A.S.revision Notes For 2nd Group

PATIL PROFESSIONAL ACADEMY
407-B, Shrivardhan complex, RNT Marg, Indore Ph: 97559908355, 9752907877
Accounting standards Revision Notes

Accounting standard -4: Events occurring after Balance sheet date before approval of account’s
Adjusting events
1) A.S. 4 talk about the adjustment in balances of assets & Liability if any additional evidences is
obtained prior to approval of B.O.A. which assist for better estimation of amount of assets & liability.
2) Adjusting event: If any event occur after the Balance sheet date but prior to approval of books of
accounts and provide additional evidences for estimation of amount of condition exist on Balance sheet
date.
3) For adjusting events balances of asset & liability must be adjusted at the time of finalization of B.O.A.
Non –adjusting events
1) Non adjusting events: other than adjusting events.
2) In case of non adjusting event a separate disclosure should be provided in reports of BOD if effect of
such events is material.
3) Exception to adjusting events: an event affecting the going concern assumption of enterprises.
Accounting standard – 5
NET PROFIT OR LOSS FOR THE PERIOD,PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES
ITEM DEFINITION TREATMENT

Prior Period Item Arises in C.Y. due to error & omission in their recording in any Disclose separately
of P.Y.
Accounting Estimation is always subject to change, which changes on the Disclose separately if
estimation availability of new information. effect of change in
estimation is material.
Ordinary activities Are those activities which are undertaken as a part of normal Disclose separately if
business activity? For example. effect of ordinary item is
a) Written down inventory to NRV & reversal of material
Such loss.
b) Profit or loss on sale of assets.
c) Amalgamation.
d)Legislative changes having retrospective application;
e) Litigation settlements;
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Extraordinary Item Extraordinary items are income or expenses that arise from Nature & amount of each
events or transactions that are clearly distinct from the E.I. should be disclosed
ordinary activities of the enterprise. separately.
Accounting policy 1. Accounting policy can be changed in any of following Disclose separately if
situation: effect of change in
a) It’s requirement of any law. Accounting policy is
material.
b) It’s requirement of any A.S.
c) Such change would better view of financial statement.
Accounting standard - 12
ACCOUNTING FOR GOVERNMENT GRANTS
Definition
1. Government refers to government, government agencies and similar bodies whether local, national or
international.
2. Government grants are assistance by government in cash or kind to an enterprise for past or future
compliance with certain conditions & do not include normal trading transaction with government.
RECOGNITION OF GOVERNMENT GRANTS
1. Where there is reasonable assurance that the enterprise will comply with the conditions attached to them; and
2. it is reasonably certain that the ultimate collection will be made.
3. Mere receipt of grant is not conclusive evidence that condition of grant has been fulfilled.
Non-monetary Government Grants
1. Non-monetary assets given free of cost are recorded at a nominal value say Rs 100.
2. Non-monetary assets at concessional rate should be recorded at price paid for.
Grants Related to Specific Fixed Assets
Type of asset At the time of At the time of Refund under 1st Refund under 2nd
Receipt Receipt method Method
(1st method ) (2nd method )
Depreciable asset Credit to asset ( Credit to defer Debited to asset Debited to D.G.G.
Reduce for cost of government grant & any balance to
asset) P&L A/c
Non depreciable Credit to asset ( Credit to capital Debited to asset. Debited to Capital
asset Reduce for cost of reserve but if grant reserve OR
asset) has certain Debited to D.G.G &
obligation then any balance to P&L
credit to defer A/c.
G.G.
a) D.G.G. is recognized in P&L Account in the ratio of depreciation of asset over the useful life of asset.

b) D.G.G. is recognized in P&L account over the period of obligation in ratio of expenses.
Presentation of Grants Related to Revenue
1. Grants related to revenue are sometimes presented as a credit in the profit and loss statement,
either separately or under a general heading such as "Other Income". Alternatively, they are deducted
in reporting the related expense.
2. At the time of refund such refund is debited to P&L A/c
Grants for Promoters' contribution
1. They are given with reference to the total investment in an undertaking or by way of contribution
towards its total capital outlay.
2. The grants are treated as capital reserve which can be neither distributed as dividend nor
considered as deferred income.
3. When grant become refundable it is debited to capital reserve.
Government grants as compensation
1. Government grants may become receivable by an enterprise as compensation for expenses or

losses incurred in a previous accounting period.
2. Such a grant is recognized in the income statement of the period in which it becomes
receivable, as an extraordinary item if appropriate.
Government grant for immediate financial support
1. 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.
2. Such grant should be credited to P&L A/c in the period when such grant becomes receivable.
Accounting standards 16 (Accounting for borrowing cost)
Objective
1. The objective of this Standard is to prescribe the accounting treatment for borrowing costs.
2. However This Standard does not deal with the actual or imputed cost of owners’ equity, including
preference share capital not classified as a liability.
Definition
1. Borrowing cost
• Interest, Amortization of discount & premium relating to borrowing.
• Amortization of ancillary cost incurred in connection with borrowing.
• Finance charges under Finance lease, Exchange difference from foreign currency borrowing.
2. Qualifying asset:
• Is an asset which necessarily takes a substantial period of time to get ready for its intended use
or sale .
3. Substantial period of time:

