1. ACCOUNTING ISSUES FOR ENTREPRENEURS by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE / CSE PARTICIPANTS mobile : 91+9414430763

2. My words.... Ours is a great country with immense entrepreneurial potential. However, our legal system and taxation system is so cumbersome that our creativity and talent is wasted / unnecessarily diverted in these sectors. I wish that these are simplified so that an ordinary entrepreneur can understand these without help from any expert. Here I present a few basic questions for fundamental understanding of Accounting I wish that more people should become entrepreneurs. An ordinary Indian entrepreneur wishes to remain an honest entrepreneur and contribute to the development of nation, but our systems and processes ...

3. Is debenture redemption fund compulsory for a company ? Yes According to SEBI guidelines, creation of debenture redemption reserve equivalent to 50% of the debenture issue is obligatory. However, a company may create more reserve if it so desire

4. Where would you show discount on issue of debenture in balance sheet? Discount on issue of debentures is a capital loss of the company and it is required to be shown on the assets side of the Balance Sheet under the heading “Miscellaneous Expenditure” until it is written off

5. What is ex-interest quote of a debenture? If the purchase price for the debentures excludes the interest for the expired period, the quotation is said to be “Ex-interest”.

6. Where would you show preliminary expenses in balance sheet ? preliminary expenses are of capital nature and as such should be shown on the assets side of the Balance Sheet under the heading “Miscellaneous Expenditure”.

7. How can preliminary expenditure be written off ? Preliminary expenses being of capital nature, may be written off against capital profits or may be written off over 10 years period

8. What are the parts of preliminary expenses ? Stamp duty legal charges for preparing the Prospectus, Memorandum and Articles Accountants’ and Valuers’ fees for reports Cost of printing the Memorandum and Articles company’s seal and books of account, statutory books printing and stamping Debenture Trust Deed

9. What are not the parts of preliminary expenses ? Cost of preparation of the feasibility report. Cost of preparation of the project report. Cost of market survey Consultancy fees

10. What can be used for issue of bonus shares ? Balance in the Profit and Loss Account; General Reserves or other Reserves created out of the profits; Realised capital profits and reserves; Securities Premium Account; Capital Redemption Reserve Account

12. What are the uses of accounting standards ? in the resolution of potential financial conflicts of interest between the various important groups

13. What are the objectives of accounting standards board? To conceive of and suggest areas in which Accounting Standards need to be developed. To formulate Accounting Standards with a view to assisting the Council of the ICAI in evolving and establishing Accounting Standards in India. To study the relevance of International Accounting Standards

14. What is the composition of accounting standards board ? Representatives of : Ministry of Corporate Affairs, Comptroller and Auditor General ,Central Board of Direct Taxes , RBI,ICWAI,ICSI,SEBI,IIMs, UNIVERSITIES, Central Board of Excise and Customs.,Industry associations, financial institutions etc.

15. What are the contents of draft of an accounting standard issued by ASB for approval ? 1. Objective of the Standard, 2. Scope of the Standard, 3. Definitions of the terms used in the Standard, 4. Recognition and measurement principles, wherever applicable, 5. Presentation and disclosure requirements.

16. To whom will ASB circulate draft of accounting standard for approval ? SEBI,RBI,SCOPE,IBA,ASSOCHAM,CAG,FICCI,ICSI,ICWAI,etc.

17. WHAT IS AS 1? All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed

18. For which type of policies /assumption, no disclosure is required ? If the fundamental accounting assumptions, viz. going concern, consistency and accrual are followed in financial statements, specific disclosure is not required.s But if a fundamental accounting assumption is not followed, the fact should be disclosed.

19. Is it necessary to disclose all the changes in accounting policies ? Yes Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated.

20. While taking cost or market price (lower), what is excluded from cost as per AS 2? (i) abnormal amounts of wasted materials, labour or other production costs; (ii) storage costs; (iii) administrative overheads that do not contribute to bringing the inventories to their present location and condition and (iv) selling and distribution costs.

21. What are the acceptable methods for cost calculations as per AS2? (i) Specific identification cost (ii) First-In-First Out and (iii) Weighted average cost.

