Introduction to accounting standards

Introduction to Accounting Standards

CA. Dhruv Sethds@sethspro.com

1Background &

Authority

2Reporting Standards

3Compliance Standards

Accounting Standards

Background & Authority1

Publications by ICAI

• Accounting Standards

• Guidance Notes

• Expert Opinion

Evolution of standards

Accounting Standards

Initiation

AS 1 to AS 15 1979 to 1995

AS 16 to AS 29 2000 to 2007

AS 30 to AS 32 Later part of 2007

Applicability of Standards

Accounting Standards Level I

Level II

Level III

AS 1 to 14 (except AS 3), 15, 16, 19, 20, 22, 25, 26, 28 and 29

a a a

AS 3 and 17 a r rAS 18 and 24 a a rAS 21, 23 and 27 (Only if entity prepares consolidated financial statements)

a r r

2 Reporting Standards

 AS-1Disclourse of Accounting Policies

Fundamental Accounting Assumptions• Going Concern• Consistency• Accrual

Consideration in selecting policies• Prudence• Substance over form• Materiality

 AS-1-Disclourse of Accounting Policies

• To ensure proper understanding by adequate disclosures

• Any change in accounting policy which affects the reader

• The amount of effect due to such policy change to be highlighted

 AS-3Cash Flow

• Depicts Incoming and Outgoing of Funds

• Highlights the true operations

• Cash flow into three sub sections :-• Operating Activities• Financing Activities• Investing Activities

A. CASH FLOW FROM OPERATING ACTIVITIESNet Profit\(Loss) before tax as per Profit & Loss Account 17,38,571.28 Adjusted for:-Add:- non cash DebitsDepriciation \ Amortisation \Impairment 11,55,197.00 Interest and Finance Charge (73,083.67)

10,82,113.33 Operating Profit before Working Capital Changes 28,20,684.61 Adjusted for:-(Increase)\Decrease in Trade & other receivables (5,52,562.00)(Increase)\Decrease in Inventories (3,61,023.00)Increase\(Decrease) in Trade Payable & other payable 12,17,969.75

3,04,384.75 Net Cash from Operating Activities 26,73,106.36

B. CASH FLOW FROM INVESTING ACTIVITIESPurchase of fixed Assets (19,96,544.00)Sale of Fixed Assets 0.00 Net Cash from\(used in) Investing Activities (19,96,544.00)

C. CASH FLOW FROM FINANCING ACTIVITIESIncrease\(Decrease) in Long Term Borrowings (1,83,081.03)Interest and Finance Charge 73,083.67

Net Cash from\(used in) Financing Activities (1,09,997.36)Net Increase / (Decrease) in Cash and Cash Equivalents 5,66,565.00 Opening Balance of Cash & Cash Equivalents 15,58,060.59 Closing Balance of Cash & Cash Equivalents 21,24,625.59

Particulars Amount CY Amount PY

Net profit 1,000 --------------

Depreciation 500 --------------

Interest Income 200 --------------

Miscellaneous Expenses W/off 200 --------------

Sundry Debtors 800 1,000

Sundry Creditors 1,000 1,300

Share Capital 500 600

Long Term Borrowings 300 400

Fixed Assets 600 500

Closing Stock 500 700

Cash and Bank 1,500 1,200

 Cash Flow

Particulars Amount CY

Net profit 1,000

Add: Depreciation (Non Cash Item) 500

Less: Interest Income (Finance Income) (200)

Add: Miscellaneous Expenses W/off 200

SUB TOTAL 1,500

Change in Sundry Debtors 200

Change in Sundry Creditors (300)

Change in Inventory 200

Cash Flow from Operating Activities 1,600

 Cash Flow

Particulars Amount CY

Cash Flow from Investing Activities

Less: Increase in Fixed Assets (100)

Add: Interest Income (Finance Income) 200

Cash Flow from Investing Activities 100

Cash Flow from Financing Activities

Reduction in Long Term Borrowings (100)

Reduction in Share Capital (100)

Cash Flow from Financing Activities (200)

 Cash Flow

Particulars Amount CY

Cash Flow from Operating Activities 1,600

Cash Flow from Investing Activities 100

Cash Flow from Financing Activities (200)

CASH Flow for the year 1,500

Cash and Bank Balance 1,500

 Cash Flow

 AS-4 - Contingencies and events occurring after B/s date

• Accounting treatment for

• Contingent Losses

• Contingent Gains

• Determination of amounts in case

to be included

 AS-4 - Contingencies and events occurring after B/s dateEvents occurring after the balance sheet date are those significant events, both favorable and unfavorable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company, or by the corresponding approving authority in the case of any other entity.(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.

