AS 1 DISCLOSURE OF ACCOUNTING POLICIES

A change in accounting policy is made only if the adoption of a different accounting policy
is required (i) by statute or (ii) for compliance with an accounting standard or (iii) if it is considered that the change
would result in a more appropriate preparation or presentation of the financial statements of the enterprise.
A more appropriate presentation of events or transactions in the financial statements occurs when the new accounting
policy results in more relevant or reliable information about the financial position, performance or cash flows of the
enterprise.

Change in accounting policy may have a material effect on the items of financial
statements. Unless the effect of
such change in accounting policy is quantified, the financial statements may not help the
users of accounts. Therefore, it is necessary to quantify the effect of change in accounting policy on financial
statement items like assets, liabilities, profit / loss. For example, if depreciation method is changed from straight-line
method to
written-down value method, or if cost formula used for inventory valuation is changed
from weighted average to FIFO, or if interest is capitalized which was earlier not in practice, or if proportionate amount
of interest is changed to inventory which was earlier
not the practice, all these may increase or decrease the net profit.

Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are
as follows:
(i) Going Concern: The financial statements are normally prepared on the assumption that an enterprise will continue
its operations in the foreseeable future and neither there is
intention, nor there is need to materially curtail the scale of operations.
(ii) Consistency: The principle of consistency refers to the practice of using same
accounting policies for similar transactions in all accounting periods unless the change is
required (i) by a statute, (ii) by an accounting standard or (iii) for more appropriate
presentation of financial statements.
(iii) Accrual basis of accounting: Under this basis of accounting, transactions are
recognised as soon as they occur, whether or not cash or cash equivalent is actually
received or paid

the materials are written down to net realisable value. As per para 24 of AS 2 ‘Valuation of Inventories’.AS 2 VALUATION OF INVENTORIES As per para 5 of AS 2 on Valuation of Inventories. an enterprise should report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities. labour or other production costs. except that cash flows described in paragraphs 22 and 24 may be reported on a net basis. materials and other supplies held for use in the production of inventories (HERE. the replacement cost of the materials may be the best available measure of their net realisable value. (ii) Storage costs unless those costs are necessary in the production process prior to a further production stage. In such circumstances. Acquisition and disposal of fixed assets is not prescribed in para 22 and 24 of the standard. the inventories are to be valued at lower of cost and net realizable value. As per para 13 of AS 2 (Revised) ‘Valuation of Inventories’. when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realizable value. Items that are to be excluded in determination of the cost of inventories as per para 13 of AS 2 on ‘Valuation of Inventories’ are: (i) Abnormal amounts of wasted materials. inventories should be valued at the lower of cost and net realizable value. . (iii) Administrative overheads that do not contribute to bringing the inventories to their present location and condition. inventories means Finished Goods) are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. AS 3 CASH FLOW STATEMENTS According to Para 21 of AS 3 (Revised) ‘Cash Flow Statements’. abnormal amounts of wasted materials. and (iv) Selling and distribution costs. Inventories should be written down to net realizable value on an item-by-item basis As per Para 5 of AS 2 “Valuation of Inventories”. labour and other production costs are excluded from cost of inventories and such costs are recognized as expenses in the period in which they are incurred. However.

consumption or other loss of value of a depreciable asset arising from use. an enterprise can change one method of charging depreciation to another method only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.AS 6 DEPRECIATION ACCOUNTING As per para 21 of AS 6 on Depreciation Accounting. plantations and similar regenerative natural resources. The deficiency or surplus arising from retrospective re-computation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed. As per para 21 of AS 6 ‘Depreciation Accounting’. (2) Goodwill. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed. depreciation should be re-calculated in accordance with the new method from the date of the asset put to use. As per paragraph 20 of AS 6 ‘Depreciation Accounting’. A combination of more than one method is sometimes used. When such a change in the method of depreciation is made. depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. provided the same methods are followed consistently. effluxion of time or obsolescence through technology and market changes.g. The management of a business selects the most appropriate method(s) based on various important factors e. According to para 12 of AS 6 ‘Deprecation Accounting’. when a change in the method of depreciation is made. For example. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts through statement of profit and loss in the year in which the method of depreciation is changed. is not applicable in respect of following assets: (1) Forest. depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. depreciation may arise even when asset has not been used in the current year but was ready for use in that year.1 of AS 6. In case the change in the method results in deficiency in depreciation in respect of past years. (4) Wasting assets or land (if it has unlimited useful life for the enterprise). the deficiency should be charged in the statement of profit and loss. (ii) the nature of the use of such asset and (iii) circumstances prevailing in the business. 3. According to para no. (3) Livestock. A company may adopt different methods of depreciation for different types of assets.. The statute governing an enterprise may provide the basis for computation of the depreciation. (i) type of asset. there are several methods of allocating depreciation over the useful life of the assets. Where the management’s estimate of the useful life of an . Accordingly. when a change in the method of depreciation is made. ‘Depreciation Accounting’. AS 6 on ‘Depreciation Accounting’. depreciation is a measure of wearing out. the Companies Act lays down the rates of depreciation in respect of various assets. As per para 21 of AS 6 ‘Depreciation Accounting’. the depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset.

