Advanced Accountancy Paper-I (M. Com. Part-I) - Shivaji University PDF

H I SHIVAJI UNIVERSITY, KOLHAPUR CENTRE FOR DISTANCE AND ONLINE EDUCATION Advanced Accountancy Paper-I For M. Com. Part-I Semester - I (In accordance...

H I SHIVAJI UNIVERSITY, KOLHAPUR CENTRE FOR DISTANCE AND ONLINE EDUCATION Advanced Accountancy Paper-I For M. Com. Part-I Semester - I (In accordance with National Education Policy 2020) (Implemented from the Academic Year 2023-24) K J Copyright © Registrar, Shivaji University, Kolhapur. (Maharashtra) First Edition 2023 Prescribed for M. Com. Part-I All rights reserved, No part of this work may be reproduced in any form by mimeography or any other means without permission in writing from the Shivaji University, Kolhapur (MS) Copies : 2,000 Published by: Dr. V. N. Shinde Registrar, Shivaji University, Kolhapur-416 004 Printed by : Shri. B. P. Patil Superintendent, Shivaji University Press, Kolhapur-416 004 ISBN- 978-93-89345-43-8  Further information about the Centre for Distance and Online Education & Shivaji University may be obtained from the University Office at Vidyanagar, Kolhapur-416 004, India. (ii)  Centre for Distance and Online Education Shivaji University, Kolhapur  ADVISORY COMMITTEE Prof. (Dr.) D. T. Shirke Prof. (Dr.) Smt. S. H. Thakar Hon'ble Vice Chancellor, I/c. Dean, Faculty of Science and Shivaji University, Kolhapur Technology, Shivaji University, Kolhapur Prof. (Dr.) P. S. Patil Prin. (Dr.) Smt. M. V. Gulavani Hon'ble Pro-Vice Chancellor, I/c. Dean, Faculty of Inter-disciplinary Shivaji University, Kolhapur Studies, Shivaji University, Kolhapur Prof. (Dr.) Prakash Pawar Dr. V. N. Shinde Department of Political Science Registrar, Shivaji University, Kolhapur Shivaji University, Kolhapur Prof. (Dr.) S. Vidyashankar Dr. A. N. Jadhav Hon'bleVice-Chancellor, KSOU, Director, Board of Examinations and Mukthagangotri, Mysuru, Karnataka Valuation, Shivaji University, Kolhapur Dr. Rajendra Kankariya Smt. Suhasini Sardar Patil G-2/121, Indira Park, Chinchwadgaon, Finance and Accounts Officer, Pune Shivaji University, Kolhapur Prof. (Dr.) Cima Yeole Dr. (Smt.) Kavita Oza Geet-Govind, Flat No. 2, Department of Computer Science, 1139 Sykes Extension, Kolhapur Shivaji University, Kolhapur Dr. Sanjay Ratnaparkhi Dr. Chetan Awati D-16, Teachers Colony, Vidhyanagari, Department of Technology, Mumbai University, Santacruz (E), Mumbai Shivaji University, Kolhapur Prof. (Dr.) S. S. Mahajan Prof. (Dr.) D. K. More Dean, Faculty of Commerce and (Member Secretary) Director, Management, Shivaji University, Kolhapur Centre for Distance Education, Shivaji University, Kolhapur. Prof. (Dr.) M. S. Deshmukh Dean, Faculty of Humanities, Shivaji University, Kolhapur (iii)  Centre for Distance and Online Education Shivaji University, Kolhapur MEMBERS OF B.O.S. IN ACCOUNTANCY Prof. (Dr.) Nandkumar Laxman Kadam Jaysingpur College, Jaysingpur, Jaysingpur, Dist. Kolhapur  Dr. Mrs. Sherya Vinay Patil  Dr. Ashok Ramchandra Shinde Balwant College, Vita, Dist. Sangli Yashwantrao Chavan Mahavidyalaya, Urun-Islampur, Tal. Walwa, Dist. Sangli  Dr. Anil S. Patil Arts, Commerce and Science College,  Prof. (Dr.) B. B. Shitole Palus, Dist. Sangli Karmaveer Bhaurao Patil Mahavidyalaya Pandharpur, Tal. Pandharpur, Dist. Solapur  Dr. Smt. Vandana S. Tandale Hon. Shri. Annasaheb Dange Arts,  Prof. (Dr.) V. K. Sawant Commerce and Science College, Dhananjayrao Gadgil College of Hatkanangale, Dist. Kolhapur Commerce, Satara  Dr. J. G. Mulani  Dr. M. N. Haladkar Shri. Sampatrao Mane Mahavidyalaya, Rajarshi Shahu Arts and Commerce Khanapur, Dist. Sangli College, Rukadi, Dist. Kolhapur  Dr. Sarjerao S. Chile  CA - A. A. Gawade Prof. (Dr.) N. D. Patil Mahavidyalaya Matoshri Plaze, Shop No. 210 2nd Floor Malkapur, Tal. Shahuwadi, Dist. Kolhapur Station Road, Venus Corner, Shahupuri, Kolhapur  Dr. Sagar R. Powar Karmaveer Hire Arts, Commerce, Science  CA - Mrs. C. K. Patil and Education College, Gargoti, Morya Residence, 4th Floor, Tal. Bhudargad, Dist. Kolhapur Rajarampuri 2nd lane, Nigade Hospital lane, Kolhapur  Dr. Ram Ningappa Naik Smt. Kusumtai Rajarambapu Patil Kanya Mahavidyalaya (Arts, Commerce & Science) Islampur, Tal. Walwa, Dist. Sangli (iv)  Preface Accounting is the process of (a) recording transactions as well as events and (b) presenting financial performance in the form of financial statements called income statement and position statement. It is also called as a language of business in modern age in which the focus of accounting has changed in respect of disclosure of financial statements in true and fair view especially in the interest of various stakeholders of the business and other organizations. Managerial perspective of accounting is emerging for efficient and effective utilization of resources through performance measurement and management where accounting works as information system and controlling system. We hope that this book will prove to be useful to students at M. Com. Part-I. The text of this book has been divided into eight chapters as four chapters for Semester-I. The students are expected to do practical according to each unit shown in the syllabus. In Semester-I on Advanced Accountancy Paper-I expects that the students should be prepared for (a) identifying accounting policies and making valuation of inventories, (b) preparation of accounts of hotels and hospitals, (c) preparation of consolidated financial statements of group of companies and (d) application of accounting process for insurance companies. The accounting standards are playing very important role in harmonization of accounting practices at national and similarly IFRSs at international level. The first unit introduced the concept of Accounting Standards, its objectives and need. It has also covered Introduction to IFRS and Distinction between Indian GAAP and IFRSs. The second unit focuses on preparation and presentation of consolidated financial statements of holding company and its subsidiary companies with considering Accounting Standard 21. The third and forth units describe the process of presentation of final accounts of Insurance Companies- (Life and General Insurance). We express our deep sense of gratitude to Hon. Vice-Chancellor Prof. (Dr.) D. T. Shirke, Pro-Vice-Chancellor Prof. P. S. Patil and Prof. (Dr.) D. K. More, Director the Centre for Distance and Online Education for giving us opportunity to contribute this book. We are thankful to writers of units for their contribution. Suggestions for improvement in the book are welcome from stakeholders of all corners.  Editors Dr. Anil G. Suryavanshi Prof. (Dr.) Shrikrishna S. Mahajan The New College, Dean, Faculty of Commerce and Kolhapur Management, Shivaji University, Kolhapur (v) Centre for Distance and Online Education Advanced Accountancy Paper-I Shivaji University, Kolhapur. M. Com. Part-I Writing Team Sem. I Writers Name Units Prof. (Dr.) S. S. Mahajan 1 Department of Commerce and Management, Shivaji University, Kolhapur Dr. J. G. Mulani 2 Malati Vasantdada Patil Kanya Mahavidyalaya, Islampur Dr. A. G. Suryavanshi 3, 4 Assistant Professor, Department of Commerce, The New College, Kolhapur  Editors Dr. Anil G. Suryavanshi Prof. (Dr.) Shrikrishna S. Mahajan The New College, Dean, Faculty of Commerce and Kolhapur Management, Shivaji University, Kolhapur (vi)  M. Com. Part-I SIM IN ADVANCED ACCOUNTANCY PAPER I INDEX Unit No. Topic Page No. Semester-I 1. Introduction to Accounting Standard 1 2. Accounting for Holding Company 50 (Group Accounts up to two subsidiaries-AS-21) 3. Accounting of Life Insurance Companies 114 4. Accounting of General Insurance Companies 179 (vii) Each Unit begins with the section objectives - Objectives are directive and indicative of : 1. what has been presented in the unit and 2. what is expected from you 3. what you are expected to know pertaining to the specific unit, once you have completed working on the unit. The self check exercises with possible answers will help you understand the unit in the right perspective. Go through the possible answers only after you write your answers. These exercises are not to be submitted to us for evaluation. They have been provided to you as study tools to keep you in the right track as you study the unit. Dear Students The SIM is simply a supporting material for the study of this paper. It is also advised to see the new syllabus 2023-24 and study the reference books & other related material for the detailed study of the paper. (viii)  Unit-1 Introduction to Accounting Standard Index: 1.0 Objectives 1.1 Introduction 1.2 Subject Matter 1.2.1 Accounting Standards 1.2.1.1 Meaning of Accounting Standards 1.2.1.2 Objectives of Accounting Standards 1.2.1.3 Procedure of Setting Accounting Standards 1.2.1.4 List of Accounting Standards in India 1.2.1.5 Need of Accounting Standards 1.2.2 International Financial Reporting Standards 1.2.2.1 Introduction to IFRS 1.2.2.2 List of IFRSs 1.2.2.3 Convergence of IFRSs with ASs in India 1.2.2.4 List of Ind ASs 1.2.3 Distinction between GAAPs and IFRSs 1.2.4 Disclosure of Accounting Policies (AS-1) 1.2.5 Valuation of Inventories (AS-2) 1.3 Summary 1.4 Terms to Remember 1.5 Answers to Check your progress 1.6 Exercise 1.7 Reference for further study 1 1.0 Objectives : After studying this Unit you will be able to: 1. Understand the term accounting standard. 2. Describe the accounting standards issued in India. 3. The International Financial Reporting Standards. 4. Make application of AS-1 and analyze disclosure of accounting policies accordingly. 