a note on financial reporting standards

8/6/2019 A Note on Financial Reporting Standards

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A Note on Financial Reporting Standard (14

Questions & Answers)

1. What is the distinction betweenStandard setting bodies and regulatory

authorities?

There is a distinction between the standard

setting bodies and regulatory authorities.

Standard Setting bodies such as International

Accounting Standards Board (ISAB), USA,

Financial Accounting Standards Board (FASB),

USA, Institute of chartered Accountants of

India (ICAI) are typically professional bodies

governed by the principle of self regulation.

Whereas, Securities Board of India (SEBI),

India and Companies Act/Income Tax act

(India) are government authorities and havelegal authority to enforce financial reporting

requirements.

2. What is IFRS?IFRS is International Financial Reporting

Standards and it is attempt to have one global

standard for financial reporting. At the centerof financial IFRS framework is (a) fair

representation of financial position; (b)


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financial performance and; (c) cash flows of a

company.

3. What are the qualitativecharacteristics of Financial Statements

under IFRS framework?

(a) Understandability (information should bereadily understandable; (b) Relevance

(Information should be timely rather than

dated (c) Reliability (Reliable information is

free from bias and materiality). Materiality

means that omission & misstatement of

information.

4. What elements provide information onfinancial position and Financial

performance?

Financial position is measured by relativecomposition of Assets, Liabilities and Equity in

the balance sheet. The financial performance is

measured by Revenue, Expenses and Capital

account adjustments such as depreciation.

5. What are the underlying assumptionsunder IFRS framework?Accrual basis of accounting and going concern

are the two key underlying assumptions of

IFRS.


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6. What is GAAP?GAAP is Generally Accepted Accounting

Practice and it is a standard prescribed

primarily in USA. GAAP is the standards and

prescriptions prescribed by various bodies but

primarily issued by American Institute of

Certified Public Accountants (AICPA). There are

hierarchy in GAAP. The top level hierarchy is

standards issued by Financial Accounting

Standards board (FASB). Prescriptions from

other bodies come into play only when there is

no relevant explicit prescription by FASB.

7. What are main difference betweenGAAP and IFRS?

The principle difference between GAP and IFRS

lies in that GAAP provides separate objectivesfor business and non-business entities where

as IFRS makes no such distinction.

3What are disclosures and where they are

presented in the annual report?

Under both GAAP and IFRS, companies can

choose alternative accounting policies such asthat in depreciation accounting and inventory

accounting. These policies have to be disclosed

either as footnotes to the financial statements


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or discuss their accounting policies in

Managerial discussion & analysis (MD&A)

8. What are the Accounting Standards(AS) in India?

Some of the important accounting standards in

India are AS#1 (Deals with discloser

requirements); As#2 (deals with valuation of

inventories); AS#3 (Cash Flow statement);

AS#5 (Net profit or loss for current period and

previous period & significant changes in

accounting polices thereof); AS#9 (Revenue

Recognition); AS#17 (Segment Reporting);

AS#22 (taxes on income).

9. What is AS#1?AS#1 deals with disclosure polices of the

company. It facilitates better understanding offinancial statements as well as meaningful

comparison between financial statements of

different enterprises. Accounting policies are

specific accounting principles and their

application in preparation of financial

statements. These policies pertain to thefollowing:

Treatment ofGoodwill


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Valuation of InventoriesValuation of Investments

Valuation of Fixed Assets

Methods of Depreciation

Treatment of retirement benefits

Treatment of Contingent Liabilities

PRIMARY CONSIDERATION of the accounting

policy is to provide the financial statements

that represent a true and fair view of the state

of affairs of the enterprise. The SECONDARY

CONSIDERATIONs are Prudence, Substance &

Materiality. The fundamental assumptions in

accounting are (a) going concern; (b)

Consistency and; (c) accrual. These are

not explicitly stated in the annual reportbut are assumed.

The disclosure requirements are as

follows:

All significant accounting policiesadopted should be disclosed.

