in Profit and Loss account by a company under IAS 28 becoz it is normally a huge figure and has been seen to range from 35 percent to 50 percent of total net profit in many cases.
On the other hand, if such companies provide/pay WWF on profit before taxation as per accounts in such cases, it would lead to double charging of WWF on same profit. Once by associate who earned it and again by associates who accounted for the share in such profit under equity method. Becoz, the associates of whom the profit share has been recognised by a company have also provided/paid WWF on their accounting profit or 4% of receipts against sales, whichever is higher.
Now, as a fellow, in a previous reply to me said that standards should not be relaxed, and I am of the same opinion as well, becoz it is the era of cross border dealing of listed securities, what should be the remedy to such problems.
What should be done by the affected companies. Should they reverse the Profit from Associates from the accounting profit and include any dividend received from such associates to determine the accounting profit for calculating WWF. Law is silent.
Should we always keep on negotiating, explaining the situations, clarifying the matters, filing the appeals, incurring heavy expenses of legal consultancy as recommended by some friends? Should we always pay the cost of ignorance and professional illiteracy of our governance people? Do their minds not work? Why they dont analyse pros and cons while they have very big claims? Why law makers are so JAAHAL that every one has to clarify them the situations and revisions come when so much is destroyed?
I hope I will keep on pointing out conflicts of IASs and local laws/practices affecting the companies financially / adversly. At the same time I dont have any claim of perfection.
I seek comments from members.
Best regards,
KAMRAN.
- shakilicma76 - 01-22-2010
DEAR ALL,
I NEED EQUITY METHOD OF ACCOUNTING EXAMPLES
THANKS
- Dard - 01-22-2010
I am an ACCA student. So far i have not come across Workers Welfare fund and the other fund that you mentioned in a similar post. Can you please enlighten me on WWF so that i can also put foward my arguments?
- kamranACA - 01-22-2010
Dear
To understand this issue, you need to study the relevant laws that are Pakistan specific. These are
- WORKERS' WELFARE FUND ACT, 1971; and
- WORKERS' PROFITS PARTICIPATION ACT, 1968
Once you have gone through these acts; and related rules (in case of WPPF), you would be able to understand the issue.
People now practically are ignoring Share of Profit in Associates while determining these charges to their net profits. They are deducting Share of Profit from Associates from net profit and addding Dividends received from such assoociates for ariving at the figure of net profit on which such charges have to be calculated.
Regards,
KAMRAN.