MCOM1001 Corporate Accounting PDF

PONDICHERRY UNIVERSITY (A Central University) DIRECTORATE OF DISTANCE EDUCATION MASTER OF COMMERCE IN FINANCE M.Com (Finance) – First Year Course Code: 59 Paper Code: MCOM1001 CORPORATE ACCOUNTING DDE – WHERE INNO...

PONDICHERRY UNIVERSITY (A Central University) DIRECTORATE OF DISTANCE EDUCATION MASTER OF COMMERCE IN FINANCE M.Com (Finance) – First Year Course Code: 59 Paper Code: MCOM1001 CORPORATE ACCOUNTING DDE – WHERE INNOVATION IS A WAY OF LIFE  PAPER – I CORPORATE ACCOUNTING Author: Prof. K. Govindarajan Department of Commerce, Annamalai University, Annamalai Nagar 608 002 Chidambaram. 1  PAPER – I CORPORATE ACCOUNTING TABLE OF CONTENTS UNIT LESSON TITLE PAGE NO. 1.1 Introduction - Accounting Concepts and Convention 4 I 1.2 Accounting Standards 15 2.1 Profit prior to Incorporation 43 2.2 Managerial Remuneration 55 II 2.3 Company Final Accounts 69 2.4 Issue of Bonus Shares 105 2.5 Financial Reporting and Disclosure Practices 117 3.1 Valuation of Goodwill 144 III 3.2 Valuation of Shares 160 4.1 Internal Reconstruction 183 Amalgamation, Absorption and External Reconstruction IV 4.2 of Companies 207 4.3 Statements for Liquidation of Companies 232 5.1 Final Statements of Accounts of Banking Companies 258 V 5.2 Final Statements of Accounts of Insurance Companies 312 2 M.Com 1st Year PAPER CODE: MCOM 1001 PAPER I - CORPORATE ACCOUNTING UNIT I Corporate Accounting: Importance and Scope - Basic Accounting Concepts and Conventions - Generally Accepted Accounting Principles and Practices (GAAPP) recommended by the ICAI - Accounting standards issues by ICAI; AS 4 : Contingencies and Events occurring after the Balance Sheet Date - AS 11: The Effects of Changes in Foreign Exchange Rates - AS 12: Accounting for Government Grants - AS 16: Borrowing Costs - AS 19: Leases - AS 20: Earnings Per Share - AS 26: Intangible Assets - AS 29: Provisions, Contingent Liabilities and Contingent Assets. UNIT II Preparation of Company Final accounts: Schedule VI Part I and Part II – Profit prior to Incorporation – Managerial Remuneration – Dividend declaration out of the past and the current profits – Issue of Bonus shares – Preparation of Balance Sheet; Financial Reporting and Disclosure Practices – Corporate Governance - Norms of SEBI relating to information Disclosure in Annual Reports; Professional Chartered Accountants’ Functions and Services - Code of Conduct - Professional Ethics UNIT III Valuation of Goodwill – Factors affecting value of Goodwill – Methods of Valuing Goodwill – Valuation of Shares – Methods of Valuation of Equity Shares. UNIT IV Amalgamation, Absorption and External Reconstruction of Companies – Purchase consideration – Accounting treatment – Books of Purchasing Company – Books of Vendor Company – Alteration of Share Capital and Internal Reconstruction – Scheme of Capital Reduction - Statements for Liquidation of Companies. UNIT V Accounting Systems and Preparation of Final Statements of Accounts of Banking and Insurance Companies. Note: Question Paper Shall covers 20% Theory and 80% Problems REFERENCES: Gupta R.L. and Others: Advanced Accountancy, Sultan Chand Sons, New Delhi 2008. Jain S.P. and K.L. Narang: Advanced Accounting, Kalyani Publisherss, Delhi 2009. Pillai R.S., Bagavathi S. Uma: Advanced Accounting, S. Chand & Co., Delhi. 2008 Shukla M.C.: Advanced Accounts S. Chand and Co., New Delhi 2009. 3  Lesson 1.1 Introduction Learning objectives After learning this chapter, you will be able to:  Explain the meaning of Corporate Accounting  Importance and Scope ofCorporate Accounting  Understand the Basic Accounting Concepts and conventions. 1.1.1 Introduction In the evolution of forms of business organizations, company form is the third stage and the first two being sole-proprietorship and partnership firms. Since the ownership is separated from the management, company enjoys a separate legal status. Even though, the shareholders contribute towards the finances of the company but all of them do not and cannot participate in the management of the company. It is managed by a Board of Directors elected by the shareholders. Thus, in the company form of business organization a shareholder may simply acts as a renter of capital. In India, Companies are governed by the provisions of the Companies Act, 1956. The Act has been amended several times. Some of the important amendments have been in 1960, 1963, 1965, 1969, 1974, 1977, 1985, 1988, 1999, 2000, 2001, 2002 and most recently in 2006. The Companies Act 1956 was replaced by the Companies Act 2013. 1.1.2 Meaning and Definition of a Company In common parlance, company means, an association of persons formed for the economic gain of its members. However, in law, any association of persons for any common object can be registered as a company. The object need not be the economic gain of its members, e.g., a company can be formed for purposes such as charity, research, advancement of knowledge, etc. In the words of Justice Lindley, "A company is an association of many persons who contribute money or money's worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs, are members." (Late) Chief Justice Marshall of USA has defined a company as "a person, artificial, invisible, intangible and existing only in the eyes of the law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence." The Companies Act defines a company as "a company formed and registered under this Act or an existing company. - An existing company means a company formed and registered under any of the former Companies Act, It is to be noted that some sole proprietorship and partnership firms use the word 'Company' as a part of their names, 4 e.g., Ram & Company, Shyam & Company. Such firms are not companies within the meaning of the Act. A company thus exists, only in the contemplation of law. It has no physical existence. Right to act as a natural being is granted to it by law. Law creates it and law alone can dissolve it. 1.1.3Essential Characteristics of a Company Essential characteristics of a company are as follows: Voluntary association: A company is a voluntary association of persons, i.e.. it can neither compel a person to become its member nor to give up its membership. It is the personal choice of people and their objective to make profits which leads them to become members of a company. Independent legal entity: A company is a legal entity quite distinct and separate from its members. It can hold and deal with any type of property—of which it is the owner—in any way it likes; can enter into contracts, open a bank account in its own name, sue and be sued by its members as well as outsiders.On account of this independent corporate existence, the creditors of a company are creditors of the company alone and their remedy lies against the company and its property only and not against any of its members. Law recognises the existence of the company as quite distinct, irrespective of the motives, intentions. scheme of conduct of the individual shareholders. Perpetual existence A company has perpetual succession. The mode of incorporation and dissolution of a company and the right of the members to transfer shares freely, guarantees the continuity of the existence of the company quite independent of the life of the members. The existence of a company can be terminated only by law. Thus_, members may come and go, but the company can go on forever. Common seal A company being an artificial entity, acts through other natural persons, who are called directors. They act as agents to the company, but not to its members. All the acts of the company are authorised by its common seal. The common seal is the official signature of the company. A document not bearing the common seal of the company will not be binding on the company. Limited liability The liability of the members of a company is generally limited to the extent of the unpaid value of the shares held by them. In the case of a guarantee company, the members are liable to contribute a specified agreed sum to the assets of the company in the event of the company being wound up if its assets fall short of its liabilities. Transferability of shares The shares of a joint stock company are freely transferable. However, in the case of private companies they are transferable subject to the restrictions put by the company's articles. 5 1.1.4Meaning of Corporate Accounting It will be useful to discuss the meaning of the terms "Body Corporate" and "Corporation" before understanding the meaning of Corporate Accounting. Body corporate The term "body corporate" is wider than the expression 'company' and has been used in several sections of the Companies Act to denote not only an Indian company but also a foreign company. It also includes corporation formed under special law of India or a foreign country except as expressly excluded by the definition. The Department of Company Law Administration has clarified the definition as follows: "Generally speaking, body corporate means, a body which has been or is incorporated under some status and which has a perpetual succession and a common seal and is a legal entity apart from the members constituting it." The term, however, does not include: (a) a society registered under the Societies Registration Act, 1860; (b) a corporation sole; (c) a cooperative society registered under any law relating to cooperative societies; and (d) any other body corporate not being a company as defined in the Companies Act, which the Central Government may, by notification in the Official Gazette, specify in this behalf [Section 2(7)]. Corporation: Corporation means anybody or institution enjoying perpetual succession and the status of an independent legal entity. It may be of two types: (a) Corporation sole and (b) Corporation aggregate. Corporation sole refers to a single person constituted as a corporation in respect of some office or function, e.g., a Public Trustee, President, Governor, Minister, etc. It is not taken as a body corporate for purposes of this Act, but it is still a legal person and can be a member of a company. A corporation aggregate may be defined as a collection of individuals united into one body having a perpetual succession and an independent legal entity. It may be a trading or a non-trading corporation. The examples of trading corporations are (i) Chartered companies, (ii) Companies incorporated by special Acts of Parliament, (iii) Companies registered under the Companies Act, etc. The examples of non-trading corporations are (i) Municipal Corporations, (ii) District Boards, (iii) Universities, etc. Corporate accounting Corporate accounting is basically concerned with accounting relating to corporate bodies. In this book we are primarily concentrating on 6 accounting concerned with Indian corporations engaged in manufacturing trading or service activities. 