1st Sem Accounts-Notes

ACCOUNTING THEORY & PRACTICES (NOTES)
UNIT-I
Syllabus –Historical Perspective, Approaches to Accounting Theory, Generally Accepted Accounting Principles-
Indian and U.S Perspective, Ethical issues in Accounting, Financial Reporting, Internal Control Procedure in
Accounting
EVOLUTION OF ACCOUNTING
The early development of accounting system is traceable to the most ancient cities, in Mesopotamia, a home of
number between 450 and 500 BC. Greece and Rome were cities where coinage was invented in about 630 BC
(Chatfield, 1977) and China is where accounting systems were concerned with the recording of merchants,
temples, and estates. Further described the use of clay tablets impressed with the markings of the Cuneiform
script by the Scribe, a forerunner of the present day accountant. The system though relatively simple by modern
standards; the Mesopotamia economy did not require more advanced system to record its transactions and
property among parties. Goldberg (1949) also recognized the recording of complex transactions of grain involving
several individuals, a system of record-keeping (accounting) which is a clear demonstration that accounting is
socially constructed. Chatfield (1977), saw the systems of estate records in part of Athenian Empire, by Zenon in
terms of data collection, recording and analysis by several individual as responsibility accounting. This system
employed by Zenon Papyri with respect to data generation, recording and analysis, (though elaborate and
meticulous) were sufficient to detect error, fraud and inefficiency in the system. The Zenon Papyri approach had
little concern for decision making, efficiency or profitability, and perhaps this feature might invalidate a lot of
work that went into the operating system (Glautier, and Underdown 2001). The Zenon system was developed in
the 5th Century BC and later modified by the Romans. Goldberg (1949), saw the modification of Zenon in ancient
Rome as the memorandum book (adversaria' in Greek) and the monthly transfer of entries to the ledgers ('codex
tabulae' in Greek), from which today's ledger has derived its name 'codex'. This system of recording in ancient
Greece and Rome according to Goldberg (1949) and Chatfield (1977), indicates that the accounting systems were
mainly concerned with recording and exposing losses due to theft, fraud, inefficiency and corruption. It was not
for decision making and assets protection. Gulman (1939), added that the accounting system at that time avoided
financial reports to outsiders or determination of income or tax due to government and allied parties. The system
still reveals that the accounting system at that period was of course fulfilling the societal needs and expectations
of the users of financial statements. Fu (1971) said the accounting systems that were mostly used by feudal and
expansionist for merchants and estates in China, under Chou dynasty (1122 - 1256), allowed for large physical
distances and several layers or hierarchies. Officials who were needed to collect taxes in the form of goods for use
by the imperial government did so to ensure compliance. The surplus products however were collected for export
and were used outside China, (Yameh, 1940). The system, though in details, covers several officials and large
distances to ensure good administrative control through the appointment of higher-level officials as auditors who
report at periodic intervals of ten days, thirty days and yearly as the case may be. The Chou system may
presumably have stringent and appropriate penalties for non-compliance by defaulters, (Yameh, 1980). Ahmed
(2000) argued that, funds accounting system exists in the form of general reserve fund, special reserve fund and
reserve fund. The source of the goods, the purposes for which they were used, the frequency of taxes being levied
and each tax ceiling were all bases of accounting system. Nwoko, (1990), in similar vein, observed that the
earliest records known, which pre-dates monetary economy, were all accounting records, and were of ancient
Content Prepared & Provided By – Rupam Gupta, Eduspark Page | 2

Middle Eastern Civilization of Egypt, Mesopotamia, Crete, and Mycenae. These were mainly records of physical
quantities of goods. Perara and Mathew (1966), opine that coinage was invented probably in Lydia at about
700BC as a result of difficulties experienced in maintaining the records and other inherent factors associated with
barter system. The early accounting records were inscribed on stones and marble tablets in the Parthenon building
accounts in Athens and Acropolis. Nwoko (1990) and Perara (1966) also observe that the Zenon Papyri which
was discovered in 1915 contains information in business, agriculture, and construction projects of the private
estate of Apollonius kept under the accounting system. These records were kept in surprising and elaborate
system that had been in Greece since the fifth century BC. The Zenon accounting system had provisions for
responsibility accounting; written records of all transactions, personal account for wages paid to employees,
inventory records, and records for assets acquisitions and disposals. In addition, it contains evidence of auditing of
all accounts, (American Institute of Certified Public Accountants (AICPA), (2006).
The worldwide use of double entry however owes a lot to the work of an Italian Monk, and a Franciscan friar, in
1494, to Luca Pacioli. Pacioli's first printed work or treatise was on algebra, titled: "Summa de
Arithmatica,Geometrica, Proportioni et proportionalita (i.e. everything about Mathematics, geometry, and
proportions)". It was developed to ensure that every transaction has equal and opposite reaction, (Mike & Fred,
1983). The treatise contained a section on book keeping entitled "De computis or Scripturis (i.e. computations and
records), which was separately published in 1504 and translated into many languages. Pacioli, however did not
lay claims as the originator of double entry as he was only describing what Italian Merchants were using for over
200 years, (Paton and Littleton, 1940).

APPROACHES TO ACCOUNTING THEORY
Hendriksen defines accounting theory as, the logical reasoning in the form of a set of broad principles that -
 Provide a general frame of reference by which accounting practice can be evaluated, and
 Guide the development of new practices and procedures.
Accounting theory is that branch of accounting which consists of the systematic statement of principles and
methodology. An accounting theory is nothing but a framework or a set of defined rules and principles that define
and guide an accountant about what should be done and what should not be done. These theories include several
logical reasoning and some practical proof to demonstrate the way an accountant can best present the accounting
information or the way investors can best interpret the given accounting information. There are several
international boards that develop these accounting theories that are then used by the accountants in different
countries.
Objectives of Accounting–
Accounting is a vast system, which includes innumerable computations, problem solving, digging out of
information and presenting the same in a specified format so that it can be read, analyzed and interpreted by
people. Accounting has several major objectives to follow. Below discussed are some of the major objectives of
accounting:
 Recording Data in a systematic manner: For an investor or decision maker, analyzing only the present
information or scenario of a company is not enough and it is crucial for them to even examine the past
performances and information of a company. And that is what accounting aids by recording data and
information in a systematic manner. Such systemized recording of information helps investors in
analyzing options and information for any previous year as well.
 Determining Financial Positioning: Every organization, big or small is required to prepare its financial
statements on the basis of the given information. All this information then helps companies and the
stakeholders in analyzing the financial position of the company. Different entries in the financial
statements represent different aspects of financial position of a firm, hence giving a clearer picture.
 Aid in Decision-Making: The very first step of the decision making process is to collect, analyze and
interpret information related to the topic to make informed decision. And this is exactly what accounting
does. The information it provides help owners, creditors, management, employees and even investors
make informed decisions related to the firm.
Role of Accounting Theory :
Accounting theory has great utility for improving accounting practices, resolving complex accounting issues and
contributing in the formulation of a useful accounting theory. Accounting theory has a great amount of influence
on accounting and reporting practices and thus serves the informational requirements of the external users.In fact,
accounting theory provides a framework for:
(i) Evaluating current financial accounting practice and

(ii) Developing new practice.
APPROACHES -
TRADITIONAL APPROACHES
1. Non-theoretical
2. Theoretical
1. Non-theoretical : Approaches to accounting theory are concerned with developing a theory or accounting
methods and principles that will be beneficial to manipulators, mainly decision makers. This approach can
be established in a practical or authoritarian way. In essence this is the approach the accounting
occupation has used in the past to develop an accounting theory and it is honestly apparent it has not been
able to resolve conflict in accounting practices or philosophies.
2. Theoretical approaches to the development of an accounting theory are many such as:
a) Deductive Approach
b) Inductive approach
c) Ethical approach
d) Sociological approach
e) Economic approach
f) Eclectic approach
a. DEDUCTIVE APPROACH - This approach involves developing a theory from elementary proposals,
premises and assumptions which results in accounting principles that are reasonable conclusions about the
subject. The theory is verified by determining whether its results are acceptable in practice. Edwards and Bell
(1961) are deductive theorists and historical cost accounting was also derived from a deductive approach.
b. INDUCTIVE APPROACH - For this approach we start with observed phenomena and move towards
generalized conclusions. The approach requires experimental testing, i.e. the theory must be supported by
sufficient illustrations/observations that support the derived conclusions. Fairly often the logical and inductive
approaches are mixed as researchers use their knowledge of accounting practices. As Riahi-Belkaoui states:
General propositions are formulated through an inductive process, but the principles and techniques are
derived by a deductive approach. He also observes that when an inductive theorist, Littleton (1935),
collaborates with a deductive theorist, Paton (1922), a hybrid results showing compromise between the two
approaches.
c. SOCIOLOGICAL APPROACH -This is truly an ethical approach that centers on social welfare. In other
words, accounting principles and methods are assessed for acceptance after considering all effects on all
groups in society. Thus within this approach we would need to be able to account for a business entity’s effect
on its social environment.

d. ECONOMIC APPROACH-This approach attention on general economic welfare. Thus accounting
principles and methods are assessed for acceptance dependent on their impact on the national economy.
Sweden, in its national GAAP, uses an economic approach to its development. The IASB in developing its
standards does tend to take an economic approach into account.
e. ECLECTIC APPROACH - This is maybe our current approach where we have a mixture of all the
approaches already identified appearing in our accounting theory. This approach has come about more by
accident than as a deliberate attempt, due to the interfering in the development of accounting theory by
specialists, governmental bodies and individuals. This eclectic approach has also run to the development of
new approaches to accounting theory.
f. REGULATORY APPROACHES - Numerous would regard this as the approach we presently have to
accounting theory. They grip this view because to them it does not look that standards, even those of the IASB,
are based on broad, related theories but are developed as solutions to current conflicts that arise in our attempts
to provide beneficial information to manipulators. Certainly, they might argue that new standards are only
developed when a specific manipulator complains about misrepresentation or non-information. But there are
questions to consider if we do adopt this approach to the development of accounting theory.
MODERN APPROACHES - These efforts to use both conceptual and empirical reasoning to formulate and
verify an accounting framework. The approaches are:
 Events approach
 Behavioral approach
 Human Information Processing approach
 Predictive approach
 Positive approach
EVENTS APPROACH - The events approach was developed in 1969 by George Sorter and was defined as
‘providing information about relevant economic events that might be useful in a variety of decision models’. The
events approach leaves the manipulator to aggregate and allocate weights and values to the event. The accountant
would only provide information on the economic event to the user, he would not undertake a decision model.
BEHAVIOURAL APPROACHThe behavioral approach attempts to take into account human behavior as it
narrates to decision making in accounting. Devine (1960) stated the following:
On balance it seems fair to conclude that accountants seem to have waded through their relationships to the
intricate psychological network of human activity with a heavy handed crudity that is beyond belief. Some degree
of crudity may be excused in a new discipline, but failure to recognize that much of what passes as accounting
theory is hopelessly entwined with unsupported behavior assumptions is unforgivable.
This to us seems fair remark. Given that financial reporting is about communicating information to users to permit
them to make decisions, a lack of attention of how that information influences their behavior is certainly
unforgivable. Studies in this area have tended to concentrate on:
The adequacy of disclosure -

