CHAPTER 1: INTRODUCTION

Company law legislation has continually been precise in its prerogatives of

retaining the desired standards on accounting arrangements within companies.
Given this opportunity, section 210A of the Companies Act, 1956 had enacted,
the “Constitution of the National Advisory Committee on Accounting
Requirements”. In keeping with the supply the central government had
constituted National Advisory committee to propose the imperative
government on numerous accounting requirements so that it will formulate and
establish accounting guidelines and standards for adoption by way of agencies
or training of organizations. Accounting and auditing requirements regulations
have emerge as a ways more stringent for the reason that 2013 to the
companies act.
Companies have to put together their financial statements, in accordance with
the accounting requirements as notified by the Ministry of Corporate Affairs.
Following that, the Companies (Indian Accounting Standards), policies, 2015
(“Ind AS”) have been notified on April 1, 2015, and the Ind AS become made
applicable, in a phased manner, to certain classes of organizations for
accounting periods starting on or after April 1, 2016, and the following classes
of businesses are presently required to follow Ind AS (“Ind AS Companies”):
 All listed organizations (equity or debt securities) which might be
indexed on any stock trade in India or abroad;
 All the businesses which are approximately to be indexed on any
exchanges in India or elsewhere;
 All unlisted companies with a net worth of two hundred and fifty crores
or greater;
Preserving such improvements in accounting standards in Companies Act,
financial statements have emerged as an essential component for each inner
and external stakeholders of companies. These standards generally outline the
requirements for the financial statements reputation, dimension, presentation
and disclosure of transactions and occasions. The accounting standards, that are
extra of a coverage report, are mostly worried with ensuring the financial
statements transparency, dependability, consistency, and comparison. As an
end result, there may be a regular set of accounting standards that sooner or

1
later standardize a states or organizations accounting coverage and ideas.
However, consistent with section 133 of the Companies Act, 2013, the onus of
issuing such fashionable measure which recognizes the enterprise money owed
falls at once on the government, with the recommendation of an accounting
body or a regulatory body such as the Institute of Chartered Accountants of
India (ICAI). Accounting is regularly known as the enterprise language as it
communicates the enterprise’s financial functions to others. Every accounting
degree in an organization has uniform accounting requirements to formulate
their policies and rules for accounting and reporting in a country, simply as
every language has positive syntax and grammar policies to be observed.

1.1 Introduction to Companies Act, 2013

The Companies Act, 2013 governs the formation, dissolution and
operations of businesses in India. The act which changed the preceding act
of 1956, came into effect across India on September 12, 2103. The term
company is derived from the Latin word “Com” which means “with or
together” and “panis” which means “bread”, hence it firstly stated a group
of individuals or associations who shared meals.
A corporation is described by way of regulation as a corporate body and a
legal individual with status and personality distinct or different from the
contributors who comprise it. A company, in the legal sense, is an
association of each herbal i.e natural and synthetic i.e artificial persons
that is integrated underneath a country’s current law.
The Companies Act, 2013 was introduced in substitution of its
predecessor that allows to deliver the act in greater consistent with the
present day company state of affairs. Moreover, by simplifying the
technique of setting up and running an enterprise, this act pursuits to focus
on economic growth and development.
The Companies Act, 2013 obtained the president’s assent on August 29,
2013 and gave notice of it in the Indian Gazette on August 30, 2013. The
Companies Act of 2013 bought new ideas to aid more suitable disclosure,
higher board governance, enterprise facilitation among other things. The
act consist of an associate company, a one person company, a small

2
 company, a dormant company, an independent director, a women director,
a resident director, a special court, secretarial standards, a secretarial audit,
a class action, registered valuers, auditor rotation, a vigil mechanism,
corporate social responsibility, and E-balloting.

1.2 Historical Background of Companies Act, 2013

Company law isn’t always a brand new concept, in reality it found its
traces in four B.C, this idea evolved through the years. The British
Parliament bought this act to India. Indians were reluctant to just accept
this because they believed it would harm their financial system, however it
changed into setup, because humans have been governed by using English
rule. Some merchant guilds in England had been called regulated
companies. The East India Company was incorporated in 1600 by way of
a royal charter. The Joint Stock Companies Act was first incorporated in
1844 in England. The said act reserved a provision for the registrations of
the companies.

The Companies Act of 1850, came into existence in the year 1850 by the
Joint Stock Company Act of 1844. During 1852 to 1883, these regulations
were amended several times due to disagreements in India, the main cause
of this conflict turned into the disparity in the perspectives of the various
people who live right here, in addition to their negative attitudes in the
direction of the English laws. The Joint Stock Company of 1844 furnished
that a company can be incorporated by way of registering without
acquiring a charter or the sanction of the registrar of this act, but the
registrar’s power of financial responsibility was denied by way of this act.

The Indian Companies Act 1913 eventually replaced the Companies Act
of 1850. Post-Independence, the government appointed a committee in the
year 1950, which was headed by Shri H.C. Bhaba, to revise the Indian
Companies Act of 1913, in 1952 the committee submitted its report. The
Companies Act of 1956 got its existence on April 1, 1956, primarily based
on the committee recommendations and the provisions of the English

3
 Companies Act 1948. While it became clear that the voluminous
legislation needed to be replaced with a brand new, more compact
companies act, Dr. J.J Irani committee was formed. To start with, the point
of interest become on liberalizing the law and making it extra consumer
pleasant, but the satyam scam had an effect on orientation, the focal point
was shifted slightly a good way to keep certain stringencies within the act.
The J.J Irani committee’s recommendations have been eventually realized
in the form of Companies Act, 2013. On August 29, 2013 the act received
the president assent. The Companies Act, 2013 is applicable in whole of
India including the states of Jammu and Kashmir.

1.3 Introduction to Accounting Standards:

Accounting Standards are recommendations that convey and standardize
accounting practices. The purpose is to make sure that every organization
comply with the same accounting regulations and use the same financial
reporting format. Accounting standards offer a standardized framework to
make certain, that a company’s financial statements are significant and
standardized, making interpreting and understanding them effortless.
Accounting standards not only enhance financial reporting transparency,
in addition they facilitate financial accountability.

Accounting standards follow in the course of a rustic, allowing its whole

economic system to apply the same set of accounting standards and
terminology. As a result, all enterprises and firms in the said country will
use a consistent, accurate and specific format to prepare their financial
statements and statistics. Accounting standards consist of a segment
reporting, goodwill accounting, an allowable method of depreciation,
mergers, lease category, a measure of accounting share, and revenue
recognition.

Accounting Standards resolve accounting conflicts of their detailing,

remedy, guidelines, and directives by using supplying uniformity in their
concepts. They are distinctly precise and informative for the reason of

4
avoiding any confusion which may additionally arise relating to
accounting standards. Accounting Standards make sure that the financial
statements are prepared fairly and consistently across the corporations.
Without accounting standards, users of financial statements would be
required to understand the accounting principles of each companies whose
accounting standards are under study. Each publicly traded enterprise in a
selected jurisdiction is needed to record their financial statements
following the accounting requirements followed by using them.

1.4 Historical Background of Accounting Standards:

The Accounting Standards of India were developed in cooperation with
the National Advisory committee on Accounting Standards of the Central
Government of India (NACAS). This was done under the supervision and
control of ICAI’s Accounting Standard Board (ASB). NACAS
recommended the Indian AS to the ministry of Corporate Affairs, which
has the authority to make the Indian As applicable to Indian Companies.
IFRS are named and numbered similarly to the corresponding IFRS. So
far 40 Indian As have been issued.

The Indian As facilitates the cross border flow of money, facilitates

worldwide listing and enables international comparability of financial
statements. This facilitates global investments, which benefits capital
market participants. The Indian AS helps the investor to compare
investments on a global scale. With Indian AS, there is no need to reset
Indian company accounts.

Indian AS original date implementation date was 2011, but due to some
unknown reasons, the Ministry of Corporate Affairs postponed the
implementation date. The companies Rules (Indian AS) were issued by the
Ministry of Corporate Affairs in February 2015. According to the notice,
Indian AS will be introduced on a voluntary basis from April 1, 2015 and
will be mandatory from April 1, 2016. A roadmap for implementation in
NBFC, Banks and insurance companies was later released.

5
Chapter 2: ACCOUNTING STANDARDS WITH
RESPECT TO FINANCIAL STATEMENTS UNDER
COMPANIES ACT, 2013

Regarding the nature of accounting standards, this chapter focuses on the

accounting standards relating to the preparation of financial statements under
the Companies Act, 2013. Before delving into the subject at hand, it is
important to point out that the subject in question is framed in chapter IX and
schedule III of the Companies Act, 2013.

2.1 – Meaning of Financial Statements

Financial statements are statements that present an accurate picture of an
organizations economic overall performance on the end of the financial year. It
is a formal record of the financial transactions that arise in an organizations.
These statements helps records customer in figuring out the organizations
financial position, liquidity, and overall performance.

Most decision makers depend upon financial statements as their number one
supply of financial statists. That is why financial accounting and reporting
vicinity the sort of top class on the accuracy, dependability, and relevance of
the facts contained in those financial statements.

Financial statements are collective information of diverse reviews consisting of

balance sheet (showing assets, liabilities and equity), income statement, cash
flow statement, and statement of equity (including statement of changes in
equity) of each organization as defined in clause (40) of section 2 in its literal
meaning as specified in section 129 (1) of the Companies Act, 2013. Local
laws, regulations, and rules, such as Ind AS, regulate most of these statements,
however, companies must comply with this mandatory requirement to prepare
financial statements at the end of each financial year, and such financial
statements may be kept electronically if they are complete and unaltered.

6
Referring the landmark decision in J&K Industries Limited versus India and
others, in appeal (civil) 3761 of 2007, the court emphasized that the general
concept of the financial statements is to present a fair overall view by avoiding
misleading information or impressions. Given the context, Balance and Profit
and Loss account must be an absolute reflection of the relevant information and
present the company’s financial condition and results of operations as they are.
Consequently, cannot be both an exaggeration and an understatement. The
court also found that such information must be disclosed in accordance with
fundamental accounting assumptions and Generally Accepted Accounting
Principles (GAAP).

2.2 - Requirement of Financial Statements

Financial Statements requirements set up the concepts for making ready
financial reports and the kinds and quantities of the information that need to be
supplied to the user of financial statements, which require investors and
creditors, so as far for them to make knowledgeable decisions. These
statements specializes in the surroundings wherein those requirements are
developed. A knowledge of the underlying framework of financial reporting
standards, that’s broader than understanding of particular accounting rules, will
allow an analyst to evaluate the valuation implications financial statements
factors and transactions, consisting of transactions that constitute new
tendencies that aren’t especially addressed through the requirements.

The financial statements have to adhere to accounting standards, be in the form

prescribed in schedule III, and offer a true and fair picture of the company’s
financial condition. The financial statements have to be made public at the
company’s annual general meeting. In the case of holding company, it must
also prepare and disclose at the annual general meeting a consolidated financial
statement of the company, in addition to the ones of its subsidiaries, associates,
and joint ventures.

The consolidated financial statements have to be organized according with the

schedule III of the Companies Act, 2013, as amended with the aid of using

7
schedule IV. In order to file, a company must include a separate form AOC -1
with its financial statements.

Financial reporting and underlying financial reporting standards can assist with
security valuation and different financial analysis. The purpose is to discuss the
conceptual goal of the financial reporting requirements, the events concerned
in widespread placing processes, and the results for analyst in tracking
reporting standard developments.

2.2.1 – True and Fair View:

Although the expression “true and fair view” isn’t always specifically
described in the accounting literature, the subsequent trendy conclusion may be
drawn:

The word “true” indicates that the financial statements are factually accurate
and had been prepared according with the relevant reporting framework,
inclusive of IFRS (International Financial Reporting Standards), and that there
are no material misstatements that would deceive users. Misstatements can
arise as a result of material error or omission in the financial statements,
transaction and balances.

“Fair” implies that the financial statements accurately present the information
without being bias, and that they reflect the economic substance of transactions
rather than just their legal form.

The requirements of company accounts to disclose a true and fair view ought to
be ensured by auditors, who ought to certify that such accounts are organized
to offer “true” and “fair” view of the company’s state of affairs. Only the
auditor and accountant are responsible for showing true and fair view of
financial statements on behalf of the organizations. According to section 211 of
the 1956 Companies Act, and later section 133 of the 2013 Companies Act, the
preparation of true and fair view of financial statements is not satisfied unless
such statements are made in accordance with the accounting standards.

8
Prior to 1988, however the Companies Act required disclosure of a “true and
correct view”, as opposed to most recent “true and fair view” principle. The
deliberate switch by lawmakers from a “true and correct view” to a “true and
fair view” mentioned above was merely a gesture to add a broader perspective
to the equation, as the former was primarily about debt tax law and made a
provision for it. However, this fair presentation rule takes precedence over any
other legal requirement relating to matters to be included in company’s
financial statements. The process of ensuring a true and fair view never
requires the provision of information beyond what is necessary to comply with
any other legal requirements, or even deviate from compliance with one or
both. Consequently any deviation must be disclosed in an appendix to the
financial statements, together with the reason for the deviation and its
consequences. Given the context, the concept of true and fair view appears to
be dynamic in nature, evolving in response to changes in economic
requirements.

2.2.2 – Accrual Basis of Accounting

The general concept of accrual accounting is that the financial transactions are
recorded by allocating income to expenses when the transactions occurs, rather
than when payment for the transaction is made or received. This method
combines current cash inflows and outflows with future cash flows. Cash flows
to provide a more realistic picture of company’s financial position. Due to the
increasing complexity of financial transactions and the need to obtain a more
accurate picture of the company, the accrual basis of accounting was adopted.

Expenses are also recognized in the income statement on an accrual basis when
they are consistent with reported income or when costs have no measurable
future benefits. When an expense occurs but cash is not available, a liability
account is created. In other words, cash receipts and payments are not the focus
of accrual accounting reporting of income and expenses. Rather, the emphasis
is on first how much money was made and secondly how much money was

9
spent. Consequently, accrual accounting provides a more accurate measure of
its profitability over an accounting period.

The institute required all the companies to keep proper accounts on an accrual
basis when it issued the guidance note on accrual basis of accounting in 1988,
which was later replaced by section 128 of the Companies Act, 2013 requiring
accrual accounting, such as the approach of income and expenses, assets and
liabilities, was properly explained in the said accrual accounting guidance
which interalia, established the principle of reconciling the recognition of
expenses against established income or against the relevant period for
determining the periodic income. Section 209, sub clause 3, states that proper
books of accounts shall not be deemed to be kept unless such books of
accounts reflect true and fair reports. If such books do not explain their
transactions because of the use of accrual accounting, they should be rejected
as they do not give a true and fair view of the company’s position. This is the
position which was later explained in section 133 of the Companies Act, 2013
and section 211 of Companies Act, 1956. Under the scheme of the companies
act two requirements must be met, namely the accrual system of accounting
and true and fair view, must be met in relation to each other.
Accrual accounting should be used for truthful and fair accounting. Because
accrual accounting precedes true and fair accounting. Given the circumstances,
the obligation to provide accurate and fair accounting is broader than the
obligation to maintain accrual accounting. As a result, in the context
of the above, the accruals-based financial statements may not give a true and
fair view due to certain deficiencies; however, the accounts cannot be true and
fair unless they are made on an accrual basis.

