Download - Accounting Standards Detailed

8/3/2019 Accounting Standards Detailed

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Accounting PrinciplesAS / IGAAP / IFRS


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Financial Reporting and OngoingBusiness

LiabilitiesAssets

Opening B/S

LiabilitiesAssetsEnding B/SP&L Statement

Cash and non cashPaid and outstandingReceived and yet to receiveKnown with certainty and unknownComplete and incompleteCovering single period and covering multiple periodRegular events and irregular events

Expenses

Income

Non-cash

Cash

Cash Flow Statement

Identifiable and non identifiableDirect and indirectVisible and invisibleSingle ownership andmultiple ownership


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Accounting Principles

l There is no definitive list of practices and

principles that are generally acceptedl Great diversity still remains affecting..,

l Inter corporate comparisons

l Intra corporate comparisons

l Comparisons with normative standard or model


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l They are not..,

l Fundamental truthsl Rules of conduct

l Methods..,l Used in observing, measuring and reporting

l Widely used by..,

l People preparing reportsl Official pronouncements by ICAI

l Regulator with authoritative (SEBI) (Tax authorities)

l Having substantial authoritative support


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l No definitive list of practices and principles that

are generally acceptedl Great diversity still remains affecting..,

l Inter corporate comparisons

l Intra corporate comparisons

l

Comparisons with normative standard or model


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Capital Expense vs. RevenueExpense


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Financial Statements

l Investors invest by future earnings

l Financial statement information is useful in reducinguncertainties about earnings growth expectations

l Only an approximation of economic reality because ofl Selective reporting of economic events by the accounting system

l Alternative accounting method and estimates

l Features of an ideal financial statementsl Comparable among companiesl Consistent over time

l Fully reflecting the economic position of the firm


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Principal Financial Statements

l Balance sheet

l Income statement

l Statement of comprehensive incomel Reports changes in certain balance sheet accounts that

bypass the income statement

l Statement of cash flowsl Statement of stock holders equity


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l Translates events into financial statements


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l Faced with uncertain bad news, accounting tends to

enter it into the recordsl Faced with uncertain good news, tendency to ignore it

l Why demand for bad news..,l Creditors with no upside, but all the downside

l Investors believe bad news disclosed by management, but

skeptical of good news unless supported by objective evidencel Management incentives affect believability of their disclosures

l Greater degree of verification for gains than for losses


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Financial Reporting Requirements

l Audited annual reports

l Unaudited quarterly reportsl Current reports

l Foreign companies reports


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Balance Sheet

l Internally generated intangible assets are not

shown as assetsl Current portion of long-term debts are

classified as current liabilitiesl However, debt expected to be refinanced through another

long-term debt are treated as long-term liabilities.


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Accounts

l All balance sheet accounts are..,

l Stock accounts orl Real accounts or

l Permanent accounts

l All income statement accounts are..,l flow accounts or

l temporary accounts or

l Nominal accounts


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Accounts

l To reduce accounting costsl Some economic activities may be continuous in nature

l The effect of such activities are accumulated over a period andthen recorded periodically rather than continuously, e.g.,consumption of stationary

l Many cases, assets and liabilities are created ordischarged without the occurrence of a visible,

documented exchange transactionl Adjusting entry..,

l Matching of expense and revenues

l Involves at least one temporary account and at least onepermanent account

l Never involves cash account


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Cash Flow Statements

l In the absence of cash flow, income does not pay thebills

l Differences between net income and CFO (cash flowfrom operations) are captured in operating currentasset and operating current liability accounts

l To arrive at CFO, adjustments that need to be made to NetIncome

l Subtract net increase in operating current assets other thancash itself

l Add net increase in operating current liabilities

l Operating cash flows are needed for the long-termsurvival of a corporation


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Who Uses Financial Statements?

l Used extensively by internal users

l Management at various levelsl Performance evaluation

l Competitive analysis

l Investment decisions

l Valuation of targets

l

Current and future employeesl Is this firm going to meet its payroll and will the stock

options be worth anything?


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Who Uses Financial Statements?

l Used primarily by external users

l Financial intermediaries (analysts)l Stock recommendations

l Lenders

l Loan decisions

l Monitoring

l Investment bankersl Valuation for M&A and IPO

l Top management performance evaluation


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Financial Statement Information

l Financial Statement Information used for.,l Valuation

l Contracting

l Arbitrage opportunity = expected future cash flows vs.actual future cash flows

l When we perform any type of valuation analysis Itwill always boil down to DCF

l P/E multiples, PEG ratios, price targetsl These all are transformations of DCF

l Other factors things like real options are just extensions to basicDCF model!


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Cash Flows over the Firms Life Cycle


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Measurement of FinancialStatement Elements

l Historical costl The assets and liabilities are recorded at the values at which they

are acquired or incurred

l Current costl The assets and liabilities are recorded at the values as if theyare

acquired or incurred currently.

l Realisable value

l The assets and liabilities are recorded at the value which can beobtained it they are sold or settled.

l Present valuel The present discounted value of the future net cash inflows or

outflows


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Accrual Principle

l Accrued as assets or liabilities = income

recognized cash flows for the periodl Income = change in assets + actual cash flows

l Analysts need to differentiate between realevents and accruals stemming from

management choice


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Financial Accounting

l One period world

l Multi period world


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Recognition and Cash Do NotCoincide


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Accounting

l Mapping of actions and events into financial

statementsl But mapping is incomplete and asymmetric

l Book keeping: necessary evil


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Scenarios of Adjusting Entries

l Cash first, expense latter

l Expense first, cash latterl Cash first, revenue latter

l Revenue first, cash latter


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Sample Income Statement Format

+ / -Extraordinary items (net of tax)

+ / -Income from discontinued operations (net of tax)

=Net income from continuing operations

-Income tax expense

=Net income

+ / -Cumulative effect of accounting changes (net of tax)

=Pretax earnings from continuing operations

+ / -Unusual or infrequent items

-Financing costs

-Operating expenses+

Other income and revenues

Revenues from the sale of goods and services


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Suggested Income StatementFormat

+ / -Cumulative effect of accounting changes (net of tax)

=Net income

+ / -Extraordinary items (net of tax)

+ / -Income from discontinued operations (net of tax)

