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indian acccounting standards

  2. 2. INTRODUCTION OF INDIANACCOUNTING STANDARDS Accounting Standards are used as one of the main compulsory regulatorymechanisms for preparation of general-purpose financial reports and subsequentaudit of the same, in almost all countries of the world. Accounting standards are concerned with the system of measurement anddisclosure rules for preparation and presentation of financial statements. Theyappear with a set of authoritative statements of how particular types oftransactions, events and other costs should be recognized and reported in thefinancial statements. Accounting standards are devised to furnish useful information to differentusers of the financial statements, to such as shareholders, creditors, lenders,management, investors, suppliers, competitors, researchers, regulatory bodiesand society at large and so on. In fact, such statements are designed andprescribed so as to improve & benchmark the quality of financial reporting.The rapid growth of international trade and internationalization of firms, theDevelopments of new communication technologies, the emergence ofinternational competitive forces is perturbing the financial environment to agreat extent. Under this global business scenario, the residents of the businesscommunity are in badly needed of a common accounting language that shouldbe spoken by all of them across the globe. A financial reporting system ofglobal standard is a pre-requisite for attracting foreign as well as present andprospective investors at home alike that should be achieved throughharmonization of accounting standards. Accounting Standards are the policy documents (authoritative statements ofbest accounting practice) issued by recognized expert accountancy bodiesrelating to various aspects of measurement, treatment and disclosure ofaccounting transactions and events? As relate to the codification of GenerallyAccepted Accounting Principles (GAAP). These are stated to be norms ofaccounting policies and practices by way of codes or guidelines to direct as tohow the items, which go to make up the financial statements should be dealtwith in accounts and presented in the annual accounts. The aim of setting standards is to bring about uniformity in financial reportingand to ensure consistency and comparability in the data published byenterprises. 2|Page
  3. 3. INTRODUCTION OF ICAIThe Institute of Chartered Accountants of India (ICAI) is a nationalprofessional accounting body of India. It was established on 1 July 1949 as abody corporate under the Chartered Accountants Act, 1949 enacted by theConstituent Assembly of India (acting as the provisional Parliament of India) toregulate the profession of Chartered Accountancy in India. ICAI is the secondlargest professional accounting body in the world in terms of membershipsecond only to American Institute of Certified Public Accountants.ICAI is the only licensing cum regulating body of the financial audit andaccountancy profession in India. It recommends the accounting standards to befollowed by companies in India to the National Advisory Committee onAccounting Standards (NACAS) and sets the accounting standards to befollowed by other types of organizations. ICAI is solely responsible for settingthe auditing and assurance standards to be followed in the audit of financialstatements in India. It also issues other technical standards like Standards on Internal Audit (SIA),Corporate Affairs Standards (CAS) etc. to be followed by practicing CharteredAccountants. It works closely with the Government of India, Reserve Bank ofIndia and the Securities and Exchange Board of India in formulating andenforcing such standards. Members of the Institute are known as Chartered Accountants. However theword chartered does not refer to or flow from any Royal Charter. CharteredAccountants are subject to a published Code of Ethics and professionalstandards, violation of which is subject to disciplinary action. Only a member ofICAI can be appointed as auditor of an Indian company under the CompaniesAct, 1956. The management of the Institute is vested with its Council with thepresident acting as its Chief Executive Authority. A person can become amember of ICAI by taking prescribed examinations and undergoing three yearsof practical training. The membership course is well known for its rigorousstandards. ICAI has entered into mutual recognition agreements with otherprofessional accounting bodies world-wide for reciprocal membershiprecognition. 3|Page
  4. 4. ICAI is one of the founder members of the International Federation ofAccountants (IFAC), South Asian Federation of Accountants (SAFA), andConfederation of Asian and Pacific Accountants (CAPA). ICAI was formerlythe provisional jurisdiction for XBRL International STRUCTURE OF ICAIThe Institute of Chartered Accountants of India periodically reviews the schemeof Education and Training to remain in tandem with developments in the fieldof education and other changes at national and global level. Evolving businessalso demands newer skills from the accounting professionals. Accordingly, theexisting scheme was revamped and the new scheme was launched on 10thDecember, 2008.Different levels of Chartered Accountancy Course: 1. Entry Level Test Common Proficiency Test 2. First Stage of Theoretical Education Integrated Professional Competence Course 3. Final Stage of Theoretical Education Final Course1. The Entry level test is named as Common Proficiency Test (CPT) which isdesigned in the pattern of entry level test for engineering, medical and otherprofessional courses. It is a test of 4 hours duration comprising of two sessionsof 2 hours each, with a break between two sessions. The test comprises of 2hours objective type questions only with negative marking for choosing wrongoptions. The Common Proficiency Test (CPT) has replaced ProfessionalEducation (Course-I) effective from September 13, 2006. The last ProfessionalEducation (Examination – I) was held in November, 2007.2. The Integrated Professional Competence Course (IPCC) with an upgradedsyllabus has replaced the Professional Competence Course (PCC) effective 4|Page
  5. 5. from December 10, 2008. The last PCC examination will be held in November,2012.3. The last leg of the Chartered Accountancy is Final Course, designed to impartexpert knowledge in financial reporting, auditing and professional ethics,taxation, corporate laws, system control, strategic finance and advancedmanagement accountancy. The Final (New) Course was launched in February2007 and first examination under new scheme was held in November, 2008.The last Final (Old) Course examination will be held in November, 2010.Updated syllabus is benchmarked to chartered accountancy courses availablearound the globe and is fully compliant to International Education Standardsissued by the International Federation of Accountants.Under the present scheme the period of articled training is three years.New upgraded 100 Hours of Information Technology Training replaced250 Hours Compulsory Computer Training in December, 2006. SCOPE OF ACCOUNTING STANDARDS: 5|Page
  6. 6. Efforts will be made to issue Accounting Standards which are in conformitywith the provisions of the applicable laws, customs, usages and businessenvironment in India. However, if a particular Accounting Standard is foundto be not in conformity with law, the provisions of the said law will prevailand the financial statements should be prepared in conformity with such law.The Accounting Standards by their very nature cannot and do not overridethe local regulations which govern the preparation and presentation offinancial statements in the country.However, the ICAI will determine the extent of disclosure to be made infinancial statements and the auditor‘s report thereon. Such disclosure may beby way of appropriate notes explaining the treatment of particular items.Such explanatory notes will be only in the nature of clarification andtherefore need not be treated as adverse comments on the related financialstatements.The Accounting Standards are intended to apply only to items which arematerial. Any limitations with regard to the applicability of a specificAccounting Standard will be made clear by the ICAI from time to time. Thedate from which a particular Standard will come into effect, as well as theclass of enterprises to which it will apply, will also be specified by the ICAI.However, no standard will have retroactive application, unless otherwisestated.The Institute will use its best endeavors to persuade the Government,appropriate authorities, industrial and business community to adopt theAccounting Standards in order to achieve uniformity in preparation andpresentation of financial statements. In formulation of Accounting Standards, the emphasis would be on layingdown accounting principles and not detailed rules for application andimplementation thereof. 6|Page
  7. 7. The Standards formulated by the ASB include paragraphs in bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. An individual standard should be read in the context of the objective stated in that standard and this Preface. The ASB may consider any issue requiring interpretation on any Accounting Standard. Interpretations will be issued under the authority of the Council. The authority of Interpretation is the same as that of Accounting Standard to which it relates. PROCEDURE FOR ISSUING AN ACCOUNTING STANDARDBroadly, the following procedure is adopted for formulating AccountingStandards: 7|Page
  8. 8. STEP-1:The ASB determines the broad areas in which Accounting Standards need to beformulated and the priority in regard to the selection thereof.STEP-2: In the preparation of Accounting Standards, the ASB will be assisted by StudyGroups constituted to consider specific subjects. In the formation of StudyGroups, provision will be made for wide participation by the members of theInstitute and others.STEP-3:The draft of the proposed standard will normally include the following:(a) Objective of the Standard,(b) Scope of the Standard,(c) Definitions of the terms used in the Standard,(d) Recognition and measurement principles,Wherever applicable,(e) Presentation and disclosure requirements.STEP-4: The ASB will consider the preliminary draft prepared by the Study Group andif any revision of the draft is required on the basis of deliberations, the ASB willmake the same or refer the same to the Study Group.STEP-5:The ASB will circulate the draft of the Accounting Standard to the Councilmembers of the ICAI and the following specified bodies for their comments:  Department of Company Affairs (DCA)  Comptroller and Auditor General of India(C&AG)  Central Board of Direct Taxes (CBDT)  The Institute of Cost and Works Accountants of India (ICWAI)  The Institute of Company Secretaries of India (ICSI)  Associated Chambers of Commerce and  Industry (ASSOCHAM), Confederation of  Indian Industry (CII) and Federation of  Indian Chambers of Commerce and  Industry (FICCI)  Reserve Bank of India (RBI)  Securities and Exchange Board of India (SEBI)  Standing Conference of Public Enterprise(SCOPE) 8|Page
