Pragmatic changes envisaged

Income Tax Act Direct Tax Code

VAT, Service Tax,CE ..GST
Companies Act. New Companies Act
Accounting Standard.. Indian AS
SAP/AAS/SA?
Above all EDP/ISA and so called paperless
working

Challenges before practioners
Keep update for changes
Big Enterprises/Blue chip Vis a vis SMEs
Big 4 Practioners Vis a vis SME Practioners
Circumstances under SME Practioner works
Statements, standards,Guidance Notes are at
PAR for all practioners
Need to educate entrepreneur/accountant of
Auditee about AS

Study of AS is not any new thing or ideas
Systematic and uniform principles to guide:
Accounting, presentation and disclosures
Prudence and Materiality plays important
role
To refresh your memory the stydy circle
meeting

Thus the source of Indian GAAP are :
1. The Statutory Requirements, such as :
The statutory requirements of Companies Act ; 1956
more particularly contained in Section 210 and 211 with
Schedule VI of the Act-True and Fair and 227 - reporting
The statutory requirements of Banking Regulation Act ; 1949 and
Insurance Act; 1938.
2. The requirements of Regulatory Authorities, such as :
Reserve Bank of India
Securities Exchange Board of India
3. Pronouncement of the Premier accounting body ICAI, such as :
Accounting Standard
Statement of Accounting matters
Guidance Notes
Opinions of Expert Advisory Committee
4. Practices and Uses such as :
Published Accounts of renowned companies.
Articles and Opinions
5. Income Tax Standards Court Judgements
ATTEST FUNCTION
1. In India the profession of Accountancy has been recognised and
provided with the attest function for certification of accounts.
2. Society confidence Vs. Expectations Code of Conduct.
3. The Chartered Accountants Act 1949 Section 21-22 contains
detailed provision in respect of misconduct.
4. Second schedules part I clause 7 & 9 provides that A Chartered
Accountant in practice shall be deemed to be guilty of
professional misconduct if he :
7. Is grossly negligent in the conduct of his professional
duties;
9. Fails to invite attention to any material departure from the
Generally Accepted Procedure of audit applicable to
circumstances;
5. Duty bound to follow ICAI Announcements.
6. Documents issued by Institute :
Statements
=> Accounting matters
=> Auditing Matters
Guidance Notes
Accounting Standards (AS)
Statements of Standard Auditing Practices
(SAPs)
# Opinions Expert Advisory Committee is
another though not general, important
document
Depreciation Accounting
Does not apply to :

