ACCOUNTING

STANDARDS
INTRODUCTION

 Statements of code of practice of the regulatory

accounting bodies which are to be observed in
the preparation and presentation of financial
statements

 ICAI constituted the ASB on April 21st , 1977

 29 Accounting Standards in India

OBJECTIVES

 Standardize the diverse accounting policies

 Add reliability to the financial statements

 Eradicate baffling variations in treatment of

accounting aspects

 Facilitate inter-firm comparison

AGENDA OF DISCUSSION

 AS 1 Disclosure of Accounting Policies

 AS 2 Valuation of Inventories

 AS 3 Cash Flow Statement

 AS 4 Contingencies and Events Occurring after the

Balance Sheet Date

 AS 5 Net Profit or Loss for the period, Prior Period Items

and Changes in Accounting Policies

 AS 6 Depreciation Accounting
ACCOUNTING
STANDARD 1

DISCLOSURE OF
ACCOUNTING POLICIES
OBJECTIVE

 To facilitate better understanding of financial

statements

 To facilitate meaningful comparison between

financial statements of different enterprises
MEANING OF ACCOUNTING
POLICIES

 Specific accounting principles.

 Methods of applying these principles are adopted by

the enterprise.

 In preparation of financial statements.

AREAS ENCOUNTERED

 Conversion of Foreign Currency

 Valuation of Inventories

 Valuation of Investments

 Valuation of Fixed Assets

 Methods of Depreciation

 Treatment of Goodwill

 Treatment of retirement benefits

CONSIDERATIONS IN THE
SELECTION OF ACCOUNTING
POLICIES

 Prudence

 Substance over form

 Materiality
FUNDAMENTAL ACCOUNTING
ASSUMPTIONS

 GOING CONCERN
 CONSISTENCY
 ACCRUAL

These are not specifically stated in the financial

statements. Their acceptance and usage is
assumed
DISCLOSURE OF
ACCOUNTING POLICIES

 All significant accounting policies adopted should be

disclosed

 The disclosure should form part of the financial

statements

 Any change in the accounting policies which has a

material effect in the current period should be
disclosed along with amount of effect

 If the fundamental accounting assumptions are not

followed, the fact should be disclosed
 ACCOUNTING
STANDARD 2

VALUATION OF INVENTORIES
 OBJECTIVE

 Specifies the principles for valuing the

inventory.

 Disclosure of the specific policies adopted by

the management for the valuation of
inventory.
DEFINITION

 Inventories are assets :

 Held for sale in the ordinary course of
business
 In the process of production for sale
 In the form of materials or supplies to be
consumed in the production process or in
the rendering of services
 SCOPE

This statement should be applied in accounting for inventories

other than:

 Work in progress arising under construction contracts,

including directly related service contracts.

 Work in progress arising in the ordinary course of business of

service providers.

 Shares, debentures and other financial instruments held as

stock-in-trade; And.

 Producers’ inventories of livestock, agricultural and forest

products, and mineral oils, ores and gases to that extent that
they are measured at net realizable value in accordance with
well established practices in those industries.
MEASUREMENT OF
INVENTORIES
 Inventories should be valued at the
lower of Cost and Net Realizable Value.

 Major Points for valuation of

Inventories are

 Determination of Cost of Inventories

 Determination of Net realizable value of
Inventories
 Comparison between the Cost and Net realizable
value
COST OF INVENTORY

 The cost of inventories should comprise:

 Cost of Purchase: includes

 Purchase Price
 Duties and taxes
 Freight inwards

 Cost of Purchase: excludes

 Trade Discount
 Rebates
COST OF INVENTORY
(CONTD..)

 Cost of conversion: implies costs that are

directly related to the units of production.

 Other costs: included only to the extent they

are incurred in bringing the inventories to
their present location and condition.
EXCLUSIONS FROM THE
COST
 Abnormal amount of wasted material, labor
and production costs.
 Storage costs, unless they are necessary in
the production process.
 Administrative overheads which do not
contribute to bringing the inventories to
their present location and condition.
 Selling and distribution costs.
 Interest and borrowing cost.
COST METHOD

 Following Cost methods can be used:

 FIFO

 Weighted average
NET REALIZABLE
VALUE

 Net realizable value means the estimated

price that can be realized in the ordinary
course of business, as reduced by the cost of
completion and cost of sale.

