1.

Accounting Standards (AS) and International

Financial Reporting Standards
(IFRS)

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

These Accounting Standards (AS) are issued by an accounting body or a regulatory

board or sometimes by the government directly. In India, the Indian Accounting
Standards are issued by the Institute of Chartered Accountants of India (ICAI).

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

i. Recognition of financial events

ii. Measurement of financial transactions
iii. Presentation of financial statements in a fair manner
iv. Disclosure requirement of companies to ensure stakeholders are not
misinformed.

Objectives of Accounting Standards

Accounting is often considered the language of business, as it communicates to others

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

1. The main aim is to improve the reliability of financial statements. Now

because the financial statements have to be made following the standards the
 users can rely on them. They know that not conforming to these standards can
have serious consequences for the companies.
2. Then there is comparability. Following these standards will allow for inter-
firm and intra-firm comparisons. This allows us to check the progress of the firm
and its position in the market.
3. It also looks to provide one set of accounting policies that include the
necessary disclosure requirements and the valuation methods of various financial
transactions.

Accounting Standards (AS)

AS 1- Disclosure of Accounting Policies
Introduction
The information presented in the financial statements of an organisation is of its
financial position. The profit or loss can be affected to a large degree by the
accounting policies followed. The accounting policies followed vary from
organisation to organisation. It is important to disclose significant accounting
policies followed to make the financial statements understandable. The disclosure is
required by law in certain cases.
In recent years, organisations in India have adopted the practice of including a
separate statement of accounting policies followed in their annual reports to
shareholders.
Many organisations list the accounting policies followed by them in the notes to
their financial statements, but there is no consistency in the disclosures among
organisations. In other words, the disclosure forms part of accounts in some cases,
while in others it is given as supplementary information.
The purpose of this standard is to promote better understanding of financial
statements by establishing the practice of disclosure of significant accounting
policies followed and the manner in which they are disclosed in the financial
statements. Such disclosure would also facilitate a more meaningful comparison
between financial statements of different organisations.
Fundamental Accounting Assumptions
Certain assumptions are used in the preparation of financial statements. They are
usually not specifically stated because they are assumed to be followed. Disclosure
is necessary only if they are not followed.
The following have been generally accepted as fundamental accounting
assumptions:
Going Concern
The organisation is normally viewed as a going concern, that is to say, it will be in
continuing operations for the foreseeable future. It is assumed that the organisation
has neither the intention, nor the necessity of shutting down or reducing the scale of
operations.
Consistency
It is assumed that accounting policies are consistently followed from one period to
another. No frequent changes are expected.
Accrual
Revenues and costs are recorded when they are earned or incurred (and not as
money is received or paid) in the periods to which they relate.
Areas in which differing Accounting Policies are possible
The following are examples of areas in which different accounting policies may be
adopted by organisations.
Methods of depreciation, depletion and amortisation
Treatment of expenditure during construction
Conversion or translation of foreign currency items
Valuation of inventories
Treatment of goodwill
Valuation of investments
Treatment of retirement benefits
Recognition of profit on long-term contracts
Valuation of fixed assets
Treatment of contingent liabilities
The above list of examples is not exhaustive.
Considerations in the Selection of Accounting Policies
The primary consideration in the selection of accounting policies by an organisation
is that the financial statements should represent a true and fair picture of the
financial position for the period.
For this purpose, the major considerations governing the selection and application
of accounting policies are:
Prudence
In view of the uncertainty of future events, profits are not anticipated but recognised
only when earned, though not necessarily in cash. However, provision is made for
all known liabilities and losses even though the amount cannot be determined with
certainty and represents only an estimate.
Substance over Form
The accounting treatment and presentation of transactions and events in financial
statements should be governed by their substance and not merely by the legal form.
Materiality
Financial statements should disclose all “material” items, i.e. items, the knowledge
of which might influence the decisions of the user of the financial statements.
Disclosure of Accounting Policies
To ensure proper understanding of financial statements, it is necessary that all
significant accounting policies adopted in the preparation and presentation of
financial statements must be disclosed.
Such disclosure should form part of the financial statements.
It would be helpful to the reader of financial statements if they are all disclosed in
one place instead of being scattered over several statements, schedules and notes.
Any change in an accounting policy which has a significant effect should be
disclosed. The amount by which any item in the financial statements is affected by
such change should also be disclosed to the extent it can be calculated. Where such
amount is not ascertainable, wholly or in part, the fact should be disclosed. If a
change is made in the accounting policies which has no material effect on the
financial statements for the current period but is expected to have a material effect
in later periods, the fact of such change should be appropriately disclosed in the
period in which the change is adopted.
Disclosure of accounting policies or of the changes is not a remedy for any wrong
or inappropriate treatment of items in the accounts.

