Accounting Pronouncements 1 PDF

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GROUP II
INTERMEDIATE COURSE
PAPER 5: ADVANCED ACCOUNTING
ACCOUNTING
PRONOUNCEMENTS
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
© The Institute of Chartered Accountants of India

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ii
A WORD ABOUT ACCOUNTING

PRONOUNCEMENTS
Accounting Standards and Guidance Notes issued by the Institute form the
strong foundation to act as pillars of sound financial reporting system of a
country, which is an integral part of good corporate governance. It may be
noted that significant changes are taking place in the area of Accounting
Standards and Guidance Notes. Many new Accounting Standards and
Guidance Notes have been formulated by the Institute of Chartered
Accountants of India keeping in mind the growing importance of financial
reporting in the corporate scenario. Existing Accounting Standards and
Guidance Notes are also being revised from time to time.
Keeping all this in view, it has been decided to publish a separate book
containing the bare text of applicable Accounting Standards and Guidance
Notes (which are covered in the syllabus). This book is quite handy and will
be highly useful for the students since they will get all the relevant
accounting pronouncements at one place for easy reference.
This handbook has been divided into two parts for the convenience of the
students.
 First Part comprises of the relevant Accounting Standards (presently
applicable to students at Intermediate Level of Paper 5 “Advanced
Accounting”) by incorporating the relevant announcements issued from
time to time.
 Second Part contains relevant Guidance Notes (presently applicable to
students at Intermediate Level of Paper 5 “Advanced Accounting”) by
incorporating the relevant announcements issued from time to time.
Happy Reading and Best Wishes!

iii

iv
CONTENTS
Part – I: Accounting Standards ................................................... I.1 – I.131
AS 7: Construction Contracts .......................................................................................... I.1
AS 9: Revenue Recognition .......................................................................................... I.13
AS 14: Accounting for Amalgamations ..................................................................... I.21
AS 18 (issued 2000) - Related Party Disclosures ..................................................... I.30
AS 19: Leases ..................................................................................................................... I.39
AS 20 - Earnings Per Share ............................................................................................ I.53

AS 24 (issued 2002) - Discontinuing Operations .................................................... I.70
AS 26 : Intangible Assets ............................................................................................... I.82
AS 29 : Provisions, Contingent Liabilities and Contingent Assets ................... I.112
Part– II: Guidance Notes .............................................................. II.1 – II.186
GN(A) 5 : Guidance Note on Terms used in Financial Statements ............................. II.1
GN(A) 6 : Guidance Note on Accrual Basis of Accounting ......................................... II.22
GN(A) 11 : Guidance Note on Accounting for Corporate Dividend Tax ................. II.31
GN(A) 18 : Guidance Note on Accounting for Employee Share-based
Payments ............................................................................................................. II.35
GN(A) 22 : Guidance Note on Accounting for Credit Available in respect of
Minimum Alternate Tax under the Income Tax Act, 1961. ................... II.87
GN(A) 23 : Guidance Note on Accounting for Real Estate Transactions ................ II.91
GN(A) 29 : Guidance Note on Turnover in Case of Contractors ............................ II.100
Guidance Note on Schedule-III to the Companies Act, 2013… ............................. II.102

v
PART – I
AS 7 ∗: Construction Contracts
[This Accounting Standard includes paragraphs set in bold italic type and plain type, which
have equal authority. Paragraphs in bold italic type indicate the main principles. This
Accounting Standard should be read in the context of its objective, the Preface to the
1
Statements of Accounting Standards and the ‘Applicability of Accounting Standards to
Various Entities’.]
Objective
The objective of this Standard is to prescribe the accounting treatment of revenue and
costs associated with construction contracts. Because of the nature of the activity
undertaken in construction contracts, the date at which the contract activity is entered into
and the date when the activity is completed usually fall into different accounting periods.
Therefore, the primary issue in accounting for construction contracts is the allocation of
contract revenue and contract costs to the accounting periods in which construction work
is performed. This Standard uses the recognition criteria established in the Framework for
the Preparation and Presentation of Financial Statements to determine when contract
revenue and contract costs should be recognised as revenue and expenses in the statement
of profit and loss. It also provides practical guidance on the application of these criteria.
Scope
1. This Standard should be applied in accounting for construction contracts in the
financial statements of contractors.
Definitions
2. The following terms are used in this Standard with the meanings specified:
2.1 A construction contract is a contract specifically negotiated for the construction
of an asset or a combination of assets that are closely interrelated or interdependent
in terms of their design, technology and function or their ultimate purpose or use.
2.2 A fixed price contract is a construction contract in which the contractor agrees to
a fixed contract price, or a fixed rate per unit of output, which in some cases is subject
to cost escalation clauses.
2.3 A cost plus contract is a construction contract in which the contractor is
reimbursed for allowable or otherwise defined costs, plus percentage of these costs or
a fixed fee.
∗Revised in 2002 and came into effect in respect of all contracts entered into during accounting
periods commencing on or after 1-4-2003 and is mandatory in nature from that date.
1Attention is specifically drawn to paragraph 4.3 of the Preface, according to which Accounting
Standards are intended to apply only to items which are material.
I-2 Accounting Pronouncements
3. A construction contract may be negotiated for the construction of a single asset such
as a bridge, building, dam, pipeline, road, ship or tunnel. A construction contract may also
deal with the construction of a number of assets which are closely interrelated or
interdependent in terms of their design, technology and function or their ultimate purpose
or use; examples of such contracts include those for the construction of refineries and other
complex pieces of plant or equipment.
4. For the purposes of this Standard, construction contracts include:
(a) contracts for the rendering of services which are directly related to the
construction of the asset, for example, those for the services of project managers
and architects; and
(b) contracts for destruction or restoration of assets, and the restoration of the
environment following the demolition of assets.
5. Construction contracts are formulated in a number of ways which, for the purposes of
this Standard, are classified as fixed price contracts and cost plus contracts. Some
construction contracts may contain characteristics of both a fixed price contract and a cost
plus contract, for example, in the case of a cost plus contract with an agreed maximum
price. In such circumstances, a contractor needs to consider all the conditions in
paragraphs 22 and 23 in order to determine when to recognise contract revenue and
expenses.
Combining and Segmenting Construction Contracts
6. The requirements of this Standard are usually applied separately to each construction
contract. However, in certain circumstances, it is necessary to apply the Standard 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.
7. When a contract covers a number of assets, the construction of each asset should
be treated as a separate construction contract when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the contractor and
customer have been able to accept or reject that part of the contract relating
to each asset; and
(c) the costs and revenues of each asset can be identified.
8. A group of contracts, whether with a single customer or with several customers,
should be treated as a single construction contract when:
(a) the group of contracts is negotiated as a single package;
(b) the contracts are so closely interrelated that they are, in effect, part of a
single project with an overall profit margin; and
(c) the contracts are performed concurrently or in a continuous sequence.
9. A contract may provide for the construction of an additional asset at the option
of the customer or may be amended to include the construction of an additional asset.
Part I: Accounting Standards I-3
The construction of the additional asset should be treated as a separate construction

contract when:
(a) the asset differs significantly in design, technology or function from the asset
or assets covered by the original contract; or
(b) the price of the asset is negotiated without regard to the original contract
price.
Contract Revenue
10. Contract revenue should comprise:
(a) the initial amount of revenue agreed in the contract; and
(b) variations in contract work, claims and incentive payments:
(i) to the extent that it is probable that they will result in revenue; and
(ii) they are capable of being reliably measured.
11. Contract revenue is measured at the consideration received or receivable. The
measurement of contract revenue is affected by a variety of uncertainties that depend on
the outcome of future events. The estimates often need to be revised as events occur and
uncertainties are resolved. Therefore, the amount of contract revenue may increase or
decrease from one period to the next. For example:
(a) a contractor and a customer may agree to variations or claims that increase or
decrease contract revenue in a period subsequent to that in which the contract
was initially agreed;
(b) the amount of revenue agreed in a fixed price contract may increase as a result
of cost escalation clauses;
(c) the amount of contract revenue may decrease as a result of penalties arising from
delays caused by the contractor in the completion of the contract; or
(d) when a fixed price contract involves a fixed price per unit of output, contract
revenue increases as the number of units is increased.
12. A variation is an instruction by the customer for a change in the scope of the work to
be performed under the contract. A variation may lead to an increase or a decrease in
contract revenue. Examples of variations are changes in the specifications or design of the
asset and changes in the duration of the contract. A variation is included in contract revenue
when:
(a) it is probable that the customer will approve the variation and the amount of
revenue arising from the variation; and
(b) the amount of revenue can be reliably measured.
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. A claim may arise from,
for example, customer caused delays, errors in specifications or design, and disputed
variations in contract work. The measurement of the amounts of revenue arising from
claims is subject to a high level of uncertainty and often depends on the outcome of
negotiations. Therefore, claims are only included in contract revenue when:
(a) negotiations have reached an advanced stage such that it is probable that the
customer will accept the claim; and
(b) the amount that it is probable will be accepted by the customer can be measured
reliably.
14. Incentive payments are additional amounts payable to the contractor if specified
performance standards are met or exceeded. For example, a contract may allow for an
incentive payment to the contractor for early completion of the contract. Incentive
payments are included in contract revenue when:
(a) the contract is sufficiently advanced that it is probable that the specified
performance standards will be met or exceeded; and
(b) the amount of the incentive payment can be measured reliably.
Contract Costs
15. Contract costs should comprise:
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated
to the contract; and
(c) such other costs as are specifically chargeable to the customer under the
terms of the contract.
16. Costs that relate directly to a specific contract include:
(a) site labour costs, including site supervision;
(b) costs of materials used in construction;
(c) depreciation of plant and equipment used on the contract;
(d) costs of moving plant, equipment and materials to and from the contract site;
(e) costs of hiring plant and equipment;
(f) costs of design and technical assistance that is directly related to the contract;
(g) the estimated costs of rectification and guarantee work, including expected
warranty costs; and
(h) claims from third parties.
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.
17. Costs that may be attributable to contract activity in general and can be allocated to
specific contracts include:
(a) insurance;

(b) costs of design and technical assistance that is not directly related to a specific
contract; and
(c) construction overheads.
Such costs are allocated using methods that are systematic and rational and are applied
consistently to all costs having similar characteristics. The allocation is based on the normal
level of construction activity. Construction overheads include costs such as the preparation
and processing of construction personnel payroll. Costs that may be attributable to
contract activity in general and can be allocated to specific contracts also include borrowing
costs as per Accounting Standard (AS) 16, Borrowing Costs.
18. Costs that are specifically chargeable to the customer under the terms of the contract
may include some general administration costs and development costs for which
reimbursement is specified in the terms of the contract.
19. Costs that cannot be attributed to contract activity or cannot be allocated to a contract
are excluded from the costs of a construction contract. Such costs include:
(a) general administration costs for which reimbursement is not specified in the
contract;
(b) selling costs;
(c) research and development costs for which reimbursement is not specified in the
contract; and
(d) depreciation of idle plant and equipment that is not used on a particular contract.
20. Contract costs include the costs attributable to a contract for the period from the date
of securing the contract to the final completion of the contract. However, costs that relate
directly to a contract and which are incurred in securing the contract are also included as
part of the contract costs if they can be separately identified and measured reliably and it
is probable that the contract will be obtained. When costs incurred in securing a contract
are recognised as an expense in the period in which they are incurred, they are not included
in contract costs when the contract is obtained in a subsequent period.
Recognition of Contract Revenue and Expenses
21. When the outcome of a construction contract can 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.
22. In the case of a fixed price contract, the outcome of a construction contract can
be estimated reliably when all the following conditions are satisfied:
(a) total contract revenue can be measured reliably;
(b) it is probable that the economic benefits associated with the contract will
flow to the enterprise;
(c) both the contract costs to complete the contract and the stage of contract
completion at the reporting date can be measured reliably; and
(d) the contract costs attributable to the contract can be clearly identified and
measured reliably so that actual contract costs incurred can be compared
with prior estimates.
23. In the case of a cost plus contract, the outcome of a construction contract can be
estimated reliably when all the following conditions are satisfied:
(a) it is probable that the economic benefits associated with the contract will
flow to the enterprise; and
(b) the contract costs attributable to the contract, whether or not specifically
reimbursable, can be clearly identified and measured reliably.
24. The recognition of revenue and expenses by reference to the stage of completion of
a contract is often referred to as the percentage of completion method. Under this method,
contract revenue is matched with the contract costs incurred in reaching the stage of
completion, resulting in the reporting of revenue, expenses and profit which can be
attributed to the proportion of work completed. This method provides useful information
on the extent of contract activity and performance during a period.
25. Under the percentage of completion method, contract revenue is recognised as
revenue in the statement of profit and loss in the accounting periods in which the work is
performed. Contract costs are usually recognised as an expense in the statement of profit
and loss in the accounting periods in which the work to which they relate is performed.
However, any expected excess of total contract costs over total contract revenue for the
contract is recognised as an expense immediately in accordance with paragraph 35.
26. A contractor may have incurred contract costs that relate to future activity on the
contract. Such contract costs are recognised as an asset provided it is probable that they
will be recovered. Such costs represent an amount due from the customer and are often
classified as contract work in progress.
27. When an uncertainty arises about the collectability of an amount already included in
contract revenue, and already recognised in the statement of profit and loss, the
uncollectable amount or the amount in respect of which recovery has ceased to be
probable is recognised as an expense rather than as an adjustment of the amount of
contract revenue.
28. An enterprise is generally able to make reliable estimates after it has agreed to a
contract which establishes:
(a) each party’s enforceable rights regarding the asset to be constructed;
(b) the consideration to be exchanged; and
(c) the manner and terms of settlement.
It is also usually necessary for the enterprise to have an effective internal financial
budgeting and reporting system. The enterprise reviews and, when necessary, revises the

estimates of contract revenue and contract costs as the contract progresses. The need for
such revisions does not necessarily indicate that the outcome of the contract cannot be
estimated reliably.
29. The stage of completion of a contract may be determined in a variety of ways. The
enterprise uses the method that measures reliably the work performed. Depending on the
nature of the contract, the methods may include:
(a) the proportion that contract costs incurred for work performed upto the reporting
date bear to the estimated total contract costs; or
(b) surveys of work performed; or
(c) completion of a physical proportion of the contract work.
Progress payments and advances received from customers may not necessarily reflect the
work performed.
30. When the stage of completion is determined by reference to the contract costs
incurred upto the reporting date, only those contract costs that reflect work performed are
included in costs incurred upto the reporting date. Examples of contract costs which are
excluded are:
(a) contract costs that relate to future activity on the contract, such as costs of
materials that have been delivered to a contract site or set aside for use in a
contract but not yet installed, used or applied during contract performance,
unless the materials have been made specially for the contract; and
(b) payments made to subcontractors in advance of work performed under the
subcontract.
31. When the outcome of a construction contract cannot be estimated reliably:
(a) revenue should be recognised only to the extent of contract costs incurred of
which recovery is probable; and
(b) contract costs should be recognised as an expense in the period in which they
are incurred.
An expected loss on the construction contract should be recognised as an expense
immediately in accordance with paragraph 35.
32. During the early stages of a contract it is often the case that the outcome of the
contract cannot be estimated reliably. Nevertheless, it may be probable that the enterprise
will recover the contract costs incurred. Therefore, contract revenue is recognised only to
the extent of costs incurred that are expected to be recovered. As the outcome of the
contract cannot be estimated reliably, no profit is recognised. However, even though the
outcome of the contract cannot be estimated reliably, it may be probable that total contract
costs will exceed total contract revenue. In such cases, any expected excess of total contract
costs over total contract revenue for the contract is recognised as an expense immediately
in accordance with paragraph 35.

33. Contract costs recovery of which is not probable are recognised as an expense
immediately. Examples of circumstances in which the recoverability of contract costs incurred
may not be probable and in which contract costs may, therefore, need to be recognised as an
expense immediately include contracts:
(a) which are not fully enforceable, that is, their validity is seriously in question;
(b) the completion of which is subject to the outcome of pending litigation or
legislation;
(c) relating to properties that are likely to be condemned or expropriated;
(d) where the customer is unable to meet its obligations; or
(e) where the contractor is unable to complete the contract or otherwise meet its
obligations under the contract.
34. When the uncertainties that prevented the outcome of the contract being
estimated reliably no longer exist, revenue and expenses associated with the
construction contract should be recognised in accordance with paragraph 21 rather
than in accordance with paragraph 31.
Recognition of Expected Losses
35. When it is probable that total contract costs will exceed total contract revenue,
the expected loss should be recognised as an expense immediately.
36. The amount of such a loss is determined irrespective of:
(a) whether or not work has commenced on the contract;
(b) the stage of completion of contract activity; or
(c) the amount of profits expected to arise on other contracts which are not treated
as a single construction contract in accordance with paragraph 8.
Changes in Estimates
37. The percentage of completion method is applied on a cumulative basis in each
accounting period to the current estimates of contract revenue and contract costs.
Therefore, the effect of a change in the estimate of contract revenue or contract costs, or
the effect of a change in the estimate of the outcome of a contract, is accounted for as a
change in accounting estimate (see Accounting Standard (AS) 5, Net Profit or Loss for the
Period, Prior Period Items and Changes in Accounting Policies). The changed estimates are
used in determination of the amount of revenue and expenses recognised in the statement
of profit and loss in the period in which the change is made and in subsequent periods.
Disclosure
38. 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 recognised in the period;
and

(c) the methods used to determine the stage of completion of contracts in

progress.
39. 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.
40. Retentions are amounts of progress billings which are not paid until the satisfaction
of conditions specified in the contract for the payment of such amounts or until defects
have been rectified. Progress billings are amounts billed for work performed on a contract
whether or not they have been paid by the customer. Advances are amounts received by
the contractor before the related work is performed.
41. 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.
42. The gross amount due from customers for contract work is the net amount of:
(a) costs incurred plus recognised profits; less
(b) the sum of recognised losses and progress billings
for all contracts in progress for which costs incurred plus recognised profits (less recognised
losses) exceeds progress billings.
43. The gross amount due to customers for contract work is the net amount of:
(a) the sum of recognised losses and progress billings; less
(b) costs incurred plus recognised profits
for all contracts in progress for which progress billings exceed costs incurred plus
recognised profits (less recognised losses).
44. An enterprise discloses any contingencies in accordance with Accounting Standard
(AS) 4, Contingencies and Events Occurring After the Balance Sheet Date 2. Contingencies
may arise from such items as warranty costs, penalties or possible losses.
Illustration
This illustration does not form part of the Accounting Standard. Its purpose is to illustrate the
application of the Accounting Standard to assist in clarifying its meaning.
2Pursuant to AS 29, Provisions, Contingent Liabilities and Contingent Assets, becoming mandatory,
all paragraphs of AS 4 that deal with contingencies stand withdrawn except to the extent they deal
with impairment of assets not covered by other Accounting Standards.
Disclosure of Accounting Policies

The following are illustrations of accounting policy disclosures:
Revenue from fixed price construction contracts is recognised on the percentage of
completion method, measured by reference to the percentage of labour hours incurred
upto the reporting date to estimated total labour hours for each contract.
Revenue from cost plus contracts is recognised by reference to the recoverable costs
incurred during the period plus the fee earned, measured by the proportion that costs
incurred upto the reporting date bear to the estimated total costs of the contract.
The Determination of Contract Revenue and Expenses
The following illustration illustrates one method of determining the stage of completion of
a contract and the timing of the recognition of contract revenue and expenses (see
paragraphs 21 to 34 of the Standard). (Amounts shown hereinbelow are in ` lakhs)
A construction contractor has a fixed price contract for ` 9,000 to build a bridge. The initial
amount of revenue agreed in the contract is ` 9,000. The contractor’s initial estimate of
contract costs is ` 8,000. It will take 3 years to build the bridge.
By the end of year 1, the contractor’s estimate of contract costs has increased to ` 8,050.
In year 2, the customer approves a variation resulting in an increase in contract revenue of
` 200 and estimated additional contract costs of ` 150. At the end of year 2, costs incurred
include ` 100 for standard materials stored at the site to be used in year 3 to complete the
project.
The contractor determines the stage of completion of the contract by calculating the
proportion that contract costs incurred for work performed upto the reporting date bear
to the latest estimated total contract costs. A summary of the financial data during the
construction period is as follows:
(amount in ` lakhs)
Year 1 Year 2 Year 3

Initial amount of revenue agreed in contract 9,000 9,000 9,000
Variation — 200 200
Total contract revenue 9,000 9,200 9,200
Contract costs incurred upto the reporting date 2,093 6,168 8,200
Contract costs to complete 5,957 2,032 —
Total estimated contract costs 8,050 8,200 8,200
Estimated Profit 950 1,000 1,000
Stage of completion 26% 74% 100%

The stage of completion for year 2 (74%) is determined by excluding from contract costs
incurred for work performed upto the reporting date, ` 100 of standard materials stored at
the site for use in year 3.
The amounts of revenue, expenses and profit recognised in the statement of profit and loss
in the three years are as follows:
Upto the Recognised Recgnised in
Reporting in Prior current year
Date year
Year 1
Revenue (9,000x .26) 2,340 2,340
Expenses (8,050x .26) 2,093 2,093
Profit 247 247
Year 2
Revenue (9,200x .74) 6,808 2,340 4,468
Expenses (8,200x .74) 6,068 2,093 3,975
Profit 740 247 493
Year 3
Revenue (9,200x 1.00) 9,200 6,808 2,392
Expenses 8,200 6,068 2,132
Profit 1,000 740 260
Contract Disclosures
A contractor has reached the end of its first year of operations. All its contract costs incurred
have been paid for in cash and all its progress billings and advances have been received in
cash. Contract costs incurred for contracts B, C and E include the cost of materials that have
been purchased for the contract but which have not been used in contract performance
upto the reporting date. For contracts B, C and E, the customers have made advances to
the contractor for work not yet performed.
The status of its five contracts in progress at the end of year 1 is as follows:
Contract
(amount in ` lakhs)
A B C D E Total
Contract Revenue recognised in 145 520 380 200 55 1,300
accordance with paragraph 21
Contract Expenses recognised in 110 450 350 250 55 1,215
accordance with paragraph 21
Expected Losses recognised in
accordance with paragraph 35 — — — 40 30 70
Recognised profits less recognised losses 35 70 30 (90) (30) 15

Contract Costs incurred in the period 110 510 450 250 100 1,420
Contract Costs incurred recognised as
contract expenses in the period in
accordance with paragraph 21 110 450 350 250 55 1,215
Contract Costs that relate to future
activity recognised as an asset in
accordance with paragraph 26 — 60 100 — 45 205
Contract Revenue (see above) 145 520 380 200 55 1,300
Progress Billings (paragraph 40) 100 520 380 180 55 1,235
Unbilled Contract Revenue 45 — — 20 — 65
Advances (paragraph 40) — 80 20 — 25 125
The amounts to be disclosed in accordance with the Standard are as follows:

Contract revenue recognised as revenue in the period [paragraph 38(a)] 1,300
Contract costs incurred and recognised profits
(less recognised losses) upto the reporting date [paragraph 39(a)] 1,435
Advances received [paragraph 39(b)] 125
Gross amount due from customers for contract work —
presented as an asset in accordance with paragraph 41(a) 220
Gross amount due to customers for contract work —
presented as a liability in accordance with paragraph 41(b) (20)
The amounts to be disclosed in accordance with paragraphs 39(a), 41(a) and 41(b) are
calculated as follows:
(amount in ` lakhs)
A B C D E Total
Contract Costs incurred 110 510 450 250 100 1,420
Recognised profits less recognised 35 70 30 (90) (30) 15
losses
145 580 480 160 70 1,435
Progress billings 100 520 380 180 55 1,235
Due from customers 45 60 100 — 15 220
Due to customers — — — (20) — (20)
The amount disclosed in accordance with paragraph 39(a) is the same as the amount for
the current period because the disclosures relate to the first year of operation.

AS 9 ∗: Revenue Recognition 1
Accounting Standard should be read in the context of the Preface to the Statements of
2
Accounting Standards and the ‘Applicability of Accounting Standards to Various Entities’.]
Introduction
1. This Standard deals with the bases 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.
2. This Standard does not deal with the following aspects of revenue recognition to which
special considerations apply:
(i) Revenue arising from construction contracts 3
(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.
3. Examples of items not included within the definition of “revenue” for the purpose of this
Standard are:
(i) Realised gains resulting from the disposal of, and unrealised gains resulting from
the holding of, non-current assets e.g. appreciation in the value of fixed assets;
(ii) Unrealised holding gains resulting from the change in value of current assets, and
the natural increases in herds and agricultural and forest products;
(iii) Realised or unrealised gains resulting from changes in foreign exchange rates and
adjustments arising on the translation of foreign currency financial statements;
(iv) Realised gains resulting from the discharge of an obligation at less than its
carrying amount;
∗Issued in 1985
1Itis reiterated that this Accounting Standard (as is the case of other accounting standards) assumes
that the three fundamental accounting assumptions i.e., going concern, consistency and accrual have
been followed in the preparation and presentation of financial statements.
3Refer to AS 7 on ‘Construction Contracts’.
(v) Unrealised gains resulting from the restatement of the carrying amount of an
obligation.
Definitions
4.1 Revenue is the gross inflow of cash, receivables or other consideration arising in
the course of the ordinary activities of an enterprise4 from the sale of goods, from the
rendering of services, and from the use by others of enterprise resources yielding
interest, royalties and dividends. 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. In an agency
relationship, the revenue is the amount of commission and not the gross inflow of
cash, receivables or other consideration.
4.2 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.
4.3 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.
Explanation
5. Revenue recognition is mainly concerned with the timing of recognition of revenue in
the statement of profit and loss of an enterprise. The amount of revenue arising on a
transaction is usually determined by agreement between the parties involved in the
transaction. When uncertainties exist regarding the determination of the amount, or its
associated costs, these uncertainties may influence the timing of revenue recognition.
6. Sale of Goods
6.1 A key criterion for determining when to recognise 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 transfer of property in goods, in most cases, results in or coincides
with the transfer of significant risks and rewards of ownership to the buyer. However, there
may be situations where transfer of property in goods does not coincide with the transfer
of significant risks and rewards of ownership. Revenue in such situations is recognised at
the time of transfer of significant risks and rewards of ownership to the buyer. 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
4The Institute has issued an Announcement in 2005 titled ‘Treatment of Inter-divisional Transfers’. As
per the Announcement, the recognition of inter-divisional transfers as sales is an inappropriate
accounting treatment and is inconsistent with Accounting Standard 9.
have occurred but for such fault. Further, sometimes the parties may agree that the risk will
pass at a time different from the time when ownership passes.
6.2 At certain stages in specific industries, such as when agricultural crops have been
harvested or mineral ores have been extracted, performance may be substantially complete
prior to the execution of the transaction generating revenue. 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, the goods involved are often valued at net
realisable value. Such amounts, while not revenue as defined in this Standard, are
sometimes recognised in the statement of profit and loss and appropriately described.
7. Rendering of Services
7.1 Revenue from service transactions is usually recognised as the service is performed,
either by the proportionate completion method or by the completed service contract
method.
(i) Proportionate completion method—Performance consists of the execution of
more than one act. Revenue is recognised proportionately by reference to the
performance of each act. The revenue recognised under this method would be
determined on the basis of contract value, associated costs, number of acts or
other suitable basis. For practical purposes, when services are provided by an
indeterminate number of acts over a specific period of time, 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.
(ii) Completed service contract method—Performance consists of the execution of
a single act. Alternatively, services are performed in more than a single act, 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. 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.
8. The Use by Others of Enterprise Resources Yielding Interest,
Royalties and Dividends
8.1 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;
(ii) royalties—charges for the use of such assets as know-how, patents, trademarks
and copyrights;
(iii) dividends—rewards from the holding of investments in shares.
8.2 Interest accrues, in most circumstances, on the time basis determined by the amount
outstanding and the rate applicable. Usually, discount or premium on debt securities held
is treated as though it were accruing over the period to maturity.

8.3 Royalties accrue in accordance with the terms of the relevant agreement and are
usually recognised on that basis unless, having regard to the substance of the transactions,
it is more appropriate to recognise revenue on some other systematic and rational basis.
8.4 Dividends from investments in shares are not recognised in the statement of profit
and loss until a right to receive payment is established.
8.5 When interest, royalties and dividends from foreign countries require exchange
permission and uncertainty in remittance is anticipated, revenue recognition may need to
be postponed.
9. Effect of Uncertainties on Revenue Recognition
9.1 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.
9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking
at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc.,
revenue recognition is postponed to the extent of uncertainty involved. In such cases, it
may be appropriate to recognise revenue only when it is reasonably certain that the
ultimate collection will be made. Where there is no uncertainty as to ultimate collection,
revenue is recognised at the time of sale or rendering of service even though payments are
made by instalments.
9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or
the rendering of the service, it is more appropriate to make a separate provision to reflect
the uncertainty rather than to adjust the amount of revenue originally recorded.
9.4 An essential criterion for the recognition of revenue is that the consideration
receivable for the sale of goods, the rendering of services or from the use by others of
enterprise resources is reasonably determinable. When such consideration is not
determinable within reasonable limits, the recognition of revenue is postponed.
9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is
considered as revenue of the period in which it is properly recognised.
Main Principles
10. Revenue from sales or service transactions should be recognised when the
requirements as to performance set out in paragraphs 11 and 12 are satisfied,
provided that at the time of performance it is not unreasonable to expect ultimate
collection. If at the time of raising of any claim it is unreasonable to expect ultimate
collection, revenue recognition should be postponed.
Explanation:
The amount of revenue from sales transactions (turnover) should be disclosed in the
following manner on the face of the statement of profit or loss :

Turnover (Gross) XX
Less: Excise Duty XX
Turnover (Net) XX
The amount of excise duty to be deducted from the turnover should be the total excise
duty for the year except the excise duty related to the difference between the closing
start and opening stock. The excise duty related to the difference between the closing
stock and opening stock should be recognised separately in the statement of profit or
loss, with an explanatory note in the notes to accounts to explain the nature of the
two amounts of excise duty.
11. In a transaction involving the sale of goods, 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; and
(ii) no significant uncertainty exists regarding the amount of the consideration
that will be derived from the sale of the goods.
12. In a transaction involving the rendering of services, performance should be
measured either under the completed service contract method or under the
proportionate completion method, whichever relates the revenue to the work
accomplished. 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.
13. Revenue arising from the use by others of enterprise resources yielding interest,
royalties and dividends should only be recognised when no significant uncertainty as
to measurability or collectability exists. These revenues are recognised on the
following bases:
(i) Interest : on time proportion basis taking into account the
amount outstanding and the rate applicable.
(ii) Royalties : on an accrual basis in accordance with the terms of the
relevant agreement.
(iii) Dividends from : when the owner’s right to receive payment is
investments in shares established.
Disclosure
14. In addition to the disclosures required by Accounting Standard 1 on ‘Disclosure
of Accounting Policies’ (AS 1), an enterprise should also disclose the circumstances in
which revenue recognition has been postponed pending the resolution of significant
uncertainties.

Illustrations
These illustrations do not form part of the Accounting Standard. Their purpose is to
illustrate the application of the Standard to a number of commercial situations in an
endeavour to assist in clarifying application of the Standard.
A. Sale of Goods
1. 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. However, the
item must be on hand, 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.
2. Delivered subject to conditions
(a) installation and inspection i.e. goods are sold subject to installation, inspection etc.
Revenue should normally not be recognised until the customer accepts delivery and
installation and inspection are complete. In some cases, however, 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.g. installation of a factory-
tested television receiver normally only requires unpacking and connecting of power
and antennae).
(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, a reasonable time has
elapsed.
(c) guaranteed sales i.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. 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. In other cases, the substance of
the agreement may amount to a sale on consignment, in which case it should be
treated as indicated below.
(d) consignment sales i.e. a delivery is made whereby the recipient undertakes to sell the
goods on behalf of the consignor.
Revenue should not be recognised until the goods are sold to a third party.
(e) cash on delivery sales
Revenue should not be recognised until cash is received by the seller or his agent.

3. Sales where the purchaser makes a series of instalment payments to the seller, 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. However,
when experience indicates that most such sales have been consummated, revenue may be
recognised when a significant deposit is received.
4. Special order and shipments i.e. where payment (or partial payment) is received for
goods not presently held in stock e.g. 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, identified
and ready for delivery to the buyer by the third party.
5. Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the same
goods at a later date
For such transactions that are in substance a financing agreement, the resulting cash inflow
is not revenue as defined and should not be recognised as revenue.
6. Sales to intermediate parties i.e. where goods are sold to distributors, dealers or others
for resale
Revenue from such sales can generally be recognised if significant risks of ownership have
passed; 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.
7. Subscriptions for publications
Revenue received or billed should be deferred and recognised either on a straight line basis
over time or, where the items delivered vary in value from period to period, 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.
8. Instalment sales
When the consideration is receivable in instalments, revenue attributable to the sales price
exclusive of interest should be recognised at the date of sale. The interest element should
be recognised as revenue, proportionately to the unpaid balance due to the seller.
9. Trade discounts and volume rebates
Trade discounts and volume rebates received are not encompassed within the
definition of revenue, since they represent a reduction of cost. Trade discounts and
volume rebates given should be deducted in determining revenue.
B. Rendering of Services
1. Installation Fees
In cases where installation fees are other than incidental to the sale of a product, they
should be recognised as revenue only when the equipment is installed and accepted
by the customer.
2. Advertising and insurance agency commissions

Revenue should be recognised when the service is completed. For advertising
agencies, 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, as opposed to production commission, which will be
recognised when the project is completed. Insurance agency commissions should be
recognised on the effective commencement or renewal dates of the related policies.
3. Financial service commissions
A financial service may be rendered as a single act or may be provided over a period
of time. Similarly, 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.
Such charges may be settled in full when made or added to a loan or other account
and settled in stages. 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;
(b) the incidence of the costs relating to the service;
(c) when the payment for the service will be received. In general, commissions
charged for arranging or granting loan or other facilities should be recognised
when a binding obligation has been entered into. Commitment, 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, the nature of the services provided and
the timing of the costs relating thereto.
4. Admission fees
Revenue from artistic performances, banquets and other special events should be
recognised when the event takes place. When a subscription to a number of events is
sold, the fee should be allocated to each event on a systematic and rational basis.
5. Tuition fees
Revenue should be recognised over the period of instruction.
6. Entrance and membership fees
Revenue recognition from these sources will depend on the nature of the services
being provided. Entrance fee received is generally capitalised. 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, the fee should be recognised when received.
If the membership fee entitles the member to services or publications to be provided
during the year, it should be recognised on a systematic and rational basis having
regard to the timing and nature of all services provided.
AS 14 ∗: Accounting for Amalgamations

Accounting Standard should be read in the context of the Preface to the Statements of
1
Accounting Standards and the ‘Applicability of Accounting Standards to Various Entities’).]
Introduction
1. This standard deals with accounting for amalgamations and the treatment of any
resultant goodwill or reserves. This Standard is directed principally to companies although
some of its requirements also apply to financial statements of other enterprises.
2. This standard does not deal with cases of acquisitions which arise when there is a
purchase by one company (referred to as the acquiring company) of the whole or part of
the shares, or the whole or part of the assets, of another company (referred to as the
acquired company) in consideration for payment in cash or by issue of shares or other
securities in the acquiring company or partly in one form and partly in the other. The
distinguishing feature of an acquisition is that the acquired company is not dissolved and
its separate entity continues to exist.
Definitions
3. The following terms are used in this standard with the meanings specified:
(a) Amalgamation means an amalgamation pursuant to the provisions of the
Companies Act, 1956 or any other statute which may be applicable to
companiesand includes ‘merger’.
(b) Transferor company means the company which is amalgamated into another
company.
(c) Transferee company means the company into which a transferor company is
amalgamated.
(d) Reserve means the portion of earnings, receipts or other surplus of an
enterprise (whether capital or revenue) appropriated by the management for
a general or a specific purpose other than a provision for depreciation or
diminution in the value of assets or for a known liability.
(e) Amalgamation in the nature of merger is an amalgamation which satisfies
all the following conditions.
(i) All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
∗Issued in 1994. A limited revision to this Standard was made in 2004, pursuant to which paragraphs
23 and 42 of this Standard were revised.

(ii) Shareholders holding not less than 90% of the face value of the equity
shares of the transferor company (other than the equity shares already
held therein, immediately before the amalgamation, by the transferee
company or its subsidiaries or their nominees) become equity
shareholders of the transferee company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity
shareholders of the transferor company who agree to become equity
shareholders of the transferee company is discharged by the transferee
company wholly by the issue of equity shares in the transferee company,
except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after
the amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets
and liabilities of the transferor company when they are incorporated in
the financial statements of the transferee company except to ensure
uniformity of accounting policies.
(f) Amalgamation in the nature of purchase is an amalgamation which does not
satisfy any one or more of the conditions specified in sub-paragraph (e)
above.
(g) Consideration for the amalgamation means the aggregate of the shares and
other securities issued and the payment made in the form of cash or other
assets by the transferee company to the shareholders of the transferor
company.
(h) Fair value is the amount for which an asset could be exchanged between a
knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s
length transaction.
(i) Pooling of interests is a method of accounting for amalgamations the object
of which is to account for the amalgamation as if the separate businesses of
the amalgamating companies were intended to be continued by the
transferee company. Accordingly, only minimal changes are made in
aggregating the individual financial statements of the amalgamating
companies.
Explanation
Types of Amalgamations
4. Generally speaking, amalgamations fall into two broad categories. In the first category
are those amalgamations where there is a genuine pooling not merely of the assets and
liabilities of the amalgamating companies but also of the shareholders’ interests and of the
businesses of these companies. Such amalgamations are amalgamations which are in the
nature of ‘merger’ and the accounting treatment of such amalgamations should ensure that
the resultant figures of assets, liabilities, capital and reserves more or less represent the
sum of the relevant figures of the amalgamating companies. In the second category are
those amalgamations which are in effect a mode by which one company acquires another
company and, as a consequence, the shareholders of the company which is acquired
normally do not continue to have a proportionate share in the equity of the combined
company, or the business of the company which is acquired is not intended to be
continued. Such amalgamations are amalgamations in the nature of ‘purchase’.
5. An amalgamation is classified as an ‘amalgamation in the nature of merger’ when all
the conditions listed in paragraph 3(e) are satisfied. There are, however, differing views
regarding the nature of any further conditions that may apply. Some believe that, in
addition to an exchange of equity shares, it is necessary that the shareholders of the
transferor company obtain a substantial share in the transferee company even to the extent
that it should not be possible to identify any one party as dominant therein. This belief is
based in part on the view that the exchange of control of one company for an insignificant
share in a larger company does not amount to a mutual sharing of risks and benefits.
6. Others believe that the substance of an amalgamation in the nature of merger is
evidenced by meeting certain criteria regarding the relationship of the parties, such as the
former independence of the amalgamating companies, the manner of their amalgamation,
the absence of planned transactions that would undermine the effect of the amalgamation,
and the continuing participation by the management of the transferor company in the
management of the transferee company after the amalgamation.
Methods of Accounting for Amalgamations
7. There are two main methods of accounting for amalgamations:
(a) the pooling of interests method; and
(b) the purchase method.
8. The use of the pooling of interests method is confined to circumstances which meet
the criteria referred to in paragraph 3(e) for an amalgamation in the nature of merger.
9. The object of the purchase method is to account for the amalgamation by applying
the same principles as are applied in the normal purchase of assets. This method is used in
accounting for amalgamations in the nature of purchase.
The Pooling of Interests Method
10. Under the pooling of interests method, the assets, liabilities and reserves of the
transferor company are recorded by the transferee company at their existing carrying
amounts (after making the adjustments required in paragraph 11).
11. If, at the time of the amalgamation, the transferor and the transferee companies have
conflicting accounting policies, a uniform set of accounting policies is adopted following
the amalgamation. The effects on the financial statements of any changes in accounting
policies are reported in accordance with Accounting Standard (AS) 5, Net Profit or Loss for
the Period, Prior Period Items and Changes in Accounting Policies.

The Purchase Method

12 Under the purchase method, the transferee company accounts for the amalgamation
either by incorporating the assets and liabilities at their existing carrying amounts or by
allocating the consideration to individual identifiable assets and liabilities of the transferor
company on the basis of their fair values at the date of amalgamation. The identifiable
assets and liabilities may include assets and liabilities not recorded in the financial
statements of the transferor company.
13. Where assets and liabilities are restated on the basis of their fair values, the
determination of fair values may be influenced by the intentions of the transferee company.
For example, the transferee company may have a specialised use for an asset, which is not
available to other potential buyers. The transferee company may intend to effect changes
in the activities of the transferor company which necessitate the creation of specific
provisions for the expected costs, e.g. planned employee termination and plant relocation
costs.
Consideration
14. The consideration for the amalgamation may consist of securities, cash or other assets.
In determining the value of the consideration, an assessment is made of the fair value of
its elements. A variety of techniques is applied in arriving at fair value. For example, when
the consideration includes securities, the value fixed by the statutory authorities may be
taken to be the fair value. In case of other assets, the fair value may be determined by
reference to the market value of the assets given up. Where the market value of the assets
given up cannot be reliably assessed, such assets may be valued at their respective net
book values.
15. Many amalgamations recognise that adjustments may have to be made to the
consideration in the light of one or more future events. When the additional payment is
probable and can reasonably be estimated at the date of amalgamation, it is included in
the calculation of the consideration. In all other cases, the adjustment is recognised as
soon as the amount is determinable [see Accounting Standard (AS) 4, Contingencies and
Events Occurring After the Balance Sheet Date].
Treatment of Reserves on Amalgamation
16. If the amalgamation is an ‘amalgamation in the nature of merger’, the identity of the
reserves is preserved and they appear in the financial statements of the transferee company
in the same form in which they appeared in the financial statements of the transferor
company. Thus, for example, the General Reserve of the transferor company becomes the
General Reserve of the transferee company, the Capital Reserve of the transferor company
becomes the Capital Reserve of the transferee company and the Revaluation Reserve of the
transferor company becomes the Revaluation Reserve of the transferee company. As a
result of preserving the identity, reserves which are available for distribution as dividend
before the amalgamation would also be available for distribution as dividend after the
amalgamation. The difference between the amount recorded as share capital issued (plus
any additional consideration in the form of cash or other assets) and the amount of share
capital of the transferor company is adjusted in reserves in the financial statements of the
transferee company.
17. If the amalgamation is an ‘amalgamation in the nature of purchase’, the identity of the
reserves, other than the statutory reserves dealt with in paragraph 18, is not preserved. The
amount of the consideration is deducted from the value of the net assets of the transferor
company acquired by the transferee company. If the result of the computation is negative,
the difference is debited to goodwill arising on amalgamation and dealt with in the manner
stated in paragraphs 19-20. If the result of the computation is positive, the difference is
credited to Capital Reserve.
18. Certain reserves may have been created by the transferor company pursuant to the
requirements of, or to avail of the benefits under, the Income-tax Act, 1961; for example,
Development Allowance Reserve, or Investment Allowance Reserve. The Act requires that
the identity of the reserves should be preserved for a specified period. Likewise, certain
other reserves may have been created in the financial statements of the transferor company
in terms of the requirements of other statutes. Though, normally, in an amalgamation in
the nature of purchase, the identity of reserves is not preserved, an exception is made in
respect of reserves of the aforesaid nature (referred to hereinafter as ‘statutory reserves’)
and such reserves retain their identity in the financial statements of the transferee company
in the same form in which they appeared in the financial statements of the transferor
company, so long as their identity is required to be maintained to comply with the relevant
statute. This exception is made only in those amalgamations where the requirements of the
relevant statute for recording the statutory reserves in the books of the transferee company
are complied with. In such cases the statutory reserves are recorded in the financial
statements of the transferee company by a corresponding debit to a suitable account head
(e.g., ‘Amalgamation Adjustment Reserve’) which is presented as a separate line item. When
the identity of the statutory reserves is no longer required to be maintained, both the
reserves and the aforesaid account are reversed.
Treatment of Goodwill Arising on Amalgamation
19. Goodwill arising on amalgamation represents a payment made in anticipation of future
income and it is appropriate to treat it as an asset to be amortised to income on a
systematic basis over its useful life. Due to the nature of goodwill, it is frequently difficult
to estimate its useful life with reasonable certainty. Such estimation is, therefore, made on
a prudent basis. Accordingly, it is considered appropriate to amortise goodwill over a
period not exceeding five years unless a somewhat longer period can be justified.
20. Factors which may be considered in estimating the useful life of goodwill arising on
amalgamation include:
(a) the foreseeable life of the business or industry;
(b) the effects of product obsolescence, changes in demand and other economic
factors;
(c) the service life expectancies of key individuals or groups of employees;

(d) expected actions by competitors or potential competitors; and

(e) legal, regulatory or contractual provisions affecting the useful life.
Balance of Profit and Loss Account
21. In the case of an ‘amalgamation in the nature of merger’, the balance of the Profit and
Loss Account appearing in the financial statements of the transferor company is aggregated
with the corresponding balance appearing in the financial statements of the transferee
company. Alternatively, it is transferred to the General Reserve, if any.
22. In the case of an ‘amalgamation in the nature of purchase’, the balance of the Profit
and Loss Account appearing in the financial statements of the transferor company, whether
debit or credit, loses its identity.
Treatment of Reserves Specified in a Scheme of Amalgamation
23. The scheme of amalgamation sanctioned under the provisions of the Companies Act,
1956 or any other statute may prescribe the treatment to be given to the reserves of the
transferor company after its amalgamation. Where the treatment is so prescribed, the same
is followed. In some cases, the scheme of amalgamation sanctioned under a statute may
prescribe a different treatment to be given to the reserves of the transferor company after
amalgamation as compared to the requirements of this Standard that would have been
followed had no treatment been prescribed by the scheme. In such cases, the following
disclosures are made in the first financial statements following the amalgamation:
(a) A description of the accounting treatment given to the reserves and the reasons
for following the treatment different from that prescribed in this Standard.
(b) Deviations in the accounting treatment given to the reserves as prescribed by the
scheme of amalgamation sanctioned under the statute as compared to the
requirements of this Standard that would have been followed had no treatment
been prescribed by the scheme.
(c) The financial effect, if any, arising due to such deviation.
Disclosure
24. For all amalgamations, the following disclosures are considered appropriate 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.
25. For amalgamations accounted for under the pooling of interests method, the following
additional disclosures are considered appropriate in the first financial statements following
the amalgamation:
(a)
description and number of shares issued, together with the percentage of each
company’s equity shares exchanged to effect the amalgamation;
(b) the amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof.
26. For amalgamations accounted for under the purchase method, the following
additional disclosures are considered appropriate in the first financial statements following
the amalgamation:
(a) consideration for the amalgamation and a description of the consideration paid
or contingently payable; and
identifiable assets acquired, and the treatment thereof including the period of
amortisation of any goodwill arising on amalgamation.
Amalgamation after the Balance Sheet Date
27. When an amalgamation is effected after the balance sheet date but before the
issuance of the financial statements of either party to the amalgamation, disclosure is made
in accordance with AS 4, ‘Contingencies and Events Occurring After the Balance Sheet Date’,
but the amalgamation is not incorporated in the financial statements. In certain
circumstances, the amalgamation may also provide additional information affecting the
financial statements themselves, for instance, by allowing the going concern assumption to
be maintained.
Main Principles
28. An amalgamation may be either –
(a) an amalgamation in the nature of merger, or
(b) an amalgamation in the nature of purchase.
29. An amalgamation should be considered to be an amalgamation in the nature of
merger when all the following conditions are satisfied:
(i) All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares
of the transferor company (other than the equity shares already held therein,
immediately before the amalgamation, by the transferee company or its
subsidiaries or their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity
shareholders of the transferor company who agree to become equity
shareholders of the transferee company is discharged by the transferee
company wholly by the issue of equity shares in the transferee company,
except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.

(v) No adjustment is intended to be made to the book values of the assets and
liabilities of the transferor company when they are incorporated in the
financial statements of the transferee company except to ensure uniformity
of accounting policies.
30. An amalgamation should be considered to be an amalgamation in the nature of
purchase, when any one or more of the conditions specified in paragraph 29 is not
satisfied.
31. When an amalgamation is considered to be an amalgamation in the nature of
merger, it should be accounted for under the pooling of interests method described in
paragraphs 33–35.
32. When an amalgamation is considered to be an amalgamation in the nature of
purchase, it should be accounted for under the purchase method described in
paragraphs 36–39.
The Pooling of Interests Method
33. In preparing the transferee company’s financial statements, the assets, liabilities
and reserves (whether capital or revenue or arising on revaluation) of the transferor
company should be recorded at their existing carrying amounts and in the same form
as at the date of the amalgamation. The balance of the Profit and Loss Account of the
transferor company should be aggregated with the corresponding balance of the
transferee company or transferred to the General Reserve, if any.
34. If, at the time of the amalgamation, the transferor and the transferee companies
have conflicting accounting policies, a uniform set of accounting policies should be
adopted following the amalgamation. The effects on the financial statements of any
changes in accounting policies should be reported in accordance with Accounting
Standard (AS) 5 Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies.
35. The difference between the amount recorded as share capital issued (plus any
additional consideration in the form of cash or other assets) and the amount of share
capital of the transferor company should be adjusted in reserves.
The Purchase Method
36. In preparing the transferee company’s financial statements, the assets and
liabilities of the transferor company should be incorporated at their existing carrying
amounts or, alternatively, the consideration should be allocated to individual
identifiable assets and liabilities on the basis of their fair values at the date of
amalgamation. The reserves (whether capital or revenue or arising on revaluation) of
the transferor company, other than the statutory reserves, should not be included in
the financial statements of the transferee company except as stated in paragraph 39.
37. Any excess of the amount of the consideration over the value of the net assets of
the transferor company acquired by the transferee company should be recognised in
the transferee company’s financial statements as goodwill arising on amalgamation.
If the amount of the consideration is lower than the value of the net assets acquired,
the difference should be treated as Capital Reserve.
38. The goodwill arising on amalgamation should be amortised to income on a
systematic basis over its useful life. The amortisation period should not exceed five
years unless a somewhat longer period can be justified.
39. Where the requirements of the relevant statute for recording the statutory
reserves in the books of the transferee company are complied with, statutory reserves
of the transferor company should be recorded in the financial statements of the
transferee company. The corresponding debit should be given to a suitable account
head (e.g., ‘Amalgamation Adjustment Reserve’) which should be presented as a
separate line item.When the identity of the statutory reserves is no longer required to
be maintained, both the reserves and the aforesaid account should be reversed.
Common Procedures
40. The consideration for the amalgamation should include any non- cash 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. In case of other assets, the fair value may be
determined by reference to the market value of the assets given up. Where the market
value of the assets given up cannot be reliably assessed, such assets may be valued at
their respective net book values.
41. Where the scheme of amalgamation provides for an adjustment to the
consideration contingent on one or more future events, the amount of the additional
payment should be included in the consideration if payment is probable and a
reasonable estimate of the amount can be made. In all other cases, the adjustment
should be recognised as soon as the amount is determinable [see Accounting Standard
(AS) 4, Contingencies and Events Occurring After the Balance Sheet Date].
Treatment of Reserves Specified in a Scheme of Amalgamation
42. Where the scheme of amalgamation sanctioned under a statute prescribes the
treatment to be given to the reserves of the transferor company after amalgamation,
the same should be followed. Where the scheme of amalgamation sanctioned under a
statute prescribes a different treatment to be given to the reserves of the transferor
company after amalgamation as compared to the requirements of this Standard that
would have been followed had no treatment been prescribed by the scheme, the
following disclosures should be made in the first financial statements following the
amalgamation:
(a) A description of the accounting treatment given to the reserves and reasons
for following the treatment different from that prescribed in this Standard.
(b) Deviations in the accounting treatment given to the reserves as prescribed
by the scheme of amalgamation sanctioned under the statute as compared
to the requirements of this Standard that would have been followed had no
treatment been prescribed by the scheme.

(c) The financial effect, if any, arising due to such deviation.

Disclosure
43. 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.
44. For amalgamations accounted for under the pooling of interests method, the
following additional disclosures should be made in the first financial statements
following the amalgamation:
(a) description and number of shares issued, together with the percentage of
each company’s equity shares exchanged to effect the amalgamation;
identifiable assets acquired, and the treatment thereof.
45. For amalgamations accounted for under the purchase method, the following
additional disclosures should be made in the first financial statements following the
amalgamation:
(a) consideration for the amalgamation and a description of the consideration
paid or contingently payable; and
identifiable assets acquired, and the treatment thereof including the period
of amortisation of any goodwill arising on amalgamation.
Amalgamation after the Balance Sheet Date
46. When an amalgamation is effected after the balance sheet date but before the
issuance of the financial statements of either party to the amalgamation, disclosure
should be made in accordance with AS 4, ‘Contingencies and Events Occurring After the
Balance Sheet Date’, but the amalgamation should not be incorporated in the financial
statements. In certain circumstances, the amalgamation may also provide additional
information affecting the financial statements themselves, for instance, by allowing the
going concern assumption to be maintained.
AS 18 ∗ (issued 2000) - Related Party Disclosures

∗A limited revision to this Standard was made in 2003, pursuant to which paragraph26 of this
Standard was revised and paragraph 27 was added to this Standard.
1
Various Entities’]
This Accounting Standard is not Mandatory for non-corporate entities falling in Level III.
Objective
The objective of this Standard is to establish requirements for disclosure of:
(a) related party relationships; and
(b) transactions between a reporting enterprise and its related parties.
Scope
1. This Standard should be applied in reporting related party relationships and
transactions between a reporting enterprise and its related parties. The requirements
of this Standard apply to the financial statements of each reporting enterprise as also
to consolidated financial statements presented by a holding company.
2. This Standard applies only to related party relationships described in paragraph 3.
3. This Standard deals only with related party relationships described in (a) to (e) below:
(a) enterprises that directly, or indirectly through one or more intermediaries, control,
or are controlled by, or are under common control with, the reporting enterprise
(this includes holding companies, subsidiaries and fellow subsidiaries);
(b) associates and joint ventures of the reporting enterprise and the investing party
or venturer in respect of which the reporting enterprise is an associate or a joint
venture;
(c) individuals owning, directly or indirectly, an interest in the voting power of the
reporting enterprise that gives them control or significant influence over the
enterprise, and relatives of any such individual;
(d) key management personnel and relatives of such personnel; and
(e) enterprises over which any person described in (c) or (d) is able to exercise
significant influence. This includes enterprises owned by directors or major
shareholders of the reporting enterprise and enterprises that have a member of
key management in common with the reporting enterprise.
4. In the context of this Standard, the following are deemed not to be related parties:
(a) two companies simply because they have a director in common, notwithstanding
paragraph 3(d) or (e) above (unless the director is able to affect the policies of
both companies in their mutual dealings);
(b) a single customer, supplier, franchiser, distributor, or general agent with whom
an enterprise transacts a significant volume of business merely by virtue of the
resulting economic dependence; and
(c) the parties listed below, in the course of their normal dealings with an enterprise
by virtue only of those dealings (although they may circumscribe the freedom of
action of the enterprise or participate in its decision-making process):
(i) providers of finance;
(ii) trade unions;
(iii) public utilities;
(iv) government departments and government agencies including government
sponsored bodies.
5. Related party disclosure requirements as laid down in this Standard do not apply
in circumstances where providing such disclosures would conflict with the reporting
enterprise’s duties of confidentiality as specifically required in terms of a statute or
by any regulator or similar competent authority.
6. In case a statute or a regulator or a similar competent authority governing an
enterprise prohibit the enterprise to disclose certain information which is required to be
disclosed as per this Standard, disclosure of such information is not warranted. For example,
banks are obliged by law to maintain confidentiality in respect of their customers’
transactions and this Standard would not override the obligation to preserve the
confidentiality of customers’ dealings.
7. No disclosure is required in consolidated financial statements in respect of intra-
group transactions.
8. Disclosure of transactions between members of a group is unnecessary in consolidated
financial statements because consolidated financial statements present information about
the holding and its subsidiaries as a single reporting enterprise.
9. No disclosure is required in the financial statements of state-controlled
enterprises as regards related party relationships with other state-controlled
enterprises and transactions with such enterprises.
Definitions
10. For the purpose of this Standard, the following terms are used with the meanings
specified:
10.1 Related party - parties are considered to be related if at any time during the
reporting period one party has the ability to control the other party or exercise
significant influence over the other party in making financial and/or operating
decisions.
10.2 Related party transaction - a transfer of resources or obligations between related
parties, regardless of whether or not a price is charged.

10.3 Control –
(a) ownership, directly or indirectly, of more than one half of the voting power
of an enterprise, or
(b) control of the composition of the board of directors in the case of a company
or of the composition of the corresponding governing body in case of any
other enterprise, or
(c) a substantial interest in voting power and the power to direct, by statute or
agreement, the financial and/or operating policies of the enterprise.
10.4 Significant influence - participation in the financial and/or operating policy
decisions of an enterprise, but not control of those policies.
10.5 An Associate - an enterprise in which an investing reporting party has significant
influence and which is neither a subsidiary nor a joint venture of that party.
10.6 A Joint venture - a contractual arrangement whereby two or more parties
undertake an economic activity which is subject to joint control.
10.7 Joint control - the contractually agreed sharing of power to govern the financial
and operating policies of an economic activity so as to obtain benefits from it.
10.8 Key management personnel - those persons who have the authority and
responsibility for planning, directing and controlling the activities of the reporting
enterprise.
10.9 Relative – in relation to an individual, means the spouse, son, daughter, brother,
sister, father and mother who may be expected to influence, or be influenced by, that
individual in his/her dealings with the reporting enterprise.
10.10 Holding company - a company having one or more subsidiaries.
10.11 Subsidiary - a company:
(a) in which another company (the holding company) holds, either by itself
and/or through one or more subsidiaries, more than one-half in nominal
value of its equity share capital; or
(b) of which another company (the holding company) controls, either by itself
and/or through one or more subsidiaries, the composition of its board of
directors.
10.12 Fellow subsidiary - a company is considered to be a fellow subsidiary of
another company if both are subsidiaries of the same holding company.
10.13 State-controlled enterprise - an enterprise which is under the control of the
Central Government and/or any State Government(s).
11. For the purpose of this Standard, an enterprise is considered to control the
composition of
(i) the board of directors of a company, if it has the power, without the consent or
concurrence of any other person, to appoint or remove all or a majority of

directors of that company. An enterprise is deemed to have the power to appoint

a director if any of the following conditions is satisfied:
(a) a person cannot be appointed as director without the exercise in his favour
by that enterprise of such a power as aforesaid; or
(b) a person’s appointment as director follows necessarily from his appointment
to a position held by him in that enterprise; or
(c) the director is nominated by that enterprise; in case that enterprise is a
company, the director is nominated by that company/subsidiary thereof.
(ii) the governing body of an enterprise that is not a company, if it has the power,
without the consent or the concurrence of any other person, to appoint or remove
all or a majority of members of the governing body of that other enterprise. An
enterprise is deemed to have the power to appoint a member if any of the
following conditions is satisfied:
(a) a person cannot be appointed as member of the governing body without the
exercise in his favour by that other enterprise of such a power as aforesaid;
or
(b) a person’s appointment as member of the governing body follows
necessarily from his appointment to a position held by him in that other
enterprise; or
(c) the member of the governing body is nominated by that other enterprise.
12. An enterprise is considered to have a substantial interest in another enterprise if that
enterprise owns, directly or indirectly, 20 per cent or more interest in the voting power of
the other enterprise. Similarly, an individual is considered to have a substantial interest in
an enterprise, if that individual owns, directly or indirectly, 20 per cent or more interest in
the voting power of the enterprise.
13. Significant influence may be exercised in several ways, for example, by representation
on the board of directors, participation in the policy making process, material inter-
company transactions, interchange of managerial personnel, or dependence on technical
information. Significant influence may be gained by share ownership, statute or agreement.
As regards share ownership, if an investing party holds, directly or indirectly through
intermediaries, 20 per cent or more of the voting power of the enterprise, it is presumed
that the investing party does have significant influence, unless it can be clearly
demonstrated that this is not the case. Conversely, if the investing party holds, directly or
indirectly through intermediaries, less than 20 per cent of the voting power of the
enterprise, it is presumed that the investing party does not have significant influence, unless
such influence can be clearly demonstrated. A substantial or majority ownership by another
investing party does not necessarily preclude an investing party from having significant
influence.
Explanation
An intermediary means a subsidiary as defined in AS 21, Consolidated Financial Statements.

14. Key management personnel are those persons who have the authority and
enterprise. For example, in the case of a company, the managing director(s), whole time
director(s), manager and any person in accordance with whose directions or instructions
the board of directors of the company is accustomed to act, are usually considered key
management personnel.
Explanation
A non-executive director of a company is not considered as a key management person
under this Standard by virtue of merely his being a director unless he has the authority and
enterprise. The requirements of this Standard are not applied in respect of a non-executive
director even enterprise, unless he falls in any of the categories in paragraph 3 of this
Standard.
The Related Party Issue
15. Related party relationships are a normal feature of commerce and business. For
example, enterprises frequently carry on separate parts of their activities through
subsidiaries or associates and acquire interests in other enterprises - for investment
purposes or for trading reasons - that are of sufficient proportions for the investing
enterprise to be able to control or exercise significant influence on the financial and/or
operating decisions of its investee.
16. Without related party disclosures, there is a general presumption that transactions
reflected in financial statements are consummated on an arm’s- length basis between
independent parties. However, that presumption may not be valid when related party
relationships exist because related parties may enter into transactions which unrelated
parties would not enter into. Also, transactions between related parties may not be effected
at the same terms and conditions as between unrelated parties. Sometimes, no price is
charged in related party transactions, for example, free provision of management services
and the extension of free credit on a debt. In view of the aforesaid, the resulting accounting
measures may not represent what they usually would be expected to represent. Thus, a
related party relationship could have an effect on the financial position and operating
results of the reporting enterprise.
17. The operating results and financial position of an enterprise may be affected by a
related party relationship even if related party transactions do not occur. The mere
existence of the relationship may be sufficient to affect the transactions of the reporting
enterprise with other parties. For example, a subsidiary may terminate relations with a
trading partner on acquisition by the holding company of a fellow subsidiary engaged in
the same trade as the former partner. Alternatively, one party may refrain from acting
because of the control or significant influence of another - for example, a subsidiary may
be instructed by its holding company not to engage in research and development.

18. Because there is an inherent difficulty for management to determine the effect of
influences which do not lead to transactions, disclosure of such effects is not required by
this Standard.
19. Sometimes, transactions would not have taken place if the related party relationship
had not existed. For example, a company that sold a large proportion of its production to
its holding company at cost might not have found an alternative customer if the holding
company had not purchased the goods.
Disclosure
20. The statutes governing an enterprise often require disclosure in financial statements
of transactions with certain categories of related parties. In particular, attention is focussed
on transactions with the directors or similar key management personnel of an enterprise,
especially their remuneration and borrowings, because of the fiduciary nature of their
relationship with the enterprise.
21. Name of the related party and nature of the related party relationship where
control exists should be disclosed irrespective of whether or not there have been
transactions between the related parties.
22. Where the reporting enterprise controls, or is controlled by, another party, this
information is relevant to the users of financial statements irrespective of whether or not
transactions have taken place with that party. This is because the existence of control
relationship may prevent the reporting enterprise from being independent in making its
financial and/or operating decisions. The disclosure of the name of the related party and
the nature of the related party relationship where control exists may sometimes be at least
as relevant in appraising an enterprise’s prospects as are the operating results and the
financial position presented in its financial statements. Such a related party may establish
the enterprise’s credit standing, determine the source and price of its raw materials, and
determine to whom and at what price the product is sold.
23. 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.
24. The following are examples of the related party transactions in respect of which
disclosures may be made by a reporting enterprise:
(a) purchases or sales of goods (finished or unfinished);
(b) purchases or sales of fixed assets;
(c) rendering or receiving of services;
(d) agency arrangements;
(e) leasing or hire purchase arrangements;
(f) transfer of research and development;
(g) license agreements;
(h) finance (including loans and equity contributions in cash or in kind);
(i) guarantees and collaterals; and
(j) management contracts including for deputation of employees.
25. Paragraph 23 (v) requires disclosure of ‘any other elements of the related party
transactions necessary for an understanding of the financial statements’. An example of
such a disclosure would be an indication that the transfer of a major asset had taken place
at an amount materially different from that obtainable on normal commercial terms.
26. Items of a similar nature may be disclosed in aggregate by type of related party
except when separate disclosure is necessary for an understanding of the effects of
related party transactions on the financial statements of the reporting enterprise.
Explanation:
Type of related party means each related party relationship described in paragraph 3
above.
27. Disclosure of details of particular transactions with individual related parties would
frequently be too voluminous to be easily understood. Accordingly, items of a similar
nature may be disclosed in aggregate by type of related party. However, this is not done in
such a way as to obscure the importance of significant transactions. Hence, purchases or
sales of goods are not aggregated with purchases or sales of fixed assets. Nor a material
related party transaction with an individual party is clubbed in an aggregated disclosure.
Explanation:
(a) Materiality primarily depends on the facts and circumstances of each case. In
deciding whether an item or an aggregate of items is material, the nature and the size of
the item(s) are evaluated together. Depending on the circumstances, either the nature or
the size of the item could be the determining factor. As regards size, for the purpose of
applying the test of materiality as per this paragraph, ordinarily a related party transaction,
the amount of which is in excess of 10% of the total related party transactions of the same
type (such as purchase of goods), is considered material, unless on the basis of facts and
circumstances of the case it can be concluded that even a transaction of less than 10% is
material. As regards nature, ordinarily the related party transactions which are not entered
into in the normal course of the business of the reporting enterprise are considered
material subject to the facts and circumstances of the case.
(b) The manner of disclosure required by paragraph 23, read with paragraph 26, is
illustrated in the Illustration attached to the Standard.
Illustration
Note: This illustration does not form part of the Accounting Standard. Its purpose is to assist
in clarifying the meaning of the Accounting Standard.
The manner or disclosures required by paragraphs 23 and 26 of AS 18 is illustrated as
below. It may be noted that the format given below is merely illustrative in nature and is
not exhaustive.
Holding Subsidia Fellow Associa Key Relatives
Company ries Subsidia tes Management Total of Key
ries Personnel Management
Personnel
Purchases of goods
Sale of goods
Purchase of fixed
assets
Sale of fixed assets
Rendering of services
Receiving of services
Agency arrangements
Leasing or hire
purchase
arrangements
Transfer of research
and development
License agreements
Finance (including
loans and equity
contributions in cash
or in kind)
Guarantees and
collaterals
Management
contracts including
for deputation of
employees

Note:
Name of related parties and description of relationship:
1. Holding Company A Ltd.
2. Subsidiaries B Ltd. and C (P) Ltd.
3. Fellow Subsidiaries D Ltd. and Q Ltd.
4. Associates X Ltd., Y Ltd. and Z (P) Ltd.
5. Key Management Personnel Mr. Y and Mr. Z
6. Relatives of Key Management Mrs. Y (wife of Mr. Y),
Personnel Mr. F (father of Mr. Z)
AS 19 1: Leases
1
Objective
The objective of this Standard is to prescribe, for lessees and lessors, the appropriate
accounting policies and disclosures in relation to finance leases and operating leases.
Scope
1. 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.
2. This Standard 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. On the other hand, this Standard 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.
1Issuedin 2001
1Attention is specifically drawn to paragraph 4.3 of the Preface, according to whichAccounting
Definitions
3.1 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.
3.2 A finance lease is a lease that transfers substantially all the risks and rewards
incident to ownership of an asset.
3.3 An operating lease is a lease other than a finance lease.
3.4 A non-cancellable lease is a lease that is cancellable only:
(a) upon the occurrence of some remote contingency; or
(b) with the permission of the lessor; or
(c) if the lessee enters into a new lease for the same or an equivalent asset with
the same lessor; or
(d) upon payment by the lessee of an additional amount such that, at inception,
continuation of the lease is reasonably certain.
3.5 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.
3.6 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, with or without further payment, which
option at the inception of the lease it is reasonably certain that the lessee will exercise.
3.7 Minimum lease payments are the payments over the lease term that the lessee is,
or can be required, to make excluding contingent rent, costs for services and taxes to
be paid by and reimbursed to the lessor, together with:
(a) in the case of the lessee, any residual value guaranteed by or on behalf of
the lessee; or
(b) in the case of the lessor, any residual value guaranteed to the lessor:
(i) by or on behalf of the lessee; or
(ii) by an independent third party financially capable of meeting this
guarantee.
However, 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, at the inception of the lease, is reasonably certain to be exercised, the minimum
lease payments comprise minimum payments payable over the lease term and the
payment required to exercise this purchase option.
3.8 Fair value is the amount for which an asset could be exchanged or a liability
settled between knowledgeable, willing parties in an arm’s length transaction.

