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Introduction to accounting standards

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Introduction to accounting standards

  1. 1. Introduction to Accounting Standards CA. Dhruv Seth ds@sethspro.com
  2. 2. Background & Authority Reporting Standards Compliance Standards
  3. 3. Accounting Standards Background & Authority
  4. 4. Publications by ICAI • Accounting Standards • Guidance Notes • Expert Opinion
  5. 5. Evolution of standards Accounting Standards Initiation AS 1 to AS 15 1979 to 1995 AS 16 to AS 29 2000 to 2007 AS 30 to AS 32 Later part of 2007
  6. 6. Applicability of Standards Accounting Standards Level I Level II Level III AS 1 to 14 (except AS 3), 15, 16, 19, 20, 22, 25, 26, 28 and 29 a a a AS 3 and 17 a r r AS 18 and 24 a a r AS 21, 23 and 27 (Only if entity prepares consolidated financial statements) a r r
  7. 7. Reporting Standards
  8. 8. AS-1Disclourse of Accounting Policies Fundamental Accounting Assumptions • Going Concern • Consistency • Accrual Consideration in selecting policies • Prudence • Substance over form • Materiality
  9. 9. AS-1-Disclourse of Accounting Policies • To ensure proper understanding by adequate disclosures • Any change in accounting policy which affects the reader • The amount of effect due to such policy change to be highlighted
  10. 10. AS-3 Cash Flow • Depicts Incoming and Outgoing of Funds • Highlights the true operations • Cash flow into three sub sections :- • Operating Activities • Financing Activities • Investing Activities
  11. 11. A. CASH FLOW FROM OPERATING ACTIVITIES Net Profit(Loss) before tax as per Profit & Loss Account 17,38,571.28 Adjusted for:- Add:- non cash Debits Depriciation Amortisation Impairment 11,55,197.00 Interest and Finance Charge (73,083.67) 10,82,113.33 Operating Profit before Working Capital Changes 28,20,684.61 Adjusted for:- (Increase)Decrease in Trade & other receivables (5,52,562.00) (Increase)Decrease in Inventories (3,61,023.00) Increase(Decrease) in Trade Payable & other payable 12,17,969.75 3,04,384.75 Net Cash from Operating Activities 26,73,106.36 B. CASH FLOW FROM INVESTING ACTIVITIES Purchase of fixed Assets (19,96,544.00) Sale of Fixed Assets 0.00 Net Cash from(used in) Investing Activities (19,96,544.00) C. CASH FLOW FROM FINANCING ACTIVITIES Increase(Decrease) in Long Term Borrowings (1,83,081.03) Interest and Finance Charge 73,083.67 Net Cash from(used in) Financing Activities (1,09,997.36) Net Increase / (Decrease) in Cash and Cash Equivalents 5,66,565.00 Opening Balance of Cash & Cash Equivalents 15,58,060.59 Closing Balance of Cash & Cash Equivalents 21,24,625.59
  12. 12. Particulars Amount CY Amount PY Net profit 1,000 -------------- Depreciation 500 -------------- Interest Income 200 -------------- Miscellaneous Expenses W/off 200 -------------- Sundry Debtors 800 1,000 Sundry Creditors 1,000 1,300 Share Capital 500 600 Long Term Borrowings 300 400 Fixed Assets 600 500 Closing Stock 500 700 Cash and Bank 1,500 1,200 Cash Flow
  13. 13. Particulars Amount CY Net profit 1,000 Add: Depreciation (Non Cash Item) 500 Less: Interest Income (Finance Income) (200) Add: Miscellaneous Expenses W/off 200 SUB TOTAL 1,500 Change in Sundry Debtors 200 Change in Sundry Creditors (300) Change in Inventory 200 Cash Flow from Operating Activities 1,600 Cash Flow
  14. 14. Particulars Amount CY Cash Flow from Investing Activities Less: Increase in Fixed Assets (100) Add: Interest Income (Finance Income) 200 Cash Flow from Investing Activities 100 Cash Flow from Financing Activities Reduction in Long Term Borrowings (100) Reduction in Share Capital (100) Cash Flow from Financing Activities (200) Cash Flow
  15. 15. Particulars Amount CY Cash Flow from Operating Activities 1,600 Cash Flow from Investing Activities 100 Cash Flow from Financing Activities (200) CASH Flow for the year 1,500 Cash and Bank Balance 1,500 Cash Flow
  16. 16. AS-4 - Contingencies and events occurring after B/s date • Accounting treatment for • Contingent Losses • Contingent Gains • Determination of amounts in case to be included
  17. 17. AS-4 - Contingencies and events occurring after B/s date Events occurring after the balance sheet date are those significant events, both favorable and unfavorable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company, or by the corresponding approving authority in the case of any other entity. (a) those which provide further evidence of conditions that existed at the balance sheet date; (b) those which are indicative of conditions that arose subsequent to the balance sheet date.
