AS1: DISCLOSURE OF ACCOUNTING POLICY
Level I Level II Level III
1. Listed or Being Listed
Enterprise
2. Banks and FI
3. Insurance Companies
4. Turnover > 50 Crore in
Previous Audit Report
5. Borrowings > 10 crore in CY
6. Subsidiary and Holding of
such enterprise
Turnover > 1 Crore
Borrowings > Rs.1 Crore
Subsidiary or Holding of Such
Enterprise
Others and MSME
AS2: INVENTORY
Objective and Scope
• Set out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content
Complete set of financial statements
•Balance sheet
•statement of P&L
•statement of cash flow
•notes
•Going Concern
•Consistency
•Accrual
Fundamental Accounting Assumptions
•Materiality
•Substance Over Form
•PrudenceTrue and Fair View
Defi
niti
on Inventories are assets :
• Held for sale in ordinary course of business
• In the process of production for such sale
• In the form of material or supplies to be consumed in the production process or in the rendering of services
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Measurement principle Inventories measured at lower of cost and net realizable value (NRV)
NRV NRV is the estimated selling price in the ordinary course of business, less the estimated
cost of completion and the estimated costs to make the sale
Cost formulas
Scope
All inventories except:
Financial instruments (Ind
AS 32)Biological assets
Does not apply to the measurement of inventories held by:
Producers of agricultural and forest products
measured at NRV
Minerals and mineral products measured at NRV
•Cost of purchase, including import duties, non-recoverable taxes, transport and handling and other directly attributable cost (trade discounts and rebates to be deducted)
•Cost of conversion such as direct labour, fixed and variable production overheads
•Other cost incurred in bringing the inventories to their present location and condition. Eg: cost of designing products for specific customers.
Cost Includes
•Abnormal waste
•Storage cost (unless necessary in the production process)
•Admin overheads not related to production
•Selling costs
•Interest cost (AS16 identifies circumstances where borrowing costs can be included)
Cost Excludes
For non-interchangeable items: specific identification
For interchangeable items, either :- FIFO, WEIGHTED
AVERAGE COSTUse of LIFO is prohibited
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Techniques for the measurement of cost
Standards cost method or the retail method used for convenience, if the results approximate cost
AS3: CASH FLOW STATEMENT
CLASSIFICATION
Standard cost method
•It takes into account normal levels of material and supplies, labour, efficiency and capacity utilization. They are regularly reviewed and revised
Retail method
•Often used in the retail industry. The cost of the inventories is determined by reducing the sale value of the inventories by the appropriate percentage gross margin
Operating activities
•principal revenue producing activities of the entity from the transaction that enters into the determination of profit or loss.
•Eg:
•cash receipts from the sale of goods and the rendering of services
•cash payment to suppliers for goods and services
•cash payments to and on behalf of employes
Investing activities
•Acquisition and disposal of long-term assets and other investments not included in cash equivalents.
•Eg:
•Purchase and sale of property, plant and equipment, intangible and other long term assets.
•Interest and dividend received.
•Cash payments (and receipts) to acquire (and sell) equity or debt instruments of other entities and interests in joint ventures.
•Cash advances and loans made to other partieS
Financing activities
•Activities that result in changes, in the size and composition of the contributed equity and borrowing of the entity. Eg:
•Cash proceeds from issuing shares
•Cash payment to acquire or redeem the entity’s shares
•Cash proceeds from issuing debentures, loans, etc.
•Cash repayment of loans, etc
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REPORTING CASHFLOWS
Operating
activities
Direct
method
Information about major classes of gross cash receipts and gross cash
payments may be obtained either:
a) From the accounting of the records of the entity or
b) By adjusting sales, cost of sales and other items in the statement of
profit and loss for –
I. Changes during the period in inventories and operating receivables and
payables
II. Other non-cash items and
III. Other items for which the cash effects are investing or financing
cash flows.
Indirect
method
Determined by adjusting profit and loss for the effects of:
a) Changes during the period in inventories and operating receivables and
payables
b) Non-cash items such as depreciation, provisions, deffered taxes,
unrealized foreign currency gains and losses, and undistributed profits
of associates and
c) All other items for which the cash effects are investing or financing
cash flows
Investing
and
financing
activities
Gross
basis
Major classes of gross cash receipts and gross payments except for
transaction which are required to be reported on net basis
Net basis 1. Cash receipts and payments on behalf of customers when the cash
flows reflect the activities of the customer rather than those of entity
and
2. Cash receipts and payment for items in which the turnover is quick, the
amounts are large, and the maturities are short
Other
Disclosures
1. Explanation of significant amount of cash balances that are not available for use
2. Disclosure of relevant information:
a. Undrawn borrowing amount
b. Identifying cash flows that increases operating capacity separately from
those that maintain operating capacity and
3. Cash flows of each reportable segments
Cash comprises cash on hand and demand deposits
Cash equivalents
Short term
High liquidity investments
Readily convertible to known amount of cash
Subject to insignificant risk of changes in value
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Specific considerations
AS4: EVENTS AFTER THE REPORTING DATE
Definition Those events favorable and unfavorable, that occur between the end of the
reporting period and the date when the financial statements are approved by the
board of directors
Recognition
and
measurement
Adjusting
events
An entity shall adjust the amounts recognized in its financial
statements.
Settlement after reporting date of court cases that confirm the
entity had a present obligation at reporting date
Bankruptcy of a customer that occurs after reporting date
confirms a loss existed at reporting date on trade receivables
Sales of the inventories after reporting date that give evidence
about their net realizable value at reporting date
Determination after reporting date of cost of assets purchased or
proceeds from assets sold, before reporting date
For
eign
cur
renc
y ca
sh f
low
s Cash flow transaction in a foreign currency shall be recorded in an entity’s currency by applying the exchange rate between the Indian currency and the foreign currency at the date of cash flow
Unrealized gains and losses arising from changes in exchange rates are not cash flows but it is reported in the statement of cash flows for reconciliation purpose
Inte
rest
and
div
idend
s Cash flows from interest and dividends received and paid shall each be disclosed separately
Financial institution classifies interest paid and interest received as cash flow
Other entity classifies interest paid as financing cash flows while interest and dividends received as investing cash flow
Tax
es o
n in
com
e Cash flows arising from taxes on income are normally classified as operating cash flow unless they can be specifically identified with financing and investing activities
Adju
sting
eve
nts Those that provide evidence of
conditions that existed at the end of the reporting period
Non
-adju
sting
eve
nts Those that are indicative of
conditions that arose after the reporting period
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Non-
adjusting
events
An entity shall not adjust the amounts recognized in its financial
statements.
Examples-
Major business combinations or disposal in subsidiary
Announcing a plan to discontinue operations
Major purchase or disposal of assets, classification assets as held
for sale or expropriation of major assets by government
Destruction of major production plant by fire after reporting date
Announcing or commencing a major restructuring
Major ordinary share transactions
Abnormal large changes after the reporting period in asset prices or
foreign exchange rates
Changes in tax rate or tax law
Entering into significant commitments such as guarantees
Commencing major litigation arising solely out of events that
occurred after the reporting period
Dividend The entity shall recognize dividend as liability dividends are declared to
holders of equity instruments after the reporting period
Disclosures
AS5: ACCOUNTING POLICIES & ESTIMATES
Going
co
ncern An entity shall restate the financial statements on a going concern
basis if management determines after the reporting date either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so
Date
of
app
rova
l fo
r issu
e
An entity shall disclose the date when financial statements were approved for issue and who gave that approval.
Non
-adju
sting
eve
nts
aft
er
the
repo
rting
period If material, non-disclosure could influence the economic decisions of users.
Thus, an entity shall disclose the following:
•The nature of the event, and
•An estimate of its financial effect, or a statement that such an estimate cannot be made
• Is required by AS
• Required by Statute
• Results in the financial statements providing reliable and more relevant information
Changes in accounting
policies only if
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Principle of
Change in
Accounting Policy
If change is due to new standard / interpretation, apply transitional
provision
If no transitional provisions, calculate retrospectively and account for
prospectively
Errors
Changes in accounting estimates
Revised AS 10: Property Plant and Equipment
•Accounting policy differs in substance from those previously undertaken
•Transaction did not occur previously or were immaterial. Any revaluation is assets as per AS10 is not a change in accounting policy to be dealt with their respective standards and not this standard
The following are not changes
in accounting policies
Definition
•Prior period errors are omission from, and misstatements in, the entity’s financial statements for one or more prior periods
Principle
•Correct material prior period error by:
•Presenting seperately in Current year for the prior period(s) presented,
Definition
A change in accounting estimate is an adjustment of the carrying amount of the asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities.
Changes in accounting estimates result from changes in the circumstances, new information or new developments and accordingly, are not corrections of errors
Principle Recognize the
change prospectively in profit or loss in:
Period of change, if it only affects that period, eg. Change in bad debts estimates or
Period of change and future periods if the changes affect both. Eg. Change in useful life of a depreciable asset
Disclos
ure The nature and
amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods.
If the amount of the effect in future periods is not disclosed because it is impracticable, an entity shall disclose that fact
•It prescribes the accounting treatment for PPE
•It applies in accounting for PPE except- Ind AS105, 41, 106 and mineral rights and reserves etc
Objective and scope
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Asset acquired
in exchange
Of Another Asset Fair market value or Net book value whichever is more
clearly evident
Of Equity Fair market value
•Plant, property and equipment- tangible items are held for use in the production or supply of goods, for rental to others, for administrative purposes, and are expected to be used during more than one year.
•Depreciation- it is the systematic allocation of the depreciable amount of an asset over its useful life
Definition
Reco
gnition Recognize the cost of an item of PPE as an asset only
if:
• Probable future economic benefits associated with the item will flow to the entity and
• The cost of the item can be measured reliably.
Initial
measu
rement
Whether acquired or self-constructed PPE should be initially recorded at cost.
Cost comprises-
• Its purchase price + import duties and non-refundable taxes(-) trade discount and rebate
• Any cost directly attributable to bringing the asset to the location and condition necessary for it to be capital of operating in the manner intended by management
• The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.
• Internal profit are eliminated
• Also include borrowing costs as per AS 16
• In an exchange transaction: cost is measured at the fair value
Subsequent measurement
The cost model
the asset is carried at cost less accumulated and impairment losses
The revaluation model
the asset is carried at a revalued amount, being its fair value at the date of the revaluation, less subsequent depreciation and impairment
losses
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Depreciation The depreciable amount is allocated on a systematic basis over the asset’s
useful life.
The residual value and the useful life shall be reviewed annually
Any change is accounted for prospectively as a change in an accounting
estimates under Ind AS 8
Depreciation is charged to profit or loss, unless it in included in the carrying
amount of another asset
Depreciation commences when the asset is available for use.
Depreciation
method
Should reflect the pattern in which the asset’s future economic benefits are
expected to be consumed
It should be reviewed annually and
Any significant change is accounted for as a change in an accounting estimate
under Ind AS 8
Method of depreciation-
1.straight line method
2. Diminishing balance method
3. Units of production method
Oth
ers
Cost of replacing part/major inspection-
•It is recognized in the carrying amount of the item of PPE if the recognition criteria are satisfied and
•Remaining carrying amount of the parts that are replaced or previous inspection cost is de-recognized
Spare parts, stand-by or servicing equipment: are classified as PPE when they meet the definition of PPE otherwise classified as inventory.
Previously there was
Increase in Value
Now Increase in value
Create RR
now decrease in Value
First adjust to RS, then to P&L
Decrease in value
now increase in value
First adjust to P&L euqal to
above, then RS
now Decrease in value
Charge to P&L
Subsequent
Revaluation
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De-recognition
The carrying amount of an item of PPE shall be derecognized-
a) On disposal or
b) When no future economic benefits are expected from its use or disposal
Gain or loss = difference between net disposal proceeds and carrying amount
Gain or loss is included in profit or loss
In case of revalued asset: revaluation surplus may be transferred directly to retained earnings
Revaluation shall be made with sufficient regularity to ensure that the carrying amount does not
differ materially from fair value at the end of the reporting period
Revaluation frequency depends upon the movements (annual revaluation for volatile items or
intervals between 3-5 years for others)
If an item is revalued, the entire class of asset to which that asset belongs is required to be
revalued
The net carrying amount of the asset is adjusted to the revalued amount and either
o The gross carrying amount is adjusted in manner consistent with the net carrying amount
o Accumulated depreciation is adjusted to equal the difference between the gross and net
carrying amount, or
o Accumulated depreciation is eliminated against the gross carrying amount
An increase in revaluation is recognized in other comprehensive income and accumulated in equity
under the heading of revaluation surplus except when the increase is recognized in profit or loss
to the extent that it reverses a revaluation decrease of the same asset previously recognized in
profit or loss.
Disclosure
Disclosures include but are not limited to-
Measurement bases used for determining the gross carrying amount
Depreciation method used
Useful life or depreciation rates used
Gross carrying amount and the accumulated depreciation at the start and end of the period
A reconciliation of the carrying amount at the start and end of the period showing-
addition/ assets held for sale/ other disposal/ acquisition through business combination/
revaluation/ impairment losses recognized and reversed / depreciation / exchange
differences/ other changes
Existence and amounts of restrictions on the title, and PPE pledged as security
Contractual commitments for the acquisition of PPE.
AS7: CONSTRUCTION CONTRACTS
Scope
• To establish ground rules for recognition of revenue and cost, relating to construction contracts, in different accounting periods in which construction work is performed
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AS9: REVENUE RECOGNITION
Fixed Price Contract
•Contract price or rate per unit of output is fixed
•Escalation clause could be present
Cost plus contract
•Revenue = Cost + Some percentage or fixed amount
Identification of contracts
Group of assets
(Construction of each asset to be treated as seperate contract if:)
Seperate proposal for each asset
seperate negociation for each asset with acceptance/rejection possible for each
part
identification of cost and revenue for each asset
Group of contracts
(With single or several customers to be treated as single if:)
Negotiated as a single package
Contacts closely inter related and in substance part of a single project
performed concurrently or in continuous sequence
Contract Revenue
•Recognised on Percentage Completion method
•Depends on initial amount agreed
•Variations in receipt maybe recognised if measurable and probable
Contract Expense
•Recognised on Percentage Completion method
•Any expected loss to be charged off immediately
•Includes all Direct cost and allocable cost
•Accrual basisInterest Charges & Royalty
•Right to receive establishedDividend
•exchange permission grantedInterest, royalty, dividend from
foreign
•when uncertainty removedescalation, incentives etc.
•recognise if item is ready for deliverydelivery delayed at buyers request
•when installation is completeinstallation major portion
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AS11: FOREIGN EXCHANGE TRANSACTION
DEFINITIONS
Net
investment
in foreign
operations
the amount of the reporting entity’s interest in the net assets of that operation
An item of which settlement is neither planner more likely to occur in the foreseeable
future is,
E.g.: Long term receivable
Trade receivable or trade payables are not included in the investment in foreign
operations
Monetary
items
Units of currency held and assets and liabilities to be received or paid in a fixed or
determinable number of units of currency.
E.g.: employee benefits to be paid in cash; provision that are to be settled in cash; and
cash dividends that are recognized as a liability.
Non-
Monetary
items
Other than Monetary item
I.e. absence of a right to receive (or an obligation to deliver) a fixed or determinable
number of units of currency.
E.g. prepaid rent, goodwill; intangible assets; inventories, PPE etc.
•approved or approval time expired w.e.l.sale on approval
•provision as per previous experienceguaranteed sales
•when sold by consigneeconsignment sales
•straight line basissubscriptions
• installments-recognise immediately
• interest- accrual basishire purchase
•service completedadvertising
• project charges- one time basis
• consultancy- continuous basisfinancial service commisions
•restrictions on remittances
•closing rate is unrealistic
when closing rate cannot be used for monetary items
• exchange difference recognised as income or loss in P&Lintegral operations
• exchange difference recognised in Foreign exchange reserve account
• on disposal income or expense recognised in P&Lnon integral operations
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Accounting for Integral Assets
Fixed Assets Historical cost
Inventory Purchase date price or NRV at fair value w.e.l.
