08-07-2023

Examination Approach for Accounting The key principle

Standards

An audit is an independent examination of financial

statements of any entity, whether profit oriented or not, and
irrespective of its size or legal form, when such examination
Presentation at the workshop organised by SICASA of is conducted with a view to expressing an opinion thereon
Madurai Branch of SIRC of ICAI
in July 2023
Independent examination Financial Statements

Activities, size and legal form

Any entity
is not a consideration

Expressing an opinion thereon

Dr. CA. Chinnsamy Ganesan
FCA DISA(ICA)

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Regulatory framework The key principle

Unlisted and Private Listed Entities carrying on any Business or

Non Corporate entities
Companies Companies Industrial or Commercial activity
Certification Compilation

Companies Act, 2013 Companies Act, 2013  Depends upon whether audit is
mandatory
 Directors [Section 133 and 134 (5)] General purpose financial statements Agreed Upon
 Directors [Section 133 and 134 (5)] Limited Review
 Auditors [Section 143]  Auditors [Section 143]  ICAI – code of conduct for auditors Procedures

ICAI SEBI
 Code of Conduct  Listing Agreement Subjected to audit under any law Stock Audit Forensic Audit

ICAI
 Code of Conduct Audit of NPOs
AS is applicable based on the level of
NCE/ Company

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Which Set of Accounting Standards to apply? The Conceptual Difference

AS of NCE AS for Companies

Companies meeting
Non Corporate General Standards issued by the Standards notified by the
certain threshold Institute of Chartered Companies Act, 2013
entities Companies
limits Accountants of India under section 133

Applicable only to Non-

Applicable to Companies
Corporates

Companies Accounting
IFRS Converged Indian
Standards issued by Standards Rules 2006, Four level classification Two level classification
Accounting Standards
ICAI amended from time to
(Ind AS)
time
Relaxation mainly for disclosures and not for recognition and
measurement

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Criteria for classification of Companies for applicability of AS CAR 2016 – an overview

Level Criteria Turnover Limits (Excluding Other Income)

SMC Listing Whose equity or debt securities are not listed or are not in the process of
listing on any stock exchange, whether in India or outside India
Accounting Standards Non SMC SMC
SMC Nature of business Which is not a bank, financial institution or an insurance company AS 1 to 14 (except AS 3), 15, 16, 18, 19, 20, 22, 24, 25, 26, a a
28 and 29
SMC Turnover whose turnover (excluding other income) does not exceed Rs.50 Crores in
the immediately preceding accounting year AS 3, 17 a r

SMC Borrowings Which does not have borrowings (including public deposits) in, excess of AS 21, 23 and 27 (Only if regulator requires consolidation a a
Rs.10 Crores at any lime during the immediately preceding accounting year or entity prepares consolidated financial statements)

SMC Other Which is not a holding or subsidiary company of a company which is not a
small and medium-sized company

All other companies are Non-SMC

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Criteria for classification of NCE for applicability of AS NCE and applicability of AS

Level Turnover Limits Borrowing Limits (including Other Criteria

(Excluding Other Income) public deposits)
I More than Rs. 250 Cr More than Rs. 50 Cr Banks, Financial Institutions,
Insurance entities and holding and
subsidiaries of the entities covered Level I entities are required to comply in full with all the Accounting
in Level I Standards

II More than Rs. 50 Cr to Rs.250 More than Rs. 10 Cr to Rs.50 Cr Holding and subsidiaries of the
Cr entities covered in Level II
Certain exemptions/ relaxations have been provided to Level II, Level
III More than Rs. 10 Cr to Rs.50 Cr More than Rs. 2 Cr to Rs.10 Cr Holding and subsidiaries of the III and Level IV NCEs
entities covered in Level III

IV Upto Rs. 10 Cr Upto Rs. 2 Cr NA

Borrowings at any time in the

TO in the immediately preceding Entities engaged in commercial,
immediately preceding financial
financial year industrial or business activities
year

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NCE and applicability of AS NCE and applicability of AS

AS Level II Entities Level III Entities Level IV Entities AS Level II Entities Level III Entities Level IV Entities
AS 1 Applicable Applicable Applicable AS 16 Applicable Applicable Applicable
AS 2 Applicable Applicable Applicable AS 17 Not Applicable Not Applicable Not Applicable
AS 18 Applicable Not Applicable Not Applicable
AS 3 Not Applicable Not Applicable Not Applicable
AS 19 Applicable with disclosures exemption Applicable with disclosures exemption Applicable with disclosures exemption
AS 4 Applicable Applicable Applicable
AS 20 Not Applicable Not Applicable Not Applicable
AS 5 Applicable Applicable Applicable AS 21 Not Applicable Not Applicable Not Applicable
AS 7 Applicable Applicable Applicable AS 22 Applicable Applicable Applicable only for current tax related
AS 9 Applicable Applicable Applicable provisions
AS 23 Not Applicable Not Applicable Not Applicable
AS 10 Applicable Applicable with disclosures exemption Applicable with disclosures
AS 24 Applicable Not Applicable Not Applicable
exemption
AS 25 Not Applicable Not Applicable Not Applicable
AS 11 Applicable Applicable with disclosures exemption Applicable with disclosures
AS 26 Applicable Applicable Applicable with disclosures exemption
exemption
AS 27 Not Applicable Not Applicable Not Applicable
AS 12 Applicable Applicable Applicable
AS 28 Applicable with disclosures exemption Applicable with disclosures exemption Not Applicable
AS 13 Applicable Applicable Applicable with disclosures exemption
AS 29 Applicable with disclosures exemption Applicable with disclosures exemption Applicable with disclosures exemption
AS 14 Applicable Applicable Not Applicable
AS 15 Applicable with exemptions Applicable with exemptions Applicable with exemptions

