Pragmatic changes envisaged
•
•
•
•
•
•
Income Tax Act……… Direct Tax Code
VAT, Service Tax,CE …..GST
Companies Act…. New Companies Act
Accounting Standard….. Indian AS
SAP/AAS/SA………?
Above all EDP/ISA and so called paperless
working
Challenges before practioners
•
•
•
•
•
Keep update for changes
Big Enterprises/Blue chip Vis a vis SMEs
Big 4 Practioners Vis a vis SME Practioners
Circumstances under SME Practioner works
Statements, standards,Guidance Notes are at
PAR for all practioners
• Need to educate entrepreneur/accountant of
Auditee about AS
• Study of AS is not any new thing or ideas
• Systematic and uniform principles to guide:
Accounting, presentation and disclosures
• Prudence and Materiality plays important
role
• To refresh your memory the stydy circle
meeting
Thus the source of Indian ‘GAAP’ are :
1. The Statutory Requirements, such as :
 The statutory requirements of Companies Act ; 1956
more particularly contained in Section 210 and 211 with
Schedule VI of the Act-True and Fair and 227 - reporting
 The statutory requirements of Banking Regulation Act ; 1949 and
Insurance Act; 1938.
2. The requirements of Regulatory Authorities, such as :
 Reserve Bank of India
 Securities Exchange Board of India
3. Pronouncement of the Premier accounting body ICAI, such as :
 Accounting Standard
 Statement of Accounting matters
 Guidance Notes
 Opinions of Expert Advisory Committee
4. Practices and Uses such as :
 Published Accounts of renowned companies.
 Articles and Opinions
5. Income Tax Standards – Court Judgements
ATTEST FUNCTION
1.
2.
3.
4.
In India the profession of Accountancy has been recognised and
provided with the attest function for certification of accounts.
Society confidence Vs. Expectations – Code of Conduct.
The Chartered Accountants Act 1949 Section 21-22 contains
detailed provision in respect of misconduct.
Second schedules part I clause 7 & 9 provides that “A Chartered
Accountant in practice shall be deemed to be guilty of
professional misconduct if he :
“7. Is grossly negligent in the conduct of his professional
duties;”
“9. Fails to invite attention to any material departure from the
Generally Accepted Procedure of audit applicable to
circumstances;”
5. Duty bound to follow ICAI Announcements.
6. Documents issued by Institute :
 Statements
=> Accounting matters
=> Auditing Matters
 Guidance Notes
 Accounting Standards (AS)
 Statements of Standard Auditing Practices
(SAP’s)
# Opinions Expert Advisory Committee is
another though not general, important
document
Accounting Standard - 6
Depreciation Accounting
Does not apply to :
forests, plantations etc.
expenditure on R&D
wasting assets
live-stock
goodwill
land
Depreciation
What it is?
A measure of wearing out, consumption or other loss of
value of a depreciable asset arising from use, affluxion of
time or obsolescence through technology/market changes
Depreciable Assets
 Expected to be used for more than one accounting
period
 Having a limited useful life
 Held for use in production/supply of goods/ services,
letting out to others, administrative purpose, and not
for sale in ordinary course of business
Useful Life
Period over which a depreciable asset is expected to be
used
OR
Number of production units expected to be obtained from
use of asset
Useful life is shorter than physical life and is:
 predetermined by legal/contractual limits
 directly governed by extraction/consumption
 dependent on extent of use and physical deterioration
on account of wear and tear
 reduced by obsolescence arising from
technological/market changes, legal restrictions
DEPRECIATION
Amount determination
Depreciable amount of a depreciable asset should be
allocated on a systematic basis during useful life
Relevant factors
Historical cost/other substituted amount
Expected useful life
Estimated residual value
Depreciable Amount
Historical Cost (or other substituted amount)
less
Estimated residual value
Depreciation Method: Change
Normally consistency should be maintained
Change only if … (same considerations as
applicable for APs)
Recalculation from inception on change
Difference (Deficiency/Surplus), to be adjusted
in year of change
Change to be treated a change in AP
Depreciation
Where Changes Prospectively
Useful life should be reviewed periodically: unamortised
amount to be charged in remaining useful life
Change in historical cost due to exchange fluctuations in
relative long term liability etc.: revised unamortised amount be
depreciated over residual useful life
Revaluation of assets: depreciation on revalued amount over
remaining useful life
Additions becoming integral part of asset: to be depreciated
over remaining useful life of asset. However, if addition retains
separate identity/capable of being independently used,
depreciation should be provided independently.
Disclosure
GENERAL
Historical cost/other amount substituted for each class
Total depreciation of the period for each class
Related accumulated depreciation
ALONG WITH AP
Methods used
Rates or useful life, if different than principal statutory rates
SPECIFIC
If revaluation materially affects depreciation : such effect in year
of change
If any asset is discarded/disposed off/demolished/destroyed : net
surplus or deficiency, if material
Accounting Standard - 10
Accounting for
Fixed Assets
This does not deal with

Accounting of forests/ plantations etc., wasting
assets, expenditure on real estate development and
livestock

Inflation Accounting of fixed assets

Allocation of depreciation

Treatment of Subsidies etc.

Assets under leasing rights
Definitions
Fixed Assets
Assets held with intention of
being used for producing
goods, providing services
etc. & not for sale in
ordinary course
FAIR Market Value
(FMV)
Value agreed in open &
unrestricted market between
parties dealing at arm’s length
Gross Book Value
Historical cost or other amount substituted for
historical cost
Identification of Assets

Material Vs. Not Material Amounts
 Stand by and Servicing Equipments are normally
capitalised.
 Spares (Machinery) Normally – Profit & lossirregular depends on
life.
 Nature of Assets- Separable like Aircraft and its
Engine
Components of Cost

Cost of purchase

Cost attributable in bringing the asset in working
condition

Financing cost upto the asset being ready for use

Expenditure incurred on start – up and
commissioning of project.
(internal profits be eliminated in case of self construction)
Ready to use – Actual use
Expenses in between are to
be charged to P & L
Cost – When and How at FMV
Where the asset is acquired in exchange of:
Another Asset/
Shares of the Enterprise
(FMV of that asset which is more clearly evident)
Subsequent expenditures :
When included in Cost?
If they increase the future benefits
Addition of asset having separate identity
Should be considered as separate asset
Disposal / Retirement of Asset
 Assets retired from active use and held for disposal to be
stated at lower of net book value and NRV : to shown
separately
 Assets to be eliminated from FS on disposal or when no
further benefit is expected
 Losses from retirement or Gain/ Loss from disposal to be
recognised in P & L
 On disposal of revalued asset gain / loss to be taken to P
& L except where a loss relates to an increase available
in RR, when it may be charged to RR
Revaluation of Fixed Assets





If revalued, entire class be revalued. Or selection to
be on systematic basis : basis to be disclosed
Revaluation not to exceed recoverable amount of a
class of assets
On upward revaluation, accumulated depreciation
not to be credited to P&L
Increase to be credited to revaluation reserve (RR)
except to extent of earlier decrease charged to P&L,
which may be taken to P&L
Decrease to be charged to P&L except to extent of
of earlier increase standing in RR(unutilised),
which may be debited to RR
Acquisition – Specific Modes
 Assets acquired on Hire Purchase terms to be
recorded on Cash Value (actual / calculated) :
Disclaimer of ownership be indicated
 Joint Ownership : Extent of share & Proportion of
all related figures be disclosed
 Purchase of several assets for consolidated price :
apportionment on basis of competent valuer’s
valuation
Other Important Issues




Goodwill be recorded only when acquired for
consideration. Where in acquisition of business,
price paid is in excess of net assets taken
over,
excess be termed as goodwill.
Direct cost for development of patents be
capitalised and w/off over legal term/ working
life, whichever is shorter.
Payment for know-how for plans, layouts etc. of
assets be capitalised under respective heads.
If know how is composite, apportionment be made
on reasonable basis.
Disclosure

Gross & net book value : Opening / Closing
showing additions, disposals etc.

