Indian Acct Standard and US GAAP

8/12/2019 Indian Acct Standard and US GAAP

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Accounting Standards are the rules basedupon which the accounts of any company areexpected to prepare.

These are written policy documents issued byexpert accounting body or by Government orby other Regulatory body covering the

aspects of recognition, measurement,presentation and disclosure of accountingtransactions in the financial statements.

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The ostensible purpose of the standard settingbodies is to promote the dissemination oftimely and useful financial information toinvestors and certain other parties having aninterest in the companys economicperformance.

Accounting standards reduce the accounting

alternatives in the preparation of financialstatements within the bounds of rationality,thereby ensuring comparability of financialstatements of different enterprises.

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Accounting standards deal with the issues of:

i) recognition of events and transactions inthe financial statements,

ii) measurement of these transactions andevents

iii) presentations of these transactions andevents in the financial statement in a mannerthat is meaningful and understandable to the

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iv) the disclosure requirements which shouldbe there to enable the public at large and thestakeholders and the potential investors inparticular, to get an insight into what thesefinancial statements are trying to reflect andthereby facilitating them to take prudent andinformed business decisions.

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Accounting standards standardize diverseaccounting policies with a view to eliminate,to the maximum possible extent,

i) the non-comparability of financialstatements and thereby improving thereliability of financial statements, and

ii) to provide a set of standard accountingpolicies, valuation norms and disclosurerequirements.

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Institute of Chartered Accountants of Indiaissues the accounting standards in India.

International Accounting StandardsCommittee (IASC), the group responsible formaking the International Accounting

Standards (IAS) in the year 1973.

IASC = IASB

Intl Financial Reporting Standards - IFRSs

US GAAP

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32 Accounting standards issued. However, AS

- 8 (Accounting for Research andDevelopment ) was withdrawn on introductionof AS 26 (Intangible assets)

Hence effectively there are 31 accountingstandards at present.

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Disclosure of accounting policies

Objective is to promote a better

understanding of the financial statement by aproper disclosure of significant accountingpolicies. Accounting policies refer to specificaccounting principals and the methods of

applying those principals in the preparationand presentation of financial statements.

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1) All significant accounting policies adopted

should be disclosed. 2) Disclosure should form part of the

financial statement and should disclose atone place.

3) Any change in accounting policy, having amaterial effect on financial statement, shouldbe disclosed.

4) Basic assumptions are to be followed. Ifnot followed, the fact should be disclosed.

5) Management should select policies on theground of Prudence, Substance over form and

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Valuation of Inventories

Objective of this AS is to determine the valueof the stock or inventories to be carried tofinancial statements, until the goods are soldand revenue is recognized.

Inventories mean the assets which are:

i) Held for sale in the ordinary course ofbusiness

ii) In the process of production for sale, or iii) Held in the form of material or supplies to

be consumed in the process of production orrendering of service

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This AS is not applicable to:

i) W I P arising under a construction contract, ii) W I P arising in the ordinary course of

business of service providers

iii) Shares, debentures, bonds and otherfinancial investment purpose instruments,held as stock in trade by financial servicescompanies

iv) Producers inventory of live stock, agri-products, forest products, mineral oil, Oresand gases to the extent that they aremeasured at the net realisable value.

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Valuation of inventories should be based on

the lower of cost or the net realisable value.

Following cost are to be excluded as cost ofinventories:

1) Abnormal amount of wasted material,labour and production cost,

2) Storage cost,

3) Administration cost which do notcontribute movement of inventory

4) Selling and distribution cost

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Generally the inventories are to be valued asper FIFO or weighted average cost, but for theitems that are not ordinarily interchangeableand for goods and service produced forspecific projects, one should use the specificidentification method.

Examples

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Cash Flow Statements

Objective of issuing this AS is to provide theusers of financial statements, with a basis toassess the ability of the enterprise to

generate cash and cash equivalents and theneeds of enterprise to utilise those cashflows.

Mandatory from FY 2004 for followingcategories of enterprises

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Enterprises whose equity or debt securities are

listed whether in India or outside India.

Enterprises which are in the process of listing theirequity / debt securities, as evidenced by the BODs

resolution in this regard.

Banks including cooperative banks.

Financial institutions.

Enterprises carrying on insurance business.

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All commercial, industrial and business reporting

enterprises, whose turnover for the immediatelypreceding accounting period on the basis ofaudited financial statements exceeds Rs.50 crs.

All commercial, industrial and business reportingenterprises, having borrowings, including publicdeposits, in excess of Rs.10 crs at any time duringthe accounting period.

Holding and subsidiary enterprises of any one ofthe above at any time during the accountingperiod.

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For extra ordinary items, a separate disclosure

after classification into operating , financing andinvesting activities, is to be made.

