Chapter 3

Various Accounting Standards issued by ASB

3.1 Introduction
“Accounting is as old as money itself” Chanakya in his Arthashastra
emphasized on the existence and the need of proper accounting and auditing.
However, modern system of accounting owes its origin to Pacioli who lived in
Italy in the 18th century. In those early days, business transactions were not so
complex due to the existence of small and easily manageable organizations,
which were managed by the proprietor himself. “Accounting to be useful on an
integral basis for economic development must be convenient and practiced in a
broad context. It must encompass the private and public enterprises (financial
and management) and government and national accounting, these branches of
accounting refers to accounting information system.” Accounting standards
have been and are being formulated at different levels. At the international level,
the accounting standards are set up by the International Accounting Standards
Board. For different countries, the accounting standards are formulated by duly
recognized and constituted authority keeping in mind: the objective of
harmonizing the national accounting standards, and the legal provisions of
accounting practices and other factors relating to that particular country.
According to AICPA-1 (1973), “Accounting standards may be regarded as a
principal which has been logically derived from the objective of accounting,
which has been awarded the stamp of authority with the intention of producing
guidelines for formulation of accounting practices comparable with the
objective”
The accounting standard setting, by its very nature, involves reaching an
optimum balance of the requirements of financial information for various
interest-groups having a stake in financial reporting. With a view to reach
consensus, to the extent possible, as to the requirements of the relevant interest-
groups and thereby bringing about general acceptance of the Accounting
Standards among such groups, considerable research, consultations and
discussions with the representatives of the relevant interest-groups at different
stages of standard formulation is being done.

3.2 Various Accounting Standards issued by ASB

Taking into account, the need of the hour, Accounting Standards Board
(ASB) also tries to adopt International Accounting Standards/International
Financial Reporting Standards. So far the Accounting Standards Board has
issued 32 Accounting Standards. They are:-
AS-1 Disclosure of Accounting Policies
AS-2 Valuation of Inventories
AS-3 Cash Flow Statements
AS-4 Contingencies and Events Occuring after the Balance Sheet Date
AS-5 Net Profit or Loss for the period, Prior Period Items and Changes in
Accounting Policies
AS-6 Depreciation Accounting
AS-7 Accounting for Construction Contracts
AS-8 Accounting for Research and Development
AS-9 Revenue Recognition
AS-10 Accounting for Fixed Assets
AS-11 Accounting for the Effects of Changes in Foreign Exchange Rates
AS-12 Accounting for Government Grants
AS-13 Accounting for Investments
AS-14 Accounting for Amalgamations
AS-15 Accounting for Retirement Benefits in the Financial Statement of
Employers
AS-16 Borrowing Costs
AS-17 Segment Reporting
AS-18 Related Party Disclosures
AS-19 Leases
AS-20 Earnings Per Share

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AS-21 Consolidated Financial Statements
As-22 Accounting for Taxes on income
AS-23 Accounting for investments in Associates in Consolidated Financial
Statements
AS-24 Discontinuing Operations
AS-25 Interim Financial Reporting
AS-26 Intangible Assets
AS-27Financial Reporting of Interests in Joint Ventures
AS-28 Impairment of Assets
AS-29 Provisions, Contingent Liabilities and Contingent Assets
AS-30 Financial Instruments: Recognition and Meausrement
AS-31 Financial Instruments: Presentation
AS-32 Financial Instruments: Disclosures

3.3 Accounting Standards in brief

AS-1 DISCLOSURE OF ACCOUNTING POLICIES

-Accounting Policies- refer to specific accounting principles adopted by the

enterprise in the preparation and presentation of financial statement.
The choice of the appropriate accounting principles and the methods
of applying those principles in the specific circumstances of each
enterprise call for considerable judgement by the management of the
enterprise.
-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 the financial statements.
- All significant accounting policies adopted in the preparation and
presentation of the financial statements should be disclosed.
Such disclosure should form part of the financial statements and
should normally disclosed in one place.

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Areas in Which Differing Accounting Policies are Encountered-
The following are examples of the areas in which different accounting
policies may be adopted by different enterprises-
• Methods of depreciation, depletion and amortization
• Treatment of expenditure during construction
• Conversion or translation of foreign currency items
• Valuation of inventories
• Treatment of goodwill
• Valuation of investments
• Treatment of retirement benefits
• Recognition of profit on long-term contracts
• Valuation of fixed assets
• Treatment of contingent liabilities.
The above list of examples is not intended to be exhaustive

Considerations in the Selection of Accounting Policies

Basic objective of selection of accounting policies is that financial
statements should be prepared on the basis of such accounting policies, which
exhibit true and fair view of state of affairs of balance sheet and the profit and
loss account.
-For this purpose, the major considerations governing the selection and
application of accounting policies are:—
a. Prudence
b. Substance over form
c. Materiality
-If the fundamental accounting assumptions viz. Going concern,
Consistency and Accrual are followed in the financial statements specific
disclosure is not required. If a fundamental accounting assumption is
not followed, the fact should be disclosed.

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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 a part of the financial statements. 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.
-Any change in the accounting policies which has a material effect in the
current period or which is reasonably expected to a have a material effect
in later periods should be disclosed. In the case of a change in the
accounting policies which has a material effect in the current period, the
amount by which any item in the financial statement is affected by such
change should also be disclosed to extent ascertainable. Where such
amount is not ascertainable, wholly or in part, the fact should be
disclosed.
-Disclosure of accounting policies or of changes therein cannot remedy a
wrong or inappropriate treatment of the item in the accounts.

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 AS-2 VALUATION OF INVENTORIES
Objective
A primary issue in accounting for inventories is the determination of the
value at which inventories are carried in the financial statements until the related
revenues are recognized.

This AS is Applied in accounting for inventories other than

-Work-in-progress arising under construction contracts, including
directly related service contracts.
-WIP arising in the ordinary course of business of service providers.
-Shares, debentures arising in the ordinary course of business of service
providers.
-Producer’s inventories of livestock, agriculture and forest products and
mineral oils, ores and gases to the extent that they are measured at net
realizable value in accordance with well established practices in those
industries.

Inventories are assets-

a. held for sale in the ordinary course of business
b. in the process of production for such sale; or
c. in the form of materials of supplies to be consumed in production
process or rendering of services.
d. NRV is the estimated selling price in the ordinary course of business
less the estimated costs for completion and the estimated costs necessary
to make the sale.
e. inventories should be valued at the lower of cost and NRV.

Cost of inventories- the cost of inventories should comprise all costs of

purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition.

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Exclusions from inventories-
- abnormal amounts of wasted materials, labour and other production
costs.
- Storage costs, unless those costs are necessary in the production prior to
further production stage.
- administration O/H that do not contribute to bringing the inventories to
their present location and condition and
- selling and distribution costs.

Cost formula-
- specific identification method means directly linking the cost with
specific item of inventories. This method is applicable in the following
conditions-
• in case of purchase of item specifically segregated for specific
project and is not ordinarily inter-changeable.
• in case of goods or services produced and segregated for specific
project.
- where specific identification method is not applicable, the cost of
inventories is valued by the following method-
• FIFO
• Weighted Average Cost
- cost of inventories in certain conditions- when it is impracticable to
calculate the cost, the following methods may be followed to ascertain
cost.
• Standard Cost
• Retail Method

NRV- NRV is estimated on the basis of most reliable evidence at the time of
valuation. Estimation of NRV is made as at each Balance Sheet date.

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Estimation of NRV- the NRV of the materials and other supplies used in the
production of finished goods is estimated under-
-if finished product in which raw material and supplies used is sold at cost or
above cost, then the estimated realizable value of raw material and supplies
is considered more than its cost.
-if finished product in which raw material and supplies used is sold below
cost, then the estimated realizable value of raw material or supplies is equal
to replacement price of raw material or supplies.

Disclosure in the financial statements-

- Accounting policy adopted in measuring inventories.
- Cost formula used.
- Classification of inventories- like – finished goods, raw material, spare
parts and its carrying amount.

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 AS-3 CASH FLOW STATEMENTS

Applicability
This standard applies to the following enterprises-
-Which has turnover more than Rs. 50 crores in financial year.
-listed companies-cash flow statement of listed companies shall be
presented only under indirect method as prescribed in AS-3.

Benefits of Cash Flow Information

A cash flow statement, when used in conjunction with the other financial
statements, provides information that enables users to evaluate the changes in
net assets of an enterprise, its financial structure (including its liquidity and
solvency) and its ability to affect the amounts and timing of cash flows in order
to adapt to changing circumstances and opportunities.

Presentation of Cash Flow Statement

The cash flow statement should report each flows during the period
classified by operating, investing and financial activities.
-Operating Activities-They are principal revenue producing activities of the
enterprises other than investing and financing activities
-Investment Activities-The activities of acquisition and disposal of long
term assets and other investment not included in cash equivalents and
disposal of debt and equity instruments, properly and fixed assets etc.
-Financing Activities- Are those activities which result in change in size
and composition of owners capital and borrowing of the organization.

Reporting Cash Flows from operating activities-

a) The Direct Method, whereby major classes of gross cash receipts and
payments are disclosed.

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 b) The Indirect Method, whereby net profit or loss is adjusted for the
effects of transactions of a non-cash nature, any deferrals or accruals of
past or future. Operating cash receipt or payments and items of income or
expense associated with investing or financing cash flows.

Reporting Cash Flows from investing and financing activities

An enterprise should report separately major classes of gross cash
receipts and gross payments arising from investing and financing activities,
except to the extent that cash flows reported on a net basis.

Reporting cash flows on Net Basis-

Cash flows arising from the following operating, investing and
financing activities may be reported on a net basis-
-cash receipts and payments on behalf of customers when the cash
flows reflect the activities of the customer rather than those of the
enterprise, and
-each receipts and payments for the items in which the turnover is
quick, the amount are large, and the maturities are short.

Foreign Currency cash flows-

The effect of change in exchange rate in cash and cash equivalents held
in foreign currently should be reported as separate part the reconciliation of cash
and cash equivalents.
Unrealized gain and losses arising from changes in foreign exchange
rates are not cash flows-
Extraordinary items-
The cash flows associated with extraordinary items should be classified
as arising from operating, investing or financing activities as appropriate and
separately disclosed.

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Interest-
Interest Received-
- from investment-investment activities
- from short term investment-as cash equivalents should be considered as
cash inflows from operating activities.
- on trade advances and operating receivables should be in operating
activities

Interest paid-
- on loans debt in financing activities
- on working capital loan and any other than taken to finance operating
activities in operating activities.

Dividend Received-
-For financial enterprises- in operating activities.
-For other than financial enterprises-in Investing activities.
Dividend Paid- Always as financing activities.

Treatment of Tax-
-Cash flow for tax payments/refund- Operating activities.
-If cash flow can be specifically identified as cash flow from investment,
financing activities, appropriate classification should be made.

Investment in associates, subsidiaries and joint Ventures

- Report in cash flow statement only cash flow between it and investee.

Cash flow relating to acquisition or disposal of subsidiaries

-Presented separately and classified as investing activities.

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Non-cash transactions-
-Investing and financing transactions that do not involve the use of cash and cash
equivalents should be excluded from cash flow statement.

Disclosure of cash and cash equivalents

An enterprise should disclose the components of cash and cash equivalents
and should present a reconciliation of the amount in the cash flow statement with
equivalent items reported in the balance sheet.
 AS-4 CONTINGENCIES AND EVENTS OCCURRING AFTER
BALANCE SHEET DATE

Contingencies refers to-

-Existing conditions or situations
-Result of which (contingencies) would be known only on happening or non-
happening of certain events in future.
-Results may be either a gain or loss.

Contingencies-
-the amount of a contingent loss should be provided for by a charge in the
statement of profit and loss if;
-It is probable that future events will confirm that, after taking into account any
related probable recovery, on asset has been impaired or a liability has been
incurred as at the balance sheet date and
-A reasonable estimate of the amount of the resulting loss can be made.
-the existence of a contingent loss should be disclosed in the financial statement
if either of the above conditions is not met, unless the possibility of a loss is
remote.
-contingent gain should not be recognized in the financial statements.

Events Occurring After Balance Sheet Date-

-assets and liabilities should be adjusted for events occurring after the
balance sheet date that provide additional information to assist the
estimation of amounts relating to conditions existing at the balance sheet
date or that indicate the fundamental accounting assumption of going concern is
not appropriate.

-dividends stated in respect of the period covered by the financial statements,

which are proposed or declared by the enterprise after the balance sheet date but
before approval of the financial statement, should be adjusted.

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-disclosure should be made in the report of the approving authority of those
events occurring after the balance sheet date that represent material change and
commitments affecting the financial position of the enterprise.

Disclosure-
- if the disclosure of contingencies is required, the following should be
provided-
-the nature of contingency.
-the uncertainties which may affect the future outcome.
-as estimate of the financial effect, or a statement that estimate cannot
be made.
-if disclosure of events occurring after the balance sheet date in the
report of the approving authority is required, the following information
should be provided-
-the nature of the event
-an estimate of the financial effect, or a statement that such an estimate
cannot be made.

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 AS-5 NET PROFIT OR LOSS FOR THE PERIOD, PRIOR
PERIOD AND CHANGES IN ACCOUNTING POLICIES

Net profit or loss for the period- all items of income and expenses which are
recognized in a period should be included in the determination of net profit or loss
for the unless an accounting standard required or permits otherwise.

The net profit or loss for the period comprises the following components-
i) profit or loss from ordinary activities and
ii) extraordinary activities.

i) profit or loss from ordinary activities- when items of income and expenses
within profit or loss from ordinary activities are of such size, nature or
incidence that their disclosure is relevant to explain the performance of the
enterprise for the period, the nature and amount of such items should be
disclosed separately.

ii) extraordinary activities- extraordinary items should be disclosed in the

statement of profit and loss as a part of net profit or loss for the period. The
nature and the amount of each extraordinary item should be separately disclosed
in the statement of profit or loss in such a manner that its impact on current profit
or loss can be perceived.

Prior period items- The nature and amount of prior period items should be
separately disclosed in the statement of profit and loss in a manner that their
impact on the current or loss can be perceived.

Changes in Accounting Estimates

- The effect of a change in an accounting estimate should be included in the
determination of net profit or loss in-
• the period of the change; if the change affects the period only; or

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 • the period of the change and future periods, if the change affects
both.
- The effect of a change in an accounting estimate should be classified using the
same classification in the statement of profit and loss as was used previously for
the estimate.
- The nature and amount of a change in an accounting estimate which has a
material effect in the current period, or which is expected to have a material
effect in subsequent periods, should be disclosed. If it is impracticable to
quantify the amount this fact should be disclosed.