 Usefulness of financial statement data
 Attitudes about corporate reporting practices
 Materiality judgements
 Decision effects of alternative accounting practices
HUMAN INFORMATION PROCESSING APPROACH
This is comparable to a behavioral approach in that it focuses on how manipulators interpret and use the
information provided.
PREDICTIVE APPROACH
This approach attempts to formulate an accounting theory by focusing on the analytical nature/ability of a
particular method of reporting an event that would be of use to the manipulator. Such approaches are most
predominant in what could be regarded as management accounting. Efficient market hypothesis, Beta models,
chaos theory are all examples of this approach.
POSITIVE APPROACH
This can be best clarified by quoting Jensen (1976), who called for the development of a positive theory of
accounting which will explain why accounting is what it is, why accountants do what they do, and what effects
these phenomena have on people and resource utilization.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
GAAP is derived from the pronouncements of a series of government-sponsored accounting entities, of which
the Financial Accounting Standards Board (FASB) is the latest. The Securities and Exchange
Commission also issues accounting pronouncements through its Accounting Staff Bulletins and other
announcements that are applicable only to publicly-held companies, and which are considered to be part of
GAAP. GAAP is codified into the Accounting Standards Codification (ASC), which is available online and (more
legibly) in printed form.
GAAP is described by management theorists as the standard framework of guiding principle for financial
accounting used in any given authority. These are normally known as accounting standards. The notion of GAAP
includes the standards, conventions, and rules that accountants pursue in recording and summarizing accounting
transactions, and in the preparation of financial statements. Generally Accepted Accounting Principles (GAAP) is
based on those rules of action or conduct, which are derived from experience and practice, and when they confirm
useful, they are accepted as principles of accounting. GAAP is a codification of how CPA firms and company
plan and present their business income and expenditure, assets and liabilities in their financial statements. GAAP
is not considered as a sole accounting law, but it is a collective of many rules on how to account for different
transactions.
GAAP is used primarily by businesses reporting their financial results in the United States. International
Financial Reporting Standards (IFRS), is the accounting framework used in most other countries. GAAP is much
more rules-based than IFRS. IFRS focuses more on general principles than GAAP, which makes the IFRS body
of work much smaller, cleaner, and easier to understand than GAAP. Since IFRS is still being constructed, GAAP
is considered to be the more comprehensive accounting framework.

DIFFERENCE BETWEEN INDIAN GAAP vs US GAAP vs IFRS
Sr No. Category Accounting Main Points

Standards
1 Accounting IFRS Subsequent to initial recognition most of the assets and liabilities like
Basis property, plant, equipment, investment, derivatives etc are based on
fair value and not on historical cost basis.
Indian GAAP Indian GAAP emphasis on historical cost with an exception to fixed
assets which may be revalued.
U.S GAAP Like IFRS most of the assets/liabilities are valued at fair value with
certain exception like property, plant, investments, provisions,
intangible assets which are not permitted to be measured at fair value
under U.S GAAP.
2 Consolidated IFRS Entity with at least one subsidiary must present consolidated financial
Financial statement unless specific criteria are met.
Statements Indian GAAP All entities with at least one subsidiary must prepare consolidated
financial statement and there is no exemption at all.
U.S GAAP Indian GAAP does not specify entities that are required to present
consolidated financial statements. The standard is required to be
followed if consolidated statements are presented.
3 Balance Sheet IFRS Balance sheet need not to be presented in prescribed format, only
certain items to be presented on the face of balance sheet.
Indian GAAP Companies Act, 1956 gives the format in which the balance sheet
needs to be updated. For Banking and Insurance format are prescribed
by relevant acts.
U.S GAAP Unlike IFRS, US GAAP does not contain requirement to present a
classified balance sheet .Here SEC regulations prescribe the format

and certain minimum line item.
4 Income IFRS IFRS Require certain item to be presented on the face of the income
Statement statement, there is no prescribed format.
Indian GAAP Though no format is prescribed, but Companies Act 1956 gives a list
of items which must be disclosed in P&L Account.
U.S GAAP SEC regulation prescribed the format and certain minimum line item
disclosure for SEC registrants.
For Non SEC registrants there is some guidance on presentations.
5 Comparative IFRS Comparative information is required for the preceding year only.
information Indian GAAP One Year comparative information is required.
U.S GAAP US GAAP does not require comparative information. However, SEC
registrants are required to present balance sheets as of the end of
current and prior reporting periods.
6 Cash Flow IFRS An entity having a subsidiary must present CFS unless specific
Statement criteria are met.
Separate Financial statements of parent that represent CFS are not
required.
Indian GAAP There is no mandatory requirement under Companies Act, 1956 for an
entity to present CFS. Accounting Standard also Do not mandate.
U.S GAAP There is no exemption from preparing CFS for parent entity.
An entity must prepare CFS when it had at least one subsidiary at any
time during current reporting period.
7 Revenue IFRS 1. Revenue recognition is based on one single standard which
Recognition contains general principles that are applied to different types of
transactions.
2. In a sale of good transaction, revenue is recognized when the seller
transfers the significant risk and rewards of ownership to the buyer.
Indian GAAP 1. Revenue recognition is based on one single standard which
contains general principles that are applied to different types of
transactions.
2. In a sale of good transaction, Indian GAAP recognizes revenue
when the seller transfers the property in goods to the buyer. There are
some subtle differences in application.
U.S GAAP 1. Extensive guidance on revenue recognition specific to industry and
transactions are available.
2. Same as IFRS, however detailed criteria underlying these principles
are different in U.S GAAP.
8 Extra-ordinary IFRS It’s prohibited and not to be disclosed in the financial statement.
items Indian GAAP Like U.S GAAP it has to be reported.
U.S GAAP It has to be reported in the financial statement.
9 True and Fair IFRS The overriding requirement of IFRS is for financial statements to give
presentation a fair presentation.
Indian GAAP The Companies Act 1985 requires Financial Statement to give true

and fair view of state of affairs and its P& L Account. The Act also
requires compliance with Accounting Standards .
U.S GAAP The objective of U.S GAAP is fair presentation in accordance with
U.S GAAP, which is more restrictive than the requirement under
IFRS.
10 Share Based IFRS 1. Cash-settled share-based payments are within the scope of the share
Payments based payment standard. However there is no explicit guidance when
the liabilities are settled by a shareholder or another group entity.
2. Share-based payment to non-employees generally are measured at
the date(s) that the goods are received or services are rendered, based
on the fair value of the goods or services received.
Indian GAAP 1. Guidance given in the guidance note is same as IFRS. However,
there is no specific guidance under the SEBI guidelines.
2. There is no specific guidance under Indian GAAP.
U.S GAAP 1. Liabilities classified (cash settled) share –based payments are
within the scope of the share-based payment standard even if settled
by another group entity or a shareholder.
2. Share-based payments to non-employees generally are measured at
the measured at the earlier of the performance and the performance
commitment date, based on the fair value of the instrument issued.
11 Deferred Tax IFRS 1. A deferred tax liability/asset is not recognized if it arises from the
Calculation initial recognition of an asset or liability in a transaction that is not a
business combination and at the time of the transaction affects neither
accounting profit nor taxable profit.
2. Deferred tax is measured based on rates and tax laws that are
enacted or substantively enacted at the reporting date.
Indian GAAP 1. It is accounted as a permanent difference under Indian GAAP
enacted or substantively enacted at the reporting date.
U.S GAAP 1. There is no exemption from recognizing a deferred tax
liability/asset for the initial recognition of an asset or liability in a
transaction that is not a business combination and at the time of the
transaction affects neither accounting profit nor taxable profit.
enacted at the reporting date.
12 Asset IFRS 1. Assets are initially recognized at cost and then measured at fair
Accounting value. All items in the same class are revalued at the same time and
revaluations are kept up to date.
2. If an item of a property has different components with different
depreciation rates, each component are depreciated separately.
Indian GAAP 1. Valuation principle is same as IFRS but revaluation of entire class
of assets is not mandatory.
2. Component accounting is not mandatory.
U.S GAAP 1. Initial valuation is at historical cost and revaluation of fixed asset is
not permitted.

2. Component accounting is not mandatory.
13 Foreign IFRS Measures assets, liabilities, expenses and incomes at functional
currency currency. Functional currency is different from local currency and it is
the currency of the primary economic environment in which the entity
operates.
Indian GAAP No concept of functional currency and entities has to report their
financial statements in Indian rupees.
U.S GAAP Same as IFRS.
14 Minority IFRS Minority interests are classified as equity in balance sheet but are
Interest presented separately from shareholders equity.
Indian GAAP Disclosed separately from liability and equity of the parent
shareholders.
U.S GAAP It’s presented as long term liability or under equity in Balance Sheet.
ETHICAL ISSUES IN ACCOUNTING
Ethics in accounting are concerned with how to make good and moral choices in regard to the preparation,
presentation and disclosure of financial information. During the 1990’s and 2000’s, a series of financial reporting
scandals brought this issue into the forefront. Knowing some of the issues presented in accounting ethics can help
you ensure that you are considering some of the implications for the actions that you take with your own business.
Fraudulent Financial Reporting
Most accounting scandals over the last two decades have centered on fraudulent financial reporting. Fraudulent
financial reporting is the misstatement of the financial statements by company management. Usually, this is
carried out with the intent of misleading investors and maintaining the company's share price. While the effects of
misleading financial reporting may boost the company's stock price in the short-term, there are almost always ill
effects in the long run. This short-term focus on company finances is sometimes known as "myopic management."
Misappropriation of Assets
On an individual employee level, the most common ethical issue in accounting is the misappropriation of assets.
Misappropriation of assets is the use of company assets for any other purpose than company interests. Otherwise
known as stealing or embezzlement, misappropriation of assets can occur at nearly any level of the company and
to nearly any degree. For example, a senior level executive may charge a family dinner to the company as a
business expense. At the same time, a line-level production employee may take home office supplies for personal
use. In both cases, misappropriation of assets has occurred.
Disclosure Violations

