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ACCOUNTING STANDARDS & IFRS
INTRODUCTION • Certain rules procedures and conventions have been developed by the accountants all over the world. • International Accounting Standards Committee was set on 29 th June 1973 to maintain uniformity. • The objective was to formulate and publish in the public interest standards.
PURPOSE • To support standards promulgated by the committee. • To use their best endeavours. • To ensure that appropriate action is taken in respect of auditors. • To seek to secure similar general acceptance and observance of these standards.
WORK OF THE COMMITTEE • The committee makes a choice of the subjects. • Prepares draft of standard practice in respect of financial information. • Final draft is approved by INTERNATIONAL FEDERATION OF ACCOUNTANTS ( IFAC). • They donot acquire a compulsiveness associated with legislation.
BENEFITS OF THE COMMITTEE • Keeps in view local regulations and customs. • Takes note of standards already issued. • Brings uniformity in diverse accounting standards. • To produce reliable acc. Information so that the users can rely upon. • But in practice the accounting practice has failed to give the true state of affairs.
APPLICABILITY • Used in developing countries such as Pakistan , Malaysia , Malawi , Singapore and Zimbabwe. • Researched in India, Yugoslavia, Egypt , Nigeria and Kenya. • Board set up a special Steering Committee in March, 1987 to find ways of direction. • New name is INTERNATIONAL FINANACIAL REPORTING STANDARD ( IFRS).
STANDARDS OF THE COMMITTEE • • IAS 1 – Presentation of Financial Statements IAS 2 - Inventories IAS 3 - No longer effective IAS 4 - Withdrawn IAS 5 - No longer effective IAS 7 - Cash flow Statements IAS 8 - P & L , Fundamental Errors and Changes in Acc policies
• • • IAS 9 - Research & Development Costs IAS 10 - Events after the Balance Sheet Date IAS 11 – Construction Contracts IAS 12 - Income Taxes IAS 13 - No longer effective IAS 14 - Segment Reporting IAS 15 - Information reflecting change in prices IAS 16 - Property, Plant & Equipment IAS 17 - Leases IAS 18 - Revenue IAS 19 - Employment Benefits IAS 20 - Acc for Govt Grants & Disclosure of Govt Assistance
• IAS 21 - The effects of changes is foreign exchange rates • IAS 22 - Business Combinations • IAS 23 - Borrowing Costs • IAS 24 - Related party disclosures • IAS 25 - Accounting for Investments • IAS 26 - Accounting 7 Reporting by Retirement Benefit Plans • IAS 27 - Consolidated Financial Statements & Acc for Investments in Subsidiaries • IAS 28 - Acc. for Investment in Associates • IAS 29 - Financial Reporting in hyper inflationary economies
• IAS 30 - Disclosures in Financial Statements of Bank & similar Financial Institutions • IAS 31 - Financial Reporting of interests in Joint Ventures • IAS 32 - Financial Instruments : Disclosure & Presentation • IAS 33 - Earning per Share • IAS 34 - Interim Financial Reporting • IAS 35 - Discontinuing Operations • IAS 36 - Impairment of Assets • IAS 37 -Provisions, contingent liabilities & contingent assets
• • • IAS 38 - Intangible assets IAS 39 - Financial instruments. Recognition & measurement. IAS 40 - Investment Property IFRS 1 - First time adoption of international reporting standards. IFRS 2 - Share-based payment IFRS 3 - Business combinations IFRS 4 - Insurance contacts IFRS 5 - Non current assets held for sale & discontinued operations. IFRS 6 - Exploration for & Evaluation of Mineral Resources IFRS 7 - Financial Instruments : Disclosures IFRS 8 - Operating Segments
Indian & International Accounting Standards • Institute of Chartered Accountants of India has : • Improved its accounting & auditing Standards. • Many statements have been issued from time to time of acc matters. • Set up Accounting Standards Board in 1977(formulation of acc standards). • Keeps in view of the customs, usages, applicable laws & the business environments.
• Accounting Standards Board seeks views & guidance of Industrial concerns, govt & other interested parties. • Also there would be recommendatory period of 3 yrs for issue of these standards. • To formulate & harmonise acc. Practices ASB marked a commendable effort. • Played a important role in improving corporate practices. • But not come upto expectations of users of Acc information.
