Acctg std 1 2 6 10
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This document provides an overview of accounting standards and corporate accounting practices in India. It discusses key points about various accounting standards issued by the Accounting Standards Board of India, including standards on revenue recognition (AS-9), valuation of inventories (AS-2), depreciation (AS-6), foreign exchange rates (AS-11), investments (AS-13), borrowing costs (AS-16), segment reporting (AS-17), related party disclosures (AS-18), and earnings per share (AS-20). It also outlines responsibilities of chartered accountants to disclose any non-compliance with accounting standards. The standards are applicable to business and commercial organizations from the specified effective dates.
Acctg std 1 2 6 10
- 2. Overview What do Accounting Standards mean? Accounting Standards • Accounting Standards are a collection of generally followed accounting principles and practices. They help to ensure a common basis for preparing the financial statements of different organizations. It means that people can understand them more easily and make useful comparisons. Accounting Policies • Accounting policies develop from Accounting Standards. Different organisations may have different policies, if the concerned standard allows alternative treatment.
- 3. International Standards • In USA, the FASB (Financial Accounting Standards Board) and AICPA (American Institute of Certified Public Accountants) have also prepared some useful material. Standards in India • In India, Accounting Standards are prepared by the Accounting Standards Board, which has been set up by the ICAI. • Twenty-eight Accounting Standards have been issued so far in India. Many of these have become mandatory for most organisations. • The Accounting Standards apply mainly to business or commercial organisations but in some cases, they are compulsory for NGOs also.
- 4. Indian Accounting Standards • The standards are applicable from different dates. This means that a particular standard applies to all financial statements for periods beginning on or after that date. • Accounting Standards apply only to material items.
- 5. Responsibilities of Chartered Accountants • CA must disclose non-compliance with the Accounting Standards, if any. • CA must disclose material departures from the Statements relating to audit matters. Where amount is ascertainable, it should be stated; if not, this fact should also be stated.
- 6. AS-1: Disclosure of Accounting Policies • All significant accounting policies should be disclosed in financial statements. • If fundamental accounting assumptions (such as accrual, going concern and consistency) are not followed, disclosure is necessary. • Applicable to all enterprises including sole proprietary concerns, partnership firms, companies, trusts etc. • Prudence, substance over form, and materiality should be the basis for selecting the accounting policies.
- 7. AS-1: Disclosure of Accounting Policies • Accounting Policies usually cover the following areas: Method of depreciation, depletion and amortisation Treatment of expenditure during construction Valuation of inventory, investments and fixed assets Treatment of goodwill Conversion and/or translation of foreign currency items Treatment of retirement benefits Treatment of contingent liabilities Recognition of profit on long-term contracts
- 8. AS-2: (Revised) Valuation of Inventories How to value and account for stocks? • The standard was revised in June 1999. Applicable to all enterprises. (Effective date: 01-04-1999) • Inventories should be valued at the lower of cost and net realisable value, on the basis of FIFO or weighted average cost. • The standard does not apply to: W-I-P in construction contracts (Ref AS-7) Stocks of traders in sharemarket(shares, debentures and other financial instruments) Inventory of live stock, agricultural and forest products, mineral oils, ores, gases etc.
- 9. AS-5 Net Profit or Loss for the period,prior period items and changes in Accounting Policies (Limited Revision) • All items of income and expenditure recognised in a period to be included in the determination of net profit or loss for the period. (Effective date: 01-04-1996; Revised in February 1997) • Treatment and disclosure of prior period items and changes in the Accounting Policies. Applicable to all enterprises. • Ordinary activities – Activities undertaken as part of business in which enterprise engages in furtherance or, incidental to, or arising from, above are ordinary activities • Extraordinary items are income or expenses arising from events that are – • distinct from ordinary activities, and • unlikely to recur frequently or regularly
- 10. AS-5: • Treatment of Specific Items • Income on NPAs • Income on non-performing investments • Clearing house rent of previous year • Salary arrears • Changes in accounting estimates • To be include in net income determination for current/current and future periods, as appropriate • Disclosure of nature and amount if effect material in current/future periods • Changes in accounting policies • When permissible – Compliance with statute – Compliance with accounting standards – More appropriate presentation • Treatment and Disclosure • Effect of transitional provisions specified in an Accounting Standard
- 11. AS-5: Exceptional items Items within profit/loss from ordinary activities may require separate disclosure due to – – Nature, or – Size, or – Incidence Prior period items – Rectification of errors of previous years – Distinct from changes in accounting estimates – Materiality to be considered, as in respect of any other item
- 12. AS-6: (Revised) Depreciation Accounting • Depreciation should be charged on assets. Related information should be disclosed. Revised in August 1994. Applicable to all enterprises. (Effective date: 01-04-1995) • Assessment of depreciation is based on the following factors:- (i) Historical cost (ii) Expected useful life of the depreciable asset ; and (iii) Estimated residual value of the depreciable asset • The companies Act (Schedule XIV) lays down the minimum rates of depreciation in respect of various assets. The management may compute depreciation by applying a higher rate / lower rate without, however, increasing the useful life of an asset. • The Income Tax Act allows WDV method for computing taxable profit.