3.9 Economic life is either:

(a) the period over which an asset is expected to be economically usable by one
or more users; or
(b) the number of production or similar units expected to be obtained from the
asset by one or more users.
3.10 Useful life of a leased asset is either:
(a) the period over which the leased asset is expected to be used by the lessee;
or
use of the asset by the lessee.
3.11 Residual value of a leased asset is the estimated fair value of the asset at the end
of the lease term.
3.12 Guaranteed residual value is:
(a) in the case 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, in any event, become
payable); and
(b) in the case of the lessor, that part of the residual value which is guaranteed
by or on behalf of the lessee, or by an independent third party who is
financially capable of discharging the obligations under the guarantee.
3.13 Unguaranteed residual value of a leased asset is the amount by which the residual
value of the asset exceeds its guaranteed residual value.
3.14 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.
3.15 Unearned finance income is the difference between:
(a) the gross investment in the lease; and
(b) the present value of
(i) the minimum lease payments under a finance lease from the standpoint
of the lessor; and
(ii) any unguaranteed residual value accruing to the lessor, at the interest
rate implicit in the lease.
3.16 Net investment in the lease is the gross investment in the lease less unearned
finance income.
3.17 The interest rate implicit in the lease is the discount rate that, at the inception of
the lease, causes the aggregate present value of
(a) the minimum lease payments under a finance lease from the standpoint of
the lessor; and
(b) any unguaranteed residual value accruing to the lessor, to be equal to the
fair value of the leased asset.
3.18 The lessee’s incremental borrowing rate of interest is the rate of interest the
lessee would have to pay on a similar lease or, if that is not determinable, the rate
that, at the inception of the lease, the lessee would incur to borrow over a similar
term, and with a similar security, the funds necessary to purchase the asset.
3.19 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.g., percentage of sales,
amount of usage, price indices, market rates of interest).
4. 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. These agreements are commonly known as hire purchase agreements.
Hire purchase agreements include agreements under which the property in the asset is to
pass to the hirer on the payment of the last instalment and the hirer has a right to terminate
the agreement at any time before the property so passes.
Classification of Leases
5. The classification of leases adopted in this Standard is based on the extent to which
risks and rewards incident to ownership of a leased asset lie with the lessor or the lessee.
Risks include the possibilities of losses from idle capacity or technological obsolescence
and of variations in return due to changing economic conditions. 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.
6. A lease is classified as a finance lease if it transfers substantially all the risks and
rewards incident to ownership. Title may or may not eventually be transferred. A lease is
classified as an operating lease if it does not transfer substantially all the risks and rewards
incident to ownership.
7. Since the transaction between a lessor and a lessee is based on a lease agreement
common to both parties, 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.
8. Whether a lease is a finance lease or an operating lease depends on the substance of
the transaction rather than its form. 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;
(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, at the inception of the lease, it is reasonably certain that the option will
be exercised;

(c) the lease term is for the major part of the economic life of the asset even if title
is not transferred;
(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
(e) the leased asset is of a specialised nature such that only the lessee can use it
without major modifications being made.
9. 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, the lessor’s losses associated with the
cancellation are borne by the lessee;
(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 equaling most of the sales
proceeds at the end of the lease); and
(c) the lessee can continue the lease for a secondary period at a rent which is
substantially lower than market rent.
10. Lease classification is made at the inception of the lease. If at any time the lessee and
the lessor agree to change the provisions of the lease, other than by renewing the lease, in
a manner that would have resulted in a different classification of the lease under the criteria
in paragraphs 5 to 9 had the changed terms been in effect at the inception of the lease, the
revised agreement is considered as a new agreement over its revised term. Changes in
estimates (for example, changes in estimates of the economic life or of the residual value
of the leased asset) or changes in circumstances (for example, default by the lessee),
however, do not give rise to a new classification of a lease for accounting purposes.
Leases in the Financial Statements of Lessees

Finance Leases
11. At the inception of a finance lease, 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. However, if the fair value of the leased
asset exceeds the present value of the minimum lease payments from the standpoint
of the lessee, the amount recorded as an asset and a liability should be the present
value of the minimum lease payments from the standpoint of the lessee. In
calculating the present value of the minimum lease payments the discount rate is the
interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s
incremental borrowing rate should be used.
Example
(a) An enterprise (the lessee) acquires a machinery on lease from a leasing company
(the lessor) on January 1, 20X0. The lease term covers the entire economic life of
the machinery, i.e., 3 years. The fair value of the machinery on January 1, 20X0 is
` 2,35,500. The lease agreement requires the lessee to pay an amount of
` 1,00,000 per year beginning December 31, 20X0. The lessee has guaranteed a
residual value of ` 17,000 on December 31, 20X2 to the lessor. The lessor,
however, estimates that the machinery would have a salvage value of only
` 3,500 on December 31, 20X2.
The interest rate implicit in the lease is 16 per cent (approx.). This is calculated
using the following formula:
ALR ALR ALR RV
Fair value = + +… n +
(1 + r)1 (1 + r)2 (1 + r) (1 + r)n
where ALR is annual lease rental,

RV is residual value (both guaranteed and unguaranteed),
n is the lease term,
r is interest rate implicit in the lease.
The present value of minimum lease payments from the stand point of the lessee
is ` 2,35,500.
The lessee would record the machinery as an asset at ` 2,35,500 with a
corresponding liability representing the present value of lease payments over the
lease term (including the guaranteed residual value).
(b) In the above example, suppose the lessor estimates that the machinery would
have a salvage value of ` 17,000 on December 31, 20X2. The lessee, however,
guarantees a residual value of ` 5,000 only.
The interest rate implicit in the lease in this case would remain unchanged at 16%
(approx.). The present value of the minimum lease payments from the standpoint
of the lessee, using this interest rate implicit in the lease, would be
` .2,27,805. As this amount is lower than the fair value of the leased asset
(` .2,35,500), the lessee would recognise the asset and the liability arising from
the lease at ` 2,27,805.
In case the interest rate implicit in the lease is not known to the lessee, the present
value of the minimum lease payments from the standpoint of the lessee would be
computed using the lessee’s incremental borrowing rate.
12. Transactions and other events are accounted for and presented in accordance with
their substance and financial reality and not merely with their legal form. While the legal
form of a lease agreement is that the lessee may acquire no legal title to the leased asset,
in the case of finance leases the substance and financial reality are that the lessee acquires
the economic benefits of the use of the leased asset for the major part of its economic life
in return for entering into an obligation to pay for that right an amount approximating to
the fair value of the asset and the related finance charge.
13. If such lease transactions are not reflected in the lessee’s balance sheet, the economic
resources and the level of obligations of an enterprise are understated thereby distorting
financial ratios. It is therefore appropriate that a finance lease be recognised in the lessee’s
balance sheet both as an asset and as an obligation to pay future lease payments. At the
inception of the lease, the asset and the liability for the future lease payments are
recognised in the balance sheet at the same amounts.
14. It is not appropriate to present the liability for a leased asset as a deduction from the
leased asset in the financial statements. The liability for a leased asset should be presented
separately in the balance sheet as a current liability or a long-term liability as the case may
be.
15. Initial direct costs are often incurred in connection with specific leasing activities, as in
negotiating and securing leasing arrangements. The costs identified as directly attributable to
activities performed by the lessee for a finance lease are included as part of the amount
recognised as an asset under the lease.
16. Lease payments should be apportioned between the finance charge and the
reduction of the outstanding liability. The finance charge should be allocated to
periods during the lease term so as to produce a constant periodic rate of interest on
the remaining balance of the liability for each period.
Example
In the example (a) illustrating paragraph 11, the lease payments would be apportioned by
the lessee between the finance charge and the reduction of the outstanding liability as
follows:
Year Finance Payment Reduction in Outstanding
charge (` ) (` ) outstanding liability (` )
liability (` )
Year 1 (January 1) 2,35,500
(December 31) 37,680 1,00,000 62,320 1,73,180
Year 2 (December 31) 27,709 1,00,000 72,291 1,00,889
Year 3 (December 31) 16,142 1,00,000 83,858 17,031 ∗
17. In practice, in allocating the finance charge to periods during the lease term, some
form of approximation may be used to simplify the calculation.
18. A finance lease gives rise to a depreciation expense for the asset as well as a
finance expense for each accounting period. The depreciation policy for a leased asset
should be consistent with that for depreciable assets which are owned, and the
depreciation recognised should be calculated on the basis set out in Accounting
Standard (AS) 6, Depreciation Accounting. If there is no reasonable certainty that the
lessee will obtain ownership by the end of the lease term, the asset should be fully
depreciated over the lease term or its useful life, whichever is shorter.
∗The difference between this figure and guaranteed residual value (`17,000) is due to approximation
in computing the interest rate implicit in the lease.
19. The depreciable amount of a leased asset is allocated to each accounting period
during the period of expected use on a systematic basis consistent with the depreciation
policy the lessee adopts for depreciable assets that are owned. If there is reasonable
certainty that the lessee will obtain ownership by the end of the lease term, the period of
expected use is the useful life of the asset; otherwise the asset is depreciated over the lease
term or its useful life, whichever is shorter.
20. The sum of the depreciation expense for the asset and the finance expense for the
period is rarely the same as the lease payments payable for the period, and it is, therefore,
inappropriate simply to recognise the lease payments payable as an expense in the
statement of profit and loss. Accordingly, the asset and the related liability are unlikely to
be equal in amount after the inception of the lease.
21. To determine whether a leased asset has become impaired, an enterprise applies the
Accounting Standard dealing with impairment of assets 4, that sets out the requirements as
to how an enterprise should perform the review of the carrying amount of an asset, how it
should determine the recoverable amount of an asset and when it should recognise, or
reverse, an impairment loss.
22. The lessee should, in addition to the requirements of AS 10, Accounting for Fixed
Assets, AS 6, Depreciation Accounting, and the governing statute, make the following
disclosures for finance leases:
(a) assets acquired under finance lease as segregated from the assets owned;
(b) for each class of assets, the net carrying amount at the balance sheet date;
(c) a reconciliation between the total of minimum lease payments at the balance
sheet date and their present value. In addition, an enterprise should disclose
the total of minimum lease payments at the balance sheet date, and their
present value, for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years; (iii) later than five
years;
(d) contingent rents recognised as expense in the statement of profit and loss for
the period;
(e) the total of future minimum sublease payments expected to be received
under non-cancellable subleases at the balance sheet date; and
(f) a general description of the lessee’s significant leasing arrangements
including, but not limited to, the following:
(i) the basis on which contingent rent payments are determined;
4Accounting Standard (AS) 28, ‘Impairment of Assets’,’ specifies the requirements relating to
impairment of assets.
(ii) the existence and terms of renewal or purchase options and escalation
clauses; and
(iii) restrictions imposed by lease arrangements, such as those concerning
dividends, additional debt, and further leasing.
Provided that a Small and Medium Sized Company and a Small and Medium Sized
Enterprise (Levels II and III non-corporate entities), may not comply with sub-
paragraphs (c), (e) and (f).
Operating Leases
23. Lease payments under an operating lease should be recognised 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.
24. For operating leases, lease payments (excluding costs for services such as insurance
and maintenance) are recognised as an expense in the statement of profit and loss on a
straight line basis unless another systematic basis is more representative of the time pattern
of the user’s benefit, even if the payments are not on that basis.
25. The lessee should make the following disclosures for operating leases:
(a) the total of future minimum lease payments under non- cancellable
operating leases for each of the following periods:
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) the total of future minimum sublease payments expected to be received
under non-cancellable subleases at the balance sheet date;
(c) lease payments recognised in the statement of profit and loss for the period,
with separate amounts for minimum lease payments and contingent rents;
(d) sub-lease payments received (or receivable) recognised in the statement of
profit and loss for the period;
(e) a general description of the lessee’s significant leasing arrangements
including, but not limited to, the following:
(i) the basis on which contingent rent payments are determined;
(ii) the existence and terms of renewal or purchase options and escalation
clauses; and
(iii) restrictions imposed by lease arrangements, such as those concerning
dividends, additional debt, and further leasing.
Provided that a Small and Medium Sized Company and a Small and Medium Sized
Enterprise (Levels II and III non-corporate entities), may not comply with sub-
paragraphs (a), (b) and (e).
Leases in the Financial Statements of Lessors

Finance Leases
26. The lessor should recognise assets given under a finance lease in its balance sheet
as a receivable at an amount equal to the net investment in the lease.
27. Under a finance lease substantially all the risks and rewards incident to legal ownership
are transferred by the lessor, and thus the lease payment receivable is treated by the lessor
as repayment of principal, i.e., net investment in the lease, and finance income to reimburse
and reward the lessor for its investment and services.
28. The recognition of finance income should be based on a pattern reflecting a
constant periodic rate of return on the net investment of the lessor outstanding in
respect of the finance lease.
29. A lessor aims to allocate finance income over the lease term on a systematic and
rational basis. This income allocation is based on a pattern reflecting a constant periodic
return on the net investment of the lessor outstanding in respect of the finance lease. Lease
payments relating to the accounting period, excluding costs for services, are reduced from
both the principal and the unearned finance income.
30. Estimated unguaranteed residual values used in computing the lessor’s gross
investment in a lease are reviewed regularly. If there has been a reduction in the estimated
unguaranteed residual value, the income allocation over the remaining lease term is revised
and any reduction in respect of amounts already accrued is recognised immediately. An
upward adjustment of the estimated residual value is not made.
31. Initial direct costs, such as commissions and legal fees, are often incurred by lessors in
negotiating and arranging a lease. For finance leases, these initial direct costs are incurred
to produce finance income and are either recognised immediately in the statement of profit
and loss or allocated against the finance income over the lease term.
32. The manufacturer or dealer lessor should recognise the transaction of sale in the
statement of profit and loss for the period, in accordance with the policy followed by
the enterprise for outright sales. If artificially low rates of interest are quoted, profit
on sale should be restricted to that which would apply if a commercial rate of interest
were charged. Initial direct costs should be recognised as an expense in the statement
of profit and loss at the inception of the lease.
33. Manufacturers or dealers may offer to customers the choice of either buying or leasing
an asset. A finance lease of an asset by a manufacturer or dealer lessor gives rise to two
types of income:
(a) the profit or loss equivalent to the profit or loss resulting from an outright sale of
the asset being leased, at normal selling prices, reflecting any applicable volume
or trade discounts; and
(b) the finance income over the lease term.

34. The sales revenue recorded at the commencement of a finance lease term by a
manufacturer or dealer lessor is the fair value of the asset. However, if the present value of
the minimum lease payments accruing to the lessor computed at a commercial rate of
interest is lower than the fair value, the amount recorded as sales revenue is the present
value so computed. The cost of sale recognised at the commencement of the lease term
is the cost, or carrying amount if different, of the leased asset less the present value of the
unguaranteed residual value. The difference between the sales revenue and the cost of
sale is the selling profit, which is recognised in accordance with the policy followed by the
enterprise for sales.
35. Manufacturer or dealer lessors sometimes quote artificially low rates of interest in
order to attract customers. The use of such a rate would result in an excessive portion of
the total income from the transaction being recognised at the time of sale. If artificially low
rates of interest are quoted, selling profit would be restricted to that which would apply if
a commercial rate of interest were charged.
36. Initial direct costs are recognised as an expense at the commencement of the lease
term because they are mainly related to earning the manufacturer’s or dealer’s selling
profit.
37. The lessor should make the following disclosures for finance leases:
(a) a reconciliation between the total gross investment in the lease at the
balance sheet date, and the present value of minimum lease payments
receivable at the balance sheet date. In addition, an enterprise should
disclose the total gross investment in the lease and the present value of
minimum lease payments receivable at the balance sheet date, for each of
the following periods:
(b) unearned finance income;
(c) the unguaranteed residual values accruing to the benefit of the lessor;
(d) the accumulated provision for uncollectible minimum lease payments
receivable;
(e) contingent rents recognised in the statement of profit and loss for the period;
(f) a general description of the significant leasing arrangements of the lessor;
and
(g) accounting policy adopted in respect of initial direct costs.
Provided that a Small and Medium Sized Company and a non-corporate Small and
Medium Sized Enterprise falling in Level II and Level IIImay not comply with sub-
paragraphs (a) and (f). Further, a non-corporate Small and Medium Sized Enterprise
falling in Level III, may not comply with sub-paragraph (g) also.
38. As an indicator of growth it is often useful to also disclose the gross investment less
unearned income in new business added during the accounting period, after deducting the
relevant amounts for cancelled leases.
Operating Leases
39. The lessor should present an asset given under operating lease in its balance sheet
under fixed assets.
40. Lease income from operating leases should be recognised 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 in which benefit derived from the use
of the leased asset is diminished.
41. Costs, including depreciation, incurred in earning the lease income are recognised as
an expense. Lease income (excluding receipts for services provided such as insurance and
maintenance) is recognised in the statement of profit and loss on a straight line basis over
the lease term even if the receipts are not on such a basis, unless another systematic basis
is more representative of the time pattern in which benefit derived from the use of the
leased asset is diminished.
42. Initial direct costs incurred specifically to earn revenues from an operating lease are
either deferred and allocated to income over the lease term in proportion to the
recognition of rent income, or are recognised as an expense in the statement of profit and
loss in the period in which they are incurred.
43. The depreciation of leased assets should be on a basis consistent with the normal
depreciation policy of the lessor for similar assets, and the depreciation charge should
be calculated on the basis set out in AS 6, Depreciation Accounting.
44. To determine whether a leased asset has become impaired, an enterprise applies the
5
Accounting Standard dealing with impairment of assets that sets out the requirements for
how an enterprise should perform the review of the carrying amount of an asset, how it
should determine the recoverable amount of an asset and when it should recognise, or
reverse, an impairment loss.
45. A manufacturer or dealer lessor does not recognise any selling profit on entering into
an operating lease because it is not the equivalent of a sale.
46. The lessor should, in addition to the requirements of AS 6, Depreciation
Accounting and AS 10, Accounting for Fixed Assets, and the governing statute, make
the following disclosures for operating leases:
(a) for each class of assets, the gross carrying amount, the accumulated
depreciation and accumulated impairment losses at the balance sheet date;
and
5Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements relating to
(i) the depreciation recognised in the statement of profit and loss for the
period;
(ii) impairment losses recognised in the statement of profit and loss for the
period;
(iii) impairment losses reversed in the statement of profit and loss for the
period;
(b) the future minimum lease payments under non-cancellable operating leases
in the aggregate and for each of the following periods:
(c) total contingent rents recognised as income in the statement of profit and
loss for the period;
(d) a general description of the lessor ’s significant leasing arrangements; and
(e) accounting policy adopted in respect of initial direct costs.
Provided that a Small and Medium Sized Company and a non-corporate Small and
Medium Sized Enterprise falling in Level II and Level III, may not comply with sub-
paragraphs (b) and (d). Further, a non-corporate Small and Medium Sized Enterprise
falling in Level III, may not comply with sub-paragraph (e) also.
Sale and Leaseback Transactions
47. A sale and leaseback transaction involves the sale of an asset by the vendor and the
leasing of the same asset back to the vendor. The lease payments and the sale price are
usually interdependent as they are negotiated as a package. The accounting treatment of
a sale and leaseback transaction depends upon the type of lease involved.
48. If a sale and leaseback transaction results in a finance lease, any excess or
deficiency of sales proceeds over the carrying amount should not be immediately
recognised as income or loss in the financial statements of a seller-lessee. Instead, it
should be deferred and amortised over the lease term in proportion to the depreciation
of the leased asset.
49. If the leaseback is a finance lease, it is not appropriate to regard an excess of sales
proceeds over the carrying amount as income. Such excess is deferred and amortised over
the lease term in proportion to the depreciation of the leased asset. Similarly, it is not
appropriate to regard a deficiency as loss. Such deficiency is deferred and amortised over
the lease term.
50. If a sale and leaseback transaction results in an operating lease, and it is clear
that the transaction is established at fair value, any profit or loss should be recognised
immediately. If the sale price is below fair value, any profit or loss should be
recognised immediately except that, if the loss is compensated by future lease
payments at below market price, it should be deferred and amortised in proportion to
the lease payments over the period for which the asset is expected to be used. If the
sale price is above fair value, the excess over fair value should be deferred and
amortised over the period for which the asset is expected to be used.
51. If the leaseback is an operating lease, and the lease payments and the sale price are
established at fair value, there has in effect been a normal sale transaction and any profit
or loss is recognised immediately.
52. For operating leases, if the fair value at the time of a sale and leaseback
transaction is less than the carrying amount of the asset, a loss equal to the amount
of the difference between the carrying amount and fair value should be recognised
immediately.
53. For finance leases, no such adjustment is necessary unless there has been an
impairment in value, in which case the carrying amount is reduced to recoverable amount
in accordance with the Accounting Standard dealing with impairment of assets.
54. Disclosure requirements for lessees and lessors apply equally to sale and leaseback
transactions. The required description of the significant leasing arrangements leads to
disclosure of unique or unusual provisions of the agreement or terms of the sale and
leaseback transactions.
55. Sale and leaseback transactions may meet the separate disclosure criteria set out in
paragraph 12 of Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies.
Illustration
Sale and Leaseback Transactions that Result in Operating Leases
The illustration does not form part of the accounting standard. Its purpose is to illustrate the
application of the accounting standard.
A sale and leaseback transaction that results in an operating lease may give rise to profit
or a loss, the determination and treatment of which depends on the leased asset’s carrying
amount, fair value and selling price. The following table shows the requirements of the
accounting standard in various circumstances.
Sale price established at Carrying Carrying amount Carrying amount
fair value (paragraph amount less than fair above fairvalue
50) equal to fair value
value
Profit No profit Recognise profit Not applicable
immediately
Loss No loss Not applicable Recognise loss
immediately
Sale price below fair
value (paragraph 50)

Profit No profit Recognise profit No profit (note 1)

immediately
Loss not compensated Recognise Recognise loss (note 1)
by future lease loss immediately
payments at below immediately
market price
Loss compensated by Defer and Defer and amortise (note 1)
future lease payments at amortise loss loss
below market price
Sale price above fair
value (paragraph 50)
Profit Defer and Defer and amortise Defer and amortise
amortise profit profit (note 2)
profit
Loss No loss No loss (note 1)
Note 1 These parts of the table represent circumstances that would have been dealt with
under paragraph 52 of the Standard. Paragraph 52 requires the carrying amount of an asset
to be written down to fair value where it is subject to a sale and leaseback.
Note 2 The profit would be the difference between fair value and sale price as the
carrying amount would have been written down to fair value in accordance with paragraph
52.
AS 20 ∗ - Earnings Per Share

1
Objective
The objective of this 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. The focus of this Standard is on the denominator of the earnings per share
calculation. Even though earnings per share data has limitations because of different
∗Issued in 2001. A limited revision to this Standard was made in 2004, pursuant to which paragraphs
48 and 51 of this Standard were revised.

accounting policies used for determining ‘earnings’, a consistently determined

denominator enhances the quality of financial reporting.
Scope
1. This Standard should be applied by all the entities. However, a Small and Medium
Sized Company and a Small and Medium Sized non-corporate entity falling in Level II
or Level III ‘Applicability of Accounting Standards to Various Entities’, may not
disclose diluted earnings per share (both including and excluding extraordinary
items). Further, a non-corporate Small and Medium Sized Entity falling in level III,
may not disclose the information required by paragraph 48(ii) of the standard.
2. In consolidated financial statements, the information required by this Standard
should be presented on the basis of consolidated information. 2
3. In the case of a parent (holding enterprise), users of financial statements are usually
concerned with, and need to be informed about, the results of operations of both the
enterprise itself as well as of the group as a whole. Accordingly, in the case of such
enterprises, this Standard requires the presentation of earnings per share information on
the basis of consolidated financial statements as well as individual financial statements of
the parent. In consolidated financial statements, such information is presented on the basis
of consolidated information.
Definitions
4. For the purpose of this Standard, the following terms are used with the meanings
specified:
4.1 An equity share is a share other than a preference share.
4.2 A preference share is a share carrying preferential rights to dividends and
repayment of capital.
4.3 A financial instrument is any contract that gives rise to both a financial asset
of one enterprise and a financial liability or equity shares of another enterprise.
4.4 A potential equity share is a financial instrument or other contract that entitles,
or may entitle, its holder to equity shares.
4.5 Share warrants or options are financial instruments that give the holder the right
to acquire equity shares.
4.6 Fair value is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm’s length transaction.
2Accounting Standard (AS) 21, 'Consolidated Financial Statements', specifies the requirements
relating to consolidated financial statements.
5. Equity shares participate in the net profit for the period only after preference shares.
An enterprise may have more than one class of equity shares. Equity shares of the same
class have the same rights to receive dividends.
6. A financial instrument is any contract that gives rise to both a financial asset of one
enterprise and a financial liability or equity shares of another enterprise. For this purpose,
a financial asset is any asset that is
(a) cash;
(b) a contractual right to receive cash or another financial asset from another
enterprise;
(c) a contractual right to exchange financial instruments with another enterprise
under conditions that are potentially favourable; or
(d) an equity share of another enterprise.
A financial liability is any liability that is a contractual obligation to deliver cash or another
financial asset to another enterprise or to exchange financial instruments with another
enterprise under conditions that are potentially unfavourable.
7. Examples of potential equity shares are:
(a) debt instruments or preference shares, that are convertible into equity shares;
(b) share warrants;
(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; and
(d) shares which would be issued upon the satisfaction of certain conditions resulting
from contractual arrangements (contingently issuable shares), such as the
acquisition of a business or other assets, or shares issuable under a loan contract
upon default of payment of principal or interest, if the contract so provides.
Presentation
8. 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. An enterprise should present basic and
diluted earnings per share with equal prominence for all periods presented.
9. This Standard requires an enterprise to present basic and diluted earnings per
share, even if the amounts disclosed are negative (a loss per share).
Measurement
Basic Earnings Per Share
10. 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.

Earnings - Basic
11. For the purpose of calculating basic earnings per share, the net profit or loss for
the period attributable to equity shareholders should be the net profit or loss for the
period after deducting preference dividends and any attributable tax thereto for the
period.
12. All items of income and expense which are recognised in a period, including tax
expense and extraordinary items, are included in the determination of the net profit or loss
for the period unless an Accounting Standard requires or permits otherwise (see Accounting
Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies). The amount of preference dividends and any attributable tax thereto
for the period is deducted from the net profit for the period (or added to the net loss for
the period) in order to calculate the net profit or loss for the period attributable to equity
shareholders.
13. The amount of preference dividends for the period that is deducted from the net profit
for the period is:
(a) the amount of any preference dividends on non-cumulative preference shares
provided for in respect of the period; and
(b) the full amount of the required preference dividends for cumulative preference
shares for the period, whether or not the dividends have been provided for. The
amount of preference dividends for the period does not include the amount of
any preference dividends for cumulative preference shares paid or declared
during the current period in respect of previous periods.
14. If an enterprise has more than one class of equity shares, net profit or loss for the
period is apportioned over the different classes of shares in accordance with their dividend
rights.
Per Share - Basic
15. For the purpose of calculating basic earnings per share, the number of equity
shares should be the weighted average number of equity shares outstanding during
the period.
16. The weighted average number of equity shares outstanding during the period reflects
the fact that the amount of shareholders’ capital may have varied during the period as a
result of a larger or lesser number of shares outstanding at any time. It is the number of
equity shares outstanding at the beginning of the period, adjusted by the number of equity
shares bought back or issued during the period multiplied by the time-weighting factor.
The time-weighting factor is the number of days for which the specific shares are
outstanding as a proportion of the total number of days in the period; a reasonable
approximation of the weighted average is adequate in many circumstances.
Illustration I attached to the Standard illustrates the computation of weighted average
number of shares.

17. In most cases, shares are included in the weighted average number of shares from the
date the consideration is receivable, for example:
(a) equity shares issued in exchange for cash are included when cash is receivable;
(b) equity shares issued as a result of the conversion of a debt instrument to equity
shares are included as of the date of conversion;
(c) equity shares issued in lieu of interest or principal on other financial instruments
are included as of the date interest ceases to accrue;
(d) equity shares issued in exchange for the settlement of a liability of the enterprise
are included as of the date the settlement becomes effective;
(e) equity shares issued as consideration for the acquisition of an asset other than
cash are included as of the date on which the acquisition is recognised; and
(f) equity shares issued for the rendering of services to the enterprise are included
as the services are rendered.
In these and other cases, the timing of the inclusion of equity shares is determined by the
specific terms and conditions attaching to their issue. Due consideration should be given
to the substance of any contract associated with the issue.
18. Equity shares issued as part of the consideration in an amalgamation in the nature of
purchase are included in the weighted average number of shares as of the date of the
acquisition because the transferee incorporates the results of the operations of the
transferor into its statement of profit and loss as from the date of acquisition. Equity shares
issued during the reporting period as part of the consideration in an amalgamation in the
nature of merger are included in the calculation of the weighted average number of shares
from the beginning of the reporting period because the financial statements of the
combined enterprise for the reporting period are prepared as if the combined entity had
existed from the beginning of the reporting period. Therefore, the number of equity shares
used for the calculation of basic earnings per share in an amalgamation in the nature of
merger is the aggregate of the weighted average number of shares of the combined
enterprises, adjusted to equivalent shares of the enterprise whose shares are outstanding
after the amalgamation.
19. Partly paid equity shares are treated as a fraction of an equity share to the extent that
they were entitled to participate in dividends relative to a fully paid equity share during the
reporting period.
Illustration II attached to the Standard illustrates the computations in respect of partly paid
equity shares.
20. Where an enterprise has equity shares of different nominal values but with the same
dividend rights, the number of equity shares is calculated by converting all such equity
shares into equivalent number of shares of the same nominal value.
21. Equity shares which are issuable upon the satisfaction of certain conditions resulting
from contractual arrangements (contingently issuable shares) are considered outstanding,

and included in the computation of basic earnings per share from the date when all
necessary conditions under the contract have been satisfied.
22. The weighted average number of equity shares outstanding during the period and
for all periods presented should be adjusted for events, other than the conversion of
potential equity shares, that have changed the number of equity shares outstanding,
without a corresponding change in resources.
23. Equity shares may be issued, or the number of shares outstanding may be reduced,
without a corresponding change in resources. Examples include:
(a) a bonus issue;
(b) a bonus element in any other issue, for example a bonus element in a rights issue
to existing shareholders;
(c) a share split; and
(d) a reverse share split (consolidation of shares).
24. In case of a bonus issue or a share split, equity shares are issued to existing
shareholders for no additional consideration. Therefore, the number of equity shares
outstanding is increased without an increase in resources. The number of equity shares
outstanding before the event is adjusted for the proportionate change in the number of
equity shares outstanding as if the event had occurred at the beginning of the earliest
period reported. For example, upon a two-for-one bonus issue, the number of shares
outstanding prior to the issue is multiplied by a factor of three to obtain the new total
number of shares, or by a factor of two to obtain the number of additional shares.
Illustration III attached to the Standard illustrates the computation of weighted average
number of equity shares in case of a bonus issue during the period.
25. The issue of equity shares at the time of exercise or conversion of potential equity
shares will not usually give rise to a bonus element, since the potential equity shares will
usually have been issued for full value, resulting in a proportionate change in the resources
available to the enterprise. In a rights issue, on the other hand, the exercise price is often
less than the fair value of the shares. Therefore, a rights issue usually includes a bonus
element. 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, multiplied by the following factor:
Fair value per share immediately prior to the exercise of rights
Theoretical ex-rights fair value per share
The theoretical ex-rights fair value per share is 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, and dividing by the number of shares outstanding after the exercise
of the rights. Where the rights themselves are to be publicly traded separately from the
shares prior to the exercise date, fair value for the purposes of this calculation is established
at the close of the last day on which the shares are traded together with the rights.

Illustration IV attached to the Standard illustrates the computation of weighted average

number of equity shares in case of a rights issue during the period.
Diluted Earnings Per Share
26. For the purpose of calculating diluted earnings per share, 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.
27. In calculating diluted earnings per share, effect is given to all dilutive potential equity
shares that were outstanding during the period, that is:
(a) the net profit for the period attributable to equity shares is:
(i) increased by the amount of dividends recognised in the period in respect of
the dilutive potential equity shares as adjusted for any attributable change
in tax expense for the period;
(ii) increased by the amount of interest recognised in the period in respect of
the dilutive potential equity shares as adjusted for any attributable change
in tax expense for the period; and
(iii) adjusted for the after-tax amount of any other changes in expenses or
income that would result from the conversion of the dilutive potential equity
shares.
(b) the weighted average number of equity shares outstanding during the period is
increased by the weighted average number of additional equity shares which
would have been outstanding assuming the conversion of all dilutive potential
equity shares.
28. For the purpose of this Standard, share application money pending allotment or any
advance share application money as at the balance sheet date, which is not statutorily
required to be kept separately and is being utilised in the business of the enterprise, is
treated in the same manner as dilutive potential equity shares for the purpose of calculation
of diluted earnings per share.
Earnings - Diluted
29. For the purpose of calculating diluted earnings per share, the amount of net profit
or loss for the period attributable to equity shareholders, as calculated in accordance
with paragraph 11, should be adjusted by the following, after taking into account any
attributable change in tax expense for the period:
(a) any dividends on dilutive potential equity shares which have been deducted
in arriving at the net profit attributable to equity shareholders as calculated
in accordance with paragraph 11;
(b) interest recognised in the period for the dilutive potential equity shares; and
(c) any other changes in expenses or income that would result from the
conversion of the dilutive potential equity shares.
30. After the potential equity shares are converted into equity shares, the dividends,
interest and other expenses or income associated with those potential equity shares will no
longer be incurred (or earned). Instead, the new equity shares will be entitled to participate
in the net profit attributable to equity shareholders. Therefore, the net profit for the period
attributable to equity shareholders calculated in accordance with paragraph 11 is increased
by the amount of dividends, interest and other expenses that will be saved, and reduced
by the amount of income that will cease to accrue, on the conversion of the dilutive
potential equity shares into equity shares. The amounts of dividends, interest and other
expenses or income are adjusted for any attributable taxes.
Illustration V attached to the standard illustrates the computation of diluted earnings in
case of convertible debentures.
31. The conversion of some potential equity shares may lead to consequential changes in
other items of income or expense. For example, the reduction of interest expense related
to potential equity shares and the resulting increase in net profit for the period may lead
to an increase in the expense relating to a non-discretionary employee profit sharing plan.
For the purpose of calculating diluted earnings per share, the net profit or loss for the
period is adjusted for any such consequential changes in income or expenses.
Per Share - Diluted
32. For the purpose of calculating diluted earnings per share, the number of equity
shares should be the aggregate of the weighted average number of equity shares
calculated in accordance with paragraphs 15 and 22, and the weighted average
number of equity shares which would be issued on the conversion of all the dilutive
potential equity shares into equity shares. Dilutive potential equity shares should be
deemed to have been converted into equity shares at the beginning of the period or,
if issued later, the date of the issue of the potential equity shares.
33. The number of equity shares which would be issued on the conversion of dilutive
potential equity shares is determined from the terms of the potential equity shares. The
computation assumes the most advantageous conversion rate or exercise price from the
standpoint of the holder of the potential equity shares.
34. Equity shares which are issuable upon the satisfaction of certain conditions resulting
from contractual arrangements (contingently issuable shares) are considered outstanding
and included in the computation of both the basic earnings per share and diluted earnings
per share from the date when the conditions under a contract are met. If the conditions
have not been met, for computing the diluted earnings per share, contingently issuable
shares are included as of the beginning of the period (or as of the date of the contingent
share agreement, if later). The number of contingently issuable shares included in this case
in computing the diluted earnings per share is based on the number of shares that would
be issuable if the end of the reporting period was the end of the contingency period.
Restatement is not permitted if the conditions are not met when the contingency period
actually expires subsequent to the end of the reporting period. The provisions of this
paragraph apply equally to potential equity shares that are issuable upon the satisfaction
of certain conditions (contingently issuable potential equity shares).
35. For the purpose of calculating diluted earnings per share, an enterprise should
assume the exercise of dilutive options and other dilutive potential equity shares of
the enterprise. The assumed proceeds from these issues should be considered to have
been received from the issue of shares at fair value. The difference between the
number of shares issuable and the number of shares that would have been issued at
fair value should be treated as an issue of equity shares for no consideration.
36. Fair value for this purpose is the average price of the equity shares during the period.
Theoretically, every market transaction for an enterprise’s equity shares could be included
in determining the average price. As a practical matter, however, a simple average of last
six months weekly closing prices are usually adequate for use in computing the average
price.
37. Options and other share purchase arrangements are dilutive when they would result
in the issue of equity shares for less than fair value. The amount of the dilution is fair value
less the issue price. Therefore, in order to calculate diluted earnings per share, each such
arrangement is treated as consisting of:
(a) a contract to issue a certain number of equity shares at their average fair value
during the period. The shares to be so issued are fairly priced and are assumed
to be neither dilutive nor anti- dilutive. They are ignored in the computation of
diluted earnings per share; and
(b) a contract to issue the remaining equity shares for no consideration. Such equity
shares generate no proceeds and have no effect on the net profit attributable to
equity shares outstanding. Therefore, such shares are dilutive and are added to
the number of equity shares outstanding in the computation of diluted earnings
per share.
Illustration VI attached to the Standard illustrates the effects of share options on diluted
earnings per share.
38. To the extent that partly paid shares are not entitled to participate in dividends during
the reporting period they are considered the equivalent of warrants or options.
Dilutive Potential Equity Shares
39. Potential equity shares should be treated as dilutive when, and only when, their
conversion to equity shares would decrease net profit per share from continuing
ordinary operations.
40. An enterprise uses net profit from continuing ordinary activities as “the control figure”
that is used to establish whether potential equity shares are dilutive or anti-dilutive. The
net profit from continuing ordinary activities is the net profit from ordinary activities (as
defined in AS 5) after deducting preference dividends and any attributable tax thereto and
after excluding items relating to discontinued operations 3.
3Accounting Standard (AS) 24, ‘Discontinuing Operations’, specifies the requirements in respect of
discontinued operations.
41. Potential equity shares are anti-dilutive when their conversion to equity shares would
increase earnings per share from continuing ordinary activities or decrease loss per share
from continuing ordinary activities. The effects of anti-dilutive potential equity shares are
ignored in calculating diluted earnings per share.
42. In considering whether potential equity shares are dilutive or anti- dilutive, each issue
or series of potential equity shares is considered separately rather than in aggregate. The
sequence in which potential equity shares are considered may affect whether or not they
are dilutive. Therefore, in order to maximise the dilution of basic earnings per share, each
issue or series of potential equity shares is considered in sequence from the most dilutive
to the least dilutive. For the purpose of determining the sequence from most dilutive to
least dilutive potential equity shares, the earnings per incremental potential equity share is
calculated. Where the earnings per incremental share is the least, the potential equity share
is considered most dilutive and vice-versa.
Illustration VII attached to the Standard illustrates the manner of determining the order in
which dilutive securities should be included in the computation of weighted average
number of shares.
43. Potential equity shares are weighted for the period they were outstanding. Potential
equity shares that were cancelled or allowed to lapse during the reporting period are
included in the computation of diluted earnings per share only for the portion of the period
during which they were outstanding. Potential equity shares that have been converted into
equity shares during the reporting period are included in the calculation of diluted earnings
per share from the beginning of the period to the date of conversion; from the date of
conversion, the resulting equity shares are included in computing both basic and diluted
earnings per share.
Restatement
44. If the number of equity or potential equity shares outstanding increases as a
result of a bonus issue or share split or decreases as a result of a reverse share split
(consolidation of shares), the calculation of basic and diluted earnings per share
should be adjusted for all the periods presented. If these changes occur after the
balance sheet date but before the date on which the financial statements are approved
by the board of directors, the per share calculations for those financial statements
and any prior period financial statements presented should be based on the new
number of shares. When per share calculations reflect such changes in the number of
shares, that fact should be disclosed.
45. An enterprise does not restate diluted earnings per share of any prior period presented
for changes in the assumptions used or for the conversion of potential equity shares into
equity shares outstanding.
46. An enterprise is encouraged to provide a description of equity share transactions or
potential equity share transactions, other than bonus issues, share splits and reverse share
splits (consolidation of shares) which occur after the balance sheet date when they are of
such importance that non- disclosure would affect the ability of the users of the financial
statements to make proper evaluations and decisions. Examples of such transactions

include:
(a) the issue of shares for cash;
(b) the issue of shares when the proceeds are used to repay debt or preference shares
outstanding at the balance sheet date;
(c) the cancellation of equity shares outstanding at the balance sheet date;
(d) the conversion or exercise of potential equity shares, outstanding at the balance
sheet date, into equity shares;
(e) the issue of warrants, options or convertible securities; and
(f) the satisfaction of conditions that would result in the issue of contingently
issuable shares.
47. Earnings per share amounts are not adjusted for such transactions occurring after the
balance sheet date because such transactions do not affect the amount of capital used to
produce the net profit or loss for the period.
Disclosure
48. In addition to disclosures as required by paragraphs 8, 9 and 44 of this Standard,
an enterprise should disclose the following:
(i) where the statement of profit and loss includes extraordinary items (within
the meaning of AS 5, Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies), the enterprise should disclose basic and
diluted earnings per share computed on the basis of earnings excluding
extraordinary items (net of tax expense); and
(ii) (a) 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;
(b) 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
(c) the nominal value of shares along with the earnings per share figures.
Provided that a non-corporate Small and Medium Sized Entity Falling in Level III,
‘Applicability of Accounting Standards to Various Entities’, may not comply with sub-
paragraph (ii).
49. Contracts generating potential equity shares may incorporate terms and conditions
which affect the measurement of basic and diluted earnings per share. These terms and
conditions may determine whether or not any potential equity shares are dilutive and, if so,
the effect on the weighted average number of shares outstanding and any consequent
adjustments to the net profit attributable to equity shareholders. Disclosure of the terms
and conditions of such contracts is encouraged by this Standard.

50. If an enterprise discloses, in addition to basic and diluted earnings per share, per
share amounts using a reported component of net profit other than net profit or loss
for the period attributable to equity shareholders, such amounts should be calculated
using the weighted average number of equity shares determined in accordance with
this Standard. If a component of net profit is used which is not reported as a line item
in the statement of profit and loss, a reconciliation should be provided between the
component used and a line item which is reported in the statement of profit and loss.
Basic and diluted per share amounts should be disclosed with equal prominence.
51. An enterprise may wish to disclose more information than this Standard requires. Such
information may help the users to evaluate the performance of the enterprise and may take
the form of per share amounts for various components of net profit. Such disclosures are
encouraged. However, when such amounts are disclosed, the denominators need to be
calculated in accordance with this Standard in order to ensure the comparability of the per
share amounts disclosed.
Illustrations
Note: These illustrations do not form part of the Accounting Standard. Their purpose is to
illustrate the application of the Accounting Standard.
Illustration I
Example - Weighted Average Number of Shares
(Accounting year 01-01-20X1 to 31-12-20X1)
No. of No. of No. of
SharesIssue Shares Shares
d O t t di
st
1 Jan., 20X1 Balance at beginning of 1,800 - 1,800
st
31 May,20X1 Issue of shares for cash 600 - 2,400
st
1 Nov., 20X1 Buy Back of shares - 300 2,100
st
31 Dec., Balance at end of year 2,400 300 2,100
Computation of Weighted Average:
(1,800 x 5/12) + (2,400 x 5/12) + (2,100 x 2/12) = 2,100 shares.
The weighted average number of shares can alternatively be computed as
follows:
Example – Partly paid shares
(Accounting year 01-01-20X1 to 31-12-20X1)
No. of Nominal Amount
shares value of paid
issued shares
st
1 January, 20X1 Balance at 1,800 ` 10 ` 10
beginning of year

st
31 October, Issue of Shares 600 ` 10 `5
20X1
Assuming that partly paid shares are entitled to participate in the dividend to the
extent of amount paid, number of partly paid equity shares would be taken as 300
for the purpose of calculation of earnings per share.
Computation of weighted average would be as follows:
(1,800x12/12) + (300x2/12) = 1,850 shares.
Illustration III
Example - Bonus Issue
(Accounting year 01-01-20XX to 31-12-20XX)
Net profit for the year 20X0 ` 18,00,000
No. of equity shares outstanding 20,00,000
until 30th September 20X1
Bonus issue 1st October 20X1 2 equity shares for each equity share
th
outstanding at 30 September, 20X1
20,00,000 x 2 = 40,00,000
Earnings per share for the year 60,00,000
20X1 (20,00,000 + 40,00,000)
= ` 1.00
Adjusted earnings per share for 18,00,000
the year 20X0 (20,00,000 + 40,00,000)
` 0.30
Since the bonus issue is an issue without consideration, the issue is treated as if
it had occurred prior to the beginning of the year 20X0, the earliest period
reported.
Example - Rights Issue
Net profit Year 20X0 : ` 11,00,000
Year 20X1 : ` 15,00,000
No. of shares outstanding prior to 5,00,000 shares
rights issue
lights issue One new share for each five outstanding (i.e.
1,00,000 new shares)
Rights issue price : ` 15.00

Last date to exercise rights:

1st March 20X1
Fair value of one equity share ` 21.00
immediately prior to exercise of
st
rights on 1 March 20X1
Computation of theoretical ex-rights fair value per share
Fair value of all outstanding shares immediately prior to exercise of rights+ total amount received from exercise
Number of shares outstanding prior to exercise + number of shares issued in the exercise
(` 21.00 x 5,00,000 shares) + (` 15.00 x 1,00,000 shares)
5,00,000 shares + 1,00,000 shares
Theoretical ex-rights fair value per share = ` 20.00
Computation of adjustment factor
Fair value per share prior to exercise of rights ` (21.00)
= =1.05
Theoretical ex -rights value per share ` (20.00)
Computation of earnings per share

Year 20X0 Year 20X1
EPS for the year 20X0 as originally reported: ` 2.20
` .11,00,000/5,00,000 shares
EPS for the year 20X0 restated for rights issue: ` 2.10
` .11,00,000/ (5,00,000 shares x 1.05)
EPS for the year 20X1 including effects of rights
issue ` 2.55
` 15,00,000
(5,00,000 x 1.05 x 2/12)+ (6,00,000 x 10/12)
Example - Convertible Debentures
Net profit for the current year ` 1,00,00,000
Basic earnings per share ` 2.00
No. of 12% convertible debentures of 1,00,000
` 100 each
Each debenture is convertible into
10 equity shares
Interest expense for the current year ` 12,00,000
Tax relating to interest expense (30%) ` 3,60,000
Adjusted net profit for the current year ` (1,00,00,000 + 12,00,000 -

3,60,000)
= ` 1,08,40,000
No. of equity shares resulting from conversion 10,00,000
of debentures
No. of equity shares used to compute diluted 50,00,000 + 10,00,000
earnings per share =60,00,000
Diluted earnings per share 1,08,40,000/60,00,000 =
` 1.81
Illustration VI
Example - Effects of Share Options on Diluted Earnings Per Share
Weighted average number of equity shares outstanding 5,00,000
during the year 20X1 shares
Average fair value of one equity share during the year 20X1 ` 20.00
Weighted average number of shares under option during the 1,00,000
20X1
Exercise price for shares under option during the year 20X1 ` h15.00
Computation of earnings per share
Earnings Shares Earnings
per share
Weighted average number of shares 5,00,000
outstanding during year 20X1
Basic earnings per share ` 2.40
Number of shares under option 1,00,000
Number of shares * (75,000)
that would have been issued at fair
value:
(100,000 x 15.00)/20.00
Diluted earnings per share ` 12,00,000 5,25,000 ` 2.29
*The earnings have not been increased as the total number of shares has been
increased only by the number of shares (25,000) deemed for the purpose of the
computation to have been issued for no consideration{see para 37(b)}

Illustration VII
Example - Determining the Order in Which to Include Dilutive Securities in the
Computation of Weighted Average Number of Shares (Accounting year 01-01-20XX to
31-12-20XX)
Earnings, i.e., Net profit attributable to equity shareholders ` 1,00,00,000
Average fair value of one equity share during the year ` 75.00
Potential Equity Shares

Options 1,00,000 with exercise price of ` 60
Convertible Preference Shares 8,00,000 shares entitled to a cumulative
dividend of ` 8 per share. Each
preference share is convertible into 2
equity shares.
Attributable tax, e.g., corporate dividend 10%
tax
12% Convertible Debentures of ` 100 Nominal amount ` 10,00,00,000. Each
each debenture is convertible into 4 equity
shares.
Tax rate 30%
Increase in Earnings Attributable to Equity Shareholders on

Conversion of Potential Equity Shares
Increase in Increase in no. Earnings per Incremental
Earnings ofEquity Share
Shares
Options
Increase in earnings Nil
No. of incremental
shares issued for no
consideration {1,00,000 20,000 Nil
x (75 - 60) / 75}
Convertible Preference Shares
Increase in net profit ` 70,40,000
attributable to equity

shareholders as adjusted
by attributable tax
[(` .8 x 8,00,000)+ 10% (8
x 8,00,000)]
No. of incremental 16,00,000 ` 4.40
shares
{2 x 8,00,000}
12% Convertible Debentures
Increase in net profit ` 84,00,000
{` 10,00,00,000 x 0.12 x
(1-0.30)}
No. of incremental 40,00,000 ` .2.10
shares
{10,00,000 x 4}
It may be noted from the above that options are most dilutive as their earnings per
incremental share is nil. Hence, for the purpose of computation of diluted earnings per
share, options will be considered first. 12% convertible debentures being second most
dilutive will be considered next and thereafter convertible preference shares will be
considered (see para 42).
Conversion of Diluted Earnings Per Shares
Net Profit No. of Net profit
Attributable Equity attributable
(` ) Shares Per Share
(` )
As reported 1,00,00,000 20,00,000 5.00
Options 20,000
1,00,00,000 20,20,000 4.95 Dilutive
12% Convertible 84,00,000 40,00,000
Debentures
1,84,00,000 60,20,000 3.06 Dilutive
Convertible Preference 70,40,000 16,00,000
Shares
2,54,40,000 76,20,000 3.34 Anti-
Dilutive
Since diluted earnings per share is increased when taking the convertible preference shares
into account (from ` 3.06 to ` 3.34), the convertible preference shares are anti-dilutive and
are ignored in the calculation of diluted earnings per share. Therefore, diluted earnings per
share is ` 3.06.

AS 24 (issued 2002) - Discontinuing Operations

1
Various Entities]
This Accounting Standard is not mandatory for non-corporate entities falling in Level III.
Objective
The objective of this Standard is to establish principles for reporting information about
discontinuing operations, thereby enhancing the ability of users of financial statements to
make projections of an enterprise's cash flows, earnings-generating capacity, and financial
position by segregating information about discontinuing operations from information
about continuing operations.
Scope
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.
Definitions
Discontinuing Operation
3. A discontinuing operation is a component of an enterprise:
(a) that the enterprise, pursuant to a single plan, is:
(i) disposing of substantially in its entirety, such as by selling the
component in a single transaction or by demerger or spin-off of
ownership of the component to the enterprise's shareholders; or
(ii) disposing of piecemeal, such as by selling off the component's assets and
settling its liabilities individually; or
(iii) terminating through abandonment; and
(b) that represents a separate major line of business or geographical area of
operations; and
(c) that can be distinguished operationally and for financial reporting purposes.
4. Under criterion (a) of the definition (paragraph 3 (a)), a discontinuing operation may
be disposed of in its entirety or piecemeal, but always pursuant to an overall plan to
discontinue the entire component.
5. If an enterprise sells a component substantially in its entirety, the result can be a net
gain or net loss. For such a discontinuance, a binding sale agreement is entered into on a
specific date, although the actual transfer of possession and control of the discontinuing
operation may occur at a later date. Also, payments to the seller may occur at the time of
the agreement, at the time of the transfer, or over an extended future period.
6. Instead of disposing of a component substantially in its entirety, an enterprise may
discontinue and dispose of the component by selling its assets and settling its liabilities
piecemeal (individually or in small groups). For piecemeal disposals, while the overall result
may be a net gain or a net loss, the sale of an individual asset or settlement of an individual
liability may have the opposite effect. Moreover, there is no specific date at which an overall
binding sale agreement is entered into. Rather, the sales of assets and settlements of
liabilities may occur over a period of months or perhaps even longer. Thus, disposal of a
component may be in progress at the end of a financial reporting period. To qualify as a
discontinuing operation, the disposal must be pursuant to a single co- ordinated plan.
7. An enterprise may terminate an operation by abandonment without substantial sales
of assets. An abandoned operation would be a discontinuing operation if it satisfies the
criteria in the definition. However, changing the scope of an operation or the manner in
which it is conducted is not an abandonment because that operation, although changed, is
continuing.
8. Business enterprises frequently close facilities, abandon products or even product
lines, and change the size of their work force in response to market forces. While those
kinds of terminations generally are not, in themselves, discontinuing operations as that
term is defined in paragraph 3 of this Standard they can occur in connection with a
discontinuing operation.
9. Examples of activities that do not necessarily satisfy criterion (a) of paragraph 3, but
that might do so in combination with other circumstances, include:
(a) gradual or evolutionary phasing out of a product line or class of service;
(b) discontinuing, even if relatively abruptly, several products within an ongoing line
of business;
(c) shifting of some production or marketing activities for a particular line of business
from one location to another; and
(d) closing of a facility to achieve productivity improvements or other cost savings.
An example in relation to consolidated financial statements is selling a subsidiary whose
activities are similar to those of the parent or other subsidiaries.
10. A reportable business segment or geographical segment as defined in Accounting
Standard (AS) 17, Segment Reporting, would normally satisfy criterion (b) of the definition
of a discontinuing operation (paragraph 3), that is, it would represent a separate major line
of business or geographical area of operations. A part of such a segment may also satisfy
criterion (b) of the definition. For an enterprise that operates in a single business or

geographical segment and therefore does not report segment information, a major product
or service line may also satisfy the criteria of the definition.
11. A component can be distinguished operationally and for financial reporting purposes
- criterion (c) of the definition of a discontinuing operation (paragraph 3) - if all the
following conditions are met:
(a) the operating assets and liabilities of the component can be directly attributed to
it;
(b) its revenue can be directly attributed to it;
(c) at least a majority of its operating expenses can be directly attributed to it.
12. Assets, liabilities, revenue, and expenses are directly attributable to a component if
they would be eliminated when the component is sold, abandoned or otherwise disposed
of. If debt is attributable to a component, the related interest and other financing costs are
similarly attributed to it.
13. Discontinuing operations, as defined in this Standard are expected to occur relatively
infrequently. All infrequently occurring events do not necessarily qualify as discontinuing
operations. Infrequently occurring events that do not qualify as discontinuing operations
may result in items of income or expense that require separate disclosure pursuant to
Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies, because their size, nature, or incidence make them relevant
to explain the performance of the enterprise for the period.
14. The fact that a disposal of a component of an enterprise is classified as a discontinuing
operation under this Standard does not, in itself, bring into question the enterprise's ability
to continue as a going concern.
Initial Disclosure Event
15. With respect to a discontinuing operation, the initial disclosure event is the
occurrence of one of the following, whichever occurs earlier:
(a) the enterprise has entered into a binding sale agreement for substantially all
of the assets attributable to the discontinuing operation; or
(b) the enterprise's board of directors or similar governing body has both (i)
approved a detailed, formal plan for the discontinuance and (ii) made an
announcement of the plan.
16. A detailed, formal plan for the discontinuance normally includes:
(a) identification of the major assets to be disposed of;
(b) the expected method of disposal;
(c) the period expected to be required for completion of the disposal;
(d) the principal locations affected;
(e) the location, function, and approximate number of employees who will be
compensated for terminating their services; and

(f) the estimated proceeds or salvage to be realised by disposal.

17. An enterprise's board of directors or similar governing body is considered to have
made the announcement of a detailed, formal plan for discontinuance, if it has announced
the main features of the plan to those affected by it, such as, lenders, stock exchanges,
creditors, trade unions, etc., in a sufficiently specific manner so as to make the enterprise
demonstrably committed to the discontinuance.
Recognition and Measurement
18. 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 recognise and measure the changes in assets and liabilities and the revenue,
expenses, gains, losses and cash flows relating to a discontinuing operation.
19. This Standard does not establish any recognition and measurement principles. Rather,
it requires that an enterprise follow recognition and measurement principles established in
other Accounting Standards, e.g., Accounting Standard (AS) 4, Contingencies and Events
2
Occurring After the Balance Sheet Date and Accounting Standard on Impairment of
Assets 3.
Presentation and Disclosure
Initial Disclosure
20. An enterprise should include the following information relating to a
discontinuing operation in its financial statements beginning with the financial
statements for the period in which the initial disclosure event (as defined in paragraph
15) occurs:
(a) a description of the discontinuing operation(s);
(b) the business or geographical segment(s) in which it is reported as per AS 17,
Segment Reporting;
(c) the date and nature of the initial disclosure event;
(d) the date or period in which the discontinuance is expected to be completed if
known or determinable;
(e) the carrying amounts, as of the balance sheet date, of the total assets to be
disposed of and the total liabilities to be settled;
(f) the amounts of revenue and expenses in respect of the ordinary activities
attributable to the discontinuing operation during the current financial
reporting period;
2Pursuant to AS 29, Provisions, Contingent Liabilities and Contingent Assets, becoming mandatory,
all paragraphs of AS 4 that deal with contingencies stand withdrawn except to the extend they deal
with impairment of assets not covered by other Accounting Standards.
(g) the amount of pre-tax profit or loss from ordinary activities attributable to
the discontinuing operation during the current financial reporting period,
4
and the income tax expense related thereto; and
(h) the amounts of net cash flows attributable to the operating, investing, and
financing activities of the discontinuing operation during the current
financial reporting period.
21. For the purpose of presentation and disclosures required by this Standard, the items
of assets, liabilities, revenues, expenses, gains, losses, and cash flows can be attributed to
a discontinuing operation only if they will be disposed of, settled, reduced, or eliminated
when the discontinuance is completed. To the extent that such items continue after
completion of the discontinuance, they are not allocated to the discontinuing operation.
For example, salary of the continuing staff of a discontinuing operation.
22. If an initial disclosure event occurs between the balance sheet date and the date on
which the financial statements for that period are approved by the board of directors in the
case of a company or by the corresponding approving authority in the case of any other
enterprise, disclosures as required by Accounting Standard (AS) 4, Contingencies and
Events Occurring After the Balance Sheet Date, are made.
Other Disclosures
23. 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.
24. The asset disposals, liability settlements, and binding sale agreements referred to in
the preceding paragraph may occur concurrently with the initial disclosure event, or in the
period in which the initial disclosure event occurs, or in a later period.
25. If some of the assets attributable to a discontinuing operation have actually been sold
or are the subject of one or more binding sale agreements entered into between the
balance sheet date and the date on which the financial statements are approved by the
board of directors in case of a company or by the corresponding approving authority in
4As defined in Accounting Standard (AS) 22, Accounting for Taxes on Income.
the case of any other enterprise, the disclosures required by Accounting Standard (AS) 4,
Contingencies and Events Occurring After the Balance Sheet Date, are made.
Updating the Disclosures
26. In addition to the disclosures in paragraphs 20 and 23, 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.
27. Examples of events and activities that would be disclosed include the nature and terms
of binding sale agreements for the assets, a demerger or spin-off by issuing equity shares
of the new company to the enterprise's shareholders, and legal or regulatory approvals.
28. The disclosures required by paragraphs 20, 23 and 26 should continue in financial
statements for periods up to and including the period in which the discontinuance is
completed. A discontinuance is completed when the plan is substantially completed
or abandoned, though full payments from the buyer(s) may not yet have been
received.
29. 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.
30. For the purpose of applying paragraph 29, disclosure of the effect includes reversal of
5
any prior impairment loss or provision that was recognised with respect to the
Separate Disclosure for Each Discontinuing Operation
31. Any disclosures required by this Standard should be presented separately for each
Presentation of the Required Disclosures
32. The disclosures required by paragraphs 20, 23, 26, 28, 29 and 31 should be
presented in the notes to the financial statements except the following which should
be shown on the face of the statement of profit and loss:
(a) 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 (paragraph 20 (g)); and
(b) the amount of the pre-tax gain or loss recognised on the disposal of assets
or settlement of liabilities attributable to the discontinuing operation
(paragraph 23 (a)).
5Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements relating to reversal
of impairment loss.
Illustrative Presentation and Disclosures

33. Illustration 1 attached to the standard illustrates the presentation and disclosures
required by this Standard.
Restatement of Prior Periods
34. Comparative information for prior periods that is presented in financial
statements prepared after the initial disclosure event should be restated to segregate
assets, liabilities, revenue, expenses, and cash flows of continuing and discontinuing
operations in a manner similar to that required by paragraphs 20, 23, 26, 28, 29, 31
and 32.
35. Illustration 2 attached to this Standard illustrates application of paragraph 34.
Disclosure in Interim Financial Reports
36. Disclosures in an interim financial report in respect of a discontinuing operation
should be made in accordance with AS 25, Interim Financial Reporting, including:
(a) any significant activities or events since the end of the most recent annual
reporting period relating to a discontinuing operation; and
(b) any significant changes in the amount or timing of cash flows relating to the
assets to be disposed or liabilities to be settled.
Illustration 1
Illustrative Disclosures
Facts
• Delta Company has three segments, Food Division, Beverage Division and Clothing
Division.
• Clothing Division, is deemed inconsistent with the long-term strategy of the Company.
Management has decided, therefore, to dispose of the Clothing Division.
• On 15 November 20X1, the Board of Directors of Delta Company approved a detailed,
formal plan for disposal of Clothing Division, and an announcement was made. On
that date the Clothing Division’s net assets was ` 90 lakhs (assets of ` 105 lakhs minus
liabilities of ` 15 lakhs).
• The recoverable amount of the assets carried at ` 105 lakhs was estimated to be ` 85
lakhs and the Company had concluded that a pre-tax impairment loss of ` 20 lakhs
should be recognised.
• At 31 December 20Xl, the carrying amount of the Clothing Division's net assets was `
70 lakhs (assets of ` 85 lakhs minus liabilities of ` 15 lakhs). There was no further
impairment of assets between 15 November 20X1 and 31 December 20X1 when the
financial statements were prepared.

• On 30 September 20X2, the carrying amount of the net assets of the Clothing Division
continued to be ` 70 lakhs. On that day, Delta Company signed a legally binding
contract to sell the Clothing Division.
• The sale is expected to be completed by 31 January 20X3. The recoverable amount
of the net assets is ` 60 lakhs. Based on that amount, an additional impairment loss of
` 10 lakhs isrecognised.
• In addition, prior to 31 January 20X3, the sale contract obliges Delta Company to
terminate employment of certain employees of the Clothing Division, which would
result in termination cost of ` 30 lakhs, to be paid by 30 June 20X3. A liability and
related expense in this regard is also recognised.
• The Company continued to operate the Clothing Division throughout 20X2.
• At 31 December 20X2, the carrying amount of the Clothing Division's net assets is `
45 lakhs, consisting of assets of ` 80 lakhs minus liabilities of ` 35 lakhs (including
provision for expected termination cost of ` 30 lakhs).
• Delta Company prepares its financial statements annually as of 31 December. It does
not prepare a cash flow statement.
• Other figures in the following financial statements are assumed to illustrate the
presentation and disclosures required by the Standard.
I. Financial Statements for 20X1
1.1 Statement of Profit and Loss for 20X1
The Statement of Profit and Loss of Delta Company for the year 20X1 can be presented as
follows:
(Amount in ` lakhs)
20X1 20X0
Turnover 140 150
Operating expenses (92) (105)
Impairment loss (20) (---)
Pre-tax profit from operating activities 28 45
Interest expense (15) (20)
Profit before tax 13 25
Profit from continuing
operations before tax(see Note 5) 15 12
Income tax expense (7) (6)
Profit from continuing
operations after tax 8 6
Profit (loss) from

discontinuing operations
before tax (see Note 5) (2) 13
Income tax expense 1 (7)
Profit (loss) from discontinuing
operations after tax (1) 6
Profit from operating
activities after tax 7 12
1.2 Note to Financial Statements for 20X1

The following is Note 5 to Delta Company's financial statements:
On 15 November 20Xl, the Board of Directors announced a plan to dispose of Company's
Clothing Division, which is also a separate segment as per AS 17, Segment Reporting. The
disposal is consistent with the Company's long-term strategy to focus its activities in the
areas of food and beverage manufacture and distribution, and to divest unrelated activities.
The Company is actively seeking a buyer for the Clothing Division and hopes to complete
the sale by the end of 20X2. At 31 December 20Xl, the carrying amount of the assets of the
Clothing Division was ` 85 lakhs (previous year ` 120 lakhs) and its liabilities were ` 15 lakhs
(previous year ` 20 lakhs). The following statement shows the revenue and expenses of
continuing and discontinuing operations:
(Amount in ` lakhs)
Continuing Discontinuing Total
Operations Operation
(Food and (Clothing
Beverage Division)
Divisions)
20X1 20X0 20X1 20X0 20X1 20X0
Turnover 90 80 50 70 140 150
Operating Expenses (65) (60) (27) (45) (92) (105)
Impairment Loss ---- ---- (20) (---) (20) (---)
Pre-tax profit from 25 20 3 25 28 45
operating activities
Interest expense (10) (8) (5) (12) (15) (20)
Profit (loss) before tax 15 12 (2) 13 13 25
Income tax expense (7) (6) 1 (7) (6) (13)
Profit (loss) from 8 6 (1) 6 7 12
operating activities after
tax

II. Financial Statements for 20X2

2.1 Statement of Profit and Loss for 20X2
The Statement of Profit and Loss of Delta Company for the year 20X2 can be presented as
follows:
(Amount in ` lakhs)
20X2 20X1
Turnover 140 140
Operating expenses (90) (92)
Impairment loss (10) (20)
Provision for employee termination benefits (30) --
Pre-tax profit from operating activities 10 28
Interest expense (25) (15)
Profit (loss) before tax (15) 13
Profit from continuing operations before tax
(see Note 5) 20 15
Income tax expense (6) (7)
Profit from continuing operations after tax 14 8
Loss from discontinuing operations before tax
(see Note 5) (35) (2)
Income tax expense 10 1
Loss from discontinuing operations after tax (25) (1)
Profit (loss) from operating activities after tax (11) 7
2.2 Note to Financial Statements for 20X2

The following is Note 5 to Delta Company's financial statements:
On 15 November 20Xl, the Board of Directors had announced a plan to dispose of
Company's Clothing Division, which is also a separate segment as per AS 17, Segment
Reporting. The disposal is consistent with the Company's long-term strategy to focus its
activities in the areas of food and beverage manufacture and distribution, and to divest
unrelated activities. On 30 September 20X2, the Company signed a contract to sell the
Clothing Division to Z Corporation for ` 60 lakhs.
Clothing Division's assets are written down by ` 10 lakhs (previous year ` 20 lakhs) before
income tax saving of ` 3 lakhs (previous year ` 6 lakhs) to their recoverable amount.
The Company has recognised provision for termination benefits of ` 30 lakhs (previous year
` nil) before income tax saving of ` 9 lakhs (previous year ` nil) to be paid by 30 June 20X3
to certain employees of the Clothing Division whose jobs will be terminated as a result of
the sale.

At 31 December 20X2, the carrying amount of assets of the Clothing Division was ` 80 lakhs
(previous year ` 85 lakhs) and its liabilities were ` 35 lakhs (previous year ` 15 lakhs), including
the provision for expected termination cost of ` 30 lakhs (previous year ` nil). The process of
selling the Clothing Division is likely to be completed by 31 January 20X3.
The following statement shows the revenue and expenses of continuing and discontinuing
operations:
(Amount in ` lakhs)
Continuing Discontinuing Total
Operations Operation
(Food and (Clothing
Beverage Division)
Divisions)
20X2 20X1 20X2 20X1 20X2 20X1
Turnover 100 90 40 50 140 140
Operating Expenses (60) (65) (30) (27) (90) (92)
Impairment Loss ---- ---- (10) (20) (10) (20)
Provision for employee ---- ---- (30) ---- (30) ---
termination
Pre-tax profit (loss) from 40 25 (30) 3 10 28
operating activities
Interest expense (20) (10) (5) (5) (25) (15)
Profit (loss) before tax 20 15 (35) (2) (15) 13
Income tax expense (6) (7) 10 1 4 (6)
Profit (loss) from 14 8 (25) (1) (11) 7
operating activities after
tax
III. Financial Statements for 20X3

The financial statements for 20X3, would disclose information related to discontinued
operations in a manner similar to that for 20X2 including the fact of completion of
discontinuance.
Illustration 2
Classification of Prior Period Operations
Facts
l. Paragraph 34 requires that comparative information for prior periods that is presented
in financial statements prepared after the initial disclosure event be restated to segregate

assets, liabilities, revenue, expenses, and cash flows of continuing and discontinuing
operations in a manner similar to that required by paragraphs 20, 23, 26, 28, 29, 31 and 32.
2. Consider following facts:
(a) Operations A, B, C, and D were all continuing in years 1 and 2;
(b) Operation D is approved and announced for disposal in year 3 but actually
disposed of in year 4;
(c) Operation B is discontinued in year 4 (approved and announced for disposal and
actually disposed of) and operation E is acquired; and
(d) Operation F is acquired in year 5.
3. The following table illustrates the classification of continuing and discontinuing
operations in years 3 to 5:
FINANCIAL STATEMENTS FOR YEAR 3 (Approved and Published early in Year
4)
Year 2 Comparatives Year 3
Continuing Discontinuing Continuing Discontinuing
A A
B B
C C
D D
FINANCIAL STATEMENTS FOR YEAR 4 (Approved and Published early in

A A
B B
C C
D D
E
FINANCIAL STATEMENTS FOR YEAR 5 (Approved and Published early in

A A
B
C C
D
E E
F

4. If, for whatever reason, five-year comparative financial statements were prepared in
year 5, the classification of continuing and discontinuing operations would be as follows:
FINANCIAL STATEMENTS FOR YEAR 5
Year 1 Year 2 Year 3 Year 4 Year 5
Comparatives Comparatives Comparatives Comparatives
Cont. Disc. Cont. Disc. Cont. Disc. Cont. Disc. Cont. Disc.
A A A A A
B B B B
C C C C C
D D D D
E E
F
AS 26 ∗ : Intangible Assets
Statements of Accounting Standards 1and the ‘Applicability of Accounting Standards to
Objective
The objective of this Standard is to prescribe the accounting treatment for intangible assets
that are not dealt with specifically in another Accounting Standard. This Standard requires
an enterprise to recognise an intangible asset if, and only if, certain criteria are met. The
Standard also specifies how to measure the carrying amount of intangible assets and
requires certain disclosures about intangible assets.
Scope
1. 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 assets 2;
∗ Issued in 2002.
2A financial asset is any asset that is:
(a) cash;
(b) a contractual right to receive cash or another financial asset from another enterprise;
(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 Standard should not be applied to expenditure in respect of termination
3
benefits also.
2. If another Accounting Standard deals with a specific type of intangible asset, an
enterprise applies that Accounting Standard instead of this Standard. For example, this
Standard does not apply to:
(a) intangible assets held by an enterprise for sale in the ordinary course of business
(see AS 2, Valuation of Inventories, and AS 7, Construction Contracts);
(b) deferred tax assets (see AS 22, Accounting for Taxes on Income);
(c) leases that fall within the scope of AS 19, Leases; and
(d) goodwill arising on an amalgamation (see AS 14, Accounting for Amalgamations)
and goodwill arising on consolidation (see AS 21, Consolidated Financial
Statements).
3. This Standard applies to, among other things, expenditure on advertising, training,
start-up, research and development activities. Research and development activities are
directed to the development of knowledge. Therefore, although these activities may result
in an asset with physical substance (for example, a prototype), the physical element of the
asset is secondary to its intangible component, that is the knowledge embodied in it. This
Standard also applies to rights under licensing agreements for items such as motion picture
films, video recordings, plays, manuscripts, patents and copyrights. These items are
excluded from the scope of AS 19.
4. In the case of a finance lease, the underlying asset may be either tangible or intangible.
After initial recognition, a lessee deals with an intangible asset held under a finance lease
under this Standard.
5. Exclusions from the scope of an Accounting Standard may occur if certain activities or
transactions are so specialised that they give rise to accounting issues that may need to be
dealt with in a different way. Such issues arise in the expenditure on the exploration for,
or development and extraction of, oil, gas and mineral deposits in extractive industries and
in the case of contracts between insurance enterprises and their policyholders. Therefore,
this Standard does not apply to expenditure on such activities. However, this Standard
applies to other intangible assets used (such as computer software), and other expenditure
(c) a contractual right to exchange financial instruments with another enterprise under conditions
that are potentially favourable; or
(d) an ownership interest in another enterprise.
3Termination benefits are employee benefits payable as a result of either:

(such as start-up costs), in extractive industries or by insurance enterprises. Accounting

issues of specialised nature also arise in respect of accounting for discount or premium
relating to borrowings and ancillary costs incurred in connection with the arrangement of
borrowings, share issue expenses and discount allowed on the issue of shares. Accordingly,
this Standard does not apply to such items also.
Definitions
6.1 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.
6.2 An asset is a resource:
(a) controlled by an enterprise as a result of past events; and
(b) from which future economic benefits are expected to flow to the enterprise.
6.3 Monetary assets are money held and assets to be received in fixed or determinable
amounts of money.
6.4 Non-monetary assets are assets other than monetary assets.
6.5 Research is original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding.
6.6 Development is the application of research findings or other knowledge to a plan
or design for the production of new or substantially improved materials, devices,
products, processes, systems or services prior to the commencement of commercial
production or use.
6.7 Amortisation is the systematic allocation of the depreciable amount of an
intangible asset over its useful life.
6.8 Depreciable amount is the cost of an asset less its residual value.
6.9 Useful life is either:
(a) the period of time over which an asset is expected to be used by the
enterprise; or
asset by the enterprise.
6.10. Residual value is the amount which an enterprise expects to obtain for an
asset at the end of its useful life after deducting the expected costs of disposal.
6.11. Fair value of an asset is the amount for which that asset could be exchanged
between knowledgeable, willing parties in an arm's length transaction.
6.12. An active market is a market where all the following conditions exist:
(a) the items traded within the market are homogeneous;
(b) willing buyers and sellers can normally be found at any time; and
(c) prices are available to the public.

6.13. An impairment loss is the amount by which the carrying amount of an asset
exceeds its recoverable amount 4.
6.14. Carrying amount is the amount at which an asset is recognised in the balance
sheet, net of any accumulated amortisation and accumulated impairment losses
thereon.
Intangible Assets
7. Enterprises frequently expend resources, or incur liabilities, on the acquisition,
development, maintenance or enhancement of intangible resources such as scientific or
technical knowledge, design and implementation of new processes or systems, licences,
intellectual property, market knowledge and trademarks (including brand names and
publishing titles). Common examples of items encompassed by these broad headings are
computer software, patents, copyrights, motion picture films, customer lists, mortgage
servicing rights, fishing licences, import quotas, franchises, customer or supplier
relationships, customer loyalty, market share and marketing rights. Goodwill is another
example of an item of intangible nature which either arises on acquisition or is internally
generated.
8. Not all the items described in paragraph 7 will meet the definition of an intangible
asset, that is, identifiability, control over a resource and expectation of future economic
benefits flowing to the enterprise. If an item covered by this Standard does not meet the
definition of an intangible asset, expenditure to acquire it or generate it internally is
recognised as an expense when it is incurred. However, if the item is acquired in an
amalgamation in the nature of purchase, it forms part of the goodwill recognised at the
date of the amalgamation (see paragraph 55).
9. Some intangible assets may be contained in or on a physical substance such as a
compact disk (in the case of computer software), legal documentation (in the case of a
licence or patent) or film (in the case of motion pictures). The cost of the physical substance
containing the intangible assets is usually not significant. Accordingly, the physical
substance containing an intangible asset, though tangible in nature, is commonly treated
as a part of the intangible asset contained in or on it.
10. In some cases, an asset may incorporate both intangible and tangible elements that
are, in practice, inseparable. In determining whether such an asset should be treated under
AS 10, Accounting for Fixed Assets, or as an intangible asset under this Standard,
judgement is required to assess as to which element is predominant. For example,
computer software for a computer controlled machine tool that cannot operate without
that specific software is an integral part of the related hardware and it is treated as a fixed
asset. The same applies to the operating system of a computer. Where the software is not
an integral part of the related hardware, computer software is treated as an intangible asset.
Identifiability
11. The definition of an intangible asset requires that an intangible asset be identifiable.
To be identifiable, it is necessary that the intangible asset is clearly distinguished from
goodwill. Goodwill arising on an amalgamation in the nature of purchase represents a
payment made by the acquirer in anticipation of future economic benefits. The future
economic benefits may result from synergy between the identifiable assets acquired or
from assets which, individually, do not qualify for recognition in the financial statements
but for which the acquirer is prepared to make a payment in the amalgamation.
12. An intangible asset can be clearly distinguished from goodwill if the asset is separable.
An asset is separable if the enterprise could rent, sell, exchange or distribute the specific
future economic benefits attributable to the asset without also disposing of future
economic benefits that flow from other assets used in the same revenue earning activity.
13. Separability is not a necessary condition for identifiability since an enterprise may be
able to identify an asset in some other way. For example, if an intangible asset is acquired
with a group of assets, the transaction may involve the transfer of legal rights that enable
an enterprise to identify the intangible asset. Similarly, if an internal project aims to create
legal rights for the enterprise, the nature of these rights may assist the enterprise in
identifying an underlying internally generated intangible asset. Also, even if an asset
generates future economic benefits only in combination with other assets, the asset is
identifiable if the enterprise can identify the future economic benefits that will flow from
the asset.
Control
14. An enterprise controls an asset if the enterprise has the power to obtain the future
economic benefits flowing from the underlying resource and also can restrict the access of
others to those benefits. The capacity of an enterprise to control the future economic
benefits from an intangible asset would normally stem from legal rights that are
enforceable in a court of law. In the absence of legal rights, it is more difficult to
demonstrate control. However, legal enforceability of a right is not a necessary condition
for control since an enterprise may be able to control the future economic benefits in some
other way.
15. Market and technical knowledge may give rise to future economic benefits. An
enterprise controls those benefits if, for example, the knowledge is protected by legal rights
such as copyrights, a restraint of trade agreement (where permitted) or by a legal duty on
employees to maintain confidentiality.
16. An enterprise may have a team of skilled staff and may be able to identify incremental
staff skills leading to future economic benefits from training. The enterprise may also expect
that the staff will continue to make their skills available to the enterprise. However, usually
an enterprise has insufficient control over the expected future economic benefits arising
from a team of skilled staff and from training to consider that these items meet the
definition of an intangible asset. For a similar reason, specific management or technical

talent is unlikely to meet the definition of an intangible asset, unless it is protected by legal
rights to use it and to obtain the future economic benefits expected from it, and it also
meets the other parts of the definition.
17. An enterprise may have a portfolio of customers or a market share and expect that,
due to its efforts in building customer relationships and loyalty, the customers will continue
to trade with the enterprise. However, in the absence of legal rights to protect, or other
ways to control, the relationships with customers or the loyalty of the customers to the
enterprise, the enterprise usually has insufficient control over the economic benefits from
customer relationships and loyalty to consider that such items (portfolio of customers,
market shares, customer relationships, customer loyalty) meet the definition of intangible
assets.
Future Economic Benefits
18. The future economic benefits flowing from an intangible asset may include revenue
from the sale of products or services, cost savings, or other benefits resulting from the use
of the asset by the enterprise. For example, the use of intellectual property in a production
process may reduce future production costs rather than increase future revenues.
Recognition and Initial Measurement of an Intangible Asset
19. The recognition of an item as an intangible asset requires an enterprise to demonstrate
that the item meets the:
(a) definition of an intangible asset (see paragraphs 6-18); and
(b) recognition criteria set out in this Standard (see paragraphs 20-54).
20. 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.
21. An enterprise should assess the probability of future economic benefits using
reasonable and supportable assumptions that represent best estimate of the set of
economic conditions that will exist over the useful life of the asset.
22. An enterprise uses judgement to assess the degree of certainty attached to the flow
of future economic benefits that are attributable to the use of the asset on the basis of the
evidence available at the time of initial recognition, giving greater weight to external
evidence.
23. An intangible asset should be measured initially at cost.
Separate Acquisition
24. If an intangible asset is acquired separately, the cost of the intangible asset can usually
be measured reliably. This is particularly so when the purchase consideration is in the form
of cash or other monetary assets.