The disclosure should form part of the

financialstatements.


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Any change in the accounting policieswhich has a material effect in the

current period should be disclosed along

with amount of effect.

If the fundamental accounting

assumptionsare not followed, the fact

should be disclosed.

10. What is AS#2?Scope: Specifies the principals for valuing the

inventory & Disclosure of the specific policies

adopted by the management for the valuation

of inventory.

This statement should be applied in accounting

for inventories other than:

a.Work in progress arising underconstruction contracts, including directly

related service contracts.

b.Work in progress arising in the ordinarycourse of business of service providers.

c.Shares, debentures and other financialinstruments held as stock-in-trade; And.

d.Producers inventories of livestock,agricultural and forest products, and

mineral oils, ores and gases to that extent


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that they are measured at net realisable

value in accordance with well established

practices in those industries.

Definition of Inventories: they are assets,

held for sale in the ordinary course of business

in the process of production for such sale and

in the form of materials or supplies to be

consumed in the production process or in the

rendering of services.

Definition of Net Realizable Value is the

estimated selling price in the ordinary course

of business less the estimated costs of

completion and the estimated cost necessary

to make the sale. Inventories are written down

to net realizable value on an item-by-itembasis except where it is appropriate to group

similar or related items;An assessment of net

realizable value is made as at each balance

sheet date.The valuation takes into

consideration cost and selling price fluctuations

directly relating to events occurring after thebalance sheet date to the extent that such

events confirm the conditions existing at the

balance sheet date.


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Prescription on valuation: Inventoriesshould be valued at the lower ofCostand Net

Realizable Value. The Practice of writing

down inventories below cost to Net Realizable

Value is consistent with the view that assets

should not be carried in excess of amounts

expected to be realized from their sale or use.

The cost of inventories should comprise:

(a) Cost of purchase ( including Duties and

taxes (other than those subsequently

recoverable by the enterprise from the taxing

authorities like MODVAT); Freight inwards and

other expenditure directly attributable to the

acquisition; (b) Cost of conversion: (Labor

Costs directly related to the production of

finished goods; Fixed and variable production

overheads that are incurred in converting

materials into finished goods and; Other

costs: included only to the extent they are

incurred in bringing the inventories to their

present location and condition. The cost should

exclude (a) Abnormal wastages of materials,

labour or other production costs; (b0 Storage

costs, unless they are necessary in the

production process; (c) Administrative


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overheads which do not contribute to bringing

the inventories to their present location and

condition and; (d) Selling and distribution

overheads.

Methods of Valuation of Inventory: FIFO,

LIFO, Weighted average.

Disclosure Requirements: Accounting

policies adopted in measuring

inventories, Cost formula used, Total carryingamount of inventories, methods of

Classification of the inventory into raw

materials and components, work in progress,

finished goods, stores and spares, and loose

tools.

11. What is AS#5?AS#5 deals with NET PROFIT OR LOSS FOR

THE PERIOD, PRIOR PERIOD ITEMS AND

CHANGES IN ACCOUNTING POLICIES. Some

relevant definitions under AS#5 are:

Ordinary activities are any activities and

other incidental activities which are undertaken

by an enterprise as part of its business.


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Extraordinary items are income or expensesthat arise from non recurring events and

transactions.

Prior period items are income or expenses,

which arise, in the current period as a result of

errors or omissions in the preparation of the

financial statements of one or more prior

periods.

Accounting policies are the specificaccounting principles and the methods of

applying those principles in the preparation

and presentation of financial statements.

Disclosure requirements under AS#5 are as

follows:

Extraordinary items: The nature and the

amount ofeach extraordinary item should be

separately disclosed in the statement of profit

and loss in a manner that its impact on

current profit or loss can be perceived.

Ordinary items: When items of income andexpense from ordinary activities are of such

size, nature or incidence that their

disclosure is relevant to explain the


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performance of the enterprise for the period,

the nature and amount of such items should

be disclosed separately.

