SOURCES OF
ACCOUNTING REGULATIONS
 Companies
Legislation : Companies
Act 1956(Companies Amendment Act
2002)
 Stock Exchange Listing Requirement
(SEBI Amendment Act 2002)
 Accounting Standards
AUDITORS HALL OF SHAME
 Arthur
Anderson
 Enron,
WorldCom,
Global Crossing,
Dynegy, Merck
 PWC
 KPMG
 Ernest
& Young
TYCO, Satyam
XEROX
AOL
INDIAN GAAP
Consists
of a set of various
pronouncements issued by
different regulatory authorities

Predominantly controlled by the
ICAI
ACCOUNTING STANDARDS
NEEDS

To harmonise the diverse
accounting policies and
practices
 To achieve uniformity in the
presentation of financial
statements
ACCOUNTING STANDARD BOARD
 To
formulate Accounting Standards
 To propagate the AS & persuade the
concerned parties to adopt
 To issue guidance notes on AS &
give clarification
 To periodically review the AS
SCOPE & STATUS
ASs
do not override the Law
Initial years: ASs are
recommendatory
29 Standards are now
mandatory,
3 - Recommended
PROCEDURE
 ASB
decides a broad area to be
standardised
 Formation of study group
 Preparation of preliminary draft
 ASB issues Exposure Draft
 AS is issued under the authority of
ICAI
STANDARD contains
A
statement of concepts & principles
relevant to the standard
 Explanation of terms to be used in
Standards
 Presentation & disclosure requirements
relevant thereto
 Date from which the Standard is proposed
to be effective
IASB
 Apr,
2001: IASB replaced IASC(1973)
 IASC issued a total of 68 Exposure
Drafts & 41 IAS(1973 to 2001)
 IASB publishes its standards called
IFRS (International Financial
Reporting Standards)
IFRS
IFRS 1:First-time adoption of International
Financial Reporting Standards
2:Share-based Payments
3:Business Combinations
4:Insurance Contracts
5:Non-current Assets Held for Sale &
Discontinued Operations
6:Exploration for & Evaluation of Mineral
Assets
7:Financial Instruments : Disclosure
8: Operating Segments
ASB & IASB
Achievements
Failures
IASB
 EU
& Australia: Adopted IFRS from 2005
 Canada: To replace its GAAP with IFRS
from 2011
 China & Japan: Undertaken convergence
projects with IASB
 US: FASB & IASB to eliminate differences
USA
FASB
SEC
SOX
Act - 2002
Sarbanes Oxly Act, 2002
 Public
Company Accounting Oversight
Board (PCAOB) established



to oversee audits of public companies that are
subject to US security laws
to establish auditing, quality control, ethics,
independence and other standards relating to
the preparation of audit reports
3 of the 5 PCAOB members cannot be and must
not be CPA.
Sarbanes Oxly Act, 2002
 PCAOB
requires the CEO and CFO of each
issuer to certify in each periodic report to the
SEC


appropriateness of the financial statements and
disclosures
that they fairly present, in all material respects,
the operational and financial condition of an
issuer.
Sarbanes Oxly Act, 2002

PCAOB requires the SEC to conduct a study of
off-balance sheet transactions and use of
spend-purpose-entities and reports to Congress
its recommendations.
 Section
404:
Increases
Corporate
management’s responsibility for assessing its
effectiveness of internal control over financial
reporting.
 Regulatory focus of SOX on auditors and
corporate management.
Corporate Governance: INDIA
 Naresh
Chandra Committee formed
immediately upon SOX for amendment of
Companies Act.
 Followed by Narayan Murthy Committee
 Based on Narayan Murthy Committee’s
recommendation

Revised Clause 49 issued on 29th October, 2004
effective 1.4.2005
Corporate Governance
 Mandatory
Provision - Audit Committee
 Comprising of at least 3 directors and two-third
being independent directors.
 All members shall be financially literate (ability
to read financial statements) and at least one
member shall have accounting or related
financial management expertise (experience in
the area or professional qualification).
Corporate Governance

At least 4 meetings a year and not more than 4
months shall elapse between 2 meetings.
 Audit Committee to mandatorily review :





