Accounting standard

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Accounting standard

  1. 1. Simplified - CA Kaustubh Deshpande CA Kaustubh Deshpande 1
  2. 2.  There are 45 Paragraphs Contents  Objective  Scope  Definitions  Foreign currency transaction-Initial recognition, subsequent reporting and exchange difference  Integral and non-integral operations  Forward Contracts  Disclosure CA Kaustubh Deshpande 2
  3. 3.  In order to include foreign currency transactions and foreign operations in the financial statements of an enterprise’s reporting currency Therefore this standard should be applied for  Accounting for transactions in foreign currency  Translating the financial statement of foreign operations CA Kaustubh Deshpande 3
  4. 4.  Average rate- exchange rates in force during a period Closing rate- exchange rate at the balance sheet date Foreigncurrency- currency other than reporting currency CA Kaustubh Deshpande 4
  5. 5.  Foreignoperation is a subsidiary, associate, joint venture or branch –the activities of which are conducted in a country other than the country of the reporting enterprise Monetary items are money held and assets and liabilities to be received or paid in fixed determinable amounts of money Reportingcurrency is the currency used in presenting the financial statements CA Kaustubh Deshpande 5
  6. 6.  Initial transaction should be recorded at the spot exchange rate or average rate (week or month ) Average rate cant be used if exchange rates significantly fluctuate At subsequent Balance Sheet Date – Monetary items should be reported using the closing rate. However where closing rate is not reasonable or realistic –relevant monetary items be reported in the reporting currency at the amount which is likely to be realised or disburse. At subsequent Balance Sheet Date -Non-monetary items be reported at historical cost which is derived by applying the exchange rate at the date of transaction CA Kaustubh Deshpande 6
  7. 7.  Exchange difference arising on settlement of monetary asset is recognised in profit and loss account Reporting monetary item at rates different from those at which they were initially recorded Exception to above is Net investment in Non- integral foreign operations CA Kaustubh Deshpande 7
  8. 8.  Classification of foreign operations (FO)  Integral operations  Non-integral operations  Following are the indications that foreign operation is non-integral  The activities of FO are carried out with significant autonomy  Transaction with reporting enterprise are not high  FO are financed mainly from its own operations  Cost of material labour etc are settled in the local currency  Sales are mainly in foreign currencies  There is an active local market CA Kaustubh Deshpande 8
  9. 9.  Integral foreign operation-foreign operations should be translated as mention above (initial ,subsequent balance sheet) Exchange difference be accounted in profit and loss account Non integral operations  Asset and liabilities (monetary and non- monetary)- Closing rate  Income and expense- at the date of transaction or average rate  Exchange difference should be accumulated in Foreign currency translation reserve till disposal(FCTR)  Equity and Surplus of profit and loss account be reported at historical cost CA Kaustubh Deshpande 9
  10. 10.  FCTRbalance on disposal of operation be recognised in profit and loss account Changein classification of a Foreign Operation  Integral- Non integral: exchange difference arising on the translation of non-monetary asset at the date of reclassification- accumulated in FCTR  Non-integral Integral: translated amounts for non-monetary items at the date of reclassification are considered as historical cost for the period and subsequent periods  Accumulated exchange difference are carried in balance sheet till the disposal of FO CA Kaustubh Deshpande 10
  11. 11.  Gainsand losses on foreign currency transactions and FO may have associated tax effects – Accounting as per AS-22 CA Kaustubh Deshpande 11
  12. 12.  Forward contract means agreement to exchange different currencies at a forward rate Forward rate is exchange rate for exchange of two currencies at a specified future date Forward Contract which is not intended for trading or speculation purposes –premium or discount should be amortised over period of contract. Premium or discount is difference between spot rate on the date of contract and forward rate CA Kaustubh Deshpande 12
  13. 13.  Forward contracts to which previous conditions does not apply:  Difference between the forward rate available at the reporting date for the remaining maturity and the contracted forward rate  Difference is recognised in profit and loss account  No premium or discount is accounted CA Kaustubh Deshpande 13
