Accounting Standards
1-15
AS-1
Disclosure of Accounting
Policies
AS 1 - Overview
Objectives
Meaning of Accounting Policies
Considerations in selection of Accounting Policies
Disclosure of Accounting Policies
Fundamental Accounting Assumptions
Deviations in Accounting Assumptions
AS 1 - Disclosure of Accounting Policies -- Objective
O B J E C T I V E
To promote better understanding of FS by establishing through an accounting standard:
the Disclosure of Significant Accounting Policies, and
the Manner of their disclosure
AS 1 - Disclosure of Accounting Policies -- What are Accounting Policies
Accounting Policies refer to:
• Specific accounting principles, and
• Methods adopted by enterprises, in applying these principles in the preparation and presentation of financial statements.
Principles Method
Providing depreciation on an asset to account for loss in value.
Straight Line Method, Written
Down Value basis or any other
appropriate method
AS 1 - Disclosure of Accounting Policies -- Areas where Accounting Policies can differ
Accounting principles and methods differ from one enterprise to another Illustrative list of areas of difference
•Accounting conventions followed
•Basis of Accounting -- Historical or Current cost
•Valuation of fixed assets including revaluation
•Valuation of investments
•Valuation of inventory
AS 1 - Disclosure of Accounting Policies --
Consideration in the selection of Accounting Policies
Primary consideration in selection of accounting policies is that it should reflect a true and fair view
For this purpose, use the canons of :
• Prudence
• Substance over form
• Materiality
AS 1 - Disclosure of Accounting Policies --
Consideration in the selection of Accounting Policies - Prudence
PRUDENCE
Where uncertainty attached to future events,
• anticipate no profits
• provide for all possible losses and liabilities even if amount cannot be
determined with certainty
AS 1 - Disclosure of Accounting Policies --
Consideration in the selection of Accounting Policies - Substance over Form
SUBSTANCE OVER FORM
The accounting treatment and presentation in financial statements
of transactions and events should be governed by their substance
and not merely by the legal form
AS 1 - Disclosure of Accounting Policies --
Consideration in the selection of Accounting Policies - Materiality
MATERIALITY
• FS should disclose all 'material' items,
• Item is regarded material if knowledge of it might influence the decisions of
the user of the financial statements.
AS 1 - Disclosure of Accounting Policies -- Disclosure of Accounting Policies
• All significant accounting policies adopted in the preparation and presentation of FS should be disclosed.
• Such disclosure should form part of the FS
• Should be disclosed in ONE PLACE instead of being scattered.
AS 1 - Disclosure of Accounting Policies --
Disclosure of Accounting Policies (continued)
• Disclose the change in the FS
• Quantify and disclose the impact
• If impact not ascertainable, indicate the fact
Dealing with change in accounting policy
A) Material impact in the current
period
B) Material impact only in the future
period/s
• Disclose the fact of such
change appropriately in the
period in which the change is
adopted.
AS 1 - Disclosure of Accounting Policies -- Fundamental accounting assumptions
Going Concern
Accrual Consistency
AS 1 - Disclosure of Accounting Policies --
Fundamental accounting assumptions - Going concern
• Enterprise normally viewed as a going concern,
• It means continuing in operation for the foreseeable future.
• Assumed that enterprise has no intention/ necessity of liquidation or of curtailing materially the scale of the operations.
• SAP 16 on Going Concern provides guidance on - Operating Indications
- Financial indications - Other indications
on the risk that Going Concern may be questioned
AS 1 - Disclosure of Accounting Policies --
Fundamental accounting assumptions - Consistency
It is assumed that accounting policies are consistent from one period to
another.
AS 1 - Disclosure of Accounting Policies --
Fundamental accounting assumptions - Accrual
Accrual Concept
• Revenues recognised as they are earned
• Costs are recognised when incurred
• Receipt or payment of money has no relevance
• Revenues and costs recorded in the period to which they relate.
AS 1 - Disclosure of Accounting Policies --
Deviations from Fundamental accounting assumptions
If above assumptions followed - No specific disclosure is required.
If above assumptions not followed, the fact should be disclosed
AS-2 (Revised)
Valuation of Inventories
AS 2 (Revised) - Overview
Objectives
Scope
Meaning of Inventory
Measurement of Inventories
Analysis of costs
Net Realisable Value
Disclosure Requirements
AS 2 - Valuation of inventories -- Objective
Big question of determination of the value at which inventories are carried in the FS
Statement deals with
• the determination of such value,
• ascertainment of cost of inventories and
• any write-down thereof to net realisable value
Statement does not deal with :
• WIP under construction contracts, including directly related service contracts (per AS 7)
• WIP arising in the ordinary course of business of service providers;
• Shares, debentures and other financial instruments held as stock-in- trade;
• Producers' inventories of livestock, agricultural and forest products, and mineral oils, ores and gases , where they are measured at net realisable value per industry norms.
