2. Overview
What do Accounting Standards mean?
Accounting Standards
• Accounting Standards are a collection of generally
followed accounting principles and practices. They
help to ensure a common basis for preparing the
financial statements of different organizations. It
means that people can understand them more
easily and make useful comparisons.
Accounting Policies
• Accounting policies develop from Accounting
Standards. Different organisations may have
different policies, if the concerned standard allows
alternative treatment.
3. International Standards
• In USA, the FASB (Financial Accounting Standards
Board) and AICPA (American Institute of Certified Public
Accountants) have also prepared some useful material.
Standards in India
• In India, Accounting Standards are prepared by the
Accounting Standards Board, which has been set up
by the ICAI.
• Twenty-eight Accounting Standards have been issued so
far in India. Many of these have become mandatory for
most organisations.
• The Accounting Standards apply mainly to business or
commercial organisations but in some cases, they are
compulsory for NGOs also.
4. Indian Accounting Standards
• The standards are applicable from different dates.
This means that a particular standard applies to all
financial statements for periods beginning on or
after that date.
• Accounting Standards apply only to material items.
5. Responsibilities of Chartered Accountants
• CA must disclose non-compliance with the
Accounting Standards, if any.
• CA must disclose material departures from
the Statements relating to audit matters.
Where amount is ascertainable, it should
be stated; if not, this fact should also be
stated.
6. AS-1: Disclosure of Accounting Policies
• All significant accounting policies should be disclosed in
financial statements.
• If fundamental accounting assumptions (such as accrual,
going concern and consistency) are not followed, disclosure
is necessary.
• Applicable to all enterprises including sole proprietary
concerns, partnership firms, companies, trusts etc.
• Prudence,
substance over form,
and materiality
should be the basis for selecting the accounting policies.
7. AS-1: Disclosure of Accounting Policies
• Accounting Policies usually cover the following
areas:
Method of depreciation, depletion and amortisation
Treatment of expenditure during construction
Valuation of inventory, investments and fixed assets
Treatment of goodwill
Conversion and/or translation of foreign currency
items
Treatment of retirement benefits
Treatment of contingent liabilities
Recognition of profit on long-term contracts
8. AS-2: (Revised) Valuation of Inventories
How to value and account for stocks?
• The standard was revised in June 1999. Applicable to all
enterprises. (Effective date: 01-04-1999)
• Inventories should be valued at the lower of cost and net
realisable value, on the basis of FIFO or weighted
average cost.
• The standard does not apply to:
W-I-P in construction contracts (Ref AS-7)
Stocks of traders in sharemarket(shares, debentures and other
financial instruments)
Inventory of live stock, agricultural and forest products, mineral
oils, ores, gases etc.
9. AS-5
Net Profit or Loss for the period,prior period items and
changes in Accounting Policies (Limited Revision)
• All items of income and expenditure recognised in a period
to be included in the determination of net profit or loss for the
period. (Effective date: 01-04-1996; Revised in February 1997)
• Treatment and disclosure of prior period items and changes
in the Accounting Policies. Applicable to all enterprises.
• Ordinary activities
– Activities undertaken as part of business in which enterprise engages
in furtherance or, incidental to, or arising from, above are ordinary
activities
• Extraordinary items are income or expenses arising from
events that are –
• distinct from ordinary activities, and
• unlikely to recur frequently or regularly
10. AS-5:
• Treatment of Specific Items
• Income on NPAs
• Income on non-performing investments
• Clearing house rent of previous year
• Salary arrears
• Changes in accounting estimates
• To be include in net income determination for current/current and future
periods, as appropriate
• Disclosure of nature and amount if effect material in current/future
periods
• Changes in accounting policies
• When permissible
– Compliance with statute
– Compliance with accounting standards
– More appropriate presentation
• Treatment and Disclosure
• Effect of transitional provisions specified in an Accounting
Standard
11. AS-5:
Exceptional items
Items within profit/loss from ordinary activities may require
separate disclosure due to –
– Nature, or
– Size, or
– Incidence
Prior period items
– Rectification of errors of previous years
– Distinct from changes in accounting estimates
– Materiality to be considered, as in respect of any other item
12. AS-6: (Revised) Depreciation Accounting
• Depreciation should be charged on assets. Related information
should be disclosed. Revised in August 1994. Applicable to all
enterprises. (Effective date: 01-04-1995)
• Assessment of depreciation is based on the following factors:-
(i) Historical cost
(ii) Expected useful life of the depreciable asset ; and
(iii) Estimated residual value of the depreciable asset
• The companies Act (Schedule XIV) lays down the minimum rates of
depreciation in respect of various assets. The management may
compute depreciation by applying a higher rate / lower rate without,
however, increasing the useful life of an asset.
