Group 1 AS Notes

Accounting Standard - 1 DISCLOSURE OF ACCOUNTING POLICIES
Objective of AS 1
➢ To facilitate better understanding of financial statements.

➢ To facilitate meaningful comparison between financial statements of different enterprises
Meaning of Accounting Policies
▪ Specific accounting principles &

▪ Methods of applying those principles adopted by the enterprise
▪ In preparation of financial statements
Valuation of Fixed Assets, Methods of Depreciation, Valuation of Inventories are the different areas where
different accounting policies can be used.
AS 1 is mandatory in nature for
ALL ENTERPRISE
www.cavidya.com AS 1.1 © Anandh Bhanggariya 96323 96323

Considerations in the Selection of Accounting Policies

CONSIDERATION
Primary Secondary
Prudence Substance over form Materiality

The financial statements should
represent a true and fair view of the ✓profits are not The accounting treatment & ✓Financial
state of affairs of the enterprise anticipated presentation of transactions & statements should
✓Provision is events in financial statements disclose all
made for all ✓should be governed by their ‘Material Items’
known substance &
liabilities and ✓not merely by their legal form
Fundamental Accounting Assumption losses
1) Going Concern The items the knowledge of which might

2) Consistency If they are not followed, disclosure is required in influence the decisions of the user of the
3) Accrual financial statements
financial statement.
www.cavidya.com AS 1.2 Cavidya 84218 84218, 75887 75887

Going Concern Concept

✓ Enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations.
✓ Assets are shown at books values (i.e. On cost less depreciation basis).
✓ Expenses and incomes related to future period are carried forward and only the incomes or expenses related to
current year are considered while calculating profit and loss.
Consistency
✓ The accounting policies are followed consistently from one period to another.
✓ Improves comparability of financial statements through time.
Any change in the accounting policy which has
• Material effect in the current period or in the subsequent period - disclosed to the extent it is ascertainable.
• If the amount is not ascertainable - the fact should be disclosed.
Accruals ✓ Accrual means recognition of revenue and costs as they are earned or incurred and not as money is received or paid.
✓ The actual date of payment of cash is immaterial for the purpose of recognition

Disclosures of Accounting Policies
✓ All significant accounting policies adopted should be disclosed
✓ The disclosure should form part of the financial statements
✓ Any change in the accounting policies which has a material effect in the current
period should be disclosed along with amount of effect
✓ If fundamental accounting assumptions is not followed, the fact should be disclosed
✓ Disclosure of accounting policies, or changes therein cannot rectify wrong or inappropriate accounting policies
followed.

Accounting Standard - 2 VA L U AT I O N O F I N V E N T O R I E S
Objective of AS 2
➢ Specifies the principals for valuing the inventory

➢ Disclosure of the specific policies adopted by the management for the valuation of inventory
Applicability
▪ This statement should be applied in accounting for inventories other than

▪ WIP under construction contract
▪ WIP arising in case of service providers.
▪ Shares, debentures and other financial instruments held as stock-in-trade;
▪ inventories of livestock, agricultural and forest products, and mineral oils, ores and gases ( valued at net realisable value)

According to AS -2
Inventories are assets

➢ Held for sale in the ordinary course of business (Finished Goods)
➢ Used in the process of production for such sale (WIP)
➢ Used in the form of materials or supplies to be consumed in the production process or in the rendering of
services (Raw Material)
The valuation of inventory is crucial because of its Inventory should be valued at lower of
direct impact on profit/loss for an accounting period COST NET REALISABLE VALUE
To ignore the anticipated profit
Value of Value of Cost

Profits
Closing Stock of Goods Sold

Measurement of Inventories COST OF INVENTORY
Raw Materials Finished Goods and Work in progress
Lower of following
At Cost (If finished goods are sold at or
above cost), otherwise at replacement cost
Cost Net Realizable Value
Cost of purchase Realizable value less

Cost of conversion Other costs
Selling Expenses less
estimated cost of
• Purchase price • Refer Chart below • Tax payable on completion
• Import duty & tax manufacturing of goods, if
• freight inwards and other any Cost excluded from the
valuation of inventories
expenditure directly • Customs duties on imported
• Abnormal costs
attributable to the acquisition goods lying in bonded • Storage costs
warehouse • Administrative costs
• Cost of designing product for • Selling & distribution
Raw materials and WIP are not for sale and hence the NRV specific customers costs
cannot be estimated. They needs to be valued at cost. • Borrowing costs
• Exchange Differences.

CONVERSION COST
Factory Overheads Direct labour Joint Cost
Fixed Variable Main/Joint*** By Products
Measured at
At Normal At actual At actual Sale Value at Sale Value at NRV. This NRV is
Capacity* Production** Production Separation Completion deducted from
cost of main /
Joint products
* When actual production is almost equal or lower than normal capacity.

** When actual production is higher than normal capacity.
*** Allocation at reasonable and consistent basis.

Borrowing Cost
As per AS 16, for inventories that are
Interest and other borrowing costs are not usually considered as part of inventories. Except qualifying assets, any directly
attributable borrowing costs (for
acquisition, construction or production)
Net Realisable Value should be capitalized as part of their cost
Net Realisable Value = Estimated selling price in the ordinary course of business -
estimated costs of completion - the estimated costs necessary to make the sale.
Cost Formula COST FORMULA
Specific Identification Method Where specific identification method is not applicable When it is impractical to calculate the cost
FIFO Weighted average cost Standard cost Retail Method

Disclosures
▪ Accounting policies adopting measuring inventories
▪ Cost formula used
▪ Total carrying amount of inventories
▪ Classification of the inventories into raw materials and components, work in progress, finished goods, stores
and spares, and loose tools

Accounting Standard - 3 C A S H F L O W S TAT E M E N T
Objective of AS 3
➢ Cash flow statement exhibits the flow of incoming and outgoing cash
➢ Assess the ability of enterprise to generate cash and to utilize the cash
➢ Tool for assessing the liquidity and solvency of the enterprise
Applicability
▪ This standard applies to the following entities
▪ Which have a turnover of more than Rs. 50 crores in a preceding financial year
▪ Borrowing more than Rs. 10 crores at any time during the immediately preceding accounting period.
▪ Financial institution
▪ Banks including co-operative banks
▪ Insurance companies
▪ Holding and subsidiary enterprises of any of the above at any time during the accounting period.

