PROFESSIONAL ACCESS Ph:98494 19306

Vijayawada
Sub :Advanced Accounts
Topic:Accounting Standards

LIST OF ACCOUNTING STANDARDS

AS-1 Disclosure of Accounting Policies

AS-2 Valuation of Inventories

AS-3 Cash Flow Statement

*AS-4 Contingencies and Events Occurring after the Balance Sheet Date

*AS-5 Net Profit of Loss for the Period, Prior period items and changes in Accounting Policies

AS-6 Depreciation Accounting

AS-7 Construction Contracts

AS-8 (included in AS-26)

AS-9 Revenue Recognition

AS-10 Accounting for Fixed Assets

*AS-11 The effects of changes in Foreign Exchange rates

*AS-12 Accounting for Government Grants

AS-13 Accounting for investments

AS-14 Accounting for Amalgamation

AS-15 Accounting for Retirement Benefits in the Financial statements of Employers (Not applicable to IPCC)

*AS-16 Borrowing costs

AS-17 Segment Reporting (Not applicable to IPCC)

AS-18 Related party Disclosures (Not applicable to IPCC)

*AS-19 Leases

*AS-20 Earning Per Share

AS-21 Consolidated Financial Statements (Not applicable to IPCC)

AS-22 Accounting for taxes on Income (Not applicable to IPCC)

AS-23 Accounting for Investment in Associates in Consolidated Financial Statements (Not applicable to IPCC)

AS-24 Discontinuing Operations (Not applicable to IPCC)

AS-25 Interim Financial Reporting (Not applicable to IPCC)

*AS-26 Intangible Assets

AS-27 Financial Reporting of interest in Joint Ventures (Not applicable to IPCC)

AS-28 Impairment of Assets (Not applicable to IPCC)

*AS-29 Provisions, Contingent Liabilities and Contingent Assets

AS-30 Recognition and Measurement(Not applicable to IPCC)

As-31 Financial Instruments Presentation(Not applicable to IPCC)

AS-32 Financial Instruments – Disclosures(Not applicable to IPCC)

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 PROFESSIONAL ACCESS Ph:98494 19306
Vijayawada
Topic: Accounting Standards

Accounting Concepts and Conventions:

a) ACCOUNTING PERIOD CONCEPT:
Final accounts should be prepared periodically in order to know the true and fair view of the business.
Generally one year period is adopted by the business concerns. An accounting period is the interval of time
at the end of which or revenue statement and balance sheet are prepared in order to show the result of operation
and change in resources which have occured the previous statements were prepared.

For special purposes ( say managerial decision) accounting reports may be prepared for shorter periods, such
as quarterly or even monthly periods.

b) BUSINESS ENTITY CONCEPT

According to this concept a clear distinction has to be made between the firm or the institution and the
proprietor. In case of sole trading concerns the proprietors liability exceeds to their private properties also.
But in case of companies there is legal distinction between the share holders and the company. The liability
of the shareholders is limited.

The business accounts are of business only and not mixed up with the owners. If the owner draws some goods
from the firm for personal use, it is not treated as a sale but the value of those goods is debited to his personal
account as drawings and reduced from capital a/c.

c) COST CONCEPT
Cost is the cash or the cash equivalent given for the asset in a transaction. An asset is recorded in the books
at cost i.e at the price at which it was purchased. The cost concept does not allow transactions to be recorded at
arbitrary value. It should not be recorded at market value.

d) DUAL ASPECT CONCEPT

All business events are regarded as having a dual aspect. The balance sheet is the statement of affairs of a
person, firm or a company. Right hand side represents assets and left hand side represents sources of
these funds. The sources are of two types. a) Owners capital b) Liabilities. The accounting equation will be

Owner's capital = Assets -Liabilities

e) MONEY MEASUREMENT CONCEPT

All transactions are recorded in terms of money. Hence money is used as the measuring unit for financial
reporting. This concept makes accounting information more meaningful and useful for analysis of
financial statements.

f) MATCHING CONCEPT
The matching concept requires that the revenue and the costs incurred to obtain that revenue should be
properly matched. This will be helpful in measuring the business performance periodically.

g) GOING CONCERN CONCEPT

Business transactions are recorded on the assumption that the business will continue for a long term.
There is neither the intention nor the necessity to liquidate the particular business venture in the future.
Therefore, it would be able to meet its contractual obligations and use its resources according to the plans
and pre-determined goals.

It is on this concept that a clear distinction is made between assets and expenses. Transactions are recorded in
such a manner that the benefits likely to accrue in future from money spent now or the future consequences of
the events occurring now are also taken into consideration. It is because of this concept that fixed assets
are valued on the basis of cost less proper depreciation keeping in mind their expected useful life ignoring
fluctuations in the prices of these assets.

h) REALISATION CONCEPT
According to realisation concept, the profit on sale is normally regarded as earned at the time when the goods
or services are passed on to the buyer and the buyer incurs the liability for that. Profit is considered as earned
on the day on which it is realised. Revenue can be said to have been realised when sale is completed.

Sale is completed when the cash is received for the goods sold or when buyer incurs liability for that.

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Vijayawada

CONVENTIONS
The new convention denotes customs or traditions which guide the accountant while preparing the
accounting statements. Following are the accounting conventions.

a) Consistency The consistency convention implies that the accounting practices should remain the same from
one year to another. The results of different years will be comparable only when accounting rules are
continuously adhered to from year to year.

For example, the principle of valuation of closing stock at cost or realizable value whichever is lower should
be followed year after year to get comparable results. But the consistency convention does not mean that a
particular method of accounting once adopted can never be changed.

b) Disclosure: Apart from statutory requirements, good accounting practice also demands that all significant
information should be fully and fairly disclosed in the financial statements. All information’s which is of
material interest to proprietors, creditors and investors should be disclosed in accounting statements.

c) Conservatism: Conservatism is a policy of playing safe. Financial statements are usually drawn up on a
conservative basis. It implies that anticipated profits are ignored but anticipated losses are taken into account
while preparing the financial statements. In other words, the principle of conservatism requires that in the
situation of uncertanity and doubt, the business transactions should be recorded in such a manner that the
profits and assets are not overstated. Thus, there are two principles which are directly related to conservatism.

a) The accountant should not anticipate income but should provide for all possible losses, and ( as per law of
prudence)
b) Faced with the choice between two methods of valuing an asset, the accountant should choose a method
which leads to lower value.

