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Accounting Standards Final Project Report
Accounting Standards Final Project Report
A PROJECT REPORT
ON
ACCOUNTING
STANDARDS
(AS-1, AS-6, AS-10, AS-
12)
PRESENTED BY:
SUSHIL KUMAR SURANA
GEORGE JOSEPH
PALLAVI DIKXIT
ROBIN JAGWAYAN
RASIKA SATAM
ABHISEKH SINGHAL
PRAKASH BIJOUR
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CONTENTS
ACCOUNTING STANDARD-1 3
ACCOUNTING STANDARD-6 15
ACCOUNTING STANDARD-10 30
ACCOUNTING STANDARD-13 42
BIBLIOGRAPHY 53
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ACCOUNTING STANDARD-1
Accounting is the art of recording transactions in the best manner possible, so as
to enable the reader to arrive at judgments/come to conclusions, and in this
regard it is utmost necessary that there are set guidelines. These guidelines are
generally called accounting policies. The intricacies of accounting policies
permitted Companies to alter their accounting principles for their benefit. This
made it impossible to make comparisons. In order to avoid the above and to
have a harmonised accounting principle, Standards needed to be set by
recognised accounting bodies.
This paved the way for Accounting Standards to come into existence.
Accounting Standards in India are issued By the Institute of Chartered
Accountants of India (ICAI). At present there are 30 Accounting Standards
issued by ICAI.
INTRODUCTION
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5.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.
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The Companies Act, 1956, as well as many other statutes in India require that
the financial statements of an enterprise should give a true and fair view of its
financial position and working results. This requirement is implicit even in the
absence of a specific statutory provision to this effect. The Accounting
Standards are issued with a view to describe the accounting principles and the
methods of applying these principles in the preparation and presentation of
financial statements so that they give a true and fair view. The Accounting
Standards not only prescribe appropriate accounting treatment of complex
business transactions but also foster greater transparency and market discipline.
Accounting Standards also helps the regulatory agencies in benchmarking the
accounting accuracy.
1. The accounting policies refer to the specific accounting principles and the
methods of applying those principles adopted by the enterprise in the
preparation and presentation of financial statements.
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The following are examples of the areas in which different accounting policies
may be adopted by different enterprises.
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system. In Public capital markets such as those in United States, high quality
accounting standards reduce uncertainty and increase overall efficiency.
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Identification of the broad areas by the ASB for formulating the Accounting
Standards.
Constitution of the study groups by the ASB for preparing the preliminary
drafts of the proposed Accounting Standards.
Consideration of the preliminary draft prepared by the study group by the ASB
and revision, if any, of the draft on the basis of deliberations at the ASB.
Circulation of the draft, so revised, among the Council members of the ICAI
and 12 specified outside bodies such as Standing Conference of Public
Enterprises (SCOPE), Indian Banks’ Association, Confederation of Indian
Industry (CII), Securities and Exchange Board of India (SEBI), Comptroller and
Auditor General of India (C& AG), and Department of Company Affairs, for
comments.
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1. PRUDENCE
In the view of the uncertainty attached to future event, 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.
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3. MATERIALITY
Financial statements should disclose all “material” items, i.e. items the
statements. The concept of materiality recognizes that some matters individually
or in the aggregate, are important for the fair presentation of the financial
statements taken as a whole. The IASC (International Accounting Standards
Committee) defines audit materiality as follows: ‘Information is the if its
omission or misstatement could influence the economic decisions of users taken
on the basis of the financial statement.’ Materiality depends on the size of the
item or error judged in the particular circumstances of its omission or
misstatement. Thus materiality provides a threshold or cut-off point rather being
primary qualitative characteristics which information must have, if it is to be
useful. There are no hard and fast rules for determining materiality. What is
material is a matter of professional judgment. For example, an amount material
to the financial statements of one entity may not be material to financial
statements of another entity of a difference size or nature. Further, what is
material to the financial statements of a particular entity might change from one
period to another.
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A. Going Concern
B. Consistency
It is assumed that accounting policies are consistent from one period to another.
