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1.0 2.0 3.0 4.0 5.0 INTRODUCTION INTERNATIONAL ACCOUNTING STANDARD INDIAN ACCOUNTING STANDARD AS VIS-À-VIS IAS THE INDIAN ACCOUNTING STANDARDS ADOPTED IN MY ORGANIZATION COMPARISON OF A. S. WITH I. A. S. ANALYSIS OF COMPARISON OF STANDARDS IGAAP VS IFRS CONCLUSION BIBLIOGRAPHY 3 4 5 6 8 26 36
Accounting standards, based on a meaningful conceptual framework, are a pre-requisite to achieving intra-country and inter-country uniformity in accounting procedure & disclosure practices for accounting items & events. Accounting Standards are used as one of the main compulsory regulatory mechanisms for preparation of general-purpose financial reports and subsequent audit of the same, in almost all countries of the world. Accounting standards are concerned with the system of measurement and disclosure rules for preparation and presentation of financials statements. Accounting standards are devised to furnish useful information to different users of the financial statements, to such as shareholders, creditors, lenders, management, investors, suppliers, competitors, researchers, regulatory bodies and society at large and so on. In fact, such statements are designed and prescribed so as to improve & benchmark the quality of financial reporting. The rapid growth of international trade and internationalization of firms, the Developments of new communication technologies, the emergence of international competitive forces is perturbing the financial environment to a great extent. Under this global business scenario, the residents of the business community are in badly need of a common accounting language that should be spoken by all of them across the globe. A financial reporting system of global standard is a prerequisite for attracting foreign as well as present and prospective investors at home alike that should be achieved through harmonization of accounting standards. In India, the Statements on Accounting Standards are issued by the Institute Of Chartered Accountants of India (ICAI) to establish standards that have to be complied with to ensure that financial statements are prepared in accordance with generally accepted accounting standards in India (India GAAP ). Adopting IAS in India, it is taking average 6.13 years for one accounting standard. The deviations of Indian Accounting Standards from International Accounting Standards are mainly due to the legal and/ or regulatory framework prevailing in the country & state of economic environment in the country. However, to reap the benefits of globalization & liberalization, it is necessary the Indian Accounting Standards may be converged with International Accounting Standards. Hence, the purpose of present study is to analyze the comparison between Indian Accounting Standards with International Accounting Standards. *****
INTERNATIONAL ACCOUNTING STANDARDS (IAS)
Accounting bodies through out the world are striving to achieve a reasonable degree of uniformity in the accounting policies by prescribing certain accounting standard with respect to collection and presentation of accounting information. Between 1973 and 2001 the International Accounting Standards Committee (IASC) released International Accounting Standards. Between 1997 and 1999 the IASC restructured their organization. These changes resulted in the formation of the International Accounting Standards Board (IASB). These changes came into effect on April 1st 2001. The IASB approved the IASB Resolution on IASC Standards at their meeting in April 2001, which confirmed the status of all IASC Standards and SIC Interpretations in effect as of 1 April 2001. The IASB aims to develop a single set of high quality global accounting standards that require transparent and comparable information in general purpose financial statements. The international standards have assumed great importance in the recent times for the following reasons: a. Globalization of the economy has led to companies expanding their operations across the borders and this calls for uniformity in accounts of units located in different countries. b. Foreign investors would give more weight age to the accounts of those companies which are based on international accounting standard If there is any conflict between the international accounting standard and the local standards or the local laws and regulations, the local standards, laws and regulations will prevail. International Financial Reporting Standards (IFRS) On its formation in April 2001 the IASB announced that the IASC Foundation Trustees agreed that accounting standards issued by IASB would be designated "International Financial Reporting Standards". On May 23rd 2002 the IASB issued published a press release announcing the publication of the Preface to International Financial Reporting Standards which provided 'a brief description of the purpose and function of the main structures of the new arrangements for setting global standards'. The first IFRS was published in June 2003 (IFRS 1, First-time Adoption of International Financial Reporting Standards).
INDIAN ACCOUNTING STANDARDS:
In India, the Statements on Accounting Standards are issued by the Institute Of Chartered Accountants of India (ICAI) to establish standards that have to be complied with to ensure that financial statements are prepared in accordance with generally accepted accounting standards in India (India GAAP ). From 1973 to 2000 the IASC has issued 32 accounting standards. These standards, as a matter of fact, most of the countries in the world, which are interested, and confidence in adopting these standards may be followed. But it is observed that many countries are not adopting the standards in the presentation of accounting information. Adopting IAS in India, it is taking average 6.13 years for one accounting standard. This points out the poor research work, and development in the accounting field. While formulating Indian Accounting Standards, changes from the corresponding IAS/ IFRS are made only in those cases where these are unavoidable considering: • • • • Legal and/ or regulatory framework prevailing in the country. To reduce or eliminate the alternatives so as to ensure comparability. State of economic environment in the country Level of preparedness of various interest groups involved in implementing the accounting standards.
One of the major reason for the prevailing divergent accounting practices is the Accounting Standards, the provisions of the Income Tax Act 1961 and Indian Companies Act 1956 do not go together. Indian Accounting Standards (ASs) are formulated on the basis of the IFRSs. While formulating ASs, the endeavor of the ICAI remains to converge with the IFRSs. The ICAI has till date issued 29 ASs corresponding to IFRSs. Some recent ASs, issued by the ICAI, are totally at par with the corresponding IFRSs, e.g., the Standards on ‘Impairment of Assets’ and ‘Construction Contracts’
ANNEXURE-I THE LIST OF INDIAN ACCOUNTING STANDARDS VIS-À-VIS INTERNATIONAL ACCOUNTING STANDARDS
Sl No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. Accounting Standard recommended by the NACAS No. AS 1 AS 2 AS 3 AS 4 AS 5 AS 6 AS 7 AS 8 AS 9 AS 10 AS 11 AS 12 AS 13 AS 14 AS 15 AS 16 AS 17 AS 18 AS 19 AS 20 AS 21 AS 22 AS 23 International Accounting Standards (IASs) / International Financial Reporting Standards (IFRSs) No. Title of the Standard IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 7 Cash Flow Statements IAS 10 Events After the Balance Sheet Date Accounting Policies, Changes in Accounting Estimates and Errors Corresponding IAS has been withdrawn since the matter is now covered by IAS 16 and IAS 38 Construction Contracts Corresponding IAS has also been withdrawn. Revenue Property, Plant and Equipment The Effects of Changes in Foreign Exchange Rates Accounting for Government Grants and Disclosure of Government Assistance Corresponding IAS has been withdrawn since the matter is now covered by IAS 32, 39, 40 and IFRS 7 Business Combinations Employee Benefits Borrowing Costs Segment Reporting Related Party Disclosures Leases Earnings Per Share Consolidated and Separate Financial Statements Income Taxes Investments in Associates
Title of the Standard Disclosure of Accounting Policies Valuation of Inventories Cash Flow Statements Contingencies and Events Occurring after the Balance Sheet Date1 Net Profit or Loss for the Period, Prior IAS 8 Period Items and Changes in Accounting Policies Depreciation Accounting Construction Contracts Accounting for Research and Development [Withdrawn pursuant to AS 26 becoming mandatory] Revenue Recognition Accounting for Fixed Assets The Effects of Changes in Foreign Exchange Rates Accounting for Government Grants Accounting for Investments Accounting for Amalgamations Employee Benefits Borrowing Costs Segment Reporting Related Party Disclosures Leases Earnings Per Share Consolidated Financial Statements Accounting for Taxes on Income Accounting for Investments in Associates in Consolidated Financial
IAS 18 IAS 16 IAS 21 IAS 20
IFRS 3 IAS 19 IAS 23 IAS 14 IAS 24 IAS 17 IAS 33 IAS 27 IAS 12 IAS 28
24. 25. 26. 27. 28. 29.