Expenditure on FA during construction /
acquisition

Revalued amounts substituted for historical
costs, method of revaluation, nature of indices,
year of appraisal and fact of involving external
valuer
Accounting Standard -12
ACCOUNTING FOR
GOVERNMENT GRANTS
It does not deal with :
 Inflation Accounting of Grants
 Government assistance other than grants
 Government participation in ownership
Government Grants
Meaning
Assistance by government in cash
or kind for past or future
compliance of certain conditions
•Govt. here includes govt. agencies/ bodies
(local/national/international)
Importance
In Financial Statements
Facilitates comparison with
other enterprise / prior period
Recognition of Government Grant
Should not be recognised until reasonable assurance of:
Compliance with conditions &
Receipt of Grant
Accounting Treatment
Capital approach
Income approach
Should not be taken to P&L
as:
• Generally are in nature of
promoters’ contribution
• They are not earned but represent
incentive without cost
Should be taken to P&L as:
• Rarely gratuitous
• Govt. levies are also charge
against income
• To correlate with exp.. to
which grant relates
However, it should be based on nature of each grant.
Grants related to Specific F/A :
Treatment
Should be deducted from Gross Value
(if grant is equal to cost, asset should be shown at
nominal value)
Alternatively
 Defer income on systematic basis over useful life
(for depreciable assets)
 Take to capital reserve.
(for other assets)
•However if requires fulfillment of obligations, be credited to
income over matching period \
Other Grants
Revenue Grants
•
•
To be recognised on systematic basis in P&L.Either as
other income or deduction from related expenses.
If receivable as compensation for expense/ loss of
preceding year or as immediate financial support,
consider AS 5 for disclosure as extraordinary item
Promoters Contribution
Take to capital reserve, treat shareholders’ fund
Assets at concessional rates / free of cost
Account for at acquisition cost / nominal value
Grants becoming refundable
An extraordinary item
If revenue
Apply first against available unamortised credit balance
/ remaining charge to P&L
If related to F/A
Increase book value / reduce capital reserve / deferred
income (in first case, change depreciation
prospectively)
If promoters’ contribution
Reduce from Capital Reserve
D i s c l o s u r e
•
Accounting Policy adopted including
methods of presentation
•
Nature and extent of grant recognised
including non monetary assets given at
concessional rates / free of cost
Accounting Standard - 13
Accounting for
Investment
Does not deal with :

Bases for recognition of interest, dividends &
rentals earned on investment which are covered by
AS-9

Operating/finance leases

Investments of retirement benefit plans and life
insurance enterprises
Investments
•
Assets held for earning income, capital appreciation,
other benefits. Stock-in-trade is not investment
Current investment
•
Investment readily realisable and is intended to be
held for not more than one year from the date of
making such investment
Long term investment
•
Investment other than current investment
Investment property
•
Investment in land/buildings that are not intended
to be occupied substantially for use
Market value
•
Amount, net of expenses, obtainable from the sale
of investment in open market
COST OF
INVESTMENT




should include acquisition charges (brokerage, fee
etc.)
if acquired in exchange of shares/securities then fair
value of such shares/securities should be taken as cost
if acquired in exchange of other assets then fair
value of those assets which is more clearly evident
should be taken as cost
Interest/ Rentals/ Dividends are generally Income.
However it may be recovery of cost where relates to
pre acquisition period.
Investments Carrying
Amount
CURRENT INVESTMENTS
LOWER OF COST & FV
(comparison not be on global basis)
LONG-TERM INVESTMENTS
AT COST
However, provision be made for decline
in value, which is not temporary, on
individual basis
Charge / credit to P&L a/c
 Any reduction / reversal
of reduction in carrying
amount
 On disposal, the surplus /
deficiency
DISCLOSURE
Classification of investment
Amounts included in P&L a/c
AP of determination of carrying amount





Income from investments separately for current/LT at gross
figure
Profit/Loss on disposal of investments and changes in
carrying amount separately for current/LT investments
Significant restrictions on ownership/realisability of
income/disposal proceeds
Aggregate amount of quoted/unquoted investments and MV
of quoted investments
Other statutory disclosures
Accounting Standard - 14
Accounting for
Amalgamations
Amalgamation means an amalgamation
pursuant to the provisions of the
Companies Act, 1956 or
other law applicable
to companies
Amalgamation in the nature of Merger

All assets / liability to become, of, transferee co.

Shareholders > 90% of equity share capital of
transferor co. become that of transferee co.

Consideration discharged by
issue of equity shares

Business is intended to
be carried by transferee co.

No adjustment is intended in book values of A/L on
incorporation in books of transferee co. except to ensure
uniformity of Accounting Policy
If any condition is not
satisfied, it would be
amalgamation in the
nature of purchase
AMALGAMATION
IN THE NATURE OF
MERGER A n M
IN THE NATURE OF
PURCHASE A n P
Pooling of interest
method
Purchase method
Pooling of Interest Method



