gaap accounting

GENERALLY ACCEPTED ACCOUNTING PRINCIPLESANUSHREE GUPTA (13)ANKITA MAHAJAN (09)ARSHIT MAHAJAN (15)ANSOYA DHAR (11)SECTION - A

CONTENTS•Need of accounting principles•Generally accepted•Generally accepted accounting principles•Who makes the accounting principles?•Characteristics of accounting principles•Selection of accounting principles•Procedure of standard setting by iasc•Accounting Concepts•Accounting Conventions•Accounting standards

NEED OF ACCOUNTING PRINCIPLES•The financial statements are public documents. •There are several parties interested in the financial

statements • If every business follows its own accounting

practices, the final accounts may not be understandable to all such parties in a similar and uniform manner.

•“Accounting principles are the rules based on assumptions, customs, usages and traditions for recording transactions.”

‘GENERALLY ACCEPTED’•An English case associated Portland cement

manufacturer ltd. Vs price commission (1974)• In this case the defendant price commission argued

that the term ‘generally accepted’ meant generally adopted or used in practice.

•The plaintiff company associated Portland cement manufacturers ltd. Argued that the term ‘generally accepted’ meant generally recognised by the accounting profession as acceptable, irrespective of the degree of their use.

•The court supported the company argument. Justice Lord Denning observed , “ it seems to me that the phrase (generally accepted) means generally proved accounting principles. It means principles which are generally regarded as permissible or legitimate by the accounting profession. That is sufficient even though only one company applies in practice.”

GENERALLY ACCEPTED ACCOUNTING PRINCIPLESAccounting Principles Board of USA states: “ Generally Accepted Accounting Principles

incorporate the consensus at a particular time as to which economic resources and obligations should be recorded as assets and liabilities by financial accounting, which changes in assets and liabilities should be recorded, when these changes are to be recorded, how the assets and liabilities and changes in them should be measured, what information should be disclosed and which financial statements should be prepared.”

• Walgenbach et al comments: “Because no basic natural accounting law exists,

accounting principles have developed on the basis of their usefulness. Consequently the growth of accounting is more closely related to experience and practice than to the foundation provided by ultimate law. As such, accounting principles tend to evolve rather than be discovered, to be flexible rather than precise and to be subject to relative evaluation rather than be ultimate or final.”

Similarly APB Statement no. 4 observes: “ present generally accepted accounting principles

are the result of an evolutionary process that can be expected to continue in the future…… generally accepted accounting principles change in response to changes in the economic and social conditions, to new knowledge and technology, and to demand of users for more serviceable financial information. The dynamic nature of financial accounting - its ability to change in response to changed conditions – enables it to maintain and increase the usefulness of the information it provides.”

WHO MAKES THE ACCOUNTING PRINCIPLES?

• Accounting Standards Board (ASB)

• Institute of Chartered Accountants of India (ICAI)

• Department of Company Affairs (Govt. of India)

• Securities and Exchange Board of India (SEBI)

• Institute of Costs and Works Accountants of India

• Institute of Company Secretaries

• Stock Exchange

• Financial Accounting Standards Board (FASB)

• American Institute of Certified Public Accountants (AICPA)

• Securities and Exchanged Commission (SEC)

• Internal Revenue Service• The American Accounting

Association

PRINCIPLES ARE CLASSIFIED INTO TWO CATEGORIES•Accounting Concepts: the basic assumptions or

fundamental propositions within which accounting operates.

•Accounting Conventions: the outcome of accounting practices or principles being followed by the enterprises over a period of time.

CHARACTERISTICS OF ACCOUNTING PRINCIPLES•Objectivity: accounting information is prepared and

reported in a “neutral” way.•Application: Application of the principle must be

possible.•Reliability: the accounting information that is

presented is truthful, accurate, complete and capable of being verified.

•Feasibility: it can be implemented without much complexity or cost.

•Understandability: The accounting principle should be simple and easily understandable by all.

