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Dear all, First of all I welcome all of you to “AksharabhyaS” – A Journey through Accounting Standards, the Accounting Standards Workshop to be held from 20th June to 02nd July 2011. It is indeed a joyous moment to note that the workshop has received a tremendous response among the students. An in depth analysis of each and every standard is done by a student speaker and icing on the cake is provided in the form of very learned and experienced Chartered Accountants who will be present as chairman of every session. CA. Srinivasa Raghavan, Executive Manager, Simpson & Co. Ltd. inaugurated the workshop on Monday, the 20th June 2011. We have devised this workshop for a period of two weeks in order to provide sufficient time for both speakers and participants to discuss the subject in detail. I wish the speakers all the best for their presentation. They have put in lots of effort to make this workshop more educative and informative. I thank all the chairpersons for accepting my invitation to chair the sessions. I sincerely thank CA. L. Venkatesan, Course Director for all the support, guidance and encouragement given to conduct this workshop. I should also thank the SIRC Chairman, my council colleagues in SIRC and also the staff of SIRC for extending their kind support for the workshop. I also thank all the firms who have sponsored their articles for this workshop. Lastly I take this opportunity to appreciate the generosity bestowed by the sponsors on us to make this workshop more meaningful and attractive. CA. C.S. Srinivas Chairman SICASA SIRC of ICAI
Accounting Standards issued by ICAI
AS 1 2 3 4 5 6 7 9 10 11 12 13 14 15 16 17 18 19 20 Name Disclosure of Accounting Policies Valuation of Inventories (Revised) Cash Flow Statements(Revised) Contingencies and events occurring after the Balance date Net Profit/Loss for the period prior period items & changes in Accounting Policies(Revised) Depreciation Accounting (Revised) Accounting for Construction Contracts(Revised) Revenue Recognition Accounting for Fixed Assets Accounting for effects of changes in Foreign Exchange Rates(Revised) Accounting for Government Grants Accounting for Investments Accounting for Amalgamations Employee Benefits Borrowing Costs Segment Reporting Related Party Disclosures Leases Earnings Per Share All level All level Level I All level All level All level All level All level All level All level All level All level All level All level All level Level I Level I All level Level I Scope Effective date 1.4.1993 1.4.1999 1.4.2001 1.1.1998 1.4.1996 1.4.1995 1.4.2002 1.4.1993 1.4.1993 1.4.2004 1.4.1994 1.4.1995 1.4.1995 1.4.1995 1.4.2000 1.4.2001 1.4.2001 1.4.2001 1.4.2001 Status Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Only for those enterprises which prepare consolidated statements
Consolidated Financial Statements
Enterprises preparing Cash Flow Statements
SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION, CHENNAI
Accounting for Taxes on Income
Listed Companies Other Companies All Enterprises
1.4.2001 1.4.2002 1.4.2006 1.4.2002 1.4.2004 1.4.2002 1.4.2003 1.4.2002 1.4.2004 1.4.2006 1.4.2008 1.4.2004
Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory
23 24 25 26 27 28
Accounting for Investments in Associates in Consolidated Financial Statements Discontinuing Operations Interim Financial Statement Intangible Assets Financial Reporting of Interests in Joint Ventures Impairment of Assets
Enterprises preparing Cash Flow Statements Level I Level I All Enterprises Enterprises preparing Cash Flow Statements Level I Level II Level III
Provisions, Contingent Liabilities and Contingent Assets Financial Instruments: Recognition and Measurement and Limited Revisions to AS 2, AS 11(revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28, AS 29.
All (except to a SME)
1.4.2011 31 Financial Instruments: Presentation All (except to a SME) 1.4.2009 1.4.2011 32 Financial Instruments: Disclosure and Limited Revision to AS 19 All (except to a SME) 1.4.2009 1.4.2011
Mandatory Recommendatory Mandatory Recommendatory Mandatory
SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION, CHENNAI
Standards needed to be set by recognised accounting bodies. this accounting standard will be recommendatory in character. In order to avoid the above and to have a harmonised accounting principle. Accounting Standards in India are issued by The Institute of Chartered Accountants of India (ICAI).in) Accounting is the art of recording transactions in the best manner possible. The accounting policies followed vary from enterprise to enterprise. this standard is recommended for use by companies listed on a recognized stock exchange and other large commercial. The disclosure of some of the accounting policies followed in the preparation and presentation of the financial statements is required by law in some cases. These guidelines are generally called accounting policies. 2. In the initial years. in Statements issued by it. The view presented in the financial statements of an enterprise of its state of affairs and of the profit or loss can be significantly affected by the accounting policies followed in the preparation and presentation of the financial statements. At present there are 30 Accounting Standards issued by ICAI. e. CHENNAI . (v_anand90@yahoo..AS 1 – DISCLOSURE OF ACCOUNTING POLICIES . The Institute of Chartered Accountants of India has. 4 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. recommended the disclosure of certain accounting policies. and in this regard it is utmost necessary that there are set guidelines.Anand Kumar V. This paved the way for Accounting Standards to come into existence. The Institute of Chartered Accountants of India on 'Disclosure of Accounting Policies'. Accounting Standard 1 issued by the Accounting Standards Board. so as to enable the reader to arrive at judgments/come to conclusions. Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. The Standard deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. This statement deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. Introduction Disclosure of Accounting Policies: Accounting Policies refer to specific accounting principles and the method of applying those principles adopted by the enterprises in preparation and presentation of the financial statements. industrial and business enterprises in the public and private sectors. 1. 3. During this period. The intricacies of accounting policies permitted Companies to alter their accounting principles for their benefit. 4. translation policies in respect of foreign currency items. This made it impossible to make comparisons.g.co.
Many enterprises include in the Notes on the Accounts. 6. however. 7. But the nature and degree of disclosure vary considerably between the corporate and the non-corporate sectors and between units in the same sector. b. Going Concern:The enterprise is normally viewed as a going concern. a few enterprises in India have adopted the practice of including in their annual reports to shareholders a separate statement of accounting policies followed in preparing and presenting the financial statements. In general. Accrual:Revenues and costs are accrued. that is. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Disclosure is necessary if they are not followed. Explanation: Fundamental Accounting Assumptions 9. The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements. The purpose of this Statement is to promote better understanding of financial statements by establishing through an accounting standard the disclosure of significant accounting policies and the manner in which accounting policies are disclosed in the financial statements. Consistency:It is assumed that accounting policies are consistent from one period to another. Such disclosure would also facilitate a more meaningful comparison between financial statements of different enterprises. CHENNAI 5 . 10. The statement of accounting policies forms part of accounts in some cases while in others it is given as supplementary information. that is. accounting policies are not at present regularly and fully disclosed in all financial statements. recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. Even among the few enterprises that presently include in their annual reports a separate statement of accounting policies. They are usually not specifically stated because their acceptance and use are assumed.5. In recent years. c. as continuing in operation for the foreseeable future. descriptions of some of the significant accounting policies. 8. (The considerations affecting the process of matching costs with revenues under the accrual assumption are not dealt with in this Statement. considerable variation exists. The following have been generally accepted as fundamental accounting assumptions:— a. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations. Certain fundamental accounting assumptions underlie the preparation and presentation of financial statements.) Nature of Accounting Policies 11.
• Methods of depreciation. 6 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. CHENNAI . the availability of alternative accounting principles and methods of applying those principles is not likely to be eliminated altogether in view of the differing circumstances faced by the enterprises. 15. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. Considerations in the Selection of Accounting Policies 16. 17. The following are examples of the areas in which different accounting policies may be adopted by different enterprises. Prudence:In view of the uncertainty attached to future events. 13. Areas in Which Differing Accounting Policies are encountered 14. The differing circumstances in which enterprises operate in a situation of diverse and complex economic activity make alternative accounting principles and methods of applying those principles acceptable. The various statements of the Institute of Chartered Accountants of India combined with the efforts of government and other regulatory agencies and progressive managements have reduced in recent years the number of acceptable alternatives particularly in the case of corporate enterprises. The choice of the appropriate accounting principles and the methods of applying those principles in the specific circumstances of each enterprise calls for considerable judgement by the management of the enterprise. For this purpose. The primary consideration in the selection of accounting policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the profit or loss for the period ended on that date. The above list of examples is not intended to be exhaustive.12. There is no single list of accounting policies which are applicable to all circumstances. depletion and amortization • 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. profits are not anticipated but recognized only when realized though not necessarily in cash. the major considerations governing the selection and application of accounting policies are:— a. While continuing efforts in this regard in future are likely to reduce the number still further.
ACCOUNTING STANDARD (The Accounting Standard comprises paragraphs 24–27 of this Statement. intended to be exhaustive. wholly or in part. Substance over Form:The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form. The amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. 23. however. The disclosure of the significant accounting policies as such should form part of the financial statements and the significant accounting policies should normally be disclosed in one place. Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. All significant accounting policies adopted in the preparation and presentation of financial statements 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 which is reasonably expected to have a material effect in later periods. 26. i.e. To ensure proper understanding of financial statements. 22. It would be helpful to the reader of financial statements if they are all disclosed as such in one place instead of being scattered over several statements. Examples of matters in respect of which disclosure of accounting policies adopted will be required are contained in paragraph 14. schedules and notes. c. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts. the fact of such change should be appropriately disclosed in the period in which the change is adopted. Where such amount is not ascertainable.) 24. This list of examples is not. Disclosure of Accounting Policies 18. CHENNAI 7 . Such disclosure should form part of the financial statements. The Standard should be read in the context of paragraphs 1–23 of this Statement and of the 'Preface to the Statements of Accounting Standards'. items the knowledge of which might influence the decisions of the user of the financial statements. the amount by which any item in the SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. the fact should be indicated. In the case of a change in accounting policies which has a material effect in the current period. 25. 21. it is necessary that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed.b. Any change in an accounting policy which has a material effect should be disclosed. 19. Materiality:Financial statements should disclose all "material" items. 20.
’ 8 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.section (1) of section 210A: Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central Government under this sub-section. The new sub-sections as inserted are reproduced below: Section 211 (3A): ‘Every profit and loss account and balance sheet of the company shall Comply with the accounting standards’ Section 211 (3B): ‘ Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards. the following. such companies shall disclose in its profit and loss account and balance sheet. and c) The financial effect. with a view to ensure that the financial statements are prepared in accordance with the Accounting Standards. 1999 has inserted new sub-sections 3A. viz. arising due to such deviation’ Section 211 (3C): ‘For the purposes of this section. b) The reasons for such deviation. The Companies (Amendment) Act. Going Concern. constituted under the Chartered Accountants Act. If a fundamental accounting assumption is not followed. Where such amount is not ascertainable. if any. 3B and 3C to Section 211. 27. Section 211 of the Companies Act. wholly or in part. namely:a) The deviation from the accounting standards. Consistency and Accrual are followed in financial statements. deals with the form and contents of balance sheet and profit and loss account. the fact should be disclosed. the expression “accounting standards” means the standards of accounting recommended by the Institute of Chartered Accountants of India. CHENNAI . specific disclosure is not required.financial statements is affected by such change should also be disclosed to the extent ascertainable. 1956. the fact should be indicated. If the fundamental accounting assumptions. as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub. 1949 (38 of 1949).
AS 2 - VALUATION OF INVENTORIES
- Subhashini Srinivasan (firstname.lastname@example.org)
Contents Applicability & Nature Objective Definitions Inclusions and Exclusions Techniques of Measurement Disclosures Exam Problems -At a glance Applicability of Nature Applicable Nature Objective A primary issue of accounting for inventories is the determination of the value at which inventories are carried in the financial statements units the related revenues are recognized. This statement deals with the determination of such value, including the ascertainment of cost of inventories and any write-down thereof to net realizable value. Definitions 01.04.1999 Onwards Mandatory (Compulsory)
Inventories are assets which are :
(a) held for sale in the ordinary course of business (Finished Goods); or (b) in the process of production of such sale (WIP); or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services (Raw material, Consumables etc.) . However, this standard does not apply to the valuation of following inventories: (a) (b) (c) (d) WIP arising under construction contract (Refer AS – 7); WIP arising in the ordinary course of business of service providers; Shares, debentures and other financial instruments held as stock in trade; and Producers’ inventories of livestock, agricultural and forest products, mineral oils, ores and gases. Such inventories are measured at net realizable value. (Inventories should be valued at the lower of cost and net realizable value.)
SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION, CHENNAI
Inclusions and Exclusions The Cost of Inventories includes: (a) All costs of purchase (b) Cost of conversion (c) Other costs (incurred in bringing the inventories to their present location and condition). Cost of inventory does not include. (a) Abnormal Loss (waste of materials, labour or other production costs; (b) Storage costs, unless those costs are necessary in the production process prior to a further production stage; (c) Administrative, Selling and Distribution costs. (d) Interest and other borrowing costs
The costs of purchase consist of
(a) the purchase price (b) duties and taxes ( other than those subsequently recoverable by the enterprise from the taxing authorities like CENVAT credit) (c) freight inwards and other expenditure directly attributable to the acquisition. Trade discounts (but not cash discounts), rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase. The costs of conversion include direct costs (Direct Material, Direct Labour & Direct Exps.) and systematic allocation of fixed and variable production overhead.
Allocation of overheads
Overhead Recovery Rate = Production Overhead Normal/Actual Production (whichever is higher)
Joint or by products:
In case of joint products, the costs incurred up to the stage of split off should be allocated on a rational and consistent basis. The basis of allocation may be sale value at split off point or sale value at the completion of production. In case of the by products, scrap or waste material, they are valued at net realizable value. The cost of main product is then joint cost minus NRV of by product or waste
SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION, CHENNAI
Techniques for the Measurement
Specific identification method for determining cost of inventories Specific identification method means directly linking the cost with specific item of inventories. Where Specific Identification method is not applicable The cost of inventories is valued by the following methods; • FIFO ( First In First Out) Method • Weighted Average Cost
Net Realisable Value means the estimated selling price less estimated cost of completion and
estimated cost necessary to make the sale. (e.g. selling exps) NRV is estimated on the basis of most reliable evidence at the time of valuation. (e.g Firm Contracts ) NRV of Raw material to be used in Finished Goods: Higher of Incremental revenue or Replacement cost
Comparison between NRV and cost of inventory
The comparison between cost and net realizable value should be made on item-by-item basis. (In some cases, it may be appropriate to group similar or related item ) For Example: Item A Item B Total Disclosure Requirements Inventory valuation policy Basis of valuation (FIFO, Weighted Average) Classification of inventories ( Raw Material, WIP, Finished goods etc.) Cost 100 100 200 NRV 90 115 205 Inventory Value as per AS-2 90 100 200 190
Exam Problems-At a glance 1. The company deals in three products A, B and C, which are neither similar nor interchangeable. At the time of closing of its account for the year 2007-2008, the historical cost and net realisable value of the items of closing stock are determined as follows.
SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION, CHENNAI
Till March. cost of conversion and other cost incurred in bringing the inventories to their present position and location.9 Lakhs.03.10 Lakhs (25% of Rs. Should disclose the closing stock at Rs. Advise. inventories are valued at cost or net realisable value whichever is lower. 9. CHENNAI .Commission is to be deducted as it is necessary to make sale. in Lakhs) 28 32 24 What will be the value of closing stock? Answer: As per para 5 of AS 2 on Valuation of Inventories. in Lakhs) 40 32 16 Net Realisable value (Rs. 2. Cost of inventories comprises cost of purchase . in lakhs) 28 32 24 84 VALUATION OF CLOSING STOCK (Rs. 75% of the stocks were sold.76 Lakhs.e Rs. Inventories should be written down to net realisable value on an item by item basis in given case. 10 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. X Co Ltd. what is the correct closing stock to be disclosed as at 31. Net Realisable value (NRV) is the estimated selling price in ordinary couse of business less estimated cost of completion and cost necessary to make the sale. the closing stock is Rs. in lakhs) 40 32 16 88 NET REALISABLE VALUE (Rs. X Co Limited purchased goods at the cost of Rs.11 Lakhs and a commission at 10% on sale is payable to the agent.9. 2006.40 Lakhs) and NRV is Rs. in lakhs) 28 32 16 76 A B C Hence the closing stock will be valued at Rs.9 Lakhs (i. The expected sale value is Rs. 10 Lakhs.120 Rs. 3. The company wants to disclose closing stock at Rs. 20 Rs. inventories should be valued at the lower of cost and net realisable value. 40 lakhs in october.Items A B C Historical cost (Rs. 11 Lakhs – 10% of 11 Lakhs for commission on sale). ITEMS HISTORICAL COST (Rs. 12 Rs. (i) Direct material cost/ kg (ii) Direct wages cost /Kg. (iii)Variable production overhead /Kg.2009 (May-2004) Solution: As per AS-2. Problem. Here. So. 2005.
The computationis as shown below Cost of unsold stock per kg. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. 100. of raw material is on stock at the year end. The finished goods in which the raw material is incorporated is expected to be sold at below cost. Replacement cost is Rs. However.000 MT of input were put in process resulting in a wastage of 300 MT.per kg. the cost of the finished item should be taken at Rs. the material are written down to net realisable value.00.: Direct material cost Conversion cost Direct wages Production overhead Variable Fixed (10. when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realisable value.000 kg. (cost or Realisable value) As per para 24 of AS 2. 100 per kg. 40 Rs. In such cases the replacement cost of material may be the best available measure of their net realisable value. 5. materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost.000) Rs. 4.10. 90 per kg Finished goods. finished stock. 10 Rs. 160 So. The entire quantity of waste is on stock at the year end. Cost per MT input is Rs. 20 Rs. Solution: The fixed overhead should be absorbed on the basis of normal capacity. 120 Rs. Price of raw material is on the decline. Rs. when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed the net realisable value. In a production process. 10 Rs. Compute the cost per unit.000 kg.in hand lying unsold (assumed production at normal capacity). 90 per kg. if in stock. Realisable value of waste is nil.000 kg.(iv) Fixed production overhead for the year based on normal capacity of 100. (i) (ii) In view of this raw material stock of 5. However.160/. the material are written down to net realisable value. 5. should be valued at lower of cost and net realisable value.000/-. At what rate it should be valued ? Solution Valuation of iventory. should be valued at Rs.000/100. 5. normal waste is 5 % of input. Compute the cost per kg. Raw material was purchased at Rs. CHENNAI 13 .00.
00.00.should not be included in production cost. Balance Rs. Solution: The fixed production overhead should be absorbed on basis of normal Capacity.00. So the cost per unit is Rs. The cost of abnormal waste amounting to Rs. 20.00. Direct material Direct labour Fixed production overhead Fixed administration overhead Normal capacity Actual production Closing stock Rs.12. 250 Rs.00. 250 per unit Rs. 400 per unit Rs.000 units 10.000 should not be included in production cost.26 per kg. 400 Rs. 20.00. Administration overhead of Rs.000 will be charged to Profit and loss A/c.000/. 67. 6. 105.a Rs.000/. 10. Accordingly.00. Administration overhead of Rs.000 Rs.670 (i. labour or other production costs are excluded from cost of inventories and such costs are recognised as expenses in the period in which they are incurred. 105.of Fixed production overhead only 40.000 would be charged to P& L A/c.00.000 units Compute value of closing stock of finished goods. The computation is shown below: Cost per unit of finished goods Direct material Direct Labour Fixed production overhead 20.000 units 40. Raw material cost /unit Direct wages cost/unit Direct Expenses / unit Rs.670 (i) (ii) 7.Solution As per AS-2.000/1. 10.00.00. Rs. 20 Rs. Closing stock of finished goods 10.000 *Rs. 5.e) Rs.e) Rs. CHENNAI .000 p. 2 110 40 14 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.a 1. 10. (i) In this case normal waste is 250 MT (ii) Abnormal waste is 50 MT The cost of 250 MT will be included in determining the cost of inventories (finished goods) at year end.26. abnormal amounts of waste materials. the cost per unit is (5000*100/4750) (i.00.000/So out of Rs. Rs.000 *20 =8.000 p.000 is absorbed.
1.000 Compute the overhead recovered rate.00.20.000*40% 5.00. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Case 3. 154.80Lakhs. Actual production: 1.25.000 5. 40.e Rs. Case 2.00.00. 1.20 Rs.000 20.000 Solution The fixed overhead should be as per actual capacity.000 units.000) Rs.154.00.5.000 9.154.00 Total Rs. Actual production: 80.00.80 i.00 Rs 2. 110.80 per unit. Actual production : 1.000*60% (9. The finished item cost is Rs.80 Closing stock 1.00. The variable observed should be as per actual capacity (exceeding normal capacity) . overhead recovered and overhead Charged to Profit & Loss A/c in the following cases: Case 1.00 Rs. (a) Normal level of production (b) Fixed production overheads 1.60 Rs.000 *Rs.00.00. 8.00. CHENNAI 15 .000 units. The computation is shown below : Cost /unit of finished goods Raw material cost Direct wages Direct expenses Production overhead Fixed: Variable 20.000+1.000 1.00.Production overhead (40% is fixed) Sales (in units) Closing stock (in units) Normal capacity (in units) Rs.00.000 units Rs.00.154.000 units Solution In case of production at normal or above normal level (cases 1&3) the fixed overhead would be recovered at a rate based on normal production level.
e Rs.25.000 (i) Rs.1. 70.000 Rs. 70.5.000-.000 90.00.000 Case III : Actual production 1. 2.000/ 22.214.171.124.000 2. 1. 6.000 (ii)Rs.5 (b) Fixed overhead at recovery rate Rs.00.000/1.25.000 Therefore fixed overhead recovery rate is Rs.000 (i)Rs.000 1.50.000 units (a) Fixed overhead recovery rate Rs.Case I : Actual production 1. 4.40. 5. The closing stock under retail method from the following data Sale value (a)Opening stock (b) Purchase (c) Sales (net) Solution Steps involved in solving the above problem Step: 1.00.5 i.000 units (a) Fixed overhead recovery rate Rs.Computation of cost of closing stock.000 i.30.000 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.e Rs.00. 5 i.000 i.e Rs. 1.5 (b) Fixed overhead recovered 80.000 1.Computation of gross profit ratio Step:3.00.000*Rs.25.5.00. 50.000=Rs.e Rs.Computation of value of sales value of closing stock Step:2.30.000 (c) Overhead written off to P&L A/c Rs.000* Rs.000 units (a) Fixed overhead recovery rate Rs.000 Rs.4/unit 9. 100. The computation details are as given below: Case II : Actual production 80. 5 per unit (c) Overhead written off as an expense Nil In case of production below normal level (case 2) fixed overhead would be recovered on actual production. Opening stock (at sales price) Add: Net purchase (at sale price) Less: Net sales Closing stock (sale price) 16 Cost (ii) Rs.000*5 i. balance amount of fixed overhead would be changed to Profit & Loss A/c. CHENNAI .00.e Rs.5 per unit (b) Overhead recovered 1.30.25.
stock (b) Sale value of purchase Total (c) Less : Cost price of (i) Op.000 Rs. 295 lakhs included in debtors.000 (Rs.50. there is sufficient evidence that realisable value of the specific order will be negligible. 40.30. A.182 % 3. stock Rs.000 (ii) Purchases Rs. withhold the delivery of finished goods products and suspend the production of remaining items .50.2. 90. qualification by auditors appears to be in order. the customer requested the company for postponement in delivery schedule. there is sufficient evidence of non realisation. 60 lakhs.1.636 10. 140 Lakhs (WIP) Rs. The petition for winding up against the customer has been filed during 2007-08 by A Ltd. the net realisable value of the inventory cannot be readily available as there is no ready market for the specific order inventory Since the company has filed a winding up petition against the customer.000*100)/22.16. CHENNAI 17 .000 Rs.1. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. finished goods and work in progress.00. However due to a liquidity crunch.000 Rs.2008 are given below: (i) (ii) (iii) Debtors balance Rs.80.364 Rs.000 Rs. The details of customer balance and the goods held by the company as work in progress and finished goods as on 31.40.000 = 18. Auditors of A Ltd. Cost of Closing Stock ` (a) Closing stock (at sale price) (b) Less Gross profit 18. Have qualified the accounts stating non –provision of Rs. Gross profit ratio .000 (c) Closing stock at cost Rs.000 Rs.1. Solution As per AS 2 Inventory should be valued at lower of cost and net realisable value.22.90.70. In this case. ` (a)Sale value of op. 95 Lakhs.00.000 (d) Gross profit (e) Gross profit ratio Rs. 60 Lakhs Finished goods Rs. As regards debtors of Rs.03. Hence.182% of Rs. 73. Ltd supplied equipment during 2006-07 as per customer’s design and drawing.
They help determine the ability of an entity to maintain its operating capability. investing (acquisition and disposal of long-term assets and other investments) and financing activities (activities that result in changes in the size and composition of owners’ capital). FOR…. CASH FLOW STATEMENT OF…. and items of income or expense associated with investing or financing cash flows). cash payments or refunds of income taxes (unless they can be specifically identified with financing and investing activities). cash receipts from the sale of goods and the rendering of services. Presentation Direct Method Cash sales Collection from Customers Cash payment to suppliers 18 Rs. XXX SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.. fees.g..Arjun Dhanush (darjun@kpmg. Cash equivalents include short term. to repay loans and to make new investments without recourse to external source of financing. This standard became mandatory to all non-SMCs in case of corporate entities and only to Level I entities in case of non-corporate entities. E. Thus. Cash flow from operating activities* Cash flow from investing activities@ Cash flow from financing activities$ Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Rs. XXX XXX XXX XXX XXX XXX *OPERATING ACTIVITIES Operating activity are the principal revenue-producing activity that are not investing or financing activities. cash receipts from royalties.com) Cash flow statement reflects historical changes in the cash and cash equivalents of an enterprise by classifying the inflows and outflows of cash and cash equivalents during a period into operating (principal revenue-producing activities). CHENNAI . cash payments to suppliers for goods and services.AS 3 – CASH FLOW STATEMENTS . commissions and other revenue. any deferrals or accruals of past or future operating cash receipts or payments. highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. XXX XXX XXX Indirect Method Net profit before taxation and extraordinary items ADJUSTMENTS (non-cash and non-operating Rs. to pay dividends. helps assess the ability of an enterprise to generate cash flows and make appropriate estimates for the future. Enterprises should represent cash flow from operating activities using either direct method (whereby major classes of gross cash receipts and gross cash payments are disclosed) or indirect method (whereby net profit or loss is adjusted for the effects of transactions of a non-cash nature.
bonds. warrants or debt instruments of other enterprises and interests in joint ventures $FINANCING ACTIVITIES These activities result in changes in the size and composition of owners’ capital and borrowings of the enterprise. unrealized foreign exchange gains and loses resulting from fluctuations in forex rates are not cash flows. The effect of such change in exchange rates on foreign currency held as cash and cash equivalents should be reported separately forming part of the reconciliation of the changes in cash and cash equivalents.g.g. loans.. Taxes on income should be classified as cash flow from operating activities and separately disclosed unless the same can be identified directly with any financing or investing activity. cash receipts from disposal of fixed assets or payments from acquisition of fixed assets (including intangibles). financing or investing as appropriate and separately disclose to enable users to understand their nature and effect on the present and future cash flows of the enterprise. These help portray the extent to which an entity incurs expenditure towards resources that intend to generate future income and cash flows.. SPECIFIC CASES Foreign Currency cash flows should be recorded in the enterprise’s reporting currency by applying the exchange rate applicable on the date of cash flow. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. cash payments to acquire shares. CHENNAI 19 . E. and other short or long-term borrowings or other similar instruments. cash proceeds from issuing shares.Cash payment to employees Cash from operations Income taxes paid Cash flow before extraordinary items Extraordinary item Net cash from operating Activities XXX XXX XXX XXX XXX XXX items) Depreciation Forex exchange loss Interest income Dividend Income Interest Expense Operating profit before working capital changes Increase in sundry debtors Decrease in inventories Decrease in sundry creditors Cash generated from operations Income taxes paid Cash flow before extraordinary items Extraordinary item Net cash from operating activities XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX @INVESTING ACTIVITIES Acquisition and disposal of long term assets and other investments not included in cash equivalents are reflected in investing activities. E. Extraordinary items are to be classified either as operating. However. notes.
Historical cash flow information is often used as an indicator of the amount. E. and (c) The conversion of debt to equity. (a) The acquisition of assets by assuming directly related liabilities. It is also useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices. for example. the reporting is restricted generally to the cash flows between itself and the investee/joint venture.g. 20 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. (b) The acquisition of an enterprise by means of issue of shares. Cash flow information is useful in appraising the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises. they are specifically excluded from the cash flow statement in order to ensure consistency with the objective of cash flow statement. It also helps users assess an enterprise’s ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. as it eliminates the effects of using different accounting treatments for the same transactions and events. impact its current cash flows. Non-cash transactions Certain investing and financing activities although capable of affecting the capital and asset structure of a company does not however. This helps to distinguish those cash flows from other regular cash flows. ADVANTAGES: Enables users to evaluate changes in net assets of an enterprise. Enhances comparability in reporting of operating performance of different enterprises. and (b) The portion of the purchase or disposal consideration discharged by means of cash and cash equivalents. its financial structure (including its liquidity and solvency). CHENNAI . Since these non-cash items do not involve cash flows in the current period.Cash flows from interest and dividends received and paid should each be disclosed separately. Dividends paid should be classified as cash flows from financing activities (Note: Cash flows arising from interest paid and interest and dividends received in the case of a financial enterprise should be classified as cash flows arising from operating activities). timing and certainty of future cash flows. Acquisitions and from disposals of subsidiaries or other business units – Aggregate cash flows arising from such activities during the period should be presented separately and classified as investing activities reflecting: (a) The total purchase or disposal consideration. Cash flows arising from interest paid should be classified as cash flows from financing activities while interest and dividends received should be classified as cash flows from investing activities. cash flows relating to dividends and advances. The cash flow effects of disposals are not deducted from those of acquisitions. Investment in an associate or a subsidiary or a joint venture.
the amount of significant cash and cash equivalent balances held by the enterprise that are not available for use by it. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. together with a commentary by management. CHENNAI 21 .DISCLOSURE: Cash and cash equivalents Reconciliation of amount in its cash flow with equivalent items The enterprise should also disclose.
Mythili Venkatesh (myth_zest@yahoo. together with nature of the event and an estimate of the financial effect or a statement that such an estimate cannot be made to be disclosed in the Director’s Report. 2004. The Standard covers two distinct and independent aspects. e. • • • Events that do not relate to conditions existing at the balance sheet date Events that do not affect the figures stated in the Financial Statements Events that representing material changes and commitments affecting the financial position of enterprise. Adjustment could be made when any of the following three conditions are fulfilled.com) Contents of the Standard: The Standard on Contingencies and Events Occurring After Balance Sheet Date was originally issued on November 1982 and revised Standard came into effect from April 1. 2004”. Due to statutory requirements and special nature events. Contingent Liabilities and Contingent Assets” w. Contingencies Events occurring after Balance Sheet date “The provisions of this Standard to the extent it deals with treatment of Contingencies stand withdrawn effective from April 1. Therefore AS 4 deals with treatment of Events Occurring after Balance Sheet date in Financial Statements. • • • Additional information materially affecting the determination of amounts in Balance Sheet is found available. 22 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Disclosure shall be made when there is an occurrence of. These events could be broadly classified into Adjusting events and Non-Adjusting events. Adjusting events are those events which necessitate adjustment of assets and liabilities as on balance sheet date. Disclosure: Events occurring after Balance Sheet date that represent material changes and commitments affecting the Financial Statements of the enterprise. And Non-Adjusting events are the other events whose financial impact requires disclosure of the fact. CHENNAI . April 1. The same is to be dealt with as per AS 29 “Provisions. Events Occurring after Balance Sheet date are those significant post balance sheet events both favourable and unfavourable that occur between the Balance Sheet date and the date on which Financial Statements are approved. f. The fundamental accounting assumption of Going Concern is affected. 1995.AS – 4 CONTINGENCY AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE .
Subject to adequate skill and care being exercised. changes in accounting policies and accounting estimates. Changes in Accounting Estimates: Accounting estimate is appropriation of an amount of an item in the absence of proper means of measurement. Changes in Accounting Policies: Accounting Policies refers to specific accounting principles and methods of applying those principles and adopted by an enterprise in the preparation and presentation of Financials. Net profit or loss for the period Prior period items Changes in accounting estimates Changes in accounting policies Net Profit or loss for the Period To determine the appropriate net profit or loss for the period all the income and expense pertaining to that period are to be recognized in the Profit and Loss statement. It is undertaken in a manner as would not undermine the reliability of financials.com) Contents of the Standard: The Standard on Net Profit or Loss for the Period. The net profit or loss shall comprise of profit or loss from ordinary activities. Prior period items include errors and omissions and exclude changes in accounting estimates. nature. This exercise involves judgement.NET PROFIT OR LOSS FOR THE PERIOD. Coverage under prior period items does not include corrections of accounting estimates made in previous years. The Standard covers four distinct and independent segments. Prior Period Items Prior period items are those which arise in current period as the result of errors and omissions in preparation of Financials of one or more prior periods. CHENNAI 23 . PRIOR PERIOD ITEMS & CHANGES IN ACCOUNTING POLICIES . Extraordinary items are those which arise from events and transactions which are clearly distinct from those of ordinary activities and not expected to recur frequently or regularly. changes with retrospective effect etc. 1997. extraordinary items. Prior Period Items and Changes in Accounting Policies was originally issued on November 1982 and the revised Standard came into effect from April 1. prior period items. Activities of significant size. compliance with Accounting Standards and for appropriate presentation of Financial Statements SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Ordinary activities are those activities which form part of day to day business and related activities. quantifying an amount on an estimated basis is an essential part of process of preparation of financials.AS 5 . For the purpose of compliance with Statue.Mythili Venkatesh (myth_zest@yahoo. or incidence are to be disclosed separately.
accounting policies can be changed. And if quantification of the effect of change is not possible the fact of change is to be disclosed. Disclosed requirements of Changes in accounting estimates are the nature and amount of change in the estimate with its impact on later periods quantifying the impact where determinable. which mean the size. nature and its incidence. Disclosure: Items and expense falling under ordinary activities should be disclosed separately in all cases. performance or cash flow. Extraordinary Items should be disclosed in income statement in a manner that. its impact on current profit or loss can be perceived. Not only the changes which affect the current year but also the changes which affect the later periods need to be disclosed if material. new policies developed for those transactions which did not occur previously do not result in change in accounting policies. CHENNAI . Also. 24 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Any material change in accounting policy that materially impacts on the financial position. keeping the materiality aspect in view. Any new adoptions of accounting policies for events and transactions that differ in substance from previously occurring events or transactions do not result in change in accounting policies. Prior Period Items are disclosed separately in a manner that the impact of item on current year profit is perceived. This would be helpful in better understanding of the financials and also for making future projections. should be disclosed that the adjustments from such a change is clearly brought out.
was issued by the Institute of Chartered Accountants of India in November 1982. Depreciation Accounting. (v) live stock. • The purpose of recording depreciation as an expense is to spread the initial price of the asset over its useful life. oils. plantations and similar regenerative natural resources. (iii) expenditure on research and development.Rashida Siamwala (rashida. it records a depreciation expense to allocate a portion of the cost of the buildings. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Council of the Institute at its 168th meeting.AS – 6 DEPRECIATION ACCOUNTING . • Each time a company prepares its financial statements. • Subsequently. in the context of insertion of Schedule XIV in the Companies Act in 1988. This statement also does not apply to land unless it has a limited useful life for the enterprise. machines or equipment it has purchased to the current fiscal year.4. 1989.1995. except the following items to which special considerations apply(i) forests. CHENNAI 25 . 1994. (ii) wasting assets including expenditure on the exploration for and extraction of minerals. Disclosure of accounting policies for depreciation followed by an enterprise is necessary to appreciate the view presented in the financial statements of the enterprise. natural gas and similar non-regenerative resources. the Institute brought out a Guidance Note on Accounting for Depreciation in Companies which came into effect in respect of accounting periods commencing on or after 1st April. BRIEF BACKGROUND ON AS 6 DEPRECIATION ACCOUNTING • Accounting Standard (AS) 6. LIST OF DEPRECIABLE ASSETS TO WHICH AS 6 DOES NOT APPLY AS – 6 deals with Depreciation Accounting and applies to all depreciable assets. held on May 26-29.com) INTRODUCTION In common parlance depreciation can be viewed as • A process by which a company allocates an asset's cost over the duration of its useful life. • Different accounting policies for depreciation are adopted by different enterprises. decided to bring AS 6 in line with the Guidance Note which deferred from the AS 6 in respect to (a) change in the method of depreciation. (iv) goodwill. • AS 6 is mandatory in respect of accounts for periods commencing on or after 1.siamwala@yahoo. and (b) change in the rates of depreciation.
Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. for rental to others. or other amount substituted for historical cost in the financial statements. Depreciation includes amortisation of assets whose useful life is predetermined.loss of value of a depreciable asset arising from use. and (iii) are held by an enterprise for use in the production or supply of goods and services.the wearing out.consumption or other . CHENNAI . DEPRECIATION Depreciation is a measure of . . . DEPRECIABLE ASSETS Depreciable assets are assets which (i) are expected to be used during more than one accounting period.historical cost.PROCESS OF DEPRECIATION ACCOUNTING DETERMINATIO N OF DEPRECIABLE ASSET AND RESIDUAL METHOD OF COMPUTING AND ALLOCATING DEPRECIATION DISCLOSURE REQUIREMENTS TERMINOLOGIES DEFINED AS PER AS 6 Before going into the accounting aspects of depreciation let us familiarize with certain terms for better understanding. USEFUL LIFE Useful life is either (i) the period over which a depreciable asset is expected to be used by the enterprise. effluxion of time or obsolescence through technology and market changes. or (ii) the number of production or similar units expected to be obtained from the use of the asset by the enterprise. or for administrative purposes and not for the purpose of sale in the ordinary course of business.less the Estimated residual value 26 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. DEPRECIABLE AMOUNT Depreciable amount of a depreciable asset is its . and (ii) have a limited useful life.
One of the bases for determining the residual value would be the realisable value of similar assets which have reached the end of their useful lives and have operated under conditions similar to those in which the asset will be used.Determination of residual value of an asset is normally a difficult matter. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. CHENNAI 27 . FACTORS TO BE CONSIDERED WHILE ASSESSING AND CHARGING DEPRECIATION 1. even if not in agreement with the other method presently followed in its other units. for different types of assets. in the method followed earlier by them and which was not consistent with their own method. In respect of depreciable assets which do not have material value.RESIDUAL VALUE AND ITS DETERMINATION . 205(2) of the companies act. . (ii) the nature of the use of such asset and (iii)circumstances prevailing in the business. METHODS OF COMPUTING AND ALLOCATING DEPRECIATION There are several methods like straight line method. depreciation is often allocated fully in the accounting period in which they are acquired. . Historical Cost or other amount substituted for the historical cost of the depreciable asset when the asset has been revalued. annuity method. or at the time of subsequent revaluation of the asset. The company wants to continue to charge depreciation for the con acquired unit. reducing balance method. it is normally regarded as nil.It is the estimated value at the end of its useful life. if the residual value is likely to be significant. machine hour method. Expected useful life of the depreciable asset and 3. Example A ltd purchased an existing bottling unit. it is estimated at the time of acquisition/installation. Straight line method and 2. provided the same methods are consistently adopted every year in terms of Sec. Those most commonly employed in industrial and commercial enterprises are the 1. (i) type of asset. sinking fund method. Reducing balance method. The management of a business selects the most appropriate method(s) based on various important factors e.On the contrary.g. production unit’s method. The ICAI’s Guidance Note on Accounting for Depreciation in Companies provide that a company may adopt or follow different methods of depreciation.If such value is considered as insignificant. 2. of allocating depreciation over the useful life of the assets. . The method of charging depreciation on machinery of the acquired unit was different from that followed by the company in its other units. A combination of more than one method is sometimes used. The company can continue in this case to follow the previous method of charging depreciation for the acquired bottling unit. Estimated residual value of the depreciable asset. .
The method of depreciation should be applied consistently to facilitate comparability of the results of operations of the enterprise from period to period. For example. Change in method of depreciation is always applied with retrospective effect. for that class of assets. CHANGE IN METHOD OF PROVIDING DEPRECIATION 1. i. 2.IMPACT OF RATES OF DEPRECIATION PROVIDED IN GOVERNING STATUE The statute governing an enterprise may provide the basis for computation of the depreciation. In view of the corrosive climate the company felt that its machine life was reducing faster. provided that such estimate is not less than the rate prescribed by the Companies Act. Can the company charge a higher rate of depreciation? The company can charge depreciation based on its useful life of machinery. Hence. CHENNAI . The impact can be analyzed as under Management's estimate of useful life is Computation of Depreciation Shorter than prescribed under Statute At a higher rate. 3.e. as estimated by Management Equal to those prescribed under Statute At the rates prescribed under the Statute Higher than prescribed under Statute At the rates prescribed under the Statute. [Lower rates can be adopted only if allowed under law] Example XYZ Ltd has set up its main plant on coastal land. depreciation is recalculated in accordance with the new 28 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. the Companies Act. The method of depreciation can be changed only for or Compliance with Statutory Requirement or Compliance with an Accounting Standard Consideration that the change would result in a more appropriate preparation or presentation of the Financial Statements of the enterprise. 1956 lays down the rates of depreciation in respect of various assets.