forests, plantations etc.
expenditure on R&D
wasting assets
live-stock
goodwill
land
Depreciation
What it is?
A measure of wearing out, consumption or other loss of
value of a depreciable asset arising from use, affluxion of
time or obsolescence through technology/market changes
Depreciable Assets
-Expected to be used for more than one accounting
period
-Having a limited useful life
-Held for use in production/supply of goods/ services,
letting out to others, administrative purpose, and not
for sale in ordinary course of business
Useful Life
Period over which a depreciable asset is expected to be
used
OR
Number of production units expected to be obtained from
use of asset
Useful life is shorter than physical life and is:
predetermined by legal/contractual limits
directly governed by extraction/consumption
dependent on extent of use and physical deterioration
on account of wear and tear
reduced by obsolescence arising from
technological/market changes, legal restrictions
DEPRECIATION
Amount determination
Depreciable amount of a depreciable asset should be
allocated on a systematic basis during useful life
Relevant factors
Historical cost/other substituted amount
Expected useful life
Estimated residual value
Depreciable Amount
Historical Cost (or other substituted amount)
less
Estimated residual value
Depreciation Method: Change
*Normally consistency should be maintained
*Change only if (same considerations as
applicable for APs)
*Recalculation from inception on change
*Difference (Deficiency/Surplus), to be adjusted
in year of change
*Change to be treated a change in AP
Depreciation
Where Changes Prospectively
Useful life should be reviewed periodically: unamortised
amount to be charged in remaining useful life
Change in historical cost due to exchange fluctuations in
relative long term liability etc.: revised unamortised amount be
depreciated over residual useful life
Revaluation of assets: depreciation on revalued amount over
remaining useful life
Additions becoming integral part of asset: to be depreciated
over remaining useful life of asset. However, if addition retains
separate identity/capable of being independently used,
depreciation should be provided independently.
Disclosure
GENERAL
Historical cost/other amount substituted for each class
Total depreciation of the period for each class
Related accumulated depreciation
ALONG WITH AP
Methods used
Rates or useful life, if different than principal statutory rates
SPECIFIC
If revaluation materially affects depreciation : such effect in year
of change
If any asset is discarded/disposed off/demolished/destroyed : net
surplus or deficiency, if material
Accounting for
Fixed Assets
Accounting of forests/ plantations etc., wasting
assets, expenditure on real estate development and
livestock
Inflation Accounting of fixed assets
Allocation of depreciation
Treatment of Subsidies etc.
Assets under leasing rights
This does not deal with
Definitions
Fixed Assets
Assets held with intention of
being used for producing
goods, providing services
etc. & not for sale in
ordinary course
FAIR Market Value
(FMV)
Value agreed in open &
unrestricted market between
parties dealing at arms length
Gross Book Value
Historical cost or other amount substituted for
historical cost
Identification of Assets
Material Vs. Not Material Amounts
Stand by and Servicing Equipments are normally
capitalised.
Spares (Machinery) Normally Profit & loss-
irregular depends on life.
Nature of Assets- Separable like Aircraft and its
Engine
Components of Cost
Cost of purchase
Cost attributable in bringing the asset in working
condition
Financing cost upto the asset being ready for use
Expenditure incurred on start up and
commissioning of project.
(internal profits be eliminated in case of self construction)
Ready to use Actual use
Expenses in between are to
be charged to P & L
Cost When and How at FMV
Where the asset is acquired in exchange of:
Another Asset/
Shares of the Enterprise
(FMV of that asset which is more clearly evident)
Subsequent expenditures :
When included in Cost?
I f they increase the future benefits
Addition of asset having separate identity
Should be considered as separate asset
Disposal / Retirement of Asset
Assets retired from active use and held for disposal to be
stated at lower of net book value and NRV : to shown
separately
Assets to be eliminated from FS on disposal or when no
further benefit is expected
Losses from retirement or Gain/ Loss from disposal to be
recognised in P & L
On disposal of revalued asset gain / loss to be taken to P
& L except where a loss relates to an increase available
in RR, when it may be charged to RR
Revaluation of Fixed Assets
If revalued, entire class be revalued. Or selection to
be on systematic basis : basis to be disclosed
Revaluation not to exceed recoverable amount of a
class of assets
On upward revaluation, accumulated depreciation
not to be credited to P&L
Increase to be credited to revaluation reserve (RR)
except to extent of earlier decrease charged to P&L,
which may be taken to P&L
Decrease to be charged to P&L except to extent of
of earlier increase standing in RR(unutilised),
which may be debited to RR

Acquisition Specific Modes
+ Assets acquired on Hire Purchase terms to be
recorded on Cash Value (actual / calculated) :
Disclaimer of ownership be indicated
+ Joint Ownership : Extent of share & Proportion of
all related figures be disclosed
+ Purchase of several assets for consolidated price :
apportionment on basis of competent valuers
valuation

Other Important Issues
- Goodwill be recorded only when acquired for
consideration. Where in acquisition of business,
price paid is in excess of net assets taken over,
excess be termed as goodwill.
- Direct cost for development of patents be
capitalised and w/off over legal term/ working
life, whichever is shorter.
- Payment for know-how for plans, layouts etc. of
assets be capitalised under respective heads.
- If know how is composite, apportionment be made
on reasonable basis.
Disclosure
+ Gross & net book value : Opening / Closing
showing additions, disposals etc.
+ Expenditure on FA during construction /
acquisition
+ Revalued amounts substituted for historical
costs, method of revaluation, nature of indices,
year of appraisal and fact of involving external
valuer
ACCOUNTING FOR
GOVERNMENT GRANTS
It does not deal with :
O Inflation Accounting of Grants
O Government assistance other than grants
O Government participation in ownership

