Accounting standards (India) and convergence to IFRS. By: Pankaj Vasani

Session on Accounting Standards
& convergence to IFRS

Institute of Management Technology (IMT), Nagpur

Guest Speaker :
Pankaj Vasani
IMT, Nagpur l Sept 5 , 2010

September 5, 2008
CA.Pankaj Vasani

Introduction of the guest faculty
Mr. Pankaj Vasani

is a qualified Chartered
Accountant and Lawyer, specializing in India
and International taxes. He is currently the Head
of Tax at Sapient Corporation Pvt. Ltd. Pankaj
has vast experience and a strong track record in
automotive, beverage, software and service
industry. In his prior assignments, he has
worked with Coca-Cola, Subros Ltd., and also in
an advisory role. He is a master draftsman
having
excellent
interpretative/
logical
reasoning skills and is very well known in the
tax fraternity. Pankaj has been a frequent
contributor and speaker at various tax seminars/
conferences, and is also a guest faculty at Bschools.


CA.Pankaj Vasani

History of accounting
 Bible and Islamic Quran contains mention about Simple trade accounting.
 Luca Pacioli (1445-1517) is to be credited for “birth of accountancy”
It
was because of his mathematical knowledge that “double accounting system” was
introduced
 The First book on accounting in English language was published in London by
John Gouge (or Gough) in 1543 described as ‘A Profitable Treaty called the
instrument’
--- It helped us to learn good order of keeping of the famous reconynge, called in
Latin Dare and Habere, In English Debtors and Creditors
 Fine art of accounting was present in India even in Vedic times. Rig-Vedas having
references to words Kraya (sale),Vanij (Merchant), Sulka (Price)
 As observed by Prof.Max Mueller there is very evidence of highly developed Hindu
Accounting tradition in “Arthashatra” written by Kautilya around 300 B.C.

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Agenda

 Accounting Standards
 Convergence of Accounting Standards with IFRS


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Foreword
OBJECTIVE
Financial reporting not an end

AS to bring qualitative improvement in FR

ICAI- leadership role-ASB

Legal recognition by Co Act & SEBI

To harmonize
different
accounting
policies and
practices in use
in a country

Seek to bring
about
uniformity in
accounting
practices

Reduce alternativebound of rationalitycompatibilityinformed decision

At par with IAS. ASI + Guidance note


CA.Pankaj Vasani

Accounting Standard Board
 ICAI constituted an Accounting Standards Board (ASB) on 21st April, 1977
 Main function of ASB is to formulate accounting standards so that such standards may be
established by the Council of the Institute in India.
 ASB takes into consideration the applicable laws, customs, usages and business
environment
 The Institute is one of the Members of the International Accounting Standards Committee
(IASC) and has agreed to support the objectives of IASC.
 While formulating the Accounting Standards, ASB gives due consideration to International
Accounting Standards, issued by IASC and tries integrate them, to the extent possible, in
the light of the conditions and practices prevailing in India
 ASB issues guidance notes on the Accounting Standards and give clarifications on issues
arising therefrom - also reviews the AS at periodical intervals

Established by an
Act
IMT, Nagpur l Sept 5 , 2010of Indian Parliament
“The Chartered Accountants Act, 1949”

The Institute of Chartered
CA.Pankaj Vasani
Accountants of India

Procedure for issue of AS
Council of the Institute
Determine broad area where AS is needed

Assisted by Study Groups

Considers
draft

Makes
amendment; if
necessary

Hold dialogue with Govt, PSU & industry

Exposure draft prepared- for comments

AS issued under the
authority of Council

Response received - draft finalized


CA.Pankaj Vasani

APPLICABILITY OF ACCOUNTING STANDARDS



ICAI, not being a legislative body, can enforce compliance with its standards only by its
members.



However, Section 211(3A) of the Companies Act requires companies to present their profit and
loss accounts and balance sheets in compliance with the accounting standards



SEBI and the RBI also require compliance with the Accounting Standards issued by the ICAI



Insurance Regulatory and Development Authority (IRDA) (Preparation of Financial Statements
and Auditor’s Report of Insurance Companies) Regulations, 2000 requires insurance
companies to follow the Accounting Standards issued by the ICAI.



The statutory auditors of every company are required to report whether the AS have been
complied with or not

Accounting Standard and Income Tax Act
 Guidance Note on Audit u/s 44AB of Income Tax Act, requires all financial statements prepared
under mercantile system of accounting to comply with all applicable mandatory accounting standards
issued by the Institute.

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Accounting Standards : 1 ~ 32


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ACCOUNTING STANDARDS
AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring after the
Balance Sheet Date
AS 5 Net Profit or Loss for the period, Prior Period
Items and Changes in Accounting Policies
AS 6 Depreciation Accounting
AS 7 Construction Contracts (revised 2002)
AS 8 Accounting for Research and Development
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in FEx Rates
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 15 (revised 2005) Employee Benefits
AS 16 Borrowing Costs

AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases
AS 20 Earnings Per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income.
AS 23 Accounting for Investments in Associates in
Consolidated Financial Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent` Liabilities and Contingent
Assets
AS 30 Financial Instruments: Recognition and
Measurement
AS 31 Financial Instruments: Presentation
AS 32 Financial Instruments: Disclosures
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5

ACCOUNTING STANDARD-1
DISCLOSURE OF ACCOUNTING POLICIES
–
–

Applicable to: all enterprises since 1-4-93.
Deals with: the disclosure of significant accounting policies followed / method adopted in
preparing and presenting financial statements.