3. Assets are revalued The provision of depreciation should be based on the Revalued amount and on estimate useful life. B/Sheet and Notes SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. REVISION IN ESTIMATED USEFUL LIFE OF AN ASSET AND WHEN ASSETS ARE REVALUED TREATMENT OF DEPRECIATION WHEN There is change in Historical Cost The depreciation on revised unamortized depreciable amount is provided prospectively over the residual useful life. 2. Amount of Depreciation in case of Revaluation of Depreciable Assets. Place of Disclosure P & L and Notes P & L Notes P&L P&L and B/Sheet P&L. Revision in estimated useful life of an asset The unamortized depreciable amount should be charged over the revised remaining useful life. discarded.Depreciation rates or the useful lives of the assets. in case if any depreciable asset is disposed of.ACCOUNTING FOR DEPRECIATION AMOUNT WHEN THERE IS CHANGE IN HISTORICAL COST. if they are different from the principal rates specified in the statue governing the enterprise. CHENNAI 29 . 4.Related Accumulated Depreciation 7. Net Surplus or Deficiency (if material). Effect on any change in method of depreciation. and 8. DISCLOSURE REQUIREMENTS Matters to be disclosed 1. Historical costs or other amount substituted for Historical Cost of each class of depreciable asset. demolished or destroyed. if Revaluation has a material effect on the amount of depreciation. 5.Total Depreciation for the period for each class of asset and 6. Depreciation method used.
US GAAP & INDIAN GAAP 30 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.but total if such items are material When the total of such items is less than 10% of the total actual cost of Plant and Machinery. 100% depreciation (full write off of low value items) is permissible. The accounting policy in this regard should be disclosed under AS . Depreciation under the Units of Production Method Under Circular 12/2003 dated 21.FEW EXPERT ADVISORY COMMITTEE (EAC) OPINION IN AS 6 1.2003. the dept. constructed on leasehold land Useful life of assets construed on leasehold land = period of lease of the land. COMPARITIVE POSITION OF IFRS. 4. Companies should not use the units of production method. Otherwise the rate as per Schedule XIV should be adopted. CHENNAI . Surplus from the disposal of rubber trees should be recognized in P&L a/c and rubber plantations should be amortised on a systematic basis. The depreciation rate should be worked out on the above basis. of Company Affairs. Schedule XIV rates should be adopted. Buildings.02. including the expected period of extension which is reasonably certain at the inception of the lease.000/. If rate so worked out is lower than specified in Schedule XIV.1 2. has clarified that WDV/SLM may be used. Individual items below ` 5. 3. etc.
e useful lives are prescribed and depreciation rates are to be derived from there) US GAAP Same as IFRS requirements INDIAN GAAP AS 6 (Revised) requires depreciation to be allocated over an asset's useful life. higher depreciation based on useful life of the asset is required to be provided. Lives of assets are not prescribed by the Companies Act but can be derived from depreciation rates. Where applicable. WDM. etc. So far as useful life is concerned the same can be reviewed but it is not mandatory to do so.IFRS Depreciation rates are based on the useful economic lives of the assets (i. Estimate of residual value are not reviewed. Units of production method. Only SLM and WDV are permitted SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. CHENNAI 31 . Changes to be Accounted for as change in an accounting estimate Variety if depreciation methods Similar to IFRS Requirements permitted such as SLM. upward Additional depreciation on revaluation of fixed assets (in case of upward revaluation) can be credited to the profit and loss account from revaluation reserve. Additional depreciation on revalued assets can be credited to retained profits from revaluation Reserve Not Applicable revaluation is not permitted) (as Residual value and useful life of the No such guidance is available asset to be reviewed atleast at each financial year end.
Construction Contract It is a contract in which a Contractor agrees to build some asset for his customer. CHENNAI . in certain circumstances.in) An overview: Prescribes PRINCIPLES of Accounting for Construction Contracts Principles of REVENUE RECOGNITION by the contractors Applies to all enterprises in respect of construction contracts entered Construction contracts generally long term to complete. Hence it prescribes revenue recognition principles. Ruban (ruban. it is necessary to apply the statement to the separately identifiable components of a single contract or to a group of contracts together in order to reflect the substance of a contract or a group of contracts. 32 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. However. When it is treated as a “Separate Construction Contract” When separate proposals have been submitted for each asset. Contractor’s Profit = Contract Price – Construction cost In general. Separate negotiation for each asset The cost and revenues of each asset can be identified.S.co. Contracts Fixed price contracts Cost Plus Contracts Combining and Segmenting Construction Contracts: The requirements of this Statement are usually applied separately to each construction contract.s@mca.AS 7 – CONSTRUCTION CONTRACTS .
The amount of contract revenue may increase or decrease from one period to next. They are capable of being reliably measured. Para 11 Contract revenue is measured at the consideration received or receivable. The amount of contract revenue recognised as revenue in the statement of profit and loss as per the requirements of AS 7 should be considered as 'turnover'. or errors in specification or design and disputed variations in contract work. • A variation is included in contract revenue only when it is probable that the customer will approve the variation and the amount of revenue arising from the variation. Para 14 Incentive payments are additional amounts payable to the contractor if specified performance standards are met or exceeded.When it is treated as a “Single Construction Contract” The group of contracts is negotiated as a single package. To the extent that it is probable that they will result in revenue & ii. Para 13 A claim is an amount that the contractor seeks to collect from the customer or another party as reimbursement for costs not included in the contract price. Can revenue be treated as ‘turnover’? The issue is whether the revenue so recognised in the financial statements of contractors as per the requirements of AS 7 can be considered as 'turnover'. Incentive payments are included in the contract revenue when: • the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded & SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. & • The amount of revenue can be reliably established. claims and incentive payments i. Such changes may be in the nature of change in duration of contract or change in specifications or designs. Claims may arise where delays are caused by customer action. As measurement of amounts of revenue arising from claims is subject to a high level of uncertainty and depends on outcome of negotiations. The contracts are so closely interrelated The contracts are performed concurrently or in a continuous sequence. Hence these are included in contract revenue only when : • Negotiations have reached advanced stage such that it is probable that the customer will accept the claim & • that this claim can be reliably estimated. CHENNAI 33 . Para 12 A variation is an instruction by the customer for a change in the scope of the work to be performed under the contract. Paragraphs stated in AS 7 Para 10 Contract revenue should comprise of the following: • Initial amount of revenue agreed in the contract & • Variations in contract work. It may lead to an increase or decrease in contract revenue.
These costs may be reduced by any incidental income that is not included in contract revenue. for example income from the sale of surplus materials and the disposal of plant and equipment at the end of the contract. Para 17 Costs may be attributable to contract activity in general and can be allocated to specific contracts include: • • • Insurance Cost of design and technical assistance that is not directly related to the specific contract. equipment and materials to and from the contract site. (d) costs of moving plant. including site supervision. and (h) claims from third parties. Such costs that may be allocated include borrowing costs as specified in AS 16 also. Contract Costs: Para 15 Contract costs should comprise: • Costs that relate directly to the specific contract • Costs that are attributable to the contract activity in general and can be allocated to the contract & • Such other costs that are specifically chargeable to the customer under the terms of the contract. including expected warranty costs. This allocation is based on normal level of construction activity. (b) costs of materials used in construction. (c) depreciation of plant and equipment used on the contract. Construction overheads. (f) costs of design and technical assistance that is directly related to the contract.• the amount of incentive payment can be measured reliably. Such costs to be allocated using systematic and rational methods which are applied consistently to all costs having similar characteristics. (e) costs of hiring plant and equipment. 34 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. CHENNAI . Para 16 Costs that relate directly to a specific contract include: (a) site labour costs. (g) the estimated costs of rectification and guarantee work.
they are not included in contract costs when the contract is obtained in a subsequent period. R&D costs for which contract does not provide of reimbursement. the term 'revenue' includes revenue from sales transactions. royalties and dividends. Such costs include: • • • • general administration costs for which reimbursement is not specified in the contract. it may be noted that the recognition of revenue as per AS 7 may be inclusive of profit (as per paragraph 21 reproduced above) or exclusive of profit (as per paragraph 31 above) depending on whether the outcome of the construction contract can be estimated reliably or not. within the meaning of AS 9. Selling costs. However. in either case it is considered as revenue as per AS 7. Revenue Recognition. revenue should be recognised only to the extent of contract costs incurred of which recovery is probable. Depn. For example. and b. contract costs should be recognised as an expense in the period in which they are incurred. When the outcome of a construction contract cannot be estimated reliably: a. When the outcome of a construction contract can be estimated reliably. When the outcome of the construction contract can be estimated reliably. the revenue is recognised inclusive of profit and when the same cannot be estimated reliably. contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 35. Where the above given costs are recognized in the period in which they are incurred. CHENNAI 35 . Paragraphs 21 and 31 of AS 7 provide as follows: "21." "31. costs that relate directly to a contract & which are incurred in securing the contract are also considered as contract costs if • The costs can be separately identified and measured reliably. it is recognised exclusive of profit. However. Of idle plant and equipment that is not used on a particular contract. 'Revenue' is a wider term.Para 19 Costs that cannot be attributed to the contract activity or cannot be allocated to the contract are excluded from the costs of the construction contract. The term 'turnover' is used in relation to the source of SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. & • It is probable that the contract will be obtained." From the above. Para 20 Contract costs include costs attributable to the contract from the date of securing the contract to the final completion of the contract. An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 35. rendering of services and from the use by others of enterprise resources yielding interest.
Recently. the Assessing Officer (AO) recomputed income based on the percentage/progressive completion method prescribed by AS 7. Assessment Year: 2005-06) Judgement : Background:. The taxpayer was following the Project Completion Method of accounting since its inception in the assessment year 1995-96 and the income of the project was offered for taxation in the year of completion of the project. Accordingly. However. the tax department cannot change the method of accounting as any change would be a tax neutral. 36 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. before the Expert Advisory Committee (EAC) formed by the ICAI.revenue that arises from the principal revenue generating activity of an enterprise. ITO [2010-TIOL-737-ITAT-MUM] (Judgment date: 20 August 2010. the revised AS 7 is applicable only to Contractors. Hence. the construction activity is its principal revenue generating activity. In case of a contractor. The Commissioner of Income-tax (Appeals) [CIT(A)] uphold the AO’s action and held that the revised AS 7 was applicable to taxpayer. The expenditures incurred on a project were accumulated under the head ‘construction work-in-progress’ and in the final year of completion it was taken as expenditure. Further. CHENNAI .The ICAI issued Accounting Standard (AS) 7 – ‘Construction Contract’ in the year 1983 which was later on revised in the year 2002. the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) has held that the Accounting Standard (AS) 7 – ‘Construction Contract’ (revised) issued by the Institute of Chartered Accountants of India(ICAI) is applicable only to contractors and not to builders and real estate developers. the Project CompletionMethod consistently followed by the taxpayer for recognising revenue in the books of accounts cannot be regarded as an unreasonable. Accordingly. As per the revised AS 7 the accounting was to be done as per percentage/progressive completion method. • For the Assessment Year 2005-06. the revenue recognised in the statement of profit and loss of a contractor in accordance with the principles laid down in AS 7. Citation : Unique Enterprises v. However. the EAC observed that the pre revised AS 7 specifically mentions about its applicability to enterprises undertaking construction activities on their own which would include real estate developer. The AS 7 laid down the principles of accounting for ‘construction contracts’ in the financial statements of the Contractors. on applicability of revised AS 7 to a real estate developer. by whatever nomenclature described Court Decisions: Revised AS 7 – ‘Construction Contract’ is applicable to only contractors and not to builders and real estate consultants Court : Mumbai bench of the Income-tax Appellate Tribunal Brief : Revised Accounting Standard 7 – ‘Construction Contract’ is applicable to onlycontractors and not to builders and real estate consultants. the Project Completion Method followed by the taxpayer for recognising revenue in the books of accounts cannot be regarded as an unreasonable. Facts of the Case • The taxpayer was engaged in the business of redevelopment of tenanted property. In response to a query rose. the taxpayer computes its taxable income following Project Completion Method.
• The taxpayer also relied on the Guidance Note on ‘Recognition of Revenue by Real Estate Developers’ issued by ICAI in 2006. Tribunal’s ruling • The Tribunal observed that the pre revised AS 7 issued by ICAI in the year 1983. it is clear that the risks and the rewards of ownership have not been transferred to the buyer and it retains effective control of the property. Assessment Year 2006-07. v. such specific inclusion is missing in the AS 7 revised in the year 2002. The taxpayer contended that Guidance Note read with the Agreement of Sale. CHENNAI 37 . • The method followed by the taxpayer cannot be called as an unreasonable method and any change in the method is revenue neutral. DCIT  33 DTR 514 (Bang). However.Taxpayer’s Contentions • The taxpayer relied on the opinion of the EAC and contended that revised AS 7 issued in the year 2002 was not applicable to the taxpayer since it does not apply to builders and real estate developers. Since the taxpayer admittedly completed only 53. the Mumbai Tribunal in the case of Champion Construction Company v. • The Tribunal observed that the Bangalore Tribunal in the case of Prestige Estate Projects (P) Ltd. Further. • As per the Guidance Note on ‘Recognition of Revenue by Real Estate Developers’ issued by the ICAI the taxpayer is bound to declare income during the year since the Agreements to sale entered by the taxpayer was partly complete and the risks was already passed. held that the Government has not specified AS 7 in Section 145 of the Act and the taxpayer developer had been regularly. before AS 7 was issued by the ICAI.95 percent of the construction it cannot be said SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. The reliance was also placed on the decision of the Bangalore Tribunal in the case of Prestige Estate Projects (P) Ltd. The Tribunal also went through the opinion given by the EAC on the applicability of AS 7 and held that the revised AS 7 does not apply to builders and real estate developers. ITO  5 ITD 495 (Mum) had accepted the Project Completion Method as an appropriate method of computing income. • The taxpayer contended that it has been consistently following the Project Completion Method of accounting since its inception and has accordingly offered to tax the entire income in the next assessment year i. specifically included enterprises undertaking construction activities on their own and as such to builders and real estate developers. the AO cannot reject the accounts of the taxpayer under Section 145(3) of the Act. the tax department cannot change the method of accounting which was accepted by it over the years. employing Project Completion Method which is an accepted method of accounting.e. Accordingly. the same method of accounting followed in earlier years had been accepted by the tax department. Further. • The Tribunal relied on the decision of the Mumbai Tribunal in the case of Champion Construction Co. and held that it would be appropriate to offer income tax in the year in which 80 percent of the construction was completed. Further. executed by the taxpayer. Tax department’s Contentions • The tax department contended that AS 7 was applicable to builders and contractors and revenue recognition has to be done as per AS 7 read with AS 9. under a bonafide belief.
38 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. 169. 9. the company took the view that the Guidance Note referred to above does not apply in the instant case. 5. Hence. CHENNAI . the Tribunal allowed the taxpayer’s contention to follow Project Completion Method and recognise the revenue accordingly in the year of project completion. 419. the expenditure of Rs. the company entrusted the work of construction of a new hall to CPWD which was completed in all respects in November.2000 should be deducted from the construction cost of the project. 3. 1998. Tata Iron & Steel Co. the company started letting out the same from November. including structural work and electrical installations. • Accordingly.64 lakh in the years 1998-99 and 1999-2000 respectively. 4. 1998. The government auditors are of the view that since the completion certificate of the hall is awaited from CPWD the expenditure incurred on the construction of the hall should be shown as ‘Capital Work-in-Progress’ in the annual accounts of the company after deducting the income generated from the project during construction period. As the hall was ready for commercial use.97 lakh from the letting out of the hall upto 31. the audit observation is based on the ‘Guidance Note on Treatment of Expenditure during Construction Period’ issued by the Institute of Chartered Accountants of India. 1998 which generated rental income of Rs. the rental income of Rs. organises fairs/exhibitions in order to achieve its objective of promoting India’s trade. The formal completion certificate of the hall is. 1998. even if a better method could be visualised. the purpose of the construction of the hall was to generate rental income. According to the querist. Accordingly.33 lakh and Rs. to depict true and fair view of the state of affairs of the company.3. and that in such a case. The company’s contention is that the hall was ready for commercial use in November. 1998 and that issuance of completion certificate by CPWD has no relevance to the actual completion of work because such certificates are issued only after rectification of all the defects by the contractors and settlement of final bills by CPWD. The Tribunal refrained from deciding as to whether any revenue has to be recognised in the relevant assessment year based on the Guidance Note issued by ICAI considering the agreement to sale entered into by the taxpayer. still awaited from CPWD. 2. the said Guidance Note referred to by the government auditors deals with treatment of income from miscellaneous sources generated during construction period. Facts of the Case 1. 1956. in the case of the company. As the hall was put to commercial use from November. 588.that the taxpayer has substantially completed the project so as to recognize income under the Project Completion Method of accounting. Cut-off date for capitalisation of construction cost A.97 crore incurred on the construction of the hall was capitalised with effect from November. As per the querist. where it was held that the method of accounting followed by the taxpayer company cannot be said to be unreasonable. however. the method consistently followed should be accepted. Ltd. whereas. During the year 1998-99. • The Tribunal also relied on the decision of the Bombay High Court in the case of CIT v. A company incorporated under section 25 of the Companies Act.
however. Treatment of retention money in the financial statements of a contractee company is setting up an integrated iron and steel plant. Opinion finalised by the Committee on 17. the Committee is of the view that the hall should be construed as ready for its intended use when it is ready to generate rental income. The querist has sought the opinion of the Expert Advisory Committee as to: (a) whether the cost of construction of the hall less the rental income received in the intervening period should be capitalised on formal receipt of certificate of completion from CPWD and depreciation charged thereafter.. 1998. The Committee also notes that the intention of the construction of the hall was the generation of rental income from letting out of the same. In this context.2001. The terms of payment in various contracts are as below: (i) For civil contracts (a) 10% of total contract price as mobilisation advance shall be paid after signing of the contract.e. (b) The depreciation should be charged from the date the hall was put to commercial use. will have no bearing on the capitalisation of the hall in the books of account.1. Accordingly. D. 1998. the rental income earned by the company after the cut-off date as arrived at as per paragraph 8 above would not be deducted in arriving at the construction cost of the project. 2. the Committee is of the following opinion on the issues raised in paragraph 7: (a) The cost of construction of the hall should be capitalised when the hall is ready for its intended use of letting out. The receipt of certificate of completion from CPWD is a matter of procedural formality and. the cut-off date for capitalisation of expenditure should be the date when the hall is ready for its intended use and any expenditure incurred or income generated after the cut-off date should be treated as of revenue nature. the Committee also notes that paragraph 20 of Accounting Standard (AS) 10. Total value of works executed shall be arrived based on actual quantity of SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Therefore. and subject to submission of pre-receipted invoice and bank guarantee.6. The government auditors. Consequently. the company)/its consultants and on submission of certain documents. C. (b) 80% of the total value of work executed shall be paid on monthly pro-rata basis subject to satisfactory progress of work and on certification of work by the purchaser (i. The entire work for setting up the plant has been divided into several packages which have been awarded to different contractors for execution. dropped the above observation from their report on the assurance that the matter shall be referred to the Institute of Chartered Accountant of India for expert advise. B. Points Considered by the Committee 8. that is from November. Opinion On the basis of the above. CHENNAI 39 . or (b) whether depreciation should be charged in the accounts from the date the hall has been put to commercial use in November. provides that “the cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for its intended use”. Queries 7. ‘Accounting for Fixed Assets’.
works executed as certified by the purchaser/consultant and unit rates applicable for such items of work. (c) 5% of the ex-works price after issue of preliminary acceptance certificate. (b) 5% of the contract price after mobilisation of men and material handling equipment as approved by the purchaser/consultant to commence erection work at site and establishment of site office and stores. (f) 5% of the contract price upon issue of final acceptance certificate. (ii) For supply contracts (a) 10% of ex-works price towards supplies shall be paid as advance after signing of the contract. CHENNAI . and erection and fabrication contracts: 85% of the value of work completed or supply made as certified by the principal consultant is booked as capital WIP (being 10% towards adjustment of mobilisation advance and 75% towards progress payments). (d) 5% of the ex-works price after issue of commissioning certificate and submission of a fresh bank guarantee for 5% of total contract price towards guarantee/warranty valid till the expiry of guarantee/warranty period. (b) 75% of the ex-works price of the supplies and 100% of taxes. duties and freight on pro-rata basis subject to submission of requisite documents as per despatch instructions. (c) The balance (10% or 15% of the contract price. (c) 10% of the contract price shall be paid on issue of completion certificate by the purchaser against submission of pre-receipted invoice and bank guarantee for equal amount valid till the expiry of maintenance and guarantee period.” 4. The querist has reproduced the company’s accounting policy relating to capital work-in-progress which is as below: “In accounting for the capital WIP. (b) For supply. (d) 5% of the contract price after issue of preliminary acceptance certificate. (e) 5% of the contract price on issue of commissioning certificate and submission of a performance bank guarantee for 5% of the total contract price towards guarantee/warranty valid till the expiry of guarantee/warranty period. Both the bank guarantees will be valid till sixty days after issue of commissioning certificate. the portion that has been retained as per terms of contract is not accounted for till it becomes due for payment/release of amounts after completion of the job. (e) 5% of the ex-works price after issue of final acceptance certificate. (c) 75% of the contract price on monthly pro-rata basis as per approved billing schedule subject to satisfactory progress of work as per milestones fixed and duly certified by purchaser/consultant on production of requisite documents. as the case may be) is not accounted for till the issuance of preliminary acceptance certificate. Payment shall be released only after submission of a bank guarantee for equal amount valid till sixty days after the completion of supplies and having submitted the bank guarantee towards security deposit. (iii) For erection and fabrication contracts (a) 5% of the contract price as advance against submission of bank guarantee for equal amount and another bank guarantee towards security deposit for 10% of the total contract price. 40 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. commissioning certificate and final acceptance certificate as provided in the contract. The payment shall be released on receipt of a bank guarantee for equal value valid till sixty days after issue of commissioning certificate. the company accounts for capital work-in-progress in the following manner: (a) For civil works: 90% of the value of work completed and certified by the principal consultant is booked as capital WIP (being 10% towards adjustment of mobilisation advance and 80% towards progress payments). Keeping the above in view. 3.
the same is restricted to the exposure of the company towards such contracts by way of performance bond/guarantees etc. on the basis of amount billable under the contracts. power. cement. However. it is not possible in the absence of settled terms to determine whether there is a profit or loss on such jobs. whichever is less. income has been accounted for on the basis of such undisputed terms though the final terms are still to be settled. provided/under negotiation in the respective contracts. A consultancy and engineering company engaged in design and project management activities in the petroleum sector undertakes work in the areas of petrochemicals.Query: Applicability of Accounting Standard (AS) 7 to an unsold site. A public sector undertaking.” Inclusion of indirect costs in the total contract cost A. warranties. pipelines. warranties and penalties etc. are to the extent of 100% of the contract value. CHENNAI 41 . Turnover/Work-in-Progress (1) No income is taken into account in respect of jobs for which: (a) the terms of remuneration receivable by the company have not been settled and/or scope of work has not been clearly defined and. Turnover Income from services rendered is accounted for: (a) in the case of cost-plus jobs. and (c) in the case of contracts providing for a percentage fee on equipment/project cost. therefore. 1. paper. undertakes as a part of its activities. (b) the terms have been agreed to at lumpsum basis but: (i) the physical progress is less than 25%. ocean engineering. registered under the Companies Act. II. 2. in cases where minimum undisputed terms have been agreed to by the clients. and after adjusting the obligation towards guarantees.. The accounting policy of the company for recognition of revenue is as below: I. Following is the Accounting Policy followed by the company for accounting of profits in construction contracts: “Profit is recognised on percentage of completion method which is further reduced to 80% for keeping an appropriate allowance for future unforeseeable factors in cost and sale prices till the project is fully completed. (b) in the case of lumpsum contracts. 1956. Costs of jobs as above are carried forward as work-in progress. Facts of the Case 1. construction of properties and sells the same. ‘Accounting for Construction Contracts’. However. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. on the basis of physical progress as certified. during the course of audit of accounts for the year 1996-97. metallurgy. ports and harbours. in regard to contracts where guarantees. (ii) supply of equipment is not complete in case of works contracts. penalties etc. government auditors have expressed certain reservations with regard to non-provision of foreseeable losses and commented that the treatment adopted by the company is not in line with paragraph 13 of Accounting Standard (AS) 7. etc. as proportion of actual direct costs of the work to latest estimated total direct costs of the work or in proportion to work estimated to have been executed. 3. According to the querist. oil and natural gas. read with paragraph 19 of the same Standard.
39 lakhs. as regards cost-plus jobs. what is the correct manner of accounting for foreseeable losses or disclosure thereof. to charge them off to the profit and loss account in the year of incurrence. The querist’s contention is that there are no foreseeable direct losses on the jobs based on revised direct cost estimates. or in proportion to the work estimated to have been executed. in their report. The invoices to the clients are raised broadly under the following heads: (i) payroll cost. (b) If the treatment adopted by the company is correct. whichever is less. The overheads of the company are billed to the clients at a fixed percentage of the payroll cost. (ii) out-of-pocket expenses. This. 42 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. According to the querist. (c) If the treatment adopted by the company is not correct. according to them. According to the querist.(2) While determining the work-in-progress overheads incurred at head office and other offices are not considered. the government auditors. and (iii) fee.” 4. 5. whether any further disclosure in the accounting policy of the company is called for. (ii) Income is recognised in the same proportion which the actual direct cost of the work done bears to the latest estimated total direct cost of the work. While determining the work-inprogress. have stated that paragraph 13 of AS 7. It recognises income on lumpsum jobs in the following manner: (i) No income is recognised when the progress of job is less than 25%. In respect of lumpsum contracts. fee and overheads are recovered. B. As the payroll cost. have taken into account the indirect costs also besides direct costs. out-of-pocket expenses. the company raises its invoices on the clients on the basis of milestones stated in the contract. According to the querist. the auditors. is not correct in the context of the accounting policy followed by the company in respect of indirect costs. the company draws revised cost estimates at the end of each financial year. For this purpose. according to the querist.. overheads incurred at head office and other offices are not included in work-in-progress and are charged to the profit and loss account in the respective years. there is no question of having any direct losses on these jobs since these are cost-plus jobs. viz. CHENNAI . requires that the foreseeable losses on the entire contract should be provided for in the financial statements irrespective of the amount of work done and method of accounting followed. As per the querist. The querist has sought the opinion of the Expert Advisory Committee on the following issues: (a) Whether the treatment adopted by the company in respect of exclusion of indirect costs in computing the total contract cost as explained above is as per the generally accepted accounting principles. read with paragraph 19 of the same Standard. 6. 7. the government auditors have pointed out three cases in which. This percentage is worked out on the basis of previous year’s data and applied in the following year. the company has not provided for the foreseeable losses to the extent of Rs. while working out the losses. the company recognises revenue as and when the expenditure is incurred. Queries 8. 267.
they should not be included in contract cost (unless they are specifically attributable to a contract). the Expert Advisory Committee is of the following opinion on queries raised in paragraph 8 above: (a) If the indirect costs under reference are of the nature described in paragraph 8. (c) The foreseeable losses should be provided for on the basis of the estimate of total contract cost including the indirect costs of the nature described in paragraph 8. if these costs are of the nature described in paragraph 8. On the other hand. Opinion Based on the above.7 of AS 7. CHENNAI 43 .D. their non-inclusion in contract cost is not appropriate. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.6 of AS 7. (b) See (a) above.6 of AS 7.
Examples of items not included within the definition of "revenue" for the purpose of this Statement are: (i) Realised gains resulting from the disposal of. and — the use by others of enterprise resources yielding interest.S. 2. non-current assets e. Harish (harishprems@gmail. (iii) Revenue arising from government grants and other similar subsidies. (ii) Revenue arising from hire-purchase. (v) Unrealised gains resulting from the restatement of the carrying amount of an obligation. The Statement is concerned with the recognition of revenue arising in the course of the ordinary activities of the enterprise from — the sale of goods. (ii) Unrealised holding gains resulting from the change in value of current assets. This Statement deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise.AS 9 – REVENUE RECOGNITION . (iv) Realised gains resulting from the discharge of an obligation at less than its carrying amount. Definitions 44 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. appreciation in the value of fixed assets. royalties and dividends. (iii) Realised or unrealised gains resulting from changes in foreign exchange rates and adjustments arising on the translation of foreign currency financial statements. CHENNAI .com) Introduction 1. 3. This Statement does not deal with the following aspects of revenue recognition to which special considerations apply: (i) Revenue arising from construction contracts. lease agreements. — the rendering of services. and the natural increases in herds and agricultural and forest products. (iv) Revenue of insurance companies arising from insurance contracts.g. and unrealised gains resulting from the holding of.
the goods involved are often valued at net realisable value. 45 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. or its associated costs. In such cases when sale is assured under a forward contract or a government guarantee or where market exists and there is a negligible risk of failure to sell. performance may be substantially complete prior to the execution of the transaction generating revenue. Rendering of Services Revenue from service transactions is usually recognised as the service is performed. sometimes the parties may agree that the risk will pass at a time different from the time when ownership passes. in most cases. The following terms are used in this Statement with the meanings specified: a) Revenue is the gross inflow of cash. these uncertainties may influence the timing of revenue recognition.4. while not revenue as defined in this Statement. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. receivables or other consideration. there may be situations where transfer of property in goods does not coincide with the transfer of significant risks and rewards of ownership. such as when agricultural crops have been harvested or mineral ores have been extracted. c) Proportionate completion method is a method of accounting which recognises revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract. royalties and dividends. are sometimes recognised in the statement of profit and loss and appropriately described. and from the use by others of enterprise resources yielding interest. When uncertainties exist regarding the determination of the amount. b) At certain stages in specific industries. Explanation 5. However. CHENNAI . 7. The transfer of property in goods. 6. receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods. b) Completed service contract method is a method of accounting which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed. In an agency relationship. either by the proportionate completion method or by the completed service contract method. Such amounts. Such cases may arise where delivery has been delayed through the fault of either the buyer or the seller and the goods are at the risk of the party at fault as regards any loss which might not have occurred but for such fault. results in or coincides with the transfer of significant risks and rewards of ownership to the buyer. Revenue recognition is mainly concerned with the timing of recognition of revenue in the statement of profit and loss of an enterprise. Sale of Goods a) A key criterion for determining when to recognize revenue from a transaction involving the sale of goods is that the seller has transferred the property in the goods to the buyer for a consideration. The amount of revenue arising on a transaction is usually determined by agreement between the parties involved in the transaction. Revenue in such situations is recognised at the time of transfer of significant risks and rewards of ownership to the buyer. from the rendering of services. the revenue is the amount of commission and not the gross inflow of cash. Further.
interest etc. c) Royalties accrue in accordance with the terms of the relevant agreement and are usually recognised on that basis unless. it is more appropriate to recognise revenue on some other systematic and rational basis. e) When interest. In such cases. services are performed in more than a single act. 8. The revenue recognised under this method would be determined on the basis of contract value. The Use by Others of Enterprise Resources Yielding Interest. Revenue is recognised proportionately by reference to the performance of each act. number of acts or other suitable basis.g. revenue recognition is postponed to the extent of uncertainty involved.(i) Proportionate completion method—Performance consists of the execution of more than one act. discount or premium on debt securities held is treated as though it were accruing over the period to maturity. Effect of Uncertainties on Revenue Recognition a) Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection. in most circumstances. d) Dividends from investments in shares are not recognised in the statement of profit and loss until a right to receive payment is established. revenue recognition may need to be postponed. (ii) royalties—charges for the use of such assets as know-how.. and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. on the time basis determined by the amount outstanding and the rate applicable. Usually. Alternatively. (ii) Completed service contract method—Performance consists of the execution of a single act. b) Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognised when the sole or final act takes place and the service becomes chargeable. royalties and dividends from foreign countries require exchange permission and uncertainty in remittance is anticipated. export incentives. associated costs. it may be appropriate to recognise revenue only when it is 46 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. patents. (iii) Dividends—rewards from the holding of investments in shares. 9. b) Interest accrues. CHENNAI . For practical purposes. having regard to the substance of the transactions. for escalation of price. Royalties and Dividends a) The use by others of such enterprise resources gives rise to: (i) interest—charges for the use of cash resources or amounts due to the enterprise. e. when services are provided by an indeterminate number of acts over a specific period of time. trade marks and copyrights. revenue is recognised on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance..
c) When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service. performance should be regarded as being achieved when the following conditions have been fulfilled: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership. CHENNAI . Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service.reasonably certain that the ultimate collection will be made. provided that at the time of performance it is not unreasonable to expect ultimate collection. In a transaction involving the rendering of services. it is considered as revenue of the period in which it is properly recognised. ACCOUNTING STANDARD 10. Where there is no uncertainty as to ultimate collection. When such consideration is not determinable within reasonable limits. 13. it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. royalties and dividends should only be recognised when no significant uncertainty as to measurability or collectability exists. performance should be measured either under the completed service contract method or under the proportionate completion method. These revenues are recognised on the following bases: (i) Interest (ii) Royalties : on a time proportion basis taking into account the amount outstanding and the rate applicable. e) When recognition of revenue is postponed due to the effect of uncertainties. Revenue arising from the use by others of enterprise resources yielding interest. whichever relates the revenue to the work accomplished. the recognition of revenue is postponed. 12. Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraphs 11 and 12 are satisfied. : on an accrual basis in accordance with 47 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. If at the time of raising of any claim it is unreasonable to expect ultimate collection. 11. d) An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods. revenue is recognised at the time of sale or rendering of service even though payments are made by installments. revenue recognition should be postponed. the rendering of services or from the use by others of enterprise resources is reasonably determinable. In a transaction involving the sale of goods. and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.
e. goods are sold subject to installation. a delivery is made whereby the recipient undertakes to sell the goods on behalf of the consignor 48 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. (c) guaranteed sales i. Disclosure 14. However. (iii) Dividends from : when the owner's right to receive investments in shares payment is established. a reasonable time has elapsed. identified and ready for delivery to the buyer at the time the sale is recognised rather than there being simply an intention to acquire or manufacture the goods in time for delivery. Delivery is delayed at buyer's request and buyer takes title and accepts billing Revenue should be recognised notwithstanding that physical delivery has not been completed so long as there is every expectation that delivery will be made. In addition to the disclosures required by Accounting Standard 1 on 'Disclosure of Accounting Policies' (AS 1).e. delivery is made giving the buyer an unlimited right of return Recognition of revenue in such circumstances will depend on the substance of the agreement.the terms of the relevant agreement. Delivered subject to conditions (a) installation and inspection i. 2. the item must be on hand.g. in which case it should be treated as indicated below. the installation process may be so simple in nature that it may be appropriate to recognise the sale notwithstanding that installation is not yet completed (e. inspection etc. In the case of retail sales offering a guarantee of "money back if not completely satisfied" it may be appropriate to recognise the sale but to make a suitable provision for returns based on previous experience. Revenue should normally not be recognised until the customer accepts delivery and installation and inspection are complete.e. however. (b) on approval Revenue should not be recognised until the goods have been formally accepted by the buyer or the buyer has done an act adopting the transaction or the time period for rejection has elapsed or where no time has been fixed. In some cases. Sale of Goods 1. Illustrations A. (d) consignment sales i. the substance of the agreement may amount to a sale on consignment. an enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties. installation of a factory-tested television receiver normally only requires unpacking and connecting of power and antennae). CHENNAI . In other cases.
where seller concurrently agrees to repurchase the same goods at a later date For such transactions that are in substance a financing agreement. when experience indicates that most such sales have been consummated. 6. Sale/repurchase agreements i. Sales to intermediate parties i. 8. CHENNAI . Special order and shipments i. 9. revenue attributable to the sales price exclusive of interest should be recognised at the date of sale. 4. where the items delivered vary in value from period to period. 7. revenue may be recognised when a significant deposit is received. Trade discounts and volume rebates 49 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. 3. proportionately to the unpaid balance due to the seller. where payment (or partial payment) is received for goods not presently held in stock e. revenue should be based on the sales value of the item delivered in relation to the total sales value of all items covered by the subscription. However.e. dealers or others for resale Revenue from such sales can generally be recognised if significant risks of ownership have passed. Subscriptions for publications Revenue received or billed should be deferred and recognised either on a straight line basis over time or.g. Installment sales When the consideration is receivable in installments. 5.e. where goods are sold to distributors. however in some situations the buyer may in substance be an agent and in such cases the sale should be treated as a consignment sale. The interest element should be recognised as revenue. (e) cash on delivery sales Revenue should not be recognised until cash is received by the seller or his agent. identified and ready for delivery to the buyer by the third party. and the seller delivers the goods only when the final payment is received Revenue from such sales should not be recognised until goods are delivered.e. Sales where the purchaser makes a series of installment payments to the seller. the resulting cash inflow is not revenue as defined and should not be recognised as revenue.Revenue should not be recognised until the goods are sold to a third party. the stock is still to be manufactured or is to be delivered directly to the customer from a third party Revenue from such sales should not be recognised until goods are manufactured.
The recognition of such revenue should therefore have regard to: (a) whether the service has been provided "once and for all" or is on a "continuing" basis. 5. Similarly. commissions charged for arranging or granting loan or other facilities should be recognised when a binding obligation has been entered into. B. since they represent a reduction of cost. Tuition fees Revenue should be recognised over the period of instruction. Trade discounts and volume rebates given should be deducted in determining revenue. which will be recognised when the project is completed. 3. Advertising and insurance agency commissions Revenue should be recognised when the service is completed. Such charges may be settled in full when made or added to a loan or other account and settled in stages. banquets and other special events should be recognised when the event takes place. Admission fees Revenue from artistic performances. 50 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. as opposed to production commission. 2. they should be recognised as revenue only when the equipment is installed and accepted by the customer. Financial service commissions A financial service may be rendered as a single act or may be provided over a period of time. Commitment. Installation Fees In cases where installation fees are other than incidental to the sale of a product. the nature of the services provided and the timing of the costs relating thereto. media commissions will normally be recognised when the related advertisement or commercial appears before the public and the necessary intimation is received by the agency. charges for such services may be made as a single amount or in stages over the period of the service or the life of the transaction to which it relates. facility or loan management fees which relate to continuing obligations or services should normally be recognised over the life of the loan or facility having regard to the amount of the obligation outstanding. CHENNAI . Rendering of Services 1.Trade discounts and volume rebates received are not encompassed within the definition of revenue. In general. the fee should be allocated to each event on a systematic and rational basis. Insurance agency commissions should be recognised on the effective commencement or renewal dates of the related policies. (c) when the payment for the service will be received. 4. For advertising agencies. (b) the incidence of the costs relating to the service. When a subscription to a number of events is sold.
6. If the membership fee permits only membership and all other services or products are paid for separately. or if there is a separate annual subscription. Entrance fee received is generally capitalised. it should be recognised on a systematic and rational basis having regard to the timing and nature of all services provided. Entrance and membership fees Revenue recognition from these sources will depend on the nature of the services being provided. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. the fee should be recognised when received. CHENNAI 51 . If the membership fee entitles the member to services or publications to be provided during the year.
‘Patents’ etc. ‘Goodwill’. it does not apply to cases relating to Fixed Assets covered by other Accounting Standards such as AS 6 ‘Depreciation Accounting’.e. in order to promote. 52 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. 3. CHENNAI . Expenditure on exploration and extraction of Non-Regenerative Assets such as Oil. 2. 2.ACCOUNTING FOR FIXED ASSETS . Expenditure on Real Estate development. the expenditure on items of fixed assets that are used to develop or maintain the above mentioned assets or activities. measurement. thereby improving the quality of financial reporting in the interest of the users of financial statements. As with any other Accounting Standard. 1. Raghuveer (veersimhan@yahoo. However the Areas covered under this standard relating to and prior to the introduction of AS 16 ‘Borrowing Costs’. Livestock. and not for resale under ordinary course of business. Natural Gas etc. Exceptions :Although AS 10 deals with Fixed Assets as a whole. Consistency of the methods followed and 3. presentation and disclosures relating to fixed assets by providing guidelines for accounting for Fixed Assets under various scenarios. and 4. AS 12 ‘Accounting for Government Grants’. ‘Plant and Machinery’.” Thus Fixed Assets are the assets held by an enterprise for a long term. in Accounting for various transactions. What are Fixed Assets? AS 10 defines Fixed Assets as: “Fixed Asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. to the extent possible. However. they constitute a major portion of the total assets of an enterprise and are hence important for the proper presentation of an enterprise’s financial position.. but separable from the same have to be accounted in accordance with this accounting standard.AS 10. AS 14 ‘Accounting for Amalgamation’. Examples :Enterprises generally categorize Fixed Assets as ‘Land and Buildings’. Wasting Assets including mineral rights. Transparency in the accounting practices. AS 10 seeks to promote uniformity in recognition.for operating the business i. Plantations etc.. AS 19 ‘Leases’ and AS 26 ‘Intangible Assets” are held withdrawn and rest being mandatory from accounting year 1-4-2000. Generally. Also AS 10 does not deal with accounting for the following items: 1.in) Accounting Standards aim at enforcing uniformity. ‘Furniture and Fittings’. Comparability of the financial statements so prepared by the process of accounting. to use them in producing goods are providing services.N. Regenerative Natural Resources such as Forests.co.