SELECTION OF ACCOUNTING PRINCIPLES The considerations which guide the selection of

accounting principles for financial reporting purposes are as follows:

1. Accurate Presentation2. Conservatism3. Profit Maximization4. Income Smoothing

ACCURATE PRESENTATION•Assets: resources having future service potential•Expenses: a measure of the cost of services

consumed during the period. •The firm would select the inventory cost flow

assumption and depreciation method that most accurately measure the amount of services consumed during the period and the amount of services still available at the end of period.

•Limitation: It is difficult to know accurately the services consumed and the service potential remaining.

CONSERVATISM

•The firm may select the set that provides the most conservative measure of net income.

•Conservatism implies that methods should be chosen and the recognition of revenues should be postponed as long as possible.

•For example, would lead to selecting an accelerated depreciation method.

PROFIT MAXIMIZATION

•An effect opposite to conservatism.•The selection of accounting principles that maximize

cumulative reported earnings. •Revenue should be recognized as quickly as

possible, and the recognition of expense should be postponed as long as possible.

•For example, the straight-line method of depreciation would be used

INCOME SMOOTHING

• Accounting methods that result in the smoothest earnings trend over time.

• Net income, not revenues and expenses individually, is to be smoothed.

• For example, the straight-line method of depreciation may provide the smoothest amount of depreciation expense on a machine over its life. If However, the productivity of the machine declines with age so that revenues decrease in later years , net income using the straight –line method may not provide the smoothest net income stream.

PROCEDURE OF STANDARD SETTING BY IASC• IASC board selects a topic and assigns it to steering

committee• The steering committee studies issues involved and presents

to the boards a point outline on the topic.• The board gives its comments on to steering committee

which then prepares a preliminary draft a proposed standard.

• The board reviews preliminary draft of new standard and then circulates it to all member bodies of for their comments

• Based on these comments the steering committee prepares a revised draft and final exposure draft is submitted to the board for its approval.

• If draft is approved by two third vote of the board, the exposure draft will be sent to the members of IASC.

•The members may send their comments on ED.•These comments received are scrutinised and detailed

debate is held. In case of disagreement between members on the issue, remedial measures are taken, if the need is their even ED is revised.

•With the acceptance of ED, it is finalised and published for adoption by the members of international federation of accounts.

• IASC has only powers to prepare its standards and has no power or authority for their enforcement.

EXPOSURE DRAFT INCLUDES 1. A statement of concepts and fundamental

accounting principles related with standard2. Definitions of various terms used in standard.3. The manner in which the accounting principles

have been applied for development of the standard.4. Class of organisation to which standard will apply.5. Date from which standard will be effective.

ACCOUNTING PRINCIPLES•Accounting Principles are classified into

two parts.▫Accounting concepts.▫Accounting conventions.

ACCOUNTING CONCEPTS•These are basic assumptions or

fundamental proposition concerning the economic, political and sociological environment in which accounting must operate.

ACCOUNTING CONCEPT1. Business entity concept2. Money measurement concept3. Double entry concept4. Going concern concept5. Accounting period concept6. Cost concept7. Realization concept8. Matching of cost and revenue concept9. Accrual concept10.The reliability concept

Business Entity Concept•The business is considered to be a

separate entity from the proprietor.•Amount invested by proprietor is shown

as a liability in the books of business.•Amount paid for personal expense of

proprietor are shown as drawings from capital of the proprietor.

•It is applicable to all forms of business.

Money Measurement Concept• Accounting Records only monetary

transactions.• Money is the common denominator for

qualifying the effects of transactions.• Events or transactions which cannot be

expressed in money don not find place in the books of account though they may be very useful for the business.

• This concept help in understanding the state of affairs of the business in much better way.

Dual Aspect Concept•For Every Debit there is a corresponding

Credit.•No transaction complete without dual

aspect.•When a new business is started with a capital of

Rs. One lakh, the position is expressed as under:▫Capital (Equities) = Cash (Assets)

•The Term Assets denotes the resource owned by the business while the term Equities denotes the various claims of the parties against those assets.

Dual Aspect ConceptEquities = Assets i.e.Capital +liabilities = Assets• This is the Accounting Equation. i.e. the

relationship of equities with assets.

