ACCOUNTING STANDARDS

D.S. RAWAT

FCA

Partner

Bansal & Co.

Chartered Accountants

INTRODUCTION

TO

ACCOUNTING STANDARDS

What are Accounting Standards

AS are written policy documents

issued by expert accounting body or by government or other regulatories

body

What these covers

Recognition

Measurements

Treatment

Presentation

Disclosure

of accounting transaction in the

financial statements

Objective

Is to standardized the diverse accounting polices and practices

with a view to eliminate to the extent possible the non-comparability of financial statements

Add the reliability to the financial statements

Section 217(2AA) (i) of Companies Act, 1956 states that Directors responsibility statement should include that in the preparation of the annual account & applicable accounting standards had been followed along with proper explanations relating to material departure

Applicability of AS w.e.f. 01.04.2004 (ICAI classification)

Applicability to -

Level I Enterprises

Level II Enterprises

Level III Enterprises

Accounting Standards Rules (2006)

Notified on 07.12.2006

Two types of Companies

- SMC & Non- SMC

Some relaxation to SMC

All the AS & ASI notified verbatim

ASI-11, 12, 27 & 29 not notified

Exchange difference with have to be

adjusted in P&L in case of asset

linked exchange difference

AS-18 applicable to all companies

AS-20 applicable to all companies

Global Accounting

Need for Harmonization &

Standardization

International Accounting Standards

(IAS/IFRS)

US GAAP

International Accounting Standards

(IAS/IFRS)

41 IAS (Effectively 29)

8 IFRS

Comparision with Indian Accounting

Standards

29 AS

Guidance notes

2 Exposure drafts

US GAAP Hierarchy

Level A

FASB Statements

FASB Interpretations

APB Opinions

Accounting Research Bulletin

US GAAP Hierarchy

Level B

FASB Technical Bulletins

AICPA Industry Audit & Accounting

Guides

AICPA Statements of Position

US GAAP Hierarchy

Level C

AICPA Practice Bulletins

Emerging Issues Task Force

Consensus Positions

AS 1

DISCLOSURE OF ACCOUNTING

POLICIES

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 deprecation

Valuation of inventories

Revenue recognition

Amortization

What are Notes to Accounts?

Notes to accounts are the explanation

of the management about the items in

the financial statements

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 statute

For compliance with accounting standard

It is considered that change would result in more appropriate presentation of financial statement

AS 2

Valuation

of

Inventories

Objective

To formulate the method of

computation of cost of inventories

Definition

Held for sale in the ordinary course of

business (finished Goods)

In the process of production (Raw-

material & WIP)

Material or supplies to be consumed in

production or rendering of services

Spares - Regular

Not applicable to

WIP under construction contract

WIP for service provider

Financial instrument held in stock

in trade.

inventory like, livestock,

agricultural and forest product,

mineral oil, ore and gases.

Measurement of inventories

Inventories should be valued at lower

of cost and net realisation value.

Determination of cost of inventories

Determination of net realisable

value of inventories

Comparison between the cost and net

realisable value

What is Cost of Inventories Cost of purchase

Cost of conversion

Other costs (incurred in bringing the

inventories to their present location

and condition)

Cost of Purchase

Purchase price

Duties and taxes

Fright inward

Other expenditures directly attributable to the

acquisition

Less:

Duties and taxes recoverable by enterprises

Trade discount

Duty drawback

Other similar items

Cost of conversion

Direct labour, direct material, direct

expenses

Systematic allocation of fixed and

variable production overheads

Inclusion of excise duty in valuation

of finished goods.

Exclusion from cost Abnormal Cost

Interest cost subject to AS-16

Storage cost

Administrative overhead

Selling & distribution cost

Cost Formula

Specific identification method

Specific identification method not

applicable

* FIFO

* Weighted average

Cost of inventories in certain conditions

Standard cost

Retails method

What is net realisable value

Estimated selling price

Less:

Estimated cost of completion

Or

Estimated cost necessary to made

Estimation net realisable value of raw material

If finished production in which raw

material and supplies used is sold at

cost or above cost

If finished product in which raw

material and supplies used is sold

below cost Replacement price

Disclosure in financial Statements

Accounting policy adopted in

measuring inventories

Cost formula used

Classification of inventories like,

finished goods, WIP, raw material,

spare parts and its carrying amount.

AS-3

CASH FLOW STATEMENT

Need and Objective

Cash flow statement is additional

information to user of financial

statement

Applicability

This AS applies to the following

enterprises :-

Which has turnover more than Rs.

50 crores in a financial year

Listed companies cash flow

statement of listed companies shall

be presented only under the

indirect method as prescribed in

AS-3

Banks, Financial institution &

Insurance companies.

All commercial enterprises having

borrowings including public

deposits in excess of Rs. 10 crores.

Holding & subsidiaries enterprises

of any of the above.