What is meant by Gross Book Value of a Fixed Asset? AS 10 defines Gross Book Value as: “Gross book value of a fixed asset is its historical cost or other amount substituted for historical cost in the books of account of financial statements. the fixed asset to which they relate. d) When the related fixed asset is either discarded or sold. e) The stand-by equipment is a separate fixed asset in its own right and should be depreciated like any other fixed asset.e. of the capital spares/insurance spares should be written off. CHENNAI 53 . Spares. erection charges etc. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. if any. Such machinery spares should be charged to the statement of profit and loss as and when issued for consumption in the ordinary course of operations. the criteria may be applied differently to special circumstances and specific types of enterprises. the standard and Accounting Standard Interpretation 2 on treatment of machinery spares hold that : a) Machinery spares which are not specific to a particular item of fixed asset but can be used generally for various items of fixed assets should be treated as inventories for the purpose of AS 2.Identification The definition given by this standard serves as the base for judging whether an item is to be identified as fixed asset or not. the written down value less disposal value. c) Machinery spares of the nature of capital spares/insurance spares should be capitalised separately at the time of their purchase whether procured at the time of purchase of the fixed asset concerned or subsequently. However.e. When this amount is shown net of accumulated depreciation. i. It includes freight. However. if the amount of expenditure on an item which could be included as a fixed asset is not material. duties and taxes. Similarly. For example.. import charges and non-refundable taxes and other costs directly attributable to making the asset ready for use and excludes any discounts. items which are individually insignificant may be grouped and the aggregate value allotted to the fixed asset. It includes the purchase price. it is termed as net book value. they can be used only in connection with a particular item of the fixed asset. The total cost of such capital spares/insurance spares should be allocated on a systematic basis over a period not exceeding the useful life of the principal item.. they may be recorded as individual fixed assets. Cost and Components of Cost Cost of a fixed asset is the total expenditure attributable to the possession of the asset and it’s preparation for use. it may be treated as an expense. Stand-by equipments and servicing equipments :1) Stand-by and Servicing equipments are usually capitalised 2) As regards machinery spares and stand-by equipments. b) Whether to capitalise machinery spare under AS 10 or not will depend on the facts and circumstances of each case. the machinery spares of the following types should be capitalised being of the nature of capital spares/insurance spares – i) Machinery spares which are specific to a particular item of fixed asset. and ii) Their use is expected to be irregular. rebates and refunds.” Historical cost of a fixed asset is the amount capitalised in the books of accounts at the time of purchase of the asset. i. In certain special cases wherein the useful lives of components of one fixed asset are estimated to be different and they are separable.
Repairs mean any service relating to a fixed asset which helps keep the asset in working condition. If it forms an integral part of the asset. the expenditure incurred during this period is also sometimes treated as deferred revenue expenditure to be amortised over a period not exceeding 3 to 5 years after the commencement of commercial production. • The expenditure incurred on start-up and commissioning of the project. it is usually recorded at the fair market value of the asset acquired or the fair market value of the shares or securities issued or the net book value of the asset given.Cost to be Capitalised :The standard provides that • The Administrative or General Overheads specifically attributable to a particular project or asset must be capitalised. Non-Monetary Consideration :When a fixed asset is acquired in exchange for another asset or shares or other securities in the enterprise. whereas the expenditure on repairs is to be charged to the profit and loss statement. is usually capitalised as an indirect element of the construction cost. Costs of Revenue nature :The standard also provides that • The expenditure incurred after the plant has begun commercial production is treated as revenue expenditure even though the contract may stipulate that the plant will not be finally taken over until after the satisfactory completion of the guarantee period. Repairs and Revaluations Improvements mean any service relating to a fixed asset which increases the future benefits from that asset beyond its previously assessed standard of performance. Any addition or extension to an existing asset which is of capital nature is treated as follows: 1. its cost is added to the gross book value of the asset. 54 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. all expenses incurred during this period are charged to the profit and loss statement. Self Constructed Assets :Gross book value of Self Constructed Assets consist of costs of construction that relate directly to the specific asset and costs that are attributable to the construction activity in general and can be allocated to the specific asset. including the expenditure incurred on test runs and experimental production. whichever is more clearly evident. What is meant by Fair Market Value? AS 10 defines Fair Market Value as: “Fair market value is the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arm's length who are fully informed and are not under any compulsion to transact.” Improvements. However. • If the interval between the date a project is ready to commence commercial production and the date at which commercial production actually begins is prolonged. Expenditure on improvements and repairs :Expenditure on improvements is to be added to the gross book value of the asset. CHENNAI . after the elimination of any internally generated profits.
Gains or losses arising on disposal are generally recognised in the profit and loss statement. it is charged to the profit and loss statement. the nullifying effect to the previous treatment is carried out and the balance increase or decrease is treated as mentioned above. • An item of fixed asset is eliminated from the financial statements on disposal. it is normally credited to the revaluation reserve and not available for distribution. accumulated depreciation and written down value. Valuation in special cases Hire Purchase :In case of a Fixed Asset acquired on hire purchase terms. • The revaluation of a class of assets resulting in the net book value of that class being greater than the recoverable amount of the assets of that class is not appropriate. in application of the principle of substance over legal form. it is necessary to disclose the gross book value included in each basis. Revaluation :• Fixed assets are commonly revalued by indexation with reference to current prices or by appraisal undertaken by competent valuers. Any expected loss is recognised immediately in the profit and loss statement. Retirements and Disposals • Items of fixed assets that have been retired from active use and are held for disposal are stated at the lower of their net book value and net realisable value and are shown separately in the financial statements. the pro rata cost of those assets may be grouped together with similar fully owned assets with appropriate disclosure. However when a revaluation which results in an increase or decrease in the book value as against the previous decrease or increase on revaluation respectively. If the cash value of the asset is not readily available. When revaluation results in an increase in the net book value of the asset. In such cases. the consideration is apportioned to the various assets on a fair basis determined by competent valuers. it is to be calculated by assuming an appropriate rate of interest. • Sometimes different bases may be used to revalue separate items within each category of fixed assets or for different categories of fixed assets. If it is capable of being used separately and can be used even after the existing asset’s disposal. the selection of the assets to be revalued must be revalued on a systematic basis. although the legal ownership is not transferred to the buyer until the final installment is paid. CHENNAI 55 . otherwise than in the case of a partner in a partnership firm. the asset is recorded in the books of the enterprise (buyer) at its cash value and depreciated thereon. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Purchased for a Consolidated Price :Where several assets are purchased for a consolidated price. then it is accounted separately. Alternatively. • When all the assets of a class are not to be revalued. The enterprise must make suitable disclosure in the balance sheet indicating that the enterprise does not have full ownership thereof.2. Joint Ownership :If the assets are jointly owned by the enterprise with others. When the revaluation results in a decrease in the net book value of the asset. the assets are recorded in the Balance sheet to the extent of the enterprise’s share in such assets. original cost.
Further. the standard also requires the enterprises to disclose the following: 1) Gross and net book values of fixed assets at the beginning and end of an accounting period showing additions. acquisitions and other movements. duties and taxes and incidental expenses related to acquisition. the year of any appraisal made. the loss in relation to the revaluation to the extent of the increase in value is charged directly to the reserve and any further loss is charged to the profit and loss statement. Coromandel Fertilizers Ltd Fixed assets are shown at cost or valuation less depreciation. Expenses capitalised also include applicable borrowing costs. 1956. in case where fixed assets are stated at revalued amounts. Application of AS 10 ITC Limited To state Fixed Assets at cost of acquisition inclusive of inward freight. Power Finance Corporation Ltd Fixed assets are shown at historical cost less accumulated depreciation. The costs are capitalised in the year in which the relevant software is implemented for use To charge off a revenue expenditure all up gradation / enhancements unless they bring similar significant additional benefits. the method adopted to compute the revalued amounts. In respect of major projects involving construction. The amount standing in revaluation reserve following the retirement or disposal of an asset which relates to that asset may be transferred to general reserve. Capitalise software where it is expected to provide future enduring economic benefits. the excess is termed as 'goodwill'. The additions to Fixed Assets are being capitalized on the basis of bills approved or estimates value method. Disclosure Requirements The standard requires disclosures to be made in accordance with the disclosure requirements on accounting for fixed assets already required by AS 1 and AS 6. in accordance with the rates prescribed in Schedule XIV of the Companies Act. except the assets retired from active use and held for disposal. the nature of any indices used. disposals. Whenever a business is acquired for a price which is in excess of the value of the net assets of the business taken over. 2) Expenditure incurred on account of fixed assets in the course of construction or acquisition. Capitalisation costs include license fees and cost of implementation/system integration services. which are stated at lower of the book value or net realizable value. and whether an external valuer was involved. Cost comprises of the purchase price and other attributable expenses including cost of borrowings till the date of capitalisation in the case of assets involving material investment and substantial lead time. related preoperational expenses form part of the value of assets capitalised. 56 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. CHENNAI . Special types of Fixed Assets Goodwill :Goodwill is recorded in the books of accounts only when some consideration in the form of money or money’s worth has been paid for it. and 3) Revalued amounts substituted for historical costs of fixed assets.• • When a fixed asset previously revalued to be higher in value is disposed at a loss.
This statement also deals with accounting for foreign currency transactions in the nature of forward exchange contracts. willing parties in an arm’s length transaction. Closing rate is the exchange rate at the balance sheet date. between knowledgeable. CHENNAI 57 .ACCOUNTING FOR THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES . Foreign currency is a currency other than the reporting currency of an enterprise. Fair value is the amount for which an asset could be exchanged. and (b) in translating the financial statements of foreign branches for inclusion in the financial statements of the enterprise. Scope This Statement should be applied by an enterprise: (a) in accounting for transactions in foreign currencies. The principal issues in accounting for foreign currency transactions and foreign branches are to decide which exchange rate to use and how to recognize in the financial statements the financial effect of changes in exchange rates.AS 11 (R) .com) I. Definitions Reporting currency is the currency used in presenting the financial statements. Average rate is the mean of the exchange rates in force during a period. Objective An enterprise may have transactions in foreign currencies or it may have foreign branches (operations).Eshwar Ramanathan (easwar. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.ramanathan@gmail. Exchange rate is the ratio for exchange of two currencies. Forward rate is the exchange rate established by the terms of an agreement for exchange of two currencies at a specified future date. or a liability settled. II. Foreign currency transactions should be expressed in the enterprise's reporting currency and the financial statements of foreign branches should be translated into the enterprise's reporting currency in order to include them in the financial statements of the enterprise. III.
Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money. IV. the activities of which are based or conducted in a country other than the country of the reporting enterprise.g. Settlement date is the date at which a receivable is due to be collected or a payable is due to be paid. ii) A transaction in a foreign currency should be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. Net investment in a non-integral foreign operation is the reporting enterprise’s share in the net assets of that operation. including its residual value on disposal. joint venture or branch of the reporting enterprise. or d) otherwise acquires or disposes of assets. iii) A transaction in a foreign currency is recorded in the financial records of an enterprise as at the date on which the transaction occurs.g. b) borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency. This exchange rate is often 58 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. fixed assets.. including transactions arising when an enterprise either: a) buys or sells goods or services whose price is denominated in a foreign currency. e. normally using the exchange rate at that date. Non-monetary items are assets and liabilities other than monetary items. associate . the activities of which are an integral part of those of the reporting enterprise. Integral foreign operation is a foreign operation. Forward rate is the specified exchange rate for exchange of two currencies at a specified future date. denominated in a foreign currency. Forward exchange contract means an agreement to exchange different currencies at a forward rate. e. receivables. investments in equity shares. CHENNAI . cash. c) becomes a party to an unperformed forward exchange contract. Recoverable amount is the amount which the enterprise expects to recover from the future use of an asset. Foreign Currency Transactions A) Recording Transactions on Initial Recognition i) A foreign currency transaction is a transaction which is denominated in or requires settlement in a foreign currency. or incurs or settles liabilities. Non-integral foreign operation is a foreign operation that is not an integral foreign operation. Foreign operation is a subsidiary . inventories. payables.
balances in bank accounts denominated in a foreign currency. except for restrictions on remittances. When a company exercised the option. should be reported using the closing rate. the exchange rate on the balance sheet date may be used) AS 11 (pre revision) provided for capitalisation of exchange differences attributable to outstanding. foreign currency notes. should be reported using the exchange rates that existed when the values were determined (e. reporting should be at the most likely realizable or disbursable amount. an average rate for all transactions during the week or month in which the transactions occur. and receivables. Exchange difference not relating to depreciable fixed asset will be accumulated in a separate account called "Foreign Currency Monetary item Translation difference account" and should be amortised over the remaining life of the asset or 31st March 2011 whichever is earlier. a rate that approximates the actual rate is often used. unpaid foreign exchange liability incurred for purchase of Fixed assets. the use of the average rate for a period is unreliable. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. the fact of exercise of option and the amount remaining unamortised shall be disclosed.referred to as the spot rate.g. CHENNAI 59 . when the closing rate is unrealistic. 2. which are carried in terms of historical cost denominated in a foreign currency. e. 1. However.g. whereas when it is taken to a separate reserve account amortisation period shall not go beyond 31st March 2011. However. For practical reasons. Companies (Accounting Standards) Amendment rule 2009 has been pronounced under section 211(3C) of Companies Act. if fair value is determined as on the balance sheet date. But once a Company exercises this option. This alternative accounting treatment prescribed under additional Para is purely optional. (b) non-monetary items. This amendment Para is applicable only to companies registered under Companies Act. The difference in amortisation method is . in terms of which an additional Para stands inserted in the standard. (c) non-monetary items which are carried in terms of fair value or other similar valuation. This Para deals with exchange differences arising from or attributable to Long Term Foreign Currency Monetary Item whose maturity period stood at 12 months or more on originating date. it is irrevocable. This rule has been eliminated and therefore such exchange rate differential cannot any longer be capitalised. Exchange difference relating to depreciable fixed asset will be added to or deducted from Historical cost of the asset and the revised unamortised cost will be depreciated over the remaining useful life of the asset. net realizable value.g.when the exchange difference is capitalised it should be amortised over useful life of asset. should be reported using the exchange rate at the date of the transaction. payables and loans denominated in a foreign currency). for example. denominated in a foreign currency. if exchange rates fluctuate significantly. B) Reporting Effects of Changes in Exchange Rates Subsequent to Initial Recognition At each balance sheet date: (a) monetary items denominated in a foreign currency (e.
Financial Statements of Foreign Operations a) Classification of Foreign Operations • The method used to translate the financial statements of a foreign operation depends on the way in which it is financed and operates in relation to the reporting enterprise. The change in the exchange rate affects the reporting enterprise’s net investment in the non-integral foreign operation rather than the individual monetary and non-monetary items held by the non-integral foreign operation. when the transaction is not settled in the same accounting period as that in which it occurred. In contrast. 3) Where an entity has non-integral foreign operations. including transactions in the reporting currency. When there is a change in the exchange rate between the reporting currency and the local currency. Reporting on balance sheet date – at a rate different from the rate at which it was initially recognized ii. generates income and perhaps arranges borrowings. It may also enter into transactions in foreign currencies. the change in the exchange rate affects the individual monetary items held by the foreign operation rather than the reporting enterprise’s net investment in that operation. i. For this purpose. Therefore. incurs expenses. the exchange differential attributable to some monetary items having specific characteristics should be accumulated in Foreign Currency Transaction Reserve.C) Recognition of Exchange Differences 1) An exchange difference results when there is a change in the exchange rate between the transaction date and the date of settlement of any monetary items arising from a foreign currency transaction. 2) Exchange differences arising on foreign currency transactions should be recognized as income or as expense in the period in which they arise. b) However. foreign operations are classified as either “integral foreign operations” or “non-integral foreign operations”. For example. V. On the date of settlement – at the rate different from the rate at which it was reported in the last financial statement. a non-integral foreign operation accumulates cash and other monetary items. the exchange difference arises over more than one accounting period. CHENNAI . • • 60 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. such a foreign operation might only sell goods imported from the reporting enterprise and remit the proceeds to the reporting enterprise. a change in the exchange rate between the reporting currency and the currency in the country of foreign operation has an almost immediate effect on the reporting enterprise’s cash flow from operations. In such cases. A foreign operation that is integral to the operations of the reporting enterprise carries on its business as if it were an extension of the reporting enterprise’s operations. the entire exchange difference arises in that period. there is little or no direct effect on the present and future cash flows from operations of either the nonintegral foreign operation or the reporting enterprise. all substantially in its local currency. a) When the transaction is settled within the same accounting period as that in which it occurred.
and judgement is necessary to determine the appropriate classification. f) cash flows of the reporting enterprise are insulated from the day-to-day activities of the foreign operation rather than being directly affected by the activities of the foreign operation. g) sales prices for the foreign operation’s products are not primarily responsive on a short-term basis to changes in exchange rates but are determined more by local competition or local government regulation. • The appropriate classification for each operation can. The cost and depreciation of tangible fixed assets is translated using the exchange rate at the date of purchase of the asset or. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. and h) there is an active local sales market for the foreign operation’s products. In some cases. c) the activities of the foreign operation are financed mainly from its own operations or local borrowings rather than from the reporting enterprise. b) Integral Foreign Operations The financial statements of an integral foreign operation should be translated using the principles and procedures as laid in sub-heading IV as if the transactions of the foreign operation had been those of the reporting enterprise itself. CHENNAI 61 . the activities of the foreign operation are carried out with a significant degree of autonomy from those of the reporting enterprise. The individual items in the financial statements of the foreign operation are translated as if all its transactions had been entered into by the reporting enterprise itself. although there also might be significant amounts of exports. in principle. e) the foreign operation’s sales are mainly in currencies other than the reporting currency. b) transactions with the reporting enterprise are not a high proportion of the foreign operation’s activities. be established from factual information related to the indicators listed above. material and other components of the foreign operation’s products or services are primarily paid or settled in the local currency rather than in the reporting currency. using the rate that existed on the date of the valuation. the classification of a foreign operation as either a non-integral foreign operation or an integral foreign operation of the reporting enterprise may not be clear. if the asset is carried at fair value or other similar valuation. d) costs of labour.• The following are indications that a foreign operation is a non-integral foreign operation rather than an integral foreign operation: a) while the reporting enterprise may control the foreign operation.
However. CHENNAI . a rate that approximates the actual rate at the date of the transaction is often used. when the net realizable value of an item of inventory is determined in a foreign currency. that value is translated using the exchange rate at the date as at which the net realizable value is determined. The rate used is therefore usually the closing rate. for example an average rate for the period. • 62 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. of the non-integral foreign operation should be translated at the closing rate. Alternatively. if exchange rates fluctuate significantly. is often used to translate income and expense items of a foreign operation. c) Non-integral Foreign Operations • In translating the financial statements of a non-integral foreign operation for incorporation in its financial statements. • For practical reasons. For practical reasons. and c) all resulting exchange differences should be accumulated in a foreign currency translation reserve until the disposal of the net investment. an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. the use of the average rate for a period is unreliable. and c) other changes to equity in the non-integral foreign operation. For example. b) translating the opening net investment in the non-integral foreign operation at an exchange rate different from that at which it was previously reported. a rate that approximates the actual exchange rates. for example. both monetary and non-monetary. An adjustment may be required to reduce the carrying amount of an asset in the financial statements of the reporting enterprise to its recoverable amount or net realizable value even when no such adjustment is necessary in the financial statements of the foreign operation. The recoverable amount or realizable value of an asset is translated using the exchange rate that existed when the recoverable amount or net realizable value was determined.The cost of inventories is translated at the exchange rates that existed when those costs were incurred. an adjustment in the financial statements of the foreign operation may need to be reversed in the financial statements of the reporting enterprise. The translation of the financial statements of a non-integral foreign operation results in the recognition of exchange differences arising from: a) translating income and expense items at the exchange rates at the dates of transactions and assets and liabilities at the closing rate. b) income and expense items of the non-integral foreign operation should be translated at exchange rates at the dates of the transactions. the reporting enterprise should use the following procedures: a) the assets and liabilities.
liquidation. or part of. A contingent liability disclosed in the financial statements of a non-integral foreign operation is translated at the closing rate for its disclosure in the financial statements of the reporting enterprise. that operation. Write down of the carrying amount of the NFO is however not a disposal. in the consolidated financial statements of the reporting enterprise. repayment of share capital. the cumulative amount of the exchange differences which have been deferred & kept in FCTR and which relate to that operation should be recognized as income or as expenses in the same period in which the gain or loss on disposal is recognized. an exchange difference arising on an intra-group monetary item. cannot be eliminated against a corresponding amount arising on other intragroup balances because the monetary item represents a commitment to convert one currency into another and exposes the reporting enterprise to a gain or loss through currency fluctuations. the assets and liabilities of the non-integral foreign operation are translated at the exchange rate at the balance sheet date of the non-integral foreign operation and adjustments are made when appropriate for significant movements in exchange rates up to the balance sheet date of the reporting enterprises in accordance with AS 21. Consolidation Procedures i) The incorporation of the financial statements of a non-integral foreign operation in those of the reporting enterprise follows normal consolidation procedures. The same approach is used in applying the equity method to associates and in applying proportionate consolidation to joint ventures in accordance with AS 23. CHENNAI 63 . Financial Reporting of Interests in Joint Ventures). However. ii) In cases where the financial statements of a non integral foreign operations are drawn for a different reporting period. VIII. Consolidated Financial Statements. for the purpose of consolidation. Accounting for Investments in Associates in Consolidated Financial Statements and AS 27. On the disposal of a non-integral foreign operation. or abandonment of all. Consolidated Financial Statements. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. allows the use of financial statements drawn up to a different reporting date provided that the difference is no greater than six months and adjustments are made for the effects of any significant transactions or other events that occur between the different reporting dates. such as the elimination of intra-group balances and intragroup transactions of a subsidiary (AS 21. such an exchange difference continues to be recognized as income or an expense or. the statements of the non integral operations are prepared as at the same date as the reporting enterprise. AS 21. Accordingly.• The resulting differences from the above should be accumulated in a Foreign Currency Translation Reserve (FCTR) until disposal of net investment of the Non-Integral Foreign operation. whether short-term or long-term. Any goodwill or capital reserve arising on the acquisition of a non-integral foreign operation is translated at the closing rate. it is accumulated in a foreign currency translation reserve until the disposal of the net investment. Financial Reporting of Interests in Joint Ventures. Disposal of a Non-integral Foreign Operation (N-FO) An enterprise may dispose of its interest in a non-integral foreign operation through sale. • • VII. In such a case. and AS 27. When it is impracticable to do this.
the translation procedures applicable to the revised classification should be applied from the date of the change in the classification. 64 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. computed as under. Category II – In respect of a forward contract entered into as a speculative activity. exchange differences arising on the translation of non-monetary assets at the date of the reclassification are accumulated in a foreign currency translation reserve. CHENNAI . should be recognized on the reporting date. IX. All Changes in Foreign Exchange Rates Tax Effects of Exchange Differences Gains and losses on foreign currency transactions and exchange differences arising on the translation of the financial statements of foreign operations may have associated tax effects which are accounted for in accordance with AS 22. • Any profit or loss arising on cancellation or renewal of such a forward exchange contract should be recognized as income or as expense for the period. AS-R prescribes that the contract should be marked to market. to establish the amount of the reporting currency required or available at the settlement date of a transaction. When a foreign operation that is integral to the operations of the reporting enterprise is reclassified as a nonintegral foreign operation. • The premium or discount arising at the inception of such a forward exchange contract should be amortized as expense or income over the life of the contract. Forward Exchange Contracts Category I – • An enterprise may enter into a forward exchange contract or another financial instrument that is in substance a forward exchange contract. • Exchange differences on such a contract should be recognized in the statement of profit and loss in the reporting period in which the exchange rates change. Exchange differences which have been deferred are not recognized as income or expenses until the disposal of the operation. the balance in FCTR will be recognized as income or expenses on a prorata basis in addition to the gain or loss on such part-disposal. the translated amounts for non-monetary items at the date of the change are treated as the historical cost for those items in the period of change and subsequent periods.Where an N-FO is disposed of in part. X. which is not intended for trading or speculation purposes. Accounting for Taxes on Income XI. When a non-integral foreign operation is reclassified as an integral foreign operation. Change in the Classification of a Foreign Operation When there is a change in the classification of a foreign operation. and gain or loss. The payment of a dividend forms part of a disposal only when it constitutes a return of the investment.
an enterprise should disclose: i. 2) When the reporting currency is different from the currency of the country in which the enterprise is domiciled. if a foreign branch is classified as a non-integral foreign operation in accordance with the requirements of this Statement. iv. 5) Disclosure is also encouraged of an enterprise’s foreign currency risk management policy. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Contingencies and Events Occurring After the Balance Sheet Date. CHENNAI 65 . and the impact on net profit or loss for each prior period presented had the change in classification occurred at the beginning of the earliest period presented.A gain or loss on a forward exchange contract should be computed by multiplying the foreign currency amount of the forward exchange contract by the difference between the forward rate available at the reporting date for the remaining maturity of the contract and the contracted forward rate (or the forward rate last used to measure a gain or loss on that contract for an earlier period). Transitional Provisions On the first time application of this Statement. 3) When there is a change in the classification of a significant foreign operation. and a reconciliation of the amount of such exchange differences at the beginning and end of the period. 4) The effect on foreign currency monetary items or on the financial statements of a foreign operation of a change in exchange rates occurring after the balance sheet date is disclosed in accordance with AS 4. Disclosure 1) An enterprise should disclose: a) the amount of exchange differences included in the net profit or loss for the period. The gain or loss so computed should be recognized in the statement of profit and loss for the period. iii. ii. the accounting treatment prescribed in paragraphs of Sub-heading IX in respect of change in the classification of a foreign operation should be applied. The premium or discount on the forward exchange contract is not recognized separately. XII. the impact of the change in classification on shareholders’ funds. the nature of the change in classification. and b) net exchange differences accumulated in foreign currency translation reserve as a separate component of shareholders’ funds. the reason for using a different currency should be disclosed. the reason for the change. The reason for any change in the reporting currency should also be disclosed.
ILLUSTRATIONS: 1.2010 – Rs. It therefore provides guidance on what operations are integral and what are not in respect of an enterprise.44/$.125.03. Avg rate – Rs. Debit Credit (in Australian dollar thousands) Plant & Machinery (at cost) 200 Accumulated Depreciation on P&M 130 Debtors / Creditors 60 30 Stock(01-04-2010) 20 Cash and Bank balances 10 Purchases / Sales 20 123 Goods sent to Branch 5 Wages and salaries 45 Rent 12 Office expenses 18 Commission receipts 100 Branch / HO Current account 7 390 390 The following information is also available: Goods sent by HO Rs. For fixed assets – Rs.IFRS There is no distinction being made between integral & nonThe Effect of changes in integral foreign operation as per Foreign Exchange Rates the revised IAS 21. At the end of 31st March 2011 the following ledger balances has been extracted from the books of the Australia Branch of X ltd. IAS-21 is (Revised) based on the concept of Functional currency and presentation currency. Integral and Non Integral Foreign operations Particulars Indian GAAP AS-11 is based on the concept of integral and non-integral operations. There is no concept of Functional Currency in Indian GAAP. Branch A/c in HO Rs. Stock at 31.03. 36/$. Convert the trial balance using the following rate of exchange As on 01.04.2011 – Rs.000.48/$.2011 in Branch $3. Sol: Integral Operation Non Integral Operation Conversio Debit Credit Conversi Debit Credit n rate on rate Plant & Machinery (at 36 7200 48 9600 cost) Accumulated 36 4680 48 6240 66 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.100. It therefore provides guidance on what should be the functional currency of an entity.40/$. CHENNAI . 120. as on 31.000.
03. 1. 01. 3 To amount payable to To Amount payable to Bank 48 Bank 48 31. Forward Exchange Contracts : A company entered into a 6 months forward contract of USD at Rs.12.12.2010 31.2010. 45 receivable Ac Dr 48 Deferred Premium Dr.10 Premium A/c Dr. the exchange loss of Rs.50. the exchange gain of Rs.2010 31. 2. 428.10.5 To Deferred Premium 1.10. Spot rate on date of settlement – Rs. For Non integral operations.Depreciation on P&M Debtors / Creditors Stock(01-04-2010) Cash and Bank balances Purchases / Sales Goods sent to Branch Wages and salaries Rent Office expenses Commission receipts Branch / HO Current account 48 40 48 44 44 44 44 44 2880 800 480 880 100 1980 528 792 - 1440 5412 4400 120 48 40 48 44 44 44 44 44 2880 800 480 880 100 1980 528 792 - 1440 5412 4400 120 15640 16052 18040 17612 Exchange Loss / Gain 412 428 In case of Integral operation.45 on 01. Financial Year ends on 31st December.10 Bank A/c Dr.2011 Spot rate 45 47 52 Forward rate(6 48 months) Forward rate(3 51 months) Account for the difference in exchange rates if a) The Forward contract is entered into to mitigate the exchange rate risk associated with a foreign exchange liability b) The forward contract is entered into as a speculative activity Sol: (a) To mitigate risk against loan (b) Speculative Activity Date Particulars Dr Cr Particulars Dr Cr 01.000 would be credited to foreign currency translation reserve account.5 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.10. 412.000 should be written off in profit and loss account for the year. 45 To F Currency loan 45 Foreign Currency (FCR) Foreign Currency receivable (FCR) Dr. CHENNAI 67 .
To F exchange gain Amount payable to bank Dr. To Bank A/c 2 2 2 2 1. 52 To FCR (Loan settled using F currency received) 68 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.11 (Proportionate for three months) F currency loss Dr. To Exchange gain 1 1 Bank A/c Dr. To F Currency loan F currency receivabl Dr. To F exchange gain Premium A/c Dr. 48 To FCR A/c 52 F currency loan Dr.5 5 5 5 5 48 48 52 FCR A/c Dr. To Deferred Premium (Proportionate for next three months) F currency loss Dr.5 1.03. 4 Amount payable to Bank A/c Dr. To Exchange gain 3 3 FCR A/c Dr. CHENNAI . To F Currency loan F currency receivabl Dr.31.
It is fundamental to the ‘income approach’ that government grants be recognized in the profit and loss statement on a systematic and rational basis over the periods necessary to match them with the related costs. In most cases. CHENNAI . government agencies and similar bodies whether local. Definitions Government refers to government. If the government grant is in the nature of promoters’ contribution then credit will be given to capital reserve (as part of shareholders’ funds). if a government grant has been received. Objective & Scope To deal with the Accounting for government grants. The receipt of government grants by an enterprise is significant for preparation of the financial statements for two reasons. an appropriate method of accounting there for is necessary. This facilitates comparison of an enterprise’s financial statements with those of prior periods and with those of other enterprises. etc. Disclosure of Accounting Policies). and the ‘income approach’. 69 • • • SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. II. cash incentives. under which a grant is taken to income over one or more periods. For other types of grants it is more appropriate to follow Income approach. it is desirable to give an indication of the extent to which the enterprise has benefited from such grant during the reporting period.AS 12 . III. under which a grant is treated as part of shareholders’ funds. Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. Accounting treatment of Government Grants Capital Approach versus Income Approach • Two broad approaches may be followed for the accounting treatment of government grants: the ‘capital approach’. Government grants are sometimes called by other names such as subsidies.Eshwar Ramanathan (easwar. Secondly. the periods over which an enterprise recognizes the costs or expenses related to a government grant are readily ascertainable and thus grants are taken to income in the same period as the relevant expenses are recognized.com I. (Accounting Standard (AS) 1. Firstly. duty drawbacks.ramanathan@gmail. Income recognition of government grants on a receipts basis is not in accordance with the accrual accounting assumption.ACCOUNTING FOR GOVERNMENT GRANTS . national or international. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the enterprise.
Government grants may become receivable by an enterprise as compensation for expenses or losses incurred in a previous accounting period.IV. Recognition of Government Grants Government grants available to the enterprise are considered for inclusion in accounts: i. These circumstances may warrant taking the grant to income in the period in which the enterprise qualifies to receive it. is credited to income for the year even though the actual amount of such benefits may be finally settled and received after the end of the relevant accounting period. In certain circumstances. V. Prior Period and Extraordinary Items and Changes in Accounting Policies). An appropriate amount in respect of such earned benefits. 70 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. as an extraordinary item if appropriate. Presentation of Grants Related to Specific Fixed Assets Grants related to specific fixed assets are generally provided with a primary condition that the qualifying enterprise should purchase. Nonmonetary assets given free of cost are recorded at a nominal value. Non-monetary Government Grants Government grants may take the form of non-monetary assets. construct or otherwise acquire such assets and such other conditions for restricting the type or location of the assets or the periods during which they are to be acquired or held. a government grant is awarded for the purpose of giving immediate financial support to an enterprise rather than as an incentive to undertake specific expenditure. (Accounting Standard (AS) 5. as an extraordinary item if appropriate (Accounting Standard (AS) 5. In these circumstances. estimated on a prudent basis. and ii. where there is reasonable assurance that the enterprise will comply with the conditions attached to them. CHENNAI . where such benefits have been earned by the enterprise and it is reasonably certain that the ultimate collection will be made. it is usual to account for such assets at their acquisition cost. Mere receipt of a grant is not necessarily a conclusive evidence that conditions attaching to the grant have been or will be fulfilled. given at concessional rates. such as land or other resources. Such grants may be confined to an individual enterprise and may not be available to a whole class of enterprises. Prior Period and Extraordinary Items and Changes in Accounting Policies). Such a grant is recognized in the income statement of the period in which it becomes receivable. Compliance with other standards in recognition of Government Grant: A contingency related to a government grant. arising after the grant has been recognized. Contingencies and Events Occurring after the Balance Sheet Date. is treated in accordance with Accounting Standard (AS) 4.
Grants related to non-depreciable assets are credited to capital reserve under this method. the grant is credited to income over the same period over which the cost of meeting such obligations is charged to income. CHENNAI 71 . Where the grant equals the whole. the asset is shown in the balance sheet at a nominal value. For example. the grants are treated as capital reserve which can be neither distributed as dividend nor considered as deferred income. grants related to depreciable assets are treated as deferred income which is recognized in the profit and loss statement on a systematic and rational basis over the useful life of the asset.g. Such allocation to income is usually made over the periods and in the proportions in which depreciation on related assets is charged. the grant is shown as a deduction from the gross value of the asset concerned in arriving at its book value.Two methods of presentation in financial statements of grants (or the appropriate portions of grants) related to specific fixed assets are regarded as acceptable alternatives.. In the next method. of the cost of the asset. as there is usually no charge to income in respect of such assets. Presentation of Grants of the nature of Promoters’ contribution Where the government grants are of the nature of promoters’ contribution. The grant is thus recognized in the profit and loss statement over the useful life of a depreciable asset by way of a reduced depreciation charge. ‘Deferred government grants’. Alternatively. i.e. either separately or under a general heading such as ‘Other Income’. such movements are often disclosed as separate items in the statement of changes in financial position regardless of whether or not the grant is deducted from the related asset for the purpose of balance sheet presentation. they are deducted in reporting the related expense. For this reason and in order to show the gross investment in assets. if a grant related to a non-depreciable asset requires the fulfillment of certain obligations. Refund of Government Grants SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.. Presentation of Grants Related to Revenue Grants related to revenue are sometimes presented as a credit in the profit and loss statement. However. VI. in the case of a company. central investment subsidy scheme) and no repayment is ordinarily expected in respect thereof. it is shown after ‘Reserves and Surplus’ but before ‘Secured Loans’ with a suitable description. The deferred income is suitably disclosed in the balance sheet pending its apportionment to profit and loss account. e. Arguments For and Against these Methods: Supporters of the first method claim that it is inappropriate to net income and expense items and that separation of the grant from the expense facilitates comparison with other expenses not affected by a grant. or virtually the whole. it is argued that the expense might well not have been incurred by the enterprise if the grant had not been available and presentation of the expense without offsetting the grant may therefore be misleading. In the first method. they are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay (for example. For the second method. The purchase of assets and the receipt of related grants can cause major movements in the cash flow of an enterprise.
depreciation on the revised book value is provided prospectively over the residual useful life of the asset. A government grant that becomes refundable is treated as an extraordinary item (Accounting Standard (AS) 5. Where a grant which is in the nature of promoters’ contribution becomes refundable. including grants of nonmonetary assets given at a concessional rate or free of cost. the relevant amount recoverable by the government is reduced from the capital reserve. AS 12 has no such disclosure requirement. IAS 20 requires separate disclosure of unfulfilled conditions and other contingencies if grant 72 Indian GAAP AS 12 requires accounting at acquisition cost. the amount is charged immediately to profit and loss statement. as appropriate. Prior Period and Extraordinary Items and Changes in Accounting Policies).. or where no deferred credit exists. i. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. VII. to the government on non-fulfillment of some specified conditions. The amount refundable in respect of a government grant related to revenue is applied first against any unamortized deferred credit remaining in respect of the grant. where the book value of the asset is increased. In respect of grant related to a specific fixed asset becoming refundable. including the methods of presentation in the financial statements. To the extent that the amount refundable exceeds any such deferred credit. IAS 20 permits accounting either at fair value or at acquisition cost.Government grants sometimes become refundable because certain conditions are not fulfilled. CHENNAI . IAS 20 requires Retrospective re-computation of depreciation and prescribes charging off the deficit in the period in which such grant becomes refundable. by the amount refundable. The amount refundable in respect of a government grant related to a specific fixed asset is recorded by increasing the book value of the asset or by reducing the capital reserve or the deferred income balance. Disclosure The following disclosures are appropriate: (i) the accounting policy adopted for government grants. In the first alternative.e. AS 12 requires enterprise to compute depreciation prospectively as a result of which the revised book value is depreciated over the residual useful life. in part or in full. (ii) the nature and extent of government grants recognized in the financial statements. Particulars IFRS In case of non-monetary assets Accounting for Government acquired at nominal/concessional Grants rate.
CHENNAI 73 .has been recognised. of promoters' contribution should be credited to capital reserve and treated as a part of shareholders' funds. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Recognition of government Government grants of the nature grants in equity is not permitted.
II. IV. Under appropriate circumstances. market value or net realizable value provides an evidence of fair value. Current investments are in the nature of current assets.ACCOUNTING FOR INVESTMENTS . even though they may be readily marketable. Fair value is the amount for which an asset could be exchanged between a knowledgeable. Classification of Investments i. CHENNAI . A current investment is an investment that is by its nature readily realizable and is intended to be held for not more than one year from the date on which such investment is made. ii. or for other benefits to the investing enterprise. Definitions Investments are assets held by an enterprise for earning income by way of dividends. fees and duties. interest. for capital appreciation. An investment property is an investment in land or buildings that are not intended to be occupied substantially for use by. III. net of expenses necessarily to be incurred on or before disposal.Eshwar Ramanathan (easwar. the investing enterprise. and rentals. willing seller in an arm’s length transaction. Investments are classified as long term investments and current investments. Enterprises present financial statements that classify fixed assets. Assets held as stock-in-trade are not ‘investments. Investments other than current investments are classified as long term investments. Market value is the amount obtainable from the sale of an investment in an open market. A long term investment is an investment other than a current investment. or in the operations of.ramanathan@gmail. investments and current assets into separate categories.com I. 74 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. willing buyer and a knowledgeable. Objective & Scope To deal with the Accounting for Investments in the financial statements of enterprises and related disclosure requirements. although the common practice may be to include them in investments. Cost of Investments The cost of an investment includes acquisition charges such as brokerage.AS 13 .
the acquisition cost is the fair value of the securities issued (which. The valuation of current investments at lower of cost and fair value provides a prudent method of determining the carrying amount to be stated in the balance sheet. In such a situation. the more prudent and appropriate method is to carry investments individually at the lower of cost and fair value. where the investments are acquired on cum-right basis and the market value of investments immediately after their becoming ex-right is lower than the cost for which they were acquired. for another asset. the sale proceeds are taken to the profit and loss statement. dividends and rentals receivables in connection with an investment are generally regarded as income. the Valuation method adopted should be disclosed. In respect of investments for which an active market exists. the cost of investment is normally reduced by dividends receivable only if they clearly represent a recovery of a part of the cost. If rights are not subscribed for but are sold in the market. in some circumstances. the concern of an enterprise may be with the value of a category of related current investments and not with each individual investment. If it is difficult to make such an allocation except on an arbitrary basis. For example. or part exchange. However. either highest of market value quoted on various stock exchanges on the reporting date will be considered or the market value quoted in the stock exchange where it has highest trading will be considered. Practically those investments which have active market would have been quoted in more than one stock exchange. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. it may be appropriate to apply the sale proceeds of rights to reduce the carrying amount of such investments to the market value. However. and accordingly the investments may be carried at the lower of cost and fair value computed category-wise (i. the acquisition cost of the investment is determined by reference to the fair value of the asset given up. Sometimes. the cost of the right shares is added to the carrying amount of the original holding. the pre-acquisition portion is deducted from cost. When dividends on equity are declared from pre-acquisition profits. CHENNAI 75 . However. The fair value may not necessarily be equal to the nominal or par value of the securities issued. when unpaid interest has accrued before the acquisition of an interest-bearing investment and is therefore included in the price paid for the investment. For current investments. When right shares offered are subscribed for.If an investment is acquired.e. the subsequent receipt of interest is allocated between pre-acquisition and post-acquisition periods. equity shares. Carrying Amount of Investments Current Investments The carrying amount for current investments is the lower of cost and fair value. a similar treatment may apply. etc. convertible debentures. being the return on the investment. Interest. or partly acquired. In either case. by the issue of shares or other securities. in appropriate cases. preference shares. any reduction to fair value and any reversals of such reductions are included in the profit and loss statement. It may be appropriate to consider the fair value of the investment acquired if it is more clearly evident. If an investment is acquired in exchange. Valuation of current investments on overall (or global) basis is not considered appropriate. V. such inflows represent a recovery of cost and do not form part of income.). market value generally provides the best evidence of fair value. may be indicated by the issue price as determined by statutory authorities).
the investee’s assets and results and the expected cash flows from the investment. CHENNAI . Restrictions on distributions by the investee or on disposal by the investor may affect the value attributed to the investment. When disposing of a part of the holding of an individual investment. is recognized in the profit and loss statement. The carrying amount of long-term investments is therefore determined on an individual investment basis. is added to the carrying amount of the investment property. Indicators of the value of an investment are obtained by reference to its market value. Disclosure The following disclosures in financial statements in relation to investments are appropriate:(a) the accounting policies for the determination of carrying amount of investments.Long-term Investments Long-term investments are usually carried at cost. in the carrying amounts of long term investments. the carrying amount is reduced to recognize the decline. VI. Disposal of Investments On disposal of an investment. Where investments are reclassified from current to long-term. net of expenses. or if the reasons for the reduction no longer exist. when there is a decline. other than temporary. the carrying amount to be allocated to that part is to be determined on the basis of the average carrying amount of the total holding of the investment. VII. other than temporary. Where there is a decline. the difference between the carrying amount and the disposal proceeds. Long-term investments are usually of individual importance to the investing enterprise. the resultant reduction in the carrying amount is charged to the profit and loss statement. in the value of a long term investment. (b) the amounts included in profit and loss statement for: 76 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. the holding of which is directly related to the right to hold the investment property. transfers are made at the lower of cost and fair value at the date of transfer. However. Reclassification of Investments Where long-term investments are reclassified as current investments. The reduction in carrying amount is reversed when there is a rise in the value of the investment. VIII. Investment Properties The cost of any shares in a co-operative society or a company. transfers are made at the lower of cost and carrying amount at the date of transfer. The type and extent of the investor’s stake in the investee are also taken into account.
