CHAPTER V

INDIAN ACCOUNTING STANDANDS

V/S.
INTERNATIONAL ACCOUNTING
STANDARDS

CONTENTS

Indian Accounting Standards

Compliance with the Accounting Standards

Deviation from the Accounting Standards

Legal Implication of Non-compliance

Establishment of NACAS

Indian Accounting Standards as compared to International

AccountingStandards

Reconciliation ©f Number of Standards

 ..123..

INDIAN ACCOUNTING STANDARDS

V/S
INTERNATIONAL ACCOUNTING STANDARDS

Accounting Standards play critical role in setting

quality of disclosure and they not only cover historical
information but also future information.
The supporters of efficient market theory argue that
historical accounting information has no utility to investors
or other stakeholders because the market any way would
capture the impact of accounting information before its
formal disclosure. However capturing of such information
takes place over a period of time as and when the
accounting information is released in bits and pieces e.g.
many analyst predict corporate earnings based on sales
volume figure released by the company either directly to the
market or through industiy association. Accounting
information would also be useful in examining the long-term
impact of industry or business life cycles on the company
and its ability to face such cyclical trends.
Accounting information needs to be provided on a
consistent basis; otherwise, the information itself can create
volatility as over a long period of time it is not possible for
any management to smoothen the bad and the good news.
Often, firms are affected by the cumulative effect at some
point of time. Accounting Standards assume importance in
this context. Standards cannot only provide consistency but
 ..124..

they can remove the scope for arbitrary treatment of an

item. Some accountants do question the desirability of
such inflexible accounting information system; however,
this concern is well addressed by most of the accounting
bodies while setting standards as they provide for
alternative treatments in case of unusual or unique
situations. Standards help to remove an element of
uncertainty in the minds of users of accounting information
by reducing scope for managerial judgment on accounting
treatment.
Accounting Standards determine what type of
information would be useful to investors and other
stakeholders and how such information has to be reported.
As and when the need for additional information arises the
demand for new and detailed accounting standard emerges
e.g. as long as the company is a simple firm, producing
homogenous products, existing standards would satisfy the
needs of the stakeholders. The moment the business
expands and diversifies the demand for new information
arises resulting into the demand for new standards like
standard on segment reporting or say standard on
consolidated accounting statement.
Similarly, the need for standards on derivative
transactions arises when companies start extensive use of
derivatives. When stock options become popular among the
firms, the users of financial statements not only require a
disclosure of outstanding stock options but also a fair
assessment of its impact on the financial statements. If
 ..125..

such information is not disclosed to public, it will be

available only with select investors (owner-managers) and
hence create information asymmetry between different types
of shareholders. From company's point of view the
accounting standard has to identify such information, the
disclosure of which will not hurt the competitive strength of
the company.
Thus, accounting standards pick up the thread from
the regulating agencies, on their decision to disclose such
pieces of information, by providing standards.
As seen in the previous chapters, accounting
standards are the policy documents issued by recognized
expert accountancy body relating to various aspects of
measurement, treatment, presentation and disclosure of
accounting transactions and events. The purpose of
accounting standards is to standardize diverse accounting
policies with a view to eliminate, to the extent possible,
incomparability of financial statements information and
provide a set of standard accounting policies, valuation
norms and disclosure requirements to discourage
pursuance of accounting policies which are not in
conformity with the generally accepted accounting policies.
Diagram 5.1 shows the qualities an ideal set of financial
statements should possess.
 ..126..

(Diagram 5.1

Hierarchy of Accounting Qualities

Source : FASB, Statement of Financial Accounting Concepts No. 2 from

International Accounting by Choi & Muller, P.50
 ..127..

5.1 Indian Accounting Standards

Institute of Chartered Accountants of India has so far

issued twenty-eight accounting standards. Out of these as
many as twelve standards have been issued during last
couple of years. Compare this with forty-one International
Accounting Standards out of which thirty-four are already
operative or more than 140 statements issued by FASB of
U.S and one realizes how much is still-left to be done if
Indian accounting standards have to be harmonized with
International accounting standards.
Issuance of last few accounting standards namely
Accounting Standards on consolidation, segment reporting,
earning per share, related party disclosure, deferred tax
accounting are expected to bring about notable changes in
the financial reporting system in India. They are definitely a
step towards convergence with international financial
reporting standards. Table 5.1 gives a glance of Indian
Accounting Standards and their equivalent International
Financial Reporting Standards.
Exhibit 5.1 and 5.2 shown at the end of this chapter
shows the financial statement of an assumed company
presented according to Indian GAAP and presented as
required by International Accounting Standards
respectively. The said exhibits showcase that even with the
same figures but due to presentation difference
reconciliation can become time - consuming exercise.
 ..128..

‘TaBfe 5.1

Indian Accounting Standards!AS)

and
International Accounting Standards (IASI
AS No. Title Corresp­
onding
IAS No.
AS-1 Disclosure of Accounting Policies . IAS-1

AS-2 Valuation of Inventories IAS-2

AS-3 Cash Flow Statement IAS-7

AS-4 Contingencies and Events occurring after the Balance IAS-10

Sheet Date & IAS-37

AS-5 Net Profit or Loss for the Period, prior Period and IAS-8
Extraordinary Items and changes in Accounting
Policies

AS-6 Depreciation Accounting IAS-16

AS-7 Construction Contracts (Revised) IAS-11

AS-8 Accounting for Research and Development (stands

withdrawn)

AS-9 Revenue Recognition IAS-18

AS-10 Accounting for Fixed Assets IAS-16

AS-11 Accounting for the Effects of changes in Foreign IAS -21

Exchange Rates

AS-12 Accounting for Government Grants IAS-20

AS-13 Accounting for Investments IAS -39 &

40 & 32

AS-14 Accounting for Amalgamations IAS-22

AS-15 Accounting for Retirement Benefits in the Financial IAS-26 &

Statements of Employees IAS-19

AS-16 Borrowing Costs' IAS-23

 ..129..

AS No. Title Correspo

nding IAS
No.
AS-17 Segmental Reporting LAS-14

AS-18 Related Party Disclosures IAS-24

AS-19 Leases IAS-17

AS-20 Earning per share IAS-33

AS-21 Consolidated Financial Statements IAS-27

AS-22 Accounting for Taxes on Income IAS-12

AS-23 Accounting for Investments in Associates in IAS-28

Consolidated Financial Statements

AS-24 Discontinuing operations IAS-35

AS-25 Interim Financial Reporting IAS-34

AS-26 Intangible Assets IAS-38

AS-27 Financial Reporting of Interests In Joint Ventures IAS-31

AS-28 Impairment of Assets IAS-36

- Financial Reporting in Hyper Inflationary Economics IAS-29

- Financial Instruments - Disclosure & Presentation IAS-32

_ Financial Instruments - Recognition & Measurement IAS-39

- Agriculture IAS-41

Covered Information reflecting the effects of IAS-15

by a Changing Prices
Guidance
Note of
ICAI

Source : Accounting Standards And Corporate Accounting Practices by T.P. Ghosh

Vol. II Novermber. 2002
 ..130..

5.2 Compliance with the Accounting Standards

Sub-section (3A) to section 211, inserted by the

Companies Amendment Act 1999 requires that every profit
and loss account and balance sheet shall comply with the
accounting standards. Accounting Standards mean the
standards of accounting recommended by the Institute of
Chartered Accountants of India (ICA1) and prescribed by the
Central Government in consultation with the National
Advisory Committee on Accounting Standards (NACAS)
constituted under sub-section 210A (1) ;
As per newly inserted clause 50 of the Listing
Agreement it is mandatory for the companies listed in
recognized stock exchanges to comply with all applicable
accounting standards in the preparation and presentation of
financial statements.
Thus, compliance with the accounting standards has
been made mandatory and the statutory auditors are
required to make qualification in their report in case any
item is treated differently from the prescribed treatment in
the relevant accounting standard.
Inspite of the fact that Accounting Standards are
mandatory in India, one research done in 1994-95 showed
that compared to US Companies, the disclosure of
accounting information in financial reports by Indian
Companies is far less. Table 5.2 shows the disclosure level
of the Indian and US Companies.
 ..131..

Ia6(e 5.2

DISCLOSURE SCORES OF THE INDIAN AND US COMPANIES

Indian US
Companies Companies
Mean Disclosure score 45.57 76.77
Standard Deviation 11.11 10.32
Co-efficient of Variation 24.38 13.44
Minimum disclosure 20 50
Maximum disclosure 68 93

Source : Corporate disclosure practices, a comparative study of the

Indian and US Companies by Pooja Kohli, 1998

In the study conducted by Verma H.I, Garg M.C. and

Singh A.P (1997), they found that Companies in public
sectors are more concerned about the disclosure of the
accounting standards as compared to companies in Private
Sector. 1

5.3 Deviation from Accounting Standards

Sub-section (3B) to Section 211 requires that in case
the profit and loss account and balance sheet of a company
do not comply with the requirements of the accounting
standards, disclosure should be made stating -
1. deviations from the accounting standards;
2. the reasons for such deviation;
3. the financial effect, if any, arising due to such
deviation.
These disclosure requirements are necessary
where the deviations from the accounting standards 'may
be material enough to affect the truth and fairness of the
financial statements. * This clause will bring transparency to
 ..132..

Indian financial reporting provided the statutoiy auditors

give qualified and if the situation warrants negative report
in case truth and fairness of the financial statements are
violated by virtue of such deviations.

