CHAPTER-1

ACCOUNTING STANDARDS
Learning Objectives:
1. To understand the concept of Indian and International Accounting Standards

2. Need for the Accounting Standards in the preparation of Financial Statements

Introduction and Meaning

Accounting Standards are used as one of the main compulsory regulatory mechanisms for preparation
of general-purpose financial reports and subsequent audit of the same, in almost all countries of the
world. Accounting standards are concerned with the system of measurement and disclosure rules for
preparation and presentation of financial statements. They appear with a set of authoritative
statements of how particular types of transactions, events and other costs should be recognized and
reported in the financial statements. Accounting standards are devised to furnish useful information to
different users of the financial statements, to such as shareholders, creditors, lenders, management,
investors, suppliers, competitors, researchers, regulatory bodies and society at large and so on. In fact,
such statements are designed and prescribed so as to improve & benchmark the quality of financial
reporting.

Accounting Standards are the policy documents (authoritative statements of best accounting practice)
issued by recognized expert accountancy bodies relating to various aspects of measurement, treatment
and disclosure of accounting transactions and events as relate to the codification of Generally
Accepted Accounting Principles (GAAP). These are stated to be norms of accounting policies and
practices by way of codes or guidelines to direct as to how the items, which go to make up the
financial statements should be dealt with in accounts and presented in the annual accounts. The aim of
setting standards is to bring about uniformity in financial reporting and to ensure consistency and
comparability in the data published by enterprises.

Objectives of Accounting Standards

In a narrow sense

The objective of setting standard is to bring uniformity in financial reporting and to ensure consistency
and comparability in the data published by enterprises.

In a broader sense

1. To provide a generally understood and accepted measure of the phenomena of concern

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2. To reduce the amount of manipulation of the reported numbers that is likely to occur in the
absence of standards.

Need for Accounting standards

1. To gain the confidence of the user groups by producing a set of fairly presented financial
statements as a system of measurement and disclosures.

2. To protect the competing economic interests of the user groups who rely upon the published
financial statements.

3. It acts as a framework defining what should be done in preparing the financial statements and
also draws the boundaries within which acceptable conduct lies and in that, they are similar in nature
of laws.

4. To resolve the potential conflicts of financial interest among the various external groups that use
and rely upon published financial statements.
Advantages or significance of Accounting Standards to the user groups

1. It helps the investors in judging the yield and risk involved in alternative investments in different
companies and different countries, as the investors in the equity of any company may be from any part
of the world.

2. It enables the public Accountants to deal with their clients by providing rules of authority to
which the accountants have to adhere in preparing the financial statements.

3. It helps in raising the standard of auditing itself in its task of reporting on the financial statements.

4. Government officials, tax authorities and others find accounting reports produced in accordance
with established standards to be reliable and acceptable.

5. It helps the financial statements to be more reliable documents for the purpose of analysis and
interpretation by analysts, researchers and consultants for economic forecasting and planning.

Generally accepted accounting Principles-GAAP

The common set of accounting principles, standards and procedures that companies use to compile their
financial statements. GAAP are a combination of authoritative standards and simply the commonly
accepted ways of recording and reporting accounting information.

GAAP are imposed on companies so that investors have a minimum level of consistency in the
financial statements they use when analysing companies for investment purposes. It covers such
things as revenue recognition, balance sheet item classification and outstanding share measurements.

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 Companies are expected to follow GAAP rules when reporting their financial data via financial
statements. If a financial statement is not prepared using GAAP principles, be very wary.

Accounting Standards prevalent all across the world: Accounting standards are being established
both at the national and international levels. But the variety of accounting standards and principles
among the nations of the world has been a sustainable problem for globalising the business
environment.

There are several standard setting bodies and organisations that are now actively involved in the process
of harmonisation of accounting practices. The most remarkable phenomenon in the sphere of
promoting global harmonisation process in accounting is the emergence of international accounting
standards.

The International Accounting Committee (IASC), now International Accounting Standards Board
(IASB) was formed on 29th June 1973, by the recognized professional accounting bodies in Canada,
Australia, France, Japan, Germany, Mexico, Netherlands, United Kingdom and the United States of
America with its secretariat and head quarters in London.

National standard setting bodies like Financial Accounting Standards Boards (FASB) of USA,
Accounting Standards Boards (ASB) of UK, and Indian Accounting Standards (IAS) in India
generally frame accounting standards in the line of IASC after due consideration of the local laws and
conditions.

In India the Accounting Standards Board (ASB) was constituted by the Institute of Chartered
Accountants of India (ICAI) on 21st April 1977 with the function of formulating accounting standards.

International Accounting Standards

An older set of standards stating how particular types of transactions and other events should be
reflected in financial statements. In the past, international accounting standards (IAS) were issued by
the Board of the International Accounting Standards Committee (IASC).

In 2001, the new set of standards has been known as the International Financial Reporting Standards
(IFRS) and has been issued by the international Accounting Standards Board (IASB).