=Net income from continuing operations

-Income tax expense

=Pretax earnings from continuing operations

+ / -Unusual or infrequent items

=Recurring (pretax) income from continuing operations

-Financing costs

=Recurring income before interest and taxes from continuing operations

+Other income and revenues=Operating income from continuing operations

-Operating expenses

Revenues from the sales of goods and services


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Annual Report

l Management letter Management discussion

l Financial statementsl Auditors reports

l As per GAAS

l As per GAAP

l Board has Audit Committee composeddirectors appoints the auditor


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Accounting Guidelines onContingencies

l Probablel Future event is likely to occur

l Reasonably possiblel Chance of occurrence of the future event (or events) is more than

remote but less than likely

l Remotel

Chance of occurrence of the future event (or events) is slightl Amount of the gain or loss must be reasonably

estimable


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Loss Contingencies

None required

But note permitted

Remote

Disclose in notesDisclose in notesReasonably possible

Disclose in notesAccrueProbable

Not MeasurableMeasurable


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Gain Contingencies

Disclosure is notrecommended

Remote

Disclose,but avoidmisleading inferences

Reasonably

possible

Disclose,but avoid misleadinginferences

DiscloseProbable

Not MeasurableMeasurable


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Reasons for Companies ChangingAccounting Methods

l Initial choice of an accounting method or principle is poorl Methods selected when firm was small

l Changed conditionsl Change in Operational environment

l Change in relationship with suppliers, investors and financing sources

l Change in product mix or firms strategy

l Actions of management itselfl

Developing new strategiesl Taking organization in new directions

l Adopting new tactics to deal with competitors


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Accounting Standards

l Applicable to..,l Commercial activities

l Industrial activitiesl Business activities

l Profit or non-profit organization

l General purpose financial statements includes..,l Balance sheet

l Statement of profit and loss

l Cash flow statement

l Statements and explanatory notes to be used by..,

l Govt. and govt. agencies

l Public references

l Financial statements are the responsibility of enterprisesmanagement


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Indian Accounting Standards

l Formulated on the basis of IFRS / IAS

l ICAI wanted to converge Indian Standards with IFRS to the extent

possiblel Are principle based

l Deals with..,l Recognition

l Measurement

l Disclosure

l Presentation

l Indian AS not having any difference with corresponding IFRS..,l Construction contracts (AS 7)

l Impairment of assets (AS 28)


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l Generally Indian companies present financial statements as perall of..,

l IFRSl I GAAP

l US GAAP

l Have been granted legal recognition under Companies Act 1956

l Financial statements prepared as per Indian AS are now acceptedin LSE

l I GAAP does not allow over-riding of standards even in extremelyrare situations

l Statement of comprehensive income is..,l Required under US GAAP

l Not required under IFRS and I GAAP


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l In preparation..,l Financial instruments: presentation

l Financial instruments: recognition and measurementl Financial instruments: disclosures

l Agriculture

l Insurance contracts

l Share based payments

l Retirement benefit plans

l Under revision..,l Disclosure of accounting policies (AS 1)

l Net profit or loss for the period, prior period items and changes inaccounting policies (AS 5)

l Accounting for fixed assets (AS 10)


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2006


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Applicability of AccountingStandards


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Accounting Standards Applicableon Level I and II

l Cash flow statements (AS 3)

l Segmental reporting (As 17)l Related party disclosure (As 18)

l Discontinued operations (As 24)


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Compliance with AccountingStandards


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Structure of Accounting Standards

l Introduction

l Explanationl Standard / disclosure

l Date of applicability


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Financial Reporting Framework

l Statutory Requirements

l Accounting Standardsl Other recognized Accounting Principlesk

Practices


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Framework for Auditing Services

l Audit - High, but not absolute assurance

l Review- Moderate assurancel The ICAI has issued 29 Auditing and Assurance

Standards till date


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Indian Accounting Standard

l ICAI follows a consultative process in the formulation of accountingstandards which ensures participation of all interest groups throughAccounting Standards Board (ASB)

l Till 1999, there was no requirement for the companies to comply withaccounting standards

l The accounting standards issued by the ICAI were mandatory only for itsmembers

l In 1999, recognizing the role of accounting standards in economicdevelopment and good governance, an amendment was made in the

Companies Act, 1956 to require all companies to follow accountingstandards

l The Amendment also contained a provision that until the accountingstandards are notified by the Government under the Act, the AccountingStandards specified by the ICAI should be followed


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Journey of Indian AS


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Causes for Rapid Change in Indian AS

l Liberalization of the economy

l Increasing inflow if FII investmentl Increasingly maturing stock markets

l Increased focus on governance

l Formation of regulators - SEBI


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Scope of Accounting Standards

l If AS found not to be conformity with law, financial statementsshould be prepared in conformity with such law

l Cannot and do not override local regulations governingpreparation and presentation of financial statements

l Applied only to items which are material

l No AS will have retroactive applications, unless otherwise stated

l Emphasizing on laying down accounting principles and not on

detailed rules for application and implementation


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Procedures for Issuing an AccountingStandard

l ASB decides the broad areas in which AS needs to be formulated and priority in selection

l Constituting study group with wider participation by ICAI and others

l ASB considers the preliminary draft prepared by study group

l Getting the comments of..,l ASSOCHAM

l FICCI

l ICWAI

l SCOPE

l ICSI

l CBDT

l DCA

l C&AG

l RBIl IBA

l SEBI

l CII

l Any other body as relevant to the AS


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l Holding meeting with representatives of various bodies

l ASB finalizing exposure draft of the proposed AS

l Comments from ICAI members and public on public draft

l Draft of proposed AS will include..,l Concepts and fundamental principles relating to the standard

l Definitions of the terms used in the standard

l Manner in which the accounting principles have been applied for

formulating the standard

l Presentation and disclosure requirements in complying with the standard

l Class of enterprise to which the standard will apply

l Date(s) from which the AS will be effective


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l Drafts of proposed AS will be finalized by ASB

and submitting to council of ICAIl ICAI Council will draft the final AS

l AS will be issued by ICAI council

l AS revision procedures will be same like

releasing a new AS


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Procedure in using IndianAccounting Standards

l ASB of ICAI after consultation with various study groups preparesthe draft of AS

l Draft as prepared will be circulated to Council members of ICAIand to the specified bodies like ICSI,ICWAI.CBDT, FICCI,ASSOCHAM, RBI ,SEBI etc for their comments

l After the meeting with the above bodies the exposure draft isfinalized and is issued to ICAI and public for their comments

l After considering the comments received, the draft is finalized by

ASB and submitted to ICAIl The ICAI if found necessary may with consultation with ASB make

required modification and issue the final AS

l NACAS to recommend to MCA for notifying the AS as issued to becomplied with


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Compliance with Accounting Standards

l Mandatory from respective dates mentioned in

ASl Any deviation from AS to be disclosed in audit

report

l Financial statements cannot be described as

complying with accounting standards unlessthey comply with all the requirements of each

applicable standard


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Accounting Standards Board (ASB)

l Constituted by: ICAI

l Constituted in: 21st April 1977

l Composition..,l Elected members of ICAI council

l Govt. nominated members of ICAI council..,l Dept. of company affairs

l Office of comptroller and auditor general of India

l Central board of direct taxes

l RBI representatives

l Representative of industry associates (one members each)..,

l FICCIl ASSOCHAM

l CII

l Representatives of ICWAI

l Representative of ICS of India


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Accounting Standards Board (ASB)

l Composition..,l Eminent professional co-opted by ICAI

l Representative of financial institutionsl SEBIs representative

l Academic Institute representatives

l Universities: 1

l IIMs: 1

l Representative of controller general of accounts

l Representative of central board of excise and customsl Chairmen of ICAIs research committee and experts advisory committee

(if not member of ASB)