5.4 Legal Implication of Non-Compliance2

According to Section 211, subsection 7 of the

Companies Act, every Profit and Loss Account and Balance
Sheet of the Company shall comply with the accounting
standards. If any person (concerned director or the
concerned Officer of the Company) fails to take all
reasonable steps to secure compliance by the Company, he
shall in respect of each offence, be punishable with
imprisonment for a term which may extend to six months
or with fine which may extend to ten thousand rupees, or
with both.
According to section 227 of the Companies Act the
auditor’s report must state whether in his opinion, the profit
and loss account and balance sheet comply with the
accounting standards. According to Section 233 of the
Companies Act, if any auditor’s report is made or any
document authenticated even though not in conformity
with the requirements of Section 227, the auditor concerned
shall, if the default is willful, be punishable with fine which
may extend to ten thousand rupees.
 ..133..

5.5 Establishment of NACAS

Section 210A, inserted vide the Companies

Amendment Act 1999, talks about the establishment of the
National Advisory Committee on Accounting Standards
i
(NACAS). The Central Government is empowered by virtue of
the provision of section 210A(1) to establish NACAS which
would advise the Central Government on the formulation
and laying down of accounting policies and accounting
standards for adoption by companies or class of companies
under the Act. The NACAS shall give its recommendation to
the Central Government on such matters of accounting
policies and standards as may be referred to it for advice
from time to time.
The ICAI is free to set accounting standards as it has
been doing since 1977. For the purpose of the Companies
Act, the Central Government enjoys the authority to
prescribe such accounting standards, which are
recommended by the, ICAI. So while prescribing any such
accounting standard, the Central Government may consult
the NACAS.
Under Section 210A (2) the NACAS shall consist of the
twelve members . Table No. 5.3 shows the details of the
members of NACAS.
 ..134..

TaSk 5.3

Details of Members of NACAS

1. A Chairman, who shall be a person of eminence 1
well versed in accountancy, finance, business
administration, business law, economics or similar
discipline.

n One member each nominated by the Institute 3

of Chartered Accountants of India, Institute of Cost
and Works Accountants of India and Institute of
Company Secretaries of India.

3. One representative of the Central Government to be 1

nominated by it.

4. One representative of the Reserve Bank of India to be 1

nominated by it.

5. One representative of the Comptroller and Auditor 1

General of India to be nominated by him.

6. A person who holds, or has held the office of 1

professor in accountancy, finance or business
management in any University or deemed university.

7. The Chairman of the Central Board of Direct Taxes, 1

constituted under Central Board of Revenue Act
1963, or his nominee.

8. Two members to represent the Chambers of 2

Commerce and Industry, to be nominated by the
Central Government.

9. One representative of the Securities Exchange Board 1

of India to be nominated by it.

Total 12

Source: Accounting Standards & Corporate Accounting Practices by

T.P.Ghosh, Vol.I, p.23, Taxmann 2002
 ..135..

When at first the proposal to set up National

Advisoiy Committee on Accounting Standards was put up
by the Companies Bill 1977 it was not welcomed by the
ICAI. The argument of the ICAI was that such a step would
hinder the process of self-regulation of an autonomous
body. The argument was not only baseless it showed the
secretive & possessive approach of the Institute which
wanted total authority in setting standards without any
accountability. Setting of accounting standards is not a
part of the administrative activities of the ICAI so it’s
argument that if that is taken away, it would jeopardize the
self-regulation of the professional accounting body3 does
not cut ice. If we look at the international scene all most all
developed countries are moving towards stiffer standards of
transparency. India has to follow the trend if it wants
financial reporting practices of India is respected in
• (

international markets.
Though setting up of NACAS has been accepted and
provided, there is a possibility that it may not prove to be
veiy effective mechanism since ICAI i.e. an accounting body
will still enjoy the authority of issuing accounting standards
i

which will be prescribed by the Central Government in

consultation with the NACAS. It will definitely be not like
FASB of U.S or ASB of U.K which are set up to set
accounting standards in consultation with accountancy
bodies in respective countries. Diagram 5.2 shows the new
standard setting mechanism in India -
 .136..

(Diagram 5.2

New Standard Setting Mechanism

Source: Accounting Standards and Corporate Accounting Practices by T.P. Gosh

Vol. 1 page 24

5.6 Indian Accounting Standards as compared to International

Accounting Standards

The following paragraphs describe briefly each Indian

Accounting Standard and the mayor differences between the
Indian Standard and its equivalent International Accounting
Standard.

1. AS-1 » Disclosure of Accounting Policies

(Issuedin November 1979)

The accounting standard contains the following issues-

(i) All significant Accounting Policies adopted in the
preparation and presentation of financial
statements should be disclosed.
(ii) The disclosure should form part of the financial
statements.
(iii) In case of a change in Accounting Policies which
has a material effect in the current period or in
 ..138..

head Equity & Liabilities. Exhibits 1 and 2 show

this difference in presentation.
(4) Definition of Current Asset and Current
Liabilities, what should constitute short term
borrowing etc. are given in detail by IAS-I which is
necessaiy to remove the confusion or a deliberate
attempt to include current liability under long term
liability.
(5) IAS-I requires Statement of Changes in Equity as
part of the financial statements. Such a
requirement is missing from IAS-I. If Indian
standards have to attain international
acceptability, it will have to incorporate all the
information required by International Standards
from financial statements.
(6) AS-I requires disclosure of Accounting Policies
by way of notes to accounts. However, the
presentation part, which is detailed in IAS-I, is
missing in AS-I.
Disclosure requirements have increased substantially
in recent times. One survey showed that in a sample of 25
large well-known US Companies, the average number of
pages of notes to the financial statements increased from 9
to 17 pages and the average number of pages for
management’s discussion and analysis from 7 to 12 pages
over a recent 10 years period4. Diagram 5.3 indicates the
type of financial information presented.
 ..139..

<Diagram 5.3

TYPES OF FINANCIAL INFORMATION

All information useful for investment, credit and similar decisions

----- Financial Reporting

"Basic Financial Statements

Financial Notes to the Supplementary Other means Other

Statements Financial Information of financial information
Statements reporting
Examples Examples Examples Examples
> Balance > Accounting > Changing > Discussion
Sheet Policies prices
> Manage
of
ment
> disclosures discus­ Competition
> Statement Contingencies
of Income > Inventory
Methods
> Oil & Gas sion and > Analysts’
> Statement Reserves analysis Reports
of Cash > Number of Information > Letter to > Economic
Shares of Stock Statistics
Flow
Stock Holders > News,
> Statement outstanding Articles
of changes > Alternative about
in Stock measures like Company
Holders market value,
Equity historical cost
etc.

Source : Ramesh Gupta, Financial Reporting, Analysis and valuation readings,

IMA 2002-03

2. AS-2 - Valuation Of Inventories

((Revised in June 1999)

AS-2 defines the ‘inventories’ for which the standard is

applicable and also lists items for which AS-2 will not be
applicable. According to AS-2 Inventories should be valued
at the lower of cost and net realizable value. The cost of
inventories should comprise of all costs of purchase, costs
of conversion and other costs incurred in bringing the
inventories to their present location and condition. AS-2
 ..140..

allows First In First Out (FIFO) or Weighted Average Cost

formula. According to AS-2, the financial statement should
disclose the accounting policies adopted in measuring
inventories, including the cost formula used and the
classification of inventories.
The Comparison :
The equivalent of AS-2 is IAS-2 - ‘Inventories’. The
revised AS-2 is very similar to IAS-2 incorporating all
important points involved in valuation, classification and
disclosure of inventories. Compared to IAS-2, AS-2 is silent
about following issues:
(1) Whereas AS-2 only refers to inventories of a service
provider, IAS-2 explains the term in detail. This is
an important issue due to the gaining importance
of service industry in any economy of the world.

(2) As in AS-2 the Benchmark treatment given by IAS-

2 for measurement of cost of inventories is FIFO
and Weighted Average. In addition, IAS-2 gives
‘Allowed Alternative Treatment1 where use of LIFO,
Last. In First Out, formula is listed as an allowed
alternative treatment. AS-2 does not permit this
method.
(3) The inclusion of borrowing costs in the cost of
inventory is discouraged by AS-2. IAS-2 allows it
in limited circumstances.

(4) Inventories are written down to their net realizable

value when they become obsolete or when their
selling prices have declined. The procedure for
doing this is clearly detailed in AS-2 and IAS-2.
However, when on new assessment the selling
price of such written down inventory goes up the
reversal treatment is needed. This treatment is
given by IAS-2 but AS-2 is completely silent on this
issue, which is an important omission.
 ..141..

(5) One glaring difference in the disclosure norm for

inventories between AS-2 & IAS-2 is that AS-2
does not require the companies to list separately
all the inventories valued at Net Realizable Value
which is rightly required by IAS-2.

Following is the scenario constructed to illustrate the

effect of the use of two different methods of inventory
valuations on a set of financial statements.
On January 1, two identical Corporations established
merchandising business. They cany out identical operations
and differ only in their method of inventory valuation.
Sure Flyer Company makes a LIFO cost flow
assumption whereas High Flyer Company makes a FIFO
assumption.
Following is the purchases record:

Date Unit Unit Price Cost of purchase

purchased
January 1 1,70,000 ®Rs.60/- Rs. 1,02,00,000
May 1 1,90,000 ®Rs.63/- Rs. 1,19,70,000
September 1 2,00,000 (%Rs.66/- Rs. 1,32,00,000
TOTAL 5,60,000 Rs.3,53,70,000

During the year 4,20,000 units are sold at an average

price of Rs. 100/- each, all for cash.
Inventory calculation ;

LIFO —
Closing Inventoiy-1,40,000 units @ Rs.60/- =84,00,000/-
COGS:- 3,53,70,000-84,00,000 = 26,970,000/-

FIFO -
Closing Inventory - 1,40,000 units @ Rs.66/- = 92,40,000/-
COGS 3,53,70,000 - 92,40,000 = 26,130,000/-
 ..142..