all Assets-Liabilities/Reserves should be
incorporated at existing carrying amt. In
same form. Balance of P&L a/c to be
merged with corresponding amount and in
absence, with General Reserve
If APs are conflicting – adopt uniform AP –
disclose effect as per AS-5
difference between consideration and share
capital of transferor company to be adjusted
in Reserves
Purchase Method
* A/L to be incorporated at existing carrying amounts or,
alternatively, the consideration be allocated to individual
identifiable assets/liabilities on the basis of FV.
* No reserves, except statutory reserves, shall be incorporated
* Difference between consideration and net assets be
recognised as Goodwill/capital reserve
* Goodwill be amortised over useful life generally not
exceeding 5 years.
* Statutory Reserves, on complying with requirements,
should be incorporated by corresponding debit to
‘Amalgamation Adjustment a/c’ under head Misc. Exp.Reversal by cross-entry of two accounts
•Non cash element of consideration to be at
fair value
•If some contingency exists as to the amount
of consideration, apply AS4
•If scheme of amalgamation statutorily
sanctioned prescribe particular treatment of
revenues, same be followed
Common Procedures
FOR ALL
DISCLOSURE
• names/general nature of business of amalgamating companies
• effective date of amalgamation
• method of accounting
• particulars of scheme
FOR POOLING METHOD
•description/no. of shares issued and ratio of exchange
• difference between consideration and net asset acquired –
treatment thereof
FOR PURCHASE METHOD
•consideration – description thereof
• difference……. (same as above), including treatment of goodwill
AFTER BALANCE SHEET DATE
•disclosure in accordance with AS-4
Accounting Standard - 15
PF
Accounting for Retirement
Benefits in the Financial
Statement of Employers
Pension
Gratuity
Others
Superannuation
Leave
Encashment
RETIREMENT BENEFITS
DEFINED
CONTRIBUTIO
N SCHEMES
eg. P.F.etc.
DEFINED
BENEFIT
SCHEMES eg.
Gratuity etc.
Accounting Treatment
Defined contribution scheme
*
Charged to P&L A/C
-
Contribution for the year
-
Shortfall between paid & payable
amount
*
Excess payment, if any, it treated as per
payment
Accounting Treatment
SELF FUNDING
•Annual
contribution
determined by
insurer to be
charged to P&L a/c
• Appropriate
charge to P&L a/c
each year
• Amount as per
actuarial valuation
or other rational
method
TRUSTS
•Costs determined
through actuarial
valuation at least
once in 3 years
• Amount as per
actuarial valuation
to be charged to
P&L a/c each year
INSURER’S
SCHEME
•Annual
contribution
determined by
insurer to be
charged to P&L a/c
Accounting Treatment
Defined Benefit Scheme
Self Funding
-Appropriate amount
charge to P&L a/c
- Amount as per
actuarial valuation or
other rational method
Trust
-Cost for the year
- Cost should be
determined through
actuarial valuation at least
once in 3 year
- Shortfall between
amount actually paid over
payable charge to P&L A/c
- Excess payment should
be treated as prepayment
Insurer’s
Scheme
-Annual
contribution
determined by
insurers to be
charged to
P&L A/c.
Treatment of Alternation
Alternation arising from introduction /
or additional benefits to retired
employees or changes in actuarial
method
Charge/credit to P&L a/c
Follow AS - 5
Disclosure
 Method of determining R/B cost
 Whether Actuarial Valuation
was made at the end of period or
any prior date? Disclose said prior
date and method for determining
cost for the period
Accounting Standard – 16
BORROWING COSTS
A. Borrowing Costs : Interest and other costs related to borrowed
funds like,
a. Interest and commitment charges.
b. Discounts or premiums.
c. Ancillary costs.
d. Finance charges as under finance lease.
e. Exchange differences from foreign currency.
B. Qualifying Assets : Those which require substantial time to
get ready for intended use or sale like,
a. Manufacturing plants
b. Power generation facilities
c. Inventories that required substantial periods of
time to bring them to saleable condition.
RECOGNITION OF COST
A.
All Borrowing Costs
Borrowing costs directly attributable to
the acquisition, construction or
production of a qualifying asset
Other Borrowing
costs
Future economic benefit
Measurement possible
Capitalise as part of the cost of
qualifying asset
Charge to P/L
B. a. In case of funds specifically borrowed for qualifying
assets:
Borrowing Costs
Actual borrowing
to be capitalised =
cost incurred
Income on temporary
-
investment of funds
b. In case of general borrowings:
Borrowing Costs = Capitalisation rate* x Expenditure on the asset
 Capitalisation rate = Weighted Average of outstanding
borrowing cost (excluding cost of specific borrowings).
CAPITALISATION OF BORROWING COST
1. COMMENCEMENT : ALL 3 conditions below to be
satisfied:
a. Expenses incurred must be for acquisition / construction /
production of qualifying asset.
b. Cost incurred must be borrowing cost.
c. Activities preparing the asset for intended use or sale must be in
progress. Such activities include related technical and administrative
work.
2. SUSPENSION : asset for intended use or sale) or asset is
interrupted. Except when:
a. Substantial technical/administrative work being done.
b. Temporary delay is inherent in the process.
CESSATION
When activities preparing the asset for intended use or sale are
substantially complete. In case of completion in parts, cost of
completed part to be ceased for capitalisation.
DISCLOSURE
•
Accounting policies.
•
Amount capitalised as borrowing costs.
Accounting Standard – 17
Segment Reporting
Application from 1.4.01 to :
*
*
Enterprises listed/in the process of being listed in a recognised
stock exchange in India.
Other enterprises with a turnover of more than Rs.50 crores.
Definitions:
Business Segment
.
Factors for Consideration
Nature of products/services.
Nature of production process.
Method used to distribute products/provide services.
Type/class of target customers.
Nature of regulatory environment, if applicable
Geographical Segment
Qua location of offices or Qua location of customer
Factors for Consideration
Similarity of economic and political conditions.
Operational relationship in various geographical areas.
Operational proximity.
Special operational risks in a specific area.
Exchange control regulations.
Currency risks.
Reportable Segment
A business / geographical segment required to be disclosed under this
standard.
Enterprise Revenue
Revenue from sale to external customers as per the P&L A/C.
Segment Results = Segment Revenue – Segment Expenses
Segment Revenue
ER directly attributable to a segment.
+
ER allocated to segment on a reasonable basis.
+
Revenue from transactions with other segments.
Excluding
Extraordinary items as per AS-5.
Interest & dividend income, provided the segmental
operations are not of a financial nature.
Profit on sale of investments/extinguishment of debts,
provided the segmental operations are not of a
financial nature.
Segment Expenses
 Expenses in a segment directly attributable to it.
+
 Enterprise expenses allocated to segment on a reasonable basis.
+
 Expenses from transactions with other segments.
Excluding
Extraordinary items as per AS-5.
Interest expenses, provided the segmental operational are not of
a financial nature.
Income-Tax expenses.
Head-office/Corporate office expenses.
Segment Assets
Directly attributable /allocated Assets
Where segment result includes interest/dividend income, the related asset
should be included in segment assets.
Allowances/provisions reported as direct offsets in the Balance sheet should be
reduced from the related asset.
Income tax assets are to be excluded.
Segment Liabilities
Directly attributable /allocated liabilities
Where interest expense is considered in segment result, corresponding liability
is to be included in segment liabilities.
Income tax liabilities are to be excluded.
Segment Accounting Policies
Policies relating to preparation and presentation of financial statements and
those relating to segmental reporting.
Identifying Reportable Segments
Either
Or
Primary = Business
Primary = Geography
Secondary = Geography
Secondary = Business
Depending upon
Dominant source & nature of risk & returns
Normally indicated by
Internal organisation & Management Structure
System of internal financial reporting to BOD/CEO
Exceptional Situations
I
II
Risk and Returns strongly
affected by both Product /
Service and
Geographically
Internal Management
Structure / Reporting
System neither based on
Product / Service nor
Geographically
Primary = Business
Directors and
Management to decide
Primary and Secondary
segment based on
conditions discussion in
earlier slide.
Secondary = Geographically
Reportable Segment –A
Segment whose
Segment Revenue
Segment Results Profit
or Loss
Segment Assets
are 10% or more of
 Segment Revenue (and
Not Enterprise Revenue
the greater of
• Segment Profit
(of Profit Segment)
• Segment Loss
(of Loss Segment)
 Segment Assets
Reporting Segment : Example : Segment Results
Segment
Segment Results
Reportable
A
- 4,00,000

B
+ 50,000

C
+ 2,00,000

D
- 20,000

E
+ 3,00,000

Enterprise Result
1,30,000
 Segment Profit
5,50,000
 Segment Loss
4,20,000
Reportable Segment –B

Segments chosen by Management despite of small size

Smaller segments (below 10%) if external revenue of reportable
segments construes less then 75% of total enterprise revenue – until
75% of total enterprise revenue is included in reportable segment.

Segment identified as reportable in immediately preceding year
should continue as reportable segment

Preceding year figures should be restated if segment identified as
reportable in current year was not reportable in preceding year.
Segment Accounting Policies

Follow policies adopted for preparation and presentation of
enterprise financial statement.

Allocate joint segment assets and liabilities between segments only
if the related revenue / expenses are also allocated.
DISCLOSURE
Reporting for each Primary Segment
Segment revenue – classified as external / internal / intersegment revenue.
Segment result.
Carrying amount of segment assets.
Carrying amount of segment liabilities.
Additions to segment tangible and intangible F/A
Only When Segments cash flow are not reports
 Depreciation and amortisation of segment assets
 Total significant non-cash expenses other than
depreciation/amortisation above
Notes :
A reconciliation segment information and enterprise
financial statement
Business Segment
If Primary is
Geographical
Segment based
on Customers
oSegment revenue for
each segment based on
geo. location whose
external revenue is 10%
or more of enterprise
revenue
oSegment assets for
each segment based on
geo. Location if > 10%
of total assets of geo.
Segments
oAdditions to assets for
each segment based on
geo. location of assets of
10% or more of total
oSegment whose revenue
from sale > 10% of ER or
asset > 10% total assets
then:
• Segment revenue from
external customer
•Carrying amount of S/A
•Cost incurred to acquire
S/A
oWhere location of assets
different from that of
customers then GS whose
revenue/asset > 10% of
enterprise
•Carrying amount of S/A
geographically
•Cost incurred to acquire
assets
Geographical Segment
based on Assets
oSegment whose revenue
from sale > 10% of ER or
segment asset > 10%of
total assets then
• Segment revenue from
external customer
•Total carrying amount of
segment assets
•Cost incurred to acquire
assets
oWhere location of
customer different from
assets
•Geographical segment
whose sales > 10% of ER
OTHER DISCLOSURE
 Inter-segment transfers, their basis of pricing
and change
 Changes in accounting policies for segment
reporting – fact and effect.
 Composition of BS/GS, both primary and
secondary, if not otherwise disclosed.
Geographical Segments –
Reporting under IASs - I
* Kuoni, Switzerland * Switzerland; United Kingdom;
International; Incoming
* LVMH, France
* France; Europe (excluding France):
USA; Japan; Far East (excluding
Japan); Other
* Novartis,
* Europe; Americas; Asis, Africa and
Swirtzerland
Australia
* Roche, Switzerland * Switzerland; European Union; Rest
of Europe; North American; Latin
America; Asia, Africa, Australia
and Oceania
Business Segments IASs - II
•ABB, Sweden and
Switzerland
* Power generation; Power transmission and
distribution; Industrial and building systems;
Financial services; Various activities and
corporate.
* Fujitsu, Japan
* Information Technology
* LVMH, France
* Champagne and Wines; Cognac and spirits;
Fashion and leather goods; Fragrances and
cosmetics; Selective retailing; Other
* Nokia, Finland
* Telecommunications; Mobile phones; Other
Operations
* Novarties, Switzerland
* Healtheare; Agribusiness; Nutrition;
Corporate
* Roche, Switzerland
* Pharmaceuticals; Vitamins and fine
chemicals; Diagnostics; Healthcare;
Fragrances and flavours
Primary
Secondary
•Segment Revenue
- External Customers
- Other Segments