It requires the same to be treated in the same manner as long-term investment.00 200. dividends (showing separately dividends from subsidiary companies). (e) other disclosures as specifically required by the relevant statute governing the enterprise.00 250. realisability of investments or the remittance of income and proceeds of disposal.i) interest.00 200. (iii) profits and losses on disposal of long term investments and changes in the carrying amount of such investments. and rentals on investments showing separately such income from long term and current investments.00 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.00 Vale to be disclosed at B/s 406. Particulars Accounting for Investment IFRS IAS 40 deals with accounting for various aspects of Investment Property in a comprehensive manner. (d) the aggregate amount of quoted and unquoted investments. the amount of income tax deducted at source being included under Advance Taxes Paid.50 54.50 70.00 Market price 440. (ii) profits and losses on disposal of current investments and changes in carrying amount of such investments. Illustration Particulars Equity shares Mutual Funds Government Securities Cost 406.00 54. (c) significant restrictions on the right of ownership. Gross income should be stated. Indian GAAP AS 13 deals with Investment Property in a limited manner. giving the aggregate market value of quoted investments. CHENNAI 77 .
co. Amalgamation is meant to include absorption as well. Scope of Coverage: Amalgamation is a process where the status of two or more legal entities vanishes and a new entity emerges. The buying company is also called the “Vendee Company”. The Company selling its business is also called the “Vendor Company” Transferee Company .R. same is called amalgamation when two or more companies come together and become a single entity.e.in) Introduction to the standard: The ideology behind the word amalgamation has been derived from the term “amalgam” which means to unite. it is called as absorption. Sinduja (sindujaca07@yahoo. The cases where one company can obtain control over another. Two or more elements combine together to form an Alloy. Consideration for amalgamation i.AS 14 . Eg: A ltd is taken over by B ltd an existing company. it is termed as amalgamation. to come together as one. Such combo may be for various reasons and not limited to the objective of effective tax savings. CHENNAI . For eg if A ltd and S Ltd are liquidated and a new company named AS ltd is formed and it acquires the businesses of both A and S. acquisition of a Important Definitions: Transferor Company .The company into which a transferor Company is amalgamated is called the Transferee company. Inclusions: The provisions of Companies act 1956 or any other statute applicable to companies.The company which is amalgamated into another company. Exclusions: • • Amalgamation does not include acquisition. where absorption means business by an existing company. The accounting treatment of this so commonly called amalgamation is the main area of our today’s discussion.ACCOUNTING FOR AMALGAMATIONS . purchase consideration means the aggregate of 78 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Accounting treatment for such situations are covered under AS 21. without affecting the status of each company being an independent and separate legal entity and yet deriving the benefit of “alloy” by acting as one single economic entity. Let us look into the areas covered and excluded with regard to amalgamation. to blend.Consolidated Financial Statements.M.
the book value of the assets of SC will be revised by applying WDV. But also of the interests of shareholders and of the business of these companies. after the amalgamation. This would ensure uniform accounting policy for the pooled assets. The business of the SC is intended to be carried on. by the BC. CHENNAI 79 . and Assets and liabilities of SC are incorporated in the Financials of the BC at book values except to ensure uniform accounting policies. Thus if SC is following SLM of depreciation and the BC is following WDV. For purpose of computing 90% the shares already held prior to amalgamation by • BC in SC • One or more subsidiaries of BC in the SC. AS 14 specifies 5 specific conditions to be fulfilled for a MERGER All the assets and liabilities of the Transferor Company (for brevity lets name it as SC) become the assets and liabilities of the Transferee Company(as BC) Shareholders of SC holding not less than 90% of the face value of equity shares become the shareholders of BC by virtue of amalgamation. Amalgamation Methods of Amalgamation: Merger Amalgamation in the nature of Merger: Purchase Genuine pooling of Not merely of the assets and liabilities of the amalgamating companies. Amalgamation in the nature of Purchase: SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. except that cash may be paid in respect of any fractional shares.• the shares and other securities (non-cash items) issued and the payment (cash) made in the form of cash or other assets by the transferee company to the SHAREHOLDERS (equity or preference) of the Transferor company but excludes Payments made to settle external liabilities like debentures and amalgamation expenses incurred. and • Nominees of BC in the SC Should be EXCLUDED The consideration paid to equity shareholders of the SC is in the form of equity shares in the BC.
Such changes made are to be reported in accordance with AS 5. CHENNAI . • In case at that time. The balance of profit and loss account to be aggregated with that of BC or transferred to General Reserve. Also the business of the company which is acquired is not necessarily intended to be continued. Methods of Accounting: NATURE OF AMALGAMTION Merger Purchase Pooling of Interest Method: Two key points to be noted Assets and Liabilities – The assets and liabilities of the SC are to be recorded in existing carrying amounts and in the same form as at the date of amalgamation. Difference between the share capital of the SC and the purchase consideration are to be adjusted as follows: DIFFERENCE BETWEEN CONSIDERATION AND SHARE CAPITAL METHOD OF ACCOUNTING Pooling of Interest Method Purchase WHEN CONSIDERATION WHEN SHARE CAPITAL IS HIGHER IS HIGHER DIFFERENCE IS ADJUSTED IN THE RESERVES 80 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Even if one of the above conditions listed for Merger is NOT satisfied then it leads to PURCHASE. What is not a merger is Purchase. Exception being when. the companies follow different accounting policies then the book values may be adjusted so as to be in line with policies of the BC. the shareholders of the company which is acquired normally discontinue to possess interest in the equity of the amalgamated Company in a proportion identical. to that held by them in the liquidated company.The cases where One company acquires another company And as a consequence.
Key points to be noted are: The assets and liabilities EXCLUDING RESERVES are to be accounted in the books of accounts of BC on FAIR VALUE basis thereby allocating the consideration proportionately among the net assets. Whenever the reserve is no longer needed at such time the above entry is reversed and the reserve is no more maintained. However such amortization period shall not exceed 5 years unless longer period is justified.i. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. ONLY STATUTORY RESERVES are to be maintained in the books of accounts of BC and other reserves are to be totally IGNORED. Purchase Method: The purchase method is very similar to that of accounting for a normal purchase of asset. CHENNAI 81 . The assets and liabilities will be accounted in accordance with the purchase consideration.e NO GOODWILL OR CAPITAL RESERVE will arise out of amalgamation by way of merger. When recording the reserves as required by any statute the following entry is made: Amalgamation Adjustment Account Dr To Statutory Reserve Account Such amalgamation adjustment account is disclosed in the balance sheet under the heading ‘Miscellaneous Expenditure’. Difference between the Net Assets of the SC and the purchase consideration are to be adjusted as follows: DIFFERENCE BETWEEN CONSIDERATION AND NET ASSETS WHEN CONSIDERATION IS HIGHER WHEN NET ASSETS IS HIGHER DEBIT TO GOODWILL A/C CREDIT TO CAPITAL RESERVE A/C The Goodwill arising on amalgamation to be amortised on a systematic basis over its useful life.
CHENNAI Consideration based on future events Treatment of Reserves 82 . The FV may be taken as either the FV or the NET BOOK VALUE of assets given up when the market value is not reliably measurable. Value fixed by Statutory authorities may also be taken as FV. cash for Shares or securities or cash consideration fractional shares Assets and Liabilities Accounted at Book Values Accounted at Fair Values Reserves Brought into books of BC ONLY Statutory Reserves that also by debit to Amalgamtion Adjustment Account (reversed whenever statutory conditions are met) Difference between NOT recorded – difference is Recorded as Goodwill or consideration and net asset adjusted in reserves Capital Reserve value of assets Other points to be noted: Non-Cash Consideration When there are cash and non-cash components. Sometimes in a scheme of amalgamation COURT APPROVAL is obtained.Important differences between the two methods: POOLING OF INTEREST PURCHASE Discharge of purchase ONLY Shares. When such is the case. In such case Court approval may specify treatment of reserves different from that in AS14. In such cases following disclosures are needed as Company has to carry out Amalgamation Procedures as directed by the Court Order SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Consideration may be partly or whole conditional and based on happening of future events. non-cash components are to be valued at FAIR VALUE. if future events are predictable and can be estimated reliably then such amount to be included in consideration Else adjustment should be considered as soon as the amount is determinable.
83 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Liabilities to be done at FAIR VALUE. IFRS 3 and US GAAP AS -14 IFRS 3 Allows both Pooling of Interest Allows ONLY Purchase and Purchase Method. treatment Amortisation period of goodwill (if any) Significant Differences among AS-14. CHENNAI . and contingently payable Difference between Consideration and NAV. Value of assets and liabilities to Valuation of Assets and be taken as Carrying Value. Effective date Method of accounting Particulars of scheme – Statutorily sanctioned Amalgamation after B/S date (before issue of FS) disclose as per AS 4 – BUT NOT TO BE INCORPORATED IN FS For POOLING OF INTEREST METHOD – 1st Financial Statement Description and No. general nature of business of amalgamating companies.• • • • Disclosure: Common Disclosures: Description of treatment of Reserves Reason for the same Quantified Deviations in such differed treatment of reserves i. FAS 142 now requires Goodwill to be written off when repaired. Amortization should for IMPAIRMENT. treatment For PURCHASE METHOD – 1st Financial Statement Consideration paid. Requires AMORTISATION of Requires Goodwill to be tested Goodwill.e between treatment as per AS 14 and Treatment as per Court Order Names. Method. of shares issued Percentage of Equity shares exchanged to give effect to amalgamation Difference between Consideration and NAV. Under IFRS not exceed 5 years. useful life of Goodwill is indefinite hence not amortised. US GAAP Allows ONLY Method. Purchase Goodwill is not treated as Wasteful asset and hence does not require amortization but suggests to test for impairment.
2005 are given below: (Rs. Loans and Advances General Reserve 170 150 50 50 Stock 350 250 Investment Allowance Reserve Profit and Loss Account 50 30 Sundry Debtors 250 300 Bills Receivable 50 50 Secured Loan 10% Debentures (Rs. in lakhs) Liabilities A B Assets A B Ltd Ltd Ltd Ltd Share Capital Fixed Assets Equity Shares of Rs. The Balance Sheets of A Ltd. recognition of Negative Goodwill in Profit and Loss account. No provision for consideration Provisional values can be used of Provisional values. A new company C Ltd. provided they are updated retrospectively within 12 months with actual values. was formed to take over the business of the existing companies.Negative Goodwill to be taken Requires immediate to Capital Reserve. and B Ltd. and B Ltd. accounted assuming acquirer is the acquiree. No provision for valuation of Requires valuation of Financial Financial Assets.100 each Machinery Reserves and Surplus Investments 150 50 Revaluation Reserve 150 100 Current Assets. 100 800 750 Land and Building 550 400 each 12% Preference shares of 300 200 Plant and 350 250 Rs. CHENNAI . 2005. Assets to be dealt with as per IFRS/IAS 39. Illustration 1: A Ltd. Does not deal with Reverse Requires acquisition is Acquisition.100 60 30 Cash and Bank 300 200 each) Current Liabilities and provisions Sundry Creditors 270 120 Bills Payable 150 70 2000 1500 2000 1500 84 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. as on 31st March. were amalgamated on and from 1st April.
as on 1st April.000 Equity Rs. and 4 equity shares for each equity share of B Ltd. as at 1st April. 10 per share. 100). 30 each. 150 per share (face value of Rs. Prepare the Balance Sheet of C Ltd. In lakhs) Amt 20 950 600 200 5. and B Ltd. CHENNAI . (4) Investment allowance reserve is to be maintained for 4 more years. will issue 5 equity shares for each equity share of A Ltd. are discharged by C Ltd. LOANS AND ADVANCES Stock 60 Sundry Debtors Cash and Bank 390 220 600 550 500 Bills Receivable 100 MISCELLANEOUS EXPENDITURE (to the extent not written off or adjusted) Amalgamation Adjustment 100 Account 3620 85 3620 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.000 Preference shares of 500 Rs. having a face value of Rs. 100 each (all the above shares are allotted as fully paid-up pursuant to contracts without payment being received in cash) RESERVES AND SURPLUS Securities Premium Account Investment Allowance Reserve SECURED LOANS 15% Debentures CURRENT LIABILITIES AND PROVISIONS Sundry Creditors Bills Payable 1650 100 CURRENT ASSETS. 2005 Liabilities SHARE CAPITAL 70. issuing such number of its 15% Debentures of Rs.00. at a price of Rs. The shares are to be issued @ Rs. Solution Balance Sheet of C Ltd. 2005 after the amalgamation has been carried out on the basis of Amalgamation in the nature of purchase. 100 each so as to maintain the same amount of interest.Additional Information: (1) 10% Debenture holders of A Ltd.00. (2) Preference shareholders of the two companies are issued equivalent number of 15% preference shares of C Ltd. (3) C Ltd.10 each Amt shares of 700 Assets FIXED ASSETS Goodwill Land and Building Plant and Machinery Investments (Rs.
30 each 1200 900 1200 450 300 (Rs.000 shares) * Rs.e. 30 each (7.00.00. 150 each (2. CHENNAI . 30.000/100*4 i. it is carried forward by a corresponding debit to Amalgamation Adjustment Account in accordance with AS-14.50.00.e. 1650 (2) Net Assets taken over A Ltd Assets taken over Land and Building Plant and Machinery Investments Stock Sundry Debtors Bills receivable Cash and bank Less: Liabilities taken over: Debentures Sundry Creditors Bills payable 550 350 150 350 250 50 300 2000 40 270 150 460 Net assets taken over Purchase consideration Goodwill Capital reserve 1540 1650 110 20 120 70 210 1290 1200 90 B Ltd 400 250 50 250 300 50 200 1500 Note: Since Investment Allowance Reserve is to be maintained for 4 more years. 150 each (b) Equity shareholders: (8.000 shares) * Rs.00.00.00.e. (1) Computation of Purchase consideration (a) Preference shareholders: (3.e.000 shares) * Rs.00.00. 2.000/100*5 i.000 shares) * Rs.00.00. 86 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. 40. in lakhs) B Ltd.000/100 i. 3.000/100 i.00.Working Notes: A Ltd.
Required: (a) What is the nature of the ‘reserves’ (whether capital or general reserves) for the purpose of AS 14 (Para 35) and for the purpose of giving effect to the scheme of amalgamation of the Company D in its books of account? (b) Whether such reserves are available for the purpose of distribution to shareholders as dividends and/or bonus shares. Company D. CHENNAI 87 .Illustration 2: Three subsidiary companies viz. are being merged into another company. Company A.. The transferor and transferee companies have received approvals for merger from respective High Courts in January and February 2010 respectively. viz.. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. (b)Reserve created on amalgamation is not available for the purpose of distribution to shareholders as dividend and/or bonus shares. Solution (a) The difference between the issued share capital of the transferee company and the share capital of the transferor companies should be treated as capital reserve for the purpose of Para 35 of AS 14 and for the purpose of giving effect to the scheme of amalgamation of Company D in its books of account. B and C.
– SMCs need not comply with Paras 11 to 15 of AS 15 to the extent that deal with the recognition and measurement of short term accumulated compensating absences. If average number of persons employed during the year is less than 50 . measurement and disclosure principles ion respect of defined benefits plans and other long term employee benefits plan. CHENNAI . However such enterprises should provide and disclosure the accrued liability in respect of defined benefits plans and other long term employee benefits plan as per actuarial valuation based in projected unit credit method and discount rate based on yield on government.com) AS 15 has been revised by the Institute of Chartered Accountants of India and applicable in respect of accounting period commencing on or after 1st April 2006 OBJECTIVES The objective of this accounting standard is to prescribe the accounting treatment and disclosure requirement in respect of employees benefits in the financial statements of employers. 88 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Discounting the amount payable after 12 months of the balance sheet as regarded defined contribution plans and termination benefits.AS – 15 EMPLOYEES BENEFITS . Recognition. APPLICABILITY Accounting standard is made applicable to different types of enterprises as under – Level 1 enterprises – in an Entirety Other than level 1 enterprises .If average number of persons employed during the year is 50 or more – the accounting standard is applicable to such enterprises except the provision relating to – • Recognition and measurement of short term accumulating compensated absence in respect of which of employee are not entitled to cash payment for unused leave at the time of leaving the service • Discounting the amount payable after 12 months of balance sheet as regards defined contribution plans and termination benefits.The SMCs have been given following relaxation as regards AS 15 “employee’s benefits “. measurement and disclosure principles in respect of in respect of defined benefits plans and other long term employees benefits plan however such enterprises should provide and disclose the accrued liability in respect of defined benefits plan and other long term employee benefits plan as per actuarial valuation based on projected unit credit method and discount rate based on yield on government bonds. Applicability to the companies . • Recognition. measurement and disclosure principles as laid down in this standard in respect of defined benefits plans and long term employee benefits will not apply to such enterprises.S. VIGNESH (email@example.com enterprise can determined and provide the liability and expenses as regards defined plans and long term employee benefits by assuming the such benefits are payable to all employees at the end of the accounting years and therefore recognition.
EMPLOYEE BENEFITS Employee benefits are all forms of consideration given by an enterprise directly to the employee . SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. MEANING OF EMPLOYEE For the purpose of this standard Employee includes whole time directors and management personnel. SHORT TERM COMPENSATION ABSENCES These are of two types accumulating and non –accumulating. The measurement of such obligations can reflect the possibility that some employees may or may not have any legal obligations to pay bonus. Expected cost of accumulating compensated absence is the additional amount that the enterprises have to pay as a result of the unused entitlement has accumulated at the balance sheet date. but it may have the practice of bonus payment. children or other dependants to other such as trust. In this type employee are entitled to a cash payment when they leave the employment. Non vesting type payment does not arise. This standard is applicable to all form of employer and employee relationships. CHENNAI 89 .Such plans create an obligation as employees render service that increases the amount to be paid if they remain in service until the end of the specified period. There is no requirement for formal employer and employee relationship. Profit sharing and bonuses payable within 12 months after the end of the period in which the employee render the related services IV. In the case of second type i. when the absences occur. Wages. This accounting standard also require to recognize expected cost of accumulating compensating absences. employees receive a share of profit only if they remain with the enterprises for a specific period . If the employee are not regular payroll employee then it should calculated during the period of absence in which the absence occur.Accumulating compensation can be carry forward if the current year entitlement was not used in full. This standard does not include share based payment like stock option these are covered by Guidance note issued by The Institute of Chartered accountants of India. An enterprises should recognize the expected cost of profit sharing and bonus payments when and only when the enterprises has a present obligation to make such payments as a result of past events and . it is recognized as a liability if the amount paid exceeds the amount which is actually paid and it is treated as an asset when amount paid exceed the amount of short term benefits. PROFIT SHARING AND BONUS PLAN Under some profit sharing plans. Short – term compensated absences . Vesting compensated absence means entitlement of cash payment is not conditional on future employment. This can be again divided into vesting and non vesting types. ACCOUNTING FOR SHORT TERM EMPLOYEES BENEFITS: The short term employees benefits are:I. Such of these enterprises has no realistic alternative but to make the payment. insurance companies in exchange of service rendered by employee. where the absences are expected to occur within 12 months after the end of the period in which the employees render the related employee service III. Non monetary benefits The short term employee benefits should be only recognized only if the employee renders the service and it is accepted as expenses by another standard.e. a reliable estimate of the obligation can be made. In the case of cost of non accumulating type of compensated absences it is computed if the employee is on the regular payroll.to their spouses. salaries and social security contribution II.
If the obligation is side of employer is should be treat such payment as defined benefits plans and not defined contribution plan and accounting treatment should be done accordingly. Thus. pension etc • Other benefits . they are Multi-employer plans. DEFINED BENEFITS PLAN 90 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. DEFINED CONTRIBUTION PLAN Under this defined contribution plan. e. The enterprises should treat contribution payment to defined contribution plan. e. post employment life insurance etc Post employment benefits plan can be classified into contribution plan and defined benefits plans.POST EMPLOYMENT BENEFITS Post employment benefits include: • Retirement benefits. is simple. The payment of fixed premium under such contract is in substance the settlement of the employee benefits obligation. CHENNAI .g. Periodical contribution paid by the employer in multi employer plan is DEBITED in expenses account and CREDITED in bank account. The enterprises should DISCLOSE the amount recognized as expenses for defined contribution plan and contribution added to defined contribution plan for key management personnel. It may be classified as defined contribution plan or defined benefits plans based on enterprise obligation under plan.. Accounting for the multi employer plan is treating it as defined contribution plan. Accounting for state plans is contribution paid by the employer is DEBITED to expenses account and if it is payable is CREDITED to liability account. STATE PLANS It was established by the legislation to cover all enterprises of a specific industry or all enterprises and is operated by national or by state government.. state plans. If the contribution is not paid and partly paid the amount is CREDITED to payable account. DEFINED CONTRIBUTION PLAN is again divided into three parts. MULTI EMPLOYER PLANS The multi employer plans are defined contribution plan or defined benefits plan and that are pool the assets contributed by various enterprises that are not under common control and those assets to provide benefits to the employer of more than one enterprises on the basis of contribution and benefits level are determined without regard to the identity of the enterprises that employ the employees concerned. INSURED BENEDITS Where the employer takes insurance policy from an insurance company for meeting obligations under post employment benefits and employer has no obligation to pay the benefits to the employee and the insurer has sole responsibility for paying the post – employment benefits.g. and insured benefits. the enterprise’s obligation is limited to the amount that agrees to contribute to the fund. the amount of post employment benefits received by the employee is determined by the amount of contribution paid by the enterprises to the post – employment benefits plan or to a contribution and the employer is no longer liable to pay the post – employment benefits to the employee.
THE accounting treatment for defined benefits plans are:Actuarial assumption are required to measure the obligation under this plan obligations are measured on discounted basis because they are not settled now it is only accrue only after many years of employee renders his service. that defines an amount of benefits to be provided usually as a function of one or more factors such as years of service . Plants assets consist of – assets held by long term employee benefits fund and qualifying insurance policies – if the proceeds of the policy can be used only to pay pr fund employee benefits under a defined benefit plan The amount recognized as a defined benefit liability in the balance sheet should be net of total of the following amounts: • The present value of the defined benefit obligation at the balance sheet date MINUS any past service cost which are not recognized MINUS the fair value at the balance sheet date of plan assets(if any) out of which the obligations may be made at intervals not exceeding three years. And actuarial loss or gain is possible. CHENNAI 91 . ACCOUNTING TREATMENT FOR DEFINED CONTRIBUTION PLAN. • Interest cost • Past service cost • Current service cost • Actuarial gains or losses • Expected return on any plan assets • The effect of any curtailment re –settlement • Effect of recognition of over funding of defined benefits plans at lower of over funding amount and present value of any economic benefits available in the plan or reduction in future contribution to the plan. The plan assets should exclude unpaid contribution due from the reporting enterprise to the fund as well as any non – transferable financial instruments issued by the enterprises and held by the financial instruments issued by SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. MEASUREMENT RECOGNITION OF PLAN ASSETS The fair value of the assets is deducted in determining the amount recognized in the balance sheet. • • • The net total of the following amounts should be charged to profit and loss account as cost of defined benefits plan excluding the employee benefits cost which is to be capitalized as per another accounting standard. ACTUARIAL VALUATION is done by actuary an expert who can reliably estimate the amount of obligation under various uncertainties.Defined benefits plans are retirement plans like Gratuity. The recognition and measurement of plant assets. pension etc. salary etc. When there is no market value is available the fair value of plan assets estimated. ACCOUNTING FOR THE OBLIGATION OF BALANCE SHEET.
the enterprise and held by the fund. REIMBURSEMENTS TO BE RECEIVED AS ASSETS. CHENNAI The disclosure requirements are The enterprise accounting policies and actuarial gains and losses A general description of the type of plan A reconciliation of opening and closing balances of present value of the defined • • • • . Plan assets are also reduced by any liability of the fund that do not relates to employee benefits. DISCLOSURE • • • benefits plan An brief analysis of the defined benefits obligation and fair value of the plan assets to the assets and liabilities recognized in the balance sheet • The total expenses recognized in the statement of profit and loss and the line items of the statements of profit and loss in which they are included • For each major category of plan assets which should include but is not limited to equity instrument debt instrument property and all other assets the % or amount that each major category constitutes of the fair value of the total plans assets • The amount included for the fair value of the plan assets • A narrative explanation about the overall expected returns • The actual and reimbursement of an assets • The actuarial assumptions • The effect of an increase of 1 % point and effect of a decrease of 1% point is assumed medical cost trend rates on expenses and obligations • Employers best estimates as soon as it can be reasonably determine • The disclosure about multi employer defined benefits plan that are treated as if they were defined contribution plans OTHER THAN LONG TERM EMPLOYEES BENEFITS • Other than long term employees benefits it includes Long term compensated absence such as long term service Long term disability fund Deferred compensation paid 12 months or more after the end of the period in which it is earned Profit sharing and bonus payable 12 months or more the end of the period which the employee render the related service ACCOUNTING FOR LONG TERM EMOPLOYEMENT BENEFITS The accounting is similar to post employment benefits except all past service cost is recognized immediately DISCLOSURE The disclosure requirement is required by other standard that is AS 5 and AS 18 92 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. The enterprise should treat same way as plan assets. Only went it is virtually certain that certain that another party will reimburse some of the expenditure required to settle a defined benefits obligation an enterprise should recognize its right to reimburse as a separate asset.
However the expenses so deferred cannot be carried forward to accounting period commencing from 1 April 2010 DISCLOSURE If there is any contingent liability the disclosure requirement under AS 29 and AS 5 on prior period items and also AS 18 on related parties is required. LONG TERM EMPLOYMENT BENEFITS Compensated absence which are not expected to occur within 12 months after the period in which the employee render the related service are recognized as an actuarially determined liability at the present value of the defined benefits obligation at the balance sheet date. overseas social security contribution and performance incentives. EXAMPLE:The application of AS 15 In TATA CONSULTANCY SERVICE LIMITED POST EMPLOYMENT BENEFITS PLANS Contribution to defined contribution retirement benefits schemes are recognized as an expenses when the employees have rendered service entitling them to contribution.TERMINATION BENEFITS Termination benefits are employee benefits payment on the results of an entities decision to terminate an employee before normal retirement or the employee employment voluntary retirement in exchange for those benefits. For the defined benefits scheme the cost of providing benefits is determined using projected unit credit method with actuarial valuations being carried out at each balance sheet date. These benefits include compensated absence such as paid annual leave. Actuarial gain or loss are recognized in full in the profit and loss account for the period in which they occur. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. SHORT TERM EMPLOYMENT BENEFITS The undiscounted amount of short term employment benefits expected to be paid in exchange for the service rendered by the employees is recognized during the period when the employee render the service. CHENNAI 93 . Past service cost is recognized immediately to the extent that benefits are already vested and otherwise is amortized on a straight line basis over the average period until the benefits become vested. ACCOUNTING TREATMENT FOR TERMINATION BENEFITS. The retirement benefits obligation recognized in the balance sheet represents the present value of the defined benefits obligations as adjusted for unrecognized past service cost and as reduced by the fair value of scheme assets. Any assets resulting from this calculation is limited to the present value of available refunds and reductions in future contributions to the scheme. TERMINATION expenses are treated as an expenses immediately however if the enterprises incur the expenditure on termination on or before 31 march 2009 the enterprises may choose to follow the accounting policy of deferred and expenditure over pay back period.
com) Introduction One of the well-accepted forms of financing is meeting of portion of business needs through borrowals. • Exchange rate differences relatable to foreign currency borrowings. There can be situations where the time lags between “building up of an asset” and subsequent creation of “earnings from the property” is substantially long. (Explanation is dealt in detail with an example at the end of this standard) 94 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Elements of borrowing costs generally include: • Interest and commitment charges on bank borrowings (Commitment charges refers to the charges which are sometimes stipulated to be payable to the lender between the date loan agreement is finalized and the date the loan or any part thereof is actually taken by the company) • • • Discounts and premiums on borrowings to the extent amortized Other ancillary costs for arranging borrowings to the extent amortized Finance charges in respect of assets under Finance Lease or under other similar arrangements E. Borrowing Cost It includes interest and other costs incurred in connection with borrowed funds. It may be for day to day operations or capital expenditure.AS 16 – BORROWING COST . 1956. CHENNAI . Section 208 of the Companies Act. You use them for the whole year on building a stadium. Definition 1. Scope This Standard prescribes accounting treatment for borrowing costs and does not deal with the actual or imputed cost of owner’s equity. The statutory provisions have been accorded due priority and hence excluded from AS 16. You lease some bulldozers under finance leases. provides for capitalization of interest paid on funds raised by the way of share capital.g. therefore an imperative need to accord proper accounting treatment for recognizing and recording borrowing costs incurred during a period properly attributable to creation of relative asset. Krishnan (sarkricas@gmail. Accounting for finance leases involves splitting the costs between depreciation and finance charges. The amount of borrowing costs eligible for capitalization should be determined and other borrowing costs should be recognized as expenses in the period in which they are incurred. to the extent that they are regarded as an adjustment to interest costs. The finance charges will be included as borrowing costs. including preference share capital not classified as a liability.Saranya M. There is. a qualifying asset. subject to authorization by the articles or by a special resolution and with previous approval of the Central Government.
maturing of liquor for longer periods.9 lakhs. [P (A/c) – Nov 2004] Solution SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.5 lakhs As at the end of financial year.2. e. Delivery of truck was not received. The following assets ordinarily take 12 months or more to get ready for its intended use or sale. Qualifying asset It is an asset that necessarily takes substantial period of time to get ready for its intended use or sale.g. construction of shed was completed and machinery installed. In recognizing Borrowing costs that can be capitalized. ship building Inventories are said to involve substantial period of time. Recognition Principles Borrowing costs that are directly attributable to the acquisition.50 lakhs to be utilized as under: (a) (b) Construction shed – Rs. Total interest charged by the Bank for the year was Rs. construction or production of qualifying assets should be capitalized as part of the cost of that asset.20 lakhs Working capital – Rs. when time is the major factor in bringing about a change in their condition. the following important attributes are to be taken cognizance of: It is probable that the qualifying asset will result in future economic benefits Costs that are to be capitalized “can be measured reliably” Example 1 Venugopal Ltd obtained a loan from the Bank for Rs. • Assets constructed under major capital expansions. to get ready for its intended use or sale should be considered in this regard. The time that an asset takes technologically and commercially. and • Assets intended for sale or lease that are constructed or otherwise produced as discrete projects e.g. Show the treatment of interest under AS-16. unless the contrary is proved by the enterprise: • Assets that are constructed or otherwise produced for an enterprise’s own use.15 lakhs (d) Advance to Purchase of truck – Rs. CHENNAI 95 .10 lakhs (c) Purchase of Machinery – Rs. Examples of Qualifying assets Exclusions from Qualifying assets Manufacturing Plants Assets that are ready for their intended use or sale when acquired Power Generation Facilities Inventories that are routinely manufactured or Inventories that require a substantial period of otherwise produced in large quantities on a repetitive basis over a short period of time time to bring them to a saleable condition Investment properties Investment other than Investment Properties As per ASI 1: A period of 12 months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of each case.
Other borrowing costs should be recognized as expenses in the period in which they are incurred. Analysis:Interest rate for the loan = Rs.15 lakhs x 18% = Added to Cost of shed as per ASMachinery Rs. eligible for capitalization should Less: Income on the temporary be determined by applying a investment of those borrowings.Principle:As per AS-16. Conclusion:The treatment for the total interest of Rs. CHENNAI .10 lakhs x 18% = Written off to P&L account as per Rs.9 lakhs is given below: Purpose Loan amount Interest amount Accounting Treatment Construction of shed Rs. Amount to be capitalized Actual Borrowing costs on that The amount of Borrowing costs Borrowing during the period.5 lakhs Rs.9 lakhs Specific and General Borrowings The amount of borrowing costs eligible for capitalization is determined as under: Nature Borrowed Specifically Borrowed Generally Situation When an enterprise borrows When the financing activity of an funds specifically for the purpose enterprise is coordinated of obtaining a particular centrally or when a range of debt Qualifying Asset.70 lakhs 16.90 lakhs a/c till the date of acquisition / installation of additional assets and capitalized later on asset creation. Total Rs. instruments are used to borrow funds at varying rates of interest and such borrowings are not readily identifiable with a specific Qualifying Asset.5 lakhs x 18% = Kept in Capital Work in Progress of truck Rs. Working capital Rs.50 lakhs Rs.2.10 lakhs Rs. Advance to purchase Rs.60 lakhs 16.20 lakhs Rs. Use of Capitalization Rate 96 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Direct Attribution The Borrowing costs that directly Identification of a direct relate to that Qualifying Asset can relationship between particular be readily identified.9 lakhs / Rs. borrowings and a Qualifying Asset requires exercise of judgement.15 lakhs Rs. construction or production of qualifying assets should be capitalized as part of the cost of that asset.20 lakhs x 18% = Added to Cost of shed as per ASRs.0.50 lakhs = 18%.80 lakhs AS-16.3. if Capitalization Rate to the any expenditure on that asset.1. borrowing costs that are directly attributable to the acquisition. Purchase of Rs.
Example 2 Rainbow Ltd.00 Conclusion:Crediting the amount of Rs. Comment on the above treatment of accountant with reference to relevant accounting standard. borrowed an amount of Rs. Amount to be capitalized = Actual Borrowing costs on that Borrowing during the period less Income on the temporary investment of those borrowings. The plant is expected to be completed in 4 years. CHENNAI 97 .150 crores.150 crores was specifically borrowed for construction of boiler plant.03. The weighted average cost of capital is 13% p.2009 for construction of boiler plant @ 11% p.150 crores on 01. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. For Specific Borrowings. Analysis:In the given case.The Capitalization rate should be the Weighted Average of the Borrowing Costs applicable to the borrowings that are outstanding during the period.50 crores was earned and credited to profit and loss account. the amount of Rs. This amount should be used to reduce the amount of Borrowings Costs eligible for capitalization. is not correct and the amount of borrowing costs to be capitalized for the financial year 2009-10 should be calculated as follows: Particulars Interest paid for 2009-10 (11% on Rs.150 crores) Less: Income on temporary investment from specific borrowings Borrowing costs to be capitalized during 2009-10 Rs.3. Linkage between Carrying amount and Recoverable amount of Qualifying Asset The carrying amount of a fixed asset as reflected in the Financial Statement cannot exceed its recoverable amount or net realizable value.2010.19. Weighted average of capitalization rate will be used for borrowings made generally. Weighted Average Capitalization Rate for General Borrowings Total Interest less Interest on specific borrowings Total Borrowings less Specific Borrowings The amount of Borrowing Costs capitalized during a period should not exceed the amount of Borrowing Costs incurred during that period.04. treatment of accountant of Rainbow Ltd. The accountant of Rainbow Ltd. Therefore. [F (A/c) – May 2010] Solution Principle:As per AS-16.a. other than borrowings made specifically for the purpose of obtaining a Qualifying Asset.a. an income of Rs.50 (3.3.50 crores to P&L a/c is not proper. Due to surplus fund out of Rs.50) 13.50 crores for the accounting period ending on 31. capitalized interest of Rs. (in crores) 16.
In certain circumstances. Expenditure on qualifying assets (a) Eligible amount: Expenditure on a qualifying asset includes only such expenditure resulting in: i) Payment of Cash ii) Transfers of other assets.000.000 (Carrying amount Rs. Borrowing cost capitalized as per AS-16 is Rs.87.90.000. Commencement of Capitalization Capitalization of borrowing costs as part of the Cost of Qualifying asset should commence only when all the following conditions are satisfied: The expenditure is being incurred for the – (a) acquisition (b) construction. (a) (b) If NRV of this item is Rs. CHENNAI .02.87.000. or iii) The assumption of interest-bearing liabilities Only these expenditure items are eligible for capitalization of borrowing costs. the carrying amount is written down or written off in accordance with the requirements of other Accounting Standards.15. the difference of Rs.000 – NRV Rs.15. What will be the accounting treatment if the NRV of this item is: (a) (b) Rs.02. or (c) production of a Qualifying Asset.000. Borrowing cost are being incurred. Inventory will be carried at Cost – Rs. the difference will be ignored. Capitalization Criteria A. 98 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.1. and Activities that are necessary to prepare the asset for its intended use or sale are in progress.If the carrying amount or the expected ultimate cost of Qualifying Asset exceeds its Recoverable amount or Net Realizable Value.000.1.000) will be written off as per AS-2 requirements.1.000.000 Rs.000. If NRV of this item is only Rs.02.15. Inventory will be carried at Rs. the amount of write-down or write-off can also be written back in accordance with those other Accounting Standards. Example 3 Cost of an inventory item is Rs.1.87. The inventory is carried at Cost or NRV whichever is lower.12.000 + Rs.87.90.1.000 = Rs.000 Solution Carrying amount of the inventory item: Rs.12.
