OverviewWhat do Accounting Standards mean?Accounting Standards• Accounting Standards are a collection of generallyfollowed accounting principles and practices. Theyhelp to ensure a common basis for preparing thefinancial statements of different organizations. Itmeans that people can understand them moreeasily and make useful comparisons.Accounting Policies• Accounting policies develop from AccountingStandards. Different organisations may havedifferent policies, if the concerned standard allowsalternative treatment.
International Standards• In USA, the FASB (Financial Accounting StandardsBoard) and AICPA (American Institute of Certified PublicAccountants) have also prepared some useful material.Standards in India• In India, Accounting Standards are prepared by theAccounting Standards Board, which has been set upby the ICAI.• Twenty-eight Accounting Standards have been issued sofar in India. Many of these have become mandatory formost organisations.• The Accounting Standards apply mainly to business orcommercial organisations but in some cases, they arecompulsory for NGOs also.
Indian Accounting Standards• The standards are applicable from different dates.This means that a particular standard applies to allfinancial statements for periods beginning on orafter that date.• Accounting Standards apply only to material items.
Responsibilities of Chartered Accountants• CA must disclose non-compliance with theAccounting Standards, if any.• CA must disclose material departures fromthe Statements relating to audit matters.Where amount is ascertainable, it shouldbe stated; if not, this fact should also bestated.
AS-1: Disclosure of Accounting Policies• All significant accounting policies should be disclosed infinancial statements.• If fundamental accounting assumptions (such as accrual,going concern and consistency) are not followed, disclosureis necessary.• Applicable to all enterprises including sole proprietaryconcerns, partnership firms, companies, trusts etc.• Prudence,substance over form,and materialityshould be the basis for selecting the accounting policies.
AS-1: Disclosure of Accounting Policies• Accounting Policies usually cover the followingareas:Method of depreciation, depletion and amortisationTreatment of expenditure during constructionValuation of inventory, investments and fixed assetsTreatment of goodwillConversion and/or translation of foreign currencyitemsTreatment of retirement benefitsTreatment of contingent liabilitiesRecognition of profit on long-term contracts
AS-2: (Revised) Valuation of InventoriesHow to value and account for stocks?• The standard was revised in June 1999. Applicable to allenterprises. (Effective date: 01-04-1999)• Inventories should be valued at the lower of cost and netrealisable value, on the basis of FIFO or weightedaverage cost.• The standard does not apply to: W-I-P in construction contracts (Ref AS-7) Stocks of traders in sharemarket(shares, debentures and otherfinancial instruments) Inventory of live stock, agricultural and forest products, mineraloils, ores, gases etc.
AS-5Net Profit or Loss for the period,prior period items andchanges in Accounting Policies (Limited Revision)• All items of income and expenditure recognised in a periodto be included in the determination of net profit or loss for theperiod. (Effective date: 01-04-1996; Revised in February 1997)• Treatment and disclosure of prior period items and changesin the Accounting Policies. Applicable to all enterprises.• Ordinary activities– Activities undertaken as part of business in which enterprise engagesin furtherance or, incidental to, or arising from, above are ordinaryactivities• Extraordinary items are income or expenses arising fromevents that are –• distinct from ordinary activities, and• unlikely to recur frequently or regularly
AS-5:• Treatment of Specific Items• Income on NPAs• Income on non-performing investments• Clearing house rent of previous year• Salary arrears• Changes in accounting estimates• To be include in net income determination for current/current and futureperiods, as appropriate• Disclosure of nature and amount if effect material in current/futureperiods• Changes in accounting policies• When permissible– Compliance with statute– Compliance with accounting standards– More appropriate presentation• Treatment and Disclosure• Effect of transitional provisions specified in an AccountingStandard
AS-5:Exceptional itemsItems within profit/loss from ordinary activities may requireseparate disclosure due to –– Nature, or– Size, or– IncidencePrior period items– Rectification of errors of previous years– Distinct from changes in accounting estimates– Materiality to be considered, as in respect of any other item
AS-6: (Revised) Depreciation Accounting• Depreciation should be charged on assets. Related informationshould be disclosed. Revised in August 1994. Applicable to allenterprises. (Effective date: 01-04-1995)• Assessment of depreciation is based on the following factors:-(i) Historical cost(ii) Expected useful life of the depreciable asset ; and(iii) Estimated residual value of the depreciable asset• The companies Act (Schedule XIV) lays down the minimum rates ofdepreciation in respect of various assets. The management maycompute depreciation by applying a higher rate / lower rate without,however, increasing the useful life of an asset.• The Income Tax Act allows WDV method for computing taxableprofit.