Changes in Accounting Policies

A change in an accounting policy should be made only if the adoption of
a different accounting policy is required by statute or for compliance of an
accounting standard or, if it is considered that the change would result in a
more appropriate presentation of the financial statements of the enterprise.

Disclosure of change in Accounting Policies

• Material effect should be shown in financial statement to reflect the effect of
such change.
• This effect should be disclosed in the year of change.
• If the effect of change is not ascertainable, the fact should be disclosed.
• If the effect of change is not material for current period, but it is material
effect for the latter period, then fact should be disclosed in the period of
change.

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 AS-6 DEPRECIATION ACCOUNTING

- The depreciable amount of a depreciable asset should be allocated on

systematic basis to each accounting period during the useful life of the asset.
- The depreciation method selected should be applied consistently from
period to period. Change in depreciation method is done in following conditions-
• For compliance of statute
• For compliance of accounting standards
• For more appropriate presentation of the financial statements.
- When such a change in the method of depreciation is made, depreciation
should be recalculated in accordance with the new method from the date of
the asset coming into use. The deficiency or surplus arising from
retrospective re-computation of depreciation in accordance with the new
method should be adjusted in the accounts in the year in which the method
of depreciation is changed. In case the change in the method results in
deficiency in depreciation in respect of past years, the deficiency should be
charged in the statement of profit and loss. In case the change in the method
results in surplus, the surplus should be credited to the statement of profit and
loss. Such a change should be treated as a change in accounting policy and its
effect should be quantified and disclosed.

Disclosure-
• The total cost of each class of assets –historical cost or revalued cost.
• Total depreciation for the period of each of assets.
• Accumulated depreciation of each class of assets.
• Depreciation method.
• Depreciation rates or the useful life of the assets, if they are different than the
rates specified in governing status.

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 AS-7 CONSTRUCTION CONTRACTS

Types of construction contracts

• Fixed price contracts.
• Cost plus contracts.

Combining and Segmenting Contracts

• For accounting purpose usually requirement of this accounting standard is
applied separately to each contract to calculate profit or loss from the
contract but under some circumstances the profit/loss may be calculated in
combination of two or more contracts or group of combined contracts,
basically group of contract may be combined for accounting purpose
because in substance these contracts are part of single project with an
overall profit margin

Contract Revenue
• the initial amount of revenue agreed in the contract and
• variations in contract work, claims and incentive payments,
-to the event that is probable that they will result in revenue; and
-they are capable of being reliably measured.

Contract Costs
• costs that relate directly to the specific contract;
• costs that are attributable to contract activity in general and can be
allocated to the contract and
• Such other costs as are specifically chargeable to the customer under the
terms of the contracts.

Contract revenue and expenses

• Revenue recognized in the period in which work is performed.

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• Expenses recognized in the period in which the work to which expenses
relate is
performed.

Conditions for recognizing the contract revenue-

• Total contract revenue can be measured reliably.
• It is probable that economic benefits associated with contract will flow to
the contractor.
• Total contract cost and cost up to stage completion is measured reliably.
• Contract cost attributable to contract can be clearly identified.

Uncertainty in collection amounts to expenses

When some uncertainty arises about the collectability of an amount already
included in contract revenue and already recognized in profit and loss statement
amounts to expense. This uncollectible amount of which recovery has ceased to
be probable is recognized as an expense rather than as adjustments to contract
revenue.

Disclosure
-An enterprise should disclose-
-the amount of contract revenue recognized as revenue in the period;
-the methods used to determine the contract revenue recognized in the period and
-the methods used to determine the stage of completion of contracts in process.
-Disclose the following for contracts in process at the reporting –
-the aggregate amount of costs incurred and recognized profits up to reporting
date.
-the amount of advances received; and
-the amount of retentions.
-An enterprise should present-
-the gross amount due from customers for contract work as an asset and
-the gross due to customers for contract work as liability.

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 AS-9 REVENUE REGONISITION
Objective
The standard explains when the revenue should be recognized in profit and
loss account and also state the circumstances in which revenue recognition can be
postponed.

Applicability
Not applicable to following revenue or gain –
- Construction Contracts (Covered under AS-7)
- Hire Purchase Agreements (Cover under AS-19)
- Governments Grants or other similar subsidies (Cover under AS-12)
- Insurance Contracts of Insurance Companies (Covered by a separate Statute)

Revenue defined
Revenue means the gross inflow of cash, receivable or other consideration
arising in the course of ordinary activities of an enterprise from sale of goods,
from rendering of services and from the use by others of the resources of the
enterprise yielding interest, royalties and dividends.

Timing of Revenue Recognition

Revenue from sale of rendering services should be recognized at the time
of sale or rendering of services. However, if at the time of rendering of services or
sale there is significant uncertainty in the ultimate collection of revenue, then the
revenue recognition is postponed and in such cases revenue should be recognized
only when it become reasonably certain that ultimate collection will be made. It
also applies to the revenue arising out of escalation of price; export incentive,
interest etc.

Revenue from sale of goods

It is recognized when all the following conditions are fulfilled-

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 i. Seller has transferred the ownership of goods to buyer for a price or All
significant risks and rewards of ownership have been transferred to
buyer.
ii. Seller does not retain any effective control of ownership of the transferred
goods.
iii. There is no significant uncertainty in collection of the amount of
consideration (i.e. cash, receivable, etc.)

Revenue from rendering of the services

It is recognized as the service is performed. The performance of service is
measured by two methods as under-
-Completed service contract method- Revenue recognized when service is
about to be completed and no significant uncertainties exist about the
collection of service charges.
-Proportionate Completion method- Revenue is recognized by reference to
the performance of each act. The revenue recognized under this method would
be determined on the basis of contract value, associated cost, number of acts
or other suitable basis. Further, no significant uncertainty exists about the
collection of amount of service charges of performed acts.

Revenue from interest should be recognized on time proportion basis.

Revenue from Royalties should be recognized on accrual basis as per terms of

agreement.

Revenue from Dividend should be recognized when the owner’s right to

receive payment is established.

Disclosure
When revenue recognition is postponed, the disclosure of the circumstances
necessitating the postponement should be made.

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 AS-10 ACCOUNTING FOR FIXED ASSETS

Scope
AS 10 deals with recognition of fixed assets, elements that constitute cost
of Fixed Assets items, as also the areas requiring specific accounting treatment.
AS 10 is made applicable to financial statements prepared on historical cost basis.
This accounting standard is not applicable to the following items-
- Forests, plantations and similar regenerative natural resource.
- Wasting assets like minerals, oil, and natural gas.
- Expenditure on real estate development.
- Live Stock.

Fixed Assets
It is an asset, which is-
-Held with intention of being used for the purpose of producing or providing
goods and service.
-Not held for sale in the normal course of business.
-Expected to be used for more than one accounting period.

Composition of Cost-General
Following principles apply in determining the historical cost of fixed
assets- Purchase Price and any other costs directly attributing to bringing the
asset to its working condition for its intended use. Like-
-Import duties and other non-refundable taxes,
-site preparation cost,
-delivery and handling cost,
-installation cost,
-expenditure incurred on start up and commissioning of the project including the
expenditure on test runs less income by sale of products,
-administrative and other general overheads attributable for fixed assets,
-loss/gain on deferred payment on foreign currency liability,

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-subject to limitations prescribed under AS-16, finance and borrowing costs.

Components of Cost-
Some distinct areas-
(I) Self constructed fixed assets- Cost of self constructed fixed assets; include
the following-
-All costs which are directly related to the specific assets.
-All costs that are attributable to the construction activity should be allocated
to the specific assets.
-Any internal profit included in the cost should be eliminated.
(II) Acquired in exchange for another- The cost of acquisition of fixed assets
is determined under the different situations differently as under-
Fixed Assets exchanged not similar- Assets acquired should be recorded
either at fair market value of asset given up or fair market value of asset
acquired, if this is more clearly evident.
Fixed Assets exchanged are similar- Fixed Assets acquired is recorded at
fair market value of assets given up or Fair Market Value of asset acquired, if
this is more clearly evident or Net Book Value of the assets given up.
Fixed Assets acquired in exchange of share or other securities- (When
payment of fixed assets is made in shares or securities) Assets should be
recorded at either fair market value of assets purchased of Fair Market Value
of share or securities, whichever is more clearly available.

Revaluation
The following principles have a bearing on the method of accounting for
revaluation of fixed assets-
1. An entire class of assets should be revalued or the selection of assets for
revaluation should be made on systematic basis. This should be disclosed.
2. Revaluation of class of assets should not result in the net book value of the
class being greater than the recoverable amount of assets of that class.

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 3. When a fixed asset is revalued upwards, accumulated depreciation existing
at the date of revaluation should not be credited to profit and loss
statement.
4. An increase in net book value arising on revaluation of fixed assets is
normally credited to owner’s interest under heading of revaluation reserves
and it is not available for distribution.
5. A decrease in net book arising on revaluation of fixed assets is required to
be charged to profit and loss statement with one exception. To the extent
that such a decrease is considered to be related to a previous increase on
revaluation included in revaluation reserve, the attributable amount is
charged against that reserve.
6. An increase to be recorded is a reversal of previous decrease arising on
revaluation which has been charged to profit and loss statement in which
case the increase is credited to profit and loss statement to the extent that it
offsets the previously recorded decrease.
7. A revalued fixed asset may be disposed. If this happens, difference
between net disposal proceeds and the net book value should be charged or
credited to P and L A/c with one exception. That such a loss is related to an
increase which was previously recorded as a credit to revaluation reserve
and which has not been subsequently reversed or utilized, may be charged
directly to that reserve.

Disclosure Requirements
-Gross and net book values of fixed assets at the beginning and end of accounting
period.
-Additions, disposals, acquisitions and other movements in fixed assets.
-Expenditure incurred for fixed assets that are in the process of construction or
acquisition.
-Amount substituted, if any, for historical cost of FA.

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-Method adopted to compute the revalued amounts, the nature of indices used, the
year of any appraisal made, and whether an external valuer was involved, in case
fixed assets are stated at revalued amounts.

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 AS-11 EFFECTS OF CHANGES IN FOREIGN
EXCHNAGE RATES

Objective
The principal issues in accounting for foreign currency transactions and
foreign operations are to decide which exchange rate to use and how to
recognize in the financial statements the financial effect of changes in exchange
rates.

Scope
The Accounting Standards applies to –
-In accounting for transactions in foreign currencies.
-In translating the financial statement of foreign operation-integral as well
non-integral.
-The accounting standard also prescribes the accounting for forward exchange
contracts.

Non-applicability-
-Re-statement of an enterprise’s financial statements from its reporting currency
into another currency for the conveniences of users accustomed to that currency.
-The presentation in a cash flow statement of cash flows arising from transactions
in a foreign currency and the transactions of cash flows of foreign operations.
-Exchange differences arising from foreign currency borrowing to the extent that
they are regarded as an adjustment to interest cost.

Definition
-Closing rate is the exchange rate at the balance sheet date.
-Exchange difference is the difference resulting from reporting the same
number of units of a foreign currency in the reporting currency at different
exchange rates.

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-Fair value is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm’s length transaction.

-Foreign operation is a subsidiary, associate5, joint venture or branch of the

reporting enterprise, the activities of which are based or conducted in a country
other than the country of the reporting enterprise.

-Forward exchange contract means an agreement to exchange different

currencies at a forward rate.

-Integral foreign operation is a foreign operation, the activities of which are an

integral part of those of the reporting enterprise.

-Monetary items are money held and assets and liabilities to be received or
paid in fixed or determinable amounts of money.

-Reporting currency is the currency used in presenting the financial

statements.

Classification for Accounting Treatment

For the purposes of accounting treatment of the effect of change in foreign
exchange rates, the transaction can be classified into following categories-
-Category-I Foreign Currency transactions-
- Buying or Selling the goods or services
- Lending and borrowing in foreign currency
- Acquisition and disposition of assets denominated in foreign currency.
- Category-II Foreign Operations-
- Foreign Branch -An Associate
- Joint Venture -Foreign Subsidiary
Further these are classified in two types-

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 -Integral operation
-Non-Integral operation
- Category-III Forwards Exchange Contracts- These may be of two types-
-For managing risk/hedging
-For trading and speculation

Foreign Currency Transactions

-Initial Recognition- A foreign currency transaction should be recorded, on
initial recognition in the reporting currency, by applying to the foreign
currency amount the exchange rate between the reporting currency and the
foreign currency at the date of the transaction.
-Reporting at Subsequent Balance Sheet Dates-
- Foreign currency monetary items should be reported using the closing
rate. However, in certain circumstances, the closing rate may not reflect
with reasonable accuracy the amount in reporting currency that is likely
to be realized from, or required to disburse, a foreign currency monetary
item at the balance sheet date.

- Foreign currency non- monetary items-

-Carried at historic cost- should be reported using the exchange rate
at the date of the transaction; and
-Carried at fair value- should be reported using the exchange rate
that existed when the values were determined.

-Recognition of Exchange Difference- All types of exchange differences

will be charged to profit and loss account for the period.

Translation of financial statement of foreign operation (Category-II)

-INTEGRAL FOREIGN OPERATION-The individual items in the financial
statements of the foreign operation are translated as if all these transactions had
been entered into by the reporting enterprises. Therefore the financial statements

57
should be translated by using the principles as prescribed for foreign currency
transactions of the reporting entity (as explained above).

- NON INTEGRAL FOREIGN OPERATION- Accounts of non-integral

foreign operation are translated using the following principles-
(a) The assets and liabilities, both monetary and non-monetary, of the non-
integral foreign operation should be translated at the closing rate;
(b) Income and expense items of the non-integral foreign operation should
be translated at exchange rates at the dates of the transactions; and
(c) All resulting exchange differences should be accumulated in a foreign
currency translation reserve until the disposal of the net investment.

Change in the Classification of a Foreign Operation

When there is a change in the classification of a foreign operation; the
translation procedures applicable to the revised classification should be applied
from the date of the change in the classification.

Accounting treatment of forward exchange contracts(Category-III)

For the purpose of accounting treatment forward exchange contracts have
been classified in two types-
(i) entered for managing risk (hedging)- The premium or discount arising
at the inception of such a forward exchange contract should be amortized
as expense or income over the life of the contract. Exchange differences
on such a contract should be recognized in the statement of profit and loss
in the reporting period in which the exchange rates change. Any profit or
loss arising on cancellation or renewal of such a forward exchange
contract should be recognized as income or as expense for the period.
(ii) entered for trading or speculation- When forward exchange contract
is entered to earn profit by trading or speculation in foreign exchange, the
accounting treatment shall be different as the object is not to reduce the
risk but to gain.

