Accounting standards

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Accounting Standards : 

Accounting Standards Provides framework Accounting Standards board of ICAI – 1977 Reps from financial institutions, SEBI, CAG, CBDT, CB of Excise and Customs, Management institutes, universities. International Accounting standards board – Intl. Financial Reporting standards Financial Accounting Standards board – US GAAP

Accounting Standards : 

Accounting Standards Indian Accounting Standards AS 1 – Disclosure of Accounting Policies Companies free to formulate own a/cing policies within accounting principles Any change having a material impact must be disclosed Eg. Certain engineering costs charged to contract costs previously charged to p&L a/c. Now it appears as WIP and profits higher by same amount.

Accounting Standards : 

Accounting Standards AS-2 Valuation of Inventories Inventories include RM and components WIP Finished goods Stores and spares Valued at historical cost or net realisable value

Accounting Standards : 

Accounting Standards AS -3 –Cash flow statement Listing agreement with stock exchanges requires corporates to present CF statement Separately show cash flow from Operating activities Investing activities Financing activities Extraordinary item

Accounting Standards : 

Accounting Standards AS -4 Contigencies and Events Occuring after the B/S date Contigencies – outcome is loss or gain Eg. Income tax liability pending in court Customer – debtor going bankrupt A reasonable estimate must be made

Accounting Standards : 

Accounting Standards AS – 5 – Net profit or loss for the periods, prior period items and changes in a/cing policies Net profit/loss results from ordinary activities and extraordinary items Extraordinary item – loss from natural calamity, large outflow due to VRS Wages on installation of machinery previous year charged to P&L a/c – needs to be rectified

Accounting Standards : 

Accounting Standards AS – 6 Depreciation Accounting Disclose dep methods and rates Straight line method Rs. 1,00,000 / 5 = Rs.20,000 Written down value method - 20% Yr 1 Rs. 1,00,000 * 20% = Rs.20,000 Yr 2 Rs. 80,000 * 20% = Rs. 16,000 Yr 3 Rs. 64,000 * 20 % = Rs. 12,800

Accounting Standards : 

Accounting Standards AS – 7 Construction Contracts Basically 2 types – A. Fixed Price contracts B. Cost plus contracts When outcome can be reasonably estimated(ie both costs and revenues measurable) contract revenue and cost estimate on degree of completion method Otherwise revenue recognised to the extent of costs incurred. Expected loss – immediately recognised

Accounting Standards : 

Accounting Standards AS – 8 Accounting for Research & Development 2 types of costs – capital and revenue Capital – asset purchased for R&D Revenue – could be amortised over many years Includes salaries, wages, RM, dep on assets Certain conditions need to be satisfied Product/process clearly defined – costs attributable Technically feasible Management wants to use product/process Indication of costs to be more Adequate resources exist to complete project

Accounting Standards : 

Accounting Standards AS – 8 withdrawn, AS -26 – mandatory AS – 9 Revenue Recognition Revenue – gross inflow of cash Sales, services, use of firm’s resources by others Concerned with timing of recognition Either in proportion or full amount

Accounting Standards : 

Accounting Standards AS 10 – Accounting for Fixed Assets Cost of the asset includes expenses to install If fixed asset appreciates on revaluation – credited to revaluation reserve not P&L a/c although dep is charged to the same. AS 11 The Effects of Changes in Foreign Exchange Rates Foreign exchange transactions are Purchase of equipments

Accounting Standards : 

Accounting Standards External commercial borrowings – gain or loss charged to P&L account Exports 3 categories of forex items Revenue items(purchases and sales) Monetary items (cash, bank, drs, crs, loans) Non monetary items (F Assets, Investments , Inventory)

Accounting Standards : 

Accounting Standards AS 12 Accounting for Government Grants Grants given in cash or kind to an enterprise for past or future compliance with certain conditions Related to Specific fixed assets Revenue items In the nature of promoters’ contribution Compensation for expense or losses incurred

Accounting Standards : 