Going Concern Concept•This entity will continue to operate in

the foreseeable future.•It is assumed that the business will

continue for fairly long time to come.•There is neither the intention nor the

necessity to liquidate the particular business venture in the foreseeable future.

Accounting Period Concept•Acc. To “Going Concern” , every

business would exist for longer duration. That longer duration is divided into appropriate segments or periods for studying the results shown by business for each period.

•After each period , it is necessary “stop” and “see back” how things have been going. So it is necessary to maintain accounts in reference to a specific period.

Accounting Period Concept•Profit and loss and Balance sheets are

prepared.•Profit and loss shows the financial

results.•Balance sheet shows the financial

positioning.•Measure business performance.

Cost Concept•Assets and liabilities should be

recorded at historical cost.•This cost is basis for all subsequent

accounting for the assets.•It may be subsequently reduced in its

value by charging depreciation.•This concept brings objectivity in the

preparation and presentation of financial statements.

Realization Concept•What is the actual point of sale is and that

profit is deemed to have been accrued?•Sale is deemed to have taken place, when

the title to the property or goods passes from the seller to the buyer.

•Time of transfer of property is material as that point determines the time of recognition of profit.

Matching Principle• Periodic Matching of costs and revenue

concept. i.e. Revenues earned during an accounting period is compared with expenditure incurred during the same period for earning that revenue.

• It is basis for recording expenses and includes 2 steps:

• Identify all the expenses incurred during the accounting period.

• Measure the expenses and match expenses against revenues earned.

Matching Principle

Accrual Concept• Incomes and expenses should be recognized

as when they are earned and incurred irrespective of whether the money is received or paid for it.

• Revenue is recognized when it is realized i.e. when sale is complete or services are given irrespective of whether cash is received or not.

• Similarly, expenses are recognized when assets or benefits are used rather than when they are paid for and in the accounting period in which they help in earning the revenue whether cash is paid or not.

The Reliability Concept•Reliability – The quality of information

that assures decision makers that the information captures the conditions or events it supports to represent.

•Objectively Determined Evidence includes:▫Invoices and vouchers for purchase and

sale.▫Bank statements for amount of cash at

bank.▫Physical checking of stock in hand.

The Reliability Concept•Information must be reasonably accurate.•Information must be free from bias.•Information must report what actually

happened.•Individuals would arrive at similar

conclusions using same data.

ACCOUNTING CONVENTIONS•Accounting conventions are traditions and

customs which guide the accountant while preparing the accounting statements.

ACCOUNTING CONVENTIONS1.Conservatism2.Consistency3.Full disclosure4.Materiality

Conservatism•Anticipate no profits but provide for

all possible losses.•Prudence is the” inclusion of a degree of

caution in the exercise of judgement needed in making the estimate required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not under stated.”

Conservatism•Policy of ‘caution’ and ‘playing safe’.•Policy of safeguarding against possible

losses in world of uncertainty.•Assets or income are not overstated and

liabilities or expenses are not understated.

•Anticipated losses are shown in the form of provisions.

Consistency• Accounting practices should remain unchanged

from one accounting period to another.• The convention requires that once a firm has decided

on certain accounting policies and methods and has used these for some time, it should continue to follow the same methods or procedures for all subsequent similar events and transactions unless it has a sound reason to do otherwise.▫Comparison of one accounting period with that in the

past is not possible ▫Eliminates personal bias.

Consistency•Does not forbid introduction to new

techniques.•The change must be clearly stated in the

financial statements by a way of note.

Materiality•The accountant should attach

importance to material details and ignore insignificant details.

•Materiality often depends on :1.The size of the organization2.Purpose3.Amount involved4.Customs

Full Disclosure•Accounting reports should disclose fully and

fairly the information they purport to represent.•The financial statements should be honestly

prepared and sufficiently disclosure information which is of material interest to the present potential creditors and investors.

• ‘Notes of Accounts’ is provided below the balance sheet.

