69 annexure iv comparison between usgaap, indian gaap … · annexure iv comparison between usgaap,...

Annexure IVComparison between USGAAP, Indian GAAP and IAS (as on April 2000)

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Comparative Analysis Between US GAAP, Indian GAAP and IAS

A comparative analysis of accounting pronouncements under US GAAP, Indian GAAP and IAS ispresented in the table below. The analysis seeks to identify the significant areas of accounting, asummary of the important applicable pronouncements under these three frameworks of reporting and acomparison of the similarities and differences between these. In this analysis, US GAAP is taken as theprimary reporting framework and Indian GAAP and IAS pronouncements are compared alongside.

This is organized by principal accounting area. To enable ease of use, a topic-wise index is presentedfirst. This index identifies the accounting area under US GAAP together with the relevant accountingpronouncements and the corresponding applicable pronouncement under Indian GAAP and IAS. Acomparison between US GAAP, Indian GAAP and IAS is then presented for each identified area.

Index

US GAAP Indian GAAP IAS

Accounting changes (Source: APB 20) Changes in Accounting Policies(Source: AS 5)

Changes in Accounting Policies(Source: IAS 8)

Accounting policies (Source: APB 22) Disclosure of Accounting Policies(Source: AS 1)

Presentation of Financial Statements(Source: IAS 1)

Adjustments to financial statements ofprior periods (Sources: FAS 16 and109, APB 9 and 20)

Prior period adjustments (Source:AS 5)

Prior period adjustments (Source:IAS 8)

Balance sheet – classification anddisplay (Sources: ARB 43, ch3A,APB 6 and 10, FAS 6, FIN 39 and 41)

No specific accountingpronouncement


Business Combinations (Sources:ARB 43, Ch 1A, ARB 51, APB 16,AIN-APB 16, FAS 10, 38, 72, 79, 87,106, 109, 111, 121 and 135, FIN 4and 9, FTB 85-5)

Accounting for Amalgamations(Source: AS 14)

Business Combinations (Source:IAS 22)

Capital stock (Sources: ARB 43, ch1A,ch1B and ch7B, APB 6, 9, 12, 14 and29, FAS 129)



Cash flow statements (Sources:FAS 95, 102, 104, 115 and 117)

Cash flow statements (Sources: AS 3and SEBI guidelines on cash flowstatements for listed companies)

Cash flow statements (Source: IAS 7)

Commitments: Long-term obligations(Sources: FAS 47 and 129)

No corresponding accountingpronouncement


Compensation: Stock based (Sources:APB 25, AIN-APB 25, ARB 43, ch13B,FAS 109, 123 and 128, FIN 28 andFTB 97-1)

SEBI (Employee Stock Option SchemeAnd Employee Stock PurchaseScheme) Guidelines, 1999.[applicable to listed companies only]


Compensation to Employees:Deferred Compensation Agreementsand Paid Absences [Sources: APB 12,FAS 43, 106, 111, 112 and 123]


No specific accounting pronouncement

Comprehensive income (Source:FAS 130)




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Computer Software To Be Sold,Leased or Otherwise Marketed(Sources: FAS 2 and 86)



Consolidation (Sources: ARB 51,FAS 13, 58, 94, 109 and 131)


Consolidated Financial Statements andAccounting for Investments inSubsidiaries (Source: IAS 27)

Contingencies (Sources: FAS 5 andFIN 14)

Contingencies and Events OccurringAfter the Balance Sheet Date(Sources: AS 4)

Events After the Balance Sheet Date(Source: IAS 10) and ContingentLiabilities (Source: IAS 37)

Costs of Computer SoftwareDeveloped or Obtained for InternalUse (Source: SOP 98-1)



Debt: (Sources: APB 14, AIN-APB 26,FAS 15, 49, 84, 91, 114 and 121,FTB 80-2 and 81-6)



Depreciation (Sources: ARB 43,Ch9C, APB 6 and 12; FAS 92, 93, 109and 135)

Depreciation Accounting (Source:AS 6 and SchVI, Part I)

Depreciation Accounting (Source:IAS 4)

Derivative Instruments and HedgingActivities (Source: FAS 133)

No comparable accountingpronouncement. Guidance Note onlyon Equity Futures Index forderivatives

Financial Instruments: Recognitionand Measurement (Source: IAS 39)

Development Stage Enterprises(Source: APB 18, FAS 7 and 95,FIN 7, SOP 98-5)

GN, Treatment of Expenditure DuringConstruction Period


Earnings per Share (Source:FAS 128)

No comparable accountingpronouncement. AS being issued byJanuary 2001.

Earnings per share (Source: IAS 33)

Financial Instruments: Disclosure(Sources: FAS 107, 112, 123, 125, 126and 133)

Financial Instruments: Disclosure(Source: AS 11)

Financial Instruments: Disclosure(Source: IAS 32)

Financial Instruments: Servicing(Source: FAS 125)



Financial Instruments: Transfers(Sources: FAS 125 and 127)


Financial Instruments: Transfers(Sources: IAS 39)

Financial Statements: ComparativeFinancial Statements (Source:ARB 43, ch2A)


Financial Statements: ComparativeFinancial Statements (Source: IAS 1)

Foreign Currency Translation(Sources: FAS 52, 95, 104, 109, 130,133 and 135 and FIN 37)

Accounting for the Effects of Changesin Foreign Exchange Rates (AS 11)

Effects of Changes in ForeignExchange Rates (AS 21)

Impairment (Sources: FAS 114, 115,118, 121, 130, 133 and 135)


Impairment of Assets (Source: IAS 36)

Income Statement Presentation(Sources: APB 9, 16 and 30, AIN-APB 9, 16 and 30, FAS 4, 16, 44, 64,101, 109, 121 and 128, FTB 85-6)

Prior Period and Extraordinary Itemsand Changes in Accounting Policies(Source: AS 5). Specific standard onDiscontinuing Operations already

Income Statement Presentation(Source: IAS 8 and 35)


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undertaken by ASB.

Income taxes (Sources: APB 2, 4, 10and 23, AIN-APB 4, FAS 37, 60, 95,109, 115, 123, 130 and 135, FTB 82-1)

Income taxes (Source: GN,Accounting for Taxes on Income) ASunder finalisation by ASB inDecember 2000.

Income taxes (Source: IAS 12)

Intangible assets (Sources: ARB 43,Ch5, APB 9 and 17, AIN-APB 17,FAS 44, 72, 109, 121 and 135, FIN 9,FTB 85-6)

No corresponding accountingpronouncement. AS 14 coversgoodwill and AS 10 covers Patents,etc.

Intangible assets (Source: IAS 38)

Interest: Capitalization of InterestCosts (Sources: FAS 34, 42, 58, 62, 87and 121, FIN 33)

AS - 16 Interest: Capitalization of InterestCosts (Sources: IAS 23)

Interest: Imputation of an InterestCost (Sources: APB 12 and 21, AIN-APB 21, FAS 34 and 109)



Interim Financial Reporting (Sources:APB 28, FAS 3, 16, 69, 95, 109, 128,130, 131 and 135, FIN 18, FTB 79-9;)


Interim Financial Reporting (Source:IAS 34)

Inventory (Sources: ARB 43, Ch3Aand 4, FAS 133)

Valuation of Inventories (Source:AS 2)

Inventories (Source: IAS 2)

Investments: Debt and EquitySecurities (Sources: ARB 43, FAS 91,115, 124, 125, 130, 133 and 135,FTB 79-19 and 94-1)

Accounting for Investments (Source:AS 13)

Accounting for Investments (Source:IAS 25)

Investments: Equity Method (Sources:APB 18, AIN-APB 18, FAS 58, 94,109, 115, 128 and 133, FIN 35,FTB 79-19)


Accounting for Investments inAssociates (Source: IAS 28) andFinancial Reporting of Interests inJoint Ventures (Source: IAS 31)

Leases (Sources: FAS 13, 22, 23, 27,28, 29, 91, 94, 98, 109 and 125,FIN 19, 21, 23, 24, 26 and 27,FTB 79-10, 79-12, 79-13, 79-14, 79-15, 79-16(R), 85-3, 86-2 and 88-1)

AS-19 Accounting for Leases Leases (Source: IAS 17)

Lending activities (Sources: FAS 91,115, 124, 125 and 133



Liabilities: Extinguishments (Sources:APB 26, AIN-APB 26, FAS 4, 64, 84,111 and 125, FTB 80-1)


Liabilities: Extinguishments (Source:IAS 39)

Non-monetary transactions (Sources:APB 29, FAS 109 and 123, FIN 30)



Pension costs (Sources: FAS 87, 88,106, 109, 130, 132 and 135)

Accounting for Retirement Benefits inthe Financial Statements of Employers(Source: AS 15)

Employee benefits (Source: IAS 19)

Postretirement Benefits Other ThanPensions (Sources: FAS 88, 106, 112,132 and 135)



Property, Plant and Equipment Accounting for Fixed Assets (AS 10) Property, Plant and Equipment


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(Source: ARB 43, Ch9B) (IAS 16)

Related parties (Source: ARB 43,Ch1A, FAS 57 and 109)

AS-18 Related parties (Source: IAS 24)

Research and Development (Sources:FAS 2 and 86; FIN 6)

Accounting for Research andDevelopment (Source: AS 8)

Intangible Assets (Source: IAS 38)

Research and DevelopmentArrangements (Sources: FAS 68,FTB 84-1)



Revenue Recognition (Sources:ARB 43, Ch1A, ARB 45, APB 10,FAS 48 and 111, FTB 90-1)

Accounting for ConstructionContracts (Source: AS 7) and RevenueRecognition (Source: AS 9)

Construction Contracts (Source:IAS 11) and Revenue (Source: IAS 18)

Segment Disclosures and RelatedInformation (Sources: FAS 131,FTB 79-4 and 79-5)

No corresponding accountingpronouncement. ED recently issuedby the ICAI

Segment Reporting (Source: IAS 14)


Accounting for Government Grants(Source: AS 12)

Accounting for Government Grants andDisclosure of Government Assistance(Source: IAS 20)

Accounting changes


Accounting changes are defined as achange in (a) an accounting principle,(b) an accounting estimate, or (c) thereporting enterprise (which is a specialtype of change in accounting principle.The correction of an error inpreviously issued financial statementsis not deemed to be an accountingchange.

A presumption in preparing financialstatements is that an accountingprinciple once adopted should not bechanged in accounting for events andtransactions of a similar type. Thatpresumption may be overcome only ifthe enterprise justifies the use of analternative acceptable accountingprinciple on the basis that it ispreferable.

The cumulative effect of a change in anaccounting principle shall be includedin net income of the period of thechange and presented in the incomestatement net of related tax effects afterextraordinary items. This does notapply to changes in certain specifiedaccounting principles that are made byretroactive restatement.

Accounting policies are defined as the“specific accounting principles and themethods of applying those principlesadopted by an enterprise in thepreparation and presentation offinancial statements”.

Changes in accounting policies arepermitted only if the adoption of adifferent accounting policy is requiredby statute or for compliance with anaccounting standard or if it isconsidered that the change wouldresult in a more appropriatepresentation of the financial statementsof the enterprise.

The following are not considered aschanges in accounting policies:

Adoption of an accounting policyfor events or transactions thatdiffer in substance from previouslyoccurring events or transactions,e.g., introduction of a formalretirement gratuity scheme by anemployer in place of ad hoc ex-gratia payments to employees onretirement; and

Adoption of a new accountingpolicy for events or transactions

A change in accounting policy istreated retrospectively by restating allprior periods presented and adjustingopening retained earnings(benchmark).

Changes in accounting policy aremade only if required by statute, or byan accounting standard setting body,or if the change will result in a moreappropriate presentation of events ortransactions in the financial statementsof the enterprise.

Changes in accounting policies areapplied retrospectively unless theamount of any resulting adjustmentthat relates to prior periods is notreasonably determinable. Resultingadjustments are reported as anadjustment to the opening balance ofretained earnings. Comparativeinformation is restated unless it isimpracticable to do so.

Changes in accounting policy areapplied prospectively when the amountof the adjustment to the openingbalance of retained earnings requiredabove cannot be reasonablydetermined.


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that did not occur previously orthat were immaterial.

A change in accounting estimate isaccounted for in the period of change ifthe change affects that period only orin the period of change and futureperiods if the change affects both.Restating amounts reported infinancial statements of prior periods orreporting pro forma amounts for priorperiods is not permitted.

The nature of and justification for achange in accounting principle and itseffect on income is disclosed in thefinancial statements of the period inwhich the change is made. Thejustification for the change shouldexplain clearly why the newly adoptedaccounting principle is preferable.

Changes in accounting principlegenerally require the followingdisclosures:

Financial statements for priorperiods included for comparativepurposes shall be presented aspreviously reported;

The cumulative effect of changingto a new accounting principle onthe amount of retained earnings atthe beginning of the period inwhich the change is made shall beincluded in net income of theperiod of the change;

The effect of adopting the newaccounting principle on incomebefore extraordinary items and onnet income (and on the related pershare amounts) of the period of thechange shall be disclosed; and

Income before extraordinary itemsand net income computed on a proforma basis shall be shown on theface of the income statements forall periods presented as if thenewly adopted accountingprinciple had been applied duringall periods affected.

AS 5 requires the disclosure of anychange in an accounting policy thathas a material effect. The impact of,and the adjustments resulting from,such change, if material, should beshown in the financial statements of theperiod in which such change is made,to reflect the effect of such change.

Where the effect of such change is notascertainable, wholly or in part, thatfact should be indicated. A changemade to an accounting policy that hasno material effect on the financialstatements for the current period but isreasonably expected to have a materialeffect in later periods, should beappropriately disclosed in the period inwhich the change is adopted.

Allowed alternative treatment

Changes in accounting policy areapplied retrospectively unless theamount of any resulting adjustmentthat relates to prior periods is notreasonably determinable. Anyresulting adjustments are included inthe determination of the net profit orloss for the current period.Comparative information is presentedas reported in the financial statementsof the prior period. Additional proforma comparative information ispresented unless it is impracticable todo so.

Disclosure is required of the reasonsfor and effect and accounting treatmentof the change.

A change in accounting estimate isreflected prospectively. The nature andeffect of the change should bedisclosed, even if the effect will only besignificant in a future period. If theeffect cannot be quantified, that factshould be disclosed.

Effects of a change in an accountingestimate are included in thedetermination of net profit or loss in:

the period of the change, if thechange affects that period only; or

the period of the change and futureperiods, if the change affects both.

A correction of a fundamental error istreated as a prior period adjustment(benchmark treatment) or recognizedin current profit or loss (allowedalternative treatment). The nature andeffect of the change in the current andprior periods should be disclosed.


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Accounting policies


Accounting policies are the specificaccounting principles and the methodsof applying those principles that arejudged by the management of theenterprise to be the most appropriatein the circumstance to present fairlyfinancial position, and results ofoperations in accordance with GAAPand that accordingly are adopted forpreparing financial statements.(APB 22, ¶6)

When financial statements are issuedpurporting to present fairly financialposition, changes in financial position,and results of operations inaccordance with generally acceptedaccounting principles, a description ofall significant accounting policies ofthe reporting entity should be includedas an integral part of the financialstatements. (APB 22, ¶8)

Disclosure of accounting policiesshould identify and describe theaccounting principles followed by thereporting entity and the methods ofapplying those principles. Inparticular, it should encompass thoseaccounting principles and methods thatinvolve any of the following:

Selection from existing acceptablealternatives;

Principles and methods peculiar tothe industry in which the reportingentity operates; and

Unusual or innovative applicationsof generally accepted accountingprinciples [and principles andmethods peculiar to the industry inwhich the reporting entityoperates]. (APB 22, ¶12)

Accounting policies are defined as the“specific accounting principles and themethods of applying those principlesadopted by an enterprise in thepreparation and presentation offinancial statements”.

AS 1 states that there is no single list ofaccounting policies applicable to allcircumstances. Differing circumstancesin which enterprises operate in asituation of diverse and complexeconomic activity make alternativeaccounting principles and methods ofapplying those principles acceptable.

The choice of appropriate accountingprinciples and the methods of applyingthose principles in the specificcircumstances of each enterprise callsfor considerable judgement by themanagement of the enterprise.

The following are examples of theareas in which different accountingpolicies may be adopted by differententerprises.

Methods of depreciation, depletionand amortization;Conversion or translation offoreign currency items;Valuation of inventories;Treatment of goodwill;Valuation of investments;Accounting for retirement benefits;Recognition of profit on long-termcontracts;Valuation of fixed assets; andTreatment of contingent liabilities.

IAS 1 defines overall considerationsfor financial statements including:

Fair presentation;Accounting policies;Going concern;Accrual basis of accounting;Consistency of presentation;Materiality and aggregation;Offsetting; andComparative information.

IAS 1 also prescribes the minimumstructure and content, includingcertain information required on theface of the financial statements:

Balance sheet (current/non-currentdistinction is not required);

Income statement (operating/non-operating separation is required);

Cash flow statement (IAS 7 setsout the details); and

Statement showing changes inequity.

IAS 1 also requires entities to disclosethe significant accounting policiesadopted in the preparation andpresentation of their financialstatements.

The primary considerations governingthe selection and application ofaccounting policies are:

Prudence: In view of the uncertaintyattached to future events, profits arenot anticipated but recognized onlywhen realized though not necessarilyin cash. Provisions are made for allknown liabilities and losses even


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though the amount cannot bedetermined with certainty andrepresents only a best estimate in thelight of available information.

Substance over form: Accountingtreatment and presentation in financialstatements of transactions and eventsare governed by their substance andnot merely the legal form.

