Accounting Standards Detailed

Accounting Principles
AS / IGAAP / IFRS
Financial Reporting and Ongoing Business

Income
Opening B/S
Assets Liabilities
Expenses
P&L Statement Cash Flow Statement

Cash
Ending B/S
Assets Liabilities
Cash and non cash Non-cash Paid and outstanding Received and yet to receive Known with certainty and unknown Complete and incomplete Covering single period and covering multiple period Regular events and irregular events
Identifiable and non identifiable Direct and indirect Visible and invisible Single ownership and multiple ownership
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There is no definitive list of practices and principles that are generally accepted Great diversity still remains affecting..,
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Inter corporate comparisons Intra corporate comparisons Comparisons with normative standard or model
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They are not..,

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Fundamental truths Rules of conduct Used in observing, measuring and reporting Widely used by..,
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Methods..,
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People preparing reports Official pronouncements by ICAI Regulator with authoritative (SEBI) (Tax authorities)
Having substantial authoritative support
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No definitive list of practices and principles that are generally accepted Great diversity still remains affecting..,
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Inter corporate comparisons Intra corporate comparisons Comparisons with normative standard or model
Capital Expense vs. Revenue Expense
Financial Statements
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Investors invest by future earnings Financial statement information is useful in reducing uncertainties about earnings growth expectations Only an approximation of economic reality because of
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Selective reporting of economic events by the accounting system Alternative accounting method and estimates Comparable among companies Consistent over time Fully reflecting the economic position of the firm
Features of an ideal financial statements

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Principal Financial Statements

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Balance sheet Income statement Statement of comprehensive income

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Reports changes in certain balance sheet accounts that bypass the income statement
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Statement of cash flows Statement of stock holders equity
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Translates events into financial statements
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Faced with uncertain bad news, accounting tends to enter it into the records Faced with uncertain good news, tendency to ignore it Why demand for bad news..,
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Creditors with no upside, but all the downside Investors believe bad news disclosed by management, but skeptical of good news unless supported by objective evidence
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Management incentives affect believability of their disclosures
Greater degree of verification for gains than for losses
Financial Reporting Requirements

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Audited annual reports Unaudited quarterly reports Current reports Foreign companies reports
Balance Sheet
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Internally generated intangible assets are not shown as assets Current portion of long-term debts are classified as current liabilities
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However, debt expected to be refinanced through another long-term debt are treated as long-term liabilities.
Accounts
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All balance sheet accounts are..,

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Stock accounts or Real accounts or Permanent accounts
All income statement accounts are..,

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flow accounts or temporary accounts or Nominal accounts
Accounts
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To reduce accounting costs

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Some economic activities may be continuous in nature The effect of such activities are accumulated over a period and then recorded periodically rather than continuously, e.g., consumption of stationary
Many cases, assets and liabilities are created or discharged without the occurrence of a visible, documented exchange transaction Adjusting entry..,
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Matching of expense and revenues Involves at least one temporary account and at least one permanent account Never involves cash account
Cash Flow Statements

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In the absence of cash flow, income does not pay the bills Differences between net income and CFO (cash flow from operations) are captured in operating current asset and operating current liability accounts
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To arrive at CFO, adjustments that need to be made to Net Income

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Subtract net increase in operating current assets other than cash itself Add net increase in operating current liabilities
Operating cash flows are needed for the long-term survival of a corporation
Who Uses Financial Statements?

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Used extensively by internal users

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Management at various levels

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Performance evaluation Competitive analysis Investment decisions Valuation of targets Is this firm going to meet its payroll and will the stock options be worth anything?
Current and future employees

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Who Uses Financial Statements?

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Used primarily by external users

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Financial intermediaries (analysts)

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Stock recommendations Loan decisions Monitoring Valuation for M&A and IPO Top management performance evaluation
Lenders
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Investment bankers
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Financial Statement Information

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Financial Statement Information used for.,

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Valuation Contracting
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Arbitrage opportunity = expected future cash flows vs. actual future cash flows When we perform any type of valuation analysis It will always boil down to DCF
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P/E multiples, PEG ratios, price targets

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These all are transformations of DCF
Other factors things like real options are just extensions to basic DCF model!
Cash Flows over the Firms Life Cycle
Measurement of Financial Statement Elements

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Historical cost
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The assets and liabilities are recorded at the values at which they are acquired or incurred The assets and liabilities are recorded at the values as if theyare acquired or incurred currently. The assets and liabilities are recorded at the value which can be obtained it they are sold or settled. The present discounted value of the future net cash inflows or outflows
Current cost
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Realisable value
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Present value
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Accrual Principle
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Accrued as assets or liabilities = income recognized cash flows for the period Income = change in assets + actual cash flows Analysts need to differentiate between real events and accruals stemming from management choice
Financial Accounting
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One period world
Multi period world
Recognition and Cash Do Not Coincide
Accounting
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Mapping of actions and events into financial statements But mapping is incomplete and asymmetric Book keeping: necessary evil
Scenarios of Adjusting Entries

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Cash first, expense latter Expense first, cash latter Cash first, revenue latter Revenue first, cash latter
Sample Income Statement Format

Revenues from the sale of goods and services Other income and revenues Operating expenses Financing costs Unusual or infrequent items Pretax earnings from continuing operations Income tax expense Net income from continuing operations Income from discontinued operations (net of tax) Extraordinary items (net of tax) Cumulative effect of accounting changes (net of tax) Net income
+ +/= = +/+/+/=
Suggested Income Statement Format

Revenues from the sales of goods and services Operating expenses Operating income from continuing operations Other income and revenues Recurring income before interest and taxes from continuing operations Financing costs Recurring (pretax) income from continuing operations Unusual or infrequent items Pretax earnings from continuing operations Income tax expense Net income from continuing operations Income from discontinued operations (net of tax) Extraordinary items (net of tax) Cumulative effect of accounting changes (net of tax) Net income = + = = +/= = +/+/+/=
Annual Report
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Management letter Management discussion Financial statements Auditors reports

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As per GAAS As per GAAP
Board has Audit Committee composed directors appoints the auditor
Accounting Guidelines on Contingencies

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Probable
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Future event is likely to occur Chance of occurrence of the future event (or events) is more than remote but less than likely Chance of occurrence of the future event (or events) is slight
Reasonably possible
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Remote
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Amount of the gain or loss must be reasonably estimable
Loss Contingencies
Measurable Probable Accrue Not Measurable Disclose in notes Disclose in notes
Reasonably possible Disclose in notes Remote None required But note permitted
Gain Contingencies
Measurable Probable Disclose Not Measurable Disclose,but avoid misleading inferences
Reasonably Disclose,but avoid misleading inferences possible Remote Disclosure is not recommended
Reasons for Companies Changing Accounting Methods

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Initial choice of an accounting method or principle is poor

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Methods selected when firm was small Change in Operational environment Change in relationship with suppliers, investors and financing sources Change in product mix or firms strategy Developing new strategies Taking organization in new directions Adopting new tactics to deal with competitors
Changed conditions
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Actions of management itself

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Accounting Standards
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Applicable to..,
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Commercial activities Industrial activities Business activities Profit or non-profit organization Balance sheet Statement of profit and loss Cash flow statement Statements and explanatory notes to be used by..,
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General purpose financial statements includes..,

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Govt. and govt. agencies Public references
Financial statements are the responsibility of enterprises management
Indian Accounting Standards

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Formulated on the basis of IFRS / IAS ICAI wanted to converge Indian Standards with IFRS to the extent possible Are principle based Deals with..,
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Recognition Measurement Disclosure Presentation Construction contracts (AS 7) Impairment of assets (AS 28)
Indian AS not having any difference with corresponding IFRS..,

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Generally Indian companies present financial statements as per all of..,

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IFRS I GAAP US GAAP
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Have been granted legal recognition under Companies Act 1956 Financial statements prepared as per Indian AS are now accepted in LSE I GAAP does not allow over-riding of standards even in extremely rare situations Statement of comprehensive income is..,
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Required under US GAAP Not required under IFRS and I GAAP

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In preparation..,
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Financial instruments: presentation Financial instruments: recognition and measurement Financial instruments: disclosures Agriculture Insurance contracts Share based payments Retirement benefit plans Disclosure of accounting policies (AS 1) Net profit or loss for the period, prior period items and changes in accounting policies (AS 5) Accounting for fixed assets (AS 10)
Under revision..,
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2006
Applicability of Accounting Standards
Accounting Standards Applicable on Level I and II

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Cash flow statements (AS 3) Segmental reporting (As 17) Related party disclosure (As 18) Discontinued operations (As 24)
Compliance with Accounting Standards
Structure of Accounting Standards

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Introduction Explanation Standard / disclosure Date of applicability
Financial Reporting Framework

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Statutory Requirements Accounting Standards Other recognized Accounting Principles k Practices
Framework for Auditing Services

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Audit - High, but not absolute assurance Review- Moderate assurance

The ICAI has issued 29 Auditing and Assurance Standards till date
Indian Accounting Standard

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ICAI follows a consultative process in the formulation of accounting standards which ensures participation of all interest groups through Accounting Standards Board (ASB) Till 1999, there was no requirement for the companies to comply with accounting standards The accounting standards issued by the ICAI were mandatory only for its members In 1999, recognizing the role of accounting standards in economic development and good governance, an amendment was made in the Companies Act, 1956 to require all companies to follow accounting standards The Amendment also contained a provision that until the accounting standards are notified by the Government under the Act, the Accounting Standards specified by the ICAI should be followed
Journey of Indian AS
Causes for Rapid Change in Indian AS

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Liberalization of the economy Increasing inflow if FII investment Increasingly maturing stock markets Increased focus on governance Formation of regulators - SEBI
Scope of Accounting Standards

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If AS found not to be conformity with law, financial statements should be prepared in conformity with such law Cannot and do not override local regulations governing preparation and presentation of financial statements Applied only to items which are material No AS will have retroactive applications, unless otherwise stated Emphasizing on laying down accounting principles and not on detailed rules for application and implementation
Procedures for Issuing an Accounting Standard

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ASB decides the broad areas in which AS needs to be formulated and priority in selection Constituting study group with wider participation by ICAI and others ASB considers the preliminary draft prepared by study group Getting the comments of..,
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ASSOCHAM FICCI ICWAI SCOPE ICSI CBDT DCA C&AG RBI IBA SEBI CII Any other body as relevant to the AS

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Holding meeting with representatives of various bodies ASB finalizing exposure draft of the proposed AS Comments from ICAI members and public on public draft Draft of proposed AS will include..,
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Concepts and fundamental principles relating to the standard Definitions of the terms used in the standard Manner in which the accounting principles have been applied for formulating the standard Presentation and disclosure requirements in complying with the standard Class of enterprise to which the standard will apply Date(s) from which the AS will be effective

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Drafts of proposed AS will be finalized by ASB and submitting to council of ICAI ICAI Council will draft the final AS AS will be issued by ICAI council AS revision procedures will be same like releasing a new AS
Procedure in using Indian Accounting Standards

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ASB of ICAI after consultation with various study groups prepares the draft of AS Draft as prepared will be circulated to Council members of ICAI and to the specified bodies like ICSI,ICWAI.CBDT, FICCI, ASSOCHAM, RBI ,SEBI etc for their comments After the meeting with the above bodies the exposure draft is finalized and is issued to ICAI and public for their comments After considering the comments received, the draft is finalized by ASB and submitted to ICAI The ICAI if found necessary may with consultation with ASB make required modification and issue the final AS NACAS to recommend to MCA for notifying the AS as issued to be complied with
Compliance with Accounting Standards

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Mandatory from respective dates mentioned in AS Any deviation from AS to be disclosed in audit report Financial statements cannot be described as complying with accounting standards unless they comply with all the requirements of each applicable standard
Accounting Standards Board (ASB)

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Constituted by: ICAI Constituted in: 21st April 1977 Composition..,

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Elected members of ICAI council Govt. nominated members of ICAI council..,

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Dept. of company affairs Office of comptroller and auditor general of India Central board of direct taxes
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RBI representatives Representative of industry associates (one members each)..,

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FICCI ASSOCHAM CII
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Representatives of ICWAI Representative of ICS of India
Accounting Standards Board (ASB)

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Composition..,
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Eminent professional co-opted by ICAI Representative of financial institutions SEBIs representative Academic Institute representatives
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Universities: 1 IIMs: 1
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Representative of controller general of accounts Representative of central board of excise and customs Chairmen of ICAIs research committee and experts advisory committee (if not member of ASB)
ASBs Objectives
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To conceive and suggest areas in which AS need to be developed To formulate AS with a view of assisting ICAIs council in evolving and establishing AS in India To examine how far relevant international AS and IFRS can be integrated while formulating AS and to integrate the same To review and revise at regular interval the AS from point view of..,
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Acceptance Changed conditions
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To provide time to time interpretations and guidance on AS To carry out such other functions relating to AS
ASBs Functions
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Formulating AS after considering..,

