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Accounting Standards are used as one of the main compulsory regulatory mechanisms for preparation of general-purpose financial reports and subsequent audit of the same, in almost all countries of the world. Accounting standards are concerned with the system of measurement and disclosure rules for preparation and presentation of financial statements. Accounting standards are devised to furnish useful information to different users of the financial statements, to such as shareholders, creditors, lenders, management, investors, suppliers, competitors, researchers, regulatory bodies and society at large and so on.
The rapid growth of international trade and internationalization of firms, the Developments of new communication technologies, the emergence of international competitive forces is perturbing the financial environment to a great extent. Under this global business scenario, the residents of the business community are in badly need of a common accounting language that should be spoken by all of them across the globe. A financial reporting system of global standard is a pre-requisite for attracting foreign as well as present and prospective investors at home alike that should be achieved through harmonization of accounting standards. This resulted in the formulation of International Financial Reporting Standards (IFRS).
Accounting standards are written documents, policy documents issued by expert accounting body or by government or other regulatory body covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transaction in the financial statement. Accounting standards in India are issued by the institute of chartered accountants of India.(ICAI)
Disclosure of Accounting Policies
Deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements
Fundamental Accounting Assumptions
Areas in Which Differing Accounting Policies are Encountered
a) procedures of depreciation:
â€¢ directly line procedure
â€¢ WDV procedure
(b) remedy of expenditure throughout building
(c) Conversion or transformation of foreign currency pieces
(d) Valuation of inventories
(e) Treatment of generosity
(f) Valuation of investments
(g) remedy of retirement advantages
(h) Recognition of profit on long-term agreements
(i) Valuation of fixed assets
(j) Treatment of contingent liabilities
Considerations in the Selection of Accounting Policies
Substance over Form
Disclosure of Accounting Policies
Proper and better comprehending of financial statements
disclosure should pattern part of the financial statements
Accounting policies should be disclosed in one place.
Valuation of inventories
Determination of the value at which inventories are carried in the financial statements until the related revenues are recognized.
Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
(d) spare parts
This Standard should be applied in accounting for inventories other than:
(a) work in progress arising under construction contracts, including directly related service contracts (see Accounting Standard (AS) 7, Construction Contracts);
(b) work in progress arising in the ordinary course of business of service providers;
(c) shares, debentures and other financial instruments held as stock-in-trade; and
(d) producers' inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the extent that they are measured at net realisable value in accordance with well established practices in those industries.
Lower of cost or net realizable value
Determine cost of inventories
Determine Net realizable value of inventories
Compare the cost and NPV
Exclusions from the Cost of Inventories
(a) abnormal amounts of wasted 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 overheads
(d) selling and distribution costs.
(a) the accounting policies adopted in measuring inventories, including the cost formula used; and
(b) the total carrying amount of inventories and its classification appropriate to the enterprise.
Cash Flow Statements
deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.
Operating activities are the important revenue-producing activities of an enterprise and activities other than investing or financing activities.
Investing activities mainly deals with acquisition and disposal of long-term assets and other investments. It is not included in cash equivalents.
Financing activities are activities that deals with increase or decrease of the owners' capital (including preference share capital in the case of a company) and borrowings of the enterprise.
Reporting Cash Flows from Operating Activities
Foreign Currency Cash Flows
Cash flows arising from transactions in a foreign currency should be recorded in an enterprise's 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 cash flow.
The cash flows associated with extraordinary items should be classified as arising from operating, investing or financing activities as appropriate and separately disclosed.
An enterprise should disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the enterprise that are not available for use by it.
Contingencies and Events Occurring After the Balance Sheet Date
Contingencies: A reasonable estimate of the amount of the resulting loss can be made. Contingent gains should not be recognized in the financial statements.
Events Occurring after the Balance Sheet Date:
Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts. Dividends stated to be in respect of the period covered by the financial statements, which are proposed or declared by the enterprise after the balance sheet date but before approval of the financial statements, should be adjusted.
Disclosure should be made in the report of the approving authority of those events occurring after the balance sheet date
(a) the nature of the contingency;
(b) the uncertainties which may affect the future outcome;
(c) an estimate of the financial effect.
Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
to prescribe the classification and disclosure of certain items in the statement of profit and loss so that all enterprises prepare and present such a statement on a uniform basis. This enhances the comparability of the financial statements of an enterprise over time and with the financial statements of other enterprises.
