presesntation asset measurement

7/31/2019 Presesntation Asset Measurement

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Aditi Rao 2560

Prachi Ahuja 2553

Priyanka Kori 2536

Rohit Yadav 2546

Shivam Jindal 2567Varun Kalia 2528

Assets: Measurement


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Asset: Measurement

When analysing any firm, we would like to know the types ofassets that it owns, the values of these assets and the degree ofuncertainty about these values. Accounting statements do areasonably good job of categorizing the assets owned by a firm,a partial job of assessing the values of these assets and a poor

job of reporting uncertainty about asset values. In this section,we will begin by looking at the accounting principles underlyingasset categorization and measurement, and the limitations offinancial statements in providing relevant information aboutassets.


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Accounting Principles Underlying AssetMeasurement

An asset is any resource that has the potential toeither generate future cash inflows or reduce futurecash outflows. While that is a general definition broadenough to cover almost any kind of asset,accountants add a caveat that for a resource to be

an asset. A firm has to have acquired it in a priortransaction and be able to quantify future benefits withreasonable precision. The accounting view of assetvalue is to a great extent grounded in the notionof historical cost, which is the original cost ofthe asset, adjusted upwards for improvements made

to the asset since purchase and downwards for theloss in value associated with the aging of the asset.This historical cost is called the

book value. While the generally acceptedaccounting principles for valuing an asset vary across

different kinds of assets, three principles underlie theway assets are valued in accounting statements:-


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An Abiding Belief in Book Value as the Best Estimate of Value

Accounting estimates of asset value begin with the book value. Unless a substantial

reason is given to do otherwise, accountants view the historical cost as the bestestimate of the value of an asset.

A Distrust of Market or Estimated Value

When a current market value exists for an asset that is different from the book value,accounting convention seems to view this market value with suspicion. The market priceof an asset is often viewed as both much too volatile and too easily manipulated to beused as an estimate of value for an asset. This suspicion runs even deeper when valuesare is estimated for an asset based upon expected future cash flows.

A Preference for under estimating value rather than over estimating it

When there is more than one approach to valuing an asset, accounting convention takesthe view that the more conservative (lower) estimate of value should be used ratherthan the less conservative (higher) estimate of value. Thus, when both market andbook value are available for an asset, accounting rules often require that you use thelesser of the two numbers.


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Accounting Standard(AS)1Disclosure of Accounting Policies

The view presented in the financial statements of an

enterprise of its state of affairs and of the profit or loss

can be significantly affected by the accounting policies

followed in the preparation and presentation of thefinancial statements.

The accounting policies followed vary from enterprise to

enterprise.

Disclosure of significant accounting policies followed is

necessary if the view presented is to be properly

appreciated.


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In general, however, accounting policies are not always present regularly

and fully disclosed in all financial statements.

Many enterprises include in the Notes to the Accounts, descriptions of some

of the significant accounting policies. But the nature and degree of

disclosure vary considerably between the corporate and the non-corporate

sectors and between units in the same sector.

Even among the few enterprises that presently include in their annual

reports a separate statement of accounting policies, considerable variation

exists. The statement of accounting policies forms part of accounts in some cases

while in others it is given as supplementary information.

All significant accounting policies adopted in the preparation and

presentation of financial statements should be disclosed as part of the

financial statements.


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Fundamental Accounting Assumptions

The following have been generally accepted as fundamental accountingassumptions:

Going ConcernThe enterprise is normally viewed as a going concern, that is, ascontinuing in operation for the foreseeable future.

Consistency

It is assumed that accounting policies are consistent from one period to

another. Accrual

Revenues and costs are accrued, that is, recognized as they are earnedor incurred (and not as money is received or paid) and recorded in thefinancial statements of the periods to which they relate.


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Considerations in the Selection of Accounting Policies

Prudence

Profits are not anticipated but recognized only when realized though not

necessarily in cash. Provision is made for all known liabilities and losses

even though the amount cannot be determined with certainty and represents

only a best estimate in the light of available information.

Substance over Form

The accounting treatment and presentation in financial statements of

transactions and events should be governed by their substance and notmerely by the legal form.

Materiality

Financial statements should disclose all material items, i.e. items the

knowledge of which might influence the decisions of the user of the financial

statements.


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Accounting Standard 2Valuation of Inventories

Net Realisable Valuemeans the estimated selling price in ordinary course of business,at the time of valuation, less estimated cost of completion and estimated cost necessary

to make the sale.

The costof inventories should comprise

all costs of purchase

costs of conversion

other costs incurred in bringing the inventories to their present location and condition.

Inventories

Cost Net Realizable Value

Inventories should be valued at thelower of cost and net realizablevalue

Inventories are assets:1.held for sale in ordinary course of business;2.in the process of production for such sale (WIP);3.in the form of materials or supplies to be consumed in the productionprocess or in the rendering of services.