5. Make application of AS-2 for valuation of inventories 1.1 Introduction : Accounting is called the language of business as accounting performs the functions of language for the business. It communicates a result of business operations to various users such as proprietor, management, creditors, investors, employees, government and regulatory authorities etc. Accounting has its own history. It is as old as money itself. It is broader than the book-keeping. Book- keeping mainly concerned with recording day-to-day transactions in a significant and orderly manner. A standard is a particular level of performance, goal or target. It is established by customs, professional or government authorities, common sense, regulatory or legal bodies etc., after extensive observation, testing, research etc. In accounting, it is a chosen set of accounting policies about the principles and methods to be adopted. This unit covers accounting standards and introduction to IFRSs, AS-1 Disclosure of Accounting Policies and AS-2 Valuation of Inventories (AS-2). 1.2 Subject Matter : Before going to know accounting standards, we must know what exactly accounting is. So firstly we should try to understand meaning of accounting. 1.2.1 Accounting Standards: In India, Accounting Standard Board (ASB) is authorized to issue accounting standards. The Accounting Standard Board of the Institute of Chartered Accountants of India (ICAI) was constituted on 21st April,1977 to formulate accounting standard applicable to Indian enterprises. Accounting standards establish rules relating to 2 recognition, measurement and disclosures. They ensure that all enterprises that follow them are comparable and they also ensure that their financial statements are true and fair and transparent. 1.2.1.1 Meaning of Accounting Standards: Accounting Standard is defined as “written documents issued from time to time by institutions of the accounting profession or institutions which has sufficient involvement and which are established expressly for this purpose”. Accounting standards deal mainly with financial measurements and disclosures used in producing a set of fairly presented financial statements. They attempt to limit theoretically possible flexibility and to give practitioners realistic working guidelines. Accounting standards enables accountants to attain both uniformity and flexibility in accounting practices. Accounting standards are the written statements consisting of rules and guidelines, issued by the accounting institutions, for the preparation of uniform and consistent financial statements and also for other disclosures affecting the different users of accounting information. Accounting standards lay down the terms and conditions of accounting policies and practices by way of codes, guidelines and adjustments for making the interpretation of the items appearing in the financial statements easy and even their treatment in the books of account. 1.2.1.2 Objectives of Accounting Standards: The process of accounting should be well-regulated in order to ensure transparency, consistency, comparability, adequacy and correctness of financial statements. The financial statements should be presented with true and fair view. Hence, the following are the specific objectives of accounting standards: 1) To standardize different accounting policies and practices in order to eliminate non-comparability. 2) To provide standard accounting policies valuation norms and disclosure requirements. 3) To eliminate confusion about information presented through the financial statement. 4) To bring consistency in accounting and presentation of financial results. 3 1.2.1.3 Procedure of Setting Accounting Standards: Since The Institute of Chartered Accountants of India (ICAI) recognized the need to harmonize the diverse accounting policies and practices, they constituted an Accounting Standards Board (ASB) on 21st April 1977. In India, the procedure of setting accounting standards is streamlined in the following steps: 1. To determine the broad Area: Firstly, the ASB determines the broad areas in which the accounting standard needs to be formulated and priority in regard to their selection. 2. To constitute the study Group: The subject-specific study group is constituted to assist ASB in formulation of accounting standards. The group consists of members of ICAI and experts. The group develops proper primary draft of accounting standard. 3. To hold dialogue and Consider view: The ASB holds dialogue with the representatives of Government, public sector undertaking, industries and the organizations to consider their view in regards to formation of accounting standards. 4. To prepare Draft: On the basis of the work of the study group and views of various experts referred to above a draft of proposed accounting standard is prepared. The draft includes the following points: a) A statement of concepts and fundamental accounting principles relating to the standard. b) The preparation and disclosure requirement in complying with the standard. c) Definition of the terms used in the standards. d) The class of entities to which the standard will apply. e) Date from which the standard will be effective f) Issue of draft. 5. To invite comments on Draft : The draft of the proposed accounting standard is issued for comments by the members of the ICAI and the public at large. 4 6. To Finalize the draft: After considering the comments, the draft of the proposed accounting standard is finalized by ASB. This final draft is sent to the Council of the ICAI. 7. To Issue Accounting Standard : The Council of the ICAI considers the final draft of the proposed standard, and if found necessary, modify the same in consultation with ASB. The accounting standard on the relevant subject will then be issued under the authority of the council. ICAI has issued 32 Accounting Standards (ASs). However, As -8 on “Research and Development” and AS-6 on Depreciation was withdrawn consequent to issue of AS-26 and AS-10 (Revised) “respectively”. Effectively, there are 29 accounting standards at present. However, only the AS-1 to AS-5, AS-7 and AS-9 to AS-29 are notified by the Central Government u/s 133 of the Companies Act, 2013. 1.2.1.4 List of Accounting Standards in India: 1) AS-1 Disclosure of Accounting Policies 2) AS-2 Valuation of Inventories 3) AS-3 Change in Financial Statements 4) AS-4 Contingencies and Events Occurring after Balance Sheet Date 5) AS-5 Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies 6) AS-6 Depreciation Accounting (withdrawn and included in AS-10) 7) AS-7 Accounting for Construction Contracts (Revised) 8) AS-8 Accounting for Research and Development (withdrawn and included in AS-26) 9) AS-9 Revenue Recognition 10) AS-10 Accounting for Fixed Assets 11) AS-11 Effects of Changes in Foreign Exchange Rates (Revised) 12) AS-12 Accounting for Government Grants 13) AS-13 Accounting for Investments 14) AS-14 Accounting for Amalgamation 5 15) AS-15 Accounting for Retirement Benefits in the financial statement of Employer 16) AS-16 Borrowing Costs 17) AS-17 Segment Reporting 18) AS-18 Related Party Disclosure 19) AS-19 Leases 20) AS-20 Earning Per Share 21) AS-21 Consolidated Financial Statements 22) AS-22 Accounting for Taxes on Income 23) AS-23 Accounting for Investment in Associates in Consolidated Financial Statements 24) AS-24 Discounting Accounting 25) AS-25 Interim Financial Reporting 26) AS-26 Intangible Assets 27) AS-27 Financial Reporting on Interest in Joint Venture 28) AS-28 Impairment of Asset 29) AS-29 Provisions, Contingent Liabilities and Contingent Assets (Revised) 1.2.1.5 Need of Accounting Standards: Suppose accounting standards are not there, what will happen? In such situation, whether accounts maintained by different entities and at different places are comparable? There will be confusion and we cannot compare their performance. We cannot find the presentation of financial statements with true and fair view. Accounting Standards are required to harmonize the diverse accounting policies and practices. They provide comparability to accounting data. They remove confusing variations. Accounting standards facilitate uniform preparation and reporting of financial statements. They ensure that their financial statements are true and fair and transparent. 6  In short we can understand the need of accounting standards with the following points: 1) Accounting standards are required to bring uniformity in accounting methods by proposing standard accounting treatments. 2) Accounting standards give a sense of faith and reliability to different users of accounting information. 3) Accounting standards make the financial statements of different business units, for different years comparable. 4) Accounting standards prevent the users from reaching any misleading conclusions and make the financial data simpler for everyone. 5) Accounting standards prevent manipulation of data by the management and others. By codifying the accounting methods, frauds and manipulations can be minimized. 6) Accounting standards lay down the terms and conditions for accounting policies and practices which help the auditor when they become the basis for auditing the books of accounts. Check Your Progress-1 A) Choose the most appropriate alternative among given alternatives: 1) The Accounting Standard Board (ASB) of the Institute of Chartered Accountants of India (ICAI) was constituted on ………. (a) 21st April 1977 (b) 1st April 1877 (c) 21st August 1977 (d) 21st August 2007 2) Accounting Standards are …………policy documents. (a) verbal (b) audio (c) written (d) unwritten 7 3) Accounting Standards are issued by …………. (a) ICWAI (b) ICAI (c) ICICI (d) IDBI 4) Accounting Standards are issued to …………different accounting policies. (a) standardize (b) devise (c) identify (d) advertize (B) State whether the following statement is ‘True’ or ‘False’: 1) Accounting Standard-3 is related to Foreign exchange rate. 2) Accounting Standards and Indian Accounting Standards are same. 3) Accounting Standards are applicable to the companies working in India. 4) Accounting Standards in India are issued by The Institute of Cost Accountants of India. 