Borrowing cost incurred during such periods of suspension represents cost of holding incomplete asset and hence should not be capitalized. Suspension of capitalization by the company is not a correct treatment as per AS-16. the work on the flyover had to be suspended for a month. any: Progress payments received. The Company accordingly suspended capitalization of borrowing costs of Rs. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. This period can be considered as a temporary delay and hence eligible for capitalization purposes. Conclusion:Borrowing cost of Rs. E. Capitalization of borrowing costs is not normally suspended – • During a period when substantial technical and administrative work is carried out. Though the rain was heavy.12. CHENNAI 99 . the period cannot be considered as extended period leading to substantial delay in suspension of construction activities.(b) Reductions: From the eligible amount. Due to heavy seasonal rains in July 2006 in the area. The same was completed in Feb 2007. including borrowing costs previously capitalized. (c) Apply Capitalization Rate: The average carrying amount of the asset during a period.50 lakhs incurred by ABC Ltd should be capitalized. [F (Aud) – Nov 2005] Solution Analysis:In the instant case. B.g. is normally a reasonable approximation of the expenditure to which the capitalization rate is applied in that period. Capitalization should continue during the extended period needed for inventories to mature. Suspension of Capitalization Capitalization of borrowing costs should be suspended during extended periods in which active development is interrupted.12. it has been mentioned that the construction activity was interrupted for a month due to seasonal rain. and Grants received in connection with the asset should be deducted. • When a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale.50 lakhs for that month. Example 4 ABC Ltd commenced construction of a flyover in Mumbai in Jan 2006 under BOLT scheme. Comment.
e. such exchange differences should be regarded as borrowing costs. Cessation of Capitalization Capitalization of borrowing costs should cease when: • All activities necessary for making assets ready for intended use/sale are substantially complete. and completed part is capable of use when work on others is in progress.(ASI 10) (a) Borrowing costs may include exchange differences arising from Foreign Currency Borrowings to the extent that they are regarded as an adjustment to interest costs.C. capitalization for completed part should be stopped. in order to reflect the economic reality. at a higher rate of interest) Interest on Foreign currency borrowings (i. CHENNAI . (c) Step 1 2 3 4 5 6 7 100 The procedure for capitalization in such cases are as follows: Procedure Interest on Local currency borrowings (i. • Where an asset is completed “in parts”. the advantage in lower loan interest rates is offset by the currency depreciation and exchange difference losses. Example 5 Determine the dates from which capitalization should cease: Building A Completed in full in March Building B Completed in full in April but not accessible until Building C is completed Building C Completed in December Building D Completed in June but got electricity connection and was ready for intended use in July Solution Building A Building B Building C Building D March December December July Exchange difference on foreign currency borrowing attributable to borrowing cost . In such cases. at a lower rate of interest) Difference in interest between foreign & local currency borrowings = (1) – (2) Exchange difference in Principal repayable at the end of the year Further amount to be considered as Borrowing costs = (3) or (4) whichever is less Balance exchange difference to be taken to P&L a/c as per AS-11 = (4) – (5) Borrowing costs under AS-16 = (2) + (5) SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.e. Hence. (b) Foreign currency borrowings may have lower interest rates than corresponding amount of local currency loans. • Items of administrative work or finishing touches to be completed happen to be minor in nature.
a as on April 1.e.) $10.000 Rs.000 + Rs. 2003.30. 2003 for a specific project at an interest rate of 5% p.48 x 5% = Rs.45) = Rs. The corresponding amount could have been borrowed by XYZ Ltd in local currency at an interest rate of 11% p. Determine the amount of borrowing cost as per AS-16.500 5 6 7 Disclosure Requirements The Financial Statements should disclose – (a) The accounting policy adopted for Borrowing Costs.500 $10.000 x Rs.48 per USD.30.500 = Rs. the exchange rate between the currencies was Rs.24. at a higher rate of interest) Interest on Foreign currency borrowings (i.500 Rs. On April 1.49500 – Rs.25.24.000 – Rs. at a lower rate of interest) Difference in interest between foreign & local currency borrowings = (1) – (2) Exchange difference in Principal repayable at the end of the year Further amount to be considered as Borrowing costs = (3) or (4) whichever is less Balance exchange difference to be taken to P&L a/c as per AS-11 = (4) – (5) Borrowing costs under AS-16 = (2) + (5) Amount (Rs.e.25. Solution Step 1 2 3 4 Particulars Interest on Local currency borrowings (i.Example 6 XYZ Ltd has taken a loan of USD 10.000 x Rs.49. The exchange rate.45 per USD.500 = Rs.25.500 Rs. 2003. as at March 31.000 = Rs.4.49.000 Rs.500 $10. is Rs. 2004.000 on April 1.000 x (48 .24.a payable annually.25. CHENNAI 101 .45 x 11% = Rs. and The amount of Borrowing Costs capitalized during the period. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.
One such inadequacy in the financial statements is that segment information was not required to be provided. NIL. Cost is prohibited to be given as per AS 17. (4cr). AS 1 state the purpose of financial statements – Understanding what happened yesterday to extrapolate. top information should be summarized and given to shareholders. By giving splitting up separately the user can help in decision making. Cash flow is given because users must be aware of cash flow generated. which is now mandatory requirement.com) For a quite some time. there has been an increasing pressure on ICAI to introduce standards on accounting that would make financial statements more transparent and provide users especially investors and lenders the information they rightly deserve. You are giving information to share holders which should be summary. So financial statements should be prepared in order to achieve the purpose of decision making. Information you give should be more detailed to the bottom level of information pyramid. 102 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. we cannot figure out the prospects. In combined statements. AS 17 was introduced to enhance information to users for decision making. In CV market – saturated market growth 5% expansion. For example Capital expenditure in three segments are 10cr. In CV there is no need of showroom or test drive when compare to PV. SEGMENT REPORT Standard requires only major segment. This will enable the users to know which expansion.Ramanujam Raghavan (rama_rghv@yahoo. CHENNAI . Identification of major segment is done by 5 tests. AS 17 should give information only to reportable segment (which are large segment). As you go on higher in the pyramid. So AS 17 has to go segment reporting with revenual segment and total column. while small segment should be consolidated and shown as others. SYNOPSIS • Preamble to Standard • Primary reporting • Test for reportable segment • Identification of segments • Definitions • Secondary reporting • Applicability PREAMBLE Every entity as they enter multiple lines of business they expand to different geographical areas. Demand for CV would come only when economy mainly agro industry grows.AS 17 – SEGMENT REPORTING . net growth increase.Trucks) and passenger vehicles (PV – Cars). the gap between US or International Standards and Indian Standards came very obvious. The risk and reward of CV is significantly different from PV. Decision will be as per the ability of the company in future and not historical performance. Tata motors manufacture commercial vehicles (CV. While preparing statements they prepare combined Profit and Loss account and income and expenditure account and balance sheet. The total column should tally with that of Profit and Loss account and balance sheet. relevant and major segment. PRIMARY REPORTING It is a report for shareholders. With the advent of US listing by Indian companies. From user point of view it is not helpful for decision making due to risk and return for CV & PV are different. stagnation. The combined information does not give any information to the users. contractions.
such segment revenues will all form as segments The segment revenue consists of both internal and external sales. such enterprise assets will all form as segments This entire standard focuses on operation segment and not financial segment. But in combined profit and loss account of whole organization. CHENNAI 103 . Therefore only operational assets are to be included. ASSET TEST If a segment assets is => 10% enterprise assets. So we should not take enterprise revenue as it includes only external sales and not internal sales. we have sales only for external. RESULT TEST SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.TEST FOR REPORTABLE SEGMENT REVENUE TEST If a segment revenue is => 10% enterprise revenue. Therefore we need to take segment revenue of all segments.
MANAGEMENT CHOICE It is a freedom given to managers to report or not. external sales of these revenue segment identified under first 4 test is it greater than 75% if enterprise external sales. UK. So as per management judgments subjected to risks and rewards. good market and dynamics are different. But we have done test of internal and external test. In order to catch the loss making segment this test structure is made. 75% Test This is a checking kind of balance criteria. Business Segments 104 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. They cannot show all segments since they are constrained by relevance. If segments expected to be material enough and wants shareholders to know about it then they may report on that segment. select segment which is pre-dominance based on risk or return which is sensitive and bring them as reportable segment. Organization Structure – Identify what segment After identification put in test of Business segment Geographical segment – currency and political risk. they may think that this segment will be major one in near by future. So as per above facts AS 17 recognizes only three segments – US.Reportable or Not reportable S1 2 S2 18 S3 -4 S4 -12 S5 -14 TOTAL 20 -30 30 3 Not Reportable Reportable Reportable Reportable Reportable This test structure is there because. asset result tests. France and Germany but prime facie there are 4 segments. France and Germany. Profit consists of internal and external. If it is yes. If 15 segments there and 5 segments are selected through revenue. So management can select some segment and report also. sustainability it is essential for external sales. The left out are ten segments. loss making segment will escape reporting requirement. For example if there are garment sales to UK. In US and UK there is a currency risk. While France and Germany politically silent and they away. no further steps complete report. profitability. Profit making segment will be captured in other test. But organization external profits are critical. DEFINITIONS 1. IDENTIFICATION OF SEGMENTS How do you find how many segments in the business there? Eg: Operations in different geographical areas. However in France and Germany there is same currency and same market risk. UK and US are politically poking nose.STEPS Each segment Profit and Loss Ascertain total Profit and Loss Select a higher value of above two items as per absolute and not value 10% of above number verified with segment Segment . We have to conduct sales in different way in different geographical areas. As far as organization performance. If it is no. Therefore for AS 17 there are criteria for enable identification segments. The management may feel why these segments not passed the tests. USA. At the end. CHENNAI . out of leftover segment.
where the cost of delivery is more. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Australia and New Zealand. There are certain states where there are prohibitions and choices too. Eg : Shipyard designing & constitution EXCLUDES Extra-ordinary items Income from investments unless business is finance in nature. Retail sale Life insurance and non-insurance – fire and marine PARTICULARS Political and economic environment Currency risk Exchange control regulation Prohibition of operations DETAILS N. Factors for identification of business segments are as follows:DETAILS Soap. then there it is segregation as a separate segment. Geographical Segments Distinct (separate) components of an enterprise operating in an economic environment whose risk and rewards are different from operations in other economic environments. On the basis of geographical segment though currency and political is same. New Zealand). Segment Revenue INCLUDES External sales Internal Sales (Sales transfer) Common income allocated on a reasonable basis – Organization raise common invoice for multiple products.Distinct (separate) components of an enterprise dealing with products and services or group of relative products and services whose risk and rewards are different from others. 3.Korea politically strong Some countries have capital control convertibility. detergents.Korea/ S. Factors for identification of business segments are as follows:PARTICULARS Nature of products and services Production method Distribution method Types of customers Regulatory environment 2. CHENNAI 105 . But within country it is treated as one segment.Korea – S. They are separately treated like that of SEZs and non-SEZs. Due to proxibility of operations we treat one segment (Canada) and other different segment (Australia. Within India segregation to segments is possible only when there is a special risk in a particular area. cosmetics Steel Production – Hot roll or cold roll NIIT – Branches and franchise Corporate sale. While other countries does not have Agricultural products export to Canada.
8. Segment Liabilities INCLUDES EXCLUDES Identified directly to segment Financial Liabilities Common liabilities capable of reasonable Corporate Liabilities (Provision for tax) allocation. Segment Expenses INCLUDES Expenses incurred by segment on external transactions Expenses incurred by segment on inter segment transactions Common expenses capable of reasonable allocation. Rent allocated to all mills. Selection based on pre-dominance of risk 106 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. CHENNAI of EXCLUDES Financial assets reasonable Corporate asset (Advance tax) ENTERPRISE ACCOUNTING POLICY . 7. Segment Result = Segment Revenue. Eg: Various mills located in one lease plant.4. select any one of them as primary reporting and other as secondary reporting. EXCLUDES Extra-ordinary items Income from investments unless business is finance in nature. any policy in segment reporting through different policy followed in the organization. But 10% to 15% will have both business and geographical operations. The standards states that where both segments there. SECONDARY REPORTING Most of organization will have only one business segment or geographical segment. Segment Assets INCLUDES Identified directly to segment Common asset capable allocation. Income tax 5.Segment Expense 6. Segment Policy It is nothing but organizations corporate Policy SPECIFIC POLICIES in relation to segment reporting As per IND AS – what ever the organization Transfer pricing policy policy the same policy should be segmented. As per US GAAP – it gives freedom for choosing Basis of allocation of common items.
so no segment reporting. Then you should disclose notes to account that we operate in one segment. if you are operating in only one segment and don’t have multiple segments then there is no question of segment reporting. Standard applies and there is only one segment. AMENDMENT TO AS 17 – 3yrs OLD Suppose enterprises to which this standard is applicable. In that case standard give two choices Matrix choice Go as per AS choice MAXTRIX APPROACH Here reporting of business in columnar and geographical in row format BS1 BS2 Revenue G1 US G1 UK G1 Europe APPLICABILITY It is applicable to Joint stock companies which are other than SMC Non Company entities which are Level I enterprises. CHENNAI 107 .and return – Judgment basis. Notes to report (segment reporting) is part and parcel of segment reporting BS3 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Eg : Company producing bricks. But in some cases it is difficult to make choice between geographical and business segments.
CHENNAI 108 . the accounting measures may not represent what they usually would be expected to represent. since they provide information on the Group as a whole. 2. Banks are obliged by law to maintain confidentiality in respect of their customer’s transactions. Due to the above.g. Where trading or borrowing transactions are not carried out at arm’s length. Exclusions The provisions of AS-18 are not applicable in the following cases: • When disclosure under AS-18 would conflict with the Reporting Enterprise’s duties of confidentiality as specifically provided and is expressly prohibited in terms of Statute or by any Regulator or by similar competent authority. and The Consolidated Financial Statements presented by a Holding Company. related party transactions and relationships could have an effect on the financial position and operating results of the reporting enterprise. Transactions. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Applicability AS-18 is applicable to disclosure of Related Party relationships in: • • The Financial Statements of each Reporting Enterprise. • Transactions between members of a Group in their Consolidated Financial Statements.com) Introduction Investors and users are entitled to believe that all the transactions of an entity are at “arm’s length” and are between independent parties. Objective The objective of AS-18 is to establish requirements for disclosure of: • • Related party relationships. or are likely to take place on terms significantly different from the terms of normal trading. and Transactions between a reporting enterprise and its related parties. or may not even be taking place at all. E. are vulnerable to being altered prior to their completion. Krishnan (sarkricas@gmail.AS 18 – RELATED PARTY TRANSACTIONS . 3. Thus.Saranya M. Scope 1. additional information is needed to ensure that users and investors can understand the financial position in its proper perspective. which are not at arm’s length.
franchiser. or are under common control with. in making financial and / or operating decisions. or are controlled by. or indirectly through one or more intermediaries. The following are not deemed to be related parties for AS-18 purposes: Common directors A single customer. As per ASI 19: The term “intermediary” means enterprises which are “subsidiaries” as defined in AS-21.• State Controlled Enterprises as regards Related Party relationships with other State Controlled Enterprises and transactions with such enterprises. Definitions (a) Related Party Parties are considered to be related if. The parties listed below. Key Management Personnel and relatives of such personnel. the Reporting Enterprise. directly or indirectly. (ii) Associate / Joint venture: Associates and Joint venture of the Reporting Enterprise and the Investing Party or Venturer in respect of which the Reporting Enterprise is an Associate / Joint venture. interest in voting power. in the course of their normal dealings with an enterprise by virtue of only those dealings: (i) (ii) (iii) (iv) Providers of Finance. 109 (iii) (iv) (v) SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. and Significant Influence: Enterprises over which any person described in (iii) or (iv) is able to exercise significant influence. at any time during the reporting period one party has the ability to – (i) control the other party or (ii) exercise significant influence over the other party. CHENNAI . Government Departments and Government Agencies including Government Sponsored bodies. Trade Unions. distributor or general agent with whom as enterprise transacts a significant volume of business merely by virtue of the resulting economic dependence. (b) Related Party Relationships Related Party relationships between enterprises are determined by the following aspects: (i) Control: Enterprises that directly. Ownership: Individuals owning. control. supplier. giving them control or significant influence over enterprise and Relatives of any such individual. Public Utilities.
it is presumed that there is no significant influence unless contrary is proved. When less than 20% voting power is held. directly or indirectly of > 50% of the voting power of an enterprise. or (iii) Agreement. CHENNAI . (e) Significant Influence It refers to participation in the financial and / or operating decisions of an enterprise. Significant influence may be gained by – (i) Share ownership. (g) Key Management Personnel They are those persons who have the authority and responsibility for planning. Whole Time Director(s). (c) Related Party Transaction refers to a transfer of resources or obligations between Related Parties. In a company. 20% or more interest in the voting power of the other enterprise. but not control of those parties. regardless of whether or not a price is charged. (ii) Statute.Note: The Related Party Relationship may exist at any time during the reporting period and not necessarily at the end of the reporting period. are usually considered as Key Management Personnel. by statute or agreement. (d) Control Control arises from: (i) (ii) (iii) Ownership. E. Manager and any person in accordance with whose directions the BOD of the Company is accustomed to act. Control of the composition of the Board of Directors in the case of a company or Governing Body in the case of any other enterprise A substantial interest in voting power and the power to direct. directly or indirectly. directing and controlling the activities of the reporting enterprise. It may be exercised in several ways like: Representation on the Board of Directors Participation in the policy making process Material inter-company transactions Interchange of managerial personnel Dependence on technical information (f) Substantial Interest An enterprise/individual is considered to have a substantial interest in another enterprise if that enterprise/individual owns. 110 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.g. The control of composition of BOD of a company or Governing Body of other enterprises arises out of power that can be exercised without consent or concurrence of any other person to appoint or remove all or a majority of directors. the Managing Director(s).
000 for his services in the Company for the period from 1st January to 30th June. Should the relative be identified as at the closing date i. and hence AS-18 is not applicable. merely by virtue of his being a Director will not be covered within the meaning of related party. except that remuneration paid to a Non-Executive Director merely by virtue of being a director. received remuneration of Rs. a Non-Executive Director will be considered as a Key Management Personnel when: (a) He has the authority and responsibility for planning. Issues in determining Related Party Relationships 1. in making financial and / or operating decisions. and accordingly disclosure provisions of AS-18 are attracted. he left the service. 2. directing and controlling the activities of the reporting enterprise. ASI 21: Non-Executive Director – Key Management Personnel A Non-Executive Director. at any time during the reporting period one party has the ability to – (i) control the other party or (ii) exercise significant influence over the other party. remuneration paid to Rajkumar should be disclosed under AS-18.50.e. of an associate would not be automatically deemed as a related party. Example 1 Rajkumar.2.ASI 23: Remuneration to Key Management Personnel – Remuneration paid to Key Management Personnel will be related party transaction requiring disclosure under AS-18. need not be reported unless any other provisions of AS-18 are attracted. Where Consolidated Financial Statements are prepared. any enterprise that may have significant influence over the subsidiary is not reckoned as a related party. intra-group transactions with Associates do not get eliminated. CHENNAI 111 . on 31st December for the purposes of AS-18? Solution Principle: Parties are considered to be related if. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. In Consolidated Financial Statements. However. 4. Conclusion: In the above case. even if the relationship did not exist on the Balance Sheet date. 3. On 1st July. As Associate Company. a relative of Key Management Personnel. or (b) He is in a position to exercise control or significant influence by virtue of owning an interest in the voting power.
P Ltd has a economic interest of 26% in R Ltd.e. Conclusion: In the Consolidated Financial Statements of Arun Ltd Group. Baskar Ltd and Chandru Ltd would not require disclosure in Consolidated Financial Statements. together hold 14% + 20% = 34% of the shares in R Ltd. (b) Q Ltd holds 20% of shares in R Ltd. Analysis: (a) P Ltd is a majority shareholder (60%) in Q Ltd. How would you assess the situation from the view point of AS-18? [P (A/c) – Nov 2007] Solution Holding: As per the holding structure given above. Thus P Ltd has control over Q Ltd. During the reporting period. Hence.Example 2 Arun Ltd owns 60% of the voting power in Baskar Ltd. 5. Q Ltd and R Ltd are Related Parties. R Ltd is a Listed Company and regularly supplies goods to P Ltd. CHENNAI . Intra-Group transactions between Arun Ltd. Karuna Ltd owns the remaining voting shares in Chandru Ltd and is considered to exercise significant influence over Chandru Ltd. So. Example 3 P Ltd has 60% voting right in Q Ltd. only transactions of Chandru Ltd with Karuna Ltd should be disclosed. Q Ltd has 20% voting right in R Ltd. 112 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Q Ltd has significant influence over R Ltd. So. Total Holding = Direct Holding of 14% + Indirect Holding through Q Ltd. P Ltd directly enjoys voting right of 14% in R Ltd. Karuna Ltd enters into transactions with Arun Ltd. P Ltd has significant influence over R Ltd. Would Karuna Ltd be a related party of Arun Ltd? Solution Analysis: Karuna Ltd is not related to Arun Ltd as it – (a) neither control nor is controlled by Arun Ltd. Also. Parent (A Ltd) which owns along with its subsidiary (B Ltd) more than 50% of the voting power in an enterprise (C Ltd) will be considered as a related party of A Ltd as control comprises both direct and indirect. (c) P Ltd and Q Ltd. (b) does not exercise significant influence over Arun Ltd or is not so influenced by it. the disclosure requirements of AS18 are applicable in the above case. Conclusion: P Ltd. The management of R Ltd has not disclosed its relationship with P Ltd. i. 60% of 20% = 12%. which in turn owns 60% voting power in Chandru Ltd.
but by virtue of being a single largest shareholder. the reporting enterprise should disclose the following: (i) The name of the transacting related party. but become members of LAB because of their professional competence and eminence. A majority of Directors in a company can at times become a majority of Directors in another company. irrespective of whether or not there are transactions. 9. Hence. 8. Disclosure Requirements 1. AS-18 does not require a specific disclosure of the basis of pricing of all transactions entered into with related parties. a Director appointed by XX Ltd in BB Ltd. the two companies would not automatically be deemed as related parties. and details of transactions with parties. and the nature of relationship with all parties. In such situations. (iv) Volume of the transactions either as an amount or as an appropriate proportion. during the existence of a related party relationship.6. coassociates cannot be deemed so. If there have been transactions between related parties. (iii) A description of the nature of transactions. unless any other requirement of AS-18 is attracted. (ii) A description of the relationship between the parties. 3. for an understanding of the effect of related party transactions on the financial statements of the reporting enterprise. Even though less than 20% voting power is held by XX Ltd. XX Ltd and BB Ltd are Related Parties. Mandatory disclosure of names. (vi) The amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date. where “control” exists. (v) Any other elements of the related party transactions necessary for an understanding of the financial statements. Ownership of less than 20% of voting power: XX Ltd acquires 14% shares in BB Ltd. 5. 7. A member of Local Advisory Board (LAB) of a Bank is not a Key Management Personnel. except when separate disclosure is necessary. CHENNAI 113 . and (vi) Amounts written off or written back in the period in respect of debts due from or to related parties. such persons do not enjoy substantial interest. 2. 4. XX Ltd has the ability to exercise significant influence over BB Ltd. where “significant influence” exists in all cases where there are transactions during the existence of related party relationship. nature of relationship. While in some cases fellow subsidiaries (where common control exists) would be related parties. In such situations. Items of a similar nature may be disclosed in aggregate by type of related party. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. as generally. Disclosure of names.
6. CHENNAI . ASI 13: Reporting Format ICAI have provided a specimen format in which aggregated information on transactions with related parties could be presented. This is reproduced below: Particulars Purchase of goods Sale of goods Purchase of fixed asset Sale of fixed asset Rendering of services Holding Company Subsidiary Fellow Subsidiary Associate KMP Relative of KMP Total 114 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.
(v) Enterprises carrying on insurance business. (vii) All commercial. this Statement does not apply to agreements that are contracts for services that do not transfer the right to use assets from one contracting party to the other. industrial and business reporting enterprises having borrowings. (ii) Enterprises which are in the process of listing their equity or debt securities as evidenced by the board of directors’ resolution in this regard. is not applicable in respect of such assets.com) Accounting Standard (AS) 19. Scope 1. and (b) licensing agreements for items such as motion picture films. Objective The objective of this Statement is to prescribe. (e) and (f). 37(a). manuscripts. 10 crore at any time during the accounting period. such as oil. (d) and (e).AS 19 – LEASES . 25(a). however. ‘Leases’. (f) and (g). for lessees and lessors. On the other hand. of this Standard: (i) Enterprises whose equity or debt securities are listed whether in India or outside India. the ‘Guidance Note on Accounting for Leases’ issued by the Institute in 1995.G. Accordingly. gas. video recordings. including public deposits. and (c) lease agreements to use lands.4. patents and copyrights. in excess of Rs. encouraged. This Statement should be applied in accounting for all leases other than: (a) lease agreements to explore for or use natural resources. (b) and (e). (iii) Banks including co-operative banks. (vi)All commercial. whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 2. an enterprise which does not fall in any of the following categories need not disclose the information required by paragraphs 22(c). This Statement applies to agreements that transfer the right to use assets even though substantial services by the lessor may be called for in connection with the operation or maintenance of such assets. (iv) Financial institutions. plays. and 46(b). industrial and business reporting enterprises. Definitions SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Turnover does not include ‘other income’. comes into effect in respect of all assets leased during accounting periods commencing on or after 1. timber. metals and other mineral rights. CHENNAI 115 . Nikitha (nikstwix@gmail. (viii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period. the appropriate accounting policies and disclosures in relation to finance leases and operating leases. In respect of accounting periods commencing on or after 1-4-2004. 50 crore.2001 and is mandatory in nature from that date. Earlier application of this Standard is. issued by the Council of the Institute of Chartered Accountants of India.
However. the minimum lease payments comprise minimum payments payable over the lease term and the payment required to exercise this purchase option. An operating lease is a lease other than a finance lease. CHENNAI . This is also known as Bargain Purchase Option. if the lessee has an option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable that. is reasonably certain to be exercised. any residual value guaranteed to the lessor: (i) by or on behalf of the lessee. at the inception of the lease. The lease term is the non-cancellable period for which the lessee has agreed to take on lease the asset together with any further periods for which the lessee has the option to continue the lease of the asset. willing parties in an arm’s length transaction. with or without further payment. together with: (a) in the case of the lessee. or (d) upon payment by the lessee of an additional amount such that.The following terms are used in this Statement with the meanings specified: A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. any residual value guaranteed by or on behalf of the lessee. at inception. continuation of the lease is reasonably certain. 116 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. or (ii) by an independent third party financially capable of meeting this guarantee. Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable. which option at the inception of the lease it is reasonably certain that the lessee will exercise. or (b) with the permission of the lessor. Economic life is either: (a) The period over which an asset is expected to be economically usable by one or more users. A non-cancellable lease is a lease that is cancellable only: (a) upon the occurrence of some remote contingency. to make excluding contingent rent. or (b) in the case of the lessor. or can be required. A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. or (b) The number of production or similar units expected to be obtained from the asset by one or more users. or (c) if the lessee enters into a new lease for the same or an equivalent asset with the same lessor. The inception of the lease is the earlier of the date of the lease agreement and the date of a commitment by the parties to the principal provisions of the lease. costs for services and taxes to be paid by and reimbursed to the lessor. Minimum lease payments are the payments over the lease term that the lessee is.
Hire purchase agreements include agreements under which the property in the asset is to pass to the hirer on the payment of the last installment and the hirer has a right to terminate the agreement at any time before the property so passes. These agreements are commonly known as hire purchase agreements. percentage of sales. Residual value of a leased asset is the estimated fair value of the asset at the end of the lease term. that part of the residual value which is guaranteed by or on behalf of the lessee. that part of the residual value which is guaranteed by the lessee or by a party on behalf of the lessee (the amount of the guarantee being the maximum amount that could. at the inception of the lease. price indices. and market rates of interest). CHENNAI 117 . or by an independent third party who is financially capable of discharging the obligations under the guarantee.g. Unearned finance income is the difference between: (a) The gross investment in the lease. Gross investment in the lease is the aggregate of the minimum lease payments under a finance lease from the standpoint of the lessor and any unguaranteed residual value accruing to the lessor. or (b) the number of production or similar units expected to be obtained from the use of the asset by the lessee. The definition of a lease includes agreements for the hire of an asset which contain a provision giving the hirer an option to acquire title to the asset upon the fulfillment of agreed conditions. at the inception of the lease.. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. and (b) Any unguaranteed residual value accruing to the lessor. to be equal to the fair value of the leased asset. Net investment in the lease is the gross investment in the lease less unearned finance income. the lessee would incur to borrow over a similar term. and (b) In the case of the lessor. and (ii) Any unguaranteed residual value accruing to the lessor.Useful life of a leased asset is either: (a) the period over which the leased asset is expected to be used by the lessee. if that is not determinable. and (b) The present value of (i) The minimum lease payments under a finance lease from the standpoint of the lessor. Unguaranteed residual value of a leased asset is the amount by which the residual value of the asset exceeds its guaranteed residual value. Contingent rent is that portion of the lease payments that is not fixed in amount but is based on a factor other than just the passage of time (e. at the interest rate implicit in the lease. Guaranteed residual value is: (a) in the case of the lessee. causes the aggregate present value of (a) The minimum lease payments under a finance lease from the standpoint of the lessor. and with a similar security. The lessee’s incremental borrowing rate of interest is the rate of interest the lessee would have to pay on a similar lease or. become payable). The interest rate implicit in the lease is the discount rate that. amount of usage. in any event. the funds necessary to purchase the asset. the rate that.
(d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset. and (c) the lessee can continue the lease for a secondary period at a rent which is substantially lower than market rent. If at any time the lessee and the lessor agree to change the provisions of the lease. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return due to changing economic conditions. however. Title may or may not eventually be transferred. (b) the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that. in a manner that would have resulted in a different classification of the lease had the changed terms been in effect at the inception of the lease. Lease classification is made at the inception of the lease. it is reasonably certain that the option will be exercised. Since the transaction between a lessor and a lessee is based on a lease agreement common to both parties. other than by renewing the lease. default by the lessee). 118 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than its form. the lessor’s losses associated with the cancellation are borne by the lessee. Rewards may be represented by the expectation of profitable operation over the economic life of the asset and of gain from appreciation in value or realisation of residual value. (b) gains or losses from the fluctuation in the fair value of the residual fall to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease). changes in estimates of the economic life or of the residual value of the leased asset) or changes in circumstances (for example. Indicators of situations which individually or in combination could also lead to a lease being classified as a finance lease are: (a) if the lessee can cancel the lease. (c) the lease term is for the major part of the economic life of the asset even if title is not transferred. and (e) the leased asset is of a specialised nature such that only the lessee can use it without major modifications being made. at the inception of the lease. Examples of situations which would normally lead to a lease being classified as a finance lease are: (a) the lease transfers ownership of the asset to the lessee by the end of the lease term. Changes in estimates (for example. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. it is appropriate to use consistent definitions. The application of these definitions to the differing circumstances of the two parties may sometimes result in the same lease being classified differently by the lessor and the lessee. the revised agreement is considered as a new agreement over its revised term. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership. CHENNAI . do not give rise to a new classification of a lease for accounting purposes.Classification of Leases The classification of leases adopted in this Statement is based on the extent to which risks and rewards incident to ownership of a leased asset lie with the lessor or the lessee.
CHENNAI 119 . Sale and lease back transactions – Meaning and accounting Meaning: When an asset is sold by the vendor and the same asset is leased back to the vendor. Accounting Treatment (i) In case of finance lease: Any excess or deficiency of sale proceeds over the carrying amount is to be deferred and amortized over the lease term in proportion of depreciation on leased asset. it is cal1ed sale and lease back transaction. (ii) In case of operating lease SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.As per US GAAP the classification of Lease is done as follows From the above diagram it can be known that where the economic life of the asset is more than 75% and where the Present value is more than 90% of the Fair value then the lease is classified as Finance Lease. According to the US GAAP this the basis for the classification.
CHENNAI . Apportion lease payments between finance charge and reduction of o/s liability (Finance charge to be calculated in a manner ensuring constant periodic rate of interest). for decrease revise income allocation. Increase in unguaranteed residual value not recorded. then loss (difference between carrying amount and fair value) should be recognized immediately. Depreciate the asset on a systematic basis. Reduce the lease Payments from principal and unearned finance income. • • • • • • • • 120 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. ACCOUNTING TREATMENT • Recognise as recievables at an amount equal to net investment. Record profit as per sales policy. • Recognise lease as an asset and liability at inception. Recognise finance income in P&L A/c. Record at fair value at inception not exceeding present value of MLP (from lessee’s perspective). Allocate initial direct cost against finance income over lease term or recognize immediately as an expense.Note: If the fair value at the time of a sale and lease back transaction is less than the carrying amount of the asset. ensure constant periodic return on net investment o/s.
Recognise lease income on a straight line basis. unless other basis is justified. • • • • • • • SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. • Recognise lease payments as an expense on straight line basis unless other basis is justified.• • • • • Do not recognize selling profit Show asset on lease as fixed asset Recognise cost and depreciation as expense Allocate initial direct costs over the lease term in proportion to the recognition of rent income or treat them as period expense. CHENNAI 121 . Unearned finance income • • Segregate leased asset from owned asset Net carrying amount at balance sheet date for each class of asset Reconciliation between MLP at Balance sheet date and present value Contingent rents recognized Future minimum sub-lease payments to be received under non-cancellable sub-leases. DISCLOSURE REQUIREMENTS • Reconciliation between gross investment and present value of MLP receivable at balance sheet date. General description of significant leasing agreements AS6 (revised) and AS 10 disclosures • • • • Unguaranteed residual value Accumulated provision for uncollectable MLP receivables Contingent rent recognized General description of significant leasing agreements Accounting Policy for Initial Direct Costs.
• • Description of significant leasing arrangements Disclosure under AS 5 (revised).• • • • • • For each class of asset 1) Gross carrying amount 2) Accumulated and period dep. CHENNAI . if any 122 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. • • • • • Future MLP under non-cancellable lease Future minimum sub-lease payments receivable for non-cancellable sub-leases. AS6 (revised) and AS 10 disclosures. 3) Accumulated and period impairment loss 4) Impairment loss reversed for the period Future MLP under non-cancellable lease Contingent rent recognised General description of significant leasing agreements Accounting Policy for Initial Direct Costs. MLP and contingent rent recognized Sub-lease payments recognized General description of significant leasing agreements.
or shares issuable under a loan contract upon default of payment of principal or interest. the Companies are required to disclose 2 types of earning per share i.AS 20 – EARNING PER SHARE . Various accounting policies are used to determine the ‘earnings’ of a Company but a consistent denominator enhances the quality of financial reporting. if the contract so provides. Even if the shares are not listed on a recognized stock exchange and if the enterprise chooses to disclose the earnings per share. that are convertible into equity shares. such as the acquisition of a business or other assets. and (d) shares which would be issued upon the satisfaction of certain conditions resulting from contractual arrangements (contingently issuable shares). Examples of potential equity shares are: (a) debt instruments or preference shares. In case of consolidated financial statements. Definitions: Various terms including equity shares. Scope: Should be applied by enterprises whose equity shares or potential equity shares are listed on a recognized stock exchange. specific reference is being to the meaning and types of potential equity shares as below. Presentation: As per the requirements of the Standard. (b) share warrants. or may entitle. CHENNAI 123 .e. (c) options including employee stock option plans under which employees of an enterprise are entitled to receive equity shares as part of their remuneration and other similar plans. A potential equity share is a financial instrument or other contract that entitles. However. its holder to equity shares. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.com) Objective: The objective of the standard is to prescribe principles for the determination and presentation of earnings per share which will improve comparison of performance among different enterprises for the same period and among different accounting periods for the same enterprise A consistent method of computing earnings per share for companies enhances comparability of different companies. the earnings per share should be disclosed on the basis of consolidated information. it should be done in accordance with this Standard. preference shares etc are defined in the Standard.Dhanush Arjun (darjun@kpmg. basic EPS and diluted EPS on the face of the profit and loss account for all the periods presented.
the net profit or loss should be the net profit or loss for the period after deducting preference dividends and any attributable tax thereto for the period. Number of equity shares: For the purpose of calculating BEPS.e. loss per share. the number of equity shares should be considered as the weighted average number of equity shares outstanding during the period. Shares are included in the weighted average number of shares from the date the consideration is receivable which can be tabulated as follows: Type Inclusion Shares issued in exchange for When cash is receivable cash Shares issued as a result of the From date of conversion conversion of debt Shares issued in lieu of interest or principal on other financial As of the date interest ceases to accrue instruments Shares issued in exchange for the Date the settlement becomes effective settlement of a liability Shares issued as consideration for the acquisition of an Date on which the acquisition is recognised asset other than cash Shares issued for the rendering of Included as the services are rendered services Partly paid shares and shares with different nominal values are to be considered to the extent they are entitled to participate in dividends relative to a fully paid equity shares.This statement requires an enterprise to present basic EPS and diluted EPS. If an enterprise has more than one class of equity shares. even if the amounts are negative i. 124 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. CHENNAI . and adjusted for any shares issued or bought back during the period multiplied by the time factor. It means the number of shares should be considered as at the beginning of the period. net profit or loss for the period is apportioned over the different classes of shares in accordance with their dividend rights. Measurement: Basic earnings per share (“BEPS”): Basic earnings per share = Net profit/ loss for the period attributable to equity shareholders Weighted average number of equity shares outstanding Explanation: Net profit/ loss: For the purpose of calculating BEPS.
of Shares = (1800*5/12) + (2100*2/12) + (2400*3/12) + (2100*2/12) = 2050 Bonus Shares In case of a bonus issue or a share split. No.60 lacs On 1st Oct 2011.60lacs = Rs.18 lacs Net Profit for 2011 Rs.0. equity shares are issued to existing shareholders for no additional consideration.5 per share on 600 shares Buy back of shares 300 Closing balance of shares 2.10) 1. The number of equity shares to be used in calculating basic earnings per share for all periods prior to the rights issue is the number of equity shares outstanding prior to the issue. a bonus issue was made in the ratio of two for every one existing share. In such a situation. EPS for 2011 = Rs. This has been illustrated below: Net Profit for 2010 Rs. No weightage should be assigned for timing of the issue.18 lacs =Rs. Avg. CHENNAI 125 . Therefore.800 Issue of shares for cash (Rs. the number of shares must be adjusted as if the issue was made at the start of the earliest reported period.Illustration on calculation of weighted average number of equity shares: 1/4/11 1/9/11 1/11/11 1/2/12 31/3/12 No.5 called up & paid up per share) 600 Called up & received fully remaining Rs. the number of equity shares outstanding is increased without an increase in resources. On that day existing shares were 20 lacs.30 (20+40) Rights Issue When rights issue is made at price below fair value. multiplied by the following factor: Fair value per share immediately prior to the exercise of rights Theoretical ex-rights fair value per share SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.100 Wtd. previous year’s EPS will need to be scaled down by the ration of ‘number of shares before bonus’ to ‘number of shares after bonus’. Further.1 (20+40) Adjusted EPS for 2010 = Rs. the issue can be treated as two separate issues – one being a bonus issue and the other being issue at full price. of equity shares held fully paid (Rs.
communication of the potential dilution.00.P.2011 F. The amount of the dilution is fair value less the issue price.05x5/12)+(6.2011 is Rs.05 Diluted EPS Where change in the number of shares is anticipated.10 5. 15 lacs No.00. per share on 30. The same can be calculated by adding the aggregate fair value of the shares immediately prior to the exercise of the rights to the proceeds from the exercise of the rights.000 x 7/12) Original EPS of 2010 = 11. The reason being.000.00. interest and other expenses or income associatedwith those potential equity shares will no longer be incurred (or earned).5.64 (5.00. per share =(5 x 21) + (1 x 15) =Rs.000 x 1. of shares outstanding 5. their conversion to equity shares would decrease net profit per share from continuing ordinary operations.00 = Rs.000 On 1st May 2011 a rights issue of one for every five is done at an exercise price of Rs.21.000 Adjusted EPS of 2010 = 11.05.000 = Rs. the dividends.V. After the potential equity shares are converted into equity shares.00. 15 per share. Diluted EPS is a measure where EPS is readjusted as though new shares are in place. the new equity shares will be entitled to participate in the net profit attributable to equity shareholders. Therefore dividends.00. Instead. When the potential equity shares increase earnings per share from continuing ordinary activities or decrease loss per share from continuing ordinary activities. shareholders could expect in the near future.00.05 EPS of 2011 = 15. N.for 2010 Rs.00. Dilutive potential equity shares Potential equity shares should be treated as dilutive when.2.V.The theoretical ex-right price is the price at which the shares ought to be quoted immediately after rights issue.20 5. they are referred to as anti-dilutive and are ignored in calculating diluted earnings per share. a measure is needed that will take into account the effect of those anticipated changes. 126 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Last date of exercising such rights is 31. and dividing by the number of shares outstanding after the exercise of the rights. interest and other expenses or income adjusted for any attributable taxes is adjusted with the profit/ loss and the number of shares are increased to take effect of the conversion.000 =2. Options and other share purchase arrangements are dilutive when they would result in the issue of equity shares for less than fair value.20 (5+1) Adjustment Factor = 21/20=1. Theoretical ex rights F.000 x 1. 2. CHENNAI . and only when. 11 lacs 2011 Rs.
Where the earnings per incremental share is the least.00 1.00.2. the potential equity share is considered most dilutive and vice-versa. each convertible into 10 equity shares Corporate tax rate 30% Diluted EPS = 100. CHENNAI 127 . NP for 2011 Rs.00.00.000 + 10.100. • Reconciliation of abovementioned numerators with Net Profit/Loss for the period.81 50.000 = Rs.00. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. 100 each. the earnings per incremental potential equity share is calculated. the per share calculations for those financial statements and any prior period financial statements presented should be based on the new number of shares The fact of occurrence of such event after the balance-sheet date should be properly disclosed Disclosure requirements: • The amounts used as the numerators and denominators in calculating basic & diluted EPS.000 / 50. • Reconciliation between the denominators used in the calculation of Basic EPS & Diluted EPS.00.00.00.00.For the purpose of determining the sequence from most dilutive to least dilutive potential equity shares.000 Basic EPS 1.000 + 12. of equity shares outstanding 50.60.000 Restatement If changes occur after the balance sheet date but before the date on which the financial statements are approved by the board of directors.00.000 – 3.000 12% FCDs of Rs.00. • The nominal value of shares alongwith EPS figures.1.000 No.000 = Rs.