INTRODUCTION • In India, the ICAI, being a premier accounting body in the country, took upon itself the leadership role by constituting the accounting standards st April 1997 board on 21
OBJECTIVES OF ACCOUNTING STANDARD • To concieve and suggest areas in which accounting standard need to be developed • To formulate accounting standard with a view of assisting the council of ACAI and evolving accounting standard in India • To revive, at regular interval the accounting standard • To provide time to time interpretation of accounting standard
GENERNAL PURPOSE OF ACCOUNTING STANDARD BOARD • Accounting standard board will keep in view the purpose and limitation of financial statements • ASB will clarify the term commonly used in financial statements • The term ‘‘general purpose financial statements” includes balance sheet, statement of profit and loss , cash flow statement • Responsibility for the preparation of financial statements and for adequate disclosure is that of management of enterprise
SCOPE OF ACCOUNTING STANDARD • Efforts will be made to issue accounting standard which are in conformity with the provision of applicable law, custom and usage • Accounting standard can not override the local regulation which govern the preparation of financial statement • Accounting standard are intended to apply only two items which are material • The Institute will use its best endeavours to persuade the government , appropriate authority to adopt the accounting standard in order to achieve uniformity • Accounting standard emphasis on laying down accounting policies and not detailed rules for applications
ADVANTAGES • Standard reduced to a reasonable extent confusing variations in accounting treatment • Standard may call for disclosure beyond that required by law • Facilitates comparison of different balance sheet • Remove conflict between different groups of society
DISADVANTAGES • • • Choice between different alternative accounting treatment became difficult Accounting standards are sometimes rigid and sometimes flexible Accounting standard can not override the statute
ACCOUNTING STANDARD 1 • • • This standard is related with disclosure requirement of accounting policies followed in preparing financial statements The true and fair state of affairs and the financial results of an entity is significantly effected by accounting policies The area in which different accounting policies can be followed are accounting for depreciation , revaluation of inventories , valuation of fixed assets Any change in the accounting policies which has material effect should be disclosed If any fundamental accounting assumptions is not followed in financial statements, the fact should be specifically disclose
Accounting standard 2 Valuation ofinventories AS-2 deals with determination of the values at which inventories are carried in the financial statements until the related revenues are recognised. According to AS-2 inventories are assets: §held for sale in ordinary course of business §in the process of production for sale §in the form of materials to be consumed in the process of production Spares which are specific and can be used only to particular item of fixed asset and whose use is irregular and is of the nature of capital spares. Such spares should be accounted for in accordance with AS-10, "accounting for Fixed Assets" and not in AS-2 states that inventories should be valued at cost or net realisable value whichever is lower. The cost of inventories should include: • costs of production • costs of conversion • costs incurred in bringing inventories in their present condition.
While ascertaining the costs, the following costs should not be included: • abnormal amounts • storage costs • administrative overheads • selling and distribution costs The costs of inventories should be assigned by using first-in and first-out (FIFO) or weighted average cost formula. When it is impractical to calculate cost, standard cost retail method may be used. under this the cost is ascertained by reducing the approximete percentage of gross profit from sale value of inventory. As per AS-2, the financial statements should disclose the accounting policies adopted in valuing inventories, cost formula, total carrying amount of inventories and its classification appropriate to the enterprise.
Accounting standard 3 Cash Flow Statements As per AS-3 an enterprise should prepare a cash flow statement for each period for which financial statements are presented becauseusers of financial statements are interested to know how the enterprise generates and uses cash and cash equivalents. Some of the terms used have beeen defined as: • Cash comprises cash on hand demand deposit 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-producing activities of the enterprise. • Investing activities are the acquisition and disposal of long-term assets and other investements not included in cash equivalents. • Financing activites are activities that result in changes in the size and composition of the owners capital and borrowings of the enterprise.
As per AS-3, cash flows asociated with extraordinary items should be classified as arising from operating, invsting or financial activities and separately disclosed. Cash flow arising from acquisition and from disposal of subsidiaries or other business units shoud be disclosed separately and classified as investing activites. Investing and financial activities that not involve the use of cash and cash equivalents should be excluded from a cash flow statement. Cash flows from interest and dividends received and paid and taxes on income should each be disclosed separately. An enterprise should disclose the components of cash and cash equivalents and should present a reconciliation of the amounts in its cash flow statement with the equivalent items reported in the balance sheet. An enterprise should disclose together with a commentary by management, the amount of significant cash and cash equivalent balances held by the enterprise that are not available for use by it.