Materiality: Financial statementsshould disclose all "material" items,i.e. items the knowledge of which mightinfluence the decisions of the user ofthe financial statements.

The disclosure of significantaccounting policies forms a part of thefinancial statements. All significantaccounting policies adopted in thepreparation and presentation offinancial statements are normallydisclosed in one place.

If the fundamental accountingassumptions, viz. going concern,consistency and accrual are followedin the preparation and presentation offinancial statements, specificdisclosure is not required. If afundamental accounting assumption isnot followed, that fact should bedisclosed.


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Adjustments to financial statements of prior periods


Adjustments are required to be made topreviously issued financial statementsif there is a correction of an error inthe financial statements of a priorperiod, a change in certain accountingprinciples, or an adjustment related toprior interim statements of the currentfiscal period or if an enterpriserealizes the income tax benefits of apre-acquisition loss carry-forward of apurchased subsidiary. All otherrevenues, expenses, gains, and lossesrecognized during a period shall beincluded in the net income of thatperiod.

All items of profit and loss recognizedduring a period, including accruals ofestimated losses from losscontingencies, are included in thedetermination of net income for thatperiod. (FAS 16, ¶10)

An item of profit and loss related to thecorrection of an error in the financialstatements of a prior period isaccounted for and reported as a priorperiod adjustment and excluded fromthe determination of net income for thecurrent period. (FAS 109, ¶288(n))

Errors in financial statements resultfrom mathematical mistakes, mistakesin the application of accountingprinciples, or oversight or misuse offacts that existed at the time thefinancial statements were prepared.(APB 20, ¶13)

The nature of an error in previouslyissued financial statements is disclosedin the period in which the error wasdiscovered and corrected. (APB 20,¶37)

Prior period items are “income orexpenses that arise in the currentperiod as a result of errors oromissions in the preparation of thefinancial statements of one or moreprior periods”.

Prior period items do not include otheradjustments necessitated bycircumstances, which though related toprior periods, are determined in thecurrent period, e.g., arrears payable toworkers as a result of revision ofwages with retrospective effect duringthe current period.

Errors in the preparation of thefinancial statements of one or moreprior periods may be discovered in thecurrent period. Errors may occur as aresult of mathematical mistakes,mistakes in applying accountingpolicies, misinterpretation of facts, oroversight.

Prior period items are generallyinfrequent in nature and can bedistinguished from changes inaccounting estimates. Accountingestimates by their nature areapproximations that may need to berevised, as additional informationbecomes known. For example, incomeor expense recognized on the outcomeof a contingency which previouslycould not be estimated reliably doesnot constitute a prior period item

The nature and amount of prior perioditems should be separately disclosed inthe statement of profit and loss in amanner that their impact on thecurrent profit or loss can be perceived.

Please refer to commentary under“Accounting changes” above.


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Balance sheet – classification and display


An enterprise preparing a classifiedbalance sheet should segregate currentassets and current liabilitiesseparately. The current classificationapplies to those assets that are realizedin cash, sold or consumed within oneyear (or operating cycle, if longer),and those liabilities that aredischarged by use of current assets orthe creation of other current liabilitieswithin one year (or operating cycle, iflonger). The current liabilityclassification is also intended toinclude obligations that, by their terms,are due on demand or will be due ondemand within one year (or operatingcycle, if longer) from the balance sheetdate, even though liquidation may notbe expected within that period. Thisalso includes long-term obligationsthat are or become callable by thecreditor either because the debtor'sviolation of a provision of the debtagreement at the balance sheet datemakes the obligation callable orbecause the violation, if not curedwithin a specified grace period, willmake the obligation callable. Suchcallable obligations are classified ascurrent liabilities unless one of thefollowing conditions is met:

The creditor has waived orsubsequently lost the right todemand repayment for more thanone year (or operating cycle, iflonger) from the balance sheetdate.

For long-term obligationscontaining a grace period withinwhich the debtor may cure theviolation, it is probable that theviolation will be cured within thatperiod, thus preventing theobligation from becoming callable.

The balance sheet classification ofassets and liabilities is determined bythe form and manner specified inSchVI, Part I. SchVI, Part Idetermines the presentation of assetsand liabilities but does not discuss thefactors that would determineclassification of an element of financialstatements as current or non-current.

The term “current assets” is defined inthe GN, “Terms Used in FinancialStatements”, as “cash and other assetsthat are expected to be converted intocash or consumed in the production ofgoods or rendering of services in thenormal course of business”.

This GN also defines “currentliability” to mean “liability includingloans, deposits and bank overdraft(s)which falls due for payment in arelatively short period, normally notmore than twelve months”.

Indian companies generally offset taxliabilities and advance taxes paid moreas a matter of convention. Thedisclosure is presented in the scheduleof “Loans and advances” (if advancetax payments are greater than the taxliability) or in the schedule of “Currentliabilities and provisions” (if the taxliability is greater than the advance taxpayments).

IAS 1 offers the alternative, based onthe nature of the operations, whetheror not to present current and non-current assets and current and non-current liabilities as separateclassifications on the face of thebalance sheet or to present assets orliabilities broadly in order of theirliquidity.

An asset is classified as a current assetwhen it:

is expected to be realized in, or isheld for sale or consumption in,the normal course of theenterprise’s operating cycle; or

is held primarily for tradingpurposes or for the short term andexpected to be realized withintwelve months of the balance sheetdate; or

is cash or a cash equivalent assetthat is not restricted in its use.

All other assets are classified as non-current assets.

A liability is classified as a currentliability when it:

is expected to be settled in thenormal course of the enterprise’soperating cycle; or

is due to be settled within twelvemonths of the balance sheet date.

All other liabilities are classified asnon-current liabilities.

Short-term obligations expected to berefinanced on a long-term basis,including those callable obligationsdiscussed above, shall be excludedfrom current liabilities only if theenterprise intends to refinance theobligation on a long-term basis and

Long-term interest bearing liabilitiesare classified as non-current even ifthey are due to be settled within twelvemonths of the balance sheet date if:

the original term was for a periodof more than twelve months;


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has the demonstrated ability toconsummate the refinancing.

Notes:

Current assets are those assets that arereasonably expected to be realized incash or sold or consumed during thenormal operating cycle of the business.(ARB 43, ch3A, ¶4)

Current liabilities are thoseobligations whose liquidation isreasonably expected to require the useof existing resources properlyclassifiable as current assets or thecreation of other current liabilities.(ARB 43, ch3A, ¶7)

Operating cycle is the average timeintervening between the acquisition ofmaterials or services and the final cashrealization [from the sale of productsor services. (ARB 43, ch3A, ¶5)

Short-term obligations are thoseobligations that are scheduled tomature within one year after the dateof an enterprise's balance sheet or, forthose enterprises that use the operatingcycle concept of working capital,within an enterprise's operating cyclethat is longer than one year. (FAS 6,¶2)

the enterprise intends to refinancethe obligation on a long term basis;and

that intention is supported by anagreement to refinance, or toreschedule payments, which iscompleted before the financialstatements are approved.

Assets and liabilities are not offsetexcept when offsetting is required orpermitted by another standard.

A financial asset and a financialliability are offset and the net amountreported in the balance sheet when anenterprise both:

has a legally enforceable right toset off the recognized amounts;and

intends either to settle on a netbasis, or to realize the asset andsettle the liability simultaneously.(IAS 32, ¶33)

Items of income and expense are notoffset except when:

an IAS requires or permits it; or

gains, losses and related expensesarising from the same or similartransactions and events are notmaterial.

The general principle of accounting isthat offsetting of assets and liabilitiesin the balance sheet is improper exceptwhen a right of setoff exists. (APB 10,¶7(1))

Generally, a right of setoff is a debtor'slegal right, by contract or otherwise, todischarge all or a portion of the debtowed to another party by applyingagainst the debt an amount that theother party owes to the debtor. A rightof setoff exists when all of the followingconditions are met:

Each of two parties owes the otherdeterminable amounts;

The reporting party has the right toset off the amount owed with theamount owed by the other party;

The reporting party intends to set


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off; and

The right of setoff is enforceable atlaw.

A debtor having a valid right of setoffmay offset the related asset andliability and report the net amount.(FIN 39, ¶5)

As regards the offsetting of assetsagainst the tax liability, the onlyexception to the general principleoccurs when it is clear that a purchaseof securities (that are acceptable forthe payment of taxes) is in substancean advance payment of taxes that willbe payable in the relatively near future,so that in the special circumstances thepurchase is tantamount to theprepayment of taxes. (APB 10, ¶7(3))


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Business combinations


A business combination occurs when acorporation and one or moreincorporated or unincorporatedbusinesses are brought together intoone accounting entity. The single entitycarries on the activities of thepreviously separate, independententerprises. The purchase method andthe pooling-of-interests method areboth acceptable in accounting forbusiness combinations, although not asalternatives in accounting for the samebusiness combination.

A business combination is accountedfor as a pooling of interests if it meetscertain specified criteria. Businesscombinations that do not meet all of thespecified criteria are accounted for aspurchases.

The criteria for the pooling methodrelate to the attributes of the combiningenterprises before the combination, themanner of combining the enterprises,and the absence of certain plannedtransactions after the combination.There are 12 specified criteria. Thepooling-of-interests method accountsfor a business combination as theuniting of the ownership interests oftwo or more companies by exchange ofequity securities. No acquisition isrecognized because the combination isaccomplished without disbursingresources of the constituents.Ownership interests continue and theformer bases of accounting areretained. The recorded assets andliabilities of the constituents arecarried forward to the combinedcorporation at their recorded amounts.

AS 14 contemplates two types ofamalgamations namely,amalgamations where there is agenuine pooling of interests includingassets, liabilities, shareholders’interests and businesses of theamalgamating companies andamalgamations as a result of whichone company acquires anothercompany. The former is known asamalgamations in the nature of amerger and is accounted for by thepooling-of-interests method. Thelatter are known as amalgamations inthe nature of purchase and areaccounted for by the purchase method.

The use of the pooling-of-interestsmethod is applied to amalgamationsin the nature of a merger. Theconditions to be satisfied for anamalgamation to be classified as amerger are set out below.

All assets and liabilities of thetransferor company become theassets and liabilities of thetransferee company afteramalgamation;

At least 90% of the shareholdersof the transferor company becomeequity shareholders of thetransferee company after theamalgamation. This excludesshares held by the transfereecompany, its subsidiaries ornominees;

The consideration payable to theequity shareholders of thetransferor company who agree tobecome equity shareholders of thetransferee company is whollydischarged by the issue of equityshares of the transferee company,except that cash may be paid tosettle fractional shares;

IAS 22 discusses the accountingtreatment to record a businesscombination as a purchase or uniting ofinterests.

From the date of acquisition, anacquirer:

incorporates into the incomestatement the results of operationsof the acquiree; and

recognizes in the balance sheet theidentifiable assets and liabilities ofthe acquiree and any goodwill ornegative goodwill arising on theacquisition.

An acquisition is accounted for at itscost which is the amount of cash orcash equivalents paid or the fair value,at the date of exchange, of the otherpurchase consideration given by theacquirer in exchange for control overthe net assets of the other enterprise,plus any costs directly attributable tothe acquisition.

Identifiable assets and liabilities thatare recognized above are those of theacquiree that existed at the date ofacquisition together with any liabilitiesrecognized below.

They are recognized separately as atthe date of acquisition if it is probablethat any associated future economicbenefits will flow to, or resourcesembodying economic benefits will flowfrom, the acquirer and a reliablemeasure is available of their cost orfair value.

The combined enterprise recognizesthose assets and liabilities recorded inconformity with generally acceptedaccounting principles by the separateenterprises at the date the combinationis consummated. The combined

The transferee company intends tocontinue the business of thetransferor company; and

No adjustments are made to thebook values of the assets andliabilities of the transferor

Liabilities are not recognized at thedate of acquisition if they result fromthe acquirer’s intentions or actions.Liabilities are not recognized for futurelosses or other costs expected to beincurred as a result of the acquisition,


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enterprise records the historical cost-based amounts of the assets andliabilities of the separate enterprisesbecause the existing basis ofaccounting continues.

Where the separate enterprises haverecorded assets and liabilities underdiffering methods of accounting, theamounts are adjusted to the same basisof accounting if the change wasotherwise appropriate for the separateenterprise. A change in accountingmethod to conform the individualmethods is applied retroactively, andfinancial statements presented for priorperiods are restated.

An enterprise that applies the pooling-of-interests method of accounting to acombination reports results ofoperations for the period in which thecombination occurs as though theenterprises were combined as of thebeginning of the period. Results ofoperations for that period thuscomprise those of the separateenterprises combined from thebeginning of the period to the date thecombination is consummated and thoseof the combined operations from thatdate to the end of the period.

Income of the combined corporationinclude income of the constituents forthe entire fiscal period in which thecombination occurs. The reportedincome of the constituents for priorperiods are combined and restated asincome of the combined corporation.

company as incorporated in thebooks of account of the transfereecompany, except to ensureuniformity of accounting policies.

Under the pooling-of-interestsmethod, assets, liabilities and reservesof the transferor company arerecorded at their existing carryingamounts. Where the transferor andtransferee companies have conflictingaccounting policies, a uniform set ofaccounting policies is adopted. Theeffect of a change in accountingpolicies on the financial statementshould be reported in accordance withAS 5.

The difference between the amount ofequity shares or other securitiesissued by the transferor company(including any additionalconsideration in the form of cash orother assets distributed) and the sharecapital of the transferor company isadjusted to the reserves of thetransferee company.

An amalgamation that does not meetany one or more of the conditions setout above is accounted for as apurchase.

The transferee company has theoption of either incorporating assetsand liabilities of the transfereecompany at their existing carryingamounts or allocating theconsideration to individualidentifiable assets and liabilities of thetransferor company on the basis oftheir fair values at the date ofamalgamation.

whether they relate to the acquirer orthe acquiree.

At the date of acquisition, the acquirerrecognizes a provision that was not aliability of the acquiree at that date ifthe acquirer has:

at, or before, the date ofacquisition, developed the mainfeatures of a plan that involvesterminating or reducing theactivities of the acquiree and thatrelates to compensating employeesof the acquiree for termination oftheir employment, closing facilitiesof the acquiree, eliminatingproduct lines of the acquiree orterminating contracts of theacquiree that have become onerousbecause the acquirer hascommunicated to the other party at,or before, the date of acquisitionthat the contract will be terminated;

by announcing the main features ofthe plan at, or before, the date ofacquisition, raised a validexpectation in those affected by theplan that it will implement theplan; and

Balance sheets and other financialinformation of the separate enterprisesas of the beginning of the period arepresented as though the enterprises hadbeen combined at that date. Financialstatements and financial information ofthe separate enterprises presented forprior years are restated on a combinedbasis to furnish comparativeinformation. All restated financialstatements and financial summariesshould indicate clearly that financialdata of the previously separate

Identifiable assets and liabilities mayinclude assets and liabilities notearlier included in the financialstatements of the transferor company.The determination of fair values maybe dependent on the intentions of thetransferee company.

Reserves of the transferor company,other than statutory reserves are notincluded in the reserves of thetransferee company. Statutoryreserves are recorded in the financialstatement of the transferee company

by the earlier of three months afterthe date of acquisition and the datewhen the annual financialstatements are approved, developedthose main features into a detailedformal plan identifying at least thebusiness or part of a businessconcerned, the principal locationsaffected; the location, function, andapproximate number of employeeswho will be compensated forterminating their services; theexpenditures that will beundertaken and when the plan will


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enterprises are combined.

All expenses related to effecting abusiness combination accounted for bythe pooling-of-interests method andlosses or estimated losses on disposalof specifically identified duplicate orexcess facilities are deducted indetermining the net income of theresulting combined enterprise for theperiod in which the expenses areincurred.

A business combination accounted forby the pooling-of-interests method isrecorded as of the date the combinationis consummated.

A combined enterprise discloses in itsfinancial statements that a combinationaccounted for by the pooling-of-interests method occurred during theperiod. The basis of currentpresentation and restatements of priorperiods may be disclosed in thefinancial statements by captions or byreferences to notes. Certain additionaldisclosures are prescribed by APB 16.

with a corresponding entry made to anaccount designated as an“Amalgamation Adjustment Account”,where the requirements of the relevantstatute for recording statutoryreserves in the books are compliedwith. Where such statutory reservesare no longer required, both thereserve and the AmalgamationAdjustment Account should bereversed.

The excess of the amount ofconsideration over the value of the netassets of the transferor companyshould be recognized as goodwill andamortized to income on a systematicbasis over its useful life, usually not toexceed five years.

Non-cash elements included in theconsideration are recorded at theirfair value. In case of securities,values fixed by statutory authoritiesmay be taken to be the fair value. Inthe case of other assets, the marketvalues are readily indicative of fairvalues. Assets may be valued thattheir respective net book values wherethe market values cannot be readilyassessed.

be implemented.

The identifiable assets and liabilitiesrecognized above are measured at theaggregate of:

the fair value of the identifiableassets and liabilities acquired as atthe date of the exchangetransaction to the extent of theacquirer’s interest obtained in theexchange transaction; and

the minority’s proportion of thepre-acquisition carrying amountsof the identifiable assets andliabilities of the subsidiary.

Any goodwill or negative goodwill isaccounted for under this standard.

Allowed alternative treatment

The identifiable assets and liabilitiesrecognized above are measured at theirfair values as at the date of acquisition.Any goodwill or negative goodwill isaccounted for under this standard.

Any minority interest is stated at theminority’s proportion of the fair valuesof the identifiable assets and liabilitiesrecognized above.

