ACCOUNTING STANDARDS

AS-1
1) All significant accounting policies adopted in
the preparation and presentation of
financial statement should be disclosed at
one place and should for part of financial
statement.
Fundamental accounting assumptions are
those assumptions which underlie the
preparation and presentation of financial
statements. These are implied and their
use is assumed and hence there is no
need to specifically state that the same
have been used.

Following are the generally accepted

fundamental accounting assumptions
1. Going concern concept
2. Consistency
3. Accrual
DISCLOSURE OF ACCOUNTING POLICIES
2) Accounting policies refer to specific
accounting principles and method of
applying those principles adopted by the
enterprise in the preparation and
presentation of the financial statements.
There is no single list of accounting
principles which can be applied in all cases.
Following are the examples of the areas
where different accounting principles may
be different enterprises.
• Methods of depreciation, depletion and
amortization
• Valuation of inventories
• Treatment of goodwill
• Valuation of investment
• Treatment of retirement
• Treatment of retirement benefits
 • Valuation of fixed assets and the list goes
on….
3) All significant accounting policies adopted in
the preparation and presentation of
financial statement should be disclosed at
one place and should for part of financial
statement.
4) Change in accounting policies having
material effect in the current period or/and
in later periods should be disclosed along
with the amount of the financial impact to
the extent the same is ascertainable. If it is
not ascertainable then this fact should be
disclosed….

AS-2 VALUATION OF
INVENTORES
Inventories are assets
• Held for sale in ordinary course of
business.
• In the process of production of such sale.
• In the form of material or supplies to be
consumed in the production process or in
the rendering of services.

MEASURMENT OF INVENTORY
Inventories should be valued at the lower or
cost and net realizable value.

COST OF INVENTORIES
Cost of inventory comprises the following
1) Cost of purchase including duties..taxes,
freight inwards and other expenditure
directly attributable to the acquisition.
However, trade discounts, rebates, duty
draw backs and other similar items are
 deducted in determining the cost of
purchase.
2) Other costs-
a) Cost of conversion,
b) interest and other borrowing costs,
storage costs unless these costs are
necessary in the production process prior
to a further production stage,
c) administration cost, selling and
distribution costs
d) abnormal amount of waste of material,
labour and other production costs,

COST FORMULAE
Cost of inventory is determined either by
applying FIFO method or WAIGHTED AVERAGE
COST method. The formula used should
reflect the fairest approximation of the
inventory. However if the inventory items are
not ordinarily inter-changeable and goods or
services produced have been segregated for
specific projects then cost should be assigned
by specific identification of individual cost in
respect of such assets.

NET REALISABLE VALUE

• Sometimes the cost of inventory may not
be recoverable. This may happen in case
of damaged inventory or obsolete
inventory. The practice in such case is to
show this stock at their net realizable
value so as not to carry the stock at a
value which is in excess of its expected
sale proceeds.
• Inventories are normally written down to
net realizable value item by item by item
basis. However, in certain cases we may
group similar or related item. This is done
when it is appropriate to do so and/or it is
not possible/ practicable to evaluate the
items separately.
• Estimates of net realizable value are
based on the most reliable evidence
 available at the time the estimates are
made as to the amount the inventories are
expected top realize. However, as per AS-
4 estimates are made taking into
consideration, fluctuations of price or
costs due to events occurring after the
date of balance sheet to the extent such
events confirms conditions existing on the
balance sheet date.

DISCLOSURE
i) The accounting policies adopted in
measuring inventories along with the
cost formula used.
ii) The total carrying amount of
inventories and its classification
appropriate to the enterprise.

CASH FLOW
AS-3
STATEMENTS
 SCOPE
An enterprise should prepare a cash flow
statement and should present it for each
period for which financial statements are
presented.