CFS comprises the following: Consolidated Balance Sheet Consolidated Profit and Loss Account Notes to Accounts. Equity. It can be simply understood as 1+1+1+1+…. 1956 preparation and presentation of Consolidated Financial Statement is not mandatory.AS-21 . Group. Subsidiary Company . As per Companies Act. It is also called as Holding Company.in) Introduction to the standard: AS 21 comes into effect in respect of accounting periods commencing on or after 01/04/2001 The purpose of the Standard is to present financial statements of a Parent Company and its Subsidiary (ies) as a single entity.. Control. CHENNAI . SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. it is to be treated as Investment because it may be disposed off in near future.n=1.M.Such Control can be exercised DIRECTLY or INDIRECTLY (through subsidiary) by purchasing More than 50% of the voting power of an enterprise (more popular) OR CONTROLLING composition of Board of DIRECTORS/GOVERNING BODY Scope of CFS: A holding company which has to prepare CFS should consolidate the financial statements of all its subsidiary (ies) whether domestic or foreign.An enterprise which is controlled by another enterprise (holding company) is called Subsidiary Company.R. However if an entity opts to prepare should be prepared/presented in accordance with AS 21. it is referred to as Consolidated Financial Statement.A parent and its subsidiaries. if parent company presents its own cash flow statement Important Terms: Parent Company .It is the residual interest in the assets of an enterprise after deducting its liabilities. other statements and explanatory material Consolidated Cash Flow Statement. Exceptions being • 128 The control acquired by the parent in the subsidiary is proposed to be TEMPORARY.Control in general means the POWER to make all the important decisions about the way an organization is run. Consolidated Financial Statement is prepared and presented to show the Consolidate position of the total assets and liabilities and net operating results of the group as a whole. Sinduja (firstname.lastname@example.org.CONSOLIDATED FINANCIAL STATEMENTS . Confused???? When the financials of a Parent and its one or more subsidiaries are combined and consolidated together as a single financial statement.A parent is an enterprise which has 1 or more subsidiaries.
O and L.N and O is FIFO method. income with income and expense with expense. 25 Crores) of total value of group inventory”. asset with asset. If it is not practicable to use the uniform accounting policies the fact should be disclosed together with the proportions of the items in the CFS to which the different accounting policies have been applied. CHENNAI 129 .M. Along with AS21 all the other standards whichever is applicable to the Holding company should also be complied with while preparing the CFS. Harmonisation of Accounting Policies: CFS is prepared in a format which is followed by the Holding Company to prepare its financial statements. CFS NOT a substitute for separate financial statements: CFS prepared can never be a substitute for preparation of separate financial statement for a parent or its subsidiaries. When the amount invested is material. It is appropriate to make the first-time adjustments to the opening balance of reserves and if there is no reserves or if they are insufficient. M. Care to be taken to see that as far as possible UNIFORM ACCOUNTING POLICIES need to be followed by the parent and subsidiary companies while preparing the CFS.e. The logic behind this method is had the parent consolidated the financials in the previous years. Amount of inventories so valued and included in CFS is 25% i. charge to the opening balance of accumulated losses (P&L). proper adjustment has to be made in the CFS to reflect the items in line with the accounting policies of the parent. Consolidation Procedure: Coming to the steps for CFS.e it should be recorded at COST. adjustments need to be made so as to harmonise the accounting policies followed by the parent and subsidiaries. L Ltd.e (Rs. in its separate Financial Statement. During the first time consolidation. H Ltd is the Parent company. The disclosure may be made as under: “Companies in the group. of which value of inventory of L included in consolidation is Rs 25 Crores.An illustration would give clarity for the term proportions of the items.• The subsidiary operates under SEVERE LONG-TERM RESTRICTIONS and due to this its ability to transfer the funds to parent is significantly weakened. The parent company should follow AS 13 to account for the investment made in subsidiary company i. That is they are supposed to prepare individual financial statements as per their governing laws apart from the CFS. In any way DISSIMILAR ACTIVITIES of Parent and subsidiaries cannot be the ground for excluding the subsidiaries from CFS. except L Ltd. consolidation is done by combining the balance sheet and profit and loss account of the parent and its subsidiaries by adding each like item on a LINE BY LINE basis i. It has four subsidiaries. adopt FIFO method for calculating inventories. liability with liability.. the adjustments would have been made to the profit and loss account of those years and the net impact till the beginning of current year would have been reflected in the opening reserves. Accounting Policy for Inventories adopted by H. Aggregate value of inventory in CFS is Rs 100 Crores. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. adopts Weighted average method. N. L adopts weighted average method.
Here 4 things to be noted to calculate the cost of control • Date of acquisition • % of shareholding (Equity shares) • Reserves and Surplus on the date of acquisition which are to be considered as PRE-ACQUISTION Profits or Reserves. the Parent’s portion of Control in the subsidiary on the date of acquisition. Dividend declared out of pre-acquisition profits) Share in Net Assets % of Shares held in Equity Share Capital % of Pre-Acquisition profits and Reserves Less: Unrealised profit in Inter-co transaction Generally cost of Investment will be considered but when the carrying amount is different from the cost. CHENNAI .e.e.Cost of Investment in subsidiary has to be cancelled or eliminated by comparing it with the % of (Equity + Reserves and Surplus on the date of acquisition) i.e. The Difference between the Cost of Control and the Share of Net Assets in the Subsidiary may result in either Goodwill Capital Reserve Cost > % Share in Net Assets %Share in Net Assets > Cost Shown as Asset in CFS Shown under Reserves and Surplus in CFS 130 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. • Cost of Investment i. Now lets see how to compute Cost of Control Cost of Investment Vs Amount recorded as Investment in the holding company Less: Preacquisition Dividend (i. The reserves and profits accrued after date of acquisition are not of consideration because they will be treated as INCOME. carrying amount will be taken for the computation purposes. Consideration paid to acquire shares in subsidiary.
e. is generally determined on a step by step basis. Unrealised losses resulting from Intra group transactions should also be eliminated unless cost cannot be recovered. the consolidated financial statements are presented only from the date on which holding-subsidiary relationship comes in existence.Now. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Preference shares not belonging to the Parent should also be included. While calculating MI. Keep in mind to include the Preference shares belonging to them. it should be adjusted against the Majority Interest. At the time of earning profits. In other words. consequently balance profit after MI represents the parent’s (holding co’s) share in profit which will be shown under the head Reserves and Surplus in CFS Intra-group balances and transactions i. Negative MI will not be shown in the CFS. CHENNAI 131 . share of minority in net profit of consolidated subsidiaries for the reporting period should be calculated and charged against the profit and loss a/c. And Share of Movements in EQUITY of Minority since the date the parent-subsidiary relationship came into existence.e when making of an investment resulting in control) If two or more investments are made over a period of time. b) c) If the Minority Interest is NEGATIVE.(i. Also add the subsidiary’s cumulative preference dividends whether or not profits are available or dividends have been declared In short MI in the net assets is the aggregate of a) Amount of equity attributed to minorities at the date on which investment in a subsidiary is made. Intra Group Balances and Transactions: 1) Elimination • Intra group balances and intra group transactions and resulting unrealized profits should be ELIMINATED IN FULL. inter-company debtor/creditors inter-company purchases/sales and resulting unrealized profit shall be eliminated in full. Step by Step Acquisition: If an enterprise makes two or more investment in another enterprise at different dates. and eventually obtains control of the other enterprise. all such profits should be allocated to Majority Interest to recover and nullify the previously adjusted MI share of losses. Minority Interest(MI) needs to be computed: Identify: Minority Interests of different subsidiaries Segregate: their share in Share Capital and Reserves and Surplus(pre and post). the equity of the subsidiary at the date of investment.
for adjusting the profits or losses arising from Intra group transaction of earlier years. ICAI have suggested the following: • Such (unrealized) profits or losses ought to be given effect to by adjustment to the opening balances of Group revenue reserves. Reporting Date: The financial statements of the Parent and subsidiary are to be of same reporting date when the CFS is prepared. CHENNAI . An issue may arise as to the procedure to be adopted in the first CFS of the parent. with a corresponding reduction in the values of assets. They may be grouped into Downstream Upstream Sale by holding to subsidiary H S Sale by subsidiary to holding H S 100% of the unrealized profits should be adjusted in the group reserves in CFS unrealized profits would be eliminated proportionate to the Parent’s share 2) Adjusting Prior Period transactions in the first CFS of the Parent There may be transactions pertaining to prior periods. the share of subsidiary in parent is to be determined by applying a mathematical formula of simultaneous equation. If it is not possible to do the same for one or more subsidiaries (because of which 132 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.• Transactions between a Holding and subsidiary in the CFS to be eliminated. Cross Holding: Sometimes there can be relationships which lead to cross holdings between Parent and subsidiary where both hold shares in each other. In such situations.
SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. there is no controlling interest. • MI computed above would be adjusted against the total equity of the subsidiary (comprising carrying amounts of all individual assets and liabilities of the subsidiary on the date of disposal) to compute the share of the parent in the net assets of the subsidiary at the date of disposal. • Nature of the relationship between the parent and a subsidiary. country of incorporation or residence. Disclosure Requirements: 1) In CFS. in respect of the disposed subsidiary should be ascertained after including the results of operations attributable to the MI until date of disposal. CHENNAI 133 . which is a parent at the reporting date. directly or indirectly through subsidiaries. In cases where the subsidiary is disposed off within the year.their reporting dates are varying) adjustments should be made for the effect of the significant transactions or other events that occur between those dates and the date of the Parent’s financial statements. Subsidiary disposal and others: When a subsidiary ceases to exist as same. • The amount so computed above. ICAI has suggested that the following steps need to be taken: Include income and expenses of the subsidiary for the period from the last reporting date. proportion of ownership interest. • Effects of the acquisition and disposal of subsidiary on the financial position at the reporting date. if the parent does not own. and if different. more than one-half of the voting power of the subsidiary. then it needs to be accounted as INVESTMENT as per AS 13 in the CFS. upto the date of disposal of the subsidiary in CFS • MI in CFS. and • Names of the subsidiary(ies) of which the reporting date(s) is/are different form that of the parent and the difference in reporting dates. 2) In CFS wherever applicable. would be adjusted to the consideration received on disposal of the subsidiary to ascertain the gain or loss on disposal of subsidiary. the difference between reporting dates should not be more than 6 months. AS 21 is applicable to an enterprise.e. a list of all subsidiaries including the name. proportion of voting power held. and the goodwill or capital reserve with respect to the subsidiary. or was a parent at any time during the year. However. i. the results for the reporting period and on the corresponding amounts for the preceding period.
owned Compulsorily require preparing CFS unless it is itself a wholly owned subsidiary. No prescription for amortization of goodwill Differential Period The differential period between dates of parent and subsidiary. If income taxes have been paid on intercompany profits on assets remaining within the group-. Other Statutory The Companies Act Requirements 1956 prescribes under section 212 the requirements for disclosure which are in addition to the requirements of the disclosure as per AS 21. Goodwil or Capital Reserve is determined on Fair Value basis. in addition to preparing CFS unless it and not in lieu of. is itself a wholly owned separate financial subsidiary. amortization is also provided. requirements. those taxes 134 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Deferred Tax The principle for deferred tax does not apply. Listed companies are required to prepare CFS Goodwill Goodwil or Capital Reserve is determined on Historical cost basis. CHENNAI . if do not coincide should not exceed 6 months US GAAP Only majority undertakings subsidiaries. the financial and operating policies of an enterprise so as to obtain benefits from activities. Requirements CFS are required to be Compulsorily require prepared. statements if the enterprises are required to prepare the CFS under any statute. The differential period between dates of parent and subsidiary. The differential period between dates of parent and subsidiary. IAS 27 and US GAAP AS -21 IAS 27 Control Control includes indirect Control can be defined control which may exist as the power to govern without majority holding. if do not coincide should not exceed 6 months which is in line sec 212 of Companies Act.Significant Differences among AS-21. those taxes If income taxes have been paid on intercompany profits on assets remaining within the group-. 1956. if do not coincide should not exceed 6 months There are no There are no corresponding statutory corresponding statutory requirements. Companies are not allowed to issue separate financial statements but only CFS and hence American companies give less information than companies in many other companies.
13) Amendments in AS-21: As a result of limited revision the name of accounting standard the name of accounting standard has been changed to ‘Consolidated Financial Statements and Accounting for Investments in Subsidiaries in Separate Financial Statements’. however it(FAS 94) provides that if the subdiary operates under foreign exchange restrictions. The name amendment is with regards to the applicability and scope of the Standard. investments in subsidiary should be accounted for in accordance with AS 13Accounting for Investment which is cost as adjusted for any permanent diminution in value of those investment. Also requires that a parent’s investment in a subsidiary be accounted for in the parent’s separate financial statements (a) at cost. Provides guidance for accounting for investment in a parent’s separate financial statements. Exception Consolidation of Subsidiary should be excluded from consolidation when it operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent are deferred until the related assets are sold in an arm’s-length transaction. CHENNAI 135 . are deferred until the related assets are sold in an arm’s-length transaction. Now this standard will also apply in accounting for investment in subsidiaries in separate financial statements of a parent.(FAS 94. The amended paragraphs provided as under: SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.Investment in subsidiary In a parent’s separate financial statements. Specifically provides that consolidation is required till control is not lost for such subsidiary. (b)using the equity method as described in IAS-28 or (c) as available for sale of financial assets as described in IAS 39. controls or other Governmentimposed uncertainities which cast significant doubt on the parent’s ability to control the subsidiary. Does not prescribe such condition for exclusion from consolidation.
control over which arises from the fact that the auditee has control over composition of board Auditee being a partner in one or more partnership firms on which auditee exercise control 3) Accounting Policy Has the auditee in its capacity as parent. Investments in subsidiaries covered under paragraph 11 of this Statement should be accounted for in accordance with Accounting Standard (AS) 30. “Financial Instruments: Recognition and Measurement. should be accounted for either: At cost. except investments in subsidiaries. having shares or securities listed in a recognised stock exchange If no. or In accordance with AS 30. AUDIT CHECKLIST FOR AS-21 1) General Is the auditee a level 1 enterprise. has the investment in subsidiary been accounted for as per AS-13(accounting for investments) 5) Consolidation procedures .” The same accounting should be applied for each category of investments. Financial Instruments: Recognition and Measurement. has the subsidiary become associate or JV requiring compliance with AS-23 or AS-27 If no. uniformity is brought about for purposes of consolidation 4) Inclusion and Exclusion of a subsidiary for consolidation Has one or more subsidiaries in which control ceased to exist during the current audit been excluded from consolidation If yes.“ In a parent’s separate financial statements.” This limited revision comes into effect in respect of accounting periods commencing on or after the date on which accounting standard (AS) 30. has the auditee voluntarily chosen to prepare and present consolidated financial statements Has the auditee provided the list of the all its subsidiaries and partnership firm in which auditee exercises control Is the auditee presenting CFS for the time (comparatives not necessary) 2) Internal control Existence of subsidiaries. investments in subsidiaries.main Included all the subsidiaries and firms in consolidation procedure Has one or more group enterprises excluded. except investments in subsidiaries covered under paragraph 11 of this Statement. If yes. the reasons for such exclusion 136 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. CHENNAI . “Financial Instruments: Recognition and Measurement” comes into effect. adopted an appropriate accounting policy for CFS in the group Accounting policies adopted by group are different from those adopted by parent.
00.000. country and proportion of ownership and proportion of voting power in each of the subsidiary ii) Subsidiaries in respect of which the reporting dates are different from the reporting date of the auditee. Profits for Last 3 years: First 8. • B Ltd. Profits for last three years are Rs.000 one creditor to whom Rs.Do the test checks carried out indicate that consolidation procedure adopted by auditee are in conformity with AS-21 particularly in the following areas. for Rs. 40. based on consolidated financials. 89 lacs.00. Whether the auditee has prepared a report on performance.000 Second 6.50. 11.500. • Of the External Creditors for Rs. of Rs.000.000 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.00. purchased 40% stake of B Ltd. 35 lacs. 10 each as fully paid up shares. 2. • Total assets of B Ltd. 12 per share. minority’s share of loss in the subsidiary has exceeded its share of equity and whether the same is been adjusted against the equity interests of auditee 7) Disclosures in consolidated financial statements Has it been ensured that the auditee has properly disclosed the following i) Names.00. financials and cash flows of reportable segments based on consolidated financial statements Whether the auditee disclosed basic and diluted EPS. Calculate the Goodwill or Capital Reserve for A Ltd.000 equity shares of Rs. Rs. decided to purchase another 40% share in B Ltd. has 1.00.900.50. in Consolidated Financial Statement.000 Third 3. Assets to be appreciated by Rs. i) cost of auditee’s investment in subsidiary and auditee’s portion of equity in the subsidiary on the date when investment is made is eliminated ii) differential in cost is recognised as GW or CR do the test check show evidence whether Minority Interest is computed after taking into account . will declare dividend @ 15%.000 was due has expired and nothing is to be paid to settle this liability.500. 10. 65 lacs and Rs. Illustration 1: A Ltd. Solution Calculation of Purchase Consideration Particulars Rs.00. CHENNAI 137 . amount of equity attributable to minority interests and minority share of net assets covering the date of investment till the date of consolidation have all the group balances and transactions been identified and eliminated have unrealised profits or losses been eliminated 6) Consolidation procedures – Losses of subsidiaries Have the subsidiaries incurring losses identified If yes. After two years A Ltd.5%. B Ltd. The purchase deal was finalised on the following terms: • Purchase price per share to be calculated on the basis of average profit of last three years capitalised at 7.
900.000/3) Total value of B Ltd. on the date of disposal was Rs.000 x 40% x 12) Capital Reserve Illustration 2 : 6.000 10.00.89.00. Solution Calculation of Profit/Loss on disposal of investment in subsidiary Particulars Net Assets of B Ltd.000. Calculate the profit or loss on disposal of this investment to be recognised in consolidated financial statement.00. 3.000 8.600. Rs. had acquired 80% share in the B Ltd.'s Share in Net Assets Proceeds from the sale of Investment Less: A Ltd.000 700.Total profits for last 3 years 18. CHENNAI .000 84.00. During the year A Ltd. 119000000 24000000 95000000 76000000 33600000 6000000 27600000 48000000 75600000 400000 A Ltd.000 138 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. sold the investment for Rs. Value per Share Purchase Consideration (1. on the date of disposal Less: Minority Interest (35 lacs x 20%) A Ltd. (63. 25 lacs. 22 lacs.00.000 Rs.50. on the day are Rs.000 2.000 x 40%) x 8.800.000 x 80%) Less: Cost of Investment: Purchase Consideration Less: Dividend Received (10.000/7.00.800.000.300.000.5%) Number of Shares in B Ltd.000 2. The net assets of B Ltd. 35 lacs. 30 lacs and net assets of B Ltd.00.00.500.000 3.000 x 40% x 15%) Add: Investment (1.00.'s share in net assets Rs. 115000000 4000000 25000000 1000000 Rs.000 200. for Rs.4 Calculation of Goodwill/Capital Reserve Particulars Fixed Assets Add: Appreciation in value of the asset Less: Creditors Less: Amount to be written off Net Asset Share in Net Asset (9.000 Average Profits (1.40 3.
000 800 1. and B Ltd.020 1.080 2. From the above information calculate Pre and Post Acquisition Profits.000 800.Less: Goodwill in the Consolidated Financial Statement Cost of investment Less: A Ltd.750 1.200 1.000 450. B Ltd.000 740. b.900 4. Profit & Loss Account of B Ltd.000 1.790 1.000 540.000 1.150 1. includes Rs.150 2.670 12. Following are the other information available: a.450 3. purchased 3/4th interest in B Ltd.000 1. Minority Interest and Cost of Control.000 Illustration 3 : Following are the Balance Sheet of A Ltd.500 A Ltd.'s Share in net asset on the date (22 lacs x 80%) Loss on sale of investment 2.500 12.500. Assets 6. B Ltd.760. in '000 A Ltd. at the beginning of the year at the premium of 25%.000 790.: Liabilities Equity Shares 6% Preference shares General Reserve Profit & Loss Account Bills Payable Creditors Proposed Dividend All Fig.620 1. Solution Calculation of Pre and Post Acquisition Profits Particulars Profit & Loss Account General Reserve Less: Minority Interest (1800/4) (790/4) Pre Acquisition Post Acquisition Profits Profits 1. 100 20 3.100 1.000 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. The directors of both the companies have proposed a dividend of 10% on equity share capital for the previous and current year.800.000 197.000.000 1.750 600 5.870 500 Goodwill Fixed Assets Investment Stock Debtors Bills Receivable Cash & Bank All Fig. in '000 A Ltd.540 1.500 139 790.000 600 400 12.670 12. 1000 thousands bought forward from the previous year. CHENNAI .850 2.100 2.
000 Less: Paid up Capital Pre Acquisition Profits Capital Reserve 3.897. 4.000 787. Rs.00.5000 5.000 x 75% x 10%) 375.000.000 450.750.000 1.Consolidated Balance Sheet Calculation of Minority Interest Particulars Paid up Equity Share Capital (50.350.000 140 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.00.500 Rs. CHENNAI .000 x 75% x 125%) 126.96.36.1990 2. 1.000 197.687.000 1.00.350.500 Less: Dividend Received (50.500 Cost of Investment in Subsidiary (50.000 592.000/4) Paid up Preference Share Capital Pre Acquisition Profits Post Acquisition Profits Minority Interest Calculation of Goodwill/Capital Reserve Particulars 1.500 Rs.312.
According to this standard tax on income is determined on the principle of accrual concept. Tax expenses for the period to be recognized consist of current tax and deferred tax. tax shall be accounted on accrual basis not on liability to pay basis.Accounting Standards – 22 (Deferred taxation) .B. According to this concept. Difference between the tax expenses (which is calculated on accrual income tax Act is called deferred tax (assets/liability). Recognition and measurement As per this accounting standard the income tax expenses should be treated just like any other expenses on accrual basis irrespective of the timing of payment of tax.com) Objective This accounting standard prescribes the accounting treatment for taxes on income. Examples • Difference due to rate of depreciation SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. tax should be accounted in the period in which corresponding revenue and expenses are accounted. • Taxes on income exclude tax payable on distribution of dividends and other distribution made by enterprise. Traditionally amount of tax payable is determined on the profit/loss computed as per income-tax laws. Scope • Taxes on income include all domestic and foreign taxes which are based on taxable income. CHENNAI 141 . Deferred tax – Deferred tax should be measured using the rates and tax laws that have been enacted or substantially enacted by the balance sheet date. In simple words. Jaisudha (jaisudha04@rediffmail. Difference in accounting profit and tax profit – As we know that profit as shown in accounts differ with the profit (taxable) calculated as per income-tax Act. 1) Timing difference: These differences originate in one period and capable of reversal in one or more subsequent periods. Current tax – Current tax is the amount of income tax determined to be payable (recoverable) in respect of taxable income (tax loss) for a period. That is why the tax expenses = Current Tax + Deferred Tax The difference between tax expenses and current tax arises only on account of timing difference and thus creating deferred tax asset/liability. Measurement of current and deferred tax Current tax – Current tax should be measured at the amount expected to be paid to (recovered from) taxation authorities using applicable tax rates and tax laws. The reasons of difference between two profits are of two types. Deferred tax – Deferred tax is the tax effect of timing difference.
On 1st April.• • Difference due to method of depreciation. 2004 and 2005 2003 2004 2005 Profit before depreciation and taxes 200 200 200 Less: Depreciation for accounting purpose 50 50 50 Profit before taxes 150 150 150 Less: Tax expense Current tax 0. Indugo limited has profits before depreciation and taxes of Rs. 50. The purchase of machine at a cost of Rs. For example.000. Although it is eligible for a 100% first year depreciation allowance for the tax purpose. 2002. 50. Deferred Tax is tax effect of timing difference Deferred Tax Liability – is recognized for timing differences that will result in taxable amounts in future years. the amount of the tax saving should also be spread over the same period as shown below: Statement of Profit and Loss for the three years ending on 31st March. 1. The machine has a useful life of three years and an expected scrap value of zero. Expenses debited in the statement of profit & loss for accounting purpose but allowed for tax purpose in subsequent year.000 in 2002 gives rise to tax saving of Rs. 1961 2) Permanent Difference: These differences originate in one period and do not reverse subsequently in other words the difference always remains and is of permanent in nature. 60.000. a timing difference is created between the depreciation as per the books of accounts and the depreciation claimed under the tax laws which. higher that depreciation claimed a expenses in the financial statements. Like section 43B of income – tax Act. For example. in initial years. it purchases a machine at a cost of Rs. Example 1: Induga Limited prepares its accounts annually on 31st March. 00.04(200-150) 20 0.40(200) 80 80 Deferred Tax Tax effect of timing differences originating during the 40 year 0. the straight-line method is considered appropriate for accounting purpose. This would lead to a higher taxable income in future. 2. If the cost of the machine is spread over three years of its life for accounting purpose.000 each year and the corporate tax rate is 40% each year. expenses debited in the statement of profit and loss for accounting purpose but it is not allowed for tax purpose at all in any year or income credited in profit and loss account while calculating the accounting profit is exempted for tax.40(150-50) 142 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. 1. 2003. CHENNAI .
deferred tax asset should be recognized only to the extent such asset can be recovered by way of tax saving. The corresponding debit/credit to the revenue reserves subject to the consideration of prudence in case of deferred tax assets. CHENNAI 143 . Prudence for Recognizing Deferred Tax Asset Deferred tax asset/liability should be measured for all timing differences. It is assumed that there is no difference between taxable income and accounting income except that set-off of loss is allowed in years 2003. 2004 and 2005 for tax purposes. Statement of Profit and Loss for the three years ending on 31st March. It is assumed that under the tax laws. and a deferred tax asset is recognized in the current year for the reduction in taxes payable in future years. For example. supported by convincing evidence.000 and Rs. Example 2: Induga Limited prepares its accounts annually on 31st March. timing differences created between the reported amount and the tax base of a liability for estimated expenses as for tax purpose. loss can be carried forward for 8 years and tax rate is 40% and at the end of the year 2003. 1.is recognized for timing differences that will result in deductible amounts in future years and for carry forward. Settlement of that liability will result in tax deduction in future years. In case there is no future sufficient income. 2003. 00. a) Unabsorbed depreciation and carry forward losses – Since there is eight year time – limit for carry forward of business loss and unabsorbed depreciation in Indian tax law recognition of the deferred tax SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. those estimated expenses are not deductible until a future year.Tax effect of timing difference reversing during the year 0. the amount of deferred tax asset/liability should be created in the same way had this accounting standard been in effect from the beginning. 60.000 in the year 2004 and 2005 respectively. 2004 and 2005 2003 2004 2005 Profit (loss) (100) 50 60 Less: Current tax (4) Deferred Tax: Tax effect of timing differences originating during the year 40 Tax effect of timing differences reversing during the year (20) (20) Profit (loss) after tax effect (60) 30 36 Transitional Provision When this accounting standard of taxes on income is first time applied. But deferred tax asset should be recognized and carried forward only to the extent it is reasonably certain that there will be sufficient future income recover such deferred tax asset. that the company would have sufficient taxable income in the future years against which unabsorbed deprecation and carry forward of losses can be set-off. The company has incurred a loss of Rs.40(0-50) Tax expense Profit after tax Notes: Net timing differences Deferred Tax liability (20) 60 90 100 40 60 90 50 20 (20) 60 90 0 0 Deferred Tax Assets .000 in the year 2003 and made profits of Rs 50. it was virtually certain.
2004 (Credit) = Rs. When different tax rate apply to different level of taxable income average rates should be used. the amount of deferred tax liability would be computed as follows: The deferred tax liability carried forward each year would appear in the Balance Sheet as under: 31st March. Any such written down amount may be reversed in subsequent period to the extent that it becomes reasonable certain that sufficient future taxable income will be available.500) 31st March. As per the explanation to para30 of AS-2 deferred tax liability should be shown after the head “Unsecured Loan” and deferred tax asset after the head “Investment” with a separate heading. The deferred tax asset should be written down.000 31st March. zero Accordingly. 2004 = 0. (17. Deferred tax asset and liability should be set off if permissible under the tax laws but to be shown separately if not permissible.asset should be guided by the concept whether the sufficient profit will be generated within the prescribed time period. 2004 and 2005 are 40%. 00. Disclosure • • • The break-up of deferred tax asset/liability should be disclosed. If it is evident that any portion of the deferred tax asset is not recoverable because of uncertainty of future income.000) = Rs. In such circumstances. (22. • Example 4 of policy as regard taxes on income – Provision for tax consists of current tax and deferred tax. Deferred tax asset/liability should be disclosed separately from current asset/liabilities. 2003 = 0. Current tax provision is computed for current income based on the tax liability after considering allowances and exemptions.35 (50.000) = Rs. c) Deferred tax asset and liability – Should be accounted on the basis of tax rate applicable for the subsequent relevant year known at balance sheet date. the nature of the evidence supporting its recognition is disclosed. 000 31st March.40. 35% and 38% respectively. 2005 (Credit) = Rs. 40.40 (1. If it becomes reasonably certain that such unrecognized deferred tax asset will be realized then unrecognized deferred tax asset is recognized now. They should also be distinguished from advance tax/tax provision/tax refund due. Deferred tax assets and liabilities are computed on the timing differences at the balance sheet date between the carrying amount of assets and liabilities and their respective tax 144 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.500) d) Review of deferred tax asset .17. evidence supporting recognition should be disclosed.The carrying amount of deferred tax asset would be reviewed at each balance sheet date. Deferred tax assets and liabilities should not be discounted to their present value. 500 31st March. b) Re-assessment of unrecognized deferred tax asset – Previously unrecognized deferred tax assets re-assessed at every balance sheet date. In case of deferred tax asset arises out of unabsorbed deprecation or loss. To recognize deferred tax assets on this account there should be convincing evidence that sufficient taxable income will be available against which such deferred tax assets can be realized. 2003 Debit 31st March. CHENNAI .40 (zero) = Rs. 2005 = 0. the amount debited/ (Credited) to the profit and loss account (with corresponding credit or debit to deferred tax liability) for each year would be as under: = Rs. Example 3: If in example 1 substantially enacted tax rates for 2003.
50) (235) 1389 Pursuant to AS-22. • Timing differences which originate first should be considered as reversing first.50 (3) 0. 3) AS-22 and capital gain • Timing differences by way of losses that arise under the capital gain should be recognized. 1. the impact of Deferred Tax Liability of Rs.bases. • The deferred tax in respect of timing difference which reverse after the tax holiday period.50 (98) 31 Liability/(a sset) as at 31-3-2003 Deferred Tax Liability (i) Difference between book and tax depreciation (ii) Prepaid Expenses (A) Deferred Tax Assets (i) Early Separation Scheme (ii) Wage Provision (iii) Provision for doubtful debts & advances (iv) Disallowances under section 43B (v) Provision for leave Salary (vi) Euro Issue Expenses (vii) Provision for Retiring Gratuity (viii) Other Deferred Tax Assets (B) Deferred Tax Liability (Net) (A-B) 1615 9 1624 (100) (30) (61) (6) (33) (0.358 crores upto 31-3-2002 as reduction in General Reserve.50) (4) (0. the company has recorded a net cumulative deferred tax liability of Rs. as this tax is on “distribution” of income rather than tax on “income” 2) AS-22 and sec 80IA and sec 80IB • The deferred tax in respect of timing differences which reverse during the tax holiday period. Example of break-up of deferred tax asset/liability Particulars Deferred Tax Current liability/(asset deferred s) year as at Tax 1-4-2002 1487 8 1495 (46) (38) (45) (5) (1) (1) (1) (137) 1358 128 1 129 (54) 8 (16) (1) (33) 0. A deferred tax asset in respect thereof will be recognized only if there is a “reasonable certainty” that sufficient future taxable income will be available under the head “Capital gain”. should be recognized in the year in which the timing differences originate. subject to consideration of prudence. dividend tax under sections 115-O to 115Q of Income-tax Act. CHENNAI 145 . SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. as a deferred tax asset and carried forward subject to consideration of prudence.e. Deferred tax assets are recognized based on management estimates of available tax liability and assessing its certainty. should not be recognized to the extent the gross total income of the enterprise is subject to such deductions. Further. AS-22 and Income tax Act 1) Tax on dividend distribution u/s 115-O to 115Q – AS22 does not cover the tax on distribution of income i. 31 Crores for the period ended on 31-3-2003 has been debited to profit and loss account.
6) Tax effect of expenses/income adjusted directly against the reserves and/or Securities Premium Account It has been noticed that some companies are charging certain expenses. on the amount that can be carried forward and set off under the Income-tax Act. 115JB – MAT The payment of tax under section 115JB of the Income-tax Act is a current tax for the period. 146 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. in respect of long-term capital assets. should be recognized in the years which the timing differences originate. which should have otherwise been credited to the profit and loss account in accordance with the requirements of generally accepted accounting principles. which originate first. • Timing difference. In case an enterprise expects that the timing difference arising in the current period would reverse in a period in which it may pay tax under section 115JB of the Act. In a period in which a company pays tax under section 115JB of the Act. which are otherwise reserves and/or Securities Premium Account pursuant to the court orders. should be considered as reversing first. may have been directly credited to a reserve account or similar account and the tax effect thereof is not recognised in the reserve account of a similar account. and reverse during the tax holiday period. the deferred tax asset should be recognized and carried forward. but reverse after the tax holiday period. to consideration of prudence. should be measured using the regular tax rates and not the tax rate under section 115B of the Act. if any. Such a situation may also arise where an enterprise adjusts its reserves to give effect to a change. subject to consideration of prudence.• • Where an entity has a carry forward depreciation or carry forward loss. Further. and timing differences by way of “losses” also arise in relation to capital gain. because of cost indexation under the income tax Act. 1956. subject of course. a company may adjust an expense against the Securities Premium Account as allowed under the provisions of section 78 of the Companies Act. should be measured using the regular tax rates and not the tax rate under section 115JB of the Act. Where there is a difference between the amounts of “losses” recognized for accounting purpose and tax purposes. tax effect of which is required to be recognized under AS-22. while the expenses are charged to reserves and/or Securities Premium Account. in accounting policy consequent upon adoption of an Accounting Standard. an income. tax effect of which is required to be recognized under AS-22. In such a case. • The deferred tax in respect of timing differences which originate during the tax holiday period. CHENNAI . should not be recognize to the extent the gross total income of the enterprises is subject to such deductions. in accordance with the transitional provision contained in the standard. the deferred tax assets and liabilities in respect of timing differences arising during the current period. the deferred tax assets and liabilities in respect of timing differences arising during the period. A similar situation may arise where. 5) AS-22 and Sec. 4) AS-22 and sections 10A and 10B • The deferred tax in respect of timing differences which originate during the tax holiday period. pursuant to a court order or under transitional provisions prescribed in an accounting standard. a deferred tax asset in respect thereof will be recognized only and only if there is “virtual certainty” that sufficient future taxable income will be available and such a conclusion is supported by consideration of prudence.
where a company recognises MAT credit as an asset on the basis of prudence. According to Explanation to para 21 of Accounting Standard ‘Accounting for Taxes on income in context of section 115JB of the Income-tax Act. 1961’. if any. 7) Presentation of MAT in Financial Statement As per the Guidance Note issued by the Institute of Chartered Accountants of India. the same should be presented under the head “Loans and Advances” since. the amount of credit availed should be shown as a deduction from the ‘Provision for Taxation’ on the liability side of the balance sheet. Accordingly. AS-22 and AS-28 Impairment loss calculated as per AS-28 is not deductible loss and therefore result in timing difference and finally result in creation of deferred tax asset which shall be recognized on the basis of prudence. should continue to be presented under the head ‘Loans and Advances’ if it continues to meet the considerations of prudence and realisability. CHENNAI 147 . The unavailed amount of MAT credit entitlement. the tax expenses arising on account of payment of MAT credit becomes eligible to be recognised as an asset in accordance with the recommendations contains in this Guidance Note. it is of the income-tax during the specified period.It is clarified by the Institute of Chartered Accountants that any item of income or expense adjusted directly to reserves and/or Securities Premium Account should be net of its tax effect to make it in compliance with Generally Accepted Accounting Principles. In the year of set-off credit. there being a convincing evidence of realization of the asset. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Issued by the Institute of Chartered Accountants of India. the said asset should be created by was of a credit to profit and loss account and presented as a separate line item therein. MAT is the current tax. The asset may be reflected as ‘MAT credit entitlement”.
Test of Significance Influence Accounting for Investments in Associates Investment in associate should be accounted as per Equity Method in preparation and presentation of consolidated financial statements.AS 23 . Equity method of accounting is as follows. in the consolidated financial statements. This standard doesn’t deal in preparation and presentation of separate financial statements.Ayushi Jain (email@example.com differences. 148 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.com) Objective: The objective of this Standard is to set out principles and procedures for recognizing. FAMILIARITY WITH THE TERMS ASSOCIATE “An enterprise” in which the investor has significant influence which is neither a subsidiary nor a joint venture of the investor SIGNIFICANT INFLUENCE “Significant influence” means the power to participate in the financial and operating decisions of the associate however doesn’t mean to control the associate. From the date of cessation of significant influence. Non . AS-23 is applicable only when investor has significant influence and not Control. When there is no significant influence in an associate or ceases to have significant influence. Distributions received from an investee reduce the carrying amount of the investment.(Equity +Reserves). I Equity Method of Accounting Equity is the residual interest in the assets of an enterprise after deducting all its liabilities. Control means to govern the financial and operating policies of an associate. For separate financial statements prepared by the investor AS-13 applicable NOW IT IS AS30. CHENNAI . II Application of Equity Method Goodwill/Capital reserve arising on the acquisition of an associate included in the carrying amount of investment in the associate.ACCOUNTING FOR INVESTMENTS IN ASSOCIATES IN CFS . The carrying amount is adjusted for the post acquisition change in the Investor’s share of Net assets of the investee. the investment in associate should be accounted as per AS-13. Other adjustments which are not included in the P&L such as Revaluation of fixed assets. The Investment is recorded at cost. identifying Goodwill/capital reserve during the time of acquisition. Merely on purchasing 20% or more shares by the investor.Applicability The Investment is acquired and held exclusively for its subsequent disposal in the near future. the effect of the investments in associates on the financial position and operating results of a group. the investee doesn’t become associate. Scope: This standard deals only with the Investments in associates in preparation and presentation of consolidated financial statements. Applicability Only when the investor prepares consolidated financial statements this standard is applicable or else it’s not applicable.
SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. the investor resumes including its share of profits only after its share of profits equals its share of net losses that have not been recognized. Contingencies In accordance with Accounting standard (AS-4). the fact should be disclosed along with the description of the differences in the accounting policies. In case an associate uses accounting policies other than those adopted for the consolidated financial statements and if it’s not feasible to make appropriate adjustments to the associate financial statements. Investments should be classified as Long term investments. the investors share of results of operations of the associate should be computed without taking into consideration the proposed dividend. to the extent the investor has incurred obligations or made payments on behalf of the associates. the investor discloses in the consolidated financial statements: a) Its share of contingencies and capital commitments of an associate for which it is also contingently liable. Interpretation by ICAI Proposed Dividend by the Associate ASI -16 If the associate has made a provision in its financial statements. Disclosure Investor should disclose in its consolidated financial statements the following: Description of associate including the proportion of ownership interest should be disclosed. contingencies and Events occurring after the balance sheet date. b) Those contingencies that arise because the investor is severally liable for the liabilities of the Associate. CHENNAI 149 . If the associate subsequently reports profit.Unrealized profits and losses resulting from transactions between the investor and the associate should be eliminated to the extent of the investor’s interest in the associate III Losses on account of investment in associates Ordinarily discontinue recognizing share of further losses and the investment is reported at NIL value Additional losses are provided for. Difference in reporting dates of financial statements of associates and of the investor should be disclosed.
AS 24 - DISCONTINUING OPERATION
- M. Sathish Kumar (firstname.lastname@example.org)
Applicability • Enterprise whose equity or debt securities are listed whether in India or outside India or Enterprise which are in the process of listing their equity or debt securities. • Enterprise whose turnover exceeds Rs 50 Crores and Turnover does not include Other Income • Enterprise having borrowings including public deposits exceeds Rs 10 Crores • Banks • Insurance Companies • Financial Institutions • Holding and subsidiary enterprises of any one of the above Objective To establish principle for reporting information about discontinuing operations Discontinuing Operation It is a component of an enterprise that: 1) The enterprise pursuant to a single plan is a) Disposing of substantially in its entirety b) Disposing of piecemeal c) Terminating through abandonment 2) Represent a separate major line of business or geographical area of operation and 3) That can be distinguished operationally and for financial reporting purposes Initial Disclosure Event Initial disclosure event is the occurrence of one of the following, whichever occurs earlier: a) An enterprise entered in to binding sale agreement or b) Board of directors or similar governing body approved plan for disposal and public announcement of the same. Recognition and Measurement An enterprise should apply the principles of recognition and measurement that are set out in other Accounting Standards for the purpose of deciding as to when and how to recognize and measure the changes in assets and liabilities and the revenue, expenses, gains, losses and cash flows relating to a discontinuing operation. Initial Disclosure 1) A description of the discontinuing operation(s); 2) The business or geographical segment(s) in which it is reported as per AS 17, Segment Reporting; 3) The date and nature of the initial disclosure event; 4) The date or period in which the discontinuance is expected to be completed if known or determinable;
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5) The carrying amounts, as of the balance sheet date, of the total assets to be disposed of and the total liabilities to be settled; 6) The amounts of revenue and expenses in respect of the ordinary activities attributable to the discontinuing operation during the current financial reporting period; 7) The amount of pre-tax profit or loss from ordinary activities attributable to the discontinuing operation during the current financial reporting period, and the income tax expense related thereto; and (Note: This information should be presented on the face of the statement of profit and loss) 8) The amounts of net cash flows attributable to the operating, investing, and financing activities of the discontinuing operation during the current financial reporting period Other Disclosures When an enterprise disposes of assets or settles liabilities attributable to a discontinuing operation or enters into binding agreements for the sale of such assets or the settlement of such liabilities, it should include, in its financial statements, the following information when the events occur: a) for any gain or loss that is recognized on the disposal of assets or settlement of liabilities attributable to the discontinuing operation, (i) the amount of the pre-tax gain or loss and (ii) income tax expense relating to the gain or loss; and (Note: This information should be presented on the face of the statement of profit and loss) b) the net selling price or range of prices (which is after deducting expected disposal costs) of those net assets for which the enterprise has entered into one or more binding sale agreements, the expected timing of receipt of those cash flows and the carrying amount of those net assets on the balance sheet date. Updating the Disclosures An enterprise should include, in its financial statements, for periods subsequent to the one in which the initial disclosure event occurs, a description of any significant changes in the amount or timing of cash flows relating to the assets to be disposed or liabilities to be settled and the events causing those changes. Such disclosures should continue in financial statements for a period up to and including period in which the discontinuance is completed. A dis-continuance is completed when the plan is substantially completed or abandoned, though full payments from buyer may not have been received. If an enterprise abandons or withdraws from a plan that was previously reported as a discontinuing operation, that fact, reasons therefor and its effect should be disclosed. Any disclosures required by this Standard should be presented separately for each discontinuing operation.