Following table 5.4 shows the effect of different inventory

valuation method on financial statements.
<1a6(e 5.4
EFFECT OF DIFFERENT INVENTORY VALUATION METHOD
ON FINANCIAL INDICATORS
Sure Flyer Co. High Flyer
Company
(in thousands) (in thousands)
1
UFO FIFO
Income Statement
Sales Revenue 42000.00 42000.00
Less COGS 26970.00 26130.00
Gross Profit 15030.00 15870.00
Less Other Expenses 5500.00 5500.00
Net Income before tax 9530.00 10,370.00
Income Tax at 35% 3335.50 3629.50
i Net Income 6194.50 6740.50

EPS (2000000 shares outstanding) Rs.3.10 Rs.3.37

Balance Sheet
Share Capital 20,000.00 20,000.00
Retained Earnings 6194.50 6740.50
26194.50 26740.50
Fixed Assets 11200.00 11200.00
Inventory 8400.00 9240.00
Cash (diff=diff in tax payment) 6594.50 6300.50
26.194.50 26.740.50

Return on Investment
1 23.65% 25.21%

Thus by employing alternate inventoiy valuation

method High Flyer Company is able to show higher net
income, better EPS and more favourable ROI ratio.
 ..143..

i
3. AS-3 - Cash Flow Statements
((Revisedin 1997)

AS-3 requires that every enterprise should prepare a

cash flow statement and should present it for each period
for which financial statements are presented. The cash flow
statement should report cash flows during the period
classified by operating, investing and financing activities.
Cash Flows can be reported either using direct method or by
using Net Basis whereby non cash flow items are adjusted
from net profit / loss shown in Income Statement. Foreign
currency cash flows along with effect of changes in
exchange rates oh cash, cash flows from extraordinary
items, cash flows from interest and dividends, cash flows
from taxes on income and cash flows from investments in
subsidiaries etc. must be shown separately. The enterprise
is required to reconcile the cash and cash equivalents given
in the balance sheet with that shown in the cash flow
statement.
The Comparison :
The equivalent of AS-3 is IAS-7 - Cash Flow
Statements. Originally AS-3 was issued in 1981 and was
titled *Changes in Financial Position. ’ The revised standard
AS-3 requiring cash flow statements along with other
financial statements is exactly on the same line as IAS-7
and includes almost all important component listed by
IAS-7.
 ..144..

4. AS-4 - Contingencies and Events Occurring After

the Balance Sheet Date.
(Originally issuedin 1982, (Revised'in 1995)

The Accounting Standard - 4 covers two issues:

First AS-4 requires that the amount of a contingent

loss should be provided for and that the existence of a
contingent loss should be disclosed in the financial
statements. Contingent gains should not be
recognized in the financial statements.

Second AS-4 requires that assets and liabilities should

be adjusted for events occurring after the balance
sheet date. On the same line 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 should be
adjusted. In the disclosure of events occurring after
the balance sheet date, the nature of the event and an
estimate of the financial effect must be stated.
A period of several weeks and sometimes months may
elapse after the end of the year before the financial
statements are issued. During the period between the
balance sheet date and its distribution to stockholders and
creditors, important transactions or events may occur that
materially affect the Company’s financial position eg.
Readers must be told if the Company has sold one of its
plants, acquired a subsidiary, suffered extraordinary losses,
settled significant litigation etc. Without an explanation in a
note, the reader might be misled and draw inappropriate
 ..145..

conclusion. Diagram 5.4 given below shows the period

between the Balance Sheet date and the financial statement
issue date.
(Diagram 5A

Time period for subsequent events

Financial Statement
Balance Sheet Date Issue Date
Ak ▲

Financial Statement Period

v \
r V
January 1,2000 December 31,2000 March 3>2001

Source : Ramesh Gupta, Financial Reporting, Analysis & Valuation

Readings II, IIMA, p.1389

The Comparison :
First part of AS-4 relating to contingencies are covered
in IAS-37- Provisions Contingent Liabilities and Contingent
Assets. Though AS-4 covers contingent liabilities, there
is no accounting standard in India dealing in detail with
provisions and contingent liabilities and assets.
Comparing the first part of AS-4 and IAS-37 following major
differences emerge.
(1) IAS-37 explains in great detail what are provisions
and how they are different from contingent
liabilities. AS-4 is mainly on contingent liability
and makes a passing reference to provision
without explaining the term or without detailing
the difference between the two.

(2) IAS-37 gives detail account of how provisions are

to be measured under different situations. No
such guidance is available in any of the Indian
Accounting Standard.
 ..146..

There is a need to have an Accounting Standard

mainly based on Provisions & Contingencies, which can
guide the firms about when the provisions are to be
created, how much provisions should be created and the
disclosure norms regarding provisions and
contingencies. Thus, what is needed is a separate
Accounting Standards for events occurring after the balance
sheet date and contingencies and provisions. Provisioning
is one area where management discretion is important and
therefore is more susceptible to window-dressing.
Therefore, there is a need to tighten this area in financial
t

reporting.
The second part of AS-4 relating to events occurring
after the balance sheet date is covered by IAS-10. Major
differences between the two are:
(i) IAS-10 gives clear distinction between adjusting
events and non-adjusting events i.e. information
that would have been recorded in the Accounts
had it been known at the Balance Sheet date like a
loss on an accounts receivable from a customer’s
bankruptcy subsequent to the Balance Sheet date
is an adjusting event and the financial statements
are adjusted before their issuance. However, events
that did not exist at the balance sheet date but
arise subsequent to that date like loss of plant
from fire or flood do not require adjustments of
the financial statements but these disclosures take
the form of ‘notes’ to the financial statement. This
reduces room for manipulation. Such clear
distinction is missing from AS-4.
(ii) Regarding proposed dividends IAS-10 clearly
disallows recognizing such dividends as liabilities,
 ' ..147..

which are proposed after the balance sheet date;

AS-4 requires such dividends to be adjusted.

(iii) According to AS-10 the sale of inventories after the

balance sheet date can be considered for the
valuation of net realizable value of those
inventories. AS-4 is silent about this issue.

(iv) In disclosure norms, also IAS-10 clearly describes

the disclosure requirements for adjusting events
and non-adjusting events. AS-4 has the almost
same disclosure norms but is given in a general
fashion without being specific about adjusting and
non adjusting events.

5. AS-5 - Net Profit or Loss for the Period. Prior

Period Items and Changes in Accounting Policies.
((Revisedin <Fe6ruaiy 1997)

AS-5 defines ordinary activities, extraordinary items,

prior period items and shows the treatment of profit or loss
arising from such items. AS-5 also defines changes in
accounting estimates and requires the firms to include
effect of a change in an accounting estimate in the
determination of net profit or loss of the current period.
AS-5 also describes what are changes in Accounting
Policies and when such changes can be considered so that
the change would result in a more appropriate presentation
of the financial statements of the enterprise. AS-5 requires
that effect of such a change in accounting policy should be
shown in the financial statement of the period in which the
change is adopted.
 ..148..

The Comparison :
j

IAS-8 - Net profit or Loss for the Period, Fundamental

Errors and Changes in Accounting Policies is the equivalent
of AS-5.
(i) As the title of IAS-8 suggests it prominently
explains what are fundamental errors and gives
Benchmark treatment for their inclusion which is
different from that given by AS-5. In AS-5
fundamental errors are explained as one of the
prior period items and their effect has to be
adjusted in current year’s income statement.
According to IAS-8 the effect of such fundamental
errors have to be routed through opening balance
of retained earnings. However, the allowed
alternative treatment given in IAS-8 is on similar
lines as given by AS-5.

(ii) IAS-8 very clearly, states that effect of change in

Accounting Policy should be shown retrospectively.
Only in such cases where the amount of
adjustment cannot be ascertained the prospective
treatment is allowed. AS-5 is not very clear about
retrospective treatment of changes in Accounting

(iii) IAS-8 requires detailed disclosure regarding the

cause for the change in accounting policy, its
current effect and it’s prior period effect. AS-5’s
disclosure norm is not a detailed one leaving room
for confusion or even manipulation.

6. AS-6 - Depreciation Accounting

(Originally issued in 1982, Modified through guidance note in 1994)

AS-6 defines the term depreciation and requires

the method of depreciation selected must be used
consistently. AS-6 distinguishes between change in
 ..149..

useful life of the asset and change in the method of

depreciation. Any change made in the estimate of
useful life of the asset is to be treated prospectively.
However, change in depreciation method is to be
treated as change in Accounting Policy and must be
given retrospective effect. Such retrospective
adjustment must be shown in income statement of the
year in which the method of depreciation is charged.
The Comparison ;
IAS-16 on property, plant and equipment includes
depreciation which is equivalent to AS-6. The major part of
IAS-16 on property, plant and equipment is given by AS-10
in Accounting for Fixed Assets.
There is only one major difference between the two i.e.
IAS-16 treats change in useful life of the asset and change
in method of depreciation, as change in accounting estimate
and thus only prospective treatment is necessary. AS-6
very clearly requires retrospective effect for change in the
i

depreciation method.
Inspite of Accounting Standard, choice of depreciation
method still remains a popular handle to manipulate the
reported earnings
Table 5.5 given below shows the effect of alternative
method of depreciation on a set of financial statements.
The two firms cany out identical operations and differ
only in their methods of accounting for depreciation. Both
firms acquire equipment on Januaiy 1 for 14 million cash-
estimate the equipment to have a 10 year life and zero
 ..150..

salvage value. Conservative company chooses the

accounting principles that will minimize its reported net
income and thus chooses double declining balance method
in its financial statements whereas Liberal Company
chooses the accounting principles that will maximize its
reported net income and thus decides to use straight-line
method.
Following table shows the effect of the depreciation
method on the reported earnings
 ..151..