1.1.5Kinds of Companies Statutory companies A company formed by a special Act passed either by the Central or State Legislature is called a statutory company. Such companies are governed by their respective Acts, and are not required to have any Memorandum or Articles of Association. Changes in their structure are possible only by legislative amendments. These companies are usually formed to carry out some special public undertakings requiring extraordinary powers and privileges. The object of such companies is not so much to earn profits as to serve people. Though the liability of the members ofsuch companies is limited, in most of the cases, they may not be required to use the word 'limited' as part of their names. Some of the important statutory companies are Reserve Bank of India, State Bank of India, Industrial Development Bank of India, etc. Government companies: A company of which not less than 51% of the paid up share capital is held by the Central government or by the State government or by any two or more of them together shall be a government company. Foreign companies A company which is incorporated outside India but which has a place of business in India is termed as a foreign company. Registered companies: Companies formed by registration under the Companies Act are known as registered companies. The working of such companies is regulated by the provisions of the Companies Act, the Memorandum of Association and the Articles of Association. These companies may be limited by shares or limited by guarantee or unlimited companies. (i) Companies limited by shares. It is a company having the liability of its members limited by memorandum to the amount unpaid, if any, on the shares respectively held by them. (ii) Companies limited by guarantee. Non-profit earning companies are mostly registered with a guarantee capital. They may or may not have share capital. A guarantee company is a company in which liability of its members is limited by memorandum to such amounts as the members may undertake by memorandum, to contribute to meet out the deficiency in the assets of the company, in the event of its being wound uP.- If the company has a share capital, the shareholders shall be liable to pay the amount which remains unpaid on their shares plus the amount payable under the guarantee. (iii) Unlimited company. A company not having any limit on the liability of its members is an unlimited company. It may or may not have share capital. 7  Members are held liable for the deficiency of assets to the liabilities of the company in proportion to their interests in the company. Liability in such a case may extend to the personal property of the shareholders. Unlimited companies, though permitted by the Companies Act, are not popular in this country. Private and Public Limited Companies Registered companies can be further classified as private and public limited companies. Private company: A private company means a company which has a minimum paid up capital of Rs I lakh or such higher capital as may be prescribed and which by its articles: (a) restricts the right of its members to transfer shares,' if any; (b) limits the number of members to fifty, excluding present and past employees of the company who are the members of the company; (c) prohibits any invitation to the general public to subscribe for its shares or debentures; and (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. A private limited company may be registered with only two members. It is required to add the words 'private limited" at the end of its name. Public company: A public company means a company which: (a) has a minimum paid up capital of Rs 5 lakhs or such higher paid up capital as may be prescribed; (b) is not a private company; or (c) is a private company which is subsidiary of a company which is not a private company. In other words a private company which is subsidiary of a public company, will also be taken as a public company. (d) A public company needs minimum seven persons for its registration. 1.1.6 Importance of Corporate Accounting The importance of corporate accounting is wide one. The importance of accounting is described below: CorporateAccounting supplies numerical information to the institution relating to its management and administration Exact results of the corporate are disclosed through Corporateaccounting 8  The body corporate can ascertain the financial status of the business operation Corporate body can compare the financial position of two/more years Proper accounting makes the firm credible to other party Tax authority can assess taxes for the corporate using the accounting information Corporate body can determine the actual assets and liabilities Using accounting data a Corporate bodycan formulate policy and take many decision on future operation Fulfilling the legal requirements Corporate governess 1.1.7 Scope of Corporate Accounting Corporate Accounting has got a very wide scope and area of application. Its use is not confined to the business world alone, but spread over in all the spheres of the society and in all professions. Theorder of the day is any corporate body need for recording and summarizing these transactions when they occur and the necessity of finding out the net result of the same after the expiry of a certain fixed period. Besides, this is also the need for interpretation and communication of that information to the appropriate persons. Only accounting use can help overcome these problems.In the modern world, accounting system is practiced not only in all the business institutions. As a matter of fact, accounting methods are used by all who are involved in a series of financial transactions.The scope of corporate accounting as it was in earlier days has undergone lots of changes in recent times. As corporate accounting is a dynamic subject, its scope and area of operation have been always increasing keeping pace with the changes in socio-economic changes and legal requirement. As a result of continuous research in this field the new areas of application of accounting principles and policies are emerged. National accounting, human resources accounting and social Accounting are examples of the new areas of application of accounting systems. 1.1.8Accounting Concepts and Convention Accounting is the language of business. It records business transactions taking place during the accounting period. Accounting communicates the result of the business transactions in the form of final accounts. With a view to make the accounting results 9 understood in the same sense by all interested parties, certain accounting concepts and conventions have been developed over a course of period. 1.1.8.1Accounting Concepts The Concepts of accounting are like the foundation pillars on which the structure of accounting is based. The Concepts of accounting are as follows: 1. Business Entity Concept It is generally accepted that the moment a business enterprise is started it attains a separate entity as distinct from the persons who own it. According to this Concept, business is treated as a unit or entity apart from its owners, creditors and others. In other words, the proprietor of a business concern is always considered to be separate and distinct from the business which he controls. All the business transactions are recorded in the books of accounts from the view point of the business. Even the proprietor is treated as a creditor to the extent of his capital. This concept is extremely useful in keeping business affairs strictly free from the effect of private affairs of the proprietors. In the absence of this concept the private affairs and business affairs are mingled together in such a way that the true profit or loss of the business enterprise cannot be ascertained nor its financial position. 2. Money Measurement Concepts Accounting records only those transactions which can be expressed in monetary terms. This feature is well emphasized in the two definitions on accounting as given by the American institute of certified public accountants and the American accounting principles board. The importance of this concept is that money provides a common denomination by means of which heterogeneous facts about a business enterprise can be expressed and measured in a much better way. In accounting, only those business transactions and events which are of financial nature are recorded. For example, when Sales Manager is not on good terms with Production Manager, the business is bound to suffer. This fact will not be recorded, because it cannot be measured in terms of money. 3. Accounting Period Concepts In accordance with the going concern concept it is usually assumed that the life of a business is indefinitely long. But owners and other interested parties cannot wait 10 until the business has been wound up for obtaining information about its results and financial position. The users of financial statements need periodical reports to know the operational result and the financial position of the business concern. Hence it becomes necessary to close the accounts at regular intervals. Usually a period of 365 days or 52 weeks or 1 year is considered as the accounting period. 4. Going Concern Concepts As per this assumption, the business will exist for a long period and transactions are recorded from this point of view. There is neither the intention nor the necessity to wind up the business in the foreseeable future. This concept assumes that the business enterprise will continue the accountant while valuing the assets of the enterprise does not take in to account the current resale values as there is no immediate expectation of selling it. Moreover, depreciation on fixed assets is charge do the basis of the respected life rather than on their market values. When there is conclusive evidence that the business enterprise has a limited life, the accounting procedures should be appropriate to the expected terminal date of the enterprise. In such cases, the financial statements could clearly disclose the limited life of the enterprise and should be prepared from the ‘quitting concern’ point of view rather than from a ‘going concern’ point of view. 5. Dual Aspect Concept Dual aspect principle is the basis for Double Entry System of book-keeping. This concept is the core of accounting. According to this concept every business transaction has a dual aspect. All business transactions recorded in accounts have two aspects - receiving benefit and giving benefit. For example, when a business acquires an asset (receiving of benefit) it must pay cash (giving of benefit). 