the depreciation provision is appropriately computed by applying a higher rate the Company can charge higher rates of depreciation based on its estimate of the useful life of machinery. depreciable assets are the assets which (i) are expected to be used during more than one accounting period. and (ii) have a limited useful life. provided that such estimate is not less than the rate prescribed by the Companies Act. and (iii) are held by an enterprise for use in the production or supply of goods and services. or for administrative purposes and not for the purpose of sale in the ordinary course of business. AS 6 does not apply to ‘land’ as land is considered to have unlimited useful life . for that class of assets. As per AS 6 ‘Depreciation Accounting’. for rental to others. such higher depreciation rates and/or the reduced useful lives of the assets should be disclosed by way of notes to the accounts in the Financial Statements.asset of the enterprise is shorter than that envisaged under the provisions of the relevant statute. However.

or (iii) the amount of profits expected to arise in other contracts. (b) costs that are attributable to contract activity in general and can be allocated to the contract. According to para 21 of AS 7 ‘Construction Contracts’.AS 7 CONSTRUCTION CONTRACTS As per paragraphs 31 and 35 of AS 7 on Construction Contracts. contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to stage of completion of the contract activity at the reporting date. the expected loss should be recognised as an expense immediately . contract cost should comprise: (a) costs that relate directly to the specific contract. or (ii) the stage of completion of the contract. and (c) such other costs as are specifically chargeable to the customer under the terms of the contract. when the outcome of a construction contract can be estimated reliably. As per para 15 of AS 7 “Construction Contracts (revised 2002)”. an expected loss on the construction contract should be recognized as an expense immediately irrespective of (i) whether or not the work has commenced on the contract. As per para 35 of AS 7 ‘Construction Contracts’. when it is probable that total contract costs will exceed total contract revenue.

where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim. If the delivery of the sales is not subject to approval from customers. As per AS 9 ‘Revenue Recognition’. and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods. Para 8. trade discounts and volume rebates given in the ordinary course of business should be deducted in determining revenue. As per AS 9 on ‘Revenue Recognition’. These requirements can be given as follows: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership. . income accrues when the related advertisement appears before public.4 of AS 9 “Revenue Recognition” states that dividend from investments in shares are not recognized in the statement of Profit and Loss until the right to receive dividend is established. interest of `10 lakhs received in the year 2007-2008 should be recognized on the time basis. revenue is the gross inflow of cash. performance should be measured either under the completed service contract method or under the proportionate completion method. then the transfer of significant risks and rewards would take place when the sale is affected and goods are dispatched.AS 9 REVENUE RECOGNITION As per AS 9 “Revenue Recognition”. revenue from sales should be recognized only when requirements as to performance are satisfied provided that at the time of performance it is not unreasonable to expect ultimate collection. whichever relates the revenue to the work accomplished’. the revenue recognition is postponed to the extent of uncertainty inverted. whereas royalty of ` 15 lakhs received in the same year should be recognized on accrual basis as per the terms of relevant agreement. As per para 12 of AS 9 ‘Revenue Recognition’. Revenue from sales should be recognized at the time of transfer of significant risks and rewards. In such cases. receivable or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods. the revenue is recognized only when it is reasonably certain that the ultimate collection will be made. However. ‘In a transaction involving the rendering of services. As per para 11 of AS 9 ‘Revenue Recognition’.

As per paragraph 22 of AS 10 ‘Accounting for Fixed Assets’ .g. Saving of ` 1. whichever is more clearly evident. it may be charged directly to that account.. As per para 11 of AS 10 “Accounting for Fixed Assets”. to the extent that such increase is related to and not greater than a decrease arising on revaluation previously recorded as a charge to the profit and loss statement. As per para no.000 on account of using its on work force is an unrealized/ internal profit.50. or the fair market value of the securities issued. clearly states that the gross book value of the self constructed fixed asset includes the costs of construction that relate directly to the specific asset and the costs that are attributable to the construction activity in general can be allocated to the specific asset.1 of AS 10 on Accounting for Fixed Assets. ‘Accounting for Fixed Assets’. e. As per para 12. expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value. If any internal profit is there it should be eliminated. fixed asset acquired in exchange for shares or other securities in the enterprise should be recorded at its fair market value.e capitalised. 10. which should not be capitalized/recorded as per the standard Internally booked profits should be eliminated in arriving at the cost of Fixed Assets. an increase in capacity. As per Para 30 of AS 10 “Accounting for Fixed Assets”. except that.. As per para 16 of AS 10 ‘Accounting for Fixed Assets’ goodwill is to be recorded only when some consideration in money or money’s worth has been paid for it.AS 10 ACCOUNTING FOR FIXED ASSETS As per para 12. e. fixed asset acquired in exchange for shares or other securities in the enterprise should be recorded at its fair market value. it may be credited to the profit and loss statement. expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value i. an increase in capacity. whichever is more clearly evident.1 of AS 10. an increase in net book value arising on revaluation of fixed assets should be credited to owner’s interests under the head of ‘revaluation reserve.1 of AS 10 ‘Accounting for Fixed Assets’.g. A decrease in net book value arising on revaluation of fixed assets is charged directly to profit and loss statement except that to the extent such a decrease is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilized . . or the fair market value of the securities issued.