25. The cost of an intangible asset comprises its purchase price, including any import
duties and other taxes (other than those subsequently recoverable by the enterprise from
the taxing authorities), and any directly attributable expenditure on making the asset ready
for its intended use. Directly attributable expenditure includes, for example, professional
fees for legal services. Any trade discounts and rebates are deducted in arriving at the cost.
26. If an intangible asset is acquired in exchange for shares or other securities of the
reporting enterprise, the asset is recorded at its fair value, or the fair value of the securities
issued, whichever is more clearly evident.
Acquisition as Part of an Amalgamation
27. An intangible asset acquired in an amalgamation in the nature of purchase is
accounted for in accordance with Accounting Standard (AS) 14, Accounting for
Amalgamations. Where in preparing the financial statements of the transferee company,
the consideration is allocated to individual identifiable assets and liabilities on the basis of
their fair values at the date of amalgamation, paragraphs 28 to 32 of this Standard need to
be considered.
28. Judgement is required to determine whether the cost (i.e. fair value) of an intangible
asset acquired in an amalgamation can be measured with sufficient reliability for the
purpose of separate recognition. Quoted market prices in an active market provide the
most reliable measurement of fair value. The appropriate market price is usually the current
bid price. If current bid prices are unavailable, the price of the most recent similar
transaction may provide a basis from which to estimate fair value, provided that there has
not been a significant change in economic circumstances between the transaction date and
the date at which the asset's fair value is estimated.
29. If no active market exists for an asset, its cost reflects the amount that the enterprise
would have paid, at the date of the acquisition, for the asset in an arm's length transaction
between knowledgeable and willing parties, based on the best information available. In
determining this amount, an enterprise considers the outcome of recent transactions for
similar assets.
30. Certain enterprises that are regularly involved in the purchase and sale of unique
intangible assets have developed techniques for estimating their fair values indirectly.
These techniques may be used for initial measurement of an intangible asset acquired in
an amalgamation in the nature of purchase if their objective is to estimate fair value as
defined in this Standard and if they reflect current transactions and practices in the industry
to which the asset belongs. These techniques include, where appropriate, applying
multiples reflecting current market transactions to certain indicators driving the
profitability of the asset (such as revenue, market shares, operating profit, etc.) or
discounting estimated future net cash flows from the asset.
31. In accordance with this Standard:
(a)
a transferee recognises an intangible asset that meets the recognition criteria in
paragraphs 20 and 21, even if that intangible asset had not been recognised in
the financial statements of the transferor; and
(b) if the cost (i.e. fair value) of an intangible asset acquired as part of an
amalgamation in the nature of purchase cannot be measured reliably, that asset
is not recognised as a separate intangible asset but is included in goodwill (see
paragraph 55).
32. Unless there is an active market for an intangible asset acquired in an amalgamation
in the nature of purchase, the cost initially recognised for the intangible asset is restricted
to an amount that does not create or increase any capital reserve arising at the date of the
amalgamation.
Acquisition by way of a Government Grant
33. In some cases, an intangible asset may be acquired free of charge, or for nominal
consideration, by way of a government grant. This may occur when a government transfers
or allocates to an enterprise intangible assets such as airport landing rights, licences to
operate radio or television stations, import licences or quotas or rights to access other
restricted resources. AS 12, Accounting for Government Grants, requires that government
grants in the form of non-monetary assets, given at a concessional rate should be
accounted for on the basis of their acquisition cost. AS 12 also requires that in case a non-
monetary asset is given free of cost, it should be recorded at a nominal value. Accordingly,
intangible asset acquired free of charge, or for nominal consideration, by way of
government grant is recognised at a nominal value or at the acquisition cost, as
appropriate; any expenditure that is directly attributable to making the asset ready for its
intended use is also included in the cost of the asset.
Exchanges of Assets
34. An intangible asset may be acquired in exchange or part exchange for another asset.
In such a case, the cost of the asset acquired is determined in accordance with the principles
laid down in this regard in AS 10, Accounting for Fixed Assets.
Internally Generated Goodwill
35. Internally generated goodwill should not be recognised as an asset.
36. In some cases, expenditure is incurred to generate future economic benefits, but it
does not result in the creation of an intangible asset that meets the recognition criteria in
this Standard. Such expenditure is often described as contributing to internally generated
goodwill. Internally generated goodwill is not recognised as an asset because it is not an
identifiable resource controlled by the enterprise that can be measured reliably at cost.
37. Differences between the market value of an enterprise and the carrying amount of its
identifiable net assets at any point in time may be due to a range of factors that affect the
value of the enterprise. However, such differences cannot be considered to represent the
cost of intangible assets controlled by the enterprise.
Internally Generated Intangible Assets
38. It is sometimes difficult to assess whether an internally generated intangible asset
qualifies for recognition. It is often difficult to:

(a) identify whether, and the point of time when, there is an identifiable asset that
will generate probable future economic benefits; and
(b) determine the cost of the asset reliably. In some cases, the cost of generating an
intangible asset internally cannot be distinguished from the cost of maintaining
or enhancing the enterprise’s internally generated goodwill or of running day-to-
day operations.
Therefore, in addition to complying with the general requirements for the recognition and
initial measurement of an intangible asset, an enterprise applies the requirements and
guidance in paragraphs 39-54 below to all internally generated intangible assets.
39. To assess whether an internally generated intangible asset meets the criteria for
recognition, an enterprise classifies the generation of the asset into:
(a) a research phase; and
(b) a development phase.
Although the terms ‘research’ and ‘development’ are defined, the terms ‘research phase’
and ‘development phase’ have a broader meaning for the purpose of this Standard.
40. If an enterprise cannot distinguish the research phase from the development phase of
an internal project to create an intangible asset, the enterprise treats the expenditure on
that project as if it were incurred in the research phase only.
Research Phase
41. No intangible asset arising from research (or from the research phase of an
internal project) should be recognised. Expenditure on research (or on the research
phase of an internal project) should be recognised as an expense when it is incurred.
42. This Standard takes the view that, in the research phase of a project, an enterprise
cannot demonstrate that an intangible asset exists from which future economic benefits
are probable. Therefore, this expenditure is recognised as an expense when it is incurred.
43. Examples of research activities are:
(a) activities aimed at obtaining new knowledge;
(b) the search for, evaluation and final selection of, applications of research findings
or other knowledge;
(c) the search for alternatives for materials, devices, products, processes, systems or
services; and
(d) the formulation, design, evaluation and final selection of possible alternatives for
new or improved materials, devices, products, processes, systems or services.
Development Phase
44. An intangible asset arising from development (or from the development phase of
an internal project) should be recognised if, and only if, an enterprise can demonstrate
all of the following:

(a) the technical feasibility of completing the intangible asset so that it will be
available for use or sale;
(b) its intention to complete the intangible asset and use or sell it;
(c) its ability to use or sell the intangible asset;
(d) how the intangible asset will generate probable future economic benefits.
Among other things, the enterprise should demonstrate the existence of a
market for the output of the intangible asset or the intangible asset itself or,
if it is to be used internally, the usefulness of the intangible asset;
(e) the availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset; and
(f) its ability to measure the expenditure attributable to the intangible asset
during its development reliably.
45. In the development phase of a project, an enterprise can, in some instances, identify
an intangible asset and demonstrate that future economic benefits from the asset are
probable. This is because the development phase of a project is further advanced than the
research phase.
46. Examples of development activities are:
(a) the design, construction and testing of pre-production or pre-use prototypes and
models;
(b) the design of tools, jigs, moulds and dies involving new technology;
(c) the design, construction and operation of a pilot plant that is not of a scale
economically feasible for commercial production; and
(d) the design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services.
47. To demonstrate how an intangible asset will generate probable future economic
benefits, an enterprise assesses the future economic benefits to be received from the asset
using the principles in Accounting Standard on Impairment of Assets 5. If the asset will
generate economic benefits only in combination with other assets, the enterprise applies
the concept of cash- generating units as set out in Accounting Standard on Impairment of
Assets.
48. Availability of resources to complete, use and obtain the benefits from an intangible
asset can be demonstrated by, for example, a business plan showing the technical, financial
and other resources needed and the enterprise's ability to secure those resources. In certain
cases, an enterprise demonstrates the availability of external finance by obtaining a lender's
indication of its willingness to fund the plan.
49. An enterprise's costing systems can often measure reliably the cost of generating an
intangible asset internally, such as salary and other expenditure incurred in securing
copyrights or licences or developing computer software.
50. Internally generated brands, mastheads, publishing titles, customer lists and
items similar in substance should not be recognised as intangible assets.
51. This Standard takes the view that expenditure on internally generated brands,
mastheads, publishing titles, customer lists and items similar in substance cannot be
distinguished from the cost of developing the business as a whole. Therefore, such items
are not recognised as intangible assets.
Cost of an Internally Generated Intangible Asset
52. The cost of an internally generated intangible asset for the purpose of paragraph 23
is the sum of expenditure incurred from the time when the intangible asset first meets the
recognition criteria in paragraphs 20-21 and
44. Paragraph 58 prohibits reinstatement of expenditure recognised as an expense in
previous annual financial statements or interim financial reports.
53. The cost of an internally generated intangible asset comprises all expenditure that can
be directly attributed, or allocated on a reasonable and consistent basis, to creating,
producing and making the asset ready for its intended use. The cost includes, if applicable:
(a) expenditure on materials and services used or consumed in generating the
intangible asset;
(b) the salaries, wages and other employment related costs of personnel directly
engaged in generating the asset;
(c) any expenditure that is directly attributable to generating the asset, such as fees
to register a legal right and the amortisation of patents and licences that are used
to generate the asset; and
(d) overheads that are necessary to generate the asset and that can be allocated on
a reasonable and consistent basis to the asset (for example, an allocation of the
depreciation of fixed assets, insurance premium and rent). Allocations of
overheads are made on bases similar to those used in allocating overheads to
inventories (see AS 2, Valuation of Inventories). AS 16, Borrowing Costs,
establishes criteria for the recognition of interest as a component of the cost of a
qualifying asset. These criteria are also applied for the recognition of interest as
a component of the cost of an internally generated intangible asset.
54. The following are not components of the cost of an internally generated intangible
asset:
(a) selling, administrative and other general overhead expenditure unless this
expenditure can be directly attributed to making the asset ready for use;
(b) clearly identified inefficiencies and initial operating losses incurred before an
asset achieves planned performance; and

(c) expenditure on training the staff to operate the asset.

Example Illustrating Paragraph 52
An enterprise is developing a new production process. During the year 20X1, expenditure
incurred was ` 10 lakhs, of which ` 9 lakhs was incurred before 1 December 20X1 and 1
lakh was incurred between 1 December 20X1 and 31 December 20X1. The enterprise is able
to demonstrate that, at 1 December 20X1, the production process met the criteria for
recognition as an intangible asset. The recoverable amount of the know-how embodied in
the process (including future cash outflows to complete the process before it is available
for use) is estimated to be ` 5 lakhs.
At the end of 20X1, the production process is recognised as an intangible asset at a cost of `
1 lakh (expenditure incurred since the date when the recognition criteria were met, that is, 1
December 20X1). The ` 9 lakhs expenditure incurred before 1 December 20X1 is recognised
as an expense because the recognition criteria were not met until 1 December 20X1. This
expenditure will never form part of the cost of the production process recognised in the
balance sheet.
During the year 20X2, expenditure incurred is ` 20 lakhs. At the end of 20X2, the recoverable
amount of the know-how embodied in the process (including future cash outflows to
complete the process before it is available for use) is estimated to be ` 19 lakhs.
At the end of the year 20X2, the cost of the production process is ` 21 lakhs (` 1 lakh
expenditure recognised at the end of 20X1 plus ` 20 lakhs expenditure recognised in 20X2).
The enterprise recognises an impairment loss of ` 2 lakhs to adjust the carrying amount of
the process before impairment loss (` 21 lakhs) to its recoverable amount (` 19 lakhs). This
impairment loss will be reversed in a subsequent period if the requirements for the reversal
of an impairment loss in Accounting Standard on Impairment of Assets 6, are met.
Recognition of an Expense
55. Expenditure on an intangible item should be recognised as an expense when it is
incurred unless:
(a) it forms part of the cost of an intangible asset that meets the recognition
criteria (see paragraphs 19-54); or
(b) the item is acquired in an amalgamation in the nature of purchase and
cannot be recognised as an intangible asset. If this is the case, this
expenditure (included in the cost of acquisition) should form part of the
amount attributed to goodwill (capital reserve) at the date of acquisition
(see AS 14, Accounting for Amalgamations).
56. In some cases, expenditure is incurred to provide future economic benefits to an
enterprise, but no intangible asset or other asset is acquired or created that can be
recognised. In these cases, the expenditure is recognised as an expense when it is incurred.

For example, expenditure on research is always recognised as an expense when it is incurred
(see paragraph 41). Examples of other expenditure that is recognised as an expense when
it is incurred include:
(a) expenditure on start-up activities (start-up costs), unless this expenditure is
included in the cost of an item of fixed asset under AS 10. Start-up costs may
consist of preliminary expenses incurred in establishing a legal entity such as legal
and secretarial costs, expenditure to open a new facility or business (pre-opening
costs) or expenditures for commencing new operations or launching new
products or processes (pre-operating costs);
(b) expenditure on training activities;
(c) expenditure on advertising and promotional activities; and
(d) expenditure on relocating or re-organising part or all of an enterprise.
57. Paragraph 55 does not apply to payments for the delivery of goods or services made
in advance of the delivery of goods or the rendering of services. Such prepayments are
recognised as assets.
Past Expenses not to be Recognised as an Asset
58. Expenditure on an intangible item that was initially recognised as an expense by
a reporting enterprise in previous annual financial statements or interim financial
reports should not be recognised as part of the cost of an intangible asset at a later
date.
Subsequent Expenditure
59. Subsequent expenditure on an intangible asset after its purchase or its
completion should be recognised as an expense when it is incurred unless:
(a) it is probable that the expenditure will enable the asset to generate future
economic benefits in excess of its originally assessed standard of
performance; and
(b) the expenditure can be measured and attributed to the asset reliably.
If these conditions are met, the subsequent expenditure should be added to the cost
of the intangible asset.
60. Subsequent expenditure on a recognised intangible asset is recognised as an expense
if this expenditure is required to maintain the asset at its originally assessed standard of
performance. The nature of intangible assets is such that, in many cases, it is not possible
to determine whether subsequent expenditure is likely to enhance or maintain the
economic benefits that will flow to the enterprise from those assets. In addition, it is often
difficult to attribute such expenditure directly to a particular intangible asset rather than
the business as a whole. Therefore, only rarely will expenditure incurred after the initial
recognition of a purchased intangible asset or after completion of an internally generated
intangible asset result in additions to the cost of the intangible asset.
61. Consistent with paragraph 50, subsequent expenditure on brands, mastheads,

publishing titles, customer lists and items similar in substance (whether externally
purchased or internally generated) is always recognised as an expense to avoid the
recognition of internally generated goodwill.
Measurement Subsequent to Initial Recognition
62. After initial recognition, an intangible asset should be carried at its cost less any
accumulated amortisation and any accumulated impairment losses.
Amortisation
Amortisation Period
63. The depreciable amount of an intangible asset should be allocated on a
systematic basis over the best estimate of its useful life. There is a rebuttable
presumption that the useful life of an intangible asset will not exceed ten years from
the date when the asset is available for use. Amortisation should commence when the
asset is available for use.
64. As the future economic benefits embodied in an intangible asset are consumed over
time, the carrying amount of the asset is reduced to reflect that consumption. This is
achieved by systematic allocation of the cost of the asset, less any residual value, as an
expense over the asset's useful life. Amortisation is recognised whether or not there has
been an increase in, for example, the asset's fair value or recoverable amount. Many factors
need to be considered in determining the useful life of an intangible asset including:
(a) the expected usage of the asset by the enterprise and whether the asset could be
efficiently managed by another management team;
(b) typical product life cycles for the asset and public information on estimates of
useful lives of similar types of assets that are used in a similar way;
(c) technical, technological or other types of obsolescence;
(d) the stability of the industry in which the asset operates and changes in the market
demand for the products or services output from the asset;
(e) expected actions by competitors or potential competitors;
(f) the level of maintenance expenditure required to obtain the expected future
economic benefits from the asset and the company's ability and intent to reach
such a level;
(g) the period of control over the asset and legal or similar limits on the use of the
asset, such as the expiry dates of related leases; and
(h) whether the useful life of the asset is dependent on the useful life of other assets
of the enterprise.
65. Given the history of rapid changes in technology, computer software and many other
intangible assets are susceptible to technological obsolescence. Therefore, it is likely that
their useful life will be short.

66. Estimates of the useful life of an intangible asset generally become less reliable as the
length of the useful life increases. This Standard adopts a presumption that the useful life
of intangible assets is unlikely to exceed ten years.
67. In some cases, there may be persuasive evidence that the useful life of an intangible
asset will be a specific period longer than ten years. In these cases, the presumption that
the useful life generally does not exceed ten years is rebutted and the enterprise:
(a) amortises the intangible asset over the best estimate of its useful life;
(b) estimates the recoverable amount of the intangible asset at least annually in order
to identify any impairment loss (see paragraph 83); and
(c) discloses the reasons why the presumption is rebutted and the factor(s) that
played a significant role in determining the useful life of the asset (see paragraph
94(a)).
Examples
A. An enterprise has purchased an exclusive right to generate hydro-electric power for
sixty years. The costs of generating hydro- electric power are much lower than the costs of
obtaining power from alternative sources. It is expected that the geographical area
surrounding the power station will demand a significant amount of power from the power
station for at least sixty years.
The enterprise amortises the right to generate power over sixty years, unless there is evidence
that its useful life is shorter.
B. An enterprise has purchased an exclusive right to operate a toll motorway for thirty
years. There is no plan to construct alternative routes in the area served by the motorway.
It is expected that this motorway will be in use for at least thirty years.
The enterprise amortises the right to operate the motorway over thirty years, unless there is
evidence that its useful life is shorter.
68. The useful life of an intangible asset may be very long but it is always finite. Uncertainty
justifies estimating the useful life of an intangible asset on a prudent basis, but it does not
justify choosing a life that is unrealistically short.
69. If control over the future economic benefits from an intangible asset is achieved
through legal rights that have been granted for a finite period, the useful life of the
intangible asset should not exceed the period of the legal rights unless:
(a) the legal rights are renewable; and
(b) renewal is virtually certain.
70. There may be both economic and legal factors influencing the useful life of an
intangible asset: economic factors determine the period over which future economic
benefits will be generated; legal factors may restrict the period over which the enterprise
controls access to these benefits. The useful life is the shorter of the periods determined
by these factors.

71. The following factors, among others, indicate that renewal of a legal right is virtually
certain:
(a) the fair value of the intangible asset is not expected to reduce as the initial expiry
date approaches, or is not expected to reduce by more than the cost of renewing
the underlying right;
(b) there is evidence (possibly based on past experience) that the legal rights will be
renewed; and
(c) there is evidence that the conditions necessary to obtain the renewal of the legal
right (if any) will be satisfied.
Amortisation Method
72. The amortisation method used should reflect the pattern in which the asset's
economic benefits are consumed by the enterprise. If that pattern cannot be
determined reliably, the straight-line method should be used. The amortisation
charge for each period should be recognised as an expense unless another Accounting
Standard permits or requires it to be included in the carrying amount of another asset.
73. A variety of amortisation methods can be used to allocate the depreciable amount of
an asset on a systematic basis over its useful life. These methods include the straight-line
method, the diminishing balance method and the unit of production method. The method
used for an asset is selected based on the expected pattern of consumption of economic
benefits and is consistently applied from period to period, unless there is a change in the
expected pattern of consumption of economic benefits to be derived from that asset. There
will rarely, if ever, be persuasive evidence to support an amortisation method for intangible
assets that results in a lower amount of accumulated amortisation than under the straight-
line method.
74. Amortisation is usually recognised as an expense. However, sometimes, the economic
benefits embodied in an asset are absorbed by the enterprise in producing other assets
rather than giving rise to an expense. In these cases, the amortisation charge forms part of
the cost of the other asset and is included in its carrying amount. For example, the
amortisation of intangible assets used in a production process is included in the carrying
amount of inventories (see AS 2, Valuation of Inventories).
Residual Value
75. The residual value of an intangible asset should be assumed to be zero unless:
(a) there is a commitment by a third party to purchase the asset at the end of its
useful life; or
(b) there is an active market for the asset and:
(i) residual value can be determined by reference to that market; and
(ii) it is probable that such a market will exist at the end of the asset's useful
life.

76. A residual value other than zero implies that an enterprise expects to dispose of the
intangible asset before the end of its economic life.
77. The residual value is estimated using prices prevailing at the date of acquisition of the
asset, for the sale of a similar asset that has reached the end of its estimated useful life and
that has operated under conditions similar to those in which the asset will be used. The
residual value is not subsequently increased for changes in prices or value.
Review of Amortisation Period and Amortisation Method
78. The amortisation period and the amortisation method should be reviewed at least
at each financial year end. If the expected useful life of the asset is significantly
different from previous estimates, the amortisation period should be changed
accordingly. If there has been a significant change in the expected pattern of economic
benefits from the asset, the amortisation method should be changed to reflect the
changed pattern. Such changes should be accounted for in accordance with AS 5, Net
Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.
79. During the life of an intangible asset, it may become apparent that the estimate of its
useful life is inappropriate. For example, the useful life may be extended by subsequent
expenditure that improves the condition of the asset beyond its originally assessed
standard of performance. Also, the recognition of an impairment loss may indicate that
the amortisation period needs to be changed.
80. Over time, the pattern of future economic benefits expected to flow to an enterprise
from an intangible asset may change. For example, it may become apparent that a
diminishing balance method of amortisation is appropriate rather than a straight-line
method. Another example is if use of the rights represented by a licence is deferred pending
action on other components of the business plan. In this case, economic benefits that flow
from the asset may not be received until later periods.
Recoverability of the Carrying Amount — Impairment Losses
81. To determine whether an intangible asset is impaired, an enterprise applies
Accounting Standard on Impairment of Assets 7. That Standard explains how an enterprise
reviews the carrying amount of its assets, how it determines the recoverable amount of an
asset and when it recognises or reverses an impairment loss.
82. If an impairment loss occurs before the end of the first annual accounting period
commencing after acquisition for an intangible asset acquired in an amalgamation in the
nature of purchase, the impairment loss is recognised as an adjustment to both the amount
assigned to the intangible asset and the goodwill (capital reserve) recognised at the date
of the amalgamation. However, if the impairment loss relates to specific events or changes
in circumstances occurring after the date of acquisition, the impairment loss is recognised
under Accounting Standard on Impairment of Assets and not as an adjustment to the

amount assigned to the goodwill (capital reserve) recognised at the date of acquisition.
83. In addition to the requirements of Accounting Standard on Impairment of Assets,
an enterprise should estimate the recoverable amount of the following intangible
assets at least at each financial year end even if there is no indication that the asset
is impaired:
(a) an intangible asset that is not yet available for use; and
(b) an intangible asset that is amortised over a period exceeding ten years from
the date when the asset is available for use.
The recoverable amount should be determined under Accounting Standard on
Impairment of Assets and impairment losses recognised accordingly.
84. The ability of an intangible asset to generate sufficient future economic benefits to
recover its cost is usually subject to great uncertainty until the asset is available for use.
Therefore, this Standard requires an enterprise to test for impairment, at least annually, the
carrying amount of an intangible asset that is not yet available for use.
85. It is sometimes difficult to identify whether an intangible asset may be impaired
because, among other things, there is not necessarily any obvious evidence of
obsolescence. This difficulty arises particularly if the asset has a long useful life. As a
consequence, this Standard requires, as a minimum, an annual calculation of the
recoverable amount of an intangible asset if its useful life exceeds ten years from the date
when it becomes available for use.
86. The requirement for an annual impairment test of an intangible asset applies whenever
the current total estimated useful life of the asset exceeds ten years from when it became
available for use. Therefore, if the useful life of an intangible asset was estimated to be less
than ten years at initial recognition, but the useful life is extended by subsequent
expenditure to exceed ten years from when the asset became available for use, an
enterprise performs the impairment test required under paragraph 83(b) and also makes
the disclosure required under paragraph 94(a).
Retirements and Disposals

87. An intangible asset should be derecognised (eliminated from the balance sheet)
on disposal or when no future economic benefits are expected from its use and
subsequent disposal.
88. Gains or losses arising from the retirement or disposal of an intangible asset
should be determined as the difference between the net disposal proceeds and the
carrying amount of the asset and should be recognised as income or expense in the
statement of profit and loss.
89. An intangible asset that is retired from active use and held for disposal is carried at its
carrying amount at the date when the asset is retired from active use. At least at each

financial year end, an enterprise tests the asset for impairment under Accounting Standard
on Impairment of Assets 8, and recognises any impairment loss accordingly.
Disclosure
General
90. 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 amortisation (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.
91. A class of intangible assets is a grouping of assets of a similar nature and use in an
enterprise's operations. Examples of separate classes may include:
(a) brand names;
(b) mastheads and publishing titles;
(c) computer software;
(d) licences and franchises;
(e) copyrights, and patents and other industrial property rights, service and operating
rights;
(f) recipes, formulae, models, designs and prototypes; and
(g) intangible assets under development.
The classes mentioned above are disaggregated (aggregated) into smaller (larger) classes
if this results in more relevant information for the users of the financial statements.
92. An enterprise discloses information on impaired intangible assets under Accounting
9
Standard on Impairment of Assets in addition to the information required by paragraph
90(d)(iii) and (iv).
93. An enterprise discloses the change in an accounting estimate or accounting policy
such as that arising from changes in the amortisation method, the amortisation period or
estimated residual values, in accordance with AS 5, Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies.
94. The financial statements should also disclose:
(a) if an intangible asset is amortised over more than ten years, the reasons why
it is presumed that the useful life of an intangible asset will exceed ten years
from the date when the asset is available for use. In giving these reasons,
the enterprise should describe the factor(s) that played a significant role in
determining the useful life of the asset;
(b) a description, the carrying amount and remaining amortisation period of any
individual intangible asset that is material to the financial statements of the
enterprise as a whole;
(c) the existence and carrying amounts of intangible assets whose title is
restricted and the carrying amounts of intangible assets pledged as security
for liabilities; and
(d) the amount of commitments for the acquisition of intangible assets.
95. When an enterprise describes the factor(s) that played a significant role in determining
the useful life of an intangible asset that is amortised over more than ten years, the
enterprise considers the list of factors in paragraph 64.
Research and Development Expenditure
96. The financial statements should disclose the aggregate amount of research and
development expenditure recognised as an expense during the period.
97. Research and development expenditure comprises all expenditure that is directly
attributable to research or development activities or that can be allocated on a reasonable
and consistent basis to such activities (see paragraphs 53-54 for guidance on the type of
expenditure to be included for the purpose of the disclosure requirement in paragraph 96).
Other Information
98. An enterprise is encouraged, but not required, to give a description of any fully
amortised intangible asset that is still in use.
Transitional Provisions
99. Where, on the date of this Standard coming into effect, an enterprise is following
an accounting policy of not amortising an intangible item or amortising an intangible
item over a period longer than the period determined under paragraph 63 of this
Standard and the period determined under paragraph 63 has expired on the date of
this Standard coming into effect, the carrying amount appearing in the balance sheet
in respect of that item should be eliminated with a corresponding adjustment to the
opening balance of revenue reserves.
In the event the period determined under paragraph 63 has not expired on the date of
this Standard coming into effect and:
(a) if the enterprise is following an accounting policy of not amortising an
intangible item, the carrying amount of the intangible item should be
restated, as if the accumulated amortisation had always been determined
under this Standard, with the corresponding adjustment to the opening
balance of revenue reserves. The restated carrying amount should be
amortised over the balance of the period as determined in paragraph 63.
(b) if the remaining period as per the accounting policy followed by the
enterprise:
(i) is shorter as compared to the balance of the period determined under
paragraph 63, the carrying amount of the intangible item should be
amortised over the remaining period as per the accounting policy
followed by the enterprise,
(ii) is longer as compared to the balance of the period determined under
paragraph 63, the carrying amount of the intangible item should be
restated, as if the accumulated amortisation had always been
determined under this Standard, with the corresponding adjustment to
the opening balance of revenue reserves. The restated carrying amount
should be amortised over the balance of the period as determined in
paragraph 63.
100. Illustration B attached to the Standard illustrates the application of paragraph 99.
Illustration A
This illustration which does not form part of the Accounting Standard, provides illustrative
application of the principles laid down in the Standard to internal use software and web-site
costs. Its purpose is to illustrate the application of the Accounting Standard to assist in
clarifying its meaning.
I. Illustrative Application of the Accounting
Standard to Internal Use Computer Software
Computer software for internal use can be internally generated or acquired.

Internally Generated Computer Software

1. Internally generated computer software for internal use is developed or modified
internally by the enterprise solely to meet the needs of the enterprise and at no stage it is
planned to sell it.
2. The stages of development of internally generated software may be categorised into
the following two phases:
• Preliminary project stage, i.e., the research phase
• Development stage
Preliminary project stage
3. At the preliminary project stage the internally generated software should not be
recognised as an asset. Expenditure incurred in the preliminary project stage should be
recognised as an expense when it is incurred. The reason for such a treatment is that at this
stage of the software project an enterprise cannot demonstrate that an asset exists from
which future economic benefits are probable.
4. When a computer software project is in the preliminary project stage, enterprises are
likely to:
(a) Make strategic decisions to allocate resources between alternative projects at a
given point in time. For example, should programmers develop a new payroll
system or direct their efforts toward correcting existing problems in an operating
payroll system.
(b) Determine the performance requirements (that is, what it is that they need the
software to do) and systems requirements for the computer software project it
has proposed to undertake.
(c) Explore alternative means of achieving specified performance requirements. For
example, should an entity make or buy the software. Should the software run on
a mainframe or a client server system.
(d) Determine that the technology needed to achieve performance requirements
exists.
(e) Select a consultant to assist in the development and/or installation of the
software.
Development Stage
5. An internally generated software arising at the development stage should be
recognised as an asset if, and only if, an enterprise can demonstrate all of the following:
(a) the technical feasibility of completing the internally generated software so that it
will be available for internal use;
(b) the intention of the enterprise to complete the internally generated software and
use it to perform the functions intended. For example, the intention to complete

the internally generated software can be demonstrated if the enterprise commits

to the funding of the software project;
(c) the ability of the enterprise to use the software;
(d) how the software will generate probable future economic benefits. Among other
things, the enterprise should demonstrate the usefulness of the software;
(e) the availability of adequate technical, financial and other resources to complete
the development and to use the software; and
(f) the ability of the enterprise to measure the expenditure attributable to the
software during its development reliably.
6. Examples of development activities in respect of internally generated software include:
(a) Design including detailed program design - which is the process of detail design
of computer software that takes product function, feature, and technical
requirements to their most detailed, logical form and is ready for coding.
(b) Coding which includes generating detailed instructions in a computer language
to carry out the requirements described in the detail program design. The coding
of computer software may begin prior to, concurrent with, or subsequent to the
completion of the detail program design.
At the end of these stages of the development activity, the enterprise has a working model,
which is an operative version of the computer software capable of performing all the major
planned functions, and is ready for initial testing ("beta" versions).
(c) Testing which is the process of performing the steps necessary to determine
whether the coded computer software product meets function, feature, and
technical performance requirements set forth in the product design.
At the end of the testing process, the enterprise has a master version of the internal use
software, which is a completed version together with the related user documentation and
the training materials.
Cost of internally generated software
7. The cost of an internally generated software is the sum of the expenditure incurred
from the time when the software first met the recognition criteria for an intangible asset as
stated in paragraphs 20 and 21 of this Standard and paragraph 5 above. An expenditure
which did not meet the recognition criteria as aforesaid and expensed in an earlier financial
statements should not be reinstated if the recognition criteria are met later.
8. The cost of an internally generated software comprises all expenditure that can be
directly attributed or allocated on a reasonable and consistent basis to create the software
for its intended use. The cost include:
(a) expenditure on materials and services used or consumed in developing the
software;
(b) the salaries, wages and other employment related costs of personnel directly
engaged in developing the software;
(c) any expenditure that is directly attributable to generating software; and

(d) overheads that are necessary to generate the software and that can be allocated
on a reasonable and consistent basis to the software (For example, an allocation
of the depreciation of fixed assets, insurance premium and rent). Allocation of
overheads are made on basis similar to those used in allocating the overhead to
inventories.
9. The following are not components of the cost of an internally generated software:
(a) selling, administration and other general overhead expenditure unless this
expenditure can be directly attributable to the development of the software;
(b) clearly identified inefficiencies and initial operating losses incurred before
software achieves the planned performance; and
(c) expenditure on training the staff to use the internally generated software.
Software Acquired for Internal Use
10. The cost of a software acquired for internal use should be recognised as an asset if it
meets the recognition criteria prescribed in paragraphs 20 and 21 of this Standard.
11. The cost of a software purchased for internal use comprises its purchase price,
including any import duties and other taxes (other than those subsequently recoverable by
the enterprise from the taxing authorities) and any directly attributable expenditure on
making the software ready for its use. Any trade discounts and rebates are deducted in
arriving at the cost. In the determination of cost, matters stated in paragraphs 24 to 34 of
the Standard need to be considered, as appropriate.
Subsequent expenditure
12. Enterprises may incur considerable cost in modifying existing software systems.
Subsequent expenditure on software after its purchase or its completion should be
recognised as an expense when it is incurred unless:
(a) it is probable that the expenditure will enable the software to generate future
economic benefits in excess of its originally assessed standards of performance;
and
(b) the expenditure can be measured and attributed to the software reliably.
If these conditions are met, the subsequent expenditure should be added to the carrying
amount of the software. Costs incurred in order to restore or maintain the future economic
benefits that an enterprise can expect from the originally assessed standard of performance
of existing software systems is recognised as an expense when, and only when, the
restoration or maintenance work is carried out.
Amortisation period
13. The depreciable amount of a software should be allocated on a systematic basis over
the best estimate of its useful life. The amortisation should commence when the software
is available for use.

14. As per this Standard, there is a rebuttable presumption that the useful life of an
intangible asset will not exceed ten years from the date when the asset is available for use.
However, given the history of rapid changes in technology, computer software is
susceptible to technological obsolescence. Therefore, it is likely that useful life of the
software will be much shorter, say 3 to 5 years.
Amortisation method
15. The amortisation method used should reflect the pattern in which the software's
economic benefits are consumed by the enterprise. If that pattern cannot be determined
reliably, the straight-line method should be used. The amortisation charge for each period
should be recognised as an expenditure unless another Accounting Standard permits or
requires it to be included in the carrying amount of another asset. For example, the
amortisation of a software used in a production process is included in the carrying amount
of inventories.
II. Illustrative Application of the Accounting Standard to Web-Site
Costs
1. An enterprise may incur internal expenditures when developing, enhancing and
maintaining its own web site. The web site may be used for various purposes such as
promoting and advertising products and services, providing electronic services, and selling
products and services.
2. The stages of a web site's development can be described as follows:
(a) Planning - includes undertaking feasibility studies, defining objectives and
specifications, evaluating alternatives and selecting preferences;
(b) Application and Infrastructure Development - includes obtaining a domain name,
purchasing and developing hardware and operating software, installing
developed applications and stress testing; and
(c) Graphical Design and Content Development - includes designing the appearance
of web pages and creating, purchasing, preparing and uploading information,
either textual or graphical in nature, on the web site prior to the web site
becoming available for use. This information may either be stored in separate
databases that are integrated into (or accessed from) the web site or coded
directly into the web pages.
3. Once development of a web site has been completed and the web site is available for
use, the web site commences an operating stage. During this stage, an enterprise maintains
and enhances the applications, infrastructure, graphical design and content of the web site.
4. The expenditures for purchasing, developing, maintaining and enhancing hardware
(e.g., web servers, staging servers, production servers and Internet connections) related to
a web site are not accounted for under this Standard but are accounted for under AS 10,
Accounting for Fixed Assets. Additionally, when an enterprise incurs an expenditure for
having an Internet service provider host the enterprise's web site on its own servers
connected to the Internet, the expenditure is recognised as an expense.
5. An intangible asset is defined in paragraph 6 of this Standard as 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. Paragraph 7 of this
Standard provides computer software as a common example of an intangible asset. By
analogy, a web site is another example of an intangible asset. Accordingly, a web site
developed by an enterprise for its own use is an internally generated intangible asset that
is subject to the requirements of this Standard.
6. An enterprise should apply the requirements of this Standard to an internal
expenditure for developing, enhancing and maintaining its own web site. Paragraph 55 of
this Standard provides expenditure on an intangible item to be recognised as an expense
when incurred unless it forms part of the cost of an intangible asset that meets the
recognition criteria in paragraphs 19-54 of the Standard. Paragraph 56 of the Standard
requires expenditure on start-up activities to be recognised as an expense when incurred.
Developing a web site by an enterprise for its own use is not a start-up activity to the extent
that an internally generated intangible asset is created. An enterprise applies the
requirements and guidance in paragraphs 39-54 of this Standard to an expenditure
incurred for developing its own web site in addition to the general requirements for
recognition and initial measurement of an intangible asset. The cost of a web site, as
described in paragraphs 52-54 of this Standard, comprises all expenditure that can be
directly attributed, or allocated on a reasonable and consistent basis, to creating, producing
and preparing the asset for its intended use.
The enterprise should evaluate the nature of each activity for which an expenditure is
incurred (e.g., training employees and maintaining the web site) and the web site's stage
of development or post-development:
(a) Paragraph 41 of this Standard requires an expenditure on research (or on the
research phase of an internal project) to be recognised as an expense when
incurred. The examples provided in paragraph 43 of this Standard are similar to
the activities undertaken in the Planning stage of a web site's development.
Consequently, expenditures incurred in the Planning stage of a web site's
development are recognised as an expense when incurred.
(b) Paragraph 44 of this Standard requires an intangible asset arising from the
development phase of an internal project to be recognised if an enterprise can
demonstrate fulfillment of the six criteria specified. Application and Infrastructure
Development and Graphical Design and Content Development stages are similar
in nature to the development phase. Therefore, expenditures incurred in these
stages should be recognised as an intangible asset if, and only if, in addition to
complying with the general requirements for recognition and initial measurement
of an intangible asset, an enterprise can demonstrate those items described in
paragraph 44 of this Standard. In addition,
(i) an enterprise may be able to demonstrate how its web site will generate
probable future economic benefits under paragraph 44(d) by using the

principles in Accounting Standard on Impairment of Assets 10. This includes

situations where the web site is developed solely or primarily for promoting
and advertising an enterprise's own products and services. Demonstrating
how a web site will generate probable future economic benefits under
paragraph 44(d) by assessing the economic benefits to be received from the
web site and using the principles in Accounting Standard on Impairment of
Assets, may be particularly difficult for an enterprise that develops a web site
solely or primarily for advertising and promoting its own products and
services; information is unlikely to be available for reliably estimating the
amount obtainable from the sale of the web site in an arm's length
transaction, or the future cash inflows and outflows to be derived from its
continuing use and ultimate disposal. In this circumstance, an enterprise
determines the future economic benefits of the cash-generating unit to
which the web site belongs, if it does not belong to one. If the web site is
considered a corporate asset (one that does not generate cash inflows
independently from other assets and their carrying amount cannot be fully
attributed to a cash- generating unit), then an enterprise applies the
'bottom-up' test and/or the 'top-down' test under Accounting Standard on
Impairment of Assets.
(ii) an enterprise may incur an expenditure to enable use of content, which had
been purchased or created for another purpose, on its web site (e.g.,
acquiring a license to reproduce information) or may purchase or create
content specifically for use on its web site prior to the web site becoming
available for use. In such circumstances, an enterprise should determine
whether a separate asset, is identifiable with respect to such content (e.g.,
copyrights and licenses), and if a separate asset is not identifiable, then the
expenditure should be included in the cost of developing the web site when
the expenditure meets the conditions in paragraph 44 of this Standard. As
per paragraph 20 of this Standard, an intangible asset is recognised if, and
only if, it meets specified criteria, including the definition of an intangible
asset. Paragraph 52 indicates that the cost of an internally generated
intangible asset is the sum of expenditure incurred from the time when the
intangible asset first meets the specified recognition criteria. When an
enterprise acquires or creates content, it may be possible to identify an
intangible asset (e.g., a license or a copyright) separate from a web site.
Consequently, an enterprise determines whether an expenditure to enable
use of content, which had been created for another purpose, on its web site
becoming available for use results in a separate identifiable asset or the
expenditure is included in the cost of developing the web site.
(c) the operating stage commences once the web site is available for use, and
therefore an expenditure to maintain or enhance the web site after development
has been completed should be recognised as an expense when it is incurred
unless it meets the criteria in paragraph 59 of the Standard. Paragraph 60 explains
that if the expenditure is required to maintain the asset at its originally assessed
standard of performance, then the expenditure is recognised as an expense when
incurred.
7. An intangible asset is measured subsequent to initial recognition by applying the
requirements in paragraph 62 of this Standard. Additionally, since paragraph 68 of the
Standard states that an intangible asset always has a finite useful life, a web site that is
recognised as an asset is amortised over the best estimate of its useful life. As indicated in
paragraph 65 of the Standard, web sites are susceptible to technological obsolescence, and
given the history of rapid changes in technology, their useful life will be short.
8. The following table illustrates examples of expenditures that occur within each of the
stages described in paragraphs 2 and 3 above and application of paragraphs 5 and 6 above.
It is not intended to be a comprehensive checklist of expenditures that might be incurred.
Nature of Expenditure Accounting treatment
Planning
• undertaking feasibility studies Expense when incurred
• defining hardware and software
specifications
• evaluating alternative products and
suppliers
• selecting preferences
Application and Infrastructure
Development
• purchasing or developing hardware Apply the requirements of AS
10
• obtaining a domain name Expense when incurred, unless
• developing operating software (e.g., it meets the recognition criteria
operating system and server software) under paragraphs 20 and 44
• developing code for the application

• installing developed applications on the
web server
• stress testing

Graphical Design and Content

Development
• designing the appearance (e.g., layout and If a separate asset is not
colour) of web pages identifiable, then expense when
• creating, purchasing, preparing (e.g., incurred, unless it meets the
creating links and identifying tags), and recognition criteria under
uploading information, either textual or paragraphs 20 and 44
graphical in nature, on the website prior to
the web site becoming available for use.
Examples of content include information
about an enterprise, products or services
offered for sale, and topics that subscribers
access
Operating
• updating graphics and revising content Expense when incurred, unless
• adding new functions, features and content in rare circumstances it meets
the criteria in paragraph 59, in
• registering the web site with search
which case the expenditure is
engines
included in the cost of the web
• backing up data site
• reviewing security access
• analysing usage of the web site
Other
• selling, administrative and other general
overhead expenditure unless it can be Expense when incurred
directly attributed to preparing the web
site for use
• clearly identified inefficiencies
• and initial operating losses incurred before
the web site achieves planned performance
(e.g., false start testing)
• training employees to operate the web site
Illustration B
This Illustration which does not form part of the Accounting Standard, provides illustrative
application of the requirements contained in paragraph 99 of this Accounting Standard in
respect of transitional provisions.
Illustration 1 - Intangible Item was not amortised and the amortisation period
determined under paragraph 63 has expired.

An intangible item is appearing in the balance sheet of A Ltd. at ` 10 lakhs as on 1-4-2003.

The item was acquired for ` 10 lakhs on April 1, 1990 and was available for use from that
date. The enterprise has been following an accounting policy of not amortising the item.
Applying paragraph 63, the enterprise determines that the item would have been amortised
over a period of 10 years from the date when the item was available for use i.e., April 1,
1990.
Since the amortisation period determined by applying paragraph 63 has already expired as
on1-4-2003, the carrying amount of the intangible item of ` 10 lakhs would be required to
be eliminated with a corresponding adjustment to the opening balance of revenue reserves
as on 1-4-2003.
Illustration 2 - Intangible Item is being amortised and the amortisation period
determined under paragraph 63 has expired.
date. The enterprise has been following a policy of amortising the item over a period of
20 years on straight-line basis. Applying paragraph 63, the enterprise determines that the
item would have been amortised over a period of 10 years from the date when the item
was available for use i.e., April 1, 1991.
Since the amortisation period determined by applying paragraph 63 has already expired as
on 1-4-2003, the carrying amount of ` 8 lakhs would be required to be eliminated with a
corresponding adjustment to the opening balance of revenue reserves as on 1-4-2003.
Illustration 3 - Amortisation period determined under paragraph63 has not expired
and the remaining amortisation period as per the accounting policy followed by the
enterprise is shorter.
date. The enterprise has been following a policy of amortising the intangible item over a
period of 5 years on straight line basis. Applying paragraph 63, the enterprise determines
the amortisation period to be 8 years, being the best estimate of its useful life, from the
date when the item was available for use i.e., April 1, 2000.
On 1-4-2003, the remaining period of amortisation is 2 years as per the accounting policy
followed by the enterprise which is shorter as compared to the balance of amortisation period
determined by applying paragraph 63, i.e., 5 years. Accordingly, the enterprise would be required
to amortise the intangible item over the remaining 2 years as per the accounting policy followed
by the enterprise.
Illustration 4 - Amortisation period determined under paragraph 63 has not expired and
the remaining amortisation period as per the accounting policy followed by the
enterprise is longer.
An intangible item is appearing in the balance sheet of A Ltd. at ` 18 lakhs as on 1-4-2003. The
item was acquired for ` 24 lakhs on April 1, 2000 and was available for use from that date. The
enterprise has been following a policy of amortising the intangible item over a period of 12
years on straight-line basis. Applying paragraph 63, the enterprise determines that the item
would have been amortised over a period of 10 years on straight line basis from the date when
the item was available for use i.e., April 1, 2000.
On 1-4-2003, the remaining period of amortisation is 9 years as per the accounting policy
followed by the enterprise which is longer as compared to the balance of period stipulated in
paragraph 63, i.e., 7 years. Accordingly, the enterprise would be required to restate the carrying
amount of intangible item on 1-4-2003 at ` 16.8 lakhs (` 24 lakhs - 3x` 2.4 lakhs, i.e.,
amortisation that would have been charged as per the Standard) and the difference of ` 1.2 lakhs
(` 18 lakhs-` 16.8 lakhs) would be required to be adjusted against the opening balance of the
revenue reserves. The carrying amount of ` 16.8 lakhs would be amortised over 7 years which is
the balance of the amortisation period as per paragraph 63.
Illustration 5 - Intangible Item is not amortised and amortisation period determined
under paragraph 63 has not expired.
An intangible item is appearing in the balance sheet of A Ltd. at ` 20 lakhs as on 1-4-2003. The
item was acquired for ` 20 lakhs on April 1, 2000 and was available for use from that date.
The enterprise has been following an accounting policy of not amortising the item.
Applying paragraph 63, the enterprise determines that the item would have been amortised
over a period of 10 years on straight line basis from the date when the item was available
for use i.e., April 1, 2000.
On 1-4-2003, the enterprise would be required to restate the carrying amount of intangible
item at ` 14 lakhs (` 20 lakhs - 3x` 2 lakhs, i.e., amortisation that would have been charged
as per the Standard) and the difference of ` 6 lakhs (` 20 lakhs-` 14 lakhs) would be required
to be adjusted against the opening balance of the revenue reserves. The carrying amount of
` 14 lakhs would be amortised over 7 years which is the balance of the amortisation period
as per paragraph 63.
AS 29 ∗ : Provisions, Contingent Liabilities and Contingent

Assets
1
Pursuant to this Accounting Standard coming into effect, all paragraphs of Accounting
Standards (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date, that
deal with contingencies (viz., paragraphs 1(a), 2, 3.1, 4 (4.1 to 4.4), 5(5.1 to 5.6), 6, 7 (7.1 to
∗Issuedin 2003.
7.3), 9.1 (relevant portion). 9.2, 10, 11, 12 and 16), stand withdrawn except to the extent
they deal with impairment of assets not covered by other Accounting Standards.
Objective
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, timing and amount. The objective of this Standard is also to lay
down appropriate accounting for contingent assets.
Scope
1. This Standard should be applied in accounting for provisions and contingent
liabilities and in dealing with contingent assets, except:
(a) those resulting from financial instruments 2 that are carried at fair value;
(b) those resulting from executory contracts, except where the contract is
onerous;
Explanation:
(i) An ‘onerous contract’ is a contract in which the unavoidable costs of meeting
the obligations under the contract exceed the economic benefits expected to
be received under it. Thus, for a contract to qualify as an onerous contract,
the unavoidable costs of meeting the obligation under the contract should
exceed the economic benefits expected to be received under it. The
unavoidable costs under a contract reflect the least net cost of exiting from
the contract, which is the lower of the cost of fulfilling it and any
compensation or penalties arising from failure to fulfill it.
(ii) If an enterprise has a contract that is onerous, the present obligation under
the contract is recognised and measured as a provision as per this Standard.
The application of the above explanation is illustrated in Illustration 10 of
Illustration C attached to the Standard.
(c) those arising in insurance enterprises from contracts with policy-holders; and
(d) those covered by another Accounting Standard.
2. This Standard applies to financial instruments (including guarantees) that are not
carried at fair value.
3. Executory contracts are contracts under which neither party has performed any of its
obligations or both parties have partially performed their obligations to an equal extent.
This Standard does not apply to executory contracts unless they are onerous.
2Forthe purpose of this Standard, the term ‘financial instruments’ shall have the same meaning as in
Accounting Standard (AS) 20, Earnings Per Share.
4. This Standard applies to provisions, contingent liabilities and contingent assets of

insurance enterprises other than those arising from contracts with policy-holders.
5. Where another Accounting Standard deals with a specific type of provision, contingent
liability or contingent asset, an enterprise applies that Standard instead of this Standard.
For example, certain types of provisions are also addressed in Accounting Standards on:
(a) construction contracts (see AS 7, Construction Contracts);
(b) taxes on income (see AS 22, Accounting for Taxes on Income);
(c) leases (see AS 19, Leases). However, as AS 19 contains no specific requirements
to deal with operating leases that have become onerous, this Standard applies to
such cases; and
(d) retirement benefits (see AS 15, Accounting for Retirement Benefits in the Financial
Statements of Employers). 3
6. Some amounts treated as provisions may relate to the recognition of revenue, for
example where an enterprise gives guarantees in exchange for a fee. This Standard does
not address the recognition of revenue. AS 9, Revenue Recognition, identifies the
circumstances in which revenue is recognised and provides practical guidance on the
application of the recognition criteria. This Standard does not change the requirements of
AS 9.
7. This Standard defines provisions as liabilities which can be measured only by using a
substantial degree of estimation. The term ‘provision’ is also used in the context of items
such as depreciation, impairment of assets and doubtful debts: these are adjustments to
the carrying amounts of assets and are not addressed in this Standard.
8. Other Accounting Standards specify whether expenditures are treated as assets or as
expenses. These issues are not addressed in this Standard. Accordingly, this Standard
neither prohibits nor requires capitalisation of the costs recognised when a provision is
made.
9. This Standard applies to provisions for restructuring (including discontinuing
operations). Where a restructuring meets the definition of a discontinuing operation,
additional disclosures are required by AS 24, Discontinuing Operations.
Definitions
10.1 A provision is a liability which can be measured only by using a substantial
degree of estimation.
10.2 A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
3AS 15 (issued 1995) has since been revised and is now titled as ‘Employee Benefits’.
10.3 An obligating event is an event that creates an obligation that results in an

enterprise having no realistic alternative to settling that obligation.
10.4 A contingent liability is:
(a) 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; or
(b) a present obligation that arises from past events but is not recognised
because:
(i) it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; or
(ii) a reliable estimate of the amount of the obligation cannot be made.
10.5 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.
10.6 Present obligation - an obligation is a present obligation if, based on the
evidence available, its existence at the balance sheet date is considered probable, i.e.,
more likely than not.
10.7 Possible obligation - an obligation is a possible obligation if, based on the
evidence available, its existence at the balance sheet date is considered not probable.
10.8 A restructuring is a programme that is planned and controlled by
management, and materially changes either:
(a) the scope of a business undertaken by an enterprise; or
(b) the manner in which that business is conducted.
11. An obligation is a duty or responsibility to act or perform in a certain way. Obligations
may be legally enforceable as a consequence of a binding contract or statutory
requirement. Obligations also arise from normal business practice, custom and a desire to
maintain good business relations or act in an equitable manner.
12. Provisions can be distinguished from other liabilities such as trade payables and
accruals because in the measurement of provisions substantial degree of estimation is
involved with regard to the future expenditure required in settlement. By contrast:
(a) trade payables are liabilities to pay for goods or services that have been received
or supplied and have been invoiced or formally agreed with the supplier; and
(b) accruals are liabilities to pay for goods or services that have been received or
supplied but have not been paid, invoiced or formally agreed with the supplier,
including amounts due to employees. Although it is sometimes necessary to
estimate the amount of accruals, the degree of estimation is generally much less
than that for provisions.
13. In this Standard, the term ‘contingent’ is used for liabilities and assets that are not
recognised because their existence 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. In addition, the term ‘contingent liability’ is used for liabilities that do not meet
the recognition criteria.
Recognition
Provisions
14. A provision should be recognised when:
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these
conditions are not met, no provision should be recognised.
Present Obligation
15. In almost all cases it will be clear whether a past event has given rise to a present
obligation. In rare cases, for example in a lawsuit, it may be disputed either whether certain
events have occurred or whether those events result in a present obligation. In such a case,
an enterprise determines whether a present obligation exists at the balance sheet date by
taking account of all available evidence, including, for example, the opinion of experts. The
evidence considered includes any additional evidence provided by events after the balance
sheet date. On the basis of such evidence:
(a) where it is more likely than not that a present obligation exists at the balance
sheet date, the enterprise recognises a provision (if the recognition criteria are
met); and
(b) where it is more likely that no present obligation exists at the balance sheet date,
the enterprise discloses a contingent liability, unless the possibility of an outflow
of resources embodying economic benefits is remote (see paragraph 68).
Past Event
16. A past event that leads to a present obligation is called an obligating event. For an
event to be an obligating event, it is necessary that the enterprise has no realistic alternative
to settling the obligation created by the event.
17. Financial statements deal with the financial position of an enterprise at the end of its
reporting period and not its possible position in the future. Therefore, no provision is
recognised for costs that need to be incurred to operate in the future. The only liabilities
recognised in an enterprise’s balance sheet are those that exist at the balance sheet date.
18. It is only those obligations arising from past events existing independently of an
enterprise’s future actions (i.e. the future conduct of its business) that are recognised as
provisions. Examples of such obligations are penalties or clean-up costs for unlawful
environmental damage, both of which would lead to an outflow of resources embodying
economic benefits in settlement regardless of the future actions of the enterprise. Similarly,
an enterprise recognises a provision for the decommissioning costs of an oil installation to
the extent that the enterprise is obliged to rectify damage already caused. In contrast,
because of commercial pressures or legal requirements, an enterprise may intend or need
to carry out expenditure to operate in a particular way in the future (for example, by fitting
smoke filters in a certain type of factory). Because the enterprise can avoid the future
expenditure by its future actions, for example by changing its method of operation, it has
no present obligation for that future expenditure and no provision is recognised.
19. An obligation always involves another party to whom the obligation is owed. It is not
necessary, however, to know the identity of the party to whom the obligation is owed –
indeed the obligation may be to the public at large.
20. An event that does not give rise to an obligation immediately may do so at a later
date, because of changes in the law. For example, when environmental damage is caused
there may be no obligation to remedy the consequences. However, the causing of the
damage will become an obligating event when a new law requires the existing damage to
be rectified.
21. Where details of a proposed new law have yet to be finalised, an obligation arises only
when the legislation is virtually certain to be enacted. Differences in circumstances
surrounding enactment usually make it impossible to specify a single event that would
make the enactment of a law virtually certain. In many cases it will be impossible to be
virtually certain of the enactment of a law until it is enacted.
Probable Outflow of Resources Embodying Economic Benefits
22. 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. For the purpose of this Standard 4, an outflow of resources or other event
is regarded as probable if the event is more likely than not to occur, i.e., the probability
that the event will occur is greater than the probability that it will not. Where it is not
probable that a present obligation exists, an enterprise discloses a contingent liability,
unless the possibility of an outflow of resources embodying economic benefits is remote
(see paragraph 68).
23. Where there are a number of similar obligations (e.g. 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. Although the likelihood of outflow for any
one item may be small, it may well be probable that some outflow of resources will be
needed to settle the class of obligations as a whole. If that is the case, a provision is
recognised (if the other recognition criteria are met).
Reliable Estimate of the Obligation
24. The use of estimates is an essential part of the preparation of financial statements and
does not undermine their reliability. This is especially true in the case of provisions, which
4The interpretation of ‘probable’ in this Standard as ‘more likely than not’ does not necessarily apply
in other Accounting Standards.
by their nature involve a greater degree of estimation than most other items. Except in
extremely rare cases, 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 recognising
a provision.
25. In the extremely rare case where no reliable estimate can be made, a liability exists
that cannot be recognised. That liability is disclosed as a contingent liability (see paragraph
68).
Contingent Liabilities
26. An enterprise should not recognise a contingent liability.
27. A contingent liability is disclosed, as required by paragraph 68, unless the possibility
of an outflow of resources embodying economic benefits is remote.
28. Where an enterprise is jointly and severally liable for an obligation, the part of the
obligation that is expected to be met by other parties is treated as a contingent liability.
The enterprise recognises a provision for the part of the obligation for which an outflow of
resources embodying economic benefits is probable, except in the extremely rare
circumstances where no reliable estimate can be made (see paragraph 14).
29. Contingent liabilities may develop in a way not initially expected. Therefore, they are
assessed continually to determine whether an outflow of resources embodying economic
benefits has become probable. If it becomes probable that an outflow of future economic
benefits will be required for an item previously dealt with as a contingent liability, a
provision is recognised in accordance with paragraph 14 in the financial statements of the
period in which the change in probability occurs (except in the extremely rare circumstances
where no reliable estimate can be made).
Contingent Assets
30. An enterprise should not recognise a contingent asset.
31. Contingent assets usually arise from unplanned or other unexpected events that give
rise to the possibility of an inflow of economic benefits to the enterprise. An example is a
claim that an enterprise is pursuing through legal processes, where the outcome is
uncertain.
32. Contingent assets are not recognised in financial statements since this may result in
the recognition of income that may never be realised. However, when the realisation of
income is virtually certain, then the related asset is not a contingent asset and its
recognition is appropriate.
33. A contingent asset is not disclosed in the financial statements. It is usually disclosed
in the report of the approving authority (Board of Directors in the case of a company, and,
the corresponding approving authority in the case of any other enterprise), where an inflow
of economic benefits is probable.

34. Contingent assets are assessed continually and if it has become virtually certain that
an inflow of economic benefits will arise, the asset and the related income are recognised
in the financial statements of the period in which the change occurs.
Measurement
Best Estimate
35. The amount recognised as a provision should be the best estimate of the
expenditure required to settle the present obligation at the balance sheet date. The
amount of a provision should not be discounted to its present valueexcept in case of
decommissioning, restoration and similar liabilities that are recognised as cost of
Property, Plant and Equipment. The discount rate (or rates) should be a pre-tax rate
(or rates) that reflect(s) current market assessments of the time value of money and
the risks specific to the liability. The discount rate(s) should not reflect risks for which
future cash flow estimates have been adjusted. Periodic unwinding of discount should
be recognised in the statement of profit and loss.
36. The estimates of outcome and financial effect are determined by the judgment of the
management of the enterprise, supplemented by experience of similar transactions and, in
some cases, reports from independent experts. The evidence considered includes any
additional evidence provided by events after the balance sheet date.
37. The provision is measured before tax; the tax consequences of the provision, and
changes in it, are dealt with under AS 22, Accounting for Taxes on Income.
Risks and Uncertainties
38. The risks and uncertainties that inevitably surround many events and
circumstances should be taken into account in reaching the best estimate of a
provision.
39. Risk describes variability of outcome. A risk adjustment may increase the amount at
which a liability is measured. Caution is needed in making judgments under conditions of
uncertainty, so that income or assets are not overstated and expenses or liabilities are not
understated. However, uncertainty does not justify the creation of excessive provisions or
a deliberate overstatement of liabilities. For example, if the projected costs of a particularly
adverse outcome are estimated on a prudent basis, that outcome is not then deliberately
treated as more probable than is realistically the case. Care is needed to avoid duplicating
adjustments for risk and uncertainty with consequent overstatement of a provision.
40. Disclosure of the uncertainties surrounding the amount of the expenditure is made
under paragraph 67(b).
Future Events
41. Future events that may affect the amount required to settle an obligation should
be reflected in the amount of a provision where there is sufficient objective evidence
that they will occur.

42. Expected future events may be particularly important in measuring provisions. For
example, an enterprise may believe that the cost of cleaning up a site at the end of its life
will be reduced by future changes in technology. The amount recognised reflects a
reasonable expectation of technically qualified, objective observers, taking account of all
available evidence as to the technology that will be available at the time of the clean-up.
Thus, it is appropriate to include, for example, expected cost reductions associated with
increased experience in applying existing technology or the expected cost of applying
existing technology to a larger or more complex clean-up operation than has previously
been carried out. However, an enterprise does not anticipate the development of a
completely new technology for cleaning up unless it is supported by sufficient objective
evidence.
43. The effect of possible new legislation is taken into consideration in measuring an
existing obligation when sufficient objective evidence exists that the legislation is virtually
certain to be enacted. The variety of circumstances that arise in practice usually makes it
impossible to specify a single event that will provide sufficient, objective evidence in every
case. Evidence is required both of what legislation will demand and of whether it is virtually
certain to be enacted and implemented in due course. In many cases sufficient objective
evidence will not exist until the new legislation is enacted.
Expected Disposal of Assets
44. Gains from the expected disposal of assets should not be taken into account in
measuring a provision.
45. Gains on the expected disposal of assets are not taken into account in measuring a
provision, even if the expected disposal is closely linked to the event giving rise to the
provision. Instead, an enterprise recognises gains on expected disposals of assets at the
time specified by the Accounting Standard dealing with the assets concerned.
Reimbursements
46. Where some or all of the expenditure required to settle a provision is expected to
be reimbursed by another party, the reimbursement should be recognised when, and
only when, it is virtually certain that reimbursement will be received if the enterprise
settles the obligation. The reimbursement should be treated as a separate asset. The
amount recognised for the reimbursement should not exceed the amount of the
provision.
47. In the statement of profit and loss, the expense relating to a provision may be
presented net of the amount recognised for a reimbursement.
48. Sometimes, an enterprise is able to look to another party to pay part or all of the
expenditure required to settle a provision (for example, through insurance contracts,
indemnity clauses or suppliers’ warranties). The other party may either reimburse amounts
paid by the enterprise or pay the amounts directly.
49. In most cases, the enterprise will remain liable for the whole of the amount in question
so that the enterprise would have to settle the full amount if the third party failed to pay

for any reason. In this situation, a provision is recognised for the full amount of the liability,
and a separate asset for the expected reimbursement is recognised when it is virtually
certain that reimbursement will be received if the enterprise settles the liability.
50. In some cases, the enterprise will not be liable for the costs in question if the third
party fails to pay. In such a case, the enterprise has no liability for those costs and they are
not included in the provision.
51. As noted in paragraph 28, an obligation for which an enterprise is jointly and severally
liable is a contingent liability to the extent that it is expected that the obligation will be
settled by the other parties.
Changes in Provisions
52. 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.
Use of Provisions
53. A provision should be used only for expenditures for which the provision was
originally recognised.
54. Only expenditures that relate to the original provision are adjusted against it.
Adjusting expenditures against a provision that was originally recognised for another
purpose would conceal the impact of two different events.
Application of the Recognition and Measurement Rules

Future Operating Losses
55. Provisions should not be recognised for future operating losses.
56. Future operating losses do not meet the definition of a liability in paragraph 10 and
the general recognition criteria set out for provisions in paragraph 14.
57. An expectation of future operating losses is an indication that certain assets of the
operation may be impaired. An enterprise tests these assets for impairment under
Accounting Standard (AS) 28, Impairment of Assets.
Restructuring
58. The following are examples of events that may fall under the definition of
restructuring:
(a) sale or termination of a line of business;
(b) the closure of business locations in a country or region or the relocation of
business activities from one country or region to another;
(c) changes in management structure, for example, eliminating a layer of
management; and

(d) fundamental re-organisations that have a material effect on the nature and focus
of the enterprise’s operations.
59. A provision for restructuring costs is recognised only when the recognition criteria for
provisions set out in paragraph 14 are met.
60. No obligation arises for the sale of an operation until the enterprise is committed
to the sale, i.e., there is a binding sale agreement.
61. An enterprise cannot be committed to the sale until a purchaser has been identified
and there is a binding sale agreement. 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. When the sale of an operation
is envisaged as part of a restructuring, the assets of the operation are reviewed for
impairment under Accounting Standard (AS) 28, Impairment of Assets.
62. A restructuring provision should include only the direct expenditures arising from
the restructuring which are those that are both:
(a) necessarily entailed by the restructuring; and
(b) not associated with the ongoing activities of the enterprise.
63. A restructuring provision does not include such costs as:
(a) retraining or relocating continuing staff;
(b) marketing; or
(c) investment in new systems and distribution networks.
These expenditures relate to the future conduct of the business and are not liabilities for
restructuring at the balance sheet date. Such expenditures are recognised on the same
basis as if they arose independently of a restructuring.
64. Identifiable future operating losses up to the date of a restructuring are not included
in a provision.
65. As required by paragraph 44, gains on the expected disposal of assets are not taken
into account in measuring a restructuring provision, even if the sale of assets is envisaged
as part of the restructuring.
Disclosure
66. 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.

Provided that a Small and Medium-sized Company and a Small and Medium-sized
Enterprise (Level II and Level III non-corporate entities), may not comply with
paragraph 66 above.
67. 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.
Provided that a Small and Medium-sized Company and a Small and Medium-sized
Enterprise (Level II and Level III non-corporate entities) may not comply with
paragraph 67 above.
68. Unless the possibility of any outflow in settlement is remote, 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, where practicable:
(a) an estimate of its financial effect, measured under paragraphs 35-45;
(b) an indication of the uncertainties relating to any outflow; and
(c) the possibility of any reimbursement.
69. In determining which provisions or contingent liabilities may be aggregated to form a
class, it is necessary to consider whether the nature of the items is sufficiently similar for a
single statement about them to fulfill the requirements of paragraphs 67 (a) and (b) and 68
(a) and (b). Thus, it may be appropriate to treat as a single class of provision amounts
relating to warranties of different products, but it would not be appropriate to treat as a
single class amounts relating to normal warranties and amounts that are subject to legal
proceedings.
70. Where a provision and a contingent liability arise from the same set of circumstances,
an enterprise makes the disclosures required by paragraphs 66-68 in a way that shows
the link between the provision and the contingent liability.
71. Where any of the information required by paragraph 68 is not disclosed because
it is not practicable to do so, that fact should be stated.
72. In extremely rare cases, disclosure of some or all of the information required by
paragraphs 66-70 can be expected to prejudice seriously the position of the enterprise
in a dispute with other parties on the subject matter of the provision or contingent
liability. In such cases, an enterprise need not disclose the information, but should
disclose the general nature of the dispute, together with the fact that, and reason why,
the information has not been disclosed.

Transitional Provisions
73. All the existing provisions for decommissioning, restoration and similar
liabilities (see paragraph 35) should be discounted prospectively, with the
corresponding effect to the related item of property, plant and equipment.
Illustration A
Tables - Provisions, Contingent Liabilities and
Reimbursements
The purpose of this illustration is to summarise the main requirements of the Accounting
Standard. It does not form part of the Accounting Standard and should be read in the context
of the full text of the Ac- counting Standard.
Provisions and Contingent Liabilities
Where, as a result of past events, there may be an outflow of resources embodying
future economic benefits in settlement of: (a) a present obligation the one whose
existence at the balance sheet date is considered probable; or (b) a possible
obligation the existence of which at the balance sheet date is considered not
probable.
There is a present There is a possible There is a possible obligation
obligation that probably obligation or a present or a present obligation where
requires an outflow of obligation that may, the likelihood of an outflow
resources and a reliable but probably will not, of resources is remote.
estimate can be made of require an outflow of
the amount of resources.
obligation.
A provision is recognised No provision is No provision is recognised
(paragraph 14). recognised (paragraph (paragraph 26).
Disclosures are required 26). No disclosure is required
for the provision Disclosures are required (paragraph 68).
(paragraphs 66 and 67). for the contingent
liability (paragraph 68).
Reimbursements
Some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party.
The enterprise has no The obligation for the The obligation for the
obligation for the part amount expected to be amount expected to be
of the expenditure to reimbursed remains with reimbursed remains with
be reimbursed by the the enterprise and it is the enterprise and the
other party. virtually certain that reimbursement is not
reimbursement will be virtually certain if the

received if the enterprise enterprise settles the

settles the provision. provision.
The enterprise has no The reimbursement is The expected reimbursement
liability for the amount recognised as a separate is not recognised as an asset
to be reimbursed asset in the balance sheet (paragraph 46).
(paragraph 50). and may be offset against
the expense in the
statement of profit and loss.
The amount recognised for
the expected
reimbursement does not
exceed the liability
(paragraphs 46 and 47).
No disclosure is The reimbursement is The expected reimbursement
required. disclosed together with the is disclosed [paragraph67(c)].
amount recognised for the
reimbursement [paragraph
67(c)].
Illustration B
Decision Tree
The purpose of the decision tree is to summarise the main recognition requirements of the
Accounting Standard for provisions and contingent liabilities. The decision tree does not form
part of the Accounting Standard and should be read in the context of the full text of the
Accounting Standard.
Start
Present obligation as a
No Possible obligation? No
result of an obligating
event?
Yes
Yes
No Yes
Portable outflow? Remote?
Yes
No
No (rare)
Reliable estimate?
Yes
Provide Disclose contingent
liability Do nothing

Note: in rare cases, it is not clear whether there is a present obligation. In these cases, a
past event is deemed to give rise to a present obligation if, taking account of all available
evidence, it is more likely than not that a present obligation exists at the balance sheet date
(paragraph 15 of the Standard).
Illustration C Illustrations: Recognition
This illustration illustrates the application of the Accounting Standard to assist in clarifying
its meaning. It does not form part of the Accounting Standard.
All the enterprises in the Illustration have 31 March year ends. In all cases, it is assumed that
a reliable estimate can be made of any outflows expected. In some Illustrations the
circumstances described may have resulted in impairment of the assets - this aspect is not
dealt with in the Illustrations.
The cross references provided in the Illustrations indicate paragraphs of the Accounting
Standard that are particularly relevant. The illustration should be read in the context of the
full text of the Accounting Standard.
Illustration 1: Warranties
A manufacturer gives warranties at the time of sale to purchasers of its product. Under the
terms of the contract for sale the manufacturer undertakes to make good, by repair or
replacement, manufacturing defects that become apparent within three years from the date
of sale. On past experience, it is probable (i.e. more likely than not) that there will be some
claims under the warranties.
Present obligation as a result of a past obligating event - The obligating event is the
sale of the product with a warranty, which gives rise to an obligation.
An outflow of resources embodying economic benefits in settlement - Probable for
the warranties as a whole (see paragraph 23).
Conclusion - A provision is recognised for the best estimate of the costs of making good
under the warranty products sold before the balance sheet date (see paragraphs 14 and
23).
Illustration 2: Contaminated Land - Legislation Virtually
Certain to be Enacted
An enterprise in the oil industry causes contamination but does not clean up because there
is no legislation requiring cleaning up, and the enterprise has been contaminating land for
several years. At 31 March 2005 it is virtually certain that a law requiring a clean-up of land
already contaminated will be enacted shortly after the year end.
contamination of the land because of the virtual certainty of legislation requiring cleaning up.
An outflow of resources embodying economic benefits in settlement - Probable.
Conclusion - A provision is recognised for the best estimate of the costs of the clean-up
(see paragraphs 14 and 21).