•Segment Result


•Segment Assets

•Total Capital Expenditure

•Total Expenses-Depreciation and Amortisation

•Total Non-Cash Expenses other than
Depreciation and Amortisation

•Reconciliation to Financial Statement


•Basis of Pricing Inter-Segment Transfers


•Changes in Segment Accounting Policies


•Composition of each Business Segment


•Composition of each geographical Segment

Accounting Standard – 18
Related Parties
*
Establish Disclosure requirements
- Related Party Relationships
- Transactions with related Parties
Scope
CFS in respect of intragroup transactions
Enterprises
having
Turnover
less than 50
Crores
Does not applies to
Conflict with
confidentiality required by
Statute
State
Controlled
Enterprises
Relationship Covered
Associates and
Joint Ventures
Key management
personal and relatives
Enterprises under significant control
of first two above
Enterprises directly or indirectly under common
control
Individuals directly or indirectly exercising control or
significant influence
Deemed Not to be
Related Parties
•Companies having Common Directors
•Economic Dependence
Single customer / supplier / franchiser
distributor / general agent.
•Parties dealing in the normal course of business.
 providers of finance
 Trade unions
 public utilities
government departments and government agencies agencies
including government sponsored bodies
Related Party
Party which has ability to control or exercise significant influence
Control
•Ownership directly or indirectly of voting power > 50%
•Control over composition BOD
•Substantial interest in voting power
Key Management Personal
Persons having authority and responsibility for planning,
directing and controlling
Rationale
Are normal feature of commerce and business
Without Disclosure General presumption
•Transactions at Arm’s length
•Transaction by two independent parties
Existence of relationship is likely to influence the
transaction
Inherent difficulty in determine effect of relationship
Transactions which took place only due to relationship
Disclosure
Name/Nature of relationship of parties
Description of the relationship
Name of transacting Party
Nature of transactions;
Volume of the transactions – In absolute/Relative Terms
Any other Element for better understanding
Amounts and appropriate proportions of outstanding provisions
for doubtful debts due
Amounts written off or written back
Examples of the Related Party Transactions
Purchases or sales of goods
Purchases or sales of fixed assets
Rendering or receiving of services
Agency arrangements
Leasing or hire purchase arrangements
Transfer of research and development
License agreements
Finance
Guarantees and collaterals
Management contracts including for deputation of employees.
Accounting Standard – 19
LEASES
SCOPE/ APPLICABILITY
Agreements
to use Land
Does not applies to
Agreement for motion picture,
film, video recording, plays
manuscripts, patents &
copyrights
Agreement
to use
national
resources.
DEFINITIONS
Lease
Agreement for transfer of right to use asset for an agreed period in return of payments
Finance Lease
Which transfers substantial risks and rewards of ownership
Operating Lease
Other than finance lease
Non-cancelable Lease
Which is Cancelable only on


Remote contingency

Permission of lessor
New lease with same lessor for similar assets

Payment of additional amount by lessee
Minimum Lease Payment (MLP)
Payment by lessee excluding contingent cost of services
and taxes but includes
For lessee
RV
guaranteed
on his behalf
For lessor
RV guaranteed by or on
behalf of lessee by and
independent party
Economic Life
Period for which economically usable or number of production units
expected to be obtained
Unguranteed RV
Amount of RV > GRV
Gross Investment
MLP + UGRV
Unearned finance income
GI –[ MIP + URGV]
Net Investment
GI-UFI
Contingent Rent
Lease payment which is not fixed
Characteristics
Finance Lease
Operating Lease
Transfer of ownership of lessee
On cancellation losses borne
by lessee
Option to purchase the assets at a
price lower than the fair value
which is reasonable certain to be
exercised
Term covers major part of the
economic life of asset
Present value of MLP amounts to
fair value of asset at inception
Unique use of asset by the lessee
Gains/losses from fluctuation
in FV borne by lessee
Option of continuance for
secondary period at
rent
substantially
lower
than
market value
DISCLOSURE
Finance Lease
In books of Lessee
•Recognized Asset and Liability at FV
•If FV > PV of MLP then at PV of
MLP
•PV computation, Discount Rate
=Interest Rate Implicit
•Apportion LP into finance charges and
outstanding liability
•Finance charges to be allocated at
constant periodic rate of interest.
•Depreciation should be accounted
according to AS -6 If no reasonable
certainty of ownership then
depreciated over the lease term
In books of Lessor
•Recognize asset at amount equal
to NI
•Finance income to be recognize at
constant periodic rate of return
•Sales to be recognized as per
accounting policy
•Sales should be restricted to
amount after applying commercial
rate of interest
•Indirect expenses charged to
P&L
Operating Lease
In books of Lessee
•Total future MLP under non cancelable
lease for each of the following period:
not later than one year
later than one but not later than five years
later than five years.
•Total future minimum sublease payments
expected to be received
In books of Lessor
In addition to AS-10 & AS-6 :
•For each class of asset
the gross carrying amount
the accumulated depreciation
accumulated impairment loss at
balance sheet date
depreciation impairment losses,
recognized/ reversed in P&L A/c.
•Total contingent rent recognized as
income in P&L A/c. for the period.
•Future MLP under non cancelable
leases in aggregate and for each of the
following period:
•LP charged to P&L alongwith MLP &
Contingent rent
•Sub lease payment received or
receivable
•General description of significant
leasing arrangements including
:
basis of contingent rent
existence and terms of renewal or
purchase options and escalation
clauses
restrictions imposed by lease
agreements
not later than one year
later than one year and not later
than five year later than five year
•General description of significant
leasing arrangements.
•Accounting policy in respect of
initial direct cost.
Sale and Lease Back Transactions
WHEN
Transactions results in
finance lease
Any surplus/deficiency in
sale proceeds be deferred
and amortised over the
lease term in proportion to
the depreciation
Transaction results in operating
lease
Any surplus/deficiency should be
recognized immediately except if the
sale price is below FV and be
compensated by future lease payments
should be deferred and amortised in
proportion lease payment.
If the value is less than the carrying
amount, difference should be
recognized immediately
Operating Lease :
(a)
Sale at Fair value – any P/L to be recognised
separately
Carrying value - 100
Fair Value
- 150
Sales Value
- 150
Since sale is at
fair value, there
is no impact of
lease back
package
(b) Sales at below fair value
Carrying value - 100
Fair Value
- 150
Sales Value
-if Rs. 140 – Profit Rs. 40
-If Rs. 90 – Loss Rs. 10
(c) Sales at below fair value
Carrying value - 100
Fair Value
- 150
Sales Value
- 160
P/L to be recognised
immediately except
- if loss is compensated
by future lease
payments below market
price
Out of profit of Rs. 60/Rs. 10/- (i.e. over fair
value) to be amortised
and Rs. 50/- (i.e.
difference between fair
value & carrying value)
to be recognised
immediately
Accounting Standard – 20
EARNING PER
SHARE
Applicability/Scope
Enterprises
Whose E/PES are listed
Which are disclosing EPS otherwise
Requirements applicable to CFS
Objective
Simplify
computation of
EPS
Make EPS
more
compatible
Improve
comparison
Potential Equity Shares (PES)
Financial Instrument / other contract, which
entitles / may entitle its holder to equity shares.
Financial Instruments (FI)
Contract giving rise to:
FA of one and FL or ES of another Enterprise
Financial Asset (FA)
Cash
Contractual right to receive cash
Contractual right to exchange FI
ES of other enterprise
Potential Equity Shares
Convertible Debt/Preference Shares
Share Warrant
Options
Contractual / Contingent Shares
What are
Basic EPS
Per share profit attributable to Existing Equity
Shareholders.
Diluted EPS
Per share profits attributable to Existing and
Potential Equity Share-holder.
Basic EPS – How Measured
Division of Net Profit or Loss by Weighted
Average no. of ES outstanding
Earnings - Basic
Net Profit or Loss attributable to ES holders
Per Share – Basic
Weighted Average no. of ES O/S during the period
Weighted Average no. of ES
Includes shares from the date consideration is received
Inclusion in case of Amalgamation
AnP
From the date acquisition
AnM
From beginning of reporting
period
Partly paid ES treated as fractions
In case different rights shares equivalent no. of shares
Contingent issue from the date conditions complied
Adjustment for change in no. without corresponding change in
resources except conversion of PES such as
•Bonus
•Bonus element in right issue
•Split/reverse split
Bonus to be adjusted for all periods reported
No. of shares in case right issue with bonus element
Share OS prior to right X
(FV/Share prior to right)
Theoretical ex-right FV / share
Right Issue – Example
Accounting Year Ending on 31.12.2001
No. of shares O/s Prior to Right (FV Rs. 21/-) 500000
Right Issue on 1.3.2001 (1 to 5) (Rs. 15/-) 100000
Theoratical ex-right FV come to Rs. 20/- as under :
(500000 x 21) + (100000 x 15)
500000 + 100000
Adjustment Factor (2120) = 1.05
Outstanding ES for the year :
(50000 x 1.05 x 212) + (600000 x 1012)
Preceding Years O/s shares shall also be adjusted.
Diluted EPS – How Measured
Division of Net Profit or Loss by Weighted Average no. of ES O/s –
both adjusted for dilutive PES
Net Profit or Loss
Attributable to ES holders including Dilutive PES i.e. after :
- Dividend (including tax) & Interest (after tax) on PES
- Other expense / income (after tax) attributable to PES
Weighted Average no. of ES
Weighted Avg. of total No. of ES including shares to be issued on
conversion of Dilutive PES deeming the same as converted in ES. PES
shall be deemed to have been so converted, in case such PES.
- issued earlier, at Beginning of the year.
- issue later, on the dated of issue of PES.
Diluted EPS – Relevant Issues
•Assumed exercise of dilutive option/PES
•Proceeds at fair value
•Difference in no. of shares issuable and shares would have been
issued at FV to be treated as without consideration
•Option dilutive when results in issue at lower than FV
•PES treated as dilutive only when leads to reduction in profit
•Only dilutive PES – Anti-dilutive to be ignored
•Shares issued at FV treated as Anti-dilutive
Restatement
If no. of ES or PES OS changes for the reason of issue of
bonus shares, split or consolidation:
•Adjust Basic & Diluted EPS for all the period presented
•Even when Change is after b/s date, these have to be adjusted
•If per share calculation reflects change in no. of shares, fact to
be disclosed
Presentation of Basic & Diluted EPS
For each class of ES
on face of P&L
equal prominence for all periods presented
even if negative
Amount used as numerator for basic/diluted alongwith
reconciliation
No. of shares for basic/diluted EPS used as denominator with
reconciliation thereof
Nominal value of shares with EPS
Example – Effects of Share Options on Diluted EPS
Net Profit for the year 2001
Rs. 12,00,000
Weighted average number of equity shares outstanding during the year 2001
5,00,000 shares
Average fair value of one equity share during the year 2001
Rs. 20.00
Weighted average number of shares under option during the year 2001
1,00,000 shares
Exercise price for shares under option during the year 2001
Rs. 15.00
Computation of EPS
Earnings
Net profit for the year 2001
Shares
EPS
Rs. 12,00,000
Weighted average number of shares outstanding during year
2001
5,00,000
Basic EPS
Rs. 2.40
Number of shares under option
1,00,000
Number of shares that would have been issued at fair value:
(1,00,000 X 15.0) / 20.00
*
(75,000)
Diluted EPS
Rs. 12,00,000
5,25,000
Rs. 2.29
* The earning have not been increased as the total number of shares has been increased only by the number of
shares (25,000) deemed for the purpose of the computation to have been issued for no consideration
Accounting Standard – 21
Consolidated Financial
Statements
DOES NOT DEAL WITH:
Amalgamations & their effects on consolidation
goodwill arising out of amalgamation
Accounting for investment in associates
Accounting for investment in joint ventures
DEFINITIONS
Control
ownership, directly or indirectly through
subsidiaries, of more than half of voting
power
control over composition of board of
director/governing body.
Minority Interest

