Accounting Standards IAS- after 2001- International Financial Reporting Standards ( IFRS)- IASB, London(june,’73) US GAAP- FASB GAAP – OTHER COUNTRIES INDIAN ACCOUNTING STANDARD – ICAI Convergence with IFRS-1/4/2011
Accounting Standards-WHY? • To harmonise the diverse accounting practices and policies in use. • Understandability • Relevance • Reliability • Comparability • Acceptability
Indian Accounting Standards • ASB set up on 21-4-77 by the ICAI • ASB board include representatives from ICSI/ICWAI/Industry Assns./RBI/SEBI/Controller General of Accounts/CBEC/Financial Insttns./Academic Instns.(2) • Accounting Stds. – in all 29 released by ICAI to be adopted. • Draft AS-30-Financial Instruments-Recognition & measurement ( w.e.f. 1-4-09) • Draft AS-31-Financial Instruments-presentation
Indian Accounting StandardsApplicability • Classification of Enterprises- Level-I • all commercial, industrial and business enterprises having turnover of Rs. 50 crore and above in the Prev. Year. • Having borrowings of over Rs. 10 crore in previous year. • Their holding and subsidiary companies. • Banks including copt. Banks • Financial Institutions • Enterprises whose securities or debt are listed in a stock exchange. • Insurance business
Indian Accounting StandardsApplicability Level-II • All commercial, industrial and business enterprises with turnover exceeding Rs. 40 lacs but not exceeding Rs. 50 crore in the previous year. Turnover does not include “ Other income” • Having borrowings including public deposits of over Rs. 1 crore but not more than Rs. 10 crore. • Holding and subsidiary cos. of the above.
Indian Accounting StandardsApplicability Level-III • Enterprises not covered under Level-I and Level-II are Level-III enterprises • Applicable to all Levels: • AS-1/2/AS-4 to AS-16/AS-22 and AS-26 • Exemptions for Level-II and Level-III • AS-3, AS-17, AS-18, AS-21. AS-23, AS-24 and AS-27 and partially AS-19, 20 and AS-29
Indian Accounting StandardsDisclosure of Accounting Policies(AS-1) • Disclose all significant accounting policies adopted in one place. • To reveal true and fair view of the financial position • Major consideration for selection of acctg. Polices- prudence, substance over form and materiality • Disclosure of policies not a substitute for accounting treatment • Deviations in fundamental accounting assumptions to be disclosed.
Valuation of Inventories( AS-2) Purpose: To formulate the method of valuation of inventories on hand for Balance Sheet purposes. Inventories include: Finished goods held for sale in the ordinary course of business. Raw material/WIP in the process of production of such sale. Material and spares to be consumed for such production( does not include machinery) Spares which are used in common with all fixed assets.
Valuation of Inventories( AS-2) • Does not include:- • WIP directly related to construction contract or service contracts. • WIP of service providers. • Financial instruments held as stock in trade. • Producer’s inventories like livestock, mineral oil, ore, gas etc.
Valuation of Inventories( AS-2) • Cost of inventory includes: • Cost of purchases. • Purchase price • Duties and taxes • Freight inward • Other exp. Attributed to acquisition. Less: a) duties /taxes recoverable from govt. b) Trade discount ( c ) rebate d) Duty draw back e) other similar items.
Valuation of Inventories( AS-2) • Cost of Inventory includes:- • Cost of conversion- • Direct Labour/Material/expenses. • Fixed production overheads.( on normal capacity) • Variable production overheads.( on actual production) • In case of joint products- rational and consistent allocation • Scrap/by-product net realizable value deducted from costs.
Valuation of Inventories( AS-2) • Inclusion of excise duty in valuation of finished goods- as applicable on the balance sheet date. ( neutral effect) • Care! Production for exports.
Valuation of Inventories( AS-2) • Exclusions from cost of inventories:- • Abnormal costs, wastage etc. • Storage costs • Administrative overheads • S & D costs. • Interest & borrowing costs.
Valuation of Inventories( AS-2) • Cost of inventories determined by:- • Specific identification method. • FIFO or weighted average cost. • Standard cost. • Retail Method( target cost)
Valuation of Inventories( AS-2) • Net Realisable Value (NRV) Is the estimated selling price less estimated cost of completion and estimated cost necessary to make the sale. Calculated on each Balance Sheet date.
Valuation of Inventories( AS-2) • Estimation of NRV:- • If finished product in which raw material and supplies used is sold at or above the cost , then estimated NRV of Raw material and supplies is shown at more than its cost. • If finished goods in which raw material and supplies used is sold below the cost, then the estimated NRV of raw material and supplies is equal to replacement price of raw material and supplies.
Valuation of Inventories( AS-2) • MODVAT and now CENVAT (wef-1-4-2000):- • For Income Tax purpose:- Inventory costs include CENVAT paid on the item. • For Balance Sheet purpose:- CENVAT amount debited to separate account as receivables.( AS-2)
Valuation of Inventories( AS-2) IAS/US Gaap Vs. Indian AS • IAS/US Gaap- only selling costs excluded. • Indian AS – both selling & distribution costs excluded. • IAS/US Gaap- No stipulation on formula for valuation of inventories. But to be uniformly followed for all inventories of similar nature and use. • Indian AS- Only FIFO or WACC to be followed.
Depreciation Accounting ( AS-6) Reduction in value of the asset on account of usage and passage of time. When used for more than one accounting period. Assets having limited useful life. Held for use in production of goods or services.
Depreciation Accounting ( AS-6) • AS applicable to all depreciable assets except:- • Forests. Plantations. • Minerals and Natural gas • Exp. On R & D • Goodwill • Livestock
Depreciation Accounting ( AS-6) • Cost of depreciable assets may change from historic cost due to:- • Exchange fluctuations. • Price adjustments • Changes in duties. • Revaluation • Other similar reasons. Depreciable amount is historic cost as adjusted as above less residual value. This is allocated over the useful life of the asset.
Depreciation Accounting ( AS-6) • Methods– (1) SLM ( 2) WDV • Changes in method- to calculate from the date of acquisition and account for in books. • Depreciation due to revaluation/increased useful life/addition or extension of the asset etc. to be charged on the residual life of the asset. • When the asset is disposed of, the surplus/deficiency is adjusted to P & L account
Contingencies/events after the Balance Sheet date ( AS-4) Based on accrual based and prudent accounting policies. Not applicable for:- Liabilities of Life insurance and General Insurance. Obligations under Retirement benefit plan. Commitments arising from long term lease contracts.
Contingencies/events after the Balance Sheet date ( AS-4) • Contingencies means existing condition or situation for which result is not known and is dependent on certain happenings or non-happenings and which may result into profit or loss. • Loss contingencies-e.g. • Collection of receivables. • Litigations, claims on assets for recovery
Contingencies/events after the Balance Sheet date ( AS-4) • Contingency Loss:- • Due to existing conditions/situations • If probable- provision should be made( depending on counter claim if any). • If reasonably possible- disclosure to made. • If remote- ignored. • Due to conditions/situations after the Balance Sheet date: No acctg .required
Contingencies/events after the Balance Sheet date ( AS-4) • Events occurring after the Balance Sheet date:- • Events relate to circumstances existing as on the date of Balance Sheet • Loss should be accounted and assets/liabilities adjusted. • Proposed dividend to be adjusted in the books New Events( not existing on Balance Sheet date) Disclosure by way of notes to accounts only. Events occurring after approval of accounts- show in Directors’ Report. Un accounted contingent losses- by way of notes.