Illustration 3: Offshore Oilfield

An enterprise operates an offshore oilfield where its licensing agreement requires it to
remove the oil rig at the end of production and restore the seabed. Ninety per cent of the
eventual costs relate to the removal of the oil rig and restoration of damage caused by
building it, and ten per cent arise through the extraction of oil. At the balance sheet date,
the rig has been constructed but no oil has been extracted.
Present obligation as a result of a past obligating event - The construction of the oil rig
creates an obligation under the terms of the licence to remove the rig and restore the
seabed and is thus an obligating event. At the balance sheet date, however, there is no
obligation to rectify the damage that will be caused by extraction of the oil.
Conclusion - A provision is recognised for the best estimate of ninety per cent of the
eventual costs that relate to the removal of the oil rig and restoration of damage caused
by building it (see paragraph 14). These costs are included as part of the cost of the oil rig.
The ten per cent of costs that arise through the extraction of oil are recognised as a liability
when the oil is extracted.
Illustration 4: Refunds Policy
A retail store has a policy of refunding purchases by dissatisfied customers, even though it
is under no legal obligation to do so. Its policy of making refunds is generally known.
sale of the product, which gives rise to an obligation because obligations also arise from
normal business practice, custom and a desire to maintain good business relations or act
in an equitable manner.
An outflow of resources embodying economic benefits in settlement -
Probable, a proportion of goods are returned for refund (see paragraph 23).
Conclusion - A provision is recognised for the best estimate of the costs of refunds (see
paragraphs 11, 14 and 23).
Illustration 5: Legal Requirement to Fit Smoke Filters
Under new legislation, an enterprise is required to fit smoke filters to its factories by 30
September 2005. The enterprise has not fitted the smoke filters.
(a) At the balance sheet date of 31 March 2005
Present obligation as a result of a past obligating event - There is no obligation because
there is no obligating event either for the costs of fitting smoke filters or for fines under
the legislation.
Conclusion - No provision is recognised for the cost of fitting the smoke filters (see
paragraphs 14 and 16-18).
(b) At the balance sheet date of 31 March 2006
Present obligation as a result of a past obligating event - There is still no obligation for
the costs of fitting smoke filters because no obligating event has occurred (the fitting of
the filters). However, an obligation might arise to pay fines or penalties under the
legislation because the obligating event has occurred (the non-compliant operation of the
factory).
An outflow of resources embodying economic benefits in settlement - Assessment of
probability of incurring fines and penalties by non-compliant operation depends on the
details of the legislation and the stringency of the enforcement regime.
Conclusion - No provision is recognised for the costs of fitting smoke filters. However, a
provision is recognised for the best estimate of any fines and penalties that are more likely
than not to be imposed (see paragraphs 14 and 16-18).
Illustration 6: Staff Retraining as a Result of Changes in the Income Tax
System
The government introduces a number of changes to the income tax system. As a result of
these changes, an enterprise in the financial services sector will need to retrain a large
proportion of its administrative and sales workforce in order to ensure continued
compliance with financial services regulation. At the balance sheet date, no retraining of
staff has taken place.
Present obligation as a result of a past obligating event - There is no obligation because
no obligating event (retraining) has taken place.
Conclusion - No provision is recognised (see paragraphs 14 and 16-18).
Illustration 7: A Single Guarantee
During 2004-05, Enterprise A gives a guarantee of certain borrowings of Enterprise B, whose
financial condition at that time is sound. During 2005-06, the financial condition of
Enterprise B deteriorates and at 30 September 2005 Enterprise B goes into liquidation.
(a) At 31 March 2005
giving of the guarantee, which gives rise to an obligation.
An outflow of resources embodying economic benefits in settlement -
No outflow of benefits is probable at 31 March 2005.
Conclusion - No provision is recognised (see paragraphs 14 and 22). The guarantee is
disclosed as a contingent liability unless the probability of any outflow is regarded as
remote (see paragraph 68).
(b) At 31 March 2006
giving of the guarantee, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits in settlement - At 31 March
2006, it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation.
Conclusion - A provision is recognised for the best estimate of the obligation (see
paragraphs 14 and 22).
Note: This example deals with a single guarantee. If an enterprise has a portfolio of similar
guarantees, it will assess that portfolio as a whole in determining whether an outflow of
resources embodying economic benefit is probable (see paragraph 23). Where an
enterprise gives guarantees in exchange for a fee, revenue is recognised under AS 9,
Revenue Recognition.
Illustration 8 : A Court Case
After a wedding in 2004-05, ten people died, possibly as a result of food poisoning from
products sold by the enterprise. Legal proceedings are started seeking damages from the
enterprise but it disputes liability. Up to the date of approval of the financial statements
for the year 31 March 2005, the enterprise’s lawyers advise that it is probable that the
enterprise will not be found liable. However, when the enterprise prepares the financial
statements for the year 31 March 2006, its lawyers advise that, owing to developments in
the case, it is probable that the enterprise will be found liable.
(a) At 31 March 2005
Present obligation as a result of a past obligating event - On the basis of the evidence
available when the financial statements were approved, there is no present obligation as a
result of past events.
Conclusion - No provision is recognised (see definition of ‘present obligation’ and
paragraph 15). The matter is disclosed as a contingent liability unless the probability of any
outflow is regarded as remote (paragraph 68).
(b) At 31 March 2006
Present obligation as a result of a past obligating event - On the basis of the evidence
available, there is a present obligation.
Conclusion - A provision is recognised for the best estimate of the amount to settle the
obligation (paragraphs 14-15).
Illustration 9A: Refurbishment Costs - No Legislative Requirement
A furnace has a lining that needs to be replaced every five years for technical reasons. At
the balance sheet date, the lining has been in use for three years.
Present obligation as a result of a past obligating event - There is no present obligation.
Conclusion - No provision is recognised (see paragraphs 14 and 16-18). The cost of
replacing the lining is not recognised because, at the balance sheet date, no obligation to
replace the lining exists independently of the company’s future actions - even the intention
to incur the expenditure depends on the company deciding to continue operating the
furnace or to replace the lining.
Illustration 9B: Refurbishment Costs – Legislative Requirement
An airline is required by law to overhaul its aircraft once every three years.
Present obligation as a result of a past obligating event - There is no present obligation.

Conclusion - No provision is recognised (see paragraphs 14 and 16-18). The costs of

overhauling aircraft are not recognised as a provision for the same reasons as the cost of
replacing the lining is not recognised as a provision in illustration 9A. Even a legal
requirement to overhaul does not make the costs of overhaul a liability, because no
obligation exists to overhaul the aircraft independently of the enterprise’s future actions -
the enterprise could avoid the future expenditure by its future actions, for example by
selling the aircraft.
Illustration 10: An Onerous Contract
An enterprise operates profitably from a factory that it has leased under an operating lease.
During December 2005 the enterprise relocates its operations to a new factory. The lease
on the old factory continues for the next four years, it cannot be cancelled and the factory
cannot be re-let to another user.
Present obligation as a result of a past obligating event-The obligating event occurs
when the lease contract becomes binding on the enterprise, which gives rise to a legal
obligation.
An outflow of resources embodying economic benefits in settlement- When the lease
becomes onerous, an outflow of resources embodying economic benefits is probable, (Until
the lease becomes onerous, the enterprise accounts for the lease under AS 19, Leases).
Conclusion-A provision is recognised for the best estimate of the unavoidable lease
payments.
Illustration D
Illustrations: Disclosure
An illustration of the disclosures required by paragraph 67 is provided below.
Illustration 1 Warranties
A manufacturer gives warranties at the time of sale to purchasers of its three product lines.
Under the terms of the warranty, the manufacturer undertakes to repair or replace items
that fail to perform satisfactorily for two years from the date of sale. At the balance sheet
date, a provision of ` 60,000 has been recognised. The following information is disclosed:
A provision of ` 60,000 has been recognised for expected warranty claims on products sold
during the last three financial years. It is expected that the majority of this expenditure will
be incurred in the next financial year, and all will be incurred within two years of the balance
sheet date.
An illustration is given below of the disclosures required by paragraph 72 where some of the
information required is not given because it can be expected to prejudice seriously the
position of the enterprise.

Illustration 2 Disclosure Exemption

An enterprise is involved in a dispute with a competitor, who is alleging that the enterprise
has infringed patents and is seeking damages of ` 1000 lakh. The enterprise recognises a
provision for its best estimate of the obligation, but discloses none of the information
required by paragraphs 66 and 67 of the Standard. The following information is disclosed:
Litigation is in process against the company relating to a dispute with a competitor who
alleges that the company has infringed patents and is seeking damages of ` 1000 lakh. The
information usually required by AS 29, Provisions, Contingent Liabilities and Contingent
Assets is not disclosed on the grounds that it can be expected to prejudice the interests of the
company. The directors are of the opinion that the claim can be successfully resisted by the
company.

PART – II
GN(A) 5 (Issued 1983) Guidance Note on Terms Used

in Financial Statements
The following is the text of the guidance note issued with a view to clarify the important
terms (including phrases) commonly used in the preparation and presentation of ‘ general
purpose financial statements’. These statements include balance sheet, statement of
profit and loss and other statements and explanatory notes which form part thereof,
issued for the use of shareholders/members, creditor, employees and public at la rge.
Introduction
1. The objective of this guidance note is to facilitate a broad and basic understanding
of the various terms as well as to promote consistency and uniformity in their usage. As
such it does not purport to provide a comprehensive or rigid dictionary.
2. The basic considerations to be borne in mind when selecting terms for use in the
financial statements are clarity, significance and consistency.
3. This guidance note does not primarily cover the terms used in a specific sense by
certain specialised institutions, e.g., banks, insurance companies, financial institutions or
electricity companies. However, it is possible that some of the terms defined here may
have common application for such institutions.
4. Many of the terms have, over a period of time, acquired a worldwide usage and
recognition. Therefore, while formulating this guidance note, the Accounting Standards
Board has taken into consideration the terminologies in use in various countries as
formulated by their respective professional bodies.
5. The terms have been defined in this note, keeping in view their usage in the
preparation and presentation of the financial statements. Some of these terms may have
different meanings when used in the context of certain special enactments.
6. The definitions of the terms in this guidance note do not spell out the accounting
procedure and are not prescriptive of a course of action.
General Definitions
1.01 Absorption Costing
A method whereby the cost is determined so as to include the appropriate share of both
variable and fixed costs.
1.02 Acceptance
The drawee’s signed assent on bill of exchange, to the order of the drawer. This term is
also used to describe a bill of exchange that has been accepted.
1.03 Account Receivable
See Sundry Debtor

II-2 Accounting Pronouncements
1.04 Accounting Policies

The specific accounting principles and the methods of applying those principles adopted
by an enterprise in the preparation and presentation of financial statements.
1.05 Accrual
Recognition of revenues and costs as they are earned or incurred (and not as money is
received or paid). It includes recognition of transactions relating to assets and liabilities as
they occur irrespective of the actual receipts or payments.
1.06 Accrual Basis of Accounting
The method of recording transactions by which revenues, costs, assets and liabilities are
reflected in the accounts in the period in which they accrue. The ‘accrual basis of
accounting’ includes considerations relating to deferrals, allocations, depreciation and
amortisation. This basis is also referred to as mercantile basis of accounting.
1.07 Accrued Asset
A developing but not yet enforceable claim against another person which accumulates
with the passage of time or the rendering of service or otherwise. It may arise from the
rendering of services (including the use of money) which at the date of accounting have
been partly performed, and are not yet billable.
1.08 Accrued Expense
An expense which has been incurred in an accounting period but for which no enforceable
claim has become due in that period against the enterprise. It may arise from the
purchase of services (including the use of money) which at the date of accounting have
been only partly performed, and are not yet billable.
1.09 Accrued Liability
A developing but not yet enforceable claim by another person which accumulates with
the passage of time or the receipt of service or otherwise. It may arise from the purchase
of services (including the use of money) which at the date of accounting have been only
partly performed, and are not yet billable.
1.10 Accrued Revenue
Revenue which has been earned in an accounting period but in respect of which no
enforceable claim has become due in that period by the enterprise. It may arise from the
rendering of services (including the use of money) which at the date of accounting have
been partly performed, and are not yet billable.
1.11 Accumulated Depletion
The total to date of the periodic depletion charges on wasting assets.
1.12 Accumulated Depreciation
The total to date of the periodic depreciation charges on depreciable assets.

Part – II: Guidance Notes II-3
1.13 Actual Cost

See Cost
1.14 Ad-valorem
A method of levying tax or duty on goods by using their assessable value as the tax base.
1.15 Added Value
See Value Added
1.16 Added Value Statement
See Value Added Statement
1.17 Advance
Payment made on account of, but before completion of, a contract, or before acquisition
of goods or receipt of services.
1.18 Amortisable Amount
See Amortisation
1.19 Amortisation
The gradual and systematic writing off of an asset or an account over an appropriate
period. The amount on which amortisation is provided is referred to as amortisable
amount. Depreciation accounting is a form of amortisation applied to depreciable assets.
Depletion accounting is another form of amortisation applied to wasting assets.
Amortisation also refers to gradual extinction or provision for extinction of a debt by
gradual redemption or sinking fund payments or the gradual writing off to revenue of
miscellaneous expenditure carried forward, e.g., share issue expenses, preliminary
expenses, etc.
1.20 Amortised Value
The amortisable amount less any portion already provided by way of amortisation.
1.21 Annual Report
The information provided annually by the management of an enterprise to the owners
and other interested persons concerning its operations and financial position. It includes
the information statutorily required, e.g., in the case of a company, the balance sheet,
profit and loss statement and notes on accounts, the auditor’s report thereon, and the
report of the Board of Directors. It also includes other information voluntarily provided
e.g., value added statement, graphs, charts, etc.
1.22 Appropriation Account
An account sometimes included as a separate section of the profit and loss statement
showing application of profits towards dividends, reserves, etc.

1.23 Assets
Tangible objects or intangible rights owned by an enterprise and carrying probable future
benefits.
1.24 Auditor’s Report
The formal expression of opinion by an independent external auditor on the financial
statements of an enterprise including such reservations, qualifications and negations as
may be called for and incorporating, where appropriate, such statutory affirmations as
may be prescribed.
1.25 Authorised Share Capital
The number and par value, of each class of shares that an enterprise may issue in
accordance with its instrument of incorporation. This is sometimes referred to as nominal
share capital.
1.26 Average Cost
The cost of an item at a point of time as determined by applying an average of the cost of
all items of the same nature over a period. When weightages are also applied in the
computation, it is termed as weighted average cost.
2.01 Bad Debts
Debts owed to an enterprise which are considered to be irrecoverable.
2.02 Balance Sheet
A statement of the financial position of an enterprise as at a given date, which exhibits its
assets, liabilities, capital, reserves and other account balances at their respective book
values.
2.03 Bill of Exchange
An instrument in writing containing an unconditional order, signed by the maker,
directing a certain person to pay a certain sum of money only, to or to the order of a
certain person or to the bearer of the instrument.
2.04 Bond
See Debenture
2.05 Bonus Shares
Shares allotted by capitalisation of the reserves or surplus of a corporate enterprise.
2.06 Book Value
The amount at which an item appears in the books of account or financial statements. It
does not refer to any particular basis on which the amount is determined e .g., cost,
replacement value, etc.

3.01 Call
A demand pursuant to terms of issue to pay a part or whole of the balance remaining
payable on shares or debentures after allotment.
3.02 Called-up Share Capital
That part of the subscribed share capital which shareholders have been required to pay.
3.03 Capital
Generally refers to the amount invested in an enterprise by its owners e.g. paid-up share
capital in a corporate enterprise. It is also used to refer to the interest of owners in the
assets of an enterprise.
3.04 Capital Assets
Assets, including investments not held for sale, conversion or consumption in the ordinary
course of business.
3.05 Capital Commitment
Future liability for capital expenditure in respect of which contracts have been made.
3.06 Capital Employed
The finances deployed by an enterprise in its net fixed assets, investments and working
capital. Capital employed in an operation may, however, exclude investments made
outside that operation.
3.07 Capital Loss

See Capital Profit
3.08 Capital Profit

Excess of the proceeds realised from the sale, transfer, or exchange of the whole or a part
of a capital asset over its cost. When the result of this computation is negative, it is
referred to as capital loss.
3.09 Capital Redemption Reserve

A reserve created on redemption of the redeemable preference shares of a corporate
enterprise out of its profits which would otherwise have been available for distribution as
dividend.
3.10 Capital Reserve

A reserve of a corporate enterprise which is not available for distribution as dividend.
3.11 Capital Work-in-progress

Expenditure on capital assets which are in the process of construction or completion.

3.12 Cash Basis of Accounting

The method of recording transactions by which revenues and costs and assets and
liabilities are reflected in the accounts in the period in which actual receipts or actual
payments are made.
3.13 Cash Discount

A reduction granted by a supplier from the invoiced price in consideration of immediate
payment or payment within a stipulated period.
3.14 Cash Profit
The net profit as increased by non-cash costs, such as depreciation, amortisation, etc.
When the result of the computation is negative, it is termed as cash loss.
3.15 Changes in Financial Position, Statement of
A financial statement which summarises, for the period covered by it, the changes in the
financial position including the sources from which funds were obtained by the enterprise
and the specific uses to which such funds were applied. This is also called the funds flow
statement.
3.16 Charge
An encumbrance on an asset to secure an indebtedness or other obligations. It may be
fixed or floating.
3.17 Cheque
A bill of exchange drawn upon a specified banker and not expressed to be payable
otherwise than on demand.
3.18 Collateral Security
Security which is given in addition to the principal security against the same liability or
obligation.
3.19 Contingency
A condition or situation, the ultimate outcome of which, gain or loss, will be known or
determined only on the occurrence or non-occurrence of one or more uncertain future
events.
3.20 Contingent Asset
An asset the existence, ownership or value of which may be known or determined only on the
occurrence or non-occurrence of one or more uncertain future events.
3.21 Contingent Liability
An obligation relating to an existing condition or situation which may arise in future
depending on the occurrence or non-occurrence of one or more uncertain future events.

3.22 Contra Account

One or two or more accounts which partially or wholly off-set another or other accounts.
3.23 Cost
The amount of expenditure incurred on or attributable to a specified article, product or
activity.
3.24 Cost of Purchase
The purchase price including duties and taxes, freight inwards and other expenditure
directly attributable to acquisition, less trade discounts, rebates, duty drawbacks, and
subsidies in respect of such purchase.
3.25 Cost-plus Contract
A contract under which the contractor is reimbursed for allowable or otherwise defined
costs as increased by a percentage of such costs or an agreed fee.
3.26 Cost of Goods Sold
The cost of goods sold during an accounting period. In manufacturing operations, it includes
(i) cost of materials; (ii) labour and factory overheads; selling and administrative expenses are
normally excluded.
3.27 Cost of Sales
Cost of goods sold plus selling and administrative expenses.
3.28 Conversion Cost
Cost incurred to convert raw materials or components into finished or semi -finished
products. This normally includes costs which are specifically attributable to units of
production, i.e., direct labour, direct expenses and subcontracted work, and production
overheads as applicable in accordance with either the direct cost or absorption costing
method. Production overheads exclude expenses which relate to general administration,
finance, selling and distribution.
3.29 Convertible Bond
See Convertible Debenture
3.30 Convertible Debenture
A debenture which gives the holder a right to its conversion, wholly or partly, in shares in
accordance with the terms of issue.
3.31 Creditor
See Sundry Creditor
3.32 Cumulative Dividend
A dividend payable on cumulative preference shares which, if unpaid, accumulates as a
claim against the earnings of a corporate enterprise, before any distrib ution is made to
the other shareholders.
3.33 Cumulative Preference Shares

A class of preference shares entitled to payment of cumulative dividends. Preference
shares are always deemed to be cumulative, unless they are expressly made non -
cumulative.
3.34 Current Assets
Cash and other assets that are expected to be converted into cash or consumed in the
production of goods or rendering of services in the normal course of business.
3.35 Current Liability
Liability including loans, deposits and bank overdraft which falls due for payment in a
relatively short period, normally not more than twelve months.
4.01 Debenture
A formal document constituting acknowledgment of a debt by an enterprise usually given
under its common seal and normally containing provisions regarding payment of interest,
repayment of principal and security, if any. It is transferable in the appropriate manner.
4.02 Debenture Redemption Reserve
A reserve created for the redemption of debentures at a future date.
4.03 Debtor
See Sundry Debtor
4.04 Deferral
Postponement of recognition of a revenue or expense after its related receipt or payment
(or incurrence of a liability) to a subsequent period to which it applies. Common examples
of deferrals include prepaid rent and taxes, unearned subscript ions received in advance
by newspapers and magazine selling companies, etc.
4.05 Deferred Expenditure
Expenditure for which payment has been made or a liability incurred but which is carried
forward on the presumption that it will be of benefit over a subs equent period or periods.
This is also referred to as deferred revenue expenditure.
4.06 Deferred Revenue
Revenue or income received or recorded before it is earned and carried forward to a
subsequent period or periods to which it relates.
4.07 Deferred Revenue Expenditure
See Deferred Expenditure
4.08 Deficiency
The excess of liabilities over assets of an enterprise at a given date. The debit balance in
the profit and loss statement.
4.09 Deficit
The debit balance in the profit and loss statement.
4.10 Depletion
A measure of exhaustion of a wasting asset represented by periodic write off of cost or
other substituted value.
4.11 Depreciable Amount
The historical cost, or other amount substituted for historical cost of a depreciable asset in
the financial statements, less the estimated residual value.
4.12 Depreciable Asset
Asset which is expected to be used during more than one accounting period, has a limited
useful life, and is held by an enterprise for use in the production or supply of goods, and
services, for rental to others, or for administrative purposes and not for the purpose of
sale in the ordinary course of business.
4.13 Depreciation
A measure of the wearing out, consumption or other loss of value of a depreciable asset
arising from use, effluxion of time or obsolescence through technology and market
changes. It is allocated so as to charge a fair proportion in each accounting period during
the useful life of the asset. It includes amortisation of assets whose useful life is
predetermined and depletion of wasting assets.
4.14 Depreciation Method
Any method of calculating depreciation for an accounting period.
4.15 Depreciation Rate
A percentage applied to the historical cost or the substituted amount of a depreciable
asset (or in case of diminishing balance method, the historical cost or the substituted
amount less accumulated depreciation).
4.16 Development Allowance Reserve
A reserve created in compliance with one of the conditions for claiming development
allowance under the Income-tax Act, 1961.
4.17 Development Rebate Reserve
A reserve created in compliance with one of the conditions for claiming development
rebate under the Income-tax Act, 1961.
4.18 Diminishing Balance Method
A method under which the periodic charge for depreciation of an asset is computed by
applying a fixed percentage to its historical cost or substituted amount less accumulated
depreciation (net book value). This is also referred to as written down value method.

4.19 Direct Cost

An item of cost that can be reasonably identified with a specific unit of product or with a
specific operation or other cost center.
4.20 Direct Costing
A method whereby the cost is determined so as to include the appropriate share of
variable costs only, all fixed costs being charged against revenue in the period in which
they are incurred.
4.21 Discount
A reduction from a list price, quoted price or invoiced price. It also refers to the price for
obtaining payment on a bill before its maturity.
4.22 Dividend
A distribution to shareholders out of profits or reserves available for this purpose.
4.23 Dividend Equalisation Reserve
A reserve created to maintain the rate of dividend in future years.
5.01 Earnings Per Share

The earnings in monetary terms attributable to each equity share, based on the net profit
for the period, before taking into account prior period items, extraordinary items and
adjustments resulting from changes in accounting policies but after deducting tax
appropriate thereto and preference dividends, divided by the number of equity shares
issued and ranking for dividend in respect of that period.
5.02 Entity Concept
The view of the relationship between the accounting entity and its owners which regards
the entity as a separate person, distinct and apart from its owners.
5.03 Equity Share
A share which is not a preference share. Also sometimes called ordinary share.
5.04 Expenditure
Incurring a liability, disbursement of cash or transfer of property for the purpose of
obtaining assets, goods or services.
5.05 Expense
A cost relating to the operations of an accounting period or to the revenue earned during
the period or the benefits of which do not extend beyond that period.
5.06 Expired Cost
That portion of an expenditure from which no further benefit is expected. Also termed as
expense.
5.07 Extraordinary Item

Gain or loss which arises from events or transactions that are distinct from ordinary
activities of the enterprise and which are both material and expected not to recur
frequently or regularly. This would also include material adjustments necessitated by
circumstances, which, though related to previous periods, are determined in the current
period.
6.01 Fair Market Value
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 not
under any compulsion to transact. Arm’s length is a term applied to any transaction on
the assumption that the parties to the transaction would act without being influenced by
each other or by any other person.
6.02 Fictitious Asset
Item grouped under assets in a balance sheet which has no real value (e.g. the debit
balance of the profit and loss statement).
6.03 First Charge
A charge having priority over other charges.
6.04 First In, First Out (FIFO)
Computation of the cost of items sold or consumed during a period as though they were
sold or consumed in order of their acquisition.
6.05 Fixed Asset
Asset held for the purpose of providing or producing goods or services and that is not
held for resale in the normal course of business.
6.06 Fixed Cost
That cost of production which by its very nature remains relatively unaffected in a defined
period of time by variations in the volume of production.
6.07 Fixed Deposit
Deposit for a specified period and at specified rate of interest.
6.08 Fixed or Specific Charge
A charge which attaches to a particular asset which is identified when the charge is
created, and the identity of the asset does not change during the subsistence of the
charge.
6.09 Floating Charge
A general charge on some or all assets of an enterprise which are not attached to specific
assets and are given as security against a debt.

6.10 Foreign Currency, Translation of

The process of expressing amounts stated in a foreign currency into equiva lent amounts
in local currency by using an exchange rate between the two currencies.
6.11 Foreign Currency Conversion
The process of expressing amounts stated in a foreign currency into equivalent amounts
in local currency by using the exchange rate at which the foreign currency is bought or
sold.
6.12 Forfeited Share
A share to which title is lost by a member for non-payment of call money or default in
fulfilling any engagement between members or expulsion of members where the articles
specifically provide therefor.
6.13 Free Reserve
A reserve the utilisation of which is not restricted in any manner.
6.14 Functional Classification
A system of classification of expenses and revenues and the corresponding assets and
liabilities to each function or activity, rather than by reference to their nature.
6.15 Fund
An account usually of the nature of a reserve or a provision which is represented by
specifically earmarked assets.
6.16 Fundamental Accounting Assumptions
Basic accounting assumptions which underlie the preparation and presentation of
financial statements. They are going concern, consistency and accrual. Usually, they are
not specifically stated because their acceptance and use are assumed. Disclosure is
necessary if they are not followed.
6.17 Funds Flow Statement
See Changes in Financial Position, Statement of 7.01 Gain
A monetary benefit, profit or advantage resulting from a transaction or group of transactions.
7.02 General Reserve
A revenue reserve which is not earmarked for a specific purpose.
7.03 Going Concern Assumption
An accounting assumption according to which an enterprise is viewed as continuing in
operation for the foreseeable future. It is assumed that the enterprise has neither the
intention nor the necessity of liquidation or of curtailing materially the scale of its
operations.

7.04 Goodwill
An intangible asset arising from business connections or trade name or reputation of an
enterprise.
7.05 Gross Margin or Gross Profit
The excess of the proceeds of goods sold and services rendered du ring a period over
their cost, before taking into account administration, selling, distribution and financing
expenses. When the result of this computation is negative it is referred to as gross loss.
7.06 Gross Sales
See Sales Turnover
7.07 Gross Turnover
See Sales Turnover
8.01 Income
See Revenue
8.02 Income and Expenditure Statement
A financial statement, often prepared by non-profit making enterprises like clubs,
associations etc. to present their revenues and expenses for an accounting period and to
show the excess of revenues over expenses (or vice versa) for that period. It is similar to
profit and loss statement and is also called revenue and expense statement.
8.03 Intangible Asset
Asset which does not have a physical identity e.g. goodwill, patents, copyright etc.
8.04 Internal Audit
An independent appraisal activity within an enterprise whether by the staff of the
enterprise or by a firm of accountants appointed for that purpose, for the review of
accounting, financial and other operations and controls as a basis for service to
management. It involves a specialised application of the techniques of auditing.
8.05 Internal Check
A system of allocation of responsibility, division of work, and methods of recording
transactions, whereby the work of an employee or group of employees is checked
continuously by correlating it with the work of others. An essential feature is that no one
employee or group of employees has exclusive control over any transaction or group of
transactions.
8.06 Internal Control
The entire system of controls, financial and otherwise, established by the management in
order to carry on the business of the enterprise in an orderly and efficient manner, ensure
adherence to management policies, safeguard the assets and secure as far as possible the
accuracy and completeness of the records.
8.07 Interim Report

The information provided with reference to a date before the close of the accounting
period by the management of an enterprise to owners or other interested persons
concerning its operations or financial position.
8.08 Inventory
Tangible property held for sale in the ordinary course of business, or in the process of
production for such sale, or for consumption in the production of goods or services for
sale, including maintenance supplies and consumables other than machinery spares.
8.09 Investment
Expenditure on assets held to earn interest, income, profit or other benefits.
8.10 Investments
Assets held not for operational purposes or for rendering services i.e. assets other than fixed
assets or current assets (e.g. securities, shares, debentures, immovable properties).
8.11 Investment Allowance Reserve
A reserve created in compliance with one of the conditions for claiming investment
allowance under the Income-tax Act, 1961.
8.12 Issued Share Capital
That portion of the authorised share capital which has actually been offered for
subscription. This includes any bonus shares allotted by the corporate enterprise.
9.01 Last In, First Out (LIFO)
Computation of the cost of items sold or consumed during a period on the basis that the
items last acquired were sold or consumed first.
9.02 Liability
The financial obligation of an enterprise other than owners’ funds.
9.03 Lien
Right of one person to satisfy a claim against another by holding or retaining possession
of that other’s assets/property.
9.04 Long-term Liability
Liability which does not fall due for payment in a relatively short period, i.e., normally a
period not more than twelve months.
9.05 Loss
See Profit

10.01 Materiality
An accounting concept according to which all relatively important and relevant items, i.e.,
items the knowledge of which might influence the decisions of the user of the financial
statements are disclosed in the financial statements.
10.02 Mercantile Basis of Accounting
See Accrual Basis of Accounting
10.03 Mortgage
A transfer of interest in specific immovable property for the purpose of securing a loan
advanced, or to be advanced, an existing or future debt or the performance of an
engagement which may give rise to a pecuniary liability. The security is redeemed when
the loan is repaid or the debt discharged or the obligations performed.
11.01 Net Assets
The excess of the book value of assets (other than fictitious assets) of an enterprise over its
liabilities. This is also referred to as net worth or shareholders’ funds.
11.02 Net Fixed Assets
Fixed assets less accumulated depreciation thereon up-to-date.
11.03 Net Loss
See Net Profit
11.04 Net Profit
The excess of revenue over expenses during a particular accounting period. When the
result of this computation is negative, it is referred to as net loss. The net profit may be
shown before or after tax.
11.05 Net Realisable Value
The actual/estimated selling price of an asset in the ordinary course of the business less
cost of completion and cost necessarily to be incurred in order to make the sale.
11.06 Net Sales
See Sales Turnover
11.07 Net Turnover
See Sales Turnover
11.08 Net Worth
See Net Assets
11.09 Nominal Share Capital
See Authorised Share Capital

12.01 Obsolescence
Diminution in the value of an asset by reason of its becoming out-of date or less useful
due to technological changes, improvement in production methods, change in market
demand for the product or service output of the asset, or legal or other restrictions.
12.02 Operating Profit
The net profit arising from the normal operations and activities of an enterprise without
taking account of extraneous transactions and expenses of a purely financial nature.
13.01 Paid-up Share Capital
That part of the subscribed share capital for which consideration in cash or otherwise has
been received. This includes bonus shares allotted by the corporate enterprise.
13.02 Pari Passu Charge
Charge created by an enterprise on its assets in favour of more than one person on the
condition that each such person has equal rights of realization out of the assets as the
other(s).
13.03 Pledge
Deposit of goods by one person (pledgor or pawnor) to another person (pledgee or
pawnee) as a security for payment of a debt or performance of a promise. The pledgee
has a special lien/right on the property in the pledged goods with a right to sell the same
after notice if the pledgor fails to discharge the debt or perform his promise on the
stipulated date.
13.04 Preference Share Capital

That part of the share capital of a corporate enterprise which enjoys preferential rights in
respect of payments of fixed dividend and repayment of capital. Preference shares may
also have full or partial participating rights in surplus profits or surplus capital.
13.05 Preferential Payment
Payment which in a winding up or insolvency has to be made in priority to all other debts
as per statute.
13.06 Preliminary Expenses
Expenses relating to the formation of an enterprise. These include legal, acco unting and
share issue expenses incurred for formation of the enterprise.
13.07 Pre-paid Expense
Payment for expense in an accounting period, the benefit for which will accrue in the
subsequent accounting period(s).
13.08 Prime Cost
The total cost of direct materials, direct wages and other direct production expenses.

13.09 Prior Period Item

A material charge or credit which arises in the current period as a result of errors or
omissions in the preparation of the financial statements of one or more prior pe riods.
13.10 Profit
A general term for the excess of revenue over related cost. When the result of this
computation is negative it is referred to as loss. Also see gross profit, operating profit,
net profit.
13.11 Profit and Loss Statement
A financial statement which presents the revenues and expenses of an enterprise for an
accounting period and shows the excess of revenues over expenses (or vice versa). It is
also known as profit and loss account.
13.12 Promissory Note
An instrument in writing (not being a bank note or currency note) containing an
unconditional undertaking, signed by the maker, to pay a certain sum of money only to,
or to the order of, a certain person or to the bearer of the instrument.
13.13 Propriety Concept

A concept of evaluating performance or specific transactions of an enterprise with
reference to the tests of commonly accepted norms, customs and standards of conduct
including those based on considerations of public interest.
13.14 Provision
An amount written off or retained by way of providing for depreciation or diminution in
value of assets or retained by way of providing for any known liability the amount of
which cannot be determined with substantial accuracy.
13.15 Provision for Doubtful Debts

A provision made for debts considered doubtful of recovery.
13.16 Prudence
A concept of care and caution used in accounting according to which (in view of the
uncertainty attached to future events) profits are not anticipated, but recognised only
when realised, though not necessarily in cash. Under this concept, 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.
13.17 Public Deposits

Fixed deposits accepted by an enterprise from the public in accordance with the prevailing
Rules made in this behalf.

14.01 Redeemable Preference Share

The preference share that is repayable either after a fixed or determinable period or at
any time decided by the management (by giving due notice), under certain conditions
prescribed by the instrument of incorporation or the terms of issue.
14.02 Redemption
Repayment as per given terms normally used in connection with preference shares and
debentures.
14.03 Reduction of Capital
The extinguishment or reduction of shareholders’ liability on any of the shares of a
corporate enterprise in respect of the share capital not fully paid up or the cancellation of
paid-up share capital of a company which is not represented by available assets. It also
refers to the return of any paid-up share capital in excess of requirements.
14.04 Reserve
The portion of earnings, receipts or other surplus of an enterprise (whether capital or
revenue) appropriated by the management for a general or a specific purpose other than
a provision for depreciation or diminution in the value of assets or for a known liability.
The reserves are primarily of two types: capital reserves and revenue reserves.
14.05 Revaluation Reserve
A reserve created on the revaluation of assets or net assets of an enterprise represented
by the surplus of the estimated replacement cost or estimated market values over the
book values thereof.
14.06 Revenue
The gross inflow of cash, receivables or other consideration arising in the course of the
ordinary activities of an enterprise from the sale of goods, from the rendering of services,
and from the use by others of enterprise resources yielding interest, royalties and
dividends. 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. It excludes amounts collected on behalf of third parties such as
certain taxes. In an agency relationship, the revenue is the amount of commission and not
the gross inflow of cash, receivables or other consideration.
14.07 Revenue and Expense Statement
See Income and Expenditure Statement
14.08 Revenue Reserve
Any reserve other than a capital reserve.
14.09 Right Share
An allotment of shares on the issue of fresh capital by a corporate enterprise to which a
shareholder is entitled on payment, by virtue of his holding certain shares in the
enterprise in proportion to the number of shares already held by him. (Shares allotted to
certain categories of debenture holders pursuant to the rights enjoyed by them are
sometimes called right shares)
15.01 Sales Turnover
The aggregate amount for which sales are effected or services rendered by an enterprise.
The terms gross turnover and net turnover (or gross sales and net sales) are
sometimes used to distinguish the sales aggregate before and after deduction of returns
and trade discounts.
15.02 Secured Loan
Loan secured wholly or partly against an asset.
15.03 Self-Insurance
The assumption by an enterprise of a risk which is not covered by an external insurance
agency and for which internal allocations or provisions have been made.
15.04 Share Capital
Aggregate amount of money paid or credited as paid on the shares and/ or stocks of a
corporate enterprise.
15.05 Share Discount
The excess of the face value of shares over their issue price.
15.06 Shareholders’ Equity
The interest of the shareholders in the net assets of a corporate enterprise. However, in
the case of liquidation it is represented by the residual assets after meeting prior claims.
15.07 Shareholders’ Funds
See Net Assets
15.08 Share Issue Expenses
Costs incurred in connection with the issue and allotment of shares. These include legal
and professional fees, advertising expenses, printing costs, underwriting commission,
brokerage, and also expenses in connection with the issue of prospectus and allotment of
shares.
15.09 Share Premium
The excess of the issue price of shares over their face value.
15.10 Short-term Liability
See Current Liability
15.11 Sinking Fund
A fund created for the repayment of a liability or for the replacement of an asset.

15.12 Social Cost Benefit Analysis

The identification, measurement and reporting of social costs and benefits related to a
project or an enterprise.
15.13 Social Cost
The cost or the loss to society resulting from the operations of an enterprise in its
particular circumstances. Such costs are often not readily measurable in monetary terms.
This term is also used in a specific sense to denote the costs incurred by an enterprise in
providing social amenities.
15.14 Social Benefit
The benefits or income to society resulting from operations of an enterprise in its
particular circumstances. Such benefits are often not readily measurable in mo netary
terms.
15.15 Standard Cost
A pre-determined cost of an activity, operation, process or product, established as a basis
for control and reporting.
15.16 Straight Line Method
The method under which the periodic charge for depreciation is computed by dividing the
depreciable amount of a depreciable asset by the estimated number of years of its useful
life.
15.17 Subscribed Share Capital
That portion of the issued share capital which has actually been subscribed and allotted.
This includes any bonus shares allotted by the corporate enterprise.
15.18 Substance over Form
An accounting concept according to which the substance and not merely the legal form
of transactions and events governs their accounting treatment and presentation in
financial statements.
15.19 Sundry Creditor
Amount owed by an enterprise on account of goods purchased or services received or in
respect of contractual obligations. Also termed as trade creditor or account payable.
15.20 Sundry Debtor
Person from whom amounts are due for goods sold or services rendered or in respect of
contractual obligations. Also termed as debtor, trade debtor, account receivable.
15.21 Surplus
Credit balance in the profit and loss statement after providing for proposed
appropriations, e.g., dividend or reserves.

16.01 Test Check

Examination of representative items selected from an account or record for the purpose
of arriving at an opinion on the entire account or record.
16.02 Trade Creditor
See Sundry Creditor
16.03 Trade Debtor
See Sundry Debtor
16.04 Trade Discount
A reduction granted by a supplier from the list price of goods or services on business
considerations other than for prompt payment.
16.05 Transfer Price
The price charged (or value assigned) to a product or service which is transferred with in
an enterprise from one segment/division to another.
17.01 Unclaimed Dividend
Dividend which has been declared by a corporate enterprise and a warrant or a cheque in
respect whereof has been despatched but has not been encashed by the shareholder
concerned.
17.02 Unexpired Cost
That portion of an expenditure whose benefit has not yet been exhausted.
17.03 Unissued Share Capital
That portion of the authorised share capital for which shares have not been offered for
subscription.
17.04 Unpaid Dividend
Dividend which has been declared by a corporate enterprise but has not been paid, or the
warrant or cheque in respect whereof has not been dispatched within the prescribed
period.
17.05 Useful Life
Life which is either (i) the period over which a depreciable asset is expected to be used by
the enterprise; or (ii) the number of production or similar units expected to be obtained
from the use of the asset by the enterprise.
18.01 Value Added
The increase in value of a product or service resulting from an alterat ion in the form,
location or availability excluding the cost of bought-out materials or services. This is also
referred to as added value.

18.02 Value Added Statement

A statement of the value added that an enterprise has been able to generate and its
distribution among those contributing to its generation. This is also referred to as added
value statement.
GN(A) 6 (Issued 1988)

Guidance Note on Accrual Basis of Accounting
1. Introduction
1.1 Certain fundamental accounting assumptions underlie the preparat ion and
presentation of financial statements. “Accrual” is one of the fundamental accounting
assumptions. Para 27 of the Accounting Standard on Disclosure of Accounting Policies
(AS-1), issued by the Institute of Chartered Accountants of India (ICAI), prov ides that if
fundamental accounting assumptions, viz., going concern, consistency and accrual are not
followed, the fact should be disclosed.
1.2 There are three bases of accounting in use, viz., (i) accrual (ii) cash and (iii) hybrid.
The Companies (Amendment) Act, 1988, has amended section 209 of the Companies Act,
1956 with effect from 15th June, 1988, making it obligatory on all companies to maintain
their accounts on accrual basis and according to the double entry system of accounting.
In view of this amendment all companies will now be required to keep their accounts on
accrual basis of accounting, in respect of any accounting year closing on or after 15th
June, 1988.
1.3 This guidance note is issued by the Research Committee of the ICAI providing
guidance in respect of maintenance of accounts on the accrual basis of accounting.
2. Accrual Basis of Accounting
2.1 The term “Accrual” has been explained in the Accounting Standard on Disclosure of
Accounting Policies (AS-1), as under:
“Revenues and costs are accrued, that is, recognised 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”.
2.2 The Guidance Note on Terms Used in Financial Statements, issued by the A ccounting
Standards Board of the ICAI, explains ‘Accrual Basis of Accounting’ as under:
“The method of recording transactions by which revenues, costs, assets and liabilities are
reflected in the accounts in the period in which they accrue. The ‘Accrual Ba sis of
Accounting’ includes considerations relating to deferrals, allocations, depreciation and
amortisation. This basis is also referred to as ‘Mercantile Basis of Accounting’.”
Accrual Basis of Accounting
2.3 Accrual basis of accounting, thus, attempts to record the financial effects of the
transactions, events, and circumstances of an enterprises in the period in which they
occur rather than recording them in the period(s) in which cash is received or paid by the
enterprise. It recognises that the buying, producing, selling and other economic events
that affect enterprise’s performance often do not coincide with the cash receipts and
payments of the period. The goal of accrual basis of accounting is to relate the
accomplishments (measured in the form of revenue) and the efforts (measured in terms
of cost) so that reported net income measures an enterprise’s performance during a
period instead of merely listing its cash receipts and payments. Apart from income
measurement, accrual basis of accounting recognises assets, liabilities or components of
revenues and expenses for amounts received or paid in cash in past, and amounts
expected to be received or paid in cash in the future.
2.4 The major difference between accrual accounting and accounting based on ca sh
receipts and outlays, is in timing of recognition of revenues, expenses, gains and losses.
Cash receipts in a particular period may largely reflect the effects of activities of the
enterprise in the earlier periods, while many of the cash outlays may re late to activities
and efforts expected in future periods. Thus, an account showing cash receipts and cash
outlays of an enterprise for a short period cannot indicate how much of the cash received
is return of investment and how much is return on investment and thus cannot indicate
whether or to what extent an enterprise is successful or unsuccessful.
2.5 The following are the essential features of accrual basis of accounting:
(i) Revenue is recognised as it is earned.
(ii) Costs are matched either against revenues so recognised or against the relevant time
period to determine periodic income, and
(iii) Costs which are not charged to income are carried forward and are kept under
continuous review. Any cost that appears to have lost its utility or its power to
generate future revenue is written-off as a loss.
2.6 The above features of accrual basis of accounting are discussed in the following
paragraphs.
3. Revenue Recognition
3.1 The Accounting Standard on “Revenue Recognition” (AS-9) issued by ICAI deals with
the bases for recognition of revenue in the statement of profit and loss of an enterprise.
This standard lays down rules for recognition of revenue arising in the course of the
ordinary activities of the enterprise from (i) sale of goods, (ii) rendering of services, and
(iii) use of resources of the enterprise by others yielding interest, royalties and dividends.
3.2 Recognition of revenue requires that revenue is measurable and that at the time of
sale or the rendering of service or the use of resources of the enterprise by others it
would not be unreasonable to expect ultimate collection.
3.3 An essential criterion for the recognition of revenue is that the consideration
receivable from the sale of goods, the rendering of services or from the use by oth ers of
resources of the enterprise is reasonably determinable. When such consideration is not
3.4 When recognition of revenue is postponed due to the effect of uncertainties, i t is

considered as revenue for the period in which it is properly recognised according to the
principles discussed herein.
3.5 Where the ability to assess the ultimate collection with reasonable certainty is lacking
at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc.,
revenue recognition is postponed to the extent of uncertainty involved. It is possible that
the uncertainty of collection may be either in respect of the entire transaction or a part
thereof. For that part in respect of which there is no uncertainty of collection, the revenue
is immediately recognised and for the remaining part the recognition of revenue is
postponed. In such cases, it may be appropriate to recognise revenue only when it is
reasonably certain that the ultimate collection will be made. It is necessary to disclose the
circumstances in which revenue recognition has been postponed pending the resolution
of significant uncertainties. Where there is no uncertainty as to ultimate collection ,
revenue is recognised at the time of sale or rendering of service even though payments
are made by installments. When the uncertainty relating to collectability arises
subsequent to the time of sale or the rendering of the service, it is more appropriate to
make a separate provision to reflect the uncertainty rather than to adjust the amount of
revenue originally recorded.
3.6 Revenue from sales or service transactions should be recognised when the
requirements as to performance set out in paragraphs 3.7 and 3.8 are satisfied, provided
that at the time of performance it is not unreasonable to expect ultimate collection.
3.7 In a transaction involving the sale of goods, 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 transferre d to a degree
usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will
be derived from the sale of goods. Thus, when such consideration is not
3.8 In a transaction involving the rendering of services, performance should be measured
either under the completed service contract method or under the proportionate
completion method, whichever relates the revenue to the work accomplished. 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.
3.9 The use of resources of the enterprise by others yielding interest, royalties and
dividends is recognised when no significant uncertainty as to measurability or
collectability exists. The terms interest, royalties and dividends mean -
(i) Interest - charges for the use of cash resources or amounts due to the enterprise;
(ii) royalties - charges for the use of such assets as know-how, patents, trademarks and
copyrights;
(iii) dividends - rewards from the holding of investments in shares.
3.10 The revenues from the above sources are recognised on the following basis:
(i) Interest accrues, in most circumstances, on the time basis determined by the amount
outstanding and the rate applicable. Usually, discount or premium on debt securities
held is treated as though it were accruing over the period of mat urity.
(ii) Royalties accrue in accordance with the terms of the relevant agreement and are
usually recognised on that basis unless, having regard to the substance of the
transactions, it is more appropriate to recognise revenue on some other systematic
and rational basis.
(iii) Dividends from investments in shares accrue when the owner’s right to receive
payment is established.
Similar considerations would apply where the resources of the enterprise are used by
others and yield revenue such as rent.
3.11 When interest, royalties and dividends from foreign countries require exchange
permission and uncertainty in remittances is anticipated, revenue recognition may need
to be postponed.
3.12 The accrual basis of accounting necessitates adjustments for income r eceived in
advance as well as for outstanding income at the end of the period of accounting since
the receipts during the period may not coincide with what is properly recognisable as
income for the period.
4. Rules for Expense Recognition
4.1 The Guidance Note on Terms Used in Financial Statements, explains the term
‘Expense’ as under:
“A cost relating to the operations of an accounting period or to the revenue earned
during the period or the benefits of which do not extend beyond that period”.
4.2 In the accrual basis of accounting, costs are matched either against revenues or
against the relevant time period to determine periodic income.
Further, costs which are not charged against income of the period are carried forward. If
any particular item of cost has lost its utility or its power to generate future revenue the
same is written off as an expense or a loss.
4.3 Under accrual basis of accounting, expenses are recognised by the following
approaches:
(i) Identification with revenue transactions
Costs directly associated with the revenue recognised during the relevant period (in
respect of which whether money has been paid or not) are considered as expenses and
are charged to income for the period.
(ii) Identification with a period of time
In many cases, although some costs may have connection with the revenue for the period,
the relationship is so indirect that it is impracticable to attempt to establish it. However,

there is a clear identification with a period of time. Such costs are regarded as ‘period
costs’ and are expensed in the relevant period, e.g., salaries, telephone, traveling,
depreciation on office building etc.
Similarly, the costs the benefits of which do not clearly extend beyond the accounting
period are also charged as expenses.
4.4 Expenses relating to a future period are accounted for as prepaid expenses even
though they are paid for in the current accounting period.
Similarly, expenses of the current year, for which payment has not yet been made
(outstanding expenses) are charged to the profit and loss account for the current
accounting period.
4.5 The amount of a contingent loss should be provided for by a charge in the statement
of profit and loss if:
(a) it is probable that at the date of the financial statements events subsequent ther eto
will confirm that (after taking into account any related probable recovery) an asset
has been impaired or a liability has been incurred as at that date, and
(b) a reasonable estimate of the amount of the resulting loss can be made.
4.6 The existence of a contingent loss should be disclosed in the financial statements if
either of the conditions in paragraph 4.5 is not met, unless the possibility of a loss is
remote.
5. Recognition of Assets and Liabilities
5.1 As in the case of revenues and expenses which are recognised under the accrual
basis of accounting, as they are earned or incurred (and not as money is received or paid),
the transactions related to assets and liabilities are recognised as they occur irrespective
of the actual receipts or payments.
6. Concept of Materiality
6.1 Section 209(3) of the Companies Act, 1956 requires that every company has to keep
the books of account in such a manner that they give a ‘true and fair’ view of its state of
affairs and that the books are maintained on the accrual basis of accounting.
6.2 The concept of ‘true and fair’ view also recognises that the concept of materiality
must be given due importance in the preparation and presentation of financial
statements. As explained in para 17 of Accounting Standard on ‘ Disclosure of Accounting
Policies’ (AS-1), financial statements should disclose all “material” items, i.e., items the
knowledge of which might influence the decisions of the user of the financial statements.
6.3 The accrual basis of accounting does not necessarily imply that detailed calculations
are required to be made in respect of even the smallest and immaterial amounts of
revenue and expenditure and co-relate the same on the basis of the principle of accrual.
For example, it may not be improper to write off a small calculator costing `.100 even
though it is expected to be used for more than one year.
7. Change in the Basis of Accounting

7.1 When an enterprise which was earlier following cash basis of accounting for all or
any of its transactions, changes over to the accrual basis of accounting, the effect of the
change should be ascertained with reference to the transactions of the previous
accounting periods also, to the extent such transactions have an impact on the current
financial position of the enterprise.
The fact of such change should be disclosed in the financial statements. The impact of,
and the adjustments resulting from, such change, if material, should be shown in the
financial statements of the period in which such change is made to refle ct the effect of
such change. Where the effect of the change is not ascertainable, wholly or in part, the
fact should be indicated. If the change has no material effect on the financial statements
for the current period but is reasonably expected to have a material effect in later
periods, the fact of such change should be appropriately disclosed in the period in which
the change is adopted.
8. Authoritative Pronouncements of the Institute vis-a-vis Accrual
Accounting
8.1 The Council of the ICAI and its various committees have issued various Guidance
Notes, Statements and Accounting Standards. The accounting treatments contained in
these documents are primarily based on accrual accounting. Thus, adoption of accounting
treatments recommended in these documents would ensure that a company has followed
accrual basis of accounting. The Appendix to this guidance note contains some special
circumstances of recognition of revenue and expenses as dealt with in the aforesaid
documents issued by the Institute. The Appendix also contains illustrations of situations
where due to uncertainty of collection, revenue recognition may be postponed.
9. Auditor’s Responsibility
9.1 Where a company has maintained its books of account in a manner that all material
transactions are accounted for on accrual basis as discussed above, the auditor should
state in his report that, as far as this aspect is concerned, the company has maintained
proper books of account as required by law.
Where a company has not maintained its books of account in a manner that all material
transactions are accounted for on accrual basis as discussed above, the auditor will have
to qualify his report or give a negative opinion with regard to the following assertions:
(a) Whether proper books of account as required by law have been kept by the
company.
(b) Whether the accounts give the information required by this Act in the manner so
required and give a true and fair view of:
(i) in the case of the balance sheet, of the state of the company’s affairs as at th e
end of its financial year; and
(ii) in the case of the profit and loss account, of the profit or loss for its financial
year.
Appendix
This Appendix is illustrative only. The purpose of the Appendix is to illustrate the
application of the Guidance Note on Accrual Basis of Accounting to some of the
important commercial situations.
Revenue Recognition
1. Sale of Goods
(i) 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. However, the
item must be on hand, 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.
(ii) Delivered subject to conditions
(a) installation and inspection i.e. goods are sold subject to installation, inspection etc.
Revenue should normally not be recognised until the customer accepts delivery
and installation and inspection are complete. In some cases, however, 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.g.
installation of a factory tested television receiver normally only requires
unpacking and connecting of power and antenna.)
(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, a reasonable
time has elapsed.
(c) guaranteed sales i.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. 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. In other
cases, the substance of the agreement may amount to a sale on consignment, in
which case it should be treated as indicated below.
(d) Consignment sales i.e. a delivery is made whereby the recipient undertakes to sell
the goods on behalf of the consignor
Revenue should not be recognised until the goods are sold to a third party.
(e) Cash on delivery sales
Revenue should not be recognised until cash is received by the seller or his
agent.
(iii) Sales where the purchaser makes a series of installment payments to the seller, 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.
However, when experience indicates that most such sales have been consummated,
revenue may be recognised when a significant deposit is received.
(iv) Special order and shipments i.e. where payment (or partialpayment) is received for
goods not presently held in stock e.g. 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,
identified and ready for delivery to the buyer by the third party.
(v) Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the
same goods at a later date
For such transactions that are in substance a financing agreement, the resulting cash
inflow is not revenue as defined and should not be recognised as revenue.
(vi) Sales to intermediate parties i.e. where goods are sold to distributors, dealers or others
for resale
Revenue from such sales can generally be recognised if significant risks of ownership
have passed, 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.
(vii) Subscriptions for publications
Revenue received or billed should be deferred and recognised either on a straight
line basis over time or, where the items delivered vary in value from period to per iod,
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.
(viii) Installments sales
When the consideration is receivable in installments, revenue attributable to th e
sales price exclusive of interest should be recognised at the date of sale. The interest
element should be recognised as revenue, proportionately to the unpaid balance due
to the seller.
2. Rendering of Services
(i) Installation fees
In cases where installation fees are other than incidental to the sale of a product,
they should be recognised as revenue only when the equipment is installed and
accepted by the customer.
(ii) Advertising and Insurance Agency Commissions
Revenue should be recognised when the service is completed. For advertising
agencies, media commissions will normally be recognized when the related
advertisement or commercial appears before the public and the necessary intimation
is received by the agency, as opposed to production commission which will be
recognised when the project is completed. Insurance agency commissions should be

recognised on the effective commencement or renewal dates of the related policies.
(iii) Financial service commissions
A financial service may be rendered as a single act or may be provided over a period
of time. Similarly, 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.
Such charges may be settled in full when made, or added to a loan or other account
and settled in stages.
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;
(b) the incidence of the costs relating to the service;
(c) when the payment for the service will be received. In general, commissions
charged for arranging or granting loan or other facilities should be recognised
when a binding obligation has been entered into. Commitment, 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, the nature of the services provided and
the timing of the costs relating thereto.
(iv) Admission fees
Revenue from artistic performances, banquets and other special events should be
recognised when the event takes place. When a subscription to a number of events is
sold, the fee should be allocated to each event on a systematic and rational basis.
(v) Entrance and membership fees
Revenue recognition from these sources will depend on the nature of the services
being provided. Entrance fee received is generally capitalized. If the membership fee
permits only membership and all other services or products are paid for separately,
or is there is a separate annual subscription, the fee should be recognised when
received. If the membership fee entitles the member to services or publications to be
provided during the year, it should be recognised on a systematic and rational basis
having regard to the timing and nature of all services provided.
3. Uncertainty of Collection
In respect of the following items of revenue, if the ability to assess the ultimate collec tion
with reasonable certainty is lacking at the time of raising any claim, revenue recognition is
postponed to the extent of uncertainty involved:
(i) Claim for escalation of price under a contract.
(ii) Export incentives due from the Government or any statutory authority.
(iii) Drawback claims, cash subsidies, benefits of Import Licenses etc. received from the
Government or any statutory authority.
(iv) Interest due or receivable on loans or other dues when the recovery of the amount is
in dispute or is doubtful.
(v) Insurance claim in respect of loss of goods or loss of profits, when the amount
receivable is not certain or capable or being determined.
4. Construction Contracts 
In accounting for construction contracts in financial statements either the percentage of
completion method or the completed contract method1 may be used. When a contractor
uses a particular method of accounting for a contract, then the same method should be
adopted for all other contracts which meet similar criteria.
Liability for Expenditure
Gratuity
Under accrual basis of accounting it is necessary to provide for accruing liability in each
accounting period.

Guidance Note on Accounting for Corporate Dividend Tax
1. The Finance Act, 1997, has introduced Chapter XIID on “Special Provisions Relating to
Tax on Distributed Profits of Domestic Companies” [hereinafter referred to as ‘CDT’
(Corporate Dividend Tax)]. The relevant extracts of sections 115O and 115Q of the
Income-tax Act, 1961, governing CDT have been reproduced in Annexure I. This Guidance
Note is being issued to provide guidance on accounting for CDT.
2. The salient features of CDT are as below:
(i) CDT is in addition to the income-tax chargeable in respect of the total income of a
domestic company.
(ii) CDT is chargeable on any amount declared, distributed or paid by such company by
way of dividends (whether interim or otherwise) on or after the 1st day of June 1997.
(iii) The dividends chargeable to CDT may be out of the current profits or accum ulated
profits.
(iv) The rate of CDT is ten per cent.
(v) CDT shall be payable even if no income-tax is payable by the domestic company on
its total income.
(vi) CDT is payable to the credit of the Central Government within 14 days of -
(a) declaration of any dividend,
 Accounting Standard (AS) 7, ‘Construction Contracts’ (revised) issued by the Institute of Chartered
Accountants of India, permits the use of only percentage of completion method for accounting for
construction contracts. AS 7 (revised) comes into effect in respect of all contracts entered into during
accounting periods commencing on or after 1-4-2003 and is mandatory in nature.
(b) distribution of any dividend, or

(c) payment of any dividend,
whichever is the earliest.
(vii) CDT paid shall be treated as the final payment of tax on the dividends and no further
credit therefor shall be claimed by the company or by any person in respect of the
tax so paid.
(viii) The expression ‘dividend’ shall have the same meaning as is given to ‘dividend’ in
clause (22) of Section 2 but shall not include sub-clause (e) thereof. (The relevant
extracts of Section 2(22) of the Income-tax Act, 1961, have been reproduced in
Annexure II).
Accounting for CDT
3. According to generally accepted accounting principles, the provision for dividend is
recognised in the financial statements of the year to which the dividend relates. In view of
this, CDT on dividend, being directly linked to the amount of the dividend concerned, should
also be reflected in the accounts of the same financial year even though the actual tax liability
in respect thereof may arise in a different year.
Disclosure and Presentation of CDT in Financial Statements
4. It is noted that clause 3(vi) of Part II of Schedule VI to the Companies Act, 1956 ,
requires the disclosure of “the amount of charge for Indian Income -tax and other Indian
taxation on profits, including, where practicable, with Indian income-tax any taxation
imposed elsewhere to the extent of the relief, if any, from Indian income -tax and
distinguishing, where practicable, between income-tax and other taxation.” It is also
noted that Part II of Schedule VI ! only lays down the information to be disclosed in the
profit and loss account. However, as a matter of convention and to improve readability,
the information in the profit and loss account is generally shown in two parts, viz., the
first part contains the information which is required to arrive at the figure of the current
year’s profit - often referred to as ‘above the line’, and the second part which discloses,
inter alia, information involving the appropriations of the current year’s profits - often
referred to as ‘below the line’.
5. Since dividends are disclosed ‘below the line’, a question arises with regard to
disclosure and presentation of CDT, as to whether the said tax should also be disclosed
‘below the line’ or should be disclosed along with the normal income-tax provision for
the year ‘above the line’.
6. The liability in respect of CDT arises only if the profits are distributed as dividends
whereas the normal income-tax liability arises on the earning of the taxable profits. Since
the CDT liability relates to distribution of profits as dividends which are disclosed ‘below
the line’, it is appropriate that the liability in respect of CDT should also be disclosed
‘below the line’ as a separate item. It is felt that such a disclosure would give a pro per
 Now Schedule III to the Companies Act, 2013.

picture regarding payments involved with reference to dividends.

Recommendations
7. CDT liability should be recognised in the accounts of the same financial year in which
the dividend concerned is recognised.
8. CDT liability should be disclosed separately in the profit and loss account, ‘below the
line’, as follows:
Dividend xxxxx
Corporate Dividend Tax thereon xxxxx xxxxx
9. Provision for Corporate Dividend Tax should be disclosed separately under the head
‘Provisions’ in the balance sheet.
Annexure I
Relevant Extracts of the Provisions under Chapter XII D of the Income-tax Act, 1961,
regarding Special Provisions relating to tax on distributed profits of domestic
companies.
115 O. Tax on Distributed Profits of Domestic Companies
(1) Notwithstanding anything contained in any other provision of this Act and subject to
the provisions of this section, in addition to the income-tax chargeable in respect of the
total income of a domestic company for any assessment year, any amount declared,
distributed or paid by such company by way of dividends (whether interim or otherwise)
on or after the 1st day of June, 1997, whether out of current or accumulated profits shall
be charged to additional income-tax (hereafter referred to as tax on distributed profits) at
the rate of ten per cent.
(1A) Notwithstanding that no income-tax is payable by a domestic company on its total
income computed in accordance with the provisions of this Act, the tax on distributed
profits under subsection
(1) shall be payable by such company.
(2) The principal officer of the domestic company and the company shall be liable to pay
the tax on distributed profits to the credit of the Central Government within fourteen
days from the date of -
(a) declaration of any dividend; or
(b) distribution of any dividend; or
(c) payment of any dividend,
whichever is earliest.
(3) The tax on distributed profits so paid by the company shall be treated as the final
payment of tax in respect of the amount declared, distributed or paid as dividends
and no further credit therefore shall be claimed by the company or by any other
person in respect of the amount of tax so paid.
(4) No deduction under any other provision of this Act shall be allowed to the company

or a shareholder in respect of the amount which has been charged to tax under sub-
section (1) or the tax thereon.
115 Q
Explanation —— For the purposes of this Chapter, the expression “dividend” shall have
the same meaning as is given to “dividend” in clause (22) of Section 2 but shall not
include sub-clause (e) thereof.
Annexure II
Relevant extracts of the definition of the term dividend as per section 2(22) of the
Income Tax Act, 1961.
2(22) 1“Dividend includes -
(a) any distribution by a company of accumulated profits, whether capitalised or not, if
such distribution entails the release by the company to its shareholders of all or any
part of the assets of the company;
(b) any distribution to its shareholders by a company of debentures, debenture -stock, or
deposit certificates in any form, whether with or without interest, and any
distribution to its preference shareholders of shares by way of bonus, to the extent
to which the company possesses accumulated profits, whether capitalized or not;
(c) any distribution made to the shareholders of a company on its liquidation, to the
extent to which the distribution is attributable to the accumulated profits of the
company immediately before its liquidation, whether capitalised or not;
(d) any distribution to its shareholders by a company on the reduction of its capital, to
the extent to which the company possesses accumulated profits which arose after
the end of the previous year ending next before the 1st day of April, 1933, whether
such accumulated profits have been capitalised or not;
(e) but ‘dividend’ does not include -
(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in
respect of any share issued for full cash consideration, where the holder of the
share is not entitled in the event of liquidation to participate in the surplus
assets;
(ii) any advance or loan made to a shareholder 4[or the said concern] by a company
in the ordinary course of its business, where the lending of money is a
substantial part of the business of the company;
(iii) any dividend paid by a company which is set off by the company against the
whole or any part of any sum previously paid by it and treated as a dividend
within the meaning of sub-clause (e), to the extent to which it is so set off.
Explanation 1. - The expression ‘accumulated profits’, wherever it occurs in this clause,
shall not include capital gains arising before the 1st day of April, 1946, or after the 31st
day of March, 1948, and before the 1st day of April,1956.
Explanation 2. - The expression ‘accumulated profits’ in sub-clauses (a), (b), (d) and (e),
shall include all profits of the company up to the date of distribution or payment referred
to in those sub-clauses and in sub-clause (c) shall include all profits of the company up to
the date of liquidation, 5[but shall not, where the liquidation is consequent on the
compulsory acquisition of its undertaking by the Government or a corporation owned or
controlled by the Government under any law for the time being in force, include any
profits of the company prior to three successive previous years immediately preceding
the previous year in which such acquisition took place].

Guidance Note on Accounting for Employee Share-based
Payments
(The following is the text of the Guidance Note on Accounting for Employee Share-based
Payments, issued by the Council of the Institute of Chartered Accountants of India.)
Introduction
1. Some employers use share-based payments as a part of remuneration package for
their employees. Such payments generally take the forms of Emplo yee Stock Option Plans
(ESOPs), Employee Stock Purchase Plans (ESPPs) and stock appreciation rights. ESOPs are
plans under which an enterprise grants options for a specified period to its employees to
purchase its shares at a fixed or determinable price. ESPPs are plans under which the
enterprise grants rights to its employees to purchase its shares at a stated price at the
time of public issue or otherwise. Stock appreciation rights is a form of employee share -
based payments whereby the employees become entitled to a future cash payment or
shares based on the increase in the price of the shares from a specified level over a
specified period. Apart from using share-based payments to compensate employees for
their services, such payments are also used by an employer as an incentive to the
employees to remain in its employment or to reward them for their efforts in improving
its performance.
2. Recognising the need for establishing uniform sound accounting principles and
practices for all types of share-based payments, the Accounting Standards Board of the
Institute of Chartered Accountants of India is developing an Accounting Standard
covering various types of share-based payments including employee share-based
payments. However, as the formulation of the Standard is likely to take some time, the
Institute has decided to bring out this Guidance Note. The Guidance Note recognises that
there are two methods of accounting for employee share-based payments, viz., the fair
value method and the intrinsic value method and permits as an alternative the intrinsic
value method with fair value disclosures. Once the Accounting Standard dealing with
Share based Payments comes into force, this Guidance Note will automatically stand
withdrawn.
Scope
3. This Guidance Note establishes financial accounting and reporting principles for
employee share-based payment plans, viz., ESOPs, ESPPs and stock appreciation rights.
For the purposes of this Guidance Note, the term ‘employee’ includes a director of the
enterprise, whether whole time or not.

4. For the purposes of this Guidance Note, a transfer of shares or stock options of an
enterprise by its shareholders to its employees is also an employee share -based payment,
unless the transfer is clearly for a purpose other than payment fo r services rendered to
the enterprise. This also applies to transfers of shares or stock options of the parent of
the enterprise, or shares or stock options of another enterprise in the same group1 as the
enterprise, to the employees of the enterprise.
5. For the purposes of this Guidance Note, a transaction with an employee in his/her
capacity as a holder of shares of the enterprise is not an employee share -based payment.
For example, if an enterprise grants all holders of a particular class of its shares the right
to acquire additional shares or stock options of the enterprise at a price that is less than
the fair value of those shares or stock options, and an employee receives such a right
because he/she is a holder of shares or stock options of that par ticular class, the granting
or exercise of that right is not subject to the requirements of this Guidance Note.
6. For the purposes of this Guidance Note, a grant of shares to the employees at the
time of public issue is not an employee share-based payment if the price and other terms
at which the shares are offered to employees are the same or similar to those at which
the shares have been offered to general investors, for example, in a public issue an
enterprise grants shares to its employees as a preferential allotment while the price and
other terms remain the same as those to other investors.
Definitions
7. For the purpose of this Guidance Note, the following terms are used with the
meanings specified:
Employee Stock Option is a contract that gives the employees of the enterprise the right,
but not the obligation, for a specified period of time to purchase or subscribe to the
shares of the enterprise at a fixed or determinable price.
Employee Stock Option Plan is a plan under which the enterprise grants Employee Stock
Options.
Employee Stock Purchase Plan is a plan under which the enterprise offers shares to its
employees as part of a public issue or otherwise.
Equity is the residual interest in the assets of an enterprise after deducting all its
liabilities.
Exercise means making of an application by the employee to the enterprise for issue of
shares against the option vested in him in pursuance of the Employee Stock Option Plan.
Exercise Period is the time period after vesting within which the employee should exercise
his right to apply for shares against the option vested in him in pursuance of the
Employee Stock Option Plan.
Expected Life of an Option is the period of time from grant date to the date on which an
option is expected to be exercised.

Exercise Price is the price payable by the employee for exercising the option granted to
him in pursuance of the Employee Stock Option Plan.
Fair Value is the amount for which stock option granted or a share offered for purchase
could be exchanged between knowledgeable, willing parties in an arm’s length
transaction.
Grant Date is the date at which the enterprise and its employees agree to the terms of an
employee share-based payment plan. At grant date, the enterprise confers on the
employees the right to cash or shares of the enterprise, provided the specified vesting
conditions, if any, are met. If that agreement is subject to an approval process, (for
example, by shareholders), grant date is the date when that approval is obtained.
Intrinsic Value is the amount by which the quoted market price of the underlying share in
case of a listed enterprise or the value of the underlying
Accounting for share determined by an independent valuer in case of an unlisted
enterprise, exceeds the exercise price of an option.
Market Condition is a condition upon which the exercise price, vesting or exercisability of
a share or a stock option depends that is related to the market price of the shares of the
enterprise, such as attaining a specified share price or a specified amo unt of intrinsic
value of a stock option, or achieving a specified target that is based on the market price
of the shares of the enterprise relative to an index of market prices of shares of other
enterprises.
Reload Feature is a feature that provides for an automatic grant of additional stock
options whenever the option holder exercises previously granted options using the shares
of the enterprise, rather than cash, to satisfy the exercise price.
Reload Option is a new stock option granted when a share of the enterprise is used to
satisfy the exercise price of a previous stock option.
Repricing of an employee stock option means changing the existing exercise price of the
option to a different price.
Stock Appreciation Rights are the rights that entitle the employees to receive cash or
shares for an amount equivalent to any excess of the market value of a stated number of
enterprise’s shares over a stated price. The form of payment may be specified when the
rights are granted or may be determined when they are exercised; in some plans, the
employee may choose the form of payment.
Vest is to become entitled to receive cash or shares on satisfaction of any specified
vesting conditions under an employee share-based payment plan.
Vesting Period is the period between the grant date and the date on which all the
specified vesting conditions of an employee share-based payment plan are to be
satisfied.
Vesting Conditions are the conditions that must be satisfied for the employee to become
entitled to receive cash, or shares of the enterprise, pursuant to an employee share-based
payment plan. Vesting conditions include service conditions, which require the employee
to complete a specified period of service, and performance conditions, which require

specified performance targets to be met (such as a specified increase in the enterprise’s
share price over a specified period of time).
Volatility is a measure of the amount by which a price has fluctuated (historical volatility)
or is expected to fluctuate (expected volatility) during a period. The volatility of a share
price is the standard deviation of the continuously compounded rates of return on the
share over a specified period.
Accounting
8. For accounting purposes, employee share-based payment plans are classified into
the following categories:
(a) Equity-settled: Under these plans, the employees receive shares.
(b) Cash-settled: Under these plans, the employees receive cash based on the price (or
value) of the enterprise’s shares.
(c) Employee share-based payment plans with cash alternatives: Under these plans, either
the enterprise or the employee has a choice of whether the enterprise settles the
payment in cash or by issue of shares.
9. A share-based payment plan falling in the above categories can be accounted for by
adopting the fair value method or the intrinsic value method. The accounting treatment
recommended herein below is based on the fair value method. The application of the intrinsic
value method is explained thereafter in paragraph 40.
Equity-Settled Employee Share-Based Payment Plans
Recognition
10. An enterprise should recognise as an expense (except where service received
qualifies to be included as a part of the cost of an asset) the services received in an
equity-settled employee share-based payment plan when it receives the services, with a
corresponding credit to an appropriate equity account, say, ‘Stock Options Outstanding
Account’. This account is transitional in nature as it gets ultimately transferred to another
equity account such as share capital, securities premium account and/or general reserve
as recommended in the subsequent paragraphs of this Guidance Note.
11. If the shares or stock options granted vest immediately, the employee is not required
to complete a specified period of service before becoming unconditionally entitled to
those instruments. In the absence of evidence to the contrary, the enterprise should
presume that services rendered by the employee as consideration for the instruments
have been received. In this case, on the grant date, the enterprise should recognise
services received in full with a corresponding credit to the equity account.
12. If the shares or stock options granted do not vest until the employee completes a
specified period of service, the enterprise should presume that the services to be
rendered by the employee as consideration for those instruments will be received in the
future, during the vesting period. The enterprise should account for those services as they
are rendered by the employee during the vesting period, on a time proportion basis, with
a corresponding credit to the equity account.