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Applicable laws Customs Usage Business environment
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Giving due consideration to IASs or IFRSs by integrating AS with IAS Propagating AS Persuading concerned parties to adopt AS in preparation and presentation of financial statements Providing interpretations and guidance on issues arising from AS Reviewing AS at periodic intervals
ASBs Functions
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Enumerating and describing basic concepts to which accounting principles should be oriented Stating accounting principles to which the practices and procedures should confirm Clarifying phrases commonly used in financial statements and suggesting improvements Examining various current alternative practices in vogue and endeavor to eliminate or reduce alternatives within the bounds of rationality
A/C. Std. AS 1 AS 2 AS 3 Deals With.. Disclosure of accounting policies Valuation of inventories Cash flow statements Issued 1979 June 1981 June 1981 1999 1997 Mandatory since April 2004 1995 Mandatory since April 1995 1997 Mandatory Revised
AS 4
Contingencies and events occurring after the balance sheet date Net profit or loss for the period, prior period items and changes in accounting policies
Nov. 1982 Mandatory Nov. 1982
AS 5
A/C. Std. AS 6 AS 7 AS 8 AS 9 AS 10 Deals With.. Depreciation Accounting Construction contracts Accounting for research and development Revenue Recognition Issued Nov 1982 Revised 1994 Mandatory 2002 Withdrawn by introducing AS 26 1985 Mandatory Mandatory
Accounting for Fixed Assets 1985
A/C. Std. AS 11 AS 12 AS 13 AS 14 AS 15 Deals With.. The effects of changes in foreign exchange rates Accounting for government grants Accounting for investments Accounting for Amalgamations Accounting for retirement benefits in the financial statements of employers Issued 1989 1991 1993 1994 1995 2003 Mandatory 2004 Mandatory Revised 1994 and 2003 Mandatory
A/C. Std. AS 16 AS 17 AS 18 AS 19 AS 20 Deals With.. Borrowing Costs Segment reporting Related Party Disclosures Leases Earnings Per Share Issued 2000 2000 2000 2001 2001 2004 Mandatory 2003 Mandatory Revised
A/C. Std. AS 21 Deals With.. Consolidated financial statements Issued 2001
Comes into effect from 1st April 2001
Revised
AS 22 AS 23
Accounting for taxes on income Accounting for investments in associates in consolidated financial statements Discontinuing operations Interim Financial Reporting
2001 2001
Mandatory Mandatory
AS 24 AS 25
2002 2002
A/C. Std. AS 26 Deals With.. Intangible assets Issued 2002
Comes into effect from 1st April 2003
Revised 2004 Mandatory
AS 27 AS 28 AS 29 AS 30
Financial reporting of interests in joint venture Impairment of assets Provisions, contingent liabilities and contingent assets Financial instruments: presentation
2002 2002 2003 2009 Recommendary in nature
Disclosure of Accounting Policies [AS 1]

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Disclosure of significant accounting polices involved in financial statements..,

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Preparation Presentation Separate statement of accounting policies most preferred method Forming part of accounts Notes & schedules on the accounts Supplementary information May required to use examples
Disclosed through..,
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Significant accounting policies [non exhaustive list]..,

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Methods of depreciation, depletion, and amortization Treatment of expenditure during construction Translation polices foreign currency items Valuation of inventories Treatment of goodwill Valuation of investments Treatment of retirement benefits Recognition of profits on LT contracts Valuation of fixed assets Treatment of contingent liabilities

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Fundamental accounting assumptions need to be disclosed if not followed

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Going concern Consistency Accrual [Change in accounting policies having material effect] - disclose
Alternative accounting polices reduced with the good effort of..,

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ICAI Government Regulatory agencies Progressive managements

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Major considerations governing selection and application of accounting policies..,

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Prudence
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Profits not anticipated but recognized Provisioning known liabilities
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Substance over form Materiality
Valuation of Inventories (AS 2)

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Value at which inventories are carried in the financial statements until the related revenues are recognized Exceptions to AS 2..,
WIP in..,
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Construction contracts Service contracts Shares Debentures Financial instruments Inventories measured at net realizable value through forward contract, a govt. guarantee, when homogeneous market exists, or negligible risk of failure to sell..,
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Livestock Agriculture and forest products Mineral oils, ores and gases
Machinery spares to be used with an item of fixed assets and whose use is expected to be irregular

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Inventories are assets..,

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Held for sale

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Goods held for sale Computer software held for sale Land and other property held for sale
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In the process of production In the form of material or supplies to be consumed in the production process or rendering of services
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Materials Maintenance supplies consumables
Net realizable value

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= estimated selling price estimated costs of completion estimated costs necessary to make the sale

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Inventories should be valued at lower of..,

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Cost of inventories Net realizable value
Cost of Inventories
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Costs of purchase
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Includes..,
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Duties and taxes Freight inwards Expenditures directly attributable to acquisition Trade discounts Rebates Duty drawbacks
Less..,
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Costs of conversion
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Direct labor Systematic allocation of fixed and variable production overheads based on normal capacity
Costs incurred in bringing inventories to present location and condition
Exclusion from Cost of Inventories

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Interests and borrowing costs Abnormal amounts of wasted materials, labor, and other production costs Storage costs Administrative overheads not forming part of bringing the inventories to present location and condition Selling and distribution costs
Cost of Inventories
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Cost to be assigned by using..,

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FIFO
Assumption: inventory purchased or produced first is consumed or sold first

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Weighted average cost

Weighted average of cost at the beginning cost of items purchased during the period WA may be calculated on periodic basis or as each additional shipment is received
Formula used should reflect the fairest possible approximation to cost incurred
Techniques for Measurement of Cost

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Standard cost method

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Considers normal levels of..,

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Consumption of materials and supplies Labor Efficiency and capacity utilization
Regularly reviewed and revised if necessary Used

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Retail method
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In retail trade When large no. of rapidly changing items having similar margins
Cost = sales value appropriate gross margin
Net Realizable Value

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Reduces when..,
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Become partially or wholly obsolete Declined selling price
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Cost of inventories may not be also recoverable if; estimated costs of completion has increased Written down to net realizable value on item-by-item basis An assessment of net realizable value is made at each balance sheet date
Cash Flow Statements (AS 3)

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Mandatory for the following enterprises since April 2004..,

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Equity or debt listed companies in India or outside India In the process of listing debt or equity but approved by BOD Banks (including Co-operative banks) Financial institutions Insurance business Turnover for the immediate preceding accounting period > Rs. 50 crore Borrowing (including in public deposit) > Rs. 10 crore Holding and subsidiary of any of the above companies Above companies may be exempted if looses the above requirements for two consecutive years

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Objective: assess..,
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Ability of an enterprise to generate cash and cash equivalents

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Timing and certainty of generation Pay obligations Conducting operations Providing returns to investors
Needs of enterprise to utilize cash flows

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Changes in net assets, financial structure Compare PV of future cash flows of different enterprises Comparability of reporting of operating performance by different enterprises Checking accuracy of past assessments of future cash flows Examining relationship between profitability and net cash flow and impact of changing prices

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Cash = cash on hand + bank demand deposit Cash flows = inflow + outflows
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Excludes movements between items that constitute cash or cash equivalents
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Operating activities = principal revenue-producing activities Investing activities = acquisition and disposal of LT assets Financing activities = change in size and composition of capital + borrowings
Cash Equivalents
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Meets ST cash commitments Readily convertible to known amount of cash (< 3 months) Insignificant risk of change in value
Presentation of Cash Flow Statements

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Cash flows to be classified as..,

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Operating activities Investing activities Financing activities
On installment payment
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Interest amount financing Loan element - investing
Operating Activities
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Principal revenue-producing activities Results from transactions and other events Cash receipts from..,
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Sale of goods Rendering services Royalties, fees, commissions and other revenue Refund of income taxes Receipt of insurance premium Receipts and payments to derivative contracts for the purpose of hedging Suppliers Employees Insurance premiums Income taxes
Cash payments to..,

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Investing Activities
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Acquiring and disposal of..,

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Fixed assets Shares, warrants and debt instruments Interest in JVs Cash advance and loans made to third parties Trading of derivatives
Financing Activities
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Cash proceeds and disposals from..,

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Issuing financial instruments Loans, notes, and bonds ST and LT borrowings
Methods of Reporting Cash Flows from Operating Activities

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Direct method
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Discloses major classes of..,

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Gross cash receipts Gross cash payments
Indirect method
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Adjusting NP or NL for..,
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Non-cash transactions Deferrals or accruals of past Income or expense associated with inventing and financing
Direct Method
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Details of gross cash receipts and payments may be obtained from..,

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Accounting records of the enterprise By adjusting sales, cost of sales, or other items
Changes in.., l Inventories l Operating receivables l Operating payables l Non-cash items
Indirect Method
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Adjusting NP or NL for the effects of..,
Changes in..,
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Inventories Operating receivables Operating payables Non-cash items

Depreciation Provisions Deferred taxes Unrealized FOREX gains and losses
Reporting Cash Flows on a Net Basis

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Cash receipts and payments..,

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On behalf of customers for the activities of customer

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Demand deposits by a bank Fund held for customers by an investment enterprise Rent collected or paid on behalf of owners or properties
For items in which the turnover is quick, amount is large, and maturities are short
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Principal amounts of credit card customers Purchase and sale of investments ST borrowings (< 3 months)
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Acceptance and repayment of deposits with fixed maturity Placement of deposits with and withdrawal of deposits from other financial enterprises Advances and loan made to customers
Foreign Currency Cash flows

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Convert at the rate prevailing at the date of cash flow To consistent with AS 11 May also use weighted average exchange rate Unrealized gains and losses arising from changes in FOREX rates are not cash flows
Other Issues
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Extraordinary item to be shown under all the three heads Interest and dividend paid financing Interest and dividend received investment Taxes on income operating activities Investments in subsidiaries, associates and JVs restricted Non cash transactions restricted..,
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Acquisition of assets by assuming directly related liabilities Acquisition of an enterprisers by issuing shares Conversion of debt to equity
Appendix I
Appendix II
Contingencies and Events Occurring After the Balance Sheet Date (AS 4)
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Contingency..,
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Condition or situation in which ultimate outcome (profit or loss) will be known or determined on occurrence or nonoccurrence of future event(s)
Exemption to contingencies..,
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Liabilities of life assurance and general insurance enterprises arising from policies issued Obligations under retirement benefit plans Commitments arising from LT lease contracts
Events Occurring After the Balance Sheet Date

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Significant events favorable or unfavorable Occurs between B/S date and the date on which the financial statements are approved by BOD Types of events..,
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Events which provide further evidence of conditions that existed at the B/S date Events which are indicative of conditions that arose subsequent to B/S date
Contingencies
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Estimates are required Uncertainty related to future events can be expressed by..,
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Range of outcomes quantified probabilities
Treatment of Contingent Losses

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Loss determined by expected outcome of contingency Amount estimation is to based on..,

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Judgment of management Information available up to the date on which the financial statements are approved Including review of events Experience of similar transactions Reports from independent experts
Treatment of Contingent Gains

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Not recognized in financial statements
Amounts at Which Contingencies to be included in Financial Statements

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Is based on information available May be on individual or collective events..,

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Estimated Uncollectable receivables Warranties for products sold
Event Occurring After the Balance Sheet Date but before the Approval of Financial Statements
Requires adjustments and provide additional information
Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies (AS 5)
Objective
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Prescribe the classification and disclosure of certain items in the statement of P&L Enhancing comparability of financial statements Details on disclosure of..,
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Extraordinary and prior period items Changes in accounting estimates Changes in accounting policies
Does not deal with tax issues on extra ordinary items
Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies (AS 5)
Definitions..,
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Ordinary activities: part of business Extraordinary items: distinct from ordinary activities [not regular] Prior period items: results from errors or omission in preparation of financial statements on one or more prior periods
Net Profit or Loss for the Period

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Should be included in items of income and expenses Components..,

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Profit or loss from ordinary activities Extraordinary items
Extraordinary Items
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Should be disclosed in the statement of P&L as a part of net profit or loss for the period Arises only on a rare occasion Determined by comparing it with nature of business Examples of events generally giving rise to extraordinary items are..,
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Attachment of property of the enterprise An earthquake
Profit or Loss from Ordinary Activities

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Disclosed separately
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Write-down and reversal of inventories to net realizable value Restructuring and reversal of provision for an enterprise activities Disposal or items of fixed assets Disposals of LT investments Legislative changes having retrospective application Litigation settlements Reversal of any other provisions
Prior Period Items

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Should be disclosed separately Infrequent in nature Distinguished from changes in accounting estimates Errors may arise because of..,
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Mathematical mistakes Mistakes in applying accounting policies Misinterpretation of facts Oversight
Prior Period Items

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Does not include..,

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Arrears payable to workers as a result of revision of wages with retrospective effect Income or expense recognized on eth outcome of a contingency which previously could not be estimated reliably does not constitute a prior period item
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Included in determination of net P&L for the period Can be also shown in P&L statement after determination of current net P&L
Changes in Accounting Estimates

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Estimation process involves judgment Example..,

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Bad debts Inventory obsolescence Useful lives of depreciable assets Change occurs on estimated circumstances Result of new information More experience Subsequent developments Change in an accounting policy Change in an accounting estimate In difficult to differentiate its treated as change in accounting estimate
Estimates need to be revised when,

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Difficult of differentiate..,
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Changes in Accounting Estimates

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Effects need to be included in..,

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Period of change; if it affects one period only

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Change in estimate of bad debts Change in estimated useful life of a depreciable asset
Period of change and future periods; if it affects both

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Material effect due to change in estimate for the current period and subsequent period should be disclosed, if not quantifiable the fact should be disclosed
Changes in Accounting Policies

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Changes allowed only if it is required by..,

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Statute Compliance with an accounting standard Change would result in a more appropriate presentation of the financial statement of the enterprise Events or transaction that differ in substances from previously occurring events or transactions
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Following are not change in accounting policies..,

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Ex. Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement
Events or transaction which did not occur previously
Material effect due to change in accounting policy for the current period and subsequent period should be disclosed, if not quantifiable the fact should be disclosed
Depreciation Accounting (AS 6)

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Assets not included for depreciation..,

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Forests Plantations Regenerative natural resources Wasting assets

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Expenditure on exploration for and extraction of minerals, oils, natural gas, similar non generative assets
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Expenditure on R&D Goodwill Live stock Land with unlimited useful life for the enterprise
Defined Terms
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Depreciation
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Measure of..,
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Wearing out / consumption / loss of value on Usage / effluxion of time / obsolescence through technology and market change
Includes amortization of assets with predetermined useful life Used more than one accounting period Having limited useful life Used for production or supply of goods and services
Depreciable asset
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Defined Terms
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Useful life
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Period of usage by firm No. of production or similar units expected to be obtained by suing the asset
Depreciable amount
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= historical cost estimated residual value
Factors in Assessment of Depreciation

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Historical cost or revalued value of the asset