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 As per the accounting standard premium or discount on such
forward contract is not to be recognized. At each balance sheet date the
value of contract is marked so its current market value, gains or loss on
the contract is recognized.

Disclosure
An enterprise should disclose-
- Amount of exchange difference included in the net profit or loss.
- Amount accumulated in foreign exchange translation reserve.
- Reconciliation of opening and closing balance of foreign exchange
translation reserve.
- If the reporting currency is different from the currency of the country in
which entity is domiciled, the reason for such difference.
- A change in classification of significant foreign operation needs
following disclosures-
- Nature of change in classification
- The reason for the change.
- Effect of such change on shareholders fund
- Impact of change on net profit or loss for each prior period
presented
- The disclosure is also encouraged of an enterprise’s foreign
currency risk management policy.

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 AS-12 ACCOUNTING FOR GOVERNMENT GRANTS

Scope
Deals with important topic of grants or assistance in the form of both
capital and revenue, from various government agencies. These grants are also
referred to as subsidies, cash incentives, duty drawbacks etc. These can also be
non-monetary. The standard provides accounting methods that can be followed, to
suit specific situations.

Government Grants
Governments’ grants are assistants by the Govt. in the form of cash or kind
to an enterprise in return for past or future compliance with certain conditions.

Recognition of Govt. Grants

The Govt. grants should be recognized when there is reasonable assurance
that-
-comply with the conditions attached to them and
-the grants will be received.

Kinds of Govt. Grants

Govt. grants are of following types-
-Non-monetary Govt. grants (Grants in form of assets such as land, plant and
mach. etc)
-Grants are given at concessional rate, and then such assets are accounted for at
their acquisition cost.
-Grants are given free of cost, then such assets are recorded at nominal value.

-Monetary Grants- Grants related to depreciable fixed assets-

There are two accounting treatments-
-shown as deduction from the gross value of asset in arriving its book value.

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-treated as deferred income. The deferred income is recognized in profit and loss
account on systematic and rational basis over useful life of assets.
-Grants related to non-depreciable fixed assets-
-shown as deduction from the gross value of asset in arriving its book value.
-if the conditions attached to grants are fulfilled, grants are credited to Capital
Reserve A/c or
-If condition attached to grants is yet to be fulfilled
-credited to income over the same period over which the cost of meeting such
conditions is charged to income.
-unapportioned deferred income is disclosed in the balance sheet as “Deferred
Govt. Grants”

Grants related to Revenue

Govt. grants related to revenue should be recognized on a systematic basis
in the profit and loss statement. Such recognition should be spread over the
periods necessary to match them with the related costs, which the grant is
intended to compensate.

Grants related to Promoter’s Contribution should be credited to Capital

Reserve and it should form part of the shareholder’s funds.

Refund of Govt. Grants

-Refund of grants related to revenue-
-should be adjusted against any unamortized “deferred govt. grants”, if any
-remaining balance amount of refund should be charged to Profit and Loss A/c
-Refund of grants related to specific assets- The amount refundable and relating to
a specific fixed asset should be accounted for by increasing the book value of the
assets, or by reducing the capital reserve, or the deferred income balance, as
appropriate.

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Disclosure
The following disclosures are appropriate
1. The accounting policy adopted for Govt. grants including the methods
of presentation in the financial statement.
2. The nature and extent of Govt grants recognized in the financial
statements including grants of non-monetary assets given at a
concessional rate or free of cost.

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 AS-13 ACCOUNTING FOR INVESTMENTS

Scope
Deals with the vital accounting aspects concerning investments. These
include classification, determination of cost for initial recognition, disposal and
re-classification of investments. Also prescribes appropriate procedures of
valuation of investments in the financial statements.

Applicability
Does not deal with the following-
-Bases for recognition of interest, dividend and rental earned on investment.
-Operating or finance lease.
-Investment of retirement benefit plans and life insurance enterprises.
-Mutual Funds, Venture Capital Fund and/or the related Asset Mgt. Co.s, banks
and public financial institutions.

Investment
Investments are assets held by an enterprise for earning income by way of
dividends, interest and rentals, for capital appreciation, or other benefits to the
investing enterprise.

Classification of Investments
Investments is classified into current and long term investment-
-Current investments are those, which are readily realizable, and are intended to
be held for not more than twelve months from the date of investment.
-Long term investments are falling outside the ambit of current investments.

Cost of Investments
Cost of investment comprises of purchase price and acquisition charges
such as brokerage, fees and duties etc.

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-Acquired by issue of shares or other securities- purchase price of investment is
the fair value of the securities issued.

-Acquired in exchange for another asset-Fair value of the asset given up or fair
value of the investment received if it is more clearly evident.

-Pre-acquisition interest- Interest has accrued in the preacquisition period and was
included in cost of investment at the time of acquisition, then subsequent receipt
of interest is deducted from the cost of investments.

-Dividend- When dividend is declared from pre-acquisition profits and later on

received, then such amount of dividend is deducted from the cost of investment.

-Right Shares-
-If right shares offered are subscribed, then cost of right shares is added to
the carrying amount of the investment.
-If right shares offered are not subscribed but right is sold in the market,
then sale proceeds are taken to Profit and Loss A/c provided original shares on
which right is not acquired cum-right.
-Acquired Cum-right- If investments are acquired cum-right and after that
it becomes ex-right then the cost of investments is to be reduced by the amount
received on sale of rights.

Carrying amount of Investment (Valuation)

-Current Investment- Carrying amount of each current investment is the lower
of cost and realizable value.
Any reduction in realizable value is debited to profit and loss account;
however if realizable value of investment is increased subsequently, the increase
in value of current investment to the level of the cost is credited to profit and loss
account.

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-Long term investment-
-It is usually carried/valued at cost.

- Long-term investments are usually of individual importance to the investing

enterprise. The carrying amount of long-term investments is therefore
determined on an individual investment basis.

-Where there is a decline, other than temporary, in the carrying amounts of long
term investments, the resultant reduction in the carrying amount is charged to
the profit and loss statement. The reduction in carrying amount is reversed when
there is a rise in the value of the investment, or if the reasons for the reduction
no longer exist.

Investment Properties
The cost of any shares in a co-operative society or a company, the holding of
which is directly related to the right to hold the investment property, is added to
the carrying amount of the investment property.

Disposal of Investments
On disposal of an investment, the difference between the carrying
amount and the disposal proceeds, net of expenses, is recognized in the profit
and loss statement.
When disposing of a part of the holding of an individual investment, the
carrying amount to be allocated to that part is to be determined on the basis
of the average carrying amount of the total holding of the investment.

Reclassification of Investments
Where long-term investments are reclassified as current investments,
transfers are made at the lower of cost and carrying amount at the date of
transfer.

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 Where investments are reclassified from current to long-term, transfers are
made at the lower of cost and fair value at the date of transfer

Disclosures
-Accounting policies followed for valuation of investment.

-Classification of investment into current and long term in addition to

classification as per Schedule VI of Companies Act in case of company.

-Agreement amount of quoted and unquoted securities separately.

-Any significant restriction on investment like minimum holding period for

sale/disposal, utilization of sale proceeds, or non-remittance of sale proceeds of
investment held outside India.

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 AS-14 ACCOUNTING FOR AMALGAMATION

Definitions
-Amalgamation means an amalgamation pursuant to the provisions of the
Companies Act, 1956 or any other statute which may be applicable to
companies.

-Consideration for the amalgamation means the aggregate of the shares and
other securities issued and the payment made in the form of cash or other assets
by the transferee company to the shareholders of the transferor company.

Accounting Standard in case of amalgamation

This accounting standard deals with accounting to be made in the books
of Transferee Company in case of amalgamation.
This Accounting Standard is not applicable to cases of acquisition of
shares when one company acquired/purchases the share of another company and
the acquired company is not dissolved and its separate entity continues to exist.

Types of Amalgamation
As per this standard, there are two types of amalgamations-
-Amalgamation in the nature of merger.
-Amalgamation in the nature of purchase

Amalgamation in the nature of merger

An amalgamation is in the nature of merger if following conditions are
satisfied-
-All assets and liabilities of Transferor Company are taken over by the
transferee company.
-The shareholders holding at least 90% or more of the equity share of the
transferor company become the equity shareholder of the transferee
company.
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 -Consideration for the amalgamation is paid in equity shares (except
fractional shares can be paid in cash).
-Business of the transferor company is intended to be carried on by the
transferee company.
-No adjustment made in the book value of the assets and liabilities except
the adjustments to ensure uniformity of accounting policies.

Amalgamation in the nature of purchase

An amalgamation will be considered in the nature of purchase if any of
the conditions regarding amalgamation in the nature of merger is not satisfied

Accounting Method
There are two main methods of accounting for amalgamations:
(a) the pooling of interests method; and
(b) the purchase method

Pooling Of Interests Method

Under the pooling of interests method, the assets, liabilities and reserves
of the transferor company are recorded by the transferee company at their
existing carrying amounts.
If, at the time of the amalgamation, the transferor and the transferee
companies have conflicting accounting policies, a uniform set of accounting
policies is adopted following the amalgamation. The effects on the financial
statements of any changes in accounting policies are reported in accordance
with Accounting Standard (AS) 5, ‘Prior Period and Extraordinary Items and
Changes in Accounting Policies’.

The Purchase Method

Under the purchase method, the transferee company accounts for the
amalgamation either by incorporating the assets and liabilities at their existing
carrying amounts or by allocating the consideration to individual identifiable

68
assets and liabilities of the transferor company on the basis of their fair values at
the date of amalgamation. The identifiable assets and liabilities may include
assets and liabilities not recorded in the financial statements of the transferor
company.
If purchase consideration exceeds the net assets taken over, the
difference is debited to Goodwill A/c. If purchase consideration is less than the
net assets taken over, the difference is credited to Capital Reserve.

Statutory Reserves
-Separate accounting adjustment/entry is not required for statutory reserves in
the case of merger.

-However in case of amalgamation by way of purchase, the reserves being

internal liabilities, are not recorded in the books of transferee as per the
purchase method. Therefore to comply with the requirements of particular
statute, the statutory reserves created in the books of Transferor Company are to
be maintained for some more years in the transferee company books.
As per the standard to fulfill the requirement of maintenance of statutory
reserves the transferee company shall record the statutory reserves by debiting
to Amalgamation Adjustment A/c and crediting to Statutory Reserve.

Treatment of Goodwill Arising on Amalgamation

Goodwill arising on amalgamation represents a payment made in
anticipation of future income and it is appropriate to treat it as an asset to be
amortised to income on a systematic basis over its useful life. Due to the nature
of goodwill, it is frequently difficult to estimate its useful life with reasonable
certainty. Such estimation is, therefore, made on a prudent basis. Accordingly, it
is considered appropriate to amortise goodwill over a period not exceeding five
years unless a somewhat longer period can be justified.

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Disclosure
Following disclosures for all amalgamation should be made-
-Names and general nature of business of amalgamating companies
-Effective date of amalgamation.
-Method of accounting used.
-Particulars of scheme sanctioned under a statute.
-In case of amalgamation under pooling of interest of method-
-description and number of share issued.
-difference between consideration and net assets acquired.
-In case of amalgamation under purchase method-
-difference between consideration and net assets acquired and treatment thereof
including period of amortization of goodwill.

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 AS-15 EMPLOYEE BENEFITS

Definitions
-Retirement benefit schemes are arrangements to provide provident fund,
superannuation or pension, gratuity, or other benefits to employees on leaving
service or retiring or, after an employee’s death, to his or her dependants.

-Defined contribution schemes are retirement benefit schemes under which

amounts to be paid as retirement benefits are determined by contributions to a
fund together with earnings thereon.

-Defined benefit schemes are retirement benefit schemes under which amounts
to be paid as retirement benefits are determinable usually by reference to
employee’s earnings and/or years of service.

-Pay-as-you-go is a method of recognizing the cost of retirement benefits only

at the time payments are made to employees on, or after, their retirement.

-Employee Benefits- are all forms of consideration given by an enteprise

directly to the employee or their spouses, children or other dependants etc.

Post-employment Benefits- includes-

-Retirement Benefits
-Other Benefits

Post employment benefit plans are classified as

(1) Defined Contribution Plan
Under this plan, the enterprise’s obligation is limited to the amount that it
agrees to contribute to the fund. Thus, the amount of post employment benefits
received by the employee is determined by the amount of contributions paid by
an enterprise to a post-employment benefit plan or to an insurance company.

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Defined Contributions Plans may be of following three types-
a) Multi employer plans- are defined contribution plans that-
-pool the assets contributed by various enterprises that are not under
common control; and
-use those assets to provide benefits to employees of more than one
enterprise, on the basis that contribution and benefits levels are determined
without regard to the identity of the enterprise that employ the employees
concerned.
b) State Plans- are established by legislation to cover all enterprises or all
enterprises of a specific industry and are operated by national or local
government.
c) Insured Benefits- Under this plan employer takes insurance policy from an
insurance company for meeting its obligation under post employment benefits
and employer has no obligation to pay benefits to the employee.

Disclosure
An enterprise should disclose-
- The amount recognized as expense for defined contribution plan;
-Contribution to defined contribution plan for key management personnel.

(2) Defined Benefit Plans- are retirement benefits plan like gratuity, pension
plan that defines an amount of benefits to be provided usually, as a function of
one or more factors such as age, year of service or compensation/salary etc.
The net total of the following amount should be charged to profit and
loss account `as cost of defined benefit plan excluding the employee benefit cost
which is to be capitalized as per another accounting standard.
-Current Service Cost
-Interest Cost
-Expected return on any plan assets or any re-imbursement rights
-Actuarial gains and losses
-The effect of any curtailment, re-settlements etc.

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Other Long Term Employee Benefits- are employee benefits which do not fall
wholly within 12 months after the end of the period in which the employees
render the related service.

Termination Benefits- are employee benefits payable as a result of either; an

entities decision to terminate an employee’s employment before the normal
retirement date; or an employee’s decision to accept voluntary retirement in
exchange for those benefits. The event which gives rise to an obligation is the
termination rather than employee service. Therefore, an enterprise should
recognize termination benefits as a liability and an expense when-
-the enterprise has a present obligation as a result of a past event;
-it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation; and
-a reliable estimate can be made of the amount of the obligation.

Disclosures
The financial statements should disclose the method by which retirement
benefit costs for the period have been determined. In case the costs related to
gratuity and other defined benefit schemes are based on an actuarial valuation,
the financial statements should also disclose whether the actuarial valuation was
made at the end of the period or at an earlier date. In the latter case, the date of
the actuarial valuation should be specified and the method by which the accrual
for the period has been determined should also be briefly described, if the same
is not based on the report of the actuary.