6. Revenue Realisation Concept According to this concept, revenue is considered as the income earned on the date when it is realised. Unearned or unrealised revenue should not be taken into account. The realisation concept is vital for determining income pertaining to an accounting period. It avoids the possibility of inflating incomes and profits. 7. Historical Cost Concept 11  Under this concept, assets are recorded at the price paid to acquire them and this cost is the basis for all subsequent accounting for the asset. For example, if a piece of land is purchased for Rs.5,00,000 and its market value is Rs.8,00,000 at the time of preparing final accounts the land value is recorded only for Rs.5,00,000. Thus, the balance sheet does not indicate the price at which the asset could be sold for. 8. Matching Concept Matching the revenues earned during an accounting period with the cost associated with the period to ascertain the result of the business concern is called the matching concept. It is the basis for finding accurate profit for a period which can be safely distributed to the owners. 9. Verifiable and Objective Evidence Concept This principle requires that each recorded business transactions in the books of accounts should have an adequate evidence to support it. For example, cash receipt for payments made. The documentary evidence of transactions should be free from any bias. As accounting records are based on documentary evidence which is capable of verification, it is universally acceptable. 1.1.8.2 Accounting Conventions 1. Convention of Conservatism It is a world of uncertainty. Hence, it is always better to pursue the policy of playing safe. This is the principle behind the convention of conservatism. According to this convention the accountant must be very careful while recognizing increases in an enterprise’s profits rather than recognizing decreases in profits. For this the accountants have to follow the rule, anticipate no profit, provide for all possible losses, while recording business transactions. It is on account of this convention that the inventory is valued at cost or market price which ever is less, i.e.When the market price of the inventories has fallen below its cost price it is shown at market price i.e. The possible loss is provided and when it is above the cost price it is shown at cost price i.e. The anticipated profit is not recorded. It is for the same reason that provision for bad and doubtful debts, provision for fluctuation in investments, etc., are created. This concept affects principally the current assets. 12 2. Convention of Full Disclosure: The emergence of joint stock company form of business organization resulted in the divorce between ownership and management. This necessitated the full disclosure of accounting information about the enterprise to the owners and various other interested parties. Thus the convention of full disclosure became important. By this convention it is implied that accounts must be honestly prepared and all material information must be adequately disclosed therein. But it does not mean that all information that some one desiresare to be disclosed in the financial statements. It only implies that there should be adequate disclosure of information which is of considerable value to owners, investors, creditors, government, etc. In sachar committee report (1978), it has been emphasized that openness in company affairs is the best way to secure responsible behaviour. It is in accordance with this convention that companies act, banking companies regulation act, insurance act etc., have prescribed proforma of financial statements to enable the concerned companies to disclose sufficient information. The practice of appending notes relating to various facts on items which do not find place in financial statements is also in pursuance to this convention. The following are some examples: (a) Contingent liabilities appearing as a note (b) Market value of investments appearing as a note (c) Schedule of advances in case of banking companies 3. Convention of Consistency: The aim of consistency principle is to preserve the comparability of financial statements. The rules, practices, concepts and principles used in accounting should be continuously observed and applied year after year. Comparisons of financial results of the business among different accounting period can be significant and meaningful only when consistent practices were followed in ascertaining them. For example, depreciation of assets can be provided under different methods, whichever method is followed, it should be followed regularly. However if introduction of a new technique results in inflating or deflating the figures of profit as compared to the previous methods, the fact should be well disclosed in the financial statement. 13 4. Convention of Materiality: The implication of this convention is that accountant should attach importance to material details and ignore insignificant ones. In the absence of this distinction, accounting will unnecessarily be over burdened with minute details. The question as to what is a material detail and what is not is left to the discretion of the individual accountant. Further, an item should be regarded as material if there is reason to believe that knowledge of it would influence the decision of informed investor. Some examples of material financial information are: fall in the value of stock, loss of markets due to competition, change in the demand pattern due to changing over moment regulations, etc. Examples of insignificant financial information are: rounding of income to nearest ten for tax purposes etc. Sometimes if it is felt that an immaterial item must be disclosed, the same may be shown as foot note or in parentheses is according to its relative importance. The materiality principle requires all relatively relevant information should be disclosed in the financial statements. Unimportant and immaterial information are either left out or merged with other items. To promote world-wide uniformity in published accounts, the International Accounting Standards Committee (IASC) has been set up in June 1973 with nine nations as founder members. The purpose of this committee is to formulate and publish in public interest, standards to be observed in the presentation of audited financial statements and to promote their world-wide acceptance and observance. IASC exist to reduce the differences between different countries’ accounting practices. This process of harmonisation will make it easier for the users and preparers of financial statement to operate across international boundaries. In our country, the Institute of Chartered Accountants of India has constituted Accounting Standard Board (ASB) in 1977. The ASB has been empowered to formulate and issue accounting standards, that should be followed by all business concerns in India. 1.1.9 Self Assessment Questions 1. What is corporate accounting? Explain its importance and scope. 2. Describe various body corporate. 3. Explain the various accounting concepts. 4. Briefly explain the various accounting conventions. 14  Lesson 1.2 Accounting Standards Learning objectives After studying this chapter, you will be able to: ♦ Understand the provisions of the Accounting Standards specified in the syllabus. 1.2 Introduction Accounting Standards (ASs) are written policy documents issued by expert accounting body or by government or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements. The accounting standards aim at improving the quality of financial reporting by promoting comparability, consistency and transparency, in the interests of users of financial statements. Good financial reporting not only promotes healthy financial markets, it also helps to reduce the cost of capital because investors can have faith in financial reports and consequently perceive lesser risks. 1.2.2 Overview International Accounting Standards Committee (IASC)was formed in 1973 to fulfill the need for standardising of accounting on a global scale. In India, the law of the land – the Companies Act and other statutes – envisages financial statements to be true and fair in including the financial position and working results of companies. What constitutes a “true and fair” view is defined neither by statute nor by case law. Thus it is quite possible for more than one set of financial statements to show simultaneously a true and fair view of a company’s performance. This lacuna has been sought to be overcome by the Institute of Chartered Accountants of India by constituting an Accounting Standard Board (ASB) on 21st April, 1997. The main function of ASB is to formulate different accounting standards after taking into consideration the applicable laws, customs, usages and business environment. 1.2.3List of Accounting Standards The Accounting Standards Board of the Institute of Chartered Accountants of India has issued 24 definitive standards as on 31st August, 2006. These are: AS-1. Disclosure of accounting policies. 15  AS-2. Valuation of inventories. AS-3. Changes in financial position. AS-4. Contingencies and events occurring after the Balance Sheet date. AS-5. Prior period and extraordinary items and changes in accounting policies. AS-6. Depreciation accounting. AS-7. Accounting for construction contracts. AS-8. Accounting for research and development. AS-9. Revenue recognition. AS-10. Accounting for fixed assets. AS-11. Accounting for the effect of changes in Foreign exchange rates. AS-12. Accounting for Government grants. AS-13. Accounting for investments. AS-14. Accounting for amalgamation. AS-15. Accounting for retirement benefits in the financial statements of employees. AS-16. Borrowing costs. AS-17. Segment Reporting. AS-18. Related Party Disclosure. AS-19. Leases. AS-20. Earnings Per Share. AS-21. Consolidated financial Statements. AS-22. Accounting for Taxes on Income. AS-23. Accounting for investments in consolidated financial statements. AS-24. Discontinuing operations. 