Accounting standard 4 Contingencies and events occuring after the balance sheet date AS-4 deals with the treatment in financial statements of contingencies and events occuring after the balance sheet date. Following subjects, which may result in contingencies, are excluded from the scope of this standard: • Liabilities of life insurance and general insurance enterprises arising from policies isued. • Obligations under retirement benefit plans. • Commitments arising from log-term lease contracts. As per-4, a contingentcy is a condition or situatiion, the ultimate outcome of which, will be determined only on the occurrence, or non-occurrence, of one or more uncertain future events. Events occurring after the balance sheet are those significant events that occur between the balance sheet date and the date on which the financial statements are approved by the board of directors. If a contingency is likely to result in a loss to the enterprise, the estimate of that loss should be made by the management. Contingent gains are not to be recognised in financial statements because their recognition may result in the recognition of revenue which may never be realised
Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date. Assets and liabilities should not be adjusted for events occurring after the balance sheet date not related to circumstances existing on balance sheet date example- Insolvency of a customer. Dividends proposed or declared by the enterprise after the balance sheet date but before approval of the financial statements and pertaining to the period covered by the financial statements, should be adjusted. Events occurring after the balance sheet date which do not affect the figures stated in the financial statements would not normally require disclosure in the financial statements. Events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise should be disclosed.
In this disclosure the following information should be provided: • The nature of the event. • An estimate of the financial effect, the followig information should be provided in made. In case of disclosure of contingencies, the following information should be provided in the financial statements: • The nature of the contingency. • The uncertainties which may affect the future outcome. • The estimate of the financial effect, or a statement that such an estimate cannot be made.
Accounting standard 5 Net profit or loss for the period, Prior period itemsand changes in accounting policies The objective of AS-5 is to describe the classification and disclosure of certain items in the statement of profit and loss so that all enterprises prepeare such statements on a uniform basis for exchancing comparability of the financial statements of an enterprise over time and with that of other enterprises. This standard deals with disclosure of profit or loss from ordinary activities, extraordinary items and prior period items in the statement of profit or loss, accounting for changes in accounting estimates and disclosure of changes in accounting policies. AS-5 defines ordinary activities as activities undertaken by an enterprise as part of their business and activities which are incidental or arising from these activities. When items from these activities are of nature that their disclosure is relevant, they should be separately disclosed.
Extra ordinary items are income or expenses which do not arise from ordinary activities and therefore are not expected to occur frequently or regularly. Prior period items have been defined as income and expenditure arising in current period as result of errors and omission in preparation of financial statements. These should be separately disclosed so that their impact on profit and loss can be perceived. The nature and amount of each extraordinary item should be separately disclosed so that their impact on profit and loss can be perceived. AS-5 states that the nature and amount of of a change in accounting estimate having material effect in current or subsequent period should be disclosed. As per this standard, any change in accounting policy should be made only if the adoption of a different accounting policy is required be statue or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate presentation of the financial statements.
Accounting standard 6 Depreciation accounting AS-6 deals with depreciation accounting and applies to all depriciable assets except the following: § forests, plantations and similar regenerative natural resources § Wasting assets § Goodwill § Livestock § Expenditure on research and development The amount of depreciation to be charged in an accounting period isbased on following factors: • Historical cost • Expected useful life of asset • Estimated residual value of the depreciable asset Cost of a depreciable asset is the total cost spent in connection with its acquisition, installation, commisining, improvement.
As per AS-6, any addition to an existing asset of capital nature which becomes an integral part of existing asset is to depreciate over the remaining useful life of asset. The method of depreciation followed is applied consistently to provide comparability of results from. A change from one method should be made if adoption of new method is required by statute or if it is considered that change would result in more appropriate presentation of financial staements. If an asset is disposed or destroyed, the net surplus or deficiency should be disclosed separately. Following information should be disclosed: • Historical cost • Total depreciation • Related accumulated depreciation Depreciation methods used depreciation rates if different from those specified in statute governing the enterprise should be disclosed along with other accounting policies.