  14. 14.  Foreign exchange gain loss- Separate in profit and loss FCTR in balance sheet along with reconciliation with opening and closing balance There is change in classification of significant foreign operation:  Nature of the change in classification  The reason  Impact on shareholders fund and profit and loss account CA Kaustubh Deshpande 14
  15. 15.  There are 34 paragraphs Contents  Objective  Scope  Definitions  Recognitions  Re-assessment of unrecognised Deferred Tax Asset (‘DTA)  Measurement  Review of DTA  Presentation and disclosures  Transitional Provisions CA Kaustubh Deshpande 15
  16. 16.  Matching Concept  The Objective of accounting taxes as per AS-22 is to achieve or comply with matching concept Scope  Determination of the amount of tax expense or saving on income in respect of an accounting period and its disclosure  Whether it is applicable for domestic and foreign taxes? CA Kaustubh Deshpande 16
  17. 17.  Accounting income (loss)- Net Profit or loss for a period, as reported Taxable income (tax loss)- Income (loss) determined in accordance with tax laws Currenttax -is the amount of income tax payable (recoverable) determined as per tax laws Deferred tax –tax effect of timing differences CA Kaustubh Deshpande 17
  18. 18.  Timingdifference are those differences between taxable income and accounting income for a period that originate in one period and capable of reversal in one or more subsequent periods. Unabsorbed depreciation and carry forward losses CA Kaustubh Deshpande 18
  19. 19.  Taxexpense for the period should comprise of Current tax and deferred tax Deferred tax should be recognised on all timing differences.(Subject to para 15-18) Deferred tax in respect of timing differences reversing during tax holiday periods is not to be recognised FIFO to apply for above explanation CA Kaustubh Deshpande 19
  20. 20.  Virtual Certainty-  Convincing Evidence Reasonable certainty of realisation  History  Estimated profits Reassessment of DTA – At each Balance Sheet date CA Kaustubh Deshpande 20
  21. 21.  Taxrates and tax laws that have been enacted or substantively enacted Incase tax is payable u/s 115JB – Applicability of AS-22 ? Ifanswer is affirmative, which rates to be applied for measurement of deferred tax as per AS-22 No discounting CA Kaustubh Deshpande 21
  22. 22. Off set Legally enforceable right to set off Same governing taxation laws Otherwise Separate disclosure in balance sheetBreak-up of DTA and DTL in notes to accountsNature of the evidence supporting the virtual certainty CA Kaustubh Deshpande 22
  23. 23.  Revenue reserve- Prior to the adoption of this standard CA Kaustubh Deshpande 23
  24. 24.  There are 51 Paragraphs Contents  Objective  Scope  Definitions  Presentation  Basic EPS  Diluted EPS  Restatement  Disclosure CA Kaustubh Deshpande 24
  25. 25.  All companies i.e. SME and Non SME However disclosure of Diluted EPS is not mandatory for SME companies. Inthe consolidated financial statements EPS should be presented on the basis of consolidated information. Comparison of performance among different enterprises and among different accounting periods for same enterprise CA Kaustubh Deshpande 25
  26. 26.  Anequity share is a share other than a preference share. Preferenceshare is a share carrying preferential rightsA potential equity share is a financial instrument or other contract that entitles, or may entitle, its holder to equity. CA Kaustubh Deshpande 26
  27. 27.  present basic and diluted EPS for each class of equity shares that has different right to share in the net profit for the period. Itshould be presented on the face of the statement of Profit and Loss account. Itshould be disclosed for all periods presented. Negative EPS should also be disclosed CA Kaustubh Deshpande 27
  28. 28.  Basic EPS  Net profit or loss attributable to shareholders  Weighted average number of equity shares outstanding during the year  Net profit or loss attributable to shareholder should be after deducting preference dividends and any attributable tax thereto  If there are more than one class of equity shares, net profit or loss for the period is apportioned according to dividend rights CA Kaustubh Deshpande 28
  29. 29.  Weighted average shares are weighted with time factor Weighted average shares outstanding during the period and for all periods be adjusted for all events except potential equity shares, that have changed the number of equity shares outstanding, without a corresponding change in resources CA Kaustubh Deshpande 29