Current Assets & Liab. Closing rate
Share Capital & Reserve Purchase date Exchange rate
P&L Average Rate Foreign Exchange
Fluctuation
Transferred to Profit and Loss
Accounting for Non Integral Operations
All assets and liab. Closing rate
Income and Exp. Date of transaction
Share Capital & Reserve Purchase date Exchange rate
P&L Average Rate Foreign Exchange
Fluctuation
Transferred to Foreign Currency Translation Reserve
AS12: GOVERNMENT GRANT
Related to specific fixed Asset Deduct form value of asset or,
Created a deferred reserve account charged to P&L as
deferred income account
Related to non-depreciable asset Credited to Capital Reserve
Related to obligatory requirement Credit to P&L over the period of incurring cost of obligation
Related to revenue Credit to P&L
Non-monetary asset at concessional
rate or no cost
No accounting required
Related to compensation for expense or
loss
Treated as extra-ordinary item
Becomes refundable Treated as extraordinary expense
(refund related to specific
fixed asset)
Depreciate prospectively
Definition
•Assistance by government
•In the form of transfer of monetary resources to an entity
•In return for past or future compliance with certain conditions relating to the operating activities on the entity
•Exclude those forms of government assistance which cannot reasonably have a value placed on them and which cannot be distinguished from the normal trading transactions of the entity
Scope
•It shall be applied in accounting and disclosure of government grant except
•Special problems were changing prices affect government grants
•Tax benefits: income tax holidays, investment tax credits, accelerated depreciation
•Government participation in the ownership of an entity
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AS13: INVESTMENTS
Scope
• To prescribe accounting treatment for Investments in the financial statements of an enterprise amd related disclosure requirements
Current Investments
• Readily realizable within 12 months from the date of purchase
• Carried at cost or Fair Value w.e.l., diff trf to P&L
Long term Investments
• Intended to be held for long term
• Carried at Cost unless Permanent Decline
Assets acquired for other than cash
by issue of securities
fair value of securities
by exchange of another asset
Fair value of asset given up or investment received whichever is more clearly evident
Identification of contracts
Group of assets
(Construction of each asset to be treated as seperate contract if:)
Seperate proposal for each asset
seperate negociation for each asset with acceptance/rejection possible for each
part
identification of cost and revenue for each asset
Group of contracts
(With single or several customers to be treated as single if:)
Negotiated as a single package
Contacts closely inter related and in substance part of a single project
performed concurrently or in continuous sequence
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AS14: AMALGAMATION
Accounting Treatment
Method Pooling of Interest Purchase Method
Reserves of transferor
company
Continued Discontinued except statutory
reserves
Difference of consideration
paid to asset acquired
Adjusted to reserves If excess – CR
If less paid – Goodwill
Recording assets/ liabilities Existing carrying amount Fair value recognition permitted
AS 15: EMPLOYEE BENEFITS
Objective and
scope
To prescribe accounting and disclosure for employee benefits
Applied by an employer in accounting for all employee benefits except shared
base payments.
Definition
Reclassified from Current to Long Term
•Transfer at Lower of Cost and Fair Value at the date of transfer
Reclassified from Long Term to Current
•Transfer at lower of Cost or Carrying Amount at the date of transfer
• dividend/interest is deducted from the asset valueacquired cum dividend/interest rights
• deducted from the asset valuepre aquisition dividend
• accounted in P&Lpost acquisition dividend
• added to carrying amount of investmentrights issue
• transferred to P&Lrights not subscribed and sold
• deduct sale of such rights portion from asset valueif investment acquired cum right
Type of Amalgamation
Pooling of Interest
All assets and liabilities
transferred
90% of shareholders
continue
Consideration only in equity
shares
Business not discontinued
no adjustment in book value
made
Purchase Method
if any of the condition
stated in PoI not satisfied
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Employee benefits are all forms of consideration given by an entity in exchange for service
rendered by employees or for the termination of employment
Types of
employee
benefits
SHORT TERM EMPLOYEE BENEFITS
E.g.: Wages, salaries, bonuses, etc. that are expected to be settled wholly within the 12
month’s from the date service is rendered
Compensated
absence :
Accumulating: carried forward and can be used in future periods if
the current period’s entitlement is not used in full
Non-accumulating: Cannot be carried forward to be used in future
period. Recognize expenses when absence occurs
All short term
benefit
Recognize the undiscounted amount as an expense / liability when the
employee has rendered service in exchange for the benefits
Profit sharing &
bonus schemes
Recognize the expenses when entity has a present legal or
constructive obligation to make payment ; and
A reliable estimate of the obligation can be made
OTHER LONG TERM BENEFITS
E.G: long service leave, etc An entity shall recognize the net total of the following
amounts in profit or loss:
(a) Service Cost;
(b) Net interest received on the defined benefits asset; and
(c) Re-measurement of the net defined benefits assets
TERMINATION BENEFITS
Provided in
exchange for
the termination
either
An entity’s decision to terminate an employee’s employment before
the normal retirement date or
An employee’s decision to accept an offer of benefits in exchange
for the termination of employment
Recognize
liability and
expense at the
earlier of
The date the entity cannot be longer withdraw the benefit or offer
The date the entity recognizes restricting cost
If termination benefits settled wholly before 12 months – apply short term employee
benefits
If termination benefits are not settled wholly before 12 months –apply other long term
employee benefits
POST EMPLOYEE BENEFITS
Post-employee benefits included:
Retirement benefits (e.g.: pension , lump sum payments
Other post –employment benefits life insurance, medical care.)
Insured
benefits
An entity may pay insurance premiums of fund a post employment benefit
plan.
Treat such plan as a defined contribution plan unless the entity will have a
legal or constructive obligation either
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To pay the employee benefits directly when they fall due;
To pay further amounts if the insurer does not pay all future employee
benefits
If the entity retains such a legal or constructive obligation, the entity
shall treat the plan as defined benefits plan
Multi
employee
plans
These are defined contribution plans or defined benefit plans that pools
the asset of various entities that are not under the common control and
use those assets to provide benefits to employees of more than one entity
If the plan is defined benefit plan, an entity may apply defined
contribution accounting when sufficient information is not available to
apply the accounting requirements for defined benefit plans
State
Plans
An entity shall account for a state plan in the same way as for the multi
employer plan
Defined
Contributi
on Plan
Straightforward scheme Obligation is determined by the amount paid
into the plan each period
No actuarial assumption
The entity shall recognize the contribution payable
to the defined contribution plan in exchange for the
service
As a liability
As an expense
Disclose the amount recognized as an expense for DCP
Defined
Benefit
Plan
More complex scheme
o Need actuarial assumptions for estimating future benefits
o Need discounting of obligation to present value
o Since assumption change there will be actuarial gain or loss
Recognition and measurement
Following steps to account for defined benefit plans
Determine the
deficit or surplus
Make the reliable estimate of the ultimate cost of
the benefit that the employees have earned in
return for their service in the current and prior
periods (using the actuarial technique by the
projected unit credit method)
Discount that benefit in order to determine the
present value of the defined benefit obligation –
fair value of the plan assets
Determine net
defined benefit
asset/ liability
Amount of the deficit or surplus as above, adjusted
for any effect of limiting a net defined benefit
asset to the asset ceiling
Determine amount
to be recognized in
profit or loss
Current service cost
Past service cost or gain or loss on settlement
Net interest on net defined benefit liability
Actuarial Gain or loss
Presentation : offset
An entity shall offset an asset relating to one plan against a liability relating to another plan when
the entity.: (a) Has a legally enforceable right ;and
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(b) Intend either to settle the obligation on a net basis ,or to realize the surplus in one plan and
settle its obligation under the other plan simultaneously
Curtailment and
Settlement
Decrease in the amount of obligation accounted for
Steps
Reduce unamortized past service cost
Determine Curtailment benefit on gross obligation
Reduce Gross obligation proportionately by related curtailment after
reducing curtailment related to Unamortized past service cost
AS16: BORROWING COST
Definition
Borrowing
cost
Borrowing cost are interest and other costs incurred by an entity in connection with
the borrowing of funds
Borrowing cost may included :
(a) Interest expense
(b) Amortization of discount/ premium on loans
(c) Amortization of ancillary cost
(d) Finance lease charges
(e) Exchange differences arising from foreign currency
Qualifying
assets
(QA)
A qualified asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale.
Example include:
I. Inventories (that are not produced over a short period of time.)
II. Manufacturing plant
III. Power generation facilities
IV. Intangible assets
Example that is not (QA)
I. Financial assets
II. Assets that are ready for their intended use or sale when acquired
Recognition Capitalize borrowing cost that are directly attributable to the acquisition,
construction or production of a qualifying assets as part of the cost of that assets
Other borrowing cost as an expense in the period in which it incurs them.
Scope
• It applies in accounting for borrowing cost.
• does not deal with the actual or imputed cost of entity
• it does not apply to the borrowing cost direcly attributable to the :
• A qualifiying assets measured at fair value
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Borrowing
cost eligible
for
capitalization
Those borrowing cost that would have been avoided if the expenditure on the
qualifying assets had not been made.
In case of specific borrowing – actual borrowing costs incurred on that borrowing
less any investments income on the temporary investment of those borrowings.
In case of general borrowing apply a capitalization rate* to the expenditure on this
assets
The amount of the borrowing cost capitalization during the period cannot exceed the
amount of borrowing costs incurred during the period
*capitalization rate= weighted average of borrowing costs applicable to the general
borrowing
Disclosure
Amount of borrowing cost capitalized during the period
Capitalization Rate used
AS 17: SEGMENT REPORTING
Core principle an entity is required to disclose information to enable the nature and financial
effect of the business activities and the economic environments in which it
operates
Scope If an entity voluntarily chooses to disclose information about segment, it shall
not describe the information as segment information.
If a financial report contains both the consolidation FS of a parent within this
AS scope +parent’s separate FS, then applicable to only consolidated FS
Operating
segment
If risk and returns related to product or service- Business Segment
If risk and return related to geographical area – Geographical Segment
Com
menc
em
ent
of
the c
apit
aliz
atio
n
Incurs expenditures of the assets
Incurs borrowing cost
Undertakes activities that are necessary to prepare the assets for its intended use or sale
Sus
pens
ion
of c
apit
aliz
atio
n Suspend capitalization of borrowing cost during extanded period in which it suspends active development of a qualifying assets
When temporary delay is a part of prodn / construction than capitalization continues
Cess
atio
n of
cap
ital
izat
ion Cease capitalization when
substantially all the activities necessary to prepare the assets for this intended use or sale are complete.
When in entity completes the contrucation of a qualifying assets in parts and each part is capable of being used while contrucation continues on other parts then cease capitalization borrowing costs when it completes substsncially all the activities necessary to prepare that part for its intended use or sale
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Quantities
threshold
Information about an operating segment is required to be disclosed
separately that meets any of the following quantitative threshold :
- Its reported revenue, including both external sales and intersegment
sales, =10 % or more of the combined revenue of all operating segments
- The absolute amount of its reported profit or loss is 10 % or more of
the greater of :
o The combined reported profit of all operating segments that did not
report a loss; and
o The combined reported loss of all operating segments that reported
a loss.
- Its assets are 10 % or more of the combined assets of all operating
segments.
- If qualified minimum threshold limit in PY
- Management Discretion
If the total external revenue reported by operating segment constitutes
less than 75% of the total revenue, additional operating segments shall be
identified as reportable segments until at least 75 % of the entity’s
revenue is included in reportable segment
AS 18: RELATED PARTY DISCLOSURE
DEFINITIONS
Key management
personnel
persons having authority and responsibility for planning, directing and
controlling the activities of the entity, directly or indirectly, including any
director (whether executive or close family member)
Related party is a person or entity that is related to the reporting entity
•To ensure that financial statement contains disclosure requirement of related party relationships
•This standard shall be applied in:
•Indentifying relating party relationships, and transactions ;
•Identifying outstanding balances, including commitments;
•Identifying the circumstances in which disclosure is required; and
•Determining the discloser to be made
Objective & Scope
•Related party relationship transaction and outstanding balance in the related consolidated and separate financial statement of:
•A parent
•Investors with joint control of an investee
•Investor with significant influence over an investee
Disclosure is also
required of
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Close family
member
those family member how may be expected to influence , or be influenced by
that person in their dealing with the entity including :
That person’s children ,spouse, brother ,sister father and mother ;
Children of that person’s spouse; and
Dependents of the that person or that person’s spouse
Government refers to government , government agencies and similar bodies whether local,
national or international
Related party
Individual A person or a close family member is related to a reporting entity if that person :
I. Has control or joint control of the reporting entity;
II. Has significant influence over the reporting entity; or
III. Is a member of the key management personnel of the reporting entity or of its
parent.
Entity Applies to an entity is related to a responding entity:
I. Parent, subsidiary and fellow subsidiary;
II. Associate & Joint venture;
III. The entity is controlled or jointly controlled by a person identified in above
table
IV. A person identified in above table has significant influence over the entity or is
a member of the key management personnel of the entity (or of parent of the
entity)
V. The entity, or any of its group member provides key management personnel
services.
Non related
party
Two entities simply because they have a director or key management personnel in
common
Two joint ventures who share joint control over a joint venture.
Provider of finance, trade unions, public utilities, and department and agencies of
a government simply by virtue of their normal dealings with an entity.
A single customer, supplier, franchiser, distributor, or general with whom an
entity transects a significant volume of business merely by virtue of the resulting
economic dependence.
DISCLOSURE
All Entities Relationship between a parent and its subsidiaries shall be disclosed irrespective of
whether there has been transaction between them.
An entity shall disclose the name of its parent and, if different, the ultimate
controlling party
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If there has been related party transaction during the reporting period then disclose
The nature of the related party relationship
Information about those transitions and
Outstanding balances, including commitments
Provisions for doubtful debts
Bad or doubtful debt expense recognized from related parties
The above disclosure be made separately
For the parent;
Entities with the joint control of, or significant influence over, the entity;
subsidiaries; associates;
Joint ventures in which the entity is a joint venture;
Key management personnel of the entity or its parent; and
Other related parties
Amounts incurred by the entity for the provision of key management personnel
services that are provide by a separate management entity shall be disclosed
AS19: LEASES
Definition Lease an agreement whereby the lessor conveys to the lessee in return for a
payment or series of payments the right to use an asset for an agreed
period of time
Minimum lease
payments
lease payments over lease term + residual value guaranteed to lessor
+amount guaranteed by or on behalf of lessee
Gross
investments
MLP under finance lease + unguaranteed residual value
Net investment gross investment - unearned finance income
Classification:
Depends on the substance of the transaction rathr than the form of the contract
Operating lease: lease other than a finance lease
Accounting treatment-
Lessee:
Recognizes lease expenseon straight line basis overthe lease term ortransferred to P&L
Accounting treatment-
Lessors:
lessors should record assets in their balance sheet as per thenature of the asset
recognizes lease income on a straight line basis over the lease term
initial direct cost shall be added to the carrying amount of theleased asset and recognized as an expense over the lease term onthe same basis as the lease income
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Sales and leaseback transactions
finance lease: lease that transfer substantially all the risk and rewards incidental to ownership of an asset
Accounting treatment:
Lessor:
recognizes a receivable equal to the netinvestment of the lease
recognizes finance income based on apattern reflecting a constant periodic rateof return on the lease
initial direct costs are included in the initialmeasurement of the finance leasereceivable and reduce the amount of incomerecognized over the lease term
there is a special requirement in case ofmanufacturer granting finance lease
Accounting treatment:
Lessee:
recognizes as an asset and a liability in thebalance sheet
recognizes asset at the lower of the fairvalue of the leased asset and present valueof MLP
discount rate = implicit rate in the lease
lease payment are appointed betweenfinance charges and reduction of liability
finance charge allocation is allocated to aperiod to produce a constant rate ofinterest over the period of time
depreciation on the leased asset should bedone on systematic basis
Finance lease
any excess of sale proceeds over carrying amount shall
not be recognized immediately
but deferred and
amortized over the
lease term
Operating lease
if the sale price is at fair value , any excess of sale proceeds over carrying amount is recognized by the lessor immediately
if the sale is below fair value, If profit, recognize immediately. If loss,difference between WDV and FV should be transferrd to P&L and difference between SP and FV to be deferred over lease term
if the sale price is above market value, If loss, recognize immediately. If profit, difference between FV and WDV should be transferrd to P&L and difference between SP and FV to be
deferred over lease term
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Examples
of
finance
lease
1. lease transfers ownership of the asset to the lessee by the end of the lease term
2. lessee has a bargain purchase option and it is certain at the date of inception that
the option will be exercised
3. the lease term is for the major part of the economic life of the asset
4. at the inception of the lease the present value of the minimum lease payments
amounts to substantially all of the fair value of the ;eased asset
5. the leased asset are of such a specialized nature that only the lessee can use
them without major modification
6. gains and losses from the fluctuation in the fair value of the residual accrue to
the lessee
7. the lessee has the ability to continue the lease for a secondary period at a rent
substantially lower than the market rent
8. if the lessee can cancel the lease, the lessor’s associated losses are borne by
lessee
AS20: EARNING PER SHARE
DEFINITIONS
ordinary share An ordinary share is an equity instrument that is subordinate to all other classes
of equity instruments
A potential
ordinary share
A potential ordinary share is a financial instruments that may entitle its holder to
ordinary shares
Dilution o is a reduction in EPS (increase in loss per share)
o from the assumption
o that convertible instruments are converted, options/warrant exercised, or
ordinary share issued upon the satisfaction of conditions
Anti-dilution o is an increase in EPS (reduction in loss per share)
o from the assumption
o That convertible instruments are converted, option/warrants exercised, or
ordinary shares issued upon the satisfaction of conditions.