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 AS-16 BORROWING COSTS

Scope
-This Statement should be applied in accounting for borrowing costs.
-This Statement does not deal with the actual or imputed cost of owners’ equity,
including preference share capital not classified as a liability.

Definition
Borrowing costs may include:
(a) interest and commitment charges on bank borrowings and other short-
term and long-term borrowings;
(b) amortisation of discounts or premiums relating to borrowings;
(c) amortisation of ancillary costs incurred in connection with the
arrangement of borrowings;
(d) finance charges in respect of assets acquired under finance leases or
under other similar arrangements; and
(e) exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs.

Recognition of borrowing costs

Borrowing cost that is directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalized as part of
the cost of that asset. The amount of borrowing costs eligible for capitalisation
should be determined in accordance with this Statement. Other borrowing costs
should be recognised as an expensein the period in which they are incurred.

Qualifying Asset
An asset which takes substantial period of time to get ready for its
intended use or sale, is called Qualifying Assets

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Specific and General Borrowing
-Specific borrowings- Specific borrowings are those which are for
expenditure on qualifying asset.
-General borrowings- When the amount borrowed is generally used for the
purpose of obtaining qualifying asset.

Commencement of Capitalization of borrowing cost

The borrowing cost incurred on qualifying asset is to be capitalized only
if all the three following conditions are fulfilled.
-Expenditure on qualifying asset is being incurred.
-Borrowing costs are incurred.
-Activities, which are essential to prepare the asset for its intended use, should
be in progress.

Suspension of capitalization of borrowing cost

Capitalization of borrowing costs should be suspended during extended
periods in which active development is interrupted.
Capitalization of borrowing costs is not suspended when a temporary
delay is a necessary part of the process of getting as asset ready for its intended
use or sale.

Cessation of capitalization of borrowing cost

Capitalization of borrowing cost should cease when-
-All activities necessary for making assets ready for intended use/sale are
substantially complete.
-Items of administrative work or finishing touches to be completed happen to be
minor in nature.
-Where an asset is completed “in parts”, and completed part is capable of use
when work on others is in progress, capitalization for completed part should be
stopped.

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Disclosure
The financial statement should disclose-
-The accounting policy adopted for borrowing cost.
-The amount of borrowing cost capitalized during the period.

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 AS-17 SEGMENT REPORTING

Objective
The objective of this Statement is to establish principles for reporting
financial information, about the different types of products and services an
enterprise produces and the different geographical areas in which it operates.
Such information helps users of financial statements:
(a) better understand the performance of the enterprise;
(b) better assess the risks and returns of the enterprise; and
(c) make more informed judgments about the enterprise as a whole.

Definitions
-A business segment is a distinguishable component of an enterprise that is
engaged in providing an individual product or service or a group of related
products or services and that is subject to risks and returns that are different
from those of other business segments.

-A geographical segment is a distinguishable component of an enterprise that

is engaged in providing products or services within a particular economic
environment and that is subject to risks and returns that are different from those
of components operating in other economic environments.

-Enterprise revenue is revenue from sales to external customers as reported in

the statement of profit and loss.

-Segment revenue is the aggregate of-

i) the portion of enterprise revenue that is directly attributable to a
segment,
ii) the relevant portion of enterprise revenue that can be allocated on a
reasonable basis to a Segment, and
iii) revenue from transactions with other segments of the enterprise.

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Segment revenue does not include-
(a) extraordinary items
(b) interest or dividend income, including interest earned on advances or
loans to other segments unless the operations of the segment are
primarily of a financial nature; and
(c) gains on sales of investments or on extinguishment of debt unless the
operations of the segment are primarily of a financial nature.

Segment expense is the aggregate of-

(i) the expense resulting from the operating activities of a segment that is
directly attributable to the segment, and
(ii) the relevant portion of enterprise expense that can be allocated on a
reasonable basis to the segment, including expense relating to transactions with
other segments of the enterprise.

Segment expense does not include-

(a) extraordinary items
(b) interest expense, including interest incurred on advances or loans
from other segments, unless the operations of the segment are primarily
of a financial nature;
(c) losses on sales of investments or losses on extinguishment of debt
unless the operations of the segment are primarily of a financial nature;
(d) income tax expense; and
(e) general administrative expenses, head-office expenses, and other
expenses that arise at the enterprise level and relate to the enterprise as a
whole.

Segment result is segment revenue less segment expense.

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Segment assets are those operating assets that are employed by a segment in its
operating activities and that either are directly attributable to the segment or can
be allocated to the segment on a reasonable basis.
If the segment result of a segment includes interest or dividend income,
its segment assets include the related receivables, loans, investments, or other
interest or dividend generating assets.
Segment assets do not include income tax assets.

Segment liabilities are those operating liabilities that result from the operating
activities of a segment and that either are directly attributable to the segment or
can be allocated to the segment on a reasonable basis.
If the segment result of a segment includes interest expense, its segment
liabilities include the related interest-bearing liabilities.
Segment liabilities do not include income tax liabilities.

Identification of Reportable Segments

Reportable segment is a business segment or geographical segment
identified on the basis of their definitions for which segment information is
required to be disclosed by the segment. Further these are divided to include
sub-segments based on the following conditions-
-Segment Revenue from sales to external customers and internal transfer is 10%
or more than total external and internal revenue of all segments
Or
-10% or more of segment result
Or
-Segment asset is 10% or more than total assets of all segments
-All the above three criteria must be applied first and
- Management may at its discretion choose any segment as
reportable segment even if such segment does not fulfill
criteria stated above.

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 - Ensure whether at least 75% of total external revenue should
be in the reportable segments.
- If 75% of total external revenue is not in the reportable
segments, then additional reportable segments should be
identified ignoring 10% threshold limits until at least 75% of
total external revenue is included in reportable segments. .

Disclosure
The disclosure requirements are as under-
-Revenue from external customers.
-Revenue from transactions with other segments
-Segment result.
-Cost to acquire tangible and intangible fixed assets.
-Depreciation and amortization expenses.
-Carrying amount of segment assets.
-Segment liabilities.
-Non-cash expenses other than depreciation and amortization.
-Reconciliation of revenue, result, assets and liabilities.

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 AS-18 RELATED PARTY DISCLOSURE
Objective-
The objective of this Statement is to establish requirements for disclosure of:
(a) Related party relationships; and
(b) Transactions between a reporting enterprise and its related parties.

Scope
1. This Statement should be applied in reporting related party relationships and
transactions between a reporting enterprise and its related parties. The
requirements of this Statement apply to the financial statements of each
reporting enterprise as also to consolidated financial statements presented by a
holding company.
2. This Statement applies only to related party relationships described in
standard.

Related Party- related party relationships described in (a) to (e) below:

(a) enterprises that directly, or indirectly through one or more intermediaries,
control, or are controlled by, or are under common control with, the reporting
enterprise (this includes holding companies, subsidiaries and fellow
subsidiaries);
(b) associates and joint ventures of the reporting enterprise and the investing
party or venturer in respect of which the reporting enterprise is an associate or a
joint venture;
(c) individuals owning, directly or indirectly, an interest in the voting power of
the reporting enterprise that gives them control or significant influence over the
enterprise, and relatives of any such individual;
(d) key management personne and relatives of such personnel; and
(e) enterprises over which any person described in (c) or (d) is able to exercise
significant influence. This includes enterprises owned by directors or major
shareholders of the reporting enterprise and enterprises that have a member of
key management in common with the reporting enterprise.

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Classification of Related Party
The concept and definition of related parties is based on the following basis.
-Control concept- one party has the ability to control the other party in
following ways-
-control by ownership (directly or indirectly) more than 50% of voting
power of an enterprise.
-control over composition of board of directors or other governing body.
-control substantial interest in the voting power and power to direct the
financial or operating policies of the enterprise.
-Significant influence- can be exercised in many ways. E.g. –
-by participation of Board of Directors.
-material inter-company transactions.

Exceptions of Related Party

Following relationship will not be deemed as related party-
-Two companies have common director but they are not able to influence the
mutual dealing between the companies.
-A single customer or supplier or franchise or distributor or general agent with
whom enterprise’s transactions are in significant volume.
-Government departments and agencies.
-State controlled enterprise as regards related party relationship with other State
controlled enterprise.

Disclosure
Following disclosure is needed-
-Name of the related party and nature of the related party relationship where
control exists should be disclosed irrespective of whether or not there have been
transactions between the related parties.

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-If there have been transactions between related parties, during the existence of
a related party relationship, the reporting enterprise should disclose the
following:
(i) the name of the transacting related party;
(ii) a description of the relationship between the parties;
(iii) a description of the nature of transactions;
(iv) volume of the transactions either as an amount or as an appropriate
proportion;
(v) any other elements of the related party transactions necessary for an
understanding of the financial statements;
(vi) the amounts or appropriate proportions of outstanding items and
provisions for doubtful debts due from such parties at that date; and
(vii) amounts written off or written back in the period in respect of debts
due from or to related parties.

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 AS-19 ACCOUNTING FOR LEASE

Objective
The objective of this Statement is to prescribe, for lessees and lessors, the
appropriate accounting policies and disclosures in relation to finance leases and
operating leases.

Scope
This Statement should be applied in accounting for all leases other than:
(a) lease agreements to explore for or use natural resources, such as oil, gas,
timber, metals and other mineral rights; and
(b) licensing agreements for items such as motion picture films, video
recordings, plays, manuscripts, patents and copyrights; and
(c) lease agreements to use lands

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

-A finance lease is a lease that transfers substantially all the risks and rewards
incidental to ownership of an asset to the lessee but not the legal ownership.

-An operating lease is a lease other than a finance lease.

-Minimum lease payments are the payments over the lease term that the lessee
is, or can be required, to make excluding contingent rent, costs for services and
taxes to be paid by and reimbursed to the lessor, together with:
(a) in the case of the lessee, any residual value guaranteed by or on
behalf of the lessee; or
(b) in the case of the lessor, any residual value guaranteed to the lessor:
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 (i) by or on behalf of the lessee; or
(ii) by an independent third party financially capable of meeting this
guarantee.

-Residual value of a leased asset is the estimated fair value of the asset at the
end of the lease term.

-Guaranteed residual value is:

(a) in the case of the lessee, that part of the residual value which is
guaranteed by the lessee or by a party on behalf of the lessee and
(b) in the case of the lessor, that part of the residual value which is
guaranteed by or on behalf of the lessee, or by an independent third party.

-Unguaranteed residual value of a leased asset is the amount by which the

residual value of the asset exceeds its guaranteed residual value.
-Gross investment in the lease is the aggregate of the minimum lease
payments under a finance lease from the standpoint of the lessor and any
unguaranteed residual value accruing to the lessor.
-Unearned finance income is the difference between:
(a) the gross investment in the lease; and
(b) the present value of
(i) the minimum lease payments under a finance lease from the
standpoint of the lessor; (ii) any unguaranteed residual value accruing to
the lessor, at the interest rate implicit in the lease.
-Net investment in the lease is the gross investment in the lease less
unearned finance income.
-Contingent rent is that portion of the lease payments that is not fixed in
amount but is based on a factor other than just the passage of time

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Accounting for lease
In the books of Lessor-
(i) For Finance Lease-
-The lessor should recognize assets given under a finance lease in its balance
sheet as a receivable at an amount equal to the net investment in the lease.
-The recognition of finance income should be based on a pattern reflecting a
constant periodic rate of return on the net investment of the lessor
outstanding in respect of the finance lease.

(ii) For Operating Lease-

-Record leased out asset as the fixed asset in the balance sheet.
-Charge depreciation as per AS-6.
-Recognize lease income in Profit and Loss A/c using straight line method.
If any other method reflects more systematic allocation of earning derived
from the diminishing value of leased out asset, that approach can be adopted.

In the books of Lessee-

(i) For Finance Lease- Legally the ownership of leased asset remains with
lessor but risk and reward of leased asset is transferred to lessee therefore the
substance of transactions is- lessee becomes the owner. Lease asset as well as
liability for lease should be recognized at the lower of-
-Fair value of the leased asset at the inception of lease or
-Present value of minimum lease payment from the lessee point of view.
Each lease payment is apportioned between finance charge and principal
amount.

(ii) For Operating Lease- Lease payments should be recognized as an expense

in the profit and loss account on a straight line basis over the lease term. If any
other method is more representative of the time pattern of the user’s benefit,
such method can be used.

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Sale and Leaseback Transactions
-If a sale and leaseback transaction results in a finance lease, any excess or
deficiency of sales proceeds over the carrying amount should not be
immediately recognized as income or loss in the financial statements of a seller-
lessee. Instead, it should be deferred and amortized over the lease term in
proportion to the depreciation of the leased asset.

-If a sale and leaseback transaction results in an operating lease, and it is clear
that the transaction is established at fair value, any profit or loss should be
recognized immediately. If the sale price is below fair value, any profit or loss
should be recognized immediately except that, if the loss is compensated by
future lease payments, it should be deferred and amortized in proportion to the
lease payments over the period for which the asset is expected to be used. If the
sale price is above fair value, the excess over fair value should be deferred and
amortized over the period for which the asset is expected to be used.

-For operating leases, if the fair value at the time of a sale and leaseback
transaction is less than the carrying amount of the asset, a loss equal to the
amount of the difference between the carrying amount and fair value should be
recognized immediately.

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 AS-20 EARNINGS PER SHARE

Objective
The objective of this Statement is to prescribe principles for the
determination and presentation of earnings per share which will improve
comparison of performance among different enterprises for the same period and
among different accounting periods of the same enterprise.

Scope
This Statement should be applied by enterprises whose equity shares or
potential equity shares are listed on a recognized stock exchange in India. An
enterprise which has neither equity shares nor potential equity shares which are
so listed but which discloses earnings per share should calculate and disclose
earnings per share in accordance with this Statement.
In consolidated financial statements, the information required by this
Statement should be presented on the basis of consolidated information.

Presentation
An enterprise should present basic and diluted earnings per share on the
face of the statement of profit and loss for each class of equity shares that has a
different right to share in the net profit for the period. An enterprise should
present basic and diluted earnings per share with equal prominence for all
periods presented.
This Statement requires an enterprise to present basic and diluted
earnings per share, even if the amounts disclosed are negative (a loss per share).

Measurement
(i) Basic Earnings Per Share- Basic earnings per share should be calculated by
dividing the net profit or loss for the period attributable to equity shareholders
by the weighted average number of equity shares outstanding during the period.

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Earnings – Basic- For the purpose of calculating basic earnings per share, the
net profit or loss for the period attributable to equity shareholders should be the
net profit or loss for the period after deducting preference dividends and any
attributable tax thereto for the period.

