Overview of Accounting Standards (AS) - PDF

EP-CA&FM V P Palanichamy CMA – US OVERVIEW OF ACCOUNTING STANDARD AS Deals with Details AS 1 Disclosure of Accounting Accounting p...

EP-CA&FM V P Palanichamy CMA – US OVERVIEW OF ACCOUNTING STANDARD AS Deals with Details AS 1 Disclosure of Accounting Accounting policies are the specific accounting principles and the Policies methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements. All significant accounting policies should be disclosed. Such disclosure form part of financial statements. All disclosures should be made at one place. Specific disclosure for the adoption of fundamental accounting assumptions is not required. Disclosure of accounting policies cannot remedy a wrong or inappropriate treatment of the item in the accounts. AS 2 Valuation of Inventories A primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statements until the related revenues are recognized. This Standard deals with the determination of such value, including the ascertainment of cost of inventories and any write-down thereof to net realizable value. Inventories should be valued at the lower of cost and net realizable value. The cost of inventories should comprise- All costs of purchase (a) Costs of conversion (b) Other costs incurred in bringing the inventories to their present location and condition. AS 3 Cash Flow Statements The Standard deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities. An enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented. Cash Flows are inflows and outflows of cash and cash equivalents. Cash Flow Statement represents the cash flows during the specified period by operating, investing and financing activities. AS 4 Contingencies and This Standard deals with the treatment in financial statements of: Events Occurring After (a) contingencies, and the Balance Sheet Date Events occurring after the balance sheet date. A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence, or non- occurrence, of one or more uncertain future events. Events occurring after the balance sheet date are those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company, and, by the corresponding approving authority in the case of any other entity. V P Palanichamy CMA – US Accounting Standards (AS) LESSON 3 AS 5 Net Profit or Loss for The objective of this Standard is to prescribe the classification and the Period, Prior Period disclosure of certain items in the statement of profit and loss so that Items and Changes in all enterprises prepare and present such a statement on a uniform Accounting Policies basis. This enhances the comparability of the financial statements of an enterprise over time and with the financial statements of other enterprises. Accordingly, this Standard requires the classification and disclosure of extraordinary and prior period items, and the disclosure of certain items within profit or loss from ordinary activities. It also specifies the accounting treatment for changes in accounting estimates and the disclosures to be made in the financial statements regarding changes in accounting policies. This Standard should be applied by an enterprise in presenting profit or loss from ordinary activities, extraordinary items and prior period items in the statement of profit and loss, in accounting for changes in accounting estimates, and in disclosure of changes in accounting policies. AS 7 Construction Contracts The objective of this Standard is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature of the activity undertaken in construction contracts, the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting periods. Therefore, the primary issue in accounting for construction contracts is the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed. This Standard uses the recognition criteria established in the Framework for the Preparation and Presentation of Financial Statements to determine when contract revenue and contract costs should be recognised as revenue and expenses in the statement of profit and loss. It also provides practical guidance on the application of these criteria. This Standard should be applied in accounting for construction contracts in the financial statements of contractors. A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. AS 9 Revenue Recognition This Standard deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise. The Standard is concerned with the recognition of revenue arising in the course of the ordinary activities of the enterprise from: (a) the sale of goods, (b) the rendering of services, and (c) the use by others of enterprise resources yielding interest, royalties and dividends. 81 EP-CA&FM Accounting Standards (AS) Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration. AS 10 Property, Plant and Property, plant and equipment are tangible items that are held for use Equipment in the production or supply of goods or services, for rental to other or for administrative services. The objective of this AS is to prescribe the accounting treatment for property, plant and equipment. The principal issues in accounting for property, plant and equipment are the recognition of the assets, determination of their carrying amounts and depreciation charges and recognition of impairment losses in relation to them. Under this AS, property, plant and equipment are initially recognized at cost, subsequently measured by using either cost model or revaluation model and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life. AS 11 The Effects of Changes An enterprise may carry on activities involving foreign exchange in two in Foreign Exchange ways. It may have transactions in foreign currencies or it may have Rates foreign operations. In order to include foreign currency transactions and foreign operations in the financial statements of an enterprise, transactions must be expressed in the enterprise’s reporting currency and the financial statements of foreign operations must be translated into the enterprise’s reporting currency. This Standard should be applied: (a) in accounting for transactions in foreign currencies; and (b) in translating the financial statements of foreign operations AS 12 Accounting for This Standard deals with accounting for Government Grants. Government Grants Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, etc. Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the enterprise. The receipt of government grants by an enterprise is significant for preparation of the financial statements for two reasons. Firstly, if a government grant has been received, an appropriate method of accounting therefor is necessary. Secondly, it is desirable to give an indication of the extent to which the enterprise has benefited from such grant during the reporting period. This facilitates comparison of an enterprise’s financial statements with those of prior periods and with those of other enterprises.  