Features

Cash flow from operating

activities

Cash flow from investing activities

Cash flow from financing

activities

Cash Equivalents

It consists of short-term highly liquid

investments

Operating Activities

Cash receipts from the sale of

goods & the rendering of services

Cash receipts from royalties, Fee.

Commission & other revenue

Operating Activities

Cash payments to supplier for

goods & services

Cash payments to & on behalf of

employees

Investment Activities

Cash payments to acquire fixed

assets

Disposal of fixed assets

Acquire share, warrants or debt

instruments

Disposal of shares, warrants or

debt instruments

Financing Activities

Sale of share

Buyback of shares

Redemption of preference shares

Financing Activities

Issue / redemption of debentures

Long-term loan/payment thereof

Dividend/interest paid

Cash flow from operating activities Direct Method In this method,

gross receipts & gross payment of

cash are disclosed.

Indirect Method In this method,

profit & loss a/c is adjusted for the

effects of transaction of non- cash

nature.

Interest Received From investment

From short-term investment classified,

as cash equivalents should be

considered as cash inflows from

operating activities

On trade advance & operating

receivable should be in operating

activities

Interest Paid

On loans/ debts is financing activities

On working capital loan & any other

loan taken to finance operating

activities is in operating activities

Dividend Received

For financial enterprises in operating

activities

For other than financial enterprises

in investing activities

Dividend Paid

Always classified as financing activities

Cash flow from foreign currency transactions

The effect of change in exchange rate in

cash and cash equivalents held in

foreign currency

Extra-ordinary items Separately disclosed

Treatment of Tax

Cash flow for tax payments/refund

should be classified as cash flow from

operating activities

Extra-ordinary items Separately disclosed

Treatment of Tax

Cash flow for tax payments/refund

should be classified as cash flow from

operating activities

Cash flow relating to investments in associates, subsidiaries & joint venture

Reporting cash on net basis

Cash receipts & payment on behalf of customers

Cash receipts & payments for items in which the turnover is quick

Cash flow relating to acquisition or disposal of subsidiaries

Acquisition of assets by assuming directly related

liabilities Acquisition of an enterprises by means of issue of shares Conversion of debt to equity

Disclose the components of cash and cash equivalents and should present a reconciliation of the amount in the cash flow statement with the equivalent items reported in the B/S

Disclose the amount of significant cash & cash equivalent balance held by the enterprises that are not available for use by it with explanation of management

IFRS/IAS-7 & US GAAP allow interest & dividend paid or received as operating cash flows whereas AS-3 does not

US GAAP does not specially require disclosure of extraordinary items whereas AS-3 requires

AS-3 & US GAAP do not make explicit distinction between bank borrowings & overdraft, whereas IFRS/IAS-7 makes so

AS 4 CONTINGENCIES AND

EVENTS OCCURING

AFTER THE BALANCE

SHEET DATE

Need and Objective

While following prudent accounting

policies, the provision is made for

all known liabilities and losses even

for those liabilities/events, which

are probable

The AS deals with

Contingencies

Events occurring after the

balance sheet date

Applicability Liabilities of life assurance and

general insurance

Obligation under retirement

benefit plans

Commitments arising from long-

term lease contracts

What is contingency

Now covered by AS-29, except

provision for bad & doubtful debts

Events occurring after the Balance Sheet date

Events, which occur between the

balance sheet date and the date on

which financial statements are

approved by the competent authority

These events significant events and

may be favorable & unfavorable

Adjusting Event

The events related to circumstances

existing on the date of balance sheet

Accounting Treatment: -Loss should

be accounted in the accounts and assets

& liabilities to be adjusted

Non-adjusting Event The events not related to circumstances

existing on balance sheet date, in other

words entirely new events after B/S

date

Accounting Treatment: -Disclosure

by way of notes to accounts only, no

adjustment in accounts

Event effecting going concern

Proposed Dividend

Event occurring after approval of accounts

Disclosure

If material contingent loss is not

provided for, its nature and an estimate

of financial effect should be disclosed

by way of note.

Significant difference with IFRS/IAS & US GAAP

Proposed dividend after balance

sheet date but before the date of the

financial statements in non adjusting

event under corresponding

IFRS/IAS 10 & US GAAP. However

as per AS-4, the proposed dividend

is shown in balance sheet and

treated as adjusting event

Significant difference with IFRS/IAS & US GAAP

Securities Exchange Commission

regulation of US requires the

adjustment of declared dividend

after the balance sheet date but

before the issuance of financial

statements

AS 5 NET PROFIT OR LOSS

FOR THE PERIOD, PRIOR PERIOD ITEMS

AND HNAGE 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 -ordinary

The write down of inventories

Restructuring cost or reversal of

provision

Profit or loss on disposal of fixed

assets

These items are not -ordinary

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 AS Except 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