Accounting Standard 1 – Disclosure of Accounting
Policies
Ø Standard
refers to disclosure of significant accounting policies followed in preparing
and presenting financial statements.
Ø Fundamental
accounting assumptions – going concern, consistency and accrual. If these are
not followed, fact to be disclosed.
Ø lprudence,
substance over form and materiality.
Ø All
significant policies.
Ø Any
change in accounting policies having a material effect in the current period or
future periods to be disclosed. Amount to be disclosed. Where such amount is
not ascertainable, the fact should be indicated.
Accounting Standard 2 –
Valuation of Inventories
Ø Not
applicable to WIP under construction contracts, WIP of service providers,
shares, debentures and financial instruments held as stock in trade, producers’
inventories of livestock, agricultural and forest products and mineral oils,
ores and gases.
Ø Inventories
are assets held for sale in ordinary course of business, in the process of
production of such sale, or in the form of materials to be consumed in
production process or rendering of services.
Ø Inventories
do not include machinery spares which can be used with an item of fixed asset
and whose use is irregular. Such spares are to be capitalised in accordance
with AS10.
Ø Cost
of inventories should comprise of all costs of purchase, costs of conversion
and other costs incurred in bringing the inventories to their present location
and condition.
Ø Exclusions
from cost of inventories: abnormal wastage, storage costs, administrative overheads
and selling & distribution costs.
Ø Inventories
should be valued at lower of cost and net realisable value. Cost is determined
on FIFO basis or weighted average basis. Finished goods and WIP includes an
allocation of fixed and variable production overheads.
Ø Net
realizable value is the estimated selling price less the estimated costs of
completion and estimated costs necessary to make the sale. An assessment is
made of net realisable value at each balance sheet date.
Disclosures:
Ø Accounting
policies adopted in measuring inventories including the cost formula used.
Ø The
total carrying amount of inventories and its classification into raw materials
and components, work in progress, finished goods, stores and spares and loose
tools.
Accounting Standard 4 –
Contingencies and events occurring after the balance sheet date
Ø Contingency
is a condition or situation the ultimate outcome of which will be known or
determined only on the occurrence or non-occurrence of uncertain future events.
Ø 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.
Ø Contingent
loss should be provided for by a charge to P & L A/c if it is probable that
future events will confirm that an asset has been impaired or a liability has
been incurred as at the balance sheet date and a reasonable estimate of the
amount of loss can be made.
Ø Existence
of a contingent loss should be disclosed in the financial statements if above
conditions are not met, unless the possibility of a loss is remote.
Ø Contingent
gains if any, should not be recognised in the financial statements.
Ø Material
changes in assets and liabilities due to events occurring after the balance
sheet date that relate to conditions existing as at the balance sheet date
should be accounted or disclosed.
Ø Dividends
for the period which are proposed or declared after the balance sheet date
should be adjusted.
Ø Material
events occurring after the balance sheet date affecting the going concern
assumption and financial position be appropriately dealt with in the accounts.
Ø Disclosures:
Ø Events
occurring after the balance sheet date and an estimate of the financial effect
or a statement that such estimate cannot be made.
Accounting Standard 5 –
Net Profit/ Loss for the period, Prior period items and changes in accounting
policies
Ø All
items of income and expenses, which are recognised in a period, should be
included in determination of net profit or loss for the period unless an
accounting standard required or permits otherwise.
Ø The
nature and amount of each prior period and extraordinary items should be
separately disclosed in a manner that their impact on current profit or loss
can be perceived. Extraordinary items should be disclosed in the profit and
loss account as a part of net profit/loss for the period.
Ø Accounting
policy may be changed only if required by statute or for compliance with an
accounting standard or if the change would result in appropriate presentation
in the financial statements.
Ø Any
change in an accounting policy, which has a material effect, should be
disclosed. The impact and adjustment arising out of material change should be
disclosed in the period in which such change is made. If it is impracticable to
quantify the amount, this fact should be disclosed.
+Accounting Standard 6 –
Depreciation Accounting
Ø Not
applicable to depreciation in respect of forests, plantations and similar
regenerative natural resources, wasting assets including expenditure on
exploration and extraction of minerals, oils, natural gas and similar
non-regenerative resources, expenditure on research and development, goodwill
and livestock.
Ø Depreciation
is allocated so as to charge a fair proportion of the depreciable amount in
each accounting period over the expected useful life of asset.
Ø Useful life may be
reviewed periodically after taking into consideration the expected physical
wear and tear, obsolescence and legal or other limits on the use of the asset.
Ø Basis for
providing depreciation must be consistently followed and disclosed. Any change
to be quantified and disclosed.
Ø In case of
addition or extension to an existing asset, depreciation is to be provided on
the adjusted figure prospectively over the residual life of the asset.
Ø Revision
in the method of depreciation should be made from the date of use. Change in
the method of charging depreciation is a change in accounting policy and its
effect should be quantified and disclosed.