To achieve world wide acceptance, uniformity and meaning in matter of accounting, two international
accounting bodies viz, the International Accounting Standards committee (IASC) and the
Informational Federation of Accounts Committee were founded. IASC was formed in 1973, through
an agreement made by professional accountancy bodies from Australia, Canada, France, Japan,
Germany, Mexico, the Netherland, the United Kingdom and Ireland and the USA.

The rapid growth of international trade and internationalization of firms, the Developments of new
communication technologies, the emergence of international competitive forces is perturbing the
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 financial environment to a great extent. Under this global business scenario, the residents of the
business community are in badly needed of a common accounting language that should be spoken by
all of them across the globe. A financial reporting system of global standard is a pre-requisite for
attracting foreign as well as present and prospective investors at home alike that should be achieved
through harmonization of accounting standards.

Objectives of IASC

1. To formulate and publish in the public interest accounting standards to be observed in the
presentation of financial statements and to promote their world-wide acceptance and observance.

2. To work generally for the improvement and harmonization of regulations, accounting standards
and procedures relating to the presentation of financial statements.

International Accounting Standards issued by IASC

IASC has issued 39 International Accounting Standards which deals with the topics that affect the
financial statements and business enterprises.

The following is the list of the International Accounting Standards, issued by IASC. They are

IAS 1: Disclosure of accounting policies

IAS 2: Valuation and presentation of Inventories in the context of historical cost system.

IAS 3: Consolidated Financial Statements

IAS 4: Depreciation Accounting.

IAS 5: Information to be disclosed in financial Statements (superseded by IAS 1 after revisions)

IAS 6: Accounting responses to changing prices (now superseded by IAS 15)

IAS 7: Statements of changes in financial position (cash flow statements)

IAS 8: Treatment of unusual and prior period, fundamental errors and changes in accounting policies,
in financial statements. (Net profit or loss for the period, fundamental errors and changes in
accounting policies)

IAS 9: Accounting for research and Development activities.

IAS 10: contingencies and events occurring after the balance sheet date.

IAS 11: Accounting for construction contracts

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IAS 12: Accounting for Income Taxes

IAS 13: Presentation of current assets and current liabilities (now superseded by IAS 1)

IAS 14: Reporting of financial information by segments.

IAS 15: Information reflecting the effects of changing prices

IAS 16: Accounting for property, plant and equipment.

IAS 17: Accounting for leases.

IAS 18: Revenue Recognition.

IAS 19: Accounting for retirement benefits in financial statements of Employers.

IAS 20: Accounting for Government grants and disclosure of government assistance.

IAS 21: Accounting for the effects of changes in Foreign Exchange rate

IAS 22: Accounting for business combinations

IAS 23: Capitalisation of borrowing costs.

IAS 24: Related party disclosures

IAS 25: Accounting for investments.

IAS 26: Accounting and reporting by Retirement Benefit Plans.

IAS 27: Consolidated financial Statements and Accounting for Investments in Subsidiaries.

IAS 28: Accounting for Investments in Associates.

IAS 29: Financial Reporting in Hyperinflationary Economics

IAS 30: Disclosures in the financial statements at banks and similar financial institutions

IAS 31: financial reporting of interests in Joint Ventures.

IAS 32: Financial Instruments: Disclosure and presentation.

IAS 33: Earning per share

IAS 34: Interim financial reporting.

IAS 35: Discounting Operations.

IAS 36: Impairment of assets

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IAS 37: Provisions, contingent liabilities and contingent assets.

IAS 38: Intangible Assets.

IAS 39: Financial Instruments: recognition and measurement.

IAS 40: Investment Property (effective 1st Jan 2001)

IAS 41: agriculture (effective from 1st January 2003)

After ignoring the standards which have been superseded, currently there are 37 standards in existence
(of which IAS 41 came into effect from 1st January 2003).

INDIAN ACCOUNTING STANDARDS

LIST OF ACCOUNTING STANDARDS (issued till date by the ICAI)

AS-1 DISCLOSURE OF ACCOUNTING POLICIES
AS-2 VALUATION OF INVENTORIES
AS-3 CASH FLOW STATEMENTS
AS-4 CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET DATE
AS-5 NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD AND CHANGES
IN ACCOUNTING ESTIMATES
AS-6 DEPRICIATION ACCOUNTING
AS-7 ACCOUNTING FOR CONSTRUCTION CONTRACTS
AS-8 ACCOUNTING FOR RESEARCH AND DEVELOPMENT
AS-9 REVENUE RECOGNITION
AS-10 ACCOUNTING FOR FIXED ASSETS
AS-11 ACCOUNTING FOR EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
AS-12 ACCOUNTING FOR GOVERNMENT GRANTS
AS-13 ACCOUNTING FOR INVESTMENTS
AS-14 ACCOUNTING FOR AMALGAMATIONS
AS-15 ACCOUNTING FOR RETIREMENT BENEFITS IN THE FINANCIAL STATEMENTS
OF EMPLOYERS
AS-16 ACCOUNTING FOR BORROWING COSTS
AS-17 SEGMENTAL REPORTING
AS-18 RELATED PARTY DISCLOSURES
AS-19 LEASES
AS-20 EARNINGS PER SHARE
AS-21 CONSOLIDATED FINANCIAL STATEMENT
AS-22 ACCOUNTING FOR TAXES ON INCOME
AS-23 ACCOUNTING FOR INVESTMENTS IN ASSOCIATES IN CONSOLIDATED BALANCE
SHEET
AS-24 DISCOUNTING OPERATIONS
AS-25 INTERIM FINANCIAL REPORTING
AS-26 INTANGIBLE ASSETS

