ACCOUNTANT STANDARDS ISSUED BY ICAI WITH
REFERENCE TO ITS RELEVANCE TO BANKERS IN
ANALYSIS AND INTERPRESENTATION OF
FINANCIAL STATEMENTS AND CRITICAL DATA
Presented By :
CA Pranav Shah
1
Meaning of Accounting Standards
Accounting Standards relate to the codification of generally
accepted accounting principles.
These are the norms of accounting policies and practices
by way of codes or guidelines to direct as to how the items
which go to make up the financial statements should be
dealt with in accounts and presented in the annual
accounts.
The main purpose of standards is to provide information to
the users as to the basis on which the accounts have been
prepared.
Disclosure of accounting policies enables the users to
interpret the reported information.
Standards may consist of detailed rules to be adopted for
accounting treatment of various items before the
presentation of financial statements.
2
List of Accounting Standards :
Disclosure of Accounting Policies AS-1
Valuation of Inventories AS-2
Cash flow Statement AS-3
Contingencies & events occurred AS-4
after the Balance Sheet Date
Depreciation Accounting AS-6
Revenue Recognition AS-9
Fixed Assets AS-10
3
Accounting for the effects of changes in AS-11
Foreign Exchange Rates
Accounting for Investments AS-13
Related Parties Disclosure AS-18
Earning per Share AS-20
Accounting for taxes of Income AS-22
Provisions Contingent Liabilities & AS-29
Contingent Assets.
4
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 & financial impact of such change of
Accounting Policies should be disclosed.
If Fundamental Assumptions (going Concern,
consistency & accrual ) are not followed , the fact
must be disclosed.
Accounting policies adopted by the enterprise
should represent true & Fair view of the state of
affairs of the financial statements.
5
Reference of Annual Report of
Micro inks Ltd.for financial year
Dec.2006
Financial Statement have been prepared
under Historical cost convention on an
accrual basis & in accordance with the
generally accepted accounting policies
issued by ICAI referring to in Sec 211 (3C)
of the companies Act ,1956.
6
BANKER’S CONCERN :AS -1
The impact of any change in
Accounting Policies shall effect on
the profitability of the company. It
should be construed with reference to
the existing policies & new policies
adopted by the company & how far it
is justified & acceptable to bank. For
e.g. Change in valuation method from
Weighted Average to FIFO may have
impact on the profitability.
7
AS-2 : Valuation of Inventories
Valued at the lower of cost & Net realisable value.
It is Sum of the Cost of purchase, cost of
conversion & other cost.
This AS is not applicable to Construction Contract,
Service providers ,Financial Instruments &
Livestock
Determination of cost-
a) Specific Identification method for determining
cost of inventories means directly linking the cost
with specific item of inventories.
b) Specific Identification method for determining cost
of inventories when not applicable then use FIFO
and Weighted average method.
8
Reference of Annual Report of
Micro inks Ltd. for financial
yearDec.2006
The finished & semi finished inventories are valued
at lower of cost on absorption basis & Net realisable
value.
Raw material & packing material are valued at
lower of cost & Net realisable value.
However ,materials & other items held for use in
production of finished goods are not written down
below cost if the product in which they will be
incorporated are expected to be sold at or above
cost.
Cost is determined on a transactional weighted
average basis, net of CENVET benefits availed by
the companies.
9
Damaged , unserviceable & inert stocks are
depreciated.
Excise duty & custom duty payable on goods
held in the bonded warehouse are provided in
valuation of inventories .
Consumables & other spares, tools , etc. are
valued at lower of cost( transactional weighted
average cost ,net of CENVAT benefits availed
by the companies) & net realisable value.
10
BANKER’S CONCERN : AS-2
Non compliance of AS-2 relating to
valuation of inventories would result in
the true & unfair view of the state of
affairs of the company & it would
ultimately has an impact on
profitability and all the accounting
ratios which affects assessment of
the proposal of the banker.
11
AS-3 Cash Flow Statement
Tool of assessing the liquidity & solvency position of the
enterprise.
Applicable to enterprise those turnover is more than Rs.
50 crores.
These are divided in 3 heads :
From operating activities
From investing activities
From financing activities
Cash flow includes - Cash + Cash equivalent i.e. short
term liquid investment having maturity less than 3
months
12
BANKER’S CONCERN : AS - 3
By studying the cashflow Statement the
banker would be in a position to make out
as to whether the profit/cash accruals
earned by the company is from operating
activities , investing activities & financial
activities which would assist in appraisal of
future cashflows of the company.
13
AS-4 : Contingencies & events occurring after
the date of Balance Sheet date
Contingencies means result not known on B/s date &
depends on happening & non happening of the events in
future.
Contingencies loss should be provided for by a charge in
the statement of P/L ,if probable future event confirm it.