Government Grants
Meaning
Assistance by government in cash
or kind for past or future
compliance of certain conditions
I mportance
I n Financial Statements
Facilitates comparison with
other enterprise / prior period
Govt. here includes govt. agencies/ bodies
(local/national/international)
Recognition of Government Grant
Should not be recognised until reasonable assurance of:
Compliance with conditions &
Receipt of Grant

Should not be taken to P&L
as:
Generally are in nature of
promoters contribution
They are not earned but represent
incentive without cost

Should be taken to P&L as:
Rarely gratuitous
Govt. levies are also charge
against income
To correlate with exp.. to
which grant relates
Accounting Treatment
Capital approach
Income approach
However, it should be based on nature of each grant.
Grants related to Specific F/A :
Treatment
Should be deducted from Gross Value
(if grant is equal to cost, asset should be shown at
nominal value)
Alternatively
Defer income on systematic basis over useful life
(for depreciable assets)
Take to capital reserve.
(for other assets)
However if requires fulfillment of obligations, be credited to
income over matching period \


Other Grants
Revenue Grants
To be recognised on systematic basis in P&L.Either as
other income or deduction from related expenses.
If receivable as compensation for expense/ loss of
preceding year or as immediate financial support,
consider AS 5 for disclosure as extraordinary item
Promoters Contribution
Take to capital reserve, treat shareholders fund
Assets at concessional rates / free of cost
Account for at acquisition cost / nominal value
Grants becoming refundable
An extraordinary item
If revenue
Apply first against available unamortised credit balance
/ remaining charge to P&L
If related to F/A
Increase book value / reduce capital reserve / deferred
income (in first case, change depreciation
prospectively)
If promoters contribution
Reduce from Capital Reserve
D i s c l o s u r e
Accounting Policy adopted including
methods of presentation
Nature and extent of grant recognised
including non monetary assets given at
concessional rates / free of cost
Accounting for
Investment
Does not deal with :

- Bases for recognition of interest, dividends &
rentals earned on investment which are covered by
AS-9

- Operating/finance leases

- Investments of retirement benefit plans and life
insurance enterprises
Investments
Assets held for earning income, capital appreciation,
other benefits. Stock-in-trade is not investment

Current investment
Investment readily realisable and is intended to be
held for not more than one year from the date of
making such investment
Long term investment
Investment other than current investment
Investment property
Investment in land/buildings that are not intended
to be occupied substantially for use
Market value
Amount, net of expenses, obtainable from the sale
of investment in open market
COST OF
INVESTMENT
should include acquisition charges (brokerage, fee
etc.)
if acquired in exchange of shares/securities then fair
value of such shares/securities should be taken as cost
if acquired in exchange of other assets then fair
value of those assets which is more clearly evident
should be taken as cost
Interest/ Rentals/ Dividends are generally Income.
However it may be recovery of cost where relates to
pre acquisition period.
Investments Carrying
Amount
CURRENT INVESTMENTS
LOWER OF COST & FV
(comparison not be on global basis)
LONG-TERM INVESTMENTS
AT COST
However, provision be made for decline
in value, which is not temporary, on
individual basis
+ Any reduction / reversal
of reduction in carrying
amount
+ On disposal, the surplus /
deficiency
Charge / credit to P&L a/c
DISCLOSURE
Classification of investment
Amounts included in P&L a/c
AP of determination of carrying amount
- Income from investments separately for current/LT at gross
figure
- Profit/Loss on disposal of investments and changes in
carrying amount separately for current/LT investments
- Significant restrictions on ownership/realisability of
income/disposal proceeds
- Aggregate amount of quoted/unquoted investments and MV
of quoted investments
- Other statutory disclosures
Amalgamation means an amalgamation
pursuant to the provisions of the
Companies Act, 1956 or
other law applicable
to companies
Accounting for
Amalgamations
Amalgamation in the nature of Merger

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

- Shareholders > 90% of equity share capital of
transferor co. become that of transferee co.
- Consideration discharged by
issue of equity shares
- Business is intended to
be carried by transferee co.

