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SELECTIVE STUDY OF ACCOUNTING STANDARDS
A Project Submitted to
University of Mumbai for partial completion of degree of Bachelor of
Commerce (Accounting and Finance) Under the Faculty of Commerce
By
Anton Brennan Lobo
Under the Guidance of

Prof. Gatting Koli
St. Gonsalo Garcia College of Commerce and Arts

YMCA Cricket Ground, Vasai Gaon, Vasai (W) Vasai- Virar, Palghar-
401202
March 2022.
SELECTIVE STUDY OF ACCOUNTING STANDARDS
A Project Submitted to
University of Mumbai for partial completion of degree of Bachelor of
Commerce (Accounting and Finance) Under the Faculty of Commerce
By
Anton Brennan Lobo
Under the Guidance of

Prof. Gatting Koli
St. Gonsalo Garcia College of Commerce and Arts

YMCA Cricket Ground, Vasai Gaon, Vasai (W) Vasai- Virar, Palghar-
401202
March 2022
DECLARATION BY THE LEARNER
I the undersigned Mr. Anton Brennan Lobo declare that the work embodied in this project work titled
Selective Study of Accounting Standards forms my own contribution to research work and has not been
previously submitted to any other university for any other degree or diploma to this or any other university.
Wherever reference has been made to previous works of others, it has been clearly indicated as such and
included in the bibliography.
I, hereby further declare that all information of this document has been obtained and presented in accordance
with academic rules and ethical conduct.
Anton Brennan lobo
Certified by
Prof- Gatting Koli
ST. GONSALO GARCIA COLLEGE BEHIND VASAI CRICKET
GROUND VASAI- 201201
CERTIFICATE
This is to certify that MR. Anton Brennan Lobo has worked and duly completed her project work for the
degree ofBachelor of Commerce (Accounting & Finance) under the faculty of Accounting and Finance
and her project is entitled,
SELECTIVE STUDY OF ACCOUNTING STANDARDS under my supervision.
I further certify that the entire work has been done by the learner and under my guidance and that no part of
it has been submitted previously for any degree or diploma of any university.
It is her own work and facts reported by her personal findings and investigations.
PRINCIPAL, PROJECT GUIDE,

Dr. SOMNATH VIBHUTE Prof.Gatting Koli
CO-ORDINATOR, SIGNATURE OF THE

PROF. RUBINA D’MELLO EXTERNAL EXAMINER
Date of Submission:
ACKNOWLEGEMENT
To list all the people who have helped me is difficult because they are so numerous and the depth is so
enormous.
I would like to acknowledge the following as being idealistic channels and fresh dimensions in the completion
pf this project.
I take this opportunity to thank the University of Mumbai for giving me a chance to do this project.
I would like to thank my Principal, Dr. Somnath Vibhute for providing the necessary facilities required for
the completion of this project.
I take the opportunity to thank our Co-ordinator, Mrs. Rubina D’mello for moral support and guidance.
I would like to express my sincere gratitude towards my project guide Prof. Gatting Koli whose guidance and
care made the project successful.
I would like to thank my College Library, for having provided various reference books and magazines related
to my project.
Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion of
the project especially My Parents and Peers who supported me throughout my project.
EXECUTIVE SUMMARY
HISTORY AND SUMMARY OF ACCOUNTING STANDARDS

Accounting Standards Board (ASB) is the board of representing and managing the Accounting Standards in
India. Formerly, India followed accounting standards from Indian Generally Acceptable Accounting Principle
(IGAAP) prior to the adoption of the Indian Accounting Standards. There was only Accounting Standards
which creates the problems for multinational companies to manage their accounts. Because they need to
comply and make their records of two types, the first one is with “Accounting Standards” for India and the
second one with “International Financial Reporting Standards (IFRS)”.
In order to reduce the compliances and some sort of confusion. Institute of Chartered Accountants of India
(ICAI) introduced the new Accounting Standards and called them “Indian Accounting Standards” under the
supervision of Accounting Standards Board (ASB). All Ind AS are named and numbered same as International
Financial Reporting Standards (IFRS) to reduce the compliances and for better transparency.
INDEX
Chp no Particulars Pg No
1 Introduction 1-7
1.1 Introduction of Accounting Standards
1.2 Standard setting process
1.3 Benefits and Limitations
1.4 How many Accounting standards
1.5 Need for convergence towards global warming
1.6 International Accounting Standard board
1.7 International Financial Reporting standards as Global standards
1.8 Convergence to IFRS in India
2 Research Methodology 8-10

2.1 Accounting Research Methodologies
[A] Analytical
[B] Archival
[C] Experimental
2.2 Other Research Methodologies
[A] Summary of Research Interests
2.3 Skills Necessary to be a successful Researcher
3 Literature Review 11-14

3.1 Status of Accounting Standards
3.2 Criteria for Classifying Non- Corporate Entities
3.3 List of Accounting Standards
4 Data Collected 14-92
4.1 AS1: Disclosure of Accounting Standards
4.2 AS2: Valuation of Inventory
4.3 AS3: Cash Flow Statements
4.4 AS4: Contingences and Events Occurring after Balance Sheet Date
4.5 AS5: Net Profit or Loss for the Period, Prior Period Items and
Changes inAccounting Policies.
4.6 AS7: Construction Contract
4.7 AS9: Revenue Recognition
4.8 AS10: Property Plant and Equipment
4.9 AS11: The Effects of Changes in the Foreign Exchange Rates
4.10 AS12: Accounting for Government Grand
4.11 AS14: Accounting for Investments
4.12 AS14: Accounting for Amalgamation
4.13 AS15: Employee Benefits
4.14 AS16: Borrowing Costs
4.15 AS17: Segment Reporting
4.16 AS18: Related Party Disclosures
4.17 AS19: Leases
4.18 AS20: Earnings Per Share
4.19 AS21: Consolidated Financial Statements
4.20 AS22: Accounting on Taxes on Income
4.21 AS23: Accounting for Investments in Associates Consolidated Financial
Statements
4.22 AS24: Discounting Operations
4.23 AS25: Interim Financial
Reporting
4.24 AS26: Intangible Assets
4.25 AS27: Financial Reporting of Intern
4.26 AS28: Impairment of Assets
4.26 AS29: Provisions, Contingent Liabilities and Contingent Asset.
5 Findings and Reviews 92-102

5.1 Conclusions
5.2 Biblography
Selective Study of Accounting Standards
CHAPTER 1: INTRODUCTION
1.1 : Introduction to Accounting Standards.

Accounting Standards (AS) are written policy documents issued by expert accounting
body or by government body or other regulatory body covering the aspects of recognition, measurement,
presentation and disclosure of accounting transactions in the financial statements. The ostensible purpose of
the standard setting bodies is to promote the dissemination of timely and useful financial information to
investors and certain other parties having an interest in the company’s economic performance. Accounting
Standards reduce the accounting alternatives in the preparation of financial statements within the bounds of
rationality thereby ensuring comparability of financial statements of different enterprises.
Accounting Standards deal with the issue of:

• Recognition of events and transactions in the financial statements,
• Measurement of these transactions and events
• Presentation of these transactions and events in the financial statements in a manner that is
understandable
• The disclosure requirements which should be there to enable the public at large and the stakeholders
and the potential investors in particular, to get an insight into what these financial statements are trying
to reflect
• To take prudent and informed business decisions.
Accounting Standards standardize diverse accounting policies with a view to:
• Eliminate the non-comparability of financial statements and there by proving the reliability of the
financial statements, to the maximum possible extent, and
• Provide a set of standard accounting policies, valuation norms and disclosure requirements.
The standard policies are intended to reflect a consensus on accounting policies to be used
in different identified area e.g. inventory valuation, capitalization of costs, depreciations and amortizations
etc. Since it is not possible to prescribe a single set of policies in any of the area to be appropriate for all
enterprises for all time , it is not enough to comply with the standards and the state that they have been
followed; one must disclose the accounting policies actually used in the preparation of financial statements.
(See AS 1, Disclosure of Accounting Policies given in appendix I of this module.) Foe example, an enterprise
should disclose which the of permitted cost formula (FIFO, Weighted Average etc.) has actually been used for
ascertaining inventory cost.
In addition to improving creditability of accounting data, standardization accounting
procedures improves comparability of financial statements, both intra-enterprise and inter-enterprise. Such
comparisons are very effective and most widely used tools for assessment of enterprise performances by users
of financial statements for taking economic decisions e.g., whether or not invest, whether or not to lend and
so on.
The intra-enterprise comparison involves comparison of financial statements of same enterprise over a
number of years. The intra-enterprise comparison is possible if the enterprise uses the same accounting policy
every year in drawing up its financial statement. For this reason, AS1 requires disclosure of changes in the
accounting policies.
TYBAF 1 ST.GONSALO GARCIA COLLEGE

The inter-enterprise comparison involves comparison of financial statements of different

enterprise for the same accounting period. This is possible only when the comparable enterprises use the same
accounting policies in the preparation of respective financial statements. The disclosure of accounting policies
allows the user to make appropriate adjustments while comparing financial statements.
Another advantage of standardization is reduction of scope for creative accounting. The
creative accounting refers to twisting of accounting policies to produce financial statements favorable to a
particular interest group. For example, it is possible to overstate the profits and assets by capitalizing revenue
expenditure or to understate them by writing off a capital expenditure against revenue of current accounting
period. Such practices can be curbed only by framing rules for capitalization, particularly for the borderline
cases where it is possible to have divergent views. The accounting standard to do just that.
In brief, the accounting standards aim at improving the quality of financial reporting by
promoting comparability, consistency and transparency, in the interest of users of financial statement. Good
financial reporting not only promotes healthy financial markets, it also helps to reduce the cost of capital
because investors have faith in financial reports and consequently perceive lesser risk.
1.2 : Standard Setting Process.

The standard-setting procedure of Accounting Standard Board (ASB) can be briefly
outlined as follows:
• Identification of board areas by ASB for formulation of AS
• Constitution of study groups by ASB to consider specific projects and to prepare preliminary drafts
of the proposed accounting standards. The draft normally includes objective and scope of the
standard, definition of the terms used in the standard, recognition and measurement principles where
ever applicable and presentation and disclosure requirements.
• Consideration of the preliminary draft prepared by the study group of ASB and revision if any of
the draft on the basis of deliberation
• Circulation of the draft of accounting standard (after revision by ASB) to the Council Member of
ICAI and specified outside bodies such as Department of Company Affairs (DCA), Securities and
Exchange Board of India (SEBI) Comptroller and Auditor General of India(C&AG),Central Board
of Direct Taxes(CBDT), Standing Conference of Public Enterprise(SCOPE) etc. for comments.
• Meeting with the representatives of the specified outside bodies to ascertain their views on the draft
of the proposed accounting standard.
• Finalization of the exposure draft of the proposed accounting standard and its insurance inviting
public comments.
• Consideration of comments received on the exposure draft and finalization of the draft accounting
standard by the ASB for submission to the Council of ICAI for its consideration and approval for
assurance.
• Consideration of the final draft of the proposed standard and by Council of the ICAI, and if found
necessary, modification of the draft in consultation with the ASB is done.
• The accounting standard on the relevant subject (for non-corporate entities) is then issued by the
ICAI. For corporate entities, accounting standards are issued by The Central Government of India.

STANDARD SETTING PROCESS

➢ IDENTIFICATION OF AREA.
➢ CONSTITUTION OF STUDY GROUP.
➢ PREPARATION OF DRAFTS AND ITS CIRCULATION.
➢ ASCERTAINMENT OF VIEWS OF DIFFERENT BODIES ON DRAFT.
➢ FINALISATION OF EXPOSURE DRAFT (ED).
➢ COMMENTS RECEIVED ON EXPOSURE DRAFT (ED).
➢ MODIFICATION OF THE DRAFT.
➢ ISSUES OF ACCOUNTING STANDARDS.
Earlier, ASB used to issue Accounting Standards Interpretations which address question
that arise in course of application of standards. These were, therefore, issued after issuance of the relevant
standard. Authority of the accounting standard interpretation (ASIs)was the same as that of the accounting
standard (AS) to which it relates. However, after notification of accounting standards by the Central
Government for the companies, where the consensus portion of the ASI was merged as ‘Explanation’ to the
relevant paragraph of the accounting standard, the council of ICAI also decided to merge the consensus portion
of ASI as ‘Explanation’ to the relevant paragraph of accounting standards issued by them. This initiative was
taken by the council of ICAI to harmonize both the set of standards i.e. accounting standards issued by the
ICAI and accounting standards notified by Central Government.
It may be noted that as per Section 133 of the Companies Act, 2013, the Central
Government may prescribe the standards of accounting or any other addendum thereto, as recommended by
the Institute of Chartered Accountants of India, constituted under Section 3 of the Chartered Accountants Act,
1949, in consultation with and after examination of the recommendations made by the National Advisory
Committee on Accounting Standards (NACAS).
1.3 : Benefits and Limitations.

Accounting standards seek to describe the accounting principles, the valuation
techniques and the methods of applying the accounting principles in the preparation and presentation of
financial statements so that they may give a true a fair view. By setting the accounting standards the accountant
has following benefits:
• Standardization of alternative accounting treatments: standards reduce to a reasonable extent or
eliminate altogether confusing variations in the accounting treatments used to prepare financial
statements.
• Requirements for additional disclosures: there are certain areas where important information are not
statutorily required to be disclosed. Standards may call for disclosure beyond that required by law.
• Comparability of financial statement: the application of accounting standards would, to a limited
extent, facilitate comparison of companies situated in different parts of the world and also of different
companies situated in the same country. However, it should be noted in this respect that the differences
in the institution, traditions and legal systems from one country to another give rise to differences in
the accounting standards adopted in different countries.
However, there are some limitations of setting accounting standards:
• Difficulties in making choice between different treatments: Alternative solutions to certain accounting
problems may each have arguments to recommend them. Therefore, the choice between different
alternative accounting treatments may become difficult.

• Lack of flexibilities: There may be a trend towards rigidity and away from flexibility in applying the
accounting standards.
• Restricted scope: Accounting standards cannot override the statute. The standards are required to be
formed within the ambit of prevailing statutes.
1.4 : How Many Accounting Standard:

The Council of the Institute of Chartered Accountants of India has, so far, issued twenty-
nine Accounting Standards. However, AS 6 on ‘Depreciation Accounting’ has been withdrawn on revision of
AS 10 ‘Property, Plant and Equipment’ and AS 8 on ‘Accounting for Research and Development’ has been
withdrawn consequent to the issuance of the AS 26 on the ‘Intangible Assets’. Thus, effectively there are only
27 notified accounting standards as per the Companies (Accounting Standards) Rules, 2006 (as amended in
2016).
The ‘Accounting Standards’ issued by the Accounting Standards Board establish
standards which have to be complies by the business entities so that the financial statements are prepared in
accordance with generally accepted accounting principles.
1.5 : Need for Convergence Towards Global Warming.

The last decade has witnessed a sea change in the global economic scenario. The
emergence of trans-national corporations in search of money, not only for fueling growth, but to sustain
ongoing activities has necessitated raising of capital from all parts of the world, cutting across frontiers.
Each country has its own set of rules and regulations for accounting and financial
reporting. Therefore, when an enterprise decides to raise a capital from the markets other than the country in
which it is located, the rules and regulations for that other country will apply and this in turn will require that
the enterprise is in the position to understand the differences between the rules governing financial reporting
in the foreign country as compared to its own country of origin. Therefore, translation and re-statement are of
utmost importance in a world that is rapidly globalizing in all ways. In themselves also, the accounting
standards and principles need to robust so that the larger society develops degree of confidence in the financial
statements, which are put up by the organization.
International analysts and investors would like to compare financial statements based
on similar accounting standards, and this had led to growing support for an internationally accepted set of
accounting standards for cross-border filling. The harmonization of financial reporting around the world will
help to rise confidence of investors generally in the information they are using to make their decisions and
assess their risk.
Also, a strong need was felt by legislation to bring about uniformity, rationalization,
comparability, transparency and adaptability in financial statements. Having a multiplicity of accounting
standards around the world is against public interest. If accounting for the same events and information
produces different reported numbers, depending on the system of standards that they are being used, then it is
self-evident that accounting will be increasingly discredited in the eyes of those using the numbers. It creates
confusion, encourages error and facilitates fraud. The cure for these ills is to have a single set of global
standards, of the highest quality, set in the interest of public. Global Standards facilitate cross border flow of
money, global listing in different bourses and comparability of financial statement.

The convergence of financial reporting and accounting standards is a valuable

process that contributes to the free flow of global investment and achieves substantial benefits for all capital
market stakeholders. It improves the ability of investors to compare investments on a global basis and thus
lower their risks of errors in judgement. It facilitates accounting and reporting for the companies with global
operations and eliminates some costly requirements say reinstatements of financial statements. It has the
potential to create new standards of accountability and greater transparency, which are values of great
significance to all market participants including the regulators. It reduces challenges for accounting firms and
focuses their value in expertise around an increasingly unified set of standards. It creates an unprecedented
opportunity for standard setters and other stakeholders to improve the reporting model, for the companies with
the joint listing in both domestic and foreign country, the convergence is very much significant.
1.6 : International Accounting Standard Board.

With a view of achieving these objectives, the London based group namely the
International Accounting Standard Committee (IASC), responsible for developing International Accounting
Standards, was established in June, 1973. It is presently known as International Accounting Standards Board
(IASB), the IASC comprises the professional accountancy bodies of over 75 countries (including the Institute
of Chartered Accountants of India). Primarily, the IASC was established, in the public interest to formulate
and publish, International Accounting Standards to be followed in the presentation of audited financial
statements. International Accounting Standards were issued to promote acceptance and observance of
International Accounting Standards worldwide. The members of IASC have undertaken a responsibility to
support the standards promulgated by IASC and to propagate those standards in their respective countries.
Between 1973 and 2001, the International Accounting Standards Committee
(IASC) released the International Accounting Standards. Between 1997 and 1999, the IASC restructured their
organisation, which resulted in formation of International Accounting Standards Boards (IASB). These
changes came into effect on 1st April, 2001. Subsequently, IASB issued statements about current and future
standards: IASB publishes its Standards in a series of pronouncements called International Financial Reporting
standards (IFRS). However, IASB has not rejected the standards issued by the IASC. The pronouncements
continue to be designated as ‘International Accounting Standards” (IAS).
1.7 : International Financial Reporting Standards as Global Standards.

The term IFRS comprises IFRS issued by IASB; IAS issued by International
Accounting Standards Committee (IASC); Interpretations issued by the Standards Interpretations Committee
(SIC) and the IFRS Interpretation Committee of the IASB.
International Financial Reporting Standards are considered a ‘principle-based’ set
of standards. In fact, they established board rules rather than dictating specific treatments. Every major nation
is moving towards adopting them to some extent. Large number of authorities requires publiccompanies to
use IFRS for stock-exchange listing purpose, and in addition, banks, insurance companies and stock exchanges
may use them for their statutorily required reports. So, over the next few years, thousands of companies will
adopt the international standards. This requirement will affect thousands of enterprises, including their
subsidiaries, equity investors and joint venture partners. The increased IFRS is not limited to public- company
listing requirements or statutory reporting. Many lenders regulators and government bodies are looking to IFRS
to fulfil local financial reporting obligations related to financing and licensing.

1.8 : Convergence to IFRS In India.

In the scenario of globalisation, India cannot insulate itself from the developments
taking place worldwide. In India, so far as the ICAI and the Government authorities such as National Advisory
Committee on Accounting Standards established under the Companies Act, 2013, and various regulators such
as Securities and Exchange Board of India and Reserve Bank of India are concerned, the aim is to comply with
the IFRS to the extent possible with the objective to formulate sound financial reporting standards for the
purpose of preparing globally accepted financial statements. The ICAI, being a member of the International
Federation of Accounts (IFAC), considered the IFRS and tried to the integrate them, to the extent possible, in
the light of the laws, customs, practises and business environment prevailing in India.
Also, the recent stream of overseas acquisitions by Indian companies makes a
compelling case for adoption of high-quality standards to convince foreign enterprises about the financial
standing as also the disclosure and governance standard of Indian acquirers.
In India, the Institute of Charted Accountants of India (ICAI) has worked towards
convergence by considering the application of IFRS in Indian corporate environment in India Accounting
Standards with Global Standards, Recognising the growing need of full convergence of Indian Accounting
Standards with IFRS, ICAI constituted a Task Force to examine various issues involved. Full convergence
involves adoption of IFRS in the same form as that issued by the IASB. While formulating the accounting
standards, ICAI recognizes the legal and other conditions prevailing in India and makes deviations from the
corresponding IFRS.
For the convergence of Indian Accounting Standards with the International
Financial Reporting Standards IFRS, the Accounting Standard Board with the Ministry of Corporate Affairs
(MCA), has decided that there will be two separate sets of Accounting Standards viz., (a) Indian Accounting
Standards converged with the IFRS- standards which are being converged by eliminating the differences of
the Indian Accounting Standards vis-à-vis IFRS (known as Ind AS) and (ii) Existing Notified Accounting
Standards.
History of IFRS- Converged Indian Accounting Standards (Ind AS)
First step towards IFRS
The Institute of Chartered Accountants of India ICAI being the accounting
standards setting body in India, way backs in 2006, initiated the process of moving towards the International
Financial Reporting Standards IFRS issues by the International Accounting Standards Board IASB with a view
to enhance the acceptability and transparency of the financial information communicated by the Indian
corporates through their financial statements. This move towards IFRS was subsequently accepted by the
Government of India.
The Government of India in consultation with the ICAI decided to converge and
not to adopt the IFRS issued by the IASB. The decision of convergence rather than adoption was taken after
the detailed analysis of the IFRS requirements and extensive discussion with the various stakeholders.
Accordingly, while formulating IFRS- converged Indian Accounting Standards (Ind AS), efforts have been
made to keep these Standard, as far as possible, in line with the corresponding IAS/IFRS and departures have
been made where considered absolutely essential. These changes have been made considering various factors
such as, various terminology related changes have been made to make it consistent with the terminology used
in law, e.g., ‘statement of profit and loss’, in place of ‘statement of profit and loss and other comprehensive
income’, and ‘balance sheet’ in place of ‘statement of financial position’. Certain changes have been made

considering the economic environment of the country, which is different as compared to the economic
environment presumed to be in existence by IFRS.
Initially Ind AS were expected to be implemented from year 2011. However,
keeping in the view the fact that certain issues including tax issues were still to be addressed, the Ministry of
Corporate Affairs decided to postpone the date of implementation of Ind AS.
In July 2014, the Finance Minister of India at that time, Shri Arun Jaitley, in his
Budget Speech announced an urgency to converge the existing accounting standards with the International
Financial Reporting Standards (IFRS) through the adoption of the new Indian Accounting Standards (Ind AS)
by the Indian Companies.
Pursuant to the above announcement, various steps have been taken to facilitate
the implementation of IFRS- converged Indian Accounting Standards. Moving in this direction, the Ministry
Of Corporate Affairs (MCA) has issued the companies (Indian Accounting Standards) Rules, 2015 vide
Notification dated February 16, 2015 covering the revised roadmap of implementation of Ind AS for the
companies other than the Banking companies, Insurance companies, and NBFCs and Indian Accounting
Standards converged with the International Financial Reporting Standards(IFRS) shall be implemented on the
voluntary basis from 1st April, 2015 and mandatorily from the 1st April, 2016. Separate roadmaps have been
prescribed for implementation of Ind AS to Banking, Insurance companies and NBFCs respectively.