2.2.3- Principle of Prudence

The concept of prudence (also known as conservatism) in accounting is a
fundamental accounting concept based on the conservative approach of
proactively estimating liabilities, expenses, and losses (i.e., the cash inflow
statements) retrospectively so that the liabilities are not undervalued and assets
are not overvalued.

10
The concept of prudence was introduced to ensure that the person preparing the
financial statements ensures that the company's assets and earnings are not
overstated. Expenditures are not understated in order to ensure that the
company is not correctly valued. The accounting principle of prudence is often
described as "don't expect profits, expect all possible losses." Consider all
possible losses but not all possible wins. The application of the principle of
prudence ensures that the financial statements present a true and fair picture of
the company's position rather than a more favorable picture of what it is.

When preparing financial statements, the accountant frequently encounters

uncertainties in estimating assets, income, liabilities, and expenses incurred.
Given these estimates, the auditor's exercise of judgment must be exercised
with caution to ensure that such assets or income generated are not overstated,
and liabilities incurred or expenses incurred are not understated. The
accountant's level of caution in making such an estimate is known as the
prudence principle. This principle is beneficial to the uncertainties associated
with future events. Income cannot simply be predicted; it must be recorded
when it is realized. Following this principle, provisions have also been made
for all known liabilities and expenses, despite the fact that the amount cannot
be determined with certainty.

2.4 –Board Approval

Section 217 of the 1956 Act, read in conjunction with Section 1 of Section 134
of the 2013 Act The Act hereby defines a corporate practice that requires
companies to hold board meetings in order for the company's board of directors
to approve the company's annual financial statements, including consolidated
financial statements, before those reports are submitted to the company's
auditors for review. In the perspective given, the power of the board of
directors is critical to preserving the essence of such corporate practice. In this
regard, the Board of Directors may not delegate this power of approving the

11
finances to any committee of directors or officers, or to any manager or officer
of the Company, but such power must be exercised by the Board of Directors.

Furthermore, in accordance with Rule 4 of the Company Regulations

(Meetings of the Board of Directors and their Powers), 2014, said board
meeting will not be held via video conference or other audiovisual means.
Considering the COVID-19 situation in our country, the Secretary of Corporate
Affairs (MCA) issued his Notification. Company (Meetings of the Board and
Their Powers) Amendment Rules, 2020 dated March 19, 2020, with a new one
Secondary Rule under Rule 4 of the Company Rule (Meetings of the Board and
Their Powers) 2014 has been inserted to ensure that meetings of the Board of
Directors are held by video conference or other audio means from March 19,
2020 to June 30, 2020. The MCA, on the other hand, issued the Business
Second Amendment Rules on June 23, 2020. (Meetings of the Boards and their
Powers), 2020 to provide the Companies (Board Meetings and Powers) Rules,
2014. Subsection 2 of Rule 4 of the Companies (Meetings of the Boards and
their Powers) Regulations, 2014 now implies that meetings from the beginning
of the Companies Amendment Rules (Meetings of the Boards and their
Powers), 2020 through September 30, 2020, may be conducted via video
conference or other audiovisual means.

Normally, these approved financial statements will be signed on behalf of the

Company by:
 The President is authorized by the Company's Board of Directors or by
any two Directors, one of whom must be the Chief Executive Officer
and the other must be the CEO because he is a director of the same
company;
 Regardless of where he is appointed, the finance director;
 Regardless of the position to which he is appointed, the general
secretary of the company.

These declarations may only be signed by a director in the case of a one person
company (OPC). Furthermore, the basic rules require that the annual financial
statements be signed with clear recognition of the company's chairman towards
12
the meeting's chairman. Whether or not he is the chairman of the meeting, the
President of the company is generally recognized as someone who can sign off
on the financial statements following approval by the board of directors. If the
Company does not have a financial director or a company secretary, the
signature of a duly authorized President on the financial statements may
suffice. Furthermore, if the company has no president or one who is not
authorized by the board of directors, the annual accounts can be signed by two
directors, one of whom must be general manager and the other general
manager. Under certain conditions, any two directors may sign the financial
statements, even if the company does not even have a director and a general
manager.

After it has been approved and signed, the financial report can be sent to the
auditor for an opinion. The auditors will be appointed at the Company's Annual
General Meeting (AGM) for the following fiscal year to perform auditing
activities throughout the fiscal year in the given scenarios. Following the
completion of the auditors' audits, a board meeting must be held to approve the
draft finances. Once the Boards have approved the draught finance, it is sent to
the auditors for approval and signature. In an attempt to shift the Chief
Executive's role away from signing financial statements and away from the
requirement that he be a director to sign, the Companies Bill was introduced
(Amendment), 2016, Sub clause (1) of Section 134, which refers to the
omission of the previous requirement relating to a CEO being a director, is
proposed to be replaced by confirming their signature on the report. In terms of
corporate language governance, this was a timely call. Now, if a company does
not have a director to manage it, the CEO of that company, whether or not he is
a director, may now be responsible for the overall management of the company
as the Key Managerial Personnel (KMP); as a result, he should be mandated to
sign the financial statements as well.

2.5 – Reopening of Accounts

13
Unlike the Companies Act of 1956, the Companies Act of 2013 included a
mechanism for reviewing or reopening of a company's financial statements,
even if they had already been approved by the company. Distributed at the
Annual General Meeting to members, or deposited with ROC accounts can be
verified or reopened in the following ways:
 Reinstatement or Voluntary Verification;
 Financial reopening is required.
In all cases, however, the approval of the relevant jurisdiction's court or arbitral
tribunal is required for review or retrial.

Sections 130 and 131 of the Companies Act 2013 were introduced, however, to
cover the review and re-opening of accounts following the Satyam Computer
Service case, in which the court ordered the company to reformulate his
accounts. According to the Committee's report on the Act, companies may
review their accounts for specific purposes, subject to approval by the National
Company Law Tribunal (the Tribunal). The sections are useful when dealing
with cases of mismanagement or fraud, or when financial statements do not
provide a true and fair picture of a company's affairs.

As the first instance of legal restatement of financial statements, the National

Company Law Tribunal in Bombay ordered the reopening of the books of
accounts of IL&FS Group ('Company') and certain of its subsidiaries. The
court issues such an order because it believes that the company's and its
specified subsidiaries' financial statements for the previous five years were
prepared fraudulently and are untrustworthy. The decision has the potential to
be game-changing, as there may be numerous cases of voluntary or statutory
recasting of financial statements in the future. Due to a lack of relevant sections
in the old Act, the legislation relating to the Companies Act 1956 had left
several cases of accounting falsification untouched. Although untouched by
legislative progress, said cases of forgery fell under the radar of several
departmental circulars dealing with account reopening issues, and their
acceptance by members of the General Assembly was carried out as early as.

14
Companies can be ordered to reopen their business books based on these
departmental circulars, if approved by the shareholders at the general meeting,
even if it is a technical requirement or a requirement resulting from a specific
law.

The Companies Act of 2013 proposed several measures to address this threat.
Although there was no such Standing Committee recommendation for
companies to apply a section to reopen or restate financial statements, the new
provision in the Companies Act was introduced in the 2011 Bill. As a result,
Section 130 of the Companies Act 2013 entered into force on June 1, 2016,
following the Department's adoption, where the first was reported in
accordance with the Companies Act 2013. Given the circumstances, the
Satyam case in India was the underlying reason for ordering the rewrite of the
accounts in the first place. In relation to the case at hand, the Committee's
report indicated the need for auditing procedural rules in certain cases. The
2013 law did not address account reopening or reconstitution, but fraud cases
always required accounts to be reopened or consolidated in order to reflect a
true and fair picture of those accounts. In the Satyam case, such a recast order
was issued by the court itself, as required by the bill's provisions. In other
cases, the account will be reopened by court order and with the necessary
assurances.

According to Section 130 of the Companies Act 2013, such measures relating
to the reopening or reconstitution of accounts may be enforced by an order of a
court or the National Company Law Tribunal (NCLT) in response to a request
from any authority. We should consider the first instance of regulatory
restatement of financial statements by the NCLT, Mumbai, in its IL&FS
judgment on the Union of India, MCA v. Infrastructure Leasing & Financial
Services Ltd & Ors., for better orientation. Based on a simple reading of
Section 130 of the Companies Act 2013, the NCLT in Mumbai believed that
the Section 130 Order could only be approved to consolidate the Company's
financial statements, even after filing notices with the central government, the
Income Tax Department, SEBI, or another statutory regulator or relevant

15
authority. Furthermore, the NCLT stated in defining the basis for Section 130
that it is not necessary to presume that the accounts were created fraudulently
in order to issue an order under this section.

In this case, the Serious Fraud Investigation Office (SFIO) and the Institute of
Chartered Accountants of India (ICAI) initiated an investigation into the
Company under Section 212 of the Companies Act 2013. This provision of the
2013 act states, among other things, that SFIO shall investigate the
corporation's affairs if the Government believes that the corporation's affairs
should be investigated. According to the problem in question-related to
Company IL&FS-the Government had directed SFIO to investigate the
Company's affairs. On that basis, SFIO provided the Government with its
document. In this case, the government analyzed the reviews received from
SFIO and ICAI, and based on that analysis, the government determined that it
was necessary to set aside funds for the re-establishment of IL&FS debts as
well as the debts of its indexed organizations, namely ITNL and IL&FS
Financial Services. However, the government did not show its support for the
fact that the Company's auditors and administrators were concerned about the
mismanagement of the Company's debts, and as a result, the debts were re-
established at the time. Furthermore, the government did not receive any
objections from all of the government to whom notices were served for the
purpose of reopening debts. Given the new circumstances, the NCLT
proceeded with its plan to appoint an unbiased chartered accountant to restate
the debts and revise the balance sheets of the company.

2.6 – Revision of Accounts and Reports

The Companies Act of 1956 made no mention of auditing company accounts.

It is true that, for technical reasons, the Department of Corporate Affairs issued
circulars reopening and auditing the financial statements to meet the
requirements of other laws, provided that the audited financial statements were

16
accepted in a general meeting and filed with the registrar of companies,
although there is no authority, which requires a special review procedure.

However, Sections 130 and 131 of the Companies Act of 2013 were added to
cover the review and reopening of accounts following the Satyam Computer
Case Service, where the Court ordered it to do so. Companies must restate their
financial statements. According to the Committee's report on the Act,
companies examining accounts for specific purposes could audit their accounts
with the approval of the National Company Law Tribunal (the Tribunal). The
sections are applicable when dealing with cases of mismanagement, fraud, or
deception.
When the financial statements do not provide a true and fair picture of an
entity's operations

If the directors of the companies discover that the financial statement or board
report does not comply with the applicable legal provisions (i.e. Sections 129
& 134) or is organized with a few errors or incorrect statistics that require
correction, she or he as administrators can apply to the Tribunal under Section
131 of the Companies Act 2013 for permission to revise the statements.
However, the agency's revision of financial statements can only be performed
once per financial year. The Company may continue to record the revised
assertion associated with a replica of such order to the Registrar of Companies
after receiving the affirmative order exceeded through the Tribunal (ROC). It is
important to note that the reproduction of such order should be beneficial to the
fact that the agency, upon receipt of such order, can revise the monetary
assertion of any of the previous three fiscal years. Given the context, an in-
depth rationale for such revision should also be proven within the board's file
of the applicable financial year wherein the revision is sought. Furthermore, if
the Tribunal receives any illustration from the Central Government or any
Income Tax Authorities, it shall notify such Government or Authorities prior to
passing any order in this regard.

17
CHAPTER 3: INDIAN ACCOUNTING STANDARDS
Ind AS is an abbreviation for Indian Accounting Standards. Companies (Indian
Accounting Standards) Rules, 2015 and Companies (Indian Accounting
Standards) Amendment Rules, 2016 have notified these accounting standards.
The International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board serve as the foundation for Ind AS
(IASB). The goal of Ind AS is to improve the quality of financial reporting in
India and to bring Indian accounting standards up to international standards.
Ind AS became mandatory for certain types of businesses on April 1, 2015. On
March 30, 2015, the Ministry of Corporate Affairs (MCA) published the
Companies (Indian Accounting Standards) Rules, 2015.

3.1 -Introduction
In India, accounting standards are formulated by the Accounting Standards
Board (ASB) of the Institute of Chartered Accountants of India (ICAI). The
ASB was constituted by the ICAI in 1977. The ASB issued its first accounting
standard in 1977. The ASB issues accounting standards from time to time and
the existing accounting standards are amended from time to time, as necessary.
The objective of the ASB is to formulate, as far as possible, accounting
standards to be followed by the business entities in the preparation of their
financial statements.

The ICAI has notified the Companies (Indian Accounting Standards) Rules,
2015, on 30th March, 2015. The Companies (Indian Accounting Standards)
Rules, 2015 notified by the Ministry of Corporate Affairs vide GSR 180(E)
dated 30th March, 2015, specifies the accounting standards (Ind AS) to be
followed by certain class of companies in the preparation of their financial
statements for the accounting periods beginning on or after 1st April, 2016.
The Ministry of Corporate Affairs has notified the Companies (Indian
Accounting Standards) (Amendment) Rules, 2016 vide notification dated 16th

18
February, 2016. The Companies (Indian Accounting Standards) (Amendment)
Rules, 2016, inter alia, provided that if a company, which is required to comply
with Ind AS in accordance with the Companies (Indian Accounting Standards)
Rules, 2015, has not prepared its financial statements for the accounting period
ending on 31st March, 2015, in accordance with Ind AS, it shall prepare and
adopt, with the prior approval of the Company Law Board or National
Company Law Tribunal, its financial statements for the accounting period
ending on 31st March, 2015, in accordance with the generally accepted
accounting principles in India. The Ministry of Corporate Affairs has notified
the Companies (Indian Accounting Standards) (Amendment) Rules, 2016 vide
notification dated 16th February, 2016. The Companies (Indian Accounting
Standards) (Amendment) Rules, 2016, inter alia, provided that if a company,
which is required to comply with Ind AS in accordance with the Companies
(Indian Accounting Standards) Rules, 2015, has not prepared its financial
statements for the accounting period ending on 31st March, 2015, in
accordance with Ind AS, it shall prepare and adopt, with the prior approval of
the Company Law Board or National Company Law Tribunal, its financial
statements for the accounting period ending on 31st March, 2015, in
accordance with the generally accepted accounting principles in India. The
Ministry of Corporate Affairs has notified the Companies (Indian Accounting
Standards) (Amendment) Rules, 2016 vide notification dated 16th February,
2016. The Companies (Indian Accounting Standards) (Amendment) Rules,
2016, inter alia, provided that if a company, which is required to comply with
Ind AS in accordance with the Companies (Indian Accounting Standards)
Rules, 2015, has not prepared its financial statements for the accounting period
ending on 31st March, 2015, in accordance with Ind AS, it shall prepare and
adopt, with the prior approval of the Company Law Board or National
Company Law Tribunal, its financial statements for the accounting period
ending on 31st March, 2015, in accordance with the generally accepted
accounting principles in India. The Ministry of Corporate Affairs has notified
the Companies (Indian Accounting Standards) (Amendment) Rules, 2016 vide
notification dated 16th February, 2016. The Companies (Indian Accounting
Standards) Amendment Rules, 2016, inter alia, provided that if a company,
which is required to comply with Ind AS in accordance with the Companies

19
(Indian Accounting Standards) Rules, 2015, has not prepared its financial
statements for the accounting period ending on 31st March, 2015, in
accordance with Ind AS, it shall prepare and adopt, with the prior approval of
the Company Law Board or National Company Law Tribunal, its financial
statements for the accounting period ending on 31st March, 2015, in
accordance with the generally accepted accounting principles in India.

