Commerce

Accounting Standards

Posted by Asok K Nadhani on

Accounting Standards

Accounting Reports communicate the Financial Results to various stakeholders and other interested persons. So, it is necessary to have some kind of control to prevent misleading, tendentious & pretentious picture of the organization and to ensure that a true & fair view is depicted.

Accounting Standards (AS’s) provide framework and standard accounting policies so that financial Accounting Reports of different companies, over different period of time, become comparable

Accounting Standards (AS) are written policy documents issued by expert accounting body, Government or other regulatory body, covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements.

Accounting Standards bring uniformity in financial statements, enabling comparability of financial statements of different enterprises.

The purpose is to promote the dissemination of timely and useful financial information to investors and others having an interest in the company’s economic performance.

Objectives of Accounting Standards

  • Recognition : Recognition of events and transactions in the financial statements, and their measurement.
  • Presentation : Presentation of transactions and events in the financial statements, in a meaningful and understandable manner,
  • Disclosure : Adequately disclose to enable the public at large, stakeholders and potential investors take prudent and informed business decisions.
  • Uniformity : Accounting Standards standardize diverse accounting policies for :
  • Comparability : Enhance the comparability of financial statements, improving the reliability of financial statements,
  • Standardisation: Provide a set of standard accounting policies, valuation norms and disclosure requirements.

Accounting Standards Setting Process in India

The ICAI has taken initiatives in setting and the procedure of Accounting Standards adopting a consultative and transparent approach.

The composition of ASB includes representatives of industries (namely, ASSOCHAM, CII, and FICCI), regulators, academicians, government departments etc. Although ASB is a body constituted by the Council of the ICAI, it (ASB) is independent in the formulation of accounting standards.

The ASB considers the International Accounting Standards (IASs)/ international Financial Reporting Standards (IFRSs) while framing Indian Accounting Standards (ASs) and try to integrate them, in the light of the applicable laws, customs, usages and business environment in the country.

The accounting standard on the relevant subject is then issued by the ICAI.

Accounting Standard in India (AS)

AS No    AS Title                                                                      

  1. Disclosure of accounting Policies
  2. Valuation of inventories
  3. Cash Flow Statement
  4. Contingencies and Events Occurring after Balance Sheet Date
  5. Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting policies
  6. Depreciation Accounting
  7. Construction Contracts
  8. Research & Development
  9. Revenue Recognition
  10. Accounting for Fixed Assets
  11. The Effects of Changes in Foreign Exchange Rates
  12. Accounting for Government Grants
  13. Accounting for Investment
  14. Accounting for Amalgamations
  15. Employee Benefits
  16. Borrowing Costs
  17. Segment Reporting
  18. Related Party Disclosures
  19. Leases
  20. Earning Per Shares
  21. Consolidated Financial Statement
  22. Accounting for Taxes on Income
  23. Accounting for Investment in Associates in Consolidated Financial Statement
  24. Discounting Operations
  25. Interim Financial Statement
  26. Intangible Assets
  27. Financial Reporting of Interests in Joint Ventures
  28. Impairment of Assets
  29. Provisions, Contingent Liabilities and Contingent Assets
    1. Financial Instruments: Recognition & Measurements
    1. Financial Instruments: Presentation
    1. Financial Instruments: Disclosures

AS-1 Disclosure of Accounting Policies

AS-1 deals with presentation / disclosure of significant accounting policies (specific accounting policies & methods of applying the principles), followed in preparation of Financial Statements.

The disclosure of  significant accounting policies should form part of Financial Statements and any change in Accounting Policies having material effect on current or next period, should be disclosed

Applicability: AS-1 is mandatory w.e.f 1.4.91 for companies governed by the Companies Act, 1956.

Fundamental Assumption: The three fundamental assumptions are

  • Going Concern-It means the enterprise which has prolonged operations.
  • Consistency- Assumed policies are consistent with each other.
  • Accrual- Revenue and Cost are accrual basis.

Three major considerations for selecting the accounting policies are – Prudence, Substance over form of and Materiality.

The enterprise should represent the true and fair view in the financial statements.

Disclosure:

  1. Same accounting policies should be adopted for similar transactions in all accounting periods. A change in accounting policy must be disclosed.
  2. Any change in the accounting policies which have a material effect in the current period (or expected to have a material effect in a later period) should be disclosed.

AS-2 Valuation of Inventories

AS-2 deals with method of computation of cost of inventory and determination of value of Inventory in Financial Statements.

The standards permits only few methods of computation of cost & valuation of Inventory (FIFO, Weighted Average Cost), following the principles of conservatism (lower of Cost or market price). 

Applicability:  w.e.f 1.4.99

This standard should be applied to all types of enterprises for accounting in Inventory except the following:

  1. Work in progress arising under construction contracts.
  2. Work in progress arising in the ordinary course of business of service providers.
  3. Shares, debentures and other financial instruments held as stock-in-trade.
  4. Producers’ inventories of livestock, agriculture and forest products and mineral oils, ores and gases. Such inventories are excluded from AS 2.

Cost of inventories: It includes all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition, excluding the following:

  1. Abnormal wastages of materials, labour, or other production costs.
  2. Storage costs.
  3. Administrative overheads.
  4. Selling and distribution costs.

Method of Valuation: There are three methods of Inventory costing: – 

  • Standard Cost,
  • Retail Method and
  • Net Realizable Value.

Inventories are to be valued at lower of cost and net realizable value.