Along with the commentary by management, a

cash flow statement should disclose the amount ofthe significant cash or cash equivalent balancesheld by the enterprises that are not available foruse by it.

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Contingencies and Events occurring after the

balance sheet date

This AS deals with any events occurred after thebalance sheet date but before approval of BalanceSheet by BOD. This is because the accounting ismade on the accrual method and after followingprudent accounting policies. Prudent accountingpolicies require the making of provisions for allknown liabilities and losses, even for those

liabilities or events which are only probable. Significant events.

Example

AS 29 deals with contingencies

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Provisions, Contingent liabilities and

Contingent assets

Mandatory from FY 2004

Provisions are liabilities that can be measuredonly by using a substantial degree ofestimation. The term provision is also used in

the context of items such as depreciation,impairment of assets and doubtful debts.

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Above are the adjustments to the carrying

amounts of assets and are not addressed inthis statement.

A provision should be recognised when: An enterprise has a present obligation as

result of past event,

It is probable that an outflow of resources

embodying economic benefits will berequired to settle the obligation; and

A reliable estimate can be made of theamount of obligation.

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Provision is measured before tax.

Future events that may affect the amountrequired to settle an obligation should be

reflected in the amount of a provision wherethere is sufficient objective evidence that theywill occur.

Contingent Liabilities -

A contingent liability is -

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1) A possible obligation that arises from past

events and the existence of which will beconfirmed only by the occurrence or nonoccurrence of one or more uncertain futureevents, not wholly within the control of the

enterprise; or 2) A present obligation that arises from past

events but is not recognised because i) it isnot probable that an outflow of resources

embodying economic benefits will berequired to settle the obligation; or ii) areliable estimate of the amount of theobligation can not be made.

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Contingent liabilities to be dealt with as

follows

An enterprise should not provide for acontingent liability,

Should be disclosed, To be assessed continuously as these

liabilities may develop in a way not initiallyexpected,

In case of joint and several liability, part ofthe obligation to be met by others to betreated as contingent liability

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Contingent Assets

A contingent asset is a possible asset thatarises from past events, the existence ofwhich will be confirmed only by theoccurrence or non occurrence of one or moreof uncertain future events, not completelywithin the control of the enterprise.

It dealt with in the following manner Not to be recognised i.e. provided for

Not to be disclosed

To be assessed continuously

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Disclosure requirements

For each class of provision, an enterpriseshould disclose:

The carrying amount at the beginning and

end of the period, Additional provision made in the period,

including increases to existing provisions,

Amount used during the period and Unused amount reversed during the period

Chart, Example, B/S T page 118

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Net profit or loss for the period, Prior period items

and the Changes in accounting policies

Objective of this AS is to prescribe theclassification and disclosure of certain items in the

statement of P&L, so that all the enterprisesprepare and present such a statement on anuniform basis.

Implications

1. Any P&L from Ordinary activities and Extraordinary activities should be disclosed on the faceof the statement of P&L.

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2. Extra ordinary items should be disclosed as a part

of the P&L account, but the nature and amount ofeach such item should be separately disclosed inthe statement of P&L account.

3. If any item of income and expenditure from

ordinary activity is of such nature, size or incidencethat their disclosure is relevant so as to explain theperformance of the enterprise for the period, thenature and amount of such items should bedisclosed separately. Such as writing down of

inventories as well as reversal of such written downamount, restructuring of activities and reversal ofany provision, disposal of fixed assets, disposal oflong term investments and litigation settlements

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4. The nature of prior period items and their

amounts should be separately disclosed in the P&Laccount, in a manner that their impact on thecurrent Profit or loss can be perceived.

5. Prior period items should always be distinguished

from estimates.6. Change in accounting estimates, having a material

effect in the current / future period, should bequantified and if the quantification is not possible,

the fact that such quantification is not possibleshould be disclosed.

Example

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Regulations for Depreciation Accounting

Objective of issuing this standard is to suggestways to account for depreciation in the books ofaccounts of a company under differentcircumstances.

AS 6 defines Depreciation as a measure of thewearing out, consumption or other loss of value ofa depreciable asset, arising from use, effluxion of

time or obsolescence through technology andmarket changes.

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Depreciable assets are the assets which:

Are expected to be used during one or more accountingperiods,

Have a limited useful life; and

Are held by a company for use in production or supply of

goods or services, for rent to others or for administrativepurpose, but not for the purpose of sale.

If the management, after making an estimate, feels that therates of depreciation should be higher than the rates

prescribed by the statute, then it is allowed to use a higherrate. But , if the management wants to change the same to alower rate, the change is required to be in accordance withthe requirements of the statute.

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Any change in the method of depreciation is

allowed only if; It is required by the statute.

