As-1 - Disclosure of Accounting Policies
As-1 - Disclosure of Accounting Policies
As-1 - Disclosure of Accounting Policies
Significant Accounting Policies followed in preparation of accounts be disclosed at one place along with the financial statements. Any change and financial impact of such change should be disclosed. If fundamental assumptions (going concern, consistency and accrual) are not followed, the fact to be disclosed. Going concern assumption is assessed for a foreseeable period of one year Accounting Policies adopted by the enterprise should represent true and fair view of the state of affairs of the financial statements Major considerations governing selection and application of accounting policies are: i) Prudence, ii) Substance over form and iii) Materiality. Note In relation to derivative contracts (e.g. foreign exchange forward contracts) the Institute interpreted on the principles of prudence that the loss (net), if any on each reporting date shall be provided through the statement of profit and loss account.
AS-2 VALUATION OF INVENTORIES (REVISED) The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Inventories are valued at lower of cost or net realisable value. Specific identification method is required when goods are not ordinarily interchangeable. In other circumstances, the enterprise may adopt either weighted average cost method or FIFO methods whichever approximates the fairest possible approximisation of cost incurred. Standard Costing Method or Retail Inventory Method can be adopted only as a techniques of measurement provided where the results of these measurements approximates the results that would be arrived at after adopting specific identification method or weighted average method or FIFO method as may be applicable to the circumstances. The financial statements should disclose: (a) the accounting policies adopted in measuring inventories, including the cost formula used; and (b) the total carrying amount of inventories and its classification appropriate to the enterprise. AS-3 CASH FLOW STATEMENTS The standard sets out the requirement that where the cash flow statement is presented, it shall disclose a movement in "cash and cash equivalents" segregating various transactions into operating, investing and financing activity. It requires certain specific items to be addressed in the cash flows and certain supplemental disclosures for non-cash transactions. Cash comprises cash on hand and demand deposits with banks.
Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Cash flows are inflows and outflows of cash and cash equivalents. Operating activities are the principal revenue-generating activities of the enterprise and other activities that are not investing or financing activities. Examples, cash receipts from the sale of goods and the rendering of services; cash receipts from royalties, fees, commissions and other revenue; cash payments to suppliers for goods and services; cash payments to and on behalf of employees. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Examples, cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalised research and development costs and self-constructed fixed assets; cash receipts from disposal of fixed assets (including intangibles); cash payments to acquire shares, warrants or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held for dealing or trading purposes). Financing activities are activities that result in changes in the size and composition of the owners capital (including preference share capital in the case of a company) and borrowings of the enterprise. Example, cash proceeds from issuing shares or other similar instruments; cash proceeds from issuing debentures, loans, notes, bonds, and other short- or longterm borrowings; and cash repayments of amounts borrowed. Additionally certain items are required to be disclosed separately, like Income Tax, Dividends, etc. The enterprise can choose either direct method or indirect method for presentation of its cash flows. Cash flows arising from transactions in a foreign currency should be recorded in an enterprises reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the cash flow. A rate that approximates the actual rate may be used if the result is substantially the same as would arise if the rates at the dates of the cash flows were used. The effect of changes in exchange rates on cash and cash equivalents held in a foreign currency should be reported as a separate part of the reconciliation of the changes in cash and cash equivalents during the period. AS-6 DEPRECIATION ACCOUNTING Allocate depreciable amount of a depreciable assets on systematic basis to each accounting year over useful life of asset, useful life may be reviewed periodically. Basis must be consistently followed and disclosed. Any change to be quantified and disclosed. Rates of depreciation should be disclosed.
A change in method followed be made only if required by the statute, compliance to Accounting Standard, appropriate preparation or presentation of the financial statement. In cases of extension, revaluation or exchange fluctuation, depreciation to be provided on adjusted figure prospectively over the residual useful life of the asset. Deficiency or surplus in case of transfer/change in method be disclosed. Historical cost, depreciation for the year and accumulated depreciation be disclosed. Revision in method of depreciation be made from date of use. Change in method of charging depreciation is change in accounting policy be disclosed.