Disclosure: The following must be disclosed:-

  1. The accounting polices adopted in measuring inventories, including the cost formula used.
  2. The total carrying amount of inventories and its classification appropriate to the enterprise.
  3. Carrying amounts and changes in them during an accounting period for each class of inventory, e.g. raw materials, components, work-in-progress, finished stock, stores, spares and loose tools.

AS-3 Cash Flow Statement

AS-3 deals with provision for historical information on Cash & Cash equivalents, through Operating, Investing & Financing Activities, by means of Cash Flow Statement.

The Cash Flow statement helps in assessing the ability of enterprise to generate Cash & Cash equivalents, improve Cash Flows and compare present value of cash equivalents of different enterprises.

Applicability:  w.e.f 1.4.01 in respect of the following enterprises:

  • Whose equity or debt securities are listed on recognized stock exchange in India, or enterprises that are in the process of issuing equity or debt securities, which will be listed on a recognised stock exchange in India.
  • All other commercial, industrial and business reporting enterprises, whose turnover for the accounting period exceeds Rs.50crores.

Salient Features:

  1. A cash flow statement should report cash flows during the period classified by operating, investing and financial activities.
    1. A cash flow statement may be prepared by using either the direct method or indirect method.
    1. Cash flow arising fromtransactions in a foreign currency should be recorded in enterprise’s reporting currency by applying the exchange rate at the date of the cash flow.
    1. Investing and financing transactions that do not involve use of cash and cash equivalent balances should be excluded.
    1. Interest and Dividends received and paid should each be disclosed separately as follows:-.
  2. Financial enterprise should classify them as Operating Activities.
  3. Other enterprises should classify interest paid as Financing Activities while Interest and Dividends received should be reported as Investing Activities.
  4. Normally Dividends paid should be classified as Financing Activities (though some argument that it may be classified as operating activities to determine the ability of an enterprise to pay dividends out of. Operating cash flows) because they are cost of obtaining financial resources.

Disclosure: The following must be disclosed:-

  1. The components of cash and cash equivalents and reconciliation of the amounts in its cash flow statement with the corresponding items reported in the balance sheet.
  2. The cash management policy adopted in determining the composition of cash and cash equivalents.
  3. Cash flows representing increases in operating capacity to determine the adequacy of the investment, to maintain its operating capacity.

AS-4 Contingencies and Events Occurring after Balance Sheet

AS-4 deals with treatment & accounting of significant events (favourable or adverse), that occur between the Balance Sheet Date and the date on which accounts are approved (other provisions related to Contingent Liabilities and Contingent Assets are covered in AS-29).

Applicability:  w.e.f 1.4.95 for all enterprise.

Contingencies:

  1. Contingencies is a condition or situation, the ultimate outcome of which (gain or loss) will be known or determined only on occurrence (or non-occurrence) of some uncertain future event. The outcome can be favourable or unfavourable.
  2. Recognition of possible favourable outcomes, called Contingent Assets, imply anticipation of gains.
  3. Contingent loss should be provided for by a charge in P & L A/c, if it is probable that future events will confirm that an asset has been impaired or a liability has been incurred as at the balance sheet date, and a reasonable estimate of the amount of the loss can be made (otherwise disclosure should be made).

Events occurring after the balance sheet date:

  • These are significant events (both favourable and unfavourable) that occur between the balance sheet date and the date on which the financial statements are approved.
    • There are 2 types of events:-

a Those which provide further evidence of conditions that existed at the balance sheet date;

b Those which are indicative of conditions that arose subsequent to the balance sheet date.

The events occurring after the balance sheets can be reported by

  • making appropriate adjustment in the financial statements 
    • through report of the approving authority, (e.g. Directors’ Report in case of companies)

Event occurring after balance sheet date require adjustment in accounts.

Disclosure:

  1. Regarding contingencies:
  2. The nature of the contingency;
  3. The uncertainties which may affect the future outcome;
  4. An estimate of the financial effect, or a statement that such an estimate cannot be made.
  5. Regarding Events occurring after the Balance Sheet Date:
  6. The nature of the event;
  7. An estimate of the financial effect (or the reasons if such estimate cannot be made).

AS-5 : Net Profit or Loss for the period, prior Period Item and Changes in Accounting Policies

AS-5 deals with provisions for presentation of current year profit from ordinary (normal) activities, extra-ordinary items and prior period, in Profit & Loss Statement

  • Prior Period Items : Prior Period Items are those items which arise in current period, due to omission in preparation of financial statements of prior period.
  • Extra-ordinary Items : Extra-ordinary Items are those items which are clearly distinct from ordinary activities that are not normally expected to recur regularly or frequently.

Applicability:  w.e.f. 01.04. 1996 for all enterprises.

This Statement should be applied by an enterprise in presenting profit or loss from ordinary activities, extraordinary items and prior period items in the statement of profit and loss, in accounting for changes in accounting estimates, and in disclosure of changes in accounting policies.

Disclosure:

i.     Any change in accounting policy, which has a material effect, should be disclosed.

  1. The impact of such change, if material should be shown in the financial statements of the period in which such change is made.
    1. If change in accounting policy is expected to have material effect on the financial statements of later period, the fact of such change should be disclosed.

AS-6 : Depreciation Accounting

As per AS-6, the depreciable amount of depreciable assets should be allocated on systematic basis to each accounting year over useful life of asset.

The depreciation method should be consistently applied from period to period. Any change in depreciation method and its impact (deficiency or surplus resulting from retrospective re-computation as per revised method) should be disclosed.

