Accounting Standard 5-8

8/14/2019 Accounting Standard 5-8

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AS-5 Netprofit and loss for

the period itemsand change in

accounting policies


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Objectives- to prescribe thecriterion for certain items in theprofit and loss accounts. Profitand loss being a periodstatement covers the items of

income and expenditure ofparticular period while there maybe a situation where income or

expenditure appears in the profitand loss account is not related tothat period, what should be doneis prescribed by this accounting

standards.


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This accounting standard also dealswith change in accounting policy,accounting estimates and extra

ordinary items


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Components of netprofit Profit or loss from ordinary activities

Extra ordinary items

These components should be disclosed on thestatement of profit and loss account.


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Profit or loss from ordinary activities

Normally all items of income and expanseswhich are recognized in a period are includedin the determination of net profit or loss forthe period. It also includes extra ordinaryitems.

The write down of inventories to net realizablevalue or reversal of such write down.

Restructuring cost or reversal of provision of

restructuring cost. Profit or loss on disposal of fixed assets.

Profit or loss on disposal of long terminvestment.

Reversal of provision.


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Extra ordinary items

Distinct from ordinary items.

Do not occur frequently.

Example: Attachment of property of theenterprises or an earthquake


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Prior period items

Arise in current periods as a result of error ofomission in the preparation of financialstatement of one or more prior periods.

Disclosure:The nature and amount of prior period should

be disclosed and its impact on current profit orloss can be perceived.


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Change in accounting estimates

Estimation of provision of sundry debtors.

Estimation of provision for any liabilities.

Computing income tax provision.

Estimating useful life of fixed assets.


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Effect of change in accountingestimate

Classify if ordinary activity

Classify if extra ordinary activity

Disclosure: Its effect should be disclosed in net profit or

loss.

The period of change, if the change effects the

period only.The period of change and future period, if the

change effects both.


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Change in accounting policies

In the following circumstances changes inaccounting policies are made:

For compliance of accounting standards

For compliance of statute or law.

For better and appropriate presentation offinancial statements.


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Disclosure of change inaccounting policies

Material effect should be shown in financialstatements.

The effect should be disclosed in the year ofchange.

If the effect of change is not ascertainable, thefact should be disclosed.

If the effect of change is not material forcurrent period, but it is material effect for

the later period, then fact should bedisclosed in the period of change.


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As-6 Depreciation accountingDEPRECIATION:-

It is a measure of wearing out,consumption or other value an assetarising from the use, and passing of

time. It is nothing but distribution of total cost

of assets over its useful life


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Depreciable assets

Are expected to be used formore than one accounting

period.Have a limited useful lifeAre held for use on

production of goods andservices.


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Calculation of depreciation

Historical cost or other amount in place ofhistorical cost like revalued amount.

Estimated useful life of depreciable assets.

Estimated residual/ scrap value of depreciableassets.

Depreciation


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Cost of depreciable assets

Increase / decrease in long term liability onaccount of exchange fluctuation.

Price adjustments

Change in duties

Revaluation of depreciable assets


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Methods of depreciation

There are two methods of depreciation

1.SLM (Straight Line Method)

2.

3.WDVM (Written Down Value Method)

Treatment Method Should Be ConsistentFor Whole Life Of Assets

1.


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Change in depreciation method

For compliance of accounting standards

For compliance of statute or law.

For better and appropriate presentation offinancial statements.


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Procedure in case of change inmethod

Depreciation should be recomputed applyingthe new method from the date of itsacquisition/ installation.

Difference between the two methods may be

surplus / deficiency. Such resultant surplus is credited to profit and

loss account under the head of depreciationwritten back.

Change in method is under accounting policy.


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Change in estimated useful life

Change should be allocated over the revisedremaining useful life of assets.

CHANGE IN HISTORICAL COST Increase/decrease is added/deducted from the

outstanding written down value on the dateof change.

Depreciation on the revised WDV will beprovided prospectively over the remaininguseful life.

Depreciation should be charged on thebasis of revalued amount and remaining

useful life.


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Depreciation charge on addition/extension to an existing asset

Additional/extension is an integral part ofexisting assets.

It is depreciated over the remaining usefullife of the existing assets.

Additional/extension is not an integral part ofexisting assets.

It is depreciated over the estimated usefullife of the additional assets.


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disclosureTotal cost of each class of assets

Total depreciation for the period of each classof assets.

Accumulated depreciation of each class of

assets. Depreciation method


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AS-7 CONSTRUCTION CONTRACT ObjectiveThe objective of this Statement is to prescribe

the accounting treatment of revenue andcosts associated with construction contracts

A construction contract is a contractspecifically negotiated for the constructionof an asset or a combination of assets thatare closely interrelated or interdependent interms of their design, technology and

function or their ultimate purpose or use.


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As-7 construction contract Accounting standard is applicable in

accounting for construction contracts incontractors financial statements.

It includes

1.Construction of asset

2.

3.Rendering of services which are directlyrelated to the construction of assets.

4.

5.Contract for destruction or restoration ofasset.


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Types of construction contract

Fixed price contracts:- fixed rate perunit

Cost plus contracts:- contractor isreimbursed the cost as defined plus fixedpercentage of fee/profit.


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Combining and segmenting contracts

Contract options:- construction ofadditional asset should be treated as a separate construction

contract if

qAsset differs significantly as compared tooriginal contract

qPrice of additional asset is independent of

original contract


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Calculating the profit or loss of aconstruction contract

Contract revenue

Contract cost

profit/ loss= Contract revenue-Contractcost

If positive profitIf negative loss


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Contract revenue

Contract revenue should comprise:(a) the initial amount of revenue agreed in the

contract; and(b) variations in contract work, claims and

incentive payments: (i) to the extent that it is probable that they

will result in revenue; and (ii) they are capable of being reliably

measured.


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Contract revenue

Revenue/price agreed as per contract

Revenue arising due to escalation clause

Claims- it is the amount that contractors seekto collect from customer as reimbursement

of cost not included in contract price. Increase in revenue due to increase in units of

output.

Incentive payments to the contractors.

penalties


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Measurement of contract revenue

Till the stage of completion

Methods

Cost to cost method

By survey of work performedexclusion from contract cost


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Contract costContract costs should comprise:-

(a) costs that relate directly to the specificcontract

(b) costs that are attributable to contractactivity in general and can be allocated to thecontract; and

(c) such other costs as are specifically

chargeable to the customer under the terms ofthe contract.


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Contract costCosts that relate directly to a specific contract

include: Site labor cost including supervision. Cost of material used Depreciation of plant and equipment used.

Cost of hiring plant Cost of design and technical assistance Estimated cost of rectification and guarantee

work.

Claim from third parties Pre-contract cost Insurance Construction overheads

These cost should be reduced by incidentalincome.


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Cost specifically chargeable

Some general administration cost

Development cost

Reimbursement cost

Cost excluded General administration cost

Selling cost

Research and development

Depreciation cost Cost of idle plant and equipment

Cost incurred in securing contract


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Provision for expected loss Whether or not work has commenced

Stage of completion of contract

The amount of profit on other contracts whichare not treated as single contract


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Disclosure by contractor

Method used to determine the stage ofcompletion

The method used to determine contractrevenue

The mount of contract revenue recognized inthe period

Contract cost incurred and profit

Advanced received

Gross amount due from customers forcontractors work

Gross amount due to customers for contractwork


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o q u e r i e s?


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Thank You

Accounting Standard 5-8

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