Objective & Scope
•To prescribe for the determination and presentation of earning per share
•Applied to companies that have issued ordinary shares to which ASs notified under the Companies Act apply.
•An entity that discloses EPS shall calculate & disclose EPS as per this Std.
•When an entity present both consolidated and separate financial statements respectively, the disclosure shall be presented both in the consolidated (based on info in consolidated ES) and separate financial statements(based on info in separate FS)
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MEASUREMENT: TYPE OF EPS
Basic EPS Diluted EPS (DEPS)
Calculate Basic EPS = (a) / (b)
(a) = Earnings
(b)= Weighted Average No.s of Equity shares
Calculate Diluted EPS = (c) / (d)
(c) = Earnings for Basic EPS as per (a) with
adjustments
(d) = Weighted Average no. s of Equity shares
for Basic EPS as per (c) with adjustments
Earnings (a) = amounts for profit or loss
attributable to ordinary equity holders of the
parent entity from continuing operations.
I.e. Net Profit or Loss after Tax, Adjusted for
the after- tax amounts of:
o preference dividends,
o difference arising on the settlement of
preference share, and
o Other similar effects of preference shares
classified as equity.
o Income / expense debited or credited to
security premium/other reserves.
Earnings (c) = Basic Earnings as per (a) adjusted
for after- tax effect of :
o Any dividends or interest or other items
related to dilutive potential ordinary shares
and
o Changes in income or expense from the
conversion of the dilutive potential ordinary
shares
Basic – Weighted average number of shares =
o The number of ordinary shares outstanding
at the beginning of the period,
o Adjusted by the number of ordinary shares
bought back or issued during the period
o Multiplied by a time-Weighting factor.
Diluted – Weighted average number of shares
(d) =
o Weighted average number of ordinary shares
in Basic EPS per (a) plus
o Additional shares that would be issued on the
conversion of all the dilutive potential ordinary
shares.
o It is presumed that conversion is at beginning
of year / date of issue of potential ordinary
share.
o Diluted EPS presented when it would decrease
EPS or increase loss per share from continuing
operations.
Notes :
o share included : from the consideration is
receivable
o Bonus issue included : in the number of shares
as if the issue had occurred at the beginning
of the earliest period presented (so restate
comparatives)
Presentation
- an entity shall present basic and diluted earnings per share with equal prominence for all periods
presented
- The basic and diluted EPS for a discontinued operation should be disclosed either in the
statement of profit and loss or in the notes.
Disclosure
An entity shall disclose the following :
(a) The amounts used in the numerators and its reconciliation to profit or loss.
(b) The Weighted average number of ordinary shares used in the denominator and its reconciliation
to each other.
(c) Instruments that could potentially dilute basic earnings per share in the future but were not
included because they are currently anti-dilutive.
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AS 21:CONSOLIDATED FINANCIAL STATEMENT
PROCEDURE
a) Ascertain and eliminate cost of investment by parent in each subsidiary
b) Ascertain and eliminate parents portion of equity in each subsidiary
c) If a>b, record goodwill else CR
d) Ascertain Minority interest in income and net assets of the company
e) Consolidate profits of both the company by eliminating MI of profits
f) Eliminate intra group transactions, balance, resulting unrealized profits or
losses
AS 22:INCOME TAXES
Current taxes
• lays down principles and procedures for preparation and presentation of CFSObjective
Seperate Financial Statement to be prepared even if CFS are prepared
All domestic and foreign subsidiaries to be consolidated even if the business activities are dis similar
in no case the difference between reporting dates should exceed 6 months
CFS to be made on the basis of uniform accouting policies
For seperate financial statement of holding, investment to be reflected as per AS 13
in case enterprise ceases to be subsidiary, it shall be accounted for as per AS 13
when controlled by two enterprise, both will prepare CFS
negative minority not to be reflected in CFS, to be adjusted against Consolidated reserves
Arrears of preference dividend to be adjusted related to minority while preparing CFS
Recognise profit or loss on disposal of subsidiary in Consolidated P&L
Tax expense not to be recomputed
Recognized as a liability to the extent unpaid
Recognized as an asset to the extent the
amount already paid exceeds the amount due
The benefits relating to a tax loss that can be
carried back to recover current tax of a
previous period shall be recognized as an asset
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Current tax- measurement
• Measure the asset / liability using the tax rates that are enacted or substantially enacted to the reporting date
Timing difference
• Differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods
Permanent Difference
• These are the differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently
Deferred Taxes
of an asset
Tax of initial years being higher and subsequent years being lower
P&L - Credit, BS - Debit
of a liability
Tax of initial years being lower and subsequent years being higher
P&L - Debit BS - Credit
Defe
rred t
ax
–measu
rement
Measure the balance at tax rates that have been enacted or substantially enacted by the end of the reporting period
They should be measured at tax rates that are expected to apply in the period when the asset is realized or liability settled
Deferred tax assets and liabilities are not discounted
Average rate used when difference tax rates apply to different levels of taxable income
In case of losses/ unabsorbed depreciation, recognise DTA only if it is virtually certain with convincing evidence that future taxable income will be available
The carrying amount of a deferred tax asset is reduced when it is no longer virtually certain that sufficient taxable profit will be available for utilization with convincing evidence
Reduction shall be reversed to the extent that it becomes virtually certain with convincing evidence that sufficient taxable profit will be available
Ignore timing difference originating and reversing in tax holiday period
Ignore MAT while calculating DTA / DTL
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Offset
AS 23: ACCOUNTING FOR ASSOCIATE
Exceptions Investment intended to be temporary
Associate operates in severe long term restrictions significantly impairing its
liability to transfer funds
AS 24: DISCONTINUING OPERATIONS
Objective &
scope
The objective of this Statement is to establish principles for reporting information
about discontinuing operations, thereby enhancing the ability of users of financial
statements to make projections of an enterprise's cash flows, earnings-generating
capacity, and financial position by segregating information about discontinuing
operations from information about continuing operations
Current tax asset/liability
An entity shall offset current tax assets and current tax liability if it has
A legally enforceable right to set off and
Intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously
Deferred tax asset/liability
An entity shall offset deferred tax asset and liability if it has:
A legally enforceable right to set off current assets against current tax liability; and
The deferred tax assets and deferred tax liability relate to income taxes levied by the same taxation authority
•Other than subsidiary or joint venture
•Has significant influence gained by statute, agreement or share ownership being more than 20%
Meaning
Ini
tial
R
eco
gnit
ion At cost
Identify goodwill/ CR and reflect it seperately S
ubse
quent
R
eco
gnit
ion Distribution received
to be deducted from investment
Increase / Decrease post acquisition profits/ losses
Elim
inat
e Unrealized profits/ losses from transaction with investor to the extent of investors interest
arrears of preference dividend
If Investors share of losses of an associate equals or exceeds the carrying amount of Investment, show Investment at NIL Value
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Definition That the enterprise, pursuant to a single plan,
Disposing of substantially in its entirety, such as by selling the component in
a single transaction or by demerger or spin-off of ownership of the
component to the enterprise's shareholders; or
Disposing of piecemeal, such as by selling off the component's assets and
settling its liabilities individually;
Terminating through abandonment; and
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 enterprise has entered into a binding sale agreement for substantially all of
the assets attributable to the discontinuing operation; or
The enterprise's board of directors or similar governing body has both (i) approved
a detailed, formal plan for the discontinuance and (ii) made an announcement of the
plan
Exception • Change in scope of operations is not discontinuing
• Gradual phasing of a product line or class of service not a
discontinuing operations
• Discontinuing several products within an ongoing line of business not
necessarily discontinuing operations
• Shifting of some production or marketing activities- not discontinuing
• Closing activity to achieve productivity improvements in other cost
saving- not necessarily discontinuing operations
AS 25:INTERIM FINANCIAL REPORTING
Definitions
Interim period Interim period is a financial reporting period shorter than a full financial year
Interim
financial report
Interim financial report means a financial report containing either a complete set
of financial statement or a set of condensed financial statement for an interim
period
Objective and scope
•To prescribe the minimum contact of anintrarin financial report and to prescribe recognition and measurement principals
•This std dos not mandate which entities should be required to public intrarin financial riports
•This std applies if an entity is required or elect to publish an interim financial report as per ind As
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Significant
events and
transactions
Significant events and transaction of changes in financial position and performance
of the entity since the end of the last annual reporting period should be included
Followings are the significant discloser: (the list is not exhaustive)
(a) Write-down of inventories to NRV and reversals;
(b) Reorganization of a impairment loss and reversals ;
(c) The reversal of any provision for the costs of restructuring ;
(d) Acquisitions and disposals of property , plant and equipment;
(e) Commitments for the purchase of property, plant and equipment;
(f) Litigation settlements;
(g) Corrections of prior period errors;
(h) Changes in the business or economic circumstances;
(i) Any loan default or breach of a loan agreements;
(j) Related party transaction;
Other
disclosure
o A statement that the same accounting policies or, if those changed, a
description of the nature and effect of the change.
o Explanatory comments about the seasonality or cyclicality of interim
operations
o The nature and amount of unusual items affecting assets liability, equity, net
income or cash flows because of their nature, size or incidence.
o The nature and amount of changes in estimates
o Issues, repurchases and repayments of debt and equity securities.
o Dividends paid separately for ordinary share and other share.
o Segment information
o Event after the interim period that have not been reflected in the financial
statement for the interim period. If an entity’s interim financial report is in
compliance with this standards, that fact shall be disclosed.
Content of interim financial report
Condensed balance sheet
Condensed statement of profit & loss
Condensed statement of cash flows
Selected explanatory notes
The condensed statement should include, at the minimum
Each of the headings and subtotals that were included in its most recent annual financial
statement
Selected explanatory notes as required by this standard
Additional line items should be included if their omission would make the condensed
interim financial stame
Basic and diluted earnigs per share for that period (when applicable)not misleading
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What
periods are
required to
be
presented?
o Balance sheet as of end of the current interim period and its comparative for
the immediately preceding financial years
o St. of P&L for the current interim period and cumulatively for the current
financial year to date along with its prior period comparative
o Statement of changes of equity cumulatively for the current financial year to
date along with its prior period comparative
o Statement of cash flow cumulatively for the current financial year to date
along with the prior period comparatively.
Disclosure in
annual
financial
statement
o If an estimated in an interim period is changed significantly during the final
interim of the financial year but a separate financial reports is not published
o The nature and amount of that changes should be disclosed in the annual
financial statement for the financial year
Recognition and measurement
Accounting policies Revenues, received
seasonally, cyclically,
or occasionally
Cost incurred unevenly
during the financial
year
Use of estimates
o Same accounting
policies as annual
o Except for
accounting policy
changes that are to
be reflected in the
next annual financial
statement
Should not be
anticipated or deferred
in interim reports.
Should only be
anticipated or deferred
for interim reporting if
it is also appropriate in
the annual financial
statements
The preparation of
interim reports
generally requires a
greater use of
estimation methods
than annual financial
reports
AS 26: INTANGIBLE ASSET
Objective & scope
•To prescribe the accounting treatment for intangible assets
•It should be applied to all intangible assets, except:
•Intangible assets covered by another standard
•Financial assets as defined in Ind AS 32 :
•Exploration and evaluation of assets and expenditure on minerals, oil, natural gas etc
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RECOGNITION AND MEASUREMENT
Separate
acquisition
Recognition
- Probable that the expected future economic benefits will
flow of the entity
- Cost can be reliably measured
Measurement - Measured initially at cost
- Cost comprise of :
(a) Its purchase price+(import duties and non-refundable
purchase taxes)-(trade discounts & rebates; and
(b) Any directly attributable cost of preparing the asset for
its intended use.
Acquisition by way
government grant
recognize at nominal value
(a) airport landing rights, licenses to operate radio or television
stations, import licenses or
(b) quotas or right to access other restricted resource
internally
generated
goodwill
Internally generated goodwill should not be recognized as an asset.
Other Examples include;
internally generated brand
customer lists
mastheads, publishing titles
Reason
as the Expenses cannot be distinguished from the cost of developing the business as
a whole
Intangible assets
•identifiable, non-monetary assets, without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes has been removed from the definition of an intangible asset.
Identifiability
•If it either :
•is payable, ie is capable of being separated and sold, transferred licensed, rented or exchange; or
•arises from contractual or other legal rights
Notes
•some intangibles is contained in a physical asset, e.g. compact disc.
•When software is not an integral part of related hardware, it is an intangible asset
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internally
generated
intangible
assets
an entity classifies the generation of the asset into:
(a) a research phase; and
(b) a developing phase;
If the research phase cannot be separated from the development phase then
the expenses is to be taken in the research phase only.
Research phase
Expenditure on research should be recognized as expenses when it is incurred.
Development phase
Expenditure on development phase should be capitalized as an Intangible
Asset if, and only if, all of the following are net :
(a) Technical feasibility of completing the intangible asset.
(b) Its intention to complete.
(c) Its intention to complete.
(d) Probable future economic benefits and the existence of a market or list
usefulness.
(e) The availability of adequate technical, financial and other resources to
complete.
(f) Its ability to measure expenditure reliably.
Recognition
of expense
Expenditure on an intangible item should be recognized as an expense when it
is incurred unless
o It forms part of the cost of the intangible asset
o The item is acquired in a business combination and cannot be recognized
as an intangible asset. Then it forms part of the goodwill
Past expense cannot be capitalized in the later period
Subsequent
Measurement
It is carried at its cost less any accumulated amortization and any
accumulated impairment losses
Useful life An entity should assess the useful life of an intangible asset
When finite
useful life
Amortization period and amortization method
The depreciable amount of an intangible asset should be allocated on a
systematic basis over its useful life
Amortization begins when the asset is available for use
Amortization ceases at the earlier of the date that the asset is classified as
held for sale and the date that the asset is derecognized
The amortization method used should reflect the pattern of future economic
benefits expected to be consumed
Residual value
It should be assumed to be zero unless
(a) There is a commitment by the third party to purchase the asset at the end
of the useful life
(b) There is an active market for the asset
a. Residual value can be determined by reference to that market and
b. It is probable that such market will exist at the end of the assets
useful life
Indefinite
useful life
Amortized maximum for 10yrs
Account for the change in accounting estimate
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Retirement
and disposal
An intangible asset should be derecognized
o On disposal or
o When no future economic benefits are expected from its use or
disposal
o The gain or loss: Net disposal proceeds – Carrying amount of the asset
o Recognized in profit or loss (Gains not to be classified as revenue)
AS 27: FR OF INTEREST IN JV
RECOGNITION REQUIREMENTS
JCO JCA JCE
Assets owned by venture and
liabilities incurred by it to be
included in CFS or Separate FS
Share of JCA shown in the
books of venture
Share of liabilities incurred
Share of Income
Separate FS – Apply AS 13
CFS
Proportionate share of
assets, liability and Income
consolidated
Uniform accounting policy
adjustment required
Joi
ntly
Con
trol
led
Ope
rati
ons no seperate legal
entity
no seperate accounting records and FS required
Joi
ntly
Con
trol
led
Ass
ets No seoerate legal
entity
No seperate FS required, accounting limited to common expenses incurred J
oint
ly C
ontr
olle
d
Ent
ity Seperate legal entity
Seperate FS and accounitng required
Inter Transactions
JCO & JCA
Sale by venturer
Profit- Recognise other venturers portion
Loss - Recognise full
Purchase by Venturer
Recognise at purchase price
JCEWhether
purchase or sale
recognise gain or loss of other venturers portion
recognise loss in full
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AS 28: IMPAIRMENT
IMPAIRMENT LOSS = Carrying Amount > Recoverable Amount
(i.e. When recoverable amt > carrying amt. No. impairment)
When & what
to test for
Impairment?