Following are some examples of the application of this convention:

a) Making provision for Bad and doubtful debts
b) Valuing stock in hand at cost or market value whichever is less subject to certain exceptional cases.
c) Amortising intangible assets like goodwill, patents, trade marks etc as early as possible.

d) Materiality: According to the convention of materiality, accountants should report only what is material and
ignore insignificant details while preparing the final accounts. This is because otherwise accounting will
unnecessarily be overburdened with minute details. The decision as to materiality may be made by the accountant
or auditor on the basis of professional experience and judgment where there is no unanimous opinion on the
subject.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS

Disclosure of accounting policies has become a common corporate financial reporting practice throughout
the world. Certain fundamental accounting assumptions underlie the preparation and presentation of financial
statements. They are usually not specifically stated because their acceptance and use are assumed. They
following are the generally accepted accounting assumptions.
a) Going Concern b) Consistency c) Accrual

Applicability of Accounting Standards:

AS-3, AS-17, AS-18, AS-20, AS-24, AS-25 applicable to level-1 enterprises only.

Level 1 Enterprise:
Enterprises which fall in any one or more of the following categories, at any time during the accounting
period, are classified as Level-1 enterprises.
a) Listing of Securities: Enterprise whose equity or debt securities are listed whether in India or outside India.

b) Listing in Process: Enterprise which are in the process of listing their equity or debt securities as evidenced
by the board of Directors resolution in this regard.

c) Financial Institutions: Banks including co-operative banks

d) Insurance companies: Enterprises carrying on insurance business

e) Turnover exceeding 50 crores: All commercial, industrial and business reporting enterprises, whose turnover
for the immediately preceding Accounting period on the basis of audited financial statements exceeds Rs.50
crores. Turnover does not Include other income.

f) Public deposits more than 10 crores: 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.

g) Holding and Subsidiary companies: Holding and subsidiary enterprises of any one of the above at any time
during the accounting period.

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 PROFESSIONAL ACCESS Ph:98494 19306
Vijayawada
Topic: Accounting Standards

Level II Enterprise:
The following categories are called Level-II enterprises.

a) All commercial, industrial and business reporting enterprises, whose turnover for the immediately proceeding
Accounting period on the basis of audited financial statements exceeds Rs.1 crore ( From 1-4-2012) but does
not exceed Rs.50 crores. Turnover does not include other income.

b) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in
excess of Rs.1 crore but not in excess of Rs.10 crores at any time during the accounting period.

Level III Enterprises:

Enterprises which are not covered under Level-1 and Level-II are considered as Level-III enterprises.

Accounting Standards are written documents, policy documents issued by expert accounting body or
government or other regulatories body covering the aspects of recognition, measurement, treatment,
Presentation and disclosure of accounting transaction in the financial statement. Accounting standards in India
are issued by Institute of Chartered Accountants of India.

Standards are basically issued to eliminate confusing variations in the accounting treatments used to prepare the
financial statements.

Areas where important information are not statutorily required to be disclosed, standards may call for
disclosure beyond that required by law

Duty of Auditor in relation to mandatory accounting standards :

a) Implementation of Mandatory Standards: While discharging their functions members of ICAI should
ensure that mandatory accounting standards are implemented in the financial statements covered by their
audit reports.

b) Deviation if any :In the event of any deviation from the standards, it will be the duty of the auditors to qualify
such accounts so the users of financial statements are aware of such deviations.

c) Compliance of Law: Under the Companies Act also, auditors are required to report if mandatory standards
have complied with in the preparation of financial statements.

** Do Accounting standards apply to Charitable entities ?

Accounting standards apply to commercial, industrial or business enterprises. Therefore they do not apply to
purely charitable entities. However a charitable entity is also engaged in business or commercial activity then
accounting standards would apply to its activity, charitable and non-charitable. (Same applicable for Co-
operative societies also).

AS-1 DISCLOSURE OF ACCOUNTING POLICIES

Objectives of AS-1
The accounting policies vary from enterprise to enterprise. The view presented in the financial statements of an
enterprise of its state of affairs and of the profit or loss can be significantly affected by the accounting policies
followed in the preparation and presentation of financial statements.

The objective of this accounting standard is to promote better understanding of financial statements by
establishing through the Accounting standard the disclosure of significant accounting policies and the manner
in which accounting policies are disclosed in the financial statements.

Accounting Policies
a) Accounting policies encompass the many principles, bases, conventions rules and procedures adopted by
management in preparing and presenting financial statement.

b)These vary from enterprises to enterprise and sometimes even in the same enterprise these may vary from year
to year. The enterprise may adopt any of the accounting policies which may suit its needs.

Selection of Accounting Policies :

There is no single list of accounting policies which are applicable to all circumstances. The primary
consideration in the selection of accounting policies by an enterprise is that financial statements
prepared and presented on the basis of such accounting policies should represent a true and fair view of the state
of affairs of the enterprise as on Balance sheet date and of the profit or loss for the period ended on that date.

Major considerations governing the selection and application of accounting policies are:

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 PROFESSIONAL ACCESS Ph:98494 19306
Vijayawada
Topic:Accounting Standards

a) Prudence : In view of uncertainity attached to future events, profits are not anticipated but recognized
only when realised though not necessarily in cash. Provision is made for all known liabilities and
losses even though the amount cannot be determined with certanity and represents only a best estimate
in the light of available information.

Ex : Warranty expenses may be provided based on technical estimates, though the actual warranty expenses
incurred in future is unlikely to be the same amount.

ii) While valuing closing stock the profit margins are ignored

b) Substance over form :

The accounting treatment and presentation in financial statements of transactions and events should be
governed by their substance and not merely by the legal form. In other words to represent faithfully the
transactions or events, it is essential that they are accounted for and presented in accordance with their substance
and the not merely their legal form.