AS 2 – Valuation of Inventories
Valuation of Inventories
This Standard should be applied in accounting for all inventories except the
following :
(a) work in progress in the construction business, including directly related service
contracts
(b) work in progress of service business (consulting, banking etc)
(c) shares, debentures and other financial instruments held as stock in trade
(d) Inventories like livestock, agricultural and forest products, mineral oils etc
These inventories are valued at net realizable value
Definition
I. Definition of the Inventory includes the following:
A. Held for sale in the normal course of business i.e finished goods
B. Goods which are in the production process i.e work in progress
C. Raw materials which are consumed during production process or rendering of
services (including consumable stores item)
II. Net Realisable Value (NRV):
“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”
Valuation of Inventories
Inventories should be valued at lower of cost and net realizable value. Following
are the steps for valuation of inventories:
A. Determine the cost of inventories
B. Determine the net realizable value of inventories
C. On Comparison between the cost and net realizable value, the lower of the two is
considered as the value of inventory. A comparison can be made the item by item or
by the group of items.
(Refer Case studies given at the end of the article)
Let’s discuss the important items of Inventory valuation in detail:
A. Cost of Inventories
The cost of inventories includes the following
i) Purchase cost
ii) Conversion cost
iii) Other costs which are incurred in bringing the inventories to their present
location and condition.
B. Cost of Purchase
While determining the purchase cost, the following should be considered:
i) Purchase cost of the inventory includes duties and taxes (except those which are
subsequently recoverable from the taxing authorities)
ii) Freight inwards
iii) Other expenditure which is directly attributable to the purchase
iv) Trade discounts, rebates, duty drawbacks and other similar items are deducted in
determining the costs of purchase
C. Cost of Conversion
Cost of conversion includes all cost incurred during the production process to
complete the raw materials into finished goods.
Cost of conversion also includes a systematic allocation of fixed and variable
overheads incurred by the enterprise during the production process.
Following are the categories of conversion cost:
I. Direct Cost
All the cost directly related to the unit of production such as direct labor
II. Fixed Overhead Cost
Fixed overheads are those indirect costs which are incurred by the enterprise
irrespective of production volume. These are the cost that remains relatively
constant regardless of the volume of production, such as depreciation, building
maintenance cost, administration cost etc.
The allocation of fixed production overheads is based on the normal capacity of the
production facilities. In case of low production or idle plant allocation of these fixed
overheads are not increased consequently.
III. Variable Overhead Cost
Variable overheads are those indirect costs of production that vary directly with the
volume of production. These are the cost that will be incurred based on the actual
production volume such as packing materials and indirect labor.
D. Other Cost
All the other cost which are incurred in bringing the inventories to the current
location and condition. For (eg) design cost which is incurred for the specific
customer order.
If there are by-products during the production of main products, their cost has to be
separately identified. If they are not separately identifiable, then allocation can be
made on the relative sale value of the main product and the by-product.
Some of the cost which should not be included are:
a. Cost of any abnormal waste materials cost
b. Selling and distribution cost unless those costs are necessary for the production
process
c. A normal loss which occurs during the production process is apportioned over the
remaining no of units and abnormal loss is treated as an expense
(Refer Case studies given at the end of the article)
Methods of Inventory Valuation
The cost of inventories of items which can be segregated for specific projects
should be assigned by specific identification of their individual costs (Specific
identification method).
All other items cost should be assigned by using the first-in, first-out (FIFO), or
weighted average cost (WAC) formula. The formula used should reflect the fairest
possible approximation to the cost incurred in bringing the items of inventory to
their present location and condition.
However, when it is difficult to calculate the cost using above methods, Standard
cost and Retail cost can be used if the results approximate the actual cost.
Accounting Disclosure
The following should be disclosed in the financial statements:
Accounting policy adopted in inventory measurement
Cost formula used
Classification of the of inventory such as finished goods, raw material & WIP and
stores and spares etc
Carrying amount of inventories carried at fair value less sale cost
Amount of inventories recognized as expense during the period
Amount of any write-down of inventories recognized as an expense and its
subsequent reversal if any