External sources of
information
i. Significant decline in market value
ii. Change in technological, market, economic or legal
environment
iii. Change in interest rate
iv. Low market capitalization
Internal source of
information
i. Evidence of obsolescence or physical damage
ii. Discontinuance, disposal or restructuring plans
- Declining asset performance
Disclosure
The event and circumstances led to the recognition or reversal of the important loss.
The amount of the impairment loss recognized or reversed
For an individual asset :
(i) The nature of the asset; and
(ii) The reportable segment to which the asset belongs
Objective
•To prescribe the procedure that an entity applies to ensure that its assets are carried at no more than their recoverable amount
Scope
•Applied in accounting for the impairment of all assets, other than;
•Inventories, contract assets, deferred tax assets, employee benefits, financial assets, biological assets, insurance contract assets, amount
Definition
•An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.
•An cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflow from other assets or group of assets.
•The recoverable amount of an asset or a cash- generating until is the fair value less costs of disposal and its value in use.
•Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit
What Assets to be identified for impairment?
Individual Assets
Cash Generating units (CGUs)
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For a cash-generating unit :
(i) A description of the cash-generating unit
(ii) The amount of the impairment loss recognized or reversed by assets and by reportable
segment; and generating unit’s recoverable amount (if any), a description of the current and
former way of aggregating assets and the reasons for changing the way the cash-generating unit
is identified.
The recoverable amount and whether is fair value less asset (cash-generating unit) is its fair value
less cost of disposal or its value in use.
It the recoverable amount is fair value costs of disposal, the entity should disclose a level of the fair
value hierarchy, a description of the technique for measuring fair value less cost of disposal, key
assumptions and the discount rates used
If recoverable amount is value in use, the discount rate used in the current estimate and previous
estimate (if any) of value in use.
Additional disclosure
The main classes of assets affected by impairment losses and the main classes of assets affected by
reversals of impairment losses.
The main event and circumstances that led to the recognition of these impairment losses and
reversals of impairment losses.
RECOGNIZING AND MEASURING AN IMPAIRMENT LOSS
Consider
Individual
Assets
- Determine Recoverable Amount
- If carrying amount>Recoverable amt, difference is charged to P/L as
impairment loss (or adjusted against existing revaluation reserve)
Consider
CGU
- Determine Recoverable Amount of CGU to which the asset belongs
- If carrying amt (including goodwill > Recoverable amt, difference is impairment
loss
- Allocate impairment loss in the following order
o 1st : against Goodwill
o Next : to other Corporate Assets on pro-rata basis of carrying amt of
each asset
In Allocating Important loss,
an asset should not reduce
below highest of
- Its fair value less costs of disposal;
- Its fair value in use; and
- Zero
After recognition of an
impairment loss
Depreciation is adjusted in future period over the asset’s revised
carrying amount, less its residual value on a systematic basis over
its remaining useful life
REVERSING AN IMPAIRMENT LOSS
1. Assess : at each balance sheet date whether any indication that an impairment loss recognized
in prior period is to be reversed.
2. If yes, Estimate the Recoverable Amount
3. Recognize Reversal of impairment loss as follows:
o Individual asset- recognize in profit and loss asset carried at revalued amount.
o CGUs- allocated to assets of CGUs on a pro-rata basis.
o Goodwill- Impairment of goodwill is reversed same as above
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EXTERNAL
INDICATORS
Significant increase in market value
Favorable changes in technological market, economic or legal environment
Change in interest rates
Market interest rates have decreased.
INTERNAL
INDICATOR
Significant favorable changes in a way asset is used or expected to be used
Evidence from internal reporting indicates that economic performance of
the asset will be better than expected
AS29: CONTINGENT LIABILITIES AND ASSET
DEFINITIONS
Provision - A liability of
- Uncertain timing or amount
Onerous
contract
One where the unavoidable costs of meeting the obligations under the contract >
the economic benefits expected to be received under it
contingent
liability
- A possible obligation
- That arise from last event
- Whose existence will be conformed only by the occurrence or non-
occurrence of one or more uncertain future events
- Not wholly in the control of the control of the entity; or
- A present obligation
- That arise from last event
- That is not recognized
- Because it is not probable that an outflow will be required to settle the
obligation or
- The amount of the obligation cannot be measured reliably
Contingent
assets
- Possible assets
- That arise from the last event and
- Whose existence will be confirmed only by the occurrence of one or more
uncertain future events.
- Not wholly within the control of the entity.
Objective & scope
• To ensure that appropriate recognition criteria and measurement bases applied to provision, contingent liabilities and contingent assets with sufficient discloser
• Applied by the entity expert:
• From executor contracts, expert where contracts is onerous; and
• Those covered by another standards
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A restructuring - Is a program that is planned and controlled by management, and
- Materially changes either :
(a) The scope of a business undertaken by a entity ; or
(b) The manner in which that business is conducted.
RECOGNITION
Provision A provision should be recognized when :
(a) An entity has a present obligation (legal or constructive) as a result of
a past event.
(b) It is probable that an outflow will be required to settle the obligation ;
and
(c) A reliable estimate of the amount of obligation can be made.
Contingent
liability
- An entity should not recognize a contingent liability
- A contingent liability disclosed
- Unless the possibility of an outflow is remote.
Contingent
assets
- An entity should not recognize a contingent asset.
- A contingent asset is not disclosed
Measurement Best estimate - Provisions are measured at the best estimate of the
expenditure required to settle the present obligation at
the balance sheet date.
- Where there is a large population is involved: the
obligation should be estimated by weighing
- U[p shall possible outcomes
- Where a signal obligation is being measured: the most
likely outcome should be chosen.
- In determining the best estimate, mgt judgment,
experience of similar transaction, reports from
independent experts, evidence, related risks and
uncertainties be considered
Reimbursement - When some of the expenses is to be reimbursed from
third parties, reimbursement should be recognized only
when, it is probable that reimbursement will be received
if the entity settles the obligation.
- It is treated as a separate asset.
- It should not exceed the provision.
- In the statement of profit & loss, the expense relating to
a provision may be presented net of reimbursement.
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Changes in
provisions
- Provisions are reviewed at each reporting date and
adjusted to reflect current best estimate
- If it is no longer probable that an outflow will be required
to settle the obligation, the provision is reserved
Application of
the recognition
and
measurement
rules
Future
operating
losses
provision should not be recognized for future operating losses
Onerous
contracts
- the provision is recognized & measured for onerous
contract at the lower of:
Costs of fulfilling the contract
Compensation arising from failure to fulfilling it.
Restructuring - A constructive obligation or restructure arises only when
an entity has the following:
(a) Has a detailed formal plan for the restructuring
identifying at least ;
I. The business or part of the business concerned
;
II. The principal of business are affected ;
III. The location, function and no’s of employees
being compensated for terminating services.
IV. The expenditures that will be undertaken ; and
V. When the plan will be implemented ; and
(b) Has raised a valid expectation in those affected that
will carry out the restructuring by starting to
important that plan or announcing its main features.
- A restructuring provision should included only the direct
expenditures arising from the restructuring, which are
those that are both:
A) Necessarily entailed by the restructuring ; and
- Not associated with the ongoing activities of the entity
Ind AS 32, 109 & 107: FINANCIAL INSTRUMENTS
Objective & scope –Ind AS 32
To establish principles for presenting financial statement instruments as liability or equity and fro
offsetting financial assets and financial liabilities
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This standards shall be applied to all types of financial instrumental except:
(a) Interest in subsidiaries, associates or JVs
(b) Employer’s right and obligations under Ind AS 19.
(c) Insurance contract as defined in Ind AS 104 with exceptions
(d) Financial instruments that are within the scope of Ind AS 104
(e) Financial instruments, contract and obligation under share – bashed payment transactions
under Ind AS 102, (except for contracts within scope & for treasury share)
DEFINITION
Financial
instrument
Any contract that gives rise to a financial assets of one entity and
A financial liability or equity instrument of another entity
Equity
instrument
(a) Any contract
(b) Evidencing a residual interest in the assets of an entity
(c) After deducting all of liabilities.
Fair value (d) The price that would be received to sell an asset or
(e) Paid to transfer a liability
(f) In an ordinary transaction
(g) Between market participants
(h) At the measurement dates.
Financial
assets
(a) Cash;
(b) An equity instruments of another entity;
(c) A contractual right;
I. To receive cash or other financial asset from another entity; or
II. To exchange financial asset or financial liability with another entity that are
potentially favorable; or
(d) A contract selected in the entity’s own equity instrument and is;
A derivative or non-derivative for which the entity is or may be obliged to receive a
variable number of the entity’s own equity instrument;
Financial
liabilities
A financial liabilities is any liability that is:
(a) A Contractual obligation :
I. To deliver cash or another financial Asset to another entity ; or
II. To exchange financial assets or financial liabilities with another entity under
condition that are potentially unfavorable to the entity ; or
(b) A contract that will may be settled in the entity’s own equity instrument and is:
I. A derivative or a non-derivative for which the entity is or may be obliged to
deliver a variable number of the entity’s own equity instrument
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PRESENTATION
Liabilities and
equities
The issuer should classify the instrument, on initial recognition as a financial
liability, a financial assets or an equity instrument in accordance with the
substance of the contract and the definitions of a financial liability, a financial
assets and an equity instrument.
The instrument is an equity instrument if, and only if, both conditions (a) and (b)
below are net.
(a) The instrument includes no contractual obligation:
I. To deliver cash or another financial assets to another entity; or
II. To exchange financial assets or financial liabilities with another entity
under conditions that is potentially unfavorable to the issuer.
(b) If the insurer will or may be settled in the issuer’s own equity instruments it
is :
I. A non-derivative that include no contractual obligation for the issuer to
deliver a variable number of its own equity instruments; or
II. A derivative that will be settled only by the issuer exchanging the fix
amount of cash or other financial assets for a fixed number of its own
equity instruments.
Settlement options: when a derivative financial instrument gives one party a choice
over how it is settled, it is a financial assets or a financial liability unless all of the
statement alternatives would result in it being an equity instrument
Treasury
shares
If an entity reacquires its own equity instrument, that instrument shall be deducted
from equity. No gain or loss on the purchase, sale, issue or cancellation of an entity’s
own equity instruments. Such treasury share may be acquired and held by the entity
or by other members of the consolidated group. Consolidation paid or received shall
be recognized directly in equity.
Compound
financial
instruments
The issuer of a non-derivative financial instrument shall evaluate the terms of the
financial instrument to determine whether it contains both a liability an equity
component.
The split is made on initial recognition of the instrument and is not subsequently
revised.
The equity component of the compound instrument is the residual the fair value of
the liability component from the fair value of the instrument as a whole.
No gain /loss arise from initial recognition.
Interest,
dividend,
losses and
gains
Interest, dividend, losses and gains relating to a financial instrument or a component
that is a financial liability shall be recognized as income or expense in profit or loss.
Distribution to holders of an equity instrument shall be recognized by the entity
directly in equity. Transaction cost of an equity transaction shall be accounted for as
a deduction from equity.
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Offsetting
financial
assets and
liability
a financial assets and financial liability shall be offset and the amount presented in
the balance sheet when, an entity
a) Currently has a legally enforceable right to set off the recognized
amounts; and
b) Intends either to settle on a basis, or to realize the assets and the
liability simultaneously.
In accounting for a transfer of financial assets that does not qualify for de
recognition, the entity shall not offset the transferred asset and the associated
liability.
Scope- Ind AS 109
Applied by all entities to all types of financial instruments except:
(a) Those interest in subsidiaries, associates and joint ventures that are accounted for in
accordance with in AS 21, AS 23 or AS 27.
(b) Rights and obligations under leases to which Ind AS 17 Applies.
(c) Employer’s rights and obligations under employee benefit plans to, which Ind AS 19.
(d) Financial instrument issued by the entity that meet the definitions of an entity instrument in
Ind AS 32 or that are required to be classified as an equity instrument in accordance with Ind
AS 32.
Initial recognition and measurement (financial asset and financial liabilities)
Initial
recognition
when the entity becomes party to the contractual provisions of the instrument
Initial
measurements
at fair value, plus for those financial assets and liabilities not classified at fair
value through profit or loss, directly attributable transaction costs.
- Fair value – is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date.
- Directly attributable transaction costs- incremental costs that costs are
directly attributed to the acquisition, issuer or disposal of a financial assets or
financial liability
Financial assets- subsequent classification and measurement
Amortized
cost
Category
classification
criteria
both of the below conditions must
(a) The financial assets is held within a business model whose objective
is to hold financial asset in order to collect contractual cash flows
and
(b) The contractual terms of the financial assets give rise on specified
dates to cash flow that are solely payments of principal and interest
on the principal amount outstanding.
i. Principal is the fair value of the financial assets at initial
recognition
ii. Interest consist of consideration for time value of money
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Effective
interest
method
Interest revenue shall be calculated by using the effective interest
method to the gross carrying amount of a financial assets except for:
(a) Purchased or originated credit impaired financial asset, for those
financial asset the entity shall apply the credit adjusted
effective interest rate of the amortized costs of the financial
assets from initial recognition.
(b) Financial assets that are not purchased or originated credit
impaired financial assets but subsequently have become credit
impaired financial assets. For those financial assets, the entity
shall apply the effective interest rate to the amortized cost of
the financial asset in subsequent reporting periods.
Modification
of
contractual
cash flows
when the contractual cash flow of a financial assets are recognition or
modified and the reorganization or modification dose not result in the
de recognition of that financial asset, an entity shall recalculate the
gross carrying amount of the financial asset and shall recognize a
modification gain or loss in profit or loss. Any costs or fees incurred
adjust the carrying amount of the modified financial assets and are
amortized over the remaining term of the modified financial asset.
Write off: An entity shall directly reduce the gross carrying amount of a financial
asset when the entity has no reasonable expectations of recovering a
financial asset in its entity or a portion thereof
Fair value
through
profit or
loss
Category
classification
criteria
- Financial assets that do not meet the amortized cost criteria
- Financial assets designated at initial recognition. The option to
designate is available:
o If doing so eliminates, or significantly reduces, a measurement or
recognition inconsistency (i.e..: accounting mismatch).
NOTE: the option to designate is irrevocable
Subsequent
measurement
At fair value, with all gains and losses recognized in profit and loss
Fair value
through
OCI
Equity instrument
category
classification
criteria
Only for equity instruments that are neither held for trading nor
contingent consideration recognized by an acquirer in a business
combination to which Ind AS103 applies
Subsequent
measurement
Fair value with all gains and losses recognized in OCI
Changes in fair values are not subsequently recycled to profit and loss
Dividend is recognized in profit and Loss
Debt instruments
category classification
criteria
Entity holds the instrument to collect contractual cash flow
and to sell the financial assets
Subsequent
measurement
Fair value, with all gains and losses recognized in other comprehensive
income.
Changes in fair value are not subsequently recycled to profit and loss
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IMPAIRMENT
Recognition
of expected
credit
losses
general
approach
An entity shall recognize a loss allowance for expected credit losses on
1. A financial assets that is measured at
a. Amortized cost or
b. Fair value through other comprehensive income in this case, the loss allowance
shall be recognized in OCI and shall not reduce the carrying amount of the
financial assets in the balance sheet.
2. A lease receivable
3. A contract assets
4. A loan commitment
5. A financial guarantee contract measurement of loss allowance:
- If credit ricks significantly increased since its initial recognition, then at an
amount equal to the life time expected credit losses.
- If credit ricks not significantly increased since its initial recognition, at an
amount equal to 12 month expected credit losses.
Simplified
approach
Measure the loss allowances at an amount equal to lifetime expected credit losses
for .
