Vous êtes sur la page 1sur 103

6-1

EXCEL BOOKS

Chapter 6
Accounting Standards in India
A brief outline of each standard

6-2

Introduction

Accounting standards are established guidelines which are to be complied with to ensure that financial statements are prepared in accordance with generally accepted accounting principles. The Institute of Chartered Accountants of India (ICAI) sets accounting standards in India. Most of the accounting standards are mandatory in nature. The National Advisory Committee on Accounting Standards (NACAS) identifies accounting standards of the ICAI for adoption by companies. Section 211(3A) of the Companies Act, 1956 states that every profit and loss account and balance sheet of a company shall comply with the accounting standards.

Accounting Standards in India: A brief outline of each standard

6-3

List of Accounting Standards (AS)

So far (May 2006), twenty nine (29) accounting standards have been issued by the ICAI.

Disclosure of Accounting Policies (AS 1) Valuation of Inventories (AS 2) Cash Flow Statement (AS 3) Contingencies and Events occurring after the Balance Sheet date (AS 4) Net Profit or Loss for the periods, Prior Period items and Changes in Accounting Policies (AS 5) Depreciation Accounting (AS 6) Construction Contracts (AS 7) Accounting for Research and Development (AS 8)

Accounting Standards in India: A brief outline of each standard

6-4

List of Accounting Standards (contd.)


Revenue Recognition (AS 9) Accounting for Fixed Assets (AS 10) The Effects of Changes in Foreign Exchange Rates (AS 11) Accounting for Government Grants (AS 12) Accounting for Investments (AS 13) Accounting for Amalgamations (AS 14) Accounting for Retirement Benefits in the Financial Statements of Employers (AS 15) Borrowing Costs (AS 16) Segment Reporting (AS 17) Related Party Disclosures (AS 18) Leases (AS 19)

Accounting Standards in India: A brief outline of each standard

6-5

List of Accounting Standards (Contd.)


Earning Per Share (AS 20) Consolidated Financial Statements (AS 21) Accounting for Taxes on Income (AS 22) Accounting for Investments in Associates in Consolidated Financial Statements (AS 23) Discontinuing Operations (AS 24) Interim Financial Reporting (AS 25) Intangible Assets (AS 26) Financial Reporting of Interests in Joint Ventures (AS 27) Impairment of Assets (AS 28) Provisions, Contingent Liabilities and Contingent Assets (AS 29)

Accounting Standards in India: A brief outline of each standard

6-6

AS 1: Disclosure of Accounting Policies

Accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by an enterprise in preparation and presentation of financial statements. An enterprise may choose its accounting policies within the overall guidelines of applicable accounting standards. All significant accounting policies should be disclosed in one place as a part of financial statements. Any change in accounting policies which have a material impact in the current period or possible impact in the future periods should be disclosed along with the amount of impact. Whenever any one or more of the three fundamental accounting assumptions is/are not followed, the fact should be disclosed.

Accounting Standards in India: A brief outline of each standard

6-7

AS 1(contd.): Fundamental Accounting Assumptions

Three fundamental accounting assumptions:

Accrual Going Concern Consistency They are integral to the preparation and presentation of financial statements. Their uses are assumed and hence only violations of these assumptions are disclosed. Change in method of depreciation (violation of Consistency assumption) Fertilizer subsidy recorded on cash basis (violation of Accrual assumption)

Why are they called fundamental?

Why are they called assumptions?

Examples of violations:

Accounting Standards in India: A brief outline of each standard

6-8

AS 2: Valuation of Inventories

Inventories include:

Raw materials and components Semi finished goods (WIP) Finished goods Stores and spares

Generally, inventories should be valued at lower of historical cost and net realisable value. Inventories should be valued item-wise or category (group)-wise. Inventories should never be valued globally (on overall basis). Exceptions to above basis of valuation:
Consumable stores and spares Reusable waste Non-reusable waste By-products

Accounting Standards in India: A brief outline of each standard

6-9

AS 2 (contd.) Cost of Inventories

The costs of inventories comprise of:


Cost of purchase Conversion cost Incidental costs for bringing inventories to their present location and condition (e.g., carriage charges from factory to warehouse)

The cost of inventories should be assigned using either of the following two methods:

First-in-first-out (FIFO) Weighted average method

However, inventory items, which are not ordinarily interchangeable or which are for specific use, should be assigned costs using specific identification method.

Accounting Standards in India: A brief outline of each standard

6-10

AS 3: Cash Flow Statement


It reports cash flows during an accounting period classified by operating, investing and financing activities. Thus, cash flow statement shows cash flows in three distinct activities:

Operating activities Investing Activities Financing Activities

Cash flows from operating activities can be reported using any one of the following methods:

Direct Method Indirect Method

Accounting Standards in India: A brief outline of each standard

6-11

AS 3(contd.)Treatment of non-cash Items & Cash Equivalents


Non-cash transactions should be excluded from a cash flow statement. Examples:


Issue of bonus shares Issue of bonus debentures (e.g.,HLL) Conversion of debentures into shares

An enterprise should disclose the components of cash and cash equivalents (e.g., Bank FD with a maturity not exceeding 90 days) and reconcile such amounts in cash flow statement with the equivalent items reported in the balance sheet.

Accounting Standards in India: A brief outline of each standard

6-12

AS 4: Contingencies and Events occurring after the Balance Sheet date


Contingencies are conditions or situations the ultimate outcome of which (gain or loss) will be known only on the occurrence or nonoccurrence of one or more uncertain future events. Thus, contingencies are of two types- contingent gains and contingent losses. Contingent losses should be provided for subject to fulfilling two conditions:

it is probable that future events would confirm that an asset has been impaired (net of possible recoveries) or a liability has been incurred on the balance sheet date; and a reasonable estimate of the amount of the resulting loss can be made.

Contingent gains should never be recognised in the financial statements. However, when the realisation of the gain is virtually certain, it is no longer contingent and hence can be recognised. It may be noted that these provisions in AS 4 regarding contingencies stand withdrawn since April 2004 with the introduction of AS 29.

