A PROJECT REPORT

ON
ACCOUNTING STANDARDS
(AS-1, AS-6, AS-10, AS-12)

PRESENTED BY:

UNDER GUIDANCE OF:

PROF.

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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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 EXECUTIVE SUMMARY

This project review about how India has set a roadmap for convergence with International
Financial Reporting Standards (IFRS) commencing from 1 April, 2011. The convergence
with IFRS standards is set to change the landscape for financial reporting in India. IFRS
represents the most commonly accepted global accounting framework as it has been adopted
by more than 100 countries. With the growth of Indian Economy and increasing integration
with the global economies, Indian corporate is raising capital globally. Under the
circumstances, it would be imperative for Indian corporate to adopt IFRS for their financial
reporting. While the Core Group of Ministry of Corporate Affairs (MCA) has recommended
convergence to IFRS in a phased manner from 1st April, 2011 Indian corporate having global
aspirations should consider earlier voluntary adoption. While there are several similarities
between Indian GAAP and IFRS, still there are differences which can have significant impact
on the financial statements. This project is aim to bring out such aspects and a comparative
analysis on Indian Accounting standard vis-à-vis IFRS.

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 INTRODUCTION
India, one of the fastest growing global economies is on the verge of converging with
International Financial Reporting Standards (IFRS). As on date 123 countries across the
globe have converged with IFRS, India is soon to join the bandwagon.

The Ministry of Corporate Affairs in its press release dated 25.2.2011 notified 35 Indian
Accounting Standards converged with International Financial Reporting Standards
(henceforth called Draft IND AS). The Ministry of Corporate Affairs will implement the
IFRS converged Indian Accounting Standards in a phased manner after various issues
including tax related issues are resolved with the concerned Departments. Consequently, the
companies listed outside but carrying their operations `in India will need to convert their
accounts from Indian GAAP to IFRS while some of the companies would like to see how
their how their present financial statements would look if these were prepared as per IFRS.
Though, there has been considerable delay in the implementation of these standards, efforts
are on the run. The newly revised Schedule VI which is completely based on IAS 1 is a clear
evidence of being optimistic on convergence with IFRS.

While similarities between the Indian Accounting standards and IFRS do exist, the changes
required to convert to international standards are both numerous and complex. It is essential
for companies and finance professionals to initiate their IFRS learning curve and to begin the
design of IFRS adoption strategy.

HISTORY OF INDIAN ACCOUNTING AND IFRS

A) History of Indian Accounting standards

Indian Accounting Standards (abbreviated as Ind-AS) in India accounting standards were

issued under the supervision and control of Accounting Standards Board (ASB), which was
constituted as a body in the year 1977. ASB is a committee under Institute of Chartered
Accountants of India (ICAI) which consists of representatives from government department,
academicians, other professional bodies viz. icsi, icai, representatives from ASSOCHAM,
CII, FICCI, etc.

The Ind AS are named and numbered in the same way as the corresponding International
Financial Reporting Standards (IFRS).National Advisory Committee on Accounting
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Standards (NACAS) recommends these standards to the Ministry of Corporate Affairs
(MCA). MCA has to spell out the accounting standards applicable for companies in India. As
on date MCA has notified 39 Ind AS. This shall be applied to the companies of financial year
2015-16 voluntarily and from 2016-17 on a mandatory basis. Based on the international
consensus, the regulators will separately notify the date of implementation of Ind-AS for the
banks, insurance companies etc. Standards for the computation of Tax have been notified as
ICDS in February 2015.

APPLICABILITY OF INDIAN ACCOUNTING STANDARDS (IND AS)

Voluntary compliance

Any company may comply with Indian AS for Financial statements beginning with period on
or after 1st April 2015, with the comparatives of period ending on 31stMarch, 2015, or
thereafter.

Mandatory Compliance

It is mandatory for the following companies to comply with Indian AS for financial
statements beginning with period on or after 1st April 2016, with the comparatives of period
ending on 31st March, 2016, or thereafter.

• Companies whose securities are listed or are in process of listing in any stock
exchange in India or outside India and having net worth of Rs. 500 crore or more;

• Companies other than above and having net worth of Rs. 500 Crore or more;

• Holding, subsidiaries, joint venture or associates of above companies.

It is also mandatory for the following companies to comply with Indian AS for financial
statements beginning with period on or after 1st April 2017, with the comparatives of period
ending on 31st March, 2016, or thereafter.

• Companies whose securities are listed or are in process of listing in any stock
exchange in India or outside India and having net worth of less than Rs. 500 crore
or more;

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 • Companies other than above and having net worth of Rs. 250 Crore but less than
Rs. 500 Crore or more;

• Holding, subsidiaries, joint venture or associates of above companies.

• Securities listed or in process of listed in SME Exchange are not included in above
companies.

• The net worth is calculated based on standalone financial statements of company

as on 31st March 2014 or first audited financial statements after this date.

• The companies which were not in existence or exiting companies falling under
above rules of applicability of AS, the net worth is calculated based on the first
audited financial statements ending after that date. If these companies are meeting
the net worth limit for first time at the end of financial year, then they shall follow
the Indian AS from next accounting year. For example if the companies meet the
net worth limit as on 31st march 2017 then the Ind AS will be applicable from
financial year 2017-18.

• Ind AS will be applied to both standalone financial statements and consolidated

financial statements.

• Overseas subsidiaries, associates, joint ventures and other similar entities of an

Indian company may prepare its standalone financials statements in accordance to
requirement of specific jurisdiction.

• Once any Indian company applies Ind AS voluntarily or mandatory, then it must
follow them consistently for future years.

Exemptions

The insurance companies, banking companies and non-banking finance companies shall not
be required to apply Indian Accounting Standards (Ind AS) for preparation of their financial
statements either voluntarily or mandatory as specified in sub-rule (1) of rule 4.

General Instruction for application of Ind As as per Rule 3

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(1) Indian AS is intended to be in conformity with the provisions of laws. However, if
due to amendments in the law, a particular Indian AS is found to be not in conformity with
such law, the provisions of the said law shall prevail and the financial statements shall be
prepared in conformity with such law.

(2) Indian AS is intended to apply only to items which are material.

(3) The Indian AS having paragraphs in bold italic type and plain type, have equal
authority. Paragraphs in bold italic type just indicate the main principles of the particular AS.

B) History of International Financial Reporting Standards

International Financial Reporting Standards (IFRS) are designed as a common global

language for business affairs so that company accounts are understandable and comparable
across international boundaries. They are a consequence of growing international
shareholding and trade and are particularly important for companies that have dealings in
several countries. They are progressively replacing the many different national accounting
standards. They are the rules to be followed by accountants to maintain books of accounts
which are comparable, understandable, reliable and relevant as per the users internal or
external.

IFRS, with the exception of IAS 29 Financial Reporting in Hyperinflationary Economies and
IFRIC 7 Applying the Restatement Approach under IAS 29, are authorized in terms of the
historical cost paradigm. IAS 29 and IFRIC 7 are authorized in terms of the units of constant
purchasing power paradigm.

