accounting standards[1]

7/31/2019 Accounting Standards[1]

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Accounting Standards

Accounting standards are written documents issued by expert accounting bodies

( In India The Institute of Chartered Accountants of India ) or by Government or

other regulatory bodies covering the following aspects

a. Recognition

b. Measurement

c. Treatment

d. Presentation and

e. Disclosure

Important accounting standards are ------

AS 1- This standard deals with disclosure of accounting policies. Accounting

policies refer to specific accounting principles and the method of applying them in

the preparation of financial statements.

At the time of preparation of financial statements , there are many areas which

have more than one method of accounting treatment such as depreciation,

treatment of expenditure during construction, translation of foreign assets,

valuation of inventories, valuation of investments, treatment of retirement

benefits, valuation of fixed assets, treatment of contingent liabilities, etc.

Therefore, it is essential that the enterprise disclose the method adopted in each

case so that the a proper analysis is made possible. Also, whenever, the enterprisedecides to adopt a different method than what was followed earlier, the enterprise

is required to disclose the cahnage in the method as also the impact thereof.

AS 2 This standard deals with the method of computing cost of inventories/

stock. The inventories should be valued at lower of the cost or net realisable value.

Hence, major points for valuation of inventories are,

a. Determination of cost cost of purchase, cost of conversion, other costs like

transport cost

b. Net realisable value- estimated selling price minus estimated cost

c. Comparison of cost and net realisable value

AS 3 - This deals with cash flow statements. This statement assesses the ability of

the enterprise to generate cash and utilise them. This is one of the tools to assess

the liquidity of the enterprise.

The cash flow statement explains cash movements under the following three

heads

a. Cash flow from operating activities

b. Cash flow from investing activities


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c. Cash flow from financing activities

Operating activities--- They are principal revenue producing activities of the

enterprise Examples are,

a. Cash receipts from sale proceeds

b. Receipts from royalties

c. Cash payments to suppliers

d. Cash payments to employees

Investment activities --- The activities of acquisition and disposal of long term

assets and investments are investing activities. Examples are

a. Cash payments to acquire fixed assets

b. Cash receipts from sale of fixed assets

c. Cash payments to acquire shares, debt instruments

d. Cash receipts from sale of shares, debt paper

Financing activities these are the activities which result in change in size and

composition of owners capital and borrowings it includes cash flow from

a. Sale of shares

b. Buy back of shares

c. Redemption of preference shares

d. Issue/ redemption of debentures

e. Long term loan payment

f. Dividend / interest paid

AS 6 - Depreciation accounting --This AS deals with charging and computation of

depreciation. The amount of depreciation is calculated based on the historical

cost, useful life of the asset,and estimated residual value. There are two methodsof depreciation

a. Straight line method

b. Written down value

A combination of methods can also be used.

AS 11 - This AS deals with translation of foreign transactions and foreign assets.

All the transactions , for the purpose of this AS is classified into three categories


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a. Category 1 - foreign currency transactions, which include buying and

selling of goods, lending and borrowing in foreign currencies, acquisition/

disposal of foreign assets

b. Category 2 - foreign operations can be in the form of joint ventures,

foreign branch, foreign subsidiary. This is further classified into integraloperations and non- integral operations. If the operations are carried out

with the support of domestic company, it is acse of integral operations and

if the operations are carried out without dependence of domestic

company , it is a case of non integral operations. In the case of integral

operations,, the translation is carried out at the rates prevailing at the time

of transactions and in the case of non integral operations, the balance sheet

items are translated at the rates prevailing on the date of Balance Sheet

and other items at the rate the transactions take place.

AS 15 This deals with accounting for retirement benefits. Examples of retirement

benefits are

a. Provident fund

b. Pension

c. Gratuity

d. Leave encashment

e. Post retirement health benefits

The retirement benefits are of two types

a. Defined contribution schemeamount to be paid under the scheme is

determined by the contribution made to the fund , example, provident fund

b. Defined benefitsamount to be paid is detrmined based on the employees

salry, length of service. Accrued liability under this is decided through

actuarial valuation. Examples are pension, gratuity, leave encashment

Liability under defined contribution is charged to profit and loss account and the

liability under defined benefits are determined by actuarial valuation and

appropriate amount caheged to profit and loss account through a provision of

accruing liability.

AS 22 Accounting for taxes-- This AS deals with accounting for tax. For the

purpose, tax expenses consist of two components

a. Current tax

b. Deferred tax

Current tax is the amount of tax payable in respect of taxable income for a period.


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Deferred tax is the tax effect of timimng difference The difference between the tax

expenses ( calculated on accrual basis ) and the current tax liability to be paid for

the particular period is deferred tax ( asset/ liability ) Hence, tax expenses =

current tax + deferred tax

The timing difference arises on account of the following

a. Difference due to rate of depreciation as prescribed in the Income Tax Act

and the accounting depreciation

b. Difference due to methods of depreciation ( Income tax permits only

reducing balance method )

c. Expenses debited in P& L account but allowed by Tax authorities

subsequently.

The permenet expenses are those which remain permanent on account of dis-

allowance as per Income Tax .Deferred tax arises only if there is a timing

difference. Accordingly , an enterprise may pay more tax in a year which is termed

as deferred tax asset and may pay less tax which is termed as deferred tax

liability.

AS 29 This AS deals with provisions, contingent liabilities and contingent assets.

Provision is a liability which can be measured only by using a substantial degree

of estimation, for example, provision for bad and doubtful debts.

A liability is a present obligation of the enterprise from past events the settlement

of which is expected to result in an out flow from the enterprise and an obligation

is a present obligation if based on evidence available, its existence on the balance

sheet date is considered probable ( more likely than not )

A contingent liability is a possible obligation that arises from past event . To be

called a contingent liability , the following conditions must be satisfied

a. Possible obligation as a result of past event

b. Existence of which will be confirmed only by occurrenceor non- occurrence of

future event

c. Future event not wholly within the control of the enterprise.

A contingent asset is a possible asset that arises from the past events the

existence of which will be confirmed only by the occurrence or non occurrence of

one or more uncertain future events not wholly within the control of the

enterprise . For example an enterprise has filed a damages case of Rs 2 crores

against its supplier of machinery for defective machinery supplied. If the chances

of the case winning is probable, it is a contingent asset.

accounting standards[1]

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