This Standard should be applied by an enterprise in presenting profit or loss from ordinary activities, extraordinary items and prior period items in the statement of profit and loss, in accounting for changes in accounting estimates, and in disclosure of changes in accounting policies.
Net Profit or Loss for the Period
All items of income and expense which are recognised in a period should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise. The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the statement of profit and loss:
(a) profit or loss from ordinary activities; and
(b) extraordinary items.
Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived.
Profit or Loss from Ordinary Activities
When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.
Prior Period Items
The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived.
This Standard deals with depreciation accounting and applies to all depreciable assets, except the following items :
(i) forests, plantations and similar regenerative natural resources;
(ii) wasting assets like oil wells, minerals, quarries.
(iii) expenditure on research and development;
(iv) goodwill and other intangible assets;
(v) live stock.
This standard also does not apply to land unless it has a limited useful life for the enterprise.
The depreciation methods used, the total depreciation for the period for each class of assets, the gross amount of each class of depreciable assets and the related accumulated depreciation are disclosed in the financial statements along with the disclosure of other accounting policies. The depreciation rates or the useful lives of the assets are disclosed only if they are different from the standard rates specified as per the statute.
In case the depreciable assets are revalued, the provision for depreciation is based on the revalued amount on the estimate of the remaining useful life of such assets. In case the revaluation has a material effect on the amount of depreciation, the same is disclosed separately in the year in which revaluation is carried out.
A change in the method of depreciation is treated as a change in an accounting policy and is disclosed accordingly.
To prescribe the accounting treatment of revenue and costs associated with construction contracts.
This Standard should be applied in accounting for construction contracts in the financial statements of contractors.
fixed price contract
cost plus contract
An enterprise should disclose:
(a) the amount of contract revenue recognised as revenue in the period;
(b) the methods used to determine the contract revenue recognized in the period; and
(c) the methods used to determine the stage of completion of contracts in progress.
An enterprise should disclose the following for contracts in progress at the reporting date:
(a) the aggregate amount of costs incurred and recognised profits (less recognised losses) upto the reporting date;
(b) the amount of advances received; and
(c) the amount of retentions
An enterprise should present:
(a) the gross amount due from customers for contract work as an asset; and
(b) the gross amount due to customers for contract work as a liability.
deals with the basis for recognition of revenue in the statement of profit and loss of an enterprise. The Standard is concerned with the recognition of revenue arising in the course of the ordinary activities of the enterprise from
- the sale of goods,
- the rendering of services, and
- the use by others of enterprise resources yielding interest, royalties and dividends.
This Standard does not deal with the following aspects of revenue recognition to which special considerations apply:
(i) Revenue arising from construction contracts;
(ii) Revenue arising from hire-purchase, lease agreements;
(iii) Revenue arising from government grants and other similar subsidies;
(iv) Revenue of insurance companies arising from insurance contracts.
Rendering of Services
Proportionate completion method
Completed service contract method
(i) Interest : on a time proportion basis taking into account the amount outstanding and the
(ii) Royalties : on an accrual basis in accordance with the terms of the relevant agreement.
(iii) Dividends from investments in shares: when the owner's right to receive payment is established.
An enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties.
Accounting for Fixed Assets
These assets are divided into various types, such as land and buildings, plant and machinery, vehicles, furniture and fittings, goodwill, patents, trade marks and designs.
This standard does not deal with accounting for the following items on which depreciation is not provided.
Components of Cost
(i) cost included in site preparation;
(ii) initial delivery and handling costs;
(iii) installation cost, such as special foundations for plant; and
(iv) professional fees, for example fees of architects and engineers.
Retirements and Disposals
In financial statements using historical cost, gains or losses arising on disposal of assets are recognized in the profit and loss statement. On previously revalued item of fixed asset which is disposed, the difference between net sale proceeds and the net book value is normally charged or credited to the profit and loss statement.
Fixed assets acquired on hire purchase terms are recorded at their cash value,
When an enterprise owns fixed assets jointly with others they are recorded at the original cost less accumulated depreciation and written down value are stated in the balance sheet.
Where an enterprise purchases several assets for a consolidated price, it is valued at fair basis.