- No adjustment is intended in book values of A/L on
incorporation in books of transferee co. except to ensure
uniformity of Accounting Policy
I f any condition is not
satisfied, it would be
amalgamation in the
nature of purchase
AMALGAMATION
IN THE NATURE OF
MERGER A n M
IN THE NATURE OF
PURCHASE A n P
Pooling of interest
method
Purchase method
Pooling of Interest Method
- all Assets-Liabilities/Reserves should be
incorporated at existing carrying amt. In
same form. Balance of P&L a/c to be
merged with corresponding amount and in
absence, with General Reserve
- If APs are conflicting adopt uniform AP
disclose effect as per AS-5
- difference between consideration and share
capital of transferor company to be adjusted
in Reserves
Purchase Method
* A/L to be incorporated at existing carrying amounts or,
alternatively, the consideration be allocated to individual
identifiable assets/liabilities on the basis of FV.
* No reserves, except statutory reserves, shall be incorporated
* Difference between consideration and net assets be
recognised as Goodwill/capital reserve
* Goodwill be amortised over useful life generally not
exceeding 5 years.
* Statutory Reserves, on complying with requirements,
should be incorporated by corresponding debit to
Amalgamation Adjustment a/c under head Misc. Exp.-
Reversal by cross-entry of two accounts
Non cash element of consideration to be at
fair value
If some contingency exists as to the amount
of consideration, apply AS4
If scheme of amalgamation statutorily
sanctioned prescribe particular treatment of
revenues, same be followed
Common Procedures
FOR ALL
names/general nature of business of amalgamating companies
effective date of amalgamation
method of accounting
particulars of scheme
FOR POOLING METHOD
description/no. of shares issued and ratio of exchange
difference between consideration and net asset acquired
treatment thereof
FOR PURCHASE METHOD
consideration description thereof
difference. (same as above), including treatment of goodwill
AFTER BALANCE SHEET DATE
disclosure in accordance with AS-4

DISCLOSURE
Accounting for Retirement
Benefits in the Financial
Statement of Employers PF
Pension
Superannuation
Gratuity
Leave
Encashment
Others
RETIREMENT BENEFITS
DEFINED
CONTRIBUTIO
N SCHEMES
eg. P.F.etc.
DEFINED
BENEFIT
SCHEMES eg.
Gratuity etc.
Accounting Treatment

Defined contribution scheme
* Charged to P&L A/C
- Contribution for the year
- Shortfall between paid & payable
amount
* Excess payment, if any, it treated as per
payment
Accounting Treatment
SELF FUNDING
Annual
contribution
determined by
insurer to be
charged to P&L a/c
Appropriate
charge to P&L a/c
each year
Amount as per
actuarial valuation
or other rational
method
TRUSTS
Costs determined
through actuarial
valuation at least
once in 3 years
Amount as per
actuarial valuation
to be charged to
P&L a/c each year

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

Accounting Treatment
Defined Benefit Scheme
Self Funding
-Appropriate amount
charge to P&L a/c
- Amount as per
actuarial valuation or
other rational method
Trust
-Cost for the year
- Cost should be
determined through
actuarial valuation at least
once in 3 year
- Shortfall between
amount actually paid over
payable charge to P&L A/c
- Excess payment should
be treated as prepayment
Insurers
Scheme
-Annual
contribution
determined by
insurers to be
charged to
P&L A/c.

Treatment of Alternation
Alternation arising from introduction /
or additional benefits to retired
employees or changes in actuarial
method
Charge/credit to P&L a/c
Follow AS - 5
Disclosure
- Method of determining R/B cost
- Whether Actuarial Valuation
was made at the end of period or
any prior date? Disclose said prior
date and method for determining
cost for the period
BORROWING COSTS
A.Borrowing Costs : Interest and other costs related to borrowed
funds like,
a. Interest and commitment charges.
b. Discounts or premiums.
c. Ancillary costs.
d. Finance charges as under finance lease.
e. Exchange differences from foreign currency.
B. Qualifying Assets : Those which require substantial time to
get ready for intended use or sale like,
a. Manufacturing plants
b. Power generation facilities
c. Inventories that required substantial periods of
time to bring them to saleable condition.
RECOGNITION OF COST
A. All Borrowing Costs
Borrowing costs directly attributable to
the acquisition, construction or
production of a qualifying asset