;
CHAPTER 2: Research Methodology
Accounting Research Methodologies
A researcher will select a methodology to determine how the research is to be conducted. There are three main
methodologies for research in accounting: archival, analytical, and experimental.
One thing to avoid when discussing methodologies is to refer to one of the methods as "empirical" to differentiate
from other methods. This is most often done by archival researchers who refer to their research as empirical and
exclude experimental research from the "empirical umbrella." Empirical research is research that is verifiable based
on observation or experimentation; thus, archival and experimental research are both empirical in nature.
Analytical
Researchers who utilize analytical methods base analysis and conclusions on formally modeling theories or
substantiated ideas in mathematical terms. These analytical studies use math to predict, explain, or give substance
to theory.
Archival
Researchers who utilize archival methods base analysis and conclusions on objective data collected from
repositories of third parties. Also included are studies in which the researchers collected the data and in which the
data has objective amounts such as net income, sales, fees, etc.
• For a recent example of archival research in accounting, see Ball and Shivakumar (2008)
Experimental
Researchers who utilize experimental methods base analysis and conclusions on data the researcher gathered by
administering treatments to subjects. Usually these studies employ random assignment; however, if the researcher
selects different populations in an attempt to “manipulate” a variable, we include these as experimental in nature
(e.g., participants of different experience levels were selected for participation). Experimental research can include
analyzing both economic and behavioral factors.
• For a recent example of experimental research in accounting, see Magilke, Mayhew, and Pike
Other Research Methodologies
Studies that did not fit into one of the other methodological categories. The methodologies in these studies vary
significantly and include such things as surveys, case studies, field studies, simulations, persuasive arguments, etc.
Summary of Research Interests

For a thorough description of each methodology as it applies to each subject area, the following matrix has been
created:
AIS Auditing Financial Managerial Tax Other Topics

Analytical Analytical Analytical Analytical Other
Analytical Analytical AIS Analytical Tax
Auditing Financial Managerial Topics
Archival Archival Archival Archival Other
Archival Archival AIS Archival Tax
Auditing Financial Managerial Topics
Experimental Experimental Experimental Experimental Experimental Experimental
Experimental
AIS Auditing Financial Managerial Tax Other Topics

Other Other Other
Other Other AIS Other Auditing Other Financial Other Tax
Managerial Topics
Skills necessary to be a successful researcher

Although there have been great discoveries made by accident that have changed the great paradigms of
knowledge, academic research and the creation of knowledge is not an event left to chance. Academic research
comes from mastering skills that enable the researcher to carry out research processes. These processes will
contribute to and progress the current accepted knowledge base, inform industry practices, and open up new ideas
and areas of research to follow.
Some of the skills necessary to become a successful researcher include the following:
• The ability to know and stay abreast of current work within your field of research.
Staying abreast of the research being performed and the publication of such work is important as you
further your own research, discover new questions and problems, and contribute to your fellow researchers.
Being involved with workshops and peer reviews, as well as working with fellow professors and reading
publications in peer journals, are some ways to stay abreast of the current work in your field. A listing of top
journals can be found at Accounting Journals
• The ability to understand and recognize research problems.

Researchers need not only stay abreast of current research being performed and published; they also need
to understand and recognize difficulties in performing their own research and the difficulties of research
performed by others. This understanding is crucial to overcoming these difficulties.
• The ability to understand research content.
The ability to read and understand the content of research articles is an important skill for
academics and practitioners alike. Teresa P. Gordon and Jason C. Porter have a great list of hints for reading a
research paper in their article.
• The ability to discover where you can make a contribution and evaluate/re-evaluate your contribution.
The ability to discern a topic that will add knowledge to the field and trigger your interests is a great strength.
Additionally, being able to evaluate the causality, strength, and validity of your research is important, not
only when initially writing it, but to return and re-evaluate later and see if it needs to be edited or expanded.
• The ability to master appropriate experimental, mathematical, and computational research skills.
It is necessary to build a strong base of mathematical and statistical tools to be able to draw on and enable
you to build experiments that have good construct and internal validity.
• The ability to think critically and analytically.

As you perform research, the ability to examine assumptions, assess evidence, discern hidden values, and
evaluate the conclusion will be greatly utilized. Additionally, the ability to break a concept or paradigm into
its constituent parts and then study the parts to find and evaluate the relationships between those parts is
also a useful skill.
• The ability to formulate plans to meet goals and deadlines.

Academia has many short-term goals (e.g. tasks on a specific paper) and long-term goals (e.g. publication)
with a wide variety of time-specific deadlines. Having the ability to identify those goals and then construct
plans around your many responsibilities to achieve those goals is important.
• The ability to follow good research practices.

Being able to develop experiments or studies that are built on good solid research practices will strengthen
the research you do and lend credibility to your work that fellow users can rely on.
• The ability to document and report your work.

After the data is gathered and analyzed and conclusions are developed and confirmed, the researcher
needs the ability to effectively communicate their work in a paper such as a thesis paper. Documenting
others who have worked in similar areas, contributed to your work, or were otherwise used to further your
research is important.
• The ability to communicate and defend a coherent argument to interested

parties.
Effective communication includes not only written papers. It also requires the ability to address and defend
your work in a public setting that includes fellow researchers and practitioners. To take criticism with a view
to improve your work and strengthen the field (without taking it personally) is desirable.
• The ability to critically review the worth of your own work and the works of
other researchers.
A researcher needs to be able to critically review and assess the strengths and weaknesses of their own
work as well as the work of others. They can determine if there is a causal relationship between variables.
They should also be able to assess the various types of validity, as follows:
• Internal Validity - what is the strength of the controlled experiment?
• Construct Validity - Does what you are measuring actually capture the ideas and events in the
hypothesis?
• Statistical Conclusion Validity - Once everything is in place, is there strong enough evidence to prove an
actual difference?
• External Validity - once you have proven this is valid in this situation, how well does it transfer to other
situations and other subjects?

CHAPTER 3: LITERATURE REVIEW
Overview of Accounting Standards:

4.1: Status of Accounting Standards.
It has already been mentioned in unit one of this chapter that the standards are
developed by the Accounting Standards Boards of the Institute of Chartered Accountants of India and are
issued under the authority of its council. The institute not being a legislative body can enforce compliance with
its standards only by its members. Also, the standards cannot override laws and local regulation. The
accounting standards are nevertheless made mandatory from the dates specified in respective standards and
are generally applicable to all the enterprises, subject to certain exception as stated below. The implication of
mandatory status of an accounting standard depends on whether the statue governing the enterprise concerned
requires compliance with the standard.
In assessing whether an accounting standard is applicable, one must find the correct
answer to the following three questions:
• Does it apply to an enterprise concerned? If yes, then the next question is
• Does it apply to financial statement concerned? If yes, the next question
• Does it apply to the financial item concerned?
The preface to the statements of accounting standards answers the above questions. Enterprise to which
accounting standards apply
Accounting standards apply in respect of any enterprise (whether organised in
corporate, co-operative or any other forms) engaged in commercial, industrial or business activities, whether
or not profit oriented and even if established for charitable or religious purposes. Accounting Standards
however, don’t apply to enterprises solely carrying on the activities which are not commercial, industrial or
business nature, (e.g., an activity of collecting donations and giving them to flood affected people). Exclusion
of an enterprise from the applicability of the Accounting Standards would be permissible only if no
commercial, industrial, or business in nature. Even if a very small portion of the activities of an enterprise
were considered to be commercial, industrial or business in nature, the accounting standards would apply to
all its activities including those, which are not commercial, industrial or business in nature.
Implication of mandatory status

Where the statue governing the enterprise does not require compliance with the
accounting standards e.g., a partnership firm, the mandatory status of an accounting standard implies that in
discharging their attest functions, the member of the Institute are required to examine whether the financial
statements are compared in compliance with the applicable accounting standards. In the event of any deviation
from the accounting standards, they have a duty to make adequate disclosures in their reports so that the users
of financial statements may be aware of such deviation. It should nevertheless be noted that responsibilities
for the preparation of financial statements and for making adequate disclosure is that of the management of
the enterprise. The authors responsibility is to form his opinion and report on such financial statements.
Section 129(1) of the Companies Act, 2013 requires companies present their
financial statements in accordance with the accounting standards notified under the section 133 of the

Companies Act, 2013. Also, the auditor is required by section 143(3)(e) to report whether, in his opinion the
financial statements of the company audited, comply with the accounting standards referred to in section 133
of the Companies Act, 2013. Where the financial statements of a company do not comply with accounting
standards, the company shall disclose in its financial statements, the deviation from the accounting standards,
the reasons for such deviations as per section 129(5) of the Companies Act, 2013. Provided also that the
financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the
company, merely by the reason of the fact that they do not disclose
• In the case of an insurance company, any matters which is not required to be disclosed by the Insurance
Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999.
• In the case of a banking company, any matters which are not required to be disclosed by the Banking
Regulation Act, 1949
• In the case of a company governed by the any other law for the time being in force, any matters which
is not requires to be disclosed by that law.
Note: as per the Companies Act, 2013 the Central Government may prescribe standards of accounting or
addendum thereto, as recommended by the Institute of Chartered Accountants in India, in consultation with
the NACAS. Till date, the Central Government has notified all the existing accounting standards.
3.2: Criteria for Classifying Non- Corporate Entities.

Level 1 entity:
Non- corporate entities which fall in one or more of the following categories, at the end of the relevant
accounting period, are classified as Level 1 entities:
• Entities whose equity or debt securities are listed or are in the process of listing on any stock
exchange, whether in India or outside India.
• All commercial, industrial and business reporting entities having borrowings (including public
deposits) in excess of rupees ten crore at the time during the immediately preceding accounting year.
• Holding and subsidiary entities of any one of the above.
Level 2 entities (SMEs):

Non- corporative entities which are not level 1 entities but fall in any one or more of the following categories
are classified as level 2 entities
• All commercial, industrial and business reporting entities, whose turnover (excluding other income)
exceeds rupees one crore but does not exceed rupees fifty crore in the immediately preceding
accounting year
• All commercial, industrial and business reporting entities, whose turnover (excluding other income)
exceeds rupees one crore but does not exceed rupees fifty crore in the immediately preceding
accounting year

• Holding and subsidiary entities of any one of the above.
Level 3 entities (SMEs):

Non- corporate entities which are not covered under Level 1 or level 2 are considered as level 3 entities:
Additional requirements:
• An SME which does not disclose certain information pursuant to the explanations or relaxations
given to it should disclose (by way of a note to its financial statements) the fact that it us SME and
has complied with the accounting standards in so far as they are applicable to the entities falling in
level 2 or level 3 as the case maybe,
• Where an entity, being covered with level 2 or level 3 had qualified for any exemption or relaxation
previously but no longer qualifies for the relevant exemption or relaxation in the current accounting
period, the relevant standards or requirements become applicable from the current period and the
figures the corresponding period of the previous accounting period need not be revised merely by
reason of its having ceased to be covered in level 2 or level 3, as the case may be. The fact that the
entity was covered in level 2 or level 3, as the case maybe, in the previous period and it had availed
of exemptions or relaxations available to that level of entities should be disclosed in the noted to
financial statements.
• Where an entity has been covered in the level 1 and subsequently, ceases to be so covered, the
entity will not be qualifying for exemption or relaxation available to level 2 entities until the entity
ceases to be covered in level 1 for two consecutive years. Similarly, is the case in respect of an
entity, which has been covered in level 1 or level 2 and subsequently, gets covered under level 3
• If an entity covered in level 2 or level 3 opts not to avail exemptions or relaxations available to that
level of entities in respect of any but not all of the Accounting Standards, it should disclose the
Standards in respect of which it has availed the exemption or relaxation
• If an entity covered in level 2 or level 3 desires to disclose the information not required to be
disclosed pursuant to the exemptions or relaxations available to that level of entities, it should
disclose that information in compliance with the relevant Accounting Standards.
• An entity covered in level 2 or level 3 may opt for availing certain exemption or relaxations from
the compliance with the requirements prescribed in an Accounting Standard: Provided that such a
partial exemption or relaxation and disclosure should not be permitted to mislead any person or
public.
• In respect of Accounting Standard (AS) 15, Employee Benefits, exemption / relaxation is available
to Level 2 and Level 3 entities, under two subclassifications, viz,
(i) Entities whose average number of persons employed during the year is 50 or more and
(ii) Entities whose average number of persons employed during the year is less than 50

3.3: List of Accounting Standards.

• AS1: DISCLOSURE OF ACCOUNTIG STANDARDS
• AS2: VALUATION OF INVENTORY
• AS3: CASH FLOW STATEMENT
• AS4: CONTIGIENCIES AND EVENTS OCCURING AFTER BALANCE SHEET DATE
• AS5: NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN
ACCOUNTING POLICIES.
• AS6: DEPRICIATION ACCOUNTING
• AS7: CONSTRUCTION CONTRACT
• AS8: ACCOUNTING FOR RESEARCH AND DEVELOPMENT
• AS9: REVENUE RECOGINITION
• AS10: PROPERTY PLSNT AND EQUIPMENT
• AS11: THE EFFECTS OF CHANGES IN THE FOREIGN EXCHANGE RATES
• AS12: ACCOUNTING FOR GOVERNMENT GRANDS
• AS13: ACCONTING FOR INVESTMENTS
• AS14: ACCOUNTING FOR AMALGAMATIONS
• AS15: EMPLOYEE BENEFITS
• AS16: BORROWING COSTS
• AS17: SEGMENT REPORTING
• AS18: RELATED PAERTY DISCLOSUERS
• AS19: LEASES
• AS20: EARNING PER SHARE
• AS21: CONSOLIDATES FINANCIAL STATEMENTS
• AS22: ACCOUNTING ON TAXES ON INCOME
• AS23: ACCOUNTING FOR INVESTENTS IN ASSOCIATES CONSOLIDATED FINANCIAL
STATEMENTS
• AS24: DISCOUNTINUING OPERATIONS
• AS25: INTEREIM FINANCAIL REPORTING
• AS26: INTANGIABLE ASSETS
• AS27: FIANCIAL REPORTING OF INTER
• AS28: IMPAIREMENT OF ASSETS
• AS29: PROVISIONS, CONTIGENT LIABLITIES AND CONTIGIENT ASSET.

CHAPTER 4: DATA COLLECTED

4.1: ACCOUNTING STANDARD 1- DISCLOSURE OF ACCOUNTING POLICIES.
Irrespective of extent of standardisation, diversity in accounting policies in unavoidable

for two reasons. Firstly, accounting standards cannot and do not cover all possible areas of accounting and
enterprises have the freedom of adopting any reasonable accounting policies in areas and not covered by a
standard.
Second, since enterprises operate in diverse situations, it is impossible to develop a single
set of policies applicable to all enterprises for all time.
The accounting standards therefore permit more than one policy even in areas covered by
it. Difference in accounting policies lead to differences in reported information even if underlying transactions
are same. The qualitative characteristics of comparability of financial statements therefore suffer due to
diversity of accounting policies. Since uniformity is impossible, and accounting standards permit more than
one alternative in many cases, it is not enough to say that all accounting standards have been complied with.
For these reasons accounting standard 1 requires enterprises to disclose statements. Such disclosures all the
user of financial statements to take the difference in accounting policies into consideration and to make
necessary adjustments in their analysis of such statements.
The purpose of accounting standard 1 disclosure of accounting policies, is to promote
better understanding of financial statements by requiring disclosure of significant accounting policies in
orderly manner. As explained in the preceding paragraph, such disclosures facilitate more meaningful
comparison between financial statements of different enterprises for same accounting periods. The standard
also requires disclosure of changes in accounting policies such that users can compare financial statements of
same enterprise for different accounting periods.
Accounting Standard 1, Disclosure of Accounting Policies, was first issued in
November 1979. It came into effect in respect of accounting periods commencing on or after April 1, 1991.
The standard applies to all the enterprises.
Going concern:
The financial statements are normally prepared on the assumption that an enterprise will
continue its operations in the foreseeable future and neither there is intention, nor there is need to materially
curtail the scale of operation. Financial statements prepared going concern basis recognise among other things
the need for sufficient retention of profit to replace assets consumed in operation and for making adequate
provisions for settlement of its liabilities.
Consistency:
The principle of consistency refers to the practise of using same accounting policies
for similar transactions in all accounting periods. The consistency improves comparability of financial
statements through time. An accounting policy can be changed if the change is required (i) by a statue (ii) by
an accounting standard (iii) for more appropriate presentation of financial statements.
Accrual basis of accounting: under this basis of accounting, transactions are
recognised as soon as they occur, whether or not cash or cash equivalent is actually received or paid. Accrual
basis ensures better matching between revenue and cost and profit /loss obtained on this basis reflects activities
of the enterprise during an accounting period, rather than cash flows generated by it.
While accrual basis is a more logical approach to profit determination than the cash
basis of accounting, it exposes an enterprise to the risk of recognising an income before actual receipt. The
accrual basis can therefore overcast the divisible profits and dividend decisions based on the such overstated
profit lead to erosion of capital. For this reason, accounting standards require that no revenue should be
recognised unless the amount of consideration and actual realisation of the consideration is unreasonably
certain.
Despite the possibility of distribution of profit not actually earned, accrual basis of
accounting id generally followed because of its logical superiority over cash basis of accounting as illustrated
below. Section 209 (3)(b) of the Companies Act makes it mandatory for companies to maintain accounts on
accrual basis only. It is not necessary to expressly state that accrual basis of accounting has been followed in
preparation of a financial statement. In case, any income/expense is recognised on cash basis, the fact should
be stated.
This list is exhaustive i.e. endless. For every item right from valuation of assets and
liabilities to recognition of revenue, providing for expected adopt those principle. This method of forming and
applying accounting principles is known as accounting policies.
As we say that the accounts are both science and art. It is a science because we have
some tested accounting principle, which are applicable universally, but simultaneously the application of these
principles, depend upon personal ability of each accountant. Sine different accountants may have different
approach, we generally find that in different enterprise under same industry, different accounting policy is
followed. Though ICAI along with Government is trying to reduce the number of accounting policies followed
in India but still it cannot be reduced to one. Accounting policies adopted will have considerable effect on the
financial results disclosed by the financial statements; it makes it almost difficult to compare two financial
statements.
Selection of accounting standards:
Financial statements are prepared to portray a true and fair view of the performance
and state affairs of an enterprise. In selecting a policy, alternative accounting policies should be evaluated in
that light. In particular, major considerations that govern selection of a particular policy are:
Prudence: In view of uncertainty, associated with the future events, profits are not anticipated, but losses are
provided for as a matter of conservatism. Provision should be created for all known liabilities and losses even
though the amount cannot be determining with certainty and represents only a best estimate in the light of
available information.
The exercise of prudence in selection of accounting policies ensure that:
• Profits are not overstated
• Losses are not understated
• Assets are not overstated
• Liabilities are not understated
Example 1:
The most common example of exercise of prudence is selection of accounting policy is the policy of valuing
inventory at lower cost and net realisable value.

Suppose a trader has purchased 500 units of certain article @₹ 10 per unit. He sold 400 units @₹ 15 per unit.
If the net realisable value per unit of unsold article is ₹ 15, the trader shall value his stock at ₹ 10 per unit and
thus ignoring the profit 500 articles that he may earn in next accounting period by selling 100 units of unsold
articles. If the net realisable value per unit of unsold article is ₹ 8 the trader shall value his stock at ₹ 8 per unit
thus recognising possible loss ₹200 that may incur in next accounting period by selling 100 units of unsold
articles.
Profit of the trader if net realisable value of unsold article is ₹ 15
=Sale – Cost of goods sold = (400 x ₹ 15) – (500 x ₹10 – 100 x ₹ 10) = 2,000₹
Profit of the trader if the net realisable value of the unsold article is ₹8
= Sale – Cost of Goods Sold = (400 x ₹15) – (500x ₹10–100 x ₹8) = ₹1800
Example 2:
Exercise of prudence does not permit creation of hidden reserve by understanding profits and assets or by
overstating liabilities and losses. Suppose a company is facing a damage suit no provision should be recognised
by a charge against profits, unless the probability of losing the suit is more than the probability of not losing
it. Substance over form: transactions and other events should be accounted for and presented in accordance
with their substance and financial reality and not merely with their legal form. Materiality: Financialstatements
should disclose all ‘material item, i.e. the items the knowledge of which might influence the decisions of the
user of the financial statement. Materiality is not always a matter of relative size. For example,a small amount
lost by fraudulent practises of certain employees can indicate a serious flaw in enterprise’s internal control
system requiring immediate attention to avoid greater losses in future. In certain cases, quantitative limits of
materiality are specified. A few of such cases are given below:
• A company shall disclose by way of notes additional information regarding any item of income or
expenditure which exceed 1% of the revenue from operations or ₹ 1,00,000 whichever is higher.
• A company shall disclose in notes to accounts, shares in the company held by each shareholder holding
more than 5% shares specifying the number of shares held
Manner of disclosure: All significant accounting policies adopted the preparation and presentation of the
financial statement should be disclosed. The disclosure of the significant accounting policies as such should
form part of the financial statements and the significant accounting policies should normally, be disclosed in
one place.
Note: Being a part of financial statement, the opinion of the auditors shall cover the disclosures of the
accounting policies.