  18. 18. AS-5 Net profit for the period, prior period and change in accounting policy • Net Profit for the period • Profit and Loss from ordinary activity and • Extraordinary items
  19. 19. AS-5 Net profit for the period, prior period and change in accounting policy • Prior Period Items • Arose in the current period • As a result of • Error OR • Omission in any previous prior year
  20. 20. AS-5 Net profit for the period, prior period and change in accounting policy • Change in Accounting Estimate • Change in Accounting Policy • Required by a statue OR • Compliance with an AS OR • More appropriate presentation
  21. 21. AS- 13 Accounting for Investments • Investment Defined as • Current Investment • Long Term Investment • Investment Property
  22. 22. AS- 13 Accounting for Investments Carrying Amounts • Current Investment • Lower of Cost of FMV • Long Term Investment • Generally carried at cost unless permanent diminution
  23. 23. AS- 13 Accounting for Investments Disclosures • Accounting Policies undertaken • Classification of Investments • Amounts in P&L (Interest, Profit etc.) • Restriction on ownership, realisability • Other disclosures as per statues
  24. 24. AS- 17 Segment Reporting Disclosures • Primarily two segment reporting • Business Segment • Geographical Segment • Reportable Segment • Greater than 10% of revenue OR • Management discretion
  25. 25. AS- 18 Related Party Disclosures • Related Parties are those that :- • Control OR • Significantly Influence The management or operating policies of the entity during the reporting period.
  26. 26. AS- 18 Related Party Disclosures • Related Party relationships • Nature of transactions between them • Volume of Transactions • Amounts written off with regard to them • Amounts Outstanding as on B/s date
  27. 27. AS- 20 Earnings per share Disclosures • Types of Calculation • Basic • Diluted
  28. 28. AS- 22 Accounting for Taxes • Types of disclosure • Current Year Tax • Deferred Tax
  29. 29. AS- 23 Accounting for investment in Associates Objectives to set out • Principles and • Procedures for recognizing the investment associates in CFS of the investors, so that effect of investments in associates on financial position of group is indicated.
  30. 30. AS- 24 Discontinuing Operations • Discontinuing Operation • Disposing off substantial part of the enterprise • Terminating through abandonment • Represents separate major line of business • Can be distinguished
  31. 31. AS- 25 Interim Financial Reporting • Reporting for less than a year i.e 3 months • Clause 41 says publish financial results on quarterly basis. • Objective is to provide frequently and timely assessment
  32. 32. AS- 29 Provision, Contingent Liability and assets • Provision – is a liability measured using substantial estimation • Liability – Present obligation arising from past events which is expected in an outflow of resources • Obligating Event – Enterprise having mo alternative other than settlement
  33. 33. AS- 29 Provision, Contingent Liability and assets • Provision to be recognized when:- • Present obligation exists • Outflow of resources would occur • Reliable estimate All the above conditions to be satisfied cumulatively in order to warrant a provision in books
  34. 34. AS- 29 Provision, Contingent Liability and assets
  35. 35. Compliance Standards
  36. 36. AS- 2 Valuation of Inventories Inventories are assets :- • Held for sale in ordinary course • In the process of production for such sale OR • Materials or supplies for rendering production Net Realizable value :- • Estimated selling price in the ordinary course less estimated completion and sales cost