MANDATORY FOR FOLLOWINGS

 ENTERPRISES WHOSE EQUITY
AND DEBT SECURITIES ARE LISTED
WHETHER IN INDIA OR OUTSIDE
INDIA
 ENTERPRISE WHOSE EQUITY AND
DEBT- STOCK EXCHANGE IN INDIA
 ALL COMMERCIAL,INDUSTRIAL
AND BUSINESS REPORTING
ENTERPRISE- TURNOVER EXCEEDS 50
CRORE
 BANKS INCLUDING CO-
OPERATIVE BANKS
  FINANCIAL INSTITUTIONS
OBJECTIVE
 Information about Cash flow useful in
providing users :-
 Ability of enterprise to generate cash
 Cash equivalents
 Timing and certainty of generating
cash
 Historical records of cash and cash
equivalents

PRESENTATION OF CASH FLOW

STATEMENT
The cash flow statement should present or
report cash flows during the period classified
by
1) Operating activities
2) Investing activities
3) Financing activities

CASH FLOW STATEMENTS

A) Cash flows from operating
activities
Cash receipt from debtors
______
Cash sales ______
Cash purchase
______
Cash paid to creditors
______
Payments to employees
______
Payment of expenses
______
Cash generated from operations
______
Interest paid (on short-term borrowings)
______
Taxes paid
______
Cash before extraordinary items
______
Extra-ordinary items
______
Net cash from (used in) operations
______
B) Cash flows from investing
activities
Purchase of fixed assets/ inventories
______
Sale of fixed assets/investments
______
Interest/ dividends received on
Investment
______
Loans to subsidiaries ______
 Net cash from investing
activities ______
C) Cash flows from financing activities
Proceeds from issue of shares/
debentures ______
Proceeds from borrowings/ loans
______
Repayment of loans
______
Redemption of debentures/ preference
Shares ______
Dividends paid
______
Interest paid (on long-term loans)
______
Net cash from financing
activities ______
Increase or decrease in cash
______
Cash and equivalents (i.e. marketable
securities)
In the begning of the year
______
Cash or equivalents (i.e. marketable
securities )
At the end of the year
______

AS-4 CONTINGENCIES AND

EVENTS OCCURRING AFTER
THE BALNACE SHEET DATE
CONTINGENCY
Meaning
It is condition or a situation the
ultimate outcome of which whether gain or
loss can be known only on the occurrence or
non-occurrence of one or mor uncertain
future events.

EVENTS OCCURRING AFTER BALANCE

SHEET
Meaning
It refers to those events both favorable
and unfavorable which occur after the date of
the balance sheet but before the date of
approval of financial statements by the board
of Directors or any other competent authority.

These events can be categorized into two

types
• Those events which provide further
evidence of conditions that existed on
balance sheet date.
• Those which are indicative of conditions
that arose subsequent to the balance
sheet date.

AS-5NET PROFIT OR LOSS

FOR THE ACCOUNTING
PERIOD, PRIOR PERIOD
ITEMS AND CHANGES IN
ACCOUNTING POLICIES

OBJECTIVES
 The objective of this Standard is to
prescribe the classification and disclosure
of certain items in the statement of profit
and loss so that all enterprises prepare
and present such a statement on a
uniform basis. This enhances the
comparability of the financial statements
of an enterprise over time and with the
financial statements of other enterprises.

SCOPE
1. This Standard should be applied
by an enterprise in presenting
profit or loss from ordinary
activities, extraordinary items
and prior period items in the
statement of profit and loss, in
accounting for changes in
accounting estimates, and in
disclosure of changes in
accounting policies.
2. This Standard deals with,
among other matters, the
disclosure of certain items of net
profit or loss for the period. These
disclosures are made in addition
to any other disclosures required
by other Accounting Standards.
3. This Standard does not deal with
the tax implications of
extraordinary items, prior period
items, changes in accounting
estimates, and changes in
accounting policies for which
appropriate adjustments will have
to be made depending on the
circumstances.
 AS-6 DEPRECIATION
ACCOUNTING

MEANING:-
 Depreciation is a measure of the wearing
out, consumption or other loss of value of
a depreciable asset arising from use,
obsolescence through technology and
market changes.
 Depreciation is allocated so as to charge a
fair proportion of the depreciable amount
in each accounting period during the
expected useful life of the asset.
Depreciation includes amortisation of
assets whose useful life is predetermined.