Ø Where
historical cost undergoes a change due to price adjustments etc, the
depreciation on the revised unamortised amount should be provided over the
balance useful life of the asset.
Ø On
revaluation of assets, depreciation should be based on the revalued amount over
the balance useful life. In case the revaluation has a material effect on the
amount of depreciation, the same should be disclosed in the year in which
revaluation is carried out.
Ø Deficiency
or surplus in case of disposal, destruction, demolition etc should be disclosed
separately, if material.
Ø Disclosures:
Ø Historical
cost or amount substituted for historical cost, depreciation for the year and
accumulated depreciation.
Ø Depreciation
method used and if rates applied are different from the rates specified in the
governing statute then the rates and useful life are to be disclosed.
Accounting Standard 7 –
Accounting for Construction Contracts
Ø Applicable
for construction contracts which may be for construction of single/combination
of interrelated or interdependent assets.
Ø In
a contract covering a number of assets, each asset is treated as a separate
construction contract when there are:
Ø separate
proposal;
Ø each
asset is subject to separate negotiations and the contractor and customer is
able to accept/reject that part of the contract;
Ø costs
and revenues of each asset can be identified.
Ø Contract
revenue and contract costs should be recognised, when outcome of the contract
can be estimated reliably upto the stage of completion at the reporting date.
Ø In
fixed price contract, the outcome can be estimated reliably when all the
following conditions are satisfied;
Ø total
contract revenue can be measured reliably;
Ø it
is probable that economic benefits associated with the contract will flow to
the enterprise;
Ø both
the contract cost to complete and the stage of completion can be measured
reliably at the reporting date; and
Ø contract
costs can be clearly identified and measured reliably so that actual contract
costs incurred can be compared with prior estimates.
Ø In
cost plus contracts the outcome can be estimated reliably when all the
following conditions are satisfied:
Ø it
is probable that the economic benefits associated with the contract will flow
to the enterprise; and
Ø contract
costs whether reimbursable or not can be clearly identified and measured
realiably.
Ø Contract
revenue comprises of:
Ø the
initial amount of revenue agreed in the contract; and
Ø variations
in contract work, claims and incentive payments that will probably result in
revenue and are capable of being reliably measured.
Ø When
outcome of a contract cannot be estimated reliably;
Ø revenue
should be recognised only to the extent of contract costs recovery of which is
probable;
Ø contract
cost should be recognised as an expense in the period in which they are
incurred; and
Ø an
expected loss should be recognised as expense.
Ø When
it is probable that contract costs will exceed total contract revenue, the
expected loss should be recognised as an expense immediately.
Ø Disclosures:
Ø contract
revenue recognised in the period;
Ø method
used to determine contract revenue recognised in the period; and
Ø methods
used to determine the stage of completion of contracts in progress.
Ø For
contracts in progress an enterprise should disclose:
Ø the
aggregate amount of costs incurred and recognised profits (less recognised
losses) up to the reporting date;.
Ø amount
of advances received; and
Ø amount
of retention
Ø An
enterprise should present:
Ø gross
amount due from customers for contract work as an asset; and
Ø the
gross amount due to customers for contract work as a liability.
Accounting Standard 9 –
Revenue Recognition
Ø Standard
does not deal with revenue arising from construction contracts, hire-purchase
and lease agreements, government grants and other similar subsidies and revenue
of insurance companies from insurance contracts.
Ø Revenue
from sale and services should be recognised on sale of
goods or rendering of services
a) If
collection is reasonably certain; and b) when risks and rewards of
ownership are transferred to the buyer and c) when effective control of the seller as the owner is lost.
Ø In
case of rendering of services, revenue must be recognised either on completed
contract method or on proportionate completion method by relating the revenue
with the work accomplished and certainity of consideration receivable.
Ø Interest
is recognised on time basis, royalties on accrual basis and dividend when
owner’s right to receive payment is established.
Ø Disclose
circumstances in which revenue recognition has been postponed pending
significant uncertainties.
Accounting Standard 10 –
Accounting for Fixed Assets
Ø Fixed
asset is an asset held for producing or providing goods and/or services and is
not held for sale in the normal course of the business.
Ø Cost
to include purchase price and attributable costs of bringing assets to its
working condition for the intended use. It includes financing cost for the
period upto the date of readiness for use.
n
Self constructed assets are to be capitalised at costs that are specifically related to the
asset and those which are allocable to the specific asset.
n
Fixed asset acquired in exchange or part
exchange should be recorded at fair market value or net book
value of asset given up adjusted for balancing payment, cash receipt
etc. Fair market value is determined with reference to asset given up or asset acquired.
n
Revaluation, if any, should be for class of
assets and not an individual asset. Basis of revaluation should be disclosed.
Increase in value on revaluation be credited to revaluation reserve while the
decrease should be charged to P&L A/c.
n
Goodwill
should be accounted only when
paid for.
n
Assets should be eliminated from books on
disposal/when of no utility value.
n
Profit/Loss on disposal of assets should be
recognised in the P&L statement.
n
Fixed assets acquired on hire purchase should be
recorded at their cash value, which if not readily
available, should be calculated by assuming an appropriate rate of interest.
n
Where several fixed assets are purchased for a
consolidated price, the consideration should be apportioned to the various
assets on a fair basis as determined by competent valuers.
