Unit – IV

LESSON 10
ACCOUNTING STANDERD IN INDIA
CONTEXT OF THE LESSON

This lesson will familiarize with the different terms and there meaning which are used in
accounting standards. This lesson signifies the objectives and advantages of applying
accounting standards in India.

OBJECTIVES OF THE LESSON

The objective of this lesson is to know:

1. Meaning of accounting standard.
2. Need and objectives of accounting standard.
3. Compliance of Accounting Standard in India.
4. Accounting Standard Board in India.
5. Number of Accounting Standard in India.

INTRODUCTION

Financial statements are prepared to summarize the end-result of all the business
activities by an enterprise during an accounting period in monetary terms. These
business activities vary from one enterprise to other. To compare the financial
statements of various reporting enterprises poses some difficulties because of the
divergence in the methods and principles adopted by these enterprises in preparing
their financial statements. In order to make these methods and principles uniform and
comparable to the extent possible – standards are evolved.
MEANING OF ACCOUNTING STANDARDS

Accounting Standards are the statements of code of practice of the regulatory

accounting bodies that are to be observed in the preparation and presentation of
financial statements. In layman terms, accounting standards are the written documents
issued by the expert institutes or other regulatory bodies covering various aspects of
measurement, treatment, presentation and disclosure of accounting transactions. e.g,
accounting standard bard (India) financial accounting standard board (U.S.A),
accounting standard board (U.K) accounting standard committee (Canada). At the
international accounting standard.

OBJECTIVES OF ACCOUNTING STANDARDS

The basic objective of Accounting Standards is to remove variations in the treatment of

several accounting aspects and to bring about standardization in presentation. They
intent to harmonize the diverse accounting policies followed in the preparation and
presentation of financial statements by different reporting enterprises so as to facilitate
intra-firm and inter-firm comparison Objective of Accounting Standards is to standarize
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.

NEED OF ACCOUNTING STANDERDS

at present accounting standard are regarded as a major component is the framework of
accounting and reporting practices. Standard exist to help accounting professional to
apply these accounting practices regard as to most suitable for the circumstances
covered. They help individual companies and there management to justify whatever
practices they adopt when preparing their financial statements. These standards
improve the credibility and reliability of financial statements
ACCOUNTING STANDARDS BOARD

The Institute of Chartered Accountants of India (ICAI) recognizing the need to

harmonize the diverse accounting policies and practices at present in use in India
constituted Accounting Standards Board (ASB) on April 21, 1977. The main role of ASB
is to formulate Accounting Standards from time to time.

 
To conceive of and suggest areas in which Accounting Standards need to be
developed.
  To formulate Accounting Standards with a view to assisting the Council of the ICAI
in evolving and establishing Accounting Standards in India.

  To examine how far the relevant International Accounting Standard/International

Financial Reporting Standard can be adapted while formulating the Accounting
Standard and to adapt the same.

  To review, at regular intervals, the Accounting Standards from the point of view of
acceptance or changed conditions, and, if necessary, revise the same.

  To provide, from time to time, interpretations and guidance on Accounting

Standards.

  To carry out such other functions relating to Accounting Standards.

COMPLIANCE WITH ACCOUNTING STANDARDS 

Section 211(3A) of Companies Act, 1956 provides that every profit and loss account
and balance sheet of the company shall comply with the accounting standards.
'Accounting Standards' means the standard of accounting recomended by the ICAI and
prescribed by the Central Government in consultation with the National Advisory
Committee on Accounting Standards(NACAs) constituted under section 210(1) of
companies Act, 1956.

The statutory auditors are required to make qualification in their report in case any item
is treated differently from the prescribed Accounting Standard. However, while
qualifying, they should consider the materiality of the relevant item. In addition to this
Section 227(3)(d) of Companies Act, 1956 requires an auditor to report whether, in his
opinion, the profit and loss account and balance sheet are complied with the accounting
standards referred to in Section 211(3C) of Companies Act, 1956.

NUMBER OF ACCOUNTING STANDARD IN INDIA

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 Accountanst of

India (ICAI). At present there are 30 Accounting Standards issued by ICAI.

Accounting Standards Issued by the Institute of Chatered Accountants of India

are as below:

 Disclosure of accounting policies:

 Valuation Of Inventories:
 Cash Flow Statements

 Contingencies and events Occurring after the Balance sheet Date

 Net Profit or loss For the period, Prior period items and Changes in accounting
Policies.

 Depreciation accounting.

 Construction Contracts.

 Revenue Recognition.

 Accounting For Fixed Assets.

 The Effect of Changes In Foreign Exchange Rates.

 Accounting For Government Grants.

 Accounting For Investments.

 Accounting For Amalgamation.

 Employee Benefits.

 Borrowing Cost.

 Segment Reporting.

 Related Party Disclosures.

 Accounting For Leases.

 Earning Per Share.

 Consolidated Financial Statement.

 Accounting For Taxes on Income.

 Accounting for Investment in associates in Consolidated Financial Statement.

  Discontinuing Operation.

 Interim Financial Reporting.

 Intangible assets.

 Financial Reporting on Interest in joint Ventures.

 Impairment Of assets.

 Provisions, Contingent, liabilities and Contingent assets.

 Financial instrument.

 Financial Instrument: presentation.

 Financial Instruments, Disclosures and Limited revision to accounting standards.

A BRIEF DISCRIPTION OF ACCOUNTING STANDARDS :

Disclosure of Accounting Policies: Accounting Policies refer to specific accounting

principles and the method of applying those principles adopted by the enterprises in
preparation and presentation of the financial statements.

Valuation of Inventories: The objective of this standard is to formulate the method of

computation of cost of inventories / stock, determine the value of closing stock /
inventory at which the inventory is to be shown in balance sheet till it is not sold and
recognized as revenue.