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ASBs Objectives

l To conceive and suggest areas in which AS need to be developed

l To formulate AS with a view of assisting ICAIs council in evolving

and establishing AS in Indial To examine how far relevant international AS and IFRS can be

integrated while formulating AS and to integrate the same

l To review and revise at regular interval the AS from point view of..,l Acceptance

l Changed conditionsl To provide time to time interpretations and guidance on AS

l To carry out such other functions relating to AS


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ASBs Functions

l Formulating AS after considering..,l Applicable laws

l Customsl Usage

l Business environment

l Giving due consideration to IASs or IFRSs by integrating AS withIAS

l Propagating AS

l Persuading concerned parties to adopt AS in preparation andpresentation of financial statements

l Providing interpretations and guidance on issues arising from AS

l Reviewing AS at periodic intervals


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ASBs Functions

l Enumerating and describing basic concepts to whichaccounting principles should be oriented

l Stating accounting principles to which the practicesand procedures should confirm

l Clarifying phrases commonly used in financialstatements and suggesting improvements

l Examining various current alternative practices invogue and endeavor to eliminate or reduce alternativeswithin the bounds of rationality


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1997

Mandatory

Nov. 1982Net profit or loss for the period, prior

period items and changes in

accounting policies

AS 5

1995

Mandatory since

April 1995

Nov. 1982

Mandatory

Contingencies and events occurring

after the balance sheet date

AS 4

1997

Mandatory since

April 2004

June 1981Cash flow statementsAS 3

1999June 1981Valuation of inventoriesAS 2

1979Disclosure of accounting policiesAS 1

RevisedIssuedDeals With..A/C. Std.


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Mandatory1985Accounting for Fixed AssetsAS 10

Mandatory1985Revenue RecognitionAS 9

Withdrawn by introducingAS 26

Accounting for research

and development

AS 8

2002Construction contractsAS 7

1994

Mandatory

Nov1982

Depreciation AccountingAS 6



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1995Accounting for retirement benefits inthe financial statements of employers

AS 15

2004

Mandatory

1994Accounting for AmalgamationsAS 14

2003

Mandatory

1993Accounting for investmentsAS 13

1991Accounting for government grantsAS 12

1994 and 2003Mandatory

1989The effects of changes in foreignexchange rates

AS 11



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2004

Mandatory

2001Earnings Per ShareAS 20

2001LeasesAS 19

2003

Mandatory

2000Related Party DisclosuresAS 18

2000Segment reportingAS 17

2000Borrowing CostsAS 16



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2002Interim Financial ReportingAS 25

2002Discontinuing operationsAS 24

Mandatory2001Accounting for investments inassociates in consolidated financial

statements

AS 23

Mandatory2001Accounting for taxes on incomeAS 22

2001Comes into effectfrom 1st April2001

Consolidated financial statementsAS 21



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Recommendary innature

2009Financial instruments: presentationAS 30

2003Provisions, contingent liabilities andcontingent assets

AS 29

2002Impairment of assetsAS 28

2002Financial reporting of interests in jointventure

AS 27

2004

Mandatory

2002Comes into effectfrom 1st April2003

Intangible assetsAS 26



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Disclosure of Accounting Policies[AS 1]

l Disclosure of significant accounting polices involvedin financial statements..,

l Preparationl Presentation

l Disclosed through..,l Separate statement of accounting policies most preferred

method

l Forming part of accounts

l Notes & schedules on the accounts

l Supplementary information

l May required to use examples


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l Significant accounting policies [non exhaustive list]..,l Methods of depreciation, depletion, and amortization

l Treatment of expenditure during constructionl Translation polices foreign currency items

l Valuation of inventories

l Treatment of goodwill

l Valuation of investments

l Treatment of retirement benefits

l Recognition of profits on LT contractsl Valuation of fixed assets

l Treatment of contingent liabilities


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l Fundamental accounting assumptions need to bedisclosed if not followed

l Going concernl Consistency

l Accrual

l [Change in accounting policies having material effect] - disclose

l Alternative accounting polices reduced with the good

effort of..,l ICAIl Government

l Regulatory agencies

l Progressive managements


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l Major considerations governing selection and

application of accounting policies..,l Prudence

l Profits not anticipated but recognized

l Provisioning known liabilities

l Substance over form

l Materiality


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Valuation of Inventories (AS 2)

l Value at which inventories are carried in the financial statements until therelated revenues are recognized

l Exceptions to AS 2.., WIP in..,

l Construction contracts

l Service contracts

l Shares

l Debentures

l Financial instruments

l Inventories measured at net realizable value through forward contract, a govt.

guarantee, when homogeneous market exists, or negligible risk of failure to sell..,l Livestock

l Agriculture and forest products

l Mineral oils, ores and gases

Machinery spares to be used with an item of fixed assets and whose use isexpected to be irregular


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l Inventories are assets..,l Held for sale

l Goods held for sale

l Computer software held for sale

l Land and other property held for sale

l In the process of production

l In the form of material or supplies to be consumed in the productionprocess or rendering of services

l Materials

l Maintenance supplies

l consumables

l Net realizable valuel = estimated selling price estimated costs of completion estimated

costs necessary to make the sale


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l Inventories should be valued at lower of..,l Cost of inventories

l Net realizable value


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Cost of Inventories

l Costs of purchasel Includes..,

l Duties and taxes

l Freight inwards

l Expenditures directly attributable to acquisition

l Less..,

l Trade discounts

l Rebates

l Duty drawbacks

l Costs of conversionl Direct labor

l Systematic allocation of fixed and variable production overheads basedon normal capacity

l Costs incurred in bringing inventories to present location andcondition


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Exclusion from Cost of Inventories

l Interests and borrowing costs

l

Abnormal amounts of wasted materials, labor,and other production costs

l Storage costs

l Administrative overheads not forming part ofbringing the inventories to present location andcondition

l Selling and distribution costs


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Cost of Inventories

l Cost to be assigned by using..,l FIFO

Assumption: inventory purchased or produced first isconsumed or sold first

l Weighted average cost

l Weighted average of cost at the beginning cost of itemspurchased during the period

l WA may be calculated on periodic basis or as each

additional shipment is received

l Formula used should reflect the fairest possibleapproximation to cost incurred


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Techniques for Measurement of Cost

l Standard cost methodl Considers normal levels of..,

l Consumption of materials and supplies

l Labor

l Efficiency and capacity utilization

l Regularly reviewed and revised if necessary

l Retail method

l Usedl In retail trade

l When large no. of rapidly changing items having similar margins

l Cost = sales value appropriate gross margin


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Net Realizable Value

l Reduces when..,l Become partially or wholly obsolete

l Declined selling price

l Cost of inventories may not be also recoverable if;estimated costs of completion has increased

l Written down to net realizable value on item-by-item

basisl An assessment of net realizable value is made at each

balance sheet date


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Cash Flow Statements (AS 3)

l Mandatory for the following enterprises since April2004..,

l Equity or debt listed companies in India or outside Indial In the process of listing debt or equity but approved by BOD

l Banks (including Co-operative banks)

l Financial institutions

l Insurance business

l Turnover for the immediate preceding accounting period > Rs. 50

crorel Borrowing (including in public deposit) > Rs. 10 crore

l Holding and subsidiary of any of the above companies

l Above companies may be exempted if looses the aboverequirements for two consecutive years


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l Objective: assess..,l Ability of an enterprise to generate cash and cash equivalents

l Timing and certainty of generation

l Needs of enterprise to utilize cash flows

l Pay obligations

l Conducting operations

l Providing returns to investors

l Changes in net assets, financial structure

l Compare PV of future cash flows of different enterprises

l Comparability of reporting of operating performance by differententerprises

l Checking accuracy of past assessments of future cash flows

l Examining relationship between profitability and net cash flow and impactof changing prices


