Original. Duplicate. Previous. AS(s)

First Published in HBL
V Pattabhi Ram

Wafers wasn’t too sure whether she should feel excited or appalled. Taxation made sound economic sense, but issues such as amendments, case laws and judgments stumped her. Why can’t they keep the laws simple she wondered? 300 sections under the Income Tax Act, not counting the A, the AA, the BB (i) and their ilk was quite a mouthful. These helped only the tax practioners, she had once argued exasperatedly. Corporate law baffled her no end. Some of those cases in mercantile law were cute but the Companies Act was getting bulkier by the day. It looked as though these were meant to help only the lawyers. As a nation with a billion plus population, we seem to believe in “more, the merrier” she told herself.

Now here was a new trouble. The one subject which she had found to her taste, Accountancy, was threatening to go the tax way. She had admired Luca Paciolli. “Every debit must have a corresponding credit” was the inspiration for Newton’s “every action has an equal and opposite reaction” her teacher had told in the opening session in class XI. And ever since she had fallen in love with Accountancy. At her CA classes her professor had remarked, “accounting jobs are going up in smoke, since technology is taking away most of the accountants’ traditional role”. He had added, “The relevant accounting jobs today are those that involve specialization in disclosure.” It was her first brush with Accounting Standards. It hadn’t dampened her spirits. He had talked about how the Institute was working overtime. Between 1979 and 1995, 15 standards had been put in place. Then between 2000 and 2004, 14 standards had sprung up. As her friend had pointed out, you needed a standard to understand the standards! More paragraphs. More illustrations. More confusion.

Titanic, the multi-million dollar company that she audited was the source of her new trouble. The company had spent a huge chunk of money in increasing the production capabilities of its plant and machinery. Five years ago, the machinery had been bought to produce 100 K units of the finished products. In the first two years, it had achieved 90 K units of production. Across the next three years, its productivity dropped and it could achieve only 70 K units per annum. The new expenditure, R & D confirmed, would increase the production to 80 K units per annum. The company wanted to capitalize the spending while Wafers trusted it was revenue in nature.

Titanic argued for capitalization saying the asset’s productivity had increased. Wafers had no trouble with the logic. But she had trouble accepting the numbers. She contended that productivity had to increase beyond 100 K units to merit capitalization. She called it the installed capacity. Coming as it did from the manufacturer, Wafers felt, it was the more reliable number. Titanic held that that the benchmark was the 70 K units that it had been achieving in the past. Wafers called it “Actual production”. The CAO (Chief Accounts Officer) argued that the so-called installed capacity could be biased. He told her the story of how he had bought a car that had a manufacturer specification of 18 km per litre for fuel efficiency but which actually gave him only 12 km per litre on the road. Peeved, he had sent the car back. The company had it tested and confirmed that it’s 18 km per litre was correct. He had asked them “how”. And the automobile company told him that it had plonked the car atop a pole, a driver sat inside accelerating the car; an engineer clocked the revolutions per second the wheel made and from that the mileage inferred! No change of gears, no traffic, all laboratory tested. The CAO’s take was simple. The 100K was lab tested, the manufacturer wasn’t an unbiased judge and so that number could not be taken as the base.

Even Wafers smiled. She was willing to see his point of view. But felt that the benchmark figure should atleast be the production level of 90 K achieved in the first two years. This time the CAO threw the rulebook (read AS) at her saying that AS 10 suggested that, “if the expenditure increased future benefits from the existing asset beyond its “previously” assessed level of performance, then the expenditure is to be capitalized”. “Previously” would naturally mean “immediate previous” he argued. Wafers wasn’t too keen on verbal gymnastics. She only had two viewpoints. One, if the CAO was right, then every piece of servicing leading to an increase in the output by a unit or two, would call for capitalization. And two that what was meant by previously assessed was only the originally assessed performance.

The CAO again threw the rulebook at her, inviting her to take a look at AS 26 on intangibles. Subsequent expenditure on an intangible asset can be capitalized only if it will enable the asset to generate future economic benefits in excess of its “originally” assessed standard of performance. Talking about review of amortization the standard further says, “useful life can be increased due to improvement over “originally” assessed standard of performance” on account of value additions. The use of the word “previously” in one standard and “originally” in another is to indicate that these carried different meanings pointed out the CAO. Stumped, Wafers argued, that one cannot interpret every word literally and that we must appreciate the spirit of the standard. The CAO smiled. “Wafers”, he said, “spirit, like beauty, lies in the eye of the beholder. And that under the circumstances it made a lot of sense to interpret the letter of the law because to understand the spirit you need to go back to the guy who drafted the standard”!

Wafers was beginning to feel robbed by this endless hairsplitting. She was reminded of the natty story her tax professor had once told her. A client of his wanted to claim the fee that he paid his barber as business expenditure. When it was explained to the client that this was an expenditure of a personal nature and such expenses were not tax deductible he pointed out that since he spent 50% of his time at office 50% of the growth arose in the course of business and hence atleast 50% of the fee payable to the barber was tax deductible.

She spoke to Doc, her senior audit manager, insisting that the audit report has to be a “qualified report”. Doc asked her to tell the CAO to get a legal opinion that could support the CAO’s view. An accounting firm seeking a legal view on an accounting matter! What was happening wondered Wafers.


About Pattabhi Ram

A chartered accountant by profession, a writer by passion and a teacher by accidental choice.
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