• Generally a period of 12 month however a shorter or longer period may also be considered.
Recognition of borrowing cost

1. Borrowing cost related to borrowing used for qualifying asset should be capitalized to cost of
that asset provided that future economic benefit from the use of qualifying asset will flow to
enterprises.
2. Amount of borrowing cost to be capitalized are calculated as per this standard.
3. Other borrowing cost should be charged to P&L A/c.
Commencement of Capitalizations
When all of the following conditions are satisfied:
1. Expenses are being incurred on Q.A.
2. Borrowing cost is being incurred.
3. Activities necessary to prepare Q.A. asset ready for use or sale are in progress.
Cessation of Capitalizations
Capitalization of borrowing cost should cease when Q.A. is ready to use.
Suspension of Capitalizations
1. Borrowing costs may be incurred during a period in which the activities necessary to prepare an
asset for its intended use or sale are interrupted. Such borrowing cost is charged to P&L A/c.
2. Capitalization is not suspended :
a) If substantial technical and administrative work is being carried out.
b) When a temporary delay is a necessary part of the process of getting an asset ready for its
intended use or sale.
Borrowing Costs Eligible for Capitalizations
• Specific borrowing cost
a) Is borrowing cost related to borrowing which has been taken specifically for Q.A.
b) Capitalization = Actual B.C – income from temporary investment.

• General Borrowing cost
a) Is borrowing cost related to borrowing taken for various purposes.

b) Capitalization = Amount used on Q.A * W.A.B.C.
c) The total amount of B.C. capitalized during a period should not exceed actual B.C.
• Exchange loss: As per AS-16 capitalization of foreign currency Borrowing cost & exchange loss may
not exceed the amount of B.C. if similar loan would have been taken in India.
Accounting for Lease
Scope
A.S. 19 applies on all lease transaction except:
(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.
Finance lease
A lease is finance lease if all risk & reward of asset are transferred to lessee at inception of
Lease for example:
a) Lease transfer ownership of asset to lessee by end of lease term.
b) Lessee has option to buy asset at end of lease term at a price less than fair value.
c) Lease term is covering major part of asset economic life.
d) At inception of lease P.V. of Minimum lease payment is equal to or cover substantial part of fair
value of asset.
Accounting for finance lease
In the books of lessee •Lessee must recognize lease asset & liability at lower of P.V. of M.L.P OR F.V
•Lessee must allocate the M.L.P. into finance charges & payment towards
O/S liability of lease.
•Depreciation must be provided on leased asset as per A.S. 6
In the books of lessor • The manufacturer or dealer must recognize the transaction of sale in P&L
A/c at lower of Present value of M.L.P. OR Fair value.
• The finance charges should be recognized on time basis.
Minimum Lease • Are payment made by lessee over the lease term excluding contingent
payment rent, cost for service, tax.
• M.L.P. includes Residual value of asset for Lessor.
• M.L.P. includes only guaranteed Residual value of asset for Lessee.
Operating lease
Definition Other than finance lease.

In the books of lessee Lessee should recognize lease payment as an expense in statement of P&L.
In the books of lessor • Lessor should recognize lease income in statement of P&L.
• Lessor should present the asset in B/S.
Sale & lease back transaction
Finance lease Any profit OR Loss is deferred & amortize to statement of P&L over the lease term.
Operating lease • If Sale value = fair value then recognize profit or Loss immediately
• If sale value > fair value then excess of fair value is amortized over the lease term
Operating lease • If sale value < fair value & lower sale value is not compensated by paying rent
below fair rent then recognize profit or Loss immediately
• Otherwise defer the profit or loss & amortize over the lease term in ratio of
lease payment.
Disclosure for lessor
In case of Finance lease in the books of lessor:

a) Gross investment = Sum of M.L.P.
b) Net investment = Present value of M.L.P.
c) Unearned finance income = a-b

