overview of indian accounting standards for smes

8/3/2019 Overview of Indian Accounting Standards for SMEs

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An overview of

Indian Accounting Standards (IAS)

By Samrat Joneja

Chartered Accountant


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Agenda

Background

Why do we need AS

Applicability of IAS to companies

IAS notified for companies

Applicability of IAS for non corporate entities

International Harmonization of IAS

Convergence with IFRS

Road map for convergence

Key features of the existing IAS

Y.K. Joneja & Co., Chartered Accountants Overview of Indian Accounting Standards


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Background


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Why do we need AS?

Rationale

Ensure a True and Fair view of financial position

To reduce accounting alternatives and thereby ensure comparability

and meaningful information to users of financial statements



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Applicability of IAS to companies

The Companies (Amendment) Act, 1999 has inserted new sub-sections3A, 3B and 3C to Section 211, with a view to ensure that the financial

statements are prepared in accordance with the Accounting Standards

Section 211 (3A): Every profit and loss account and balance sheet

of the company shall comply with the accounting standards

Further section 211(3C) prescribes that the expression accounting

standards means the standards of accounting recommended by the

Institute of Chartered Accountants of India, constituted under theChartered Accountants Act, 1949 (38 of 1949), as may be prescribed by

the Central Government in consultation with the National Advisory

Committee on Accounting Standards



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IAS prescribed for companies

The Central Government has notified Companies (Accounting

Standards) Rules 2006 (The Rules). These rules prescribes accounting

Standards 1 to 7 and 9 to 29 as recommended by the Institute of

Chartered Accountants of India (ICAI)

Further ICAI has also issue Accounting Standard 30,31 and 32

The Rules state that every Company and its auditor shall comply with

Accounting Standards



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IAS prescribed for companies

Relaxation from certain provisions has been provided to Small &Medium Sized companies (SMCs). SMCs include companies whichfulfill all the following conditions:

i. The company is not listed on a recognized stock exchange;

ii. The company is not a bank, financial institution or insurance company;

iii. Turnover does not exceed Rs. 50 crore in the preceding accounting year;

iv. The company does not have borrowings in excess of Rs. 10 crore at anytime during preceding accounting year; and

v. Is not a holding or subsidiary of a company which is not a SMC.



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Applicability of IAS for non corporate

assessee

The accounting standards apply equally to Non Corporate Assesses.The Preface to the Statements of Accounting Standards issued by the

ICAI, inter alia state:-

While discharging their attest functions, it will be the duty of the

members of the Institute to ensure the Accounting Standards are

implemented in the presentation of financial statements covered by

their audit reports

Thus, in case of sole proprietorship concerns, partnership firms andother non corporate entities subject to tax audit, the ISA issued by

ICAI will apply. ( Para 10.5 of The Guidance Note on Tax Audit under

Section 44AB of the Income Tax Act issued by the ICAI)



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Applicability of IAS for non corporate

entities

Are IAS applicable to Charitable and religious institutions?

Para 10.6 of the Guidance Note on Tax Audit u/s 44AB of the Income

Tax Act 1961 states:-

AS apply in respect of commercial, industrial or business activities of

an enterprise. In case of charitable or religious institutions, AS will not

apply ifallthe activities of such organization are not of commercial,

industrial or business nature

The ICAI has also prescribed certain relaxation to applicability of AS to

non corporate entities.



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International Harmonization of AS

As the cross-border transfers of capital are became increasinglycommon there was a need to harmonize AS in different countries

Recognizing this need for international harmonization of accounting

standards, in 1973, the International Accounting Standards Board

(IASB) was established.

The Institute of Chartered Accountants of India (ICAI) being a member

body of the IASB, constituted the Accounting Standards Board (ASB) on

21st April, 1977. While formulating accounting standards, the ASBgives due consideration to International Financial Reporting Standards

(IFRSs) issued by IASB and tries to integrate them, to the extent

possible, in the light of conditions and practices prevailing in India.



