Accounting Standard

Q. What is an Accounting Standard? Who prepares an Accounting Standard in India?

A- Accounting Standards (AS) are basic policy documents. Their main aim is to ensure transparency,
reliability, consistency, and comparability of the financial statements. They do so by standardizing
accounting policies and principles of a nation’s economy. So the transactions of all companies will be
recorded in a similar manner if they follow these accounting standards.

These Accounting Standards (AS) are issued by an accounting body or a regulatory board or
sometimes by the government directly. In India, the Indian Accounting Standards are issued by the
Institute of Chartered Accountants of India (ICAI).

Accounting Standards mainly deal with four major issues of accounting, namely

i. Recognition of financial events

ii. Measurement of financial transactions

iii. Presentation of financial statements in a fair manner

iv. Disclosure requirement of companies to ensure stakeholders are not misinformed

Q. What are the main objectives of the Applicability of an Accounting Standard in India?

A- Accounting is often considered the language of business, as it communicates to others the financial
position of the company. And like every language has certain syntax and grammar rules the same is true
here. These rules in the case of accounting are the Accounting Standards (AS). They are the framework
of rules and regulations for accounting and reporting in a country. Let us see the main objectives of
forming these standards.

1.  The main aim is to improve the reliability of financial statements. Now because the financial
statements have to be made following the standards the users can rely on them. They know that not
conforming to these standards can have serious consequences for the companies.

2. Then there is comparability. Following these standards will allow for inter-firm and intra-firm
comparisons. This allows us to check the progress of the firm and its position in the market.

3. It also looks to provide one set of accounting policies that include the necessary disclosure
requirements and the valuation methods of various financial transactions.

Q. What are the benefits and the limitations of an Accounting Standard?

A- Accounting Standards are the ruling authority in the world of accounting. It makes sure that the
information provided to potential investors is not misleading in any way. Let us take a look at the
benefits of AS.
1] Attains Uniformity in Accounting.

2] Improves Reliability of Financial Statements.

3] Prevents Frauds and Accounting Manipulations.

4] Assists Auditors.

5] Comparability.

There are a few limitations of Accounting Standards as well. The regulatory bodies keep updating the
standards to restrict these limitations.

1] Difficulty between Choosing Alternatives

2] Restricted Scope

Q. What are the objectives of an INDAS 1?

A- The main objectives of an INDAS 1 are as follows.

• This standard prescribes the basis of Presentation of General Purpose Financial statements.

• This will ensure comparability both with-

◦ Entity’s Financial statements of previous periods

◦ Financial statements of other entities

• It sets out-

◦ Overall requirement of presentation of financial statements

◦ Guidelines for their structure and

◦ Minimum requirement for their content

Q. What are the Scopes of IND AS 1?

A- Scope of Indian Accounting Standard (Ind AS) 1 Presentation of Financial Statements are as follows.

1 An entity shall apply this Standard in preparing and presenting general purpose financial statements in
accordance with Indian Accounting Standards (IndAS).

2 Other Ind ASs set out the recognition, measurement and disclosure requirements for specific
transactions and other events.
3 This Standard does not apply to the structure and content of condense d interim financial statements
prepared in accordance with Ind AS 34 Interim Financial

Reporting. However, paragraphs 15–35 apply to such financial statements. This Standard applies equally
to all entities, including those that present consolidated

financial statements and those that present separate financial statements as defined in Ind AS 27
Consolidated and Separate Financial Statements .

4 This Standard uses terminology that is suitable for profit -oriented entities, including public sector
business entities. If entities with not-for-profit

activities in the private sector or the public sector apply this Standard, they may need to amend the
descriptions used for particular line items in the

financial statements and for the financial statements themselves.

5 Similarly, entities whose share capital is not equity may need to adapt the financial statement
presentation of members’ interests.

Q. What are the major definitions’/terms used in INDAS 1?

A- The major terms/Definitions used in the INDAS 1 are as follows.

General purpose financial statements (referred to as ‘financial statements’) are those intended to meet
the needs of users who are not in a position to

require an entity to prepare reports tailored to their particular information needs.