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AS-27 FINANCIAL REPORTING OF INTERESTS IN JOINT VENTURES

AS-1 DISCLOSURE OF ACCOUNTING POLICIES

This standard was issued in 1979 and effective from that time. It is mandatory to the enterprises.
Accounting policies refer to the specific accounting principles and the methods of applying those
principles adopted by the enterprise in the preparation and presentation of financial statements.

Disclosure is required if fundamental accounting assumptions viz, going concern, consistency and
accrual concept are not followed in financial statement.

The objective of this standard is to

1. Promote better understanding of financial statement and

2. To facilitate a more meaningful comparison between financial statements of different enterprises.

AS-2 VALUATION OF INVENTORIES

This standard was issued in 1981, but it was revised in 1999. The revised standard came into effect
from 1.4.1999. It is mandatory to the enterprises. 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 service.

It is applicable in accounting for inventories other than:

1. Work in progress arising under

a) construction contracts, including directly related service contracts

b) Ordinary course of business of service providers.

2. Shares, debentures and other financial instruments held as stock-in-trade and

3. Producers’ inventories of live stock, agricultural and forest products and mineral oils, ores and
gases to the extent they are measured at net realizable value in accordance with well established
practices in those industries.

The main objective of this standard is to determine the value of inventories at which they are carried in
the financial statements until the related revenues are recognized.

AS-3 CASH FLOW STATEMENTS

This standard was issued in 1981, revised in March 1997. An enterprise should prepare a cash flow
statement and should present it for each period for which financial statements are presented.

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Cash comprises cash on hand and demand deposits with banks. Cash equivalents are short term highly
liquid investments that are readily convertible into known amounts of cash and which are subject to an
insignificant risk of changes in value. Cash flows refer to both inflow and outflow of cash and cash
equivalents.

The objective of this standard is to provide users of financial statements with a basis to assess the ability
of the enterprise in generating cash and cash equivalents and the needs of the enterprise to utilize
those cash flows.

AS-4 CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET DATE

It deals with the treatment in financial statements of a) liabilities and b) events occurring after
the balance sheet date.

However, the following subjects, which may result in contingencies, are excluded from the scope of this
standard.

a) Liability of life assurance and general insurance enterprises arising from policies issued.
b) Obligations under retirement benefit plans and
c) Commitments arising from long-term lease contracts.

Note:

1. A Contingency is a condition or situation, the ultimate outcome of which, gain or lose, will be
known or determined only on occurrence, of one or more uncertain future events.
2. 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 case of a company, and by
the corresponding approving authority in the case of any other entity.

The main objective is to assist the estimation of amounts relating to conditions existing at the balance
sheet date.

AS-5 NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD AND
CHANGES IN ACCOUNTING ESTIMATES

This standard 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. However, the
statement does not deal with the tax implications of above mentioned items, for which appropriate
adjustments will have to be made depending on the circumstances.

The main objective of this standard is to prescribe the classification and disclosure of certain items in
the statement of profit and losses so that all enterprises prepare and present such a statement on

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 uniform basis, thereby enhancing the comparability of financial statements of enterprise overtime, and
with those of other enterprises.

Note:

1. 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 those activities.
2. Extra ordinary 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 occur
frequently or regularly.
3. Prior period items are income or expenses which arise in the current period as a result of errors or
omission in the preparation of the financial statements of one or more prior periods.

AS-6 DEPRICIATION ACCOUNTING

This standard deals with depreciation accounting and applies to all depreciable assets, except the
following items:

1) Forests, plantations and similar regenerative natural resources

2) Wasting assets including expenditure on the exploration for and extraction of minerals, oils,
natural gas and similar non-regenerative resources.
3) Expenditure on research and development
4) Goodwill
5) Live stock
6) Land (until it has limited useful life for the enterprise)

The main objective is to ensure allocation of depreciable asset, on a systematic basis to each accounting
period during the useful life of the asset.

Note:

1) Depreciation is a measure of the wearing out consumption or other loss of value of a depreciable
asset arising from use, effluxion of time or obsolescence through technology and market changes.
2) Depreciable assets are assets which

i) Are expected to be used during more than one accounting period

ii) Have a limited useful life and
iii) Are held by an enterprise for use in production or supply of goods, for rental to others, or for
administrative purposes and not for the purpose of sale in the ordinary course of business.