Disclosures:
a) Gross
and net book value of assets at the beginning and end of an accounting period
showing additions, disposals, acquisitions and other movements;
a) Expenditure
incurred on account of fixed assets in the course of construction or
acquisition.
Accounting Standard 11 –
The effect of changes in Foreign Exchange Rates
n
Standard should be applied in accounting for
transactions in foreign currency, translating the financial statements of
foreign operations and accounting of forward exchange contract.
n
Initial recognition of a foreign currency
transaction shall be by applying the foreign currency exchange rate as on the
date of the transaction. In case of voluminous transactions a weekly or a
monthly average rate is permitted, if fluctuation during the period is not
significant.
n
At each balance sheet date, foreign currency
monetary items shall be reported at the closing exchange rates unless there are
restrictions on remittances. Such items should be accounted at the amount at
which it is likely to be realised in reporting currency.
n
Non monetary items which are carried at
historical cost shall be reported at the exchange rate on the date of
transaction. Non monetary items which are carried at fair value shall be
reported at the exchange rate that existed when the value was determined.
n
Exchange difference arising on settlement of
monetary items or on restatement of monetary items on each balance sheet date shall
be recognised as expense or income in the period in which they arise.
n
Exchange difference arising on monetary items
which in substance is net investment in a non integral foreign operation (long
term loans) shall be credited to foreign currency translation reserve and
recognised as income or expense at the time of disposal of net investment.
n
The financial statements of an integral foreign
operation shall be translated as if the transactions of the foreign operation
had been those of the reporting enterprise; i.e, it is initially to be
accounted at the exchange rate prevailing on the date of transaction.
n
For incorporation of non integral foreign
operations:
a) both
monetary and non monetary assets and liabilities should be translated at the
closing rate as on the date of the balance sheet date;
b) the
income and expense should be translated at the exchange rates at the date of
transactions; and
n
The resulting exchange differences should be
accumulated in foreign currency translation reserve until the disposal on net
investment. Any goodwill or capital reserve on acquisition of non-integral
financial operation is translated at the closing rate.
n
In consolidated financial statement of the
reporting enterprise, exchange difference arising on intra group monetary items
continues to be recognised as income or expense, unless the same is in
substance an enterprise’s net investment in non integral foreign operation.
n
Exchange difference arising on translation shall
be considered for deferred tax in accordance with AS22.
n
Forward exchange contracts not intended for
trading or speculation purposes – the premium or discount arising at the time
of inception of the forward contract should be amortised as expense or income
over the life of the contract. Exchange differences on forward exchange
contracts should be recognised in the P&L A/c in the reporting period in
which there is a change in the exchange rates.
n
Exchange difference on such contracts is the
difference between exchange rate at the reporting date and exchange difference
at the date of inception of the contract for the underlying currency .
n
Profit or loss arising on renewal or
cancellation of the forward contract should be recognised as income or expense
for the period.
n
Gain or loss on forward exchange contract intended
for trading or speculation should be recognised in the profit and loss account
for the period which is computed with reference to the difference between
forward rate on the reporting date for the remaining maturity period of the
contract and the contracted forward rate. This means that the forward contract
is marked to market.
Accounting Standard 12 –
Accounting for Government Grants
n
Grants can be in cash or in kind and may carry
certain conditions to be complied.
n
Grants should not be recognised unless
reasonably assured to be realised and the enterprise complies with the
conditions attached to the grant.
n
Grants by way of promoters contribution is to be
credited to capital reserve and considered as part of shareholders funds
n
Grants towards specific assets should be
deducted from its gross value. Alternatively, it can be treated as deferred
income in the P&L A/c on rational basis over the useful life of the
depreciable asset.
n
Grants related to non-depreciable assets should
be credited to capital reserve unless it stipulates fulfilment of certain
conditions. In the later case the grant should be credited to the P&L A/c
over a reasonable period and the deferred income balance shown separately in
the financial statements.
n
Grants in the form of non-monetary assets, given
at concessional rates, shall be accounted at their acquisition cost. Assets
given free of cost be recorded at nominal value.
n
Grants of revenue nature to be recognised in the
P&L A/c over the period to match with the related cost, which are intended
to be compensated. Such grants can be treated as other income or can be reduced
from related expense.
n
Grants receivable as compensation for
losses/expenses incurred should be recognised and disclosed in P&L A/c in
the year it is receivable and shown as extraordinary item, if material in
amount.
n
Grants when become refundable be shown as
extraordinary item. Revenue grants when refundable should be first adjusted
against unamortised deferred credit balance of the grant and the balance should
be charged to the P&L A/c.
n
Grants against specific assets on becoming
refundable are recorded by increasing the value of the respective asset or by
reducing capital reserve/deferred income balance of the grant as applicable.