AS 2 - Valuation of inventories --
Scope Restrictions
Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
AS 2 - Valuation of inventories --
Meaning of inventory
Measurement = Lower OF COST & NET RELISABLE VALUE
AS 2 - Valuation of inventories -- Measurement of Inventories
NRV
Selling price less costs of completions and costs
to make sale COST
Cost of purchases plus Costs of conversion plus
Other costs
Cost of Purchase includes:
• Purchase price
• Duties and taxes like CST, Customs duties etc
• Freight inwards
• Other expenditure directly attributable to the acquisition.
AS 2 - Valuation of inventories -- Analysis of cost - Cost of purchase
Trade discounts, rebates, duty drawbacks etc
deducted
Duties and taxes excluded if recoverable from
authorities.
Example: MODVAT
Cost of conversion:
• Comprise fixed production overheads and variable production overheads
• Should be allocated on a systematic basis
• FPOH are allocated based on Normal capacity of production
• Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal
circumstances, taking into account the loss of capacity resulting from planned maintenance
• In case of joint products/by-products:
- Allocation should be done on a rational and consistent basis - No specific basis mentioned.
AS 2 - Valuation of inventories --
Analysis of cost - Cost of conversion
AS 2 - Valuation of inventories -- Analysis of cost - Other cost
Include only to the extent incurred in bringing the inventories to their PRESENT LOCATION AND
CONDITION
EXAMPLES
• Costs of designing products for specific customers
• Interest and borrowing
costs only if they meet
the above critieria.
• Abnormal wastages;
• Storage costs, unless necessary in the production process prior to a further production stage;
• Administrative overheads
• Selling and distribution costs
AS 2 - Valuation of inventories --
Exclusions from the cost of inventories
AS 2 - Valuation of inventories -- Cost Formulas
AVERAGE COST METHOD ie FIFO and
Weighted Average SPECIFIC
IDENTIFICATION METHOD
COST FORMULAS
AS 2 - Valuation of inventories --
Cost Formulas - Specific Identification Method
Meaning:
• It means that specific costs are attributed to identified items of inventory.
When to use this formula:
• For items that are segregated for a specific project, whether purchased or produced.
When NOT to use this formula
• When there are large numbers of items of inventory which are ordinarily
interchangeable
AS 2 - Valuation of inventories -- Cost Formulas - Average costs
There are two prescribed methods under Average cost ie
• FIFO method
• Weighted Average Method
FIFO Method
• Assumes that the items of inventory which were
purchased/produced first are consumed/sold first.
• Consequently year end inventory comprise most recently purchased/
produced ones.
Weighted Average Method
• Cost is determined from the WA of the cost of
similar items at beginning of a period and cost of
similar items purchased or produced during the year.
• Can be on a periodic basis like Monthly or shipment- wise etc
AS 2 - Valuation of inventories --
Techniques for the measurement of cost
There are two techniques for the measurement of costs ie
• Standard Cost method
• Retail Method
Standard Cost Method
• Considers Normal levels of consumption of
materials and supplies, labour, efficiency and capacity utilisation.
• Is reviewed and revised regularly.
Retail Method
• For measuring inventories of large numbers of rapidly changing items that have similar margins
• Cost is arrived by marking down sale price at an
appropriate Gross Margin percentage.
AS 2 - Valuation of inventories -- Net Realisable value - Meaning
Definition:
Estimated selling price in the ordinary course of business less
Estimated costs of completion and for making the sale.
Rationale for Write Down to NRV:
• Cost of inventories may not be recoverable if those inventories are - Damaged or
- Have become obsolete, or
- If their selling prices have declined.
• Practice of writing down below cost to NRV ensures that assets are not
carried in excess of realisable value.
AS 2 - Valuation of inventories --
Net Realisable value - Approach to Computation
• An assessment of NRV is made at each balance sheet date.
• Done on an item-by-item basis. In some cases, similar or related items are grouped
• Use the most most reliable evidence available at the time of making the estimate
• Always consider the purpose for which the inventory is held
AS 2 - Valuation of inventories --
Net Realisable value - Approach to Computation (Contd…)
• No - If the finished products in which they will be incorporated are expected to be sold at or above cost.
• However, when
- there has been a decline in the price of materials and
- it is estimated that cost of the finished products will exceed NRV, the materials are written down to net realisable value.
• In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value.
Should Raw Materials be written down to NRV?
• Accounting policies adopted in measuring inventories,
• The cost formula used
• Total carrying amount of inventories with appropriate classification
AS 2 - Valuation of inventories --
Disclosure Requirements
AS-3 (Revised)
Cash Flow Statements
AS 3 (Revised) - Overview
Background
Key definitions
Operating activities - Meaning, Identifications and Reporting
Financing activities - Meaning, Identifications and Reporting
Investing activities - Meaning, Identifications and Reporting
Special cases
Disclosure Requirements
AS 3 - Cash Flow Statements -- Background
• Recommendatory in Nature
• CFS provides information about - historical changes
- in cash and cash equivalents of an enterprise
- by classifying cash flows into operating, investing and financing activities.
