Introduction of Accounting Standards

In the initial years, this accounting standard will be recommendatory in character. During this period, this standard is recommended for use by companies listed on a recognized stock exchange and other large commercial, industrial and business enterprises in the public and private sectors. Meaning of Accounting Standards: Accounting Standards are written documents, policy documents issued by expert accounting body or Government or other regulatory body covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transaction in the financial statement. Accounting Standards in India are issued by The Institute of Charted Accountants of India (ICAI). By: Prof. Deval Nirmal

AS- 1 Disclosure of Accounting Policies

The following is the text of the Accounting Standard (AS) 1 issued by the Accounting Standards Board, the Institute of Chartered Accountants of India on Disclosure of Accounting Policies. The Standard deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements What are Accounting Policies? Accounting policies refer to specific accounting principles and the method of applying those principles adopted by the enterprises in preparation and presentation of the financial statements. Need for disclosure of Accounting Policies: For proper and better understanding of financial statement, it is required that all significant accounting policies followed in preparation -1-

of financial statements should be disclosed because assets & liabilities in Balance sheet & Profit & loss A/c are significantly affected by accounting policy followed. All significant Accounting Policies disclosed at one place because it would be helpful to the reader of financial statements. In recent years, a few enterprises in India have adopted the practice of including in their annual reports to shareholders a separate statement of accounting policies followed in preparing and presenting the financial statements. Nature of Accounting Policies: There is no single list of accounting policies which are applicable to all circumstances. The differing circumstances in which enterprises operate in a situation of diverse and complex economic activity make alternative accounting principles and methods of applying those principles acceptable. The choice of the appropriate accounting principles and the methods of applying those principles in the specific circumstances of each enterprise calls for considerable judgments by the management of the enterprise. Areas in which different Accounting Policies are encountered: Methods of Depreciation (AS-6) - Straight line Method - WDV Method Treatment of expenditure during construction (AS-7) - Written off - Capitalization - Deferment Conversion or Translation of Foreign currency item (AS-11) - Average Rate - TT Buying Rate Valuation of Inventories (AS-2) - FIFO - Weighted average - Retail Method - Standard Cost Valuation of Investments -2-

Valuation of Fixed Assets Treatment of Contingent Liability There are many areas other than aforesaid, where more than one method can be followed in preparation of Balance Sheet & profit & loss Account are disclosed as accounting policies. Hence accounting policies contain the information about the method adopted for the preparation of financial statements. Statements of accounting policy are parts of financial statements.

Selection of Accounting Policies: Basic objective of selection of accounting policies is that the financial statement should be prepared on the basis of such accounting policies, which exhibit true & fair view of state of affairs of balance sheet & profit & loss account. Major points, which are considered for the purpose of selection and application of accounting policies, are: 1. Prudence 2. Substance over form 3. Materiality Changes in Accounting Policies: A change in accounting policies should be made in the following conditions. 1. Adoption of different accounting policies is required by statue or for compliance with an accounting standard. 2. It is considered that change would result in more appropriate presentation of financial statement. Disclosure of Accounting Policies: To ensure proper understanding of financial statements, it is necessary that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. Such disclosure should form part of the financial statements. -3-

It would be helpful to the reader of financial statements if they are all disclosed as such in one place instead of being scattered over several statements, schedules and notes. Examples of matters in respect of which disclosure of accounting policies adopted will be required. Any change in an accounting policy which has a material effect should be disclosed. The amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.

AS-6 Depreciation Accounting

Meaning of Depreciation: Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or Obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined. By: Prof. Deval Nirmal -4-

Depreciable assets are assets which of business. Useful life is either the period over which a depreciable asset is expected to be used by the enterprise; or the number of production or similar units expect ed to be obtained from the use of the asset by the enterprise. are expected to be used during more than one accounting period; and have a limited useful life; and are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course

Depreciable amount of a depreciable asset is its historical cost, or Other amount substituted for historical cost in the financial statements, less estimated residual value.

Estimated residual value/ scrap value of the asset It is estimated value of depreciable asset at the end of its useful life.