1.2.2 International Financial Reporting Standards (IFRSs): International Financial Reporting Standards (IFRSs) is a set of high quality and globally acceptable financial reporting standards developed by the International Accounting Standard Board (IASB). The IASB is the independent standard setting body of the IFRS Foundation, its head-quarter is London. The IFRSs are followed in more than 114 countries of the world. Following the IFRSs is like speaking one accounting language all over the world. 1.2.2.1 Introduction to IFRS: IFRSs are a set of high quality, understandable and enforceable global accounting standards which includes: 1. International Accounting standards (IASs) 2. International Financial Reporting standard (IFRSs) 3. International Financial Reporting Interpretations (IFRIs) 8 4. Standing Interpretations (SIs) 1.2.2.2 List of IFRSs: International Accounting Standards Sr. IAS Description No. 1 IAS-1 Presentation of Financial Statements 2 IAS-2 Inventories 3 IAS-3 Consolidated Financial Statements (originally issued in 1976, effective 1 Jan 1977, Superseded in 1989 by IAS-27 and IAS-28 4 IAS-4 Depreciation Accounting (withdrawn in 1999, replaced by IAS-16, 22 and 38, all of which were issued or revised in 1998) 5 IAS-5 Information to be Disclosed in Financial Statements (originally issued in Oct.1976, effective 1 Jan. 1997, Superseded by IAS-1 in 1997) 6 IAS-6 Accounting Responses to Changing Prices (Superseded by IAS-15, which was withdrawn in Dec 2003) 7 IAS-7 Cash Flow Statements 8 IAS-8 Accounting Policies, Changes in Accounting Estimates and Errors 9 IAS-9 Accounting for Research and Development Activities (Superseded by IAS-38, effective 1 July 1999) 10 IAS-10 Events after the Balance Sheet Date 11 IAS-11 Construction Contracts 12 IAS-12 Income Taxes 13 IAS-13 Presentation of Current Assets and Current Liabilities (Superseded by IAS-1) 14 IAS-14 Segment Reporting 15 IAS-15 Information Reflecting the Effects of Changing Prices (withdrawn in Dec.2003) 9 16 IAS-16 Property, Plant and Equipment 17 IAS-17 Leases 18 IAS-18 Revenue 19 IAS-19 Employee Benefits 20 IAS-20 Accounting for Government Grants and Disclosure of Government Assistance 21 IAS-21 The Effects of Changes in Foreign Exchange Rates 22 IAS-22 Business Combinations 23 IAS-23 Borrowing Costs 24 IAS-24 Related Party Disclosures 25 IAS-25 Accounting for Investments (Superseded by IAS-39 and IAS-40 effective 2001) 26 IAS-26 Accounting and Reporting by Retirement Benefit Plans 27 IAS-27 Consolidated and Separate Financial Statements 28 IAS-28 Investments in Associates 29 IAS-29 Financial Reporting in Hyperinflationary Economics 30 IAS-30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions (Superseded by IFRS-7 effective 2007) 31 IAS-31 Interests in Joint Ventures 32 IAS-32 Financial Instruments: Presentation (Disclosure provisions superseded by IFRS-7 effective 2007) 33 IAS-33 Earnings Per Share 34 IAS-34 Interim Financial Reporting 35 IAS-35 Discontinuing Operations (Superseded by IFRS-5 effective 2005) 36 IAS-36 Impairment of Assets 37 IAS-37 Provisions, Contingent Liabilities and Contingent Assets 10 38 IAS-38 Intangible Assets 39 IAS-39 Financial Instruments: Recognition and Measurement 40 IAS-40 Investment Property 41 IAS-41 Agriculture (Source: https://www.ifrs.org) International Financial Reporting Standards Sr. IFRS Description No. 1 IFRS-1 First-time Adoption of International Financial Reporting Standards 2 IFRS-2 Share-based Payment 3 IFRS-3 Business Combination 4 IFRS-4 Insurance Contracts 5 IFRS-5 Non-current Assets held for Sale and Discontinued Operations 6 IFRS-6 Exploration for and Evaluation of Mineral Assets 7 IFRS-7 Financial Instruments: Disclosures 8 IFRS-8 Operating Segments 9 IFRS-9 Financial Instruments 10 IFRS-10 Consolidated Financial Statements 11 IFRS-11 Joint Agreements 12 IFRS-12 Disclosure of Interest in other Entities 13 IFRS-13 Fair Value Measurement 14 IFRS-14 Regulatory Deferral Accounts 15 IFRS-15 Revenue from Contracts with Customers 16 IFRS-16 Leases (Source: https://www.ifrs.org) 11  Financial statements consist of (1) A statement of financial position, (2) A statement of comprehensive Income, (3) A statement of changes in equity and (4) A cash flow statement or statement of cash flow. 1.2.2.3 Convergence of IFRSs with ASs in India: India made a commitment to G20 to follow IFRSs from 2011, however this date was postponed and the IFRSs are implemented from April 2016 for specific companies. There are two approaches to move accept this framework: (a) adoption of IFRSs and (b) convergence of IFRSs with Accounting Standards. India has accepted second option i.e. convergence of IFRSs with its own accounting standards. The convergence gives a scope for making country specific changes. It was decided that the converged standards with the IFRSs be named as Indian Accounting Standards (Ind ASs). Now India have two sets of accounting standards viz., existing accounting standards under Companies (Accounting Standard) Rules, 2006 and IFRSs converged Indian Accounting Standards (Ind ASs). Ind AS are named and numbered in the same way as the corresponding IFRSs. The Ministry of Corporate Affairs has notified Ind ASs as Companies (Indian Accounting Standards) Rules 2016 with the roadmap of implementation. 1.2.2.4 List of Ind ASs: Ind ASs Title Corresponding IAS/IFRS No. Ind AS 1 Presentation of Financial Statements IAS 1 Ind AS 2 Inventories IAS 2 Ind AS 7 Cash Flow Statements IAS 7 Ind AS 8 Accounting Policies, Change in Accounting IAS 8 Estimates and Errors Ind AS 10 Events after the Balance Sheet Date IAS 10 Ind AS 11 Construction Contracts (See Note) IAS 11 Ind AS 12 Income Taxes IAS 12 Ind AS 16 Property, Plant and Equipment IAS 16 12 Ind AS 17 Leases IAS 17 Ind AS 18 Revenue (See Note) IAS 18 Ind AS 19 Employee Benefits IAS 19 Ind AS 20 Accounting for Govt. Grants and Disclosure of IAS 20 Government Assistance Ind AS 21 The Effects of changes in the Foreign Exchange IAS 21 Rates Ind AS 23 Borrowing Costs IAS 23 Ind AS 24 Related Party Disclosure IAS 24 Ind AS 27 Separate Financial Statements IAS 27 Ind AS 28 Investments in Associates and Joint Ventures IAS 28 Ind AS 29 Financial Reporting in Hyper Inflationary Economies IAS 29 Ind AS 32 Financial Instruments: Presentation IAS 32 Ind AS 33 Earnings Per Share IAS 33 Ind AS 34 Interim Financial Reporting IAS 34 Ind AS 36 Impairment of Assets IAS 36 Ind AS 37 Provisions, Contingent liabilities and Contingent IAS 37 Assets Ind AS 38 Intangible Assets IAS 38 Ind AS 40 Investment Property IAS 40 Ind AS 41 Agriculture IAS 41 Ind AS 101 First time adoption of Indian Accounting Standards IFRS 1 (Ind AS) Ind AS 102 Share Based Payments IFRS 2 Ind AS 103 Business Combination IFRS 3 Ind AS 104 Insurance Contracts IFRS 4 13 Ind AS 105 Non-current assets held for sale and discontinued IFRS 5 operations Ind AS 106 Exploration for and evaluation of mineral resources IFRS 6 Ind AS 107 Financial Instrument: disclosure IFRS 7 Ind AS 108 Operating Segment IFRS 8 Ind AS 109 Financial Instruments IFRS 9 Ind AS 110 Consolidated Financial Statements IFRS 10 Ind AS 111 Joint Arrangement IFRS 11 Ind AS 112 Disclosure of interest in other entities IFRS 12 Ind AS 113 Fair Value Measurement IFRS 13 Ind AS 114 Regulatory Deferral Accounts IFRS 14 Ind AS 115 Revenue from Contracts with Customers (See Notes) IFRS 15 (Source: www.mca.gov.in) Note: The Ind AS 115 ‘Revenue from Contracts with Customers’ has been postponed for implementation and in place thereof Ind AS 11 ‘Construction Contracts’ and Ind AS 18 ‘Revenue’ have been notified by MCA. However, now The Ministry of Corporate Affairs notified Ind AS 115 for application by Ind AS companies from financial year beginning or after 1st April 2018. 1.2.3 Distinction between GAAPs and IFRSs: We have seen meaning of IFRSs in earlier discussion. GAAPs are Generally Accepted Accounting Principles which are territorially different for e.g.- Indian GAAPs are different from US GAAPs. Indian GAAPs include Accounting Principles or accounting standards which are country based GAAPs. IFRSs are international GAAPs, which any country can adopt or converge with IFRSs. Old Accounting Standards are useful only in India however IFRSs or Ind AS are useful worldwide. Indian GAAPs enables access to Indian stock market whereas IFRSs enable access to global capital market. Indian GAAPs are based on conceptual framework which is a set of guiding principles. IFRSs are based on less precise guidance. In Indian GAAPs perspective, financial statements are 14 prepared on the basis of historical cost. However, as per IFRSs, financial statements are prepared on the basis of fair value. We can compare IFRSs and Indian GAAP on the basis of the following points: IFRS Indian GAAPs 1. Presentation and Disclosures: IAS-1 prescribes minimum structure of There is no separate standard for financial statements and contains disclosure. For Companies, format and guidance on disclosures; disclosure requirements are set out under Schedule VI of the Companies Act. IAS-1 requires disclosure of critical No such requirement under Indian judgments made by management in GAAP. applying accounting policies; IAS-1 prohibits any items to be AS-5 specifically requires disclosure disclosed as extra-ordinary items; of certain items as Extra-ordinary items. IAS-1 requires a “Statement of Under Indian GAAP, this is typically Changes in Equity” which comprises spread over several captions such as all transactions with equity holders. share capital, reserves and surplus, P&L debit balance etc. 2 True and Fair Override In extremely rare circumstances the True and fair override is generally not true and fair override is allowed, such permitted under Indian GAAP. Further as, when management concludes that in terms of hierarchy local legislations compliance with a requirement in an are more superior. The Accounting IAS would be misleading, and Standards by their very nature cannot therefore that departure from a and do not override the local requirement is necessary to achieve a regulations which govern the fair presentation. However proper preparation and presentation of disclosures would be required under financial statements in the country. these circumstances. 