Determination of vesting period
13. A grant of shares or stock options to an employee is typically conditional on the
employee remaining in the employment of the enterprise for a specified period of time.
Thus, if an employee is granted stock options conditional upon completing three years’
service, then the enterprise should presume that the services to be rendered by the
employee as consideration for the stock options will be received in the future, over that
three-year vesting period.
14. There might be performance conditions that must be satisfied, such as the enterprise
achieving a specified growth in profit or a specified increase in the share price of the
enterprise. Thus, if an employee is granted stock options conditional upon the
achievement of a performance condition and remaining in the employment of the
enterprise until that performance condition is satisfied, and the length of the vesting
period varies depending on when that performance condition is satisfied, the enterprise
should presume that the services to be rendered by the employee as consideration for
the stock options will be received in the future, over the expected vesting period. The
enterprise should estimate the length of the expected vesting period at grant date, based
on the most likely outcome of the performance condition. If the performance condition is
a market condition, the estimate of the length of the expected vesting period should be
consistent with the assumptions used in estimating the fair value of the options granted,
and should not be subsequently revised. If the performance condition is not a market
condition, the enterprise should revise its estimate of the length of the vest ing period, if
necessary, if subsequent information indicates that the length of the vesting period
differs from previous estimates.
Measurement
15. Typically, shares (under ESPPs) or stock options (under ESOPs) are granted to
employees as part of their remuneration package, in addition to a cash salary and other
employment benefits. Usually, it is not possible to measure directly the services received
for particular components of the employee’s remuneration package. It might also not be
possible to measure the fair value of the total remuneration package independently,
without measuring directly the fair value of the shares or stock options granted.
Furthermore, shares or stock options are sometimes granted as part of a bonus
arrangement, rather than as a part of basic pay, e.g., as an incentive to the employees to
remain in the employment of the enterprise or to reward them for their efforts in
improving the performance of the enterprise. By granting shares or stock options, in
addition to other remuneration, the enterprise is paying additional remuneration to
obtain additional benefits. Estimating the fair value of those additional benefits is likely to
be difficult. Because of the difficulty of measuring directly the fair value of the services
received, the enterprise should measure the fair value of the employee services received
by reference to the fair value of the shares or stock options granted.
Determining the fair value of shares or stock options granted

16. An enterprise should measure the fair value of shares or stock options granted at the
grant date, based on market prices if available, taking into account the terms and
conditions upon which those shares or stock options were granted (subject to the
requirements of paragraphs 18 to 21). If market prices are not available, the enterprise
should estimate the fair value of the instruments granted using a valuation technique to
estimate what the price of those instruments would have been on the grant date in an
arm’s length transaction between knowledgeable, willing parties. The valuation technique
should be consistent with generally accepted valuation methodologies for pricing
financial instruments (e.g., use of an option pricing model for valuing stock options) and
should incorporate all factors and assumptions that knowledgeable, willing market
participants would consider in setting the price (subject to the requirements of
paragraphs 18 to 21).
17. Appendix I contains further guidance on the measurement of the fair value of shares
and stock options, focusing on the specific terms and conditions that are common
features of a grant of shares or stock options to employees.
Treatment of vesting conditions
18. Vesting conditions, other than market conditions, should not be taken into account
when estimating the fair value of the shares or stock options at the grant date. Instead,
vesting conditions should be taken into account by adjusting the number of shares or
stock options included in the measurement of the transaction amount so that, ultimately,
the amount recognised for employee services received as consideration for the shares or
stock options granted is based on the number of shares or stock options that eventually
vest. Hence, on a cumulative basis, no amount is recognized for employee services
received if the shares or stock options granted do not vest because of failure to satisfy a
vesting condition (i.e., these are forfeited), e.g., the employee fails to complete a specified
service period, or a performance condition is not satisfied, subject to the requirements of
paragraph 20.
19. To apply the requirements of paragraph 18, the enterprise should recognise an
amount for the employee services received during the vesting period based on the best
available estimate of the number of shares or stock options expected to vest and should
revise that estimate, if necessary, if subsequent information indicates that the number of
shares or stock options expected to vest differs from previous estimates. On vesting date,
the enterprise should revise the estimate to equal the number of shares or stock options
that ultimately vest, subject to the requirements of paragraph 20.
2The term ‘forfeiture’ is used to refer only to an employee’s failure to earn a vested right
to obtain shares or stock options because the specified vesting conditions are not
satisfied.
20. Market conditions, such as a target share price upon which vesting (or exercisability)
is conditioned, should be taken into account when estimating the fair value of the shares
or stock options granted. Therefore, for grants of shares or stock options with market
conditions, the enterprise should recognise the services received from an employee who

satisfies all other vesting conditions (e.g., services received from an employee who
remains in service for the specified period of service), irrespective of the fact whether that
market condition is satisfied.
Treatment of a reload feature
21. For options with a reload feature, the reload feature should not be taken into
account when estimating the fair value of options granted at the grant date. Instead, a
reload option should be accounted for as a new option grant, if and when a reload option
is subsequently granted.
After vesting date
22. On exercise of the right to obtain shares or stock options, the e nterprise issues
shares on receipt of the exercise price. The shares so issued should be considered to have
been issued at the consideration comprising the exercise price and the corresponding
amount standing to the credit of the relevant equity account (e .g., Stock Options
Outstanding Account). In a situation where the right to obtain shares or stock option
expires unexercised, the balance standing to the credit of the relevant equity account
should be transferred to general reserve.
Appendix II contains various illustrations of the accounting for equity settled employee
share-based payment plans that do not involve modifications to the terms and conditions
of the grants.
Modifications to the terms and conditions on which shares or stock options were
granted, including cancellations and settlements
23. An enterprise might modify the terms and conditions on which the shares or stock
options were granted. For example, it might reduce the exercise price of options granted
to employees (i.e., reprice the options), which increases the fair value of those options.
24. The enterprise should recognise, as a minimum, the services received measured at
the grant date fair value of the shares or stock options granted, unless those shares or
stock options do not vest because of failure to satisfy a vesting condition (other than a
market condition) that was specified at grant date. This applies irrespective of (a) any
modifications to the terms and conditions on which the shares or stock options were
granted, or (b) a cancellation or settlement of that grant of shares or stock options. In
addition, the enterprise should recognise the effects of modifications that increase the
total fair value of the employee share-based payment plan or are otherwise beneficial to
the employee.
25. The requirements of paragraph 24 should be applied as follows:
(a) If the modification increases the fair value of the shares or stock options granted
(e.g., by reducing the exercise price), measured immediately before and after the
modification, the enterprise should include the incremental fair value granted in the
measurement of the amount recognised for services received as consideration for
the shares or stock options granted. The incremental fair value granted is the
difference between the fair value of the modified shares or stock options and that of

the original shares or stock options, both estimated as at the date of the
modification. If the modification occurs during the vesting period, the incremental
fair value granted is included in the measurement of the amount recognised for
services received over the period from the modification date until the date when the
modified shares or stock options vest, in addition to the amount based on the grant
date fair value of the original shares or stock options, which is recognized over the
remainder of the original vesting period. If the modification occurs after the vesting
date, the incremental fair value granted is recognised immediately, or over the
vesting period if the employee is required to complete an additional period of
service before becoming unconditionally entitled to those modified shares or stock
options.
(b) Similarly, if the modification increases the number of shares or stock options
granted, the enterprise should include the fair value of the additional shares or stock
options granted, measured at the date of the modification, in the measurement of
the amount recognised for services received as consideration for the shares or stock
options granted, consistent with the requirements in (a) above. For example,
if the modification occurs during the vesting period, the fair value of the additional
shares or stock options granted is included in the measurement of the amount
recognised for services received over the period from the modif ication date until the
date when the additional shares or stock options vest, in addition to the amount
based on the grant date fair value of the shares or stock options originally granted,
which is recognised over the remainder of the original vesting per iod.
(c) If the enterprise modifies the vesting conditions in a manner that is beneficial to the
employee, for example, by reducing the vesting period or by modifying or
eliminating a performance condition (other than a market condition, changes to
which are accounted for in accordance with (a) above), the enterprise should take the
modified vesting conditions into account when applying the requirements of
paragraphs 18 to 20.
26. Furthermore, to apply the requirements of paragraph 24, if the enterprise modifies
the terms or conditions of the shares or stock options granted in a manner that reduces
the total fair value of the employee share-based payment plan, or is not otherwise
beneficial to the employee, the enterprise should nevertheless continue to a ccount for
the services received as consideration for the shares or stock options granted as if that
modification had not occurred (other than a cancellation of some or all the shares or
stock options granted, which should be accounted for in accordance wi th paragraph 27).
For example:
(a) if the modification reduces the fair value of the shares or stock options granted,
measured immediately before and after the modification, the enterprise should not
take into account that decrease in fair value and should continue to measure the
amount recognised for services received as consideration for the shares or stock
options based on the grant date fair value of the shares or stock options granted.

(b) if the modification reduces the number of shares or stock options granted to an
employee, that reduction should be accounted for as a cancellation of that portion of
the grant, in accordance with the requirements of paragraph 27.
(c) if the enterprise modifies the vesting conditions in a manner that is not benefici al to
the employee, for example, by increasing the vesting period or by modifying or
adding a performance condition (other than a market condition, changes to which
are accounted for in accordance with (a) above), the enterprise should not take the
modified vesting conditions into account when applying the requirements of
paragraphs 18 to 20.
27. If the enterprise cancels or settles a grant of shares or stock options during the
vesting period (other than a grant cancelled by forfeiture when the vesting con ditions are
not satisfied):
(a) the enterprise should account for the cancellation or settlement as an acceleration of
vesting, and should therefore recognize immediately the amount that otherwise
would have been recognised for services received over the remaining vesting period.
(b) any payment made to the employee on the cancellation or settlement of the grant
should be deducted from the relevant equity account (e.g., Stock Options Outstanding
Account) except to the extent that the payment exceeds the fair value of the shares or
stock options granted, measured at the cancellation/settlement date. Any such excess
should be recognised as an expense.
(c) if new shares or stock options are granted to the employee as replacement for the
cancelled shares or stock options, the enterprise should account for the granting of
replacement shares or stock options in the same way as a modification of the
original grant of shares or stock options, in accordance with paragraphs 24 to 26. For
the purposes of the aforesaid paragraphs, the incremental fair value granted is the
difference between the fair value of the replacement shares or stock options and the
net fair value of the cancelled shares or stock options, at the date the replacement
shares or stock options are granted. The net fair value of the cancelled shares or
stock options is their fair value, immediately before the cancellation, less the amount
of any payment made to the employee on cancellation of the shares or stock options
that is deducted from the relevant equity account in accordance with (b) above.
28. If an enterprise settles in cash vested shares or stock options, the payment made to
the employee should be accounted for as a deduction from the relevant equity account
(e.g., Stock Options Outstanding Account) except to the extent that the payment exceeds
the fair value of the shares or stock options, measured at the settlement date. Any such
excess should be recognised as an expense.
Appendix III contains illustrations on modifications to the terms an d conditions on which
stock options were granted.
Cash-Settled Employee Share-Based Payment Plans
29. An enterprise might grant rights such as stock appreciation rights to employees as

part of their remuneration package, whereby the employees will become e ntitled to a
future cash payment (rather than shares), based on the increase in the share price of the
enterprise from a specified level over a specified period of time. Or an enterprise might
grant to its employees a right to receive a future cash payment by granting to them a
right to shares (including shares to be issued upon the exercise of stock options) that are
redeemable, either mandatorily (e.g., upon cessation of employment) or at the option of
the employee.
Recognition
30. An enterprise should recognise as an expense (except where service received
qualifies to be included as a part of the cost of an asset) the services received in a cash -
settled employee share-based payment plan when it receives the services with a
corresponding increase in liability by creating a provision therefor.
31. The enterprise should recognise the services received, and the liability to pay for
those services, as the employees render service. For example, some stock appreciation
rights vest immediately, and the employees are therefore not required to complete a
specified period of service to become entitled to the cash payment. In the absence of
evidence to the contrary, the enterprise should presume that the services rendered by the
employees in exchange for the stock appreciation rights have been received. Thus, the
enterprise should recognise immediately the services received and a liability to pay for
them. If the stock appreciation rights do not vest until the employees have completed a
specified period of service, the enterprise should recognise the services received, and a
liability to pay for them, as the employees render service during that period.
Measurement
32. For cash-settled employee share-based payment plan, the enterprise should measure
the services received and the liability incurred at the fair value of the liability. Until the
liability is settled, the enterprise should remeasure the fair value of the liability at each
reporting date and at the date of the settlement, with any changes in fair value
recognised in profit or loss for the period.
33. The liability should be measured, initially and at each reporting date until settled, at
the fair value of the stock appreciation rights, by applying an option pricing model taking
into account the terms and conditions on which the stock appreciation rights were
granted, and the extent to which the employees have rendered service to date.
Appendix IV contains an illustration of a cash-settled employee share based payment
plan.
Employee Share-Based Payment Plans with Cash
Alternatives
Employee share-based payment plans in which the terms of the arrangement
provide the employee with a choice of settlement
34. If an enterprise has granted the employees the right to choose whether a share -
based payment plan is settled in cash or by issuing shares, the plan has two components,
viz., (i) liability component, i.e., the employees’ right to demand settlement in cash, and
(ii) equity component, i.e., the employees’ right to demand settlement in shares rather
than in cash. The enterprise should first measure, on the grant date, fair value of the
employee share-based payment plan presuming that all employees will exercise their
option in favour of cash settlement. The fair value so arrived at should be considered as
the fair value of the liability component. The enterprise should also measure the fair value
of the employee share-based payment plan presuming that all employees will exercise
their option in favour of equity settlement. In case the fair value under equity - settlement
is greater than the fair value under cash settlement, the excess should be considered as
the fair value of the equity component. Otherwise, the fair value of the equity component
should be considered as zero. The fair value of the equity component should b e
accounted for in accordance with the recommendations in respect of ‘Equity -settled
employee share-based payment plan’. The fair value of the liability component should be
accounted for in accordance with the recommendations in respect of ‘Cash -settled
employee share-based payment plan’.
35. At the date of settlement, the enterprise should remeasure the liability to its fair
value. If the enterprise issues shares on settlement rather than paying cash, the amount of
liability should be treated as the consideration for the shares issued.
36. If the enterprise pays in cash on settlement rather than issuing shares, that payment
should be applied to settle the liability in full. By electing to receive cash on settlement,
the employees forgo their right to receive shares. The enterprise should transfer any
balance in the relevant equity account (e.g., Stock Options Outstanding Account) to
general reserve.
Appendix V contains an illustration of an employee share-based payment plan with cash
alternatives.
Employee share-based payment plans in which the terms of the arrangement
provide the enterprise with a choice of settlement
37. For an employee share-based payment plan in which the terms of the arrangement
provide the enterprise with the choice of whether to settle in cash or by issuing shares,
the enterprise should determine whether it has a present obligation to settle in cash and
account for the share based payment plan accordingly. The enterprise has a present
obligation to settle in cash if the choice of settlement in shares has no commercial
substance (e.g., because the enterprise is legally prohibited from issuing shares), or the
enterprise has a past practice or a stated policy of settling in cash, or generally settles in
cash whenever the employee asks for cash settlement.
38. If the enterprise has a present obligation to settle in cash, it should account for the
transaction in accordance with the requirements in respect of ‘Cash -settled employee
share-based payment plan’.
39. If no such obligation exists, the enterprise should account for the transaction in
accordance with the requirements in respect of ‘Equity settled employee share-based
payment plan’. Upon settlement:

(a) If the enterprise elects to settle in cash, the cash payment should be accounted for as
a deduction from the relevant equity account (e.g., Stock Options Outstanding
Account) except as noted in (c) below.
(b) If the enterprise elects to settle by issuing shares, the balance in the relevant equity
account should be treated as consideration for the shares issued except as noted in
(c) below.
(c) If the enterprise elects the settlement alternative with the higher fair value (e.g., the
enterprise elects to settle in cash the amount of which is more than the fair value of
the shares had the enterprise elected to settle in shares), as at the date of settlement,
the enterprise should recognise an additional expense for the excess value given, i.e.,
the difference between the cash paid and the fair value of the shares that would
otherwise have been issued, or the difference between the fair value of the shares
issued and the amount of cash that would otherwise have been paid, whichever is
applicable.
Intrinsic Value Method
40. Accounting for employee share-based payment plans dealt with here to before is
based on the fair value method. There is another method known as the ‘Intrinsic Value
Method’ for valuation of employee share based payment plans. Intrinsic value, in the case
of a listed company, is the amount by which the quoted market price of the underlying
share exceeds the exercise price of an option. For example, an option with an exercise
price of ` 100 on an equity share whose current quoted market price is ` 125, has an
intrinsic value of ` 25 per share on the date of its valuation. If the quoted market price is
not available on the grant date then the share price nearest to that date is taken. In the
case of a non-listed company, since the shares are not quoted on a stock exchange, value
of its shares is determined on the basis of a valuation report from an independent valuer.
For accounting for employee share-based payment plans, the intrinsic value may be used,
mutatis mutandis, in place of the fair value as described in paragraphs 10 to 39.
Examples of equity-settled employee share-based payment plan and cash settled
employee share-based payment plan, using intrinsic value method, are given in
Illustration 1 of Appendix II and the Illustration in Appendix IV, respectively.
Recommendation
41. It is recommended that accounting for employee share-based payment plans should
be based on the fair value approach as described in paragraphs 10 to 39. However,
intrinsic value method as described in paragraph 40 is also permitted.
Graded Vesting
42. In case the options/shares granted under an employee stock option plan do not vest
on one date but have graded vesting schedule, total plan should be segregated into
different groups, depending upon the vesting dates. Each of such groups would be
having different vesting period and expected life and, therefore, each vesting date should
be considered as a separate option grant and evaluated and accounted for accordingly.
For example, suppose an employee is granted 100 options which will vest @ 25 options
per year at the end of the third, fourth, fifth and sixth years. In such a case, each tranche
of 25 options would be evaluated and accounted for separately.
An illustration of an employee share-based payment plan having graded vesting is given in
Appendix VI.
Employee Share-Based Payment Plan Administered Through a Trust
43. An enterprise may administer an employee share-based payment plan through a
trust constituted for this purpose. The trust may have different kinds of arrangements, for
example, the following:
(a) The enterprise allots shares to the trust as and when the employees exercise stock
options.
(b) The enterprise provides finance to the trust for subscription to the shares issued by
the enterprise at the beginning of the plan.
(c) The enterprise provides finance to the trust to purchase shares from the market at
the beginning of the plan.
44. Since the trust administers the plan on behalf of the enterprise, it is recommended
that irrespective of the arrangement for issuance of the shares under the employee share -
based payment plan, the enterprise should recognise in its separate financial statements
the expense on account of services received from the employees in accordance with the
recommendations contained in this Guidance Note. Various aspects of accounting for
employee share-based payment plan administered through a trust under the
arrangements mentioned above, are illustrated in Appendix VII, for the purpose of
preparation of separate financial statements.
45. For the purpose of preparation of consolidated financial statements as per
Accounting Standard (AS) 21, ‘Consolidated Financial Statements’, issued by the Institute
of Chartered Accountants of India, the trust created for the purpose of administering
employee share-based compensation, should not be considered. This is because the
standard requires consolidation of only those controlled enterprises which provide
economic benefits to the enterprise and, accordingly, consolidation of entities, such as,
gratuity trust, provident fund trust, etc., is not required. The nature of a trust est ablished
for administering employee share-based compensation plan is similar to that of a gratuity
trust or a provident fund trust as it does not provide any economic benefit to the
enterprise in the form of, say, any return on investment.
Earnings Per Share Implications
46. For the purpose of calculating Basic Earnings Per Share as per Accounting Standard
(AS) 20, ‘Earnings Per Share’, shares or stock options granted pursuant to an employee
share-based payment plan, including shares or options issued to an ESOP trust, should
not be included in the shares outstanding till the employees have exercised their right to
obtain shares or stock options, after fulfilling the requisite vesting conditions. Till such
time, shares or stock options so granted should be considered as dilutive potential equity
shares for the purpose of calculating Diluted Earnings Per Share. Diluted Earnings Per
Share should be based on the actual number of shares or stock options granted and not
yet forfeited, unless doing so would be anti-dilutive.

47. For computations required under paragraph 35 of AS 20 with regard to shares or
stock options granted pursuant to an employee share-based payment plan, the assumed
proceeds from the issues should include the exercise price and the unamortis ed
compensation cost which is attributable to future services.
An example to illustrate computation of Earnings Per Share in a situation where the
enterprise has granted stock options to its employees is given in Appendix VIII.
Disclosures
48. An enterprise should describe the method used to account for the employee share -
based payment plans. Where an enterprise uses the intrinsic value method, it should also
disclose the impact on the net results and EPS – both basic and diluted – for the
accounting period, had the fair value method been used.
49. An enterprise should disclose information that enables users of the financial
statements to understand the nature and extent of employee share -based payment plans
that existed during the period.
50. To give effect to the principle in paragraph 49, the enterprise should disclose at least
the following:
(a) a description of each type of employee share-based payment plan that existed at any
time during the period, including the general terms and conditions of each plan,
such as vesting requirements, the maximum term of options granted, and the
method of settlement (e.g., whether in cash or equity). An enterprise with
substantially similar types of plans may aggregate this information, unless separate
disclosure of each arrangement is necessary to satisfy the principle in paragraph 49.
(b) the number and weighted average exercise prices of stock options for each of the
following groups of options:
(i) outstanding at the beginning of the period;
(ii) granted during the period;
(iii) forfeited during the period;
(iv) exercised during the period;
(v) expired during the period;
(vi) outstanding at the end of the period; and
(vii) exercisable at the end of the period.
(c) for stock options exercised during the period, the weighted average share price at
the date of exercise. If options were exercised on a regular basis throughout the
period, the enterprise may instead disclose the weighted average share price during
the period.
(d) for stock options outstanding at the end of the period, the range of exercise prices
and weighted average remaining contractual life (comprising the vesting period and
the exercise period). If the range of exercise prices is wide, the outstanding options
should be divided into ranges that are meaningful for assessing the number and
timing of additional shares that may be issued and the cash that may be received
upon exercise of those options.
51. An enterprise should disclose the following information to enable users of the
financial statements to understand how the fair value of shares or stock options granted,
during the period, was determined:
(a) for stock options granted during the period, the weighted average fair value of those
options at the grant date and information on how that fair value was measured,
including:
(i) the option pricing model used and the inputs to that model, including the
weighted average share price, exercise price, expected volatility, option life
(comprising the vesting period and the exercise period), expected dividends, the
risk-free interest rate and any other inputs to the model, including the method
used and the assumptions made to incorporate the effects of expected early
exercise;
(ii) how expected volatility was determined, including an explanation of t he extent
to which expected volatility was based on historical volatility; and
(iii) whether and how any other features of the option grant were incorporated into
the measurement of fair value, such as a market condition.
(b) for other instruments granted during the period (i.e., other than stock options), the
number and weighted average fair value of those instruments at the grant date, and
information on how that fair value was measured, including:
(i) if fair value was not measured on the basis of an observable market price, how it
was determined;
(ii) whether and how expected dividends were incorporated into the measurement
of fair value; and
(iii) whether and how any other features of the instruments granted were
incorporated into the measurement of fair value.
(c) for employee share-based payment plans that were modified during the period:
(i) an explanation of those modifications;
(ii) the incremental fair value granted (as a result of those modifications); and
(iii) information on how the incremental fair value granted was measured,
consistently with the requirements set out in (a) and (b) above, where
applicable.
52. An enterprise should disclose the following information to enable users of the
financial statements to understand the effect of employee share-based payment plans on
the profit or loss of the enterprise for the period and on its financial position:
(a) the total expense recognised for the period arising from employee share -based
payment plans in which the services received did not qualify for recognition as a part
of the cost of an asset and hence were recognised immediately as an expense,
including separate disclosure of that portion of the total expense that arises from
transactions accounted for as equity-settled employee share-based payment plans;
(b) for liabilities arising from employee share-based payment plans:
(i) the total carrying amount at the end of the period; and
(ii) the total intrinsic value at the end of the period of liabilities for which the right
of the employee to cash or other assets had vested by the end of the period
(e.g., vested stock appreciation rights).
Appendix IX contains illustrative disclosures.
Effective Date
53. This Guidance Note applies to employee share-based payment plans the grant date
in respect of which falls on or after April 1, 2005.
Appendix I
Estimating the Fair Value of Shares or Stock Options Granted
1. The appendix discusses measurement of the fair value of shares and stock options
granted, focusing on the specific terms and conditions that are common features of a
grant of shares or stock options to employees. Therefore, it is not exhaustive.
Shares
2. The fair value of the shares granted should be measured at the market price of the
shares of the enterprise (or an estimated value based on the valuation report of an
independent valuer, if the shares of the enterprise are not publicly traded), adjusted to
take into account the terms and conditions upon which the shares were granted (except
for vesting conditions that are excluded from the measurement of fair value in
accordance with paragraphs 18 to 20 of the text of the Guidance Note).
3. For example, if the employee is not entitled to receive dividends during the vesting
period, this factor should be taken into account when estimating the fair value of the
shares granted. Similarly, if the shares are subject to restrictions on transfer after vesting
date, that factor should be taken into account, but only to the extent that the post -
vesting restrictions affect the price that a knowledgeable, willing market participant
would pay for that share. For example, if the shares are actively traded in a deep and
liquid market, post-vesting transfer restrictions may have little, if any, effect on the price
that a knowledgeable, willing market participant would pay for those shares. Restrictions
on transfer or other restrictions that exist during the vesting period should not be taken
into account when estimating the grant date fair value of the shares granted, because
those restrictions stem from the existence of vesting conditions, which are accounted for
in accordance with paragraphs 18 to 20 of the text of the Guidance Note.
Stock Options
4. For stock options granted to employees, in many cases market prices are not
available, because the options granted are subject to terms and conditions that do not
apply to traded options. If traded options with similar terms and conditions do not exist,
the fair value of the options granted should be estimated by applying an option pricing
model.
5. The enterprise should consider factors that knowledgeable, willing market
participants would consider in selecting the option pricing model to apply. For example,
many employee options have long lives, are usually exercisable during the period
between vesting date and the end of the life of the option, and are often exercised early.
These factors should be considered when estimating the grant date fair value of the
options. For many enterprises, this might preclude the use of the Black -Scholes-Merton
formula, which does not allow for the possibility of exercise before the end of the
option’s life (comprising the vesting period and the exercise period) and may not
adequately reflect the effects of expected early exercise. It also does not allow for the
possibility that expected volatility and other model inputs might vary over the option’s
life. However, for stock options with relatively short contractual lives (comprising the
vesting period and the exercise period), or that must be exercised within a short pe riod of
time after vesting date, the factors identified above may not apply. In these instances, the
Black-Scholes-Merton formula may produce a value that is substantially the same as a
more flexible option pricing model.
6. All option pricing models take into account, as a minimum, the following factors:
(a) the exercise price of the option;
(b) the life of the option;
(c) the current price of the underlying shares;
(d) the expected volatility of the share price;
(e) the dividends expected on the shares (if appropriate); and
(f) the risk-free interest rate for the life of the option.
7. Other factors that knowledgeable, willing market participants would consider in setting
the price should also be taken into account (except for vesting conditions and reload features
that are excluded from the measurement of fair value in accordance with paragraphs 18 to 21
of the text of the Guidance Note).
8. For example, a stock option granted to an employee typically cannot be exercised
during specified periods (e.g., during the vesting period or during periods specified, if
any, by securities regulators). This factor should be taken into account if the option
pricing model applied would otherwise assume that the option could be exercised at any
time during its life. However, if an enterprise uses an option pricing model that values
options that can be exercised only at the end of the options’ life, no adjustment is
required for the inability to exercise them during the vesting period (or other periods
during the options’ life), because the model assumes that the options cannot be exercised
during those periods.
9. Similarly, another factor common to employee stock options is the possibility of early
exercise of the option, for example, because the option is not fr eely transferable, or
because the employee must exercise all vested options upon cessation of employment.
The effects of expected early exercise should be taken into account, as discussed in
paragraphs 16 to 21 of this Appendix.
10. Factors that a knowledgeable, willing market participant would not consider in
setting the price of a stock option should not be taken into account when estimating the
fair value of stock options granted. For example, for stock options granted to employees,
factors that affect the value of the option from the perspective of the individual employee
only are not relevant to estimating the price that would be set by a knowledgeable,
willing market participant.
Inputs to option pricing models
11. In estimating the expected volatility of and dividends on the underlying shares, the
objective is to approximate the expectations that would be reflected in a current market
or negotiated exchange price for the option. Similarly, when estimating the effects of
early exercise of employee stock options, the objective is to approximate the expectations
that an outside party with access to detailed information about employees’ exercise
behaviour would develop based on information available at the grant date.
12. Often, there is likely to be a range of reasonable expectations about future volatility,
dividends and exercise behaviour. If so, an expected value should be calculated, by
weighting each amount within the range by its associated probability of occurrence.
13. Expectations about the future are generally based on experience, modified if the
future is reasonably expected to differ from the past. In some circumstances, identifiable
factors may indicate that unadjusted historical experience is a relatively poor predictor of
future experience. For example, if an enterprise with two distinctly different lines of
business disposes of the one that was significantly less risky than the other, historical
volatility may not be the best information on which to base reasonable expectations for
the future.
14. In other circumstances, historical information may not be available. For example, a
newly listed enterprise will have little, if any, historical data on the volatility of its share
price. Unlisted and newly listed enterprises are discussed further below.
15. In summary, an enterprise should not simply base estimates of volatility, exercise
behaviour and dividends on historical information without considering the extent to
which the past experience is expected to be reasonably predictive of future experience.
Expected early exercise
16. Employees often exercise stock options early, for a variety of reasons. For example,
employee stock options are typically nontransferable. This often causes employees to
exercise their stock options early, because that is the only way for the employees to
liquidate their position. Also, employees who cease employment are usually required to
exercise any vested options within a short period of time, otherwise the stock options are
forfeited. This factor also causes the early exercise of employee stock options. Other
factors causing early exercise are risk aversion and lack of wealth diversification.
17. The means by which the effects of expected early exercise are taken into account

depends upon the type of option pricing model applied. For example, expected early
exercise could be taken into account by using an estimate of the expected life of the
option (which, for an employee stock option, is the period of time from grant date to the
date on which the option is expected to be exercised) as an input into an option pricing
model (e.g., the Black-Scholes-Merton formula). Alternatively, expected early exercise
could be modelled in a binomial or similar option pricing model that uses contractual life
as an input.
18. Factors to consider in estimating early exercise include:
(a) the length of the vesting period, because the stock option typically cannot be
exercised until the end of the vesting period. Hence, determining the valuation
implications of expected early exercise is based on the assumption that the
options will vest. The implications of vesting conditions are discussed in
paragraphs 18 to 20 of the text of the Guidance Note.
(b) the average length of time similar options have remained outstanding in the
past.
(c) the price of the underlying shares. Experience may indicate that the employees
tend to exercise options when the share price reaches a specified level above
the exercise price.
(d) the employee’s level within the organisation. For example, experience might
indicate that higher-level employees tend to exercise options later than lower-
level employees (discussed further in paragraph 21 of this Appendix).
(e) expected volatility of the underlying shares. On average, employees might tend
to exercise options on highly volatile shares earlier than on shares with low
volatility.
19. As noted in paragraph 17 of this Appendix, the effects of early exercise could be
taken into account by using an estimate of the option’s expected life as an input into an
option pricing model. When estimating the expected life of stock options granted to a
group of employees, the enterprise could base that estimate on an appropriately
weighted average expected life for the entire employee group or on appropriately
weighted average lives for subgroups of employees within the group, based on more
detailed data about employees’ exercise behaviour (discussed further below).
20. Separating an option grant into groups for employees with relatively homogeneous
exercise behaviour is likely to be important. Option value is not a linear function of option
term; value increases at a decreasing rate as the term lengthens. For example, if all other
assumptions are equal, although a two-year option is worth more than a one-year option,
it is not worth twice as much. That means that calculating estimated option value on the
basis of a single weighted average life that includes widely differing individual lives would
overstate the total fair value of the stock options granted. Separating options g ranted
into several groups, each of which has a relatively narrow range of lives included in its
weighted average life, reduces that overstatement.
21. Similar considerations apply when using a binomial or similar model. For example,
the experience of an enterprise that grants options broadly to all levels of employees
might indicate that top-level executives tend to hold their options longer than middle-
management employees hold theirs and that lower-level employees tend to exercise their
options earlier than any other group. In addition, employees who are encouraged
required to hold a minimum amount of their employer’s shares or stock options, might
on average exercise options later than employees not subject to that provision. In those
situations, separating options by groups of recipients with relatively homogeneous
exercise behaviour will result in a more accurate estimate of the total fair value of the
stock options granted.
Expected volatility
22. Expected volatility is a measure of the amount by which a price is expected to
fluctuate during a period. The measure of volatility used in option pricing models is the
annualised standard deviation of the continuously compounded rates of return on the
share over a period of time. Volatility is typically expressed in annualised terms that are
comparable regardless of the time period used in the calculation, for example, daily,
weekly or monthly price observations.
23. The rate of return (which may be positive or negative) on a share for a period
measures how much a shareholder has benefited from dividends and appreciation (or
depreciation) of the share price.
24 The expected annualised volatility of a share is the range within which the
continuously compounded annual rate of return is expected to fall approx imately two-
thirds of the time. For example, to say that a share with an expected continuously
compounded rate of return of 12 per cent has a volatility of 30 per cent means that the
probability that the rate of return on the share for one year will be bet ween –18 per cent
(12% –30%) and 42 per cent (12% + 30%) is approximately two-thirds. If the share price is
`.100 at the beginning of the year and no dividends are paid, the year -end share price
would be expected to be between ` 83.53 (`.100 × e–0.18) and `.152.20 (` 100 × 0.42)
approximately two-thirds of the time.
25. Factors to be considered in estimating expected volatility include:
(a) Implied volatility from traded stock options on the shares of the enterprise, or other
traded instruments of the enterprise that include option features (such as convertible
debt), if any.
(b) The historical volatility of the share price over the most recent period that is
generally commensurate with the expected term of the option (taking into account
the remaining contractual life of the option and the effects of expected early
exercise).
(c) The length of time shares of an enterprise have been publicly traded. A newly listed
enterprise might have a high historical volatility, compared with similar enterprises
that have been listed longer. Further guidance for newly listed enterprises is given in
paragraph 26 of this Appendix.
(d) The tendency of volatility to revert to its mean, i.e., its long -term average level, and
other factors indicating that expected future volatility might differ from past

volatility. For example, if share price of an enterprise was extraordinarily volatile for
some identifiable period of time because of a failed takeover bid or a major
restructuring, that period could be disregarded in co mputing historical average
annual volatility.
(e) Appropriate and regular intervals for price observations. The price observations
should be consistent from period to period.
For example, an enterprise might use the closing price for each week or the high est price
for the week, but it should not use the closing price for some weeks and the highest price
for other weeks.
Newly listed enterprises
26. As noted in paragraph 25 of this Appendix, an enterprise should consider historical
volatility of the share price over the most recent period that is generally commensurate
with the expected option term. If a newly listed enterprise does not have sufficient
information on historical volatility, it should nevertheless compute historical volatility for
the longest period for which trading activity is available. It could also consider the
historical volatility of similar enterprises following a comparable period in their lives. For
example, an enterprise that has been listed for only one year and grants options with an
average expected life of five years might consider the pattern and level of historical
volatility of enterprises in the same industry for the first six years in which the shares of
those enterprises were publicly traded.
Unlisted enterprises
27. An unlisted enterprise will not have historical information upon which to base an
estimate of expected volatility. It will therefore have to estimate expected volatility by
some other means. The enterprise could consider the historical volatility of similar liste d
enterprises, for which share price or option price information is available, to use as the
basis for an estimate of expected volatility. Alternatively, volatility of unlisted enterprises
can be taken as zero.
Expected dividends
28. Whether expected dividends should be taken into account when measuring the fair
value of shares or stock options granted depends on whether the employees are entitled
to dividends or dividend equivalents. For example, if employees were granted options
and are entitled to dividends on the underlying shares or dividend equivalents (which
might be paid in cash or applied to reduce the exercise price) between grant date and
exercise date, the options granted should be valued as if no dividends will be paid on the
underlying shares, i.e., the input for expected dividends should be zero. Similarly, when
the grant date fair value of shares granted to employees is estimated, no adjustment is
required for expected dividends if the employees are entitled to receive dividends paid
during the vesting period.
29. Conversely, if the employees are not entitled to dividends or dividend equivalents
during the vesting period (or before exercise, in the case of an option), the grant date
valuation of the rights to shares or options should take expec ted dividends into account.
That is to say, when the fair value of an option grant is estimated, expected dividends
should be included in the application of an option pricing model. When the fair value of a
share grant is estimated, that valuation should be reduced by the present value of
dividends expected to be paid during the vesting period.
30. Option pricing models generally call for expected dividend yield. However, the models
may be modified to use an expected dividend amount rather than a yield. An enterprise may
use either its expected yield or its expected payments. If the enterprise uses the latter, it
should consider its historical pattern of increases in dividends. For example, if policy of an
enterprise has generally been to increase dividends by approximately 3 per cent per year, its
estimated option value should not assume a fixed dividend amount throughout the option’s
life unless there is evidence that supports that assumption.
31. Generally, the assumption about expected dividends should be based on publicly
available information. An enterprise that does not pay dividends and has no plans to do
so should assume an expected dividend yield of zero. However, an emerging enterprise
with no history of paying dividends might expect to begin paying dividends during the
expected lives of its employee stock options. Those enterprises could use an average of
their past dividend yield (zero) and the mean dividend yield of an appropriately
comparable peer group.
Risk-free interest rate
32. Typically, the risk-free interest rate is the implied yield currently available on zero -
coupon government issues, with a remaining term equal to the expected term of the
option being valued (based on the option’s remaining contractual life and taking into
account the effects of expected early exercise). It may be necessary to use an appropriate
substitute, if no such government issues exist or circumstances indicate that the implied
yield on zero-coupon government issues is not representative of the risk free interest
rate. Also, an appropriate substitute should be used if market participants would typically
determine the risk-free interest rate by using that substitute, rather than the implied yield
of zero-coupon government issues, when estimating the fair value of an option with a life
equal to the expected term of the option being valued.
Capital structure effects
33. Typically, third parties, not the enterprise, write traded stock options. When these
stock options are exercised, the writer delivers shares to the opti on holder. Those shares
are acquired from existing shareholders. Hence the exercise of traded stock options has
no dilutive effect.
34. In contrast, if stock options are written by the enterprise, new shares are issued when
those stock options are exercised. Given that the shares will be issued at the exercise
price rather than the current market price at the date of exercise, this actual or potential
dilution might reduce the share price, so that the option holder does not make as large a
gain on exercise as on exercising an otherwise similar traded option that does not dilute
the share price.
35. Whether this has a significant effect on the value of the stock options granted depends
on various factors, such as the number of new shares that will be issued on exercise of the
options compared with the number of shares already issued. Also, if the market already
expects that the option grant will take place, the market may have already factored the
potential dilution into the share price at the date of grant.
36. However, the enterprise should consider whether the possible dilutive effect of the
future exercise of the stock options granted might have an impact on their estimated fair
value at grant date. Option pricing models can be adapted to take into account this
potential dilutive effect.
Appendix II
Equity-Settled Employee
Share-based Payment Plans
Illustration 1 : Stock Options With Service Condition Only
(A) Accounting during the vesting period
At the beginning of year 1, an enterprise grants 300 options t o each of its 1,000
employees. The contractual life (comprising the vesting period and the exercise period) of
options granted is 6 years. The other relevant terms of the grant are as below:
Vesting Period 3 years
Exercise Period 3 years
Expected Life 5 years
Exercise Price ` 50
Market Price ` 50
Expected forfeitures per year 3%
The fair value of options, calculated using an option pricing model, is ` 15 per option.
Actual forfeitures, during the year 1, are 5 per cent and at the end of year 1, the
enterprise still expects that actual forfeitures would average 3 per cent per year over the
3-year vesting period. During the year 2, however, the management decides that the rate
of forfeitures is likely to continue to increase, and the expected forfeitu re rate for the
entire award is changed to 6 per cent per year. It is also assumed that 840 employees
have actually completed 3 years vesting period.
Suggested Accounting Treatment
Year 1
1. At the grant date, the enterprise estimates the fair value of the options expected to
vest at the end of the vesting period as below:
No. of options expected to vest = 300 x 1,000 x 0.97 x 0.97 x 0.97 = 2,73,802 options
Fair value of options expected to vest = 2,73,802 options x ` 15 = ` 41,07,030
2. At the balance sheet date, since the enterprise still expects actual forfeitures to
average 3 per cent per year over the 3-year vesting period, no change is required in the
estimates made at the grant date. The enterprise, therefore, recognises one -third of the
amount estimated at (1) above (i.e., ` 41,07,030/3) towards the employee services
received by passing the following entry:
Employee compensation expense A/c Dr. ` 13,69,010
To Stock Options Outstanding A/c ` 13,69,010
(Being compensation expense recognised in respect of the ESOP)
3. Credit balance in the ‘Stock Options Outstanding A/c’ may be disclosed in the
balance sheet under a separate heading, between ‘Share Capital’ and ‘Reserves and
Surplus’.
Year 2
1. At the end of the financial year, management has changed its estimate of expected
forfeiture rate from 3 per cent to 6 per cent per year. The revised number of options
expected to vest is 2,49,175 (3,00,000 x .94 x .94 x .94). Accordingly, the fair value of
revised options expected to vest is ` 37,37,625 (2,49,175 x ` 15). Consequent to the
change in the expected forfeitures, the expense to be recognised during the year are
determined as below:
Revised total fair value ` 37,37,625
Revised cumulative expense at the end of year 2= (` 37,37,625 x 2/3) =` 24,91,750
Expense already recognised in year 1 =` 13,69,010
Expense to be recognised in year 2 =` 11,22,740
2. The enterprise recognises the amount determined at (1) above (i.e., ` 11,22,740)
towards the employee services received by passing the following entry:
Surplus’.
Year 3
1. At the end of the financial year, the enterprise would examine its actual forfeitures
and make necessary adjustments, if any, to reflect expense for the number of options that
actually vested. Considering that 840 employees have completed three years vesting
period, the expense to be recognised during the year is determined as below:
No. of options actually vested = 840 x 300 = 2,52,000
Fair value of options actually vested (` 2,52,000 x ` 15) = ` 37,80,000
Expense already recognised ` 24,91,750
Expense to be recognised in year 3 ` 12,88,250
2. The enterprise recognises the amount determined at (1) above towards the
employee services received by passing the following entry:
(Being compensation expense recognised in respect of ESOP)
Surplus’.
(B) Accounting at the time of exercise/expiry of the vested options
Continuing Illustration 1(A) above, the following further facts are provided:
(a) 200 employees exercise their right to obtain shares vested in them in pursuance of
the ESOP at the end of year 5 and 600 employees exercise their right at the end of
year 6.
(b) Rights of 40 employees expire unexercised at the end of the contractual life of the
option, i.e., at the end of year 6.
(c) Face value of one share of the enterprise is ` 10.
1. On exercise of the right to obtain shares, the enterprise issues shares to the
respective employees on receipt of the exercise price. The shares so issued are considered
to have been issued on a consideration comprising the exercise price and the
corresponding amount standing to the credit of the Stock Options Outstanding Account.
In the present case, the exercise price is ` 50 per share and the amount of compensation
expense recognised in the ‘Stock Options Outstanding A/c’ is ` 15 per option. The
enterprise, therefore, considers the shares to be issued at a price of ` 65 per share.
2. The amount to be recorded in the ‘Share Capital A/c’ and the ‘Securities Premium
A/c’, upon issuance of the shares, is calculated as below:
Particulars Exercise Exercise
Date Date
Year-end 5 Year-end 6
No. of employees exercising option 200 600
No. of shares issued on exercise @ 300 per employee 60,000 1,80,000
Exercise Price received @ ` 50 per share 30,00,0000 1,80,000
Corresponding amount recognised in the ‘Stock Options
Outstanding A/c’ @ ` 15 per option 9,00,000 27,00,000
Total Consideration 39,00,000 1,17,00,000
Amount to be recorded in ‘Share Capital A/c’ @ ` 10 per 6,00,000 18,00,000
share
Amount to be recorded in ‘Securities Premium A/c’ @ 33,00,000 99,00,000
` 55 per share
Total 39,00,000 1,17,00,000
3. The enterprise passes the following entries at end of year 5 and year 6, respectively,
to record the shares issued to the employees upon exercise of options vested in them in
pursuance of the Employee Stock Option Plan:
Year 5 Bank A/c Dr. ` 30,00,000
Stock Options Outstanding A/c Dr. ` 9,00,000
To Share Capital A/c ` 6,00,000
To Securities Premium A/c ` 33,00,000
(Being shares issued to the employees against the options vested
in them in pursuance of the Employee Stock Option Plan)
Year 6 Bank A/c Dr. ` 90,00,000
To Securities Premium A/c ` 99,00,000
(Being shares issued to the employees against the options vested
in them in pursuance of the Employee Stock Option Plan)
4. At the end of year 6, the balance of ` 1,80,000 (i.e., 40 employees x 300 options x
` 15 per option) standing to the credit of the Stock Options Outstanding Account, in
respect of vested options expiring unexercised, is transferred to general reserve by
passing the following entry:
To General Reserve ` 1,80,000
(Being the balance standing to the credit of the Stock Options Outstanding Account, in
respect of vested options expired unexercised, transferred to the general reserve)
(C) Intrinsic Value Method
The accounting treatment suggested in Illustrations 1(A) and 1(B) above is based on the fair
value method. In case the enterprise follows the intrinsic value method instead of the fair
value method, it would not recognise any compensation expense since the market price of
the underlying share at the grant date is the same as the exercise price and the intrinsic value
of the options is nil. However, in case the market price of the underlying share at the grant
date is more than the exercise price, say, ` 52 per share, then the difference of ` 2 between
the market value and the exercise price would be the intrinsic value of the option. In such a
case, the enterprise would treat the said intrinsic value as compensation expense over the
vesting period on the lines of Illustrations 1(A) and 1(B) above.
Illustration 2: Grant with A Performance Condition, in which the length of the
Vesting Period Varies
At the beginning of year 1, the enterprise grants 100 stock options to each of its 500
employees, conditional upon the employees remaining in the employment of the
enterprise during the vesting period. The options will vest at the end of year 1 if the

earnings of the enterprise increase by more than 18 per cen t; at the end of year 2 if the
earnings of the enterprise increase by more than an average of 13 per cent per year over
the two year period; and at the end of year 3 if the earnings of the enterprise increase by
more than an average of 10 per cent per year over the three year period. The fair value of
the options, calculated at the grant date using an option pricing model, is ` 30 per
option. No dividends are expected to be paid over the three-year period.
By the end of year 1, the earnings of the enterprise have increased by 14 per cent, and 30
employees have left. The enterprise expects that earnings will continue to increase at a
similar rate in year 2, and, therefore, expects that the options will vest at the end of year
2. The enterprise expects, on the basis of a weighted average probability, that a further 30
employees will leave during year 2, and, therefore, expects that options will vest in 440
employees at the end of year 2.
By the end of year 2, the earnings of the enterprise have increased by on ly 10 per cent
and, therefore, the options do not vest at the end of year 2. 28 employees have left
during the year. The enterprise expects that a further 25 employees will leave during year
3, and that the earnings of the enterprise will increase by at le ast 6 per cent, thereby
achieving the average of 10 per cent per year.
By the end of year 3, 23 employees have left and the earnings of the enterprise have
increased by 8 per cent, resulting in an average increase of 10.67 per cent per year.
Therefore, 419 employees received 100 shares each at the end of year 3.
1. In the given case, the length of the vesting period varies, depending on when the
performance condition is satisfied. In such a situation, as per paragraph 14 of th e text of
the Guidance Note, the enterprise estimates the length of the expected vesting period,
based on the most likely outcome of the performance condition, and revises that
estimate, if necessary, if subsequent information indicates that the length of the vesting
period is likely to differ from previous estimates.
2. The enterprise determines the compensation expense to be recognised each year as
below:
Particulars Year 1 Year 2 Year 3
Length of the expected vesting period (at the 2 years 3 years 3 years
end of the year)
No. of employees expected to meet vesting 440 417 419
conditions employees employees employees
No. of options expected to vest 44,000 41,700 41,900
Fair value of options expected to vest @ ` 30 13,20,000 12,51,000 12,57,000
per option (`)
Compensation expense accrued till the end of 6,60,000 8,34,000 12,57,000
year (`) [13,20,000/2] (12,51,000 *
2/3)

Compensation expense recognised till the end Nil 6,60,000 8,34,000

of previous year (`)
Compensation expense to be recognized for 6,60,000 1,74,000 4,23,000
the year (`)
Illustration 3 : Grant with a Performance Condition, in which the number of Stock
Options Varies
At the beginning of year 1, an enterprise grants stock options to each of its 100
employees working in the sales department. The stock options will vest at the end of year
3, provided that the employees remain in the employment of the enterprise, and provided
that the volume of sales of a particular product increases by at least an average of 5 per
cent per year. If the volume of sales of the product increases by an average of between 5
per cent and 10 per cent per year, each employee will receive 100 stock options. If the
volume of sales increases by an average of between 10 per cent and 15 per cent each
year, each employee will receive 200 stock options. If the volume of sales increases by an
average of 15 per cent or more, each employee will receive 300 stock options.
On the grant date, the enterprise estimates that the stock options have a fair value of ` 20
per option. The enterprise also estimates that the volume of sales of the product will
increase by an average of between 10 per cent and 15 per cent per year, and therefore
expects that, for each employee who remains in service until the end of year 3, 200 s tock
options will vest. The enterprise also estimates, on the basis of a weighted average
probability, 20 per cent of employees will leave before the end of year 3.
By the end of year 1, seven employees have left and the enterprise still expects that a
total of 20 employees will leave by the end of year 3. Hence, the enterprise expects that
80 employees will remain in service for the three-year period. Product sales have
increased by 12 per cent and the enterprise expects this rate of increase to continue o ver
the next 2 years.
By the end of year 2, a further five employees have left, bringing the total to 12 to date.
The enterprise now expects that only three more employees will leave during year 3, and
therefore expects that a total of 15 employees will have left during the three-year period,
and hence 85 employees are expected to remain. Product sales have increased by 18 per
cent, resulting in an average of 15 per cent over the two years to date. The enterprise
now expects that sales increase will average 15 per cent or more over the three-year
period, and hence expects each sales employee to receive 300 stock options at the end of
year 3.
By the end of year 3, a further two employees have left. Hence, 14 employees have left
during the three-year period, and 86 employees remain. The sales of the enterprise have
increased by an average of 16 per cent over the three years. Therefore, each of the 86
employees receives 300 stock options.
Since the number of options varies depending on the outcome of a performance

condition that is not a market condition, the effect of that condition (i.e., the possibility
that the number of stock options might be 100, 200 or 300) is not taken into account
when estimating the fair value of the stock options at grant date. Instead, the enterprise
revises the transaction amount to reflect the outcome of that performance condition, as
illustrated below.
Year Calculation Compensation Cumulative
expense for compensation
period (`) expense (`)
1. 80 employees × 200 options × ` 20 × 1/3 1,06,667 1,06,667
2. (85 employees × 300 options × ` 20 × 2/3) – 2,33,333 3,40,000
` 1,06,667
3. (86 employees × 300 options × ` 20 × 3/3) – 1,76,000 5,16,000
` 3,40,000
Illustration 4: Grant with a Performance Condition, in which the Exercise Price Varies
At the beginning of year 1, an enterprise grants 10,000 stock options to a senior
executive, conditional upon the executive remaining in the employment of the enterprise
until the end of year 3. The exercise price is ` 40. However, the exercise price drops to
` 30 if the earnings of the enterprise increase by at least an average of 10 per cent per
year over the three-year period.
On the grant date, the enterprise estimates that the fair value of the stoc k options, with
an exercise price of ` 30, is ` 16 per option. If the exercise price is ` 40, the enterprise
estimates that the stock options have a fair value of ` 12 per option. During year 1, the
earnings of the enterprise increased by 12 per cent, and the enterprise expects that
earnings will continue to increase at this rate over the next two years. The enterprise,
therefore, expects that the earnings target will be achieved, and hence the stock options
will have an exercise price of ` 30. During year 2, the earnings of the enterprise increased
by 13 per cent, and the enterprise continues to expect that the earnings target will be
achieved.
During year 3, the earnings of the enterprise increased by only 3 per cent, and therefore
the earnings target was not achieved. The executive completes three years’ service, and
therefore satisfies the service condition. Because the earnings target was not achieved,
the 10,000 vested stock options have an exercise price of ` 40.
Because the exercise price varies depending on the outcome of a performance condition
that is not a market condition, the effect of that performance condition (i.e. the possibility
that the exercise price might be ` 40 and the possibility that the exercise price might be
` 30) is not taken into account when estimating the fair value of the stock options at the
grant date. Instead, the enterprise estimates the fair value of the stock options at the
grant date under each scenario (i.e. exercise price of ` 40 and exercise price of ` 30) and
ultimately revises the transaction amount to reflect the outcome of that performance

condition, as illustrated below:

expense for compensatio
period (`) n expense
(`)
1 10,000 options × ` 16 × 1/3 53,333 53,333
2. (10,000 options × ` 16 × 2/3) ` 53,333 53,334 1,06,667
3. (10,000 options × ` 12 × 3/3) – ` 1,06,667 13,333 1, 20,000
Illustration 5: Grant with A Market Condition

At the beginning of year 1, an enterprise grants 10,000 stock options to a senior
executive, conditional upon the executive remaining in the employment of the enterprise
until the end of year 3. However, the stock options cannot be exercised unless the share
price has increased from `.50 at the beginning of year 1 to above ` 65 at the end of year
3. If the share price is above ` 65 at the end of year 3, the stock options can be exercised
at any time during the next seven years, i.e. by the end of year 10.
The enterprise applies a binomial option pricing model, which takes into account the
possibility that the share price will exceed ` 65 at the end of year 3 (and hence the stock
options become exercisable) and the possibility that the share price will not exceed ` 65
at the end of year 3 (and hence the options will not become exercisable). It estimates the
fair value of the stock options with this market condition to be ` 24 per option.
Because paragraph 20 of the text of the Guidance Note requires the enterprise to
recognise the services received from an employee who satisfies all other vesting
conditions (e.g., services received from an employee who remains in service for the
specified service period), irrespective of whether that market condition is satisfied, it
makes no difference whether the share price target is achieved. The possibility that the
share price target might not be achieved has already been taken into account when
estimating the fair value of the stock options at the grant date. Therefore, if th e
enterprise expects the executive to complete the three-year service period, and the
executive does so, the enterprise recognises the following amounts in years 1, 2
and 3:
1. 10,000 options × ` 24 × 1/3 80,000 80,000
2. (10,000 options × ` 24 × 2/3) – ` 80,000 80,000 1,60,000
3. (10,000 options × ` 24) – ` 1,60,000 80,000 2,40,000
As noted above, these amounts are recognised irrespective of the outcome of the market
condition. However, if the executive left during year 2 (or year 3), the amount recognised
during year 1 (and year 2) would be reversed in year 2 (or year 3). This is because the
service condition, in contrast to the market condition, was not taken into account when
estimating the fair value of the stock options at grant date. Instead, the service condition
is taken into account by adjusting the transaction amount to be based on the number of
shares or stock options that ultimately vest, in accordance with paragraphs 18 and 19 of
the text of the Guidance Note.
Illustration 6: Grant with A Market Condition, in Which the Length of the Vesting
Period Varies
At the beginning of year 1, an enterprise grants 10,000 stock options with a ten -year life
to each of ten senior executives. The stock options will vest and become exercisable
immediately if and when the share price of the enterprise increases from ` 50 to ` 70,
provided that the executive remains in service until the share price target is ach ieved.
The enterprise applies a binomial option pricing model, which takes into account the
possibility that the share price target will be achieved during the ten -year life of the
options, and the possibility that the target will not be achieved. The ente rprise estimates
that the fair value of the stock options at grant date is ` 25 per option. From the option
pricing model, the enterprise determines that the mode of the distribution of possible
vesting dates is five years. In other words, of all the possible outcomes, the most likely
outcome of the market condition is that the share price target will be achieved at the end
of year 5. Therefore, the enterprise estimates that the expected vesting period is five
years. The enterprise also estimates that two executives will have left by the end of year 5,
and therefore expects that 80,000 stock options (10,000 stock options x 8 executives) will
vest at the end of year 5.
Throughout years 1-4, the enterprise continues to estimate that a total of two executives
will leave by the end of year 5. However, in total three executives leave, one in each of
years 3, 4 and 5. The share price target is achieved at the end of year 6. Another executive
leaves during year 6, before the share price target is achieved.
Paragraph 14 of the text of the Guidance Note requires the enterprise to recognise the
services received over the expected vesting period, as estimated at grant date, and also
requires the enterprise not to revise that estimate. Therefore, the enterprise recognises
the services received from the executives over years 1 to 5. Hence, the transaction
amount is ultimately based on 70,000 stock options (10,000 stock options × 7 executives
who remain in service at the end of year 5). Although another executive left during year 6,
no adjustment is made, because the executive had already completed the expected
vesting period of 5 years. Therefore, the enterprise recognises the following amounts in
years 1-5:
1 80,000 options × ` 25 × 1/5 4,00,000 4,00,000
2. (80,000 options × ` 25 × 2/5) – ` 4,00,000 4,00,000 8,00,000

3. (80,000 options × ` 25 × 3/5) – ` 8,00,000 4,00,000 12,00,000
4. 4 (80,000 options × ` 25 × 4/5) – ` 12,00,000 4,00,000 16,00,000
5. (70,000 options × ` 25) – ` 16,00,000 1,50,000 17,50,000
Illustration 7: Employee Share Purchase Plan

An enterprise offers all its 1,000 employees the opportunity to participate in an employ ee
stock purchase plan. The employees have two weeks to decide whether to accept the
offer. Under the terms of the plan, the employees are entitled to purchase a maximum of
100 shares each. The purchase price will be 20 per cent less than the market price of the
shares of the enterprise at the date the offer is accepted, and the purchase price must be
paid immediately upon acceptance of the offer. All shares purchased must be held in trust
for the employees, and cannot be sold for five years. The employee i s not permitted to
withdraw from the plan during that period. For example, if the employee ceases
employment during the five-year period, the shares must nevertheless remain in the plan
until the end of the five-year period. Any dividends paid during the five-year period will
be held in trust for the employees until the end of the five-year period.
In total, 800 employees accept the offer and each employee purchases, on average, 80
shares, i.e., the employees purchase a total of 64,000 shares. The weighted -average
market price of the shares at the purchase date is ` 30 per share, and the weighted-
average purchase price is `.24 per shares.
Paragraph 15 of the text of the Guidance Note provides that the enterprise should
measure the fair value of the employee services received by reference to the fair value of
the shares or stock options granted. To apply this requirement, it is necessary first to
determine the type of instrument granted to the employees. Although the plan is
described as an employee stock purchase plan (ESPP), some ESPPs include option
features and are therefore, in effect, stock option plans. For example, an ESPP might
include a ‘lookback feature’, whereby the employee is able to purchase shares at a
discount, and choose whether the discount is applied to the share price of the enterprise
at the date of grant or its share price at the date of purchase. Or an ESPP might specify
the purchase price, and then allow the employees a significant period of time to decid e
whether to participate in the plan. Another example of an option feature is an ESPP that
permits the participating employees to cancel their participation before or at the end of a
specified period and obtain a refund of amounts previously paid into the plan.
However, in this example, the plan includes no option features. The discount is applied to
the share price at the purchase date, and the employees are not permitted to withdraw
from the plan.
Another factor to consider is the effect of post-vesting transfer restrictions, if any.
Paragraph 3 of the Appendix I to the Guidance Note states that, if shares are subject to
restrictions on transfer after vesting date, that factor should be taken into account when
estimating the fair value of those shares, but only to the extent that the post-vesting
restrictions affect the price that a knowledgeable, willing market participant would pay for
that share. For example, if the shares are actively traded in a deep and liquid market,
post-vesting transfer restrictions may have little, if any, effect on the price that a
knowledgeable, willing market participant would pay for those shares. In this example,
the shares are vested when purchased, but cannot be sold for five years after the date of
purchase. Therefore, the enterprise should consider the valuation effect of the five-year
post-vesting transfer restriction. This entails using a valuation technique to estimate what
the price of the restricted share would have been on the purchase date in an arm’s length
transaction between knowledgeable, willing parties. Suppose that, in this example, the
enterprise estimates that the fair value of each restricted share is ` 28. In this case, the
fair value of the instruments granted is ` 4 per share (being the fair value of the restricted
share of ` 28 less the purchase price of ` 24). Because 64,000 shares were purchased, the
total fair value of the instruments granted is ` 2,56,000.
In this example, there is no vesting period. Therefore, in accordance with paragraph 11 of
the text of the Guidance Note, the enterprise should recognise an expense of ` 2,56,000
immediately.
Appendix III
Modifications to the Term and Conditions of Equity-Settled Employee
Share-based Payment Plans
Illustration 1: Grant of Stock Options that are Subsequently Repriced
At the beginning of year 1, an enterprise grants 100 stock options to each of its 500
employees. The grant is conditional upon the employee remaining in service over the
next three years. The enterprise estimates that the fair value of each option is ` 15. On
the basis of a weighted average probability, the enterprise estimates that 100 employees
will leave during the three-year period and therefore forfeit their rights to the stock
options.
Suppose that 40 employees leave during year 1. Also suppose that by the end of year 1,
the share price of the enterprise has dropped, and the enterprise reprices its stock
options, and that the repriced stock options vest at the end of year 3. The enterprise
estimates that a further 70 employees will leave during years 2 and 3, and hence the total
expected employee departures over the three-year vesting period is 110 employees.
During year 2, a further 35 employees leave, and the enterprise estimates that a further
30 employees will leave during year 3, to bring the total expected employee departures
over the three-year vesting period to 105 employees. During year 3, a total of 28
employees leave, and hence a total of 103 employees ceased employment during the
vesting period. For the remaining 397 employees, the stock options vested at the end of
year 3.
The enterprise estimates that, at the date of repricing, the fair value of each of the
original stock options granted (i.e., before taking into account the repricing) is ` 5 and

that the fair value of each repriced stock option is ` 8.

Paragraph 24 of the text of the Guidance Note requires the enterprise to recognise the
effects of modifications that increase the total fair value of the employee share -based
payment plans or are otherwise beneficial to the employee. If the modification increases
the fair value of the shares or stock options granted (e.g., by reducing the exercise price),
measured immediately before and after the modification, paragraph 25(a) of the text of
this Guidance Note requires the enterprise to include the incremental fair value granted
(i.e., the difference between the fair value of the modified instrument and that of the
original instrument, both estimated as at the date of the modification) in the
measurement of the amount recognised for services received as consideration for the
instruments granted. If the modification occurs during the vesting period, the incremental
fair value granted is included in the measurement of the amount recognise d for services
received over the period from the modification date until the date when the modified
instruments vest, in addition to the amount based on the grant date fair value of the
original instruments, which is recognised over the remainder of the or iginal vesting
period.
The incremental value is ` 3 per stock option (` 8 – ` 5). This amount is recognised over the
remaining two years of the vesting period, along with remuneration expense based on the
original option value of ` 15.
The amounts recognised towards employees services received in years 1-3 are as follows:
1 (500 – 110) employees ×100 options × ` 15 1,95,000 1,95,000
× 1/3
2. (500 – 105) employees × 100 options × (` 2,59,250 4,54,250
15 × 2/3 + ` 3 × 1/2) – ` 1,95,000
3. (500 – 103) employees × 100 options × (` 2,60,350 7,14,600
15 + ` 3) – ` 4,54,250
Illustration 2: Grant of Stock Options with A Vesting Condition that is Subsequentl y
Modified
At the beginning of year 1, the enterprise grants 1,000 stock options to each member of
its sales team, conditional upon the employees remaining in the employment of the
enterprise for three years, and the team selling more than 50,000 units of a particular
product over the three-year period. The fair value of the stock options is ` 15 per option
at the date of grant.
During year 2, the enterprise increases the sales target to 1,00,000 units. By the end of
year 3, the enterprise has sold 55,000 units, and the stock options do not vest. Twelve
members of the sales team have remained in service for the three-year period.

Paragraph 19 of the text of the Guidance Note requires, for a performance condition that
is not a market condition, the enterprise to recognise the services received during the
vesting period based on the best available estimate of the number of shares or stock
options expected to vest and to revise that estimate, if necessary, if subsequent
information indicates that the number of shares or stock options expected to vest differs
from previous estimates. On vesting date, the enterprise revises the estimate to equal the
number of instruments that ultimately vested. However, paragraph 24 of the text of th e
Guidance Note requires, irrespective of any modifications to the terms and conditions on
which the instruments were granted, or a cancellation or settlement of that grant of
instruments, the enterprise to recognise, as a minimum, the services received, m easured
at the grant date fair value of the instruments granted, unless those instruments do not
vest because of failure to satisfy a vesting condition (other than a market condition) that
was specified at grant date. Furthermore, paragraph 26(c) of the te xt of this Guidance
Note specifies that, if the enterprise modifies the vesting conditions in a manner that is
not beneficial to the employee, the enterprise does not take the modified vesting
conditions into account when applying the requirements of parag raphs 18 to 20 of the
text of the Guidance Note.
Therefore, because the modification to the performance condition made it less likely that
the stock options will vest, which was not beneficial to the employee, the enterprise takes
no account of the modified performance condition when recognising the services
received. Instead, it continues to recognise the services received over the three -year
period based on the original vesting conditions. Hence, the enterprise ultimately
recognizes cumulative remuneration expense of ` 1,80,000 over the three-year period (12
employees × 1,000 options × ` 15).
The same result would have occurred if, instead of modifying the performance target, the
enterprise had increased the number of years of service required for the st ock options to
vest from three years to ten years. Because such a modification would make it less likely
that the options will vest, which would not be beneficial to the employees, the enterprise
would take no account of the modified service condition when recognising the services
received. Instead, it would recognise the services received from the twelve employees
who remained in service over the original three-year vesting period.
Appendix IV
Cash-Settled Employee Share-based Payment Plans
Continuing, Illustration 1(A) of Appendix II, suppose the enterprise has granted stock
appreciation rights (SARs) to its employees, instead of the options whereby the enterprise
pays cash to the employees equal to the intrinsic value of the SARs as on the exercise
date. The SARs are granted on the condition that the employees remain in its
employment for the next three years. The contractual life [comprising the vesting period
(3 years) and the exercise period (2 years)] of SARs is 5 years.
The other facts of the Illustration are the same as those in Illustration 1(A) of Appendix II.
However, it is also assumed that at the end of year 3, 400 employees exercise their SA Rs,
another 300 employees exercise their SARs at the end of year 4 and the remaining 140
employees exercise their SARs at the end of year 5.
The enterprise estimates the fair value of the SARs at the end of each year in which a
liability exists and the intrinsic value of the SARs at the end of years 3, 4 and 5. The values
estimated by the enterprise are as below:
Year Fair Value Intrinsic Value
1 ` 15.30
2 ` 16.50
3 ` 19.20 ` 16.00
4 ` 21.30 ` 21.00
5 ` 26.00
1. The expense to be recognised each year in respect of SARs are determined as below:
Year 1
No. of SARs expected to vest (as per the original estimate)
1,000 x 300 x 0.97 x 0.97 x 0.97 = 2,73,802 SARs
Provision required at the year-end
2,73,802 SARs x ` 15.30 x 1/3 = ` 13,96,390
Less: provision at the beginning of the year Nil
Expense for the year ` 13,96,390
Year 2
No. of SARs expected to vest (as per the revised estimate)
1,000 x 300 x 0.94 x 0.94 x 0.94 = 2,49,175 SARs
Provision required at the year-end 2,49,175 SARs x ` 16.50 x 2/3 = ` 27,40,925
Less: provision at the beginning of the year ` (13,96,390)
Year 3
No. of SARs actually vested 840 employees x 300 SARs 2,52,000 SARs
No. of SARs exercised at the year-end 400 employees x 300 SARs 1,20,000 SARs
No. of SARs outstanding at the year-end 1,32,000 SARs
Provision required in respect of SARs outstanding at the year-end
1,32,000 SARs x ` 19.20 = ` 25,34,400
Plus: Cash paid on exercise of SARs by employees1,20,000 SARs x ` 16.00 = ` 19,20,000
Total ` 44,54,400

Year 4
No. of SARs outstanding at the beginning of the year 1,32,000 SARs
No. of SARs exercised at the year-end 300 employees x 300 SARs 90,000 SARs
No. of SARs outstanding at the year-end 42,000 SARs
42,000 SA` x ` 21.30 = ` 8,94,600
Plus: Cash paid on exercise of SARs 90,000 SARs x ` 21.00 =`.18,90,000
Total ` 27,84,600
Year 5
No. of SARs outstanding at the beginning of the year 42,000 SARs
No. of SARs outstanding at the year-end Nil
Provision required in respect of SARs outstanding at the year-end Nil
Plus: Cash paid on exercise of SARs 42,000 SARs x ` 26.00 = ` 10,92,000
Total ` 10,92,000
2. The enterprise passes the following entry, in each of the years, to recognise the
compensation expense determined as above:
Employee compensation expense A/c Dr. _________
To Provision for payment of SARs A/c _________
(Being compensation expense recognised in respect of SA Rs)
3. The enterprise passes the following entry, in the years 3, 4 and 5, to record the cash
paid on exercise of SARs:
Provision for payment of SARs A/c Dr. _________
To Bank A/c _________
(Being cash paid on exercise of SARs)
4. Balance in the ‘Provision for payment of SARs Account’, outstanding at year-end, is
disclosed in the balance sheet, as a provision under the heading ‘Curre nt Liabilities and
Provisions’.


