Pragmatic changes envisaged

• Income Tax Act……… Direct Tax Code

• VAT, Service Tax,CE …..GST

• Companies Act…. New Companies Act

• Accounting Standard….. Indian AS

• SAP/AAS/SA………?

• Above all EDP/ISA and so called paperless working

Challenges before practioners• Keep update for changes

• Big Enterprises/Blue chip Vis a vis SMEs

• Big 4 Practioners Vis a vis SME Practioners

• Circumstances under SME Practioner works

• Statements, standards,Guidance Notes are at PAR for all practioners

• Need to educate entrepreneur/accountant of Auditee about AS

• Study of AS is not any new thing or ideas

• Systematic and uniform principles to guide:

Accounting, presentation and disclosures

• Prudence and Materiality plays important

role

• To refresh your memory the stydy circle meeting

Thus the source of Indian ‘GAAP’ are :1. The Statutory Requirements, such as :

The statutory requirements of Companies Act ; 1956 more particularly contained in Section 210 and 211 with

Schedule VI of the Act-True and Fair and 227 - reporting

The statutory requirements of Banking Regulation Act ; 1949 and Insurance Act; 1938.2. The requirements of Regulatory Authorities, such as :

Reserve Bank of India Securities Exchange Board of India

3. Pronouncement of the Premier accounting body ICAI, such as : Accounting Standard Statement of Accounting matters Guidance Notes Opinions of Expert Advisory Committee

4. Practices and Uses such as : Published Accounts of renowned companies. Articles and Opinions

5. Income Tax Standards – Court Judgements

ATTEST FUNCTION1. In India the profession of Accountancy has been recognised and

provided with the attest function for certification of accounts.

2. Society confidence Vs. Expectations – Code of Conduct.

3. The Chartered Accountants Act 1949 Section 21-22 contains detailed provision in respect of misconduct.

4. Second schedules part I clause 7 & 9 provides that “A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he :

“7. Is grossly negligent in the conduct of his professional duties;”

“9. Fails to invite attention to any material departure from the Generally Accepted Procedure of audit applicable to circumstances;”

5. Duty bound to follow ICAI Announcements.6. Documents issued by Institute :

Statements=> Accounting matters=> Auditing Matters

Guidance Notes Accounting Standards (AS) Statements of Standard Auditing

Practices (SAP’s)# Opinions Expert Advisory Committee is

another though not general, important document

Accounting Standard - 6

Depreciation Accounting

Does not apply to :

forests, plantations etc.

expenditure on R&D

wasting assets

live-stock

goodwillland

DepreciationWhat it is?

A measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, affluxion of time or obsolescence through technology/market changes

Depreciable AssetsExpected to be used for more than one accounting

periodHaving a limited useful lifeHeld for use in production/supply of goods/ services,

letting out to others, administrative purpose, and not for sale in ordinary course of business

Useful LifePeriod over which a depreciable asset is expected to be

usedOR

Number of production units expected to be obtained from use of asset

Useful life is shorter than physical life and is: predetermined by legal/contractual limits directly governed by extraction/consumption dependent on extent of use and physical deterioration on

account of wear and tear reduced by obsolescence arising from

technological/market changes, legal restrictions

DEPRECIATIONAmount determination

Depreciable amount of a depreciable asset should be allocated on a systematic basis during useful life

Relevant factorsHistorical cost/other substituted amountExpected useful lifeEstimated residual value

Depreciable AmountHistorical Cost (or other substituted amount)

lessEstimated residual value

Depreciation Method: Change

Normally consistency should be maintainedChange only if … (same considerations as

applicable for APs)Recalculation from inception on changeDifference (Deficiency/Surplus), to be adjusted

in year of changeChange to be treated a change in AP

DepreciationWhere Changes Prospectively

Useful life should be reviewed periodically: unamortised amount to be charged in remaining useful life

Change in historical cost due to exchange fluctuations in relative long term liability etc.: revised unamortised amount be depreciated over residual useful life

Revaluation of assets: depreciation on revalued amount over remaining useful life

Additions becoming integral part of asset: to be depreciated over remaining useful life of asset. However, if addition retains separate identity/capable of being independently used, depreciation should be provided independently.

DisclosureGENERAL

Historical cost/other amount substituted for each classTotal depreciation of the period for each classRelated accumulated depreciation

ALONG WITH APMethods usedRates or useful life, if different than principal statutory rates

SPECIFICIf revaluation materially affects depreciation : such effect in year of changeIf any asset is discarded/disposed off/demolished/destroyed : net surplus or deficiency, if material

Accounting for Fixed Assets

Accounting Standard - 10

Accounting of forests/ plantations etc., wasting assets, expenditure on real estate development and livestock

Inflation Accounting of fixed assets

Allocation of depreciation

Treatment of Subsidies etc.

Assets under leasing rights

This does not deal with

DefinitionsFixed Assets

Assets held with intention of being used for producing goods, providing services

etc. & not for sale in ordinary course

FAIR Market Value (FMV)

Value agreed in open & unrestricted market between

parties dealing at arm’s length

Gross Book Value

Historical cost or other amount substituted for historical cost

Identification of Assets

Material Vs. Not Material Amounts

Stand by and Servicing Equipments are normally capitalised.

Spares (Machinery) Normally – Profit & loss- irregular depends on life.

Nature of Assets- Separable like Aircraft and its Engine

Components of Cost Cost of purchase

Cost attributable in bringing the asset in working condition

Financing cost upto the asset being ready for use

Expenditure incurred on start – up and commissioning of project.

(internal profits be eliminated in case of self construction)

Ready to use – Actual useExpenses in between are to

be charged to P & L

Cost – When and How at FMVWhere the asset is acquired in exchange of:

Another Asset/Shares of the Enterprise

(FMV of that asset which is more clearly evident)

Subsequent expenditures :When included in Cost?

If they increase the future benefits

Addition of asset having separate identity Should be considered as separate asset

Disposal / Retirement of Asset Assets retired from active use and held for disposal to be

stated at lower of net book value and NRV : to shown separately

Assets to be eliminated from FS on disposal or when no further benefit is expected

Losses from retirement or Gain/ Loss from disposal to be recognised in P & L

On disposal of revalued asset gain / loss to be taken to P & L except where a loss relates to an increase available in RR, when it may be charged to RR

Revaluation of Fixed Assets If revalued, entire class be revalued. Or selection to

be on systematic basis : basis to be disclosed Revaluation not to exceed recoverable amount of a

class of assets On upward revaluation, accumulated depreciation

not to be credited to P&L Increase to be credited to revaluation reserve (RR)

except to extent of earlier decrease charged to P&L,which may be taken to P&L

Decrease to be charged to P&L except to extent ofof earlier increase standing in RR(unutilised),which may be debited to RR

Acquisition – Specific Modes

Assets acquired on Hire Purchase terms to be

recorded on Cash Value (actual / calculated) :

Disclaimer of ownership be indicated

Joint Ownership : Extent of share & Proportion of

all related figures be disclosed

Purchase of several assets for consolidated price :

apportionment on basis of competent valuer’s

valuation

Other Important Issues Goodwill be recorded only when acquired for consideration. Where in acquisition of business, price paid is in excess of net assets taken over, excess be termed as goodwill. Direct cost for development of patents be capitalised and w/off over legal term/ working life, whichever is shorter. Payment for know-how for plans, layouts etc. of assets be capitalised under respective heads. If know how is composite, apportionment be made

on reasonable basis.

Disclosure Gross & net book value : Opening / Closing

showing additions, disposals etc.

Expenditure on FA during construction /

acquisition

Revalued amounts substituted for historical

costs, method of revaluation, nature of indices,

year of appraisal and fact of involving external

valuer

Accounting Standard -12ACCOUNTING FOR

GOVERNMENT GRANTSIt does not deal with : Inflation Accounting of Grants Government assistance other than grants Government participation in ownership

Government GrantsMeaning

Assistance by government in cash or kind for past or future

compliance of certain conditions

ImportanceIn Financial StatementsFacilitates comparison with

other enterprise / prior period

•Govt. here includes govt. agencies/ bodies(local/national/international)

Recognition of Government GrantShould not be recognised until reasonable assurance of:

Compliance with conditions & Receipt of Grant

Should not be taken to P&L as:

• Generally are in nature of promoters’ contribution

• They are not earned but represent incentive without cost

Should be taken to P&L as:• Rarely gratuitous

• Govt. levies are also charge against income

• To correlate with exp.. to which grant relates

Accounting TreatmentCapital approach Income approach

However, it should be based on nature of each grant.