(a) Trade receivable or contracted asset that result from transaction that are
within the scope of Ind AS 115, and that:
i) Do not contain a significant financing component in accordance with Ind AS
115, or
ii) Contain a significant financing component in accordance with Ind AS 115, if
the entity chooses at its accounting policy to measure the loss amount equal
to lifetime expected credit losses. That accounting policy shall be applied to
all such trade receivables or contract assets but may be applied separately
to finance and operating lease receivables.
Measure expected credit losses of a financial instruments in a way that reflects:
(a) Unbiased and probability- weighted amount that is determined by evaluating a
range of possible outcomes.;
(b) lease receivable that result from transaction that are within the scope of Ind
As 17 , if the entity chooses as its accounting policy to measure the loss
allowances at an amount equal to lifetime expected credit loss. That
accounting policy shall be applied to all lease receivable but may be applied
separately to finance and operating lease receivables.
Measure expected credit losses of a financial instrument in a way reflected:
(a) an unbiased and probability – weighted amount that is determined amount that
is determinate by evaluating a range of possible outcomes;
(b) the time value of money; and
(c) Reasonable and supportable information that is available without undue cost or
effort at the reporting date about past events, current conditions and forecast
of future economic conditions.
FINANCIAL LIABILITIES
Amortized cost Category
classification
criteria
Financial liabilities, except those that meet the
criteria of fair value through profit or loss, Financial
guarantee contracts, and commitment to provide a
loan at a loan at below market interest rate.
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Subsequent
measurements
Amortized cost using the effective interest method
fair value through profit
and loss
Category
classification
criteria
Financial asset that do not meet the amortized
cost criteria
Financial asset designated at initial recognition.
The potion to designate is available:
o If doing so eliminates, or significantly (i.e.,
accounting mismatch)
NOTE: the option designate is irrevocable.
Subsequent
measurement
at fair value, with all gains and losses recognized in
profit and loss
(i) Financial guarantee
contracts and
(ii) Commitments to
provide a loan at a
below market interest
rate
Subsequent
measurement
(higher of)
(i) The amount of loss allowance determined and
(ii) The amount initially recognized less, when
appropriate, the cumulative amount of income
recognized in accordance with the principles of
Ind AS 115.
(iii) Financial liabilities
resulting from the
transfer of a
financial assets( that
does not qualify for
de recognition)
(where there is
continuing
involvement)
Financial liability for the consideration received is recognized.
If a transfer dose not results in de recognition, continue to
recognize the transferred asset in its entirety and shall recognize
a financial liability for the consideration received. Subsequently,
recognize any income on the transferred assets and any expense
incurred on the financial liability.
When an entity continues to recognize an asset to the extent of
its continuing involvement, the entity also recognizes an associated
liability. Despite the other measurement requirement in this
standard, the transferred asset and the associated liability are
measured on a basis that reflects the rights and the obligation
that the entity has retained. The associated liability is measured
in such a way that the net carrying amount of the transferred
assets and the associated liability is:
a) The amortized cost of the rights and obligations retained
by the entity, if the transferred asset is measured at
amortized cost, or
b) Equal to the faire value of the rights and obligations
retained by the entity when measured on a stand-alone
basis, if the transferred asset is measured at fair value
Embedded derivatives
Definition An embedded derivatives is a component of a hybrid contract that also
includes a non-derivative host- with the effect that some of the cash flow of
the combined instrument vary in a way similar to a standalone derivative
Hybrid contracts
with financial assets
hosts
The embedded derivative is not separated from the host contract instead,
the whole contracts in its entity is accounted for as a signal instrument
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Other hybrid
Contracts
If a hybrid contract contains a host that is not an asset within the
scope of this Standards , an embedded derivatives
1) Shall be separated from the host , and
2) Accounted for as a derivative
Criteria: to separate an embedded derivative
1) Economics characteristics of the embedded derivative and host
are not closely related
2) An identical instrument( with the same terms) would meet the
definition of a derivative, and
3) The entire (hybrid) contract is not measured at fair value through
profit or loss.
If an embedded derivative is separated, the host contract shall be
accounted for in accordance with the appropriate standards
COMPARATIVES
AS 1: Accounting Policies
Point of Difference AS 1 Ind AS 1
1 Compliance with AS Not required Disclose
2 Extraordinary items Disclose separately Prohibited
3 Opening balance sheet Not required In case of change in policy
4 Statement of change in equity Not required Required
5 Statement of Other Comprehensive
Income
Not required Below P&L
6 Comparative information Not required Required
AS 2: Inventory
Point of Difference AS 2 Ind AS 2
1 Inventory of Service Provider Excluded Included
2 Inventory of Commodity trader/ broker Included Excluded
3 Subsequent assessment of NRV Covered in AS 5 Covered in Ind AS 2
4 Inventory purchased on deferred basis Recorded at
purchase price
Purchase price less interest
chargeable beyond normal
credit period
5 Machine spares Defined Defined in Ind AS 16
AS 3: Cash flow statements
Point of Difference AS 3 Ind AS 7
1 Bank OD Financing Activity Cash Equivalent
2 Asset purchase and sale in rental
business
Investing Activity Operating Activity
3 Undistributed profits of associate Not covered Deduct from profit while
calculating cash flow from OA
4 Cash flow from Extra ordinary
Activity
Separately disclosed Not covered
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5 Sale of subsidiary stake without loss
of control
Investing Activity Financing Activity
6 Dividend paid in case of Financial
Enterprise
Operating Activity Financing Activity
AS 5: Change in policy, Prior period items and Change in Estimate
Point of Difference AS 5 Ind AS 8
1 Extraordinary items Covered Excluded
2 Accounting for change in
accounting policy
Retrospective calculation,
prospective accounting
Retrospective calculation
retrospective accounting
3 Change in accounting policy
in case required by statute
Covered Not covered
4 Prior period items Accounting in current year Accounting retrospectively
5 Disclosure requirement Comparatively less Comparatively more
AS 4: Events occurring after balance sheet date
Point of Difference AS 4 Ind AS 10
1 Non Adjusting Events Disclose in Directors
report
Disclose in notes to accounts
2 Proposed dividend Recognize in BS Disclose in notes to accounts
3 Going concern Restate balance sheet Fundamental change in basis of
accounting
4 Breach rectified later of long
term loan arrangement
Not covered Continue to classify as long term
loan
AS 22: Income Taxes
Point of Difference AS 22 Ind AS 12
1 Approach Income Balance Sheet
2 DTA related to losses and
unabsorbed Depreciation
Virtual certainty with
convincing evidence
Probable benefits in future
3 Disclosure Separately Noncurrent asset/ liability
4 Revaluation of Fixed Asset No DTL/DTA DTL @ sale of asset rather
than through use
5 Guideline on change in tax status
of entity
Not covered Covered
6 Deferred taxes related to tax
holiday period
Covered Not covered
AS 15: Employee Benefits
Point of Difference AS 15 Ind AS 19
1 Constructive (Assumed) Obligation Not Covered Covered
2 Directors in Definition Only whole time All
3 Short term employee benefit Due within 12 months
from date of
rendering service
Due within 12 months from
date of reporting date
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4 Surplus funds accounting in Multi
employer plan
Not covered Covered
5 Contribution to multi employer fund Not related party Related party transaction
6 Actuary valuation Over regular interval Ones in every three years
7 Actuarial gains/ losses Recognized In P&L Recognized In OCI
AS 19: Leases
Point of Difference AS 19 Ind AS 17
1 Land Lease Not Covered Covered
2 Property other than investment property held
for operating lease
Not Covered Covered
3 Biological asset other than Agriculture Activity Not covered Covered
4 Initial transaction cost for Mfg./ Dealer P&L OL- Amortize
FL- P&L
5 Initial transaction cost for Others Option to Amortize
or charge to P&L
Amortize
6 Cost incurred between inception and
commencement of lease
Not covered Covered
7 Accounting for incentives Not defined Defined
8 Escalation in lease rent under Operating lease Straight lined Other than related to
inflation straight lined
AS 12: Government Grant
Point of Difference AS 12 Ind AS 20
1 Government Assistance Not Covered Covered
2 Non Depreciable asset received at
concessional price
Nominal Value Fair Value
3 Deferment of Govt. Grant related to non
depreciable asset
Not required Covered
4 Deferment of Govt. Grant related to
Promoters Contribution
Not required Covered
5 Loans at concessional rate Recognized at full
amount
Recognized at discounted
amount
AS 11: Foreign Exchange Fluctuation
Point of Difference AS 11 Ind AS 21
1 Forward Exchange Contracts Covered Not covered
2 FCMITDA Covered Not Covered
3 Currency Type 1. Reporting
Currency
2. Foreign Currency
1. Functional Currency
2. Presentation Currency
3. Foreign Currency
AS 16: Borrowing Cost
Point of Difference AS 16 Ind AS 23
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1 Fair Value Assets Not Excluded Not covered
2 Repetitive inventory Covered Not Covered
3 Interest rate Weighted Avg. for GL
and Specific for SL
Effective interest rate
4 Substantial period of time Not Defined Defined
5 Disclosure of Capitalization rate Not required Required
AS 18: Related Party Disclosure
Point of Difference AS 18 Ind AS 24
1 Domestic Partner Not covered Covered
2 State Controlled Enterprise Control of CG/SG Control or Significant
influence of CG/SG
3 KMP of holding in case of subsidiary Not covered Covered
4 JV to JV, JV to Associate Not Covered Covered
5 Post Employment Plans Not covered Covered
6 Compensation to KMP Disclose in aggregate Disclose each type separately
7 Govt. Related Entities Exempted Covered
AS 20: Earnings Per Share
Point of Difference AS 20 Ind AS 33
1 Options related to own share Not covered Covered
2 Basic and Diluted EPs of Continuing
and Discontinued Operations
Aggregate Separately
3 Extra Ordinary Items Separately Not covered
AS 25: Interim Financial Reporting
Point of Difference AS 25 Ind AS 34
1 Compliance If interim report
prepared
Interim report not necessarily
as per Ind AS 34
2 Change in Equity Not Required Required
3 Reversal of Impairment Loss related
to Goodwill
Permitted Not permitted
4 Parents Separate Financial
Statements in case of CFS
Present both Separate financial statement
not required
5 Dividend related to equity and other
shares
Aggregate Separately
6 Contingent Assets Not disclosed Disclosed
7 Extraordinary items Required Prohibited
8 Comparatives in case of change in
policy
Not revised Revised
AS 28: Impairment Loss
Point of Difference AS 28 Ind AS 36
1 Financial assets like subsidiary, JV
and Associate
Not covered Covered
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2 Biological Assets Not excluded Agriculture related not
covered
3 Intangible Asset with indefinite Life Not tested every year Tested for impairment every
year
4 Reversal of Goodwill Permitted Not permitted
5 Bottom up and Top down test Covered Not covered as goodwill is
always allocable
AS 29: Contingent Liabilities
Point of Difference AS 29 Ind AS 37
1 Constructive Obligation Not Covered Covered
2 Discounting Prohibited Permitted
3 Contingent Assets Not disclosed Disclosed
4 Onerous Contracts No specific guidelines IL to be provided
AS 26: Intangible Assets
Point of Difference AS 26 Ind AS 38
1 Definition Held for use in admin or
production or rental
No such requirement
2 Assumed probable benefit No such assumption If IA is purchased
3 Payment on deferred basis Recorded at purchase
price
Purchase price less
interest
4 Exchange of assets No guidelines FV of asset given
5 Government Grant Recorded at nominal value Fair Value
6 Indefinite Life asset Amortized within 10yrs Not amortized, tested
for impairment
7 Cessation, de-recognition guidelines Not provided Provided
8 Fair Value model Not given Given
9 Amortization over Useful life vs. legal
life
Legal life Useful life
10 Residual value Not checked annually Checked annually, no
amortization if value
more than CA
AS 13: Investments
Point of Difference AS 13 Ind AS 40
1 Coverage All type of
Investments
Only properties
AS 24: Discontinuing Operations
Point of Difference AS 24 Ind AS 105
1 Scope Discontinuing
Operations
Discontinued Operations and
Asset Held For Sale
2 Cash flow statement Separate disclosure No such requirement
3 Time period Not defined 12 months
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4 Initial Disclosure Event Defined Not required
5 Measurement of Asset held for
disposal
Defined in AS 10 Cost or FV wel
6 Abandonment of Asset Considered as
discontinuing
Disclosed Separately
7 Reclassification as continued asset Not defined Defined
AS 17: Segment Reporting
Point of Difference AS 17 Ind AS 108
1 Identification of Segment Risk and Return
Approach
Management Approach
2 Basis of Measurement As per accounting
policies defined
As defined by Chief
Operating Decision Maker
3 Aggregation criteria Not defined Defined
4 Single reportable segment No disclosure Certain disclosures
5 Interest Expense Not presented Presented
AS 7: Construction Contracts
Point of Difference AS 7 Ind AS 11
1 Borrowing Cost Included as per AS 16 No specific reference
2 Fair Value Not recognized Revenue recognized at FV
3 Service concession arrangement Not specified Recognize as expense
AS 27: Joint Venture
Point of Difference AS 27 Ind AS 111
1 Type 1. Jointly controlled operations
2. Jointly controlled assets
3. Jointly controlled entities
1. Joint operation
2. Joint venture
2 Equity method Only proportionate
consolidation method
Equity method defined
3 Near future disposal Considered joint venture Not considered joint venture
4 Applicability Only in case of CFS Applied in other than
separate financial
statements
5 Post acquisition reserves Disclosed No such requirement
AS 21: Consolidation
Point of Difference AS 21 Ind AS 110
1 Mandatory No Yes
2 Control One half of voting rights Investor controls investee
3 More than one parent Disclose Cannot be more than one parent
4 Difference in reporting
dates
Not more than 6 months 3 months
5 Non controlling interest Presented separately other
than equity and liability
Presented separately in equity
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6 Potential voting rights Not covered Defined
7 Temporary investment Not considered subsidiary No such exemption
AS 23: Investment in Associate
Point of Difference AS 23 Ind AS 28
1 Significant influence Does not include joint control Includes joint control
2 Potential equity shares Not considered Considered
3 Equity method Only if CFS prepared Statement other than separate
financial statement
4 Exemption If fund transfer restriction No such exemption
5 Near future saleable Not considered as Associate Covered under Ind AS 105
6 Difference in reporting
dates
Can be any period 3 months
7 Uniform accounting policies Not necessary required
AS 14: Amalgamation
Point of Difference AS 14 Ind AS 103
1 Method of accounting Pooling of interest and
purchase method
Purchase method
2 Asset and liability under
purchase method
Cost of fair value Fair value
3 Amortization of goodwill 5yrs Not amortized
4 Reverse acquisition Not covered covered
5 Contingent consideration Not Covered Covered
6 Bargain purchase gain Capital Reserve Other Comprehensive income
AS 10: Property, Plant and Equipment
Point of Difference AS 10 Ind AS 16
1 Assets held for disposal Covered Covered under Ind AS 105
2 Stripping cost in mine Not covered covered
AS 9: Revenue
Point of Difference AS 9 Ind AS 18
1 Definition From goods, services etc. Which result in increase in
equity
2 Measurement Nominal value Fair value
3 Barter Not covered Covered
4 Interest Accrual basis Effective interest method
5 Customer loyalty program Not covered Covered
6 Excise duty Deduct from revenue Not specifically provided
7 Disclosure Comparatively less Comparatively more
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Carve outs
Point of difference Ind AS IAS
1 Breach of Long term loan
arrangement which is
rectified
Ind AS 1
Disclose as long term loan
arrangement
IAS 1
Classify as current
2 Rectification of breach Ind AS 10
Non-adjusting event
IAS 10
Adjusting event
3 Escalation in Operating lease
rental
Ind AS 17
Do not straight line if at par
with inflation
IAS 17
Do not straight line if it
represents the time pattern
systematically
4 Construction of real estate Ind AS 18
Proportionate completion
method
IFRIC 15
Treat as sale of goods
5 Uniform accounting policies
while consolidating associate
Ins AS 28
Unless impracticable to do so
IAS 28
Compulsory
6 Foreign currency
denominated convertible
bonds
Ind AS 32
Equity component
IAS 32
Liability component
7 Carrying amount of property
plant and equipment on first
time adoption
Ind AS 101
Continue as per historical cost
and determine fair value in
future
IFRS 1
Apply fair value retrospectively
8 Para 46A on long term
monetary asset
Ind AS 101
Continue as per Para 46A
No such provision
9 Gain while acquiring
subsidiary
Ind AS 103
Recognize in OCI and transfer
to reserve
IFRS 3
Recognize in P&L
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GUIDANCE NOTE ON DERIVATIVES
Q. ABC Ltd. is an exporter of goods. In the month of July 2013, it receives the order for
supply of goods to US customers in the month of January 2014 and as per the payment cycle
with the customers; it expects to realize USD 100,000 in April 2014.