Ex 1 : In financial leases, the lessee in substance is the owner of the asset whilst the lessor is merely the legal
owner. The accounting for finance leases ( AS 19) is based on the substance rather from of the
transaction. Based on this principle the lessee capitalizes the lease rent as fixed asset, being the owner
in substance; where as lessor records the investment made as a debtor.

Ex 2: In respect of Hire purchase sale Hire Purchaser in substance is the owner. Legal owner is Hire Vendor. But
still we show the capital value of the asset in the books of Hire Purchase even he is not the legal owner of
the asset.

c) Materiality :
a) 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.

b) The concept of materiality recognises that some matters individually or in the aggregate, are
important for the fair presentation of the financial statements. Accordingly, financial statements should
disclose all material items. (i.e knowledge of which might influence the decision of the user of
financial statements.

Q) What are disclosure requirements of AS-1 (May 95)

Disclosure requirements are
a) Disclosure of significant accounting policies adopted in the preparation and presentation of financial
statements.
b) The disclosure should form part of the financial statements and normally at one place.
c) Disclosure of change in accounting policy having a material effect along with the effect of change.

d) If fundamental accounting assumptions are followed i.e going concern, Consistency and Accrual are followed
in financial statements, specific disclosure is not required . If any fundamental accounting assumption is not
followed, the fact should be disclosed.

Q) What are fundamental Accounting Assumptions

Certain fundamental accounting assumption underlie the preparation and presentation of financial
statements. They are not specifically stated because their acceptance and use are assumed. The following have
been generally accepted as fundamental accounting assumptions.

A) Going Concern :Generally everyone commences business with an intention to continue the business for a
considerable length of time. This can be viewed as Going concern. It is assumed that the enterprise has
neither the intention nor the necessity of liquidation.

B) Consistency : Accounting policies, rules and practices should remain the same from year to another year.
Then only the results of a firm canbe compared from one year to another. Consistency has to be
followed particularly in respect of the following areas.

a) Method of providing depreciation - St.line method or WDV method

b) Valuation of a)raw materials b) stores and spares c) WIP d) Finished goods

C) Accrual : Revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as
money is received or paid) and recorded in the financial statements of the periods to which they relate.

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 PROFESSIONAL ACCESS Ph:98494 19306
Vijayawada
Topic:Accounting Standards

Q) Under what circumstances can an enterprise change its accounting policy (PE II Nov 05)
Even though consistency is a fundamental accounting assumption, it does not mean that the accounting
policies once adopted cannot be changed, An enterprise may change its policy if the following conditions
are satisfied.

a) Such a change is required by statue or for compliance with an accounting standard

b) Such change would result in an appropriate presentation of the financial statements of the enterprise i.e. the
objective of true and fair presentation of financial statements is achieved.

Areas for Which different Accounting policies are to be followed:

i) Methods of depreciation ( WDV or Straight line etc)
ii) Valuaton of inventories ( Cost or market value)
iii) Valuation of investments ( Cost or market value)
iv) Translation of foreign currency items
v) Valuation of fixed assets
vi) Treatment of retirement benefits
vii) Treatment of goodwill
viii) Treatment of expenditure during construction
ix) Treatment of contingent liabilities etc.

AS1
1) Can same type of inventory at two different factories be valued by applying two different accounting policies.

2) Can different methods of depreciation be followed for the same class of assets used in different plants ?

3) The finished goods inventory is valued on prime cost and on principle of market value, whichever is lower.
The cost included the cost of the material,packing material, direct production , labour expenses and excise duty
is applicable on the finished goods. Comment.

4) A & Co a partnership firm has prepared its accounts on cash basis. comment

5) X ltd had accounted for its liability towards retirement benefits of its employees on cash basis, and had
disclosed the same in the Notes on Accounts. Since, it has not followed the fundamental accounting
assumptions of `accrual' the Auditors want to qualify the report. The company feels that a qualified report is
not necessary since AS-1 simply requires a disclosure if a fundamental accounting assumption has not been
followed. Comment.

6) A Ltd sold its building for Rs. 50 lakhs. The purchaser has paid full price. Company has given possession to
the purchaser. The book value of the building is Rs.35 lakhs. As at 31 st March 2008, documentation and legal
formalities are pending. The company has not recorded the disposal. It has shown the amount received as
advance. Do you agree with this treatment.

7) B Ltd has taken a loan of Rs. 10 crores from ICICI Ltd. Its bankers Canara Bank have given guarantee to
ICICI on its behalf. B ltd has mortgaged its assets to Canara Bank. B Ltd has disclosed this loan in balance
sheet as unsecured loan on the grounds that no security has been given to the lender ICICI Ltd.

8) X Ltd follows the practice of disclosing accounting policies adopted in preparation of financial statements in
the Directors report. Comment on this practice.

9) A partnership firm was formed to secure the tenders floated by BSNL for publication of telephone directories
in 2009-2010. It bagged the tender for publishing directory for Pune circle for 5 years. It has made a profit in
2009-2010, 2010-2011, 2011-2012, 2012-2013. It bid in tenders for publication of directories for other cities
Nagpur, Nashik , Mumbai, Hyderabad but failed to bag any of these. Its only activity till date is publication of
Pune directory. The contract is said to expire on 31-12-2014. Its only activity till date is publication of Pune
directory. The contract is said to expire on 31-12-2014. You are auditing the accounts of 2012-2013. Is the
going concern assumption appropriate for preparation of accounts for 2012-2013.

b) In case if situation continues in the year 2013-2014 would your answer be different.

10) X Ltd has disclosed accounting policies related to fixed assets in Schedule E Fixed assets, accounting policies
relating to investments in schedule F investments and accounting policies relating to inventories in Schedule G
current assets, loans and advances and so on. Comment on this practice.

11) Is there any specific disclosure under AS-1 for a company for in Liquidation.