Measurement of Inventories:


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Determining Cost of Inventories

Specific identification method

Specific identification methodmeans directly linking the costwith specific item of inventories.

This method has application infollowing conditions: In case of purchase of itemspecifically segregated forspecific project and is notordinarily interchangeable.

In case of goods of servicesproduced and segregated forspecific project.

Where Specific Identificationmethod is not applicable

The cost of inventories isvalued by the followingmethods;

FIFO ( First In First Out)MethodWeighted Average CostMethod

Raw material valuationIf the finished goods to which raw material is applied, is sold at profit, RAW MATERIAL

is valued at cost irrespective of its NRV level being lower to its costs.

A ti St d d 4


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Accounting Standard 4Contingencies and Events OccurringAfter the Balance Sheet Date

Contingency : A contingency is a condition or situation, the ultimate

outcome of which, gain or loss, will be known or determined only on

the occurrence, or non-occurrence, of one or more uncertain future

events.

Events occurring after the balance sheet date are those significantevents, that occur between the balance sheet date and the date onwhich the financial statements are approved by the Board ofDirectors in case of a company, and, by the corresponding approvingauthority in the case of any other entity.

Two types of events can be identified

Adjusting Event Non-Adjusting Events


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Accounting Standard 5Net Profit or Loss for the Period, Prior Period Items andChanges in Accounting Policies

The net profit or loss for the period comprises the followingcomponents, each of which should be disclosed on the face of thestatement of profit and loss:

1. Profit or loss from ordinary activities

2. Extraordinary items.

When items of income and expenses within profit or loss fromordinary activities are of such size, nature that their disclosure isrelevant to explain the performance of the enterprise for the period,

the nature and amount of such items should be disclosed properly.Examples of such circumstances are:

I. disposal of items of fixed assets

II. litigation settlements

III. disposal of long term investments


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Changes in Accounting Policy A change in an accounting policyshould be made only if the adoption of a different accounting policy isrequired:

o by statute

o for compliance with an accounting standardo if it is considered that the change would result in a more

appropriate presentation of the financial statements of theenterprise

Any change in accounting policy which has a material effect, should

be disclosed. Such changes should be disclosed in the statement ofprofit and loss in a manner that their impact on profit or loss can beperceived.


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Accounting Standard 6DEPRECIATION ACCOUNTING

Depreciation is a measure of the wearing out, consumption or otherloss of value of a depreciable asset arising from use, passage of timeor obsolescence through technology and market changes.

Depreciation is allocated so as to charge a fair proportion of thedepreciable amount in each accounting period during the expecteduseful life of the asset. Depreciation includes amortization of assetswhose useful life is predetermined.

The depreciable amount of a depreciable asset should be allocatedon a systematic basis to each accounting period during the useful lifeof the asset.


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Methods of Depreciation

There are two method of depreciation:

1] Straight Line Method (SLM)2] Written Down Value Method (WDVM)

The depreciation method selected should be applied consistentlyfrom period to period.

The change in method of depreciation should be made only if:

The adoption of the new method is required by statute; or

For compliance with an accounting standard; or

If it is considered that change would result in a more appropriatepreparation of financial statement

When there is change in method of depreciation, depreciationshould be recalculated in accordance with the new method from thedate of the assets coming into use. (i.e RETROSPECTIVELY)

ACCOUNTING STANDARD 7


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ACCOUNTING STANDARD 7CONSTRUCTION CONTRACT

A Construction contract is a contract specifically negotiated for theconstruction of an asset or a combination of assets that are closelyinterrelated or interdependent in terms of their design, technology andfunction or their ultimate purpose or use.

Contract revenue should comprise:

the initial amount of revenue agreed in the contract; and variations in amount to be received

(Contract can of two kinds: Fixed Price contract and Cost Plus contract)

Contract costs should comprise:

costs that relate directly to the specific contract; costs that are attributable to contract activity in general and can be

allocated to the contract.

Contract costs that relate to future activity, are recognized as an asset

provided it is probable that they will be recovered. Such asset isclassified as Contract WIP.


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Accounting Standard 9Revenue Recognition

Revenue is the gross inflow of cash, receivables or otherconsideration arising in the course of the ordinary activities of anenterprise from

the sale of goods

the rendering of services, and interest, royalties and dividends.

Sale of goods

Revenue from sales should be recognized when

All significant risks and rewards of ownership have been transferred tothe buyer from the seller.

Ultimate realisability of receipt is reasonably certain.

Revenue from Interest : Recognised on time proportion basis

Revenue from Royalties : Recognised on accrual basis in accordance


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Rendering of Services

Revenue from service transactions is usually recognized as the service isperformed, either by proportionate completion method or by the completedservice contract method.

This is a method of accounting, whichrecognises revenue in the statement ofprofit and loss proportionately with degreeof completion of services under a contract.

ProportionateCompletion

method

This is a method of accounting, whichrecognises revenue in the statement ofprofit and loss only when the rendering ofservices under a contract is completed orsubstantially completed..

