ACCOUNTING STANDARDS

(By)

.

AS–1

DISCLOSURE OF ACCOUNTING POLICIES

What are Notes to Accounts?

Notes to accounts are the explanation of the management about the items in the financial statements

What are Accounting Policies

Specific accounting principles and the method applying those principles adopted by the enterprises in preparation and presentation of the financial statements

Examples of Accounting Policies

Methods of deprecationValuation of inventoriesRevenue recognition Amortization

Need for disclosure of Accounting policies

For proper and better understanding of financial statement.

All significant accounting policies should be disclosed at one place.

Fundamental Accounting Assumptions

Going Concern

Consistency

Accrual

Assumption as regards fundamental accounting assumption

Selection of Accounting Policies

Prudence

Substance over form

Materiality

Change in Accounting Policies

Adoption of different accounting policies is required by statuteFor compliance with accounting standardIt is considered that change would result in more appropriate presentation of financial statement

AS–5NET PROFIT OR LOSS FOR THE PERIOD, PRIOR

PERIOD ITEMS AND CHANGE IN

ACCOUNTING POLICIES

Objective

The objective of this accounting standard prescribing the criteria for certain items in the profit and loss account so that comparability of the financial statement can be enhanced

Components of net profit

• Profit or loss from ordinary activities

• Extra-ordinary items

Ordinary activities are defined as any activities, which are undertaken by an enterprise as part of its business and incidental to main business

Profit/loss from ordinary activities

When items of income and expenditure from ordinary activities are of such size and nature that their disclosure is relevant to explain the performance of the enterprises for the period

These items are not “Extra-ordinary items”• The write down of inventories

• Restructuring cost or reversal of provision

• Profit or loss on disposal of fixed assets

These items are not “Extra-ordinary items”• Profit or loss on disposal of long-term

investment

• Litigation settlements

• Reversal of provisions

• Legislative charge having long-term retrospective application

Extra-ordinary items

Extraordinary items are income or expenses that arise from transactions that are clearly distinct from ordinary activities

Example Extra-ordinary items

• Loss due to earthquakes

• Attachment of property

• Govt. grants becoming refundable

• Govt. grants for giving immediate financial support with no further cost

Example Extra-ordinary items

• Govt. grant receivable as compensation for expenses or losses incurred in previous accounting period.

Prior Period Items

Prior period items are income or expense, which arise in current period as a result of error or omission in the preparation of financial statement of one or more prior periods

Disclosure of Prior Period Items

Should be separately disclosed in the statement of profit loss in manner that their impact on current profit or loss an be perceived

Examples of Prior Period Items• Error in calculation in providing

expenditure or income

• Omission to account for income or expenditure

• Non-provision of travelling expenses

Examples of Prior Period Items• Non-provision for salary

• Applying incorrect rate of depreciation

• Treating operating lease as finance lease

• Capitalisation f borrowing cost on working capital

Change in Accounting Estimate• Estimation of provision of sundry

debtors

• Estimation of provision of any liabilities

• Computing income tax provision

• Estimating the useful life of fixed assets

Effect of Change in Accounting Estimate

• If an estimate pertains to ordinary activities classified as ordinary activities

• If estimates pertains to extraordinary items classified as extraordinary

AS – 6

DEPRECIATION ACCOUNTING

Depreciation is loss of value of an asset

It is a measure of wearing out, consumption or other loss of value of depreciable asset arising from use and passes of time

Depreciable Assets

• Are expected to be used for more than one accounting period

• Have a limited useful life• Are held for use in production of

goods & services

Applicability of ASExcept the followings:• Forests, Plantations• Wasting assets, Minerals & Natural

Gas• Expenditure on research &

development• Goodwill• Live Stock – Cattle, Animal

husbandry

Calculation of depreciation • Historical cost or other amount in

place of historical cost

• Estimate useful life of depreciable assets

• Estimated residual/scrap value

Cost of Depreciable Asset• Increase/decrease in long-term liability

• Price adjustments

• Changes in duties

• Revaluation of depreciable assets

• Other similar reasons

Estimated useful life of Depreciable Asset• Pre-determined by legal or

contractual limits

• Depends upon the number of shifts for which the asset is to be used

• Repair & maintenance policy

• Other similar reasons

Estimated useful life of Depreciable Asset

• Technological obsolescence

• Innovation/improvements

• Legal or other restrictions

Estimated residual /scrap value of depreciable asset

It is estimated value of depreciable assets at the end of its useful life

Depreciable amount Historical Cost

Less

Residual Value

Method of Depreciation

• Straight Line Method (SLM)