Accounting standard 7 (revised)Construction contract AS-7 deals with accounting for construction contracts in the financial statements of contractors. The standard does not apply to contractees and construction projects undertaken by enterprise commercial venture in nature of production activities. Among the two methods used for construction contracts i. e- percentage of completion method and completed contract method, the second method has been eliminated under the standard. As per standard, profit in case of fixed price contracts is not recognised unless the work isprogressed to a reasonable extent. The costs included in the amount of construction contract work is stated should comprise those costs that relate directly to a specific contract and those that are attributable to the contract activity in general and can be allocated to specific contracts. A foreseeable loss on the entire contract shoulde be provided for in the financial statements irrespective of the amount of work done and the method of accounting
An enterprise should disclose : • The amount of contract revenue recognised as revenue of the period • The methods used to determine the contract revenue recognised • The methods used to determine the stage of completion of contract in progress. • An enterprise should also disclose contracts in the progress at the reporting date • The aggregate amount of costs incurred , recognised profits, retentions. • The amount of advances received
Accounting standard 9 Revenue recognition AS-9 deals with bases for recognition of revenue in the statement of profit and loss of an enterprise. The standard is concerned eith the recognition of revenue arising in the course of ordinary activities of the enterprise from the sale of goods, the rendering of the services and the use by others of enterprise resources yeilding interest, royalties ans dividends. This standard doesn not deal with the followinf aspects: • Revenue arising from construction contracts. • Revenue arising from hire-purchase and lease agreements. • Revenue arising from government grants and other similar subsidies. • Revenue of insurance companies arising from insurance contracts. As per AS-9, following items are not included: • Realised gains resulting from the disposal of fixed assests and unrealised gains resulting from the holding of fixed assets by appreciation in their values. • Unrealised holding gains resulting from the change in the value of current assets and the natural increases in herds and agriculture and forest products. • Realised or unrealised gains resulting from changes in foreign exchange rates.
• Realised gains resulting from thedischarge of an obligation at less than its carrying amount. • Unrealised gain resulting from the restatement of the carrying amount of an obligation. Revenue from sales transactions should be recognised only when : • the seller of goods has transferred to the buyer the property in goods for certain price and seller retains no effective control of the goods transfered • no significant uncertainity exists regarding the amount of consideration that will be derived from sale of goods Revenue arising from the use by others of enterprise resources yielding interest , royalties and dividends should only be recognised when no significant uncertainity as to measureability exists. dividends from investment in shares are not recognised in statement of proft and loss until a right to receive payment is established. When interest , royalties and dividends from foreign countrie require exchange permission and uncertainity in remittance is anticipated , revenue recognition may need to be postponed. The circumstances in which it is postponed should be disclosed. When revenue is postponed it is considered as revenue of the period in which it is properly recognised.
Accounting standard 10 Accounting for fixed assets AS-10 deals with accounting for fixed assets. The gross book value of a fixed asset should be either historical cost or a revaluation computed in accordance with this standard. The cost of a fixed asset should include its purchase price , attributable costs of bringing the asset to its working condition. Fixed asset should be eliminated from the financial statements on disposal. Losses arising from the retirement or gains or losses arising from disposal of fixed asset should be recognised in the profit and loss statement. An increase in net book value arising on account of revaluation should be credited to owners interest under the head of revaluation reserve. A decrease in net book value arising on account of revaluation should be charged directly to profit and loss statement. acquiring it. When several fixed assets are purchased for a consolidated price, the amount should be apportioned to various assets on a fair basis. Goodwill should be recorded in books only when some considration in money or money's worth has been paid for acquiring it. The direct costs incurred in developing the patents should be capitalised and written off over their legal term of validity or over their working life, whichever is shorter.
As per AS-10, the following information should be disclosed in the financial statements: gross and net book values of fixed assets at the beginning and end of an accounting period showing additions, disposals, acquistions and other movements; expenditure incurred on account of fixed assets in the course of construction or acquistion; and revalued amount subsituted for historical costs of fixed assets, the method adopted to compute the revalued amounts, the nature of indices used, the year of any appraisal made, and whether an external valuer was involved, in case where fixed assets are stated at revalued amount.
Accounting Standard 11 - Accounting for the effects of changes in foreign exchange rates AS-11 is applied by an enterprise in accounting for transactions in foreign currencies and in translating the financial statements of foreign branches for the inclusion in financial statements of the enterprise. The financial statements of a foreign branch should be translated using the procedure as given below: - (i) Revenue items, expect opening and closing inventories and depreciation, should be translated into reporting currency of the reporting enterprise at average rate. (ii) Monetary items should be translated using the closing rate. (iii) Non-Monetary items other than inventories and fixed assets should be translated using the exchange rate at the date of the transactions (iv) Contingent liabilities should be translated into the reporting currency of enterprise at the closing rate.
(v) Fixed assets should be translated using the exchange rate at the date of the transaction. Where has been increase or decrease in the liability of the enterprise by applying the closing rate, for making payment towards the whole or a part of the cost of the fixed asset, the amount by which the liability is so increased or decreased during the year, should be added to or reduced from the historical cost of the fixed asset concerned. (vi) Balance in the head office account should be reported at the amount of the balance in the branch account in the books of the head office after adjusting for unresponded transactions. (vii) The net exchange difference resulting from the translating of the financial statements of a foreign branch into head office currency should be recognized as income or expense for the period. An enterprise should disclose the following in the financial statements: (i) The amount of exchange differences included in the net profit or loss of the period; (ii) The amount of exchange differences adjusted in the carrying amount of fixed assets during the accounting period; and (iii) The amount of exchange differences in respect of forward exchange contracts to be recognized in the profit & loss for one or more subsequent accounting period.