The accounting treatment suggested above is based on the fair value method. In case the
enterprise has followed the intrinsic value method instead of the fair value method, it
would make all the computations suggested above on the basis of intrinsic value of SA Rs
on the respective dates instead of the fair value. To illustrate, suppose the intrinsic value
of SARs at the grant date is ` 6 per right. The intrinsic values of the SARs on the
subsequent dates are as below:
Year Intrinsic Value
1 ` 9.00
2 ` 12.00
3 ` 16.00
4 ` 21.00
5 ` 26.00
In the above case, the enterprise would determine the expense to be recognised each
year in respect of SARs as below:
Year 1
No. of SARs expected to vest (as per the original estimate)
1,000 x 300 x 0.97 x 0.97 x 0.97 = 2,73,802 SARs
Provision required at the year-end 2,73,802 SARs x ` 9.00 x 1/3 = ` 8,21,406
Year 2
No. of SARs expected to vest (as per the revised estimate)
1,000 x 300 x 0.94 x 0.94 x 0.94 = 2,49,175 SARs
Provision required at the year-end
2,49,175 SARs x ` 12.00 x 2/3 = ` 19,93,400
Year 3
No. of SARs actually vested 840 employees x 300 SARs 2,52,000 SARs
No. of SARs exercised at the year-end 400 employees x 300 SARs 1,20,000 SARs
No. of SARs outstanding at the year-end 1,32,000 SARs
1,32,000 SARs x ` 16.00 = ` 21,12,000
Plus: Cash paid on exercise of SARs by employees 1,20,000 SARs x ` 16.00
= ` 19,20,000

Total ` 40,32,000
Year 4
No. of SARs outstanding at the beginning of the year 1,32,000 SARs
No. of SARs outstanding at the year-end 42,000 SARs
42,000 SARs x ` 21.00 = ` 8,82,000
Total ` 27,72,000
Year 5
No. of SARs outstanding at the beginning of the year 42,000 SARs
No. of SARs outstanding at the year-end Nil
Provision required in respect of SARs outstanding at the year-end Nil
Total ` 10,92,000
Appendix V
Employee Share-based Payment Plan with Cash Alternatives
Illustration:
An enterprise grants to an employee the right to choose either a cash payment equal to
the value of 1,000 shares, or 1,200 shares. The grant is conditional upon the completion
of three years’ service. If the employee chooses the equity alternative, the shares must be
held for three years after vesting date. The face value of shares is ` 10 per share.
At grant date, the fair value of the shares of the enterprise (without considering p ost-
vesting restrictions) is ` 50 per share. At the end of years 1, 2 and 3, the said fair value is `
52, ` 55 and ` 60 per share respectively. The enterprise does not expect to pay dividends
in the next three years. After taking into account the effects of the post-vesting transfer
restrictions, the enterprise estimates that the grant date fair value of the equity
alternative is ` 48 per share.
At the end of year 3, the employee chooses:

Scenario 1: The cash alternative
Scenario 2: The equity alternative
1. The employee share-based payment plan granted by the enterprise has two
components, viz., (i) a liability component, i.e., the employees’ right to demand settlement
in cash, and (ii) an equity component, i.e., the employees’ right to demand settlement in
shares rather than in cash. The enterprise measures, on the grant date, the fair value of
two components as below:
Fair value under equity settlement 1,200 shares x ` 48 = ` 57,600
Fair value under cash settlement 1,000 shares x ` 50 = ` 50,000
Fair value of the equity component (` 57,600 – ` 50,000) = ` 7,600
Fair value of the liability component ` 50,000
2. The enterprise calculates the expense to be recognised in respect of the liability
component at the end of each year as below:
Year 1
Provision required at the year-end 1,000 x ` 52.00 x 1/3 = ` 17,333
Expense for the year ` 17,333
Year 2
Provision required at the year-end 1,000 x ` 55.00 x 2/3 = ` 36,667
Less: provision at the beginning of the year ` 17,333
Year 3
Provision required at the year-end 1,000 x ` 60.00 = ` 60,000
Less: provision at the beginning of the year ` 36,667
3. The expense to be recognised in respect of the equity component at the end of each
year is one third of the fair value (` 7,600) determined at (1) above.
4. The enterprise passes the following entry at the end of each of the years to
recognise compensation expense towards liability component determined at (2) above:
To Provision for liability component of employee share-based payment plan __________
(Being compensation expense recognised in respect of liability component of employee
share-based payment plan with cash alternative)

5. The enterprise passes the following entry at the end of each of the year to recognise
compensation expense towards equity component determined at (3) above:
To Stock Options Outstanding A/c _________
(Being compensation expense recognised in respect of equity component of employee
share-based payment plan with cash alternative)
6. Provision for liability component of employee share-based payment plan,
outstanding at year-end, is disclosed in the balance sheet, as a provision under the
heading ‘Current Liabilities and Provisions’. Credit balance in the ‘Stock Options
Outstanding A/c’ is disclosed under a separate heading, between ‘Share Capital’ and
‘Reserves and Surplus’.
7. The enterprise passes the following entry on the settlement of the employee share -
based payment plan with cash alternative:
Scenario 1: The cash alternative
Provision for liability component of employee share-based payment plan Dr. ` 60,000
To Bank A/c ` 60,000
(Being cash paid on exercise of cash alternative under the employee share-based
payment plan)
Stock Options Outstanding A/c Dr. ` 7,600
To General Reserve ` 7,600
(Being the balance standing to the credit of the Stock Options Outstanding Account
transferred to the general reserve upon exercise of cash alternative)
Scenario 2: The equity alternative
Stock Options Outstanding A/c Dr. ` 7,600
Provision for liability component of employee share-based payment plan Dr. ` 60,000
To Share Capital A/c (1,000 shares x ` 10) ` 10,000
To Securities Premium A/c ` 57,600
(Being shares issued on exercise of equity alternative under the employee share -based
payment plan)
Appendix VI
Graded Vesting
Continuing Illustration 1(A) of Appendix II, suppose that the options granted vest
according to a graded schedule of 25 per cent at the end of the year 1, 25 per cent at the
end of the year 2, and the remaining 50 per cent at the end of the year 3. The expected
lives of the options that vest at the end of the year 1, 2 and 3 are 2.5 years, 4 years and 5
years respectively. The fair values of these options, computed based on their respective
expected lives, are ` 10, ` 13 and ` 15 per option, respectively. It is also assumed that
expected forfeiture rate is 3% per year and does not change during the vesting period.
1. Since the options granted have a graded vesting schedule, the enterprise segregates
the total plan into different groups, depending upon the vesting dates and treats each of
these groups as a separate plan.
2. The enterprise determines the number of options expected to vest under each group
as below:
Vesting Date (Year-end) Options expected to vest
1 300 options x 1,000 employees x 25% x 0.97 = 72,750 options
2 300 options x 1,000 employees x 25% x 0.97 x .97= 70,568 options
3 300 options x 1,000 employees x 50% x 0.97x .97 x .97 =1,36,901 options
Total options expected to vest 2,80,219 options
3. Total compensation expense for the options expected to vest is determined as
follows:
Vesting Date Expected Vesting Value per Compensation
(Year-end) (No. of Options) Option (`) Expense (`)
1 72,750 10 7,27,500
2 70,568 13 9,17,384
3 1,36,901 15 20,53,515
Total 36,98,399
4. Compensation expense, determined as above, is recognised over the respective
vesting periods. Thus, the compensation expense of ` 7,27,500 attributable to 72,750
options that vest at the end year 1, is allocated to the year 1. The expense of
` 9,17,384 attributable to the 70,568 options that vest at the end of year 2 is allocated
over their 2-year vesting period (year 1 and year 2). The expense of ` 20,53,515
attributable to the 1,36,901 options that vest at the end of year 3 is allocated over their 3 -
year vesting period (year 1, year 2 and year 3). Total compensation expense of
` 36,98,399, determined at the grant date, is attributed to the years 1, 2 and 3 as below:
Vesting Date Cost to be recognised
(End of year) Year 1 Year 2 Year 3
1 7,27,500
2 4,58,692 4,58,692
3 6,84,505 6,84,505 6,84,505
Cost for the year 18,70,697 11,43,197 6,84,505
Cumulative cost 18,70,697 30,13,894 36,98,399


The accounting treatment suggested above is based on the fair value method. In case the
enterprise has followed the intrinsic value method instead of the fair value method, it
would make computations suggested above on the basis of intrinsic value of options at
the grant date (which would be the same for all groups) instead of the fair value. To
illustrate, suppose the intrinsic value of the option at the grant date is ` 6 per option. In
such a case, total compensation expense for the options expected to vest would be
Vesting Date Expected Vesting Value per Compensation
(End of year) (No. of Options) Option (`) Expense (`)
1 72,750 6 4,36,500
2 70,568 6 4,23,408
3 1,36,901 6 8,21,406
Total 16,81,314
Total compensation expense of ` 16,81,314, determined at the grant date, would be

attributed to the years 1, 2 and 3 as below:
Vesting Date Cost to be recognised
(End of year) Year 1 Year 2 Year 3
1 4,36,500
2 2,11,704 2,11,704
3 2,73,802 2,73,802 2,73,802
Cost for the year 9,22,006 4,85,506 2,73,802
Cumulative cost 9,22,006 14,07,512 16,81,314
Appendix VII
Accounting for Employee Share-based Payment Plans Administered
Through a Trust
Illustration 1: Enterprise allots Shares to the ESOP Trust as and when the Employees
Exercise Stock Options
At the beginning of year 1, an enterprise grants 300 stock options to each of its 1,000
enterprise for one year. The fair value of the stock options, at the date of grant, is
` 15 per option and the exercise price is ` 50 per share. The options can be exercised in
one year after the date of vesting. The other relevant terms of the grant and assum ptions
are as below:
(a) The grant is administered by an ESOP trust appointed by the enterprise. According to
the terms of appointment, the enterprise agrees to allot shares to the ESOP trust as
and when the stock options are exercised by the employees.
(b) The number of employees expected to complete one year vesting period, at the

beginning of the plan, is 900, i.e., 100 employees are expected to leave during the
vesting period and, consequently, the options granted to them are expected to be
forfeited.
(c) Actual forfeitures, during the vesting period, are equal to the expected forfeitures
and 900 employees have actually completed one year vesting period.
(d) All 900 employees exercised their right to obtain shares vested in them in pursuance
of the ESOP at the end of year 2.
(e) Apart from the shares allotted to the trust, the enterprise has 10,00,000 shares of `
10 each outstanding at the end of year 1. The said shares were issued at a premium
of ` 15 per share. The full amount of premium received on issue of shares is still
standing to the credit of the Securities Premium Account. The enterprise has not
made any change in the share capital upto the end of year 2, except that arising from
transactions with the employees pursuant to the Employee Sto ck Option Plan.
The accounting treatment, in this case, would be the same as explained in the case where
the enterprise itself is administering the Employee Stock Option Plan (ESOP) although the
enterprise issues shares to the ESOP Trust instead of issuing shares to the employees
directly. The accounting treatment in this case is explained herein below.
Year 1
1. At the grant date, the enterprise estimates the fair value of the options expected to
vest at the end of the vesting period as below:
No. of options expected to vest
(1,000 – 100) employees x 300 options = 2,70,000 options
Fair value of options expected to vest
2,70,000 options x ` 15 = ` 40,50,000
2. At the end of the financial year, the enterprise examines its act ual forfeitures and
makes necessary adjustments, if any, to reflect expense for the number of options that
actually vested. Considering that actual forfeitures, during the vesting period, are equal to
the expected forfeitures and 900 employees have actually completed one year vesting
period, the enterprise recognises the fair value of options expected to vest (estimated at
1 above) towards the employee services received by passing the following entry:
3. Credit balance in the ‘Stock Options Outstanding Account’ is disclosed in the balance
sheet under a separate heading, between ‘Share Capital’ and ‘Reserves and Surplus’, as
below:

Extracts from the Balance Sheet

Liabilities Amount (` )
Share Capital
Paid-up Capital:
10,00,000 equity shares of ` 10 each 1,00,00,000
Stock Options Outstanding Account 40,50,000
Reserves and Surplus
Securities Premium A/c (10,00,000 shares x ` 15) 1,50,00,000
Year 2
1. On exercise of the right to obtain shares by the employees, the enterprise allots
shares to the ESOP Trust for issuance to the employees. The shares so issued are
considered to have been issued on a consideration comprising the exercise price and the
fair value of the options. In the present case, the exercise price is ` 50 per share and the
fair value of the options is ` 15 per option. The enterprise, therefore, considers the shares
to be issued at a price of ` 65 per share.
2. The amount to be recorded in the ‘Share Capital Account’ and the ‘Securities
Premium Account’, upon issuance of the shares, is calculated as below:
Particulars Computations
No. of employees exercising option 900
No. of shares issued on exercise @ 300 per employee 2,70,000
Exercise Price @ ` 50 per share 1,35,00,000
Fair value of options @ ` 15 per option 40,50,000
Total Consideration 1,75,50,000
Amount to be recorded in ‘Share Capital A/c’ @ ` 10 per 27,00,000
share
Amount to be recorded in ‘Securities Premium A/c’ @ ` 55 1,48,50,000
per share
Total 1,75,50,000
3. The ESOP Trust receives exercise price from the employees exercising the options
vested in them in pursuance of the Employee Stock Option Plan. The Trust passes on the
exercise price so received to the enterprise for issuance of shares to the employees. The
enterprise allots shares to the ESOP Trust for issuance to the employees exercising the
options vested in them in pursuance of the Employee Stock Option Plan. To recognise the
transaction, the following entry is passed:
Bank A/c Dr. `.1,35,00,000


To Securities Premium A/c ` 1,48,50,000
(Being shares allotted to the ESOP Trust for issuance to the employees against the
options vested in them in pursuance of the Employee Stock Option Plan)
4. The Share Capital Account and the Securities Premium Account are disclosed in the
balance sheet as below:
Liabilities Amount (`)
Share Capital
Paid-up Capital:
12,70,000 equity shares of ` 10 each fully paid 1,27,00,000
(Of the above, 2,70,000 shares of ` 10 each have been issued to
the employees pursuant to an Employee Share-based Payment
Plan. The issue price of the share was ` 65 per share out of which
` 15 per share were received in the form of employee services
over a period of one year).
Securities Premium A/c 2,98,50,000
Computation of Earnings Per Share

For the purpose of calculating Basic EPS, stock options granted pursuant to the employee
share-based payment plan would not be included in the shares outstanding till the
employees have exercised their right to obtain shares, after fulfilling the requisite vesting
conditions. Till such time, stock options so granted would be considered as dilutive
potential equity shares for the purpose of calculating Diluted EPS.
Illustration 2: Enterprise Provides Finance to the ESOP Trust for Subscription to
Shares Issued by the Enterprise at the Beginning of the Plan
Continuing Illustration 1 above, suppose the enterprise provides finance, at the grant
date, to the ESOP trust for subscription to the shares of the enterprise equiva lent to the
number of shares expected to vest. With the help of finance provided by the enterprise,
the trust subscribes to the shares offered by the enterprise at a cash price of ` 50 per
share, at the beginning of the plan. The Trust would issue shares to the employees as and
when they exercise the right vested in them in pursuance of the Employee Stock Option
Plan (ESOP). The other facts of the case are the same as in Illustration 1.
The computations of employee compensation expense, amount to be recognised in the
Share Capital Account and the Securities Premium Account, etc., would be the same as
that in Illustration 1 above.

Year 1
1. The enterprise passes the following entry to record provision of finance [ `
1,35,00,000 (i.e., 2,70,000 shares x ` 50)] to the ESOP trust:
Amount recoverable from ESOP Trust A/c Dr. ` 1,35,00,000
To Bank A/c ` 1,35,00,000
(Being finance provided to the ESOP trust for subscription of shares)
2. The enterprise passes the following entry to record the allotment of 2,70,000 shares
to the ESOP Trust at ` 65 per share [comprising the exercise price (` 50) and the fair value
of options (` 15)]:
Bank A/c Dr. ` 1,35,00,000
Amount recoverable from ESOP Trust A/c Dr. ` 40,50,000
To Securities Premium A/c ` 1,48,50,000
(Being shares allotted to the ESOP Trust in respect of the Employee Stock Option Plan)
3. The enterprise passes the following entry to recognise the employee services received
during the year:
4. The Share Capital Account, the Securities Premium Account, credit balance in the
‘Stock Options Outstanding Account’ and debit balance in the ‘Amount recoverable from
ESOP Trust Account’ are disclosed in the balance sheet as below:
Share Capital
Paid-up Capital:
Less: Amount recoverable from ESOP Trust 27,00,000 1,00,00,000
(face value of 2,70,000 share allotted to the Trust)
Securities Premium Account 2,98,50,000
Less: Amount recoverable from ESOP Trust 1,48,50,000 1,50,00,000
(Premium on 2,70,000 share allotted to the Trust)

5. Apart from other required disclosures, the enterprise gives a sui table note in the
Notes to Accounts to explain the transaction and the nature of deduction of the ‘Amount
recoverable from ESOP Trust’ made from the ‘Share Capital’ and the ‘Securities Premium
Account’.
Year 2
1. On exercise of the right to obtain shares, the ESOP trust issues shares to the
respective employees after receiving the exercise price of ` 50 per share. The ESOP Trust
passes on the exercise price received on issue of shares to the enterprise. The enterprise
passes the following entry to record the receipt of the exercise price:
Bank A/c Dr. ` 1,35,00,000
To Amount recoverable from ESOP Trust A/c ` 1,35,00,000
(Being amount received from the ESOP Trust against finance provided to it at the
beginning of the Employee Stock Option Plan)
2. The enterprise transfers the balance standing to the credit of the ‘Stock Options
Outstanding Account’ to the ‘Amount recoverable from ESOP Trust Account’ by passing
the following entry:
To Amount recoverable from ESOP Trust A/c ` 40,50,000
(Being consideration for shares issued to the employees received in the form of employee
services adjusted against the relevant account)
3. The Share Capital Account and the Securities Premium Account are disclosed in the
balance sheet as below:
Liabilities Amount (` .)
Share Capital
Paid-up Capital:
12,70,000 equity shares of ` 10 each fully paid (Of the above, 1,27,00,000
2,70,000 shares of ` 10 each have been issued to the employees
(through ESOP Trust) pursuant to an Employee Share-based
Payment Plan. The issue price of the share was ` 65 per share
out of which ` 15 per share were received in the form of
employee services over a period of one year).

For the purpose of calculating Basic EPS, shares allotted to the ESOP Trust pursuant to the
employee share-based payment plan would not be included in the shares outst anding till
the employees have exercised their right to obtain shares, after fulfilling the requisite

vesting conditions. Till such time, the shares so allotted would be considered as dilutive
potential equity shares for the purpose of calculating Diluted EPS.
Illustration 3: Enterprise Provides Finance to the ESOP Trust to Purchase Shares from
the Market at the beginning of the Plan
Continuing Illustration 2 above, suppose the enterprise does not issue fresh shares to the
ESOP Trust. Instead, it provides finance, at the grant date, to the trust to purchase shares
of the enterprise from the market, equivalent to the number of shares expected to vest.
With the help of finance provided by the enterprise, the ESOP Trust purchases 2,70,000
shares from the market @ ` 52 per share at the beginning of the plan. The other facts
remain the same as in Illustration 2 above.
Year 1
1. The enterprise passes the following entry to record provision of finance
[` 1,40,40,000 (i.e., 2,70,000 shares x ` 52)] to the ESOP trust:
Amount recoverable from ESOP Trust A/c Dr. ` 1,40,40,000
To Bank A/c ` 1,40,40,000
(Being finance provided to the ESOP trust for purchase of shares in respect of the ESOP)
2. The enterprise passes the following entry at the end of the year to recognise the
employee services received during the year:
3. Credit balance in the ‘Stock Options Outstanding Account’ is disclosed on the
liability side of the balance sheet under a separate heading, between ‘Share Capital’ and
‘Reserves and Surplus’. Debit balance in the ‘Amount recoverable from ESOP Trust
Account’ is disclosed on the asset side under a separate heading, between the
‘Investments’ and the ‘Current Assets, Loans and Advances’. On this basis, the relevant
extracts of the balance sheet appear as below:
Share Capital
Paid-up Capital:
Assets Amount (`)
Investments —
Amount recoverable from ESOP Trust 1,40,40,000

Current Assets, Loans and Advances —
4. Apart from the other required disclosures, the enterprise gives a suitable note in the
‘Notes to Accounts’ to explain the transaction and the nature of th e ‘Amount recoverable
from ESOP Trust’.
Year 2
1. On exercise of the right to obtain shares by the employees, the ESOP trust issues
shares to the respective employees after receiving the exercise price. The exercise price so
received is passed on to the enterprise.
The amount received, in this manner, is ` 1,35,00,000 (i.e., 900 employees x 300 options x
` 50). The enterprise passes the following entry to record the receipt of the exercise price:
Bank A/c Dr. ` 1,35,00,000
To Amount recoverable from ESOP Trust A/c ` 1,35,00,000
(Being amount received from the ESOP trust against the finance provided to it in respect
of the Employee Stock Option Plan)
2. The enterprise transfers an amount equivalent to the difference between the cost of
shares to the ESOP Trust and the exercise price from the ‘Stock Options Outstanding
Account’ to the ‘Amount recoverable from ESOP Trust Account’. In the present case, there
is a difference of ` 2 per share (i.e., ` 52 – ` 50) between the cost of shares and the
exercise price. The number of shares issued to the employees is 2,70,000. The enterprise,
accordingly, transfers an amount of ` 5,40,000 from the ‘Stock Options Outstanding
Account’ to the ‘Amount recoverable from ESOP Trust Account’ by passing t he following
entry:
To Amount recoverable from ESOP Trust A/c ` 5,40,000
(Being the difference between the cost of shares to the ESOP Trust and the exercise price
adjusted)
3. The balance of ` 35,10,000 (i.e., ` 40,50,000 – ` 5,40,000)
standing to the credit of the ‘Stock Options Outstanding Account’ is transferred to the
‘General Reserve’ by passing the following entry:
To General Reserve ` 35,10,000
(Being balance in the ‘Stock Options Outstanding Account’ transferred to the ‘General
Reserve’, at the end of the Employee Stock Option Plan)
4. The Share Capital Account, the Securities Premium Account and the General Reserve
are disclosed in the balance sheet as below:


Liabilities Amount
(`)
Share Capital
Paid-up Capital:
10,00,000 equity shares of ` 10 each fully paid 1,00,00,000
General Reserve xx,xx,xxx
Add: Amount transferred from the Stock
Options Outstanding Account 35,10,000 yy,yy,yyy
5. The enterprise gives a suitable note in the ‘Notes to Accounts’ to explain the nature
of the addition of ` 35,10,000 made in the ‘General Reserve’.
In this case, the enterprise does not issue any new shares either at the beginning of the
Employee Stock Option Plan or on exercise of stock options by the employees. Instead,
the ESOP Trust purchases the shares from the market at the beginning of the plan and
the employees exercising options vested in them are granted shares out of the shares so
purchased. The shares purchased by the Trust represent the shares that have already
been issued by the enterprise and the same should continue to be included in the shares
outstanding for the purpose of calculating Basic EPS as would have been done prior to
the purchase of the shares by the Trust. Since the exercise of stock options granted under
the plan does not result into any fresh issue of shares, the stock options granted would
not be considered as dilutive potential equity shares for the purpose of calculating
Diluted EPS.
Appendix VIII
Illustration:
At the beginning of year 1, an enterprise grants 300 stock options to each of its 1,000
enterprise for two years. The fair value of the stock options, at the date of grant, is ` 10
per option and the exercise price is ` 50 per share. The other relevant terms of the grant
and assumptions are as below:
(a) The number of employees expected to complete two years vesting period, at the
beginning of the plan, is 900. 50 employees are expected to leave during the each of
the year 1 and year 2 and, consequently, the options granted to them are expected
to be forfeited.

(b) Actual forfeitures, during the vesting period, are equal to the expected forfeitures
and 900 employees have actually completed two-years vesting period.
(c) The profit of the enterprise for the year 1 and year 2, before amortisation of
compensation cost on account of ESOPs, is ` 25,00,000 and ` 28,00,000 respectively.
(d) The fair value of shares for these years was ` 57 and `.60 respectively.
(e) The enterprise has 5,00,000 shares of ` 10 each outstanding at the end of year 1 and
year 2.
Compute the Basic and Diluted EPS, ignoring tax impacts, for the year 1 and year 2.
Suggested Computations
(a) The stock options granted to employees are not included in the shares outstanding
till the employees have exercised their right to obtain shares or stock options, after
fulfilling the requisite vesting conditions. Till such time, the stock options so granted
are considered as dilutive potential equity shares for the purpose of calculating
Diluted EPS. At the end of each year, computations of diluted EPS are based on the
actual number of options granted and not yet forfeited.
(b) For calculating diluted EPS, no adjustment is made to the net profit attributable to
equity shareholders as there are no expense or income that would result from
conversion of ESOPs to the equity shares.
(c) For calculating diluted EPS, the enterprise assumes the exercise of dilutive options.
The assumed proceeds from these issues are considered to have been received from
the issue of shares at fair value. The difference between the number of shares
issuable and the number of shares that would have been issued at fair value are
treated as an issue of equity shares for no consideration
(d) As per paragraph 47 of this Guidance Note, the assumed proceeds to be included for
computation, mentioned at (c) above, include (i) the exercise price; and (ii) the
unamortized compensation cost related to these ESOPs, attributable to future
services.
(e) The enterprise calculates the basic and diluted EPS as below:
Particulars Year 1 Year 2
Net profit before amortisation of ESOP
cost ` 25,00,000 ` 28,00,000
Less: Amortisation of ESOP cost (` 13,50,000) (` 13,50,000)
[(900 employees × 300 options × ` 10)/2]
Net profit attributable to equity shareholders ` 11,50,000 ` 14,50,000
Number of shares outstanding 5,00,000 5,00,000
Basic EPS ` 2.30 ` 2.90
Number of options outstanding (Options
granted less actual forfeitures) 2,85,000 2,70,000

[1,000 employees [2,85,000× 300

options – options – (50 employees (50
employees
× 300 options)] × 300 options)]
Unamortised compensation cost per `5 `0
option [` 10 – ` 10/2]
Number of dilutive potential equity 10,000 45,000
shares [2,85,000 – [2,70,000 –({(2,85,000 * 50)
(2,70,000 + (2,85,000 * 50)/60)]* 5)}/57)]
No. of equity shares used to compute
diluted earnings per share 5,10,000 5,45,000
Diluted EPS ` 2.255 ` 2.66
Appendix IX
Illustrative Disclosures
An example has been given in this appendix to illustrate the disclosure requirements in
paragraphs 49 to 52 of the text of the Guidance Note. The students are advised to refer this
appendix from the compendium of Guidance Notes.

Guidance Note on Accounting for Credit Available in respect
of Minimum Alternative Tax under the Income-tax Act, 1961
(The following is the text of the Guidance Note on Accounting for Credit Available in
Respect of Minimum Alternative Tax Under the Income-tax Act,1961, issued by the Council
of the Institute of Chartered Accountants of India.)
Introduction
1. The Finance Act, 1997, introduced section 115JAA in the Income -tax Act, 1961
(hereinafter referred to as the ‘Act’) providing for tax credit in respect of MAT paid under
section 115JA (hereinafter referred to as ‘MAT credit’) which could be carried forward for
set-off for five succeeding years in accordance with the provisions of the Act. Section
115JA was inserted by the Finance Act, 1996, w.e.f. 1.4.1997. The said section provided for
payment of Minimum Alternative Tax (hereinafter referred to as ‘MAT’) by certain
companies, where the total income, as computed under the Income -tax Act, 1961, in
respect of any previous year relevant to the assessment year commencing on or after 1st
day of April, 1997, but before the 1st day of April, 2001, was less than 30% of its book
profit. In such a case, the total income of the company chargeable to tax for the relevant
previous year was deemed to be an amount equal to thirty per cent of its book profit.
2. The Finance Act, 2000, w.e.f. 1.4.2001, introduced section 115JB according to which a
company is liable to pay MAT under the provisions of the said section in respect of any
previous year relevant to the assessment year commencing on or after the 1st day of
April, 2001. The MAT under this section is payable where the normal income -tax payable
by such company in the previous year is less than 7.5 per cent (10 per cent prop osed by
the Finance Bill, 2006) of its book profit which is deemed to be the total income of the
company. Such company is liable to pay income-tax at the rate of 7.5 per cent (10 per
cent proposed by the Finance Bill, 2006) of its book profit.
The Finance Act, 2005, inserted sub-section (1A) to section 115JAA, to grant tax credit in
respect of MAT paid under section 115JB of the Act with effect from assessment year
2006-07.
3. The salient features of MAT credit under section 115JAA as applicable, in respect of tax
paid under sections 115JA and 115JB, are as below:
(a) A company, which has paid MAT, would be allowed credit in respect thereof.
(b) The amount of MAT credit would be equal to the excess of MAT over normal
income-tax for the assessment year for which MAT is paid.
(c) No interest is allowable on such credit.
(d) The MAT credit so determined can be carried forward for set -off for five succeeding
assessment years from the year in which MAT credit becomes allowable. The Finance
Bill, 2006, has proposed that credit in respect of MAT paid under section 115JB can
be carried forward upto seven succeeding assessment years (hereinafter referred to
as the ‘specified period’).
(e) The amount of MAT credit can be set-off only in the year in which the company is
liable to pay tax as per the normal provisions of the Act and such tax is in excess of
MAT for that year.
(f) The amount of set-off would be to the extent of excess of normal income-tax over
the amount of MAT calculated as if section 115JB had been applied for that
assessment year for which the set-off is being allowed.
Accounting Treatment
Whether MAT credit is a deferred tax asset
4. An issue has been raised whether the MAT credit can be considered as a deferred tax
asset within the meaning of Accounting Standard (AS) 22, Accounting for Taxes on
Income, issued by the Institute of Chartered Accountants of India. In this context, the
following definitions given in AS 22 are noted:
“Timing differences are the differences between taxable income and accounting income
for a period that originate in one period and are capable of reversal in one or more
subsequent periods.”
“Accounting income (loss) is the net profit or loss for a period, as reported in the
statement of profit and loss, before deducting income tax expense or adding income tax
saving.”
“Taxable income (tax loss) is the amount of the income (loss) for a period, determined
in accordance with the tax laws, based upon which income tax payable (recoverable) is
determined.”
5. From the above, it is noted that payment of MAT, does not by itself, result in any
timing difference since it does not give rise to any difference between the accounting
income and the taxable income which are arrived at before adjusting the tax expense,
namely, MAT. In other words, under AS 22, deferred tax asset and deferred tax liability
arise on account of differences in the items of income and expenses credited or charged
in the profit and loss account as compared to the items of income that are taxed or items
of expense that are allowed as deduction, for the purposes of the Act. Thus, deferred tax
assets and deferred tax liabilities do not arise on account of the amount of the tax
expense itself. In view of this, it is not appropriate to consider MAT credit as a deferred
tax asset for the purposes of AS 22.
Whether MAT credit can be considered as an ‘asset’
6. Although MAT credit is not a deferred tax asset under AS 22 as discussed above, yet
it gives rise to expected future economic benefit in the form of adjustment of futu re
income tax liability arising within the specified period. A question, therefore, arises
whether the MAT credit can be considered as an ‘asset’ and in case it can be considered
as an asset whether it should be so recognised in the financial statements.
7. The Framework for the Preparation and Presentation of Financial Statements, issued
by the Institute of Chartered Accountants of India, defines the term ‘asset’ as follows:
“An asset is a resource controlled by the enterprise as a result of past events from which
future economic benefits are expected to flow to the enterprise.”
8. MAT paid in a year in respect of which the credit is allowed during the specified
period under the Act is a resource controlled by the company as a result of past event,
namely, the payment of MAT. MAT credit has expected future economic benefits in the
form of its adjustment against the discharge of the normal tax liability if the same arises
during the specified period.
Accordingly, MAT credit is an ‘asset’.
9. According to the Framework, once an item meets the definition of the term ‘asset’, it
has to meet the criteria for recognition of an asset so that it may be recognised as such in
the financial statements. Paragraph 88 of the Framework provides the following criteria
for recognition of an asset:
“88. An asset is recognised in the balance sheet when it is probable that the future economic
benefits associated with it will flow to the enterprise and the asset has a cost or value that can
be measured reliably.”
10. In order to decide when it is ‘probable’ that the future economic benefits associated
with the asset will flow to the enterprise, paragraph 84 of the Framework, inter alia,
provides as below:
“84. The concept of probability is used in the recognition criteria to re fer to the degree of
uncertainty that the future economic benefits associated with the item will flow to or from
the enterprise. The concept is in keeping with the uncertainty that characterises the
environment in which an enterprise operates. Assessments of the degree of uncertainty
attaching to the flow of future economic benefits are made on the basis of the evidence
available when the financial statements are prepared.”
11. The concept of probability as contemplated in paragraph 84 of the Framework
relates to both items of assets and liabilities and, therefore, the degree of uncertainty for
recognition of assets and liabilities may vary keeping in view the consideration of
‘prudence’. Accordingly, while for recognition of a liability the degree of uncert ainty to be
considered ‘probable’ can be ‘more likely than not’ (as in paragraph 22 of Accounting
Standard (AS) 29, ‘Provisions, Contingent Liabilities and Contingent Assets’) for
recognition of an asset, in appropriate conditions, the degree may have to b e higher than
that. Thus, for the purpose of consideration of the probability of expected future
economic benefits in respect of MAT credit, the fact that a company is paying MAT and
not the normal income tax, provides a prima facie evidence that normal income tax
liability may not arise within the specified period to avail MAT credit. In view of this, MAT
credit should be recognised as an asset only when and to the extent there is convincing
evidence that the company will pay normal income tax during the s pecified period. Such
evidence may exist, for example, where a company has, in the current year, a deferred tax
liability because its depreciation for the income-tax purposes is higher than the
depreciation for accounting purposes, but from the next year o nwards, the depreciation
for accounting purposes would be higher than the depreciation for income -tax purposes,
thereby resulting in the reversal of the deferred tax liability to an extent that the company
becomes liable to pay normal income tax.
12. Where MAT credit is recognised as an asset in accordance with paragraph 11 above,
the same should be reviewed at each balance sheet date. A company should write down
the carrying amount of the MAT credit asset to the extent there is no longer a convincing
evidence to the effect that the company will pay normal income tax during the specified
period.
Presentation of MAT credit in the financial statements
Balance Sheet
13. Where a company recognises MAT credit as an asset on the basis of the
considerations specified in paragraph 11 above, the same should be presented under the
head ‘Loans and Advances’ since, there being a convincing evidence of realisation of the
asset, it is of the nature of a pre-paid tax which would be adjusted against the normal
income tax during the specified period. The asset may be reflected as ‘MAT credit
entitlement’.
14. In the year of set-off of credit, the amount of credit availed should be shown as a
deduction from the ‘Provision for Taxation’ on the liabilities side of the balance sheet. The
unavailed amount of MAT credit entitlement, if any, should continue to be presented
under the head ‘Loans and Advances’ if it continues to meet the considerations stated in

paragraph 11 above.
Profit and Loss Account
15. According to paragraph 6 of Accounting Standards Interpretation (ASI) ‘Accounting
for Taxes on Income in the context of Section 115JB of the Income -tax Act, 1961’, issued
by the Institute of Chartered Accountants of India, MAT is the current tax. Accordingly,
the tax expense arising on account of payment of MAT should be charged at the gross
amount, in the normal way, to the profit and loss account in the year of payment of MAT.
In the year in which the MAT credit becomes eligible to be recognised as an asset in
accordance with the recommendations contained in this Guidance Note, the said asset
should be created by way of a credit to the profit and loss account and presented as a
separate line item therein.
GN(A) 23 (Revised 2012)
Guidance Note on Accounting for Real Estate Transactions

(The following is the text of the Guidance Note on Accounting for Real Estate
Transactions, issued by the Council of the Institute of Chartered Accountants of India.)
1. Objective and Scope
Objective
1.1 The objective of this Guidance Note is to recommend the accounting treatment by
enterprises dealing in ‘Real Estate’ as sellers or developers. The term ‘real estate’ refers to
land as well as buildings and rights in relation thereto. Enterprises who undertake such
activity are generally referred to by different terms such as ‘real estate developers’,
‘builders’ or ‘property developers’.
Scope
1.2 This Guidance Note covers all forms of transactions in real estate. An illustrative list
of transactions which are covered by this Guidance Note is as under:
(a) Sale of plots of land (including long term sale type leases) without any development.
(b) Sale of plots of land (including long term sale type leases) with development in the
form of common facilities like laying of roads, drainage lines and w ater pipelines,
electrical lines, sewage tanks, water storage tanks, sports facilities, gymnasium, club
house, landscaping etc.
(c) Development and sale of residential and commercial units, row houses, independent
houses, with or without an undivided share in land.
(d) Acquisition, utilisation and transfer of development rights.
(e) Redevelopment of existing buildings and structures.
(f) Joint development agreements for any of the above activities.

1.3 The Guidance Note primarily provides guidance on application of percentage of

completion method where it is appropriate to apply this method as explained in
subsequent paragraphs as such transactions and activities of real estate have the same
economic substance as construction contracts. For this purpose, the Guidance Note draws
upon the principles enunciated in Accounting Standard (AS) 7, Construction Contracts. In
respect of transactions of real estate which are in substance similar to delivery of goods
principles enunciated in Accounting Standard (AS) 9, Revenue Recognition, are applied.
1.4 Real estate transactions of the nature covered by Accounting Standard (AS) 10,
Accounting for Fixed Assets, Accounting Standard (AS) 12, Accounting for Government
Grants, Accounting Standard (AS) 19, Leases, and Accounting Standard (AS) 26, Intangible
Assets, are outside the scope of this Guidance Note.
1.5 This Guidance Note should be applied to all projects in real estate which are
commenced on or after April 1, 2012 and also to projects which have alr eady commenced
but where revenue is being recognised for the first time on or after April 1, 2012. An
enterprise may choose to apply this Guidance Note from an earlier date provided it
applies this Guidance Note to all transactions which commenced or were entered into on
or after such earlier date. This Guidance Note supersedes the Guidance Note on
Recognition of Revenue by Real Estate Developers, issued by the Institute of Chartered
Accountants of India in 2006, when this Guidance Note is applied as above.
2. Definitions
2.1 Project – Project is the smallest group of units/plots/saleable spaces which are
linked with a common set of amenities in such a manner that unless the common
amenities are made available and functional, these units /plots / saleabl e spaces cannot
be put to their intended effective use.
A larger venture can be split into smaller projects if the basic conditions as set out above
are fulfilled. For example, a project may comprise a cluster of towers or each tower can
also be designated as a project. Similarly, a complete township can be a project or it can
be broken down into smaller projects.
2.2 Project Costs – Project costs in relation to a project ordinarily comprise:
(a) Cost of land and cost of development rights -All costs related to the acquisition of
land, development rights in the land or property including cost of land, cost of
development rights, rehabilitation costs, registration charges, stamp duty, brokerage
costs and incidental expenses.
(b) Borrowing Costs – In accordance with Accounting Standard (AS) 16, Borrowing Costs
which are incurred directly in relation to a project or which are apportioned to a project.
(c) Construction and development costs – These would include costs that relate directly
to the specific project and costs that may be attributable to project activity in general and
can be allocated to the project.

2.3 Construction costs and development costs that relate directly to a specific
project include:
(a) land conversion costs, betterment charges, municipal sanction fee and other charges
for obtaining building permissions;
(b) site labour costs, including site supervision;
(c) costs of materials used in construction or development of property;
(d) depreciation of plant and equipment used for the project;
(e) costs of moving plant, equipment and materials to and from the project site;
(f) costs of hiring plant and equipment;
(g) costs of design and technical assistance that is directly related to the project;
(h) estimated costs of rectification and guarantee work, including expected warranty
costs; and
(i) claims from third parties.
2.4 The following costs should not be considered part of construction costs and
development costs if they are material:
(a) General administration costs;
(b) selling costs;
(c) research and development costs;
(d) depreciation of idle plant and equipment;
(e) cost of unconsumed or uninstalled material delivered at site; and
(f) payments made to sub-contractors in advance of work performed.
2.5 Costs that may be attributable to project activity in general and can be
allocated to specific projects include:
(a) insurance;
(b) costs of design and technical assistance that is not directly related to a specific
project; and
(c) construction or development overheads; and
(d) borrowing costs.
Such costs are allocated using methods that are systematic and rational and are applied
consistently to all costs having similar characteristics. The allocation is based on the normal
level of project activity. Construction overheads include costs such as the preparation and
processing of construction personnel payroll.
2.6 Project revenues – Project revenues include revenue on sale of plots, undivided
share in land, sale of finished and semi-finished structures, consideration for
construction, consideration for amenities and interiors, consideration for parking
spaces and sale of development rights.
Project revenues are measured as the consideration received or receivable. The

measurement of project revenues is affected by a variety of uncertainties that depend on
the outcome of future events. The estimates often need revision as events occur and
uncertainties are resolved. Therefore, the amount of project revenue may increase or
decrease from one reporting period to the next.
3. Accounting for Real Estate Transactions
3.1 Real estate activities and transactions take diverse forms. While some are for sale of
land (developed or undeveloped), others are for construction, development or sale of units
that are not complete at the time of entering into agreements for construction,
development or sale.
3.2 The typical features of most construction/development of commercial and residential
units have all features of a construction contract – land development, structural
engineering, architectural design and construction are all present. The natures of these
activities are such that often the date when the activity is commenced and the date when
the activity is completed usually fall into different accounting periods. It is not unusual for
such activities to spread over two or more accounting periods.
3.3 For recognition of revenue in case of real estate sales, it is necessary that all the
conditions specified in paragraphs 10 and 11 of Accounting Standard (AS) 9, Revenue
Recognition, are satisfied. As stated above, real estate sales take place in a variety of ways
and may be subject to different terms and conditions as specified in the agreement for
sale. Accordingly, the point of time at which all significant risks and rewards of ownership
can be considered as transferred, is required to be determined on the basis of the terms
and conditions of the agreement for sale. In case of real estate sales, the seller usually
enters into an agreement for sale with the buyer at initial stages of construction. This
agreement for sale is also considered to have the effect of transferring all significant risks
and rewards of ownership to the buyer provided the agreement is legally enforceable and
subject to the satisfaction of conditions which signify transferring of significant risks and
rewards even though the legal title is not transferred or the possession of the real estate is
not given to the buyer. Once the seller has transferred all the significant risks and rewards
to the buyer, any acts on the real estate performed by the seller are, in substance,
performed on behalf of the buyer in the manner similar to a contractor. Accordingly,
revenue in such cases is recognised by applying the percentage of completion method
on the basis of the methodology explained in AS 7, Construction Contracts.
Further, where individual contracts are part of a single project, although risks and rewards
may have been transferred on signing of a legally enforceable individual contract but
significant performance in respect of remaining components of the project is
pending, revenue in respect of such an individual contract should not be recognised
until the performance on the remaining components is considered to be completed
on the basis of the aforesaid principles. This Guidance Note, thus, provides guidance
in the application of:

• Principles of AS 9 in respect of sale of goods for recognising revenue, costs and

profits from transactions of real estate which are in substance similar to delivery of
goods where the revenues, costs and profits are recognised when the revenue
recognition process is completed; and
• Percentage completion method for recognising revenue, costs and profits from
transactions and activities of real estate which have the same economic substance
as construction contracts.
3.4 The application of the methods described in paragraph 3.3 above requires a careful
analysis of the elements of the transaction, agreement, understanding and conduct of
the parties to the transaction to determine the economic substance of the
transaction. The economic substance of the transaction is not influenced or affected by the
structure and/or legal form of the transaction or agreement.
4. Application of Principles of AS 9 in Respect of Sale of Goods to a Real Estate
Project
4.1 The application of principles of AS 9 in respect of sale of goods requires recognition
of revenues on completion of the transaction/activity when the revenue recognition
process in respect of a real estate project is completed as explained in paragraph 4.2
below.
4.2 The completion of the revenue recognition process is usually identified when the
following conditions are satisfied:
(a) The seller has transferred to the buyer all significant risks and rewards of ownership
and the seller retains no effective control of the real estate to a degree usually associated
with ownership;
(b) The seller has effectively handed over possession of the real estate unit to the
buyer forming part of the transaction;
(c) No significant uncertainty exists regarding the amount of consideration that
will be derived from the real estate sales; and
(d) It is not unreasonable to expect ultimate collection of revenue from buyers.
4.3 Where transfer of legal title is a condition precedent to the buyer taking on the
significant risks and rewards of ownership and accepting significant completion of the
seller’s obligation, revenue should not be recognised till such time legal title is validly
transferred to the buyer.
5. Application of Percentage Completion Method
5.1 The percentage completion method should be applied in the accounting of all real
estate transactions/activities in the situations described in paragraph 3.3 above, i.e.,
where the economic substance is similar to construction contracts. Some further
indicators of such transactions/activities are:

(a) The duration of such projects is beyond 12 months and the project commencement
date and project completion date fall into different accounting periods.
(b) Most features of the project are common to construction contracts, viz., land
development, structural engineering, architectural design, construction, etc.
(c) While individual units of the project are contracted to be delivered to different buyers
these are interdependent upon or interrelated to completion of a number of common
activities and/or provision of common amenities.
(d) The construction or development activities form a significant proportion of the
project activity.
5.2 This method is applied when the outcome of a real estate project can be estimated
reliably and when all the following conditions are satisfied:
(a) total project revenues can be estimated reliably;
(b) it is probable that the economic benefits associated with the project will flow to the
enterprise;
(c) the project costs to complete the project and the stage of project completion at the
reporting date can be measured reliably; and
(d) the project costs attributable to the project can be clearly identified and measured
reliably so that actual project costs incurred can be compared with prior estimates.
When the outcome of a project can be estimated reliably, project revenues and project
costs associated with the project should be recognised as revenue and expenses
respectively applying the percentage of completion method in the manner detailed in
paragraphs 5.3 to 5.8 below.
5.3 Further to the conditions in paragraph 5.2 there is a rebuttable presumption that
the outcome of a real estate project can be estimated reliably and that revenue should be
recognised under the percentage completion method only when the events in (a) to (d)
below are completed.
(a) All critical approvals necessary for commencement of the project have been obtained.
These include, wherever applicable:
(i) Environmental and other clearances.
(ii) Approval of plans, designs, etc.
(iii) Title to land or other rights to development/ construction.
(iv) Change in land use.
(b) When the stage of completion of the project reaches a reasonable level of development. A
reasonable level of development is not achieved if the expenditure incurred on construction and
development costs is less than 25% of the construction and development costs as defined in
paragraph 2.2 (c) read with paragraphs 2.3 to 2.5.
(c) Atleast 25% of the saleable project area is secured by contracts or agreements with
buyers.
(d) Atleast 10 % of the total revenue as per the agreements of sale or any other legally
enforceable documents are realised at the reporting date in respect of each of
the contracts and it is reasonable to expect that the parties to such contracts will
comply with the payment terms as defined in the contracts. To illustrate - If there are 10
Agreements of sale and 10 % of gross amount is realised in case of 8 agreements, revenue
can be recognised with respect to these 8 agreements.
5.4 When the outcome of a real estate project can be estimated reliably and the
conditions stipulated in paragraphs 5.2 and 5.3 are satisfied, project revenue and project
costs associated with the real estate project should be recognised as revenue and
expenses by reference to the stage of completion of the project activity at the reporting
date. For computation of revenue the stage of completion is arrived at with reference to the
entire project costs incurred including land costs, borrowing costs and construction and
development costs as defined in paragraph 2.2. Whilst the method of determination of
stage of completion with reference to project costs incurred is the preferred method, this
Guidance Note does not prohibit other methods of determination of stage of completion,
e.g., surveys of work done, technical estimation, etc. However, computation of
revenue with reference to other methods of determination of stage of completion should
not, in any case, exceed the revenue computed with reference to the ‘project costs
incurred’ method. Illustration appended to this Guidance Note clarifies the method of
computation of revenue.
5.5 The project costs which are recognised in the statement of profit and loss by
reference to the stage of completion of the project activity are matched with the revenues
recognised resulting in the reporting of revenue, expenses and profit which can be
attributed to the proportion of work completed. Costs incurred that relate to future activity
on the project and payments made to subcontractors in advance of work performed
under the sub-contract are excluded and matched with revenues when the activity or work
is performed. This method provides useful information to the extent of contract activity
and performance during a period.
5.6 The recognition of project revenue by reference to the stage of completion of the
project activity should not at any point exceed the estimated total revenues from ‘eligible
contracts’/other legally enforceable agreements for sale. ‘Eligible contracts’ means
contracts/ agreements specified in paragraph 5.3 where at least 10% of the contracted
amounts have been realised and there are no outstanding defaults of the payment terms
in such contracts.
5.7 When it is probable that total project costs will exceed total eligible project revenues,
the expected loss should be recognised as an expense immediately. The amount of such a
loss is determined irrespective of:
(a) commencement of project work; or
(b) the stage of completion of project activity.
5.8 The percentage of completion method is applied on a cumulative basis in each
reporting period to the current estimates of project revenues and project costs. Therefore,

the effect of a change in the estimate of project costs, or the effect of a change in the
estimate of the outcome of a project, is accounted for as a change in accounting
estimate. The changed estimates are used in determination of the amount of
revenue and expenses recognised in the statement of profit and loss in the period in
which the change is made and in subsequent periods.
5.9 The changes to estimates referred to in paragraph 5.8 above also include changes
arising out of cancellation of contracts and cases where the property or part thereof is
subsequently earmarked for own use or for rental purposes. In such cases any revenues
attributable to such contracts previously recognised should be reversed and the costs in
relation thereto shall be carried forward and accounted in accordance with AS 10,
Accounting for Fixed Assets.
6. Accounting for Sale of Land or Plots
A. Sale of plots of land without any development
Revenue from sale of land or plots should be recognised when all the conditions in
paragraph 4.2 above are met.
B. Sale of developed plots
Where the development activity is significant and if the projects meet the criteria specified
in paragraphs 3.3 and 5.1 above, the percentage completion method is used to account
for such sales.
7. Transferable Development Rights
7.1 Transferable Development Rights (TDRs) are generally acquired in different ways
as mentioned hereunder:
(a) Direct purchase.
(b) Development and construction of built-up area.
(c) Giving up of rights over existing structures or open land.
7.2 When development rights are acquired by way of direct purchase or on development
or construction of built- up area, cost of acquisition would be the cost of purchases or
amount spent on development or construction of built-up area, respectively. Where
development rights are acquired by way of giving up of rights over existing structures or
open land, the development rights should be recorded either at fair market value or at the
net book value of the portion of the asset given up whichever is less. For this purpose,
fair market value may be determined by reference either to the asset or portion thereof
given up or to the fair market value of the rights acquired whichever is more clearly
evident.
7.3 When development rights are utilised in a real estate project by an enterprise,
the cost of acquisition should be added to the project costs.
7.4 When development rights are sold or transferred, revenue should be recognised
when both the following conditions are fulfilled:
(a) title to the development rights is transferred to the buyer; and
(b) it is not unreasonable to expect ultimate realisation of revenue.

8. Transactions with Multiple Elements
8.1 An enterprise may contract with a buyer to deliver goods or services in addition to the
construction/development of real estate [e.g. property management services, sale of
decorative fittings (excluding fittings which are an integral part of the unit to be
delivered), rental in lieu of unoccupied premises, etc.]. In such cases, the contract
consideration should be split into separately identifiable components including one for the
construction and delivery of real estate units.
8.2 The consideration received or receivable for the contract should be allocated to
each component on the basis of the fair market value of each component.
8.3 The accounting of each of the components should be in accordance with paragraph
3.3 above.
9. Disclosure
9.1 An enterprise should disclose:
(a) the amount of project revenue recognised as revenue in the reporting period;
(b) the methods used to determine the project revenue recognised in the reporting
period; and
(c) the method used to determine the stage of completion of the project.
9.2 An enterprise should also disclose each of the following for projects in progress at
the end of the reporting period:
(a) the aggregate amount of costs incurred and profits recognised (less recognised losses)
to date; and
(b) the amount of advances received;
(c) the amount of work in progress and the value of inventories;
(d) Excess of revenue recognised over actual bills raised (unbilled revenue).
Illustration on application of percentage completion method
Total saleable area 20,000 Sq. ft. Estimated Project Costs (This comprises
land cost of ` 300 Lakhs and construction
costs of ` 300 Lakhs) ` 600 lakhs
Cost incurred till end of reporting period
(This includes land cost of ` 300 lakhs and
construction cost of ` 60 Lakhs) ` 360 Lakhs
Total Area Sold till the date of reporting period 5,000 Sq. ft.
Total Sale Consideration as per Agreements
of Sale executed ` 200 Lakhs
Amount realised till the end of the reporting `50 Lakhs period
Percentage of completion of work 60% of total project cost including

land cost or
20% of total construction cost
At the end of the reporting period the enterprise will not be able to recognise any
revenue as reasonable level of construction, which is 25% of the total construction cost,
has not been achieved, though 10% of the agreement amount has been realised.
Continuing the illustration
If the work completed till end of reporting period is
(This includes land cost of ` 300 Lakhs and
construction cost of ` 90 lakhs) ` 390 Lakhs
Percentage of completion of work would be 65% of total project cost including
land cost or
30% of construction cost
The enterprise would be able to recognise revenues at the end of the accounting period.
The revenue recognition and profits would be as under:
Revenue recognised
(65 % of ` 200 lakhs as per Agreement of Sale) ` 130 Lakhs
Proportionate cost (5000 sft./20,000 sft.) X 390 ` 97.50 Lakhs Income from the project
` 32.50 Lakhs Work in progress to be carried forward ` 292.50 Lakhs

Guidance Note on Turnover in Case of Contractors
(The following is the text of the ‘Guidance Note on Turnover in case of Contractors’, issued
by the Council of the Institute of Chartered Accountants of India. Pursuant to the issuance
of this Guidance Note, Accounting Standards Interpretation (ASI) 29 – ‘Turnover in case of
Contractors (Re. AS 7)’, stands withdrawn.)
Introduction
1. This Guidance Note deals with the issue whether the revenue recognised in the
financial statements of contractors as per the requirements of Accounting Standard
(AS) 7, Construction Contracts (revised 2002), can be considered as ‘turnover’.
 This Guidance Note was earlier issued as Accounting Standards Interpretation (ASI) 29, ‘Turnover in case
of Contractors (Re. AS 7)’ by the Institute of Chartered Accountants of India (ICAI). While the Accounting
Standards notified by the Central Government under the Companies (Accounting Standards) Rules, 2006,
have incorporated the ‘Consensus’ part of various ASIs issued by the ICAI, ASI 29 has not been so
incorporated as it was felt that it is primarily clarificatory in nature. The Council of the ICAI, has accordingly,
decided to withdraw ASI 29, and issue the same as a Guidance Note as it provides appropriate guidance
on the subject.
2. AS 7 (revised 2002) deals, inter alia, with revenue recognition in respect of

construction contracts in the financial statements of contractors. It requires
recognition of revenue by reference to the stage of completion of a contract
(referred to as ‘percentage of completion method’). This method results in reporting
of revenue which can be attributed to the proportion of work completed. Under this
method, contract revenue is recognised as revenue in the statement of profit and
loss in the accounting period in which the work is performed.
3. The paragraph dealing with the ‘Objective’ of AS 7 (revised 2002) provides as follows:
“Objective
The objective of this Statement is to prescribe the accounting treatment of revenue
and costs associated with construction contracts. Because of the nature of the
activity undertaken in construction contracts, the date at which the contract activity
is entered into and the date when the activity is completed usually fall into different
accounting periods. Therefore, the primary issue in accounting for construction
contracts is the allocation of contract revenue and contract costs to the accounting
periods in which construction work is performed. This Statement uses the
recognition criteria established in the Framework for the Preparation and
Presentation of Financial Statements to determine when contract revenue and
contract costs should be recognised as revenue and expenses in the statement of
profit and loss. It also provides practical guidance on the application of these
criteria.”
From the above, it may be noted that AS 7 (revised 2002) deals, inter alia, with the
allocation of contract revenue to the accounting periods in which construction w ork
is performed.
4. Further, paragraphs 21 and 31 of AS 7 (revised 2002) provide as follows:
“21. When the outcome of a construction contract can 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.”
“31. When the outcome of a construction contract cannot be estimated reliably:
(b) revenue should be recognised only to the extent of contract costs incurred
of which recovery is probable; and
(c) contract costs should be recognised as an expense in the period in which
they are incurred.
An expected loss on the construction contract should be recognised as an
expense immediately in accordance with paragraph 35.”
From the above, it may be noted that the recognition of revenue as per AS 7 (revis ed
2002) may be inclusive of profit (as per paragraph 21 reproduced above) or exclusive

of profit (as per paragraph 31 reproduced above) depending on whether the

outcome of the construction contract can be estimated reliably or not. 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, it is
recognised exclusive of profit. However, in either case it is considered as revenue as
per AS 7 (revised 2002).
5. ‘Revenue’ is a wider term. For example, within the meaning of Accounting Standard
(AS) 9, Revenue Recognition, the term ‘revenue’ includes revenue from sales
transactions, rendering of services and from the use by others of enterprise
resources yielding interest, royalties and dividends. The term ‘turnover’ is used in
relation to the source of revenue that arises from the principal revenue generating
activity of an enterprise. In case of a contractor, the construction activity is its
principal revenue generating activity. Hence, the revenue recognised in the
statement of profit and loss of a contractor in accordance with the principles laid
down in AS 7 (revised 2002), by whatever nomenclature described in the financial
statements, is considered as ‘turnover’.
Recommendation
6. The amount of contract revenue recognised as revenue in the statement of
profit and loss as per the requirements of AS 7 (revised 2002), should be
considered as ‘turnover’.
Guidance Note on the Schedule III to the Companies Act,

2013
1. Introduction
1.1 Schedule III to the Companies Act, 2013 (‘the Act’) provides the manner in which
every company registered under the Act shall prepare its Balance Sheet, Statement of
Profit and Loss and notes thereto. In the light of various economic and regulatory reforms
that have taken place for companies over the last several years, there was a need for
enhancing the disclosure requirements under the Old Schedule VI to the Act and
harmonizing and synchronizing them with the notified Accounting Standards as
applicable (‘AS’/‘Accounting Standard(s)’). Accordingly, the Ministry of Corporate Affairs
(MCA) had issued a revised form of Schedule VI on February 28, 2011 and this has formed
the basis for the Schedule III of Companies Act, 2013. As per the Act and rules /
notifications thereunder, the Schedule applies to all companies for the Financial
Statements to be prepared for the financial year commencing on or after April 1, 2014.
1.2 The requirements of the Schedule III however, do not apply to companies as
referred to in the proviso to Section 129(1) of the Act, i.e., any insurance or banking
company, or any company engaged in the generation or supply of electricity or to any
other class of company for which a form of Balance Sheet and Statement of Profit and
Loss has been specified in or under any other Act governing such class of company.
1.3 It may be clarified that for companies engaged in the generation and supply of
electricity, however, neither the Electricity Act, 2003, nor the rules framed thereunder,
prescribe any specific format for presentation of Financial Statements by an electricity
company. Section 1 (4) of the Companies Act states that the Companies Act will apply to
electricity companies, to the extent it is not inconsistent with the provisions of the Electricity
Act. Keeping this in view, Schedule III may be followed by such companies till the time any
other format is prescribed by the relevant statute.
2. Objective and Scope
2.1. The objective of this Guidance Note is to provide guidance in the preparation and
presentation of Financial Statements of companies in accordance with various aspects of
the Schedule III. However, it does not provide guidance on disclosure requirements under
Accounting Standards, other pronouncements of the Institute of Chartered Accountants
of India (ICAI), other statutes, etc.
2.2. In preparing this Guidance Note, reference has been made to the Accounting
standards notified under Section 133 of the Companies Act, 2013 read together with
Paragraph 7 of the Companies (Accounts) Rules, 2014 and various other pronouncements
of the ICAI. The primary focus of the Guidance Note has been to lay down broad
guidelines to deal with practical issues that may arise in the implementation of the
Schedule III.
2.3. As per the clarification issued by ICAI regarding the authority attached to the
Documents Issued by ICAI, “‘Guidance Notes’ are primarily designed to provide guidance to
members on matters which may arise in the course of their professional work and on which
they may desire assistance in resolving issues which may pose difficulty. Guidance Notes
are recommendatory in nature. A member should ordinarily follow recommendations in a
guidance note relating to an auditing matter except where he is satisfied that in the
circumstances of the case, it may not be necessary to do so. Similarly, while discharging his
attest function, a member should examine whether the recommendations in a guidan ce
note relating to an accounting matter have been followed or not. If the same have not been
followed, the member should consider whether keeping in view the circumstances of the
case, a disclosure in his report is necessary.”
3. Applicability
3.1. As per the Government Notification no. S.O. 902 (E) dated 26 th March, 2015, the
Schedule III is applicable for the Balance Sheet and Statement of Profit and Loss to be
prepared for the financial year commencing on or after April 1, 2014.
3.2. Early adoption of the Schedule III is not permitted since Schedule VI is a statutory
format.
3.3. The Schedule III requires that except in the case of the first Financial Statements
laid before the company after incorporation, the corresponding amounts for the

immediately preceding period are to be disclosed in the Financial Statements including

the Notes to Accounts. Accordingly, corresponding information will have to be presented
starting from the first year of application of the Schedule III. Thus for the Financial
Statements prepared for the year 2014-15(1stApril 2014to 31 st March 2015),
corresponding amounts need to be given for the financial year 2013 -14.
3.4. ICAI had earlier issued the Statement on the Amendments to Schedule VI to the
Companies Act, 1956 in March 1976 (as amended). Wherever guidance provided in this
publication is different from the guidance in the aforesaid Statement, this Guidance Note
will prevail.
3.5. Applicability of the Schedule III format to interim Financial Statements prepared by
companies in the first year of application of the Schedule:
Relevant paragraphs of AS-25 Interim Financial Reporting are quoted below:
“10. 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.
11. 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. Additional
line items or notes should be included if their omission would make the condensed interim
Financial Statements misleading.”
3.6. Accordingly, if a company is presenting condensed interim Financial Statements, its
format should also going forward conform to that used in the company’s most recent
annual Financial Statements, i.e., the Schedule III of Companies Act, 2013.
3.7. The format of Balance Sheet currently prescribed under Clause 41 to the Listing
Agreement is also based the format of Balance Sheet in the Schedule III.
3.8. The formats of the Balance Sheet and Statement of Profit and Loss prescribed under
the SEBI (Issue of Capital & Disclosure Requirements) Regulations 2009 (‘ICDR
Regulations’) is inconsistent with the format of the Balance Sheet/ Statement of Profit and
Loss in the Schedule III. However, the formats of Balance Sheet and Statement of Profit
and Loss under ICDR Regulations are “illustrative formats”. Accordingly, to make the data
comparable and meaningful for users, companies should use the Schedule III format to
present the restated financial information for inclusion in the offer document.
Consequently, among other things, this will involve classification of assets and liabilities
into current and non-current for earlier years presented as well.
Attention is also invited to the General Circular no 62/2011 date d 5 thSeptember 2011
issued by the Ministry of Company Affairs which clarifies that ‘the presentation of
Financial Statements for the limited purpose of IPO/FPO during the financial year 2011 -12
may be made in the format of the pre-Revised Schedule VI under the Companies Act,
1956. However, for period beyond 31 stMarch 2012, they would prepare only in the new
format as prescribed by the Schedule VI of the Companies Act, 1956’. In the absence of
similar clarification with regard to use of Revised Schedule VI vis-à-vis, for the periods
after 31 st March 2012, the Schedule III format will have to be adhered to, which is anyway,
similar to the Revised Schedule VI format under Companies Act 1956 for standalone
financials except for an additional disclosure requirement with respect to Corporate Social
Responsibility Expenditure.
4. Summary of Schedule III
4.1. Main principles
4.1.1. The Schedule III requires that if compliance with the requirements of the Act and/
or the notified Accounting Standards requires a change in the treatme nt or disclosure in
the Financial Statements as compared to that provided in the Schedule III, the
requirements of the Act and/ or the notified Accounting Standards will prevail over the
Schedule.
4.1.2. The Schedule III clarifies that the requirements mentioned therein for disclosure on
the face of the Financial Statements or in the notes are minimum requirements. Line
items, sub-line items and sub-totals can be presented as an addition or substitution on
the face of the Financial Statements when such presentation is relevant for understanding
of the company’s financial position and/or performance.
4.1.3. The terms used in the Schedule III will carry the meaning as defined by the
applicable Accounting Standards. For example, the terms such as ‘associate’, ‘related
parties’, etc. will have the same meaning as defined in Accounting Standards notified
under Companies (Accounting Standards) Rules, 2006.
4.1.4. In preparing the Financial Statements including the Notes to Accounts, a balance
will have to be maintained between providing excessive detail that may not assist users of
Financial Statements and not providing important information as a result of too much
aggregation.
4.1.5. All items of assets and liabilities are to be bifurcated between current and non -
current portions and presented separately on the face of the Balance Sheet. Such
classification was not required by the Old Schedule VI, but was introduced in the Revised
Schedule VI itself.
4.1.6. There is an explicit requirement to use the same unit of measurement uniformly
throughout the Financial Statements and notes thereon. Moreover, rounding off
requirements (where opted for) have been changed to eliminate the option of presenting
figures in terms of hundreds and thousands if turnover exceeds 100 crores.
4.2. Major changes related to the Balance sheet (brought in by Revised Schedule VI
onwards)
4.2.1. The Schedule III (and earlier, the Revised Schedule VI) prescribes only the vertical
format for presentation of Financial Statements. Thus, a company will now not have an
option to use horizontal format for the presentation of Financial Statements as prescribed
in Old Schedule VI.

4.2.2. Current and non-current classification has been introduced for presentation of
assets and liabilities in the Balance Sheet. The application of this classification will requi re
assets and liabilities to be segregated into their current and non -current portions. For
instance, current maturities of a long-term borrowing will have to be classified under the
head “Other current liabilities.”
4.2.3. Number of shares held by each shareholder holding more than 5 percent shares in
the company now needs to be disclosed. In the absence of any specific indication of the
date of holding, such information should be based on shares held as on the Balance
Sheet date.
4.2.4. Details pertaining to aggregate number and class of shares allotted for
consideration other than cash, bonus shares and shares bought back will need to be
disclosed only for a period of five years immediately preceding the Balance Sheet date
including the current year.
4.2.5. Any debit balance in the Statement of Profit and Loss will be disclosed under the
head “Reserves and surplus.” Earlier, any debit balance in Statement of Profit and Loss
carried forward after deduction from uncommitted reserves was required to be shown as
the last item on the Assets side of the Balance Sheet.
4.2.6. Specific disclosures are prescribed for Share Application money. The application
money not exceeding the capital offered for issuance and to the extent not refundable
will be shown separately on the face of the Balance Sheet. The amount in excess of
subscription or if the requirements of minimum subscription are not met will be shown
under “Other current liabilities.”
4.2.7. The term “sundry debtors” has been replaced with the term “trade receivables.”
‘Trade receivables’ are defined as dues arising only from goods sold or services rendered
in the normal course of business. Hence, amounts due on account of other contractual
obligations can no longer be included in the trade receivables.
4.2.8. The Old Schedule VI required separate presentation of debtors outstanding for a
period exceeding six months based on date on which the bill/invoice was raised whereas,
the Schedule III (and earlier, the Revised Schedule VI) requires separate disclosure of
trade receivables outstanding for a period exceeding six months from the date the
bill/invoice is due for payment.
4.2.9. “Capital advances” are specifically required to be presented separately under the
head “Loans & advances” rather than including elsewhere.
4.2.10. Tangible assets under lease are required to be separately specified under each
class of asset. In the absence of any further clarification, the term “under lease” should be
taken to mean assets given on operating lease in the case of lessor and assets held under
finance lease in the case of lessee.
4.2.11. In the Old Schedule VI, details of only capital commitments were required to be
disclosed. Under the Schedule III (and earlier, the Revised Schedule VI), other
commitments also need to be disclosed.

4.2.12. The Schedule III (and earlier, the Revised Schedule VI) requires disclosure of all
defaults in repayment of loans and interest to be specified in each case. Earlier, no such
disclosure was required in the Financial Statements. However, disclosures pertaining to
defaults in repayment of dues to a financial institution, bank and debenture holders
continue to be required in the report under Companies (Auditor’s Report) Order, 2015
(CARO).
4.2.13. The Schedule III (and earlier, the Revised Schedule VI) introduced a number of
other additional disclosures. Some examples are:
(a) Rights, preferences and restrictions attaching to each class of shares, including
restrictions on the distribution of dividends and the repayment of capital;
(b) Terms of repayment of long-term loans;
(c) In each class of investment, details regarding names of the bodies corporate in
whom investments have been made, indicating separately whether such bodies are
(i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special purpose
entities, and the nature and extent of the investment made in each such body
corporate (showing separately partly-paid investments);
(d) Aggregate provision for diminution in value of investments separately for current
and long-term investments;
(e) Stock-in-trade held for trading purposes, separately from other finished go ods.
4.3. Main changes related to Statement of Profit and Loss (brought in by Revised
Schedule VI and added to by Schedule III)
4.3.1. The name has been changed to “Statement of Profit and Loss” as against ‘Profit and
Loss Account’ as contained in the Old Schedule VI.
4.3.2. Unlike the Old Schedule VI, the Schedule III (and earlier Revised Schedule VI) lays
down a format for the presentation of Statement of Profit and Loss. This format of
Statement of Profit and Loss does not mention any appropriation item on its face.
Further, the Schedule III (and earlier Revised Schedule VI) format prescribes such ‘below
the line’ adjustments to be presented under “Reserves and Surplus” in the Balance Sheet.
4.3.3. In addition to specific disclosures prescribed in the Statement of Profit and Loss,
any item of income or expense which exceeds one percent of the revenue from
operations or ` 100,000 (earlier 1 % of total revenue or ` 5,000), whichever is higher,
needs to be disclosed separately.
4.3.4. The Old Schedule VI required the parent company to recognize dividends declared
by subsidiary companies even after the date of the Balance Sheet if they were pertaining
to the period ending on or before the Balance Sheet date. Such requirement no longer
exists in the Schedule III(and earlier Revised Schedule VI). Accordingly, as per AS-9
Revenue Recognition, dividends should be recognized as income only when the right to
receive dividends is established as on the Balance Sheet date.

4.3.5. In respect of companies other than finance companies, revenue from operatio ns
need to be disclosed separately as revenue from (a) sale of products, (b) sale of services
and (c) other operating revenues.
4.3.6. Net exchange gain/loss on foreign currency borrowings to the extent considered as
an adjustment to interest cost needs to be disclosed separately as finance cost.
4.3.7. Break-up in terms of quantitative disclosures for significant items of Statement of
Profit and Loss, such as raw material consumption, stocks, purchases and sales have been
simplified and replaced with the disclosure of “broad heads” only. The broad heads need
to be decided based on considerations of materiality and presentation of true and fair
view of the Financial Statements.
4.3.8. Schedule III has brought in an additional requirement under additional information
to be provided requiring companies to disclose amount of expenditure incurred on
corporate social responsibility activities.
4.4. Disclosures no longer required (brought in by Revised Schedule VI)
The Schedule III (and earlier Revised Schedule VI) has removed a number of d isclosure
requirements that were not considered relevant in the present day context. Examples
include:
(a) Disclosures relating to managerial remuneration and computation of net profits for
calculation of commission;
(b) Information relating to licensed capacity, installed capacity and actual production;
(c) Information on investments purchased and sold during the year;
(d) Investments, sundry debtors and loans & advances pertaining to companies under
the same management;
(e) Maximum amounts due on account of loans and advances from directors or officers
of the company;
(f) Commission, brokerage and non-trade discounts
However, there are certain disclosures such as value of imports calculated on CIF basis,
earnings/expenditure in foreign currency, etc. that still continue in the Sc hedule III (and
earlier Revised Schedule VI).
5. Structure of the Schedule III
The Structure of Schedule III is as under:
I. General Instructions
II. Part I – Form of Balance Sheet
III. General Instructions for Preparation of Balance Sheet
IV. Part II – Form of Statement of Profit and Loss
V. General Instructions for Preparation of Statement of Profit and Loss
VI. General Instructions for the Preparation of Consolidated Financial Statements
6. General Instructions to The Schedule III

6.1. The General Instructions lay down the broad principles and guidelines for
preparation and presentation of Financial Statements.
6.2. As laid down in the Preface to the Statements of Accounting Standards issued by
ICAI, if a particular Accounting Standard is found to be not in conformity with law, the
provisions of the said law will prevail and the Financial Statements should be prepared in
conformity with such law. Accordingly, by virtue of this principle, disclosure requirements
of the Old Schedule VI were considered to prevail over Accounting Standards. Howe ver,
since the Schedule III(and earlier, the Revised Schedule VI) gives overriding status to the
requirements of the Accounting Standards and other requirements of the Act, such
principle of law overriding the Accounting Standards is inapplicable in the co ntext of the
Schedule III (and earlier, the Revised Schedule VI).
6.3. The Schedule III requires that if compliance with the requirements of the Act
including applicable Accounting Standards require any change in the treatment or
disclosure including addition, amendment, substitution or deletion in the head/sub-head
or any changes interse, in the Financial Statements or statements forming part thereof,
the same shall be made and the requirements of Schedule III shall stand modified
accordingly.
6.4. Implications of all instructions mentioned above can be illustrated by means of the
following example. One of the line items to be presented on the face of the Balance Sheet
under Current assets is “Cash and cash equivalents”. The break-up of these items required
to be presented by the Schedule III comprises of items such as Balances with banks held
as margin money or security against borrowings, guarantees, etc. and bank deposits with
more than 12 months maturity. According to AS-3 Cash Flow Statements, Cash is defined
to include cash on hand and demand deposits with banks. Cash Equivalents are defined
as short term, highly liquid investments that are readily convertible into known amounts
of cash and which are subject to an insignificant risk of changes in value. The Sta ndard
further explains that an investment normally qualifies as a cash equivalent only when it
has a short maturity of three months or less from the date of acquisition. Hence,
normally, deposits with original maturity of three months or less only should b e classified
as cash equivalents. Further, bank balances held as margin money or security against
borrowings are neither in the nature of demand deposits, nor readily available for use by
the company, and accordingly, do not meet the aforesaid definition o f cash equivalents.
Thus, this is an apparent conflict between the requirements of the Schedule III and the
Accounting Standards with respect to which items should form part of Cash and cash
equivalents. As laid down in the General Instructions, Para 1 of Schedule III, requirements
of the Accounting Standards would prevail over the Schedule III and the company should
make necessary modifications in the Financial Statements, which may include addition,
amendment, substitution or deletion in the head/sub-head or any other changes interse.
Accordingly, the conflict should be resolved by changing the caption “ Cash and cash
equivalents” to “Cash and bank balances,” which may have two sub-headings, viz., “Cash
and cash equivalents” and “Other bank balances.” The former should include only the
items that constitute Cash and cash equivalents defined in accordance with AS 3 (and not
the Schedule III), while the remaining line-items may be included under the latter
heading.
6.5. Para 2 of the General Instructions to the Schedule III states that the disclosure
requirements of the Schedule are in addition to and not in substitution of the disclosure
requirements specified in the notified Accounting Standards. They further clarify that the
additional disclosures specified in the Accounting Standards shall be made in the Notes
to Accounts or by way of an additional statement unless required to be disclosed on the
face of the Financial Statements. All other disclosures required by the Act are also
required to be made in the Notes to Accounts in addition to the requirements set out in
the Schedule III.
6.6. An example to illustrate the above point is the specific disclosure required by AS-24
Discontinuing Operations on the face of the Statement of Profit and Loss which has not
been incorporated in the Schedule III. The disclosure pertains to the amount of pre -tax
gain or loss recognised on the disposal of assets or settlement of liabilities attributable to
the discontinuing operation. Accordingly, such disclosures specifically required by the
Accounting Standard on the face of either the Statement of Profit and Loss or Balance
Sheet will have to be so made even if not forming part of the formats prescribed under
the Schedule III.
6.7. All the other disclosures required by the Accounting Standards will continue to be
made in the Financial Statements. Further, the disclosures required by the Act will
continue to be made in the Notes to Accounts. An example of this is the separate
disclosure required by Sub Section (3) of Section 182 of the Act for donations made to
political parties. Such disclosures would be made in the Notes.
6.8. Though not specifically required by the Schedule III, disclosures mandated by other
Acts or legal requirements will have to be made in the Financial Statements. For exampl e,
The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 requires
specified disclosures to be made in the annual Financial Statements of the buyer
wherever such Financial Statements are required to be audited under any law.
Accordingly, such disclosures will have to be made in the buyer company’s annual
Financial Statements.
6.9. The above principle would apply to disclosures required by other legal
requirements as well such as, disclosures required under Clause 32 to the Listing
Agreement, etc. A further extension of the above principle also means that specific
disclosures required by various pronouncements of regulatory bodies such as the ICAI
announcement for disclosures on derivatives and unhedged foreign currency exposures,
and other disclosure requirements prescribed by various ICAI Guidance Notes, such as
Guidance Note on Employee Share-based Payments, etc. should continue to be made in
the Financial Statements in addition to the disclosures specified by the Schedule III.
6.10. In the Old Schedule VI, break-up of amounts disclosed on the face of the Balance
Sheet and Profit and Loss Account was required to be given in the Schedules. Additional

information was required to be furnished in the Notes to Account. The Schedule III (and
earlier, the Revised Schedule VI) requires all information relating to each item on the face
of the Balance Sheet and Statement of Profit and Loss to be cross -referenced to the
Notes to Accounts. The manner of such cross-referencing to various other informations
contained in the Financial Statements has also been changed to “Note No.” as compared
to “Schedule No.” in the Old Schedule VI. Hence, the same is suggestive of a change in
the old format of presentation from Schedules and Notes to Accounts to the new format
of only Notes to Accounts. The instructions state that the Notes to Accounts should
provide where required, narrative descriptions or disaggregations of items recognized in
those statements. Hence, presentation of all narrative descriptions and disaggregations
should preferably be presented in the form of Notes to Accounts rather than in the form
of Schedules. Such style of presentation is also in line with the manner of presentation of
Financial Statements followed by companies internationally and would facilitat e
comparability of Financial Statements.
6.11. Para 3 of the General Instructions of the Schedule III also states that the Notes to
Accounts should also contain information about items that do not qualify for recognition
in Financial Statements. These disclosures normally refer to items such as Contingent
Liabilities and Commitments which do not get recognised in the Financial Statements.
These have been dealt with later in this Guidance Note. Some of the other disclosures
relating to items that are not recognized in the Financial Statements also emanate from
the Accounting Standards, such as, disclosures required under AS9Revenue Recognitionon
circumstances in which revenue recognition is to be postponed pending the resolution of
significant uncertainties. Contingent Assets, however, are not to be disclosed in the
Financial Statements as per AS29 Provisions, Contingent Liabilities and Contingent Assets.
6.12. The General Instructions also lay down the principle that in preparing Financial
Statements including Notes to Accounts, a balance shall be maintained between
providing excessive detail that may not assist users of Financial Statements and not
providing important information as a result of too much aggregation. Compliance with
this requirement is a matter of professional judgement and may vary on a case to case
basis based on facts and circumstances. However, it is necessary to strike a balance
between overburdening Financial Statements with excessive detail that may not assist
users of Financial Statements and obscuring important information as a result of too
much aggregation. For example, a company should not obscure important information by
including it among a large amount of insignificant detail or in a way that it obscures
important differences between individual transactions or associated risks.
6.13. The Schedule III (and earlier, the Revised Schedule VI) has specifically introduced a
new requirement of using the same unit of measurement uniformly across the Financial
Statements. Such requirement should be taken to imply that all figures disclosed in the
Financial Statements including Notes to Accounts should be of the same denomination.
6.14. The Schedule III (and earlier, the Revised Schedule VI) has also introduced new
rounding off requirements as compared to the Old Schedule VI. The new requirement
does not prescribe the option to present figures in terms of hundreds and thousands if
the turnover equals or exceeds `` 100 crores. Rather, they allow rounding off in crores,
which was earlier permitted only when the turnover equaled or exceeded five hundred
crores rupees. Similarly, where turnover is below `` 100 crore, the Schedule III (and
earlier, the Revised Schedule VI) gives an option to present figures in lakhs and millions
as well, which did not exist earlier. However, it is not compulsory to apply rounding off
and a company can continue to disclose full figures. But, if the same is applied, the
rounding off requirement should be complied with.
Old Schedule VI Schedule III (and earlier, the Revised
Schedule VI)
 Turnover <` 100 Crores – Round off  Turnover <` 100 Crores - Round off to
to the nearest hundreds, thousands or the nearest hundreds, thousands, lakhs
decimal thereof or millions or decimal thereof.
 Turnover ` 100 to ` 500 Crores- Round
off to the nearest hundreds, thousands,
lakhs or millions or decimal thereof  Turnover >` 100 Crores - Round off to
 Turnover >` 500 Crores- Round off to the nearest lakhs, millions or crores, or
the nearest hundreds, thousands, lakhs, decimal thereof
millions or crores, or decimal thereof.
6.15. The instructions also clarify that the terms used in the Schedule III shall be as per
the applicable Accounting Standards. For example, the term ‘related parties’ used at
several places in the Schedule III should be interpreted based on the definition given in
AS-18 Related Party Disclosures.
6.16. The Notes to the General Instructions re-clarify that the Schedule III sets out the
minimum requirements for disclosure in the Financial Statements including notes. It
states that line items, sub-line items and sub-totals shall be presented as an addition or
substitution on the face of the Balance Sheet and Statement of Profit and Loss when such
presentation is relevant to an understanding of the company’s financial position or
performance or to cater to industry/sector-specific disclosure requirements, apart from,
when required for compliance with amendments to the Act or the Accounting Standards.
The application of the above requirement is a matter of professional judgement. Th e
following examples illustrate this requirement. Earnings before Interest, Tax, Depreciation
and Amortization is often an important measure of financial performance of the company
relevant to the various users of Financial Statements and stakeholders of t he company.
Hence, a company may choose to present the same as an additional line item on the face
of the Statement of Profit and Loss. The method of computation adopted by companies
for presenting such measures should be followed consistently over the yea rs. Further,
companies should also disclose the policy followed in the measurement of such line
items.
6.17. Similarly, users and stakeholders often want to know the liquidity position of the
company. To highlight the same, a company may choose to present additi onal sub-totals
of Current assets and Current liabilities on the face of the Balance Sheet.
6.18. One example of addition or substitution of line items, sub -line items and sub-totals
to cater to industry-specific disclosure requirements can be noted from Non-Banking
Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve
Bank) Directions, 2007. The Directions prescribe that every non -banking finance company
is required to separately disclose in its Balance Sheet the provisions made under the
Directions without netting them from the income or against the value of assets. Though
not specifically required by the Schedule, such addition or substitution of line items can
be made in the notes forming part of the Financial Statements as wel l.
7. General Instructions For Preparation of Balance Sheet : Notes 1 To 5
7.1. Current/Non-current assets and liabilities:
The Schedule III requires all items in the Balance Sheet to be classified as either Current
or Non-current and be reflected as such. Notes 1 to 3 of the Schedule III define Current
Asset, Operating Cycle and Current Liability as below:
7.1.1. “An asset shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be realized in, or is intended for sale or consumpt ion in, the
company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months after the reporting date; or
(d) it is Cash or cash equivalent unless it is restricted from being exchanged o r used to
settle a liability for at least twelve months after the reporting date.
All other assets shall be classified as non-current.”
7.1.2. “An operating cycle is the time between the acquisition of assets for processing and
their realization in Cash or cash equivalents. Where the normal operating cycle cannot be
identified, it is assumed to have a duration of twelve months.”
7.1.3. “A liability shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting date. Terms of a liability that
could, at the option of the counterparty, result in its settlement by the issue of
equity instruments do not affect its classification.
All other liabilities shall be classified as non-current.”
7.1.4. The Schedule III defines “current assets” and “current liabilities”, with the non -
current category being the residual. It is therefore necessary that the balance pertaining
to each item of assets and liabilities contained in the Balance Sheet be split i nto its
current and non-current portions and be classified accordingly as on the reporting date.