• CFS should be presented for each period for which FS are presented.
Cash comprises cash on hand and demand deposits with banks.
AS 3 - Cash Flow Statements -- Key Definitions
Cash equivalents are - short term,
- highly liquid investments
- that are readily convertible into known amounts of cash and - are subject to an insignificant risk of changes in value.
• Investments normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less
• Preference shares acquired shortly before their specified redemption date
are generally Cash Equivalents
Cash flows:
• Defined as inflows and outflows of cash and cash equivalents.
• Exclude movements between items that constitute cash or cash equivalents
AS 3 - Cash Flow Statements -- Key Definitions
Presentation of a Cash Flow Statement:
OPERATING ACTIVITIES
FINANCING ACTIVITIES
INVESTING ACTIVITIES
Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.
AS 3 - Cash Flow Statements --
Cash Flows - Operating activities - Definition
• The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have
generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans and make new investments
without recourse to external sources of financing.
• Helps in forecasting future operating cash flows.
(a) cash receipts from the sale of goods and the rendering of services;
(b) cash receipts from royalties, fees, commissions and other revenue;
(c) cash payments to suppliers for goods and services;
(d) cash payments to and on behalf of employees;
(e) cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits;
(f) cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and
(g) cash receipts and payments relating to futures contracts, forward contracts, option contracts and swap contracts when the contracts are held for dealing or trading purposes.
AS 3 - Cash Flow Statements --
Cash Flows - Operating activities - Indicators
.An enterprise should report cash flows from operating activities using either:
(a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or
(b) the indirect method, whereby net profit or loss is adjusted for the
effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.
AS 3 - Cash Flow Statements --
Cash Flows - Operating activities - Reporting
.The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method and is, therefore, considered more appropriate than the indirect method. Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either:
(a) from the accounting records of the enterprise; or
(b) by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial enterprise) and other items in the statement of profit and loss for:
i) changes during the period in inventories and operating receivables and payables;
ii) other non-cash items; and
iii) other items for which the cash effects are investing or financing cash flows.
AS 3 - Cash Flow Statements --
Cash Flows - Operating activities - Reporting Direct Method
.Under the indirect method, the net cash flow from operating activities is determined by adjusting net profit or loss for the effects of:
(a) changes during the period in inventories and operating receivables and payables;
(b) non-cash items such as depreciation, provisions, deferred taxes, and unrealised foreign exchange gains and losses; and
(c) all other items for which the cash effects are investing or financing cash flows.
Alternatively, the net cash flow from operating activities may be
presented under the indirect method by showing the operating revenues and expenses excluding non-cash items disclosed in the statement of profit and loss and the changes during the period in inventories and operating receivables and payables.
AS 3 - Cash Flow Statements --
Cash Flows - Operating activities - Reporting Indirect Method
Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
AS 3 - Cash Flow Statements --
Cash Flows - Investing activities - Definition
The separate disclosure of cash flows arising from investing
activities is important because the cash flows represent the extent
to which expenditures have been made for resources intended to
generate future income and cash flows.
(a) cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalised research and development costs and self-constructed fixed assets;
(b) cash receipts from disposal of fixed assets (including intangibles);
(c) cash payments to acquire shares, warrants or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held for dealing or trading purposes);
(d) cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interests in joint ventures (other than receipts from those instruments considered to be cash equivalents and those held for dealing or trading purposes);
(e) cash advances and loans made to third parties (other than advances and loans made by a financial enterprise);
(f) cash receipts from the repayment of advances and loans made to third parties (other than advances and loans of a financial enterprise);
(g) cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and (h) cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.
AS 3 - Cash Flow Statements --
Cash Flows - Investing activities - Indicators
Financing activities are activities that result in changes in the size and composition of the owners' capital (including preference share capital in the case of a company) and borrowings of the enterprise.
AS 3 - Cash Flow Statements --
Cash Flows - Financing activities - Definition
The separate disclosure of cash flows arising from financing
activities is important because it is useful in predicting claims
on future cash flows by providers of funds (both capital and
borrowings) to the enterprise.
(a) cash proceeds from issuing shares or other similar instruments;
(b) cash proceeds from issuing debentures, loans, notes, bonds, and other short or long-term borrowings; and
(c) cash repayments of amounts borrowed.
AS 3 - Cash Flow Statements --
Cash Flows - Financing activities - Indicators
.An enterprise should report separately major classes of gross
cash receipts and gross cash payments arising from investing and financing activities, except to the extent that cash flows described in paragraphs 22 and 24 are reported on a net basis.