Q.a6(e 5.5

Effect of different methods of Depreciation

on Financial Statements
Figure in thousands
Conservative Co. Liberal Co.
Sales Revenue 42,000.00 42,000.00
Expenses
Cost of goods sold 26,970.00 26,970.00
Depreciation on equipment 2,800.00 1,400.00
Other Expenses 2.700.00 2.700.00
Total Expenses 32.470.00 31.070.00
Net Income before tax 9,530.00 10,930.00
Income tax expenses - 35% 3335.50 3825.50
Net Income 6195.50 7104.50

E.P.S (20,00,000 shares outstanding) Rs.3.10 Rs.3.55

Balance Sheet
Equities
Share Capital 20,000.00 20,000.00
Retained Earnings 6194.50 7104.50
26,194.50 27.104.50
Assets
Equipment 14,000.00 14,000.00
Less Acc. Depreciation 2.800.00 1.400.00
11,200.00 12,600.00
Other Assets 8,400.00 8,400.00
Cash 6594.50 6104.50
26.194.50 27,104.50

Return on Capital 23.65% 26.21%

Thus choice of different depreciation method leads to

different EPS, different Return on Capital and different cash
position due to different payments of income tax.
The above table shows that the depreciation method
choice affects the assessments of earnings quality in cross-
 ..152..

company and cross-national comparison. Such choices

provide opportunities to firms with a high proportion of
depreciable assets, to bias earnings in their favour.

7. AS-7 - Accounting for Construction Contracts

(Issuedin <Decem6er 1983)

This statement deals with accounting for construction

contracts in the financial statements of enterprises
undertaking such contracts. AS-7 allows the use of either
the percentage of completion method or the completed
contract method. The statement also requires that
provision be made for losses arising out of unforeseeable
factors.
The Comparison :
IAS-11 - Construction Contracts is the equivalent of
AS-7. There are no major differences between the recently
revised AS-7 and IAS-11. The disclosure requirements are
also the same and like IAS-11 AS-7 also explains all the
different types of contracts and the suitable method to be
used to recognize revenue and costs in detail. AS-7 also
requires that change from one method to another be treated
as change in Accounting Policy and thus effect of such
change on prior period statements must be disclosed.
8. AS-8 - Accounting for Research and Development
This standard has been withdrawn from the date of
AS- 26 - Intangible Asset becoming mandatory. AS-26 and
its corresponding IAS-38 will be discussed at a later stage.
 ..153.. .

9. AS-9- Revenue Recognition

AS-9 lays down at what point of time the revenue is to

be recognized in a transaction involving the sale of goods.
In most cases, the revenue is recognized with the transfer of
property in goods. However, when transfer of property in
i

goods does not coincide with the transfer of risks and

rewards of ownership, revenue is recognized at the time of
transfer of significant risks and rewards of ownership to the
buyer. AS-9 also lays down that revenue from service
transactions is to be recognized either by the proportionate
completion method or by the completed service contract
method. It also gives appropriate treatment for interest,
royalties and dividends.
The Comparison:

The relevant international standard is IAS-18 -

Revenue. The important differences are -

(i) IAS-18 explains the concept of fair value and

requires revenue to be measured at the fair value
of the consideration received or receivable. The
concept of fair value is absent in AS-9.

(ii) In the case of revenue earned from interest IAS-18

takes into account the effective yield on the asset
i.e. the concept of present value of the future cash
receipts. AS-9 is silent about this concept.

(iii) The disclosure norms set by IAS-18 is more

detailed one compared to AS-9, which relies on the
disclosures required by AS-I. IAS-18 requires the
disclosure of accounting policies adopted for the
recognition of revenue, amount of each significant
 ..154..

category of revenue recognized and revenue arising

from exchanges of goods or services.

10. AS-10 - Accounting for Fixed Assets

(Issued in 9iovem6er1985)

AS-10 defines what are Fixed Assets and what should

constitute the cost of the Fixed Assets. The statement
allows the Fixed Assets to be valued either at historical
costs or at revalued amount. AS-10 also describes special
types of fixed assets like Goodwill, Patents & Know-How and
explains the method of valuing them in financial reports.
The Comparison:
As stated earlier IAS-16 - property, Plant & Equipment
gives the details about valuation of Fixed Assets as well as
Depreciation.
There are no major differences between the two
standards except IAS-16 gives historical cost as the
Benchmark Treatment and revalued amount as the allowed
alternative treatment. AS-10 allows both methods.
The disclosure requirements are also very detailed
specially when assets are valued at revalued amount the
firm is required to show the effect if the asset had been
valued at historical cost basis.
t
i

11. AS-11-Accounting for the Effects of Changes in

Foreign Exchange Rates.
(Revisedin 1994)

This statement has to be applied by an enterprise in

accounting for transactions in foreign currencies and in
 ..155..

translating the financial statement of foreign branches for

inclusion in the financial statements of the enterprise.
However, this standard is not applicable to forward
exchange transactions. According to AS-11, monetaiy items
denominated in a foreign currency should be reported using
the closing rate, non-monetary items using the exchange
rate at the date of the transaction and the exchange
differences should be recognized as income or as an expense
in the period in which they arise.

The Comparison:

IAS-21 - The Effects of Changes in Foreign Exchange

Rates is the equivalent standard for AS-11. However, there
are some major differences between the two -
(i) According to AS-11 for inter-related transaction
exchange rate is applicable to net amount. Netting
is not allowed as per IAS-21.

(ii) Reporting at subsequent balance sheet date for

monetary items both standards require the use of
closing rate. However, in case expected realizable
rate is different from the closing rate AS-11
permits the use of such a rate. IAS-21 does not
permit forecasting expected realizable rate.

(iii) IAS-21 requires to classify the exchange difference

arising from net investment in foreign entity as
equity until disposal of the net investment. Even
the exchange difference arising on foreign currency
liability, which is used as a hedge of net
investment in foreign entity, should be classified as
equity. No such treatment is recognized in AS-11.
The statement requires all exchange differences to
be treated as income or expense or in case of
liabilities that are linked to fixed assets to be
 ..156..

adjusted in the carrying amount of the fixed

assets.

(iv) IAS-21 distinguishes between the foreign

operations that are integral to the operation of the
Reporting Enterprise i.e. Foreign Branches and
Foreign Entities. The treatment prescribed for
translation of the financial statements of foreign
branches is almost similar in IAS-21 and AS-11.
However, AS-11 is silent about Foreign Entity
which is a glaring omission because foreign branch
and foreign entity operate differently and must be
explained differently in the statement.

12. AS-12 - Accounting for Government Grants

(Issuedin August 1991)
I

This statement deals with accounting for government

grants like subsidies, cash incentives, duty drawbacks etc.
AS-12 allows two approaches for accounting for Government
Grants. Capital approach whereby the grants are taken as
capital reserve and Income approach where the grant is
taken in income statement under extraordinaiy item. The
statement also requires Non-monetaiy Government Grants
to be valued at a nominal value.

The Comparison :
IAS-20 Accounting for Government Grants and
Disclosure of Government Assistance is the equivalent
standard for AS-12. There are few differences between the
two. Also AS-12 is quite detailed and explains each term
and condition in almost, the same way as IAS-20. The few
differences are :
 ..157..

(i) IAS-20 requires that non-monetaiy grants should

be measured at fair value. As a second alternative
IAS-20 allows such assets to be valued at nominal
amount. AS-12 does not talk about fair value and
requires assets transferred free of cost to be valued
at nominal amount.

(ii) IAS-20 does not allow crediting, any grant directly

to shareholders’fund. While according to AS-12
Grants in the nature of the promoter’s contribution
is to be credited to capital reserve as a part of
shareholders’ fund.

(iii) In AS-12 no distinction has been made between

Government Grant and Government Assistance.
IAS-20 specifies that in case of Government
Assistance like free technical or marketing advice
offered by the Government, loans at nil of low
interest, export credits available at a cheaper rate
which may have significant influence on the
financial statements, information must be
disclosed separately specifying the nature of
Government Assistance. AS-12 ignores such
Government Assistance and there is a need to
formulate a disclosure mechanism for significant
Government Assistance.

13. AS-13 - Accounting for Investments

(Issuedin Septem6er 1993)

This standard deals with accounting for investments in

the financial statements of enterprises and related
disclosure requirements. The statement covers current
investment, long term investment and an investment
property. According to AS-13, the carrying amount for
current investments is the lower of cost and fair value.
Long term investments are carried at cost, however, when
 ..158..

there is a decline in the value of a long term investment

which is not temporary in nature the carrying amount is
reduced to recognize the decline by charging the difference
to profit & loss statement. AS-13 requires that an
enterprise holding investment properties should account for
them as long-term investment.
The Comparison :
f

(i) There is no exact equivalent International

Standard for AS-13. IAS-40 - Investment Property
deals entirely with recognition, measurement and
disclosure of investment property,

(ii) Whereas AS-13 states that investment property

should be treated as long-term investment and
must be valued as such, IAS-40 describes in detail
what constitutes investment property and how it is
to be valued initially and subsequently.

(iii) IAS-40 has developed two-valuation model Fair

Value Model and Cost Model for valuing
investment property. Both models are described in
detail by IAS-40. This entire area is untouched by
Indian Accounting Standards.

(iv) IAS-40 was issued replacing IAS-25 which was on

accounting for investment. The current investment
and long term investment discussed in AS-13 is
covered indirectly by IAS-39 i.e. through valuation
of investments in financial instruments.

As mentioned in one of the earlier paragraphs it has

been found out that Companies in public sectors are more
concerned about the disclosure of the accounting standards
compared to the companies in private sector. It is
interesting to note the compliance level of this standard by
 ..159..

even public sector enterprises from the research study

undertaken by Manju Gupta, Praveen Saxena and
S.P.Kaushik on 'Accounting Standards Vs. Accounting
Practices in Indian Public Sector. Table 5.6 shows the
compliance of AS-13 by PSUs.