Depreciable Assets
 Depreciable assets are assets which
 are expected to be used during more
than one accounting period.
 Have a limited useful life.
 Are 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.

ITEMS TO WHICH AS 6 IS NOT

APPLIED

 This Statement deals with

depreciation accounting and applies
to all depreciable assets, except the
following items to which special
considerations apply:-
 Forests, plantations and similar
regenerative natural resources.
 Wasting assets including expenditure
on the exploration for and extraction
of minerals, oils, natural gas and
similar non-regenerative resources.
 Expenditure on research and
development.
 Goodwill.
 Live stock.

EXPLANATION
 Depreciation has a significant effect
in determining and presenting the
financial position and results of
operations of an enterprise.
 Depreciation is charged in each
accounting period by reference to the
extent of the depreciable amount,
irrespective of an increase in the
market value of the assets.
Assessment of depreciation and the
amount to be charged in respect
 thereof in an accounting period are
usually based on the following three
factors:
historical cost or other amount
substituted for the historical cost of
the depreciable asset when the asset
has been revalued.
 Expected useful life of the
depreciable asset.
 Estimated residual value of the
depreciable asset.

AS-7 ACCOUNTING FOR

CONSTRUCTION
CONTRACTS

DEFINITION
 A CONSTRUCTION CONTRACT is a
contract for the construction of an asset or
of a combination of assets which together
constitute a single project.

PURPOSE
• Accounting for construction contracts
in the financial statements of enterprises
undertaking such contracts.

• Applies to enterprises undertaking

construction activities not as contractors
but on their own account as venture of a
commercial nature where the enterprise
has entered into agreements for sale.

TYPES OF CONTRACTS
1. Fixed price contracts.

2. Cost plus contracts.

METHODS FOLLOWED
PERCENTAGE OF COMPLETION
METHOD

OR

COMPLETED CONTRACT METHOD

PERCENTAGE OF COMPLETION
METHOD
This method can be used if
the out come of a contract can be reliably
estimated. This method should be applied
for fixed price contract and cost plus
contracts. (if some conditions is satisfied)
COMPLETED CONTRACT METHOD
Under this method, revenue
is recognized only when the contract is
completed or substantially completed.
In other words, only minor work is left.
Here ,costs and progress payments
received are accumulated during the
contract period and the revenue/ profit/
loss is recognized only when the contract
is substantially completed.

DISCLOSURE

i) The amount of construction work in

progress.
ii) Progress payment received and
advances and retentions on account of
contracts included in construction work
in progress.
iii) The amount receivable in respect of
income accrued under cost plus
contracts not included in construction of
work in progress.
iv) If the method of accounting has been
changed the same should be disclosed
along with the financial impacts.

AS-8 ACCOUNTING FOR

RESEARCH AND
DEVELOPMENT

RESEARCH
It is original and planned
investigation done with the hope of
gaining new scientific or technical
knowledge and understanding.
DEVELOPMENT
It is the translation of research
findings or other knowledge into a plan or
design for the production of new or
substantially improved material, devices,
products, processes, systems or services
prior to commencement of the commercial
production.

Accounting treatment
Depending upon the type, nature, and
amount of expense, research and
development cost is to be treated as
under
i) Revenue expenditure
ii) Deferred revenue expenditure
 AS-9 REVENUE
RECOGNITION

This Statement deals with the bases for

recognition of revenue in the statement of
profit and loss of an enterprise. The
Statement is concerned with the
recognition of revenue arising in the
course of the ordinary activities of the
enterprise from :

• the sale of goods

• the rendering of services, and
• the use by others of enterprise resources
yielding interest, royalties and dividends.

This Statement does not deal with

the following aspects of revenue
recognition to which special
considerations apply:
 (i) Revenue arising from construction
contracts;
(ii) Revenue arising from hire-purchase,
lease agreements;
(iii) Revenue arising from government
grants and other similar subsidies;
(iv) Revenue of insurance companies
arising from insurance contracts.