4.2: ACCOUNTING STANDARDS 2- VALUATION OF INVENTORIES.
The cost of closing inventory, e.g. cost of closing stock of raw materials, closing work-in-
progress and closing finished stock, is a part of the costs incurred in the current accounting period that is
carried over to next accounting period. Likewise, the cost of opening inventory is a part of costs incurred in
the previous accounting period that is brought forward to current accounting period.
Since the inventories are assets, and assets are resources expected to cause flow of future
economic benefits to the enterprise, the costs to be included in the inventory costs, are the cost expected to
generate future economic benefits either (i) the location of the inventory, e.g. freight incurred to carry the
materials to factory or (ii) conditions of the inventory, e.g. costs incurred to convert materials in finished stock.
The costs incurred to maintain the inventory for example, storage costs do not generate
any extra economic benefits for the enterprise and therefore should not be included in inventory costs.
The valuation of inventory is crucial because of its direct impact in measuring
profit/loss for an accounting period. Higher the value of closing inventory lower is the cost of goods sold and
hence larger is the profit. The principle of prudence demands that no profit should be anticipated while all
foreseeable losses should be recognised. Thus, if the net realisable value of inventory is less than the inventory
cost, inventory valued at net realisable value to reduce the reported profit in anticipation of loss. On the other
hand, if net realisable value of the inventory is more than the inventory cost, the anticipated profit is ignored
and the inventory is valued at cost. In short, inventory is valued at lower of cost and net realisable value. The
standard specifies
• What the cost of inventory should consist of and
• How the net realisable value is determined.
Failure of an item of inventory to recover its costs is unusual. If net realisable value of
an item of inventory is less than its cost, the fall in profit in consequence of writing down of inventory to net
realisable is an unusual loss ad should be shown as sperate line item in the Profit & Loss statement to help the
users of financial statements to make a more informed analysis of the enterprise performance.
By their very nature, abnormal gains or losses are not expected to recur regularly. For
a meaningful analysis of an enterprise’s performance, the users of financial statements need to know the
account of such gains/losses included in current profit/losses. For this reason, instead of taking abnormal gains
and losses in inventory costs, these are shown in the profit and losses statement in such way that their impact
on current profit/loss can be perceived.
Part I of Schedule III to the Companies Act prescribes that valuation mode shall be
disclosed for inventory held by the companies. AS2 “Valuation of Inventories” was first issued in June 1981
to supplement the legal requirements, it was revised and made mandatory for all enterprises in respect of
accounting periods commencing on or after April 1, 1999.
Paragraph 3 of AS2 defines inventories as assets held:
• For sale in the ordinary course of business or,
• In the process of production for such sale or
• In the form of materials or supplies to be consumed in the production process or in rendering of
services.

As per paragraph 1 of the Accounting Standards, following are excluded from the scope of AS2:
• Work in progress arising under the construction contracts, i.e. cost of part construction, including
directly related services contracts, being covered under the AS7, Accounting for Construction
Contract; Inventory held for use in construction, e.g. cement lying at the site shall however be covered
by AS2.
• Work in progress arising in the ordinary course of business of service providers i.e. cost of providing
a part of service. For example, for a shipping company, fuel and stores not consumed at the end of
accounting period is inventory but nit costs for voyage-in-progress. Work-in-progress may arise for
different other services e.g. software development, consultancy, medical services, merchant banking
and so on.
• Shares, debentures and other financial instruments held as stock-in-trade.it should be noted that these
are excluded from the scope of AS13 as well. The current Indian practise is however to value them at
lower of cost and fair value.
• Producers inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to
the extent that they are measured at net realisable value in accordance with well-established practises
in those industries, e.g. where sale is assured under a forward contract or a government guarantee or
where a homogenous market exists and there is negligible risk to future sell.
Inventories should be valued at lower of cost and net realisable value. As per paragraph 3, net realisable value
is the estimated selling price in the ordinary course of business less than the estimated costs of completion and
the estimated costs necessary to make the sale. The valuation of inventory at lower of cost and net realisable
value is based on the view that no asset should be carried at a value which is in excess of the value realisable
by its sale or use.
Example 1:
Particulars Amount
Net Selling Price 250
Less: Estimated Cost of Completion (100)
150
Less: Brokerage (4% of 250) (10)
Net Realisable Value 140
Cost of Inventory 150
Value of Inventory (lower of cost and net realisable value) 140
Cost of Inventory: Costs of Inventories comprise all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition.
Cost of Purchase: The cost of purchase consists of the purchase price including duties and taxes other than
those subsequently recoverable by the enterprise from the taxing authorities, freight inwards and expenditures
directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items
deducted in determining the costs of purchase.
Example 2:
A trader purchased certain articles for ₹85,000. He sold some of the articles for ₹1,05,000. The average
percentage of gross margin is 25% on cost. Opening stock of inventory at cost was ₹15,000.

Cost of Closing Stock is as below:

Particulars Amount
Sale value of opening stock and purchases (₹85,000+₹15,000) x 1.25 1,25,000
Sales (1,05,000)
Sale value of unsold stock 20,000
Less: Gross Margin (₹20,000/1.25) x 0.25 (4,000)
Cost of Inventory 16,000
Estimated of realisable value:

Estimated of net realisable value are based on the most reliable evidence at the time the
estimates are made as to the amount the inventories are expected to realise. These estimates take into
consideration fluctuations of price or costs directly relating to the events occurring after the balance sheet date
to the extent that such events confirm the conditions existing at the balance sheet date

4.3: ACCOUNTING STANDARD 3- CASH FLOW STATEMENT
Traditional financial statements comprised of a balance sheet portraying at the end of

accounting period, resources controlled by the reporting enterprise together with sources of funds used for
their acquisitions and a statement of income, showing income, expenses and profit earned or loss incurred by
the reporting enterprise during the accounting period. It was however, noticed that due to use of accrual basis
of accounting, recognition of financial elements, e.g. assets, liabilities, income, expenses and equity coincide
with the events to which they relate rather than with cash receipts or payments. For this reason, traditional
financial statements fail to inform the users the way the reporting enterprise has gathered cash and the way
these were utilized during accounting period. To a person, less accustomed with the accounting practises, it
may sometimes appear perplexing to observe that despite earning a large profit, an enterprise is left with very
little cash to pay dividends. The need for inclusion of a summary of cash receipts and payments in the financial
statements of the reporting enterprise was therefore recognised. The summary of cash receipts and payments
during an accounting period is called Cash Flow Statement.
A simple example is given below to illustrate the relation of cash flow with profitability of an enterprise
Study of AS3: The standard is mandatory for level 1 enterprises in respect of accounting periods commencing
on or after April 1, 2001. The level 2 and level 3 non- corporate entities and level 2 corporate entities are
encouraged but not required to apply the standard.
• Meeting of the term cash for cash flow statements.
Cash for the purpose of cash flow statement consists the following
• Cash in hand and deposits repayable on demand with any bank or financial institutions and
• Cash equivalents, which are short term, highly liquid investments that are readily convertible into
known amounts of such and are subject to insignificant risk or change in value. A short-term investment
is one, which is due for maturity within three months from the date of acquisitions. Investments in
shares are not normally taken as cash equivalent, because of the uncertainties associated with them as
to realisable value.
Meaning of the term cash flow:

Cash flows are inflows (i.e. receipts).and outflows (i.e. payments) of a cash and cash
equivalents. Any transaction, which does not result in cash flow, should not be reported in the cash flow
statement. Movements within cash or cash equivalents are cash flows as they do not change cash as defined
by AS3, which is sum of cash, cash equivalents and bank. For example, acquisition of cash equivalent
investments or cash deposited into the bank are not cash flows. It is important to note that a change in cash
does not necessarily imply cash flow. For example, suppose an enterprise has a bank balance of USD 10,000
stated in the books at ₹4,90,000 using the rate of exchange 49/USD prevailing on date of receipts of dollars.
₹5,00,000 on the balance sheet date. The increase is however, not a cash flow because neither there is any cash
inflow nor cash outflow.
Type of Cash Flow:

Cash flows for an enterprise occur in various ways e.g. through operating income andexpenses,
by borrowing or repayment of borrowing or by acquisition or disposal of fixed asset. The implication
of each type of cash flow is clearly different. Cash received on disposal of a useful fixed asset is likely to have
adverse effect on future performance of the enterprise and it is completely different from cash received through
operating income and cash received through borrowing. It may also be noted that implications of cash flow
types are interrelated. For example, borrowed cash used for acquisitions of fixed asset.
For the aforesaid reasons, the standard identifies three types of cash flows, i.e. investing cash
flows, financing cash flows and operating cash flows. Separate presentation of each type of cash flow is cash
flow statement improves usefulness of cash flow information.
The investing cash flows are cash flows generated by investing activities. The investing
activities are the acquisitions and disposal of long-term assets and other investments not included in cash
equivalents. The examples of investing cash flows include cash flow arising from investing activities include:
• Receipts from disposal of fixed assets;
• Loan given to/recovered from other entities (other than loans by financial enterprise)
• Payments to acquire fixed assets.
• Interest and dividends earned (other than interests and dividends earned by financial institutions)
The financial cash flows are cash flows generated by financing activities. Financial activities are activities
that result in charges in the size and compositions of the owner’s capital (including preference share capital in
the case of the company) and borrowings of the enterprise. Examples include issue of shares/debentures,
redemption of debentures /preference shares, payment of dividends and payments of interest (other than
interest paid by financial institutions).
• The operating cash flows are cash flows generated by operating activities or by other activities that are
not investing or financing activities. Operating activities are the principal revenue-producing activities
of the enterprise. Examples include cash purchase and sale of goods, collections from customers for
goods, payments to suppliers of goods, payment of salaries, wages etc.
Identifying types of Cash Flows:

Cash flow type depends on the business of the enterprise and other factors. For example, since
principal business of financial enterprises consists of borrowing, lending and investing, loans given and
interests earned are operating cash flow for financial enterprises and investing cash flows for other enterprise.
Loans/ Advances given and Interests earned:

• Loans and advantages given and interest earned on them in ordinary course of business are operating
cash flows for financial enterprise.
• Loans and advantages given and interest on them are investing cash flows for non-financial enterprises.
• Loans and advances given to subsidiaries and interest earned on them are investing cash flows for all
enterprises.
• Loans and advances given to employees and interest earned on them are operating cash flows for all
enterprises.
• Advance payments to suppliers and interest earned on them are operating cash flows for all enterprises.

• Interest earned from customers for late payments are operating cash flows for non-financing
enterprises.
Loans/Advances interest paid taken:

• Loans and advances taken and interest paid on them in the ordinary course of business are operating
cash flows for financial enterprises.
• Loans and advances taken and interests paid on them are financing cash flows for non-financing
enterprises.
• Loans and advances taken from subsidiaries and interest on them are investing cash flows for all
enterprises.
• Advances taken from customers and interest paid on them are operating cash flows for non-financing
enterprises.
• Interest taken as part of inventory costs in accordance with AS16 are operating cash flows.
Investments made and dividends earned:

• Investments made and dividends earned on them in the ordinary course of business are operating cash
flows for financial enterprises.
• Investments made and dividends earned on them are investing cash flows for non-financing enterprises.
• Investments in subsidiaries and dividends earned on them are investing cash flow for all enterprises.
Dividends paid: dividends paid are financing cash outflows for all enterprises.
Income Tax:
• Taxes paid on operating income is operating cash outflows for all enterprises.
• Tax deducted at source against income are operating cash outflows if concerned incomes are operating
incomes and investing cash outflows if the concerned incomes are investment income e.g. interest
earned.
• Tax deducted at source against expenses are operating cash inflows if concerned expenses are operating
expenses and financial cash inflows if concerned expenses are financing expenses, e.g. interest paid.
Insurance claimed:
• Insurance claims received against loss of stock or loss of profits are extraordinary operating cash
inflows for all enterprises.
• Insurance claim received against loss of fixed assets are extraordinary investing cash inflows for all
enterprises.
• Separate disclosure of extraordinary cash flows, classifying them as cash inflows from operating,
investing or financing activities, as may be appropriate.

• Profit or loss on disposal of fixed assets.

• Profit or loss on sale of fixed assets is not operating cash flow. The entire process of such transactions
should be taken as cash inflow from investing activity.
• Fundamental techniques of cash flow preparations
• A cash flow statement is a summary of cash receipts and payments of an enterprise during an
accounting period. Any attempt to compile such a summary from cash books is impractical due to large
volume of transactions.
• Reporting cash flows on net basis.

4.4: ACCOUNTING STANDARD 4- CONTINGENCIES AND EVENTS OCCURRING

AFTER THE BALANCE SHEET DATE
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, an 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 statements if either
of the conditions in above paragraph is not met, unless the possibility of a loss is remote.
Contingent gains should not be recognised in the financial statements.
Events occurring after the Balance Sheet Date:

Assets and liabilities should be adjusted for events occurring after the balance sheet date
that provide additional evidence to assist the estimation of amounts relating to conditions existing at the
balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the
continuance of existence or substratum of the enterprise) is not appropriate.
Dividends stated to be 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
statements, should be adjusted.
Disclosure should be made in the report of the approving authority of those events
occurring after the balance sheet date that represent material changes and commitments affecting the
financial position of the enterprise
Disclosure:
If disclosure of contingencies is required by paragraph 11 of the Statement, the
following information should be provided: the nature of the contingency, the uncertainties which may affect
the future outcome, an estimate of the financial effect, or a statement that such an estimate cannot be made.
If disclosure of events occurring after the balance sheet date in the report of the
approving authority is required by the Standard then it shall disclose; the nature of the event, an estimate of
the financial effect, or a statement that such an estimate cannot be made.
Example 1:
In the following case of a company, whose accounting year ended 31st March 2009, the
accounts for that period were considered and approved by the respective Board of Directors on 15.5.2009.

The following events took place after April 2009 and you are required to state with reasons how the event
would be dealt with in the financial statement for the year ended 31st March 2009. In case any disclosures are
deemed necessary, you are required to draft the relevant notes also.
A claim for damage of Rs. 10 lakhs for breach of patents and copyrights had been served on the company in
January 2009. The Directors sought competent legal advice for eligibility of the claim and were advised that
the claim was highly frivolous, without any base and would not survive even in the first trial court. The
company, however, anticipates a long drawn legal battle and huge legal costs.
Solution:
Under the circumstances, claim for damages amounting to Rs. 10 lakhs for breach of patents
and copyrights cannot legally be enforceable as per legal advice. As the outcome is uncertain, it is a case of
contingency. A reasonable provision for legal expenses should be made since the case will continue for a long
period which requires huge legal expenses.
Since it is a contingent liability, a note should be written on the footnote of the Balance
Sheet as:
“Contingent liabilities not provided for”—A claim for damages amounting to Rs. 10 lakhs
for breach of patent and copyright had been served on the company. According to expert legal advice, the same
was highly frivolous although the case will continue for a long period for which huge legal expenses (estimated
Rs….) will be required and for that purpose proper provisions should be made.

4.5 : ACCOUNTING STANDARDS 5- NET PROFIT/LOSS FOR THE

PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING
POLICIES
Prominent definitions include; Ordinary activities are any activities which are
undertaken by an enterprise as part of its business and such related activities in which the enterprise engages
in furtherance of, incidental to, or arising from, these activities. Extraordinary items are income or expenses
that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and,
therefore, are not expected to recur frequently or regularly.
Prior period items are income or expenses which arise in the current period as a result of
errors or omissions in the preparation of the financial statements of one or more prior periods. Accounting
policies are the specific accounting principles and the methods of applying those principles adopted by an
enterprise in the preparation and presentation of financial statements.
Accounting treatment and disclosures:

4.5.1 Ordinary Activities: When items of income and expense 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.
4.5.2 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 disclosedin the statement of profit and loss in a manner that its impact on current
profit or loss can be perceived.
4.5.3 Prior Period: 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 profit or loss can be
perceived.
4.5.4 Accounting Estimate : The effect of a change in an accounting estimate should be included
in the determination of net profit or loss in; (a) the period of the change, if the change affects
the period only;or (b) the period of the change and future periods, if the change affects both.
4.5.5 Accounting Policy: Any change in an accounting policy which has a material effect should
be disclosed. The impact of, and the adjustments resulting from, such change, if material, should
be shownin the financial statements of the period in which such change is made, to reflect the
effect of such change. Where the effect of such change is not ascertainable, wholly or in part,
the fact should be indicated. If a change is made in the accounting policies which has no
material effect on the financial statements for the current period but which is reasonably
expected to have a material effect in later periods, the fact of such change should be
appropriately disclosed in the period in which the change isadopted.
A change in accounting policy consequent upon the adoption of an Accounting Standard should be accounted
for in accordance with the specific transitional provisions, if any, contained in that Accounting Standard.
However, disclosures required by paragraph 32 of the Statement should be made unless the transitional
provisions of any other Accounting Standard require alternative disclosures in this regard.
Where any policy was applied to immaterial items in any earlier period but the item is
material in the current period, the change in accounting policy, if any, shall not be treated as a change in
accounting policy and accordingly no disclosure is required e.g., gravity booked on cash basis in earlier period
for relatively insignificant number of employees which in current period has become material and thus
provided on basis of report of Actuary.

Example 1:
Advise B & Co. Ltd., about the treatment of the following in the final statement of accounts for the year
ended 31st March 1993: The company finds that the stock sheet as on 31st March 1992 had included twice
an item the cost of which was Rs. 55,000.
Solution:
Prior period items are incomes or expenses which arise in the current period as a result of
errors or omissions in the preparation of the financial statements of one or more prior period(s). In this
problem, the error was discovered in the current year i.e. 31.4.1993 which has happened in the financial
statements on 31.4.1992 which was nothing but a prior period item. It is needless to say that overvaluation of
closing stock of 31.4.1992 means overvaluation of opening stock for the year ended 31.4.1993 as result of
which profit was overstated by Rs. 55,000.
Errors in the preparation of the financial statements of one or more prior period(s) may be
discovered in the current period which should separately be disclosed in the current statement of profit and
loss.

4.6: ACCOUNTING STANDARD 7- CONSTRCTION CONTRACT
Accounting standard 7 prescribes the principle of accounting for construction contracts

in the financial statements of contractors. The focus of the standard is on principal of revenue recognition by
the contractor.
A construction contract is a contract specifically negotiated for the construction of an
asset or a combination of assets that are closely interrelated or interdependent in terms of their design,
technology and function on their unlimited purpose or use.
A construction contract maybe negotiated for the construction of a single building, bridge,
dam, pipeline, road, ship or tunnel. A construction contract may also deal with the construction of number of
assets which are closely interrelated or interdependent in terms of their design, technology and function on
their unlimited purpose or use; examples of such contracts include those for the construction of refineries and
other complex pieces and plants or equipment.
In a fixed price contract, the price is agreed as fixed sum or fixed rate per unit of output.
In some cases, the contact may require the customer to additional sums to compensate the contractor against
escalation.
A cost-plus contact is a construction contract in which the contractor is reimbursed for
allowable or otherwise defined cost, plus percentage of these cost or fixed fee.
Percentage Completion Method:

Construction contracts are mostly long term, i.e. they take more than one accounting year
to complete. This means, the final outcome (profit/loss) of a construction contract can be determined only after
a number of years from the year of commencement of contractions are over. It is nevertheless possible to
recognise revenue annually in proportion of progress of work to be matched with corresponding construction
costs incurred in that year. This method of accounting, called the stage of completion method (percentage
completion method), provides useful information on the extent of contract activity and performance during an
accounting period.
The percentage completion method may suffer from a serious drawback viz. anticipation of
profit. Since the method recognises revenue pending final outcome of a contract is known, it is possible that
an enterprise may distribute dividend based on reported profit of a year, while final result loss. To avoid such
possibilities, percentage completion method should be used with caution. AS7 prescribes that the percentage
completion method not to be used unless it is possible to make a reasonable estimate of the final outcome of
the contract. Also, AS7 provides that whenever total contract cost is expected to exceed the total contract
revenue, the loss should be recognised as an expense immediately. As per AS7, the outcome of fixed price
contracts can be estimated reliably when all the following conditions are satisfied:
• Total contract revenue can be measured reliably,
• It is probable that the economic benefits associated with the contract and the stage of contract
completion at the reporting date can be measured reliably
• The contract costs attributable to the contract can be clearly identified and measured reliably so that
actual contract costs incurred can be compared with prior estimates.
The outcome of a cost pus contract can be estimated reliably when all the following conditions are satisfied:
• It is probable that the economic benefits associated with the contract and the stage of contract
completion at the reporting date can be measured reliably
• The contract costs attributable to the contract, whether or not specifically reimbursable, can be clearly
identified and measured reliably.
Treatment of costs:
Under the percentage completion method, contract revenue is recognised as revenue in the
statement of profit and loss in accounting periods in which the work is performed. Contract costs are usually
recognised as an expense in the statement of profit and loss in accounting periods which the work to which
they relate is performed. The contract is however recognised as an asset provided it is probable that they will
be recovered. Such costs represent an amount due from the customers and are often classified as contract work
in progress.
Uncollectable Contract Revenue:

When an uncertainty arises about the collectability of an amount already included in contract
revenue, and already recognised in the statement of profit and loss, the uncollectable amount or the amount in
respect of which recovery has ceased to be probable is recognised as an expense rather than as an adjustment
of the amount of contract revenue.
Stage of Completion:
The stage of completion of a contract may be determined in a variety of ways. The enterprise
uses the method that measures reliably the work performed. Depending on the nature of the contract, the
methods may include:
• The proportion that contract costs incurred for work performed up to the reporting date bear to the
estimated total contract costs; or
• Surveys of work performed or
• Completion of a physical proportion of the contract work.
Progress payments and advances received from customers may not necessarily reflect the work performed.
Example 1:
Mr. Shayam, a construction contractor undertakes the construction of an industrial complex. He has separate
proposals raised for each unit to be constructed in the industrial complex. Since each unit is subject to separate
negotiation, he is able to identify the costs and revenues attributable to each unit. Should Mr. Shayam treat
construction of each unit as a separate construction contract according AS7?
Solution: As per AS 7 ‘Construction Contract’s, when a contract covers a number of assets, the construction
of each asset should be treated as a separate construction contract when:
• Separate proposals have been submitted for each asset
• Each asset has been subject to separate negotiation and the contractor and the customer have been able
to accept or reject that part of the contract relating to each asset and
• The costs and the revenue of each asset can be identified.
Therefore, Mr. Shayam is required to treat construction of each unit as a separate construction contract.
Example 2:
On 1st December, 2016, Vishwakarma Construction Co. Ltd. undertook a contract to construct a building for
₹ 85 lakhs. On 31st March, 2017, the company found out that it had already spent ₹ 64,99,000 on the
construction. Prudent estimate of the additional cost for completion was ₹ 32, 01,000. What amount should be
charged to revenue in the final accounts for the year ended 31st March, 2017 as per provisions of AS 7
Solution:
Particulars Amount
Cost incurred till 31st March,2017. 64,99,000
Prudent estimate of additional cost for completion 32,01,000
Total cost construction 97,00,000
Less: contract price (85,00,000)
Total foreseeable loss 12,00,000
According to AS 7, the amount of ₹12,00,000 is required to be recognised as expense.