Any increase in the value of the asset should be depreciated prospectively over
the remaining useful life of the asset.
Disclosures:
a) accounting
policy adopted for grants including method of presentation in the financial
statements;
b) Nature
and extent of government grants recognised in the financial statements,
including grants of non-monetary assets given at a concession rate or free of
cost.
Accounting Standard 13 – Accounting for Investments
n
Current investments and long term investments
should be disclosed distinctly in the financial statements with further
sub-classification into government or trust securities, shares, debentures or
bonds, investment properties, others unless it is required to be classified in
other manner as per statute.
n
Investment properties should be accounted for as
long term investments.
n
Cost of investments should include acquisition
charges including brokerage, fees and duties.
n
If an investment is acquired by issue of
shares/securities or in exchange of an asset, the cost of the investment is the fair value of the securities
issued or the assets given up. Acquisition cost may be determined
considering the fair value of the investments acquired.
n
Current investments should be carried at the lower of cost and fair value determined either on an
individual investment basis or by category of investment but not on global
basis.
n
Long term investments should be carried at cost. Provision for decline (other than
temporary) should be made for each investment individually.
n
Changes in the carrying amount and the difference between the carrying amount and
the net proceeds on disposal should be charged or credited to the P&L A/c.
Disclosures:
a) accounting
policy adopted;
b) classification
of investments;
c) Interest,
dividends (showing separately dividends from subsidiary companies), and rentals
on investment showing separately such income from long-term and current
investments.
d) profit/loss
on disposal and changes in carrying amount of such investments;
e) aggregate
amount of quoted and unquoted investments together with aggregate market value
of quoted investments.
f) Significant
restrictions on right of ownership, realisability of investments or the
remittance of income and proceeds of disposal.
Accounting Standard 14 – Accounting for
Amalgamations
n
Amalgamations in the nature of merger should be
accounted for under the pooling of interest method and in the nature of
purchase it should be accounted for under the purchase method.
Under the pooling of interest method:
a) All
assets, liabilities and reserves of the transferor company should be recorded
at existing carrying amount and in the same form as it was appearing in the
books of the transferor.
b) Shareholders
holding not less than 90% of the
face value of the equity shares become equity shareholders of the transferee
company by virtue of amalgamation.
c) The
balance of the Profit and Loss Account of the transferee company should be
aggregated with the corresponding balance of the transferee company or
transferred to the general reserve if any.
d) Difference
between the amount recorded as share capital issued and the amount of capital
of the transferor company should be adjusted in reserves.
e) In
case of conflicting accounting policies, a uniform policy should be adopted on
amalgamation. Effect on financial statement of such change in policy should be
reported as per AS5.
n
Under
purchase method:
a) all
assets and liabilities of the transferor company be recorded at their existing
carrying amount or alternatively the consideration
should be allocated to individual identifiable assets and liabilities on
the basis of fair values at the date of amalgamation.
b) The
reserves of the transferor company shall lose its identity.
c) The
excess or shortfall of consideration over the value of net assets should be
recognised as goodwill or capital reserve.
d) The
goodwill arising on amalgamation should be amortised to income on a systematic
basis over its useful life not to exceed five years unless a somewhat larger
period can be justified.
n
Any non-cash item included in the consideration
on amalgamation should be accounted at fair value.
n
In case the scheme of amalgamation sanctioned
under the statute prescribes a treatment to be given to the transferor company
reserves on amalgamation, same should be followed. A description of accounting
treatment given to reserves and the reasons for following a treatment different
from that prescribed in the standard is to be given.
Disclosures:
a) effective
date of amalgamation for accounting;
b) method
of accounting followed;
c) the
particulars of the scheme sanctioned.
In case of amalgamation under
pooling of interest method:
a) the
treatment given to the difference between the consideration and the value of
the net identified assets acquired is to be disclosed.
n In
case of amalgamation under the purchase method:
a) the
consideration and the treatment given to the difference compared to the value
of the net identifiable assets acquired, and the treatment thereof including
the period of amortisation of any goodwill arising on amalgamation.
Accounting Standard 15 –
Accounting for Employees benefits
n
Employee benefits are all forms of consideration
given in exchange of services rendered by employees. Employee benefits include
those provided under formal plan or as per informal practices which give rise
to an obligation or required as per legislative requirements. These include
performance bonus (payable within 12 months) and non-monetary benefits such as
housing, car or subsidised goods or services to current employees,
post-employment benefits, deferred compensation and termination benefits.