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Includes..,
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Acquisition + Installation + Commissioning + Improvements Increase or decrease in LT liability on account of exchange fluctuations Price adjustments Changes in duties Changes in similar other factor
May change due to..,

l
l l l

l
Expected useful life of the depreciable asset

l l l l l
Is shorter than physical life Predetermined by legal or contractual limits Directly governed by extraction or consumption Depends on operational factors [usage] Reduced by obsolescence due to..,
l l l l
Technological changes Improvement in production methods Change in market demand for the product or service output of the asset Legal or other restrictions Experience with similar type of assets
l l
Estimation purely based on..,

l
Any addition or extension which retains a separate identity and is capable of being used after the existing asset is disposed of, is depreciated independently on the basis of an estimate of its own useful life

l
Estimated Residual Value of the Depreciable Asset

l l l
A difficult matter Estimated at time of acquisition / installation or at time of subsequent revaluation of the asset Basis of determination..,
l
Realizable value of similar assets
Depreciation
l l
Quantum of depreciation to be provided in an accounting period involves.., Exercise of judgment by management in light of..,
l l l l l
Technical Commercial Accounting Legal requirements Need periodical review and revision
Depreciation Methods
l
Commonly employed method includes..,

l l
Straightline method Reducing balance method Type of asset Nature of use of such asset Circumstances prevailing in business
Factors in selection of method..,

l l l
l l l
Applied consistently to provide comparability Combination of more than method is sometimes used Depreciable assets which do not have material value, depreciation is often allocated fully in accounting period in which they are acquired
Changing Depreciation Method

l l
Is treated as as a change in an accounting policy Change in method is allowed if..,

l l l
Its required by statute Compliance with an AS Results in more appropriate preparation and presentation of financial statements Depreciation is calculated using new method from the date of asset coming into use Deficiency or surplus on change need to be adjusted during the year of change [charged to P&L statement]
On change in method
l l
Depreciation
l l l l
Companies Act 1956 lays down rates of depreciation in respect of various assets Estimates useful life of an asset is shorter than under the provision of relevant statute Depreciation provision computed by applying higher rate Depreciable assets are disposed / discarded / demolished / destroyed, the net surplus or deficiency, if material, is disclosed separately
Depreciation Disclosure in Financial Statements

l
Disclosure to be made includes..,

l l l l
Depreciation methods used Total depreciation for the periods for each class of assets Gross amount of each class of depreciable assets Related accumulated depreciation
Assets depreciation rates and useful life are disclosed only of they are different from the principal rates specified in the statute governing the enterprise
Revenue Recognition (AS 9)

l
Concerned about recognizing revenue in the case of..,

l l l
Sales of goods Rendering of services Yielding interest, royalties and dividends Construction contracts Hire-purchase Lease agreements Government grants and subsidies In insurance companies arising from insurance contracts
Does not cover revenues arising from..,

l l l l l
Items Not Included in Revenues

l l l
Appreciation in the value on disposal of fixed assets or non current assets Unrealized holding gains on change in value of current assets Natural increase in,
l l l
Herds Agricultural Forest products
l l l
realized and unrealized gains from change in exchange rates Realized gains resulting from discharge of an obligation less than its carrying amount Unrealized gains resulting from restatement of the carrying amount of an obligation
Definition
l
Revenue..,
l l l
Gross inflow of cash Receivables Other consideration
l l
Completed service contract method..,

l
Recognizing revenue on completion of a contract
Proportionate completion method

l
Recognizes proportionately with degree of completion of services under a contract
Revenue Recognition
l l
Main concern is timing of revenue recognition Sale of goods..,

l l l
Transferred property in the goods to the buyer for a consideration Transfer of significant risk and rewards of ownership o the buyer In agricultural crops or mineral ores sales of goods..,
l l l
Sale assured under a forward contract Sale assured under a govt. guarantee Market exist and negligible risk to sell
Rendering of Services
l
Revenue recognized by..,
Proportionate completion method

l
Determined on the basis of,

l l l
Contract value Associated costs No. of acts or other suitable basis
Completed service contract method
Enterprise Resources Yielding Interest, Royalties and Dividends

l l
Interest charges for use of cash resources

l
Determined on accrual basis [amount outstanding x rate applicable] Include..,

l l l l
Royalties
l
Know-how Patents Trade marks Copyrights
Accrues in accordance with terms of the agreement Recognized in P&L statement when right receive payment is established
Dividends from holding of investments in shares

l
Uncertainties on Revenue Recognition

l l
Revenue measurable at the time of sale Postponement of revenue recognition in case of..,
l l l
Escalation of price Export incentives Interest
Uncertainty on collectability requires provisioning
Sale of Goods
l l
Delivery is delayed at buyers request and buyer takes title and accept billing Delivered subject to conditions
l
l l l l
Installation and inspection revenue recognized on installation but if the installation is too simple it can be recognized at the time of sale On approval Guaranteed sale can recognize if provision provided Consignment sales recognized only on final sales Cash on delivery recognized on cash receipt
Sale of Goods
l
Purchaser makes a series of installments payments to the seller, and the seller delivers the goods only when the final payments is received
l l
Recognized on delivery of goods May be recognized even when a significant deposit is received Recognized when goods are manufactured, identified and ready for delivery to the buyer Not a revenue to be recognized
Special order shipments

l
Sale/repurchase agreement
l
Sale of Goods
l
Sales to intermediate parties [goods sold to distributors, dealers and other]

l
Recognized on passing significant risks of ownership
Subscription for publications

l
Revenue recognized will be deferred as on..,

Straight line basis Based on sales value of item delivered in relation to total sales value of all items covered by subscription
Sale of Goods
l
Installment sales
l l
Recognized at the date of sale Interest element recognized as revenue, proportionately to the unpaid balance due to the seller
Trade discounts and volume rebates

l l
Is not to recognized as revenue Deducted in determining revenue
l
Installation fees
l
Recognized as revenue when equipment is installed and accepted by customer Recognized when service is completed
l l
Advertising and insurance agency commissions

l
Financial service commission
Recognition based on..,

Whether services provided once and for all or on continuing basis Incidence of costs relating to service When the payment of service will be received
l l l
Admission fees
l
Recognized when the event takes place
Tuition fees
l
Recognized over the period of instructions
Entrance and membership fees

l
Recognition depends on nature of services provided

l
Membership fees only for membership fees received is capitalized In annual fee recognized when received
Accounting for Fixed Assets (AS 10)

l
Fixed assets include..,

l l l l l l l l l
Land Buildings Plant and machinery Vehicles Furniture and fittings Goodwill Patents Trade marks Designs
Assets Excluded from AS 10

l l l l
Forests Plantations Regenerative natural resources Wasting rights..,

l l
Mineral rights Expenditures on exploration for extraction of minerals, oils, natural gas, and non-regenerative resources
l l l l
Expenditure on real estate development Livestock Government grants and subsidies Assets under leasing rights
Definitions
l
Fixed asset
l l
Used for producing and providing services Not held for sale
Fair market value

l
Price agreed in open unrestricted market between knowledgeable willing parties dealing at arms length
Gross book value - historical cost
Identification of Fixed Asset

l l l l l l l
Judgment required Aggregate individually insignificant items, and to apply the criteria to aggregate value Stand-by equipment is capitalized Servicing equipment is capitalized General machinery spares charged to P&L on consumption Any specific machinery spares which irregular in nature allocate over a period not exceeding useful life of the principal item Accounting can be improved if the total expenditure is allocated to component parts, when in practice separable, and estimates are made of useful lives of these components
Components of Cost
l l l l
Purchase price Import duties Non-refundable taxes or levies Directly attributable cost in bringing the asset to its working condition..,
l l l l
Site preparation Initial delivery and handling costs Installation costs special foundations for plant Professional fees architect fees or engineers fees
l l l l
Deduct trade discount and rebates from purchase price Commissioning cost.., Expenditure on test runs Expenditure on experimental production
Components of Cost
l
Costs may undergo changes subsequent to acquisition due to..,

l l l
Exchange fluctuations Price adjustments Changes in duties or similar factors
l l l
Administration and general overheads expenses are excluded Any specific direct admin and OH expenses related to making the asset workable is included Expenses during prolonged period between installation and commercial start up
l l
Will be charged to P&L statements Treated as deferred revenue expenditure amortized over a period not exceeding 3 to 5 years after commencement of commercial production
Self-Constructed Fixed Assets

l l
Gross book value = costs of construction Internal profit to be eliminated
Non-Monetary Consideration
l l l l
FA acquired in exchange for another asset Cost of FA = FMV of consideration given When asset is same; cost = net book value FA acquired in exchange for shares in the enterprise,
l l
Cost of FA = FMV (or) Cost of FA = FMV of shares
Improvements and Repairs

l
Improvement
l l l
Expenditure increasing future benefits Added to gross book value Includes..,

l l
Addition Extension
Amount Substituted for Historical Cost

l
Methods valuing assets

l l
Can be restated by appraisal by competent valuer Indexation and reference to current prices Restating gross book value and accumulated depreciation; net book value = net revalued amount Restating the net book value by adding therein the net increase on account of revaluation
Revalued amount is presented as..,

l l
Upward revaluation does not provide a basis for crediting to the P&L statement the accumulated depreciation existing at the date of revaluation

l
Different bases of valuation can be sued in same financial statements for..,

l l
Separate item in each of the categories of fixed assets Different categories of fixed assets
l l
Systematic basis of valuation is required when select assets are revalued Not appropriate to have revalued class of assets net book value more than recoverable amount of the assets of that class

l
Increase in net book value on revaluation is directly credited to

l l
Owners account in the name revaluation reserve P&L account, if earlier a revaluation loss is charged to P&L account
Any decrease in value charged to..,

l l
P&L account Revaluation reserve, if there was charge in increase done earlier
Retirement and Disposals

l l
l l
On disposal the FA are eliminated from financial statements Assets retired from active use and held for disposal are stated at lower of net book value or realizable value, expected loss accounted in P&L account Gain or loss on disposal of an asset in recognized in P&L account in a historical cost financial statement On disposal of revalued asset
l
Difference between net book value and net disposal proceed to P&L account, but loss to the extent of increase in revaluation reserve will be charged to revaluation reserve account Any unsettled amount in revaluation reserve will be transferred to general reserve
Valuation of Fixed Assets in Special Cases

l
Hire purchase
l l
Proportional value to the extent of payment is shown in the balance sheet Appropriate disclosure regarding HP should be made Extent of its share in balance sheet including..,
l l l
Joint ownership with others

l
Original cost Accumulated depreciation Written down value
Can be also grouped with similar fully owned assets Consideration is apportioned to the various assets on a fair basis as determined by competent valuers
Several assets purchased for a consolidated price

l
Fixed Assets of Special Types

l
Goodwill
l l
Recorded in books only when some consideration in money or money;s worth has been paid for it Arises from..,
l l l l
Business connections Trade name Reputation of an enterprise Intangible benefits enjoyed by an enterprise
l l
Goodwill is written off over a period Many of them they retain it as an asset without writing off
Disclosure
l
Special disclosure required in financial statements

l
Gross and net book values of FA at the beginning and end to show..,
l l l l
Additions Disposals Acquisitions Other movements
l l
Expenditure incurred on account of FA in the course of construction or acquisition On revaluation of FA, show disclose..,
l l l l
Method adopted to compute the revalued amounts Nature of any indices used Year of any appraisal made Whether an external value was involved?
Effects of Changes in Foreign Exchange Rates [AS 11]

l
Objectives
l
Enterprise involving FOREX in two ways..,

l l
Transactions in foreign currencies Having foreign operations
Financial statements of an enterprise expressed in reporting currency and foreign operations gets translated in reporting currency which exchange rate to sue How to recognize change in exchange rates in financial statements
Principals issue..,
l l
Scope of AS 11
l
Used for..,
l l l l
Accounting for transactions in foreign currencies Translating financial statements of foreign operations Reporting currency should be home currency, if not used reason to be specified Change in reporting currency to be disclosed Presentation of cash flow statements cash flows arising from..,
l l
Does not deals with..,

l
Transactions in foreign currency Foreign operations
Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs
Definitions
l
Foreign operations
l
Activities which are based or conducted in a country other than country of reporting enterprise of..,
l l l l
Subsidiaries Associates Joint ventures Branches
Foreign Currency Transactions

l
Includes..,
l l l l l
Buying or selling of goods or services in foreign currency Borrow or lend in foreign currency Becoming a party to an unperformed forward exchange contract Acquiring / disposing assets in foreign currency Incurring / settling liabilities in foreign currency
Foreign Currency Transactions

l
Reported
l l l
In reporting currency based on exchange rate prevailing on the day of transaction Using average rate On significant fluctuation in exchange rate average rate becomes unreliable
Reporting at Subsequent Balance Sheet Dates

l
Foreign currency monetary items: closing rate

l l l
Cash Receivables Payables Fixed assets Inventories Investments in equity shares
Non-monetary items: exchange rate at the date of the transaction

l l l
l l
Revalued non-monetary items: exchange rate at the date of the revaluation Contingent liability: closing rate
Recognition of Exchange Differences

l
Exchange differences arising from..,

l l l
Settlement of monetary items Reporting an enterprises monetary items Reported as..,

l
Income or expenses
Net investments in a non-integral foreign operations

l
Should be accumulated in a foreign currency translation reserve till the disposal of net investment
Classification of Foreign Operations Based on way of Financing

l
Integral operations
l l l
Extension of reporting enterprises operations Sell goods imported from reporting enterprise and remits it back Change in exchange rate affects the individual monetary items held by the foreign operation rather than the reporting enterprises net investment in that operation Accumulates cash and other items Incurs expenses Generates income Arranges borrowing in local currency Enter into transactions in foreign currency Change in exchange rate affects the reporting firms net investment rather than individual monetary and non-monetary items held by non-integral foreign operation
Non-integral operations
l l l l l l
Indications of Non-Integral Foreign Operations

l l l
Reporting enterprise controls foreign operations, but foreign operations operate with significant degree of autonomy Transaction with reporting firm is not of high proportion Foreign operation financed through..,
l l
Own operations Local borrowings Costs of labor Costs of material Costs of labor
Settled in local currency..,

l l l
Foreign operation sales mainly in currencies other than reporting firms currency
Indications of Non-Integral Foreign Operations

l l
Reporting firms cash flows are insulated from foreign operation's cash flows Sales price of foreign operations are not mainly determined by change in forex rate but by..,
l l
Local competition Local government's regulations
An active sales market force for foreign operations
Integral Foreign Operations

l
Translated as if transactions has been entered by reporting firm

l l
Cost and depreciation of tangible assets: exchange rate on date of purchase of asset Cost of inventories: exchange rate on incurring that cost
Non-Integral Foreign Operations

