Category Archives: accounting standards

Amendments to the Corporate Income Tax (CIT) Law: Social Responsibility Tax Relief Explained



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As part of its ongoing efforts to encourage corporate social responsibility (CSR), the Mongolian government has introduced significant amendments to the Corporate Income Tax (CIT) Law. Effective from August 30, 2024, these provisions allow businesses to claim tax relief for specific activities that benefit society, the environment, and public welfare. Here’s a breakdown of the new tax relief opportunities available under section 22.9 of the law.

Key Highlights of the Tax Relief Provisions

Under these amendments, businesses can deduct certain expenses from their taxable income as part of their social responsibility initiatives. These expenses must align with the law’s stipulations and are subject to the following conditions:

  • The expenses must be unrelated to the taxpayer’s income-generating operations.
  • Deductions include investments in depreciable fixed assets, financial support for unrelated entities, and charitable contributions.
  • The total deduction is capped at 1% of the taxable income for the relevant tax year.

Activities Eligible for Tax Relief

To qualify for this tax benefit, businesses must invest in one or more of the following activities:

  1. Environmental Conservation
    • Initiatives aimed at reducing pollution, restoring ecosystems, and protecting natural resources.
  2. Care for Vulnerable Groups
    • Supporting senior citizens, individuals with disabilities, and children through care facilities and programs.
  3. Cultural Heritage and the Arts
    • Projects that protect and restore cultural sites, or provide support to museums, libraries, and artistic endeavors.
  4. Public Infrastructure Development
    • Funding and maintaining essential infrastructure such as parks, roads, and public transportation systems.
  5. Sports Development
    • Building and maintaining sports facilities or supporting athletes participating in Olympic-level competitions.
  6. Education and Scholarships
    • Providing scholarships for students and funding educational institutions to enhance learning opportunities.
  7. Research and Development
    • Supporting innovation through grants to universities and scientific organizations.

To ensure transparency and alignment with the law, businesses must adhere to reporting standards set by relevant government ministries. These ministries will also establish guidelines to verify compliance with the eligibility criteria for tax relief.

The amendments are applicable from August 30, 2024, and will remain in effect until January 1, 2035. Businesses planning to take advantage of this tax relief must carefully document and report eligible expenses to qualify.

Conclusion

The revised CIT law provides a dual benefit—encouraging businesses to engage in socially responsible activities while easing their tax burden. By aligning corporate operations with these initiatives, companies can contribute to the broader development of society, culture, and the environment.

If you’re a business owner or finance professional, now is the time to explore how your organization can benefit from these provisions while making a positive impact.

“How to Account for Free Inventory Under IAS 2: A Step-by-Step Guide”



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When it comes to receiving free inventory, the accounting treatment can be tricky. Whether you’re receiving assets from a government body, suppliers, or shareholders, understanding the correct International Accounting Standard (IAS) to apply is crucial. This guide will explain how to record free inventory, particularly under IAS 2, and how other IAS rules, such as IAS 20 for government grants, may apply.

Free Inventory: Different Sources, Different Accounting

  1. Free Assets from the Government: If your company receives assets as part of a government grant, these are accounted for under IAS 20 (Government Grants and Government Assistance), not IAS 2. This applies to grants from any governmental entity, whether local, national, or international bodies like the IMF, World Bank, or UN. The assets received must be disclosed according to the specific conditions of the grant, and the valuation process must adhere to IAS 20’s rules.
  2. Free Assets from a Supplier: When free assets are received from a supplier, such as spare parts in a purchase contract, they are considered a form of discount under IAS 16 (Property, Plant, and Equipment). The fair value of the free assets must be deducted from the total purchase price, effectively lowering the cost of the purchased inventory.
  3. Free Assets from Shareholders: Shareholders may transfer assets like machinery or land to the company for free. In this case, IAS 2 and IAS 16 require that these assets be recognized at fair value. However, these contributions should not be recorded as income. Instead, they are reflected as capital contributions under the equity section of the balance sheet.

Practical Application

  • Government Grants: Recorded under IAS 20, and recognized as either deferred income or deducted from the carrying amount of the related asset.
  • Supplier Discounts: Recorded as part of the purchase cost reduction, adhering to IAS 2 or IAS 16.
  • Shareholder Contributions: Recognized as capital contributions, not income, and added to the fixed asset account at fair value.

Key Journal Entries for Free Inventory

  • Debit: Fixed assets (Fair value of the asset)
  • Credit: Equity/Other income (Capital contribution)

This ensures the correct accounting treatment, aligning with IAS standards and providing accurate financial reporting.

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When Should You Start Calculating Depreciation? The Crucial Timing You Can’t Afford to Miss



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Many companies face the dilemma of when to begin depreciating valuable assets, especially when they remain unused for months. The key question: Should you start calculating depreciation as soon as an asset is purchased, or only when it begins generating revenue? The answer lies in IAS 16 Property, Plant, and Equipment.

What Does IAS 16 Say?

Paragraph 55 of IAS 16 states that depreciation begins when an asset is “ready for use”—not when it’s actively generating revenue. This means that as soon as the asset is in a usable condition, depreciation should be calculated, regardless of whether it’s currently being used in operations.

Common Violation: Depreciating “In Use”

A frequent mistake companies make is delaying depreciation until the asset is actively being used. This is a violation of IFRS standards. Depreciation needs to start when the asset is ready for its intended purpose, even if it remains idle for some time.

Example: Special Purpose Equipment

Imagine your company purchased new equipment on February 1, 2020, to manufacture a new product. The equipment requires installation and testing, which is completed by April 2020. However, production of the new product only begins in June 2020.

Here’s the timeline:

  • The equipment is ready for use in April 2020 after installation and testing are complete.
  • Production doesn’t start until June 2020, but under IFRS, depreciation should begin in April 2020 when the equipment is fully operational, not when it’s actively used.

Challenges: Depreciation Without Revenue

One issue with starting depreciation before an asset generates income is that it creates an expense on your financial statements without corresponding revenue. This appears to conflict with the coherence principle, which links expenses to revenue generation.

Solution: Imposition on Units of Manufactured Products

A practical approach to this issue is the “units of production” method. Under this method, depreciation is tied to the output of the equipment. If no products are being manufactured, depreciation costs do not accrue for that period. This aligns depreciation expenses more closely with revenue generation.

Key Takeaways:

  • Depreciation should start when the asset is ready for use, not when it begins generating income.
  • Starting depreciation too late can lead to IFRS non-compliance.
  • Consider the “units of production” method to better align depreciation with asset output.

Understanding and applying IAS 16 properly can save your business from compliance issues and ensure accurate financial reporting.

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