Disclosure violations are errors of ethical omission. While intentionally recording transactions in a manner that is
not in accordance with generally accepted accounting principles is considered fraudulent financial reporting, the
failure to disclose information to investors that could change their decisions about investing in the company could
be considered fraudulent financial reporting, as well. Company executives must walk a fine line; it is important
for management to protect the company's proprietary information. However, if this information relates to a
significant event, it may not be ethical to keep this information from the investors.
Penalties
Penalties for violations of accounting ethics laws have increased greatly since the passage of the Sarbanes-Oxley
Act of 2002. This legislation allows for harsh penalties for manipulating financial records, destroying information,
interfering with an investigation and provides legal protection for whistle-blowers. In addition, chief executives
can be held criminally liable for the misreporting of their company. If accounting ethics wasn't an important
consideration before, the higher stakes provided by the Sarbanes-Oxley Act have definitely upped the ante.
FINANCIAL REPORTING (F.R)
Financial Reporting involves the disclosure of financial information to the various stakeholders about the
financial performance and financial position of the organization over a specified period of time. These
stakeholders include – investors, creditors, public, debt providers, governments & government agencies. In case
of listed companies the frequency of financial reporting is quarterly & annual. Financial Reporting is usually
considered as end product of Accounting. The typical components of financial reporting are:
 The financial statements – Balance Sheet, Profit & loss account, Cash flow statement & Statement of
changes in stock holder’s equity
 The notes to financial statements
 Quarterly & Annual reports (in case of listed companies)
 Prospectus (In case of companies going for IPOs)
 Management Discussion & Analysis (In case of public companies)
The Government and the Institute of Chartered Accounts of India (ICAI) have issued various accounting
standards & guidance notes which are applied for the purpose of financial reporting. This ensures uniformity
across various diversified industries when they prepare & present their financial statements.
OBJECTIVES / PURPOSE OF FINANCIAL REPORTING
According to International Accounting Standard Board (IASB), the objective of financial reporting is “to provide
information about the financial position, performance and changes in financial position of an enterprise that
is useful to a wide range of users in making economic decisions.”
 Providing information to management of an organization which is used for the purpose of planning,
analysis, benchmarking and decision making.
 Providing information to investors, promoters, debt provider and creditors which is used to enable them to
male rational and prudent decisions regarding investment, credit etc.
 Providing information to shareholders & public at large in case of listed companies about various aspects
of an organization.

 Providing information about the economic resources of an organization, claims to those resources
(liabilities & owner’s equity) and how these resources and claims have undergone change over a period of
time.
 Providing information as to how an organization is procuring & using various resources.
 Providing information to various stakeholders regarding performance management of an organization as
to how diligently & ethically they are discharging their fiduciary duties & responsibilities.
 Providing information to the statutory auditors which in turn facilitates audit.
 Enhancing social welfare by looking into the interest of employees, trade union & Government.
IMPORTANCE OF FINANCIAL REPORTING
The importance of financial reporting cannot be over emphasized. It is required by each and every stakeholder for
multiple reasons & purposes. The following points highlights why financial reporting framework is important –
 In helps an organization to comply with various statues and regulatory requirements. The organizations
are required to file financial statements to ROC, Government Agencies. In case of listed companies,
quarterly as well as annual results are required to be filed to stock exchanges and published.
 It facilitates statutory audit. The Statutory auditors are required to audit the financial statements of an
organization to express their opinion.
 Financial Reports forms backbone for financial planning, analysis, bench marking and decision making.
These are used for above purposes by various stakeholders.
 Financial reporting helps organizations to raise capital both domestic as well as overseas.
 On the basis of financials, the public in large can analyze the performance of the organization as well as
of its management.
 For the purpose of bidding, labor contract, government supplies etc., organizations are required to furnish
their financial reports & statements.
INTERNAL CONTROL PROCEDURE IN ACCOUNTING
Internal control is the process by which management structures an organization to provide assurance that an entity
operates effectively and efficiently, has a reliable financial reporting system and complies with applicable laws
and regulations.
Internal controls are policies and procedures put in place to ensure the continued reliability of accounting systems.
Accuracy and reliability are paramount in the accounting world. Without accurate accounting records, managers
cannot make fully informed financial decisions, and financial reports can contain errors. Internal control
procedures in accounting can be broken into seven categories, each designed to prevent fraud and identify errors
before they become problems.
Separation of Duties
Separation of duties involves splitting responsibility for bookkeeping, deposits, reporting and auditing. The
further duties are separated, the less chance any single employee has of committing fraudulent acts. For small
businesses with only a few accounting employees, sharing responsibilities between two or more people or
requiring critical tasks to be reviewed by co-workers can serve the same purpose.

Access Controls
Controlling access to different parts of an accounting system via passwords, lockouts and electronic access logs
can keep unauthorized users out of the system while providing a way to audit the usage of the system to identify
the source of errors or discrepancies. Robust access tracking can also serve to deter attempts at fraudulent access
in the first place.
Physical Audits
Physical audits include hand-counting cash and any physical assets tracked in the accounting system, such as
inventory, materials and tools. Physical counting can reveal well-hidden discrepancies in account balances by
bypassing electronic records altogether. Counting cash in sales outlets can be done daily or even several times per
day. Larger projects, such as hand counting inventory, should be performed less frequently, perhaps on an annual
or quarterly basis.
Standardized Documentation
Standardizing documents used for financial transactions, such as invoices, internal materials requests, inventory
receipts and travel expense reports, can help to maintain consistency in record keeping over time. Using standard
document formats can make it easier to review past records when searching for the source of a discrepancy in the
system. A lack of standardization can cause items to be overlooked or misinterpreted in such a review.
Trial Balances
Using a double-entry accounting system adds reliability by ensuring that the books are always balanced. Even so,
it is still possible for errors to bring a double-entry system out of balance at any given time. Calculating daily or
weekly trial balances can provide regular insight into the state of the system, allowing you to discover and
investigate discrepancies as early as possible.
Periodic Reconciliations
Occasional accounting reconciliations can ensure that balances in your accounting system match up with balances
in accounts held by other entities, including banks, suppliers and credit customers. For example, a bank
reconciliation involves comparing cash balances and records of deposits and receipts between your accounting
system and bank statements. Differences between these types of complementary accounts can reveal errors or
discrepancies in your own accounts, or the errors may originate with the other entities.
Approval Authority
Requiring specific managers to authorize certain types of transactions can add a layer of responsibility to
accounting records by proving that transactions have been seen, analyzed and approved by appropriate authorities.
Requiring approval for large payments and expenses can prevent unscrupulous employees from making large
fraudulent transactions with company funds.

UNIT-II
Syllabus –Accounting Standards-Need, Relevance & Applicability, Setting Procedure, Overview of Standards,
IFRS-Need, Arguments for Global Convergence, Ind-AS, An overview and compliance status
ACCOUNTING STANDARDS (AS)
Accounting standards are the written statements consisting of rules and guidelines, issued by the accounting
institutions, for the preparation of uniform and consistent financial statements and also for other disclosures
affecting the different users of accounting information.
Accounting standards are authoritative statements of how particular types of transactions should bereflected in
financial statements. Compliance with standards is necessary for accounts to give a 'True and Fair View'.
Accounting standards are statements on various accounting issues setting out:
 How transactions should be accounted for
 Disclosure in accounts
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.
NATURE OF ACCOUNTING STANDARDS
(I) SERVE AS A GUIDE TO THE ACCOUNTANTS
Accounting standards serve the accountants as a guide in the accounting process. They provide basis on which
accounts are prepared. For example, they provide the method of valuation of inventories.
(II) ACT AS A DICTATOR
Accounting standards act as a dictator in the field of accounting. Like a dictator, in some areas accountants have
no choice of their own but to opt for practices other than those stated in the accounting standards. For example,
Cash Flow Statement should be prepared in the format prescribed by accounting standard.
(III) SERVE AS A SERVICE PROVIDER
Accounting standards comprise the scope of accounting by defining certain terms, presenting the accounting
issues, specifying standards, explaining numerous disclosures and implementation date. Thus, accounting
standards are descriptive in nature and serve as a service provider.
(IV) ACT AS A HARMONIZER
Accounting standards are not biased and bring uniformity in accounting methods. They remove the effect of
diverse accounting practices and policies. On many occasions, accounting standards develop and provide
solutions to specific accounting issues. It is thus clear that whenever there is any conflict on accounting issues,
accounting standards act as harmonizer and facilitate solutions for accountants.

NEED / OBJECTIVES OF ACCOUNTING STANDARDS
For the following purposes, accounting standards are needed:
(I) FOR BRINGING UNIFORMITY IN ACCOUNTING METHODS
Accounting standards are required to bring uniformity in accounting methods by proposing standard treatments to
the accounting issue. For example, AS-6(Revised) states the methods for depreciation accounting.
(II) FOR IMPROVING THE RELIABILITY OF THE FINANCIAL STATEMENTS
Accounting is a language of business. There are many users of the information provided by accountants who take
various decisions relating to their field just on the basis of information contained in financial statements. In this
connection, it is necessary that the financial statements should show true and fair view of the business concern.
Accounting standards when used give a sense of faith and reliability to various users.
(III) SIMPLIFY THE ACCOUNTING INFORMATION
Accounting standards prevent the users from reaching any misleading conclusions and make the financial data
simpler for everyone. For example, AS-3 (Revised) clearly classifies the flows of cash in terms of ‘operating
activities’, ‘investing activities’ and ‘financing activities’.
(IV) PREVENTS FRAUDS AND MANIPULATIONS
Accounting standards prevent manipulation of data by the management and others. By codifying the accounting
methods, frauds and manipulations can be minimized.
(V) HELPS AUDITORS
Accounting standards lay down the terms and conditions for accounting policies and practices by way of codes,
guidelines and adjustments for making and interpreting the items appearing in the financial statements. Thus,
these terms, policies and guidelines etc. become the basis for auditing the books of accounts.
CLASSIFICATION OF ENTERPRISES
The enterprises are classified and labeled as-
 Level I,
 Level II,
 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
 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
APPLICABILITY OF ACCOUNTING STANDARDS
Accounting Standards Level Level Level

I II III
AS 1 Disclosure of Accounting Principles Yes Yes Yes
AS 2 Valuation of Inventories Yes Yes Yes
AS 3 Cash Flow Statements Yes No No
AS 4 Contingencies and Events Occurring After the Balance Sheet Date Yes Yes Yes
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Yes Yes Yes
Accounting Policies
AS 6 Depreciation Accounting Yes Yes Yes
AS 7 Construction Contracts (Revised 2002) Yes Yes Yes
AS 9 Revenue Recognition Yes Yes Yes
AS 10 Accounting for Fixed Assets Yes Yes Yes

AS 11 The Effects Of Changes In Foreign Exchange Rates (Revised 2003) Yes Yes Yes
AS 12 Accounting for Government Grants Yes Yes Yes
AS 13 Accounting for Investments Yes Yes Yes
AS 14 Accounting for Amalgamations Yes Yes Yes
AS 15 Employee Benefits (Revised 2005) Yes Yes Yes
AS 16 Borrowing Costs Yes Yes Yes
AS 17 Segment Reporting Yes No No
AS 18 Related Party Disclosures Yes No No
AS 19 Leases Yes Partial Partial
AS 20 Earnings Per Share Yes Partial Partial
AS 21 Consolidated Financial Statements Yes No No
AS 22 Accounting for taxes on income Yes Yes Yes
AS 23 Accounting for Investments in Associates in Consolidated Financial Yes No No
Statements
AS 24 Discontinuing Operations Yes No No
AS 25 Interim Financial Reporting Yes No No
AS 26 Intangible Assets Yes Yes Yes
AS 27 Financial Reporting of Interests in Joint Ventures Yes No No
AS 28 Impairment of Assets Yes Yes Yes
AS 29 Provisions, Contingent Liabilities and Contingent Assets Yes Partial Partial
Important Note :-
1. AS 19 Leases
Paragraphs 22(c), (e) and (f); 25(a), (b) and (e); 37(a), (f) and (g); and 46(b), (d) and (e), of AS 19 does not apply
to Level II and Level III enterprises
2. AS 20 Earnings Per Share
The provisions of Part IV of Schedule VI to the Companies Act, 1956 require all companies to disclose earning
per share in their financial statements.
AS 20 does not mandate disclosure of diluted earning per share and information required by paragraph 48 for
Level II and Level III enterprises.