1.2.4AS-4 (Revised): Contingencies and Events Occurring After the Balance Sheet Date Introduction This standard deals with the treatment in financial statements of Contingencies, and Events occurring after the balance sheet date. The following subjects, which may result in contingencies, are excluded from the scope of this statement in view of special considerations applicable to them: Liabilities of life assurance and general insurance enterprises arising from policies issued; 16 Definitions The following terms are used in this Statement with the meanings specified: A contingencyis 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 dateare those significant events, both favourable and unfavorable, 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. Two types of events can be identified: (a) Those which provide further evidence of conditions that existed at the balance sheet date; and (b) Those which are indicative of conditions that arose subsequent to the balance sheet date. Contingencies The term “contingencies” used in this statement is restricted to conditions or situations at the balance sheet, the financial effect of which is to be determined by future events which may or may not occur. Estimates are required for determining the amounts to be stated in the financial statements for many on-going and recurring activities of an enterprise. One must, however, distinguish between an event which is certain and one which is uncertain. The fact that an estimate is involved does not, of itself, create the type of uncertainty which characterizes a contingency. For example, the fact that estimates of useful life are used to determine depreciation does not make depreciation a contingency; the eventual expiry of the useful life of the assets is not uncertain. Also, amounts owed for services received are not contingencies as defined, even though the amounts may have been estimated, as there is nothing uncertain about the fact that those obligations have been incurred. The uncertainty relating to future events can be expressed by range of outcomes. This range may be presenting as qualified probabilities, but in most circumstances, this suggests a level of precision that is not supposed by the available information. The possible outcomes can, therefore, usually be generally described except where reasonable quantification is practicable. The estimates of the outcome and of the financial effect of contingencies are determined by the judgment of the management of 17 the enterprise. This judgment is based on consideration of information available up to date on which the financial statements are approved and will include a review of events occurring after the balance sheet date, supplemented by experience of similar transactions and, in some cases, reports from independent experts. Accounting Treatment of Contingent Losses The accounting treatment of a contingent loss is determined by the expected outcome of the contingency. If it is likely that a contingency will result in a loss to the enterprise, then it is prudent to provide for that loss in the financial statements. The estimation of the amount of a contingent loss to be provided for the financial statements may be based on information referred to in paragraph 4.4. If there is conflicting or insufficient evidence for estimating the amount of a contingent loss, then disclosure is made of the existence and nature of the contingency. A potential loss to an enterprise may be reduced or avoided because a contingent liability is matched by a related counter-claim or claim against a third party. In such cases, the amount of the provision is determined after taking into account the probable recovery under the claim if no significant uncertainty as to its measurability or collectability exists. Suitable disclosure regarding the nature and gross amount of the contingent liability is also made. The existence and amount of guarantees, obligations arising from discounted bills of exchange and similar obligations undertaken by an enterprise are generally disclosed in financial statements by way of note, even though the possibility that a loss to the enterprise will occur, is remote. Provisions for contingencies are not made in respect of general or unspecified business risks since they do not relate to conditions or situations existing at the balance sheet date. Accounting treatment of contingent gains are not recognized in financial statements since their recognition may result in the recognition of revenue which may never be realised. However, when the realization of a gain is virtually certain, then such gain is not a contingency and accounting for the gain is appropriate. Determination of the amounts at which contingencies are included in financial statements The amount at which a contingency is stated in the financial statements is based on the information which is available at the date on which the financial statements are 18 approved. Events occurring after the balance sheet date that include that an asset may have been impaired, or that a liability may have existed, at the balance sheet date are, therefore, taken into account in identifying contingencies and in determining the amounts at such contingencies are included in financial statements. In some cases, each contingency can be separately identified, and the special circumstances of each situation considered in the determination of the amount of the contingency. A substantial legal claim against the enterprise may represent such a contingency. Among the factors taken into account by management in evaluating such a contingency are the progresses of the claim at the date on which the financial statements are approved, the opinions, wherever necessary, of legal experts or other advisers, the experience of the enterprise in similar cases and the experience of other enterprises in similar situations. If the uncertainties which created a contingency in respect of an individual transaction are common to a large number of similar transactions, then the amount of the contingency need not be individually determined, but may be based on the group of similar transactions. An example of such contingencies may be the warranties for products sold. These costs are usually incurred frequently and experience provides a means by which the amount of the liability or loss can be estimated with reasonable precision although the particular transactions that may result in a liability or a loss are not identified. Provision for these costs results in their recognition in the same accounting period in which the related transactions took place. Events Occurring after Balance Sheet Date Events which occur between the balance sheet date and the date on which the financial statements are approved, may indicate the need for adjustments to assets and liabilities as at the balance sheet date or may require disclosure. Adjustments to assets are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date. For, example, an adjustment may be made for a loss on a trade receivable account which is confirmed by the insolvency of a customer which occur after the balance sheet date. Adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events are not relate to conditions existing at the balance sheet date. An example is the decline in market value of investments between the balance sheet date and the date on which the financial statements are approved. Ordinary fluctuations in market values do not normally relate to 19 the condition of the investments at the balance sheet date, but reflect circumstances which have occurred in the following period. Events occurring after the balance sheet date which do not affect the figures stated in the financial statements would not normally require disclosure in the financial statements although they may require in the report of the approving authority to enable users of financial statements to make proper evaluations and decisions. There are events which, although they take place after the balance sheet date, are sometimes reflected in the financial statements because of statutory requirements or declared by the enterprise after the balance sheet date in respect of the period covered by the financial statements. Even occurring after the balance sheet date may include that the enterprise ceases to be a going concern. A deterioration in operating results and financial position, or unusual changes affecting the existence or substratum of the enterprise after the balance sheet date (e.g., destruction of a major production plant by a fire after the balance sheet date) may indicate a need to consider whether it is proper to use the fundamental accounting concept of going concern in the preparation of the financial statements. Disclosure The disclosure requirements herein referred to apply only in respect of those contingencies or events which affect the financial position to a material extent.If a contingent loss is not provided for, its nature and an estimate of its financial effect are generally disclosed by way of note unless the possibility of a loss is remote. If a reliable estimate of the financial effect cannot be made, this fact is disclosed. When the events occurring after the balance sheet date are disclosed in the report of the approving authority*, the information given comprises the nature of the events and an estimate of their financial effects or a statement that such an estimate cannot be made. Contingencies The amount of a contingent loss should be provided by a charge in the statement of profit and loss if: a. It is probable that future events will confirm that, after taking into account may related probable recovery, an asset has been impaired or a liability has been incurred as at the balance sheet date, and b. A reasonable estimate of the amount of the resulting loss can be made. 20 The existence of a contingent loss should be disclosed in the financial statements if either of the conditions in this standard is not met, unless the possibility of a loss is remote. Contingent gains should not be recognised in the financial statements. Events Occurring after Balance Sheet Date Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumptions of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate. Dividends stated to be in respect of the period covered by the financial statements, which are proposed or declared by the enterprise after the balance sheet date but before approval of the financial statements, should be adjusted.Disclosure should be made in the report of the approving authority of those occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise. Disclosure If disclosure of contingencies is required by paragraph 11 of this statement, the following information should be provided: a. The nature of the contingency; b. The uncertainties which may affect the future outcome; c. An estimate of the financial effect or a statement that such an estimation cannot be made. If disclosure of events occurring after the balance sheet date in the report of the approving authority is required by paragraph 15 of this statement, the following information should be provided. a. The nature of the event; b. An estimate of the financial effect or a statement that such an estimate cannot be made. 1.2.5 AS-11 (Revised): Accounting for the Effects of Changes in Foreign Exchange Rates This Standard should be applied by an enterprise: In accounting for transactions in foreign currencies and in translating the financial statements of foreign branches for inclusion in the financial statements of the enterprise. 