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l Cash = cash on hand + bank demand deposit

l Cash flows = inflow + outflowsl Excludes movements between items that constitute cash or cash

equivalents

l Operating activities = principal revenue-producingactivities

l Investing activities = acquisition and disposal of LT

assetsl Financing activities = change in size and composition

of capital + borrowings


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Cash Equivalents

l Meets ST cash commitments

l Readily convertible to known amount of cash(< 3 months)

l Insignificant risk of change in value


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Presentation of Cash Flow Statements

l Cash flows to be classified as..,l Operating activities

l Investing activities

l Financing activities

l On installment paymentl Interest amount financing

l Loan element - investing


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Operating Activities

l Principal revenue-producing activities

l Results from transactions and other events

l

Cash receipts from..,l Sale of goodsl Rendering services

l Royalties, fees, commissions and other revenue

l Refund of income taxes

l Receipt of insurance premium

l Receipts and payments to derivative contracts for the purpose of hedging

l Cash payments to..,l Suppliers

l Employees

l Insurance premiums

l Income taxes


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Investing Activities

l Acquiring and disposal of..,l Fixed assets

l Shares, warrants and debt instruments

l Interest in JVs

l Cash advance and loans made to third parties

l Trading of derivatives


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Financing Activities

l Cash proceeds and disposals from..,l Issuing financial instruments

l Loans, notes, and bonds

l ST and LT borrowings


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Methods of Reporting Cash Flows fromOperating Activities

l Direct methodl Discloses major classes of..,

l Gross cash receipts

l Gross cash payments

l Indirect methodl Adjusting NP or NL for..,

l Non-cash transactionsl Deferrals or accruals of past

l Income or expense associated with inventing andfinancing


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Direct Method

l Details of gross cash receipts and payments

may be obtained from..,l Accounting records of the enterprise

l By adjusting sales, cost of sales, or other items

Changes in..,

l Inventories

l Operating receivables

l Operating payables

l Non-cash items


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Indirect Method

l Adjusting NP or NL for the effects of.., Changes in..,

l Inventories

l Operating receivables

l Operating payables

l Non-cash items Depreciation

Provisions Deferred taxes

Unrealized FOREX gains and losses


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Reporting Cash Flows on a Net Basis

l Cash receipts and payments..,l On behalf of customers for the activities of customer

l Demand deposits by a bank

l Fund held for customers by an investment enterprise

l Rent collected or paid on behalf of owners or properties

l For items in which the turnover is quick, amount is large, and maturitiesare short

l Principal amounts of credit card customers

l Purchase and sale of investments

l ST borrowings (< 3 months)

l Acceptance and repayment of deposits with fixed maturityl Placement of deposits with and withdrawal of deposits from other financial

enterprises

l Advances and loan made to customers


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Foreign Currency Cash flows

l Convert at the rate prevailing at the date of

cash flow

l To consistent with AS 11

l May also use weighted average exchange rate

l Unrealized gains and losses arising from

changes in FOREX rates are not cash flows


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Other Issues

l Extraordinary item to be shown under all the three heads

l Interest and dividend paid financing

l Interest and dividend received investmentl Taxes on income operating activities

l Investments in subsidiaries, associates and JVs restricted

l Non cash transactions restricted..,l Acquisition of assets by assuming directly related liabilities

l Acquisition of an enterprisers by issuing sharesl Conversion of debt to equity


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Appendix I


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Appendix II


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Contingencies and Events Occurring After theBalance Sheet Date (AS 4)

l Contingency..,l Condition or situation in which ultimate outcome (profit or

loss) will be known or determined on occurrence or non-occurrence of future event(s)

l Exemption to contingencies..,l Liabilities of life assurance and general insurance

enterprises arising from policies issued

l Obligations under retirement benefit plans

l Commitments arising from LT lease contracts


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Events Occurring After the Balance SheetDate

l Significant events favorable or unfavorable

l Occurs between B/S date and the date onwhich the financial statements are approved byBOD

l Types of events..,l Events which provide further evidence of conditions that

existed at the B/S datel Events which are indicative of conditions that arose

subsequent to B/S date


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Contingencies

l Estimates are required

l Uncertainty related to future events can beexpressed by..,l Range of outcomes quantified probabilities


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Treatment of Contingent Losses

l Loss determined by expected outcome of

contingency

l Amount estimation is to based on..,l Judgment of management

l Information available up to the date on which the financialstatements are approved

l Including review of eventsl Experience of similar transactions

l Reports from independent experts


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Treatment of Contingent Gains

l Not recognized in financial statements


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Amounts at Which Contingencies to beincluded in Financial Statements

l Is based on information available

l May be on individual or collective events..,l Estimated Uncollectable receivables

l Warranties for products sold


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Event Occurring After the Balance Sheet Date but before theApproval of Financial Statements

l Requires adjustments and provide additional

information


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Net Profit or Loss for the Period, Prior Period Items and

Changes in Accounting Policies(AS 5)

l Objectivel Prescribe the classification and disclosure of certain items

in the statement of P&L

l Enhancing comparability of financial statements

l Details on disclosure of..,

l Extraordinary and prior period items

l Changes in accounting estimates

l Changes in accounting policies

l Does not deal with tax issues on extra ordinary items


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Net Profit or Loss for the Period, Prior Period Items and

Changes in Accounting Policies(AS 5)

l Definitions..,l Ordinary activities: part of business

l Extraordinary items: distinct from ordinary activities [notregular]

l Prior period items: results from errors or omission inpreparation of financial statements on one or more priorperiods


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Net Profit or Loss for the Period

l Should be included in items of income and

expenses

l Components..,l Profit or loss from ordinary activities

l Extraordinary items


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Extraordinary Items

l Should be disclosed in the statement of P&Las a part of net profit or loss for the period

l Arises only on a rare occasion

l Determined by comparing it with nature ofbusiness

l Examples of events generally giving rise to

extraordinary items are..,l Attachment of property of the enterprise

l An earthquake


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Profit or Loss from Ordinary Activities

l Disclosed separatelyl Write-down and reversal of inventories to net realizable

value

l Restructuring and reversal of provision for an enterpriseactivities

l Disposal or items of fixed assets

l Disposals of LT investments

l Legislative changes having retrospective application

l Litigation settlements

l Reversal of any other provisions


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Prior Period Items

l Should be disclosed separately

l Infrequent in nature

l Distinguished from changes in accountingestimates

l Errors may arise because of..,l Mathematical mistakes

l Mistakes in applying accounting policiesl Misinterpretation of facts

l Oversight


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Prior Period Items

l Does not include..,l Arrears payable to workers as a result of revision of wages

with retrospective effectl Income or expense recognized on eth outcome of a

contingency which previously could not be estimatedreliably does not constitute a prior period item

l Included in determination of net P&L for the

periodl Can be also shown in P&L statement after

determination of current net P&L


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Changes in Accounting Estimates