The net surplus or deficiency, if material, on assets disposed of, discarded, demolished or destroyed, should be disclosed separately

Applicability: w.e.f. 01.04.1995 for all enterprises.

The standard applies to all depreciable assets, except the following to which special consideration apply:

  1. forests, plantations and similar regenerative natural resources
  2. wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non-regenerative resources.
  3. expenditure on research and development.
  4. livestock

Land has indefinite life. Hence, the standard does not apply to land, unless it has a limited useful life.

Salient Features:

  1. Depreciable amount of a depreciable asset are allocated on systematic basis to each accounting year over useful life of asset.
  2. In case of addition or extension of the existing asset, depreciation to be provided on adjusted figure prospectively over the residual useful life of the asset or at the rate applicable to the asset.

Disclosure:

  1. The information of,
  2. The historical cost (or other amount substituted for historical cost) of each  class of depreciable assets;
  3. Total depreciation for the period for each class of assets and the related accumulated depreciation.
  4. In addition to above,
  5. Depreciation methods used;
  6. Depreciation rates (or the useful lives of the assets), if they are different from the principal rates specified in the statute.
  7. Where any depreciable asset is disposed of, discarded, demolished or destroyed, the net surplus or deficiency, if material, should be disclosed separately.

AS-7 : Construction Contracts

AS-7 specifies guidelines for treatment of revenue & cost associated with Construction Contracts during the accounting period

The organization should  disclose the amount of recognised revenue  and the methods of determining the revenue having regard to stages of completion of each project.

AS-8 Accounting for Research and Development

AS-8 was withdrawn with effect from 1.04.2003, when AS-26 ‘Intangible Assets’ became mandatory

Applicability: w.e.f. 01.04.2003 for all enterprises

AS-7 is applicable to Contractors executing:-                                                               

  1. Contracts of rendering of services which are directly related to the construction of assets.
    1. Contract for destruction or restoration of asset and the restoration of the environment following the demolition of asset.

It is not applicable for the construction projects undertaken by the enterprise on its own account.

Contract Revenue: Itmeansthe initial amount of revenue agreed in the contract, including claims and incentive payments to the extent they are expected to result in revenue.

Recognition of Contract Revenue:

  1.    Two methods of accounting are generally followed by the contractors:
  2. Percentage of completion method
  3. Completed contract method
  4.     In both the methods, provisions are made for losses for:-
    1. The stage of completion reached on the contract,
    1. Losses on the remainder of the contract.
  5.     For the purpose of accounting, a single Contract made with several customers may be combined.

Contract Cost: It represents specific contract costs that can be directly allocated to the contract, and costs specifically chargeable to the customer under the terms of the contracts.

Cost plus Contract: Cost plus contract, is a contract in which contractor is reimbursed for specified cost incurred plus percentage of those cost or a fixed fee.

Disclosure:

  • The amount of contract revenue recognized as revenue in the period;
  • The methods used to determine the contract  revenue recognized in the period;
  • The method used to determine the stage of completion of contracts in progress.
    • Aggregate amount of costs incurred and recognized profits (less recognized losses) up to the reporting date
  • Amount of advances received
  • Amount of retentions.
  • Gross amount due from customers for contract work as an asset
  • Gross amount due to customers for contract work as a liability.

AS-9 : Revenue Recognition

AS-9deals with basis of revenue arising from ordinary activities of an enterprise : sale of goods; rendering of services; use of Enterprise resources yielding interest, royalties, and dividends.

The enterprise should disclose the circumstances in which revenue recognition has been postponed

Applicability: w.e.f. 01.04.2001 for all enterprises.

It does not deal with revenue recognition aspects arising from construction contracts, hire-purchase and lease agreements, government grants and other similar subsidies and revenue of insurance companies from insurance contracts (these are separately dealt in AS-9)

Salient features:

  1. Revenue is the gross inflow of cash receivable or other consideration, arising in the course of the ordinary activities of an enterprise from: sale of goods; rendering of services; use of Enterprise resources yielding interest, royalties, and dividends.
  2. Where the ultimate collection is not reasonably certain at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty involved.
  3. The enterprise should disclose the circumstances in which revenue recognition has been postponed.

AS-10 : Accounting for Fixed Assets

AS-10deals with reporting of status of Fixed Assets for producing or providing goods or services.

It requires to disclose  i) Gross and net book values of fixed assets at the beginning and end of an accounting period showing additions, disposals, acquisitions and other movements, ii) Expenditure incurred on account of fixed assets in the course of construction or acquisition, iii) revalued amounts substituted for historical costs of fixed assets

Applicability: w.e.f. 01.04.1991 for all enterprises.

  1. The statement deals with accounting of fixed assets, such as land and buildings, plant and  machinery, vehicles, furniture and fittings, goodwill, patents, trademarks, designs etc.
  2. This statement does not deal with accounting for the following items, to which special considerations apply:
  3. Forests, plantations and similar regenerative natural resources.
  4. Wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources.
  5. Expenditure on real estate development.
  6. Livestock.

Salient features:

  1. Fixed Asset is an asset held for the purpose of producing or providing goods or services, and is not held for sale in the normal course of business.
    1. Cost to include purchase price and attributable costs of bringing asset to its working condition.

Disclosure:

The following disclosures should be made:

  1. Gross and net book values of fixed assets at the beginning and end of an accounting period showing additions, disposals, acquisitions and other movements.
  2. Expenditure incurred on account of fixed assets in the course of construction or acquisition.
  3. Where revalued amounts are substituted for historical costs of fixed assets, the method adopted to compute the revalued amounts, the nature of indices used, if any, the year of any appraisal made.