15 3 Small and Medium Sized Enterprises No standard as yet on small and Detailed guidance on applicability of medium sized enterprises. various accounting standards to SME’s exists. 4 Inventories IAS-2 prescribes same cost formula to AS-2 requires that the formula used in be used for all inventories having a determining the cost of an item of similar nature and use to the entity. inventory needs to be selected with a view to providing the fairest possible approximation to the cost incurred in bringing the item to its present location and condition. However, there is no stipulation for use of same cost formula in AS-2 as compared to IFRS. There are certain additional requirement in IAS-2 which are not contained in AS-2 which are as under: (a) Purchase of inventory on deferred settlement terms- excess over normal price is to be accounted as interest over the period of financing. (b) Measurement criteria are not applicable to commodity broker- traders. (c) Exchange differences are not includible in inventory valuation. 5 Cash Flow Statements There is no exemption of preparing Exemption for SME’s. cash flow statement. Bank overdrafts are to be treated as a AS-3 is silent. component of cash/ cash equivalents under IAS-7. 16  IAS-7 allows interest and dividend AS-3 mandates disclosure of interest paid to be classified either under and dividend paid under Financing Operating Activities or Financing Activities only. Activities. IAS-7 prohibits separate disclosure of AS-3 requires disclosure of extraordinary items in Cash Flow extraordinary items. Statements. IAS-7 deals with cash flows of AS-3 does not deal with cash flows consolidated financial statements. relating to consolidated financial statements. 6 Proposed Dividends IAS-10 provides that proposed AS-4 specifically requires such dividend should not be shown as disclosure as the same is mandated by liability. statutory requirement. 7 Prior Period Items and Changes in Accounting Policies In case of change in accounting policy, No specific guidance given except for IAS-8 requires retrospective effect to change in method of depreciation be given by adjusting opening retained should be considered as change in earnings. accounting policy and is accounted retrospectively. The effect of changes in accounting policies are reflected in the current year P & L. The definition of prior period items is AS-5 covers only incomes and broader under IAS-8 as compared to expenses in the definition of prior AS-5 since IAS-8 covers all the items period items. in the financial statements including balance sheet items. IAS-8 requires retrospective AS-5 requires prior period items to be restatement of prior period figures by included in the determination of net restatement of opening balances of profit or loss for the current period. 17  assets, liabilities and equity for the earliest period practicable. 8 Revenue Recognition In case of revenue from rendering of AS-9 allows completed service services, IAS-18 allows only contract, method or proportionate percentage of completion method. completion method. IAS-18 requires effective interest AS-09 requires interest income to be method to be followed for interest recognized on a time proportion basis. income recognition. Under IAS-18, AS-9 permits recognition when the payments received in advance for goods are manufactured, identified and goods yet to be manufactured or third ready for delivery in such cases. party sales cannot be recognized as revenue until such goods are delivered to the buyer. Deals with accounting of barter No guidance on barter transaction. transactions. For multiple element contracts, the No specific guidance in the standard. standard broadly requires that each element is fair valued and recognized when the underlying service is performed. 9 Fixed Assets & Depreciation IAS-16 mandates component As-10 recommends but does not force accounting. component accounting. Depreciation is based on useful life. Depreciation is based on higher of useful life or Schedule XIV rates. In practice most companies use Schedule XIV rates. Major repairs and overhaul Major repair and overhaul expenditure expenditure are capitalized as if it is a are expensed. separate component. 18  Under IAS-16, if subsequent costs are AS-10 provides that only that incurred for replacement of a part of an expenditure which increases the future item of fixed assets, such costs are benefits from the existing asset beyond required to be capitalized and its previously assessed standard of simultaneously the replaced part has to performance is included in the gross be de-capitalized. book values. g. an increase in capacity. In case of change in method of AS-6 requires retrospectively re- depreciation, IAS-16 requires effect to computation of depreciation and any be given prospectively. Change in excess or deficit on such re- method of depreciation is treated as computation is required to be adjusted change in accounting estimate under in the period in which such change is IAS-16. affected. Estimates of residual value needs to be AS-6 considers this as change in updated. accounting policy. Estimates of residual value are not updated. Revaluation is an allowed alternative No need to update revaluation treatment; however, revaluation will regularly. have to be done regularly. Depreciation on revaluation portion Depreciation on revaluation portion cannot be recouped out of revaluation can be recouped out of revaluation reserve and will have to be charged to reserve. the P&L account. Provision on site-restoration and No guidance in the standard. However, dismantling is mandatory. guidance note on oil and gas issued by ICAI, requires capitalization of site restoration cost. 10 Foreign Exchange IAS-21 is based on the concept of AS-11 is based on the concept of functional currency v reporting integral and non-integral operations. It currency. It therefore provides therefore provides guidance on what 19  guidance on what should be the operations are integral and what are functional currency of an enterprise. not in respect of an enterprise. Foreign exchange differences cannot Foreign exchange differences are not be capitalized unless they are in capitalized, as per the Companies respect of borrowings and the (Accounting standard) Rules and AS- exchange differences are in effect an 11 except for exchange differences on adjustment of interest cost. borrowings to the extent they are an adjustment of interest cost. 11 Government Grants In case of non-monetary assets As-12 requires accounting at acquired at nominal/ concessional rate, acquisition cost. IAS-20 premits accounting either at fair value or at acquisition cost. In respect of grant related to a specific As-12 requires enterprise to compute fixed asset becoming refundable.IAS- depreciation prospectively as a result 20requires retrospective re of which the revised book value is computation of depreciation and provided over the residual useful life. prescribes charging off the deficit in the period in which such grant becomes refundable. IAS-20 requires separate disclosure of AS-12 has no such disclosure unfulfilled conditions and other requirement. contingencies if grant has been recognized. 12 Business Combinations Business combinations are dealt with Business combinations are dealt with under IFRS-3. various standards such as AS-14, AS- 21, AS-23, AS-27 and AS-10. IFRS-3 allows only purchase method. AS-14 allows both Pooling of Interest Option of pooling method given under Method and Purchase Method. Pooling IAS-22 has been withdrawn. method is allowed subject to certain conditions. 20  IFRS-3 requires valuation of assets & AS-14 requires valuation at carrying liabilities at fair value. Even contingent value in the case of pooling method. In liabilities are fair valued. the case of purchase method either carrying value or fair value may be used. Contingent liabilities are not fair valued. Under AS-21, AS-23 and AS- 27, goodwill is determined based on book values rather than fair values. IFRS-3 requires Goodwill to be tested AS-14 requires amortization of for impairment. It requires recognition goodwill. AS-21, AS-23 and AS-27 of negative goodwill immediately in are silent. AS-10 also recommends Profit & Loss A/c. subject to amortization of goodwill. AS-28 conditions. requires impairment testing. IFRS-3 requires recognition of AS-14 requires it to be credited to negative goodwill immediately in P & Capital Reserve. L A/c. subject to conditions. IFRS-3 Reverse Acquisition is AS-14 does not deal with reverse accounted assuming acquirer is the acquisition. acquiree. Under IFRS-3, provisional values can AS-14 contains no such similar be used provided they are updated provision. retrospectively within 12 months with actual values. 13 Employee Benefits: IAS-19 provides an option to recognize AS-15 (revised) does not admit actuarial gains and losses either by “Corridor Approach”. All actuarial following “Corridor Approach” or gains and losses are recognized immediately in Profit & Loss A/c. immediately in the profit and loss Under corridor approach, actuarial account. gains/losses are recognized over a period of time. 21  Under IAS-19, the discount rate used AS-15 (revised) allows use of only to discount post-employment benefit market yields on Govt. bonds. obligations should be determined by reference to market yields of high quality corporate bonds or, in case there is no deep market in such bonds, on the basis of market yields of Govt. bonds. Under IAS-19, the liability for Termination benefits are dealt with termination benefits has to be under AS-29, which are required to be recognized based on constructive recognized based on legal obligation obligation for e.g. Announcement of a rather than constructive obligation. formal plan. Under IAS there is no concept of VRS expenditure can be deferred deferral. under Indian GAAPs over 3-5 years. 