Accounting for intangible Asset
Definition
•Is a resources controlled by enterprises where enterprises has power to obtain future
economic benefit from the asset & can restrict the access of other to those benefit.
Asset •From which Future economic benefit will inflow to enterprises.
•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.
Intangible •Training expenses , market share , portfolio of customer , start up activities cost ,
asset advertisement exp , preliminary expenses are not I.T.A
•Are money held and assets to be received in fixed or determinable amounts of money.
Monetary
Asset
Recognition and Initial Measurement of an Intangible Asset
1) 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.
2) An intangible asset should be measured initially at cost.
Cost of intangible asset
Mode of purchase cost
For cash Purchase price + non refundable taxes, duties &

expenses – Trade discount & rebate.
In exchange of securities At FMV of asset acquired or securities issued whichever

is more clearly evident.
By way of government grant At nominal value say Rs 100 or at concessional rate paid
for asset.
Internally generated asset 1) Research exp.– write off to P&L A/c
2) Development exp.– capitalized to asset provided this
would result in future economic benefit to enterprises.

Subsequent expenses
1) It is difficult to attribute subsequent expenses to a particular I.T.A hence rarely these expenses are
charged to P&L A/c.
2) However if such expenses can be related with a particular asset & expenses increases the future
economic benefit from the asset over its previous assessed standard performance then such expenses
are capitalized.
Amortization
Amortization period 1. Rebuttable presumption is that life may not
exceed 10 year. If persuasive evidences are
available for life of more than 10 year then such
life is taken.
2. If control is obtained through legal right then life

should not exceed the period of legal right unless
(a) legal right are renewable (b) Renewal is virtually
certain.
3. Useful life should be shorter of Economic or

legal life.
Amortization method 1. I.T.A may be amortized using S.LM. , WDV or

Unit of Production method on the basis of
consumption of future economic benefit.
2. If enterprise is not able to consumption pattern

of future economic benefit then SLM is used.
Residual value & Gain or loss
1. Residual value of any I.T.A is taken as a NIL unless :

a) These are commitment by third party for buy.
b) There is an active market for asset & it is probable that such market would exist at the end of
life of asset.
2. Any gain or loss on disposal of asset is credited or debited to P&L A/c.
Provisions, Contingent Liabilities and Contingent
Definition
Obligating Event A event that create obligation for settlement of

obligation.
Present obligation A obligation is present obligation if on the basis of
available evidences, it is more probable that
obligation exist on B/S date.
Possible obligation A obligation is possible obligation if on the basis of

available evidences, it is not probable that
obligation exist on B/S date.
Contingent liability Is a possible obligation & present obligation for

which provision could not be created.
Provision
1) As per A.S.-29 enterprises must create the provision if following condition is satisfied:
a) An enterprise has present obligation from past event.
b) Outflow of resources are probable.
c) A reliable estimate of amount of obligation can be made.
If any of the condition is not satisfied then contingent liability should be disclosed.
2) No provision is recognised for costs that need to be incurred to operate in the future.
3) When a expenses required for settlement of provision is to be reimbursed by another party then a
separate asset should be recognized only if its receipt is virtually certain.
4) Provision should be reviewed at each B/S date.
5) Provision amount should not discounted except in case of provision created for removal of PPE under
AS -10.
Contingent liability
1) Contingent liability is disclosed in following situation :
a) A enterprises has possible obligation as on B/S date.
b) A enterprises has present obligation on B/S date for which enterprises is not able to create the
provision.
c) A contingent liability should be reviewed at regular interval.
Contingent Asset
1) Contingent asset should never be recognized in books of accounts.
The Effects of Changes in Foreign Exchange Rates

Scope
This standard should be applied:

a) In accounting for transaction in foreign currency.
b) In translating the financial statement of foreign operation.
Foreign currency transaction
1) Initial Recognition :
A foreign currency transaction should be recorded at exchange at prevailing on the date of transaction.
2) Reporting at subsequent B/S date:
a) Foreign currency monetary asset should be reported using the exchange rate on prevailing on B/S
date.
b) Foreign currency non-monetary asset should be reported at exchange rate of transaction date only.
Treatment of exchange difference

Is a possible obligation & present obligation for Exchange difference arising on settlement or
which provision could not be created. reporting on such item may added to or reduced
from cost of asset.( Optional)
On L.T. foreign currency monetary liability related Exchange difference arising on settlement or
to acquisition of depreciable asset reporting on such item may be accumulated in
Foreign currency monetary item translation
difference A/c & amortize over the life of liability.
Other exchange difference should be recognised as income or as expenses in
the period in which they arise
Type of foreign operation
1) Integral foreign operations:
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.
2) Non integral foreign operation:
Other than Integral Foreign operation.
Rule for translation of Integral foreign operation
Item Exchange rate