Grants related to Specific F/A : Treatment

Should be deducted from Gross Value(if grant is equal to cost, asset should be shown at

nominal value)

Alternatively Defer income on systematic basis over useful life

(for depreciable assets) Take to capital reserve.

(for other assets) •However if requires fulfillment of obligations, be credited to

income over matching period \

Other GrantsRevenue Grants

• To be recognised on systematic basis in P&L.Either as other income or deduction from related expenses.

• If receivable as compensation for expense/ loss of preceding year or as immediate financial support, consider AS 5 for disclosure as extraordinary item

Promoters ContributionTake to capital reserve, treat shareholders’ fund

Assets at concessional rates / free of

costAccount for at acquisition cost / nominal value

Grants becoming refundableAn extraordinary item

If revenueApply first against available unamortised credit balance

/ remaining charge to P&L

If related to F/AIncrease book value / reduce capital reserve / deferred

income (in first case, change depreciation prospectively)

If promoters’ contributionReduce from Capital Reserve

D i s c l o s u r e

• Accounting Policy adopted including

methods of presentation

• Nature and extent of grant recognised

including non monetary assets given at

concessional rates / free of cost

Accounting Standard - 13

Accounting for

Investment

Does not deal with :

Bases for recognition of interest, dividends &

rentals earned on investment which are covered by

AS-9

Operating/finance leases

Investments of retirement benefit plans and life

insurance enterprises

Investments• Assets held for earning income, capital appreciation,

other benefits. Stock-in-trade is not investment

Current investment• Investment readily realisable and is intended to be

held for not more than one year from the date of making such investment

Long term investment• Investment other than current investment

Investment property• Investment in land/buildings that are not intended

to be occupied substantially for use

Market value• Amount, net of expenses, obtainable from the sale

of investment in open market

COST OF INVESTMENT

should include acquisition charges (brokerage, fee etc.) if acquired in exchange of shares/securities then fair

value of such shares/securities should be taken as cost if acquired in exchange of other assets then fair value of those assets which is more clearly evident should be taken as cost Interest/ Rentals/ Dividends are generally Income.

However it may be recovery of cost where relates to pre acquisition period.

Investments Carrying AmountCURRENT INVESTMENTS

LOWER OF COST & FV(comparison not be on global basis)LONG-TERM INVESTMENTS

AT COSTHowever, provision be made for decline

in value, which is not temporary, on individual basis

Any reduction / reversal of reduction in carrying

amount On disposal, the surplus /

deficiency

Charge / credit to P&L a/c

DISCLOSUREClassification of investmentAmounts included in P&L a/c

AP of determination of carrying amount Income from investments separately for current/LT at gross

figure Profit/Loss on disposal of investments and changes in

carrying amount separately for current/LT investments Significant restrictions on ownership/realisability of

income/disposal proceeds Aggregate amount of quoted/unquoted investments and MV

of quoted investments Other statutory disclosures

Accounting Standard - 14

Amalgamation means an amalgamationpursuant to the provisions of the

Companies Act, 1956 orother law applicable

to companies

Accounting for Amalgamations

Amalgamation in the nature of Merger

All assets / liability to become, of, transferee co.

Shareholders > 90% of equity share capital of transferor co. become that of transferee co.

Consideration discharged by issue of equity shares

Business is intended to be carried by transferee co.

No adjustment is intended in book values of A/L on incorporation in books of transferee co. except to ensure uniformity of Accounting Policy

If any condition is not satisfied, it would be amalgamation in the nature of purchase

AMALGAMATION

IN THE NATURE OF MERGER A n M

IN THE NATURE OF PURCHASE A n P

Pooling of interest method Purchase method

Pooling of Interest Method all Assets-Liabilities/Reserves should be incorporated at existing carrying amt. In same form. Balance of P&L a/c to be merged with corresponding amount and in absence, with General Reserve If APs are conflicting – adopt uniform AP – disclose effect as per AS-5 difference between consideration and share capital of transferor company to be adjusted in Reserves

Purchase Method* A/L to be incorporated at existing carrying amounts or, alternatively, the consideration be allocated to individual identifiable assets/liabilities on the basis of FV.* No reserves, except statutory reserves, shall be incorporated* Difference between consideration and net assets be recognised as Goodwill/capital reserve* Goodwill be amortised over useful life generally not exceeding 5 years.* Statutory Reserves, on complying with requirements, should be incorporated by corresponding debit to ‘Amalgamation Adjustment a/c’ under head Misc. Exp.- Reversal by cross-entry of two accounts

•Non cash element of consideration to be at fair value

•If some contingency exists as to the amount of consideration, apply AS4

•If scheme of amalgamation statutorily sanctioned prescribe particular treatment of revenues, same be followed

Common Procedures

FOR ALL• names/general nature of business of amalgamating companies• effective date of amalgamation• method of accounting • particulars of scheme

FOR POOLING METHOD•description/no. of shares issued and ratio of exchange• difference between consideration and net asset acquired – treatment thereof

FOR PURCHASE METHOD•consideration – description thereof• difference……. (same as above), including treatment of goodwill

AFTER BALANCE SHEET DATE•disclosure in accordance with AS-4

DISCLOSURE

Accounting for Retirement Benefits in

the Financial Statement of Employers

Accounting Standard - 15PF

PensionSuperannuationGratuity

LeaveEncashmentOthers

RETIREMENT BENEFITS

DEFINED CONTRIBUTION SCHEMES

eg. P.F.etc.

DEFINED BENEFIT

SCHEMES eg. Gratuity etc.

Accounting Treatment

Defined contribution scheme

* Charged to P&L A/C

- Contribution for the year

- Shortfall between paid & payable

amount

* Excess payment, if any, it treated as per

payment

Accounting TreatmentSELF FUNDING•Annual contribution determined by insurer to be charged to P&L a/c• Appropriate charge to P&L a/c each year• Amount as per actuarial valuation or other rational method

TRUSTS•Costs determined through actuarial valuation at least once in 3 years• Amount as per actuarial valuation to be charged to P&L a/c each year

INSURER’S SCHEME

•Annual contribution determined by insurer to be charged to P&L a/c

Accounting TreatmentDefined Benefit

SchemeSelf Funding

-Appropriate amount

charge to P&L a/c

- Amount as per

actuarial valuation or

other rational method

Trust-Cost for the year- Cost should be determined through actuarial valuation at least once in 3 year- Shortfall between amount actually paid over payable charge to P&L A/c- Excess payment should be treated as prepayment

Insurer’s Scheme

-Annual

contribution

determined by

insurers to be

charged to

P&L A/c.

Treatment of Alternation

Alternation arising from introduction / or additional benefits to retired

employees or changes in actuarial method

Charge/credit to P&L a/c Follow AS - 5

Disclosure Method of determining R/B cost

Whether Actuarial Valuation

was made at the end of period or

any prior date? Disclose said prior

date and method for determining

cost for the period

Accounting Standard – 16

BORROWING COSTSA.Borrowing Costs : Interest and other costs related to

borrowed funds like,a. Interest and commitment charges.b. Discounts or premiums.c. Ancillary costs.d. Finance charges as under finance lease.e. Exchange differences from foreign currency.

B.Qualifying Assets : Those which require substantial time to get ready for intended use or sale like,a. Manufacturing plantsb. Power generation facilitiesc. Inventories that required substantial periods of

time to bring them to saleable condition.

RECOGNITION OF COSTA. All Borrowing Costs

Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset

Future economic benefit

Measurement possible

Capitalise as part of the cost of qualifying asset

Other Borrowing

costs

Charge to P/L

B. a. In case of funds specifically borrowed for

qualifying assets:

Borrowing Costs Actual borrowing Income on

temporary

to be capitalised cost incurred investment of

funds

b. In case of general borrowings:

Borrowing Costs = Capitalisation rate* x Expenditure on the

asset

Capitalisation rate = Weighted Average of outstanding

borrowing cost (excluding cost of specific borrowings).