14 Borrowing Costs IAS-23 prescribes borrowing costs to AS-16 mandates capitalization of be recognized as expense as borrowing costs, where the relevant benchmark treatment. It allows conditions are fulfilled. capitalization as an allowed alternative. IAS23 requires disclosure of AS-16 does not require such capitalization rate used to determine disclosure. the amount of borrowing costs. 15 Segment Reporting IAS-14 prescribes treatment of AS-17 is silent on the aspect of revenue, expenses, profit/loss, assets treatment in consolidated financial and liabilities in relation to Associates statements. & Joint Ventures in consolidated financial statements. IAS-14 encourages reporting of AS-17 does not make any distinction vertically integrated activities as between vertically integrated segment 22  separate segments but does not and other segments. mandate the disclosure. IAS-14 provides that a business AS-17 does not contain any such segment can be treated as reportable stipulation. segment only if, interalia, majority of its revenue is earned from sales to external customers. Under IAS-14, if a reportable segment Under AS-17, this is mandatory ceases to meet threshold requirements, irrespective of the judgment of then also it remains reportable for one management. year if the management judges the segment to be of continuing significance. In case of change in identification of AS-17 requires only disclosure of the segments, IAS-14 requires restatement nature of the change and financial of prior period segment information. In effect of the change, if reasonably case it is not practicable, IAS-14 determinable. requires disclosure of data for both the old and new bases of segmentation. 16 Related Party Disclosures The definition of related party under AS-18 does not include this IAS-24 includes post employment relationship. benefit plans (e.g. gratuity fund, pension fund) of the enterprise or of any other entity, which is a related party of the enterprise. The definition of Key management AS-18 read with ASI-18 excludes non- persons (KMPs) under IAS-24 executive directors from the definition includes any director whether of the key management persons. AS- executive or otherwise i.e. Non- 18 does not specifically cover indirect executive directors are also related authority and responsibility. 23 party. Further, under IAS-24, if any person has indirect authority and responsibility for planning, directing and controlling the activities of the enterprise, he will be treated as a Key Management Person (KMP). The definition of related party under AS-18 covers relatives of KMPs. IAS-24 includes close members of the families of KMPs as related party as well as of persons who exercise control or significant influence. IAS-24 requires compensation to AS-18 read with ASi-23 requires KMPs to be disclosed category wise disclosure of remuneration paid to key including share-based payments. management persons but does not mandate category-wise disclosures. IAS-24 mandates that no disclosure AS-18 contains no such stipulations. should be to the effect that related party transactions were made on arm’s length basis unless terms of the related party transaction can be substantiated. NO concession under IAS-24 where AS-18 provides exemption from disclosure of information would disclosure in such cases. conflict with the duties of confidentiality in terms of statute or regulating authority. Under IAS-24, the definition of Under AS-18, the definition is wider “control” is restrictive as it requires as it refers to power to govern the power to govern the financial and financial and/or operating policies of operating policies of the management the management. of the enterprise. 24  The definition of “control” under IAS- AS-18 includes control over 24 is restrictive on the count that it composition of Board of directors in does not include control over the definition of “control”. composition of Board of Directors. IAS-24 requires disclosure of terms No such disclosure requirement is and conditions of outstanding items contained in AS-18. pertaining to related parties. IAS-24 does not prescribe a rebuttable AS-18 prescribes a rebuttable presumption of significant influence. presumption of significant influence if 20% or more of the voting power held by any party. No exemption. Transactions between state controlled enterprises are not required to be disclosed under AS-18. 17 Leases Under IAS- 17 it has been clarified thatAS-19 ‘Accounting for Lease’ as it land and building, elements of a lease stands at present does not deal with of land and building need to be lease agreements to use lands. Hence, considered separately. The land the classification criteria are element is normally an operating lease applicable only to building as separate unless title passes to the lessee at theasset. To be in line with IAS-17,a end of the lease term.The buildings suitable modification is required in element is classified as an operating orAs-19 to bring lease agreements for finance lease by applying the use of land within the purview and classification criteria. prescribe separate classification criteria for land as stated in revised IAS-17. IFRIC 4 requires lease accounting for No such requirement under Indian service contracts that convey night to GAAP. use specific assets. The definition of residual value is not included in IAS- 17. 25  IAS-17 specifically excludes lease As-19 defines residual value. accounting for investment property and biological assets. IAS-17 does not prohibit upward There is no such exclusion under AS- revision in value of unguaranteed 19. residual value during the term of lease. In case of sale and lease back,IAS-17 AS-19 permits only downward requires excess of sale proceeds over revision. the carrying amount to be deferred and amortized over the lease term. IAS-17does not require any separate AS-19 requires excess or deficiency disclosure for assets acquired under both to be deferred and amortized over finance lease segregated from assets the lease term in proportion to the owned. depreciation of the leased asset. Schedule VI mandates separate disclosure of leaseholds. IAS-17 prescribes initial direct cost As-19 requires initial direct cost incurred by lessor to be included in incurred by lessor to be either charged lease receivable amount in cast finance off at the time of incurrence or to be lease and in the carrying amount of the amortized over the lease period and asset in case of operating lease and requires disclosure for accounting does not mandate any accounting policy relating thereto in the financial policy related disclosure. statements of the lessor. IAS-17 requires assets given on As-29 requires assets given on operating leases to be presented to the operating lease to be presented in the nature of the asset. balance sheet under Fixed Assets. 18 Earnings per share IAS-33 requires separate disclosure of AS-20 does not require any such basic and diluted EPS for continuing separate computation or disclosure. operations and discontinued 26  operations. IAs-33 deals with computation of EPS AS-20 does not contain any such in case of Share-based payment provision. The Guidance note issued transactions. by ICAI on “Employee Share-Based Payments” deals with the same. IAs-33 prescribes treatment of written AS-20 is silent on this aspect. put options and forward purchase contracts in computing EPS. IAS-33 requires change in accounting AS-20 does not permit such treatment. policy in be given retrospective effect for computing EPS, which means EPS to be adjusted for prior period presented. IAS-23 does not require disclosure of AS-20 requires EPS/DEPS with and EPS with and without extra-ordinary without extra-ordinary items to be items. disclosed separately. IAs-33 does not deal with the Under AS-20, application money held treatment of application money held pending allotment should be included pending allotment. in the computation of diluted EPS. IAS-33 requires disclosure of anti- AS-20 does not mandate such dilutive instruments even though they disclosure. are ignored for the purpose of computing dilutive EPS. IAS-33 does not require disclosure of Disclosure of face value is required face value of share. under As-20. 19 Consolidated Financial Statements Under IAS-27, it is mandatory to Under As-21,it is not mandatory to prepare CFS and an entity should prepare CFS. However, listed 27 prepare separate financial statements in companies are mandatorily required addition to CFS only local regulations but the terms of listing agreement of so require. SEBI to prepare and present Consolidated financial statements. Under IAS-27, exemption from There is no such exemption under As- preparation of CFS is granted if certain 21. conditions are fulfilled. Under IAS-27, a subsidiary cannot be Under As-21,a subsidiary can be excluded from consolidation under any excluded from consolidation if (1) the circumstances. subsidiary is acquired and held with an intention to dispose:(2) the subsidiary operates under severe long terms restrictions impairing its ability to transfer funds to parent. Under IAS-27, while determining AS-21 is silent. whether entity has power to govern financial and operating policies of another entity, potential voting rights currently exercisable should be considered. Under IAS-27, the definition of Control means the ownership, directly “control” requires power to govern the or indirectly through subsidiary(ies), financial and operating policies of the of more than one-half of the voting management of the enterprise. power of an enterprise; or control over composition of board of directors for obtaining economic benefits. Use of uniform accounting policies for AS-21 gives exemption from like transactions while preparing CFS following uniform accounting policies is mandatory under IAS-27. if the same is not practicable. 