accounting standards new

8/8/2019 Accounting Standards New

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Standardize the diverse accounting policiesStandardize the diverse accounting policies

Add reliability to the financial statementsAdd reliability to the financial statements

Eradicate baffling variations in treatment ofEradicate baffling variations in treatment ofaccounting aspectsaccounting aspects

Facilitate interFacilitate inter--firm comparisonfirm comparison


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AS 1 Disclosure of Accounting PoliciesAS 1 Disclosure of Accounting Policies

AS 2 Valuation of InventoriesAS 2 Valuation of Inventories

AS 3 Cash Flow StatementAS 3 Cash Flow Statement

AS 4 Contingencies and Events Occurring after theAS 4 Contingencies and Events Occurring after theBalance Sheet DateBalance Sheet Date

AS 5 Net Profit or Loss for the period, Prior Period ItemsAS 5 Net Profit or Loss for the period, Prior Period Itemsand Changes in Accounting Policiesand Changes in Accounting Policies

AS 6 Depreciation AccountingAS 6 Depreciation Accounting


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To facilitate better understanding of financialTo facilitate better understanding of financial

statementsstatements

To facilitate meaningful comparison betweenTo facilitate meaningful comparison betweenfinancial statements of different enterprisesfinancial statements of different enterprises


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Specific accountingSpecific accounting principles.principles.

MethodsMethods of applyingof applying thesethese principlesprinciples are adoptedare adopted bybythe enterprise.the enterprise.

InIn preparationpreparation of financial statements.of financial statements.


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Conversion of Foreign CurrencyConversion of Foreign Currency

Valuation of InventoriesValuation of Inventories

Valuation of InvestmentsValuation of Investments

Valuation of Fixed AssetsValuation of Fixed Assets

Methods of DepreciationMethods of Depreciation

Treatment of GoodwillTreatment of Goodwill

TreatmentTreatment of retirement benefitsof retirement benefits

Treatment of Contingent LiabilitiesTreatment of Contingent Liabilities


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PrudencePrudence

Substance over formSubstance over form

MaterialityMateriality


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GOING CONCERNGOING CONCERN

CONSIST

ENCYCONSIST

ENCY ACCRUALACCRUAL

These are not specifically stated in the financialThese are not specifically stated in the financialstatements. Their acceptance and usage isstatements. Their acceptance and usage is

assumedassumed


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All significant accounting policies adopted should beAll significant accounting policies adopted should bediscloseddisclosed

The disclosure should form part of the financialThe disclosure should form part of the financialstatementsstatements

Any change in the accounting policies which has aAny change in the accounting policies which has amaterial effect in the current period should bematerial effect in the current period should be

disclosed along with amount ofdisclosed along with amount of effecteffect

If the fundamental accounting assumptionsIf the fundamental accounting assumptions are notare notfollowed, the fact should befollowed, the fact should be discloseddisclosed


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Specifies the principles for valuing theSpecifies the principles for valuing theinventory.inventory.

Disclosure of the specific policies adopted byDisclosure of the specific policies adopted by

the management for the valuation ofthe management for the valuation ofinventory.inventory.


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InventoriesInventories are assets :are assets :

Held for sale in the ordinary course ofHeld for sale in the ordinary course of

businessbusiness In the process of production for saleIn the process of production for sale

In the form of materials or supplies to beIn the form of materials or supplies to be

consumed in the production process or inconsumed in the production process or inthe rendering of servicesthe rendering of services


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This statement should be applied in accounting for inventoriesThis statement should be applied in accounting for inventoriesother thanother than::

Work in progress arising under construction contracts,Work in progress arising under construction contracts,including directly related service contracts.including directly related service contracts.

Work in progress arising in the ordinary course of business ofWork in progress arising in the ordinary course of business ofservice providers.service providers.

Shares, debentures and other financial instruments held asShares, debentures and other financial instruments held asstockstock--inin--trade; And.trade; And.

Producers inventories of livestock, agricultural and forestProducers inventories of livestock, agricultural and forestproducts, and mineral oils, ores and gases to that extent thatproducts, and mineral oils, ores and gases to that extent thatthey are measured at net realizable value in accordance withthey are measured at net realizable value in accordance withwell established practices in those industries.well established practices in those industries.


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Inventories should be valued at theInventories should be valued at thelower of Cost and Net Realizable Valuelower of Cost and Net Realizable Value..