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Convergence with IFRS

The Core Group constituted by the Ministry of Corporate Affairs forconvergence of IAS with IFRS has laid out a roadmap for convergence

of IAS with IFRS in toto. This decision came in light of the benefits

associated with full convergence with IFRS which is now accepted in

more than 100 countries world over. The benefits are :

One language

Comparability enhanced

Understanding enhanced

One set of books

Access to global capital marketsLow cost of capital

Attract foreign investment

Elimination of multiple reports



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Roadmap for Convergence with IFRS

The Group agreed that in view of the roadmap for achieving convergence,there will be two separate sets of Accounting Standards


IAS Converged with IFRS

Phase I ( Reporting date 31 March 2012): Companies which arepart of NSE- Nifty 50 or BSE Sensex 30, or Listed outside India orwhether listed or not having net worth in excess of 1000 crore

Phase 2 : The companies, whether listed or not, having a net worthexceeding Rs. 500 crore but not exceeding Rs. 1,000 crore

Phase 3: Listed companies which have a net worth of Rs. 500 croreor less

Existing IAS

Applicable to Non-listed

companies which have a networth of Rs. 500 crore or less

and SMCs


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Key features of the Existing/Notified IAS


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Notified AS


AS1: Disclosure of Accounting Policies

AS 2 Valuation of InventoriesAS 3 Cash Flow Statements

AS 4 Contingencies and Events Occurring after the

Balance Sheet Date

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

and Changes in

Accounting Policies

AS 6 Depreciation AccountingAS 7 Construction Contracts

AS 8 Accounting for Research and Development

(Withdrawn pursuant to

AS 26 becoming mandatory)

AS 9 Revenue Recognition

AS 10 Accounting for Fixed Assets

AS 11The Effects of Changes in Foreign Exchange RatesAS 12 Accounting for Government Grants

AS 13 Accounting for Investments

AS 14 Accounting for Amalgamations

AS 15 Employee Benefits

AS 16 Borrowing Costs

AS 17 Segment ReportingAS 18 Related Party Disclosures

AS 19 Leases

AS 20 Earnings Per Share

AS 21Consolidated Financial Statements

AS 22 Accounting for Taxes on Income

AS 23 Accounting for Investments in

Associates in Consolidated FinancialStatements

AS 24 Discontinuing Operations

AS 25 Interim Financial Reporting

AS 26 Intangible Assets

AS 27 Financial Reporting of Interests in Joint

Ventures

AS 28 Impairment of AssetsAS 29 Provisions, Contingent Liabilities and

Contingent Assets

AS 30 Financial Instruments: Recognition and

Measurement

AS 31 Financial Instruments: Presentation


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AS 1: Disclosure of Accounting Policies

All significant accounting policies adopted needs to be disclosed. Thedisclosure should form part of FS and at one place

Any change in accounting policy having material effect should be

disclosed including the amount of impact due to such change

Disclosure of Fundamental Accounting Assumptions ( Going Concern,

Consistency and Accrual) is necessary if these are not followed

Primary consideration for selection of accounting policy is that the FSshould give a true and fair view. Other factors for selection are :

prudence, substance over form and materiality



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AS 2: Valuation of Inventories

Inventories should be valued at lower of cost or Net realizable value

The cost of inventories should comprise of all costs of purchase, cost of

conversion and other cost in bringing the inventories to their present

location and condition

Cost formulas: Specific identification ( in case goods are not

interchangeable), FIFO or Weighted average

The FS should disclose accounting policy measuring the inventoriesincluding cost formula and total carrying amount of inventories in

appropriate classification



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AS 3: Cash Flow Statements

An enterprise shall prepare cash flow statement for each period a FS is

prepared

The cash flow should report cash flows during the period classified by

operating , investing and financing activities

An enterprise may use either the direct method or indirect method

Not mandatory for SMC



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AS 4: Events Occurring After Balance Sheet