AS 3 - Cash Flow Statements --
Cash Flows - Reporting of Financing & Investing activities
Cash flows arising from the following operating, investing or financing activities may be reported on a net basis:
(A) cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the
enterprise; and
(a) the acceptance and repayment of demand deposits by a bank;
(b) funds held for customers by an investment enterprise; and
(c) rents collected on behalf of, and paid over to, the owners of properties.
(B) cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short.
. (a) principal amounts relating to credit card customers;
(b) the purchase and sale of investments; and
(c) other short-term borrowings, for example, those which have a maturity period of three months or less.
AS 3 - Cash Flow Statements --
Cash Flows - Reporting - Is ‘Net’ Reporting permitted
Cash flows arising from each of the following activities of a financial enterprise may be reported on a net basis:
(a) cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date;
(b) the placement of deposits with and withdrawal of deposits from other financial enterprises; and
(c) cash advances and loans made to customers and the repayment of those advances and loans.
AS 3 - Cash Flow Statements --
Cash Flows - Reporting - Is ‘Net’ Reporting permitted
(Contd…)
Foreign Currency Cash Flows
.Cash flows arising from transactions in a foreign currency should be recorded in an enterprise's reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the cash flow. A rate that approximates the actual rate may be used if the result is substantially the same as would arise if the rates at the dates of the cash flows were used. The effect of changes in exchange rates on cash and cash equivalents held in a foreign currency should be reported as a separate part of the reconciliation of the changes in cash and cash equivalents during the period.
.Cash flows denominated in foreign currency are reported in a manner consistent with Accounting Standard (AS) 11, Accounting for the Effects of Changes in Foreign Exchange Rates. This permits the use of an exchange rate that approximates the actual rate. For example, a weighted average exchange rate for a period may be used for recording foreign currency transactions.
.Unrealised gains and losses arising from changes in foreign exchange rates are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the cash flow statement in order to reconcile cash and cash equivalents at the beginning and the end of the period. This amount is presented separately from cash flows from operating, investing and financing activities and includes the differences, if any, had those cash flows been reported at the end-of-period exchange rates.
AS 3 - Cash Flow Statements --
Special cases - Foreign Currency Cash Flows
Extraordinary Items
.The cash flows associated with extraordinary items should be classified as arising from operating, investing or financing activities as appropriate and separately disclosed.
.The cash flows associated with extraordinary items are disclosed separately as arising from operating, investing or financing activities in the cash flow statement, to enable users to understand their nature and effect on the present and future cash flows of the enterprise. These disclosures are in addition to the separate disclosures of the nature and amount of extraordinary items required by Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.
AS 3 - Cash Flow Statements --
Special cases - Extraordinary items
• Interest paid and interest and dividends received in the case of a financial enterprise are classified as operating activities.
• In the case of other enterprises, cash flows arising from interest paid should be classified as cash flows from financing activities while
interest and dividends received should be classified as cash flows from investing activities.
• Dividends paid should be classified as cash flows from financing activities.
• The total amount of interest paid during the period is disclosed in the cash flow statement whether it has been recognised as an expense in the statement of profit and loss or capitalised in accordance with
Accounting Standard (AS) 10, Accounting for Fixed Assets.
AS 3 - Cash Flow Statements --
Special cases - Interest and Dividend
• Cash flows arising from taxes on income should be separately disclosed
• classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.
• However, when it is practicable to identify the tax cash flow with an individual transaction that gives rise to cash flows that are classified as investing or financing activities, the tax cash flow is classified as an investing or financing activity as appropriate. When tax cash flow are allocated over more than one class of activity, the total amount of taxes paid is disclosed
AS 3 - Cash Flow Statements --
Special cases - Taxes on Income
Foreign Currency Cash Flows
.Cash flows arising from transactions in a foreign currency should be recorded in an enterprise's reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the cash flow. A rate that approximates the actual rate may be used if the result is substantially the same as would arise if the rates at the dates of the cash flows were used. The effect of changes in exchange rates on cash and cash equivalents held in a foreign currency should be reported as a separate part of the reconciliation of the changes in cash and cash equivalents during the period.
.Cash flows denominated in foreign currency are reported in a manner consistent with Accounting Standard (AS) 11, Accounting for the Effects of Changes in Foreign Exchange Rates. This permits the use of an exchange rate that approximates the actual rate. For example, a weighted average exchange rate for a period may be used for recording foreign currency transactions.
.Unrealised gains and losses arising from changes in foreign exchange rates are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the cash flow statement in order to reconcile cash and cash equivalents at the beginning and the end of the period. This amount is presented separately from cash flows from operating, investing and financing activities and includes the differences, if any, had those cash flows been reported at the end-of-period exchange rates.