• The Income Tax Act allows WDV method for computing taxable
profit.
13. AS-9: Revenue Recognition
When and how revenue should be recognised?
• What disclosure is necessary. Applicable to all
enterprises. (Effective date: 01-04-1993)
• Conditions for recognition
• Realisation, i.e., performance of act giving rise to revenue
• Measurability
• Collectibility
• Recognition: Interest, dividend, royalty
• Interest – on time proportion basis
• Dividends from shares – when owner’s right to receive is
established
• Royalties –as per terms of agreement
• Defer recognition if measurability/ collectibility criterion
not met.
14. AS-9: Revenue Recognition
• Issues in Revenue Recognition
• Non-recognition of income on NPAs
• Loan origination fee
• Guarantee expiration
• Locker rent
• Income from non-funded commitments
• Merchant banking activities
• Materiality considerations
• Other Aspects
• Subsequent uncertainty of collection – provision
more appropriate than reversal
• Disclosure to be made of circumstances in which
revenue recognition is postponed due to
uncertainties
15. AS-10: Accounting for Fixed Assets
• Determining cost of fixed assets. Disclosure of gross and
net values in accounts. Applicable to all enterprises.
(Effective date: 01-04-1993)
– Gross book value of fixed assets should be disclosed.
– Interest on loans relating to acquisition or construction of fixed
assets for the period upto completion of construction/ acquisition
and other attributable costs may be included.
– Basis of selection of fixed assets for revaluation should be disclosed;
value of an asset on revaluation should not be more than its
realisable value. Increase in the net book value should be credited to
Revaluation Reserve but any decrease in value should be charged
to P & L account.
– Disclosure regarding method adopted for revaluation etc.
– Goodwill and other intangibles : Ref AS –26 if applicable.
16. AS-11: (Revised) Accounting for effects of
changes in Foreign Exchange Rates
• What exchange rates to be used and how to account for the
changes in exchange rates.
• How to account and disclose foreign currency assets,
liabilities and fluctuations. Applicable to all enterprises.
(Revised in December 1994; Exposure Draft issued for
further revision). (Effective date: 01-04-1995)
• Scope
• Foreign exchange transactions
• Translation of financial statements of foreign
branches
• Extent of applicability to banks
• Exposure draft proposes significant changes
17. AS-11: (Revised) Accounting for effects of
changes in Foreign Exchange Rates
• Foreign exchange transactions
• Initial recognition
– At date-of-transaction rate
– Use of average rate
• Balance sheet date restatement and treatment
of exchange difference
– Restate monetary items at closing rate
– Restate non-monetary items (other than fixed assets)
which are carried in balance sheet at a valuation at
exchange rate existing on date of such valuation
– Fixed-asset related: adjust carrying amount
– Revalued fixed assets – recoverable amount not to be
exceeded
– Take to P & L if not related to fixed asset
18. AS-11: (Revised) Accounting for effects of
changes in Foreign Exchange Rates
• Translation of financial statements of foreign branches : RBI
Guidelines
• Assets & liabilities at closing rate
• Income & expenses at closing rate
• Net exchange loss to be charged to P & L A/c
• Net exchange gain to balance sheet (other liabilities)
• Disclosure Requirements
• Disclosure to be made of amounts of exchange differences
• Included in P & L
• Included in fixed assets
• Un-recognised, in respect of forward exchange contracts.
• Disclosure of risk management policy encouraged
19. AS-13: Accounting for Investments
• Accounting, valuation and disclosure on investment
related information. Applicable to all enterprises.
(Effective date: 01-04-1995)
– Investments are assets held for earning income by way of dividends,
interest, and rentals, for capital appreciation, or for other benefits to
the investing enterprise.
– Current investments and long term investments should be disclosed
separately as specified in the statute governing the enterprise.
– Cost of investment should include acquisition costs such as
brokerage, fees and duties.
– If an investment is required in exchange for an asset, the acquisition
cost should be determined by reference to the fair value of the asset
given up.
– Investment properties to be shown as long term investments
– Current investments to be carried at lower of the acquisition cost and
fair value. Long term investments to be shown at cost but provision
should be made for diminution in value, if any.
– Quoted and unquoted investments to be shown separately.