Cash and Cash Equivalents
▪ Held for the purpose of meeting short-term cash commitments

▪ Readily convertible in cash and are subject to an insignificant risk of changes in value.
▪ Investments in shares are excluded unless they are, in substance, cash equivalents
Presentation of Cash Flow Statements

▪ An enterprise presents its cash flows from operating, Investing and
Cash movement under three different heads
financing activities in a manner which is most appropriate to its
business
Operating Investing Financing ▪ A single transaction may include cash flows that are classified
Activities Activities Activities differently.

Operating activity
➢ Cash flow statement exhibits the flow of incoming and outgoing cash
➢ Assess the ability of enterprise to generate cash and to utilize the cash
➢ Tool for assessing the liquidity and solvency of the enterprise
Elements of Operating Activity
➢ Cash receipts from sale of goods and rendering services.

➢ Cash receipts from royalty, fees, commissions and other revenue.
➢ Cash payments to suppliers for goods and services.
➢ Cash payments to and on behalf of employees.
➢ Cash receipts & payments by an insurance enterprise for premiums ,claims, annuities etc.
➢ Cash payments and refunds of income taxes
➢ Cash receipts and payments relating to contracts held for dealing or trading purposes.
➢ Cash flow from dealing in securities when enterprise holds securities for such purpose.

Investment activity
➢ Acquisition and disposal of long-term assets and other investments not included in cash equivalents
Elements of Investing Activity
➢ Cash payments for acquisition of fixed assets including intangibles.

➢ Cash receipts from disposal of fixed assets.
➢ Cash payments to acquire shares, warrants or debt instruments of other enterprise.
➢ Cash receipts from disposal of shares, warrants or debt instruments of other enterprise.
➢ Cash advances and loans made to third parties.
➢ Cash receipts from repayments of advances and loans made to third parties.
➢ Cash payments for future, forward, option and swap contracts.
➢ Cash receipts from future, forward, option and swap contracts.

Financing Activity
➢ Activities which results in changes in the size and composition of the owners capital and borrowing of
organization.
Elements of Financing Activity
➢ Cash proceeds from issuing shares or other equity instruments.

➢ Cash payments to owners to acquire or redeem the enterprise’s shares.
➢ Cash proceeds from issuing debentures, & other short & long term borrowings.
➢ Cash repayments of amounts borrowed.
➢ Cash payments by a lease for the reduction of the outstanding liability relating to a finance lease.
Investing and financing transactions that do not require the use of

cash equivalents should be excluded from a cash flow statement.

Foreign currency cash flows
➢ Transactions in a foreign currency should be recorded in an enterprise's reporting currency.

➢ A rate that approximates the actual rate may be used if the result is substantially the same.
➢ The effect of changes in exchange rates on cash and cash equivalents held in a foreign currency should be
reported as a separate part of the reconciliation of the changes in cash and cash equivalents during the period.
Extraordinary Item Income taxes
➢ classified in operating, investing and financing activity. If such ➢ Operating activities unless they can be
categorization is not possible then show it in operating activity. specifically identified with financing &
Sale of non – current asset investing activity.
➢ Investing activity.
Acquisitions and disposal of
subsidiaries and other business units: ➢ Presented separately and classified as investing activities.

INTEREST AND DIVIDEND
Financial Enterprise Other Enterprise
Interest Paid Interest Received Dividend Received Interest Paid Interest & Dividend Received
Operating Activities Financing Activity Investing Activity
• Dividend paid should be classified as cash flow from financing activities

Disclosures
➢ An enterprise should disclose the component of cash and cash equivalent and should present a reconciliation of
the amount in the cash flow statement with the equivalent items reported.
➢ An enterprise should disclose amount of significant cash and cash equivalent balance held by enterprise that are
not available for use by it with explanation of management

Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT
Objective of AS 10
Information about
Prescribe Investment in PPE

Help the User of
OBJECTIVES OF “Accounting
Financial Statements to
AS 10 (REVISED) Treatment for
understand
PPE”
Changes in such
Investment
Scope
✓ This Standard should be applied in accounting for property, plant and equipment except when another Accounting Standard
requires or permits a different accounting treatment.

Scope of Standard
This standard does not apply to:

✓ Biological assets related to agricultural activity other than bearer plants.
✓ Wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oils, natural gas and
similar non-regenerative resources.
Use in Production
Definitions or Supply of
Goods or Services
Condition 1: For rental to

Held for others
PPE For Administrative

(TANGIBLE ITEMS) purposes
Condition 2: Used for more

Expected to be than 12 month

Recognition Criteria
The cost of an item of property, plant and equipment should be recognised as an asset if, and only if:
✓ it is probable that future economic benefits associated with the item will flow to the enterprise and
✓ Cost of the item can be measured reliably.
RECOGNITION OF SPARE PARTS AND STAND-BY EQUIPMENT
If the recognition criteria is met If recognition criteria is not satisfied

Accounted as per AS 10 (Revised) Accounted as per AS 2 ‘Valuation for Inventories’

Measurement at Recognition
An item of property, plant and equipment that qualifies for recognition as an asset should be measured at its cost.
The cost of PPE includes;