IFRS began as an attempt to harmonize accounting across the European Union but the value
of harmonization quickly made the concept attractive around the world. However, it has been
debated whether or not de facto harmonization has occurred. Standards that were issued by
IASC (the predecessor of IASB) are still within use today and go by the name International
Accounting Standards (IAS), while standards issued by IASB are called IFRS. IAS was
issued between 1973 and 2001 by the Board of the International Accounting Standards
Committee (IASC). On 1 April 2001, the new International Accounting Standards Board
(IASB) took over from the IASC the responsibility for setting International Accounting
Standards. During its first meeting the new Board adopted existing IAS and Standing

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Interpretations Committee standards (SICs). The IASB has continued to develop standards
calling the new standards "International Financial Reporting Standards".

APPLICABILITY OF INTERNATIONAL FINANCIAL REPORTING

STANDARDS

Voluntary Compliances

Companies can voluntarily adopt Ind AS for accounting periods beginning on or after 1 April
2015 with comparatives for period ending 31 March 2015 or thereafter. However, once they
have chosen this path, they cannot switch back.

Mandatory Compliances

Phase I

Ind AS will be mandatorily applicable to the following companies for periods beginning on
or after 1 April 2016, with comparatives for the period ending 31 March 2016 or thereafter

• Companies whose equity and/or debt securities are listed or are in the process of
listing on any stock exchange in India or outside India and having net worth of
500 crore INR or more.

• Companies having net worth of 500 crore INR or more other than those covered
above.

• Holding, subsidiary, joint venture or associate companies of companies covered

above.

Phase II

Ind AS will be mandatorily applicable to the following companies for periods beginning on
or after 1 April 2017, with comparatives for the period ending 31 March 2017 or thereafter:

1. Companies whose equity and/or debt securities are listed or are in the process of being
listed on any stock exchange in India or outside India and having net worth of less
than rupees 500 Crore.

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 2. Unlisted companies other than those covered in Phase I and Phase II whose net worth
are more than 250 crore INR but less than 500 crore INR.

3. Holding, subsidiary, joint venture or associate companies of above companies.

Clarifications

The notification has clarified many previously open questions, some of which have been
described below:

Net worth

• It has been clarified that net worth will be determined based on the standalone
accounts of the company as on 31 March 2014 or the first audited period ending
after that date.

• Net worth has been defined to have the same meaning as per section 2(57) of the
Companies Act, 2013. It is the aggregate value of the paid-up share capital and all
reserves created out of the profits and securities premium account, after deducting
the aggregate value of the accumulated losses, deferred expenditure and
miscellaneous expenditure not written off, as per the audited balance sheet, but
does not include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation.

Standalone and consolidated financial statements

• It is now clear that Ind AS will apply to both consolidated and stand-alone
financial statements of a company covered by the roadmap. This is helpful as
companies will not have to maintain dual accounting systems.

Foreign operations

• It is a relief that an overseas subsidiary, associate or joint venture of an Indian

company is not required to prepare its stand-alone financial statements as per the
Ind AS, and instead, may continue with its jurisdictional requirements. However,
these entities will still have to report their Ind AS adjusted numbers for their
Indian parent company to prepare consolidated Ind AS accounts.

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Applicability to insurance, banking and non-banking financial companies

• Insurance, banking and non-banking financial companies shall not be required to

apply Ind AS either voluntarily or mandatorily. However, it appears (though not
clarified), that if these entities are subsidiaries, joint venture or associates of a
parent company covered by the roadmap, they will have to report Ind AS adjusted
numbers for the parent company to prepare consolidated Ind AS accounts.

Early adoption of standards

• The debate on two of the most significant standards, revenue recognition and
financial instruments has now been settled with them being notified. Interestingly,
India will be one of the first countries to mandatorily adopt these standards from 1
April 2015 while the rest of the world will follow from 2017. These two standards
will have a significant effect on entities, impacting not only their financial results
but also catalysing numerous organizational and business changes.

Others

• There was hope that companies will be given an option to prepare their financial
statements as per IFRS issued by the IASB (the true IFRS), which has been now
ruled out.

• The rules specify that in case of conflict between Ind AS and a law, the provisions
of the law shall prevail and the financial statements shall be prepared in
conformity with it.

With IFRS set to become the future Indian GAAP and IFRS being a moving target, Indian
companies should actively monitor and participate in the IASB’s standard setting process.

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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

1. This statement 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 Statements issued by it,

recommended the disclosure of certain accounting policies, e.g.,translation policies in respect
of foreign currency items.

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.

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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 Statement 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.

OBJECTIVE OF ACCOUNTING STANDARDS

Objective of Accounting Standards is to standardize the diverse accounting policies and

practices with a view to eliminate to the extent possible the non-comparability of financial
statements and the reliability to the financial statements.

Accounting Standards are formulated with a view to harmonise different accounting policies
and practices in use in a country. The objective of Accounting Standards is, therefore, to
reduce the accounting alternatives in the preparation of financial statements within the
bounds of rationality, thereby ensuring comparability of financial statements of different
enterprises with a view to provide meaningful information to various users of financial
statements to enable them to make informed economic decisions.

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
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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.

NATURE OF ACCOUNTING POLICIES

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.

2. There is no single list of accounting policies which are applicable to all circumstances. The
differing circumstances in which enterprises operate in a situation of diverse and complex
economic activity make alternative accounting principles and methods of applying those
principles acceptable. The choice of the appropriate accounting principles and the methods of
applying those principles in the specific circumstances of each enterprise calls for
considerable judgement by the management of the enterprise.

3. The various statements of the Institute of Chartered Accountants of India combined with
the efforts of government and other regulatory agencies and progressive managements have
reduced in recent years the number of acceptable alternatives particularly in the case of
corporate enterprises. While continuing efforts in this regard in future are likely to reduce the
number still further, the availability of alternative accounting principles and methods of
applying those principles is not likely to be eliminated altogether in view of the differing
circumstances faced by the enterprises.

AREAS IN WHICH DIFFERING ACCOUNTING POLICIES ARE

ENCOUNTERED

The following are examples of the areas in which different accounting policies may be
adopted by different enterprises.

• Methods of depreciation, depletion and amortisation

• Treatment of expenditure during construction
• Conversion or translation of foreign currency items
• Valuation of inventories
• Treatment of goodwill

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 • Valuation of investments
• Treatment of retirement benefits
• Recognition of profit on long-term contracts
• Valuation of fixed assets
• Treatment of contingent liabilities.

The above list of examples is not intended to be exhaustive.

Accounting Standards establish rules relating to recognition, measurement and disclosures,

thereby ensuring that all enterprises that follow them are and that their financial statements
are true, fair and transparent. High quality accounting standards are a necessary and
important element of a sound capital market system. In Public capital markets such as those
in United States, high quality accounting standards reduce uncertainty and increase overall
efficiency.