Accounting Standards Can be treated as deferred income or as deduction from gross value of asset Cash and promoters’ contribution can be credited to capital reserve Revenue items to be shown in P&L a/c AS 13 Accounting for Investments Current – market value or cost whichever is lower

Accounting Standards : 

Accounting Standards Long term at cost AS 14 Accounting for Amalgamations Disclose Names and general nature of business Effective date of amalgamation Method of accounting used to reflect amalgamation No. of shares issued, exchange ratio and so on

Accounting Standards : 

Accounting Standards AS 15 Employee Benefits Employee benefits include: Wages, salaries and social security contributions paid annual leave, profit-sharing and bonuses and non-monetary benefits for current employees; post-employment benefits such as gratuity, pension, other retirement benefits other long-term employee benefits, including long-service leave sabbatical leave, bonuses and deferred compensation; and termination benefits.

Accounting Standards : 

Accounting Standards as an expense, unless another Accounting Standard requires or permits the inclusion of the benefits in the cost of an asset. AS 16 Borrowing Costs Interest and other charges on borrowing funds Amortisation of discounts or premiums Finance charges under finance lease

Accounting Standards : 

Accounting Standards Eg: Borrowing cost Rs 1000 Interest to be paid 10 Interest earned by investing Rs.1000 4 Cost to be capitalised 1006 AS 17 Segment Reporting Reportable segment is a business segment or geographical segment

Accounting Standards : 

Accounting Standards Segment must contribute to at least 10% to total revenues Segment profit or loss – 10% at least of results of all segments Segment assets – at least 10% of total assets Disclose total assets, liabilities, total costs, non cash expenses

Accounting Standards : 

Accounting Standards AS 18 Related Party Disclosures Parties that can influence others who have decision making powers over financial and operating decisions Disclose – name, relationship, transaction, amount and amounts written off regarding debts due from or to that party

Accounting Standards : 

Accounting Standards AS 19 Leases Finance lease and operating lease Finance lease – recognise as asset and liability in B/S. Lessee claims depreciation I T laws allow lessor to claim dep for lessor IT laws contradict AS AS 20 EPS Divide Earnings by weighted average no. of shares rather than closing no. of shares

Accounting Standards : 

Accounting Standards AS 21 Consolidated Financial Statements Holding companies must prepare CFS if listed AS 22 Accounting for Taxes on Income Difficult because accounting income different from taxable income. Provision must be made to suit matching principle

Accounting Standards : 

Accounting Standards Timing difference and permanent difference Former originate during one period and changes in another while the latter originates but does not change later Eg: introduction of VAT Tax must comprise of current tax and deferred tax Deferred tax on income arising due to timing difference

Accounting Standards : 

Accounting Standards AS 23 Accounting for Investment in Associates in Consolidated Financial Statements An associated is where the investment is between 20% to 50% and holding company can influence Use equity method – recording at cost and difference between cost and value of investment (on the basis of proportionate value of net assets of investee) should be recognised and disclosed separately as goodwill or capital reserve as the case may be

Accounting Standards : 

Accounting Standards AS 24 Discontinuing Operations Initial Disclosure event – disclose as soon as plan is made Financial statements must include details – total amounts of assets to be disposed, total liabilities to be settled, amount of revenues and expenses attributable to discontinuing operations and so on until disposal is complete

Accounting Standards : 

Accounting Standards AS 25 Interim Financial Reporting SEBI has made it mandatory for listed companies Must include B/S, P&L A/C, Cash Flow Statement and explanatory notes AS 26 Intangible assets Patents, copyrights, comp software, customer list, franchises, brands, G/W cannot be generated internally Cost must be reliably estimated and future benefits

Accounting Standards : 

Accounting Standards AS 27 Financial Reporting of Interests in Joint Ventures Proportionately AS 28 Impairment of Assets Impairment = Loss in value Asset is impaired when depreciated value > recoverable amount. Difference is called impairment

Accounting Standards : 