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AS 25- INTERIM FINANCIAL REPORTING
- Radhakrishna Das (email@example.com)
BACKGROUND AND INTRODUCTION OF THE STANDARD: Accounting Standard (AS) 25, 'Interim Financial Reporting', issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2002.The objective of this Statement is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in complete or condensed financial statements for an interim period. Timely and reliable interim financial reporting improves the ability of investors, creditors, and others to understand an enterprise's capacity to generate earnings and cash flows, its financial condition and liquidity. KEY DEFNITIONS IN THE STANDARD: Interim period is a financial reporting period shorter than a full financial year. Interim financial report means a financial report containing either a complete set of financial statements or a set of condensed financial statements for an interim period. FORM AND CONTENT OF INTERIM FINANCIAL STATEMENTS: If an enterprise prepares and presents a complete set of financial statements in its interim financial report, the form and content of those statements should conform to the requirements as applicable to annual complete set of financial statements. If an enterprise prepares and presents a set of condensed financial statements in its interim financial report, those condensed statements should include, at a minimum, each of the headings and sub-headings that were included in its most recent annual financial statements and the selected explanatory notes as required by this Statement. An Enterprise should include the following information, as a minimum, in the notes to its interim financial statements, if material and if not disclosed elsewhere in the interim financial report: • A statement that the same accounting policies are followed in the interim financial statements as those followed in the most recent annual financial statements or, if those policies have been changed, a description of the nature and effect of the change; • Explanatory comments about the seasonality of interim operations • The nature and amount of items affecting assets, liabilities, equity, net income, or cash flows that are unusual because of their nature, size, or incidence; • The nature and amount of changes in estimates of amounts reported in prior interim periods of the current financial year or changes in estimates of amounts reported in prior financial years, if those changes have a material effect in the current interim period; • Issuances, buy-backs, repayments and restructuring of debt, equity and potential equity shares; • Material events subsequent to the end of the interim period that have not been reflected in the financial statements for the interim period. the effect of changes in the composition of the enterprise during the interim period, such as amalgamations, acquisition or disposal of subsidiaries and long-term investments, restructurings, and discontinuing operations; and • Material changes in contingent liabilities since the last annual balance sheet date.
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date basis. except for accounting policy changes made after the date of the most recent annual financial statements that are to be reflected in the next annual financial statements.. or disclose an item for interim financial reporting purposes. government grants. For example the principles for recognizing and measuring losses from inventory writedowns. Different terminology is used in AS 25 e. or impairments in an interim period are the same as those that an enterprise would follow if it prepares its annual financial statements. However. Interim Financial Reporting. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. COMPARISION WITH IAS 34: With regard to preparation of statement of profit and loss. or occasionally within a financial year shall not be anticipated or deferred as of an interim date if anticipation or deferral would not be appropriate at the end of the entity’s financial year. materiality should be assessed in relation to the interim period financial data. One objective of the preceding principle is to ensure that a single accounting policy is applied to a particular class of transactions throughout an entire financial year. it is also appropriate to anticipate or defer that type of cost at the end of the financial year. half-yearly. However. In making assessments of materiality. REVENUES RECEIVED & COSTS INCURRED UNEVENLY IN THE FINANCIAL YEAR: Costs that are incurred unevenly during an entity’s financial year shall be anticipated or deferred for interim reporting purposes if. the original estimate is changed in the subsequent interim period either by accrual of an additional amount of loss or by reversal of the previously recognized amount. the frequency of an enterprise's reporting (annual. the term ‘balance sheet’ is used instead of ‘Statement of financial position’ and ‘Statement of Profit and Loss’ is used instead of ‘Statement of comprehensive income’. it should be recognized that interim measurements may rely on estimates to a greater extent than measurements of annual financial data. restructurings. But. other than one for which the transition is specified by an Accounting Standard. or quarterly) should not affect the measurement of its annual results. Amounts accrued for income tax expense in one interim period may have to be adjusted in a subsequent interim period of that financial year if the estimate of the annual income tax rate changes. To achieve those objective. Dividend income. AS 25 allows only single statement approach. and only if. RECOGNITION AND MEASUREMENT: An enterprise should apply the same accounting policies in its interim financial statements as are applied in its annual financial statements. provides option either to follow single statement approach or to follow two statement approaches. royalty income etc. International Accounting Standard (IAS) 34. Another example to make it comprehensive is that income tax expense is recognized in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year. CHENNAI 153 . classify. RESTATEMENT OF PREVIOUSLY REPORTED INTERIM PERIODS: A change in accounting policy. if such items are recognized and measured in one interim period and the estimate changes in a subsequent interim period of that financial year. measurements for interim reporting purposes should be made on a year to.MATERIALITY: In deciding how to recognize measure. Eg. cyclically. Similarly revenues that are received seasonally. should be reflected by restating the financial statements of prior interim periods of the current financial year.g.
AS 26 – INTANGIBLE ASSETS
- C. Naresh (firstname.lastname@example.org)
What is an Intangible Asset? • An Intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. o An Asset is a resource controlled by an enterprise as a result of past events, and from which future economic benefits are expected to flow to the enterprise. o Non-monetary assets are those other than monetary assets (monetary assets are money held and assets to be received in fixed or determinable amounts of money) Some examples of intangible assets are patents, copyrights, computer software, franchises, market share, brand, etc. For an asset to be recognized as intangible asset, it should satisfy certain conditions, viz definition and recognition criteria:
Definition Criteria • • • It should be separately identifiable .i.e the asset should be able to be rented, sold or exchanged for consideration without disposing of the business as a whole. An expected future economic benefit should flow from the asset, in the form of saving of costs, or increase in revenue, or a combination of both. The asset should be controlled by the entity. Legal rights, technical knowledge, copyrights, restraint of trade agreement, etc ensures control over economic benefits.
Recognition Criteria It should be recognized only if • it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise • the cost of the asset can be measured reliably. Measurement Criteria – The principles of measurement are similar to that in AS 10.
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Intangible Asset arising from Amalgamation: The standard recognizes only intangible assets that emerge from an amalgamation in the nature of purchase. Such assets can be recognized by transferee even if not recognized by the transferor. (Although AS 14 will apply in such cases) These intangible assets are to be measured at fair value. If the fair value of the asset is not separately ascertainable, then it should be included as part of goodwill. Intangible Asset received through Government Grants: Intangible assets such as airport landing rights, access to resources which are acquired through government grants should be recognized at cost of acquisition. Internally Generated Intangible Assets: Incase of goodwill, the same should not be recognized. Incase of any other expenses, the same should be classified under either research phase or development phase. All expenses under research phase should not be recognized as intangible asset but charged as expense as and when required. E.g. activities for obtaining new knowledge, search for research findings, evaluation of alternatives, etc. All Expenses qualified under development stage can be recognized as intangible asset. Development activities can comprise costs for designing, testing methods and processes, pilot plants, etc. For an expense to be classified under development stage, the following six conditions needs to be satisfied: Technical feasibility of completing the intangible asset Intention to complete and use the intangible asset Ability to use the asset Probability of generating future economic benefits from the asset Adequate technical and financial resource available to complete the development of the asset Reliable measurability of the expenses incurred in the development.
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Thus an expenditure can be recognized as intangible asset only if meets the definition and recognition criteria. Else, it should be charged off as expense. Once an expense is charged off as expense, the same cannot be later converted into an intangible asset. Measurement subsequent to initial recognition: The intangible asset recognized in the books should be reviewed periodically and amortized, if necessary. The asset should appear in the books in its carrying amount. Carrying amount is the amount at which an asset is recognized in the balance sheet, net of any accumulated amortization and accumulated impairment losses thereon. Amortization: While the decrease in value of tangible assets is called as depreciation, the same is termed as amortization incase of intangible assets. There are three critical aspects to identify the amount to be amortized:
Pin-points: • • Amortization should commence only from the time the asset is available for use. In certain cases, where the period of intangible asset is defined for a finite period (e.g. license rights for 5yrs, etc.) by express agreement or implied, then the defined period should be taken as the period of amortization. Generally, the amortization amount will be charged off as expense. Marking an exception to this, some assets gets absorbed in the production process of other assets. E.g. Amortization of intangible asset used in production process is included in the carrying amount of inventories. Once a residual value of the asset, other than zero, is assigned by demonstrating with persuasive evidence, the same cannot be increased at a later date.
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Classify separately internally generated intangible assets and other intangible assets in the assets side of the Balance Sheet and carry the same at carrying amount net of amortization and impairment loss. Disclosure Requirements: Disclose the amortization amount recognized and the R&D expenses in the Profit & Loss Account. sometimes the carrying amount of the asset may exceed its recoverable amount. when there is a significant change in the ‘expected useful life’ or/and a significant change in the ‘expected pattern of economic benefits’. The same should be tested at each financial year for impairment. then the asset is to be de-recognized and eliminated from Balance Sheet. Such excess amount is to be treated as loss. Also disclose the gain/loss on retirement or disposal or asset and the impairment losses recognized.• During the periodical annual review of the amortization. which is termed as ‘impairment loss’. The amount of difference between the net disposal proceeds and the carrying amount is to be recognized as income or expense. as the case maybe. Assets of similar nature should be grouped together. as the case maybe. CHENNAI 157 . Impairment Loss: During the periodical annual review of the intangible asset. disclose the amortization method and period. A retired asset pending disposal should be carried at carrying amount at the date when the asset is retired. In Notes to Accounts. Also describe the accounting policy adopted for intangible assets. However this change will be governed by AS 5. the amortization period or/and the amortization method. Disposal of Intangible Assets: • • • When an intangible asset is disposed off or no more of future economic benefits to flow from its continued use. specific reasons if the period taken is over ten years. should also be changed accordingly. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.
In some cases.AS 27 . 158 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. an enterprise by a contractual arrangement establishes joint control over an entity which is a subsidiary of that enterprise within the meaning of Accounting Standard (AS) 21. Capital contributions by the ventures. CHENNAI . liabilities. The appointment of the board of directors or equivalent governing body of the joint venture and the voting rights of the ventures. expenses or results of the joint venture. the contractual arrangement is normally in writing and deals with such matters as: The activity. which is subject to joint control. In such cases. Accounting for Investments in Associates in Consolidated Financial Statements). The contractual arrangement may be evidenced in a number of ways. the entity is not consolidated under AS 21.FINANCIAL REPORTING OF INTEREST IN JOINT VENTURE . Consolidated Financial Statements. income.Ayushi Jain (ayuprash@gmail. Scope Definitions For the purpose of this Statement. Activities which have no contractual arrangement to establish joint control are not joint ventures for the purposes of this Statement. In some exceptional cases. duration and reporting obligations of the joint venture. Joint control is the contractually agreed sharing of control over an economic activity. AS-23 and AS-27 which relate to Consolidation of Financial Statements. prepares and presents consolidated financial statements they are required to be complied with the Accounting Standards AS-21. but is treated as a joint venture as per this Statement. the following terms are used with the meanings specified : A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity. the arrangement is incorporated in the articles or other by-laws of the joint venture. income and expenses (ALIE) in the financial statements of ventures and investors. Whatever its form.com) Objective The objective of this Statement is to set out principles and procedures for accounting for interests in joint ventures and reporting of joint venture Assets. A venture is a party to a joint venture and has joint control over that joint venture. for example by a contract between the ventures or minutes of discussions between the ventures. Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefits from it. and The sharing by the ventures of the output. An investor in a joint venture is a party to a joint venture and does not have joint control over that joint venture. Contractual Arrangement The existence of a contractual arrangement distinguishes interests which involve joint control from investments in associates in which the investor has significant influence (see Accounting Standard (AS) 23. Applicability Entities pursuant to the requirements of a Statue/regulator or voluntarily.
The joint venture agreement usually provides means by which the revenue from the jointly controlled operations and any expenses incurred in common are shared among the venture. a venture should recognize in its separate financial statements and consequently in its consolidated financial statements: a. or acquired for the purpose of. the venture may prepare accounts for internal management reporting purposes so that they may assess the performance of the joint venture.The contractual arrangement establishes joint control over the joint venture. and often the joint ownership. classified according to the nature of the assets. CHENNAI 159 . and consequently in its consolidated financial statements: Its share of the jointly controlled assets. a particular product. Its share of any liabilities incurred jointly with the other venture in relation to the joint venture. jointly. Jointly Controlled Assets Some joint ventures involve the joint control. The contractual arrangement may identify one venture as the operator or manager of the joint venture. The operator does not control the joint venture but acts within the financial and operating policies which have been agreed to by the ventures in accordance with the contractual arrangement and delegated to the operator. each taking a share of the rents received and bearing a share of the expenses. It also incurs its own expenses and liabilities and raises its own finance. B. An example of a jointly controlled asset is an oil pipeline jointly controlled and operated by a number of oil production companies. such share being determined in accordance with the contractual arrangement. Another example of a jointly controlled asset is when two enterprises jointly control a property. in its separate financial statements. Each venture uses its own fixed assets and carries its own inventories. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Each venture may take a share of the output from the assets and each bears an agreed share of the expenses incurred. or a financial structure that is separate from the ventures themselves. The arrangement identifies those decisions in areas essential to the goals of the joint venture which require the consent of all the ventures and those decisions which may require the consent of a specified majority of the ventures. and b. a venturer should recognize. market and distributes. The expenses that it incurs and its share of the income that it earns from the joint venture. The joint venture's activities may be carried out by the venture’s employees alongside the venture’s similar activities. Each venturer uses the pipeline to transport its own product in return for which it bears an agreed proportion of the expenses of operating the pipeline. Any liabilities which it has incurred. The assets that it controls and the liabilities that it incurs. An example of a jointly controlled operation is when two or more venture combines their operations. such as an aircraft. which represent its own obligations. Different parts of the manufacturing process are carried out by each of the venture. In respect of its interest in jointly controlled assets. A. Each venture bears its own costs and takes a share of the revenue from the sale of the aircraft. the joint venture and dedicated to the purposes of the joint venture. Separate accounting records may not be required for the joint venture itself and financial statements may not be prepared for the joint venture. The assets are used to obtain economic benefits for the venture. Such an arrangement ensures that no single venture is in a position to unilaterally control the activity. Jointly Controlled Operations The operation of joint ventures involves the use of the assets and other resources of the venture rather than the establishment of a corporation. partnership or other entity. resources and expertise in order to manufacture. In respect of its interests in jointly controlled operations. by the venture of one or more assets contributed to. However.
Because the assets. partnership or other entity in which each venturer has an interest. A jointly controlled entity controls the assets of the joint venture. although the venture may prepare accounts for internal management reporting purposes so that they may assess the performance of the joint venture. no adjustments or other consolidation procedures are required in respect of these items when the venture presents consolidated financial statements. interest in a jointly controlled entity should be accounted for as an investment in accordance with Accounting Standard (AS) 13. usually. For example. and consequently in its consolidated financial statements. A jointly controlled entity maintains its own accounting records and prepares and presents financial statements in the same way as other enterprises in conformity with the requirements applicable to that jointly controlled entity. Separate accounting records for the joint venture itself may be limited to those expenses incurred in common by the venture and ultimately borne by the venture according to their agreed shares. Similarly. Accounting for Investments. marketing. Jointly Controlled Entities A jointly controlled entity is a joint venture which involves the establishment of a corporation. except that a contractual arrangement between the venture establishes joint control over the economic activity of the entity. liabilities. incurs liabilities and expenses and earns income.Any income from the sale or use of its share of the output of the joint venture. together with its share of any expenses incurred by the joint venture. The entity operates in the same way as other enterprises. the design. Financial Reporting Aspects Separate Financial Statements of a Venturer In a venture’s separate financial statements. for example. the legal form of the joint venture. such as an oil pipeline. and Any expenses which it has incurred in respect of its interest in the joint venture. 160 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. the venture may contribute. C. into a jointly controlled entity. Another example is when an enterprise commences a business in a foreign country in conjunction with the government or other agency in that country. although some jointly controlled entities also involve a sharing of the output of the joint venture. An example of a jointly controlled entity is when two enterprises combine their activities in a particular line of business by transferring the relevant assets and liabilities into a jointly controlled entity. Many jointly controlled entities are similar to those joint ventures referred to as jointly controlled operations or jointly controlled assets. into a jointly controlled entity. The treatment of jointly controlled assets reflects the substance and economic reality and. distribution or after-sales service of the product. assets which will be operated jointly. the venture may transfer a jointly controlled asset. CHENNAI . Financial statements may not be prepared for the joint venture. by establishing a separate entity which is jointly controlled by the enterprise and the government or agency. income and expenses are already recognized in the separate financial statements of the venture. Some jointly controlled operations also involve the establishment of a jointly controlled entity to deal with particular aspects of the activity. Each venture is entitled to a share of the results of the jointly controlled entity. It may enter into contracts in its own name and raise finance for the purposes of the joint venture activity.
The consolidated statement of profit and loss of the venturer includes its share of the income and expenses of the jointly controlled entity. income and expenses of the jointly controlled entity in its consolidated financial statements. it shows its share of the inventory of the jointly controlled entity separately as part of the inventory of the consolidated group. Accounting for Investments. When reporting an interest in a jointly controlled entity in consolidated financial statements. CHENNAI 161 . which are set out in Accounting Standard (AS) 21. For example. a venturer should report its interest in a jointly controlled entity using proportionate consolidation except a. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Interest in such a jointly controlled entity should be accounted for as an investment in accordance with Accounting Standard (AS) 13. income and expenses of the jointly controlled entity by using proportionate consolidation. unless a legal right of set-off exists and the offsetting represents the expectation as to the realization of the asset or the settlement of the liability. In a jointly controlled entity. liabilities. that fact is disclosed together with the proportions of the items in the consolidated financial statements to which the different accounting policies have been applied. and b. Consolidated Financial Statements of a Venturer In its consolidated financial statements. liabilities. Many of the procedures appropriate for the application of proportionate consolidation are similar to the procedures for the consolidation of investments in subsidiaries. it shows its share of the fixed assets of the jointly controlled entity separately as part of the same items of the consolidated group. it is essential that a venturer reflects the substance and economic reality of the arrangement. The venturer usually prepares consolidated financial statements using uniform accounting policies for the like transactions and events in similar circumstances.Each venturer usually contributes cash or other resources to the jointly controlled entity. An interest in a jointly controlled entity which is acquired and held exclusively with a view to its subsequent disposal in the near future. An interest in a jointly controlled entity which operates under severe long-term restrictions that significantly impair its ability to transfer funds to the venturer. While giving effect to proportionate consolidation. appropriate adjustments are made to the financial statements of the jointly controlled entity when they are used by the venturer in applying proportionate consolidation. This substance and economic reality is reflected in the consolidated financial statements of the venturer when the venturer reports its interests in the assets. These contributions are included in the accounting records of the venturer and are recognized in its separate financial statements as an investment in the jointly controlled entity. rather than the joint venture's particular structure or form. it is inappropriate to offset any assets or liabilities by the deduction of other liabilities or assets or any income or expenses by the deduction of other expenses or income. The application of proportionate consolidation means that the consolidated balance sheet of the venturer includes its share of the assets that it controls jointly and its share of the liabilities for which it is jointly responsible. Under proportionate consolidation. If it is not practicable to do so. In case a jointly controlled entity uses accounting policies other than those adopted for the consolidated financial statements for like transactions and events in similar circumstances. a venturer has control over its share of future economic benefits through its share of the assets and liabilities of the venture. the venturer includes separate line items for its share of the assets. Consolidated Financial Statements.
the venturer should recognise only that portion of the gain or loss which is attributable to the interests of the other venture. except to the extent that the investors have a binding obligation to. If the jointly controlled entity subsequently reports profits. From the date of discontinuing the use of the proportionate consolidation. A venturer should recognise its share of the losses resulting from these transactions in the same way as profits except that losses should be recognised immediately when they represent a reduction in the net realisable value of current assets or an impairment loss. While the assets are retained by the joint venture. It ceases to have joint control over a jointly controlled entity but retains. interest in a jointly controlled entity should be accounted for: a. either in whole or in part. its interest in the entity. For this purpose. and provided the venturer has transferred the significant risks and rewards of ownership. and are able to. Where the carrying amount of the venture’s interest in a jointly controlled entity is different from its cost. In all other cases. cost of the investment should be determined as under: The venture’s share in the net assets of the jointly controlled entity as at the date of discontinuance of proportionate consolidation should be ascertained. or b. recognition of any portion of a gain or loss from the transaction should reflect the substance of the transaction. make good the losses.Any excess of the cost to the venturer of its interest in a jointly controlled entity over its share of net assets of the jointly controlled entity. The use of the proportionate consolidation is no longer appropriate because the jointly controlled entity operates under severe long-term restrictions that significantly impair its ability to transfer funds to the venturer. all such profits are allocated to venture until the investors' share of losses previously absorbed by the venture has been recovered. In accordance with Accounting Standard (AS) 21. at the date on which interest in the jointly controlled entity is acquired. The losses pertaining to one or more investors in a jointly controlled entity may exceed their interests in the equity of the jointly controlled entity. and any further losses applicable to such investors. are recognised by the venture in the proportion of their shares in the venture. the difference is treated as a capital reserve in the consolidated financial statements. if the venturer acquires unilateral control over the entity and becomes parent within the meaning of that Standard. Transactions between a Venturer and Joint Venture When a venturer contributes or sells assets to a joint venture. When the cost to the venturer of its interest in a jointly controlled entity is less than its share of the net assets of the jointly controlled entity. The venturer should recognise the full amount of any loss when the contribution or sale provides evidence of a reduction in the net realisable value of current assets or an impairment loss. as an investment in accordance with Accounting Standard (AS) 13. and The amount of net assets so ascertained should be adjusted with the carrying amount of the relevant goodwill/capital reserve (see paragraph 37) as at the date of discontinuance of proportionate consolidation. Such excess. CHENNAI . as appropriate. at the date on which interest in the jointly controlled entity is acquired. Accounting for Investments. or in accordance with Accounting Standard (AS) 23. When a venturer purchases assets from a joint venture. Consolidated Financial Statements. A venturer should discontinue the use of proportionate consolidation from the date that: a. the carrying amount is considered for the purpose of above computations. and separately disclosed in the consolidated financial statements. Accounting for Investments in Associates in Consolidated Financial Statements. the venturer should not recognise its share of the profits of the joint venture from the transaction until it resells the assets to an independent party. is recognised as goodwill. 162 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. and b.
To assess whether a transaction between a venturer and a joint venture provides evidence of impairment of an asset, the venturer determines the recoverable amount of the asset as per Accounting Standard on Impairment of Assets. In determining value in use, future cash flows from the asset are estimated based on continuing use of the asset and its ultimate disposal by the joint venture. The separate financial statements of the venturer, the full amount of gain or loss on the transactions taking place between the venturer and the jointly controlled entity is recognised. However, while preparing the consolidated financial statements, the venture’s share of the unrealized gain or loss is eliminated. Unrealized losses are not eliminated, if and to the extent they represent a reduction in the net realisable value of current assets or an impairment loss. The venturer, in effect, recognises, in consolidated financial statements, only that portion of gain or loss which is attributable to the interests of other venture. Reporting Interests in Joint Ventures in the Financial Statements of an Investor An investor in a joint venture, which does not have joint control, should report its interest in a joint venture in its consolidated financial statements in accordance with Accounting Standard (AS) 13, Accounting for Investments, Accounting Standard (AS) 21, Consolidated Financial Statements or Accounting Standard (AS) 23, Accounting for Investments in Associates in Consolidated Financial Statements, as appropriate. Operators of Joint Ventures Operators or managers of a joint venture should account for any fees in accordance with Accounting Standard (AS) 9, Revenue Recognition. One or more venture may act as the operator or manager of a joint venture. Operators are usually paid a management fee for such duties. The fees are accounted for by the joint venture as an expense. Disclosure The aggregate amounts of each of the “ALIE” related to its interest in the jointly controlled entity. Any contingency that has been incurred in relation to its interest in joint Venture. Its share of contingencies that has been incurred jointly with other venturer. A list of all joint venturer description of interest in significant joint venture.
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AS 28 IMPAIRMENT OF ASSETS
- M. Sathish Kumar (email@example.com)
Applicability Scope All Enterprises All Assets other than: 1) Inventories 2) Assets arising from Construction Contracts 3) Financial Assets 4) Deferred Tax Assets
Key Definitions: Recoverable amount is the higher of an asset’s net selling price and its value in use. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. A cash generating unit is the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets. Identifying an Asset that may be Impaired An asset is impaired when the carrying amount of the asset exceeds its recoverable amount. An enterprise should assess at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise should estimate the recoverable amount of the asset. External Indication a) during the period, an asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use b) significant changes with an adverse effect on the enterprise have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the enterprise operates or in the market to which an asset is dedicated; c) market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially; d) the carrying amount of the net assets of the reporting enterprise is more than its market capitalization
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Internal Indication a) evidence is available of obsolescence or physical damage of an asset b) significant changes with an adverse effect on the enterprise have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include plans to discontinue or restructure the operation to which an asset belongs or to dispose of an asset before the previously expected date; and c) Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected. Net Selling Price The best evidence of an asset’s net selling price is a price in a binding sale agreement in an arm’s length transaction, adjusted for incremental costs that would be directly attributable to the disposal of the asset If there is no binding sale agreement but an asset is traded in an active market, net selling price is the asset’s market price less the costs of disposal. The appropriate market price is usually the current bid price. When current bid prices are unavailable, the price of the most recent transaction may provide a basis from which to estimate net selling price, provided that there has not been a significant change in economic circumstances between the transaction date and the date at which the estimate is made. If there is no binding sale agreement or active market for an asset, net selling price is based on the best information available to reflect the amount that an enterprise could obtain, at the balance sheet date, for the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal. In determining this amount, an enterprise considers the outcome of recent transactions for similar assets within the same industry. Net selling price does not reflect a forced sale, unless management is compelled to sell immediately. Costs of disposal, other than those that have already been recognized as liabilities, are deducted in determining net selling price. Value in Use Estimating the value in use of an asset involves the following steps: (a) estimating the future cash inflows and outflows arising from continuing use of the asset and from its ultimate disposal; and (b) applying the appropriate discount rate to these future cash flows. Composition of Estimates of Future Cash Flows Estimates of future cash flows should include:
SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION, CHENNAI
The discount rate(s) should not reflect risks for which future cash flow estimates have been adjusted. an enterprise should recognize a liability if. A future restructuring to which an enterprise is not yet committed. and only if. 2. and Other market borrowing rates. The enterprise may take into account the following rates: • • • The enterprise’s weighted average cost of capital determined using techniques such as the Capital Asset Pricing Model. if any. that is required by another Accounting Standard. or allocated on a reasonable and consistent basis. in which case any impairment loss of a revalued asset should be treated as a revaluation decrease under that Accounting Standard. Income tax receipts or payments. CHENNAI . Net cash flows. An impairment loss should be recognized as an expense in the statement of profit and loss immediately. cash inflows or outflows from financing activities. The enterprise’s incremental borrowing rate.1. to be received (or paid) for the disposal of the asset at the end of its useful life. unless the asset is carried at revalued amount in accordance with another Accounting Standard (see Accounting Standard (AS) 10. 166 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. to the asset. Estimates of future cash flows should not include: 1. Estimates of future cash flows should not include estimated future cash inflows or outflows that are expected to arise from: 1. or 2. Recognition and Measurement of an Impairment Loss If the recoverable amount of an asset is less than its carrying amount. Projections of cash inflows from the continuing use of the asset. and 3. When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates. Accounting for Fixed Assets). the carrying amount of the asset should be reduced to its recoverable amount. Projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and that can be directly attributed. Future capital expenditure that will improve or enhance the asset in excess of its originally assessed standard of performance. Discount Rate The discount rate(s) should be a pre-tax rate(s) that reflect(s) current market assessments of the time value of money and the risks specific to the asset. Future cash flows should be estimated for the asset in its current condition. That reduction is an impairment loss. or 2.
cash outflows or discount rates used to determine the asset’s recoverable amount since the last impairment loss was recognized. CHENNAI 167 . Goodwill In testing a cash-generating unit for impairment. Impairment Loss for a Cash-Generating Unit The impairment loss should be first allocated to goodwill then to the other assets of the unit on a pro-rata basis based on the carrying amount of each asset in the unit.After the recognition of an impairment loss. and b) In determining the value in use of other cash-generating units of the reporting enterprise. an enterprise should identify whether goodwill that relates to this cash-generating unit is recognized in the financial statements. If an active market exists for the output produced by an asset or a group of assets. an enterprise should determine the recoverable amount of the cash-generating unit to which the asset belongs (the asset’s cash-generating unit). In allocating an impairment loss. In case if it is recognized. management’s best estimate of future market prices for the output should be used: a) In determining the value in use of this cash-generating unit. Identification of the Cash-Generating Unit to Which an Asset Belongs If there is any indication that an asset may be impaired. the recoverable amount should be estimated for the individual asset. and c. the depreciation (amortization) charge for the asset should be adjusted in future periods to allocate the asset’s revised carrying amount. when estimating the future cash outflows that relate to the internal use of the output. when estimating the future cash inflows that relate to the internal use of the output. this asset or group of assets should be identified as a separate cash-generating unit. b. on a systematic basis over its remaining useful life. If this is the case. If this is the case. Enterprise shall perform Bottom up test or top down test if required. the carrying amount of the asset should be increased to its recoverable amount. The carrying amount of a cash-generating unit should be determined consistently with the way the recoverable amount of the cash-generating unit is determined. less its residual value (if any). If it is not possible to estimate the recoverable amount of the individual asset. even if some or all of the output is used internally. its net selling price (if determinable). SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. the carrying amount of an asset should not be reduced below the highest of a. its value in use (if determinable). zero Reversal of an Impairment Loss An impairment loss recognized for an asset in prior accounting periods should be reversed if there has been a change in the estimates of cash inflows.
Reversal of an Impairment Loss for Goodwill An impairment loss recognized for goodwill should not be reversed in a subsequent period unless: (a) the impairment loss was caused by a specific external event of an exceptional nature that is not expected to recur. unless the asset is carried at revalued amount in accordance with another Accounting Standard (see Accounting Standard (AS) 10. Accounting for Fixed Assets) in which case any reversal of an impairment loss on a revalued asset should be treated as a revaluation increase under that Accounting Standard. Disclosure For each class of assets. Reversal of an Impairment Loss for a Cash-Generating Unit A reversal of an impairment loss for a cash-generating unit should be first allocated to asset other than goodwill and such reversal should not be increased above the lower of: a) its recoverable amount and b) carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior accounting periods. A reversal of an impairment loss for an asset should be recognized as income immediately in the statement of profit and loss.the increased carrying amount of an asset due to a reversal of an impairment loss should not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior accounting periods. Impairment in case of Discontinuing Operations Enterprise sells discontinuing substantially and in its entirety operation Recoverable amount is determined for the discontinuing operation as a whole Enterprise disposes discontinuing operation on Recoverable amount is determined for individual piece meal basis assets Enterprise abandons discontinuing operation Recoverable amount is determined for individual assets It may be noted that the carrying amount of a discounting operation includes carrying amount of goodwill.However . the financial statements should disclose 168 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. and (b) subsequent external events have occurred that reverse the effect of that event. CHENNAI .
CHENNAI 169 .• • • • • • • • The amount of impairment losses recognized in the statement of profit and loss The amount of reversals of impairment losses recognized in the statement of profit & loss The amount of impairment losses recognized directly against revaluation surplus and The amount of reversals of impairment losses recognized directly in revaluation surplus The event and circumstances that led to the recognition or reversal of the impairment loss For an individual asset: a) The nature of the asset and b) Reportable segment to which asset belongs (as per AS 17) For CGU: a) Description of CGU (whether it is related to business segment or geographical segment – as per AS 17) b) Amount of impairment loss recognized or reversed by reportable segment based on entity’s primary format. Computation of recoverable amount SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.
consistency and accrual principles are the backbone of the accounting principles. An obligating event is an event that creates an obligation that results in an enterprise having no realistic alternative to settling that obligation. APPICABILITY OF THE STANDARD: This statement should be applied in accounting for provisions and Contingent liabilities and in dealing with Contingent assets except: • Those resulting from financial instruments that are carried at fair value. Contingent liabilities and Contingent assets.com) INTRODUCTION The object of introduction of any Accounting Standards is to standardize the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability of financial statements and the reliability to the financial statements.PROVISIONS. timing and amount. If anybody were to look at these concepts. • Those resulting from executory contracts. • Those arising in insurance companies from contracts with policy holders. the settlement of which is expected to result in an out flow from the enterprise of resources embodying economic benefits. The objective of this Standard is also to lay down appropriate accounting for contingent assets. AS 29 is no exception and it too centers on the same basic principles. Other principles include Prudence. CONTINGENT LIABILITIES AND CONTINGENT ASSETS . BACKGROUND OF ACCOUNTING STANDARD 29: Going concern.Radhakrishna Das (rkdasinbox@gmail. • Those covered by other Accounting Standards. one would find that the so called accounting standards designed and drafted by the experts are nothing but the magnification of the basic principles outlined above and solution for every situation in the business that which relates to maintaining books of accounts.AS 29. 170 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. KEY DEFNITIONS USED IN THE STANDARD A provision is a liability which can be measured only by using a substantial degree of estimation. the Institute of Chartered Accountants of India took so many initiatives and has also completed drafting the Indian accounting standards converged with the IFRS. Realizing the fact. A liability is a present obligation of the enterprise arising from past events. CHENNAI . The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature. I’ve discussed a few matters that relate to Accounting Standard 29 –Provisions. matching etc.
based on the evidence available.Contingent liability is a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. If these conditions are not met. its existence at the balance sheet date is considered probable. more likely than not.. In such a case. and (c) A reliable estimate can be made of the amount of the obligation. (b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. Present Obligation In almost all cases it will be clear whether a past event has given rise to a present obligation. no provision should be recognized. or (ii) a reliable estimate of the amount of the obligation cannot be made. First of all provisions. the enterprise recognizes a provision (if the recognition criteria are met). An obligation is a possible obligation if. an enterprise determines whether a present obligation exists at the balance sheet date by taking account of all available evidence. lets break up the standard in to three and then in detail look in to the aspects of the standard. The evidence considered includes any additional evidence provided by events after the balance sheet date. and SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. On the basis of such evidence: (a) Where it is more likely than not that a present obligation exists at the balance sheet date. its existence at the balance sheet date is considered not probable. for example in a lawsuit. for example. PROVISION A provision should be recognized when: (a) An enterprise has a present obligation as a result of a past event. including. based on the evidence available.e. i. the opinion of experts. In rare cases. Now for simplicity. it may be disputed either whether certain events have occurred or whether those events result in a present obligation. An obligation is a present obligation if. Or A present obligation that arises from past events but is not recognized because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation. CHENNAI 171 .
This is especially true in the case of provisions.e. CONTINGENT LIABILITIES: An enterprise should not recognize an contingent liability. an enterprise discloses a contingent liability. The enterprise recognizes a provision for the part of the obligation for which an outflow of resources embodying economic benefits is probable. If that is the case.g. It is only those obligations arising from past events existing independently of an enterprise's future actions (i. In the extremely rare case where no reliable estimate can be made. product warranties or similar contracts) the probability that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Probable Outflow of Resources Embodying Economic Benefits: For a liability to qualify for recognition there must be not only a present obligation but also the probability of an outflow of resources embodying economic benefits to settle that obligation. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability. an outflow of resources or other event is regarded as probable if the event is more likely than not to occur. it may well be probable that some outflow of resources will be needed to settle the class of obligations as a whole. the part of the obligation that is expected to be met by other parties is treated as a contingent liability. They are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. Where there are a number of similar obligations (e. the future conduct of its business) that are recognized as provisions. a provision is recognised (if the other recognition criteria are met). Past Event: A past event that leads to a present obligation is called an obligating event.e. Where it is not probable that a present obligation exists. the enterprise discloses a contingent liability. a liability exists that cannot be recognised. both of which would lead to an outflow of resources embodying economic benefits in settlement regardless of the future actions of the enterprise. An event that does not give rise to an obligation immediately may do so at a later date. Except in extremely rare cases. Where details of a proposed new law have yet to be finalized. Reliable Estimate of the Obligation The use of estimates is an essential part of the preparation of financial statements and does not undermine their reliability. Although the likelihood of outflow for any one item may be small. It is only disclosed unless the possibility of the outflow is remote. In many cases it will be impossible to be virtually certain of the enactment of a law until it is enacted. because of changes in the law. Examples of such obligations are penalties or clean-up costs for unlawful environmental damage.(b) Where it is more likely that no present obligation exists at the balance sheet date. Where an enterprise is jointly and severally liable for an obligation.. an enterprise will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is reliable to use in recognizing a provision. For the purpose of this Standard. unless the possibility of an outflow of resources embodying economic benefits is remote. CHENNAI . which by their nature involve a greater degree of estimation than most other items. a provision is recognized in accordance with this standard. That liability is disclosed as a contingent liability (see paragraph 68). 172 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. the probability that the event will occur is greater than the probability that it will not. i. unless the possibility of an outflow of resources embodying economic benefits is remote. an obligation arises only when the legislation is virtually certain to be enacted.
the asset and the related income are recognized in the financial statements of the period in which the change occurs. including increases to existing provisions. Adjusting expenditures against a provision that was originally recognized for another purpose would conceal the impact of two different events. APPLICATION OF THE RECOGNITION AND MEASUREMENT RULES Future Operating Losses: Provisions should not be recognized for future operating losses as they do not meet the definition of liability indicated above. An enterprise cannot be committed to the sale until a purchaser has been identified and there is a binding sale agreement. A provision should be used only for expenditures for which the provision was originally recognized.CONTINGENT ASSETS: An enterprise should not recognize a contingent asset. an enterprise should disclose: (a) The carrying amount at the beginning and end of the period. Changes and use of provisions: Provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. the expense relating to a provision may be presented net of the amount recognized for a reimbursement. Until there is a binding sale agreement. the enterprise will be able to change its mind and indeed will have to take another course of action if a purchaser cannot be found on acceptable terms. The amount recognized for the reimbursement should not exceed the amount of the provision. Contingent assets are assessed continually and if it has become virtually certain that an inflow of economic benefits will arise. Also a restructuring provision should include only the direct expenditures arising from the restructuring. This is in consonance with the prudence concept. DISCLOSURES For each class of provision. An enterprise tests these assets for impairment under Accounting Standard (AS) 28. the reimbursement should be recognized when. CHENNAI 173 . In the statement of profit and loss. Impairment of Assets.e. The reimbursement should be treated as a separate asset. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation. It is usually disclosed in the report of the approving authority where an inflow of economic benefits is probable. where we had earlier indicated that most of the accounting standards revolves around the same underlying principles and their presence has strongly commended for the principles to be followed. A contingent asset is not disclosed in the financial statements.. No obligation arises for the sale of an operation until the enterprise is committed to the sale. it is virtually certain that reimbursement will be received if the enterprise settles the obligation. Reimbursements & Restructuring: Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party. and only when. A provision for restructuring costs is recognized only when the recognition criteria for provisions set out in paragraph 14 are met. and (d) Unused amounts reversed during the period: SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Only expenditures that relate to the original provision are adjusted against it. there is a binding sale agreement. the provision should be reversed.e. (b) Additional provisions made in the period. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. (c) Amounts used (i. incurred and charged against the provision) during the period. i.