Fundamental accounting assumption:
 Going Concern
 Consistency
 Accrual

Disclosure of AP:
 One place
 Part of FS
 No remedy for wrong or inappropriate
treatment
 Any change…


Consideration in selection of AP:
 Prudence
 Substance over form
(actual happening Vs legal form)
 Materiality
(information – influence- judgment)
Change in AP when:
 Reqd by statute
 Better/more appropriate presentation
 Compliance with AS

CA.Pankaj Vasani

ACCOUNTING STANDARD- 2
VALUATION OF INVENTORIES
–
–

Applicability: to all enterprises since 1-4-1999 [originally issued in june-1981]
Deals with: accounting for inventories other than: AS-7, service providers; financial instruments held
as stock-in-trade; and Producers inventories of livestock, agricultural and forest products, …
OBJECTIVE:
 Method of computation of cost of stock
 Determine value of C/stock - at which it
will be shown in BS – till it is not sold
and recognized as revenue

Major point of valuation of inventory
 Determine cost of inventory
(CP+CoA+ CoC)
 Determine NRV of inventory Lower taken
(SP-CP-CoS)


INVENTORY: Inventories are assets
consisting of :
 Finished goods
 WIP & Raw Material
 other stores, spares, raw material &
consumables
DISCLOSURE IN FS
 AP adopted for measuring inventory &
Cost Formula used
 Classification of inventory like
Finished, WIP & its Carrying cost

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AS-2 and International Accounting Standard (IAS)-2: both are similar

CASH FLOW STATEMENTS
–
–

Applicability: Mandatory to Level III enterprises (since 1-4-2004)
Deals with / explains : cash movement under following heads

Cash flow from operating
Cash flow from investing
activities
activities
(sum of these 3 reflect inc/dec in cash & cash equivalent)
Operating Activity

Definitions
 Cash: comprises cash on hand
and demand deposits with banks.
 Cash equivalents:
 short term,
 highly liquid investments
 having maturity of less than 3
months
 can readily be convertible into
cash
 w/o risk of changes in value

(Principal revenue producing
activity)

Investing activity
(Acquiring/disposing long
term asset & other
investment)

Financing activity
(result in change in
size/composition of owner’s
capital/ borrowing of Org

Cash flow from financing
activities

 Cash received from sale of
good/service
 Cash received from royalty, fee, comm..
 Cash payment for goods/services, tax
payment
 Cash payment on behalf of employee
 Cash received from sale of FA/ITA
 Cash payment for acquiring FA & ITA
 Cash payment / investment in JV and
other Co.
 Cash received from sale of share, issue
of shares
 Cash payment for buy back of shares,
interest/dividend payment

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Note: Non-cash Transactions are to be excluded from cash flow statement

CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE
–
–

Applicability: Mandatory to all enterprises (since 1-4-1998)
Deals with : treatment in financial statements of contingency & events occurring after the balance
sheet date.

 Existing condition/situation
 Result of which is not know
 Result will be know on
happening/non-”
 Result may be gain/loss

Contingency

E.g.: litigation, claim, obligation etc
 Contingency must exist on a B.S
date
 No contingency- no provision /notes
to a/c
 Prudence- contingent loss only
recognized





Events
occurring
after B.S
date

May have favorable/ un-” effect
Occurs b/w date on which B.S made
and approved by BOD
Requires either adjustment to
asset/liability or disclosure

E.g.: debtor insolvent, going concern, MV
of investment, dividend etc.





Relate to event existing on BS date
Do not relate to event existing on BS
date
Events which take place after BS but
require adjustment in assets/liability
Event after acceptance of a/c –
disclosure in board report

Following information should be provided in disclosure:
 the nature of the event;
 an estimate of the financial effect, or a statement that such an estimate cannot beCA.Pankaj Vasani
made

NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES

–
–

Applicability: Mandatory to all enterprises (since 1-4-1996)
Deals with : the following
 Presenting P&L from ordinary activities, extraordinary items & prior period items in P&L a/c; a
 accounting for changes in accounting estimates, and
 disclosure of changes in accounting policies.

Ordinary activities

 Ordinary activities undertaken by an enterprise as part of its business and related
activities arising due to these activities.
 All items of income and expense which are recognized in a period should be included in
the determination of net profit or loss for the period unless an Accounting Standard requires
or permits otherwise.

Prior period item

 “Material charges” or “credits” that arise in current period as a result of error and
omission in past period
 Generally infrequent
 Separate disclosure – nature and amount- impact
 E.g. dep faulty calc or mathematical error

Extraordinary item

 Income/exp arising – distinct from ordinary activity – expected to be infrequent
 Vis-à-vis business ordinarily carried on.- Subjective - Abnormal not necessarily
extraordinary
 E.g. Natural disaster, expropriation of asset by state, change in govt fiscal policy, business
segment discontinuance
 Part of net P&L for the period – separate disclosure – size, nature & amount

Accounting estimate

 Many FS item cannot be measured with precision but can only be estimated
 E.g. provision for debtor/creditor, any liability , useful life of asset etc.
5
 Revision of estimate does not bring adjustment
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DEPRECIATION ACCOUNTING
–

Applicability: to all enterprises since 1-4-1995

–

Deals with: depreciation accounting and applies to all depreciable assets
 Depreciation: a measure of the wearing out, consumption or other loss of value of a
depreciable asset arising from use, efflux, passing of time or obsolescence through
technology and market changes.
 Depreciation includes amortization of assets whose useful life is predetermined – more than 1
year
 No depreciation on land, but applicable on leasehold land
Depreciation as per St. line method:
(Cost – scrap value) / estimated
useful life

Depreciation as per WDV:
1-N (Scrap value/ cost)
N = estimated useful life

Note:
 Companies Act, under Schedule XIV gives minimum amount of depreciation and
not the maximum
 An Organisation can provide more depreciation – disclosure- effect – reason
 Change in method- to be disclosed in notes
Disclosure
 Total cost of each class of asset
 Total depreciation for the period