(i) The fixed assets gross and net book values at the beginning and end of an accounting period must state the additions, disposals, acquisitions and other movements made during the year;
(ii) expenditure on fixed assets for construction or acquisition; and
(iii) the revalued amounts instead of historical costs of fixed assets, the method used for computing the revalued amounts, the nature of indices used, the year of any appreciation made, and disclosure of external valuer who was involved, for revaluation of fixed assets.
The Effects of Changes in Foreign Exchange Rates
Decide which exchange rate to use and how to recognize in the financial statements the financial effect of changes in exchange rates.
This Standard should be applied:
(a) in accounting for transactions in foreign currencies; and
(b) in translating the financial statements of foreign operations.
This Standard also deals with accounting for foreign currency transactions in the nature of forward exchange contracts.1
At each balance sheet date:
Foreign currency monetary items should be reported using
the closing rate.
Non-monetary items which are carried at historical Cost using the exchange rate at the date of the transaction.
Non-monetary items which are carried at fair value should be reported using the exchange rates that existed when the values were determined.
Classification of Foreign Operations
Integral Foreign Operations
Non-integral Foreign Operations
An enterprise should disclose:
(a) the amount of exchange differences included in the net profit or loss for the period; and
(b) net exchange differences accumulated in foreign currency translation reserve as a separate component of shareholders' funds, and a reconciliation of the amount of differences in exchange rates at the opening and closing date of the period.
Accounting for Government Grants
Deals with accounting for government grants. Government grants (subsidies,
cash incentives, duty drawbacks, etc.)
This Standard does not deal with:
(i) the special problems arising in accounting for government grants in
financial statements reflecting the effects of changing prices or in
supplementary information of a similar nature;
(ii) government assistance other than in the form of government grants;
(iii) government participation in the ownership of the enterprise.
Accounting Treatment of Government Grants
The following should be disclosed:
the accounting policy
(ii) the methods of presentation in the financial statements;
the nature and extent of government grants
(iv) grants of non-monetary assets given at a concessional rate or free of cost.
Accounting for Investments
1. Accounting for investments
2. It does not deal with:
(a) recognition of interest, dividends and rentals earned
on investments which are covered by Accounting Standard 9 on
(b) operating or finance leases;
(c) investments of retirement benefit plans and life insurance enterprises; and
(d) mutual funds and venture capital funds.
Classification of Investments
long term investments
Carrying Amount of Investments
current investments are carried at the lower of cost and fair value.
long term investments are carried at cost.
Difference in Carrying Amounts of Investments
Any reduction and any reversals of such
reductions should be credited to the profit and loss statement.
Disposal of Investments
carrying amount minus net disposal proceeds should be credited to the profit and loss statement.
The following disclosures in financial statements in relation to
investments are appropriate:-
(a) the accounting policies
(b) the amounts included in income statement for:
(i) interest, dividends (showing separately dividends from subsidiary
companies), and rentals on investments showing separately such income from long term and current investments.
Gross income should be stated, the amount of income tax deducted at source being included under Advance Taxes Paid;
(ii) profits and losses on disposal of current investments and changes in carrying amount of such investments;
(iii) profits and losses on disposal of long term investments and changes in the carrying amount of such investments;
(c) significant restrictions on the right of ownership, realisability of
investments or the remittance of income and proceeds of disposal;
(d) the aggregate amount of quoted and unquoted investments, giving
the aggregate market value of quoted investments;
(e) other disclosures as specifically required by the relevant statute
governing the enterprise.
Accounting for Amalgamations
Amalgamation may be either -
(a) an amalgamation in the nature of merger, or
(b) an amalgamation in the nature of purchase.
The consideration for the amalgamation should include any noncash
element at fair value. In case of issue of securities, the value fixed by
the statutory authorities may be taken to be the fair value.
The Pooling of Interests Method
The Purchase Method
For all amalgamations, the following disclosures should be made in the first financial statements following the amalgamation:
(a) names and general nature of business of the amalgamating companies;
(b) effective date of amalgamation for accounting purposes;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.
To prescribe the accounting and disclosure for employee benefits. The Standard requires an enterprise to recognise:
(a) a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and
(b) an expense when those economic benefits are consumed
1. This Standard should be applied by an employer in accounting for all employee benefits, except employee share-based payments1.
2. This Standard does not deal with accounting and reporting by
employee benefit plans.
3. Employee benefits
Short-term Employee Benefits
Benefits payable within 12 months:
(a) wages, salaries and social security contributions;
(b) short-term compensated absences
(c) profit-sharing and bonuses payable
(d) non-monetary benefits for current employees.