Per Share– Basic- For the purpose of calculating basic earnings per share, the
number of equity shares should be the weighted average number of equity
shares outstanding during the period.

The weighted average number of equity shares outstanding during the period
and for all periods presented should be adjusted for events, other than the
conversion of potential equity shares that have changed the number of equity
shares outstanding, without a corresponding change in resources.

Right Issue- Right issue includes a bonus element. Hence, the number of equity
shares to be used in calculating basic EPS for all periods prior to right issue is
the number of equity shares outstanding prior to the issue multiplied by right
factor which is calculate as under-

Right Factor= Fair value per share immediately prior to right issue
Theoretical ex-right fair value per share

Theoretical ex-right Aggregate fair value of share immediately prior

fair value per = to the exercise of rights + Proceeds from exercise of the right
share No. of shares outstanding immediately after right issue

(ii) Diluted Earning per Share

Diluted earning per share is calculated when there are potential equity
shares in capital structure of the enterprises.

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 Potential equity shares are those financial instruments which entitle to its
holder the right to acquire equity shares like convertible debentures, convertible
preference share, options, warrants etc.

Diluted Potential equity shares

Potential equity shares are diluted if their conversion into equity shares
reduces the earning per share.
Diluted Earnings-
-Compute net profit or loss for the period attributable to existing equity
shareholder,
-Add back dividend along with distribution tax on convertible preference share
previously deducted.
-Add back interest net of tax effect charged on convertible debenture or loans.

Order in which potential equity shares to be considered

Potential equity share should be ranked in order of dilutive effect.
Dilutive effect is determined dividing incremental net profit by incremental
equity share arising out of conversion.

Restatement
If the number of equity shares or potential equity shares outstanding is
increased as a result of bonus issue, share split, consolidation of shares, the
calculation of basic and diluted equity per share should be adjusted for all the
period presented.
If changes occur after the balance sheet date but before the approval of
financial statements by the competent authority, the EPS calculation for these
financial statements and any prior period financial statements should be restated
on the basis of new number of shares.

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Disclosure
-Disclosure of Numerator and reconciliation- The amount used as numerator
for calculating basic and diluted EPS and its reconciliation with net profit or
loss for the period.

-Disclosure of denominator and reconciliation-

-Weighted average number of shares used as denominator for calculating
basic and diluted EPS and reconciliation of their denominator to each other.
-Nominal value of shares along with EPS.
-Basic earnings per share computed on the basis of earnings excluding
extraordinary items (net of tax expense).
-Diluted earnings per share computed on the basis of earnings excluding
extraordinary items (net of tax expense).

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 AS-21 CONSOLIDATED FINANCIAL STATEMENTS

Objective
The objective of this Statement is to lay down principles and procedures
for preparation and presentation of consolidated financial statements.
Consolidated financial statements are presented by a parent (also known as
holding enterprise) to provide financial information about the economic
activities of its group. These statements are intended to present financial
information about a parent and its subsidiary(ies) as a single economic entity to
show the economic resources controlled by the group, the obligations of the
group and results the group achieved with its resources.

Scope
This Statement should be applied in the preparation and presentation of
consolidated financial statements for a group of enterprises under the control of
a parent.
This Statement should also be applied in accounting for investments in
subsidiaries in the separate financial statements of a parent.

Presentation of Consolidated Financial Statements

Consolidated Financial Statements are not the substitute for separate
financial statements of a parent and its subsidiary (ies).

Scope of Consolidated Financial Statements

A parent, which is required to prepare the consolidated financial
statements, should consolidate the financial statements of all its subsidiary (ies),
whether domestic or foreign.

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Exceptions
Consolidated Financial Statements are not required to be prepared even if
parent-subsidiary(ies) relationship exists when-
-A parent acquires the control, which is intended to be temporary as the
investment (control) is to be disposed in the near future.
-The subsidiary operates under severe long-term restrictions and due to this its
ability to transfer the funds to parent is significantly weakened.

Consolidation Procedures
In order that the consolidated financial statements present financial
information about the group as that of a single enterprise, the following steps
should be taken:-
(a) the cost to the parent of its investment in each subsidiary and the parent’s
portion of equity of each subsidiary, at the date on which investment in each
subsidiary is made, should be eliminated;

(b) any excess of the cost to the parent of its investment in a subsidiary over the
parent’s portion of equity of the subsidiary, at the date on which investment in
the subsidiary is made, should be described as goodwill to be recognized as an
asset in the consolidated financial statements;

(c) when the cost to the parent of its investment in a subsidiary is less than the
parent’s portion of equity of the subsidiary, at the date on which investment in
the subsidiary is made, the difference should be treated as a capital reserve in
the consolidated financial statements;

(d) minority interests in the net income of consolidated subsidiaries for the
reporting period should be identified and adjusted against the income of the
group in order to arrive at the net income attributable to the owners of the
parent; and

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(e) minority interests in the net assets of consolidated subsidiaries should be
identified and presented in the consolidated balance sheet separately from
liabilities and the equity of the parent’s shareholders. Minority interests in the
net assets consist of:
(i) the amount of equity attributable to minorities at the date on which
investment in a subsidiary is made; and
(ii) the minorities’ share of movements in equity since the date the
parent-subsidiary relationship came in existence.
Where the carrying amount of the investment in the subsidiary is
different from its cost, the carrying amount is considered for the purpose of
above computations.

(f) Intragroup balances and intragroup transactions and resulting unrealized

profits should be eliminated in full. Unrealized losses resulting from intragroup
transactions should also be eliminated unless cost cannot be recovered.

(g) The financial statements used in the consolidation should be drawn up to the
same reporting date. If it is not practicable to draw up the financial statements of
one or more subsidiaries to such date and, accordingly, those financial
statements are drawn up to different reporting dates, adjustments should be
made for the effects of significant transactions or other events that occur
between those dates and the date of the parent’s financial statements. In any
case, the difference between reporting dates should not be more than six
months.

(h) If parent and its subsidiaries are following different accounting policies, the
consolidated financial statement should be prepared using uniform accounting
policies, if it is not practicable, then the items in which different accounting
policies have been followed should be disclosed.

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Enterprise ceasing to be a subsidiary
An investment in an enterprise should be accounted for in accordance
with Accounting Standard (AS) 13, Accounting for Investments, from the date
that the enterprise ceases to be a subsidiary and does not become an associate.

Disclosure Requirements
Following disclosure should be made in consolidated financial statements-
-List of all subsidiaries
-Proportion of ownership interest.
-Nature of relationship between parent and subsidiary whether direct control
or control through subsidiaries.
-Name of the subsidiaries of which reporting date are different.
-The fact for different accounting policies applied for preparation of
consolidated financial statements.
-If consolidation of particular subsidiary has not been made as per the
grounds allowed in accounting standards the reason for not consolidating
should be disclosed.

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 AS-22 ACCOUNTING FOR TAXES ON INCOME

Objective
This Accounting Standards prescribe the accounting treatment for taxes on
income. According this standards tax on income is determined on the principle of
accrual concept, that means tax should be accounted in the period in which
corresponding revenue and expenses are accounted.

Scope
This Statement should be applied in accounting for taxes on income. This
includes the determination of the amount of the expense or saving related to
taxes on income in respect of an accounting period and the disclosure of such an
amount in the financial statements.

Definitions
-Tax expense (tax saving) is the aggregate of current tax and deferred tax
charged or credited to the statement of profit and loss for the period.

-Deferred tax is the tax effect of timing differences.

-Timing differences are the differences between taxable income and accounting
income for a period that originate in one period and are capable of reversal in
one or more subsequent periods.

-Permanent differences are the differences between taxable income and

accounting income for a period that originate in one period and do not reverse
subsequently.

Recognition
-Taxes on income are considered to be an expense incurred by the enterprise in
earning income and are accrued in the same period as the revenue and expenses
to which they relate. Such matching may result into timing differences.

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-The tax effects of timing differences are included as the tax expense in the
statement of profit and loss and as deferred tax assets or as deferred tax
liabilities, in the balance sheet.
-Permanent differences do not result in deferred tax assets or deferred tax
liabilities.
-Deferred tax should be recognized for all the timing differences, subject to the
consideration of prudence in respect of deferred tax assets.
-Deferred tax assets should be recognized and carried forward only to the extent
that there is a reasonable certainty that sufficient future taxable income will be
available against which such deferred tax assets can be realized.
-There are two distinct items that may lead to deferred tax asset. These are
unabsorbed depreciation or carried forward loss under tax laws. A deferred tax
asset can be recognized and carried forward only to the extent that there is
VIRTUAL CERTAINTY that sufficient taxable income would be available in
future, against which such deferred tax assets can be realized.

Measurement
-Current tax should be measured at the amount expected to be paid to
(recovered from) the taxation authorities, using the applicable tax rates and tax
laws.
-Deferred tax assets and liabilities should be measured using the tax rates and
tax laws that have been enacted or substantively enacted by the balance sheet
date.
-Deferred tax assets and liabilities should not be discounted to their present
value.

Review of Deferred Tax Assets

The carrying amount of deferred tax assets should be reviewed at each
balance sheet date. An enterprise should write-down the carrying amount of a
deferred tax asset to the extent that it is no longer reasonably certain or virtually
certain, that sufficient future taxable income will be available against which

97
deferred tax asset can be realized. Any such write-down may be reversed to the
extent that it becomes reasonably certain or virtually certain, as the case may be,
that sufficient future taxable income will be available.

Disclosure
-The break up of deferred tax asset/liability should be disclosed.

-In case of deferred tax asset arises out of unabsorbed depreciation or loss,
evidence supporting recognition should be disclosed.

-Deferred tax asset/liability should be disclosed separately from current

asset/liabilities. They should be distinguished from advance tax/tax
provision/tax refund due. Deferred tax liability should be shown after the head
“unsecured Loan” and deferred tax asset after the head “Investment” with a
separate heading.

-Deferred tax asset and liability should be set off if permissible under the tax
laws but to be shown separately if not permissible.

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 AS-23 ACCOUNTING FOR INVESTMENTS IN
ASSOCIATES IN CONSOLIDAED FINANCIAL
STATEMENTS

Objective
The objective of this Statement is to set out principles and procedures for
recognizing, in the consolidated financial statements, the effects of the
investments in associates on the financial position and operating results of a
group.

Scope
This Statement should be applied in accounting for investments in
associates in the preparation and presentation of consolidated financial
statements by an investor.

Definitions
-An associate is an enterprise in which the investor has significant influence
and which is neither a subsidiary nor a joint venture of the investor.

-Significant influence is the power to participate in the financial and/or

operating policy decisions of the investee but not control over those policies.

-Control:
(a) the ownership, directly or indirectly through subsidiary(ies), of more than
one-half of the voting power of an enterprise; or
(b) control of the composition of the board of directors in the case of a company
or of the composition of the corresponding governing body in case of any other
enterprise so as to obtain economic benefits from its activities.

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-The equity method is a method of accounting whereby the investment is
initially recorded at cost, identifying any goodwill/capital reserve arising at the
time of acquisition. The carrying amount of the investment is adjusted thereafter
for the post acquisition change in the investor’s share of net assets of the
investee. The consolidated statement of profit and loss reflects the
investor’s share of the results of operations of the investee.

-Equity is the residual interest in the assets of an enterprise after deducting all
its liabilities.

Accounting for Investments – Equity Method

Investment in associate should be accounted for as per equity method in
consolidated financial statements if the investor is required to prepare
consolidated financial statement. From the date of cessation of significant
influence, the investment in such associate should be accounted as per AS-13
even if consolidated statements are prepared by the investor. The carrying
amount of the investment at that date should be regarded as cost thereafter in the
consolidated financial statement.

Application of Equity Method

Goodwill/capital reserve arising on the acquisition of an associate by an
investor should be included in the carrying amount of investment in the
associate but should be disclosed separately.
Carrying amount is increased /decreased to recognize the investor’s share
of the profits and losses of the associate after the date of acquisition.
Distributions received from associate should be reduced from the
carrying amount.
The carrying amount of investment in an associate should be reduced to
recognize a decline, other than temporary, in the value of the investment, such
reduction being determined and made for each investment individually.

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 Unrealized profits and losses resulting from transaction between investor
and the associate should be eliminated to the extent of the investor’s interest in
the associate.
Unrealized losses should not be eliminated. However if the recoverable
amount of transferred asset is more than the transfer cost of the asset the
unrealized losses should be eliminated.
Investor share in associates profits or losses should be computed after
adjusting dividend on cumulative preference share whether or not dividend has
been declared.

Carrying amount of investment in Associate

If there is permanent decrease in the value of investment in associate; the
carrying amount of investments in associate should be reduced by the amount of
permanent reduction.
If investor’s share of losses in associates equals or exceeds the carrying
amount of investment the investor discontinues recognizing its share of further
losses and investment is reported at nil value.

Contingencies
In accordance with Accounting Standard (AS) 4, Contingencies and
Events Occurring after the Balance Sheet Date, the investor discloses in the
consolidated financial statements:
(a) Its share of the contingencies and capital commitments of an associate for
which it is also contingently liable; and
(b) Those contingencies that arise because the investor is severally liable for the
liabilities of the associate.

Disclosures
-Description of associate including the proportion of ownership interest should
be disclosed.

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-Investment in associates accounted for using the equity method should be
classified as long term investments.

-Difference in reporting dates of financial statements of associates and of the

investor should be disclosed.

-In case an associate uses accounting policies other than those adopted for the
consolidated financial statements for like transactions and events and it is not
practicable to make appropriate adjustments to the associate’s financial
statements, the fact should be disclosed along with a brief description of the
differences in the accounting policies.

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 AS-24 DISCONTINUING OPERATIONS

Objective
The objective of this Statement is to establish principles for reporting
information about discontinuing operations, thereby enhancing the ability of
users of financial statements to make projections of an enterprise's cash flows,
earnings-generating capacity, and financial position by segregating information
about discontinuing operations from information about continuing operations.

Definitions
Discontinuing Operation-
A discontinuing operation is a component of an enterprise:
(a) That the enterprise, pursuant to a single plan, is:
i) Disposing of substantially in its entirety, such as by selling the
component in a single transaction or by demerger or spin-off of ownership
of the component to the enterprise's shareholders; or
(ii) Disposing of piecemeal, such as by selling off the components assets
and settling its liabilities individually; or
(iii) Terminating through abandonment; and
(b) That represents separate major line of business or geographical area of
operations; and
(c) That can be distinguished operationally and for financial reporting purposes.