 Accumulated depreciation
 Depreciation Method
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CONSTRUCTION CONTRACTS
–
–

Applicability: to all enterprises (since 01-04-02)
Deals with: the accounting treatment of revenue and costs associated with construction
contracts

Construction contract:
 a contract
 specifically negotiated for
 construction of an asset or a combination of assets
 that are closely interrelated or interdependent in terms of their design, technology and function or
Types of Contract :
their ultimate purpose or use.
 Fixed price for construction the contractor agrees to a
 Like contract contract: in this of bridge, building, dam etcfixed contract price, or a fixed rate per
unit of output, which in some cases is subject to cost escalation clauses.
Cost plus contract: in this the contractor is reimbursed for allowable or otherwise defined costs,
plus percentage of these costs or a fixed fee
Before the revision of this AS, there were two methods to determine profit.
 Percentage of completion method >> Post revision of AS only this to be used
revenue recognized in method used to
methods used to
aggregate amount of
 Completed contract methods
the period
determine the contract
determine the stage of
costs incurred and
completion of contracts recognised profits
in progress


D
i
s
c
l
o
s
amount of advances
u
r
received
e IMT, Nagpur l Sept 5 , 2010

amount of retentions

gross amount due from
customers
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Accounting for Research and Development

In view of operation of AS 26, this Standard stands withdrawn


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REVENUE RECOGNITION
–
–

Deals with: the bases for recognition of revenue

Revenue: the gross inflow of cash, receivables or other consideration arising in the course of the
ordinary activities of an enterprise from
a. the sale of goods,
b. the rendering of services and
c. the use by others of enterprise resources yielding interest, royalties and dividends
Revenue recognition in case of rendering of Services:
 when service is performed & no significant
uncertainty exists Performance is measured either:
 Completed service contract method: recognizes
revenue only when the rendering of services under a
contract is completed or substantially completed, or
 Proportionate completion method: recognizes
revenue proportionately with the degree of
completion of services under a contract.
Revenue recognition in case of:
 Consignment sale – when agent sells
 Interest- when accrued
 Advertisement – when displayed to public
 Dividend: when Co. declares or individual has
right to receive 2010
IMT, Nagpur l Sept 5 , etc

Revenue recognition in case of Sale of
Goods:
 property in the goods has been
transferred to the buyer for a
consideration, Or
 significant risks and rewards of
ownership has been transferred to
the buyer; and
 seller retains no effective control of
ownership of the goods transferred;
and
Uncertainty - Provision
 no significant uncertainty exists
regarding - disclosure
Postponed the amount of the
consideration.
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ACCOUNTING FOR FIXED ASSET
–
–

Deals with: accounting for FA

Fixed Assets: is an asset which is:
 Expected to be used for more than 1 accounting period
 Not held for sale in normal course of business
 Self made asset – only direct cost
 Held with the intention of production of good or rendering of service – no profit margin
recorded
 Asset exchanged: 3 scenarios
Gross book value:
- Not similar asset – FMV of asset
given up
historical cost .When this amount is shown net of
accumulated depreciation, it is termed as net book
- Similar asset- FMVof asset
value
acquired/given
or WDV
- Shares issued – FMV of
share/asset – whichever higher
Fair market value:
the price that would be agreed to in an open and
 Gain/loss on sale of FA- generally
unrestricted market between knowledgeable and
Valuation of FA in special cases:
recognized in PnL
 willing parties dealingprice
Hire Purchase – cost at arm's length who are fully
informed and are not under any compulsion to
 FeX fluctuation – adjusted in cost of
 Jointly held asset- Prorata cost
transact
FA
 Acquired at consolidated price – valuer’s value
 Improvement cost – capitalised
 Dividend: when Co. declares or individual has
 Repair – debit to PnL
right to receive etc

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ACCOUNTING FOR EFFECT OF CHANGES IN FOREIGN EXCHANGE RATE
–

Deals in:
 accounting for transaction in foreign currency
 translating the FS of foreign branch

 Reporting currency: currency of country where FS are prepared
 Foreign currency: currency other than reporting currency FS OF FOREIGN BRANCHES
TRANSLATION OF
 Average rate: mean of exchange rate during the period (week, fortnight, month etc) inventories
 Revenue items, except opening and closing
 Closing rate: Exchange rate at BS date and depreciation- average rates.
 Forwards rate: agreed exchange rate b/w 2 parties for exchange of 2at the commencement of the
 Opening inventories – rate currencies at a specified
future date
accounting period.
A transaction in a foreign currency should be recorded
 Closing inventories, Monetary items, - closing rate or
in the reporting currency by applying to the foreign
realisable value.
currency amount the exchange rate between the
 Non the date
reporting currency and the foreign currency at monetary items - rate prevalent at the date of the
transaction.
of the transaction.
 Fixed assets- rate prevalent at the date of the transaction
CHANGES IN EXCHANGE RATE SUBSEQUENT TO Liabilities- closing rate, translation does not
 Contingent
INITIAL RECOGNITION
result in any exchange difference
Adjusted to the carrying amount of the fixed assets.
In case the fixed assets are revalued the necessary
adjustments should be given effect to the revalued
asset

CA.Pankaj Vasani

ACCOUNTING FOR GOVERNMENT GRANTS
–

Applicability: Mandatory for all enterprises with respect from 01/04/1994

Government Grants are :
 assistance by government
 in cash or kind
 for past or future compliance with certain conditions
Government grants may be received in
following ways:
 Grants related to acquisition of fixed
assets
 Grants related to revenueaccounted either
Government grants can be
 Grants capital approach or by using
by using related to promoter’s contribution
income approach compensation for
 Grants related to
expenses
 Capital approach: The grant is treated as
part of shareholder’s funds.
 Income approach: The grant is taken to
income over one or more periods to match
Contingency related to Govt. Grant
them with the related costs
A contingency related to Govt. grant
receivable and refundable should be treated
in accordance with AS-4.