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AS-2 VALUATION OF INVENTORIES
This standard does not apply to
a) WIP in contracts: Work in progress arising under construction contracts, including directly related service
contracts (Separate AS-7 exists)
b) WIP in Service providers: Work in progress arising in the ordinary course of business of service providers
c) Securites : Shares, debentures and other financial instruments held as stock in trade and
d) Live Stock: livestock, agricultural and forest products, mineral oils, ores and gas etc for valuation of which
certain established practices may exist.

items included in Inventory

a) held for sale in the ordinary course of business
b) in the process of production of such sale or
c) in the form of materials or suppliers to be consumed in the production process or in the rendering of
services.
d) Machinery spares which are not specific to a particular item of fixed asset but can be used generally for
various items of fixed assets should be treated as inventories for the purpose of AS-2.

Measurement :
Inventories should be valued at cost or Net Realizable value whichever is lower.

Cost includes
a) Purchase Cost: Cost of purchase, net of trade discounts, rebates, duty drawback, Cenvat Credit availed etc.

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b) Conversion Cost: Cost of conversion
c) Carriage :Other costs incurred in bringing the inventories to their present location
PROFESSIONAL ACCESS Ph:98494 19306
Vijayawada
Sub :Advanced Accounts
Topic:Accounting Standards

Methods of Valuation:
1 ) Specific identification method : This method is also known as specific price method, identifiable cost
method etc. This is also known as actual cost method because the specific job bears the actual cost of material
bought for the job. When using this method, units in inventory are specifically identified and each unit cost is
identified with a particular invoice.

2) FIFO method 3) Weighted Average 4) Standard Cost method

5 ) Retail Inventory Method

This method is based not on actual cost but aims at ensuring that the value of inventories being a close
approximation to cost. This method is associated with periodic inventory systems where detailed records are
not kept. In this method cost of inventory is determined as under Ascertain the sales value of inventory -
Appropriate % of gross margin.

Cost Formulas
FIFO, Weighted Average
Standard Cost, Retail
method, Specific
identification method
LIFO NOT ALLOWED

Treatment of Machine Spares

|
-----------------------------------------------------------------------------------------------------------------------------
| |
Treated As Inventory for AS-2 Treated As fixed asset
| As per AS -10
| |
Machine spares are not specific to a particular item of Machine spares are specific
Fixed asset but can be used generally for various to a particular item of fixed
Items of fixed assets asset and their use is expected
To be irregular.

Valuation of Inventory
-----------------------------------------------------------------------------------------------------------------------------
| | |
Raw Material Work in progress Finished goods
| | |
Valued at cost Valued at cost Lower of cost or NRV

COST INCLUDES
| | |
Cost of purchase Conversion Cost Cost incurred in
| | Bringing the
| | Inventories to
| | Their present
| | Condition or
| | Location
| | |
It Includes Purchase Direct labour + Factory overhead Like cost of
Price + Duties & Taxes + Joint cot of Joint or By products designing of
+Freight + expenditure the product.
Directly attributable Less
Cenvat Credit i.e duties &
Taxes recovered back

****Following should not be included in the cost of inventory:***

a) Interest Expenses: Interest and other borrowing costs ( AS-2 state that usually interest other borrowing costs
are not included. But in some exceptional cases inclusion is possible. Ex Wine/timber held for maturity )
b) Storage Cost : All expenses of Storage are excluded from cost
c) Administrative overhead: Administrative overheads excluded from valuation of inventory
d) Selling and Distribution overhead :Selling and distribution overhead

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e) Abnormal losses :Abnormal losses/wastages i.e Abnormal amount of waste material, labour or other
production cost
PROFESSIONAL ACCESS Ph:98494 19306
Vijayawada
Sub :Advanced Accounts
Topic:Accounting Standards

Disclosure:
Accounting policies adopted for valuation ( including change if any along with its impact)
Cost Formulas used
Carrying amount of inventories
Appropriate classification of inventories.

AS-6 DEPRECIATION
|
Status –Mandatory
|
Applicability- All

Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset
arising from, use, efflux of time or obsolescence through technology and market changes.

This standard does not apply to

a) Forest Plantations: Forest plantations and similar regenerative natural resources
b) Wasting Assets :Wasting assets including expenditure on the exploration for and extraction of minerals,
oils, natural gas and similar non-generative resources.
c) Expenses on Research: Expenditure on research and development
d) Goodwill and Livestock
e) Land-unless it has a limited useful life for the reporting entity.

Depreciable Assets
|
---------------------------------------------------------------------------------------------------------------
| | |
To be used for more than Limited useful Life Help for use in production of goods and services
One accounting year

Objective of AS-6
Fixed assets like building, plant and furniture etc subject to depreciation. Thus depreciation needs to be
provided so as to
a) Allocation of Cost: ensure allocation of original cost of a fixed asset over its useful life.
b) Real Cost: ascertaining the true cost of operations
c) Current Value: providing current valuation of fixed assets in the Balance sheet.

Depreciable asset
Depreciable asset means
a) are expected to be used during more than one accounting period
b) have a limited useful life; and
c) are held by an enterprise for use in the production or supply of goods and services, for rental to others or
for administrative purposes and not for sale in the ordinary course of business.

Determining amount of depreciation :

Depreciable amount of a depreciable asset is its historical cost or cost substituted for historical cost i.e less
residual value. The value of depreciation depends upon the following.
a) Cost of assets
b) Life of the asset
c) Residual value of the asset

Historical cost :
Historical cost means the acquisition cost ( including the necessary expenses to bring the asset to its original
location) i.e freight and installation charges.

Useful Life :
Useful life is the period over which the depreciable asset is to be used or the number of production runs
expected to be obtained from the use of the asset.

Most Common Methods of providing depreciation :

a) Straight Line Method
b) Written down value method
c) Sinking Method
d) Depletion method

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 An enterprise may adopt more than one method of depreciation for different assets.

PROFESSIONAL ACCESS Ph:98494 19306

Vijayawada
Sub :Advanced Accounts
Topic:Accounting Standards

** Can Management apply depreciation rates higher than those laid down by the relevant statute:
The rate specified in the companies Act, 1956 are the minimum rates of depreciation. Where the
management's estimated of the useful life of an asset is shorter than the period specified in the relevant
statute, depreciation can be calculated at higher rate.