28 Under IAS-27, minority interest has to Under AS-21, minority interest has to disclose within equity but separate be separately disclosed from liability from parent shareholders equity. and equity of parent shareholder. Under IFRS-3, goodwill/capital Under AS-21,goodwill/capital reserve reserve on consolidation is computed on consolidation is computed on the on fair values of assets/liabilities. basis of carrying value of assets/liabilities. Under IAS-37, 3 month’s time gap is Under AS-21, six months time gap is permitted between balance-sheet dates allowed. of financial statements of subsidiary and parent. IAS-27 prescribes that deferred tax No deferred tax is to be created on adjustment as per IAS-12 should be unrealized profit. made in respect of timing difference arising out of elimination of unrealized profit. Acquisition accounting requires Under As-21, for computing parent’s drawing up of financial statements as portion of equity in a subsidiary at the on the date of acquisition for date on which investment is made, the computing parent’s portion of equity in financial statements of immediately a subsidiary. preceding period can be used as basis of consolidation if it is impracticable to draw financial statement of the subsidiary as on the date of investment. IAS-27 does not require additional AS-21 requires additional disclosure disclosure of list of all subsidiaries of list of all subsidiaries including the including the name, country of name, country of incorporation, incorporation, proportion of ownership proportion of voting power held. interest and if different proportion of 29  voting power held. SIC-12 requires consolidation of No such guidance under As-21. SPV’s when certain criteria are met. 20 Accounting for Taxes on Income IAS-12 is based on Balance Sheet AS-22 is based on income statement Approach or the temporary difference approach or the timing difference approach. approach. Differed taxes are determined on Deferred taxes are not determined on temporary differences such as (a) temporary differences. Revaluation of fixed assets, (b)Business combinations, (c)Consolidation adjustment (d) Undistributed profits, (e)Foreign currency translation adjustment. FBT is included as part of the related FBT is included as a tax expense. expense which gave rise to FBT. In the case of unabsorbed losses, In the case of unabsorbed losses, deferred tax asset is recognized if there deferred tax asset is recognized if is convincing evidence of future there is virtual certainty of future reversals. reversals. 21 Accounting for Associate in Consolidated Financial Statement. Under IAS-28, potential voting rights Under ASI-28 potential voting rights currently exercisable are to be are not considered for determining considered in assessing significant voting power in assessing significant influence. influence. As per IAs-28, difference between Under AS-23, no period is specified. balance sheet date of investor and Only consistency is mandated. associate cannot be more than three 30  months. In case uniform accounting policies are Under AS-23, if it is not practicable to not followed by investor & investee, make such adjustments, exemption is necessary adjustments have to be made given, but appropriate disclosures are while preparing consolidated financial made. statements of investor. While recognizing losses of Under AS-23, losses are to be associates/joint ventures under IAS-28, recognized to the extent of investment carrying amount of investment in plus incurred obligations plus equity and other long term interests to payments made towards guaranteed be considered. obligations. For identification of goodwill/capital AS-23 prescribes historical cost basis reserve, IAS-28 envisages net fair on acquisition, for computation of value basis on acquisition. goodwill/capital reserves. Under IAS-28 it is necessary to subject If decline in value of investments in an the investments in associates/joint associate is permanent, provision for ventures to the test of impairment. diminution to be made Impairment testing is not required under AS-23. 22 Interim Financial Reporting Under IAS-34, minimum components No such disclosure is required under of Interim Financial Report include- AS-25, since the concept of SOCIE Statement showing changes in equity. does not prevail under Indian GAAP. Under IAS-34, in case of any change AS-25, requires restatement of figures in accounting policy, figures of prior of prior interim periods of the current interim periods of the current financial financial year only. year and comparable figures of corresponding previous periods to be restated. AS-25 does not address these issues Under IAS-34, separate guidance is specifically. available for treatment of provision for Leave encashment, Interim Period 31  Manufacturing Cost Variances, Foreign Currency Translation Gains and Losses. 23 Intangible Assets There is no presumption under IAS-38 Under AS-26, there is a rebuttable as regards useful life of an intangible presumption that the useful life of asset. intangible assets will not exceed 10 years. Under IAS-38, intangible assets having There is not concept of indefinite “Indefinite useful life” cannot be useful life in As-26. Theoretically, amortized. Indefinite useful life means even for such assets, amortization where, based on analysis, there is no would be mandatory, though the foreseeable limit to the period over threshold period could exceed beyond which the asset is expected to generate 10 years. net cash inflow for the entity. Indefinite is not equal to Infinite. Such assets should be tested for impairment at each balance-sheet date and separately disclosed. IAS-38 does not require any AS-26 requires test of impairment to impairment testing if there are no be applied even if there is no indications of impairment. indication of that asset being impaired for following assets: -Intangible asset not yet available for use -Intangible asset amortized over ^ 10 years. Under IAS-38, if Intangible Asset is There is no such stipulation under AS- ‘held for sale’ then amortization should 26 be stopped. Under IAS-38, R&D expenditure that AS -26 is silent on this. 32  relates to an in-process R&D project acquired separately or in a business combination shall be accounted as Intangible asset. Under IAS-38, Revaluation Model is AS-26 does not permit revaluation allowed for accounting Intangible model. Asset provided active market exists. 24 Financial Reporting of Interests in Joint Ventures Under IAS-31, when the investments There is no such provision under AS- are made by venture capital 27 and the standard on financial organization, mutual funds, unit trusts instruments is applicable from 2009.on and similar entities then those recommendatory basis and mandatory investments are classified as held for from 2011. trading and accounted for as per IAS- 39. IAS-31 not to apply if parent is exempt There is no such specific provision from preparing CFS under IAS- under AS-27. 27.Similar exemption for investor satisfying same conditions as parent. IAS-31 permits both proportionate AS-27 permits only proportionate consolidation method and equity consolidation method. method for recognizing interest in a jointly controlled equity in CFS, Equity method prescribed in IAS-31 is similar to hat prescribed in IAS-28. Accounting for subsidiary where joint Accounting for subsidiary where joint control is established through control is established through contractual agreement should be done contractual agreement should be done as joint venture, i.e. either as subsidiary –i.e. full consolidation. proportionate consolidation or equity 33  accounting as the case may be. 25 Impairment of Assets Impairment losses on goodwill are not Impairment losses on goodwill are subsequently reversed. subsequently reversed only if the external event that caused impairment of goodwill no longer exists and is not expected to recur. Goodwill acquired on business Goodwill is allocated to CGU’s based combination is allocated to each CGU on bottom up and top-down tests. based on the benefit it would enjoy from the synergies of the combination. 26 Provisions, Contingent Assets and Contingent Liabilities IAS-37 requires discounting of AS-29 prohibits discounting. provisions. IAS-37 requires provisioning on the AS-29 requires recognition based on basis of constructive obligation on legal obligation. restructuring costs. IAS-37 requires disclosure of AS-29 prohibits it. Contingent Assets in Financial Statements. IAS-37 provides certain basis and AS-29 does not contain any such statistical methods to be followed for guidance and relies on judgment of arriving at the best estimate of the management. expenditure for which provision is recognized. IAS-37 defines obligation but does not AS-29 defines present obligation and make a distinction between present possible obligation as well. 34  obligation and possible obligation. 27 Financial Instruments IAS-32 and IAS-39 deal with financial As-30 and AS-31 corresponding to instruments and entity’s own equity in IAS-39 and IAS-32 respectively have detail including matters relating to been issued. It is recommendatory in hedging. 2009 and mandatory from 2011.It may however be noted that these standards have not yet been incorporated in the Companies (Accounting Standard) Rules. 28 Share based Payments IFRS-2 covers share based payments The ICAI guidance note deals with both for employees and non only employee share based payments. employees. Under IFRS option that Fair valuation is not mandatory. have a value are compulsorily charged Therefore in many cases there would to the P&L account over the vesting be no charge to the profit and loss period. account on issue of options to employees. 