Major Points for valuation ofMajor Points for valuation ofInventories areInventories are

Determination of Cost of InventoriesDetermination of Cost of Inventories Determination of Net realizable value ofDetermination of Net realizable value of

InventoriesInventories

Comparison between the Cost and Net realizableComparison between the Cost and Net realizablevaluevalue


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The cost of inventories should comprise:The cost of inventories should comprise:

Cost of PurchaseCost of Purchase: includes: includes Purchase PricePurchase Price Duties and taxesDuties and taxes Freight inwardsFreight inwards

Cost of PurchaseCost of Purchase: excludes: excludes Trade DiscountTrade Discount RebatesRebates


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Cost of conversionCost of conversion: implies costs that are: implies costs that are

directly related to the units of production.directly related to the units of production.

Other costsOther costs: included only to the extent they: included only to the extent they

are incurred in bringing the inventories toare incurred in bringing the inventories totheir present location and condition.their present location and condition.


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Abnormal amount of wasted material, laborAbnormal amount of wasted material, laborand production costs.and production costs.

Storage costs, unless they are necessary inStorage costs, unless they are necessary inthe production process.the production process.

Administrative overheads which do notAdministrative overheads which do notcontribute to bringing the inventories tocontribute to bringing the inventories to

their present location and condition.their present location and condition.

Selling and distribution costs.Selling and distribution costs.

Interest and borrowing cost.Interest and borrowing cost.


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Following Cost methods can be used:Following Cost methods can be used:

FIFOFIFO

Weighted averageWeighted average


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Net realizable value means the estimatedNet realizable value means the estimatedprice that can be realized in the ordinaryprice that can be realized in the ordinary

course of business, as reduced by the cost ofcourse of business, as reduced by the cost ofcompletion and cost of sale.completion and cost of sale.

Net realizable value also takes into accountNet realizable value also takes into accountthe purpose for which the inventory is held.the purpose for which the inventory is held.


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The Net realizable value of the supplies heldThe Net realizable value of the supplies heldfor use in production of finished goods isfor use in production of finished goods isestimated as under:estimated as under:

If finished product, in which raw materials are used:If finished product, in which raw materials are used:

Is sold at cost or above cost:Is sold at cost or above cost: then thethen theestimated realizable value of raw material andestimated realizable value of raw material andsupplies is considered more than cost.supplies is considered more than cost.

Is sold below cost:Is sold below cost: then the estimated realizablethen the estimated realizablevalue of raw material or supplies is equal tovalue of raw material or supplies is equal toreplacement price of raw material or supplies.replacement price of raw material or supplies.


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The comparison between cost and NetThe comparison between cost and Netrealizable value should be made.realizable value should be made.


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AmbicaAmbica Toys Ltd. purchased 1,00,000 units ofToys Ltd. purchased 1,00,000 units of

remote cars, during the year 2004remote cars, during the year 2004--05. The cost05. The costper unit of car consists of raw materials of Rsper unit of car consists of raw materials of Rs100, wages of Rs 50 and other direct expenses100, wages of Rs 50 and other direct expensesof Rs 25 per car. During the year, 10,000 unitsof Rs 25 per car. During the year, 10,000 units

of the cars remained unsold. All theof the cars remained unsold. All themanufactured cars were placed in amanufactured cars were placed in a godowngodown, for, for

which a fixed rent of Rs 12,000 per annum waswhich a fixed rent of Rs 12,000 per annum waspaid. Further, a commission of Rs 50 per carpaid. Further, a commission of Rs 50 per car

was paid to the selling department.was paid to the selling department.

What is the value of the stock at the end of theWhat is the value of the stock at the end of theyear?year?


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Given:Given: No. of Units purchasedNo. of Units purchased--1,00,000.1,00,000.

Raw MaterialsRaw Materials-- Rs 100/unit.Rs 100/unit.

WagesWages-- Rs 50.Rs 50.

Other direct ExpensesOther direct Expenses-- Rs 25/car.Rs 25/car.

Unsold carsUnsold cars-- 10,000 units.10,000 units.

RentRent-- 12,000.12,000.

Commission paidCommission paid-- Rs 50/unit.Rs 50/unit.