Initial Cost: cost incurred initially to acquire or COST OF AN ITEM OF PPE
construct the PPE
Subsequent Cost: costs incurred subsequently to
add to, replace part of, or service it. Includes Excludes
Purchase Price Any Directly Decommissioning,

Attributable Costs Restoration and 1. Cost of opening a new facility or
similar Liabilities business (Such as, Inauguration costs)
1. Costs of employee benefits (AS 15) arising directly from the construction or 2. Costs of introducing a new product or
acquisition of the item of PPE service (including coasts of
advertising and promotional
2. Costs of site preparation activities)
3. Initial delivery and handling costs
3. Costs of conducting business in a new
4. Installation and assembly costs location or with a new class of
5.Costs of testing whether the asset is functioning properly, after deducting the customer (including costs of staff
training)
net proceeds from selling any items produced while bringing the asset to that
4. Administration and other general
location and condition (such as samples produced when testing equipment) overhead costs
6. Professional fees

Self Constructed Assets

▪ Same principles as for an acquired asset.
▪ The cost of the asset is usually the same as the cost of constructing an asset for sale.
▪ Any internal profits are eliminated in arriving at such costs.
▪ The cost of abnormal amounts of wasted material, labour, or other resources incurred in self-constructing an asset is not included in the cost
▪ Any borrowing cost which can be capitalized can be included in the cost of PPE.
▪ Bearer plants are accounted for in the same way as self-constructed items of PPE before they are in the location and condition necessary to be capable of operating in the
manner intended by management.
Measurement of cost
▪ If payment is deferred beyond normal credit terms:
Total payment minus Cash price equivalent
o is recognised as an interest expense over the period of credit
o unless such interest is capitalised in accordance with AS 16
▪ PPE acquired in Exchange for a Non-monetary Asset or Assets or A combination of Monetary and Non-monetary Assets:
Cost of such an item of PPE is measured at fair value unless:
o Exchange transaction lacks commercial substance; Or
o Fair value of neither the asset(s) received nor the asset(s) given up is reliably measurable

MEASUREMENT AFTER RECOGNITION
Cost Model Revaluation Model
Fair value at the date of the XXX

revaluation
Less: Any subsequent accumulated (XXX)
Cost- Any Accumulated Depreciation- depreciation
Any Accumulated Impairment losses
Less: Any subsequent accumulated (XXX)
impairment losses
Carrying value XXX

Revaluation
▪ If an item of PPE is revalued the entire class of PPE to which this asset belongs should be revalued.
Frequency of Revaluations
(Sufficient Regularity)
Items of PPE experience Items of PPE with only
significant and volatile changes insignificant changes in Fair
in Fair value value
Annual revaluation should be Revaluation should be done at
done. an interval of 3 or 5 years

Accounting treatment Revaluation

REVALUATION
Increase Decrease
Credited Directly to Exception: When it is Charged to the Exception: When it is

owner’s interests under subsequently statement of profit subsequently
the heading of Increased (Initially and loss Decreased (Initially
Revaluation surplus Decreased) Increased)
Recognised in the statement of profit

Decrease should be debited
and loss to the extent that it reverses
directly to owner’s interests
a revaluation decrease of the same
under the heading of
asset previously recognised in the
Revaluation surplus to the
statement of profit and loss
extent of any credit balance
existing in the Revaluation
surplus in respect of that asset

DEPRECIATION
▪ Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted
for cost, less its residual value.
Component cost approach is to be followed - i.e., Each part of an item of property, plant and equipment with a cost that is significant in relation to the
total cost of the item should be depreciated separately.
Methods of Depreciation
▪ The depreciation method used should reflect the pattern in which the future economic benefits of the asset are expected to be consumed by the enterprise.
METHODS OF DEPRECIATION
Straight line Method Diminishing Balance Method Units of Production Method

Results in a constant Results in a decreasing Results in a charge based
charge over the useful charge over the useful on the excepted use or
life if the residual value life output
of the asset does not
change

Review of Residual Value, Useful life & Method of Depreciation

▪ AS 10 (Revised) required that the residual value, useful life and method of depreciation used should be reviewed at least at each financial year.
▪ In case of method of depreciation, if there has been a significant change in the expected pattern of consumption of the future economic benefits
embodied in the asset, the method should be changed to reflect the changed pattern. Such a change should be accounted for as a change in an
accounting estimate in accordance with AS 5.
▪ In case of residual value and useful life, , if expectations differ from previous estimates, the change(s) should be accounted for as a change in an
accounting estimate in accordance with AS 5.
Commencement of period for charging Depreciation
▪ Depreciation of an asset begins when it is available for use
Cessesation of Depreciation
1. Depreciation ceases to be charged when asset’s residual value exceeds its carrying amount
2. Depreciation of an asset ceases at the earlier of:
• The date that the asset is retired from active use and is held for disposal,and
• The date that the asset is derecognised

IMPAIRMENT
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
To determine whether an item of property, plant and equipment is impaired, an enterprise applies AS 28, Impairment of Assets.
Compensation from third parties for items of property, plant and equipment that were impaired, lost or given up should be included in the statement of
profit and loss when the compensation becomes receivable.
RETIREMENTS
▪ Items of PPE retired from active use and held for disposal should be stated at the lower of their carrying amount and net realisable value.
▪ Any write-down in this regard should be recognised immediately in the statement of profit and loss.