AS 24 AS 25 AS 26 AS 27 AS 28 AS 29
Statements Discontinuing Operations4 Interim Financial Reporting Intangible Assets Financial Reporting of Interests in Joint Ventures Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets
IFRS 5 IAS 34 IAS 38 IAS 31 IAS 36 IAS 37 IAS 38 IAS 15 IAS 22 IAS 26 IAS 29 IAS 30 IAS 32 IAS 35 IAS 39 IAS 40 IAS 41
Non-current Assets Held for Sale and Discontinued Operations Interim Financial Reporting Intangible Assets Interests in Joint Ventures Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets Intangible Assets Information reflecting the effects of changing prices Business Combinations Accounting & Reporting by Retirement benefit plans Financial reporting in Hyperinflationary economies Disclosures in the Financial Statements of Banks & similar financial institutions Financial Instruments : Disclosure & Presentation Discontinuing Operations Financial Instruments: Recognition & Measurement Investment Property Agriculture
THE INDIAN ACCOUNTING STANDARDS ADOPTED IN MY ORGANIZATION
The following Indian Accounting Standards are being adopted in my Organization:
I) Accounting Standard (AS) 1 Disclosure of Accounting Policies
The following the text of the Accounting Standard –I issued by the accounting standard board, the institute of charted accountant of India on “ disclosure of the accounting policies”. The standard deals with the significant accounting policies followed in preparing financial statements. (This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context of the General Instructions contained in part A of the Annexure to the Notification.) Introduction 1. This Standard deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. 2. The view presented in the financial statements of an enterprise of its state of affairs and of the profit or loss can be significantly affected by the accounting policies followed in the preparation and presentation of the financial statements. The accounting policies followed vary from enterprise to enterprise. Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 3. The disclosure of some of the accounting policies followed in the preparation and presentation of the financial statements is required by law in some cases. 4. The Institute of Chartered Accountants of India has, in Standard issued by it, recommended the disclosure of certain accounting policies, e.g., translation policies in respect of foreign currency items. 5. In recent years, a few enterprises in India have adopted the practice of including in their annual reports to shareholders a separate statement of accounting policies followed in preparing and presenting the financial statements. 6. In general, however, accounting policies are not at present regularly and fully disclosed in all financial statements. Many enterprises include in the Notes on the Accounts, descriptions of some of the significant accounting policies. But the nature and degree of disclosure vary considerably between the corporate and the non-corporate sectors and between units in the same sector. 7. Even among the few enterprises that presently include in their annual reports a separate statement of accounting policies, considerable variation exists. The statement of accounting policies forms part of accounts in some cases while in others it is given as supplementary information. 8. The purpose of this Standard is to promote better understanding of financial statements by establishing through an accounting standard the disclosure of significant accounting policies and the manner in which accounting policies are disclosed in the financial statements. Such disclosure would also facilitate a more meaningful comparison between financial statements of different enterprises. Considerations in the Selection of Accounting Policies 16. The primary consideration in the selection of accounting policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policies should
represent a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the profit 17. For this purpose, the major considerations governing the selection and application of accounting policies are:— a. Prudence In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. b. Substance over Form The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form. c. Materiality Financial statements should disclose all “material” items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements. Disclosure of Accounting Policies 18. To ensure proper understanding of financial statements, it is necessary that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. 19. Such disclosure should form part of the financial statements. 20. It would be helpful to the reader of financial statements if they are all disclosed as such in one place instead of being scattered over several statements, schedules and notes. 22. Any change in an accounting policy which has amaterial effect should be disclosed. The amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted. 23. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts. MainPrinciples 24. All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. 25. The disclosure of the significant accounting policies as such should form part of the financial statements and the significant accounting policies should normally be disclosed in one place. 26. Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. 27. If the fundamental accounting assumptions, viz. Going Concern, Consistency and Accrual are followed in financial statements, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed.
II) Statements of Accounting Standards (AS 2) Revised Valuation of Inventories
(In this Accounting Standard, the standard portions have been set in bold italic type. These should be read in the context of the background material which has been set in normal type, and in the context of the 'Preface to the Statements of Accounting Standards'.) The following is the text of the revised Accounting Standard (AS) 2, 'Valuation of Inventories', issued by the Council of the Institute of Chartered Accountants of India. This revised Standard supersedes Accounting Standard (AS) 2, 'Valuation of Inventories', issued in June, 1981. The revised standard comes into effect in respect of accounting periods commencing on or after 1.4.1999 and is mandatory in nature. Objective A primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statements until the related revenues are recognised. This Statement deals with the determination of such value, including the ascertainment of cost of inventories and any write-down thereof to net realisable value. Scope 1. This Statement should be applied in accounting for inventories other than: (a) work in progress arising under construction contracts, including directly related service contracts (see Accounting Standard (AS) 7, Accounting for Construction Contracts); (b) work in progress arising in the ordinary course of business of service providers; (c) shares, debentures and other financial instruments held as stock-in-trade; and (d) producers' inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the extent that they are measured at net realisable value in accordance with well established practices in those industries. 2. The inventories referred to in paragraph 1 (d) are measured at net realisable value at certain stages of production. This occurs, for example, when agricultural crops have been harvested or mineral oils, ores and gases have been extracted and sale is assured under a forward contract or a government guarantee, or when a homogenous market exists and there is a negligible risk of failure to sell. These inventories are excluded from the scope of this Statement. Definitions 3. The following terms are used in this Statement with the meanings specified:
Inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
III) Statements of Accounting Standards (AS 3) Revised Cash Flow Statements
(In this Accounting Standard, the standard portions have been set in bold italic type. These should be read in the context of the background material which has been set in normal type, and in the context of the 'Preface to the Statements of Accounting Standards'.) The following is the text of the revised Accounting Standard (AS) 3, 'Cash Flow Statements', issued by the Council of the Institute of Chartered Accountants of India. This Standard supersedes Accounting Standard (AS) 3, 'Changes in Financial Position', issued in June, 1981. In the initial years, this accounting standard will be recommendatory in character. During this period, this standard is recommended for use by companies listed on a recognised stock exchange and other commercial, industrial and business enterprises in the public and private sectors. Objective Information about the cash flows of an enterprise is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation. The Statement deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities. Scope 1. An enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented. 2. Users of an enterprise's financial statements are interested in how the enterprise generates and uses cash and cash equivalents. This is the case regardless of the nature of the enterprise's activities and irrespective of whether cash can be viewed as the product of the enterprise, as may be the case with a financial enterprise. Enterprises need cash for essentially the same reasons,
however different their principal revenue-producing activities might be. They need cash to conduct their operations, to pay their obligations, and to provide returns to their investors. Definitions 5. The following terms are used in this Statement with the meanings specified: Cash comprises cash on hand and demand deposits with banks. Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Cash flows are inflows and outflows of cash and cash equivalents. Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activities are activities that result in changes in the size and composition of the owners' capital (including preference share capital in the case of a company) and borrowings of the enterprise.
IV) Statements of Accounting Standards (AS 5) Revised Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
(In this Accounting Standard, the standard portions have been set in bold italic type. These should be read in the context of the background material which has been set in normal type, and in the context of the 'Preface to the Statements of Accounting Standards'.) The following is the text of the revised Accounting Standard (AS) 5, 'Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies', issued by the Council of the Institute of Chartered Accountants of India. This revised standard comes into effect in respect of accounting periods commencing on or after 1.4.1996 and is mandatory in nature. It is clarified that in respect of accounting periods commencing on a date prior to 1.4.1996, Accounting Standard 5 as originally issued in November, 1982 (and subsequently made mandatory) will apply. Objective The objective of this Statement is to prescribe the classification and disclosure of certain items in the statement of profit and loss so that all enterprises prepare and present such a statement on a uniform basis. This enhances the comparability of the financial statements of an enterprise over time and with the financial statements of other enterprises. Accordingly, this Statement requires
the classification and disclosure of extraordinary and prior period items, and the disclosure of certain items within profit or loss from ordinary activities. It also specifies the accounting treatment for changes in accounting estimates and the disclosures to be made in the financial statements regarding changes in accounting policies. Scope 1. 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. 2. This Statement deals with, among other matters, the disclosure of certain items of net profit or loss for the period. These disclosures are made in addition to any other disclosures required by other Accounting Standards. 3. This Statement does not deal with the tax implications of extraordinary items, prior period items, changes in accounting estimates, and changes in accounting policies for which appropriate adjustments will have to be made depending on the circumstances. Definitions 4. The following terms are used in this Statement with the meanings specified: Ordinary activities are any activities which are undertaken by an enterprise as part of its business and such related activities in which the enterprise engages in furtherance of, incidental to, or arising from, these activities. Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly. Prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. Accounting policies are the specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements. Net Profit or Loss for the Period 5. All items of income and expense which are recognised in a period should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise. 6. Normally, all items of income and expense which are recognised in a period are included in the determination of the net profit or loss for the period. This includes extraordinary items and the effects of changes in accounting estimates.