The purchase method accounts for abusiness combination as the acquisitionof one enterprise by another. Theacquiring corporation records at itscost the acquired assets less liabilitiesassumed. The difference between thecost of an acquired enterprise and thesum of the fair values of tangible andidentifiable intangible assets lessliabilities assumed is recorded asgoodwill. The reported income of anacquiring corporation includes theoperations of the acquired enterpriseafter acquisition, based on the cost tothe acquiring corporation.

The general principles to apply thehistorical cost basis of accounting to anacquisition of an asset depend on thenature of the transaction:

An asset acquired by exchangingcash or other assets is recorded atcost, i.e. at the amount of cashdisbursed or the fair value of other

Schemes of amalgamation mayprovide for the payment of additionalamounts contingent upon theoccurrence of one or more futureevents. Such contingent considerationshould be included in theconsideration if the payment isprobable and a reasonable estimate ofthe amount can be made.

The treatment prescribed by a schemeof amalgamation sanctioned under astatute, of reserves of the transferorcompany, should be followed.

The disclosures to be made in the firstfinancial statements following theamalgamation are set out below.

Names and general nature ofbusiness of the amalgamatingcompanies;

Effective date of amalgamationfor accounting purposes;

Particulars of the scheme

If the fair value of an intangible assetcannot be measured by reference to anactive market (as defined in IAS 38),the amount recognized for thatintangible asset at the date of theacquisition is limited to an amount thatdoes not create or increase negativegoodwill that arises on the acquisition.

Any excess of the cost of the acquisitionover the acquirer’s interest in the fairvalue of the identifiable assets andliabilities acquired as at the date of theexchange transaction is described asgoodwill and recognized as an asset.Goodwill is carried at cost less anyaccumulated amortization and anyaccumulated impairment losses.

Goodwill is amortized on a systematicbasis over its useful life. Theamortization period reflects the bestestimate of the period during whichfuture economic benefits are expectedto flow to the enterprise. There is arebuttable presumption that the useful


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assets distributed;

An asset acquired by incurringliabilities is recorded at cost, i.e. atthe present value of the amounts tobe paid; and

An asset acquired by issuing sharesof stock of the acquiring enterpriseis recorded at the fair value of theasset, i.e. shares of stock issued arerecorded at the fair value of theconsideration received for thestock.

The nature of an asset determines anacquirer's subsequent accounting forthe cost of that asset. The basis formeasuring the cost of an asset, whetheramount of cash paid, fair value of anasset received/given up, amount of aliability incurred, or fair value of stockissued, has no effect on the subsequentaccounting for that cost.

sanctioned under a statute;

Description and number of sharesissued, together with thepercentage of each company’sequity shares exchanged to effectthe amalgamation;

In case of a pooling-of-interests,the amount of any differencebetween the consideration and thevalue of net identifiable assetsacquired, and the treatmentthereof; and

In case of a purchase, the amountof any difference between theconsideration and the value of netidentifiable assets acquired, andthe treatment thereof including theperiod of amortization of anygoodwill arising on theamalgamation.

life of goodwill will not exceed twentyyears from initial recognition. Theamortization method used reflects thepattern in which the future economicbenefits arising from goodwill isexpected to be consumed. The straight-line method is adopted unless there ispersuasive evidence that anothermethod is more appropriate in thecircumstances. The amortization foreach period is recognized as anexpense.

The amortization period and theamortization method are reviewed atleast at each financial year end. If theexpected useful life of goodwill issignificantly different from previousestimates, the amortization period ischanged accordingly.

The enterprise that distributes cash orother assets or incurs liabilities toobtain the assets or stock of anotherenterprise is clearly the acquirer. Theidentities of the acquirer and theacquired enterprise are usually evidentin a business combination effected bythe issue of stock. The acquiringenterprise normally issues the stockand commonly is the larger enterprise.If a new enterprise is formed to issuestock to effect a business combinationto be accounted for by the purchasemethod, one of the existing combiningenterprises is considered the acquireron the basis of the evidence available.

The same accounting principles applyto determining the cost of assetsacquired individually, those acquiredin a group, and those acquired in abusiness combination. A cash paymentby an enterprise measures the cost ofacquired assets less liabilities assumed.Similarly, the fair values of other assetsdistributed, such as marketablesecurities or properties, and the fairvalue of liabilities incurred by anacquiring enterprise measure the costof an acquired enterprise.

The cost of an enterprise acquired in abusiness combination accounted for by

If there has been a significant changein the expected pattern of economicbenefits from goodwill, the method ischanged to reflect the changed patternand accounted for as a change inaccounting estimates by adjusting theamortization charge for the current andfuture periods.

Any excess, as at the date of theexchange transaction, of the acquirer’sinterest in the fair values of theidentifiable assets and liabilitiesacquired over the cost of theacquisition, is recognized as negativegoodwill.

When the acquisition agreementprovides for an adjustment to thepurchase consideration contingent onone or more future events, the amountof the adjustment is included in the costof the acquisition as at the date ofacquisition if the adjustment isprobable and the amount can bemeasured reliably.

The cost of the acquisition is adjustedwhen a contingency affecting theamount of the purchase considerationis resolved subsequent to the date of theacquisition, so that payment of theamount is probable and a reliable


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the purchase method includes the directcosts of acquisition. Costs ofregistering and issuing equity securitiesare a reduction of the otherwisedeterminable fair value of thesecurities. However, indirect andgeneral expenses related toacquisitions are deducted as incurredin determining net income.

estimate of the amount can be made.

Identifiable assets and liabilities, whichare acquired but which do not satisfythe criteria above for separaterecognition when the acquisition isinitially accounted for, are recognizedsubsequently as and when they satisfythe criteria. The carrying amounts ofassets and liabilities acquired areadjusted when, subsequent toacquisition, additional evidencebecomes available to assist with theestimation of the amounts assigned tothose assets and liabilities.

A business combination agreement mayprovide for the issuance of additionalshares of a security or the transfer ofcash or other consideration contingenton specified events or transactions inthe future. Contingent considerationmay be based on earnings or securityprices or a combination of both.

Some agreements provide that aportion of the consideration be placedin escrow to be distributed or to bereturned to the transferor whenspecified events occur. Either debt orequity securities may be placed inescrow, and amounts equal to interestor dividends on the securities duringthe contingency period may be paid tothe escrow agent or to the potentialsecurity holder.

Cash and other assets distributed,securities issued unconditionally andamounts of contingent considerationthat are determinable at the date ofacquisition are included in determiningthe cost of an acquired enterprise andrecorded at that date. Considerationthat is issued or issuable at theexpiration of the contingency period orthat is held in escrow pending theoutcome of the contingency is disclosedbut not recorded as a liability or shownas outstanding securities unless theoutcome of the contingency isdeterminable beyond reasonable doubt.

Contingent consideration is usuallyrecorded when the contingency isresolved and consideration is issued orbecomes issuable.

In applying the pooling of interestsmethod, the financial statement items ofthe combining enterprises for theperiod in which the combination occursand for any comparative periodsdisclosed are included in the financialstatements of the combined enterprisesas if they had been combined from thebeginning of the earliest periodpresented.

The financial statements of anenterprise do not incorporate a unitingof interests to which the enterprise is aparty if the date of the uniting ofinterests is after the date of the mostrecent balance sheet included in thefinancial statements.

Any difference between the amountrecorded as share capital issued plusany additional consideration in theform of cash or other assets and theamount recorded for the share capitalacquired is adjusted against equity.

Expenditures incurred in relation to auniting of interests are recognized asexpenses in the period in which theyare incurred.


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An acquiring enterprise allocates thecost of an acquired enterprise to theassets acquired and liabilities assumed.Allocation follows the principlesdescribed below.

All identifiable assets acquired,either individually or by type, andliabilities assumed in a businesscombination, whether or not shownin the financial statements of theacquired enterprise, are assigned aportion of the cost of the acquiredenterprise, normally equal to theirfair values at date of acquisition;and

The excess of the cost of theacquired enterprise over the sum ofthe amounts assigned toidentifiable assets acquired lessliabilities assumed is recorded asgoodwill. The sum of the marketor appraisal values of identifiableassets acquired less liabilitiesassumed may sometimes exceedthe cost of the acquired enterprise.If so, the values otherwiseassignable to non-current assetsacquired is reduced by aproportionate part of the excess todetermine the assigned values. Adeferred credit for an excess ofassigned value of identifiableassets over cost of an acquiredenterprise (sometimes callednegative goodwill) is not recordedunless those assets are reduced tozero value.

A business combination is accountedfor as an acquisition, unless anacquirer cannot be identified. Invirtually all business combinations anacquirer can be identified, i.e., theshareholders of one of the combiningenterprises obtain control over thecombined enterprise.

The classification of a businesscombination is based on an overallevaluation of all relevant facts andcircumstances of the particulartransaction. The guidance given in IAS22 provides examples of importantfactors to be considered, not acomprehensive set of conditions to bemet. Single characteristics of acombined enterprise such as votingpower or relative fair values of thecombining enterprises is not evaluatedin isolation in order to determine how abusiness combination is be accountedfor.

IAS 22, ¶16(a)-(c) describe theessential characteristics of a uniting ofinterests. An enterprise classifies abusiness combination as an acquisition,unless all of these three characteristicsare present. Even if all of the threecharacteristics are present, anenterprise classifies a businesscombination as a uniting of interestsonly if the enterprise can demonstratethat an acquirer cannot be identified.

Business combinations under IAS 22are either an “acquisition” or a“uniting of interests”.

The date of acquisition of an enterpriseis the date assets are received andother assets are given or securities areissued. Parties may, for convenience,designate as the effective date the endof an accounting period between thedates a business combination isinitiated and consummated.

The values assigned to assets acquiredand liabilities assumed are determinedas of the date of acquisition. Thestatement of income of an acquiringenterprise for the period in which abusiness combination occurs includeincome of the acquired enterprise after


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the date of acquisition by including therevenue and expenses of the acquiredoperations based on the cost to theacquiring enterprise.

The following disclosures are required:

Name and a brief description of theacquired enterprise;

Method of accounting for thecombination;

Period for which results ofoperations of the acquiredenterprise are included in theincome statement of the acquiringenterprise;

Cost of the acquired enterprise and,if applicable, the number of sharesof stock issued or issuable and theamount assigned to the issued andissuable shares;

Description of the plan foramortization of acquired goodwill,the amortization method, andperiod; and

Contingent payments, options, orcommitments specified in theacquisition agreement and theiraccounting treatment.


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Capital stock


Items that are normally charged toexpense in the current or future yearscannot be charged against additionalpaid-in capital. The only exception tothis rule occurs when an enterpriseundergoes reorganization or quasireorganization, in which theshareholders have been fully informedand have approved the action.(ARB 43, ch1A, ¶2)

The following capital transactions arealways excluded from thedetermination of net income or theresults of operations:

Adjustments or charges or creditsresulting from transactions in theenterprise's own capital stock;

Transfers to and from accountsproperly designated asappropriated retained earnings(such as general purposecontingency reserves or provisionsfor replacement costs of fixedassets); and

Adjustments made pursuant to aquasi reorganization. (APB 9, ¶28)

Disclosure of changes in the separateaccounts comprising stockholders'equity (in addition to retainedearnings) and of the changes in thenumber of shares of equity securitiesduring at least the most recent annualfiscal period and any subsequentinterim period presented is required.(APB 12, ¶10)

Although Indian GAAP does not haveany accounting pronouncements asregards “Share capital” and“Reserves and surplus”, CA 56 setsout the disclosure requirements in thisarea.

SchVI, Part I requires the followingdisclosures in respect of share capital:

Authorized, issued, subscribed,called up and paid up capital,(distinguishing between thevarious classes of capital);

In respect of each class of capital,number of shares allotted as fullypaid up pursuant to a contractwithout payment being received incash;

In respect of each class of capital,number of shares allotted as fullypaid up by way of bonus shares,including source namely,capitalization of profits, sharepremium account etc;

Calls unpaid separately disclosingcalls unpaid by secretaries,directors and others;

Forfeited shares;

Terms of redemption orconversion of preference sharecapital together with the earliestdate for the redemption orconversion;

Particulars of options on unissuedshare capital; and

Particulars of different classes ofpreference share capital.

IAS 1 sets out the presentationrequirements in respect of sharecapital as discussed below.

for each class of share capital, thenumber of shares authorized,issued and fully paid, and issuedbut not fully paid, par value pershare or that the shares have no parvalue, a reconciliation of thenumber of shares outstanding atthe beginning and at the end of theyear, the rights, preferences andrestrictions attaching to that class,including restrictions on thedistribution of dividends and therepayment of capital, shares in theenterprise held by the enterpriseitself or by subsidiaries orassociates of the enterprise; andshares reserved for issue underoptions and sales contracts,including the terms and amounts;

a description of the nature andpurpose of each reserve withinowners’ equity;

when dividends have beenproposed but not formallyapproved for payment, the amountincluded (or not included) inliabilities; and

the amount of any cumulativepreference dividends notrecognized.

If the enterprise is without sharecapital, information equivalent to thatrequired above is disclosed, showingmovements during the period in eachcategory of equity interest and therights, preferences and restrictionsattaching to each category of equityinterest.

The distribution of non-monetaryassets, other than an enterprise's owncapital stock, to stockholders asdividends is generally referred to as adividend-in-kind. A dividend-in-kind isrecorded at the fair value of the assettransferred, and a gain or loss isrecognized by the enterprise on the

SchVI, Part I specifies the followingdisclosures in respect of reserves andsurplus:

Separate disclosure of capitalreserves, capital redemptionreserves, share premium account,other reserves (specifying theirnature) after deducting debit

Treasury shares are presented in thebalance sheet as a deduction fromequity. The acquisition of treasuryshares is presented in the financialstatements as a change in equity. Nogain or loss is recognized in theincome statement on the sale, issuance,or cancellation of treasury shares.Consideration received towards


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disposition of the asset. (APB 29, ¶18)

The issuer of a dividend-in-kind isrequired to disclose in the financialstatements for the period the nature ofthe transaction, the basis of accountingfor the assets transferred, and thegains and losses recognized. (APB 29,¶28)

Enterprises are required to disclose theaggregate liquidation preference oftheir outstanding preferred stock andthe price at which the preferred stockmay be called or redeemed.Enterprises are also required todisclose the aggregate and per-shareamounts of cumulative preferreddividends in arrears. (FAS 129, ¶6 and¶7)

Enterprises issuing stock dividendsshall capitalize retained earnings in anamount equal to the fair value of theadditional shares issued. Enterpriseseffecting stock splits shall capitalizeretained earnings to the extentrequired by law. Stock distributionsinvolving issuance of additional sharesof more than 25 percent of the numberpreviously outstanding are generallyaccounted for as stock splits. (ARB 43,ch7B)

balances in profit and loss account(if any), balance in profit and lossaccount after proposed allocationssuch as dividends, bonus ortransfers to reserves and proposedadditions to reserves;

Additions and deductions since thelast balance sheet date are to bedisclosed separately under each ofthe above heads;

The word “fund” in relation to anyreserve is used where such reserveis specifically represented byearmarked investments; and

The share premium account shouldprovide details of its utilization inthe manner provided in Sec 78 ofCA 56 in the year of utilization.

Sec 78 specifies that the sharepremium account should be used for:

Paying up unissued shares of thecompany to be issued to themembers of the company as fullypaid bonus shares;

Writing off preliminary expensesof the company;

Writing off the expenses of, or thecommission paid or discountallowed on any issue of shares ordebentures of the company; or

In providing for the premiumpayable on the redemption of anyredeemable preference shares or ofany of the debentures of thecompany.

treasury shares is presented in thefinancial statements as a change inequity. (SIC 16, ¶4)

There are no specific pronouncementsfor the treatment of dividends in kind,stock dividends and stock splits.

Stock dividends do not give rise to anychange in either the enterprise's assetsor its respective shareholders'proportionate interests therein.However, many recipients of stockdividends look upon them asdistributions of corporate earnings andusually in an amount equivalent to thefair value of the additional sharesreceived. Furthermore, whenissuances of stock dividends are smallin comparison with the sharespreviously outstanding, they do nothave any apparent effect upon theshare market value. Therefore, stockdividends are accounted for by

There are no specific pronouncementsfor the treatment of dividends in kind,stock dividends and stock splits andtreasury stock.


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transferring from retained earnings tothe category of permanentcapitalization (represented by thecapital stock and additional paid-incapital accounts) an amount equal tothe fair value of the additional sharesissued. (ARB 43, ch7B, ¶10)

When the number of additional sharesissued as a stock dividend is so greatthat it has, or may reasonably beexpected to have, the effect ofmaterially reducing the share marketvalue, the transaction partakes of thenature of a stock split. Consequently,there is no need to capitalize retainedearnings, other than to the extentoccasioned by legal requirements. It isrecommended, however, that in suchinstances every effort is made to avoidthe use of the word dividend in relatedcorporate resolutions, notices, andannouncements. In those cases wherebecause of legal requirements thiscannot be done, the transaction isdescribed, as a stock split effected inthe form of a dividend. (ARB 43, ch7B,¶11)

Where an enterprise acquires shares ofits own capital stock, the cost of theacquired shares is generally shown asa deduction from capital. Gains andlosses on sales of treasury stock areaccounted for as adjustments to capitaland not as part of income. (ARB 43,ch1B and APB 6, ¶12, 13)

Dividends on shares held in theenterprise's treasury (treasury stock)are not credited to income. (ARB 43,ch1A)

If the price paid for the shares issignificantly in excess of currentmarket price, that may indicate that theprice paid may include considerationfor other factors such as stated orunstated rights, privileges, oragreements in addition to the capitalstock. In such cases, the excess shouldbe attributed to the other factors.(ARB 43, ch1B and APB 6)

Enterprises should explain, insummary form, the pertinent rights andprivileges of the various securitiesoutstanding. Example disclosures


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include dividend and liquidationpreferences, participation rights, callprices and dates, conversion orexercise prices or rates and pertinentdates, sinking-fund requirements,unusual voting rights, and significantterms of contracts to issue additionalshares. (FAS 129, ¶4)

Enterprises should disclose withintheir financial statements the numberof shares issued upon conversion,exercise, or satisfaction of requiredconditions during at least the mostrecent annual fiscal period and anysubsequent interim period presented.(FAS 129, ¶5)


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Cash flow statements


FAS 95 establishes standards for cashflow reporting and requires astatement of cash flows as part of a fullset of financial statements for allbusiness enterprises in place of astatement of changes in financialposition. A statement of cash flowsclassifies cash receipts and paymentsaccording to whether they stem fromoperating, investing, or financingactivities.