Cash Flow Statements: Cash flow statement is additional information to user of

financial statement. This statement exhibits the flow of incoming and outgoing cash.
This statement assesses the ability of the enterprise to generate cash and to utilize the
cash. This statement is one of the tools for assessing the liquidity and solvency of the
enterprise.
Contingencies and Events occurring after the balance sheet date: In preparing
financial statement of a particular enterprise, accounting is done by following accrual
basis of accounting and prudent accounting policies to calculate the profit or loss for the
year and to recognize assets and liabilities in balance sheet. While following the
prudent accounting policies, the provision is made for all known liabilities and losses
even for those liabilities / events, which are probable. Professional judgement is
required to classify the likehood of the future events occurring and, therefore, the
question of contingencies and their accounting arises.

Objective of this standard is to prescribe the accounting of contingencies and the

events, which take place after the balance sheet date but before approval of balance
sheet by Board of Directors. The Accounting Standard deals with Contingencies and
Events occuring after the balance sheet date.

Net Profit or Loss for the Period, Prior Period Items and change in Accounting
Policies : The objective of this accounting standard is to prescribe the criteria for
certain items in the profit and loss account so that comparability of the financial
statement can be enhanced. Profit and loss account being a period statement covers
the items of the income and expenditure of the particular period. This accounting
standard also deals with change in accounting policy, accounting estimates and
extraordinary items.

Depreciation Accounting : It is a measure of wearing out, consumption or other loss

of value of a depreciable asset arising from use, passage of time. Depreciation is
nothing but distribution of total cost of asset over its useful life.

Construction Contracts : Accounting for long term construction contracts involves

question as to when revenue should be recognized and how to measure the revenue in
the books of contractor. As the period of construction contract is long, work of
construction starts in one year and is completed in another year or after 4-5 years or
so. Therefore question arises how the profit or loss of construction contract by
contractor should be determined. There may be following two ways to determine profit
or loss: On year-to-year basis based on percentage of completion or On cpmpletion of
the contract.

Revenue Recognition : The standard explains as to when the revenue should be

recognized in profit and loss account and also states the circumstances in which
revenue recognition can be postponed. Revenue means gross inflow of cash,
receivable or other consideration arising in the course of ordinary activities of an
enterprise such as:- The sale of goods, Rendering of Services, and Use of enterprises
resources by other yeilding interest, dividend and royalties. In other words, revenue is a
charge made to customers / clients for goods supplied and services rendered.

Accounting for Fixed Assets : It is an asset, which is:- Held with intention of being
used for the purpose of producing or providing goods and services. Not held for sale in
the normal course of business. Expected to be used for more than one accounting
period.

The Effects of changes in Foreign Exchange Rates : Effect of Changes in Foreign

Exchange Rate shall be applicable in Respect of Accounting Period commencing on or
after 01-04-2004 and is mandatory in nature. This accounting Standard applicable to
accounting for transaction in Foreign currencies in translating in the Financial
Statement Of foreign operation Integral as well as non- integral and also accounting for
For forward exchange.Effect of Changes in Foreign Exchange Rate, an enterprises
should disclose following aspects:

 Amount Exchange Difference included in Net profit or Loss;

 Amount accumulated in foreign exchange translation reserve;

 Reconciliation of opening and closing balance of Foreign Exchange translation

 reserve;

Accounting for Government Grants : Governement Grants are assistance by the

Govt. in the form of cash or kind to an enterprise in return for past or future compliance
with certain conditions. Government assistance, which cannot be valued reasonably, is
excluded from Govt. grants,. Those transactions with Governement, which cannot be
distinguished from the normal trading transactions of the enterprise, are not considered
as Government grants.

Accounting for Investments : It is the assets held for earning income by way of
dividend, interest and rentals, for capital appreciation or for other benefits.

Accounting for Amalgamation : This accounting standard deals with accounting to be

made in books of Transferee company in case of amalgamation. This accounting
standard is not applicable to cases of acquisition of shares when one company
acquires / purchases the share of another company and the acquired company is not
dissolved and its seperate entity continues to exist. The standard is applicable when
acquired company is dissolved and separate entity ceased exist and purchasing
company continues with the business of acquired company

Employee Benefits : Accounting Standard has been revised by ICAI and is applicable
in respect of accounting periods commencing on or after 1st April 2006. the scope of
the accounting standard has been enlarged, to include accounting for short-term
employee benefits and termination benefits.

Borrowing Costs : Enterprises are borrowing the funds to acquire, build and install the
fixed assets and other assets, these assets take time to make them useable or
saleable, therefore the enterprises incur the interest (cost on borrowing) to acquire and
build these assets. The objective of the Accounting Standard is to prescribe the
treatment of borrowing cost (interest + other cost) in accounting, whether the cost of
borrowing should be included in the cost of assets or not.

Segment Reporting : An enterprise needs in multiple products/services and operates

in different geographical areas. Multiple products / services and their operations in
different geographical areas are exposed to different risks and returns. Information
about multiple products / services and their operation in different geographical areas
are called segment information. Such information is used to assess the risk and return
of multiple products/services and their operation in different geographical areas.
Disclosure of such information is called segment reporting.

Related Party Disclosure : Sometimes business transactions between related parties

lose the feature and character of the arms length transactions. Related party
relationship affects the volume and decision of business of one enterprise for the
benefit of the other enterprise. Hence disclosure of related party transaction is essential
for proper understanding of financial performance and financial position of enterprise.

Accounting for leases : Lease is an arrangement by which the lesser gives the right
to use an asset for given period of time to the lessee on rent. It involves two parties, a
lessor and a lessee and an asset which is to be leased. The lessor who owns the asset
agrees to allow the lessee to use it for a specified period of time in return of periodic
rent payments.