Hence only Level I enterprises are required to apply AS 20 entirely without any relaxations.
3. AS 29, Provisions, Contingent Liabilities, and Contingent Assets
Paragraph 67 does not apply to Level II enterprises
Paragraphs 66 and 67 does not apply to Level II and Level III enterprises
SETTING PROCEDURE – ACCOUNTING STANDARDS
ACCOUNTING STANDARD BOARD (ASB)
ICAI is the highest accounting body in the country. And the ASB is a committee of the ICAI. But to ensure
maximum transparency and independence, the ASB is a completely independent body.
The ASB formulates all the accounting standards for the Indian companies. This process is fully transparent, very
thorough and completely independent of any government involvement. While framing the standards the ASB will
try and incorporate the IFRS and its principles in the Indian standards. While India does not plan to adopt the
IFRS, this process will help the convergence of the two standards. So the ASB will modify the IFRS to suit the
laws, customs and common usage in the country.
The ASB is composed of various members. There are representatives of industries like the FICCI and
ASSOCHAM. There are also certain government officials, a few academics, and regulators from various
departments. The idea is to make the ASB as inclusive and representative as possible.
Let us take a brief look at the procedure setting process that the ASB follows
 First, the ASB will identify areas where the formulation of accounting standards may be needed
 Then the ASB will constitute study groups and panels to discuss and study the topic at hand. Such panels
will prepare a draft of the standards. The draft normally includes the definition of important terms, the
objective of the standard, its scope, measurement principles and the representation of said data in the
financial statements.
 The ASB then carries out deliberations of the said draft of the standard. If necessary changes and
revisions are made.
 Then this preliminary draft is circulated to all concerned authorities. This will generally include the
members of the ICAI, and any other concerned authority like the Department of Company Affairs (DCA),
the SEBI, the CBDT, Standing Conference of Public Enterprises (SCPE), Comptroller and Auditor
General of India etc. These members and departments are invited to give their comments.
 Then the ASB arranges meetings with these representatives to discuss their views and concerns about the
draft and its provisions
 The exposure draft is then finalized and presented to the public for their review and comments

 The comments by the public on the exposure draft will be reviewed. Then a final draft will be prepared
for the review and consideration of the ICAI
 The Council of the ICAI will then review and consider the final draft of the standard. If necessary they
may suggest a few modifications.
 Finally, the Accounting Standard is issued. In the case of standard for non-corporate entities, the ICAI
will issue the standard. And if the relevant subject relates to a corporate entity the Central Government
will issue the standard.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
IFRS standards are International Financial Reporting Standards (IFRS) that consist of a set of accounting rules
that determine how transactions and other accounting events are required to be reported in financial statements.
They are designed to maintain credibility and transparency in the financial world, which enables investors and
business operators to make informed financial decisions.
IFRS standards are issued and maintained by the International Accounting Standards Board and were created to
establish a common language, so financial statements can easily be interpreted from company to company and
country to country.
IFRS are the standard in over 100 countries, including the EU and many parts of Asia and South America. The
United States, however, has not yet adopted them and the SEC is still deciding whether or not they should move
towards them as the official standard of accounting.
IFRS IFRS Standard
1 First-time Adoption of International Financial Reporting Standards
2 Share-based Payment
3 Business Combinations
4 Insurance Contracts
5 Non-current Assets Held for Sale and Discontinued Operations
6 Exploration for and Evaluation of Mineral Resources
7 Financial Instruments: Disclosures
8 Operating Segments
9 Financial Instruments
10 Consolidated Financial Statements
11 Joint Arrangements
12 Disclosure of Interests in Other Entities
13 Fair Value Measurement

IFRS IFRS Standard
14 Regulatory Deferral Accounts
15 Revenue from Contracts with Customers
16 Leases
17 Insurance Contracts
APPLICABILITY OF IFRS
According to the Concept Paper on Convergence with IFRS in India, issued by ICAI in October 2007, the IFRS
should be applicable to Public Interest Entities (PIE). PIE has been defined to include:
 All Listed Companies

 All Banking Companies
 All Financial Institutions
 All Scheduled Commercial Banks
 All Insurance Companies
 All Non Banking Financial Institution (NBFC’s)
ADOPTION OR CONVERGENCE ?
The two terms though used interchangeably but there is a faint but important difference.
Adoption- is process of adopting IFRS as issued by IASB, with or without modifications. Modifications being,
generally in the nature of additional disclosures requirement or elimination of alternative treatment. It involves an
endorsement of IFRS by legislative or regulatory with minor modifications done by standard setting authority of a
country.
Convergence- is harmonization of national GAAP with IFRS through design and maintenance of accounting
standards in a way that financial statements prepared with national accounting standards are in compliance with
IFRS.
WHAT WILL CHANGE?
Any kind of change results in some what different conditions. Similarly convergence to IFRS, which is indeed a
complex process will, brings about a change inter-allia in the following:
 Change in existing GAAP;

 Changes in numbers reported;
 Changes to the accounting policies;
 Changes in procedures adopted by the company;
 Changes in financial reporting systems and
 Improving the IFRS skills for company personnel.

Either convergence or adoptions, both has important implication and will require synchronization of both internal
and external reporting keeping in view that it can have a deep and wide impact on overall aspects of the
organization as such mentioned below;
 Affecting investor relations;

 HR rewards;
 Debts covenants;
 Performance measures; and
 Investors and market expectations.
WHO WILL BE BENEFITED?
The convergence with IFRS entails benefit to the following:-
The Investors:- The investor will be benefited in as the way accounting information made available to them will
be more reliable, relevant, timely and most importantly the information will be comparable across different legal
framework. It will develop better understanding and confidence among the investors.
The Professional:- The professional, both in practice and in employment will get benefits as they will be able to
provide their services in various part of the world, as few years after everybody will follow the same reporting
standards.
The Corporate world:- The Indian corporate reputation and relationship with international finance community
will elevate because of achievement of higher level of consistency between reporting structure and requirements;
better access to international markets; improving confidence among the international investors. The international
comparability will also get improve strengthening the industrial and capital markets in the country.
CHALLENGES FACED DUE TO CONVERGENCE OF IFRS ?
RISKS INVOLVED IN INTRODUCING IFRS IN INDIA
 Implementing IFRS has increased financial reporting risk due to technical complexities, manual
workarounds and management time taken up with implementation.
 Another risk involved is that the IFRS do not recognize the adjustments that are prescribed through court
schemes and consequently all such items will be recorded through income statement
 In IFRS framework, treatment of expenses like premium payable on redemption of debentures, discount
allowed on issue of debentures, underwriting commission paid on issue of debentures etc is different than
the present method used. This would bring about a change in income statement leading to enormous
confusion and complexities.
 IFRS will introduce changes in the very concepts and definitions of in a few areas like change in the
definition of 'equity'. This would result in tax benefits of hybrid instruments where 'interest' is treated as
receiving a dividend.

 At the ground level, it will be difficult for the small firms and the accounting companies to keep pace with
the process of convergence with IFRS and it will be more challenging for them. Basically the idea is that
it should be made mandatory for the companies to prepare consolidated financial statements which would
require them to provide information about their unlisted companies as well under IFRS. This may
however result in increased challenges to the small and medium firms in the country.
 IFRS financial statements are significantly more complex than financial statements based on Indian
GAAP. This complexity threatens to undermine the usefulness of IFRS financial statements in making
decisions. The risk is that the preparation of financial reports will become just a technical compliance
exercise rather than a mechanism for communicating performance and the financial position of
companies.
 Laws and pronouncements are always country specific and no country can abandon its own laws
altogether. It will always be checked to see if the IFRS pronouncements fit for application in a particular
country and its environment.
Complexities of the introduction of concepts such as present value and fair value measurement, recognition and
the extent of disclosure required under IFRS. For example, a few listed below though not all:
 IFRS does not provide for the compromise, merger and amalgamation through court schemes, effect of all
such schemes are recognized through income statement.
 Treatment of expenses like premium payable on redemption of debentures, discount allowed on issue of
debentures, underwriting commission paid on issue of debentures etc is different. This would bring a
change in income statement leading to enormous confusion and complexities.
 Equity definition changed, this would result impact on tax benefits where interest is treated as receiving a
dividend.
 Financial statements more complex under IFRS and thereby would pose challenge making useful
decision.
The law and regulations of a country is a land specific and so of India too. Therefore, to overcome the challenges,
a Core Group has been constituted by Indian regulatory to identify inconsistencies between IFRS and as listed
below,
 Companies Act;
 SEBI Regulations;
 Banking Laws & Regulations,
 Insurance Laws & Regulations.
DIFFERENCE BETWEEN IND-AS Vs IFRS / IAS
Indian Accounting Standard International Accounting Standards (IAS) / International

(Ind-AS) Financial Reporting Standards (IFRS)
AS No. Name of Standard IAS / Name of Standard
IFRS
No.
1 Disclosures of Accounting Policies 1 Presentation of financial statements
2 Valuation of Inventories 2 Inventories