= -

CAPITALISATION OF BORROWING COST

1. COMMENCEMENT : ALL 3 conditions below to be

satisfied:

a. Expenses incurred must be for acquisition / construction /

production of qualifying asset.

b. Cost incurred must be borrowing cost.

c. Activities preparing the asset for intended use or sale must

be in progress. Such activities include related technical and

administrative work.

2. SUSPENSION : asset for intended use or sale) or asset is

interrupted. Except when:

a. Substantial technical/administrative work being done.

b. Temporary delay is inherent in the process.

CESSATION

When activities preparing the asset for intended use or sale are

substantially complete. In case of completion in parts, cost of

completed part to be ceased for capitalisation.

DISCLOSURE

• Accounting policies.

• Amount capitalised as borrowing costs.

Accounting Standard – 17

Segment Reporting

Application from 1.4.01 to :* Enterprises listed/in the process of being listed in a recognised stock

exchange in India.

* Other enterprises with a turnover of more than Rs.50 crores.

Definitions:Business Segment

.

Factors for Consideration Nature of products/services.

Nature of production process.

Method used to distribute products/provide services.

Type/class of target customers.

Nature of regulatory environment, if applicable

Geographical Segment Qua location of offices or Qua location of customer

Factors for ConsiderationSimilarity of economic and political conditions.

Operational relationship in various geographical areas.Operational proximity.

Special operational risks in a specific area.Exchange control regulations.

Currency risks.

Reportable Segment A business / geographical segment required to be disclosed under this

standard.

Enterprise Revenue Revenue from sale to external customers as per the P&L A/C.

Segment Results = Segment Revenue – Segment Expenses

Segment Revenue ER directly attributable to a segment.

+

ER allocated to segment on a reasonable basis.+

Revenue from transactions with other segments.Excluding

Extraordinary items as per AS-5.Interest & dividend income, provided the segmental

operations are not of a financial nature.Profit on sale of investments/extinguishment of

debts, provided the segmental operations are not of a

financial nature.

Segment ExpensesExpenses in a segment directly attributable to it.

+

Enterprise expenses allocated to segment on a reasonable basis.+

Expenses from transactions with other segments.

ExcludingExtraordinary items as per AS-5.

Interest expenses, provided the segmental operational are not of

a financial nature.Income-Tax expenses.

Head-office/Corporate office expenses.

Segment Assets Directly attributable /allocated Assets

Where segment result includes interest/dividend income, the related asset should be included in segment assets.

Allowances/provisions reported as direct offsets in the Balance sheet should be reduced from the related asset.

Income tax assets are to be excluded.

Segment LiabilitiesDirectly attributable /allocated liabilities

Where interest expense is considered in segment result, corresponding liability is to be included in segment liabilities. Income tax liabilities are to be excluded.

Segment Accounting PoliciesPolicies relating to preparation and presentation of financial statements and

those relating to segmental reporting.

Identifying Reportable Segments

Either

Primary = Business

Secondary = Geography

Or

Primary = Geography

Secondary = Business

Depending upon

Dominant source & nature of risk & returns

Normally indicated byInternal organisation & Management Structure

System of internal financial reporting to BOD/CEO

Exceptional Situations I II

Risk and Returns strongly affected by both

Product / Service and Geographically

Internal Management Structure / Reporting

System neither based on Product / Service nor

Geographically

Primary = Business

Secondary = Geographically

Directors and Management to decide Primary and Secondary

segment based on conditions discussion in

earlier slide.

Reportable Segment –A

Segment whose

are 10% or more of

Segment RevenueSegment Results

Profit or LossSegment Assets

Segment Revenue (and Not Enterprise Revenue

the greater of Segment Profit (of Profit Segment) Segment Loss (of Loss Segment)

Segment Assets

Reporting Segment : Example : Segment Results

Segment Segment Results Reportable

A - 4,00,000

B + 50,000

C + 2,00,000

D - 20,000

E + 3,00,000

Enterprise Result 1,30,000

Segment Profit 5,50,000

Segment Loss 4,20,000

Reportable Segment –B

Segments chosen by Management despite of small size

Smaller segments (below 10%) if external revenue of reportable

segments construes less then 75% of total enterprise revenue – until

75% of total enterprise revenue is included in reportable segment.

Segment identified as reportable in immediately preceding year

should continue as reportable segment

Preceding year figures should be restated if segment identified as

reportable in current year was not reportable in preceding year.

Segment Accounting Policies

Follow policies adopted for preparation and presentation of

enterprise financial statement.

Allocate joint segment assets and liabilities between segments only

if the related revenue / expenses are also allocated.

DISCLOSURE

Reporting for each Primary Segment

Segment revenue – classified as external / internal / inter-

segment revenue.

Segment result.

Carrying amount of segment assets.

Carrying amount of segment liabilities.

Additions to segment tangible and intangible F/A

Only When Segments cash flow are not reports

Depreciation and amortisation of segment assets Total significant non-cash expenses other than

depreciation/amortisation above

Notes :

A reconciliation segment information and enterprise financial statement

oSegment revenue for each segment based on

geo. location whose external revenue is

10% or more of enterprise revenue oSegment assets for

each segment based on geo. Location if > 10% of total assets of geo.

SegmentsoAdditions to assets for each segment based on geo. location of assets of

10% or more of total

oSegment whose revenue from sale > 10% of ER or

segment asset > 10%of total assets then

• Segment revenue from external customer

•Total carrying amount of segment assets

•Cost incurred to acquire assets

oWhere location of customer different from

assets•Geographical segment

whose sales > 10% of ER

oSegment whose revenue from sale > 10% of ER or

asset > 10% total assets then:

• Segment revenue from external customer

•Carrying amount of S/A•Cost incurred to acquire

S/AoWhere location of assets

different from that of customers then GS whose

revenue/asset > 10% of enterprise

•Carrying amount of S/A geographically

•Cost incurred to acquire assets

Business Segment Geographical Segment based on AssetsGeographica

l Segment based on

Customers

If Primary is

OTHER DISCLOSURE

Inter-segment transfers, their basis of pricing

and change

Changes in accounting policies for segment

reporting – fact and effect.

Composition of BS/GS, both primary and

secondary, if not otherwise disclosed.

* Kuoni, Switzerland * Switzerland; United Kingdom; International; Incoming

* LVMH, France * France; Europe (excluding France): USA; Japan; Far East (excluding Japan); Other

* Novartis, Swirtzerland

* Europe; Americas; Asis, Africa and Australia

* Roche, Switzerland * Switzerland; European Union; Rest of Europe; North American; Latin America; Asia, Africa, Australia

and Oceania

Geographical Segments – Reporting under IASs - I

•ABB, Sweden and

Switzerland

* Power generation; Power transmission and distribution; Industrial and building systems; Financial services; Various activities and corporate.

* Fujitsu, Japan * Information Technology

* LVMH, France * Champagne and Wines; Cognac and spirits; Fashion and leather goods; Fragrances and cosmetics; Selective retailing; Other

* Nokia, Finland * Telecommunications; Mobile phones; Other Operations

* Novarties, Switzerland * Healtheare; Agribusiness; Nutrition; Corporate

* Roche, Switzerland * Pharmaceuticals; Vitamins and fine chemicals; Diagnostics; Healthcare;

Fragrances and flavours

Business Segments IASs - II

Primary Secondary

•Segment Revenue - External Customers - Other Segments

•Segment Result

•Segment Assets

•Total Capital Expenditure

•Total Expenses-Depreciation and Amortisation

•Total Non-Cash Expenses other than Depreciation and Amortisation

•Reconciliation to Financial Statement

•Basis of Pricing Inter-Segment Transfers

•Changes in Segment Accounting Policies

•Composition of each Business Segment

•Composition of each geographical Segment

Accounting Standard – 18Related Parties

* Establish Disclosure requirements

- Related Party Relationships

- Transactions with related Parties

Scope

Conflict with confidentiality required by Statute

State Controlled Enterprises

CFS in respect of intra-group transactions

Enterprises having

Turnover less than 50

Crores

Does not applies to

Relationship Covered

Enterprises under significant control of first two above

Key management personal and relatives

Individuals directly or indirectly exercising control or significant influence

Associates and Joint Ventures

Enterprises directly or indirectly under common control

Deemed Not to beRelated Parties

•Companies having Common Directors

•Economic Dependence

Single customer / supplier / franchiser

distributor / general agent.