Earning Per Share: Earning per share (EPS)is a financial ratio that gives the
information regarding earning available to each equiy share. It is very important
financial ratio for assessing the state of market price of share. This accounting standard
gives computational methodology for the determination and presentation of earning per
share, which will improve the comparison of EPS. The statement is applicable to the
enterprise whose equity shares or potential equity shares are listed in stock exchange.

Consolidated Financial Statements : The objective of this statement is to present

financial statements of a parent and its subsidiary (ies) as a single economic entity. In
other words the holding company and its subsidiary (ies) are treated as one entity for
the preparation of these consolidated financial statements. Consolidated profit/loss
account and consolidated balance sheet are prepared for disclosing the total profit/loss
of the group and total assets and liabilities of the group. As per this accounting
standard, the conslidated balance sheet if prepared should be prepared in the manner
prescribed by this statement.

Accounting for Taxes on Income : This accounting standard prescribes the

accounting treatment for taxes on income. Traditionally, amount of tax payable is
determined on the profit/loss computed as per income tax laws. According to this
accounting standard, tax on income is determined on the principle of accrual concept.
According to this concept, tax should be accounted in the period in which
corresponding revenue and expenses are accounted. In simple words tax shall be
accounted on accrual basis; not on liability to pay basis.

Accounting for Investments in Associates in consolidated financial statements :

The accounting standard was formulated with the objective to set out the principles and
procedures for recognizing the investment in associates in the cosolidated financial
statements of the investor, so that the effect of investment in associates on the financial
position of the group is indicated.

Discontinuing Operations : The objective of this standard is to establish principles for

reporting information about discontinuing operations. This standard covers
"discontinuing operations" rather than "discontinued operation". The focus of the
disclosure of the Information is about the operations which the enterprise plans to
discontinue rather than dsclosing on the operations which are already discontinued.
However, the disclosure about discontinued operation is also covered by this standard.

Interim Financial Reporting (IFR) : Interim financial reporting is the reporting for
periods of less than a year generally for a period of 3 months. As per clause 41 of
listing agreement the companies are required to publish the financial results on a
quarterly basis.

Intangible Assets : An Intangible Asset is an Identifiable non-monetary Asset without

physical substance held for use in the production or supplying of goods or services for
rentals to others or for administrative purpose

Financial Reporting of Interest in joint ventures : Joint Venture is defined as a

contractual arrangement whereby two or more parties carry on an economic activity
under 'joint control'. Control is the power to govern the financial and operating policies
of an economic activity so as to obtain benefit from it. 'Joint control' is the contractually
agreed sharing of control over economic activity.

Impairment of Assets : The dictionary meanong of 'impairment of asset' is weakening

in value of asset. In other words when the value of asset decreases, it may be called
impairment of an asset. As per AS-28 asset is said to be impaired when carrying
amount of asset is more than its recoverable amount.

Provisions, Contingent Liabilities And Contingent Assets : Objective of this

standard is to prescribe the accounting for Provisions, Contingent Liabilitites,
Contingent Assets, Provision for restructuring cost.
Provision: It is a liability, which can be measured only by using a substantial degree of
estimation.
Liability: A liability is present obligation of the enterprise arising from past events the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.

Financial Instrument: Recognition and Measurement, issued by The Council of the

Institute of Chartered Accountants of India, comes into effect in respect of Accounting
periods commencing on or after 1-4-2009 and will be recommendatory in nature for An
initial period of two years. This Accounting Standard will become mandatory in respect
of Accounting periods commencing on or after 1-4-2011 for all commercial, industrial
and business Entities except to a Small and Medium-sized Entity. The objective of this
Standard is to establish principles for recognizing and measuring Financial assets,
financial liabilities and some contracts to buy or sell non-financial items. Requirements
for presenting information about financial instruments are in Accounting Standard.

Financial Instrument: presentation : The objective of this Standard is to establish

principles for presenting financial instruments as liabilities or equity and for offsetting
financial assets and financial liabilities. It applies to the classification of financial
instruments, from the perspective of the issuer, into financial assets, financial liabilities
and equity instruments; the classification of related interest, dividends, losses and
gains; and the circumstances in which financial assets and financial liabilities should be
offset. The principles in this Standard complement the principles for recognising and
measuring financial assets and financial liabilities in Accounting Standard Financial
Instruments:

Financial Instruments, Disclosures and Limited revision to accounting

standards: The objective of this Standard is to require entities to provide disclosures in
their financial statements that enable users to evaluate:
  the significance of financial instruments for the entity’s financial position and
performance; and

 the nature and extent of risks arising from financial instruments to which the
entity is exposed during the period and at the reporting date, and how the entity
manages those risks.
SELF CHECK QUESTION:

1. Define Accounting standards ? explain its need and objective?

2. How many accounting standards are issued by Accounting standard Board in
India (ASB)? Give a brief description of any eight accounting standards of India?
3. Write a brief notes on the following :
Accounting Standard Board
Compliance of accounting standard in India.

Lesson 11
Accounting Standard (AS) 9 Revenue Recognition

CONTEXT OF THE LESSON

This lesson will familiarize with the different terms and there meaning which are used in
revenue recognition. This lesson signifies the objectives and advantages of applying
revenue recognition.
OBJECTIVES OF THE LESSON

The objective of this lesson is to know:

1. Meaning and definition of various terms used in revenue recognition
2. Objectives of revenue recognition
3. Significance of revenue recognition
4. Disclosure of revenue in Financial reports

Introduction

1. This standard was used in 1985.

2. This standard deals with basis of revenue.
3. This Standard deals with the bases for recognition of revenue in the statement of
profit and loss of an enterprise. The Standard is concerned with the recognition of
revenue arising in the course of the ordinary activities of the enterprise from two
methods.
-- The sale of goods,
-- The rendering of services, and
-- The use by others of enterprise resources yielding interest, royalties and dividends.