Similarly if the management's estimate of the useful life of the asset is more than the relevant statute
depreciation rate lower than the rate specified in the relevant statute can be provided.

Treatment of Disposal of Asset :

When a depreciable asset is disposed, discarded, demolished or destroyed we need to ascertain the surplus
or deficiency. We ascertain it in the following manner.

Step 1: Ascertain the historical cost of asset sold

Step 2: Deduct
a) Depreciation till to date
b) net selling price
Step 3: The balance after deducting step 2 from step 1 is positive then it is loss transfer to P & L A/c.
If it is negative then it is profit and transfer to P & L A/c.

Circumstances when en enterprise change method of depreciation:

In order to ensure comparability, the depreciation method once selected generally be applied consistently
from period to period. However in the following circumstances, the method of depreciation may be changed.

a) When adoption of new method is reqired by the statute

b) When the adoption is required with an Accounting Standard
c) When it is considered that the change would result in a more appropriate preparation or presentation of
the financial statements.

Effective date of change :

If the method of depreciation has been changed, then the change should be applied with RETROSPECTIVE
EFFECT i.e the date when the asset was put into use. If any difference arised due to change in method then
transfer the difference eith debit/credit to the P & L A/c.

Calculation of depreciation When Historical cost has undergone a change:

Step 1: Ascertain the revised unamortised amount ( amount not yet written off)

Step 2: Ascertain the residual useful life of the asset

Step 3: Calculate revised depreciation by applying the relevant method using revised unamortized
depreciable amount and the remaining useful life.

How to calculate depreciation in case of asset Re-valued:

For this purpose, the following three steps we follow

Step 1: Ascertain the revalued amount

Step 2: Ascertain the residual useful life of the asset
Step 3: Calculate revised depreciation by applying the relevant method using revalued amount and remaining
useful life.

Disclosure Requirements :
a) The Historical Cost or other amount substituted for historical cost of each class of depreciable assets.
b) Current years depreciation on each class of assets
c) Accumulated depreciation
d) Depreciation method used
e) Depreciation rate/useful life if the same is different than prescribed in statute.

Note: 1) Different methods can be adopted for different assets in one organization provided the same methods are
consistently from year to year.
2) Method of depreciation should be selected on the basis of type and nature of asset and other relevant
Information

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 PROFESSIONAL ACCESS Ph:98494 19306
Vijayawada
Sub: Advanced Accounts
Topic: Accounting Standards

DEPRECIATION
-----------------------------------------------------------------------------------------------------------------------------------
| |
No method or rates prescribed by AS Depreciable amount (Cost – scrap)
(SLM or WDV is commonly followed should be allocated systematically
Over its useful life of asset
|
Chang in depreciation due to
|
---------------------------------------------------------------------------------------------------
| | |
Change in method Change in life Change in
cost
Retrospective effect Balance to be written off asset due to Reva-
And difference to be in remaining revised life. Luation /Foreign
Adjusted in the year of exchange difference
Change. /Govt Grants/Refund
/duty changes
It is a change in It is a change in
Accounting Policy Accounting Estimate

AS-7 CONSTRUCTION CONTRACTS

|
Applicable to Contractors from 1-4-2003
|
A large number of construction contracts are not completed in the same accounting year in which they were
started. The primary issue for issuing this standard is the allocation of contract revenue and contract costs
to the accounting period in which construction work is performed. The objective is to establish the rules for
recognition of revenue and costs.

Contracts are of two types:

a) Fixed price contracts b) Cost Plus contracts

Fixed price contract : A fixed price contract is a contract in which the contractor agrees to a fixed contract price.

Cost plus contract : A cost plus contract is a construction contract in which the contractor is reimbursed for
allowable costs plus some percentage of these costs.

Claim : A claim is an amount that the contractor seeks to collect from the customer for costs not included in
contract price.
Ex : Claims may arise in case of Customer delays, errors in specification or design etc

Retentions : Retention are amounts of progress billings which are not paid until satisfaction of conditions
specified.

Progress Billings :Progress Billings are amounts billed for work done whether paid or not.

Segmenting : When a contract covers a number of assets, the construction of each asset should be treated as a
separate construction contract when

a) Separate proposals have been submitted for each asset

b) Each asset has been subject to separate negotiation and the contractor and customer have been able to
accept or reject that part of the contract relating to each asset; and

c) The costs and revenues of each asset can be identified.

Combining : A group of contracts, whether with a single customer or with several customers, should be treated
as single construction contract.
a) The group of contracts is negotiated as a single package
b) The contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit
margin; and
a) The contracts are performed concurrently or in a continuous stage.

11
 PROFESSIONAL ACCESS Ph:98494 19306
Vijayawada
Sub: Advanced Accounts
Topic: Accounting Standards

Contract Revenue
----------------------------------------------------------------------------------------------------------------------------------
| |
Initial amount of revenue Other Income
|
As agreed in contract |
----------------------------------------------
| |
|
Variation in Claims Incentive
contract work payments

Costs incurred in securing contracts :

Contract costs include the cost attributable to a contract for the period from the date of securing the
contract to the final completion of the contract.

Ex: Expenses include a) Field work expenses b) Liaison expenses c) cost of tender forms and non refundable
fees if any

Recognition as an expense: Costs that relate directly to a contract are also included as part of contract costs
if they are separately identified.

When costs incurred in securing a contract are recognised as an expense in the period in which they are
incurred, they are not included in contract costs when the contract is obtained in subsequent period.

Contract Costs
|
--------------------------------------------------------------------------------------------------------------------------------
| | |
Direct Costs Allocated Costs Specific chargeable costs
|
a) Site labour costs a) Insurance Costs that are specifically
including super- b) cost of design chargeable to the customer
vision at site and technical under the terms of the contract
b) Cost of materials assistance that
c) Depreication on is not directly
Plant & Equipment related to
used in the con- specific contract
tract

d) Cost of hiring c) Construction overheads

Plant & Equipment Ex: Preparation of
payroll of construction
personnel

Items excluded from Contract costs

Costs that cannot be attributed are excluded from the costs of construction . Such costs include
1) General Administration Costs for which reimbursement is not specified in the contract.
2) Selling costs
3) Research and Development costs for which reimbursement is not specified in the contracts.
4) Depreciation on idle plant and equipment that is not used on a particular contract.