  9. 9.  Indian Banks‘ Association (IBA)  Any other body considered relevant by the ASB keeping in view the nature of the Accounting StandardSTEP-6: The ASB will hold a meeting with the representatives of specified bodies toascertain their views on the draft of the proposed Accounting Standard. On thebasis of comments received and discussion with the representatives of specifiedbodies, the ASB will finalize the Exposure Draft of the proposed AccountingStandard.STEP-7 The Exposure Draft of the proposed Standard will be issued for comments bythe members of the Institute and the public. The Exposure Draft willspecifically be sent to specified bodies (as listed above), stock exchanges, andother interest groups, as appropriate.STEP-8After taking into consideration the comments received, the draft of the proposedStandard will be finalized by the ASB and submitted to the Council of the ICAI.STEP-9 The Council of the ICAI will consider the final draft of the proposed Standard,and if found necessary, modify the same in consultation with the ASB. TheAccounting Standard on the relevant subject will then be issued by the ICAI.STEP-10 For a substantive revision of an Accounting Standard, the procedure followedfor formulation of a new Accounting Standard, as detailed above, will befollowed.STEP-11 Subsequent to issuance of an Accounting Standard, some aspect(s) may requirerevision which is not substantive in nature. For this purpose, the ICAI maymake limited revision to an Accounting Standard. The procedure followed forthe limited revision will substantially be the same as that to be followed forformulation of an Accounting Standard, ensuring that sufficient opportunity isgiven to various interest groups and general public to react to the proposal forlimited revision. 9|Page
  10. 10. Accounting Standard (AS) 1 Disclosure of Accounting PoliciesIntroductionThis statement deals with the disclosure of significant accounting policiesfollowed in preparing and presenting financial statements.The view presented in the financial statements of an enterprise of it State ofaffairs and of the profit or loss can be significantly affected by the accountingpolicies followed in the preparation and presentation of the financial statements.The accounting policies followed vary from enterprise to enterprise. Disclosureof significant accounting policies followed is necessary if the view presented isto be properly appreciated. The disclosure of some of the accounting policiesfollowed preparation and presentation of the financial statements is required bylaw in some cases.The Institute of Chartered Accountants of India has, in Statements issued by it,recommended the disclosure of certain accounting policies, e.g., translationpolicies in respect of foreign currency items.In recent years, a few enterprises in India have adopted the practice of includingin their annual reports to shareholders a separate statement of accountingpolicies followed in preparing and presenting the financial.Nature of Accounting PoliciesThe accounting policies refer to the specific accounting principles and themethods of applying those principles adopted by the enterprise in thepreparation and presentation of financial statements.There is no single list of accounting policies which are applicable to allCircumstances. The differing circumstances in which enterprises operate in a 10 | P a g e
  11. 11. situation of diverse and complex economic activity make alternative accountingprinciples and methods of applying those principles acceptable.The choice of the appropriate accounting principles and the methods ofApplying those principles in the specific circumstances of each enterprise callsfor considerable judgment by the management of the enterprise.The various statements of the Institute of Chartered Accountants of Indiacombined with the efforts of government and other regulatory agencies andprogressive managements have reduced in recent years the number ofacceptable alternatives particularly in the case of corporate enterprises. Whilecontinuing efforts in this regard in future are likely to reduce the number stillfurther, the availability of alternative accounting principles and methods ofDisclosure of Accounting Policies 43Applying those principles is not likely tobe eliminated altogether in view ofthe differing circumstances faced by the enterprises.Areas in which differing Accounting Policies areEncountered The following are examples of the areas in which differentaccounting policies may be adopted by different enterprises.• Methods of depreciation, depletion and amortization• Treatment of expenditure during construction• Conversion or translation of foreign currency items• Valuation of inventories• Treatment of goodwill• Valuation of investments• Treatment of retirement benefits• Recognition of profit on long-term contracts• Valuation of fixed assets• Treatment of contingent liabilities.The above list of examples is not intended to be exhaustive. 11 | P a g e
  12. 12. Disclosure of Accounting Policies To ensure proper understanding of financial statements, it is necessary that allsignificant accounting policies adopted in the preparation and presentation offinancial statements should be disclosed.Such disclosure should form part of the financial statements. It would be helpful to the reader of financial statements if they are all disclosedas such in one place instead of being scattered over several statements,schedules and notes. Examples of matters in respect of which disclosure of accounting policiesadopted will be required are contained in paragraph. This list of examples is not, however, intended to be exhaustive. Any change inan accounting policy which has a material effect should be disclosed. Theamount by which any item in the financial statements is affected by such changeshould also be disclosed to the extent ascertainable. 12 | P a g e
  13. 13. Accounting Standard (AS) 2 Valuation of InventoriesMeaning The following terms are used in this Statement with the meanings specified:Inventories are assets:(a) Held for sale in the ordinary course of business;(b) in the process of production for such sale; or(c) in the form of materials or supplies to be consumed in the productionprocess or in the rendering of services. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale.Scope1. This Statement should be applied in accounting for inventories otherthen:(a) Work in progress arising under construction contracts, including directlyrelated service contracts (see Accounting Standard (AS) 7, Accounting forConstruction Contracts3);(b) Work in progress arising in the ordinary course of business of serviceproviders;(c) Shares, debentures and other financial instruments held as stock-in-trade;and(d) Producers‘ inventories of livestock, agricultural and forest products, andmineral oils, ores and gases to the extent that they are measured at net realizablevalue in accordance with well established practices in those industries.2. The inventories referred to in paragraph 1 (d) are measured at net realizablevalue at certain stages of production. This occurs, for example, whenagricultural crops have been harvested or mineral oils, ores and gases have beenextracted and sale is assured under a forward contract or a governmentguarantee, or when a homogenous market exists and there is a negligible risk offailure to sell. These inventories are excluded from the scope of this Statement. 13 | P a g e
  14. 14. Measurement of InventoriesInventories should be valued at the lower of cost and net realizable value.Cost of Inventories: The cost of inventories should comprise all costs ofpurchase, costs of conversion and other costs incurred in bringing theinventories to theirPresent location and condition.Costs of Purchase: The costs of purchase consist of the purchase priceincluding duties and taxes (other than those subsequently recoverable by theenterprise fromthe taxing authorities), freight inwards and other expenditure directlyattributable to the acquisition. Trade discounts, rebates, duty drawbacks andother similar items are deducted in determining the costs of purchase.Costs of Conversion: The costs of conversion of inventories include costsdirectly related to the units of production, such as direct labor. They alsoinclude a systematic allocation of fixed and variable production overheads thatare incurred in converting materials into finished goods. Fixed productionoverheads are those indirect costs of production that remain relatively constantregardless of the volume of production, such as depreciation and maintenance offactory buildings and the cost of factory management and administrationVariable production overheads are those indirect costs of production that varydirectly, or nearly directly, with the volume of production, such as indirectmaterials and indirect labor.Exclusions from the Cost of Inventories It is appropriate to exclude certain costs andrecognize them as expenses in the period in which they are incurred. Examplesof such costs are:(a) Abnormal amounts of wasted materials, labor, or other production costs;(b) Storage costs, unless those costs are necessary in the production processprior to a further production stage;(c) Administrative overheads that do not contribute to bringing the inventoriesto their present location and condition; and(d) Selling and distribution costs. 14 | P a g e
  15. 15. Techniques for the Measurement of Cost Techniques for the measurement of the cost of inventories, such as the standardcost method or the retail method, may be used for convenience if the resultsapproximate the actual cost. Standard costs take into account normal levels ofconsumption of materials and supplies, labor, efficiency and capacityutilization. They are regularly reviewed and, if necessary, revised in the light ofcurrent conditions.The retail method is often used in the retail trade for measuring inventories oflarge numbers of rapidly changing items that have similar Margins and forwhich it is impracticable to use other costing methods. The cost of the inventoryis determined by reducing from the sales value of the inventory the appropriatepercentage gross margin. The percentage used takes into considerationinventory which has been marked down to below its original selling price. Anaverage percentage for each retail department is often used.DisclosureThe financial statements should disclose:(a) The accounting policies adopted in measuring inventories, including the costformula used; and(b) The total carrying amount of inventories and its classification appropriate tothe enterprise.Information about the carrying amounts held in different classifications ofinventories and the extent of the changes in these assets is useful to financialstatement users. Common classifications of inventories are raw materials andcomponents, work in progress, finished goods, stores and spares, and loosetools. 15 | P a g e