ABC Ltd has decided to fully hedge the sales from foreign currency risk. Immediately after
getting the order, to hedge the firm commitment in foreign currency it enters into a derivative
transaction with XYZ Bank, for future sale of USD 100,000 in the month of April 2014 @ Rs.
65 per USD (Spot Rate was Rs. 64.50 per USD).
For this purpose, it is assumed that the company has entered into a cash flow hedge, which is
generally the case for hedging foreign currency risk.
Further, it is assumed that:
1. At the time of booking of sale in January 2014, the USD rate was Rs. 61, and forward
rate for delivery on April 30, 2014 was Rs. 61.20.
2. On the reporting date on March 31, 2014, the USD rate was Rs. 60.50 and forward
rate for delivery on April 30, 2014 was Rs. 60.60.
3. At the time of realization USD rate was Rs. 60/- on April 30, 2014.
The above transaction should be accounted in the following manner (impact of discounting of
MTM of the hedging instrument has been ignored in this simplified illustration).
ABC Limited entered to sell a forward exchange
contract for USD 100,000 having ten months
maturity on April 30, 2014
Forward Exchange Rate
Spot Rate as at July 01, 2013
No entry in the books
65.00
64.50
Upto January
31,
2014
ABC Limited accounts the MTM effect in the
books
Forward Contract Rate Entered
Forward Contract Available in the market with
similar maturity
65.00
61.20
Forward Contract Receivable
To Cash Flow Hedge Reserve
380,000
380,000
January 31,
2014
ABC Limited recognizes the revenue by booking an
invoice for USD 100,000, having credited period of
90 days (i.e. due date –
April 30, 2014)
Spot rate as at January 31, 2014
Forward Contract Available in the Market with
similar maturity
61.00
61.20
Recognition of Revenue
Accounts Receivable
To Revenue
61.00,000
61,00,000
Recognition of Hedging gain
Cash Flow hedge reserve
To Statement of Profit & Loss
380,000
380,000
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March 31,
2014
Spot Rate
Forward Contract Available in the
Market with similar maturity
60.50
60.60
Restatement of Accounts Receivable
Forex Gain/Loss (P&L)
To Accounts Receivable
50,000
50,000
MTM Effect of Forward Cover
Forward Contract Receivable
To Forex Gain/Loss (P&L)
60,000
60,000
April 30,
2014
Spot rate
Realization of Accounts Receivable
Bank
Forex Gain/Loss (P&L)
To Accounts Receivable
60.00
60,00,000
50,000
60,50,000
Maturity of Forward Contract
Bank
To Forward Contract Receivable
To Forex Gain/Loss (P&L)
5,00,000
4,40,000
60,000
Guidance note on Accounting for Corporate Social
Responsibility
• Applicability
Section 135 of the Companies Act, 2013 (the Act)
Every company having a
– net worth of Rupees 500 crore or more, or
– turnover of Rupees 1,000 crore or more or
– a net profit of Rupees 5 crore or more, during any financial year,
Spends in every financial year atleast 2% of the average net profits of the company made during the
three immediately preceding financial years on Corporate Social Responsibility (CSR)
Net Profit
Additions to be made
1. Subsidy and bounties by CG
2. Profit on sale of Assets of company
Additions not to be made
1. Premium on shares or debentures;
2. profits on sales by the company of forfeited shares;
3. Profit on sale of undertaking
4. profits from the sale of any immovable property
5. Revaluation on fixed assets in book
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Deductions to be made
1. Usual working charges
2. Directors remuneration
3. Bonus or commission
4. Tax levied by CG other than IT
5. Interest on debenture/ unsecured loan/ mortgages
6. Repairs
7. Charity contribution under section 181
8. Depreciation
9. Loss of PY after commencement of act
10. Legal liability
11. Bad debts
12. Loss on sale of Fixed Assets
Deductions not to be made
1. Income tax or surcharge
2. Loss on sale of undertaking
3. Voluntary compensation for damages
4. Devaluation of assets in books
• If expenditure not made- Specify the reason in Directors Report
• Contractual obligation taken but payment not made- create a provision of the same
• What if paid in excess of 2% - expense off, no carry forward permitted
• How to accomplish CSR activities?
– making a contribution to the funds as specified in Schedule VII to the Act
– through a registered trust or a registered society or a company established under
section 8 of the Act (or section 25 of the Companies Act, 1956) by the company, either
singly or along with its holding or subsidiary or associate company or along with any
other company or holding or subsidiary or associate company of such other company, or
otherwise
– in any other way in accordance with the Companies (Corporate Social Responsibility
Policy) Rules, 2014, e.g. on its own
• What if expense leads to creation of asset?
– If ownership is transferred, derecognize
– If ownership is retained, since no economic benefits will flow to the enterprise, asset is
to be derecognized
• How to determine cost is specific cases
– Own manufactured goods transferred
1. Determine expense as per AS 2
2. Indirect tax also to be included in cost
– Service has been rendered
1. Determine at cost incurred in providing service
• Income earned from CSR projects
– Recognized as income in P&L
– Transferred to liability for CSR immediately by debiting P&L
– Not to form part for 2% calculation of profits
• Schedule VII
– eradicating hunger, poverty and malnutrition, promoting health care including
preventive health care and sanitation including contribution to the Swach Bharat Kosh
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set-up by the Central Government for the promotion of sanitation and making available
safe drinking water;
– promoting education, including special education and employment enhancing vocation
skills especially among children, women, elderly and the differently abled and livelihood
enhancement projects;
– hostels for women and orphans; setting up old age homes, day care centres and such
other facilities for senior citizens and measures for reducing inequalities faced by
socially and economically backward groups;
– ensuring environmental sustainability, ecological balance, protection of flora and fauna,
animal welfare, agro forestry, conservation of natural resources and maintaining quality
of soil, air and water2 including contribution to the Clean Ganga Fund set-up by the
Central Government for rejuvenation of river Ganga;
– protection of national heritage, art and culture including restoration of buildings and
sites of historical importance and works of art; setting up public libraries; promotion
and development of traditional arts and handicrafts
– measures for the benefit of armed forces veteran, war widows and their dependents;
– training to promote rural sports nationally recognized sports, Paralympic sports and
Olympic sports;
– contribution to the Prime Minister's National Relief Fund or any other fund set up by
the Central Government for socio-economic development and relief and welfare of the
Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and
women;
– contributions or funds provided to technology incubators located within academic
institutions which are approved by the Central Government;
– rural development projects;
– slum area development
Guidance note on Accounting for Depreciation
-CA. Sumit L. Sarda
1. Shift from rate based to useful life
Useful life to be same as given in Part C of Schedule II
If considered to be different
a. Give disclosure of the fact
b. Provide justification
Example 1
A Limited is a company incorporated under the Companies Act, 1956, engaged in the business of
manufacturing of toys. A Limited purchased a unit of machinery costing Rs. 60 lakhs as on April 01,
2014. As per Schedule II the general useful life of the assets is 15 years. However, as per A Ltd.’s
estimation, the useful life of the asset is 20 years supported by the technical advice. Issue: Should
the company use the useful life as 15 years or 20 years?
Answer
In this case, keeping in view the requirements under Schedule II, A Ltd. should depreciate the
machinery over its useful life of 20 years as determined by the company and not over 15 years as
indicated in Schedule II.
A limited should also provide disclosures in this regard as recommended later in this Guidance Note in
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the notes to accounts to justify the reason for difference between the indicative use life and A’s
estimated useful life.
Example 2
B Limited had considered the minimum rates of depreciation mentioned in Schedule XIV for
depreciating all its fixed assets till March 31, 2014. Based on the rates mentioned for SLM and WDV
in Schedule XIV, B Limited had derived the useful lives for the assets. Schedule II of the Companies
Act, 2013 is now applicable to B Limited w.e.f. April 1, 2014
Whether B Limited needs to follow the useful lives mentioned in the Schedule II or derived useful
lives considered till March 31, 2013 can be considered?
Answer
W.e.f. April 1, 2014, B limited should estimate the remaining useful lives of its assets based on the
definition of useful life in Schedule II and the factors specified in AS 6 for recognizing depreciation
in the statement of profit and loss. There is no relevance of the derived useful life as per Schedule
XIV. However, if B Limited estimates useful lives different from those specified in Schedule II, it
should disclose such differences in the financial statements and provide justification in this behalf
duly supported by technical advice.
2. Residual value of the asset
Can be equal to or lower than 5% of original cost
If considered to be higher
a. Disclose the fact
b. Provide justification
3. CPP and NESD
Continuous process plant and No extra shift depreciation plant
- Depreciation as per Schedule II
Multiple shift plant
- Double shift: Increase depreciation by 50%
- Triple shift: Increase depreciation by 100%
4. Unit of production method
Permissible where appropriate
Example 3
A Limited is a company incorporated under the Companies Act and engaged in the business of oil
exploration. Keeping in view the requirement in Schedule XIV it was depreciating its oil and gas
assets on SLM basis. In the financial year 2014-15, when A applies Schedule II it decides to
depreciate the said assets by following the UOP method.
Issue: How should change in method be accounted for?
Answer
In this case, in accordance with AS 6, A Limited should calculate depreciation on all such assets
following the UOP method since the assets came into existence and recognize any deficiency/gain in
the statement of profit and loss for the period ending on March 31, 2015.
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5. Transition
Existing asset
a. Depreciate as per remaining useful life left
b. If no useful life left: adjust assets value to General reserve
New asset/ second hand asset
a. Depreciate as per life mentioned in schedule II
Example 4
Limited has followed Schedule XIV rates for depreciation of a plant and machinery under WDV
method by following the rate of 13.91% as it runs under single shift. The WDV of the asset as at
March 31, 2014 is Rs.23,63,919 and remaining useful life as estimated by the company is 11 years. B
Limited estimates that the residual value of the asset is 5% of the original cost of the asset, i.e., Rs.
2,50,000.
Issue: On transition to Schedule II, how plant and machinery should be depreciated?
Answer
As per the transitional provisions given under Schedule II assets are required to be depreciated over
their remaining useful lives. In the above case, since B Ltd follows WDV method for depreciation, the
carrying value of Rs. 23,63,919 of plant and machinery should be depreciated by following the WDV
method over its remaining useful life of 11 years. B Limited should determine the rate of depreciation
to be charged under WDV method as follows:
Rate of Depreciation: {1- (Residual Value/Cost of the Asset)^1/useful life}*100
Rate of Depreciation in the above case = {1- (2,50,000/23,63,919)^1/11}*100
=18.47 %
Year Carrying value Depreciation WDV
1 2363919 4,36,690.25 19,27,228.75
2 1927228.75 3,56,019.82 15,71,208.93
3 15,71,208.93 2,90,251.75 12,80,957.19
4 12,80,957.19 2,36,633.11 10,44,324.07
5 10,44,324.07 1,92,919.53 8,51,404.54
6 8,51,404.54 1,57,281.22 6,94,123.32
7 6,94,123.32 1,28,226.43 5,65,896.90
8 5,65,896.90 1,04,538.97 4,61,357.93
9 4,61,357.93 85,227.33 3,76,130.59
10 3,76,130.59 69,483.16 3,06,647.43
11 3,06,647.43 56,647.43 2,50,000.00
Example 5
B Limited purchased a unit of plant and machinery on April 1, 2005, and depreciated the same at the
rate of 4.75% on straight line basis as per the depreciation rate given in Schedule XIV (equivalent
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useful life approximately 21 years), even though the useful life as estimated by the management at
the time of initial recognition of the asset was higher (30 years). For the financial year beginning on
April 1, 2014, when B Limited applies Schedule II, it estimates that the remaining useful life of the
plant and machinery as on April 1, 2014, is 18 years, which is different from the useful life remaining
as per Schedule XIV i.e., 12 years.
Issue: Which remaining useful life of plant and machinery should be considered by the B Limited to
provide depreciation?
Answer
B Limited should depreciate the plant and machinery over its estimated remaining useful life of 18
years on prospective basis and not on the basis of remaining useful life as per Schedule XIV, i.e., 12
years (21 years – 9 years).
Example 6
B Limited purchased machinery as on April 1, 2005 and depreciated the same on straight line method
as per the depreciation rates given in Schedule XIV. For the financial year beginning on April 1, 2014,
when B Limited applies Schedule II, it estimates that the remaining useful life of machinery is nil and
requires to be disposed off.
Issue: What should be the treatment of carrying amount of machinery?
Answer
The carrying amount of machinery (net of tax) may be recognized in the opening balance of the
retained earnings as on April 01, 2014.
Example 7
B Limited, a company incorporated under the Companies Act, acquired a second hand machinery for
Rs. 5,00,000 from C Limited As per the estimate of the C Limited, the useful life of the asset when
it was newly purchased by it was 15 years out of which 8 years have already elapsed (duration for
which machinery is used by the C Limited). B Limited, for the purpose of providing depreciation on
SLM basis under Schedule II, estimates that the asset can be used for 10 years and the residual
value is estimated to be nil.
What useful life of such second hand machinery should be considered by the B Limited for providing
depreciation?
Answer
In this case, B Limited should provide for depreciation on the machinery on the basis of useful life of
10 years and not 7 years remaining as per the earlier estimate of C Ltd. (15 years – 8 years).
Therefore, depreciation expense to be recognized in the statement of profit and loss for the year
would be Rs. 50,000 (5,00,000/10 yrs.).
6. Intangible Assets
Depreciation as per schedule II
Only Toll roads may use revenue based methodology
Example 8
B Limited is a company engaged in various projects of infrastructure development. B’s basic business
model is to enter into various infrastructure development projects with the Central and State
Governments controlled enterprises under Public Private Partnership (PPP) Model. During the year
2011-12, B Limited entered into a contract with the State Government of Haryana for developing a
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coal-fired thermal power plant serving the states of Haryana, Delhi, Rajasthan and Punjab.
At the year-end, i.e., 31st March, 2015, for providing amortization on the intangible assets arising
from the above-mentioned projects for developing thermal power plant, B Limited was of the view
that the revenue based amortization methodology as permitted by the Schedule II may be applied.
Whether the view taken by B Limited is appropriate?
Answer
In this case, use of revenue-based amortization is inappropriate as Schedule II permits revenue
based amortization only for intangible assets arising from toll road projects and not from any other
infrastructure projects even though they are entered into through PPP model, BOT or BOOT.
7. Revaluation
Depreciation to be provided on substituted figure
Amortization of revaluation surplus shall be made to revenue reserve and not P&L
8. Component approach
As per revised AS 10
Schedule III presentation and disclosure
As per Companies ACT
Ind AS related Changes are highlighted and marked bold, others are old schedule III
GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET:
(pehle Assets dikhana and then Equity and Liability)
1. An entity shall classify an asset as current when-
(a) it expects to realise the asset, or intends to sell or consume it, in its normal
operating cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realise the asset within twelve months after the reporting period; or
(d) the asset is cash or a cash equivalent unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve months after the reporting period.
An entity shall classify all other assets as non-current.
2. The operating cycle of an entity is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents, When the entity's normal
operating cycle is not clearly identifiable, it is assumed to be twelve months.
3. An entity shall classify a liability as current when-
(a) it expects to settle the liability in its normal operating cycle;
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(b) it holds the liability primarily for the purpose of trading;
(c) the liability is due to be settled within twelve months after the reporting period; or
(d) it does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period. Terms of a liability that could, at the option
of the counterparty, result in it settlement by the issue of equity instruments do not affect
its classification.
An entity shall classify all other liabilities as non-current.
4. A receivable shall be classified as a 'trade receivable' if it is in respect of the amount due
on account of goods sold or services rendered in the normal course of business.
5. A payable shall be classified as a 'trade payable' if it is in respect of the amount due on
account of goods purchased or services received in the normal course of business.