Prior period items: The nature and amount

of prior period items should be separately

disclosed in the profit and loss statement in

such a way that their impact on the current

profit or loss can be perceived.

Accounting estimates: The nature andamount of a change in an accounting estimate

which has a material effect in the current

period or which is expected to have a material

effect in subsequent periods, should be

disclosed. If the effect cannot be quantified,

this fact should be disclosed.

Accounting policies: The effect of any

change in an accounting policy, if material,

should be disclosed in thefinancial statements

of the period quantifying the impact. Where

the effect cannot be quantified, wholly or in

part, the fact should be disclosed.

12. What is AS#9?AS#9 deals with recognizing revenue arising in

the course of the ordinary activities of the


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enterprise. It includes sale of goods, rendering

of services and use by others of enterprise

resources yielding interest, royalties and

dividends. This statement does not deal with

the Revenue arising from construction

contracts; Revenue arising from hire-purchase,

lease agreements, Revenue arising from

government grants and other similar subsidies

and the Revenue of insurance companies

arising from insurance contracts.

Revenue Recognition under of sale ofgoods should be based on the following

CONDITIONS:

a.The property in goods in transferred for aprice.

b.All significant risks and rewards have beentransferred and no effective control is

retained.

c.No significant uncertainty exists regardingthe amount of consideration.

d.It is reasonable to expect ultimatecollection of consideration.


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REVENUE RECOGNITION underRENDERING service should be based on

the following conditions:

a.Service is recognised either on completedservice or proportionate completion

method.

b.No, 1significant uncertainty existsregarding amount of consideration.

c. It is reasonable to expect ultimatecollection of consideration

d.Completed service method recognisesrevenue only when service complete or

substantially complete. In such cases

there are more than one act involved

and revenue is recognised on' execution of

all those acts.e.Proportionate completed method

recognises revenue proportionate with the

degree of completion of services. In such

cases there are more than one act involved

and revenue is recognised on execution of

certain acts.REVENUE RECOGNITION IN USE OFENTERPRISE RESOURCESBY OTHERS

under the following conditions:


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a.Interest: Revenue is recognized on thetime basis determined by the amount

outstanding and the rate applicable.

b.Royalty: Revenue is recognized inaccordance with the terms of the relevant

agreement.

c.Dividends: Revenue is recognized onlywhen a right to receive payment is

established.

DISCLOSURE REQUIREMENTS under AS#9When recognition of revenue is postponed due to

the effect of uncertainties, an enterprise should

disclose the circumstances in which revenue

recognition has been postponed.

13. What is AS#17?AS#17 deals with reporting financial

information about different types of products

and services an enterprise produces, and the

different geographical areas in which it

operates. Segment reporting benefits users in

terms of (a) Better understanding of the

performance of the enterprise; (b) Assess the

risks and returns of the enterprise and; (c)


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Make more informed judgments about the

enterprise as a whole.

Definitions under AS#17BUSINESS SEGMENT is a Distinguishable

component of an enterprise engaged in

providing an individual product or service

subject to risks and returns different from

other business segments.

GEOGRAPHICAL SEGMENT is a

Distinguishable component of an enterprise

Engaged in providing products or services

within a particular economic environment that

is subject to risks and returns that are differentfrom those of components operating in other

economic environments

Identification of Segment for Reporting: A

segment should be identified for reporting ifIts

revenue from sales to external customers is 10per cent more of the total revenue, or Its

segment result, whether profit or loss, is 10

per cent or more of the combined result of all


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segments in profit or loss, or Its segment

assets are 10 per cent or more of the total

assets of all segments. The location of

production or service facilities and other assets

of an enterprise or the location of its

customers. If total revenue attributable to all

reportable segment is less than 75% of the

total enterprises revenue, additional segments

should be identified as reportable segments,

even if they do not meet the 10% thresholds,

until at least 75% of total enterprises revenue

is included in reportable segments.