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Accounting Standards simplified? Accounting Standards - Balance Sheet Approach

Asset related Standards

Assets Investments Income Disclosures Others

Investment related Standards AS 13 AS 1
AS 5 AS 11
AS 2
AS 14 AS 7 AS 3 AS 12
AS 10
Income related Standards AS 21 AS 9 AS 4 AS 15
AS 16
AS 23 AS 29 AS 17 AS 22
AS 19
Disclosure related Standards AS 27 AS 18 AS 25
AS 26
AS 20
AS 28
Other Standards AS 24

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General Principles - Reporting & Disclosures Accounting Standards – a practical approach?

Balance Sheet P & L Account Notes

• All Asset related
• All investment related
• All Income related
•Some Other Standards
• All Asset related
• All investment related
• All Income related
•Some disclosure related
• Some Other Standards
• All Asset related
• All investment related
• All Income related
•All disclosure related
• All Other Standards
Approach to the Standard Insights into the Standard
• Objective • Key Definitions
• Applicability • Practical issues
• Recognition • Related Standards
• Measurement • Implication under Companies Act
• Implication Under Income Tax Act
• Reporting and Disclosures

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Accounting Standards - a Quick Look AS 1 - Some frequently asked questions

AS 1
 Items new in the current year
 Items not applicable to the enterprise
 Mix up of change in accounting policy with
disclosure of accounting policy
 Going concern issues not addressed
AS 2
It is correct to give a note stating that the Trade Receivables, Trade Payables,
 Lower of Cost or Net Realisable Value Current Assets and current liabilities are subject to confirmation?
often confused with market price
Whether making a disclosure will remediate wrong or inappropriate accounting
 Cost formula to be mentioned policy?
 Overhead allocations for WIP and Finished
Whether accounting policy as per all AS is required to be given?
Goods not properly done (Fixed Cost
based on normal capacity)

 Materiality considerations not used Whether change in accounting estimate also required to be quantified?

Level of Importance for NCE - High Level of Importance for NCE - High

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AS 2 - Some frequently asked questions Accounting Standards - a Quick Look

AS 5
Whether interest on borrowed funds can be capitalised?
 Treatment of changes in accounting
policies
Whether NRV to be tested only for finished goods?
 Changes in accounting estimate
Is it permitted to use Retail method for valuation of inventories?  Accounting Errors
How to treat slow moving and non-moving inventory?
Is it mandatory to observe physical verification of inventories for NCEs?
Level of Importance for NCE - High
AS 7
 Completed Contract method is not
acceptable
 % completion method shall be based on
one of the accepted principles
 Foreseeable losses not estimated and
provided
 Disclosures not given properly in respect
of contracts in progress
Level of Importance for NCE - Depends

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AS 7 - Some frequently asked questions Accounting Standards - a Quick Look

AS 9 AS 10

Treatment of retention money and ICDS

 Timing of revenue recognition
Completed contract method for contracts to be executed within 90 days  No more completed contract method
 Recognition of interest and Royalty
Uncertainty of collection cannot be the basis for deferring claims and incentives Income
under ICDS
 Ready for the intended use Vs Date put to
use
 Whether depreciation claim is optional
under AS?
 Capital work-in-progress not tested for
impairment

Foreseeable future losses are permitted only on PoC method under ICDS

Level of Importance for NCE - High Level of Importance for NCE - Depends

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AS 10 - Some frequently asked questions Accounting Standards - a Quick Look

AS 11 AS 13

Whether administrative overheads can be capitalised along with the cost of FA?
 Forex differences in the nature of  Which is current and which is long term?
adjustment of borrowing costs
How to assess estimated useful life and residual life?  What is strategic investments?
 Accounting for forward contracts Vs ICDS
 What is diminution in value of investments,
 Unrealised forex loss adjusted in the other than temporary?
Can the Income Tax Rates of Depreciation be used as depreciation policy?
carrying value for Income Tax Depreciation

Whether capitalisation of borrowing costs is mandatory?