Benefits provided to employees spouses, children, dependents, nominees are also
covered. Does not include employee share-based payments.
n
Short term employee benefits should be
recognised as an expense without discounting, unless permitted by other AS to
be included as a cost of an asset.
n
Cost of accumulating compensated absences is
accounted on accrual basis and cost of non-accumulating compensated absences is
accounted when the absences occur.
n
Cost of profit sharing and bonus plans are
accounted as an expense when the enterprise has a present obligation to make
such payments as a result of past events and a reliable estimate of the
obligation can be made. While estimating, probability of payment at a future
date is also considered.
n
Post employment benefits can either be defined
contribution plans, under which enterprise’s obligation is limited to
contribution agreed to be made and investment returns arising from such
contribution, or defined benefit plans under which the enterprise’s obligation
is to provide the agreed benefits. Under the later plans if actuarial or
investment experience are worse then expected, obligation of the enterprise may
get increased at subsequent dates.
n
If defined benefit cost cannot be reliably
estimated it should recognise cost as if it were a defined contribution plan,
with certain disclosures.
n
Cost of defined contribution plan should be
accounted as an expense on accrual basis. In case contribution does not fall
due within 12 months from the balance sheet date, expense should be recognised
for discounted liabilities.
n
For balance sheet purpose, the amount to be
recognised as a defined benefit liability is the present value of the defined
benefit obligation reduced by
a) past
service cost not yet recognised; and
b) the
fair value of the plan asset at the balance sheet date.
c) An
enterprise should determine the present value of defined benefit obligations
(through actuarial valuation at intervals not exceeding three years) and the
fair value of plan assets (on each balance sheet date) so that amount recognised
in the financial statements do not differ materially from the liability
required.
d) In
case the fair value of plan asset is higher than the liability required, the
present value of excess should be treated as an asset.
e) An
enterprise should use the projected unit credit method to determine the present
value of its defined benefit obligations and the related current service cost
and where applicable, past service cost.
f) Actuarial
gains/losses should be recognised in profit and loss account as income/expense.
g) When
enterprise adopts the revised standard for the first time, additional charge on
account of change in a liability, compared to pre-revised AS15 should be
adjusted against revenue reserves and surplus.
Accounting Standard 16 –
Borrowing Costs
n
Statement does not deal with the actual or
imputed cost of owner’s equity/preference capital.
n
Borrowing costs that are directly attributable to the acquisition,
construction or production of any qualifying asset should be capitalised
provided the assets takes a substantial period of time to get ready for its
intended use or sale. Generally a period of 12 months is considered as a substantial period of time.
n
Income on the temporary investment of the
borrowed funds should be deducted from borrowing costs.
n
In case of funds obtained generally and used for
obtaining a qualifying asset, the borrowing cost to be capitalized is
determined by applying weighted average cost of borrowing cost on outstanding
borrowings, other than borrowings for obtaining a qualifying asset.
n
Capitalisation of borrowing costs should be
suspended during extended periods in which development is interrupted. When the
expected cost of the qualifying asset exceeds its recoverable amount or net
realisable value, the carrying amount is written down.
n
Capitalisation should cease when activity is
completed substantially or if completed in parts, in respect of that part, all
the activities for its intended use or sale are complete.
Disclosures:
a) accounting
policy adopted for borrowing cost; and
b) the
amount of borrowing costs capitalised during the period.
Accounting Standard 18 –
Related Party Disclosures
n
This statement should be applied in reporting
related party relationships and transactions between a reporting enterprise and
its related parties. The requirements of this statement apply to the financial
statements of each reporting enterprise as also to consolidated financial
statements presented by a holding company.
v The statement deals with following related
party relationships:
a) enterprises
that directly or indirectly control (through subsidiaries) or are controlled by
or are under common control with the reporting enterprise;
b) Associates
and joint ventures of the reporting entity; investing party or venturer in
respect of which reporting enterprise is an associate or a joint venture;
c) Individuals
owning voting power giving them control or significant influence;
d) key
management personnel and their relatives; and
e) enterprises
over which any of the persons in (c) or (d) are able to exercise significant
influence.
f) Relative
of an individual means spouse, son, daughter, brother, sister, father and
mother who may be expected to influence, or be influenced by, that individual
in dealings with the reporting entity.
g) Parties
are considered related if one party has ability to control or exercise
significant influence over the other party in making financial and/or operating
decisions.
v Following
are not considered related parties:
a) two
companies merely because of common director;
b) customer,
supplier, franchiser, distributor or general agent merely by virtue of economic
independence; and
c) financiers,
trade unions, public utilities, government departments and bodies merely by
virtue of their normal dealings with the enterprise.
v Where there are transactions between the related
parties, following information is to be disclosed;
a) name
of the related party;
b) nature
of relationships;
c) nature
of transactions and its volume (as an amount or its proportion);
d) amount
or appropriate provision outstanding pertaining to related parties, provision
for doubtful debts from related parties, amounts written off or written back in
respect of debts due from or to related parties.
v *
Names of the related party and nature of related party relationship to be
disclosed even where there are no transactions but the control exists.
v * Items of similar nature may be aggregated by
type of the related party. The type of related
party for the purpose of aggregation of items of a similar nature implies
related party relationships. Material transactions, i.e more than 10% of
related party transactions are not to be clubbed in an aggregated disclosure.