  16. 16. Accounting Standard (AS) 3 Cash Flow Statements Accounting Standard (AS) 3, ‗Cash Flow Statements‘ (revised 1997), issuedby the Council of the Institute of Chartered Accountants of India, comes intoeffect in respect of accounting periods commencing on or after1-4-1997. ThisStandard supersedes Accounting Standard (AS) 3, ‗Changes in FinancialPosition‘, issued inJune1981. This Standard is mandatory innature2 in respect ofaccounting periods commencing on or after 1-4-20043 for the enterprises whichfall in any one or more of the following categories, at any time during theaccounting period. AS 3 was originally made mandatory in respect of accounting periodscommencing on or after 1-4-2001, for the following:(i) Enterprises whose equity or debt securities are listed on a recognized stockexchange in India, and enterprises that are in the process of issuing equity ordebt securities that will be listed on a recognized stock exchange in India asevidenced by the board of directors‘ resolution in this regard.(ii) All other commercial, industrial and business reporting enterprises, whoseturnover for the accounting period exceeds Rs. 50 crores.DefinitionsThe following terms are used in this Statement with the meanings specified:Cash comprises cash on hand and demand deposits with banks.Cash equivalents are short term, highly liquid investments that are readilyconvertible into known amounts of cash and which are subject to aninsignificant risk of changes in value.Cash flows are inflows and outflows of cash and cash equivalents.Operating activities are the principal revenue-producing activities of theEnterprise and other activities that are not investing or financing activities.Investing activities are the acquisition and disposal of long-term assetsAnd other investments not included in cash equivalents. 16 | P a g e
  17. 17. Financing activities are activities that result in changes in the size andComposition of the owners‘ capital (including preference share capital in thecase of a company) and borrowings of the enterprise.Scope1. An enterprise should prepare a cash flow statement and should present it foreach period for which financial statements are presented.2. Users of an enterprise‘s financial statements are interested in how theenterprise generates and uses cash and cash equivalents. This is the caseregardless of the nature of the enterprise‘s activities and irrespective of whethercash can be viewed as the product of the enterprise, as may be the case with afinancial enterprise. Enterprises need cash for essentially the same reasons,however different their principal revenue producing activities might be. Theyneed cash to conduct their operations, to pay their obligations, and to providereturns to their investors.Presentation of a Cash Flow StatementThe cash flow statement should report cash flows during the period classifiedby operating, investing and financing activities. An enterprise presents its cash flows from operating, investing and financingactivities in a manner which is most appropriate to its business.Classification by activity provides information that allows users to assess theimpact of those activities on the financial position of the enterprise and theamount of its cash and cash equivalents. This information may also be used toevaluate the relationships among those activities. A single transaction may include cash flows that are classified differently. Forexample, when the installment paid in respect of a fixed asset acquired ondeferred payment basis includes both interest and loan, the interest element isclassified under financing activities and the loan element is classified underinvesting activities. 17 | P a g e
  18. 18. DisclosuresAn enterprise should disclose, together with a commentary by management, theamount of significant cash and cash equivalent balances held by the enterprisethat are not available for use by it. There are various circumstances in which cash and cash equivalent balancesheld by an enterprise are not available for use by it. Examples include cash andcash equivalent balances held by a branch of the enterprise that operates in acountry where exchange controls or other legal restrictions apply as a result ofwhich the balances are not available for use by the enterprise.Additional information may be relevant to users in understanding the financialposition and liquidity of an enterprise. Disclosure of this information, togetherwith a commentary by management, is encouraged and may include:(a) the amount of undrawn borrowing facilities that may be available for futureoperating activities and to settle capital commitments, indicating any restrictionson the use of these facilities; and(b) the aggregate amount of cash flows that represent increases in operatingcapacity separately from those cash flows that are required to maintainoperating capacity. The separate disclosure of cash flows that represent increases in operatingcapacity and cash flows that are required to maintain operating is useful inenabling the user to determine whether the enterprise is investing adequately inthe maintenance of its operating capacity. An enterprise that does not investadequately in the maintenance of its operating capacity may be prejudicingfuture profitability for the sake of current liquidity and distributions to owners. 18 | P a g e
  19. 19. Accounting Standard (AS) 4 Contingencies and Events Occurring After the Balance Sheet DateIntroduction This Statement deals with the treatment in financial statements of(a) Contingencies4, and(b) Events occurring after the balance sheet date. The following subjects, which may result in contingencies, are excluded fromthe scope of this Statement in view of special considerations applicable to them:(a) Liabilities of life assurance and general insurance enterprises arising frompolicies issued;(b) Obligations under retirement benefit plans; and(c) Commitments arising from long-term lease contracts scope of thisStatement.DefinitionsThe following terms are used in this Statement with the meanings specified:A contingency is a condition or situation, the ultimate outcome of which, gainor loss, will be known or determined only on the occurrence, or Non-occurrence, of one or more uncertain future events.Events occurring after the balance sheet date are those significant events, bothfavorable and unfavorable, that occur between the balance sheet date and thedate on which the financial statements are approved by the Board of Directors inthe case of a company, and, by the corresponding approving 19 | P a g e
  20. 20. ExplanationContingencies The term ―contingencies‖ used in this Statement is restricted to conditions orsituations at the balance sheet date, the financial effect of which is to bedetermined by future events which may or may not occur. Estimates are required for determining the amounts to be stated in the financialstatements for many on-going and recurring activities of an Enterprise. Onemust, however, distinguish between an event which is certain and one which isuncertain. The fact that an estimate is involved does not, of itself, create the typeof uncertainty which characterizes a contingency.For example, the fact that estimates of useful life are used to determinedepreciation does not make depreciation a contingency; the eventual expiry ofthe useful life of the asset is not uncertain. Also, amounts owed for servicesreceived are not contingencies as defined in paragraph, even though the amountsmay have been estimated, as there is nothing uncertain about the fact that theseobligations have been incurred.Accounting Treatment of Contingent Losses The accounting treatment of a contingent loss is determined by the expectedoutcome of the contingency. If it is likely that a contingency will result in a lossto the enterprise, and then it is prudent to provide for that loss in the financialstatements. If there is conflicting or insufficient evidence for estimating the amount of acontingent loss, then disclosure is made of the existence and nature of thecontingency.Accounting Treatment of Contingent Gains 20 | P a g e
  21. 21. Contingent gains are not recognized in financial statements since theirrecognition may result in the recognition of revenue which may never berealized. However, when the realization of a gain is virtually certain, then suchgain is not a contingency and accounting for the gain is appropriate.DisclosureThe disclosure requirements herein referred to apply only in respect of thosecontingencies or events which affect the financial position to a material extent. If a contingent loss is not provided for, its nature and an estimate of itsfinancial effect are generally disclosed by way of note unless the possibility of aloss is remote (other than the circumstances mentioned in paragraph. If areliable estimate of the financial effect cannot be made, this fact is disclosed.When the events occurring after the balance sheet date are disclosed in thereport of the approving authority, the information given comprises the nature ofthe events and an estimate of their financial effects or a statement that such anestimate cannot be made. 21 | P a g e
  22. 22. Accounting Standard (AS) 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting PoliciesDefinitionsThe following terms are used in this Statement with the meanings specified:Ordinary activities are any activities which are undertaken by an enterprise aspart of its business and such related activities in which the enterprise engages infurtherance of, incidental to, or arising from, these activities.Extraordinary items are income or expenses that arise from events ortransactions that are clearly distinct from the ordinary activities of the enterpriseand, therefore, are not expected to recur frequently or regularly.Prior period items are income or expenses which arise in the current period as aresult of errors or omissions in the preparation of the financial statements of oneor more prior periods.Accounting policies are the specific accounting principles and the methods ofapplying those principles adopted by an enterprise in the preparation andpresentation of financial statements.Scope1. This Statement should be applied by an enterprise in presenting profit or lossfrom ordinary activities, extraordinary items and prior period items in thestatement of profit and loss, in accounting for changes in accounting estimates,and in disclosure of changes in accounting policies.2. This Statement deals with, among other matters, the disclosure of certainItems of net profit or loss for the period. These disclosures are made in additionto any other disclosures required by other Accounting Standards.3. This Statement does not deal with the tax implications of extraordinary items,prior period items, changes in accounting estimates, and changes in accountingpolicies for which appropriate adjustments will have to be made depending onthe circumstances. 22 | P a g e
