International Accounting StandardCommittee (IASC- ested.1973):Objectives of the Committee are: Formulating, publishing and promotingthe use of the accounting standardsworldwide, and To work for the improvement andharmonization of regulations, accountingstandards and procedures relating tofinancial
Importance of IAS: Globalization of the economy and enteredthe Indian organizations in to foreignnations. Foreign investors would give moreweightage to those organizations whichfollow IAS. If there is a conflict between the IAS and the local standards or the local laws and regulations, the local standards, laws and regulations will prevail.
List of accounting standardsissued by the IASC is as below:IAS 1 Presentation of Financial StatementsIAS 2 InventoriesIAS 7 Cash Flow StatementsIAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting PoliciesIAS 10 Events after the Balance Sheet Date
IAS 11 Construction ContractsIAS 12 Income TaxIAS 14 Segment ReportingIAS 15 Information Reflecting the Effects of Change PricesIAS 16 Property, Plant and EquipmentIAS 17 LeasesIAS 18 RevenueIAS 19 Employee Benefits
IAS 20 Accounting for Government Grants and Disclosure of Government AssistanceIAS 21 The Effects of Changes in Foreign Exchange RatesIAS 22 Business CombinationsIAS 23 Borrowing CostsIAS 24 Related Party DisclosureIAS 26 Accounting and Reporting by Retirement Benefit PlansIAS 27 Consolidated Financial StatementsIAS 28 Investments in Associates
IAS 29 Financial Reporting in Hyperinflationary EconomicsIAS 30 Disclosures in the Financial Statements of Banks and Similar Financial InstitutionsIAS 31 Financial Reporting of Interests in Joint VenturesIAS 32 Financial Instruments: Disclosures and PresentationsIAS 33 Earnings per ShareIAS 34 Interim Financial ReportingIAS 35 Discontinuing Operations
IAS 36 Impairment of AssetsIAS 37 Provisions, Contingent Liabilities and Contingent AssetsIAS 38 Intangible AssetsIAS 39 Financial Instruments: Recognition and MeasurementIAS 40 Investment PropertyIAS 41 Agriculture
Indian Accounting Standards:The Institute of Chartered Accountants ofIndia constituted an Accounting StandardsBoard (ASB) on 21st April, 1977.Function: The ASB is to frame accountingstandards which are formally issued underthe authority of the Council of the Instituteof Chartered Accountants.ASB takes in to consideration all aspects i.e.applicable laws, customs, usages andbusiness environment.
Before formulating the standards normallyASB holds discussion with therepresentatives of the Govt., PSU, industryand other organizations.
An exposure draft of the proposed standardare prepared and issued for comments bythe members of the Institute and the publicat large.After considering the comments received,the draft of the proposed standard isfinalized by ASB and submitted to thecouncil which modifies it (if necessary) andissues it under its authority.
Importance of AccountingStandards:Maintain the uniformity in theirpresentation.Recognition of Companies Amendment Act2000. All the significant accounting policiesadopted in preparation of the BS and P & LA/c should be disclosed in company’s BSand if there is any difference from thestandard, that also should be disclosed alongwith the reasons thereof and its financialeffect.
Incase the auditor fails to justify thedeviation the ICAI can take disciplinaryaction against him on the ground ofprofessional misconduct.
Accounting Standards Issued byASB of the Institute of CharteredAccountants of India.There are 29 standards as below:AS 1 Disclosure of Accounting PoliciesAS 2 Valuation of InventoriesAS 3 Cash Flow StatementsAS 4 Contingencies and Events occurring after the Balance Sheet DateAS 5 Net Profit or Loss for the Period, Prior Period and Extraordinary Items and Changes in Accounting Policies
AS 6 Depreciation AccountingAS 7 Construction Contracts (Revised Accounting Standard)AS 8 Accounting for Research and DevelopmentAS 9 Revenue ReorganizationAS 10 Accounting for Fixed AssetsAS 11 (Revised 2003), the effects of Changes in Foreign Exchange RateAS 12 Accounting for Government GrantsAS 13 Accounting for InvestmentsAS 14 Accounting for Amalgamation
AS 15 Accounting for Retirement Benefits in the Financial Statement of EmployeesAS 16 Borrowing CostsAS 17 Segment ReportingAS 18 Related Party DisclosureAS 19 LeasesAS 20 Earnings Per ShareAS 21 Consolidated Financial StatementsAS 22 Accounting for taxes on IncomeAS 23 Accounting for Investments in Associates in Consolidated Financial StatementsAS 24 Discounting Operations
AS 25 Interim Financial ReportingAS 26 Intangible AssetsAS 27 Financial Reporting of Interest in Joint VenturesAS 28 Impairment of AssetsAS 29 Provisions, Contingent Liabilities and Contingent Assets
In addition to these, the ICAI has issuedstatements, guidance notes, opinions,Accounting Standard Interpretations,General Clarifications and Backgroundmaterial for seminars which seek to bringabout uniformity in corporate accountingpractices.