4.7 : ACCOUNTING STANDARD 9- REVENUE RECOGNITION.
AS 9 is mandatory for all enterprises.

AS9 deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise. The
standard is concerned with the recognition of the revenue arising in the course of the ordinary activities of the
enterprise from:
4.7.1 The sale of goods
4.7.2 The rendering of services
4.7.3 The use by others of enterprise resources yielding interest, royalties and dividends.
AS9 does not deal with the following aspects of revenue recognition to which special considerations apply:
4.7.4 Revenue arising from construction contracts
4.7.5 Revenue arising from hire-purchase, lease agreements
4.7.6 Revenue arising from government grants and other similar subsidies;
4.7.7 Revenue of insurance companies arising from insurance contracts.
Examples of items not included within the definition of revenue for the purpose of AS9 are:
4.7.8 Realised gains resulting from the disposal of, and unrealised gains resulting from the holding
of, non-current assets e.g. appreciation in value of fixed assets;
4.7.9 Unrealised holding gains resulting from the change in the view of current assets, and
the naturalincrease in the herds and agricultural and forest products;
4.7.10 Realised or unrealised gains resulting from the changes in foreign exchange rates and
adjustments arising in the translation of foreign currency financial statements;
4.7.11 Realised gains resulting from the discharge of an obligation at less than it carrying
amount;
4.7.12 Unrealised gains resulting from the restatement of carrying amount of an obligation.
Revenue is the gross inflow of cash, receivables or other considerations arising in the course of the
ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by
others of the enterprise resources yielding interest, royalties, dividends. Revenue is measured by the charges
made to customers or clients for goods supplied and services rendered to them and by the charges and rewards
arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission
and not the gross inflow of cash, receivables or other consideration.
Sale of goods:
Revenue from the sales or service transactions should be recognised when the requirements as
to performance set out in below paragraph are satisfied, provided that at the time of performance it is not
unreasonable to expect ultimate collection. If at the time of raising claim it is unreasonable to expect ultimate
collection, revenue recognition should be postponed.

In a transaction involving the sale of goods, performance should be regarded as being achieved
when the following conditions have been fulfilled:
4.7.13 The seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with the
ownership; and
4.7.14 No significant uncertainty exists regarding the amount of consideration that will be derived
from the sale of goods.
Rendering of services:
Revenue from service transactions is usually recognised as the service is performed. There
are two methods of recognition of revenue from service transaction, viz,
Proportionate Completion Method is a method of accounting which recognises revenue in
the statement of profit and loss proportionately with the degree of completion of services under a contract.
Here performance consist of the execution of more than one act. Revenue is recognised proportionately by
reference to the performance of each act.
Completed Service Contract Method is a method of accounting which recognises revenue
in the statement of profit and loss only when the rendering of services under the contract is completed or
substantially completed. In this method performance consists of the execution of a single act. Alternatively,
services are performed is more than a single act, and the services yet to performed are so significant in relation
to the transaction taken as a whole performance cannot be deemed to have been completed until the execution
of those acts. The completed service contract method is relevant to these patterns of performance and
accordingly revenue is recognised when the sole or final act takes place and the service becomes chargeable.
Revenue from sales or service transaction should be recognised when the requirements as
to performance set out below paragraph are satisfied, provided that at the time of performance it is not
unreasonable to expect ultimate collection, revenue recognition should be postponed.
In a transaction involving the rendering of services, performances should be measured
either under the completed service contract method or under the proportionate completion method, whichever
relates the revenue to the work accomplished. Such performance should be regarded as being achieved when
no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering
the service.
Example 1:
The Board of Directors decided on 31.03.2017 to increase the sale price of certain items
retrospectively from the 1st January, 2017. In view of this price revision with effect from 1st January, 2017, the
company has to receive ₹15 lakhs from its customers in respect of sales made from 1st January, 2017 to 31st
March, 2017. Accountant cannot make up his mind whether to include ₹15 lakhs in the sales for 2016- 2017.
Advise.
Solution:
Price revision was affected during the current accounting period 2016-2017. As a result, the company
stands to receive ₹15 lakhs from its customers in respect of sales made from 1st January, 2017 to 31st March,
2017. If the company is able to assess ultimate collection with reasonable certainty, the additional revenue
arising out of the said price revision may be recognised in 2016-2017.
Example 2:
Y Ltd used certain resources of X Ltd. received ₹ 10 lakhs and ₹15 lakhs as interested and royalties
respective from Y ltd. during the year 2016-2017. You are required to state whether and on what basis these
revenues can be recognised by X Ltd.
Solution:
As per AS9 on Revenue Recognition, revenue arising from the use by others of enterprise resources
yielding interest and royalties should be only recognised when no significant uncertainty as to measurability
or collectability exists. These revenues are recognised on the following bases:
4.7.14.1 Interest: on a time, proportion basis taking into account the amount outstanding
and the rateapplicable.
Royalties: in an accrual basis in accordance with the terms of the relevant agreement.

4.8 : ACCOUNTING STANDARDS 10- ACCOUNTING FOR FIXED ASSETS.

AS 10 Accounting for Fixed Assets was issue by the ICAI in 1985. Financial statements
disclose certain information relating to fixed assets. In many enterprises these assets are grouped into various
categories, such as land, building, plant and machinery, vehicles, furniture and fittings, goodwill, patents,
trademark and designs. This statement deals with accounting for such fixed asset and is applicable to fixed
assets on Historical Cost basis.
4.8.1 The cost of a fixed asset should comprise its purchase price and any attributable cost of
bringing theasset to its working condition for its intended use.
4.8.2 Self-constructed asset shall be accounted at cost.
4.8.3 In case of exchange of asset, fair value of asset acquired or the net book value of asset
given upwhichever is more clearly evident shall be considered.
4.8.4 Revaluation is permitted provided it is done for the entire class of assets. The basis of
revaluationshould be disclosed.
4.8.5 Increase in value on revaluation shall be credited to Revaluation Reserve while the decrease
should becharged to Profit and Loss Account.
4.8.6 Goodwill to be accounted only when paid for.
4.8.7 Assets acquired on hire purchase shall be recorded at its fair value.
4.8.8 Gross and net book values at beginning and end of year showing additions, deletions
and othermovements is required to be disclosed.
4.8.9 Assets should be eliminated from books on disposal or when of no utility value.
4.8.10 Profit/loss on disposal be recognised on disposal to Profit and Loss Account.
4.8.11 Machinery spares that can be used only in conjunction of specific asset shall be
capitalised.
Example 1:
On 1.1.2016, Z Ltd acquired a freehold land & building for Rs. 10, 00,000.
It decided the following for the purpose of depreciation on such building:
(i) The building part, valued Rs. 8, 00,000 depreciated on straight line method for 25 years having no scrap
value.
(ii) The land part valued Rs. 2, 00,000, no depreciation will be charged on it.
On 1.1.2000, it was decided that the value of land and building would be Rs. 20, 00,000, divided into: Land
Rs. 5, 00,000 and building Rs. 15, 00,000. It has also been further estimated that the useful life of the Land
and Building would be further 20 years. Ascertain the amount of depreciation to be charged annually over the
useful life of Land and Building, the WDV of the same to be shown in Balance Sheet of every year.
Calculate also the surplus on revaluation of land and building in
(1) Before Revaluation, and
(2) After the Revaluation.
Solution:
(i) Before the Revaluation:

Annual depreciation on Building = Rs. 8, 00,000/25 years = Rs. 32,000.
Naturally, for the 1st 5 years, annual depreciations to be made @ Rs. 32,000 each.
The W.D.V of Building for the year ended:
31.12.2016 9,68,000
31.12.2017 9,36,000
31.12.2018 9,04,000
31.12.2019 8,72,000
31.12.2020 8,40,000
(ii) After the Revaluation:

Depreciation to be charged on building by the following new rate:
Rs. 15, 00,000/20 = Rs. 75,000 p.a.
From 1.1.2000, the WDV of the building to be reduced by Rs. 75,000. The building part will totally be
depreciated after 20 years but the value of the land will be Rs. 5, 00,000.
Profit on Revaluation:
As per para 30, AS 10, this surplus amounting to Rs. 11,60,000 should be transferred to Revaluation Reserve.
Particulars Amount
Value of building 20,00,000
Less: net book value as on 31.12.1999 8,40,0000
Surplus 11,60,0000
Example 2:
A company obtained term loan during the year ended 31.3.2004, to an extent of Rs. 650 lakhs for
modernisation and development of its factory. Building worth Rs. 120 lakhs were completed and Plant and
Machinery worth Rs. 350 lakhs were installed by 31.3.2004.
A sum of Rs. 70 lakhs have been advanced for assets, the installation of which is expected in the following
year. Rs. 110 lakhs have been utilized for Working Capital requirements. Interest paid on the loans of Rs. 650
lakhs during the year 2003-04 amounted to Rs. 58-50 lakhs.
How should the interest amount be treated in the accounts of the company?
Solution:
As per para 10.1 of AS 10, Accounting for Fixed Assets—Self-constructed fixed assets—
while arising at the gross book value of self-constructed fixed assets, cost includes all direct costs and
attributable costs which are required for the construction of such fixed assets (any internal profits are
eliminated in arising at such costs). In the present case, interest on borrowed Capital should be included with
the gross book value of the assets. But interest paid which are related to Working Capital should be charged
to Profit and Loss Account.

The particulars of the problem are:

Term loan taken Rs. 650 during the year ended 30.5.2004 and interest paid on such term loan Rs. 58.50 lakh
during the said period.
Utilization of term loans Amt Allocation of interest Amt.

Building 120 120/650×58.50 10.80
Plant and Machinery 320 320/650×58.50 31.50
Installation of assets 70 70/650×58.50 6.30
Working capital 110 110/650×58.50 9.90
Total 650 Total 58.50

4.9: ACCOUNTING STANDARDS 11- THE EFFECTS OF CHANGE IN FOREIGN

EXCHANGE RATES.
AS 11, (revised 2003), came into effect in respect of accounting periods commencing on or
after 1-4-2004 and its mandatory in nature from that date.
Scope:
The statement should be applied:
4.9.1 In accounting for transactions in foreign currencies.
4.9.2 In translating the financial statements of foreign operations.
4.9.3 This statement also deals with accounting for foreign currency transactions in the nature of
forwardexchange contracts.
The statement does not:
4.9.4 Specify the currency in which an enterprise presents its financial statements.
4.9.5 Deal with the presentation in a cash flow statement of cash flows arising from transactions in
a foreigncurrency and the transaction of cash flows of a foreign operation.
4.9.6 Deal with exchange difference arising from foreign currency borrowings to extent that
they areregarded as an adjustment to interest costs.
A foreign currency transaction is a transaction which is denominated in or requires settlement in a foreign
currency, including transactions arising when an enterprise either:
4.9.7 Buys or sells goods or services whose price is denominated in a foreign currency.
4.9.8 Borrows or lends funds when the amounts payable or receivable are denominated in a
foreign currency.
4.9.9 Becomes a party to an unperformed forward exchange contract or
4.9.10 Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a
foreigncurrency.
Registration of Exchange Rates:

Exchange differences arising on the settlement of monetary items or on reporting an enterprises
monetary items at rates different from those at which they are initially recorded during the period, or reported
in previous financial statements, should be recognised as income or as an expense in the period which they
arise.
However, exchange differences arising on a monetary item that, in substance, forms part of an
enterprises net investment in a non-integral foreign operation should be accumulated in a foreign currency
translation reserve in the enterprise’s financial statements until the disposal of the net investments. On the
disposal of a non-integral foreign operation, the cumulative amount of the exchange differences which have
been deferred and which relate to that operation should be recognised as income or as expenses in the same
period in which the gain or loss on disposal is recognised. 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.
An exchange difference results when there is a change in exchange rate between the transaction
date and date of settlement of any monetary items arising from a foreign currency transaction.

When the transaction is settled which the same accounting period as that in which it occurred,
all the exchange difference is recognised in that period.
When the transaction is settled in a subsequent accounting period, the exchange difference
recognised in each intervening period up to the period of settlement is determined by the change in exchange
rates during that period.
Example 1:
Opportunity Ltd, purchased an equipment costing ₹24,00,000 lakhs on the 1.04.2013 and the same was
fully financed by foreign currency loan (US Dollars) payable in four annual equal instalments. Exchange rates
were 1 Dollar = ₹60.00 and ₹62.50 as on 1.04.2013 and 31.03.2014 respectively. First instalment was paid on
31.03.2014. The entire difference in foreign exchange can been capitalized. You are required to state that how
these transactions would be accounted for.
Solution:
As per para 13 of AS 11 (revised 2003) ‘The Effects of Changes in Foreign Exchanges Rates’, exchange
differences arising on reporting an enterprises monetary items at rates different from those at which they were
initially recorded during the period, should be recognised as income or expenses in the period in which they
arise. Thus, exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed
assets will be recognised as income or expenses.
Foreign Currency Loan = 24,00,000/60 = 40,000 US Dollars
Exchange difference = 40,000 US Dollars x (62.50 – 60.00) =

1,00,000
(Including exchange loss payments of first instalment).

Therefore, entire loss due to exchange differences amounting 1,00,000 should be charged to profit
and loss account for the year.
Note: The above answer has been given on the basis that the company has not availed the option for
capitalization of exchange difference as per para 46/ 46 A of AS 11.
However, as per para 46A of the standard, the exchange differences arising on reporting of long term
foreign currency monetary items at rates different from those at which they were initially recorded during the
period, in so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted
from the cost of asset and shall be depreciated over the balance lift of the asset.
According, in case Opportunity Ltd. opts for capitalizing the exchange difference, then the entire
amount of exchange difference of ₹ 1,00,000 will be capitalizing to ‘Equipment Account’. The capitalized
exchange difference will be depreciated over the useful life of the asset.

4.10: ACCOUNTING STANDARDS 12- ACCOUNTING FOR GOVERNMENT

GRANTS.
The standard came into effect in respect of accounting periods commencing on or after 1.04.1992
and is mandatory for all entities.
Introduction:
4.10.1 This standard deals with accounting for government grants. Government grants are
sometimes called by other names such as subsides, cash incentives, duty drawbacks, etc.
4.10.2 This standard does not deal with: (i) The special problems arising in accounting for
government grants in financial statements reflecting the effects of changing prices or in
supplementary information of a similar nature. (ii) Government assistance other than in the form
of government grants. (iii) Government participation in the ownership of the enterprise.
The receipt of government grants by an enterprise is significant for preparation of the

financial statements for two reasons. Firstly, if a government grant has been received, an appropriate method
of accounting therefore is necessary. Secondly, it is desirable to give an indication of the extent to which the
enterprise has benefited from such grant during the reporting period. This facilitates comparison of an
enterprise’s financial statements with those of prior periods and with those of other enterprise.
Accounting Treatment:
Capital Approach versus Income Approach:

Two broad approaches may be followed for the accounting treatment of
government grants namely: the ‘capital approach’, under which a grant is treated as a part of shareholders’
funds, and the ‘income approach’, under which a grant is taken to income over one or more periods.
Those in support of ‘capital approach’ argue as follows:
• Many government grants are in the nature of promoters’ contribution, i.e., they are given by way of
contribution towards its total capital outlay and no repayment is ordinarily expected in the case of such
grants.
• They are not earned but represent an incentive provided by government without related costs.
Arguments in support of the ‘income approach’ are as follows:

• The enterprise earns grants through the compliance with their conditions and meeting the envisaged
obligations. They should therefore be taken to income and matched with the associated costs which the
grant is intended to compensate.
• As income tax and other taxes are charged against income, it is logical to deal also with government
grants, which are an extension of fiscal policies, in the profit and loss statements.

• In case grants are credited to the shareholders’ funds, no correlation is done between the accounting
treatment of the grand and the accounting treatment of the expenditure to which the grant relates.
It is generally, considered appropriate that accounting for government grant should
be based on the nature of the relevant grant. Grants which have the characteristics similar to those of
promoters’ contribution should be treated as part of shareholders fund. Income approach may be more
appropriate in the case of other grants.
In most cases, the periods over which an enterprise recognises the cost or expenses
related to a government grant are readily ascertainable and thus the grants in recognition of specific
expenses are taken to the income in the same period as the relevant expenses.
Recognition of Government Grants:

Government grants available to the enterprise are considered for inclusion in accounts:
• Where there is a reasonable assurance that the enterprise will comply with the conditions attached to
them;
• Where such benefits have been earned by the enterprise and it is reasonably certain that the ultimate
collection will be made.
Mere receipt of a grant is not necessarily conclusive evidence that the conditions attaching to the grant have
been or will be fulfilled.
Non-Monetary Government Grants:

Government grants may take the form of non-monetary assets, such as land or other
resources, given at concessional rates. In these circumstances, it is usual to account for such assets at their
acquisitions cost. Non-monetary assets given free pf cost are recorded at the nominal value.
Presentation of Grants Related to Specific Fund Assets:

Two methods of presentation in financial statements of grants related to specific fixed
assets are regarded as acceptable alternatives.
Method I:
• The grant is shown as the deduction from the gross value of the asset concerned in arriving at its book
value.
• The grant is thus recognised in the profit and loss statement over the useful life of a depreciable asset
by way of reduced depreciation charge.
Where the grant equals the whole, of the cost of the asset, the asset is shown in the balance sheet at a nominal
value.

Example 1:
Z limited, purchased a fixed asset for ₹ 50 Lakhs, which has the estimated useful life of 5 years with the salvage
value of ₹ 5,00,000. On purchase of the asset government granted it a grant for ₹ 10 Lakhs. Grant was considered
as refundable in the end of the 2nd year to the extent of ₹ 7,00,000. Pass the journal entry for refundof the grant
as per the first method.
Solution:
Fixed Assets Account Dr 7,00,000
To Bank Account 7,00,000
(being government grant on asset refundable)
Disclosure:
• The accounting policy adopted for government grants, including the methods of presentation in the
financial statements;
• The nature and extent of government grants recognised in the financial statements, including grants
of non-monetary assets given at a concessional rate or free of cost.