  23. 23. Accounting Standard (AS) 6 Depreciation AccountingIntroduction This Statement deals with depreciation accounting and applies to alldepreciable assets, except the following items to which special considerationsapply:—(i) Forests, plantations and similar regenerative natural resources;(ii) Wasting assets including expenditure on the exploration for and extractionof minerals, oils, natural gas and similar non-regenerative resources;(iii) Expenditure on research and development;(iv) Goodwill;(v) Live stock.This statement also does not apply to land unless it has a limited useful life forthe enterprise. Different accounting policies for depreciation are adopted by differententerprises. Disclosure of accounting policies for depreciation followed by anenterprise is necessary to appreciate the view presented in the financialstatements of the enterprise.DefinitionsThe following terms are used in this Statement with the meanings specified: Depreciation is a measure of the wearing out, consumption or other loss ofvalue of a depreciable asset arising from use, efflux ion of time or Obsolescencethrough technology and market changes. Depreciation is allocated so as tocharge a fair proportion of the depreciable amount in each accounting periodduring the expected useful life of the asset. Depreciation Includes amortizationof assets whose useful life is predetermined. 23 | P a g e
  24. 24. Depreciable assets are assets which(i) are expected to be used during more than one accounting period; and102 AS6 (revised 1994)(ii) have a limited useful life; and(iii) are held by an enterprise for use in the production or supply of goods andservices, for rental to others, or for administrative purposes and not for thepurpose of sale in the ordinary course of business. Useful life is either (i) the period over which a depreciable asset is expected to be used by the enterprise; or (ii) the number of production or Similar units expected to be obtained from the use of the asset by the enterprise.Explanation Depreciation has a significant effect in determining and presenting the financialposition and results of operations of an enterprise. Depreciation is charged ineach accounting period by reference to the extent of the depreciable amount,irrespective of an increase in the market value of the assets. Assessment of depreciation and the amount to be charged in respect thereof inan accounting period are usually based on the following three factors:(i) Historical cost or other amount substituted for the historical cost of thedepreciable asset when the asset has been revalued;(ii) Expected useful life of the depreciable asset; and(iii) Estimated residual value of the depreciable asset.Historical cost of a depreciable asset represents its money outlay or itsequivalent in connection with its acquisition, installation and commissioning aswell as for additions to or improvement thereof. The historical cost of adepreciable asset may undergo subsequent changes arising as a result ofincrease or decrease in long term liability on account of exchange fluctuations,price adjustments, and changes in duties or similar factors. 24 | P a g e
  25. 25. DisclosureThe depreciation methods used, the total depreciation for the period for eachclass of assets, the gross amount of each class of depreciable assets and therelated accumulated depreciation are disclosed in the financial statements alongwith the disclosure of other accounting policies. The depreciation rates or theuseful lives of the assets are disclosed only if they are different from theprincipal rates specified in the statute governing the enterprise. In case the depreciable assets are revalued, the provision for depreciation isbased on the revalued amount on the estimate of the remaining Useful life ofsuch assets. In case the revaluation has a material effect on the amount ofdepreciation, the same is disclosed separately in the year in which revaluation iscarried out. 25 | P a g e
  26. 26. Accounting Standard (AS) 7 Construction ContractsDefinitionsThe following terms are used in this Statement with the meanings specified: A construction contract is a contract specifically negotiated for theconstruction of an asset or a combination of assets that are closely interrelatedor interdependent in terms of their design, technology and function or theirultimate purpose or use. A fixed price contract is a construction contract inwhich the contractor agrees to a fixed contract price, or a fixed rate per unit ofoutput, which in some cases is subject to cost escalation clauses. A cost pluscontract is a construction contract in which the contractor is reimbursed forallowable or otherwise defined costs, plus percentage of these costs or a fixedfee. A construction contract may be negotiated for the construction of a single assetsuch as a bridge, building, dam, pipeline, road, ship or tunnel. A constructioncontract may also deal with the construction of a number of assets which areclosely interrelated or interdependent in terms of their design, technology andfunction or their ultimate purpose or use; examples of such contracts includethose for the construction of refineries and other complex pieces of plant orequipment.Contract Revenue:Contract revenue is measured at the consideration received or receivable. Themeasurement of contract revenue is affected by a variety of Uncertainties thatdepend on the outcome of future events. The estimates often need to be revisedas events occur and uncertainties are resolved. Therefore, the amount of contractrevenue may increase or decrease from one period to the next. For example:(a) A contractor and a customer may agree to variations or claims that increaseor decrease contract revenue in a period subsequent to that in which the contractwas initially agreed;(b) The amount of revenue agreed in a fixed price contract may increase as aresult of cost escalation clauses; 26 | P a g e
  27. 27. (c) The amount of contract revenue may decrease as a result of penalties arisingfrom delays caused by the contractor in the completion of the contract; or(d) When a fixed price contract involves a fixed price per unit of output,contract revenue increases as the number of units is increased.Contract Costs: Contract costs should comprise:(a) Costs that relate directly to the specific contract;(b) Costs that are attributable to contract activity in general and can be allocatedto the contract; and(c) Such other costs as are specifically chargeable to the customer under theterms of the contract. Costs that relate directly to a specific contract include:(a) Site labour costs, including site supervision;(b) Costs of materials used in construction;(c) Depreciation of plant and equipment used on the contract;(d) Costs of moving plant, equipment and materials to and from the contractsite;(e) Costs of hiring plant and equipment;(f) Costs of design and technical assistance that is directly related to thecontract;(g) The estimated costs of rectification and guarantee work, including expectedwarranty costs; and(h) Claims from third parties. These costs may be reduced by any incidentalincome that is not included in contract revenue, for example income from thesale of surplus materials and the disposal of plant and equipment at the end ofthe contract 27 | P a g e
  28. 28. Recognition of Contract Revenue and Expenses When the outcome of a construction contract can be estimated reliably,contract revenue and contract costs associated with the construction contractshould be recognized as revenue and expenses respectively by reference to thestage of completion of the contract activity at the reporting date. In the case of a fixed price contract, the outcome of a construction contract canbe estimated reliably when all the following conditions areSatisfied:(a) total contract revenue can be measured reliably;(b) it is probable that the economic benefits associated with the contract willflow to the enterprise;(c) Both the contract costs to complete the contract and the stage of contractcompletion at the reporting date can be measured reliably; and(d) The contract costs attributable to the contract can be clearly identified andmeasured reliably so that actual contract costs incurred can be compared withprior estimates.In the case of a cost plus contract, the outcome of a construction contract can beestimated reliably when all the following conditions are satisfied:(a) It is probable that the economic benefits associated with the contract willflow to the enterprise; and(b) The contract costs attributable to the contract, whether or not specificallyreimbursable, can be clearly identified and measured reliably. 28 | P a g e
  29. 29. DisclosureAn enterprise should disclose:(a) The amount of contract revenue recognized as revenue in the period;(b) The methods used to determine the contract revenue recognized the period;and(c) The methods used to determine the stage of completion of contract inprogress. An enterprise should disclose the following for contracts in progress at thereporting date:(a) the aggregate amount of costs incurred and recognized profits(lessrecognized losses) up to the reporting date;(b) The amount of advances received; and(c) The amount of retentions. Retentions are amounts of progress billings which are not paid until thesatisfaction of conditions specified in the contract for the payment of suchConstruction Contracts 121amounts or until defects have been rectified.Progress billings are amounts billed for work performed on a contract whetheror not they have been paid by the customer. Advances are an amount receivedby the contractor before the related work is performed. An enterprise should present:(a) The gross amount due from customers for contract work as an asset; and(b) The gross amount due to customers for contract work as a liability. 29 | P a g e
  30. 30. Accounting Standard (AS) 8 Accounting for Research and DevelopmentAccounting Standard (AS) 8, Accounting for Research and Development, arewithdrawn from the date of AS 26, Intangible Assets, becoming mandatory forrespective enterprises. AS 26 is published elsewhere in this Compendium. 30 | P a g e
  31. 31. Accounting Standard (AS) 9 Revenue RecognitionIntroductionThis Statement deals with the bases for recognition of revenue in the statementof profit and loss of an enterprise. The Statement is concerned With therecognition of revenue arising in the course of the ordinary activities of theenterprise from the sale of goods.AS 9 (issued 1985)— The rendering of services, and— The use by others of enterprise resources yielding interest, royalties anddividends. This Statement does not deal with the following aspects of revenue recognitionto which special considerations apply:(i) Revenue arising from construction contracts; 5(ii) Revenue arising from hire-purchase, lease agreements;(iii) Revenue arising from government grants and other similar subsidies;(iv) Revenue of insurance companies arising from insurance contracts.DefinitionsThe following terms are used in this Statement with the meanings specified: Revenue is the gross inflow of cash, receivables or other consideration arisingin the course of the ordinary activities of an enterprise6 from the sale of goods,from the rendering of services, and from the use by others of enterpriseresources yielding interest, royalties and dividends. Revenue is measured by thecharges made to customers or clients for goods supplied and services renderedto them and by the charges and rewards arising from the use of resources bythem. In an agency relationship, the revenue is the amount of commission andnot the gross inflow of cash, receivables or other consideration. Completed service contract method is a method of accounting which recognizesrevenue in the statement of profit and loss only when the rendering of servicesunder a contract is completed or substantially completed. 31 | P a g e