ACCOUNTING STANDARDS - SETTING IN INDIA

The institute of Chartered Accountants of India, recognizing the need to harmonize the
diverse accounting policies and practices, constituted at Accounting Standard Board (ASB)
on 21st April, 1977.

The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC,
constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view to
harmonise the diverse accounting policies and practices in use in India. After the avowed
adoption of liberalization and globalisation as the corner stones of Indian economic policies
in early ‘90s, and the growing concern about the need of effective corporate governance of
late, the Accounting Standards have increasingly assumed importance. While formulating
accounting standards, the ASB takes into consideration the applicable laws, customs, usages
and business environment prevailing in the country. The ASB also gives due consideration to
International Financial Reporting Standards (IFRSs)/ International Accounting Standards
(IASs) issued by IASB and tries to integrate them, to the extent possible, in the light of
conditions and practices prevailing in India.

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COMPOSITION OF THE ACCOUNTING STANDARDS BOARD

The composition of the ASB is broad-based with a view to ensuring participation of all
interest groups in the standard-setting process. These interest-groups include industry,
representatives of various departments of government and regulatory authorities, financial
institutions and academic and professional bodies. Industry is represented on the ASB by
their apex level associations, viz., Associated Chambers of Commerce & Industry
(ASSOCHAM), Confederation of Indian Industries (CII) and Federation of Indian Chambers
of Commerce and Industry (FICCI). As regards government departments and regulatory
authorities, Reserve Bank of India, Ministry of Company Affairs, Comptroller & Auditor
General of India, Controller General of Accounts and Central Board of Excise and Customs
are represented on the ASB. Besides these interest-groups, representatives of academic and
professional institutions such as Universities, Indian Institutes of Management, Institute of
Cost and Works Accountants of India and Institute of Company Secretaries of India are also
represented on the ASB. Apart from these interest groups, certain elected members of the
Central Council of ICAI are also on the ASB.

THE ACCOUNTING STANDARDS - SETTING PROCESS

The accounting standard setting, by its very nature, involves reaching an optimal balance of
the requirements of financial information for various interest-groups having a stake in
financial reporting. With a view to reach consensus, to the extent possible, as to the
requirements of the relevant interest-groups and thereby bringing about general acceptance of
the Accounting Standards among such groups, considerable research, consultations and
discussions with the representatives of the relevant interest-groups at different stages of
standard formulation becomes necessary. The standard-setting procedure of the ASB, as
briefly outlined below, is designed in such a way so as to ensure such consultation and
discussions:

• 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.

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 • 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.

• Meeting with the representatives of specified outside bodies to ascertain their views
on the draft of the proposed Accounting Standard.

• Finalisation of the Exposure Draft of the proposed Accounting Standard on the

basis of comments received and discussion with the representatives of specified
outside bodies.

• Issuance of the Exposure Draft inviting public comments.

• Consideration of the comments received on the Exposure Draft and finalisation of the
draft Accounting Standard by the ASB for submission to the Council of the ICAI for
its consideration and approval for issuance.

• Consideration of the draft Accounting Standard by the Council of the Institute, and if
found necessary, modification of the draft in consultation with the ASB.

THE PRINCIPLES GOVERNING SELECTION OF AN ACCOUNTING

POLICY

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
present a true and fair view of the state of affairs of the enterprise as at the balance sheet date
and of the profit and loss for the period ended on that date. For this purpose , the major
considerations governing the selection and application of accounting policies are :

1. PRUDENCE

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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.

2. SUBSTANCE AND FORM

The accounting treatment and presentation in financial statements of transactions and events
should be governed by their substance and merely by the legal form. A typical example
where substance takes precedence over form is in the case of finance leases. In finance
leases, the lessee in substance is the owner of the asset whilst the less or is merely the legal
owner. The accounting of finance leases is based on the substance rather than form of the
transaction.

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.

THE FUNDAMENTAL ACCOUNTING ASSUMPTIONS

Certain fundamentals accounting assumptions underlie the preparations and presentation of

financial statements. They are usually not specifically stated because there acceptance and
use are assumed. Disclosure is necessary if they are not followed, otherwise disclosure is not

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required. The following have been generally accepted as fundamental accounting
assumptions:

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 A. Going Concern

The enterprise is normally viewed as going concern, that is, as continuing in operation for the
foreseeable future. It is assumed the enterprise has neither the intention nor the necessity of
liquidation or of curtailing materiality the scale of the operations.

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.

PRINCIPLES FOLLOWING A “NOT GOING CONCERN”

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 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.

DIFFERENT ACCOUNTING POLICIES FOR SIMILAR ITEMS

This is the contrary to the fundamental accounting assumptions of consistency, which require
use consistence policies year after year and also in the same year for all similar items. In the

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case of depreciation, Expert Advisory Committee (EAC) of ICAI has given an opinion that
different methods of depreciation for the for the same class of assets used in different plants
of company can be applied if the management considers it appropriate to do so after taking
into account important factors such as the type of assets, the nature of the use of such assets
and circumstances prevailing in the business. Whilst such exceptions may be justifiable it
would be difficult to justify valuing the same type of inventory at to different factories by
applying to different accounting policies.

DISCLOSURE OF ACCOUNTING STANDARDS

To ensure proper understanding of financial statements, it is necessarythat all significant

accounting policies adopted in the preparation and presentation of financial statements should
be disclosed. Such disclosure should form part of the financial statements. 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.

Examples of matters in respect of which disclosure of accounting policies adopted will be

required are contained in paragraph 14. This list of examples is not, however, intended to be
exhaustive. Any change in an accounting policy which has a material 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.

Disclosure of accounting policies or of changes therein cannot remedy a wrong or

inappropriate treatment of the item in the accounts. All significant accounting policies
adopted in the preparation and presentation of financial statements should be disclosed.

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,
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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 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

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 AS- 6: DEPRECIATION

THE SCOPE AND OBJECTIVE OF AS-6 & DEPRECIABLE ASSETS

Depreciation is a measure of the wearing out, consumption or other loss of value of a

depreciable asset arising from use, efflux of time or obsolescence through technology and
market changes. Depreciation includes amortization of assets whose useful life is pre-
determined. Different accounting policies for depreciation are adopted by different
enterprises. Disclosure of accounting policies for depreciation followed by enterprise is
necessary to appreciate the view presented in the financial statements of the enterprise.
Depreciation has a significant in determining and presenting the financial position and result
of operation of an enterprise. Depreciable assets are assets which

 Are Expected To Be Used More Than One Accounting Period

 Have a limited useful life, and
 Are held by an enterprise for use in the production or supply of goods and services for
rental and others, or for administrative purpose and not for the purpose of sale in the
ordinary course of business. To qualify as a depreciable asset all there conditions are
required to be fulfilled. Even if a single condition is not fulfilled the same will not
qualify as a depreciable asset. For e.g. though land will fulfill two of the above
conditions, it does not fulfill the condition of a limited useful life and therefore is not
a depreciable asset AS-6 deals with depreciable accounting and applies to all
depreciable assets except the following items to which special consideration apply:
 Forest plantation and similar regenerative natural resources
 Wasting asset including expenditure on the exploration for an extraction of
minerals, oil, natural gases and similar non-regenerative resources.
 Expenditure on research and development
 Goodwill
 Livestock

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

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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.