C. Accrual
Revenues and cost are accrued, that is, recognised as they are earned or incurred
(and not as money received or paid) and recorded in the financial statements of
the period which they relate. The accrual concept forces the matching of
revenues against relevant cost, for example, though warranty expenses are
incurred much after the turnover takes place, it has to be estimated and provided
for when the turnover is affected, as it is a cost incurred to achieve that turnover.
The company should prepare the accounts on the basis that it is not a going
concern or that it will be closed in the near future. All the assets of such a
company should be valued as its net realisable value. All the liabilities should be
valued at the expected settlement price. In addition, further liabilities may have
to be provided in respect of employee termination or premature termination of
various contracts including the lease of the premises. Adequate
disclosure/adjustments should be made in financial statements about the
impending closure and the fact that accounts are prepared on the basis. Since the
accounts would be true and fair, there no need for the auditor to make a
qualification. The auditor should however add a paragraph in his report
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detailing the going situation (matter of emphasis and not qualification). If the
financial statement is not prepared on the above basis, the auditor will have to
qualify the financial statements.
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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.
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.
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AS- 6: DEPRECIATION
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As already stated AS-6 does not apply to Land unless it has a limited useful life
for the Enterprise. Land and Buildings are separable assets and are dealt with
separately for accounting purposes, even when they are acquired together. Land
normally has an unlimited life and therefore is not depreciated. Building has a
limited life and therefore is depreciable asset. An increase in the value of land
on which the building stands does not affect the determination of the useful life
of the building.
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Historical cost or other amount substituted for the historical cost of the
depreciable asset when the asset has been revalued
Expected useful value of the depreciable value and
Estimated residual value of the depreciable asset.
In the case the depreciable assets are revalued, the provision for depreciation is
based on the revalued amount on the estimate of the remaining useful life of
such assets. Depreciation is charged in each accounting period by reference of
the depreciable amount irrespective of an increase in the market value of the
asset. This is based on the concept of historical cost. Historical cost of a
depreciable asset represents its money outlay or its equivalent connection with
its acquisition, installation and commissioning as well as for additions to or
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Useful life is either (1) the period over which a depreciable asset is expected to
be used by the enterprise or (2) the number of production or similar units
expected to be obtained from the use of assets by the enterprise. The useful life
of a depreciable asset is shorter than its physical life and is
a. Technological changes
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The useful life of an asset is defined in terms of the asset’s expected utility to
the enterprise. The asset management policy of an enterprise may involve the
disposal of assets after a specified time or after consumption of a certain
proportion of the economic benefits embodied in the assets. Therefore the useful
life of an asset may be shorter than its economic life. The estimation of the
useful life of an item of property, plant and equipment is a matter of judgment
based on the experience of the enterprise with similar assets
The statute governing an enterprise may provide the basis for computation of
the depreciation. For example the companies act 1965 lays down the rates of
depreciation in respect of various assets. Where the management’s estimate of
the useful life of an asset of the enterprise is shorter than that envisaged under
the relevant statutes, the depreciation provision is appropriately computed y
applying a higher rate. If the managements estimate of the useful life of the
asset is longer than that envisaged under the statute, depreciation rate lower than
that envisaged by the statute can be applied only in accordance with
requirements of the statute. In a large number of cases, the rates of depreciation
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Rates higher than schedule 14 should be used provided such rates are based on
sound commercial and technical considerations. For example a factory building
situated in a coastal area may be subject to higher depreciation due to corrosion.
In such a case the auditor should broadly satisfy himself that the rates are
determined in an appropriate manner. Since the determination of commercial
life of an asset is a technical matter, the decision of the Board of Directors is
normally accepted by the auditors unless he has reason to believe that such
decision is grossly incorrect.
If the managements estimate of the useful life of the asset is longer than that
envisaged, under the statute, depreciation rate lower than that envisaged by the
statute can be applied only in accordance with requirement of the statute.