•E.g.. Information related to contingent liabilities and market value of investments

ACCOUNTING STANDARDS

ACCOUNTING STANDARDS• A standard is an agreed upon criteria of what is proper

practices in a given situation, a basis for comparison and judgement, a point of departure when variations is justifiable by the circumstances and reported as such.

• Standards are not design to confine practice within rigid limits but rather to serve as guide posts to truth, honesty and fair dealing.

• Not accidental but intentional in origin• Expressive of deliberately chosen policies.• It deals with mainly financial measurements and

disclosures and can be considered as technical response to calls for better financial accounting and reporting.

• Achieving uniformity in accounting practices.

Need of accounting standards• Accounting standards are being changed, added and

deleted with passage of time.• They act as guidelines and handy rules for the conduct of

accounting work.• They include 3 parts:1. A description of the problem to be handled.2. Discussion of ways of solving the problem.3. In the light of discussion of the prescribed solution.

Merits of accounting standards1. Standards improve reliability of financial

statements

2. Helpful for accounting professional

3. Accounting reforms

4. Determining managerial and corporate accounts

Accounting Standards issued by various authorities:(A) Accounting Standards (Accrual basis) issued by the Institute of Chartered Accountant of India (ICAI) are as follows:

Accounting Standards (ASs) No.

Accounting Standards on

Objectives of the Standards

AS 1 Disclosure of Accounting Policies

in preparation and presentation of the financial statements

AS2 Valuation of Inventories

to formulate the method of computation of cost of inventories / stock, determine the value of closing stock / inventory at which the inventory is to be shown in balance sheet till it is not sold and recognized as revenue

AS3 Cash Flow Statements

This statement exhibits the flow of incoming and outgoing cash.

AS4 Contingencies and Events occurring after the Balance Sheet Date

The Accounting Standard deals with Contingencies and Events occuring after the balance sheet date




AS5 Net Profit or Loss for the period, Prior Period items and changes in Accounting Policies.

to prescribe the criteria for certain items in the profit and loss account so that comparability of the financial statement can be enhanced. Profit and loss account being a period statement covers the items of the income and expenditure of the particular period. This also deals with change in accounting policy, accounting estimates and extraordinary items.

AS6 Depreciation Accounting

It is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, passage of time. Depreciation is nothing but distribution of total cost of asset over its useful life

AS7 Construction Contracts

As the period of construction contract is long, work of construction starts in one year and is completed in another year or after 4-5 years or so. There may be following two ways to determine profit or loss: On year-to-year basis based on percentage of completion or On completion of the contract.




AS8 Accounting for Research and Development

This deals with accounting for research and development

AS9 Revenue Recognition

The standard explains as to when the revenue should be recognized in profit and loss account and also states the circumstances in which revenue recognition can be postponed.

AS10 Accounting for Fixed Assets

It is an asset, which is:- Held with intention of being used for the purpose of producing or providing goods and services.

AS11 The effects of Changes in Foreign Exchange Rates (Revised 2003)

This accounting Standard applicable to accounting for transaction in Foreign currencies in translating in the Financial Statement Of foreign operation Integral as well as non- integral and also accounting for For forward exchange. Effect of Changes in Foreign Exchange Rate, an enterprises should disclose following aspects:•Amount Exchange Difference included in Net profit or Loss; •Amount accumulated in foreign exchange translation reserve; •Reconciliation of opening and closing balance of Foreign Exchange translation reserve;




AS12 Accounting for Government grants

Government Grants are assistance by the Govt. in the form of cash or kind to an enterprise in return for past or future compliance with certain conditions.

AS13 Accounting for investments

It is the assets held for earning income by way of dividend, interest and rentals, for capital appreciation or for other benefits.