AS 3 - Cash Flow Statements --
Special cases - Investments in Subsidiaries, Associates and JV’s
.The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units should be presented separately and classified as investing activities.
.An enterprise should disclose, in aggregate, in respect of both
acquisition and disposal of subsidiaries or other business units during the period each of the following:
(a) the total purchase or disposal consideration; and
(b) the portion of the purchase or disposal consideration discharged by means of cash and cash equivalents.
.The separate presentation of the cash flow effects of acquisitions and disposals of subsidiaries and other business units as single line items helps to distinguish those cash flows from other cash flows. The cash flow effects of disposals are not deducted from those of acquisitions.
AS 3 - Cash Flow Statements --
Special cases - Acquisitions and Disposals of Subsidiaries
and Other Business Units
Non-cash Transactions
.Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Such transactions should be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities.
.Many investing and financing activities do not have a direct impact on
current cash flows although they do affect the capital and asset structure of an enterprise. The exclusion of non-cash transactions from the cash flow statement is consistent with the objective of a cash flow statement as these items do not involve cash flows in the current period. Examples of non-cash transactions are:
(a) the acquisition of assets by assuming directly related liabilities;
(b) the acquisition of an enterprise by means of issue of shares; and (c) the conversion of debt to equity.
AS 3 - Cash Flow Statements --
Special cases - Non cash transactions
.An enterprise should disclose the components of cash and cash equivalents and should present a reconciliation of the amounts in its cash flow statement with the equivalent items reported in the balance sheet.
.An enterprise should disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the enterprise that are not available for use by it.
AS 3 - Cash Flow Statements --
Disclosure requirements
AS-4 (Revised)
Contingencies, and Events occurring after the Balance
Sheet date
AS 4 (Revised) - Overview
Scope
Meaning of Contingencies
Accounting of Contingent loss/Gain
Disclosure of Contingencies
Meaning of Events Occuring after BS date
Dividends
Disclosure requirements
AS - Contingencies, and Events occurring after the Balance Sheets date --
Scope
DEALS WITH:
(a) contingencies, and
(b) events occurring after the balance sheet date.
DOES NOT DEAL WITH:
(a) Liabilities of life assurance and general insurance enterprises arising from policies issued;
(b) Obligations under retirement benefit plans; and
(c) Commitments arising from long-term lease contracts.
AS - Contingencies, and Events occurring after the Balance Sheets date --
Meaning of contingencies
DEFINITION:
A contingency is
• a condition or situation,
• the ultimate outcome of which, gain or loss,
• will be known or determined only on the occurrence, or non-occurrence, of
• one or more uncertain future events.
AS - Contingencies, and Events occurring after the Balance Sheets date --
Accounting Treatment of Contingent Losses
• If the expected outcome of the contingency indicates a likely loss, it is prudent to provide for that loss in the financial statements.
• If it is difficult to estimate the loss, then, disclosure is made of the existence and nature of the contingency.
• If contingent liability is matched by a related counter-claim or claim
against a third party, provision is determined net provided no significant uncertainty as to its measurability or collectability of the counter-claim exists. Disclosures regarding the nature and gross amount of the
contingent liability is also made.
• Existence and amount of guarantees, obligations arising from
discounted bills of exchange etc are generally disclosed in FS by way of note, even though the possibility of loss is remote.
• Provisions for contingencies are not made in respect of general or
unspecified business risks since they do not relate to conditions or
situations existing at the balance sheet date.
AS - Contingencies, and Events occurring after the Balance Sheets date --
Accounting Treatment of contingent gains
• Governed by the concept of Prudence
• NOT RECOGNISED in FS since their recognition may result in the
recognition of revenue which may never be realised.
AS - Contingencies, and Events occurring after the Balance Sheets date --
Amounts at which Contingencies are disclosed
The amount at which a contingency is stated in the financial statements is based on the information which is available at the date on which the financial statements are approved. Events occurring after the balance sheet date that indicate that an asset may have been impaired, or that a liability may have existed, at the balance sheet date are, therefore, taken into account in
identifying contingencies and in determining the amounts at which such contingencies are included in financial statements.
7.2 In some cases, each contingency can be separately identified, and the special circumstances of each situation considered in the determination of the amount of the contingency. A substantial legal claim against the
enterprise may represent such a contingency. Among the factors taken into account by management in evaluating such a contingency are the progress of the claim at the date on which the financial statements are approved, the opinions, wherever necessary, of legal experts or other advisers, the
experience of the enterprise in similar cases and the experience of other enterprises in similar situations.
7.3 If the uncertainties which created a contingency in respect of an individual transaction are common to a large number of similar transactions, then the amount of the contingency need not be individually determined, but may be based on the group of similar transactions. An example of such contingencies may be the estimated uncollectable portion of accounts receivable. Another example of such contingencies may be the warranties for products sold.