Level of Importance for NCE - Depends Level of Importance for NCE - Low

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AS 11 - Some frequently asked questions Accounting Standards - a Quick Look

AS 15 AS 16

Can the export invoices be recognised at the actual realised amount?

 Validating the data given to actuary  What is a qualifying asset?

Whether Fixed Assets purchased in foreign currency has to be restated at the year  Consideration of increments given during
end? the year
Whether advances paid to and received in foreign currency has to be restated at the  Validating the actuarial assumptions
yearend
 Disclosures
Can accounting for MTM losses on forward contracts be omitted by a NCE?  Treatment of provisions under the Income
Tax Act
 General Vs Specific borrowings
 Impact of ICDS
 Qualifying asset differently defined
 No suspension of capitalisation of
borrowing costs
 General Borrowings

Level of Importance for NCE - Medium Level of Importance for NCE - Depends

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AS 15 - Some frequently asked questions AS 16 - Some frequently asked questions

Whether actuarial valuation is mandatory in all cases? How to treat changes in foreign exchange rates under AS 16?

When the entity does not have term loans but has working capital limits, whether
Whether actuarial valuation from independent actuary is always mandatory?
capitalisation of borrowing costs is required?

What if the entity spent on qualifying asset and then they have taken term loan as a
Is there any guidance for leave encashment and sick leave entitlements?
reimbursement of the project cost?

Is there any exemption for SMEs? What is the common mistake with respect to AS 16?

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Accounting Standards - a Quick Look AS 18 - Some frequently asked questions

AS 18 AS 19

 If subjected to Tax Audit – match the
disclosure with 40 A 2(b)
 Loans to related parties Vs assessing
officer’s view on the related interest
 Operating leases also require disclosure How to determine the related parties?
 Operating leases in substance finance
leases How the transactions with related parties to be identified?
 Finance leases still treated differently for
Tax Purposes
Whether capital expenditure and reimbursement of expenses to be disclosed?

Level of Importance for NCE - Low Level of Importance for NCE - Low

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Accounting Standards - a Quick Look AS 22 - Some frequently asked questions

AS 22 AS 26

Is there any difference between Balance Sheet and Profit and Loss Approach?
 Tallying effective tax rates  Economic useful life Vs Amortisation

 Recognition of Deferred Tax Asset without  Rebuttable presumption of economical What is the tax rate to be used for creating deferred tax?
convincing evidence useful life

 DTA/ DTL during the tax holiday period  Depreciation rate under the income tax –
Is there any exemption available for SMEs?
Computer software and other intangibles
 Recognition of Minimum Alternate Credits

 Continuous assessment of DTA at each What if the entity does not create Deferred Tax?
reporting periods

Level of Importance for NCE - Low Level of Importance for NCE - Low

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Accounting Standards - a Quick Look AS and Audit Report Considerations

AS 28 AS 29 Ascertain accounting policy followed and

disclosure made by the enterprise

 Indicators of impairment  Validating estimates of provisions

No Is accounting Is disclosure as No
 Cash generating unit Vs idle machinery in  Reconciling the closing and opening policy as per per standard?
standard?
CGU provisions with Section 43B disclosures Make negative statement in
Make negative Yes Make positive Yes audit report
 Cash Flow projections not backed with statement in audit statement in audit
report report
complete plans Is there a violation
Yes
of legal
 Impairment loss and the Income Tax Act requirements?

No
Is effect of Yes
deviation Yes
Qualify the audit report Is true and fair
material? view affected?
Level of Importance for NCE - Low Level of Importance for NCE - Medium No No
No further action required

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Financial Statements for NCEs Financial Statements for NCEs

An attempt to standardise the formats of the financial statements to be prepared by May be used by the NCEs unless any formats/principles are specifically prescribed
the non-corporate entities by the relevant Statute or Regulator or any Authority

Technical Guide of ICAI recommends the formats of financial statements for non- Complete set of financials statements include, BS, Statement of Profit and Loss,
corporate entities CFS (only for Level I NCE), Notes on Accounts and other statements

Since LLPs are corporate form of entity, they are scoped out of the applicability of Notes on accounts include Significant Accounting Policies, Disclosures required by
the Technical Guide various AS and ICDS

Technical Guide aims at bringing consistency and comparability in the presentation Framework for the Preparation and Presentation of Financial Statements shall also
and disclosure of financial information be considered by NCEs

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Financial Statements for NCEs – FAQ Financial Statements for NCEs – FAQ

Whether it is mandatory to use the format of financial statements given in the

Whether rounding off in the FS is mandatory for NCEs?
Technical Guide?

Can a NCE add, amend, substitute, delete any line items given in the format of FS? Whether unit of measurement needs to uniform across the FS of NCEs?

What are the additional considerations for disclosures in the FS of NCEs? Whether comparative information is mandatory?

Whether every item of the BS and P&L need to be cross-referenced to any related
Whether assets and liabilities to be classified into current and non-current?
information in the notes to accounts

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Questions? Thank you

? ganesanca@yahoo.com/ 0 99401 30403

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