l Estimation process involves judgment

l Example..,l Bad debts

l Inventory obsolescence

l Useful lives of depreciable assets

l Estimates need to be revised when,l Change occurs on estimated circumstances

l Result of new information

l More experience

l Subsequent developments

l Difficult of differentiate..,l Change in an accounting policy

l Change in an accounting estimate

l In difficult to differentiate its treated as change in accounting estimate


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Changes in Accounting Estimates

l Effects need to be included in..,l Period of change; if it affects one period only

l Change in estimate of bad debts

l Period of change and future periods; if it affects both

l Change in estimated useful life of a depreciable asset

l Material effect due to change in estimate for

the current period and subsequent periodshould be disclosed, if not quantifiable the fact

should be disclosed


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Changes in Accounting Policies

l Changes allowed only if it is required by..,l Statute

l Compliance with an accounting standard

l Change would result in a more appropriate presentation of the financial statement ofthe enterprise

l Following are not change in accounting policies..,l Events or transaction that differ in substances from previously occurring events or

transactions

l Ex. Introduction of a formal retirement gratuity scheme by an employer in place of adhoc ex-gratia payments to employees on retirement

l Events or transaction which did not occur previouslyl Material effect due to change in accounting policy for the current period

and subsequent period should be disclosed, if not quantifiable the factshould be disclosed


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Depreciation Accounting (AS 6)

l Assets not included for depreciation..,l Forests

l Plantationsl Regenerative natural resources

l Wasting assets

l Expenditure on exploration for and extraction ofminerals, oils, natural gas, similar non generative assets

l Expenditure on R&D

l Goodwill

l Live stock

l Land with unlimited useful life for the enterprise


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Defined Terms

l Depreciationl Measure of..,

l Wearing out / consumption / loss of value onl Usage / effluxion of time / obsolescence through technology

and market change

l Includes amortization of assets with predetermined useful life

l Depreciable assetl Used more than one accounting period

l Having limited useful life

l Used for production or supply of goods and services


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Defined Terms

l Useful lifel Period of usage by firm

l No. of production or similar units expected to be obtainedby suing the asset

l Depreciable amountl = historical cost estimated residual value


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Factors in Assessment of

Depreciation

l Historical cost or revalued value of the assetl Includes..,

l Acquisition +l Installation +

l Commissioning +

l Improvements

l May change due to..,

l Increase or decrease in LT liability on account of exchange

fluctuationsl Price adjustments

l Changes in duties

l Changes in similar other factor


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Depreciation

l Expected useful life of the depreciable assetl Is shorter than physical life

l Predetermined by legal or contractual limits

l Directly governed by extraction or consumptionl Depends on operational factors [usage]

l Reduced by obsolescence due to..,

l Technological changes

l Improvement in production methods

l Change in market demand for the product or service output of the asset

l Legal or other restrictions

l Estimation purely based on..,

l Experience with similar type of assets

l Any addition or extension which retains a separate identity and is capable of beingused after the existing asset is disposed of, is depreciated independently on thebasis of an estimate of its own useful life


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Depreciation

l Estimated Residual Value of the Depreciable

Assetl A difficult matter

l Estimated at time of acquisition / installation or at time ofsubsequent revaluation of the asset

l Basis of determination..,

l Realizable value of similar assets


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Depreciation

l Quantum of depreciation to be provided in an

accounting period involves..,

l Exercise of judgment by management in lightof..,

l Technical

l Commercial

l Accounting

l Legal requirements

l Need periodical review and revision


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Depreciation Methods

l Commonly employed method includes..,l Straightline method

l Reducing balance method

l Factors in selection of method..,l Type of asset

l Nature of use of such asset

l Circumstances prevailing in business

l Applied consistently to provide comparability

l Combination of more than method is sometimes used

l Depreciable assets which do not have material value, depreciationis often allocated fully in accounting period in which they areacquired


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Changing Depreciation Method

l Is treated as as a change in an accounting policy

l Change in method is allowed if..,

l Its required by statutel Compliance with an AS

l Results in more appropriate preparation and presentation offinancial statements

l On change in methodl Depreciation is calculated using new method from the date of

asset coming into usel Deficiency or surplus on change need to be adjusted during the

year of change [charged to P&L statement]


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Depreciation

l Companies Act 1956 lays down rates of depreciation in respect ofvarious assets

l Estimates useful life of an asset is shorter than under the provisionof relevant statute

l Depreciation provision computed by applying higher rate

l Depreciable assets are disposed / discarded / demolished /destroyed, the net surplus or deficiency, if material, is disclosedseparately


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Depreciation Disclosure in Financial

Statements

l Disclosure to be made includes..,l Depreciation methods used

l Total depreciation for the periods for each class of assetsl Gross amount of each class of depreciable assets

l Related accumulated depreciation

l Assets depreciation rates and useful life aredisclosed only of they are different from the

principal rates specified in the statutegoverning the enterprise


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Items Not Included in Revenues

l Appreciation in the value on disposal of fixed assets or noncurrent assets

l Unrealized holding gains on change in value of current assets

l Natural increase in,l Herds

l Agricultural

l Forest products

l realized and unrealized gains from change in exchange rates

l

Realized gains resulting from discharge of an obligation less thanits carrying amount

l Unrealized gains resulting from restatement of the carryingamount of an obligation


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Definition

l Revenue..,l Gross inflow of cash

l Receivables

l Other consideration

l Completed service contract method..,l Recognizing revenue on completion of a contract

l Proportionate completion methodl Recognizes proportionately with degree of completion of

services under a contract


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Revenue Recognition

l Main concern is timing of revenue recognition

l Sale of goods..,l Transferred property in the goods to the buyer for a

consideration

l Transfer of significant risk and rewards of ownership o thebuyer

l In agricultural crops or mineral ores sales of goods..,

l Sale assured under a forward contract

l Sale assured under a govt. guarantee

l Market exist and negligible risk to sell


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Rendering of Services

l Revenue recognized by..,

Proportionate completion method

l Determined on the basis of,

l Contract value

l Associated costs

l No. of acts or other suitable basis

Completed service contract method


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Enterprise Resources Yielding Interest,

Royalties and Dividends

l Interest charges for use of cash resourcesl Determined on accrual basis [amount outstanding x rate applicable]

l

Royaltiesl Include..,

l Know-how

l Patents

l Trade marks

l Copyrights

l Accrues in accordance with terms of the agreement

l Dividends from holding of investments in sharesl Recognized in P&L statement when right receive payment is established


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Uncertainties on Revenue

Recognition

l Revenue measurable at the time of sale

l Postponement of revenue recognition in caseof..,

l Escalation of price

l Export incentives

l Interest

l Uncertainty on collectability requiresprovisioning


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Sale of Goods

l Delivery is delayed at buyers request andbuyer takes title and accept billing

l Delivered subject to conditionsl Installation and inspection revenue recognized on

installation but if the installation is too simple it can berecognized at the time of sale

l On approval

l Guaranteed sale can recognize if provision providedl Consignment sales recognized only on final sales

l Cash on delivery recognized on cash receipt


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Sale of Goods

l Purchaser makes a series of installments payments tothe seller, and the seller delivers the goods only when

the final payments is receivedl Recognized on delivery of goods

l May be recognized even when a significant deposit is received

l Special order shipmentsl Recognized when goods are manufactured, identified and ready

for delivery to the buyer

l Sale/repurchase agreementl Not a revenue to be recognized


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Sale of Goods

l Sales to intermediate parties [goods sold to

distributors, dealers and other]l Recognized on passing significant risks of ownership

l Subscription for publicationsl Revenue recognized will be deferred as on..,

Straight line basis

Based on sales value of item delivered in relation to totalsales value of all items covered by subscription