Item Cost per unit No. of units Total Cost

Raw Materials 100 10,000 10,00,000

Wages 50 10,000 5,00,000

Direct

Expenses

25 10,000 2,50,000

Value of the Closing Stock 17,50,000


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Cash flow statement is additional information to userCash flow statement is additional information to userof financial statementof financial statement

This statement exhibits the flow of incoming andThis statement exhibits the flow of incoming andoutgoing cashoutgoing cash

This statement assesses the ability of the enterprise toThis statement assesses the ability of the enterprise togenerate cash and cash equivalentsgenerate cash and cash equivalents

It also assesses the needs of the enterprise to utilizeIt also assesses the needs of the enterprise to utilizethe cash and cash equivalents generatedthe cash and cash equivalents generated

It also assesses the liquidity and solvency of theIt also assesses the liquidity and solvency of theenterprise.enterprise.


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This standard applies to the enterprises:This standard applies to the enterprises:

Having turnover more than Rs. 50 Cores in aHaving turnover more than Rs. 50 Cores in a

financial year;financial year;

Listed companies;Listed companies;

Cash flow statement of listed companies shall beCash flow statement of listed companies shall be

presented only under thepresented only under the indirect methodindirect method as prescribedas prescribedin AS 3in AS 3


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CashCash comprises cash on hand and demand deposits with banks.comprises cash on hand and demand deposits with banks.

Cash equivalentsCash equivalents are short term, highly liquid investments that areare short term, highly liquid investments that arereadily convertible into known amounts of cash and which are subjectreadily convertible into known amounts of cash and which are subjectto an insignificant risk of changes in value.to an insignificant risk of changes in value.

Cash flowsCash flows are inflows and outflows of cash and cash equivalents.are inflows and outflows of cash and cash equivalents.

Operating activitiesOperating activities are the principal revenueare the principal revenue--producing activities ofproducing activities ofthe enterprise and other activities that are not investing or financingthe enterprise and other activities that are not investing or financingactivities.activities.

Investing activitiesInvesting activities are the acquisition and disposal of longare the acquisition and disposal of long--termterm

assets and other investments not included in cash equivalents.assets and other investments not included in cash equivalents.

Financing activitiesFinancing activities are activities that result in changes in the sizeare activities that result in changes in the sizeand composition of the owners capital (including preference shareand composition of the owners capital (including preference sharecapital in the case of a company) and borrowings of the enterprise.capital in the case of a company) and borrowings of the enterprise.


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Cash EquivalentsCash Equivalents Held for meeting short term commitmentsHeld for meeting short term commitments

It is readily convertible into known amounts ofIt is readily convertible into known amounts ofcashcash

It has a very insignificant riskIt has a very insignificant risk Short maturity (say 3 months maximum)Short maturity (say 3 months maximum)

Cash flows excludeCash flows exclude

Movements between cash and cash equivalentsMovements between cash and cash equivalents

Cash management includes the investment ofCash management includes the investment ofexcess cash in cash equivalentsexcess cash in cash equivalents


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The cash flow statement should report cash flowsThe cash flow statement should report cash flowsduring the period classified byduring the period classified by

Operating,Operating,

Investing andInvesting and

Financing activities.Financing activities.

Sum of these three types of cash flow reflect netSum of these three types of cash flow reflect netincrease or decrease of cash and cash equivalents.increase or decrease of cash and cash equivalents.


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These are principal revenue producingThese are principal revenue producingactivities of the enterprise.activities of the enterprise.

Examples:Examples:

Cash receipts from sale of goods / renderingCash receipts from sale of goods / renderingservices;services;

Cash receipts from royalties, fees, commissionsCash receipts from royalties, fees, commissionsand other revenue;and other revenue;

Cash payments to suppliers of goods and service;Cash payments to suppliers of goods and service;

Cash payments to and on behalf of employees.Cash payments to and on behalf of employees.


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The activities of acquisition and disposal of long term assetsThe activities of acquisition and disposal of long term assetsand other investments not included in cash equivalent areand other investments not included in cash equivalent areinvesting activities.investing activities.

It includes making and collecting loans, acquiring and disposalIt includes making and collecting loans, acquiring and disposalof debt and equity instruments, property and fixed assets etc.of debt and equity instruments, property and fixed assets etc.

Examples of cash flows arising from investing activities are asExamples of cash flows arising from investing activities are asfollows:follows: Cash payments to acquire fixed assetsCash payments to acquire fixed assets

Cash receipts from disposal of fixed assetsCash receipts from disposal of fixed assets

Cash payments to acquire shares, warrants or debt instruments ofCash payments to acquire shares, warrants or debt instruments ofother enterprises and interest in joint venturesother enterprises and interest in joint ventures

Cash receipt from disposal of above investmentsCash receipt from disposal of above investments


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It can be derived either from direct method orIt can be derived either from direct method orindirect methodindirect method

Direct method:Direct method: In this method, gross receipts and gross payments ofIn this method, gross receipts and gross payments of

cash are disclosedcash are disclosed

Indirect method:Indirect method: In this method, profit and loss account is adjusted for theIn this method, profit and loss account is adjusted for the

effects of transaction of noneffects of transaction of non--cash nature.cash nature.