Not Applicable to: forests, plantations and similar regenerative natural resources; wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar nonregenerative resources; expenditure on research and development; goodwill; -5-

live stock.

Methods of Depreciation:

Methods of Depreciation

Straight Line Method ( SLM)

Written Down Value Method ( WDV)

Straight Line Method: Under this method, a fixed and equal amount in the form of depreciation, according to a fixed percentage on the original cost, is written off during each accounting period over the useful life of the asset. How to calculate rate of depreciation under SLM? .. Original cost less Residual Value Step 1 Amount of Depreciation = asset 100 Step 2 Rate of Depreciation = Expected useful life of the Amount of Depreciation Original Cost

Written Down Value Method (WDV): Under this method, depreciation according to a fixed percentage calculated upon the original cost (in the first year) and written down value, (in subsequent year) of an asset over the expected useful life of the asset. Under this method, the rate of depreciation remains constant year after year whereas the amount of depreciation goes on decreasing. -6-

 How to calculate rate of Depreciation under WDV method...?

Changes in Depreciation Method: The method of depreciation, once adopted, needs to be applied consistently to provide comparability of the results of the operations of the enterprise from period to period. A change from one method to another can be done only: When the statute governing the enterprise requires the adoption of the new method To comply with the requirements of an accounting standard or When change is considered to result in a more appropriate preparation or presentation of the financial statements of the enterprise. Procedure to be followed in case of change in method: Change in depreciation Method Changing in Accounting Policy Retrospective Effect Recalculation of depreciation with new method from the date of pch New Accumulated Depreciation Old Accumulated Depreciation Difference between above Surplus/ deficit Cr/ Dr to P & l A/c in the year of change Disclosed Separately

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Depreciation charge on addition / extension to an existing asset: Addition/ extension is an integral part of an existing asset. - It is depreciated over the remaining useful life of the existing asset. Addition/ extension is not an integral part of an existing asset. - It is depreciated over the estimated useful life of the additional asset.

When the depreciable asset is disposed of, discarded, demolished or destroyed: Net surplus or deficiency (i.e. sale less WDV) is credited or charged to profit & Loss account.

Disclosure Required: Total cost of each class of assets Total depreciation for the period of each class of assets Accumulated depreciation of each class of assets Depreciation method Change in depreciation method

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AS-10 Accounting for Fixed Assets

Fixed assets often comprise a significant portion of the total assets of an enterprise, and therefore are important in the presentation of financial position. Furthermore, the determination of whether an expenditure represents an asset or an expense can have a material effect on an enterprises reported results of operations. Meaning of Fixed Assets & related terms: Fixed asset is an asset Held with the intention of being used for the purpose of producing or providing goods or services. Not held for sale in the normal course of business. Expected to be used for more than one accounting period.

Examples of Fixed assets are: land Building ( Freehold & Leasehold) Plant & Machinery Furniture & Fittings etc.

Not Applicable to: Forests, Plantations& similar natural resources Wasting Assets like minerals, oil and natural gas Expenditure on real estate development Live stock

Gross book value of a fixed asset is its historical cost or other amount substituted for historical cost in the books of account or financial statements. -9-

When this amount is shown net of accumulated depreciation, it is termed as net book value.

Historical Cost: Purchase Price (-) Any Trade Discount (+) Import Duties & other non-refundable Taxes (+) Any other cost of bringing asset to the working condition (Site preparation, Delivery & handling cost, Installation cost, Professional fees, expenditure incurred on start up / test runs, Administrative and other overheads are specifically attributable for construction/ acquisition / installation of fixed assets) (-) Amount of Gov. Grant received against fixed assets. Fair market value is the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arms length who are fully informed and are not under any compulsion to transact. When Fixed asset acquired in exchange of existing asset: Fixed assets exchanged not similar: Asset acquired should be recorded either at fair market value of asset given up or FMV of asset acquired, if this is more clearly evident

Fixed Assets exchanged are similar: Asset acquired should be recorded either at fair market value of asset given up or FMV of asset acquired, if this is more clearly evident or Net Book value of the asset given up.