- This Standard does not deal with the of revenue recognition to arising from following
activities:

(i) Revenue arising from construction contracts. (AS-7)

(ii) Revenue arising from hire-purchase, lease agreements. (AS-19)
(iii) Revenue arising from government grants and other similar subsidies. (AS-12)
(iv) Revenue of insurance companies arising from insurance contracts.

3. Following items are not included within the definition of "revenue" for the purpose of
this Standard are:
(i) Realized gains resulting from the disposal of fixed assets like sale of machinery, and
unrealized gains resulting from the holding of, non-current assets e.g. appreciation in
the value of fixed assets.
(ii) Unrealized holding gains resulting from the change in value of current assets, and
the natural increases in herds and agricultural and forest products.

(iii) Realized or unrealized gains resulting from changes in foreign exchange rates and
adjustments arising on the translation of foreign currency financial statements.

(iv) Realized gains resulting from the discharge of an obligation at less than its carrying
amount. For example term loan repaid at lower amount in one time settlement.

(v) Unrealized gains resulting from the restatement of the carrying amount of an
obligation. For example debenture holders agree to take lower amount then the amount
carried in balance sheet.
.

DEFINITIONS OF REVENUE

The following terms are used in this Standard with the meanings specified for revenue:

Revenue is the gross inflow of cash, receivables or other consideration arising in the
course of the ordinary activities of an enterprise from the sale of goods, from the
rendering of services, and from the use by others of enterprise resources yielding
interest, royalties and dividends. Revenue is measured by the charges made to
customers or clients for goods supplied and services rendered to them and by the
charges and rewards arising from the use of resources by them.
 In an agency relationship, the revenue is the amount of commission and not the
gross inflow of cash, receivables or other consideration.

For recognition of revenue from sales or service contract the accounting standard
-prescribed following two methods:

1. Completed service contract method it is a method of accounting which recognizes

revenue in the statement of profit and loss only when the rendering of services under a
contract is completed or substantially completed.

2. Proportionate completion method it is a method of accounting which recognizes

revenue in the statement of profit and loss proportionately with the degree of completion
of services under a contract. Explanation

Revenue recognition is mainly concerned with the timing of recognition of revenue in the
statement of profit and loss of an enterprise. The amount of revenue arising on a
transaction is usually determined by agreement between the parties involved in the
transaction. When uncertainties exist regarding the determination of the amount, or its
associated costs, these uncertainties may influence the timing of revenue recognition.

Revenue recognition from Sale of Goods

A key criterion for determining when to recognize revenue from a transaction involving
the sale of goods is that the seller has transferred the property in the goods to the buyer
for a consideration. The transfer of property in goods, in most cases, results in or
coincides with the transfer of significant risks and rewards of ownership to the buyer.
However, there may be situations where transfer of properly in goods does not coincide
with the transfer of significant risks and rewards of ownership. Revenue in such
situations is recognized at the time of transfer of significant risks and rewards of
ownership to the buyer.
At the time of rising any claim uncertainty does not exist as to ultimate collectability of
receivables amount if there is any such uncertainty exist revenue should be postponed.
At certain stages in specific industries, such as when agricultural crops have been
harvested or mineral ores have been extracted, performance may be substantially
complete prior to the execution of the transaction generating revenue. In such
Cases when sale is assured under a forward contract or a Government guarantee or
where market exists and there is a negligible risk of failure to sell, the goods involved
are often valued at net realizable value. Such amounts, while not revenue as defined in
this Standard, are sometimes recognized in the statement of profit and loss and
appropriately described.

Delayed delivery of goods

If delivery of goods is delayed at buyer’s request, revenue should be recognized subject
to the condition that goods must be in hand, identified and ready for delivery at the time
of sale.

Sales subject to installation and inspection

 If goods sold subject to installation, inspection etc. revenue should be recognized

after the buyer accepts delivery, installation and inspection are completed.
 If the installation process is simple, revenue is recognized without references to
completion of installation. E.g, installation of air condition acceptance of goods.

Sale on approval

 If goods are delivered subject to approval, the revenue should be recognized

only when the buyer formally accepts the goods.
  The revenue can also be recognized if the buyer has done an act adopting the
transaction, or the time fixed for rejection has elapsed. If no time is fixed for
rejection, on elapse of reasonable time, revenue is recognized.

Guaranteed sales if the delivery of goods is made giving the buyer an unlimited right of
return Recognition of revenue in such circumstances will depend on the substance of
the agreement. In the case of retail sales offering a guarantee of "money back if not
completely satisfied" it may be appropriate to recognize the sale but to make a suitable
provision for returns based on previous experience. In other cases, the substance of the
agreement may amount to a sale on consignment, in which case it should be treated as
indicated below.

Consignment sales if delivery of goods is made under consignment transaction to sell

Revenue should not be recognized until the goods are sold to a third party.

Cash sales In case of case sales Revenue should not be recognized until cash is
received by the seller or his agent.

Installation payment Sales where the purchaser makes a series of installment

payments to the seller and the seller delivers the goods only when the final payment is
received Revenue from such sales should not be recognized until goods are delivered.
However, when experience indicates that most such sales have been consummated,
revenue may be recognized when a significant deposit is received.

Special order and shipments where payment (or partial payment) is received for
goods not presently held in stock e.g. the stock is still to be manufactured or is to be
delivered directly to the customer from a third party Revenue from such sales should not
be recognized until goods are manufactured, identified and ready for delivery to the
Buyer by the third party.
Sales under repurchase agreements where seller concurrently agrees to repurchase
the same goods at a later date for such transactions that are in substance a financing
agreement, the resulting cash inflow is not revenue as defined and should not be
recognized as revenue.