AS-4 Contingencies and Events Occurring after the Balance

Sheet Date
Accounting Standard 4 (AS 4) pertains to the treatment of the following items in
the financial statements:
 Contingencies
 Events occurring after the balance sheet date
Further, there are certain subjects which can lead to contingencies. However, these
issues are outside the scope of this accounting standard on account of special
considerations that apply to them. These include:
 Liabilities of Life Assurance and General Insurance enterprises resulting from
policies issued
 Obligations under Retirement Benefit Plans
 Commitments arising from long term lease contracts
What is a Contingency?
The term contingency is defined as a state or a circumstance as on the balance sheet
date the financial implications of which are known by the occurrence or the non-
occurrence of any uncertain future events.
Furthermore, the financial implications of these future uncertain events could be
favorable or unfavorable for the enterprise.
Therefore, it is important for the enterprise to differentiate between certain and
uncertain events for an estimate to be called as a contingency. This is because the
enterprise also generally provides estimates in respect of various on-going and
recurring activities.
Thus, simply giving an estimate does not mean that the particular activity for which
the estimate is being given is a contingency.
For example, a chartered accountant has been providing accounting and auditing
services to your firm for which you are indebted to pay. Such an activity cannot be
categorized as a contingency since there is nothing uncertain about the event.
Also, uncertainty regarding the future events can be indicated by a pool of
outcomes. Such outcomes must be described generally in the financial statements if
they cannot be reasonably quantified.
However, the enterprise must quantify such outcomes where is is possible to
reasonably quantify them.
Finally, the estimates as well as the financial implications of these outcomes are
established by the judgment of the management of the enterprise.
 And, the management makes such a judgement by taking into account:
 information available up to the date on which such financial statements are
approved
 an evaluation of events occurring after the balance sheet date
 experience of similar transactions and
 reports from independent experts
Accounting Treatment of Contingent Losses
Show a Contingent Loss
The anticipated result of a contingency governs the accounting treatment of the
contingent loss. In other words, it is wise that you provide for a contingent loss in
the financial statements if it is expected that a contingency would lead to a loss for
the enterprise .
Estimate The Contingent Loss
The estimated amount of the contingent loss to be specified in the financial
statements is based on your management’s judgment.
Cases Where Sufficient Evidence Is Not Available
There are situations when sufficient evidence is not available to provide an estimate
of the amount of contingent loss. In such cases, you just need to give a simple
disclosure of the nature and existence of such a contingency.
Cases Where There is a Counterclaim
There can be circumstances where a possible loss to your enterprise can be reduced
or avoided. This is possible where a contingent liability has a complementing
counterclaim or a claim against a third party.
Thus in these situations, the amount of provision is established after considering the
possible recovery under the claim. Provided there exists no uncertainty in respect of
its measurability or collectibility.
Provision for Guarantees or Obligations Arising from Bills of Exchange
You need to provide information regarding the amount of guarantees or obligations
arising from discounted bills of exchange assumed by your enterprise in the
financial statements. Such information needs to be given in the form of a note. This
is regardless of the fact that the chances of loss occurring to your enterprise are low.
Provisions Regarding General Risks
There is no need to create provisions for contingencies regarding general and
unspecified business risks. This is because such risks do not relate to the conditions
existing at the time of the balance sheet date.
Accounting Treatment of Contingent Gains
When it comes to contingent gains, they are not shown in the financial statements.
This is because showing contingent gains in financial statements would lead to
recognizing financial revenue which may never materialize.
But when you are certain that such a gain would be materialized, it no more remains
a contingency. And it is proper for you as a business to account for such a gain in
the financial statements.
Determination of Contingency Amounts To Be Included In The Financial
Statements
Amount of Contingency To Be Shown in Financial Statements
The amount of contingent loss to be specified in the financial statements must be
based on the details available up to the date on which such financial statements are
approved.
In addition to this, events taking place after the balance sheet date must be taken
into account to declare contingencies and their relevant amounts in the financial
statements. Such events are the ones that suggest that there existed an asset that has
been impaired or a liability on the balance sheet date.
Identification of Contingency
There can be cases where each contingency can be recognized separately. Thus, you
must consider special conditions for each such contingency to determine the amount
at which such contingency must be declared.
Amount of Contingency Having Similar Characteristics
There can be circumstances where uncertainties resulting in a contingency
pertaining to a particular transaction also result in contingencies with respect to
other similar transactions.
In such situations, you can determine the amount of contingency based on a batch
of these similar transactions in place of determining them individually.
Events Occurring After The Balance Sheet Date
Definition of Events Occurring After The Balance Sheet Date
Events Occurring After The Date of Balance Sheet refer to the ones that:
 Take place between the date of balance sheet and the date on which such
financial statements are approved and
 Such events suggest a requirement to adjust assets and liabilities on the
balance sheet date or may need a disclosure.
When To Adjust Assets and Liabilities in the Balance Sheet?

You need to adjust the assets and liabilities for events that take place after the
balance sheet date. This needs to be done in cases where such events give additional
information. Provided such information significantly affects the ascertainment of
amounts relating to conditions existing at the date of balance sheet.

When Adjusting Assets and Liabilities in the Balance Sheet is not Appropriate?

There are cases where you need not adjust the assets and liabilities for events taking
place after the balance sheet date. Such events are the ones that are not related to the
conditions that exist on the balance sheet date.

Adjustment of Events Occurring After The Balance Sheet Date But Not
Having Material Impact

There can be events that take place after the balance sheet date but do not have any
impact on the amounts specified in the financial statements. Such events generally
are not required to be disclosed in the financial statements. However, they may be
of material nature to an extent that they need to be disclosed in the report of the
approving authority. This is to help users of the financial statements to make
appropriate evaluations and decisions.