3 Cash Flow Statements 7 Statements of Cash Flows
4 Contingencies and Events Occurring 10 Events after the Reporting Period
after the Balance Sheet Date
5 Net Profit or Loss for the Period, Prior 8 Accounting Policies, Changes in Accounting
Period Items and Changes in Estimates and Errors
Accounting Policies
6 Depreciation No equivalent standard. Included in IAS 16
7 Constructions Contracts 11 Constructions Contracts
9 Revenue Recognition 18 Revenue
10 Accounting for Fixed Assets 16 Property, Plant and Equipment
11 The Effects of Changes in Foreign 21 The Effects of Changes in Foreign Exchanges Rates
Exchanges Rates
12 Accounting for Government Grants 20 Accounting for Government Grants and Disclosure of
Government Assistance
13 Accounting for Investments Mainly dealt with in IAS 39
14 Accounting for Amalgamations IFRS 3 Business Combinations
15 Employee Benefits 19 Employee Benefits
16 Borrowing Costs 23 Borrowings Costs
17 Segment Reporting IFRS 8 Operating Segments
18 Related Party Disclosures 24 Related Party Disclosures
19 Leases 17 Leases
20 Earnings Per Share 33 Earnings Per Share
21 Consolidated Financial Statements 27 Consolidated and Separate Financial Statements
22 Accounting for Taxes for Income 12 Income Taxes
23 Accounting for Investment in 28 Investments in Associates
Associates in Consolidated Financial
Statements
24 Discontinuing Operations IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations
25 Interim Financial Reporting 34 Interim Financial Reporting
26 Intangible Assets 38 Intangible Assets
27 Financial Reporting of Interest in Joint 31 Interest in Joint Ventures
Ventures
28 Impairment of Assets 36 Impairment of Assets
29 Provisions, Contingent Liabilities and 37 Provisions, Contingent Liabilities and Contingent
Contingent Assets Assets
30 Financial Instruments: Recognition and 32 Financial Instruments: Recognition and Measurement
Measurement
31 Financial Instruments: Presentation 39 Financial Instruments: Presentation
32 Financial Instruments: Disclosures IFRS 7 Financial Instruments: Disclosures
However, currently there are no corresponding Standards available under Indian GAAP for the following
IAS/IFRS:
 IAS 26- Accounting and Reporting by retirement Benefit Plans

 IAS 29- Financial Reporting in Hyperinflationary Economies

 IAS 40-Investment Property
 IAS 41- Agriculture
 IFRS 1- First Time Adoption of International Financial Reporting Standards
 IFRS 2- Share Based Payment
 IFRS 4- Insurance Contracts
 IFRS 6- Exploration for and Evaluation of Mineral Resources
INDIAN ACCOUNTING STANDARDS (Ind-AS)
Meaning:- Indian Accounting Standards (abbreviated as Ind-AS) are a set of accounting standards notified by
the Ministry of Corporate Affairs which are converged with International Financial Reporting Standards (IFRS).
OBJECTIVE OF IND-AS
The objective of this Ind-AS is to ensure that an entity’s first Ind-AS financial statements, and its interim financial
reports for part of the period covered by those financial statements, contain high quality information that:
 is transparent for users and comparable over all periods presented;

 provides a suitable starting point for accounting in accordance with Indian Accounting Standards (Ind
AS), and
 can be generated at a cost that does not exceed the benefits.
APPLICABILITY OF IND-AS
ON VOLUNTARY BASIS
Accounting periods beginning on or after April 1, 2015, with the comparatives for the periods ending 31st March,
2015 or thereafter;
ON MANDATORY BASIS
1. Accounting periods beginning on or after 1/4/16(For 31/3/17) with the comparatives
a) Companies whose equity and/or debt securities are listed or are in the process of listing on any stock exchange
in India or outside India and having net worth* of Rs. 500 Crore or more.
b) Companies having net worth of Rs. 500 Crore or more.
c) Holding, subsidiary, joint venture or associate above.

2. Accounting periods beginning on or after 01/04/17(For 31/3/18), with the comparatives.
a) Companies whose equity and/or debt securities are listed or are in the process of being listed on any stock
exchange in India or outside India.
b) Unlisted companies having net worth of 250 crore or more but less than rupees 500 Crore.
c) Holding, subsidiary, joint venture or associate companies of above.
“NET WORTH” means the aggregate value of the paid-up share capital and all reserves created out of the profits
and securities premium account, after deducting the aggregate value of the accumulated losses, deferred
expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include
reserves created out of revaluation of assets, write-back of depreciation and amalgamation.
Note -Companies listed on SME exchanges shall not be required to apply Ind AS.
Once Ind AS are followed by the company, it shall be required to follow,
for all the subsequent financial statements.
UNIT-III
Syllabus –Disclosure of Accounting Policies, Valuation of Inventories, Cash Flow Statements, Revenue
Recognition
DISCLOSURE OF ACCOUNTING POLICIES (AS-1)
Disclosure of Accounting Policies - The Standard deals with the disclosure of significant accounting policies
followed in preparing and presenting financial statements. In the initial years, this accounting standard will be
recommendatory in character. During this period, this standard is recommended for use by companies listed on a
recognized stock exchange and other large commercial, industrial and business enterprises in the public and
private sectors.
In other words Accounting policies refers to accounting principles and the methods of applying these principles
adopted by the organization in the preparation of their financial statements.
Para 1:
AS-1 deals with - the disclosure of significant accounting policies - followed in presentation of Financial
Statements.
Para 3:
The disclosures of some accounting policies are required by statute or law in some cases.
Para 8:
The purpose of AS-1 is to promote better understanding of financial statements.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS
Para-10:Certain assumptions are used in the preparation of financial statements. They are usually not specifically
stated because they are assumed to be followed. Disclosure is necessary only if they are not followed. The
following have been generally accepted as fundamental accounting assumptions:
Going Concern
The organization is normally viewed as a going concern, that is to say, it will be in continuing operations for the
foreseeable future. It is assumed that the organization has neither the intention, nor the necessity of shutting down
or reducing the scale of operations.
Consistency
It is assumed that accounting policies are consistently followed from one period to another. No frequent changes
are expected.
Accrual
Revenues and costs are recorded when they are earned or incurred (and not as money is received or paid) in the
periods to which they relate.
NATURE OF ACCOUNTING POLICIES
Para 11: The accounting policies refers to-

 the specific accounting principles and
 the methods of applying those principles
 adopted by the enterprise in the preparation and presentation of Financial Statements
AREAS IN WHICH DIFFERENT ACCOUNTING POLICIES ARE POSSIBLE
The following are examples of areas in which different accounting policies may be adopted by organizations.
 Methods of depreciation, depletion and Amortization

 Treatment of expenditure during construction
 Conversion or translation of foreign currency items
 Valuation of inventories
 Treatment of goodwill
 Valuation of investments
 Treatment of retirement benefits
 Recognition of profit on long-term contracts

 Valuation of fixed assets
 Treatment of contingent liabilities
CONSIDERATIONS IN THE SELECTION OF ACCOUNTING POLICIES
Para-17 :The primary consideration in the selection of accounting policies by an organization is that the financial
statements should represent a true and fair picture of the financial position for the period.
For this purpose, the major considerations governing the selection and application of accounting policies are:
Prudence
In view of the uncertainty of future events, profits are not anticipated but recognized 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.
DISCLOSURE OF ACCOUNTING POLICIES
 Para 23: Disclosure of accounting policies or of changes therein can not remedy a wrong or inappropriate
treatment of the items in the accounts.
 Para 25: The significant accounting policies as such form part of Financial Statements and it should
normally be disclosed in one place.
 Para 26: Any changes in accounting policies which has a material effect should be disclosed to the extent
amount is ascertainable otherwise the fact should be disclosed if such amount is not ascertainable.
 Para 27: Only if the fundamental accounting assumption is not followed, the fact should be disclosed.
TRICK = A GOOD CHARTERED ACCOUNTANT MUST SEE POLICY OF PSM LTD.
 G : Going Concern
 C : Consistency
 A : Accrual
 P : Prudence
 S : Substance over form

 M : Materiality
-----------------------------------------------------------------------------------------------------------------------------------------
VALUATION OF INVENTORIES (AS-2)
I. Definition of the Inventory includes the following:
 Held for sale in the normal course of business i.e finished goods
 Goods which are in the production process i.e work in progress
 Raw materials which are consumed during production process or rendering of services (including
consumable stores item)
II. Net RealisableValue (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”
Valuation of Inventories :Inventories should be valued at lower of cost and net realizable value. Following are
the steps for valuation of inventories:
A. Determine the cost of inventories
B. Determine the net realizable value of inventories
C. On Comparison between the cost and net realizable value, the lower of the two is considered as the value of
inventory. A comparison can be made the item by item or by the group of items.
IMPORTANT ITEMS OF INVENTORY VALUATION IN DETAIL
A. Cost of Inventories
The cost of inventories includes the following
i) Purchase cost
ii) Conversion cost
iii) Other costs which are incurred in bringing the inventories to their present location and condition.
B. Cost of Purchase
While determining the purchase cost, the following should be considered:
i) Purchase cost of the inventory includes duties and taxes (except those which are subsequently recoverable from
the taxing authorities)
ii) Freight inwards
iii) Other expenditure which is directly attributable to the purchase
iv) Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of
purchase
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.
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. For (eg)
design cost which is incurred for the specific customer order.
If there are by-products during the production of main products, their cost has to be separately identified. If they
are not separately identifiable, then allocation can be made on the relative sale value of the main product and the
by-product.
Some of the cost which should not be included are:
 Cost of any abnormal waste materials cost

 Selling and distribution cost unless those costs are necessary for the production process
 A normal loss which occurs during the production process is apportioned over the remaining no of units
and abnormal loss is treated as an expense
METHODS OF INVENTORY VALUATION
The cost of inventories of items which can be segregated for specific projects should be assigned by specific
identification of their individual costs

 SPECIFIC IDENTIFICATION METHOD
All other items cost should be assigned by using the
 FIRST-IN, FIRST-OUT (FIFO),

 WEIGHTED AVERAGE COST (WAC)
The formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of
inventory to their present location and condition.
However, when it is difficult to calculate the cost using above methods, Standard cost and Retail cost can be used
if the results approximate the actual cost.
ACCOUNTING DISCLOSURE
The following should be disclosed in the financial statements:
1. Accounting policy adopted in inventory measurement
2. Cost formula used
3. Classification of the of inventory such as finished goods, raw material & W.I.P and stores and spares etc
4. Carrying amount of inventories carried at fair value less sale cost
5. Amount of inventories recognized as expense during the period
6. Amount of any write-down of inventories recognized as an expense and its subsequent reversal if any.
CASH FLOW STATEMENTS(AS-3)
According to Khan and Jain, “Cash Flow statements are statements of changes in financial position prepared on
the basis of funds defined as cash or cash equivalents.”
According to The Institute of Cost and Works Accountants of India, “Cash Flow statement is a statement
setting out the flow of cash under distinct heads of sources of funds and their utilisation to determine the
requirements of cash during the given period and to prepare for its adequate provision.”
In simple words, Cash Flow Statement is a statement which provides a detailed explanation for the changes in a
firm’s cash balance during a particular period by indicating the firm’s sources and uses of cash and, ultimately,
net impact on cash balance during that period.
APPLICABILITY OF AS-3

CASH FLOW STATEMENTS are to be prepared by all companies, except-
One Person Company (OPC), Small Company and Dormant Company.
 OPC means a company which has only one single person as its member.
 A Small Company is a private company with a maximum paid up capital of Rs. 50 lakhs and a maximum
turnover of Rs. 2 crores.
 A Dormant Company is an inactive company which is formed for some future projects or only to hold an
asset and has no significant transactions.
FEATURES OF CASH FLOW STATEMENT
The features or characteristics of Cash Flow Statement may be summarized in the following way:
 It is a periodical statement as it covers a particular period of time, say, month or year.