Initial Disclosure Event

With respect to a discontinuing operation, the initial disclosure event is
the occurrence of one of the following, whichever occurs earlier:
(a) the enterprise has entered into a binding sale agreement for substantially all
of the assets attributable to the discontinuing operation; or
(b) the enterprise's board of directors or similar governing body has both (i)
approved a detailed, formal plan for the discontinuance and (ii) made an
announcement of the plan.
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Presentation and Disclosure
The standard prescribes-
Initial disclosure- An enterprise should include the following information in its
financial statements in which the initial disclosure event occurs:
(a) A description of the discontinuing operation(s);
(b) The business or geographical segment(s) in which it is reported;
(c) The date and nature of the initial disclosure event;
(d) The date or period in which the discontinuance is expected to be completed;
(e) The carrying amounts of total assets to be disposed of and the total liabilities
to be settled;
(f) Amount of revenue and expense attributable to discontinuing operation
(g)Amount of pre-tax profit or loss and tax expense attributable to discontinuing
operation.
(h)Net cash flows attributable to the operating, investing and financing activities
of the discontinuing operation

Other Disclosure- When an enterprise disposes of assets or settles liabilities

attributable to a discontinuing operation, the following other information is also
disclosed.
-Amount of gain or loss recognized on the disposal of assets or settlement of
liabilities and related income tax.
-Net selling prices from the sale of those net assets for which the enterprise has
entered into binding sale agreements and the expected timing thereof and
carrying amount of those assets.

Updating the disclosure-The disclosure required for discontinuing operation

should continue in financial statements for the period up to and including the
period in which the discontinuance is completed, the disclosure required should
be updated. Discontinuance is completed when the plan is substantially
completed or abandoned, though full payments from the buyer(s) may not yet
have been received. If an enterprise abandons or withdraws from a plan that was

104
previously reported as a discontinuing operation, that fact, reasons therefore and
its effect should be disclosed.

Disclosure in Interim Financial Reports

Interim financial reports should disclose in its notes any significant
activity or event since the end of the most recent annual reporting relating to
discontinuing operation and any significant change in the amount or timing of
cash flows relating to assets and liabilities to be disposed/settled.

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 AS-25 INTERIM FINANCIAL REPORTING

Objective
The objective of this Statement is to prescribe the minimum content of an
interim financial report and to prescribe the principles for recognition and
measurement in a complete or condensed financial statement for an interim
period. Timely and reliable interim financial reporting improves the ability of
investors, creditors, and others to understand an enterprise's capacity to generate
earnings and cash flows, its financial condition and liquidity.

Scope
This Statement does not mandate which enterprises should be required to
present interim financial reports, how frequently, or how soon after the end of
an interim period. If an enterprise is required or elects to prepare and present an
interim financial report, it should comply with this Statement.

Definitions
-Interim period is a financial reporting period shorter than a full financial year.

-Interim financial report means a financial report containing either a complete

set of financial statements or a set of condensed financial statements (as
described in this Statement) for an interim period.

Principles of recognition and measurements

As the objective of this accounting standard is to prescribe the principle
for recognition and measurement of income, expenses, assets and liabilities in a
complete or condensed financial statements i.e. Balance Sheet, Profit and Loss
Account, Cash Flow statements and Accounting Notes and Policies, there may
be two distinctive principles/views of recognition and measurement of income
and expenses in interim financial reporting-

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-INTEGRAL VIEW-An approach to measuring interim period income by
viewing each interim period as an integral part of the annual (financial) period.
Expenses are recognized in proportion to revenues earned through the use of
special accruals and deferrals.

-DISCRETE VIEW-An approach to measuring interim period income by

viewing each interim period separately.
AS-25 resolves the debate by prescribing the discrete view in general. As
per the standard, Income and Expense should be recognized/measured on
year to date basis for interim reporting.

Accounting Policies
An enterprise should apply the same accounting policies in the interim
financial statements as are applied in the annual financial statements.

Minimum Components of an Interim Financial Report

An interim financial report should include at least the following
components:
(a) condensed balance sheet;
(b) condensed statement of profit and loss;
(c) condensed cash flow statement; and
(d) selected explanatory notes

Form and Content of Interim Financial Statements

An interim financial report can contain either a complete set of financial
statements or a set of condensed financial statements.
-Complete financial statements- If an enterprise opts to prepare a complete set
of financial statements in the interim financial reporting, it should be prepared
in the same format and as per the contents and requirements of annual financial
statements.

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-Condensed financial statements- If an enterprise prepares and presents a set of
condensed financial statements, those condensed statements should include, at a
minimum, each of the headings and sub-headings that were included in its most
recent annual financial statements and the selected explanatory notes as required
by this Statement. Additional items or notes should be included if their omission
would make the condensed interim financial statements misleading.

Selected Explanatory Notes

Criteria adopted for selection of explanatory notes to be included in
interim financial report is updating the financial information, it is assumed that
the users of interim financial report are having access to the most recent annual
financial statements therefore notes to interim financial report should provide
information on financial year to date basis. However it is necessary to disclose
any events or transactions, which are material for understanding the interim
financial reporting.

Materiality
In deciding how to recognize, measure, classify, or disclose an item for
interim financial reporting purposes, materiality should be assessed in relation
to the interim period financial data. In making assessments of materiality, it
should be recognized that interim measurements may rely on estimates to a
greater extent than measurements of annual financial data.

Minimum Disclosures of Notes

Following minimum disclosure of notes and explanatory statements
should be made-
-a statement that the same accounting policies are followed in the interim
financial statements as those followed in the most recent annual financial
statements or, if those policies have been changed, a description of the
nature and effect of the change;
-explanatory comments about the seasonality of interim operations;

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-the nature and amount of items affecting assets, liabilities, equity, net
income, or cash flows that are unusual because of their nature, size, or
incidence
-Effects of change in estimates.
-issuances, buy-backs, repayments and restructuring of debt, equity and
potential equity shares;
-dividends, aggregate or per share (in absolute or percentage terms),
separately for equity shares and other shares
-Segment revenue, segment result for business segment or geographical
segment, whichever is the primary basis of the reporting entity.
-material events subsequent to the end of the interim period.
-the effect of changes in the composition of the enterprise during the interim
period, such as amalgamations, acquisition or disposal of subsidiaries and
long-term investments, restructurings, and discontinuing operations; and
-material changes in contingent liabilities since the last annual balance sheet
date.

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 AS-26 INTAGIBLE ASSETS

Objective
The objective of this Statement is to prescribe the accounting treatment
for intangible assets that are not dealt with specifically in another Accounting
Standard. This Statement requires an enterprise to recognize an intangible asset
if, and only if, certain criteria are met. The Statement also specifies how to
measure the carrying amount of intangible assets and requires certain
disclosures about intangible assets.

Scope
This Statement should be applied by all enterprises in accounting for
intangible assets, except:
(a) intangible assets that are covered by another Accounting Standard;
(b) financial assets;
(c) mineral rights and expenditure on the exploration for, or development and
extraction of, minerals, oil, natural gas and similar non-regenerative resources;
and
(d) intangible assets arising in insurance enterprises from contracts with
policyholders.
This Statement should not be applied to expenditure in respect of termination
benefits also.

Definitions
The following terms are used in this Statement:
-An intangible asset is an identifiable non-monetary asset, without physical
substance, held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes.

-Research is original and planned investigation undertaken with the prospect of

gaining new scientific or technical knowledge and understanding.
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-Development is the application of research findings or other knowledge to a
plan or design for the production of new or substantially improved materials,
devices, products, processes, systems or services prior to the commencement of
commercial production or use.

Recognition and Initial Measurement of an Intangible Asset

An intangible asset should be recognized if, and only if:
(a) it is probable that the future economic benefits that are attributable to the
asset will flow to the enterprise; and
(b) the cost of the asset can be measured reliably.
An enterprise should assess the probability of future economic benefits
using reasonable and supportable assumptions that represent best estimate of the
set of economic conditions that will exist over the useful life of the asset.

An intangible asset should be measured initially at cost-

The cost of acquisition depends on the way the intangible is acquired-
-Separate Acquisition-When an intangible asset is acquired separately, its cost
can be measured separately. Its cost consists of purchase price, any import
duties and non-refundable purchase taxes and directly attributable expenses.
-Exchange of assets- If intangible assets are acquired in exchange of assets, the
cost of intangible assets shall be fair value of assets given up.
-By issue of share of securities-The assets should be recorded at fair value of
intangibles acquired or fair value of shares or securities issued, whichever is
more evident.

-Acquisition of intangible assets in amalgamation- Intangible assets acquired

other than goodwill in amalgamation in the nature of purchase shall be
recognized only if it is meets the criteria of asset, even if that asset is not
recognized in the books of transferor company.

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Valuation of Goodwill in amalgamation in the nature of purchase is done as per
AS-14, which is equal to purchase consideration less fair value of net assets
acquired (including the intangible assets other than Goodwill).
Internally generated goodwill- As the cost cannot be measured reliably; the self
generated goodwill is not recognized in books/financial statements.

Accounting treatment of research and development cost

Following is the accounting treatment of research and development cost-
-Research Cost- As per this standard Research Cost be expensed as and when
incurred, in other words the cost of research cannot be capitalized. The
intangible asset arising from the research should not be recorded as an asset and
therefore the research cost of internal project shall be treated as an expense in
financial statement.

-Development Expenses- The development expenses, cost of internal project

also to be expensed as incurred unless they meet asset recognition criteria,
before recognizing these costs as assets the following points should be
demonstrated-
-Technical feasibility of the product -Availability of product for use or sale
-Identification of cost incurred -Probability of external market or
-The realistic expectation that there will be sufficient future revenues to cover
cost.
If development expenses generate the intangible, which meets asset
recognition criteria and other criteria, the intangible assets generated from
development expenses are capitalized.

Past Expenses not to be Recognized as an Asset

Expenditure on an intangible item that was initially recognized as an
expense by a reporting enterprise in previous annual financial statements or
interim financial reports should not be recognized as part of the cost of an
intangible asset at a later date.

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Subsequent Expenditure
Subsequent expenditure on an intangible asset after its purchase or its
completion should be recognized as an expense when it is incurred unless:
(a) it is probable that the expenditure will enable the asset to generate future
economic benefits in excess of its originally assessed standard of performance;
and
(b) the expenditure can be measured and attributed to the asset reliably.
If these conditions are met, the subsequent expenditure should be added to the
cost of the intangible asset.

Carrying amount of intangibles

Intangibles shall be carried at its cost less any accumulated amortization
and any accumulated impairment losses in the financial statements of the
enterprises.
The Accounting Standard states that the depreciable amount of an
intangible asset should be allocated on a systematic basis over the best estimates
of its useful life. Amortization should start when the asset is available for use.
If the pattern of benefit and cost can be determined reliably, then the
enterprises should amortize the intangibles as per the pattern. However, if no
pattern of benefit consumed can be determined reliably, then straight-line
method should be made.

Recoverability of the Carrying Amount - Impairment Losses

In addition to the requirements of Accounting Standard on Impairment of
Assets, an enterprise should estimate the recoverable amount of the following
intangible assets at least at each financial year end even if there is no indication
that the asset is impaired:
(a) an intangible asset that is not yet available for use; and
(b) an intangible asset that is amortized over a period exceeding ten years from
the date when the asset is available for use.

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The recoverable amount should be determined under Accounting Standard on
Impairment of Assets and impairment losses recognized accordingly.

Retirements and Disposal

An intangible asset which is retired from active use (no future economic
benefits) expected should be carried in Balance Sheet at its carrying cost subject
to impairment as per Accounting Standard on ‘Impairment of Assets’.

Disclosure
The financial statements should disclose the following in respect of
intangible asset-
-Useful life or amortization rate.
-Amortization method.
-Gross carrying amount, accumulated amortization and impairment loss at
the beginning and at the end of the period.
-Reconciliation of carrying amount at the beginning and at the end of the
period.

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 AS-27 Financial Reporting of Interests in Joint Ventures

Scope
This Statement should be applied in accounting for interests in joint
ventures and reporting of joint venture assets, liabilities, income and expenses in
the financial statements of venturers and investors, regardless of the structures
or forms under which the joint venture activities take place.

Definitions
-A Joint Venture is a contractual arrangement whereby two or more parties
undertake an economic activity, which is subject to joint control.

- Proportionate consolidation is a method of accounting and reporting

whereby a venturer's share of each of the assets, liabilities, income and expenses
of a jointly controlled entity is reported as separate line items in the venturer's
financial statements.

-Control is the power to govern the financial and operating policies of an

economic activity so as to obtain benefits from it.

Forms of Joint Venture

- Jointly Controlled Operation
The operation of some joint ventures involves the use of the assets and
other resources of the venturers rather than the establishment of separate
entities. Each venturer uses its own fixed assets and carries its own inventories.
It also incurs its own expenses and liabilities and raises its own finance, which
represent its own obligations. The joint venture's activities may be carried out
by the venturer's employees alongside the venturer's similar activities. The joint
venture agreement usually provides means by which the revenue from the
jointly controlled operations and any expenses incurred in common are shared
among the venturers.
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-Jointly Controlled Assets
Some joint ventures involve the joint control, and often the joint
ownership, by the venturers of one or more assets contributed to, or acquired for
the purpose of, the joint venture and dedicated to the purposes of the joint
venture. The venturer shares economic benefits of these jointly controlled assets
in agreed manner.

-Jointly Controlled Entities

A jointly controlled entity is a joint venture which involves the
establishment of separate entity. A jointly controlled entity controls the assets of
the joint venture, incurs liabilities and expenses and earns income. It may enter
into contracts in its own name and raise finance for the purposes of the joint
venture activity. Each venturer is entitled to a share of the results of the jointly
controlled entity, although some jointly controlled entities also involve a sharing
of the output of the joint venture.

Reporting and Recognition in Financial Statements in case of Jointly

Controlled Entities
-In a venturer's separate financial statements, interest in a jointly controlled
entity should be accounted for as an investment in accordance with Accounting
Standard (AS) 13, Accounting for Investments.

-If the venturer is required to prepare Consolidated Financial Statements, then

the interest in a jointly controlled entity should be reported as per proportionate
consolidation.

Transactions between a Venturer and Joint Venture

-In case of jointly controlled operation and jointly controlled assets- When a
venturer contributes or sells the assets to a joint venture and joint venture retains
the assets, the risk and reward of ownership is transferred by the venturer. Then

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venturer should account for that portion of the gain or loss, which is attributable
to the interest of other venture.
- When venturer purchases assets from a joint venture, the venture should not
recognize its share of the profits of the joint venture from the transaction until it
resells the assets to an independent party. A venturer should recognize its share
of the losses resulting from these transactions in the same way as the profit
except that losses should be recognized immediately when they represent a
reduction in net realizable value of current asset or an impairment loss on fixed
asset.
-In case of jointly controlled entities- Transactions shall be recognized as per
the principles of AS-9 Revenue Recognition.