29 First Time Adoption Detail first time adoption rules exist. No first time adoption rules. Source: D'Souza, Dolphy (2009). Check Your Progress-2: (A) Choose the most appropriate alternative among given alternatives: 1) IFRS denotes …………………………. (a) Indian Financial Reporting Standards (b) International Financial Reporting Standards (c) Indonesia Financial Reporting Station (d) International Financial Reports Standards 2) ………………is a set of high quality and globally acceptable financial reporting standards developed by the International Accounting Standard Board (IASB). (a) Indian Financial Reporting Standards 35  (b) Indonesia Financial Reporting Station (c) International Financial Reports Standards (d) International Financial Reporting Standards 3) International Accounting Standard-7 is related to …………… (a) Inventories (b) Depreciation (c) Cash Flow Statement (d) Construction Contracts (B) State whether the following statement is ‘True’ or ‘False’: 1) International Accounting Standard-6 is related to Depreciation Accounting. 2) International Accounting Standard-33 is related to Earning Per Share. 3) IFRS-10 is related to Consolidated Financial Statements. 1.2.4 AS-1 Disclosure of Accounting Policies This accounting standard is related to the disclosure of accounting policies adopted by accountants in preparing financial statements. There are different areas where more than one method can be followed for accounting. These methods are followed in preparation of financial statements. In such situation where different methods are available and the specific method is followed, this method should be disclosed as accounting policy, according to this standard. It is generally assumed that financial statements are prepared on the basis of fundamental accounting assumptions. As per this accounting standard, the fundamental accounting assumptions are: Going Concern, Consistency and Accrual. If nothing is written about them, it is assumed that they are followed. However, if they are not followed, it must be disclosed. In detail we can discuss about the fundamental accounting assumptions as follows: (a) Going Concern: The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materiality the scale of the operations. 36 (b) Consistency: It is assumed that accounting policies are consistent from one period to another. (c) Accrual: Revenues and cost are accrued, that is, recognized as they are earned or incurred (not as money received or paid) and recorded in the financial statements of the periods to which they relate. The accrual concept forces the matching of revenues against relevant costs. For the purpose of selecting accounting policies, the important considerations are: Prudence, Substance over form and Materiality. (a) Prudence: It means making right estimates which are required under conditions of uncertainty while preparing financial statements. Profits are not anticipated but recognized only when realized though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. (b) Substance over form: It means that transaction should be recorded in accordance with actual happening and economic reality of the transactions, not by its legal form. We can understand it by example of finance lease. In finance lease, the lessee in substance is the owner of the asset whilst the lessor is merely the legal owner. The accounting of finance lease (AS-19) is based on the substance rather than form of the transaction. Based on this principle the lessee capitalizes the lease equipment as fixed assets, being owner in substance; whereas, the lessor records the investment made as a debtor. (c) Materiality: It refers to disclosure of all the items and facts which are sufficient enough to influence the decisions of reader or user of financial statement. In other words, financial statements should disclose all "material" items. The International Accounting Standards Committee defines audit materiality as:"Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements. Materiality depends upon the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have, if it is to be useful." 37  According to this standard, disclosures are necessary to be made are (a) accounting policies adopted to prepare financial statements, (b) change in accounting policies and (c) effect of change in accounting policies on financial statements. The change in the accounting policies which has a material effect in current period or in latter period, should be disclosed. Illustration-1: ABC Ltd. sold its building to XYZ Ltd. for 100 lakhs on 30-09-2011 and gave possession of the property to XYZ Ltd. However, documentation and legal formalities are pending. Due to this, the company has not recorded the sale and has shown the amount received as an advance. The book value of the building is 40 lakhs as on 31-03-2012. Do you agree with this treatment? If you do not agree, explain the reasons with reference to the accounting standard. Solution: As per AS-1 Disclosure of Accounting Policies, principles of prudence, substance over form and materiality should be looked into, to ensure true and fair consideration in a transaction. Here, the economic reality and substance of the transaction is that the rights and beneficial interest in the property has been transferred although legal title has not been transferred. Hence, ABC Ltd. should record the sale and recognize the profit of 60 lakhs iin its financial statements for the year ended 31-03-2012, value of building should be removed balance sheet. Therefore the treatment given by the company is not correct. 1.2.5 AS-2 Valuation of Inventories: The purpose of this standard is to formulate the method of computing cost of inventories, determine the value of closing inventory. As per this standard, inventories are those assets which (a) held for sale in the ordinary course of business, (b) in the process of production for such sale (raw material and work-in-progress) or (c) in the form of material or supplies to be consumed in the production process or in the rendering of services (stores, spares, raw material, consumables). Inventories do not include machinery. 1.2.5.1 Measurement: As far as measurement of inventories is concerned, inventories should be valued at lower of cost and net realizable value. Cost of 38 inventories should include the (a) cost of purchase, (b) cost of conversion and (c) other costs incurred in bringing the inventories to their present location and position. (a) Cost of Purchase: The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase. (b) Cost of Conversion: The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour. The allocation of fixed production overheads for the purpose of their inclusion in the costs of conversion is based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates normal capacity. The amount of fixed production overheads allocated to each unit of production is not increased as a consequence of low production or idle plant. Un allocated overheads are recognised as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed production overheads allocated to each unit of production is decreased so that inventories are not measured above cost. Variable production overheads are assigned to each unit of production on the basis of the actual use of the production facilities. A production process may result in more than one product being produced simultaneously. This is the case, for example, when joint products are produced or when there is a main product and a by-product. When the costs of conversion 39  of each product are not separately identifiable, they are allocated between the products on a rational and consistent basis. The allocation may be based, for example, on the relative sales value of each product either at the stage in the production process when the products become separately identifiable, or at the completion of production. Most by-products as well as scrap or waste materials, by their nature, are immaterial. When this is the case, they are often measured at net realisable value and this value is deducted from the cost of the main product. As a result, the carrying amount of the main product is not materially different from its cost. (c) Other Costs: Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include overheads other than production overheads or the costs of designing products for specific customers in the cost of inventories. Interest and other borrowing costs are usually considered as not relating to bringing the inventories to their present location and condition and are, therefore, usually not included in the cost of inventories. The net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. The comparison between cost and net realizable value should be made item by item or by group of items. The historical cost of inventories should normally be determined by using First in First out (FIFO) average cost or Last in First Out (LIFO) method of valuation. The base stock method of valuation may be used in exceptional circumstances only. Inventory of consumable stores and maintenance supplies should ordinarily be valued at cost. 1.2.5.2 Disclosure: The financial statements should disclose: (a) the accounting policies adopted in measuring inventories, including the cost formula used; and (b) the total carrying amount of inventories and its classification appropriate to the enterprise. As per this accounting standard, the financial statement should disclose: (1) accounting policy adopted in measuring inventories, (2) cost formula used and (3) classifications of inventories are: a) raw materials and components, b) work-in- progress, c) finished goods, d) stock-in-trade, e) stores and spares, f) loose tools and g) others. 40 Illustration-2: The normal waste is 4% of input in production process. 