22. What method of valuation should be used for valuing inventories that are damaged or that have become wholly or partially obsolete or selling price has declined Net realisable value or the replacement cost of materials (if it is known that finished goods will be higher in value than net realisable value)

23. As per AS 2, inventory has to be classified and inventory valuation formula must be shown. What are the methods for classification? raw materials and components, work-in-progress, finished goods, stores and spares loose tools.

24. How should a company report foreign exchange transactions as per AS 3? Cash flows arising from transactions in a foreign currency should be recorded in an enterprise’s reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and foreign currency at the date of the cash flow

25. When can a company change depreciation policy ? As per AS 6 : A change in one method of providing depreciation to another method should be made only if the adoption of the new method is required by statute or for compliance with the accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of financial statements

26. What should be shown in the balance sheet regarding depreciation ? (i) historical cost or other amount substituted for historical cost of each class of depreciable asset; (ii) total depreciation for the period for each class of assets; (iii) the related accumulated depreciation; (iv) depreciation methods used; and (v) depreciable rates & useful life (if rate are different from schedule 14)

27. What are methods to recognise revenue of contract ? 1. the proportion that contract costs incurred for work performed upto the reporting date bear to the estimated total contract costs; or 2. surveys of work performed; or 3. completion of a physical proportion of the contract work.

28. What should be done about expected losses in a contract ? AS 7 : When it is probable that total contract cost will exceed total contract revenue, the expected loss should be recognised as an expense immediately.

29. In construction contracts, what should be disclosed ? 1. the amount of contract revenue recognised as revenue in the period; 2. the methods used to determine the contract revenue recognised in the period; and 3. the methods used to determine the stage of completion of contracts in progress.

30. When should sale be recognised ? AS 9 : WHEN : (i) the property in goods is transferred from seller to buyer AND (ii) there is no uncertainty regarding the amount of consideration

31. How shold self constructed assets be shown ? only direct costs are included in the cost of the asset. Exclude administrative and other overheads

32. When can we show goodwill ? Goodwill should be recorded only when some consideration has been paid for it. (AS 10)

33. How should assets acquired on hire puchase be shown ? Fixed assets acquired on hire-purchase should be disclosed only at net cash value stating the fact of hire purchase.

34. What should be done with the benefit arising from revaluation of fixed assets ? An increase in net book value arising on revaluation of fixed assets should be credited directly to owner’s interest under revaluation reserve and should not be used for any purpose except to write off decrease in value of assets.

35. What details should be given about revaluation of assets (AS 10)? revalued assets (asset class – when revalution is done, it should be for entire class) should include revalued amount substituted for historical cost of fixed assets, the method adopted to compute the revalued amounts, the nature of indices used, the year of any appraisal made and whether an external valuer was involved etc.

36. What should be the method of valuation of assets in foreign exchange ? foreign currency monetary items should be reported using the closing rate. non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction; and non-monetary items which are carried at fair value or other similar valuation denominated in a foreign currency should be reported using the exchange rates that existed when the values were determined

37. What is difference between integral and non-integral operations for forex transactions? A foreign operation that is integral to the operations of the reporting enterprise carries on its business as if it were an extension of the reporting enterprise’s operations. In contrast, a non-integral foreign operation accumulates cash and other monetary items, incurs expenses, generates income and perhaps arranges borrowings, all substantially in its local currency.

38. What are the 2 methods of showing government grants ? ‘capital approach’ under which a grant is treated as part of the shareholders’ funds ‘income approach’ under which a grant is taken to income over one or more periods

39. As per AS 13, how should we value an investment, if it is acquired in exchange for another asset? If an investment is acquired in exchange for another asset, the acquisition cost of the investment should be determined by reference to the fair value of asset given up.

40. Should we recognise long term investments at cost or market price ? No Investments classified as current investments should be stated at lower of cost and fair value while long-term investments be stated at cost with provision for diminution to recognise a decline.

41. What is differnce between amalgamation as merger and as purchase ? Merger : there is a pooling not merely of assets and liabilities of the amalgamating companies but also of the shareholders’ interests and of the business of these companies. Purchasse : one company acquires another company and as a consequence, the shareholders of the company which is acquired, normally do not continue to have proportionate share in the equity of the combined company. Also the business of the company which is acquired is not intended to be continued.