Impracticable Applying a requirement is impracti cable when the entity cannot apply it after making
every reasonable effort to do so.

Indian Accounting Standards (Ind ASs) are Standards prescribed underthe Companies Act, 1956.

Material Omissions or misstatements of items are material if they could,individually or collectively,

influence the economic decisions that users make

on the basis of the financial statements. Materiality depends on the size and nature of the omission or
misstatement judged in the surrounding circumstances.

The size or nature of the item, or a combination of both, could be the determining factor.

Assessing whether an omission or misstatement could influence economic decisions of users, and so be
material, requires consideration of the characteristics

of those users. The Framework for the Preparation and Presentation of Financial Statements issued by
the Institute of Chartered Accountants of India states
in paragraph 25 that ‘users are assumed to have a reasonable knowledge of business and economic
activities and accounting and a willingness to study the

information with reasonable diligence.’ Therefore, the assessment needs to take into account how users
with such attributes could reasonably be expected

to be influenced in making economic decisions.

Notes contain information in addition to that presented in the balance sheet (including statement of
changes in equity which is a part of the balance sheet),

statement of profit and loss and statement of cash flows. Notes provide narrative descriptions or
disaggregations of items presented in those statements and information about items that do not qualify
for recognition in those statements.

Other comprehensive income comprises items of income and expense (including reclassification
adjustments) that are not recognised in profit or loss as

required or permitted by other Ind ASs.

The components of other comprehensive income include:

(a) changes in revaluation surplus (see Ind AS 16 Property, Plant and Equipment and Ind AS 38X)
Intangible Assets);

(b) actuarial gains and losses on def ined benefit plans recognised in accordance with paragraph 92 and
129A of Ind A S 19 Employee Benefits;

(c) gains and losses arising from translating the financial statements of a foreign operation (see Ind AS 21
The Effects of Changes in Foreign Exchange

Rates).

(d) gains and losses on remeasuring available -for-sale financial assets (see Ind AS 39 Financial
Instruments: Recognition and Measurement );

(e) the effective portion of gains and losses on hedging instruments in a cash flow hedge (see Ind AS 39).

Owners are holders of instruments classified as equity.

Profit or loss is the total of income less expenses, excluding the components of other comprehensive
income. Reclassification adjustments are amounts reclassified to profit or loss in the current period that
were recognised in other comprehensive income in the

current or previous periods.

Total comprehensive income is the change in equity during a period resulting from transactions and
other events, other than those changes resulting from transactions with owners in their capacity as
owners.

Total comprehensive income comprises all components of ‘profit or loss’ and of ‘other comprehensive
income’.

q. What are the principles of an INDAS 16?

A- Ind AS 16 prescribes the accounting treatment for Property and PE (Plant, and Equipment). The
principal issues covered in the standard includes: –

1. Timing of recognizing an asset

2. Determining the carrying amounts of the assets

3. Depreciation to be recognized in the financial statements

Q. Where does an INDAS 16 is Applicable? And What are its skopes?

A-  Ind AS 16 Property Plant Equipment is applicable to all Property and PE (Plant & Equipment) unless
and until any other accounting standard asks for a different treatment.

Ind AS 16 Property Plant Equipment is not applicable in the following cases:

(i) Property and PE (Plant & Equipment) which are classified as held for sale as per Ind AS 105

(ii) Biological assets which are related to agricultural activities except bearer plants

(iii) The measurement and recognition of exploration and evaluation assets

(iv) Mineral rights and reserves like oil, natural gas and other such non-regenerative resources

Q. When does a PPE are treated as an Assets? What are the main expenses are considered for
calculating the cost of a PPE?

A- The cost of any item of PPE must be recognized as an asset only when:

(a) It is apparent that the future economic benefits related to such asset would flow to the business; and

(b) Cost of such asset could be reliably measured

The cost of the item of PPE includes:

(a) The purchase price, which includes the import duties and any non-refundable taxes on such
purchase, after deducting rebates and trade discounts

(b) Costs which are directly attributable to bringing assets to the condition and location essential for it to
operate in a manner as intended by the management
(c) Initial estimate of costs of removing and dismantling an item and restoring a site where it is located

Q. What are the main factors to be considered for charging Depreciation?

A- Each part of PPE with a cost which is substantial with respect to the total cost of the PPE should be
separately depreciated. The amount of depreciation should be allocated on an orderly basis over the
useful life of an asset.