- 13. AS-9: Revenue Recognition When and how revenue should be recognised? • What disclosure is necessary. Applicable to all enterprises. (Effective date: 01-04-1993) • Conditions for recognition • Realisation, i.e., performance of act giving rise to revenue • Measurability • Collectibility • Recognition: Interest, dividend, royalty • Interest – on time proportion basis • Dividends from shares – when owner’s right to receive is established • Royalties –as per terms of agreement • Defer recognition if measurability/ collectibility criterion not met.
- 14. AS-9: Revenue Recognition • Issues in Revenue Recognition • Non-recognition of income on NPAs • Loan origination fee • Guarantee expiration • Locker rent • Income from non-funded commitments • Merchant banking activities • Materiality considerations • Other Aspects • Subsequent uncertainty of collection – provision more appropriate than reversal • Disclosure to be made of circumstances in which revenue recognition is postponed due to uncertainties
- 15. AS-10: Accounting for Fixed Assets • Determining cost of fixed assets. Disclosure of gross and net values in accounts. Applicable to all enterprises. (Effective date: 01-04-1993) – Gross book value of fixed assets should be disclosed. – Interest on loans relating to acquisition or construction of fixed assets for the period upto completion of construction/ acquisition and other attributable costs may be included. – Basis of selection of fixed assets for revaluation should be disclosed; value of an asset on revaluation should not be more than its realisable value. Increase in the net book value should be credited to Revaluation Reserve but any decrease in value should be charged to P & L account. – Disclosure regarding method adopted for revaluation etc. – Goodwill and other intangibles : Ref AS –26 if applicable.
- 16. AS-11: (Revised) Accounting for effects of changes in Foreign Exchange Rates • What exchange rates to be used and how to account for the changes in exchange rates. • How to account and disclose foreign currency assets, liabilities and fluctuations. Applicable to all enterprises. (Revised in December 1994; Exposure Draft issued for further revision). (Effective date: 01-04-1995) • Scope • Foreign exchange transactions • Translation of financial statements of foreign branches • Extent of applicability to banks • Exposure draft proposes significant changes
- 17. AS-11: (Revised) Accounting for effects of changes in Foreign Exchange Rates • Foreign exchange transactions • Initial recognition – At date-of-transaction rate – Use of average rate • Balance sheet date restatement and treatment of exchange difference – Restate monetary items at closing rate – Restate non-monetary items (other than fixed assets) which are carried in balance sheet at a valuation at exchange rate existing on date of such valuation – Fixed-asset related: adjust carrying amount – Revalued fixed assets – recoverable amount not to be exceeded – Take to P & L if not related to fixed asset
- 18. AS-11: (Revised) Accounting for effects of changes in Foreign Exchange Rates • Translation of financial statements of foreign branches : RBI Guidelines • Assets & liabilities at closing rate • Income & expenses at closing rate • Net exchange loss to be charged to P & L A/c • Net exchange gain to balance sheet (other liabilities) • Disclosure Requirements • Disclosure to be made of amounts of exchange differences • Included in P & L • Included in fixed assets • Un-recognised, in respect of forward exchange contracts. • Disclosure of risk management policy encouraged
- 19. AS-13: Accounting for Investments • Accounting, valuation and disclosure on investment related information. Applicable to all enterprises. (Effective date: 01-04-1995) – Investments are assets held for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. – Current investments and long term investments should be disclosed separately as specified in the statute governing the enterprise. – Cost of investment should include acquisition costs such as brokerage, fees and duties. – If an investment is required in exchange for an asset, the acquisition cost should be determined by reference to the fair value of the asset given up. – Investment properties to be shown as long term investments – Current investments to be carried at lower of the acquisition cost and fair value. Long term investments to be shown at cost but provision should be made for diminution in value, if any. – Quoted and unquoted investments to be shown separately.