AS-7 ACCOUNTING FOR CONSTRUCTION CONTRACTS

The standard deals with accounting for construction contracts in the financial statement of the
enterprises undertaking such contracts. It also applies to enterprises undertaking construction
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 activities of the type dealt within this standard, not as a venture of a commercial nature where the
enterprise has entered into agreements for sale.

The main objective is to provide for preparation and presentation of financial statements of construction
undertakings on uniform basis.

Construction contract is a contract for the construction of an asset or a combination of assets which
together constitute a single project.

AS-8 ACCOUNTING FOR RESEARCH AND DEVELOPMENT

The standard deals with the treatment of cost of research and development in financial statements but
does not deal with the accounting implications of

i) Research and development activities conducted for others under a contract

ii) Exploration for oil, gas and mineral deposits
iii) Research and development activities of enterprises at the construction stage.

Note:

1. Research is original and planned investigation undertaken with the hope of gaining new scientific
or technical knowledge and understanding.
2. Development is the translation of research findings or other knowledge into 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.

AS-9 REVENUE RECOGNITION

The standard deals with the basis for recognition of revenue in the statement of profit or loss of an
enterprise, arising in the course of the ordinary activities of the enterprise from the sale of goods, the
rendering of services, and the use by others of enterprise resources yielding interest, royalties and
dividends. But does not deal with revenue recognitions of revenue arising from a) construction
contracts b) hire purchase, lease agreements c) government grants and other similar subsidies and d)
insurance contracts of insurance companies.

The main objective is to provide for preparation and presentation of financial statements on uniform
basis.

Revenue refers to 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.

AS-10 ACCOUNTING FOR FIXED ASSETS

The standards deal with accounting for fixed assets except with accounting for the following items:
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i) Forests, plantations and similar regenerative natural resources.
ii) Wasting assets including mineral rights, expenditure on the exploration for and extraction of
mineral oil, natural gas and similar non-regenerative resources
iii) Expenditure on real estate development and
iv) Live stock.

The main objective of this standard is to provide for preparation and presentation of financial statements
on uniform basis.

Fixed asset is an asset held with the intention of being used for the purpose of producing or providing
goods or services and is not held for sale in the normal course of business.

AS-11 ACCOUNTING FOR EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

The standard should be applied by an enterprise a) in accounting for transactions in foreign currencies
and b) In translating the financial statements of foreign branches for inclusions in the financial
statements of the enterprise.

The main objective is that an enterprise may have transactions in foreign currencies or it may have
foreign branches. Foreign currency transactions should be expressed in the enterprise’s reporting
currency and the financial statements of foreign branches should be translated into the enterprise’s
reporting currency in order to include then in the financial statements of the enterprise. The principal
issues in accounting for foreign exchange transactions and foreign branches are to decide which
exchange rate to use and how to recognize the financial effect of changes in exchange rates.

Note:

1. Reporting currency is the currency used in presenting the financial statements.

2. Foreign currency is a currency other than the reporting currency of an enterprise.
3. Exchange rate is the ratio of exchange of two currencies as applicable to the realization of a
specific asset or the payment of a specific liability or the recording of a specific transaction or a group
of interrelated transactions.

AS-12 ACCOUNTING FOR GOVERNMENT GRANTS

The standard deals with accounting for government grants (such as subsidies, cash incentives, duty
draw backs etc) but does not deal with:

1. Special problems arising in accounting for government grants in financial statement reflecting
the effects of changing prices or in supplementary information of a similar nature.
2. Government assistance other than in the form of government grants and
3. Government participation in the ownership of the enterprise.

The main objective of this standard is to provide for preparation of financial statements on uniform
basis.
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Note:

1. Government refers to government, government agencies and similar bodies whether local,
national or international.
2. Government grants are assistance by government in cash or kind to an enterprise for post or future
compliance with certain conditions.

AS-13 ACCOUNTING FOR INVESTMENTS

The standard deals with accounting for investments in the financial statements of enterprise and related
disclosure requirements, but does not deal with

1. The bases for recognition of interest, dividends and rentals earned on investments
2. Operating or financial leases
3. Investments of retirement benefit plans and life insurance enterprises and
4. Mutual funds and or the related asset management companies, banks and public financial
institutions.

The main objective of this standard is to provide for preparation and presentation of financial
statement on uniform basis.

Investments are assets held by an enterprise for earning income by way of dividends, interest and
rentals for capital appreciation or for other benefits to the investing enterprise. Assets held as stock-
in-trade are not investments.

AS-14 ACCOUNTING FOR AMALGAMATIONS

The standard deals with accounting for amalgamations and the treatment of any resultant goodwill or
reserves, but does not deal with case of acquisitions which arise when there is purchase by one
company of the whole or part of the shares, or the whole or part of the assets of another company in
consideration for payment in cash or by issue of shares or other securities in the acquiring company or
partly in form and partly in the other.

The main objective is to provide for uniformity in accounting in the cases of amalgamation.

Note:

1. Amalgamation means an amalgamation pursuant to the provisions of the companies Act, 1956,
or any other statute which may be applicable to companies.
2. Transferor Company means the company which is amalgamated into another company.
3. Transferee company means the company into which a transferors company is amalgamated.