AS 1, Disclosure of Accounting Policies:It deals with the disclosure of significantaccounting policies followed in preparingand presenting financial statements.Assumptions: Going Concern Consistency Accrual
Nature of Accounting Policies:The differing circumstances in whichenterprises operate in a situation of diverseand complex economic activity makealternative accounting principles andmethods of applying those principlesacceptable.
Areas in which Differing AccountingPolicies are Encountered: Methods of depreciation,depletion/reduction and amortization /payingback Treatment of expenditure duringconstruction Conversion or translation of foreigncurrency items
Valuation of inventories Treatment of Goodwill Valuation of Investments Treatment of Retirement Benefits Valuation of fixed assets Treatment of contingent liabilities, etc.The above list is not the exhaustive.
Considerations in the Selection of Accounting Policies:Financial statements should be prepared andpresented on the basis of such accountingpolicies which should represent a true andfair view of the state of affairs of theenterprise as at the balance sheet date and ofthe profit or loss for the period on that date.For this purpose, the major considerationsgoverning the selection and application ofaccounting polices are:
Prudence/Caution: In view of theuncertainty attached to future events, profitsare not anticipated but recognized onlywhen realized though not necessarily incash.Substance over Form: The accountingtreatment and presentation in financialstatements of transactions and events shouldbe governed by their substance/content andnot merely by the legal form.
Materiality: Financial statements shoulddisclose all material items i.e. items theknowledge of which might influence thedecisions of the user of the financialstatements.
Disclosure of Accounting Policies:All significant accounting policies adoptedin the preparation and presentation offinancial statements should be disclosedand these should form part of the financialstatements.Any change in an accounting policy whichhas a material effect should be disclosed.
If the fundamental accounting assumptionsviz. going concern, consistency and accrualare followed in financial statements,specific disclosure is not required. If afundamental accounting assumption is notfollowed, the fact should be disclosed.
AS 4 Contingencies and events occurring after the Balance Sheet:It deals with the treatment in financialstatements of a contingencies and eventsoccurring after the Balance Sheet Date.It does not cover certain contingencies suchas: Liabilities of Life assurance and generalinsurance enterprises arising from policiesissued;
Obligation under retirement benefit plansand commitments arising from long-termlease contracts in view of specialconsiderations applicable to them.The term ‘Contingencies is restricted toconditions or situations at the balance sheetdate, the financial effect of which is to bedetermined by future events, which may ormay not occur.
Accounting Treatment of ContingentLosses:The estimated Amt. of a contingent loss tobe provided for in the financial statementsmay be based on information referred to inparagraph 4.4.For conflicting and insufficient evidence forestimation, then disclosure is made of theexistence and nature of the contingencies.
Accounting Treatment ofContingent Gains:Contingent gains are not recognized infinancial statements since their recognitionmay result in the recognition of revenue,which may never be realized. If therealization of a gain is virtually certain,then such gain is not a contingency andaccounting for the gain is appropriate.
Disclosure:If a reliable estimate of the financial effectcan not be made, this fact is disclosed.
Events Occurring after the BalanceSheet Date- between BS date and thedate on which it is approved by theBoard of Directors / approvingauthority.
Events could be of two types: Which provide further evidence ofconditions that existed at the BalanceSheet date,(loss on a trade receivable A/c ,which is confirmed by the insolvency of acustomers), and Which are indicative of conditions thatarose subsequent to the BS (proposed &declared dividend)
AS 5Net Profit or Loss for the Period, PriorPeriod Items and Changes in AccountingPolicies:It came in to effect from 1.4.1996 issued inNovember 1982.
Net Profit or Loss for the Period:All items of income and expenses(including extraordinary items and theeffects of changes in accounting estimates)which are recognized in a period should beincluded unless an Accounting Standardsrequires or permits otherwise.