7.1.5. Based on the definition, current assets include assets such as raw material and
stores which are intended for consumption or sale in the course of the company’ s normal
operating cycle. Items of inventory which may be consumed or realized within the
company’s normal operating cycle should be classified as current even if the same are not
expected to be so consumed or realized within twelve months after the report ing date.
Current assets would also include assets held primarily for the purpose of being traded
such as inventory of finished goods. They would also include trade receivables which are
expected to be realized within twelve months from the reporting date and Cash and cash
equivalents which are not under any restriction of use.
7.1.6. Similarly, current liabilities would include items such as trade payables, employee
salaries and other operating costs that are expected to be settled in the company’s
normal operating cycle or due to be settled within twelve months from the reporting
date. It is pertinent to note that such operating liabilities are normally part of the working
capital of the company used in the company’s normal operating cycle and hence, should
be classified as current even if they are due to be settled more than twelve months after
the end of the reporting date.
7.1.7. Further, any liability, pertaining to which the company does not have an
unconditional right to defer its settlement for at least twelve months after the Balance
Sheet/reporting date, will have to be classified as current.
7.1.8. The application of this criterion could be critical to the Financial Statements of a
company and requires careful evaluation of the various terms and conditions of a loan
liability. To illustrate, let us understand how this requirement will apply to the following
example:
Company X has taken a five year loan. The loan contains certain debt covenants, e.g.,
filing of quarterly information, failing which the bank can recall th e loan and demand
repayment thereof. The company has not filed such information in the last quarter; as a
result of which the bank has the right to recall the loan. However, based on the past
experience and/or based on the discussions with the bank the man agement believes that
default is minor and the bank will not demand the repayment of loan. According to the
definition of Current Liability, what is important is, whether a borrower has an
unconditional right at the Balance Sheet date to defer the settleme nt irrespective of the
nature of default and whether or not a bank can exercise its right to recall the loan. If the
borrower does not have such right, the classification would be “current.” It is pertinent to
note that as per the terms and conditions of the aforesaid loan, the loan was not
repayable on demand from day one. The loan became repayable on demand only on
default in the debt covenant and bank has not demanded the repayment of loan upto the
date of approval of the accounts. In the Indian context, the criteria of a loan becoming
repayable on demand on breach of a covenant, is generally added in the terms and
conditions as a matter of abundant caution. Also, banks generally do not demand
repayment of loans on such minor defaults of debt covenants. Therefore, in such
situations, the companies generally continue to repay the loan as per its original terms
and conditions. Hence, considering that the practical implications of such minor breach
are negligible in the Indian scenario, an entity could conti nue to classify the loan as “non-
current” as on the Balance Sheet date since the loan is not actually demanded by the
bank at any time prior to the date on which the Financial Statements are approved.
However, in case a bank has recalled the loan before the date of approval of the accounts
on breach of a loan covenant that occurred before the year -end, the loan will have to be
classified as current. Further, the above situation should not be confused with a loan
which is repayable on demand from day one. For such loans, even if the lender does not
demand repayment of the loan at any time, the same would have to be continued to be
classified as ”current”.
7.2. The term “Operating Cycle” is defined as the time between the acquisition of assets
for processing and their realization in Cash or cash equivalents. A company’s normal
operating cycle may be longer than twelve months e.g. companies manufacturing wines,
etc. However, where the normal operating cycle cannot be identified, it is assumed to
have a duration of twelve months.
7.2.1. Where a company is engaged in running multiple businesses, the operating cycle
could be different for each line of business. Such a company will have to classify all the
assets and liabilities of the respective businesses into current and non -current, depending
upon the operating cycles for the respective businesses.
Let us consider the following other examples:
1. A company has excess finished goods inventory that it does not expect to realize
within the company’s operating cycle of fifteen months. Since such finished goods
inventory is held primarily for the purpose of being traded, the same should be
classified as “current”.
2. A company has sold 10,000 tonnes of steel to its customer. The sale contract
provides for a normal credit period of three months. The company’s operating cycle
is six months. However, the company does not expect to receive the payment within
twelve months from the reporting date. Therefore, the same should be classified as
“Non-Current” in the Balance Sheet. In case, the company expects to realize the
amount upto 12 months from the Balance Sheet date (though beyond operating
cycle), the same should be classified as “current”.
7.3. For the purpose of Schedule III, a company also needs to classify its employee
benefit obligations as current and non-current categories. While AS-15 Employee Benefits
governs the measurement of various employee benefit obligations, their classification as
current and non-current liabilities will be governed by the criteria laid down in the
Schedule III. In accordance with these criteria, a liability is classified as “current” if a
company does not have an unconditional right as on the Balance Sheet date to defer its
settlement for twelve months after the reporting date. Each company will need to apply
these criteria to its specific facts and circumstances and decide an appropriate
classification of its employee benefit obligations. Given below is an illustrative example
on application of these criteria in a simple situation:
(a) Liability toward bonus, etc., payable within one year from the Balance Sheet date is
classified as “current”.
(b) In case of accumulated leave outstanding as on the reporting date, the employees
have already earned the right to avail the leave and they are normally entitled to
avail the leave at any time during the year. To the extent, the employee has
unconditional right to avail the leave, the same needs to be classified as “current”
even though the same is measured as ‘other long-term employee benefit’ as per
AS-15.However, whether the right to defer the employee’s leave is available
unconditionally with the company needs to be evaluated on a case to case basis –
based on the terms of Employee Contract and Leave Policy, Employer’s right to
postpone/deny the leave, restriction to avail leave in the next year for a maximum
number of days, etc. In case of such complexities the amount of Non -current and
Current portions of leave obligation should normally be determined by a qualified
Actuary.
(c) Regarding funded post-employment benefit obligations, amount due for payment
to the fund created for this purpose within twelve months is treated as “current”
liability. Regarding the unfunded post-employment benefit obligations, a company
will have settlement obligation at the Balance Sheet date or within t welve months
for employees such as those who have already resigned or are expected to resign
(which is factored for actuarial valuation) or are due for retirement within the next
twelve months from the Balance Sheet date. Thus, the amount of obligation
attributable to these employees is a “current” liability. The remaining amount
attributable to other employees, who are likely to continue in the services for more
than a year, is classified as “non-current” liability. Normally the actuary should
determine the amount of current &non-current liability for unfunded post-
employment benefit obligation based on the definition of Current and Non -current
assets and liabilities in the Schedule III.
7.4. The Schedule III requires Investments to be classified as Current and Non-Current.
However, AS13 ‘Accounting for Investments’ requires to classify Investments as Current
and Long-Term. As per AS 13, current investment is an investment that is by its nature
readily realisable and is intended to be held for not more than one y ear from the date on
which such investment is made. A long-term investment is an investment other than a
current investment.
7.4.1. Accordingly, as per AS-13, the assessment of whether an Investment is “Long-term”
has to be made with respect to the date of Investment whereas, as per the Schedule III,
“Non-current” Investment has to be determined with respect to the Balance Sheet date.
7.4.2. Though the Schedule III clarifies that the Accounting Standards would prevail over
itself in case of any inconsistency between the two, it is pertinent to note that AS-13 does
not lay down presentation norms, though it requires disclosures to be made for Current
and Long-term Investments. Accordingly, presentation of all investments in the Balance
Sheet should be made based on Current/Non-current classification as defined in the
Schedule III. The portion of long-term investment as per AS13 which is expected to be
realized within twelve months from the Balance Sheet date needs to be shown as Current
investment under the Schedule III.
7.5. Settlement of a liability by issuing of equity

7.5.1. The Schedule III clarifies that, “the terms of a liability that could, at the option of the
counterparty, result in its settlement by the issue of equity instruments do not affect its
classification”. A consequence of this is that if the conversion option in convertible debt is
exercisable by the holder at any time, the liability cannot be classified as “current” if the
maturity for cash settlement is greater than one year. A question therefore arises as to
how does the aforesaid requirement affect the classification of items for say, a)
convertible debt where the conversion option lies with the issuer, or b) mandatorily
convertible debt instrument.
7.5.2. Based on the specific exemption granted only to those cases whe re the conversion
option is with the counterparty, the same should not be extended to other cases where
such option lies with the issuer or is a mandatorily convertible instrument. For all such
cases, conversion of a liability into equity should be conside red as a means of settlement
of the liability as defined in the Framework For the Preparation and Presentation of
Financial Statements issued by ICAI. Accordingly, the timing of such settlement would
also decide the classification of such liability in terms of Current or Non-current as
defined in the Schedule III.
7.6 As per the classification in the Schedule III and in line with the ICAI’s earlier
announcement with regard to the presentation and classification of net Deferred Tax
asset or liability, the same should always be classified as “non-current”.
8. Part I: Form of Balance Sheet and Note 6 to General Instructions
for Preparation of Balance Sheet
As per the Framework for The Preparation and Presentation of Financial Statements,
asset, liability and equity are defined as follows:
An asset is a resource controlled by the enterprise as a result of past events from which
future economic benefits are expected to flow to the enterprise.
A liability is a present obligation of the enterprise arising from past events, the settlement
of which is expected to result in an outflow from the enterprise of resources embodying
economic benefits.
Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.
I. Equity and Liabilities
8.1. Shareholders’ Funds
Under this head, following line items are to be disclosed:
 Share Capital;
 Reserves and Surplus;
 Money received against share warrants.

8.1.1. Share capital

8.1.1.1. Notes to the General Instructions require a company to disclose in the Notes to
Accounts line items/sub-line items referred to inNotes6A to 6Q. Clauses (a) to (l) of Note
6 A deal with disclosures for Share Capital and such disclosures are required for each
class of share capital (different classes of preference shares to be treated separately).
8.1.1.2. As per ICAI Guidance Note on Terms Used in Financial Statements, ‘Capital’
refers “to the amount invested in an enterprise by its owners e.g. paid -up share capital in a
corporate enterprise. It is also used to refer to the interest of owners in the assets of a n
enterprise.”
8.1.1.3. The said Guidance Note defines ‘Share Capital’ as the “aggregate amount of
money paid or credited as paid on the shares and/or stocks of a corporate enterprise.”
8.1.1.4. In respect of disclosure requirements for Share Capital, the Schedule III stat es
that “different classes of preference share capital to be treated separately”. A question
arises whether the preference shares should be presented as share capital only or does it
mean that a company compulsorily needs to decide whether preference share s are
liability or equity based on its economic substance using AS31Financial Instruments:
Presentation principles and present the same accordingly. The Schedule III deals only with
presentation and disclosure requirements. Accounting for various items is governed by
the applicable Accounting Standards. However, since Accounting Standards AS 30
Financial Instruments: Recognition and Measurement, AS 31 and AS 32 Financial
Instruments: Disclosures are yet to be notified and Section 85(1) of the Act refers to
Preference Shares as a kind of share capital, Preference Shares will have to be classified as
Share Capital.
8.1.1.5. Presently, in the Indian context, generally, there are two kinds of share capital
namely - Equity and Preference. Within Equity/Preference Share Capital, there could be
different classes of shares, say, Equity Shares with or without voting rights, Compulsorily
Convertible Preference Shares, Optionally Convertible Preference Shares, etc. If the
preference shares are to be disclosed under the head ‘Share Capital’, until the same are
actually redeemed, they should continue to be shown under the head ‘Share Capital’.
Preference shares of which redemption is overdue should continue to be disclosed under
the head ‘Share Capital’.
8.1.1.6. Clause (a) of Note 6A - the number and amount of shares authorized :
As per the Guidance Note on Terms Used in Financial Statements ‘Authorised Share
Capital’ means “the number and par value, of each class of shares that an enterprise may
issue in accordance with its instrument of incorporation. This is sometimes referred to as
nominal share capital.”
8.1.1.7. Clause (b) of Note 6A - the number of shares issued, subscribed and fully
paid, and subscribed but not fully paid :
The disclosure is for shares:
 Issued;

 Subscribed and fully paid;

 Subscribed but not fully paid.
Though the disclosure is only for the number of shares, to make the disclosure relevant to
understanding the company’s share capital, even the amount for each category should be
disclosed. Issued shares are those which are offered for subscription within the authorised
limit. It is possible that all shares offered are not subscribed to and to the extent of
unsubscribed portion, there will be difference between shares issued and subscribed. As
per the Guidance Note on Terms Used in Financial Statements, the expression ‘Subscribed
Share Capital’ is “that portion of the issued share capital which has actually been
subscribed and allotted. This includes any bonus shares issued to the shareholders.”
Though there is no requirement to disclose the amount per share called, if shares are not
fully called, it would be appropriate to state the amount per share called. As per the
definition contained in the Guidance Note on Terms Used in Financial Statements, the
expression ‘Paid-up Share Capital’ is “that part of the subscribed share capital for which
consideration in cash or otherwise has been received. This includes bonus shares allotted by
the corporate enterprise.” As per the Old Schedule VI, debit balance on the allotment or
call account is presented in the Balance Sheet not as an asset but by way of deduction
from Called-up Capital. However, as required by Clause (k) of Note 6A of the Schedule III,
calls unpaid are to be disclosed separately as per the Schedule III.
However, the unpaid amount towards shares subscribed by the subscribers of the
Memorandum of Association should be considered as 'subscribed and paid -up capital' in
the Balance Sheet and the debts due from the subscriber should be appropriately
disclosed as an asset in the balance sheet.
8.1.1.8. Clause (c) of Note 6A – par value per share :
Par value per share is the face value of a share as indicated in the Capital Clause of the
Memorandum of Association of a company. It is also referred to as ‘ face value’ per share.
In the case of a company having share capital, (unless the company is an unlimited
company), the Memorandum shall also state the amount of share capital with which the
company is registered and their division thereof into shares of fixed amount as required
under clause (a) to the sub-section (4) of section 13 of the Act. In the case of a company
limited by guarantee, Memorandum shall state that each member undertakes to
contribute to the assets of the company in the event of winding -up while he is a member
or within one year after he ceases to be a member, for payment of debts and liabilities of
the company, as the case may be. There is no specific mention for the disclosure by
companies limited by guarantee and having share capital, and companies limited by
guarantee and not having share capital. Such companies need to consider the
requirement so as to disclose the amount each member undertakes to contribute as per
their Memorandum of Association.

8.1.1.9. Clause (d) of Note 6A- a reconciliation of the number of shares outstanding
at the beginning and at the end of the reporting period :
As per the Schedule III, opening number of shares outstanding, shares issued, shares
bought back, other movements, etc. during the year and closing number of outstanding
shares should be shown. Though the requirement is only for a reconciliation of the
number of shares, as given for the disclosure of issued, subscribed capital, etc. [Clause (b)
of Note 6A] above, to make the disclosure relevant for understanding the company’s
share capital, the reconciliation is to be given even for the amount of share capital.
Reconciliation for the comparative previous period is also to be given. Further, the above
reconciliation should be disclosed separately for both Equity and Preference Shares and
for each class of share capital within Equity and Preference Shares.
8.1.1.10. Clause (e) of Note 6A - the rights, preferences and restrictions attaching to
each class of shares including restrictions on the distribution of dividends and the
repayment of capital.
As per the Guidance Note on Terms Used in Financial Statement, the expression
‘Preference Share Capital’ means “that part of the share capital of a corporate enterprise
which enjoys preferential rights in respect of payments of fixed dividend and repayment of
capital. Preference shares may also have full or partial participating rights in surplus profits
or surplus capital.” The rights, preferences and restrictions attached to shares are based
on the classes of shares, terms of issue, etc., whether equity or preference. In respect of
Equity Share Capital, it may be with voting rights or with differential voting rights as to
dividend, voting or otherwise in accordance with such rules and subject to such
conditions as may be prescribed under Companies (Issue of Share Capital with Differential
Voting Rights) Rules, 2001.In respect of Preference shares, the rights include (a) as
respects dividend, a preferential right to be paid a fixed amount or at a fixed rate and,
(b)as respects capital, a preferential right of repayment of amount of capital on winding
up. Further, Preference shares can be cumulative, non-cumulative, redeemable,
convertible, non-convertible etc. All such rights, preferences and restrictions attached to
each class of preference shares, terms of redemption, etc. have to be disclosed separately.
8.1.1.11. Clause (f) of Note 6A - shares in respect of each class in the company held
by its holding company or its ultimate holding company including shares held by or
by subsidiaries or associates of the holding company or the ultimate holding
company in aggregate :
The requirement is to disclose shares of the company held by -
 Its holding company;
 Its ultimate holding company;
 Subsidiaries of its holding company;
 Subsidiaries of its ultimate holding company;
 Associates of its holding company; and
 Associates of its ultimate holding company.
Aggregation should be done for each of the above categories.

The terms ‘subsidiary’, ‘holding company’ and ‘associate’ should be understood as
defined under AS-21, Consolidated Financial Statements and AS-18, Related Party
Disclosures. Based on the aforesaid definitions, for the purposes of the above disclosures,
shares held by the entire chain of subsidiaries and associates starting from the holding
company and ending right upto the ultimate holding company would have to be
disclosed. Further, all the above disclosures need to be made separately for each class of
shares, both within Equity and Preference Shares.
8.1.1.12. Clause (g) of Note 6A - shares in the company held by each shareholder
holding more than 5 percent shares specifying the number of shares held :
In the absence of any specific indication of the date of holding, the date for computing
such percentage should be taken as the Balance Sheet date. For example, if during the
year, any shareholder held more than 5% Equity shares but does not hold as much at the
Balance Sheet date, disclosure is not required. Though it is not specified as to whether
the disclosure is required for each class of shares or not, companies should disclose the
shareholding for each class of shares, both within Equity and Preference Shares.
Accordingly, such percentage should be computed separately for each class of shares
outstanding within Equity and Preference Shares. This information should also be given
for the comparative previous period.
8.1.1.13. Clause (h) of Note 6A - shares reserved for issue under options and
contracts/commitments for the sale of shares/disinvestment, including the terms
and amounts :
Shares under options generally arise under promoters or collaboration agr eements, loan
agreements or debenture deeds (including convertible debentures), agreement to convert
preference shares into equity shares, ESOPs or contracts for supply of capital goods, etc.
The disclosure would be required for the number of shares, amoun ts and other terms for
shares so reserved. Such options are in respect of unissued portion of share capital.
8.1.1.14. Clause (i) of Note 6A– For the period of five years immediately preceding the
date as at which the Balance Sheet is prepared :(a) Aggregate number and class of
shares allotted as fully paid up pursuant to contract(s) without payment being
received in cash. (b) Aggregate number and class of shares allotted as fully paid up by
way of bonus shares. (c) Aggregate number and class of shares bought back.
(a) Aggregate number and class of shares allotted as fully paid up pursuant to
contract(s) without payment being received in cash.
The following allotments are considered as shares allotted for payment being
received in cash and not as without payment being received in cash and
accordingly, the same are not to be disclosed under this Clause:
(i) If the subscription amount is adjusted against a bona fide debt payable in
money at once by the company;
(ii) Conversion of loan into shares in the event of default in repayment.

(b) Aggregate number and class of shares allotted as fully paid up by way of bonus
shares.
As per the Guidance Note on Terms Used in Financial Statements ‘Bonus shares’ are
defined as shares allotted by capitalisation of the reserves or surplus o f a corporate
enterprise. The requirement of disclosing the source of bonus shares is omitted in
the Schedule III.
(c) Aggregate number and class of shares bought back.
The total number of shares bought back for each class of shares needs to be
disclosed.
All the above details pertaining to aggregate number and class of shares allotted for
consideration other than cash, bonus shares and shares bought back need to be disclosed
only if such event has occurred during a period of five years immediately preceding t he
Balance Sheet date. Since disclosure is for the aggregate number of shares, it is not
necessary to give the year-wise break-up of the shares allotted or bought back, but the
aggregate number for the last five financial years needs to be disclosed.
8.1.1.15. Clause (j) of Note 6A- Terms of any securities convertible into
equity/preference shares issued along with the earliest date of conversion in
descending order starting from the farthest such date:
This disclosure would cover securities, such as Convertible Pref erence Shares, Convertible
Debentures/bonds, etc. – optionally or otherwise into equity.
Under this Clause, disclosure is required for any security, when it is either convertible into
equity or preference shares. In this case, terms of such securities and the earliest date of
conversion are required to be disclosed. If there are more than one date of conversion,
disclosure is to be made in the descending order of conversion. If the option can be
exercised in different periods then earlier date in that perio d is to be considered. In case
of compulsorily convertible securities, where conversion is done in fixed tranches, all the
dates of conversion have to be considered. Terms of convertible securities are required to
be disclosed under this Clause. However, in case of Convertible debentures/bonds, etc.,
for the purpose of simplification, reference may also be made to the terms disclosed
under the note on Long-term borrowings where these are required to be classified in the
Balance Sheet, rather than disclosing the same again under this clause.
8.1.1.16. Clause (k) of Note 6(A) - Calls unpaid (showing aggregate value of calls
unpaid by directors and officers):
A separate disclosure is required for the aggregate value of calls unpaid by directors and
also officers of the company. The Old Schedule VI required disclosures of calls due by
directors only. The total calls unpaid should be disclosed. The terms ‘director’ and ‘officer’
should be interpreted based on the definitions in the Act.


Note 6(B) of the General Instructions deals with the disclosures of “Reserves and Surplus”
in the Notes to Accounts and the classification thereof under the various types of
reserves.
8.1.2.1. Reserve:
The Guidance Note on Terms Used in Financial Statements defines the term ‘Reserve’ as
“the portion of earnings, receipts or other surplus of an enterprise (whether capital or
revenue) appropriated by the management for a general or a specific purpose other than a
provision for depreciation or diminution in the value of assets or for a known
liability.”‘Reserves’ should be distinguished from ‘provisions’. For this purpose, reference
may be made to the definition of the expression `provision’ in AS-29 Provisions,
Contingent Liabilities and Contingent Assets.
As per AS-29, a ` provision’ is “a liability which can be measured only by using a substantial
degree of estimation”. A ‘liability’ is “a present obligation of the enterprise arising from past
events, the settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.” 'Present obligation’ – “an obligation is a present
obligation if, based on the evidence available, its existence at the Balance Sheet date is
considered probable, i.e., more likely than not.”
8.1.2.2. CapitalReserves :
It is necessary to make a distinction between capital reserves and revenue reserves in the
accounts. A revenue reserve is a reserve which is available for distribution. The term
“Capital Reserve” has not been defined under the Schedule III. However, as pe r the
Guidance Note on Terms Used in Financial Statements, the expression ‘capital reserve’ is
defined as “a reserve of a corporate enterprise which is not available for distribution as
dividend”. Though the Schedule III does not have the requirement of “t ransferring capital
profit on reissue of forfeited shares to capital reserve”, since profit on re -issue of forfeited
shares is basically profit of a capital nature and, hence, it should be credited to capital
reserve.
8.1.2.3. Capital Redemption Reserve :
Under the Act, Capital Redemption Reserve is required to be created in the following two
situations:
a) Under the provisions of Section 55 of the Act, where the redemption of preference
shares is out of profits, an amount equal to nominal value of shares redeemed is t o
be transferred to a reserve called ‘capital redemption reserve’.
b) Under Section 69 of the Act, if the buy-back of shares is out of free reserves, the
nominal value of the shares so purchased is required to be transferred to capital
redemption reserve from distributable profit.
8.1.2.4. Securities Premium Reserve :
The Guidance Note of Terms Used in Financial Statements defines ‘Share Premium’ as “the
excess of the issue price of shares over their face value.” Though the terminology used in
the Schedule III is ‘Securities Premium Reserve” the nomenclature as per the Act is
“Securities Premium Account”. Accordingly, the terminology of the Act should be used.
8.1.2.5. Debenture Redemption Reserve :
According to Section 71 of the Act where a company issues debentures, it is req uired to
create a debenture redemption reserve for the redemption of such debentures. The
company is required to credit adequate amounts, from out of its profits every year to
debenture redemption reserve, until such debentures are redeemed.
On redemption of the debentures for which the reserve is created, the amounts no longer
necessary to be retained in this account need to be transferred to the General Reserve.
8.1.2.6. Revaluation Reserve :
As per the Guidance Note of Terms Used in Financial Statements, ‘Revaluation reserve’ is
‘a reserve created on the revaluation of assets or net assets of an enterprise represented by
the surplus of the estimated replacement cost or estimated market values over the book
values thereof.’ Accordingly, if a company has carried out revaluation of its assets, the
corresponding amount would be disclosed as “Revaluation Reserve”
8.1.2.7. Share Options Outstanding Account :
Presently, as per the Guidance Note on Accounting for Employee Share -based Payments,
Stock Options Outstanding Account is shown as a separate line-item. The Schedule III
requires this item to be shown as a part of ‘Reserve and Surplus’.
8.1.2.8. Other Reserves (specify the nature and purpose of reserve and the amount
in respect thereof) :
Every other reserve which is not covered in the paragraphs 8.1.2.2 to 8.1.2.7 is to be
reflected as `Other Reserves’. However, since the nature, purpose and the amount are to
be shown, each reserve is to be shown separately. This would include reserves to be
created under other statutes like Tonnage Tax Reserve to be created under the Income
Tax Act, 1961.
8.1.2.9. Surplus i.e. balance in Statement of Profit and Loss disclosing allocations
and appropriations such as dividend, bonus shares and transfer to/from reserves,
etc.
Appropriations to the profit for the year (including carried forward balance) is to be
presented under the main head ’Reserves and Surplus’. Under the Schedule III, the
Statement of Profit and Loss will no longer reflect any appropriations, like dividends
transferred to Reserves, bonus shares, etc.
Please also refer to the discussion in Para 10.9 below.
8.1.2.10. Additions and deductions since the last Balance Sheet to be shown under
each of the specified heads:
This requires the company to disclose the movement in each of the reserves and surplus
since the last Balance Sheet.
Please refer to Para 10.9 of this Guidance note.
8.1.2.11As per Schedule III, a reserve specifically represented by earmarked investments

shall be termed as a ‘fund’
8.1.2.12 Debit balance in the Statement of Profit and Loss and in Reserves and
Surplus:
Debit balance in the Statement of Profit and Loss which would arise in case of
accumulated losses, is to be shown as a negative figure under the head ‘Surplus’. The
aggregate amount of the balance of ‘Reserves and Surplus’, is t o be shown after adjusting
negative balance of surplus, if any. If the net result is negative, the negative figure is to be
shown under the head ‘Reserves and Surplus’.
8.1.3. Money received against Share Warrants
Generally, in case of listed companies, share warrants are issued to promoters and others
in terms of the Guidelines for preferential issues viz., SEBI (Issue of Capital and Disclosure
Requirements), Guidelines, 2009. AS 20Earning Per Share notified under the Companies
(Accounting Standards) Rules, 2006 defines‘ share warrants’ as “financial instruments
which give the holder the right to acquire equity shares”. Thus, effectively, share warrants
are nothing but the amount which would ultimately form part of the Shareholders’ funds.
Since shares are yet to be allotted against the same, these are not reflected as part of
Share Capital but as a separate line-item – ‘Money received against share warrants.’
8.2. Share Application Money pending allotment
8.2.1. Share Application money pending allotment is to be disclosed as a separate line
item on the face of Balance Sheet between “Shareholders’ Funds” and “Non -current
Liabilities”. Share application money not exceeding the issued capital and to the extent
not refundable is to be disclosed under this line item. If the company’s issued capital is
more than the authorized capital and approval of increase in authorized capital is pending,
the amount of share application money received over and above the authorized capital
should be shown under the head “Other Current Liabilities”.
8.2.2. Clause (g) of Note6Gof General Instructions for preparation of Balance sheet lists
various circumstances and specifies the information to be disclosed in respect of share
application money. However, amount shown as ‘share application money pending
allotment’ will not include share application money to the extent refundable. For example,
the amount in excess of issued capital, or where minimum subscription requirement is not
met. Such amount will have to be shown separately under ‘Other Current Liabilitie s’.
8.2.3. Various disclosure requirements pertaining to Share Application Money are as
follows:
 terms and conditions;
 number of shares proposed to be issued;
 the amount of premium, if any;
 the period before which shares are to be allotted;

 whether the company has sufficient authorized share capital to cover the share
capital amount on allotment of shares out of share application money;
 Interest accrued on amount due for refund;
 The period for which the share application money has been pending beyond the
period for allotment as mentioned in the share application form along with the
reasons for such share application money being pending.
The above disclosures should be made in respect of amounts classified under both Equity
as well as Current Liabilities, wherever applicable.
8.2.4. As per power given under section 50 of the Act, a company, if so authorized by its
Articles, may accept from any member the whole or a part of the amount remaining
unpaid on any shares held by him, although no part of that amount has been called up.
The shareholder who has paid the money in advance is not a creditor for the amount so
paid as advance, as the same cannot be demanded for repayment and the company
cannot pay him back unless Articles so provide. The amount of calls paid in advance doe s
not form part of the paid-up capital. The Department of Company Affairs has clarified
that it is better to show “Calls in Advance” under the head “Current Liabilities and
Provisions” (Letter No. 8/16(1)/61-PR, dated 9.5.1961). Thus, under the Schedule III, calls
paid in advance are to be reflected under “Other Current Liabilities”. The amount of
interest which may accrue on such advance should also is to be reflected as a liability.
8.2.5. “Share application money pending allotment” is required to be shown as a separate
line item on the face of the Balance Sheet after Shareholders’ Funds. However, under
“Other current liabilities” there is a statement that Share application money not exceeding
the issued capital and to the extent not refundable shall be shown und er the head Equity.
The two requirements appear to be conflicting. However, from the format as set out in
the Schedule, it appears that the Regulator’s intention is to specifically highlight the
amount of Share application money pending allotment, though t hey may be, in
substance, in nature of Equity. Accordingly, the equity element should continue to be
disclosed on the face of the Balance Sheet as a separate line item, rather than as a
component of Shareholders’ Funds.
8.3. Non-current liabilities
A liability shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting date. Terms of a liability that could, at the
option of the counterparty, result in its settlement by the issue of equity instruments do
not affect its classification.
All other liabilities shall be classified as non-current.

Based on the above definitions, on the face of the Balance Sheet, the following items shall
be disclosed under non-current liabilities.
 Long-term borrowings;
 Deferred tax liabilities (Net);
 Other Long-term liabilities;
 Long-term provisions.
8.3.1. Long-term borrowings:
8.3.1.1. Long-term borrowings shall be classified as:
(a) Bonds/debentures;
(b) Term loans;
 from banks;
 from other parties;
(c) Deferred payment liabilities;
(d) Deposits;
(e) Loans and advances from related parties;
(f) Long term maturities of finance lease obligations;
(g) Other loans and advances (specify nature).
8.3.1.2. Borrowings shall further be sub-classified as secured and unsecured. Nature of
security shall be specified separately in each case.
8.3.1.3. Where loans have been guaranteed by directors or others, the aggregate
amount of such loans under each head shall be disclosed. The word “others” used in the
phrase “directors or others” would mean any person or entity other than a director.
Therefore, this is not restricted to mean only related parties. However, in the normal
course, a person or entity guaranteeing a loan of a company will generally be associated
with the company in some manner.
8.3.1.4. Bonds/debentures (along with the rate of interest and particulars of redemption
or conversion, as the case may be) shall be stated in descending order of maturity or
conversion, starting from farthest redemption or conversion date, as the case may be.
Where bonds/debentures are redeemable by installments, the date of maturity for this
purpose must be reckoned as the date on which the first installment becomes due.
8.3.1.5. Particulars of any redeemed bonds/ debentures which the company has power
to reissue shall be disclosed.
8.3.1.6. Period and amount of continuing default as on the Balance Sheet date in
repayment of loans and interest shall be specified separately in each case.
8.3.1.7. The phrase "long-term" has not been defined. However, the definition of ‘non-
current liability’ in the Schedule III may be used as long-term liability for the above
disclosure. Also, the phrase "term loan" has not been defined in the Schedule III. Term
loans normally have a fixed or pre-determined maturity period or a repayment schedule.
8.3.1.8. As referred to in para 72 of the 2005 edition of the ICAI Statement on

Companies (Auditor’s Report) Order, 2003 (CARO) in the banking industry, for example,
loans with repayment period beyond thirty six months are usually known as “term loans”
(The same guidance is relevant for this item as per CARO 2015 also). Cash credit,
overdraft and call money accounts/ deposit are, therefore, not covered by the expression
“terms loans”. Term loans are generally provided by banks and financial institutions for
acquisition of capital assets which then become the security for the loan, i.e., end use of
funds is normally fixed.
8.3.1.9 Deferred payment liabilities would include any liability for which payment is to
be made on deferred credit terms. E.g. deferred sales tax liability, def erred payment for
acquisition of fixed assets etc.
8.3.1.10 The current maturities of all long-term borrowings will be disclosed under ‘other
current liabilities’ and not under long-term borrowings and short-term borrowings.
Hence, it is possible that the same bonds / debentures / term loans may be bifurcated
under both long-term borrowings as well as under other current liabilities. Further, long -
term borrowings are to be sub-classified as secured and unsecured giving the nature of
the security for the secured position.
8.3.1.11 The Schedule III also stipulates that the nature of security shall be specified
separately in each case. A blanket disclosure of different securities covering all loans
classified under the same head such as ‘All Term loans from ban ks’ will not suffice.
However, where one security is given for multiple loans, the same may be clubbed
together for disclosure purposes with adequate details or cross referencing.
8.3.1.12 The disclosure about the nature of security should also cover the t ype of asset
given as security e.g. inventories, plant and machinery, land and building, etc. This is
because the extent to which loan is secured may vary with the nature of asset against
which it is secured.
8.3.1.13 When promoters, other shareholders or any third party have given any personal
security for any borrowing, such as shares or other assets held by them, disclosure should
be made thereof, though such security does not result in the classification of such
borrowing as secured.
8.3.1.14 The Schedule III requires that under the head “Borrowings,” period and amount
of “continuing default (in case of long-term borrowing) and default (in case of short-term
borrowing) as on the Balance Sheet date in repayment of loans and interest shall be
specified separately in each case". The word “loan” has been used in a more generic
sense. Hence, the disclosures relating to default should be made for all items listed under
the category of borrowings such as bonds/ debentures, deposits, deferred payment
liabilities, finance lease obligations, etc. and not only to items classified as “loans” such as
term loans, or loans and advances, etc.
8.3.1.15 Also, a company need not disclose information for defaults other than in respect
of repayment of loan and interest, e.g., compliance with debt covenants. The Schedule III

requires specific disclosures only for default in repayment of loans and interest and not
for other defaults.
8.3.1.16 Though two different terms, viz., continuing default (in case of long -term
borrowing) and default (in case of short-term borrowing) have been used, the
requirement should be taken to disclose default “as on the Balance Sheet date” in both
the cases. Pursuant to this requirement, details of any default in repayment of loan and
interest existing as on the Balance Sheet date needs to be separately disclosed. Any
default that had occurred during the year and was subsequently made good before the
end of the year does not need to be disclosed.
8.3.1.17 Terms of repayment of term loans and other loans shall be disclosed. The term
‘other loans’ is used in general sense and should be interpreted to mean all categories
listed under the heading ‘Long-term borrowings’ as per Schedule III. Disclosure of terms
of repayment should be made preferably for each loan unless the repayment terms of
individual loans within a category are similar, in which case, they may be aggregated.
8.3.1.18 Disclosure of repayment terms should include the period of maturity with
respect to the Balance Sheet date, number and amount of instalments due, the applicable
rate of interest and other significant relevant terms if any.
8.3.1.19 Deposits classified under Borrowings would include deposits accepted from
public and inter corporate deposits which are in the nature of borrowing s.
8.3.1.20 Loans and advances from related parties are required to be disclosed. Advances
under this head should include those advances which are in the nature of loans.
8.4. Other Long-term liabilities
This should be classified into:
a) Trade payables; and
b) Others.
8.4.1 A payable shall be classified as 'trade payable' if it is in respect of amount due on
account of goods purchased or services received in the normal course of business. As per
the Old Schedule VI, the term 'sundry creditors’ included amounts due in respect of
goods purchased or services received or in respect of other contractual obligations as
well. Hence, amounts due under contractual obligations can no longer be included within
Trade payables. Such items may include dues payables in respect of statutory obligations
like contribution to provident fund, purchase of fixed assets, contractually reimbursable
expenses, interest accrued on trade payables, etc. Such payables should be classified as
"others" and each such item should be disclosed nature-wise. However, Acceptances
should be disclosed as part of trade payables in terms of the Schedule III.
8.4.2 The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006
however, requires specified disclosures to be made in the annual Financ ial Statements of
the buyer wherever such Financial Statements are required to be audited under any law.
Though not specifically required by the Schedule III, such disclosures will still be required
to be made in the annual Financial Statements.

8.4.3 The following disclosures are required under Sec 22 of MSMED Act 2006 under the
Chapter on Delayed Payments to Micro and Small Enterprises:
(a) the principal amount and the interest due thereon (to be shown separately)
remaining unpaid to any supplier as at the end of accounting year;
(b) the amount of interest paid by the buyer under MSMED Act, 2006 along with the
amounts of the payment made to the supplier beyond the appointed day during
each accounting year;
(c) the amount of interest due and payable for the period (where the principal has
been paid but interest under the MSMED Act, 2006 not paid);
(d) The amount of interest accrued and remaining unpaid at the end of accounting
year; and
(e) The amount of further interest due and payable even in the succeeding year, until
such date when the interest dues as above are actually paid to the small enterprise,
for the purpose of disallowance as a deductible expenditure under section 23.
The terms ''appointed day'', ''buyer'', ''enterprise'', ''micro enterprise '', ''small enterprise''
and'' supplier'', shall be as defined under clauses (b), (d), (e), (h), (m) and (n) respectively
of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006.
8.5. Long-Term Provisions
8.5.1This should be classified into provision for employee benefits and others specifying
the nature. Provision for employee benefits should be bifurcated into long -term (non-
current) and other current and the long-term portion is disclosed under this para. All
long-term provisions, other than those related to employee benefits should be disclosed
separately based on their nature. Such items would include Provision for warranties etc.
While AS-15Employee Benefits governs the measurement of various employee benefit
obligations, their classification as current and non-current liability will be governed by the
criteria laid down in the Schedule III. Accordingly, a liability is classified as current if a
company does not have an unconditional right as on the Balance Sheet date to defer its
settlement for 12 months after the reporting date. Each company will need to apply these
criteria to its specific facts and circumstances and decide an appropriate classification for
its employee benefit obligations.
8.6. Current Liabilities
This should be classified on the face of the Balance Sheet as follows:
 Short-term borrowings;
 Trade payables;
 Other current liabilities;
 Short-term provisions.
8.6.1. Short-term borrowings
8.6.1.1. (i) Short-term borrowings shall be classified as:
(a) Loans repayable on demand
 from banks;
 from other parties.

(b)Loans and advances from related parties;
(c) Deposits;
(d) Other loans and advances (specify nature).
(ii) Borrowings shall further be sub-classified as secured and unsecured. Nature of
security shall be specified separately in each case.
(iii) Where loans have been guaranteed by directors or others, the aggregate amount of
such loans under each head shall be disclosed.
(iv) Period and amount of default as on the Balance Sheet date in repayment of loans
and interest shall be specified separately in each case.
8.6.1.2Loans payable on demand should be treated as part of short-term borrowings.
Short-term borrowings will include all loans within a period of 12 months from the date
of the loan. In the case of short-term borrowings, all defaults existing as at the date of the
Balance Sheet should be disclosed (item-wise). Current maturity of long-term borrowings
should not be classified as short-term borrowing. They have to be classified under Other
current liabilities. Guidance on disclosure on various matters under this Para should also
be drawn, to the extent possible, from the guidance given under Long-term borrowings.
8.6.2. Trade payables
Guidance on disclosure under this clause should be drawn from the guidance given under
Other Long-term borrowings to the extent applicable.
8.6.3. Other current liabilities
The amounts shall be classified as:
(a) Current maturities of long-term debt;
(b) Current maturities of finance lease obligations;
(c) Interest accrued but not due on borrowings;
(d) Interest accrued and due on borrowings;
(e) Income received in advance;
(f) Unpaid dividends;
(g) Application money received for allotment of securities and due for refund and
interest accrued thereon;
(h) Unpaid matured deposits and interest accrued thereon;
(i) Unpaid matured debentures and interest accrued thereon;
(j) Other payables (specify nature).
The portion of long term debts / lease obligations, which is due for payments within
twelve months of the reporting date is required to be classified und er “Other current
liabilities” while the balance amount should be classified under Long -term borrowings.

Trade Deposits and Security Deposits which are not in the nature of borrowings should be
classified separately under Other Non-current/Current liabilities. Other Payables may be
in the nature of statutory dues such as Withholding taxes, Service Tax, VAT, Excise Duty
etc.
8.6.4. Short-term provisions
The amounts shall be classified as:
(a) Provision for employee benefits;
(b) Others (specify nature).
Others would include all provisions other than provisions for employee benefits such as
Provision for dividend, Provision for taxation, Provision for warranties, etc. These amounts
should be disclosed separately specifying nature thereof.
II. Assets
8.7. Non-current assets
Definition and Presentation
An asset shall be classified as ‘current’ when it satisfies any of the following criteria:
(a) it is expected to be realized in, or is intended for sale or consumption in the
company’s normal operating cycle;
(c) it is expected to be realized within twelve months after the reporting date; or
(d) it is Cash or cash equivalent unless it is restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting date.
All other assets shall be classified as ‘non-current’.
Based on the above definition, on the face of the Balance Sheet, the following items shall
be disclosed under non-current assets: -
(a) Fixed Assets
(i) Tangible assets;
(ii) Intangible assets;
(iii) Capital work-in-progress;
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets
8.7.1 Fixed Assets
Fixed assets are classified as:

S.N Particulars Relevant Accounting Standards as

o. notified under Companies
(Accounting Standards) Rules,
2006
1. Tangible assets AS 10, AS 6
2. Intangible assets AS 26
3. Capital work-in- AS 10
progress
4. Intangible assets AS 26
under development
8.7.1.1 Tangible Assets
The company shall disclose the following in the Notes to Accounts as per 6(I) of Part I of
the Schedule III.
(i) Classification shall be given as:
(a) Land;
(b) Buildings;
(c) Plant and Equipment;
(d) Furniture and Fixtures;
(e) Vehicles;
(f) Office equipment;
(g) Others (specify nature).
(ii) Assets under lease shall be separately specified under each class of asset.
The term “under lease” should be taken to mean assets given on operating lease in
the case of lessor and assets held under finance lease in the case of lessee. Further,
leasehold improvements should continue to be shown as a separate asset class.
(iii) A reconciliation of the gross and net carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions, disposals,
acquisitions through business combinations and other adjustments and the related
depreciation and impairment losses/reversals shall be disclosed separately.
All acquisitions, whether by way of an asset acquisition or through a business
combination are to be disclosed as part of the reconciliation in the note on Fixed Assets.
Acquisitions through ‘Business Combinations’ need to be disclosed separately for each
class of assets. Similarly, though not specifically required, it is advisable that asset
disposals through demergers, etc. may also be disclosed separately for each class of
assets.
The term “business combination” has not been defined in the Act or the Accounting
Standards as notified under the Companies (Accounting Standards) Rules, 2006. However,

related concepts have been enumerated in AS14Accounting for Amalgamations and

AS10Accounting for Fixed Assets. Accordingly, such terminology should be interpreted to
mean an amalgamation or acquisition or any other mode of restructuring of a set of
assets and/or a group of assets and liabilities constituting a business.
Other adjustments should include items such as capitalization of exchange differences
where such option has been exercised by the Company as per AS11The Effects of Changes
in Foreign Exchange Rates and/or adjustments on account of exchange fluctuations for
fixed assets in case of non-integral operations as perAS11and/or borrowing costs
capitalised in accordance with AS 16 Borrowing Costs. Such adjustments should be
disclosed separately for each class of assets.
Since reconciliation of gross and net carrying amounts of fixed assets is required, the
corresponding depreciation/amortization for each class of asset should be disclosed in
terms of Opening Accumulated Depreciation, Depreciation/amortization for the year,
Deductions/Other adjustments and Closing Accumulated Depreciation/Amortization.
Similar disclosures should also be made for Impairment, if any, as applicable.
(iv) Where any amounts have been written-off on a reduction of capital or revaluation of
assets or where sums have been added on revaluation of assets, every Balance Sheet
subsequent to date of such write-off or addition shall show the reduced or increased
figures, as applicable. Disclosure by way of a note would also be required to show
the amount of the reduction or increase, as applicable, together with the date
thereof for the first five years subsequent to the date of such reduction or increase.
The Schedule III has introduced office equipment as a separate line item while dropping
items like, livestock, railway sidings, etc. However, if the said items exist, the same should
be disclosed separate asset class specifying nature thereof.
The Revised Schedule does not prescribe any particular classification/presentation for
leasehold land. AS 19 Leases, excludes land leases from its scope. The accounting
treatment for leasehold land should be continued with as is being currently followed
under the prevailing Indian generally accepted accounting principles and practices.
Accordingly, Leasehold land should also continue to be presented as a separate asset
class under Tangible Assets. Also, Freehold land should continue to be presented as a
separate asset class.
AS10 Accounting for Fixed Assets also requires a company to disclose details such as gross
book value of revalued assets, method adopted to compute revalued amounts, nature of
indices used, year of appraisal, involvement of external valuer as long as the concerned
assets are held by the enterprise.
The Schedule III is clear that the disclosure requirements of the Accounting Standards are
in addition to disclosures required under the Schedule. Also, in case of any conflict, the
Accounting Standards will prevail over the Schedule. Keeping this in view, companies
should make disclosures required by the Schedule III only for five years. However, details
required by AS10 will have to be given as long as the asset is held by the company.

However, it may be noted that, AS 26 Intangible Assets does not permit revaluation of
intangible assets.
8.7.1.2 Intangible assets
The company shall disclose the following in the Notes to Accounts as per 6(J) of Part I of
the Schedule III.
(i) Classification shall be given as:
(a) Goodwill;
(b) Brands /trademarks;
(c) Computer software;
(d) Mastheads and publishing titles;
(e) Mining rights;
(f) Copyrights, and patents and other intellectual property rights, services and
operating rights;
(g) Recipes, formulae, models, designs and prototypes;
(h) Licenses and franchise;
(i) Others (specify nature).
(ii) A reconciliation of the gross and net carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions, disposals,
acquisitions through business combinations and other adjustments and the related
amortization and impairment losses/reversals shall be disclosed separately.
(iii) Where sums have been written-off on a reduction of capital or revaluation of assets
or where sums have been added on revaluation of assets, every Balance Sheet
subsequent to date of such write-off, or addition shall show the reduced or
increased figures as applicable and shall by way of a note also show the amount of
the reduction or increase, as applicable, together with the dat e thereof for the first
five years subsequent to the date of such reduction or increase.
Classification of intangible assets (as listed above) has been introduced under the
Schedule III, which did not exist earlier.
The guidance given above on Tangible Assets, to the extent applicable, is also to be used
for Intangible Assets.
8.7.1.3Capital work-in-progress
As per the Schedule III, capital advances should be included under Long -term loans and
advances and hence, cannot be included under capital work-in-progress.
8.7.1.4Intangible assets under development
Intangible assets under development should be disclosed under this head provided they
can be recognised based on the criteria laid down inAS 26 Intangible Assets.

8.7.2 Non-current investments

(i) Non-current investments shall be classified as trade investments and other
investments and further classified as:
(a) Investment property;
(b) Investments in Equity Instruments;
(c) Investments in preference shares;
(d) Investments in Government or trust securities;
(e) Investments in debentures or bonds;
(f) Investments in Mutual Funds;
(g) Investments in partnership firms;
(h) Other non-current investments (specify nature).
Under each classification, details shall be given of names of the bodies corpora te
(indicating separately whether such bodies are (i) subsidiaries, (ii) associates, (iii)
joint ventures, or (iv) controlled special purpose entities) in whom investments have
been made and the nature and extent of the investment so made in each such body
corporate (showing separately investments which are partly-paid). In regard to
investments in the capital of partnership firms, the names of the firms (with the
names of all their partners, total capital and the shares of each partner) shall be
given.
(ii) Investments carried at other than at cost should be separately stated specifying the
basis for valuation thereof.
(iii) The following shall also be disclosed:
(a)Aggregate amount of quoted investments and market value thereof;
(b)Aggregate amount of unquoted investments;
(c)Aggregate provision for diminution in value of investments
If a debenture is to be redeemed partly within 12 months and balance after 12 months,
the amount to be redeemed within 12 months should be disclosed as current and balance
should be shown as non-current.
8.7.2.1 Trade Investment
Note 6(K)(i) of Part I requires that non-current investments shall be classified as "trade
investment" and "other investments". The term “trade investments” is defined neither in
Schedule III nor in Accounting Standards.
The term "trade investment" is, however, normally understood as an investment made by
a company in shares or debentures of another company, to promote the trade or
business of the first company.

8.7.2.2 Investment property

As per AS13 Accounting for Investments, an investment property is an investment in land
or buildings that are not intended to be occupied substantially for use by, or in the
operations of, the investing enterprise.
8.7.2.3 Aggregate provision for diminution in value
As per the Schedule III, this amount should be disclosed separately in the notes. However,
as per AS13 all long-term (non-current) investments are required to be carried at cost.
However, when there is a decline, other than temporary, in the value of a l ong-term
investment, the carrying amount is reduced to recognize the decline. Accordingly, the
value of each long-term investment should be carried at cost less provision for other than
temporary diminution in the value thereof. It is recommended to disclo se the amount of
provision netted-off for each long-term investment.
However, the aggregate amount of provision made in respect of all non -current
investments should also be separately disclosed to comply with the specific disclosure
requirement in Schedule III.
8.7.2.4 Controlled special purpose entities
Under investments, there is also a requirement to disclose the names of bodies corporate,
including separate disclosure of investments in “controlled special purpose entities” in
addition to subsidiaries, etc. The expression “controlled special purpose entities” however,
has not been defined either in the Act or in the Schedule III or in the Accounting
Standards. Accordingly, no disclosures would be additionally required to be made under
this caption. If and when such terminology is explained/ introduced in the applicable
Accounting Standards, the disclosure requirement would become applicable.
8.7.2.5 Basis of valuation
The Schedule III requires disclosure of the “basis of valuation” of non -current investments
which are carried at other than cost. However, what should be understood by such
terminology has not been clarified. The term ‘basis of valuation’ was not used in the Old
Schedule VI. Hence, the same may be interpreted in the following ways:
One view is that basis of valuation would mean the market value, or valuation by
independent valuers, valuation based on the investee’s assets and results, or valuation
based on expected cash flows from the investment, or management estimate, etc. Hence,
for all investments carried at other than cost, the basis of valuation for each individual
investment should be disclosed.
The other view is that, disclosure for basis of valuation should be either of:
 At cost;
 At cost less provision for other than temporary diminution;
 Lower of cost and fair value.
However, making disclosures in line with the latter view would be sufficient compliance
with the disclosure requirements.

8.7.2.6 Quoted investments

The term quoted investments has not been defined in the Schedule III. Th e expression
“quoted investment”, as defined in the Old Schedule VI, means an investment as respects
which there has been granted a quotation or permission to deal on a recognized stock
exchange, and the expression “unquoted investment” shall be construed accordingly.
8.7.2.7 Under each sub-classification of Investments, there is a requirement to disclose
details of investments including names of the bodies corporate and the nature and extent
of the investment in each such boy corporate. The term “nature and extent” should be
interpreted to mean the number and face value of shares. There is also a requirement to
disclose partly-paid shares. However, it is advisable to clearly disclose whether
investments are fully paid or partly paid.
8.7.2.8 Disclosure relating to partnership firms in which the company has invested,
etc. (under Current and Non-current Investments in the Balance Sheet)
A company, as a juridical person, can enter into partnership. The Schedule III provides for
certain disclosures where the company is a partner in partnership firms.
In the Balance Sheet, under the sub-heading “Current Investments” and “Non-current
Investments”, separate disclosure is to be made of any investment in the capital of
partnership firm by the company. In addition, in the Notes to Accounts separate
disclosure is required with regard to the names of the firms, along with the names of all
their partners, total capital and the shares of each partner.
The disclosure in the Balance Sheet relating to the value of the investm ent in the capital
of a partnership firm as the amount to be disclosed as on the date of the Balance Sheet
can give rise to certain issues, the same are discussed in the following paragraphs.
(a) In case of a change in the constitution of the firm during the year, the names of the
other partners should be disclosed by reference to the position existing as on the
date of the company’s Balance Sheet.
(b) The total capital of the firm to be disclosed should be with reference to the amount
of the capital on the date of the company’s Balance Sheet.
If it is not practicable to draw up the Financial Statements of the partnership upto
such date and, are drawn up to different reporting dates, drawing analogy from AS -
21 and AS-27, adjustments should be made for the effects of significant
transactions or other events that occur between those dates and the date of the
parent’s Financial Statements. In any case, the difference between reporting dates
should not be more than six months. In such cases, the difference in reporting dates
should be disclosed.
(c) For disclosure of the share of each partner it is suggested to disclose share of each
partner in the profits of the firm rather than the share in the capital since, ordinarily,
the expression “share of each partner” is understood in this sense. Moreover,
disclosure is already required of the total capital of the firm as well as of the

company’s share in that capital. The share of each partner should be disclosed as at
the date of the company’s Balance Sheet
(d) The Statement of investments attached to the Balance Sheet is required to disclose,
inter alia, the total capital of the partnership firm in which the company is a partner.
Where such a partnership firm has separate accounts for partner’s capital, drawing s
or current, loans to or from partners, etc., disclosure must be made with regard to
the total of the capital accounts alone, since this is what constitutes the capital of
the partnership firm. Where, however, such accounts have not been segregated, or
where the partnership deed provides that the capital of each partner is to be
calculated by reference to the net amount at his credit after merging all the
accounts, the disclosure relating to the partnership capital must be made on the
basis of the total effect of such accounts taken together.
Separate disclosure is required by reference to each partnership firm in which the
company is a partner. The disclosure must be made along with the name of each such
firm and must then indicate the total capital of each firm, the names of all the partners in
each firm and the respective shares of each partner in the firm.
8.7.2.9 A limited liability partnership is a body corporate and not a partnership firm as
envisaged under the Partnership Act, 1932. Hence, disclosures pertaining to Investments in
partnership firms will not include investments in limited liability partnerships. The investments
in limited liability partnerships will be disclosed separately under other investments. Also,
other disclosures prescribed for Investment in partnership firms, need not be made for
investments in limited liability partnerships.
8.7.2.10 Any application money paid towards securities, where security has not been allotted
on the date of the Balance Sheet shall be disclosed as a separate line item. If the amount is
material, details about the allotment since made or when the allotment is expected to be
completed may also be disclosed.
In case the investment is of current investment in nature, such share application money shall
be accordingly, disclosed under current investments.
8.7.3 Long-term loans & advances
(i) Long-term loans and advances shall be classified as:
(a) Capital Advances;
(b) Security Deposits;
(c) Loans and advances to related parties (giving details thereof);
(d) Other loans and advances (specify nature).
(ii) The above shall also be separately sub-classified as:
(a) Secured, considered good;
(b) Unsecured, considered good;
(c) Doubtful.
(iii) Allowance for bad and doubtful loans and advances shall be disclose d under the
relevant heads separately.

(iv) Loans and advances due by directors or other officers of the company or any of them
either severally or jointly with any other persons or amounts due by firms or private
companies respectively in which any director is a partner or a director or a member
should be separately stated.
Under the Schedule III, Capital Advances are not to be classified under Capital Work in
Progress, since they are specifically to be disclosed under this para.
Capital advances are advances given for procurement of fixed assets which are non-
current assets. Typically, companies do not expect to realize them in cash. Rather, over
the period, these get converted into fixed assets which, by nature, are non -current assets.
Hence, capital advances should be treated as non-current assets irrespective of when the
fixed assets are expected to be received and should not be classified as Short -
Term/Current.
Details of loans and advances to related parties need to be disclosed. Since the Schedule
III states that the terms used therein should be interpreted based on applicable the
Accounting Standards, the term “details” should be interpreted to understand the
disclosure requirements contained in AS 18Related Party Disclosure. Accordingly, making
disclosures beyond the requirements of AS-18 would not be necessary.
Other loans and advances should include all other items in the nature of advances
recoverable in cash or kind such as Prepaid expenses, Advance tax, CENVAT credit
receivable, VAT credit receivable, Service tax credit receivable, etc. which are not expected
to be realized within the next twelve months or operating cycle whichever is longer, from
the Balance Sheet date.
Each item of loans and advances should be further sub-classified as a) Secured,
considered good, b) Unsecured, considered good and c) Doubtful. Further, the amount of
allowance for bad and doubtful loans and advances is required to be disclosed separately
under the “relevant heads”. Therefore, the amount of such allowance also shou ld be
disclosed separately for each category of loans and advances.
8.7.4 Other non-current assets
Other non-current assets shall be classified as:
(i) Long term Trade Receivables (including trade receivables on deferred credit terms);
(ii) Others (specify nature)
Long term Trade Receivables, shall be sub-classified as:
(i) (a) Secured, considered good;
(b) Unsecured considered good;
(c) Doubtful
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads
separately.

(iii) Debts due by directors or other officers of the company orany of them either
severally or jointly with any other person or debts due by firms or private
A receivable shall be classified as 'trade receivable' if it is in respect of the amount due on
account of goods sold or services rendered in the normal course of business. Whereas as
per the Old Schedule VI, the term 'sundry debtors' included amounts due in respect of
goods sold or services rendered or in respect of other contractual obligations as well.
Hence, amounts due under contractual obligations cannot be included within Trade
Receivables. Such items may include dues in respect of insurance claims, sale of fixed
assets, contractually reimbursable expenses, interest accrued on trade receivables, etc.
Such receivables should be classified as "others" and each such item should be disclosed
nature-wise.
Guidance in respect of above items may also be drawn from the guidance given in
respect of Long-term loans &advances to the extent applicable.
The Schedule III does not contain any specific disclosure requirement for the unamortized
portion of expense items such as share issue expenses, ancillary borrowing costs and
discount or premium relating to borrowings. The Old Schedule VI required these items to
be included under the head “Miscellaneous Expenditure.”
As per AS 16 Borrowing Costs ancillary borrowing costs and discount or premium relating
to borrowings could be amortized over the loan period. Further, share issue expenses,
discount on shares, ancillary costs-discount-premium on borrowing, etc., being special
nature items are excluded from the scope of AS 26Intangible Assets (Para 5). Keeping this
in view, certain companies have taken a view that it is an acceptable practice to amortize
these expenses over the period of benefit, i.e., normally 3 to 5 years. The Schedule III does
not deal with any accounting treatment and the same continues to be governed by the
respective Accounting Standards/practices. Further, the Schedule III is clear that
additional line items can be added on the face or in the notes. Keeping this in view, entity
can disclose the unamortized portion of such expenses as “Un amortized expenses”, under
the head “other current/ non-current assets”, depending on whether the amount will be
amortized in the next 12 months or thereafter.
8.8 Current assets
As per the Schedule III, all items of assets and liabilities are to be bifurcated between current
and non-current portions. In some cases, the items presented under the “non-current” head
of the Balance Sheet do not have a corresponding “current” head especially for Assets. For
example: Security Deposits have been shown under “Long-term loans & advances”, however,
the same is not reflected under the “short-term loans & advances”. Since Schedule III permits
the use of additional line items, in such cases the current portion should be classified under
the Short-term category of the respective balance as a separate line item and other relevant
disclosures e.g. doubtful amount, related provision etc. should be made.

8.8.1 Current investments

(i) Current investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investment in Preference Shares
(c) Investments in government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms
(g) Other investments (specify nature).
Under each classification, details shall be given of names of the bodies corporate
(indicating separately whether such bodies are (i) subsidiaries, (ii) associates, (iii)
joint ventures, or (iv) controlled special purpose entities) in whom investments have
been made and the nature and extent of the investment so made in each such body
corporate (showing separately investments which are partly-paid). In regard to
investments in the capital of partnership firms, the names of the firms (with the
names of all their partners, total capital and the shares of each partner) shall be
given.
(ii) The following shall also be disclosed:
(a) The basis of valuation of individual investments
(b) Aggregate amount of quoted investments and market value thereof;
(c) Aggregate amount of unquoted investments;
(d) Aggregate provision made for diminution in value of investments.
Guidance in respect of above items may be drawn from the guidance given in respect of
Non-current investments to the extent applicable.
Based on these criteria, if a debenture is to be redeemed partly within twelve months and
balance after twelve months, the amount to be redeemed within twelve months should be
disclosed as current and balance should be shown as non-current.
Additionally, the Schedule III also require basis of valuation of individual investment. It is
pertinent to note that there is no requirement to classify investments into trade & non -
trade in respect of current investments.
The aggregate provision for diminution in the value of current investments that need s to
be separately disclosed is the amount written down based on the measurement principles
of Current Investments as per AS-13 on a cumulative basis, though such write-down is
not actually a ‘provision’ as per the Standard.
8.8.2 Inventories
(i) Inventories shall be classified as:
(a) Raw materials;
(b) Work-in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) Stores and spares;
(f) Loose tools;
(g) Others (specify nature).
(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
(iii) Mode of valuation shall be stated.
As per the Schedule III, goods in transit should be included under relevant heads with
suitable disclosure. Further, mode of valuation for each class of inven tories should be
disclosed.
The heading Finished goods should comprise of all finished goods other than those
acquired for trading purposes.
8.8.3 Trade Receivables (current)
(i) Aggregate amount of Trade Receivables outstanding for a period exceeding six
months from the date they are due for payment should be separately stated.
(ii) Trade receivables shall be sub-classified as:
(b) Unsecured considered good;
(c) Doubtful.
(iii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads
separately.
(iv) Debts due by directors or other officers of the company or any of them either
severally or jointly with any other person or debts due by firms or private
A trade receivable will be treated as current, if it is likely to be realized within twelve
months from the date of Balance Sheet or operating cycle of the business.
The Old Schedule VI required separate presentation of debtors (i) outstanding for a
period exceeding six months (i.e., based on billing date) and (ii) other debtors. However,
the Schedule III (and earlier, the Revised Schedule VI) requires separate disclosure of
“Trade Receivables outstanding for a period exceeding six months from the date they
became due for payment” only for the current portion of trade receivables.
Where no due date is specifically agreed upon, normal credit period allowed by the
company should be taken into consideration for computing the due date which may vary
depending upon the nature of goods or services sold and the type of customers, etc.

All other guidance given under Long-term Trade Receivables to the extent applicable are
applicable here also.
8.8.4 Cash and cash equivalents
(i) Cash and cash equivalents shall be classified as:
(a) Balances with banks;
(b) Cheques, drafts on hand;
(c) Cash on hand;
(d) Others (specify nature).
(ii) Earmarked balances with banks (for example, for unpaid dividend) s hall be
separately stated.
(iii) Balances with banks to the extent held as margin money or security against the
borrowings, guarantees, other commitments shall be disclosed separately.
(iv) Repatriation restrictions, if any, in respect of cash and bank bal ances shall be
separately stated.
(v) Bank deposits with more than twelve months maturity shall be disclosed separately.
The term "cash and bank balances" in the Old Schedule VI is replaced with ‘Cash and cash
equivalents’ in the Schedule III.
Please also refer to the earlier discussion under the section on General Instructions
in para 6.4 for classification of items under this head.
“Other bank balances” would comprise of items such as balances with banks to the extent
of held as margin money or security against borrowings etc, and bank deposits with more
than three months maturity. Banks deposits with more than more than twelve months
maturity will also need to be separately disclosed under the sub -head ‘Other bank
balances’. The non-current portion of each of the above balances will have to be classified
under the head “Other Non-current assets” with separate disclosure thereof.
8.8.5Short-term loans &Advances
(i) Short-term loans and advances shall be classified as:
(a) Loans and advances to related parties (giving details thereof);
(b) Others (specify nature).
(ii) The above shall also be sub-classified as:
(b) Unsecured, considered good;
(c) Doubtful.
(iii) Allowance for bad and doubtful loans and advances shall be disclosed under the
relevant heads separately.
(iv) Loans and advances due by directors or other officers of the company or any of them

either severally or jointly with any other person or amounts due by firms or private
shall be separately stated.
The guidance for disclosures under this head should be drawn from guidance given for
items comprised within Long-term Loans and Advances.
8.8.6 Other current assets (specify nature)
This is an all-inclusive heading, which incorporates current assets that do not fit into any
other asset categories e.g. unbilled Revenue, unamortized premium on forward contracts
etc.
In case any amount classified under this category is doubtful, it is a dvisable that such
doubtful amount as well as any provision made there against should be separately
disclosed.
8.8.7 Contingent liabilities and commitments
(i) Contingent liabilities shall be classified as:
(a) Claims against the company not acknowledged as debt;
(b) Guarantees;
(c) Other money for which the company is contingently liable
(ii) Commitments shall be classified as:
(a) Estimated amount of contracts remaining to be executed on capital account
and not provided for;
(b) Uncalled liability on shares and other investments partly paid
(c) Other commitments (specify nature).
8.8.7.1 The provisions of AS-29Provisions, Contingent Liabilities and Contingent Assets,
will be applied for determining contingent liabilities.
8.8.7.2 A contingent liability in respect of guarantees arises when a company issues
guarantees to another person on behalf of a third party e.g. when it undertakes to
guarantee the loan given to a subsidiary or to another company or gives a guarantee that
another company will perform its contractual obligations. However, where a company
undertakes to perform its own obligations, and for this purpose issues, what is called a
"guarantee", it does not represent a contingent liability and it is misleading to show such
items as contingent liabilities in the Balance Sheet. For various reasons, it is customary for
guarantees to be issued by Bankers e.g. for payment of insurance premia, deferred
payments to foreign suppliers, letters of credit, etc. For this purpose, the company issues
a "counter-guarantee" to its Bankers. Such "counter-guarantee" is not really a guarantee
at all, but is an undertaking to perform what is in any event the obligation of the
company, namely, to pay the insurance premia when demanded or to make deferred
payments when due. Hence, such performance guarantees and counter-guarantees
should not be disclosed as contingent liabilities.

8.8.7.3 The Schedule III also requires disclosures pertaining to various commitments such
as Capital commitments not provided for and Uncalled liability on shares. It also requires
disclosures pertaining to ‘Other commitments’, with specification of nature thereof, which
was not required by the Old Schedule VI.
8.8.7.4 The word ‘commitment’ has not been defined in the Schedule III. The Gu idance
Note on Terms Used in Financial Statements issued by ICAI defines ‘Capital Commitment’
as future liability for capital expenditure in respect of which contracts have been made.
Hence, drawing inference from such definition, the term ‘commitment’ wou ld simply
imply future liability for contractual expenditure. Accordingly, the term ‘Other
commitments’ would include all expenditure related contractual commitments apart from
capital commitments such as commitments arising from long-term contracts for purchase
of raw material, employee contracts, lease commitments, etc. The scope of such
terminology is very wide and may include contractual commitments for purchase of
inventory, services, investments, sales, employee contracts, etc. However, to give
disclosure of all contractual commitments would be contrary to the overarching principle
under General Instructions that “a balance shall be maintained between providing
excessive detail that may not assist users of Financial Statements and not providing
important information as a result of too much aggregation.”
8.8.7.5 Disclosures relating to lease commitments for non-cancellable leases are required
to be disclosed by AS-19 Leases.
8.8.7.6Accordingly, the disclosures required to be made for ‘other commitments ’ should
include only those non-cancellable contractual commitments (i.e. cancellation of which
will result in a penalty disproportionate to the benefits involved) based on the
professional judgement of the management which are material and relevant in
understanding the Financial Statements of the company and impact the decision making
of the users of Financial Statements.
Examples may include commitments in the nature of buy-back arrangements,
commitments to fund subsidiaries and associates, non-disposal of investments in
subsidiaries and undertakings, derivative related commitments, etc.
8.8.7.7 The Schedule III requires disclosure of the amount of dividends proposed to be
distributed to equity and preference shareholders for the period and the related am ount
per share to be disclosed separately. It also requires separate disclosure of the arrears of
fixed cumulative dividends on preference shares. The Old Schedule VI specifically required
proposed dividend to be disclosed under the head “Provisions.” In the Schedule III, this
needs to be disclosed in the notes. Hence, a question that arises is as to whether this
means that proposed dividend is not required to be provided for when applying the
Schedule III. AS-4 Contingencies and Events Occurring After the Balance Sheet date
requires that 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 a djusted. Keeping this in
view and the fact that the Accounting Standards override the Schedule III, companies will
have to continue to create a provision for dividends in respect of the period covered by
the Financial Statements and disclose the same as a provision in the Balance Sheet, unless
AS-4 is revised. Hence, the disclosure to be made in the notes is over and above the
disclosures pertaining to a) the appropriation items to be disclosed under Reserves and
Surplus and b) Provisions in the Balance Sheet.
8.8.7.8The Schedule III requires that where in respect of an issue of securities made for a
specific purpose, the whole or part of the amount has not been used for the specific
purpose at the Balance Sheet date, there shall be indicated by way of note how such
unutilized amounts have been used or invested.
8.8.7.9 The Schedule III also states that if, in the opinion of the Board, any of the assets
other than fixed assets and non-current investments do not have a value on realization in
the ordinary course of business at least equal to the amount at which they are stated, the
fact that the Board is of that opinion, shall be stated. It is difficult to contemplate a
situation where any asset other than fixed assets and non-current investments has a
realizable value that is lower than its carrying value, and the same is not given effect to in
the books of account, since Accounting Standards do not permit the same.
AS13Accounting for Investments requires current investments to be valued at lower of
cost and fair value. AS2 Valuation of Inventories also requires inventories to be valued at
the lower of cost and net realizable value. Further, Allowance for bad and doubtful debts
is required to be shown as a deduction from both Long-term loans &advances and Other
Non-current assets as well as Trade Receivables and Short-term loans and advances as
per Schedule III. Hence, a diligent application of the requirements of Accounting
Standards and Schedule III will normally not leave any scope for making any additional
disclosures in this regard.
9. Part II – Statement of Profit and Loss
Part II deals with disclosures relating to the Statement of Profit and Loss. The format
prescribed is the vertical form wherein disclosure for revenues and expenses is in various
line items. Part II of the Schedule contains items I to XVI which lists items of Revenue,
Expenses and Profit / (Loss). “General Instructions for Preparation of Statement of Profit
and Loss” govern the other disclosure and presentation.
As per the Guidance Note ‘Terms Used in Financial Statements’, the phrase ‘Profit and
Loss statement’ is defined as “the Financial Statement which presents the revenues and
expenses of an enterprise for an accounting period and shows the excess of revenues over
expenses (or vice versa) It is also known as profit and loss account.”
As per Note 1 to “General Instructions for Preparation of Statement of Profit and Loss”,
the provisions of this part also apply to the income and expenditure account referred to
in sub clause (ii) of clause (40) of section 2 of the Companies Act, 2013 in the same
manner as they apply to a Statement of Profit and Loss.
The specific format laid down for presentation of various items of Income and Expenses in
the Statement of Profit and Loss indicates that expenses should be aggregated based on
their nature. Accordingly, functional classification of expenses is prohibited.