Analysis showing compliance of AS-13 (in percentage)

Year Investment Cost method Diminution Carrying Disclosure

properly Disclosed treatment cmount
classified
L.TJ C.I P.P N.D L.T.1 C.I
1995-96 56.81 13.33 7.23 28.33 7.33 48.67 39.98 59.33
1996-97 57.91 14.02 9.66 28.87 22.80 49.82 40.33 62.43
1997-98 59.67 17.33 10.21 31.67 12.96 51.33 40.57 63.67
1998-99 60.67 15.66 10.33 31.83 12.83 51.67 41.67 65.33
1999-00 60.82 15.67 11.34 32.00 13.33 52.33 42.67 65.67

Average 59.18 14.60 9.75 30.54 13.25 50.76 41.04 63.29

L.T.I Long Term Investment
C.I Current Investment
P.P. Properly provided
N.D. Not disclosed

Source : Manju Gupta, Praveen Saxena da S.P.Kaushik, Accounting Standards

Vs. Accounting practices in Indian Public Sector, The Indian Journal
of Commerce, volume 55 No. 4 October-December, 2002 p.25

From the study of table 5.6, it is clear that the

Companies do not pay specific attention towards the
compliance of standard even though it is mandatory.

The problem arises when management uses its

discretion to decide whether there is permanent devaluation
in the cost of long term investment or say twists the nature
of the research undertaken to suit the management’s desire
 ..160..

to show higher or lower profit. Table 5.7 shows the effect of

these two seemingly innocent decisions on financial
indicators of the company.
7a6le5'7

Effect of Management* s discretionary decisions on

Financial Indicators
A B
(Rs. In (Rs. In
thousands)
thousands)
Income statement
Revenue 8000 8000
Operating Expenses 7500 7500
1500 1500
Less Research on new product - 1000
Operating Income 1500 500
Less Loss on securities held - 550
Net Income 1500 (50)

Balance Sheet
Assets 8700 8700
Investment 2000 1450
1 10700 10150
Research on new product 1000 -

11700 10150

Capital 3300 3300

R.E 1500 (50)
4800 3250
Other liabilities 6900 6900
11700 10150

Financial Indicators
Net Income 1500 (50)

ROI 31.25% -1.54%

E.P.S. 4.54 -0.15

 ..161..

Naturally one does not require great intelligence to

realize which Company the investor is going to invest in. He
ofcourse doesnot know that figures are of the same
Company presented in different manner. In case I i.e.
Company A, the management decides that devaluation is
not permanent and thus does not reduce profit. It also
decides that till the research expense starts earning it will
be treated as an intangible asset. In case of Case II or
Company B by deciding to devalue the investment and by
writing off research expense, it lends itself in trouble by
showing loss in the first year of operation.

14. AS-14 - Accounting for Amalgamations

(issuedin Octo6erl994)

This statement deals with accounting for

amalgamations and the treatment of any resultant goodwill
or reserves. This statement does not deal with cases of
acquisitions. AS-14 covers two types of amalgamations - an
amalgamation in the nature of merger or an amalgamation
in the nature of purchase. When an amalgamation is
considered to be an amalgamation in the nature of merger,
it should be accounted for under pooling of interests
method. When an amalgamation is considered to be an
amalgamation in the nature of purchase, it should be
accounted for under the purchase method.
The Comparison:
IAS-22 - Business Combinations is the equivalent
standard for AS-14. The word 'amalgamation’ is used in
 .. 162..

AS-14 because that is the legal term used in India in place

of internationally acceptable accounting term ‘business
combination*. The classification of amalgamations are same
as the business combinations i.e. amalgamation in the
nature of purchase stated in AS-14 is same as ‘acquisition*
stated in IAS-22. While amalgamation in the nature of
merger stated in AS-14 corresponds to ‘uniting of interest*
stated in IAS-22. Some major differences between the two
are -
(i) AS-14 identifies acquisition by exclusion i.e. if an
amalgamation is not in the nature of merger then
it is a purchase. While in IAS-22 certain conditions
are listed like more than one half of the voting
right, power to cast majority votes, power to govern
etc. If these conditions are fulfilled then it is
acquisition.

(ii) AS-14 sets five criteria for acquisition to be termed

as merger. However, it does not talk about the
concept of mutual sharing of risks and returns
which forms the basis on which IAS-22 classifies
business combination as merger.
tr.

(iii) IAS-22 allows assets and liabilities to be recognized

at fair value in purchase method. According to AS-
14 along with fair value, the assets and liabilities
can be carried at their carrying amount
alternatively. Thus if a firm uses this given
alternative the valuation will differ considerably
under AS-14 and IAS-22.

(iv) IAS-22 describes the procedure to deal with

minority interest in purchase method which is
absent in AS-14.
 .. 163..

(v) IAS-22 talks about the concept of negative goodwill

and how it is to be accounted. AS-14 does not use
the word negative goodwill at all.

15. AS-15 - Accounting for Retirement Benefits in the

Financial Statements of Employers
(Issuedin January 1995)

This statement deals with accounting for retirement

benefits in the financial statements of employers. AS-15
covers retirement benefits like provident fund,
superannuation-pension, gratuity, leave encashment benefit
on retirement, post-retirement health and welfare schemes
and other such retirement benefits. According to AS-15, in
respect of retirement benefits like provident fund, the
contribution payable by the employer for a year should be
charged to the statement of profit and loss for the year. In
respect of benefit schemes like gratuity the accounting
treatment will depend on the actuarial valuation method
adopted.
The Comparison :
IAS-19 - Employee Benefits is the standard on the
topic covered by AS-15. Though both standards cover
accounting of employee benefit plans they both are
extremely different in their coverage. The major differences
are:
(i) IAS-19 covers five categories of employee benefits,
short-term employee benefits such as wages
salaries etc., post-employment benefits like
pensions, other long-term employee benefits like
long-term disability benefits, profit sharing etc,
termination benefits and equity compensation
benefits. AS-15 on the other hand covers only
 .. 164..

one aspect i.e. post-employment benefits. It does

not even cover termination benefits.

(ii) Even in case of post-employment benefits there

are major differences between the two standards.
IAS-19 clearly states that when contribution due
do not fall within 12 months after the end of the
period in which employees rendered related
services, they should be discounted. The concept
of present value is missing from AS-15.

(iii) IAS-19 lists six items which are to be treated as

contribution and accounted as expense. AS-15
does not list any of these six elements. Instead
AS-15 gives alternative situations like
contribution out of own funds, through trusts, or
through scheme by an insurer.

(iv) IAS-19 also gives in detail what should be treated

as liability and under what circumstances. AS-
15 simply states that asset or liability should be
recognized based on actuarial valuation of
liability made by the reporting enterprise.

(v) IAS-19 specifies that for actuarial valuation

projected unit credit method should be employed.
AS-15 requires that a suitable actuarial valuation
method be selected.

(vi) IAS-19 gives detailed method for determining

actuarial gains or losses (paras 92-95). No such
method is given by AS-15.

(vii) In certain situation specified, IAS-19 requires

that for attributing benefits to periods of service
straight line method be employed. AS-15 is silent
about this concept.

(viii) IAS-19 lists actuarial assumptions to be made in

para 72-91. There are no such requirements in
AS-15.
 ..165..

In fact AS-15 is only one small part of IAS-19 in the

concepts covered by each of them. Even the concepts
covered by AS-15 are not in as much detail as the same
dealt by IAS-19. The other concepts which are not covered
by AS-15 like termination benefits, equity compensation
benefits and short-term and long-term employee benefits
are not covered by any of the Indian Accounting Standards.
Thus, this is one area which needs urgent attention of
standard setters in India.

16* AS-16 Borrowing Costs

(Issuedin JipiiC2000)

This standard should be applied in accounting for

borrowing costs. According to AS-16, borrowing costs that
are directly attributable to the acquisition, construction or
production of a qualifying asset should be capitalized as
part of the cost of that asset. Other borrowing costs should
be recognized as an expense in the period in which they are
incurred.
The Comparison :
The equivalent International Accounting Standard is
IAS-23 - Borrowing Costs.
The main difference between the two standards is that
IAS-23 allows two treatment of borrowing costs. The
Benchmark Treatment given by IAS-23 is to expense all
items of borrowing costs in the period in which they are
incurred. IAS-23 also gives allowed alternative treatment
whereby borrowing costs related to acquisition, construction
 -166..

or production of a qualifying asset can be capitalized. The

provisions given in the allowed alternative treatment is
similar to what is covered by AS-16. However problem will
arise when a firm while preparing its accounts follows
benchmark treatment for accounting of borrowing costs.
Such accounts will no longer be comparable with the Indian
counterpart.