21 Definitions The following terms are used in this Statement with the meanings specified: Reporting currency is the currency used in presenting the financial statements. Foreign currency is a currency other than the reporting currency of an enterprise. Exchange rate is the ratio for exchange of two currencies as applicable to the realization of a specific assets or the payment of a specific liability or the recording of specific transaction or a group of inter-related transactions. Average rate is the mean of the exchange rates in force during a period. Forward rate is the specified exchange rate for exchange of two currencies at a specified future date. Closing rate is the exchange rate at the balance sheet date. Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money, e.g., cash, receivables, payables. Non-monetary itemsare assets and liabilities other than monetary items e.g., fixed assets, inventories, investments in equity shares. Settlement date is the date at which a receivable is due to be collected or payable is due to be paid. Recoverable amount is the amount which the enterprise expects to recover from the future use of an asset, including its residual value on disposal. Foreign Currency Transactions Exchange Rate A multiplicity of forigen exchange rates is possible in a given situation. In such a case, the term assets, ‘exchange rate’ refers to the rate which is applicable transaction.The term ‘exchange rate’ is defined in this Statement with reference to a specific asset, liability or transactions are considered inter-related transactions. For the purpose of this statement, two or more transaction or a group of inter-related if, by virtue of being set off against one another or otherwise, they affect the net amount of reporting currency that will be available on, or required for, the settlement of those transactions. Although the exchange rates applicable to realizations and disbursements in a foreign currency may be different, an enterprise may, where legally permissible, partly use the receivables to settle the payables and receivables are reported at the exchange rate as applicable to the net amount of receivable or payable. Further, where realizations are deposited into, and disbursements made out of, a foreign currency bank account, all the 22 transactions during a period (e.g., a month) are reported at a rate that approximates the actual rate during that period. However, where transactions cannot be considered inter- related as stated above, by set-off or otherwise, the receivables and payables are reported at the rates applicable to the respective amounts even where these are receivable from, or payable tp the same forigen party. Recording Transactions on Initial Recognition A transaction in a forigen currency should be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction, except as stated above in respect of inter-related transactions. A transaction in a foreign currency is recorded in the financial records of an enterprise as at the date on which the transaction occurs, normally using the exchange rate at that date. This exchange rate is often referred to as the spot rate. For practical reasons, rate that approximates the actual rate is often used, for example, an average rate for all transactions during the week or month in which the transactions occur. However, if exchange rates fluctuate significantly, the use of the average rate for a period is unreliable. Reporting Effects of Charges in Exchange Rates Subsequent to Initial Recognition At each balance sheet date: (a) Monetary items denominated in a foreign currency (e.g., foreign currency notes, balances in bank accounts denominated in a foreign currency, and receivables, payables and loans denominated in a foreign currency) should be reported using the closing rate. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realised from, or required to disburse, a foreign currency monetary item at the balance sheet date, e.g., where there are restrictions on remittances or where the closing rate is unrealistic and it is not possible to effect an exchange of currencies at the rate at the balance sheet date. In such circumstances, the relevant monetary item should be reported in the reporting currency at the amount which is likely to be realised from, or required to disburse, such item at the balance sheet date; 23  (b) Non-monetary items other than fixed assets, which are carried in terms of historical cost denominated in a forigen currency, should be reported using the exchange rate at the date of the transaction; (c) Non-monetary items other than fixed assets, which are carried in terms of fair value or other similar valuation, e.g., net realisable value, denominated in a forigen currency should be reported using the exchange rates that existed when the values were determined (e.g., if the fair values is determined as on the balance sheet date, the exchange rate on the balance sheet date may be used); and (d) The carrying amount of fixed assets should be adjusted as stated in paragraphs 10 and 11 below. Recognition of Exchange Differences Paragraphs 9 to 11 set out the accounting treatment required by this statement in respect of exchange differences on foreign currency transactions.Exchange differences arising on foreign currency transactions should be recognised as income or as expenses in which they arise, except as stated in paragraphs 10 and 11 below.Exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which are carried in items of historical cost, should be adjusted in carrying amount of the respective fixed assets. The carrying amount of such fixed assets should, to the extent not already so adjusted or otherwise accounted for, also be adjusted to account for any increase or decrease in the liability of the enterprise, as expressed in the reporting currency by applying the closing rate, for making payment towards the whole or a part of the cost of the assets or for repayment of the whole or a part of the monies borrowed by the enterprise from any person., directly or indirectly, in foreign currency specifically for the purpose of acquiring those assets.The carrying amount of fixed assets which are carried in terms of revalued amounts should also be adjusted in the manner described in paragraph 10 above. However, such adjustment should not result in the net book value of a class of revalued fixed assets exceeding the recoverable amount of assets of that class, the remaining amount of the increase in liability, if any, being debited to the revaluation reserve, or to the profit and loss statement in the event of inadequacy or absence of the revaluation reserve.An exchange difference results when there is a change rate between the transaction date and the date of settlement of any monetary items arising from forigen currency transaction. When the transaction is settled within the 24 same accounting period as that in which it occurred, the entire exchange difference assets arises in that period. However, when the transaction is not settled in the same accounting period as that in which it accrued, the exchange difference arises over more than one accounting period. Forward Exchanges Contracts An enterprise may enter into a forward exchange contract, or another financial instrument that is in substance a forward exchange contract, to establish the amount of the reporting currency required or available at the settlement date of a transaction. The difference between the forward rate and the exchange rate at date of transaction should be recognised as income or expense over the life of the contract, except in respect of liabilities incurred for acquiring fixed assets, in which case, such difference should be adjusted in the carrying amount of the respective fixed assets. The difference between the forward rate and the exchange rate at the inception of a forward exchange contract is recognised as income or expense over the life of the contract. The only exception is in respect of forward exchange contracts related to liabilities in foreign currency incurred for acquisition of fixed assets.Any profit or loss arising on cancellation or renewal of a forward exchange contract should be recognised as income or as expense for the period, except in case of a forward exchange contract relating to liabilities incurred for acquiring fixed assets, in which case, such profit or loss should be adjusted in the carrying amount of the respective fixed assets. Depreciation Where the carrying amount of depreciable assets has undergone a change in accordance with paragraph 10 or 11 or 13 or 15 of this statement, the depreciation on the revised unamortized depreciable amount should be provided in accordance with Accounting Standard (AS) 6, Depreciation Accounting. Translation of the Financial Statements of Foreign Branches The need for foreign currency translation arises in respect of the financial statements of foreign branches of the parent enterprise.The financial statements of a foreign branch should be translated using the procedures in paragraphs 19 to 25 of this statement.Revenue items, except opening and closing inventories and depreciation, should be translated into reporting currency of the reporting enterprise at average rate. In appropriate circumstances, weighted average rate may be applied e.g., where the income or expenses are not earned or expenses are not earned or incurred evenly during the 25 accounting period (such as in the case of seasonal business) or where there are exceptionally wide fluctuations in exchange rates during the accounting period. Opening and closing inventories should be translated at the rates prevalent at the commencement and close respectively of the accounting period. Depreciation should be translated at the rates used for the translation of the assets on which depreciation is calculated. Monetary items should be translated using the closing rate. However, in circumstances where the closing rate does not reflect with reasonable accuracy the amount in reporting currency that is likely to be realised from, or required to disburse, the foreign currency item at the balance sheet date, a rate that reflects approximately the likely realization or disbursement as aforesaid should be used. Non-monetary items other than inventories and fixed assets should be translated using the exchange rate at the date of the transaction. Fixed assets should be translated using the exchange rate at the date of the transaction. Where there has been increase or decrease in the liability of the enterprise, as expressed in Indian rupees by applying repayment of the whole or a part of the cost of a fixed asset or for repayment of the whole or a part of monies borrowed by the enterprise from any person, directly or indirectly, in forigen currency specifically for the purpose of acquiring a fixed asset, the amount by which the liability is so increased or reduced during the year, should be added to, or reduced from, the historical cost of the fixed asset concerned. Balance in ‘head office account’, whether debt or credit, should be reported at the amount of the balance in the ‘Branch Account’ in the books of the head office after adjusting for unresponded transactions.The net exchange difference resuming from the transaction of items in the financial statements of a forigen branch should be recognised as income or as expense for the period, except to the extent adjusted in the carrying amount of the related fixed assets in accordance with paragraph 22 above.Contingent liabilities should be translated into the currency of the enterprise at the closing rate. The translation of contingent liabilities does not result in any exchange difference as defined in this statement. Disclosures An enterprise should disclose – (i) The amount of exchange differences included in the net profit or loss for the period; 26  (ii) The amount of exchange differences adjusted in the carrying amount of fixed assets during the accounting period; and (iii) The amount of exchange differences in respect of forward exchange contracts to be recognised in the profit or loss for one or more subsequent accounting periods, as required by paragraph 13. (iv) Disclosure is also encouraged of an enterprise’s foreign currency risk management policy. 