DEPRECIATION CHARGES RECOGNIZED IN FINANCIAL

STATEMENTS

The depreciation charges for a period are usually recognized as an expense. However in some
circumstances, the economic benefit embodies in an asset are absorbed by the enterprise in
producing other asset rather than giving rise to an expense. In this case, the depreciation
charged comprises part of the cost of the other asset as is included in its carrying amount. For
e.g. the depreciation of manufacturing plant and equipment is included in the cost of
conversion of inventories. Simi9larly depreciation of property plant and equipment used for
development activities may be included in the cost of an intangible asset or as a capital
research and development item.

THE QUANTUM OF DEPRECIATION DETERMINED UNDER AS-6

Depreciation is allotted so as to charge a fair proportion of the depreciable amount in each

accounting period during the expected useful life of the asset. Depreciable amount of a
depreciable asset is its historical cost, or other amount substituted for historical cost in the
financial statement, less the estimated residual value. Assessment of depreciation and the
amount to be charged in respect thereof in an accounting period are usually based on the
following three factors

 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.

The quantum of depreciation is provided in an accounting period involves the exercise of

judgment by management in light of technical, commercial, accounting and legal
requirements and accordingly may need periodical review. If it is considered that the original
useful life of an asset and any revision, the unamortized depreciable amount of the asset is

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charged to the revenue over the revised remaining useful life. The useful life of major
depreciable assets or classes of depreciable asset should therefore be reviewed periodically.

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
improvement thereof. The historical cost of a depreciable asset may undergo subsequent
changes arising as a result of increase or decrease in long term liability on account of
exchange fluctuations, price adjustments, change in duties or similar factors.

DETERMINATION OF AN USEFUL LIFE OF AN ASSET

As the economic benefits embodied in an asset is reduced are consumed by the enterprise, the
carrying amount of an asset is reduced to reflect this consumption, normally by charging an
expense for depreciation .A depreciation charge is made even if the value of the asset exceeds
its carrying amount. The economic benefits embodied in an item of property, plant and
equipment are consumed by the enterprise principally through the use of the asset. However
other factors such as technical obsolescence and wear and tear while an asset remains idle
often result in diminution of the economic benefits that might have been expected to be
available from the assets.

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

1. Predetermined by legal or contractual limits, such as the expiry dates of related leases,
2. Directly governed by extraction or consumption
3. Dependent on the extent of use and physical deterioration on account of wear and tear
which again depends on operational factors such as the number of shifts for which the
asset is to be used, repair and maintenance policy of the enterprise etc. and
4. Reduced by obsolescence arising from such factors as:

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 a. Technological changes
b. Improvement in production methods
c. Change in market demand for the product or service output of the assets

d. Legal or other restrictions.

Determination of a useful life of a depreciable asset is a matter of estimation and is normally

based on various facts including experience with similar types of assets. Such estimation is
more difficult for an asset using new technology or used in the production of new product or
in the provision of a new service but is nevertheless required on some reasonable basis.

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

AS-6 OR COMPANIES ACT SHOULD BE FOLLOWED BY

COMPANIES FOR DETERMINING DEPRECIABLE AMOUNT

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 under schedule 14 of
companies are lowland therefore enterprises have a nose for good corporate governance and
accountant practices ,use much higher rates than that prescribed under schedule 14.for
example Infosys uses much higher rates than that prescribed under schedule 14 on computers
owned by them. It is important for the financial statements to be true and fair that
management estimates the useful lives of assets and determines depreciation at higher rates.
If the useful lives are lower than one set out in schedule 14.

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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.

There could be instances where a company adopts accelerated depreciation rates in respect
class of assets i.e. depreciation rates are higher than rates prescribed under schedule14 of the
companies act. For the other assets the company charges depreciation at the rates lower than
the schedule 14 of the companies act. However aggregate depreciation charge on all assets as
per the companies policy is higher than the aggregate depreciation had the company followed
schedule 14 rates for all the assets.

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.

Department of Company affairs vide circular no.2/89 has clarified that:

It may be clarified that the rates as contained in schedule 14 should be viewed as the
minimum rates and therefore a company shall not be permitted to charge depreciation at rates
lower than those specified in schedule in relations to assets purchased. After the date of
applicability of the schedule.

The conclusion is:

 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.

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USEFUL LIVES OF ASSETS REQUIRED TO BE REVIEWED

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 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.

ADDITION OR EXTENSION TO AN EXISTING ASSET

Any addition or extension to an existing asset which is of a capital nature and which becomes
an integral part of the existing asset is depreciated over the useful remaining life of that asset.
As a practical measure, however depreciation is sometimes provided on such addition or
extension at the rate which is applied to an existing asset. Any addition or extension which
retains a separate identity and is capable of being used after the existing asset is disposed of,
is depreciated independently on the basis of an estimate of its own useful life. Where the
historical cost of a depreciable asset may undergo subsequent changes arising as a result of
increase or decrease in long term liability on account of exchange fluctuations, price
adjustments, changes in duties or similar factors the depreciation on the revised unamortised
depreciable amount is provided prospectively over the residual useful life of the asset. For
example let’s say the useful life of an asset of Rs. 600000 is 5 years. In the second year when
the net value of the asset was Rs. 480000 an additional amount of Rs. 20000 nibs capitalised
on account of foreign exchange difference. The revised unamortised amount of Rs. 500000
would be depreciated over the remaining useful life of 4 years. therefore deprecation each
year for the next 4 years would be Rs. 125000.if the company was using the written down
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value method then depreciation would be provided on the revised unamortised amount of Rs.
500000 at the WDV depreciation rate.

DEPRECIATION ON IDLE ASSETS

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

Determination of residual value of an asset is normally a difficult matter. If such value is

considered as insignificant, it is normally regarded as nil. On the contrary, if the value is
considered as insignificant, it is estimated at the time of acquisition / installation, or at the
time of subsequent revaluation of the asset. One of the basis for determining the residual
value would be the realizable value of similar assets, which have reached the end of their
useful lives and have operated under conditions similar to those in which the asset will be
used

PRINCIPLE GOVERNING TO CHOOSE THE DEPRECIATION

METHOD

There are several methods of allocating depreciation over the useful life of the assets. Those
most commonly employed in industrial and commercial 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

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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.