Adjustment of Events Occurring After the Balance Sheet Date But To Be

Shown Mandatorily

There can be events that occur after the balance sheet date. But you need to
mandatorily declare such events in the financial statements either because of a
statutory requirement or their special nature. For example, dividend Proposed or
declared by the entity after the balance sheet date for the time period for which the
financial statements are prepared.

Adjustment of Events Occurring After the Balance Sheet Date Suggesting That
Business Entity is No Longer a Going Concern

There can be events occurring after the balance sheet date but which suggest that a
business entity is no longer a going concern. Such events could include the
declining operating results and financial position or some unusual changes that
impact the existence or the very foundation of enterprise after the balance sheet date.

These events suggest that the enterprise needs to think over the fact whether it is
appropriate to use the fundamental assumption of going concern while preparing its
financial statements.

AS-5 Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies
Accounting Standard 5 (AS 5) deals with the classification and disclosure of
specific items in the Statement of Profit and Loss.
The purpose of AS 5 is to suggest such a classification and disclosure in order to
bring uniformity in the preparation and presentation of statement of net profit or
loss across enterprises.
This enables the enterprises to compare their financial statements over time as well
as draw comparison of their financial statements with other enterprises.
Thus, the statement of net profit or loss requires:
 Disclosure of certain items within profit or loss from ordinary activities
 Classification and disclosure of extraordinary and prior period items
 Accounting treatment and disclosure for changes in the accounting estimates
 Disclosure of changes in the accounting policies
Scope of Accounting Standard 5
AS 5 should be put into use by an enterprise in:
 Presenting profit or loss from ordinary activities,
 Representing extraordinary items and prior period items in the statement of
P&L
 Considering changes in the accounting estimates
 Disclosure of changes in accounting policies
This standard pertains to the disclosure of specific items of net profit or loss for the
given period. Such disclosures are made apart from any other disclosures required
by other accounting standards.
This standard does not pertain to tax implications of:
 extraordinary items,
 prior period items,
 changes in accounting estimates and
 the changes in accounting policies for which necessary adjustments would be
required depending on specific conditions

Profit or Loss From Ordinary Activities

What Are Ordinary Activities?

These are the activities that a business entity undertakes in the ordinary course of its
business. It also includes related activities that a business entity assumes:
 To grow activities undertaken in the ordinary course of business
 That result from activities undertaken in the ordinary course of business
 To support activities undertaken in the ordinary course of business