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Sale of Goods

l Installment salesl Recognized at the date of sale

l Interest element recognized as revenue, proportionately tothe unpaid balance due to the seller

l Trade discounts and volume rebatesl Is not to recognized as revenue

l Deducted in determining revenue


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Rendering of Services

l Admission feesl Recognized when the event takes place

l Tuition feesl Recognized over the period of instructions

l Entrance and membership feesl Recognition depends on nature of services provided

l Membership fees only for membership fees received iscapitalized

l In annual fee recognized when received


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Accounting for Fixed Assets (AS

10)

l Fixed assets include..,l Land

l Buildingsl Plant and machinery

l Vehicles

l Furniture and fittings

l Goodwill

l

Patentsl Trade marks

l Designs


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Assets Excluded from AS 10

l Forests

l Plantations

l Regenerative natural resources

l Wasting rights..,l Mineral rights

l Expenditures on exploration for extraction of minerals, oils, natural gas,and non-regenerative resources

l Expenditure on real estate development

l Livestock

l Government grants and subsidies

l Assets under leasing rights


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Definitions

l Fixed assetl Used for producing and providing services

l Not held for sale

l Fair market valuel Price agreed in open unrestricted market between

knowledgeable willing parties dealing at arms length

l Gross book value - historical cost


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Identification of Fixed Asset

l Judgment required

l Aggregate individually insignificant items, and to apply the criteriato aggregate value

l Stand-by equipment is capitalized

l Servicing equipment is capitalized

l General machinery spares charged to P&L on consumption

l Any specific machinery spares which irregular in nature allocateover a period not exceeding useful life of the principal item

l Accounting can be improved if the total expenditure is allocated tocomponent parts, when in practice separable, and estimates aremade of useful lives of these components


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Components of Cost

l Purchase price

l Import duties

l Non-refundable taxes or levies

l Directly attributable cost in bringing the asset to its working condition..,l Site preparation

l Initial delivery and handling costs

l Installation costs special foundations for plant

l Professional fees architect fees or engineers fees

l Deduct trade discount and rebates from purchase price

l Commissioning cost..,

l Expenditure on test runs

l Expenditure on experimental production


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Components of Cost

l Costs may undergo changes subsequent to acquisition due to..,l Exchange fluctuations

l Price adjustments

l Changes in duties or similar factors

l Administration and general overheads expenses are excluded

l Any specific direct admin and OH expenses related to making theasset workable is included

l Expenses during prolonged period between installation andcommercial start up

l Will be charged to P&L statements

l Treated as deferred revenue expenditure amortized over a period notexceeding 3 to 5 years after commencement of commercial production


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Self-Constructed Fixed Assets

l Gross book value = costs of construction

l Internal profit to be eliminated


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Non-Monetary Consideration

l FA acquired in exchange for another asset

l Cost of FA = FMV of consideration given

l When asset is same; cost = net book value

l FA acquired in exchange for shares in the

enterprise,l

Cost of FA = FMV (or)l Cost of FA = FMV of shares


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Improvements and Repairs

l Improvementl Expenditure increasing future benefits

l Added to gross book valuel Includes..,

l Addition

l Extension


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Amount Substituted for Historical

Cost

l Methods valuing assetsl Can be restated by appraisal by competent valuer

l Indexation and reference to current prices

l Revalued amount is presented as..,l Restating gross book value and accumulated depreciation; net

book value = net revalued amount

l Restating the net book value by adding therein the net increaseon account of revaluation

l Upward revaluation does not provide a basis forcrediting to the P&L statement the accumulateddepreciation existing at the date of revaluation


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Cost

l Different bases of valuation can be sued insame financial statements for..,

l Separate item in each of the categories of fixed assetsl Different categories of fixed assets

l Systematic basis of valuation is required whenselect assets are revalued

l

Not appropriate to have revalued class ofassets net book value more than recoverableamount of the assets of that class

A S b i d f Hi i l


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Cost

l Increase in net book value on revaluation is

directly credited tol Owners account in the name revaluation reserve

l P&L account, if earlier a revaluation loss is charged to P&Laccount

l Any decrease in value charged to..,l

P&L accountl Revaluation reserve, if there was charge in increase done

earlier


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Retirement and Disposals

l On disposal the FA are eliminated from financial statements

l Assets retired from active use and held for disposal are stated atlower of net book value or realizable value, expected lossaccounted in P&L account

l Gain or loss on disposal of an asset in recognized in P&L accountin a historical cost financial statement

l On disposal of revalued assetl Difference between net book value and net disposal proceed to P&L

account, but loss to the extent of increase in revaluation reserve will becharged to revaluation reserve account

l Any unsettled amount in revaluation reserve will be transferred to general

reserve

V l i f Fi d A i


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Valuation of Fixed Assets in

Special Cases

l Hire purchasel Proportional value to the extent of payment is shown in the balance sheet

l Appropriate disclosure regarding HP should be made

l Joint ownership with othersl Extent of its share in balance sheet including..,

l Original cost

l Accumulated depreciation

l Written down value

l Can be also grouped with similar fully owned assets

l Several assets purchased for a consolidated pricel Consideration is apportioned to the various assets on a fair basis as

determined by competent valuers


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Fixed Assets of Special Types

l Goodwilll Recorded in books only when some consideration in

money or money;s worth has been paid for itl Arises from..,

l Business connections

l Trade name

l Reputation of an enterprise

l

Intangible benefits enjoyed by an enterprisel Goodwill is written off over a period

l Many of them they retain it as an asset without writing off


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Disclosure

l Special disclosure required in financial statementsl Gross and net book values of FA at the beginning and end to show..,

l Additions

l Disposalsl Acquisitions

l Other movements

l Expenditure incurred on account of FA in the course of construction or

acquisition

l On revaluation of FA, show disclose..,

l Method adopted to compute the revalued amounts

l Nature of any indices used

l Year of any appraisal made

l Whether an external value was involved?