Investing activities include making andcollecting loans and acquiring anddisposing of debt or equity instrumentsand property, plant, and equipmentand other productive assets, that is,assets held for or used in theproduction of goods or services by theenterprise [other than materials thatare part of the enterprise's inventory].(FAS 95, ¶15)

Financing activities include obtainingresources from owners and providingthem with a return on, and a return of,their investment; borrowing money andrepaying amounts borrowed, orotherwise settling the obligation; andobtaining and paying for otherresources obtained from creditors onlong-term credit. (FAS 95, ¶18)

Operating activities are those activitiesthat are not defined as investing orfinancing activities. (FAS 95, ¶21)

FAS 95 encourages enterprises toreport cash flows from operatingactivities directly by showing majorclasses of operating cash receipts andpayments (the direct method).

Enterprises are required to prepare acash flow statement and present it foreach period for which financialstatements are presented. (AS 3, ¶1)

Cash flow statements should reportcash flows during the period classifiedby operating, investing and financingactivities. (AS 3, ¶8)

Operating activities are principalrevenue-producing activities of theenterprise and other activities that arenot investing or financing activities.(AS 3, ¶5)

Investing activities are acquisition anddisposal of long-term assets and otherinvestments not included in cashequivalents. (AS 3, ¶5)

Financing activities are activities thatresult in changes in the size andcomposition of the owners' capital(including preference share capital inthe case of a company) and borrowingsof the enterprise. (AS 3, ¶5)

Enterprises report cash flows fromoperating activities using either:

the direct method, whereby majorclasses of gross cash receipts andgross cash payments are disclosed;or

the indirect method, whereby netprofit or loss is adjusted for theeffects of transactions of a non-cash nature, any deferrals oraccruals of past or future operatingcash receipts or payments, anditems of income or expenseassociated with investing orfinancing cash flows. (AS 3, ¶18)

The cash flow statement is a requiredbasic financial statement that explainschanges in cash and cash equivalentsduring a period. It should classifychanges in cash and cash equivalentsinto operating, investing, and financialactivities.

Operating cash flows may be presentedusing either the direct or indirectmethods. The direct method showsreceipts from customers and paymentsto suppliers, employees, government(taxes), etc. The indirect method beginswith accrual basis net profit or lossand adjusts for major non-cash items.

Investing cash flow disclosures includeseparately cash receipts and paymentsarising from acquisition or sale ofproperty, plant, and equipment;acquisition or sale of equity or debtinstruments of other enterprises(including acquisition or sale ofsubsidiaries); and advances and loansmade to, or repayments from, thirdparties.

Financing cash flow disclosuresinclude separately cash receipts andpayments arising from an issue ofshare or other equity securities;payments made to redeem suchsecurities; proceeds arising fromissuing debentures, loans, notes; andrepayments of such securities.

Cash flows from taxes are disclosedseparately within operating activities,unless they can be specificallyidentified with one of the other twoheadings.

Enterprises that choose not to showoperating cash receipts and paymentsreport the same amount of net cashflow from operating activitiesindirectly by adjusting net income toreconcile it to net cash flow fromoperating activities by removing theeffects of (a) all deferrals of pastoperating cash receipts and paymentsand all accruals of expected future

Cash flows arising from the followingoperating, investing or financingactivities may be reported on a netbasis:

cash receipts and payments onbehalf of customers when the cashflows reflect the activities of thecustomer rather than those of theenterprise; and

Investing and financing activities thatdo not give rise to cash flows (a non-monetary transaction such asacquisition of property by issuing debt)are excluded from the cash flowstatement but disclosed separately.

Cash flows arising from transactions ina foreign currency are translated intothe reporting currency at the exchangerate at the date of the cash flow. Cash


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operating cash receipts and paymentsand (b) all items that are included innet income that do not affect operatingcash receipts and payments. If thedirect method is used, a reconciliationof net income and net cash flow fromoperating activities should be providedin a separate schedule. (FAS 95, ¶28)

The statement of cash flows reports thereporting currency equivalent offoreign currency cash flows, using thecurrent exchange rate at the time of thecash flows. The effect of exchange ratechanges on cash held in foreigncurrencies is disclosed as a separateitem in the reconciliation of beginningand ending balances of cash and cashequivalents. (FAS 95, ¶25)

Information about investing andfinancing activities not resulting incash receipts or payments in the periodis provided separately. (FAS 95, ¶32)

cash receipts and payments foritems in which the turnover isquick, the amounts are large, andthe maturities are short. (AS 3,¶22)

Cash flows arising from each of thefollowing activities of a financialenterprise may be reported on a netbasis:

cash receipts and payments for theacceptance and repayment ofdeposits with a fixed maturity date;

the placement of deposits with andwithdrawal of deposits from otherfinancial enterprises; and

cash advances and loans made tocustomers and the repayment ofthose advances and loans. (AS 3,¶24)

Cash flows arising from transactions ina foreign currency are recorded in anenterprise's reporting currency. Theeffect of changes in exchange rates oncash and cash equivalents held in aforeign currency is reported separatelyin the reconciliation of the changes incash and cash equivalents during theperiod. (AS 3, ¶25)

flows of a foreign subsidiary aretranslated at the exchange rates at thedates of the cash flows.

Cash flows associated withextraordinary items are classified asoperating, investing or financingactivities as appropriate.

Cash flows from interest and dividendsreceived and paid are appropriatelyclassified consistently from period toperiod as either operating, investing orfinancing activities.

Cash flows associated withextraordinary items are classified asarising from operating, investing orfinancing activities as appropriate andseparately disclosed. (AS 3, ¶28)

Cash flows from interest and dividendsreceived and paid are disclosedseparately depending on their sourceand the nature of operations of theenterprise. (AS 3, ¶30)

Cash flows arising from taxes onincome are separately disclosed andclassified as cash flows from operatingactivities unless they are specificallyidentified with financing and investingactivities. (AS 3, ¶34)

The aggregate cash flows arising fromacquisitions and from disposals ofsubsidiaries or other business unitsshould be presented separately andclassified as investing activities. (AS 3,¶37)


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Investing and financing transactionsthat do not require the use of cash orcash equivalents should be excludedfrom a cash flow statement. Suchtransactions should be disclosedelsewhere in the financial statements ina way that provides all the relevantinformation about these investing andfinancing activities. (AS 3, ¶40)

Enterprises should disclose thecomponents of cash and cashequivalents and present areconciliation of the amounts in thecash flow statement with the equivalentitems reported in the balance sheet.(AS 3, ¶42)

Enterprise should disclose, togetherwith a management commentary, theamount of significant cash and cashequivalents held that are not availablefor use by it. (AS 3, ¶45)

FAS 47 requires an enterprise todisclose its commitments underunconditional purchase obligationsthat are associated with suppliers'financing arrangements. Suchobligations often are in the form oftake-or-pay contracts and throughputcontracts. (FAS 47, ¶7)

For long-term unconditional purchaseobligations that are associated withsuppliers' financing and arerecognized on purchasers' balancesheets, payments for each of the nextfive years shall be disclosed. (FAS 47,¶7)

Enterprises should also disclose futurepayments on long-term borrowings andredeemable stock. For long-termunconditional purchase obligationsthat are associated with suppliers'financing and are not recognized onpurchasers' balance sheets, thedisclosures include the nature of theobligation, the amount of the fixed anddeterminable obligation in theaggregate and for each of the next fiveyears, a description of any portion ofthe obligation that is variable, and thepurchases in each year for which anincome statement is presented.(FAS 47, ¶6)


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For long-term borrowings andredeemable stock, the disclosuresinclude maturities and sinking fundrequirements (if any) for each of thenext five years and redemptionrequirements for each of the next fiveyears, respectively. (FAS 47, ¶10 andFAS 129, ¶7 and 8)


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Compensation: Stock based


FAS 123 establishes the standard forstock-based employee compensationplans including all arrangements bywhich employees receive shares ofstock or other equity instruments of theemployer or the employer incursliabilities to employees in amountsbased on the price of the employer'sstock.

FAS 123 also applies to transactions inwhich an entity issues its equityinstruments to acquire goods orservices from non-employees. Suchtransactions are accounted for basedon the fair value of the considerationreceived or the fair value of the equityinstruments issued, whichever is morereliably measurable.

FAS 123 defines a fair value basedmethod of accounting for an employeestock option. Entities are encouragedto adopt this method for all of theiremployee stock compensation plans.However, it also allows an entity tocontinue to measure compensation costfor such plans using the intrinsic valuebased method prescribed by APB 25.The fair value based method ispreferable to the APB 25 method forpurposes of justifying a change inaccounting principle under APB 20.

Entities electing to remain with theaccounting in APB 25 are required tomake pro forma disclosures of netincome and, if presented, earnings pershare, as if the fair value based methodof accounting defined in FAS 123 wasapplied.

The SEBI guidelines set out theaccounting for stock basedcompensation by listed companies.

The accounting value of optionsgranted during an accounting period istreated as a form of employeecompensation. This value is equal tothe aggregate, over all employee stockoptions granted during the accountingperiod, of the fair value of the option.

Fair value means the option discountor, if the company so chooses, thevalue of the option using the BlackScholes formula or other similarvaluation method.

Option discount means the excess ofthe market price of the share at thedate of grant of the option under ESOSover the exercise price of the option(including up-front payment, if any)

The accounting value of the optionshould be amortized on a straight-linebasis over the vesting period.

When an unvested option lapses byvirtue of the employee not conformingto the vesting conditions after theaccounting value of the option hasalready been accounted for asemployee compensation, thisaccounting treatment shall be reversedby a credit to employee compensationexpense equal to the amortized portionof the accounting value of the lapsedoptions and a credit to deferredemployee compensation expense equalto the unamortized portion.

Although IAS does not specify anyrecognition and measurement criteriafor equity based compensation,companies are required to adhere tocertain disclosure requirements. Theseinclude:

the nature and terms (includingany vesting provisions) of equitycompensation plans;

the accounting policy for equitycompensation plans;

the amounts recognized in thefinancial statements for equitycompensation plans;

the number and terms (including,where applicable, dividend andvoting rights, conversion rights,exercise dates, exercise prices andexpiry dates) of the enterprise’sown equity financial instrumentswhich are held by equitycompensation plans (and, in thecase of share options, byemployees) at the beginning andend of the period;

the extent to which employees’entitlements to those instrumentsare vested at the beginning and endof the period;

the number and terms (including,where applicable, dividend andvoting rights, conversion rights,exercise dates, exercise prices andexpiry dates) of equity financialinstruments issued by theenterprise to equity compensationplans or to employees (or of theenterprise’s own equity financialinstruments distributed by equitycompensation plans to employees)during the period and the fair valueof any consideration received fromthe equity compensation plans orthe employees;

Under the fair value based method,compensation cost is measured at thegrant date based on the value of theaward and is recognized over theservice period, which is usually the

When a vested option lapses on expiryof the exercise period, after the fairvalue of the option has already beenaccounted for as employeecompensation, this accounting

the number, exercise dates andexercise prices of share optionsexercised under equitycompensation plans during theperiod;


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vesting period.

Fair value is determined using anoption-pricing model that takes intoaccount the stock price at grant date,the exercise price, the expected optionlife, the volatility of the underlyingstock and the expected dividends on itand the risk-free interest rate over theexpected option life. Nonpublicentities are permitted to exclude thevolatility factor in estimating the valueof their stock options, which results inmeasurement at minimum value.

The fair value of an option estimated atthe grant date is not subsequentlyadjusted for changes in the price of theunderlying stock or its volatility, thelife of the option, dividends on thestock, or the risk-free interest rate.

Equity instruments granted orotherwise transferred directly to anemployee by a principal stockholderare stock-based employeecompensation and should be accountedfor by the entity under either APB 25or FAS 123, whichever method theentity is applying, unless the transferclearly is for a purpose other thancompensation.

treatment shall be reversed by a creditto employee compensation expense.

The SEBI guidelines are effectiveJune 19, 1999 and apply to all stockcompensation plans established afterthis date.

the number of share options heldby equity compensation plans, orheld by employees under suchplans, that lapsed during theperiod;

the amount, and principal terms, ofany loans or guarantees granted bythe reporting enterprise to, or onbehalf of, equity compensationplans;

the fair value, at the beginning andthe end of the period, of theenterprise’s own equity financialinstruments (other than shareoptions) held by equitycompensation plans;

the fair value at the date of issue,of the enterprise’s own equityfinancial instruments (other thanshare options) issued by theenterprise to equity compensationplans or to employees, or by equitycompensation plans to employees,during the period.

If it is not practicable to determine thefair value of the equity financialinstruments (other than share options),disclose that fact.

Employee stock purchase plans thatallow employees to purchase stock at adiscount from market price are notcompensatory if they satisfy threeconditions:

The discount is relatively small (5percent or less, though in somecases a greater discount also mightbe justified as non-compensatory);

Substantially all full-timeemployees may participate on anequitable basis; and

The plan incorporates no optionfeatures such as allowing theemployee to purchase the stock ata fixed discount from the lesser ofthe market price at grant date ordate of purchase

The cumulative amount ofcompensation cost recognized for astock-based award that ordinarily

When there is more than one equitycompensation plan, disclosures may bemade in total, separately for each planor in groupings that are consideredmost useful for assessing theenterprise’s obligations. Wheredisclosure is given in total for agrouping of plans, they are provided inthe form of weighted averages or ofrelatively narrow ranges.

When there is more than one equitycompensation plan, disclosures may bemade in total, separately for each planor in groupings that are consideredmost useful for assessing the numberand timing of shares that may be issuedand the cash that may be received as aresult. It may be useful to distinguishoptions that are “out-of-the-money”from those that are “in-the-money”. Itmay also be useful to combine thedisclosures in groupings that do not


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results in a future tax deduction underexisting tax law should be consideredto be a deductible temporary differencein applying FAS 109. The deferred taxbenefit (or expense) that results fromincreases (or decreases) in thattemporary difference, for example, asadditional service is rendered and therelated cost is recognized, shall berecognized in the income statement.

FAS 123 requires that an employer'sfinancial statements include certaindisclosures about stock-basedemployee compensation arrangementsregardless of the method used toaccount for them.

aggregate options with a wide range ofexercise prices or dates.

Pro forma disclosures required by anemployer that continues to apply theaccounting provisions of APB 25should reflect the difference betweencompensation cost, if any, included innet income and the related costmeasured by the fair value basedmethod defined in FAS 123, includingtax effects, if any. The required proforma amounts will not reflect anyother adjustments to net income orearnings per share.

A summary of APB 25 and relatedinterpretations is presented below.

Entities should recognizecompensation costs for stock issuedthrough non-variable employee stockoption, purchase, and award plans asthe difference between the quotedmarket price of the stock at themeasurement date (ordinarily the dateof grant or award) less the amount, ifany, the employee is required to pay.This cost is charged to expense overthe periods in which the employeeperforms the related services.

The measurement date for stockappreciation rights and other variablestock option and award plans is not thedate of grant or award. Compensationrelating to such variable plans ismeasured at the end of each period asthe amount by which the quoted marketvalue of the shares of the employer'sstock covered by a grant exceeds theoption price or value specified underthe plan. This is charged to expense


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over the periods in which the employeeperforms the related services.

The measurement date for grants understock option, purchase, and awardplans involving junior stock is the firstdate on which are known both thenumber of shares of the employer'sregular common stock that anemployee is entitled to receive inexchange for the junior stock and theoption or purchase price, if any.Generally, total compensation cost isthe amount by which the market priceat the measurement date of theemployer's regular common stock thatan employee is entitled to receiveexceeds the amount that the employeepaid or will pay for the junior stock. Ifperformance goals to which the juniorstock award relates will probably beachieved, compensation cost shall becharged to expense over the periodsthe employee performs the relatedservices.

Changes in the quoted market valueare reflected as an adjustment ofaccrued compensation andcompensation expense in the periods inwhich the changes occur until the datethe number of shares and purchaseprice, if any, are both known.


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Compensation to Employees: Deferred Compensation Agreements and Paid Absences


Estimated amounts to be paid under adeferred compensation contract that isnot equivalent to a pension plan or apostretirement health or welfarebenefit plan are accrued over theperiod of an employee's activeemployment from the time the contractis signed to the employee's fulleligibility date.

Employer are required to accrue aliability for employees' rights toreceive compensation for futureabsences and for post-employmentbenefits provided to former or inactiveemployees, their beneficiaries, andcovered dependents when certainconditions are met. A liability isaccrued for vacation benefits thatemployees have earned but have notyet taken and for benefits provided as aresult of disability or layoff. A liabilityis generally not required to be accruedfor future sick pay benefits, holidays,and similar compensated absencesuntil employees are actually absent.