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ThisThis standardstandard deals with the treatment in the financialdeals with the treatment in the financialstatements of:statements of:

Contingencies.Contingencies.

EventsEvents occurring after the balance sheet date.occurring after the balance sheet date.

ThisThis standardstandard does not deal with:does not deal with:

Liabilities of life assurance and general insuranceLiabilities of life assurance and general insuranceenterprises arising from policies issued.enterprises arising from policies issued.

Obligations under retirement benefit plans.Obligations under retirement benefit plans.

Commitments arising from longCommitments arising from long--term leaseterm lease contracts.contracts.


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ContingencyContingency isis aa conditioncondition oror situation,situation, thethe ultimateultimate

outcomeoutcome ofof which,which, gaingain oror loss,loss, willwill bebe knownknown orordetermineddetermined onlyonly onon thethe occurrence,occurrence, oror nonnon--occurrence,occurrence,ofof oneone oror moremore uncertainuncertain futurefuture eventsevents..


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OnlyOnly contingentcontingent lossloss shouldshould bebe recognizedrecognized ininfinancialfinancial statementstatement..

ContingentContingent gainsgains shouldshould notnotbebe recognizedrecognized ininfinancialfinancial statementsstatements..


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Events occurring after the balance sheet date: thoseEvents occurring after the balance sheet date: thosesignificant events, bothsignificant events, both favorablefavorable andand unfavorableunfavorable,,that occur between the balance sheet date and thethat occur between the balance sheet date and thedate on which the financial statements are approveddate on which the financial statements are approved

by the Board ofby the Board of Directors.Directors.

Classification of Events:Classification of Events: ThoseThose whichwhich provideprovide furtherfurther evidenceevidence ofof conditionsconditions

thatthat existedexisted atat thethe balancebalance sheetsheet datedate andand ThoseThose whichwhich areare indicativeindicative ofof conditionsconditions thatthat arosearose

subsequentsubsequent toto thethe balancebalance sheetsheet datedate


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The nature of theThe nature of the event.event.

AnAn estimateestimate ofof thethe financialfinancial effecteffect oror aa statementstatementthatthat suchsuch anan estimateestimate cannotcannot bebe mademade..


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OrdinaryOrdinary activitiesactivities areare anyany activitiesactivities andand otherother incidentalincidentalactivitiesactivities whichwhich areare undertakenundertaken byby anan enterpriseenterprise asas partpart ofofitsits businessbusiness..

ExtraordinaryExtraordinary itemsitems areare incomeincome oror expensesexpenses thatthat arisearise

fromfrom nonnon recurringrecurring eventsevents andand transactionstransactions..

PriorPrior periodperiod itemsitems areare incomeincome oror expenses,expenses, whichwhich arise,arise,inin thethe currentcurrent periodperiod asas aa resultresult ofoferrorserrors oror omissionsomissions ininthethe preparationpreparation ofof thethe financialfinancial statementsstatements ofof oneone oror moremorepriorprior periodsperiods..

AccountingAccounting policiespolicies areare thethe specificspecific accountingaccountingprinciplesprinciples andand thethe methodsmethods ofof applyingapplying thosethose principlesprinciples ininthethe preparationpreparation andand presentationpresentation ofof financialfinancial statementsstatements..


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ExtraordinaryExtraordinary itemsitems:: TheThe naturenature andand thethe amountamountofof eacheach extraordinaryextraordinary itemitem shouldshould bebe separatelyseparatelydiscloseddisclosed inin thethe statementstatement ofof profitprofit andand lossloss inin aa

mannermanner thatthat itsits impactimpact onon currentcurrent profitprofit oror lossloss cancanbebe perceivedperceived..

OrdinaryOrdinary itemsitems:: WhenWhen itemsitems of of incomeincome andandexpenseexpense fromfrom ordinaryordinary activitiesactivities areare of of suchsuch size,size,

naturenature oror incidenceincidence thatthat theirtheir disclosuredisclosure isis relevantrelevant totoexplainexplain thethe performanceperformance ofof thethe enterpriseenterprise forfor thetheperiod,period, thethe naturenature andand amountamount ofof suchsuch itemsitems shouldshould

bebe discloseddisclosed separatelyseparately..