1.2.6 AS -12: Accounting for Government Grants (AS) This Standard deals with accounting for government grants. Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, etc. This Standard does not deal with: i) The special problems arising in accounting for government grants in financial statements reflecting the effects of changing prices or in supplementary information of a similar nature. ii) Government assistance other than in the form of government grants. iii) Government participation in the ownership of the enterprise. Definitions The following terms used in this statement with the meanings specified: Government refers to government, government agencies and similar bodies whether local, national or international. 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 here a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the enterprise. Explanation 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 therefore 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. 27 Accounting Treatment of Government Grants Capital Approach versus Income Approach Two broad approaches may be followed for the accounting treatment of government grants: the ‘capital approach’, under which a grant is treated as part of shareholders’ funds, and the ‘incomeapproach’, under which a grant is taken to income over one or more periods. Those in support of the ‘capital approach’ argue as follows: i. Many government grants are in the nature of promoters’ contribution, i.e., they are given with the reference to the total investment in an undertaking or by way of contribution towards its total capital outlay and no repayment is ordinarily expected in the case of such grants. These should, therefore, be credited directly to shareholder’s funds. ii. It is inappropriate to recognize government grants in the profit and loss statements, since they are not earned but represent an incentive provided by government without related costs. Arguments in support of the ‘income approach’ are as follows: i. Government grants are rarely gratuitous. The enterprise earns grants through compliance with their conditions and meeting the envisaged. They should therefore be taken to income and matched with the associated costs which the grant is intended to compensate. ii. As income tax and other taxes are charges against income, it is logical to deal also with government grants, which are an extension of fiscal policies, in the profit and loss statement. iii. In case grants are credited to shareholders’ funds, no correlation is done between the accounting treatment of the grant and the accounting treatment of the expenditure to which the grant relates. It is generally considered appropriate that accounting for government grant should be based on the nature of the relevant grant. Grants which have the characteristics similar to those of promoters’ contribution should be treated as part of shareholders’ funds. Income approach may be more appropriate in the case of other grants. It is fundamental to the income approach that government grants be recognised in the profit and loss statement on a systematic and rational basis over the periods 28 necessary to much them with the related costs, Income recognition of government grants on a receipts basis is not in accordance with the accrual accounting assumption (see Accounting Standards (AS) 1, Disclosure of Accounting Policies). In most cases, the periods over which an enterprise recognizes the costs or expenses related to a government grant are readily ascertainable and thus grants in recognition of specific expenses are taken to income in the same period as the relevant expenses. Recognition of Government Grants Government grants available to the enterprise are considered for inclusion in accounts: i. Where there is reasonable assurance that the enterprise will comply with the conditions attached to them; and ii. Where such benefits have been earned by the enterprise and it is reasonably certain that the ultimate collection will be made. Mere receipt of a grant is not necessarily conclusive evidence that conditions attaching to the grant have been or will be fulfilled. An appropriate amount in respect of such earned benefits, estimated on a prudent basic, is credited to income for the year even though the actual amount of such benefits may be finally settled and received after the end of the relevant accounting period. A contingency related to government grant, arising after the grant has been recognised, is treated in accordance with accounting standard (AS) 4. Contingencies and events occurring after the balance sheet date. In certain circumstances, a government grant is awarded for the purpose of giving immediate financial support to an enterprise rather than as an intensive to undertake specific expenditure. Such grants may be confined to an individual enterprise and may not be available to a whole class of enterprise. These circumstances may warrant taking the grant into income in the period in which the enterprise qualifies to receive it, as an extraordinary item if appropriate. Government grants may become receivable by an enterprise as compensation for expenses or losses incurred in a previous accounting period. Such a grant is recognised in the income statement of the period in which it becomes receivable, as an extraordinary item if appropriate (See Accounting Standard (AS) 5, Prior Period and Extraordinary Item and Changes in Accounting Periods). 29 Non-monetary Government Grants Government grants may take the form of non-monetary assets, such as land or other resources, given at concessional rates. In these circumstances, it is usual to account for such assets at their acquisition cost. Non-monetary assets given free of cost are recorded at a nominal value. Presentation of Grants Related to Specific Fixed Assets Grants related to specific fixed assets are government grants whose primary condition is that an enterprise qualifying for them should purchase, contract or otherwise acquire such assets. Other conditions may also be attached restricting the type or location of the assets or the periods during conditions may also be acquired or held. There are two methods of presentation in financial statements of grants related to specific fixed assets are regarded as acceptable alternatives. Under first method, the grant is shown as deduction from the gross value of the assets concerned in arriving at its book value. The grant is thus recognised in the P&L statement over the useful life of a depreciable asset by way of a reduced depreciation charge. Where the grant equals the whole, or virtually the whole, of the cost of the assets; the asset is shown in the Balance Sheet at a nominal value.Under the second method, grants related to depreciable assets are treated as deferred income which is recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset. Such allocation to income is usually made over the periods and in the proportions in which depreciation on related assets is charged. Grants related to non-depreciable assets are credited to capital reserve assets is charged. Grants related to non depreciable assets are credited to capital reserve under this method, as there is usually no charge to income in respect of such assets. However, if a grant related to a non-depreciable asset requires the fulfillment of certain obligations, the grant is credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income is suitably disclosed in the balance sheet pending its apportionment to profit and loss Account. For example, in the case of a company, it is shown after ‘Reserves and Surplus’ but before ‘Secured Loans’ with a suitable description, e.g. ‘Deferred government grants’. The purchase of assets and the receipts of related grants can cause major movements in the cash flow of an enterprise. For this reason and in order to show the gross investment in assets, such movements are often disclosed as separate items in the 30 statement of changes in financial position regardless of whether or not the grant is deducted from the related asset for the purpose of Balance sheet presentations. Presentation of grants related to revenue Grants related to revenue are sometimes presented as a credit in the profit and loss statement, either separately or under a general heading such as ‘other Income’. Alternatively, they are deducted in reporting the related expense. Supporters of the first method claim that it is inappropriate to net income and expense items and that separation of the grant from the expense facilities comparison with other expenses not affected by a grant. For the second method, it is argued that the expense might well not have been incurred by the enterprise if the grant had not been available and presentation of the expense without offsetting the grant may therefore be misleading. Presentation of Grants of the nature of Promoters’ contribution Where the government grants are of the nature of promoters’ contribution, i.e., they are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay (for example, central investment subsidy scheme) and no repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve which can be neither distributed as dividend nor considered as deferred income. Refund of government grants Government grants sometimes become