If a segment is identified as a reportable

segment in the current period, preceding

period segment data is presented for

comparative purpose, even if that segment did

not satisfy the 10% threshold in the preceding

period. A segment identified as a reportable

segment in the immediately preceding period

should continue to be a reportable segment for

the current period even if it does not meet the

10% threshold.

A segment should be reported as Business

Segment If RISKS AND RETURNS associated

with products and services are affected by


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Differences in the business segment. A

segment is reported as Geographic segment if

Operation are different countries or

geographical locations.

Companies can go for matrix presentation If

the risk & return of an enterprise are equally

effected by differences in the products and

services it produces and by differences in the

geographical areas in which it operates, then

the enterprise should use BUSINESS

SEGMENTS as its PRIMARY SEGMENT

reporting format and GEOGRAPHICAL

SEGMENTS as its SECONDARY REPORTING

format & full segment disclosures is given on

each basis

DISCLOSURE REQUIREMENTS underAS#17

a.Segment revenue from sales to externalcustomers

b.Segment revenue from transactions with othersegments

c.Segment resultd.Total carrying amount of segment assets;e.Total amount of segment liabilities;


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f.Additions to tangible and intangible fixedassets;

g.Depreciation and amortization for the periodh.Significant other non-cash expenses

14. What is AS#22?AS#22 deals with taxes on income. It deals

with ACCOUNTING INCOME (LOSS) which is

Net profit or loss for a period as per profit and

loss statement and TAXABLE INCOME (TAX

LOSS) which isIncome (loss) for a period

determined in accordance with the tax laws.

Accounting income and taxable income for a

period are seldom the same. Differences

between the two are on account of permanent

Differences & Timing Differences

Permanent differences are those which arise in

one period and do not reverse subsequently.

For e.g., an income exempt from tax or an

expense that is not allowable as a deduction

for tax purposes. Timing differences are thosewhich arise in one period and are capable of

reversal in one or more subsequent periods.


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For e.g., Depreciation, Sales Tax, Bonus etc.,

U/s 43B

CURRENTTAX is the amount that is expected

to be paid to the taxation authorities.

DEFERREDTAX ASSETS ANDLIABILITIES

are the tax amounts at the tax rates and tax

laws that have been enacted at the balance

sheet date. Excess tax paid as on balance

sheet date will be deferred tax assets and

taxes paid in short as on balance sheet are

deferred tax liabilities.

DISCLOSURE REQUIREMENTS underAS#22

a.Disclose major components of deferred taxassets and liabilities.

b.Deferred tax assets and liabilities should bedistinguished from assets and liabilities

representing current tax for the period

c.Disclose nature of evidence supportingrecognition of deferred tax assets in the

event of there being unabsorbed

depreciation or carried forward losses.


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d.On first implementation of the standard,the net deferred tax balance accumulated

prior to adoption of the standard should be

adjusted against revenue reserves.

HUL Annual Report - Instruction for study:

1.You may be asked to give the reported amount

of a particular asset or liability, revenue,

expenses, gains or losses. You have to

thoroughly read the Annual report and

familiarise yourself as to where the information

is available. For instance the amount of

revenue & expense, deferred tax assets,

deferred liability, Accounts payable, accounts

receivable, cost of goods sold etc

2.You have to familiarise yourself with where you

will find significant accounting policies. You

may be asked to explain a given accounting

policy.

3.You have to familiarise with the accounting

standards and should be able to relate a given

accounting policy with the accounting standard

4.You have to familiarize with segments wise

information reported in the annual report. You

may be asked to relate segment wise


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information with corresponding accounting

standard.

5.You have to familiarize with disclosures? In

addition you have to understand why they

important?

6.You have to familiarise with interest in Joint

ventures as reported in the annual report.

7.You have to familiarise with Operating

activities, investment activities and financing

activities reported in page 117? You should be

in a position to Define each type of activity

8.Familiarise with related party disclosure & its

significance in reporting

9.You have to familiarise with the kinds of

disclosures are presented in Management

Discussion and Analysis (MD&A) section of theannual report

a note on financial reporting standards

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