  32. 32. Proportionate completion method is a method of accounting which recognizesrevenue in the statement of profit and loss proportionately with the degree ofcompletion of services under a contract.Explanation Revenue recognition is mainly concerned with the timing of recognition ofrevenue in the statement of profit and loss of an enterprise. The amount ofrevenue arising on a transaction is usually determined by agreement between theparties involved in the transaction. When uncertainties exist regarding thedetermination of the amount, or its associated costs, these uncertainties mayinfluence the timing of revenue recognition.The Institute has issued an Announcement in 2005 titled ‗Treatment ofInterdivisional Transfers‘ (published in ‗The Chartered Accountant‘ May 2005,pp. 1531).As per the Announcement, the recognition of inter-divisional transfersas sales is an inappropriate accounting treatment and is inconsistent withAccounting Standard9. [For full text of the Announcement reference may bemade to the section titled ‗Announcements of the Council regarding status ofvarious documents issued by the Institute of Chartered Accountants of India‘appearing at the beginning of this Compendium.]Sale of GoodsA key criterion for determining when to recognize revenue from a transactioninvolving the sale of goods is that the seller has transferred the property in thegoods to the buyer for a consideration. The transfer of property in goods, inmost cases, results in or coincides with the transfer of significant risks andrewards of ownership to the buyer. However, there may be situations wheretransfer of property in goods does not coincide with the transfer of significantrisks and rewards of ownership. Revenue in such situations is recognized at thetime of transfer of significant risks and rewards of ownership to the buyer. Suchcases may arise where delivery has been delayed through the fault of either thebuyer or the seller and the goods are at the risk of the party at fault as regardsany loss which might not have occurred but for such fault. Further, sometimesthe parties may agree that the risk will pass at a time different from the timewhen ownership passes.Rendering of ServicesRevenue from service transactions is usually recognized as the service isperformed, either by the proportionate completion method or by the completedservice contract method. 32 | P a g e
  33. 33. (i) Proportionate completion method—Performance consists of the execution ofmore than one act. Revenue is recognized proportionately by reference to theperformance of each act. The revenue recognized under this method would bedetermined on the basis of contract value, associated costs, number of acts orother suitable basis. For practical purposes, when services are provided by anindeterminate number of acts over a specific period of time, revenue isrecognized on a straight line basis over the specific period unless there isevidence that some other method better represents the pattern of performance.(ii) Completed service contract method—Performance consists of the executionof a single act. Alternatively, services are performed in more than a single act,and the services yet to be performed are so significant in relation to thetransaction taken as a whole that performance cannot be deemed to have beencompleted until the execution of those acts. The completed service contractmethod is relevant to these patterns of performance and accordingly revenue isrecognized when the sole or final act takes place and the service becomeschargeable.DisclosureIn addition to the disclosures required by Accounting Standard 1on ‗Disclosureof Accounting Policies‘ (AS 1), an enterprise should alsodisclose the circumstances in which revenue recognition has been postponedpending the resolution of significant uncertainties. 33 | P a g e
  34. 34. Accounting Standard (AS) 10 Accounting for Fixed AssetsIntroduction Financial statements disclose certain information relating to fixed assets. Inmany enterprises these assets are grouped into various categories, such as land,buildings, plant and machinery, vehicles, furniture and fittings, goodwill,patents, trademarks and designs. This statement does not deal with the specialized aspects of accounting forfixed assets that arise under a comprehensive system reflecting the effects ofchanging prices but applies to financial statements prepared on historical costbasis. This statement does not deal with the treatment of government grants andsubsidies, and assets under leasing rights. It makes only a brief reference to thecapitalization of borrowing costs4 and to assets acquired in an amalgamation ormerger. These subjects require more extensive consideration than can be givenwithin this Statement.ExplanationFixed assets often comprise a significant portion of the total assets of anenterprise, and therefore are important in the presentation of financial position.Furthermore, the determination of whether expenditure represents an asset or anexpense can have a material effect on an enterprise‘s reported results ofoperations.Identification of Fixed AssetsJudgment is required in applying the criteria to specific circumstances orspecific types of enterprises. It may be appropriate to aggregate individuallyinsignificant items, and to apply the criteria to the aggregate value. Anenterprise may decide to expense an item which could otherwise have beenincluded as fixed asset, because the amount of the expenditure is not material.Stand-by equipment and servicing equipment are normally capitalized.Machinery spares are usually charged to the profit and loss statement as andwhen consumed. However, if such spares can be used only in connection with 34 | P a g e
  35. 35. an item of fixed asset and their use is expected to be irregular, it may beappropriate to allocate the total cost on a systematic basis over a period notexceeding the useful life of the principal item.Fixed Assets of Special TypesGoodwill, in general, is recorded in the books only when some consideration inmoney or money‘s worth has been paid for it. Whenever a business is acquiredfor a price (payable either in cash or in shares or otherwise) which is in excessof the value of the net assets of the business taken over, the excess is termed as‗goodwill‘. Goodwill arises from business connections, trade name or reputationof an enterprise or from other intangible benefits enjoyed by an enterprise.DisclosureCertain specific disclosures on accounting for fixed assets are already requiredby Accounting Standard 1 on ‗Disclosure of Accounting Policies‘ andAccounting Standard 6 on ‗Depreciation Accounting‘.Further disclosures that are sometimes made in financial statements include:(i) gross and net book values of fixed assets at the beginning and end of anaccounting period showing additions, disposals, acquisitions and othermovements;(ii) expenditure incurred on account of fixed assets in the course of constructionor acquisition; and(iii) revalued amounts substituted for historical costs of fixed assets, the methodadopted to compute the revalued amounts, the nature of any indices used, theyear of any appraisal made, and whether an external valued was involved, incase where fixed assets are stated at revalued amounts. 35 | P a g e
  36. 36. Accounting Standard (AS) 11 The Effects of Changes in Foreign Exchange RatesIntroductionAccounting Standard (AS) 11, The Effects of Changes in Foreign ExchangeRates (revised 2003), issued by the Council of the Institute of CharteredAccountants of India, comes into effect in respect of accounting periodscommencing on or after 1 4-2004 and is mandatory in nature2 from that date.The revised Standard supersedes Accounting Standard (AS) 11, Accounting forthe Effects of Changes in Foreign Exchange Rates (1994), except that in respectof accounting for transactions in foreign currencies entered into by the reportingenterprise itself or through its branches before the date this Standard comes intoeffect, AS 11 (1994) will continue to be applicable.Scope1. This Statement should be applied:(a) in accounting for transactions in foreign currencies; and(b) In translating the financial statements of foreign operations.2. This Statement also deals with accounting for foreign currency transactions inthe nature of forward exchange contracts. 3. This Statement does not specify the currency in which an enterprise presentsits financial statements. However, an enterprise normally uses the currency ofthe country in which it is domiciled. If it uses a different Currency, thisStatement requires disclosure of the reason for using that currency. ThisStatement also requires disclosure of the reason for any change in the reportingcurrency. 36 | P a g e
  37. 37. 4. This Statement does not deal with the restatement of an enterprise‘s financialstatements from its reporting currency into another currency for the convenienceof users accustomed to that currency or for similar purposes.5. This Statement does not deal with the presentation in a cash flow statement ofcash flows arising from transactions in a foreign currency and the translation ofcash flows of a foreign operation. 6. This Statement does not deal with exchange differences arising from foreigncurrency borrowings to the extent that they are regarded as an adjustment tointerest costs.Disclosure An enterprise should disclose:(a) the amount of exchange differences included in the net profit or loss for theperiod; and172 AS 11 (revised 2003)(b) net exchange differences accumulated in foreign currency translation reserveas a separate component of shareholders‘ funds, and a reconciliation of theamount of such exchange differences at the beginning and end of the period.When the reporting currency is different from the currency of the country inwhich the enterprise is domiciled, the reason for using different currency shouldbe disclosed. The reason for any change in the reporting currency should also bedisclosed. When there is a change in the classification of a significant foreign operation,an enterprise should disclose:(a) the nature of the change in classification;(b) the reason for the change;(c) the impact of the change in classification on shareholders‘ funds; and(d) the impact on net profit or loss for each prior period presented had thechange in classification occurred at the beginning of the earliest periodpresented. 37 | P a g e