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PriorPrior periodperiod itemsitems:: TheThe naturenature andand amountamount ofof priorpriorperiodperiod itemsitems shouldshould bebe separatelyseparately discloseddisclosed inin thethe profitprofitandand lossloss statementstatement inin suchsuch aa wayway thatthat theirtheir impactimpact ononthethe currentcurrent profitprofit oror lossloss cancan bebe perceivedperceived..

AccountingAccounting estimatesestimates:: TheThe naturenature andand amountamount ofof aachangechange inin anan accountingaccounting estimateestimate whichwhich hashas aa materialmaterialeffecteffect inin thethe currentcurrent periodperiod oror whichwhich isis expectedexpected toto havehaveaa materialmaterial effecteffect inin subsequentsubsequent periods,periods, shouldshould bebediscloseddisclosed.. IfIf thethe effecteffect cannotcannot bebe quantified,quantified, thisthis factfactshouldshould bebe discloseddisclosed..

AccountingAccounting policiespolicies:: TheThe effecteffect ofof anyany changechange inin ananaccountingaccounting policy,policy, ifif material,material, shouldshould bebe discloseddisclosed inin thethefinancialfinancial statementsstatements ofof thethe periodperiod quantifyingquantifying thetheimpactimpact.. WhereWhere thethe effecteffect cannotcannot bebe quantified,quantified, whollywholly ororinin part,part, thethe factfact shouldshould bebe discloseddisclosed..


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Disclosure of accounting policy for depreciationDisclosure of accounting policy for depreciationfollowed by an enterprise.followed by an enterprise.


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Depreciation:Depreciation:Is a measure of the wearing out, consumption or otherIs a measure of the wearing out, consumption or other

loss of value of a depreciable asset arising from use,loss of value of a depreciable asset arising from use,effluxioneffluxion of time or obsolescence due to technology andof time or obsolescence due to technology andmarket changes.market changes.


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DEPRECIABLEASSETS

UsedUsed duringduring moremore thanthan oneone yearyear

HaveHave aa limitedlimited usefuluseful lifelife AreAre heldheld byby anan enterpriseenterprise forfor useuse inin ::

thethe productionproduction oror supplysupply ofof goodsgoods andand servicesservices

forfor rentingrenting toto othersothers

forfor administrativeadministrative purposespurposes

notnot forfor thethe purposepurpose ofof salesale inin thethe ordinaryordinary coursecourse ofofbusinessbusiness..


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DEPRECIABLEAMOUNTOF AN ASSETDEPRECIABLEAMOUNTOF AN ASSET

Is its historical cost, or other amount substitutedIs its historical cost, or other amount substitutedfor historical cost in the financial statements, lessfor historical cost in the financial statements, lessthe estimated residual value.the estimated residual value.

Depreciable amount of a depreciable asset shouldDepreciable amount of a depreciable asset shouldbe allocated on a systematic basis to eachbe allocated on a systematic basis to eachaccounting period during its useful life.accounting period during its useful life.


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Historical cost.Historical cost.

ExpectedExpected useful life of theuseful life of the depreciable asset.depreciable asset.

EstimatedEstimated residual value of theresidual value of the

depreciabledepreciable asset.asset.


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1.1. STRAIGHTLINESTRAIGHTLINEMETHODMETHOD

2.2. WRITTENDOWN VALUEMETHODWRITTENDOWN VALUEMETHOD

If a change in the method of depreciation is made, depreciationIf a change in the method of depreciation is made, depreciationis recalculated in accordance with the new method from the dateis recalculated in accordance with the new method from the dateof the asset coming into use. The deficiency or surplus arisingof the asset coming into use. The deficiency or surplus arisingfrom retrospective refrom retrospective re--computation is adjusted in the profit andcomputation is adjusted in the profit and

loss account in the year in which the method of depreciation isloss account in the year in which the method of depreciation ischanged.changed.


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The historical cost each class of assets;The historical cost each class of assets;

Total depreciation for the period.Total depreciation for the period.

The related accumulated depreciation;The related accumulated depreciation;

Depreciation methods used; andDepreciation methods used; and

Depreciation rates (only if they are different fromDepreciation rates (only if they are different fromthe principal rates specified in the statutethe principal rates specified in the statutegoverning thegoverning the enterprise).enterprise).


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