Accounting Standards - BY CA Abhishek Baradiya - 31.01.2021

OVERVIEW OF
ACCOUNTING STANDARDS
BY :
CA ABHISHEK BARADIYA
+91 91 1100 9522
CRITERIA FOR CLASSIFICATION OF ENTITIES
Entity
Non
Corporate
Corporate
Non SMC SMC Level I Level II Level III
CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

Criteria for classification of companies under the
Companies (Accounting Standards) Rules, 2006
SMC Non SMC
• Equity or debt Securities - not listed/nor • Equity or debt Securities - listed/in

in process of listing on any stock process of listing on any stock exchange
exchange - In India / Outside India - In India / Outside India
• Not a Bank/FI’s/Insurance Company • Bank/FI’s/Insurance Company
• T/o <= Rs. 50 crores (Immediately • T/o > Rs. 50 crores (Immediately
Preceding Accounting Year) Preceding Accounting Year)
• Borrowings(Including Public Deposits) <= • Borrowings(Including Public Deposits) >
Rs. 10 crores (At any time during Rs. 10 crores (At any time during
Immediately Preceding Accounting Immediately Preceding Accounting
Year) Year)
• Not a Holding / Subsidiary of a • Holding / Subsidiary of a Company
Company which is Non SMC which is Non SMC
Not Mandatory : 5 AS* : AS 3, 17, 21, 23, 27 All AS Applicable*

Criteria for classification of Non-Corporate Entities
(As per ICAI Pronouncements)
Level I Level II Level III
•Equity or debt Securities - listed/in •Not Level I Entities •Not Level I Entities
process of listing on any stock •T/o > Rs. 1 crores <= Rs. 50 crore •Not Level II Entities
exchange - In India / Outside India (Immediately Preceding Accounting
•Banks (including co-operative banks), Year)
financial institutions or entities •Borrowings(Including Public Deposits)
carrying on insurance business > Rs. 1 crores <= Rs. 10 crore (At any
•T/o > Rs. 50 crores (Immediately time during Immediately Preceding
Preceding Accounting Year) Accounting Year)
•Borrowings(Including Public Deposits) •Holding and subsidiary entities of any
> Rs. 10 crores (At any time during of the above
Immediately Preceding Accounting
Year)
•Holding and subsidiary entities of any
of the above
Not Mandatory : 6 AS* : Not Mandatory : 7 AS* :

All AS Applicable*
AS 3, 17, 21, 23, 24, 27 AS 3, 17, 18, 21, 23, 24, 27
DISCLSOURE OF
AS 1
ACCOUNTING
(issued in Nov, 1979)
POLICIES

AS 1 : DISCLOSURE OF ACCOUNTING POLICIES
SCOPE AND OBJECTIVE

 AS 1 deals with the disclosure of significant accounting policies followed in
preparing and presenting financial statements
 The purpose of this Standard 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

ACCOUNTING POLICIES
 Accounting Policies refer to the specific accounting principles and methods of applying those principles adopted by
the enterprise in the preparation and presentation of financial statements
 The following are examples of the areas in which different accounting policies may be adopted by different
enterprises.
(a) Methods of depreciation, depletion and amortization (f) Valuation of investments
(b) Treatment of expenditure during construction (g) Treatment of Retirement benefits
(c) Conversion or translation of foreign currency items (h) Recognition of profit on long-term contracts
(d) Valuation of inventories (i) Valuation of fixed assets
(e) Treatment of goodwill (j) Treatment of contingent liabilities
The above list of examples is not intended to be exhaustive
DISCLOSURE OF ACCOUNTING POLICIES
 To ensure proper understanding of financial statements, it is necessary that all significant

accounting policies adopted in the preparation and presentation of financial statements
should be disclosed.
 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.
 Disclosure of accounting policies or of changes therein cannot remedy a wrong or
inappropriate treatment of the item in the accounts

CONSIDERATION IN SELECTION OF
ACCOUNTING POLICIES
 PRIMARY CONSIDERATION  MAJOR CONSIDERATION IN ACHIEVING

PRIMARY CONSIDERATION
❑ Financial Statement should represent

true and fair view ❑ Prudence
[ Eg. Prov for Debtors/ Creditors ]
❑ Substance Over Form
[ Eg. Fin Lease v/s Op Lease
❑ Materiality
[ Eg. Bank Locker ]

Examples
 The most common example of exercise of prudence in selection of accounting policy –

Valuation of Inventory – Cost or NRV – whichever is lower
 A company facing damage suit – No provisions for damages should be recognised by a
charge against profit unless probability of losing the suit is more than probability of not
losing it.
 Exercise of prudence does not permit creation of hidden reserves by understating profits
and assets or by overstating liabilities and losses.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS
CONSISTENCY ACCRUAL GOING CONCERN
FOLLOWED – SPECIFIC DISCLOSURE NOT REQUIRED

NOT FOLLOWED – FACTS TO BE DISCLOSED
CHANGES IN ACCOUNTING POLICY
 Any change in the accounting policies which has a material effect in the current period or
which is reasonably expected to have a material effect in later periods should be disclosed
 In the case of a change in accounting policies which has a material effect in the current
period, the amount by which any item in the financial statements is affected by such change
should also be disclosed to the extent ascertainable.
 Where such amount is not ascertainable, wholly or in part, the fact should be indicated.