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AS-15 ACCOUNTING FOR RETIREMENT BENEFITS IN THE FINANCIAL
STATEMENTS OF EMPLOYERS

The standard deals with accounting for retirement benefits in financial statements. Retirement benefits
usually consists of a) provident fund b) superannuation/pension c) gratuity d) leave encashment
benefit on retirement e) post retirement health and welfare schemes and f) other retirement benefits.

The main objective of this standard is to provide for preparation and presentation of financial statements
on uniform basis.

Note:

Retirement benefit schemes are arrangements to provide provident fund, superannuation or pension,
gratuity or other benefits to employees on leaving service or retiring or after an employee’s death, to
his or her dependents.

AS-16 ACCOUNTING FOR BORROWING COSTS

The standard should be applied in accounting for borrowing costs. However, the standard does not deal
with actual or imputed cost of owners’ equity, including preference share capital not classified as a
liability.

The main objective is to prescribe the accounting treatment for borrowing costs.

Note:

Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing
funds.

AS-17 SEGMENTAL REPORTING

The standard should be applied in presenting general purpose financial statements, and can also be
applicable in case of consolidated financial statements.

The main objective is to establish principles for reporting financial information, about the different
types of products and services an enterprise produces and the different geographical areas in which it
operates, enabling the users of financial statements in better understanding of the performance of the
enterprise, better assessment of the risks and returns of the enterprise and better judgment of the
enterprise as a whole.

Note:

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A business segment is a distinguishable component of an enterprise that is engaged in providing an
individual product or service or a group of related products or services and that is subject to risks and
returns that are different from those of other business segments.

AS-18 RELATED PARTY DISCLOSURES

The standard should be applied in reporting related party relationships and transactions between a
reporting enterprise and its related parties. The requirements of the standard applies to the financial
statements of each reporting enterprise as also to consolidated financial statements presented by a
holding company.

The main objective is to establish requirements for disclosure of a) related party relationships and b)
transactions between a reporting enterprise and its related parties.

Note:

1. Related parties are considered to be related if at any time during the reporting period one has the
ability to control the other party or exercise significant influence over the other party in making
financial or operating decisions.
2. Related party transaction refers to a transfer of resources or obligations between related parties
regardless of whether or not a price is charged.

AS-19 LEASES

The standard should be applied in accounting for all leases other than:

1. Lease agreements to explore for or use natural resources, such as oil, gas, timber, metals and
other mineral rights and
2. Licensing agreements for items such as motion pictures films, video recordings, plays,
manuscripts, patents and copy rights and
3. Lease agreements to use lands.

The main objective is to prescribe, for lessees and lessors, the appropriate accounting policies and
disclosures in relation to finance leases and operating leases.

Note:

1. A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series
of payments the right to use an asset for an agreed period of time.
2. A financial lease is a lease that transfers substantially all the risks and rewards incidents
ownership of an asset.
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3. An operating lease is a lease other than a finance lease.

AS-20 EARNINGS PER SHARE:

The standard should be applied by enterprises whose equity shares or potential equity shares are
listed on a recognized stock exchange in India. An enterprise which has neither equity shares nor
potential equity shares which are to be listed but which discloses earnings per share should calculate
and disclose earnings per share in accordance with this standard.

The main objective is to prescribe the principles for the determination and presentation of earnings per
share which will improve comparison of performance among different enterprises for the same period
and among different periods for the same enterprise.

Note:

1. An equity share is a share other than a preference share.

2. A preference share is a share carrying preferential rights to dividends and repayment of capital
3. A potential equity share is a financial instrument or other contract that entitles, or may entitle, its
holder to equity shares.

AS-21 CONSOLIDATED FINANCIAL STATEMENTS

The standard should be applied in the preparation and presentation of consolidated financial
statements for a group of enterprises under the control of a parent. The standard should also be
applied in accounting for investments in subsidiaries in the separate financial statements of a parent.
The standard does not deal with:

a) Methods of accounting for amalgamation and their effects on consolidation, including goodwill
arising on amalgamation.
b) Accounting for investments in associates, and
c) Accounting for investment in joint ventures.

The objective of this standard is to lay down principles and procedures for preparation and presentation
of consolidated financial statements, that are presented by a parent (holding Co.,) to provide financial
information about the economic activities of its group. These statements are intended to present
financial information about a parent and its subsidiary as a single economic entity to show the
economic resources controlled by the group and the results the group achieves with its resources.

Note:

1. Subsidiary is an enterprise that is controlled by another enterprise.(known as the parent)

2. A parent is an enterprise that has one or more subsidiaries.
3. A group is a parent and all its subsidiaries.

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AS-22 ACCOUNTING FOR TAXES ON INCOME

The standard should be applied in accounting for taxes on income. This includes the determination
of the amount of the expense or saving related to taxes on income in respect of an accounting period
and the disclosure of such an amount in the financial statements. For the purposes of this standard,
taxes on income include all domestic and foreign taxes which are based on taxable income.

The main objective is to prescribe accounting treatment for taxes on income.