Examples of items not included within the

definition of “revenue” for the purpose of
this Statement are:

• 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;
• Unrealised holding gains resulting from
the change in value of current assets, and
the natural increases in herds and
agricultural and forest products;
• Realised gains resulting from the
discharge of an obligation at less than its
carrying amount;

 The Use by Others of Enterprise

Resources Yielding Interest, Royalties
and Dividends

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, trade marks
and copyrights;
(iii) dividends—rewards from the holding
of investments in shares.

AS-10 ACCOUNTING FOR

FIXED ASSETS

This standard deals with fixed assets

grouped in various categories such as land
& buildings , plant & machinery , vehicles,
furniture & fittings , goodwill , patents ,
trademarks & designs.
This standard specifies a criteria for
determining whether an expenditure
represents an asset or an expense
because it can have a material effect on
an enterprise reported results of
operations.

DEFINITION
Fixed asset is an asset held with
the intention of being used for the purpose
of producing or providing goods or
 services and is not held for sale in the
normal course of business.

Important points included in accounting

for fixed assets
• Identification of fixed assets.
• Components of cost.
• Self - constructed fixed assets.
• Non - monetary consideration.
• Improvements & repairs .
• Amount substituted for historical cost.
• Retirements & disposals.
• Valuation of fixed assets in special cases.
• Fixed assets of special types.

Disclosure
a) Gross and net book value at the
beginning and at the end along with
acquisition and disposals during the year.
b) Expenditure incurred on fixed assets
during cou;rse of construction or
acquisition.
c) Revalued amount substituted for
historical cost along with the method
adopted to compute the revalued amount.

AS-11 ACCOUNTING FOR

THE EFFECTS OF CHANGES
IN FOREIGN EXCHANGE
RATE
The Statement is applied in accounting for
transactions in foreign currency and
translating financial statements of foreign
operations. It also deals with accounting of
forward exchange contract.

Objectives
 activities involving foreign exchange
– transactions in foreign currencies or
– foreign operations.
 transactions must be expressed in the
enterprise's reporting currency
 the financial statements of foreign
operations must be translated into the
enterprise's reporting currency
 The principal issues
– which exchange rate to use and
– how to recognise in the financial
statements the financial effect of changes
in exchange rates.
 Scope
 Applies in accounting for transactions
in
foreign currencies; and
 Applies in translating the financial
statements of foreign operations.
 Deals with accounting for foreign
currency
transactions in the nature of
forward
exchange contracts.

Does not:
 specify the currency in which an
enterprise presents its financial
statements.
 deal with the restatement of an
enterprise's financial statements
 from its reporting currency into
another currency for the convenience
of users
deal with the presentation in a cash
flow statement of cash flows arising
from transactions in a foreign
currency
deal with exchange differences
arising from foreign currency
borrowings to the extent that they
are regarded as an adjustment to
interest costs

FOREIGN CURRENCY TRANSACTIONS

AT EACH BALANCE SHEET DATE
 monetary items should be reported using
the
closing rate.

 non-monetary items which are carried in

terms of historical cost denominated in a
 foreign currency should be reported using
the exchange rate at the date of the
transaction; and
 non-monetary items which are carried at
fair value or other similar valuation
denominated in a foreign currency should
be reported using the exchange rates that
existed when the values were determined.

FORWARD EXCHANGE CONTRACTS

Forward exchange contract not
intended for trading or speculation
purposes:
 The premium or discount arising at the
inception of such a forward exchange
contract
– should be amortised as expense or
income over the life of the contract.
 Any profit or loss arising on cancellation or
renewal of such a forward exchange
contract
 – should be recognised as income or as
expense for the period.
Forward exchange contract for
trading or speculation purposes:
 The gain or loss so computed should be
recognised in the statement of profit and
loss for the period.
 The premium or discount on the forward
exchange contract is not recognised
separately.

DISCLOSURE
 When the reporting currency is different
from the currency of the country in which
the enterprise is domiciled,
– the reason for using a different
currency should be disclosed.
– The reason for any change in the
reporting currency should also be
disclosed.
 enterprise should disclose:
– the nature of the change in
classification;
– the reason for the change;
– the impact of the change in
classification on shareholders‘ funds;
– the impact on net profit or loss

AS-12 Accounting for

Government Grants

• Grants can be in cash or in kind and

may carry certain conditions to be
complied.