Sales to intermediate parties where goods are sold to distributors, dealers or others
for resale Revenue from such sales can generally be recognized if significant risks of
ownership have passed; however in some situations the buyer may in substance be an
agent and in such cases the sale should be treated as a consignment sale.

Subscriptions for publications Revenue received or billed should be deferred and

recognized either on a straight line basis over time or, where the items delivered vary in
value from period to period, revenue should be based on the sales value of the item
delivered in relation to the total sales value of all items covered by the subscription.

Installment sales When the consideration is receivable in installments, revenue

attributable to the sales price exclusive of interest should be recognized at the date of
sale. The interest element should be recognized as revenue, proportionately to the
unpaid balance due to the seller.

Trade discounts and volume rebates

Trade discounts and volume rebates received are not encompassed within the definition
of revenue, since they represent a Reduction of cost. Trade discounts and volume
rebates given should be deducted in determining revenue.
RECOGNITION OF REVENUE RENDERING OF SERVICES

The performance transaction involved in rendering of services is measured under

proportionate completion method or under completed service contract method.

Proportionate completion method

  Performance consists of execution of more then one act.
 The revenue is recognized proportionately based on the performance of each
act.
 This method suggest the determination of revenue and its recognition on the
basis of contract value, its associated costs and the number of acts involved in it
or any other suitable basis.
 Where providing of services includes execution of number of acts over a period
of time. Revenue is recognized on a straight line basis over specific period,
unless a batter method is available for revenue recognition.

Completed services contract method

 Performance consists of the execution of a single act.

 If mare acts are involved, performance is deemed to be completed on the
execution of all those act.
 This method is suitable when the service becomes changeable after the final act
of performance.

 The revenue is recognized only when significant uncertainty does not exist
regarding consideration amount as well as collectability of receivables.

Installation Fees In cases where installation fees are other than incidental to the sale
of a product, they should be recognized as revenue only when the equipment is
installed and accepted by the customer.

Advertising and insurance agency commissions Revenue should be recognized

when the service is completed. For advertising agencies, media commissions will
normally be recognized when the related advertisement or commercial appears before
the public and the necessary intimation is received by the agency, as opposed to
production commission, which will be recognized when the project is completed.
Insurance agency commissions should be recognized on the effective commencement
or renewal dates of the related policies.

Financial service commissions A financial service may be rendered as a single act or

may be provided over a period of time. Similarly, charges for such services may be
made as a single amount or in stages over the period of the service or the life of the
transaction to which it relates. Such charges may be settled in full when made or added
to a loan or other account and settled in stages. The recognition of such revenue should
therefore have regard to:

(a) Whether the service has been provided "once and for all" or is on a "continuing"
basis;
(b) The incidence of the costs relating to the service;
(c) When the payment for the service will be received. In general, commissions charged
for arranging or granting loan or other facilities should be recognized when a binding
obligation has been entered into. Commitment, facility or loan management fees which
relate to continuing obligations or services should normally be recognized over the life
of the loan or facility having regard to the amount of the obligation outstanding, the
nature of the services provided and the timing of the costs relating thereto.

Admission fees Revenue from artistic performances, banquets and other special
events should be recognized when the event takes place. When a subscription to a
number of events is sold, the fee should be allocated to each event on a systematic and
rational basis.

Tuition fees
Revenue should be recognized over the period of instruction.

Entrance and membership fees

Revenue recognition from these sources will depend on the nature of the services being
provided. Entrance fee received is generally capitalized. If the membership fee permits
only membership and all other services or products are paid for separately, or if there is
a separate annual subscription, the fee should be recognized when received. If the
membership fee entitles the member to services or publications to be provided during
the year, it should be recognized on a systematic and rational basis having regard to the
timing and nature of all services provided.

Recognition of revenue from interest, royalties and dividends.

The Use by Others of Enterprise Resources Yielding Interest, Royalties and Dividends

The use by others of such enterprise resources gives rise to:

(i) interest--charges for the use of cash resources or amounts due to the enterprise;
(ii) Royalties--charges for the use of such assets as know-how, patents, trade marks
and copyrights;
(iii) Dividends--rewards from the holding of investments in shares.

Interest accrues, in most circumstances, on the time basis determined by the amount
outstanding and the rate applicable. Usually, discount or premium on debt securities
held is treated as though it were accruing over the period to maturity.

Royalties accrue in accordance with the terms of the relevant agreement and are
usually recognized on that basis unless, having regard to the substance of the
transactions, it is more appropriate to recognize revenue on some other systematic and
rational basis.

Dividends from investments in shares are not recognized in the statement of profit
and loss until a right to receive payment is established.
When interest, royalties and dividends from foreign countries require exchange
permission and uncertainty in remittance is anticipated, revenue recognition may need
to be postponed.

Revenue Recognition in uncertainties

Recognition of revenue requires that revenue is measurable and that at the time of
sale or the rendering of the service it would not he unreasonable to expect ultimate
collection.

Where the ability to assess the ultimate collection with reasonable certainty is lacking
at the time of raising any claim, e.g., for escalation of price, export incentives, interest
etc., revenue recognition is postponed to the extent of uncertainly involved. In such
cases, it may be appropriate to recognize revenue only when it is reasonably certain
that the ultimate collection will be made. Where there is no uncertainty as to ultimate
collection, revenue is recognized at the time of sale or rendering of service even though
payments are made by installments.

When the uncertainly relating to collectability arises subsequent to the time of sale or
the rendering of the service, it is more appropriate to make a separate provision to
reflect the uncertainty rather than to adjust the amount of revenue originally recorded.