Accounting Standard 12 Accounting for Government Grants AS-12 deals with accounting for govt. grants such as subsidies, cash incentives, duty drawbacks etc. and has come into force with effects from April, 1992. According to AS-12, government grants should not be recognized until there is reasonable assurance that the enterprise will comply with the conditions attached to them and the grants will be received. Mere receipt to the grant has been or will be fulfilled. Govt. grants related to specific fixed assets should be presented in the balance sheet. Government grants related to revenue should be recognized on a systematic basis in the profit and loss statement. If govt. grants take the form of non-monetary assets, such as land or other resources given at concessional rates, then such assets as per this standard should be recorded at their acquisition cost. Non-monetary assets given free of cost should be recorded at nominal at value. Following information should be disclosed in financial statements: (a) Accounting policy adopted for govt. grants including the methods of presentation in the financial statements. (b) Nature & extent of govt. recognized in the financial statements.
Accounting standard 13 Accounting for investments AS -13 deals with accounting for investments in the financial statements of enterprises and related disclosure requirements. AS-13 defines investments as follows : “investments are assets held by an enterprise for earning income by the way of dividends , interest and rentals , for capital appreciation, or for other benefits to the investing enterprise. Assets held as stock –in –trade are non –investments according to AS-13, an enterprise should disclose current investments distinctly in its financial statements current investments should be carried in the financial statements at the lower of cost and fair value determined on an individual investments basis or by category of investments, but not on overall basis. Long term investments should be carried in the financial statements at cost. on sale of an investment, the difference between the carrying amount and net disposal proceeds should be charged or credited to the profit and loss statement. Following information should be disclosed in the financial investments (a) accounting policies for determination of carrying amount of investments. (b) classification of investments in current and long term as specified in the statute governing the enterprise. In the absence of statutory requirements, investments may be classified as (i) government or trust securities , (ii)shares, debentures or bonds, (iii) investment properties, and (iv)others – specifying nature
ACCOUNTING STANDARDS 14 ACCOUNTING FOR AMALGAMATIONS AS-14 deals with accounting for amalgamations. According to this standard, an amalgamation may be either an amalgamation in the nature of merger or an amalgamation in the nature of purchase. An amalgamation is considered to be an amalgamation in the nature of merger or when all the following conditions are satisfied : (i) All the assets and liabilities of the transfer or company become , after amalgamation, the assets and liability of the transferee company. (ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferee company become equity shareholders of the transferee company by virtue of the amalgamation. (iii) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company. (iv) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the company except to ensure uniformity of accounting policies.
Pooling of interests methods is applied in case of amalgamation in the nature of merger and purchase method is case of amalgamation in the nature of purchase. For all amalgamations, the following disclosures should be made in the first financial statements following the amalgamation: (a) Names and general nature of business of the amalgamating companies; (b) Effective date of amalgamation for accounting purposes; (c) The method of accounting used to reflect the amalgamation; and (d) Particulars of the scheme sanctioned under a statue.
Accounting standard 15 -Employe Benefits AS- 15 deals with accounting for retirement benefits and is mandatory in nature. According to this standard, retirement benefits usually include provident fund, pension gratuity, leave encashment benefit on retirement, post retirement health and welfare schemes and other retirement benefits, and termination benefits. As per this standard, an enterprise should recognize expected cost of profit sharing and bonus payments. Post-employment benefit plans are classified as defined benefit plans. The amount recognized as a defined benefit liability should be the net total of the following amounts: (a) The present value of the defined benefit obligation at the balance sheet date; (b) Minus any past service cost not yet presented; (c) Minus the fair value at the balance sheet date of plan assets out of the which the obligations are to be settled directly. An enterprise should recognize the net total of the following amounts in the statement of profit and loss: (a) Current service cost; (b) Interest cost; (c) The expected return on any plan assets & on any reimbursement rights; (d) Actuarial gains and loans.
Accounting Standard 16 - Borrowing costs The objective of this standard is to prescribe the accounting treatment for borrowing costs. This standard covers the borrowing costs for borrowing of funds for the qualifying assets i. e. , assets that necessarily take a substantial period of time to get ready for their intended use or sale. Examples of qualifying assets are manufacturing plants, power generation facilities inventories that require a substantial period to a saleable condition, & investment properties. The amount of borrowing costs capitalized during a period should not exceed the amount of borrowing costs incurred during that period. The financial statements should disclose: (a) The accounting policy adopted for borrowing costs; and (b) The amount of borrowing costs capitalized during this period.