That part of net results and of net assets of subsidiary
attributable to interest not owned- directly or
indirectly, by the parent.
Minority interest in net assets:
 amount of equity
 share of movements in equity since
date relationship
SCOPE
•
Parent to present CFS;
•
consolidate all subsidiaries, domestic and foreign
other than

Temporary control
(subsidiary held & acquired for disposal in near future.)

severe long term restrictions on subsidiary which
significantly impair its ability to transfer funds to parent.


Investment -as per Accounting Standard 13.
Reasons for not consolidating -disclosed in CFS.
PROCEDURE


Line by line, adding like items
Cost to parent of investment & parent’s portion of equity
eliminated

If Cost > Parent’s portion then Goodwill
If Cost < Parent’s portion then Capital Reserve

Arrive at net income attributable to owners of parent after
adjusting minority interest
 Present minority interest in consolidated B/S separately

Intragroup balance Intergroup transaction eliminated.

Unrealisable losses from intragroup transactions
eliminated (don’t eliminate when even cost can’t be
recovered)

Financial statement used in consolidation to be drawn
upto same reporting date.

If not practicable - in any case difference between
reporting dates not be more than six months.

Uniform accounting policies
(If not practicable, disclose fact)

Investment in enterprises ceasing to be subsidiary- doesn’t
become associate - Accounted as per Accounting Standard
13.

Investment in subsidiary in parent’s separate financial
statement as per Accounting Standard 13.
Presentation
Parent which presents CFS should do so in addition to separate
financial statement
Disclosure
•
List of all subsidiary name,
•
•
country of incorporation
proportion of ownership interest
•
•
Effect financial position at reporting date
•
•
Nature of relationship
Results for reporting period also
Names of subsidiary whose reporting date is different
Accounting Standard – 22
ACCOUNTING FOR TAXES ON
INCOME
Objective
Determination
of Expenses and
Savings of Tax
in an
Accounting
Period
Matching of
Taxes with
Revenue
Prescribed
Treatment of
Taxes
Eliminate
effect of
difference in
tax and book
profit
APPLICABILITY/SCOPE
Mandatory from
1.4.2001
•Enterprise whose equity/debt securities listed or
likely to be listed on recognized stock exchange
•Enterprise of a group whose parent follow AS
22 in CFS
1.4.2002
All other companies whose securities are
not listed
1.4.2003
All other enterpirses
Introduction
 Accrual
A fundamental accounting assumption
 Tax Expense
Recognition Rule
Same Period of recognition of Revenue/ Expenses