AS14 Accounting for Amalgamation

It deals with accounting to be made in books of Transferee company in case of amalgamation

AS15 Employees Benefit (Revised 2005)

The scope of the accounting standard has been enlarged, to include accounting for short-term employee benefits and termination benefits

AS16 Borrowing costs

It prescribe the treatment of borrowing cost (interest + other cost) in accounting, whether the cost of borrowing should be included in the cost of assets or not




AS17 Segment Reporting

Disclosure of information regarding multiple products/services and their operations is called segment reporting

AS!8 Related Party Disclosures

disclosure of related party transaction is essential for proper understanding of financial performance and financial position of enterprise

AS19 Leases Lease is an arrangement by which the lesser gives the right to use an asset for given period of time to the lessee on rent. It involves two parties,

AS20 Earning Per share

The statement is applicable to the enterprise whose equity shares or potential equity shares are listed in stock exchange.

AS21 Consolidated Financial Statements

the consolidated balance sheet if prepared should be prepared in the manner prescribed by this statement.




AS22 Accounting for taxes on Income

This accounting standard prescribes the accounting treatment for taxes on income.

AS23 Accounting for Investments in Associates in Consolidated financial statements

It set out the principles and procedures for recognizing the investment in associates in the consolidated financial statements of the investor,

AS24 Discontinuing operations

The objective of this standard is to establish principles for reporting information about discontinuing operations.

AS25 Interim Financial Reporting

As per clause 41 of listing agreement the companies are required to publish the financial results on a quarterly basis




AS26 Intangible Assets

An Intangible Asset is an Identifiable non-monetary Asset without physical substance held for use in the production or supplying of goods or services for rentals to others or for administrative purpose

AS27 Financial Reporting of Interests in Joint Ventures

'Joint control' is the contractually agreed sharing of control over economic activity.

AS28 Impairment of Assets

As per AS-28 asset is said to be impaired when carrying amount of asset is more than its recoverable amount.

AS29 Provisions, Contingent Liabilities and Contingent Assets

Objective of this standard is to prescribe the accounting for Provisions, Contingent Liabilities, Contingent Assets, Provision for restructuring cost




AS30 Financial Instruments : Recognition and Measurement and Limited Revisions to AS 2, AS 11 (revised 2003), AS 21, As 23, AS 26, AS 27, AS 28, and AS 29

this Standard is to establish principles for recognizing and measuring Financial assets, financial liabilities and some contracts to buy or sell non-financial items

AS31 Financial Instruments: Presentation

This Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities.

AS32 Financial Instruments: Disclosures, and Limited Revision to Accounting Standards(AS) 19 , leases

The objective of this Standard is to require entities to provide disclosures in their financial statements that enable users to evaluate: •the significance of financial instruments for the entity’s financial position and performance; and •the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks

ACCOUNTING STANDARD -11

ACCOUNTING FOR THE EFFECTS OF CHANGE IN FOREIGN EXCHANGE RATES.

• This Accounting Standard applicable to accounting for transaction in Foreign currencies in translating in the Financial Statement Of foreign operation Integral as well as non- integral and also accounting for For forward exchange.

• Effect of Changes in Foreign Exchange Rate, an enterprises should disclose following aspects:

1. Amount Exchange Difference included in Net profit or Loss; 2. Amount accumulated in foreign exchange translation reserve; 3. Reconciliation of opening and closing balance of Foreign

Exchange translation reserve;

ACCOUNTING STANDARDS - 12ACCOUNTING FOR GOVERNMENT GRANTS

• Government Grants are assistance by the Govt. in the form of cash or kind to an enterprise in return for past or future compliance with certain conditions.

• Government grants can be accounted either using 1. Capital approach 2. Income approach• Capital approach : the grant is treated as a part of shareholder’s funds.• Income approach : the grant is taken to income over one or more periods to

match them with related costs.

ACCOUNTING STANDARDS - 13

ACCOUNTING FOR INVESTMENTS (REV. ’03)

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

• Investments are classified into long term investment & current investments.• The cost of investment includes acquisition charges such as brokerage, fees

and duties.• An enterprise should disclose current investments and long term investments

distinctly in financial statements.• Investment classified as current investments should be carried in financial

statements at the lower of cost and fair value determined.• Investment classified as long term investments should be carried in financial

statements at cost .• On disposal of an investment , the difference between the carrying amount and

net disposal poroceeds should be credited to the P/L Account.