17. AS-17 - Segment Reporting

(It is mandatory in nature andcomes into effect on JlpriC1, 2001)

Internationally, segment reporting is a recent

development in the history of financial reporting. Since
the mid-sixties business combinations resulted in highly
diversified corporations. With the increasing complexities of
business, and the widening geographical spread of the
business, the need for segment reporting has become
important. In real terms, the fact that a particular company
or a part of a particular company is operating in a business
environment which is geographically, technically, product-
wise or clientele-wise different from others need to be
highlighted.
 ..167..

cTa6le5.8

Segmented Income Statement

OFFICE EQUIPMENT AND AUTO PARTS COMPANY
Income Statement Data
(Rs. in millions)
Consoli­ Office Auto
dated Equip­ Parts
ment
Net Sales 78.8 18 60.8
Manufacturing Costs 50.8 14.7 36.1
Selling and Adm. Expenses 1201 1.6 10.5
Total Operating Expenses 62.9 16.3 46.6
Income before Taxes 15.9 1.7 14.2
Income Taxes 9.3 1.0 8.3
Net Income 6.6 0.7 5.9
Source : Ramesh Gupta, Financial Reporting, Analysis 8b Valuation
Readings, IIMA 2002-03

Table 5.8 shows that if only the consolidated figures

are available to the analyst, there is no way to tell from the
consolidated data the extent to which the differing product
lines contribute to the Company’s profitablity, risk and
growth potential.
Shri Kumaramangalam Birla Committee on
Corporate Governance of SEBI recommended issuance of
an Accounting Standard on Segment Reporting where a
company has multiple lines of business.
AS-17 lays down conditions which defines business
segment and geographical segment in an enterprise and
requires financial reporting of such segments which are
termed as reportable segments.
According to AS-17, information about the reportable
segment of an enterprise can be included either within the
 ..168..

body of the financial statements, or in the footnotes to the

financial statements or in a separate schedule that forms
integral part of the financial statements.
The Comparison :
IAS-14 - Segment Reporting is the equivalent of AS-
17. AS-17 is modeled on IAS-14 and thus there are no
major differences. However, IAS-14 gives wider definition to
segment revenue-encompassing enterprises’ share of profits
or losses of associates’ joint ventures or other investments
accounted for under the equity method and also joint
venture’s share of revenue of a jointly controlled entity
accounted for under proportionate consolidation method.
AS-17 does not cover these items as AS-23 and AS-27 do
not require application of equity method and proportionate
consolidation in the individual financial statements of the
investor.
IAS-14 requires use of consolidated GAAP Accounting
Policies while AS-17 requires use of accounting policies
adopted for the enterprise.
IAS-14 does not require reporting of vertical segments
i.e. an enterprise may choose not to report its vertically
integrated activities as separate segments. AS-17 is silent
about this provision and thus if other conditions are
satisfied the enterprise will have to report vertical segments
under AS^-17.
 ..169..

18. AS-18 - Related Party Disclosures

flHis standard conies into effect in respect of accounting periods commencing
on or after 1-4-2002 andis mandatory in nature)

According to AS-18, an enterprise has to disclose

related party transactions in their financial statements, if
they prepare and present quarterly or half-yearly financial
statements. For the purpose of this statement the definition
of the term ‘Related Party’ provides that 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
the financial and/or operating decisions. AS-18 is a
disclosure standard. It gives in detail the information
required to be disclosed in case of related party transactions
and also specifies the disclosure norms for stating related
party relationships irrespective of whether there have been
transactions between the related parties.
The Comparison:
IAS-24 - ‘Related Party Disclosures’ is the equivalent
International Accounting Standard for AS-18. As AS-18 is
modeled on IAS-24 there are no major differences between
the two. In fact, AS-18 seems more explicit in certain
aspects then IAS-24, e.g. IAS-24 does not include the
expression ‘at any time during the reporting periodAS-18
includes these words. Similarly AS-18 clearly states the
relatives of an individual e.g. spouse, son, daughter, father,
mother, brother, sister. However, IAS-24 does not state
clearly as to who are the close ‘members of the family’.
According to AS-18, if any disclosure made by any
 ..170..

enterprise contradicts with confidentiality clause stipulated

by any statute, any regulator or any other competent
authority then such an enterprise need not make such
disclosure. IAS-24 does not include such a provision.

19. AS-19 - Leases

flfiis statement is mandatory in nature and comes into effect on or after
1.4.2001)

It was found that due to different possible treatments

for leased assets, the industry was using the concept of
lease to its convenience and advantage, e.g. misuse of
depreciation as an allowable expense, using the expenditure
of lease rental as a means of tax avoidance, entering into
lease agreements without effecting transactions in real
terms etc. AS-19 has standardized accounting treatment
followed by the lessors and the lessees in lease transactions.
AS-19 covers lease agreement whereby the lessor gives
to the lessee in return for a payment or series of payments
the right to use an asset for an agreed period of time. The
scope of AS-19 does not extend to cover lease agreement to
use land, items such as motion picture films, licensing of
copyrights, patents etc. and also the agreements to explore
for or use of natural resources AS-19 covers finance leases
and operating leases.
The Comparison:
IAS-17 - Leases, is the equivalent International
Accounting Standard for AS-19. AS-19 is modeled on IAS-
17 and thus there are no major differences between the two.
 ..171..

With regard to concept of leases U.S. Standard on

leases is more explicit then even International Accounting
Standard e.g. criteria given for classifying the lease as
operating lease or finance lease IAS uses ambiguous terms,
such as 'major part of economic life’ and *substantially all of
the fair value’. It is always possible that with such non­
specific guidelines the lessor and the lessee may reach
different conclusions regarding the classification of a given
lease. In U.S GAAP (SFAS 13) a threshold of 75% or more of
the useful life has been specified for classifying a lease as a
finance lease. Similarly the present value of the minimum
lease payments equaling at least 90% of leased asset fair
value is set under the U.S Standard. These issues have
been a persistent problem in applying IAS-17 and since AS-
19 is based on IAS-17, applicability of AS-19 also suffers
from this ambiguity,
The finance lease method recognizes expenses sooner
than does the operating lease method. Table 5.9 shows the
comparison of expense recognized under operating and
finance lease method by a hypothetical company.
 ..172..

*Ta6le 5.9
Expenses under Operating and Finance Lease Method
___________ _________________________ _________ Expenses recognized each year
Year Operating Lease Finance Lease Method
. 1 | Rs. 19,709 Rs.21,750 (=15000+6750)
2 Rs. 19,709 Rs. 19,806 (=15000+4806)
3 Rs. 19,709 Rs. 17,571 (= 15,000+2571)
Total j 59,127! Rs.59,127 (=45,0002+141273)

Details : 45,000 lease liability - three equal instalments of 19709

each. Interest at 15% compounded p.a]
1- Rent Expenses
2- Amortization Expenses
3- Interest Expenses

Thus given a choice, most managers prefer operating

lease as they would prefer to recognize expenses later than
sooner and also finance leases record assets and liabilities
on the balance sheet, increasing debt ratio. Therefore, it is
very important that AS-19 should be made very specific on
classification of leases.

20. AS-2Q - Earnings Per Share

(This standardcame into effect in 2001 andis mandatory in nature)

AS-20 requires that 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 and for all
period presented. AS-20 gives specific guidelines for
calculating basic as well as diluted earnings and basic as
well as diluted ‘per-share’.
 ..173..

The Comparison:
IAS-33 - Earning Per Share, is the International
Standard on which AS-20 is completely based. AS-20
follows the same method of calculation for earnings and
outstanding equity shares as given by IAS-33 and thus
there are no differences between the two. The only
difference between the two arises due to different
benchmark treatment allowed under IAS-8, i.e. IAS-33
requires that EPS of all periods must be adjusted for the
effects of fundamental errors and changes in accounting
policies. However, under Indian GAAP, since the impact of
prior period items are recorded in current period financial
statements, AS-20 does not require restatement of prior
period EPS for abovementioned changes.

21. AS-21 - Consolidated Financial Statements

(JZs-21 came into effect since 2001)

This standard was formulated on the recommendation

of Shri Kumaramangalam Birla Committee set up by
SEBI. According to AS-21, an enterprise that presents
consolidated financial statements is required to prepare and
present such statements in accordance with the said
standard.
The Comparison :
IAS-27 - ‘Consolidated Financial Statements and
Accounting for Investments in Subsidiaries’, is the
equivalent standard for AS-21. The basic differences
between the two are:
 ..174..

(i) IAS-27 refers to IAS-22 - Business Combination

for consolidation procedures, which follows the
fair value approach, whereas AS-21 is based on
cost concept.
(ii) AS-21 is different from the IAS-27 as it requires
separate preparation of financial statements of
the holding company besides the consolidated
statements.
(iii) In respect of treatment of goodwill IAS-27 again
refers to IAS-22 where goodwill is required to be
amortized in a systematic basis over its useful life
which should not exceed 20 years. AS-21 does
not contain this requirement which means that
goodwill arising on consolidation should not be
amortized in the consolidated financial
statements.
(iv) The time difference allowed between the reporting
date of parent company and that of subsidiaries
is not more than 3 months as per IAS-27.
According to AS-21 this difference should not
exceed 6 months.
(v) IAS-27 does not contain Transitional Provisions
which is included in AS-21 and deals with the
requirement of disclosing comparative figures of
previous years in consolidated statements.

22 AS-22 - Accounting for Taxes on Income

AS-22 came into effect in 2001 and is mandatory in
nature. This standard has to be applied in accounting for
taxes on income. AS-22 requires that tax expense for the
period, comprising current tax and deferred tax should be
included in the determination of the net profit or loss for the
period. AS-22 classifies the differences between taxable
 ..175..

income and accounting income into permanent differences

and timing differences. It requires that after identifying the
timing differences current tax rate should be applied to
determine the deferred tax liability and/or deferred tax asset
based on the principle of general prudence.
The Comparison :
IAS-12 - Income Taxes, is the equivalent International
Accounting Standard. IAS-12 is very detailed Standard
i
compared to AS-22. The main differences are -
(i) IAS-12 defines temporary differences in 3 terms
i.e. Taxable Temporary Differences, Deductible
Temporary Differences and Tax Base. AS-22 uses
the term timing difference to explain temporary
differences. Thus different terminologies are used
by both the statements.

(ii) IAS-12 explains in detail the application of

deferred tax concept in case of business
combination, joint ventures and in case of
investments in subsidiaries branches and
associates. Such reference is missing from AS-
22.

In India the concept of Deferred Tax is relatively new

concept and thus it is very essential that the Standard on
such a concept is very detailed and self-explanatory.
Otherwise it’s applicability only adds to the confusion. SFAS
109 of US GAAP is more detailed and very clear in
explaining the concept of deferred tax compared to IAS-12
or AS-22.
 .176.