Post-employment benefits include:
(a) retirement benefits, e.g., gratuity and pension; and
(b) other benefits, e.g., post-employment life insurance and postemployment medical care.
An enterprise may pay insurance premiums to fund a postemployment
Recognition and Measurement
The enterprise should recognise the contribution payable to a defined contribution plan in exchange for that service:
as a liability after deducting any contribution already paid.
(b) as an expense, unless another Accounting Standard requires or permits the inclusion of the contribution in the cost of an asset.
Long-term Employee Benefit
(a) long-term paid leave;
(b) jubilee benefits;
(c) long-term disability benefits;
(d) profit-sharing and bonuses payable twelve months or later
(e) deferred compensation paid twelve months or more after the end
of the period in which it is earned.
Recognition and Measurement
The amount recognised as a liability for other long-term employee
benefits should be the net total of the following amounts:
the present value of the defined benefit obligation at the balance sheet date.
minus the fair value at the balance sheet date of plan assets (if
any) out of which the obligations are to be settled directly.
To prescribe the accounting treatment for borrowing costs.
It does not deal with the actual or imputed cost of owners' equity, including preference share capital not classified as a liability.
Borrowing costs may include:
(a) interest and commitment charges on bank borrowings and other short-term and long-term borrowings;
(b) amortisation of discounts or premiums relating to borrowings;
(c) amortisation of ancillary costs incurred in connection with the arrangement of borrowings;
(d) finance charges in respect of assets acquired under finance leases or under other similar arrangements; and
(e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset.
Other borrowing costs should be recognised as an expense in the period in which they are incurred.
Commencement of Capitalisation
The capitalisation of borrowing costs as part of the cost of a qualifying asset should commence when all the following conditions are satisfied:
(a) expenditure for the acquisition, construction or production of a qualifying asset is being incurred;
(b) borrowing costs are being incurred; and
(c) activities that are necessary to prepare the asset for its intended use or sale are in progress.
The financial statements should disclose:
(a) the accounting policy adopted for borrowing costs; and
(b) the amount of borrowing costs capitalised during the period.
To establish principles for reporting financial information, about the different types of products and services an enterprise produces and the different geographical areas in which it operates.
A business segment or geographical segment should be identified as a reportable segment if:
(a) its revenue from sales to external customers and from transactions with other segments is 10 per cent or more of the total revenue, external and internal, of all segments; or
(b) its segment result, whether profit or loss, is 10 per cent or more
(i) the combined result of all segments in profit, or
(ii) the combined result of all segments in loss, whichever is greater in absolute amount; or
(c) its segment assets are 10 per cent or more of the total assets of all
Primary Reporting Format
An enterprise should disclose the following for each reportable
(a) segment revenue, classified into segment revenue from sales to
external customers and segment revenue from transactions with
(b) segment result;
(c) total carrying amount of segment assets;
(d) total amount of segment liabilities;
(e) total cost incurred during the period to acquire segment assets
that are expected to be used during more than one period (tangible
and intangible fixed assets);
(f) total amount of expense included in the segment result for
depreciation and amortisation in respect of segment assets for the period; and
(g) total amount of significant non-cash expenses, other than
depreciation and amortisation in respect of segment assets, that were included in segment expense and, therefore, deducted in
measuring segment result.
Related Party Disclosures
to establish requirements for disclosure of:
(a) related party relationships; and
(b) transactions between a reporting enterprise and its related parties.
Related party transaction
If there have been transactions between related parties, during the
existence of a related party relationship, the reporting enterprise should disclose the following:
(i) the name of the transacting related party;
(ii) a description of the relationship between the parties;
(iii) a description of the nature of transactions;
(iv) volume of the transactions either as an amount or as an appropriate proportion;
(v) any other elements of the related party transactions necessary for an understanding of the financial statements;
(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; and
(vii) amounts written off or written back in the period in respect of
debts due from or to related parties.
To prescribe, for lessees and lessors, the appropriate accounting policies and disclosures in relation to finance leases and operating leases.
This Standard should be applied in accounting for all leases other than:
(a) lease agreements to explore for or use natural resources, such as oil, gas, timber, metals and other mineral rights; and
(b) licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights; and
(c) lease agreements to use lands.
the lessee should recognise the lease as an asset and a liability. Such recognition should be at an amount equal to the fair value of the leased asset at the inception of the lease.