De-Recognition
The carrying amount of an item of PPE should be derecognised:
• On disposal
o By sale
o By entering into a finance lease, or
o By donation, Or
• When no future economic benefits are expected from its use or disposal
Accounting Treatment:
▪ Gain or loss arising from de-recognition of an item of PPE should be included in the Statement of Profit and Loss.
Gain or loss arising from de-recognition of an item of PPE
= Net disposal proceeds (if any) - Carrying Amount of the item

Note: Gains should not be classified as revenue, as defined in AS 9 ‘Revenue Recognition’

Important Disclosure Requirements

The financial statements should disclose, for each class of property, plant and equipment:
• The measurement bases (i.e., cost model or revaluation model) used for determining the gross carrying amount.
• The depreciation methods used.
• The useful lives or the depreciation rates used.
• The gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period.
A reconciliation of the carrying amount at the beginning and end of the period showing:
1. additions;
2. assets retired from active use and held for disposal;
3. acquisitions through business combinations ;
4. increases or decreases resulting from revaluations and from impairment losses recognised or reversed directly in revaluation surplus in accordance with AS 28;
5. impairment losses recognised in the statement of profit and loss in accordance with AS 28;
6. impairment losses reversed in the statement of profit and loss in accordance with AS 28;
7. depreciation;
8. the net exchange differences arising on the translation of the financial statements of a non-integral foreign operation in accordance with AS 11, The Effects of Changes in
Foreign Exchange Rates; and
9. other changes.

The financial statements should also disclose:

the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities;
the amount of expenditure recognised in the carrying amount of an item of property, plant and equipment in the course of its construction;
the amount of contractual commitments for the acquisition of property, plant and equipment;
if it is not disclosed separately on the face of the statement of profit and loss, the amount of compensation from third parties for items of property, plant
and equipment that were impaired, lost or given up that is included in the statement of profit and loss; and
the amount of assets retired from active use and held for disposal.
If items of property, plant and equipment are stated at revalued amounts, the following should be disclosed:
the effective date of the revaluation;
whether an independent valuer was involved;
the methods and significant assumptions applied in estimating fair values of the items;
the extent to which fair values of the items were determined directly by reference to observable prices in an active market or recent market transactions
on arm’s length terms or were estimated using other valuation techniques; and
the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders.

Accounting Standard - 11 T H E E F F E C T O F C H A N G E S I N F O R E I G N E X C H A N G E R AT E
Objective of AS 11
✓ To Prescribe the selection of exchange rate for foreign currency transaction and operations
✓ To Prescribe the treatment of effect of change in exchange rates.
Applies to…..
• In accounting for transaction in foreign currency.
• In translating the financial statement of foreign operations – Integral as well as non-integral.
• Forward exchange contracts.
Not Applies to…..

• Re- statement of enterprise financial statements from its reporting currency into another currency
• The presentation in cash flow statement
• Exchange differences arising from foreign currency borrowings to the extent of adjustment to interest cost.

Important Definitions
Reporting Currency Reporting currency is the currency used in presenting the financial statements.
Foreign Currency Currency other than reporting Currency is called foreign currency
Exchange Rate The rate at which foreign currency is converted into reporting currency or vice versa.
Average Rate It is the mean of exchange rate in force during the period. Period may be week, fortnight, months, etc.
Forward Rate Agreed Exchange rate between two parties for exchange of two currencies at a specified future date.
Closing Rate Exchange rate at the balance sheet date.
Foreign Operations Operational activities conducted in a country other than the country of the reporting enterprises by the reporting
enterprises.
Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amount of
Monetary Items
money. For example -cash, receivable and payable.
Non-monetary items are assets and liabilities other than monetary items. For example, fixed assets, inventories, and
Non-Monetary Items investment in equity shares.
Transactions denominated in a foreign currency or require settlement in foreign currency are called as Foreign
Foreign Currency Transactions Currency Transactions

Transactions are classified as….
Foreign Currency Transactions Foreign Operations Forward Exchange Contract
✓ Buying or selling the goods or ✓ Foreign branch ✓ For managing risk/hedging.

services. ✓ An associate ✓ For trading and speculation
✓ Lending & borrowing in foreign ✓ Joint venture
currency. ✓ Foreign subsidiary
✓ Acquisition & disposition of
asset in foreign currency.
Initial Recognition of Foreign Currency Transactions
• Alternatively average rate for a week or a month can be used if there is no significant fluctuation in the exchange rate.
• Transactions are recorded by applying an exchange rate between the reporting currency and the foreign currency at the date of transaction.

Valuation at the Balance Sheet Date FOREIGN CURRENCY TRANSACTIONS
Monetary items Non-Monetary items
Monetary items are Debtors, Creditors, Cash, Loans etc. Items Carried at Items Carried at
Historical Cost Fair Value
These are converted at closing exchange difference rate.
i.e. exchange rates on balance sheet date. Fixed assets, long term Non-monetary items
investments for which such as inventory ,
There can be exchange fluctuation gain or loss, which is transactions are made in current investment for
the difference of the closing exchange rate and foreign currency are which transactions are
reported at the actual made in foreign
exchange rate used for initial recognition. rate used for initial currency which are
recognition. carried at fair value.
Generally fair value is determined at the balance sheet date.

Therefore conversion is made using exchange rate of balance
sheet date.

Treatment of Exchange difference

Reasons for exchange difference
Reported at different rate from the rate at which it is initially recorded.
Transactions are settled at a rate different from the one taken for the reporting in the last financial statement
Transaction, monetary or non-monetary item being settled at a rate different from the rate at which it is initially recorded
Accounting Treatment of Contingent Liability
Contingent Liability
These liabilities are reported at the exchange rate of the balance sheet date.