7. The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the statement of profit and loss: (a) profit or loss from ordinary activities; and (b) extraordinary items.
V) Statements of Accounting Standards (AS 6) Revised Depreciation Accounting
The following is the text of the revised Accounting Standard (AS) 6, 'Depreciation Accounting', issued by the Council of the Institute of Chartered Accountants of India. Introduction 1. This Statement deals with depreciation accounting and applies to all depreciable assets, except the following items to which special considerations apply:— (i) forests, plantations and similar regenerative natural resources; (ii) wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non-regenerative resources; (iii) expenditure on research and development; (iv) goodwill; (v) live stock. This statement also does not apply to land unless it has a limited useful life for the enterprise. 2. Different accounting policies for depreciation are adopted by different enterprises. Disclosure of accounting policies for depreciation followed by an enterprise is necessary to appreciate the view presented in the financial statements of the enterprise. Definitions 3. The following terms are used in this Statement with the meanings specified: 3.1 Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is predetermined. 3.2 Depreciable assets are assets which
(i) are expected to be used during more than one accounting period; and (ii) have a limited useful life; and (iii) are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business. 3.3 Useful life is either (i) the period over which a depreciable asset is expected to be used by the enterprise; or (ii) the number of production or similar units expected to be obtained from the use of the asset by the enterprise. 3.4 Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for historical cost in the financial statements, less the estimated residual value.
VI) Statements of Accounting Standards (AS 7) Accounting for Construction Contracts
The following is the text of the Accounting Standard (AS) 7 issued by the Institute of Chartered Accountants of India on 'Accounting for Construction Contracts'. The Standard deals with accounting for construction contracts in the financial statements of contractors. In the initial years, this accounting standard will be recommendatory in character. During this period, this standard is recommended for use by companies listed on a recognised stock exchange and other large commercial, industrial and business enterprises in the public and private sectors. Introduction 1. This Statement deals with accounting for construction contracts in the financial statements of enterprises undertaking such contracts (hereafter referred to as 'contractors'). The Statement also applies to enterprises undertaking construction activities of the type dealt with in this Statement not as contractors but on their own account as a venture of a commercial nature where the enterprise has entered into agreements for sale. 2. The feature which characterises a construction contract dealt with in this Statement is the fact that the date at which the contract is secured and the date when the contract activity is completed fall into different accounting periods. The specific duration of the contract performance is not used as a distinguishing feature of a construction contract. Accounting for such contracts is essentially a process of measuring the results of relatively long-term events and allocating those results to relatively short-term accounting periods. 3. For the purposes of this Statement, a construction contract is a contract for the construction of an asset or of a combination of assets which together constitute a single project. Examples of activity covered by such contracts include the construction of bridges, dams, ships, buildings and complex pieces of equipment. 4. Contracts for the provision of services come within the scope of this Statement to the extent that they are directly related to a contract for the construction of an asset. Examples of such
service contracts are contracts for the services of project managers and architects and for technical engineering services related to the construction of an asset. Explanation 5. The principal problem relating to accounting for construction contracts is the allocation of revenues and related costs to accounting periods over the duration of the contract.
VII) Statements of Accounting Standards (AS 9) Revenue Recognition
The following is the text of the Accounting Standard (AS) 9 issued by the Institute of Chartered Accountants of India on 'Revenue Recognition'. In the initial years, this accounting standard will be recommendatory in character. During this period, this standard is recommended for use by companies listed on a recognised stock exchange and other large commercial, industrial and business enterprises in the public and private sectors. Introduction 1. This Statement deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise. The Statement is concerned with the recognition of revenue arising in the course of the ordinary activities of the enterprise from — the sale of goods, — the rendering of services, and — the use by others of enterprise resources yielding interest, royalties and dividends. 2. This Statement does not deal with the following aspects of revenue recognition to which special considerations apply: (i) Revenue arising from construction contracts; (ii) Revenue arising from hire-purchase, lease agreements; (iii) Revenue arising from government grants and other similar subsidies; (iv) Revenue of insurance companies arising from insurance contracts. 3. Examples of items not included within the definition of "revenue" for the purpose of this Statement are: (i) Realised gains resulting from the disposal of, and unrealised gains resulting from the holding of, non-current assets e.g. appreciation in the value of fixed assets;
(ii) Unrealised holding gains resulting from the change in value of current assets, and the natural increases in herds and agricultural and forest products; (iii) Realised or unrealised gains resulting from changes in foreign exchange rates and adjustments arising on the translation of foreign currency financial statements; (iv) Realised gains resulting from the discharge of an obligation at less than its carrying amount; (v) Unrealised gains resulting from the restatement of the carrying amount of an obligation. Definitions 4. The following terms are used in this Statement with the meanings specified: 4.1 Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration. 4.2 Completed service contract method is a method of accounting which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed. 4.3 Proportionate completion method is a method of accounting which recognises revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract. Explanation 5. Revenue recognition is mainly concerned with the timing of recognition of revenue in the statement of profit and loss of an enterprise. The amount of revenue arising on a transaction is usually determined by agreement between the parties involved in the transaction. When uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainties may influence the timing of revenue recognition.
VIII) Statements of Accounting Standards (AS 10) Accounting for Fixed Assets
The following is the text of the Accounting Standard 10 (AS 10) issued by the Institute of Chartered Accountants of India on 'Accounting for Fixed Assets'. In the initial years, this accounting standard will be recommendatory in character. During this, this standard is recommended for use by companies listed on a recognised stock exchange and other large commercial, industrial and business enterprises in the public and private sectors.
Introduction 1. Financial statements disclose certain information relating to fixed assets. In many enterprises these assets are grouped into various categories, such as land, buildings, plant and machinery, vehicles, furniture and fittings, goodwill, patents, trade marks and designs. This statement deals with accounting for such fixed assets except as described in paragraphs 2 to 5 below. 2. This statement does not deal with the specialised aspects of accounting for fixed assets that arise under a comprehensive system reflecting the effects of changing prices but applies to financial statements prepared on historical cost basis. 3. This statement does not deal with accounting for the following items to which special considerations apply: (i) forests, plantations and similar regenerative natural resources; (ii) wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources; (iii) expenditure on real estate development; and (iv) livestock. Expenditure on individual items of fixed assets used to develop or maintain the activities covered in (i) to (iv) above, but separable from those activities, are to be accounted for in accordance with this Statement. 4. This statement does not cover the allocation of the depreciable amount of fixed assets to future periods since this subject is dealt with in Accounting Standard 6 on 'Depreciation Accounting'. 5. .This statement does not deal with the treatment of government grants and subsidies, and assets under leasing rights. It makes only a brief reference to the capitalisation of borrowing costs and to assets acquired in an amalgamation or merger. These subjects require more extensive consideration than can be given within this Statement. Definitions 6. The following terms are used in this Statement with the meanings specified: 6.1 Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business 6.2 Fair market value is the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arm's length who are fully informed and are not under any compulsion to transact. 6.3 Gross book value of a fixed asset is its historical cost or other amount substituted for historical cost in the books of account of financial statements. When this amount is shown net of accumulated depreciation, it is termed as net book value.
Explanation 7. Fixed assets often comprise a significant portion of the total assets of an enterprise, and therefore are important in the presentation of financial position. Furthermore, the determination of whether an expenditure represents an asset or an expense can have a material effect on an enterprise's reported results of operations.