Completedservice contract

method


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Accounting Standard 10Accounting for Fixed Assets

Fixed Asset is an asset held with the intention of being used for thepurpose of producing or providing goods or services and is not held forsale in the normal course of business. (It is expected to be used formore than one accounting period.)

The cost of fixed asset includes:

a. Purchase price

b. Import Duties and other non-refundable taxes

c. Direct cost incurred to bring the asset to its working conditiond. Installation cost

e. Professional fees like fees of architects

f. Any expenses before the commercial production

g. Any expenses before the asset is ready for use not put to use


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When fixed asset is acquired in exchange foranother asset, the cost of the asset acquiredshould be recorded

I. either at, fair market value, orII. the net book value of the assets given up


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Valuation of Assets

Fixed assets Debtors debtsStocks

(inventories)

-At first Historical price

(purchase or production)-Annual depreciation oftangible assets

- Annual revaluation of-Investment property,biological active, fixedassets for sales

--Revaluation of otherfixed assets is possible

under certain conditions

-At first Historical

price (purchase orproduction)

-Then revaluationonly if the market pricegoes down

-Calculation of costs atthe moment of writingoff

-Valuation according to

bills

-Revaluation accordingto probability to receivemoney back

-Hopeless andunreliable debts must bewritten off


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Revaluation Revaluation of fixed assets is a technique to

accurately describe the true value of fixed assetsowned by a business.

It can be upward revaluation or downward revision(i.e. impairment) in the book values of assets.

When the fixed assets are revalued, these assets areshown at revalued price. Revaluation of fixed assets

should be restricted to the net recoverable amount offixed asset.

When a fixed asset is revalued, an entire class of

assets should be revalued.


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Reasons for Revaluation

To show the true rate of return on capital employed.

To conserve adequate funds in the business for replacementof fixed assets at the end of their useful lives. Provision fordepreciation based on historic cost will show inflated profits

and lead to payment of excessive dividends. To show the fair market value of assets which have

considerably appreciated since their purchase such as landand buildings.

To negotiate fair price for the assets of the company before

merger with or acquisition by another company. To get fair market value of assets, in case of sale and

leaseback transaction.

When the company intends to take a loan frombanks/financial institutions by mortgaging its fixed assets.

Proper revaluation of assets would enable the company to geta hi her amount of loan.

A ti t t t f l ti d diff t


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Accounting treatment of revaluation under differentsituation

When revaluation is made upward

Fixed Assets A/c Dr

To Revaluation Reserve

When revaluation is made upwardsubsequent to previous upwardrevaluation

Fixed Assets A/c Dr

To Revaluation Reserve

When revaluation is made upward

subsequent to previous downwardrevaluation

Fixed assets A/c Dr

To P&L A/c

(Previous downward revaluation)

To Revaluation Reserve(Balancing Figure)

When revaluation is made downward

P&L A/c DrTo Fixed Assets

When revaluation is made downwardsubsequent to previous downwardrevaluation

P& L A/c Dr

To Fixed Assets

When revaluation is made downwardsubsequent to previous upwardrevaluation

Revaluation Reserve A/c Dr

(To the extent of carrying amount of R.R)

P&L A/c Dr

(Balancing Figure)To Fixed assets


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Disposal of Fixed Assets

In financial statements, gains or losses arising on disposal are generallyrecognised in the profit and loss statement.

Bank A/c Dr

P & L A/c Dr (If Loss)

To Fixed Assets

To P & L A/c (If Profit)

On sale of previously revalued fixed asset Difference between net disposal proceeds and net book value is credited

to P&L account. In case loss is related to an increase which was previously recorded as a

credit to revaluation reserve and which has not been subsequentlyreversed or utilized, it is charged directly to that account. The amount standing in revaluation reserve following the retirement or

disposal of an asset which relates to that asset may be transferred togeneral reserve.


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Bank A/c Dr

Revaluation Reserve A/cDr

P& L A/cDr

To Fixed Assets


To General Reserve

Loss

Bank A/c Dr

To Fixed Assets A/c

To P/L A/c


To General Reserve

Profit


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In the case of fixed assets owned by the enterprise jointlywith others, the extent of the enterprises share in suchassets, and the proportion of the original cost,accumulated depreciation and WDV should be stated inthe B/S.

Alternatively, the pro rata cost of such jointly ownedassets may be grouped together with similar fully ownedassets.

Only purchased goodwill should be recorded in books.


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Asset Distortions Distortions in asset values arise due to

ambiguity about whether: The firm owns or controls the economic resources in question

The economic resources are likely to provide future economic

benefits that can be measured with reasonable certainty The fair value of assets fall below their book values


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Overstated Assets Overstatement of assets arise when managers have incentives

to increase reported earnings. Requires adjustments to theincome statement in the form of increased expenses or reducedrevenues.