Government Grants should be recognized where
there is reasonable assurance that :
 the enterprise will comply with the conditions
attached to them; and
 the grants will be received.
Amount of Grant:
 Monetary Grant: Amount earned should be the
value of grant.
 Non- Monetary Grant:
++ Where grants are given at concessional rate,
then such assets are accounted for at their
acquisition cost.
++ Where grants are given free of cost, then such
Disclosures:
assets are recorded at nominal value

 The accounting policy adopted
 The nature and extent of govt. grants
recognized in the financial statements
CA.Pankaj Vasani

ACCOUNTING FOR INVESTMENT
–
–

Applicability: mandatory to all enterprises (since 01-04-93)
Deals with: Accounting for investments in the financial statements of enterprises and
related disclosure requirements

INVESTMENTS
 are assets held by an enterprise
 for earning income
 by way of dividends, interest, and rentals, for capital
appreciation, or for other benefits to the investing enterprise.
Assets heldAMOUNT OF INVESTMENTS
CARRYING as stock-in-trade are not ‘investments’
Current Investments - At Lower of cost or fair value.
Long term investments - At Cost.

INVESTMENTS TYPE:
 Long term investment
 Short term investment

DISCLOSURE
 Classification of investments,
 Accounting policies used
 Amounts included in PnL for
interest, dividends, rentals
 Realisability of investments
or the remittance of income
and proceeds of disposal

 Any reduction in the carrying amount should be
charged to the profit and loss statement
 However, in case of a permanent decline,
DISPOSAL OF INVESTMENT be made
provision for diminution shall
 When any investments is sold, the difference between the carrying amount and net sale
proceeds should be charged or credited to the profit and loss statement

 In case of partial disposal, the carrying amount to be allocated to that part is to be determined
on the basisSept the average carrying amount of the total holding of the investment
IMT, Nagpur l of 5 , 2010

CA.Pankaj Vasani

ACCOUNTING FOR AMALGAMATION
– Deals with:
Accounting for amalgamations
Treatment of any resultant goodwill or reserves
It does not deal with acquisition by one company of another company in consideration
for payment in cash or by issue of shares

TYPES OF AMALGAMATION
 NATURE OF MERGER
- Pooling of interest method
 NATURE OF PURCHASE
- Purchase method

POOLING OF INTEREST METHOD
 The assets, liabilities and reserves are recorded at their
existing carrying amounts
 Uniform set of accounting policies is adopted
 The difference between the share capital issued and the share
capital of the transferor company should be adjusted in
reserves.

PURCHASE METHOD
 The assets & liabilities are
recorded either at existing
carrying values or by
allocating the consideration
on the basis of Fair values
on the date of
amalgamation.
 The reserves of the
transferor company, other
than the statutory reserves,
should not be included in
the financial statements of
the transferee company

CA.Pankaj Vasani

ACCOUNTING FOR RETIREMENT BENEFIT
–

Deals with: the accounting treatment of the cost of the retirement benefits in the financial
statements of employers

Retirement benefit schemes are:
 Legal contractual arrangement
 Where employer provides benefit to
employee
 On leaving service, retirement or at
death
 Liability arises at the due date for
the payment of liability
 These benefits do not accrue at the
time of death, resignation etc

Retirement Benefits consists of :
1. Provident Fund
2. Superannuation / Pension (20 years)
3. Gratuity (5 yrs)
4. Leave Encashment Benefit (leave not taken ~
cash)
5. Other Retirement Benefits
There are 3 stages of payment of
expense
 Expense arise
 Enforceable claim against the Co.
 Payment of expense

Disclosure:
 Method by which retirement benefit costs for the period have been defined
 When accounting is made as per actuarial valuation, date on which such valuation
was conducted

CA.Pankaj Vasani

BORROWING COST
–

Applicability: mandatory to all enterprises

–

Deals with: whether the cost of borrowing should be included in cost of asset or

not

BORROWING COST
 other and commitment charges on bank & other short term
 Borrowing costs are interest andInterestcosts
borrowings
incurred by an enterprise in connection with the
 Amortisation of discounts or premiums relating to
borrowing of funds
borrowings
 Qualifying asset is an asset that  Amortisation of ancillary costs incurred in connection with
necessarily takes a
the arrangement of borrowings
substantial period of time to get ready for its
 Finance charges of assets acquired under finance leases or
intended use or sale E.g. construction process,
under other similar arrangements
patent etc
RECOGNITION

 Capitalize borrowing costs that areExchange differences arising from foreign currency
directly attributable to the
borrowings to the extent that they are regarded as an
acquisition, construction or production of a qualifying asset
adjustment to interest costs
 These should be capitalized only if:
++ it is probable that they will result in future economic benefits to
the enterprise and
++ costs can be measured reliably
DISCLOSURE
++ other borrowing costs to beaccountingoff.
 The expensed policy adopted for borrowing costs.
 The amount of borrowing costs capitalised during
the period

CA.Pankaj Vasani

SEGMENT REPORTING
–

Deals with: Reporting financial information about:
 Different types of products and services an enterprise produces, and
 Different geographical areas in which it operates.