FOREIGN CURRENCY TRANSACTIONS
Integral Foreign Operations Non- Integral Foreign Operations
The operations which are not “integral foreign operations”

A foreign operation which are
carried out as if it were extension
✓ Foreign operation activities are carried independently.
of the reporting enterprise. ✓ Transactions with the reporting enterprise are not a high proportion
of the foreign operation’s activities.
✓ The activities of the foreign operation are financed mainly from its
own operations or local borrowings.
Activities Translation of accounts
✓ Costs of labour, material and other components of the foreign
operation’s products or services are primarily paid or settled in the
Transactions of local currency.
• Dependent Branches
foreign branch are ✓ The foreign operation’s sales are mainly in currencies other than the
• Sales Depot reporting currency.
• Foreign arm which produces translated as if all
these transactions had ✓ Cash flows of the reporting enterprise are insulated from the day-
raw material and transfers it to to-day activities of the foreign operation.
head office been entered into by
✓ There is an active local sales market for the foreign operation’s
• Foreign operations only raises the reporting
products.
finance to help reporting enterprise. ✓ Sales prices for the foreign operation’s products are not responsive
enterprise to changes in exchange rates.

Translation of Financial Statement Non Integral Foreign

• The assets and liabilities, both monetary and non-monetary, of the non-integral foreign operation should be translated at the
closing rate;
• Income and expense items of the non-integral foreign operation should be translated at exchange rates at the dates of the
transactions, and
• All resulting exchange differences should be accumulated in a foreign currency translation reserve until the disposal of the net
investment.
Translation of accounts of Non-Integral Foreign Operations

Non-Integral Foreign operations
Balance sheet item Items of incomes Resulting Exchange Contingent Liability
and Expenses difference
For both Monetary and Actual Exchange rate At closing rate

Non-monetary items – on the date of
Apply closing rates transactions Accumulated in a “Foreign Currency
Translation Reserve” until the disposal of
“net investment in non-integral foreign
operations”

Disposal of non-integral foreign operations

Disposal includes:
• Sales ,Liquidation
• Repayment of its share capital by non-integral foreign operation
• Abandonment of all or part of the foreign operation by reporting enterprise
• Payment of dividend by the non-integral foreign operation if it is treated as return on investment by the reporting enterprise.
Treatment of foreign currency translation reserve:

➢ On partial disposal, proportionate foreign currency translation reserve is recognized as income or expenses.
➢ On full disposal, whole foreign currency translation reserve is recognized as income or expenses.
Consolidation Procedure when non-integral foreign subsidiary is consolidated with the reporting enterprise
✓ Goodwill/capital reserve arising on the acquisition, as a result of consolidation is translated using closing rate.
✓ Intra-group transactions are eliminated as per AS-21 and AS-27.
✓ Exchange difference arising on intra-group monetary item - recognize as income or expense in consolidated financial statements. If exchange
difference arising on monetary items that in substance form part of net investment in non-integral foreign operation, it should be
accumulated in currency translation reserve.

Change in Classification
Change in classification from….
Integral to Non-integral From non-integral to integral
✓ Translation procedure applicable to ✓ Translation procedure as applicable to integral

non-integral shall be followed from the should be applied from the date of change.
date of change. ✓ Translated amount of non-monetary items at the
✓ Exchange difference arising on the date of change is treated as historical cost.
translation of non-monetary assets at ✓ Exchange difference lying in foreign currency
the date of re-classification is translation reserve is not to be recognized as
accumulated in foreign currency income or expense till the disposal of the
translation reserve. operation even if the foreign operation becomes
integral.

Forward Exchange Contract

A forward contract is an agreement between two parties whereby one parties agrees to buy from or sell to the other party an
asset at future date for an agreed price. In case of foreign exchange contract the assets is foreign currency.
Accounting Treatment of Forward Exchange Contract
Forward Exchange contract entered for Forward Exchange contract

Managing Risk/hedging entered for Trading/speculation
❖ The premium or discount that arises on entering into the

To earn profit by trading or speculation in foreign
contract is measured by the difference between the
exchange.
exchange rate at the date of the inception of the forward
As per the accounting standard premium or discount
❖ If forward exchange contract is cancelled/renewed the profit
on such forward contract is not to be recognized, in
or loss arising on cancellation/ renewal is recognised in P & L
other words, is to be ignored.
a/c for the period.
At each balance sheet date the value of contract is
❖ To minimize the risk due to fluctuation in exchange on the
marked, so its current market value, gains or loss on
date of the settlement of the transaction is the contract for
the contract is recognized.
managing the risk.

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

Accounting Standard - 12 ACCOUNTING FOR GOVERNMENT GRANTS
Objective of AS 12
▪ To provide the guidelines for classification of Government Grant

▪ To prescribe the accounting treatment of Government Grant
Government Grant
✓ It is assistance by the government in the form of cash / kind to an enterprise in return for past or future compliance with
certain condition.
AS – 12 does not apply to
Government assistance Government participation
Which cannot be measured reasonably Investment by Government as

i.e. Tax holiday, Tax exemption. equity in the enterprise

Analysis Nature of Incentive
Capital Approach Income Approach sales-tax exemption available

to the unit is not an assistance
in cash or kind and is therefore
If incentive is in nature of not a government grant
If related to revenue
promoter’s contribution
Capital Subsidy Credited to P&L
Recognition of Government grant recognised only when…

Government Grant
Only receipt of grant is not
The enterprise will comply The grants will be received conclusive evidence that
with the condition attached
condition attaching to the
to them
grant have been or will be
fulfilled.

Approaches
Capital Approach Income Approach
Grant is treated as part of Grant is taken as income for one

shareholder fund or more period
➢ They are given with reference to the total ➢ Grant are given subject to compliance of condition
investment in an undertaking, or and cost is incurred to fulfill such condition hence
➢ By way of contribution towards its total grant is credited to income statement along with
capital outlay and associated cost.
➢ No repayment is ordinarily expected in the ➢ In case grants are credited to shareholders’ funds,
case of such grants. no correlation is done between the accounting
➢ Since they are not earned but represent an treatment of the grant and the accounting
incentive provided by government without treatment of the expenditure to which the grant
related costs. relates.
Accounting of grant should be on the basis of nature of relevant grant.

Grant having characteristic of promoter should be transferred to shareholder fund.
Other grants are transferred to income statement.