  38. 38. Accounting Standard (AS) 12 Accounting for Government GrantsIntroductionThis Statement deals with accounting for government grants. Governmentgrants are sometimes called by other names such as subsidies, cash incentives,duty drawbacks, etc. This Statement does not deal with:(i) the special problems arising in accounting for government grants in financialstatements reflecting the effects of changing pricesAccounting Standards are intended to apply only to items which are material.(ii) government assistance other than in the form of government grants;(iii) government participation in the ownership of the enterprise.DefinitionsThe following terms are used in this Statement with the meanings specified:Government refers to government, government agencies and similar bodieswhether local, national or international.Government grants are assistance by government in cash or kind to anenterprise for past or future compliance with certain conditions. They excludethose forms of government assistance which cannot reasonably have a valueplaced upon them and transactions with government which cannot bedistinguished from the normal trading transactions of the enterprise.Explanation The receipt of government grants by an enterprise issignificant for preparation of the financial statements for two reasons. Firstly, ifa government grant has been received, an appropriate method of accountingthere for is necessary. Secondly, it is desirable to give an indication of the extentto which the enterprise has benefited from such grant during the reportingperiod. This facilitates comparison of an enterprise‘s financial statements withthose of prior periods and with those of other enterprises. 38 | P a g e
  39. 39. Disclosure The following should be disclosed:(i) the accounting policy adopted for government grants, including the methodsof presentation in the financial statements;(ii) the nature and extent of government grants recognized in the financialstatements, including grants of non-monetary assets given at a concessional rateor free of cost. 39 | P a g e
  40. 40. Accounting Standard (AS) 13 Accounting for InvestmentsIntroductionThis Statement deals with accounting for investments in the financial statementsof enterprises and related disclosure requirements. This Statement does not dealwith:(a) The bases for recognition of interest, dividends and rentals earned(b) Operating or finance leases;(c) Investments of retirement benefit plans and life insuranceEnterprises; and(d) Mutual funds and venture capital funds4 and/or the related assetmanagement companies, banks and public financial institutions formed under aCentral or State Government Act or so declared under the Companies Act,1956.Definitions The following terms are used in this Statement with themeanings assigned:Investments are assets held by an enterprise for earning income by way ofdividends, interest, and rentals, for capital appreciation, or for other benefits tothe investing enterprise. Assets held as stock-in-trade are not ‗investments‘. A current investment is an investment that is by its naturereadily realizable and is intended to be held for not more than one year from thedate on which such investment is made. A long term investment is aninvestment other than a current investment. An investment property is aninvestment in land or buildings that are not intended to be occupiedsubstantially for use by, or in the operations of, the investing enterprise. Fair value is the amount for which an asset could beexchanged between a knowledgeable, willing buyer and a knowledgeable,willing seller in an arm ‘length transaction. Under appropriate circumstances,market value or net realizable value provides an evidence of fair value. The Council of the Institute decided to make the limitedrevision to AS 13 in 2003pursuant to which the words ‗and venture capitalfunds ‘This revision comes into effect in respect of accounting periodscommencing on or after 1-4-2002. Market value is the amount obtainable fromthe sale of an investment in an open market, net of expenses necessarily to beincurred on or before disposal. 40 | P a g e
  41. 41. Disclosure The following disclosures in financial statements in relation to investments areappropriate:—(a) the accounting policies for the determination of carrying amount ofinvestments; (b) the amounts included in profit and loss statement for: (i) interest, dividends (showing separately dividends from subsidiarycompanies), and rentals on investments showing separately such income fromlong term and current investments. Gross income should be stated, the amountof tax deducted at source being included under Advance Taxes Paid; (ii) profits and losses on disposal of current investments and changes incarrying amount of such investments; (iii) profits and losses on disposal of long term investments andchanges in the carrying amount of such investments;(c) significant restrictions on the right of ownership, reliability of investments orthe remittance of income and proceeds of disposal;(d) the aggregate amount of quoted and unquoted investments, giving theaggregate market value of quoted investments;(e) other disclosures as specifically required by the relevant statute governingthe enterprise. 41 | P a g e
  42. 42. Accounting Standard (AS) 14 Accounting for AmalgamationsDefinitionsThe following terms are used in this statement with the meanings specified:(a) Amalgamation means an amalgamation pursuant to the provisions of theCompanies Act, 1956 or any other statute which may be applicable tocompanies.(b) Transferor company means the company which is amalgamated intoanother company.(c) Transferee company means the company into which a transferor companyis amalgamated.(d) Reserve means the portion of earnings, receipts or other surplus of anenterprise (whether capital or revenue) appropriated by the management for ageneral or a specific purpose other than a provision for depreciation ordiminution in the value of assets or for a known liability. 42 | P a g e
  43. 43. ExplanationTypes of Amalgamations Generally speaking, amalgamations fall into twobroad categories. In the first category are those amalgamations where there is agenuine pooling not merely of the assets and liabilities of the amalgamatingcompanies but also of the shareholders‘ interests and of the businesses of thesecompanies. Such amalgamations are amalgamations which are in the nature of‗merger ‘and the accounting treatment of such amalgamations should ensurethat the resultant figures of assets, liabilities, capital and reserves more or lessrepresent the sum of the relevant figures of the amalgamating companies. In thesecond category are those amalgamations which are in effect a mode by whichone company acquires another company and, as a consequence, the shareholdersof the company which is acquired normally do not continue to have aproportionate share in the equity of the combined company, or the business ofthe company which is acquired is not intended to be continued.Methods of Accounting for Amalgamations There are two main methods ofaccounting for amalgamations: The Pooling of Interests Method: Under the pooling of interests method, the assets,liabilities and reserves of the transferor company are recorded by the transfereecompany at their existing carrying amounts. If, at the time of the amalgamation, the transferorand the transferee companies have conflicting accounting policies, a uniform setof accounting policies is adopted following the amalgamation. The effects onthe financial statements of any changes in accounting policies are reported inaccordance with Accounting Standard (AS) 5, ‗Prior Period and ExtraordinaryItems and Changes in Accounting Policies‘.3The Purchase Method: Under the purchase method, the transfereecompany accounts for the amalgamation either by incorporating the assets andliabilities at their existing carrying amounts or by allocating the consideration toindividual identifiable assets and liabilities of the transferor company on thebasis of their fair values at the date of amalgamation. The identifiable assets andliabilities may include assets and liabilities not recorded in the financialstatements of the transferor company. 43 | P a g e
  44. 44. Disclosure For all amalgamations, the following disclosures should be made in the firstfinancial statements following the amalgamation:(a) Names and general nature of business of the amalgamating companies;(b) Effective date of amalgamation for accounting purposes;(c) The method of accounting used to reflect the amalgamation; and(d) Particulars of the scheme sanctioned under a statute.For amalgamations accounted for under the pooling of interests method, thefollowing additional disclosures should be made in the first financial statementsfollowing the amalgamation:(a) Description and number of shares issued, together with the percentage ofeach company‘s equity shares exchanged to effect the amalgamation;(b) The amount of any difference between the consideration and the value of netidentifiable assets acquired, and the treatment thereof. For amalgamations accounted for under the purchase method, the followingadditional disclosures should be made in the first financial statements followingthe amalgamation:(a) Consideration for the amalgamation and a description of the considerationpaid or contingently payable; and(b) The amount of any difference between the consideration and the value of netidentifiable assets acquired, and the treatment thereof including the period ofamortization of any goodwill arising on amalgamation. 44 | P a g e
  45. 45. Accounting Standard (AS) 15 Employee BenefitsObjective The objective of this Statement is to prescribe the accounting and disclosure foremployee benefits. The Statement requires an enterprise to recognize:(a) A liability when an employee has provided service in exchange foremployee benefits to be paid in the future; and(b) An expense when the enterprise consumes the economic benefit arising fromservice provided by an employee in exchange for employee benefits.Scope1. This Statement should be applied by an employer in accounting for allemployee benefits, except employee share-based payments .2. This Statement does not deal with accounting and reporting by employeebenefit plans.3. The employee benefits to which this Statement applies include thoseprovided:(a) under formal plans or other formal agreements between an enterprise andindividual employees, groups of employees or their representatives;(b) under legislative requirements, or through industry arrangements, wherebyenterprises are required to contribute to state, industry or other multi-employerplans; or(c) by those informal practices that give rise to an obligation. Informal practicesgive rise to an obligation where the enterprise has no realistic alternative but topay employee benefits. An example of such an obligation is where a change inthe enterprise‘s informal practices would cause unacceptable damage to itsrelationship with employees.4. Employee benefits include:(a) short-term employee benefits, such as wages, salaries and social securitycontributions (e.g., contribution to an insurance company by an employer to payfor medical care of its employees), paid annual leave, profit-sharing andbonuses (if payable within twelve months the end of the period) and non-monetary benefits (such as medical care, housing, cars and free or subsidizedgoods or services) for current employees; 45 | P a g e