Examples
 A company has switched from FIFO to Wtd Avg Cost. If Closing Inventory by FIFO is
Rs. 5.00 lakhs and by Wtd Avg is Rs. 4.80 lakhs.
 The change in accounting policy pulls down profit and Inventory by Rs. 20,000
 The company can disclose the change in accounting policy as under
 “The company values its investment at lower of Cost and NRV. Since NRV of all items
of inventory was higher than costs, the company valued its inventory at cost. In the
present year the company has changed to Wtd Avg Cost formula, which better
reflects the consumption pattern of inventory vis-à-vis earlier method of FIFO. The
change in policy has reduced profit and value of inventory by Rs. 20,000”

AS 2 VALUATION OF
(revised in Nov, 1999) INVENTORIES

AS 2 : VALUATION OF INVENTORIES
SCOPE AND OBJECTIVE

 AS 2 deals with determination of the value at which inventories are carried in the financial statements
until the related revenues are recognized including the ascertainment of cost of inventories and any
write-down thereof to net realisable value
 Excluded Inventories
❑ work in progress arising under construction contracts, including directly related service contracts
❑ work in progress arising in the ordinary course of business of service providers;
❑ shares, debentures and other financial instruments held as stock-in-trade; and
❑ producers’ inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to
the extent that they are measured at net realisable value in accordance with well established practices
in those industries.
DEFINITION
 Inventories are assets:

(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the
rendering of services
 Inventories do not include spare parts, servicing equipment and standby equipment which
meet the definition of property, plant and equipment as per AS 10

MEASUREMENT
 Inventories should be valued at the lower of cost and net realisable value
The cost of inventories should comprise all
COST
costs of purchase,
costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.
NRV
Net realisable value is the
estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make the sale.

MEASUREMENT
Costs of purchase consist of the

❑ purchase price
❑ dutiesand taxes (other than those subsequently recoverable by the
enterprise from the taxing authorities),
❑ freight inwards and
❑ other expenditure directly attributable to the acquisition.
Trade discounts, rebates, duty drawbacks and other similar items are
deducted in determining the costs of purchase

MEASUREMENT
The costs of conversion of inventories include

❑ costs directly related to the units of production, such as direct labour.
❑ allocation of fixed and variable production overheads that are incurred in converting
materials into finished goods.
❖ Fixed production overheads are those indirect costs of production that remain relatively
constant regardless of the volume of production, such as depreciation and maintenance of
factory buildings and the cost of factory management and administration. Allocation of
fixed production overheads is based on the normal capacity
❖ Variable production overheads are those indirect costs of production that vary directly with
the volume of production, such as indirect materials and indirect labour. Variable production
overheads are assigned to each unit of production on the basis of the actual use of the
production facilities

MEASUREMENT
 In determining the cost of inventories, it is appropriate to exclude certain costs and

recognise them as expenses in the period in which they are incurred.
❑ abnormal amounts of wasted materials, labour, or other production costs;
❑ storage costs, unless those cost are necessary in the production process prior to a
further production stage;
❑ administrative overheads that do not contribute to bringing the inventories to their
present location and condition; and
❑ selling and distribution costs.

Examples
 Cost of partly finished product at the end of 2019-20 is Rs.150. The product can be
finished next year by a further expenditure of Rs. 100. The finished product can be
sold at Rs. 250 subject to 4% brokerage on selling price.
 Value o Inventory
Selling Price 250

Brokerage [ 4% of 250 ] (10)
Estimated Cost of Completion (100)
Net Realisable Value 140
Cost of Inventory 150
Value of Inventory [ Cost ot NRV – WEL ] 140
COST FORMULAS
 SPECIFIC COST - The cost of inventories of items that are not ordinarily interchangeable and
goods or services produced and segregated for specific projects should be assigned by
specific identification of their individual costs
 FIFO/WTD AVG COST - The cost of other inventories, should be assigned by using the first-in,
first-out (FIFO), or weighted average cost formula whichever reflects the fairest possible
approximation to the cost incurred in bringing the items of inventory to their present location
and condition.