6. A company shall disclose the following in the Notes:
A Non-Current Assets
l. Property. Plant and Equipment : (name changed)
(i)Classification shall be given as:
(a) Land
(b) Buildings
(c) Plant and Equipment
(d) Furniture and Fixtures
(e) Vehicle
(f) Office equipment
(g) Bearer Plants
(h) Others (specify nature)
(ii) Assets under lease shall be separately specified under each class of assets
(iii) A reconciliation of the gross and net carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions, disposals, acquisitions through
business combinations and other adjustments and the related depreciation and impairment
losses or reversals shall be disclosed separately.
ll. Investment Property:
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A reconciliation of the gross and net carrying amounts of each class of property at the
beginning and end of the reporting period showing additions, disposals, acquisitions through
business combinations and other adjustments and the related depreciation and impairment
losses or reversals shall be disclosed separately.
III. Goodwill: (To be shown separately from other ITA)
A reconciliation of the gross and net carrying amount of goodwill at the beginning and end
of the reporting period showing additions, impairments, disposals and other adjustments.
IV. Other Intangible assets
(i) Classification shall be given as:
(a) Brands or trademarks
(b) Computer software
(c) Mastheads and publishing titles
(d) Mining rights
(e) Copyright, patents, other intellectual property rights, services and operating
rights
(f) Recipes, formulae, models, designs and prototypes
(g) Licenses and franchises
(h) Others (specify nature)
(ii) A reconciliation of the gross and net carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions, disposals, acquisitions through
business combinations and other adjustments and the related amortization and impairment
losses or reversals shall be disclosed separately.
V. Biological Assets other than bearer plants:
A reconciliation of the carrying amounts of each class of assets at the beginning and end of
the reporting period showing additions, disposals, acquisitions through business combinations
and other adjustments shall be disclosed separately.
VI. Investment
(i) Investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investments in Preference Shares;
(c) Investments in Government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
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(f) Investments in partnership firms; or
(g ) Other investments (specify nature)
Under each classification, details shall be given of names of the bodies corporate that are-
(i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) structured entities(name changed
from SPE), in whom investments have been made and the nature and extent of the
investment so made in each such body corporate (showing separately investments which are
partly-paid). lnvestment in partnership firms alongwith names of the firms, their partners,
total capital and the shares of each partner shall be disclosed separately.
(ii) The following shall also be disclosed:
(a) Aggregate amount of quoted investment and market value thereof:
(b) Aggregate amount of unquoted investment: and
(c) Aggregate amount of impairment in value of investment.
VII. Trade Receivables:
(i) Trade receivables shall be sub-classified as;
(a) Secured, considered good;
(b) Unsecured considered good; and
(c) Doubtful
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads
separately.
(iii) Debts due by directors or other officers of the company or any of them either
severally or jointly with any other person or debts due by firms or private companies
respectively in which any director is a partner or a director or a member should be
separately stated.
VIII. Loans;
(i) Loans shall be classified as -
(a) Security Deposits;
(b) Loans to related parties (giving details thereof); and
(c) Other loans (specify nature).
The above shall also be separately sub-classified as-
(a) Secured, considered good;
(b) Unsecured, considered good; and
(c) Doubtful. Allowance for bad and doubtful loans shall be disclosed under the relevant
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heads separately.
(ii) Loans due by directors or other officers of the company or any of them either severally
or jointly with any other persons or amounts due by firms or private companies respectively
in which any director is a partner or a director or a member should be separately stated.
IX. Bank deposits with more than 12 months maturity shall be disclosed under 'Other
financial assets';
X. Other non-current asset: Other non-current assets shall be classified as-
(i) Capital Advances; and
(ii) Advances other than capital advances;
(1) Advances other than capital advances shall be classified as:
(a) Security Deposits;
(b) Advances to related parties (giving details thereof; and
(c) Other advances (specify nature).
(2) Advances to directors or other officers of the company or any of them either
severally or jointly with any other persons or advances to firms or private
companies respectively in which any director is a partner or a director or a
member should be separately stated, ln case advances are of the nature of a
financial asset as per relevant Ind AS, these are to be disclosed under other
financial assets separately.
(iii) Others (specify nature)
B. Current Assets
I. Inventories:
(i) Inventories shall be classified as-
(a) Raw materials;
(b) Work in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) stores and spares;
(f) Loose tools; and
(g) Others (specify nature).
(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
(iii) Mode of valuation shall be stated.
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II. Investment;
(i) Investments shall be classified as-
(a) Investments in Equity lnstruments;
(b) lnvestment in Preference Shares;
(c) lnvestment in government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) lnvestment in partnership firms; and
(g) Other investments (specify nature).
Under each classification, details shall be given of names of the bodies corporate that are -
(i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) structured entities(changed from
SPE), in whom investments have been made and the nature and extent of the investment so
made in each such body corporate (showing separately investments which are partly - paid)
(ii) The following shall also be disclosed
(a) Aggregate amount of quoted investments and market value thereof;
(b) Aggregate amount of unquoted investments;
(c) Aggregate amount of impairment in value of investments,
III. Trade Receivables
(i) Trade receivables shall be sub-classified as:
(a) Secured, considered good;
(b) Unsecured considered good; and
(c) Doubtful.:
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads
separately.
(iii) Debts due by directors or other officers of the company or any of them either
severally or jointly with any other person or debts due by firms or. private companies
respectively in which any director is a partner or a director or a member should be
separately stated.
IV. Cash and cash equivalents:
Cash and cash equivalents shall be classified as -
a. Balances with Banks (of the nature of cash and cash equivalents);
b. Cheques, drafts on hand;
c. Cash on hand; and
d. Others (specify nature).
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V. Loans;
(i) Loans shall be classified as:
(a) Security deposits;
(b) Loans to related parties (giving details thereof); and
(c) others (specify nature).
(ii) The above shall also be sub -classified as -
(a) Secured, considered good;
(b) Unsecured, considered good; and
(c) Doubtful.
(iii) Allowance for bad and doubtful loans shall be disclosed under the relevant heads
separately.
(iv) Loans due by directors or other officers of the company or any of them either
severally or jointly with any other person or amounts due by firms or private companies
respectively in which any director is a partner or a director or a member shall be separately
stated.
VI. Other current assets (specify nature):
This is an all-inclusive heading, which incorporates current assets that do not fit into any
other asset categories. Other current assets shall be classified as-
(i) Advances other than capital advances
(1) Advances other than capital advances shall be classified as:
(a) Security Deposits;
(b) Advances to related parties (giving details thereof);
(c) Other advances (specify nature)
(2) Advances to directors or other officers of the company or any of them either
severally or jointly with any other persons or advances to firms or private companies
respectively in which any director is a partner or a director or a member should be
separately stated.
(a) Earmarked balances with banks (for example. for unpaid dividend) shall be separately
stated.
(b) Balances with banks to the extent held as margin money or security against the
borrowings, guarantees, other commitments shall be disclosed separately.
(c) Repatriation restrictions, if any, in respect of cash and bank balances shall be separately
stated.
D. Equity- (name changes from share capital)
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I. Equity Share Capital: For each class of equity share capital:
(a) the number and amount of shares authorized;
(b) the number of shares issued, subscribed and fully paid, and subscribed but not fully
paid;
(c) par value per Share;
(d) a reconciliation of the number of shares outstanding at the beginning and at the
end of the period;
(e) the rights, preferences and restrictions attaching to each class of shares including
restrictions on the distribution of dividends and the repayment of capital;
(f) shares in respect of each class in the company held by its holding company or its
ultimate holding company including shares held by subsidiaries or associates of the holding
company or the ultimate holding company in aggregate;
(g) shares in the company held by each shareholder holding more than five per cent.
shares
specifying the number of shares held;
(h) shares reserved for issue under options and contracts or commitments for the sale
of shares or disinvestment, including the terms and amounts;
(i) for the period of five years immediately preceding the date at which the Balance
Sheet is prepared
• aggregate number and class of shares allotted as fully paid up pursuant to
contract without payment being received in cash;
• aggregate number and class of shares allotted as fully paid up by way of bonus
shares; and
• aggregate number and class of shares bought back;
(j) terms of any securities convertible into equity shares issued along with the earliest
date of conversion in descending order starting from the farthest such date;
(k) calls unpaid (showing aggregate value of calls unpaid by directors and officers);
(l) forfeited shares (amount originally paid up).
II. Other Equity: (name changed from R&S)
(i) Other Reserves' shall be classified in the notes as-
(a) Capital Redemption Reserve;
(b) Debenture Redemption Reserve;
(c) Share Options Outstanding Account; and
(d) others- (specify the nature and purpose of each reserve and the amount in
respect thereof);
(Additions and deductions since last balance sheet to be shown under each of the specified
heads)
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(ii) Retained Earnings represents surplus i.e. balance of the relevant column in the Statement
of Changes in Equity;
(iii) A reserve specifically represented by earmarked investments shall disclose the fact that
it is so represented;
(iv) Debit balance of Statement of Profit and Loss shall be shown as a negative figure under
the head 'retained earnings'. Similarly, the balance of 'Other Equity', after adjusting negative
balance of retained earnings, if any, shall be shown under the head 'Other Equity' even if the
resulting figure is in the negative; and
(v) Under the sub-head 'Other Equity', disclosure shall be made for the nature and amount
of each item.
E. Non-Current Liabilities- (name changed)
I. Borrowings:
(i) borrowings shall be classified as-
(a) Bonds or debentures
(b) Term loans
(I) from banks
(lI) from other Parties
(c) Deferred payment liabilities
(d) Deposits.
(e) Loans from related parties
(f) Long term maturities of finance lease obligations
(g) Liability component of compound financial instruments
(h) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured. Nature of
security shall be specified separately in each case.
(iii) where loans have been guaranteed by directors or others, the aggregate amount of
such loans under each head shall be disclosed;
(iv) bonds or debentures (along with the rate of interest, and particulars of
redemption or conversion, as the case may be) shall be stated in descending order of
maturity or conversion, starting from farthest redemption or conversion date, as the case
may be, where bonds/debentures are redeemable by installments, the date of maturity for
this purpose must be reckoned as the date on which the first installment becomes due;
(v) particulars of any redeemed bonds or debentures which the company has power to
reissue shall be disclosed;
(vi) terms of repayment of term loans and other loans shall be stated; and
(vii) period and amount of default as on the balance sheet date in repayment of
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borrowings and interest shall be specified separately in each case.
II. Provisions: The amounts shall be classified as-
(a) Provision for employee benefits; and
(b) Others (specify nature).
III. Other non-current liabilities;
(a) Advances; and
(b) Others (specify nature).
F. Current Liabilities (name changed)
I. Borrowings:
(i) Borrowings shall be classified as -
(a) Loans repayable on demand
(I) from banks
(II) from other parties
(b) Loans from related parties
(c) Deposits
(d) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured. Nature of
security shall be specified separately in each case;
(iii) where loans have been guaranteed by directors or others, the aggregate amount of
such loans under each head shall be disclosed;
(iv) period and amount of default as on the balance sheet date in repayment of
borrowings and interest, shall be specified separately in each case.
II. Other Financial Liabilities: Other Financial liabilities shall be classified as-
(a) Current maturities of long-term debt;
(b) Current maturities of finance lease obligations;
(c) Interest accrued;
(d) Unpaid dividends;
(e) Application money received for allotment of securities to the extent refundable and
interest accrued thereon;
(f) Unpaid matured deposits and interest accrued thereon;
(g) Unpaid matured debentures and interest accrued thereon; and
(h) Others (specify nature).
'Long term debt is a borrowing having a period of more than twelve months at the time of
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origination
III. Other current liabilities:
The amounts shall be classified as-
(a) revenue received in advance;
(b) other advances (specify nature); and
(c) others (specify nature);
V. Provisions: The amounts shall be classified as-
(i) provision for employee benefits; and
(ii) others (specify nature)
G. The presentation of liabilities associated with group of assets classified as held for sale and
non-current assets classified as held for sale shall be in accordance with the relevant Indian
Accounting Standards (Ind ASs)
H. Contingent Liabilities and Commitments: (to the extent not provided for)
(i) Contingent Liabilities shall be classified as-
(a) claims against the company not acknowledged as debt;
(b) guarantees excluding financial guarantees; and
(c) other money for which the company is contingently liable.
(ii) Commitments shall be classified as-
(a) estimated amount of contracts remaining to be executed on capital account
and not provided for;
(b) uncalled liability on shares and other investments partly paid; and
(c) other commitments (specify nature).
I. The amount of dividends proposed to be distributed to equity and preference shareholders
for the period and title related amount per share shall be disclosed separately. Arrears of
fixed cumulative dividends on irredeemable preference shares shall also be disclosed
separately.
J. Where in respect of an issue of securities made for a specific purpose the whole or part of
amount has not been used for the specific purpose at the Balance sheet date, there shall be
indicated by way of note how such unutilised amounts have been used or invested.
7. When a company applies an accounting policy retrospectively or makes a restatement of
items in the financial statements or when it reclassifies items in its financial statements, the
company shall attach to the Balance Sheet, a "Balance Sheet" as at the beginning of the
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earliest comparative period presented.
8. Share application money pending allotment shall be classified into equity or liability in
accordance with relevant Indian Accounting Standards. share application money to the
extent not refundable shall be shown under the head Equity and share application money to
the extent refundable shall be separately shown under 'Other financial liabilities'.
9. Preference shares including premium received on issue, shall be classified and presented as
'Equity' or 'Liability' in accordance with the requirements of the relevant Indian Accounting
Standards. Accordingly, the disclosure and presentation requirements in that regard
applicable to the relevant class of equity or liability shall be applicable mutatis mutandis to
the preference shares. For instance, redeemable preference shares shall be classified and
presented under 'non-current liabilities' as 'borrowings' and the disclosure requirements in
this regard applicable to such borrowings shall be applicable mutatis mutandis to redeemable
preference shares.
10. Compound financial instruments such as convertible debentures, where split into equity
and liability components, as per the requirements of the relevant Indian Accounting
Standards, shall be classified and presented under the relevant heads in 'Equity' and
'Liabilities'
11. Regulatory Deferral Account Balances shall be presented in the Balance Sheet in
accordance with the relevant Indian Accounting Standards.
GENERAL INSTRUCTIONS FOR PREPARING OF STATEMENT OF PROFIT AND LOSS
1. The provisions of this Part shall apply to the income and expenditure account, in like
manner as they apply to a Statement of Profit and Loss,
2. The Statement of Profit and Loss shall include:
(1) Profit of loss for the Period;
(2) Other Comprehensive Income for the period
The sum of (1) and (2) above is “ Total Comprehensive Income"
3. Revenue from operations shall disclose separately in the notes
(a) sale of products (including Excise Duty);
(b) sale of services; and
(c) other operating revenues.
4. Finance Costs: Finance costs shall be classified as-
(a) interest;
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(b) dividend on redeemable preference shares;
(c) exchange differences regarded as an adjustment
to borrowing costs; and
(d) other borrowing costs (specify nature).
5. Other income: other income shall be classified as-
(a) interest Income;
(b) dividend Income; and
(c) other non-operating income (net of expenses directly attributable to such income)
6. Other Comprehensive Income shall be classified into-
(A) Items that will not be reclassified to profit or loss
(i) Changes in revaluation surplus;
(ii) Re-measurements of the defined benefit plans;
(iii) Equity Instruments through Other Comprehensive Income;
(iv) Fair value changes relating to own credit risk of financial liabilities designated at fair
value through profit or loss;
(v) Share of Other Comprehensive Income in Associates and Joint Ventures, to the extent
not to be classified into profit or loss; and
(v) Share of Other Comprehensive Income in Associates and Joint Ventures, to the extent
not to be classified into profit or loss; and
(vi) Others (specify nature)
B) Items that will be reclassified to profit or loss;
(i) Exchange differences in translating the financial statements of a foreign operation;
(ii) Debt instruments through Other Comprehensive Income;
(iii) The effective portion of gains and loss on hedging instruments in a cash flow hedge;
(iv) Share of other comprehensive income in Associates and Joint Ventures, to the extent
to be classified into profit or loss; and
(v) Others (specify nature)
7. Additional Information:
A Company shall disclose by way of notes, additional information regarding aggregate
expenditure and income on the following items:
(a) employee Benefits expense (showing separately (i) salaries and wages, (ii) contribution to
provident and other funds, (iii) share based payments to employees, (iv) staff welfare
expenses).