Accounting Standards in India: A brief outline of each standard

6-13

AS 4 (contd.): Events after the balance sheet date

What is after the balance sheet date?

It is a period between the balance sheet date and the date when the financial statements are actually approved by the Board of Directors.

Two types of events occur after the balance sheet date:


those which provide further evidence of conditions that existed at the balance sheet date (type i); and those which are indicative of conditions that arose subsequent to the balance sheet date (type ii). Debts due from customer which were doubtful of recovery as on the balance sheet date turn bad subsequently (type i) Agreement signed after the balance sheet date to sell a division of a business (type ii)

Examples:

Financial statements are required to be adjusted for type i events and only disclosure in the Directors Report is required for type ii events.

Accounting Standards in India: A brief outline of each standard

6-14

AS 5: Net Profit or Loss for the periods, Prior Period items and Changes in Accounting Policies

The net profit or loss for a given accounting period comprises essentially of two items:
profit or loss from ordinary activities; and extraordinary items (e.g. losses from an earthquake)

Both the above items are to be recognised on the face of the profit and loss statement. Extraordinary items rarely happen.

Accounting Standards in India: A brief outline of each standard

6-15

AS 5 (contd.): Prior Period Items

These are income or expenses which arise in the current period as a result of errors or omissions in the financial statements of one or more prior periods. The nature and amount of prior period items should be separately disclosed in the profit and loss statement in a manner that their impact on the current profit/loss can be perceived. Thus, ideally, prior period items (net impact) should be shown as a separate line item in the profit and loss statement (above-the-line)

Accounting Standards in India: A brief outline of each standard

6-16

AS 5 (contd.): Accounting Estimates


Accounting estimates are integral part of accrual system of accounting. An estimate may have to be revised if the underlying conditions change. Any change in accounting estimate (e.g., change in method of depreciation) is not a prior period item and hence need not be separately disclosed. However, the effect of a change in an accounting estimate should be included in the determination of profit or loss. Since such a change results in a violation of one of the fundamental accounting assumptions (i.e., consistency), the nature and amount (if determinable) of change should be disclosed in the notes to accounts.

Accounting Standards in India: A brief outline of each standard

6-17

AS 5 (contd.): Changes in Accounting Policies

Frequent changes in accounting policies should be avoided. Accounting policies can be changed only if

the adoption of different accounting policy is required by statute; or the adoption of different accounting policy is required for compliance with an accounting standard; or if it is considered that the change would result in a more appropriate presentation of the financial statements.

The impact of, and the adjustments resulting from such changes, if material, should be shown in the financial statements of the period in which such change is made. Where the effect of such change is not determinable, the fact should be indicated.

Accounting Standards in India: A brief outline of each standard

6-18

AS 6: Depreciation Accounting

Depreciation refers to loss of value of a depreciable asset arising from:

use; or effluxion of time; or obsolescence through technology; or market changes

Depreciable assets are assets:

which are for long-term use (more than one accounting period); which have a limited useful life; and which are held for use and not intended for sale.

AS 6 is not applicable to intangible assets, goodwill, live stock, wasting assets (e.g., coal mines), R&D, and forests, plantations and similar regenerative natural resources.

Accounting Standards in India: A brief outline of each standard

6-19

AS 6(contd.): Depreciation Variables

Three variables affect the amount of depreciation:


cost of the depreciable asset; useful life of the depreciable asset; and estimated residual value of the depreciable asset.

Cost of the asset is more or less certain and the estimated residual value does not normally exceed 5% of the cost. Hence the only uncertain variable is useful life. Useful life depends on:

expected physical wear and tear; obsolescence; legal or other limits on the use of the asset.

Accounting Standards in India: A brief outline of each standard

6-20

AS 6 (contd.) Methods of Depreciation

There are two popular methods of depreciation:


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

The depreciation method selected should be consistently applied from period to period. Any change in method of depreciation should be made only if:

the adoption of different method is required by statute; or the adoption of different method is required for compliance with an accounting standard; or if it is considered that the change would result in a more appropriate presentation of the financial statements.

In the year of such change, the following charges of depreciation will be recognised in the profit and loss statement:

retrospective effect of change in method of depreciation; and annual depreciation on the basis of the new method.

Accounting Standards in India: A brief outline of each standard

6-21

AS 6 (contd.) Addition/Disposal of Assets

Any addition or extension which becomes an integral part of existing assets changes the cost of the existing assets. Hence, depreciation should be recomputed over the remaining useful life of the asset. However, when such addition or extension retains a separate identity and is capable of being used after the existing asset is disposed of, depreciation on such addition or extension should be provided independently on the basis of an estimate of its own useful life. If any depreciable asset is disposed of during an accounting period, depreciation should be charged till the date of disposal of the asset.

Accounting Standards in India: A brief outline of each standard

6-22

AS 7: Construction Contracts

Construction contracts are of two types:

Fixed price contracts Cost plus contracts (e.g., time and material contracts of Infosys)

Two methods of accounting:


Percentage of completion method Completed contract method


ease of estimation of outcome; time length of the contract

The choice of the method depends on:


Accounting Standards in India: A brief outline of each standard

6-23

AS 7(contd.): Methods of Accounting

Percentage of completion method:

The amount of revenue recognised is determined by reference to the state of completion of the contract activity at the end of each accounting period. Thus the method can be applied only if identification of different stages of construction and costs in each stage is possible.

This method follows the accrual principle in the sense that revenue is recognised in he accounting period during which the activity is undertaken to earn such revenue. While recognising profit under this method, an appropriate provision for future unforeseeable factors should be made on either a specific or percentage basis.

Accounting Standards in India: A brief outline of each standard

6-24

AS 7(contd.) Completed Contract Method

Revenue is recognised only when the contract is fully completed or substantially completed. Costs and progress payments are accumulated during the course of the contract (as asset and liability respectively). This method is used when:

the work cannot be classified into different stages; and reasonable estimate of costs in each stage cannot be made.