Common forms of asset overstatement:

Delays in writing down current assets: If current assetsbecome impaired, they are to be written down to their fair values.Impairment also affect earnings , therefore, deferring currentasset write downs is one way to boost reported profits.


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Underestimated reserves (e.g., allowances for bad debts or loanlosses): If the value of expected customer defaults on receivable &loans is underestimated, assets & earnings will be overstated.

Accelerated recognition of revenues (increasing receivables): This

boosts the reported earnings for the period & the accounts receivableand earnings will then be overstated.

Delayed write-downs of long-term assets: Managers can use theirreporting judgment to delay write-down on the balance sheet & avoid

showing impairment charges in the income statement.

Understated depreciation/ amortization on long-term assets:Optimistic estimates of asset lives, salvage values & amortizationschedules for depreciable long-term assets results in overstatement.


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Understated Assets

Understatement of assets arise when managers have incentives todeflate reports earnings.

Common forms of asset overstatement:

Overstated write-downs of current assets: To show lower futureexpenses, boosting earnings in years of sub-par performance orwhen a turn-around is needed.

Overestimated reserves (e.g., allowances for bad debts or loanlosses): If the reserves for bad debts or loan losses areoverestimated, accounts receivable & loans will be understated.


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Overstated write-downs of long-term assets: Overly pessimisticestimates of long-term asset impairments reduce current periodearnings & boost earnings in future periods.

Overstated depreciation/ amortization on long-term assets:Amortizing assets more rapidly given the assets economicusefulness, leads to long-term asset understatements


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Accounting Standard(AS) 12Accounting for Government Grants Accounting Treatment of Government Grants

Approaches

capital approach

(part of shareholders funds)

income approach

(income over one or more periods)

Grants related to Depreciable assets:Government grants related to depreciable fixed assets may be treated

as deferred income which should be recognised in the profit and lossstatement on a systematic and rational basis over the useful life of theasset, i.e., such grants should be allocated to income over the periodsand in the proportions in which depreciation on those assets ischarged.

Accounting Standard 13


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Accounting Standard 13Accounting for Investments

Investments are classified as Long Term Investments and Short TermInvestments.

Current Investment is intended to be held for not more than one year andreadily realisable.

Long term Investment is an investment other than a current investment.

Any reduction in value of investment is adjusted through P&L A/c.

Cost of Investments:

The cost of an investment should include acquisition charges such as

brokerage, fees and duties.Investment property:

is investment in land or buildings that is not intended to be occupiedsubstantially for use by the investing enterprise. An investment property isclassified as long-term investment.

Disposal of Investments:On dis osal the difference between the carr in amount and the dis osal


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AS 16 Borrowing Costs

Borrowing Costs include:

a) Interest and commitment charges on borrowings

b) Amortization of discounts or premiums relating to borrowings

c) Amortization of ancillary costs incurred in connection with thearrangement of borrowings

d) Finance charges in respect of assets acquired under financeleases or under other similar arrangements

Borrowing costs that are directly attributable to the acquisition, constructionor production of a qualifying asset should be capitalised as part of the cost

of that asset.

Qualifying Asset is an asset that necessarily takes a substantial period oftime to get ready for its intended use or sale.


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Examples of qualifying assets include-a) Fixed assets

b) Intangible assets during development phase

c) Investment properties

d) Inventories that require a substantial period of time to bring them to a

saleable condition Other borrowing costs should be recognised as an expense in the

period in which they are incurred

As per AS 16, borrowing cost can be capitalised up to the date ofcompletion of qualifying asset for the purpose of use or sale. If

borrowing cost has been incurred after completion of qualifyingasset then such amount should be transferred to P&L statement.

Capitalisation of borrowing costs should be suspended duringextended periods in which active development is interrupted.Borrowing cost during such interruption should be transferred to P&L

statement provided such interruption is not temporary in nature.

A ti St d d 19


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Accounting Standard 19Leases

A lease is an agreement whereby the lessor conveys to the lessee inreturn for a payment or series of payments the right to use an asset foran agreed period of time.

Finance Lease : All risks and rewards incident to ownership of an asset istransferred.

Operating Lease : Lease other than finance lease; i.e. which does nottransfer all the risk and reward incidental to ownership

Minimum Lease Payments =Total Lease rent to be paid over the lease term

+

Any Guaranteed Residual Value by or on behalf of Lessee+

Residual Value Guaranteed by Third Party (For lesser)(-)

Contingent Rent(-)

Cost for Service and tax to be paid by and reimbursed to lessor


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Accounting for Finance Lease In the books of lessee

The lessee should recognize the lease as an asset at lower of thefollowing

Fair Value of the leased asset

Present value of minimum lease payments

The discount rate can be:

interest rate implicit in the lease

If implicit rate is not known, the lessees incremental borrowing rateshould be used.