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Compliance with AS-6 and the companies act should be viewed based on
each type of asset for example buildings, plant and machinery, furniture
etc and not on all the assets taken together.
In the given case, accounting policy followed by the company is not in
agreement with the accounting standard 6 and provisions of the
companies act.
The useful life of an item if property, plant and equipment should be reviewed
periodically and if expectations are significantly different from previous
estimates, the unamortised depreciable amount should be charged over the
revised remaining useful life. During the life of an asset it may become apparent
that the estimate of the useful life is inappropriate. For example the useful life
may be extended by subsequent expenditure on the asset which improves the
condition of the asset beyond its originally assessed standard of performance.
Alternatively, technological changes or changes in the market for the products
may reduce its useful life of the asset. For example due to certain changes in the
design of the finished product, a company may intend to discontinue using the
moulds much before the expiry of their useful life, the repair and maintenance
policy of the enterprise may also affect the useful life of an asset. The policy
may result in an extension of the useful life of the asset or an increase in its
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residual value. However the adoption of such a policy does not negate the need
to charge depreciation. It is important that the above reassessment of useful does
not result in depreciation lower than the required under schedule 14, as that
would result in contravention of section 205(2) of the companies act.
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Sec 205 (2) of the companies act 1956 does not deal with the manner of
provision for depreciation on assets remaining idle owing to labor trouble etc.
However since depreciation also arises out of efflux of time it would be
necessary for the purpose of section 205 to provide for depreciation even in
respect of assets which are not in use during any financial year if it plans to
declare any dividend. It may be possible that due to assets lying idle the
remaining usable life is extended, in which case a reassessment of useful life
can be made. On this basis the unamortised depreciable amount should be
charged over the revised remaining useful life, which would result in a lower
annual charge of depreciation in the future years. However as cautioned above
depreciation amount should not be lower than that determined under schedule
14 for the purposes of section 205 of the companies act. Full depreciation is
provided for even if the asset is kept in the best working condition or its market
price is gone up, since depreciation is also a factor of efflux of time.
RESIDUAL VALUE
There are several methods of allocating depreciation over the useful life of the
assets. Those most commonly employed in industrial and commercial
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enterprises are the straight line method and reducing balance method. The
management of a business selects the most appropriate method based on the
various important factors e.g. (i) type of asset, (ii) the nature of the use of such
asset and (iii) circumstances prevailing in the business. A combination of more
than one method is sometimes used. The method used for an asset is selected
based on the expected pattern of economic benefits and is consistently applied
from period to period unless there is a change in the expected pattern of
economic benefits from that asset. For example, a motor vehicle may provide
uniform economic benefits over several years. Therefore some enterprises may
choose to apply WDV method in the case of motor vehicle and SLM method in
the case of buildings.
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Schedule XIV to the Companies Act 1956, prescribed that “where during the
year, any addition has been made to any assets, or any asset has been sold,
discarded, demolished or destroyed, the depreciation on such assets shall be
calculated on a pro rata basis from the date of such addition or, as the case may
be, up to the date on which such asset has been sold, discarded, demolished or
destroyed”.
Depreciation should be provided when the asset is installed even though not in
use (but ready to use) for the whole or part of any financial year, due to reasons
like strike, lock-out, shortage of raw materials etc. However, if the asset is not
installed and is thus not ready for being put to use, depreciation should not be
provided on them. If the company has purchased certain equipments which are
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in capital WIP, since civil work has been delayed for along period, the company
should not provide depreciation on the equipments.
As per the Schedule XIV of the Companies Act, individual items below rupees
five thousands (Rs. 5000) should be depreciated 100 %. An item of furniture
such as chair or table is capable of being used independently, therefore each
chair or table will have to be provided 100 % depreciation if its individual value
does not exceed Rs. 5000. The 100 % depreciation provision cannot be avoided
by arguing that the furniture can be used only as a set, for example, asset of
chairs, which cost Rs. 5000 (unless they are attached and fixed to each other
and one chair cannot be moved without simultaneously moving the other).
