Accounting Standards

What is the purpose?

It suggests the rules for recognition measurement, treatment, presentation and disclosure of accounting transactions in the financial statement of an organization. Accounting Standard Board (ASB) constituted in 1977 performs the function of preparation of Accounting standards in India. There are 29 accounting Standards issued by ICAI.

As-2 Valuation of Inventories

The objective is to determine the value of the stock or inventories to be carried to the financial statement until the goods are sold and revenue is recognized. It clearly states that valuation should be based on lower of cost or the NRV Cost of Inventories includes all cost of purchase, cost of conversion and other costs incurred in bringing the inventory to the present condition and location. Cost of conversion implies costs that are directly related to the units of production.

The following costs are excluded from the cost of inventories.  Abnormal amount of wasted material, labor and production cost  Storage cost  Admin. cost  Selling and distribution cost

AS4- Contingencies and Events occurring after balance sheet date

Events occurring after balance sheet date are all those significant events occurring between the balance sheet date and the date on which the Financial statements are approved by the director. Types of Events Those providing further evidence of existence of conditions that exited at the balance sheet date  Those which are indicative of conditions that arose after the balance sheet date.

AS6- Depreciation Accounting

AS6 defines depreciation as a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, or obsolescence through technology and market changes. The Management can use any method or combination of available methods. Once a method is followed the same should be used consistently. Change of method possible only if  It is required by the statute.  It is needed for compliance with the AS  It is required for better presentation of Financial statements.

AS6 Not applicable on assets such as

 Forests, Plantations, similar regenerative natural resources  Wasting assets such as expenditure on exploration for minerals, oils and natural gas.  Expenditure on R&D  Good will  Live stock  Land

AS9 -Revenue Recognition

As per this AS, revenue should be recognized when the following conditions are satisfied  In case of sale of goods , goods along with all the significant risks and rewards of ownership have been transferred to the buyer.  Incase of services, execution is measured either under the completed service contract method or proportionate completion method.  Revenue arising from the use by others like Interest, royalty dividend.

AS 9 not applicable
Revenue from construction contract Revenue from govt. grants Revenue of insurance companies Revenue from lease agreement

AS 10 Accounting for fixed assets

Fixed assets should be shown in the balance sheet either at their historical cost or at their revalued figures. Any subsequent expenditure on the FA can be added to its value only if it increases the future benefits of the existing asset beyond its previously assessed std of performance. In case of revaluation , an entire class of asset should be revalued In case of disposal of fixed assets, the diff. between the net proceeds and the book value should be charged or credited to the P&L account.

AS-3 Cash flow statement

AS-3 mandatory w.e.f. FY2001 for the following companies.  All listed companies that are in the process of issuing debt or equity securities that will be listed on a recognized stock exchange of India  All other business reporting enterprises whose turnover for the accounting period exceeds Rs. 50 crores.

The cash flow statement explains the movement of cash under the following heads
 Cash flow from operating activities-cash receipts on account of sales, services, royalties, fees, commission etc  Cash flow from investing activities-Cash payment on account of fixed asset, R&D and other investments, cash received on disposal of fixed assets ,shares and debentures, cash receipts and payments on account of loans and advances.  Cash flow from Financing activities-Cash proceeds from issue of shares, debentures , loans , bonds and cash repayment of loans borrowed

INDIAN GAAP VS US GAAP

Sr.N Particulars o 1 Consolidation

US GAAP All majority owned subsidiaries to be consolidated

INDIAN GAAP Does not require consolidation, however financial statement should be attached to that of parent company Presented in the reverse order Not Required

Format of balance sheet

Presented in the order of liquidity starting with most liquid asset Requires disclosure of movement in stockholders equity. Current portion of long term debt is classified as current liability

Not required

Requires a Cash statement of cash Flow Statement flow It forms part of the financial statement

Came into force in FY 2001. Recent amendments in Stock exchange , requires all listed Co.s to attach cash flow statement with the annual accounts.

Dividend Dividends are the

Proposed dividends charge to retained are reflected in the earnings at the financial statements of point of time they the year to which they are formally relate even though declared by a board proposed or approved of directors after the year end.

5 Related Requires disclosure of all

Parties

Requires only amount outstanding material related party at the end of the transaction, financial year and Nature of relationship, max balance Description of the transaction, amount of the outstanding during the year. transaction for the financial Auditors comments year and amount due. required on the reasonableness of certain transactions. These can be accounted for as deferred expenses and amortized

6 Share

Requires such expense to be written off when issue expense incurred against proceeds of capital

Historical Cost

Strict adherence to the historical cost Convention.

A bonafide revaluation is recognized in India with adequate disclosures.

Depreciation

Straight line basis over the useful economic life of the asset

Rates are prescribed by the Indian Companies act 1956, for minimum depreciation provision. Same principle with exception that exchange rate fluctuations arising from foreign currency borrowings / liabilities are added /deducted from carrying cost from the relevant fixed asset

Accounting for foreign exchange transaction

Gains or losses arising from foreign currency transactions are included in determining the net income for the period in which such gains or losses arise.

10 Intangible assets

All intangible asset must be amortized by the systematic charge to income over the period estimated to be benefited not exceeding 40 years

Requires intangible assets to be written off within their period of use or legal term of validity whichever is earlier while other intangible assets such as deferred revenue expenditure be written off within 3-5 years

Inventory

Inventory should be stated at the lower of cost or market except in certain exceptional cases when it may be stated above cost. Exceptional cases when inventories be stated above cost include precious metals

Inventories are valued at the lower of cost and net realizable value. AS-2 permits only FIFO or weighted average cost formula for determining the cost of inventories

WHY US GAAP????

1. Transparency. 2. Access to global financial market. 3. Enhances company profile and reputation. 4. Facilitates benchmarking and comparability. 5. Key to seamless financial markets.