•Parties dealing in the normal course of business. providers of finance

Trade unions

public utilities

government departments and government agencies agencies

including government sponsored bodies

Related PartyParty which has ability to control or exercise significant influence

Control•Ownership directly or indirectly of voting power > 50%

•Control over composition BOD

•Substantial interest in voting power

Key Management PersonalPersons having authority and responsibility for planning,

directing and controlling

RationaleAre normal feature of commerce and business

Without Disclosure General presumption

•Transactions at Arm’s length

•Transaction by two independent parties

Existence of relationship is likely to influence the transaction

Inherent difficulty in determine effect of relationship

Transactions which took place only due to relationship

Disclosure Name/Nature of relationship of parties

Description of the relationshipName of transacting PartyNature of transactions;

Volume of the transactions – In absolute/Relative Terms

Any other Element for better understanding

Amounts and appropriate proportions of outstanding provisions for doubtful debts due

Amounts written off or written back

Examples of the Related Party Transactions

Purchases or sales of goods

Purchases or sales of fixed assets

Rendering or receiving of services

Agency arrangements

Leasing or hire purchase arrangements

Transfer of research and development

License agreements

Finance

Guarantees and collaterals

Management contracts including for deputation of employees.

Accounting Standard – 19

LEASES

SCOPE/ APPLICABILITY

Agreement for motion picture, film, video recording, plays

manuscripts, patents & copyrights

Agreement to use

national resources.

Agreements to use Land Does not applies to

DEFINITIONSLease

Agreement for transfer of right to use asset for an agreed period in return of payments

Finance Lease

Which transfers substantial risks and rewards of ownership

Operating Lease

Other than finance lease

Non-cancelable Lease

Which is Cancelable only on

Remote contingency

Permission of lessor

New lease with same lessor for similar assets

Payment of additional amount by lessee

Minimum Lease Payment (MLP) Payment by lessee excluding contingent cost of services

and taxes but includes

For lessee For lessor

RV guaranteed

on his behalf

RV guaranteed by or on behalf of lessee by and

independent party

Economic Life

Period for which economically usable or number of production units expected to be obtained

Gross Investment

MLP + UGRV

Unearned finance income

GI –[ MIP + URGV]

Net Investment

GI-UFI

Contingent Rent

Lease payment which is not fixed

Unguranteed RV

Amount of RV > GRV

Finance Lease

Transfer of ownership of lessee

Option to purchase the assets at a price lower than the fair value which is reasonable certain to be exercised

Term covers major part of the economic life of asset

Present value of MLP amounts to fair value of asset at inception

Unique use of asset by the lessee

Characteristics

Operating Lease

On cancellation losses borne by lessee

Gains/losses from fluctuation in FV borne by lessee

Option of continuance for secondary period at rent substantially lower than market value

In books of Lessee In books of Lessor

•Recognized Asset and Liability at FV

•If FV > PV of MLP then at PV of MLP

•PV computation, Discount Rate =Interest Rate Implicit

•Apportion LP into finance charges and outstanding liability

•Finance charges to be allocated at constant periodic rate of interest.

•Depreciation should be accounted according to AS -6 If no reasonable

certainty of ownership then depreciated over the lease term

•Recognize asset at amount equal

to NI

•Finance income to be recognize at

constant periodic rate of return

•Sales to be recognized as per

accounting policy

•Sales should be restricted to

amount after applying commercial

rate of interest

•Indirect expenses charged to

P&L

DISCLOSUREFinance Lease

In books of Lessee In books of Lessor

•Total future MLP under non cancelable

lease for each of the following period:

not later than one year

later than one but not later than five years

later than five years.

•Total future minimum sublease payments

expected to be received

In addition to AS-10 & AS-6 :

•For each class of assetthe gross carrying amountthe accumulated depreciationaccumulated impairment loss at balance sheet datedepreciation impairment losses, recognized/ reversed in P&L A/c.

•Total contingent rent recognized as income in P&L A/c. for the period.

•Future MLP under non cancelable leases in aggregate and for each of the following period:

Operating Lease

•LP charged to P&L alongwith MLP &

Contingent rent

•Sub lease payment received or

receivable

•General description of significant

leasing arrangements including :

basis of contingent rent

existence and terms of renewal or

purchase options and escalation

clauses

restrictions imposed by lease

agreements

not later than one year

later than one year and not later

than five year later than five year

•General description of significant

leasing arrangements.

•Accounting policy in respect of

initial direct cost.

Sale and Lease Back Transactions

WHEN

Any surplus/deficiency in

sale proceeds be deferred

and amortised over the

lease term in proportion to

the depreciation

Any surplus/deficiency should be recognized immediately except if the sale price is below FV and be compensated by future lease payments should be deferred and amortised in proportion lease payment.

If the value is less than the carrying amount, difference should be recognized immediately

Transaction results in operating

leaseTransactions results in

finance lease

Operating Lease :

(a) Sale at Fair value – any P/L to be recognised separately

Carrying value - 100

Fair Value - 150

Sales Value - 150

Since sale is at fair value, there is no impact of lease back package

Carrying value - 100Fair Value - 150Sales Value-if Rs. 140 – Profit Rs. 40-If Rs. 90 – Loss Rs. 10

P/L to be recognised immediately except

- if loss is compensated by future lease payments below market price

(b) Sales at below fair value

Carrying value - 100Fair Value - 150Sales Value - 160

Out of profit of Rs. 60/- Rs. 10/- (i.e. over fair value) to be amortised and Rs. 50/- (i.e. difference between fair value & carrying value) to be recognised immediately

(c) Sales at below fair value

Accounting Standard – 20

EARNING PER SHARE

Objective

Applicability/Scope

Enterprises

Whose E/PES are listed

Which are disclosing EPS otherwise

Requirements applicable to CFS

Improve comparisonMake EPS

more compatible

Simplify computation of

EPS

Potential Equity Shares (PES)

Financial Instrument / other contract, which entitles / may entitle its holder to equity shares.

Financial Instruments (FI)

Contract giving rise to:

FA of one and FL or ES of another Enterprise

Financial Asset (FA)

Cash

Contractual right to receive cash

Contractual right to exchange FI

ES of other enterprise

Potential Equity Shares

Convertible Debt/Preference Shares

Share Warrant

Options

Contractual / Contingent Shares

What areBasic EPS

Per share profit attributable to Existing Equity Shareholders.

Diluted EPS

Per share profits attributable to Existing and Potential Equity Share-holder.

Basic EPS – How Measured

Division of Net Profit or Loss by Weighted Average no. of ES outstanding

Earnings - Basic

Net Profit or Loss attributable to ES holders

Per Share – Basic

Weighted Average no. of ES O/S during the period

Date of inclusion* ES of different nominal values (with same division rights)

* Effect of Change in no. of ES without corresponding change in resources otherwise than by conversion of PES for all periods

* Bonus Shares / Share Split

Changes in No. of ES without corresponding change in resources* Right Issue & Calculation of No. of ES

For all prior periods: No. of ES O/s multiplied by –

FV per ES prior to right

Theoretical ex-rights FV per Share

Where the denominator is calculated by dividing (Total FV of all ES prior to right + proceeds of right) by no. of ES O/s after exercise of right.