  30. 30.  Diluted EPS  Net profit or loss attributable to shareholders  Weighted average number of shares outstanding during the period should be adjusted for the effect of all dilutive potential equity shares.  Net profit or loss attributable to shareholder means adjusted to the extent of interest or dividend accounted on potential equity share and its tax effect  Allotment money pending is treated as dilutive potential equity shares.  Dilutive potential shares should be deemed to be have been converted into equity at the beginning of the period. CA Kaustubh Deshpande 30
  31. 31.  EPSbefore and after extra-ordinary items Numerator Denominator Nominal value of share CA Kaustubh Deshpande 31
  32. 32.  There are 27 paragraphs Contents  Objective  Scope  Definitions  Related Party issues  Disclosures CA Kaustubh Deshpande 32
  33. 33.  Disclosure of:  Related party relationship  Transaction between enterprise and related party  It is applicable to all reporting enterprise as also to consolidated financial statements. CA Kaustubh Deshpande 33
  34. 34.  Enterprises directly or indirectly under common control with the reporting enterprise Associates and Joint ventures of the reporting enterprise and the investing party or venturer Individuals owning directly or indirectly an interest in the voting power of the reporting enterprise and relatives of such individuals Key management personnel and relatives of such person Enterprises over which any person mentioned in above two points is able to have significant influence. CA Kaustubh Deshpande 34
  35. 35.  A statute or regulator or a similar competent authority governing -an enterprise prohibit the enterprise to disclose certain information which is required to be disclosed.o No disclosure of intra group transactions in Consolidated financial statementso No disclosure of transactions between enterprise controlled by different states CA Kaustubh Deshpande 35
  36. 36.  Related party- one party has control or significant influence over the other party Related party transaction – a transfer of resources or obligation whether or not a price is charged Control- ownership, control of the composition of the board of directors, Substantial interest Key management personnel- persons having authority and responsibility for planning, directing and controlling the activities of reporting enterprise CA Kaustubh Deshpande 36
  37. 37.  Relative- in relation to individual means- spouse, son, daughter, father, mother who may be expected to influence. CA Kaustubh Deshpande 37
  38. 38.  Names of the related parties Nature of the related party relationship Irrespective of whether or not there have been transactions between related parties Nature of transaction Volume of transactions as an amount or appropriate proportion Outstanding items pertaining to related parties at the balance sheet date. Amounts written off or back in respect of debts due from or to related parties CA Kaustubh Deshpande 38
  39. 39.  There are 100 paragraphs Contents  Objective  Scope  Intangible Asset  Recognition and measurement  Subsequent expenditure  Amortisation CA Kaustubh Deshpande 39
  40. 40.  Standard prescribes the accounting treatment for intangible assets that are not dealt by another accounting standard Itdoes not apply to a) Intangibles –Another AS b) financial assets c) Mineral rights d) Contract with policyholder- In insurance companies e) expenditure in respect of Termination benefits CA Kaustubh Deshpande 40
  41. 41.  Intangible asset is an identifiable non- monetary asset without physical substance An asset is a resource 1) controlled by enterprise as a result of past events 2) from which future economic benefits are expected to flow. Research is original and planned investigation with object of gaining new technical knowledge Development is the application of research findings to produce the intangible asset CA Kaustubh Deshpande 41
  42. 42.  Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life. CA Kaustubh Deshpande 42
  43. 43.  Software, patents, copyrights, Customer list, marketing rights, motion film etc There could be cases where both tangible and intangible elements exists and inseparable. Whether AS-10 or AS-26 is applicable- Which element is predominant Now ever items mentioned above may not meet the definition of intangible CA Kaustubh Deshpande 43
  44. 44.  Identifiable – Separability is not necessary condition for identifiable asset Future economic benefits Control-power to obtain future economic benefits and restrict the access of others to those resources. Examples – 1) Marketing rights (Future benefits and Copyright) 2) Skilled Staff (future benefits and control?) 3) customer Contracts ? CA Kaustubh Deshpande 44