IX) Statements of Accounting Standards (AS 11) Accounting for the Effects of Changes in Foreign Exchange Rates
(In this Accounting Standard, the Standard portions have been set in bold italic type. These should be read in the context of the background material which has been set in normal type, and in the context of the 'Preface to the Statements of Accounting Standards'.) The following is the text of Accounting Standard (AS) 11, 'Accounting for the Effects of Changes in Foreign Exchange Rates', issued by the Council of the Institute of Chartered Accountants of India. This Standard will come into effect in respect of accounting periods commencing on or after 1.4.1995 and will be mandatory in nature. Objective An enterprise may have transactions in foreign currencies or it may have foreign branches. Foreign currency transactions should be expressed in the enterprise's reporting currency and the financial statements of foreign branches should be translated into the enterprise's reporting currency in order to include them in the financial statements of the enterprise. The principal issues in accounting for foreign currency transactions and foreign branches are to decide which exchange rate to use and how to recognise in the financial statements the financial effect of changes in exchange rates. Scope 1. This Statement should be applied by an enterprise : (a) in accounting for transactions in foreign currencies; and (b) in translating the financial statements of foreign branches for inclusion in the financial statements of the enterprise. Definitions 2. The following terms are used in this Statement with the meanings specified : Reporting currency is the currency used in presenting the financial statements.
Foreign currency is a currency other than the reporting currency of an enterprise. Exchange rate is the ratio for exchange of two currencies as applicable to the realisation of a specific asset or the payment of a specific liability or the recording of a specific transaction or a group of inter-related transactions. Average rate is the mean of the exchange rates in force during a period. Forward rate is the exchange rate established by the terms of an agreement for exchange of two currencies at a specified future date. Closing rate is the exchange rate at the balance sheet date. Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money, e.g., cash, receivables, payables. Non-monetary items are assets and liabilities other than monetary items e.g. fixed assets, inventories, investments in equity shares. Settlement date is the date at which a receivable is due to be collected or a payable is due to be paid. Recoverable amount is the amount which the enterprise expects to recover from the future use of an asset, including its residual value on disposal.
X) Statements of Accounting Standards (AS 13) Accounting for Investments
The following is the text of Accounting Standard (AS) 13, 'Accounting for Investments', issued by the Council of the Institute of Chartered Accountants of India. Introduction 1. This Statement deals with accounting for investments in the financial statements of enterprises and related disclosure requirements. 2. This Statement does not deal with: (a) the bases for recognition of interest, dividends and rentals earned on investments which are covered by Accounting Standard 9 on Revenue Recognition; (b) operating or finance leases; (c) investments of retirement benefit plans and life insurance enterprises; and
(d) mutual funds and/or the related asset management companies, banks and public financial institutions formed under a Central or State Government Act or so declared under the Companies Act, 1956. Definitions 3. The following terms are used in this Statement with the meanings assigned: Investments are assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. Assets held as stock-in-trade are not 'investments'. A current investment is an investment that is by its nature readily realisable and is intended to be held for not more than one year from the date on which such investment is made. A long term investment is an investment other than a current investment. An investment property is an investment in land or buildings that are not intended to be occupied substantially for use by, or in the operations of, the investing enterprise. Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length transaction. Under appropriate circumstances, market value or net realisable value provides an evidence of fair value. Market value is the amount obtainable from the sale of an investment in an open market, net of expenses necessarily to be incurred on or before disposal.
XI) Accounting Standard 16 BORROWING COSTS
(In this Accounting Standard, the standard portions have been set in bold italic type. These should be read in the context of the background material which has been set in normal type, and in the context of the ‘Preface to the Statements of Accounting Standards’.) The following is the text of Accounting Standard (AS) 16, ‘Borrowing Costs’, issued by the Council of the Institute of Chartered Accountants of India. This Standard comes into effect in respect of accounting periods commencing on or after 1-4-2000 and is mandatory in nature. Paragraph 9.2 and paragraph 20 (except the first sentence) of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, stand withdrawn from this date. Objective The objective of this Statement is to prescribe the accounting treatment for borrowing costs. Scope
1. This Statement should be applied in accounting for borrowing costs. 2. This Statement does not deal with the actual or imputed cost of owners’ equity, including preference share capital not classified as a liability. Definitions 3. The following terms are used in this Statement with the meanings specified: Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. 4. Borrowing costs may include: (a) interest and commitment charges on bank borrowings and other short-term and long-term borrowings; (b) amortisation of discounts or premiums relating to borrowings; (c) amortisation of ancillary costs incurred in connection with the arrangement of borrowings; (d) finance charges in respect of assets acquired under finance leases or under other similar arrangements; and (e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. 5. Examples of qualifying assets are manufacturing plants, power generation facilities, inventories that require a substantial period of time to bring them to a saleable condition, and investment properties. Other investments, and those inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired also are not qualifying assets. Recognition 6. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset. The amount of borrowing costs eligible for capitalization should be determined in accordance with this Statement. Other borrowing costs should be recognized as an expense in the period in which they are incurred. 7. Borrowing costs are capitalized as part of the cost of a qualifying asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. Other borrowing costs are recognized as an expense in the period in which they are incurred.
XII) Accounting Standard 19 Leases
(In this Accounting Standard, the standard portions have been set in bold italic type. These should be read in the context of the background material which has been set in normal type, and in the context of the ‘Preface to the Statements of Accounting Standards’.) The following is the text of Accounting Standard (AS) 19, ‘Leases’, issued by the Council of the Institute of Chartered Accountants of India. This Standard comes into effect in respect of all assets leased during accounting periods commencing on or after 1.4.2001 and is mandatory in nature from that date. Accordingly, the ‘Guidance Note on Accounting for Leases’ issued by the Institute in 1995, is not applicable in respect of such assets. Earlier application of this Standard is, however, encouraged. Objective The objective of this Statement is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures in relation to finance leases and operating leases. Scope 1. This Statement should be applied in accounting for all leases other than: a. lease agreements to explore for or use natural resources, such as oil, gas, timber, metals and other mineral rights; and b. licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights; and c. lease agreements to use lands. 2. This Statement applies to agreements that transfer the right to use assets even though substantial services by the lessor may be called for in connection with the operation or maintenance of such assets. On the other hand, this Statement does not apply to agreements that are contracts for services that do not transfer the right to use assets from one contracting party to the other. Definitions 3. The following terms are used in this Statement with the meanings specified: A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. An operating lease is a lease other than a finance lease. A non-cancellable lease is a lease that is cancellable only: 1. upon the occurrence of some remote contingency; or
2. with the permission of the lessor; or 3. if the lessee enters into a new lease for the same or an equivalent asset with the same lessor; or 4. upon payment by the lessee of an additional amount such that, at inception, continuation of the lease is reasonably certain. The inception of the lease is the earlier of the date of the lease agreement and the date of a commitment by the parties to the principal provisions of the lease. The lease term is the non-cancellable period for which the lessee has agreed to take on lease the asset together with any further periods for which the lessee has the option to continue the lease of the asset, with or without further payment, which option at the inception of the lease it is reasonably certain that the lessee will exercise. Minimum lease payments are the payments over the lease term that the lessee is, or can be required, to make excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with: a. in the case of the lessee, any residual value guaranteed by or on behalf of the lessee; or b. in the case of the lessor, any residual value guaranteed to the lessor: i. by or on behalf of the lessee; or ii. by an independent third party financially capable of meeting this guarantee. However, if the lessee has an option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable that, at the inception of the lease, is reasonably certain to be exercised, the minimum lease payments comprise minimum payments payable over the lease term and the payment required to exercise this purchase option. Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction. Economic life is either: a. the period over which an asset is expected to be economically usable by one or more users; or b. the number of production or similar units expected to be obtained from the asset by one or more users. Useful life of a leased asset is either: a. the period over which the leased asset is expected to be used by the lessee; or b. the number of production or similar units expected to be obtained from the use of the asset by the lessee. Residual value of a leased asset is the estimated fair value of the asset at the end of the lease term. Guaranteed residual value is: a. in the case of the lessee, that part of the residual value which is guaranteed by the lessee or by a party on behalf of the lessee (the amount of the guarantee being the maximum amount that could, in any event, become payable); and