 AS-5 Net profit for the period, prior period and change in accounting policy

• Net Profit for the period

• Profit and Loss from ordinary

activity and

• Extraordinary items

 AS-5 Net profit for the period, prior period and change in accounting policy

• Prior Period Items

• Arose in the current period

• As a result of

• Error OR

• Omission

in any previous prior year

 AS-5 Net profit for the period, prior period and change in accounting policy

• Change in Accounting Estimate

• Change in Accounting Policy

• Required by a statue OR

• Compliance with an AS OR

• More appropriate presentation

 AS- 13 Accounting for Investments

• Investment Defined as

• Current Investment

• Long Term Investment

• Investment Property

 AS- 13 Accounting for Investments

Carrying Amounts

• Current Investment

• Lower of Cost of FMV

• Long Term Investment

• Generally carried at cost unless

permanent diminution

 AS- 13 Accounting for Investments

Disclosures

• Accounting Policies undertaken

• Classification of Investments

• Amounts in P&L (Interest, Profit etc.)

• Restriction on ownership, realisability

• Other disclosures as per statues

 AS- 17 Segment Reporting

Disclosures

• Primarily two segment reporting

• Business Segment

• Geographical Segment

• Reportable Segment

• Greater than 10% of revenue OR

• Management discretion

 AS- 18 Related Party

Disclosures

• Related Parties are those that :-

• Control OR

• Significantly Influence

The management or operating

policies of the entity during the

reporting period.

 AS- 18 Related Party

Disclosures

• Related Party relationships

• Nature of transactions between them

• Volume of Transactions

• Amounts written off with regard to

them

• Amounts Outstanding as on B/s date

 AS- 20 Earnings per share

Disclosures

• Types of Calculation

• Basic

• Diluted

 AS- 22 Accounting for Taxes

• Types of disclosure

• Current Year Tax

• Deferred Tax

 AS- 23 Accounting for investment in Associates

Objectives to set out • Principles and • Procedures for recognizing the investment associates in CFS of the investors, so that effect of investments in associates on financial position of group is indicated.

 AS- 24 Discontinuing Operations

• Discontinuing Operation

• Disposing off substantial part of the

enterprise

• Terminating through abandonment

• Represents separate major line of

business

• Can be distinguished

 AS- 25 Interim Financial Reporting

• Reporting for less than a year i.e 3 months

• Clause 41 says publish financial results on quarterly basis.

• Objective is to provide frequently and timely assessment

 AS- 29 Provision, Contingent Liability and assets

• Provision – is a liability measured using substantial estimation

• Liability – Present obligation arising from past events which is expected in an outflow of resources

• Obligating Event – Enterprise having mo alternative other than settlement

 AS- 29 Provision, Contingent Liability and assets

• Provision to be recognized when:-• Present obligation exists• Outflow of resources would occur• Reliable estimate

All the above conditions to be satisfied cumulatively in order to warrant a provision in books

 AS- 29 Provision, Contingent Liability and assets

Compliance Standards 3

 AS- 2 Valuation of Inventories

Inventories are assets :-• Held for sale in ordinary course• In the process of production for such

sale OR• Materials or supplies for rendering

productionNet Realizable value :-• Estimated selling price in the

ordinary course less estimated completion and sales cost

 AS- 2 Valuation of Inventories

Cost of Inventory• Compromise all costs of purchase• Cost of Conversion• Other costs in bringing the

inventories to their present location and condition

 AS- 2 Valuation of Inventories

Exclusions from Cost of Inventory• Abnormal wastage• Storage costs unless for production• Administrative overheads • Selling and distribution costs