(b) depreciation and amortisation expense;
(c) any item of income or expenditure which exceeds one per cent of the revenue from
operations or `10,00,000, whichever is higher, in addition to the consideration of '
materiality ‘as specified in clause 7 of the General Instructions for Preparation of Financial
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Statements of a Company;
(d) interest Income
(e) interest Expense
(f) dividend income;
(g) net gain or loss on sale of investments;
(h) net gain or loss on foreign currency transaction and translation (other than considered
as finance cost);
(i) payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company law
matters, (d) for other services, (e) for reimbursement of expenses;
(j) in case of companies covered under section 135, amount of expenditure incurred on
corporate social responsibility activities; and
(k) details of items of exceptional nature;
8. Changes in Regulatory Deferral Account Balances shall be presented in the Statement of
Profit and Loss in accordance with the relevant Indian Accounting Standards
New Questions for revised AS 10 Q1. Entity A, a supermarket chain, is renovating one of its major stores. The store will have
more available space for in store promotion outlets after the renovation and will include a
restaurant. Management is preparing the budgets for the year after the store reopens, which
include the cost of remodelling and the expectation of a 15% increase in sales resulting from
the store renovations, which will attract new customers. State whether the remodeling cost
will be capitalized or not.
Solution
The expenditure in remodelling the store will create future economic benefits (in the form of
15% of increase in sales) and the cost of remodelling can be measured reliably, therefore, it
should be capitalised.
Q2. What happens if the cost of the previous part/inspection was/ was not identified in the
transaction in which the item was acquired or constructed?
Solution
De-recognition of the carrying amount occurs regardless of whether the cost of the previous
part/inspection was identified in the transaction in which the item was acquired or
constructed
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Q3. What will be your answer in the above question, if it is not practicable for an enterprise
to determine the carrying amount of the replaced part/inspection?
Solution
It may use the cost of the replacement or the estimated cost of a future similar inspection as
an indication of what the cost of the replaced part/existing inspection component was when
the item was acquired or constructed
Q4. Entity A has an existing freehold factory property, which it intends to knock down and
redevelop. During the redevelopment period the company will move its production facilities
to another (temporary) site. The following incremental costs will be incurred:
1. Setup costs of `5,00,000 to install machinery in the new location.
2. Rent of ` 15,00,000
3. Removal costs of ` 3,00,000 to transport the machinery from the old location to the
temporary location.
Can these costs be capitalised into the cost of the new building?
Solution
Constructing or acquiring a new asset may result in incremental costs that would have been
avoided if the asset had not been constructed or acquired. These costs are not to be included
in the cost of the asset if they are not directly attributable to bringing the asset to the
location and condition necessary for it to be capable of operating in the manner intended by
management. The costs to be incurred by the company do not meet the requirement of AS
10 and therefore, cannot be capitalized
Q5. Entity A, which operates a major chain of supermarkets, has acquired a new store
location. The new location requires significant renovation expenditure. Management expects
that the renovations will last for 3 months during which the supermarket will be closed.
Management has prepared the budget for this period including expenditure related to
construction and remodelling costs, salaries of staff who will be preparing the store before its
opening and related utilities costs.What will be the treatment of such expenditures?
Solution
Management should capitalise the costs of construction and remodelling the supermarket,
because they are necessary to bring the store to the condition necessary for it to be capable
of operating in the manner intended by management. The supermarket cannot be opened
without incurring the remodelling expenditure, and thus the expenditure should be
considered part of the asset. However, the cost of salaries, utilities and storage of goods are
operating expenditures that would be incurred if the supermarket was open. These costs are
not necessary to bring the store to the condition necessary for it to be capable of operating
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in the manner intended by management and should be expensed.
Q6. An amusement park has a 'soft' opening to the public, to trial run its attractions. Tickets
are sold at a 50% discount during this period and the operating capacity is 80%. The official
opening day of the amusement park is three months later. Management claim that the soft
opening is a trial run necessary for the amusement park to be in the condition capable of
operating in the intended manner. Accordingly, the net operating costs incurred should be
capitalised. Comment.
Solution
The net operating costs should not be capitalised, but should be recognised in the Statement
of Profit and Loss. Even though it is running at less than full operating capacity (in this case
80% of operating capacity), there is sufficient evidence that the amusement park is capable
of operating in the manner intended by management. Therefore, these costs are specific to
the start-up and, therefore, should be expensed as incurred.
Q7. Entity A exchanges surplus land with a book value of ` 10,00,000 for cash of `
20,00,000 and plant and machinery valued at ` 25,00,000. What will be the measurement
cost of the assets received?
Solution
Since the transaction has commercial substance. The plant and machinery would be recorded
at 25,00,000, which is equivalent to the fair value of the land of 45,00,000 less the cash
received of ` 20,00,000.
Q8. Entity A exchanges car X with a book value of ` 13,00,000 and a fair value of `
13,25,000 for cash of 15,000 and car Y which has a fair value of 13,10,000. The
transaction lacks commercial substance as the company’s cash flows are not expected to
change as a result of the exchange. It is in the same position as it was before the transaction.
What will be the measurement cost of the assets received?
Solution
The entity recognises the assets received at the book value of car X. Therefore,it recognises
cash of 15,000 and car Y as PPE with a carrying value of ` 12,85,000
Q9. Entity A is a large manufacturing group. It owns a number of industrial buildings, such
as factories and warehouses and office buildings in several capital cities. The industrial
buildings are located in industrial zones, whereas the office buildings are in central business
districts of the cities. Entity A's management want to apply the revaluation model as per AS
10 to the subsequent measurement of the office buildings but continue to apply the historical
cost model to the industrial buildings. State whether this is acceptable under AS 10 or not
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with reasons?
Solution
Entity A's management can apply the revaluation model only to the office buildings. The
office buildings can be clearly distinguished from the industrial buildings in terms of their
function, their nature and their general location. AS 10 permits assets to be revalued on a
class by class basis. The different characteristics of the buildings enable them to be classified
as different PPE classes. The different measurement models can, therefore, be applied to
these classes for subsequent measurement. All properties within the class of office buildings
must, therefore, be carried at revalued amount.
Q10. Entity A has a policy of not providing for depreciation on PPE capitalised in the year
until the following year, but provides for a full year's depreciation in the year of disposal of
an asset. Is this acceptable?
Solution
The depreciable amount of a tangible fixed asset should be allocated on a systematic basis
over its useful life. The depreciation method should reflect the pattern in which the asset's
future economic benefits are expected to be consumed by the entity. Useful life means the
period over which the asset is expected to be available for use by the entity. Depreciation
should commence as soon as the asset is acquired and is available for use.
Q11. Entity A purchased an asset on 1st January 2013 for ` 1,00,000 and the asset had an
estimated useful life of 10 years and a residual value of nil. On 1st January 2017, the
directors review the estimated life and decide that the asset will probably be useful for a
further 4 years. Calculate the amount of depreciation for each year, if company charges
depreciation on Straight Line basis.
Solution
The entity has charged depreciation using the straight-line method at ` 10,000 per annum
i.e (1,00,000/10 years).
On 1st January 2017, the asset's net book value is [1,00,000 – (10,000 x 4)] ` 60,000.
The remaining useful life is 4 years. The company should amend the annual provision for
depreciation to charge the unamortised cost over the revised remaining life of four years.
Consequently, it should charge depreciation for the next 4 years at `15,000 per annum
i.e. (60,000 / 4 years)
Note: Depreciation is recognised even if the Fair value of the Asset exceeds its Carrying
Amount. Repair and maintenance of an asset do not negate the need to depreciate it
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Q12. Entity B constructs a machine for its own use. Construction is completed on 1st
November 2016 but the company does not begin using the machine until 1st March 2017.
Comment
Solution
The entity should begin charging depreciation from the date the machine is ready for use –
that is, 1st November 2016. The fact that the machine was not used for a period after it
was ready to be used is not relevant in considering when to begin charging depreciation.
Q13. A property costing `10,00,000 is bought in 2016. Its estimated total physical life is
50 years. However, the company considers it likely that it will sell the property after 20
years.
The estimated residual value in 20 years' time, based on 2016 prices, is:
Case (a) 10,00,000
Case (b) 9,00,000
Calculate the amount of depreciation
Solution
Case (a)
The company considers that the residual value, based on prices prevailing at the balance
sheet date, will equal the cost. There is, therefore, no depreciable amount and depreciation is
correctly zero.
Case (b)
The company considers that the residual value, based on prices prevailing at the balance
sheet date, will be `9,00,000 and the depreciable amount is, therefore, `1,00,000.
Annual depreciation (on a straight line basis) will be `5,000 [{10,00,000 – 9,00,000} ÷
20].
Q14. Entity B manufactures industrial chemicals and uses blending machines in the
production process. The output of the blending machines is consistent from year to year and
they can be used for different products. However, maintenance costs increase from year to
year and a new generation of machines with significant improvements over existing machines
is available every 5 years. Suggest the depreciation method to the management.
Solution
Management should determine the depreciation method based on production output. The
straight-line depreciation method should be adopted, because the production output is
consistent from year to year. Factors such as maintenance costs or technical obsolescence
should be considered in determining the blending machines’ useful life
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Q15. Entity A carried plant and machinery in its books at 2,00,000. These were destroyed
in a fire. The assets were insured 'New for old' and were replaced by the insurance company
with new machines that cost 20,00,000.The machines were acquired by the insurance
company and the company did not receive the `20,00,000 as cash compensation. State, how
Entity A should account for the same?
Solution
Entity A should account for a loss in the Statement of Profit and loss on de-recognition of
the carrying value of plant and machinery in accordance with AS 10. Entity A should
separately recognise a receivable and a gain in the income statement resulting from the
insurance proceeds under AS 29 once receipt is virtually certain. The receivable should be
measured at the fair value of assets that will be provided by the insurer
Q16. XYZ Ltd. has acquired a heavy road transporter at a cost of `1,00,000 (with no
breakdown of the component parts). The estimated useful life is 10 years. At the end of the
sixth year, the power train (one of its component) requires replacement, as further
maintenance is uneconomical due to the off-road time required. The remainder of the vehicle
is perfectly roadworthy and is expected to last for the next four years. The cost of a new
power train is `45,000. Can the cost of the new power train be recognized as an asset, and,
if so, what treatment should be used?
Answer
The new power train will produce economic benefits to XYZ Ltd., and the cost is measurable.
Hence the item should be recognized as an asset as per AS 10 (Revised) as the recognition
criteria is satisfied. The original invoice for the transporter did not specify the cost of the
power train. However, its cost of the replacement is `45,000 which can be used as an
indication (usually by discounting factor) of the likely cost, six years previously.
If an appropriate discount rate is 5% per annum, `45,000 discounted back six years
amounts to `33,570 (45,000 x 0.746), which would be written out of the asset records.
The cost of the new power train, `45,000, would be added to the asset record, resulting in
a new asset cost of `1,11,430 (`1,00,000–`33,570 + `45,000)
Q17. ABC Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) `25,00,000
2.Initial delivery and handling costs `2,00,000
3. Cost of site preparation `6,00,000
4. Consultants used for advice on the acquisition of the plant `7,00,000
5. Interest charges paid to supplier of plant for deferred credit `2,00,000
6. Estimated dismantling costs to be incurred after 7 years `3,00,000
7. Operating losses before commercial production `4,00,000
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Please advise ABC Ltd. on the costs that can be capitalized in accordance with AS 10
(Revised).
Answer
According to AS 10 (Revised), these costs can be capitalized:
1. Cost of the plant `25,00,000
2. Initial delivery and handling costs `2,00,000
3. Cost of site preparation `6,00,000
4. Consultants’ fees `7,00,000
5. Estimated dismantling costs to be incurred after 7 years 3,00,000
`43,00,000
Note:
Interest charges paid on “Deferred credit terms” to the supplier of the plant (not a
qualifying asset) of `2,00,000 and operating losses before commercial production amounting
to `4,00,000 are not regarded as directly attributable costs and thus cannot be capitalized.
They should be written off to the Statement of Profit and Loss in the period they are
incurred.
Q18. Determine if the following costs can be added to the invoiced purchase price and
included in the initial recognition of the cost of the asset:
1. Consultants fees for choosing the new asset
2.A trade discount received of 5% of the purchase price of the asset
3.A discount received for paying the invoice within 90 days
4.Interest paid on a short term loan taken to provide the necessary cash for payment of the
purchase price
5. Import duties paid
6. Shipping costs and cost of road transport
7. Insurance for the shipping
8. An economic development rebate from the state
9. VAT paid on the purchase
10. Cost of laying a new concrete slab and installing special rubber mounted footings for the
new press in order to reduce vibration during use
11.Hire of a crane to transfer the press from the vehicles into the factory
12. Costs associated with removing a section of the factory roof to allow the machine to be
dropped into place and subsequently refitting the roof
13. Cost of installing soundproofing in the roof at the same time in order to provide
protection for workers in other parts of the factory building
14. Professional fees charged by consulting engineer for overseeing the installation process
15. Electricians fees for connecting the press to the power supply
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16. A portion of the operating costs (salaries, office expenses) of the purchasing department
17. Costs of materials (papers and inks) used in calibrating the machine and setting it up for
operation
18. Costs of training the operators of the new machine
19. A portion of the inefficiencies in production for the first month of use while the
operators
became comfortable with using the machine
Answer
Included in Cost: Point no. 2,5,6,7,8,10,11,12,14,15 and 17
Excluded from Cost: Point no. 1,3,4,9,13,16,18 and 19
Q19. A Ltd. has carried out certain works on various machines in their engineering plant,
which manufactures high quality metal patterns and templates for use in industry.
Determine in each case whether the costs of the improvements can be added to the existing
carrying value of the assets concerned?
1. The cost of an annual machine overhaul which will maintain the originally assessed
standard of performance of the machine for the coming 12 months.
2. The cost of repairs to a press machine, which was damaged by the emergency services
while trying to extricate the arm of a worker who had become trapped in the press.
3. Modifications to a cutting machine which will increase its rate of output from 500 to
560 patterns per shift.
4. Modifications to a lathe which will replace the current water cooling system with an
oil-based system, thereby extending the life of the lathe by a forecast 2 years.
5. The upgrading of a cutting machine with new software which will improve the
accuracy of its measurement and cutting tolerances by a number of microns, thereby
raising the quality of output.
6. Alterations to a production line which will allow automatic feeding from a machine to
the next one in the production process, thereby removing the need for an employee to
manually load the second machine.
Answer
Point 1: No. This may not be capitalized as subsequent expenditure, since it merely
maintains the originally assessed standard of performance of the asset.
Point 2: Yes. An impairment loss should have been recognized when the damage occurred
and any insurance payment received as compensation should have been recognized as income
in the Statement of Profit and Loss when received.
When expenditure is incurred to restore the asset, such expenditure is added to the carrying
amount of the asset to the extent that it is probable that future economic benefits will flow
to the enterprise.
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Point 3: Yes. The cost of such modifications may be added to the carrying amount of the
asset.
Point 4: Yes. Such costs may be capitalized.
Point 5: Yes. Such costs may be capitalized.
Point 6: Yes. Such costs may be capitalized.
Q20. An entity acquires the right to use an underground cave for gas storage purposes for a
period of 50 years. The cave is filled with gas, but a substantial part of that gas will only be
used to keep the cave under pressure in order to be able to get gas out of the cave. It is not
possible to distinguish the gas that will be used to keep the cave under pressure and the rest
of the gas. Evaluate whether AS 10 would apply or AS 2?
Answer
The total volume of gas must be virtually split into
(i) Gas held for sale, and
(ii) Gas held to keep the cave under pressure.
The former must be accounted for under AS2 as Inventories. The latter must be accounted
for as PPE under AS 10 and depreciated over the period the cave is expected to be used.
Q21. An entity operates an oil refining plant. For the refining process to take place, the
plant must contain a certain minimum quantity of oil. This can only be taken out once the
plant is abandoned and would then be polluted to such an extent that the plant’s value is
significantly reduced. Evaluate whether AS 10 would apply or AS 2?
Answer
The part of the crude that is necessary to operate the plant and cannot be recouped (or can
be recouped but would then be significantly impaired), even when the plant is abandoned,
should be considered as an item of PPE under AS 10 and amortized over the life of the
plant.