Lease payments under an operating lease should be recognized as an expense in the statement of profit and loss on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the user's benefit.
Earnings Per Share
Financial ratio for assessing the state of market price of share.
An enterprise should present basic and diluted earnings per share on the face of the statement of profit and loss for each class of equity shares that has a different right to share in the net profit for the period.
Standard requires an enterprise to present basic and diluted earnings per share, even if the amounts disclosed are negative
Basic earnings per share should be calculated by dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period.
diluted earnings per share is calculated as the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period should be adjusted for the effects of all dilutive potential equity shares.
the amounts used as the numerators in calculating basic and diluted earnings per share, and a reconciliation of those amounts to the net profit or loss for the period;
the weighted average number of equity shares used as the denominator in calculating basic and diluted earnings per share, and a reconciliation of these denominators to each other; and
the nominal value of shares along with the earnings per share figures.
Consolidated Financial Statements
A parent is an enterprise that has one or more subsidiaries
A subsidiary is an enterprise that is controlled by another enterprise known as parent
Control can be exercised by purchasing 50% of equity shares and voting rights
Or it is also possible by controlling the composition of board of directors or the governing body
Consolidated financial statements are prepared in the same format as followed by the parent company for the preparation of its financial statements.
A parent and its subsidiaries should prepare separate financial statements according to the statute.
The consolidated financial statement made by a parent is in addition to the separate financial statements
When the parent acquired control in subsidiary as a temporary investment and the control will be disposed in the near future.
The subsidiary operates under severe long- term restrictions and due to this transfer of funds to parent is significantly weakened
Financial statements of parent and subsidiaries should be combined and added line by line.
List of all subsidiaries.
Proportion of ownership interest.
Nature of relationship between parent and subsidiary whether direct control or control through subsidiaries.
Name of the subsidiary of which reporting dates are different.
The reason for different accounting policies applied for the preparation of consolidated financial statements
If consolidation of a particular subsidiary is not made according the prescribed accounting standards, the reason for the same should be disclosed.
Accounting for Taxes on Income
To prescribe accounting treatment for taxes on income.
Taxes on income include all domestic and foreign taxes which are based on taxable income.
Taxes that are payable on distribution of dividends and other distributions made by the enterprise are to be excluded.
Tax expense for the period, comprising current tax and deferred
tax, should be included in the determination of the net profit or loss for
Current tax should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates and tax laws.
Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.
An enterprise should offset assets and liabilities representing current tax if the enterprise:
(a) has a legally enforceable right to set off the recognized amounts; and
(b) intends to settle the asset and the liability on a net basis.
Accounting for Investments in Associates in Consolidated Financial Statements
The standard explains the effects of investments in associates on the financial position and operating results of a group.
Investment in associates are to be listed and described as to the proportion of ownership interest and, in case of difference, the proportion of voting power held should be disclosed in the 'Consolidated Financial Statements'.
Investments in associates should be classified as long-term investments and disclosed separately in the consolidated balance sheet.
The investor's share of the profits or losses of such investments, should be disclosed separately in the consolidated statement of profit and loss.
The investor's share of any extraordinary or prior period items should also be separately disclosed.
To establish principles for reporting information about discontinuing operations
1. This Standard applies to all discontinuing operations of an enterprise.
2. The requirements related to cash flow statement contained in this Standard are applicable where an enterprise prepares and presents a cash flow statement.
Recognition and Measurement
To decide as to when and how to recognise and measure the changes in assets and liabilities and the revenue, expenses, gains, losses and cash flows relating to a discontinuing operation.
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 recognised 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
(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.
Interim Financial Reporting
To prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in a 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.
A complete set of financial statements normally includes:
(a) balance sheet;
(b) statement of profit and loss;
(c) cash flow statement; and
(d) notes including those relating to accounting policies and other statements and explanatory material that are an integral part of the financial statements.
In deciding how to recognise, measure, classify, or disclose an item for interim financial reporting purposes, materiality should be assessed in relation to the interim period financial data. In making assessments of materiality, it should be recognised that interim measurements may rely on estimates to a greater extent than measurements of annual financial data.
To prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Accounting Standard. The Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures about intangible assets.