b. in the case of the lessor, that part of the residual value which is guaranteed by or on behalf of the lessee, or by an independent third party who is financially capable of discharging the obligations under the guarantee. Unguaranteed residual value of a leased asset is the amount by which the residual value of the asset exceeds its guaranteed residual value. Gross investment in the lease is the aggregate of the minimum lease payments under a finance lease from the standpoint of the lessor and any unguaranteed residual value accruing to the lessor. Unearned finance income is the difference between: a. the gross investment in the lease; and b. the present value of i. the minimum lease payments under a finance lease from the standpoint of the lessor; and ii. any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease. Net investment in the lease is the gross investment in the lease less unearned finance income. The interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes the aggregate present value of a. the minimum lease payments under a finance lease from the standpoint of the lessor; and b. any unguaranteed residual value accruing to the lessor, to be equal to the fair value of the leased asset. The lessee's incremental borrowing rate of interest is the rate of interest the lessee would have to pay on a similar lease or, if that is not determinable, the rate that, at the inception of the lease, the lessee would incur to borrow over a similar term, and with a similar security, the funds necessary to purchase the asset. Contingent rent is that portion of the lease payments that is not fixed in amount but is based on a factor other than just the passage of time (e.g., percentage of sales, amount of usage, price indices, market rates of interest). 4. The definition of a lease includes agreements for the hire of an asset which contain a provision giving the hirer an option to acquire title to the asset upon the fulfillment of agreed conditions. These agreements are commonly known as hire purchase agreements. Hire purchase agreements include agreements under which the property in the asset is to pass to the hirer on the payment of the last installment and the hirer has a right to terminate the agreement at any time before the property so passes. *****
COMPARISON OF INDIAN ACCOUNTING STANDARDS WITH INTERNATIONAL ACCOUNING STANDARDS
AS by / ICAI IAS
IFRS Position under IAS / IFRS Position as per Indian GAAP
IAS-1 Disclosure of Accounting Policies IAS 1, inter alia, deals with overall considerations, including fair presentation, off-setting, comparative information. IAS 1 prescribed minimum structure of financial statements and contains guidance on related issues viz. current liabilities etc. Under IAS 1, financial statements includes Statement showing changes in equity Under IAS 1, there is a presumption that application of IFRS would lead to fair presentation IAS 1 requires specific disclosure for departures from IFRS IAS 1 requires disclosure of critical judgements made by management in applying accounting policies IAS 1 prohibits any items to be disclosed as extraordinary items. IAS-2 Valuation of Inventories: IAS 2 prescribes same cost formula to be used for all inventories having a similar nature and use to the entity.
AS 1 does not deal with these aspects.
AS 1 does not prescribe any minimum structure. AS 1 does not prescribe any such statement to be prepared. There is no such presumption under AS 1. There is no such specific provision in AS 1. There is no such specific disclosure requirement in AS 1 AS 5 specifically requires disclosure of certain items as Extra-ordinary items. AS 2 requires that the formula used in determining the cost of an item of inventory needs to be selected with a view to providing the fairest possible approximation to the cost incurred in bringing the item to its present location and condition.However, there is no stipulation for use of same cost formula in AS 2 as compared to IFRS
There are certain additional requirement in IAS 2 which are not contained in AS 2 which are as under: 1. Purchase of inventory on deferred settlement terms excess over normal price is to be accounted as interest over the period of financing. 2. Measurement criteria are not applicable to commodity broker-traders. 3. Exchange differences are not includible in inventory valuation. 4. Inventory pledged as security for liabilities requires separate disclosure. IAS-7 Cash Flow Statements: Bank overdrafts are to be treated as a component of cash / cash equivalents under IAS 7. IAS 7 allows interest and dividend paid to be classified either under Operating Activities or Financing Activities. IAS 7 requires additional disclosure of cash payments by a lessee relating to finance lease under Financing Activities. IAS 7 deals with issues relating to disclosure in cash flow statement in consolidated financial statements viz. Undistributed profits of associate & minority interests,
AS 3 has no such stipulation AS 3 mandates disclosure of interest and dividend paid under Financial Activities only. No such disclosures required under AS 3. AS 3 was issued prior to AS 21, hence issues relating to consolidate financial statements are not dealt with.
Forex cash flows of foreign subsidiary etc. IAS 7 prohibits separate disclosure of extraordinary items in Cash Flow Statements. In case of acquisition of subsidiary, IAS 7 requires two Additional disclosures on acquisitions viz. Cash/ cash equivalents of acquired subsidiary and all other assets acquired. AS 4 IAS 10 Contingencies and Events occurring after the Balance Sheet Date: IAS 10 provides that proposed dividend should not be shown as liability. IAS 10 requires date of authorization for issue of financial statements to be specifically mentioned in the financial statements itself. IAS 10 also requires disclosure of contingent liability to be updated in the light of new information received after the balance sheet date.
AS 3 mandates such disclosure. No such provision in AS 3
AS 4 specifically requires such disclosure as the same is mandated by statutory requirement. AS 4 has no such stipulation.
AS 4 requires adjustments to figures stated in financial statements for events occurring after the balance sheet date, if such events relate to conditions existing at the balance sheet date.
IAS 8 Prior Period Items and Changes in Accounting Policies: In case of change in accounting policy IAS 8 requires retrospective effect to be given by adjusting opening retained earnings. The definition of prior period Items is broader under IAS 8 as compared to AS 5 since IAS 8 covers all the items in the financial statements. IAS 8 requires retrospective restatement of prior period figures by restatement of opening balances of assets, liabilities and equity for the earliest period practicable. IAS 8 requires disclosure of any impending change in accounting policy viz. change mandated by a new accounting standard which is yet to come into effect. IAS 8 prohibits disclosure of any items as extra-ordinary item. No corres pon Depreciation Accounting (AS 6): ding In case of change in method of depreciation, IAS 16 IAS requires effect to be given prospectively. (cover ed by IAS Change in method of depreciation is treated as change in which accounting estimate under IAS 16. discus s IAS 16 requires estimation of Residual value without about considering inflation effects i.e, residual value has to be assets ) estimated assuming that the asset were already of the age and in the condition expected at the end of its useful life
AS 5 requires only prospective change in accounting policy with appropriate disclosures. AS 5 covers only incomes and expenses in the definition of prior period items. AS 5 requires prior period items to be included in the determination of net profit or loss for the current period. AS 5 does not require such disclosure
AS 5 requires separate disclosure of extraordinary items.
AS 6 requires retrospectively re-computation of depreciation and any excess or deficit on such re-computation is required to be adjusted in the period in which such change is effected. AS 6 considers this as change in accounting policy There is no such stipulation in AS 6 although it prescribes use of realisable value of similar assets, which have reached the end of their useful lives and have operated under conditions similar to the asset as one of the
basis of estimating residual value. AS-7 (Revis ed) IAS -11 Construction Contract (AS 7): Contract Revenue under IAS 11 is measured at the fair value of the consideration received or receivable.
AS 7 does not refer to fair value and states that Contract revenue is measured at the consideration received or receivable
IAS18 Revenue Recognition (AS 9): Under IAS 18, revenue from sale of goods cannot be recognised when entity retains continuing managerial ownership or effective control over the goods sold. In case of revenue from rendering of services, IAS 18 allows only percentage of completion method. IAS 18 requires effective interest method prescribed in Under IAS 18, payments received in advance for goods yet to be manufactured or third party sales, cannot be recognized as revenue until such goods are delivered to the buyer.
AS 9 does not contain any such stipulation.
AS 9 allows completed service contract method or proportionate completion method. AS 9 requires interest income to be recognised on a time proportion basis. AS 9 permits recognition when the goods are manufactured, identified and ready for delivery in such cases.
IAS16 Accounting for Fixed Assets: Under IAS 16, if subsequent costs are incurred for replacement of a part of an item of fixed assets, such costs are required to be capitalized and simultaneously the replaced part has to be de-capitalized.
AS 10 provides that only that expenditure which increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e.g., an increase in capacity.