Accounting Standards An enterprise should assess the impairment issue at each balance sheet date Indicators of impairment – obsolescence, fall in market value and so on. In case of impairment the enterprise must assess the loss

Accounting Standards : 

Accounting Standards AS 29 Provisions, Contingent Liabilities and Contingent Assets Distinction between provisions and contingencies Provisions – amount based on estimation, recognised in Fin Statements Eg. Abandonment and restoration of quarry Contingent liability – possible or present obligation

Accounting Standards : 

Accounting Standards Eg: pending legal case No recognising contingent asset nor disclose

AS 30 Financial Instruments: Recognition and Measurement : 

AS 30 Financial Instruments: Recognition and Measurement issued by the Council of the ICAI, comes into effect on or after 1-4-2009 and will be recommendatory in nature for a period of two years. This Standard will become mandatory on or after 1-4-2011 for all commercial, industrial and business entities except to a Small and Medium-sized Entity

AS 30 Financial Instruments: Recognition and Measurement : 

AS 30 Financial Instruments: Recognition and Measurement Recognition and Derecognition Initial Recognition An entity should recognise a financial asset or a financial liability on its balance sheet when, and only when, the entity becomes a party to the contractual provisions of the instrument.

AS 30 Financial Instruments: Recognition and Measurement : 

AS 30 Financial Instruments: Recognition and Measurement A financial asset or financial liability meets either of the following conditions. (a) It is classified as held for trading Eg: Held-to-maturity investments Available-for-sale financial assets loans and receivables

AS 30 Financial Instruments: Recognition and Measurement : 

AS 30 Financial Instruments: Recognition and Measurement An entity should derecognise a financial asset when, and only when: (a) the contractual rights to the cash flows from the financial asset expire; or (b) it transfers the financial asset to one or more recipients

AS 30 Financial Instruments: Recognition and Measurement : 

AS 30 Financial Instruments: Recognition and Measurement An entity should remove a financial liability (or a part of a financial liability) from its balance sheet when, and only when, it is extinguished—i.e., when the obligation specified in the contract is discharged or cancelled or expires.

AS 30 Financial Instruments: Recognition and Measurement : 

AS 30 Financial Instruments: Recognition and Measurement Measurement Upon initial recognition it is valued at fair value by the entity Short-term receivables and payables with no interest rate should be measured at original invoice amount Subsequently it should be measured at amortised cost using the effective interest method.

AS 31 Financial Instruments: Presentation : 

AS 31 Financial Instruments: Presentation applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument.

AS 31 Financial Instruments: Presentation : 

AS 31 Financial Instruments: Presentation For eg, a preference share that provides for redemption on a specific date or at the option of the holder contains a financial liability. a debenture that is convertible by the holder into a fixed number of equity shares of the entity is a compound financial instrument. From the perspective of the entity, such an instrument comprises two components: a financial liability and an equity instrument.

AS 31 Financial Instruments: Presentation : 

AS 31 Financial Instruments: Presentation Interest, dividends, losses and gains relating to a financial instrument should be recognised as income or expense in the statement of profit and loss.

AS 32 Financial Instruments: Disclosures : 

AS 32 Financial Instruments: Disclosures To evaluate the significance of financial instruments for its financial position and performance. Qualitative disclosures For each type of risk arising from financial instruments, an entity should disclose: (a) the exposures to risk and how they arise; (b) how it is managing the risk and the methods used to measure the risk;

AS 32 Financial Instruments: Disclosures : 

AS 32 Financial Instruments: Disclosures Quantitative disclosures For each type of risk arising from financial instruments, an entity should disclose: (a) summary quantitative data about its exposure to that risk . This disclosure should be based on the information provided internally to key management personnel (c) Concentrations of risk if not apparent from (a) and (b).

AS 32 Financial Instruments: Disclosures : 

AS 32 Financial Instruments: Disclosures Credit Risk Liquidity Risk Market Risk comprises three types of risk: Currency risk, Interest rate risk and Other Price risk. other price risk caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the Market other than currency and interest rate risks.

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