• Written Down Value Method (WDVM)

Selection of appropriate method • Type of assets

• Nature of the use of such asset

• Circumstances prevailing in the business

A combination of more than one method may be used

Change in depreciation method • For compliance of statute

• For compliance of accounting standards

• For more appropriate presentation of the financial statement

Procedure to be followed in case of change in depreciation method

Change of depreciation method should be treated as change in accounting policy and its effect should be quantified and disclosed

Change in estimated useful life

Should be allocated over the revised remaining useful life of assets

Change in historical cost

Provided prospectively over the remaining useful life of the assets

Change in historical cost due to revaluation

Estimate of the remaining useful lives of the such assets

Depreciation charge on addition/extension to an existing asset

• Addition/extension is an integral part of existing asset

Remaining useful life of the asset

Depreciation charge on addition/extension to an existing asset

• Addition/extension is not an integral part of existing assets Estimated useful life of

additional assets

Depreciable asset is disposed of, discarded, demolished or destroyed

Disclosure • Total cost of each class of assets

• Total depreciation

• Accumulated depreciation

• Depreciation method

Disclosure • Depreciation rate, useful life of assets,

if they are different than the rate specified in governing statute

• A change in method of depreciation

• Effect of the revaluation

Significant differences with IAS/IFRS & US GAAP

• AS-6 allows the depreciation on revalued value however, US GAAP prohibits revaluation. IAS-16 allows fair value accounting.

Significant differences with IAS/IFRS & US GAAP• Change in depreciation method under

AS-16 & US GAAP is treated as a change in accounting policy; whereas IAS-16, change in estimate.

AS–10ACCOUNTING FOR

FIXED ASSETS

Fixed Assets

• Held with intention of being used for the purpose of producing or providing goods and services

• Not held for sale in the normal course of business

• Expected to be used for more than one accounting period

Applicability

Not applicable to :-

• Forests, plantations and similar regenerative natural resources

• Wasting assets like, minerals, oils & natural gas.

• Expenditure on real estate development

• Live stock

Fixed assets in financial statements

Historical cost- Cost of acquired fixed assets.

• Purchase price• Import duties & other non-refundable

taxes.• Any directly attributable cost of

bringing the asset to the working condition for its intended use.

Historical cost of self-constructed fixed assets

• All cost which are directly related to the specific asset

• All costs that are attributable to the construction activity should be allocated to the specific assets

• An internal profit included in the cost should be eliminated

Cost of asset acquired in exchange of existing assets

• Fixed assets exchanged not similar

• Fixed assets exchanged are similar

• Fixed assets acquired in exchange of share or other securities

- When the fixed assets are revalued these assets are shown at revalued prices in financial statement.

- An entire class of assets should be revalued or the selection of assets for revaluation should be made on a systematic basis.

Revalued price

Method of presentation of revalued asset in financial statement

• By re-stating the gross book value and accumulated depreciation

• By re-stating net block value adding there in the net increase on account of revaluation

Maximum amount of revaluation

• Revaluation of fixed assets should be restricted to the net recoverable amount

Accounting treatment of revaluation

• First time revaluation (upward)

• First time revaluation (downward)

Accounting treatment of revaluation

• First time revaluation (downward) subsequent revaluation (upwards)

• First revaluation (upward) subsequent revaluation (downward)

Improvement & repairs • Expected future benefit from fixed

assets do nt change

• Expected future benefits from fixed asset will increase beyond the previously assessed standard performance

Addition or extension of capital nature to an existing asset

• If integral part

• If separate identity

Retirement & disposal

• Deleted from the financial statement

• Gains or losses arising on disposal

Fixed assets are retired from active use and held for disposal• Stated at the lower of net book value

and net realisable value

• Expected loss is recognised immediately

• Separately shown in financial statement

Disposal previously revalued fixed assets

• If there is profit, credited to profit & loss a/c

• If there is loss, adjusted against the balance of revaluation reserve

Disclosure• Gross net book values of fixed assets

• Expenditure incurred on account of fixed assets

• Revalued amount substituted for historical cost of fixed assets

Review of balance in CENVAT credit receivable accounts

Treatment of CENVAT credit on capital goods (Fixed assets)

Significant difference with IFRS/IAS-16 & US GAAP

• IFRS/IAS-16 also allow revaluation

• US GAAP does not allow revaluation