 It shows movement of cash in between two balance sheet dates.
 It establishes the relationship between net profit and changes in cash position of the firm.
 It does not involve matching of cost against revenue.
 It shows the sources and application of funds during a particular period of time.
 It records the changes in fixed assets as well as current assets.
 A projected cash flow statement is referred to as cash budget.
 It is an indicator of cash earning capacity of the firm.
 It reflects clearly how financial position of a firm changes over a period of time due to its operating
activities, investing activities and financing activities.
ADVANTAGES OF CASH FLOW STATEMENT
1. Evaluation of Cash Position:It is very helpful in understanding the cash position of a firm. Since cash is the
basis for carrying on business operations smoothly, the cash flow statement is very useful in evaluating the
current cash position of the business.
2.Planning and Control:A projected cash flow statement enables the management to plan and coordinate the
financial operations properly. The financial manager can know how much cash is needed, from where it will be
derived, how much can be generated internally, and how much could be obtained from outside.
3.Performance Evaluation:A comparison of actual cash flow statement with the projected cash flow statement
will disclose the failure or success of the management in managing cash resources. Deviations will indicate the
need for corrective actions.
4.Framing Long-term Planning:The projected cash flow statement helps financial manager in exploring the
possibility of repayment of long-term debts which depends upon the availability of cash.

5. Capital Budgeting Decision:A projected cash flow statement also helps the management in taking capital
budgeting decisions.6.Liquidity Position:Liquidity position of a firm refers to its ability to meet short-term
obligations such as payment of wages and other operating expenses etc. From cash flow statement the financial
manager is able to understand how well the firm is meeting these obligations.
LIMITATIONS OF CASH FLOW STATEMENT
Cash Flow Statement is, no doubt, an important tool of financial analysis which discloses the complete story of
cash management. The increase in—or decrease of—cash and reasons thereof, can be known, However, it has its
own limitation. These limitations are:
 Since cash flow statement does not consider non-cash items, it cannot reveal the actual net income of
the business.
 Cash flow statement cannot replace fund flow statement or income statement. Each of them has a
separate function to perform which cannot be done by the cash flow statement.
 The cash balance as disclosed by the projected cash flow statement may not represent the real liquid
position of the business since it can be easily influenced by the managerial decisions, by making
certain payments in advance or by post ponding payments.
 It cannot be used for the purpose of comparison over a period of time. A company is not better off in
the current year than the previous year because its cash flow has increased.
 It is not helpful in measuring the economic efficiency in certain cases e.g., public utility service
where generally heavy capital expenditure is involved.
In spite of these limitations, it can be said that cash flow statement is a useful supplementary instrument. It helps
management in knowing the amount of capital blocked up in a particular segment of the business. The technique
of cash flow analysis—when used in conjunction with ratio analysis—serves as a barometer in measuring the
profitability and financial position of the business.
SOURCES OF CASH INFLOW & OUTFLOW
1. Operating Activities
Cash flows from operating activities are primarily derived from principal revenue-generating/producing activities
of the firm. As such, they usually arise from the transactions and other events which enter into the determination
of net profit or loss.
 Cash receipts from the sale of goods and the rendering of service;
 Cash receipts from royalties, fees, commission and other revenues;
 Cash payment to creditors for goods and services;
 Cash payment to and on behalf of employees;
 Cash receipts and cash payments of an insurance enterprise for premium and claims, annuities and other
benefits;

 Cash payment of refund of Income-tax unless they can be specifically identified with financing and
investing activities; and
 Cash receipts and payments relating to future contracts, forward contracts, option contracts and swap
contracts when contracts are held for dealing or trading purposes.
2. Investing Activities
Practically, cash flows from Investing Activities comprise of the purchase and sale of long-time assets, i.e. fixed
assets or non-current assets and investments. In other words, the cash flows represent the extent to which
expenditures have been made for resources intended to generate future income and cash flows.
 Cash payment to acquire fixed asset (including intangible);

 Cash receipts from disposal of fixed asset (including intangible);
 Cash payment to acquire shares, warrants, or debt instruments of other enterprises and interest on joint
venture.
 Cash receipts of disposal of share, warrants, or debt instruments of other enterprises and interest on joint
venture;
 Cash advances and loans made to third parties;
 Cash receipts from the repayment of advances and loans made to third parties;
 Cash payments for future contracts, forward contracts, option contract and swap contracts;
 Cash receipts from future contracts, forward contracts, and option contracts and swap contracts.
3. Financing Activities
Financing activities reveal the composition of capital structure of a firm, i.e. composition of owned capital and
borrowed capital. These activities arises from the changes in Equity Share Capital, Preference Share Capital,
Debenture, etc. In short, it is useful in predicting claims on future cash flows by providing of funds both from
capital and borrowings.
 Cash proceeds from issuing shares on other similar instruments;

 Cash proceeds from issuing debentures, loans, notes, bonds and other short- or long-term borrowings;
 Cash repayment of amount borrowed;
 Cash payment for redemption of Preference Shares;
 Cash payment for Buy-back of Equity Shares;
 Cash payment for Interest on Loans and Debentures;
 Cash payments for Equity Dividend and Preference Dividend.
Reporting Cash Flow Statements From Operating, Investing & Financing Activities
The Cash Flow Statement can be presented in two ways –

1. Direct Method Cash Flow Statements Reporting.
2. Indirect Method Cash Flow Statements Reporting.
1. Direct method – Where all the major classes of cash receipts and cash payments are presented; or
2. Indirect method – Where the net profit or net loss is adjusted for:
a) Effects of transactions that are non-cash in nature such as depreciation, deferred taxes, provisions, etc.

b) Accruals or deferrals of future or past operating cash proceeds or payments
c) Any expense or income related to financing or investing cash flows
REVENUE RECOGNITION-(AS-9)
Revenue :-The gross inflow of cash receivables or other consideration arising in the course of the ordinary
activities of an enterprise from the sale of-
 Sale of Goods,
 Rendering of Services,
 Use by others, of an enterprise resources, yielding interest, royalties and dividends
Recognition :-The process of recording and reporting an item as an element of financial statement
Revenue Recognition :-Revenue Recognition is an accounting principle that outlines the specific conditions
under which revenue is recognized. In theory, there is a wide range of potential points for which revenue can be
recognized. Therefore, IFRS outlines the criteria for revenue recognition with customers. This guide will address
recognition principles for both IFRS and U.S. GAAP.
Revenue is gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities
of an enterprise
 From sale of goods,

 From rendering of services, and
 From the use by others of enterprise resources yielding interest, royalties and dividends
NON APPLICABILITY OF AS-9
 Revenue arising from Construction Contracts (AS-7)

 Revenue arising from hire-purchase, lease agreements (AS-19)
 Revenue arising from government grants and other similar subsidies (AS-12)
 Revenue of Insurance companies arising from insurance contracts
ITEMS NOT RECOGNIZED AS “REVENUE” AS PER AS-9
 Realized gains resulting fromthe disposal of, and unrealized gains resulting from the holding of, non-
current assets e.g. appreciation in the value of fixed assets;
 Unrealized holding gains resulting from the change in value of current assets, and the natural increases in
herds and agricultural and forest products;
 Realized or unrealized gains resulting from changes in foreign exchange rates and adjustments arising on
the translation of foreigncurrency financial statements;
 Realised gains resulting fromthe discharge of an obligation at less than its carrying amount;

 Unrealised gains resulting from the restatement of the carrying amount of an obligation.
REVENUE RECOGNITION AS PER AS-9

FROM SALE OF GOODS
Basic Conditions
 Property in goods is transferred from seller to buyer

 Significant risk and reward of ownership have been transferred to buyer
 No significant uncertainties exist regarding amount of sale
Additional Guidelines
 Revenue should be recognized when delivery is delayed at buyer’s request and ownership has been
transferred to the buyer
 Unless the installation process is very simple, revenue should not be recognized until customer accepts
the delivery and installation and inspection is complete
 In case of sale on approvable basis, no revenue shall be recognized until-
1. Goods are formally accepted by the buyer, or

2. Done any act of adopting the goods, or
3. Time period of rejection has elapsed, otherwise reasonable time has elapsed
 Consignment sale is not recognized until goods are sold to a third party
 Until cash is received by the seller or his agent, cash on delivery sales should not be recognized
 Sale/repurchase agreement i.e. where the seller agrees to repurchase the goods at the later date is a
financing agreement. Net cash flow shall be treated as interest
 In case of subscriptions and publications, revenue shall be deferred and recognized on straight line basis
or sale value of item delivered in relation to total sales value of items covered by subscription
FROM RENDERING SERVICES
Basic Conditions
 Measured either through Completed Service contract method or proportionate completion method
 No significant uncertainties regarding collection of amount of consideration at the time of performance of
service
Additional Guidelines
 Tuition fee should be recognized over the period of instruction

 Admission fees to any event should be recognized when event takes place, in case of multiple events
allocated to each event on rational basis
 Revenue from advertisement or commercial is recognized when it appears before public

 Commissions of insurance companies should be recognized on commencement of renewal date of related
policy
 Financial service can be provided in a single act or over a period of time and should be recognized
accordingly
 If membership fees only permits membership and for other services members are charged separately then
it should be recognized on receipt basis, if fee charged is for the services to be provided during the year
then it should be recognized on some systematic or rational basis.
USE OF ENTERPRISE RESOURCES BY OTHERS UNDER AS-9
Interest
 Charges for the use of cash resources or amount due

 Interest accrues mostly on time basis
 Determined by the amount outstanding and the rate applicable
 Discount or premium on debt securities are treated as they are accruing over the period to maturity
Royalties
 Charges for the use of intangible assets such as know-how, patents, copyrights or trademarks
 Accrued in accordance with the relevant terms of agreement unless on some other systematic and rational
basis, having regards to substance of transaction
Dividends
 Rewards from holding shares as investments

 Not recognized until the right to receive payment is not established
EFFECTS OF UNCERTAINTIES ON REVENUE RECOGNITION UNDER AS-9
 When the uncertainty to collectability arises at the time of raising claim, it may be appropriate to
recognize revenue only when it is reasonably certain that the ultimate collection will be made. Examples
escalation of price, export incentives, interest etc.
 When the uncertainty to collectability arises subsequent to the time of sale or rendering services, it may
be appropriate to make a separate provision to reflect uncertainty instead of making adjustment in
originally recorded amount.
 When consideration is not determinable within reasonable time limit, the recognition should be delayed.