Date

Assets and liabilities should be adjusted for events occurring after thebalance sheet date that

Provide additional evidence to assist the estimation of amounts relating toconditions existing at the balance sheet date ; or

that indicate that fundamental accounting assumptions ofgoing concern is notappropriate

Disclosure is required of

Nature of the event

An estimate of the financial effect, or a statement that such estimated cannot bemade



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AS 5: Net Profit or Loss for the Period , Prior

Period items & Changes in Accounting Policy


Items Meaning Disclosure requiredProfit or loss from ordinary

activities

Profit or loss from activities

undertaken as part of business

or incidental to it

Profit or loss from ordinary

activities to be disclosed on the

face of P&L

Items within profit or loss

from ordinary activities to be

disclosed separately if the nature

size or incidence is relevant to

explain the performance of an

entity

Extraordinary items Income or expenses from events

distinct from ordinary activities.

The disclosure is required on the

face of P&L in a manner so that

their impact can be perceived

Prior Period items Income or expenses which arisein current period as a result of

errors or omissions in prior

periods

Nature and amount to beseparately disclosed in such

manner that their impact on

current profit or loss can be

ascertained.


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AS 5: Net Profit or Loss for the Period , Prior

Period items & Changes in Accounting Policy


Items Meaning Disclosure requiredChange in Accounting Estimates Estimates could be due to

uncertainties inherent in

business activities e.g.. Bad

debts, inventory obsolescence or

the useful life of depreciable

assets

The effect of change in

accounting estimate should be

classified using the same

classification as was previously

for the estimate.

The nature and amount of

change in accounting estimate

which has a material effect

should be disclosed

Change in Accounting Policy Change in accounting policy can

be made only if the change is

required for complying withstatute or for compliance with

accounting standard or for

better presentation

Any change in accounting policy

which has a material impact

should be disclosed along withthe amount of such impact


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AS 6: Depreciation

The depreciable amount of assets should be allocated on a systematicbasis to each accounting period over the useful life of the asset

The depreciation method should be applied consistently from period

to period

Method of depreciation can be changed only if the change :-

Is required by statute or

Is required for compliance with a accounting standard or

results in better presentation of the financial statements

Change in method of depreciation shall be retrospective and any

deficiency or surplus arising shall be charged to or credited to profit

and loss account



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AS 7: Construction Contracts

This AS prescribes accounting in the books of contractors

Meaning of construction Contracts

Construction contract is a contract specifically negotiated for the

construction of an asset or a combination of assets that are closelyinterrelated in term of design, technology and function or ultimate

use. AS 7 is to be applied to each contract separately

What is to be included in contract revenue?

The initial amount of revenue agreed; and

Revenue for variations in the contract work,

- To the extent that it is probable that they will result in revenue; and

- They are capable of being reliably measured



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This AS prescribes accounting in the books of contractors

Meaning of construction Contracts

Construction contract is a contract specifically negotiated for the

construction of an asset or a combination of assets that are closelyinterrelated in term of design, technology and function or ultimate

use. AS 7 is to be applied to each contract separately

What is to be included in contract revenue?

The initial amount of revenue agreed; and

Revenue for variations in the contract work,

- To the extent that it is probable that they will result in revenue; and

- They are capable of being reliably measured



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What is to be included in contract cost?

Cost that are directly related to the specific contract

Costs that is generally related and which can be allocated

Recognition principles


When the outcome of the contract

Can be Estimated Reliably Cannot be Estimated Reliably

Recognize the revenue onlyto the extent of suchcontract costs incurred,, therecovery of which isprobable.

Recognize revenue andexpenses having regard tothe stage of completion ofthe contract activity at thereporting date


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Irrespective of the reliably or otherwise of the outcome of thecontract, any expected loss on the contract should be immediately

recognized as an expense



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AS 9: Revenue Recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to theentity and the revenue can be reliably measured.

Sale of Goods

Revenue is recognized when the significant risks and rewards of ownership of the goods havepassed to the buyer.