AS-11 : Accounting for effect of changes in Foreign Exchange Rates

An enterprise may carry on activities involving foreign exchange in two ways: 1. Transacting in foreign currencies 2. Foreign Operations

AS-11 deals with accounting for transactions in foreign currencies, translating the financial statements of foreign operations and accounting for foreign currency transactions in the nature of forward exchange contracts

Applicability:  w.e.f. 01.04.1995 for all enterprises.

To be applied in accounting for transactions in foreign currencies, translating the financial statements of foreign operations and accounting for foreign currency transactions in the nature of forward exchange contracts.

Disclosure:

  1. Exchange Difference :
  2. The amount of exchange differences included in the net profit or loss for the period.
  3. Net exchange differences accumulated in foreign currency translation reserve as a separate component of shareholders’ funds, and a reconciliation of the amount of such exchange differences at the beginning and end of the period.
  4. Currency Difference: The reason for any change in the reporting currency should also be disclosed.
  5. Change in Classification : When there is a change in the classification of a significant foreign operation, an enterprise should disclose:
  6. The nature of the change in classification
  7. The reason for the change
  8. The impact of the change in classification on shareholder’ funds; and
  9. The impact on net profit or loss for each prior period presented.

AS-12 : Accounting for Government Grants

AS-12 deals with accounting for government grants (like subsidies, cash incentives, duty drawbacks, etc.). Government grants should not be recognized until there is reasonable assurance that the organization will comply with conditions attached to them and the Grant will be received.

The organisation should disclose the accounting policy adopted for government grants, including the methods of presentation in the financial statements; and the nature and extent ofgovernment grants recognized in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost

Applicability:  w.e.f 1.04.1994 for all enterprises.

  1. This statement deals with accounting for government grants (like subsidies, cash incentives, duty drawbacks, etc.)
  2. This statement does not deal with matters in respect of:
  3. Government assistance other than in the form of government grants.
  4. Government participation in the ownership of the enterprise.

Disclosure:

The following disclosures are:

  1. The accounting policy adopted for government grants, including the methods of presentation in the financial statements;
  2. The nature and extent ofgovernment grants recognized in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost.

AS-13 Accounting for Investments

As per AS-13, the enterprise should disclose all current investments (realisable in nature and within one year of its acquisition) and long term investments (other than current investments) separately.

Current investment should be valued lower of Cost and Fair value. An investment property should account for as long term investment

Applicability: AS-13 is mandatory w.e.f. 01.04.1995 for all enterprises.

Accounting Treatment:

  1. Carrying amount for current investments is the lower of cost and fair value. Valuation of current investments on overall basis is not considered appropriate.
  2. Long-term investments are usually carried at cost.
  3. On disposal of an investment, the difference between the carrying amount and the disposal proceeds is recognised in the profit and loss statement.
  4. If an investment is acquired by issue of shares/securities or in exchange of an asset, the cost of theinvestment is the fair value of the securities issued or the assets given up.

Valuation Methods of Investments: Fair value is the exchange price between buyer and seller. Market value is the amount obtainable from the sale of an investment in an open market.

Disclosure:

  1. The accounting policies for the determination of carrying amount of investments.
  2. The amounts included in profit and loss statement for:
    1. Interest, dividends (showing separately dividends from subsidiary companies), and rentals on investments showing separately such income from long term and current investments.
    1. Profit and Losses on disposal of current investment as well as long term investment, and changes in the carrying amount of the respective investment should be disclosed.

AS-14 : Accounting for Amalgamations

AS-14 deals withamalgamation (in the nature of purchase or merger) and the treatment or any resultant goodwill or reserves. AS-14 is principally directed to Companies, but some of its provision applies to other types of enterprises also.

AS-14 specifies Pooling of Interest Method for amalgamations in the nature of merger, and Purchase Methodfor amalgamation in the nature of purchase.

Applicability: w.e.f. 01.04.1995 for all enterprises.

This statement deals with accounting for amalgamation and the treatment or any resultant goodwill or reserves. This statement is directed principally to companies,

This statement does not deal with cases of acquisitions. In acquisition, the acquired company till continues to exist. It deals only with the accounting in the books of Transferee (purchasing) company, but does not deal with the accounting in the books of Transferor (vendor).

Accounting Methods:

  1. Depending on the nature of amalgamation, AS- 14 prescribes two different methods of accounting:
  2. Pooling of Interest Method: For amalgamations in the nature of merger.
  3. Purchase Method: for amalgamation in the nature of purchase.
  4. Under the Pooling of the Interest Method, Assets, Liabilities and Reserves of the transfer company are recorded at existing carrying amount, and in the same form, as it was appearing in the books of the transferor.
  5. Difference in the value of capital issued by Transferee Company, against the value of the shares of Transferor Company, is adjusted in Reserves.
  6. Under Purchase Method, all assets and liabilities of the transferor company be recorded at existing carrying amount (or consideration be allocated to individual identifiable assets and liabilities on basis of fair values at the date of amalgamation). The reserves of the transferor Company will not exist. The excess or shortfall of consideration over value of net assets is recognized as goodwill or capital reserve.

Disclosure:

The following disclosures should be made:

  1. Names and nature of the amalgamating companies, effective date of amalgamation, method of accounting scheme, difference between the purchase consideration and value of asset acquired etc.
  2. In case of Polling of Interest Method, number of share issued, difference between the consideration and value of identifiable asset acquired and the treatment thereof should be disclosed.
  3. In case of Purchase Method, consideration for amalgamation, difference between the consideration and value of identifiable asset acquired and the treatment thereof, amortization of goodwill should be disclosed.