Note:

1. Accounting income (loss) is the net profit or loss for a period as reported in the statement of
profit/loss, before deducting income tax expense or adding income tax saving.
2. Taxable income (tax loss) is the amount of the income (loss) for a period, determined in
accordance with the tax laws, based upon which income tax payable (recoverable) is determined.
3. Tax expense (tax saving) is the aggregate of current tax and deferred tax charged (or credited) to
the statement of profit or loss for the period.
4. Current tax is the amount of income tax determined to be payable (recoverable) in respect of the
taxable income (loss) for a period.
5. Deferred tax is the tax effect of timing differences.

AS-23 ACCOUNTING FOR INVESTMENTS IN ASSOCIATES IN CONSOLIDATED

FINANCIAL STATEMENTS

The standard should be applied in accounting for investments in associates in the preparation and
presentation of consolidated financial statements by an investor. The standard does not deal with
accounting for investments in associates in the preparation and presentation of separate financial
statements by an investor.

The main objective is to see out principles and procedures for recognizing, in the consolidated financial
statements, the effect of the investments in associates on the financial position and operating results of
a group.

Note:

1. An associate is an enterprise in which the investor has significant influence and which is neither
a subsidiary nor a joint venture of the investor.
2. Significant influence is the power to participate in the financial and or operating policy
decisions of the investee but not control over those policies.

AS-24 DISCOUNTINUING OPERATIONS

The standard applied to all discontinuing operations of an enterprise. The requirements related to
cash flow statement contained in this standard are applicable where an enterprise prepares and
presents a cash flow statement.
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The main objective is to establish principles for reporting information about discontinuing operations,
thereby enhancing the ability of users of financial statements to make projections of an enterprise’s
cash flows, earnings generating capacity, and financial position by segregating information about
discontinuing operations from information about continuing operations.

Note:

A discontinuing operation is a component of an enterprise:

1. That the enterprise, pursuant to a single plan, is:

a) Disposing of substantially in its entirely, such as by seeing the component in a single transaction
or by de-merger or spin-off of ownership of the component to the enterprise’s shareholders; or
b) Disposing of piecemeal, such as by selling off the component’s assets and settling its liabilities
individually; or
c) Terminating through abandonment; or

2. That represents a separate major line of business or geographical area of operations; and
3. That can be distinguished operationally and for financial reporting purposes.

AS-25 INTERIM FINANCIAL REPORTING

The standard is applicable to enterprises which are required to or elects to prepare and present
interim financial report. Minimum components of an interim financial report;

a) Condensed balance sheet

b) Condensed statement of profit and loss
c) Condensed cash flow statement; and
d) Selected explanatory notes.

The main objective is to prescribe the minimum content of an interim financial report and to prescribe
the principle for recognition and measurement in a complete or condensed financial statements for an
interim period, thereby enabling the improvement of investors creditors and others ability to
understand an enterprise’s capacity to generate earnings and cash flows and its financial condition and
liquidity.

Note:

1. Interim financial means a financial report containing either a complete set of financial statements
or a set of consolidated financial statements for an interim period.
2. Interim period is a financial reporting period shorter than a full financial year.

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AS-26 INTANGIBLE ASSETS

The standard should be applied by all enterprises in accounting for intangible assets, except

a) Intangible assets that are covered by another accounting standard.

b) Financial assets
c) Mineral rights and expenditure on the exploration for or development and extraction of, minerals,
oil, natural gas, and similar non-regenerative resources, and
d) Intangible assets arising in insurance enterprises from contracts with policy holders.

The main objective is to prescribe the accounting treatment for intangible assets that are not dealt with
specifically in another accounting standard

Note:

1. An intangible asset is an identifiable non-monetary asset without physical substance, held for use
in the production or supply of guide or services for rental to others, or for administrative purposes.
2. An asset is a resource: a) controlled by an enterprise as a result of past events and b) from which
future economic benefits are expected to flow to the enterprise.

AS-27 FINANCIAL REPORTING OF INTERESTS IN JOINT VENTURES

The standard should be applied in accounting for interests in joint ventures and the reporting of joint
venture and the reporting of joint ventures assets, liabilities, income and expenses in the financial
statements of ventures and investors, regardless of the structures or forms under which the joint
venture activities take place.

The main objective is to set out principles and procedures for accounting for interest in joint venture
assets, liabilities, income and expenses in the financial statement s of ventures and investors.

Note:

1. Joint venture is a contractual arrangement whereby two or more parties, undertake an economic
activity, which is subject to joint control.
2. A venture is a party to a joint venture and has joint control over the joint venture.
3. An investor to a joint venture is a party to a joint venture and does not have control over that joint
venture.

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 EXERCISES

SECTION A

1. Give the meaning of accounting standards

2. State any two objectives of accounting standards
3. State any four Indian Accounting standards.
4. Mention any two international accounting standards.
5. State the objective AS-2.
6. Mention any two uses of accounting standards.
7. What are borrowing costs?
8. Define taxable Income.
9. Give the meaning of intangible asset/
10. What are cash equivalents?