AS-11 (Revise IASd) 21 Effects of changes in Foreign Exchange Rates: The revised IAS 21 makes no distinction between an integral foreign operation and non-integral foreign operation as done in AS 11. In fact, the factors of distinction between an integral operation and a non-integral operation are incorporated as considerations for determining functional currency. Revised IAS 21 requires an entity to determine functional currency and measure results and financial position in that currency. Functional currency is the currency of the primary economic environment. Under the revised IAS 21 states that if functional currency of a foreign operation is other than reporting currency, the provisions of translation of such operation are similar to that prescribed for a non-integral foreign operation under AS 11. If financial statements are presented in any other currency other than functional currency, the revised IAS 21 requires Assets /Liabilities to be translated at Closing Rate and Income / Expenses at Average Rate. IASAS-12 20 Government Grants: The concept of extra-ordinary item is deleted under all standards of IFRS.
AS 11 provides separate treatment for integral operations and non-integral operations.
There is no concept of functional currency under AS 11.
Absence of functional currency concept does not enable AS 11 to provide for such a stipulation. AS 11 does not contain any guidance on this issue.
AS 12 requires disclosure of government grants for financial support / compensation
In case of non-monetary assets acquired at nominal / concessional rate, IAS 20 permits accounting either at fair value or at acquisition cost In respect of grant related to a specific fixed asset becoming refundable, IAS 20 requires retrospective re-computation of depreciation and prescribes charging off the deficit in the period in which such grant becomes refundable. IAS 20 requires separate disclosure of unfulfilled conditions and other contingencies if grant has been recognised. AS-14 IFRS 3 (IFRS 3 supers edes IAS 22) Accounting for Amalgamations: IFRS 3 allows only purchase method. Option of pooling method given under IAS 22 has been withdrawn. IFRS 3 requires valuation of assets & liabilities at Fair Value. IFRS 3 requires Goodwill to be tested for impairment. IFRS 3 requires recognition of negative goodwill immediately in P&L A/c. IFRS 3: Reverse Acquisition is accounted assuming acquirer is the acquiree. IFRS 3 requires valuation of Financial Assets to be dealt with as per IAS 39. Under IFRS 3, provisional values can be used provided they are updated retrospectively within 12 months with actual values.
for losses as extra-ordinary items in P&L. AS 12 requires accounting at acquisition cost. AS 12 requires enterprise to compute depreciation prospectively as a result of which the revised book value is provided over the residual useful life. AS 12 has no such disclosure requirement.
AS 14 allows both Pooling of Interest Method and Purchase Method. AS 14 requires valuation at carrying value. AS 14 requires amortization of Goodwill AS 14 requires it to be credited to Capital Reserve AS 14 does not deal with reverse acquisition AS 14 contains no such similar provision. There is no such provision in AS 14.
IAS23 Borrowing Costs : IAS 23 prescribes borrowing costs to be recognized as expense as benchmark treatment. It requires capitalization as an allowed alternative. IAS 23 requires disclosure of capitalization rate used to determine the amount of borrowing costs. IAS14 Segment Reporting: IAS 14 prescribes treatment of revenue, expenses, profit/loss, assets and liabilities in relation to Associates & Joint Ventures in consolidated financial statements. IAS 14 encourages reporting of vertically integrated activities as separate segments but does not mandate the disclosure. IAS 14 provides that a business segment can be treated as reportable segment only if, inter alia, majority of its revenue is earned from sales to external customers. Under IAS 14, if a reportable segment ceases to meet threshold requirements, than also it remains reportable for one year if the Management judges the segment to be of continuing significance. In case of change in identification of segments, IAS 14 requires restatement of prior period segment information. In case it is not practicable, IAS 14 requires disclosure of
AS 16 mandates capitalization of borrowing costs. AS 16 does not require such disclosure.
AS 17 is silent on the aspect of treatment in consolidated financial statements. AS 17 does not make any distinction between vertically integrated segment and other segments AS 17 does not contain any such stipulation.
Under AS 17, this is mandatory irrespective of the judgment of Management.
AS 17 requires only disclosure of the nature of the change and the financial effect of the change, if reasonably determinable.
data for both the old and new bases of segmentation. AS-18 IAS24 Related Party Disclosures: The definition of related party under IAS 24 includes Post employment benefit plans (e.g. gratuity fund, pension fund) of the enterprise or of any other entity, which is a related party of the enterprise. The definition of Key management persons (KMPs) under IAS 24 includes any director whether executive or otherwise i.e. Non-executive directors are also related party. Further, under IAS 24, if any person has indirect authority and responsibility for planning, directing and controlling the activities of the enterprise, he will be treated as a key management person (KMP) The definition of related party under IAS 24 includes close members of the families of KMPs as related party as well as of persons who exercise control or significant influence. IAS 24 requires compensation to KMPs to be disclosed category-wise including share-based payments. IAS 24 mandates that no disclosure should be made to the effect that related party transactions were made on arms length basis unless terms of the related party transaction can be substantiated No concession is provided under IAS 24 where disclosure of information would conflict with the duties of confidentiality in terms of statute or regulating authority. Under IAS 24, the definition of "control" is restrictive as it requires power to govern the financial and operating policies of the management of the enterprise The definition of "control" under IAS 24 is restrictive on the count that it does not include control over composition of Board of Directors The disclosure requirement under IAS 24 are applicable when related party relationship exists as on the date of balance sheet IAS 24 requires disclosure of terms and conditions of outstanding items pertaining to related parties. IAS 24 does not define "significant influence" which is to be considered while determining related party relationship. IAS17 Leases Under IAS-17 it has been clarified that land and buildings elements of a lease of land and buildings need to be considered separately. The land element is normally an operating lease unless title passes to the lessee at the end of the lease term. The buildings element is classified as an operating or finance lease by applying the classification criteria.
AS 18 does not include this relationship.
AS 18 read with ASI-18 excludes non-executive directors from the definition of keymanagement persons. AS 18 does not specifically cover indirect authority and responsibility.
AS 18 covers only relatives of KMPs
AS 18 read with ASI 23 requires disclosure of remuneration paid to key management persons but does not mandate category-wise disclosures. AS 18 contains no such stipulation.
AS 18 provides exemption from disclosure in such cases. Under AS 18, the definition is wider as it refers to power to govern the financial and /or operating policies of the management. AS 18 includes control over composition of Board of Directors in the definition of "control" Under AS 18 the standard applies if related party relationship exist at any time during the year.No such disclosure requirement is contained in AS 18. AS 18 prescribe a rebuttable presumption of significant influence if 20% or more of the voting any party holds power.
AS-19 - " Accounting for Leases" at it stands at present does not deal with lease agreements to use lands. Hence, the classification criteria are applicable only to buildings as a separate asset. To be in line with IAS-17, a suitable modification is required in AS-19 to bring lease agreements for use of land within the purview and prescribe separate classification
The definition of residual value is not included in IAS 17. IAS 17 specifically excludes lease accounting for investment property and biological assets. IAS 17 does not prohibit upward revision in value of un-guaranteed residual value during the term of lease. In case of sale & lease back, IAS 17 requires excess of sale proceeds over the carrying amount to be deferred and amortised over lease term. IAS 17 does not require any separate disclosure for assets acquired under finance lease segregated from assets owned. IAS 17 prescribes initial direct costs incurred by lessor to be included in lease receivable amount in case of finance lease and in the carrying amount of the asset in case of operating lease and does not mandate any accounting policy related disclosure. IAS 17 requires assets given on operating leases to be presented in the Balance Sheet according to the nature of the asset. AS-20 IAS33 Earnings per Share (EPS): IAS 33 requires separate disclosure of basis and diluted EPS for continuing operations and discontinued operations. IAS 33 deals with computation of EPS in case of Share based payment transactions. IAS 33 prescribes treatment of written put options and forward purchase contracts in computing EPS. IAS 33 requires changes in accounting policy to be given retrospective effect for computing EPS, which means EPS to be adjusted for prior periods presented. IAS 33 does not require disclosure of EPS with and without extra-ordinary item IAS 33 does not deal with the treatment of application money held pending allotment. IAS 33 requires disclosure of anti-dilutive instruments even though they are ignored for the purpose of computing dilutive EPS. IAS 33 does not require disclosure of normal face value of share AS-21 IAS27 Consolidated Financial Statements (CFS): Under IAS 27, it is mandatory to prepare CFS and an entity should prepare separate financial statements in addition to CFS only if local regulations so require. Under IAS 27, exemption from preparation from CFS if certain conditions are fulfilled. Under IAS 27, a subsidiary cannot be excluded from
criteria for land as stated in revised IAS-17. AS 19 defines residual value. There is no such exclusion under AS 19. AS 19 permits only downward revision AS 19 requires excess or deficiency both to be deferred and amortised over the lease term in proportion to the depreciation of the leased asset. AS 19 mandates such separate disclosure.