Monetary Item At closing exchange rate
Non monetary item At exchange rate on date of transaction
Item of Income & expenses Average exchange rate
Treatment of exchange gain or Loss Charge as a income or as a expenses to P&L A/c
Rule for translation of Non Integral foreign operation
Item Exchange rate

Monetary Item At closing exchange rate
Non monetary item At closing exchange rate
Item of Income & expenses Average exchange rate
Treatment of exchange gain or Loss Accumulated in a foreign currency translation
reserve until the disposal of the net investment.
Forward contract
1) Forward contract not held for speculation or a) Premium/ discount=spot exchange rate-
trading purpose Forward exchange rate.
b) Amortize premium or discount over the life
of contract.
c) Any exchange gain or loss on Forward
contract is recognized in P&L in the period
of loss.
2) Forward contract held for speculation or trading a) No premium/ discount are recognized.
purpose b) Any exchange difference is recognized in
P&L A/c when they arise.
c) G/L = F.C.amount ( F.C.E.R – F.C.E.R.on B/s
date for remaining maturity of contract)
Earnings per share
Scope
1) AS 20 should be applied by all companies however small & medium size companies are not
required to disclose diluted E.P.S.
2) In consolidated financial statement, EPS is reported on the basis of consolidated information.
3) Even negative E.P.S is reported.
4) Basic EPS is reported with or without extraordinary item.
Presentation
There are two type of EPS reported in statement of P&L:
a) Basic EPS
b) Diluted EPS
Basic E.P.S
E.P.S. = Earnings available to Equity share holder
W.A. Number of equity share
Earnings available to Equity share holder

EBIT XX
Interest (XX)
(PBT) XX
Tax (XX)
(PAT) XX
Preference dividend ( cumulative whether provided or not) (XX)
Preference dividend ( Non -cumulative if provided ) (XX)
Dividend distribution tax (XX)
(Earnings available to ESH after extraordinary item) XX
Extraordinary item ( Plus or minus) (XX)
(Earnings available to ESH before Extraordinary item ) XX
W.A. number of equity shares

1. Shares issued for cash Date of cash receipt
2. Debt converted in ESC Date of conversion
3. Share issued for settlement of liability Date of settlement become effective
4. Shares issued for buying the asset Date of recognition of asset in Books of Account
5. Shares issued in exchange of receipt of services Date of services rendered
6. Bonus share / opportunity bonus share / split off Beginning of last financial year
shares
7. Amalgamation ( Purchase) Date of acquisition
8. Amalgamation ( Merger) Beginning of reporting period
For calculating weighted average share in most cases shares are included from the date of consideration
receivable.
Partly paid up & different nominal value share
1) Partly paid up shares are converted in equivalent number of fully paid up equity share if their
dividend entitlement right is similar to fully paid share otherwise calculate separate EPS for Fully &
partly paid up value share.
2) Enterprises has more than one Face value share and all has same dividend entitlement right then
calculate single EPS after converting all the Face value share in equivalent number of share in same
face value otherwise calculate separate EPS for each Face value.
3) For calculating more than one EPS, EAESH is apportioned in ratio of dividend entitlement right.
Right shares
In case of right issue a component of opportunity bonus is calculated & added to outstanding share
before right issue.
Opportunity bonus = Right share – share require to raise same amount
Share require to raise same amount= (Right share * issue price)

Theoretical value of share after right issue
Theoretical value of share after right us

Follow issue
on =our
O/s share prior
YouTube to Right
channel: * F.V .before
CA PATIL SIR right issue
+
(Right share * Issue price of right)
Practical assignment
Net Profit: Year 2000: Rs 11, 00,000 Year 2001: Rs 15, 00,000
No. of shares outstanding prior to rights issue 5, 00,000 shares
Rights issue: One new share for each five outstanding (i.e. 1, 00,000 new shares) Rights issue price: Rs
15.00
Fair value of one equity share immediately prior to exercise of rights on 1 st March 2001 Rs 21.00.
Th. Value of share after right issue (500000*21) + (100000*15)/ 600000 Rs 20
Amount Raised by way of Right share 100000*15 Rs 1500000
Shares required to raise same amount Rs 15,00,000 / Rs 20 75000 share

at the rate of Rs 20 per share
Opportunity Bonus 100000 share – 75000 share 25000 share
Date Particular No. of O/S share Time O/s share *

share Time
1.01.2001 Opening 500000 525000 2 10,50000

1.03.2001 Right issue 100000 600000 10 60,00,000
Total 70,50,000
Weighted average number of share (70,50,000/12) 5,87,500
Current year EPS ( Rs 15,00,000 / 5,87,500) Rs 2.55