  45. 45.  IA should be recognised only if : future economic benefits will flow and cost of the asset can be measured Separate acquisition- Purchase price including other incidental expenses Acquisition as a part of amalgamation- Amalgamation in the nature of purchase is accounted as per AS-14. (Standard does not talk about amalgamation in the nature of merger) Option I- Fair vale in active market, Option II- ALP , Option III- Discounted future cash flows. If separate value cant be ascertained then it will be included in goodwill CA Kaustubh Deshpande 45
  46. 46.  Goodwill –Does not meet the definition of IA Other assets  It should meet the basic requirements of IA and measurement  Therefore an enterprise classifies the generation of the asset into a) research phase b) development phase CA Kaustubh Deshpande 46
  47. 47.  Expenditure incurred in this phase does not qualify for capitalisation, so it should be expensed . Reason:Research phase does not demonstrate that an IA exists from which future economic benefits are probable. Research activities means: obtaining new knowledge, search for alternatives, design, evaluation etc CA Kaustubh Deshpande 47
  48. 48.  IA arising from development phase should be recognised if:  Technical feasibility  Intention to complete asset and use or sell it  Future economic benefits  Ability to measure the expenditure CA Kaustubh Deshpande 48
  49. 49.  Objective – to prescribe accounting treatment of borrowing costs. Scope –• This standard should be applied in accounting of borrowing costs• This standard does not deal with actual or imputed cost of owner’s equity, including preference share capital not classified as a liability CA Kaustubh Deshpande 49
  50. 50.  Borrowing Costs – interest and other costs incurred by an entity in connection with borrowing of funds and may include costs like interest and commitment charges paid to bank, finance charges against finance lease, exchange differences arising from foreign currency borrowings, etc. Qualifying Asset – an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. E.g. Manufacturing plants, power generation facilities, investment properties. Assets that are ready for intended use or sale when acquired also are not qualifying assets CA Kaustubh Deshpande 50
  51. 51.  The borrowing costs can be treated as follows –1. Capitalize and include in the cost of the asset - if the conditions for capitalizing are satisfied.2. Charge to Profit and Loss – If the borrowing costs would have been avoided if expenditure on Qualifying Asset had not been made Conditions for Capitalization of Borrowing Costs –a. Qualifying Asset will give Future Economic Benefitsb. Costs to be capitalized can be measured reliably CA Kaustubh Deshpande 51
  52. 52.  To the extent funds are borrowed specifically for the purpose of obtaining a qualifying asset, amount of borrowing costs should be capitalized and determined in following manner –i. Capitalization Rate = Actual Borrowing Costsii. Amount of Borrowing Cost = Actual Borrowing Cost (less) Income on Temporary Investment of those borrowings CA Kaustubh Deshpande 52
  53. 53.  To the extent funds are borrowed generally and used for obtaining qualifying asset, the amount of borrowing cost eligible for capitalization will be determined by applying a capitalization rate to the expenditure on that asset. Capitalization Rate = Weighted Average of Borrowing Costs The borrowing costs should not exceed actual costs incurred CA Kaustubh Deshpande 53
  54. 54.  Capitalization as a part of cost should commence when ALL of the following conditions are satisfied –1. Expenditure for the acquisition, construction or production of a qualifying asset is being incurred2. Borrowing costs are being incurred3. Activities that are necessary to prepare the asset for its intended use or sale are in progress CA Kaustubh Deshpande 54
  55. 55.  Capitalization of Borrowing Costs should be suspended when –1. Extended periods in which active development is interrupted2. Natural Calamity has occurred (flood, earthquake, etc.) which would hamper the development of Qualifying Asset Capitalization is not normally suspended when substantial technical or administrative work is being carried out or temporary delay is a necessary part of getting the asset ready CA Kaustubh Deshpande 55
  56. 56.  Capitalization of Borrowing Costs should cease when –1. Substantially all activities necessary to prepare the Qualifying Asset for its intended use or sale are complete2. When the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts, capitalization of borrowing costs in relation to a part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are complete CA Kaustubh Deshpande 56