AS 19 requires initial direct cost incurred by lessor to be either charged off at the time of incurrenceor to be amortised over the lease period andrequires disclosure for accounting policy relatingthereto in the financial statements of lessor. AS 19 requires assets given on operating lease to be presented in Balance Sheet under Fixed Assets.
AS 20 does not requires any such separate computation or disclosure. AS 20 does not contain any such provision. AS 20 is silent on this aspect. AS 20 does not prescribe such treatment.
AS 20 requires EPS / DPS with and without extra-ordinary items to be disclosed separately. Under AS 20, application money held pending allotment should be included in the computation of diluted EPS. AS 20 does not mandate such disclosure.
Disclosure of normal face value is required under AS 20
Under AS 21, it is not mandatory to prepare CFS. There is no such exemption under AS 21. Under AS 21, a subsidiary can be excluded
consolidation under any circumstances.
Under IAS 27 while determining whether entity has power to govern financial and operating policies of another entity, potential voting rights currently exercisable should be considered. Under IAS 27, the definition of "control" is restrictive as it requires power to govern the financial and operating policies of the management of the enterprise Use of uniform accounting policies for like transactions while preparing CFS is mandatory under IAS 27. Under IAS 27, minority interest has to be disclosed within equity but separate from parent shareholders equity. Under IAS 27, Goodwill / capital reserve on consolidation is computed on fair values of assets / liabilities Under IAS 27, 3 months' time gap is permitted between Balance Sheet dates of financial statements of subsidiary and parent. IAS 27 prescribes that deferred tax adjustment as per IAS 12 should be made in respect of timing difference arising out of elimination of unrealised profit. IAS 27 requires drawing up of financial statements as on the date of acquisition for computing parent's portion of equity in a subsidiary.
from consolidation if (1) the subsidiary is acquired and held with an intention to dispose; or (2) the subsidiary operates under severe long term restrictions impairing its ability to transfer funds to parent. AS 21 does not provide for such eventuality.
Under AS 21, the definition is wider as it refers to power to govern the financial and or operating policies of the management. AS 21 gives exemption from following uniform accounting policies if the same is not practicable Under AS 21, minority interest has to be separately disclosed from liability and equity of parent shareholder. Under AS 21, Goodwill / capital reserve on consolidation is computed on the basis of carrying value of assets/ liabilities. Under AS 21, six months time gap is allowed. AS 21 is silent on this aspect.
IAS 27 does not require additional disclosure of list of all subsidiaries including the name, country of incorporation, proportion of ownership interest and if different, proportion of voting power held. IAS12 Accounting for Taxes on Income: IAS 12 is based on Balance Sheet approach and therefore temporary difference (for e.g. Difference on any upward revaluation of assets, leads to creation of deferred tax liability) Under IAS 12, deferred tax liability for differences associated with investments in subsidiaries, associates and Joint Ventures may not be provided, if the parent is able to control the timing of reversal and it is probable that difference will not reverse in foreseeable future. IAS- Accounting for Associate in Consolidated Financial
Under AS 21, for computing parent's portion of equity in a subsidiary at the date on which investment is made, the financial statements of immediately preceding period can be used as a basis of consolidation if it is impracticable to draw financial statement of the subsidiary as on the date of investment. AS 21 requires additional disclosure of list of all subsidiaries including the name, country of incorporation, proportion of ownership interest and if different, proportion of voting power held.
AS 22 is based on income statement approach and only timing differences leads to creation of deferred tax asset or liability. AS 22 provides no such exception as it does not deal with temporary differences
28 Statement: Under IAS-28, Potential voting rights currently exercisable to be considered in assessing significant influence. As per IAS 28, difference between Balance sheet date of investor and associate can not be more than three month. In case uniform accounting policies are not followed by investor & Investee, necessary adjustments have to be made while preparing consolidated financial statements of investor. While recognizing losses of associates / joint ventures under IAS 28, carrying amount of investment in equity and other long term interests to be considered AS-23 is silent on this.
Under AS 23, no period is specified. Only consistency is mandated Under AS 23, if it is not practicable to make such adjustments, exemption is given, provided appropriate disclosures are made. Under AS 23, losses are to be recognised to theextent of investment plus incurred obligations pluspayments made towards guaranteed obligations. For identification of goodwill / capital reserve , IAS-28 AS-23 prescribes historical cost basis on envisages net fair value basis on acquisition acquisition , for computation of goodwill. Under IAS 28 it is necessary to subject the investments in If decline in value of investment in an associate associates / joint ventures to the test of impairment . ispermanent, provision for diminution to be made.Impairment testing is not required under AS23. While defining Significant influence under IAS 28 participation As per AS-23, participation in the financial in the financial and operating policy decisions and / or operating policy decisions is is envisaged. required AS-25 IAS34 Interim Financial Reporting: Under IAS 34, minimum components of Interim Financial Report includes - Statement showing changes in Equity Under IAS 34, in case of any change in accounting policy, figures of prior interim periods of the current financial year and comparable figures of corresponding previous periods to be restated. Under IAS 34, separate guidance is available for treatment of Provision for Leave encashment, Interim Period Manufacturing Cost Variances, Foreign Currency Translation Gains and Losses. IAS 38 Intangible Assets: There is no presumption under IAS 38 as regards useful life of an intangible asset IAS 38 does not exclude intangible assets arising in insurance enterprise from contract with policy holder Under IAS 38, intangible assets having "Indefinite useful life" cannot be amortized. Indefinite useful life means where, based on analysis, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflow for the entity. Indefinite is not equal to Infinite. Such assets should be tested for impairment at each Balance sheet date and separately disclosed
No such disclosure is required under AS 25.
AS 25 requires restatement of figures of prior interim periods of the current financial year only AS 25 does not address these issues specifically.
Under AS 26, there is a rebuttable presumption that the useful life of intangible assets will not exceed 10 years. Intangible assets arising in insurance enterprise from contract with policyholder are excluded from scope of AS-26. There is no such restriction in AS 26
IAS 38 does not require any impairment testing if there are no indications of impairment.
Under IAS 38, if Intangible Asset is 'held for sale' then amortization should be stopped. Under IAS 38, R&D expenditure that relates to an in process R&D project acquired separately or in a business combination shall be accounted as per normal principles considering the research phase and development phase. Under IAS 38, Revaluation Model is allowed for accounting Intangible Asset provided active market exists. AS-27 IAS31 Financial Reporting of Interests in Joint Ventures: Under IAS 31, when the investments are made by venture capital organization, mutual funds, unit trusts and similar entities when those investments are classified as held for trading and accounted for as per IAS 39. IAS 31 not to apply if parent is exempt from preparing CFS under IAS 27. Similar exemption for investor satisfying same conditions as parent. IAS 31 permits both proportionate consolidation method and equity method for recognizing interest in a jointly controlled entity in CFS. Equity method prescribed in IAS 31 is similar to that prescribed in AS 23. IAS36 Impairment of Assets: Under IAS 36, for determining net selling price, cost of disposal to be reduced only in cases where asset is intended to be disposed off. IAS 36 does not permit reversal of impairment losses. IAS 36 suggests only bottom-up approach for allocation of goodwill in case of a cash-generating unit. IAS37 Provisions, Contingent Assets and Contingent Liabilities IAS 37 permits discounting of provisions. IAS 37 requires that provisions for onerous contracts to be recognized IAS 37 requires provisioning on the basis of construction obligation on restructuring. IAS 37 requires disclosure of Contingent Assets in Financial Statements. IAS 37 provides certain basis and statistical methods to be followed for arriving at the best estimate of the expenditure for which provision is recognised. IAS 37 defines only obligation but does not define present obligation and possible obligation.