For accounting purpose should be based on accounting income and
taxable income.
 Tax are due & paid on taxable income while recognised as expense on
the basis of accounting income.
Accounting income (loss)
Net profit or loss for a period, reported , before income tax expense/saving
Taxable income (tax loss)
Income/loss as per tax laws, on which tax is payable/recoverable
Tax expense (tax saving)
Current tax + Deferred tax
Current tax
Tax payable (recoverable) on income for a period
Deferred tax
Tax effect of timing differences.
Timing differences
Differences originating in one period capable of reversal in subsequent periods
Permanent differences
Differences which are not reversible subsequently
DEFERRED TAX EFFECT
Two type of differences
Permanent
Timing
No
Asset/Liability
Tax
Asset/Liability
RECOGNITION
Determine Net Profit or Loss after Tax
Expense/Saving
If Timing Difference then
Deferred Tax Asset/Liability subject to prudence
In case unabsorbed Depreciation/Accumulated
Losses then DTA to the extent reasonably certain
future tax income will be available for setoff
Basis of
reasonable
certainty
Past records
Realistic estimates
MEASUREMENT
Current Tax
Deferred Tax
Assets/Liabilities
At rates as per current law
At rates which are enacted
or substantively enacted
In case of slab then average rate of tax
No Discounting
Example
In case of Individual
(A.Y. 2001 –2002 ) 10+ 20 + 30 = 60 Average : 60/3 = 20%
Use 20% for measuring DTA and DTL.
Re-assessment of Unrecognized Deferred
Tax Assets – Annually
Review of DTA
-
Carrying amount Annually
Write up / Write down of DTA on the
basis of reasonable certainty
Set Off When
Right
Legally
Enforceable
Presentation and
Disclosure
Current Tax
DTA/DTL
relates to
same Tax
Laws
Deferred Tax
Right Legally
Enforceable
Intends to
settle A/L on
net basis
DTA/DTL
relates to same
Tax Law
OTHER DISCLOSURE
•Nature of Evidences supporting recognition
•Separately from Current Tax
•Break up in major Components
Transitional Provision
First year of application Opening DTA/DTL to
be adjusted against Revenue Reserve
Example - DTL
Particulars
Year 1
Year 2
Net Profit –A/c
200
200
Dep. Adj.
-50
+50
Tax Profit
150
250
Tax Effect @40%
80
80
Tax Payable @40%
60
100
Create/Reverse
20
(20)
DTL
Example – DTA
Particulars
Year 1
Year 2
Net Profit –A/c
200
200
See 43B Adj.
+50
-50
Tax Profit
250
150
Tax Effect @40%
80
80
Tax Payable @40%
100
60
Create/Reverse
20
(20)
DTL
Illustrative Timing Difference
Year 0 WDV Tax
A/c
in A/c WDV Dep
100
100
Tax
Dep
Diff.
Tax
Cum
Effect effect
1
75
63
25
37
-12
-4.8
-4.8
2
56
40
19
23
-4
-1.6
-6.4
9
5
2
5
2
1
0.4
-1.2
10
1
1
4
1
3
1.2
0
99
99
0
Analysis of Timing Difference
1
A/c Income> Tax Income
Tax Effect> Tax
Payable
DTL
2
A/c Income> Tax Income
Tax Effect> Tax
Payable
DTA
3
A/c Income> Tax Loss-C/F Tax Effect, No Tax /
MAT
DTL /
DTA
4
A/c Loss< Tax Loss
C/F Advtage. Less in
future
DTL
5
A/c Loss> Tax Loss
C/F Advtage. More in
future
DTA
6
A/c Income, A/c Loss
Tax Effect<Tax
Payable
DTA
Accounting Standard – 23
Accounting for investment in
associates in consolidated
financial statements
DEFINITIONS
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.
Control
The ownership, directly or indirectly through
subsidiaries, of more than one-half of the voting
power of an enterprise
Control of the composition of the board of
directors /corresponding governing body
Significant influence
power to participate in the financial and/or operating
policy decisions but not control over those policies.
Subsidiary
enterprise that is controlled by another enterprise
(known as the parent).
Group
parent and all its subsidiaries.
Equity
residual interest in the assets of an enterprise after
deducting all its liabilities.
Consolidated Financial statements
financial statements of a group presented as those of a
single enterprise.
The equity method
• method of accounting
• the investment is initially recorded at cost,
identifying any goodwill/capital reserve
•carrying amount of the investment is adjusted for the
post acquisition change in net assets.
•The consolidated profit and loss reflects
the investor’s share of the results .
ACCOUNTING IN THE EQUITY METHOD
 Goodwill/capital reserve arising - included in the
carrying amount but disclosed separately.
 Intragroup balance Intergroup transaction eliminated.
 Unrealisable losses from intragroup transactions
eliminated (don’t eliminate when even cost can’t be
recovered)
 Investor ensure that Reporting date are same.
•
•
If not associate should prepare for the same date.
If, impracticable, different date statement can be used.
•
Investor - make adjustment for the effect of any
•
significant events between the dates.
 Uniform Accounting Polices
 investor recognize its share of results after
providing for preference dividend
 If Carrying Amount < = loss then reported at NIL
value and further loss is not booked
Exception
Additional losses are provided to the extent that the investor has
incurred obligation or made payments on behalf.
SIGNIFICANT INFLUENCE
An investor holds directly or indirectly 20% or more or less of
the voting power by this it is not evidenced that investor has
significant influence unless it can be clearly demonstrated.
The existence of significant influence is evidenced in following
ways:
Representation on the BOD / corresponding governing body
Participation in policy making processes.
Material transactions
Interchange of managerial personnel.
Provision of essential technical information.
ACCOUNTING FOR INVESTMENTS
Accounted for under the equity method except.
†Investment is acquired and held for subsequent
disposal in near future.
†severe long-term restriction on associates
(Accounting should be as per AS-13.)
†Accounting under equity method should discontinue
from the date that - it ceases to have significant influence.
 Disclosure required as per A S – 4.
 Appropriate listing and description
 Investment disclosed as long term investment.
 Investor’s share in results disclosed separately.
 Investor’s share of any extraordinary / prior period
item should be disclosed separately.
 Associate having different Accounting Policy
 Name of the Associates -reporting date is different.
Accounting Standard – 24
DISCONTINUING
OPERATIONS
Applies to all discontinuing operations of
an enterprise.
DEFINITIONS
Discontinuing Operation
is a component of an enterprise:
•
that the enterprise, pursuant to a single plan, is:
disposing of substantially in its entirety
disposing of piecemeal
terminating through abandonment;
•
that represents a separate major line of business or
geographical area of operations; and
•
that can be distinguished operationally and for
financial reporting purposes.
Initial Disclosure Event
 the occurrence of one of the following, whichever occurs
earlier:
 the enterprise has entered into a binding sale
agreement for substantially all of the assets or
 the enterprise’s BOD/governing body has both
 approved a detailed, formal plan for the
discontinuance and
 made an announcement of the plan.
RECOGNITION AND MEASUREMENT
On occurrence of initial disclosure event
the net realizable value of the assets should be estimated
if carrying amount < realisable value
the estimated loss - recognised
After initial recognition
On every balance sheet date, till the discontinuance is
completed, estimate the net realisable value of assets and
recognise any additional loss or reversal of estimated loss.
For any gain or loss that is recognized on the disposal
of assets or settlement of liabilities
The amount of the pre-tax gain or loss
Income tax expense relating to the gain or loss
Net Selling Price
DISCLOSURE
•Initial disclosure event till discontinuance is completed
*
*
*
*
description
the date and nature
the date or period in which the discontinuance is completed
the carrying amounts,of the total assets and the total liabilities
to be disposed of;
*
the amounts of revenue, expenses, and pre-tax profit or
loss from ordinary activities during the current financial reporting
period, and the income tax expense
*
the amounts of net cash flows.


Initial disclosure event – Dealt in accordance of AS-4.
When an enterprise disposes of assets or settles liabilities it should
include in its financial statements the net selling price.

Any significant change in the relating to the assets to be disposed
or liabilities to be settled and the events causing those changes.

Fact & effect, if an enterprises abandons or withdraws from a plan
that was previously reported as discontinuing operations.

in Interim Financial Reports describe any significant activities or
events and any significant changes
DISCLOSURES
These
Disclosures
either
in the notes to the FS
or
on the face of of the FS
Except
pre tax gain or loss recognised on the disposal of assets or
settlement of liabilities
shown on the face of the statement of P&L.

Restatement of prior periods
segregate continuing and discontinuing assets & liabilities,
revenue, expenses and cash flows.
Accounting Standard - 25
INTERIM FINANCIAL
REPORTING
Applicability And Scope
Enterprises, electing to prepare IFS
Does not mandate frequency of reporting
Requirements for cash flow applies as in annual FS
Effective from 1.4.2002
Objective
PRESCRIBE
Definitions
 minimum content
Interim period
Principles for
recognition and
measurement in a
complete or
condensed financial
statements
Reporting period
shorter than a full
financial year

Timely and
reliable reporting for
better understanding
of the readers
Interim financial
report
Financial report
containing
Complete/Condensed
set of FS for an
interim period
Minimum Components
Condensed
balance sheet
Condensed
statement of
profit and loss
Selected
explanatory
notes
Condensed
cash flow
statement
Use of complete sets of FS not prohibited.
Forms and Contents
Complete Financial Statement
Conform to the requirements as
applicable to Annual FS
Condensed Financial Statements
•Include Minimum each of headings or
Sub Headings as in Annual FS
•Selected Explanatory Notes
•Additional line items if omission
leads to a misleading impact
EPS where required to be presented as per AS 20
Selected Explanatory Notes
Explanations of the Events and transactions that are significant to an
understanding of the changes in the financial position and performance
since last reporting date.