When these items are purchased during the year, the 100 % depreciation should
be pro- rated based on date of addition. In the case of plant and machinery
where the aggregated actual cost of individual items of plant and machinery
costing Rs. 5000 constituents more than 10 % of the total actual cost of plant
and machinery, normal Schedule XIV rates should be used.
After Schedule XIV coming into the force, rates higher than those under that
schedule can also be adopted on the basis of bona fide determination of the
commercial life of an asset in accordance with AS-6, which is a technical
matter. Also in such a case, proper disclosure has to be made. Therefore, a
company can follow rates prescribed under the Income Tax Act/ rules only if
these rates represent bona fide commercial depreciation.
The distinction between a continuous process and non continuous process plant
is important because the continuous plant carries a depreciation rate of 5.28 %
SLM (15.33 % WDV) without any requirement to provide extra shift
depreciation as the plant has to be continuously in operation. Non continuous
process plant carries depreciation rate of 4.75 % SLM (13.91 % WDV), plus
extra-shift depreciation. Therefore treating the plant as non continuous would
result in high depreciation where a plant has worked extra-shift. Schedule XIV,
note 7 defines continuous process plant which is required and designed to
operate 24 hours a day. Guidance note on schedule XIV issued by ICAI further
clarifies that the technical design of a continuous process plant is such that there
is a requirement to run it continuously for 24 hours a day, if it is not so run,
there are significant energy loss. It is however possible that due to various
reasons, for example, lack of demand, maintenance; etc such a plant may be
shut down for some time. The shut down does not change the inherent technical
nature of the plant , for instance a blast furnace which is required and designed
to operate 24 hours a day may be shut down due to various reasons; it would
still be considered as a continuous process plant. In contrast a textile unit may
be operated for 24 hours a day, yet they are not continuous process plant
because their technical design is not such that they have to be operated for 24
hours.
In integrated steel plants, coke ovens, blast furnace, steel melting shops and
rolling mills are main plants of a steel mill. In coke ovens, blast furnaces, and
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In case of a cement plant the process are lime stone minning, lime stone crusher,
raw mill/coal mill, klin and cement mill. The lime and stone are heated in the
klin, and the output generated is klinker (small particles). The klin is designed to
operate for 24 hours a day, as it operates under high temperature. Any closure of
the klin results in high power loss and thermal shock. The klinker is processed
in the cement mill too generate cement. The clinker and the cement mill can be
operated separately (non continuous) though since output of one is input of the
other, there capacities and operation have to be balanced. However, such
balancing can be done also by purchasing/selling clinker from/to third parties
the klin is designed to operate for 24 hours a day but not the other plants in the
cement factory, for example, the lime stone crusher, cement mill, coal mill etc
are not designed to operate 24 hours a day, though from capacity balancing
point of view it may be beneficial to operate them for 24 hours a day.
Therefore whereas the kiln plant may satisfy the definition of a continuous
process plant the other plants in the cement fulfill ICAI’s definition of a
continuous process plant.
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(i) The historical cost or other amount substituted for historical cost of each
class of depreciable assets;
(ii) Total depreciation for the period for each class of assets; and
(iii) The related accumulated depreciation.
In case the depreciable assets are revalued, the provision for depreciation is
based on the revalued amount on the estimate of the remaining useful life of
such assets. In case the revaluation has a material effect on the amount of
depreciation, the same is disclosed separately in the year in which revaluation is
carried out.
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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. This statement deals with accounting for fixed assets such as
land, buildings, plant and machinery, vehicles, furniture and fittings, goodwill,
patens, trademarks and designs. This statement however does not deal with
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The cost of an item of fixed asset comprise its purchase price, including import
duties and other non-refundable taxes or levies and any directly attributable cost
of bringing the asset to its working condition for its intended use; any trade
discounts and rebates are deducted in arriving at the purchase price. MODVAT
credit can be considered to be of the nature of a refundable tax. Therefore,
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MODVAT credit should be reduced from the purchase cost of capital goods
concerned. Examples of directly attributable cost are
Sites preparation;
Initial delivery and handling costs;
Installation costs, such as special foundation for plant; and
Professional fees, for example fees of architects and engineers.
