Accounting standards
Accounting Standard 1- Disclosure Of Accounting policies
This statement deals with the disclosure of significant accounting policies followed in preparing
and presenting financial statements.
2. 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 the financial statements. The accounting policies followed vary from
enterprise to enterprise. Disclosure of significant accounting policies followed is necessary if the
view presented is to be properly appreciated.
3. The disclosure of some of the accounting policies followed in the preparation and presentation
of the financial statements is required by law in some cases.
4. The Institute of Chartered Accountants of India has, in Statements issued by it, recommended
the disclosure of certain accounting policies, e.g., translation policies in respect of foreign
currency items.
5. In recent years, a few enterprises in India have adopted the practice of including in their
annual reports to shareholders a separate statement of accounting policies followed in preparing
and presenting the financial statements.
6. In general, however, accounting policies are not at present regularly and fully disclosed in all
financial statements. Many enterprises include in the Notes on the Accounts, descriptions of
some of the significant accounting policies. But the nature and degree of disclosure vary
considerably between the corporate and the non-corporate sectors and between units in the same
sector.
7. Even among the few enterprises that presently include in their annual reports a separate
statement of accounting policies, considerable variation exists. The statement of accounting
policies forms part of accounts in some cases while in others it is given as supplementary
information.
8. The purpose of this Statement is to promote better understanding of financial statements by
establishing through an accounting standard the disclosure of significant accounting policies and
the manner in which accounting policies are disclosed in the financial statements. Such
disclosure would also facilitate a more meaningful comparison between financial statements of
different enterprises.
Accounting Standard -2-Valuation of Inventories
This Statement should be applied in accounting for inventories other than:
(a) work in progress arising under construction contracts, including directly related
service contracts (see Accounting Standard (AS) 7, Accounting for Construction
Contracts);
(b) work in progress arising in the ordinary course of business of service providers;
(c) shares, debentures and other financial instruments held as stock-in-trade; and
(d) producers' inventories of livestock, agricultural and forest products, and mineral oils,
ores and gases to the extent that they are measured at net realisable value in accordance
with well established practices in those industries.
2. The inventories referred to in paragraph 1 (d) are measured at net realisable value at certain stages of
production. This occurs, for example, when agricultural crops have been harvested or mineral oils, ores
and gases have been extracted and sale is assured under a forward contract or a government guarantee,
or when a homogenous market exists and there is a negligible risk of failure to sell. These inventories are
excluded from the scope of this Statement.
Definitions
3. The following terms are used in this Statement with the meanings specified:
Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the
rendering of services.
Net realisable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.
4. Inventories encompass goods purchased and held for resale, for example, merchandise purchased by
a retailer and held for resale, computer software held for resale, or land and other property held for
resale. Inventories also encompass finished goods produced, or work in progress being produced, by the
enterprise and include materials, maintenance supplies, consumables and loose tools awaiting use in the
production process. Inventories do not include machinery spares which can be used only in connection
with an item of fixed asset and whose use is expected to be irregular; such machinery spares are
accounted for in accordance with Accounting Standard (AS) 10, Accounting for Fixed Assets.
Measurement of Inventories
5. Inventories should be valued at the lower of cost and net realisable value
Accounting Standard-6 Depreciation Accounting
Introduction
1. This Statement deals with depreciation accounting and applies to all depreciable assets, except the
following items to which special considerations apply:—
(i) forests, plantations and similar regenerative natural resources;
(ii) wasting assets including expenditure on the exploration for and extraction of minerals,
oils, natural gas and similar non-regenerative resources;
(iii) expenditure on research and development;
(iv) goodwill;
(v) live stock.
This statement also does not apply to land unless it has a limited useful life for the enterprise.
2. Different accounting policies for depreciation are adopted by different enterprises. Disclosure of
accounting policies for depreciation followed by an enterprise is necessary to appreciate the view
presented in the financial statements of the enterprise.
Definitions
3. The following terms are used in this Statement with the meanings specified:
3.1 Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable
asset arising from use, effluxion of time or obsolescence through technology and market changes.
Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting
period during the expected useful life of the asset. Depreciation includes amortisation of assets whose
useful life is predetermined.
3.2 Depreciable assets are assets which
(i) are expected to be used during more than one accounting period; and
(ii) have a limited useful life; and
(iii) 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 the purpose of sale in the
ordinary course of business.
3.3 Useful life is either (i) the period over which a depreciable asset is expected to be used by the
enterprise; or (ii) the number of production or similar units expected to be obtained from the use of the
asset by the enterprise.
3.4 Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for
historical cost in the financial statements, less the estimated residual value.
Accounting Standard-9 Revenue Recognition
Introduction
1. This Statement deals with the bases for recognition of revenue in the statement of profit and loss of an
enterprise. The Statement is concerned with the recognition of revenue arising in the course of the
ordinary activities of the enterprise from
— the sale of goods,
— the rendering of services, and
— the use by others of enterprise resources yielding interest, royalties and dividends.
2. This Statement does not deal with the following aspects of revenue recognition to which special
considerations apply:
(i) Revenue arising from construction contracts;
(ii) Revenue arising from hire-purchase, lease agreements;
(iii) Revenue arising from government grants and other similar subsidies;
(iv) Revenue of insurance companies arising from insurance contracts.
3. Examples of items not included within the definition of "revenue" for the purpose of this Statement are:
(i) Realised gains resulting from the disposal of, and unrealised gains resulting from the holding of, noncurrent assets e.g. appreciation in the value of fixed assets;
(ii) Unrealised holding gains resulting from the change in value of current assets, and the natural
increases in herds and agricultural and forest products;
(iii) Realised or unrealised gains resulting from changes in foreign exchange rates and adjustments
arising on the translation of foreign currency financial statements;
(iv) Realised gains resulting from the discharge of an obligation at less than its carrying amount;
(v) Unrealised gains resulting from the restatement of the carrying amount of an obligation.
Definitions
4. The following terms are used in this Statement with the meanings specified:
4.1 Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the
ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the
use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by
the charges made to customers or clients for goods supplied and services rendered to them and by the
charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is
the amount of commission and not the gross inflow of cash, receivables or other consideration.
4.2 Completed service contract method is a method of accounting which recognises revenue in the
statement of profit and loss only when the rendering of services under a contract is completed or
substantially completed.
4.3 Proportionate completion method is a method of accounting which recognises revenue in the
statement of profit and loss proportionately with the degree of completion of services under a contract.