It is needed for compliance with the AS, or

It is required for a better presentation of the

financial statements.

AS 6 is not applicable on assets, such as: Forests,plantations and similar regenerative natural

resources, wasting assets such as expenditure onexploration for mineral, oils and natural gas,expenditure on R&D, goodwill, Live stock and Landunless it has a limited useful life for the enterprise.

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Disclosure requirements of AS 6:

The depreciation method is used to be mentionedalong with the total amount of depreciation for eachclass of asset, gross amount of each class ofdepreciable asset and the accumulated depreciation.

In case of modernisation, the depreciation is based onthe revalued amount over the remaining life of theasset. Hence if modernisation has a material effect onthe amount of depreciation, it should be disclosed.

A change in method of depreciation results in achange in the accounting policy, which needs to bedisclosed clearly, with the reasons for the change beingmentioned.

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Norms for revenue recognition

The objective of issuing this AS is to provide abasis for recognition of revenue in the books ofaccounts of an enterprise.

This statement is concerned with the recognitionof revenue arising in the course of ordinaryactivities of the enterprise, from sale of goods,

rendering of service and use of enterpriseresources (by others) yielding interest, royaltiesand dividends.

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ale of goodsIn case of SOG, the following conditionsshould be satisfied:

- The goods are transferred to buyer for a price,wherein all the significant risks and rewards ofownership have been transferred to the buyer.

- No significant uncertainty exists regarding theamount of consideration that will be derived from thesale of goods.

In case of services, the execution is measured eitherunder the completed service contract method or underthe proportionate completion method, whicheverrelated revenue to the work carried out. Also thecertainty regarding the amount to be collected to exist.

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The revenues from royalties, interest and dividends

to be recognised on the following basis:

Interest on a time period proportionate basis ofthe amount outstanding, at applicable rates.

Royalties As per terms of agreements , on accrualbasis

Dividend when the owners right to receive thepayment is established.

AS 9 not applicable to revenues from constructioncontracts, hire purchase, lease agreements,government grants and insurance companies.

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Accounting for Fixed Assets

Objective of issuing this standard is to provideguidelines for the valuation and disclosure ofcertain information relating to fixed assets owned

by an enterprise, in its books of accounts.

A Fixed asset, as per this accounting standard is anasset held with intention of being used for the

purpose of producing (or providing) goods andservices, and it is not held for sale in the normalcourse of business. Land, Building and Machineryare good examples of fixed assets.

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Requirements

Fixed assets should be shown in the balance sheeteither at their historical cost or at their revaluedfigures. If the FA is acquired in exchange of

another asset, the cost should be the value of theasset forgone.

If a revaluation is planned, an entire class of assetsshould be revalued, or the selection of assets for

revaluation should be made in a systematic basis,and the basis should be disclosed.

In case of revaluation, the increase in the valueshould be credited to the revaluation reserve.

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In case of disposal of assets, the difference between the

net proceeds and the net book value should be chargedor credited to P&L account.

In case of joint ownership of fixed assets, theenterprises share in such asset and the proportion oforiginal cost and accumulated depreciation , are to be

disclosed in the B/S of the enterprise. In case of goodwill, only the amount of purchased

goodwill is to be shown. If a business is purchased, theamount of goodwill is calculated as the excess of pricepaid over the value of assets taken.

For patents, the direct cost attributable to the patentsshould be capitalised and written off over their legalterm of validity or working life, whichever is lower.

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For know-how, the amount paid for plans, layouts,

designs of buildings or machinery should be capitalisedunder the relevant asset head, that is building, plant,machinery etc. and the depreciation is calculated on thewhole amount.

The gross and net value of fixed assets at he beginningand end of the accounting period, should be disclosed,showing the additions, disposals, acquisitions and othermovements.

Expenditure incurred on construction or acquisitionshould be disclosed.

Revaluation amount, if any, substituted for the historicalvalue should be disclosed.

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Norms for consolidated financial statements

The shareholders of a parent company would beinterested in not only having the financials of theparent company but also the combined

performance of the company and its sisterconcerns. The presentation of combined financialstatements is known as consolidated financialstatements.

Consolidated financial statements are presented bya parent or holding enterprise, to provide financialinformation about the economic activities of itsgroup.

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Separate financial statements for Parent andConsolidated financial statement for the Group needs tobe published.

Consolidation process

While preparing consolidated financial statements, thefinancial statements of the parent and its subsidiariesshould be combined on a line by line basis, by addingtogether like items of assets, liabilities, income andexpenses.

The cost to the parent, of its investment in eachsubsidiary and the parents portion of equity of eachsubsidiary, at he date on which the investment is madeshould be eliminated.

