Accounting Standards

What is the purpose?

• It suggests the rules for recognition measurement, treatment, presentation and disclosure of accounting transactions in the financial statement of an organization.

• Accounting Standard Board (ASB) constituted in 1977 performs the function of preparation of Accounting standards in India.

• There are 32 accounting Standards issued by ICAI.

As-2 Valuation of Inventories

• The objective is to determine the value of the stock or inventories to be carried to the financial statement until the goods are sold and revenue is recognized.

• It clearly states that valuation should be based on lower of cost or the NRV

• Cost of Inventories includes all cost of purchase, cost of conversion and other costs incurred in bringing the inventory to the present condition and location.

• Cost of conversion implies costs that are directly related to the units of production.

The following costs are excluded from the cost of inventories.

Abnormal amount of wasted material, labor and production cost

Storage costAdmin. costSelling and distribution cost

AS-4 Contingencies and Events occurring after balance sheet date

“Events occurring after balance sheet date” are all those significant events occurring between the balance sheet date and the date on which the Financial statements are approved by the director.

Types of Events- Those providing further evidence of existence of

conditions that existed at the balance sheet date Those which are indicative of conditions that

arose after the balance sheet date.

AS-6 Depreciation Accounting

• AS6 defines depreciation as a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, or obsolescence through technology and market changes.

• The Management can use any method or combination of available methods. Once a method is followed the same should be used consistently. Change of method possible only if

It is required by the statute. It is needed for compliance with the AS It is required for better presentation of Financial

statements.

AS-6 Not applicable on assets such as

Forests, Plantations, similar regenerative natural resources

Wasting assets such as expenditure on exploration for minerals, oils and natural gas.

Expenditure on R&DGoodwillLive stockLand

AS-9 Revenue Recognition

As per this AS, revenue should be recognized when the following conditions are satisfied

In case of sale of goods , goods along with all the significant risks and rewards of ownership have been transferred to the buyer.

In case of services, execution is measured either under the completed service contract method or proportionate completion method.

Revenue arising from the use by others like Interest, royalty ,dividend.

AS-9 not applicable

Revenue from construction contract

Revenue from govt. grants

Revenue of insurance companies

Revenue from lease agreement

AS-10 Accounting for fixed assets

• Fixed assets should be shown in the balance sheet either at their historical cost or at their revalued figures. Any subsequent expenditure on the FA can be added to its value only if it increases the future benefits of the existing asset beyond its previously assessed std of performance.

• In case of revaluation , an entire class of asset should be revalued

• In case of disposal of fixed assets, the diff. between the net proceeds and the book value should be charged or credited to the P&L account.

AS-3 Cash flow statement

AS-3 mandatory w.e.f. FY2001 for the following companies.

All listed companies that are in the process of issuing debt or equity securities that will be listed on a recognized stock exchange of India

All other business reporting enterprises whose turnover for the accounting period exceeds Rs. 50 crores.

The cash flow statement explains the movement of cash under the following heads

Cash flow from operating activities-cash receipts on account of sales, services, royalties, fees, commission etc

Cash flow from investing activities-Cash payment on account of fixed asset, R&D and other investments, cash received on disposal of fixed assets ,shares and debentures, Loans and Advances

Cash flow from Financing activities-Cash proceeds from issue of shares, debentures , loans , bonds and cash repayment of loans borrowed

INDIAN GAAP VS

US GAAP

Sr.No

Particulars US GAAP INDIAN GAAP

1 Consolidation All majority owned subsidiaries to be consolidated

Does not require consolidation,

however financial statement should be attached to that of parent company

2 Format of balance

sheet

Presented in the order of liquidity starting with most liquid asset

Requires disclosure of movement in related parties

Current portion of long term debt is classified

as current liability

Presented in the reverse order

Not Required

Not required

3 Cash Flow Statement

Requires a statement of cash flow

It forms part of the financial statement

Came into force in FY 2001.

Recent amendments in Stock exchange , requires all listed Co.’s to attach cash flow statement with the annual accounts.

4 Dividend Dividends are the charge to retained earnings at the point of time they are formally declared by a board of directors

Proposed dividends are reflected in the financial statements of the year to which they relate even though proposed and approved after the year end.

5 Related

Parties

Requires disclosure of all material related party transaction,

Nature of relationship,

Description of the transaction, amount of the transaction for the financial year and amount due.

Requires only amount outstanding at the end of the financial year and max balance outstanding during the year.

Auditor’s comments required on the reasonableness of certain transactions.

6 Share issue expense

Requires such expense to be written off when incurred against proceeds of capital

These can be accounted for as deferred expenses and amortized

7 Historical

Cost

Strict adherence to the historical cost Convention.

A bonafide revaluation is recognized in India with adequate disclosures.

8 Depreciation Straight line basis over the useful economic life of the asset

Rates are prescribed by the Indian Companies act 1956, for minimum depreciation provision.

9 Accounting

for foreign exchange transaction

Gains or losses arising from foreign currency transactions are included in determining the net income for the period in which such gains or losses arise.

Same principle with exception that exchange rate fluctuations arising from foreign currency borrowings / liabilities are added /deducted from carrying cost from the relevant fixed asset

10 Intangible

assets

All intangible asset must be amortized by the systematic charge to income over the period estimated to be benefited not exceeding 40 years

Requires intangible assets to be written off within their period of use or legal term of validity whichever is earlier while other intangible assets such as deferred revenue expenditure be written off within 3-5 years

Inventory Inventory should be stated at the lower of cost or market except in certain exceptional cases when it may be stated above cost.

Exceptional cases when inventories be stated above cost include precious metals

Inventories are valued at the lower of cost and net realizable value.

AS-2 permits only FIFO or weighted average cost formula for determining the cost of inventories

WHY US GAAP????

1. Transparency.

2. Access to global financial market.

3. Enhances company profile and reputation.

4. Facilitates benchmarking and comparability.

5. Key to seamless financial markets.

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IFRS International Financial Reporting

Standards

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DIFFERENCE BETWEEN IFRS AND OTHER COUNTRIES GAAP

1. The Principle Basis Of The Standard – GAAP is rule based whereas IFRS is concept based ( capturing economic substance underlying a transaction is essential)

2. Scope To Make Choices Within The Framework – Gives scopes for choosing the accounting policy for range of options

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3. Level Of Specificity – Rules based standard will be more specific than concept based. Thus IFRS places due weight on managerial decision making skills for judgment on various standards

4. Jurisdiction Nature Of The Standard – As in the past, accounting standards have been restricted to a particular region or a nation, IFRS in a contrast is not rooted in any particular legal or regulatory jurisdiction. Every country’s regulating body will be responsible for compliance.

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SOME FEATURES OF IFRS

• Separate financial statements for parent company and subsidiary company

• Source of estimation of uncertainties and its nature must be considered and disclosure in the financial statement

• Only income or expenses arising out of normal business are considered

• Incase of business combinations, goodwill is not amortized but its impairment is accounted.

• The critical judgment of the concerned management must be disclosed.

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• Research will be an expense, but development will be capitalized.

• Property, plant and equipment may be carried out at cost less depreciation and impairment, or at face value.

• The definition of debt and equity will alter which can flow through to what is treated as interest rather than dividends.

• Proposed final dividend will not be accrued until they have been approved.

• Provisions will be calculated by discounting future cashflows, so adjustment will affect interest