Recognition of Revenue
------------------------------------------------------------------------------------------------------------------------
| |
Estimated reliably Cannot be estimated reliably
| |
Apply percentage Recognise income only
completion method to the extent of such
i.e recognise the revenue and contract costs incurred,
expenses having regard to the the recovery of which
stage of completion of the is probable. Further
contract activity at the contract costs are to be

12
reporting date. treated as period costs..

PROFESSIONAL ACCESS Ph:98494 19306

Vijayawada
Topic: Accounting Standards

Determination of stage of completion : In % completion method an enterprise recognises the revenue and
expenses with reference to stage of completion of contract activity at the reporting date. Now the question
arises as to how to determine the stage of completion of the contract.

The stage of completion of contract may be determined in a variety of ways.Depending upon the nature of the
contract an enterprise may adopt any of the following methods.

a) Proportion of contract costs incurred for work performed upto the reporting date bear to the estimated total
contract costs.
b) Surveys of work performed
c) Completion by physical proportion of the contract work.

Disclosure:
An enterprise should disclose
a) amount of revenue recognized
b) methods used to determine amount of revenue recognized
c) Methods used to determine stage of completion.

AS-9 REVENUE RECOGNITION

This Standard explains as to when the revenue should be recognized in profit and oss a/c and also states the
circumstances in which revenue recognition can be postponed.
Account of Revenues
|
------------------------------------------------------------------------------------------------------------------------
| | |
Sale of Goods Rendering of Use of enterprise
services resources
Ingredients
Transfer of goods As when service -Interest
performed -Royalties
-Dividends
Timing of Revenue Recognition:
a) Revenue from sale of rendering services should be recognized at the time of the sale or rendering services.

However, if at the of rendering services or sale there is significant uncertanity in ultimate collection of the
revenue, then the revenue recognition is postponed and in such cases revenue should be recognized only when
it becomes reasonably certain that ultimate collection will be made.

b) It also applies to the revenue arising out of escalation of price, export incentive, interest etc.

APPLICABILITY :
AS-9 is not applicable to the folloiwng revenue or gain
a) Construction Contracts: Revenue arising from construction contracts
b) Leases: Revenue arising from hire purchase, lease agreements
c) Grants:Revenue arising from Govt. grants and subsidies
d) Insurance Companies: Revenue of insurance companies arising from insurance contracts
e) Sale of Assets: Gain-realized or unrealized gain. Ex:Profit on sale of fixed assets etc.

REVENUE FROM SALE OF GOODS

It is recognised when all the following conditions are fulfilled.

a) Seller has transferred the ownership of goods to buyer for a price or All significant risks and rewards of
ownership have been transferred to buyer.
b) Seller does not retain any effective control of ownership of the transferred goods
c) There is no significant uncertanity in collection of the amount of consideration ( cash, receivables etc)

** Revenue Recognition when the delivery of goods is delayed at buyers request:

Delivery is delayed at buyer's request and buyer takes title and accepts billing. Revenue should be recognized
immediately but goods must be in the hands of seller, identified and ready for delivery at the time of
recognition of revenue.

* Goods are subjected to Installation,inspection etc

Revenue should normally not recognised until the customer accepts delivery and installation and inspection

13
 are complete. However, in some cases, the installation process may be so simple in nature that it may be
appropriate to recognise the sale even installation not yet completed

PROFESSIONAL ACCESS Ph:98494 19306

Vijayawada
Sub: Advanced Accounts
Topic: Accounting Standards

* Goods sent on sale or Return basis

Revenue should not be recognised until the goods have been formally accepted by the buyer.

* Consignment Sales
Revenue should not be recognised until the goods are sold to a third party. Revenue should not be
recognised when goods are transferred to agent. Revenue should be recognised only when agent sold
goods to a third party.

Installment sales:
When the consideration is receivable in installments, revenue attributable to the sale price exclusive of
interest should be recognised at the date of sale. The interest element should be reconginsed as revenue,
proportionately to the unpaid balance due to the seller.

Sales to intermediate parties:

Where goods are sold to distributors, dealers or others for resale, revenue from such sale should be
recognised if significant risks of ownership have passed; however in some situations the byer may be an
agent and in such cases the sale should be treated as a consignment sale

Revenue from Rendering of Services :

Revenue from service is generally recognised as the service is performed. The performance of service is
measured by two methods namely:

a) Completed service contract method:

Revenue is recognised when service is about to be completed and no significant uncertainties exist about the
collection of amount of service charges.

b) Proportionate Completion Method:

Revenue is recognised by reference to the performance of each act. The revenue recognised under this method
would be determined on the basis of contract value, associated costs, number of acts or other suitable basis.

c) Installation fees:
It is recognised when the installation has been completed and accepted by the client.

d) Advertising and insurance agency commission:

Advertising commission is recognised when the advertisement appears before public.

Insurance commission is recognised on the effective commencement/renewal date of the policies.

e) Revenue from royalties

Royalties are recognised on the basis of accrual.

f) Revenue from Dividend

Wheneven company declares dividend we recognise it as income.

Disclosure:
If revenue recognition is postponed the disclosure of the circumstances necessitating the postponement
should be made.

Manner of Disclousre
To ensure uniformity in the manner of disclosure of Turnover by Companies, the Amount of Turnover
should be disclosed in the P & L A/c as under.
Gross Turnover xxxxx
Less Excise duty xx
Net Turnover xxxxx

Considerations for excise duty :

a) Excise duty on sales : Shown as deduction: Excise duty shown as a deduction from turnover should be the
total excise duty for the year. It should not include the Excise duty related to the difference between
the closing stock and opening stock.

b) Excise duty on Stock : ( Separate Disclosure)

ED relating to the difference between the closing stock and opening stock should be recognised separately

14
 in the P & L A/c.