The related party transactions which are not entered in the normal course of
the business would ordinarily be considered material.
v A
non-executive director is not a key management person for the purpose of this
standard unless he is in a position to exercise significant influence by virtue
of owning an interest in the voting power or he is responsible and has the
authority for directing and controlling the activities of the reporting
enterprise. Mere participation in the policy decision making process will not
attract AS18.
Accounting Standard 19 –
Leases
n
Applies in accounting for all leases other than
leases to explore for or use natural resources, licensing agreements for items
such as motion picture films, video recordings plays etc and lease for use of
lands.
n
A lease is classified as a finance lease or as a
operating lease.
n
A finance lease is one where risks and rewards
incident to the ownership are transferred substantially; otherwise it is an
operating lease.
Treatment of finance lease in
books of lessee:
n
At the inception, lease should be recognised as
an asset and a liability at lower of fair value of leased asset and the present
value of minimum lease payments.
n
Lease payments should be appropriated between
finance charge and the reduction of outstanding liability so as to produce a
constant periodic rate of interest on the balance of the liability.
n
Depreciation policy for leased asset should be
consistent with that for other owned depreciable assets and are to be
calculated as per AS6.
Treatment of finance lease in
books of lessor:
n
The lessor should recognise the asset as a
receivable equal to net investment in lease.
n
Finance income should be based on pattern
reflecting a constant periodic return on net investment in lease.
n
Manufacturing/dealer lessor should recognise
sales as outright sales. If artifically low interest rates quoted, profit
should be calculated as if commercial rates of interest were charged. Initial
direct costs should be expensed.
Treatment of operating lease in
books of lessee:
n
Lease payments should be recognised as an
expense on straight line basis or other systematic basis, if appropriate.
Treatment of operating lease in
books of lessor:
n
Lessor should present an asset given on lease
under fixed assets and lease income should be recognised on a straight-line
basis or other systematic basis, if appropriate.
n
Costs including depreciation should be
recognised as an expense.
n
Initial direct costs are either deferred over
lease term or recognised as expenses.
Accounting Standard 20 –
Earnings per Share
n
To present basic and diluted EPS on the face of
Profit and loss statement with equal prominence to all periods presented.
n
EPS required to be presented even when negative.
n
Basic EPS is calculated by dividing net profit
or loss for the period attributable to equity shareholders by weighted average
number of equity shares outstanding during the period. Basic & diluted EPS
to be computed on the basis of earnings excluding extraordinary items (net of
tax).
n
Earnings attributable to equity shareholders are
after the preference dividend for the period and the attributable tax.
n
Weighted average number of shares is adjusted
for bonus issue, share split and consolidation of shares. In case of rights
issue at price lower than fair value, there is an embedded bonus element for
which adjustment is made.
n
For calculating diluted EPS, net profit or loss
attributable to equity shareholders and the weighted average number of shares
are adjusted for the effects of dilutive potential equity shares (i.e, assuming
conversion into equity of all dilutive potential equity.
n
Potential equity shares are treated as dilutive
when their conversion into equity would result in a reduction in profit per
share from continuing operations.
n
Effect of anti-dilutive potential equity share
is ignored in calculating diluted EPS.
n
In calculating diluted EPS each issue of
potential equity share is considered separately and in sequence from the most
dilutive to the least dilutive. This is determined on the basis of earnings per
incremental potential equity.
n
If the number of equity shares or potential
equity shares outstanding increases or decreases on account of bonus, splitting
or consolidation during the year or after the balance sheet date but before the
approval of financial statements, basic and diluted EPS are recalculated for
all periods presented. The fact is also disclosed.
n
Nominal value of shares is disclosed along with
EPS.
Accounting Standard 22 –
Accounting for Taxes on Income
n
Differences between taxable income and
accounting income to be classified into permanent differences and timing
differences.
n
Permanent differences are those differences
between taxable income and accounting income, which originate in one period and
do not get reversed subsequently.
n
Timing differences are those 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 period.
n
Deferred tax should be recognised for all timing
differences, subject to the consideration of prudence in respect of deferred
tax assets.
n
In case of carry forward losses, DTA is to be
recognised only if there is virtual certainty supported by convincing evidence
of future taxable income. Unrecognised DTA is reassessed at each balance sheet
date. Virtual certainty refers to the fact that there is practically no doubt
regarding the determination of availability of the future taxable income.
n
In respect of loss under capital gains, DTA
shall be recognised only to the extent that there is a virtual certainty of
sufficient future taxable capital gain.
n
Tax expense of the period, comprises of current
tax and deferred tax.
n
Deferred tax assets and liabilities should be
measured using the tax rates and tax laws that have been enacted or
substantially enacted by the balance sheet date and should not be discounted to
their present value.
n
Deferred tax assets and liabilities in respect
of timing differences which originate during the tax holiday period and reverse
during the tax holiday period, should not be recognised to the extent deduction
from the total income of an enterprise is allowed during the tax holiday
period. However, if timing differences reverse after the tax holiday period,
DTA and DTL should be recognised in the year in which timing differences
originate.