3.2 - Presentation of Financial Statements

Ind AS 1 presentation of financial statements is a regulation that prescribes the
manner in which financial statements shall be presented. It is applicable to all
entities including companies, partnerships, proprietorships, trusts, etc. The
regulation is based on the accounting standards prescribed by the Institute of
Chartered Accountants of India (ICAI).

The main objective of Ind AS 1 presentation of financial statements is to

ensure that the financial statements present a true and fair view of the financial
position, financial performance and cash flows of an entity.

The financial statements shall be presented in a manner that reasonably reflects

the entity's financial position, financial performance and cash flows.

The presentation of financial statements in accordance with Ind AS 1 shall give

a true and fair view of the state of affairs, profit or loss and cash flows of the
entity.

3.3 – Inventories
Inventories are recognized as assets when it is probable that future economic benefits
associated with the item will flow to the enterprise and the cost or other value can be
measured reliably. Cost comprises all costs of purchase, costs of conversion and other
costs incurred to bring the inventories to their present location and condition. Cost is
ordinarily determined on a weighted average basis Inventories are measured at the
lower of cost and net realizable value. Net realizable 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.

20
Inventories are classified as:
 Raw Material;
 Work-in-progress;
 Finished goods;
 Spare Parts;
 Stores and packaging Material.

Inventories are recognized as assets when it is probable that future economic

benefits associated with the item will flow to the enterprise and the cost or
other value can be measured reliably. Cost comprises all costs of purchase,
costs of conversion and other costs incurred to bring the inventories to their
present location and condition. Cost is ordinarily determined on a weighted
average basis.

Inventories are measured at the lower of cost and net realisable value. 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.

3.4 - Statement of Cash Flows

Statement of cash flows is a financial statement that provides detailed
information about the cash inflows and outflows of a company for a specific
period of time. It is used to assess the company's financial health and to
identify any potential red flags. The statement of cash flows has three main
sections: operating activities, investing activities, and financing activities.
Operating activities include cash inflows and outflows from the company's
core business operations. Investing activities include cash inflows and outflows
from the company's investments in long-term assets. Financing activities
include cash inflows and outflows from the company's borrowing and lending
21
activities. The statement of cash flows is an important financial statement
because it provides insights that are not readily apparent from other financial
statements. For example, the statement of cash flows can show whether a
company is generating enough cash to cover its expenses, whether it is
investing its cash wisely, and whether it is relying too heavily on debt
financing. Indian Accounting Standard 7 (IAS 7) is the international
accounting standard that governs the preparation of statement of cash flows.
IAS 7 requires companies to present a statement of cash flows as a separate
financial statement. IAS 7 also prescribes the classification of cash flows into
operating, investing, and financing activities.

The Indian Accounting Standard 7 deals with the statement of cash flows and
prescribes the minimum content of the statement of cash flows, as well as the
manner of its presentation. The objective of IAS 7 is to require the provision of
information about the historical changes in cash and cash equivalents of an
entity by means of a statement of cash flows which classifies cash flows during
the period from operating, investing and financing activities.

3.5 –Accounting Policies, Changes in Accounting Estimates and

Errors

The Indian Accounting Standard 8 (IAS 8) Accounting Policies, Changes in

Accounting Estimates and Errors prescribes the criteria for the selection and
application of accounting policies by the management of an entity, and the
changes in accounting estimates and errors. The standard provides guidance on
how to select and apply accounting policies in the absence of explicit guidance.
The standard also requires that changes in accounting estimates be accounted
for prospectively and that errors be corrected retrospectively. The standard
does not deal with the presentation and disclosure of accounting policies.

IAS 8 is a principle-based Standard that requires management to exercise

judgment in developing and applying accounting policies in the absence of
specific guidance.

22
The key principles in IAS 8 are as follows:
 Accounting policies are to be selected and applied in a consistent
manner, unless there is a valid reason for changing them;
 Changes in accounting policies are to be accounted for on a prospective
basis;
 Changes in accounting estimates are to be accounted for on a
prospective basis;
 Errors are to be corrected on a retrospective basis.

Indian Accounting Standard 8 (IAS 8) deals with accounting policies, changes

in accounting estimates and errors. It prescribes the principles for the selection
and application of accounting policies, the accounting treatment of changes in
accounting estimates and the correction of errors. The Standard requires the
disclosure of the significant accounting policies adopted in the preparation and
presentation of the financial statements.

IAS 8 defines accounting estimates as those estimates which are uncertain at

the time of making the financial statements and which involve a measurement
of future events which are based on assumptions about future economic
conditions. Examples of accounting estimates include depreciation methods,
useful lives of intangible assets, impairment of assets and provisions for
liabilities. The Standard requires that changes in accounting estimates should
be accounted for on a prospective basis. However, if the change in accounting
estimate results in a material impact on the current period financial statements,
then the change should be accounted for on a retrospective basis.

Errors are defined as omissions or misstatements in the financial statements

that arise from an incorrect application of accounting policies or an incorrect
application of generally accepted accounting principles. Errors should be
corrected on a retrospective basis.

23
3.6 -Events after the Reporting Period

IAS 10 Events after the Reporting Period provides guidance on the accounting for and
disclosure of events that occur after the end of the reporting period but before the
financial statements are authorized for issue.

IAS 10 Events after the Reporting Period prescribes the accounting treatment for
events after the end of the reporting period. There are two types of events after the
reporting period:
1. Events that provide further evidence of conditions that existed at the end of the
reporting period (adjusting events);
2. Events that are indicative of conditions that arose after the end of the reporting
period (non-adjusting events) the standard requires that adjusting events be recognized
in the financial statements, while non-adjusting events are only to be disclosed.

IAS 10 provides guidance on when to recognize an event as occurring after the

reporting period. An event is recognized as occurring after the reporting period
if it provides evidence of conditions that existed at the end of the reporting
period, and the event would have been recognized had it occurred at that time.
IAS 10 Events after the Reporting Period sets out the accounting treatment for
events that occur after the end of the reporting period. These events can be
either favorable or unfavorable to the entity. Favorable events are those that
increase the chances of the entity achieving its objectives and unfavorable
events are those that decrease the chances of the entity achieving its objectives.
The standard requires that entities consider all events that occur after the end of
the reporting period, up to the date that the financial statements are authorized
for issue. This includes events that provide evidence of conditions that existed
at the end of the reporting period. If the event is material, then it should be
adjusted in the financial statements. If it is not material, then it should be
disclosed. There is a rebuttable presumption that an event is material if it would
24
have an effect on the decision of a reasonable person regarding the allocation
of resources.

3.7 - Income Taxes

Indian Accounting Standard (Ind AS) 12, Income Taxes, prescribes the
accounting treatment for income taxes. It recognizes the obligation of an entity
to pay taxes in respect of its taxable income or profit (tax liability) and the right
to receive a refund from the tax authorities in respect of any overpayment of
taxes. The standard requires the recognition of tax liabilities and assets in the
financial statements. A tax liability is recognized for current and deferred tax
arising from taxable profit or loss for the period. A tax asset is recognized to
the extent that it is probable that the tax authority will allow a tax deduction/
credit in respect of the tax liability. The standard also requires the disclosure of
information about tax liabilities and assets in the financial statements.

Income taxes consist of all taxes levied on income, profits or gains. This
includes taxes on employment income, business income, investment income,
and other forms of income. Current tax is the tax payable on the taxable
income for the current year. Deferred tax is the tax payable on the taxable
income for the current year that is not payable until a future year. Income tax
expense is the total of current tax and deferred tax. The IAS 12 was first issued
in September 1992 and was subsequently amended in December 1996 and
September 2000.

According to IAS 12, the current tax liability or asset for the current or
upcoming period should be recognized based on the best estimate of the tax
payable or recoverable in respect of the current or upcoming period. The
deferred tax liability or asset for the future periods should be recognized based
on the expected tax consequences of the temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
their tax bases. The standard requires the use of the asset and liability method

25
in accounting for deferred tax. Under this method, deferred tax assets are
recognized to the extent that it is probable that they will be realized in future
periods. IAS 12 was issued by the International Accounting Standards Board in
1996 and was adopted by the Institute of Chartered Accountants of India in
April 1998.
3.8 - Property, Plant and Equipment

Property, plant and equipment are tangible items that are held for use in the
production or supply of goods or services, for rental to others, or for
administrative purposes.
This standard applies to all property, plant and equipment, regardless of
whether they are acquired:
 for cash;
 by exchange of other assets;
 by the incurrence of liabilities; or
 by a combination of these methods.

This standard deals with the recognition, measurement, and disclosure of

property, plant, and equipment. Property, plant, and equipment are tangible
assets that are used in the production or provision of goods or services, or in
the renting of assets to others. Items of property, plant, and equipment are
initially recorded at cost. Cost includes all costs necessary to get the asset ready
for its intended use. After initial recognition, items of property, plant, and
equipment are measured at their fair value less any accumulated depreciation
and impairment losses. Depreciation is charged on a straight-line basis over the
estimated useful lives of the assets. Disclosures are required in the financial
statements about the carrying amount and depreciation of property, plant, and
equipment, as well as any impairment losses that have been recognized.

This standard applies to all entities that have property, plant and equipment.
The recognition criteria in this standard are:
 it is probable that future economic benefits associated with the asset
will flow to the entity; and

26
  (b) the cost of the asset can be measured reliably.

The measurement principles in this standard are:

 property, plant and equipment are measured at cost, less accumulated
depreciation and accumulated impairment losses;
 depreciation is charged so as to allocate the cost or other basic value of
property, plant and equipment, less its residual value, over its useful
life; and
 Gains and losses arising from the disposal of an asset are included in
the profit or loss for the period.

The disclosure requirements in this standard are:

 the gross carrying amount and the accumulated depreciation of
property, plant and equipment, by class of asset, are disclosed in the
balance sheet;
 the depreciation methods used, the depreciation rates applied and the
residual values of property, plant and equipment are disclosed;
 the major classes of property, plant and equipment are disclosed; and
 the total of the carrying amounts as at the beginning and the end of the
period, the depreciation charged for the period and the gain or loss on
disposal of property, plant and equipment during the period are
disclosed in the statement of comprehensive income.

3.9 - Employee Benefits

Indian Accounting Standard 19 Employee Benefits prescribes the accounting

treatment for employee benefits, which include all forms of consideration
given by an employer to an employee in exchange for services rendered. The
Standard includes both financial and non-financial benefits, and requires that
all employee benefits be recognized and measured in the financial statements.
The Standard requires that employee benefits be classified into four categories:
- Short-term employee benefits - Post-employment benefits - Other long-term
employee benefits - Termination benefits Short-term employee benefits include

27
all benefits that are due and payable within 12 months of the end of the
reporting period. They are typically paid in cash, and therefore their
measurement is relatively straightforward. Post-employment benefits include
all benefits that are not due and payable within 12 months of the end of the
reporting period. The most common type of post-employment benefit is a
pension, which is a long-term financial commitment by the employer. Other
types of post-employment benefits include post-retirement medical benefits
and life insurance. Other long-term employee benefits include all benefits that
are not due and payable within 12 months of the end of the reporting period,
and are not post-employment benefits. Examples of other long-term employee
benefits include long-service awards and sabbatical leave. Termination benefits
include all benefits that are payable as a result of an employee’s termination of
employment, whether the termination is voluntary or involuntary. Examples of
termination benefits include severance pay and outplacement assistance.

The Standard requires that the cost of providing employee benefits be

recognized in the income statement over the period in which the benefits are
earned by employees, or as they vest, whichever is later. Short-term employee
benefits include salary, bonus, commission, and other short-term benefits. The
cost of short-term employee benefits is recognized as an expense in the period
in which the employee renders the service. Post-employment benefits include
retirement benefits, post-retirement medical benefits, and other long-term
benefits. The cost of post-employment benefits is recognized as an expense
over the employees' expected service period. Other long-term employee
benefits include long-service awards, sabbatical leave, and other benefits. The
cost of other long-term employee benefits is recognized as an expense over the
employees' expected service period. Termination benefits include severance
pay, early retirement benefits, and other benefits. The cost of termination
benefits is recognized as an expense in the period in which the benefits are
incurred. Other employee benefits include group life insurance, group
disability insurance, and other benefits. The cost of other employee benefits is
recognized as an expense in the period in which the benefits are incurred.

28
3.10 - Accounting for Government Grants and Disclosure of
Government Assistance

IAS 20, Accounting for Government Grants and Disclosure of Government

Assistance, prescribes the accounting treatment for government grants and the
disclosure of government assistance. Government grants are assistance by
government in the form of transfer of resources to an entity in return for past or
future compliance with certain conditions relating to the operating activities of
the entity. Grants may take the form of cash, assets, or tax concessions. The
main objectives of IAS 20 are:

 To ensure that government grants are recognized only when there is

reasonable assurance that the entity will comply with the conditions
attached to them, and that the grants will be received;
 To ensure that government grants are recognized as income only when
the entity has met the conditions attached to them;
 To ensure that government assistance is disclosed in the financial
statements ;
 Government assistance is defined as assistance by government in the
form of transfer of resources to an entity in return for past or future
compliance with certain conditions relating to the operating activities of
the entity. Assistance may take the form of cash, assets, or tax
concessions.

3.11 - The Effects of changes in Foreign Exchange Rates

Indian Accounting Standard 21 (IAS 21) deals with the effects of changes in
foreign exchange rates. It prescribes how to account for foreign currency
transactions and operations in the financial statements of an entity. An entity
may carry out transactions in foreign currencies and have foreign operations.
Foreign currency transactions are transactions that are denominated in a
currency other than the functional currency of the entity. Foreign operations are
activities that are based in a country or territory other than the country or

29
territory in which the reporting entity is domiciled. IAS 21 prescribes how to
include foreign currency transactions and foreign operations in the financial
statements of an entity. It requires entities to present their financial statements
in a single currency, the functional currency. The functional currency is the
currency of the primary economic environment in which the entity operates.
An entity’s functional currency can be different from the currency of the
country in which it is domiciled. The standard requires entities to use the
temporal method to account for foreign currency transactions. Under this
method, foreign currency transactions are initially recorded in the functional
currency using the exchange rate prevailing at the date of the transaction.
Subsequently, foreign currency transactions are re-measured at the exchange
rates prevailing at the dates of the balance sheet prepared.