42. What is the difference between purchase and merger ? Purchase : The reserves whether capital or revenue or arising on revaluation of the transferor company other than the statutory reserves, should not be included in the financial statements of the transferee company. Merger : - reserves should be recorded at their existing carrying amounts and in the same form as at the date of the amalgamation.

43. What are rules regarding capitalisation of borrowing cost as per AS 16? Capitalisation of borrowing cost can be done : 1. expenditure for the acquisition, construction or production of a qualifying asset is being incurred; 2. borrowing costs are being incurred; 3. activities that are necessary to prepare the asset for its intended use or sale are in progress (it is not complete). It should be shown in final accounts.

44. When can we identify a unit as a segment (AS 17) ? (a) its revenue from sales to external customers and from transactions with other segment is 10 per cent or more of the total revenue, external and internal of all segments; or (b) its segment result, whether profit or loss is 10 per cent or more of (i) the combined result of all segments in profits or (ii) the combined results of all segments in loss which is greater in absolute amount; or (c) its segment assets are 10 per cent or more of the total assets of all segments.

45. Who are related parties as per AS 18? (b) associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture; (c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them control (d) key management personnel and relatives of such personnel and (e) enterprises over which any person described is able to exercise significant influence.

46. What should be disclosed ass per AS 18? 1. the name of the transacting related party; 2. a description of the relationship between the parties; 3. description of the nature of the transactions; 4. volume of transactions 5. any other relevant information 6. the amounts or appropriate propositions of outstanding items pertaining to related parties at the balance sheet date and provision for doubtful debts due from such parties at that date; and 7. the amounts written off or written back in the period in respect of debts due from or to related parties. Items of a similar nature may be disclosed in aggregate by type of related party.

47. How to depreciate assets in finance lease ? a finance lease gives rise to a depreciation expense for the asset as well as finance expense for each accounting period. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset should be fully depreciated over the lease term or its useful life whichever is shorter. The assets have to be shown at value / present value of all lease payments (whichever is lower)

48. Who should show assets in balance sheet in lease ? In finance lease = lessee in operating lease = lessor (accordingly depreciation will apply, read AS 19 for details )

49. How should revenue be shown in lease ? Finance lease = fixed % on invesment operating lease = straight line basis method

50. What happens Sale and lease back transaction changes in finance or operating lease ? Finance lease = recognise income over the term of lease operating lease = recognise it immediately

51. How should basic EPS be calculated ? By dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period.

52. When is diluted EPS calculated ? Diluted earnings per share is calculated when there are potential equity shares in the capital structure of the enterprise.

53. What is potential capital ? Potential equity share are those financial instruments which entitle the holder to the right of equity shares like convertible debentures, convertible preference shares, options warrants etc.

54. What should every company show about calculation of EPS in its financial statements (as per AS 20)? 1. The amounts used as the numerators in calculating basic and diluted earnings per share, and a reconciliation of those amounts to the net profit or loss for the period; 2. The weighted average number of equity shares used as the denominator in calculating basic and diluted earnings per share, and a reconciliation of these denominators to each other; and 3. The nominal value of shares along with the earnings per share figures.

55. As per AS 21, should a company prepare both separate and consolidated accounts ? Yes A parent which presents consolidated financial statements should present these statements in addition to its separate financial statements.

56. What are the cases when consolidation is not necessary ? 1. its control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future; or 2. it operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent. (read AS 21)

57. How should consolidation take place ? 1. Eliminate the cost of the investment 2. The excess of the cost to the parent of its investment in a subsidiary over the equity of the subsidiary = ‘goodwill' if cost is less, the difference is ‘capital reserve’. 3. The majority interest in the net income of consolidated subsidiaries have to be identified and adjusted against the income of the group so as to arrive at the net income attributable to the owners of the parent. 4. minority interests in the net assets of consolidated subsidiaries has to be identified and presented separately from liabilities and equity of the parents’ shareholders. 5. Eliminate Intragroup balances and intragroup transactions and resulting unrealized profits

58. What are tax differences as per AS 22? The differences between taxable income and accounting income can be classified into permanent differences and timing differences. Permanent differences are those differences between taxable income and accounting income which originate in one period and do not reverse subsequently. Timing differences are those differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods. Timing differences arise because the period in which some items of revenue and expenses are included in taxable income do not coincide with the period in which such items of revenue and expenses are included or considered in arriving at accounting income.