ACCOUNTING STANDARDS - 14 ACCOUNTING FORAMALGAMATIONS

• An amalgamation takes place when two or more companies carrying on business of a like nature combine together and form a new company.

• Absorption , generally applies to a situation where an existing company buys or absorbs another smaller company doing similar business.

• From accounting point of view there are two types of amalgamations: 1. amalgamation in nature of merger 2. amalgamation in nature of purchase.• Methods followed : - nature of merger : pooling of interest method - nature of purchase : purchase method

ACCOUNTING STANDARDS - 15 ACCOUNTING FOR RETIREMENT BENEFITS

(Revised in 2005 & titled as Employees Benefit)

• This standard deals with the accounting treatment of the cost of the retirement benefits in the financial statements of the employer.

• Provident fund , superannuation /pension benefit, defined contribution scheme, defined benefit scheme and gratuity are the types of retirement benefits.

• Accounting treatment: - The cost of retirement benefits should be accounted for in the period during

which the employee renders service. - Thus, accounting for retirement benefits cost when the employee leaves i.e.

on the cash basis is not appropriate.

ACCOUNTING STANDARDS – 16BORROWING COSTS

• This standard prescribe the treatment of borrowing cost (interest + other cost) in accounting, whether the cost of borrowing should be included in the cost of assets or not .

• Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

• Capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset

• Other borrowing costs to be expensed off • Capitalise if it is probable that they will result in future

economic benefits to the enterprise and costs can be measured reliably

67

Ascertain whether there is a borrowing

AS-16 not applicable

Is it a general borrowing

Is it a specific borrowing for acquisition of a qualifying asset

Whether borrowing costs have been

incurred

Capitalise &disclose

Expense off the borrowing cost

OVERVIEWNo

No

Yes

No

Yes

Yes No

Yes

Yes

•Are borrowing costs directly attributable to the construction / acquisition / production of a qualifying asset•Are funds, that are generally borrowed, used for obtaining a qualifying asset

ACCOUNTING STANDARDS - 17 SEGMENTAL REPORTING

•A BUSINESS SEGMENT is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments.

•A GEOGRAPHICAL SEGMENT is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. • A REPORTABLE SEGMENT is a business segment or a geographical

segment identified on the basis of foregoing definitions for which segment information is required to be disclosed by the standard.

• ENTERPRISE REVENUE is revenue is revenue from sales to external customers as reported in the statement of profit and loss. (i.e. Sales made to external customers by all segments)

• SEGMENT REVENUE is the aggregate of revenue directly attributable to segments revenue reasonably allocated to segment; and revenue from transactions with other segments.

• SEGMENT EXPENSE is the aggregate of operating expense directly attributable to segment expenses reasonably allocated to segment; and expenses relating to transactions with other segments.

• Primary segment and Secondary segment :One among the two, Business Segment and Geographical Segment, is primary segment and other becomes secondary segment. The reporting requirements for the primary and secondary segments are different.

If RISKS AND RETURNS are affected by

Differences in the Operation in different products and services countries or geographical areas

BUSINESS SEGMENT GEOGRAPHICAL SEGMENT

• 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 SEGMENT.

• 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

ACCOUNTING STANDARDS - 18 RELATED PARTY DISCLOSURES (REV. ’03)

• The standard establishes requirements for the disclosure of : -Related party relationships; and- Transactions between a reporting enterprise and its related parties

• Related party is considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions.

• Disclosure During Existence Of Related Party Transactions Name of transacting related party; Description of the relationship; Description of the nature of transactions; Volume of transactions either as an amount or as an appropriate proportion; Any other element of the transaction necessary for an understanding of the

financial statements;

ACCOUNTING STANDARDS – 19 LEASES

• A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred.

• Leasing is an agreement that provides a firm with the use and control over asset without buying and owning the same.

• An operating lease is a lease other than a finance lease.• An operating or service lease is a short term lease on a period to period basis.

The lease period in such a contract is less than the useful life of an asset.• A lease is classified as financial lease if it ensures the lessor for amortization of

the same cost of investment plus the expected return on capital outlay during the term of the lease.