Disclosure of Certain Items of Ordinary Activities

The nature and amount of items of income and expense within profit or loss from
ordinary activities must be disclosed separately.
This must be done if the size, nature or incidence of such activities is such that their
disclosure is important. It is important in terms of describing the performance of the
enterprise for the given period.
Disclosure To Be Made in Notes
The items of income and expense within profit or loss from ordinary items may not
be extraordinary in nature.
But the nature and amount of such items may be important for the users of the
financial statements in order to evaluate the financial position and performance of a
business entity. And to make future projections with regards to the same.
Thus, business entities choose to declare details with regards to such items as notes
to financial statements.
Examples of Such Items of Ordinary Activities
There are certain situations that may lead to separate disclosure of items of income
and expense within profit or loss from ordinary activities. These are as follows:
 Write down of inventories to net realizable value and reversal of such write
downs
 Restructuring of activities of an enterprise and reversal of any provisions for
costs of restructuring
 Disposal of items of fixed assets
 Litigation settlements
 Disposal of long term investments
 Legislative changes with retrospective application
 Other reversals of provisions
Extraordinary Items
What Are Extraordinary Items?
Extraordinary items are income or expenses that result from events or transactions
that are separate from ordinary activities of an enterprise. In other words, these
incomes or expenses are not anticipated to occur repetitively.
Disclosure of Extraordinary Items
Extraordinary items must be declared in the statement of profit or loss as a part of
net profit or loss for the given period.
Business entities must separately declare the nature as well as the amount of every
extraordinary item in the profit and loss statement.
Further, it should be done in such a way that its implication on the current profit and
loss is clearly understood.
When an Activity is Considered Extraordinary?
Typically, all the items of income and expense that establish net profit or loss of a
business entity for a given period result in the course of its ordinary activities. Thus,
it’s only in few circumstances that an event or a transaction leads to an
extraordinary item.
The business entity needs to establish if a particular event or transaction is different
from the ordinary activities of the business entity. This is established by the nature
of the event or the transaction with regards to the business undertaken ordinarily by
the business entity. And not by the frequency of such activities.
Accordingly, a particular event or a transaction may be an extraordinary activity for
one business entity and not the other. This is because of the different ordinary
activities of different business entities.
For instance, losses incurred due to earthquake may count as an extraordinary item
for many business entities. But it is not so for an insurance company as such
companies ensure the risk of losses due to earthquakes and disburse claims for the
same to the policyholders.
Prior Period Items
What Are Prior Period Items?
Prior period items include income and expenses which occur in the current period
due to certain errors and omissions while preparing financial statements of one or
more prior periods.
Disclosure of Prior Period Items
The nature and the relevant amount of prior period items should be declared
separately in the profit and loss statement. Further it should be done in such a way
that their implications on the current period’s profit and loss can be clearly
understood.
Are Adjustments A Part of Prior Period Items?
As mentioned above, prior period items include income or expenses that occur in
the current period due to errors or omissions while preparing financial statements of
one or more prior periods. These do not encompass other adjustments so demanded
by situations which are no doubt related to the prior periods but are established in
the current period. For instance, arrears outstanding to workers due to revision of
wages with retrospective effect during the current period.
Reasons Due To Which Errors Arise
Errors while preparing the financial statements of one or more prior periods may be
found in the current period. Such errors may be an outcome of some mathematical
mistakes, mistakes in the application of accounting policies, misinterpretation,
oversight etc.
 Difference Between Prior Period Items and Accounting Estimates
Prior period items are typically not repetitive in nature and can be differentiated
from changes in the accounting estimates. When it comes to accounting estimates,
they are approximations that may need to be corrected on the availability of
additional information.
How To Disclose Prior Period Items?
Prior period items are typically considered while calculating the profit or loss for
the current period. Another way is to show such items in profit or loss statements
after establishing the current period’s net profit or loss. In both circumstances the
purpose is to suggest the implications of such items on the current period’s profit or
loss.
Changes in Accounting Estimates
 How To Measure Accounting Estimates?
Many items that form part of financial statements cannot be measured accurately
and hence are estimated figures. This is because of the uncertainties deep rooted in
the business activities. Estimation requires judgement based on the current
information available to a business entity.
Further, a business entity may have to provide estimates with regards to bad debts,
useful life of depreciable assets, inventory obsolescence etc. Accordingly, using
rational estimates forms an important part of preparing financial statements. Thus,
such estimates do not hamper the reliability of such statements.
When Are Accounting Estimates Altered?
Business entities would have to alter such estimates if there are any changes in
respect of the situations on which such estimates are based. Or due to additional
information, greater experience or any other future developments. Further, a revised
estimate does not bring about any adjustment within the definitions of extraordinary
or prior period items.
 When It Gets Difficult To Differentiate Between change in the accounting
policy and a change in the estimate
In certain situations, it becomes challenging to differentiate between change in the
accounting policy and a change in the estimate. In such circumstances, business
entities are required to treat the change as a change in the accounting estimate after
making proper disclosure with regards to the same.
 In What Period Change In Accounting Estimate Should Be Shown?
The impact of change in the accounting estimate should form part of the calculation
of the net profit or loss in:
 The period of change if the change impacts the period only or
 Period of change and future periods if such a change impacts both

 How To Show Change In Accounting Estimate in Current as well as Future

Periods?
There can be situations where a change in the accounting estimate may impact
either only the current period or both current and future periods. For instance, any
change in the estimation of the amount of bad debts is shown immediately and thus
impacts only the current period.
But, a change in the estimated useful life of the depreciable asset impacts both the
amount of depreciation in the current period as well as the depreciation amount in
each period during the remaining useful life of the asset.
Now, in both situations, the impact of change with regards to the current period is
shown as income or expense in the current period. Whereas, the impact of change
on the future periods is recognized in the future periods.
 Classification of Impact of Change in Accounting Estimate
Business entity should use the same classification for classifying the impact of
change in the accounting estimate in the profit and loss statement as used previously
for recognizing such an estimate.

 When To Classify The Impact of Change in Accounting Estimate as

Ordinary Item and Extraordinary Item
Business entities should include the impact of change in the accounting estimate in
the profit and loss from ordinary activities. This happens if such an impact was
previously included in the same component of the profit or loss.
Similarly, changes in the accounting estimate should form part of an extraordinary
item if it was included in extraordinary item previously. This is so done in order to
compare the financial statements of different periods.
Disclosure of Change in the Accounting Estimate Having a Significant Impact
Change in the accounting estimate that has significant impact in the current period
or is anticipated to have a significant impact in the future periods must be declared.
Further, if it’s not practical to quantify the change in the accounting estimate, the
same should be disclosed in the financial statement.
Changes in Accounting Policies
Use of Same Accounting Policies Over Time
The users of financial statements of business entities should be able to compare its
financial statements over time. This is to understand the trends and performance of
the business entity and its cash flows.
Thus, business entities must use the same accounting policies for similar
transactions in every period.
When Should Business Entity Change An Accounting Policy
Business entity should make changes in the accounting policy only if such a change:
 is required by the statute
 is required to comply with an accounting standard
 Would help in presenting financial statements appropriately
Benefit of Adopting
Business entities can present transactions in a better way if new accounting policies
lead to more relevant information about the performance, financial position and
cash flows of business entity.
Changes That Cannot Be Taken As Change in Accounting Policies
There are certain changes which cannot be taken as changes in accounting policies.
These include:
 Choosing accounting policies for transactions that vary in substance, vis-a-vis
the transactions that occurred previously
 Choosing new accounting policies for transactions which did not take place
previously or were insignificant