4.11 : ACCOUNTING STANDARD 13- ACCOUNTING FOR INVESTMENTS.
This accounting standard comes into effect for financial statements covering periods
commencing on or after 1st April, 1995’.
This standard does not deal with:
4.11.1 The bases for recognition of interest, dividends and the rental earned on the investments
which arecovered by AS 9.
4.11.2 Operating or finance leases.
4.11.3 Investments of retirement benefit plans and life insurance enterprise and
4.11.4 Mutual funds and /or the related asset management companies, banks and public financial
institutions formed under the Central or State Government Act or so declared under the
Companies Act, 2013.
Fair value is the amount for which an asset could be exchanged between knowledgeable,
willing buyer and a knowledgeable, willing seller in an arm’s length transaction. Under appropriate
circumstances, market value or net realisable value provides an evidence of fair value.
Market value is the amount obtainable from the sale of an investment in an open market,
net of expenses necessarily to be incurred on or before disposal.
Forms of Investments:
Investments are assets held by enterprise for earning income by way of dividends, interest
and the rentals, for capital appreciations, or for other benefits to the investing enterprise. Assets held as stock-
in-trade are not ‘investments.
Enterprise hold investments for diverse reasons. For some enterprise, investment activity is
a significant element of operations, and assessment of the performance of the enterprise may largely or solely
depend on the reported results of this activity.
Some investments have no physical existence and are represented merely by certificates or
similar documents (e.g. shares) while others exist in the physical form (e.g. buildings)
For some investments an active market exists from which a market value can be established.
For other investments an active market does not exists and other means are used to determine fair value.
A current investment is an investment that is by its nature readily realizable and is intended
to be held not for more than one year from the date on which such investment is made.
A long term is an investment other than a current investment.
Cost of Investments:
The cost of investments includes acquisitions charges such as acquisition fees, brokerage and
duties. If an investment is required of partly acquired, by the issue of shares or other securities or other assets,
the acquisition cost is. The fair value of the securities issued or assets given up the fair value may not
necessarily be equal to the nominal or par value of the securities issued. It may be appropriate to consider the
fair value of the investment acquired if it is more clearly evident.
Interest dividend and rental receivables in connection with an investment are generally
regarded as income when the return on investment however in some circumstances such inflows represent a
recovery of cost and do not form a part of income.
If it is difficult to make an allocation except on an arbitrary basis the cost of investment is
normally reduced by diffidence receivables only if they clearly represent a recovery of a part of the cost.
When right shares offer a subscribe for the cost of the right shares is added to the carrying
amount of the original holding. If rights are not subscribed but are sold in the market, the sale proceeds are
taken to the profit and loss statement. However, whether investments are acquired on cum right basis the
market value of investments image greatly after they are becoming ex-right is lower than the cost of which
they were acquired, it may be appropriate to apply the sale proceeds of rights to reduce the carrying amount
of such investments to the market value.
Carrying amount of Investments

The carrying amount of current Investments is the lower of cost and fair value valuation
of current investments on overall basis is not considered appropriate. The more prudent in appropriate method
is to carry investments individually at the lower of cost and fair value. Any reduction to fair value and any
reversals of such reductions are included in the profit and loss statement.
Long term investments are usually carried at cost where there is a decline other than
temporary in the carrying amount of the long-term investments the resultant reduction in the carrying amount
is carried to the profit and loss statement. The reduction in carrying amount is reserved where there is a rise in
the value of the investment or the reasons of the reduction no longer exist.
Investment properties:
Investment property is an investment in land or buildings that are not intended to be occupied
substantially for use by or in the operation of the investing enterprise.
As investment property is accounted for in accordance with the cost model as prescribed in AS
10 ‘Property Plant and Equipment’. The cost of any shares in a co-operative society or a company 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 and investment the difference between the carrying amount and the disposal
proceeds, net of expenses, is recognised in the profit and loss statement.
When disposing of a part of the holding of an investment individually 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:

When long term investments are classified as current investments transfers are made at lower of
cost and carrying amount at the date of transfer.
When investments are classified from current to long-term transfers are made at the lower of
cost and fair value at the date of transfer.
Disclosure
The following disclosures in financial statements in relation to the investments are appropriate:
4.11.5 The accounting policies for the determination of carrying out the amount of investments.
4.11.6 the amount included in profit and loss statement for:
Interest, dividend (showing separately evidence from the subsidiary companies) and rentals on
investments is showing separately search income from long term and current investments. Gross
income should be stated, the amount of Income Tax deducted at source being included under advance
taxes paid.
(i) Profits and losses on disposal of current investments and changes in carrying amount of such
investments.
(ii) Profits and losses on disposal of long-term investments and changes in carrying amount of
such investments.
4.11.7 Significant restrictions on the right of ownership reasonability of investments are the remittance of
income and procedure of disposal.
4.11.8 The aggregate amount of the quoted and unquoted investments giving the aggregate market value of
quoted investments.
Other disclosures as specifically required by the relevant statue governing the enterprise.
Example 1
X Limited on 1-1-2014 had made an investment of ₹ 600 lacs in equity shares of Y Limited of which
50% is made in the long-term category and the rest as temporary investment. Their realizable value of all such
investment on 31st March 2014 become ₹ 200 lacs as while limited lost the case of copyright. From the given
market conditions, it is apparent that the reduction and the value is permanent in nature. How many recognise
reduction in financial statements for the year ended 31st March 2014.
Solution:
X Limited invested ₹ 600 lacs in equity shares of Y Limited. Out of the same, the company intense
to hold 50% shares for long term period that is ₹ 300 lacs and the remaining extempore (current) investments
that is ₹ 300 lacs. Irrespective of the fact that investment has been held by X Limited only for 3 months from
1st January 2014 to 31st March 2014 AS 13 lays emphasize on intention of the investors to classify the
investment is current or long term even though the long-term investments may readily marketable.
In the given situation, the realizable value of all such investments on 31 st March 2014 become ₹ 200
lacs that is ₹ 100 lacs in respect of current investments and hundred lives in respect of long-term investments.
As per AS13 ‘Accounting for Investment’, the carrying amount of current investment is lower of cost
and fair value. In respect of current investments for which an active market exist, market value generally
provides the best evidence of fair value price.

Accordingly, the carrying value of the investment held as temporary investment should be shown at
realizable value that is ₹ 100 lacs. The reduction of ₹ 200 lacs in the carrying value of the current investment
will be charged to the profit and loss account.
Standard further states that long term investments are usually carried at cost. However, when there is
a decline, other than temporary, in the value of long-term investments, the carrying amount is reduced to
recognise the decline.
Here Y Limited lost the case of copyright which drastically reduced the realizable value of shares to
one third which is quite a substantial figure. Losing the case of copyright affect the business and the
performance of the company in long run. Accordingly, it will be appropriate to reduce the carrying amount of
long-term investments by ₹ 200 lacs and show the investments at ₹ 100 lacs, since the downfall in the value
shares is other than temporary. The reduction of ₹ 200 lacs in the carrying value of long-term investments will
be charged to the statement of profit and loss.

4.12 : ACCOUNTING STANDARDS 14- ACCOUNTING FOR AMALGAMATION.
This standard is mandatory in nature. It deals with the accounting for amalgamation and
the treatment of any resultant goodwill or reserves. This statement is directly principally to the companies all
the sum of its requirements also applies to the financial statements of enterprises.
This statement does not deal with cases of acquisitions. The distinguishing feature of an
acquisition is that the acquired company is not dissolved and its separate entity continues to exist.
Amalgamation means an amalgamation pursuant to the provisions of the Companies Act
2013 for any other statue which may be applicable to companies.
Transfer a company means the company which is amalgamated into another company.
Transferee company means a company into which the transferor company is amalgamated.
Types of Amalgamation
Amalgamation falls into two broad categories:
In the first category are those amalgamations where there is a genuine pooling not merely
of the Assets and liabilities of amalgamated companies but also the shareholders interest and of the business
of these companies. These are known as amalgamation in the nature of merger. Other is known as
amalgamation and nature of purchase.
Amalgamation in the nature of merger and amalgamation which satisfies the following
conditions:
• All the assets and liabilities of the transfer of company become, after amalgamation, the assets and
liabilities of the transferee company.
• Shareholders holding not less than 90% of the face value of the equity shares of the transferor company
(other than the equity share already held there in immediately before examination by the transferee
company or its subsidiaries or their nominees) become equity shareholders of the transferee company
by virtue of amalgamation.
• The consideration of the amalgamation receivable by those equity shareholders to the transfer of the
company who agrees to become equity shareholder of the transferee company is discharged by the
transferee company wholly by the issue of equity shares in the transferee company except that cash
may be paid in respect of any fractional shares.
• The business of the transferee company is intended to be carried on after the amalgamation by the
transferee company.
• No adjustment intended to be made to the book values of the assets and liabilities of the transferor
company when they are incorporated in the financial statements of the transferee company accept to
ensure uniformity of the accounting policies.
• Amalgamation is the nature of purchase in an amalgamation which does not satisfy any one or more
than the condition specified above.

Methods of Accounting for Amalgamation:

There are two main methods of accounting for amalgamation which is
Pooling of Interest
Under this method the assets liabilities and reserves of the transferee company are recorded by
the transferee company at the existing carrying accounts.
If at the time of amalgamation to transfer and the transferee companies have conflicting
accounting policies a uniform set of the accounting policies adopted following the amalgamation effects of
the financial statement of any changes in accounting policies are reported in accordance with the AS5.
The Purchase Method

Under the Purchase method the transferee company accounts for the amalgamation either by
incorporating the assets and liabilities at the existing carrying amount or by allocating the consideration of
individual identifiable asset and liabilities of the transferee company on the basis of their 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.
Consideration of the amalgamation is aggregate of the shares and other securities issued by and
the payment made in the form of cash or any other said by the transferee company to the shareholders of the
transferor company. Many amalgamations recognise that adjustments may have to be made to the
consideration in the light of one or more future events. When the additional payment is probable and can
reasonably be estimated at the date of amalgamation it is included in the calculation of the consideration in all
are the cases The Adjustment is recognised as shown as the amount is determinable [AS 4].
Example 1
A limited took over B Limited on April 1st 2015 and discharges consideration for the business as
follows:
(i) Issued 42,000 fully paid equity shares of ₹ 10 each at park to the equity shareholders of B Limited
(ii) Issued fully paid up 15% preference shares of ₹ 100 each to discharge the preference shareholders (₹
1,70,000) of B Limited at a premium of 10%.
(iii) It is agreed that debentures of B Limited ₹ 50,000 will be converted into equal number and the amount
of 13% debentures of A limited
Solution
Particulars
Equity shares (42000 ×10) 420000
Preference shares capital 170000
Add: premium on redemption 17000 187000
Purchase consideration 607000
Treatment of Reserves on Amalgamation

If the amalgamation is an ‘amalgamation in the nature of merger’, the identity of the reserves
is preserved and they appear in the financial statements of the transferee company in the same form in which
they appear in the financial statements of the transferor company. As a result of preserving the identity reserves
which are available for distribution as dividend before the amalgamation should be available for distribution
as dividend after valuation adjustment to reserves amalgamation.
Amalgamation- Amalgamation in the Nature of Merger

When amalgamation is accounted for using the pooling of interest method the reserves of the
transferee company are registered to give effect to the account.
Conflicting accounting policies to the transferor and transferee. A uniform set of accounting
policies should be adopted following the amalgamation and hence the policies of the transferor and transferee
are aligned. The effects of the financial statements of this change in the accounting policies is reported in
accordance with AS5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies’.
Difference between the amount recorded as share capital issued (plus any additional
consideration in the form of cash or any other assets) an amount of share capital of the transferor company.
Adjustments to the reserve’s - amalgamation in the nature of purchase

If the amalgamation is an ‘amalgamation in the nature of purchase’ the amount of the
consideration is deducted from the value of the net assets of the transferor company acquired by the transferee
company. If the result of the competition is negative the difference is debited to Goodwill arising on
amalgamation and the result of the competition is positive the difference is credited to Capital Reserve.
In the case of an ‘amalgamation in the nature of purchase’ the balance of the profit and loss
account appearing in the financial statements of the transferor company whether debit or credit losses its
identity.
Though normally in an amalgamation in the nature of purchase the Identity of the reserves is
not preserved an exception is made in respect of reserves of the aforesaid nature (referred to hereinafter as
‘statutory Reserves’) and such reserves retain their and identity in the financial statement of the transferee
company in the same form in which they appear in the financial statements of the transferor company so long
as their identity is required to be maintained to comply with the relevant statue. This exception is made only
in those amalgamations weather requirements of the elements tattoo for recording the statutory reserves in the
books of the transferee company are complied with. In such cases the statutory reserves are recorded in the
financial statements of the transferee company by the corresponding debit to a suitable account head (example
‘amalgamation adjustment reserve’) which is presented as a separate line item. When the identity of the
statutory reserve is no longer required to be maintained both the reserves and opposite account a reversed. The
standard gives a title which read as “Reserve”. This gives rise to the following requirements:
• the corresponding debit is also to a reserve account.
• that Reserve account will show a negative balance.
4.13: ACCOUNTING STANDARDS 15- EMPLOYEES’S BENEFIT.

The method of accounting of retirement benefits depends on the nature of retirement
benefits and in practice it may not be incorrect to say that it also depends on the mode of funding. On the basis
of nature, a retirement benefit scheme can be classified either as defined benefit plan or defined contribution
plan.
Defined contribution schemes are schemes where the amounts to be paid as retirement
benefits are determined by contributions to a fund together with earnings thereon; e.g., provident fund
schemes. 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; e.g.,
gratuity schemes.
4.13.1 For defined contribution schemes, contribution payable by employer is charged to Profit &
Loss Account.
4.13.2 For defined benefit schemes, accounting treatment will depend on the type of arrangements
which theemployer has made.
4.13.3 If payment for retirement benefits is made out of employer’s funds, appropriate charge to Profit
& Loss Account to be made through a provision for accruing liability, calculated according to
actuarial valuation.
4.13.4 If liability for retirement benefit is funded through creation of trust, the excess/shortfall of
contributionpaid against amount required to meet accrued liability as certified by actuary is
treated as pre-paymentor charged to Profit & Loss Account.
4.13.5 If liability for retirement benefit is funded through a scheme administered by an insurer, an
actuarial certificate or confirmation from insurer is obtained. The excess/shortfall of the
contribution paid against the amount required to meet accrued liability as confirmed by insurer
is treated as pre-paymentor charged to Profit & Loss Account.
4.13.6 Any alteration in the retirement benefit cost should is charged or credited to Profit & Loss
Account and change in actuarial method is to be disclosed.
4.13.7 Financial statements to disclose method by which retirement benefit cost have been
determined.
4.13.8 The institute has issued AS-15 which is broadly on lines of IFRS-19. It is applicable for
accounting periods commencing after December 7, 2007.The Standard improves the existing
practices mainly in the following areas.
It is broad in its applicability as it covers all short-term and long-term employee benefits.
For example, annual paid leave (though not encash able), long-term service rewards, subsidised goods or
services, etc. are also covered
Additional disclosures are required in relation to any defined benefits plans including:
(i) The reconciliation of (opening to closing) of Projected Benefit Obligation.
(ii) The reconciliation of (opening to closing) of Fair Value of Plan Assets.
(iii) The reconciliation of (opening to closing) of Net Liability/Prepaid Asset.
(iv) Components of charge during the year.
(v) Principal actuarial assumptions.

Example 1:
Mention the prescribed accounting treatment in respect of gratuity benefits payable to employees as per AS
15.
Solution:
As per paragraph 28 of AS 15:
In respect of gratuity benefit and other defined benefit schemes, the accounting treatment
will depend on the type of arrangement which the employer has chosen to make. If the employer has chosen
to make payment for retirement benefits out of his own funds, an appropriate charge to the statement of profit
and loss for the year should be made through a provision for the accruing liability.
The accruing liability should be calculated according to actuarial valuation. However, those
enterprises which employ only a few persons may calculate the accrued liability by reference to any other
rational method, e.g. method based on the assumption that such benefits are payable to all employees at the
end of the accounting year. In case the liability for retirement benefits is funded through creation of a trust, the
cost incurred for the year should be determined actuarially. Such actuarial valuation should normally be
conducted at least once in every three years.
However, where the actuarial valuations are not conducted annually, the actuary’s report
should specify the contributions to be made by the employer on annual basis during the inter-valuation period.
This annual contribution (which is in addition to the contribution that may be required to
finance unfunded past service cost) reflects proper accrual of retirement benefit cost for each of the years
during the inter-valuation period and should be charged to the statement of profit and loss for each such year.
Where the contribution paid during a year is lower than the amount required to be
contributed during the year to meet the accrued liability as certified by the actuary, the shortfall should be
charged to the statement of profit and loss for the year.
Where the contribution paid during a year is in excess of the amount required to be contributed during the year
to meet the accrued liability as certified by the actuary, the excess should be treated as a pre-payment. In case
the liability for retirement benefits is funded through a scheme administered by an insurer, an actuarial
certificate or a confirmation from the insurer should be obtained that the contribution payable to the insurer is
the appropriate accrual of the liability for the year.
Where the contribution paid during a year is lower than amount required to be contributed
during the year to meet the accrued liability as certified by the actuary or confirmed by the insurer, as the case
may be, the shortfall should be charged to the statement of profit and loss for the year.
Where the contribution paid during a year is in excess of the amount required to be
contributed during the year to meet the accrued liability as certified by the actuary or confirmed by the insurer,
as the case may be, the excess should be treated as a pre-payment.

4.14: ACCOUNTING STANDARD 16- BORROWING COST.

AS 16, Borrowing Costs, issued by the ICAI came into effect on or after 1.4.2000 and
is mandatory in nature. The objective of this Standard is to prescribe the accounting treatment for borrowing
costs. This Accounting Standard does not deal with the actual or imputed cost of owner’s equity, including
preference share capital not classified as a liability.
4.14.1 Borrowing costs that are directly attributable to the acquisition, construction or production of
any qualifying asset (assets that takes a substantial period of time to get ready for its intended
use or sale)should be capitalised.
4.14.2 Borrowing costs that can be capitalised are interest and other costs that are directly attributable
to the acquisition, construction and production of a qualifying asset.
4.14.3 Income on the temporary investment of the borrowed funds to be deducted from borrowing
costs.
4.14.4 Capitalisation of borrowing costs should be suspended during extended periods in which
developmentis interrupted.
4.14.5 Capitalisation should cease when completed substantially or if completed in parts, in
respect of thatpart, all the activities for its intended use or sale are complete.
4.14.6 Statement does not deal with the actual or imputed cost of owner’s equity/preference capital
are treatedas borrowing costs.
4.14.7 Financial statements to disclose accounting policy adopted for borrowing cost and also the
amount ofborrowing costs capitalised during the period.
Example 1:
When should capitalisation of Borrowing Cost cease as per AS 16?
Solution:
As per paras 19, 20 and 21 of AS 16, Borrowing Cost, Capitalisation of Borrowing
Costs should cease when substantially all the activities necessary to prepare the qualifying assets for its
intended use or sale are complete.
An asset is normally ready for its intended use or sale when its physical construction or
production is complete even though routine administrative work might still continue. If minor modifications,
such as the decoration of a property to the user’s specification, are all that are outstanding, this indicates that,
substantially, all the activities are complete.
When the construction of a qualifying asset is completed in parts and completed part is
capable of being used while construction continues for the other parts, capitalisation of borrowing costs in
relation to a part should cease when substantially all the activities necessary to prepare that part for its intended
use or sale are complete.

Example 2: Explain the provisions laid down as per AS 15 relating to contingent liabilities and contingent
assets.
Solution:
As per para 36, AS 15, Provision for Contingent Liabilities and Contingent Assets require an
enterprise to recognize or disclose information about certain contingent liabilities.
A contingent liability may arise from:
(i) Actuarial losses relating to other participating enterprises because each enterprise that participates in a
multi-employee plan shares in the actuarial risks of every other participating enterprise,
(ii) Any responsibility under the terms of a plan to finance any shortfall in the plan if other enterprises cease
to participate.

4.15: ACCOUNTING STANDARDS 17- SEGMENT REPORTING.
AS 17, issued by the ICAI on 1.4.2001, is mandatory in nature from the said date in respect of
the following:
(i) Enterprises whose equity or debt securities are listed on a recognised stock exchange in India, and
enterprises that are in the process of issuing equity or debt securities that will be listed on a recognised stock
exchange in India as evidenced by the board of directors’ resolution in this regard.
(ii) All other commercial, industrial and business reporting enterprises, whose turnover for the accounting
period exceeds Rs. 50 crores.
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.
Many enterprises provide groups of products and services or operate in geographical areas
that are subject to differing rates of profitability, opportunities for growth, future prospects, and risks.
Information about different types of products and services of an enterprise and its operations in different
geographical areas—often called segment information—is relevant to assessing the risks and returns of a
diversified or multi-location enterprise but may not be determinable from the aggregated data. Reporting of
segment information is widely regarded as necessary for meeting the needs of users of financial statements.
• Renquires reporting of financial information about different types of products and services an enterprise
provides and different geographical areas in which it operates.
• A business segment is distinguishable component of an enterprise providing a product or service or group
of products or services that is subject to risks and returns that are different from other business segments.
• A geographical segment is distinguishable component of an enterprise providing products or services in
a particular economic environment that is subject to risks and returns that are different from components
operating in other economic environments.
• Internal financial reporting system is normally the basis for identifying the segments.
• The dominant source and nature of risk and returns of an enterprise should govern whether its primary
reporting format will be business segments or geographical segments.
• A business segment or geographical segment is a reportable segment if (a) revenue from sales to external
customers and from transactions with other segments exceed 10% of total revenues (external and internal)
of all segments; or (b) segment result, whether profit or loss is 10% or more of (i) combined result of all
segments in profit or (ii) combined result of all segments in loss whichever is greater in absolute amount;
or (c) segment assets are 10% or more of all the assets of all the segments.
• If total external revenue attributable to reportable segment constitutes less than 75% of total revenues then
additional segments should be identified.
• Under primary reporting format for each reportable segment the enterprise should disclose external and
internal segment revenue, segment result, amount of segment assets and liabilities, cost of fixed assets,
acquired, depreciation, amortisation of assets and other non-cash expenses.