 Net realizable value also takes into account

the purpose for which the inventory is held.
ESTIMATION OF NET
REALIZABLE VALUE
The Net realizable value of the supplies held
for use in production of finished goods is
estimated as under:

 If finished product, in which raw materials are used:

 Is sold at cost or above cost: then the
estimated realizable value of raw material and
supplies is considered more than cost.
 Is sold below cost: then the estimated realizable
value of raw material or supplies is equal to
replacement price of raw material or supplies.
COMPARISON BETWEEN
COST AND NET REALISABLE
VALUE

 The comparison between cost and Net

realizable value should be made.
ILLUSTRATION
Ambica Toys Ltd. purchased 1,00,000 units of
remote cars, during the year 2004-05. The cost
per unit of car consists of raw materials of Rs
100, wages of Rs 50 and other direct expenses
of Rs 25 per car. During the year, 10,000 units
of the cars remained unsold. All the
manufactured cars were placed in a godown, for
which a fixed rent of Rs 12,000 per annum was
paid. Further, a commission of Rs 50 per car
was paid to the selling department.

What is the value of the stock at the end of the

year?
SOLUTION
Given: No. of Units purchased-1,00,000.
Raw Materials- Rs 100/unit.
Wages- Rs 50.
Other direct Expenses- Rs 25/car.
Unsold cars- 10,000 units.
Rent- 12,000.
Commission paid- Rs 50/unit.

Item Cost per unit No. of units Total Cost

Raw Materials 100 10,000 10,00,000
Wages 50 10,000 5,00,000

Direct 25 10,000 2,50,000

Expenses

Value of the Closing Stock 17,50,000

ACCOUNTING
STANDARD 3

CASH FLOW
STATEMENTS
INTRODUCTION
 Cash flow statement is additional information to user
of financial statement

 This statement exhibits the flow of incoming and

outgoing cash

 This statement assesses the ability of the enterprise to

generate cash and cash equivalents

 It also assesses the needs of the enterprise to utilize

the cash and cash equivalents generated

 It also assesses the liquidity and solvency of the

enterprise.
APPLICABILITY

 This standard applies to the enterprises:

 Having turnover more than Rs. 50 Cores 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
DEFINITIONS
• Cash comprises cash on hand and demand deposits with banks. 

• Cash equivalents are short term, highly liquid investments that are
readily convertible into known amounts of cash and which are subject
to an insignificant risk of changes in value. 

• Cash flows are inflows and outflows of cash and cash equivalents. 

• Operating activities are the principal revenue-producing activities of

the enterprise and other activities that are not investing or financing
activities. 

• Investing activities are the acquisition and disposal of long-term

assets and other investments not included in cash equivalents. 

• Financing activities are activities that result in changes in the size

and composition of the owners’ capital (including preference share
capital in the case of a company) and borrowings of the enterprise.
CASH AND CASH
EQUIVALENTS
 Cash Equivalents
 Held for meeting short term commitments
 It is readily convertible into known amounts of
cash
 It has a very insignificant risk
 Short maturity (say 3 months maximum)

 Cash flows exclude

 Movements between cash and cash equivalents

 Cash management includes the investment of

excess cash in cash equivalents
FEATURES OF CASH
FLOW STATEMENT

 The cash flow statement should report cash flows

during the period classified by
 Operating,
 Investing and
 Financing activities.

 Sum of these three types of cash flow reflect net

increase or decrease of cash and cash equivalents.
OPERATING ACTIVITIES

 These are principal revenue producing

activities of the enterprise.

 Examples:
 Cash receipts from sale of goods / rendering
services;

 Cash receipts from royalties, fees, commissions

and other revenue;

 Cash payments to suppliers of goods and service;

 Cash payments to and on behalf of employees.

INVESTMENT ACTIVITIES
 The activities of acquisition and disposal of long term assets
and other investments not included in cash equivalent are
investing activities.

 It includes making and collecting loans, acquiring and disposal

of debt and equity instruments, property and fixed assets etc.

 Examples of cash flows arising from investing activities are as

follows:
 Cash payments to acquire fixed assets

 Cash receipts from disposal of fixed assets

 Cash payments to acquire shares, warrants or debt instruments of

other enterprises and interest in joint ventures

 Cash receipt from disposal of above investments

FINANCING ACTIVITIES

 Those activities that result in changes in size and composition of

owners capital and borrowing of the organization.

 It includes receipts from issuing shares, debentures, bonds,

borrowing and payment of borrowed amount, loan etc.