l l l l l l
Assets and liabilities [monetary + non-monetary]: closing rate Income and expenses: exchange rate on date of transactions Exchange differences: accumulated in foreign currency translation reserve until disposal of net investment Goodwill on acquisition: closing rate Contingent liability: closing rate On disposition of non-integral operation: deferred exchange differences will be recognized as income or gain in the same period
Change in Classification of Foreign Operations

l
Exchange difference to reported in forex reserve on reclassification
Forward Exchange Contracts

l
Exchange difference on forward contract is the difference between

l l l
Foreign currency amount of contract translated at exchange rate at reporting date Same currency amount translated at the later date of inception of forward contract and last reporting date Gain or loss is recognized on balance sheet based on marking to current market value
Accounting for Government Grants [AS 12]

l
Scope..,
l
Deals with..,
l l l l
Government grants Subsidies Cash incentives Duty drawbacks Special problems arising in accounting for govt. grants Any other form of govt assistance Govt. participation in ownerships of firm
Does not deal with..,

l l l
Definition
l l
Government Govt., Govt. agencies, local bodies, national and international bodies Government grants
l l
In cash or kind For past or future compliance
Accounting Treatment of Government Grants

l
Capital approach
l l
Grant is treated as part of shareholders fund Funds in nature of promoters contribution
Income approach
l l l
Grant is treated as part of income Govt. grants comes with some expenses shown as part of P&L Treated like income tax and other taxes
Accounting for Investments [AS 13]

l
Does not deals with..,

l l l l l l l l l
Bases for recognition of interest, dividends, rentals earned Operating or finance leases Investments of retirement benefit plans and life insurance enterprise MFs VFs Related asset management companies Banks Public financial institutions Assets held as stocks
Definition
l
Investments
l
Assets held by firms for earnings..,

l l l l l
Interest Dividend Rentals Capital appreciation Other benefits
Market value
l
Amount obtainable from the sale of an investment in an open market, net of expenses necessarily to be incurred on or before disposal
Forms of Investments
l l
Some firms investment activity is a significant element of operations Physical

l l
Buildings Land Shares Debt
Non-physical existence
l l
l l
Active market existing assets and Non active market existing assets Classification current investments and LT investments
Cost of Investments
l
Includes..,
l l l l l
Fair value of securities issued or cash paid or fair value of asset given up Brokerage Fees Duties Any pre acquisition income form investment in deducted from cost
Carrying Amount of Investments

l
Current investments: lower of fair value or cost

l l
Fair value = market value for assets with active market Any reduction to fair value and nay reversals of such reductions are included in P&L statement
LT investments
l l l
Carried at cost Decline value can be recognized and charged to P&L statement [can be reversed on market ups] Determined on an individual investment basis
Disposal and Reclassifications of Investments

l
Disposal
l
Amount entered in P&L statement = net of carrying amount and f=disposal proceeds
Reclassification
l
LT investment reclassified as current investment net proceed is recognized in P&L statements
Disclosures
l l l l l l
Accounting policies related to carrying amount Amount included in P&L statements Restrictions on ownerships rights Resalablity of investments Remittances of income and proceeds of disposal Aggregate amount of quoted and unquoted investments
Accounting for Amalgamations [AS 14]

l
Scope
l l
Deals with treatment of goodwill or reserve in amalgamation Does not deal with acquisitions
Definition
l l l l
Amalgamation
l
Defined as per companies act 1956 Company which is amalgamated into another company Company into which transferor company amalgamated All the asset and liabilities of transferor becomes the assets and liabilities of transferee company Not less than 90% of shareholders of transferor company becomes shareholder of transferee company Consideration paid in shares except cash paid for fractional shares Business of transferor to be carried by transferee after amalgamation No adjustment made in book values of assets and liabilities of transferor when added to transferees books
Transferor company
l
Transferee company
l
Amalgamation in the nature of merger

l l l l l
Definition
l
Pooling of interests
l
Requires only minimal changes in aggregating the individual financial statements of the amalgamating companies
Types of Amalgamations
l
Amalgamation with genuine pooling of interest, (Merger) by pooling..,

l l l
Assets and liabilities Shareholders interests Businesses

l
Post amalgamated figure will be a sum of two companies
Amalgamation with intentions of acquisitions
Methods of Accounting for Amalgamations

l
Pooling of interest method

l l l l
Used for amalgamation in the nature of merger Assets, liabilities and reserves are recorded as carrying amount Adjusted only for accounting policies Difference between amount recorded as share capital issued and amount of share capital of transferor company is adjusted in reserves in the financial statements of the transferee company Used for amalgamation in the nature pf purchase May use carrying amount or fair value of assets Good will = amount of net assets < consideration Capital reserve = amount of net assets > consideration
Purchase method
l l l l
Treatment of Goodwill Arising on Amalgamation

l l l
Treated as asset Amortized systematically not exceeding 5 year unless longer period is justified Factors included in estimating life of goodwill..,
l l l l l
Foreseeable life of business or industry Effects of products obsolescence, changes in demand and other economic factors Service life expectancies of key individuals or group of employees Expected actions by competitors or potential competitors Legal, regulatory or contractual provisions affecting useful life
Disclosures
l l l l l
Names and nature of amalgamating companies Date of amalgamation Method accounting used No of shares issued Difference between consideration and value of net identifiable assets
Accounting for Retirement Benefits in the Financial Statements of Employers [AS 15]
Retirement benefits consists of..,

l l l l l l
Provident fund Superannuating fund Gratuity Leave encashment benefit on retirement Post-retirement health and welfare schemes Other retirement benefits
Borrowing Costs [AS 16]

l
Scope
l l
Applied in accounting for borrowing costs Does not deal with..,

l
Actual or imputed cost of owners and preference capital
Definitions
l
Qualifying asset
l l
Asset taking substantial period of time to get ready for its intended use or sale Examples..,
l l l l
Manufacturing plants Power generation facilities Inventories Investment properties
Borrowing costs includes..,

l l l l l l
Interest Commitment charges Amortization of discounts or premiums relating to borrowings Amortization of ancillary costs incurred in connection with arrangement of borrowings Finance charges from finance leases Exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to interest costs
Recognition
l
Capitalize borrowing costs directly attributable to qualifying assets such as..,

l l l
Acquisitions Construction Production
Cost capitalized should..,

l l
Probably result in future economic benefits to the firm Costs can be measured reliably
Borrowing Costs Eligible for Capitalization

l l l l l l
Borrowing cost directly used in buying, developing qualifying asset Judgment is required in any indirect cost on acquiring qualifying asset Borrowing cost to be capitalized = actual borrowing costs on borrowing during the period income on temporary investment of those borrowings Should be determined by applying a capitalization rate to the expenditure on that asset Capitalization rate = weighted average of borrowing costs applicable to borrowings of the enterprise that are outstanding during the period Amount of borrowing costs capitalized cannot exceed amount of borrowing costs inured during that period
Excess of Carrying Amount of the Qualifying Asset Over Recoverable Amount

l
Carrying amount or expected ultimate cost of qualifying asset > recoverable amount or net realizable value, carrying amount is written down or written off in accordance with requirements of other accounting standards
Commencement of Capitalization
l
On satisfying following conditions..,

l l l
Expenditure as incurred Borrowing costs as incurred Activities that are necessary to prepare the asset for its intended use for sale are in progress
Suspension and Cessation of Capitalization

l
Suspension
l
During extended periods in which active development is interrupted
Cessation
l
When substantially all activities necessary to prepare the qualifying asset for its intended use or sale are complete
Disclosure
l l
Accounting policy adopted for borrowing costs Amount of borrowing costs capitalized during the period
Segment Reporting [AS 17]

l
Covers the following enterprises..,

l l l l l l l l
Listed companies Companies ready to be listed Banks including cooperative banks FIs Enterprises carrying on insurance businesses Commercial, industrial, and business reporting enterprises turnover exceeding Rs. 50 crore Firms having public deposit more than Rs. 10 crore Holding and subsidiary firms of any one of the above at any time during the accounting period
Segment Reporting (AS 17)

l
Scope
l
Covers disclosing performance based on ..,

l l
Products and services Geographical areas General purpose financial statements Consolidated financial statements
Applicable in presenting..,
l l
Should comply with this statement fully not selectively
Definitions
l
Business Segment
l l
Distinguishable component of a firm Can be.., l Individual products

l
Group related products
Factors considered in identifying related products are as follows l Nature of products or services l Nature of production process l Type or class of customers for products or services l Methods used to distribute the products or provide the services l Nature of regulatory environment
Definitions
l
Geographical segment
l l
Distinguishable component of an enterprise Factors considered in identifying geographical segments..,

l l
l l l l
Similarity of economic and political conditions Relation between operations in different geographical areas Proximity of operations Special risks associated with operations in a particular area Exchange control regulations Underlying currency risks
Definitions
l
Segment revenue does not include..,

l l l
Extraordinary items Interest or dividend income Gains on sales of investments Extraordinary items Interest expense losses on sales of investments Income tax expenses General administrative expenses
Segment expense does not include..,

l l l l l
Definitions
l
Segment asset
l l l l
Directly attributable to the segment Allocated to the segment on a reasonable basis Does not include income tax assets Determined after deducting related allowances
Segment liabilities
l l
Operating liabilities Do not include income tax liabilities
Reportable Segment
l
Conditions..,
l l l
Revenues from sale to external customers > 10% Profit or loss > 10% of results of combined segments in profits or loss Assets > 10% of the total assets of all segments
When total external revenue attributable segments < 75% of total firms revenue,
l
Additional segment should be identified as reportable segments
Segment Accounting Policies

l l
Should be in line with firms accounting polices Disclosure..,

l
Segment revenue from..,

l l
External customers Transactions with other segment
l l l l l l
Segment results Total carrying amount of segment assets Total amount of segment liabilities Total cost incurred during the period to acquire segment assets Total amount of expenses included in eths segment results for depreciation and amortization Total amount significant non-cash expenses
Related Party Disclosure [AS 18]

l

l l l l l l l l
Related Party Disclosure [AS 18]

l
Scope
l
Covers..,
l l
Related party relationships Transaction between a reporting firm and its related parties
Related parties include..,

l l l l l
Reporting firm controlling a firm directly or indirectly Reporting firms JV, associate Individual owning ownership required to control the firm Key management personnel and relatives of such personnel Person having significant influence
Related Party Disclosure [AS 18

l
Does not include..,

l l
Two companies simply having a director in common Significant of business with a single..,
l l l l l
Customer Supplier Franchiser Distributor General agent Providers of finance Trade unions Public utilities Government departments Government agencies Government sponsored bodies
Parties in normal dealings of a firm..,

l l l l l l
Exception to Related Party Discloser

l l l
When it goes against the confidentiality of the business Intra-group transactions State-controlled enterprises
Disclosure
l
Non-transacting related party

l l l
Names of related party Nature of related party relationship Where control exists Name Description of relationship Description of nature of transactions Volume of transactions Outstanding items if any
Transacting related party

l l l l l
Examples of Related Party Transactions

l l l l l l l l l l
Purchases or sales of goods Purchases or sales of fixed assets Rendering or receiving of services Agency arrangements Leasing and HP arrangements Transfer of R&D License agreements Finance Guarantee and collaterals Management contracts including deputation of employees
Earnings Per Share [AS 20]

l
Cover the following firms..,

l l l l l l l l
Listed firms Firms ready to get listed Banks including cooperative banks FIs Firms doing insurance business Firms with turnover more than Rs. 50 crores Firms with borrowings or public deposit exceeding RS. 10 crores Holding or subsidiary firms of above firms
Earnings Per Share [AS 20]

l
Objective
l l
Computing EPS for comparative purpose Focus on denominator
l l
Firms can have more than one class of shares Financial instruments is any contract that gives rise to both a financial assets on one enterprise and financial liability or equity shares of another enterprise
l
Financial assets is any asset that is..,

l l
Cash Contractual right to receive cash or another financial asset from another companies Contractual right to exchange financial instruments with another enterprise under conditions that are potentially favorable Equity shares of another enterprise
Examples of Potential Equity Shares

l l l l
Debt instruments convertible into equity shares Preference shares convertible into equity shares Share warrants Options ESOP
Presentation and Measurement

l l l l
Firm should present basic EPS and diluted EPS even if earnings are negative Basic EPS = NP / weighted average no. of outstanding equity shares Net P&L for the period = P&L for the period preference dividends attributable tax In computation of weighted average no. of shares, No shares are considered..,
l l l l l
Cash received when issued for cash Conversion on convertible debt Interest ceasing to accrue Settlement becomes effective Acquisition is recognized
Basic Equity Shares

l l l
Partly paid shares treated as fraction of an equity share Equity share at different nominal values converted to same value before computing no. of shares Equity shares issued or reduced with out corresponding change in resources..,
l l l l
Bonus issue Bonus element in any other issue Share split Reverse share split
No. of Shares in Case of a Rights Issue

l
No of equity shares after rights issue = No. of equity shares prior to rights issue x [fair value per share immediately prior to exercise of rights / Theoretical exrights fair value per share] Theoretical ex-rights fair value per share = aggregate fair value of shares immediately prior to exercise of rights to proceed from exercise rights / no. of shares outstanding after exercise of rights
Diluted EPS
l l
No. of shares should be adjusted for all dilutive potential equity shares Net profit is adjusted or increased for..,
l l
Increased amount of dividend recognized in the period Increased amount of interest recognized in the period adjusted for after-tax amount of any changes in expenses or income No. of shares increased by weighted average no. of additional equity shares which would have been outstanding assuming the conversion of all dilutive potential equity shares
Diluted EPS
l
l l
Assume most advantageous conversion rate or exercise price from the standpoint of the holder of the potential equity shares Difference between no. of shares issuable and the no. of shares that would have been issued at fair value should be treated as an issue of equity shares for no consideration Fair value = average price of equity shares Average price = average of last six months weekly closing prices
Dilutive Potential Equity Shares

l
Potential equity shares can be of..,

l l
Dilutive Anti-dilutive = decreases loss per share or increases from continuing ordinary activities
l l
Effects of anti-dilutive potential shares are ignored in calculating diluted EPS Potential equity shares are weighted for the period they were outstanding
Incidences After Balance Sheet to be Disclosed