Indian GAAP requires compensation toemployees including deferredcompensation agreements and paidabsences to be measured andrecognized on the accrual basis.

IAS requires compensation toemployees including deferredcompensation agreements to bemeasured and recognized on theaccrual basis.

The expected cost of short termemployee benefits in the form ofcompensated absences is recognized asfollows:

in the case of accumulatingcompensated absences, when theemployees render service thatincreases their entitlement tofuture compensated absences; and

in the case of non-accumulatingcompensated absences, when theabsences occur.

The expected cost of accumulatingcompensated absences is measured asthe additional amount that is expectedto be paid as a result of the unusedentitlement that has accumulated at thebalance sheet date.


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Comprehensive income


Comprehensive income is defined as“the change in equity [net assets] of abusiness enterprise during a periodfrom transactions and other events andcircumstances from non-ownersources. It includes all changes inequity during a period except thoseresulting from investments by ownersand distributions to owners”. (CON 6,¶70)

A full set of financial statements for aperiod should show financial positionat the end of the period, earnings (netincome) for the period, comprehensiveincome (total non-owner changes inequity) for the period, cash flowsduring the period, and investments byand distributions to owners during theperiod. (CON 5, ¶13)

The term “comprehensive income” isused to describe the total of allcomponents of comprehensive income,including net income. The term “othercomprehensive income” is used torefer to revenues, expenses, gains, andlosses that are included incomprehensive income but excludedfrom net income. (FAS 130, ¶10)

The purpose of reportingcomprehensive income is to report ameasure of all changes in equity of anenterprise that result from recognizedtransactions and other economicevents of the period other thantransactions with owners. (FAS 130,¶11)

Items included in other comprehensiveincome are classified based on theirnature. For example, othercomprehensive income is classifiedseparately into foreign currency items,minimum pension liability adjustments,and unrealized gains and losses oncertain investments in debt and equitysecurities. (FAS 130, ¶17)

IAS 1 requires entities to prepare andpresent a statement of changes inequity.

This statement shows:

each item of income and expense,gain or loss that is recognizeddirectly in equity, and the total ofthese items. Examples includeproperty revaluation, certainforeign currency translation gainsand losses, and changes in fairvalues of financial instruments;and

net profit or loss for the period.

A total of these two items is notpresented.

Owners' investments and withdrawalsof capital and other movements inretained earnings and equity capitalare shown in the footnotesaccompanying the financialstatements:

Same as above, but with a total ofthe two items (sometimes called'comprehensive income'). Again,owners' investments andwithdrawals of capital and othermovements in retained earningsand equity capital are shown in thefootnotes accompanying thefinancial statements.

The statement shows bothrecognized gains and losses thatare not reported in the incomestatement and owners' investmentsand withdrawals of capital andother movements in retainedearnings and equity capital. Anexample of this would be thetraditional multicolumn statementof changes in shareholders' equity.

The total of other comprehensiveincome for a period is required to betransferred to a component of equitythat is displayed separately fromretained earnings and additional paid-


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in capital in a statement of financialposition at the end of an accountingperiod. A descriptive title such asaccumulated other comprehensiveincome should be used for thatcomponent of equity. (FAS 130, ¶26)

An enterprise should also discloseaccumulated balances for eachclassification in that separatecomponent of equity on the face of astatement of financial position, in astatement of changes in equity, or innotes to the financial statements. Theclassifications should correspond toclassifications used elsewhere in thesame set of financial statements forcomponents of other comprehensiveincome. (FAS 130, ¶26)

All components of comprehensiveincome should be reported in thefinancial statements in the period inwhich they are recognized. A totalamount for comprehensive incomeshould be displayed in the financialstatement where the components ofother comprehensive income arereported. (FAS 130, ¶14)


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Computer software to be sold, leased or otherwise marketed


US GAAP specifies the accounting forthe costs of computer software to besold, leased, or otherwise marketed asa separate product or as part of aproduct or process. It applies tocomputer software developedinternally and to purchased software.

Costs incurred internally in creating acomputer software product arecharged to expense when incurred asresearch and development untiltechnological feasibility has beenestablished for the product.Technological feasibility is establishedupon completion of a detail programdesign or, in its absence, completion ofa working model. This occurs whenthe enterprise has completed allplanning, designing, coding, andtesting activities that are necessary toestablish that the product can beproduced to meet its designspecifications including functions,features, and technical performancerequirements.

Thereafter, all software productioncosts are capitalized and subsequentlyreported at the lower of unamortizedcost or net realizable value.Capitalized costs are amortized basedon current and future revenue for eachproduct with an annual minimum equalto the straight-line amortization overthe remaining estimated economic lifeof the product.

Capitalization of computer softwarecosts ceases when the product isavailable for general release tocustomers. Costs of maintenance andcustomer support are charged toexpense when related revenue isrecognized or when those costs areincurred, whichever occurs first.

The cost of purchased computersoftware to be sold, leased, orotherwise marketed that has noalternative future use is accounted forthe same as the costs incurred todevelop such software internally. Ifthat purchased software has analternative future use, the cost is


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capitalized when the software isacquired and accounted for inaccordance with its alternative futureuse.

Capitalized software costs areamortized on a product-by-productbasis. The annual amortization is thegreater of the amount computed using(a) the ratio that current grossrevenues for a product bear to the totalof current and anticipated future grossrevenues for that product or (b) thestraight-line method over theremaining estimated economic life ofthe product including the period beingreported on. Amortization starts whenthe product is available for generalrelease to customers.

At each balance sheet date, theunamortized capitalized costs of acomputer software product iscompared to the net realizable value ofthat product. The amount by which theunamortized capitalized costs of acomputer software product exceed thenet realizable value of that asset iswritten off. The amount of the write-down shall not be subsequentlyrestored.

Disclosures include unamortizedcomputer software costs included ineach balance sheet presented and thetotal amount charged to expense ineach income statement presented foramortization of capitalized computersoftware costs and for amounts writtendown to net realizable value.


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Consolidation


The purpose of consolidated statementsis to present the results of operationsand the financial position of a parentcompany and its subsidiariesessentially as if the group were a singleenterprise with one or more branchesor divisions. Consolidated statementsare more meaningful than separatestatements and are usually necessaryfor a fair presentation when one of theenterprises in the group directly orindirectly has a controlling financialinterest in the other enterprises.(ARB 51, ¶1)

If an enterprise has one or moresubsidiaries, consolidated statementsrather than parent-company financialstatements are the appropriategeneral-purpose financial statements.(FAS 94, ¶61)

The usual condition for a controllingfinancial interest is ownership of amajority voting interest, i.e. ownershipby one enterprise, directly orindirectly, of over fifty percent of theoutstanding voting shares of anotherenterprise. A majority-ownedsubsidiary shall not be consolidated ifcontrol is likely to be temporary or if itdoes not rest with the majority owner(as, for instance, if the subsidiary is inlegal reorganization or in bankruptcyor operates under foreign exchangerestrictions, controls, or othergovernmentally imposed uncertaintiesso severe that they cast significantdoubt on the parent's ability to controlthe subsidiary). (FAS 94, ¶13)

The Report of the Kumar MangalamCommittee on Corporate Governancetook note of the discussions of the SEBICommittee on Accounting Standards.The report recommends thatcompanies should be required to giveconsolidated financial statements inrespect of all subsidiaries in whichthey hold 51 % or more of the sharecapital.

SEBI is currently discussing this issuewith the ICAI to issue an AS onconsolidated financial statements.

A parent company presentsconsolidated financial statementsunless it:

is itself a wholly ownedsubsidiary; or

is virtually wholly owned and theparent obtains the approval of theowners of the minority interest.

All subsidiaries, domestic and foreign,are consolidated unless:

control is intended to be temporarybecause the subsidiary is acquiredand held exclusively with a viewto its subsequent disposal in thenear future; or

it operates under severe long-termrestrictions that significantlyimpair its ability to transfer fundsto the parent.

Subsidiaries excluded fromconsolidation on the grounds aboveare accounted for in the consolidatedfinancial statements as if they areinvestments in accordance with IAS 25.

Intra-group balances and transactions,resulting unrealized profits andresulting unrealized intra-group lossesare eliminated in full on consolidation.

When the financial statements of asubsidiary used in preparing theconsolidation are drawn up to a datewhich is different from that of theparent, adjustments are effected forsignificant transactions or other eventsthat occur between the two dates(which should be within three monthsof each other).

A difference in fiscal periods of aparent and subsidiary does not justifythe latter’s exclusion fromconsolidation. It is ordinarily feasiblefor the subsidiary to preparestatements for a period thatcorresponds with or closelyapproaches the fiscal period of theparent. Where the difference is notmore than three months, it isacceptable to use the subsidiary's

Consolidated financial statements areprepared using uniform accountingpolicies for like transactions and otherevents in similar circumstances.

When an investment ceases to be asubsidiary, it is accounted for as if itwere an investment under IAS 25 or anassociate under IAS 28, as applicable.

In a parent’s separate financialstatements, investments in subsidiaries


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statements for its fiscal period.Recognition is given to the effect ofintervening events that materiallyaffect the financial position or resultsof operations by disclosure. (ARB 51,¶4)

Consolidated statements shoulddisclose the consolidation policy beingfollowed. (ARB 51, ¶5)

In the preparation of consolidatedstatements, intercompany balances andtransactions are eliminated. Further,any intercompany profit or loss onassets remaining within the group shallbe eliminated. The concept usuallyapplied for this purpose is gross profitor loss (ARB 51, ¶6)

Income taxes paid on intercompanyprofits on assets remaining within thegroup are deferred or theintercompany profits to be eliminatedin consolidation are appropriatelyreduced. (ARB 51, ¶17)

If one enterprise purchases two ormore blocks of stock of anotherenterprise at various dates andeventually obtains control of the otherenterprise, the date of acquisitiondepends on the circumstances.(ARB 51, ¶10)

that are included in the consolidatedfinancial statements are either:

accounted for using the equitymethod (under IAS 28); or

carried at cost or revalued amountsunder the parent’s accountingpolicy for long term investments(under IAS 25).

Investments in subsidiaries that areexcluded from consolidation areaccounted for in the parent’s separatefinancial statements as if they areinvestments in accordance with IAS 25.

An SPE is consolidated when thesubstance of the relationship betweenan enterprise and the SPE indicatesthat the SPE is controlled by thatenterprise.

Where two or more purchases aremade over a period of time, theretained earnings of the subsidiary atacquisition are generally determinedon a step-by-step basis. Where smallpurchases are made over a period oftime and then a purchase is madewhich results in control, the date of thelatest purchase may be considered asthe date of acquisition. (ARB 51, ¶10)

When a subsidiary is acquired duringthe year, there are two methods ofdealing with the results of itsoperations in the consolidated incomestatement. One method is to includethe subsidiary in the consolidation asthough it had been acquired at thebeginning of the year, and to deduct atthe bottom of the consolidated incomestatement the pre-acquisition earningsapplicable to each block of stock. Thispresents results that are more

The following circumstances, forexample, may indicate a relationship inwhich an enterprise controls an SPEand consequently consolidate the SPE:

in substance, the activities of theSPE are being conducted on behalfof the enterprise according to itsspecific business needs so that theenterprise obtains benefits fromthe SPE’s operation;

in substance, the enterprise has thedecision-making powers to obtainthe majority of the benefits of theactivities of the SPE or, by settingup an “autopilot” mechanism, theenterprise has delegated thesedecision making powers;

in substance, the enterprise hasrights to obtain the majority of thebenefits of the SPE and thereforemay be exposed to risks incident to


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indicative of the current status of thegroup, and facilitates futurecomparison with subsequent years.Another method of prorating income isto include in the consolidatedstatement only the subsidiary's revenueand expenses subsequent to the date ofacquisition. (ARB 51, ¶11)

When the investment in a subsidiary isdisposed of during the year, it ispreferable to omit the details ofoperations of the subsidiary from theconsolidated income statement, and toshow the equity of the parent in theearnings of the subsidiary prior todisposal as a separate item in thestatement. (ARB 51, ¶12)

Shares of the parent held by asubsidiary are not treated asoutstanding stock in the consolidatedbalance sheet. (ARB 51, ¶13)

the activities of the SPE; or

in substance, the enterprise retainsthe majority of the residual orownership risks related to the SPEor its assets in order to obtainbenefits from its activities.

The excess of losses applicable to theminority interest in a subsidiary overthe equity capital of the subsidiary arecharged against the majority interest,as there is no obligation of the minorityinterest to make good such losses. Themajority interest is credited to theextent of such losses previouslyabsorbed when future earningsmaterialize. (ARB 51, ¶15)

To justify consolidation, the controllingfinancial interest should rest directlyor indirectly in one of the enterprisesincluded in the consolidation. Thereare circumstances, however, wherecombined financial statements (asdistinguished from consolidatedstatements) of commonly controlledenterprises are likely to be moremeaningful than their separatestatements. Combined financialstatements would be useful if oneindividual owns a controlling interestin several enterprises related by theiroperations. Combined statements arealso used to present the financialposition and the results of operationsof a group of unconsolidatedsubsidiaries or enterprises undercommon management. (ARB 51, ¶22)


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Contingencies


A contingency is an existing condition,situation, or set of circumstancesinvolving uncertainty as to possiblegain (gain contingency) or loss (losscontingency) to an enterprise that willultimately be resolved when one ormore future events occur or fail tooccur. (FAS 5, ¶1)

The likelihood that the future event orevents confirm the loss or impairmentof an asset or the incurrence of aliability can range from probable toremote. The terms probable,reasonably possible, and remote areused to identify three areas within thatrange:

Probable means the future event orevents are likely to occur.

Reasonably possible means thechance of the future event orevents occurring is more thanremote but less than likely; and

Remote means the chance of thefuture event or events occurring isslight. (FAS 5, ¶3)

An estimated loss from a losscontingency is accrued by a charge toincome if both of the followingconditions are met:

a. Information available prior toissuance of the financialstatements indicates that it isprobable that an asset wasimpaired or a liability wasincurred at the date of the financialstatements. It must be probablethat one or more future events willoccur confirming the fact of theloss; and

b. The amount of loss can bereasonably estimated. (FAS 5, ¶8)

Contingencies are conditions orsituations, the ultimate outcome ofwhich are known or determined onlyon the occurrence, or non-occurrence,of one or more uncertain future events.(AS 4, ¶3)

Contingent losses are provided for by acharge in the statement of profit andloss if:

it is probable that future eventswill confirm that an asset has beenimpaired or a liability has beenincurred as at the balance sheetdate, after taking into account anyrelated probable recovery; and

a reasonable estimate of theamount of the resulting loss can bemade. (AS4, ¶10)

The existence of a contingent loss isdisclosed in the financial statements ifeither of the conditions above is notmet, unless the possibility of a loss isremote. (AS4, ¶11). This arises on thepremise that where there is conflictingor insufficient evidence for estimatingthe amount of a contingent loss,readers of financial statements shouldbe made aware of the existence andnature of the contingency.

The existence and amount ofguarantees, obligations arising fromdiscounted bills of exchange andsimilar obligations are generallydisclosed in financial statements byway of note, even though the possibilitythat a loss to the enterprise will occuris remote. (AS 4, ¶5.5)

IAS 37 requires that provisions arerecognized in the balance sheet whenan enterprise has a present obligation(legal or constructive) as a result of apast event, it is probable (i.e. morelikely than not) that an outflow ofresources embodying economicbenefits will be required to settle theobligation and a reliable estimate canbe made of the amount of theobligation.

Provisions should be measured in thebalance sheet at the best estimate ofthe expenditure required to settle thepresent obligation at the balance sheetdate, in other words, the amount thatan enterprise would rationally pay tosettle the obligation, or to transfer it toa third party, at that date.

An enterprise should take risks anduncertainties into account. However,uncertainty does not justify thecreation of excessive provisions or adeliberate overstatement of liabilities.An enterprise should discount aprovision where the effect of the timevalue of money is material and shouldtake future events, such as changes inthe law and technological changes,into account where there is sufficientobjective evidence that they will occur.

The amount of a provision should notbe reduced by gains from the expecteddisposal of assets (even if the expecteddisposal is closely linked to the eventgiving rise to the provision) nor byexpected reimbursements (for example,through insurance contracts, indemnityclauses or suppliers' warranties).

If condition a. is met with respect to aparticular loss contingency and thereasonable estimate of the loss is arange, condition b. is met and anamount is accrued for the loss. If someamount within the range appears at thetime to be a better estimate than any

The amount at which a contingency isstated in the financial statements isbased on information available at thedate on which the financial statementsare approved. Events occurring afterthe balance sheet date that indicatethat an asset was impaired, or that a

When it is virtually certain thatreimbursement will be received if theenterprise settles the obligation, thereimbursement should be recognizedas a separate asset.

A provision is used only forexpenditures for which the provision


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other amount within the range, thatamount shall be accrued. If no amountwithin the range is a better estimatethan any other amount, however, theminimum amount in the range shall beaccrued. (FIN 14, ¶3)

A disclosure of the nature of anaccrual made pursuant to the aboveprovisions and, in some circumstancesthe amount accrued, may be necessaryfor the financial statements not to bemisleading. The terminology usedshould be descriptive of the nature ofthe accrual. (FAS 5, ¶9)

Where an accrual is not made for aloss contingency because one or bothof the conditions above are not met, orif an exposure to loss exists in excess ofthe amount accrued, disclosure of thecontingency is made when there is areasonable possibility that a loss or anadditional loss may have beenincurred. The disclosure shouldindicate the nature of the contingencyand also give an estimate of thepossible loss or range of loss or statethat such an estimate cannot be made.(FAS 5, ¶10)

General or unspecified business risksdo not meet the conditions for accrualand no accrual for loss (reserves forgeneral contingencies) shall be made.(FAS 5, ¶14)

liability existed, at the balance sheetdate are taken into account inidentifying contingencies and indetermining the amounts at which suchcontingencies are included in financialstatements. (AS 4, ¶7.1)

Provisions for contingencies are notmade in respect of general orunspecified business risks as they donot relate to conditions or situationsexisting at the balance sheet date.(AS 4, ¶5.6)

Contingent gains are not recognized inthe financial statements. (AS4, ¶12)

Events occurring after the balancesheet date are those significant events,both favorable and unfavorable, thatoccur between the balance sheet dateand the date on which the financialstatements are approved by the Boardof Directors in the case of a company,and, by the corresponding approvingauthority in the case of any otherentity.