• Classification depends on substance of the transaction rather than the form of the contract

• Basic criteria providing guidance in determining whether these risks and rewards have been transferred.

ACCOUNTING STANDARDS - 20 EARNING PER SHARE (REV. ’04)

• Earning per share is a financial ratio that gives the information regarding earning available to each equity shareholder.

• The objective of this standard is to improve comparability as between two or more companies and as between two or more accounting periods.

• This statement is applicable to the enterprise whose equity shares or potential equity shares are listed in stock exchange & It is to be reported by the enterprises on the face of the statement of profit and loss a/c.

• Two types of EPS are: Basic EPS & Diluted EPS.• Basic EPS = Net profit/loss for the period attributable to equity shareholders /Weighted Average No. of Equity Shares • Diluted EPS = Adjusted Net profit/loss for the period attributable to equity

shareholders. / Weighted Average No. of (Equity Shares + Dilutive Potential Equity Shares)

ACCOUNTING STANDARDS - 21CONSOLIDATED FINANCIAL

STATEMENTS• The objective of this standard is to formulate principles and procedures for

preparation and presentation of consolidated financial statements.• Applicable to following enterprises: --Group of enterprises under the control of a parent. --Investments in subsidiaries• Excluded cases --Amalgamations -- Investments in associates --Investments in joint ventures• The consolidated financial statements are compiled on the basis of financial

statements of PARENT and all enterprises that are controlled by the parent.

• The consolidated financial statement of a parent organisation should encompass all the subsidiaries, both domestic and foreign companies

Consolidation procedures• Basic procedure : The financial statements of the parent and its subsidiaries should be combined on a ONE-TO-

ONE BASIS by grouping together the like items of assets, liabilities, income and expenses. • Other procedureThe holding company should eliminate its cost of investment in each of its

subsidiaries

If cost of investment > holding’s share in equity

GOODWILL

If cost of investment < holding’s share in equity

CAPITAL RESERVE

ACCOUNTING STANDARDS - 22ACCOUNT FOR TAXES ON INCOME

• ACCOUNTING INCOME (LOSS) : Net profit or loss for a period as per profit and loss statement.

• TAXABLE INCOME (TAX LOSS): Income (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 :

1. Permanent Differences2. 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 those which arise in one period and are capable of reversal in one or more subsequent periods. For e.g., Depreciation, Sales Tax , Bonus etc

• For determining the net profit or loss for the period, current tax and deferred tax have to be included.

• Deferred tax assets and liabilities are usually measured using the tax rates and tax laws for the time being in force.

• Deferred tax assets should be recognized and carried forward only to the extent of the deferred taxes those are realizable in future.

ACCOUNTING STANDARDS - 23ACCOUNTING FOR INVESTMENT INASSOCIATES IN

CONSOLIDATED FINANCIAL STATEMENT

• The standard explains the effects of investments in associates on the financial position and operating results of a group.

• An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor

• Significant influence is the power to participate in the financial and/ or operating policy decisions of an associates but does not extend to control over such policies.

• A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).

• A parent is an enterprise that has one or more subsidiaries. • A group is a parent and all its subsidiaries.• Consolidated Financial Statements are the financial statements of a group

presented as of a single enterprise. • Equity is the residual interest in the assets of an enterprise after deducting all

its liabilities. i.e.(Equity + Reserves)• The Equity Method is a method of accounting whereby the investment is

initially recorded at cost, identifying any goodwill/ capital reserve arising at the time of acquisition. The carrying amount of the investment is adjusted thereafter for the post acquisition change in the investor's share of net assets of the investee or to recognise the investor's share of the profits or losses of the investee after the date of acquisition.