An essential criterion for the recognition of revenue is that the consideration

receivable for the sale of goods, the rendering of services or from the use by others of
enterprise resources is reasonably determinable. When such consideration is not
determinate within reasonable limits, the recognition of revenue is postponed.

When recognition of revenue is postponed due to the effect of uncertainties, it is

considered as revenue of the period in which it is properly recognized. Main Principles
Revenue from sales or service transactions should be recognized when the
requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided
that at the time of performance it is not unreasonable to expect ultimate collection. If at
the time of rising of any claim it is unreasonable to expect ultimate collection, revenue
recognition should be postponed.

Disclosure requirement

The amount of revenue from sales transactions (turnover) should be disclosed in the
following manner on the face of the statement of profit and loss:

Turnover (Gross) XX
Less: Excise Duty XX
Turnover (Net) XX
The amount of excise duty to be deducted from the turnover should be the total excise
duty for the year except the excise duty related to the difference between the closing
stock and opening stock. The excise duty related to the difference between the closing
stock and opening stock should be recognized separately in the statement of profit and
loss, with an explanatory note in the notes to accounts to explain the nature of the two
amounts of excise duty.

In a transaction involving the sale of goods, performance should be regarded as being

achieved when the following conditions have been fulfilled:

(i) the seller of goods has transferred to the buyer the property in the goods for a
price or all significant risks and rewards of ownership have been transferred
to the buyer and the seller retains no effective control of the goods transferred
to a degree usually associated with ownership; and

(ii) No significant uncertainty exists regarding the amount of the consideration that will
be derived from the sale of the goods.
In a transaction involving the rendering of services, performance should be measured
either under the completed service contract method or under the proportionate
completion method, whichever relates the revenue to the work Accomplished. Such
performance should be regarded as being achieved when no significant uncertainty
exists regarding the amount of the consideration that will be derived from rendering the
service.

Revenue arising from the use by others of enterprise resources yielding interest,
royalties and dividends should only be recognized when no significant uncertainty as to
measurability or collectability exists. These revenues are recognized on the following
bases:

(i) Interest: on a time proportion basis taking into account the amount outstanding and
the rate applicable.
(ii) Royalties: on an accrual basis in accordance with the terms of the relevant
agreement.

(iii) Dividends from investment in shares: when the owner's right to receive payment
is established. Disclosure

In addition to the disclosures required by Accounting Standard 1 on 'Disclosure of

Accounting Policies' (AS 1), an enterprise should also disclose the circumstances in
which revenue recognition has been postponed pending the resolution of significant
uncertainties.

Self Check Questions:

 1. Explain revenue recognition in case of sales of goods.
2. Describe revenue recognition in case of sale of services.
3. Write a note on the disclosure requirement as per AS – 9.
4. Briefly describe the following:
5. (a) Meaning of revenue as per AS- 9
(b) Which revenues are not included in the scope of AS- 9

LESSON 12
INTANGIBLE ASSETS:

Objective of the lesson: After studying this lesson you will be able to understand:

: Accounting Standard on Intangible assets

: Meaning, identification, valuation, disclosure of intangible assets.

Introduction
• The Accounting Standard comes into effect in respect of expenditure incurred during
accounting periods commencing on or after I-4-2003 and is mandatory in nature from
that date for the following:

(i) Enterprises whose equity or debt securities are listed and enterprises that are in the
process of issuing equity or debt securities that will be listed as evidenced by Board
of Directors resolution in this regard.

(ii) All other commercial, industrial and business reporting enterprises whose turnover
for the accounting period exceeds Rs. 50 crores.

The effective date in respect of all other remaining enterprises is 1-4-2004.

• The objective of the Accounting standard are as follows:

 Prescribing accounting treatment for intangible assets.

 Prescribing criteria for recognition of assets in the books of account.
 To measure the amount at which the intangible assets should be recorded in the
books.
 Amortization methods for intangible assets,
 Disclosure about intangible assets in financial statements of the enterprise.

• The Accounting Standard should be applied by all enterprises in accounting for

intangible assets except in the following cases:

 In tangible assets that are covered by other Accounting Standards.

 Financial assets like cash, ownership interest in another enterprise.
 Mineral rights and expenditure incurred on the exploration or for development
and extraction of minerals, oil, natural gas and similar non-regenerative
resources.
 Intangible assets arising in insurance enterprises from contracts with
policyholder.
 Share issue expenses, discount allowed on issue of shares etc.
• The Accounting Standard is applicable to expenditure on advertising, training, start-up
research and development activities.

• The Accounting Standard is also applicable to rights under licensing agreements for
item such as motion picture films, video recordings; plays, manuscripts, patents and
copyrights.

Meaning of Intangible Assets

• The Accounting Standard defines an intangible asset as “an identifiable non-monetary

assets, without physical substance, held for age in the production or supply of goods
or services, for rental to others or for administrative purpose.”

• The term asset is defined as a resource controlled by an enterprise from which future
economic benefits are expected to flow.

SEPARATE ACQUISITION

Intangible asset is an identifiable; asset (unlike goodwill), a non-monetary asset (where

value is not fixed), is without physical substance and is held for use: in the business.
Such use could also be for administrative purposes.

Expenses may be incurred on intangible items but every such expense will not give rise
to intangible assets and therefore, cannot be brought in books unless all the items of
definition and recognition any fulfilled e.g. customer loyalty, expenditure on
establishment of branches etc.