• Reconciliation between information about reportable segments and information in financial statements of
the enterprise is also to be provided.
• Secondary segment information is also required to be disclosed. This includes information about revenues,
assets and cost of fixed assets acquired.
• When primary format is based on geographical segments, certain further disclosures are required.
• Disclosures are also required relating to intra-segment transfers and composition of the segment.
• In case, by applying the definitions of ‘business segment’ and ‘geographical segment’, contained in AS-
17, it is concluded that there is neither more than one business segment nor more than one geographical
segment, segment information as per AS-17 is not required to be disclosed.
• It may be mentioned that the illustrative disclosure attached to Standard as appendix (though not forming
part of the Standard) illustrate in detail; determination of reportable segments, information about business
segments and summary of required disclosures.
Example 1: Describe the factors for determinations of “Reportable Segments” as per AS 1
Solution:
As per paras 27, 28, and 29 of AS 17: A business segment or geographical segment should be
identified as a reportable segment if:
(a) Its revenue from sales to external customers and from transactions with other segments is 10 per cent or
more of the total revenue, external and internal, of all segments; or
(b) Its segment result, whether profit or loss, is 10 per cent or more of:
(i) The combined result of all segments in profits; or
(ii) The combined result of all segments in loss, whichever is greater in absolute amount; or
(c) Its segment assets are 10 per cent or more of the total assets of all segments.
• A business segment or a geographical segment which is not a reportable segment, as per paragraph
27, may be designated as a reportable segment despite its size at the discretion of the management of
the enterprise. If that segment is not designated as a reportable segment, it should be included as an
unallocated reconciling item.
• If total external revenue attributable to reportable segments constitutes less than 75 per cent of the
total enterprise revenue, additional segments should be identified as reportable segments, even if they
do not need the 10 per cent thresholds in paragraph 27, until at least 75 per cent of total enterprise
revenue is included in reportable segments.
Example 2: Define a Business Segment and a Geographical Segment as per AS 17.
Solution:
As per para 5 of AS 17: 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.
Factors that should be considered in determining whether products or services are related include:
(a) The nature of the products or services;

(b) The nature of the production processes;
(c) The type or class of customers for the products or services;
(d) The methods used to distribute the products or provide the services; and
(e) If applicable, the nature of the regulatory environment, for example, banking, insurance, or public
utilities.
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.
Factors that should be considered in identifying geographical segments include:
(a) Similarity of economic and political conditions;
(b) Relationships between operations in different geographical areas;
(c) Proximity of operations;
(d) Special risk associated with operations in a particular area;
(e) Exchange control regulations;
(f) The underlying currency risks

4.16 : ACCOUNTING STANDARDS 18 - RELATED PARTY DISCLOSURES.
AS 18 prescribed the requirements for Disclosure of Related Party Relationships and

transactions between the reporting enterprise and its related parties. The requirements of the standard apply to
the financial statements of each reporting enterprise as also to consolidated financial statements presented by
holding company.
Related Party Relationships:

Related party-parties are considered to be related if at any time during the reporting
period one party has the ability to control the other party or exercise significant influence over the other party
in making financial and/or operating decisions.
AS 18 deals only with related party relationships described in (a) to (e) below:
a. Enterprises that directly, or indirectly through one or more intermediaries, control, or a controlled by,
or under common control with, the reporting enterprise (this includes holding companies, subsidiaries
and fellow subsidiaries).
b. Associate and joint ventures of the reporting enterprise and investing parties or venture 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 individuals.
d. Key management personnel and relatives of such personally and
e. Enterprises over which any person described in (c) or (d) is able to exercise significant influence. This
includes enterprises owned by directors of major shareholders of the reporting enterprise and
enterprises that have a member of key management in common with reporting enterprise.
In the context of AS18, the following are deemed not to be related parties:
• Two companies simply because they have a director in common (unless the director is able to affect
the policies of both companies and their mutual dealings).
• A single customer, supplier, franchisor, distributor, or general agent with whom and enterprise
transacts a significant volume of business merely by virtue of the resulting economic dependence
and
• The parties listed below, in the course of the normal dealings with an enterprise by virtue only of
those dealing (although they may circumscribe the freedom of action of the enterprise or participate
in a decision-making process):
(i) Providers of Finance
(ii) Trade unions
(iii) Public utilities
(iv) Government departments and government agencies including government sponsored
bodies
Related party disclosure requirements as laid down in AS 18 do not apply in
circumstances where providing such disclosures would conflict and the reporting enterprises duties of
confidentiality as specifically required in terms of a statue or by any regulatory or similar competent authority.

No disclosure is required in consolidated financial statements in respect of intra-group

transactions. No disclosure is required in the financial statements of state control enterprises as regards related
party relationships with other state-controlled enterprises and transactions with such enterprises
Definition of other terms used in AS 18:

Related party transaction: A transfer of resources or applications between related
parties, regardless of whether or not a price is charged.
• Ownership directly or indirectly of more than one half of the voting power of an enterprise or
• Control of the composition of the board of directors in the case of the company or the composition of
the corresponding governing body in case of any other enterprise, or
• A substantial interest in voting power and the power to direct by the statue or agreement, the financial
and /or operating policies of the enterprise.
For the purpose of AS 18 an enterprise is considered to control the composition of the
board of directors of a company or governing body of an enterprise, if it has the power, without the consent
or concurrence of any person, to appoint or remove all or a majority of directors/members of the governing
body of that company/enterprise. An enterprise is deemed to have the power to appoint a director/member
of the governing body, if any of the following conditions are satisfied:
• A person cannot be appointed as director/member of the governing body without the exercise in
his favour by that enterprise of such a power as aforesaid or
• A person’s appointment as director/member of the governing body follows necessarily from his
appointment to a position held by him in the enterprise or
• The director member of the governing body is nominated by that enterprise; in case that enterprise
is a company, the director is nominated by that company/subsidiary thereof.
Example 1:
Narmada limited sold goods for ₹ 90 lacs to Ganga Limited during financial year ended
31st March 2017. The Managing Director of Narmada Limited ow100% of Ganga Limited. The sales were
made to Ganga Limited at normal selling price followed by Narmada Limited. The Chief Accountant of
Narmada Limited contends that the sales need not require a different treatment from the other sales made by
the company and hence non-disclosure is necessary as per the accounting standard. Is the Chief Accountant
correct?
Solution:
As per AS 18 ‘Related Party Disclosures’ enterprises over which a key management personnel
are able to exercise significant influence are related parties. This includes enterprises owned by the directors
or major shareholders of the reporting enterprise and enterprise that have a member of key management in
common with reporting Enterprise.
In the given case Narmada Limited and the Ganga Limited are related parties and hence
disclosure of transaction between them is required irrespective of whether the transaction was done at normal
selling price
Hence the contention of Chief Accountant of Narmada Limited is wrong.

4.17: ACCOUNTING STANDARDS 19- LEASES.

The objective of AS 19 is to prescribe, for lessees and lessors, the appropriate
accounting policies and disclosures in relation to finance leases and operating leases.
A lease is an agreement by the Lessor (legal owner of an asset) conveys to the Lessee
(another party) in return of a payment or a series of periodic payments (lease rents), the right to use an asset
for an agreed period of time.
Acceptability of AS 19:
The standard applies to all leases other than:
4.17.1 Lease agreements to explore for use of natural resources, such as oil, gas, Timber, metals and other
material right; and
4.17.2 Licensing agreements for items such as motion picture films, video recordings, plays, manuscripts,
patents and copyrights; and
4.17.3 Lease agreements to use lands
4.17.4 Agreements that are contracts for services, that do not transfer right to use of asset from one
contracting party to another.
Definition:
A non-cancellable lease is released that is cancellable only:
4.17.5 upon the occurrence of some remote contingency; or
4.17.6 with the permission of the lessor; or
4.17.7 If a lessee enters into a new lease for the same or an equivalent asset with the same lessor; or
4.17.8 Upon payment by the lessee of an additional amount such that at inception continuation of the lease
is reasonably certain.
The lease term is the non-cancellable period for which the lessee has agreed to take on
a lease of an asset together with any further periods for which the lessee has the option to continue the lease
of the assets, with or without further payment, which option at the inception of the lease it is reasonably certain
that the lessee will exercise.
Minimum lease payments are the payments over the lease term that the lessee is, or
can be required, to make excluding contingent rent, cost of services and the taxes to be paid by and reimburse
to the lessor together with:
4.17.9 In the case of the lessee, any residual value guaranteed to the lessor by or on behalf of the lessee;
or
4.17.10 In the case of the lesser any residual value guaranteed to the lessor;
(i) By or on behalf of the lessee; or
(ii) By an independent third party financially capable of meeting the guarantee.
However if the lessee has an option to purchase the asset at a price which is expected to
be sufficiently lower than the fair value at the date the option becomes exercisable that, at the inception of the
lease, is reasonably certain to be exercised, the minimum lease payments compromise minimum payments
payable over the lease term and the payment required to exercise this purchase option.

Fair price value is the amount for which an asset could we exchange our reliability
centred between knowledgeable, willing parties in an arm’s length transaction.
Economic life is either:

4.17.11 the period over which an asset is expected to be economically usable by one or more users; or
4.17.12the number of production or similar units expected to be obtained from the assets by one or more
users.
Useful life of a leased asset is either:

4.17.13 the period over which the least asset is expected to be used by the lessee; or
4.17.14the number of production or similar units expected to be obtained from the use of the assets by the
lessee.
Residual value of the least asset is the estimated fair value of the asset at the end of the lease term.
Guaranteed Residual Value is:

4.17.15in the case of the lessee, the part of the residual value which is guaranteed by the lessee or by the party
on the half of the lesson (the amount of the guarantee being the maximum amount that could, in any
event, become payable) and
4.17.16In the case of the lessor, that part in which the residual value which is guaranteed by or on behalf of
the lesser, or by independent third party who is financially capable of discharging the obligation under
the guarantee.
Unguaranteed value of a leased asset is amount by which the residual value of the asset
exceeds its guarantee residual value.
Gross investment in the lease is the aggregate of the minimum lease payments under
the finance lease from the standpoint of the lessor and any unguaranteed residual value accruing the lessor
Unearned finance income is the difference between:

4.17.17 The gross investment in the lease; and
4.17.18 The present value of
(i) The minimum lease payments under a finance lease from the standpoint of lessor: and
(ii) Any unguaranteed residual value accruing to the lessor, at the interest rate implicit lease.
Net investments in lease is the gross investments in the lease less unearned finance income.
The interest implicit in the lease is the discount rate, at the inception of the lease, causes the aggregate
present value of
a. The minimum lease payments under a finance lease from the standpoint of the lesser; and
b. Any guaranteed residual value accusing to the lessor, to be equal to the fair value of the leased asset.
The lessee’s incremental borrowing rate of interest is the rate of interest the lessee
would have to pay on the similar lease or, if that is not determinable, the rate that, at the inception of the lease,
the lessee would include to borrow over a similar term, and with a similar security, the funds necessary to

purchase the asset. Contingent rent is that portion of the lease payment that is not fixed in amount but is based
on the factor other than just the passage of time (example percentage of sales, amount of usage, price indices
market rate of interest).
Types of Leases:
For accounting purposes, leases are classified as
• Financial leases; and
• Operating leases
Financial lease is a lease that transfers substantially all the risk and reward incident
to ownership of an asset. Title may or may not be eventually transferred. A lease is classified as an Operating
lease if it does not transfer substantially all the risks and rewards incident to the ownership.
• Indicators of Finance Lease
Situations, which would normally lead to a lease being classified as a finance lease are
• The lease transfer ownership of the set to the lessee by the end of the lease term
• The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower
than the fair value at the date of the option becomes exercisable such that, the inception of the lease, it
is reasonably certain that the option will be exercise;
• The lease term is for the major part of the economic life of the asset even if the title is not transferred;
• At the inception of the lease, present value of the minimum lease payments amounts to at least
substantially all of the fair value of the least asset; and
• The least asset is a a specialised nature such that only the lessee can use it without major modifications
being made.
Indicators of situations with individually or in combination could also lead to a lease be classified as a finance
lease are:
• if the lessee can cancel the lease and the lessor losses associated with the cancellation are borne by the
lessee
• if gains or losses from the fluctuations in the residual value accrue to the lessee (for example if the
lesser agrees to allow rent rebate equalling most of the disposable value of the least a set at the end of
the lease) and
• if the lessee can continue the least for the secondary period at a rent which is substantially lower than
the market rate.
Lease classification is made at the inception of the lease. If at any time the lessee
and lessor agree to change the provisions of the lease, other than by renewing the lease, in a manner that
would have resulted in a different classification of the lease had the changed terms been in effect at the
inception of the lease, the revised agreement is considered as a new agreement over its revised term.
Changes in estimates (for example changes in estimates of the economic life or of
the residual value of the least asset) or changes and circumstances (for example the fault by the lessee)
however, do not give rise to new classification of a lease for accounting purposes.
Example 1:
S. Square private limited has taken machinery on lease from S.K Ltd. The information is as under:
Lease term= 4 years
Fair value price at inception of lease = ₹ 20,00,000

Lease rent = ₹ 6,25,000 p.a at the end of the year
Guaranteed residual value = ₹ 1,25,000
Expected residual value = ₹ 3,75,000
Implicit interest rate= 15%
Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and 0.5718 respectively.
Calculate the value of the lease liability as per AS 19.
Solution:
According to the para 11 of AS 19 “Leases” the lessee should recognise the lease as an asset
and liability at an amount equal to the fair value of the leased asset at the inception of the finance lease.
However, if the fair value of the leased asset exceeds the present value of the minimum lease payments from
the standpoint of the lessee, the amount recorded as an asset and liability should be present value of the
minimum lease payments from the standpoint of the lessee. In calculating the present value of the minimum
lease payments, the discount rate is the interest rate implicit in the lease. Present value of the minimum lease
payments will be calculated as follows:
Year Minimum Lease Payment Internal Rate of Present value

Return
1 6,25,000 0.8696 5,43,500
2 6,25,000 0.7561 4,72,563
3 6,25,000 0.6575 4,10,937
4 (7,50,000) 4,28,850
Total 26, 25,000 18,55,850
Present value of minimum lease payments ₹ 18,55,850 is less than the fair price value at the inception of the
lease i.e. ₹ 20,00,000, therefore, the lease liability should be recognised at ₹ 18,55,850 as per AS 19.
Example 2:
A limited sold machinery has WDV of ₹ 40 lacs to B limited for 50 lacs and the same machinery
was leased back by B limited to A limited. The lease back operating lease. Comment if:
• Fair value is ₹ 60 lacs
• Fair value is ₹ 45 lacs and sale price is ₹ 38 lacs
Solution:
Following will be the treatment in the given cases:
1. When the fair value is ₹ 60 lacs then also a profit of ₹ 10 lacs should be immediately recognised by
A Limited.
2. When the fair value price of the leased machinery is ₹ 45 lacs and the sale price is ₹ 38 , then the
loss of ₹ 2 lacs (40 - 38) to be immediately recognised by A Limited in its books provided loss is not
compensated by future lease payment.
3. When the sale price is ₹ 50 lacs is equal to the fair value price A Limited should immediately
recognise the profit of ₹ 10 lacs (50 - 40) in its books.
4. When the fair price is ₹ 46 lacs and the sale price is ₹ 50 lacs, profit of ₹ 4 lacs (50 – 40) is to be
amortized/deferred over the lease period.
5. When the fair value is ₹ 35 lacs and sale price is ₹ 39 lacs, then the profit of ₹ 4 lacs should be
amortized/deferred over the lease period.

4.18 : ACCOUNTING STANDARDS 20 – EARNINGS PER SHARE.
This AS came in the effect in respect of accounting periods commencing on or after 1st April
2001 and its mandatory in nature.
Applicability:
This statement should be applied by enterprise whose equity shares (ordinary shares) or
potential equity shares (potential ordinary shares) are listed on a recognised stock exchange in India. An
enterprise which has neither equity shares nor potential equity shares which are so listed but which discloses
earning per shares should calculate and disclose earning per share in accordance with this standard.
4.18.1 An equity share is a share other than performance share.
4.18.2 A preference share is a share carrying preferential rights to dividends and repayment of
capital.
A potential equity share is a financial instrument or other contract that entitles, its holder to
equity shares.
Examples of potential equity shares are:
4.18.3 Debt instruments or preference shares that are convertible into equity shares;
4.18.4 Share warrants;
4.18.5 Options including employee stock option plans under which employees of an enterprise are
entitled toreceive equity shares as part of their remuneration and other similar plans; and
4.18.6 Shares which would be issued upon the satisfaction of certain conditions resulting from
contractual arrangements (contingently issuable shares), such as the acquisition of a business
or other asset, or shares issuable under a loan contract upon default of payment of principal or
interest, if the contract soprovides.
Objective:
The objective of the standard is to prescribe principles for the determination and presentation
of earnings per share so as to improve performance comparison between different entities in the same reporting
periods for the same entity. The focus of the standard is on the denominator of the earnings per share
calculation.
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 of the period.
An enterprise should present basic and diluted earnings per share with equal prominence for all periods
presented.
Note: This standard requires an enterprise to present basic and diluted earnings per share even if the amount
disclosed a negative (a loss per share).
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 of the parent entity (the numerator) by the weighted average number of
equity shares outstanding (the denominator) during the period.

All items of income and expenses which are recognised in a period, including tax expense and
extraordinary items are included in the determination of the net profit or loss for the period unless AS 5 requires
or permits otherwise. The amount of preference dividend and any attributable tax thereto for the period is
deducted from the net profit for the period (or added to the net loss for the period) in order to calculate the net
profit or loss for the period attributable to equity shareholders. The amount of preference dividend for the
period that is deducted from the net profit for the period is:
4.18.7 The amount of any preference dividend or non-cumulative preference shares provided for in
respect ofthe period; and
The full amount of the required preference dividend for cumulative preference shares for the
period, whether or not the dividend has been provided for. The amount of preference dividend for the period
does not include the amount of any preference dividend for cumulative preference shares paid or declared
during the current period in respect of previous period.
If an enterprise has more than one class of equity shares, net profit or loss for the period is
apportioned over the different classes of shares in accordance with their dividend rights.
For the purpose of calculating basic for the purpose of calculating basic earnings per share the
number of ordinary shares shall be the weighted average number of equity shares outstanding at the beginning
of the period, adjusted by the number of equity shares bought back or issued during period multiplied by the
time weighting factor. The time weighting factor is a number of days for which the specific shares are
outstanding as a proportion of the total number of days in a period a reasonable approximation of the weighted
average is adequate in many circumstances.
Example 1:
Net profit of the Year 2011. 18,00,000
Net profit of the year 2012. . 60,00,000
Number of equity shares outstanding until 30th September 2012. 2,00,000
Bonus issue 1st October 2012 was 2 equity shares for each equity share outstanding at 30th September 2012.
Calculate the basic Earning per share
Solution:
Number of Bonus issues = 20,00,000 × 2= 40,00,000 shares
Since the bonus issues is an issue without consideration the issue is treated as if it had occurred
prior to the beginning of the year 2011 the earliest period reported.
In a rights issue, on the other hand the exercise price is often less than the fair value of the shares
Therefore a rights issue usually includes a bonus element the number of equity shares to be used in calculating
basic earnings per share for all periods prior to the rights issue is the number of equity shares outstanding prior
to the issue, multiplied by the following adjusted factor:
Fair value price per share immediately prior to the exercise of rights
Theoretical ex-rights fair value per share:
The theoretical ex- rights share value per share is calculated by adding the aggregate fair value of
the shares immediately prior to the exercise of the rights to the proceeds from the exercise of the right and
dividing by the number of shares outstanding after the exercise of rights.

4.19: ACCOUNTING STANDARDS 21- CONSOLIDATES FINANCIAL

STATEMENTS
AS 21 Consolidated Financial Statements, issued by the ICAI, came into effect on or after
1.4.2001
The objective of the Standard 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 achieves with its resources.
4.19.1 To be applied in the preparation and presentation of consolidated financial statements for a group of
enterprises under the control of a parent.
4.19.2 Control means the ownership of more than one-half of the voting power of an enterprise or control of
the composition of the board of directors or such other governing body.
4.19.3 Control of composition implies power to appoint or remove all or a majority of directors.
4.19.4 Consolidated financial statements to be presented in addition to separate financial statements.
4.19.5 All subsidiaries, domestic and foreign to be consolidated except where control is intended to be
temporary or the subsidiary operates under severe long-term restriction impairing transfer of funds to
the parent.
4.19.6 Consolidation to be done on a line by line basis by adding like items of assets, liabilities, income and
expenses which involve.
4.19.7 Elimination of cost to the parent of the investment in the subsidiary and the parent’s portion of equity
of the subsidiary at the date of investment.
4.19.8 Excess of cost over parent’s portion of equity, to be shown as goodwill.
4.19.9 Where cost to the parent is less than its portion, of equity, difference to be shown as capital
reserve.
4.19.10 Minority interest in the net income to be adjusted against income of the group.
4.19.11 Minority interest in net assets to be shown separately as a liability.
4.19.12Intra group balances and intra-group transactions and resulting unrealised profits should be eliminated
in full.
4.19.13 Unrealised losses should also be eliminated unless cost cannot be recovered.
4.19.14Where two or more investments are made in a subsidiary, equity of the subsidiary to be generally
determined on a step by step basis.
4.19.15Financial statements used in consolidation should be drawn up to the same reporting date. If reporting
dates are different, adjustments for the effects of significant transactions/events between the two dates
to be made.
4.19.16Consolidation should be prepared using same accounting policies. If the accounting policies followed
are different, the fact should be disclosed together with proportion of such items.
4.19.17In the year in which parent subsidiary relationship ceases to exist, consolidation to be made up-to-date
of cessation.
4.19.18Disclosure is to be of all subsidiaries giving name, country of incorporation, residence, proportion of
ownership and voting power if different, nature of relationship between parent and subsidiary, effect
of the acquisition and disposal of subsidiaries on the financial position, names of subsidiaries whose
reporting dates are different than that of the parent.

4.19.19When the consolidated statements are presented for the first time figures for the previous year need
not be given.
4.19.20While preparing consolidated financial statements, the tax expense to be shown in the consolidated
financial statements should be the aggregate of the amounts of tax expense appearing in the separate
financial statements of the parent and its subsidiaries. ‘Near Future’ should be considered as not more
than twelve months from acquisition of relevant investments unless a longer period can be justified on
the basis of facts and circumstances of the case.
4.19.21When there are more than one investor in a company in which one of the investors controls the
composition of board of directors and some other investor holds more than half of the voting power,
both these investors are required to consolidate the accounts of the investee in accordance with this
Standard.
Note: Not all the notes appearing in standalone financial statements is required to be disclosed in the
consolidated financial statements. Typically notes that are not required to be included are, managerial
remuneration, CIF value of import, capacity, quantitative details, etc.