AS-9: Revenue RecognitionWhen and how revenue should be recognised?• What disclosure is necessary. Applicable to allenterprises. (Effective date: 01-04-1993)• Conditions for recognition• Realisation, i.e., performance of act giving rise to revenue• Measurability• Collectibility• Recognition: Interest, dividend, royalty• Interest – on time proportion basis• Dividends from shares – when owner’s right to receive isestablished• Royalties –as per terms of agreement• Defer recognition if measurability/ collectibility criterionnot met.
AS-9: Revenue Recognition• Issues in Revenue Recognition• Non-recognition of income on NPAs• Loan origination fee• Guarantee expiration• Locker rent• Income from non-funded commitments• Merchant banking activities• Materiality considerations• Other Aspects• Subsequent uncertainty of collection – provisionmore appropriate than reversal• Disclosure to be made of circumstances in whichrevenue recognition is postponed due touncertainties
AS-10: Accounting for Fixed Assets• Determining cost of fixed assets. Disclosure of gross andnet values in accounts. Applicable to all enterprises.(Effective date: 01-04-1993)– Gross book value of fixed assets should be disclosed.– Interest on loans relating to acquisition or construction of fixedassets for the period upto completion of construction/ acquisitionand other attributable costs may be included.– Basis of selection of fixed assets for revaluation should be disclosed;value of an asset on revaluation should not be more than itsrealisable value. Increase in the net book value should be credited toRevaluation Reserve but any decrease in value should be chargedto P & L account.– Disclosure regarding method adopted for revaluation etc.– Goodwill and other intangibles : Ref AS –26 if applicable.
AS-11: (Revised) Accounting for effects ofchanges in Foreign Exchange Rates• What exchange rates to be used and how to account for thechanges in exchange rates.• How to account and disclose foreign currency assets,liabilities and fluctuations. Applicable to all enterprises.(Revised in December 1994; Exposure Draft issued forfurther revision). (Effective date: 01-04-1995)• Scope• Foreign exchange transactions• Translation of financial statements of foreignbranches• Extent of applicability to banks• Exposure draft proposes significant changes
AS-11: (Revised) Accounting for effects ofchanges in Foreign Exchange Rates• Foreign exchange transactions• Initial recognition– At date-of-transaction rate– Use of average rate• Balance sheet date restatement and treatmentof exchange difference– Restate monetary items at closing rate– Restate non-monetary items (other than fixed assets)which are carried in balance sheet at a valuation atexchange rate existing on date of such valuation– Fixed-asset related: adjust carrying amount– Revalued fixed assets – recoverable amount not to beexceeded– Take to P & L if not related to fixed asset
AS-11: (Revised) Accounting for effects ofchanges in Foreign Exchange Rates• Translation of financial statements of foreign branches : RBIGuidelines• Assets & liabilities at closing rate• Income & expenses at closing rate• Net exchange loss to be charged to P & L A/c• Net exchange gain to balance sheet (other liabilities)• Disclosure Requirements• Disclosure to be made of amounts of exchange differences• Included in P & L• Included in fixed assets• Un-recognised, in respect of forward exchange contracts.• Disclosure of risk management policy encouraged
AS-13: Accounting for Investments• Accounting, valuation and disclosure on investmentrelated information. Applicable to all enterprises.(Effective date: 01-04-1995)– Investments are assets held for earning income by way of dividends,interest, and rentals, for capital appreciation, or for other benefits tothe investing enterprise.– Current investments and long term investments should be disclosedseparately as specified in the statute governing the enterprise.– Cost of investment should include acquisition costs such asbrokerage, fees and duties.– If an investment is required in exchange for an asset, the acquisitioncost should be determined by reference to the fair value of the assetgiven up.– Investment properties to be shown as long term investments– Current investments to be carried at lower of the acquisition cost andfair value. Long term investments to be shown at cost but provisionshould be made for diminution in value, if any.– Quoted and unquoted investments to be shown separately.