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Issue of shares for cash Issues of shares to repay debt or preference shares Cancellation of equity shares Conversion of shares Exercise of potential shares Issue of warrants, options, convertible securities Issue of contingently issuable shares
Above transactions are not considered computing EPS
Disclosure
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Basic EPS Diluted EPS No. of shares No. of diluted shares Weighted average no. of shares Nominal value of shares along with the EPS figure
Consolidated Financial Statements (AS 21)

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Presented by parent (holding) company Scope of AS 21..,

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Applied to
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Group of enterprises under the control of a parent In accounting for investments in subsidiaries in the separate financial statements of a parent Methods of accounting for amalgamation (AS 14) Accounting for investments in associates (AS 13) Accounting for investments in JV (AS 13)
Not applied to
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Definitions
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Control
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Ownership, directly or indirectly through subsidiary(ies) of > 50% of the voting power of an enterprise (or) Control of composition of BOD in a company to obtain economic benefits from its activities
Minority interest
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Part of net results of operations and net assets of a subsidiary not owned by parent
Consolidated Financial Statements

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Include..,
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Balance sheet Statement of P&L Notes Other statements Explanatory material Consolidated cash flow statement is presented in case a parent presents its own cash flow statement
Presented in the same format as that of the parents financial statements to the extent possible
Scope of Consolidated Financial Statements

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Consolidate all subsidiaries including domestic + foreign Consolidated financial statements will not cover controls entrusted on trusts like..,
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Gratuity trust Provident fund trust
Control
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Controlling composition of BOD

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Appoint and remove all or a majority of directors of a company

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Person cannot be appointed as director without the exercise in his favor by the enterprise of such power Persons appointment as director follows necessarily from his appointment to a position held by him in that enterprise Director is nominated by the enterprise or a subsidiary thereof
Appoint or remove all majority of members of the governing body on a non-company enterprise
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Person cannot be appointed as member of the governing body without the exercise in his favor by the enterprise of such power Persons appointment as member of the governing body follows necessarily from his appointment to a position held by him in that enterprise Member of the governing body is nominated by the enterprise or a subsidiary thereof
Subsidiaries Excluded from Consolidation

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Control is intended to be temporary Operates under sever LT restrictions which significantly impairs its ability to transfer funds to the parent Reasons for not consolidating to be disclosed
Consolidation Procedures
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Combined on a line by line basis by adding together like items of..,

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Assets Liabilities Income and expenses Parents investment in subsidiaries Parents portion of equity at each subsidiary
Eliminate..,
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Recognize goodwill as asset when excess of cost of parents investment in a subsidiary over the parents portion of equity in subsidiary at the date on which investment is made
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Recognize capital reserve when less than of cost of parents investment in a subsidiary over the parents portion of equity in subsidiary at the date on which investment is made Adjusting for minority interest on net income Adjusting in net assets for minority interest by showing in the liability side..,
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Amount of equity attributable to minorities at the date on which investment in a subsidiary is made Minorities share of movements in equity since the date the parent-subsidiary relationship came in existence
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Parents portion of equity in subsidiary on the day of investment is determined..,

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On the basis of information contained in financial statements of subsidiary as the date of investments (or) On the basis of financial statements of subsidiary for the immediately preceding period after adjusting for..,
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Significant transactions and events between dates of financial statements and date of investments in subsidiary
Parent making investments through two investments and occurring the control in 2nd investment, the consolidated statements are prepared only on getting control
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Eliminate..,
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Intragroup transactions
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Sales expenses Dividends Included in carrying amounts of assets such as inventory, fixed assets
Intragroup balances
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Intragroup unrealized profits

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Unrealized losses resulting form intragroup transactions (that are deducted in arriving at the carrying amount of assets) should also be eliminated unless cost cannot be recovered
l
All financial statements of the firms in the group should have same date, if not found then adjusted financial statements are used to prepare consolidated financial statements
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Difference in reporting dates cannot be more than 6 months Length of reporting periods and any difference in the reporting dates should be same from period to period
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CFS should be prepared using uniform accounting policies for like transactions and other event is similar circumstances
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When a subsidiary uses different accounting policy, the modification is required to suit the accounting policy CFS If any deviation should be disclosed
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CFS is prospered from the date when the parent subsidiary relation established On cessation of P-S relation, P&L cover transactions till the cessations + profit or loss on the disposal of investment Carrying amount of the investment at the date that it ceases to be a subsidiary is regarded as cost thereafter Loss applicable to minority may exceed minority interest in the equity of subsidiary
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Excess loss will be covered against majority In future when profit made, will be shared for minority after adjusting for the loss boned by the majority shareholders
Disclosure
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List of all subsidiaries should be disclosed in CFS..,

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Name Country of incorporation or residence Proportion of ownership interest Proportion of voting power held Nature of relationship between parent and subsidiary
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Effect of acquisition and disposal of subsidiaries Names of subsidiaries for which reporting dates are different
Accounting for Taxes on Income (AS 22)

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AS 22 mandatory for..,
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Listed firms Firms getting ready to be listed Parent presenting consolidated financial statement and any of firm in the group falls in the above categories
Taxes on income
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Significant item Accrued in the same period
Taxable Income vs. Accounting Income

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Reasons for divergence.., Differences between items of revenues, expenses and deductions as,
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Appearing in P&L statement Appearing for tax purposes
Scope of AS 22
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AS 22 include all domestic and foreign taxes which are based on taxable income AS 22 does not specify taxes payable on..,
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Distribution of dividends Other distribution made by enterprise
Definitions
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Accounting income
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Net P&L for a period, as reported in statement of P&L, before..,

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Deducting income tax expense Adding income tax saving
Tax expense
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Aggregate of current tax and deferred tax charged or credited to the statement of P&L for the period Amount of income tax determined to be payable is respect of taxable income (loss) for a period
Current tax
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Definitions
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Deferred tax
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Tax effect of timing differences Differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods Example..,
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Timing differences
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Machinery purchased for scientific research related to business is fully allowed as deduction in the first year for tax purpose whereas the same would be charged to statement of P&L as depreciation over its life Unabsorbed depreciation and carry forward of losses which cane be set off against future taxable income
Permanent differences
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Differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently
Recognition
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Tax expenses for the period should be included in determination of net P&L for the period..,
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Current tax Deferred tax
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Permanent differences do not result in deferred tax assets or deferred tax liabilities Consideration of prudence..,
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Deferred tax assets are recognized and carried forward only to the extent that there is a reasonable certainty of their realization Reasonable level of certainty would normally be achieved by examining past record of enterprise and by making realistic estimates of profits for the future
Recognition
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Existence of unabsorbed depreciation or carry forward of losses under tax laws is strong evidence that future taxable income may not be available When an enterprise has a history of recent losses, the enterprise recognizes deferred tax assets only to the extent that it has timing differences the reversal of which will result in sufficient income or there is other convincing evidence that sufficient taxable income will be available against which such deferred tax assets can be realized
Re-Assessment of Unrecognized Deferred Tax Assets

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Has to be done at each B/S date Done based on sufficiency of future taxable income will be available against which such deferred tax assets can be realized
l
Example..,
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An improvement in trading conditions may make it reasonably certain that the enterprise will be able to generate sufficient taxable income in the future
Measurement
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Current tax
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Measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rate and tax laws Measured using tax rates and tax laws that have been enacted or substantively enacted by the B/S date When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using average rates Should not be discounted to their present value
Deferred tax
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Disclosure
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An enterprise should offset assets and liabilities representing current tax if enterprise..,
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Has legally enforceable right to set off the recognized amounts Intends to settle the asset and liability on a net basis Should be disclosed separately in B/S Break up of deferred tax into major components of the respective balances should be disclosed in note to accounts Nature of evidence supporting recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws
Deferred tax..,
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Disclosure
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On applying AS 22 for the first time

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Opening balances of assets and liabilities for accounting purpose and tax purposes are compared and difference is determined Tax effects of these differences if any should be recognized as deferred tax if the difference is timing difference
Applying AS 22 for the First Time

Example
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Opening balance of fixed assets as per..,

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Accounting purpose: Rs. 100 Tax purpose: Rs. 60 Accounting purpose: Straight line Tax purpose: Written down value
Depreciation method used..,

l l
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Enacted tax rate: 40% Deferred tax liability = 40% * [100 - 60] = Rs. 16 should be recognized
Timing Differences
Example
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Expenses debited in the P&L statement for accounting purpose but allowed for tax purposes in subsequent years Expenses amortized in books over a period of year but are allowed for tax purposes wholly in the first year or shorter or longer period Book and tax depreciation differ..,
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Difference in depreciation rates Differences in methods of depreciation Differences in method of calculation Differences in composition of actual cost of assets
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Income credited to the statement of P&L but taxed only in subsequent years Recognition of income is spread over a no .of years in the accounts but the income is fully taxed in the year of receipt
Accounting for Taxes on Income

Example
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Company: ABC Ltd Prepares accounts annually on 31st March 1st April 2001
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Purchased machine at a cost of Rs. 1,50,000

l l l l
Machine useful life: 3 years Expected scrap value: 0 Eligible first year depreciation allowance under tax purposes: 100% Depreciation method appropriate for accounting purpose: straight line method Tax saving: Rs. 60,000
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Profits before taxes before depreciation and taxes: Rs. 2,00,000 each year Corporate tax rate: 40%

Example
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If the cost of machine is spread over three years of its life for accounting purposes, the amount of tax saving should also be spread over the same period
Statement of Profit and Loss Rupees in Thosands 2001 2002 2003 200 200 200 50 50 50 150 150 150
Profit before depreciation and taxes Less: Depreciation for accounting purposes Profit before taxes Less: Tax expense Current tax 0.40 (200 - 150) 0.40 (200) Deferred tax Tax effect of timing differences originating during the year 0.40 (150 - 50) Tax effect of timing differences reversing during the year 0.40 (0 - 50) Tax expense Profit after tax Net timing differences Deferred tax liability
20 80 80
40 -20 60 90 50 20 -20 60 90 0 0
60 90 100 40
In 2001, amount of deprceiation allowed for tax purposes exceeds the amount of depreciation charged for accounting purposes by Rs. 1,00,000 and therefore taxable income is lower than the accounting income, This give rise to a deferred tax laibility of Rs. In 2002 and 2003, accounting income is lower than taxable income because the amount of depreciation charged for accounting purpose exceeds the amount of depreciation allowed for tax purposes by Rs. 50,000 each year Deferred tax liability is reduced by Rs. 20,000 each in both the years
Tax expense is based on the accounting income of each period

In 2001, P&L account is debited and deferred tax liability account is credited with the amount of tax on the orginating timing difference of Rs. 1,00,000 while in each of the following two years Deferred tax liability account is debited and P&L account is credited with the amount of tax on the reversing timing difference of Rs. 50,000
Journal Entries Debit Year 2001
Credit
P&L A/C 20,000 To Current tax A/C 20,000 P&L A/C 40,000 To Deferred tax A/C 40,000 Year 2002 P&L A/C 80,000 To Current tax A/C 80,000 Deferred tax A/C To P&L A/C Year 2003 P&L A/C 80,000 To Current tax A/C 80,000 Deferred tax A/C To P&L A/C 20,000 20,000 20,000 20,000

Example
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If the tax rate for..,

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2001: 40% 2002: 35% 2003: 38%
The deferred tax liability carried forward each year would appear in the balance sheet as under..,
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31st March 2001: 0.40 (1,00,000) = Rs. 40,000 31st March 2002: 0.35 (50,000) = Rs. 17,500 31st March 2003: 0.38 (0) = Rs. 0

Example
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The amount debited / (credited) to the P&L account (with corresponding credit or debit to deferred tax liability) for each year would be as under..,
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31st March 2001: Debit = Rs. 40,000 31st March 2002: Credit = Rs. 22,500 31st March 2003: Credit = Rs. 17,500

Example - 2
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Company: XYZ Ltd Accounts prepared annually during: 31st March Company has incurred..,
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2001: loss of Rs. 1,00,000 2002: Profit of Rs. 50,000 2003: Profit of Rs. 60,000
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Under tax law loss can be carried forward for 8 years Tax rate: 40%

Example - 2
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At the end of 2001, virtually certain, supported by evidence that the company have sufficient taxable income in eth future years against which unabsorbed depreciation and carry forward of losses can be set-off Assumed no difference between taxable income and accounting income except that setoff of loss is allowed in years 2002 and 2003 for tax purpose

Example - 2
Statement of Profit and Loss 2001 2002 2003 -100 50 60 -4 40 -60 -20 30 -20 36
Profit (Loss) Less: Current tax Deferred tax Tax effect of timing differences originating during the year Tax effect of timing differences reversing during the year Profit (loss) after tax effect
Accounting for Investments in Associates in Consolidated Financial Statements (As 23)
Scope of AS 23
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Deals with preparation and presentation of consolidated statements of an investor Does not deals with accounting for investments in associates in the preparation and presentation of financial statements by an investor
Definition
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Associate
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An enterprise in which the investor has significant influence and which is not a..,
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Subsidiary Joint venture
Significant influence
l l l l l l l
Power to participate in the financial and/or operating policy decisions of the investee but not control over those policies May be gained by.., Sharing ownership Statute or Agreement Can be presumed, when an investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee A substantial or majority ownership by another investors does not necessarily preclude an investor from having significant influence
Equity Method
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Method of accounting Investment is initially recorded at cost, identifying any goodwill / capital reserve arising at the time of acquisition Carrying amount of investment is adjusted thereafter for the post acquisition change in the investors share of net assets of the investee..,
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Revaluation of fixed assets FOREX translation differences Differences arising from amalgamations
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Distributions received from an investee reduce the carrying amount of the investment Consolidated statements of profits and loss reflects the investors share of the results of operations of the investee Equity means residual interest in the assets of an enterprise after deducting all its liabilities
Equity Method
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Should be discontinued from the date of,

l l
Ceasing to have significant influence in an associate but retains, either in whole or in part, its investment When associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor
Most recent available financial statements of the associate are used by investor in applying equity method Length of the reporting periods, and any difference in the reporting dates, are consistent from period to period
Equity Method
l
Investors share of losses of an associate > carrying amount of investment, investor discontinues recognizing share of further losses and the investment is reported nil value If associate subsequently reports profits, investor resumes including its share of those profits only after its share of profits equals the share of net losses that have not been recognized
Evidences of Significant Influence

