Introduction of Accounting Standards

In the initial years, this accounting standard will be

recommendatory in
character. During this period, this standard is recommended for use by
companies listed on a recognized stock exchange and other large
commercial,
industrial and business enterprises in the public and private sectors.

Meaning of Accounting Standards:

Accounting Standards are written documents, policy documents

issued by expert accounting body or Government or other regulatory
body covering the aspects of recognition, measurement, treatment,
presentation and disclosure of accounting transaction in the financial
statement. Accounting Standards in India are issued by The Institute
of Charted Accountants of India (ICAI).

AS- 1
Disclosure of Accounting Policies

The following is the text of the Accounting Standard (AS) 1 issued by

the Accounting Standards Board, the Institute of Chartered
Accountants of
India on ‘Disclosure of Accounting Policies’. The Standard deals with
the
disclosure of significant accounting policies followed in preparing
and presenting financial statements

What are Accounting Policies?

Accounting policies refer to specific accounting principles and the

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

Need for disclosure of Accounting Policies:

For proper and better understanding of financial statement, it is

required that all significant accounting policies followed in preparation
of financial statements should be disclosed because assets & liabilities
in Balance sheet & Profit & loss A/c are significantly affected by
accounting policy followed. All significant Accounting Policies disclosed

-1- By: Prof. Megha Shah

(GLS- NRIBM)
at one place because it would be helpful to the reader of financial
statements.

In recent years, a few enterprises in India have adopted the

practice of
including in their annual reports to shareholders a separate statement
of
accounting policies followed in preparing and presenting the financial
statements.

Nature of Accounting Policies:

There is no single list of accounting policies which are applicable

to all
circumstances. The differing circumstances in which enterprises
operate in
a situation of diverse and complex economic activity make alternative
accounting principles and methods of applying those principles
acceptable.
The choice of the appropriate accounting principles and the methods of
applying those principles in the specific circumstances of each
enterprise
calls for considerable judgments by the management of the enterprise.

Areas in which different Accounting Policies are encountered:

Methods of Depreciation (AS-6)

- Straight line Method
- WDV Method
Treatment of expenditure during construction (AS-7)
- Written off
- Capitalization
- Deferment
Conversion or Translation of Foreign currency item (AS-11)
- Average Rate
- TT Buying Rate
Valuation of Inventories (AS-2)
- FIFO
- Weighted average
- Retail Method
- Standard Cost
Valuation of Investments
Valuation of Fixed Assets
Treatment of Contingent Liability

-2- By: Prof. Megha Shah

(GLS- NRIBM)
 There are many areas other than aforesaid, where more than
one method can be followed in preparation of Balance Sheet & profit &
loss Account are disclosed as accounting policies. Hence accounting
policies contain the information about the method adopted for the
preparation of financial statements. Statements of accounting policy
are parts of financial statements.

Selection of Accounting Policies:

Basic objective of selection of accounting policies is that the

financial statement should be prepared on the basis of such accounting
policies, which exhibit true & fair view of state of affairs of balance
sheet & profit & loss account.
Major points, which are considered for the purpose of selection and
application of accounting policies, are:

1. Prudence
2. Substance over form
3. Materiality

Changes in Accounting Policies:

A change in accounting policies should be made in the following

conditions.
1. Adoption of different accounting policies is required by statue or for
compliance with an accounting standard.
2. It is considered that change would result in more appropriate
presentation of financial statement.

Disclosure of Accounting Policies:

To ensure proper understanding of financial statements, it is necessary

that all significant accounting policies adopted in the preparation and
presentation of financial statements should be disclosed.

 Such disclosure should form part of the financial statements.

 It would be helpful to the reader of financial statements if they
are all
disclosed as such in one place instead of being scattered over
several
statements, schedules and notes.

-3- By: Prof. Megha Shah

(GLS- NRIBM)
  Examples of matters in respect of which disclosure of accounting
policies
adopted will be required.
 Any change in an accounting policy which has a material effect
should
be disclosed. The amount by which any item in the financial
statements is
affected by such change should also be disclosed to the extent
ascertainable. Where such amount is not ascertainable, wholly
or in part,
the fact should be indicated. If a change is made in the
accounting policies
which has no material effect on the financial statements for the
current
period but which is reasonably expected to have a material
effect in later
periods, the fact of such change should be appropriately
disclosed in the
period in which the change is adopted.

AS-6
Depreciation Accounting

Meaning of Depreciation:

Depreciation is a measure of the wearing out, consumption or

other
loss of value of a depreciable asset arising from use, effluxion of time
or
Obsolescence through technology and market changes. Depreciation is
allocated so as to charge a fair proportion of the depreciable amount in
each
accounting period during the expected useful life of the asset.
Depreciation
includes amortization of assets whose useful life is predetermined.

Depreciable assets are assets which

 are expected to be used during more than one accounting

period; and
 have a limited useful life; and
 are held by an enterprise for use in the production or supply of
goods and services, for rental to others, or for administrative
-4- By: Prof. Megha Shah
(GLS- NRIBM)
 purposes and not for the purpose of sale in the ordinary course
of
business.

