Financial Accounting Notes

1. What is a Segment? A company may consist of a group of related products or services or a group of environments which is significantly different from other group of related products or services or a group different in terms of risk and rewards. 2. Types of Segment Business Segment: Company may consist of a group of related products or services which is significantly different from another group of related products or services in terms of risk and rewards. Geographical Segment: A company may consist of a group of related businesses which is significantly different from another group of related businesses in terms of environment or market and rewards. Risk and Rewards Factors of Business Segment: Nature of product or service Nature of production process Nature of distribution Types of customers Nature of regulatory environment Risk Rewards Risk and Rewards Factors of Geographical Segment: Political and Economical Conditions Special Risks Currency Risks Exchange Control Regulation (ECR) Nature of production process 3. Classification of Segments for Analysis Purposes Primary Segment: Comparatively higher level of rewards, detailed disclosure required. Secondary Segment: Comparatively lower level of rewards, comparatively less disclosure required. Note 1: What are Primary Segments & Secondary Segments Product + Location: 1 Product + 1 Location: As, X4 Multiple Products + 1 Location: Business (e.g., Mee Cheese, cake, bread) 1 Product + Multiple Locations: Tata Steel Multiple Products + Multiple Locations: Apple Some Location Based Segments: 1 Location: Primary Segment: Business Strategy 2 or 3 Locations: Primary Segment: Business Strategy + Location 4 or 5 Locations: Primary Segment: Location Risk: Primary Segment: Business Strategy + Location Secondary Segment: Location 4. What are reportable primary segments? A segment is called reportable if any one of the conditions is satisfied: (i) Para 27a of Accounting Standard-17: States that a segment is reportable if its total revenue (external + intersegmental) is 10% or more of total revenue of all segments. Then those segments are reportable. (ii) Para 27b States: If the total profit or loss of any segment is 10% or more of combined profit or loss of all segments in absolute terms, then that segment is reportable. (iii) Para 27c States: If the total assets of any segment are 10% or more from the total assets of all segments, then that segment is reportable. (iv) Para 28 States: Management may designate any segment as reportable even if it doesn't satisfy the above-mentioned criteria. (v) Para 29 requires: If the total external revenue of reportable segments identified as per para 27 & 28 is less than 75% of total enterprise revenue, additional segments should be identified as reportable till the limit of 75-10% is reached. AS 17: SEGMENT REPORTING: INDEX 1. What is segment? 2. Types of segment. 3. Classification of segment for Disclosure purpose. 4. What are reportable primary segments? 5. What are reportable secondary segments? 6. Disclosure Cost of asset - 200L Asset value - 200L Life - 5 years Asset has ended off in 25% of its useful life. Tax rate - 50%. Net profit before ASD: Year 1 2 3 4 5 BDT 200L 200L 200L 200L 200L Dep (200L) (200L) (200L) (200L) (200L) TNPST - - - - - rent tak - 100L 100L 100L 100L After law: BDT 200L 200L 200L 200L 200L Dept (40L) (40L) (40L) (40L) (40L) PBT 160L 160L 160L 160L 160L PAT 160L 160L 160L 160L 160L Notes: 1. Principle 2. Actual 3. Matching Concept 4. Market and fair view 5. Smart Calculate expense as per law. Expense as per law. Expense as per books. Difference. (x-x) Evaluate whether it is a permanent difference. If permanent difference goes to step no. 9. If difference is positive DTA. If difference is negative DTL. Note: In previous you are getting both DTA & DTL. In second step if you are getting both DTA & DTL. Positive difference (DTA) negative difference (DTL). In 1st year of DTA, the difference is getting reversed. Don't create DTA on DTA. Current tax will be calculated at current year's tax rate. Calculated at next year's tax rate. If tax rate changes then deferred tax balance will be calculated at current year's tax rate. Balance X (x% - y%) If lost your tax rate was 50 and current year's tax rate is 40. Permanent Difference. Temporary Difference Differences that arise in 1 year and reversed in subsequent years. Record DTA/DTL. 1) Tax - IC (Tax, fringe benefit, commission) Paid in year 4 - 10L Received in year 5. In previous year 4L. TD - 4L Tax - 10L Dep' as per law = 4L Dep' as per tax = 4L Tax rate = 30% Calculate DTA/DTL. Note: question relates to AS 17(2) - Arching for tax a loss. Dep' as per law = 4L Dep' as per tax = 4L Tax rate = 30% Permanent Diff (3L x 30%) = 90,000 Dep as per law = 4L Dep as per tax = 2L Tax rate (30%) = 30% Dep as per law = 4L Dep as per tax = 2L Timing difference = 2L DTA = (Timing diff x tax rate) = 2L x 30% = 60,000 Profit (law) = 10L (-) Dep (law) = 2L (+) Dep (tax) = 3.5L Total income = 9,20,000 Taxable expense = 9,20,000 Calculated tax = 9,20,000 x 30% = 2,76,000 Current tax = 9,20,000 x 50% = 4,60,000 (Adj. for DTA/DTL) = 4,60,000 - 60,000 = 4,00,000 Depreciation: Dep as per law = 3.5L Dep as per tax = 2.5L Timing diff = 1L DTL = 0.75 Cash expense as per law = 10,000 Cash expense as per books = 70,000 Permanent difference = 60,000 (20% of total tax) Current tax = 4,60,000 + DTL = 60,000 Total tax = 5,20,000 Profit (law) = 12L (-) Dep (law) = 7L (+) Dep (tax) = 15L Donation to put boost = 2L Total taxable income = 15L Calculate current tax, total tax, DTA, DTL. Tax rate = 35% Current tax = 6,00,000 x 35% = 2,10,000 Dep: Dep as per law = 2,10,000 Dep as per tax = 1,52,000 Timing diff = 58,000 DTL = 28 Set off: Cash in hand = 20 Goods = 10 Expense as per law = 2L Total = 32 Set off total = 32 Less current tax + DTL = 2,10,000 + 28 = 2,12,800 Profit (law) = 10L (-) Dep (law) = 5L (+) Dep (tax) = 10L (+) Int accrued but not paid = 2L Total income = 15L Calculate current tax, total tax, DTA, DTL. Current tax = 15L x 35% = 5.25L Dep as per law = 5L Dep as per tax = 4L Timing diff = 1L DTL = 1L Total tax = current tax + DTL = 5.25L + 1L = 6.25L Income tax expense: To Cash A/c Dr. 2,12,800 (Income tax expense) To Deferred tax A/c Cr. 2,12,800 P & L A/c to Income tax expense A/c Cr. 15L Profit (law) = 10L (-) Dep (law) = 5L (+) Dep (tax) = 10L (+) Int accrued but not paid = 2L Total income = 15L Calculate current tax, total tax, DTA, DTL. Current tax = 15L x 35% = 5.25L