Weighted Average no. of ES

Includes shares from the date consideration is received

Inclusion in case of Amalgamation

AnP AnM

From the date acquisition From beginning of reporting period

Partly paid ES treated as fractions

In case different rights shares equivalent no. of shares

Contingent issue from the date conditions complied

Adjustment for change in no. without corresponding change in resources except conversion of PES such as

•Bonus

•Bonus element in right issue

•Split/reverse split

Bonus to be adjusted for all periods reported

No. of shares in case right issue with bonus element

Share OS prior to right X (FV/Share prior to right)

Theoretical ex-right FV / share

Right Issue – ExampleAccounting Year Ending on 31.12.2001

No. of shares O/s Prior to Right (FV Rs. 21/-) 500000

Right Issue on 1.3.2001 (1 to 5) (Rs. 15/-) 100000

Theoratical ex-right FV come to Rs. 20/- as under :

(500000 x 21) + (100000 x 15)

500000 + 100000

Adjustment Factor (2120) = 1.05

Outstanding ES for the year :

(50000 x 1.05 x 212) + (600000 x 1012)

Preceding Years O/s shares shall also be adjusted.

Diluted EPS – How MeasuredDivision of Net Profit or Loss by Weighted Average no. of ES O/s –

both adjusted for dilutive PES

Net Profit or Loss Attributable to ES holders including Dilutive PES i.e. after :

- Dividend (including tax) & Interest (after tax) on PES

- Other expense / income (after tax) attributable to PES

Weighted Average no. of ES Weighted Avg. of total No. of ES including shares to be issued on conversion of Dilutive PES deeming the same as converted in ES. PES shall be deemed to have been so converted, in case such PES.

- issued earlier, at Beginning of the year.

- issue later, on the dated of issue of PES.

Diluted EPS – Relevant Issues•Assumed exercise of dilutive option/PES

•Proceeds at fair value

•Difference in no. of shares issuable and shares would have been

issued at FV to be treated as without consideration

•Option dilutive when results in issue at lower than FV

•PES treated as dilutive only when leads to reduction in profit

•Only dilutive PES – Anti-dilutive to be ignored

•Shares issued at FV treated as Anti-dilutive

If no. of ES or PES OS changes for the reason of issue of

bonus shares, split or consolidation:

•Adjust Basic & Diluted EPS for all the period presented

•Even when Change is after b/s date, these have to be adjusted

•If per share calculation reflects change in no. of shares, fact to

be disclosed

Restatement

Presentation of Basic & Diluted EPS

For each class of ES

on face of P&L

equal prominence for all periods presented

even if negative

Amount used as numerator for basic/diluted alongwith reconciliation

No. of shares for basic/diluted EPS used as denominator with reconciliation thereof

Nominal value of shares with EPS

Example – Effects of Share Options on Diluted EPS

Net Profit for the year 2001 Rs. 12,00,000

Weighted average number of equity shares outstanding during the year 2001 5,00,000 shares

Average fair value of one equity share during the year 2001 Rs. 20.00

Weighted average number of shares under option during the year 2001 1,00,000 shares

Exercise price for shares under option during the year 2001 Rs. 15.00

Earnings Shares EPS

Net profit for the year 2001 Rs. 12,00,000

Weighted average number of shares outstanding during year 2001

5,00,000

Basic EPS Rs. 2.40

Number of shares under option 1,00,000

Number of shares that would have been issued at fair value: (1,00,000 X 15.0) / 20.00

* (75,000)

Diluted EPS Rs. 12,00,000 5,25,000 Rs. 2.29

* The earning have not been increased as the total number of shares has been increased only by the number of shares (25,000) deemed for the purpose of the computation to have been issued for no consideration

Computation of EPS

Accounting

Standard – 21

Consolidated Financial

Statements

DOES NOT DEAL WITH:

Amalgamations & their effects on consolidation

goodwill arising out of amalgamation

Accounting for investment in associates

Accounting for investment in joint ventures

DEFINITIONS

Control

ownership, directly or indirectly through subsidiaries, of more than half of voting

power

control over composition of board of director/governing body.

Minority Interest

That part of net results and of net assets of subsidiary attributable to interest not owned- directly or indirectly, by the parent.

Minority interest in net assets:

amount of equity

share of movements in equity since

date relationship

SCOPE

• Parent to present CFS;

• consolidate all subsidiaries, domestic and foreign

other than

Temporary control

(subsidiary held & acquired for disposal in near future.)

severe long term restrictions on subsidiary which significantly impair its ability to transfer funds to parent.

Investment -as per Accounting Standard 13.

Reasons for not consolidating -disclosed in CFS.

PROCEDURE

Line by line, adding like items

Cost to parent of investment & parent’s portion of equity

eliminated

If Cost > Parent’s portion then Goodwill

If Cost < Parent’s portion then Capital Reserve

Arrive at net income attributable to owners of parent after

adjusting minority interest Present minority interest in consolidated B/S separately

Intragroup balance Intergroup transaction eliminated.

Unrealisable losses from intragroup transactions

eliminated (don’t eliminate when even cost can’t be

recovered)

Financial statement used in consolidation to be drawn

upto same reporting date.

If not practicable - in any case difference between

reporting dates not be more than six months.

Uniform accounting policies

(If not practicable, disclose fact)

Investment in enterprises ceasing to be subsidiary- doesn’t

become associate - Accounted as per Accounting

Standard 13.

Investment in subsidiary in parent’s separate financial

statement as per Accounting Standard 13.

Presentation

Parent which presents CFS should do so in addition to separate

financial statement

Disclosure

• List of all subsidiary name,

• country of incorporation

• proportion of ownership interest

• Nature of relationship

• Effect financial position at reporting date

• Results for reporting period also

• Names of subsidiary whose reporting date is different

Accounting Standard – 22

ACCOUNTING FOR TAXES ON

INCOME

Objective

Determination of Expenses and Savings of Tax

in an Accounting

Period

Matching of Taxes with Revenue

Eliminate effect of difference in tax and book profit

Prescribed Treatment of

Taxes

APPLICABILITY/SCOPE

Mandatory from

1.4.2001

•Enterprise whose equity/debt securities listed or likely to be listed on recognized stock exchange

•Enterprise of a group whose parent follow AS 22 in CFS

1.4.2002

All other companies whose securities are not listed

1.4.2003

All other enterpirses

Introduction Accrual A fundamental accounting assumption

Tax Expense Recognition RuleSame Period of recognition of Revenue/ Expenses

For accounting purpose should be based on accounting income and taxable income.

Tax are due & paid on taxable income while recognised as expense on the basis of accounting income.

Accounting income (loss)

Net profit or loss for a period, reported , before income tax expense/saving

Taxable income (tax loss)

Income/loss as per tax laws, on which tax is payable/recoverable

Tax expense (tax saving)

Current tax + Deferred tax

Current tax

Tax payable (recoverable) on income for a period

Deferred tax

Tax effect of timing differences.

Timing differences

Differences originating in one period capable of reversal in subsequent periods

Permanent differences

Differences which are not reversible subsequently

DEFERRED TAX EFFECTTwo type of differences

Permanent

No Asset/Liability

Timing

Tax Asset/Liability

RECOGNITION

Determine Net Profit or Loss after Tax Expense/Saving

If Timing Difference then

Deferred Tax Asset/Liability subject to prudence

In case unabsorbed Depreciation/Accumulated Losses then DTA to the extent reasonably

certain future tax income will be available for setoff

Basis of reasonable certainty

Past records

Realistic estimates

MEASUREMENTCurrent Tax Deferred Tax

Assets/Liabilities

Example In case of Individual

(A.Y. 2001 –2002 ) 10+ 20 + 30 = 60 Average : 60/3 = 20%

Use 20% for measuring DTA and DTL.