The lessor should recognize the transaction as sale with the cash price

A ti St d d 22


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Accounting Standard 22Accounting for Taxes on Income

Objective

Prescribe accounting treatment for taxes on income in accordancewith the matching concept:

Matching of taxes with the corresponding revenue and expenses sincetaxable income significantly varies with the accounting income

Reasons

Difference between items of Revenue and expense as per profit & Loss

account and those considered for tax purpose

Difference between the amount of the items of Revenue and expenses asper profit and loss account and those considered for tax purpose


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A recent call for corporate tax reform has highlighted the disparitybetween financial and income tax reporting, a broad-based measurethat appears to capture cross-sectional variation in tax aggressiveness.The firms appear to be using cushion to smooth earnings.

It is mainly used to smooth earnings by firms with larger implicit claimsand equity financing

Depreciation method is one of the ways: Normal depreciation

Accelerated depreciation: the company claims $200 in depreciationfor the first five years, and nothing for the last five years. For the firstfive years, it has no taxable profit and pays no gains tax. For the last

five years, the company has a gain of $200, and pays $40 per year intax, for a total of $200.

The deferral of taxes to a later period is favourable according tothe time value of money principle.


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Deferred tax is the tax effect of timing differences. Model journal entries to be passed in booksof account should be as under:

Current Tax A/c ..Dr

To Provision for Current Tax

Deferred Tax A/c Dr

To Deferred Tax Liability A/c

OR Deferred Tax Assets A/c .Dr

To Deferred Tax A/c

Tax Expense A/cDr

DeferredTax A/cDr (In case DTA is created)

To Current Tax A/c

To Deferred Tax A/c (In case DTL is created)

P/L A/cDr

To Current Tax A/c


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Recognition

Tax expense (Accrued tax) = Current tax + Deferred Tax

Tax expense should be included in the determination of net profit orloss for the period

Tax effects of timing difference are included in tax expenses and asdeferred tax assets or as deferred tax liability This has to be done for all the timing differences

Deferred tax assets are recognized subject to the consideration ofprudence i.e. there is reasonable certainty that sufficient futuretaxable income will be available against which deferred tax asset

can be realized Past record of the enterprise should be referred.

Tax effects of permanent difference do not result in deferred taxassets or deferred tax liabilities.


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Re-assessment of Unrecognized Deferred Tax Assets

Re-assessment of unrecognized Deferred tax assets has to be done

at each balance sheet date Recognize previously unrecognized deferred tax asset to the extent it

is reasonably certain

Measurement

Current tax should be measured at the amount expected to be paidto (recovered from) the taxation authorities, using the applicable taxrates and tax laws.

Deferred tax assets and liabilities should be measured using the taxrates and tax laws that have been enacted or substantively enacted

by the balance sheet date. For different tax rates for levels of income average rates should be

used for deferred tax assets and liabilities

Deferred tax assets and liabilities should not be discounted to theirpresent value



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Accounting Standard 24Discontinuing operation

A discontinuing operation is a component of an enterprise:

a) that the enterprise, pursuant to a single plan, is disposing ofsubstantially in its entirety, disposing of piecemeal (selling and settlingassets and liabilities one by one), terminating through abandonment

b) that represents a separate major line of business or geographical areaof operations

c) that can be distinguished operationally and for financial reportingpurposes.

Examples of activities that may not satisfy criteria (a) above but thatcan be discontinuing operations in combination with othercircumstances include: gradual or evolutionary phasing out of aproduct line or class of service; discontinuing, even if relativelyabruptly, several products within an ongoing line of business.


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A component that can be distinguished operationally and forfinancial reporting purposes -- if all the following conditions aremet:

1. the operating assets and liabilities of the component can be directlyattributed to it;

2. its revenue can be directly attributed to it;

3. at least a majority of its operating expenses can be directly attributed to it.

An enterprise should include the following information relating to adiscontinuing operation in its financial statements beginning withthe financial statements for the period in which the initial disclosureevent occurs and up to and including the period in whichdiscontinuance is completed.

INITIAL DISCLOSURE:

A description of the discontinuing operations;

the business or geographical segment in which it is reported.

the date and nature of the initial disclosure event;

the date or period in which the discontinuance is expected to be


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the carrying amounts, as of the balance sheet date, of the total assets tobe disposed of and the total liabilities to be settled;

revenue and expenses from such discontinuing operation in currentreporting period;

pre-tax profit/loss from discontinuing operation during the currentfinancial reporting period, and income tax expense.

net cash flows attributable to the operating, investing, and financing

activities of the discontinuing operation during the current financialreporting period.

With respect to a discontinuing operation, the initial disclosure event isthe occurrence of one of the following, whichever occurs earlier

-- the enterprise has entered into a binding sale agreement forsubstantially all of the assets of the discontinuing operation; or

-- the enterprises board of directors or similar governing body has both

(i) approved a formal plan; and

(ii) made an announcement of the plan.