16 AS – 15 : Employee Benefits

AS-15 specifies guidelines for recognition of liability in respect of services provides by employee.

It provides for  recognition, measurement criterion and disclosure requirements for Short-term benefits (Salary, paid leave, bonus, non-monetary benefits etc. falling due within 12 months),  Post-employment benefits (Gratuity, pension, post employments, life insurance, medical care etc), long-term benefits(Long-service leave, sabbatical leave, Jubilee awards, etc) and termination benefits (VRS etc)

Applicability: w.e.f. 01.04.1995 for all enterprises and was revised in 2005.

  1. It is applicable on all employees (whether full time, part time, permanent, casual or temporary). It also covers whole-time directors and other management personnel.
  2. It is not applicable to employee share based payments such as ESOP, ESPS etc.
  3. It covers:
  4. Short-term benefits: Salary, paid leave, bonus, non-monetary benefits etc. falling due within 12 months.
  5. Post-employment benefits: Gratuity, pension, post employments, life insurance, medical care etc.
  6. Other long-term benefits:Long-service leave, sabbatical leave, Jubilee awards, etc.

Disclosure:

  1. Defined Contribution Plan: Amount recognised as expense.
  2. Defined Benefit Plans: General description of type of plan.
  3. Other disclosures that may be required by AS-18 and AS-29.

17 AS-16 Borrowing Costs

AS-16 provides guidelines for Accounting for Borrowing Costs (Interest and other Costs) for borrowing funds.

AS-16 specifies guidelines for capitalization of borrowing cost for  qualifying asset (an asset that takes substantial time to get ready), period for which such costs can be capitalised and its amount

Applicability: w.e.f. 01.04.2000 for all enterprises.

This Standard should be applied to Accounting for Borrowing Costs. However it does not deal with cost of owners’ equity, including preference share capital not classified as a liability.

Accounting Treatment

  1. Borrowing costs are capitalized as part of the cost of a qualifying asset (an asset that takes substantial time to get ready), when future economic benefits will result and the costs can be measured reliably. Other borrowing costs are recognised as an expense in the period in which they are incurred.
  2. Income on the temporary investment of the borrowed funds be deducted from borrowing costs.

Disclosure

The financial statements should disclose:

  • The accounting policy adopted for borrowing costs;
  • The amount of borrowing costs capitalized during the period.

18 AS-17 Segment Reporting

AS-17 specifies guidelines for reporting of Financial Information for each segment (Business & Services, and Geographical Areas).

It specifies disclosure requirements in respect of Revenue from external customers as well as transactions with other segments, segment results, acquisition cost of assets, carrying amount of assets, segment liabilities, depreciation and amortization expenses, reconciliation cost, etc.

Applicability: w.e.f. 01.04.2001 in respect of the following enterprises:­

  • Enterprises whose equity or debt securities are listed on a recognised stock exchange in India.
  • Enterprises that are in the process of issuing equity or debt securities that will be listed on a recognised stock exchange in India.
  •  All other commercial, industrial and business reporting enterprises, whose turnover for the accounting period exceeds Rs.50 crore.

Segments:

There are two types of segments

  • Business Segment– Segment made on basis of products or service and are exposed to different risks and returns.
  • Geographical segment– Segment is made on basis of its operation in different geographical areas and is exposed to different risks and returns.
  • Segment Revenue– The aggregate of the portion of ‘Enterprise Revenue’ directly attributable to a segment on a reasonable basis.
  • Enterprise Revenue– The revenue arises from sales to external customers as reported in the Profit & Loss statement.
  • Segment Assets– Employed by a segment in its operating activities or directly attributable to a segment. Ex.-Current assets, Tangible and Intangible Fixed Assets.
  • Segment Liabilities- Operating liabilities or directly attributable to a segment. Trade and other liabilities, customers advance etc.
  • Segment Result– segment revenue – segment expenses.

Disclosure : Revenue from external customers as well as transactions with other segments, segment results, acquisition cost of assets, carrying amount of assets, segment liabilities, depreciation and amortization expenses, reconciliation cost, etc.

AS-18 Related Party Disclosures

AS-18 specifies disclosure requirements for transactions / relations with related parties.

Transactions include purchase or sale of goods as well as fixed assets, rendering or receiving services, leasing or hire purchase agreement , finance, guarantees and collaterals.

Related Parties include i) Enterprises that directly or indirectly control or are controlled by or are under common control with the reporting enterprise, ii) Associates, Joint Ventures of the reporting entity; Investing party or venture in respect of which reporting enterprise is an associate or a joint venture, iii) Individuals who own voting power exercising control or significant influence, iv) Key management personnel and their relatives, or who are able to exercise significant influence

Applicability: w.e.f. 1.04.2000 in respect of:

  • Enterprises whose equity or debt securities are listed in recognized stock exchange /Enterprise that are in the process of issuing equity or debt securities to be listed in a recognised stock exchange in India.
  • All other commercial, industrial and business reporting enterprises, whose turnover for the accounting period exceeds Rs.50 crore.
  • Related party follows:
    • Enterprises that directly or indirectly control or are controlled by or are under common control with the reporting enterprise,
    • Associates, Joint Ventures of the reporting entity; Investing party or venture in respect of which reporting enterprise is an associate or a joint venture,
    • Individuals who own voting power exercising control or significant influence,
    • Key management personnel and their relatives, or who are able to exercise significant influence.