M. D. & A. (Management Discussion & Analysis) of financial
conditions and results
Statement of significant related party transactions
Management letters / letters of internal control weaknesses
issued by statutory auditors.
Internal audit reports relating to internal control weaknesses
Appointment, removal, terms of remuneration of Chief
Internal Auditors.
ACCOUNTING STANDARDS
AS-1: DISCLOSURE OF
ACCOUNTING POLICIES
PURPOSE
 To promote better understanding
 To facilitate meaningful comparison
WHY AS-1
 Considerable variations exist
 P/L & state of affairs can be significantly
affected by AP
FUNDAMENTAL ACCOUNTING
ASSUMPTIONS
Going
concern
Consistency
Accrual
ACCOUNTING POLICIES
Specific
accounting principles
and methods in the preparation
& presentation of Fin. Sts.
No single list of AP which is
applicable to all circumstances
AREAS HAVING DIFFERENT APs










Methods of depreciation, depletion & amortisation
Treatment of expenditure during construction
Translation of foreign currency items
Valuation of Inventories
Treatment of Goodwill
Valuation of Investment
Treatment of retirement benefits
Recognition of profit on long-term contracts
Valuation of FA
Treatment of Contingent liabilities
No exhaustive list of APs
CONSIDERATIONS IN THE
SELECTION OF APs
 Primary
consideration:
Fin. Sts. Should represent true
and fair view of the state of affairs
 Other considerations:
Prudence
Substance over form
Materiality
AS-1
 24.
All significant accounting policies adopted in
the preparation and presentation of Financial
Statement should be disclosed.
 25.
The Disclosure of significant APs should
form part of the Financial Statements and
should be disclosed in one place.
 26.
 Any
change in the APs which has a material
effect should be disclosed.
 The amount by which any item in the Financial
Statement is affected by such change should
be disclosed.
 Where such amount is not ascertainable wholly
or in part, the fact should be disclosed
 27.
If the fundamental accounting
assumptions (i.e.,3) are followedSpecific disclosure is not required.
 If not followedThe fact should be disclosed.

AS- 2 Revised
Mandatory: 01.04.1999
VALUATION OF INVENTORIES
OBJECTIVE:
Determination of the value at which inventories
are carried in the Financial Statement
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.
Inventories encompass:
 Goods
purchased and held for resale
 Computer software held for resale
 Land and other property held for resale
 Finished goods, Work-in-progress,
Materials, Maintenance Supplies,
Consumables & Loose tools.
Inventories do not include
Machinery spares
AS 2 will not apply to:
a)
b)
c)
d)
WIP under construction contracts
WIP of service provider
Shares, debentures and other financial
instruments
Producer inventories of live stock,
agricultural and forest products and
mineral oils, ores and gases
MEASUREMENT OF INVENTORIES
Inventories should be valued at the
lower of cost and net realisable value
COST
The cost of inventories should comprise
(1) Cost of purchase
(2) Cost of conversion
(3) Other cost incured in bringing
the inventories to there present
location and condition
Exclusion from the cost of inventory:
Abnormal amounts, Storage cost, administrative overhead,
selling & distribution overhead
COST FORMULA
(1)Specific identification of cost
Items not ordinarily interchangeable
Goods & Services for specific projects
(2) FIFO or Weighted Average cost
TECHNIQUES FOR MEASUREMENT OF COST
(1)Standard Cost
(2) Retail Method
NET REALISABLE VALUE
(Estimated selling price less Estimated cost of
completion)
Damaged
Wholly or partially obsolete
Selling prices have declined
Increase in estimated cost of completion
CASH FLOW STATEMENT
AS 3 Revised
Objective:
Shows the historical changes in cash
and cash equivalents during the
period from operating, investing &
financing activities.
 Cash
 C.E.
 Activities
Benefits
(1)
(2)
(3)
(4)
(5)
(6)
Shows the ability to generate cash & cash equivalent
Shows the need to utilise these cash flows
Helps to assess liquidity & solvency
Indicate the amount, timing & certainty of future
cash flows
Shows relationship between profit & net cash
flows
Useful in checking accuracy of past assessment
Cash Flow Statement
Cash flow from operating activities
-----------Cash flow from investing activities
-----------Cash flow from financing activities
-----------_______________________________________________
Net cash increase (decrease) in
cash & cash eq.
-----------Cash &cash eq. at the beginning
of the period
-----------_______________________________________________
Cash & cash eq. at the end of the
Period
------------
AS-4: CONTINGENCIES AND
EVENTS OCCURING AFTER
THE BALANCE SHEET DATE
Deals with:
Contingencies
Events
occurring after the
Balance Sheet date
AS-4 does not apply:
 Liabilities
of life assurance and general
insurance
 Obligation under retirement benefit plans
 Commitments arising from long-term lease
contracts
Contingencies refers to Existing
conditions or situation.
 Result of which is not known on the
balance sheet date.
 Result of which would be known only
happening or non-happening of certain
events in future.
 Result may be either gain or loss.
Examples of Contingencies:
 Collectibility
of recoverable/debtors
 Litigation, claims and assessments for
recovery of assets.
Events after Balance Sheet date:
 Events
which occur between the
balance sheet date and date on which
financial statements are approved by
competent authority.
 The events are significant event and
may be favourable and unfavourable.
DISCLOSURE
 If
material contingent loss is not provided
for, its nature and an estimate of financial
effect should be disclosed by way of note.
 If estimate of financial effect can not be
made, the fact should be disclosed.
AS 5-Net profit or loss for the
period, prior period items &
change in accounting policies
OBJECTIVE:
 To prescribe the criteria for certain items in the P&L
a/c to enhance comparability
 To suggest the accounting treatment & presentations
of the items not relating to the period.
 To deal with the change in accounting policy,
accounting estimates & extraordinary items
COMPONENTS OF NET PROFIT
P&L
from ordinary activities
Extraordinary items
To be disclosed on the face
of statement of P&L account
DISCLOSE SEPARATELY :
If Relevant
Write down of inventory to NRV or reversal of
such write down
 Restructuring cost
 Profit or loss on disposal of F.A.
 Profit or loss on disposal of long term
investment
 Litigation settlements
 Reversal of provisions