DISCLOSURES
 The financial statements should disclose:

❑ the accounting policies adopted in measuring inventories, including the cost formula used; and
❑ the total carrying amount of inventories and its classification appropriate to the enterprise
❑ Common classifications of inventories are:
(a) Raw materials and components
(b) Work-in-progress
(c) Finished goods
(d) Stock-in-trade (in respect of goods acquired for trading)
(e) Stores and spares
(f) Loose tools
(g) Others (specify nature)”.

CONTINGENCIES
AND
AS 4
EVENTS OCCURING
(revised in Nov, 1995)
AFTER BALANCE
SHEET DATE

AS 4 : CONTINGENCIES AND EVENTS
OCCURING AFTER BALANCE SHEET DATE
SCOPE AND OBJECTIVE

 AS 4 deals with the treatment in financial statements of
❑ contingencies, and
❑ events occurring after the balance sheet date
 Excluded Contingencies
❑ liabilities of life assurance and general insurance enterprises arising from policies issued;
❑ obligations under retirement benefit plans; and
❑ commitments arising from long-term lease contracts.

DEFINITION
 CONTINGENCY
A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be
known or determined only on the occurrence, or non-occurrence, of one or more uncertain
future events.
 EVENTS OCCURING AFTER BALANCE SHEET DATE
Events occurring after the balance sheet date are those significant events, both favourable
and unfavourable, that occur between the balance sheet date and the date on which the
financial statements are approved by the Board of Directors in the case of a company, and,
by the corresponding approving authority in the case of any other entity

EVENTS OCCURING AFTER B/S DATE
• those which provide further evidence of

ADJUSTING conditions that existed at the balance
sheet date
EVENTS
• those which are indicative of conditions

NON-ADJUSTING that arose subsequent to the balance
sheet date
EVENTS

ACCOUNTING TREATMENT OF CONTINGENCIES
 CONTINGENCY LOSS
The amount of a contingent loss should be provided for by a charge in the statement of profit and
loss if:
❑ it is probable that future events will confirm that, after taking into account any related probable
recovery, an asset has been impaired or a liability has been incurred as at the balance sheet
date, and
❑ a reasonable estimate of the amount of the resulting loss can be made.
The existence of a contingent loss should be disclosed in the financial statements if either of the
conditions is not met
 CONTINGENCY GAIN
Contingent gains should not be recognised in the financial statements

ACCOUNTING TREATMENT OF
EVENTS OCCURING AFTER BALANCE SHEET DATE
ADJUSTING EVENTS NON ADJUSTING EVENTS

Assets and liabilities should be adjusted Disclosure should be made in the report
for events occurring after the balance of the approving authority of those
sheet date that provide additional events occurring after the balance sheet
evidence to assist the estimation of date that represent material changes
amounts relating to conditions existing at and commitments affecting the financial
the balance sheet date or that indicate position of the enterprise
that the fundamental accounting
assumption of going concern (i.e., the If an enterprise declares dividends to shareholders
continuance of existence or substratum after the balance sheet date, the enterprise
of the enterprise) is not appropriate should not recognise those dividends as a liability
at the balance sheet date unless a statute
requires otherwise. Such dividends should be
disclosed in notes
Examples
 A company follows April to March as its Financial Year. It recognises cheque dated
31st March or before, received from customers after balance sheet date but before
approval of BOD, BY Debiting Cheques in Hand and Crediting Debtors A/c.
 The cheque in hand is shown in balance sheet as an item of cash and cash
equivalents.
 All cheques presented to bank in the month of April and also realised in same month.
 Even if cheques bear the date 31st March, cheques received after 31st March do not
represent any condition existing on balance sheet date. Thus collection of cheques
after balance sheet date is not an adjusting event, hence its recognition is not in line
with AS 4

DISCLOSURES
➢ CONTINGENCIES -
❑ (a) the nature of the contingency;
❑ (b) the uncertainties which may affect the future outcome;
❑ (c) an estimate of the financial effect, or a statement that such an estimate cannot be made.
➢ EVENTS -
❑ (a) the nature of the event;
❑ (b) an estimate of the financial effect, or a statement that such an estimate cannot be made.

NET PROFIT OR LOSS
AS 5 FOR THE PERIOD,
(revised in 1997) PRIOR PERIOD ITEMS,
limited revision in AND CHANGES IN
2001 ACCOUNTING
POLICIES

AS 5 : NET PROFIT OR LOSS FOR THE PERIOD,
PRIOR PERIOD ITEMS AND CHANGES IN
ACCOUNTING POLICIES
SCOPE AND OBJECTIVE
 AS 5 should be applied by an enterprise in presenting profit or loss from
❑ ordinary activities,
❑ extraordinary items and
❑ prior period items in the statement of profit and loss,
❑ in accounting for changes in accounting estimates, and
❑ in disclosure of changes in accounting policies.