APPLICABILITY:
BUSINESS SEGMENT is a distinguishable component of an enterprise
Accounting period commencing on or after April 1, 2001 in respect of
 enterprises:
following that is engaged in providing an individual product or service or
 LISTED  a group of related products or services process of Listing
ENTERPRISES or those which are in the and
 that is annual to risks more than that are different from those of other
 Enterprises with subject turnoverand returns Rs. 50 crores
business segments.
GEOGRAPHICAL SEGMENT is a distinguishable component of an
enterprise
BENEFIT TO USERS
 that is engaged in providing products or services within a particular
 Better understanding of the performance of the enterprise;
economic environment and
 Assess the risks and returns of the enterprise.
 that is subject to risks and returns that are different from those of
 Make more informed judgments about the enterprise
components operating in other economic environments


CA.Pankaj Vasani

RELATED PARTY DISCLOSURE
–
–

Applicability: Mandatory for all enterprises with respect from 01/04/2004
Deals with: Related party relationships; and transactions between a reporting enterprise and its
related parties.
RELATIONSHIP COVERED
RELATED PARTY: Ability to  Control of another enterprise (parent);
 Control ; or
 Control by another enterprise (subsidiary);
 Exercise significant influence in making
 Under common control (fellow subsidiary);
financial and/or operating decisions
 Associates/ joint ventures/ co-venturer;
 Investor in respect of which the enterprise
is an associate;
CONTROL
NOT RELATED PARTY
SIGNIFICANT INFLUENCE
 Individuals in
 Ownership, directly or indirectly, of more they have Participation in financial and/or operating
 Two companies simply because
a director owning, directly or indirectly,
voting power that but not control;
than 50% of the voting power
common.
policy decisions gives them control or
significant influence and their relatives;
 Control  A single customer, supplier, franchise/ distributor gained by  May be
of composition of board of
utilities, government
directors of a companyfinance, trade unions, publicKey management personnel and their
 Providers of
Share ownership
relatives
 A substantial interest in voting power (20%
departments and government agencies in the course of their
 Statute; and
or more) normal dealing
 agreement
 Assumed to exist in case of holding of
20% or more voting power directly or
indirectly.


CA.Pankaj Vasani

ACCOUNTING FOR LEASE
–
–

Applicability: leases commencing on and from 1st April 2001
Deals with: accounting policies & disclosures for lessees & lessors

Lease : A lease is
 an agreement, whereby
 the lessor conveys to the lessee
 in return for a payment or series of payments
 the right to use an asset for an agreed period of time
CLASSIFICATION OF LEASES
 Finance lease is a lease that transfers substantially all the risks and rewards incident to
EXAMPLE OF FINANCE LEASE
ownership of an asset. Title may or may not eventually be transferred
 Ownership transferred by end of lease term.
 Operating lease is a lease other than a finance lease
 Lease contains bargain purchase option.
 Lease term for major part of asset’s economic
life.
 Classification depends on substance of the  Present value of than the form ofpayments
transaction rather minimum lease the contract
 Accounting for finance lease
amounts to at least substantial all of asset’s
 Basic criteria providing guidance in determining whether these risks and rewards have
fair value.
 Accounting for operating lease
been transferred
 Leased asset of specialized nature that only
 Sale and buy back transaction
lessee can use without major modifications
being made

CA.Pankaj Vasani

EARNING PER SHARE
–
–

Applicability: Mandatory w.e.f. 1.04.2001 in respect of Cos listed in India
Objective: Comparability enhancement
 Different enterprises, same period
 Different periods, same enterprise

An enterprise should present BASIC & DILUTED EPS on the face of the statement of profit and
loss account for each class of equity shares that has a different right to share in the net profit for
the period. EPS ISSUE, SHARE SPLIT, REVERSE SHARE SPLIT etc
 BONUS to be calculated & presented even in case of losses.
 RIGHTS ISSUE
Basic EPS
= Net profit/loss for the period attributable to equity shareholders
/ Weighted Average No. of Equity Shares
Diluted EPS=

Adjusted Net profit/loss for the period attributable to equity shareholders.
/ Weighted Average No. of (Equity Shares + Dilutive Potential Equity Shares)


CA.Pankaj Vasani

CONSOLIDATED FINANCIAL STATEMENT
–
–

Deals with: principles and procedures for preparation and presentation of consolidated financial
statements

APPLICABLE TO FOLLOWING ENTERPRISES
 Group of enterprises under the control of a parent
 Investments in subsidiaries

EXCLUDED CASES
 Amalgamations
 Investments in associates
 Investments in joint ventures

COMPOSITION OF CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATION PROCEDURES
 Consolidated balance sheet,
BASIC PROCEDURE: The financial statements of the parent and its subsidiaries should be combined
 Consolidated statement of profit and loss,
on a ONE-TO-ONE BASIS by grouping together the like items of assets, liabilities, income and
 Notes, additional statements and explanatory material that
expenses.
outline an essential part thereof
OTHER PROCEDURE
NOTE: Consolidated financial statements are presented, to investment in each of its subsidiaries
The holding company should eliminate its cost of
the extent possible, in the same format as adopted by the
parent for If cost of investment > holding’s share in equity --------- GOODWILL
its separate financial statements
If cost of investment < holding’s share in equity ---------- CAPITAL RESERVE


CA.Pankaj Vasani

ACCOUNTING FOR TAXES ON INCOME
–
–

Seeks to: redress the distortions caused by traditional method of accounting for income-taxes
by requiring the adoption of deferred tax accounting in respect of timing differences