SECTION B & C

1. Bring out the need for accounting standards

2. Elucidate the significance of accounting standards.
3. Mention the accounting standards which are common in both, Indian and International context.
4. Give the list of different Indian Accounting standards.
5. Briefly explain any four Indian accounting standards.

CHAPTER 2
ACCOUNTS OF BANKING COMPANIES

LEARNING OBJECTIVES
• To understand the important provisions relating to final accounts of banking companies.
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 • Get familiar with the prescribed formats of the profit and loss account and balance sheet.
• Describe the mode of disclosure of accounting policies adopted by a banking company in the
preparation of its financial statements.
• Understand the accounting treatment of certain specific adjustments in the final accounts of banking
companies.
• Prepare final accounts of banking companies.

INTRODUCTION AND MEANING

A banking company has been defined under sec 5(c) of the Banking Regulation Act, 1949, as “any
company which transacts the business of banking in India”

Section 5(b) of the Banking Regulation Act, 1949, defines Banking as “accepting, for the purpose of
lending or investment, of deposits of money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, and order or otherwise”

BOOKS OF ACCOUNTS TO BE MAINTAINED BY BANKING COMPANIES

A Banking company is required to maintain various ledgers (or books) and registers as per the
requirements of the Banking Regulation Act, 1949. All the books and registers, a bank has to
maintain can be classified into the following categories:
1. Principal Ledgers (or Books)
2. Subsidiary Ledgers (or Books) and
3. Other Registers and memorandum books.

PRINCIPAL LEDGERS
A banking company is required to maintain the following two principal books:
1. Cash book: Cash book provides the summary of collections (at the counter) and payments (at the
counter) of the bank.

2. General Ledger: General ledger provides details regarding expenses and asset not covered under
subsidiary books and also contains the control accounts of subsidiary books.

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 SUBSIDIARY LEDGERS
It includes:
(a) Receiving Cashier’s Counter Cash Book;
(b) Paying Cashier’s Counter Cash Book;
(c) Current Accounts Ledger;
(d) Savings Bank Accounts Ledger;
(e) Fixed Deposit Accounts Ledger
(f) Investment Ledger;
(g) Cash Credit Ledger;
(h) Loan Ledger;
(i) Bills Discounted and Purchased Ledger;
(j) Recurring Deposit Accounts Ledger;
(k) Fixed Deposit Accounts Ledger;
(l) Customer’s Acceptance, Endorsement and Guarantee Ledger etc.;

Other Registers and Memorandum Books

It includes:
(a) Bills for Collection Register;
(b) Share Security Register;
(c) Jewellery Register;
(d) Demand Draft Register;
(e) Safe Custody Register;
(f) Standing Order Register;
(g) Dishonoured Cheque Register;
(h) Letter of Credit Register;
(i) Lockers Register etc.;

Special Features of Bank Accounting

The following are the features of bank accounting;

1. Banking companies have to maintain books of accounts under Double-Entry System.

2. It has to maintain all books of accounts, as required under the provisions of the
Banking Regulation Act.
3. The posting of transactions in the ledger will be based on debit/credit slips. (That is,
slip system of ledger posting is followed in banking companies).
4. Self-balancing system of ledge is followed in accounting, by banking companies.

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 SOME IMPORTANT PROVISIONS OF THE BANKING REGULATION ACT, 1949

I. Share Capital
(a) A banking company can issue only equity shares. (Section 12).
(b) The subscribed capital of a banking company (carrying on business in India) must be
atleast one-half of the authorised capital; and the paid-up capital must be atleast one-half of the
subscribed (Section 12).
(c) The total of paid-up capital and reserves must be atleast the amount specified in Section
11,which have been given below:

Minimum Total of
Paid-up capital and
reserves Rs.
1. For banking companies incorporated outside India
(i.e., Foreign Banks)
(a) If it has place of business in Mumbai or Kolkata; or 20,00,000
both
(b) If it has place of business other than in Mumbai or 15,00,000
Kolkata;
2. For Banking Companies Incorporated in India
(a) If it has place of business in Mumbai or Kolkata; or
both 10,00,000
(b) If it does not have place of business in Mumbai or
Kolkata; but have place of business
(I) in more than one state
(II) in only one state 5,00,000
- If there is only one place of business
- If it has more than one place of businesses
For principal place of business 50,000
For every other place of business, in the same
district
1,00,000
For every other place of business outside the
district Additional 10,000

(The total, in this case however, need not exceed Additional 25,000
Rs. 5,00,000)

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 (c) If it has place and business in one state and also have
place of business in Mumbai or Kolkata; or both
(I) for place of business in Mumbai or Kolkata; or
both
(II) for each place situated outside the city of Mumbai 5,00,000
and
Additional 25,000
Kolkata
(The total in this case, however, need not exceed
Rs.
10,00,000)

(d) Private Banks registered as a pubic limited company under the companies act, 1956, must have
a minimum paid – up – capital of Rs. 100 crores.
(e) The capital adequacy Ratio (CAR) of all the banks operating in India must be 8%, and it should
be 10% by 2002. (Capital Adequacy Ratio Refers to the percentage of capital and reserves [after
writing off bad debts] to the assets of the bank).