AS-10 ACCOUNTING FOR FIXED ASSETS The cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for its intended use. Self-constructed asset shall be accounted at cost. In case of exchange of asset, fair value of asset acquired or the net book value of asset given up whichever is more clearly evident shall be considered. Revaluation is permitted provided it is done for the entire class of assets. The basis of revaluation should be disclosed. Increase in value on revaluation shall be credited to Revaluation Reserve while the decrease should be charged to Profit and Loss Account. Goodwill to be accounted only when paid for. Assets acquired on hire purchase shall be recorded at its fair value. Gross and net book values at beginning and end of year showing additions, deletions and other movements is required to be disclosed. Assets should be eliminated from books on disposal or when of no utility value. Profit/loss on disposal be recognised on disposal to Profit and Loss Account. Machinery spares that can be used only in conjunction of specific asset shall be capitalised
AS-14 ACCOUNTING FOR AMALGAMATION The Accounting Standard is applicable only where it is made in pursuant to a scheme sanctioned by statute. The accounting method to be adopted depends whether the amalgamation is in the nature of merger or not as defined in para 3(e) of the Standard. The definitions list out five criteria, all of which must be satisfied for an amalgamation to be accounted on the basis
of "Pooling of Interest Method". If any criterion is not met then the amalgamation is accounted on by using "Purchase Method". It may be mentioned that these criteria relates to mode of payment of consideration of merger, shareholding pattern pre and Post Merger, intention to carry-on business after the merger, pooling of all assets and liabilities after the merger and an intention to continue to carry the carrying amounts of assets and liability after the merger. Under Purchase Method, all assets and liabilities of the transferor company is recorded either at existing carrying amount or consideration is allocated to individual identifiable assets and liabilities on basis of its fair values at date of amalgamation. The excess or shortfall of consideration over value of net assets is recognised as goodwill or capital reserve. Under the Pooling of Interest Method, assets, liabilities and reserves of the transferor company be recorded at existing carrying amount and in the same form as on date of amalgamation. In case of conflicting accounting policies existing in transferor and transferee company a uniform policy be adopted on amalgamation, as per AS5. Certain specific disclosures as discussed in the questionnaire below are required to be made in financial statements after amalgamation. In case of amalgamation effected after Balance Sheet date but before issue of financial statements of either party, the event be only specifically disclosed and not given effect in such statements. AS-21 CONSOLIDATED FINANCIAL STATEMENTS To be applied in the preparation and presentation of consolidated financial statements for a group of enterprises under the control of a parent. Control means the ownership of more than one-half of the voting power of an enterprise or control of the composition of the board of directors or such other governing body. Control of composition implies power to appoint or remove all or a majority of directors. Consolidated financial statements to be presented in addition to separate financial statements. All subsidiaries, domestic and foreign to be consolidated except where control is intended to be temporary or the subsidiary operates under severe long-term restriction impairing transfer of funds to the parent. Consolidation to be done on a line by line basis by adding like items of assets, liabilities, income and expenses which involve. Elimination of cost to the parent of the investment in the subsidiary and the parents portion of equity of the subsidiary at the date of investment. Excess of cost over parents portion of equity, to be shown as goodwill.
Where cost to the parent is less than its portion, of equity, difference to be shown as capital reserve. Minority interest in the net income to be adjusted against income of the group. Minority interest in net assets to be shown separately as a liability. Intra group balances and intra-group transactions and resulting unrealised profits should be eliminated in full. Unrealised losses should also be eliminated unless cost cannot be recovered. Where two or more investments are made in a subsidiary, equity of the subsidiary to be generally determined on a step by step basis. Financial statements used in consolidation should be drawn up to the same reporting date. If reporting dates are different, adjustments for the effects of significant transactions/events between the two dates to be made. Consolidation should be prepared using same accounting policies. If the accounting policies followed are different, the fact should be disclosed together with proportion of such items. In the year in which parent subsidiary relationship ceases to exist, consolidation to be made up-to-date of cessation. Disclosure is to be of all subsidiaries giving name, country of incorporation, residence, proportion of ownership and voting power if different, nature of relationship between parent and subsidiary, effect of the acquisition and disposal of subsidiaries on the financial position, names of subsidiaries whose reporting dates are different than that of the parent. When the consolidated statements are presented for the first time figures for the previous year need not be given. While preparing consolidated financial statements, the tax expense to be shown in the consolidated financial statements should be the aggregate of the amounts of tax expense appearing in the separate financial statements of the parent and its subsidiaries. Near Future should be considered as not more than twelve months from acquisition of relevant investments unless a longer period can be justified on the basis of facts and circumstances of the case. When there are more than one investor in a company in which one of the investors controls the composition of board of directors and some other investor holds more than half of the voting power, both these investors are required to consolidate the accounts of the investee in accordance with this Standard. Note: Not all the notes appearing in standalone financial statements is required to be disclosed in the consolidated financial statements.Typically notes that are not required to be included are, managerial remuneration, CIF value of import, capacity, quantitative details, etc. AS-22 ACCOUNTING FOR TAXES ON INCOME This statement should be applied in accounting for taxes on income. This includes the determination of the amount of the expense or saving related to taxes on income in respect of an accounting period and the disclosure of such an amount in the financial statements.
The expense for the period, comprising current tax and deferred tax should be included in the determination of the net profit or loss for the period. Deferred tax should be recognised for all the timing differences, subject to the consideration of prudence in respect of deferred tax assets as set out in paragraph below. Except in the situations stated in paragraph 5, deferred tax assets should be recognised and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised. Current tax should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates and tax laws. Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets and liabilities should not be discounted to their present value. The carrying amount of deferred tax assets should be reviewed at each balance sheet date. An enterprise should write-down the carrying amount of a deferred tax asset to the extent that it is no longer reasonably certain or virtually certain, as the case may be that sufficient future taxable income will be available against which deferred tax asset can be realised. Any such writedown may be reversed to the extent that it becomes reasonably certain or virtually certain, as the case may be that sufficient future taxable income will be available. An enterprise should offset assets and liabilities representing current tax if the enterprise: 1. (a) Has a legally enforceable right to set off the recognised amounts; and 2. (b) Intends to settle the asset and the liability on a net basis. An enterprise should offset deferred tax assets and deferred tax liabilities if: 1. (a) The enterprise has a legally enforceable right to set off assets against liabilities representing current tax; and 2. (b) The deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same governing taxation laws. Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period.
Deferred tax assets and liabilities should be disclosed under a separate heading in the balance sheet of the enterprise, separately from current assets and current liabilities. The break-up of deferred tax assets and deferred tax liabilities into major components of the respective balances should be disclosed in the notes to accounts. The nature of the evidence supporting the recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws. On the first occasion that the taxes on income are accounted for in accordance with this statement, the enterprise should recognise, in the financial statement, the deferred tax balance that has accumulated prior to the adoption of this statement as deferred tax asset/liability with a corresponding credit/charge to the revenue reserve, subject to the consideration of prudence in case of deferred tax assets. The amount so credited/charged to the revenue reserve should be the same as that which would have resulted if this statement had been in effect from the beginning.