Changes in Accounting Polices Having a Material and Immaterial Impact

Changes in accounting polices having a significant impact must be declared in the

financial statements. Further, the effect of and the adjustments arising from such
changes which are significant in nature must be declared in the financial statements
in the period in which such changes take place.
This is done to show the impact of such changes during the given period. In cases
where the impact of such a change cannot be determined, the fact with regards to
the same should also be declared.
Further, changes made in accounting policies not having significant impact on the
financial statements for the current period but are anticipated to have significant
impact in the future periods must be declared in the period in which such changes
are adopted.
Change In Accounting Policies After Choosing an Accounting Standard
Any change in the accounting policy that takes place after an enterprise chooses an
accounting standard must also be accounted for. This should be done according to
the provisions mentioned in such an accounting standard.

AS-6 Depreciation Accounting

Depreciation Accounting - Accounting Standard-6 (AS-6)
Introduction: Each company adopts its own accounting policy for depreciation.
However it is essential that such a policy is disclosed for understanding the
financial statements. The standard for Depreciation Accounting is mandatory and
applies to all assets that are subject to wear and tear. Some assets however are
excluded from this standard and are treated separately.
They include:
Forest, plantation and similar regenerative natural resources Wasting assets like
exploration for extraction of minerals, oils, natural gas Research and development
expenditure Intangible assets including goodwill Live stock Land is also not
depreciated unless information is available that the same has a limited useful life.
Depreciation:
Depreciation is a charge and indicates the amount of the value of an asset that has
been used up. This could happen due to wear and tear, obsolescence due to
technology changes or change in market conditions. It is applied systematically
each year and as a Non-cash business expenditure.
Depreciable assets should fulfill the following conditions: They should be held
for more than an accounting year They generally have a limited useful life They
should be held by a company for production or supply of goods or services. They
could also be held for rental to others or for administrative purposes. However they
should not be held for sale to others. Useful life is either the period for which the
asset is expected to be used by the business or number of production units expected
to be generated by the company on use of the asset. Depreciation is charged every
accounting year and is independent of the market value of the asset. It also has a
significant impact on the financial results of a company.
The amount of depreciation to be charged in a year depends on the following
factors:
1.Historical cost of the asset or revised value on revaluation Expected useful life of
the asset Estimated residual value of the asset
2. Historical cost of the asset is the amount paid or agreed to be paid to bring the
asset to its location and make it functional.
Hence costs of commissioning or installation form part of such costs. If
modifications are made to the asset to enhance its life, such costs are added to its
historical costs. So in practice historical cost of an asset may change during its
lifetime. Useful life of an asset is usually lower than its physical life. This may be
governed by contracts which limit the use of the asset or companys policy of
maintaining assets. Sometimes it is dependent on technology changes in production
or demand in the product making the asset obsolete. When modifications are made
to an existing asset to enhance its life, the additional amount incurred is added to
the value of the asset and becomes an integral part of the cost of the asset. It is also
depreciated at the same rate as the original asset. However if the modification or
enhancement is made such that the additions have a longer useful life and can exist
independent of the main asset, it is depreciated separately based on its useful life.
Residual value of an asset is estimated at the time of installation of the asset or at
the time of its revaluation. If the expected residual value is insignificant, it is treated
as nil. A common way to determine residual value of an asset is to compare the
asset with similar ones already existing in the market.
Depreciation method & rates: The methods of depreciation prescribed by the
Companies Act, 1956 are the Straight Line Method and Written Down Value. The
company is free to adopt any method.
The method adopted by a company will depend on: Type of asset Use of the
asset and Circumstances prevailing in the business The Companies Act, 1956 gives
the minimum rates for different classes of assets.
When the management of a company are of the view that the useful life of the asset
is likely to be lower and the applicable rate as per the Companies Act, 1956 may not
be appropriate, it can adopt a higher rate for that asset.
Further if the asset is of very low value, the entire amount may be depreciated in a
year. When a company changes its method of depreciation, it has to recalculate
depreciation on the assets from the date it was put into use by the new method
adopted and the difference resulting from such change must be disclosed separately.

According to AS-6 guidelines the following must be disclosed in the final

accounts: The method of depreciation adopted by the company must be stated. The
gross value of each class of assets and their accumulated depreciation must be
disclosed. Rates applied need not be explicitly stated if the rates as per statute have
been adopted. If different rates have been adopted, it should be mentioned. When
there is a revaluation of assets, depreciation is charged on the remaining life of the
asset and on its new historical cost. If this results in a material change in the
depreciation amount, it is necessary to give a disclosure. When an asset is sold,
disposed of or discarded, the net surplus or deficiency if material is disclosed. Most
importantly if the company adopts a change in the method of depreciation, it
amounts to a change in accounting policy and has to be mandatorily disclosed.