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Other Disclosures

When an enterprise disposes of assets or settles liabilities attributableto a discontinuing operation or enters into binding agreements for thesale of such assets or the settlement of such liabilities, it shouldinclude, in its financial statements, the following information when theevent occurs.

Gain or loss recognized on such disposal. Net selling prices (or range of prices) of those assets for which the

enterprise has entered into binding contract, the expected timingof receipt of cash flow and the carrying amount of those assets.

If an enterprise abandons or withdraws from a plan that was

previously reported as a discontinuing operation, that fact, reasontherefor and its effect should be disclosed.

Comparative information for prior periods in respect of discontinuingoperations should also be deemed as discontinuing operations.


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AS-26:- Intangible Assets

This Statement requires an enterprise torecognise an intangible asset if, and only if,certain criteria are met.

The Statement also specifies how to measurethe carrying amount of intangible assets andrequires certain disclosures about intangibleassets.

It does not apply to goodwill arising on anamalgamation and goodwill arising onconsolidation.


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The recognition of an item as an intangible assetrequires an enterprise to demonstrate that the itemmeets the:

(a) definition of an intangible asset (see paragraphs 6-

18); and(b) recognition criteria set out in this Statement

An intangible asset should be recognised if, and only if:

(a) it is probable that the future economic benefits thatare attributable to the asset will flow to the enterprise;

(b) the cost of the asset can be measured reliably


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In case of exchange of assets, the cost of the assetacquired is determined in accordance with theprinciples laid down in this regard in AS 10

Internally generated goodwill should not be

recognised as an asset.


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Expenditure on an intangible item should berecognised as an expense when it is incurredunless:

(a) it forms part of the cost of an intangible asset

that meets the recognition criteria ;or(b) the item is acquired in an amalgamation in thenature of purchase and cannot be recognised as anintangible asset


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Amortisation

The depreciable amount of an intangible asset shouldbe allocated on a systematic basis over the bestestimate of its useful life.

The amortisation method used should reflect the pattern

in which the asset's economic benefits are consumedby the enterprise. If that pattern cannot be determinedreliably, the straight-line method should be used. Theamortisation charge for each period should berecognised as an expense unless another AccountingStandard permits or requires it to be included in thecarrying amount of another asset.


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The residual value of an intangible asset should beassumed to be zero unless:

(a) there is a commitment by a third party to purchasethe asset at the end of its useful life; or

(b) there is an active market for the assetIf there has been a significant change in the expectedpattern of economic benefits from the asset, theamortisation method should be changed to reflect the

changed pattern. Such changes should be accountedfor in accordance with AS 5, Net Profit or Loss for thePeriod, Prior Period Items and Changes in AccountingPolicies.

A i S d d 28


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Accounting Standard 28Impairment of Assets

Impairment of Assets means weakening in the value ofasset. An enterprise should assess at each balance sheetdate whether there is any indication that an asset may beimpaired. Then, recoverable value of the asset should beestimated.


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Indication of Impairment of an asset

External Sources of Information

Market value has declined significantly more than that would be expectedas a result of depreciation.

Adverse effect on the enterprise due to change in technology, market

conditions, etc. Change in interest rates.

The carrying amount of the net assets of the reporting enterprise is morethan its market capitalization.

Internal Sources of Information

Physical damage of asset

Significant change in style or extent of use of asset.

Internal Reporting indicates that the economic performance of an asset is,or will be, worse than expected.


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RECOVERABLE AMOUNT : (of asset or cash generating unit)

HIGHER OF NET SELLING PRICE OF ASSET

VALUE IN USE

Estimating the value in use of an asset involves the following steps :-Estimation of future cash inflows & Outflows.

Application of appropriate discount rate.

Projection of cash flow should be based on

Most recent financial budgets/forecasts.

Reasonable and supportable assumptions on the economic conditions.Giving more weights to external evidence.

Steady or declining growth rate for the period beyond the periodcovered by most recent budgets/forecasts.


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Future cash flows are estimated in the currency in which they will begenerated and then discounted using a discount rate appropriate forthe currency.

As a starting point the enterprise may take into account the followingrates :-

Weighted average cost of capital.

Market borrowing rate.

Enterprises incremental Borrowing rates.

Impairment loss = Carrying amount (-) Recoverable amount

An impairment loss or a revalued asset is recognized as an expense inthe statement of Profit or Loss.

However, an impairment loss on a revalued asset is recognized directly

against any revaluation surplus for the asset to the extent that theim airment loss does not exceed the amount held in the revaluation



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gPROVISIONS, CONTIGENT LIABILITIESAND CONTINGENT ASSETS

A provision is a liability which can be measured only byusing a substantial degree of estimation.

It ensures that appropriate recognition criteria andmeasurement bases are applied to provisions andcontingent liabilities and that sufficient information isdisclosed in the notes to the financial statements to

enable users to understand their nature, timing andamount.


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There is a presentobligation thatprobably requiresan outflow ofresources and a

reliable estimatecan be made of theamount ofobligation.