Accounting Standards in India: A brief outline of each standard

6-25

AS 8: Accounting for Research and Development

Research is an original and planned investigation to gain new scientific or technical knowledge. Development is the utilisation of research results to produce new or substantially improved materials, devices etc. AS 8 stands completely withdrawn with effect from 1 April 2004 with the introduction of AS 26 Intangible Assets.

Accounting Standards in India: A brief outline of each standard

6-26

AS 9: Revenue Recognition

Revenue arises in the course of ordinary activities of an enterprise from three sources:

Sale of goods; Rendering of services; Use by others of enterprise resources yielding interest, royalty and dividends.

Revenue recognition is concerned with the timing of recognition of revenue in the profit and loss statement. Recognition of revenue requires that it is measurable and collectible. When recognition of revenue is postponed due to uncertainties, it is considered as revenue of the period in which uncertainties cease to exist.

Accounting Standards in India: A brief outline of each standard

6-27

AS 9(contd.) Sale of goods

Three conditions to be satisfied to recognise revenue arising out of sale of goods:

the property (title) in the goods is transferred from seller to the buyer;
the amount of consideration is determinable with certainty; and it is not unreasonable, at the time of sale, to expect ultimate collection.

Accounting Standards in India: A brief outline of each standard

6-28

AS 9(contd.) Rendering of services

Revenue is recognised following any of the two methods:

Completed service contract method (when performance consists of execution of a single act)
Proportionate completion method (when performance consists of more than a single act)

Revenue is recognised when no significant uncertainty exists regarding the amount of consideration that will be derived from rendering the service.

Accounting Standards in India: A brief outline of each standard

6-29

AS 9(contd.) Interest, Royalty, Dividends


Interest: on a time proportion basis (e.g., interest on a bank fixed deposit) Royalties: on accrual basis in accordance with the terms of relevant agreement (e.g., royalties levied by State Government on oil extraction) Dividends: when the owners right to receive dividend is established (i.e., after the shareholders approve the dividend in the Annual General Meeting of the company declaring dividend)

Accounting Standards in India: A brief outline of each standard

6-30

AS 10: Accounting for Fixed Assets


Fixed asset is held with the intention of being used for the purpose of producing or providing goods and services and is not held for resale in the ordinary course of business. Hence, fixed assets are also called long-lived assets. Cost of fixed assets consist of:

purchase price (inclusive of import duties and other nonrefundable taxes or levies but net of rebate and trade discount); and directly attributable cost (e.g., site preparation cost, installation cost, architects fees etc.) start-up costs

Cost of fixed assets may undergo change subsequent to its acquisition or construction on account of:

exchange fluctuation; price adjustments changes in duties.

Accounting Standards in India: A brief outline of each standard

6-31

AS 10(contd.): Revaluation of fixed assets


The gross book value of a fixed asset should be either historical cost or revalued amount. When a fixed asset is revalued, an entire class of assets should be revalued (e.g., if land is revalued, all lands under the control of the enterprise should be revalued) The revalued amount of a class of fixed asset can in no case exceed the recoverable amount of the asset class. When a fixed asset is revalued upwards, any accumulated depreciation existing at the date of the revaluation should not be credited to profit and loss statement. An increase/(decrease) in net book value arising on revaluation of fixed assets should be credited/(charged) to Revaluation Reserve/(profit and loss statement).

Accounting Standards in India: A brief outline of each standard

6-32

AS 10(contd.) Jointly held assets

In the case of jointly held assets, the extent of the enterprises share in such assets, and the proportion of the original cost (gross lock), accumulated depreciation and written down value (net block) should be stated in the balance sheet.

When several fixed assets are purchased for a consolidated price (e.g., under a scheme of slump sale), the consideration should be apportioned to the various assets on a fair value basis as determined by competent valuers.

Accounting Standards in India: A brief outline of each standard

6-33

AS 11:The Effects of Changes in Foreign Exchange Rates

This standard discusses how to recognise the financial effects of changes in foreign exchange rates in the financial statements of the reporting entity. The reporting currency in India is Indian rupee (INR). Hence, any currency other than INR is a foreign currency. AS 11 deals with:

Transaction exposure Translation exposure

Accounting Standards in India: A brief outline of each standard

6-34

AS 11(contd.) Foreign Currency Transactions


A foreign currency transaction is denominated in foreign currency and also requires settlement in foreign currency. There are three types of foreign currency transactions:

revenue items (e.g. imports and exports of goods and services); monetary items (Cash and bank balance, Debtors etc.) ; and non-monetary items (e.g., Inventory, Fixed Assets).

Any foreign currency transaction should be initially recorded in the reporting currency by applying the exchange rate as on the date of the transaction. An exception can be made to the above rule in case of revenue items, where a periodic average rate might be used for all transactions during the period.

Accounting Standards in India: A brief outline of each standard

6-35

AS 11(contd.) Monetary Items


Monetary items are subsequently recognised in the balance sheet by applying the exchange rate as on the reporting date (i.e., the date of the balance sheet) For example, a US dollar loan availed on 1 October 2005 will first be recorded by applying the exchange rate as on 1 October 2005 (say, Rs.45). Subsequently, the outstanding foreign currency loan will be recognised in the balance sheet as on 31 March 2006 by applying the exchange rate as on that date (say Rs.44). This will give rise to exchange difference. Such exchange differences should be recognised as income or expenses in the period in which these arise.

Accounting Standards in India: A brief outline of each standard

6-36

AS 11(contd.) Capitalisation of exchange differences

The earlier version of AS 11 allowed capitalisation of exchange differences arising on repayment of foreign currency liability incurred for the purpose of acquiring fixed assets. Such facility is no longer allowed and hence AS 11 now requires such exchange differences to be recognised in the profit and loss statement. However, Schedule VI of the Companies Act still allows capitalisation only when the fixed assets are imported. In case of any contradiction between AS and the law, the law shall prevail. Hence, companies in India now follow:

In case of fixed assets procured within India- apply AS 11 In case of fixed assets imported - apply Schedule VI.