DIFFERENT DEPRECIATION METHODS APPLIED FOR THE SAME

CLASS OF FIXED ASSETS

The management of a business selects the most appropriate depreciation methods based on
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. It is therefore possible that plant and machinery be depreciated on WDV
basis and all the other assets on SLM basis. Sometimes different methods of depreciation of
the same class of assets used in different plants of the company can be applied if the
management considers it appropriate to do so, after taking into account important factors such
as type of assets, the nature of the use of such assets and circumstances prevailing in the
business. For example, if an enterprise is in the business of letting out vehicles on hire it may
depreciate the hired vehicles at higher rate than compared to the vehicles which are used by
its employees fro office purposes.

CHANGING OF DEPRECIATION METHODS

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.
When such a change in the method of depreciation is made, depreciation is recalculated in
accordance with the new method from the date of the asset coming into use. The deficiency
or surplus arising from retrospective recomputation of depreciation in accordance with the
new method is adjusted in the accounts in the year in which the method of depreciation is
changed. In case the change in the method results in deficiency in depreciation in respect of
past years, the deficiency is charged in the statement of profit and loss. In case the change in

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the method results in surplus, the surplus is credited to the statement of profit and loss. Such a
change is treated as a change in accounting policy and its effect is quantified and disclosed.

DEPRECAITION PROVIDED ON FIXED ASSETS ADDITION/

DELETION DURING THE YEAR

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 in capital WIP, since civil work has been delayed for along
period, the company should not provide depreciation on the equipments.

PROVISIONS FOR THE DEPRECIATION ON FIXED ASSETS ITEMS

BELOW Rs. 5000

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.

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INCOME TAX BASIS OF DETERMINING DEPRECIATION
ACCEPTABLE IN THE FINANCIAL ACCOUNTS UNDER
COMPANIES ACT 1956

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.

AS-6 and schedule XIV require pro-rata depreciation to be charged in respect of addition/
deletion to fixed assets. Therefore for purposes of Companies Act financial accounts, it is not
appropriate to determine depreciation, after crediting profit on sale of assets against the
concerned block of assets, like it is done for income-tax purpose. Infact profit on sale of
assets needs separate recognition and disclosure in the Companies Act financial statements.

CONTINUOUS AND NON-CONTINUOUS PRCOCESS PLANT’s

DEPRCIATION DISTINGUISH

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,
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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 steel melting shops there is a
technological compulsion to operate 24 hours a day, i.e., if such plants are shut down costs
also. But there is no such technological compulsion in case of rolling mills. When this matter
was referred to the EAC for opinion, it gave the following opinion: “the committee is of the
view that whether a particular rolling mill is a continuous prices plant should be determined
on the basis of the facts and technical evaluation that whether it is both designed and required
to operate 24 hours a day. The committee notes that the argument advanced by the querist
primarily emphasize the “technical compulsion” to operate certain mills 24 hours a day.
However apart from fulfilling the aforesaid condition the plant should also be designed to
operate 24 hours a day. Whether a plant is designed to operate 24 hours a day is also a
question of fact of a technical nature.

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.

DISCLOSURE REQUIRED UNDER AS-6

The following information should be disclosed in the financial statements:

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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.

The following information should also be disclosed in the financial statements along with the
disclosure of other accounting policies:

(i) depreciation methods used; and

(ii) depreciation rates or the useful lives of the assets, if they are different from the principal
rates specified in the statute governing the enterprise.

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.

A change in the method of depreciation is treated as a change in an accounting policy and is

disclosed accordingly.

Where depreciable assets are disposed of, discarded, demolished or destroyed, the net surplus
or deficiency, if material, is disclosed separately.

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 AS-10: ACCOUNTING FOR FIXED ASSETS

OBJECTIVE AND SCOPE OF AS-10

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 expenditure represents an assets or an expense can have a material
effect on an enterprise’s reported results of operations. This standard is mandatory in nature.
The provisions relating to borrowing costs, intangible assets and leases that were originally
contained in this standard were withdrawn once new accounting standards were developed in
these areas. This statement does not deal with accounting for the following items to which
special consideration apply;
 Forests, plantations and similar regenerative natural resources;
 Wasting assets including mineral rights, expenditure on exploration for and extraction
of minerals, oil, natural gas and similar non-regenerative resources;
 Expenditure on real estate development; and
 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.

WHAT ARE FIXED ASSETS?

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 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 bases. It may be appropriate to aggregate individually

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insignificant items, such as moulds, tools and dies, and to apply the criteria to the aggregate
value.

ACCOUNTING FOR MACHINERY SPARES

The accounting of machinery spares is done in accordance with this statement and not in
accordance with AS-2 on ‘Inventories”. Stand-by equipment and servicing equipment are
normally capitalized. Machinery spares are usually charged to the profit and loss statement as
and when consumed. However, if such spares can be used only in connection with an item of
fixed asset and their use is expected to be irregular, it may be appropriate to allocate the total
cost on a systematic basis over a period not exceeding the useful life of the principal item.
In certain circumstances, the accounting for an item of fixed asset may be improved if the
total expenditure thereon is allocated to its component parts, provided they are in practice
separable, and estimates are made of the useful lives of these components. For example,
rather than treat an aircraft and its engines as one unit, it may be better to treat the engines as
a separate unit if it is likely that their useful life is shorter than that of the aircraft as a whole

COMPONENTS OF COSTS OF FIXED ASSETS

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, 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.

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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 composite sum in respect of both the manufacturing process as well as plans,
drawings and designs for buildings, plant and machinery, etc., the management should
apportion such consideration into two parts on a reasonable bases. If the said costs are not
directly attributable to bringing the assets concerned to their working condition for their
intended use, it should not be capitalised as part of the cost the asset.

SELF-CONSTRUCTED FIXED ASSETS

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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ACCOUNTING OF COST INCURRED DURING PROJECT DELAYS
AND WASTAGES
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 to 3 to 5 years after the
commencement of commercial production.
Normal wastages are capitalised. Abnormal wastages are not capitalised but charged to the
profit and loss account.

NON MONETARY CONSIDERATION FOR FIXED ASSETS

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.

SUBSEQUENT EXPENDITURE INCURRED ON FIXED ASSETS

AFTER INITIAL CAPITALISATION ACCOUNTED
Frequently, it is difficult to determine whether subsequent expenditure related to fixed asset
represents improvements that ought to be added to the gross book value or repair that ought
to be charged to the profit and loss statement. Only expenditure that increases the future
benefits from the existing asset beyond its previously assessed standard of performance is
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included in the gross book value, e.g., an increase in capacity or structural alteration to a
building that increases the strength of the building beyond its original strength. Examples of
improvements which result in increased future economic benefits include:
 Modification of an item of plant to extend its useful life, including an increase in
its capacity;
 Upgrading machine parts to achieve a substantial improvement in the quality of
output; and
 Adoption of new production processes enabling a substantial reduction in
previously assessed operating costs