Accounting standard 17 -Segament reporting This standard comes into effect with effect from 1 -4 -2001 & is mandatory in nature. The objective of this standard is to establish principles for reporting financial information about the different types of products and services an enterprises produces and the different geographical areas in which it operates. According to this standard, a business segment or geographical segment should be identified as reportable segment if: (a) Its revenue from sales to external customers & from transactions with other segments is 10% or more of the total revenue, external & internal, of all segments; or (b) Its segment result, whether profit or loss, is 10% or more of the combined result of all segments in profits or the combined result of all segments in loss, whichever is greater in absolute amount; or (c) Its segment assets are 10% or more of the total assets of all segments.
An enterprise should disclose the following for each reportable segment: (a) Segment revenue ; (b) Segment result (c) Total carrying amount of segment assets and liabilities ; (d) Total cost incurred during the period to acquire segment tangible and intangible fixed assets ; (e) Total amount of expense included in the segment result for depreciation and amortisation in respect of segment assets for the period and other significant non-cash expenses. An enterprise that reports the amount of cash flows arising from operating, investment and financing activities of a segment need disclose depreciation and amortisation expense and non-cash expenses of such segment.
Accounting standard 18 - Related party disclosures AS-18 comes into effect in respect of accounting periods commencing on or after 1 -42001 and is mandatory in nature. The objective of this standard is to establish requirements for disclosure of related party relationships and transactions between a reporting enterprise and its related parties. According to this standard, if there have been transactions between related parties, during the existence of a related party relationship, the reporting enterprise should disclose the following: (a) Name of the transacting part. (b) A description between the parties. (c) A description of the nature of transaction. (d) Volume of the transactions. (e) An other elements of the related transactions necessary for an understanding of the financial statements. (f) Amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date. (g) Amounts written off or written back in the period in respect of debts due from or related parties.
Accounting Standard 19 - Leases AS-19 for leases comes into effect in respect of all assets leased during accounting periods commencing on or after 1 -4 -2001 and is mandatory in nature. The objective this standard is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures in relation to finance leases and operating. (a) The lessor should present an asset given under operating lease in the balance sheet under fixed assets. (b) As per AS-19, if a sale and leaseback transaction results in a finance lease, an excess or deficiency of sales over the carrying amount should not be immediately recognized as income or loss in the financial statements of a seller-lessee.
Accounting standard 20 - Earnings per share AS-20 comes into effect in respect of accounting period commencing on or after 1 -4 -2001 and is mandatory in nature. The objective of this standard is to prescribe principles for the determination and presentation of earnings per share. According to this standard, an enterprise should present basic and diluted earnings per share, even if the amounts disclosed are negative.
Accounting Standard (AS) ØPrinciples that govern current accounting practices ØIn India Accounting Standards are issued by ICAI ØCentral Government notifies AS u/s 211(3 C) of Companies Act, 1956 ØPurpose is to – §Recognize §Measure §Present §Disclose ØEnables Comparability, Consistency, Transparency, Uniformity 61
Need for AS on Financial Instrument ØGlobalization of Indian Economy ØIncreasing sophistication of financial products and markets ØNo comprehensive standard before ØDiverse practice has made comparability of performance difficult 62
• AS 30 - Financial Instruments: Recognition and Measurement • AS 31 - Financial Instruments: Presentation • AS 32 - Financial Instruments: Disclosures 63
Salient features of AS 30, 31 and 32 ØDeals with accounting of Financial instruments ØIssued by ICAI in 2007 ØNot yet notified by Central Government ØFramed in accordance with global standards ØRecommendatory in nature for initial 2 years ØMandatory from 1 st April, 2011 to all entities except to Small and Medium-sized Entity 64
Objective ØTo establish principles for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items ØTo present and classify financial assets and financial liabilities ØTo provide disclosures in financial statements so that users can evaluate – §The significance of financial instruments for the entity’s financial position and performance and §The nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks 65
Financial Instruments ØA legal document entered between 2 parties ØEnforcement to receive Financial Asset and to pay Financial Liability ØRight for one party to receive money or liquid asset & Obligation for other party to pay money or liquid asset ØTo be recognized when the parties entered into contract 66