Accounting Standards in India: A brief outline of each standard

6-37

AS 11(contd.) Foreign Currency Translations-Integral operations

AS 11 prescribes procedures to translate financial statements of foreign operations. Foreign operations are of two types:

Integral operations (e.g., foreign branch/subsidiary) Non-integral operations (e.g., cross-border joint ventures)

Financial statements of integral foreign operations should be translated as below:


Monetary items: closing rate as on the date of translation. Non-monetary items: rate as on the date of transactions. Revenue items (excepting depreciation): periodic average rate Depreciation : apply the rate of depreciation to the (already translated) carrying amount of depreciable assets.

All exchange differences should be recognised in the profit and loss statement.

Accounting Standards in India: A brief outline of each standard

6-38

AS 11(contd.) Non-integral operations

The financial statements of a non-integral foreign operation should be translated as below:

All monetary and non-monetary items (i.e., assets and liabilities) should be translated at the closing rate Revenue items should be translated at exchange rates as on the date of the transactions or periodic average rates

All resulting exchange differences should be accumulated in a foreign currency translation reserve until the disposal of net investment in such foreign operation. The balance in the foreign currency translation reserve should be shown separately in the balance sheet as a part of shareholders funds.

Accounting Standards in India: A brief outline of each standard

6-39

AS 11(contd.) Forward Exchange Contracts.

A forward exchange contract is undertaken to minimise the effect of foreign exchange fluctuations in the financial statements. A forward exchange contract (forward) is an agreement to exchange different currencies at a specified exchange rate (called forward rate) and at a specified future date. Forward can be entered into for two purposes:

hedging trading or speculation

Business entities in India are allowed to enter into forwards only for hedging purposes.

Accounting Standards in India: A brief outline of each standard

6-40

AS 11(contd.) Forward

At the date of the forward, the difference between spot rate and the forward rate is called forward premium/discount Forward premium/discount should be amortised as expense/income over the life of the contract. The exchange difference in a forward is the difference between:

The foreign currency amount of the contract translated at the exchange rate at the reporting/settlement date; and The same foreign currency amount translated at the rate at the inception of the forward or last reporting date, whichever is applicable.

The exchange difference in a forward should be recognised in the profit and loss statement.

Accounting Standards in India: A brief outline of each standard

6-41

AS 11(contd.) Forward for speculation


No forward premium/discount is separately reognised. The gain or loss on forward is determined by multiplying the foreign currency amount of the contract with the difference between the forward rate available at the reporting date for the remaining maturity of the contract and the contracted forward rate. For example, X Ltd. enters into a 3-month forward( for trading purposes) on 1 March 2006 at a forward rate of $1=Rs.45. As on the balance sheet date (31 March 2006), the forward rate for a 2-month contract is $1=Rs.45.50. Gain on forward is Re.0.50 per dollar. The computed gain or loss should be recognised in the profit and loss statement.

Accounting Standards in India: A brief outline of each standard

6-42

AS 12: Accounting for Government Grants

Government grants are assistance by government in cash or kind to an enterprise for past or future compliance of certain conditions. Government grants could be of four types:

Grants related to specific fixed assets (called capital grants)


Revenue grant

Grants in the nature of promoters contribution


Grants as compensation for expense or losses incurred in a previous accounting period.

Accounting Standards in India: A brief outline of each standard

6-43

AS 12(contd.) Capital grants

For depreciable fixed assets, government grants can be treated in the financial statements by either gross approach or net approach. The effect would be same under both approaches. For non-depreciable fixed assets, government grants should be credited to capital reserve. However, if such grants require fulfillment of certain obligations, the grant should be credited to income over the same period in which the cost of meeting such obligation is charged to income.

Accounting Standards in India: A brief outline of each standard

6-44

AS 12(contd.) Other grants

Revenue-related grants should be recognised on a systematic basis (e.g., SLM) in the profit and loss statement over the periods necessary to match with the related costs which they are intended to compensate. Such revenue-related grants can either be shown as income or be deducted from related expenses. Grants in the nature of promoters contribution should be credited to capital reserve. Grants as compensation should be recognised in the profit and loss statement of the period in which they are receivable, as an extraordinary item if appropriate. Otherwise, as an ordinary item.

Accounting Standards in India: A brief outline of each standard

6-45

AS 13: Accounting for Investments

There are two types of investments:


Current investments (short-term) Long-term investments

Current investments are valued at lower of cost (includes brokerage) and fair value (net realisable value) determined on an individual basis or by category of investments. Long-term investments are carried at cost unless there is a permanent diminution in the value of investments. In such a case, provision for such diminution has to be made. Any reduction in the carrying amount of investment or any reversal of such reductions should be charged or credited to the profit and loss statement.

Accounting Standards in India: A brief outline of each standard

6-46

AS 13(contd.) Change in classification


Reclassification of current investment into longterm investment and vice versa are allowed. Where long-term investments are reclassified as current investment, reclassification is made at lower of cost and carrying amount on the date of reclassification. Where current investments are reclassified as long-term investments, transfers are made at the lower of cost and fair value as on the date of transfer. Any consequential effect of such reclassifications is recognised in the profit and loss statement.

Accounting Standards in India: A brief outline of each standard

6-47

AS 14: Accounting for Amalgamations

Amalgamation refers to acquisition of entity by another and/or merger of two companies to form a new company. The critical factor for AS 14 to be applicable is that the entity acquired must cease to exist. For example, if A Ltd. acquires 100% equity shares of B Ltd. and B Ltd. continues to exist, it is not a case of amalgamation and hence AS 14 is not applicable. On the other hand, if A Ltd. later decides to merge B Ltd. with itself, AS 14 would then be applicable.

Accounting Standards in India: A brief outline of each standard

6-48

AS 14(contd.) Types of amalgamations

Two types:

Amalgamation in the nature of merger


Amalgamation in the nature of purchase

Methods of accounting:

Pooling of interests method (for amalgamation in the nature of merger)


Purchase method (for amalgamation in the nature of purchase)

Where amalgamation is effected after the balance sheet date, a disclosure is necessary as per AS 4.