AS 4 discusses two types of events:

those which provide furtherevidence of conditions that existedat the balance sheet date; and

those that are indicative ofconditions that arose subsequent tothe balance sheet date.

was originally recognized and shouldbe reversed if an outflow of resourcesis no longer probable.

IAS 37 sets out three specificapplications of these generalrequirements:

a provision is not recognized forfuture operating losses;

a provision is recognized for anonerous contract - a contract inwhich the unavoidable costs ofmeeting the obligations under thecontract exceed the expectedeconomic benefits; and

a provision for restructuring costsis recognized only when anenterprise has a detailed formalplan for the restructuring and hasraised a valid expectation in thoseaffected that it will carry out therestructuring by starting toimplement that plan or announcingits main features to those affectedby it. For this purpose, amanagement or board decision isnot enough. A restructuringprovision should exclude costs -such as retraining or relocatingcontinuing staff, marketing orinvestment in new systems anddistribution networks - that are notnecessarily entailed by therestructuring or that are associatedwith the enterprise's ongoingactivities.

After the date of an enterprise'sfinancial statements but before thosefinancial statements are issued,information may become availableindicating that an asset was impairedor a liability was incurred after thedate of the financial statements or thatthere is at least a reasonable possibilitythat an asset was impaired or a liabilitywas incurred after that date. Theinformation may relate to a losscontingency that existed at the date ofthe financial statements. On the otherhand, the information may relate to aloss contingency that did not exist atthe date of the financial statements. Innone of the cases was an assetimpaired or a liability incurred at the

Post balance sheet date events mayindicate the need for adjustments toassets and liabilities as of the balancesheet date or may require disclosure.(AS 4, ¶8.1)

Adjustments to assets and liabilities arerequired for post balance sheet dateevents that provide additionalinformation affecting the determinationof the amounts relating to conditionsexisting at the balance sheet date.(AS 4, ¶8.2)

Assets and liabilities are adjusted forpost balance sheet date events thatindicate that the going concernassumption is not appropriate. (AS 4,

IAS 37 prohibits the recognition ofcontingent liabilities and contingentassets. An enterprise should disclose acontingent liability, unless thepossibility of an outflow of resourcesembodying economic benefits isremote, and disclose a contingent assetif an inflow of economic benefits isprobable

An enterprise should adjust itsfinancial statements for events after thebalance sheet date that provide furtherevidence of conditions that existed atthe balance sheet. An enterpriseshould not adjust its financialstatements for events after the balancesheet date that are indicative of


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date of the financial statements, and thecondition for accrual is therefore notmet. Disclosure of those kinds of lossesor loss contingencies may be necessary,however, to keep the financialstatements from being misleading.Where disclosure is deemed necessary,the financial statements should indicatethe nature of the loss or losscontingency and give an estimate of theamount or range of loss or possibleloss or state that such an estimatecannot be made. Occasionally, in thecase of a loss arising after the date ofthe financial statements where theamount of asset impairment or liabilityincurrence can be reasonablyestimated, disclosure may best be madeby supplementing the historicalfinancial statements with pro formafinancial data giving effect to the lossas if it had occurred at the date of thefinancial statements. It may bedesirable to present pro formastatements, usually a balance sheetonly, in columnar form on the face ofthe historical financial statements.(FAS 5, ¶11)

¶15)

Adjustments to assets and liabilities arenot appropriate for events occurringafter the balance sheet date, if suchevents do not relate to conditionsexisting at the balance sheet date.(AS 4, ¶8.3)

Disclosures are made in the report ofthe approving authority of eventsoccurring after the balance sheet datethat represent material changes andcommitments affecting the financialposition of the enterprise. (AS 4, ¶15)

Certain events that take place postbalance sheet date are sometimesreflected in the financial statementsbecause of statutory requirements orbecause of their special nature. Theseinclude the amount of dividendproposed or declared by the enterpriseafter the balance sheet date in respectof the period covered by the financialstatements. (AS 4, ¶8.5)

conditions that arose after the balancesheet date.

If dividends to holders of equityinstruments are proposed or declaredafter the balance sheet date, anenterprise should not recognize thosedividends as a liability. An enterprisemay give the disclosure of proposeddividends either on the face of thebalance sheet as an appropriationwithin equity or in the notes to thefinancial statements.

An enterprise should not prepare itsfinancial statements on a goingconcern basis if managementdetermines after the balance sheet dateeither that it intends to liquidate theenterprise or to cease trading, or that ithas no realistic alternative but to do so.There is no requirement to adjust thefinancial statements where an eventafter the balance sheet date indicatesthat the going concern assumption isnot appropriate for part of anenterprise.

An enterprise should disclose the datewhen the financial statements wereauthorized for issue and who gave thatauthorization.

Certain loss contingencies aredisclosed in financial statements eventhough the possibility of loss may beremote. The common characteristic ofthose contingencies is a guarantee,normally with a right to proceedagainst an outside party in the eventthat the guarantor is called upon tosatisfy the guarantee. Examplesinclude (a) guarantees of indebtednessof others, (b) obligations of commercialbanks under standby letters of credit,and (c) guarantees to repurchasereceivables that have been sold orotherwise assigned. Disclosure ofthose loss contingencies, and othersthat in substance have the samecharacteristics, should be continuedand should include the nature andamount of the guarantee.Consideration should be given todisclosing, if estimable, the value ofany recovery that could be expected toresult, such as from the guarantor's

Where the enterprise's owners or othershave the power to amend the financialstatements after issuance, theenterprise should disclose that fact.

An enterprise should updatedisclosures that relate to conditionsthat existed at the balance sheet date inthe light of any new information that itreceives after the balance sheet dateabout those conditions.


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right to proceed against an outsideparty. (FAS 5, ¶12)

Contingencies that might result ingains are usually not reflected in thefinancial statements since this might beto recognize revenue prior to itsrealization. Adequate disclosure ismade of contingencies that might resultin gains, but care is exercised to avoidmisleading implications as to thelikelihood of realization. (FAS 5, ¶17)

Unused letters of credit, assets pledgedas security for loans, and commitments,such as those for plant acquisition oran obligation to reduce debts, maintainworking capital, or restrict dividends,shall be disclosed in financialstatements. (FAS 5, ¶18 and 19)


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Costs of computer software developed or obtained for internal use


SOP 98-1 provides guidance onaccounting for the costs of computersoftware developed or obtained forinternal use.

Computer software meeting thecharacteristics specified in this SOP isinternal-use software.

Computer software costs that areincurred in the preliminary projectstage are expensed as incurred. Oncethe capitalization criteria of SOP 98-1are met, external direct costs ofmaterials and services consumed indeveloping or obtaining internal-usecomputer software, payroll andpayroll-related costs for employeeswho are directly associated with andwho devote time to the internal-usecomputer software project (to theextent of the time spent directly on theproject), and interest costs incurredwhen developing computer software forinternal use are capitalized.

Training costs and data conversioncosts are expensed as incurred.

Internal and external costs incurredduring the preliminary project stageare expensed as incurred.

Internal and external costs incurred todevelop internal-use computer softwareduring the application developmentstage are capitalized. Costs to developor obtain software that allows foraccess or conversion of old data bynew systems are also capitalized.Training costs are not internal-usesoftware development costs and, ifincurred during this stage, areexpensed as incurred.


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Accounting for the costs of computer software developed or obtained for internal use (continued)


The process of data conversion fromold to new systems includes purging orcleansing of existing data,reconciliation or balancing of the olddata and the data in the new system,creation of new/additional data, andconversion of old data to the newsystem. Data conversion often occursduring the application developmentstage. Data conversion costs areexpensed as incurred.

Post-Implementation/Operation Stage.Internal and external training costs andmaintenance costs are expensed asincurred.

Internal costs incurred for maintenanceare expensed as incurred. Entities thatcannot separate internal costs on areasonably cost-effective basis betweenmaintenance and relatively minorupgrades and enhancements shouldexpense such costs as incurred.

External costs incurred underagreements related to specifiedupgrades and enhancements areexpensed or capitalized depending ontheir nature. External costs related tomaintenance, unspecified upgrades andenhancements, and costs underagreements that combine the costs ofmaintenance and unspecified upgradesand enhancements are recognized inexpense over the contract period on astraight-line basis unless anothersystematic and rational basis is morerepresentative of the services received.

Impairment is recognized andmeasured in accordance with theprovisions of FAS 121. [ReferImpairment below]

The capitalized costs of computersoftware developed or obtained forinternal use should be amortized on astraight-line basis unless anothersystematic and rational basis is morerepresentative of the software's use.

If, after the development of internal-usesoftware is completed, an entity decidesto market the software, proceedsreceived from the license of the


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computer software, net of directincremental costs of marketing, shouldbe applied against the carrying amountof that software.

SOP 98-1 applies to all non-governmental entities and is effectivefor financial statements for fiscal yearsbeginning after December 15, 1998.The provisions of SOP 98-1 should beapplied to internal-use software costsincurred in those fiscal years for allprojects, including those projects inprogress upon initial application of theSOP. Earlier application isencouraged. Costs incurred prior toinitial application of this SOP, whethercapitalized or not, should not beadjusted to the amounts that wouldhave been capitalized had this SOPbeen in effect when those costs wereincurred.


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Debt


Convertible debt securities are debtsecurities that are convertible intocommon stock of the issuer or anaffiliated enterprise at a specified priceat the option of the holder and that aresold at a price or have a value atissuance not significantly in excess ofthe face amount. The terms of suchsecurities generally include:

An interest rate that is lower thanthe issuer could establish fornonconvertible debt;

an initial conversion price that isgreater than the market value of thecommon stock at time of issuance;and

a conversion price that does notdecrease except pursuant toantidilution provisions.

In most cases such securities arecallable at the option of the issuer andare subordinated to nonconvertibledebt. (APB 14, ¶3)

The proceeds from issuance of debtsecurities with detachable warrants isallocated between the warrants and thedebt securities based on their relativefair values at time of issuance. Theportion allocable to the warrants isaccounted for as additional paid-incapital. No similar allocation is madefor the issuance of either convertibledebt or debt securities with non-detachable warrants.

When a debtor induces conversion ofconvertible debt by issuing additionalsecurities or paying otherconsideration to convertible debtholders, there is a recognition ofexpense equal to the fair value of theadditional securities or otherconsideration issued to induceconversion.

SchVI, Part I sets out the disclosurerequirements in respect of debt. Debtdisclosures are made on the basis ofthe underlying security.

The following disclosures are requiredfor secured debt:

Classified between debentures,loans and advances from banks,subsidiaries and others;

Classified between loans takenfrom directors, secretaries,treasurers and managers of thecompany;

Nature of the security offered;

Terms of redemption or conversionof debentures together with theearliest date for the redemption orconversion;

Guarantees given by directors,secretaries, treasurers andmanagers of the company togetherwith the aggregate amount of loansguaranteed;

Interest accrued and due onsecured debt.

Note (k) of the “General instructions forpreparation of balance sheet” containedin SchVI, Part I also requirescompanies to disclose the nominalamount and carrying amount of any ofthe company’s debentures that are heldby a nominee or trustee for thecompany.

The only requirement relates todisclosure of debt in a classifiedbalance sheet as current or non-current. This is in accordance with theguidance contained in AS 1.

All entities that have issued securities,including options, warrants, debt, andstock, must comply with the disclosurerequirements of FAS 129 dealing withdisclosures on capital structures.

The following disclosures are requiredfor unsecured debt:

Classified between fixed deposits,loans and advances fromsubsidiaries, short-term loans and


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Product financing arrangements forproducts that were produced by orwere originally purchased by thesponsor or purchased by anotherenterprise on behalf of the sponsor andhave the following characteristics:

The financing arrangement requires thesponsor to purchase the product, asubstantially identical product, orprocessed goods of which the productis a component at specified prices. Thespecified prices are not subject tochange except for fluctuations due tofinance and holding costs. Thischaracteristic of predetermined pricesalso is present if any of the followingcircumstances exists:

The specified prices in thefinancing arrangement are in theform of resale price guarantees;

The sponsor has an option topurchase the product, the economiceffect of which compels thesponsor to purchase the product;and

The sponsor is not required by theagreement to purchase the productbut the other enterprise has anoption whereby it can require thesponsor to purchase the product.

The payments that the other enterprisewill receive on the transaction areestablished by the financingarrangement.

advances from banks and othersand other loans and advances frombanks and others;

Classified between loans takenfrom directors, secretaries,treasurers and managers of thecompany;

Guarantees given by directors,secretaries, treasurers andmanagers of the company togetherwith the aggregate amount of loansguaranteed;

Interest accrued and due onunsecured debt.

Short-term loans are those that are notdue for more than one year as of thebalance sheet date.

The amounts to be paid by the sponsorare adjusted, as necessary, to coversubstantially all fluctuations in costsincurred by the other enterprise inpurchasing and holding the product(including interest). (FAS 49, ¶5)

Product and obligations under productfinancing arrangements that have bothcharacteristics described above areaccounted for as follows:

Where a sponsor sells a product toanother enterprise and, in a relatedtransaction, agrees to repurchasethe product or processed goods ofwhich the product is a component,the sponsor records a liability at thetime the proceeds are received


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from the other enterprise to theextent that the product is coveredby the financing arrangement. Thesponsor shall not record thetransaction as a sale; and

Where the sponsor is a party to anarrangement whereby anotherenterprise purchases a product onthe sponsor's behalf and, in arelated transaction, the sponsoragrees to purchase the product orprocessed goods of which theproduct is a component from theenterprise, the sponsor shall recordthe asset and the related liabilitywhen the product is purchased bythe other enterprise. (FAS 49, ¶8)

A restructuring of debt constitutes aTDR if the creditor, for reasons relatedto the debtor's financial difficulties,grants a concession to the debtor that itwould not otherwise consider. Thisdoes not apply to routine changes indebt terms.

The accounting for a TDR is based onthe type of the restructuring, which maybe one of two primary types: (a) atransfer of assets (or equity interest)from a debtor to a creditor in fullsettlement of a debt and (b) amodification of terms.

If a debtor satisfies a debt in full bytransferring assets, or by granting anequity interest, to a creditor and theFMV of the assets transferred or equityinterest granted is less than thecarrying value of the debt (or, in thecase of the creditor, is less than therecorded investment in the debt) thedifference generally is an extraordinarygain to the debtor and ordinary loss tothe creditor. Also, the debtor mustrecognize a gain or loss for anydifference between the carrying valueof the assets transferred and their fairvalue. Subsequent accounting forassets received in a TDR is the same asif the assets were acquired for cash.

If a creditor receives assets or anequity interest in the debtor in fullsatisfaction of a receivable, the creditoraccounts for those assets at their fairvalue at the time of the restructuring


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and accounts for those assets receivedthe same as if the assets had beenacquired for cash.

For a creditor in a TDR in fiscal yearsbeginning before December 16, 1994involving only a modification of terms,the effects of the restructuring areaccounted for prospectively from thetime of restructuring, as long as theloan is not impaired based on the termsof the restructuring agreement. Nogain or loss is recorded at the time ofrestructuring unless the carryingamount of the debt (or, in the case ofthe creditor, the recorded investment inthe debt) exceeds the total future cashpayments (or receipts) specified by thenew terms. A creditor in a TDR infiscal years beginning afterDecember 15, 1994 involving amodification of terms or in a TDR infiscal years beginning beforeDecember 16, 1994 that becomesimpaired after that date based on theterms of the restructuring agreementshall account for the restructured loanin accordance with FAS 121.


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Depreciation


The cost of an asset is one of the costsof the services it renders during itsuseful economic life. GAAP requiresthat this cost be spread over theexpected useful life of the asset in sucha way as to allocate it as equitably aspossible to the periods during whichservices are obtained from the use ofthe asset.

Depreciation accounting is a system ofaccounting that aims to distribute thecost or other basic value of tangiblecapital assets, less salvage (if any),over the estimated useful life of the unit(which may be a group of assets) in asystematic and rational manner. It is aprocess of allocation, not of valuation.(ARB 43, ch9C, ¶5)

The process of using up the futureeconomic benefit or service potential ofland often takes place over a period solong that its occurrence isimperceptible. Land used as a buildingsite is perhaps the most commonexample. In contrast, however, thatprocess also sometimes occurs muchmore rapidly—land used as a site fortoxic waste, as a source of gravel orore, or for farming under conditions inwhich fertility dissipates relativelyquickly and cannot be restoredeconomically are examples. (FAS 93,¶34)

AS 6 does not apply to:

Forests, plantations and similarregenerative natural resources;

Wasting assets includingexpenditure on the exploration forand extraction of minerals, oils,natural gas and similar non-regenerative resources;

expenditure on research anddevelopment;

goodwill; and

live stock.

AS 6 also does not apply to land unlessit has a limited useful life for theenterprise.

The depreciable amount of adepreciable asset is allocated on asystematic basis to each accountingperiod during the useful life of theasset.