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Any excess / shortage of the cost of the parent of

its investment in its subsidiary against the parentsportion of equity, should be described as Goodwillor Capital reserve in consolidated statement.

Intragroup balances and intragroup transactionsand the resulting unrealised profits / losses shouldbe eliminated in full.

Consolidated financial statements should beprepared using uniform accounting policies for liketransactions and other events in similar

circumstances. If not practicable, it should bedisclosed

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Additional disclosure requirements

A list of all subsidiaries, including the name,country of incorporation or residence, proportionof ownership interest and if different, proportion of

voting power held. Wherever applicable, the nature of the relationship

between the parent and a subsidiary, if the parentdoes not own more than one-half of the votingpower of the subsidiary.

The names of subsidiaries of which reporting datesare different from that of the parent and thedifference in reporting dates.

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Accounting for Taxes on income

The objective of issuing this accounting standard is toprovide a guideline, based upon which, the tax onincome is required to be accounted for.

Deferred Tax Deferred tax according to this AS is thetax effect of timing differences. Timing differences arethe differences between taxable income and accountingincome for a period that originate in one period and

which are capable of reversal in one or moresubsequent periods. e.g. the expenses debited instatement of P&L for accounting purposes, but allowedfor tax purposes in subsequent years.

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Permanent differences are the differences between taxable

income and accounting income for a period that originate inone period and do not reverse subsequently. e.g. whilecomputing taxable income, the tax laws disallow a part orwhole of an item of expenditure.

Deferred tax liability It is the amount of temporarydifference that will result in a payment of tax in future years.In some cases, the tax laws allow a company to deductcertain expenses totally in a single year, but the managementwants to phase out the charges over a number of years. e.g.

on some assets, the IT Act permits complete depreciation (orhigher rates of depreciation), compared to the depreciationprovided in the statement of P&L.

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Deferred tax asset - It is the amount of temporary

differences that will result in deductible amounts infuture years. These are cases where the companiescharge off duty, cess and tax dues against profits,when they become due, but they would be

recognised for tax computation only when actuallypaid. Similar is the case with other expenses thatare not allowed as per IT act. In such cases, acompany is actually pre paying taxes pertaining tofuture years.

Example

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Disclosure requirements:

Deferred Tax assets and Liabilities should bedistinguished from assets and liabilitiesrepresenting current tax for the period. Separate

heading under B/S. Break up of deferred tax assets and liabilities into

major components of the respective balances,should be disclosed in the notes to accounts.

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Accounting for Intangible Assets It requires an

enterprise to recognise an intangible asset if, andonly if, certain criteria are m. AS 26 has made thismandatory and the following AS stand withdrawn:

AS 8 Accounting for R & D

AS 6 Dep. respect to amortisation of Intangibleassets

AS 10 Accounting for FA specific para related toIntangible assets

This AS is to be applied by all enterprises, exceptthose enterprises dealing with financial assets andmining and other exploration rights.

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An intangible asset is an identifiable non monetary

asset, without physical substance, held for use inthe production or supply of goods or services, forrental to others, or for administrative purposes. Itis a resource controlled by an enterprise as a resultof past events; and from which, future economic

benefits are expected to flow to the enterprise.

An intangible assets should be measured initially,at cost. Internally generated intangibles such as

goodwill, should not be recognised as assets. Nointangible assets arising from research is to berecognised

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An IA arising from R&D can be recognised only ifthat enterprise can demonstrate its feasibility,ability to sell, generation of future economicbenefits, intention and availability of resources forcompletion and ability to measure the expenditure.

If any expenditure on an IA is recognised as an

expense in any year, the same cannot be a part ofthe cost of an IA at a later year.

An IA is to be amortised over its useful life in thepattern in which the assetseconomic benefits are

consumed or on a straight line method. A IA has to be de recognised on its disposal

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AS 7 Accounting for construction contracts

AS 8 Accounting for R&D (withdrawn aftermandatory AS 26)

AS 11 - Accounting for the effects of changes inforeign exchange rates

AS 12 Accounting for Government grants

AS 13 Accounting for investments

AS 14 Accounting for amalgamations

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AS 15 - Accounting for Retirement benefits of

employees

AS 16 Borrowing cost

AS 17 Segment reporting

AS 18 Related party disclosures

AS 19 Leases

AS 20 - EPS

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AS 23 Accounting for Investments in Associates inconsolidated statements

AS 24 Discontinuing operations

AS 25 Interim Financial reporting

AS 27 -Financial Reporting of interests in Joint Ventures

AS 28 Impairment of Assets

AS 30 Financial instruments: Recognition and Measurement

AS 31 Presentations of financial instruments

AS 32 Disclosures of financial instruments

Documents

Indian Acct Standard and US GAAP