Accounting Standards in India: A brief outline of each standard

6-49

AS 14(contd.) Pooling of interests method

All assets, liabilities and reserves of the transferor company should be recorded at their existing carrying amounts in the financial statements of the transferee (acquirer). The balance of the profit and loss account of the transferor should be aggregated with the corresponding balance of the transferee company. The difference between the purchase consideration and the amount of share capital of the transferor should be adjusted in reserves. Thus, goodwill does not arise on amalgamation.

Accounting Standards in India: A brief outline of each standard

6-50

AS 14(contd.) Purchase method

All assets and liabilities of the transferor should be incorporated in the financial statements of the transferee:

either at their existing carrying amounts; or at their fair values.

Only statutory reserves (e.g., export profit reserve) of the transferor will get transferred to the transferee with a corresponding amount in an artificial account Amalgamation Adjustment Account. When purchase consideration> net assets (assetsliabilities) acquired, the difference is called goodwill. When purchase consideration< net assets acquired, the difference is treated as capital reserve.

Accounting Standards in India: A brief outline of each standard

6-51

AS 15: Accounting for Retirement Benefits in the Financial Statement of Employers

Retirement benefits usually consist of:


Provident fund Pension Gratuity Leave encashment benefit on retirement Post-retirement health and welfare scheme Other benefits.

Accounting for retirement benefits depends on the nature of the benefit scheme. The above retirement benefit schemes can be broadly classified into two categories:

defined contribution schemes; defined benefit schemes.

Accounting Standards in India: A brief outline of each standard

6-52

AS 15(contd.) Defined contribution schemes

Only the contribution of the employer is defined (e.g. contributory provident fund). But the ultimate benefits that would accrue to the employees depend on market forces which is uncertain. The obligation of the employer is restricted to timely contribution to the funds/trust managing the schemes. The contribution payable by the employer for a year is charged to profit and loss statement. Any shortfall in contribution actually paid by the employer would be shown as current liability in the balance sheet. Similarly, any excess contribution would be classified as prepaid contribution in the balance sheet.

Accounting Standards in India: A brief outline of each standard

6-53

AS 15(contd.) Defined benefit schemes


Here the benefits are linked to certain defined criteria and are determinable usually by reference to employees salary and/or years of service (e.g., gratuity, pension etc.) The employer has to ensure that retiring employees get these defined benefits as per entitlements. The contribution required to finance such schemes is actuarially determined. The accounting treatment depends on whether the retirement benefits are paid out of own funds of the employer or through trust/insurer. In case of former, an appropriate charge is made in the profit and loss statement through a corresponding provision of accruing liability calculated as per actuarial valuation. In case of the later, the cost incurred for the year is actuarially determined and paid to the trust/insurer. The contribution payable to the trust/insurer is charged to profit and loss statement.

Accounting Standards in India: A brief outline of each standard

6-54

AS 16: Borrowing Costs

Interest cost should be capitalised as part of the cost of acquiring or constructing qualifying assets (assets for own use and also assets intended for sale or lease that are constructed as discrete projects). To compute the amount of interest cost to be capitalized for a particular accounting period, the average accumulated investment in a qualifying asset during that period must be determined. To determine the average accumulated investment, each expenditure must be weighted for the time it was outstanding during the particular accounting period.

Accounting Standards in India: A brief outline of each standard

6-55

AS 16(contd.) Identification of interest rate

If a specific borrowing is made to acquire the qualifying asset, the interest rate incurred on that borrowing may be used to determine the amount of interest costs to be capitalized. That interest rate is applied to the average accumulated investment for the period to calculate the amount of capitalized interest cost on the qualifying asset. Capitalized interest cost on average accumulated investments in excess of the amount of the specific borrowing is calculated by the use of the weighted-average interest rate incurred on other borrowings outstanding during the period.

Accounting Standards in India: A brief outline of each standard

6-56

AS 16(contd.) Capitalisation period

The interest capitalization period starts when three conditions are met :

Expenditures have occurred. Activities necessary to prepare the asset (including administrative activities before construction) have begun. Interest cost has been incurred.

Interest is not capitalized during delays or interruptions, except for brief interruptions, that occur during the acquisition or development stage of the qualifying asset.

Accounting Standards in India: A brief outline of each standard

6-57

AS 17: Segment Reporting


A reportable segment is a business segment or a geographical segment. A business segment is a distinguishable component of an enterprise that are subject to risks and returns quite different from those of other business segments (e.g., oil exploration and oil refining). A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services in a particular economic environment that is subject to risks and returns quite different from those of components operating in other economic environments (e.g., domestic market and export market).

Accounting Standards in India: A brief outline of each standard

6-58

AS 17(contd.) Reportable Segment

A business or geographical segment is a reportable segment if any of the following quantitative criteria is met :
The segments total revenues (both external, such as sales to other enterprises, and inter-segment, such as sales between segments) make up 10% or more of the combined revenue of all segments. The absolute amount of the reported profit or loss of the segment is 10% or more of the greater (absolute amount) of the total profit of all segments reporting a profit or the total loss of all segments reporting a loss. The segments assets make up 10% or more of the combined assets of all segments.

If total external revenue attributable to reportable segments is less than 75% of total enterprise revenue, additional segments should be identified as reportable segments even if the above criteria are not satisfied.

Accounting Standards in India: A brief outline of each standard

6-59

AS 17(contd.) Primary and secondary segments

Segmental information is presented in primary segment and secondary segment reporting format. Primary reporting format contains more details. Segment reports include:

Segment revenue Segment expenses Segment results Segment assets Segment liabilities

Accounting Standards in India: A brief outline of each standard

6-60

AS 17(contd.) Segment Reporting


Segment information should be prepared in conformity with the accounting policies adopted for the preparation and presentation of financial statements of the enterprise as a whole. Assets and liabilities that relate jointly to two or more segments should be allocated to segments if, and only if, their related revenues and expenses are also allocated to those segments. If a single financial report contains both consolidated financial statements (CFS) and the separate financial statements of the parent, segment information need to be presented only on the basis of CFS.