AS-10 Accounting for Fixed Assets

Fixed Assets ?
It is an assets , which is

a. Held for purpose of producing or providing goods or services

 b. Not held for sale in the normal course of business
c. Expected to be used for more than one accounting period like Land, building
(freehold, leasehold) Plant & machinery, furniture , vehicles,computers

Site preparation for existing assets will be considered as revenue expense not
capital expense
Interest on loan will be considered as capital expenses till the assets is ready for use
not put to use.

Example : The company constructed of fixed assets internally . The cost of

construction was

1. Material of Rs.10 lacs (Purchased by production dept at 8 lacs)

2. Labour 2 Lacs
3. Director salary

Internal profit to be eliminated. Fixed assets should be taken at original price at

which it purchased from party. If a dept transfer assets to another deptt by taking
some profit, that should be ignored.
In above case fixed assets was purchased at Rs.8 lacs but transferred at Rs.10 lacs.
So original cost should be taken that is Rs. 8 lacs plus Labour 2 lacs so cost of fixed
assets will be Rs.10 lacs.

Example : The company purchased machinery for Rs.100 lacs from GK & Co. It
paid to GK & Co. as follows :

a. Advance Rs.10 lacs

b. Balance 85 lacs in full & final settlement after one year

At the time of purchase fixed assets to be booked at full value Rs.100 lacs. After
full settlement it will decrease fixed asset value.

Example : The company exchanged its old machine for new machinery. Price of
old machine as per book value is Rs.16800. it paid 6000 more for the new
machinery . however if the machinery had purchased in cash it would have cost
Rs.20500
We have to book loss on old machinery and should show new machinery at actual
price Rs.20500
Loss = 16800+6000-20500 = 2300

Machinery New A/c Dr 20500

P&L A/c Dr 2300
To cash 6000
To Machinery old 16800

Asssets retired from use (Assets held for disposal)

They are stated at the lower of
1.Book value
2.Net realisable value

Treatment of cenvat
50% of excise duty paid on input in current year and remaining 50% in next
year. In next year benefit of input cenvat can be taken in any month but at the time
of benefit taken , asset should exist

Treatment in case of revaluation of fixed assets

1. If assets are revalued at more than book value , create revaluation reserve not
book the profit
2. At the time of assets sale , first adjust revaluation reserve account
3. At the time of assets sale book profit or loss through P&L a/c
4. If assets are revalued at less than the book value, book lose through P&L a/c

International Financial Reporting Standards (IFRS): Meaning

& Objectives
International Financial Reporting Standards (IFRS) is a set of accounting standards
developed by an independent, not-for-profit organization called the International
Accounting Standards Board (IASB).

The goal of IFRS is to provide a global framework for how public companies
prepare and disclose their financial statements. IFRS provides general guidance for
the preparation of financial statements, rather than setting rules for industry-specific
reporting.

Having an international standard is especially important for large companies that

have subsidiaries in different countries. Adopting a single set of world-wide
standards will simplify accounting procedures by allowing a company to use one
reporting language throughout. A single standard will also provide investors and
auditors with a cohesive view of finances.

Currently, over 100 countries permit or require IFRS for public companies, with
more countries expected to transition to IFRS by 2015. Proponents of IFRS as an
international standard maintain that the cost of implementing IFRS could be offset
by the potential for compliance to improve credit ratings.

IFRS is sometimes confused with IAS (International Accounting Standards), which

are older standards that IFRS has replaced.
What Are International Financial Reporting Standards (IFRS)?
International Financial Reporting Standards (IFRS) set common rules so that
financial statements can be consistent, transparent, and comparable around the
world. IFRS are issued by the International Accounting Standards Board (IASB).
They specify how companies must maintain and report their accounts, defining
types of transactions, and other events with financial impact. IFRS were established
to create a common accounting language so that businesses and their financial
statements can be consistent and reliable from company to company and country to
country.