Accounting Standard 24 –
Discontinuing Operations
n
The standard requires an enterprise to segregate
information about discontinuing operations from continuing one and establishes
principles for reporting information about discontinuing operations.
n
A discontinuing operation is a part of an
enterprise:
a) which
is being disposed off or abandoned pursuant to a single coordinated plan;
b) it
represents separate line of business or geographical area of operations; and
c) can
be distinguished operationally and for financial reporting.
All these three conditions need to be
satisfied simultaneously.
v The
statement does not establish any recognition and measurement principles. It
requires enterprise to follow principles establised in other accounting
standard for the purpose of changes in assets, liabilities, revenue, expenses
etc.
v An
enterprise should give these information in its financial statements beginning
with the financial period in which the ‘Initial disclosure event’ occurs:
a) description
of continuing operations;
b) segment
in which it is reported as per AS17;
c) date
and nature of initial disclosure event;
d) time
by which the discontinuation is expected to be completed;
a) the
carrying amounts of the assets to be disposed of;
b) revenue,
expenses, pre-tax profit/loss, income-tax in relation to the ordinary
activities of identified discontinuing operations.
n On
disposal of assets or settlement of liabilities, disclosure is required for
gain/loss recognised on disposal/settlement and income tax expenses thereto.
n
On entering into a binding contract for sale of
assets, disclosure is required for net selling price after deducting expected
disposal cost, the expected timing of cash flow and the carrying amount of
assets on the balance sheet date.
n
For period subsequent to initial disclosure
event period, description of any significant changes in amount or timing of
cash flow is required to be disclosed.
n
The disclosures to continue up to the period in
which the discontinuance is completed; i.e, discontinuance plan is
substantially completed or abandoned.
n
In case discontinuance plan is abandoned, the
disclosure is required of this fact, reason therefore and its effect on the
financial statements.
n
Disclosure of pre-tax profit/loss from ordinary
activities of the discontinuing operation, income tax expenses related thereto,
pre-tax gain/loss recognised on the disposal/settlement to be made on the face
of profit and loss account.
n
All disclosures should be separately presented
for each discontinuing operation.
n
Comparative information for prior periods to be
re-stated to seggregate discontinuing operations.
n
In the interim financial report, disclosure is
required for any significant activities or event and any significant changes in
the amount or timing of cash flows relating to disposal/ settlement.
Accounting Standard 26 – Intangible Assets
n
Not applicable to intangibles covered by other
AS, financial assets, mineral rights/ expenditure on exploration etc,
intangible assets arising in insurance enterprises from contracts with policy
holders and also to expenditure in respect of termination benefits.
n
An intangible asset is an identifiable non-monetary asset, without
physical substance, held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes.
n
As asset is a resource controlled by an
enterprise as a result of past events and from which future economic benefits
are expected to flow to the enterprise.
n
An intangible asset is to be recognised
if, only if:
a) future economic benefits will flow; and
b) the cost of the asset can be measured
reliably.
n An
intangible asset should be measured initially at cost. Probability of future
economic benefits to be assessed using reasonable and supportable assumptions.
n
Internally generated goodwill, brands,
publishing titles etc should not be recognised as an asset.
n
No intangible asset arising from research should
be recognised and expenditure on research should be recognised as an expense,
when incurred.
n
An intangible asset arising from development to be recognised, if and only if, an enterprise demonstrates:
a) its
feasibility to complete;
b) intention
and ability to use or sell;
c) generation
of future economic benefits; and
d) availability
of resources for completion and ability to measure the expenditure.
n Subsequent
expenditure to be added to cost only if it is probable that the expenditure
will generate future benefits in excess of the original estimates.
n An
intangible asset should be carried at its cost less any accumulated
amortisation and accumulated impairment losses. Impairment loss is the amount
by which the carrying amount exceeds its recoverable amount.
n An
intangible asset should be amortised over its useful life on a systematic
basis, to reflect the pattern in which the economic benefits are consumed or if
the pattern cannot be determined reliably, on the straight line method.
n Useful
life is period of time over which an asset is expected to be used or the number
of production units expected to be obtained from the asset.
n There
is a rebuttable presumption for useful life of an intangible asset will not
exceeding ten years from the date it is available for use. In case of intangible
assets in the form of legal rights, the useful life is not to exceed the period
of the legal rights, unless renewable, which is virtually certain.
n The
recoverable amount of each intangible asset to be estimated at each year end.
n An
intangible asset to be derecognised on disposal or when no future economic
benefits are expected from its use and gain or loss recognised
Disclosures:
a) for
each class of intangibles, their useful lives or the amortisation rates used;
b) Amortisation
amount and methods used;
c) carrying
amount (gross and net), any additions, retirements, impairment losses
recognised or reversed and any other change.
d) In
case of useful life of an intangible asset exceeding ten years, proper
disclosure of the reasons for the same should be given.
e) Research
and development expenditure recognised as as expense to be disclosed.