NP or Loss comprises the followingcomponents, each of the which should bedisclosed on the face of the statement ofprofit and loss; Profit or loss from ordinary activities and Extraordinary items.
Ordinary Activities:These are the activities which areundertaken by an enterprise as part of itsbusiness and such related activities inwhich the enterprise engages infurtherance of, incidental to, or arisingfrom, these activities.
Extraordinary items are income orexpenses that arise from events ortransactions that are clearly distinct fromthe ordinary activities of the enterpriseand, therefore, are not expected to recurfrequently or regularly. E.g. naturaldisaster
Prior Period Items are income orexpenses which arise in the currentperiod as a result of errors or omission inthe preparation of the financialstatements of one or more prior periods.
Accounting Policies are the specificaccounting principles and the methods ofapplying those principles adopted by anenterprise in the preparation andpresentation of financial statements.
Profit or Loss from OrdinaryActivities:If the activities are of such size, nature orincidence that their disclosure is relevant toexplain the performance of the enterprise forthe period, the nature and amount of suchitems should be disclosed separately.
Circumstances which may give rise to theseparate disclosure of items of income andexpense in accordance with paragraph 12includes: The write-down of inventories to netrealizable value as well as the reversal ofsuch write-downs; A restructuring of the activities of anenterprise and the reversal of any provisionsfor the costs of restructuring;
Disposal of items of fixed assets; Legislative changes having retrospectiveapplication; Litigation/ judicial proceeding settlements; Other reversal of provisions.
Changes in Accounting Estimates:Estimates may be needed for bad debts,inventory obsolescence etc.An estimate may have to be revised ifchanges occur on which the estimate wasbased.If it is difficult to distinguish between achange in accounting policy and a change inan accounting estimate, the change is treatedas a change in an accounting estimate, withproper disclosure.
Changes in Accounting Policies:A change in an accounting policy should bemade only if the adoption of a differentaccounting policy is required by statute orfor compliance with an accounting standardor if it is considered that the change wouldresult in a more appropriate presentation ofthe financial statements of the enterprise.Any changes in an accounting policy whichhas a material effect should be disclosed andthe impact of, the adjustments resulting from,such change should be in the FSs of theperiod in which such change is made.
AS 7Accounting for Construction ContractsIssued in December 1983 and madecompulsory after 1-4-2003.Objective is to prescribe the accountingtreatment of revenue and costs associatedwith construction contracts.Scope: This statement should be appliedin accounting for construction contractsin the financial statements of contractors.
A fixed price contract is a constructioncontract in which the contractor agrees to afixed contract price, or a fixed rate per unitof output, which in some cases is subjectto cost escalation clauses.A cost plus contract is a constructioncontract in which the contractor isreimbursed for allowable or otherwisedefined costs, plus % of these costs or afixed fee.
Combining and segmentingConstruction Contracts: When a contract covers a number ofassets, the construction of each assetshould be treated as a separate constructioncontract when:• Separate proposals have been submittedfor each asset
• Each asset has been subject to separatenegotiation and the contractor and customerhave been able to accept or reject that partof the contract relating to each asset; and• The costs and revenues of each asset canbe identified.
A group of contracts, whether with asingle customer or with several customers,should be treated as a single constructioncontract when: the group of contract is negotiated as asingle package; the contracts are so closely interrelatedthat they are, in effect, part of a singleproject with an overall profit margin; and the contracts are performedconcurrently or in a continuous sequence.
Contract Revenue should comprise: the initial amount of revenue agreed inthe contract; and variations in contract work, claims andincentives payments: to the extent that is probable that they will result in revenue; and they are capable of being reliably measured.
Contract Costs:Contract cost should comprise:1. Costs that relate directly to the specific contract2. Cost that are attributable to contract activity in general and can be allocated to the contract; and3. Such other costs as are specifically chargeable to the customer under the terms of contract
Direct costs relate to a specific contractare:• Site labour cost, including site supervision• Cost of material used in contract• Depreciation of plant and equipment used on thecontract• Cost of hiring plant & equipment• Claims from third parties, etc.
Costs that may be attributable to contractactivity in general and can be allocated tospecific contracts are:• Insurance• Construction overheads, etc.
Recognition of Contract Revenueand Expenses:When the outcome of a constructioncontract can be estimated reliably, contractand costs associated with the constructioncontract should be recognized as revenueand expenses respectively by reference tothe stage of completion of the contractactivity at the reporting date. An expectedloss on the construction contract should berecognized as an expenses immediately .