 AS- 2 Valuation of Inventories

• Inventories comprise of • Raw Materials• Work in Progress• Finished Goods• Spares etc.• DOES NOT INCLUDE

• Shares and securities• Livestock or agricultural goods• Construction contracts

 AS- 6Accounting for Depreciation

Exclusions from Standard

• Forest, Plants or natural resources

• Expenditure on R&D

• Goodwill and Intangibles

• Live Stock

• Land unless limited useful life

 AS- 6Accounting for Depreciation

Depreciation is a measure of• Loss of value arising from

• Use• Effluxion of Time• Obsolesce through technology

• Measured for a charge of fair proportion over the expected life of the asset

 AS- 6Accounting for Depreciation

• Should be applied consistently

• Change of method is change in accounting policy (retrospective working required)

• Change in life of asset to be applied prospectively since change in estimate

 AS- 6Accounting for Depreciation

• Reviewed periodically for technological degradation

• Addition which becomes integral part to be written off in same manner

• Disclose the rate of depreciation if different from the one in statue

 AS- 10Accounting for Fixed Assets

Fixed Asset is :-

• Held with an intention of being used

• For the purpose of production

• Not held for sale in the normal course of business

 AS- 10Accounting for Fixed Assets

Components of costs

• Attributable costs in bringing the asset to its working condition :-• Site preparation• Initial delivery• Installation costs• Freight• Professional fees• Startup costs

 AS- 10Accounting for Fixed Assets

Improvements and Repairs

• Expenses to be capitalized when

• Increases the future benefits• Material in nature

 AS- 10 Accounting for Fixed Assets

Particulars IT Act ASMethod of Depreciation W.D.V W.D.V or S.L.M.

Rates of Depreciation As in IT Rules Sch XIV of CA, 1956

Concept of Grouping Block of Asset Each asset separately

Change in Method Not Allowed Allowed

Depreciation Full or Half Year Day wise pro-rata

Revaluation Not Allowed Allowed

Asset disposed off To continue in block To be written off

Depreciation in Sale Not Allowed Day wise pro-rata

 AS- 7 Construction Contracts

•Both percentage of completion method and the completed contract method allowed

• Applies to Contractors & Developer\Builders

AS-7 OLD NEW

• Only percentage of completion method allowed

• Applies to Contractors only

 AS- 7Construction Contracts

• Large contracts only bifurcated :-• Separate proposals for each• Each asset subject to individual

negotiation• Cost and revenue can be identified

 AS- 7Construction Contracts

Cost which do not form part of construction cost and require write off:-

• General Administration costs• Selling costs• R&D costs• Depreciation of idle P&M

 AS- 7Construction Contracts

• Expected Loss from a contract to be recognized immediately; else

• Revenue to be recognized only to the extent contract costs incurred and recovery of same is probable.

• Change in contracts costs to be treated as change in estimate.