AS 26 requires test of impairment to be applied even if there is no indication of that the asset is impaired for following assets: Intangible asset not yet available for use -Intangible asset amortised over > 10 years. There is no such stipulation under AS 26. AS 26 is silent on this.
AS 26 does not permit revaluation model.
There is no such provision under AS 27.
There is no such specific provision under AS 27 AS 27 permits only proportionate consolidation method.
AS 28: For determining net selling price, cost of disposal to be reduced from fair value of assets in all cases. AS 28 permits reversal of impairment losses. AS 28 allows both bottom up and top down methods
AS 29 does not permit any discounting AS 29 does not mandate it. AS 29 prohibits the same. AS 29 allows such disclosure only in approving authority report. AS 29 does not contain any such guidance and relies on judgement of management. AS 29 defines present obligation and possible obligation as well.
ANALYSIS OF COMPARISON OF STANDARDS IGAAP VS IFRS
Comparison of frameworks
Historical Costing – Both IGAAP and IFRS permits revaluation in contrast to Historical
True & Fair View: Under IFRS and IGAAP framework, there is an assumption that
adoption of IFRS /IGAAP leads to a true and fair presentation.
Comparative Position : under IGAAP and IFRS, comparative financial figures are to be
provided for one previous years.
Over-riding of Standards – In rare cases, IFRS permits that a company may withhold
application of IFRS if it is felt that application of IFRS would defeat the very objective of Financial reporting. The reason has to be disclosed. There is no such provision in IGAAP.
Reporting Elements : IFRS prescribes the minimum structure and content of financial
statement including Statement of Changes in equity (in addition to Balance sheet, Income statement, Cash flow statement , notes comprising significant accounting Policy and other explanatory notes). These are not required under IGAAP. Comparison of Balance Sheet A balance sheet is a statement of assets and liabilities. • Act, 1956) The IGAAP provides two format of Balance SheetVertical format requires details of each item in separate
Horizontal and Vertical format ( Part I of schedule VI to the Companies schedule, read with notes. IFRS does not prescribe any format . • IFRS does not prescribe any format, but stipulates
minimum line items like PPE, Investment property, Intangible assets, Financial assets, Biological assets, inventory, receivables etc. Additional line items, subheadings and subtotals shall be presented on the face of BS if relevant. The order of presentation within the group or otherwise in not mandatory.
IGAAP does not prescribe any current and non current
classification. The line items are listed in increasing order of liquidity as sources and application of funds. Under IAS, An organisation has an option to adopt Current or Non current classification of assets and liabilities . Deferred Tax Assets not to be shown as Current assets, if Current /non current classification adopted. ( IAS 1.53 ). Some items like Biological assets, Tax Liability, Minority Interest have to be disclosed on the Balance Sheet (IAS 1.66) • IFRS permits an enterprise to disclose any long term interest bearing liability due for settlement within 12 months,as long term liability’ if the
same is likely to be refinanced and can be supported by adequate documentary evidence Comparison of Income statement • Format: Under Indian GAAP no format is prescribed , but minimum line items have
been specified in Part II of schedule VI to Companies Act, 1956 including Aggregate Turnover, Gross Service revenue for Commission paid to Sole selling agent, Brokerage and discount on sales, depreciation, consumption of stores and spare parts, power and fuel, rent, repairs, rates and taxes etc. IFRS does not prescribe any standard format for income statement but prescribes minimum disclosure includes revenue, finance costs, share of post tax results of JV and associates using equity method, pre tax gain/loss on asset disposal, discontinued operation tax charge, and Net profit or loss etc. • Additional disclosure: Indian GAAP requires disclosure of several additional
information by way of notes like Licensed and installed capacity, actual production details, details of imports, forex earnings and outgo, Net Profit computation u/s 349 etc Additional disclosure under IFRS include amount of dividend and DPS declared or proposed (IAS 1.95) , Share in profit /loss of associates under equity method, profit/loss attributable to minority interest (IAS 1.82) . • Indian GAAP requires any item of expenditure which exceeds 1% of total revenue or Rs
5000/- whichever is higher should be shown as a distinct items and should not be clubbed as Miscellaneous expenses. • • Indian GAAP requires separate disclosure of exceptional and non recurring items. Under IFRS , the reporting entity has an option to prepare income statement either by
nature of expenses or by Function (Cost of sales method ) (IAS 1.84) • Under IFRS , Income is defined as Revenue and gains and expenses are defined to
include losses and are decreases in economic activity that result in decrease in equity.
Change in accounting policy : Under IGAAP effect for change in accounting policy is
given with prospective effect , if the same is material. Only in case of change in method of depreciation, the same has to be applied with retrospective effect. Other disclosures required like need for change etc IFRS requires retroactive application for the earliest period practical and adjustment of opening retained earning. Exemption given for prospective application, if resulting adjustment are not reasonably determinable Prior period items : IGAAP (AS 5.15,19) requires separate disclosure of prior period in the current financial statement either as part of current years results or as an alternative approach after determination of current net profit or loss. No restatement of retained earnings are required.however complete disclosure of prior period and its impact on financial statements should be disclosed. IFRS requires that a prior period item/error should be corrected by retrospective effect by restatement of opening balance of assets, liabilities or equities for the earliest period practicable. Entity should also disclose nature of error and the amount of correction for each financial line item. • Discounting : IFRS provides that where the inflow of cash is significantly deferred
without interest, discounting is needed. While there is no concept of discounting under IGAAP. • Others :There are significant differences in the 3 GAAP on measurement and disclosure
of various heads of Income and Expenditure including forex losses, extinguishment of debts, Employee benefits, ESOP, Dividend Tax, Loss on investments etc. leading to reconciliation issues between IGAAP results vis a vis IFRS.
In the present era of globalization and liberalization, the World has become an economic village. The globalization of the business world and the attendant structures and the regulations, which support it, as well as the development of e-commerce make it imperative to have a single globally accepted financial reporting system. A number of multi-national companies are establishing their businesses in various countries with emerging economies and vice versa. The entities in emerging economies are increasingly accessing the global markets to fulfill their capital needs by getting their securities listed on the stock exchanges outside their country. Capital markets are, thus, becoming integrated consistent with this Worldwide trend. Indian companies are also being listed on overseas stock exchanges. Sound financial reporting structure is imperative for economic well-being and effective functioning of capital markets. The forces of globalization prompt more and more countries to open their doors to foreign investment and as businesses expand across borders the need arises to recognize the benefits of having commonly accepted and understood financial reporting standards. In this scenario of globalization, India cannot insulate itself from the developments taking place worldwide. In India, so far as the ICAI and the Governmental authorities such as the National Advisory Committee on Accounting Standards established under the Companies Act, 1956, and various regulators such as Securities and Exchange Board of India and Reserve Bank of India are concerned, the aim has always been to comply with the IFRSs to the extent possible with the objective to formulate sound financial reporting standards. The ICAI, being a member of the International Federation of Accountants (IFAC), considers the IFRSs and tries to integrate them, to the extent possible, in the light of the laws, customs, practices and business environment prevailing in India. The Preface to the Statements of Accounting Standards, issued by the ICAI, categorically recognizes the same. Although, the focus has always been on developing high quality standards, resulting in transparent and comparable
financial statements, deviations from IFRSs were made where it was considered that these were not consistent with the laws and business environment prevailing within the country. Now, as the world globalizes, it has become imperative for India also to make a formal strategy for convergence with IFRSs with the objective to harmonise with globally accepted accounting standards. *****
Websites: http://www.icai.org http://www.iasb.org http://en.wikipedia.org/ http://www.iasplus.com References: The Institute of Charted Accountants India, Oct’10, 2007 “Concept Paper on Convergence with IFRSs in India”. The Charted Accountant, Feb 2005, “Indian Accounting Standards and IFRSs : A Comparative Study.” Prof Vishwanathan Bharathan, May’2005, “ Indian and International Accounting Standard practices.” *****
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