refundable because certain conditions are not fulfilled. A government grant that becomes refundable is treated as an extraordinary item (see Accounting Standard (AS) 5, Prior Period and Extraordinary Items and Changes in Accounting Policies). The amount refundable in respect of a government grant related to revenue is applied first against any unamortised deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged immediately to profit and loss statement. The amount refundable in respect of a government grant related to a specific fixed asset is recorded by increasing the book value of the asset or by reducing the deferred income balance, as appropriate, by the amount refundable. In the first alternative, i.e. where the book value of the asset is increased, depreciation on the 31 revised book value is provided prospectively over the residual useful life of the asset. Where a grant which is in the nature of promoters’ contribution becomes refundable, in part or in full, to the government on non-fulfillment of some specified conditions, the relevant amount recoverable by the government is reduced from the capital reserve. Disclosure The following disclosures are appropriate: (i) The accounting policy adopted for government grants, including the methods of presentation in the financial statements; (ii) The nature and extent of government grants recognised in the financial assessments, including grants of non-monetary assets at a concessional rate or free of cost. 1.2.7 AS - 16: Borrowing Costs The objective of this standard to prescribe the accounting treatment for borrowing costs. Thisstandard should be applied in according for borrowing costs. This sstandard does not detail with the actual or imputed cost of owners’ equity, including preference share capital not classified not as a liability. Definitions The following terms are used in this statement with the meanings specified. Borrowing costs are inherent and other costs incurred by an enterprise in commotion with the borrowing of funds. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Borrowing costs may include: (a) Interest and commitment charges on bank borrowings and other short-term and long- term borrowings; (b) Amortisation of discounts or premiums relating to borrowings; (c) Amortisation of ancillary costs incurred in connection with the arrangements of borrowings; (d) Finance charges in respect of assets acquired under finance leases or under other similar arrangements; and 32 (e) Exchange differences arising from forigen currency borrowings to the extent that they are regarded as an adjustment to interest costs. Examples of qualifying assets are manufacturing plants, power generation facilities, inventories that require a substantial period of time to bring them to a saleable condition, and investment properties. Other investments, and those inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired also are not qualifying assets. Recognition Borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets should be capitalised as part of the cost of that asset. The amount of borrowing costs should be recognised as an expense in the period in which they are incurred.Borrowing costs are capitalised as part of the cost a qualifying asset when it is possible that they will result in future economic benefits to the enterprise and can be measured reliably. Other borrowing costs are recognised as an expense in the period in which they are incurred. Borrowing Costs Eligible for Capitalisation The borrowing costs that are attributable to the acquisition, construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying assets had not been made. When an enterprise borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified. It may be difficult to identify a direct relationship between particular and qualifying asset and to determine the borrowings that could otherwise have been avoided. Such a difficulty occurs, for example, when the financing activity of an enterprise is co-ordinated centrally or when range of debt instruments are used to borrow funds at varying rates of interest and such borrowings are not readily identifiable with a specific qualifying asset. As a result, the determination of the amount of borrowing costs that are directly attributable to the acquisition, construction or production of qualifying asset is often difficult and the exercise of judgment is required. 33  To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings. The financing arrangements for a qualifying asset may result in an enterprise obtaining funds and incurring associated borrowing costs before some or all of the funds are used for expenditure on the qualifying asset. In such circumstances, the funds are often temporary invested pending their expenditure on the qualifying asset. In determining the amount of borrowing costs eligible for capitalisation during a period, any income earned on the temporary investment of those borrowings is deducted from the borrowing costs incurred. To extant that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation should be determined by applying a capitalisation rate to the expenditure on that asset. The capitalisation rate should be the weighted average of the borrowing capitalised during a period should not exceed the amount of borrowing costs incurred during that period. Excess of the Carrying Amount of the Qualifying Asset over Recoverable Amount When the carrying amount or the expected ultimate costs of the qualifying asset exceed its recoverable amount or net realisable value, the carrying amount is written down off in accordance with the requirements of other Accounting Standards. In certain circumstances, the amount of the write-down or write-off is written back in accordance with those other According Standards. Commencement of Capitalisation The capitalisation of borrowing costs as part of the cost of a qualifying asset should commence when all the following conditions are satisfied: (a) Expenditure for the acquisition, construction or production of a qualifying asset is being incurred; (b) Borrowing costs are being incurred; and (c) Activities that are necessary to prepare the asset for its intended use or sale are in progress. 34  Expenditure on a qualifying asset includes only such expenditure that has resulted in payments of cash, transfers of other assets or the assumption of interest- bearing liabilities. Expenditure is reduced by any progress payments received and grants received in connection with the asset (see accounting standard 12, according to Government Grants). The average carrying amount of the asset during a period, including borrowing costs previously capitalized, is normally a reasonable approximation of the expenditure to which the capitalisation rate is applied in that period. The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of asset. They include technical and administrative work prior to the commencement of physical construction, such as the activities associated with obtaining permits prior to the commencement of physical construction of the physical construction. However, such activities exclude the holding of an asset when no production or development that changes the asset’s condition is taking place. For example, borrowing costs incurred while land under development are capitalised during the period in which activities related to the development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalization. Suspension of Capitalisation Capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted.Borrowing costs may be incurred during an extended period in which the activities necessary to prepare an asset for intended use are interrupted. Such costs are costs of holding partially completed assets and do not qualify the capitalisation. Disclosure The financial statements should disclose; (a) The accounting policy adopted for borrowing costs; and (b) The amount of borrowing costs capitalised during the period. 1.2.8AS – 19 – Leases The objective of this standard is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures in relation to finance leases and 35 operating leases. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership, title may or may not eventually be transferred. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership. Leases in the Financial Statement of Leases (a) Financial Leases: In this case at the inception of a financial lease, the lease should recognise the lease as an asset and a liability. Such recognition should recognition should be at an amount equal to the fair value of the leased asset at the inception of the lease. However, if the fair value of the leased asset exceeds the present value of the minimum lease payments from the stand point of the lessee, the amount recorded as an asset and a liability should be the present value of the minimum lease payment from the stand point of the lessee. The lease payments should be apportioned between the finance charge and the reduction of the outstanding liability. The finance change should be allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining of the liability of each period. Also a finance lease gives rise to depreciation expense for the asset as well as finance expenses for each accounting period. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset should be fully depreciated over the lease term or its useful life whichever is shorter. (b) Operating Leases: Lease payments under an operating lease should be recognised as an expenses in the statement of profit and loss on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit. Leases in the Financial Statements of Lessors (a) Finance Leases: the lessor should recognise assets given under a finance lease in its balance sheet as a receivable at an amount equal to the net investment in the lease. The recognition of finance income should be based on a pattern reflecting a constant periodic rate of return on the net investment of the lessor outstanding in respect of the finance lease. 36  (b) Operating Leases: The lessor should present an asset given under operating lease in its balance sheet under fixed assets. The lease income from operating leases should be recognised in the statement of the profit and loss on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern in which benefit derived from the use of the leased asset is diminished. The depreciation on leased should be on a basis consistent with the normal depreciation policy of the lessor company. Sale and Lease back transaction If a sale and lease back transaction results in a finance lease, any excess or deficiency of sales proceeds over the carrying amount should not be immediately recognised as income or loss in the financial statements of a seller lessee, instead it should be deferred and amortised over the lease term in proportion to the depreciation of the leased asset. If a sale and leaseback transaction results in an operating lease, and it is clear that the transaction is established at fair value, any profit or loss should be recognised immediately. 