20. AS-16: Borrowing Costs
• Accounting, capitalizing and disclosure of interest
etc.Applicable to all enterprises.(Effective date: 01-04-2000)
• Borrowing costs directly attributable to the acquisition, construction or
production of a qualifying asset should be capitalised as part of the
cost of that asset.
• Other borrowing costs should be recognised as an expense in the
period in which they are incurred.
21. AS-17: Segment Reporting
• Presenting financial results according to business or
geographical segments;applies to listed companies or
to organizations with turnover exceeding Rs. 50 crs.
per annum. (Effective date: 01-04-2001)
• Mandatory in nature in respect of the enterprises whose
equity or debt securities are listed on a stock exchange
and enterprises whose turnover exceeds Rs 50 crores.
• A business or geographical segment, is to be identified as
a Reportable Segment, if
• its revenue is 10% or more of the total revenue; or
• its result is 10 % or more of the combined result o all
the segments; or
• its segment assets are 10 % or more of the total assets of
all segments.
22. AS-18: Related Party Disclosures
• Disclosure of related parties and transactions with
them.(Effective date: 01-04-2001)
• Parties are considered to be related if at any time during the reporting
period one party has the ability to control the other party or exercise
significant influence over the other party in making financial or operating
decisions.
23. AS-20: Earnings per Share
• Relevant only for companies with equity share capital.
(Effective date: 01-04-2001)
AS- 20 is mandatory in nature in respect of enterprises whose equity
shares or potential equity shares are listed on a recognised stock
exchange in India. An enterprise which has neither equity shares nor
potential equity shares which are so listed but which discloses
earnings per share, should calculate and disclose earnings per share
in accordance with AS- 20. Every company, which is required to give
information under Part IV of the Schedule VI to the Companies Act,
1956, should calculate and disclose earnings per share in
accordance with AS- 20, whether its equity shares or potential equity
shares are listed on a recognised stock exchange in India or not.
An enterprise whose shares are listed, should present basic and
diluted earnings per share.
Basic earnings per share should be calculated by dividing the net
profit by the weighted average number of equity shares outstanding
during that period.
For calculating diluted earnings per share, the net profit and weighted
average number of shares should be adjusted for the effects of all
dilutive potential equity shares.
24. AS-21: Consolidated Financial Statements
• Designed for holding companies and group companies.
Applies only if consolidated statements are prepared by the
group or parent company. Some concepts are relevant to
consolidation of accounts of NGOs.(Effective date: 01.04.2001)
– AS - 21 is mandatory only if an enterprise presents consolidated
financial statements. In other words, the accounting standard does
not mandate an enterprise to present consolidated financial
statements but, if the enterprise presents consolidated financial
statements for complying with the requirements of any statute or
otherwise, it should prepare and present consolidated financial
statements in accordance with AS - 21.
– However,in terms of Indian Companies Act, Sec 212, a holding
company has to attach to its Balance Sheet the B/S and P&L
account of each of its subsidiaries.
– All listed companies are required to give consolidated statements in
respect of subsidiaries in which they hold 51% or more share capital.
These statements are prepared as if the group were a single
enterprise with one or more divisions.
25. AS-21: Consolidated Financial Statements
– Control means the ownership, directly or indirectly through
subsidiary of more than one-half of the voting power of an
enterprise or of the board of directors for economic benefit
and not investments in associates and joint ventures.
– Financial statements of the parent and its subsidiaries should
be combined on line by line basis by adding together like items
of assets, liabilities, income and expenses.
– Where the carrying amount of the investment in the subsidiary
is different from its cost, any excess of the cost is recognised as
goodwill and shortfall is treated as a capital reserve. Intra-group
balances and intra-group transactions and resulting unrealised
profits should be eliminated in full.
– Financial statements used in the consolidation should be drawn
upto the same reporting date and prepared using uniform
accounting policies for like transactions and other events in
similar transactions.
26. AS- 25: Interim Financial Reporting
• This accounting standard does not mandate which
enterprises should present interim financial reports, how
frequently, or how soon after the end of an interim period
but if an enterprise is required or elects to prepare and
present an interim financial report, it should comply with this
standard. (01– 04 – 2002)
• Objective
– To prescribe the minimum content of an interim financial report.
Interim period is a financial reporting period shorter than a full
financial year.
An interim financial report should include, at a minimum, the
condensed balance sheet, statement of profit and loss, cash flow
statement and selected explanatory notes.
Interim reports should include these three financial statements as of
the end of the current interim period and comparative statements as
at the end of the immediately preceding financial year.