  46. 46. (b) post-employment benefits such as gratuity, pension, other retirementbenefits, post-employment life insurance and post-employment medical care;(c) other long-term employee benefits, including long-service leave orsabbatical leave, jubilee or other long-service benefits, long-term disabilitybenefits and, if they are not payable wholly within twelve months after the endof the period, profit-sharing, bonuses and deferred compensation; and(d) termination benefits.Because each category identified in (a) to (d) above has different characteristics,this Statement establishes separate requirements for each category.5. Employee benefits include benefits provided to either employees or theirspouses, children or other dependants and may be settled by payments (or theprovision of goods or services) made either:(a) directly to the employees, to their spouses, children or other dependants, orto their legal heirs or nominees; or(b) to others, such as trusts, insurance companies.6. An employee may provide services to an enterprise on a full-time, part-time,permanent, casual or temporary basis. For the purpose of this Statement,employees include whole-time directors and other management personnel.Disclosure Although this Statement does not require specific disclosures about short-termemployee benefits, other Accounting Standards may require disclosures. Forexample, where required by AS 18 Related Party Disclosures an enterprisediscloses information about employee benefits for key management personnel. 46 | P a g e
  47. 47. Accounting Standard (AS) 16 Borrowing CostsDefinitionsThe following terms are used in this Statement with the meanings specified: Borrowing costs are interest and other costs incurred by an enterprise inconnection with the borrowing of funds. A qualifying asset is an asset that necessarily takes a substantial period oftime3 to get ready for its intended use or sale. Borrowing costs may include:(a) Interest and commitment charges on bank borrowings and other short-termand long-term borrowings;(b) amortization of discounts or premiums relating to borrowings;(c) amortization of ancillary costs incurred in connection with the arrangementof borrowings;(d) finance charges in respect of assets acquired under finance leases or underother similar arrangements; and(e) exchange differences arising from foreign currency borrowings to the extentthat they are regarded as an adjustment to interest costs . Examples of qualifying assets are manufacturing plants, power generationfacilities, inventories that require a substantial period of time to bring them to asaleable condition, and investment properties. Other investments, and thoseinventories that are routinely manufactured or otherwise produced in largequantities on a repetitive basis over a short period of time, are not qualifyingassets. Assets that are ready for their intended use or sale when acquired also arenot qualifying assets.Disclosure The financial statements should disclose:(a) The accounting policy adopted for borrowing costs; and(b) The amount of borrowing costs capitalized during the period. 47 | P a g e
  48. 48. Accounting Standard (AS) 17 Segment ReportingDefinitions The following terms are used in this Statement with the meanings specified:A business segment is a distinguishable component of an enterprise that isengaged in providing an individual product or service or a group of relatedproducts or services and that is subject to risks and returns that are differentfrom those of other business segments. Factors that should be considered indetermining whether products or services are relatedinclude:(a) the nature of the products or services;(b) the nature of the production processes;(c) the type or class of customers for the products or services;(d) the methods used to distribute the products or provide the services; and(e) if applicable, the nature of the regulatory environment, for example,banking, insurance, or public utilities.A geographical segment is a distinguishable component of an enterprise that isengaged in providing products or services within a particular economicenvironment and that is subject to risks and returns that are different from thoseof components operating in other economic environments. Factors that shouldbe considered in identifying geographical segments include:(a) similarity of economic and political conditions;(b) relationships between operations in different geographical areas;(c) proximity of operations;(d) special risks associated with operations in a particular area;(e) exchange control regulations; and(f) the underlying currency risks.A reportable segment is a business segment or a geographical segmentidentified on the basis of foregoing definitions for which segment information isrequired to be disclosed by this Statement.Enterprise revenue is revenue from sales to external customers as reported inthe statement of profit and loss. 48 | P a g e
  49. 49. Scope1. This Statement should be applied in presenting general purpose financialstatements.2. The requirements of this Statement are also applicable in case of financialstatements.3. An enterprise should comply with the requirements of this Statement and notselectively.4. If a single financial report contains both consolidated financial statements andthe separate financial statements of the parent, segment information need bepresented only on the basis of the consolidated financial statements. In thecontext of reporting of segment information in consolidated financialstatements, the references in this Statement to any financial statement itemsshould construed to be the relevant item as appearing in the consolidatedfinancial statements.DisclosuresIn measuring and reporting segment revenue from transactions with othersegments, inter-segment transfers should be measured on the basis that theenterprise actually used to price those transfers. The basis of pricing inter-segment transfers and any change therein should be disclosed in the financialstatements. Changes in accounting policies adopted for segment reporting that have amaterial effect on segment information should be disclosed. Such disclosureshould include a description of the nature of the change, and the financial effectof the change if it is reasonably determinable.AS 5 requires that changes in accounting policies adopted by the enterpriseshould be made only if required by statute, or for compliance with anaccounting standard, or if it is considered that the change would result in a moreappropriate presentation of events or transactions in the financial statements ofthe enterprise. Changes in accounting policies adopted at the enterprise level that affectsegment information are dealt with in accordance with AS 5. AS 5 requires thatany change in an accounting policy which has a material effect should bedisclosed. The impact of, and the adjustments resulting from, such change, if 49 | P a g e
  50. 50. material, should be shown in the financial statements of the period in whichsuch change is made, to reflect the effect of such change. Where the effect ofsuch change is not ascertainable, wholly or in part, the fact should be indicated.If a change is made in the accounting policies which has no material effect onthe financial statements for the current period but which is reasonably expectedto have a material effect in later periods, the fact of such change should beappropriately disclosed in the period in which the change is adopted. Some changes in accounting policies relate specifically to segment reporting.Examples include changes in identification of segments and changes in the basisfor allocating revenues and expenses to segments. Such changes can have asignificant impact on the segment information reported but will not changeaggregate financial information reported for the enterprise. To enable users tounderstand the impact of such changes, this Statement requires the disclosure ofthe nature of the change and the financial effect of the change, if reasonablydeterminable. An enterprise should indicate the types of products and services included ineach reported business segment and indicate the composition of each reportedgeographical segment, both primary and secondary, if not otherwise disclosed inthe financial statements. To assess the impact of such matters as shifts in demand, changes in the pricesof inputs or other factors of production, and the development of alternativeproducts and processes on a business segment, it is necessary to know theactivities encompassed by that segment. Similarly, to assess the impact ofchanges in the economic and political environment on the risks and returns of ageographical segment, it is important to know the composition of thatgeographical segment. 50 | P a g e
  51. 51. Accounting Standard (AS) 18 Related Party DisclosuresDefinitions For the purpose of this Statement, the following terms are used with themeanings specified:Related party - parties are considered to be related if at any time during thereporting period one party has the ability to control the other party or exercisesignificant influence over the other party in making financial and/or operatingdecisions.Related party transaction - a transfer of resources or obligations between relatedparties, regardless of whether or not a price is charged .Control – (a) ownership, directly or indirectly, of more than one half of thevoting power of an enterprise, or (b) control of the composition of the board of directors in the case of acompany or of the composition of the corresponding governing body in case ofany other enterprise, or (c) a substantial interest in voting power and the power to direct, bystatute or agreement, the financial and/or operating policies of the enterprise.Significant influence - participation in the financial and/or operating policydecisions of an enterprise, but not control of those policies.An Associate - an enterprise in which an investing reporting party has influenceand which is neither a subsidiary nor a joint venture of that party.A Joint venture - a contractual arrangement whereby two or more partiesundertake an economic activity which is subject to joint control.Joint control - the contractually agreed sharing of power to govern the financialand operating policies of an economic activity so as to obtain benefits from it.Key management personnel - those persons who have the authority andresponsibility for planning, directing and controlling the activities of thereporting enterprise.Relative – in relation to an individual, means the spouse, son, daughter, brother,sister, father and mother who may be expected to influence, or be influenced by,that individual in his/her dealings with the reporting enterprise. 51 | P a g e