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Representation on the BOD or corresponding governing body of the investee Participation in policy making processes Material transactions between the investor and the investee Material transactions between the investor and the investee Interchange of managerial personnel Provision of essential technical in formation
Disclosure
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Listing and description of associates Proportion of ownership interest Proportion of voting power Investment associates disclosed as equity should be shown as LT investments in consolidated B/S P/L should be shown separately Disclosure for any differences in..,
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Accounting period Accounting policies
Discontinuing Operations [AS 24]

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Discontinuing Operations
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Scope
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Applies to all discontinued operations of a firm
Definition
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Discontinuing operations includes..,

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Single plan of..
Selling entirety l Demerger l Spin-off Disposing of piecemeal Terminating through abandonment
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Separate major line of business or geographical area of operations Can be distinguished operationally and for financial reporting purposes
Definition
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Initial disclosure event

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Firm has entered into a binding sale agreement BOD approved detailed formal plan for discontinuance
Interim Financial Reporting [AS 25]

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Objective
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To prescribe minimum content of an interim financial report To prescribe the principles for recognition and measurement in a complete or condensed financial statements for an interim period
Interim reporting improves ability of.in understanding firms capacity earn and generate cash flows, liquidity..,
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Investors Creditors others
Scope
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Does not mandate firms

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To present interim reports How frequently to report
If decided to do so then should comply with this AS
Definition
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Interim period
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Financial reporting period shorter than a full financial year
Interim financial report

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Condensed or complete set of financial statements
Content of Interim Financial Report

l l l l
Balance sheet Statement of P&L Cash flow statement Selected explanatory notes, including those relating to..,
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Accounting policies Other statements Explanatory material

l l l l l l l l
Condensed financial statements Provide update on latest annual financial statements Focuses on new activities, events,a dn circumstances Does not duplicate information previously reported Should also present basic EPS and diluted EPS Also include consolidated financial statements Estimates are made to a greater extent Accounting policy should be similar to that of annula reports

l
Minimum notes required on..,

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Accounting policies Explanations on seasonality of interim operations Nature and amount of changes in estimates of amounts reported in prior interim periods Issuances, buybacks, repayments, restructuring of debts and equity and potential equity shares Dividends, aggregate or per share Segment revenues, segment capital employed, segment results product wise or geographic wise Material event not reflected in interim financial statements Effects of business consolidations Material change sin contingent liabilities
Intangible Assets (AS 26)

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AS 26 is mandatory for..,
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Firms listed in stock exchanges Firms in the process of issuing listed securities Firms with turnover more than rs. 50 crores
Scope of AS 26
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Intangible assets as per AS 26 will not include..,

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Financial assets Mineral rights and expenditure on exploration for Development and extraction of..,
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Minerals Oil Natural gas Non-regenerative resources
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Intangible assets arising in insurance enterprises from contracts with policy holders Expenditure in respect of termination benefits
Scope of AS 26
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Intangible assets as per AS 26 will not include..,

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Intangible assets covered by other AS

l
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Intangible assets held by a firm for sale in ordinary course of business (AS 2 and AS 7) Deferred tax assets (AS 22) Leases falling within the scope of AS 19 Goodwill arising on amalgamation (AS 14) Goodwill arising on consolidation (AS 21)
Scope of AS 26
Scope of AS 26
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Intangible assets as per AS 26 will include..,

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Expenditure on..,
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Advertising Training Start-up R&D activities Motion picture films Video recordings Plays Manuscripts Patents copyrights
Rights under licensing agreements for..,

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Scope of AS 26
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Intangible assets as per AS 26 will include..,

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Lease dealing with an intangible asset held under a finance lease Expenditure on exploration, development and extraction Contracts between insurance enterprises and policy holders Discount or premium to borrowing Cost on arrangement with borrowing Shares issue expenses Discounted allowed on issue of shares
Issues creating complexity..,

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Definitions
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Intangible asset
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Identifiable non-monetary asset No physical substances Used in production, rental or administrative purpose Resource controlled by an enterprise as a result of past events Expected future economic events Money held and assets to be received in fixed or determinable amounts of money
Asset
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Monetary assets
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Definitions
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Active market
l l l
Items traded are homogeneous Willing buyers and seller van be found at any time Prices are available to public Amount by which the carrying amount of an asset exceeds its recoverable amount Amount at which an asset is recognized in the balance sheet, net of any..,
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Impairment loss
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Carrying amount
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Accumulated amortization Accumulated impairment losses
Intangible Assets
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Scientific or technical knowledge Design and implementation of new processes or systems Licenses Intellectual property rights Market knowledge Trademarks Brand names Computer software Patents Copy rights Fishing licenses Import quotas Franchises Customer or supplier relationships Customer loyalty Market share Marketing rights
Intangible Assets
l
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Acquiring any intangible asset not usable for generating future economic benefit will counted as expenses and not as asset Any intangible asset acquired not usable for generating future economic benefits through amalgamation will form part of goodwill Any insignificant physical component (CD) will treated as form of intangible asset Asset having intangible and tangible component to decide on the nature of asset, the predominance is considered
Identifiability of an Intangible Asset

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Clearly distinguishable from goodwill Asset is separable

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Firm could rent, sell, exchange or distribute Not a necessary condition
Goodwill in nature of purchase will provide economic benefit in future through..,

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Synergy between identifiable assets acquired Assets do not qualify for recognition in financial statements
Control
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Controlling future economic benefits Can be controlled by legal rights Intangible asset can be controlled by..,
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Knowledge is protected by legal rights such as..

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Copy rights Restraint of trade agreement Legal duty on employees to maintain confidentiality
Control
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Uncontrolled in legal terms - specific management or technical talent may not meet the definition of an intangible asset Uncontrolled in legal terms portfolio of customers or market share or customer relationship or loyalty may not meet the definition of an intangible asset Future economic benefits flowing from an intangible asset includes..,
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Revenue from sale of products or services Cost savings Other benefits resulting from the use of the asset by the enterprise
Recognition and Initial Measurement of an Intangible Asset

l
Recognition
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Meets definition of an intangible asset Meets recognition criteria When its probable that the future economic benefits will flow to enterprise
l
Recognition
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Can be assessed using reasonable and supportable assumptions May use judgment
When cost of the asset can be measured
An intangible asset should be measured initially at cost
Separate Acquisition
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Cost can be measured reliably (very easy if consideration is in money or other monetary assets) Cost of intangible asset comprises..,
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Purchase price Import duties and other taxes Directly attributable expenditure on making asset ready for its intended use
l
Professional fees for legal services
If acquired in exchange of shares; asset value = fair value of asset or fair value of securities, which is clearly evident
Acquisition as Part of an Amalgamation

l
Consideration is allocated to individual identifiable assets and liabilities on the basis of their fair values based on..,
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Quoted market prices in an active market Market price = current bid price Market price = price of most recent similar transaction Cost reflecting the amount the the firm would have paid in an arms length transactions Appropriate applying multiples reflecting current market transactions to certain indicators driving the profitability of the asset Discounting estimated future net cash flows from the asset
Acquisition by way of a Government Grant

l
Acquiring asset at free of cost or for nominal consideration

l l l l l
Airport landing rights Licenses to operate radio or TV stations Import licenses Quotas Rights to access other restricted resources
Recognized at a nominal value or at acquisition cost + directly attributable cost
Internally Generated Goodwill

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Should not be recognized as an asset Internal good will = market value of firm carrying amount of its net identifiable assets
Internally Generated Intangible Asset Recognition..,

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Whether and when there is an identifiable asset? Determine cost of asset reliably
Phase of generation
Research phase
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No intangible asset arising from research should be recognized Expenses should be recognized as expense Example..,
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Activities aimed at obtaining new knowledge Search / evaluation / final selection / application of research findings Searching for alternatives for materials / devices / products / process / systems / services
Development phase
Development Phase
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Intangible asset arising from development can be recognized on following conditions..,

l l l l l l
Completion of technical feasibility making it available for use or sale Intention to complete intangible asset and use or sell it Ability to use or sell Demonstrating existence of a market for the output of intangible asset or intangible asset itself or use it internally Adequate technical, financial and other resources to complete development Ability ot measure expenditure reliably
Development Phase
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Example of development activities..,

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Design / construction / testing of pre-production or pre-use prototypes and models Design of tools / Jigs / Moulds / dies Design and construction of pilot plant Design /construction / testing of chosen alternatives
Following internally generated items cannot be recognized as intangible assets..,

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Brands Mastheads Publishing titles Customer lists Items similar in substance
Provisions, Contingent Liabilities and Contingent Assets [AS 29]

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Listed companies Companies ready to be listed Banks including cooperative banks FIs Enterprises carrying on insurance business Commercial, industrial, and business reporting enterprises turnover exceeding Rs. 50 crore Firms having public deposit more than Rs. 10 crore Holding and subsidiary firms of any one of the above at any time during the accounting period
Provisions, Contingent Liabilities and Contingent Assets

l
Will not include provisions, contingent liabilities and assets resulting from..,
l l l l
Financial instruments that are carried at fair value Executory contracts Insurance firms from contracts with policy-holders Covered by another accounting standard
Definitions
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Obligating event
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Event that creates an obligation that results in an enterprise having no realistic alternative to settling that obligation Possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of firm Present obligation that arises from past events but is not recognized
Contingent liability
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Recognition of Provisions
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Conditions
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Present obligation as result of past event Probable that an outflow of resources embodying economic benefits will be required to settle the obligation Reliable estimate can be made of the mount of obligation
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Contingents liabilities: should not recognize Contingent assets: should not recognize
Measurement of Provision
l l l l
Provisions should be the best estimate Amount provision should not be discounted for present value Should be reviewed at each B/S date Provision ..,
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Should be used only for expenditures for which the provision was originally recognized Should not be recognized for future operating losses
Restructuring
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Events as restructuring includes..,

l l l l
Sales or termination of a line of business Closure of business locations in a region Changes in management structure Fundamental reorganization
Disclosure
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Under provisioning
l l l l l l l l
Carrying amount begging and end Additional provisions made Amounts used Unused amounts revered during the period Nature of obligation Expected timing of outflow Indication of uncertainties Amount of any expected reimbursement
Generally Accepted Accounting Principles (GAAP)

ASB ICAI Companies Act SEBI RBI Act Listing agreements Electricity act Income tax regulations Customs authorities Practices Bilateral agreements Banking act IRDA act
Govt. Acts / circulars Internal memorandums
Accounting Environment
l l l l l l l l
GAAP Companies Act Income Tax Act ESSAR Accounting Standards Guidelines & Opinions Of Expert Committees Regulators Accounting Policies of the Company
IGAAP
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Is close to IFRS IFRS..,

l l l
Issued by IASB since 2001 onwards (before that IASC issued IAS) Mandatory for EU companies since 2005 onwards Mandatory for companies listed in EU since 2005 onwards
In India, for consolidation of financial statements the companies act definition is based on either majority ownership or board control
Conceptual Framework I GAAP

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Defines fundamental accounting principle and theories for formulation of accounting standards Decides..,
l l l l
Elements of financial statements Qualitative characteristics Fundamental assumptions Other concepts Standard setting process Interpretation and application of accounting standards Harmonisation with other standards Enabling auditors in forming an opinion wherever there are no standard or standards are silent etc
Assists in..,
l l l l

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ICAI framework statement issued in July 2000 Not an accounting standard in itself and does not override accounting standard Identified users..,
l l l l l l l
Investors Lenders Suppliers Customers Employees Government Public

l
Underlying assumptions
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Accrual basis Going concern Consistency Understandability Relevance Reliability Comparability True and fair view
Qualitative characteristics
l l l l l

l
Elements of financial statements

l l l l l l l l
Assets Liabilities Equity Performance Income Expenses Capital maintenance adjustments Guidelines for recognition of elements of financial statements Historical cost Current cost Realizable value
Measurement criteria for elements of financial statements

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l
Enterprises have been classified in 3 categories for application of accounting standards..,

l l l
Level 1 Level 2 Level 3
Conceptual Framework IFRS

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Was issued in April 1989 Deals with..,

l l l l l
Objective of financial statement Qualitative characteristics Elements of financial statement Concept of capital Capital maintenance
IFRS is required or permitted for use in over 90 countries for financial reporting

l
Qualitative characteristics..,
l l l l l l l l l l l
Understandability Relevance Materiality Reliability Faithful representation Substance over form Neutrality Prudence Completeness Comparability True and fair view

l
Measurement criteria..,
l l l l
Present value Historical cost Current cost Realizable value
IFRS allows over-riding of standards in extremely rare situations
Balance Sheet - I GAAP

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Primary financial statements Format..,

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Vertical Horizontal
l l l
Does not prescribe any current and non current classification Items in increasing order or liquidity ad sources and application of funds Additional required disclosures..,
l l l l
No of shares held by holding company Ultimate holding companys aggregate value of quoted investments Market value of investments Amount of guarantee given by company on behalf of directors
Consolidation of financial statements of subsidiaries is not compulsory until it is required under some other law or regulation
Income Statement I GAAP

No format is prescribed Minimum line items have been specified in Part II of schedule VI to Companies Act, 1956 including..,
Aggregate Turnover Gross Service revenue for Commission paid to Sole selling agent Brokerage and discount on sales Depreciation Consumption of stores and spare parts Power and fuel Rent Repairs, rates and taxes etc.

l
Requires disclosure of several additional information by way of notes like..,

l l l l l
Licensed and installed capacity Actual production details Details of imports Forex earnings and outgo Net Profit computation u/s 349 etc
Any item of expenditure which exceeds 1% of total revenue or Rs 5000/- whichever is higher should be shown as a distinct items and should not be clubbed as Misc expenses Requires separate disclosure of exceptional and non recurring items

l
Effect for change in accounting policy is..,

l l l
Given with prospective effect , if the same is material Only in case of change in method of depreciation, the same has to be applied with retrospective effect Other disclosures required like need for change etc
Prior period items

l
Requires separate disclosure of prior period in the current financial statement either as part of current years results or as an alternative approach after determination of current net profit or loss No restatement of retained earnings are required.however complete disclosure of prior period and its impact on financial statements should be disclosed
Components of Income
l l
ICO: Income from continuing operations Below the line items

l l
Items disclosed below ICO Are each shown net of income tax
Income = ICO + DCO + EI + Cumulative effect of change in accounting principles
Cash Flow vs. Earnings