4.20: ACCOUNTING STANDARDS 22- ACCOUNTING ON TAXES ON INCOME
AS 22 Accounting for Taxes on Income issued by the ICAI came into effect on and from
1.4.2001.
It is mandatory in nature for:
(a) All the accounting periods commencing on or after 01.04.2001, in respect of:
(i) Enterprises whose equity or debt securities are listed on a recognised stock exchange in India and
enterprises that are in the process of issuing equity or debt securities that will be listed on a recognized stock
(ii) All the enterprises of a group, if the parent presents consolidated financial statements and the Accounting
Standard is mandatory in nature in respect of any of the enterprises of that group in terms of (i) above.
(b) All the accounting periods commencing on or after 01.04.2002, in respect of companies not covered by
(a) above.
(c) All the accounting periods commencing on or after 01.02.2003, in respect of all other enterprises.
The objective of this Statement is to prescribe accounting treatment for taxes on income. Taxes on income is
one of the significant items in the statement of profit and loss of an enterprise.
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. The expense for the period, comprising
current tax and deferred tax should be included in the determination of the net profit or loss for the period.
Deferred tax should be recognised for all the timing differences, subject to the consideration
of prudence in respect of deferred tax assets as set out in paragraph below. Except in the situations stated in
paragraph 5, deferred tax assets should be recognised 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 realised.
Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws,
deferred tax assets should be recognised only to the extent that there is virtual certainty supported by
convincing evidence that sufficient future taxable income will be available against which such deferred tax
assets can be realised.
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.
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, as the case may be that sufficient future taxable income will be available
against which deferred tax asset can be realised. 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.

An enterprise should offset assets and liabilities representing current tax if the enterprise:
1. Has a legally enforceable right to set off the recognised amounts; and
2. Intends to settle the asset and the liability on a net basis.
An enterprise should offset deferred tax assets and deferred tax liabilities if:
1. The enterprise has a legally enforceable right to set off assets against liabilities representing current tax; and
2. The deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same governing
taxation laws.
Deferred tax assets and liabilities should be distinguished from assets and liabilities representing
current tax for the period. Deferred tax assets and liabilities should be disclosed under a separate heading in
the balance sheet of the enterprise, separately from current assets and current liabilities. The break-up of
deferred tax assets and deferred tax liabilities into major components of the respective balances should be
disclosed in the notes to accounts.
The nature of the evidence supporting the recognition of deferred tax assets should be disclosed,
if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws. On the first occasion
that the taxes on income are accounted for in accordance with this statement, the enterprise should recognise,
in the financial statement, the deferred tax balance that has accumulated prior to the adoption of this statement
as deferred tax asset/liability with a corresponding credit/charge to the revenue reserve, subject to the
consideration of prudence in case of deferred tax assets. The amount so credited/charged to the revenue reserve
should be the same as that which would have resulted if this statement had been in effect from the beginning.
Example 1: What are the principles for recognition of deferred taxes under AS 22?
Solution:
As per paras 9 and 10 of AS 22, Accounting for Taxes on Income: Tax expense for the period,
comprising current tax and deferred tax, should be included in the determination of the net profit or loss for
the period. 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.
The tax effects of timing differences are included in the tax expense in the statement of profit
and loss and as deferred tax assets (subject to the consideration of prudence as set out in paragraphs 15-18) or
as deferred tax liabilities, in the balance sheet.
Similarly, as per paras 13 and 15 of AS 22:
Deferred tax should be recognized for all the timing differences, subject to the consideration of
prudence in respect of deferred tax assets. This Statement requires recognition of deferred tax for all the timing
differences. This is based on the principle that the financial statements for a period should recognise the tax
effect, whether current or deferred, of all the transactions occurring in that period.

Except in these situations, deferred tax assets should be recognised 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 realised.
Example 2: Compute the permanent difference and timing difference and amount of deferred tax liability (rate
of income tax being 40%) from the following particulars present by S Ltd:
Cost of the project Rs. 5 crores, S Ltd. incurred Rs. 15, 00,000 for preliminary expenditure to be amortized
within a period of 5 years under straight line method which should be started from the year 2000-01.
Solution:
Income-Tax Rule:
Qualifying amount for preliminary expenses is allowed as deduction @ 25% of the cost of the
project which again be allowed as per IT rule as deduction by 10 equal instalments.
Permanent Difference:
As per para 4 of AS 22, Accounting for Taxes on Income, permanent differences are the
differences between taxable income and accounting income for a period that originates in one period and do
not reverse subsequently. In the present case however,
Permanent difference = Preliminary Expenses to be wiped-off – Allowed as per IT Rule
= Rs. 15, 00,000 – Rs. 12, 50,000 (Rs. 5, 00, 00,000 × 2.5%)
= Rs. 2, 50,000
Similarly, as per para 4 of AS 22, timing differences are the differences between taxable income and
accounting income for a period that originates in one period and are capable of reversal in one or more
subsequent period.
In the present case, the timing difference amounting to Rs. 12,50,000 to be allowed as deduction by 10 equal
instalments i.e., 1/10th of Rs. 12,50,000 i.e. 1,25,000 per year.
Computation of Deferred Tax Liability is as follows:

Computation of Deferred Tax Liability.
Year Charged As per IT Timing Effect of Tax Deferred Tax

against PNL Act difference on Time Liability
AC Difference
Col. (1) (2) Rs. (3) = Col.1- (4) = Col.3 (5)
12,50,000 /10 Col 2 ×40%
2000-01 2,50,000 1,25,000 1,25,000 (50,000) 50,000
2001-02 2,50,000 1,25,000 1,25,000 (50,000) 1,00,000
2002- 03 2,50,000 1,25,000 1,25,000 (50,000) 1,50,000
2003-04 2,50,000 1,25,000 1,25,000 (50,000) 2,00,000
2004-05 2,50,000 1,25,000 1,25,000 (50,000) 2,50,000
2005-06 - 1,25,000 (1,25,000) 50,000 2,00,000
2006-07 - 1,25,000 (1,25,000) 50,000 1,50,000
2007-08 - 1,25,000 (1,25,000) 50,000 1,00,000
2008-09 - 1,25,000 (1,25,000) 50,000 50,000
2009-10 - 1,25,000 (1,25,000) 50,000 0

4.21 : ACCOUNTING STANDARDS 23- ACCOUNTING FOR INVESTMENTS

INASSOCIATES IN CONSOLIDATED FINANCIAL STATEMENTS.
AS 23, Accounting for Investments in Associates in Consolidated Financial Statements,

issued by the ICAI which came into effect on or after 1.4.2002:
4.21.1 An enterprise that presents consolidated financial statements should account for
investments in
associates in the consolidated financial statements in accordance with this Standard. The following is
the text of the Accounting Standard.
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.
This Statement should be applied in accounting for investments in associates in the
preparation and presentation of consolidated financial statements by an investor. This Statement does not
deal with accounting for investments in associates in the preparation and presentation of separate financial
statements by an investor.
This statement should be applied in accounting for investments in associates in the preparation and
presentation of consolidated financial statements by an investor. An investment in an associate should be
accounted for in a consolidated financial statement under the equity method except when:
1. (a) The investment is acquired and held exclusively with a view to its subsequent disposal in the near future,
or
2. (b) The associate operates under severe long-term restrictions that significantly impair its ability to transfer
funds to its investors. Investment in such associates should be accounted for in accordance with the Accounting
Standard (AS)-13, Accounting for Investments. The reason for not applying the equity methods in accounting
for investments in an associate should be disclosed in the consolidated financial statements.
An investor should discontinue the use of equity method from the date that:
1. (a) It ceases to have significant influence in an associate but retains, either in whole or in part, its
investments, or
2. (b) The use of the equity method is no longer appropriate because the associate operates under severe long-
term restrictions that significantly impair its ability to transfer funds to the investors. From the date of
discontinuing the use of equity method, investments in such associates should be accounted for in accordance
with Accounting Standard (AS)-13, Accounting for Investments. For this purpose, the carrying amount of
investments at that date should be regarded as the cost thereafter.
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. In using equity
method for accounting for investment in an associate, unrealised profits and losses resulting from transactions
between the investor (or its consolidated subsidiaries) and the associate should be eliminated to the extent of
the investor’s interest in the associate.
Unrealised losses should not be eliminated if and to the extent the cost of the transferred asset cannot
be recovered. The carrying amount of investment in an associate should be reduced to recognise a decline,
other than temporary, in the value of the investment, such reduction being determined and made for each
investment individually. In addition to the disclosures required by paragraphs 2 and 4, an appropriate listing
and descripttion of associates including the proportion of ownership interest and, if different, the proportion
of voting power held should be disclosed in the consolidated financial statements.
Investments in associates accounted for using the equity method should be classified as long-term
investments and disclosed separately in the consolidated balance sheet. The investor’s share of the profits or
losses of such investments should be disclosed separately in the consolidated statement of profit and loss. The
investor’s share of any extraordinary or prior period items should also be separately disclosed. The name(s) of
the associate(s) of which reporting date(s) is/are different from that of the financial statements of an investor
and the differences in reporting dates should be disclosed in the consolidated financial statements.
In case an associate uses accounting policies other than those adopted for the consolidated financial
statements for transactions and events in similar circumstances and it is not practicable to make appropriate
adjustments to the associate’s financial statements, the fact should be disclosed along with a brief descripttion
of the differences in the accounting policies. On the first occasion when investment in an associate is accounted
for in consolidated financial statements in accordance with this statement, the carrying amount of investment
in the associate should be brought to the amount that would have resulted had the equity method of accounting
been followed as per this statement since the acquisition of the associate.
The corresponding adjustment in this regard should be made in the retained earning in the
consolidated financial statements. Adjustments to the carrying amount of investment in an associate arising
from changes in the associate’s equity that have not been included in the statement of profit and loss of the
associate should be directly made in the carrying amount of investment without routing it through the
consolidated statement of profit and loss.
The corresponding debit/credit should be made in the relevant head of the equity interest in the
consolidated balance sheet. For example, in case the adjustment arises because of revaluation of fixed assets
by the associate, apart from adjusting the carrying amount of investment to the extent of proportionate share
of the investor in the revalued amount, the corresponding amount of revaluation reserve should be shown in
the consolidated balance sheet.
Example1: A Ltd. acquired 25% shares in B Ltd. on 31.3.2002 for Rs. 3 lakhs. The Balance Sheet of B Ltd.
as on 31.3.2002 is
Particulars Amount
Share capital 5,00,000
Reserves and Surplus 5,00,0000
10,00,000
Fixed Assets 5,00,000
Investments 2,00,000
Current Assets 3,00,000
10,00,000
During the year ended 31.3.2003, the following are the additional information available:
(i) A Ltd. received dividend from B Ltd. for the year ended 31.3.2002 at 40% from the Reserve.
(ii) B Ltd. made a profit after tax of Rs. 7 lakhs for the year ended 31.3.2003.
(iii) B Ltd. declared a dividend @ 50% for the year ended 31.3.2003 on 30.4.2003.
A Ltd. is preparing consolidated financial statement, with AS 21, for its various subsidiaries.
Calculate:

(i) Goodwill, if any, on the acquisition of B Ltd. share.

(ii) How will A Ltd. reflect the investment value of B Ltd. in the consolidated financial statement?
Solution: (1) Computation of Goodwill:-

Cost of shares. 3,00,000
Less: 25% of Shareholder’s Fund
Share Capital. 5,00,000
Reserve and Surplus. 5,00,000
10,00,000×25% 2,50,000
Total Goodwill 50,000
2. Investment in Associates:-
Cost of shares. 3,00,000
Add: 25% of share Profit.
(7,00,000×25%). 1,75,000
4,75,000
Less: Divided @ 25%
(40% of 5,00,000 i.e 2,00,000×25%) (50,000)

4,25,000

4.22 : ACCOUNTING STANDARDS 24- DISCOUNTING OPERATIONS.

AS 24 Discontinuing Operations issued by the ICAI in February 2002 and came in effect on or
after 1.4.2004 and mandatory in nature for the following:
(i) Enterprises whose equity or debt securities are listed on a recognized stock exchange in India, and
exchange in India as evidenced by the Board of Directors resolution in this regard.
(ii) All other commercial, industrial and business reporting enterprises, whose turnover for the accounting
period exceeds Rs. 50 crores. In respect of all other enterprises, the Accounting Standard would be mandatory
in nature in respect of accounting period commencing on or after 1.4.2005.
The object of the 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, earning-generating capacity, and financial position by segregating information about discontinuing
operations from information about continuing operations.
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.
A discontinuing operation is a component of an enterprise that the enterprise, pursuant to a single
plan, is:
(1) 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
(2) disposing of piecemeal, such as by selling off the component’s assets and settling its liabilities individually;
or
(3) terminating through abandonment; and that represents a separate major line of business or geographical
area of operations; and that can be distinguished operationally and for financial reporting purposes.
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.
An enterprise should apply the principles of recognition and measurement that are set out in
other Accounting Standards for the purpose of deciding as to when and how to recognise and measure the
changes in assets and liabilities and the revenue, expenses, gains, losses and cash flows relating to a
discontinuing operation.
When an enterprise disposes of assets or settles liabilities attributable to a discontinuing
operation or enters into binding agreements for the sale of such assets or the settlement of such liabilities, it
should include, in its financial statements, the following information when the events occur
(a) for any gain or loss that is recognised on the disposal of assets or settlement of liabilities attributable to the
discontinuing operation,
(i) the amount of the pre-tax gain or loss and
(ii) income tax expense relating to the gain or loss; and
(b) the net selling price or range of prices (which is after deducting expected disposal costs) of those net assets
for which the enterprise has entered into one or more binding sale agreements, the expected timing of receipt
of those cash flows and the carrying amount of those net assets on the balance sheet date.
Any disclosures required by this statement should be presented separately for each
discontinuing operation. The disclosures requirements may be quickly assessed by referring to questionnaire
below. An appendix to the Standard (though not a part of the Standard) sets out detailed illustration explaining
significant disclosure requirements of the Standard.
Example 1: P Ltd. has two production divisions viz:

(i) Book Division, and (ii) Stationery Division.
P Ltd. sells its Book Division to T. Ltd. and transfers all its assets of the said division for a consideration
of Rs. 2,000 lakhs for fixed assets only. Necessary adjustments to be made for current assets, loan and
liabilities. The assets, liabilities, incomes and expenses relating to Stationery department stood as under as
on 30.6.2007: Incomes (Revenue) Rs. (in lakhs) 1,000; Expenses Rs. 700; Fixed Assets Rs. 2,500; Current
Assets Rs. 1,000; Current Liabilities Rs. 400; Loans Rs. 1,500.
Additional Information:
(i) Current Assets were Rs. 1,200; Current Liabilities were Rs. 400; Outstanding Interest on Loan amounted
to Rs. 150 lakhs.
(ii) Depreciation for the quarter amounted to Rs. 150 lakhs.
(iii) This discontinuation may be completed by Oct. 2007.
How will you treat the matter in the accounts as per AS 24?
(iv) Rate of Income Tax @ 40%. The company followed calendar year.
Solution:
The total assets and liabilities and other necessary information of Book Divisions stood as on 30.6.2007:
Particulars Amt (’00,000)
Fixed Assets (less depreciation) (Rs.2,500- Rs 150) 2,350
Current Assets 1,200
Current Liabilities 400
Loans 1,500
Similarly, information relating to Income (revenue), expenses, cash flows in the Books of Division as on
30.6.2007
Ascertainment of Net Operating Cash Flow
Particulars Rs.
(’00,000)
Income/Revenue 1,000
Less: Expenses (700)
Net Profit before Tax 300
Rs.(’00,000)
Less: income tax 40% 120
Net Operating Cash Flow 180
Investment in Cash Flow -
Financial Cash Flow (outstanding interest on Loan) (150)

4.23: ACCOUNTING STANDARDS 25- INTERIM FINANCIAL REPORTING.
AS 25, “Interim Financial reporting”, issued by ICAI which came into effect on or after
1.4.2002:
If an enterprise is required to prepare and present an interim financial report, it should comply
with the Standard. The following is the text of the Accounting Standard. The objective of this statement is to
prescribe the minimum content of an interim financial report and to prescribes 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 flow, its financial condition, and
liquidity. 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. 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. An
interim financial report should include, at a minimum, the following components:
(a) condensed balance sheet;
(b) condensed statement of profit and loss;
(c) condensed cash flow statement; and
(d) selected explanatory notes.
An enterprise should include the following information, as a minimum, in the notes to its interim
financial statements, if material and if not disclosed elsewhere in the interim financial report:
(a) 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;
(b) explanatory comments about the seasonality of interim operations;
(c) the nature and number of items affecting assets, liabilities, equity, net income, or cash flows that are unusual
because of their nature, size, or incidence, net profit or loss for the period, prior period items and changes in
accounting policies);
(d) the nature and amount of changes in estimates of amounts reported in prior interim periods of the current
financial year or changes in estimates of amounts reported in prior financial years, if those changes have a
material effect in the current interim period;
(e) issuances, buy-backs, repayments and restructuring of debt, equity and potential equity shares;
(f) dividends, aggregate or per share (in absolute or percentage terms), separately for equity shares and other
shares;
(g) segment revenue, segment capital employed (segment assets minus segment liabilities) and segment result
for business segments or geographical segments, whichever is the enterprise’s primary basis of segment

reporting (disclosure of segment information is required in an enterprise’s interim financial report only if the
enterprise is required, in terms of AS-17, Segment Reporting, to disclose segment information in its annual
financial statements);
(h) 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
(i) material changes in contingent liabilities since the last annual balance sheet date.
Interim reports should include interim financial statements (condensed or complete) for periods
as
(a) balance sheet as of the end of the current interim period and a comparative balance sheet as of the end of
the immediately preceding financial year;
(b) statements of profit and loss for the current interim period and cumulatively for the current financial year
to date, with comparative statements of profit and loss for the comparable interim periods (current and year-
to-date) of the immediately preceding financial year;
(c) cash flow statement cumulatively for the current financial year to date, with a comparative statement for
the comparable year-to-date period of the immediately preceding financial year. An enterprise should apply
the same accounting policies in its interim financial statements as are applied in its annual financial statements,
except for accounting policy changes made after the date of the most recent annual financial statements that
are to be reflected in the next annual financial statements.
However, the frequency of an enterprise’s reporting (annual, half-yearly, or quarterly) should
not affect the measurement of its annual results. To achieve that objective, measurements for interim reporting
purposes should be made on a year-to-date basis. Users may refer four appendices attached to the Standard
(which though not a part of the Standard) set out detailed illustrations explaining inter alia;
1. Illustrative format of Condensed Balance Sheet, Condensed Profit and Loss Account, Condensed Cash
Flows.
2. Illustration of periods required to be presented.
3. Examples of applying the recognition and measurement principles. Examples of use of estimates.
It may be mentioned that the companies required to disclose quarterly results are not required
to follow the disclosure-related requirements of the Standard. Thus presentation format is not mandatory.
However, it is a normal practice to adopt the recognition and measurement principles.
Example1:
Accounts of Poornima Ltd. shows a net profit of Rs. 7, 20,000 for the third quarter of 2005 after incorporating:
(i) Bad debts of Rs. 40,000 incurred during the quarter; 50% of the bad debts have been deferred to the next
quarter.
(ii) Extraordinary loss of Rs. 35,000 incurred during the quarter has been fully recognized in this quarter.
(iii) Additional depreciation of Rs. 45,000 resulting from the change in the method of charging of depreciation.
Ascertain the correct quarterly income.

Solution:
The net profit amounting to Rs. 7, 20,000 against the 3rd quarter of 2005 should be verified
as per AS 25, Interim Financial Reporting, i.e. the following items should be adjusted (if necessary):
(i) As per question, total bad debt amounting to Rs. 40,000 of which 50% i.e. Rs. 20,000 was adjusted in the
respective quarter, i.e. third quarter, and the balance was deferred to next quarter.
As total amount of Rs. 40,000 relates to 3rd quarter the amount should have been charged against the profit of
3rd quarter, i.e. balance Rs. 20,000 should be charged to 3rd quarter without deferring any amount to other
quarter. As a result, the profit was increased by Rs. 20,000—which should be deducted from the profit of 3rd
quarter.
(ii) No adjustment is required for extraordinary loss amounting to Rs. 35,000 incurred in 3rd quarter as the
same was adjusted correctly against the profit of 3rd quarter.
(iii) No adjustment is also required for additional depreciation amounting to Rs. 45,000 due to change in
method of calculating depreciation as the same was recognised and adjusted against the profit of 3rd quarter.
Thus the correct quarterly income will be Rs. 7, 00,000 (i.e. Rs. 7, 20,000 – Rs. 20,000 for bad
debts).