At rates as per current law At rates which are enacted or substantively enacted

In case of slab then average rate of tax

No Discounting

Re-assessment of Unrecognized Deferred Tax Assets – Annually

Review of DTA

- Carrying amount Annually

- Write up / Write down of DTA on the basis of reasonable certainty

Set Off When

DTA/DTL relates to same Tax

Laws

Right Legally

Enforceable Presentation and

Disclosure

Current Tax Deferred Tax

Intends to settle A/L on

net basis

DTA/DTL relates to same

Tax Law

Right Legally Enforceable

OTHER DISCLOSURE

•Nature of Evidences supporting recognition

•Separately from Current Tax

•Break up in major Components

Transitional Provision

First year of application Opening DTA/DTL to

be adjusted against Revenue Reserve

Example - DTLParticulars Year 1 Year 2

Net Profit –A/c 200 200

Dep. Adj. -50 +50

Tax Profit 150 250

Tax Effect @40% 80 80

Tax Payable @40% 60 100

Create/Reverse 20 (20)

DTL

Example – DTAParticulars Year 1 Year 2

Net Profit –A/c 200 200

See 43B Adj. +50 -50

Tax Profit 250 150

Tax Effect @40% 80 80

Tax Payable @40% 100 60

Create/Reverse 20 (20)

DTL

Illustrative Timing Difference

Year 0 WDV in A/c 100

Tax WDV 100

A/c Dep

Tax Dep

Diff. Tax Effect

Cum effect

1 75 63 25 37 -12 -4.8 -4.8

2 56 40 19 23 -4 -1.6 -6.4

9 5 2 5 2 1 0.4 -1.2

10 1 1 4 1 3 1.2 0

99 99 0

Analysis of Timing Difference

1 A/c Income> Tax Income Tax Effect> Tax Payable

DTL

2 A/c Income> Tax Income Tax Effect> Tax Payable

DTA

3 A/c Income> Tax Loss-C/F Tax Effect, No Tax / MAT

DTL / DTA

4 A/c Loss< Tax Loss C/F Advtage. Less in future

DTL

5 A/c Loss> Tax Loss C/F Advtage. More in future

DTA

6 A/c Income, A/c Loss Tax Effect<Tax Payable

DTA

Accounting Standard – 23

Accounting for investment in associates in

consolidated financial statements

DEFINITIONS

An Associate

• Is an enterprise in which the investor has

significant influence and which is neither

a subsidiary nor a joint venture of the

investor.

ControlThe ownership, directly or indirectly through

subsidiaries, of more than one-half of the voting

power of an enterprise

Control of the composition of the board of

directors /corresponding governing body

Significant influence

power to participate in the financial and/or operating policy decisions but not control over those policies.

Subsidiary enterprise that is controlled by another enterprise

(known as the parent).

Group

parent and all its subsidiaries.

Equity residual interest in the assets of an enterprise after

deducting all its liabilities.

Consolidated Financial statements

financial statements of a group presented as those of a single enterprise.

The equity method

• method of accounting

• the investment is initially recorded at cost, identifying any goodwill/capital reserve

•carrying amount of the investment is adjusted for the post acquisition change in net assets.

•The consolidated profit and loss reflects the investor’s share of the results .

ACCOUNTING IN THE EQUITY METHOD

Goodwill/capital reserve arising - included in the

carrying amount but disclosed separately.

Intragroup balance Intergroup transaction eliminated.

Unrealisable losses from intragroup transactions

eliminated (don’t eliminate when even cost can’t be

recovered)

Investor ensure that Reporting date are same.

• If not associate should prepare for the same date.

• If, impracticable, different date statement can be used.

• Investor - make adjustment for the effect of any

• significant events between the dates.

Uniform Accounting Polices

investor recognize its share of results after

providing for preference dividend

If Carrying Amount < = loss then reported at NIL

value and further loss is not booked

Exception

Additional losses are provided to the extent that the investor has incurred obligation or made payments on behalf.

SIGNIFICANT INFLUENCEAn investor holds directly or indirectly 20% or more or less of the voting power by this it is not evidenced that investor has significant influence unless it can be clearly demonstrated.

The existence of significant influence is evidenced in following ways:

Representation on the BOD / corresponding governing body

Participation in policy making processes.

Material transactions

Interchange of managerial personnel.

Provision of essential technical information.

ACCOUNTING FOR INVESTMENTS

Accounted for under the equity method except.

†Investment is acquired and held for subsequent

disposal in near future.†severe long-term restriction on associates

(Accounting should be as per AS-13.)†Accounting under equity method should discontinue

from the date that - it ceases to have significant influence.

Disclosure required as per A S – 4.

Appropriate listing and description

Investment disclosed as long term investment.

Investor’s share in results disclosed separately.

Investor’s share of any extraordinary / prior period

item should be disclosed separately.

Associate having different Accounting Policy

Name of the Associates -reporting date is different.

Accounting Standard – 24

DISCONTINUING OPERATIONS

Applies to all discontinuing operations of an enterprise.

DEFINITIONS

Discontinuing Operation

is a component of an enterprise:

• that the enterprise, pursuant to a single plan, is:

disposing of substantially in its entirety

disposing of piecemeal

terminating through abandonment;

• that represents a separate major line of business or geographical area of operations; and

• that can be distinguished operationally and for financial reporting purposes.

Initial Disclosure Event the occurrence of one of the following, whichever occurs

earlier:

the enterprise has entered into a binding sale agreement for substantially all of the assets or

the enterprise’s BOD/governing body has both

approved a detailed, formal plan for the discontinuance and

made an announcement of the plan.

RECOGNITION AND MEASUREMENT

On occurrence of initial disclosure event

the net realizable value of the assets should be estimated

if carrying amount < realisable value

the estimated loss - recognised

After initial recognition

On every balance sheet date, till the discontinuance is completed, estimate the net realisable value of assets and recognise any additional loss or reversal of estimated loss.

For any gain or loss that is recognized on the disposal

of assets or settlement of liabilities

The amount of the pre-tax gain or loss

Income tax expense relating to the gain or loss

Net Selling Price

DISCLOSURE

•Initial disclosure event till discontinuance is completed

* description

* the date and nature

* the date or period in which the discontinuance is completed

* the carrying amounts,of the total assets and the total liabilities to be disposed of;

* the amounts of revenue, expenses, and pre-tax profit or loss from ordinary activities during the current financial reporting

period, and the income tax expense

* the amounts of net cash flows.

Initial disclosure event – Dealt in accordance of AS-4.

When an enterprise disposes of assets or settles liabilities it should

include in its financial statements the net selling price.

Any significant change in the relating to the assets to be disposed

or liabilities to be settled and the events causing those changes.

Fact & effect, if an enterprises abandons or withdraws from a plan

that was previously reported as discontinuing operations.

in Interim Financial Reports describe any significant activities or

events and any significant changes

These Disclosures

either

in the notes to the FS or

on the face of of the FS

Except

pre tax gain or loss recognised on the disposal of assets or settlement of liabilities

shown on the face of the statement of P&L.

Restatement of prior periods

segregate continuing and discontinuing assets & liabilities, revenue, expenses and cash flows.

DISCLOSURES

Accounting Standard - 25

INTERIM FINANCIAL REPORTING

Applicability And Scope

Enterprises, electing to prepare IFS

Does not mandate frequency of reporting

Requirements for cash flow applies as in annual FS

Effective from 1.4.2002

Objective

PRESCRIBE

minimum content

Principles for recognition and

measurement in a complete or

condensed financial statements

Timely and reliable reporting for better understanding

of the readers

Definitions

Interim period

Reporting period shorter than a full

financial year

Interim financial report

Financial report containing

Complete/Condensed set of FS for an interim period

Minimum Components

Condensed

balance sheet

Condensed statement of

profit and loss Condensed cash flow statement

Selected explanatory

notes

Use of complete sets of FS not prohibited.

Complete Financial Statement

Condensed Financial Statements

Conform to the requirements as applicable to Annual FS

•Include Minimum each of headings or

Sub Headings as in Annual FS

•Selected Explanatory Notes

•Additional line items if omission

leads to a misleading impact

Forms and Contents

EPS where required to be presented as per AS 20

Selected Explanatory Notes

Explanations of the Events and transactions that are significant to an understanding of the changes in the financial position and

performance since last reporting date.