Future economic benefit

Measurement possible
Capitalise as part of the cost of
qualifying asset
Other Borrowing
costs
Charge to P/L
B. a. In case of funds specifically borrowed for qualifying
assets:
Borrowing Costs Actual borrowing Income on temporary
to be capitalised cost incurred investment of funds

b. In case of general borrowings:
Borrowing Costs = Capitalisation rate* x Expenditure on the asset
Capitalisation rate = Weighted Average of outstanding
borrowing cost (excluding cost of specific borrowings).
=
-
CAPITALISATION OF BORROWING COST
1. COMMENCEMENT : ALL 3 conditions below to be
satisfied:
a. Expenses incurred must be for acquisition / construction /
production of qualifying asset.
b. Cost incurred must be borrowing cost.
c. Activities preparing the asset for intended use or sale must be in
progress. Such activities include related technical and administrative
work.
2. SUSPENSION : asset for intended use or sale) or asset is
interrupted. Except when:
a. Substantial technical/administrative work being done.
b. Temporary delay is inherent in the process.

CESSATION
When activities preparing the asset for intended use or sale are
substantially complete. In case of completion in parts, cost of
completed part to be ceased for capitalisation.

DISCLOSURE

Accounting policies.
Amount capitalised as borrowing costs.
Segment Reporting

Application from 1.4.01 to :
* Enterprises listed/in the process of being listed in a recognised
stock exchange in India.
* Other enterprises with a turnover of more than Rs.50 crores.
Definitions:
Business Segment

.
Factors for Consideration
Nature of products/services.
Nature of production process.
Method used to distribute products/provide services.
Type/class of target customers.
Nature of regulatory environment, if applicable
Geographical Segment
Qua location of offices or Qua location of customer

Factors for Consideration
Similarity of economic and political conditions.
Operational relationship in various geographical areas.
Operational proximity.
Special operational risks in a specific area.
Exchange control regulations.
Currency risks.

Reportable Segment
A business / geographical segment required to be disclosed under this
standard.
Enterprise Revenue
Revenue from sale to external customers as per the P&L A/C.
Segment Results = Segment Revenue Segment Expenses

Segment Revenue
ER directly attributable to a segment.
+
ER allocated to segment on a reasonable basis.
+
Revenue from transactions with other segments.
Excluding
Extraordinary items as per AS-5.
Interest & dividend income, provided the segmental
operations are not of a financial nature.
Profit on sale of investments/extinguishment of debts,
provided the segmental operations are not of a
financial nature.

Segment Expenses
Expenses in a segment directly attributable to it.
+
Enterprise expenses allocated to segment on a reasonable basis.
+
Expenses from transactions with other segments.

Excluding
Extraordinary items as per AS-5.
Interest expenses, provided the segmental operational are not of
a financial nature.
Income-Tax expenses.
Head-office/Corporate office expenses.
Segment Assets
Directly attributable /allocated Assets

Where segment result includes interest/dividend income, the related asset
should be included in segment assets.
Allowances/provisions reported as direct offsets in the Balance sheet should be
reduced from the related asset.
Income tax assets are to be excluded.

Segment Liabilities
Directly attributable /allocated liabilities

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

Segment Accounting Policies
Policies relating to preparation and presentation of financial statements and
those relating to segmental reporting.
Identifying Reportable Segments
Either
Primary = Business
Secondary = Geography
Or
Primary = Geography
Secondary = Business
Depending upon
Dominant source & nature of risk & returns
Normally indicated by
Internal organisation & Management Structure
System of internal financial reporting to BOD/CEO
Exceptional Situations
I II
Risk and Returns strongly
affected by both Product /
Service and
Geographically

Internal Management
Structure / Reporting
System neither based on
Product / Service nor
Geographically
Primary = Business
Secondary = Geographically

Directors and
Management to decide
Primary and Secondary
segment based on
conditions discussion in
earlier slide.
Reportable Segment A
Segment whose



are 10% or more of
Segment Revenue
Segment Results Profit
or Loss
Segment Assets
Segment Revenue (and
Not Enterprise Revenue
the greater of
Segment Profit
(of Profit Segment)
Segment Loss
(of Loss Segment)
Segment Assets


Reporting Segment : Example : Segment Results
Segment Segment Results Reportable
A - 4,00,000
B + 50,000
C + 2,00,000
D - 20,000
E + 3,00,000
Enterprise Result 1,30,000
Segment Profit 5,50,000
Segment Loss 4,20,000


Reportable Segment B
Segments chosen by Management despite of small size
Smaller segments (below 10%) if external revenue of reportable
segments construes less then 75% of total enterprise revenue until
75% of total enterprise revenue is included in reportable segment.
Segment identified as reportable in immediately preceding year
should continue as reportable segment
Preceding year figures should be restated if segment identified as
reportable in current year was not reportable in preceding year.