AS-16: Borrowing Costs• Accounting, capitalizing and disclosure of interestetc.Applicable to all enterprises.(Effective date: 01-04-2000)• Borrowing costs directly attributable to the acquisition, construction orproduction of a qualifying asset should be capitalised as part of thecost of that asset.• Other borrowing costs should be recognised as an expense in theperiod in which they are incurred.
AS-17: Segment Reporting• Presenting financial results according to business orgeographical segments;applies to listed companies orto organizations with turnover exceeding Rs. 50 crs.per annum. (Effective date: 01-04-2001)• Mandatory in nature in respect of the enterprises whoseequity or debt securities are listed on a stock exchangeand enterprises whose turnover exceeds Rs 50 crores.• A business or geographical segment, is to be identified asa Reportable Segment, if• its revenue is 10% or more of the total revenue; or• its result is 10 % or more of the combined result o allthe segments; or• its segment assets are 10 % or more of the total assets ofall segments.
AS-18: Related Party Disclosures• Disclosure of related parties and transactions withthem.(Effective date: 01-04-2001)• Parties are considered to be related if at any time during the reportingperiod one party has the ability to control the other party or exercisesignificant influence over the other party in making financial or operatingdecisions.
AS-20: Earnings per Share• Relevant only for companies with equity share capital.(Effective date: 01-04-2001) AS- 20 is mandatory in nature in respect of enterprises whose equityshares or potential equity shares are listed on a recognised stockexchange in India. An enterprise which has neither equity shares norpotential equity shares which are so listed but which disclosesearnings per share, should calculate and disclose earnings per sharein accordance with AS- 20. Every company, which is required to giveinformation under Part IV of the Schedule VI to the Companies Act,1956, should calculate and disclose earnings per share inaccordance with AS- 20, whether its equity shares or potential equityshares are listed on a recognised stock exchange in India or not. An enterprise whose shares are listed, should present basic anddiluted earnings per share. Basic earnings per share should be calculated by dividing the netprofit by the weighted average number of equity shares outstandingduring that period. For calculating diluted earnings per share, the net profit and weightedaverage number of shares should be adjusted for the effects of alldilutive potential equity shares.
AS-21: Consolidated Financial Statements• Designed for holding companies and group companies.Applies only if consolidated statements are prepared by thegroup or parent company. Some concepts are relevant toconsolidation of accounts of NGOs.(Effective date: 01.04.2001)– AS - 21 is mandatory only if an enterprise presents consolidatedfinancial statements. In other words, the accounting standard doesnot mandate an enterprise to present consolidated financialstatements but, if the enterprise presents consolidated financialstatements for complying with the requirements of any statute orotherwise, it should prepare and present consolidated financialstatements in accordance with AS - 21.– However,in terms of Indian Companies Act, Sec 212, a holdingcompany has to attach to its Balance Sheet the B/S and P&Laccount of each of its subsidiaries.– All listed companies are required to give consolidated statements inrespect of subsidiaries in which they hold 51% or more share capital.These statements are prepared as if the group were a singleenterprise with one or more divisions.
AS-21: Consolidated Financial Statements– Control means the ownership, directly or indirectly throughsubsidiary of more than one-half of the voting power of anenterprise or of the board of directors for economic benefitand not investments in associates and joint ventures.– Financial statements of the parent and its subsidiaries shouldbe combined on line by line basis by adding together like itemsof assets, liabilities, income and expenses.– Where the carrying amount of the investment in the subsidiaryis different from its cost, any excess of the cost is recognised asgoodwill and shortfall is treated as a capital reserve. Intra-groupbalances and intra-group transactions and resulting unrealisedprofits should be eliminated in full.– Financial statements used in the consolidation should be drawnupto the same reporting date and prepared using uniformaccounting policies for like transactions and other events insimilar transactions.
AS- 25: Interim Financial Reporting• This accounting standard does not mandate whichenterprises should present interim financial reports, howfrequently, or how soon after the end of an interim periodbut if an enterprise is required or elects to prepare andpresent an interim financial report, it should comply with thisstandard. (01– 04 – 2002)• Objective– To prescribe the minimum content of an interim financial report. Interim period is a financial reporting period shorter than a fullfinancial year. An interim financial report should include, at a minimum, thecondensed balance sheet, statement of profit and loss, cash flowstatement and selected explanatory notes. Interim reports should include these three financial statements as ofthe end of the current interim period and comparative statements asat the end of the immediately preceding financial year.