Same accounting policies, if changed then description of nature/effect

Explanatory comments on seasonality of operations

Nature and amount of items which are unusual

nature and amount of changes in estimates
Reported in prior interim periods of current financial year
Reported in prior financial years

Issuances, buy-backs, repayments and restructuring of debt, E/PE

Dividends, aggregate or per share, separately for equity/others


Effect of changes in composition of enterprise


Segment reporting as per AS-17
Material changes in contingent liabilities
Other disclosures as required by the other AS
Periods of Interim Financial Statements
Balance Sheet
Cash Flow
Statement
P&L
Current interim period prepared upto year to date with
comparative figures of same period in preceding year
Separate IFR for final interim period may
not be prepared
Disclose
Significant changes in estimates
separately as per AS-5
Recognize how to
measure, classify, or
disclose item in IFR
materiality should be
assessed
Recognition And Measurement
•Same accounting policies except changes taken place after the recent financial
statements
•Seasonal or occasional revenues not to be anticipated or deferred
•Unevenly incurred Costs should be anticipated or deferred only if, it is appropriate
to anticipate or defer the same at the end of financial year
•Measurements and use of estimates should be such that all material financial
information relevant for understanding the financial position or performance are
disclosed
•Change in accounting policy, should be made retrospectively from prior interim
periods year
Accounting Standard - 26
INTANGIBLE ASSETS
Applicability

Expenditure incurred on intangible items during accounting
periods commencing on or after 1-4-2003

Mandatory for:

Enterprises- whose equity or debt securities listed/to be
listed on a recognised stock exchange

All other reporting enterprises,-turnover for the accounting
period exceeds Rs. 50 crores.

Other enterprises during accounting periods commencing
on or after 1-4-2004

Earlier application of the AS is encouraged.
After this Standard, the following stand
withdrawn :

AS - 8, Accounting for Research and Development;

AS-6, Depreciation Accounting, with respect to the amortisation
(depreciation) of intangible assets; and

AS - 10, Accounting for Fixed Assets - paragraphs 16.3 to 16.7,
37 and 38.
Objective

Accounting treatment for intangible assets not dealt in another AS

To recognise an intangible asset if certain criteria are met

Measure the carrying amount of intangible assets and disclosures
about intangible assets.
Scope
Not applied in accounting for:
 that are covered by another AS
 held by an enterprise for sale in the ordinary course of business
 deferred tax assets
 AS 19, Leases
 goodwill arising on an amalgamation and on consolidation
 financial assets;
 mineral rights and expenditure on the exploration for, or development and
extraction of, minerals, oil, natural gas and similar non-regenerative
resources; and
 arising in insurance enterprises from contracts with policyholders.
Intangible asset
identifiable non-monetary asset, without physical substance,
held for
use in the production or supply , for rental to others, for
administrative purposes.
Asset
a resource:
 controlled by an enterprise
 future economic benefits are expected
Amortisation
systematic allocation of the depreciable amount of an intangible
asset over its useful life.
Depreciable amount
cost less residual value.
Residual value
amount an enterprise expects to obtain at the end of assets useful life
Active Market
market where following conditions exist :
 the items are homogeneous;
 willing buyers and sellers can normally be found at any time;
 prices are available to the public.
Impairment Loss
carrying amount > recoverable amount.
Carrying amount
amount at which an asset is recognised in the balance sheet, net of
any accumulated amortisation /accumulated impairment losses
Recognition Criteria
recognised if:
 future economic benefits will flow to the enterprise
 the cost measured reliably.
•
assess the probability of future economic benefits will exist over the useful
life
•
measured initially at cost.
•
acquired separately- the cost measured reliably.
•
acquired in an amalgamation in the nature of purchase - is accounted for in
accordance with A S 14
•
by way of a Government Grant - at a nominal value or at the acquisition
cost
•
acquired in Exchanges of Assets- is determined in accordance with AS 10
•
Internally Generated Goodwill - not be recognized as an asset
Internally Generated Intangible Assets
Meets the criteria for recognition, classifies into:
RESEARCH PHASE
intangible asset arising
from
research
should
not recognized
Expenditure
DEVELOPMENT PHASE
An intangible asset arising
recognised if demonstrate :
from
development
 the technical feasibility
 its intention to complete
 its ability to use or sell
research  the existence of a market for the output
recognised as an expense
 the availability of adequate resources
 its ability to measure the expenditure
Recognition of an Expenses
Recognised as an expenses unless
 forms part of an intangible assets;
 item is acquired in an amalgamation in the nature
of purchase and cannot be recognized as an assets
 Past expenses not recognized as an assets
 Subsequent Expenses recognized as an Expenses
unless
it is for enabling the assets to earn future
benefit
attributed to the assets
Amortization

Depreciable amount of an I.A. amortised on a systematic basis

method reflect the pattern in which the economic benefits are consumed

Period reviewed at least once in a year.
Residual Value
Assumed to be Zero unless there is an commitment by third or there exist an
active market.
Retirement/ Disposal

eliminated from Balance Sheet.

Gains or losses (i.e. diff. between net disposal proceed and carrying
amount)
Disclosure
For Each Intangible assets distinguishing between internally generated&
others
Useful life
Amortisation methods and rates
Gross and net carrying amount
Reconciliation
Other Disclosure
If amortised more than 10 years
reasons why? And factors
Material information
Title restricted
commitments
Showing
Addition
Disposals
Impairment loss
Amortisation
Accounting Standard 27
Financial Reporting of
Interest in Joint Ventures
Scope / Status
Mandatory application in case of
Accounting for interest in
Joint Venture
Reporting of Assets, Liabilities,
Income and Expenses of Joint
Venture in SFS/CFS of
Venturers/Investors
Effective from 1.4.2002
Objective
SET OUT PRINCIPLES AND PROCEDURES FOR
Accounting of Interest
Reporting of Joint Venture Assets, Liabilities, Income and
Expenses in SFS
Joint Venture
Contractual arrangement to undertake an economic activity under
Joint Control
Joint Control
Contractually agreed sharing of control
Control
Power to govern financial and operating policies
Venturer
Party having Joint Control
Investor
Party having no joint Control
Proportionate Consolidation
Method of Accounting and Reporting share Jointly controlled
Entity in SFS.
Jointly
Controlled
Assets
Forms
Jointly
Controlled
Operations
Jointly
Controlled
Entity
Common Features
Bound by Contractual arrangement
Contractual Arrangement establishing Joint Control
Contractual Arrangement
Contents
Characteristics
Activity, Duration
and Reporting
Obligations
Joint Control
Appointment of
BoD/GB and
Voting rights of
Venturers
Capital
Contributions
Sharing of Output,
Income, Expenses
and Results
Identifies Decision Areas
essential to Goal
Protective Rights and
Participative Rights
One Venturer as Operator
No significant influence
Agreement in writing
Contractual Arrangements with
Subsidiaries treated as Joint
Venture
Evidences
Contract
between
Venturers
Minutes of
Discussions
Arrangements
Incorporated in
Articles
By-Laws of
Joint Venture
Characteristics
Jointly Control Assets
Jointly Control Operation
•Joint Ownership of Assets for common
economic benefit
•Reflects economic reality and legal form
•Limited Accounting records
•Use of Own Assets, Inventories,
incurring expenses,liabilities and
finance
•No Separate Financial Statements
Recognition of interest Separate and
Consolidated FS:
Recognition of interest in
Separate FS
•Share in joint assets
•Assets controls and liabilities incurs
•Liabilities incurred individually
•Expenses incurred and share in
income from JV
•Liabilities incurred jointly
•Income from sale or use of share of output
and expenses
•Expenses incurred in Joint Venture
Common
•No Separate Establishment,
Partnership or Other entity or
separate financial structure
•Agreements for sharing Joint
revenue and expenses
•May prepare accounts for
internal management reporting
purposes
Jointly Controlled Entities
•
Separate Establishment of Corporation, Partnership or Other entity
•
Controls Assets, incurs Liabilities and Expenses, Earns Income
•
Enter into Contracts in own name, raise finance
•
•
•
Venturers entitled to share in results
Own accounting Records and own FS
Involves features of both jointly controlled assets and operations
Recognition of Interest in
Separate Financial Statements
As per AS-13
Consolidated Financial Statements
As Per Proportionate Consolidation Method
Excepts where