investment classified as long term investments should be carried in the financial statements at cost. However. As per para 32 of AS 13 ‘Accounting for Investments’.AS 13 ACCOUNITING FOR INVESTMENTS As per para 7 and 8 of AS 13 on ‘Accounting for Investments’. reduction in value will not be recognized and investments would be carried at cost. if other than temporary. However. if the investments were acquired for long term and decline is temporary in nature. indicators of the value of an investment are obtained by reference to its market value. then it will be shown at lower of cost or net realizable value Recognition of reduction in value of investment would depend upon the nature of investment and nature of decline as per Accounting Standard 13 “Accounting for Investments”. If the investment is a long term investment than it will be shown at cost. Gold and silver are generally purchased with an intention to hold it for long term period untill and unless given otherwise. According to para 14 of the standard. transfers are made at the lower of cost and carrying amount at the date of transfer. there are two categories of investments. viz. the carrying amount for current investments is the lower of cost and fair value whereas para 17 states that Long Term Investments are valued at cost less permanent diminutions in value of investment. whichever is less. provision for diminution shall be made to recognize a decline. for investment in shares . in the value of shares. . any reduction to fair value and any reversals of such reductions are included in the profit and loss statement. the investee’s assets and results and the expected cash flows from the investment. For current investments. However. if the investment is a current investment. However.if shares are purchased with an intention to hold for short-term period then it will be shown at the realizable value. provision for diminution shall be made to recognise a decline. if equity shares are acquired with an intention to hold for long term period then it will be shown at cost. where long-term investments are reclassified as current investments. such reduction being determined and made for each investment individually. other than temporary. in the value of the investments. Current Investments and Long Term Investments. As per para 17 of the standard. If the investments are current investments. As per provisions of the standard. And where investments are reclassified from current to long term.. If the decline is of permanent nature. As per AS 13 Accounting for Investments’. it will be charged to profit and loss account. then the reduction should be recognized and charged to Profit and Loss Account as the current investments are carried at cost or fair value. As per AS 13 ‘Accounting for Investments’. para 16 of the standard states that. transfers are made at lower of cost and fair value on the date of transfer.

the determination of fair values may be influenced by the intentions of the transferee company. a uniform set of accounting policies is adopted following the amalgamation. liabilities. Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions: Para 24 of AS 14 ‘Accounting for Amalgamations’ states that for all amalgamations (whether for amalgamations accounted for under the pooling of interests method or amalgamations accounted for under the purchase method). Where assets and liabilities are restated on the basis of their fair values. or an amalgamation in the nature of purchase. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company. there are two main methods of accounting for amalgamations: (i) The Pooling of Interest Method: Under this method. In the second category are those amalgamations which are in effect a mode by which one company acquires another company and. If at the time of amalgamation. capital and reserves more or less represent the sum of the relevant figures of the amalgamating companies. Such amalgamations are amalgamations in the nature of ‘purchase’. According to AS 14 “Accounting for Amalgamations”. As per AS 14. In first type of amalgamation there is a genuine pooling not merely of assets and liabilities of the amalgamating companies but also of the shareholders’ interests and of the businesses of the companies.AS14 AMALGAMATION As per AS 14 on ‘Accounting for Amalgamations’. Prior Period Items and Changes in Accounting Policies’. the transferor and the transferee companies have conflicting accounting policies. Such amalgamations are amalgamations which are in the nature of ‘merger’ and the accounting treatment of such amalgamations should ensure that the resultant figures of assets. An amalgamation may be either – an amalgamation in the nature of merger. The selection of method of accounting for amalgamation (pooling of interests or purchase method) is to be judged after considering the intentions of the both the companies. . The effects on the financial statements of any changes in accounting policies are reported in accordance with AS 5 on ‘Net Profit or Loss for the Period. the assets. ‘Accounting for Amalgamations’ there are two types of amalgamation. and (d) Particulars of the scheme sanctioned under a statute. or the business of the company which is acquired is not intended to be continued. (b) Effective date of amalgamation for accounting purposes. (c) The method of accounting used to reflect the amalgamation. as a consequence. liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts (after making the necessary adjustments). (ii) The Purchase Method: Under the purchase method. the share holders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company. the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. the following disclosures are considered appropriate in the first financial statements following the amalgamation: (a) Names and general nature of business of the amalgamating companies.

if B Ltd. or A Ltd. The object of the purchase method is to account for the amalgamation by applying the same principles as are applied in the normal purchase of assets. separate businesses of both the companies are continued and their amalgamation scheme satisfies all the conditions necessary for merger as specified in AS 14 “Accounting for Amalgamations”. Thus choice of accounting method depends on the fact whether B Ltd. In that case. . wants to continue its business or not. wants to acquire the other company. However. then purchase method needs to be adopted. liabilities. shareholders’ interest is intended.If genuine pooling of all assets. pooling of interests method is adopted. the shareholders of the acquired company don’t continue to have proportional share in equity of the combined company and the business of the acquired company is not intended to be continued.