4.24 : ACCOUNTING STANDARD 26 – INTANGIBLE ASSETS.
As 26 came into effect in respect of expenditure incurred on tangible items during

accounting periods commencing on or after 1st April 2003 E and is mandatory in nature from the date for the
following:
4.24.1 Enterprises who is equity or debt securities are listed on a recognised stock exchange in India
and Enterprises that are in the process of issuing equity or debt securities that will be listed on
a recognisedstock exchange in India as evidence by the board of directors resolution in this
regard
4.24.2 All other commercial industrial and business reporting Enterprises whose turnover for the
accountingperiod exceeds Rupees 50 crores
In respect of all other Enterprises the accounting standards came into effect in respect of
expenditure incurred on intangible items during accounting periods commencing on or after 1st April 2004 and
its mandatory in nature from that date
Scope:
This statement should be applied by all and prices and accounting for tangible assets except:
4.24.3 Intangible assets that are covered by another accounting standards like AS 2,7, 14, 19, 21
and 22
4.24.4 Financial assets
4.24.5 Mineral rights and expenditures on the acceleration for development and extraction of
minerals oilnatural gas and similar non regenerative resources and
4.24.6 Intangible assets arising in insurance Enterprises from contracts with policyholders
How about this statement applies to other intangible assets used such as computer software and other
expenditures such a start up cost in extractive industries for buy insurance Enterprises
This statement also implies to:
4.24.7 Expenditure on advertising training start up cost
4.24.8 Research and development activities
4.24.9 right under licensing agreements for items such as motion picture film video recording
playsmanuscripts
4.24.10 Patents copyrights and trademarks
4.24.11 Goodwill
An asset is a resource:
4.24.12 Controlled by enterprise as a result of past events and
4.24.13 From which future economic benefits are expected to flow to the Enterprise
Monetary assets are money held and assets to be received in fixed or determinable amounts of money
Amortization is a systematic allocation of the depreciable amount of an intangible asset over its useful life
Inactive market is a market where all the following condition exist:
4.24.14 The items traded within the market are homogeneous
4.24.15 Willing buyers and sellers can normally be found and

4.24.16 Prices are available to the public.
An impairment loss is the amount by which the carrying amount of an asset exists is recoverable amount
A financial asset is any asset that is:
4.24.17 Cash
4.24.18 A contractual right to receive cash or another financial asset from another Enterprise
4.24.19A contractual right to exchange financial instruments with another enterprise under
conditions that arepotentially favourable for
4.24.20 And ownership interest in other Enterprise
Intangible assets
An intangible asset is
4.24.21 An iidentifiable
4.24.22 Non-monetary assets
4.24.23 Without physical substance
4.24.24Held for use in the production or supply of goods or services for rental to others for
administrativepurposes
Enterprises frequently expand resources or Inka liabilities on the acquisition development

maintenance or enhancement of the intangible resources such as scientific or technical knowledge design and
implementation of new process of system licence intellectual property market knowledge and trademarks
Not all the items prescribed above will meet the definition of an intangible asset, that is,
identifiability, control over the resource and expectation of the economic benefits flowing to the enterprise. If
an item covered by the statement does not meet the definition of an intangible asset expenditure to acquire it
or generate it internally is recognised as an expense when it is incurred.
In some cases and asset may incorporate board intangible and tangible elements that are
in practice in separable judgement is required to exercise as to which element is predominant. If use of physical
assets is possible only with the intangible parts of it we treat them as fixed assets like operating system for
computers. If physical elements is just to support intangible part of it we treat them as intangible assets.
Identifiability
4.24.25The definition of an intangible asset requires that an intangible asset be identifiable to be
identifiable it is necessary that the intangible asset is clearly distinguished from goodwill
4.24.26Intangible asset can be clearly distinguished from goodwill if the set a separable and asset is
separableif the enterprise could rent sell exchange or distribute the specific future economic
benefits attributableto the Asset without also disposing of the future economic benefits that
flow from the other assets usedin the same revenue earning activity

4.24.27Though separability is not a necessary condition for identifiability if an asset generate future
economicbenefits only in combination with other assets the asset is identifiable is enterprise
can identify the future economic benefits that will flow from the Asset
Control:
Enterprise controls and asset if the enterprise has the power to obtain the future economic
benefit flowing from the underlying resource and also can restrict the access of others to those benefits. The
capacity of an enterprise to control the future economic benefit from an intangible asset would normally steam
from legal rights that are enforceable in the court of law. However, legal enforceability of the right is not a
necessary condition of control since an enterprise may be able to control the future economic benefits and
some other way.
Market and technical knowledge may give rise to future economic benefits. An enterprise
controls those benefits if for example the knowledge is protected by legal rights such as copyrights a restraint
of trade agreement or by a legal duty on employees to maintain confidentiality.
Amortization:
A variety of amortization methods can be used to allocate the depreciable amount of an
asset on the systematic basis over its useful life. These methods include the straight-line method the
diminishing balance method and the unit of production method. The method used for an asset is selected on
the basis of the expected pattern of consumption of economic benefits and is consistently applied from period
to period unless there is a change in the expected pattern of consumption of economic benefits to be derived
from that asset. There will rarely if ever be persuasive evidence to support and amortization method for
intangible assets that results in the lower amount of accumulated amortization then under the straight-line
method. The amortization charge for each period should be recognised as an expense unless anotheraccounting
standard format or requires it to be included in the carrying amount of another asset.
Residual Value:
Residual value is the amount which an enterprise expects to obtain for an asset at the end of
its useful life after deducting the expected cost of disposal.
The residual value of an intangible asset should be consumed to be zero unless:
4.24.28 There is a commitment by third party to purchase the Asset at the end of its useful life or
4.24.29 There is an active market for the Asset and:
I. Present value can be determined by reference to the market.
II. It is probable that such a market will exist at the end of the asset’s useful life.
Example 1:
The company has spent ₹ 45 lacs For publicity and Research expenses on one of its new consumer
product which was marketed in the accounting year 2011-2012, but prove to be a failure state how will you
deal with the following matters in the accounts of U Limited for the year ended 31st March 2012.

Solution
In the given case the company spent ₹ 45 lacs for publicity and research of a new product which
was marketed but prove to be a failure. it is clear that in future there will be no related for the revenue benefit
because of the failure of the product does according to paras 41 to 43 of AS 6 ‘Intangible Assets’ the company
should charge the total amount of ₹ 45 lacs as an expense in the profit and loss account.
Example 2:
A company with turnover of ₹ 250 crores an annual advertising budget of rupees to crores had
taken up the marketing of new product it was estimated that the company would have a turnover of ₹ 25 crores
from the new product. The company had debited to which profit and loss account the total expenditure of ₹2
crore in card on extensive special initial advertisement campaign for the new product is the procedure adopted
by the company correct?
Solution:
According to paras 55 and 56 of AS 26 ‘Intangible Assets’ “expenditure on an intangible
item should be recognised as an expense when it is incurred unless it forms a part of the cost of an intangible
asset”. In a given case advertisement expenditure of rupees to crores had been taken up for the marketing of a
new product which may provide for the economic benefits to an enterprise by having a turnover of ₹ 25 crores.
Here no intangible asset or other asset is required or created that can be recognised. Therefore the accounting
treatment by the company of debiting the entire advertising expenditure of ₹ 2 crores to profit and loss account
of the year is correct.

4.25: ACCOUNTING STANDARDS 27- FINANCIAL REPORTING OF INTERN
AS 27, ‘Financial Reporting of Inter’, issued by the ICAI, came into effect in respect
of accounting periods commencing on or after 01.04.2002. In respect of separate financial statements of an
enterprise, this Standard is mandatory in nature from the date.
In respect of consolidated financial statements of an enterprise, this Standard is
mandatory in nature where the enterprise prepares and presents the consolidated financial statements in respect
of accounting period commencing on or after 01.04.2002.
The objective of this Statement is to set out principles and procedures for accounting
for interests in joint ventures and reporting of joint venture assets, liabilities, incomes and expenses in the
financial statements of ventures and investors.
This Statement should be applied in accounting for interests in joint ventures and the
reporting of joint venture assets, liabilities, income and expenses in the financial statements of ventures and
investors, regardless of the structures or forms under which the joint venture activities take place.
The requirements relating to accounting for joint ventures in consolidated financial
statements, contained in this Statement, are applicable only where consolidated financial statements are
prepared and presented by the venture.
The standards define what is a joint venture. Some of the important concepts includes;
joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which
is subject to joint control. Joint control is the contractually agreed sharing of control over an economic activity.
Control is the power to govern the financial and operating policies of an economic
activity so as to obtain benefits from it. Proportionate consolidation is a method of accounting and reporting
whereby a venture’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity
is reported as separate line items in the venture’s financial statements.
The accounting treatments depends on the nature of joint venture which can be one of
the three, i.e. Jointly Controlled Entity or Jointly Controlled Operations or Jointly Controlled Assets. In respect
of its interests in jointly controlled operations, a venturer should recognise in its separate financial statements
and consequently in its consolidated financial statements:
(a) the assets that it controls and the liabilities that it incurs; and
(b) the expenses that it incurs and its share of the income that it earns from the joint venture.
In respect of its interest in jointly controlled assets, a venturer should recognise, in
its separate financial statements, and consequently in its consolidated financial statements: its share of the
jointly controlled assets, classified according to the nature of the assets; any liabilities which it has incurred;
its share of any liabilities incurred jointly with the other venture’s in relation to the joint venture; any income
from the sale or use of its share of the output of the joint venture, together with its share of any expenses
incurred by the joint venture; and any expenses which it has incurred in respect of its interest in the joint
venture.
In respect of jointly controlled operations the accounting treatment depends upon
whether it is to be accounted in stand-alone financial statements or consolidated financial statement. In case

of standalone financial statements the investments are accounted at cost in accordance with AS-13 whereas in
case of consolidated financial statements where these are prepared (or required to be prepared) the investment
in joint venture is accounted using proportionate consolidation method unless these are subsidiaries in which
case these are consolidated under AS-27.
Example1:
A Ltd. and B Ltd. entered into a joint venture sharing 2:1 for which a new company C Ltd. was formed.
The Balance Sheets of the companies as on 31.3.2009 were:
Make a proportionate Consolidation Statement.
Liabilities A Ltd B Ltd. C Ltd. Assets A Ltd B Ltd. C Ltd.
Rs. Rs. Rs. Rs. Rs. Rs.
Equity Share 80,000 60,000
Capital. 30,000 Fixed Assets 90,000 90,000 30,000
Reserves and 50,000 40,000 9,000 Investments 20,000 10,000 -
Surplus
Long term 30,000 20,000 12,000 Working Capital 50,000 20,000 21,000
Loans
1,60,000 1,20,000 51,000 1,60,000 1,20,000 51,000
Solution:
Statement Showing Proportionate Consolidation
Liabilities A Ltd. B Ltd Assets A Ltd. B Ltd.
Equity share 80,000 60,000 Fixed assets 90,000 90,000
Reserve and Add: from C Ltd. 20,000 10,000
surplus 1,10,000 1,00,000
(50,000 + 6,000) 56,000
(40,000 + 3,000) 43,000 Investments
Long term loan Working capital
(30,000 + 8,000) 38,000 (50,000+ 14,000) 64,000
(20,000 + 4,000) 24,000 (20,000+ 7,000) 27,000
1,74,000 1,27,000 1,74,000 1,27,000

4.26: ACCOUNTING STANDARDS 28 – IMPAIRMENT OF ASSETS.
AS 28, Impairment of Assets, issued by the ICAI, came into effect on or after 1.4.2004 and
is mandatory in nature form that date for the following:
(a) Enterprises whose equity or debt securities are listed on a recognized stock exchange in India, and
(b) All other commercial, industrial and business reporting enterprises, whose turnover for the accounting
period exceed Rs. 50 crores.
In respect of all other enterprises, the Accounting Standard comes into effect in respect of
accounting period commencing on or after 1.4.2005 and is mandatory in nature from that date. 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.
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 (see AS 7, Accounting for Construction Contracts);
(c) Financial assets, including investments that are included in the scope of AS 13, Accounting for
Investments; and
(d) Deferred tax assets (see AS 22, Accounting for Taxes on Income).
Prominent concepts introduced by the standards includes: An impairment loss is the amount
by which the carrying amount of an asset exceeds its recoverable amount. 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.
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.
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.
At each balance sheet date, it needs to be assessed as to whether there is triggering event
that requires the impairment testing to be made. Triggering event shall be assessed based on external
information like fall in interest rate or industry growth rate, change in law, etc., and internal information like
forecasts, obsolescence, damage, etc. Where there is a triggering event the impairment loss needs to be
assessed at the level of each Cash Generating Unit.
Where all the assets of the enterprise are allocated to cash generating unit, only bottom-up
testing method is applied and in case there is some portion of asset that is not allocated or corporate assets,
then bottom-up testing method coupled with and followed by top-down testing method is applied. In measuring
value in use, the Standard specifies certain factors that needs to be considered in arriving the discount rate and
cash flow projection. Discount rate shall be independent of capital structure of the enterprise or its incremental
borrowing cost.

As a starting point, the enterprise may take into account the following rates: the enterprise’s
weighted average cost of capital determined using techniques such as the Capital Asset Pricing Model; the
enterprise’s incremental borrowing rate; and other market borrowing rates. These rates are adjusted: to reflect
the way that the market would assess the specific risks associated with the projected cash flows; and to exclude
risks that are not relevant to the projected cash flows. Consideration is given to risks such as country risk,
currency risk, price risk and cash flow risk Cash flow projections should be based on reasonable and
supportable assumptions that represent management’s best estimate of the set of economic conditions that will
exist over the remaining useful life of the asset.
Greater weight should be given to external evidence; cash flow projections should be based
on the most recent financial budgets/forecasts that have been approved by management. Projections based on
these budgets/forecasts should cover a maximum period of five years, unless a longer period can be justified;
and cash flow projections beyond the period covered by the most recent budgets/forecasts should be estimated
by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for
subsequent years, unless an increasing rate can be justified.
This growth rate should not exceed the long-term average growth rate for the products,
industries, or country or countries in which the enterprise operates, or for the market in which the asset is used,
unless a higher rate can be justified. Project cash flows shall not consider impact of future capital expenditure
or restructuring unless these are committed.
Reversal of impairment loss is allowed to an extent that would be additional carrying amount
of asset had there be no impairment. However, in case of reversal of impairment loss relating to goodwill
additional condition needs to be satisfied. The detailed text of the standard spreads across 124 paragraphs and
is supplemented with 8 examples (which are not part of the Standard). Users are expected to go through it in
detail before applying the Standard.
Example 1: The following particulars were present by T Ltd. on 1.1.2005 from which you are asked to
ascertain the amount of depreciation to be charged against Profit and Loss Statement:
T Ltd. bought a plant for Rs. 1,100 lakhs on 1.1.2002. Its estimated life was 10 years and scrap
value amounted to Rs. 100 lakhs. On 31.12.2004, the net selling price of the asset was Rs. 650 lakhs.
Present value of future cash flows (at 15% (’00,000) discount factor) were:
(’00,000)
YEAR 2005 2006 2007 2008 2009 2010 2011
CASH 80 100 90 95 110 98 70
FLOW
Solution: Amount in (’00,000)

1.Computation of Carrying Amount:
Depreciation = Cost Price – Scrap Value ÷ Estimated Life
= ₹ 11,00,000 - ₹1,00,000 ÷ 10
= ₹ 1,00,000
Particulars Amount
Cost of Plant 1,100
Less: Depreciation @ Rs.100 for 3 years (from 1.1.2002 to 31.12.2004) 300
WDV/ Carrying Amount on 31.12.2004 800
2. Computation of Value in Use
Value in Use = ₹80 + ₹100 + ₹90 +₹ 95 + ₹110 + ₹98 + ₹70 = ₹643

3. Computation of Recoverable Amount
Value in Use ₹ 643

Net Selling Price ₹650
Whichever is greater. Therefore, the Recoverable Amount = Net Selling Price = ₹ 650.
4. Computation of Impairment Loss
Impairment Loss = Carrying Amount – Receivable Amount

= ₹800 - ₹650
= ₹150.
5. Computation of Amount of Depreciation
Particulars Amount
Carrying Amount 800
Less: Impairment Loss 150
Carrying Amount (revised) 650
Depreciation = ₹650 - ₹100÷ (10 – 3) 7 years = ₹85.71 Lakhs.

4.27: ACCOUNTING STANDARDS 29- PROVISIONS, CONTINGENT LIABILITIES

AND CONTINGENT ASSETS
The Standard prescribes the accounting and disclosure for all provisions, contingent
liabilities and contingent assets, except:
(a) Those resulting from financial instruments that are carried at fair value;
(b) Those resulting from executory contracts, except where the contract is onerous. Executory contracts are
contracts under which neither party has performed any of its obligations or both parties have partially
performed their obligations to an equal extent;
(c) Those arising in insurance entities from contracts with its policyholders; or
(d) Those covered by another Standard
Provisions: The Standard defines provisions as a liability which can be measured only by using a substantial
degree of estimation. A provision should be recognised when, and only when:
(a) An entity has a present obligation (legal or constructive) as a result of a past event;
(b) It is probable (i.e., more likely than not) 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.
The Standard notes that it is only in extremely rare cases that a reliable estimate will
not be possible. The amount recognised as a provision should be the best estimate of the expenditure required
to settle the present obligation at the balance sheet date. The provisions shall not be discounted. Gains from
the expected disposal of assets should not be taken into account, even if the expected disposal is closely linked
to the event giving rise to the provision.
An entity may expect reimbursement of some or all of the expenditure required to
settle a provision (for example, through insurance contracts, indemnity clauses or suppliers’ warranties). An
entity should:
(a) recognise a reimbursement when, and only when, it is virtually certain that reimbursement will be received
if the entity settles the obligation. The amount recognised for the reimbursement should not exceed the amount
of the provision; and
(b) recognise the reimbursement as a separate asset. In the income statement, 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. A provision should be used only for
expenditures for which the provision was originally recognised. Provisions should not be recognised for future
operating losses.
An expectation of future operating losses is an indication that certain assets of the
operation may be impaired. In this case, an entity tests these assets for impairment under AS-28 Impairment
of Assets. The Standard defines a restructuring as a programme that is planned and controlled by management,
and materially changes either:

(a) the scope of a business undertaken by an entity; or

(b) the manner in which that business is conducted.
A provision for restructuring costs is recognised only when the general recognition
criteria for provisions are met.
Contingent Liabilities: The Standard defines a contingent liability as:
(a) A possible obligation that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the
entity; 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) the amount of the obligation cannot be measured with sufficient reliability. An entity should not recognise
a contingent liability.
Contingent Asset: A Contingent asset is the potential economic benefit which may arise to a company or
enterprise based on an occurrence of uncertain future events. The Company does not have any control over
the occurrence of such future events.
i. It is a possible gain to an Enterprise whose occurrence depends on an uncertain future event.

ii. The amount of economic benefits is uncertain.
iii. These assets are not recognized and disclosed in financial statement unlike contingent. liability which
is disclosed in a financial statement by way of notes to account.
iv. It is generally disclosed in the director’s statement.
v. When there is a certainty on a realization of such Asset, it no longer remains Contingent Asset and
becomes an actual asset which is recognized and represented in the Balance Sheet.

CHAPTER 5: FINDINGS AND REVIEWS

5.1: Conclusions
Providing a standard for the diverse accounting policies and principles. To put an
end to the non-compatibility of financial statements. To increase the reliability of the financial statements
To provide standards which are transparent for users. To define the standards
which are compatible all over periods presented. To provide a suitable starting point for accounting.
Accounting standards contain high quality information to generate the financial
reports. This can be done at a cost that does not exceed the benefits for eradication the use amount of variation
in the treatment of accounting standards.
Accounting standards harmonize the different Accounting Policies. The policies
are used in the preparation of Financial Reports. This could be prepared by different Enterprises this would
bring out a certain degree of confusion at the time of comparison.

5.2: BIBLOGRAPHY
ICAI, the institute of Chartered Accounting of India: A bird’s eye view:
(i) D.S. Rawat
(ii) Israr Shaikh
(iii) PWC Report
ICAI Journals and Modules.
WEBLOGRAPHY
https://www.caclubindia.com/forum/summary-of-all-the-accounting-standards-243641.asp
: SUMMARY OF ALL ACCOUNTING STANDARDS – STUDENTS FORUM- CAclubindia.

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SELECTIVE STUDY OF ACCOUNTING STANDARDS

Under the Guidance of

St. Gonsalo Garcia College of Commerce and Arts

Under the Guidance of

St. Gonsalo Garcia College of Commerce and Arts

Anton Brennan lobo

PRINCIPAL, PROJECT GUIDE,

CO-ORDINATOR, SIGNATURE OF THE

HISTORY AND SUMMARY OF ACCOUNTING STANDARDS

2 Research Methodology 8-10

3 Literature Review 11-14

5 Findings and Reviews 92-102

1.1 : Introduction to Accounting Standards.

Accounting Standards deal with the issue of:

TYBAF 1 ST.GONSALO GARCIA COLLEGE

The inter-enterprise comparison involves comparison of financial statements of different

1.2 : Standard Setting Process.

TYBAF 2 ST.GONSALO GARCIA COLLEGE

STANDARD SETTING PROCESS

1.3 : Benefits and Limitations.

TYBAF 3 ST.GONSALO GARCIA COLLEGE

1.4 : How Many Accounting Standard:

1.5 : Need for Convergence Towards Global Warming.

TYBAF 4 ST.GONSALO GARCIA COLLEGE

The convergence of financial reporting and accounting standards is a valuable

1.6 : International Accounting Standard Board.

1.7 : International Financial Reporting Standards as Global Standards.

TYBAF 5 ST.GONSALO GARCIA COLLEGE

1.8 : Convergence to IFRS In India.

TYBAF 6 ST.GONSALO GARCIA COLLEGE

TYBAF 7 ST.GONSALO GARCIA COLLEGE

CHAPTER 2: Research Methodology

Accounting Research Methodologies

Summary of Research Interests

AIS Auditing Financial Managerial Tax Other Topics

TYBAF 8 ST.GONSALO GARCIA COLLEGE

Skills necessary to be a successful researcher

• The ability to understand and recognize research problems.

• The ability to understand research content.

• The ability to think critically and analytically.

• The ability to formulate plans to meet goals and deadlines.

• The ability to follow good research practices.

TYBAF 9 ST.GONSALO GARCIA COLLEGE

• The ability to document and report your work.

• The ability to communicate and defend a coherent argument to interested

TYBAF 10 ST.GONSALO GARCIA COLLEGE

CHAPTER 3: LITERATURE REVIEW

Overview of Accounting Standards:

Implication of mandatory status

TYBAF 11 ST.GONSALO GARCIA COLLEGE

3.2: Criteria for Classifying Non- Corporate Entities.

Level 2 entities (SMEs):

TYBAF 12 ST.GONSALO GARCIA COLLEGE

• Holding and subsidiary entities of any one of the above.

Level 3 entities (SMEs):

TYBAF 13 ST.GONSALO GARCIA COLLEGE

3.3: List of Accounting Standards.

TYBAF 14 ST.GONSALO GARCIA COLLEGE

CHAPTER 4: DATA COLLECTED

Irrespective of extent of standardisation, diversity in accounting policies in unavoidable

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TYBAF 17 ST.GONSALO GARCIA COLLEGE