Depreciable amount means historicalcost, or other amount substituted forhistorical cost in the financialstatements, less the estimated residualvalue.

Depreciable assets are assets that areexpected to be used during more thanone accounting period; have a limiteduseful life and are not held by anenterprise for the purpose of sale in theordinary course of business.

Useful life is the period over which adepreciable asset is expected to be usedby the enterprise or the number ofproduction or similar units expected tobe obtained from the use of the asset bythe enterprise.

The depreciable amount of adepreciable asset is allocated on asystematic basis to each accountingperiod during the useful life of theasset.

The useful lives of assets are estimatedafter considering expected physicalwear and tear, obsolescence and legalor other limits on the use of the asset.

The useful lives of major depreciableassets or classes of depreciable assetsare reviewed periodically anddepreciation rates adjusted for currentand future periods if expectations aresignificantly different from previousestimates.

The depreciation method selected isapplied consistently unless alteredcircumstances justify a change.

Disclosures include:

The valuation bases used fordepreciable assets with otheraccounting policies.

For each major class of depreciableasset, the depreciation methodsused, the useful lives ordepreciation rates used, totaldepreciation allocated for theperiod and the gross amount ofdepreciable assets and relatedaccumulated depreciation.

Effect of changes in the usefullives of major depreciable assets orclasses of depreciable assets in theaccounting period in which thechange occurs.

In an accounting period in whichthe depreciation method ischanged, disclosure of thequantified effect and the reason forthe change.

Property, plant, and equipment is notwritten up by an enterprise to reflectappraisal, market, or current valueswhich are above cost to the enterprise.This may not apply to foreignoperations under unusual conditionssuch as serious inflation or currency

The depreciation method selected isapplied consistently from period toperiod. A change from one method ofproviding depreciation to anothershould be made in accordance withAS 1 and 5. When such a change in themethod of depreciation is made,


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devaluation. However, when theaccounts of an enterprise with foreignoperations are translated into U.S.currency for consolidation, such write-ups normally are eliminated.Whenever appreciation is recorded onthe books, income is charged withdepreciation computed on the written-up amounts. (APB 6, ¶17)

Where the expected productivity orrevenue-earning power of the asset isrelatively greater during the earlieryears of its life, or where maintenancecharges tend to increase during lateryears, the declining-balance methodmay provide the most satisfactoryallocation of cost. That conclusionalso applies to other methods,including the sum-of-the-years'-digitsmethod, which produce substantiallysimilar results. (FAS 109, ¶288a)

The following disclosures are made inthe financial statements or in notesthereto:

Depreciation expense for theperiod and balances of majorclasses of depreciable assets, bynature or function, at the balancesheet date

Accumulated depreciation, bymajor classes of depreciable assetsor in total, at balance sheet date;and

Description of the method ormethods used in computingdepreciation with respect to majorclasses of depreciable assets.(APB 12, ¶5)

depreciation is recalculated inaccordance with the new methodretroactively. The deficiency or surplusarising from retrospectiverecalculation of depreciation isadjusted in the financial statements inthe year in which the method ofdepreciation is changed. Such a changeis treated as a change in accountingpolicy and its effect is quantified anddisclosed. (AS 6, ¶17)

The useful lives of major depreciableassets or classes of depreciable assetsmay be reviewed periodically. Wherethere is a revision of the estimateduseful life of an asset, the unamortizeddepreciable amount should be chargedover the revised remaining useful life.(AS 6, ¶23)

Any addition or extension that becomesan integral part of the existing asset isdepreciated over the remaining usefullife of that asset. The depreciation onsuch addition or extension is providedat the rate applied to the existing asset.Where an addition or extension retainsa separate identity and is capable ofbeing used after the existing asset isdisposed of, depreciation is providedindependently on the basis of anestimate of the applicable useful life.(AS 6, ¶24)

Where the historical cost of adepreciable asset undergoes a changedue to increase or decrease in longterm liability on account of exchangefluctuations, price adjustments,changes in duties or similar factors, thedepreciation on the revisedunamortized depreciable amount isprovided prospectively over theresidual useful life of the asset. (AS 6,¶25)

Where depreciable assets are revalued,the provision for depreciation is basedon the revalued amount and on the


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estimate of the remaining useful lives ofsuch assets. In case the revaluation hasa material effect on the amount ofdepreciation, the same is disclosedseparately in the year in whichrevaluation is carried out. (AS 6, ¶26)

The following information is disclosedin the financial statements:

the historical cost or other amountsubstituted for historical cost ofeach class of depreciable assets;

total depreciation for the period foreach class of assets; and

the related accumulateddepreciation. (AS 6, ¶28)

The following information is alsodisclosed in the financial statementstogether with the disclosure of otheraccounting policies:

depreciation methods used; and

depreciation rates or the usefullives of the assets, if they aredifferent from the principal ratesspecified in the statute governingthe enterprise. (AS 6, ¶29)


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Derivative instruments and hedging activities


Section AC D 50 presents theaccounting and reporting standards forderivative instruments, includingcertain derivative instrumentsembedded in other contracts,(collectively referred to as derivatives)and for hedging activities. It requiresthat an entity recognize all derivativesas either assets or liabilities in thestatement of financial position andmeasure those instruments at fairvalue. If certain conditions are met, aderivative may be specificallydesignated as (a) a hedge of theexposure to changes in the fair value ofa recognized asset or liability or anunrecognized firm commitment, (b) ahedge of the exposure to variable cashflows of a forecasted transaction, or (c)a hedge of the foreign currencyexposure of a net investment in aforeign operation, an unrecognizedfirm commitment, an available-for-salesecurity, or a foreign-currency-denominated forecasted transaction.

The accounting for changes in the fairvalue of a derivative (that is, gains andlosses) depends on the intended use ofthe derivative and the resultingdesignation.

For a derivative designated as hedgingthe exposure to changes in the fairvalue of a recognized asset or liabilityor a firm commitment (referred to as afair value hedge), the gain or loss isrecognized in earnings in the period ofchange together with the offsetting lossor gain on the hedged item attributableto the risk being hedged. The effect ofthat accounting is to reflect in earningsthe extent to which the hedge is noteffective in achieving offsetting changesin fair value.

IAS 39 is effective for annual financialstatements beginning on or afterJanuary 1, 2001 and is summarizedbelow.

Under IAS 39, all financial assets andfinancial liabilities are recognized onthe balance sheet, including allderivatives. They are initially measuredat cost, which is the fair value ofwhatever was paid or received toacquire the financial asset or liability.

An enterprise should recognize normalpurchases of securities in the marketplace either at trade date or settlementdate, with recognition of certain valuechanges between trade and settlementdates if settlement date accounting isused.

Transaction costs are included in theinitial measurement of all financialinstruments.

Subsequent to initial recognition, allfinancial assets are remeasured to fairvalue, except for the following, whichshould be carried at amortized cost:

loans and receivables originated bythe enterprise and not held fortrading;

other fixed maturity investments,such as debt securities andmandatorily redeemable preferredshares, that the enterprise intendsand is able to hold to maturity; and

financial assets whose fair valuecannot be reliably measured(generally limited to some equitysecurities with no quoted marketprice and forwards and options onunquoted equity securities).

For a derivative designated as hedgingthe exposure to variable cash flows of aforecasted transaction (referred to as acash flow hedge), the effective portionof the derivative's gain or loss isinitially reported as a component ofother comprehensive income (outsideearnings) and subsequently reclassified

An enterprise measures loans andreceivables that it has originated andthat are not held for trading atamortized cost, less reductions forimpairment or uncollectibility. Theenterprise need not demonstrate intentto hold originated loans andreceivables to maturity. For other fixed


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into earnings when the forecastedtransaction affects earnings. Theineffective portion of the gain or loss isreported in earnings immediately.

For a derivative designated as hedgingthe foreign currency exposure of a netinvestment in a foreign operation, thegain or loss is reported in othercomprehensive income (outsideearnings) as part of the cumulativetranslation adjustment. The accountingfor a fair value hedge described aboveapplies to a derivative designated as ahedge of the foreign currency exposureof an unrecognized firm commitment oran available-for-sale security.Similarly, the accounting for a cashflow hedge described above applies toa derivative designated as a hedge ofthe foreign currency exposure of aforeign-currency-denominatedforecasted transaction.

For a derivative not designated as ahedging instrument, the gain or loss isrecognized in earnings in the period ofchange.

maturity investments, intent to hold tomaturity is considered in the aggregate,not by subcategories.

An intended or actual sale of a held-to-maturity security due to a non-recurring and not reasonablyanticipated circumstance beyond theenterprise's control should not call intoquestion the enterprise's ability to holdits remaining portfolio to maturity.

If an enterprise is prohibited fromclassifying financial assets as held-to-maturity because it has sold more thanan insignificant amount of assets that ithad previously said it intended to holdto maturity, that prohibition shouldexpire at the end of the secondfinancial year following the prematuresales.

After acquisition most financialliabilities are measured at originalrecorded amount less principalrepayments and amortization. Onlyderivatives and liabilities held fortrading (such as securities borrowed bya short seller) are remeasured to fairvalue.

Under this section, an entity that electsto apply hedge accounting is requiredto establish at the inception of thehedge the method it will use forassessing the effectiveness of thehedging derivative and themeasurement approach for determiningthe ineffective aspect of the hedge.Those methods must be consistent withthe entity's approach to managing risk.

This section applies to all entities. Anot-for-profit organization shouldrecognize the change in fair value of allderivatives as a change in net assets inthe period of change. In a fair valuehedge, the changes in the fair value ofthe hedged item attributable to the riskbeing hedged also are recognized.However, because of the format of theirstatement of financial performance,not-for-profit organizations are notpermitted special hedge accounting forderivatives used to hedge forecastedtransactions. This section does notaddress how a not-for-profitorganization should determine the

For those financial assets andliabilities that are remeasured to fairvalue, an enterprise will have a single,enterprise-wide option either to:

recognize the entire adjustment innet profit or loss for the period; or

(b) recognize in net profit or lossfor the period only those changesin fair value relating to financialassets and liabilities held fortrading, with the non-trading valuechanges reported in equity until thefinancial asset is sold, at whichtime the realized gain or loss isreported in net profit or loss. Forthis purpose, derivatives are alwaysdeemed held for trading unlessthey are designated as hedginginstruments.

IAS 39 requires that an impairment lossbe recognized for a financial assetwhose recoverable amount is less thancarrying amount. Guidance is providedfor calculating impairment.


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components of an operating measure ifone is presented.

This section precludes designating anon-derivative financial instrument asa hedge of an asset, liability,unrecognized firm commitment, orforecasted transaction except that anon-derivative instrument denominatedin a foreign currency may bedesignated as a hedge of the foreigncurrency exposure of an unrecognizedfirm commitment denominated in aforeign currency or a net investment ina foreign operation.

If a debtor delivers collateral to thecreditor and the creditor is permitted tosell or repledge the collateral withoutconstraints, then the debtor recognizesthe collateral given as a receivable andthe creditor recognizes the collateralreceived as an asset and the obligationto repay the collateral as a liability.

If a guarantee is recognized as aliability, it should be measured at fairvalue until it expires, or at originalrecorded amount if fair value cannot bemeasured reliably.

IAS 39 establishes conditions fordetermining when control over afinancial asset or liability has beentransferred to another party. Forfinancial assets a transfer normallywould be recognized if (a) thetransferee has the right to sell orpledge the asset and (b) the transferordoes not have the right to reacquire thetransferred assets unless either theasset is readily obtainable in themarket or the reacquisition price is fairvalue at the time of reacquisition.

With respect to derecognition ofliabilities, the debtor must be legallyreleased from primary responsibilityfor the liability (or part thereof) eitherjudicially or by the creditor. If part of afinancial asset or liability is sold orextinguished, the carrying amount issplit based on relative fair values. Iffair values are not determinable, a costrecovery approach to profit recognitionis taken.

Hedging, for accounting purposes,means designating a derivative or (onlyfor hedges of foreign currency risks) anon-derivative financial instrument asan offset in net profit or loss, in wholeor in part, to the change in fair value orcash flows of a hedged item. Hedgeaccounting is permitted under IAS 39 incertain circumstances, provided thatthe hedging relationship is clearlydefined, measurable, and actuallyeffective.

Hedge accounting is permitted only ifan enterprise designates a specifichedging instrument as a hedge of a


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change in value or cash flow of aspecific hedged item, rather than as ahedge of an overall net balance sheetposition.

However, the approximate incomestatement effect of hedge accountingfor an overall net position can beachieved, in some cases, by designatingpart of one of the underlying items asthe hedged position.

For hedges of forecasted transactions,the gain or loss on the hedginginstrument will adjust the basis(carrying amount) of the acquired assetor liability.

IAS 39 supplements the disclosurerequirements of IAS 32 for financialinstruments.

IAS 39 is effective for annualaccounting periods beginning on orafter 1 January 2001. Earlierapplication is permitted as of thebeginning of a financial year that endsafter issuance of IAS 39.

On initial adoption of IAS 39,adjustments to bring derivatives andother financial assets and liabilitiesonto the balance sheet and adjustmentsto remeasure certain financial assetsand liabilities from cost to fair valuewill be made by adjusting retainedearnings directly.


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Development stage enterprises


Generally accepted accountingprinciples that apply to establishedoperating enterprises govern therecognition of revenue by adevelopment stage enterprise anddetermine whether a cost incurred by adevelopment stage enterprise is to becharged to expense when incurred or isto be capitalized or deferred.

Accounting treatment is governed bythe nature of the transaction ratherthan by the degree of maturity of theenterprise. Thus, the determination ofwhether a particular cost is charged toexpense when incurred or iscapitalized or deferred is based on thesame accounting standards regardlessof whether the enterprise incurring thecost is already operating or is in thedevelopment stage.

An enterprise is considered to be in thedevelopment stage if it is devotingsubstantially all of its efforts toestablishing a new business and eitherof the following conditions exists:

Planned principal operations havenot commenced; and

Planned principal operations havecommenced, but there has been nosignificant revenue therefrom.

Financial statements issued by adevelopment stage enterprise shouldpresent financial position, cash flows,and results of operations in conformitywith the generally accepted accountingprinciples that apply to establishedoperating enterprises and shall includecertain additional information.

Indian GAAP contains no definitivepronouncement regardingdevelopmental stage enterprises. TheICAI GN, Treatment of ExpenditureDuring Construction Period, containsrecommendatory guidance in respectof income earned and expensesincurred during the constructionperiod as well as preparation of aprofit and loss account by a companyduring its construction period.

The GN contain recommendations onthe following matters:

Treatment of preliminary corporateexpenses including those incurredon the formation of a company;

Costs that may be capitalized as apart of the project cost includingpreliminary project expenditure;

Treatment accorded to interestcharges, commitment fees andother borrowing costs onloans/borrowings taken forfinancing the project or for thepurposes of providing workingcapital;

Treatment of indirect expenditureincluding general office andadministration expenditure;

Income earned during constructionperiod including interest income,income from hire of equipmentand other assets, etc;

Treatment of advance payments tosuppliers of capital equipment, andcapital work-in-progress;

Depreciation charged on assetscapitalized during the constructionperiod;

The additional information includesthe following:

Balance sheet, includingcumulative net losses reportedwith a descriptive caption such as"deficit accumulated during thedevelopment stage" in thestockholders' equity section;

Treatment of costs of landacquired for construction includingcosts incurred thereon;

Determination of the date ofcapitalization of the project;

Income earned and expenditureincurred during the trial run andstart-up/commissioning period of


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Income statement, showingamounts of revenue and expensesfor each period covered by theincome statement and cumulativeamounts from the enterprise'sinception;

Statement of cash flows, showingthe cash inflows and cash outflowsfor each period for which anincome statement is presented andcumulative amounts from theenterprise's inception;

Statement of stockholders' equity,showing from the enterprise'sinception:

− The date and number ofshares of stock, warrants,rights, or other equitysecurities issued for cash andfor other consideration;

− The dollar amounts (pershare or other equity unit andin total) assigned to theconsideration received forshares of stock, warrants,rights, or other equitysecurities;

− The nature of any noncashconsideration and the basis forassigning amounts.

The financial statements are alsoidentified as those of a developmentstage enterprise and include adescription of the nature of thedevelopment stage activities in whichthe enterprise is engaged.

the project; and

Classification and disclosure ofexpenditure during constructionperiod, taking into considerationthe requirements of stature(CA 56) and applicable companylaw notifications;

SOP 98-5 provides guidance on thefinancial reporting of start-up costsand organization costs.

Start-up activities as those one-timeactivities related to opening a newfacility, introducing a new product orservice, conducting business in a newterritory, conducting business with anew class of customer or beneficiary,initiating a new process in an existingfacility, or commencing some newoperation. Start-up activities includeactivities related to organizing a newentity (commonly referred to as


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organization costs).

Costs relating to the consumption ofeconomic benefits during a period maybe recognized either directly or byrelating it to revenues recognizedduring the period. Other costs arerecognized as expenses in the period inwhich they are incurred because theperiod to which they otherwise relate isindeterminable or not worth the effortto determine.

Certain expenditures for start-up andpreoperative activities anddevelopment stage enterprises areexamples of the kinds of items forwhich assessments of future economicbenefits may be especially uncertain.

Costs of start-up activities, includingorganization costs, are consequentlyexpensed as incurred.

SOP 98-5 applies to all non-governmental entities and is effectivefor financial statements for fiscal yearsbeginning after December 15, 1998.