ACCOUNTING STANDARDS - 24 DISCONTINUING OPERATIONS

•A discontinuing operation is a component of an enterprise: (a) that the enterprise, pursuant to a single plan, is: 1. -disposing of substantially in its entirety (example – demerger) 2. -disposing of piecemeal (selling and settling assets and liabilities one by one) 3. -terminating through abandonment; and (b) That represents a separate major line of business or geographical area of operations; and (c) That can be distinguished operationally and for financial reporting purposes. • A component that can be distinguished operationally and for financial reporting purposes

{criteria [c] above} – if all the following conditions are met: --the operating assets and liabilities of the component can be directly attributed to it; --its revenue can be directly attributed to it; --at least a majority of its operating expenses can be directly attributed to it. • An enterprise should include the following information relating to a

discontinuing operation in its financial statements beginning with the financial statements for the period in which the initial disclosure event occurs and up to and including the period in which discontinuance is completed.

ACCOUNTING STANDARDS - 25 INTERIM FINANCIAL REPORTING

• The objective of this Statement is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in a complete or condensed financial statements for an interim period.

•Interim period is a financial reporting period shorter than a full financial year. Interim financial report means a financial report containing either a complete set of financial statements or a set of condensed financial statements (as described in this Statement) for an interim period.

•An interim financial report should include, at a minimum, the following components(a) condensed balance sheet;(b) condensed statement of profit and loss;(c) condensed cash flow statement; and(d) selected explanatory notes.

ACCOUNTING STANDARDS – 26INTANGIBLE ASSETS

• An asset is a resource; (a) controlled by an enterprise as a result of past events; and (b) from which future economic benefits are expected to flow to the enterprise. • An intangible asset is an identifiable non-monetary asset, without physical

substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.

• The objective of this standard is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Accounting Standard.

• This standard requires an enterprise to recognize an intangible asset if, and only if, certain criteria are met.

• The standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures about intangible assets.

ACCOUNTING STANDARDS – 27FINANCIALREPORTING OF INTERESTS IN JOINTVENTURES

•The standards defines what is a joint venture.1. Joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control.2. Joint control is the contractually agreed sharing of control over an economic activity.3. Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefits from it.4. Proportionate consolidation is a method of accounting and reporting whereby a venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as separate line items in the venturer’s financial statements.• The accounting treatments depends on the nature of joint venture which can

be one of the three, i.e. 1. Jointly Controlled Entity or 2. Jointly Controlled Operations or 3. Jointly Controlled Assets.

ACCOUNTING STANDARDS - 28 IMPAIRMENT OF ASSETS

•Impairment of Assets means weakening in the value of asset. An enterprise should assess at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise should estimate the recoverable amount of the asset. • The main objective of this standard is:- To ensure that the assets are carried at no more than recoverable amount- Recoverable amount not to exceed the amount to be recovered through use or sale of the asset- Impaired loss to be recognized in the financial statement- Impaired loss may be reversed in certain circumstances- To make certain disclosures for impaired assets.

ACCOUNTING STANDARDS - 29 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

•PROVISION: A provision is a liability which can be measured only by using a substantial degree of estimation.

•Treatment: A provision should be recognized when: An enterprise has a present obligation as a result of past event It is probable that an outflow of resources embodying economic benefits will

be required to settle the obligation; and A reliable estimate can be made of the amount of the obligation.

ACCOUNTING STANDARDS 30, 31, &32FINANCIAL INSTRUMENTS—NOT

MANDATORY FOR YEAR ENDED MARCH31, 2011

• Need For AS on Financial Instruments1. Globalization of Indian Economy2. Increasing sophistication of financial products and markets3. No comprehensive standard before4. Diverse practice has made comparability of performance difficult.

• AS 30 - Financial Instruments: Recognition and Measurement• AS 31 - Financial Instruments: Presentation• AS 32 - Financial Instruments: Disclosures

Financial InstrumentsA legal document entered between 2 parties

Enforcement to receive Financial Asset and to pay Financial Liability

Right for one party to receive money or liquid asset & Obligation for other party to pay money or liquid asset

To be recognized when the parties entered into contract

Objective Of The Standards

To establish principles for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items

To present and classify financial assets and financial liabilities

To provide disclosures in financial statements so that users can evaluate –

The significance of financial instruments for the entity’s financial position and performance andThe nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks,

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