Disclosures: Following to be disclosed:

  • Related party relationship/transactions between reporting enterprise and related parties.
  • Transactions include purchase or sale of goods as well as fixed assets, rendering or receiving services, leasing or hire purchase agreement ,finance, guarantees and collaterals.

20 AS-19  Leases

AS-19 specifies guidelines for Finance & Operating lease, in respect of both  lessor and lessee

A finance lease is one where risks and rewards incident to the ownership are transferred substantially; otherwise it is an operating lease

Applicability: w.e.f. 01.04.2001 for all enterprises.

The standard applies to all leases except:

  1. Lease agreements to explore for or use of natural resources, (like oil, gas, timber metals and other mineral rights).
    1. Licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights.
      1. Lease agreements to use lands.

Salient features

  1. For accounting purposes, leases are classified as Financing lease, and Operating lease.
  2. A finance lease is one where risks and rewards incident to the ownership are transferred substantially; otherwise it is an operating lease.
  3. Accounting Treatment:
    1. Financing lease:
      1. Treatment in the financial statements of Lessee: The fair value of the asset or the present value of lease payments whichever is less should be recognised as an asset with a corresponding liability.
      1. Treatment in the financial statements of the Lessor:
        1. The lessor shall recognize the asset at the net lease payments receivable amount.
        1. The lessor shall determine the finance income to reflect the constant periodic rate of return on the net investment outstanding in respect of finance lease and shall recognize the income statement.
    1. Operating Leases:
  4. Treatment in the financial statements of Lessee: Lease payments under an operating lease should be recognized as an expense.
  5. Treatment in Financial statement of Lessor: The lessor shall recognize the lease payments in the income statements and shall continue to treat the leased asset as a fixed asset.

Disclosures:

  1. For Finance Lease By Lessee:

– Assets acquired under finance lease as segregated from the assets owned

-The net carrying amount at the balance sheet date for each class of assets

-Contingent rents recognized as expense in the statement of profit and loss for the period.

  1. By Lessor:

– Unearned finance income

– The unguaranteed residual values accruing to the benefit of the lessor;

– The accumulated provision for uncollectible minimum lease payments receivable

– Contingent rents recognised in the statement of profit and loss for the period;

  • For Operating Lease
  • By Lessee:

– Lease payments recognised in the statement of profit and loss for the period, with separate amounts for minimum lease payments and contingent rents;

– Sub-lease payments received (or receivable) recognised in the statement of profit and loss for the period

– The total of future minimum sublease payments expected to be received under non­- cancelable subleases at the balance sheet date etc.

  1. By Lessor:

For each class of assets:

  • the gross carrying amount,
  • the accumulated depreciation and accumulated impairment losses at the balance sheet date;
  • the depreciation recognised, impairment losses recognized and impairment losses reversed in the statement of profit and loss for the period.
  • Total contingent rents recognised as income in the statement of profit and loss for the period.

AS-20  Earnings Per Share

Earnings per share (EPS) is a financial ratio indicating the profit /loss attributable to each Equity Share

AS-20 specifies principles for determination & presentation of Earnings  per Share (Basic & Diluted)  for comparison for performance of different enterprises and different periods

Applicability: w.e.f. 1.4.2001 in respect of the following enterprises:

  • Enterprises whose equity shares or potential equity shares are listed on a recognised stock exchange in India.
  • 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 case of a parent (holding co.), presentation of earnings per share (EPS)  information on the basis of consolidated financial statements as well as individual financial statements of the parent.

Salient features:

  1. An enterprise should present basic and diluted earnings per share-
  2. Basic earnings per share should be calculated by dividing the net profit or loss (after deducting preference dividends and any attributable tax thereto for the period) for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period.

Disclosure:

For calculating basis and diluted EPS, the following should be disclosed:

  • the amount used as numerators
  • the weighted average number of equity shares used as denominator and reconciliation of these denominators to each other.
  • The nominal value of shares.

AS-21 Consolidated Financial Statements

AS-21 provides guidelines for Holding Companies for preparation and presentation of consolidated financial statements, as a single entity, in a separate statement.

The CFS should contain the list of all subsidiaries including the name, country of incorporation, proportion of ownership interest, proportion of voting power held etc.

Applicability: w.e.f. 1.04.2001.

It is not mandatory for an enterprise to present Consolidated Financial Statements (CFS). But, if the enterprise prepares consolidated financial statements, such statements should be drawn in accordance with AS-21.

Salient features:

  1. To be applied in the preparation and presentation of consolidated financial statements (CFS) for group of enterprises under the control of a parent.
  2. Consolidated financial statements to be presented in addition to separate financial statements.
  3. All subsidiaries, domestic and foreign to be consolidated.
  4. Consolidated balance sheet, Consolidated P & L, notes and other statements are included in CFS, necessary for presenting a true and fair view.

Disclosure:

  1. In CFS, a list of all subsidiaries including the name, country of incorporation, proportion of ownership interest, proportion of voting power held should be disclosed.
    1. The following should be disclosed, where applicable:
      1. The nature of relationship between the parent and subsidiary.
      1. The effect of the acquisition and disposal of subsidiaries on the financial position at the reporting date.
      1. The names of the subsidiaries of which reporting date is different from that of the parent.

AS-22 Accounting for Taxes on Income

AS-22 provides guidelines for treatment of Taxes as per the concept of matching of expenses against revenue for the period

AS-22 seeks to reconcile tax on income computed as per books of accounts and with the taxable income.