Accounting Standard 28 –
Impairment of Assets
n
Applicable for impairment of all assets other
than:
a) Inventories;
b) assets
arising from construction contracts;
c) financial
assets, including investments; and
d) deferred
tax assets.
n
Impairment loss should be recognised for a cash
generating unit if, and only if, its recoverable amount is less than its
carrying amount. The impairment loss should be allocated to reduce the carrying
amount of the assets of the unit in the following
order:
a) first,
to goodwill allocated to the cash-generating unit (if any); and
a) then
to the other assets of the unit on a pro-rata basis based on the carrying
amount of each asset in the unit.
n
Recoverable amount is the higher of an asset’s
net selling price and its value in use.
n
An impairment loss is the amount by which the
carrying amount of an asset exceeds its recoverable amount.
n
Value in use is the present value of estimated
future cash flows expected to arise from the continuing use of an asset and
from its disposal at the end of its useful life.
In measuring value in use:
n
cash flow projections should be based on
assumptions that represent management’s best estimate of the set of economic
conditions that will exist over the remaining useful life of the asset. Greater
weight should be given to external evidence;
n
cash flow projections should be based on the
most recent financial budgets/forecasts (maximum 5 years unless longer period
can be justified) that have been approved by management;
n
Cash flow projections beyond the period covered
by the most recent budgets/forecasts should be estimated by extrapolating the
projections based on the budgets/forecasts using a steady or declining growth
rate for subsequent years, unless an increasing rate can be justified. This
growth rate should not exceed the long-term average growth rate for the
products, industries, or country or countries in which the enterprise operates,
or for the market in which the asset is used, unless a higher rate can be
justified.
n
Estimates of future cash flows should include:
a) projections
of cash inflows from the continuing use of the asset;
b) projections
of cash outflows that are necessarily incurred to generate the cash inflows
from continuing use of the asset (including cash outflows to prepare the asset
for use) and that can be directly attributed, or allocated on a reasonable and
consistent basis, to the asset; and
c) net
cash flows if any to be received (or paid) for the disposal of the asset at the
end of its useful life.
n
Future cash flows should be estimated for the
asset in its current condition. They should not include estimated future cash
inflows or outflows that are expected to arise from:
a) a
future restructuring to which the enterprise is not yet committed; or
b) future
capital expenditure that will improve or enhance the asset in excess of its
originally assessed standard of performance.
n
Estimates of future cash flows should not
include; (a) cash inflows or outflows from financing activities; or (b) income
tax receipts or payments.
n
The estimate of net cash flows to be received
(or paid) for the disposal of an asset at the end of its useful life should be
the amount that is expected to be obtained from the disposal of the asset in an
arm’s length transaction between knowledgeable, willing parties, after
deducting the estimated costs of disposal.
n
The discount rate should be a pre tax rate that
reflect current market assessments of the time value of money and the risks
specific to the asset and should not reflect risks for which future cash flow
estimates have been adjusted.
n
An impairment loss should be recognised as an
expense in the profit and loss account immediately. Impairment loss is the
reduction in carrying amount of the assets to its recoverable amount.
n
If the estimated impairment loss is greater than
the carrying amount of the asset, recognise a liability if, and only if,
required by another AS.
n
The depreciation/amortisation charge for the
asset should be adjusted in future periods to allocate the asset’s revised
carrying amount, less its residual value on a systematic basis over its
remaining useful life.
n
A reversal of an impairment loss for an asset
should be recognised as income immediately in profit and loss account. In case
of revalued assets, the same should be treated as a revaluation increase as per
AS10.
n
After a reversal of an impairment loss, the
depreciation (amortisation) charge for the asset should be adjusted in future
periods to allocate the asset’s revised carrying amount, less its residual
value (if any) on a systematic basis over its remaining useful life.
Accounting Standard 29 –
Provisions, Contingent Liabilities and Contingent Assets
n
A provision should be recognised when:
a) an
enterprise has a present obligation as a result of a past event;
b) it
is probably (more likely than not) that an outflow of resources will be
required to settle the obligation; and
c) a
reliable estimate can be made of the amount of the obligation.
d) A
contingent liability is not recognised in the financial statements but is
disclosed.
e) A
contingent asset is not recognised in financial statements.
f) The
amount of provision should be the best estimate of the expenditure required to
settle the present obligation at the balance sheet date and should not be
discounted to its present value.
g) The
risks and uncertainties that inevitably surround many events and circumstances
should be taken into account in arriving at the best estimate of provision to
avoid its under or over statement.
h) Expected
future events, which are likely to affect the amount required to settle an
obligation, may be important in measuring provisions.
i)
In the statement of profit and loss, the expense
relating to a provision may be presented net of the amount recognised for a
reimbursement.
j)
A provision should be used only for expenditures for
which the provision was originally recognised and not against a provision
recognised for another purpose, so as not to conceal the impact of two
different events.
k) Provision
should not be recognised for future operating losses, since it is not a
liability nor meet the criteria for provisions.