Fixed Asset acquired in exchange of Share or other securities:

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When payment of asset is made in shares or securities asset should be recorded at either FMV of asset purchased or FMV of shares, whichever is more clearly available.

Basket Purchase: Where several fixed assets are purchased for a consolidated price, the consideration is apportioned to the various assets on a fair basis as determined by a valuer

Revaluation of Fixed Assets: When the fixed assets are revalued, these assets are shown at revalued price in financial statements.

Upward Revaluation Downward Revaluation Cr. To Revaluation Reserve L A/c

Exception: If upward Reva. Is due downward Reva. is due To downward Reva. In any previous previous year Year & it is debited to P & L A/c. Revaluation reserve Then, upward reva. To the extent of downward reva. is credited to to P& L A/c

Dr. to P &
Exception: If to upward Reva. In any & it is credited to A/c. Then, downward reva. to the extent of upward reva. is debited revaluation Reserve A/c. (If Bal. available)

Retirement & Disposals: Fixed Assets are deleted from the financial statement either on disposal or when expected economic benefit is over Gains or losses arising on disposal are generally recognized in profit & loss account.

Disclosure Required:

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Gross & book values of fixed assets at the beginning and at the end of accounting period showing additions, disposal, acquisition and other movements. Expenditure incurred on account of fixed assets in the course of construction or acquisition and Revalued amount substituted for historical cost of fixed assets, the method adopted to compute the revalued amount, and whether the external valuer has valued the fixed assets are stated at revalued amount.

Government Grants are assistance by the Gove. In the form of cash or in kind to an enterprise Kinds of Grants :-Government Grants may be of two types.Monetary & Non-Monetary. Non Monetary Grants : (Grants in form of assets such as Land, Plant & Machinery etc) If grants are given at concessional rate , then such assets are accounted for at their acquisition cost. If grants are given free of cost, then such assets are recorded at nominal value. Monetary Grants : Grants related to depreciable Fixed assets. Specific Grants :- The Government, for many reasons, provides capital grants at times, e.g. to promote an industry. Two alternative treatments are available to account for such grant.

Capital Approach Income Approach Capital Approach: The Grant is shown as deduction from the gross value of assets in arriving at its book value. When the Grant equals to the cost of the assets, the assets should be shown in the balance sheet at nominal value. Income Approach :- 12 -

Grants are treated as a deferred Income. The deferred Income is recognized in profit & Loss A/c on a systematic and rational basis over the useful lives of assets. Such allocation to income is made over the periods and in proportions in which depreciation on related asset is charged. Recognition of Government Grants:- Gove. Grants are recognised in the Fina. statements only when there is reasonable assurance that : The enterprise comply with the conditions attached to them. The Grants will be ultimately received. Mere receipt of the grant cannot be considered as fulfilment of all conditions & compliance. Borrowing costs are defined as interest and other costs incurred relating to the borrowing of funds. It includes following costs. Interest & commitment charges on borrowings Finance charges when asset acquired on finance lease.etc. Conditions for capitalization of borrowing cost: Those borrowing costs, which are directly attributable to the acquisition, construction or production of qualifying assets are eligible for capitalization. - Qualifying assets will give future benefits to the enterprise and the cost can be measured. - (Qualifying Assets is an asset which takes substantial period of time to get ready for its intended use or sale.) Specific borrowings :When funds are borrowed specifically for the purpose of obtaining a fixed asset. General borrowings: When funds are borrowed generally and use for the purpose of obtaining a fixed asset. Borrowings for projects :When funds are borrowed as a means to part finance the cost of a project, all borrowing costs incurred during the construction period are capitalised and allocate to various fixed assets in the ratio of their basic cost. -

6.2 Fair market value is the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arms length who are fully informed and are not under any compulsion to transact. - 13 -

6.3 Gross book value of a fixed asset is its historical cost or other amount substituted for historical cost in the books of account or financial statements. When this amount is shown net of accumulated depreciation, it is termed as net book value.

By: Prof. Deval Nirmal JKPIM

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