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Earnings are superior indicators of expected future cash flows Earnings provide straightforward measure of delivered performance
Statement of Comprehensive Income

Changes in Changes in EquityEquity Display (Year Ended December 31, 2007) Accumulated Other Comprehensive Retained Comprehensive Common Paid-In Total Income Earnings Income Stock Capital 563,500 88,500 25,000 150,000 300,000 63,250 63,250
Beginning balance Comprehensive income Net income 126,500 Other comprehensive income, net of tax unrealized gains on securities, net of reclassification adjustments 11,500 Foreign currency translation adjustments 8,000 Minimum pension liability adjsutment -2,500 Other comprehensive income Comprehensive income Common stock issued 150,000 Dividends declared on common stock -10,000 Ending balance 847,000 Disclosure of reclassifiaction amount Unrealized holding gains arising during period 13,000 Less: reclassification adjustments for gains included in net income -1,500 Net unrealized gaisn on securities 11,500
11,500 8,000 -2,500 17,000 80,250 -10,000 141,750
17,000 50,000 100,000 42,000 200,000 400,000
IASBs Agreements on FASBs 5 Principles

l
Performance statement should be able to distinguish..,

l l
ROCE ROE
l l l l
Components of gains and losses should be reported as gross unless they give little information with respect to future income Income and expenses resulting from remeasurement of an asset or liability should be reported separately Performance statement should identify gains and losses where the change in economic value does not arise in period in which it is reported Performance statement should allow reporting in the form of..,
l l l
Information on the entity as a whole, analyzed by nature of function Activities in disaggregated by business segment (product or geographic) Additional distinctions according to managerial discretion
IASBs Proposed Format for Financial IASB's Proposed Statement of Comprehensive Income Performance Statement Income Valuation
Flows Operating Revenue Cost of sales Other captions Discontinued operations Total operating Financing Interest on net debt Actual gains and losses Fair value gains and losses Cash flow hedges Discontinued operations Total financing Tax Group Associates Discontinued operations Total tax Comprehensive income xxx xxx xxx xxx xxx xxx Adjustments xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Total xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx
xxx xxx xxx xxx xxx xxx
Other Possible Approaches in Stating Comprehensive Profit

l l
Separating transactions with 3rd parties from all other transactions and events Separating..,
l l l
Cash measurements Accrual measurements Fair-value measurements Events driven by historical cost principles Events driven by fair value or remeasurement principles
Separating..,
l l
Separating income and expenses from remeasurement of an asset or liability
Accounting Issues in Companies Act

l l l
Financial report should be produced before AGM before six month from the date of B/S Accounting period cannot be more than 15 months Annual report should include..,
l l l l
B/S P&L Report of BOD Report of auditors
Earnings Management Using Discretion Allowed Under GAAP

l l
Taking a bath
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Pre-booking expenses during bad times Booking too many expenses during good times to avoid showing expenses during bad times Undisclosed liabilities Aggressive accounting practices and fraud
Creating hidden reserves

l
l l
Off-balance-sheet financing
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Overstating financial performance

l
Inherent GAAP Limitations

l
Value of R&D, goodwill, and other self-created intangible assets are not reported
l
Nobody stops a manager from providing estimates (legal liability) Where inflation has not been a big issue Except in cases of liabilities or losses through conservatism Consistent with conservatism, objectivity, and verifiability
l l l
No adjustments for inflation in U.S.

l
Expected performance is not shown

l
Most assets stated at historical costs

l
Diversity in Accounting
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Unlikely to be eliminated by..,

l l l
Policy Law Practice

Financial communication Accounting measurement Financial reporting
Exists because of complex arena..,

Diversity in GAAP
l l l l l l l l l l l l l l
Cash Receivables Marketable securities Inventories Land, Plant and Equipment Intercorporate investments Intangible assets Current liabilities LT liabilities Owners equity Revenues Costs of goods sold Expenses Net income
Diversity in Accounting Principle

Example Statements of Financial Position, Jan 1, 2007 Company A Company B Assets Cash 500 500 Marketable securities 1000 1000 Inventories (100units @ Rs.10) 1000 1000 Building and equipment (estimated life: 10 years) 2000 2000 Less: Accumulated depreciation 0 0 Total assets 4500 4500 Liabilities Accounts payable 200 200 Bank loans 1000 1000 Total liabilities 1200 1200 Owner's equity: common stock 3300 3300 Total equity + liabilities 4500 4500

Example Trasactions of Companies A and B for the year 2007 Events and
Sales of merchandise (200 units @ Rs.40) Purchase of inventory on account (3% discount if paid within 10 days) March 31, 50 units @ Rs.10 June 30, 50 units @ Rs.12 September 30, 50 units @ Rs.15 December 31, 50 units @ Rs.20 Paid accounts payable April 30. July 31. October 31. Paid salaries Increased bank loan Purcahsed new equipment (estimated life, 4 years) Piad for research on new product not yet introduced Value of marketable securities, Dec 31, 2007 8000 500 600 750 1000 500 600 750 2500 2000 2000 500 950

Example Accounting Methods Used in Preapring Finnacial Reports by Companies A and B Item Company A Company B Cash Report face amount on hand and in bank Report face amount on hand and in bank
Marketable secuirties Inventory Report at cost unless market is 'materially' lower and sales contemplated Report a lower of market cost or market Report at cost, assuming FIFO Report at cost, assuming LIFO Report at cost less accumulated Buildings and Report at cost less accumulated straight- depreciation accelerated at two time equipment line depreciation straight-line rate Intangible Hold as asset at cost until related Charge against revenues when cash assets revenues are realized expended Accounts Report at amount due less discounts payable available Report at face amount Bank loan Report at amount due Report at amount due Owner's equity Asset-liabilities Asset-liabilities

Example
Statement of Income for the Year 2007 Company A Company B Sales revenues 8000 8000 Less: Cost of goods sold Beginning inventory 1000 1000 Add: purchases 2850 2850 Available 3850 3850 Ending inventory 1750 2100 1000 2850 Gross margin 5900 5150 Less: expenses Salaries 2500 2500 Depreciation 700 1400 Research on new prdocut 3200 500 4400 Operating income 2700 750 Add: discounts available 30 Less: Loss on securities held 50 Net income 2730 700

Example
Balance Sheet Dec 31, 2007 Company A 3650 1000 1750 4000 700 4000 1400 Company B 3650 950 1000 Assets Cash Marketable securities Inventories Building and equipment Cost Accumulated depreciation Research on new product Total assets Liabilities Accounts payable Bank loans Total liabilities Owners' equity Commo stock Retained earnings Total equities Total equities and liabilities
3300 500 10200 1170 3000 4170
2600 8200 1200 3000 4200
3300 2730 6030 10200
3300 700 4000 8200

Cash from operations Net income Add: depreciation Decrease in marketable securities Increase in inventories Increase in accounts payable Total cash from operations Cash from investments Purchase of new equipment Research on new product Total cash from investments Cash from financing New bank loan Total changes in cash Cash, Jan 1, 2007 Cash, Dec 31, 2007
Statement of Cash Flows for the Year 2007 Example 2730 700 0 -750 970 3650 -2000 -500 -2500 2000 3150 500 3650
Company A Company B 700 1400 50 0 1000 3150 -2000 0 -2000 2000 3150 500 3650

Reconciliation of Income for companies A and B Company B income 700 Add: Rs. 50 because company A does not reduce value of marketable securities to market value of Rs. 950 50 Add: Rs. 750 because company A uses FIFO instead LIFO for inventory values and determining costs of goods sold Add: Rs. 700 because company A uses staright-line depreciation instead of an accelerated method Add: Rs. 500 because compan A retains research costs as an asset Add: Rs. 30 because company A reduced liabilities to discounted amount Company A income
Example
750 700 500 30 2730

Income Statement - Type Display (Year Ended Dec 31, 2007) Income Statement-Type
Revenues Expenses Other gains and losses Gains on sale of securities Income from operations before tax Income tax expense Income before extraordinary item and cumulative effect of accounting change Extraordinary item, net of tax Income before cumulative effect of accounting change Cumulative effect of accounting change, net of tax Net income Other comprehensive income Foreign currency translation adjustments net of tax Unrealized gain on securities Unrealized holding gains arising during period, net of tax Less: reclassification adjustment, net of tax, for gain included in net income Minimum penison liability adjsutment, net of tax Other comprehensive income Comprehensive income 140,000 -25,000 8,000 2,000 125,000 -31,250 93,750 -28,000 65,750 2500 63,250 8,000 13,000 -1,500
11,500 -2500 17,000 80,250

Changes inChanges in Equity Display (Year Ended December 31, 2007) Equity
Accumulated Other Comprehensive Retained Comprehensive Common Paid-In Total Income Earnings Income Stock Capital 563,500 88,500 25,000 150,000 300,000 126,500 63,250 63,250
Beginning balance Comprehensive income Net income Other comprehensive income, net of tax unrealized gains on securities, net of reclassification adjustments Foreign currency translation adjustments Minimum pension liability adjsutment Other comprehensive income Comprehensive income Common stock issued Dividends declared on common stock Ending balance Disclosure of reclassifiaction amount Unrealized holding gains arising during period Less: reclassification adjustments for gains included in net income Net unrealized gaisn on securities
11,500 8,000 -2,500
11,500 8,000 -2,500 17,000 80,250 -10,000 141,750
17,000 50,000 42,000 200,000 100,000 400,000
150,000 -10,000 847,000 13,000 -1,500 11,500
IASBs Agreements on FASBs 5 Principles

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Performance statement should be able to distinguish..,

l l
ROCE ROE
l l l l
Components of gains and losses should be reported as gross unless they give little information with respect to future income Income and expenses resulting from remeasurement of an asset or liability should be reported separately Performance statement should identify gains and losses where the change in economic value does not arise in period in which it is reported Performance statement should allow reporting in the form of..,
l l l
Information on the entity as a whole, analyzed by nature of function Activities in disaggregated by business segment (product or geographic) Additional distinctions according to managerial discretion
IASBs Proposed Format for Financial IASB's Proposed Statement of Comprehensive Income Performance Statement Income Valuation
Flows Operating Revenue Cost of sales Other captions Discontinued operations Total operating Financing Interest on net debt Actual gains and losses Fair value gains and losses Cash flow hedges Discontinued operations Total financing Tax Group Associates Discontinued operations Total tax Comprehensive income xxx xxx xxx xxx xxx xxx Adjustments xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Total xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx
xxx xxx xxx xxx xxx xxx
Accounting Issues
l l l l l
Level of judgments Consistency between time periods Comparability between companies Reliability of financial information Risk of financial controls / surprises
Accounting is Complex and Interesting

l l l
Diversity of business events Many different players Diverse incentives

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Economic Other
l l l
Uncertainty Many regulations Accounting is a complex field contrary to common perceptions
Diversity in GAAP
Cash
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Including all cash on hand and cash in bank as one item Use separate captions for cash on hand, and/or cash in banks, and/or cash in banks that cannot be easily withdrawn, and/or separate currencies
Diversity in GAAP
Receivables
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Show receivables at gross amount Show receivables at gross amount less allowances for unsecured interest and doubtful accounts Show receivables classified by type (accounts, notes, etc.), and/or by time, and/or by source (customers, employees, government, etc.) Exclude receivables unless earned and due, as in lease payments receivable
Diversity in GAAP
Marketable Securities (Temporary Investments)
l l l l
Show securities at cost Show securities at market value when below cost Show securities at cost + interest earned but not yet paid Show securities at approximate market value
Diversity in GAAP
Inventories
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Show inventories at gross cost and/or by classes..,

l l l l
Supplies Raw materials WIP Finished goods ready for sale
l l l l
Show inventories at cost or market, which ever is lower Show inventories at market or selling price Determine cost or price by assuming average costs or standard costs Report flow of costs and value of goods remaining by assuming LIFO, FIFO, average costs in and out, standard costs in and out, etc.,
Diversity in GAAP
Land, Plant and Equipment
l l l
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Show land, plant, and equipment at original cost, and/or adjusted original cost, and/or cost or market value, whichever is lower Show plant and equipment at current value Show plant and equipment at cost less accumulated depreciation calculated by assuming straight-line allocation of cost to periods, or by an accelerated or decelerated rate of depreciation Charge all purchase of plant and equipment as expense in period purchased Show land at original cost less depletion caused by mining, harvesting, or extraction of gases or fluids
Diversity in GAAP
Investments
l l l
Shows investments in other companies at cost Shows investments in other companies at cost or market value, whichever is lower Show investments in other companies at cost plus any proportional share of earnings on investment not received Show investments at market value
Diversity in GAAP
Intangible Assets
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Exclude intangible assets, charge all costs related thereto as expense in the period of expenditure Show all intangible assets at cost Show intangible assets at cost but allocate costs over few periods until only a nominal value remains Show intangible assets at cost but allocate cost to all periods of expected value Show intangible assets at cost but do not charge costs to periods unless value has clearly fallen Show intangible assets at estimated value at time of acquisition, adjusted for subsequent charges
Diversity in GAAP
Current Liabilities
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Show liabilities at face amount Show liabilities at amount at which obligations could be satisfied + any costs of doing so
Diversity in GAAP
Long-Term Liabilities
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Show LT liabilities as face amount Show LT liabilities at face amount adjusted for discounts or premium given at acceptance and amortized over period of the liability Show liabilities, including commitments on leases, pensions, and other contractual agreements, at face amount or adjusted for effect of interest
Diversity in GAAP
Owners Equity
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Show owners equity as the amount of assets less the amount of liabilities Show owners equity classified to show original source Show owners equity classified by original source but modified by transactions between the equity and shareholders, and/or extraordinary reclassifications or earned Within owners equity, segregate earnings retained by implied use of resources earned
Diversity in GAAP
Revenues
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Recognize revenue in period when products or services are delivered Recognize revenue in period when product is ready for delivery (as in case of precious germs or metals) Recognize revenue in period when payment is received from customer or client
Diversity in GAAP
Costs of Goods Sold
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Recognize expense in the period and at purchase of product delivered Recognize expense in the period and at purchase cost of some assumed unit of product delivered Recognize expense in period and at cost of replacement of the product delivered
Diversity in GAAP
Expenses
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Recognize as expenses of the period, all or selected cash payments Recognize as expense of the period, all expenditures related to products or services sold in the period. All expenditures are assets or in satisfaction of obligations Recognize as expenses in the period, all estimated declines in assets value and estimated increases in obligations not related to costs of goods sold
Diversity in GAAP
Net Income
Show all increases or decreases in net values of owners equity as net income regardless of source Exclude from net income all adjustments relating to prior periods reports, and/or extraordinary events
Other Possible Approaches in Stating Comprehensive Profit