  37. 37. AS- 2 Valuation of Inventories Cost of Inventory • Compromise all costs of purchase • Cost of Conversion • Other costs in bringing the inventories to their present location and condition
  38. 38. AS- 2 Valuation of Inventories Exclusions from Cost of Inventory • Abnormal wastage • Storage costs unless for production • Administrative overheads • Selling and distribution costs
  39. 39. AS- 2 Valuation of Inventories • Inventories comprise of • Raw Materials • Work in Progress • Finished Goods • Spares etc. • DOES NOT INCLUDE • Shares and securities • Livestock or agricultural goods • Construction contracts
  40. 40. AS- 6 Accounting for Depreciation Exclusions from Standard • Forest, Plants or natural resources • Expenditure on R&D • Goodwill and Intangibles • Live Stock • Land unless limited useful life
  41. 41. AS- 6 Accounting for Depreciation Depreciation is a measure of • Loss of value arising from • Use • Effluxion of Time • Obsolesce through technology • Measured for a charge of fair proportion over the expected life of the asset
  42. 42. AS- 6 Accounting for Depreciation • Should be applied consistently • Change of method is change in accounting policy (retrospective working required) • Change in life of asset to be applied prospectively since change in estimate
  43. 43. AS- 6 Accounting for Depreciation • Reviewed periodically for technological degradation • Addition which becomes integral part to be written off in same manner • Disclose the rate of depreciation if different from the one in statue
  44. 44. AS- 10 Accounting for Fixed Assets Fixed Asset is :- • Held with an intention of being used • For the purpose of production • Not held for sale in the normal course of business
  45. 45. AS- 10 Accounting for Fixed Assets Components of costs • Attributable costs in bringing the asset to its working condition :- • Site preparation • Initial delivery • Installation costs • Freight • Professional fees • Startup costs
  46. 46. AS- 10 Accounting for Fixed Assets Improvements and Repairs • Expenses to be capitalized when • Increases the future benefits • Material in nature
  47. 47. AS- 10 Accounting for Fixed Assets Particulars IT Act AS Method of Depreciation W.D.V W.D.V or S.L.M. Rates of Depreciation As in IT Rules Sch XIV of CA, 1956 Concept of Grouping Block of Asset Each asset separately Change in Method Not Allowed Allowed Depreciation Full or Half Year Day wise pro-rata Revaluation Not Allowed Allowed Asset disposed off To continue in block To be written off Depreciation in Sale Not Allowed Day wise pro-rata
  48. 48. AS- 7 Construction Contracts •Both percentage of completion method and the completed contract method allowed •Applies to Contractors & DeveloperBuilders AS-7 OLD NEW • Only percentage of completion method allowed • Applies to Contractors only
  49. 49. AS- 7 Construction Contracts • Large contracts only bifurcated :- • Separate proposals for each • Each asset subject to individual negotiation • Cost and revenue can be identified
  50. 50. AS- 7 Construction Contracts Cost which do not form part of construction cost and require write off:- • General Administration costs • Selling costs • R&D costs • Depreciation of idle P&M
  51. 51. AS- 7 Construction Contracts • Expected Loss from a contract to be recognized immediately; else • Revenue to be recognized only to the extent contract costs incurred and recovery of same is probable. • Change in contracts costs to be treated as change in estimate.