1.2.9AS -20 – Earning Per Share Earning per share (EPS) is a financial ratio that gives the information regarding earning available to each equity share. This accounting standard gives computational methodology for determination and presentation of earning per share on the face of the statement of profit and loss account for each class of equity shares that has a different right to share in the net profit for the period. An enterprise should present basic and audited earning per share with equal prominence for all periods presented. The standard also requires that an enterprise to present basic and diluted earnings per share even if the amounts disclosed are negative i.e. a loss per share. Basic earnings per share should be calculated by dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period. For the purpose of calculating basic earnings per share, the net profit or loss for the period after deducting preference dividends and any attributable tax thereof. For the purpose of calculating basic earnings per share, the number of equity shares should be the weighted average number of equity shares outstanding during the period. The weighted average number of equity shares 37 outstanding during the period reflect the fact that the amount of shareholders capital may have varied during the period as a result of a larger or lessor number of shares outstanding at any time. It is the number of equity shares bought issued during the period multiplied by the time-weighting factor. Diluted earnings per share is calculated when there are potential equity shares in the structure of the enterprise. Potential equity share are those financial instruments which entitle the holder to the right of equity shares like convertible debentures, convertible preference shares, options warrents etc. for the purpose of calculating diluted earnings per share, thr net profit and loss for the period attributable to equity shareholders and weighted average number of shares outstanding during the period should be adjusted for the effect of all dilutive equity shares. The weighted average number of equity shares outstanding during the period is increased by the weighted average number of additional equity shares which would have been outstanding the conversion of all dilutive equity shares. Potential equity shares should be treated as dilutive when, and only when, their conversion to equity shares would decrease net profit per share from continuing ordinary operations. Potential equity shares are anti-dilutive when their conversion to equity shares would be increased earnings per share from continuing ordinary activities or decrease loss per share from continuing ordinary activities. The effect of anti-dilutive potential equity shares are ignored in calculating diluted earnings per share. An enterprise should be disclose the following: (i) The amounts used as the numerators in calculating basic and diluted earnings per share, and a reconciliation of those amounts to the net profit or loss for the period; (ii) The weighted average number of equity shares as the denominator in calculating basic and diluted earnings per share, and a reconciliation of these denominators to each other; and (iii) The nominal value of shares along with the earnings per share figures. 1.2.10AS – 26 – Intangible Assets The standard defines an intangible asset as an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. An intangible asset should be recignised if, and only if; 38  (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 profitability 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 per the standard an intangible asset should initially be measured at cost. Internally generated goodwill should not be recognised as an asset. Intangible asset arising from research (or from the research phase of an internal project) should not be recognised as an asset. Expenditure on research should be recognised as an expense when it is incurred. An intangible asset from development should be recognised if and only if an enterprise can demonstrate all the following: (a) The technical feasibility of complete the intangible asset so that it will be available for use or sale; (b) Its intention to complete the intangible asset and used or sell it; (c) Its ability to use or sell the intangible asset; (d) How the intangible asset will generate probable future economic benefits. Among other things, the enterprise should demonatrate the existence of a market for the output of the intangible asset or the intangible asset itself or; if it is to be used internally, the usefulness of the intangible asset; (e) The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and (f) Its ability to measure the expenditure attributable to the intangible asset during its development reliably. This accounting standard takes the view that expenditure on internally generated brands, mastheads, publishing titles, customer lists items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognised assets. Expenditure on an intangible item that was initially recognised as an expense by a reporting enterprise in previous annual financial statements or interim financial reports should be recognised as part of the cost of an intangible asset at a later date. 39 Enterprise may incur expenditure on intangible assets after these intangible are recognised in the book. The standard prescribes the conditions when such expenses should be capitalised and included in the cost of intangible. (a) Subsequent expenses increase the future economic benefits of intangible; (b) Subsequent expenses can be measured and attributed to the asset reliability. If these conditions are not met, the subsequent expenses after initial recognition shall be expensed and not be capitalised. After initial recognition, an intangible asset should be carried at its less any accumulated amortisation and accumulated impairment losses. The accounting standard states that the depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable presumption that the asset is available for use. Amortisation should commence when the asset is available for use. If control over the future economic benefits from an intangible asset is achieved through legal rights that have granted for a finite period, the useful life of the intangible asset should not exceed the period of the legal rights unless; (a) The legal rights are renewable; and (b) Renewal is virtually certain. The amortisation method used should reflect the pattern in which the assets economic benefits are consumed by the enterprise. If that pattern cannot be determined reliably, the straight-line method should be used. The amortisation charge for each period should be recognised as an expense unless another accounting standard permits or requires it to be included in the carrying amount of another asset. The residual value of an intangible asset should be assumed to be unless; (a) There as a commitment by a third party to purchase the asset at the end of its useful life; or (b) There is an active market for the asset and; (i) Residual value can be determined by reference to that market; and (ii) It is probable that such a market will exist at the end of the asset’s useful life’ The amortisation period and the amortisation method should be reviewed at least at each financial year end. 40 The financial statements should disclose the following for each class of intangible asset, distinguishing between internally generated intangible asset and other intangible asset; (a) The useful lives or the amortisation rates used; (b) The amortisation methods used; (c) The gross carrying amount and the accumulated amortisation at the beginning and end of the period; (d) A reconciliation of the carrying amount at the beginning and end of the period. 1.2.11AS -29 – Provisions, Contingent Liabilities and Contingent Assets A provision is a liability, which can be measured only by using a substantial degree of estimation. A contingent liability is: (a) A possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or (b) A present obligation that arises from past events but is not recognised because: (i) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) A reliable estimate of the amount of the obligation cannot be made. A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not only wholly within the control of the enterprise. This standard specifies that a provision should be recognised when: (a) An enterprise has a present obligation as a result of past event; (b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) A reliable estimation can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised.An enterprise should not recognise a contingent liability or contingent asset. The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date. The amount of a provision should not be discounted 41 to its present value. Future events that may affect the amount required to settle an obligation should be reflected in the amount of a provision where there is sufficient objective evidence that they will occur. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, th reimbursement should be recognised when, and only when, it is virtually certain that reimbursement will be reviewed if the enterprise settle the obligation. The reimbursement should be treated as a separate asset. The amount recognised for the reimbursement should not exceed the amount of the provision. In the statement of profit and loss, the expense relating to a provision may be presented net of the amount recognised for a reimbursement. Provisions should not be recognised for future operating losses. For each class of provision, an enterprise should disclose the following: (a) The carrying amount at the beginning and end of the period; (b) Additional provisions made in the period, including increases to existing provisions; (c) Amounts used during the period; and (d) Unused amounts reversed during the period. In addition an enterprise should also disclose the following for each class of provision. (a) A brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits. (b) An indication of the uncertainties about those outflows. Where necessary to provide adequate information, an enterprise should disclose the major assumptions made concerning future events, and (c) The amount of any expected reimbursement stating the amount of any asset that has been recognised for that expected reimbursement. 1.2.12 Self Assessment Questions 1. Explain shortly the list of accounting standards. 2. Discuss the ac