When an entity has transactions in a foreign currency, those transactions are

initially recorded in the functional currency of the entity. The functional
currency is generally the currency of the primary economic environment in
which the entity operates. At the end of the reporting period, the amounts of the
transactions need to be translated into the reporting currency. The reporting
currency is generally the currency in which the financial statements are
presented. Translation can be a complex process, and there are a number of
ways to do it. The method chosen should be the one that best reflects the
economic reality of the transactions. The most common methods used for
translation are the current rate method and the temporal method. The current
rate method translating foreign currency amounts using the exchange rates that
exist at the time of the transaction. This method is appropriate when the
transaction is in the normal course of business and the foreign currency is not
subject to significant fluctuations. The temporal method translating foreign
currency amounts using the exchange rates that existed at the time the
transaction occurred. This method is appropriate when the transaction is not in
the normal course of business or the foreign currency is subject to significant
fluctuations. There are also a number of other methods that can be used in
special circumstances. Once the amounts have been translated, they need to be
reported in the financial statements. This can be done in a number of ways,
depending on the nature of the transaction. For transactions that are

30
denominated in the functional currency, no further translation is required. The
transaction is reported in the functional currency and is not affected by changes
in the exchange rate. For transactions that are denominated in a foreign
currency, the transaction is reported in the functional currency using the
exchange rate at the time of the transaction. If the exchange rate changes, the
transaction will be affected. If the transaction is a hedged transaction, the
hedging gains and losses will offset the effects of the exchange rate changes.
IAS 21 also deals with the translation of foreign currency financial statements.
This is the process of converting the amounts in the financial statements from
the functional currency to the reporting currency. The main methods used for
translation are the current rate method and the temporal method. The current
rate method translating the amounts in the financial statements using the
exchange rates that exist at the end of the reporting period. This method is
appropriate when the foreign currency is not subject to significant fluctuations.
The temporal method translating the amounts in the financial statements using
the exchange rates that existed at the end of the reporting period. This method
is appropriate when the foreign currency is subject to significant fluctuations.
There are also a number of other methods that can be used in special
circumstances. Once the amounts have been translated, they need to be
reported in the financial statements. This can be done in a number of ways,
depending on the nature of the transaction. For items that are denominated in
the functional currency, no further translation is required. The items are
reported in the functional currency and are not affected by changes in the
exchange rate. For items that are denominated in a foreign currency, the items
are reported in the functional currency using the exchange rate at the end of the
reporting period. If the exchange rate changes, the items will be affected. If the
items are hedged items, the hedging gains and losses will offset the effects of
the exchange rate changes.

3.12 - Borrowing Costs

IAS 23 prescribes the accounting treatment for borrowing costs. It requires that
borrowing costs directly attributable to the acquisition, construction or

31
production of a qualifying asset be capitalized as part of the cost of that asset.
The standard defines a qualifying asset as an asset that necessarily takes a
substantial period of time to get ready for its intended use or sale. In
determining whether an asset is a qualifying asset, an entity should consider all
the relevant facts and circumstances, including the nature of the asset and its
expected use. Borrowing costs eligible for capitalization under IAS 23 include
interest on loans, amortization of ancillary costs incurred in connection with
the acquisition of the loan and exchange differences arising from foreign
currency borrowings to the extent that they are attributable to the acquisition,
construction or production of a qualifying asset. The standard provides
guidance on how to determine the amount of borrowing costs that can be
capitalized, and includes a number of practical examples.

The standard provides guidance on when borrowing costs can be considered as

being directly attributable to the acquisition, construction or production of an
asset, and how to calculate the amount of borrowing costs that can be
capitalized. IAS 23 was first issued in 1984 and was subsequently amended in
1989 and 2003. The 2003 amendment introduced the concept of a 'qualifying
asset' for the purposes of capitalization of borrowing costs. A qualifying asset
is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.

The amendment also clarified that, for the purposes of capitalization of

borrowing costs, an asset includes:
 An asset that is under construction or production, on the basis of
contracts or other arrangements for its construction or production; and
 An asset that is acquired, whether or not it is subject to a contract or
other arrangement for its construction or production.

In addition, the amendment clarified that the term 'production' includes

'development'.

32
3.13 - Related party Disclosures

IAS 24 requires disclosure of information about transactions and arrangements

between an entity and its related parties. A related party is an entity that is
related to the reporting entity. This includes entities that are related to the
reporting entity by virtue of control, significant influence or common
ownership. The disclosures required by IAS 24 are intended to give users of
financial statements information that is useful in evaluating the nature and
extent of relationships between the reporting entity and its related parties, and
the effect of those relationships on the financial statements. The disclosures are
also intended to help users assess the risk that the reporting entity may be
unduly influenced by its related parties.

The specific disclosures required by IAS 24 are as follows:

 The nature of the relationships between the reporting entity and its
related parties;
 For each material transaction or series of transactions with a related
party, the following information must be disclosed:
 The nature of the transaction or series of transactions.
 The amount of the transaction or series of transactions.
 The terms of the transaction or series of transactions. The
reason for the transaction or series of transactions.
 The manner in which the transaction or series of transactions
was conducted.
 For each material transaction or series of transactions that is not at
arm’s length, the following information must be disclosed:
 The nature of the transaction or series of transactions.
 The amount of the transaction or series of transactions.
 The terms of the transaction or series of transactions.
 The reason for the transaction or series of transactions.
 The manner in which the transaction or series of transactions
was conducted.

33
  For each material transaction or series of transactions that is not
conducted at arm’s length, the following information must be disclosed:
a. The nature of the transaction or series of transactions.
b. The amount of the transaction or series of transactions.
c. The terms of the transaction or series of transactions.
d. The reason for the transaction or series of transactions.
e. The manner in which the transaction or series of transactions was
conducted.
 The aggregate amount of all transactions and series of transactions with
each related party during the period;
 The outstanding balances, if any, at the end of the period with each
related party;
 The provisions of any guarantees or collateral arrangements made by
the reporting entity or its subsidiaries in favor of related parties at any
time during the period;
 The amounts of any loans made or guaranteed by the reporting entity or
its subsidiaries to related parties at any time during the period;
 The amounts of any dividends paid or proposed to be paid by the
reporting entity or its subsidiaries to related parties during the period;
 The amounts of any other material benefits provided or received by the
reporting entity or its subsidiaries from related parties during the
period.

3.14 - Separate Financial Statements

It is mandatory for certain companies to prepare their financial statements as
per the requirements of the Indian Accounting Standard (IFRS). Indian
Accounting Standard 27 deals with the recognition and measurement of items
in the separate financial statements. There are two types of companies that
need to prepare their financial statements as per IFRS – those that are required
to do so by the Securities and Exchange Board of India (SEBI) and those that
have listed their equity shares on a stock exchange outside India. The
requirements of this standard are applicable to the recognition and

34
measurement of items in the separate financial statements of a company that
prepare its financial statements in accordance with IFRS.

The standard deals with the recognition and measurement of:

 Investments in equity instruments
 Investments in debt instruments
 Derivative instruments
 Foreign currency transactions and translation of foreign currency
financial statements
 Revenue
 Expenses
 Gains and losses
 Fair value measurement

IAS 27 deals with the presentation of separate financial statements. Under this
standard, an entity is required to present separate financial statements if it is
required by law or regulation, or if it is desired by the management. The
standard requires that the financial statements be prepared in accordance with
the accounting policies adopted by the entity. Further, the financial statements
should comply with the generally accepted accounting principles (GAAP) in
force in the jurisdiction in which the entity operates. The standard also requires
that the financial statements be presented in a format that is easy to understand
and compare. The financial statements should be free from any material
misstatement. Lastly, the standard requires that the entity disclose the
information required by law or regulation in its financial statements.

3.15 - Investments in Associates and Joint Ventures

Indian Accounting Standard (Ind-AS) 28, Investments in Associates and Joint

Ventures, prescribes the accounting treatment for investments in associates and
joint ventures, which are entities over which an investor has significant
influence, but does not have control or joint control. Ind-AS 28 applies to all

35
entities, including those that are public sector entities that prepare their
financial statements in accordance with Ind-AS. An investment in an associate
or a joint venture is an investment in an entity over which the investor has
significant influence. Significant influence is the power to participate in the
financial and operating policy decisions of the investee, but is not control or
joint control over those policies. The standard requires the use of the equity
method to account for investments in associates and joint ventures, except in
certain circumstances. The equity method is an accounting technique that
adjusts the carrying amount of an investment in an associate or joint venture
for the investor’s share of the investee’s profits or losses and other changes in
equity. The equity method is used because it reflects the economic reality of
the investment, which is that the investor and the investee are sharing in the
profits and losses of the investee. The standard also requires the investor to
recognize its share of the associates’ or joint ventures’ deferred tax assets and
liabilities. The standard does not apply to investments in subsidiaries, as these
are accounted for using the consolidation method.

The equity method of accounting for investments in associates and joint

ventures is based on the premise that the investor has significant influence over
the investee. Significant influence is presumed to exist when the investor holds,
directly or indirectly through subsidiaries, 20 per cent or more of the voting
power of the investee. Under the equity method, the investment is initially
recognized at cost and is subsequently carried at its share of the net assets of
the investee, adjusted for changes in the investor’s equity interest that are not
attributable to transactions between the investor and the investee. The
investor’s share of the profit or loss of the investee is recognized in the
investor’s profit or loss. When the equity method is applied, the investor
recognizes its share of the profit or loss of the investee only to the extent that it
has an ownership interest in the investee. That is, the investor does not
recognize its share of the investee’s profit or loss to the extent that the
investee’s activities generate losses in excess of the investor’s interest in the
investee. The equity method can be applied to investments in associates and
joint ventures that are accounted for using the cost or equity method. The
equity method can also be applied to investments in associates and joint

36
ventures that are not accounted for using either the cost or equity method,
provided that the investor has significant influence over the investee.

3.16 - Financial Reporting in Hyperinflationary Economies

Indian Accounting Standard 29 (IAS 29) prescribes the accounting treatment to

be followed in financial statements when an economy is experiencing high
inflation. It is based on the recommendations of the International Accounting
Standards Board (IASB). In an economy with high inflation, the monetary unit
of measurement loses its purchasing power. This has a significant impact on
the financial statements as the values of assets and liabilities are no longer
representative of their real worth. In such a scenario, the use of historical cost
accounting becomes impractical and a more appropriate approach is needed to
reflect the true economic position of the entity. Under IAS 29, an entity should
use the current purchasing power (CPP) method to account for the effects of
inflation. Under this method, all items in the financial statements are restated to
their CPP. This means that the values of assets and liabilities are increased or
decreased to reflect the change in purchasing power. The resulting figure is
referred to as the current cost or real value. Income and expenses are also
restated to their CPP. This is done by applying an indexation factor to the
historical cost amounts. The indexation factor is the ratio of the current cost to
the historical cost. The CPP method is the only method permitted by IAS 29.
However, an entity may elect to use the replacement cost method instead.
Under this method, only those assets that have been replaced are restated to
their current cost. This means that the value of un-replaced assets is not
updated and remains at historical cost. The CPP method is generally considered
to be more accurate in reflecting the true economic position of an entity.
However, it can be more difficult to implement and may not be suitable for all
entities.

37
3.17 -Financial Instruments Presentation

Indian Accounting Standard (Ind AS) 32, Financial Instruments: Presentation,

prescribes the recognition and measurement principles for financial
instruments. Ind AS 32 applies to all entities that have financial instruments. A
financial instrument is any contract that gives rise to a financial asset of one
entity and a financial liability or equity instrument of another entity. Ind AS 32
requires an entity to recognize a financial asset or financial liability only when
it is reasonable and prudent to do so. An entity is required to measure a
recognized financial asset or financial liability at its initial recognition at its fair
value plus, in the case of a financial asset, any directly attributable transaction
costs. For financial instruments that are measured at amortized cost, Ind AS 32
requires an entity to recognize an impairment loss for a financial asset if, and
only if, there is objective evidence that the asset is impaired. Ind AS 32
requires an entity to present financial assets and financial liabilities in its
statement of financial position by category. The categories of financial assets
and financial liabilities are set out in Ind AS 32. Ind AS 32 requires an entity to
disclose information that enables users of its financial statements to evaluate
the nature and extent of risks arising from its financial instruments. Ind AS 32
is effective for annual periods beginning on or after 1 April 2017. Early
application is permitted.

Indian Accounting Standard (Ind AS) 32, Financial Instruments: Presentation,

deals with the recognition and measurement of financial instruments. The
standard sets out the recognition and measurement principles for financial
instruments, including derivatives, and establishes presentation and disclosure
requirements. Ind AS 32 requires the recognition of financial instruments at
initial recognition. A financial instrument is any contract that gives rise to a
financial asset of one entity and a financial liability or equity instrument of
another entity. Initial recognition of a financial instrument requires the
measurement of the instrument at its fair value, plus or minus any directly
attributable transaction costs. Ind AS 32 also establishes requirements for the

38
subsequent measurement of financial instruments. Financial assets and
financial liabilities are to be measured at amortized cost using the effective
interest method, with the exception of financial assets classified as held for
trading, which are to be measured at fair value. Equity instruments are to be
measured at fair value, with any resulting gains or losses recognized in profit or
loss. The standard requires the disclosure of information that will enable users
of financial statements to evaluate the significance of financial instruments for
the entity's financial position and performance. This information includes, but
is not limited to, the fair value of financial instruments, the exposure to risk
arising from financial instruments, and the effect of financial instruments on
the entity's cash flows.

3.18 - Earnings per Share

The Indian Accounting Standard 33, Earnings per Share, prescribes the
accounting treatment for calculation and disclosure of earnings per share. This
standard is applicable to all entities that present earnings per share information
in their financial statements. EPS is a measure of profitability that indicates
how much profit a company generates for each share of common stock
outstanding. It is calculated by dividing a company's net income by the number
of shares outstanding. The numerator for the EPS calculation, net income, is
determined after all expenses, including interest and taxes, have been deducted
from a company's revenues. The denominator, shares outstanding, is the
number of shares of common stock that are currently held by investors. EPS
can be calculated for different time periods, such as for a quarter or for a year.
When a company reports EPS for a certain time period, it is generally referring
to its diluted EPS. This figure takes into account the dilutive effect of
convertible securities, such as stock options and convertible bonds. Diluted
EPS is generally lower than basic EPS because it reflects the potential dilutive
effect of outstanding securities that have not yet been converted into shares of
common stock. The accounting treatment for EPS is prescribed in Accounting
Standard (AS) 20, Accounting for Taxes on Income. This standard requires that

39
companies calculate EPS using the two-method approach. The first method, the
net income method, calculates EPS by dividing net income by the weighted
average number of shares outstanding during the period. The second method,
the earnings available to common shareholders method, calculates EPS by
dividing earnings available to common shareholders by the weighted average
number of shares outstanding during the period. The earnings available to
common shareholders method is generally preferred because it gives a more
accurate picture of a company's profitability. However, the net income method
is sometimes used when earnings available to common shareholders is not
readily available. Both methods must be used when calculating EPS if the
results are materially different. In such cases, companies must disclose both
EPS figures and the reasons for the differences. When calculating EPS,
companies must use the treasury stock method in order to account for the
dilutive effect of outstanding securities. This method assumes that all securities
are converted into shares of common stock at the beginning of the period. The
treasury stock method also assumes that the proceeds from the sale of securities
are used to repurchase shares of common stock at the end of the period. This
method results in a lower EPS figure than if the securities were not assumed to
be converted. Companies must disclose their EPS calculation methods in their
financial statements. They must also disclose the number of shares used in the
calculation and the weighted average number of shares outstanding during the
period. In addition, companies must disclose any material differences between
their EPS figures and those of other companies in their industry. This
disclosure is necessary in order to allow investors to make informed investment
decisions.

3.19 - Interim Financial Reporting

Indian Accounting Standard 34 on Interim Financial Reporting prescribes the

minimum content of an interim financial report and the manner of its
presentation. It is applicable to all entities, including listed companies that

40
prepare interim financial statements. An entity’s interim financial report should
include:
 a condensed balance sheet;
 a condensed statement of comprehensive income;
 a condensed statement of changes in equity;
 a condensed statement of cash flows; and notes, including an
accounting policy note.