- 20. AS-16: Borrowing Costs • Accounting, capitalizing and disclosure of interest etc.Applicable to all enterprises.(Effective date: 01-04-2000) • Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. • Other borrowing costs should be recognised as an expense in the period in which they are incurred.
- 21. AS-17: Segment Reporting • Presenting financial results according to business or geographical segments;applies to listed companies or to organizations with turnover exceeding Rs. 50 crs. per annum. (Effective date: 01-04-2001) • Mandatory in nature in respect of the enterprises whose equity or debt securities are listed on a stock exchange and enterprises whose turnover exceeds Rs 50 crores. • A business or geographical segment, is to be identified as a Reportable Segment, if • its revenue is 10% or more of the total revenue; or • its result is 10 % or more of the combined result o all the segments; or • its segment assets are 10 % or more of the total assets of all segments.
- 22. AS-18: Related Party Disclosures • Disclosure of related parties and transactions with them.(Effective date: 01-04-2001) • Parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial or operating decisions.
- 23. AS-20: Earnings per Share • Relevant only for companies with equity share capital. (Effective date: 01-04-2001) AS- 20 is mandatory in nature in respect of enterprises whose equity shares or potential equity shares are listed on a recognised stock exchange in India. An enterprise which has neither equity shares nor potential equity shares which are so listed but which discloses earnings per share, should calculate and disclose earnings per share in accordance with AS- 20. Every company, which is required to give information under Part IV of the Schedule VI to the Companies Act, 1956, should calculate and disclose earnings per share in accordance with AS- 20, whether its equity shares or potential equity shares are listed on a recognised stock exchange in India or not. An enterprise whose shares are listed, should present basic and diluted earnings per share. Basic earnings per share should be calculated by dividing the net profit by the weighted average number of equity shares outstanding during that period. For calculating diluted earnings per share, the net profit and weighted average number of shares should be adjusted for the effects of all dilutive potential equity shares.
- 24. AS-21: Consolidated Financial Statements • Designed for holding companies and group companies. Applies only if consolidated statements are prepared by the group or parent company. Some concepts are relevant to consolidation of accounts of NGOs.(Effective date: 01.04.2001) – AS - 21 is mandatory only if an enterprise presents consolidated financial statements. In other words, the accounting standard does not mandate an enterprise to present consolidated financial statements but, if the enterprise presents consolidated financial statements for complying with the requirements of any statute or otherwise, it should prepare and present consolidated financial statements in accordance with AS - 21. – However,in terms of Indian Companies Act, Sec 212, a holding company has to attach to its Balance Sheet the B/S and P&L account of each of its subsidiaries. – All listed companies are required to give consolidated statements in respect of subsidiaries in which they hold 51% or more share capital. These statements are prepared as if the group were a single enterprise with one or more divisions.
- 25. AS-21: Consolidated Financial Statements – Control means the ownership, directly or indirectly through subsidiary of more than one-half of the voting power of an enterprise or of the board of directors for economic benefit and not investments in associates and joint ventures. – Financial statements of the parent and its subsidiaries should be combined on line by line basis by adding together like items of assets, liabilities, income and expenses. – Where the carrying amount of the investment in the subsidiary is different from its cost, any excess of the cost is recognised as goodwill and shortfall is treated as a capital reserve. Intra-group balances and intra-group transactions and resulting unrealised profits should be eliminated in full. – Financial statements used in the consolidation should be drawn upto the same reporting date and prepared using uniform accounting policies for like transactions and other events in similar transactions.
- 26. AS- 25: Interim Financial Reporting • This accounting standard does not mandate which enterprises should present interim financial reports, how frequently, or how soon after the end of an interim period but if an enterprise is required or elects to prepare and present an interim financial report, it should comply with this standard. (01– 04 – 2002) • Objective – To prescribe the minimum content of an interim financial report. Interim period is a financial reporting period shorter than a full financial year. An interim financial report should include, at a minimum, the condensed balance sheet, statement of profit and loss, cash flow statement and selected explanatory notes. Interim reports should include these three financial statements as of the end of the current interim period and comparative statements as at the end of the immediately preceding financial year.
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