CURRENT TAX
The amount that is expected
to be paid to the taxation
Differences between the two are on account of:
ACCOUNTING Differences are the differences between taxable income authorities.
 Permanent INCOME (LOSS)
and accounting income for a
Netperiod or loss for a period as per profit do not reverse subsequently.
profit that originate in one period and and loss statement.
DTA/DTL: At the tax rates and
Examples:
tax laws that have been
TAXABLE INCOME (TAX LOSS) Income Tax Act (Forever)
Expenditure disallowed as per
enacted at the balance sheet
Income (loss) for a period determined in accordance within respect of Scientific Expenditure
the
Excess expenditure allowed by Income Tax Act, 1961
date.
tax laws
Accounting income and taxable income for a period are seldom
the same

 Timing Differences are the 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.
Examples:
 Depreciation rate/method different as per Accounts and Income tax Calculation
 Expenditure of the nature mentioned in Section 43B (e.g. sales tax charged in account on accrual
basis but not paid; such sales tax will be an allowable expenditure in the year of payment and a
disallowable expenditure in the year in which accrued)

CA.Pankaj Vasani

ACCOUNTING FOR CONSOLIDATED FINANCIAL STATEMENT
–
–

Deals with: to set out principles and procedures for recognizing, in the consolidated financial
statements, the effects of the investments in associates on the financial position and operating
results of a group.

Consolidated financial statements are the financial statements of a group presented as those of a single
enterprise


CA.Pankaj Vasani

DISCONTINUING OPERATION
–

Covers: discontinuing operation and not discontinued operation

DICONTINUING OPERATION is a component of an enterprise:
(a) that the enterprise, pursuant to a single plan, is:
- disposing of substantially in its entirety (example – demerger)
- disposing of piecemeal (selling and settling assets and liabilities one by one)
EXAMPLE:
- terminating through abandonment; and out of a product line or class of service;
 gradual or evolutionary phasing
NOT DICONTINUING OPERATION
(b) Thatrepresents a separateif relatively of business or geographical area of operations; and
major line abruptly,
discontinuing, even Planned change in product line
 operationally and for several products within an ongoing line
(c) That can business;
financial reporting purposes.
of be distinguished
 Abrupt/unplaned change in product line
 shifting of some production or marketing activities for a particular line of
business from one location to another;
 closing of a facility to achieve productivity improvements or other cost savings;
 Selling shares of subsidiary whose activities are similar to those of the parent or
other subsidiaries. (In case of Consolidated Financial Statements)


CA.Pankaj Vasani

INTERIM FINANCIAL REPORTING
–
–

Deals with: reporting for period < 1 year. Clause 41 of listing agreement provides to publish
financial result on quarterly basis

 Interim period is a financial reporting periodimproves the a full financial year. creditors, and
Timely and reliable interim financial reporting shorter than ability of investors,
others to understand an enterprise's capacity to generate earnings and cash flows, its financial
 Interim financial report means a financial report containing either a complete set of
condition and liquidity
financial statements or a set of condensed financial statements (as described in this
Statement) for an interim period
 During the first year of operations of an enterprise, its annual financial reporting period
may be shorter than a financial year. In such a case, that shorter period is not
considered as an interim period
Minimum Components of an Interim Financial Report
A.
condensed balance sheet;
B.
condensed statement of profit and loss;
C.
condensed cash flow statement; and
D.
selected explanatory notes


CA.Pankaj Vasani

INTANGIBLE ASSET
–
–

Deals with: accounting for intangible assets that are not dealt with specifically in another
Accounting Standard

An intangible asset is an identifiable 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.
An asset is a resource:
A. controlled by an enterprise as a result of past events; and
B. from which future economic benefits are expected to flow to the enterprise.
Monetary assets are money held and assets to be received in fixed or determinable amounts of
money.
Non-monetary assets are assets other than monetary assets.
Research is “original” and planned investigation undertaken with the prospect of gaining
new scientific or technical knowledge and understanding.
Development : Converts result of research into marketable product


CA.Pankaj Vasani

FINANCIAL REPORTING OF INTEREST IN JOINT VENTURE
–

Scope:


Applicable in accounting for

interests in joint ventures and
 reporting of joint venture assets, liabilities, income and expenses in the financial statements
of venturers and investors

 A joint venture is a contractual arrangement whereby two or more parties undertake an
economic activity, which is subject to joint control
 A venturer is FORMSto a JV venture and has joint control over that joint venture.
a party OF joint
 jointly controlled operations,
 An investor in a joint venture is aassets, and
 jointly controlled party to a joint venture and does not have joint control
over that joint venture.
 jointly controlled entities.
 Proportionate consolidation is a method of accounting and reporting whereby a venturer's
share of each of the assets, liabilities, income and expenses of a jointly controlled entity is
reported as separate line items in the venturer's financial statements.


CA.Pankaj Vasani

IMPAIRMENT OF ASSET
–



OBJECTIVE
To identify the assets which are sick / unhealthy
To ensure that enterprise assets are carried at not more than their recoverable amount

If carrying amountloss:
Treatment of impairmentapplies to all assets other than
AS-28 < = Recoverable amount :
Asset is not impaired
1. Inventories(AS-2)
 An impairment loss should be recognized against the revaluation reserve, if any, and
2. Assets arising from construction contract (AS-7)
balance, if any, as3. Financial assets/Investments(AS-13)
an expense in the P/L A/c
If carrying amount > Recoverable amount :
Asset is impaired
4. Deferred tax assets(AS-22)
 Impairment loss for a Cash Generating Unit should be allocated in the following order
 Goodwill, if
Impairment Loss any.
= Carrying Amount – Recoverable Amount
 Balance, if any, to individual assets in proportion to their carrying cost


CA.Pankaj Vasani

PROVISION, CONTINGENT LIABILTY AND CONTINGENT ASSET

PROVISION:

CONTINGENT LIABILITY:

A provision is a liability which can be measured is: by using
CONTINGENT ASSETS: contingent liability only
A
a substantial degree of estimation.
 A possible obligation that arises from past events and;
A contingent assets is : existence of which will be confirmed by the occurrence or non