The cost of a fixed asset may undergo changes subsequent to its
acquisition or construction on account of exchange fluctuations, price
adjustments, change in duties of similar factors.
Administration and other general overhead expenses are usually excluded from
the cost of fixed assets because they do not relate to a specific fixed asset.
However, in some circumstances, such expenses as are specifically attributable
to construction of a project or to the acquisition of a fixed asset or bringing it to
its working condition, may be included as part of the cost of the construction
project or as a part of the cost of the fixed asset.
The expenditure incurred on start-up and commissioning of the project,
including the expenditure incurred on test runs and experimental production is
usually capitalized as an indirect element of the construction cost. However, the
expenditure incurred after the plant has begun commercial production, i.e.
production intended for sale or captive consumptions, is not capitalised and is
treated as revenue expenditure even though the contract may stipulate that the
plant will not be finally taken over until after the satisfactory completion of the
guarantee period.
Amount paid for know-how for the plans, layout and designs of buildings
and/or design of the machinery should be capitalised under the relevant asset
heads such as buildings, plants and machinery, etc. Depreciation should be
calculated on the total cost of those assets, including the cost of the know-how
capitalised. Know-how related to the manufacturing process is usually expensed
in the year in which it is incurred. Where the amount paid for know-how is a
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In arriving at the gross book value of self-constructed fixed assets, the above
principles apply. Included in the gross book value are costs of construction that
relate directly to the specific asset and costs that are attributable to the
construction activity in general and can be allocated to the specific asset. Any
internal profits are eliminated in arriving at such costs.
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When a fixed asset is acquired in exchange for another asset, its cost is usually
determined by reference to the fair market value of the consideration given. 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. It may be
appropriate to consider also the fair market value of the asset acquired if this is
more clearly evident. An alternative accounting treatment that is sometimes
used for an exchange of assets, particularly when the assets exchanges are
similar, is to record the asset acquired at eh net book value of the asset given up
in each case; an adjustment is made for any balancing receipt or payment of
cash or other consideration. When a fixed asset is acquired in exchange for
share or other securities in the enterprise, it is usually recorded at its fair market
value, or the fair market value of the securities issued, whichever is more
clearly evident.
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It is not appropriate for the revaluation of a class of assets to result in the net
book value of that class being greater than the recoverable amount of the assets
of that class. Therefore revaluation would be restricted to the recoverable
amount of the fixed assets. The revalued amounts of fixed assets are presented
in financial statements either by restating both the gross book value and
accumulated depreciation so as to give a net book value equal to the net
revalued amount or by restating the net book value by adding therein the net
increase on account revaluation. An upward revaluation does not provide a basis
for crediting to the profit and loss statement the accumulated depreciation
existing at the date of revaluation.
As increase in net book value arising on revaluation of fixed assets should
credited directly to owner’s interests under the head of revaluation reserves,
except that, 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, it may be credited to the profit and loss statement. A decrease in
net book value arising on revaluation of fixed asset should be charged directly
to the profit and loss statement except that to the extent that such a decrease is
related to an increase which was previously recorded as a credit to revaluation
reserve and which has not been subsequently reserved or utilised, it may be
charged directly to that account.
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Depreciation under AS-6 should be provided on the total value of the fixed asset
including the revalued protion. Depreciation on the revalued portion of the fixed
asset can either be charged to the profit and loss account or alternatively
charged to the profit and loss account and at the same time compensated from
the revaluation reserve such that the net charge to the profit and loss account is
nil.
ACCOUNTING OF RETIREMENTS AND DISPOSALS
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Where an enterprise owns fixed assets jointly with other (otherwise than as a
part in a firm), the extent of its share in such assets, and the proportion in the
original cost, accumulated depreciation and written down values are stated in
the balance sheet. Alternatively, the pro rata cost of such jointly owned assets is
grouped together with similar fully owned assets with an appropriate disclosure
thereof. Details of such jointly owned assets are indicated separately in the fixed
assets register.