  57. 57.  Financial statement should disclose –1. The accounting policy adopted for borrowing costs2. The amount of borrowing costs capitalized during the period CA Kaustubh Deshpande 57
  58. 58.  There are 146 paragraphs Contents  Objective  Scope  Definitions  Short term employee benefits and recognition  Post employment benefits  Long term benefits  Termination benefits CA Kaustubh Deshpande 58
  59. 59.  Thestandard requires an enterprise to recognise:  A liability when an employee has provided service in exchange for employee benefits to be paid  An expense when enterprise consumes the economic benefit arising from service provided by an employee in exchange for employee benefits. CA Kaustubh Deshpande 59
  60. 60.  Short term benefits plan Post employment benefit Long term employee benefits Termination benefits CA Kaustubh Deshpande 60
  61. 61.  Employee benefits- consideration given by an enterprise in exchange of service rendered by employee Short term employee benefit- employee benefits which fall due within twelve months after the end of the period Post employment benefits- employee benefits which are payable after the completion of employment Long term employee benefits- Employee benefits which do not fall due wholly within twelve months after the end of the period CA Kaustubh Deshpande 61
  62. 62.  Termination benefits: Benefits payable as a result of either- terminate an employee’s employment before the normal retirement and VRS CA Kaustubh Deshpande 62
  63. 63.  Examples: Salary, wages, performance bonus, compensated absences (within twelve), non monetary benefits (medical care, cars, etc) Recognition:Undiscounted amount of short term employee benefits to be paid in exchange of services In case of non vesting compensated absences ( Only exemption to SMC) CA Kaustubh Deshpande 63
  64. 64.  Post employment benefits are classified  Defined contribution plan  Obligation is limited to the amount that it agrees to contribute to the fund  Recognition: contribution payable to defined contribution payable. However where contribution so not fall due within 12 month its should be discounted (Except SMC) as per para 78 (Market yield on gov. bonds)  Defined Benefit plan  Obligation is to provide the agreed benefit to current and former employees  Recognition: Actuarial Valuation CA Kaustubh Deshpande 64
  65. 65.  Example:Long term compensated absences, long service benefits,  Recognition: Actuarial valuation CA Kaustubh Deshpande 65
  66. 66.  Recognition  Enterprise has a present obligation as a result of a past event  Probable that an outflow  Reliable estimate  Where termination benefits fall due more than 12 months – It should be discounted as per para 78 CA Kaustubh Deshpande 66
  67. 67.  There are 35 paragraphs Contents  Definitions  Classification of investments  Cost of investments  Carrying amount of investments  Disposal of investments  Reclassification of investment CA Kaustubh Deshpande 67
  68. 68.  Standard does not deal with 1) recognition of interest, dividend 2) Asset management companies, banks and public financial institution CA Kaustubh Deshpande 68
  69. 69.  Investments are assets held by an enterprise for earning income by way of dividend, interest etc. A Current investment –by nature readily realisable and is intended to be held for not more than one year A long term investment- other than current CA Kaustubh Deshpande 69
  70. 70.  Current investment Long term investment  Cost of Investment  Cost plus acquisition charges  Investment acquired in exchange of asset- Fair value of asset given up  Interest bearing investment- Pre-acquisition interest and post-acquisition interest CA Kaustubh Deshpande 70
  71. 71.  Long term investment  At cost  Other than temporary decline –recorded in Profit and Loss account  Reversal if revival of investment Current investment  Lower of cost or fair value CA Kaustubh Deshpande 71
  72. 72.  Netdifference on disposal of investment is recorded in Profit and loss account.  Sale proceeds  Carrying cost CA Kaustubh Deshpande 72
  73. 73.  Longterm to Current- transfer is made at lower of carrying amount and cost on the date of transfer Current to long term- transfer is made at the lower of cost and fair vale on the date of transfer CA Kaustubh Deshpande 73
  74. 74.  Accounting policies- for carrying amount Separatedisclosure of income earned on investment and profit or loss on disposal of current and long term investment Significant restrictions on the right of ownership Aggregateamount of quoted and un quoted investment along with aggregate amount of market value CA Kaustubh Deshpande 74