Same accounting policies, if changed then description of nature/effect

Explanatory comments on seasonality of operations

Nature and amount of items which are unusual

nature and amount of changes in estimates

Reported in prior interim periods of current financial year

Reported in prior financial years

Issuances, buy-backs, repayments and restructuring of debt, E/PE

Dividends, aggregate or per share, separately for equity/others

Segment reporting as per AS-17

Effect of changes in composition of enterprise

Material changes in contingent liabilities

Other disclosures as required by the other AS

Periods of Interim Financial Statements

Balance Sheet Cash Flow

Statement

P&L

Current interim period prepared upto year to date with comparative figures of same period in preceding year

Recognize how to measure, classify, or disclose item in IFR materiality should be

assessed

Separate IFR for final interim period may not be prepared

Disclose

Significant changes in estimates separately as per AS-5

Recognition And Measurement

•Same accounting policies except changes taken place after the recent financial

statements

•Seasonal or occasional revenues not to be anticipated or deferred

•Unevenly incurred Costs should be anticipated or deferred only if, it is appropriate

to anticipate or defer the same at the end of financial year

•Measurements and use of estimates should be such that all material financial

information relevant for understanding the financial position or performance are

disclosed

•Change in accounting policy, should be made retrospectively from prior interim

periods year

Accounting Standard - 26

INTANGIBLE ASSETS

Applicability

Expenditure incurred on intangible items during accounting

periods commencing on or after 1-4-2003

Mandatory for:

Enterprises- whose equity or debt securities listed/to be listed on a recognised stock exchange

All other reporting enterprises,-turnover for the accounting

period exceeds Rs. 50 crores.

Other enterprises during accounting periods commencing

on or after 1-4-2004

Earlier application of the AS is encouraged.

After this Standard, the following stand withdrawn :

AS - 8, Accounting for Research and Development;

AS-6, Depreciation Accounting, with respect to the amortisation (depreciation) of intangible assets; and

AS - 10, Accounting for Fixed Assets - paragraphs 16.3 to 16.7, 37 and 38.

Objective Accounting treatment for intangible assets not dealt in another AS

To recognise an intangible asset if certain criteria are met

Measure the carrying amount of intangible assets and disclosures about intangible assets.

Scope

Not applied in accounting for:

that are covered by another AS

held by an enterprise for sale in the ordinary course of business

deferred tax assets

AS 19, Leases

goodwill arising on an amalgamation and on consolidation

financial assets;

mineral rights and expenditure on the exploration for, or development and extraction of, minerals, oil, natural gas and similar non-regenerative

resources; and

arising in insurance enterprises from contracts with policyholders.

Intangible asset identifiable non-monetary asset, without physical substance,

held for

use in the production or supply , for rental to others, for administrative purposes.

Asset a resource:

controlled by an enterprise

future economic benefits are expected

Amortisation

systematic allocation of the depreciable amount of an intangible asset over its useful life.

Depreciable amount

cost less residual value.

Residual value

amount an enterprise expects to obtain at the end of assets useful life

Active Market

market where following conditions exist :

the items are homogeneous;

willing buyers and sellers can normally be found at any time;

prices are available to the public.

Impairment Loss

carrying amount > recoverable amount.

Carrying amount

amount at which an asset is recognised in the balance sheet, net of any accumulated amortisation /accumulated impairment losses

Recognition Criteriarecognised if:

future economic benefits will flow to the enterprise

the cost measured reliably.

• assess the probability of future economic benefits will exist over the useful life

• measured initially at cost.

• acquired separately- the cost measured reliably.

• acquired in an amalgamation in the nature of purchase - is accounted for in accordance with A S 14

• by way of a Government Grant - at a nominal value or at the acquisition cost

• acquired in Exchanges of Assets- is determined in accordance with AS 10

• Internally Generated Goodwill - not be recognized as an asset

Internally Generated Intangible Assets

Meets the criteria for recognition, classifies into:

RESEARCH PHASE DEVELOPMENT PHASE

intangible asset arising

from research should

not recognized

Expenditure research

recognised as an expense

An intangible asset arising from development recognised if demonstrate :

the technical feasibility

its intention to complete

its ability to use or sell

the existence of a market for the output

the availability of adequate resources

its ability to measure the expenditure

Recognition of an Expenses

Recognised as an expenses unless

forms part of an intangible assets;

item is acquired in an amalgamation in the nature of purchase and cannot be recognized as an assets

Past expenses not recognized as an assets

Subsequent Expenses recognized as an Expenses unless

it is for enabling the assets to earn future benefit

attributed to the assets

Amortization Depreciable amount of an I.A. amortised on a systematic basis

method reflect the pattern in which the economic benefits are consumed

Period reviewed at least once in a year.

Residual ValueAssumed to be Zero unless there is an commitment by third or there exist an active market.

Retirement/ Disposal eliminated from Balance Sheet.

Gains or losses (i.e. diff. between net disposal proceed and carrying amount)

Disclosure

For Each Intangible assets distinguishing between internally generated& others

Gross and net carrying amount

Useful life Amortisation methods and rates

Reconciliation

ShowingAddition

Disposals

Amortisation

Impairment loss

Other DisclosureIf amortised more than 10 years

reasons why? And factorsMaterial information

Title restrictedcommitments

Accounting Standard 27

Financial Reporting of

Interest in Joint Ventures

Scope / Status Mandatory application in case of

Accounting for interest in Joint Venture

Reporting of Assets, Liabilities, Income and Expenses of Joint

Venture in SFS/CFS of Venturers/Investors

Effective from 1.4.2002

Objective

SET OUT PRINCIPLES AND PROCEDURES FOR

Accounting of Interest

Reporting of Joint Venture Assets, Liabilities, Income and

Expenses in SFS

Joint Venture

Contractual arrangement to undertake an economic activity under Joint Control

Joint Control

Contractually agreed sharing of control

Control

Power to govern financial and operating policies

Venturer

Party having Joint Control

Investor

Party having no joint Control

Proportionate Consolidation

Method of Accounting and Reporting share Jointly controlled Entity in SFS.

Common Features

Bound by Contractual arrangement

Contractual Arrangement establishing Joint Control

FormsJointly

Controlled Operations

Jointly Controlled

Assets

Jointly Controlled

Entity

Joint Control

Identifies Decision Areas essential to Goal

Protective Rights and Participative Rights

One Venturer as Operator

No significant influence

Agreement in writing

Contractual Arrangements with Subsidiaries treated as Joint

Venture

Contractual Arrangement

Characteristics Evidences Contents

Contract between

Venturers

Minutes of Discussions

Arrangements Incorporated in

Articles

By-Laws of Joint Venture

Activity, Duration and Reporting

Obligations

Appointment of BoD/GB and

Voting rights of Venturers

Capital Contributions

Sharing of Output, Income, Expenses

and Results

 Characteristics

•Use of Own Assets, Inventories, incurring expenses,liabilities and

finance•No Separate Financial Statements

Recognition of interest in Separate FS

•Assets controls and liabilities incurs

•Expenses incurred and share in income from JV

•Joint Ownership of Assets for common economic benefit

•Reflects economic reality and legal form

•Limited Accounting records

Recognition of interest Separate and Consolidated FS:

•Share in joint assets

•Liabilities incurred individually

•Liabilities incurred jointly

•Income from sale or use of share of output and expenses

•Expenses incurred in Joint Venture

Jointly Control Assets Jointly Control Operation

Common

•No Separate Establishment, Partnership or Other entity or

separate financial structure•Agreements for sharing Joint

revenue and expenses•May prepare accounts for

internal management reporting purposes

Jointly Controlled Entities

• Separate Establishment of Corporation, Partnership or Other entity

• Controls Assets, incurs Liabilities and Expenses, Earns Income

• Enter into Contracts in own name, raise finance

• Venturers entitled to share in results

• Own accounting Records and own FS

• Involves features of both jointly controlled assets and operations

Recognition of Interest in

Separate Financial Statements

As per AS-13

Consolidated Financial Statements

As Per Proportionate Consolidation Method

Excepts where

Interest is likely to dispose of in near future

jointly controlled entity operates under severe long-term

restrictions that significantly, impair its ability to transfer funds

Accounted as per AS-13

Reflect substance and economic reality

not structure or form

Line wise Consolidation as per AS-21

No set off of legal right exist

Excess losses of investors to be

recognized by the venturers

Future profits , first absorbed by the

venturers to the extent of losses

Recognition of Goodwill/Capital

Reserve

Accounting Policies

Uniform, If not adjustment,

Where no adjustment then

disclose

Reporting Period

Consistent, statements drawn to

same date, if not adjustment,

where no adjustment disclosure

Proportionate Consolidation Method

Discontinuance When

Ceases control but retains, either in whole or in part, its interest

Entity operates under severe long-term restrictions that significantly impair its ability to transfer funds Other wise