EXTRAORDINARY ITEMS
 Clearly
distinct from ordinary activities
 Not occurring frequently or regularly
 Nature and amount : Disclosed separately
in P&L account
PRIOR PERIOD ITEM
 Incomes
or expenses arising in current period
as a result of error or omission in the
preparation of Financial Statements of one or
more prior periods
 Nature and amount : Disclosed separately in
P&L
 Ex. Salary A/C
Dr.
Prior period expense (Salary) Dr.
To Bank A/C
Note: Payment of prior period expense by court order
CHANGE IN ACCOUNTING
ESTIMATES




Estimation of provision of sundry debtors
Estimation of provision for any liability
Computing income tax provision
Estimating the useful life of F.A.
To classify as ordinary &
extraordinary & disclose the effect
CHANGES IN ACCOUNTING POLICIES
 For
compliance of accounting standards
 For compliance of statute or law
 For better and appropriate presentation
of the Financial Statement.
Disclose the effect of the change in A.P.
ACCOUNTING STANDARD - 6
DEPRECIATION ACCOUNTING

1.
2.
3.
4.
5.
Applies to all depreciable assets except:
Forests, plantations and similar regenerative natural
resources.
Wasting assets: minerals, oils, natural gas and
similar non-generative resources.
Expenditure on R & D.
Goodwill
Live stock
It also does not apply to land unless it has a
limited useful life for the organisation.

Why AS for Depreciation Accounting?

DEPRECIATION: A measure of the wearing out,
consumption or other loss of value arising from use,
effluxion of time or obsolescence through technology
and market changes.

DEPRECIABLE ASSETS are assets which:
1. are used during more than one accounting period.
2. have a limited useful life.
3. are held for use in the production or supply of goods
and services.

i.
ii.

USEFUL LIFE
The period over which a depreciable asset is
expected to be used, or
The number of production or similar units
expected to be obtained for the asset.
DEPRECIABLE AMOUNT
Historical cost or other amount substituted for
historical cost
Less the estimated residual value.
AMOUNT OF DEPRECIATION
Based on:
i. Historical cost
or other amount substituted.
ii. Expected useful life.
iii. Estimated residual value