These costs are usually incurred frequently and experience provides a means by which the amount of the liability or loss can be estimated with
reasonable precision although the particular transactions that may result in a
liability or a loss are not identified. Provision for these costs results in their
recognition in the same accounting period in which the related transactions
took place.
AS - Contingencies, and Events occurring after the Balance Sheets date --
Meaning of events occurring after the Balance Sheet date
Events occurring after the balance sheet date are
• those significant events,
• both favourable and unfavourable,
• that occur between the balance sheet date and the date on which the financial statements are approved.
Two types of events can be identified:
(a) those which provide further evidence of conditions that existed at the balance sheet date; and
(b) those which are indicative of conditions that arose subsequent to the
balance sheet date.
AS - Contingencies, and Events occurring after the Balance Sheets date --
Dividends
The standard specifically requires dividend to be accounted to the period
it pertains even if proposed or declared after the balance sheet date but before
approval of the FS.
AS - Contingencies, and Events occurring after the Balance Sheets date --
Disclosure of contingencies
• Nature of the contingency;
• Uncertainties which may affect the future outcome;
• An estimate of the financial effect, or a statement that such an estimate cannot be made.
Example
AS - Contingencies, and Events occurring after the Balance Sheets date --
Disclosure of events occurring after the balance sheet date
• Nature of the event;
• An estimate of the financial effect, or a statement that such an estimate cannot be made.
Example
AS-5 (Revised)
Net Profit or Loss for the period, Prior Period items and
Changes in Accounting Policies
AS 5 (Revised) - Overview
Objectives
Scope
Net profit or loss for the period
Extraordinary items
Ordinary items requiring disclosure
Prior Period items
Change in Accounting estimate
Change in Accounting Policy
AS 5 - Net Profit or Loss for the period, Prior Period items and Changes in Accounting Policies --
Objectives
• To prescribe the classification and disclosure of certain items in the P&L account so that all enterprises prepare and present such a
statement on a uniform basis.
• Requires the classification and disclosure of extraordinary and prior period items, and the disclosure of certain items within profit or loss from ordinary activities.
• Specifies the accounting treatment for changes in accounting estimates
• Specifies the disclosures to be made in the financial statements
regarding changes in accounting policies.
DEALS WITH
• Presenting profit or loss from ordinary activities;
• Profit amd loss from extraordinary items;
• Prior period items in the P&L account
• Accounting for changes in accounting estimates, and
• Disclosure of changes in accounting policies.
DOES NOT DEAL WITH
• Tax implications of extraordinary items, prior period items, changes in accounting estimates, and changes in accounting policies for which appropriate adjustments will have to be made depending on the circumstances.
AS 5 - Net Profit or Loss for the period, Prior Period items and Changes in Accounting Policies --
Scope
AS 5 - Net Profit or loss for the period, prior period items and changes in Accounting Policies --
Net Profit or loss for the period
.All items of income and expense which are recognised in a period should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise.
The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the statement of profit and loss:
profit or loss from ordinary activities; and
extraordinary items.
AS 5 - Net Profit or loss for the period, prior period items and changes in Accounting Policies --
Extraordinary items
The nature and the amount of each extraordinary item should be
separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived.
.Examples of events or transactions that generally give rise to extraordinary items for most enterprises are:
– attachment of property of the enterprise; or
– an earthquake.
AS 5 - Net Profit or loss for the period, prior period items and changes in Accounting Policies --
Ordinary activities requiring special disclosure
Ordinary activities are any activities which are undertaken by an enterprise as part of its business and such related activities in which the enterprise engages in furtherance of, incidental to, or arising from, these activities.
.When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items
should be disclosed separately.
(a) the write-down of inventories to net realisable value as well as the reversal of such write-downs;
(b) a restructuring of the activities of an enterprise and the reversal of any provisions for the costs of restructuring;
(c) disposals of items of fixed assets;
AS 5 - Net Profit or loss for the period, Prior Period Items and changes in Accounting Policies --
Prior Period Items - Meaning
Meaning
Income or expenses which arise in the current period as a result of errors or
omissions in the preparation of the financial statements of one or more prior
periods.
AS 5 - Net Profit or loss for the period, Prior Period Items and changes in Accounting Policies --
Prior Period Items - Disclosures
• Should be separately disclosed in the P&L account
• Alternative approach is to show such items in the P&L account after
determination of current net profit or loss so that their impact on the
current profit or loss can be more clearly perceived.
AS 5 - Net Profit or loss for the period, Prior Period Items and changes in Accounting Policies --
Accounting estimate - Meaning .As a result of the uncertainties inherent in business activities, many financial statement items cannot be measured with precision but can only be estimated. The estimation process involves judgments based on the latest information available. Estimates may be required, for example, of bad debts, inventory obsolescence or the useful lives of depreciable assets. The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.