Treatment : A provision should occurrence of future events not wholly within the control of the
be recognized when:
 a possible asset
 An 
enterprise has a present obligation as a result of past
enterprise
that arises from past events
event
 existence of which will be confirmed only by the occurrence or non-occurrence of one or
 It is probable that an outflow of resources embodying
Treatment:
more uncertain future events
economic benefits will be required to settle the obligation;
An enterprise should not

and not wholly within the control of the enterprise. recognize a contingent liability. It
should be disclosed in financial statements unless the
 A reliable estimate can be made of the amount of the remote.
possibility of outflow is
Treatment:
obligation.
(Prudence) - An enterprise should not recognize a contingent asset. An enterprise should not
be disclosed in financial statements.
It may be disclosed in the report of approving authority, where an inflow is probable


CA.Pankaj Vasani

Financial Instruments: Recognition and Measurement

Financial Instruments: Presentation

Financial Instruments: Disclosures


CA.Pankaj Vasani

Financial instruments
Embedded
Derivatives

Derivatives

AS 30, 31, 32


Hedging

CA.Pankaj Vasani

Financial instruments

AS 30

AS 31

AS 32

Recognition
and
derecognizing

Measurement
of

Derivatives
and

of

financial

hedge

financial

instruments

accounting

Presentation

Disclosure

instruments


CA.Pankaj Vasani

Market trends as reflected in AS 30, 31 and 32
Key principles of the Standards
Harmonisation of markets

Increased complexity

Detailed disclosures

All derivatives are
Most financial
recognized on the assets measured
balance sheet
at fair value

Use of fair values

Reduction of options


Measurement of the hedging
instrument is the basis for
hedge accounting

CA.Pankaj Vasani

Convergence of Accounting Standards
with IFRS
Why, When, What & How


CA.Pankaj Vasani

IFRS - International Financial Reporting Standards
 International Financial Reporting Standards (IFRS) are:
 “principles-based” London
 IASB is based in
 Standards, Interpretations and Framework (SIF)
 adopted by the Internationalcreate a sound foundation for(IASB). accounting
 Its overall objective is to Accounting Standard Board future
International Financial Reporting Standards comprise:
standards that are principles-based, internally consistent and internationally
 International Financial Reporting Standards (IFRS)—standards
 The converged.
principle-based standards have distinct advantage that the transactions can not
issued after achieve a particular accounting
be manipulated easily to2001
• International Accounting Standards (IAS)—standards issued
 The IASB and the US FASB (the boards) are undertaking the project jointly
 IFRSs lay down treatments based on the economic substance of various events and
before 2001
• Interpretations originated from
transactions rather than their legal form. the International Financial
Reporting Interpretations Committee (IFRIC)—issued after 2001
• Standing Interpretations result into events and transactions being
 The application of this approach mayCommittee (SIC)—issued before 2001
Framework for the Preparation and form.
presented•in a manner different from their legal Presentation of Financial
Statements
 To illustrate, as per IAS 32, preference shares that provide for mandatory redemption
by the issuer are presented as a liability


CA.Pankaj Vasani

IFRS Structure
IAS 1(2007) Presentation of Financial Statements

IAS 26 Accounting and Reporting by Retirement
Benefit Plans

IAS
 2 Inventories “IFRSs” currently comprises of: Reporting Standards
The term
IFRS 1 First-time Adoption of International Financial
IAS 7 Statement of Cash Flows

>> 9 IFRSs, 29 IASs (originally 41),
IFRS 2 Share-based Payment

IAS 8 Accounting Policies, Changes in Accounting
the Framework
Estimates Business Combinations
IFRS 3 and Errors

IAS 27(2008) Consolidated and Separate Financial
18Statements 11 SIC interpretations, plus
IFRIC and
IAS 28 Investments in Associates

IAS 29 Financial Reporting in Hyperinflationary
 10 Events after15 new standards and major projects for which exposure drafts are
IAS There are the Reporting Period
Economies
IFRS 4 Insurance Contracts
issued
IAS 11 Construction Contracts
IAS 31 Interests in Joint Ventures
IFRS 5 Non-current
 12 Income Taxes Assets Heldbeen issuedDiscontinued Operations
Final SME standard have for Sale and in July 2009.
IAS
IAS 32 Financial Instruments: Presentation
 16 existingPlant and Equipment being amended for which exposure drafts are issued
IFRSProperty, standards are
8 6 Exploration for and Evaluation of Mineral Resources
IAS
IAS 33 Earnings per Share

IAS 17 Leases
IFRS 7 Financial

Instruments: Disclosures

IAS 18 Revenue

IFRS 8 Operating Segments

IAS 19 Employee Benefits

IFRS 9 Financial Instruments - Assets

IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance

IAS 21 The Effects of Changes in Foreign Exchange
Rates
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures

IAS 34 Interim Financial Reporting
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and
Measurement
IAS 40 Investment Property
IAS 41 Agriculture
CA.Pankaj Vasani

Non-financial Disclosures

 The Framework recognizes financial statements do not provide all the information
required for decisions
 To achieve, the objective the financial reports may include additional information in
the form of non-financial disclosures - that is useful to a wide range of users in

making economic decisions
 Such disclosures are usually contained in Management Report
 To deal with the aspect, the IASB is developing a separate IFRS on Management
Commentary
 Recently, a discussion paper on the subject has been issued


CA.Pankaj Vasani

The Global Move Towards IFRS

Canada
2009/11
Europe
2005
United States
(2014/15/16?)