This Standard should be applied by all enterprises in accounting for intangible assets, except:
(a) intangible assets that are covered by another Accounting Standard;
(b) financial assets1;
(c) mineral rights and expenditure on the exploration for, or development and extraction of, minerals, oil, natural gas and similar non-regenerative resources; and
(d) intangible assets arising in insurance enterprises from contracts with policyholders.
This Statement does not apply to:
(a) intangible assets held by an enterprise for sale in the ordinary course of business (referred to AS 2, Valuation of Inventories, and AS 7, Construction Contracts);
(b) deferred tax assets
(c) leases that fall within the scope of AS 19, Leases; and
(d) goodwill arising on an amalgamation and goodwill arising on consolidation.
Recognition and Initial Measurement
An intangible asset should be recognised if, and only if:
(a) it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and
(b) the cost of the asset can be measured reliably.
The financial statements should disclose the following for each class of intangible assets, distinguishing between internally generated intangible assets and other intangible assets:
(a) the useful lives or the amortisation rates used;
(b) the amortisation methods used;
(c) the gross carrying amount and the accumulated amortization (aggregated with accumulated impairment losses) at the beginning and end of the period;
(d) a reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions, indicating separately those from internal development and through amalgamation;
(ii) retirements and disposals;
(iii) impairment losses recognised in the statement of profit and loss during the period (if any);
(iv) impairment losses reversed in the statement of profit and loss during the period (if any);
(v) amortisation recognised during the period; and
(vi) other changes in the carrying amount during the period.
Financial Reporting of Interest in Joint Venture
Joint venture is defined as a contractual arrangement whereby two or more parties carry an economic activity under joint control
Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefit from such control
It is a contractually agreed sharing of control over the economic activities
Jointly controlled operation
Jointly controlled assets, and
Jointly controlled entities
Jointly Controlled Operation
When the joint venture is not a separate entity, the parties may carry out the joint venture activities side by side with their main activity
This includes two or more venturers combine their operations and resources for their joint activity
Agreement will specify the profit sharing norms
Venturers may not maintain separate accounts
Jointly Controlled Assets
Assets are shared as per the agreement
This type of arrangement does not require a separate business entity, company or partnership
Each venturer shares the expenses according to their usage
For example use of oil pipe line
Jointly Controlled Entities
Formed as a separate entity
Joint control is exercised by the venturers over the separate economic entity
There is a contractual relationship
Separate accounting records are maintained
Each venturer is entitled to share the profits and losses of the jointly controlled entity
In Consolidated Financial Statements
Then the interest in the jointly controlled entity should be reported as per the proportionate consolidation
Proportionate consolidated balance sheet of the venturer includes its share of assets and liabilities in the jointly controlled entity
Proportionate consolidated profit and loss account of the venturer includes its share of income and expenses in a jointly controlled entity
Impairment of assets
As per As 28 asset is said to be impaired when the carrying amount of the asset is more than its recoverable amount
Is higher of net selling price and value in use
Net selling price is the amount obtainable from the sale of an asset less cost of disposal
Sources of collecting the net selling price are binding sale agreement, active market and best estimate based on information
Value in Use
Value in use of an asset is the present value of estimated future cash flows arising from the use of asset + Scrap value at the end of its useful life
Discount rate is applied to calculate the present value of estimated cash flows
Indications About Impairment
Asset value has declined
Due to change in technology, market conditions, legal regulations, there is an adverse effect on the enterprise
Interest rate has increased, or
Return on investment has increased
Obsolescence or physical damage of an asset
Significant changes in the usage of asset
Significant changes in the manner in which the asset is expected to be used
History of continued asset losses
History of continued cash flow losses, and
History of continued budgeted losses
Provisions, Contingent Liabilities and Contingent Assets
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, timing and amount.
This Standard should be applied in accounting for provisions and contingent liabilities and in dealing with contingent assets, except:
(a) those resulting from financial instruments1 that are carried at fair value;
(b) those resulting from executory contracts, except where the contract is onerous;
(c) those arising in insurance enterprises from contracts with policyholders; and
(d) those covered by another Accounting Standard.
Changes in Provisions
Provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision should be reversed.
For each class of provision, an enterprise should disclose:
(a) the carrying amount at the beginning and end of the period;
(b) additional provisions made in the period, including increases to existing provisions;
(c) amounts used (i.e. incurred and charged against the provision) during the period; and
(d) unused amounts reversed during the period.