Useful life is either

 the period over which a depreciable asset is expected to be used

by the enterprise; or
 the number of production or similar units expect ed to be
obtained from the use of the asset by the enterprise.

Depreciable amount of a depreciable asset is

 its historical cost, or

 Other amount substituted for historical cost in the financial
statements, less estimated residual value.

Estimated residual value/ scrap value of the asset

 It is estimated value of depreciable asset at the end of its useful

life.

Not Applicable to:

forests, plantations and similar regenerative natural resources;


wasting assets including expenditure on the exploration for and

extraction of minerals, oils, natural gas and similar non-
regenerative
resources;
 expenditure on research and development;
 goodwill;
 live stock.

Methods of Depreciation:

-5- By: Prof. Megha Shah

(GLS- NRIBM)
 Methods of Depreciation

Straight Line Method ( SLM) Written Down Value Method ( WDV)

Straight Line Method: Under this method, a fixed and equal

amount in the form of depreciation, according to a fixed percentage
on the original cost, is written off during each accounting period
over the useful life of the asset.

 How to calculate rate of depreciation under SLM? ………..

Original cost less

Residual Value
Step 1 – Amount of Depreciation = Expected useful life of the
asset

Amount of Depreciation
×100
Step 2 – Rate of Depreciation = Original Cost

Written Down Value Method (WDV): Under this method,

depreciation according to a fixed percentage calculated upon the
original cost (in the first year) and written down value, (in
subsequent year) of an asset over the expected useful life of the
asset. Under this method, the rate of depreciation remains constant
year after year whereas the amount of depreciation goes on
decreasing.

 How to calculate rate of Depreciation under WDV method...?

Changes in Depreciation Method:

-6- By: Prof. Megha Shah
(GLS- NRIBM)
 The method of depreciation, once adopted, needs to be applied
consistently to provide comparability of the results of the operations of
the enterprise from period to period. A change from one method to
another can be done only:
 When the statute governing the enterprise requires the adoption
of the new method
 To comply with the requirements of an accounting standard or
 When change is considered to result in a more appropriate
preparation or presentation of the financial statements of the
enterprise.

Procedure to be followed in case of change in method:

 Change in depreciation Method

 Changing in Accounting Policy

 Retrospective Effect

 Recalculation of depreciation with new method from the date of

pch

 New Accumulated Depreciation

 Old Accumulated Depreciation

 Difference between above

 Surplus/ deficit

 Cr/ Dr to P & l A/c in the year of change

 Disclosed Separately

Depreciation charge on addition / extension to an existing

asset:

 Addition/ extension is an integral part of an existing asset.

- It is depreciated over the remaining useful life of the existing
asset.

 Addition/ extension is not an integral part of an existing asset.

-7- By: Prof. Megha Shah
(GLS- NRIBM)
 - It is depreciated over the estimated useful life of the
additional asset.

When the depreciable asset is disposed of, discarded,

demolished or destroyed:

 Net surplus or deficiency (i.e. sale less WDV) is credited or

charged to profit & Loss account.

Disclosure Required:

 Total cost of each class of assets

 Total depreciation for the period of each class of assets
 Accumulated depreciation of each class of assets
 Depreciation method
 Change in depreciation method

-8- By: Prof. Megha Shah

(GLS- NRIBM)
 AS-10
Accounting for Fixed Assets

Fixed assets often comprise a significant portion of the total

assets of an
enterprise, and therefore are important in the presentation of financial
position.
Furthermore, the determination of whether an expenditure represents
an
asset or an expense can have a material effect on an enterprise’s
reported
results of operations.

Meaning of Fixed Assets & related terms:

Fixed asset is an asset

 Held with the intention of being used for the purpose of

producing or providing goods or services.
 Not held for sale in the normal course of business.
 Expected to be used for more than one accounting period.

Examples of Fixed assets are:

 land
 Building ( Freehold & Leasehold)
 Plant & Machinery
 Furniture & Fittings etc.

Not Applicable to:

 Forests, Plantations& similar natural resources

 Wasting Assets like minerals, oil and natural gas
 Expenditure on real estate development
 Live stock

Gross book value of a fixed asset is its historical cost or other

amount
substituted for historical cost in the books of account or financial
statements.

-9- By: Prof. Megha Shah

(GLS- NRIBM)
When this amount is shown net of accumulated depreciation, it is
termed as
net book value.

Historical Cost:

Purchase Price
(-) Any Trade Discount
(+) Import Duties & other non-refundable Taxes
(+) Any other cost of bringing asset to the working condition
(Site preparation, Delivery & handling cost, Installation
cost, Professional fees, expenditure incurred on start
up / test runs, Administrative and other overheads are
specifically attributable for construction/ acquisition /
installation of fixed assets)
(-) Amount of Gov. Grant received against fixed assets.

Fair market value is the price that would be agreed to in an open

and
unrestricted market between knowledgeable and willing parties
dealing at
arm’s length who are fully informed and are not under any compulsion
to
transact.