UNIT – IV
Syllabus – Property, Plant & Equipment, Accounting for Amalgamations, Leases
PROPERTY, PLANT & EQUIPMENT(AS-10)
Formerly known as “Account Standard on Fixed Assets”
Property, Plant & Equipment -The property, plant, and equipment (PP&E) account, also known as tangible
fixed assets, represents the non-current, physical, illiquid assets that are expected to generate long-term economic
benefits for a firm including land, buildings, and machinery.
Property, Plants and Equipments are tangible items that-
 Are held for use in the production or supply of goods or services, for rental to others, or for administrative
purposes and,
 Are expected to be used during more than a period of twelve months.
In other words, PP&E are physical, tangible assets expected to generate economic benefits for a company for a
period of longer than one year. Examples of PP&E include land, buildings, and vehicles. Industries or businesses
that require a large number of fixed assets are described as capital intensive.
NON APPLICABILITY OF AS-10
AS-10 is not applicable to :-
 Biological Assets (Living Animal or Plant) Ex- Livestock, Cattles, Hens etc
 Bearer Plants ( Fruits or produce – Ex- Mango Tree)
 Mining, Oil, Natural Gas and Similar Assets
 Assets Covered under AS-19 (Leases)- however depreciation of assets covered under AS-19 will be as
per AS-10.
 For Valuation of Investment properties (covered under AS-13)- Cost basis model as per AS-10
Bearer Plants –Bearer Plant is a plant that-
 Is used in the production or supply of agricultural produce,

 It is expected to bear produce for more than a period of twelve months and
 Has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
Agricultural Produce–It is harvested product of biological assets.

RECOGNITION OF ASSET AS PER AS-10
The cost of property and P&E should be recognized as an asset only if:-
 It is apparent that the future economic benefits related to such asset would flow to the business; and
 The cost of such asset could be reliably measured.
MEASUREMENT OF COST OF ASSET
An enterprise can select the revaluation model or the cost model as the accounting policy and employ the same to
the entire class of its properties and P&E. According to the cost model, after recognizing the asset as an item of
property or plant and equipment, it should be carried at the cost less the accumulated depreciation and the
accumulated impairment losses (if any). As per revaluation model, once the asset is recognized and its fair value
could be measured reliably, then it must be carried at the revalued amount, which is the fair value of such asset at
the date of the revaluation as reduced any following accumulated depreciation and accumulated impairment losses
(if any). Revaluations must be done at regular intervals for ensuring that the carrying amount doesn’t differ much
from that which would be determined using the fair value at balance sheet date.
Carrying Amount – It is the amount at which an asset is recognized after deducting any accumulated
depreciation and accumulated impairment losses.
DEPRECIATION UNDER AS-10
 As per the standard, depreciation charge for every period must be recognized in the P/L Statement unless
it’s included in carrying the amount of any another asset. Depreciable amount of any asset should be
allocated on a methodical basis over the useful life of the asset.
 Every part of property or P&E (Plant and Equipment) whose cost is substantial with respect to the overall
cost of the item must be depreciated separately.
 The standard also prescribes, that the residual value and useful life of an asset must be reviewed at the end
of each financial year and, in case the expectations vary from the previous estimates, changes must be
accounted for as changes in accounting estimate as per Accounting Standard 5 – Net Profit or Loss for the
Period, Prior Period Items and Changes in Accounting Policies.
 The method of depreciation employed must reflect the pattern of future economic benefits of the asset
consumed by an enterprise. Various depreciation methods could be used for allocating the depreciable
amount of an asset on a methodical basis over the useful life of the asset. The methods include SLM
(Straight-line Method), Diminishing Balance Method or Units Of Production Method.

ACCOUNTING FOR AMALGAMATIONS(AS-14)
Amalgamation :-Amalgamation is defined as the combination of one or more companies into a new entity. It
includes:
 Two or more companies join to form a new company

 Absorption or blending of one by the other
Thereby, amalgamation includes absorption.However, one should remember that Amalgamation as its name
suggests, is nothing but two companies becoming one. On the other hand, Absorption is the process in which the
one powerful company takes control over the weaker company.
Generally, Amalgamation is done between two or more companies engaged in the same line of activity or has
some synergy in their operations.
Transferor Company means the company which is amalgamated into another company; while
Transfer Company means the company into which the transfer or company is amalgamated.
Existing companies A and B are wound up and a new company Amalgamation

C is formed to take over the businesses of A and B
Existing company A takes over the business of another existing Absorption

company B which is wound up
A New Company X is formed to take over the business of an External

existing company Y which is wound up. reconstruction
TYPES OF AMALGAMATION
1. AMALGAMATION IN THE NATURE OF MERGER
In this type of amalgamation, not only is the pooling of assets and liabilities is done but also of the shareholders’
interests and the businesses of these companies. In other words, all assets and liabilities of the transferor company
become that of the transfer company. The Conditions for Amalgamation in nature of merger-
(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and
liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (other than the equity shares already held therein, immediately before the amalgamation, by
the transferee company or its subsidiaries or their nominees) become equity shareholders of the
transferee company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor
company who agree to become equity shareholders 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.
(iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the
transferee company.
(v) No adjustment is 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 except to
ensure uniformity of accounting policies.
2. AMALGAMATION IN THE NATURE OF PURCHASE
This method is considered when the conditions for the amalgamation in the nature of merger are not satisfied.
Through this method, one company is acquired by another, and thereby the shareholders’ of the company which is
acquired normally do not continue to have proportionate share in the equity of the combined company or the
business of the company which is acquired is generally not intended to be continued.
If the purchase consideration exceeds the net assets value then the excess amount is recorded as the goodwill,
while if it is less than the net assets value it is recorded as the capital reserves.
NEED FOR AMALGAMATION
 To acquire cash resources

 Eliminate competition
 Tax savings
 Economies of large scale operations
 Increase shareholders value
 To reduce the degree of risk by diversification
 Managerial effectiveness
 To achieve growth and gain financially
PROCEDURE FOR AMALGAMATION
 The terms of amalgamation are finalized by the board of directors of the amalgamating companies.

 A scheme of amalgamation is prepared and submitted for approval to the respective High Court.
 Approval of the shareholders’ of the constituent companies is obtained followed by approval of SEBI.
 A new company is formed and shares are issued to the shareholders’ of the transferor company.
 The transferor company is then liquidated and all the assets and liabilities are taken over by the transferee
company.
ACCOUNTING OF AMALGAMATION
POOLING OF INTERESTS METHOD
Through this accounting method, the assets, liabilities and reserves of the transferor company are recorded by the
transferee company at their existing carrying amounts.
PURCHASE METHOD
In this method, the transfer company accounts for the amalgamation either by incorporating the assets and
liabilities at their existing carrying amounts or by allocating the consideration to individual assets and liabilities of
the transfer or company on the basis of their fair values at the date of amalgamation.
COMPUTATION OF PURCHASE CONSIDERATION
Consideration :- The consideration for the amalgamation may consist of securities, cash or other assets. In
determining the value of the consideration, an assessment is made of the fair value of its elements.
For computing purchase consideration, generally two methods are used:
(A) PURCHASE CONSIDERATION USING NET ASSET METHOD: Total of assets taken over and this
should be at fair values minus liabilities that are taken over at the agreed amounts.
Particulars Rs.
Agreed value of assets taken over XXX
Less: Agreed value of liabilities taken over XXX
Purchase Consideration XXX
AGREED VALUE- means the amount at which the transfer or company has agreed to sell and the transferee
company has agreed to take over a particular asset or liability.
(B) PURCHASE CONSIDERATION USING PAYMENTS METHOD: Total of consideration paid to both
equity and preference shareholders in various forms.

Example: A. Ltd takes over B. Ltd and for that it agreed to pay Rs 5,00,000 in cash. 4,00,000 equity shares of Rs
10 each fully paid up at an agreed value of Rs 15 per share. The Purchase consideration will be calculated as
follows:
Particulars Rs.
Cash 5,00,000
4,00,000 equity shares of Rs10 fully paid up at Rs15 per share 60,00,000
Purchase Consideration 65,00,000
ADVANTAGES OF AMALGAMATION
 Competition between the companies gets eliminated

 R&D facilities are increased
 Operating cost can be reduced
 Stability in the prices of the goods is maintained
DISDVANTAGES OF AMALGAMATION
 Amalgamation may lead to elimination of healthy competition

 Reduction of employees may take place
 There could be additional debt to pay
 Business combination could lead to monopoly in the market, which is not always positive
 The goodwill and identity of the old company is lost
RECENTLY ANNOUNCED AMALGAMATIONS
One of the recent amalgamations announced on the corporate front is of -
 PVR Ltd. Multiplex operator PVR Ltd has approved an amalgamation scheme between Bijli Holdings Pvt
Ltd and itself to simplify PVR’s shareholding structure. As per the management, the purpose of the
amalgamation is to simplify the shareholding structure of PVR and reduction of shareholding tiers. It also
envisages demonstrating Bijli Holdings’ direct engagement with PVR. After the amalgamation, individual
promoters will directly hold shares in PVR and there will be no change in the total promoters’
shareholding of PVR.
Other examples of Amalgamations-
 Maruti Motors operating in India and Suzuki based in Japan amalgamated to form a new company called
Maruti Suzuki (India) Limited.

 Gujarat Gas Ltd (GGL) is an amalgamation of Gujarat Gas Company Ltd (GGCL) and GSPC Gas.
 Satyam Computers and Tech Mahindra Ltd
 Tata Sons and the AIA group of Hongkong amalgamated to form Tata AIG Life Insurance.
LEASES(AS-19)
As per AS-19, A lease is a transaction whereby an agreement is entered into by the lessor with the lessee for the
right to use an asset by the lessee in return for a payment or series of payments for an agreed period of time.
In other word,A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of
payments the right to use an asset for an agreed period of time.
LESSOR– The Lessor is the owner of the asset and the ownership remains with him, however the right to use
theasset is transferred to the Lesse.
LESSE – Lesse is the party who takes the asset for a specified period for which he has to pay lease rentals
throughout the lease period.
ADVANTAGES OF LEASE FINANCING
 It helps is reducing the financial burden on lessee.