AS 11The effects of Changes in Foreign ExchangeRates:Made mandatory after 1-4-2004 revised2003 (1994).Objective:Transaction in foreign currencies or it mayhave foreign operation.
Scope:This statement should be applied:• In accounting for transactions in foreign currencies;and• In translating the financial statements of foreignoperations.•It does not specify in which an enterprise presents itsfinancial statements. Normally the enterprise uses thecurrency of the country in which it is domiciled.•This statement does not deal with exchangedifferences arising from foreign currency borrowingsto the extent that they are regarded as an adjustmentto interest costs.
Average rate is the mean of theexchange rates in force during a period.Closing rate is the exchange rate at thebalance sheet date.Exchange difference is the differenceresulting from reporting the same numberof units of a foreign currency in thereporting currency at different exchangerates.
Fair value is the amount for which anasset could be exchanged, or a liabilitysettled, between knowledgeable, willingparties in an arm’s length transaction.Foreign currency is a currency other thanthe reporting currency of an enterprise.Foreign operation is a subsidiary,associate, joint venture or branch of thereporting enterprise, the activities of whichare based or conducted in a country otherthan the country of the reporting enterprise.
Forward exchange contract means anagreement to exchange different currenciesat a forward rate.Forward rate is the specified exchangerate for exchange of two currencies at aspecified future date.Integral foreign operation is a operation,the activities of which are an integral/inherent part of those of the reportingenterprise.
Monetary items are money held and assetsand liabilities to be received or paid infixed or determinable amounts of money,e.g. cash, receivables, etc.Net investment in a non-integral foreignoperation is the reporting enterprise’sshare in the net assets of that operation.Non-integral foreign operation is aforeign operation that is not an integralforeign operation. Cost of labour, materialand other components paid or settled in thelocal currency rather than in operatingcurrency.
Non-monetary items are assets andliabilities other than monetary items e.g.FA, inventories and investments, etc.Reporting currency is the currency usedin presenting the financial statements.Foreign currency transactions is atransaction which is denominated in orrequires settlement in a foreign currency.
Reporting at Subsequent Balance Sheet Dates:At each balance sheet date:• foreign currency monetary items should be reported using the closing rate.• non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction; and
• non-monetary items which are carried at fair value or other similar valuation denominated in a foreign currency should be reported using the exchange rates that existed when the values were determined.
Accounting Treatment of GovernmentGrants AS 12:Capital Approach Vs. Income Approach:Capital Approach: Grant is treated as partof shareholders’ funds, as many Govt. grantsare in nature of promoters’ contribution i.e.they are given with reference to the totalinvestment and they are not earned but presentan incentive provided by Govt. without relatedcosts.
Income Approach: Grant is taken toincome over one or more periods asenterprise earns them through compliancewith their conditions and meeting theenvisaged obligations and income tax andother taxes are charged against income.It is fundamental to the income approachthat government grants be recognized inthe P & L A/c (Cr.-Other income) on asystematic and rational basis over theperiods necessary to match them with therelated costs.
Recognition of Government Grants:Govt. grants available to the enterprise areconsidered for inclusion in accounts: Where there is a reasonable assurance thatthe enterprise will comply/follow with theconditions attached to them; and Where such benefits have been earned bythe enterprise and it is reasonably certainthat the ultimate collection will made.
Non-monetary Government Grants:If the grant is in the form of non-monetaryassets e.g. land at confessional rates, it isusual to account for such assets at theiracquisition cost, and if it is given free ofcost, is recorded at a nominal value.Grants related to depreciable assets aretreated as deferred income and shown inB/S after reserves & surplus but beforesecured loans.
If the grants are of the nature of promoters’contribution (e.g. central investmentsubsidy scheme) and no payment isordinarily expected in respect thereof, thegrants are treated as capital reserve whichcan be neither distributed as dividend norconsidered as deferred income.
AS 14 Accounting for Amalgamation:Issued in 1983 and came into effect(mandatory) on or after 1-4-1995.This statement deals with accounting foramalgamations and the treatment of anyresultant goodwill or reserves.
Transferor company means the companywhich is amalgamated into anothercompany.Transferee company means the companyinto which a transferor company isamalgamated.Reserves means the portion of earnings,receipts or other surplus of an enterpriseappropriated by the management for ageneral or a specific purpose other than aprovision for depreciation or diminution inthe value of assets or for a known liability.