.An estimate may have to be revised if changes occur regarding the circumstances on which the estimate was based, or as a result of new information, more experience or subsequent developments. The revision of the estimate, by its nature, does not bring the adjustment within the definitions of an extraordinary item or a prior period item.
.Sometimes, it is difficult to distinguish between a change in an
accounting policy and a change in an accounting estimate. In such
cases, the change is treated as a change in an accounting estimate,
with appropriate disclosure.
AS 5 - Net Profit or loss for the period, Prior Period Items and changes in Accounting Policies --
Change in Accounting estimates - Disclosures
.The effect of a change in an accounting estimate should be included in the determination of net profit or loss in:
(a) the period of the change, if the change affects the period only; or (b) the period of the change and future periods, if the change affects both.
.The effect of a change in an accounting estimate should be classified using the same classification in the statement of profit and loss as was used previously for the estimate.
The nature and amount of a change in an accounting estimate which
has a material effect in the current period, or which is expected to
have a material effect in subsequent periods, should be disclosed. If
it is impracticable to quantify the amount, this fact should be
disclosed.
Accounting Policies refer to:
• Specific accounting principles, and
• Methods adopted by enterprises, in applying these principles in the preparation and presentation of financial statements.
Principles Method
Providing depreciation on an asset to account for loss in value.
Straight Line Method, Written Down Value basis or any other appropriate method
AS 5 - Net Profit or loss for the period, Prior Period Items and changes in Accounting Policies --
Meaning of Accounting Policies
.A change in an accounting policy should be made only if the adoption of a different accounting policy is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise.
AS 5 - Net Profit or loss for the period, Prior Period Items and changes in Accounting Policies --
Change in Accounting Policies - Circumstances
Any change in an accounting policy which has a material effect should be disclosed. The impact of, and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such change is made, to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.
AS 5 - Net Profit or loss for the period, Prior Period Items and changes in Accounting Policies --
Change in Accounting Policies - Disclosures
Limited Revision:
•New para introduced
•Comes in to effect in respect of accounting periods commencing on or after 1.4.2001.
•A change in accounting policy consequent upon the adoption of an Accounting Standard should be accounted for in accordance with the specific transitional provisions, if any, contained in that
Accounting Standard. However, disclosures required by paragraph 32 of this Statement should be made unless the transitional
provisions of any other Accounting Standard require alternative disclosures in this regard. ”
AS 5 - Net Profit or loss for the period, Prior Period Items and changes in Accounting Policies --
Change in Accounting Policies - Disclosures (Contd…)
AS-6 (Revised)
Depreciation Accounting
AS 6(Revised) - Overview
Scope
Meaning of Depreciation and Depreciable Assets
Computation of Depreciation
Change in Method
Change in Measure
Various accounting cases
Disclosure Requirements
AS 6 - Depreciation Accounting -- Scope
AS - 6 deals with depreciation accounting and applies to all depreciable assets, except the following items to which special considerations apply: - (i) forests, plantations and similar regenerative natural resources;
(ii) wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non-regenerative resources;
(iii) expenditure on research and development;
(iv) goodwill;
(v) live stock.
This statement also does not apply to land unless it has a limited useful
life for the enterprise.
AS 6 - Depreciation Accounting -- Meaning of depreciation
Depreciation is - a measure of
- the wearing out, consumption or other loss of value of - a depreciable asset
- arising from use, effluxion of time or technological obsolescence and market changes.
Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset.
Depreciation includes amortisation of assets whose useful life is
predetermined
AS 6 - Depreciation Accounting -- Meaning of depreciable assets
Depreciable assets are assets which
(i) are expected to be used during more than one accounting period; and
(ii) have a limited useful life; and
(iii) held for use in the production or supply of goods and services, for rental to others, or for administrative purposes
(iv) and not for the purpose of sale in the ordinary course of business.
AS 6 - Depreciation Accounting -- Determination of depreciation
(1) Historical cost or other amount substituted for the Historical cost
(2) Expected useful life
(3) Estimated residual value.
Based on
Three Variables
AS 6 - Depreciation Accounting --
Computation of depreciation - Historical cost
Historical cost of a depreciable asset represents - its money outlay or its equivalent
- in connection with its acquisition, installation and commissioning - as well as for additions to or improvement thereof.
The historical cost of a depreciable asset may undergo subsequent changes arising as a result of:
- change in long term liability on account of exchange fluctuations, - price adjustments,
- changes in duties or similar factors.
AS 6 - Depreciation Accounting --
Computation of depreciation - Useful life
Useful life of a depreciable asset is estimated after considering :
• expected physical wear and tear;
• obsolescence;
• legal or other limits on the use of the asset.
AS 6 - Depreciation Accounting --
Computation of depreciation - Residual Value
• It is a matter of judgement
• Residual value is estimated at the time of acquisition/installation, or at the time of subsequent revaluation of the asset.