Contingencies gain should not be recognised in the
financial statement.
Events after B/S date means which occur between B/S
date & date of which financial Statement are approved by
competent authority.
They are significant & may be favorable & unfavorable.
Accounting Treatment for events after B/S date loss should
be accounted in the accounts & Assets –Liabilities are
adjusted .OR Disclosure by way of Notes to accounts
only .
14
BANKER’S CONCERN : AS- 4
Any contingency / event which happens
after the Balance Sheet date for e.g.
Breaking out of a fire in the company’s
factory which an inadequate insurance
would cause a huge loss to the company
which will be reflected in the Books of
Accounts of next financial year but it can
be assessed by the bankers referring to
Notes of Accounts wherein the compliance
of AS 4 is disclosed.
15
AS-6 : Depreciation Accounting
Measure of value of a depreciable asset arising from
use, passage of time.
Applicable to assets used for period more than one year.
Calculated by 2 methods – Straight line method (SLM ) &
Written Down Balance Method (WDBM)
In case of extension, revaluation or exchange
fluctuation ,deprecation is provided on adjusted figure .
16
Reference of Annual Report of
Micro inks Ltd. for financial year
Dec.2006
Depreciation is provided on SLM basis on
all assets at the rate prescribed in
Schedule XIV of the companies Act,1956
Depreciation on the assets not owned by
the company’s included in Gross Block is
provided over the estimated period of the
economic life of the assets.
Depreciation is charged on pro rata basis
for the assets purchased/Sold during the
year.
17
BANKER’S CONCERN : AS - 6
Change in method of depreciation
should be based on some sound
acceptable reasoning & its effect
must be incorporated with
retrospective effect i.e. the date on
which assets is put to use.
18
AS-9 : Revenue Recognition
It explains when revenue is recognized in P/L account &
when postponed.
Revenue is gross inflow of cash,receivable or other
consideration arising in course of ordinary activities of an
enterprise.
In case of sale of goods revenue is recognised when 3
conditions are fulfilled as
Goods transfer from seller to buyer for a price
Seller does not retain any effective control on transferred
goods.
No uncertainty in collection of the amount of consideration.
In case of rendering of Services 2 methods are applicable
Completed Service Contract Method
Proportionate completion Method
19
Reference of Annual Report of
Micro inks Ltd. for financial year
Dec.2006
Domestic sales are recognised at time of
despatch to the customer, on the basis of
invoice. Export sales are recognised on the
basis of dates of bills of lading.
Gross sales include excise duty but
exclude custom duty ,education cess, sales
tax, other recoveries set off against the
respective expenditure heads & are net of
trade discount.
20
BANKER’S CONCERN : AS- 9
Revenue recognition is particularly
important when goods are transferred
through sales invoice to a Sister concern
where generally the company is not having
business terms with that Sister Concern .
Only to book the profit the goods have
shown to be sold & then returned back
after 1st April in the new financial year .You
may also refer to AS 18 which will be
discussed later on.
21
AS-10 : Accounting For Fixed Assets
Cost comprise of its Purchase price & any attributable to
the asset to its working conditions.
Self-Construction assets shall be accounted at cost.
Assets on Hire basis should be recorded at fair value.
Gross & net values at the beginning & end of year
showing additions, deletions and other improvements is
required to be disclosed.
22
Reference of Annual Report of
Micro inks Ltd. For Dec.2006
Fixed Assets are stated at historical cost of
acquisition or construction less
accumulated depreciation/ amortisation.
All cost relating to acquisition & installation
of fixed assets are capitalised.The cost
excludes the duty benefits admissible
against installation of the specific assets.
23
In respect of loan’s & suppliers credit
arrangement for purchase assets
repayable in foreign currencies, the net
increase in the Company’s liability for
repayment consequent upon realignment in
rupee value is capitalised
Advances payment for
acquisition/construction & cost of assets
which are not put to use as at reporting
date are disclosed under capital WIP
24
BANKER’S CONCERN : AS -10
Whether the Fixed Assets have been purchased
from long term funds or short term funds have
been used to finance the purchase of Fixed
Assets as it would badly affect the working
capital cycle of the company further the interest
paid for acquisition of Fixed Assets prior to
commercial production should be capitalised.
25
AS-11 :Effects of changes in Foreign
Exchange rates
Applicable to all enterprises for which
accounting period commence on or after
1/04/04.
Monetary items denominated in foreign
currency shall be reported at closing rated.
Non monetary items carried in terms of
historical cost in foreign currency reported at
exchange rate on the date of the transaction.
All types of exchange differences will be
charged to P/L for the period.
26
Reference of Annual Report of
Micro inks Ltd. for financial year
Dec.2006
Transactions in foreign currency recorded at the
rates of exchange in force at the time of occurrence
of the transactions.