Segment Accounting Policies
Follow policies adopted for preparation and presentation of
enterprise financial statement.
Allocate joint segment assets and liabilities between segments only
if the related revenue / expenses are also allocated.
DISCLOSURE
Reporting for each Primary Segment
Segment revenue classified as external / internal / inter-
segment revenue.
Segment result.
Carrying amount of segment assets.
Carrying amount of segment liabilities.
Additions to segment tangible and intangible F/A
Only When Segments cash flow are not reports
Depreciation and amortisation of segment assets
Total significant non-cash expenses other than
depreciation/amortisation above

Notes :
A reconciliation segment information and enterprise
financial statement
oSegment revenue for
each segment based on
geo. location whose
external revenue is 10%
or more of enterprise
revenue
oSegment assets for
each segment based on
geo. Location if > 10%
of total assets of geo.
Segments
oAdditions to assets for
each segment based on
geo. location of assets of
10% or more of total
oSegment whose revenue
from sale > 10% of ER or
segment asset > 10%of
total assets then
Segment revenue from
external customer
Total carrying amount of
segment assets
Cost incurred to acquire
assets
oWhere location of
customer different from
assets
Geographical segment
whose sales > 10% of ER
oSegment whose revenue
from sale > 10% of ER or
asset > 10% total assets
then:
Segment revenue from
external customer
Carrying amount of S/A
Cost incurred to acquire
S/A
oWhere location of assets
different from that of
customers then GS whose
revenue/asset > 10% of
enterprise
Carrying amount of S/A
geographically
Cost incurred to acquire
assets
Business Segment
Geographical Segment
based on Assets
Geographical
Segment based
on Customers
I f Primary is
OTHER DISCLOSURE
- Inter-segment transfers, their basis of pricing
and change
- Changes in accounting policies for segment
reporting fact and effect.
- Composition of BS/GS, both primary and
secondary, if not otherwise disclosed.
* Kuoni, Switzerland * Switzerland; United Kingdom;
International; Incoming
* LVMH, France * France; Europe (excluding France):
USA; Japan; Far East (excluding
Japan); Other
* Novartis,
Swirtzerland
* Europe; Americas; Asis, Africa and
Australia
* Roche, Switzerland * Switzerland; European Union; Rest
of Europe; North American; Latin
America; Asia, Africa, Australia
and Oceania
Geographical Segments
Reporting under IASs - I
ABB, Sweden and
Switzerland
* Power generation; Power transmission and
distribution; Industrial and building systems;
Financial services; Various activities and
corporate.
* Fujitsu, Japan * Information Technology
* LVMH, France
* Champagne and Wines; Cognac and spirits;
Fashion and leather goods; Fragrances and
cosmetics; Selective retailing; Other
* Nokia, Finland * Telecommunications; Mobile phones; Other
Operations
* Novarties, Switzerland * Healtheare; Agribusiness; Nutrition;
Corporate
* Roche, Switzerland * Pharmaceuticals; Vitamins and fine
chemicals; Diagnostics; Healthcare;
Fragrances and flavours
Business Segments IASs - II
Primary Secondary
Segment Revenue
- External Customers
- Other Segments





Segment Result
Segment Assets
Total Capital Expenditure
Total Expenses-Depreciation and Amortisation
Total Non-Cash Expenses other than
Depreciation and Amortisation

Reconciliation to Financial Statement


Basis of Pricing Inter-Segment Transfers


Changes in Segment Accounting Policies
Composition of each Business Segment
Composition of each geographical Segment
Related Parties