 It is a device of financing the cost of an asset.
 It is an important financial service as it provides benefit to both parties.
PARTIES INVOLVED IN LEASE FINANCING
(i) Asset – The asset, property, equipment is the subject matter of the contract. It may be an automobile, plant and
machinery, equipment, land and building, factory, business, aircraft etc. Ownership of asset is separated from use
of asset during the lease period.

(ii) Term Period – The time period for which the asset is taken on lease is called lease period. Every lease has a
specified or definite period after which it expires. On the basis of contract between the lessor and lessee, the lease
period may be of two types:
(iv) Consideration – Lease Financing involves consideration in form of lease rentals to be paid by the lessee to
the lessor for a specified term period. The amount of lease rental is decided by taking into account –
 The cost of investment

 Cost of repair and maintenance
 Depreciation
 Taxes
 And adjusted value of cash flows (time value of money).
TYPES OF LEASES NOT COVERED UNDER (AS-19)
AS-19 is not applicable to:-
(a) Lease agreements for exploring or using natural resource. Ex Oil, gas, timber, metals and other mineral rights
(b) Licensing agreements. Ex Motion picture films, video recordings, plays, manuscripts, patents and copyrights
(c) Lease agreements for use land
TYPES OF LEASES
There are two types of leases:-
1. Finance Lease
2. Operating Lease
Finance / Capital Lease- A financial Lease involves payment of lease rentals over one obligatory, non-
cancelable lease period sufficient in total to amortize the capital invested by the lessor and also leave some profit.
It involves the transfer of all risks and rewards associated with the ownership of the asset to the lessee, but the
title of ownership may or may not be transferred after the completion of lease period. Financial Lease may be of
two types:
 Full pay out lease – A Full Payout Lease covers the total value/cost of the asset through Lease rentals
and scrap value. The lease period usually covers the entire economic life of the asset.
 True lease – A true lease only involves only taxation benefits for the lessor as he bears all the risks and
rewards associated with ownership of asset and the lessee only gets the right to use the asset.Eg. Ships, air
crafts, railway wagon, land, heavy machinery.
Operating Lease: An Operating lease has the following features:-

 It does not transfer all the risks and rewards associated with ownership of the asset
 The cost of asset is not fully amortized during the primary lease period
 It consists of a cancellation clause
 Responsibility of maintenance and repair, insurance lies with the lessor
 The asset is provided on lease for a short period only, usually less than the useful life of the asset
 It is a high risk lease
 The Lease can be renewed after the expiry of term period
 Eg. computer operator, taxi, printers.
ACCOUNTING IN THE BOOKS OF LESSEE IN CASE OF FINANCE LEASE
1. At the inception of lease, lessee will recognize the lease as assets or liability at an amount equal to the
fair value of leased assets
2. Apportion the lease payments into finance charge and reduction in outstanding liability
3. Allocate finance charge to the periods during lease term
4. Pass journal entry for depreciation
DIFFERENCE BETWEEN OPERATING LEASE AND FINANCIAL LEASE:
ON THE BASIS OF OPERATING LEASE FINANCING LEASE

More than one lease contract is
The number of lease A single lessee is contracted under a single
undertaken and there are several
contracts agreement
lessees
The cost of asset is not fully
Fully pay out lease – The asset is amortized
Amortization of cost of amortized because the asset is
through a single lease as it is provided for a
asset leased many times with different
long term
lessees over a period of time
Equipment or asset is for general
Specific Use Asset is for the specific use of the lessee
purpose use
Risk associated with ownership is
It is transferred to the lessee and the lessor
Ownership risk borne by the lessor and the lessee
only retains the title of ownership
only gets the right to use the asset
Undertaken for a short time period
Lease period Long time, entire economic life of the asset
hours or days
Can be canceled at any point before
It is not revocable in the primary lease
Cancellation clause the expiry of the lease period by
period
notice to the lessor
Risk of obsolesce Lessor has to bear the risk Lessee has to bear the risk
Specialized services The lessor is specialized in services Lessor is a financial investor and does not

of handling the asset or equip and provide any additional services
maintaining it
DISCLOSURE IN CASE OF FINANCE LEASE
1. Assets acquired on Lease should be shown separately
2. For each leased assets, show net carrying amount at the balance sheet date
3. Provide reconciliation between Minimum Lease Payment at balance sheet date and their present value
4. Disclose total of minimum lease payment at balance sheet date and their present value for:
a)Not later than one year

b) Later than one year but not later than five year
c) Later than five years
5. Future minimum sublease payment expected to receive at balance sheet date
6. General description of lessee significant leasing arrangements

UNIT- V
Syllabus –Earning Per Share, Consolidated Financial Statements of Holding Companies, Provisions, Contingent
Liabilities and Contingent Assets.
EARNING PER SHARE(AS-20)
EARNINGS PER SHARE (EPS) is a financial ratio that provides information regarding earnings available on
each equity share held in a company.
This ratio acts as an important financial tool to improve the comparability between two or more companies, as
well as between two or more accounting periods.
PROCESS OF CALCULATION OF EPS AS PER AS- 20
There are two types of EPS which are to be reported by enterprises on the face of the statement of profit & loss
account even if the amounts disclosed are negative (a loss per share).
 Basic EPS
 Diluted EPS
1. BASIC EPS - Net profit or loss attributable to equity shareholders / Weighted average number of outstanding
equity shares
Earnings – Basic (Numerator)
Net profit or loss for the period as defined under AS-5 which is shown here:
Particulars Amount

Earnings before tax XXX
(+) extraordinary items (income) XXX
(-) extraordinary items (expenses) (XXX)
(-) tax attributable to the period (XXX)
(-) preference dividend * (XXX)
Profit for the purpose of calculating EPS XXX
*the preference dividend deducted for the period is:

(a) the amount of any preference dividends on non-cumulative preference shares provided for the period; and
(b) the full amount of the required preference dividends for cumulative preference shares for the period, whether
or not the dividends have been provided for. The amount of preference dividends for the period does not include
the amount of any preference dividends for cumulative preference shares paid or declared during the current
period in respect of previous periods.
Per share – Basic (Denominator)
For calculating basic earnings per share, the number of equity shares should be the weighted average number of
equity shares outstanding during the period.
The time-weighting factor = Number of days for which the specified share is outstanding / Total number of days
in the period
DILUTED EPS - For calculating diluted earnings per share, the net profit or loss for the period attributable to
equity shareholders and the weighted average number of shares outstanding during the period should be adjusted
for the effects of all dilutive potential equity shares.
Earnings – Diluted (Numerator)
For calculating Diluted EPS, the numerator used for basic EPS should be adjusted by the following, after
considering any attributable change in tax expense for the period:
 any dividends on dilutive potential equity shares which have been deducted in arriving numerator of basic
EPS;
 interest recognized in the period for the dilutive potential equity shares; and
 any other changes in expenses or income that would result from the conversion of the dilutive potential
equity shares.
Per share – Diluted (Denominator)

For calculating diluted earnings per share, the number of equity shares should be the aggregate of the weighted
average number of equity shares which would be issued on the conversion of all the dilutive potential equity
shares into equity shares.
Diluted earning per share is calculated in the case of potential equity share like convertible debentures,
convertible preference shares, options etc. Potential equity shares are diluted if their conversion into equity shares
reduces the earning per share and if it increases, then they are considered as anti-dilutive.
Example:
Particulars Amount
Net profit for the current year Rs. 1,00,00,000
Number of equity shares outstanding 50,00,000
Basic EPS 1,00,00,000/50,00,000 =
2
Number of 12% convertible debentures of Rs. 100 1,00,000
each
Each debenture is convertible into 10 equity shares
Interest expense for the current year Rs. 12,00,000
Tax relating to interest expense (30%) Rs. 3,60,000
Particulars Amount
Adjusted Net profit for the current Rs. (1,00,00,000 + 12,00,000 –
year 3,60,000) = Rs. 1,08,40,000
Number of equity shares resulting 10,00,000
from conversion of debentures
Number of equity shares used to 50,00,000 + 10,00,000 = 60,00,000
calculate diluted earnings per share
Diluted earnings per share 1,08,40,000/60,00,000 = Rs. 1.81
CONSOLIDATED FINANCIAL STATEMENTS(AS-21)
Consolidated financial statements are the financial statements of a group of entities that are presented as being
those of a single economic entity. These statements are useful for reviewing the financial position and results of
an entire group of commonly-owned businesses. Otherwise, reviewing the results of individual businesses within
the group does not give an indication of the financial health of the group as a whole.
The key entities used in the construction of consolidated statements are:

 A group is a parent entity and all of its subsidiaries
 A subsidiary is an entity that is controlled by a parent company
Thus, consolidated financial statements are the combined financials for a parent company and its subsidiaries. It is
also possible to have consolidated financial statements for a portion of a group of companies, such as for a
subsidiary and those other entities owned by the subsidiary.

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ACCOUNTING THEORY & PRACTICES (NOTES)

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Role of Accounting Theory :

(i) Evaluating current financial accounting practice and

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The adequacy of disclosure -

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HUMAN INFORMATION PROCESSING APPROACH

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

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Sr No. Category Accounting Main Points

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ETHICAL ISSUES IN ACCOUNTING

Fraudulent Financial Reporting

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FINANCIAL REPORTING (F.R)

OBJECTIVES / PURPOSE OF FINANCIAL REPORTING

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IMPORTANCE OF FINANCIAL REPORTING

INTERNAL CONTROL PROCEDURE IN ACCOUNTING

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ACCOUNTING STANDARDS (AS)

NATURE OF ACCOUNTING STANDARDS

(I) SERVE AS A GUIDE TO THE ACCOUNTANTS

(II) ACT AS A DICTATOR

(III) SERVE AS A SERVICE PROVIDER

(IV) ACT AS A HARMONIZER

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For the following purposes, accounting standards are needed:

(I) FOR BRINGING UNIFORMITY IN ACCOUNTING METHODS

(II) FOR IMPROVING THE RELIABILITY OF THE FINANCIAL STATEMENTS

(III) SIMPLIFY THE ACCOUNTING INFORMATION

(IV) PREVENTS FRAUDS AND MANIPULATIONS

(V) HELPS AUDITORS

The enterprises are classified and labeled as-

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Level III Enterprises:

APPLICABILITY OF ACCOUNTING STANDARDS

Accounting Standards Level Level Level

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2. AS 20 Earnings Per Share

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3. AS 29, Provisions, Contingent Liabilities, and Contingent Assets

Paragraph 67 does not apply to Level II enterprises

SETTING PROCEDURE – ACCOUNTING STANDARDS

ACCOUNTING STANDARD BOARD (ASB)

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INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

IFRS IFRS Standard

1 First-time Adoption of International Financial Reporting Standards

5 Non-current Assets Held for Sale and Discontinued Operations

6 Exploration for and Evaluation of Mineral Resources

7 Financial Instruments: Disclosures

10 Consolidated Financial Statements