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Effects of Changes in Foreign Exchange

Rates [AS 11]

l Objectivesl Enterprise involving FOREX in two ways..,

l Transactions in foreign currenciesl Having foreign operations

l Financial statements of an enterprise expressed inreporting currency and foreign operations gets translated inreporting currency

l Principals issue..,l which exchange rate to sue

l How to recognize change in exchange rates in financialstatements


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Scope of AS 11

l Used for..,l Accounting for transactions in foreign currencies

l Translating financial statements of foreign operations

l Reporting currency should be home currency, if not used reasonto be specified

l Change in reporting currency to be disclosed

l Does not deals with..,l Presentation of cash flow statements cash flows arising from..,

l Transactions in foreign currency

l Foreign operations

l Exchange differences arising from foreign currency borrowings tothe extent that they are regarded as an adjustment to interestcosts


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Definitions

l Foreign operationsl Activities which are based or conducted in a country other

than country of reporting enterprise of..,l Subsidiaries

l Associates

l Joint ventures

l Branches


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Foreign Currency Transactions

l Includes..,l Buying or selling of goods or services in foreign currency

l Borrow or lend in foreign currencyl Becoming a party to an unperformed forward exchange

contract

l Acquiring / disposing assets in foreign currency

l Incurring / settling liabilities in foreign currency


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Foreign Currency Transactions

l Reportedl In reporting currency based on exchange rate prevailing on

the day of transactionl Using average rate

l On significant fluctuation in exchange rate average ratebecomes unreliable

Reporting at Subsequent Balance


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Reporting at Subsequent Balance

Sheet Dates

l Foreign currency monetary items: closing ratel Cash

l Receivables

l Payables

l Non-monetary items: exchange rate at the date of the transactionl Fixed assets

l Inventories

l Investments in equity shares

l

Revalued non-monetary items: exchange rate at the date of therevaluation

l Contingent liability: closing rate

Recognition of Exchange


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Recognition of Exchange

Differences

l Exchange differences arising from..,l Settlement of monetary items

l Reporting an enterprises monetary itemsl Reported as..,

l Income or expenses

l Net investments in a non-integral foreign

operationsl Should be accumulated in a foreign currency translationreserve till the disposal of net investment


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Classification of Foreign Operations Based

on way of Financing

l Integral operationsl Extension of reporting enterprises operations

l Sell goods imported from reporting enterprise and remits it back

l Change in exchange rate affects the individual monetary items held by the foreignoperation rather than the reporting enterprises net investment in that operation

l Non-integral operationsl Accumulates cash and other items

l Incurs expenses

l Generates income

l Arranges borrowing in local currency

l Enter into transactions in foreign currencyl Change in exchange rate affects the reporting firms net investment rather than

individual monetary and non-monetary items held by non-integral foreign operation


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Indications of Non Integral Foreign


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Indications of Non-Integral Foreign

Operations

l Reporting firms cash flows are insulated from

foreign operation's cash flows

l Sales price of foreign operations are not mainlydetermined by change in forex rate but by..,

l Local competition

l Local government's regulations

l An active sales market force for foreignoperations


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Integral Foreign Operations

l Translated as if transactions has been entered

by reporting firml Cost and depreciation of tangible assets: exchange rate on

date of purchase of asset

l Cost of inventories: exchange rate on incurring that cost


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Non-Integral Foreign Operations

l Assets and liabilities [monetary + non-monetary]: closing rate

l Income and expenses: exchange rate on date of transactions

l

Exchange differences: accumulated in foreign currency translationreserve until disposal of net investment

l Goodwill on acquisition: closing rate

l Contingent liability: closing rate

l On disposition of non-integral operation: deferred exchangedifferences will be recognized as income or gain in the sameperiod

Change in Classification of Foreign


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Change in Classification of Foreign

Operations

l Exchange difference to reported in forex

reserve on reclassification


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Forward Exchange Contracts

l Exchange difference on forward contract is the

difference betweenl Foreign currency amount of contract translated at

exchange rate at reporting date

l Same currency amount translated at the later date ofinception of forward contract and last reporting date

l Gain or loss is recognized on balance sheet based on

marking to current market value

Accounting for Government Grants


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Accounting for Government Grants

[AS 12]

l Scope..,l Deals with..,

l Government grantsl Subsidies

l Cash incentives

l Duty drawbacks

l Does not deal with..,

l

Special problems arising in accounting for govt. grantsl Any other form of govt assistance

l Govt. participation in ownerships of firm


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Definition

l Government Govt., Govt. agencies, local

bodies, national and international bodies

l Government grantsl In cash or kind

l For past or future compliance

Accounting Treatment of


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Accounting Treatment of

Government Grants

l Capital approachl Grant is treated as part of shareholders fund

l Funds in nature of promoters contribution

l Income approachl Grant is treated as part of income

l Govt. grants comes with some expenses shown as part ofP&L

l Treated like income tax and other taxes


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Accounting for Investments [AS 13]

l Does not deals with..,l Bases for recognition of interest, dividends, rentals earned

l Operating or finance leases

l Investments of retirement benefit plans and life insurance

enterprise

l MFs

l VFs

l Related asset management companies

l Banksl Public financial institutions

l Assets held as stocks


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Definition

l Investmentsl Assets held by firms for earnings..,

l Interest

l Dividend

l Rentals

l Capital appreciation

l Other benefits

l Market valuel Amount obtainable from the sale of an investment in an

open market, net of expenses necessarily to be incurred onor before disposal


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Forms of Investments

l Some firms investment activity is a significant element ofoperations

l Physicall Buildings

l Land

l Non-physical existencel Shares

l Debt

l Active market existing assets and Non active market existingassets

l Classification current investments and LT investments


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Cost of Investments

l Includes..,l Fair value of securities issued or cash paid or fair value of

asset given upl Brokerage

l Fees

l Duties

l Any pre acquisition income form investment in deducted

from cost


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Carrying Amount of Investments

l Current investments: lower of fair value or costl Fair value = market value for assets with active market

l Any reduction to fair value and nay reversals of suchreductions are included in P&L statement

l LT investmentsl Carried at cost

l Decline value can be recognized and charged to P&L

statement [can be reversed on market ups]

l Determined on an individual investment basis

Disposal and Reclassifications of


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Disposal and Reclassifications of

Investments

l Disposall Amount entered in P&L statement = net of carrying amount

and f=disposal proceedsl Reclassification

l LT investment reclassified as current investment netproceed is recognized in P&L statements


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Disclosures

l Accounting policies related to carrying amount

l Amount included in P&L statements

l Restrictions on ownerships rightsl Resalablity of investments

l Remittances of income and proceeds ofdisposal

l Aggregate amount of quoted and unquotedinvestments


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Definition

l Amalgamationl Defined as per companies act 1956

l Transferor companyl Company which is amalgamated into another company

l Transferee companyl Company into which transferor company amalgamated

l Amalgamation in the nature of mergerl All the asset and liabilities of transferor becomes the assets and liabilities of

transferee company

l Not less than 90% of shareholders of transferor company becomes shareholder oftransferee company

l Consideration paid in shares except cash paid for fractional sharesl Business of transferor to be carried by transferee after amalgamation

l No adjustment made in book values of assets and liabilities of transferor when addedto transferees books