23. AS-23 - Accounting for Investments in Associates

in Consolidated Financial Statements.

AS-23 comes into effect in respect of accounting

periods commencing on or after 1.4.2002. AS-23 should be
applied in accounting for investments in associates in the
preparation and presentation of consolidated financial
statements by an investor. An associate is an enterprise in
which the investor has significant influence and which is
neither a subsidiary nor a joint venture of the investor. AS-
23 requires that an investment in an associate should be
accounted for in consolidated financial statements under
the equity method.
T?ie Comparison :
IAS-28 - Accounting for Investments in Associates is
the equivalent International Standard for AS-23. Though
AS-23 is formulated on the same line as LAS-28 following
are some of the differences between the two -
(i) According to AS-23, on acquisition of the
investment, any difference between the cost of
acquisition and the investor’s share of the equity
of the associate is described as goodwill or
capital reserve. Thus fair value accounting is not
permitted under AS-23. Under IAS-28 fair
valuation of the investor’s share of the net
identifiable assets of the associate is required to
be done.
(ii) AS-23 does not clarify what requires to be done
subsequent to the recognition of goodwill or
capital reserve. Under IAS-28 the positive or
negative goodwill (the term capital reserve is not
used by IAS-28) has to be treated in accordance
 ..177..

with the provision laid down in IAS-22, Business

Combinations.

(iii) Under AS-23 significant influence is the power to

participate in the financial and/or operating
policy decisions of the investee. The word 'or' is
not there in IAS-28. Therefore, under IAS-28 the
power to participate should exist for both
financial and operating policies, whereas under
AS-23 either one would suffice to determine
significant influence.

(iv) IAS-28 permits investments in associates to be

measured using the equity method, at cost, or as
a trading or available-for-sale financial asset in
the financial statements of entities without
subsidiaries or in separate financial statement of
the investor. AS-23 requires the use of provisions
laid down in AS-13 - Accounting for investments
under such a situation, which does not allow
equity method.

(v) IAS-28 requires that an impairment loss be

recognized if the investment’s recoverable amount
is less than its carrying amount. In such a
situation, it requires that the enterprise apply
IAS-36 Impairment of Asset’. The Standard on
impairment is yet to be formulated in India, but
in the mean-while diminutions other than
temporaiy are required to be provided for on long­
term investments.

24. AS-24 - Discontinuing Operations

This Accounting Standard comes into effect in respect

i

of accounting periods commencing on or after 1.4.2002. AS-

24 applies to all discontinuing operations of an enterprise.
The objective of this statement is to establish principles for
reporting information about discontinuing operations,
 ..178..

thereby enhancing the ability of users of financial

statements to make projections of an enterprise’s cash
flows, earning-generating capacity and financial position by
segregating information about discontinuing operations
from information about continuing operations. AS-24 is a
disclosure related standard.
The Comparison :
IAS-35, *Discontinuing Operations’ is the equivalent
International Accounting Standard for AS-24. AS-24 is
formulated on the same line as IAS-35 and thus there are
no major differences between the two. However, while
comparing the two standards one can find following
discrepancies in AS-24.
(i) As per AS-24, the loss on discontinuing
operations is computed based on the net
realizable value of the assets of discontinuing
operations. While IAS-35 requires the use of IAS-
36 (Impairment of Assets), IAS-37 (Provisions,
Contingent Liabilities and Contingent Assets), IAS-
19 (Employee benefits), IAS-16 (Property, Plant
and Equipment) etc. for measuring the loss.
IAS-35 is therefore more clear and elaborate.

(ii) In case of IAS-35 detailed disclosures are

required even when the disposal of
asset/liabilities takes place between the balance
sheet date and date of approval of accounts by
the board of directors. However AS-24 requires
the provisions listed in AS-4 to be followed where
minimal disclosure is required.
 ..179..

25. AS-25 - Interim Financial Reporting

This Standard comes into effect in respect of
accounting periods commencing on or after 1.4.2002.
According to AS-25 if an enterprise is required or elects to
}

prepare and present an interim financial report, it should

comply with this standard. The objective of this statement
is to prescribe the minimum content of an interim financial
report, as timely and reliable interim financial reporting
improves the ability of investors, creditors and others to
understand an enterprise’s capacity to generate earnings
and cash flows, its financial condition and liquidity. In
India SEBI requires half-yearly results to be prepared by the
enterprise and get a limited review done by the auditors.
The underlying concept for this standard is that for
any information to be relevant it must be available to
decision makers before it loses its capacity to influence their
decisions. This standard requires that the same accounting
principles used for annual reports should be employed for
interim reports. However, within this broad guideline, a
number of unique reporting problems develop eg. Problem of
seasonality ^expenses subject to year end adjustments,
extraordinary items occurring in third quarter, change in
accounting principle effected in third quarter, calculation of
interim reporting of earnings per share etc. Table 5.10
illustrates how seasonality becomes a problem for interim
reporting.
 ..180..

<1a6(e5.10

Problem of Seasonality & AS-25

Sales Rs. % of sales Net Income

In thousand In thousand
1st quarter 20,000 20% 4,500

2nd quarter 5,000 5% (4,500)

3rd quarter 10,000 10% (1,500)

4th quarter 65,000 65% 31,500

Total for the year 1,00,000 100% 30,000

An investor who uses the hypothetical company’s first

quarter’s results can be misled. After the second quarter’s
results occur, the investor may become even more confused.
Thus, inspite of accounting standard for interim
reporting, much still has to be done. No definitive guidelines
are available for handling problems shown in Table 5.10
Discussion persists concerning the independent auditor’s
involvement in interim reports. Many auditors are reluctant
to express an opinion on interim financial information,
arguing that the data are too tentative and subjective.
The Comparison :
IAS-34 - Interim Financial Reporting is the equivalent
International Accounting Standard. Since AS-25 is modeled
on IAS-34 there are no major differences except that IAS-34
requires condensed statement showing changes in equity in
interim financial reports which is not required by AS-25.
Also according to IAS-34 for preparing interim financial
 ..181..

reports the provisions of relevant International Accounting

Standard has to be applied e.g. IAS-37 for provisions and
contingencies, IAS 36 for impairment of assets, IAS-19 and
IAS-26 for voluntary retirement schemes etc. In the
absence of a corresponding Indian Standards dealing with
these issues, there may be inconsistencies in the way,
manner and timing of accrual of such items by enterprises.

26. AS-26 - Intangible Assets

This Standard comes into effect for the accounting

periods commencing on or after 1.4.2003 and is mandatory
in nature. AS-26 prescribe_the accounting treatment for
intangible assets that are not dealt with specifically in other
accounting standards. This statement requires an
enterprise to recognize an intangible asset if and only if
certain criteria are met. The Statement also specifies how to
measure the carrying amount of intangible assets and
requires certain disclosures about intangible assets.
The Comparison :
IAS-38 - Intangible Assets is the equivalent
International Accounting Standard for AS-26. Indian
Standard is modeled on IAS-38 and thus no major
differences exist between the two except two minor
differences. : Firstly, IAS-38 provides revaluation of
Intangibles where the market value of such Intangibles
exists as an allowed alternative treatment. AS-26 does not
permit revaluation of Intangibles. Second, IAS-38 generally
 ..182..

requires that an Intangible asset be amortized over its

useful life, with a rebuttable presumption that the useful life
of an intangible asset will not exceed 20 years. The
corresponding period is 10 3rears under AS-26.
Following hypothetical case shows how goodwill- an
Intangible asset is capable of causing international
disharmony5 in Company's reported results inspite of
accounting standards or may be because of (diverse)
accounting standards.
‘TaBCe 5.11
Goodwill - A cause of International Disharmony
Rs in Crores Write off Not write 10 years 20 years 40 years
to off India IASC. USA
Reserves UK
Balance Sheet
Net Asset 2859 2859 2859 2859 2859
Goodwill - 982 884 933 957
Total Net Asset 2859 3841 3743 3792 3816

Income Statement
Profit 379 379 379 379 379
Goodwill w/off - - 98 49 25
Net Profit 379 379 281 330 354

Return on Capital 379/2859 379/3841 281/3743 330/3792 354/3816

= 13.26% = 9.87% = 7.50% 8.70% = 9.28%

EPS 37.9 p 37.9 p 28.1 p 33.0 p 35.4 p

Source : Michael Jones & Honar Mellejf- International Accountacy May 99

pp. 76-77

27. AS-27 - Financial Reporting of Interests in Joint

Ventures.
This standard comes into effect in respect of
accounting periods commencing on or after 1.4.2002. It is
 ..183..

mandatory in nature. AS-27 sets out principles and

procedures for accounting for interests in joint ventures and
reporting of joint venture assets, liabilities, income and
expenses in the financial statement of venturers and
investors.
The Comparison :
IAS-31 - ' Financial Reporting of Interests in Joint
Ventures is the equivalent International Standard for AS-27.
AS-27 has been formulated on the same line as IAS-31,
however there are significant differences between the two
Standards, primarily because IAS allows more than one
r
treatment to the same transaction which is not allowed by
AS-27.
(i) IAS-31 allows proportionate consolidation method
for inclusion of interest in joint venture in the
consolidated financial statements of the venturer
as benchmark treatment. IAS-31 also allows
equity method as an *allowed alternative’ for the
purpose of consolidated financial statements of
the venturer. There is no allowed alternative
available in AS-27 which means equity method
cannot be applied.

(ii) In IAS-31 even with the benchmark treatment

two practices are allowed. The venturer may
combine its share of each of the assets, liabilities,
income and expenses of the jointly controlled
entity with the similar items in its consolidated
financial statements on a line-by-line basis.
Alternatively, the venturer may include separate
line items for its share of the assets, liabilities,
income and expenses of the jointly
controlled entity in its consolidated financial
statements. AS-27 requires line by line
 ..184.

consolidation. This is basically a presentatibn

difference.