Disclosure
A venturer should make the following disclosure in its separate as well as in
consolidated financial statements-
-A list of all joint venturer description of interest in significant Joint venture.
-Proportion of interest in case of jointly controlled entity.
-The aggregate amounts of each of the assets, liabilities, income and expenses
related to its interest in the jointly controlled entity.
-Amount of capital commitments in the joint venture that has been incurred with
other venturer and its share in such capital commitments.
-Any contingency that has been incurred in relation to its interest in joint
venture.
-Its share of contingencies that has been incurred jointly with other Venturer.
-Contingencies for which the venturer is liable for the other venturer of joint
venture.

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 AS-28 Impairment of Assets

Objective
The objective of this Statement is to prescribe the procedures that an
enterprise applies to ensure that its assets are carried at no more than their
recoverable amount.

Scope
This Statement should be applied in accounting for the impairment of all
assets, other than:
(a) inventories (see AS 2, Valuation of Inventories);
(b) assets arising from construction contracts (AS 7)
(c) financial assets, including investments that are included in the scope of AS
13, and
(d) deferred tax assets (AS 22)

Definitions
- Recoverable amount is the higher of an asset’s net selling price and its value
in use.

-Value in use is the present value of estimated future cash flows expected to
arise from the continuing use of an asset and from its disposal at the end of its
useful life.

-An impairment loss is the amount by which the carrying amount of an asset
exceeds its recoverable amount.

- Carrying amount is the amount at which an asset is recognised in the balance

sheet after deducting any accumulated depreciation (amortisation) and
accumulated impairment losses thereon.

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-Useful life is either:
(a) the period of time over which an asset is expected to be used by the
enterprise; or
(b) the number of production or similar units expected to be obtained from the
asset by the enterprise.

-A cash generating unit is the smallest identifiable group of assets that

generates cash inflows from continuing use that are largely independent of the
cash inflows from other assets or groups of assets.

-Corporate assets are assets other than goodwill that contribute to the future
cash flows of both the cash generating unit under review and other cash
generating units.

Identifying an Asset that may be Impaired

An enterprise should assess at each balance sheet date whether there is
any indication that an asset may be impaired. If any such indication exists, the
enterprise should estimate the recoverable amount of the asset. Indications may
come from external sources or internal sources.

External indications- Following are the circumstances which indicate

impairment of assets-
-Asset market value has declined.
-Due to change in technology, market conditions, legal regulations there is
an adverse effect on the enterprise.
-Interest rate in the market has increased or a general expectation about
return on investment has increased.

Internal indications-
-Obsolescence or physical damage of an asset.

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 -significant changes with an adverse effect on the enterprise have taken
place during the period, or are expected to take place in the near future, in
extent to which, or manner in which, an asset is used or is expected to be
used.
-evidence is available from internal reporting that indicates that the
economic performance of an asset is, or will be, worse than expected.

Recognition and Measurement of an Impairment Loss

-If the recoverable amount of an asset is less than its carrying amount, the
carrying amount of the asset should be reduced to its recoverable amount. That
reduction is an impairment loss.
-An impairment loss should be recognised as an expense in the statement of
profit and loss immediately, unless the asset is carried at revalued amount in
accordance with another Accounting Standard.
-When the amount estimated for an impairment loss is greater than the carrying
amount of the asset to which it relates, an enterprise should recognise a liability
if, and only if, that is required by another Accounting Standard.
-After the recognition of an impairment loss, the depreciation (amortisation)
charge for the asset should be adjusted in future periods to allocate the asset’s
revised carrying amount, less its residual value (if any), on a systematic basis
over its remaining useful life.

Cash-Generating Units
If there is any indication that an asset may be impaired, the recoverable
amount should be estimated for the individual asset. If it is not possible to
estimate the recoverable amount of the individual asset, an enterprise should
determine the recoverable amount of the cash-generating unit to which the asset
belongs (the asset’s cash-generating unit).
Although cash generating unit is defined as the smallest group of asset
for which cash flows can be determined independently but sometimes
aggregation of cash generating units become necessary if each of the cash

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generating units cannot be disposed of separately even if cash flows from each
cash generating unit can be determined independently.

Recoverable Amount and Carrying Amount of a Cash-Generating

Unit
The carrying amount of a cash-generating unit should be determined
consistently with the way the recoverable amount of the cash-generating unit is
determined. The carrying amount of a cash-generating unit:
(a) includes the carrying amount of only those assets that can be attributed
directly, or allocated on a reasonable and consistent basis, to the cash-generating
unit and that will generate the future cash inflows estimated in determining the
cash-generating unit’s value in use; and
(b) does not include the carrying amount of any recognized liability, unless the
recoverable amount of the cash-generating unit cannot be determined without
consideration of this liability.
This is because net selling price and value in use of a cash-generating
unit are determined excluding cash flows that relate to assets that are not part of
the cash-generating unit and liabilities that have already been recognized in the
financial statements

Goodwill
In testing a cash-generating unit for impairment, an enterprise should identify
whether goodwill that relates to this cash-generating unit is recognised in the
financial statements. If this is the case, an enterprise should:
(a) perform a ‘bottom-up’ test, that is, the enterprise should:
(i) identify whether the carrying amount of goodwill can be allocated on a
reasonable and consistent basis to the cash-generating unit under review; and
(ii) then, compare the recoverable amount of the cash generating unit under
review to its carrying amount (including the carrying amount of allocated
goodwill, if any) and recognize any impairment loss.

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The enterprise should perform the step at (ii) above even if none of the carrying
amount of goodwill can be allocated on a reasonable and consistent basis to the
cash-generating unit under review; and
(b) if, in performing the ‘bottom-up’ test, the enterprise could not allocate the
carrying amount of goodwill on a reasonable and consistent basis to the cash-
generating unit under review, the enterprise should also perform a ‘top-down’
test, that is, the enterprise should:
(i) identify the smallest cash-generating unit that includes the cash-
generating unit under review and to which the carrying amount of goodwill can
be allocated on a reasonable and consistent basis (the ‘larger’ cash generating
unit); and
(ii) then, compare the recoverable amount of the larger cash generating
unit to its carrying amount (including the carrying amount of allocated
goodwill) and recognize any impairment loss.

Corporate Assets
In testing a cash-generating unit for impairment, an enterprise should
identify all the corporate assets that relate to the cash-generating unit under
review. For each identified corporate asset, an enterprise should then apply
following:
(a) if the carrying amount of the corporate asset can be allocated on a reasonable
and consistent basis to the cash-generating unit under review, an enterprise
should apply the ‘bottom up’ test only; and
(b) if the carrying amount of the corporate asset cannot be allocated on a
reasonable and consistent basis to the cash generating unit under review, an
enterprise should apply both the ‘bottom-up’ and ‘top-down’ tests.

Impairment Loss for a Cash-Generating Unit

An impairment loss should be recognised for a cash-generating unit if,
and only if, its recoverable amount is less than its carrying amount. The

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impairment loss should be allocated to reduce the carrying amount of the assets
of the unit in the following order:
(a) first, to goodwill allocated to the cash-generating unit (if any); and
(b) then, to the other assets of the unit on a pro-rata basis based on the
carrying amount of each asset in the unit.
These reductions in carrying amounts should be treated as impairment
losses on individual assets and recognised in accordance with another
accounting standard.
In allocating an impairment loss for cash generating unit as above, the
carrying amount of an asset should not be reduced below the highest of:
(a) its net selling price (if determinable);
(b) its value in use (if determinable); and
(c) zero.
The amount of the impairment loss that would otherwise have been
allocated to the asset should be allocated to the other assets of the unit on a pro-
rata basis.
After the requirements in standard for impairment loss have been
applied, a liability should be recognised for any remaining amount of an
impairment loss for a cash-generating unit if that is required by another
Accounting Standard.

Reversal of an Impairment Loss

An enterprise should assess at each balance sheet date whether there is
any indication that an impairment loss recognised for an asset in prior
accounting periods may no longer exist or may have decreased. If any such
indication exists, the enterprise should estimate the recoverable amount of that
asset.
An impairment loss recognised for an asset in prior accounting periods
should be reversed if there has been a change in the estimates of cash inflows,
cash outflows or discount rates used to determine the asset’s recoverable
amount since the last impairment loss was recognised. If this is the case, the

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carrying amount of the asset should be increased to its recoverable amount. That
increase is a reversal of an impairment loss.

Reversal of an Impairment Loss for an Individual Asset

The increased carrying amount of an asset due to a reversal of an
impairment loss should not exceed the carrying amount that would have been
determined (net of amortisation or depreciation) had no impairment loss been
recognised for the asset in prior accounting periods.
A reversal of an impairment loss for an asset should be recognized as
income immediately in the statement of profit and loss, unless the asset is
carried at revalued amount in accordance with another Accounting Standard in
which case any reversal of an impairment loss on a revalued asset should be
treated as a revaluation increase under that Accounting Standard.
After reversal, increased carrying amount of an asset should not exceed
the carrying amount that would have been determined had no impairment loss
been recognized for the asset in prior accounting period, any increase in the
carrying amount above this carrying amount is revaluation profit.
Depreciation (amortization) charge of the asset should be adjusted in
future periods to allocate asset’s revised amount less its residual value (if any)
over its remaining useful life.

Reversal of an Impairment Loss for a Cash-Generating Unit

A reversal of an impairment loss for a cash-generating unit should be
allocated to increase the carrying amount of the assets of the unit. Firstly the
asset other than goodwill on a pro rata basis and then to goodwill. Reversal of
impairment loss should be treated as income. After allocation of reversal of
impairment loss carrying amount should be increased lower of recoverable
amount and the carrying amount that would have been determined had no
impairment loss been recognized.

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Reversal of an Impairment Loss for Goodwill
An impairment loss recognized for goodwill should not be reversed in a
subsequent period unless:
(a) the impairment loss was caused by a specific external event of an
exceptional nature that is not expected to recur; and
(b) subsequent external events have occurred that reverse the effect of that
event.

Disclosure
Categorized in four major categories-
Basic requirements for each class of assets-
- Amount of impairment loss debited in profit and loss statement is not
separately disclosed, item of profit and loss statement within which included.
- Amount of reversal of impairment loss credited to profit/loss account as
income and if separately not shown in profit/loss account, item in which
included.
- Amount of impairment loss set off against revaluation reserve during the
period.
- Amount of reversal of impairment loss credited to revaluation reserve during
the period.

Requirement for segment reporting- Enterprises where AS-17 Segment

Reporting is applicable, the following should be disclosed-
- The amount of impairment loss recognized in profit and loss statement and
directly in revaluation reserve during the period.
- The amount of reversal of impairment losses recognized in profit and loss
statement and directly to revaluation reserve during the period.

Requirement for Cash Generating Unit- If impairment loss or reversal

thereof during the period is material for the reporting enterprises as a whole an
enterprise should disclose: -

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- The events and circumstances that led to recognition of impairment loss and
reversal thereof.
- Amount of impairment loss recognized or reversed.
- Nature of the individual assets and reportable segment to which it belongs.
- Description of cash generating unit.
- Amount of impairment loss recognized or reversal thereof for primary
reportable segment.
- Whether recoverable amount is ‘net selling price’ or ‘value in use’.
- If recoverable amount is ‘value in use’, the discount rate used.
- Assumptions used to determine the recoverable amount. This disclosure of
assumption is not mandatory but encouraged to disclose.

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 AS-29 Provisions, Contingent Liabilities and Contingent Assets

Objective
To prescribe the accounting for-
- Provisions
- Contingent liabilities
- Contingent assets
- Provision for restructuring cost.

Definitions
A provision is a liability which can be measured only by using a substantial
degree of estimation.

A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.

A contingent liability is:

(a) a possible obligation that arises from past events and the existence of which
will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the enterprise; or
(b) a present obligation that arises from past events but is not recognised
because:
(i) it is not probable that an outflow of resources embodying economic benefits
will be required to settle the obligation; or
(ii) a reliable estimate of the amount of the obligation cannot be made.

Present obligation - an obligation is a present obligation if, based on the

evidence available, its existence at the balance sheet date is considered
probable, i.e., more likely than not.

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Possible obligation –
An obligation is a possible obligation if, based on the evidence available,
its existence at the balance sheet date is considered not probable.

Recognition
A provision should be recognized 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 economic benefits 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 recognized.

Contingent Liabilities/Assets
An enterprise should not recognize contingent liability/assets.

The amount recognized as a provision should be the best estimate of the

expenditure required to settle the present obligation at the balance sheet date.
The amount of a provision should not be discounted to its present value.

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

Reimbursements
Where some or all of the expenditure required to settle a provision is
expected to be reimbursed by another party, the reimbursement should be
recognized when, and only when, it is virtually certain that reimbursement will
be received if the enterprise settles the obligation. The reimbursement should be
treated as a separate asset. The amount recognised for the reimbursement should
not exceed the amount of the provision.

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In the statement of profit and loss, the expense relating to a provision may be
presented net of the amount recognised for a reimbursement.
Provisions should be reviewed at each balance sheet date and adjusted to
reflect the current best estimate. If it is no longer probable that an outflow of
resources embodying economic benefits will be required to settle the obligation,
the provision should be reversed.

Provisions for Restructuring Costs

Restructuring is a programme that is planned and controlled by
management and materially changes either-
- The scope of a business undertaken; or
- The manner in which that business is conducted.

No obligation arises for the sale of an operation until the enterprise is

committed to the sale, i.e., there is a binding sale agreement.
A restructuring provision should include only the direct expenditures
arising from the restructuring which are those that are both:
(a) necessarily entailed by the restructuring; and
(b) not associated with the ongoing activities of the enterprise.

Disclosure
For each class of provision, an enterprise should disclose:
(a) the carrying amount at the beginning and end of the period;
(b) additional provisions made in the period, including increases to existing
provisions;
(c) amounts used (i.e. incurred and charged against the provision) during the
period; and
(d) unused amounts reversed during the period.

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Besides these the following other disclosures are required-
- A brief description of provision.
- Major assumption about future events made while measuring the provision
and indication of uncertain items.

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 AS-30 Financial Instruments: Recognition And
Measurement

Objective
The objective of this Standard is to establish principles for recognising
and measuring financial assets, financial liabilities and some contracts to buy or
sell non-financial items.

Scope
The scope is very wide ranging and therefore, it will be better to list out
the financial instruments which are not within the scope of this standard. The
financial instruments which are outside the scope of AS-30 are as under-
-obligation arising under insurance contracts
-interests in subsidiaries
-interests in associates
-interests in joint ventures
-employee benefit plans
-right and obligation under lease to which AS-19 Leases applies subject
to certain exceptions.