Accounting Standards in India: A brief outline of each standard

6-61

AS 18: Related Party Disclosures

Parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party. Related party transaction refers to transfer of resources or obligations between related parties, regardless of whether or not price is charged. Name of the related party and nature of related party relationship (e.g., subsidiary, associate etc.) should be disclosed irrespective of whether or not there have been transactions between the parties.

Accounting Standards in India: A brief outline of each standard

6-62

AS 18(contd.) Disclosures

The reporting enterprise should disclose:

name of the transacting related party and a description of their relationship; a description of the nature of transactions and the volume of the transactions; the amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions of doubtful debts due from such parties; amount written off/back in the period in respect of debts due from/to related parties.

Accounting Standards in India: A brief outline of each standard

6-63

AS 19: Leases

A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. There are broadly two types of lease transactions:

Finance lease (long-term lease) Operating lease (short-term lease)

In finance lease, all the risks and rewards incident to ownership of an asset is transferred to the lessee. Operating lease is a lease other than finance lease.

Accounting Standards in India: A brief outline of each standard

6-64

As 19(contd.) Finance Lease

At the inception, the lessee should recognise the lease as an asset and a liability at an amount equal to the fair value of the leased asset. Subsequently, lease payments should be apportioned between the finance charge and reduction of the outstanding liability. The lessee charges depreciation on leased asset. The lessor recognises assets given under finance lease as a receivable in its balance sheet. The lessor recognises finance income on a pattern reflecting a constant periodic rate of return on the net investment of the lessor.

Accounting Standards in India: A brief outline of each standard

6-65

As 19(contd.) Operating Lease

Lease payments are recognised by the lessee as expenses in the profit and loss statement on a straight line or other appropriate basis. The lessor presents an asset given under operating lease as fixed asset in the balance sheet. The lessor charges depreciation on assets given under operating lease. Lease income is recognised in the profit and loss statement on a straight line or other suitable basis.

Accounting Standards in India: A brief outline of each standard

6-66

AS 20: Earning Per Share (EPS)

Two types of EPS:

Basic EPS: For the purpose of calculating basic EPS, the net profit or loss for the period attributable to ordinary shareholders should be divided by the weighted average number of ordinary shares outstanding during the period. Diluted EPS (DEPS): For the purpose of calculating diluted earning per share, the net profit attributable to ordinary shareholders and the weighted average number of shares outstanding should be adjusted for the effects of all dilutive potential ordinary shares.

Accounting Standards in India: A brief outline of each standard

6-67

AS 20(contd.) Weighted average computation


Transaction Common stock outstanding at the beginning Issuance of common stock Conversion into common stock Repurchase of common stock Effect on WA Computation Included in number of shares outstanding Time-weighted. Time-weighted Decrease number of shares outstanding by number of shares repurchased times portion of the year since repurchase Increase number of shares outstanding by number of bonus shares issued or resulting from the split retroactively as of the beginning of the earliest period presented Decrease number of shares outstanding by decrease in shares retroactively as of the beginning of the earliest period presented Time-weighted

Stock dividend or split

Reverse split

Business combination

Accounting Standards in India: A brief outline of each standard

6-68

AS 20(contd.) Diluted EPS

Two methods:

The treasury stock method Generally used for options and warrants The if-converted method Generally used for convertible securities

Diluted EPS assumes that all issuances that have the right to become common stock exercise that right (unless the exercise would be antidilutive), and therefore, anticipates and measures all potential dilution.

Accounting Standards in India: A brief outline of each standard

6-69

AS 20(contd.) Disclosures

EPS (and DEPS) should be shown on the face of the income statement along with the nominal value of shares. A reconciliation statement of the numerators and the denominators of the basic and DEPS computations. The weighted average number of equity shares used for calculating EPS and DEPS.

Accounting Standards in India: A brief outline of each standard

6-70

AS 21: Consolidated Financial Statements (CFS)

CFS is prepared for a group of enterprises under the control of a parent. Control includes control of the composition of the board of directors. All majority-owned subsidiaries (through direct or indirect ownership of a majority voting interest) to be consolidated unless:

Control is likely to be temporary, or Control does not rest with majority owner

Accounting Standards in India: A brief outline of each standard

6-71

AS 21(contd.) Temporary Control


The company is under judicial or regulatory order to divest the subsidiary; There is pending litigation concerning the acquisition of a subsidiary and it is probable that such litigation will result in its divestiture; Management's intent to dispose of all or part of its investment in a subsidiary, and a high probability that such disposition will occur reasonably soon, is not enough to support deconsolidation of a subsidiary.

Examples where control is likely to be temporary:

Examples where control does not rest with majority owner:


The parent does not have the ability to repatriate funds of a subsidiary because of long-term exchange restrictions, political uncertainties, threats of expropriation of a subsidiary's assets, or similar situations. The minority holder has certain veto-rights
Accounting Standards in India: A brief outline of each standard

6-72

AS 21(contd.) Presentation of CFS

A parent which presents CFS should also prepare and present its separate financial statements (SFS).

For CFS, the financial statements of the parent and its subsidiaries should be combined on a line by line basis by adding together like items of assets, liabilities, income and expenses. Where cost of investment in subsidiaries>parents portion of equity of the subsidiary, the difference is shown as goodwill
Where cost of investment in subsidiaries<parents portion of equity of the subsidiary, the difference is shown as capital reserve Intragroup balances/transactions and resulting unrealised profits should be eliminated in full.

Accounting Standards in India: A brief outline of each standard

6-73

AS 21(contd.) Minority Interests

Minority interest is that part of the net results of operations and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiary(ies), by the parent. Minority interest should be shown in the CFS as a separate line item.

Minority interests in the income of the group should also be separately presented.

Accounting Standards in India: A brief outline of each standard

6-74

AS 22: Accounting for Taxes on Income

The objectives of accounting for income taxes are identified in terms of elements of the balance sheet :

To recognize the amount of taxes currently payable or refundable. To recognize the deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the financial statements or in tax returns.