Methods of Accounting for Amalgamations:1.The pooling of interest method:Under this method the assets,liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts and make a uniform set of of accounting policies following the amalgamation.
2.The purchase method:The transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis their fair values at the date of amalgamation.
AS 15 AS on Retirement BenefitsCame into effect on or after 1.4.1995This statement deals with retirementbenefits in the financial statements ofemployers.Retirement benefits consists of:Provident Fund, Superannuation/Pension,Gratuity, Leave encashment benefit onretirement, Post-retirement health andwelfare schemes and other retirementbenefits.
Defined Contribution Schemes areretirement benefit schemes under whichamounts to be paid as retirement benefitsare determined by contribution to a fundtogether with earnings thereon.Defined Benefit Schemes are retirementbenefit schemes under which amounts tobe paid as retirement benefits aredeterminable usually by reference toemployee’s earnings and/or years ofservice.
Actuary (someone who uses statistics tocalculate insurance premiums)Actuarial valuation is the process used byan actuary to estimate the present value ofbenefits to be paid under a retirementbenefit schemes and the present values ofthe scheme assets and, sometimes, of futurecontribution.Pay as you go is a method of recognizingthe cost of retirement benefits only at thetime payments are made to employeeson,or after, their retirement.
Accounting:In respect of retirement benefits in theform of PF and other defined contributionschemes, the contribution payable by theemployer for a year is charged to thestatement of P& L A/c for the year.If the benefits is funded through creation ofa trust, the cost incurred for the year isdetermined actuarially. Many employersundertake such valuations every year whileothers undertake them once in three years.Contribution is to be made annually duringthe inter valuation period.
If the benefits is funded through a schemeadministered by an insurer, it is usuallyconsidered necessary to obtain an actuarialcertificate or a confirmation from theinsurer that the contribution payable to theinsurer is the appropriate accrual of theliability of the year. Less payment istreated as liability and excess payment istreated as pre-payment
US GAAP- US Generally AcceptedAccounting Principles:It is established by the Financial AccountingStandard Board (FASB) and the AmericanInstitute of Certified Public Accountants(AICPA)Financial Statements include three reports:• Income Statement• Balance Sheet and• Funds Flow Statement (not needed in India).
US GAAP provides the the principles forfinancial accounting, managementaccounting, and the Internal RevenueService for tax accounting purposes.Difference between Indian AccountingStandards and US GAAP.Indian AS US GAAPThe accent/emphasis of the It is on disclosure andIAS is on reporting. It is transparency. On thenot necessary to disclose contrary, it insists onthe portion of long term disclosing the portion of long-debt which has an un term debt separately whichexpired term to maturity of has an un expired term toless than one year. maturity of less than one year.
Indian AS US GAAPThe accent/emphasis of the On the contrary, a leaseIAS is on form, e.g. in lease deal confers theaccounting, the depreciation depreciation benefit onbenefit is available to the the lease since thelessor because in form a benefits of the productivelease deal is not a sale. use of the asset rests with the lessee.
Indian AS US GAAPCompanies provide On the contrary, it requiresdepreciation as per SLM the company to make ain the financial statement deferred tax liabilityand WDV in the tax provision for the potentialstatements, which enable loss as although it is athem to get more pt. and current gain, in substance itless tax. In the next year is offset by a future lossthis gain will translate which needs to be providedinto a potential loss since for today.the available depreciationwill reduce. It is notneeded to disclose thispotential loss as it is acurrent gain.
Other Major Differences Between USGAAP and Indian GAAP. No specific format is required for thepreparation of financial statement, as long asthey comply with the disclosurerequirements of US accounting standards. Consolidation of group company accountsis compulsory Disclosure of EPS data is compulsory Research & Development costs areexpenses as incurred
Investments in own shares is permitted. Itis shown as a reduction from shareholdersequity. Revaluation of assets is not permitted.Depreciation is over the useful economiclives of assets. Depreciation and profit andloss is based on historical costs. Goodwill is treated as any other intangibleasset, and is capitalized and amortized. Thecarry forward period is 40 years. Financial leases are to be capitalized.
Cash flow statement is compulsory Current and long term components ofassets and liabilities should be disclosedseparately. Current component normallyrefers to one year of the period of theoperating cycle. The concept of pre-operative expensesdoes not exist.