As per the Framework For The Preparation and Presentation Of Financial Statements,
Income and expenses are defined as follows:
(a) Income is increase in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases
in equity, other than those relating to contributions from equity participants.
(b) Expenses are decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities that result in
decreases in equity, other than those relating to distributions to equity participants.
9.1 Revenue from operations:
The aggregate of Revenue from operations needs to be disclosed on the face of the
Statement of Profit and Loss as per Schedule III
9.1.1 Note 2(A) to General Instructions for the Preparation of Statement of Profit and
Loss require that in respect of a company other than a finance company, Revenue from
operations is to be separately disclosed in the notes, showing revenue from:
(a) Sale of products
(b) Sale of services
(c) Other operating revenues
(d) Less: Excise duty
9.1.2 As per AS-9 “Revenue Recognition”, the above disclosure in respect of Excise Duty
needs to be shown on the face of the Statement of Profit and Loss. Since Accounting
Standards override Schedule III, the presentation in respect of excise duty will have to be
made on the face of the Statement of Profit and Loss. In doing so, a company may choose
to present the elements of revenue from sale of products, sale of services and other
operating revenues also on the face of the Statement of Profit and Loss instead of the
Notes.
9.1.3Indirect taxes such as Sales tax, Service tax, Purchase tax etc. are generally collected
from the customer on behalf of the government in majority of the cases. However, this
may not hold true in all cases and it is possible that a company may be acting as principal
rather than as an agent in collecting these taxes. Whether revenue should be presented
gross or net of taxes should depend on whether the company is acting as a principal and
hence responsible for paying tax on its own account or, whether it is acting as an agent
i.e. simply collecting and paying tax on behalf of government authorities. In the former
case, revenue should also be grossed up for the tax billed to the customer and the tax
payable should be shown as an expense. However, in cases, where a company collects tax
only as an intermediary, revenue should be presented net of taxes.
9.1.4 However, as per the Guidance Note on Value Added Tax, “Value Added Tax
(VAT) is collected from the customers on behalf of the VAT authorities and, therefore, its
collection from the customers is not an economic benefit for the enterprise and it does
not result in any increase in the equity of the enterprise”. Accordingly, VAT should not be
recorded as Revenue of the enterprise. At the same time, the payment of VAT should not
be treated as an expense in the Financial Statements of the company.

9.1.5 Further, as per the definition of Revenue in the Guidance Note on Terms Used in
Financial Statement, “It excludes amounts collected on behalf of third parties such as
certain taxes”. The Guidance Note on VAT further states, “Where the enterprise has not
charged VAT separately but has made a composite charge, it should segregate the
portion of sales which is attributable to tax and should credit the same to ‘VAT Payable
Account’ at periodic intervals”.
9.1.6 For non-finance companies, revenue from operations needs to be disclosed
separately as revenue from
(a) sale of products,
(b) sale of services and
(c) other operating revenues.
It is important to understand what is meant by the term “other operating revenues” and
which items should be classified under this head vis-à-vis under the head “Other Income”.
9.1.7 The term “other operating revenue” is not defined. This would include Revenue
arising from a company’s operating activities, i.e., either its principal or ancillary revenue-
generating activities, but which is not revenue arising from the sale of products or
rendering of services. Whether a particular income constitutes “other operating revenue”
or “other income” is to be decided based on the facts of each case and detailed
understanding of the company’s activities. The classification of income would also
depend on the purpose for which the particular asset is acquired or held. For instance, a
group engaged in manufacture and sale of industrial and consumer products also has one
real estate arm. If the real estate arm is continuously engaged in leasing of real estate
properties, the rent arising from leasing of real estate is likely to be “other operating
revenue”. On the other hand, consider a consumer products company which owns a 10
storied building. The company currently does not need one floor for its own use and has
given the same temporarily on rent. In that case, lease rent is not an “other operating
revenue”; rather, it should be treated as “other income”.
9.1.8 To take other examples, sale of Fixed Assets is not an operating activity of a
company, and hence, profit on sale of fixed assets should be classified as other income
and not other operating revenue. On the other hand, sale of manufacturing scrap arising
from operations for a manufacturing company should be treated as other operating
revenue since the same arises on account of the company’s main operating activity.
9.1.9 Net foreign exchange gain should be classified as Other Income. This is because
such gain or loss arises purely on account of fluctuation in exchange rates and not on
account of sale of products or services rendered, unless the business of the company is to
deal in foreign exchange.
9.1.10 As per Note 2(A) to General Instructions for Preparation of Statement of Profit
and loss, in respect of a finance company, revenue from operations shall include revenue
from

(a) Interest; and

(b) Other financial services
Revenue under each of the above heads is to be disclosed separately by way of Notes to
Accounts to the extent applicable.
9.1.11 The term finance company is not defined under the Companies Act, 2013, or
Schedule III. Hence, the same should be taken to include all companies carrying on
activities which are in the nature of “business of non-banking financial institution” as
defined under section 45I(f) of the Reserve Bank of India Act, 1935.
The relevant extract is reproduced below:
(a) ‘‘business of a non-banking financial institution’’ means carrying on of the business
of a financial institution referred to in clause (c) and includes business of a non -banking
financial company referred to in clause (f);
(c) ‘‘financial institution’’ means any non-banking institution which carries on as its
business or part of its business any of the following activities, namely: –
(i) the financing, whether by way of making loans or advances or otherwise, of any
activity other than its own:
(ii) the acquisition of shares, stock, bonds, debentures or secur ities issued by a
Government or local authority or other marketable securities of a like nature:
(iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as
defined in clause (c) of section 2 of the Hire-Purchase Act, 1972:
(iv) the carrying on of any class of insurance business;
(v) managing, conducting or supervising, as foreman, agent or in any other capacity, of
chits or kuries as defined in any law which is for the time being in force in any State,
or any business, which is similar thereto;
(vi) collecting, for any purpose or under any scheme or arrangement by whatever name
called, monies in lumpsum or otherwise, by way of subscriptions or by sale of units,
or other instruments or in any other manner and awarding prizes or gifts, whether
in cash or kind, or disbursing monies in any other way, to persons from whom
monies are collected or to any other person, but does not include any institution,
which carries on as its principal business,–
(a) agricultural operations; or
(aa) industrial activity; or
(b) the purchase or sale of any goods (other than securities) or the providing of
any services; or
(c) the purchase, construction or sale of immovable property, so however, that no
portion of the income of the institution is derived from the financing of
purchases, constructions or sales of immovable property by other persons;

Explanation.– For the purposes of this clause, ‘‘industrial activity’’ means any
activity specified in sub-clauses (i) to (xviii) of clause (c) of section 2 of the
Industrial Development Bank of India Act, 1964;
(f) ‘‘non-banking financial company’’ means–
(i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as its principal
business the receiving of deposits, under any scheme or arrangement or in
any other manner, or lending in any manner;
(iii) such other non-banking institution or class of such institutions, as the bank
may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify;
9.1.12 Accordingly, applying the aforesaid definition, the term “finance company” would
cover all NBFCs - Asset Finance companies, Investment companies, Leasing and Hire
Purchase companies, Loan companies, Infra Finance companies, Core Investment
companies, Micro-finance companies, etc. Further, Housing Finance Companies regulated
by National Housing Bank should also be considered as a finance company.
9.2 Other income:
The aggregate of ‘Other income’ is to be disclosed on face of the Statement of Profit and
Loss.
9.2.1 As per Note 4 to General Instructions for the preparation of Statement of Profit and
Loss ‘Other Income shall be classified as:
(a) Interest Income (in case of a company other than a finance company);
(b) Dividend Income;
(c) Net gain / loss on sale of investments;
(d) Other non-operating income (net of expenses directly attributable to such income).
9.2.2 All kinds of interest income for a company other than a finance company shou ld be
disclosed under this head such as interest on fixed deposits, interest from customers on
amounts overdue, etc.
9.2.3 Clause (a) of Note 5 (vii) requires a separate disclosure for Dividends from
subsidiary companies. The Old Schedule VI specifically required parent companies to
recognise dividend declared by subsidiary companies even if declared after the Balance
Sheet date if they are related to the period covered by the Financial Statements. The
Schedule III (and earlier, the Revised Schedule VI) does not prescribe any such accounting
requirement. Accordingly, dividend income from subsidiary companies should be
recognized in accordance with AS-9, i.e. only when they have a right to receive the same
on or before the Balance Sheet date. Normally, the right to receive is established only
when the dividend is approved by the shareholders at the Annual General Meeting of the
investee company.

9.2.4 Other income items such as interest income, dividend income and net gain on sale
of investments should be disclosed separately for Current as well as Long-term
Investments as required by AS13 “Accounting for Investments”. If it is a net loss the same
should be classified under expenses.
9.2.5 For other non-operating income, income should be disclosed under this head net
off expenses directly attributable to such income. However, the expenses so netted off
should be separately disclosed.
9.3 Share of profits/losses in a Partnership firm
9.3.1 Though, there is no specific requirement in the Schedule III to disclos e profit or
losses on investments in a partnership firm as was required by the Old Schedule VI, the
same should be disclosed as discussed as under.
9.3.2 Share of profit or loss in a partnership firm accrues the moment the same is
computed and credited or debited to the Capital/Current/any other account of the
company in the books of the partnership firm. Hence, the same should be accordingly
accounted for in the books of the company.
9.3.3 Separate disclosure of profits or losses from partnership firms should be made. In a
case where the company was a partner during the year but is not a partner at the end of
the year, the disclosure should be made for the period during which the company was a
partner.
9.3.4 The company's share of the profits or losses of the partnership firm should be
calculated by reference to the company's own accounting year. The Financial Statements
of the partnership for computing the share of profits and losses should be drawn up to
the same reporting date. If it is not practicable to draw up the Financial Statements of the
partnership upto such date and, are drawn up to a different reporting date, drawing
analogy from AS-21 and AS-27, adjustments should be made for the effects of significant
transactions or other events that occur between that date and the date of the parent’s
Financial Statements. In any case, the difference between reporting dates should not be
more than six months. In such cases, the difference in reporting dates should be
disclosed.
9.3.5 In case the year ending of the company and of the firm fall on different dates, the
Financial Statements of the company should also contain a note to indicate that the
accounting period of the partnership firm in respect of which the profits or losses have
been accounted for in the company's books.
9.3.6 If however, a partnership firm happens to be in the nature of a Jointly Controlled
Operation as defined in AS-27, the share of incomes, expenses, assets or liabilities will
have to be accounted for in the Standalone Financial Statements as prescribed in AS-27.
9.3.7 In case the partnership firm is a Subsidiary under AS-21, Associate under AS-23 or
Jointly Controlled Entity/Jointly Controlled Operation under AS -27, in the Consolidated
Financial Statements, the share of profit/loss from the firm should be accounted for in
terms of the applicable Accounting Standard as stated above.

9.3.8 The aforesaid principles should also be applied to accounting for the share of
profits and losses in an Association of Persons (AOP).
9.4 Share of profits/losses in a Limited Liability Partnership (LLP)
9.4.1 A Limited Liability Partnership, as per the LLP Act, is a body corporate and the share
of profit/loss in the LLP does not accrue to the partners till the same is transferred to the
Partners’ Capital/Current Account as per the terms of the LLP Agreement. Accordingly,
the share of profit/loss should be accounted in the books of the company as and when
the same is credited/debited to the Partners’ Capital Account.
9.4.2 Depending upon the terms of agreement between the Partners, the LLP may be a
Subsidiary under AS-21, Associate under AS-23 or Jointly Controlled Entity under AS-27.
Hence, accounting in respect of the same in the Consolidated Financial Statements would
be governed by the applicable Accounting Standards.
9.5 Expenses
The aggregate of the following expenses are to be disclosed on the face of the
Statement of Profit and Loss:
 Cost of materials consumed
 Purchases of Stock-in-Trade
 Changes in inventories of finished goods, work in progress and stock in trade
 Employee benefits expense
 Finance costs
 Depreciation and amortization expense
 Other expenses
9.5.1 Cost of materials consumed
9.5.1.1 This disclosure is applicable for manufacturing companies. Materials consumed
would consist of raw materials, packing materials (where classified by the company as raw
materials) and other materials such as purchased intermediates and components which
are ‘consumed’ in the manufacturing activities of the company. Where packing materials
are not classified as raw materials the consumption thereof should be disclosed
separately. However, intermediates and components which are internally manufactured
are to be excluded from the classification:
9.5.1.2 For purpose of classification of inventories, internally manufactured components
may be disclosed as below:
i. where such components are sold without further processing they are to be
disclosed as 'finished products'.
ii. where such components are sold only after further processing, the better course is
to disclose them as 'work-in-progress' but they may also be disclosed as
'manufactured components’ subject to further processing or with such other
suitable description as 'semi-finished products' or 'intermediate products'.

iii. where such components are sometimes sold without further processing and
sometimes after further processing it is better to disclose them as 'manufactured
components'.
9.5.1.3 For the purpose of interpreting the requirement to classify the raw materials,
some guidance may be necessary with regard to the question as to what constitutes raw
materials. According to the strict dictionary connotation of this term, raw materials would
include only materials obtained in the state of nature. Such a definition would, however,
be unrealistic in context of this requirement because it would exclude even a basic
material such as steel. Generally speaking, the term “raw materials” would include
materials which physically enter into the composition of the finished product. Materials,
such as stores, fuel, spare parts etc, which do not enter physically into the composition of
the finished product, would therefore, be excluded from the purview of the term “raw
materials”.
9.5.1.4 The requirement is silent with regard to containers and packaging materials. It is,
therefore, open to question whether such materials constitute a category of “raw
materials” for the purpose of the classification. The matter should be decided in the light
of the facts and circumstances of each case, the nature of the containers and packaging
materials, their relative value in comparison to the raw materials consumed, and other
similar considerations. Where, however, packaging materials, because of their nature are
included in raw materials it is preferable to show the description as “raw materials
including packaging materials consumed”.
9.5.1.5 Since in case of a company which falls under the category of manufacturing or
manufacturing and trading company, disclosure is required with regard to raw materials
consumed, care should be taken to ensure that the figures relate to actual consumption
rather than “derived consumption”. The latter figure is ordinarily obtained by deducting
the closing inventory from the total of the opening inventory and purchases, but this
figure may not always represent a fair indication of actual consumption because it might
conceal losses and wastages. On the other hand, if the figure of actual consumption can
be compiled from issue records or other similar data, it is likely to be more accurate.
Where this is not possible, the derived figure of consumption may be shown and it is left
to the company, according to the circumstances of each case, to determine whether any
footnote is required to indicate that the consumption disclosed is on the basis of derived
figures rather than actual records of issue.
9.5.1.6 Where the consumption is disclosed on the basis of actual records of issue, a
further question arises with regard to the treatment of shortages, losses and wastages. In
most manufacturing companies, these are inevitable. It is, therefore, suggested that the
company should itself establish reasonable norms of acceptable margins. Any shortages,
losses or wastages which are within these norms may be regarded as an ordinary
incidence of the manufacturing process and may, therefore, be included in the figure of
consumption. On the other hand, any shortages, losses or wastages which are beyond the
permitted margin or when they are known to have occurred otherwise than in the
manufacturing process, should not be included in the consumption figures. Whether or
not such abnormal variations need to be separately disclosed in the accounts would
depend upon the facts and circumstances of each case. The General Instructions for
Preparation of Statement of Profit and Loss does not require any specific disclosures.
9.5.1.7 In the case of industries where there are several processes, materials may move
from process to process, so that the finished product of one department constitutes the
raw materials of the next. Since the disclosure requirement provides only for disclosure of
raw material under broad heads and goods purchased under broad heads and also
having regard to the fact that the consumption of raw materials for production of such
intermediates would have to be accounted as raw materials consumed, it follows that
internal transfers from one department to another should be disregarded in determining
the consumption figures to be disclosed.
9.5.2 Purchases of Stock in Trade
Stock-in-trade refers to goods purchased normally with the intention to resell or trade in.
In case, any semi-finished goods/materials are purchased with an intention of doing
further processing activities on the same, the same should be included in ‘cost of
materials consumed’ rather than under this item.
9.5.3 Changes in inventories of finished goods, work-in-progress and stock-in-trade
This requires disclosure of difference between opening and closing inventories of finished
goods, work-in-progress and stock-in-trade. The difference should be disclosed
separately for finished goods, work in progress and stock in trade.
9.5.4 Employee benefits expense [Note 5(i)(a)]
This requires disclosure of the following details:
9.5.4.1Salaries and wages
The aggregate amounts paid/payable by the company for p ayment of salaries and wages
are to be disclosed here. Expenses on account of bonus, leave encashment, compensation
and other similar payments also need to be disclosed here. Where a separate fund is
maintained for Gratuity payouts, contribution to Gratuity fund should be disclosed under
the sub-head Contribution to provident and other funds.
The term employee should be deemed to include directors who are either in whole -time
or part-time employment of the company. It will exclude those directors who attend only
Board meetings and are not under a contract of service with the company. Those who act
as consultants or advisers without involving the relationship of master and servant with
the company should also be excluded. A distinction should be made between persons
engaged under a contract of service and those engaged under a contract for services.
Only the former are to be included in the computation. Whether part -time employees are
to be included would depend on the facts and circumstances of each case - the basic
criterion being whether they are employed under a contract of service or a contract for
services.

9.5.4.2 Contribution to provident and other funds

The aggregate amounts paid/payable by a company on account of contributions to
provident fund and other funds like Gratuity fund, Superannuation fund, etc. are to be
disclosed here.
Contributions for such funds for contract labour may also be separately disclosed here.
However, penalties and other similar amounts paid to the statutory authorities are not
strictly in the nature of ‘contribution’ and should not be disclosed here.
9.5.4.3 Expense on Employee Stock Option Scheme (ESOP) and Employee Stock
Purchase Plan (ESPP)
The amount of expense under this head should be determined in accordance with th e
Guidance Note on Accounting for Employee Share based Payments and/or the SEBI
(Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999,
as applicable. All disclosures required by the aforesaid Guidance Note should be made
here.
9.5.4.4 Staff welfare expense
The total expenditure on Staff welfare is to be disclosed herein.
9.5.5 As per Note 3 of to the General Instructions for the Preparation of the
Statement of Profit and Loss, disclosure of Finance costs is to be bifurcated under
the following:
(A) Interest expense
(B) Other borrowing costs
(C) Applicable net gain/loss on foreign currency transactions and translation
A) Interest expense
This would cover interest paid on borrowings from banks and others, on debentures,
bonds or similar instruments etc. Finance charges on finance leases are in the nature of
interest expense and hence should also be classified as interest expense.
B) Other borrowing costs
Other borrowing costs would include commitment charges, loan processing cha rges,
guarantee charges, loan facilitation charges, discounts/premium on borrowings, other
ancillary costs incurred in connection with borrowings, or amortization of such costs, etc.
C) Applicable net gain/loss on foreign currency transactions and transla tion
As per Para 4(e) of AS-16, borrowing costs also include exchange differences arising from
foreign currency borrowings to the extent that they are regarded as an adjustment to
interest costs. Any such exchange differences would need to be disclosed und er this
head.
9.5.6 Depreciation and amortization expense [Note 5(i)(b)]
A company has to disclose depreciation provided on fixed assets and amortization of
intangible assets under this head.
9.5.7 Other Expenses

All other expenses not classified under other heads will be classified here. For this
purpose, any item of expenditure which exceeds one percent of the revenue from
operations or ` 1,00,000, whichever is higher (as against the requirement of Old Schedule
VI of 1 percent of total revenue or ` 5,000 whichever is higher), needs to be disclosed
separately.
Further Note 5(vi) requires a separate disclosure of each of the following items, which will
also be classified under ‘Other expenses’
 Consumption of stores and spare parts;
 Power and fuel;
 Rent;
 Repairs to buildings;
 Repairs to machinery;
 Insurance;
 Rates and taxes, excluding taxes on income;
 Miscellaneous expenses.
9.6 Exceptional items
The term ‘Exceptional items’ is not defined in Schedule III. However, AS -5 “Net Profit or
Loss for the period, Prior period items and changes in Accounting Policies ” has a reference
to such items in Paras 12, 13 and 14.
“Para 12: 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.
Para 13: Although the items of income and expense described in paragraph 12 are not
extraordinary items, the nature and amount of such items may be relevant to users of
Financial Statements in understanding the financial position and performance of an
enterprise and in making projections about financial position and performance. Disclosure
of such information is sometimes made in the notes to the Financial Statements.
Para 14: Circumstances which may give rise to the separate disclosure of items of income
and expense in accordance with paragraph 12 include: the write-down of inventories to net
realisable value as well as the reversal of such write-downs; a restructuring of the activities
of an enterprise and the reversal of any provisions for the costs of restructuring;”
 disposals of items of fixed assets;
 disposals of long-term investments;
 legislative changes having retrospective application;
 litigation settlements; and

 other reversals of provisions.

In case the company has more than one such item of income / expense of the above
nature, the aggregate of such items should be disclosed on the face of the Stateme nt of
Profit and Loss. Details of the all individual items should be disclosed in the Notes. [Note
5 (i) (l) to the General Instructions for preparation of the Statement of Profit and Loss]
9.7 Extraordinary items
The term ‘Extraordinary items’ is not defined in Schedule III. However, AS 5 “Net Profit or
Loss for the period, Prior period items and changes in Accounting Policies ” at para 4.2
defines ‘extraordinary items’ as: ‘Extraordinary items are income or expenses that arise
from events or transactions that are clearly distinct from the ordinary activities of the
enterprise and, therefore, are not expected to recur frequently or regularly. Further p ara 8 of
AS-5 discusses about the disclosure of extraordinary items as below:
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.”
In case the company has more than one such item of income / expense of the above
nature, the aggregate of such items should be disclosed on the face of the Statement of
Profit and Loss. Details of the all individual items should be disclosed in the Notes. [Note
5 (i) (l) to the General Instructions for Preparation of the Statement of Profit and Loss].
9.8 Tax expense:
This is to be disclosed on the face of the Statement to Profit and Loss and bifurcated into:
(1) Current tax and
(2) Deferred tax
9.8.1 Current tax
9.8.1.1 The term ‘Current tax’ has been defined under AS-22 “Accounting for Taxes” on
Income as the amount of income tax determined to be payable (recoverable) in respect of
the taxable income (tax loss) for a period. Hence, details of all taxes on income payable
under the applicable taxation laws should be disclosed here.
9.8.1.2 Presentation for Minimum Alternate Tax (MAT) credit should be made as
prescribed by the ICAI Guidance Note on “Accounting for Credit Available in Respect of
Minimum Alternative tax under the Income-tax Act, 1961’. The relevant portion is as
under:
“Profit and Loss Account:
15. According to paragraph 6 of Accounting Standards Interpretation (ASI) 6, ‘Accounting
for Taxes on Income in the context of Section 115JB of the Income-tax Act, 1961’, issued by
the Institute of Chartered Accountants of India, MAT is the current tax. Accordingly, the tax
expense arising on account of payment of MAT should be charged at the gross amount, in
the normal way, to the profit and loss account in the year of payment of MAT. In the year in
which the MAT credit becomes eligible to be recognised as an asset in accordance with the
recommendations contained in this Guidance Note, the said asset should be created by way
of a credit to the profit and loss account and presented as a separate line item therein .”
The Disclosure in this regard should be made as under :
Current tax (MAT) XX
Less : MAT credit entitlement (XX)
Net Current tax XX
9.8.1.3 Any interest on shortfall in payment of advance income-tax is in the nature of
finance cost and hence should not be clubbed with the Current tax. The same should be
classified as Interest expense under finance costs. However, such amount should be
separately disclosed.
9.8.1.4 Any penalties levied under Income tax laws should not be classified as Current
tax. Penalties which are compensatory in nature should be treated as interest and
disclosed in the manner explained above. Other tax penalties should be classified under
Other expenses.
9.8.1.5 Wealth tax payable by a company on assets liable for wealth tax should not be
included within current tax since the same is not a tax on income. Accordingly, wealth tax
should be included in Rates and taxes under other expenses.
9.8.1.6 Excess/Short provision of tax relating to earlier years should be separately
disclosed.
9.8.2 Deferred tax
9.8.2.1 Any charge/credit for deferred taxes needs to be disclosed separately on the
face of the Statement of Profit and Loss.
9.8.2.2 AS22 “Accounting for Taxes on Income” defines ‘Deferred tax’ as the tax effect of
timing differences.
Timing differences are defined as “differences between taxable income and accounting
income for a period that originate in one period and are capable of reversal in o ne or more
subsequent periods.”
9.9 Profit / (loss) for the period from Discontinuing operations
9.9.1 The term ’Discontinuing operations’ is defined in AS 24 “Discontinuing operations” as
a component of an enterprise:
a. that the enterprise, pursuant to a single plan, is:
(i) disposing of substantially in its entirety, such as by selling the component in a
single transaction or by demerger or spin-off of ownership of the component to
the enterprise's shareholders; or
(ii) disposing of piecemeal, such as by selling off the component's assets and
settling its liabilities individually; or
(iii) terminating through abandonment; and

b. that represents a separate major line of business or geographical area of operations;

and
c. that can be distinguished operationally and for financial reporting purposes.
9.9.2 Profit or loss from Discontinuing Operations needs to be separately disclosed on
the face of Statement of Profit and Loss. This disclosure is in line with the disclosure
requirement of AS-24 Para 32(a) which requires 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 to be disclosed on the face
of the Statement of Profit and Loss.
9.9.3 Further, AS-24 Para 32(b) requires the following disclosure to be made on the face
of the Statement of Profit and Loss as well:
“(b) the amount of the pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to the discontinuing operation.”
Accordingly, such disclosures for discontinuing operations should be made wherever
applicable.
9.10 Tax expense of discontinuing operations
In case there are any taxes payable / tax credits available on profit s / losses of
discontinuing operations, the same needs to be disclosed as a separate line item on the
Statement of Profit and Loss.
9.11 Earnings per equity share
Computation of Basic and Diluted Earnings Per Share should be made in accordance with
AS20 Earnings Per Share. It is pertinent to note that the nominal value of equity shares
should be disclosed along with the Earnings Per Share figures as required by AS20.
10 Other additional information to be disclosed by way of

Notes to Statement of Profit and Loss
Besides the above disclosures, Para 5 of the General instructions for Preparation of
Statement of Profit and Loss also require disclosure on the following items:
10.1 Adjustments to the carrying amount of investments [Clause (h) of Note 5(i)]
In case there are any adjustments to carrying amount of investments pursuant to
diminution in value of the investment (or reversal thereof) in conformity with AS 13
“Accounting for Investments”, the same should be disclosed here.
10.2 Net gain or loss on foreign currency translation (other than considered as
finance cost) Clause (i) of Note 5(i)
Any gains / losses on account of foreign exchange fluctuations are to be disclosed
separately as per AS11. Thus net exchange loss should be classified under Other expens es
and the amount so included should be separately disclosed. Under this head, exchange
differences to the extent classified as borrowing costs as per Para 4(e) of AS -16 should
not be disclosed. Refer para9.6.5 [Note 3(c) of Schedule III].
10.3 Payments to the auditor [Clause (j) of Note 5(i)]

Payments covered here should be for payments made to the firm of auditor(s). Expenses
incurred towards such auditor’s remuneration should be disclosed under each of the
following sub-heads as follows:
As :
(a) Auditor,
(b) For taxation matters,
(c) For company law matters,
(d) For management services,
(e) For other services,
(f) For reimbursement of expenses;
10.4 Prior period items [Clause (m) of Note 5 (i)]
The term ‘Prior period Items’ is not defined in Schedule III. AS 5 “ Net Profit or Loss for the
period, Prior period items and changes in Accounting Policies ”, in para 4.3 defines ‘Prior
period items’ as “Prior period items are income or expenses which arise in the current
period as a result of errors or omissions in the preparation of t he Financial Statements of
one or more prior periods”.
10.5 The Schedule III requires the following additional information to be given by
way of notes:
Nature of company Disclosures required
Manufacturing companies Raw materials under broad heads
Goods purchased under broad
heads
Trading companies Purchases of goods traded under
broad heads
Companies rendering or Gross income derived from
supplying services services rendered under broad
heads
Company that falls under more It will be sufficient compliance
than one category with the requirements, if
purchases, sales and consumption
of raw material and the gross
income from services rendered are
shown under broad heads.

10.6 The disclosure requirements to be made for the above in the Financial
Statements are discussed as under:
The disclosures required as above are not very clear and give rise to the following
questions:
(a) Whether a company is required to disclose quantitative details or not?
(b) Whether a manufacturing company will disclose purchase, sale or consumption of
raw materials?
(c) What is meant by “good purchased” in case of manufacturing companies?
(d) While there is a requirement to disclose gross income in case of a service company
and sales in case of a company falling under more than one category, ther e is no
clear requirement to disclose sales for a manufacturing or a trading company.
(e) With regard to a company falling under more than one category different
interpretations seem possible. One interpretation is that it should disclose purchase,
sale and consumption for raw material. The other interpretation is that purchase
relates to traded goods, sale relates to all goods sold (both manufactured goods
and traded goods) and for raw material, only consumption needs to be disclosed.
10.7 Since the Schedule III gives a note stating that “Broad heads shall be decided taking
into account the concept of materiality and presentation of true and fair view of Financial
Statements”, a company may consider the following in deciding the disclosures required:
(a) Apparently, there is no need to give quantitative details for any of the items.
(b) Considering the ambiguity and on a conservative interpretation, a m anufacturing
company may disclose the following under broad heads:
(i) Consumption of major items of raw materials (including other items classified
as raw material such as intermediates/components/packing material)
(ii) Goods purchased for trading (if any)
(iii) Though the Schedule III does not specifically require, it is also suggested to
disclose major items of opening and closing stock. However, it is not
mandatory.
(iv) Considering the requirement to disclose gross income in case of a service
company and sales in case of a company falling in more than one category,
disclosure of sales of finished goods should also be made under broad hea ds.
(c) The term “broad heads” may be interpreted to mean broad categories of raw
materials, goods purchased, etc. These categories should be decided based on the
nature of each business and other facts and circumstances. Normally, 10 percent of
total value of sales/services, purchases of trading goods and consumption of raw
material is considered as an acceptable threshold for determination of broad heads.
Any other threshold can also be considered taking into account the concept of
materiality and presentation of true and fair view of Financial Statements.
(d) Similar principle may be followed to decide disclosure requirement in other cases.
10.8 Based on the above perspectives, given below is a suggested format for making this
disclosure:
10.8.1 Manufacturing company
(Amount in `)
Particulars Consumption
Raw materials
Raw material A XX
(YY)
Raw material B XX
(YY)
Others XX
(YY)
Total XX
(YY)
Particulars Purchases
Goods purchased
Traded item A XX
(YY)
Traded item B XX
(YY)
Others XX
(YY)
Total XX
(YY)
Particulars Sales values Closing Opening

Inventory Inventory
Manufactured goods
Finished goods A XX XX XX
(YY)
Finished goods B XX XX XX
(YY)
Others XX XX XX
(YY)
Total XX XX XX

(YY)
Traded goods
Traded goods A XX XX XX
(YY)
Traded goods B XX XX XX
(YY)
Others XX XX XX
(YY)
Total XX XX XX
(YY)
Particulars WIP
Work in Progress
Goods A WIP XX
(YY)
Goods B WIP XX
(YY)
Others XX
(YY)
Total XX
(YY)
10.8.2 Trading company
Particulars Purchase Sales
Traded goods
Traded goods A XX XX
(YY) (YY)
Traded goods B XX XX
(YY) (YY)
Others XX XX
(YY) (YY)
Total XX XX
(YY) (YY)

10.8.3 Service Company

Particulars Amount
Services rendered
Service A XX
(YY)
Service B XX
(YY)
Others XX
(YY)
Total XX
(YY)
Note : Figures in brackets represent previous year figures.
A company falling under more than one category will make the above disclosures,
to the extent relevant.
10.9 The aggregate, if material, of any amounts set aside or proposed to be set
aside, to reserve [Clause (a) of Note 5(iv)]
10.9.1 Disclosure is required for amounts set aside or proposed to be set aside to
reserves out of the profits for the period. The said transfers can be in terms of the
applicable statute under which the Financial Statements are prepared i. e., the Companies
Act, 2013 or any other applicable statute e.g. Income Tax Act, 1961, or RBI Act, 1932, etc.
Further, profits may also be appropriated to free reserves as deemed appropriate by the
management.
10.9.2 The transfer to reserves as above should, however, not include provisions made
to meet any specific liability, contingency or commitment known to exist at the date as on
which the Balance Sheet is made up.
10.10 The aggregate, if material, of any amounts withdrawn from such reserves
[Clause (b) of Note 5 (iv):
In case the company has made any withdrawals from any reserves created in terms of
Clause (a) of Note5(iv) above, the same is to be disclosed separately.
It may be noted that such setting aside as well as withdrawal from reserves is to b e
disclosed under applicable Line item of Reserves and Surplus, and not under the
Statement of Profit and Loss since the same is an appropriation of profits and not a
charge against revenue.
10.11 The aggregate, if material, of the amounts set aside to provisions made for
meeting specific liabilities, contingencies or commitments and amounts withdrawn
from such provisions, as no longer required [Clause (a) of Note5(v) and Clause (b) of
Note5(v)]
The amounts in respect of the items under this requirement should be separately disclosed as
a charge to the Statement of Profit and Loss. Provisions no longer required should be
credited to the Statement of Profit and Loss.
10.12 Clause (b) of Note 5(vii) requires disclosure for ‘Provisions for losses of
subsidiary companies’.
However, as per AS-13, a provision in respect of losses made by subsidiary companies is
made only when the same results in an other than temporary diminution in the value of
investments in the subsidiary. Accordingly, the aforesaid disclosure should be made
separately only where such a provision has been made in respect of the investment in
such loss-making subsidiary.
10.13 Clause (k) of Note 5(i) requires disclosure for ‘expenditure incurred on
corporate social responsibility activities’.
This new requirement introduced by the Companies Act 2013 is that the companies which
are covered under Section 135 are required to disclose the amount of expenditure
incurred on corporate social responsibility activities. The Guidance Note on Accounting
for Expenditure on Corporate Social Responsibility Activities issued may be referred to for
disclosure requirements, which are essentially as under:
a) From the perspective of better financial reporting and in line with the requirements
of Schedule III in this regard, it is recommended that all expenditure on CSR
activities, that qualify to be recognised as expense should be recognised as a
separate line item as ‘CSR expenditure’ in the statement of profit and loss. Further,
the relevant note should disclose the break-up of various heads of expenses included
in the line item ‘CSR expenditure’.
b) The notes to accounts relating to CSR expenditure should also contain the following:
(1) Gross amount required to be spent by the company during the year.
(2) Amount spent during the year on:
In cash Yet to be paid in cash Total
(i) Construction/acquisition of any asset
(ii) On purposes other than (i) above
The above disclosure, to the extent relevant, may also be made in the notes to the
cash flow statement, where applicable.
(c) Details of related party transactions, e.g., contribution to a trust controlled by the
company in relation to CSR expenditure as per Accounting Standard (AS) 18, Related
Party Disclosures.
(d) Where a provision is made in accordance with paragraph 8 above the same should
be presented as per the requirements of Schedule III to the Companies Act, 2013.
Further, movements in the provision during the year should be shown separately.

11 Other Disclosures
The Statement of Profit and Loss shall also contain by way of a note the following
information, namely:-
(a) Value of imports calculated on C.I.F basis by the company during the financial year in
respect of –
I. Raw materials;
II. Components and spare parts;
III. Capital goods;
(b) Expenditure in foreign currency during the financial year on account of royalty,
know-how, professional and consultation fees, interest, and other matters;
(c) Total value if all imported raw materials, spare parts and components consumed
during the financial year and the total value of all indigenous raw materials, spare
parts and components similarly consumed and the percentage of each to the total
consumption;
(d) The amount remitted during the year in foreign currencies on account of dividends
with a specific mention of the total number of non-resident shareholders, the total
number of shares held by them on which the dividends were due and the year to
which the dividends related;
(e) Earnings in foreign exchange classified under the following heads, namely: -
 Export of goods calculated on F.O.B. basis;
 Royalty, know-how, professional and consultation fees;
 Interest and dividend;
 Other income, indicating the nature thereof
11.1 Value of imports calculated on C.I.F. basis by the company during the financial
year [Clause (a) of Note 5(viii)]
The above disclosure is to be given in respect of –
Raw materials;
Components and spare parts;
Capital goods.
11.1.1 One of the requirements of disclosure as a note to the Statement of Profit and
Loss is the value of imports of raw materials calculated on C.I.F. basis. The manner in
which the term “raw materials” should be interpreted for this purpose, is as discussed in
para9.5.1.3 of this Guidance Note.
11.1.2Disclosure is also required to be made as to the value of imports of components
and spare parts and capital goods respectively. The term “components” may be
interpreted in the same manner as the term “intermediates or components” in connection
with the requirement, discussed earlier in para9.5.1.2 of this Guidance Note, t o disclose
the consumption of purchased components or intermediates. The term “spare parts”

would ordinarily relate to spare parts for plant and machinery and other capital
equipment. The total value of imports of components and spare parts may be disclose d in
the aggregate. It may be appropriate to sub-classify the value of imports between
components and spare parts respectively since the nature of these two items is not
entirely similar. Such separate classification however, is not a mandatory requirement of
the Schedule III. However, wherever the records for raw materials and components are
maintained together, the information required under this clause pertaining to
components can be presented collectively with raw materials.
11.1.3 As regards “capital goods”, disclosure would be involved in respect of imported
plant and machinery, furniture and fixtures, transport equipment, intangible assets and
other types of expenditure which is treated as capital expenditure in the books of
account. It is undoubtedly anomalous to disclose the value of imports of capital goods by
way of a note on the Statement of Profit and Loss, since by the very definition, capital
assets do not form part of the Statement of Profit and Loss. However, since this is the
specific requirement of the Schedule III, it would have to be complied as such. Since this
disclosure is required for the Statement of Profit and Loss, it would not be advisable to
disclose the imports of capital goods by way of a note on Fixed Assets - Tangible Assets or
Capital work-in-progress, even though it would be more appropriate to do so.
11.1.4 It is significant that this requirement covers only imported spare parts. It apparently
does not apply to goods imported for sale, imported stores, etc. However, the practice
followed by most companies is that imported stores are being clubbed with imported spare
parts for the purposes of this disclosure. This is probably due to the practical difficulty
involved in separating stores from spare parts. Hence, where it is not possible to segregate
the two owing to practical difficulties, the total value of imports of stores and spare parts may
be shown against a caption which clearly indicates that the value shown relates to both the
stores as well as the spare parts.
11.1.5 The disclosure in respect of imports of the foregoing items is to be made on
accrual basis. This is because disclosure is required in respect of the value of imports
“during the financial year”. Consequently, if the particular item has been imported during
the accounting year, it should be disclosed as such, even though the payment is not
made in that year.
11.1.6 It is also to be noted that the disclosure under this requirement relates to the
imports as such. It is not linked with the consumption of the material or utilization of
capital goods.
11.1.7 While a subsequent requirement relates to expenditure in foreign currency for
designated items, the requirement presently under discussion is not linked with any
particular expenditure in foreign currency or local currency. Consequently, the value of
imports of raw materials, components and spare parts and capital goods is to be
disclosed irrespective of whether or not such imports have resulted in an expenditure in
foreign currency. It is possible that imports may have been arranged on Rupee payment

terms without involving any foreign currency expenditure but even so, the value of the
imports would have to be suitably disclosed.
11.1.8 Disclosure should be made in Indian currency. Where the imports involve forei gn
currency expenditure, the amount be disclosed would be the corresponding Rupee value
of the imports as translated in the books of account on normal principles relating to the
translation of foreign currencies.
11.1.9 The value of the imports is to be calculated on C.I.F. basis – that is inclusive of
cost, insurance and freight. It is possible that the imported materials may have been
shipped by an Indian carrier and the insurance may have been arranged with an Indian
insurer, so that, really, there is no element of import of services with regard to the
insurance and freight. Even so, the Schedule III requires the value of the imports to be
disclosed on a C.I.F. basis, and while this may be anomalous in the types of situations
indicated above, the requirement should ordinarily be complied with. If for any reason,
there is some practical difficulty in disclosing the value of the imports on C.I.F. basis, a
footnote should be appended to the statement indicating the precise method by which
the value of imports has been arrived at. For example, it may be stated that, because of
practical difficulties in disclosing the value of imports on C.I.F. basis, such disclosure has
been made on F.O.B. basis. Without attempting to particularize the various circumstances
under which it may be difficult to disclose the value of imports on a C.I.F. basis, one
example may be cited. A company may have standing arrangements with a shipping line
or with an insurer so that all imports are covered through such a standing arrangement .
In that case, it may be difficult to allocate the insurance or freight to each specific
shipment. Similarly, if a company is a self insurer, or if it owns its own fleet of ships,
disclosure of the value of imports cannot be made on a C.I.F. basis. In sit uations of this
kind the matter should be covered by a suitable explanatory note but otherwise, wherever
possible, the value of imports should be disclosed on a C.I.F. basis. It may be noted that
the requirement to disclose the value on a C.I.F. basis relates to the method of
computation of the value, rather than the terms of the import contract. It is not to be
implied that this method of valuation is restricted to a case where the import contract is
itself on a C.I.F. basis.
11.1.10 Disclosure is required with regard to the value of imports “by the company”.
This implies that only direct imports by the company are involved in the disclosure. If the
company purchases imported materials in the open market, no disclosure would be
necessary under this requirement. Similarly, if the company canalized its imports through
another agency such as the State Trading Corporation, no disclosure would be required,
since it is the latter agency which is the importing entity. On the other hand, if a company
purchases import entitlements and thereafter imports materials on the basis of those
entitlements, the value of such imports would need to be disclosed, since they are the
imports of the company, irrespective of the manner in which the company procured the
import entitlements. Within this rather broad statement of the case, it is apprehended
that practical difficulties may arise in determining whether or not a particular import has
been made “by the company”.

11.1.11 For the purpose of this requirement, only direct imports are to be taken into
consideration. Imported materials purchased locally, and imports canalized through other
sources, need not be disclosed. While this distinction may be clear in the large majority of
cases, problems may arise in individual cases. In particular, in the case of indirect imports,
care should be taken to determine whether the source from which the imports have been
obtained represent an agency or an independent principal. If a company has appointed a
person or a company as its agent for the purpose of securing the import of raw materials,
etc., the imports through such agent must be regarded as the company’s imports, and the
value of such imports should be disclosed pursuant to the requirement under this Note.
On the other hand, if another person or company has already imported the materials and
the company in question merely purchases such imported materials, on a principal to
principal basis, (except in cases where importing the materials is done under specific
requisition resulting in substance agent-principal relationship) the value of such imports
should be ignored by the latter company, and included by the former.
11.1.12 The value of imports should also include goods which are in transit on the
Balance Sheet date, provided significant risks and rewards of ownership in those goods
have already passed to the purchasing company. For the purpose of determining whether
or not the property has passed, reference may be made to the terms of the import
contract, and recognized legal principles, relating to this matter. Conversely, goods-in-
transit at the beginning of the year should be excluded on a similar basis so that they do
not form part of the value of the current year’s imports or succeeding year’s for the
purpose of the same disclosure relating to the value of imports.
11.1.13 Since the requirement is to disclose the value of imports during the accounting
year, it may be necessary to determine when the significant risks and rewards of
ownership to the goods has passed from the overseas exp orter to the Indian importer in
accordance with the well recognized legal principles relating to this matter, irrespective of
the fact whether or not the goods have been physically received.
11.1.14 A particular problem may, however, arise in the case of import of capital goods
where delivery is to be made in installments through part shipments from time to time.
The contract may provide for the total value of the entire shipment and it may, therefore,
be difficult to determine the separate value of the part shipments received during the
accounting year. Since the disclosure which is required is in respect of imports during the
accounting year, it may be necessary to estimate, on a reasonable basis, the separate
value of part shipments. If such estimates are reasonable, no objection needs be taken
thereto.
11.1.15 It follows from this that, in appropriate cases, the disclosure would include the
value of goods in transit at the end of the year if the significant risks and rewards of
ownership in such goods has already passed to the Indian importer. Conversely, it may be
necessary to exclude the value of the opening inventory in transit if the title to such
inventory had already passed to the Indian importer prior to the end of the previous year.
11.1.16 For the purpose of working out the C.I.F. value of imports, it may be necessary
to make approximations in suitable cases. For example, a company may be actually
importing materials on the basis of F.O.B. contracts so that the values directly available
from its records would be those relating to F.O.B. terms. In such cases, a standard formula
may be applied in order to convert the F.O.B. values to C.I.F. For example, the company’s
accountant may calculate that a loading of, say, eleven per cent on the F.O.B. values is
ordinarily adequate and correct in order to convert the F.O.B. values to C.I.F. If such
approximations are reasonable, no objection should ordinarily be taken thereto.
11.2 Expenditure in foreign currency during the financial year [Clause (b) of
Note5(viii)]
The above is to be disclosed for expenditure incurred on account of royalty, know -how,
professional and consultation fees, interest and other matters;
11.2.1 In addition to the requirement discussed earlier relating to the disclosure of the
value imported materials, and the disclosure relating to the consumption of imported
materials as compared to indigenous materials, there is also a further requirement to
disclose expenditure in foreign currency on account of royalty, know -how, professional
consultation fees, interest, and other matters.
11.2.2 In this particular case, the disclosure is to be made with regard to the
expenditure in foreign currency. Consequently, if no foreign currency expenditure is
involved, no disclosure would be required, even though the specific services covered by
this requirement have been imported free of cost or against Rupee payment or against
any other method of payment or adjustment not involving the expenditure of foreign
currency. Although the disclosure is required to be made with regard to items involving
expenditure in foreign currency, the amount to be disclosed would be the Indian Rupee
amount. It should be noted that every company is required to follow accrual system of
accounting and the requirement refers to ‘expenditure’, the disclosure should be on the
basis of the expenditure incurred and recorded in the books of account and not on the
basis of remittance. The appropriate Rupee figure can be obtained by converting the
foreign exchange figure through the application of a rate of exchange which is suitable
for that purpose, having regard to normal principles of foreign currency
translation/conversion in accounts. If so desired, the foreign currency figure may also be
given as additional information but this cannot be regarded as mandatory.
11.2.3 While the requirement relating to the disclosure of imports clearly specifies the
different heads under which the disclosure is to be made, and while the requirement
relating to foreign exchange earnings also similarly indicates the specific heads under
which the disclosure is to be classified, there is no such requirement with regard to the
disclosure of expenditure in foreign currency. It is true that the specific items in respect of
which such disclosure is to be made have been indicated, but this does not by itself imply
that the disclosure is to be classified with reference to those items. At the same time,
since such classification should not be difficult, it is advisable to classify the foreign
currency expenditure between royalty, know-how, professional consultation fess, interest
and other matters. In other words, the classification as between these items is certainly
desirable but is probably not mandatory, having regard to the precise terms of the

Schedule III. It may also be noted that under old Schedule VI, for the same requirement,
the practice has been to classify between different heads and disclose.
11.2.4 The various items specified above do not call for any particular comments since
they are expressed through well understood terms. The residual item relating to “other
matters” appears to be sufficiently exhaustive so as to cover any items for which foreign
currency expenditure is involved. It is necessary to point out that disclosure is required
with regard to “other matters” rather than with regard to “other similar matters”.
Consequently, it would not be reasonable to infer that disclosure is limited to items of a
nature similar to royalty, know-how, professional consultation fees and interest. At the
same time, however, it would be unreasonable to suggest that disclosure should be made
once again with regard to the expenditure involved in foreign currency for an item whose
import value has already been disclosed in response to the earlier requirement. Ordin arily,
the requirement presently under discussion relates to expenditure on intangible items
rather than on the import of tangible goods. However, if any foreign currency expenditure
on the import of tangible goods has not been disclosed pursuant to the ea rlier
requirements, it would need to be disclosed under this requirement. For example, foreign
currency expenditure on the import of stores may not have been disclosed on the basis
that the earlier requirement necessitates disclosure only with regard to th e value of
imports of “components and spare parts”. In that case, the foreign currency expenditure
involved in the import of stores would need to be disclosed under the requirement
presently under discussion since this requirement covers “expenditure in fo reign currency”
on account of royalty, know-how, professional consultation fees, interest and other
matters. Disclosure would also be involved under this requirement of any foreign currency
expenditure in the payment of taxes in an overseas country on inco me earned in that
country in a case where the payment of such taxes involves actual remittance from India.
Where, however, the payment of taxes in the overseas country is made through deduction
at source rather than by actual remittance from India, the met hod of disclosure has been
suggested in a subsequent paragraph of this Note dealing with foreign exchange earnings
where it has been recommended that foreign exchange earnings received subject to
deduction of tax at source should be disclosed both gross an d net.
11.2.5 The disclosure of expenditure in foreign currency is to be made on accrual basis
since all the items in the Statement of Profit and Loss are stated on an accrual basis.
11.2.6 A further question which needs to be resolved is whether the disclosure is to be
made of the gross amount of the expenditure, or of the net amount after tax deduction
at source, in a case where such deduction is involved. So far as the company in
concerned the gross expenditure is the amount of expenditure incurred in fo reign
currency even though a part of it may have been paid in Rupees to the Government to
meet the statutory obligation of deducting tax at source. Deduction of tax at source by
itself is not the finality of the matter and is merely a preliminary stage tow ards settlement
of tax liability of the non-resident. Ultimately, on assessment of the non-resident, the full
amount of tax deducted at source may have to be refunded. In view of this, the

preferable course seems to be to disclose the gross expenditure tha t has been incurred
by the company.
11.2.7 Disclosure is to be limited only to those cases where the company itself incurs a
foreign currency expenditure. Where an expenditure involves foreign currency but the
original payment by the company itself is in Rupees, no disclosure is necessary. For
instance, if a company has borrowed a loan from a Government agency and incurs
expenditure in payment of interest on that loan, the company may be aware that the
interest paid by it to the Government agency in Rupees will ultimately be remitted by the
Government agency to a foreign lender. However, since the company itself does not incur
any foreign currency expenditure, no disclosure is required in its accounts.
11.3 Total value of all imported raw materials, spare parts and components
consumed during the financial year and the total value of all indigenous raw
materials, spare parts and components similarly consumed and the percentage of
each to the total consumption; [Clause (c) of Note 5(viii)]
11.3.1 Apart from the disclosure relating to the C.I.F. value of imports, separate
disclosure is also required with reference to the value of imported raw materials, spare
parts and components consumed during the accounting year. There is no guidance, for
the purpose of this requirement, as to the manner in which the imported materials are to
be evaluated i.e., C.I.F. basis or F.O.B. basis or any other basis. Even though the value of
materials imported by the company itself is required to be stated on a C.I.F. basis, it does
not follow that this basis is necessarily appropriate to the disclosure of the value of
imported materials consumed. In the latter case, it would be more appropriate to make
the disclosure on the basis of the actual cost to the company of the imported mater ials
which have been consumed, since it is this cost which enters into the company’s accounts.
Consequently, the value of imported materials consumed should include not only their
cost but also incidental expenses directly related to the purchase of such m aterials. There
is another reason for this suggestion and that is based on the fact that the value
imported materials consumed is required to be compared with the value of indigenous
materials consumed. Moreover, in the company’s accounts, the total figure shown for
consumption of materials (inclusive of indigenous and imported materials) would
ordinarily be based on the value inclusive of the cost of such materials and various
incidental charges. Therefore, in order to facilitate correlation with the total amount
shown for consumption of materials in the Statement of Profit and Loss account as well as
in order to facilitate comparison between the value of indigenous consumption and
imported consumption, it is desirable that the value of imported materials c onsumed
should be stated on a similar and consistent basis by including the cost of such materials
and various incidental charges.
11.3.2 On the face of it, it would appear that this requirement duplicates the earlier
requirement relating to the disclosure of the value of imports of raw materials,
components and spare parts. However, there is a difference. The earlier requirement
relates to the disclosure of the value of imports per se irrespective of whether or not the
materials imported have been consumed in the company’s operations. The latter
requirement, on the other hand relates only to the value of the imported materials
consumed in the company’s operation.
11.3.3 As in the case of earlier requirement, it is not relevant to consider whether or
not the imported materials which have been consumed have necessitated an expenditure
in foreign currency. Even if no foreign currency expenditure is involved, the value of
consumption of imported materials is still required to be disclosed.
11.3.4 The disclosure is to be made in Indian currency by applying normal methods for
the translation of foreign currencies where the original expenditure was incurred in a
foreign currency.
11.3.5 A question may arise whether to include the consumption of locally purchased
materials of foreign origin. Apart from the difficulties of ascertaining which locally
purchased materials are of imported origin, it is logical to interpret this requirement as
requiring disclosure only of materials imported directly or indirectly by the co mpany. This
would include materials imported directly by the company as well as indirect imports
made to be company’s knowledge or at its request through canalizing agents such as the
State Trading Corporation.
11.3.6 It is not entirely clear whether the requirement herein implies that the value of
imported raw materials, spare parts and components should be separately disclosed for
each of these three items, or whether a composite disclosure for all the three items taken
together is sufficient. The latter part of this clause states that “the percentage of each to
the total consumption” is also to be disclosed. This may be taken to imply that the
consumption is to be shown separately for raw materials, spare parts and components
respectively. However, wherever the records for raw materials and components are
maintained together, the information required under this clause can be presented
collectively.
11.3.7 While raw materials are undoubtedly consumed in the course of operations, this
term is hardly appropriate to spare parts and components. Spare parts may be utilized for
repairs and maintenance or for other similar purposes, and components may be
assembled into the finished product. In either case, the spare parts and components can
hardly be said to have been “consumed”. However, without going into the semantics
relating to the word “consumed”, the intention appears to be reasonably clear and
disclosure may, therefore, be made on the basis of indicating the value of imported spare
parts and components utilized in the company’s operations.
11.3.8 In addition to disclosing the value of imported raw materials spare parts and
components consumed during the accounting year, disclosure is also required with
regard to the value of indigenous raw materials, spare parts and components similarly
consumed during that year. In both cases, the value of the consumption should be
determined on the same identical basis, so that like is compared with like. Thereafter, it is
also required that the relative percentages of consumption value in respect of imported
items and indigenous items should be stated as a percentage of total consumption for
each of the categories of raw materials, spare parts and components respectively.

11.3.9 Care should be taken to ensure that the total consumption agrees with the
figures in the Statement of Profit and Loss. In the case of consumption of raw materials,
the separate figures for such consumption is generally disclosed in one figure in the
Statement of Profit and Loss, in which case, the total consumption classified as between
imported and indigenous should agree with this figure. Sometimes, however, the total
consumption of raw materials is not shown as one figure in the Statement of Profit and
Loss. Instead, a note is given indicating the consumption of raw materials shown under
more than one head of account. In that case, care should be taken to ensure that the total
figure for consumption of raw materials analysed as between imported and indigenous
agrees with the total consumption shown in the Statement of Profit and Loss inclusive of
the figure of consumption charged to other heads of account.
11.3.10 The term “spare parts” for the purpose of the foregoing requirements would
refer to spares for plant and machinery and other items of a si milar nature or intended for
a similar purpose. This term would not ordinarily include stores. The term “stores” refers
to materials and supplies which assist the manufacturing process but which do not
directly enter into the furnished product. It is a term of wider import than “spare parts”
and ordinarily, the term “stores” would include “spare parts”. Since the present
requirement is limited to spare parts, it would appear to be unnecessary to disclose the
separate figures relating to the consumption of stores – imported and indigenous. It is
somewhat curious that disclosure should be required with regard to spare parts and not
with regard to stores, but this is nevertheless, the logical interpretation of the words used
in the relevant clause. Where the segregation between stores and spare parts is not
possible owing to practical difficulties, the value of consumption of imported and
indigenous stores and spare parts may be shown against a caption which clearly indicates
that the value shown relates to both stores and spare parts.
11.3.11 As regards spare parts, the substantive requirement of Schedule III (Other
expenses para 9.5.7) requires a composite figure to be disclosed in respect of
consumption of stores and spare parts, whereas the analysis here is r equired only in
respect of consumption of spare parts. Consequently, the total figure analysed for
consumption of spare parts may not agree directly with the figure disclosed in the
Statement of Profit and Loss for consumption of stores and spare parts, un less in the
Statement of Profit and Loss, these two figures are separately itemized. In any case,
however, a reconciliation statement should be kept on the company’s working paper files
to indicate that the figures have been agreed.
11.3.12 As regards components, the clause does not indicate clearly whether the
classification of imported and indigenous components is to be restricted to purchased
components, or whether it would also include components manufactured internally.
Normally, imported components would in any case be restricted to those which are
purchased, with the possible exception of a rare case in which components are fabricated
outside India by a branch or department of the same company and are then shipped to
India for incorporation into the finished product. Ignoring such an exception, it would
appear that if imported components are to be restricted to those which are purchased,

indigenous components would also have to be similarly restricted, otherwise the

comparison would be vitiated. Consequently, it is suggested that this requirement may be
interpreted in a manner whereby the classification of components between imported and
indigenous would be limited to purchased components, ignoring any components which
are manufactured internally.
11.3.13 Under some systems accounting, the consumption is originally charged in the
accounts on the basis of standard or pre-determined rates. Periodically, an adjustment is
made in the total consumption account in order to accord with the actual rates at which
relevant materials may have been purchased. A problem may arise with reference to the
classification of the total net debit or credit for such price adjustment as between
imported and indigenous consumption. The most obvious method of solving this
difficulty – which should be acceptable in most cases – is to allot the total debit or credit
adjustment between imported and indigenous consumption, in the same ratio as the
figure for imported and indigenous consumption prior to such debit or credit adjustment.
A similar procedure may also be followed in the case of any other special debit or credit
adjustments which are entered in the consumption accounts to reflect adjustments to the
total consumption figure. On a slightly different context, a similar problem arises where
the same item is partly purchased locally and partly imported and stocks are not
physically kept separately. In such cases, it appears to be permissible to assume that
consumption is on a pro-rata basis, e.g., in the ratio of opening stock plus purchase.
11.4 Total amount remitted during the year in foreign currencies on account of
dividends with a specific mention of the total number of non-resident shareholders,
the total number of shares held by them on which the dividends were due and the
year to which the dividends related [Clause (d) of Note 5(viii)];
11.4.1 The requirement is to the disclosure with regard to the amount remitted to non -
resident shareholders on account of dividends. This disclosure is to be made with
reference to the amount remitted during the accounting year in foreign currencies.
Consequently, if the dividend has been paid to a non-resident shareholder in Indian
Rupees, disclosure would not appear to be necessary. Also, if a non -resident shareholder
has indicated that all dividends payable to him are to be deposited in a Rupee account
with his bankers in India, and if such deposit is actually made on the basis of the
necessary sanctions from the Reserve Bank of India, no disclosure would be required
because such a deposit does not constitute any payment in foreign currency. It is possible
that the non-resident shareholder may ultimately arrange for foreign currency
remittances out of his Rupee bank account but this would be no concern of the company
which pays the dividends into his Rupee bank account. However, by way of additional
information, deposits regarding such dividends paid in the bank account may be given,
indicating the fact.
11.4.2 As in the case of other disclosure relating to imports, exports, foreign exchange
expenditure and earnings, etc. the amount to be disclosed in respect of foreign currency
dividends is to be stated in Indian Rupees. If so desired, additional information may be
furnished with regard to the foreign currency equivalent to the dividend, whic h has been
remitted, but the basic requirement is to disclose the rupee amount. Disclosure of the
foreign currency equivalent is not mandatory.
11.4.3 Since disclosure is required with regard to the “amount remitted during the
year”, it would appear that the information is to be furnished in the year of actual
payment of dividend rather than in the year in which the dividend is proposed or
declared. In other words, the disclosure should be made on a cash basis, contrary to the
fact that the other disclosures are to be made on accrual basis.
11.4.4 In addition to the disclosure relating to the amount of dividends remitted in
foreign currency, further disclosure is also required with regard to the number of non -
resident shareholders to whom the dividends were remitted, the number of shares held
by them, and the year to which the dividends relate. These requirements should not be
difficult to comply with and no particular problem in likely to be encountered.
11.4.5 A question may arise as to whether or not any information is to be furnished with
regard to the number of non-resident shareholders and the number of shares held by
them, in particular year in which no dividend has been remitted to the non -resident
shareholders. The answer is in negative, since, as already indicated earlier, the information
relating to the number of non-resident shareholders and the number of shares held by
them is intended to be linked to the basic information relating to the dividends remitted
to non-resident shareholders.
11.5 Earnings in Foreign exchange [Clause (e) of Note 5 (viii)]
11.5.1 Foreign exchange earnings have to be classified under the following heads: -
(i) export of goods calculated on F.O.B. basis;
(ii) royalty, know-how, professional and consultation fees;
(iii) interest and dividends; and
(iv) other income (indicating the nature thereof).
11.5.2 In this case also, as in the case of disclosure relating to foreign currency
expenditure, the question arises as to whether foreign currency earnings have to be
disclosed on a cash basis or on an accrual basis. The considerations relating to this aspect
of the matter are similar to those discussed earlier in connection with the requirement
relating to the disclosure of foreign currency expenditure. Since the Statement of Profit
and Loss is prepared on an accrual basis, it may be suggested that foreign currency
earnings should also be disclosed on a similar basis.
11.5.3 Since, foreign exchange earnings are to be disclosed on an accrual basis, the
subsequent receipt of foreign exchange in a later year should be ignored, as otherwise
the same earnings would be disclosed twice.
11.5.4 A further question which arises is whether the foreign exchange earnings should
be disclosed gross of tax or whether they should be disclosed net of any tax deducted at
source in the overseas country in which earnings have arisen. One way of looking at the
matter is that the actual amount of earnings is the amount received after deduction of
overseas tax at source, where such deduction is involved. On the other hand, the tax
which is deducted at source in the overseas country is available by way of credit against
the tax payable in that country. But for this credit, actual or constructive remittance may
be involved from India to the overseas country for the purpose of mee ting the tax liability
in that country. It is, therefore, suggested that the more appropriate basis of disclosure
would be gross of tax with a mention of the net of tax earnings and tax deducted at
source. A further advantage of this method of disclosure is that the amount which is so
disclosed would agree with the financial accounts, since, in the books of accounts kept in
India, the gross amount of the foreign exchange earnings would be credited to revenue,
while the tax deducted at source would be debited to an appropriate account relating to
payment of taxes.
11.5.5 While the requirement relating to the disclosure of imports requires the “value of
imports” to be disclosed, the disclosure of exports requires the “earnings from export of
goods” to be disclosed. It would probably have been more consistent if the relevant
clause had required the value of exports to be disclosed, rather than the earnings.
11.5.6 Considerations that apply in determining whether a purchase is an import by the
company will also apply in determining whether sales is an export by the company. Any
sales made direct by the company through an agent to any overseas buyer is an export
by the company. However, goods sold to any canalizing agent like the State Trading
Corporation for export is not the company’s export.
12 Multiple Activity Companies
Where a company has multiple activities e.g. both manufacturing and trading i.e. it falls
under more than one category, it should comply with the various disclosure requirements
relating to each of its classified activities. For instance, in respect of its manufacturing
activities, such a company should comply with the requirements relating to a
manufacturing company, whereas in respect of its trading or service activities, it should
comply with the requirements relating to those categories of companies. However, in case
of complexities in segregating the required information it would be sufficient compliance
if the information is disclosed with respect to main activities with a suitable disclosu re
explaining the reasons thereof.
13 Consolidated Financial Statements
The Companies Act 2013 has mandated that the companies which have one or more
subsidiaries / associates (which as per the Act includes joint ventures) are required to
prepare Consolidated Financial Statements, except under certain circumstances exempted
under the Act and Rules.
The companies are expected to prepare the standalone financial statements and in
addition prepare the consolidated financial statements also.
Schedule III provides for general instructions in regard to the preparation of consolidated
financial statements. This is a new addition brought in under Companies Act 2013.

13.1. General requirement

Where the company is required to prepare consolidated financial statement s, the
company shall mutatis mutandis follow the requirements of Schedule III for the
standalone financial statements. This means that all the reporting requirements of the
Schedule III need to be aggregated and reported for the group as a whole in the
consolidated financial statements.
This would also indicate the need to obtain such information for all the subsidiaries /
associates of the consolidated financial statements, including where such subsidiaries /
associates are not audited under the Companies Act 2013.
However, due note has to be taken of the fact that the Schedule III itself states that the
provisions of the schedule are to be followed mutatis mutandis to a consolidated financial
statement. MCA has also clarified vide General Circular No. 39 / 2014 dated 14 th October
2014 that Schedule III to the Act read with the applicable Accounting Standards does not
envisage that a company while preparing its CFS merely repeats the disclosures made by
it under stand-alone accounts being consolidated. Accordingly, the company would need
to give all disclosures relevant for CFS only.
In this context, the requirements of Schedule III shall apply to a CFS, subject to the
following exemptions / modifications based on the relevance to the CFS:
Schedule III Requirement Applicability to CFS (if left blank, is

applicable, as it is)
Share capital – authorized, issued, It is adequate to present paid up capital
subscribed and paid up and any calls in arrears
Note: It has no relevance in the CFS context.
Capital reserve or goodwill arising on Needs to be shown as a separate line item
consolidation on the face of the Balance Sheet
Note: IFRS / Ind AS does not require this to
be stated separately. However, as per AS,
differing treatment is given to goodwill
arising on amalgamation and goodwill
arising on consolidation and even SEBI
format requires this to be separately
disclosed.
(a) Period and amount of continuing On all these items, disclosure can be
default as on the Balance Sheet limited to those which are material to the
date in repayment of loans and CFS; materiality could be considered at
interest, shall be specified 10% of the respective balance sheet item
separately in each case.
(b) Loans and advances due by
directors or other officers of the

company or any of them either

severally or jointly with any other
persons or amounts due by firms
or private companies respectively
in which any director is a partner
or a director or a member should
be separately stated
(c) Debts due by directors or other
officers of the company or any of
them either severally or jointly
with any other person or debts
due by firms or private companies
respectively in which any director
is a partner or a director or a
member should be separately
stated
(d) Where in respect of an issue of
securities made for a specific
purpose, the whole or part of the
amount has not been used for the
specific purpose at the Balance
Sheet date, there shall be
indicated by way of note how such
unutilized amounts have been
used or invested
Note: This item is required to be
disclosed even if it is exempted as
per AS- 21 by keeping it here, as it is
only reinforcing the regulatory
requirement for reporting – what is
required by AS 21 cannot override
regulatory requirements
Application money received for Separate notes should be given for such
allotment of securities and due for monies due outside the group in respect of
refund and interest accrued thereon. entities which are consolidated.
Share application money includes
advances towards allotment of share
capital. The terms and conditions
including the number of shares
proposed to be issued, the amount of
premium, if any, and the period before
which shares shall be allotted shall be
disclosed. It shall also be disclosed

whether the company has sufficient
authorized capital to cover the share
capital amount resulting from
allotment of shares out of such share
application money. Further, the period
for which the share application money
has been pending beyond the period
for allotment as mentioned in the
document inviting application for
shares along with the reason for such
share application money being
pending shall be disclosed. Share
application money not exceeding the
issued capital and to the extent not
refundable shall be shown under the
head Equity and share application
money to the extent refundable i.e.,
the amount in excess of subscription
or in case the requirements of
minimum subscription are not met,
shall be separately shown under ‘Other
current liabilities’
Requirement to disclose excise duty To be disclosed where such information is
separately available for the entities consolidated.
Note: Though AS 9 states excise to be shown
separately, where subsidiaries are not
disclosing it, it would not be practical and
also no benefit is derived by disclosure of
this.
(a) Payments to the auditor as (a) Not relevant at CFS level and hence, may
auditor, (b) for taxation matters, (c) be dispensed with
for company law matters, (d) for
management services, (e) for other
services, (f) for reimbursement of
expenses
(b) In case of Companies covered
under section 135, amount of
expenditure incurred on corporate
social responsibility activities
(c) Raw materials under broad heads

(d) goods purchased under broad

heads
(e) In the case of trading companies,
purchases in respect of goods
traded in by the company under
broad heads
(f) In the case of companies rendering
or supplying services, gross income
derived form services rendered or
supplied under broad heads
(g) In the case of a company, which
falls under more than one of the
categories mentioned in (a), (b)
and (c) above, it shall be sufficient
compliance with the requirements
herein if purchases, sales and
consumption of raw material and
the gross income from services
rendered is shown under broad
heads
(h) In the case of other companies, Not relevant at CFS level and hence, may
gross income derived under broad be dispensed with
heads
(i) In the case of all concerns having
works in progress, works-in-
progress under broad heads
(j) Value of imports calculated on C.I.F
basis by the company during the
financial year in respect of
(i) Raw materials
(ii) Components and spare parts
(iii) Capital goods
(k) Expenditure in foreign currency
during the financial year on
account of royalty, know-how,
professional and consultation fees,
interest, and other matters
(l) Total value if all imported raw
materials, spare parts and
components consumed during the

financial year and the total value of

all indigenous raw materials, spare
parts and components similarly
consumed and the percentage of
each to the total consumption
(m) The amount remitted during the Not relevant at CFS level and hence, may
year in foreign currencies on be dispensed with
account of dividends with a
specific mention of the total
number of non-resident
shareholders, the total number of
shares held by them on which the
dividends were due and the year to
which the dividends related
(n) Earnings in foreign exchange
classified under the following
heads, namely:
(i) Export of goods calculated on
F.O.B. basis
(ii) Royalty, know-how,
professional and consultation
fees
(iii) Interest and dividend
(iv) Other income, indicating the
nature thereof
13.2. Accounting Standards

The Consolidated Financial Statements shall also disclose the information as required
under the various accounting standards applicable.
13.3. Minority Interest
Profit or loss attributable to “minority interest” shall be shown as an allocation for the
period in the statement of profit and loss.
In the Balance Sheet, “minority interest” shall be presented within equity separately from
equity of the owners of the parent.
13.4. Additional information on the entities included in the consolidated financial
statements
Schedule III requires specific disclosure of additional information on the entities which are
included in the consolidated financial statement in the following format.

Name of the entity in Net Assets i.e., total assets Share in profit or loss
minus total liabilities
As % of Amount As % of Amount
Consolidated Consolidated
net assets profit or loss
1 2 3 4 5
Parent
Subsidiaries
Indian
1
2
3
…
…..
Foreign
1
2
3
…
…..
Minority interest in all
subsidiaries Associates
(Investment as per
equity method)
Indian
1
2
3
…
…
Foreign

1
2
3
…
…..
Joint Ventures (as per
proportionate
consolidation/
Investment as per equity
method)
1
2
3
…
…..
Foreign
1
2
3
…
…..
TOTAL
In this context, it needs to be considered that in order to ensure that the total can be
matched with the reported profits and net assets in the consolidated financial statements,
the inter company eliminations needs to be adjusted to the respective entities which are
part of the consolidated financial statements. This would require management to take
judgements as to which entity the profit element and inter company balances are to be
adjusted from in providing for an entity wise break up of net profits and net assets.
13.5. Entities not consolidated
Entities which are not covered in the consolidated financial statement, whether
subsidiaries, associates or joint ventures are to be listed in the consolidated financial
statement along with the reasons for not consolidating such entities. This requirement is

also in line with the requirements of the accounting standard on con solidated financial
statements.
13.6 Comparative figures
Schedule III states that except for the first financial statements prepared by a company
after incorporation, presentation of comparative amounts is mandatory. Schedule III
however, clarifies that in case of any conflict between Accounting Standards and Schedule
III, Accounting Standards will prevail over the requirements of Schedule III. The
transitional provisions of AS 21 exempt presentation of comparative numbers in the first
set of consolidated financial statements prepared, even by an existing group. Hence, an
existing group preparing consolidated financial statements for the first time under AS 21,
need not present comparative information.
13.7 Definition of terms relevant for consolidation
The terms “Control”, “Subsidiary” and “Associate” are defined very differently in the
Companies Act as compared to definition in Accounting Standards. Rule 6 of the
Companies (Accounts) Rules however states that consolidated financial statements shall
be prepared in accordance with the provisions of Schedule III of the Act and the
applicable accounting standards. Accordingly, for removal of all doubts it is hereby
clarified that for the purposes of preparing consolidated financial statements, the
definitions of the above terms as given in Accounting Standards should be followed.

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AS 20 - Earnings Per Share ............................................................................................ I.53

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The construction of the additional asset should be treated as a separate construction

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The Purchase Method

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(d) expected actions by competitors or potential competitors; and

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directors of that company. An enterprise is deemed to have the power to appoint

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3.9 Economic life is either:

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Leases in the Financial Statements of Lessees

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Leases in the Financial Statements of Lessors

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Profit No profit Recognise profit No profit (note 1)

AS 20 ∗ - Earnings Per Share

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accounting policies used for determining ‘earnings’, a consistently determined

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