International Financial Reporting Standards (IFRS): Objectives

IFRS is issued by the International Accounting Standard Board with the main
purpose of maintaining consistency and transparency in the financial statements
across the world. It describes the common set of rules for financial statements and
contributes to economic efficiency. Information in this is quite relevant for the
objectives of IFRS and appropriate as it’s based on clearly stated principles. This is
a common global language and adopted most of the business firms because
accounts are understandable and comparable with the help of this.
 Reliability: financial statements are provided complete and unbiased. It
indicates it’s the importance of being used widely as all the business affairs
need the faithful representation of their financial terms.
 Relevance: Information derived using this is relevant. It works better for
taking future decisions and comparability across international boundaries. This
is extremely supportive to know the exact picture as manipulation by the
mangers under this system is not allowed. Absence of manipulation always
leads to the right decisions.
 Conceptual framework: this is a complete conceptual framework which
serves as a tool to develop standards. Many companies and firms use this as a
reference for selecting their accounting policies and working accordingly. So it
plays a significant role in all entities.
 Compatibility: Ifrs adoption enables the comparison which is very important
to do in today’s competitive era for the efficient functioning of the capital
market. All companies whether small or big want to compare set of financial
 statements with those of previous years and other companies which helps them
about the future course of action.
 Timeliness: Using this framework is also considered to be time-saving. As
it’s technically based and can be done without involving many efforts. So, it is
time-saving which is advantageous for all business entities to grow further.
Along with that, it recognizes the loss immediately which is very beneficial for
investors, Landers and other stakeholders in the company.
 Better access to foreign capital in terms of investment: It helps to access
the international position easily as it is widely adopted by all the developed
countries like Canada, Japan, Europe and many other joining countries. So, it
shows when the financial statements are prepared under one reporting standard
then they have easy access to foreign capital and investment. It helps with the
comparability of the international market and also increases the focus on
investors.
 Standardization of accounting and financial reporting: IFRS ensures the
standardization of accounting standards which eventually helps to have clear
and improved financial statements. Even, it also removes the barriers in trade
and promotes the country towards globalized era.
 Identifying the opportunity and threats: adoption of IFRS helps the
business to identify the opportunities. It provides the financial statements in a
very true and fair manner which are very helpful in identifying the opportunities
and risks across the world. By this, it contributes to economic efficiency as well
and helps in improving capital allocation.
 Flexibility provides with more flexibility in the accounting standards as it uses
a principles-based system rather than a philosophy based and follows specific
rules. The goal is to reach a reasonable valuation, there are multiple ways to
reach that outcome. IFRS system gives the freedom to firms that it needs to
adapt to the global system to fit their specific situations.
IFRS 1 –First Time Adoption of International Financial
Reporting Standards
Objective
1 The objective of this IFRS is to ensure that an entity’s first IFRS financial
statements, and its interim financial reports for part of the period covered by
those financial statements, contain high quality information that:
(a)is transparent for users and comparable over all periods presented;
(b)provides a suitable starting point for accounting in accordance
with International Financial Reporting Standards (IFRSs); and
(c)can be generated at a cost that does not exceed the benefits.

Scope

2 An entity shall apply this IFRS in:

(a)its first IFRS financial statements; and
(b)each interim financial report, if any, that it presents in accordance with
IAS 34 Interim Financial Reporting for part of the period covered by
its first IFRS financial statements.
3 An entity’s first IFRS financial statements are the first annual financial
statements in which the entity adopts IFRSs, by an explicit and unreserved
statement in those financial statements of compliance with IFRSs. Financial
statements in accordance with IFRSs are an entity’s first IFRS financial
statements if, for example, the entity:
(a) presented its most recent previous financial statements:
(i)in accordance with national requirements that are not consistent with
IFRSs in all respects;
(ii)in conformity with IFRSs in all respects, except that the financial
statements did not contain an explicit and unreserved statement
that they complied with IFRSs;
 (iii)containing an explicit statement of compliance with some, but not
all, IFRSs;
(iv)in accordance with national requirements inconsistent with IFRSs,
using some individual IFRSs to account for items for which
national requirements did not exist; or
(v)in accordance with national requirements, with a reconciliation of
some amounts to the amounts determined in accordance with
IFRSs;
(b) prepared financial statements in accordance with IFRSs for internal use
only, without making them available to the entity’s owners or any other
external users;
(c) prepared a reporting package in accordance with IFRSs for
consolidation purposes without preparing a complete set of financial
statements as defined in IAS 1 Presentation of Financial Statements (as
revised in 2007); or

(d) did not present financial statements for previous periods.

4 This IFRS applies when an entity first adopts IFRSs. It does not apply when,
for example, an entity:
(a) stops presenting financial statements in accordance with national
requirements, having previously presented them as well as another set
of financial statements that contained an explicit and unreserved
statement of compliance with IFRSs;
(b) presented financial statements in the previous year in accordance with
national requirements and those financial statements contained an
explicit and unreserved statement of compliance with IFRSs; or
(C) presented financial statements in the previous year that contained an
explicit and unreserved statement of compliance with IFRSs, even if the
auditors qualified their audit report on those financial statements.
5 This IFRS does not apply to changes in accounting policies made by an entity
that already applies IFRSs. Such changes are the subject of:
(a)requirements on changes in accounting policies in IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors; and
 (b)specific transitional requirements in other IFRSs.

Recognition and measurement

Opening IFRS statement of financial position

6 An entity shall prepare and present an opening IFRS statement of financial

position at the date of transition to IFRSs. This is the starting point for its
accounting in accordance with IFRSs.

Accounting policies

7 An entity shall use the same accounting policies in its opening IFRS statement
of financial position and throughout all periods presented in its first IFRS
financial statements.
8 An entity shall not apply different versions of IFRSs that were effective at
earlier dates. An entity may apply a new IFRS that is not yet mandatory if
that IFRS permits early application.