HISTORICAL COST
 Represents
its money outlay for acquisition,
installation & commissioning as well as for
additions to or improvement thereof.
 H.C. may undergo changes arising as a result
of increase or decrease in long term liability on
account of exchange fluctuations, price
adjustments, changes in duties or similar
factors.
 The
quantum of depreciation to be
provided in an accounting period involves
the exercise of judgement by mgt. in the
light of technical, commercial, accounting
and legal requirements and may need
periodical review.
 Original
revised.
estimate of useful life may be
METHODS
Straight line method
Reducing balance method
The Companies Act 1956 lays
down the rates of depreciation for
various assets.
DISCLOSURE
 The
depreciation methods used.
 The total depreciation for each class of
assets.
 The gross amount of each class of asset
 The accumulated depreciation.
 Revaluation of depreciable asset.
 Change in the method of depreciation
AS (Paragraphs 20-29)
20. The depreciable amount should be allocated on a
systematic basis to each accounting period during the
useful life.
21. The depreciation method selected should be
applied consistently from period to period.
A change in method should be made only if:
 The adoption of new method is required by statute.
 For compliance with an accounting standard.
 Change would result in a more appropriate
preparation or presentation of financial statistics.
Retrospective recomputation of depreciation
Deficiency/Surplus adjusted in St. of profit and loss.
22. Useful life should be estimated after
considering:
i.
Expected physical wear and tear.
ii. Obsolescence
iii. Legal or other limits on the use of the asset.
23. Useful lives may be reviewed periodically.
The unamortized depreciable amount should
be charged over the revised remaining useful
life.
24. Any addition or extension should be
depreciated over the remaining useful life of
that asset.
25. Change in H.C.: Due to exchange fluctuation
price adjustments, changes in duties etc.
Depreciation on revised amount should be
provided prospectively over the residual
useful life.
 26.
Revaluation of asset: Depreciation on
revalued amount.
Disclosed separately if revaluation has
material effect on the amount of
depreciation.
27. If the asset is disposed of, discarded,
demolished or destroyed, the net surplus of
deficiency; if material , should be disclosed.
28. Disclose:
i.
H.C. or other amount substituted for H.C.
ii. Depreciation for the period for each class.
iii. The related accumulated depreciation.
29. Disclose: along with other accounting
policies
i.
Depreciation methods used
ii. Depreciation rates or the useful lives if
they are different from statute.
ACOUNTING FOR FIXED ASSETS
(AS-10)
This statement does not deal with:
i.
Forest plantations & similar regenerative
natural resources.
ii. Wasting assets
iii. Expenditure on real estate development
iv. Livestock
Applies to Financial statements prepared
on H.C. basis.
FIXED ASSET: Definition
Fixed
asset is an asset held
with the intention of being used
for the purpose of producing or
providing goods or services
and is not held for sale in the
normal course of business.
(para 6.1)
GROSS
BOOK VALUE of a
fixed asset is its historical cost
or other amount substituted for
historical cost.
NET
BOOK VALUE: Net of
accumulated depreciation
WHY THIS STANDARD?
Expenditure: An asset or
an expense
An enterprise may decide to
expense an item which could
otherwise have been included as
fixed assets, because the amount
of the expenditure is not material.
COMPONENTS OF COST

Purchase price including import duties &
other non-refundable taxes or levies & any
directly attributable cost.

Examples
Site preparation
Initial delivery & handling costs
Installation cost
Professional fees
i.
ii.
iii.
iv.
AS (Paragraphs 18-39)
18. Items included under F.A. : Para 6.1
19. Gross Book Value: Historical cost or
Revaluation.
20. Cost of a F.A. : Purchase price
Attributable cost
Financing cost up to completion of F.A.
21. Cost of a Self-constructed F.A.:
Direct costs
Attributable costs
22. F.A. acquired in exchange for another F.A.
Recorded at fair market value or, net book
value
Adjusted for balancing payment/receipt.
FMV: Price agreed to in an open and unrestricted
market between knowledgeable & willing
parties.
23. Subsequent expenditures
Added if they increase future benefits.
24. Material items retired from active use &
held for disposal
Stated at the lower of their net book value & net
realizable value: Shown separately.
25. F.A. eliminated from Financial Statements:
On disposal or no further benefit is
expected from its use.
26. Losses arising from retirement or,
gains or losses arising from disposal:
Recognised in P & L A/C.
27. Revaluation of F.A.
An entire class of assets to be revalued or,
systematic selection of assets for revaluation.
Basis of selection should be disclosed.
28. Revaluation of a class of assets
Net book value ≤ Recoverable amount
29. F.A. revalued upwards
Accumulated depreciation not credited to
P & L A/C
30. Increase in net book value on revaluation
Credited to Revaluation Reserve
P/L: Increase ≤decrease on previous revaluation
Decrease in net book value on revaluation
- Charged to P/L
- Charged to Revaluation Reserve: if previously
increased
31. F.A. at revaluation: Para 23,24 &25
applicable.
32. Disposal of revalued F.A.:
- Difference charged or credited to P/L
- Revaluation Reserve: If loss relates to
previous increase & RR is not utilised
33. F.A. on hire purchase: At cash value
Shown in Balance Sheet with narration.
34. Joint ownership of F.A.
Proportion of original cost, accumulated
depreciation & written down value:
Shown in Balance Sheet