l l
Separating transactions with 3rd parties from all other transactions and events Separating..,
l l l
Cash measurements Accrual measurements Fair-value measurements Events driven by historical cost principles Events driven by fair value or remeasurement principles
Separating..,
l l
Separating income and expenses from remeasurement of an asset or liability
IFRS vs. GAAP

l l l
IFRS: principles-based with limited application guidance GAAP: rule-based with more specific application guidance Countries adopted IFRS..,
l l l l
EU (25 countries) from 2005 Australia from 2005 Canada likely from 2011 China and Japan agreed for convergence
Balance Sheet - IFRS

l l
No prescribed format Stipulated minimum lines like..,

l l l l l l l
PPE Investment property Intangible assets Financial assets Biological assets Inventory Receivables
Order of presentation within the group or otherwise is not mandatory
Balance Sheet - IFRS

l l l
Optional to adopt current and non current classification of assets and liabilities Deferred tax assets not to be shown as current assets Any LT interest bearing liability due for settlement within 12 months as LT liability of the same is likely to be refinanced and can be supported by adequate documentary evidences Consolidation of financial statements of subsidiaries is not compulsory until it is required under some other law or regulation
Income Statement IFRS

l l
Does not prescribe any standard format for income statement Prescribes minimum disclosure including..,
l l l l l l
Revenue Finance costs Share of post tax results of JV and associates using equity method Pre tax gain/loss on asset disposal Discontinued operation tax charge, and Net profit or loss etc.
Reporting entity has an option to prepare income statement either by..,

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Nature of expenses or Function (Cost of sales method )

l l l
Income is defined as revenue and gains Expenses are defined to include losses and are decreases in economic activity that result in decrease in equity Additional disclosure include..,
l l l l
Amount of dividend DPS declared or proposed Share in profit /loss of associates under equity method Profit/loss attributable to minority interest
l l
In accounting policy changes requires retroactive application for the earliest period practical and adjustment of opening retained earning Exemption given for prospective application, if resulting adjustment are not reasonably determinable

l
Prior period items

l
l l
Requires that a prior period item/error should be corrected by retrospective effect by restatement of opening balance of assets, liabilities or equities for the earliest period practicable Entity should also disclose nature of error and the amount of correction for each financial line item Also requires that such disclosure should not be repeated in subsequent period
Discounting
l
Provides that where the inflow of cash is significantly deferred without interest, discounting is needed
IFRS Issues
l l l
Heavily loaded with Fair valuation Principles There is no IFRS which provides guidance for fair valuation IASB ( International Accounting Standard Board)
l l l l
Is an independent, private-sector body Develops and approves International Financial Reporting Standards Operates under the oversight of the International Accounting Standards Committee Foundation (IASCF) Formed in 2001
IAS vs. IFRS

l l l
l l
Prior to IFRS, International Accounting Standards were used The term International Financial Reporting Standards (IFRSs) has both a narrow and a broad meaning Broadly, IFRSs refers to the entire body of IASB pronouncements, including standards and interpretations approved by the IASB However the IAS are still in use until they are superceded by IFRS Currently 29 IAS and 8 IFRS are effective
IFRS Complaint Nations

l
Currently there are over 100 nations across the world where in entities are required to or permitted to use IFRS
List of IFRS
l l l l l l l l
IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments
International Accounting Standards

l l l l l l l l l l l l l l l
IAS-1-Presentation of Financial Statements IAS-2- Inventories IAS-7- Cash Flow Statements IAS-8- Accounting Policies, Change in Accounting estimates and Errors IAS-10- Events after balance sheet date IAS-11- Construction Contracts IAS-12- Income Taxes IAS-16-Property, Plant and Equipments IAS-17- Leases IAS-18- Revenue IAS-19- Employee Benefits IAS-20-Accounting for Govt Grant and Disclosure of Govt. Assistance IAS-21- Effect of Changes in Forex Rates IAS-23-Borrowing Costs IAS-24- Related Party Disclosures
International Accounting Standards

l l l l l l l l l l l l l l
IAS-26- Accounting and reporting by retirement benefit plans IAS-27- Consolidated and Separate Financial Statements. IAS-28- Investment in Associates IAS-29- Financial Reporting in Hyperinflationary Conditions IAS-31- Interest in Joint Ventures IAS-32- Financial Instruments- Presentation IAS-33- Earning Per Share IAS-34- Interim Financial Reporting IAS-36- Impairment of Assets IAS-37- Provisions, Contingent Liabilities and Contingent Assets IAS-38- Intangible Assets IAS-39- Financial Instruments: Recognition and Measurement IAS-40-Investment Property IAS-41- Agriculture
Differences IGAAP and IFRS

l
Areas involving choices
IFRS in India
l l l
ICAI has decided to implement IFRS in India The Ministry of Corporate Affairs has also announced its commitment to convergence to IFRS by 2011 Reasons for complying with IFRS..,
l l l l
Bringing about a uniformity in reporting systems globally, enabling businesses, finances and funds to access more opportunities Indian companies are listed on overseas stock exchanges and have to recast their accounts to be compliant with GAAP requirements of those countries Foreign companies having subsidiaries in India are having to recast their accounts to meet Indian & overseas reporting requirements which are different Foreign Direct Investors(FDI), overseas financial institutional investors (FII) are more comfortable with compatible accounting standards and companies accessing overseas funds feel the need for recast of accounts in keeping with globally accepted standards
To Whom IFRS is Applicable to in India?

l
Public Entities which include..,

l l l l
Companies & entities listed on any stock exchange Raised money from the public Having a substantial public interest Public sector companies
IFRS in India would cover the following public interest entities in the first phase..,
l l l l l
Listed companies Banks, insurance companies, mutual funds, and financial institutions Turnover in preceding year > INR 1 billion Borrowing in preceding year > INR 250 million Holding or subsidiary of the above
IFRS is not applicable to SMEs as of now
IFRS Conversion Timeline
Impact of IFRS
Impact of IFRS
l
Affects several areas of the business entity, such as..,

l l l l l
Presentation of accounts Accounting policies and procedures Way legal documents are drafted Way the entity looks at its assets and their usage, as well as the its communications with its stakeholders and also the Way it conducts its business
This fundamental and pervasive nature of impact of IFRS, makes it imperative that sufficient planning and thought is given to this aspect and choices made at the transition stage itself, as they determine the effect on the company and its operations A detailed analysis of all aspects of impact and change as well as all legal documentation and communication becomes necessary
Pain Areas of IFRS

l
l l l l l l
IFRS is itself a moving target, with changes being introduced continually, refining the provisions and adding more areas for disclosures Implementation requires a multi- disciplinary approach and is the responsibility of the management Not many trained resources to effect the requisite change Lack of awareness and understanding of the requirements and implications of IFRS transition and compliance Communicating the change and managing the transition properly attains importance in this regard Requires aligning business practices and policies to the reporting requirements (including retrospective ones) Training the organizational components will be a huge task
IFRS Statements
Indian Accounting Standard

l
l l l
ICAI follows a consultative process in the formulation of accounting standards which ensures participation of all interest groups through Accounting Standards Board (ASB) Till 1999, there was no requirement for the companies to comply with accounting standards The accounting standards issued by the ICAI were mandatory only for its members In 1999, recognizing the role of accounting standards in economic development and good governance, an amendment was made in the Companies Act, 1956 to require all companies to follow accounting standards The Amendment also contained a provision that until the accounting standards are notified by the Government under the Act, the Accounting Standards specified by the ICAI should be followed
I GAAP and IFRS Convergence

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Convergence means..,
l l l
Eliminating the differences between Indian GAAP and IFRS and/or Aligning Indian GAAP more closely to IFRS and/or Adopting IFRS as it is
I GAAP and IFRS Convergence

l l
Convergence means to achieve harmony with IFRSs Convergence can be considered..,

l
To design and maintain national accounting standards in a way that financial statements prepared in accordance with national accounting standards Draw unreserved statement of compliance with IFRSs, i.e., when the national accounting standards will comply with all the requirements of IFRS
l l
Convergence doesnt mean that IFRS should be adopted word by word e.g.,
l
Replacing the term true & fair for present fairly, in IAS 1, Presentation of Financial Statements. Such changes do not lead to non-convergence with IFRS.
Indian Accounting Standards and IFRS Convergence

l
The ICAI has proposed two option for convergence

l l
1- All at once 2- Stage wise Approach
l l
But since the stage wise approach leads to non compliance with either of IFRS or AS, hence the all at once approach has been adopted First Time adoption
l
For first time adoption, two key terms needs to be understood

Reporting date-It is the end of latest period covered by financial statements. Transition date- It is beginning of earliest period for which an entity presents first full IFRS compliant financial statements.
l l
For an Indian Company, the first reporting date will be 31-03-2012 and transition date will be 01-04-2010. Hence, first set of financials shall be for 01-04-2011 to 31-03-2012 with IFRS comparables also to be provided for 01-04-2010 to 31-03-2011
Applicability of IFRS in India

l l l l
l l l
ICAI is of the view that IFRS to be adopted for public interest entities such listed Co, Banking Companies, Insurance entities and large size entities From the Accounting period beginning on or after April 2011. Strengthened by convergence process being initiated by Ministry of Corporate Affairs Public interest entities are the entities falling under the Category level1 as defined by ICAI except that turnover should exceed Rs 100 Crs (Instead of Rs 50 Crs) and borrowing should exceed Rs 25 Crs (instead of Rs 10Crs) Even if listed company does not fulfill the above criteria for level 1 enterprises, the application of IFRS is mandatory Early adoption of IFRS is encouraged but it should be the adoption of all IFRS and should not be on selective basis For other entities, IFRS are not mandatory but recommendatory.
Proposed Convergence Timeline
Why IFRS?
l l
Enable internationally to standardize and assure better quality on a global screen Permit international capital to flow more freely, enabling companies to develop consistent global practices on accounting problems Beneficial to regulators too, as a complexity associated with needing to understand various reporting regimes would be reduced For investors, it gives a better understanding to the financial statements and assess the investment opportunities other than Home Country Benefits the accounting professionals in a way that they will be able to sell their services in the different part of world
IFRS Transition Issues

l
l l l
Right now accounting standards and other reporting requirements are governed by various regulators e.g. RBI, SEBI, tax authorities, Companies Act, High courts (for amalgamation etc) . Global standards do not recognize such override by nonstandard setters If the 2011 deadline is to be met then, all these hurdles will have to be addressed by corresponding amendments in respective laws IFRS are largely fair value driven which result in unrealized gain/loss. How are these to be dealt in Income Tax? In Fair Value accounting, fair values can bring a lot of volatility and subjectivity to the financial statements besides requiring a lot of hard work and use of valuation experts
Progress in Indian Accounting Standard and IFRS Convergence
Qualitative Factors to be Used by Financial Statement Users

l l l l l l
Obscuring changes in earnings trend Hiding the failure to achieve analyst forecasts Changing a reported loss to income or vice versa Obscuring changes in significant business segments Increasing management compensation Affecting compliance with..,
l l l
Regulatory requirement Loan covenants Other contracts
Concealing unlawful acts
Financial Analysis - Insights

l
Earnings power
l
A companys ability to increase its wealth through operations and generate cash in the future A measure of the extent to which reported earnings reflect true financial performance The extent to which current income is a predictor of future income levels A companys ability to meet its obligations
Earnings quality
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Earnings persistence
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Solvency
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Accounting Principles

Financial Reporting and Ongoing Business

P&L Statement Cash Flow Statement

They are not..,

Having substantial authoritative support

Capital Expense vs. Revenue Expense

Features of an ideal financial statements

Principal Financial Statements

Balance sheet Income statement Statement of comprehensive income

Statement of cash flows Statement of stock holders equity

Translates events into financial statements

Management incentives affect believability of their disclosures

Greater degree of verification for gains than for losses

Financial Reporting Requirements

All balance sheet accounts are..,

Stock accounts or Real accounts or Permanent accounts

All income statement accounts are..,

flow accounts or temporary accounts or Nominal accounts

To reduce accounting costs

Cash Flow Statements

To arrive at CFO, adjustments that need to be made to Net Income

Who Uses Financial Statements?

Used extensively by internal users

Management at various levels

Current and future employees

Who Uses Financial Statements?

Used primarily by external users

Financial intermediaries (analysts)

Financial Statement Information

Financial Statement Information used for.,

P/E multiples, PEG ratios, price targets

These all are transformations of DCF

Cash Flows over the Firms Life Cycle

Measurement of Financial Statement Elements

One period world

Multi period world

Recognition and Cash Do Not Coincide

Scenarios of Adjusting Entries

Sample Income Statement Format

Suggested Income Statement Format

Management letter Management discussion Financial statements Auditors reports

As per GAAS As per GAAP

Board has Audit Committee composed directors appoints the auditor

Accounting Guidelines on Contingencies

Amount of the gain or loss must be reasonably estimable

Reasons for Companies Changing Accounting Methods

Initial choice of an accounting method or principle is poor

Actions of management itself

General purpose financial statements includes..,

Govt. and govt. agencies Public references

Financial statements are the responsibility of enterprises management

Indian Accounting Standards

Indian AS not having any difference with corresponding IFRS..,

Indian Accounting Standards

Generally Indian companies present financial statements as per all of..,

IFRS I GAAP US GAAP

Required under US GAAP Not required under IFRS and I GAAP

Indian Accounting Standards

Applicability of Accounting Standards

Accounting Standards Applicable on Level I and II

Compliance with Accounting Standards

Structure of Accounting Standards

Introduction Explanation Standard / disclosure Date of applicability