The condensed financial statements should be prepared using the same

accounting policies and methods of computation as the entity’s most recent
annual financial statements. The interim financial report should include a
statement from the management that explains the entity’s financial position and
performance during the period. The report should also include disclosures
required by other accounting standards, including disclosures about events that
have occurred since the end of the most recent reporting

The Accounting Standards Board (ASB) in India had notified Indian

Accounting Standard (Ind AS) 34, Interim Financial Reporting, on 30
September 2009. Ind AS 34 prescribes the minimum content of an interim
financial report and the principles for recognition and measurement to be
followed in preparation of such a report. Ind AS 34 was amended by the ASB
in December 2011 and the amended version was notified on 15 February 2012.
The amended standard is applicable for interim financial statements relating to
accounting periods beginning on or after 1 April 2012. Ind AS 34 requires an
entity to prepare an interim financial report at least once in each financial year.
An interim financial report may be prepared more often than once in a financial
year if required by law or regulation or if an entity chooses to do so. The
interim financial report should include a summary of significant accounting
policies used in preparation of the report. However, an entity is not required to
disclose information in the interim financial report that is not required to be
disclosed in the annual financial statements. The interim financial report should
include a balance sheet, a statement of profit or loss and other comprehensive
income, a statement of changes in equity, and a statement of cash flows. The

41
interim financial report should also include condensed notes, which should
include information that is required by law or regulation to be included in the
annual financial statements. The interim financial report should give a true and
fair view of the state of affairs of the entity as at the end of the period and of
the profit or loss of the entity for the period. In preparing the interim financial
report, an entity is required to use the same accounting policies as were used in
the most recent annual financial statements. Ind AS 34 requires an entity to
recognize and measure items in the interim financial report in accordance with
the principles set out in Ind AS 1, Presentation of Financial Statements. An
entity is required to make estimates and assumptions that are prudent and
reasonable in the circumstances. Ind AS 34 was amended in December 2011 to
align it with the requirements of the International Financial Reporting Standard
for Small and Medium-sized Entities (IFRS for SMEs). The amendments made
to Ind AS 34 are not expected to have a significant impact on the financial
statements of most entities.

3.20 -Impairment of Assets

IAS 36 Impairment of Assets applies to the impairment of all assets except:

 intangible assets that are not yet available for use
 financial assets · assets arising from construction contracts
 assets whose carrying amount will be recovered through sales within a
short period of time

In order to determine whether an asset is impaired, an entity must first assess at

the end of each reporting period whether there is any indication that the asset
may be impaired. If there is such an indication, then the entity must estimate
the asset’s recoverable amount. The recoverable amount of an asset is the
higher of its fair value less costs of disposal and its value in use. Value in use is
the present value of the future cash flows expected to be derived from the asset.
An impairment loss is recognized for the amount by which the asset’s carrying

42
amount exceeds its recoverable amount. Impairment losses are recognized in
the profit or loss. They are not reversed in a subsequent period.

Indian Accounting Standard (Ind AS) 36, Impairment of Assets, prescribes the
accounting treatment for impairment of assets that is when the carrying value
of assets exceeds its recoverable amount. The standard requires an entity to
recognize an impairment loss if the carrying value of an asset or its cash-
generating unit (“CGU”) exceeds its recoverable amount. The recoverable
amount is the higher of an asset’s or CGU’s fair value less costs of disposal
and its value in use. An entity is required to assess at each reporting date
whether there is any indication that an asset or its CGU is impaired. If any such
indication exists, the recoverable amount of the asset or CGU is estimated. Ind
AS 36 also contains guidance on the accounting for reversal of impairment
losses.

3.21 - Provisions, Contingent Liabilities and Contingent Assets

Contingent liabilities are liabilities that may or may not arise, depending on the
outcome of a future event. For example, if a company has issued a warranty on
its products, it has a contingent liability in case the products turn out to be
defective and customers claim compensation. Accounting Standard 37 deals
with the recognition and disclosure of contingent liabilities. It requires
companies to disclose all contingent liabilities that are material in nature. A
contingent liability is material if it is likely to result in a loss or an increase in
the company's liabilities, and if the amount involved is material in relation to
the company's financial position. If a contingent liability is not material, it need
not be disclosed. However, if the contingency is such that it cannot be
estimated with reasonable certainty, it should be disclosed as a contingent
liability.

Contingent liabilities are those liabilities which arise due to some event that has
occurred in the past, but the amount of liability is not known. For example, a

43
company may have given a guarantee to another company, and if that company
defaults on its loan, the first company will be liable to pay the loan. Similarly, a
company may be involved in a legal dispute, and if it loses the case, it will
have to pay damages. The recognition and measurement of contingent
liabilities are governed by Indian Accounting Standard 37 (Provisions,
Contingent Liabilities and Contingent Assets). According to this standard, a
provision should be recognized only when there is a present obligation arising
from a past event, it is probable that there will be an outflow of resources, and
the amount of the provision can be reasonably estimated. Contingent liabilities
are not recognized in the financial statements, but are disclosed in the notes.
For example, a company may disclose that it has given a guarantee for a loan
of another company, but does not recognize the liability in its financial
statements as the amount is not known.

3.22 - Intangible Assets

IAS 38 prescribes the accounting treatment for intangible assets, which are
non-monetary assets without physical substance. They are identifiable and are
subject to legal or contractual rights. Examples of intangible assets include
goodwill, patents, copyrights, and trademarks. Intangible assets are initially
recognized at cost, which includes all expenditure incurred to acquire and
prepare the asset for its intended use. Subsequent to initial recognition,
intangible assets are carried at their amortized cost using the straight-line
method. Amortized cost is calculated by taking into account the estimated
useful life of the asset and the applicable interest rate. Intangible assets are
considered to have an indeterminate useful life if they are not expected to
generate future economic benefits for the entity on a stand-alone basis. These
assets are not amortized but are tested for impairment annually. An impairment
loss is recognized if the carrying value of the asset exceeds its recoverable
amount. The recoverable amount is the higher of the asset’s fair value less
costs to sell and its value in use. Intangible assets with a definite useful life are
derecognized on disposal or when no future economic benefits are expected
from their use or disposal.

44
3.23 -Investment Property
Investment property is defined as a property (land or a building or part of a
building or both) held (by the owner or by the lessee under a finance lease) to
earn rentals or for capital appreciation or both. The standard prescribes the
accounting treatment for investment property, which includes recognition,
measurement, and disclosure.

Recognition:
Investment property should be recognized as an asset when, and only when, it
is probable that future economic benefits associated with the property will flow
to the owner and the cost of the property can be measured reliably. An entity
shall measure an investment property at its cost or revalued amount, whichever
is lower. An entity shall recognize depreciation on an investment property,
except for land.

Measurement:
After recognition, investment property is measured at cost. Cost comprises all
costs incurred to bring the property to its present location and condition,
including transaction costs.

Subsequent expenditure:
Subsequent expenditure on an investment property is capitalized only if it is
probable that the future economic benefits associated with the expenditure will
flow to the owner and the cost of the expenditure can be measured reliably. If
these criteria are not met, the expenditure is recognized in profit or loss when
incurred.

Disclosure
An entity must disclose:
 the total carrying amount of investment property at the beginning and
end of the period;

45
  for each class of investment property, the amount of gross investment
property and the net carrying amount at the beginning and end of the
period;
 depreciation charged to profit or loss for the period;
 any reclassification of investment property during the period; and
 any impairment losses recognized during the period in respect of
investment property.

3.24 – Agriculture

Indian accounting standard (IAS) 41, ‘Agriculture’, prescribes the accounting

treatment for transactions related to agricultural activity. It also provides
guidance on recognition and measurement of biological assets and agricultural
produce at the time of harvest. The standard applies to all entities that carry out
agricultural activity, including primary producers, processors and marketers of
agricultural produce. Biological assets are living plants or animals. Agricultural
produce comprises the outputs of biological assets that are harvested and are
either in their natural state or have undergone the minimum necessary
processing. Agricultural activity includes activities undertaken in connection
with the production of agricultural products, including forestry, livestock,
horticulture and aquaculture. IAS 41 requires agricultural activity to be
accounted for using the accrual basis of accounting. This means that revenue is
recognised when it is earned, and expenses are recognised when they are
incurred. The standard requires biological assets and agricultural produce to be
measured at fair value less costs to sell. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.

The standard requires that all transactions relating to agriculture be accounted

for on a accrual basis. This means that revenue should be recognized when it is
earned, and expenses should be recognized when they are incurred. Inventories
of agricultural produce should be valued at either the lower of cost or net
realizable value. Cost may be determined using either the first-in, first-out

46
method or the weighted average cost method. Agricultural land and buildings
should be stated at historical cost. Depreciation should be provided on a
straight-line basis over the estimated useful life of the asset. The standard
requires that biological assets be measured at fair value less costs to sell. Fair
value is the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement date. Biological
assets include crops, trees, and livestock. They are considered to be living
assets because they can reproduce themselves. The standard requires that any
gain or loss on the disposal of a biological asset be recognized in profit or loss.
This standard applies to annual periods beginning on or after April 1, 2016.
Earlier application is permitted.

3.25 - First Time Adoption of Indian Accounting Standards

IAS 101 First Time Adoption of Indian Accounting Standards sets out the
procedures that an entity must follow when it adopts the Indian Accounting
Standards (Ind AS) for the first time. An entity may adopt Ind AS either in
accordance with the transitional provisions in Ind AS 101 or on a fully
retrospective basis.

The main requirements of Ind AS 101 are as follows:

 An entity must prepare its financial statements, including the
accompanying notes, in conformity with the recognition and
measurement requirements of the Indian Accounting Standards.
 An entity must disclose:
a) the fact that the financial statements are the entity's first Ind AS
financial statements;
b) b) the date from which the entity has adopted Ind AS, which shall
be the beginning of the entity's first Ind AS reporting period; and
c) how the transition from previous GAAP to Ind AS has affected its
reported financial position, financial performance and cash flows.

47
  An entity must apply the recognition and measurement requirements of
Ind AS to transactions and other events that occurred during periods
beginning on or after the date of transition to Ind AS (the "transition
date");
 An entity must restate its financial statements for prior periods as if Ind
AS had always been applied;
 An entity must disclose information that enables users of the financial
statements to understand the impact of the transition to Ind AS on the
reported financial position, financial performance and cash flows of the
entity.

AS 101 is the Indian Accounting Standard for first-time adoption of Indian

Accounting Standards. It applies to entities that are adopting Indian
Accounting Standards for the first time. The standard prescribes the manner in
which the financial statements are to be prepared in order to give a true and fair
view of the financial position, financial performance and cash flows of the
entity. The standard requires that an entity shall prepare and present its
financial statements in accordance with the generally accepted accounting
principles (GAAP) in India.

3.26 - Share based Payment

IAS 102 Share-based Payment prescribes the accounting treatment for

transactions in which an entity acquires goods or services as consideration for
equity instruments of the entity or another group entity. The standard defines a
share-based payment transaction as a transaction in which the entity acquires
goods or services by incurring a liability to transfer equity instruments of the
entity or another group entity to the supplier of those goods or services, or by
incurring a liability to settle such a liability in cash or other assets of the entity.
The standard requires that the cost of goods or services acquired in a share-
based payment transaction be measured at the fair value of the consideration
received, less any direct costs incurred to settle the transaction. The standard

48
also requires that the fair value of the equity instruments issued or transferred
in a share-based payment transaction be measured at the fair value of the
consideration received, less any direct costs incurred to settle the transaction.
The standard allows entities to measure the fair value of the equity instruments
issued or transferred in a share-based payment transaction using a variety of
methods, including the use of market-based or mathematical models. The
standard requires that entities recognize the cost of goods or services acquired
in a share-based payment transaction on a straight-line basis over the vesting
period of the equity instruments. The standard requires that entities recognize
the fair value of the equity instruments issued or transferred in a share-based
payment transaction on the date of the transaction.

IAS 102 provides guidance on the accounting for share-based payments. A

share-based payment is a transaction in which an entity receives goods or
services from another entity as consideration for equity instruments of the
entity, or as consideration for instruments that are convertible into, or
exercisable for, equity instruments of the entity. In order to account for a share-
based payment transaction, an entity needs to determine the fair value of the
consideration received. The fair value of the consideration received can be
estimated using a variety of valuation techniques, including option pricing
models and other pricing models. Once the fair value of the consideration
received has been determined, the entity needs to account for the share-based
payment transaction in accordance with the requirements of IAS 32 Financial
Instruments: Presentation and IAS 36 Impairment of Assets. If the fair value of
the consideration received cannot be reasonably estimated, then the share-
based payment transaction should be accounted for as an equity transaction.

The standard requires that entities disclose the following information about
share-based payment transactions:
 the nature of the goods or services acquired;
 he fair value of the consideration received;
 the method used to measure the fair value of the equity instruments
issued or transferred;

49
  the fair value of the equity instruments issued or transferred;
 the fair value of the equity instruments issued or transferred;
 the vesting period of the equity instruments the expected term of the
share-based payment arrangement.

3.27 - Business Combination

The Indian Accounting Standard 103 (Ind AS 103) prescribes the accounting
treatment for business combinations. A business combination is defined as an
acquisition or a merger of two or more entities or businesses in which the
acquirer obtains control over the acquired entities or businesses. The standard
requires that the acquirer recognizes the acquired entities or businesses at their
fair value as of the acquisition date. The fair value is the consideration paid or
the fair value of the assets and liabilities assumed, whichever is more clearly
evident. The standard also requires that the acquirer recognize any goodwill
arising from the business combination. Goodwill is defined as the excess of the
consideration paid over the fair value of the net assets acquired. The standard
requires that the acquirer allocate the consideration paid to the acquired assets
and liabilities on a fair value basis. Any goodwill arising from the business
combination is to be recognized as an intangible asset and amortized over a
period not exceeding 20 years.

Under the acquisition method, the acquirer records the assets and liabilities of
the acquired business at their fair values as of the acquisition date. The
difference between the fair value of the consideration paid and the fair value of
the net assets acquired is recorded as goodwill. Goodwill is not amortized, but
is tested for impairment annually. If the carrying value of goodwill exceeds its
fair value, an impairment charge is recorded to reduce goodwill to its fair
value. The standard also requires the recognition of any identifiable intangible
assets of the acquired business at their fair values as of the acquisition date.
These intangible assets are amortized over their estimated useful lives.

50
The standard requires that the acquirer disclose the following information
about the business combination:
(a) the consideration paid or the fair value of the assets and liabilities
assumed;
(b) the amount of goodwill recognised;
(c) the basis of allocation of the consideration to the assets and liabilities
assumed; and
(d) the pro forma financial information as if the business combination had
occurred on the beginning of the previous accounting period.

3.28 - Insurance Contracts

IAS 104 Insurance Contracts was issued by the International Accounting

Standards Board (IASB) in May 2017. The standard provides guidance on the
recognition, measurement and disclosure of insurance contracts. The standard
applies to all insurance contracts, except those that are reinsurance contracts,
financial guarantees, and contracts held for investment purposes.

The main provisions of the standard are as follows:

 Insurance contracts are to be recognized as assets or liabilities on the
balance sheet;
 The measurement of insurance contracts is to be based on the present
value of the expected future cash flows, using a risk-adjusted discount
rate;
 Insurance contracts are to be classified as either on-balance sheet or off-
balance sheet contracts.

It applies to all entities that enter into insurance contracts, except for those that
reinsure contracts issued by other entities. The standard requires that an entity
recognize a liability for the coverage provided by an insurance contract at the
time the contract is entered into. The liability is measured at the present value
of the estimated future cash flows expected to arise from the coverage provided

51
by the contract, discounted at a rate that reflects the time value of money and
the entity’s own credit risk. The standard also requires that an entity recognize
revenue from an insurance contract as the coverage provided by the contract is
delivered. The revenue is measured at the amount of the premiums received,
adjusted for any changes in the present value of the liability for the coverage
provided by the contract. If an insurance contract includes an investment
component, then the standard requires that the investment component be
accounted for separately from the coverage provided by the contract. The
investment component is measured at fair value.