DEFINITION
 Ordinary activities are any activities which are undertaken by an enterprise as part of its
business and such related activities in which the enterprise engages in furtherance of,
incidental to, or arising from, these activities.
 Extraordinary items are income or expenses that arise from events or transactions that are
clearly distinct from the ordinary activities of the enterprise and, therefore, are not
expected to recur frequently or regularly.
 Prior period items are income or expenses which arise in the current period as a result of
errors or omissions in the preparation of the financial statements of one or more prior
periods.

NET PROFIT OR LOSS FOR THE PERIOD
 All items of income and expense which are recognised in a period should be included
in the determination of net profit or loss for the period unless an Accounting Standard
requires or permits otherwise.
 The net profit or loss for the period comprises the following components, each of
which should be disclosed on the face of the statement of profit and loss:
(a) profit or loss from ordinary activities; and
(b) extraordinary items
Extraordinary items should be disclosed in the statement of profit and loss as a part of net
profit or loss for the period. The nature and the amount of each extraordinary item should
be separately disclosed in the statement of profit and loss in a manner that its impact on
current profit or loss can be perceived.

PROFIT OR LOSS FROM ORDINARY ACTIVITES
AND PRIOR PERIOD ITEMS
 When items of income and expense within profit or loss from ordinary activities are of such
size, nature or incidence that their disclosure is relevant to explain the performance of the
enterprise for the period, the nature and amount of such items should be disclosed
separately.
 The nature and amount of prior period items should be separately disclosed in the
statement of profit and loss in a manner that their impact on the current profit or loss can be
perceived.
 Prior period items are normally included in the determination of net profit or loss for the
current period. An alternative approach is to show such items in the statement of profit and
loss after determination of current net profit or loss.

Examples
 Mr. X purchased a new machine for Rs. 10 Lakhs, useful life also 10 years. Thus
depreciation was charged at 10% pa of Original Cost. i.e. Rs. 1 Lakh per year
 After 5 years, when carrying amount was Rs. 5 lakhs, management realises that
machine can work for only 2 years.
 Now machine will be depreciated at 2.50 lakhs per year for next 2 years.
 This is not a case of Prior period item.
 Rather it is change in Accounting Estimates

Examples
 In the same example, let us say there is no change in useful life of machine after 5
years, but management by mistake, charge depreciation for 5th year as 60,000 [ 10%
of 6 lakhs ] instead of 1 lakhs [ 10% of 10 lakhs ] and in the next year decides to
charge depreciation of Rs. 1.40 lakhs
 In this case 1 lakh will be the depreciation for current year and 40,000 will be
considered as prior period item

CHANGES IN ACCOUNTING POLICIES
 A change in an accounting policy should be made only if

❑ the adoption of a different accounting policy is required by statute or
❑ for compliance with an accounting standard or
❑ if it is considered that the change would result in a more appropriate presentation of the financial
statements of the enterprise
❖ Any change in an accounting policy which has a material effect should be disclosed. The impact of,
and the adjustments resulting from, such change, if material, should be shown in the financial
statements of the period in which such change is made, to reflect the effect of such change.
❖ Where the effect of such change 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

THANK YOU

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OVERVIEW OF

Non SMC SMC Level I Level II Level III

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

• Equity or debt Securities - not listed/nor • Equity or debt Securities - listed/in

Not Mandatory : 5 AS* : AS 3, 17, 21, 23, 27 All AS Applicable*

Level I Level II Level III

Not Mandatory : 6 AS* : Not Mandatory : 7 AS* :

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

SCOPE AND OBJECTIVE

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

 To ensure proper understanding of financial statements, it is necessary that all significant

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

 PRIMARY CONSIDERATION  MAJOR CONSIDERATION IN ACHIEVING

❑ Financial Statement should represent

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

 The most common example of exercise of prudence in selection of accounting policy –

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

CONSISTENCY ACCRUAL GOING CONCERN

FOLLOWED – SPECIFIC DISCLOSURE NOT REQUIRED

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

SCOPE AND OBJECTIVE

 Inventories are assets:

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The cost of inventories should comprise all

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

Costs of purchase consist of the

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

The costs of conversion of inventories include

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

 In determining the cost of inventories, it is appropriate to exclude certain costs and

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

Selling Price 250

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 The financial statements should disclose:

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CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

SCOPE AND OBJECTIVE

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• those which provide further evidence of

• those which are indicative of conditions

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ADJUSTING EVENTS NON ADJUSTING EVENTS

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CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

CA. ABHISHEK BARADIYA | +91 91 1100 9522 | abhishekbaradiya.ca@gmail.com

 A change in an accounting policy should be made only if

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