The definition of an intangible asset requires that an intangible assets be identifiable. To

be identifiable, it should be separable. An asset is separable if the enterprise could rent
sell exchange or distribute the specific future economic benefits attributable to the
assets.
  Since goodwill cannot be separable from business, it cannot be distinguished as
intangible asset. However, goodwill in amalgamation can be treated as intangible
asset.
 Separability is not a necessary condition for identifiability, since an enterprise
may be able to identify an asset in some other way. For example, if an intangible
asset is acquired with a group of assets, the transaction may involve the transfer
of legal rights that enable an enterprise to identify the intangible asset.
 Separation from business of an intangible asset is not required e. g. licence
which cannot be sold but is used in business is still an intangible asset.
 Similarly, if an internal project aims to create legal rights for the enterprise, the
nature of these rights may assist the enterprise in identifying an underlying
internally generated intangible asset.
 Even if an asset generates future economic benefits only in combination with
other assets, the asset if is identifiable if the enterprise can identify the future
economic benefits that will flow from the asset.
 An intangible asset may sometimes have a physical substance e.g. Computer
software, import licence, Quota, drawing and design for technical know-how etc.
 Sometimes tangible and intangible assets may be combined as computer
hardware and software. In such cases consideration is to be given to what is
predominant in value to decide whether AS-26 will apply.

Control of intangible Asset

 An enterprise controls an asset if the enterprise has the power to obtain the
future economic benefits flowing from the underlying resource and also can
restrict the access of others to those benefits.
 The capacity of an enterprise to control the future economic benefits from an
intangible asset would normally stem from legal rights that are enforceable in a
court of law.
 Market and technical knowledge may give rise to future economic benefits.
 The future economic benefits flowing from an intangible asset may include
revenue from the sale of products or services, cost savings or other benefits
 resulting from the use of the asset by the enterprise. For example, the use of
intellectual property in a production process may reduce future production cost
rather than increase future revenues.

Recognition of Intangible Asset

 An Intangible asset should be recognized if, and only if,

(a) It is possible that the future economic benefits that are attributable to the
enterprise will flow to the enterprise.
(b) the cost of the asset can be measured reliably; and
(c) An intangible asset should be measured initially at cost.

• An enterprise should assess the probability of future economic benefits using

reasonable and supportable assumptions that represent best estimate of the set
of economic conditions that will exist over the useful life of the asset.

Separate Acquisition

• If an intangible asset is acquired separately, the cost of the intangible asset can
usually be measured reliably.

 The cost of intangible asset comprises its purchase price, including any import
duties and other taxes and any directly attributable expenditure on making the
asset ready for its intended use.
 If an intangible asset is acquired in exchange for shares or other securities of the
reporting enterprise, the asset is recorded at its fair value, or the fair value of the
securities issued, whichever is more clearly evident.

Acquisition of Intangible Assets in Amalgamation

 In case of amalgamation in the nature of purchase (AS-14), the intangible assets

of two types can be acquired i.e. (i) Goodwill, and (ii) Other than goodwill.
  Intangible assets acquired other than goodwill in amalgamation in the nature of
purchase shall be recognized only if it meets the criteria of asset, even if that
asset is not recognized in the books of transfer or company.
 If the cost of intangible asset other than goodwill cannot be measured reliably,
the same shall be included in the value of goodwill arising at the time of
amalgamation in the nature of purchase.
 Valuation of goodwill in amalgamation in the nature of purchase is done as per
AS- 1 4, which is equal to purchase consideration less fair value of net assets
acquired (including the intangible assets other than goodwill).
 Sometimes recognition of an intangible in amalgamation in the nature of
purchase creates Capital Reserve or increases Capital Reserve (AS-14).

Acquisition by way of Government Grant

 In some cases, the intangible asset may be acquired free of charge or for normal
consideration, by way of a government grant. This may occur when a
government transfers or allocates to an enterprise intangible assets such as
airport landing rights, licences to operate radio or television stations. Import
licences /quotas or rights to access other restricted resources.
 AS-12. ‘Accounting for Government Grants’, requires that 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. As AS-l2 also requires that in
case of non-monetary asset is given free of cost. It should be recorded at a
nominal value.
 Accordingly, intangible asset acquired free of charge, or for nominal
consideration, by way of government grant is recognized at a nominal value or at
the acquisition cost as appropriate.

Exchange of Assets
An intangible asset may be acquired in exchange or part exchange for another asset. In
such case, the cost of asset acquired is determined in accordance with the principles
laid down in this regard in AS-10 ‘Accounting for Fixed Assets'.

Internally Generated Intangible Asset

 In some cases, expenditure is incurred to generate future economic benefits but

it does not result in the creation of an intangible asset that meets the recognition
criteria in this Standard. Such expenditure is often described as contributing to
internally generated goodwill.
 Internally generated goodwill is not recognized as an asset because it is not an
identifiable resource considered by the enterprise that can be measured reliably
at cost.
 The expenditure on internally generated brands, mastheads, publishing titles,
customer lists and items similar in substance cannot be distinguished from the
cost of developing the business A whole. Therefore, such items are not
recognized as intangible assets.
 During the process of research and development intangible assets are
generated. In order to assess whether an internally generated intangible asset
meets the criteria for recognition. an enterprise classifies the generation of the
asset into: (i) Research phase, and (ii) Development phase.

Research Phase

 Research is original and planned investigation undertaken with the prospect of

gaming scientific or technical knowledge and understanding.
 Intangible asset arising from research or research phase of an internal project,
should not be recognized as an asset.
 Expenditure on it should be recognized as an expense when it is incurred.

Development Phase

 Development is the application of research findings or other knowledge to a plan

or design for the production of new or substantially improved materials, devices,
 products, processes, systems or services prior to the commencement of
commercial production or use.
 An intangible asset arising from development or from the development phase of
an internal project, should be recognized if and only if, an enterprise can
demonstrate all of the following:
 The technical feasibility of completing the intangible asset so that it will be
available for use or sale.
 Its intention to complete the intangible asset and use or sell it.
 Its ability to use or sell the intangible asset.
 How the intangible asset will generate probable future economic benefits.
Among other things, the enterprise should demonstrate the existence of a
market for the output of the intangible asset or the intangible asset itself or, if
it is to be used internally, the usefulness of the intangible asset.
 The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.
 Its ability to measure the expenditure attributable nu the intangible asset
during the development reliably.
 If the development expenses generate the intangible, which meets asset
recognition criteria and other criteria, the intangible assets generated from
development expenses are capitalized and recognized at cost.