While deciding whether subsequent expenditure resulted in an increase in the future benefits
from the asset or not, recognition should be given both to the increase in the benefits ‘per
annum’ as well as increase in benefits through extension of the life of the asset. Thus, even if
there was no increase in the annual capacity, but the life of the asset was substantially
increased, it would be taken as an increase in the future benefits from the concerned asset
beyond its previously assessed standard of performance. The expenditure on regular
overhauling only results in maintaining the previously estimated standard of performance and
it does not have the effect of improving the previously assessed of performance. Lets
consider an example, where a land right is in dispute when it was acquired by an enterprise.
The enterprise subsequently incurred legal expenses and got all the land rights transferred in
its favour. This expenditure should be capitalised because it increases the value of the land
beyond its original assessed standard of performance. Lets consider another example. An
enterprise purchases a land on which there is not dispute. Subsequent to the acquisition there
is encroachment of land. The enterprise incurs legal expenses to vacate the encroachers. This
expenditure cannot be capitalised because it does not increase the value of the land beyond its
original assessed standard of performance.
The cost of an addition or extension to an existing asset which is of a capital nature and
which becomes an integral part of the existing asset is usually added to its gross books value.
Expenditure on repairs or maintenance of property, plant and equipment is made to restore or
maintain the future economic benefits that an enterprise can expect from the originally
assessed standard of performance of the asset. As such, it is usually recognised as an expense
when incurred. For example, the cost of servicing or overhauling plant and equipment is
usually an expense since it restores, rather than increase, the originally assessed standard
performance.
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BASIS FOR REVALUATION OF FIXED ASSETS AND USE OF
REVALUATION RESERVE FOR DECLARING DIVIDENDS OR
ISSUING BONUS SHARES
Sometimes financial statements that are otherwise prepared on a historical cost basis include
part or all of the fixed assets at a valuation in substitution for historical costs and depreciation
is calculated accordingly. A commonly accepted and preferred method of restating assets is
by appraisal, normally undertaken by competent valuer’s. Other methods are used are
indexation and reference o the current prices which when applied across checked periodically
by appraisal method. According to Schedule VI of Companies Act, every balance sheet
subsequent to revaluation shall disclose the increased figure with the date of increase in place
of original cost for all the first 5 years. The fact of revaluation will be disclosed in all the
future balance sheets till such time the revalued assets appear in the company’s balance sheet.
Revaluation reserve is a reserve that represents the excess of the estimated replacement cost
or estimated market values over the book values thereof. As the revaluation reserve is a not a
realized gain, it is not available for distribution of dividends or issue of bonus shares , or
writing off accumulated losses or profit and loss debit balance or clearing backlog of
depreciation of arrears etc. SEBI also prohibits use of revaluation reserve for purpose of
declaring bonus shares.

PRINCIPLES FOR SELECTION OF FIXED ASSETS FOR

REVALUATION
When a fixed asset is revalued in financial statements, an entire class of assets should be
revalued, or the selection of assets for revaluation should be made on a systematic basis. This
basis should be disclosed. Selective revaluation of assets can lead to unrepresentative
amounts being reported in financial statements. Accordingly, when revaluations do not cover
all assets of given class, it is appropriate that the selection of assets to be made on a
systematic basis. e.g an enterprise may be revalued a whole class of assets within a unit.

ACCOUNTING TREATMENT FOR REVALUATION

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
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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.
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

Fixed asset should be eliminated from the financial statements on disposal or when no further
benefit is expected from its use and disposal. Items of fixed assets that have been retired from
active use and are held for disposal are stated at the lower of their net book value and
realisable value and are shown separately in the financial statements. Any expected loss is
recognized immediately in the profit and loss statements. In historical cost financial
statements, gains or losses arising on disposal are recognised in the profit and loss statement.
Paragraph 24 of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’ states that
“Material items retired from active use and held for disposal should be stated at the lower of
their net book value and net realisable value and shown separately in the financial
statements.” The fixed assets which are retired from active use and dismantled and are not
actually sold off, should be disclosed appropriately at the lower of net realisable value and net

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book value in the Schedule of Fixed Assets or on the face of the balance sheet under the head
Fixed Assets. These items cannot be disclosed under the caption ‘inventories’
On disposal of a previously revalued item of fixed asset, the difference between net disposal
proceeds and the net book value should be charged or credited to the profit and loss statement
except that to the extent that such a loss is related to an increase which was previously
recorded or utilised, it may be charged directly to that account. The amount standing in
revaluation reserve following the retirement or disposal of an asset which relates to that asset
may be transferred to general reserves.

TREATMENT FOR JOINTLY OWNED FIXED ASSETS

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.

AMORTISATION/ DEPRECIATION OF GOODWILL

Goodwill, in general, is recorded in the books only when some consideration in money or
money’s worth has been paid for it. Whenever, a business is acquired for a price (payable
either in cash or in shares or otherwise) which is in excess of the value of the net assets of the
business taken over, the excess is termed as ‘goodwill’. Goodwill arises from business
connections, trade name or reputation of an enterprise or from other intangible benefits
enjoyed by an enterprises. Where several fixed assets are purchased for a consolidated price,
the consideration should be apportioned to the various assets on a fair basis as determined by
competent value. As a matter of financial prudence, goodwill is written off over a period of 3-
5 years.

DISCLOSURES OF FIXED ASSETS

In addition to disclosures required to be made under AS-1 and AS-6, further disclosures
under AS-10 are as follows:
(i) Gross and net book values of fixed assets at the beginning and end of an accounting
period showing additions, disposals, acquisitions and other movements;

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(ii) Expenditure incurred on account of fixed assets in the course of construction or
acquisition; and
(iii) Revalued amount substituted for historical costs of fixed assets, the basis of selection
of fixed assets for revaluation, the method adopted to compute the revalued amount,
the nature of any indices used, the year of any appraisal made, and whether an
external valuer was involved, in case where fixed assets are stated at revalued
amounts.

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.

SIGNIFICANT DIFFERENCES BETWEEN AS-10, IAS AND US GAAP

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. 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
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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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 AS-12: GOVERNMENT GRANTS

ACCOUNTING FOR GOVERNMENT GRANTS

 Capital Approach versus Income Approach

 Recognition of Government Grants
 Non-monetary Government Grants
 Presentation of Grants Related to Specific Fixed Assets
 Presentation of Grants Related to Revenue
 Presentation of Grants of the nature of Promoters’ contribution
 Refund of Government Grants

 Disclosure

STATEMENTS OF ACCOUNTING STANDARDS

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’.

The Standard comes into effect in respect of accounting periods commencing on or after
1.4.1992 and will be recommendatory in nature for an initial period of two years.

Accordingly, the Guidance Note on ‘Accounting for Capital Based Grants’ issued by the
Institute in 1981 shall stand with drawn from this date. This Standard will become mandatory
in respect of accounts for periods commencing on or after 1.4.1994.2

INTRODUCTION

1. This Statement deals with accounting for government grants. Government grants are
sometimes called by other names such as subsidies, cash incentives, duty drawbacks,
etc.