Monetary and Non Monetary Grant

Accounting treatment of
government grants
Monetary Grant Non-Monetary Grant
Capital approach Income approach Concessional Rate Free of cost
Grant treated as part Treated as income over Assets are Assets are
of share holders fund one or more years accounted for at recorded at
Grant is credited to i.e. treated as deferred their acquisition nominal value
capital reserve income, cost
Credited to P & L a/c or
deducted from related
expenses

Grant related to Specific Fixed Assets Grant related to Specific Fixed Assets
Primary Conditions Other Conditions
❖ Purchase ❖ Type of Asset

❖ Construct or ❖ Location of Assets
❖ Otherwise acquire such assets. ❖ Period during which they are acquired
Presentations in Financial Statements
Deductive Approach Deferred Income Approach
✓ When the grant is lower than the cost of assets, then

it is shown at reduction from the cost of such assets.
✓ When grant is equal to the value of assets then it is
shown at Nominal Value.

Grants related to specific fixed assets

Accounting Treatment
Non-depreciable fixed assets Depreciable fixed assets
On fulfilment of If condition is yet to be fulfilled Alternative 1 Alternative 2

Conditions - ❖ Grants are credited to
Credited to Capital income over the same ❖ Grant credited to ❖ Grant treated as
asset a/c and reduce deferred income.
Reserve a/c period over which the cost net book value ❖ Provide depreciation on
of meeting such condition ❖ Provide depreciation carrying amount of fixed
on net book value assets
is charged to income. ❖ If grant equals the ❖ Transfer deferred
❖ Un-apportioned deferred whole or virtually income to P & L a/c at
the whole of the the same proportion as
income is disclosed on the assets, record the depreciable bears to
balance sheet as “Deferred assets at its nominal depreciation amount.
value.
Government Grant”

Presentation of Grant Related to Revenue
Grant Related to Revenue
Presented as a credit in the Grant is deducted in reporting

profit and loss statement the related expenses
Separately Under General Heading like Other Income

Refund of Government Grants Refund of government grant

❖ Government grant become
refundable due to non-fulfilment
of condition attached to the Related to revenue Related to specific fixed asset
grant.
❖ A government grant that become ✓ The amount of refund be When the grant was received
refundable is treated as an adjusted against any
extraordinary item under AS 5. unamortised “deferred
government grant”, It is deducted from It is treated as It is credited to
✓ Remaining balance gross value of assets deferred income capital reserve
amount of refund should
be charged to P & L a/c as
extraordinary item. Refundable Refundable
amount should amount
be adjusted with should be
✓ Refund should be recorded by increasing unamortised adjusted with
the book value of the asset deferred income. the capital
✓ Depreciation on the revised book value reserve.
should be provided prospectively over the
residual useful life of asset

Disclosures
➢ The accounting policy adopted for government grants including the method of presentation in the financial
statement.
➢ The nature and extent of government grant recognised in the financial statement including grants of non-
monetary assets given at a concessional rate or free of cost.

Accounting Standard - 13 ACCOUNTING FOR INVESTMENTS
Objective of AS 13
▪ Every organization makes some investments either for short duration or long term purpose.
▪ It is very important component of balance sheet
▪ Income on it shall be correctly recorded to have correct calculation of profit.
• Investments are asset held by

• Assets held as a stock in trade is not Investment. enterprise for earning income
• Shares, debentures and other securities held as by the way of Dividend,
stock in trade, are accounted for & disclosed in Interest, Rental, Capital
Financial Statement in a manner that is applicable Appreciation, for Other
to Current Investments. Benefits

Applicability
Not applies to
▪ Mutual funds, venture capital fund and/ or the related asset management companies, banks and public financial
Institutions (Guidance note by ICAI)
▪ The basis for Recognition of Interest, dividend & rentals earned on Investment ( AS – 9)
▪ Operating or finance Leases (AS – 19)
▪ Investment of Retirement benefit plans and life insurance enterprise (AS - 15)
Classification of Investment
Current Investment Long term Investment Investment Property
• Readily realisable Investment other than Investment in land or building

• Intended to be held for not current investment that is not intended to be
occupied for use in their Valued at cost as per AS 10
more than one year
operation

Cost of Investment = Purchase Price + Acquisition charges
Finance & Borrowing cost is part of

Brokerage, Fees & Duties payable
cost of Investment Property subject
to AS 16 Other Important Point
Investment Investment Pre-acquisition Dividend

acquired in acquired by issue interest
exchange of of shares or other
another asset securities Interest accrued in pre- Dividend declared
acquisition period & was from Pre- acquisition
included in cost of profits & Later on
Cost of Investment Cost of received by the
Investment = investment at the time of
= Fair value of asset purchaser of
Fair value of acquisition (cum –
given up or fair investment, then such
securities issued interest price) then
value of investment amount of dividend is
subsequent receipt of
acquired whichever deducted from The
such pre acquisition
is more clearly cost of investment
interest is deducted from
evident
the cost of Investment

Carrying Amount of Investments
Current Investment Long Term Investment
Carried at lower of At cost
Cost Fair Value Provision for permanent diminution

shall be made to recognize the
decline, other than temporary.
Determined on
individual basis or
by category of ✓ Usually valued at cost
investment ✓ Temporary increase / decrease in value of
investment is not recognised
✓ Any reduction in the carrying amount and
1. Reduction in realisable value - Dr. to P & L A/c
2. Increase in realisable value – Upto Cost of investment - Cr. to P
any reversal of such reduction should be
& L A/c & excess portion ignored. charged or credited to P & L Account

Right Shares Issue
Right Shares Issue
Right share Offered Right share Offered are not subscribed

are subscribed but right sold In the market
Cost of right Original shares on which Original shares on which

shares is added to right is received is not right is received is
the carrying amount acquired at cum- right acquired at cum- right
of investment
Earning From Investments

Sale proceed credited Cost of investment is reduced
✓ Interest and dividends on investment to P & L A/c by the amount received on sale of
are to be treated as income. rights
✓ when the purchase is made on cum-
interest or cum-dividend terms,
interest or dividend received need to
be allocated between capital and
revenue as appropriate.