Previous year EPS Re stated ( Rs 11,00,000 / 5,25,000) Rs 2.09
Bonus issue
1) AS per A.S.20 issue of share is assumed to be on first day of previous financial year.
2) Hence in case of actual bonus issue opportunity bonus of right share, previous year EPS is also
restated.
Diluted EPS

Diluted EPS is calculated for those potential equity shares which are to be issued next year for without
consideration.
Earnings, i.e., Net profit attributable to Rs 1,00,00,000

equity shareholders
No. of equity shares outstanding 20,00,000
Average fair value of one equity share Rs 75.00

during the year
Potential Equity Shares
Options 1,00,000 with exercise price of Rs 60
Convertible Preference shares 8, 00,000 shares entitled to a cumulative

dividend of Rs 8 per share. Each preference
share is convertible into 2 equity shares.
10%
corporate dividend tax
12% Convertible Debentures of Rs 100 each Nominal amount Rs 10, 00, 00,000. Each
debenture is convertible into 4 equity shares.
Tax rate 30%
Rank for inclusion in computation of diluted EPS
Case Increase in Increase in Increase In EPS Rank for

earning number of most
shares dilutive
Option 0 20000 0 1
Convertible Rs70,40,000 16,00,000 Rs 4.40 3

preference
shares
Convertible Rs 84,00,000 40,00,000 Rs 2.10 2

debenture
Computation of diluted EPS
Particular Earning W.A. Number EPS

of share
Basic EPS Rs 100,00,000 20,00,000 Rs 5

Diluted EPS taking option Rs 100,00,000 20,20,000 Rs 4.95
Diluted EPS taking option & Rs 1,84,00,000 60,20,000 Rs 3.06

convertible debenture ( Report)
Diluted EPS taking option , Rs 2,54,40000 76,20,000 Rs 3.34

Convertible debenture & ( Anti-dilution)
Preference share


A.S.revision Notes For 2nd Group

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PATIL PROFESSIONAL ACADEMY

407-B, Shrivardhan complex, RNT Marg, Indore Ph: 97559908355, 9752907877

Accounting standards Revision Notes

Non –adjusting events

1) Non adjusting events: other than adjusting events.

ITEM DEFINITION TREATMENT

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2. Non-monetary assets at concessional rate should be recorded at price paid for.

Grants Related to Specific Fixed Assets

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Presentation of Grants Related to Revenue

2. At the time of refund such refund is debited to P&L A/c

Grants for Promoters' contribution

3. When grant become refundable it is debited to capital reserve.

Government grants as compensation

1. Government grants may become receivable by an enterprise as compensation for expenses or

Government grant for immediate financial support

Accounting standards 16 (Accounting for borrowing cost)

3. Substantial period of time:

Recognition of borrowing cost

3. Other borrowing cost should be charged to P&L A/c.

Capitalization of borrowing cost should cease when Q.A. is ready to use.

Borrowing Costs Eligible for Capitalizations

• Specific borrowing cost

b) Capitalization = Actual B.C – income from temporary investment.

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a) Is borrowing cost related to borrowing taken for various purposes.

Definition Other than finance lease.

Sale & lease back transaction

Disclosure for lessor

In case of Finance lease in the books of lessor:

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Recognition and Initial Measurement of an Intangible Asset

1) An intangible asset should be recognised if, and only if:

For cash Purchase price + non refundable taxes, duties &

In exchange of securities At FMV of asset acquired or securities issued whichever

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2. If control is obtained through legal right then life

3. Useful life should be shorter of Economic or

Amortization method 1. I.T.A may be amortized using S.LM. , WDV or

2. If enterprise is not able to consumption pattern

Residual value & Gain or loss

1. Residual value of any I.T.A is taken as a NIL unless :

Obligating Event A event that create obligation for settlement of

Possible obligation A obligation is possible obligation if on the basis of

Contingent liability Is a possible obligation & present obligation for

The Effects of Changes in Foreign Exchange Rates

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This standard should be applied:

Treatment of exchange difference

Type of foreign operation

1) Integral foreign operations:

2) Non integral foreign operation:

Other than Integral Foreign operation.

Rule for translation of Integral foreign operation

Item Exchange rate

Rule for translation of Non Integral foreign operation

Item Exchange rate

Earnings available to Equity share holder

W.A. number of equity shares

Partly paid up & different nominal value share

Opportunity bonus = Right share – share require to raise same amount

Share require to raise same amount= (Right share * issue price)

Th. Value of share after right issue (50000021) + (10000015)/ 600000 Rs 20