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Definition

l Pooling of interestsl Requires only minimal changes in aggregating the

individual financial statements of the amalgamatingcompanies


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Types of Amalgamations

l Amalgamation with genuine pooling of interest,

(Merger) by pooling..,l Assets and liabilitiesl Shareholders interests

l Businesses

l Post amalgamated figure will be a sum of twocompanies

l Amalgamation with intentions of acquisitions

Methods of Accounting for


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Methods of Accounting for

Amalgamations

l Pooling of interest methodl Used for amalgamation in the nature of merger

l Assets, liabilities and reserves are recorded as carrying amount

l Adjusted only for accounting policiesl Difference between amount recorded as share capital issued and amount

of share capital of transferor company is adjusted in reserves in the

financial statements of the transferee company

l Purchase methodl Used for amalgamation in the nature pf purchase

l May use carrying amount or fair value of assetsl Good will = amount of net assets < consideration

l Capital reserve = amount of net assets > consideration

Treatment of Goodwill Arising on


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eat e t o Good s g o

Amalgamation

l Treated as asset

l Amortized systematically not exceeding 5 year unless

longer period is justifiedl Factors included in estimating life of goodwill..,

l Foreseeable life of business or industry

l Effects of products obsolescence, changes in demand and othereconomic factors

l Service life expectancies of key individuals or group of employeesl Expected actions by competitors or potential competitors

l Legal, regulatory or contractual provisions affecting useful life


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Disclosures

l Names and nature of amalgamating

companies

l Date of amalgamation

l Method accounting used

l No of shares issued

l Difference between consideration and value ofnet identifiable assets


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Accounting for Retirement Benefits in the Financial Statements

of Employers [AS 15]

l Retirement benefits consists of..,l Provident fund

l Superannuating fundl Gratuity

l Leave encashment benefit on retirement

l Post-retirement health and welfare schemes

l Other retirement benefits


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Borrowing Costs [AS 16]

l Scopel Applied in accounting for borrowing costs

l Does not deal with..,l Actual or imputed cost of owners and preference capital


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Definitions

l Qualifying assetl Asset taking substantial period of time to get ready for its intended use or sale

l Examples..,l Manufacturing plants

l Power generation facilitiesl Inventories

l Investment properties

l Borrowing costs includes..,l Interest

l Commitment charges

l Amortization of discounts or premiums relating to borrowings

l Amortization of ancillary costs incurred in connection with arrangement of borrowings

l Finance charges from finance leases

l Exchange differences arising from foreign currency borrowings to the extent they areregarded as an adjustment to interest costs


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Recognition

l Capitalize borrowing costs directly attributable

to qualifying assets such as..,

l Acquisitionsl Construction

l Production

l Cost capitalized should..,l Probably result in future economic benefits to the firm

l Costs can be measured reliably

Borrowing Costs Eligible for


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g g

Capitalization

l Borrowing cost directly used in buying, developing qualifying asset

l Judgment is required in any indirect cost on acquiring qualifying asset

l Borrowing cost to be capitalized = actual borrowing costs on borrowing

during the period income on temporary investment of those borrowingsl Should be determined by applying a capitalization rate to the expenditure

on that asset

l Capitalization rate = weighted average of borrowing costs applicable toborrowings of the enterprise that are outstanding during the period

l Amount of borrowing costs capitalized cannot exceed amount of

borrowing costs inured during that period

Excess of Carrying Amount of the Qualifying Asset


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Excess of Carrying Amount of the Qualifying Asset

Over Recoverable Amount

l Carrying amount or expected ultimate cost of

qualifying asset > recoverable amount or net

realizable value, carrying amount is writtendown or written off in accordance with

requirements of other accounting standards


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Suspension and Cessation of


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p

Capitalization

l Suspensionl During extended periods in which active development is

interruptedl Cessation

l When substantially all activities necessary to prepare thequalifying asset for its intended use or sale are complete


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Disclosure

l Accounting policy adopted for borrowing costs

l Amount of borrowing costs capitalized during

the period


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Segment Reporting [AS 17]

l Covers the following enterprises..,l Listed companies

l Companies ready to be listed

l Banks including cooperative banks

l FIs

l Enterprises carrying on insurance businesses

l Commercial, industrial, and business reporting enterprisesturnover exceeding Rs. 50 crore

l Firms having public deposit more than Rs. 10 crorel Holding and subsidiary firms of any one of the above at any

time during the accounting period


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Segment Reporting (AS 17)

l Scopel Covers disclosing performance based on ..,

l Products and servicesl Geographical areas

l Applicable in presenting..,

l General purpose financial statements

l Consolidated financial statements

l Should comply with this statement fully not selectively


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Definitions

l Business Segmentl Distinguishable component of a firm

l Can be..,

l Individual products

l Group related products

l Factors considered in identifying related products are as follows

l Nature of products or services

l Nature of production process

l Type or class of customers for products or services

l Methods used to distribute the products or provide the services

l Nature of regulatory environment


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Definitions

l Geographical segmentl Distinguishable component of an enterprise

l Factors considered in identifying geographical segments..,

l Similarity of economic and political conditions

l Relation between operations in different geographicalareas

l Proximity of operations

l Special risks associated with operations in a particulararea

l Exchange control regulations

l Underlying currency risks


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Definitions

l Segment revenue does not include..,l Extraordinary items

l Interest or dividend income

l Gains on sales of investments

l Segment expense does not include..,l Extraordinary items

l Interest expense

l

losses on sales of investmentsl Income tax expenses

l General administrative expenses


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Definitions

l Segment assetl Directly attributable to the segment

l Allocated to the segment on a reasonable basisl Does not include income tax assets

l Determined after deducting related allowances

l Segment liabilitiesl Operating liabilities

l Do not include income tax liabilities


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Reportable Segment

l Conditions..,l Revenues from sale to external customers > 10%

l Profit or loss > 10% of results of combined segments inprofits or loss

l Assets > 10% of the total assets of all segments

l When total external revenue attributable

segments < 75% of total firms revenue,l Additional segment should be identified as reportable

segments


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Segment Accounting Policies

l Should be in line with firms accounting polices

l Disclosure..,l Segment revenue from..,

l External customers

l Transactions with other segment

l Segment results

l Total carrying amount of segment assets

l Total amount of segment liabilities

l Total cost incurred during the period to acquire segment assets

l Total amount of expenses included in eths segment results fordepreciation and amortization

l Total amount significant non-cash expenses


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Related Party Disclosure [AS 18]

l Covers the following enterprises..,l Listed companies

l Companies ready to be listed

l Banks including cooperative banks

l FIs

l Enterprises carrying on insurance businesses

l Commercial, industrial, and business reporting enterprisesturnover exceeding Rs. 50 crore

l Firms having public deposit more than Rs. 10 crorel Holding and subsidiary firms of any one of the above at any

time during the accounting period


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Related Party Disclosure [AS 18]

l Scopel Covers..,

l Related party relationships

l Transaction between a reporting firm and its related parties

l Related parties include..,l Reporting firm controlling a firm directly or indirectly

l Reporting firms JV, associate

l Individual owning ownership required to control the firm

l Key management personnel and relatives of such personnell Person having significant influence


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Related Party Disclosure [AS 18

l Does not include..,l Two companies simply having a director in common

l Significant of business with a single..,

l Customer

l Supplierl Franchiser

l Distributor

l General agent

l Parties in normal dealings of a firm..,

l Providers of finance

l Trade unions

l Public utilities

l Government departments

l Government agencies

l Government sponsored bodies

Exception to Related Party


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Discloser

l When it goes against the confidentiality of the

business

l Intra-group transactionsl State-controlled enterprises


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Disclosure

l Non-transacting related partyl Names of related party

l Nature of related party relationship

l Where control exists

l Transacting related partyl Name

l Description of relationship

l Description of nature of transactions

l Volume of transactions

l Outstanding items if any

Examples of Related Party


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Transactionsl Purchases or sales of goods

l Purchases or sales of fixed assets

l Rendering or receiving of services

l Agency arrangements

l Leasing and HP arrangements

l Transfer of R&D

l License agreements

l Finance

l Guar

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