Interest is likely to dispose of in near future

jointly controlled entity operates under severe long-term
restrictions that significantly, impair its ability to transfer funds
Accounted as per AS-13
Proportionate Consolidation Method
Reflect substance and economic
reality not structure or form
Accounting Policies
Uniform, If not adjustment,
 Line wise Consolidation as per AS-21
Where no adjustment then
No set off of legal right exist
disclose
Excess losses of investors to be
recognized by the venturers
Reporting Period
Future profits , first absorbed by the
venturers to the extent of losses
Recognition of Goodwill/Capital
Reserve
Consistent, statements drawn
to same date, if not adjustment,
where no adjustment
disclosure
When
Discontinuance
Ceases control but retains,
either in whole or in part, its
interest
Entity operates under severe
long-term restrictions that
significantly impair its ability
to transfer funds
Reporting Thereafter
Unilateral
Control As per AS
21
Cost of Investment on the
date of discontinuance
Venturer’s share in net assets
adjusted with carrying amount of
Goodwill/Capital Reserve
Other wise
AS-13orAS-23
Transaction Between a Venturer and Joint Venture
Venturer Contributes or
Sales assets to the Joint
Venture
If Significant risk and reward of
Venturer Purchases Assets
from Joint Venture

ownership transferred then
of profits/losses until resells
recognise
 portion of Gain/Loss
attributable to interest of other
Venturers
 full loss where evidence of
reduction in the net realizable
value/impairment loss exist
Should not recognize its share
the assets to independent Party

Recognize losses immediately
in case of net realizable value or
Impairment loss
Transaction between Venturer and Joint Entity
IN SFS
IN CFS
Full profit/loss
Same as Above
Reporting Interests in FS of an Investor
No Joint Control:
a.) In CFS as per AS-13, AS-21 or AS-23 as appropriate
b.) In SFS as per AS-13
Operators of Joint Ventures
Should account for any fees in accordance
with AS-9
Disclosures
Common for separate and consolidated financial
statements
Commitments in respect of its
interests separately
• Interests and share in commitments
incurred jointly
• Share of commitments of the joint
ventures themselves.
Additional Disclosure in Separate
Financial Statement
Aggregate amounts of assets, liabilities,
income and expenses related to its
interest in the jointly controlled entities
Contingent liabilities to be disclose
separately unless probability of
loss is remote:
• Interest and share in liabilities
incurred jointly
•Share of liability of the Joint Ventures
themselves
•Those, which arise as Venturer is
contingently liable for the liabilities of
other Venturer’s
List Joint Ventures
Description of Interest in Significant Joint
Ventures
Proportion of ownership interest, name, country
of incorporation or residence in respect of Jointly
Controlled Entities
Accounting Standard - 28
IMPAIRMENT OF
ASSETS
Applicability

In respect of expenditure incurred on intangible items during
accounting periods commencing on or after 1-4-2004

Mandatory for:

Enterprises- whose equity or debt securities listed /to
be listing on a recognised stock exchange

All other business reporting enterprises,-turnover for
the accounting period exceeds Rs. 50 crores.

Other enterprises during
commencing on or after 1-4-2005
Earlier application
encouraged.
of
the
accounting
Accounting
periods
Standard
is
Objectives
• prescribe the procedures to ensure that assets are carried at no more than their
recoverable amount
• recognize an impairment loss
• when an enterprise reverse an impairment loss and it prescribes certain
disclosures .
Scope
Applied in accounting for the impairment of all assets
other than
•inventories
•assets arising from construction contracts
•financial assets, including investments
•deferred tax assets
Applies to assets that are carried at cost / at revalued amounts
Definitions
Recoverable amount
higher of an asset's
net selling price
and its value in use
Net selling price
amount obtainable from the
sale parties
less costs of disposal
Value in use
present value of
estimated future cash
flows arise from the
continuing use of an
asset and from
its disposal at the end
Impairment loss
Amount by which the carrying amount of
an asset exceeds its recoverable amount.
Cost of Disposal
incremental costs for
disposal of an asset
Discount Rate
A pre-tax rate that reflect current market assessments of the time value
of money and the risks. not reflect risks for which future cash flow
estimates have been adjusted.
Carrying amount
Amount at which an asset is recognised in the balance sheet after
deducting any accumulated depreciation .
Cash-generating
Unit is the smallest identifiable group of assets that generates cash
inflows from continuing use that are largely independent of the cash
inflows from other assets .
Corporate assets
Assets other than goodwill that contribute to the future cash flows.
Identifying an Asset that May be Impaired
Impaired when
Carrying Amount > Recoverable Amount.
Assess at each balance sheet date whether any assets is impaired.
If yes
Estimate the recoverable amount .

In assessing an enterprise should consider the following
External sources of information
Internal sources of information
an asset's market value declined
evidence is available of obsolescence
or physical damage
significant changes with an adverse
significant changes with an adverse
effect- changes include plans to
discontinue or restructure the operation
effect in the technological, market,
economic or legal environment
market interest rates or other market
rates of return - increased
the carrying amount is more than its
market capitalisation
economic performance of an asset is /
will be worse than expected
Measurement of Recoverable Amount
 Not necessary to determine both an asset's net selling price and its
value in use.
 Possible to determine net selling price, even if an asset is not traded in an
active market.
 If an asset not traded in an active market, the recoverable amount may be
taken to be its value in use.
Recoverable amount - for an individual asset
If not possible recoverable amount is determined for the cash-generating unit to
which it belongs, unless
Or
Either
Net selling price is higher than
its carrying amount
The asset's value in use can be
estimated to be close to its net
selling price and
net
selling price can be determined.
Net Selling Price
The best evidence is a
price in a binding sale
agreement adjusted
for incremental costs
If this not
If asset is traded in an
active market –
market price less cost
of disposal
If both are not
available
Based on best information
available, at the balance sheet
date
Basis for Estimates of Future Cash Flows
Based on
Reasonable and supportable assumptions
The most recent financial budgets/forecasts
Composition of Estimates of Future Cash Flows
Estimates of future cash flows should include:
projections of cash
inflows
projections of cash outflows
necessarily incurred for the
cash inflows
net cash flowson disposal of
assets
Estimates of future cash flows not include flows arise
from:
 a future restructuring which is not yet committed
 future capital expenditure for improving /
enhancing the asset
 cash inflows or outflows from financing activities;
 income tax receipts or payments.
Recognition and Measurement of an Impairment
Loss
RECOVERABLE AMOUNT < CARRYING AMOUNT

Carrying amount of the asset reduced to its recoverable
amount.
Reduction is an impairment loss.

recognised as an expense immediately,

if revalued assets than according to AS-10
IMPAIRMENT LOSS > CARRYING AMOUNT
Recognise a liability if required by another AS
The depreciation charge adjusted in future periods to allocate the asset's
revised carrying amount less its residual value
Cash-Generating Units
Identification
•If not possible to estimate the recoverable amount of the individual asset, an enterprise
should determine the recoverable amount of the cash-generating unit to which the asset
belongs.
•Cash generating unit identified consistently from period to period
What is cash generating units?
Discussed in earlier slides
Goodwill
•In testing cash generating unit for impairment
•goodwill related to this cash-generating unit is identified in FS
Perform Bottom
Test
Whether carrying amount of goodwill can be
allocated on a reasonable and consistent basis
then, compare the recoverable amount to its
carrying amount
identify the smallest cash-generating unit to
which the carrying amount of goodwill can be
allocated on a reasonable and consistent basis
then, compare the recoverable amount of the
larger cash-generating unit to its carrying
amount
Perform TopDown Test
Corporate Assets
In testing a cash-generating unit for impairment identify all the corporate assets on these CA
If carrying amount can allocated on a reasonable basis
perform Bottom Test
If not
perform Top Down Test
Impairment Loss for a Cash-Generating Unit
Allocated to reduce the carrying amount in the following order:
to goodwill allocated to
the cash-generating unit
and
Carrying amount not reduced below the highest of
its net selling price
then, to other assets unit
on a pro-rata basis
its value in use
zero.
Reversal of an Impairment Loss
Assess at each balance sheet date –
There is any indication that an impairment loss recognised- may no longer exist
for this an enterprise should consider, as a minimum, of
External sources
of information
•the asset's market
value has increased
•significant changes
with a favorable
effect environment
•market interest rates
or other market rates
have decreased
Internal sources
of information
•significant changes that
includes capital expenditure
incurred on improvement
•Better performance
evidence is available
Disclosure
:
For each type of assets
•impairment losses recognized
•reversal of impairment losses
•impairment losses recognized against revaluation reserve
•reversal of impairment losses against revaluation reserve
An enterprise that applies AS-17 should disclose above for each
reportable segment
If amount of impairment loss or reversal of impairment loss material
to the FS then an entity should disclose:
For an Individual Assets
•Event and circumstances
•Amount
•the nature; and the reportable
segment
•For a cash generating unitdescription; amount; current and
former way of aggregating assets
•Recoverable amount and basis
As a whole
•The main classes of
assets affected by
impairment
•Events and circumstances