Definition
-A derivative is a financial instrument or other contract within the scope of this
Standard with all three of the following characteristics:
(a) its value changes in response to the change in a specified interest rate,
financial instrument price, commodity price, foreign exchange rate, index of
prices or rates, credit rating or credit index, or other variable, provided in the
case of a non-financial variable that the variable is not specific to a party to the
contract (sometimes called the ‘underlying’);

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(b) it requires no initial net investment or an initial net investment that is smaller
than would be required for other types of contracts that would be expected to
have a similar response to changes in market factors; and
(c) it is settled at a future date.

-Financial Asset-
Any asset that is-
(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right-
i) to receive cash or another financial asset from another entity; or
ii) to exchange financial assets or financial liabilities with another entity
under conditions that are potentially favorable to the entity
(d) a contract that will or may be settled in the entity’s own equity instruments
that is-
i) a non-derivating for which the entity is or may be obliged to receive a
variable number of the entity’s own equity instruments; or
ii) a derivating that will or may be settled other than by the exchange of a
fixed amount of cash or another financial asset for a fixed number of the entity’s
own equity instruments.

-Financial Liabilities-
Any liability that is-
(a) Deliver cash or another financial asset to another entity; or
(b) Exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavorable to the entity.
(c) A contract that will or may be settled in the entity’s own equity instruments
that is-
i) a non-derivative for which the entity is or may be obliged to deliver a
variable number of the entity’s own equity instrument; or

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 ii) a derivative that will or may be settled other than by the exchange of a
fixed amount of cash or another financial asset for a fixed number of the entity’s
own equity instruments.

Held-to-maturity investments are non-derivative financial assets with fixed or

determinable payments and fixed maturity that an entity has the positive
intention and ability to hold to maturity other than:
(a) those that the entity upon initial recognition designates as at fair value
through profit or loss;
(b) those that meet the definition of loans and receivables; and
(c) those that the entity designates as available for sale.
An entity should not classify any financial assets as held to maturity if
the entity has, during the current financial year or during the two preceding
financial years, sold or reclassified more than an insignificant amount of held-
to-maturity investments before maturity (more than insignificant in relation to
the total amount of held-to maturity investments) other than sales or
reclassifications that:
(i) are so close to maturity or the financial asset's call date (for example,
less than three months before maturity) that changes in the market rate of
interest would not have a significant effect on the financial asset’s fair value; or
(ii) occur after the entity has collected substantially all of the financial
asset's original principal through scheduled payments or prepayments; or
(iii) are attributable to an isolated event that is beyond the entity’s
control, is non-recurring and could not have been reasonably anticipated by the
entity.

Loans and receivable are non-derivative financial assets with fixed or

determinable payments that are not quoted in an active market, other than:
(a) those that the entity intends to sell immediately or in the near term, which
should be classified as held for trading, and those that the entity upon initial
recognition designates as at fair value through profit or loss;

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(b) those that the entity upon initial recognition designates as available for sale;
or
(c) those for which the holder may not recover substantially all of its initial
investment, (other than because of credit deterioration), which should be
classified as available for sale.
An interest acquired in a pool of assets that are not loans or receivables
(for example, an interest in a mutual fund or a similar fund) is not a loan or
receivable.

Available-for-sale financial assets are those non-derivative financial assets that

are designated as available for sale or are not classified as (a) loans and
receivables, (b) held-to-maturity investments, or (c) financial assets at fair value
through profit or loss.

Classification of Financial Assets and Liabilities-

There are four categories of financial assets and two categories of
financial liabilities. The recognition, measurement, presentations and disclosure
in financial statements depend upon the classification of financial assets and
liabilities-
-Financial Assets-
Four categories of financial assets are-
i) Financial assets at fair value through profit or loss (FVTPL)
ii) Held to maturity investments
iii) Loans and receivables
iv) Available for sale

i) Financial assets at fair value through profit or loss-This category has two
sub-categories- -Financial assets held for trading and
-Designated to the category at inception
-Financial assets held for trading is one that is-

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 -part of a portfolio for which there is an evidence of a recent pattern of
short term profit taking
-a derivative unless it is designated as an effective hedging instrument be
accounted for as per hedge accounting.

Trading assets include debt and equity securities and loans and
receivables acquired by the entity with the intention of making a short-term
profit from price or dealer’s margin. Derivatives are always categorized as held
for trading unless they are accounted for as hedges.

The second sub category includes any financial assets that an entity had
decided to designate to the category on initial recognition because-
-it eliminates or significantly reduces a measurement or recognition
inconsistency - sometimes referred to as ‘an accounting mismatch’
-it is a part of a group of financial assets managed and evaluated on a fair
value basis according to the risk management or investment strategy of the
entity.
There are not restrictions on this voluntary designation but it is
irrevocable. The asset cannot be moved to another category during the life.

ii) Held to maturity investments- These investments are non-derivative

financial assets with fixed or determinable payments and fixed maturity that an
entity has the positive intent and ability to hold to maturity. This category
excludes originated loans. Equity securities cannot be classified as held to
maturity because they doe not have a fixed maturity date.
A financial asset whose maturity is fixed but payments are not
determinable does not qualify as held to maturity. If an entity classifies
investment as held to maturity investments but sells a substantial portion of
them before maturity, then they need to be reclassified as held to for sale.
Held for maturity investments do not include those that-

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 -the entity upon initial recognition designates as at fair value through
profit or loss
-the entity designates as available for sale.
-meet the definition of loans and receivables.

iii) Loans and receivables- These are non-derivative financial assets with a
fixed or determinable payment and are not quoted in an active market. They
typically arise when an entity provides money, goods or services directly to a
debtor with no intention of trading the receivable. These items do not include
the items which are originated with intent to be sold immediately or in the short
run, if so, they should be classified as held for trading. If the holder of the
financial asset is not able to recover all of its intial investment, it is classified as
available for sale or Financial assets at fair value through profit or loss.

iv) Available for sale-All financial assets that are not classified in any of the
above category are classified as available for sale. This category includes all
equity securities other than those classified as at fair value through income.

Financial Liabilities-
It has two categories-
i) Financial liabilities at fair value through profit or loss
ii) Other Financial liabilities

i) Financial liabilities at fair value through profit or loss-This has two

sub categories, liabilities held for trading and those designated to the category at
inception. The financial liabilities held for trading include-
-derivative liabilities that are not accounted for hedging instruments
-obligations to deliver securities or other financial assets borrowed by a
short seller
- financial liabilities that are incurred with the intention to repurchase them
in the near term and

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 -financial liabilities that are form part of a portfolio of identified financial
instruments that are managed together and for which there is evidence of a
recent actual pattern of short term profit taking
As with financial assets, an entity has the right to designate any financial
liability to this category on initial recognition.

ii) Other Financial liabilities – These include liabilities like trade payables,
borrowings and customer deposit accounts etc. All liabilities and derivatives other
than trading liabilities and derivatives that are hedging instruments automatically
fall under this category.

Financial Assets-Recognition
Under AS-30, an entity should recognize a financial asset or liability on its
balance sheet when and only when it becomes a party to the contractual provision
of the instruments.
-Initial and subsequent recognition and measurement of financial assets-
-a financial asset or financial liability at fair value through profit or loss
should be measured at fair value on the date of acquisition or issue.
-short-term receivables and payables with no stated interest rate should be
measured at original invoice amount if the effect of discounting is immaterial.
-other financial assets or financial liabilities should be measured at fair value
plus/minus transaction costs that are directly attributable to the acquisition or
issue of the financial asset or financial liability.

Measurement of Financial Liabilities

When a financial liability is recognized initially, an entity should
measure it as follows:
(a) A financial liability at fair value through profit or loss should be measured at
fair value on the date of acquisition or issue.
(b) A derivative liability should be measured at directly attributable transaction
cost or fair value initially. Subsequent measurement in case of derivatives which

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are linked to unquoted equity instruments, whose fair value cannot be reliably
measured, are measured at cost.
(c) Financial liability arising out of continuing involvement of transferred asset
and does not qualify for de-recognition are measured at amortised cost or fair
value.
(d) Financial guarantee is measured as per AS-29 initially and subsequently
higher of the amount initially recognized less cumulative amortization or
valuation as per AS-29.
(e) Other financial liabilities including debentures, bonds, preference shares,
loans, advances and payables are initially measured at fair value and
subsequently at amortized cost.

Derecognition of Financial Assets and Financial Liabilities

The derecognition requirements in the Standard should be applied
prospectively for transactions occurring on or after the date of this Standard
becoming mandatory. An entity may, however, apply the derecognition
requirements in the Standard retrospectively from a date of the entity’s
choosing, provided that the information needed to apply this Standard to
financial assets and financial liabilities derecognised as a result of past
transactions was obtained at the time of initially accounting for those
transactions.

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 AS-31 Financial Instruments: Presentation

Objective
To establish principles for-
- Presenting financial instruments as liabilities or equity.
- Offsetting financial assets and financial liabilities
- Compound financial instruments.

Scope
AS-31 applies to all financial instruments, both recognized and
unrecognized except for-
-Interest in subsidiaries, associates and joint ventures accounted for under
AS-21, AS-23 or AS-27
-Employees’ rights and obligations under employee benefit plans subject
to AS15
-Insurance Contracts
-The acquirer’s contracts for contingent consideration in a business
combination
-Financial instruments, contracts and obligations under share based
payment.

Presentation
AS-31 prescribes the presentation requirements for-
-Debt Equity Classification-
The issuer of a financial instrument should classify the instrument, or its
component parts, on initial recognition as a financial liability, a financial asset
or an equity instrument in accordance with the substance of the contractual
arrangement and the definitions of a financial liability, a financial asset and an
equity instrument.

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-Compound Financial Instruments-
The issuer of a non-derivative financial instrument should evaluate the
terms of the financial instrument to determine whether it contains both a liability
and an equity component. Such components should be classified separately as
financial liabilities or equity instruments.

-Treasury shares-
If an entity reacquires its own equity instruments, those instruments
(‘treasury shares’) should be deducted from equity. No gain or loss should be
recognised in statement of profit and loss on the purchase, sale, issue or
cancellation of an entity’s own equity instruments. Such treasury shares may be
acquired and held by the entity or by other members of the consolidated group.
Consideration paid or received should be recognised directly in equity.

-Interest, Dividends, Losses and Gains-

Interest, dividends, losses and gains relating to a financial instrument or a
component of financial instrument that is a financial liability should be
recognised as income or expense in the statement of profit and loss.
Distributions to holders of an equity instrument should be debited by the entity
directly to an appropriate equity account, net of any related income tax benefit.
Transaction costs of an equity transaction should be accounted for as a
deduction from equity net of any related income tax benefit.

-Offsetting a Financial Asset and a Financial Liability-

A financial asset and a financial liability should be offset and the net
amount presented in the balance sheet when and only when, an entity:
(a) currently has a legally enforceable right to set off the recognised amounts;
and
(b) intends either to settle on a net basis, or to realise the asset and settle the
liability simultaneously.

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 In accounting for a transfer of a financial asset that does not qualify for
derecognition, the entity should not offset the transferred asset and the
associated liability.

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 AS-32 Financial Instruments: Disclosures

Objective
1. The objective of this Standard is to require entities to provide disclosures in
their financial statements that enable users to evaluate:
(a) the significance of financial instruments for the entity’s financial position
and performance; and
(b) the nature and extent of risks arising from financial instruments to which the
entity is exposed during the period and at the reporting date, and how the entity
manages those risks.

Scope-
This AS applies to –
i) Recognized and unrecognized financial instruments including financial
assets and financial liabilities within the scope of AS 30.
ii) Contracts to buy or sell a non-financial item that are within the scope of
AS-30.
Not applies to-
i) Interest in subsidiaries, associates and joint ventures accounted under AS
21, AS 23 and AS 27.
ii) Employee’s rights and obligations under employee benefit plans subject to
AS 15.
iii) Insurance contracts.
iv) The acquirer’s contracts for contingent consideration in a business
combinations
v) Financial instruments, contracts and obligations under share based
payment.

Prescribes the disclosures requirements for-

-Different categories of financial assets-
-Different categories of financial liabilities
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-Re-classifications of financial assets.
-De-recognition of financial assets and financial liabilities.
-Financial assets pledged or held as collateral.
-Allowances for credit losses.
-Compound financial instruments with multiple embedded derivatives.
-Defaults and breaches for loan payable.
-Income, expense, gains or losses recognized in profit and loss account.
-Accounting policies followed.
-Hedge Accounting
-Fair value determination for financial assets and liabilities
-Risk disclosures.

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• 3.4 Reconciliation with International Accounting Standards-
Table 3.1 Reconciliation of the International Accounting Standards the
Indian Accounting Standards (Till the issuance of AS 32)
Number of International Accounting Standards (IASs) issued by the
International Accounting Standards Committee (IASC) now International
Accounting Standards Board) 41
Less: Number of IASs since withdrawn by the IASC -7
Add: IAS 4 which has been withdrawn, however, 1 included here for
reconciliation purposes because corresponding Accounting Standard of the
ICAI (i.e. AS 6) is in force 1
35

Accounting Standards (ASs) and other documents issued by the Institute of

Chartered Accountants of India
Number of Indian Accounting Standards issued except AS 8 which is
withdrawn pursuant to AS 26 becoming mandatory) 31
Number of Guidance Notes issued 1
IAS irrelevant to the Indian Economic conditions 1
Number of Accounting Standards under preparation 2
35

There is rapid development of Indian Accounting Standards and now

they are at par with International Accounting Standards except for three more
accounting standards which are under preparation by ASB.

3.5 Conclusion
ASB of ICAI has issued 32 standards till date and Indian Accounting
Standards are now at par with the International Accounting Standards. The
Indian Accounting Standards are issued to suit the Indian Business
Environment, Statutes of the Land and the practices followed. Every care is

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taken while issuing AS and as per requirement, modifications are also done in
various AS from time to time. Accordingly, revised AS are issued by ICAI
many times. Reasonable time is alos given for implementation of New or
Revised AS.
The scope of Accounting Standards is defined by Para 4 of ‘Preface to
the Statements of Accounting Standards’ issued by ICAI. In general, it
provides that:
- If a situation arises where particular Accounting Standard is not in
conformity with the provisions of the some of the laws of land, than the
provisions of said law will prevail and the financial statements should be
prepared in conformity with such law.
- The Accounting Standards do not override the local regulations which
govern the preparation and presentation of financial statements in our
country.
- The application of Accounting Standards is deliberately limited only to
items which are material.

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