II. Statutory Reserve

According to Section 17(1) of the Banking Regulation Act, every banking company,
incorporated in India, must transfer at least 25% of its annual profits (before declaring dividends)
to Statutory Reserve. Such transfer must be made until the Reserve (along with share premium, if
any) exceeds the paid-up capital.

III. Cash Reserve (Cash Reserve Ratio)

According to Section 42 of the Banking Regulation Act, every scheduled and non-scheduled
Bank must deposit with Reserve Bank of India, an amount equal to 3% of its time and demand
liabilities as cash reserves with the Reserve Bank of India. Presently, the percentage is 5%. RBI
has powers to increase the percentage upto 20% by a notification in the official gazette.
According to the section 18 of the Banking Regulation Act, every non-scheduled bank is also
required to maintain in India by way of cash reserve with itself or in any current account opened
with the Reserve Bank of India or the state Bank of India or partly in cash with itself and partly

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in such account or accounts, a sum equivalent to atleast 3% of the total of its time and demand
liabilities in India.

IV. Statutory Liquidity Ratio & Statutory Reserve

Statutory Liquidity Ratio: Over and above the cash reserve, every banking company is
required to maintain in India in cash, gold and unencumbered securities, an amount which shall
not be less than 25% of its time and demand liabilities (i.e., total deposits) in India. This is
known as “Statutory Liquidity Ratio”. The Reserve Bank of India has the power to increase this
ratio upto 40%.
Statutory Reserve: Every banking company incorporated in India shall, before any dividend is
declared, transfer a sum equal to 25% of the profit of each to a statutory reserve until the amount
of the reserve together with any securities premium account is still aggregate amount of reserve
fund and the securities premium account, if any exceeds its paid up capital. The central
government may, however, grant an exemption in this regard on the recommendation of the
Reserve Bank of India. If a banking company appropriates any sum from the reserve or the
securities premium account, it shall, within 21 days from the date of such appropriation report
the fact to the Reserve Bank of India explaining the circumstanced relating to such appropriation.
The statutory reserve is shown in the balance sheet on the liabilities side under the heading
“Reserves and Surplus”.

V. Assets in India

According to Section 25 of the Banking Regulation Act, every Banking Company must
have assets in India, equivalent to at least 75% of its time and demand liabilities, at the close of
business on the last Friday of every quarter.

VI. Investment in Share and Debentures

Other than in exceptional cases provided in Section 19, no banking company shall hold
shares and debentures of another company, more than 30% of the concerned company’s paid-up
capital or its own paid-up capital.

VII. Declaration and Payment of Dividends

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 According to Section 15, no banking company can declare and pay dividends until all
capitalized expenses (i.e., preliminary expenses, brokerage, indemnity commission etc.) have
been completely written off.

VIII. Payment of Commission, Brokerage or Remuneration in respect of Issue of Shares or

Discount on issue of Shares

According to section 13 of the Banking Regulation Act, such payment or discount cannot
exceed 2.5% of the paid-up value of the said shares.

IX. Uncalled Capital

According to Section 14, a banking company cannot create any charge on uncalled
capital.

X. Restrictions on Loans and Advances.

According to section 20, a banking company is bound by the following restrictions

regarding loans and advances:
1. It cannot grant any loans or advances on the security of its own shares:
2. It cannot enter into any commitment for granting any loan or advance to or on behalf of the
following persons;
(a) Any of its directors;
(b) Any firm in which any of its director is interested as partner, manager, employer or guarantor.
(c) Any company (not being a subsidiary of a banking company or a company registered under
section 25 of the companies act, 1956 or a government company) of which any of the directors
of the banking company is a director, manager or employee or guarantor or in which he holds
substantial interest;
(d) Any individual in respect of whom any of its directors is a partner or guarantor.

FINAL ACCOUNTS OF BANKING COMPANIES

Section 29, Schedule III of the Banking Regulations Act, 1949, gives the format for the
preparation of Final Accounts of Banking Companies. The present format is applicable with
effect 1st April, 1991. The final accounts of banking companies include preparation of profit
and loss account and balance sheet. The prescribed formats of the two, along with formats of
schedules to be prepared are given below:

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 Form ‘A’
Form of Balance Sheet

Balance sheet of ………………………………….(here enter name of the banking

company) Balance sheet as on 31st March (year)
Capital& Liabilities As on 31.3…. As on 31.3…
Schedule (Current year) (previous
year)

Capital 1
Reserve & surplus 2
Deposit 3
Borrowings 4
Other liabilities and provisions 5
TOTAL
ASSETS
Cash and balance with Reserve 6
Bank of India
Balances with banks and 7
money at call and short notice
Investments 8
Advances 9
Fixed assets 10
Other assets 11
TOTAL
Contingent Liabilities 12
Bills for collection

SCHEDULE 1- CAPITAL

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