Accounting Standards in India: A brief outline of each standard

6-75

AS 22(contd.) Deferred Tax Liability or Asset

It is recognised for the estimated future tax effects attributable to timing differences and carry forwards. A timing difference is defined as a difference between the taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.

Accounting Standards in India: A brief outline of each standard

6-76

AS 22(contd.) Timing differences

A taxable timing difference is one that will result in the payment of income taxes in the future when the temporary difference reverses. A deductible timing difference is one that will result in reduced income taxes in future years when the temporary difference reverses. Taxable timing differences give rise to deferred tax liabilities; deductible timing differences give rise to deferred tax assets.

Accounting Standards in India: A brief outline of each standard

6-77

AS 22(contd.) Measurement and Recognition

Current tax should be measured at the amount expected to be paid to (recovered from) the tax authorities, using the applicable tax rates and tax laws. Deferred tax asset/liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. Tax expense for the period, comprising current tax and deferred tax, should be included in determination of net profit/loss for the period.

Accounting Standards in India: A brief outline of each standard

6-78

AS 23: Accounting for Investments in Associates in Consolidated Financial Statements


This standard is applicable in CFS only. An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the enterprise. Normally, if an investor holds, directly or through subsidiaries, 20% or more (but not exceeding 50%) of the voting power of the investee, it is presumed that the investor has significance influence.

Accounting Standards in India: A brief outline of each standard

6-79

AS 23(contd.) Accounting Methods

Two Alternative Methods in AS-23:

Equity Method

Cost Method (same as prescribed in AS 13)

An investment in associate is required to be accounted for (in consolidated financial statements) under equity method except in two situations:

When an investment is acquired for the purpose of disposal in near future. There is severe long term restrictions on fund transfer by the associate to the investor.

Accounting Standards in India: A brief outline of each standard

6-80

AS 23(contd.) Features of Equity Method

Measurement Criteria:

Find out the value of investments on the basis of proportionate value of net assets of the investee.
Find out goodwill or capital reserve arising out of purchase consideration. Such goodwill or capital reserve should be included in the carrying amount of investment and should be disclosed separately.

Accounting Standards in India: A brief outline of each standard

6-81

AS 23(contd.) Features of Equity Method

The carrying amount is increased (decreased) on the basis of share of profit(loss) in the investee. Carrying amount is reduced by any distribution of profit by investee (investors share). Unrealised profit or loss resulting from transactions between the investor (and its consolidated subsidiary) and the associate should be eliminated to the extent of the interest of the investor in the associate. The carrying amount of investment in an associate is reduced to recognise decline in the value of investments computed in terms of proportionate net assets of the investee. In case of decline in the value of investment in associates, the loss should be first adjusted against goodwill (if any) and there after from the value of investment.

Accounting Standards in India: A brief outline of each standard

6-82

AS 24: Discontinuing Operations

A discontinuing operation is a separate line of business which is under a plan of disposal or abandonment. This standard requires separate reporting of discontinuing operations from continuing operations so that users of financial statements may make proper forecast of the entitys future cash flows/earnings from continuing operations. The fact that a disposal of a component of an enterprise is classified as a discontinuing operation does not, in itself, bring into question the enterprises ability to continue as going concern.

Accounting Standards in India: A brief outline of each standard

6-83

AS 24(contd.) Initial disclosure event

An enterprise is required to disclose certain details about the discontinuing operation in its financial statements for the period in which the initial disclosure event occurs. The initial disclosure event is the occurrence of one of the following events, whichever occurs earlier:

the enterprise has entered into a binding sale agreement for substantial part of discontinuing operation; the enterprises board of directors has approved and made announcement of a detailed, formal plan for the discontinuance.

Accounting Standards in India: A brief outline of each standard

6-84

AS 24(contd.) Measurement and recognition

Principles of recognition and measurement as set out in other Accounting Standards would be applicable for reporting financial elements relating to a discontinuing operation. An enterprise should include in its financial statements certain information relating to the discontinuing operqtion (e.g., description of the discontinuing operation, carrying amounts of assets and liabilities to be disposed of/settled, amounts of revenue/expenses attributable to discontinuing operation etc.) In subsequent years, a description of any significant changes in the amount or timing of cash flows relating to assets to be disposed or liabilities to be settled, in the form of notes.

Accounting Standards in India: A brief outline of each standard

6-85

AS 25: Interim Financial Reporting

Interim financial report contains either a complete set of financial statements or CFS for an interim period (e.g., a quarter). A complete set of financial statements normally includes:

balance sheet; profit and loss statement; cash flow statement; and notes to accounts

However, an interim financial report should include, at a minimum,:

condensed balance sheet; condensed profit and loss statement; condensed cash flow statement; and selected explanatory notes.

Accounting Standards in India: A brief outline of each standard

6-86

AS 25(contd.) Recognition and measurement

An enterprise should apply the same accounting policies in its interim financial statements as are applied in its annual financial statements, except for accounting policy changes made after the last annual financial statements that are to be reflected in the next annual financial statements. Revenues that are received seasonally or occasionally within a financial year should not be anticipated or deferred as of an interim date if anticipation or deferral would not be appropriate at the end of the enterprises financial year. Of course, this may lead to greater volatility in reported interim revenue.

Accounting Standards in India: A brief outline of each standard

6-87

AS 26: Intangible Assets

This standard becomes effective from 1 April 2004 and consequently the following stand withdrawn:

AS 8 Relevant paragraph (relating to amortisation/depreciation of intangible assets) of AS 6 Relevant paragraphs (relating to valuation and disclosure of intangible assets) of AS 10.

This standard does not apply to financial assets, mineral rights, exploration expenditure, insurance contracts.

Accounting Standards in India: A brief outline of each standard

6-88

AS 26(contd.) Definitions

Intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services. Common examples of intangible assets include patents, copyright, computer software, customer list, brands etc. Goodwill is a special type of intangible asset that is not separable.

Accounting Standards in India: A brief outline of each standard

6-89

AS 26(contd.) Recognition

An intangible asset should be recognised if and only if:


it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and the cost of the asset can be measured reliably.