Outstanding recoverable & payable in foreign
currency at the reporting date are stated at the rates
of exchange prevailing at the reporting date or at the
forward rates relevant to the transaction.
Gains / losses on cancellation of Forward Exchange
Contracts are recognised in the P/L Account
27
BANKER’S CONCERN : AS - 11
Any non compliance of AS-11would
result in higher profitability &
consequently the ratios calculated
would also not give a correct picture
of the companies financial
performance.
28
AS-13 : Accounting for Investment
It is assets held for earning income by way of
dividend , interest & rentals, for capital
appreciation or for other benefits.
Cost of Investment include acquisition charges ,
e.g. brokerage , fees and duties.
Investment readily realisable & held not more
than a year are classified as current assets
Current investment disclosed at lower of cost &
fair value. Long term investment disclosed at
cost.
29
Reference of Annual Report of
Micro inks Ltd. for financial year
Dec.2006
Long term investments are stated at the cost,
less provision , if any , for diminution in value
other than temporary
Current Investments are stated at cost & fair
value whichever is lower.
30
BANKER’S CONCERN : AS - 13
If no provision is made for diminution on
the value of investment then to that extant
profit of the company would be shown on
higher side therefore while apprising the
proposal the profitability of the company
may be recalculated.
31
AS-18 : Related Party Disclosures
Parties are considered to be related if, any
time during reporting period, one party has
ability to control or exercise significant
influence over the other party in making
financial and /or operating decisions.
Name of the related party & nature of
related party relationship must be disclosed
even there is no transactions but control
exist.
32
BANKER’S CONCERN : AS - 18
In case of AS 18 bankers would be
able to know whether the disclosure
to the bank regarding group
concerns / Sister concerns have been
truly made or not & whether to
include or exclude such group
concerns book debt while calculating
drawing power.
33
AS-20 : Earning Per Share
It is financial ratio that gives the information regarding
earning available to each equity share. It shows market
price of a share.
Applicable to enterprise whose shares are listed in Stock
exchange.
These are of 2 types – basic EPS & Diluted EPS
They must be shown in the profit & loss statement even if
negative.
Basic EPS calculated by dividing net P/L for the period
attributable to equity shareholders by weighted average of
equity shares outstanding during the year .
Diluted EPS calculated as net P/L for the period
attributable to equity shareholders by weighted average of
shares are adjusted for the effects of dilutive potential
equity share .
34
AS-22 : Accounting for taxes on
income
There are two types of tax Current tax & the
deferred Tax.
Current tax measured at the amount expected to
be paid to ( recovered from ) the taxation
authorities , using the applicable tax rates & tax
laws.
Deferred tax assets & liabilities should be
measured using the applicable tax rates & tax
laws that have been enacted by the Balance
Sheet date.
35
Both the current & Deferred tax,
assets & liabilities are shown
distinguish from each other.
Nature of 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.
36
Reference of Annual Report of
Micro inks Ltd. for financial year
Dec.2006
Provision for current tax based on taxable profit
for the 9 months period upto Dec 31,2006. The
actual liability will be determined on the basis of
the results for the period April 1 ,2006 to March
31, 2007.in accordance with Income Tax
Act ,1961
Provision for Fringe Benefit Tax is made in
accordance with provisions of Income Tax
Act ,1961
Deferred tax is recognised , on timing difference
, being the difference between taxable income
& accounting income that originate in one
period and are capable of reversal in one or
more subsequent periods. 37
Deferred tax Assets in respect of
unabsorbed & carrying forward losses
are recognised if there is virtual
certainty that there will be sufficient
future taxable income available to
realise such losses.
38
BANKER’S CONCERN : AS -22
The deferred tax liability which is a
liability entry passed by way of
notional entry to bring the Indian
Accounting Standard in harmony with
International Accounting Standard &
to eliminate the time difference
between Income Tax Act &
Companies Act.
39
AS-29 : Provisions ,Contingent
liabilities & contingent Assets
Provision is a liability , which can be
measured by using a substantial degree of
estimation.
Contingent liabilities is a possible obligation
that arises from past event & existence of
which will be confirmed only by the
occurrence or non occurrence of one or
more uncertain future events.
Contingent liabilities are not recognised in
the P/L account & disclosed in notes to the
accounts.
40
Reference of Annual Report of
Micro inks Ltd. for financial year
Dec.2006
A provision is recognised when the company has a
present legal or constructive obligation as a result
of past event & it is probable that a outflow of
resources will be required to settle the obligation.
Provisions ( excluding retirement benefits ) are not
discounted to its present value & are determined
based on best estimate require to settle the
obligation at the Balance Sheet date
41
BANKER’S CONCERN : AS -29
Whether all the provisions have been
made in books of accounts & whether
they have been correctly recorded.
The impact of contingent liability on
the future cashflows of the company.
42
THANKS YOU
43