China
2007

Japan
(2016)

India
2011
Brazil
2010
Chile
2009
South Africa
2005

Australia
2005

Current or anticipated requirement
or option to use IFRS (or equivalent)

CA.Pankaj Vasani

IFRS Adoption
•

Approximately 100 countries have
adopted or are in the process of
adoption

China

Similar to IFRS
(effective for
listed entities
2007)

•

Status of adoption by some
countries which compete with
India for capital allocation:

Brazil

2010

Russia

Currently
applicable for
banks.

South Korea

2011

USA

2014/15/16

UK

2005

Nepal

2011 (as per
action plan
released)


CA.Pankaj Vasani

IFRS Adoption…contd.
BIGGEST STAMP OF APPROVAL
 Securities and Exchange Commission (SEC), United States of America
have permitted Foreign Private Issuers to file IFRS compliant financial
statements (as promulgated by the IASB) without reconciliation to US GAAP
 SEC has issued a proposed roadmap to assess whether US domestic
registrants should be permitted to use IFRS


CA.Pankaj Vasani

Convergence of Accounting Standards
What is Convergence ?
Convergence means eliminating the differences between Indian
GAAP and IFRS
and/or
aligning Indian GAAP more closely to IFRS
and/or
may be even adopting IFRS as it is.


CA.Pankaj Vasani

WHY IFRS
 To bring uniformity in reporting systems globally

 ICAI has decided to implement IFRS in India.

 Indian companies are listed on overseas stock exchanges and have to recast their
 accounts to beof Corporate Affairs requirements of those countries
The Ministry compliant with GAAP has also announced its

commitment to convergence to IFRS by 2011.

 Foreign companies having subsidiaries in India are having to recast their accounts to
meet Indian & overseas reporting requirements which are different
 Foreign Direct Investors (FDI), overseas financial institutional investors (FII) are more
comfortable with compatible accounting standards


CA.Pankaj Vasani

Convergence Project in India
 In October 2007, ICAI issued concept paper giving the approach and
roadmap for convergence
 Various study groups have been formed
 The convergence exercise will be taken up in phases - listed and bigger
companies initially, smaller public companies thereafter, and eventually all
private companies/SMEs
 The ministry of Company affairs has appointed two working groups, headed
by Mr. Y.H. Malegam and Mr. Mohandas Pai to finalise the roadmap to IFRS
convergence.
 SEBI Committee on Disclosures and Accounting Standards (SCODA) is the
standing Committee - Voluntary adoption of International Financial Reporting
Standards (IFRS) by listed entities having overseas subsidiaries or by all
listed entities.


CA.Pankaj Vasani

Convergence Project in India…contd.
 in India – Phase I - 1st April, 2011
:
IFRS On January 22, 2010 II MCA has released Road Map for convergence with
IFRS in India – Phase - 1st April, 2013
IFRS – For large Companies
The The companies, whether listed or not, converta net worth exceeding Rs.
of companies
 following categoriesAmendment to will having their opening balance
On April 5, 2010 :
listing Agreement provides the option of
sheets incrores but not exceeding Rs. accounting standards which are
compliance with the notified 1,000 crores
500
adoption of International Financial Reporting Standards (IFRS) by listed
convergent with IFRS. These companies are:entities having subsidiaries while declaring Consolidated results/financial
statements
a. Companies which are part of NSE – Nifty 50
 Standalone results
be as
existing
b. Companies which arewillIII - 1stper -the 2014 30 Indian GAAP
part of BSE Sensex
IFRS in India – Phase
April,
c. Companies whose shares have a net worth ofare listedcrores or less
Listed companies which or other securities Rs. 500 on stock
exchanges outside India
d. Companies, whether listed or not, which have a net worth in excess of
Rs.1,000 crores


CA.Pankaj Vasani

Convergence with IFRSs in India
 While formulating ASs, ICAI comply IFRSs as far as possible
 The Preface to the Statements of Accounting Standards, issued by the
ICAI, recognizes the same


While formulating ASs, the ICAI makes changes from IFRSs only in those
cases where these are unavoidable, particularly, considering legal and/ or
regulatory framework prevailing in the country


CA.Pankaj Vasani

IFRS –THE GREY AREAS
 While IFRS compliance date has been declared by the ICAI, there are several
areas which are still not in consonance with such implementation and several
accounting standards and statutes will need amendment.
 Full & unreserved compliance with IFRS is the objective. However, not many
entities are aware about the significance or ramifications thereof, which may lead
to a rush for compliance later with some undesirable consequences.
 The onus will be on the management to comply with the requirements and the
auditors will only have to comment on whether the management has properly
complied with the norms or not.


CA.Pankaj Vasani

IFRS –THE PLAIN AREAS
 IFRS is itself a moving target, with changes being introduced continually…
 There are not many trained resources to effect the requisite change.
 There is a lack of awareness and understanding of the requirements and
implications of IFRS transition and compliance
 Communicating the change and managing the transition properly attains
importance in this regard.
 Training the organizational components will be a huge task.


CA.Pankaj Vasani

IFRS – IMPACT

IFRS implementation affects several
areas of the business entity, such as:
 presentation of accounts,
 accounting policies and
procedures,
 the way legal documents are
drafted,
 the way the entity looks at its
assets and their usage,
 Its communications with its
stakeholders and also
 the way it conducts its business.


CA.Pankaj Vasani

Steps for transition
Parallel run and test
systems
Implement business
decisions
Train staff
Design and implement
systems

Plan the
implementation
Think of business
issues
Scope the
impact

CA.Pankaj Vasani

IFRC & DIRECT TAX CODE (DTC)


CA.Pankaj Vasani

Thank you!

OPEN HOUSE – ASK ME!


CA.Pankaj Vasani

Accounting standards (India) and convergence to IFRS. By: Pankaj Vasani

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