Disclosures are to be made about the nature of the risk exposures arising from
insurance contracts, the amount of reinsurance protection, and the sensitivity of
the fair value of the contracts to changes in discount rates and other factors.

3.29 - Non-Current Assets Held for Sale and Discontinued

operations

IASC 105, Non-current Assets Held for Sale and Discontinued Operations,
deals with the accounting for non-current assets that are held for sale and for
discontinued operations. A non-current asset is classified as held for sale if its
carrying amount will be recovered primarily through a sale transaction rather
than through continuing use. A discontinued operation is a component of an
entity that has been disposed of or is being disposed of by the entity. The main
requirement of IASC 105 is that non-current assets that are held for sale and
discontinued operations must be presented separately in the statement of
financial position. Non-current assets that are held for sale must be measured at
the lower of their carrying amount and fair value less costs to sell.
Discontinued operations must be presented in the statement of comprehensive
income, net of tax. IASC 105 applies to all entities that prepare financial
statements in accordance with International Financial Reporting Standards
(IFRS).

52
The standard requires that an entity should not recognize any gain or loss on
the measurement of a non-current asset or disposal group held for sale at the
date that it is classified as held for sale. However, an entity must derecognize a
non-current asset when, and only when:
(a) the asset is disposed of; or
(b) the asset is classified as held for sale and its carrying amount will be
recovered principally through a sale transaction.
An entity must recognise any impairment loss for a non-current asset or
disposal group classified as held for sale in accordance with I.A.S. 36,
Impairment of Assets. However, an entity is not required to assess impairment
of a non-current asset or disposal group classified as held for sale if the asset or
disposal group is expected to be recovered through a sale within 12 months
from the date that it is classified as held for sale.

The standard requires that an entity should present, as a single line item in the
statement of financial position, all non-current assets or disposal groups that
are classified as held for sale. An entity should disclose, either in the notes to
the financial statements or in the statement of cash flows, information that is
relevant to an understanding of the financial position and performance of the
entity, including:
 The major line items of revenue and expenses arising from
discontinuing operations;
 The major line items of non-current assets or disposal groups that are
classified as held for sale; and
 Any material changes in the estimate of the expected losses from such
discontinuing operations or held for sale assets or disposal groups.

3.30 - Exploration for and Evaluation of Mineral Resources

Ind AS 106 sets out the accounting treatment for exploration and evaluation of
mineral resources. The standard applies to all entities that carry out such
activities. The main objective of Ind AS 106 is to ensure that the costs incurred

53
in the exploration and evaluation of mineral resources are reflected in the
financial statements in a consistent and transparent manner. Ind AS 106
requires that all costs incurred in the exploration and evaluation of mineral
resources be accounted for as expenses in the period in which they are
incurred. This includes costs such as salaries and wages, supplies and services,
and impairment losses on exploration and evaluation assets.

Exploration for and evaluation of mineral resources involve activities to

determine the nature and extent of resources. Such activities include the search
for new mineral resources, the assessment of known resources and the
determination of the quality and quantity of resources. The costs incurred in
exploration and evaluation activities are capitalized as part of the cost of the
mineral resources. These costs are included in the carrying value of the assets
only when it is probable that future economic benefits will flow to the entity
and the costs can be measured reliably. Expenditure on activities prior to the
commencement of production is included in the carrying value of the related
assets only when it is probable that future economic benefits will flow to the
entity and the costs can be measured reliably.

In addition, Ind AS 106 requires that entities disclose information about their
exploration and evaluation activities, including the amount of money spent on such
activities, the nature and extent of the resources explored and evaluated, and the
results of any evaluation.

3.31 - Financial Instruments Disclosure

There are several things that should be taken into consideration when
disclosing financial instruments. Indian Accounting Standard 107 (IAS 107)
Financial Instruments: Disclosure provides guidance on what should be
disclosed and how it should be presented.
The standard requires disclosures in the following areas:
 Classification of financial instruments
 Recognition and recognition of financial instruments

54
  Measurement of financial instruments
 Hedge accounting
 Contingent liabilities and contingent assets

In general, the disclosures should include information that would enable users
of the financial statements to evaluate the significance of financial instruments
for the entity and the risks associated with them.

Classification of financial instruments:

Financial instruments should be classified into the following categories:
 Financial assets
 Financial liabilities

Financial assets are classified as either:

 Loans and receivables
 Held-to-maturity investments
 Available-for-sale financial assets

Loans and receivables are non-derivative financial assets with fixed or

determinable payments that are not quoted in an active market. They are
recognized when it is probable that the economic benefits associated with the
asset will flow to the entity and the initial measurement of the asset is at fair
value. Held-to-maturity investments are non-derivative financial assets with
fixed or determinable payments and fixed maturities that the entity has the
positive intent and ability to hold to maturity. They are recognized when it is
probable that the economic benefits associated with the asset will flow to the
entity and the initial measurement of the asset is at fair value.

Available-for-sale financial assets are non-derivative financial assets that are

either:
 Quoted in an active market
 That are not quoted in an active market but for which fair value can be
reliably measured

55
Available-for-sale financial assets are recognized when it is probable that the
economic benefits associated with the asset will flow to the entity and the
initial measurement of the asset is at fair value.

Financial liabilities are classified as either:

 Deposits
 Trading liabilities
 Borrowings
 Derivative financial instruments

Deposits are non-derivative financial liabilities with fixed or determinable

payments that are not quoted in an active market. They are recognized when it
is probable that the economic benefits associated with the liability will flow to
the entity and the initial measurement of the liability is at fair value.

Trading liabilities are non-derivative financial liabilities that are either:

 Quoted in an active market
 That are not quoted in an active market but for which fair value can be
reliably measured

Trading liabilities are recognized when it is probable that the economic

benefits associated with the liability will flow to the entity and the initial
measurement of the liability is at fair value. Borrowings are non-derivative
financial liabilities with fixed or determinable payments and fixed or
determinable maturities. They are recognized when it is probable that the
economic benefits associated with the liability will flow to the entity and the
initial measurement of the liability is at fair value.

Derivative financial instruments are financial instruments with all three of the
following characteristics:
 Their value changes in response to changes in an underlying instrument
 They require no initial investment
 They are settled at a future date

56
Derivative financial instruments are recognized when it is probable that the
economic benefits associated with the instrument will flow to the entity and the
initial measurement of the instrument is at fair value.

Recognition and recognition of financial instruments

A financial instrument is recognized when it is probable that the economic
benefits associated with the instrument will flow to the entity and the initial
measurement of the instrument is at fair value. A financial instrument is
derecognized when it is no longer probable that the economic benefits
associated with the instrument will flow to the entity.

Measurement of financial instruments

Financial instruments are measured at fair value, unless they are:
 Loans and receivables
 Held-to-maturity investments
 Available-for-sale financial assets

Loans and receivables, held-to-maturity investments, and available-for-sale

financial assets are measured at amortized cost. Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Amortized
cost is the amount paid to acquire a financial asset, minus any discount or
premium, plus any expenditure that is directly attributable to the asset.

Hedge accounting
Hedge accounting is an accounting treatment that aims to reflect the economic
results of a hedging transaction in the financial statements. Hedge accounting is
only available for hedging relationships that are entered into for the purpose of
reducing risk, and not for speculative purposes.

To qualify for hedge accounting, the following conditions must be met:

 The hedging relationship must be formally designated as a hedge.

57
  The hedging relationship must be documented at the inception of the
hedge.
 The hedging relationship must be effective.

The following hedging relationships are eligible for hedge accounting:

 Interest rate risk
 Foreign currency risk
 Commodity price risk
 Equity price risk

Contingent liabilities and contingent assets

Contingent liabilities are potential liabilities that arise from past events, but
which are not recognized in the financial statements because they are not
probable or the amount cannot be reasonably estimated.

Contingent assets are potential assets that arise from past events, but which are
not recognized in the financial statements because they are not probable or the
amount cannot be reasonably estimated.

3.32 - Operating Segments

Ind AS 108, Operating Segments, establishes standards for the disclosure of

information about an entity’s operating segments. The objective of this
Standard is to enhance the information provided in financial statements about
an entity’s operating segments.

Operating segments are those parts of an organization that engage in business

activities from which revenues and expenses are derived and for which discrete
financial information is available. The operating segments of a company are
typically defined by the company's management team. In order to be
considered an operating segment, a number of criteria must be met. First, the
operating segment must engage in business activities from which revenues and

58
expenses are derived. Second, discrete financial information must be available
for the operating segment. Finally, the operating segment must be managed
separately from other parts of the organization. If an operating segment meets
these criteria, then it must be reported separately in the financial statements.
The financial statements must include a disaggregation of operating income (or
loss) and of identifiable assets and liabilities by operating segment. Operating
segments are important to investors and other financial statement users because
they provide information about the parts of the organization that generate
revenues and incur expenses. This information can be used to assess the
performance of the organization as a whole, as well as the performance of its
individual operating segments. Indian Accounting Standard 108, "Operating
Segments," sets forth the requirements for the disclosure of operating segments
in the financial statements. The Standard requires that companies disclose
information about their operating segments in order to give financial statement
users a better understanding of the company's business activities and the risks
and rewards associated with those activities.

This Standard requires an entity to disclose information to enable users of its

financial statements to evaluate the nature and financial effects of the entity’s
business activities and how they relate to its financial performance. In
particular, an entity is required to disclose:

(a) its operating segments and the basis of segmentation;

(b) the reportable segments;
(c) the relationship between its operating segments and its reported
profit or loss and other measures of financial performance; and
(d) information about products and services, geographical areas and
major customers.
This Standard applies to all entities, whether or not they are required to prepare
consolidated financial statements.
Operating segments are an important part of the financial statements. They
provide information about the parts of the organization that generate revenues
and incur expenses. This information can be used to assess the performance of
the organization as a whole, as well as the performance of its individual

59
operating segments. In order to meet the requirements of Indian Accounting
Standard 108, "Operating Segments," companies must disclose information
about their operating segments in order to give financial statement users a
better understanding of the company's business activities and the risks and
rewards associated with those activities.

3.33 - Financial Instruments

Indian Accounting Standard 109, Financial Instruments, deals with the

recognition and measurement of financial assets and financial liabilities. The
Standard prescribes recognition and measurement principles for financial assets
and financial liabilities, including some hybrid contracts. Ind AS 109 is based
on the recognition and measurement principles in IFRS 9 Financial
Instruments. Ind AS 109 applies to all entities that have financial assets or
financial liabilities. Ind AS 109 requires an entity to recognize a financial asset
or financial liability in its statement of financial position when, and only when,
the entity becomes a party to the contractual provisions of the instrument. An
entity measures a financial asset or financial liability at its fair value at the end
of each reporting period, unless the asset or liability is measured at amortized
cost or at fair value through other comprehensive income in accordance with
Ind AS 109. When an entity derecognizes a financial asset or financial liability,
the entity removes the asset or liability from its statement of financial position
and recognizes any resulting gain or loss in profit or loss. An entity recognizes
a gain or loss on a financial asset or financial liability in profit or loss when the
asset or liability is derecognized, and the change in fair value of the asset or
liability has been recognised in profit or loss during the period.

Indian Accounting Standard 109 deals with financial instruments. A financial

instrument is any contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity. Some common
examples of financial instruments include loans, bonds, and shares. Financial
instruments are used by businesses for a variety of purposes, such as to raise
finance, to hedge risk, or to speculate on future price movements. IAS 109 sets

60
out the recognition and measurement requirements for financial assets,
financial liabilities, and equity instruments. It also includes specific provisions
for the classification and measurement of certain types of financial instruments,
such as derivatives.

The standard requires financial assets and financial liabilities to be classified

into one of the following categories:
 Amortized cost
 Fair value through profit or loss
 Fair value through other comprehensive income
 Available-for-sale

Equity instruments are not classified into any of the above categories and are
measured at fair value. The standard allows for the use of alternative
measurement bases for financial instruments, provided that such alternative
measurement bases are disclosed. Ind AS 109 is applicable to all entities that
have financial instruments.

3.34 - Consolidated Financial Instruments

In India, the accounting standard for consolidated financial instruments is

known as Indian Accounting Standard (IAS) 110. This standard deals with the
consolidation of an entity's financial instruments, including both debt and
equity instruments. The main objective of this standard is to ensure that an
entity's financial statements give a true and fair view of its financial position,
financial performance, and cash flows. In order to achieve this, the standard
requires that an entity's financial instruments be consolidated on a consistent
basis. There are two main methods of consolidation: the pro rata method and
the equity method. The pro rata method is the more commonly used method,
and it involves consolidating the financial instruments of an entity on a pro rata
basis. Under this method, each instrument is consolidated in proportion to its
ownership interest in the entity. The equity method, on the other hand, involves
consolidating an entity's financial instruments on the basis of the equity

61
ownership interests held by the various shareholders. Under this method, each
instrument is consolidated in proportion to the equity interests held by the
shareholders. The main advantage of the equity method is that it provides a
more accurate picture of an entity's financial position and financial
performance. However, it is also more complex and time-consuming to prepare
financial statements using this method. IAS 110 was issued by the Institute of
Chartered Accountants of India (ICAI) in 2011 and is effective for accounting
periods beginning on or after 1 April 2012.

In India, the accounting standard for consolidated financial instruments is

known as Indian Accounting Standard (IAS) 110. This standard deals with the
consolidation of an entity's financial instruments, including both debt and
equity instruments. The main objective of this standard is to ensure that an
entity's financial statements give a true and fair view of its financial position,
financial performance, and cash flows. In order to achieve this, the standard
requires that an entity's financial instruments be consolidated on a consistent
basis. There are two main methods of consolidation: the pro rata method and
the equity method. The pro rata method is the more commonly used method,
and it involves consolidating the financial instruments of an entity on a pro rata
basis. Under this method, each instrument is consolidated in proportion to its
ownership interest in the entity. The equity method, on the other hand, involves
consolidating an entity's financial instruments on the basis of the equity
ownership interests held by the various shareholders. Under this method, each
instrument is consolidated in proportion to the equity interests held by the
shareholders. The main advantage of the equity method is that it provides a
more accurate picture of an entity's financial position and financial
performance. However, it is also more complex and time-consuming to prepare
financial statements using this method. IAS 110 was issued by the Institute of
Chartered Accountants of India (ICAI) in 2011 and is effective for accounting
periods beginning on or after 1 April 2012.

62
3.35 - Joint Agreements
In India, accounting for joint agreements is governed by Indian Accounting
Standard 111 (AS 111). AS 111 applies to all types of joint arrangements,
including joint ventures and joint operations. Under AS 111, a joint
arrangement is defined as an arrangement between two or more parties that is
structured through a contractual agreement. The parties to a joint arrangement
are referred to as joint operators. AS 111 sets out the accounting requirements
for joint arrangements, including the recognition and measurement of assets,
liabilities, income, and expenses. It also provides guidance on the disclosure of
information about joint arrangements. Under AS 111, joint arrangements are
classified into two types: joint ventures and joint operations. A joint venture is
an arrangement between two or more parties that is structured through a
contractual agreement to undertake an economic activity together. The parties
to a joint venture share the risks and rewards of the activity in proportion to
their ownership interests. A joint operation is an arrangement between two or
more parties that is structured through a contractual agreement to undertake an
activity together. The parties to a joint operation share the risks and rewards of
the activity in proportion to their ownership interests.