  52. 52. Holding company - a company having one or more subsidiaries.Subsidiary - a company:(a) in which another company (the holding company) holds, either by itselfand/or through one or more subsidiaries, more than one-half in value of its equity share capital; or(b) of which another company (the holding company) controls, either by itselfand/or through one or more subsidiaries, the composition of its board ofdirectors.Fellow subsidiary - a company is considered to be a fellow subsidiary ofanother company if both are subsidiaries of the same holding company.State-controlled enterprise - an enterprise which is under the control of theCentral Government and/or any State Government(s).Scope1. This Statement should be applied in reporting related party relationships andtransactions between a reporting enterprise and its related parties. Therequirements of this Statement apply to the financial statements of eachreporting enterprise as also to consolidate financial statements presented by aholding company.2. This Statement applies only to related party relationships described as follow.3. This Statement deals only with related party relationships described in(a) to (e) below:(a) enterprises that directly, or indirectly through one or more intermediaries ,control, or are controlled by, or are under common control with, the reportingenterprise (this includes holding companies, subsidiaries and fellowsubsidiaries);(b) associates and joint ventures of the reporting enterprise and the investingparty or venture in respect of which the reporting enterprise is an associate or ajoint venture;(c) individuals owning, directly or indirectly, an interest in the voting power ofthe reporting enterprise that gives them control or significant influence over theenterprise, and relatives of any such individual;(d) key management personnel5 and relatives of such personnel; and(e) enterprises over which any person described in (c) or (d) is able to exercisesignificant influence. This includes enterprises owned by directors or majorshareholders of the reporting enterprise and enterprises that have a member ofkey management in common with the reporting enterprise.4. In the context of this Statement, the following are deemed not to be parties:(a) two companies simply because they have a director in common, 52 | P a g e
  53. 53. (unless the director is able to affect the policies of both companies in theirmutual dealings);(b) a single customer, supplier, franchiser, distributor, or general agent withwho man enterprise transacts a significant volume of business merely by virtueof the resulting economic dependence; and(c) the parties listed below, in the course of their normal dealings with anenterprise by virtue only of those dealings (although they may circumscribe thefreedom of action of the enterprise or participate in its decision-makingprocess):(i) providers of finance;(ii) trade unions;(iii) public utilities;(iv) government departments and government agencies including governmentsponsored bodies.5. Related party disclosure requirements as laid down in this Statement do notapply in circumstances where providing such disclosures would conflict withthe reporting enterprise‘s duties of confidentiality as specifically required interms of a statute or by any regulator or similar competent authority.6. In case a statute or a regulator or a similar competent authority governing anenterprise prohibit the enterprise to disclose certain information which isrequired to be disclosed as per this Statement, disclosure of such information isnot warranted. For example, banks are obliged by law to maintainconfidentiality in respect of their customers‘ transactions and this Statement notoverrides the obligation to preserve the confidentiality of customers‘ dealings.7. No disclosure is required in consolidated financial statements in respect ofintra-group transactions.8. Disclosure of transactions between members of a group is unnecessary inconsolidated financial statements because consolidated financial statementspresent information about the holding and its subsidiaries as a single reportingenterprise.9. No disclosure is required in the financial statements of statecontrolledenterprises as regards related party relationships with other state-controlledenterprises and transactions with such enterprises. 53 | P a g e
  54. 54. Disclosure The statutes governing an enterprise often require disclosure in financialstatements of transactions with certain categories of related parties. Inparticular, attention is focused on transactions with the directors or similar keymanagement personnel of an enterprise, especially their remunerationborrowings, because of the fiduciary nature of their relationship with theenterprise.Name of the related party and nature of the related party relationship wherecontrol exists should be disclosed irrespective of whether or not there have beentransactions between the related parties.Where the reporting enterprise controls, or is controlled by, another party, thisinformation is relevant to the users of financial statements irrespective ofwhether or not transactions have taken place with that party.This is because the existence of control relationship may prevent the reportingenterprise from being independent in making its financial and/or operatingdecisions. The disclosure of the name of the related party and the nature ofrelated party relationship where control exists may sometimes be at least asrelevant in appraising an enterprise‘s prospects as are the operating results andthe financial position presented in its financial statements. Such a related partymay establish the enterprise‘s credit standing, determine the source and price ofits raw materials, and determine to whom and at what price the product is sold.If there have been transactions between related parties, during the existence of arelated party relationship, the reporting enterprise should disclose the following:(i) the name of the transacting related party;(ii) a description of the relationship between the parties;(iii) a description of the nature of transactions;(iv) volume of the transactions either as an amount or as anappropriate proportion;(v) any other elements of the related party transactions necessaryfor an understanding of the financial statements;(vi) the amounts or appropriate proportions of outstanding items pertaining torelated parties at the balance sheet date andprovisions for doubtful debts due from such parties at that date; and(vii) amounts written off or written back in the period in respect of debts duefrom or to related parties.The following are examples of the related party transactions in respect of whichdisclosures may be made by a reporting enterprise:• purchases or sales of goods (finished or unfinished); 54 | P a g e
  55. 55. • purchases or sales of fixed assets;• rendering or receiving of services;• agency arrangements;• leasing or hire purchase arrangements;• transfer of research and development;• licence agreements;• finance (including loans and equity contributions in cash or in kind);• guarantees and collaterals; and• management contracts including for deputation of employees. Accounting Standard (AS) 19 LeasesScope1. This Statement should be applied in accounting for all leases other than:(a) lease agreements to explore for or use natural resources, as oil, gas, timber, metals and other mineral rights; and(b) licensing agreements for items such as motion picture films, recordings, plays, manuscripts, patents and copyrights; and(c) lease agreements to use lands.2. This Statement applies to agreements that transfer the right to use assetseven though substantial services by the less or may be called for in connectionwith the operation or maintenance of such assets. On the otherhand, this Statement does not apply to agreements that are contracts for servicesthat do not transfer the right to use assets from one contracting party to theother. 55 | P a g e
  56. 56. DefinitionsThe following terms are used in this Statement with the meanings specified:A lease is an agreement whereby the lesser conveys to the lessee in return for apayment or series of payments the right to use an asset for an agreed period oftime.A finance lease is a lease that transfers substantially all the risks and rewardsincident to ownership of an asset.An operating lease is a lease other than a finance lease.A non-cancellable lease is a lease that is cancellable only:(a) upon the occurrence of some remote contingency; or(b) with the permission of the lessor; or(c) if the lessee enters into a new lease for the same or an equivalent asset withthe same lesser; or(d) upon payment by the lessee of an additional amount such that, at inception,continuation of the lease is reasonably certain.The inception of the lease is the earlier of the date of the lease agreement andthe date of a commitment by the parties to the principal provisions of the lease.The lease term is the non-cancellable period for which the lessee has agreed totake on lease the asset together with any further periods for which the lessee hasthe option to continue the lease of the asset, with or without further payment,which option at the inception of the lease it is reasonably certain that the lesseewill exercise. 56 | P a g e
  57. 57. Accounting Standard (AS) 20 Earnings Per ShareDefinitionsFor the purpose of this Statement, the following terms are used with themeanings specified:An equity share is a share other than a preference share.A preference share is a share carrying preferential rights to dividends andrepayment of capital.A financial instrument is any contract that gives rise to both a financial asset ofone enterprise and a financial liability or equity shares of another enterprise.A potential equity share is a financial instrument or other contract that entitles,or may entitle, its holder to equity shares.Share warrants or options are financial instruments that give the holder the rightto acquire equity shares.Fair value is the amount for which an asset could be exchanged, or a liabilitysettled, between knowledgeable, willing parties in an arm‘s length transaction.Scope1. This Statement should be applied by enterprises whose equity shares orpotential equity shares are listed on a recognized stock exchange in India. Anenterprise which has neither equity shares nor potential equity shares which areso listed but which discloses earnings per share should calculate and discloseearnings per share in accordance with this Statement.2. In consolidated financial statements, the information required by Statementshould be presented on the basis of consolidated information.3. This Statement applies to enterprises whose equity or potential equity sharesare listed on a recognized stock exchange in India. An enterprise which hasneither equity shares nor potential equity shares which are so is not required todisclose earnings per share. However, comparability in financial reportingamong enterprises is enhanced if such an enterprise that is required to discloseby any statute or chooses to disclose earnings per share calculates earnings pershare in accordance with the principles laid down in this Statement. In the caseof a parent (holding enterprise), users of financial statements are usually 57 | P a g e