Where necessary to provide adequate information. But as per IAS 37 disclosure is required for contingent assets in the financial statements where the inflow of economic benefits is probable. where practicable: (a) An estimate of its financial effect. Contingent Assets: Contingent assets in both AS and IAS have no place in the financial statements.An enterprise should disclose the following for each class of provision: (a) A brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits.PROVISIONS. the amount of provision should be the present value of the expenditure expected to settle that obligation. Unless the possibility of any outflow in settlement is remote. stating the amount of any asset that has been recognized for that expected reimbursement. an enterprise should disclose the major assumptions made concerning future events. an enterprise should disclose for each class of contingent liability at the balance sheet date a brief description of the nature of the contingent liability and. CONTINGENT LIABILITIES AND CONTINGENT ASSETS: Discounting of provision: IAS 37 requires that where the effect of the time value of money is material. (b) An indication of the uncertainties about those outflows. (c) The amount of any expected reimbursement. Present obligation of onerous contracts is not required to be recognized as it amounts to recognition of loss of future periods in the current year income statement. CHENNAI . and (c) The possibility of any reimbursement. Provision for Onerous contracts excluded: Onerous contract are those in which the unavoidable costs of meeting the obligation under the contracts exceed the benefits expected to be received. 174 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. as addressed in paragraph 41. COMPARISION WITH IAS 37 . measured (b) An indication of the uncertainties relating to any outflow. Our Accounting Standard centers around the historical cost concept and discounting is not allowed.
CHENNAI 175 .SUMMARY OF THE STANDARD: SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.
OBJECTIVE The objective of this standard is to prescribe the principles for recognising and measuring the financial assets and financial liabilities. cheques. APPLICABILITY AS 30.P. OBJECTIVE 2. industrial and business entities other than small and medium sized entities (SMEs). in associates ( AS 23) and in Joint ventures (AS 27) • Items of assets and liabilities such as employee benefits. COMPARISON WITH IAS AND IFRS Financial Instrument is a document which has a monetary value such as draft.FINANCIAL INSTRUMENTS: RECOGNITIION AND MESUREMENT . MEASUREMENT 8. However for the purpose of AS -30. SCOPE This standard should be applied by all entities to all types of instruments except: • Interest in subsidiaries(AS 21). DEFINITIONS 5. APPLICABILITY 3. SCOPE 4.M. IMPAIRMENT 9.com) 1. • Contracts and obligations under share based payment transaction etc. bills of exchange and promissory notes. DERECOGNITION 10. HEDGE ACCOUNTING 11. Shankar Ganesh (shankar@sandbca. Insurance contracts. DERIVATIVES 6. RECOGNITION 7.AS 30 . TYPES AND CRITERIA FOR HEDGE ACCOUNTING 12. leases. ‘Financial instruments’ includes wide spectrum of assets and liabilities of entities and is not limited to investments or merely capital market instruments. which are specifically dealt with by other standards are excluded from the coverage • Rights to receive reimbursements against provisions already made to meet certain obligations as per AS 29 • Commodity derivatives 176 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. AS 31 and AS 32 will be applicable to all commercial. The principles for presentations of financial assets and liabilities in the financial statements are prescribed in AS -31 “Financial Instruments: Presentation”. CHENNAI . Another Accounting Standard namely “Financial Instruments : Disclosures (AS – 32) prescribes the requirement for disclosing information about financial instruments through notes and policies to financial statements.
• Equity instrument of another entity. certain loan commitments and any contract to buy or sell a non financial item that can be settled net or if such a contract bears the characteristics of a financial instrument.• Contract between an acquirer and vendor in a business combination to buy or sell an acquire at a future date. FINANCIAL LIABILITIES: • Contractual obligation to deliver cash or another financial asset or to ex-change financial asset or liabilities under potentially unfavourable conditions • Certain contracts settled in the entity’s own equity EQUITY INSTRUMENTS: Contract evidencing a residual interest in the assets of an entity after deducting all of its liabilities FOUR CATEGORIES OF FINANCIAL INSTRUMENTS Category Financial assets at fair value through profit or loss Definition • • • Financial assets held for trading Derivatives.financial assets or liabilities under potentially favourable conditions. But includes derivative contracts. DEFINITIONS: A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. would be covered. • Contractual right to receive cash or another financial asset or to exchange . • Certain contracts settled in the entity’s own equity. CHENNAI 177 . financial contracts. FINANCIAL ASSETS : • Cash. unless accounted for as hedges Financial asset designated to this category under the fair value option Loans and receivables Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market Non-derivative financial assets with fixed or determinable payments and fixed maturity that the entity has the positive intent and ability to hold to maturity • • All financial assets that are not classified in another category are classified as available-for-sale Any financial asset designated to this category on initial recognition Held-to-maturity investments Available-for-sale financial assets SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION.
with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand alone derivative instrument. Foreign exchange rate. Security price. • It requires no or little initial net investment.CATEGORIES OF FINANCIAL LIABILITIES Category Financial liabilities at fair value through profit or loss Definition • • Financial liabilities held for trading Financial liability designated as at fair value through profit or loss on initial recognition (fair value option) Other financial liabilities – at amortised cost All financial liabilities that are not classified at fair value through profit or loss FINACIAL GUARENTEE CONTRACTS “A contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the original or modified terms of a debt instrument” DERIVATIVES: A Derivative is a financial instrument. including derivatives. an entity is required to separate the derivatives from the host contract and account for that derivative by treating it as an independent financial instrument. EMBEDDED DERIVATIVES An embedded derivative is a component of a hybrid instrument that combines the derivative and a non derivative host contract. Commodity price. equity index. CHENNAI . or other contract within the scope of this standard with all the following characteristics: • Fair value changes in response to the change in underlying Interest rate. should be recognised on the balance sheet when the entity becomes party to the contractual provisions of the instrument. or Other index. 178 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. MEASUREMENT: INITIAL MEASUREMENT: • Measured at fair value on initial recognition. RECOGNITION: All financial assets and financial liabilities. movements in foreign exchange etc. • Settled at a future date. The standard stipulates that subject to certain conditions being met. Financial Assets should be recognised at the fair value of the consideration given while the financial liability should be recognised at the fair value of the consideration received. It would also include contracts whose values are linked to movements in certain indices or variables such as an inflation related index. Credit rating.
lowinterest or interest-free loans by a shareholder or government). • Bankruptcy or financial reorganisation of the borrower. less any impairment losses previously recognised– for available-for-sale financial assets. • Granting of a concession by the lender. • No Active Market: valuation techniques using maximum market input and minimum entity specific input. the entity should assess whether there is objective evidence of impairment for an asset or group of financial assets. VALUE CHANGES P&L Not relevant (unless impaired) Not relevant (unless impaired) Equity (unless impaired) P&L Not relevant P&L SUBSEQUENT MEASUREMENT: INSTRUMENT MEASUREMENT Financial assets at fair value Fair value through profit or loss Held-to-maturity investments Amortised cost (effective interest rate) Loans and receivables Amortised cost (effective interest rate) Available-for-sale Fair value Financial liabilities at fair value Fair value through profit or loss or designated as such Other liabilities Amortised cost Derivatives Fair value FAIR VALUES: The fair value of a financial instrument in the different cases is as follows: • Active Market: Unadjusted published price quotations. At each balance sheet date. and the acquisition cost (net of any principal repayment and amortisation) and current fair value. • Fair values of equity instruments: in the absence of market quotation are to be based on estimates or cost less impairment (as a last resort and only if impossible to make reliable estimates).. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. • Significant financial difficulty of the issuer/obligor. Applies to all financial instruments – whether or not negotiated on an arm’s length basis (e. • Measurable decrease in the estimated future cash flows. • Default or breach of contract. IMPAIRMENT: A financial asset or a group of financial assets is impaired if. and only if. • Disappearance of an active market for the assets concerned.for loans and receivables or held-to-maturity investments. CHENNAI 179 . there is objective evidence of impairment as a result of one or more events that occurred after initial recognition.g. An impairment loss is measured as the difference between: the asset’s carrying amount and the present value of estimated future cash flows . and the loss event has an impact on estimated future cash flows.• • Transaction costs are included in the initial measurement of financial instruments that are not measured at fair value through profit or loss.
De. Different companies are exposed to different types of financial risks such as risks related to interest rates or exchange rates. • that is attributable to a particular risk. or an identified portion of any of the above two. 180 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. CHENNAI . Entities use a risk management technique called hedging. HEDGING INSTRUMENT: The following can be designated as hedging instruments: • All derivatives with third parties. HEDGED ITEM: To qualify for designation the hedged item should create an exposure to risk that ultimately affects profit or loss. risk. it does either of the following: • Transfers the contractual rights to receive the cash flows of the financial asset. C. HEDGE ACCOUNTING: Entities face many business risks and most significant risk is financial risk. except for net written options.recognition is the end of the life cycle of an asset or liability that begins with its recognition. An enterprise derecognises its financial asset only when: • The contractual rights to the cash flow from the financial asset expire. In financial sense also hedge stands for defence against financial risk using derivative or non derivative instruments. Hedging instrument cannot be designated for a portion of its life. re. • It transfers the financial asset and the transfer qualifies for de-recognition. • Firm commitments or highly probable forecast transactions. responsibility etc. subject to certain conditions. and • could affect P&L. AS 30 prescribes the principles for A.DERECOGNITION: De-recognition of financial instrument means removal of an asset or a liability from the books as a result of sale payment.negotiation or default by the counter party. • Net investments in foreign operations. The following can be designated as hedged items: • A single or group of assets/liabilities. • A portion of the cash flows on any financial asset/liability. an unrecognised firm commitment. • Non-financial assets/liabilities for foreign currency risk or the entire risk. duty. • Retains the contractual rights to receive the cash flows of the financial asset but assumes a contractual obligation to pay the cash flows to one or more recipients. An enterprise transfers a financial asset only if. Net positions cannot be designated as hedged items. TYPES OF HEDGES: FAIR VALUE HEDGES: Hedge of exposure to changes in fair value of: • a recognised asset or liability. De-recognition combined with recognition of new liability. • Non-derivatives for a hedge of foreign currency risk. Partial de-recognition. Complete de-recognition of financial asset. B. • Combination of two or more derivatives or non-derivatives. Hedging is shelter one’s self from danger. whereby the entity tries to reduce the impact of the future potential costs or losses.
• Ineffective portion of gain or loss on hedging instrument recorded in P&L. • At inception.9. re-assessment of embedded derivative issued by the International Financial reporting interpretation committee. CRITERIA FOR HEDGE ACCOUNTING: • Exposure must be due to specific hedge able risk that ultimately affects earnings. thus costs/benefits of hedge accounting should be considered.. • Accounting treatment similar to that of a cash flow hedge. The rules are strict. COMPARISON WITH IAS AND IFRS: As – 30 Financial Instruments: Recognition and measurements is based on International Accounting standard (IAS) 39: Financial Instruments: Recognition and measurement and Incorporates IFRIC. and • could affect P&L. • Formal documentation is required at the inception of the hedge and must include: o Identification of the hedging instrument and the hedged item or transaction. o The risk management objective and strategy for undertaking the hedge. • The hedging relationship should be formally designated. in equity. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. • The hedge must remain highly effective during the whole period of the hedge. • Release to P&L when the net investment is sold. HEDGES OF A NET INVESTMENT IN FOREIGN OPERATIION • Must meet requirements for hedge accounting. o The nature of the risk being hedged. the hedge must be expected to be highly effective and effectiveness must be reliably measurable.e. There are no material changes between AS 30 and IAS 39 and IFRIC 9.CASH FLOW HEDGES: Hedge of exposure to variability in cash flows that is: • attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (also an inter-company one). • Effective portion of gain or loss on hedging instrument recorded in the same manner as the foreign currency translation gain or loss i. o How effectiveness will be assessed. CHENNAI 181 .
CHENNAI . PRESENTAION REQUIREMENTS IN CASE OF SETTLEMENT IN ENTITY’S OWN EQUITY INSTRUMENTS 10. Scope: Same as AS30. PRESENTATION REQUIREMENTS IN THE CASE OF INTEREST. sale or usage requirements. in the same way as a financial instrument is traded. The standard is applied to buy or sell a non financial item that can be settled net in cash or by exchanging with financial instruments.com) TABLE OF CONTENTS 1. Classification of the financial instrument is to be made from the perspective of the issuer into 3 categories – financial assets. and the entity complies with the statutory requirements of the governing law.S. APPLICABILITY 2. PRESENTATION OF OFFSETTING A FINANCIAL ASSET AND A FINANCIAL LIABILITY Applicability: Same as AS30 Statutory Requirements Vs AS 31: Where an entity is required to present any financial instrument say as an asset or a liability or an income or an expense. STATUTORY REQUIREMENTS VS AS31 3. SCOPE 5. it shall be said to meet the requirements of the Standard. Deepika Jain (deepika@sandbca. PRESENTATION REQUIREMENTS IN THE CASE OF TREASURY SHARES 14. DIVIDENDS. dividends. PRESENTATION OF SETTLEMENT OPTIONS 12. LOSSES AND GAINS 15. Objective: The objective of the standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. except that the contract was entered into and held for the purpose of receipt or delivery of a non financial item in accordance with the entity’s purchase. the classification of related interest. The standard also gives an inclusive list of the transactions that will be regarded as settlement net in cash or by exchanging financial instruments. PRESENTATION REQUIREMENTS WHERE THERE IS NO CONTRACTUAL OBLIGATION TO DELIVER CASH OR ANOTHER FINANCIAL ASSET 9.AS 31 – FINANCIAL INSTRUMENTS – PRESENTATION . PRESENTATION OF CONTINGENT SETTLEMENT PROVISIONS 11. PRESENTATION REQUIREMENTS IN THE CASE OF CONSOLIDATED FINANCIAL STATEMENTS 13. PRESENTATION OF LIABILITIES AND EQUITY 8. 182 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. DEFINITIONS 6. losses and gains and the circumstances in which FA and FL should be offset. The standard also complements the Recognition and Measurement principles and the Disclosure requirements as per AS30 and AS 32 respectively. EXAMPLES OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES 7. financial liabilities and equity instruments. OBJECTIVES 4.
e. Contractual right to receive cash in future and corresponding financial liabilities representing a contractual obligation to deliver cash in future such as: Trade accounts receivable and payable Bills receivable and payable Loans receivable and payable Bonds receivable and payable Deposits and advances. The standard provides definitions for the following terms: a. Financial Instruments b. A contractual right/obligation to receive. Financial Liability d.Definitions: Same as explained under AS30. deliver or exchange financial instruments is a financial instrument in itself.@8% interest paid perpetually. g. Perpetual Debt instruments normally provides the holder the contractual right to receive payments on account of interest at fixed dates extending into an indefinite future either with or without the right to receive the principal. Equity Instrument e. Cash Deposit with Bank/Financial Institutions. In each of the cases the parties’ contractual right to receive cash is matched with the other parties’ obligation to pay against the same. f. respectively. Contracts and financial instruments can take various forms and therefore always need not be in writing. trusts and government agencies.X . Here the holder of the instrument holds it as a financial asset and the issuer holds it as a financial liability as the instrument creates an obligation on the part of the issuer. i. Common examples of Financial Assets: i. partnerships. When A gives a SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. if it will ultimately lead to receipt/acquisition or payment/issue of cash/equity instruments. d.Financial Asset-As the depositor has a contractual right to obtain cash from the institution/bank or draw a cheque/similar instrument in the favor of the creditor in payment of the financial liability for the balance standing at the account. a promissory note payable in government bonds gives the holder the contractual right to receive and the issuer the obligation to deliver government bonds and not in cash. Entity includes individuals. A contractual right to exercise a contractual right of requirement to satisfy a contractual obligation may be absolute/contingent on the occurrence of a future event.1000/. incorporated bodies. a chain of contractual rights and obligations meet the definition of financial instrument. For example. Currency (Cash) – Financial Asset – since it is a medium of exchange and therefore the basis on which all transactions are measured and recognized in the financial statements b. with principal payment on the part of Mr. c. Therefore. it is also to be treated as a financial asset of the promissory note holder and a financial liability of the promissory note issuer. An instrument will be called a financial instrument even where the economic benefit to be received or given up is a financial asset other than cash.X being Rs. Since the promissory note is the basis of receipt of the financial asset. Examples of Financial Assets and Financial Liabilities: a. Say an entity issues a perpetual financial instrument in the form of perpetual bond. say an entity issues a perpetual bond to Mr. Fair Value Contracts and contractual means the agreement between 2 parties having a clear economic consequence thereby the parties have little or no discretion to avoid the agreement usually because the agreement is not enforceable by law. These bonds are treated as financial assets as they represent the obligation on the part of the government to receive cash. For example. CHENNAI 183 . Financial Asset c. e.
Financial instruments can be classified into 2 types: Primary instruments (such as receivables. who in turn pays a series of streamlined payments which includes payments towards principal and the interest. forward. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. p. The contract is a clear case of financial guarantee. A contract by an entity that gives right to reacquire a fixed number of equity instruments in exchange of fixed number of own equity instruments for delivering fixed amount of cash/another financial asset is not a financial asset of the entity. Similarly deferred revenue and warranty obligations are not financial assets as the outflow of benefits associated with them is delivery of goods and services rather than a contractual obligation to pay cash or another financial asset. As control of such physical and intangible assets creates an opportunity to generate cash or another financial asset but such assets cannot be presented to receive cash or another financial instrument. A contract involving receipt or delivery of physical asset does not give rise to a financial asset of one party and a financial liability of another party unless the payment is deferred past the date on which the physical assets are transferred. deliver or exchange a financial asset. n. Here the contract assumes the form of a financial instrument because. Under operating lease. Therefore a financial lease is regarded as a financial instrument and an operating lease is not a financial instrument. Equity instruments include non puttable equity shares. futures. some classes of preference shares. m. Instead the consideration paid is deducted from equity. q. Under financial lease. k. Certain contracts are commodity linked but settlement does not take place through commodity. warrants and written call options that allow the holder to subscribe for or purchase of fixed number of non puttable equity shares in the issuing entity in exchange of fixed amount of cash or another financial asset. The lessor therefore continues to account for the leased asset itself rather than recording the receivables under the same.h. plant and equipment. the lessor passes on the leased asset to the lessee. Liabilities/assets that are created due to statutory requirements rather than contractual requirements are neither financial assets nor financial liabilities. interest rate swaps and currency rates swaps) Contracts to buy or sell non financial items do not constitute a financial asset as the contractual right of one party to receive a non financial asset/service and the corresponding obligation of the other party do not create a present obligation to receive. B shall pay A. rather it takes place through cash. Such guarantee takes the form of contingent financial asset on the part of A and Contingent financial liability on the part of B. for example goods sold on credit. guarantee to B that in case of default in payment by C. l. Such contract constitutes a financial instrument. i. o. The settlement price of such contracts is price determined based on the commodity prices though the actual settlement takes place through cash. the lessor provides the lessee the right to use the asset upon the payment of a fee. even though such assets and liabilities are not always recognized in the financial statements. Physical assets such as inventories. Assets such as prepaid expenses where the future economic benefit is the right to receive goods or services rather than receiving cash/financial asset are not financial assets. The lessor accounts for amounts receivable under the lease contract rather than recording the asset itself. CHENNAI 184 . j. B’s payment to A shall take place on default by C – obligation arising on account of some past event. leased assets and intangible assets are not regarded as financial assets. payables and equity instruments) and derivative instruments (such a financial options.
Equity is the residual interest in the assets after deducting its financial liabilities for redemption at fair value. Members’ shares in a cooperative society are equity if the entity has an unconditional right to refuse redemption of the members’ shares or if the governing laws. A financial instrument that gives the holder the right to put it back to the issuer for cash or another financial asset is a financial liability. For example. ii. Presentation requirements where there is no contractual obligation to deliver cash or another financial asset: a. When preference shares are not redeemable. The substance of the financial instrument governs the classification rather than its legal form. existence of a contractual obligation needs not be in existence. e. on initial recognition. Distributions to the holders of the equity instruments are recognized directly as revenue reserves and surplus. financial asset or an equity instrument in accordance with the definitions of the terms and the substance of the contractual obligation. the shares are equity instruments. b. a financial and non financial liability. Unconditional prohibition of redemption of members’ shares can be absolute. into financial liability. statute. c. Preference shares may be issued with various rights – therefore they can be either a financial liability or an equity instrument. f. bye laws. Financial instrument comprises of a financial and non financial asset. as well as. The contractual right of the holder of the financial instruments to request redemption of preference shares does not by itself require that the instrument is classified as financial liability. dividends or otherwise. h. dividends and other returns relating to financial liabilities are classified as expenses. d. Such financial instrument gives the option to one party to exchange a financial asset for a non financial asset. if the redemption reduces the number of members/paid up capital below minimum i. the obligation meets the definition of a financial liability.r. For example: i. If an entity has a conditional right to avoid delivering cash or another financial asset to settle a contractual obligation. Some financial instruments assume legal form as equity but are liabilities in substance. A financial instrument that does not explicitly establish a contractual obligation to deliver cash or another financial asset may establish obligation indirectly through its terms and conditions and is therefore a financial liability. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. the instrument is an equity instrument if and only if the conditions given in the definitions are satisfied. an oil linked bond may give the holder the right to receive a stream of interest payments (fixed) along with repayment of principal on maturity with an option to exchange the same with fixed quantity of oil. If the distributions to the holder of preference shares are at the discretion of the issuer. regardless of whether the payment is towards interest. the appropriate classification is determined by the other rights attached to them. Interest. The option exercised by the holder shall be based on the relative price of oil. etc prohibit the redemption of the members’ shares. A preference share that provides for mandatory redemption by the issuer for a fixed amount or gives the holder the right to redeem the financial instrument on or after a particular date for a fixed amount is called a financial liability. Presentation Liabilities and Equity The issuer of the financial instrument should classify the instrument or its parts. For differentiating a financial liability from an equity instrument. j. g. When the issuer applies the definitions to differentiate a financial liability from an equity instrument. For example a holder of financial instrument may be eligible to receive a pro rate share of any dividends or other distributions of equity although there is no obligation on the part of the issuer of the instrument to deliver in such a manner. CHENNAI 185 .
Presentation for offsetting a financial asset and a financial liability: A financial asset and a financial liability should be offset and the net amount should be presented in the balance sheet if and only if: i. It is a financial liability of the issuer unless: i. No gain or loss should be recognized in the statement of profit and loss on the purchase. does not make it a equity instrument. dividends. Thus a contract requiring a settlement in cash/variable number of entity’s own equity instruments on the occurrence of a highly abnormal event is an equity instrument. after netting off any related income tax benefit. Presentation of Contingent Settlement Provisions: A financial instrument might require the delivery of cash or another financial asset. it assumes the proposition of a financial asset or a financial liability unless all the settlement alternatives result in it satisfying the definition of the equity instrument. to settle it in such a manner that it results in a liability classification and vice versa.Presentation requirements in case of settlement in entity’s’ own equity instruments a. ii. 186 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Distributions to the holders of the equity instruments should be debited to the appropriate equity account by the entity. Presentation requirements in the case of consolidated financial statements: When classifying a financial instrument in the consolidated financial statements. Presentation of Settlement Options: When a derivative financial instrument gives one party a choice over how it is being settled (the modecash/own equity instruments). A contractual right/obligation to receive or deliver a number of its own equity shares against the amount receivable/payable. c. On the other hand a contract that will be settled by the entity receiving or delivering a fixed number of its own equity instrument for a fixed amount of cash or another financial instrument is an equity instrument. to settle it towards a financial liability. It still takes the form of a financial liability/asset. sale or cancellation of the entity’s own instruments. dividends. The entity intends to settle the amount on a net basis. b. Transaction costs of an equity transaction should be deducted from equity after netting off any related income tax benefit. CHENNAI . A contract that contains a obligation for an entity to purchase its own equity instruments for cash or another financial asset gives rise to a financial liability for the present value of the redemption amount. A contract that involves settlement of fixed number of entity’s own equity instruments in exchange of the variable amount of cash/financial asset is a financial asset or a financial liability. Presentation requirements in the case of treasury shares: If an entity reacquires its own equity instruments those instruments should be deducted from equity. The issuer can be required to settle the obligation in cash or financial asset only in the event of liquidation of the issuer. Presentation requirements in the case of interest. Consideration paid or received should be directly recognized in equity. in the event of occurrence/non occurrence of a uncertain future event that are beyond the control of both the issuer and the holder of the instrument. in determining whether the group as a whole has an obligation to deliver cash or another financial asset. The part of the contingent settlement agreed upon is not genuine. or to realize the asset and settle the liability simultaneously. losses and gains: Interests. The entity has a legally enforceable right to set off the recognized amounts. d. losses or gains should be treated as an income/expense in the statement of profit and loss. the entity considers all terms and conditions agreed upon between the members and the holders of the instruments. ii. Such shares are called as treasury shares may be acquired and held by the entity or by other members of the consolidated group.
AS 32 – FINANCIAL INSTRUMENTS – DISCLOSURE . DISCLOSURE OF NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS 17. Statutory Requirements Vs AS 32: Where an entity is required to disclose any financial instrument say as an asset or a liability or an income or an expense. exposure and the extent of risks from financial instruments the entity faces as at the reporting date and during the period and how the entity manages the risks. and b. DISCLOSURE OF ALLOWANCE ACCOUNT FOR CREDIT LOSSES 11. The Standard also complements the recognition measurement and presentation requirements of AS 30 and AS 31 respectively. SCOPE 6. which will enable the users of the Financial Statements to evaluate: a. QUALITATIVE DISCLOSURES 18. CLASSIFICATION OF THE INSTRUMENTS 7. The nature. Objective: The objective of this standard is to require entities to provide disclosures in their financial statements.com) TABLE OF CONTENTS 1. DISCLOSURE REQUIREMENTS FOR DEFAULTS AND BREACHES 13. Scope: SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. DISCLOSURE REQUIREMENTS OF CREDIT RISKS 20. DISCLOSURE REQUIREMENTS OF MARKET RISKS Applicability: Same as AS – 30 Why AS 32: The requirement of this standard is met with when the entity discloses such information that enables the users of the financial statements to evaluate the significance of the financial instruments for ascertaining its financial position and performance. DISCLOSURE REQUIREMENTS FOR COLLATERAL 10. OTHER DISCLOSURES 15. STATUTORY REQUIREMENTS VS AS 32 4. and the entity complies with the statutory requirements of the governing law. DISCLOSURE OF COMPOUND FINANCIAL INSTRUMENTS WITH MULTIPLE EMBEDDED DERIVATIVES 12. WHY AS 32? 3. DERECOGNITION 9. DISCLOSURE REQUIREMENTS OF LIQUIDITY RISKS 21. it shall be said to meet the requirements of the Standard. APPLICABILITY 2. CHENNAI 187 . DISCLOSURE OF FAIR VALUE 16. DISCLOSURE REQUIREMENTS IN STATEMENT OF PROFIT AND LOSS AND EQUITY 14. QUANTITATIVE DISCLOSURES 19.S. Deepika Jain (deepika@sandbca. OBJECTIVES 5. The importance of the financial instruments in ascertaining the financial position and performance . RECLASSIFICATION 8.
The entity believes that using an alternative method would represent the amount of change in the fair value due to credit risk being associated with it. At cost or amortized value rather than at fair value or b. Additionally. the financial liability at fair value through profit or loss should indicate i. ii. determined as: i. the financial assets at fair value through profit or loss should indicate i. Available for sale financial assets e. The amount of change in its value is not owing to market risk – owing to changes in the market conditions such as changes in the benchmark interest rates. In case of financial assets/financial liabilities at fair value through profit or loss account. If the entity believes that the disclosures it has given to comply with the above requirements is not giving a true representation of the change in the fair value of the financial asset or financial liability owing to the changes in the credit risk. a. The Standard also requires the entity to provide sufficient information that would aid reconciliation of the line items presented in the Balance Sheet. commodity price. CHENNAI . 188 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. It also includes contracts to buy or sell a non financial item which are within the meaning of AS30. ii. foreign exchange rate or index of price or rates. it should disclose the amount reclassified into or out of each of the category and the reasons for such a reclassification. Classification of the instruments: Disclosure requirements of this standard state that the entity groups the financial instruments into classes that are appropriate to the nature and characteristics of the information required. The amount by which any related credit derivatives/similar instruments mitigate that maximum exposure t the credit risk iii. Financial liabilities at fair value through profit or loss showing separately those instruments that are designated upon initial recognition and those instruments that are held for trading. Financial liabilities measured at amortized cost.Same as AS 30. Reclassification: If the entity has reclassified a financial asset in either of the following ways via. The difference between the carrying amount and the amount the entity would be contractually liable to pay at maturity to the holder of the obligation. the reasons for reaching such conclusions and the relevant factors. At fair value rather than at cost or amortized cost. Additionally. The amount of change in the fair value of the financial asset or financial liability during the period and cumulatively owing to the changes in the credit risk. The entity should also disclose a. it should disclose a. Loans and receivables d. f. c. Held to maturity investments c. b. The amount of change In the Fair value of any related credit derivatives/similar instruments has occurred during the period/cumulatively since the loan or receivable was designated. The methods used to comply with the above mentioned requirements b. For Balance Sheet: The carrying amount of each of the following categories should be disclosed either in the Balance sheet or in the notes: a. Additional scope covered is that the standard is applicable to recognized and derecognized financial instruments within the meaning of AS30. b. Financial assets at fair value through profit or loss account showing separately those instruments that are designated upon initial recognition and those instruments that are held for trading. The maximum exposure to credit risk as at the reporting date.
b. Whether the default was remedied or the terms of the loans payable were renegotiated before the financial instruments were authorized for issue. sinking fund or redemption terms of the loans payable. For loans payable recognized at the reporting date. showing separately those assets or liabilities that are designated upon initial recognition and those that are held for trading as per AS 30. it should disclose the existence of such features. Therefore.Derecognition: An entity may have transferred financial assets in such a way that a part or the whole of the financial assets do not qualify for Derecognition. instead of reducing it from the carrying value of the asset. gains or losses either on the face of the financial instruments of in the notes: a. The fair value of the collateral held. The terms and conditions associated with the use of its collateral. b. the entity should disclose: i. Disclosure requirements for Collateral: a. For any other breaches of loan agreement. Collateral issued by the entity: An entity should disclose the carrying amount of the financial assets pledged as collateral for liabilities/contingent liabilities including such amounts to the extent of reclassification and the terms and conditions of the pledge. iii. Had the entity continued to recognize all of the assets. b. CHENNAI 189 . Financial assets or financial liabilities at fair value through profit and loss. it should disclose a reconciliation of changes in the account during the period for each class of such financial assets. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. it should disclose: i. Disclosure of compound financial assets with multiple embedded derivatives: If an entity has an instrument that contains both liability and an equity component in it and the instrument holds such multiple embedded derivatives whose values are interdependent. The carrying amount of the loans payable in default at the reporting date. gains and losses: An entity should disclose the following items of income. the total carrying amount of the original assets. the entity should disclose the information given in a. interest. b. The nature of the risks and rewards to which the entity remains exposed. d. c. Disclosure requirements for defaults and breaches: a. ii. The details of defaults in principal. Collateral issued to the entity: if the entity holds a collateral (financial/non financial assets) and is permitted to sell or repledge the collateral even in the absence of default by the owner of the collateral. the amount of the assets the entity continues to recognize and the carrying amount of the liabilities. The fair value of the collateral sold or repledged and the obligation of the entity to return the same iii. ii. Disclosure requirements in Statement of profit and loss and equity: Items of income. expenses. the entity should disclose for each class of financial assets: a. The nature of the assets. Disclosure of Allowance account for credit losses: When the financial assets are impaired with credit losses and the entity records such impairment in a separate account called allowance account (for individual impairments or collectively for all impairments in the same account). expense. c above provided the breach has permitted the lender to demand accelerated repayment. the carrying amounts of such assets and all associated liabilities. If the entity continues to recognize the assets to the extent they are having a continuing involvement. No such disclosure is required if the breaches were remedied/terms were negotiated before the reporting date.
The periods when the cash flows are expected to occur and when they are expected to affect profit and loss. Financial statements should also disclose the ineffectiveness recognized in the statement of profit and loss arising from cash flow hedge and from net investments from foreign operations. an entity should disclose the fair value in a way that permits it to be compared with its carrying amount. For all categories of hedges. b. showing separately the amount of gain or loss recognized directly in the equity or such amounts that are removed from equity and are recognized in the statement of profit and loss for the period. CHENNAI . a. c. Description of financial instruments designated as hedging instruments and their fair values as at the reporting dates. Disclosure of Fair Value: a. Financial liabilities measured at amortized cost. The amount of impairment loss for each class of financial assets needs to be disclosed separately. Trusts and other fiduciary activities that result in the holding or investing of assets on behalf of individuals. An entity should also disclose the methods. For each class of financial asset/financial liabilities. For cash flow hedge in particular the entity should disclose. Available for sale financial assets. c. To check if the amount was recognized in the appropriate equity account. Financial assets or liabilities that are not at fair value through profit or loss. the entity should group the financial assets/financial liabilities into classes. Description of forecast transaction for which hedge accounting has been used earlier and is not expected to occur in the future. b. used in preparation of the financial statements and other accounting policies used which are relevant to the understanding of the financial statements. The amount that was removed from the appropriate equity account during the period and included in the initial cost of other carrying amount of a non financial asset or a non financial liability. Hedge Accounting: An entity should disclose the following separately for each type of hedge: a. Description of each type of hedge. b. b. the entity should also disclose the gains or losses on the hedging instrument and on the hedged item attributable to hedged risk. 190 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Interest income for impairment loss for each class of financial assets need to be disclosed. assumptions applied in determining the fair value. The amount that was removed from the appropriate equity account and included in the statement of profit and loss for the period. d. Held to maturity instruments. Loans and receivables. e. In disclosing its fair values. the measurement basis. and retirement benefit plans and other institutions. The nature of the risks. The entity should also disclose the total interest income and the total expense using effective interest method for such financial assets and liabilities that are not fair value through profit and loss account. Other Disclosures: Accounting Policies: The entity should summarize the significant accounting policies used. e. d. Fee income and other expense (that are not included in the effective interest computation) arising from: a. trusts. c. c. whose incurrence was a hedged and a highly probable forecast transaction. the valuation techniques used.b.
concentrations of the risks to be disclosed. If the market for a financial asset is not active the entity establishes fair value using a valuation technique. that is measured at cost in accordance with AS30. liquidity risks and market risks except when they are immaterial c. Also to determine the total amount of change in fair value estimated using a valuation technique recognized in the statement of profit and loss. the entity should disclose: a. and the reasons as to shy their fair value cannot be measured accurately c. The description of the financial instruments. The fact that the fair value has not been disclosed because fair value could not be measured reliably b. carrying amount. Quantitative Disclosures: For each type of risk.d. due to the reason that the fair value cannot be measured reliably. The disclosures with regard to credit risks. For an investment in equity instruments that do not have quoted market price in an active market. liquidity risk and market risk) arising from the financial instruments to which the entity is exposed at the reporting date. b. If risk is not apparent in a and b. The exposures to risk and how they arise. If there is a difference between the fair value at initial recognition and the amount determined at the valuation technique. The aggregate difference yet to be recognized in the statement at the beginning and end of the period and a reconciliation of the changes in the balance of this difference. Whether the fair value is determined based on the published price quotations in the active market or are estimated using a valuation technique. as in the case of short term trade receivables and payables. Information about the market for the instruments d. For fair value at initial recognition. When the carrying amount is reasonable approximation of fair value. c. Disclosure of the nature and the extent of risk arising from financial instruments: The entity is required to disclose information that shall enable the users to evaluate the nature and the extent of risk (including credit risk. Information about the disposal of the financial instruments shall be carried out by the entity e. For contract containing discretionary participation feature – if the fair value cannot be measured reliably. The accounting policy for recognizing the difference in the statement of profit and loss ii. If financial instruments whose fair value could not be recognized earlier are derecognized. the entity should disclose the difference between the carrying amount and their fair value including: a. the fact. then the entity should disclose: i. e. if changing one or more assumptions would change the fair value significantly. Disclosure of fair value – when not required? a. Changes in a and b mentioned above. Also for b and c described above. Summary quantitative data about its exposure to risk at reporting date b. SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Its objectives. policies and processes for managing the risk and the methods used to measure the risk and. Qualitative Disclosures: For each type of risk the entity should disclose the a. If fair values are determined on any other means other than the observable market data. c. b. the best price is the transaction price. the entity should state this fact and disclose the effect of such changes. CHENNAI 191 . the carrying amount on Derecognition and the amount of gain or loss recognized.
CHENNAI . A maturity analysis for financial liabilities that shows the remaining contractual maturities.d. Unless an entity complies with the provisions above. c. Disclosure requirements for Credit Risks: For disclosing credit risks. the entity should disclose: a. Information about the credit quality of the financial assets that are neither past due nor impaired. b. Disclosure requirements for liquidity risks: An entity should disclose: a. Description of how it manages the risk inherent in point a above. in such a way that the value at risk represents the interdependencies between the various risk variables. Changes from the previous periods in the method and assumptions used and the reasons for such changes. The methods and the assumptions used to prepare sensitivity analysis and c. The carrying amount of such financial assets that are past due or impaired. Sensitivity analysis of each type of market risk exposed on the reporting date b. an entity should disclose: a. is should disclose. The amount that represents the maximum exposure to credit risk at the reporting date without considering the collateral held or other credit enhancements. An explanation of the method used and the limitations due to which the assets and liabilities are not fully recorded at its fair value. Disclosure requirements for market risks: If an entity prepares a sensitivity analysis. An explanation to the method used in preparing the analysis and the main parameters and assumptions used. and b. 192 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. provided the terms are renegotiated. Also the entity is required to disclose the amount of collateral security held and other credit enhancements b. a. If the risks is not representative the entity should provide further information to show that its representative.
CHENNAI 193 . Reported assets. and elicit more meaningful and accurate corporate disclosure.DISCLOSURES IN FINANCIAL REPORTING AND THE UNDERLYING ACCOUNTING STANDARDS . liabilities. We want companies to present their business and financial condition based on current knowledge and expectations for the future. and adverse effects on the economy and people's financial wellbeing. this helps investors formulate their investment decisions. resources will be misallocated. Srinivas Swaminathan "The objective of financial statements is to provide information about the financial position. performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. What is the importance surrounding this?. the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) was passed.an erosion of confidence in the disclosure that fosters investment.to punish those responsible for fraudulent conduct and to deter others from engaging in similar activity. capital will be deployed sub-optimally. ultimately. and better investments will get bypassed. The scandals raised investor concerns about the veracity of the company disclosures. Whether financial statements are inaccurate because of fraud or complex financial standards. inflated values. Lenders would not be able to price loans consistent with the real risk assumed. reliable and comparable. penalties and accounting bars and suspensions . Even before the scandals at Enron. and they became more apt to question whether companies' operating results and financial condition were accurately reflected in their financial statements.CA. retirement and investment decisions based on a false picture of their employer's financial prospects. Customers and suppliers would make important business and strategic decisions based on a flawed picture of economic reality. We also want financial statements to reflect economic and business reality because. Employees would make career. If the financial statements distort economic and business reality. expenses. My topic on disclosures in financial reporting and the underlying accounting standards. For example the SEC and other global regulators have focused heavily on deterring accounting fraud through enforcement actions and rulemaking. financial and non financial information are directly related to an organization's financial position and indicative future performance. This parade of horribles should sound familiar . and the Commission promulgated a myriad of new regulations designed to improve corporate governance. What are we trying to accomplish?.these were the very painful consequences of the Enron and other scandals. While the Commission SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. Considering this background and the maturity in economies there has been a global change in the modalities of accounting which has also reflected in disclosures to be made by Companies in preparing its financial statements. income. investors will pay a huge opportunity cost by investing in companies with unrealistic. the SEC / IASB and other regulators have been relentless in taking enforcement action against companies and company executives that have engaged in financial fraud. enhance auditor independence. the result can be the same . equity. relevant." Financial statements should be understandable. Competitors would strive to achieve unrealistic goals.injunctions. disgorgement. The regulators have used all of the weapons in its enforcement arsenal . To restore investor confidence. We want accurate reports of companies' operating results and cash flows. WorldCom and Satyam but increasingly so afterwards. The answer goes to why we have accounting standards and disclosure rules in the first place.
increase in accounting guidance and extent of disclosures. including the emergence of the Internet. the regulatory focus expanded to include corporate governance and the processes and procedures necessary to further induce public companies to provide reliable financial statements and other disclosures. The importance of financial reporting and disclosures also increase as the economy continues to evolve at a rapid pace. Globally. The financial statements are the building blocks of valuation. while reporting standards and mechanisms are in a "catch-up" mode. Considering. These disclosures have increased to the extent that there are now reporting’s on carbon credits. Globalization and the emergence of new economies and capital markets have increased dramatically.continued its aggressive enforcement activity after Sarbanes-Oxley. Information is material where there is a substantial likelihood that a reasonable person would consider it important in the total mix of available information to formulating an investment decision. CHENNAI . But what makes disclosure useful? The ultimate purpose of disclosure requirements is to elicit full and accurate disclosure of material information. to making an investment decision. or a discounted cash flow or liquidation analysis. faster and more ubiquitous communication and other technological developments. as well as changing the types of financial arrangements and instruments that businesses utilize. over the past several years. 194 SOUTHERN INDIA CHARTERED ACCOUNTANTS STUDENTS' ASSOCIATION. have changed the way companies do business. increased transparency and disclosures in financial statements. Advances in technology. Whether an investor applies a comparable company or transaction analysis. capital management in the financial statements. impact of change in the financial statements on account of change in market risk. India transition to IND-AS (Equivalent to IFRS) we would see on IND-AS adoption. we have also witnessed a transformation in the convergence of accounting standards. so have financial reports and accounting standards. sensitivity analysis. credit risk. As the business world has become more complex. financial statements of the company or other companies are key to valuation and thus.
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