Joint Agreements refers to the accounting standard that deals with the
accounting for joint arrangements. Under this standard, a joint arrangement is
defined as an arrangement between two or more parties that is governed by a
contract or other agreement, and that specifies the rights and obligations of the
parties to the arrangement with respect to the assets, liabilities, income,
expenses, and cash flows of the arrangement. There are two types of joint
arrangements: joint operations and joint ventures. Joint operations are
arrangements in which the parties to the arrangement share the risks and
rewards of the underlying activity in proportion to their ownership interests.
Joint ventures are arrangements in which the parties to the arrangement have
agreed to undertake an activity together and to share the risks and rewards of
the activity in proportion to their ownership interests. Under the joint
arrangements standard, the classification of a joint arrangement as a joint
operation or a joint venture is determined by the substance of the arrangement

63
and the contractual relationships between the parties. The standard requires that
joint arrangements be classified as either joint operations or joint ventures, and
that joint ventures be accounted for using the equity method.

3.36 -Disclosure of Interest in other Entities

IAS 112 Disclosure of Interests in Other Entities deals with the disclosure
requirements for an entity's interests in other entities, including unconsolidated
subsidiaries, associates and joint ventures.

The standard requires an entity to disclose:

 The nature of its interest in other entities and the extent of that interest;
 The entity's interests in other entities that are material to the entity;
 The entity's interests in other entities that are not material to the entity
but that could be material to the users of the entity's financial
statements; and
 For each material interest in another entity, the address of that entity
and the nature of its activities.

In addition, the Standard requires an entity to disclose information about its

interests in other entities that are material to an understanding of the entity's
financial statements. The disclosures required by the Standard are to be made
in the notes to the financial statements.

3.37 - Fair Market Value

This standard defines the term Fair value and establishes a framework for
measuring fair value in a single standard, it also requires disclosure about fair
value measurements. When another standard requires or permit fair value
measurements or disclosures, this accounting standard is applicable. At the

64
measurement date, the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants.

The hierarchy categories the inputs used in valuation techniques into three
levels:

Level 1 Inputs:
These are quoted prices in active markets for identical assets or liabilities that
the entity can access at the measurement date.

Level 2 Inputs:
These are inputs other than quoted market prices included within level 1 that
are observable for the asset or liability, either directly or indirectly.

Level 3 Inputs:
These are unobservable inputs for the asset or liability.

Fair value measurement approach the objective is to estimate the prices at

which an orderly transactions to sell the assets or to transfer the liability. Fair
value measurement requires an entity to determine:
 Particular asset or liability;
 Valuation premises;
 Principal (most advantageous market);
 Valuation technique.

Three widely used valuation techniques are:

Market Approach:
This approach uses prices and other relevant information generated by the
market transactions involving identical or comparable assets, liabilities, or a
group of assets and liabilities.

Cost Approach:

65
This approach reflects the amount that would be required currently to replace
the service capacity of an asset (current replacement cost).
Income Approach:
This approach converts future amounts (cash flows or income and expenses) to
a single current amount, reflecting current market expectations about those
future amounts.

3.38 - Regulatory Deferral Accounts

IAS 114 Regulatory Deferral Accounts deals with the accounting for regulatory
deferral accounts. These are accounts that are established by regulatory
authorities in order to defer the recognition of income or expenses. The most
common type of regulatory deferral account is a rate stabilization account,
which is used to smooth out the impact of changes in regulatory rates on a
utility company's financial statements. The main principle of IAS 114 is that
regulatory deferral accounts should be treated as assets or liabilities on the
balance sheet, depending on whether the future income or expense is expected
to be higher or lower than the current regulatory rate. The account should be
reported at its fair value, with any changes in value reported in the income
statement. Income or expenses that have been deferred in a regulatory deferral
account should not be included in the calculation of regulatory asset or liability
balances. This is because the income or expense has not yet been earned or
incurred, and including it would result in double-counting. IAS 114 is effective
for annual periods beginning on or after 1 January 2009.

Indian Accounting Standard (Ind AS) 114 sets out the accounting treatment for
regulatory deferral accounts. A regulatory deferral account is an account that is
established by a regulatory authority to defer income or expenses that relate to
a regulated activity. The account is used to smooth out the impact of changes in
regulation on the financial statements of a regulated entity. Ind AS 114 applies
to all entities that are subject to regulation by a statutory body. The standard
does not apply to entities that are not subject to regulation. The standard

66
requires that a regulatory deferral account be recognized as a separate asset or
liability in the statement of financial position. The account should be measured
at its original value, plus or minus any adjustments that are required by changes
in regulation. The standard requires that income or expenses that relate to a
regulatory deferral account be recognized in the period in which the income or
expense arises. This means that the income or expense will be recognized even
if it relates to a period that is not covered by the current regulatory regime. The
standard requires that when a regulatory deferral account is no longer required,
it should be derecognized. Any income or expenses that relate to the account
should be recognized in the period in which the regulatory regime changes.

3.39 - Revenue from Contracts with Customers

Revenue from Contracts with Customers (ICAS 11) deals with the recognition
and measurement of revenue arising from contracts with customers.

The standard prescribes a five-step model for the recognition of revenue. The
steps are:
1. Identify the contract with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognize revenue when (or as) the entity satisfies a performance
obligation.

The standard requires entities to exercise judgment in applying the recognition

and measurement principles in the context of their contracts with customers. In
particular, entities need to consider the terms of the contract and the nature of
the goods or services to be provided. The standard also contains guidance on
disclosures, including information about the amount of revenue recognized,

67
significant judgments made in applying the recognition and measurement
principles, and changes in estimates.

The standard applies to all entities that enter into contracts with customers,
including both business entities and non-business entities. The standard does
not apply to leases, financial instruments, insurance contracts, or collective
investment schemes. The standard requires an entity to recognize revenue
when it transfers goods or services to a customer in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those
goods or services. The standard also requires an entity to disclose the nature,
amount, and timing of revenue that arises from contracts with customers.

The Standard applies to all entities that enter into contracts with customers.
The Standard does not apply to contracts entered into between an entity and
another entity that is a member of the same group as the entity (i.e. a related
party transaction). The Standard requires an entity to recognize revenue when it
satisfies a performance obligation by transferring a good or service to a
customer. A performance obligation is satisfied when the customer obtains
control of the good or service. Control is transferred when the customer has the
ability to direct the use of, and obtain the benefits from, the good or service.
The amount of revenue recognized should reflect the consideration to which
the entity expects to be entitled in exchange for satisfying the performance
obligation. The consideration may take the form of cash, assets or services. The
Standard requires an entity to disclose the nature, amount and timing of
revenue recognized from contracts with customers.

3.40 – Leases

Indian Accounting Standard - Leases (Ind AS) is the Indian version of the
International Financial Reporting Standard - Leases (IFRS). It was issued by
the Institute of Chartered Accountants of India (ICAI) in 2016 and is applicable
for annual periods beginning on or after 1 April 2019. Ind AS - Leases requires
a lessee to recognize a right-of-use asset and a corresponding lease liability for

68
all leases, except for short-term leases and leases of low-value assets. A lessor
continues to recognize the leased asset and associated lease receivable.

The standard requires lessees to use one of two accounting methods for leases:
the operating lease method or the finance lease method. The operating lease
method results in the recognition of lease expenses on a straight-line basis over
the lease term. The finance lease method results in the recognition of interest
and amortization expense on a reducing balance basis. The standard requires
lessees to disclose information about their leases, including the nature of their
leases, the extent of their commitments under leases, and the amount of future
cash flows expected to be paid under leases. Lessors are required to disclose
similar information about their leases.

Under the standard, a lease is an agreement between two parties, the lessor and
the lessee, whereby the lessor agrees to provide the use of an asset to the lessee
for an agreed period of time, in exchange for periodic payments from the
lessee. The lessor continues to recognize the leased asset and the associated
lease receivable on its balance sheet. The lessee recognizes the leased asset as
an asset and the associated lease liability on its balance sheet. The standard
requires that lease payments be apportioned between the finance charge and the
reduction of the lease liability so as to achieve a constant rate of interest on the
remaining balance of the liability. The lessee recognizes depreciation on the
leased asset over the lease term. The lessor recognizes income from the lease
receivable, less any impairment losses, over the lease term.

CHAPTER 4: PROCEDURAL ASPECTS

4.1 – Notice of Board Meeting
A board meeting is a gathering of the board of directors of a company to
discuss various company policies and important decisions for the future. The
board of directors makes ratifying decisions or takes actions on behalf of the

69
company. The powers of the Management Board are outlined in the Company's
Articles of Association. All procedures at the meeting of the Directors shall be
governed by the Company's Articles of Association and such rules as the
Directors themselves may determine in accordance with the powers conferred
by the Articles. If the articles of association provide for a quorum of a certain
number, it is not necessary for all directors to be present at a meeting. If the
prescribed quorum is not present, the presence of the majority of the assembly
is required.

Certain powers of a company's board of directors may only be exercised on its

behalf by a resolution of a board meeting, not by a resolution approved by
circulation. As a result, board meetings are an essential component of running a
limited liability company in India. According to the Companies Act of 2013,
the time between two board meetings cannot be more than 120 days. As a
result, a company would need to hold at least three board meetings over the
course of a year.

A board meeting must be convened by a written notice of the board meeting to

all directors of the company, according to the Companies Act. A meeting of the
Board of Directors must be announced in writing and personally delivered to
each director, or by first class or registered mail, or by facsimile, email, or
other electronic means. Notice conveying a meeting must be given at least
seven days before the general meeting, unless the articles of association specify
a longer period. If the company sends the notice via speed or registered mail,
the notice service must be added two days. It is customary to send the meeting
agenda along with the notice board. If the agenda is not available, the invitation
to the board meeting can be sent before the agenda.

The invitation to the board meeting should be sent on company letterhead if

possible. If the letter is not sent on letterhead, by email, or by other electronic
means, a copy may be scanned on letterhead and sent as an attachment. If it is
only by email and/or there is no company letterhead available, it must be sent
from an official company email id and include the name of the company in the
header or footer of the email, as well as its full address registered office and all

70
its details such as Corporate Identification Number (CIN). Finally, any
clarification or correction must include the date of the notice, the power of
attorney, and the name and position of the person who issued the notice, as
well as the telephone number of the company secretary or other senior official
whom the board of directors can contact.

In the case of procedural matters, such voluntary review must be preceded by a

request for the issuance of notice and provision of the board meeting agenda in
accordance with Section 173(3) of the Companies Act 2013. A typical agenda
would include considering the director's approval of the audit of the company's
annual accounts or report, as well as authorizing the company's acting
secretaries/certified auditors/accountants in practice to appear. After holding
the board meeting and approving all resolutions on the agenda, the Company's
directors are required to complete Form NCLT-1 within 14 days of the board's
decision.

4.2 – Advertisement of Petition

Furthermore, the announcement of a corporate petition must be made in
accordance with Rule 35 of the NCLT Rules, 2016. This announcement will be
in the format NCLT-3A, 14 days before the hearing and will be published
twice in the newspaper, once in a people's newspaper in the main language of
the district where the company's registered office is located and once in
English in an English newspaper circulated in that district.

The advertisement must include, among other things, a statement that any
person of your interest who is affected by the proposed petition or who intends
to oppose or support the petition or reference at the hearing will proceed with a
notice, specifying the interest rate and the reasons for their objection, to the
relevant chamber, as well as to the petitioner or, where appropriate, his
authorized representative, to reach him two days before the date set for the
hearing. Furthermore, an affidavit must be filed with the court within three
days of the original court hearing date. Given the circumstances, such an
affidavit is required for the petition announced under this Rule as well as any

71
notice properly served on the persons to be served, both at the same time. It's
also worth noting that any such affidavit must be accompanied by proof of
advertising or service, if available.

4.3 – Issuance of Notice to Auditor

Pursuant to Rule 77(5) of NCLT Rule 2016, the Court determined that the
current examiner is different, and after considering the application and Hearing
of the Auditor and any other person the Court considers appropriate, the Court
may make the appropriate order by means of a notice and hearing to the auditor
of the original financial statements.

4.4 – On Receipt of NCLT (National Company Law Tribunal)

order
According to Rule 77(6) of NCLT Rule 2016, the corporation must provide a
certified copy of the application from the court to the Registrar of company
within 30 days of receiving the certified copy of Electronic Form INC-28.

According to Rule 77(7) of the NCLT Rules, 2016, a preferred assembly can
be called, and notice of such preferred assembly, as well as the reasons for the
extrude in economic statements, can be published in newspapers in both
English and vernacular languages.

4.5 – General Meeting

A general meeting can be a special meeting of a company called for a specific
purpose, or it can be an annual general meeting. A general meeting can be
called by the company's boards or by a certain number of members. Details on
how to call a general meeting and what notice is required for a general
meeting. According to Rule 77(8) of the NCLT Rules, 2016, a preferred

72
assembly must be set up in order to take decisions on the adoption of the
revised economic statements, along with statements from administrators and
auditors.

4.6 - Filing of INC -28

According to Rule 77(9) of the 2016 NCLT Rules, the audited financial
statements, along with the auditor's or the Board of Directors' revised report,
will be filed with the Registrar of Company with the approval of the General
Meeting within 30 days of the date of approval by the General Meeting.

CHAPTER 5: National Financial Reporting Authority

(NFRA) Under Companies Act, 2013

The Companies Act of 2013 grants the Center the authority to regulate auditors
through Section 132. A parliamentary committee also suggested the formation

73
of such a committee. Section 132 of the Act establishes the NFRA for matters
concerning accounting and auditing standards in accordance with the Act.

The National Financial Reporting Authority (NFRA) is a quasi-judicial body

which is responsible for enforcing accounting and auditing standards in India.
It was established by the Companies Act, 2013 and became operational in
October 2018. The NFRA is empowered to investigate cases of professional or
other misconduct by chartered accountants and to impose penalties. It can also
make recommendations to the central government on matters relating to
financial reporting and auditing.

5.1 –Introduction

The Government of India established the National Financial Reporting

Authority (NFRA) on 1 October 2018 in accordance with Subsection (1) of
Section 132 of the Companies Act 2013. The NFRA is a statutory supervisory
authority for the auditing profession. The NFRA is the government agency in
charge of establishing the country's accounting standards, its mission is to
improve the quality and consistency of financial statements in the country, as
well as to ensure that companies and financial institutions disclose accurate and
fair information. Following several recent scams and fraud in the country,
including the PNB and other financial institutions, the NFRA is a very
welcome move by the current government.

On March 1, 2018, the National Financial Reporting Authority (NFRA) was

established. With the approval of the Union Cabinet and the capital markets
regulator Securities Exchange Board of India (SEBI) in accordance with
Section 132 (1) of the Company’s Act of 2013, it was undeniably a successful
attempt to improve the quality of accounting and auditing standards within
corporate governance of. Following that, the Ministry of Corporate Affairs
(MCA) approved the establishment and operation of the National Financial
Reporting Authority (NFRA) under Section 132 of the Companies Act 2013.
As a result, the Authority's operations are governed by the National Financial

74
Reporting Authority (Form of Appointment and Other Terms and Conditions
of Service of the President and Members) Rules, 2018 (hereinafter “NFRA
Rules, 2018”).