Applicability: w:e.f. 1-4-2001 in respect of the following :

  1. Enterprises whose equity or debt securities are listed (to be listed) in a recognised stock exchange in India.
  2. If the parent presents CFS and the Accounting Standard is mandatory in respect of any enterprises of that group.

Salient features:

  1. Taxable income and accounting income should be clearly distinguished.
  2. Deferred tax should be recognized .
  3. Current tax should be measured at the amount expected to be paid using the applicable tax rates.
  4. Deferred tax assets and liabilities should be measured using the tax rates and tax laws.
  5. The tax rates and tax laws enacted by the B/S date, and not to be discounted to their present value.

Disclosure:

  1. Differed tax assets and liabilities should be disclosed under a separate head in the balance sheet.
    1. The break up of deferred tax assets and deferred tax liabilities into major components of the respective balances should be disclosed.

AS-23 Accounting for Investments in Associates in Consolidated Financial Statements

As-23 describes principle and procedure for accounting of Investments in associate (other than subsidiaries) having significant influence

The Investing entity should  disclose the particulars as per AS-23, in its separate statement, following the guidelines of AS-13, as applicable.

Applicability: w.e. f. 1.4.2002

AS-23 is mandatory if an enterprise presents consolidated financial statement.

Disclosure:

  • An appropriate listing and description of associates, proportion of ownership interest, and proportion of voting power held should be disclosed.
  • The names of the associates, of which reporting dates are different from that of the financial statement of an investor and the differences in reporting dates should be disclosed in the CFS.

AS-24 Discontinuing Operations

AS-24 seeks to establish principles of reporting for Discontinuing Operations, to make projections of  Cash Flow,  income generating capacity, financial position etc, about the continuing operations and discontinuing operations.

Applicability: w.e. f. 1. 4.2004.

  • This standard is applicable for all discounting operations.
  • It is necessary to segregate information about discontinuing operations from continuing one and establishes principles for reporting information about discontinuing operations.

Disclosure:

Disclosure is required for changes in any significant activities or event, or any significant changes in the cash flow, relating to disposal or settlement.

AS-25 Interim Financial Reporting

For organisations preparing interim reports, AS–25 specifies principles for preparation of Financial Statement (complete or condensed) for Interim period.

Applicability: w.e.f. 1. 4. 2002

If an enterprise prepares interim financial report, it should comply with this Accounting Standard.

Disclosure:

Promoters’ and non promoters’ shareholding details, dividend paid or recommended, any audit qualifications in the audited accounts of a period should be disclosed.

AS-26 Intangible Assets

AS-26 specifies recognition & accounting treatment for Intangible Assets (not covered by other accounting standards) meeting certain criterion.

Applicability: w.e.f.1-4-2003.

AS 26 applies to following types of enterprises:

  1. Enterprises whose equity or debt securities are listed (or are in the process of being listed) on a recognized stock exchange in India
  2. All other commercial, industrial and business enterprises, whose turnover for the Accounting period exceeds Rs.50crores.

Salient features

  1. An intangible asset is an identifiable non monetary asset, without physical substance. It must have the characteristics of an asset (i.e. future economic benefits and reliably measured).
  2. As per the standard, the intangible asset initially shown at cost.
  3. An intangible asset to be recognized only if future economic benefits will flow and the cost of the asset can be measured reliably.

Disclosure: The following should be disclosed:

  • Useful life or amortization rate, amortization method, gross carrying amount, accumulated amortization and impairment loss at the beginning,
  • Reconciliation of carrying amount at the beginning and at the end of the period.

AS-27 Financial Reporting of Interests in Joint Ventures

AS-27 sets out  principles and procedures for accounting and reporting of interests in joint venture of Jointly controlled operations, Jointly controlled Assets and Jointly controlled entities

AS-27 specifies for reporting of Joint Venture Assets, Liabilities, Income & Expenses, in the financial statements of venturers and investors,

 Applicability: w.e.f. 1-4-2002 forthe enterprises those prepare and present the consolidated financial statements in respect of accounting periods commencing on or after 1-4-2002.

Salient features:

  1. A joint venture is a contractual arrangement whereby two or more parties in collaboration perform an economic an activity, which is subject to joint control.
  2. Joint control is the contractually agreed sharing of control over an economic activity.

Disclosure:

  • A venturer should disclose a list ventures and description of interests in significant joint ventures.
    • In respect of jointly controlled entitles, the venturer should disclose the proportion of ownership interest, name and country of incorporation or residence.
    • A venturer should disclose, the aggregate amounts of each of the assets, liabilities, income and expenses related to its interests in the jointly controlled entities.

AS-28 Impairment of Assets

If the sum of all estimated future cash flows is less than the carrying value of the asset, the asset would be considered impaired. 

AS-28 deals with impairment losses. Assets should not be carried at an amount higher than the recoverable amount because of impairment.

The enterprise, at each Balance Sheet date, should assess whether an Asset is impaired (other than Inventories: AS-2, Assets under Construction Contracts : AS-7, Financial Assets : AS-13, Deferred Tax Assets AS-22), and if so, should assess the recoverable value and the impairment loss, if any, should be recognized in Profit & Loss Statement.

As 28 deals with impairment losses. Assets should not be carried at an amount higher than the recoverable amount because of impairment.

  • Recoverable Amount: it is the higher of an asset’s net selling price and its present value.
  • Impairment Loss: it is the amount by which the carrying amount of an asset exceeds its recoverable amount.
  • Carrying Amount: it is the amount at which an asset is recognized in the balance sheet after deducting any accumulated depreciation and accumulated impairment losses thereon.