(iii) Interests in joint venture that are not included in

consolidation i.e. when interest is held
temporarily or there is severe restriction of funds
transfer by the venture, IAS-39 has to be followed
for accounting interest in venture. This means
fair value accounting will be applicable.
According to AS-27 in such a situation AS-13 has
to be followed which requires cost method.

Comparatively AS-27 is well drafted allowing no

choices, thereby enhancing the comparability of financial
statements that are prepared within the framework of
Indian accounting standards.

28. AS-28 - Impairment of Assets

This is a proposed Accounting Standard which
is under preparation. Institute of Chartered Accountants of
India has issued the Exposure Draft of proposed Standard.
This standard will come into effect on or after the date
which will be declared later and will be mandatory in
nature.
The objective of this statement is to prescribe the
procedures that an enterprise applies to ensure that its
assets are carried at not more than their recoverable
amount. In cases where the asset’s carrying amount
exceeds the amount to be recovered through use or sale of
the asset, such asset is described as *impaired* and this
statement requires the enterprise to recognize an
 ..185..

impairment loss. This statement also specifies when an

enterprise should reverse an impairment loss and it
prescribes certain disclosures for impaired assets.
The Comparison :
IAS-36 - Impairment of Assets is the equivalent
International Accounting Standard for AS-28. The
Exposure Draft of AS-28 is exactly similar to IAS-36.
However, both are quite different from US GAAP which is
more detailed and strict in its provisions e.g. U.S GAAP does
not allow reversal of impairment losses. However, US GAAP
is outside the scope of this study and thus the comparison
is not given here.
The Impairment Standard is likely to have significant
impact on the Indian industry. The ongoing recession, the
inefficiencies in Indian enterprises caused by a highly
protective economic policy in the past, bad labour laws,
unfavourable indirect tax structure, severe decline in
property prices in last few years are some of the reasons
which may result in sharp impairment of assets of Indian
enterprises. Even the mis-use of accounting practices such
as huge capitalization of pre-operative expenses and interest
incurred during construction period, not compensated by
future cash flows would render enterprise’s assets impaired.
Very conservative Indian attitude is also one of the
factors causing impairment e.g. in India a shareholder
would keep his investment in shares even if the share prices
decline on the hope that some day the price would go up. In
more advanced market, the shareholder would sell the
 ..186..

share and cut losses so as to invest the remaining amount

more profitably. The same is true for Indian Entrepreneur.
He is emotionally attached to his business and would be
veiy reluctant to dispose it off even if it is loss making.
All these means that the real worth of many inefficient
Indian enterprises is likely to be exposed with the
Accounting Standard on Impairment of Assets. Application
of this standard will require significant impairment
provisions by many enterprises, specially those companies
that have built huge capacities in far excess of their
requirements. Under these circumstances the I CATs
courage in introducing such a bold Standard which would
make financial statements more true and fair is
commendable.

5.7 Reconciliation of number of Standards

Table 5.12 shows the reconciliation between the

number of Indian Accounting Standards and the total
number of International Accounting Standards existing to
date. :
 ..187.,

aa6(e 5.12

Table of Reconciliation of Indian Accounting Standards

with the International Accounting Standards.
Details of Standards No.of
Standards
I International Accounting Standards

(i) Standards issued by the International Accounting Standards

Committee (IASC) 41
(ii) Less: Standards withdrawn by IASC (6)
(IAS Nos. 3,5,6,9,13 and 25) IAS-4 is withdrawn but is excluded
as the corresponding AS-6 is in force
(iii) Standards to be reconciled 35

II Indian Accounting Standards

(i) Standards issued by ICAI (including AS-28 but excluding AS-8 withdrawn 27
on the introduction of AS-26)
(ii) No. of Guidance Notes issued (on the subject covered by IAS-15 i.e. 1
Information Reflecting the Effects ofChanging Prices)
(iii) IAS irrelevant to the Indian Economic conditions (LAS-29- Financial 1
Reporting on Hyper-inflationary Economics is applicable only in those
countries where the inflationary rate is extremely high and thus there is no
justification to issue corresponding Standard in India)
(iv) IAS-30 - ‘Disclosures in Financial Statements of Banks and 1
Similar Financial Institutions’ - (is covered in India by Banking
Regulation Act 1949 and the disclosure norms prescribed by the Reserve Bank
ofIndia and thus Accounting Standard is not considered necessary)
(v) Number of Guidance Notes under preparation. 1
(In respect ofIAS-26 - A ccounting and Reporting by Retirement Benefit plans,
the ICAI has decided to prepare a Guidance Note on the subject in view of the
fact that there are very few private players in the sector and the retirement
benefit plans run by LIC or Govt, are based on totally different accounting
systems)
(vi) IAS-39 - ‘Financial Instruments : Recognition and Measurement’ 1
- to be covered by the Guidance Notes issued and to be issued.
(Accounting Standards Board ofICAI has decided not to issue a corresponding
Standard because IAS 39 is based on fair value approach for which ICAIfeels
Indian industries are not ready and thus the subject is to be covered by the
Guidance Notes)
Number of Accounting Standards under preparation 3
(IAS-32 - Financial Instruments: Disclosure and Presentation,
IAS-37 - Provisions, Contingent Liabilities and Contingent Assets.
IAS-41 - Agriculture)
Total 35

(Source : The Chartered Accountant - July 2002)

 -.188..

QZx(ii6it 5.1

FINANCIAL STATEMENTS OF AN ASSUMED COMPANY

AS PER INDIAN GAAP

I. Income statement of XXX Co. for the period ending XXX 31.12.2001
2001 2000 1999
(Rupees in Million)
Sales 2000 1200 1000
Change in inventory 200 120 100
Other income 100 80 60
Total Revenue 2300 1400 1160
Expenses 1000 900 850
Depreciation 100 80 70
Interest 80 75 70

Profit Before Taxes 1120 345 170

Provision for Income taxes 336 103 51

Current Taxes 200 80 40
Deferred Taxes 136 23 11

Profit After Taxes 784 242 119

Balance at the beginning of the year 20 50 70
Profit Available for Distribution 804 292 189
Transfer to General Reserve 300 72 39
Dividend Including Tax 400 200 100
Balance at the end of the Year 104 20 50

Earning per share

Basic 7.84 2.42 1.19
Diluted 7.84 2.42 1.19
 ..189..

II. Balance Sheet of XXX Co. as on 31.12.2001

31.12.2001 31.12.2000
(Rupees in Million)
Share Capital 1000 900
Share premium 200 200
General reserve 572 272
Profit & Loss Account 104 20
Secured Loans 400 300
Unsecured Loans 200 200

Total Sources 2476 1892

Gross Block 1500 1800

Less Accumulated Depreciation 300 200

Net Block 1200 1600

Investments 500 200

Current Assets Loans and Advances: 1612 592

Inventories 900 200

.-H
00
o
Debtors 200
Cash 312 192
Loans & Advances 200 20
Less: Current Liabilities & Provisions 836 500

Sundry Creditors 300 200

Provisions 300 200
Deferred Tax Liability 236 100

Net Current Assets 776 92

Total Application 2476 1892

 ..190..

<E%fii6it 5.2

Financial Statements of an Assumed Company

as per International Requirement

I. Statement of Changes in Shareholders’ Equity

Change in shareholders’ Retained Other com- Additional Common

Equity Earnings prehensive Paid-in Shares
income Capital
Balance as on 31.12.2000 252 40 20 900
Net income 734
Less: Adjustments
Other comprehensive 0 0 0 0
Income
Translation gain 50
986
Less: proposed dividend 400
586 90 200 900

II, Income Statement

2001 2000 1999

(Rupees in million)
Sales 2000 1200 1000
Change in inventory 200 120 100
Other income 50 40 60

Total Revenue 2250 1360 1160

Expenses 1000 900 850

Depreciation 100 80 70
Interest 80 75 70

Profit before taxes 1070 305 170

Provision for income taxes 336 103 51
Current Taxes 200 80 40
Deferred Taxes 136 23 11
' Profit After Taxes 734 202 119
Earning per share:
Basic 7.34 2.02 1.19
Diluted 7.34 2.02 1.19
 .191.

III. Balance Sheet

2001 2000
(Rupees in Million)
Current Assets:
Cash 312 192
Debtors 200 180
Inventories 900 200
Total Current Assets 1412 572

Non- current Assets

Property, plant and equipment 1500 1800
Less: accumulated depreciation 300 200
1200 1600

Loans and advances 200 20

Investments 500 200
Total non-current assets 1900 1820

3312 2392

Current Liabilities:
Sundry Creditors 300 200
Provisions 300 200
Deferred tax liability 236 100
Current portion of secured & unsecured loans 140 0
Total Current Liabilities 976 520

Loans 460 500

Total non-current liabilities 460 500

Stockholders’ Equity:
Common Shares 1000 900
Additional paid-in capital 200 200
Retained earnings 676 292
Total Shareholders’ Equity 1876 1392

3312 2392
 ..192..

Reference:
1 Manju Gupta, Praveen Saxena and S.P.Kaushik, Accounting Standards Vs. Accounting Practices in
Indian Public Sector, the Indian Journal of Commerce Vol. 55 No.4 October-foecember, 2002, P.25

2 Taxmann’s Companies Act as amended by Companies (Amendment) Act, 2000

3 From the President, The Institute of Chartered Accountants of India in “The Chartered
Accountant" September 1997

4 Ray J Groves “Financial Disclosure when more in Not Better,” Financial Executive, May/June, 1994

5 Michael Jones & Honar MellefF - International Accountacy May 99 P.P 76-77