AS-13orAS-23

Cost of Investment on the date of

discontinuance

Venturer’s share in net assets adjusted with carrying amount of

Goodwill/Capital Reserve

Reporting Thereafter

Unilateral Control As per AS

21

Venturer Contributes or Sales assets to the Joint

Venture

Venturer Purchases Assets from Joint Venture

If Significant risk and reward of

ownership transferred then

recognise

portion of Gain/Loss

attributable to interest of other

Venturers

full loss where evidence of

reduction in the net realizable

value/impairment loss exist

Should not recognize its share

of profits/losses until resells

the assets to independent Party

Recognize losses immediately

in case of net realizable value or

Impairment loss

Transaction Between a Venturer and Joint Venture

Transaction between Venturer and Joint Entity

Reporting Interests in FS of an Investor

No Joint Control:

a.) In CFS as per AS-13, AS-21 or AS-23 as appropriate

b.) In SFS as per AS-13

Operators of Joint Ventures Should account for any fees in accordance

with AS-9

IN SFS

Full profit/loss

IN CFS

Same as Above

Disclosures

Common for separate and consolidated financial statements

Commitments in respect of its interests separately

• Interests and share in commitments incurred jointly

• Share of commitments of the joint ventures themselves.

Contingent liabilities to be disclose separately unless probability of loss is remote:

• Interest and share in liabilities incurred jointly

•Share of liability of the Joint Ventures themselves

•Those, which arise as Venturer is contingently liable for the liabilities of

other Venturer’sAdditional Disclosure in Separate

Financial Statement

Aggregate amounts of assets, liabilities, income and expenses related to its

interest in the jointly controlled entities

List Joint Ventures

Description of Interest in Significant Joint

Ventures

Proportion of ownership interest, name, country

of incorporation or residence in respect of Jointly

Controlled Entities

Accounting Standard - 28

IMPAIRMENT OF ASSETS

Applicability In respect of expenditure incurred on intangible items during

accounting periods commencing on or after 1-4-2004

Mandatory for:

Enterprises- whose equity or debt securities listed /to be listing on a recognised stock exchange

All other business reporting enterprises,-turnover for the accounting period exceeds Rs. 50 crores.

Other enterprises during accounting periods commencing on or after 1-4-2005

Earlier application of the Accounting Standard is encouraged.

Objectives• prescribe the procedures to ensure that assets are carried at no more than their recoverable amount

• recognize an impairment loss

• when an enterprise reverse an impairment loss and it prescribes certain disclosures .

ScopeApplied in accounting for the impairment of all assets

other than

•inventories

•assets arising from construction contracts

•financial assets, including investments

•deferred tax assets

Applies to assets that are carried at cost / at revalued amounts

Definitions

Recoverable amounthigher of an asset's

net selling price and its value in use

Value in usepresent value of

estimated future cash

flows arise from the

continuing use of an

asset and from

its disposal at the end

Net selling priceamount obtainable from the

sale parties

less costs of disposalCost of Disposal

incremental costs for disposal of an assetImpairment loss

Amount by which the carrying amount of an asset exceeds its recoverable

amount.

Discount Rate

A pre-tax rate that reflect current market assessments of the time value of money and the risks. not reflect risks for which future cash flow

estimates have been adjusted.

Carrying amount

Amount at which an asset is recognised in the balance sheet after deducting any accumulated depreciation .

Cash-generating

Unit is the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash

inflows from other assets .

Corporate assets

Assets other than goodwill that contribute to the future cash flows.

Identifying an Asset that May be Impaired

Impaired when

Carrying Amount > Recoverable Amount.

Assess at each balance sheet date whether any assets is impaired.

If yes

Estimate the recoverable amount .

In assessing an enterprise should consider the following

External sources of information

Internal sources of information

an asset's market value declined evidence is available of obsolescence or physical damage

significant changes with an adverse

effect in the technological, market,

economic or legal environment

significant changes with an adverse effect- changes include plans to

discontinue or restructure the operation

market interest rates or other market

rates of return - increased

economic performance of an asset is / will be worse than expected

the carrying amount is more than its

market capitalisation

Measurement of Recoverable Amount Not necessary to determine both an asset's net selling price and its value in use.

Possible to determine net selling price, even if an asset is not traded in an active market.

If an asset not traded in an active market, the recoverable amount may be taken to be its value in use.

Recoverable amount - for an individual asset

If not possible recoverable amount is determined for the cash-generating unit to which it belongs, unless

The asset's value in use can be estimated to be close to its net selling price and net selling price can be determined.

Net selling price is higher than its carrying amount

EitherOr

Net Selling Price

The best evidence is a price in a binding sale

agreement adjusted for incremental costs

If asset is traded in an active market –

market price less cost of disposal

Based on best information available, at the balance sheet

date

If this not

If both are not available

Basis for Estimates of Future Cash Flows

Based onReasonable and supportable assumptions

The most recent financial budgets/forecasts

Composition of Estimates of Future Cash Flows

Estimates of future cash flows should include: projections of cash

inflows projections of cash outflows necessarily incurred for the cash

inflows net cash flows- on disposal of

assets

Estimates of future cash flows not include flows arise from:

a future restructuring which is not yet committed

future capital expenditure for improving /

enhancing the asset

cash inflows or outflows from financing activities;

income tax receipts or payments.

Recognition and Measurement of an Impairment Loss

RECOVERABLE AMOUNT < CARRYING AMOUNT

Carrying amount of the asset reduced to its recoverable amount.

Reduction is an impairment loss.

recognised as an expense immediately,

if revalued assets than according to AS-10

IMPAIRMENT LOSS > CARRYING AMOUNT

Recognise a liability if required by another AS

The depreciation charge adjusted in future periods to allocate the asset's revised carrying amount less its residual value

Cash-Generating UnitsIdentification

•If not possible to estimate the recoverable amount of the individual asset, an enterprise

should determine the recoverable amount of the cash-generating unit to which the asset

belongs.

•Cash generating unit identified consistently from period to period

What is cash generating units?Discussed in earlier slides

Goodwill•In testing cash generating unit for impairment

•goodwill related to this cash-generating unit is identified in FS

Perform Bottom Test

Whether carrying amount of goodwill can be allocated on a reasonable and consistent

basisthen, compare the recoverable amount to its

carrying amount

Perform Top-Down Test

identify the smallest cash-generating unit to which the carrying amount of goodwill can be allocated on a reasonable and consistent

basis

then, compare the recoverable amount of the larger cash-generating unit to its

carrying amount

Corporate AssetsIn testing a cash-generating unit for impairment identify all the corporate assets on these CA

If carrying amount can allocated on a reasonable basis

If not

Impairment Loss for a Cash-Generating Unit

Allocated to reduce the carrying amount in the following order:

Carrying amount not reduced below the highest of

its net selling price

perform Top Down Test perform Bottom Test

to goodwill allocated tothe cash-generating unit

then, to other assets unit on a pro-rata basisand

its value in use

zero.

Reversal of an Impairment Loss

Assess at each balance sheet date –

There is any indication that an impairment loss recognised- may no longer exist

for this an enterprise should consider, as a minimum, of

External sources of information

Internal sources of information

•the asset's market value has increased

•significant changes with a favorable

effect environment

•market interest rates or other market rates

have decreased

•significant changes that includes capital expenditure

incurred on improvement

•Better performance

evidence is available

Disclosure:

An enterprise that applies AS-17 should disclose above for each reportable segment

If amount of impairment loss or reversal of impairment loss material to the FS then an entity should disclose:

For each type of assets

•impairment losses recognized

•reversal of impairment losses

•impairment losses recognized against revaluation reserve

•reversal of impairment losses against revaluation reserve

For an Individual Assets As a whole

•Event and circumstances

•Amount

•the nature; and the reportable segment

•For a cash generating unit- description; amount; current and former way of aggregating assets

•Recoverable amount and basis

•The main classes of assets affected by

impairment

•Events and circumstances