• Guidance can be taken from realisable value of similar assets which have reached the end of their useful lives and have operated under conditions similar to those in which the asset will be used.
• If such value is considered as insignificant, it is normally regarded as nil.
AS 6 - Depreciation Accounting --
Selection of a method of depreciation
The method of depreciation should be such that:
• Depreciable amount is allocated on a systematic basis to each accounting period during the useful life of the asset.
• The depreciation method is applied consistently from period to period.
• Change of method is made only when:
- the new method is required by statute or
- for compliance with an accounting standard or
- it result in a more appropriate preparation or presentation of the FS
AS 6 - Depreciation Accounting -- Various Methods of depreciation
Method Formula Effect on FS
Straight Line Method (SLM)
(Cost - Expected Relaisable Value) / Estimated Useful Life
Charge is equally spread over the useful life of the asset
Reducing Balance Method (WDV)
Net carrying amount of the fixed asset * % charge
Higher depreciation in the initial years
Sum of Digits Method
Cost * (Remianing life of assets, including current year / Sum of all digits of life of assets in years)
Higher depreciation in the initial years
Units of Production
Cost * ( Total output for the year / Expected total output over the life of the asset)
Charge to revenue is in line with usage of the asset
Other methods like Annuity Method, Depreciation Fund method, Machine
Hour rate method etc are rarely used
AS 6 - Depreciation Accounting --
Accounting for Change in Method of depreciation
Whenever there is a change in method of depreciation:
Computation
• Depreciation should be recalculated in accordance with the new method
• It is computed retrospectively from the date of the asset coming into use.
Accounting for difference:
• The deficiency or surplus is adjusted in the year of change of method
• Deficiency is expenses in the P&L account and surplus credited to P&L account
Disclosure:
• Such a change should be treated as a change in accounting policy and its
effect should be quantified and disclosed.
AS 6 - Depreciation Accounting --
Change in Measurement of Depreciable amount
Five cases can be envisaged:
• Change in Historical cost
• Historical cost substituted due to Revaluation
• Change in Estimated useful life
• Change in estimated residual value
• addition or extension which becomes an integral part of the existing asset
AS 6 - Depreciation Accounting -- Case I - Change in Historical cost
• Change in Historical cost can be caused due to foreign exchange fluctuation on liability towards the asset etc
• The unamortised amount should be determined and written off over the
residual life of the asset
AS 6 - Depreciation Accounting --
Case II - Historical cost substituted due to Revaluation
• Depreciation should be based on the revalued amount juxtaposed to estimated remaining useful life of revalued assets
• Guidance Note of ICAI suggests that it is preferrable to charge
depreciation on the revalued amount and transfer the portion pertaining
to revalued amount alone to Revaluation Reserve account.
AS 6 - Depreciation Accounting --
Case III - Change in estimated useful life
• The useful lives of major depreciable assets or classes of depreciable assets may be reviewed periodically.
• Where there is a revision of the estimated useful life of an asset, the
unamortised depreciable amount should be charged over the revised
remaining useful life.
AS 6 - Depreciation Accounting --
Case IV - Change in estimated residual value
Whenver there is a change in the estimate of the residual value that is expected to be realised at the end of the estiamted useful life,
• The unamortised amount should be charged to revenue over the remaining
useful life.
• Ascertain remaining unamortised amount including incremental cost (say X)
• Calculate the remaining useful life of the asset (say Y)
• Depreciate X over Y
• Determine the incremental unamortised amount (say A)
• Determine its useful life (say B)
• Amortise A over B Addition/Extension is an integral
part of the existing asset
Addition/Extension results in an asset having a separate identity can be used ever after the original asset
is disposed
AS 6 - Depreciation Accounting --
Case V - Additions / Extensions
AS 6 - Depreciation Accounting -- Disclosure requirements
(A) Disclosures in the FS:
(i) the historical cost or other amount substituted for historical cost of each class of depreciable assets;
(ii) total depreciation for the period for each class of assets; and (iii) the related accumulated depreciation.
(B) Disclosure in Accounting Policies:
(i) depreciation methods used; and
(ii) depreciation rates or the useful lives of the assets, if they are different
from the principal rates specified in the statute governing the enterprise.
AS 6 - Depreciation Accounting -- Disclosure requirements
Asset discarded/disposed/destroyed
The net surplus or deficiency, if material, should be disclosed separately
Assets revalued
If Revaluation has a material effect on the amount of depreciation, the
same should be disclosed separately in the year in which revaluation is
carried out.
AS-7 (New)
Accounting for Construction
Contracts
AS 7 (Revised) - Overview
Meaning of construction contracts
Types
Treatment of costs
Revenue Recognition - PCM and CCM
Provision for foreseeable losses