An intangible asset should be measured initially at cost. After initial recognition, an intangible asset should be carried at its cost less any accumulated amortisation and any accumulated impairment losses.

Accounting Standards in India: A brief outline of each standard

6-90

AS 26(contd.) Research and Development

All research costs should be expensed.

Development costs can be recognised as intangible asset provided certain conditions are fulfilled. Internally generated brands, customer lists, publishing titles and similar items should not be recognised as intangible assets. Internally generated goodwill should not be recognised as an asset.

Accounting Standards in India: A brief outline of each standard

6-91

AS 27: Financial Reporting of Interests in Joint Ventures

A joint venture is a contractual agreement whereby two or more parties undertake an economic activity, which is subject to joint control. Three types of joint ventures:

Jointly controlled operations Jointly controlled assets Jointly controlled entities

Accounting Standards in India: A brief outline of each standard

6-92

AS 27(contd.) Jointly controlled operations

A venturer should recognise in its separate financial statements and consequently in CFS:

the assets that it controls and the liabilities that it incurs; and

the expenses that it incurs and its share of the income that it earns from the joint venture.

Accounting Standards in India: A brief outline of each standard

6-93

AS 27(contd.) Jointly controlled assets

A venturer should recognise in its separate financial statements and consequently in CFS:

its share of the jointly controlled assets; any liability which it has incurred; its share of any liabilities incurred jointly with the other venturers in relation to the JV; any income from the sale or use of its share of output of the JV, together with its share of any expenses incurred by the JV; and any expenses which it has incurred in respect of its interest in the JV

Accounting Standards in India: A brief outline of each standard

6-94

AS 27(contd.) Jointly controlled entities

A jointly controlled JV is in the form of a corporation or partnership, or other entity in which each venturer has an interest. A jointly controlled entity maintains its own records and prepares and presents its own financial statements. In a venturers separate financial statements, interest in a jointly controlled entity should be accounted for as per AS 13. In CFS, a venturer should normally report its interest in a jointly controlled entity using proportionate consolidation method.

Accounting Standards in India: A brief outline of each standard

6-95

AS 27(contd.) Proportionate consolidation method

It is a method of accounting and reporting whereby a venturers share of each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as separate line items in the venturers financial statements. An investor in a JV, which does not have joint control, should report its investment in JV in its CFS in accordance with AS 13 or AS 21 or AS 23, as appropriate.

Accounting Standards in India: A brief outline of each standard

6-96

AS 28: Impairment of Assets


Impairment denotes loss in value. An enterprise should assess, at each balance sheet date, existence of any indication of impairment. If any such indication exists, the enterprise should estimate the recoverable amount of the asset. Does not apply to:

inventories Assets arising from construction contracts Financial instruments Deferred tax assets

Accounting Standards in India: A brief outline of each standard

6-97

AS 28(contd.) Impairment

An impairment loss is the amount by which the carrying amount of the asset exceeds its recoverable amount of the asset. Recoverable amount is the higher of an assets net selling price and value in use. Value in use is the amount obtainable from the sale of an asset in an arms length transaction, less the cost of disposal. After an impairment is recognised, the reduced carrying amount of the asset shall be accounted for as its new cost and depreciation would be charged on the new cost for the remaining life.

Accounting Standards in India: A brief outline of each standard

6-98

AS 28(contd.) Impairment

The impairment loss can be reversed for a later recovery in market value. Goodwill shall be included in an asset group (equivalent to the concept of cash generating unit) to be tested for impairment only if the asset group is or includes a reporting unit. Goodwill shall not be included in a lower-level asset group that includes only part of a reporting entity.

Accounting Standards in India: A brief outline of each standard

6-99

AS 28(contd.) Recognition

An impairment loss is recognised as an expense in the profit and loss statement immediately (unless the asset was revalued earlier) An impairment loss for a cash generating unit (CGU) shall be allocated first to goodwill allocated to the CGU and then to the other assets on a prorata basis using the relative carrying amounts of those assets. However, loss allocated to an individual asset of the CGU shall not reduce the carrying amount of the asset below its recoverable amount whenever that recoverable amount is determinable without undue cost and effort.

Accounting Standards in India: A brief outline of each standard

6-100

AS 28(contd.) Impairment of goodwill


Goodwill shall not be amortized. Instead, it shall be tested for impairment at a cash generating unit level. Goodwill is assumed to have impaired when the carrying amount of goodwill exceeds its recoverable amount. The recoverable amount of goodwill can be measured only as a residual and cannot be measured directly. Goodwill impairment should be based on bottomup approach or top-down approach.

Accounting Standards in India: A brief outline of each standard

6-101

AS 29: Provisions, Contingent Liabilities and Contingent Assets


A provision is a liability which can be measured only by using a substantial degree of estimation. When the amount of a liability can only be estimated, it is called provision. In the process of determining best estimates, the amount of provision should not be discounted. A contingent liability is:

a possible obligation that arises from past events and the existence of which will be confirmed only by occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the enterprise; or a present obligation that arises from past events but is not recognised because either the possibility of cash outflow is remote or is difficult to estimate.

Thus contingent liability could either be a possible or present obligation. A contingent asset is a possible asset.

Accounting Standards in India: A brief outline of each standard

6-102

AS 29(contd.) Recognition of Provision


A provision is recognised when:

an enterprise has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation.If these conditions are not met, no provision should be recognised.

An enterprise should not recognise a contingent liability or contingent asset.

Accounting Standards in India: A brief outline of each standard

6-103

AS 29(contd.) Restructuring
A restructuring is a programme that is planned and controlled by management, and materially changes either:

the scope of a business undertaken by an enterprise; or the manner in which that business is conducted.

No obligation arises for the sale of an operation until the enterprise is committed to the sale, i.e., there is a binding sale agreement. A restructuring provision should include only the direct expenditures arising from the restructuring which are those that are both:

necessarily entailed by the restructuring; and not associated with the ongoing activities of the enterprise

Accounting Standards in India: A brief outline of each standard