InterestRevenue is recognized on a time proportion basis taking into account the amount outstanding andthe rate applicable.

Income from service contracts

Income from service contracts is recognized pro-rata over the period of the contract as and whenservices are rendered.

Dividends

Revenue is recognized when the shareholders right to receive payment is established by thebalance sheet date. Dividend from subsidiaries is recognised even if same are declared after thebalance sheet date but pertains to period on or before the date of balance sheet as per therequirement of schedule VI of the Companies Act, 1956



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AS 10: Accounting for fixed assets

The method of gross book value of the fixed assets should either be theHistorical cost or the revalued amounts as per standard

Historical costs means purchase price and any attributable costs in bringingthe asset to its present location or condition

Subsequent expenditure related to an item of fixed asset should be added toits book value only if the increase in future benefits from the existing assetbeyond its previously assessed standard of performance.

Loss or gain from retirement or disposal of fixed asset carried at cost should berecognized in the profit and loss account

When fixed assets are revalued, an entire class of the asset should be revalued.Such revaluation should not result in net book value of the class greater thanrecoverable amounts. The increase on revaluation should be credited torevaluation reserve and decrease should be charged to profit and loss account



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AS 12 : Accounting for Government Grants

Government grants should not be recognized until there is reasonableassurance that the enterprise will comply with the conditions attachedto the grant and Grants will be received


Type of grant Recognition

Grant for specific fixed

assets which aredepreciable

Option1: To be shown as a deduction from gross book value ; or

Option 2: to Treat as deferred income to be credited to profit and lossaccount on a systematic basis

Grant for specific fixed

assets which are non

depreciable

To be Credited to capital reserve account

However if grants related to non depreciable assets require fulfillment

of certain obligations, the grant should be credited to income over the

same period over which the cost of meeting such obligation is charged

to income

Revenue Grants To be credited to profit and loss account

Promoters

contribution

To be Credited to capital reserve account

Note: Government Grant that has become refundable should be treated as extraordinary

item


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AS 13 : Accounting for Investments

An enterprise should disclose current investments and long terminvestments distinctly in the financial statements

The cost of investments should include acquisition charges such asbrokerage fee and duties

An enterprise holding investment properties should account them aslong term investments

Current Investments is an investments that is by its nature readily

realizable and is intended to be held for not more than one year fromthe date on which such investment is made

Long term investment is an investment other than current investment



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AS 13 : Accounting for Investments

Recognize Current investments: At Costs or fair value whichever islower

Long term investments: At Costs

However provision for diminution in value of investments of

permanent nature should be recognized

Any changes in carrying values to be debited or credited to P&L

Account

Gains or losses on disposal of assets to be recognized in P&L Account



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AS 16 : Borrowing Costs

Meaning : Interest and other costs incurred in connection with theborrowing of funds

When should Borrowing Costs be capitalized?

Borrowing costs , that are directly attributable to the acquisition,

construction or production ofqualifying asset should be capitalized as

part of costs of that asset

Qualifying Asset?

It is an asset that necessarily takes a substantial period of time to getready for its intended use or sale

Ordinarily a period of 12 months is considered as substantial period

unless a shorter period can be justified



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AS 22 : Accounting for Taxes on Income

Concept

Accounting for taxes on income, has been traditionally based on Tax

payable method.

Globally, Tax effect accounting method is used

Seeking to accrue taxes, in accordance with the matching concept,

in the same period as the revenue and expenses to which they

relate

By which DTA\DTL created after considering deductible and\or

taxable timing differences



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Definitions

Tax expense: Current Tax (+ or -) Deferred tax

Current tax: Income tax payable in respect of taxable income for

a period

Deferred tax: Tax effect of timing differences

Timing differences: Differences between taxable income and

accounting income for a period, that originate in one period and are

capable of reversal in one or more subsequent periods.