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;
(b) an indication of the uncertainties about those outflows. Where necessary to provide adequate information, an enterprise should disclose the major assumptions made concerning future events,
as addressed in paragraph 41; and
(c) the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.
Financial Instruments Presentation
To all commercial, industrial and business entities other than small and medium sized entities
It is recommendatory for an initial period of two years on or after 1-4-2009
It is mandatory for the accounting period commencing on or after 1-4-2011
Presenting financial instruments as liabilities or equity
Offsetting financial assets and financial liabilities
Compound financial instruments
Requires a debtor to make a payment, or payments to a creditor in circumstances specified in a contract between them, or
Specifies between the two parties certain rights or obligations, the nature of which requires them to be treated as financial
Applicability to financial instrument
This accounting standard is applicable to all financial instruments both recognized and unrecognized, except for the following
Interest in subsidiaries, associates and joint ventures accounted for under As 21
Contracts or obligations under share based payment
Debt- equity classification
Compound financial instruments
Interest, dividend, loss and gains, and
Offsetting of a financial asset and a financial liability
When an entity re- acquires its own equity instruments in the buy back process, then the shares thus bought are termed as treasury shares- No gain or loss should be recognized in statement of profit and loss with regard to purchase, sale issue or cancellation of an entity's own equity instruments
1.Can be broadly classified into two
Gross or line by line consolidation, and
2.Net Consolidation is subdivided into two
One line or Equity, and
Pro rata or Proportional
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB). International Financial Reporting Standards (IFRS) refer to a comprehensive, high quality set of accounting standards and interpretations used in the preparation of financial statements. IFRS are considered a principles-based set of standards in that they establish broad rules with greater emphasis on interpretation and the use of judgment, rather than reliance on specific "bright-lines." The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting.Â
Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2000 by the International Accounting Standards Committee(IASC). The Standing Interpretations Committee (SIC), the IASC's interpretive body formed in 1997, developed interpretations of IAS to be applied where the standards were silent or unclear. The interpretations were referred to as SICs. Having an international standard is especially important for large companies that have subsidiaries in different countries.
Adopting a single set of world-wide standards will simplify accounting procedures by allowing a company to use one reporting language throughout. A single standard will also provide investors and auditors with a cohesive view of finances.Â IFRS is used in many parts of the world, including the European Union, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, South Africa, Singapore and Turkey. As in August, 2008, more than 110 countries around the world, including all of Europe, currently require or permit IFRS reporting. Approximately 85 of those countries require IFRS reporting for all domestic listed companies.
First-time adoption of IFRS
An entity adopting IFRS for the first time from the usual National GAAP should comply with the standard. It applies to an entity's first IFRS financial statements and the interim reports presented under IAS 34, 'Interim financial reporting', that are part of that period.
The optional exemptions relate to:
cumulative translation differences
compound financial instruments
assets and liabilities of subsidiaries, associates and joint ventures
designation of previously recognized financial instruments
share-based payment transactions
fair value measurement of financial assets or financial liabilities at initial recognition
service concession arrangements
investments in subsidiaries, jointly controlled entities and associates;
transfers of assets from customer;
extinguishing financial liabilities with equity instruments
Exceptions which are mandatory
The following exceptions are mandatory, not optional:
Comparative information is prepared and presented on the basis of IFRS. Almost all adjustments arising from the first-time application of IFRS are against opening retained earnings of the first period that is presented on an IFRS basis.
It applies to all share-based payment arrangements
A share-based payment arrangement is defined as: "an agreement between the entity (or another group entity or any shareholder of any group entity) and another party (including an employee) that entitles the other party to receive:
(a) Cash or other assets of the entity for amounts that are based on the price (or value) of equity instruments (including shares or share options) of the entity or another group entity, or
(b)Equity instruments (including shares or share options) of the entity or another group entity."
For equity settled share-based transactions, goods and services received and the corresponding increase in equity is measured
at the fair value of the goods and services received. If the fair value of the goods and services cannot be estimated reliably, then the value is measured with reference to the fair value of the equity instruments granted. Different valuation techniques may be applied.
Recognise as an expense over the vesting period. Goods and services in a share-based payment transaction are recognised when goods are received or as services are rendered. A corresponding increase in equity is recognised if goods and services were received in an equity-settled share-based payment transaction or a liability if these were acquired in a cash-settled share-based payment transaction.