  52. 52. AS- 7 Construction Contracts Example of Percentage completion Cost of Construction – Rs. 150 crore Time Period of construction – 3 years Contracted Price – Rs. 200 crore Estimated Profit – Rs. 50 crore over 3 years
  53. 53. AS- 7 Construction Contracts Particulars Year 1 Year 2 Year 3 Cost Incurred 40.00 90.00 140.00 Percentage Completion 25% 60% 100% Revenue Recognized 50.00 70.00 80.00 25% of 200 60% of 200 less last years Balance Cost to be debited 40.00 50.00 60.00 Profit for the year 10.00 20.00 20.00
  54. 54. AS- 7 Construction Contracts Particulars Year 1 Year 2 Year 3 Cost Incurred 40.00 90.00 180.00 Percentage Completion 25% 50% 100% Revenue Recognized 50.00 50.00 100.00 25% of 200 50% of 200 less last years Balance Cost to be debited 40.00 50.00 90.00 Profit for the year 10.00 0.00 10.00 2nd Year cost estimate at revised 180 cr
  55. 55. AS- 7 - Construction Contracts Particulars Year 1 Year 2 Year 3 Estimated Total Cost 1,000.00 Estimated Construction Cost 600.00 Estimated Revenue 1,500.00 Total Cost incurred 500 700 1000 Construction Cost Incurred 100 300 600 Area Sold 15% 30% 100% Amount Received from customers 200 400 1500 Eligible Customer Contracts 1000 1200 1500
  56. 56. AS- 7 Construction Contracts Particulars Year 1 Year 2 Year 3 Development Cost Incurred 100 300 600 Percentage Completion 16.67% 50.00% 100.00% Revenue Recognized 0.00 600.00 900.00 Since less than 25% 50% of 1,200 less last years Balance Cost to be debited 0.00 500.00 500.00 Profit for the year 00.00 100.00 400.00 Work in Progress (Balance Sheet) 500.00 200.00 0.00
  57. 57. Guidance Note – Real Estate revenue recognition Revenue to be recognized when :- • All major clearances received AND • Project is completed 25% of construction costs. AND • Atleast 25% of the saleable project area is secured by contracts AND • Atleast 10% of the amount in the above contracts have been received
  58. 58. AS- 9 Revenue Recognition Revenue is the :- • Gross Inflow • In the course of Ordinary activities • Exception – Commission Agency
  59. 59. AS- 9 Revenue Recognition Methods of Revenue recognition • Completed Service Contract Method • Proportionate completion method • Exception – Commission Agency
  60. 60. AS- 9 Revenue Recognition Point of Revenue recognition • Transfer of Risk and Rewards • Certainty of realization • Interest – Time basis • Dividend – Right to receive is established
  61. 61. AS- 9 Revenue Recognition Point of Revenue recognition • Delivery delayed at buyers request • Delivery subject to installation • Consignment Sale • Cash on Delivery sale • Sale on Installments • Treatment of Bulk Trade discounts • Advertisement • Admission fees for 10 years
  62. 62. AS-11 Effect of Foreign Exchange Important Definition Monetary Items – Money held and assets and liabilities to be received or paid in fixed or determinable amounts of money Non Monetary Items – Assets and liabilities other than monetary items
  63. 63. AS-11 Effect of Foreign Exchange Initial Recording • At the prevalent transaction exchange rate Subsequent reporting dates • Monetary Items – Revalued • Non monetary Items – Historical Revaluation charged to P&L
  64. 64. AS-12 Accounting for Government Grants Government means • Government agencies and similar bodies whether local, national or international Approaches for recognition • Capital Approach • Income Approach
  65. 65. AS-12 Accounting for Government Grants Point of Recognition • Reasonable assurance that the enterprise would comply to the conditions attached; AND • Benefits have been earned and reasonable certainty that the ultimate collection would be made.
  66. 66. AS-16 Borrowing Costs Borrowing Cost to be capitalized when • Assets is a qualifying asset • Without the asset such cost would not have occurred at all Types of Borrowing Cost • Specific Borrowing • General Borrowing
  67. 67. AS-16 Borrowing Costs Under Income Tax Act, 1961 • Explanation 8 to Sec 43(1) read with Sec 36(1) the treatment of Interest is to be – • Capitalize in Asset till the date it is first put to use • Write off to P&L after asset has been first put to use
  68. 68. AS-16 Borrowing Costs Cessation of capitalization • Accounting Standard 16 • Substantially all the activities are over for intended use or sale • Income Tax Act 1961 • Once the asset has been actually put to use
  69. 69. AS-19 Leases Classification of Leases • Finance Lease • Operating Lease Allow ability of Depreciation (AS-6) • Finance Lease - Lessee • Operating Lease – Lessor Allow ability of Depreciation (IT Act) • Finance or Operating - Lessor
  70. 70. AS-26 Intangibles Intangible Asset • Identifiable • Non monetary assets • Without physical substance • Held for use of production or supply Asset • Controlled by an enterprise • With future economic benefits
  71. 71. AS-26 Intangibles Difference between Accounts and treatment in Income Tax Act, 1961 • Preliminary Expenses • Heavy Advertisement Expenses • Advance lease rental for next 5 years • Stamp papers for the above rental • Research Expenses

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