59. Can permanent tax differences come in balance sheet ? No Permanent differences do not result in deferred tax assets or deferred tax liabilities. (but it is not so in the case of timing differences)

60. What is associate as per AS 23? An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor. (e.g. 20% or more shareholding)

61. Examples of associateships ? — Representation on the board of directors. — Participation in policy making processes; — Material transactions between the investor and the investee. — Interchange of managerial personnel. — Provision of essential technical information.

62. What is discontinuing operations as per AS 24? When a unit is relatively large component of an enterprise which is major line of business or geographical segment, this is distinguishable operationallys. In discontinuing operation, this unit of businessis is seprarated on the basis of an overall plan in one shot or in piecemeal. Discontinuance will be carried either through demerger or spin-off, piecemeal disposal of assets and settling of liabilities or by abandonment.

63. What must be shown in interim financial reports as per AS 25? Condensed balance sheet; Condensed statement of profit and loss; Condensed cash flow statement; and Selected explanatory notes Basic and diluted earnings per share as per AS-20.

64. What is intangible asset as per AS 26? “non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.”

65. When should intangible asset be recognised ? it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and the cost of the asset can be measured reliably

66. When can an organisation recognise intangible asset ? the technical feasibility of completing the intangible asset so that it will be available for use or sale; its intention to complete the intangible asset and use or sell it; its ability to use or sell the intangible asset; how the intangible asset will generate probable future economic benefits. The company should show the usefulness of the intangible asset; the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and its ability to measure the expenditure attributable to the intangible asset during its development reliably.

67. Can the method of amortisation be changed ? Yes If the expected useful life of the asset is significantly different from previous estimates, the amortisation period should be changed accordingly. If there has been a significant change in the expected pattern of economic benefits from the asset, the amortisation method should be changed to reflect the changed pattern. Such changes should be accounted for in accordance with AS-5, Net Profit or Loss for the Period, Prior Period items and Changes in Accounting Policies.

68. What is impairment of intangible asset ? if its recoverable amount is less than the carrying amount

69. What is a joint venture as per AS 27? A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control.

70. What are the assets where we cannot apply AS 28 regarding impairment of assets ? inventories; assets arising from construction contracts; financial assets; deferred tax assets.

71. What are the steps in impairment of an asset ? Collect information from external and internal sources about impairment of asset estimate the future cash inflows and outflows arising from continuing use of the asset and from its ultimate disposal; and apply the appropriate discount rate to these future cash flows change depreication rate / method (if required)

72. What is contingent liability as per AS 29? a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or a present obligation that arises from past events but is not recognised because: it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or a reliable estimate of the amount of the obligation cannot be made.

73. WHAT IS A PROVISION? A provision is a liability, which can be measured only by using a substantial degree of estimation.

74. When should provision be recognised as per AS 29? an enterprise has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation.

75. Can a provision be used for a purpose other than the purpose intendend for ? No A provision should be used only for expenditures for which the provision was originally recognised. (read AS 29)

76. Can we make provision for future operating losses ? No Provisions should not be recognised for future operating losses. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. An enterprise tests these assets for impairment under Accounting Standard (AS) 28, Impairment of Assets.

77. What should be shown as per AS 29 for contingent liabilities? an estimate of its financial effect; an indication of the uncertainties relating to any outflow; and the possibility of any reimbursement.

78. What are the types of hedges as per AS 30? (a) fair value hedge: a hedge of the exposure to changes in fair value of a asset or liability or an unrecognised firm commitment, that is attributable to a particular risk and could affect profit or loss. (b) cash flow hedge: a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognised asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction and (ii) could affect profit or loss. (c) hedge of a net investment in a foreign operation as defined in AS 11.

79. How should a financial instrument be recognised ? A financial asset or financial liability at fair value through profit or loss should be measured at fair value on the date of acquisition or issue (AS 30)

80. What are the cases when fair value is not used to measure financial instruments ? loans and receivables held-to-maturity investments investments in equity instruments that do not have a quoted market price

81. What is a finacial lease as per ASS 17 A lease is classified as finance lease if it transfers substantially all risks and rewards incidental to ownership.

