Accounting Standards

Introduction to Accounting Standards (ASs)

• Meaning of Accounting Standards

• Accounting Standards are written policy
documents issued by expert accounting body
or by the government or other regulatory
body covering the aspects of recognition,
measurement, treatment, presentation, and
disclosure of accounting transactions in
financial statements.
 Introduction to Accounting Standards
(ASs)
• 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.
 Classification of Enterprises

• The enterprises are classified and labeled as

Level I, Level II and Level III companies. Based
on this classification and the category in which
they fall the Accounting standards are
applicable to the enterprises
 Level I Enterprises

• Enterprises which fall under any one or more category

below mentioned are termed as Level I Companies
• Enterprises whose equity or debt securities are listed
whether in India or outside India
• Enterprises which are in the process of listing their
equity or debt securities. Board of directors’
resolution must be available as an evidence
• Banks including co-operative banks
• Financial institutions
• Enterprises carrying on insurance business
 Level I Enterprises

• All commercial, industrial and business reporting

enterprises, whose turnover not including ‘other
income’ for the immediately preceding accounting
period on the basis of audited financial statements
exceeds Rs. 50 crore
• All commercial, industrial and business reporting
enterprises having borrowings, including public deposits,
in excess of Rs. 10 crores at any time during the
accounting period
• Holding and subsidiary enterprises of any one of the
above at any time during the accounting period
 Level II Enterprises

• Enterprises which fall under any one or more category below

mentioned are termed as Level II Companies
• All commercial, industrial and business reporting enterprises,
whose turnover (excluding ‘other income’) for the immediately
preceding accounting period on the basis of audited financial
statements is greater than Rs. 40 lakhs but less than Rs. 50 crore
• All commercial, industrial and business reporting enterprises
having borrowings, including public deposits, is greater Rs. 1
crore but less than Rs. 10 crores at any time during the
accounting period
• Holding and subsidiary enterprises of any one of the above at any
time during the accounting period
 Level III Enterprises

• Enterprises which do not fall under Level I

and Level II, are considered as Level III
enterprises .
 Benefits
• 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 not
statutorily required to be disclosed. Standards may
call for disclosure if required by law.
 Benefits
• Comparability of financial statements: The
application of Accounting Standards would, to a
limited extent, facilitate comparison of financial
statements 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 the differences in the
institutions, traditions and legal systems from one
country to another give rise to differences in
Accounting Standards adopted in different countries.
 Limitations
• there are some limitations of setting of Accounting
Standards:
• Difficulties in making choice between different
treatments: Different continues may give alternative
solutions to certain accounting problems and 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 which could lead different countries to be less
flexibility in applying the Accounting Standards.
 Limitations
• Restricted scope: Accounting Standards
cannot override the statute. The standards are
required to be framed within the ambit of
prevailing statutes.
 List of Accounting Standards as issued by ICAI

• AS 1 Disclosure of Accounting Policies

• AS 2 (Revised) Valuation of Inventories
• AS 3 Cash Flow Statements
• AS 4 (Revised) Contingencies and Events Occurring
After Balance Sheet Date
• AS 5 Net profit or Loss for the period, Prior Period
Items and Changes in Accounting Policies
• AS 6 Depreciation Accounting
• AS 7 Accounting for Construction Contracts
• AS 8 Accounting for Research and Development
ACCOUNTING STANDARD AND AUDITORS

• It is the duty of the auditors that while

discharging their function they have to ensure
that the Accounting Standards issued and made
mandatory by the Central Government are
compiled with. Section 143(3)(e) of the
Companies Act 2013 requires that the auditor to
report whether in his opinion the financial
statements comply with the Accounting
Standards referred in section 133 of the
Companies Act, 2013.
 AS 01. Disclosure of Accounting Policies

• 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.
• These assumptions are also known as concepts.
These are
• Going Concern
• Consistency
• Accrual
Areas -The AS -1 gives a list of areas Accounting Policies are possible