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For purposes of Schedule VI, the revalued amounts of each class of fixed assets
are presented in the balance sheet separately, by restating both the gross book
value and accumulated depreciation so as to give a net book value to a new
revalued amount. It is not correct to net off the increase/decrease in net-book
value arising from revaluation of various classes of fixed assets, for example,
machinery and building.
Fixed assets are more elaborately defined under IAS and US GAAP. For
example according to IAS-16, an item of property, plant and equipment should
be recognised as an asset when (a) it is probable that future economic benefits
associated with the asset will flow to the enterprise; and (b) the cost of the asset
to the enterprise can be measured reliably. Though these provision not contained
in AS-10 it is assumed that they would apply even in the Indian situation.
US GAAP does not permit revaluation of fixed assets. As regards upward
revaluation of fixed assets, IAS-16 permits it as an alternative treatment.
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Revaluation is also permitted under AS-10, such as (a) IAS provides more detail
guidelines than AS-10 on revaluation principles (b) Under IAS-16, revaluations
are required to be done with sufficient regularity such that their carrying amount
do not differ materially from the fair values. There is no such requirement in
AS-10. IAS-16 also states that annual revaluations are important where fixed
asset fair values are subject to significant volatility, otherwise a revaluation
every three or five year is sufficient.
Under AS-10 if the interval between the date a project is ready to commence
commercial production and the date at which commercial production actually
begins is prolonged, all expenses (other than borrowing costs) incurred during
this period are charged to the profit and loss statement. However, the
expenditure incurred during this period is also sometimes treated as deferred
revenue expenditure to be amortised over a period not exceeding 3 to 5 years
after the commencement of commercial production. Under IAS/US GAAP
deferral of expenditure is not permitted, and all expenses incurred in these
circumstances are charged to the profit and loss account.
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Disclosure
The following is the text of the Accounting Standard (AS) 12 issued by the
Council of the Institute of Chartered Accountants of India on ‘Accounting for
Government Grants’.
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Introduction
Definitions
The following terms are used in this Statement with the meanings Specified:
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Explanation
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As income tax and other taxes are charges against income, it is logical to
deal also with government grants, which are an extension of fiscal
policies, in the profit and loss statement.
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Where there is reasonable assurance that the enterprise will comply with
the conditions attached to them; and
Government grants may take the form of non-monetary assets, such as land or
other resources, given at concessional rates. In these circumstances, it is usual to
account for such assets at their acquisition cost.
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Under one method, the grant is shown as a deduction from the gross value
of the asset concerned in arriving at its book value. The grant is thus
recognised in the profit and loss statement over the useful life of a
depreciable asset by way of a reduced depreciation charge. Where the
grant equals the whole, or virtually the whole, of the cost of the asset, the
asset is shown in the balance sheet at a nominal value.
Under the other method, grants related to depreciable assets are treated 4
AS 5 has been revised in February 1997. The title of revised AS 5 is ‘Net
Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies’. as deferred income which is recognised in the
profit and loss statement on a systematic and rational basis over the useful
life of the asset. Such allocation to income is usually made over the
periods and in the proportions in which depreciation on related assets is
charged. Grants related to non- depreciable assets are credited to capital
reserve under this method, as there is usually no charge to income in
respect of such assets. However, if a grant related to a non-depreciable
asset requires the fulfillment of certain obligations, the grant is credited
to income over the same period over which the cost of meeting such
obligations is charged to income. The deferred income is suitably
disclosed in the balance sheet pending its apportionment to profit and loss
account. For example, in the case of a company, it is shown after
‘Reserves and Surplus’ but before ‘Secured Loans’ with a suitable
description.
The purchase of assets and the receipt of related grants can cause major
movements in the cash flow of an enterprise. For this reason and in order
to show the gross investment in assets, such movements are often
disclosed as separate items in the statement of changes in financial
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Disclosure
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value should be provided prospectively over the residual useful life of the
asset.
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Bibliography
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