Disposal of Investment
Disposal of Investment
Complete investment Only part of total investment

is disposed is disposal off
Difference between carrying ✓ Calculate carrying amount of

amount & net sale proceed is part of investment
recognised in Profit & Loss ✓ Difference in Carrying
Account amount & net sale proceed is
recognised in P & L a/c
Reclassification
Long term to current Current to Long term

Take date of transfer as base Take date of transfer as base
Determine carrying amount on such date Determine fair value on such date
Determine cost Determine cost
Apply lower of cost & carrying amount Apply lower of cost & fair value

Disclosure
The following information should be disclosed in the financial statements:
(a) the accounting policies for determination of carrying amount of investments;
(b) classification of investments.
(c) the amounts included in profit and loss statement for:
(i) interest, dividends (showing separately dividends from subsidiary companies), and rentals on investments showing separately such
income from long term and current investments. Gross income should be stated, the amount of income tax deducted at source being
included under Advance Taxes Paid;
(ii) profits and losses on disposal of current investments and changes in the carrying amount of such investments; and
(iii) profits and losses on disposal of long term investments and changes in the carrying amount of such investments;
(d) significant restrictions on the right of ownership, realisability of investments or the remittance of income and proceeds of disposal;
(e) other disclosures as specifically required by the relevant statute governing the enterprise.

Accounting Standard - 16 BORROWING COST
Objective of AS 16
▪ Appreciate the basis for recognising borrowing costs

▪ Identify the nature of specific and general borrowings, & treatment of related borrowing costs
▪ Ensure when to Commence capitalisation, Suspend capitalisation, Cease capitalisation
Applicability
Not Applicable to
▪ Actual cost of owners' equity - including preference share capital and
▪ Imputed cost of such equity
▪ And such other items forming part of equity and not classified as a liability

Borrowing cost Money borrowed by enterprise for
Purchasing fixed asset Acquiring land Working capital Constructing Building
These assets take time to make them useable or saleable.

Enterprise incur cost on borrowing i.e. interest and other cost
Standard deals with accounting of borrowing cost.
Interest + Other cost = Borrowing cost
Other cost include –

✓ Commitment charges on borrowing.
✓ Amortization of discounts or provision relating to borrowing.
✓ Amortization of ancillary costs incurred in connection with arrangement of borrower.
✓ Finance charges when the asset acquired under finance leases.
✓ Exchange difference arising from foreign currency borrowing to the extent that they are regarded as an adjustment to interest costs.
✓ Amortisation means dividation of total ancillary expenses in the ratio of usage amount.

Qualifying Asset QA is an asset which takes substantial period of time to get ready for its
✓ intended use (Fixed assets or investment properties) or
✓ sale (Inventory)
Examples
Any tangible fixed assets, Any intangible assets, Investment Inventories that require
which are in construction which are in property. a substantial period to
process or acquired development phase or bring them to a
tangible fixed assets, acquired but not ready saleable value.
which are not ready for for use such as patent.
use, such as plant and
machinery.
Following is not a QA
• Inventories routinely
✓ Substantial Period of Time is the period of 12 month. manufactured
• Inventories produced in large
quantities on repetitive basis
Longer or shorter period may also be justified based on the • Assets ready for intended use
circumstances of the case at the time of acquisition

Accounting treatment of Borrowing cost

As per AS – 16, borrowing cost, which is directly related to the acquisition, construction or production of qualifying asset should be capitalized.
Capitalization of borrowing cost
Borrowing cost directly Borrowing cost would Qualifying asset Cost to be

attributable to the have been avoided if will give future capitalised can be
acquisition, the expenditure on benefit to measured reliably.
construction/Productio qualifying asset had enterprise.
n of qualifying asset not been made
• If any of the above conditions does not satisfy then it is charged to P & L A/c
• If all the conditions are satisfied, Capitalise the Borrowing cost.

Types of Borrowing
Types of Borrowing
Specific Borrowing General Borrowing
Borrowed specifically for Borrowing is wholly or partly for

expenditure on qualifying asset. expenditure incurred on qualifying asset
Amount of borrowing cost to be capitalised = Actual

Borrowing cost to be capitalised = Apply
borrowing cost – income on temporary investment
capitalisation rate to the expenditure on
that asset
Borrowing cost capitalised should not exceed actual cost incurred
during the period. Capitalisation rate = Weighted average of
borrowing cost
When the carrying amount of qualifying assets exceeds its

recoverable amount of NRV, the carrying amount is written down
in accordance with requirement of other AS

Difference between Specific Borrowing and General Borrowing :

Specific Borrowing General Borrowing
Money borrowed specifically for the purpose of obtaining a A range of debt instruments are used to borrow funds at varying rate of
particular QA interest and such borrowing are not readily identifiable with a specific QA.
BC on QA can be readily identified BC on QA requires exercise of judgement.
Actual borrowing Cost xxx • Calculate a weighted average borrowing rate.
(-) Income on temporary investment (xxx) • Calculate the amount to be capitalized
Amount to be capitalized xxx • Amount of BC capitalized during the period should not be more than
actual BC.
Stages of Capitalization
➢ Commencement
➢ Suspension
➢ Cessation

Commencement of Capitalization Conditions
Activity Borrowing Expenditure for acquisition, construction

should be in cost is or production of a qualifying asset is
Progress incurred being incurred
Suspension of Capitalisation Expenditure on a qualifying

asset includes:
Capitalization is suspended during extended • Expenditure that has
resulted in payment of cash
period in which active development is interrupted • Transfers of other assets or
the assumption of interest
Delay bearing liabilities.
Expenditure is reduced by:

• Any progress payments
Temporary or Normal Not Temporary or Abnormal received and
• Grants received in
No suspension should be done. Suspension should be made connection with the asset.
Example : The extended period during which higher water levels delay construction of a bridge.