The pooling of interests and purchase method
All business combinations, other than those between entities under common control, are accounted using the purchase method. An acquirer is identified for all business combinations, which is the entity that obtains control of the other combining entity. Pooling of interest to record business combinations within the scope of IFRS 3 is prohibited.
At the time of acquisition, an entity may elect to measure, on a transaction by transaction basis, the non-controlling interest at (a) fair value or (b) the
non-controlling interest's proportionate share of the fair value of the identifiable net assets of the acquiree.
Measured as the difference between:
â€¢ the aggregate of (a) the acquisition- date fair value of the consideration
transferred; (b) the amount of any non-controlling interest and (c) in
a business combination achieved in stages, the acquisition-date fair value
of the acquirer's previously held equity interest in the acquiree; and
â€¢ the net of the acquisition-date fair values of the identifiable assets acquired and the liabilities assumed. If the above difference is negative, the resulting gain is recognised as a bargain purchase in profit or loss.
Subsequent measurement of goodwill
Goodwill is not amortised but tested for impairment on an annual basis or
more frequently if events or changes in circumstances indicate impairment
Consideration for the acquisition includes the acquisition-date fair value of contingent consideration. Changes to contingent consideration resulting from events after the end of the reporting period are recognized in profit or loss.
acquisition related costs
Acquisition related costs such as finder's fee,
due diligence costs, etc. are accounted for
as expenses in the period in which the costs
are incurred and the services are received.
Insurance contracts are contracts where an entity accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if the insured event adversely affects the policyholder.
Applicable to insurance and reinsurance contracts and to discretionary participation features in insurance contracts.
The insurer is required at the end of each reporting period to make a liability adequacy test to assess whether its recognized insurance liabilities are adequate. If test shows carrying amount of its liabilities are inadequate, the deficiency is recognised in profit or loss
Entities should disclose:
Information that identifies and explains the amounts in its financial statements arising from insurance contracts.
Information that enables users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts.
Non-current assets held for sale and discontinued operations
Non-current assets to be disposed of are classified as held for sale when the asset is available for immediate sale and the sale is highly probable. Depreciation ceases on the date when the assets are classified as held for sale. Non-current assets classified as held for sale are measured at the lower of its carrying value and fair value less costs to sell.
An operation is classified as discontinued when it has either been disposed of or is classified as held for sale
Exploration for and evaluation of mineral resources', addresses the financial reporting for the exploration for and evaluation of mineral resources. It does not address other aspects of accounting by entities engaged in the exploration for and evaluation of mineral reserves (such as activities before an entity has acquired the legal right to explore or after the technical feasibility and commercial viability to extract resources have been demonstrated). Activities outside the scope of IFRS 6 are accounted for according to the applicable standards (such as IAS 16, 'Property, plant and equipment', IAS 37, 'Provisions, contingent liabilities and contingent assets', and IAS 38, 'Intangible assets'.)
Exploration and evaluation assets are measured at cost or revaluation less accumulated amortisation and impairment loss. An entity determines the policy specifying which expenditure is recognised
as exploration and evaluation assets.
Financial Instruments : Disclosures
is to establish requirements for all aspects of accounting for financial instruments, including distinguishing debt from equity, netting, recognition, derecognition, measurement, hedge accounting and disclosure. The standards' scopes are broad. The standards cover all types of financial instrument, including receivables, payables, investments in bonds and shares, borrowings and derivatives. They also apply to certain contracts to buy or sell non-financial assets (such as commodities) that can be net-settled in cash or another financial instrument.
The standard prescribes the disclosures that enable financial statement users to evaluate the significance of financial instruments
to an entity, the nature and extent of their risks, and how the entity manages those risks.
Operating segments are identified based on the financial information that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
Segment profit or loss is reported on the same measurement basis as that used by the chief operating decision maker. There is no definition of segment revenue, segment expense, segment result, and segment asset or segment liability. Requires reconciliation of segment performance measures, and segment assets and liabilities with the corresponding amounts reported in the financial statements.
Requires disclosure of
(a) external revenues from each product or service;
(b) revenues from customers in the country of domicile
and from foreign countries;
(c) geographical information on non-current assets located in the country of domicile and foreign countries. Information on major customer including total revenues from each major customer is
disclosed if revenues from each customer is 10% or more of total segment revenues.