 Sale of share

 Buy back of shares

 Redemption of preference shares

 Issue / redemption of debentures

 Long term loan / payment thereof

CASH FLOW FROM
OPERATING ACTIVITIES
 It can be derived either from direct method or
indirect method

 Direct method:
 In this method, gross receipts and gross payments of
cash are disclosed

 Indirect method:
 In this method, profit and loss account is adjusted for the
effects of transaction of non-cash nature.
 ACCOUNTING
STANDARD 4

CONTINGENCIES AND EVENTS

OCCURING AFTER THE
BALANCE SHEET DATE
PURPOSE

 This standard deals with the treatment in the financial

statements of:

 Contingencies.
 Events occurring after the balance sheet date.
 This standard does not deal with:
 Liabilities of life assurance and general insurance
enterprises arising from policies issued.
 Obligations under retirement benefit plans.
 Commitments arising from long-term lease contracts.
CONTINGENCY

 Contingency is a condition or situation, the ultimate

outcome of which, gain or loss, will be known or
determined only on the occurrence, or non-occurrence,
of one or more uncertain future events.
CONTINGENCY [CONTD..]

 Only contingent loss should be recognized in

financial statement.

 Contingent gains should not be recognized in

financial statements.
EVENTS OCCURING AFTER
THE BALANCE SHEET DATE

 Events occurring after the balance sheet date: those

significant events, both favorable and unfavorable,
that occur between the balance sheet date and the
date on which the financial statements are approved
by the Board of Directors.

Classification of Events:
 Those which provide further evidence of conditions
that existed at the balance sheet date and
 Those which are indicative of conditions that arose
subsequent to the balance sheet date
DISCLOSURE IN NOTES

 The nature of the event.

 An estimate of the financial effect or a statement

that such an estimate cannot be made.
 ACCOUNTING
STANDARD 5

NET PROFIT OR LOSS FOR THE

PERIOD, PRIOR PERIOD ITEMS AND
CHANGES IN ACCOUNTING
POLICIES
RELEVANT DEFINITIONS

 Ordinary activities are any activities and other incidental

activities which are undertaken by an enterprise as part of
its business.

 Extraordinary items are income or expenses that arise

from non recurring events and transactions.

 Prior period items are income or expenses, which arise,

in the current period as a result of errors or omissions in
the preparation of the financial statements of one or more
prior periods.

 Accounting policies are the specific accounting

principles and the methods of applying those principles in
the preparation and presentation of financial statements.
DISCLOSURE
REQUIREMENTS

 Extraordinary items: The nature and the amount

of each extraordinary item should be separately
disclosed in the statement of profit and loss in a
manner that its impact on current profit or loss can
be perceived.

 Ordinary items: When items of income and

expense from ordinary activities are of such size,
nature or incidence that their disclosure is relevant to
explain the performance of the enterprise for the
period, the nature and amount of such items should
be disclosed separately.
 DISCLOSURE
REQUIREMENTS [CONTD..]
 Prior period items: The nature and amount of prior
period items should be separately disclosed in the profit
and loss statement in such a way that their impact on
the current profit or loss can be perceived.
 Accounting estimates: The nature and amount of a
change in an accounting estimate which has a material
effect in the current period or which is expected to have
a material effect in subsequent periods, should be
disclosed. If the effect cannot be quantified, this fact
should be disclosed.
 Accounting policies: The effect of any change in an
accounting policy, if material, should be disclosed in the
financial statements of the period quantifying the
impact. Where the effect cannot be quantified, wholly or
in part, the fact should be disclosed.
ACCOUNTING
STANDARD 6

DEPRECIATION ACCOUNTING
OBJECTIVE

 Disclosure of accounting policy for depreciation

followed by an enterprise.
DEFINITIONS

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 due to technology and
market changes.
DEFINITIONS [CONTD..]

DEPRECIABLE ASSETS

 Used during more than one year

 Have a limited useful life
 Are held by an enterprise for use in :
 the production or supply of goods and services
 for renting to others
 for administrative purposes
 not for the purpose of sale in the ordinary course of
business.
DEFINITIONS [CONTD..]

DEPRECIABLE AMOUNT OF AN ASSET

Is its historical cost, or other amount substituted

for historical cost in the financial statements, less
the estimated residual value.

Depreciable amount of a depreciable asset should

be allocated on a systematic basis to each
accounting period during its useful life.
ASSESSMENT OF
DEPRECIATION

 Historical cost.

 Expected useful life of the depreciable asset.

 Estimated residual value of the

depreciable asset.
METHODS FOLLOWED

1. STRAIGHT LINE METHOD

2. WRITTEN DOWN VALUE METHOD

If a change in the method of depreciation is made, depreciation

is recalculated in accordance with the new method from the date
of the asset coming into use. The deficiency or surplus arising
from retrospective re-computation is adjusted in the profit and
loss account in the year in which the method of depreciation is
changed.
DISCLOSURE
REQUIREMENTS

 The historical cost each class of assets;

 Total depreciation for the period.

 The related accumulated depreciation;

 Depreciation methods used; and

 Depreciation rates (only if they are different from

the principal rates specified in the statute
governing the enterprise).
CONCLUSION
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