LESSON 3 This Standard does not mandate which enterprises should be required to present interim financial reports, how frequently, or how soon after the end of an interim period. If an enterprise is required or elects to prepare and present an interim financial report, it should comply with this Standard. AS 26 Intangible Assets The objective of this Standard is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Accounting Standard. This Standard requires an enterprise to recognise an intangible asset if, and only if, certain criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures about intangible assets. This Standard should be applied by all enterprises in accounting for intangible assets, except: (a) intangible assets that are covered by another Accounting Standard; (b) financial assets; (c) mineral rights and expenditure on the exploration for, or development and extraction of, minerals, oil, natural gas and similar non-regenerative resources; and (d) intangible assets arising in insurance enterprises from contracts with policyholders. An intangible asset should be recognised if, and only if: (a) it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and (b) the cost of the asset can be measured reliably. An enterprise should assess the probability of future economic benefits using reasonable and supportable assumptions that represent best estimate of the set of economic conditions that will exist over the useful life of the asset. AS 27 Financial Reporting The objective of this Standard is to set out principles and procedures for of Interests in Joint accounting for interests in joint ventures and reporting of joint venture Ventures assets, liabilities, income and expenses in the financial statements of venturers and investors. This Standard should be applied in accounting for interests in joint ventures and the reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors, regardless of the structures or forms under which the joint venture activities take place. EP-CA&FM AS 28 Impairment of Assets The objective of this Standard is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and this Standard requires the enterprise to recognise an impairment loss. This Standard also specifies when an enterprise should reverse an impairment loss and it prescribes certain disclosures for impaired assets. This Standard should be applied in accounting for the impairment of all assets, other than: (a) inventories (see AS 2, Valuation of Inventories); (b) assets arising from construction contracts (see AS 7, Construction Contracts); (c) financial assets, including investments that are included in the scope of AS 13, Accounting for Investments; and deferred tax assets (see AS 22, Accounting for Taxes on Income). AS 29 Provisions, Contingent The objective of this Standard is to ensure that appropriate recognition Liabilities and criteria and measurement bases are applied to provisions and Contingent Assets contingent liabilities and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount. The objective of this Standard is also to lay down appropriate accounting for contingent assets. This Standard should be applied in accounting for provisions and contingent liabilities and in dealing with contingent assets, except: (a) those resulting from financial instruments1 that are carried at fair value; (b) those resulting from executory contracts, except where the contract is onerous; (c) those arising in insurance enterprises from contracts with policyholders; and (d) those covered by another Accounting Standard. At present, there are two sets of Accounting Standards under Companies Act as under: Accounting Standards (ASs) as notified by the Companies (Accounting Standards) Rules, 2006. These are from AS-1 to AS-5, AS-7 and AS-9 to AS-29, as amended by notification dated 30th March, 2016. ndian Accounting Standards (Ind AS) as notified by the Companies (Indian Accounting Standards) Rules, 2015. These are from Ind AS-1 to Ind AS-41 and Ind AS-101 to Ind AS-116 as amended by Companies (Ind AS) Amendment Rules, 2016 dated 30th March, 2016. Indian Accounting Standards (Ind AS) are another set of accounting standards notified by the Ministry of Corporate Affairs, Government of India which are converged with International Financial Reporting Standards (IFRS). These accounting standards are formulated by Accounting Standards Board of  APPLICABILITY OF INDIAN ACCOUNTING STANDARDS [IND AS] The Ministry of Corporate Affairs (MCA), in 2015, had notified the Companies (Indian Accounting Standards (IND AS) Rules 2015, which stipulated the adoption and applicability of Ind AS in a phased manner beginning from the Accounting period 2016-17. The MCA has issued Amendment Rules in the year 2016, 2017, 2018 and 2019 to amend the 2015 rules. For companies other than Banking companies, Non-banking Financial Companies (NBFCs) and Insurance companies: For the Accounting period beginning on or after 1st April, 2016: The following companies were Adoption, Convergence and Interpretation of IFRS and Accounting Standards in India required to prepare their financial statements by adopting Indian Accounting Standards (Ind ASs): Companies whose equity or debt securities are listed or are in the process of listing on any stock exchange either in India or out of India and having the net worth of Rs. 500 crore or more; Unlisted companies having the net worth of Rs. 500 crore or more; and Holding companies, subsidiary companies, joint venture or associate companies of the companies mentioned at (a) or (b) above. Comparatives for the above periods shall be for the period ending on 31st March, 2016 or thereafter. For the Accounting period ending on or after 1st April, 2017 : The following companies were required to prepare their financial statements by adopting Indian Accounting Standards (Ind ASs): Listed companies having net worth of less than Rs. 500 crores; Unlisted companies having net worth of Rs. 250 crore or more but less than Rs. 500 crores; and Holding, subsidiary, joint venture and associate companies of the companies mentioned at or (b) above. Comparatives for the above periods shall be for the period ending on 31st March, 2017 or thereafter. It may be noted that the net worth of the company will be considered based on the audited financial statements of the company concerned as at 31st March, 2014 or based on the first audited financial statements of the company concerned as at any date after 31st March, 2014. Companies whose securities are listed or are in the process of being listed on SME Exchanges will continue to apply the existing Accounting Standards specified under the Companies (Accounting Standards) Rules, 2006. Companies which are not required to mandatorily follow Indian Accounting Standards (Ind ASs) are required to follow the existing Accounting Standards specified under the Companies (Accounting Standards) Rules, 2006 unless they voluntarily choose to apply Indian Accounting Standards (Ind ASs). For Non-banking Financial Companies (NBFCs): For the Accounting period beginning on or after 1st April, 2018: The following NBFCs will be required to adopt Ind ASs: NBFCs having net worth of Rs. 500 crore or more; and Holding, subsidiary, joint venture and associate companies of the above companies. The comparatives will be for the period ending on 31st March, 2018 or thereafter.