• Grants should not be recognised unless

reasonably assured to be realized and the
enterprise complies with the conditions
attached to the grant.
• Grants towards specific assets should be
deducted from its gross value.
Alternatively, it can be treated as deferred
income in P & L A/c on rational basis over
the useful life of the depreciable asset.
Grants related to non-depreciable asset
should be generally credited to Capital
Grants of revenue nature to be recognised
in the P & L A/c over the period to match
with the related cost, which are intended
to be compensated. Such grants can be
treated as other income or can be reduced
from related expense.
.
• Grants in the form of non-monetary
assets, given at concessional rate, shall be
accounted at their acquisition cost. Asset
given free of cost be recorded at nominal
value.
• Grants receivable as compensation for
losses/expenses incurred should be
recognised and disclosed in P & L A/c in
the year it is receivable and shown as
extraordinary item, if material in amount.
• Grants when become refundable, be
shown as extraordinary item.

• Revenue grants when refundable should

be first adjusted against unamortized
deferred credit balance of the grant and
the balance should be charged to the P &
L A/c.

• Grants against specific assets on

becoming refundable are recorded by
increasing the value of the respective
asset or by reducing Capital Reserve /
 • Accounting policy adopted for grants
including method of presentation, extent
of recognition in financial statements,
accounting of non-monetary assets given
at concession/ free of cost be disclosed.

AS-13 ACCOUNTING FOR

INVESTMENTS
PURPOSE
Accounting for investments in the
financial statements of enterprises and
related disclosure requirements.
DEFINITION
INVESTMENTS

are assets held by an enterprise for earning

income by way of dividends, interest, and
rentals, for capital appreciation, or for other
benefits to the investing enterprise.

Assets held as stock-in-trade are not

‘investments’.

CLASSIFICATION
1. LONG TERM INVESTMENTS

2. CURRENT INVESTMENTS.

COST OF INVESTMENTS
INCLUDES

1. Basic cost
2. Acquisition charges such as brokerage,
fees and duties.

OTHER MODES

If an investment is acquired by the issue of

shares or other securities, the acquisition cost
is the Fair value of the securities issued.

The right shares, if subscribed to is added

to the carrying amount of original shares but
if rights are sold, the sale proceeds are
treated as income and credited to profit and
loss statement.

INCOME FROM INVESTMENTS

Interest, dividend and rentals receivable in
respect of such investments are treated as
income except where such interest or
dividend relates to pre-acquisition period, in
which case, such interest or dividend received
is reduced from the acquisition cost.

CARRYING AMOUNT OF INVESTMENTS

Current Investments - At Lower of cost
or fair value.

Long term investments - At Cost.

However, in case of a permanent decline,

provision for diminution shall be made.

Any reduction in the carrying amount

should be charged to the profit and loss
statement.

BASIS

Current Investments:
 Either on an individual investment basis or
by category of investment, but not on an
overall basis.

Long term investments:

Each investment individually

DISPOSAL
When any investments is sold, the
difference between the carrying amount
and net sale proceeds should be charged
or credited to the profit and loss
statement

In case of partial disposal, the carrying

amount to be allocated to that part is to be
determined on the basis of the average
carrying amount of the total holding of the
investment.
DISCLOSURES
Classification of investments,

2. The accounting policies for determination

of carrying amount of investments,

3. The amounts included in profit and loss

statement for interest, dividends,
rentals,profits and losses on disposal of
investments
4. Significant restriction on the right of
ownership, realisability of investments or the
remittance of income and proceeds of
disposal;

5. The aggregate amount of quoted and

unquoted investments

6. Other disclosures specifically required by

the relevant statute.
 AS-14 Accounting for
Amalgamations
INTRODUCTION
• This statement deals with accounting
for amalgamations and the treatment
of any resultant goodwill or reserves.
This statement is directed principally
to companies although some of its
requirements also apply to financial
statements of other enterprises.
• This statement does not deal with
cases of acquisitions which arise when
there is a purchase by one company