82. How should government grants be shown as per IAS 20? Grants should not be credited directly to equity. They should be recognised as income in a way matched with the related costs. Grants related to assets should be deducted from the cost or treated as deferred income.

83. What are the 3 types of joint ventures as per IAS 31? Jointly controlled operations Jointly controlled assets Jointly controlled entities

84. What is an onerous contract? Is provision necessary for this ? a contract in which the unavoidable costs of meeting the obligations under the contract exceed the expected economic benefits yes, provision is necessary for this

85. What cannot be recognised as intangible assets ? Internally generated goodwill, Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance.

86. Can we reclassify an expense as intangible asset later on ? N o Expenditure on an intangible item that was initially recognized as an expense shall not be recognized as part of the cost of an intangible asset at a latter date.

87. What are methods to recognise investment property? a fair value model: Investment property should be measured at fair value and changes in fair value should be recognised in the income statement; or a cost model: Investment property should be measured at depreciated cost (less any accumulated impairment losses).

88. WHEN WERE INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) ISSUED ? 2001

89. What is the main theme of IFRS 1? How should a company adopt IFRS and that it must explain how the transition from previous GAPP to IFRSs affected its reported financial position, financial performance and cash flows.

90. What must be disclosed as per IFRS 7? It is about financial assets. information on the significance of financial instruments to the entity’s financial position and performance; the nature and extent of risk exposures arising from financial instruments (quantitative disclosures); and the approach taken in managing those risks (qualitative disclosures).

91. What is expected to be a major issue for accountants in 2011? convergence of Indian Accounting Standards with IFRS by 1st April 2011.

92. Can directors change the location of accounts ? Yes . If the Directors decide to keep the books or any of the books at a place other than the registered office (the other place must be in India), the Registrar must be notified within seven days of the decision.

93. Who is responsible for keeping books of accounts ? managing director or manager; where the company has neither a managing director nor manager then every director of the company; and every officer and other employees and agent as defined under Section 240(6) of the Act.

94. What is the time limit for getting minimum subscription? within 120 days of the issue of prospectus otherwise return entire amount, if the subscriptions are not repaid within 130 days of the issue of prospectus, the defaulting directors will be jointly and severally liable to pay interest @ 6% per annum from the expiry of 130 days.

95. What is interest on call in arrearss as per Table A ? Interest has to be paid from the day appointed for payment to the time of actual payment at a rate not exceeding 5% per annum

96. What for can a company use share premium amount as per sec. 78? issuing fully paid bonus shares to the members; writing off preliminary expenses of the company; writing off the expenses of or the commission paid or discount allowed on any issue of shares or debentures of the company; or providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.

97. Can a company use share premium in buy back of its shares? Yes according to Section 77A, a company may purchase (or buy back) its own shares or other specified securities out of the Securities Premium Account.

98. What conditions must be fulfilled for issue of shares at discount ? The shares must belong to a class already issued. At least one year has elapsed since the date on which the company was entitled to commence business The issue is authorised by a resolution passed in the general meeting of the company and the sanction of the Central Government is obtained.The resolution must specify the maximum rate of discount at least one year has at the date of the issue elapsed from commencement of business shares be issued within two months of sanction

99. Where should the amount paid to promoters for services rendered by them is shown in accounts? Show it in goodwill

100. What is the time limit for submission of return regarding buy back of shares ? After the completion of buy-back, a return containing such particulars relating to the buy-back as may be prescribed has to be filed with the Registrar of Companies and Securities and Exchange Board of India within thirty days of such completion.

101. What cannot be used for buy back of shares ? Free resserves can be used but these should be excluded : Unamortised miscellaneous expenditure. Unamortised deferred revenue expenditure. Contingent liabilities likely to mature and not provided for. Purchased goodwill. Any diminution of long-term investments not provided for. Any impairment in the value of tangible assets not provided for.

102. Which money can used for redemption of preference shares ? The capital redemption reserve account / fresh issue proceeds may be applied by the company in paying up unissued shares of the company to be issued to the members of the company as fully paid bonus shares. Otherwise Capital Redemption Account must be maintained intact unless otherwise sanctioned by the Court

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