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Definitions

Examples of timing difference: Differences between book and tax depreciation

Expenditure allowed only on payment basis u/s 43B of the Income-tax

Act, 1961

Unabsorbed depreciation and carry forward of losses.

Taxable income: Income computed in accordance with tax laws

Accounting income: Net profit before tax, as per financial statements



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Definitions

Permanent differences: Differences between taxable income andaccounting income that originate in one period and do not reverse

subsequently.

Examples

Disallowance of expenditure charged to Profit & Loss Account

Donations where only 50% deduction u/s 80G is available under tax laws

Weighted deduction for scientific research expenditure under tax laws

Tax exemption to new industries setup in backward areas u/s 80IA



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Definitions


DTA Any item which will reduce the

future taxable income

Provision for bad and

doubtful debts

Section 43B items

Unabsorbed depreciation

and carry forward of losses

Other provisions

Payments u/s 40(a)(i)

DTL Any item which will increase the

future taxable income

Deferred revenue

expenditure

Tax Depreciation,

if > book depreciation


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Accounting for Income taxes

Taxes payable method Tax effect accounting method

DTA DTL

Tax payable based on tax income, no

recognition of timing difference

Recognize effect of timing

difference between book

profit and tax profit

Recognise for all

items

Recognise if

realisation is

probable

egTiming differences Permanent differences

No effect

Apply current tax rate on

accumulated balances




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Recognition criteria

DTA should be recognised subject to consideration of prudence in respectto DTA.

DTA should be recognised and carried forward only to the extent that

there is reasonable certainty that sufficient future taxable income will be

available against which such DTA can be realised.

In case of unabsorbed depreciation or carry forward of losses under tax

laws, DTAs should be recognised only to the extent that there is virtual

certainty supported by convincing evidence that sufficient future taxable

income will be available against which such DTAs can be realised.




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START

Determine current incometax (or benefit) and related

payable

Identify and accumulatetiming differences as of the

end of the current year

Identify operating losses

and tax credit carry

forwards

Recognize DTL for taxable

timing differences

Recognize DTA for deductible timing

differences and operating loss and

carry forwards

Calculate the

income tax liability

Perform intraperiod

allocation

END

Permanent

differencesTiming

differencesThe application of AS 22 to a

particular entitys situation

generally involves these steps.


Steps



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AS 26 : Intangible Assets

Conditions for an asset to be treated as an intangible asset for AS 26:-

It is identifiable

Non monetary asset which does not have a physical substance and

Is held by the enterprise for use in the production and supply of goods and

services, for rental to others and for administrative purposes I

Control of the asset is with the enterprise

Future Economic benefits are expected from such asset

Conditions for recognizing an Intangible Asset in the books:-

It is probable that future economic benefits attributable to such assets shall flow

to the enterprise

The cost of the asset can be measured reliably

Intangible Item vs. Intangible Assets: An enterprise may incur expenditure toprovide future economic benefits, but no intangible assets may be created

since any of the conditions mentioned above are not met. Such expenditure

has to be written off in the profit and loss Account in the year in which it is

incurred


AS 29 P i i C ti t Li biliti


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AS 29: Provisions Contingent Liabilities

and Contingent Assets When should Contingent Liability be disclosed?

If there is a PossibleObligationarising from Past Events; and

Existence of such obligation shall be confirmed by a uncertain future events not

within the control of the enterprise

OR

A Present Obligation that arises from Pasts Events but is not recognizedBecause it is not probable that outflow of recourses will be required or

A reliable estimate of the obligation cannot be made

Present Obligation?

If existence of the obligation is considered probable i.e. more likely than not(Probability >50%) on the balance sheet date

Possible Obligation?

If existence of obligation is not probable (Probability


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AS 29: Provisions Contingent Liabilities

and Contingent Assets When should Provisions be Recognized?

If there is a Present Obligationthat arises from Pasts Events;

It is probable that an outflow of resources shall be required to settle the obligation

and

Reliable estimate can be made of the amount of obligation



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QUESTIONS?



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Thank You

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