5.2 – Need for NFRA

The NFRA was founded in 2013 and is administered by the Ministry of
Corporate Affairs. The government's decision to notify the NFRA comes in the
wake of the Punjab National Bank scandal, which involved a billionaire and
fraudulent guarantees, as well as a flawed accounting system. These scandals
called into question the role of the internal auditors are needed in these
situations. The NFRA is a body established by the Companies Act with the
authority to supervise auditing policies and accounting standards. It can also
look into specific instances of professional misconduct and Contributes
significantly to corporate governance and financial reporting.

In addition to overseeing the audit process, the NFRA is responsible for the
financial statements' integrity. It is in charge of preventing wrongdoing,
promoting transparency, and ensuring that financial statements are based on
accurate data. Its structure must include an independent board of three full-time
members and a secretary.

Given the circumstances, the Satyam case served as a wake-up call to all of the
company's management that an agency was desperately needed to serve the
interests of investors and ensure a true and fair view of companies' financial
statements. Furthermore, all of the recent financial scams and debt defaults by
major players have added fuel to the fire in this regard. In addition, SEBI has
revealed scripts from 132 companies that are on the additional watch list for

Unusual price increases that are not supported by the company's fundamentals.
As a result, it was time to reaffirm the importance of an independent audit
regulator.

75
5.3 – Legal Presence of NFRA
Furthermore, in accordance with Section 132(2) of the Companies Act 2013,
NFRA recommends that the central government should develop and implement
accounting and auditing policies and standards for corporate adoption, as well
as oversee and enforce accounting and auditing standards. Similarly, this
authority regulates the supervision of the quality of service in relation to the
professions, related to the supervision of compliance with these regulations and
the suggestion of necessary measures to improve the quality of service.
Furthermore, under Section 132(4)(a) of the Companies Act 2013, NFRA has
been empowered to act either at its own discretion or in response to any
reference made by the central government in relation to the specified class of
legal persons or persons in matters relating to professional or other misconduct
of a member or an accounting firm.

5.4 –Powers and Functions of NFRA

The ICAI will continue to be the accounting profession's regulator, with
National Financial Reporting Authority assistance in drafting and enforcing
laws. The ICAI expressed concerns about the proposed creation of the NFRA,
claiming that it would create two regulatory bodies for the same profession and
require double effort.

The NFRA shall have the following powers:

 The NFRA possesses the same authority as the civil court. It has the
authority to demand the release of account books, oaths, and other
documents, as well as question people under oath;
 The National Financial Information Authority (NFRA) has the authority
to investigate any wrongdoing involving the national financial
information system;
 It has the authority to initiate proceedings and levy significant fines on
auditors who make mistakes;
 The NFRA has the authority to investigate allegations of wrongdoing
involving CAs and CPAs;

76
  The NFRA may levy a penalty of not less than one lakh rupees but not
more than five times the levied fees. Furthermore, the NFRA has the
authority to conduct investigations and take action against individuals
who violate professional rules;
 He has the authority to initiate investigations both on his own initiative
and at the request of the central government;
 It can also form commissions to question witnesses and issue
disqualifications and appeals;
 The NFRA has broad authority to suspend or prohibit an audit firm's or
member's practice;
 If NFRA discovers that a Member did not follow the rules at work, it
may take action against the audit firm or auditor;
 The NFRA can also invite other experts to perform similar functions;
 NFRA have the ability to make changes to the ICAI Rules and
Regulations. This can help to improve the accounting profession's
service quality.

5.5 – Composition of Authority

The Supreme Court of India established the National Financial Reporting
Authority to improve the auditing profession's regulatory process. It will be in
charge of enforcing accounting standards and supervising auditors. It is a
government agency comprised of publicly traded companies, securities, and
subsidiaries. A president, three full-time members, and a secretary comprise
the authority.

The NFRA Rules, 2018 seek to align the composition of this authority with
Section 132(3) of the Companies Act 2013. According to the aforementioned
rules, this authority can have a maximum of fifteen members at any given time,
made up of the following individuals:

77
  A Chairperson must be an outstanding, capable, and upright man with
at least 25 years of knowledge and experience in accounting, auditing,
finance, and law;
 Three full-time members must have at least twenty years of knowledge
and experience in the same field as the Chairperson and must have the
ability, integrity, and position;
 Nine part-time members who have no financial or other interests that
could interfere with their role as part-time Authority members.

5.6 -Penalty Mechanism

If professional accountant misconduct is proven, the Authority may order:

 Implementing a fine of not less than Rs 1,000, which can further

quintuple the fees received from individuals, and not more than Rs
10,000, which can increase the rates received from corporations by up
to ten times.
 Members or corporations were not permitted to serve as members of the
Institute of Chartered Accountants of India (ICAI) for a minimum of
six months and a maximum of ten years, as determined by the
Authority.

5.7 – Institute of Charted Accountant of India (ICAI) versus

Ministry of Corporate Affairs (MCA)
The Institute of Chartered Accountants of India (ICAI) has voiced its
opposition to the establishment of the National Financial Reporting Authority
(NFRA) to the Ministry of Corporate Affairs (MCA). The main concerns about
such a statute, as articulated by ICAI's Standing Committee, are based on three
major pillars:

78
First, the establishment of NFRA in the presence of ICAI would result in the
existence of two regulatory bodies, governing the same accounting profession,
resulting in long-term duplication.

Second, establishing the NFRA would be a costly endeavor. The main goal of
establishing the NFRA, on the other hand, is to regulate audit quality and
protect the public interest to a greater extent, whereas the ICAI already serves
the public with the same purpose and goals and is a world-class regulatory
body. As a result, investing resources in establishing the NFRA is not a viable
option.

Third, as a world-class regulator, ICAI's auditing standards are more aligned

with market needs, and NFRA's regulatory provisions are new to the public.
Properly checked for primary requirements Aside from that, the ICAI has
sufficient regulatory, supervisory, organizational, and budgetary independence
in its auditing profession.

On the contrary, the MCA reiterated its position, claiming that the ICAI's self-
regulation mechanism has inherent weaknesses in terms of discipline and
compliance. In the long run, it distorts the MCA, necessitating the
establishment of an independent regulator in the form of the NFRA to serve
various jurisdictions.

Concerning overlapping jurisdictions, the MCA had cleared the air with the
help of Section 132(4) of the 2013 Act, which defines this as being
independent of others. According to the laws in effect at the time, the NFRA
has the authority to investigate cases of professional misconduct involving
legal entities or individuals. It goes on to say that once the NFRA takes action,
no other institution or authority will take action for such misconduct.

In light of recent developments, the National Financial Reporting Authority has

evolved into a regulatory body with quasi-judicial powers to oversee
professional misconduct by auditors and chartered accountants. The application

79
of the NFRA is quite similar to that of other foreign regulators such as the
Financial Services Authority (FSA) in the United Kingdom and the Public
Company Accounting Oversight Board (PCAOB) in the United States.
However, given the disciplinary conflict of mandates between NFRA and
ICAI, the establishment of NFRA appears to be an important step toward
establishing a transparent accounting, auditing, and reporting mechanism.

Rather, unlike the previous advisory body, the National Advisory Committee
on Accounting Standards (NACAS), NFRA has been given the authority to
regulate accounting standards and auditing principles, as well as to investigate
specific cases of professional misconduct by corporate auditors when the need
arises. As a result, the National Financial Reporting Authority's (NFRA)
Constitution appears to play an important role in the vision of financial
reporting for effective corporate governance.

80
CHAPTER 6: ISSUES AND CHALLENGES IN
ACCOUNTING STANDARDS
One of the primary issues and challenges in accounting standards is the
development of new accounting standards in response to changes in the
business environment. The International Accounting Standards Board (IASB)
is responsible for setting accounting standards. The IASB has been working on
a number of new accounting standards, including standards for revenue
recognition and leases. The new revenue recognition standard will require
companies to recognize revenue when it is earned, rather than when it is
received. The new lease accounting standard will require companies to
recognize lease payments as an expense on their income statements.

Another issue and challenge in accounting standards is the implementation of

new accounting standards. Companies will need to make changes to their
accounting systems and processes in order to comply with new accounting
standards. The costs of implementing new accounting standards can be
significant, and companies will need to ensure that they have the resources and
capabilities to implement the new standards.

Finally, another issue and challenge in accounting standards is the enforcement

of new accounting standards. The IASB has established an enforcement
mechanism, known as the IFRS Enforcement Regime, to ensure that companies
comply with new accounting standards. However, the IFRS Enforcement
Regime is still in its early stages, and it is not yet clear how effective it will be
in enforcing new accounting standards.

There are a number of issues and challenges in accounting standards that need
to be addressed. Some of the most pressing issues include:
1. The need for global accounting standards:
With the increasing globalization of business, there is a need for
accounting standards that are globally accepted. This would allow for
more consistent and comparable financial reporting by companies
around the world.

81
2. The need for more consistent application of accounting standards:
There is currently a lack of consistency in the way accounting standards
are applied by different companies. This can lead to confusion and
misunderstanding when comparing financial statements from different
businesses.

3. The need for simplification of accounting standards:

The current accounting standards are often complex and difficult to
understand. This can make it difficult for businesses to comply with the
standards and can also make it difficult for investors and other users of
financial statements to interpret the information.

4. The need for more timely updates to accounting standards:

The current accounting standards are not always up-to-date with the
latest developments in business and accounting. This can lead to
problems and inconsistencies when financial statements are prepared.

5. The need for greater transparency in accounting standards:

The current accounting standards do not always provide enough
information about how they should be applied. This can lead to
confusion and misunderstanding about the true meaning of the
standards.

6. Lack of comparability:
One of the main issues with accounting standards is the lack of
comparability between financial statements prepared using different
accounting standards. This makes it difficult to compare the financial
performance of companies using different accounting standards.

7. Lack of transparency:
Another issue with accounting standards is the lack of transparency in
the financial statements. This makes it difficult for investors and other

82
 users of financial statements to understand the true financial position of
a company.

8. Lack of uniformity:
Another issue with accounting standards is the lack of uniformity in the
application of accounting standards. This makes it difficult to compare
the financial statements of companies using different accounting
standards.

9. Complexity:
Another issue with accounting standards is the complexity of the
standards. This makes it difficult for users of financial statements to
understand and interpret the financial statements.

10. Cost:
Another issue with accounting standards is the cost of compliance with
the standards. This can be a significant burden for small and medium
sized companies.

83
Conclusion and Suggestions
Conclusion:
There is no one-size-fits-all answer to the question of what corporate law and
accounting standards are best for a company. Every company is different, and
the laws and regulations that apply to them will vary depending on their size,
industry, and location. That said, there are some general issues and challenges
that all companies face when it comes to corporate law and accounting
standards. One of the biggest challenges is keeping up with the ever-changing
laws and regulations. Companies must constantly monitor changes in the law
and adapt their policies and procedures accordingly. This can be a daunting
task, especially for smaller companies with limited resources.

Another challenge is ensuring compliance with corporate law and accounting

standards. This includes making sure that financial statements are accurate and
complete, and that all relevant disclosures are made. Non-compliance can lead
to significant penalties, including fines and jail time. Finally, corporate law and
accounting standards can be complex and confusing. This can make it difficult
for companies to understand their obligations and make informed decisions
about their business. Despite the challenges, it is important for companies to
comply with corporate law and accounting standards. Failure to do so can
result in serious consequences, including financial penalties, jail time, and
damage to reputation.

There is a need for harmonization of corporate law and accounting standards to

avoid regulatory arbitrage and to promote a level playing field for businesses.
In particular, there is a need to address the following issues:

1. The lack of a single set of globally accepted accounting standards.

2. The lack of a clear and consistent legal framework for the recognition
and enforcement of cross-border insolvency proceedings.

84
 3. The lack of transparency and comparability of corporate disclosure
practices.
4. The need to strike a balance between the need for corporate disclosure
and the protection of legitimate commercial interests.
5. The need to address the challenges posed by new business models, such
as the rise of the digital economy and the sharing economy.

This research provides an overview of the corporate law and accounting

standards. The lecture also discusses the key issues and challenges associated
with the corporate law and accounting standards.

Suggestion:
The corporate law and accounting standards are the two most important aspects
of any business organization. They are the two areas that dictate how a
company is run and how its financial statements are prepared. While both of
these areas are crucial to the success of a company, they can also be a source of
conflict and confusion. The corporate law is the body of law that governs the
formation, operation, and dissolution of corporations. This law is designed to
protect the rights of shareholders, creditors, and employees of corporations.
The accounting standards are the set of rules and guidelines that dictate how
financial statements must be prepared. These standards are designed to ensure
that financial statements are accurate and transparent.

While the corporate law and accounting standards are both important, they can
sometimes conflict with each other. For example, the accounting standards may
require a company to disclose certain information that the corporate law may
not. This can create a dilemma for companies who must choose between
following the law and following the accounting standards. Another issue that
can arise is when the accounting standards change. Companies may find
themselves in compliance with the old standards but out of compliance with the
new standards. This can create confusion and may lead to financial penalties.
The corporate law and accounting standards are constantly evolving. This can

85
make it difficult for companies to keep up with the latest changes. It is
important for companies to have a good understanding of both the corporate
law and the accounting standards so that they can make informed decisions
about their business.
There is no one-size-fits-all answer to this question, as the issues and
challenges faced by corporate law and accounting standards vary depending on
the specific context and situation. However, some general issues and
challenges that may be faced by corporate law and accounting standards
include:

1. Ensuring compliance with ever-changing laws and regulations:

Corporate law and accounting standards are constantly evolving, and
companies must ensure that they are compliant with the latest
requirements. This can be a challenge, especially for small and
medium-sized enterprises that may not have the resources to keep up
with the latest changes.
2. Managing risk:
Companies must be careful to manage the risks associated with their
business activities, as non-compliance with corporate law and
accounting standards can lead to hefty fines and penalties.
3. Maintaining transparency and accuracy:
Corporate law and accounting standards require companies to maintain
accurate and transparent records of their financial activities. This can be
a challenge, especially for companies with complex financial structures.
4. Ensuring fairness:
Companies must make sure that their financial practices are fair and
equitable, in line with corporate law and accounting standards. This can
be difficult to achieve, especially in cases where there are different
stakeholders with conflicting interests.

The development of corporate law and accounting standards is a complex and

ongoing process that is constantly evolving. This process is driven by a variety
of factors, including changes in the business environment, economic
conditions, and regulatory requirements. As a result, corporate law and

86
accounting standards are constantly changing, which can pose challenges for
businesses. One of the most significant challenges businesses face is keeping
up with the latest changes in corporate law and accounting standards. This can
be a difficult and time-consuming task, as businesses must ensure that they are
compliant with all applicable laws and regulations. In addition, businesses must
also be aware of changes in accounting standards so that they can properly
report their financial information.

Another challenge businesses face is dealing with the complexities of corporate

law and accounting standards. The laws and regulations governing businesses
can be very complex, and they can vary significantly from one jurisdiction to
another. This can make it difficult for businesses to understand and comply
with all the applicable laws and regulations. In addition, accounting standards
can be complex and often require businesses to make significant changes to
their accounting practices. Finally, businesses must also deal with the costs
associated with complying with corporate law and accounting standards. The
costs of compliance can be significant, and they can include the costs of hiring
experts to help businesses understand and comply with the laws and
regulations, as well as the costs of making changes to accounting practices.
Despite the challenges, businesses must continue to comply with corporate law
and accounting standards. Failure to do so can result in significant penalties,
including fines, jail time, and the loss of business licenses.

87