• The following are examples of areas in which different accounting

policies may be adopted by organisations.
• Methods of depreciation, depletion and amortisation
• Treatment of expenditure during construction
• Conversion or translation of foreign currency items
• Valuation of inventories
• Treatment of goodwill
• Valuation of investments
• Treatment of retirement benefits
• Recognition of profit on long-term contracts
• Valuation of fixed assets
• Treatment of contingent liabilities
 Considerations in the Selection of Accounting
Policies
• Prudence: In view of the uncertainty of future events, profits
are not anticipated but recognised only when earned, though
not necessarily in cash. However, provision is made for all
known liabilities and losses even though the amount cannot
be determined with certainty and represents only an
estimate.
• Substance over Form: The accounting treatment and
presentation of transactions and events in financial statements
should be governed by their substance and not merely by the
legal form.
• Materiality: Financial statements should disclose all “material”
items, i.e. items, the knowledge of which might influence the
decisions of the user of the financial statements.
 AS-1- Requires that:
• All significant accounting policies should be
disclosed. Such disclosure form part of financial
statements.
• the financial statement and the significant
accounting policies should normally be disclosed in
one place.
• Specific disclosure for the adoption of fundamental
accounting assumptions is not required.
• Disclosure of accounting policies cannot remedy a
wrong or inappropriate treatment of the item in
the accounts.
 AS-2 Valuation of Inventories

• Definition
I . Inventory includes the following:
• A. Held for sale in the normal course of business i.e finished
goods
• B. Goods which are in the production process i.e work in
progress
• C. Raw materials which are consumed during production process
or rendering of services (including consumable stores item)
• II. Net Realisable Value (NRV):
• “Net realizable value is the estimated selling price in the ordinary
course of business less the estimated costs of completion and
the estimated costs necessary to make the sale”.
 Steps for valuation of inventories
• A. Cost of Inventories The cost of inventories
includes the following
• Purchase cost
• Conversion cost
• Other costs which are incurred in bringing the
inventories to their present location and
condition.
 Steps for valuation of inventories
• B. Cost of Purchase While determining the purchase
cost, the following should be considered:
• Purchase cost of the inventory includes duties and
taxes
• Freight inwards
• Other expenditure which is directly attributable to
the purchase
• Trade discounts, rebates, duty drawbacks and other
similar items are deducted in determining the costs
of purchase
 Steps for valuation of inventories
• C. Cost of Conversion Cost of conversion
includes all cost incurred during the
production process to complete the raw
materials into finished goods. Cost of
conversion also includes a systematic
allocation of fixed and variable overheads
incurred by the enterprise during the
production process.
 Following are the categories of conversion cost

I. Direct Cost
• All the cost directly related to the unit of production such as
direct labor
II. Fixed Overhead Cost
• Fixed overheads are those indirect costs which are incurred by the
enterprise irrespective of production volume. These are the cost
that remains relatively constant regardless of the volume of
production, such as depreciation, building maintenance cost,
administration cost etc.
• The allocation of fixed production overheads is based on the
normal capacity of the production facilities. In case of low
production or idle plant allocation of these fixed overheads are not
increased consequently.
 Following are the categories of conversion cost

III. Variable Overhead Cost

• Variable overheads are those indirect costs of
production that vary directly with the volume of
production. These are the cost that will be
incurred based on the actual production volume
such as packing materials and indirect labor.
D. Other Cost
• All the other cost which are incurred in bringing
the inventories to the current location and
condition.
 AS-2 Accounting Disclosure

• The following should be disclosed in the financial

statements:
a) Accounting policy adopted in inventory measurement
b) Cost formula used
c) Classification of the of inventory such as finished goods, raw
material & WIP and stores and spares etc
d) Carrying amount of inventories carried at fair value less sale
cost
e) Amount of inventories recognized as expense during the
period
f) Amount of any write-down of inventories recognized as an
expense and its subsequent reversal if any.
AS 3 Cash Flow Statements
Classification of Cash Flows as per Accounting Standard 3
 AS 04.Contingencies and Events Occurring After the Balance Sheet Date