Applicability: w.e.f. 1-4-2005

  1. Enterprises whose equity or debt securities are listed on a recognized stock exchange in India.
  2. Enterprises that are in the process of issuing equity or debt securities that will be listed or a recognized stock exchange in India as evidenced by the board of director’s resolution in this regard.
  3. All other commercial, industries and business reporting enterprises, whose turnover for the accounting period exceed Rs.50crore.
  4. Applied in accounting for the impairment of all assets, other than inventories (AS-2), assets arising from construction controls (AS-7), and financial assets, including investments (AS-13), and deferred tax assets (A.S-22).

Disclosure:

(a) The amount of impairment losses recognized in the statement of profit and loss during the period and the line item(s) of the statement of profit and loss in which those impairment losses are included.

(b) The amount of reversals of impairment losses recognized in the statement of profit and loss during the period.

(c) The amount of impairment losses recognized directly against revaluation surplus during the period.

(d) The amount of reversals of impairment losses recognized directly in revaluation surplus during the period.

AS- 29 Provisions, Contingent Liabilities and Contingent Assets

AS-29 provides guidelines for recognition criterion and measurement principles and reporting for provisions and contingent liabilities.

The standard specifies for accounting recognition and reporting in notes, about contingent liabilities and contingent assets.

Applicability: w.e.f. 1-4-2004.

This Statement should be applied in accounting for provisions and contingent liabilities and in dealing with contingent assets.

Salient features:

  1. Provision is a liability, which can be measured only by using a substantial degree of estimation and arise from past events existing independently of an enterprise’s future actions (i.e. the future conduct of its business)
  2. A Contingent Liability is
  3. A possible obligation that arises from past events, 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
  4. A present obligation that arises from past events, but is not recognized because:
    1. It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
    1. A reliable estimate of the amount of the obligation cannot be made.
  • Contingent asset is possible asset that arises from past events, 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.

Disclosure:

  1. For each class of provision, an enterprise should disclose:
  2. The carrying amount at the beginning and end of the period;
  3. Additional provisions made in the period, including increases to existing provisions;
  4. Amounts used (i.e. incurred and charged against the provision) during the period.
  5. Unused amounts reversed during the period.
  6. Unless the possibility of any outflow in settlement is remote, an enterprise should disclose a brief description for each class of contingent liability at the balance sheet date, including the following, where practicable:
  7. An estimate of its financial effect,
  8. An indication of the uncertainties relating to any outflow;
  9. The possibility of any reimbursement.

AS 30 Financial Instruments: Recognition and Measurement

AS-30 provides guidelines to establish principles for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items

The requirements of presentation as per AS-30 are stated in AS-31 and requirements of Disclosure are stated in AS-32

Applicability : AS 30 comes into effect from 1-4-2009 and initially remains for two years, and become mandatory from 1-4-2011 for all commercial, industrial and business entities except to a Small and Medium-sized Entity, as defined below:

  1. Whose equity or debt securities are not listed or are not in the process of listing on any stock exchange.
    1. Which is not a bank (including co-operative bank), financial institution or any entity carrying on insurance business;
    1. Whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year;
    1. Which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year;
    1. Which is not a holding or subsidiary entity of an entity, which is not a small and medium-sized entity

From the date of this Standard becoming mandatory for the concerned entities, AS 4, AS 11 & AS 13 stands withdrawn.

Objective: The objective of this Standard is to establish principles for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items.

Requirements for presenting information are stated in AS 31, Financial Instruments: Presentation.

Requirements for disclosing information are stated in AS 32, Financial Instruments: Disclosures5

AS 31: Financial Instruments: Presentation

AS-31 establishesprinciples for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities.

It applies to classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset

Applicability: Accounting Standard (AS) 31, Financial Instruments: Presentation, comes into effect from 1-4-2009 and initially remains recommendatory for two years and becomes mandatory from

1-4-2011 for all commercial, industrial and business entities except to a Small and Medium-sized Entity, as defined below:

  1. Whose equity or debt securities are not listed or are not in the process of listing on any stock exchange,
  2. Which is not a bank (including co-operative bank), financial institution or any entity carrying on insurance business;
  3. Whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year;
  4. Which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year;
  5. Which is not a holding or subsidiary entity of an entity which is not a small and medium-sized entity

Objective: The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset.

Principles: The principles in this Standard complement the principles for recognising and measuring financial assets and financial liabilities in AS 30, and for disclosing information about them in AS 32.

AS 32 : Financial Instruments: Disclosures

AS-32 provides guidelines for disclosures in their financial statements to evaluate, i) significance of financial instruments for the entity’s financial position and performance. ii) nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks

Applicability: AS 32  comes into effect in respect of accounting periods commencing on or after 1-4-2009 and  initially remains recommendatory for two years and becomes mandatory from 1-4-2011 for all commercial, industrial and business entities, except to a Small and Medium-sized Entity, as defined below:

  1. Whose equity or debt securities are not listed or are not in the process of listing on any stock exchange,
  2. Which is not a bank (including a co-operative bank), financial institution or any entity carrying on insurance business;
  3. Whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year;
  4. Which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year;
  5. Which is not a holding or subsidiary entity of an entity which is not a small and medium-sized entity

Objective: The objective of this Standard is to require entities to provide disclosures in their financial statements that enable users to evaluate:

  1. The significance of financial instruments for the entity’s financial position and performance.
    1. The nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks.

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