PROFESSIONAL ACCESS Ph:98494 19306

Vijayawada
Sub: Advanced Accounts
Topic: Accounting Standards

AS-10 ACCOUNTING FOR FIXED ASSETS

Fixed Asset : Defined as

a) It is as asset which is used for providing services or which is used for producing goods.
b) Not held for sale in normal course of business.
c) Expected to be used for more than one accounting period.

Ex: Land, Building, Plant and Machinery .....etc

Applicability: This accounting standard is not applicable to the following items.

a) Forests, plantations and similar regenerative natural resources

b) Wasting assets like minerals, oil and natural gas
c) Expenditure on real estate development
d) Live stock

Fixed assets if purchase are valued at cost less depreciation the financial statements.

Cost means purchase cost plus import duties and non refundable taxes and all other expenditures which are
directly attributable to the assets.

If Fixed assets are self generated then all costs related to specific asset and other expenses which are
attributable to the construction of self generation are includible in cost of Fixed assets.

Cost of fixed asset acquired in exchange of existing assets: ( consideration in kind)

If assets exchanged is similar: Asses acquired should be recorded at the value of assets acquired.

Revaluations :
When fixed assets are revalued, these assets are shown at revalued price in financial statement. Generally
specific valuers do revaluation. Revaluations may be done by using price indexes.

When a fixed assets is revalued, the entire class of fixed asset be revalued or the selection of assets for
revaluation should be made on a systematic basis. The basis must be disclosed.

Presentation : There are two methods for showing the revalued amount in the financial statements. They are-
a) By re-stating the gross book value and accumulated depreciation.

b) By re-stating net book value adding therein the net increase on account of revaluation.

Maximum amount of revaluation : Revaluation of fixed assets should be restricted to the net recoverable
value of fixed asset.

Accounting Treatment :
Case 1 :
First time Revaluation: ( Up ward)
Increase net book value of assets and credit owners interest under the head Revaluation reserve

Case 2 : First time Devaluation:(Down ward)

Decrease net book value and transfer loss to P & l A/c

Case 3 : First Revaluation (downward) and subsequent Revaluation (upward)

Decrease in book value charge to P & l A/c in the year in which downward revaluation was done.

Amount of revaluation that can be credited to P & L A/c is restricted to the amount of devaluation earlier
written off. Balance amount of revaluation should be credited to Revaluation.

Case 4 : First revluation ( upward) and subsequent (downward)

Increase net book value and credit to Revaluation reserve

15
 Amount of devaluation can be charge to revalaution reserve to the extent the revalation reserve earlier
credited is unutilised, the balance amount of devaluation is charged to P & L A/c.

PROFESSIONAL ACCESS Ph:98494 19306

Vijayawada
Sub: Advanced Accounts
Topic: Accounting Standards

Valuation of Fixed Assets in Some Special Cases :

Assets acquired on Hire purchase basis: Such assets are recorded at cash price only.( interest portion
ignore)

Cost of Jointly Held assets : Either the original cost, accumulated depreciation, and written down value should
be stated in the Balance sheet in the proportion in which the entity has right to utilise the asset

Fixed assets acquired at consolidated price: Cost of each fixed asset should be determined on a fair basis
as per valuation by competent valuers.

Retirement and disposals :

When fixed assets are sold and destroyed or demolished they are deleted from the financial statements. In
case any gain or loss arised on disposal .. etc transfer to P & L A/c.

Disclosure :
a) Gross and net book values of fixed assets at the beginning and at the end of the accounting period
showing additions, disposal, acquisition and other movements.

b) Revalued amount substituted for historical cost of fixed assets, the method adopted to compute the
revalued amount, and whether an external valuer has valued the fixed assets in case where fixed
assets are stated at revalued amount.

REVALUATION OF FIXED ASSETS

|
| |
First time Revaluation Already revalued in fast
|
--------------------------------------- |
| | Previous valuation
Increase in Value Decrease in value ---------------------------------------------------------------------
| |
| |
Credit Revaluation A/c Charge to P & L A/c Increase in Value Decrease in value
| |
Now Now
| |
----------------------------- __________________________
| | | |
Increase in value Decrease in Increase in value Decrease
Value | in value
| | | |
Credit revaluation ------------------ ------------------------- |
Reserve | | | | |
Charge Charge to Credit Credit Charge to
Revaluation P & L A/c P &L A/c Revaluation P
& L A/c
reserve for to the extent reserve for
Previous of previous balance
Increase decrease

AS-13 ACCOUNTING FOR INVESTMENTS

(Mandatory for all enterprises from 1-4-1995)

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

In addition to investment in securities i.e shares and debentures of other companies, assets like land and
buildings held for earning rentals or capital appreciations are also investments.

Assets held as stock in trade are however not investments.

Investments are of two types. They are

16
 a) Current Investment b) Fixed Investment or Long term Investment
Current investment: A current investment is an investment that is readily realizable and is intended to be held

not for more than one year from the date of such investment.

Long term investment: A long term investment is an investment other than Current investment.
PROFESSIONAL ACCESS Ph:98494 19306
Vijayawada
Topic: Accounting Standards

AS-13 requires enterprises to disclose current investments and long term investments separately in its financial
statements.

Long term investments are not intended for disposal in the near future, the market value of such investments are
not relevant. Due to this long term investments are carried at cost, unless there is a permanent decline in value.

Current investments being investments to be disposed within a year are carried at lower of cost and fair value.

Fair Value: Fair value is the amount for which an asset could be exchanged between a willing buyer and a seller
in transaction. Market value or Net Realisable Value is generally taken as Fair value.

Market Value: It is the amount realizable from the sale of investment in an open market.

Cost of Investments to be recorded:

Cost of an investment should include acquisition charges such as brokerage, fees and duties.

If investment is acquired by issue of shares or other securities , the acquisition cost should be fair value of
securities issued.

If an investment if acquired in exchange of another asset, the acquisition cost of the investment should be
determined by reference to the fair value of the asset given up. Alternatively the acquisition cost of the
investment may be determined with reference to the fair vaue of the investment acquired if it more clearly
evident.

Treatment of pre-acquisition interest received:

Interest on debentures are paid periodically. A holder of debenture collects interest due from last due date to
current due date whether or not debentures were held by him throughout the period.