10,000 MT of input were put in process resulting in a wastage of 500 MT. Cost of input is 2,000 per MT. The entire quantity of waste is on stock at the year end. What would you take the value of inventories in financial statement according to Accounting Standard? Solution: In this example, we have to take into consideration the details given in AS-2 Valuation of Inventories. As per this AS, abnormal amounts of waste materials, labour and other production costs are excluded from cost of inventories and such costs are recognized as expenses in the period in which they are incurred. So the value of inventories is determined as shown below: Calculation of Value of Inventory Particulars Quantity Amount (MT) ( ) Total Cost 10,000 2,00,00,000 Less: Normal Waste @5% 400 -- Total Cost of Expected Input 9,600 2,00,00,000 Less: Cost of Abnormal Waste to be charged to Profit & Loss A/c. (2,00,00,000/9,600) x 100] 100 2,08,333 Cost of Inventory 9,500 1,97,91,667 Illustration-3: Particulars Quantity Amount Kg. ( ) Opening Stock: Finished Goods 1,000 25,000 Raw Materials 1,100 11,000 Purchases 10,000 1,00,000 Labour 76,500 Overheads (Fixed) 75,000 Sales 10,000 2,80,000 Closing Stock: Finished Goods 900 Raw Materials 1,200 41  The expected production for the year was 15,000 kg. of the finished goods. Due to fall in market demand the sales price for the finished goods was 20 per kg. and the replacement cost for the raw material was 9.50 on the closing day. Calculate the value of closing stock. Solution: Particulars Amount Quantity ( ) (units) (cost per unit) Purchases 1,00,000 10,000 10.00 Add: Opening Stock of materials 11,000 1,100 10.00 Less: Closing Stock of materials 9,000 900 10.00 Cost of Purchases 1,02,000 10,200 10.00 Add: Direct Labour 76,500 7.50 Add: Production Overheads (Fixed)* 75,000 5.00 Total Cost per unit 22.50 *Overheads per unit = 75,000/15,000 = 5.00 per unit Hence, closing stock should be valued at NRV (i.e. 20 per unit), since it is less than cost (i.e. 22.50 per unit). Check Your Progress-3: (A) Choose the most appropriate alternative among given alternatives: 1) Disclosure of Accounting Policies is …………… (a) Accounting Standard-1 (b) Accounting Standard-2 (c) Accounting Standard-3 (d) Accounting Standard-4 2) Accounting Standard-2 is on …………. (a) Depreciation Accounting (b) Revenue Recognition (c) Valuation of Inventories 42  (d) Disclosure of Accounting Policies 3) While selecting the accounting policies, which of the following factor should be considered? 1. Prudence 2. Substance over form 3. Materiality 4. Net Realizable Value (a) 1, 2 and 3 (b) 2, 3 and 4 (c) 1, 2 and 4 (d) 1, 3 and 4 4) Cost of inventories include ……… 1. Cost of purchase 2. Cost of conversion 3. Cost of maintenance of machine 4. Other cost (a) 1, 2 and 3 (b) 2, 3 and 4 (c) 1, 2 and 4 (d) 1, 3 and 4 5) Inventories include ………… 1. Building of Storage 2. Stock of raw material 3. Work-in-progress 4. Stock of finished goods (a) 1, 2 and 3 (b) 1, 3 and 4 (c) 1, 2 and 4 (d) 2, 3 and 4 6) ……….. are fundamental accounting assumptions. 1. Going Concern 2. Consistency 3. Accrual 4. Materiality (a) 1, 2 and 3 (b) 1, 2 and 4 (c) 1, 3 and 4 43  (d) 2, 3 and 4 (B) State whether the following statement is ‘True’ or ‘False’: 1) Inventories include stock of raw material. 2) Accrual is one of the fundamental accounting assumptions. 3) Differential methods adopted for accounting treatment are called accounting policies. 1.3 SUMMARY: Accounting Standard is defined as “written documents issued from time to time by institutions of the accounting profession or institutions which has sufficient involvement and which are established expressly for this purpose”. Accounting standards enables accountants to attain both uniformity and flexibility in accounting practices. Accounting standards are the written statements consisting of rules and guidelines, issued by the accounting institutions, for the preparation of uniform and consistent financial statements and also for other disclosures affecting the different users of accounting information. This unit covered objectives of accounting standards, procedure of setting accounting standards, list of accounting standards in India and need of accounting standards. International Financial Reporting Standards (IFRSs) is a set of high quality and globally acceptable financial reporting standards developed by the International Accounting Standard Board (IASB). IFRSs are a set of high quality, understandable and enforceable global accounting standards which includes (a) International Accounting standards (IASs), (b) International Financial Reporting standard (IFRSs), (c) International Financial Reporting Interpretations (IFRIs) and (d) Standing Interpretations (SIs). This unit covers list of IFRSs, the discussion on convergence of IFRSs with ASs in India, and list of Ind ASs. We have seen the comparison between IFRSs and Indian GAAP. AS-1 Disclosure of Accounting Policies is related to the disclosure of accounting policies adopted by accountants in preparing financial statements. As per this accounting standard, the fundamental accounting assumptions are: Going Concern, Consistency and Accrual. For the purpose of selecting accounting policies, the important considerations are: Prudence, Substance over form and Materiality. The disclosures are necessary according to this standard. 44  As per AS-2 Valuation of Inventories, inventories are those assets which (a) held for sale in the ordinary course of business, (b) in the process of production for such sale (raw material and work-in-progress) or (c) in the form of material or supplies to be consumed in the production process or in the rendering of services (stores, spares, raw material, consumables). Inventories do not include machinery. As far as measurement of inventories is concerned, inventories should be valued at lower of cost and net realizable value. Cost of inventories should include the (a) cost of purchase, (b) cost of conversion and (c) other costs incurred in bringing the inventories to their present location and position. The financial statements should disclose: (a) the accounting policies adopted in measuring inventories, including the cost formula used; and (b) the total carrying amount of inventories and its classification appropriate to the enterprise. 1.4 TERMS TO REMEMBER: 1. Accounting Standard: It is written document issued from time to time by institutions of the accounting profession or institutions which has sufficient involvement and which are established expressly for this purpose. 2. International Financial Reporting Standard(IFRS): It is a set of high quality and globally acceptable financial reporting standards developed by the International Accounting Standard Board (IASB). 3. Fundamental Accounting Assumptions: As per AS-1, the fundamental accounting assumptions are: Going Concern, Consistency and Accrual. 4. Going Concern: The accounting is made with assumptions that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materiality the scale of the operations. It will continue its operations in foreseeable future. 5. Consistency: It is assumptions that accounting policies are consistent from one period to another. 6. Accrual: Accrual is such a principle of accounting according to which revenue or cost are recorded in the financial statements of the period which they relate, whether they are received or not or paid or not. 7. Prudence: Prudence means making right estimates which are required under conditions of uncertainty while preparing financial statements. 45 8. Substance over form: Substance over form means that transaction should be recorded in accordance with actual happening and economic reality of the transactions, not by its legal form. 9. Materiality: Materiality refers to disclosure of all the items and facts which are sufficient enough to influence the decisions of reader or user of financial statement. 10. Inventories: They are the assets which (a) held for sale in the ordinary course of business, (b) in the process of production for such sale (raw material and work- in-progress) or (c) in the form of material or supplies to be consumed in the production process or in the rendering of services (stores, spares, raw material, consumables). Inventories do not include machinery. 11. Cost of Inventories: Cost of inventories should include the (a) cost of purchase, (b) cost of conversion and (c) other costs incurred in bringing the inventories to their present location and position. 1.5 ANSWERS TO CHECK YOUR PROGRESS: Check Your Progress-1: (A) 1) – (a) 2) – (c) 3) - (b) 4) - (a) (B) 1) – False 2) – False 3) – True 4) – False Check Your Progress-2: (A) 1) – (b) 2) – (d) 3) - (c) (B) 1) – False 2) – True 3) – True Check Your Progress-3: (A) 1) – (a) 2) – (c) 3) - (a) 4) - (c) 5) – (d) 6) – (a) (B) 1) – True 2) – True 3) – True 1.6 EXERCISE: 1. What is the meaning of Accounting Standards? What are its objectives? 2. What is the procedure for setting Accounting standards? 3. What is the need of Accounting Standards? 46 4. What is the meaning of IFRS and its broader composition? 5. What are the first five IFRS? What are International Accounting Standards? 6. Distinguish between Indian GAAPs and IFRS. 7. Describe the areas of different accounting policies being adopted by different enterprises. 8. Write a short note on the followings: (a) Objectives of Accounting Standard (b) International Financial Reporting Standards (c) Ind ASs (d) Disclosure of Accounting Policies (e) Fundamental Accounting Assumptions (f) Valuation of Inventories (g) Disclosure requirements under AS-2 9. X Ltd. follows the accounting policy for retirement benefits as shown below: At the end of the year, actuarial valuation is done in respect of employees who have opted for pension scheme. On the basis of this valuation, the contribution is made to pension fund. The contribution to the gratuity fund is also made on the basis of the actuarial valuation. Leave encashment is accounted for on Pay AS YOU GO Method. Comment on these policies. (Clue: Para 10 (c) of AS-1 Fundamental Accounting Assumption- especially ‘Accruals’.) 10. Amit Health Care Ltd. as consistently followed LIFO method in the past for inventory valuation, so they continue to follow the same. Is it right? 11. A Ltd. deals with three products, X, Y and Z, which are neither similar nor interchangeable. On 31st March 2018 at the closing of accounts, the historical cost and net realizable value of the items of stock are determined as follows: 47  Items Historical cost NRV ( in lakhs) ( in lakhs) X 120 95 Y 88 88 Z