There is a possibleobligation or apresent obligationThat may, butProbably will not,

require an out flow ofresources.

There is a possibleobligation or apresent obligationwhere the likelihoodof an out flow of

resources is remote.

A provision is recognisedDisclosures are required

for the provision

No provision isrecognised

Disclosures arerequired for thecontingent liability

No provision isRecognised.

No disclosure isRequired


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RecognitionProvisionsA provision should be recognised when:

(a) an enterprise has a present obligation as a result of a past

event;

(b) it is probable that an outflow of resources embodying economicbenefits will be required to settle the obligation; and

(c) a reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision should be recognised

Reliable Estimate of the ObligationProvisions involve a greater degree of estimation than most otheritems. Except in extremely rare cases, an enterprise will be able todetermine a range of possible outcomes and can therefore make anestimate of the obligation that is reliable to use in recognising aprovision.


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Contingent liability

An enterprise should not recognise a contingent liability

A contingent liability is disclosed, unless the possibility of an outflow ofresources embodying economic benefits is remote.

The part of the obligation that is expected to be met by other parties is

treated as a contingent liability.If it becomes probable that an outflow of future economic benefits willbe required for an item previously dealt with as a contingent liability, aprovision is recognised


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Measurement

The amount recognised as a provision should be the best estimateof the expenditure required to settle the present obligation at thebalance sheet date. The amount of a provision should not bediscounted to its present value.

The estimates of outcome and financial effect are determined by

the judgment of the management of the enterprise, supplementedby experience of similar transactions

The provision is measured before tax


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Risks and Uncertainties

The risks and uncertainties that inevitably surround many eventsand circumstances should be taken into account in reaching thebest estimate of a provision.

Caution is needed in making judgments under conditions ofuncertainty, so that income or assets are not overstated and

expenses or liabilities are not understated.However, uncertainty does not justify the creation of excessiveprovisions or a deliberate overstatement of liabilities.


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Future events

Future events that may affect the amount required to settle anobligation should be reflected in the amount of a provision wherethere is sufficient objective evidence that they will occur.

Gains from the expected disposal of assets should not be takeninto account in measuring a provision.

Where some or all of the expenditure required to settle a provisionis expected to be reimbursed by another party, the reimbursementshould be recognised when, and only when, it is virtually certainthat reimbursement will be received if the enterprise settles theobligation.


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Reimbursement

The reimbursement should be treated as a separate asset. Theamount recognised for the reimbursement should not exceed theamount of the provision

In the statement of profit and loss, the expense relating to aprovision may be presented net of the amount recognised for a

reimbursement.Provisions should be reviewed at each balance sheet date andadjusted to reflect the current best estimate.

Application of the Recognition and


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Application of the Recognition andMeasurement Rules

Provisions should not be recognised for futureoperating losses

Restructuring: A provision for restructuring costs isrecognised only when the recognition criteria for

provisions are met

As 30:-Financial Instruments:


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As 30: Financial Instruments:Recognition and Measurement

The objective of this Standard is to establish principles for recognising andmeasuring financial assets, financial liabilities and some contracts to buy or sellnon-financial items. Once we find that a transaction creates a financial asset orfinancial liability, or dispose of or extinguishes a financial asset or financialliability, there are question pertaining to recognition and de-recognition of the

asset or liability.

Recognition of a financial asset or liability

The date of recognition should be the date on which the entity becomes entitled to,or obligated to, the cash flows and not the actual date of the inflow.Derecognition of financial asset

In order to de-recognise of financial assets from the books of the seller mere legalsale of the asset is not enough, it should be backed by either transfer of risks &rewards, or surrender of control by the seller.

The seller can restrain the buyer from re-selling it, sale would be disregarded andthe asset would not get de- recognized.

Drivers of a Firms Profitability &


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Drivers of a Firm s Profitability &

Growth

Framework for Financial Ratio


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a e o o a c a at oAnalysis


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Company Evaluation

for the year ended31st March, 2011

GUJARAT STATE FERTILIZERS


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LTD

RATIOS VALUES (March11)

Return On Net Worth(%) 26

Return On Operating Assets(%) 26.2

Return on Assets Excluding Revaluations 355

Return on Assets Including Revaluations 355Fixed Assets Turnover Ratio 1.3

Asset Turnover Ratio 1.3

Dividend Payout Ratio Net Profit 8.7

Return on Equity(%) 29.69

Cost of Equity(%) 20.39

WACC (NO DEBT IN THE CAPITALSTRUCTURE)

20.39

,life of the lease


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Intangible assets are amortized over their existing economic life but notmore than ten years on a straight line basis

Analysis


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InventoriesValued at FIFO basisFinished stock valued at lower of weighted average cost or net realizablevalue

Investments

Long term investments are carried out at costCurrent investments are carried out at lower of cost or quoted price

ImpairmentsThe company makes assessment and accounts for impairments in

assets.No change in the accounting policy of the firmhas been observed.