Exception
Capitalization of borrowing cost is not suspended
• During a period when substantial technical and administrative work is being carried out
• When a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale.
Example: Capitalization should continue during the extended period needed for inventories to mature, or the extended period during which
high water levels delay the construction of a bridge.
Cessation of capitalization
✓ Capitalization of borrowing cost should cease when substantially all the activities necessary to prepare the qualifying assets for its intended
use or sale are completed.
✓ Items of administrative work or finishing touches to be completed happen to be minor in nature
✓ Construction of the qualifying asset is carried out in parts / phase and each part / phase can be used independently, required activities are
completed for such phase and it is ready for intended use or sale, capitalization of borrowing cost for such phase / part will cease.

Divisible and Indivisible Indivisible Projects : These situations are analysed below :
Particulars Asset completed in parts (i.e. Divisible Projects) Assets completed in full (i.e. Indivisible Projects)
(a)Description When construction of a Qualifying Asset is completed in parts and a When the Qualifying Assets consists of a number of parts which
completed part is capable of being used while construction continues for the can be used only in total, i.e. a completed part cannot be used
other parts. until construction of all parts is complete.
(b)Example A Business Park comprising several buildings, each of which can be used An Industrial Plant involving several processes which are carried
individually, is a Qualifying Asset for which each part is capable of being used out in sequence at different parts of the plant within the same
while construction continues for the other parts. site, such as a Steel Mill, is a Qualifying Asset that needs to be
complete in all respects before any part can be used.
(c)Cessation of Capitalisation of Borrowing Costs in relation to a part should cease when Capitalisation of Borrowing Costs should cease only when
Capitalisation substantially all the activities necessary to prepare that part of the asset for substantially all the activities necessary to complete the whole of
its intended use or sale are complete. the assets for its intended use or sale, is complete.
Disclosures
➢ The accounting policy adopted for borrowing cost.
➢ The amount of borrowing cost capitalised during the period.

Group 1 AS Notes

Uploaded by

Copyright:

Available Formats

Group 1 AS Notes

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Group 1 AS Notes

Uploaded by

Copyright:

Available Formats

Accounting Standard - 1 DISCLOSURE OF ACCOUNTING POLICIES

➢ To facilitate better understanding of financial statements.

Meaning of Accounting Policies

▪ Specific accounting principles &

www.cavidya.com AS 1.1 © Anandh Bhanggariya 96323 96323

Considerations in the Selection of Accounting Policies

Prudence Substance over form Materiality

1) Going Concern The items the knowledge of which might

www.cavidya.com AS 1.2 Cavidya 84218 84218, 75887 75887

Going Concern Concept

www.cavidya.com AS 1.3 © Anandh Bhanggariya 96323 96323

Disclosures of Accounting Policies

✓ All significant accounting policies adopted should be disclosed

✓ The disclosure should form part of the financial statements

period should be disclosed along with amount of effect

✓ If fundamental accounting assumptions is not followed, the fact should be disclosed

www.cavidya.com AS 1.4 Cavidya 84218 84218, 75887 75887

➢ Specifies the principals for valuing the inventory

▪ This statement should be applied in accounting for inventories other than

www.cavidya.com AS 2.1 © Anandh Bhanggariya 96323 96323

Inventories are assets

To ignore the anticipated profit

Value of Value of Cost

www.cavidya.com AS 2.2 Cavidya 84218 84218, 75887 75887

Raw Materials Finished Goods and Work in progress

Cost of purchase Realizable value less

www.cavidya.com AS 2.3 © Anandh Bhanggariya 96323 96323

Factory Overheads Direct labour Joint Cost

Fixed Variable Main/Joint*** By Products

* When actual production is almost equal or lower than normal capacity.

www.cavidya.com AS 2.4 Cavidya 84218 84218, 75887 75887

Cost Formula COST FORMULA

FIFO Weighted average cost Standard cost Retail Method

www.cavidya.com AS 2.5 © Anandh Bhanggariya 96323 96323

▪ Accounting policies adopting measuring inventories

▪ Cost formula used

▪ Total carrying amount of inventories

and spares, and loose tools

www.cavidya.com AS 2.6 Cavidya 84218 84218, 75887 75887

www.cavidya.com AS 3.1 © Anandh Bhanggariya 96323 96323

Cash and Cash Equivalents

▪ Held for the purpose of meeting short-term cash commitments

Presentation of Cash Flow Statements

www.cavidya.com AS 3.2 Cavidya 84218 84218, 75887 75887

Elements of Operating Activity

➢ Cash receipts from sale of goods and rendering services.

www.cavidya.com AS 3.3 © Anandh Bhanggariya 96323 96323

Elements of Investing Activity

➢ Cash payments for acquisition of fixed assets including intangibles.

www.cavidya.com AS 3.4 Cavidya 84218 84218, 75887 75887

Elements of Financing Activity

➢ Cash proceeds from issuing shares or other equity instruments.

Investing and financing transactions that do not require the use of

www.cavidya.com AS 3.5 © Anandh Bhanggariya 96323 96323

➢ Transactions in a foreign currency should be recorded in an enterprise's reporting currency.

www.cavidya.com AS 3.6 Cavidya 84218 84218, 75887 75887

INTEREST AND DIVIDEND

Financial Enterprise Other Enterprise

Operating Activities Financing Activity Investing Activity

• Dividend paid should be classified as cash flow from financing activities