2. This Statement does not deal with:

 The special problems arising in accounting for government grants in financial

statements reflecting the effects of changing prices. Accounting Standards are
intended to apply only to items which are material.
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  Reference may be made to the section titled ‘Announcements of the Council
Regarding status of various documents issued by the Institute of Chartered
Accountants of India’ appearing at the beginning of this Compendium for a
detailed discussion on the implications of the mandatory status of an accounting
standard.

DEFINITIONS

The following terms are used in this Statement with the meanings Specified:

 Government refers to government, government agencies and similar bodies whether

local, national or international.

 Government grants are assistance by government in cash or kind to an enterprise for

past or future compliance with certain conditions.

 They exclude those forms of government assistance which cannot reasonably have a
value placed upon them and transactions with government which cannot be
distinguished from the normal trading transactions of the enterprise.

EXPLANATION

The receipt of government grants by an enterprise is significant for Preparation of the

financial statements for two reasons. Firstly, if a government grant has been received, an
appropriate method of accounting there for is necessary. Secondly, it is desirable to give an
indication of the extent to which the enterprise has benefited from such grant during the
reporting period. This facilitates comparison of an enterprise’s financial statements with those
of prior periods and with those of other enterprises.

ACCOUNTING TREATMENT OF GOVERNMENT GRANTS

Capital Approach versus Income Approach

 Two broad approaches may be followed for the accounting treatment of government
grants: the ‘capital approach’, under which a grant is treated as part of shareholders’
funds, and the ‘income approach’, under which a grant is taken to income over one or
more periods.

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Those in support of the ‘capital approach’ argue as follows:

 Many government grants are in the nature of promoters’ contribution, i.e., they are
given with reference to the total investment in an undertaking or by way of
contribution towards its total capital outlay and no repayment is ordinarily expected in
the case of such grants. These should, therefore, be credited directly to shareholders’
funds.

 It is inappropriate to recognise government grants in the profit and loss statement,

since they are not earned but represent an incentive provided by government without
related costs.

Arguments in support of the ‘income approach’ are as follows:

 Government grants are rarely gratuitous. The enterprise earns them through
compliance with their conditions and meeting the envisaged obligations. They should
therefore be taken to income and matched with the associated costs which the grant is
intended to compensate.

 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.

 In case grants are credited to shareholders’ funds, no correlation is done between the
accounting treatment of the grant and the accounting treatment of the expenditure to
which the grant relates.

 It is generally considered appropriate that accounting for government grant should be

based on the nature of the relevant grant. Grants which have the characteristics similar
to those of promoters’ contribution should be treated as part of shareholders’ funds.
Income approach may be more appropriate in the case of other grants.

 It is fundamental to the ‘income approach’ that government grants be recognised in

the profit and loss statement on a systematic and rational basis over the periods
necessary to match them with the related costs. Income recognition of government
grants on a receipts basis is not in accordance with the accrual accounting assumption.

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RECOGNITION OF GOVERNMENT GRANTS

Government grants available to the enterprise are considered for inclusion in accounts:

 Where there is reasonable assurance that the enterprise will comply with the
conditions attached to them; and

 Where such benefits have been earned by the enterprise and it is reasonably certain
that the ultimate collection will be made.

 Mere receipt of a grant is not necessarily a conclusive evidence that condition

attaching to the grant have been or will be fulfilled.

NON-MONETARY GOVERNMENT GRANTS

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.

Non-monetary assets given free of cost are recorded at a nominal value.

PRESENTATION OF GRANTS RELATED TO SPECIFIC FIXED

ASSETS

 Grants related to specific fixed assets are government grants whose primary condition
is that an enterprise qualifying for them should purchase, construct or otherwise
acquire such assets. Other conditions may also be attached restricting the type or
location of the assets or the periods during which they are to be acquired or held.

 Two methods of presentation in financial statements of grants (or the appropriate

portions of grants) related to specific fixed assets are regarded as acceptable
alternatives.

 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.
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  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 position regardless of whether or not the grant is
deducted from the related asset for the purpose of balance sheet presentation.

PRESENTATION OF GRANTS RELATED TO REVENUE

 Grants related to revenue are sometimes presented as a credit in the profit and loss
statement, either separately or under a general heading such as ‘Other Income’.
Alternatively, they are deducted in reporting the related expense.

 Supporters of the first method claimt hat it is inappropriate to net income and expense
items and that separation of the grant from the expense facilitate comparison with
other expenses not affected by a grant. For the second method, it is argued that the
expense might well not have been incurred by the enterprise if the grant had not been
available and presentation of the expense without offsetting the grant may therefore
be misleading.

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PRESENTATION OF GRANTS OF THE NATURE OF PROMOTERS’
CONTRIBUTION

 Where the government grants are of the nature of promoters’ contribution, i.e., they
are given with reference to the total investment in an undertaking or by way of
contribution towards its total capital outlay (for example, central investment subsidy
scheme) and no repayment is ordinarily expected in respect thereof, the grants are
treated as capital reserve which can be neither distributed as dividend nor considered
as deferred income.

REFUND OF GOVERNMENT GRANTS

 Government grants sometimes become refundable because certain conditions are not
fulfilled. A government grant that becomes refundable is treated as an extraordinary
item (see Accounting Standard (AS) 5, Prior Period and Extraordinary Items and
Changes in Accounting Policies5).

 The amount refundable in respect of a government grant related to revenue is applied

first against any unamortised deferred credit remaining in respect of the grant. To the
extent that the amount refundable exceeds any such deferred credit, or where no
deferred credit exists, the amount is charged immediately to profit and loss statement.

 The amount refundable in respect of a government grant related to a specific fixed

asset is recorded by increasing the book value of the asset or by reducing the capital
reserve or the deferred income balance, as appropriate, by the amount refundable. In
the first alternative, i.e., where the book value of the asset is increased, depreciation
on the revised book value is provided prospectively over the residual useful life of the
asset.

 Where a grant which is in the nature of promoters’ contribution becomes refundable,

in part or in full, to the government on non-fulfillment of some specified conditions,
the relevant amount recoverable by the government is reduced from the capital
reserve.

DISCLOSURE

The following disclosures are appropriate:

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  The accounting policy adopted for government grants, including the methods of
presentation in the financial statements; the nature and extent of government grants
recognised in the financial statements, including grants of non-monetary assets given
at a concessional rate or free of cost.

 Government grants should not be recognised until there is reasonable assurance that
(i) the enterprise will comply with the conditions attached to them, and (ii) the grants
will be received.

 Government grants related to specific fixed assets should be presented in the balance
sheet by showing the grant as a deduction from the gross value of the assets
concerned in arriving at their book value. Where the grant related to a specific fixed
asset equals the whole or virtually the whole, of the cost of the asset, the asset should
be shown in the balance sheet at a nominal value. Alternatively, government grants
related to depreciable fixed assets may be treated as deferred income which should be
recognised in the profit and loss statement on a systematic and rational basis over the
useful life of the asset, i.e., such grants should be allocated to income over the periods
and in the proportions in which depreciation on those assets is charged. Grants related
to non-depreciable assets should be credited to capital reserve under this method.
However, if a grant related to a non-depreciable asset requires the fulfillment of
certain obligations, the grant should be credited to income over the same period over
which the cost of meeting such obligations is charged to income. The deferred income
balance should be separately disclosed in the financial statements.