Thus, no impact different from past years would


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Analysis

Operating ROA is almost equal to WACC thusruling out Over valuation

ROE is not much different from Cost of Equity


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National fertilizers Ltd.

RATIOS VALUES

Return On Net Worth(%) 8.3



Return on Assets Including Revaluations 34Fixed Assets Turnover Ratio 2

Asset Turnover Ratio 2

Dividend Payout Ratio Net Profit 35

Return On Equity(%) 8.28

Cost Of Equity 8


8


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Analysis

No change in the accounting policies Since Operating ROA is not less than WACC,

assets are not over valued, more or less equal.

ROE not very different from Cost of Equity


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Chambal Fertilizers Ltd

RATIOS VALUES




Return on Assets Including Revaluations 39Fixed Assets Turnover Ratio 0.94




Cost Of Equity 24.14

WACC 17.916


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Analysis

Huge difference between Cost of equity andROE.

ROA and WACC not very different.

No changes in accounting policies.


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Coromandel

RATIOS VALUES



Return on Assets Excluding Revaluations 67.56

Return on Assets Including Revaluations 67.56Fixed Assets Turnover Ratio 5.66




Cost Of Equity 2.41


2.41


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Analysis

Huge difference between ROE and cost of equitycan be attributed to international standards

Return on operating assets and WACC also verydifferent from each other

No change in accounting policies


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Rajesh Exports

RATIOS VALUES

Return On Net Worth(%) 15.53%

Adjusted RONW(%) 0.53%

Return on Assets Excluding Revaluations 54.08%

Return on Assets Including Revaluations 54.08%

Fixed Assets Turnover Ratio 232.18%

Asset Turnover Ratio 232.18%

Dividend Payout Ratio Net Profit 8.30%

Return On Equity(%)Cost Of Equity

WACC


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Su-raj Diamonds

RATIOS Values



Return on Assets Excluding

Revaluations

143.23%

Return on Assets Including

Revaluations143.23%



Dividend Payout Ratio Net Profit 8.72%Return On Equity(%)

Cost Of Equity

WACC


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Goenka Diamonds and JewelsRATIOS VALUES








Return On Equity(%)

Cost Of EquityWACC


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Gitanjali gemsRATIOS VALUES








Return On Equity(%)

Cost Of EquityWACC

Sagar Cements Ltd


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Sagar Cements Ltd.

RATIOS VALUES

Return on Net Worth 7.94%

adjusted RONW 4.68%

ROA excluding revaluations 146.15

ROA including revaluations 146.15

Asset turnover ratio 1.04

Fixed Asset turnover ratio 1.04

Dividend payout ratio net

profit

22.52

Return on Equity 116.06%

Cost of Equity 1.17%

WACC 1.17%

JK Lakshmi Cement Ltd


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JK Lakshmi Cement Ltd.

RATIOS VALUES


adjusted RONW 3.63%

ROA excluding revaluations 84.29ROA including revaluations 85.51



Dividend payout ratio netprofit 30.05



WACC 1.88%

Shiva Cement Ltd.


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Shiva Cement Ltd.

RATIOS VALUES


adjusted RONW 3.07%

ROA excluding revaluations 4.23ROA including revaluations 4.23



Dividend payout ratio netprofit

----


Cost of Equity ----

WACC ----

Prism Cement Ltd.


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Prism Cement Ltd.

RATIOS VALUES


adjusted RONW 23.17%

ROA excluding revaluations 23.23

ROA including revaluations 23.23



Dividend payout ratio netprofit

49.12



WACC 1.96%

P k i S t


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Packaging Sector

Ratio BalmerLawrie Bilcare TimeTechnoplast

Uflex

Return on Net Worth(RONW)

20.07% 14.16% 16.62% 38.48%

ROA adjusted RONW 20.23% 14.34% 17.01% 36.63%

ROA excludingrevaluations

392.52 442.38 31.91 251.24

ROA includingrevaluations

392.52 442.38 31.91 251.25

Asset turnover ratio 3.30 0.93 1.34 1.27

Fixed asset turnoverratio

3.30 0.93 1.34 1.27

Dividend payout

ratio net profit

41.21 --- 12.26 9.01

P k i S t


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Packaging Sector

Ratio JindalPolyfilms

Ess Dee EverestKanto PolyplexCorp.

Return on Net Worth(RONW)

36.58% 17.12% 9.30% 65.74%

ROA adjusted RONW 36.05% 16.55% 9.26% 43.55%

ROA excludingrevaluations

353.20 215.03 70.74 502

ROA includingrevaluations

353.20 217.83 70.74 502

Asset turnover ratio 1.37 1.47 1.18 1.36

Fixed asset turnoverratio

1.37 1.47 0.99 1.36

Dividend payout

ratio net profit

2.24 6.33 26.58 3.52


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THANK YOU.

presesntation asset measurement

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