Financial Assets ØCash; ØEquity instrument of another entity; ØA contractual right to receive cash or financial asset; ØExchange of financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity; ØContract which will or may be settled in entities own equity instruments that is– §A non-derivative instrument where the entity is obliged to receive variable number of entity’s own equity instruments; or §A derivative instrument that will or may be settled other than by exchange of a fixed amount of cash or financial asset for a fixed number of entity’s own equity instruments 67
Financial Liabilities Ø Ø A contractual obligation to deliver cash or another financial asset to another entity; Exchange of financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity; A contract that will or may be settled in entity’s own equity instruments and is a non-derivative instrument. Also the entity is oblige to issue variable number of equity instruments of the entity; A derivative instrument that will be settled other than by exchange of fixed amount of cash or financial asset against fixed number of entity’s own equity instrument. 68
Classification 1. Financial Assets ØFair value through Profit or Loss [FVTPL] ØHeld to maturity [HTM] ØLoans and Receivables [LR] ØAvailable for sale [AFS] 2. Financial Liabilities Ø Fair value through Profit or Loss [FVTPL] Ø Financial liabilities at amortized cost [FLAC] 69
Re-Classification of Financial Asstes ØFrom FVTPL to any category ØFrom HTM to AFS ØFrom LR to FVTPL ØFrom AFS to FVTPL 70
Measurement of Financial Assets 1. Category Initial Measurement Subsequent Measurement Fair value through Profit Record at fair value on acquisition date and Change in fair value between two or Loss [FVTLP] transaction cost is to be debited to P & L reporting date, whether gain or loss, is be A/c recognized in P & L A/c 2. Held to maturity [HTM] Record at fair value on acquisition date and By applying Amortized cost methodtransaction cost is to be included in the Effective Interest Rate (i. e. IRR/YTM) same 3. Loans & Receivables (a) Short term loan (not more than 1 [LR] year): At original invoice value (b) All other : Fair value + Transaction cost Continue to be recorded at original invoice value (b) All other : By applying Amortized cost method. Effective Interest Rate (IRR/YTM) 4. Available for sale [AFR] Record at fair value on acquisition date and Change in Fair value between reporting transaction cost is to be included in the date, whether gain or loss, shall be same transferred to investment revaluation reserve or fair value reserve 71
Measurement of Financial Liabilities Category Initial Measurement Subsequent Measurement 1. Fair value through Record at fair value on acquisition Change in fair value between two Profit or Loss date and transaction cost is to be reporting date, whether gain or loss, debited to P & L A/c is be recognized in P & L A/c 2. Financial liabilities at amortized cost (a) Short term loan (not more than 1 year): At original invoice value (b) All other : Fair value + Transaction cost Continue to be recorded at original invoice value (b) All other : By applying Amortized cost method. Effective Interest Rate (IRR/YTM) 72
Derivatives If all 3 conditions are satisfied then the instrument can be called as Derivative – ØUnderlying items ØNo or small initial investment ØSettlement at Future date E. g. : - Forwards, Swaps, Futures, Options Derivatives are always recorded at Marked to Market value 73
Embedded Derivatives ØA component of hybrid instrument ØNon-derivative contract with derivative element included ØThe contract in which they are embedded is known as Host contract E. g. : - ABC ltd. holds convertible debentures of XYZ ltd. §Host contract = Debenture §Embedded derivative = Conversion option ØDerivative once separate out is compulsory is classified as FVTPL ØAfter Separation Host contract shall be classified as HTM/ LR / AFS on the basis of its independently features 74
Hedging ØThe risk management tool aiming to reduce the impact of future potential loss ØClassification of Hedge Accounting : §Fair value hedge §Cash flow hedge §Hedges of a net investment in an overseas operation ØRecognition & Measurement depend on classification of hedged instrument 75
Impairment of Financial Assets Following are the indicators for Impairment – ØSignificant Financial Difficulties of their issuer; ØDefault on interest or principal; ØLoss of active market; ØHigh probability of bankruptcy of issuer or debtors; ØGranting of concession to a borrowed which would not be offer under business conditions 76
Continued…. 1. Category Fair value through Profit or Loss Formula Impairment loss provision is not required 2. Held to maturity Amortized cost on date of Impairment Less: PV of future expected benefits * Discounted rate issued is effective interest rate (IRR) used for amortized cost schedule 3. Loans & Receivables (a) Short term loan (not more than 1 year) – Carrying Amount - Undiscounted future Excepted Cash flow (a) All other – Amortized cost on date of Impairment Less: PV of future expected benefits * Discounted rate issued is effective interest rate (IRR) used for amortized cost schedule 4. Available for sale FV on Preceding Reporting date Less: FV on date of Impairment 77
De-recognition Ø Financial Assets – ü Contractual rights to receive cash flows have expired; or ü Financial assets have been transferred Ø Financial Liabilities – ü Obligation specified in the contract is expired 78