• This Standard deals with the treatment in financial

statements of
• a) contingencies, and
• b) events occurring after the balance sheet date.
• A contingency is a condition or situation, the ultimate
outcome of which, gain or loss, will be known or
determined
• only on the occurrence, or non-occurrence, of one or
more uncertain future events.
 AS 04.Contingencies and Events Occurring After the Balance Sheet Date

• Events occurring after the balance sheet date

are those significant events, both favourable
and unfavourable, that occur between the
balance sheet date and the date on which the
financial statements are approved by the
Board of Directors in the case of a company,
and, by the corresponding approving
authority in the case of any other entity.
 AS 04.Contingencies and Events Occurring After the Balance Sheet Date

• 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.
• Proposed or declared dividend after the balance sheet
date but before approval of the financial statements
should be adjusted.
• Material changes and commitments affecting the
financial position of the enterprise.
 AS 05. Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies

• The objective of this Standard is to prescribe the

classification and disclosure of certain items in the
statement of profit and loss so that all enterprises
prepare and present such a statement on a uniform
basis.
• This Standard should be applied by an enterprise in
presenting profit or loss from ordinary activities,
extraordinary items and prior period items in the
statement of profit and loss, in accounting for changes
in accounting estimates, and in disclosure of changes in
accounting policies.
 AS 05. Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

• Ordinary activities;
• Related activities in which the enterprise engages in
furtherance of, incidental to, or arising from these activities.
• Extraordinary items ;
• Not expected to recur frequently or regularly.
• Prior period items :
• Current period as a result of errors or omissions in the
preparation of the financial statements of one or more
prior periods.
• and Accounting policies.
 AS-6- Depreciation Accounting

• This Standard deals with depreciation accounting and

applies to all depreciable assets, except the following
items to which special considerations apply
• (i) forests, plantations and similar regenerative
natural resources;
• (ii) wasting assets including expenditure on the
exploration for and extraction of minerals, oils,
natural gas and similar non-regenerative resources;
• (iii) expenditure on research and development;
• (iv) goodwill and other intangible assets;
• (v) live stock.
 Main Principles

i) The depreciable amount of a depreciable asset should be

allocated on a systematic basis to each accounting
period during the useful life of the asset.
ii) The depreciation method selected should be applied
consistently from period to period. A change from one
method of Providing depreciation to another should be
made only if the adoption of the new method is
required by statute or for compliance with an
accounting standard or if it is considered that the
change would result in a more appropriate preparation
or presentation of the financial statements of the
enterprise.
 Main Principles

iii) The useful life of a depreciable asset should be

estimated after considering the following factors:
• (i) expected physical wear and tear;
• (ii) obsolescence;
• (iii) legal or other limits on the use of the asset.

iv) The useful lives of major depreciable assets or classes

of depreciable assets may be reviewed periodically
Where there is a revision of the estimated useful life of
an asset, the unamortised depreciable amount should
be charged over the revised remaining useful life.
 Main Principles
v)The depreciation on such addition or extension may also be
provided at the rate applied to the existing asset. Where an
addition or extension retains a separate identity and is
capable of being used after the existing asset is disposed of,
depreciation should be Provided independently on the basis
of an estimate of its own useful life.
vi) Where the historical cost of a depreciable asset has under
gone a change due to increase or decrease in long term
liability on account of exchange fluctuations, price
adjustments, changes in duties or similar factors, the
depreciation on the revised unamortised depreciable amount
should be provided prospectively over the residual useful life
of the asset.
 AS– 7- Construction Contract
• Construction Contract: - 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 or their ultimate purpose or
use.
• Recognition of contract revenue and contract cost
When the outcome of a construction contract can be
estimated reliably, contract revenue and contract cost
should be recognized as revenue and expenses by
reference to the stage of construction.
 Disclosure

• Contract Revenue recognized as revenue

• Method used to determine the contract revenue
• Method used to determine the stage of
completion
• Contract costs incurred + Recognised Profit –
Recognised Loss
• Amount of advances received
• Amount due from customers
• Amount due to customers
 AS-8 Accounting for Research and
Development
• This standard is withdrawn from 1.4.2004 for
all enterprises and its substance is now
covered under AS-26 Intangible assets.