When Fixed asset acquired in exchange of existing asset:

Fixed assets exchanged not similar:-

 Asset acquired should be recorded either at fair market value of

asset given up or FMV of asset acquired, if this is more clearly
evident

Fixed Assets exchanged are similar:-

 Asset acquired should be recorded either at fair market value of

asset given up or FMV of asset acquired, if this is more clearly
evident or Net Book value of the asset given up.

Fixed Asset acquired in exchange of Share or other securities:

- 10 - By: Prof. Megha Shah

(GLS- NRIBM)
  When payment of asset is made in shares or securities asset
should be recorded at either FMV of asset purchased or FMV of
shares, whichever is more clearly available.

Basket Purchase:

 Where several fixed assets are purchased for a consolidated

price, the consideration is apportioned to the various assets on a
fair basis as determined by a valuer

Revaluation of Fixed Assets: When the fixed assets are revalued,

these assets are shown at revalued price in financial statements.

Upward Revaluation
Downward Revaluation

Cr. To Revaluation Reserve Dr. to P &

L A/c

Exception: If upward Reva. Is due Exception: If

downward Reva. is due
to downward Reva. In any previous to upward Reva. In any
previous year
year & it is debited to P & L A/c. & it is credited to
Revaluation reserve
Then, upward reva. To the extent A/c. Then, downward reva. to the
of downward reva. is credited to extent of upward reva. is debited
to
P& L A/c revaluation Reserve A/c.
(If Bal. available)

Retirement & Disposals:

 Fixed Assets are deleted from the financial statement either on

disposal or when expected economic benefit is over

 Gains or losses arising on disposal are generally recognized in

profit & loss account.

Disclosure Required:

- 11 - By: Prof. Megha Shah

(GLS- NRIBM)
  Gross & book values of fixed assets at the beginning and at the
end of accounting period showing additions, disposal, acquisition
and other movements.

 Expenditure incurred on account of fixed assets in the course of

construction or acquisition and

 Revalued amount substituted for historical cost of fixed assets,

the method adopted to compute the revalued amount, and
whether the external valuer has valued the fixed assets are
stated at revalued amount.

 Government Grants are assistance by the Gove. In the form of

cash or in kind to an enterprise

 Kinds of Grants :-Government Grants may be of two types.-

Monetary & Non-Monetary.

 Non Monetary Grants : (Grants in form of assets such as Land,

Plant & Machinery etc)
– If grants are given at concessional rate , then such assets
are accounted for at their acquisition cost.
– If grants are given free of cost, then such assets are
recorded at nominal value.
Monetary Grants : Grants related to depreciable Fixed assets.

 Specific Grants :- The Government, for many reasons, provides

capital grants at times, e.g. to promote an industry. Two
alternative treatments are available to account for such grant.

Capital Approach Income Approach

 Capital Approach:-
- 12 - By: Prof. Megha Shah
(GLS- NRIBM)
 – The Grant is shown as deduction from the gross value of
assets in arriving at its book value. When the Grant equals
to the cost of the assets, the assets should be shown in the
balance sheet at nominal value.
Income Approach :-
- Grants are treated as a deferred Income. The deferred Income is
recognized in profit & Loss A/c on a systematic and rational basis over
the useful lives of assets. Such allocation to income is made over the
periods and in proportions in which depreciation on related asset is
charged.
Recognition of Government Grants:- Gove. Grants are recognised in
the Fina. statements only when there is reasonable assurance that :
– The enterprise comply with the conditions attached to
them.
– The Grants will be ultimately received.
– Mere receipt of the grant cannot be considered as fulfilment of
all conditions & compliance.

 Borrowing costs are defined as interest and other costs incurred

relating to the borrowing of funds. It includes following costs.
– Interest & commitment charges on borrowings
– Finance charges when asset acquired on finance lease.etc.

Conditions for capitalization of borrowing cost:

- Those borrowing costs, which are directly attributable to

the acquisition, construction or production of qualifying
assets are eligible for capitalization.
- Qualifying assets will give future benefits to the enterprise
and the cost can be measured.
- (Qualifying Assets is an asset which takes substantial
period of time to get ready for its intended use or sale.)
- Specific borrowings :When funds are borrowed specifically for the
purpose of obtaining a fixed asset.
- General borrowings: When funds are borrowed generally and use
for the purpose of obtaining a fixed asset.
- Borrowings for projects :When funds are borrowed as a means to
part finance the cost of a project, all borrowing costs incurred
during the construction period are capitalised and allocate to
various fixed assets in the ratio of their basic cost.

6.2 Fair market value is the price that would be agreed to in an open
and
unrestricted market between knowledgeable and willing parties
dealing at

- 13 - By: Prof. Megha Shah

(GLS- NRIBM)
arm’s length who are fully informed and are not under any compulsion
to
transact.
6.3 Gross book value of a fixed asset is its historical cost or other
amount
substituted for historical cost in the books of account or financial
statements.
When this amount is shown net of accumulated depreciation, it is
termed as
net book value.

- 14 - By: Prof. Megha Shah

(GLS- NRIBM)