The standard also requires:

1. The method of depreciation used should reflect an asset’s pattern of future economic benefits

2. At each balance sheet date, three standard requires review of

(i) Residual value and the useful life of assets

(ii) Depreciation method employed

Q. What are the major meterials to be disclosed as per INDAS 16?

A- Ind AS 16 prescribes financial statements should disclose, for every class of PPE:

(i) Measurement basis for determining carrying amount

(ii) Depreciation methods used

(iii) Depreciation rates/ Useful lives of the assets

(iv) Aggregate carrying amount and accrued depreciation at the start and at the end of period

(v) Existence and value of restrictions on the title and PPE pledged as collateral for liabilities

(vi) Amount of expenditure recognized in carrying amount of an item of PPE during its construction

(vii) Amount with respect to contractual commitment for acquisition of PPE.

Q. What do you mean by EPS?

A- Earnings per share is a method used to review the performance of an entity. As the term itself
denotes it simply means determining the profit attributable

to each share. Such information is required to understand the return on investment for the shareholders
and prospective investors.  

Q. What is the objectives of an INDAS 33?

A- The objective of the standard is to provide a common parameter for reviewing the performance of
the entities and compare the same. Also, the computation can be used for reviewing the performance of
the entity between different periods.
Q. What is the skope of an INDAS 33?

A- This standard requires that if an entity computes earnings per share then it must calculate and
disclose the same as per this standard. Further, this standard

requires that if an entity presents both Consolidated financial statements and Separate financia
statements as per the standards then it must present

the earnings per share in both the statements separately

The standard prescribes two methods for measurement of earnings per share:

• Basic earnings per share 

• Diluted earnings per share

Basic earnings per share will be calculated by dividing the profit or loss attributable to ordinary equity
holders of the parent entity by the weighted

average number of ordinary shares outstanding for the period.  This computation enables in
understanding the earnings attributable to each ordinary share.

Diluted earnings per share

The diluted earnings per share are computed by adjusting the profit or loss and ordinary shares for the
effects of all dilutive potential ordinary share.

The numerator will be the profit or loss as computed for basic earnings per share adjusted by the after-
tax effect of the

• dividends or any other items that are related to dilutive potential ordinary shares that are deducted in
computing basic earnings per share.

• interest in the period related to dilutive potential ordinary shares that are recognized

• changes in income or expense that would be due to the conversion of the dilutive potential ordinary
share.  

The denominator is the weighted average number of ordinary shares as per the computation of basic
earnings per share plus the weighted average number of shares that would be issued on conversion of
all dilutive potential ordinary shares into ordinary shares.  

Potential ordinary shares will be dilutive only when their conversion to ordinary shares reduces the
earnings per share or increase the loss per share from continuing operations.

Q. What are the major deffinations of an INDAS 33?

A- The following terms are used in the standard with the meanings specified
Anti Dilution is the increase in the earnings per share or reduction in the loss per share that results from
the assumption that convertible instruments

are converted,  options or warrants exercised or that ordinary share are issued upon the satisfaction of
specified conditions.  

A contingent share agreement is an agreement that is dependent on the satisfaction of conditions for
the issue of shares. 

Contingently issuable ordinary shares are issued on the satisfaction of specified conditions in a
contingent share agreement for consideration or otherwise.

Dilution is the reduction in the earnings per share or increase in the loss per share that results from the
assumption that convertible instruments are

converted,  options or warrants exercised or that ordinary share are issued upon the satisfaction of
specified conditions.  

Options,  warrants and their equivalent give the holder the right to purchase an ordinary share.

An ordinary share is an equity instrument that is subordinate to all equity instruments.

A potential ordinary share is an instrument that may entitle its holder to ordinary shares. 

Put options on ordinary shares are contracts that give the holder the right to sell ordinary shares at a
specified price for a given period.