For this reason seller of debentures collects interest from last due date to date of sale from buyer. Where price
includes this interest it is called cum-interest price. In case of ex-interest price the buyer pays interest separately

If cost of investment in debentures in taken to be cum-interest price, interest collected by the buyer from last due
date to date of acquisition of debentures ( pre-acquisition interest) , should be regarded as recovery of cost.

Treatment of Disposal of investments:

Full Disposal of investments: On disposal of an investment, the difference between the carrying amount, the
difference between the carrying amount and net disposal proceeds shouldbe charged to the profit and loss a/c.

Disposal of part investments: When disposing a part of the investments, the profit or loss is calculated on the
basis of average value and carrying value of the investment in the books of account also determined on the
basis of average basis only.

Reclassification of investments:
Long term to Short term: Where long term investments are reclassified as current investments, transfers are
made at the lower of cost and carrying amount at the date of transfer.

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

Right Shares:
When right shares are subscribed for, the cost of rights shares is added to the amount of the original holding.

Disclosure Requirements:
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 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 TDS being included under Advance Taxes paid.

17
 ii) profits and losses on disposal of current investments and changes in the carrying amount of such
investments and

iii) profits and losses of long term investments and changes in the carrying amount of such investments.
iv) The aggregate amount of quoted and unquoted investments, giving the aggregate market value of quoted
investments.
PROFESSIONAL ACCESS Ph:98494 19306
Vijayawada
Topic: Accounting Standards

AS-14 ACCOUNTING FOR AMALGAMATIONS

(Mandatory from 1-4-1995)

Quite often two or more companies separately incorporated under the Companies Act, 1956 are merged together
to form a new company. In this there may arise goodwill or capital reserve. ( being the difference between
purchase price and net price)

AS-14 aims to provide accounting treatment of mergers and also treatment of goodwill or capital reserve.

The standard does not deal with acquisitions where an investor acquires whole or part of capital of some other
company and does not result in dissolution of the acquired entity.

Types of amalgamations:
Amalgamation is of two types
a) Amalgamation in the nature of merger b) amalgamation in the nature of purchase

Amalgamation in the nature of merger: If the following conditions are satisfied then we call the
amalgamation as amalgamation in the nature of merger.

a) All the assets and liabilities of the transferor company become after amalgamation , the assets and liabilities
of the amalgamated company.

b) Shareholders holding not less than 90% of face value the equity shares of the transferor company must
become the shareholders of the transferee company.

c) 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 cash may be paid in respect
of fractional shares.

d) the business of the transferor company is intended to be carried on, after the amalgamation, by the
transferee company.

e) No adjustment is intended to be made to the book value of 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.

Amalgamation in the nature of purchase:

If any of the above stated conditions not satisfied then we call the amalgamation as amalgamation in the nature
of purchase.

Method of Accounting for Amalgamations:

This Accounting standard stipulates about two methods of Accounting for Amalgamation.

a) Pooling of Interest Method:

i) Recording assets and liabilities: In preparing the transferee company financial statements, the
assets,liabilities and reserves of the transferor company should be recorded at their existing
values at the date of amalgamation.

ii) Profit and Loss A/c balance: The balance of Profit and loss A/c of the transferor company should
be transferred to the transferee company

iii) Conflicting Accounting Policies:

Generally while transferring assets from transferor company to transferee company we consider
only book values. Even assets revalued we ignore them . But if at the time of amalgamation, the
transferor and transferee companies have different accounting policies, a uniform set of
accounting policies should be adopted.

Ex: In case transferor company is following St.line method of providing depreciation on assets and
if transferee company is following WDV method then adjust asset values as per WDV .

18
 iv) Purchase consideration adjustments:
If purchase consideration is more than the share capital of the transferor company ( equity + preference
share capital) then the amount shall be debited to reserves, if reverse the difference is credited to reserves.

PROFESSIONAL ACCESS Ph:98494 19306

Vijayawada
Topic: Accounting Standards

The purchase Method:

a) Recording of assets and liabilities: Record the assets and liabilities as per the revaluations agreed between
the transferor company and the transferee company. If revaluations not specified then record at book values.

b) Treatment of reserves: All the reserves except statutory reserves we transfer to Equity shareholders
account.

c) Treatment of Statutory Reserves: Statutory reserves like PF A/c, provision for Gratuity are to be
transferred to transferee company A/c. Some time due to some statutory requirements reserves of the
transferor company should be recorded in the books of transferee company. In this Amalgamation
Adjustment Account is debited and statutory reserves are credited in transferee company books.

Amalgamation adjustment a/c shall be disclosed in balance sheet under the head ‘Miscellaneous
expenditure and statutory reserves under the head Reserves and Surplus. For this Journal entry is

Amalgamation Adjustment A/c Dr.

To Reserve A/c

Treatment of goodwill arising on amalgamation:

Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is
appropriate to treat it as an asset to be amortized to income on a systematic basis over its useful life. Due to the
nature of goodwill, it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is
therefore made on a prudent basis. Accordingly it is considered appropriate to amortize goodwill over a period
not exceeding 5 years unless a somewhat longer period can be justified.

Disclosure
The following disclosures are considered appropriate in the first financial statements following the amalgamation.

a) names and general nature of business of the amalgamating companies

b) Effective date of amalgamation for accounting purposes
c) The method of accounting used to reflect the amalgamation and
d) Particulars of scheme sanctioned under a statute.

Amalgamation accounted under pooling of interest method:

a) description and number of shares issued, together with % of each company equity shares exchanged to
effect the amalgamation.
b) The amount of any difference between the consideration and the value of net identifiable assets acquired,
and the treatment thereof.

GENERAL QUESTIONS

****Accounting standards deals with issues of

1) Recognition of events and transactions in financial statements

2) Measurement of these transactions and events
3) Presentation of these transactions and events in financial statements in a manner that is meaningful and
understandable to the trader and
4) Disclosure requirements which should be there to enable the public at large and stake holders and potential
inventors in particular to get an insight into what these financial statements are trying to reflect and thereby
facilitating them to take prudent and informed business decisions.

19