 AS- 7Construction Contracts

Example of Percentage completion

Cost of Construction – Rs. 150 crore

Time Period of construction – 3 years

Contracted Price – Rs. 200 crore

Estimated Profit – Rs. 50 crore over 3 years

 AS- 7Construction Contracts

Particulars Year 1 Year 2 Year 3

Cost Incurred 40.00 90.00 140.00

Percentage Completion 25% 60% 100%

Revenue Recognized 50.00 70.00 80.00

25% of 200

60% of 200 less last years

Balance

Cost to be debited 40.00 50.00 60.00

Profit for the year 10.00 20.00 20.00

 AS- 7 Construction Contracts

Particulars Year 1 Year 2 Year 3

Cost Incurred 40.00 90.00 180.00

Percentage Completion 25% 50% 100%

Revenue Recognized 50.00 50.00 100.00

25% of 200

50% of 200 less last years

Balance

Cost to be debited 40.00 50.00 90.00

Profit for the year 10.00 0.00 10.00

2nd Year cost estimate at revised 180 cr

 AS- 7 - Construction Contracts

Particulars Year 1 Year 2 Year 3

Estimated Total Cost 1,000.00

Estimated Construction Cost 600.00

Estimated Revenue 1,500.00

Total Cost incurred 500 700 1000

Construction Cost Incurred 100 300 600

Area Sold 15% 30% 100%

Amount Received from customers 200 400 1500

Eligible Customer Contracts 1000 1200 1500

 AS- 7 Construction Contracts

Particulars Year 1 Year 2 Year 3

Development Cost Incurred 100 300 600

Percentage Completion 16.67% 50.00% 100.00%

Revenue Recognized 0.00 600.00 900.00

Since less than 25%

50% of 1,200 less last years

Balance

Cost to be debited 0.00 500.00 500.00

Profit for the year 00.00 100.00 400.00

Work in Progress (Balance Sheet) 500.00 200.00 0.00

 Guidance Note – Real Estate revenue recognition

Revenue to be recognized when :-• All major clearances received AND• Project is completed 25% of

construction costs. AND• Atleast 25% of the saleable project

area is secured by contracts AND• Atleast 10% of the amount in the

above contracts have been received

 AS- 9Revenue Recognition

Revenue is the :-

• Gross Inflow

• In the course of Ordinary activities

• Exception – Commission Agency

 AS- 9Revenue Recognition

Methods of Revenue recognition

• Completed Service Contract Method

• Proportionate completion method

• Exception – Commission Agency

 AS- 9Revenue Recognition

Point of Revenue recognition

• Transfer of Risk and Rewards

• Certainty of realization

• Interest – Time basis

• Dividend – Right to receive is established

 AS- 9Revenue Recognition

Point of Revenue recognition

• Delivery delayed at buyers request• Delivery subject to installation• Consignment Sale• Cash on Delivery sale• Sale on Installments• Treatment of Bulk Trade discounts• Advertisement• Admission fees for 10 years

 AS-11Effect of Foreign Exchange

Important Definition

Monetary Items – Money held and assets and liabilities to be received or paid in fixed or determinable amounts of money

Non Monetary Items – Assets and liabilities other than monetary items

 AS-11Effect of Foreign Exchange

Initial Recording

• At the prevalent transaction exchange rate

Subsequent reporting dates• Monetary Items – Revalued• Non monetary Items – HistoricalRevaluation charged to P&L

 AS-12Accounting for Government Grants

Government means

• Government agencies and similar bodies whether local, national or international

Approaches for recognition• Capital Approach• Income Approach

 AS-12Accounting for Government Grants

Point of Recognition

• Reasonable assurance that the enterprise would comply to the conditions attached; AND

• Benefits have been earned and reasonable certainty that the ultimate collection would be made.

 AS-16Borrowing Costs

Borrowing Cost to be capitalized when• Assets is a qualifying asset• Without the asset such cost would not

have occurred at all

Types of Borrowing Cost• Specific Borrowing• General Borrowing

 AS-16Borrowing Costs

Under Income Tax Act, 1961

• Explanation 8 to Sec 43(1) read with Sec 36(1) the treatment of Interest is to be –• Capitalize in Asset till the date it is

first put to use• Write off to P&L after asset has

been first put to use

 AS-16Borrowing Costs

Cessation of capitalization

• Accounting Standard 16• Substantially all the activities are

over for intended use or sale

• Income Tax Act 1961• Once the asset has been actually

put to use

 AS-19 Leases

Classification of Leases• Finance Lease• Operating Lease

Allow ability of Depreciation (AS-6)• Finance Lease - Lessee• Operating Lease – Lessor

Allow ability of Depreciation (IT Act)• Finance or Operating - Lessor

 AS-26 Intangibles

Intangible Asset• Identifiable• Non monetary assets• Without physical substance• Held for use of production or supply

Asset• Controlled by an enterprise• With future economic benefits

 AS-26 Intangibles

Difference between Accounts and treatment in Income Tax Act, 1961

• Preliminary Expenses• Heavy Advertisement Expenses• Advance lease rental for next 5 years• Stamp papers for the above rental• Research Expenses

THANK YOU

Dhruv Sethds@sethspro.com