  75. 75.  Costincurred for development of IA should be identified and accounted Expenditure on an intangible item that was initially recognised as an expense by reporting enterprise in previous financial statement should not be recognised as part of the cost of an intangible asset at a later date. CA Kaustubh Deshpande 75
  76. 76.  Future economic benefits in excess of its originally assessed standard of performance. Expenditure can be measured and attributed to the cost. CA Kaustubh Deshpande 76
  77. 77.  Usefullife Rebuttable presumption 10 years Hence if evidence for more than 10 years. CA Kaustubh Deshpande 77
  78. 78.  There are 125 Paragraphs Contents  Scope  Definitions  Identifying an asset – Impairment  Measurement of recoverable  Net selling price  Value in use  Recognition and measurement of impairment loss  Cash generating Units CA Kaustubh Deshpande 78
  79. 79.  Standard does apply to:  Inventories  assets arising from construction contracts,  Financial assets  deferred tax asset CA Kaustubh Deshpande 79
  80. 80.  Recoverable amount- Higher of an asset’s net selling price and its value in use Valuein use is the present value of estimated future cash flows from the use of an asset and disposal SMChas an option not to calculate present value for deriving the value in use. CA Kaustubh Deshpande 80
  81. 81.  Net selling price is the amount obtainable from the sale of an asset in an arms length transaction An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. Cash generating unit is the smallest identifiable group of assets that generates cash flows from continuing use that are largely independent of the cash inflows from other assets or group of assets. CA Kaustubh Deshpande 81
  82. 82.  At each balance sheet date enterprise should whether there is any indication that an asset may be impaired. External information  Assets market value has been declined  Changes in technology, economics, legal environment,  Carrying amount of net assets is more than market capitalisation CA Kaustubh Deshpande 82
  83. 83.  Internal information  Physical damage of asset or outdated  Economic performance – based on internal reproting CA Kaustubh Deshpande 83
  84. 84.  Higher of Value in use or net selling price Net selling price  Best evidence for net selling price  Binding sale agreement  Traded in active market- market price less cost of disposal CA Kaustubh Deshpande 84
  85. 85.  Value in use  Estimate the future cash flows  Cash flow projections should be based on reasonable and supportable assumptions  Cash flows should be based on recent financial budget  Beyond the period covered by budget be estimated by extrapolating the projections using growth rate (Subsequent years)  Cash inflows should consider the amount receivable (payable) for disposal of asset at the end of its useful life  Apply discounting rate CA Kaustubh Deshpande 85
  86. 86.  Futurecash flows should be estimated on current conditions:  Cash flows arising from restructuring or future capital expenditure which will improve the asset in its excess of its originally assessed standard performance  Cash flows should not include financing activity and income tax receipts and payment  As the discount rate is pre tax and should reflect the time value of money hence above two points should not be considered while determining value in use. Discounting rate should also consider the risk CA Kaustubh Deshpande 86
  87. 87.  If the recoverable amount is less than its carrying value , asset should be reduced to its recoverable value. An impairment loss should be recognised as an expense in the statement of Profit and Loss account After accounting for impairment loss, the depreciation charge for the asset should be calculated on the assets revised carrying amount. CA Kaustubh Deshpande 87
  88. 88.  If an active market exists for the output produced by an asset or a group of assets, this asset or group of assets should be identified as a separate cash- generating unit, even if some or all of the output is used internally. If this is the case, management’s best estimate of future market prices for the output should be used: (a) in determining the value in use of this cash- generating unit, when estimating the future cash inflows that relate to the internal use of the output; and (b) in determining the value in use of other cash- generating units of the reporting enterprise, when estimating the future cash outflows that relate to the internal use of the output. CA Kaustubh Deshpande 88
  89. 89. THANK YOU!CA Kaustubh Deshpande 89

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