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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
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