Cost of Internally Generated Intangible Asset

 The cost of an internally generated intangible asset comprises all expenditure

that can be directly attributed, or allocated on a reasonable and consistent basis
for creating, producing and making the asset ready for its intended use. The cost
includes the following:
 Expenditure on materials and services used or consumed in generating the
intangible assets.
 Salaries, wages and other employment related costs of personnel directly
engaged in generating the asset.
 Any expenditure than is directly attributable to generating the asset.
  Overheads that are necessary Lo generate the asset and that can be
allocated on a reasonable and consistent basis to the asset.
 The following are not components of the cost of an internally generated
intangible asset:
 Selling, administrative and other general of or head expenditure not directly
attributed to making the asset ready for used.
 Inefficiencies and initial operating losses incurred before an asset achieves
planned performance.
 Expenditure on training the staff to operate the asset.

Measurement subsequent to Initial Recognition

After initial recognition, an intangible asset should be carried at the cost less any
accumulated amortization and an accumulated impairment losses in the financial
statement of the enterprises.

Amortization Period

 The depreciable amount of Intangible asset should be allocated on a systematic

basis over the best estimate of the useful life.
 There is a rebuttable presumption that the useful life of an intangible asset will
not exceed 10 years from the date when the asset is available for use.
 Amortization should commence when the asset is available for use.
 If control over the future economic benefits from an intangible asset is achieved
through legal rights have been granted for a finite period, the useful life of the
intangible asset should not exceed the period of the legal rights unless:
 the legal rights are renewable, and
 renewal is virtually certain.

Amortization Method
  The amortisation method used should reflect the pattern in which the assets
economic benefits are consumed by the enterprise.
 If that pattern cannot be determined reliably, the straight line method should be
used.
 The amortization charge for each period should be recognised as an expense
unless another Accounting Standard permits or requires it to be included in the
carrying amount of another asset

Residual Value

The residual value of an intangible asset should be assumed to be zero unless:

(i) There is a commitment by a third party to purchase the asset at the end of its
useful life, or

(ii) There is an active market for the asset and

(iii) Residual value can be determined by reference to that market, and

(iv) It is probable that such a market will exist at the end of the asset’s useful life.

Review of Amortization Period and Amortization Method

 The amort.1sat1on period and amortization method should be i·ev1ewed at least

at each financial year end.
 If the expected useful life of the asset is significantly different from previous
estimates, the amortization period should be changed accordingly.
 If there has been a significant change in the expected pattern of economic
benefit from the asset the amortization method should be changed to reflect the
changed pattern.
 Such changes should he accounted for in accordance with AS—5, 'Net Profit or
Loss for the Period Prior Period Items and Changes in Accounting Policies'.

Impairment Losses
  To determine the impairment loss the enterprise should apply AS-28,
`Impairment of Assets`,
 Intangible asset is said to be impaired if the recoverable amount is less: than the
carrying amount.
 Recoverable amount as per AS-28 means higher of the value in use and net
selling price. Value in use is the present value of future cash inflow to be derived
from the asset.

Retirement and Disposal of Intangible Asset

 An intangible asset should be de—recognized/eliminated from Balance Sheet if,

(a) An intangible asset is disposed or,

(b) No future economic benefits are expected from the use of intangible Asset.

 An intangible asset which is retired from active use (no future economic benefits)
expected should be carried. Balance Sheet at its carrying cost subject to
impairment as per Accounting Standard on impairment of Assets'.
 Gain or loss on disposal should be recognized as income or expenses in Profit
and Loss Account

Disclosure requirements

The financial statement should disclose the following for each class of intangible assets,
distinguishing between internally generated intangible assets and other intangible
assets:

(a) The useful lives or the amortization rates used.

(b) The amortization methods used

(c) The gross carrying amount and the accumulated amortization (aggregated with
accumulated impairment losses) at the beginning and end of the period.

(d) A reconciliation of the carrying amount at the beginning and end of the period
showing:
  Additions, indicating separately those from internal development and through
amalgamation.
 Retirements and disposals.
 Impairment losses recognized in the statement of profit and loss during the
period (if any).
 Impairment losses reversed in the statement of profit and loss during the period
(if any).
 Amortization recognized during the period.
 Other changes in the carrying amount during the period

The financial statements should also disclose the following:

 If an intangible asset is amortized over more than ten years, the reasons why it is
presumed that the useful life of an intangible asset will exceed ten years from the
date when the asset is available for use.
 A description, the carrying amount and remaining amortization period of any
individual intangible asset that is material to the financial statements of the
enterprise as a whole.
 The existence and carrying amounts of intangible assets whose title is restricted
and the carrying amounts of intangible assets pledged as security for liabilities.
 The amount of commitments for the acquisition of intangible assets.
 Research and development expenditure recognized as an expense during the
period.

SELF CHECK QUESTIONS

1. What is the scope of AS-26?

2. Define ‘Intangible Asset`. Discuss its features.
3. How do you recognize Internally Generated Intangible Assets?
4. Distinguish the Intangible asset arising from Research Phase' and Development
Phase.
5. What are the circumstances in which an intangible asset is recognized as an
expense?
6. Write a brief note on the following:
(a) Amortisation Period
(b) Amortisation Method
(c) Residual value
7. What are the disclosure requirements of an intangible asset?