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Earnings per share


FAS 128 establishes standards forcomputing and presenting earnings pershare (EPS) and applies to entitieswith publicly held common stock orpotential common stock. It simplifiesthe standards for computing earningsper share previously found in APB 15and makes them comparable tointernational EPS standards. Itreplaces the presentation of primaryEPS with a presentation of basic EPSand also requires dual presentation ofbasic and diluted EPS on the face ofthe income statement for all entitieswith complex capital structures.FAS 128 also requires a reconciliationof the numerator and denominator ofthe basic EPS computation to thenumerator and denominator of thediluted EPS computation.

Basic EPS excludes dilution and iscomputed by dividing income availableto common stockholders by theweighted-average number of commonshares outstanding for the period.Diluted EPS reflects the potentialdilution that could occur if securitiesor other contracts to issue commonstock were exercised or converted intocommon stock or resulted in theissuance of common stock that thenshared in the earnings of the entity.Diluted EPS is computed similarly tofully diluted EPS pursuant to APB 15.

FAS 128 is effective for financialstatements issued for periods endingafter December 15, 1997, includinginterim periods; earlier application isnot permitted. This Statement requiresrestatement of all prior-period EPSdata presented.

SchVI, Part IV, Balance Sheet Abstractand Companies General BusinessProfile, requires that companiesprovide details of EPS as part of theirannual financial statements. However,SchVI, Part IV does not provide anymechanics of computing EPS.

The GN, Terms Used in FinancialStatements, issued by the ICAI definesEPS as “the earnings in monetaryterms attributable to each equity sharebased on the net profit for the period,before taking into account prior perioditems, extraordinary items andadjustments resulting from changes inaccounting policies but after deductingtaxes appropriate thereto andpreference dividends, divided by thenumber of equity shares issued andranking for dividend in respect of thatperiod.

The GN, Audit Reports/Certificates onFinancial Information in OfferDocuments contains guidance oncalculating basic and diluted EPS forthe purpose of their inclusion therein.This guidance is substantially similarto that contained in IAS 33.

IAS 33 is substantially similar to therequirements of FAS 128 and isapplicable to public companies only.

IAS 33 requires the disclosure of basic(undiluted) and diluted net income perordinary share on the face of theincome statement with equalprominence.

EPS disclosures are required for eachclass of common having differentdividend rights.

Diluted EPS reflects the potentialreduction of EPS from that would ariseon the conversion of options, warrants,rights, convertible debt, convertiblepreferred, and other contingentissuances of ordinary shares.

The numerator for basic EPS is profitafter minority interest and preferencedividends. The denominator for basicEPS is the weighted averageoutstanding ordinary shares during anaccounting period.

The “What if converted method” isapplied to compute potential dilutionarising on the conversion of commonstock equivalents such as rights,convertible debt, convertible preferred,and other contingent issuances ofordinary shares.

The “Treasury stock method” is usedto compute dilution of options andwarrants.

Pro forma EPS reflects issuances,exercises, and conversions afterbalance sheet date.

Basic and diluted EPS are adjusted forthe effects of fundamental errors andchanges in accounting policies as wellas the effects of a business combinationthat is a uniting of interests.


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Financial instruments: Disclosure


The disclosures relating to financialinstruments are contained in AC F 25.

F 25 presents requirements for allentities to disclose certain informationabout their financial instruments.However, certain disclosures areoptional for nonpublic entities thatmeet the following criteria are exemptfrom the disclosure requirements ofthis section.

The entity's total assets are lessthan $100 million on the date ofthe financial statements.(FAS 126, ¶2)

The entity has no instrument that,in whole or in part, is accountedfor as a derivative instrumentduring the reporting period.(FAS 133, ¶537)

These criteria are applied to the mostrecent year presented in comparativefinancial statements to determineapplicability. If disclosures are notrequired in the current period, thedisclosures for previous years may beomitted if financial statements for thoseyears are presented for comparativepurposes.

Disclosure of information aboutsignificant concentrations of credit riskfrom an individual counterparty orgroups of counterparties for allfinancial instruments is required.

AS 11, ¶26 requires the disclosure ofthe amount of exchange differences inrespect of forward exchange contractsto be recognized in the profit or lossfor one or more subsequent accountingperiods, as required by AS 11, ¶13.

AS 11, ¶27 encourages the disclosureof an enterprise's foreign currency riskmanagement policy.

AS 11, ¶13 states that “an enterprisemay enter into a forward exchangecontract, or another financialinstrument that is in substance aforward exchange contract, toestablish the amount of the reportingcurrency required or available at thesettlement date of a transaction. Thedifference between the forward rateand the exchange rate at date of thetransaction should be recognized asincome or expense over the life of thecontract, except in respect of liabilitiesincurred for acquiring fixed assets, inwhich case, such difference should beadjusted in the carrying amount of therespective fixed assets”.

The purpose of the disclosuresrequired is to provide information thatwill enhance understanding of thesignificance of on-balance sheet andoff-balance sheet financial instrumentsto an enterprise’s financial position,performance and cash flows and assistin assessing the amounts, timing andcertainty of future cash flowsassociated with those instruments.

In addition to giving information aboutparticular financial instrumentbalances and transactions, enterprisesare encouraged to provide a discussionof the extent to which financialinstruments are used, the associatedrisks and the business purposes served.

A discussion of management’s policiesfor controlling the risks associatedwith financial instruments, includingpolicies on matters such as hedging ofrisk exposures, avoidance of undueconcentrations of risk andrequirements for collateral to mitigatecredit risks, provides a valuableadditional perspective that isindependent of the specific instrumentsoutstanding at a particular time.

Some enterprises provide suchinformation in a commentary thataccompanies their financial statementsrather than as part of the financialstatements.

In addition, all entities except certainnonpublic entities are required todisclose the fair value of financialinstruments, both assets and liabilitiesrecognized and not recognized in thestatement of financial position, forwhich it is practicable to estimate fairvalue. If estimating fair value is notpracticable, F 25 requires disclosureof descriptive information pertinent toestimating the value of a financialinstrument.

F 25 also encourages, but does notrequire, quantitative information aboutmarket risks of derivative instruments,and also of other assets and liabilities,

The standards do not prescribe eitherthe format of the information requiredto be disclosed or its location withinthe financial statements. With regardto recognized financial instruments, tothe extent that the required informationis presented on the face of the balancesheet, it is not necessary for it to berepeated in the notes. With regard tounrecognized financial instruments,however, information in notes orsupplementary schedules is theprimary means of disclosure.

Disclosures may include a combinationof narrative descriptions and specificquantified data, as appropriate to the


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that is consistent with the way theentity manages or adjusts those risks.

A financial instrument is defined ascash, evidence of an ownership interestin an entity, or a contract that both:

Imposes on one entity acontractual obligation (1) todeliver cash or another financialinstrument to a second entity or (2)to exchange other financialinstruments on potentiallyunfavorable terms with the secondentity; and

Conveys to that second entity acontractual right (1) to receivecash or another financialinstrument from the first entity or(2) to exchange other financialinstruments on potentiallyfavorable terms with the firstentity. (FAS 107, ¶3)

nature of the instruments and theirrelative significance to the enterprise.Determination of the level of detail tobe disclosed about particular financialinstruments is a matter for judgement.

Disclosures include:

Terms, conditions and accountingpolicies in respect of various typesof financial instruments;

Interest rate risk disclosures;

Credit risk disclosures;

Fair values including informationon assets carried in excess of theirfair values;

Hedges of anticipated futuretransactions; and

Treasury stock.

If it is not practicable for an entity toestimate the fair value of a financialinstrument or a class of financialinstruments, the following is disclosed:

Information pertinent to estimatingthe fair value of that financialinstrument or class of financialinstruments, such as the carryingamount, effective interest rate, andmaturity; and

The reasons why it is notpracticable to estimate fair value.(FAS 107, ¶14)

Appendix A to FAS 107 providesexamples of procedures for estimatingthe fair value of financial instruments.These examples are illustrative and arenot meant to portray all possible waysof estimating the fair value of afinancial instrument in order to complywith the provisions of FAS 107.(FAS 107, ¶18)

Appendix B to FAS 107 providesexamples of illustrations applying thedisclosure requirements about fairvalue of financial instruments. Theexamples are guides to implementationof the disclosure requirements.Entities are not required to display theinformation contained in the specific


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manner illustrated. Alternative waysof disclosing the information arepermissible as long as they satisfy thedisclosure requirements. (FAS 107,¶30)


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Financial instruments: Servicing


Financial assets are cash, evidence ofan ownership interest in an entity, or acontract that conveys to a second entitya contractual right (a) to receive cashor another financial instrument from afirst entity or (b) to exchange otherfinancial instruments on potentiallyfavorable terms with the first entity.(FAS 125, ¶243). This definition issimilar to the definition of financialinstrument under FAS 107, ¶3(b).

Servicing assets are contracts toservice financial assets under whichthe estimated future revenues fromcontractually specified servicing fees,late charges, and other ancillaryrevenues are expected to more thanadequately compensate the servicer forperforming the servicing. A servicingcontract is either (a) undertaken inconjunction with selling or securitizingthe financial assets being serviced or(b) purchased or assumed separately.(FAS 125, ¶243)

Servicing liabilities are contracts toservice financial assets under whichthe estimated future revenues fromcontractually specified servicing fees,late charges, and other ancillaryrevenues are not expected toadequately compensate the servicer forperforming the servicing. (FAS 125,¶243)

Each time an entity undertakes anobligation to service financial assets itrecognizes either a servicing asset or aservicing liability for that servicingcontract, unless it securitizes theassets, retains all of the resultingsecurities, and classifies them as debtsecurities held-to-maturity

Servicing assets purchased orservicing liabilities assumed should beinitially measured at fair value.

A servicing asset or liability isamortized in proportion to and overthe period of estimated net servicingincome (if servicing revenues exceedservicing costs) or net servicing loss (ifservicing costs exceed servicing


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revenues). A servicing asset orliability is assessed for impairment orincreased obligation based on its fairvalue (FAS 125, ¶13)

An entity should disclose the followingfor all servicing assets and servicingliabilities:

The amounts of servicing assets orliabilities recognized andamortized during the period;

The fair value of recognizedservicing assets and liabilities forwhich it is practicable to estimatethat value and the method andsignificant assumptions used toestimate the fair value;

Risk characteristics of theunderlying financial assets used tostratify recognized servicing assetsfor purposes of measuringimpairment; and

Activity in any valuationallowance for impairment ofrecognized servicing assets—including beginning and endingbalances, aggregate additionscharged and reductions credited tooperations, and aggregate directwrite-downs charged against theallowances—for each period forwhich results of operations arepresented. (FAS 125, ¶17(e))


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Financial instruments: Transfers


The accounting and reportingstandards for transfers of financialassets are contained in AC F 38.Those standards are based onconsistent application of a financial-components approach that focuses oncontrol. Under this approach, after atransfer of financial assets, an entityrecognizes the financial and servicingassets it controls and the liabilities ithas incurred, derecognizes financialassets when control has beensurrendered, and derecognizesliabilities when extinguished. F 38provides standards for distinguishingtransfers of financial assets that aresales from transfers that are securedborrowings.

A transfer of financial assets in whichthe transferor surrenders control overthose assets is accounted for as a saleto the extent that consideration otherthan beneficial interests in thetransferred assets is received inexchange. The transferor hassurrendered control over transferredassets if and only if all of the followingconditions are met:

The transferred assets have beenisolated from the transferor—putpresumptively beyond the reach ofthe transferor and its creditors,even in bankruptcy or otherreceivership;

Either (1) each transferee obtainsthe unconditional right to pledge orexchange the transferred assets or(2) the transferee is a qualifyingspecial-purpose entity and theholders of beneficial interests inthat entity have the unconditionalright to pledge or exchange thoseinterests; and

IAS 39 provides guidance on transfersof financial instruments.

An enterprise derecognizes a financialasset or a portion of a financial assetwhen, and only when, the enterpriseloses control of the contractual rightsthat comprise the financial asset (or aportion of the financial asset). Anenterprise loses such control if itrealizes the rights to benefits specifiedin the contract, the rights expire, or theenterprise surrenders those rights.

Determining whether an enterprise haslost control of a financial assetdepends both on the enterprise’sposition and that of the transferee.Consequently, if the position of eitherenterprise indicates that the transferorhas retained control, the transferordoes not remove the asset from itsbalance sheet. On derecognition, thedifference between:

the carrying amount of an asset (orportion of an asset) transferred toanother party; and

the sum of the proceeds receivedor receivable and any prioradjustment to reflect the fair valueof that asset that had been reportedin equity.

is included in net income.

The transferor does not maintaineffective control over thetransferred assets through (1) anagreement that both entitles andobligates the transferor torepurchase or redeem them beforetheir maturity or (2) an agreementthat entitles the transferor to

If a debtor delivers collateral to thecreditor and the creditor is permittedto sell or repledge the collateralwithout constraints, then:

the debtor discloses the collateralseparately from other assets notused as collateral; and


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repurchase or redeem transferredassets that are not readilyobtainable.

Liabilities and derivatives incurred orobtained by transferors as part of atransfer of financial assets are initiallymeasured at fair value, if practicable.Servicing assets and other retainedinterests in the transferred assets areinitially measured by allocating theprevious carrying amount between theassets sold, if any, and retainedinterests, if any, based on their relativefair values at the date of transfer.

Debtors should reclassify financialassets pledged as collateral andsecured parties should recognize thoseassets and their obligation to returnthem in certain circumstances in whichthe secured party has taken control ofthose assets.

F 38 provides implementationguidance for assessing isolation oftransferred assets and for accountingfor transfers of partial interests,securitizations, transfers of sales-typeand direct financing lease receivables,securities lending transactions,repurchase agreements including"dollar rolls," "wash sales," loansyndications and participations, riskparticipations in banker's acceptances,factoring arrangements, and transfersof receivables with recourse.

the creditor recognizes thecollateral in its balance sheet as anasset, measured initially at its fairvalue, and also recognizes itsobligation to return the collateralas a liability.

If an enterprise transfers a part of afinancial asset to others whileretaining a part, the carrying amountof the financial asset is allocatedbetween the part retained and the partsold based on their relative fair valueson the date of sale.

A gain or loss is recognized based onthe proceeds for the portion sold. Inthe rare circumstance that the fairvalue of the part of the asset that isretained cannot be measured reliably,then that asset is recorded at zero.

The entire carrying amount of thefinancial asset is attributed to theportion sold, and a gain or loss isrecognized equal to the differencebetween a) the proceeds and b) theprevious carrying amount of thefinancial asset plus or minus any prioradjustment that had been reported inequity to reflect the fair value of thatasset (a “cost recovery” approach).

An enterprise removes a financialliability (or a part of a financialliability) from its balance sheet when,and only when, it is extinguished – thatis, when the obligation specified in thecontract is discharged, cancelled, orexpires.

An exchange between an existingborrower and lender of debtinstruments with substantially differentterms is an extinguishment of the olddebt that results in derecognition ofthat debt and recognition of a new debtinstrument.

Similarly, a substantial modification ofthe terms of an existing debt instrument(whether or not due to the financialdifficulty of the debtor) is accounted


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for as an extinguishment of the olddebt.

The difference between the carryingamount of a liability (or part of aliability) extinguished or transferred toanother party, including relatedunamortized costs, and the amountpaid for it is included in net profit orloss for the period.


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Financial Statements: Comparative Financial Statements


The presentation of comparativefinancial statements in annual andother reports enhances the usefulnessof such reports and brings out moreclearly the nature and trends of currentchanges affecting the enterprise. Suchpresentation emphasizes the fact thatstatements for a series of periods arefar more significant than those for asingle period and that the accounts forone period are but an installment ofwhat is essentially a continuoushistory. (ARB 43, ch2A, ¶1)

In any one year it is ordinarilydesirable that the balance sheet, theincome statement, [the statement ofcash flows,] and the statement of[retained earnings] be given for one ormore preceding years as well as for thecurrent year. Footnotes andexplanations that appeared on thestatements for the preceding yearsshould be repeated, or at least referredto, in the comparative statements to theextent that they continue to be ofsignificance. (ARB 43, ch2A, ¶2)

It is necessary that prior-year figuresshown for comparative purposes be infact comparable with those shown forthe most recent period, or that anyexceptions to comparability be clearlybrought out. (ARB 43, ch2A, ¶3)

Note (n) of the “General instructionsfor preparation of balance sheet”contained in SchVI, Part I states that:“Except in the case of the first balancesheet laid before the Company ……….,the corresponding amounts for theimmediately preceding financial yearfor all items shown in the balance sheetshall also be given in the balancesheet. The requirement in this behalfshall, in the case of companiespreparing quarterly or half-yearlyaccounts, etc., relate to the balancesheet for the corresponding date in theprevious year”.

SchVI, Part II, ¶6 states:

Except in the case of the first profit andloss account ………., thecorresponding amounts for theimmediately preceding financial yearfor all items shown in the profit andloss account shall also be given in theprofit and loss account.

The requirement in sub-clause (1)shall, in the case of companiespreparing quarterly or half-yearlyaccounts, relate to the profit and lossaccount for the period which enteredon the corresponding date of theprevious year.

Unless a standard permits or requiresotherwise, comparative information isdisclosed in respect of the previousperiod for all numerical information inthe financial statements.

Comparative information is included innarrative and descriptive informationwhen it is relevant to an understandingof the current period’s financialstatements.

When the presentation or classificationof items in the financial statements isamended and comparative amounts arereclassified, the nature, amount of, andreason for any reclassification isdisclosed.

When the presentation or classificationof items in the financial statements isamended, but it is impracticable toreclassify comparative amounts, thereason for not reclassifying and thenature of the changes that would havebeen made if amounts were reclassifiedis disclosed.