 Government grants related to revenue should be recognised on a systematic basis in

the profit and loss statement over the periods necessary to match them with the related
costs which they are intended to compensate. Such grants should either be shown
separately under ‘other income’ or deducted in reporting the related expense.

 Government grants of the nature of promoters’ contribution should be credited to

capital reserve and treated as a part of shareholders’ funds.

 Government grants in the form of non-monetary assets, given at a concessional rate,

should be accounted for on the basis of their acquisition cost. In case a non-monetary
asset is given free of cost, it should be recorded at a nominal value.

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  Government grants that are receivable as compensation for expenses or losses
incurred in a previous accounting period or for the purpose of giving immediate
financial support to the enterprise with no further related costs, should be recognised
and disclosed in the profit and loss statement of the period in which they are
receivable, as an extraordinary item if appropriate.

 A contingency related to a government grant, arising after the grant has been
recognised, should be treated in accordance with Accounting Standard (AS) 4,
Contingencies and Events Occurring After the Balance Sheet Date.7

 Government grants that become refundable should be accounted for as an

extraordinary item.

 The amount refundable in respect of a grant related to revenue should be applied first
against any unamortised deferred credit remaining in respect of the grant. To the
extent that the amount refundable exceeds any such deferred credit, or where no
deferred credit exists, the amount should be charged to profit and loss statement.

 The amount refundable in respect of a grant related to a specific fixed asset should be
recorded by increasing the book value of the asset or by reducing the capital reserve
or the deferred income balance, as appropriate, by the amount refundable. In the first
alternative, i.e., where the book value of the asset is increased, depreciation on the
revised book value should be provided prospectively over the residual useful life of
the asset.

 Government grants in the nature of promoters’ contribution that become refundable

should be reduced from the capital reserve.

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 LITERATURE REVIEW
Source: The Economics Times (20th march 2016)

Over half of India Inc not ready for Ind AS implementation: PwC

With less than a fortnight left for formal adoption of Indian Accounting Standards, over half
of the companies aren't ready for the transition, says a PwC survey. The audit and tax
consulting firm believes that the level of preparedness for Ind AS adoption goes beyond
financial reporting, requiring significant organizational changes. "More than 50 per cent of
the respondents are yet to plan or commence implementing changes at an organizational
level.” Also, 39 per cent of them are yet to start or plan for the impact assessment of Ind AS
adoption," says a PwC quoting the findings from a February 2016 survey among 100
companies across industry sectors and size. About 63 per cent of them are covered under
mandatory phase I adoption of Ind AS. Known as Ind AS, new accounting and reporting
standards that are in line with global practices will kick in from April 1 in a phased manner.
Nearly half (45 per cent) believe management approach for identification of segments will
have a major impact on disclosures.

Sumit Seth, a partner at Price Waterhouse & Co, the accounting arm of PwC India, advices
companies to follow a step-by-step approach to Ind AS. "Since the impact of Ind AS adoption
cascades beyond accounting resulting in several organizational changes impacting direct and
indirect taxes, contractual arrangements with customers, suppliers, lenders, and incentive
policies including timely communication with various stakeholders, companies will have to
follow a step-by-step approach to ensure a smooth transition," he said.

Three-fourths of the respondents expect they will have to report additional non-Gaap
financial measures once they switch to Ind AS, says the survey, adding that even though the
impact of adopting Ind AS will vary from company to company and from across the sectors,
better planning will enable firms to address some implementation challenges in advance.

As per the survey, 45 per cent believe that management approach for identification of
segments will have a significant impact on the disclosures made by them. According to PwC,
financial services, retail and consumer companies as well as pharma and life sciences will be
the most impacted sectors once the transition takes place.

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RESEARCH METHODOLOGY

OBJECTIVE OF THE STUDY

The primary objective of study is explaining the deference between the International
Financial Regulation Standard (IFRS) and Indian Accounting standard principles (GAAP).
This study also aims to find out the contribution of IFRS and Indian Accounting standard.

DATA COLLECTION

Methods of Data Collection

The data’s were collected through secondary sources.

Secondary Sources

Secondary data’s are in the form of finished products as they have already been treated
statistically in some form or other.

The secondary data mainly consists of data and information collected from records, company
websites and also discussion with the management of the organization. Secondary data was
also collected from journals, magazines and books

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 CONCLUSION
The overhaul of Indian GAAP into Ind AS promises to bring about positive changes for the
Indian business environment. The current roadmap relating to the convergence to Ind AS will
start taking practical shape next year, where unlisted and listed companies having a net worth
of 500 crores or more will have to undergo mandatory Ind AS adoption on 1 April, 2016.
This assumption has been taken given that there will be no further delay regarding Ind AS
adoption henceforth. the differences between India’s accounting standards and IFRS are sure
to be at an all-time low once Ind AS is introduced into the Indian business environment, with
the roadmap indicating that it should be in the coming year for certain companies who have
been recognized in the mentioned criteria. Ind AS is a good way for Indian entities to smooth
out their earnings from Indian GAAP to something similar to IFRS. For Ind AS to be
successfully instilled in the business environment, hard work as well as training starting from
the grassroots level needs to be done by entities prescribed to be adhering to these standards
soon. First and foremost, there should no further delays regarding introducing Ind AS to the
environment. Once Ind AS has been successfully implemented in India, there could be
discussion on how to mitigate the potentially irreconcilable differences between Ind AS and
IFRS. It is well within the realm of possibility that one day; India has the capacity and the
resources to completely adopt IFRS in its business environment.

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 BIBLIOGRAPHY

 Compendium of Accounting Standards

 ICAI – Institute of Chartered Accountants of India
 Student Guide to Indian Accounting Standard & GAAP
 www.icai.org
 https://en.wikipedia.org/wiki/Indian_Accounting_Standards
 https://en.wikipedia.org/wiki/International_FinancialReporting_Standards
 http://www.caquery.com/applicability-indian-accounting-standard-ind/
 http://www.pwc.in/services/ifrs/ifrs-in-india_roadmap.html
 https://www2.deloitte.com/content/dam/Deloitte/in/Documents/audit/in-audit-ind-as-
conversion-considerations-for-directors-and-audit committees-noexp.pdf
 http://indiabudget.nic.in/ub2014-15/bs/bs.pdf
 http://www.icaiknowledgegateway.org/media/k2/attachments/Framework_for_the_Pr
 eparation_and_Presentation_of_Financial_Statements_in_accordance_with_Indian_A
ccoun
 http://www.ifrs.org
 http://mha.nic.in/hindi/sites/upload_files/mhahindi/files/pdf/Eighth_Schedule.pdf
 http://data.worldbank.org/country/india
 http://economictimes.indiatimes.com/articleshow/51479444.cms?
utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

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