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BY- MONAPARA PARESHKUMAR MBA TRIMISTER-4 EN NO, 12 SOEBA 21021 SUB-GLOBAL CROSS FUCTIONAL MANAGEMENT, R. K. UNIVERSITY-RAJKOT (P. NARI) 79
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) Meaning International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. The rules to be followed by accountants to maintain books of accounts which is comparable, understandable, reliable and relevant as per the users internal or external. 80
HISTORY IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee(IASC). On 1 April 2001, the new International Accounting Standards Board took over from the IASC the responsibility for setting International Accounting Standards. The IASB has continued to develop standards calling the new standards International Financial Reporting Standards (IFRS). 81
OBJECTIVE OF FINANCIAL STATEMENTS A financial statement should reflect a true and fair view of the business affairs of the organization. As statements are used by various constituents of the society / regulators, they need to reflect a true view of the financial position of the organization, and they are very helpful to check the financial position of the business for a specific period. 82
QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS Comparability Verifiability Timeliness Understandability 83
ELEMENTS OF FINANCIAL STATEMENTS Statement of Financial Position. The elements include: Asset: An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise. Liability: A liability is a present obligation of the enterprise arising from the past events, the settlement of which is expected to result in an outflow from the enterprise' resources, i. e. , assets. Equity: Equity is the residual interest in the assets of the enterprise after deducting all the liabilities under the Historical Cost Accounting model. Equity is also known as owner's equity. 84
Statement of Comprehensive Income(income state mentor profit and loss account). The elements of an income statement or the elements that measure the financial performance are as follows: Revenues: increases in economic benefit during an accounting period in the form of inflows or enhancements of assets, or decrease of liabilities that result in increases in equity. However, it does not include the contributions made by the equity participants, i. e. , proprietor, partners and shareholders. Expenses: decreases in economic benefits during an accounting period in the form of outflows, or depletions of assets or incurrence's of liabilities that result in decreases in equity. 85
MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS (a) Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business. 86
(b) Current cost. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently. 87
(c) Realizable (settlement) value. Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business. 88
REQUIREMENTS OF IFRS a Statement of Financial Position a Statement of Comprehensive Income separate statements comprising an Income Statement and separately a Statement of Comprehensive Income, which reconciles Profit or Loss on the Income statement to total comprehensive income a Statement of Changes in Equity (SOCE) a Cash Flow Statement or Statement of Cash Flows 89
ADOPTION OF IFRS are used in many parts of the world, including the European Union, India, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, Chile, South Africa, Singapore and Turkey. As more than 113 countries around the world, including all of Europe, currently require or permit IFRS reporting and 85 require IFRS reporting for all domestic, listed companies, according to the U. S. Securities and Exchange Commission. 90
IFRS-4 -INSURANCE CONTRACT • It requires limited improvements to accounting by insurer’s for insurance contract. • It applies to all insurance contracts. • If the assessment shows any deficiency in respect of the estimated future cash flow should be recognised in profit & loss a/c • An insurer should disclose all information that can help the user to understand.
IFRS-5 -NON-CURRENT ASSET HELD FOR SALE & DISCONTINUED OPERATION IFRS-5 requires : • Held for sale- assets held for sale to be measured at the lower of carrying amount & fair value less than cost to sell. • Disposable group-assets held for sale within disposable group to be separately shown in balance sheet. • Discontinued operations-results to be shown separately in comprehensive statement.
IFRS-6 -EXPl. ORATION FOR & EVALUATION OF MINIRAL RESOURES • As per as ifrs-6 exploration & evaluation assets to be measured at cost. • if carrying amount of exploration & evaluation may exceeds its recoverable amount then the entity shall measure & disclose any impairment loss.
IFRS-7 -FINANCIAL INSTRUMENTS: DISCLOSURE • It deals with disclosure requirements in relation to all risks arsing from financial instruments. • There are 3 types of risks: credit risk market risk liquidity risk
IFRS-8 -OPERATING SEGMENTS • It requires entity to report • It applies to all entitiescertain information about the (a) whose debt or equity following : instruments are traded in market (a) their products & services (b)that files with securities (b) the geometric areas in commission for the which they operate purpose of issuing any (c) their major customers class of instruments in a public market. about the reported Segmented liabilities) ( it requires an entity to give inf segment p&l, segment assets &
BENIFITS OF ACHIEVING CONVERGENCE WITH IFRSS THE ECONOMY INVESTORS THE INDUSTRY THE ACCOUNTING PROFESSIONALIST