* Establish Disclosure requirements
- Related Party Relationships

- Transactions with related Parties

Scope
Conflict with
confidentiality required by
Statute
State
Controlled
Enterprises
CFS in respect of intra-
group transactions
Enterprises
having
Turnover
less than 50
Crores
Does not applies to
Relationship Covered
Enterprises under significant control
of first two above
Key management
personal and relatives
Individuals directly or indirectly exercising control or
significant influence
Associates and
Joint Ventures
Enterprises directly or indirectly under common
control
Deemed Not to be
Related Parties
Companies having Common Directors
Economic Dependence
Single customer / supplier / franchiser
distributor / general agent.
Parties dealing in the normal course of business.
- providers of finance
- Trade unions
- public utilities
-government departments and government agencies agencies
including government sponsored bodies
Related Party
Party which has ability to control or exercise significant influence
Control
Ownership directly or indirectly of voting power > 50%
Control over composition BOD
Substantial interest in voting power
Key Management Personal
Persons having authority and responsibility for planning,
directing and controlling
Rationale
-Are normal feature of commerce and business
-Without Disclosure General presumption
Transactions at Arms length
Transaction by two independent parties
-Existence of relationship is likely to influence the
transaction
-Inherent difficulty in determine effect of relationship
-Transactions which took place only due to relationship
Disclosure
Name/Nature of relationship of parties
Description of the relationship
Name of transacting Party
Nature of transactions;
Volume of the transactions In absolute/Relative Terms
Any other Element for better understanding
Amounts and appropriate proportions of outstanding provisions
for doubtful debts due
Amounts written off or written back
Examples of the Related Party Transactions
Purchases or sales of goods
Purchases or sales of fixed assets
Rendering or receiving of services
Agency arrangements
Leasing or hire purchase arrangements
Transfer of research and development
License agreements
Finance
Guarantees and collaterals
Management contracts including for deputation of employees.
LEASES
SCOPE/ APPLICABILITY
Agreement for motion picture,
film, video recording, plays
manuscripts, patents &
copyrights
Agreement
to use
national
resources.
Agreements
to use Land
Does not applies to
DEFINITIONS
Lease
Agreement for transfer of right to use asset for an agreed period in return of payments
Finance Lease
Which transfers substantial risks and rewards of ownership
Operating Lease
Other than finance lease
Non-cancelable Lease
Which is Cancelable only on
Remote contingency
Permission of lessor
New lease with same lessor for similar assets
Payment of additional amount by lessee
Minimum Lease Payment (MLP)
Payment by lessee excluding contingent cost of services
and taxes but includes
For lessee
For lessor
RV
guaranteed
on his behalf
RV guaranteed by or on
behalf of lessee by and
independent party
Economic Life
Period for which economically usable or number of production units
expected to be obtained
Gross Investment
MLP + UGRV
Unearned finance income
GI [ MIP + URGV]
Net Investment
GI-UFI
Contingent Rent
Lease payment which is not fixed
Unguranteed RV
Amount of RV > GRV
Finance Lease
Transfer of ownership of lessee
Option to purchase the assets at a
price lower than the fair value
which is reasonable certain to be
exercised
Term covers major part of the
economic life of asset
Present value of MLP amounts to
fair value of asset at inception
Unique use of asset by the lessee
Characteristics
Operating Lease
On cancellation losses borne
by lessee
Gains/losses from fluctuation
in FV borne by lessee
Option of continuance for
secondary period at rent
substantially lower than
market value
In books of Lessee
In books of Lessor
Recognized Asset and Liability at FV
If FV > PV of MLP then at PV of
MLP
PV computation, Discount Rate
=Interest Rate Implicit
Apportion LP into finance charges and
outstanding liability
Finance charges to be allocated at
constant periodic rate of interest.
Depreciation should be accounted
according to AS -6 If no reasonable
certainty of ownership then
depreciated over the lease term
Recognize asset at amount equal
to NI
Finance income to be recognize at
constant periodic rate of return
Sales to be recognized as per
accounting policy
Sales should be restricted to
amount after applying commercial
rate of interest
Indirect expenses charged to
P&L
DISCLOSURE
Finance Lease
In books of Lessee
In books of Lessor
Total future MLP under non cancelable
lease for each of the following period:
-not later than one year
-later than one but not later than five years
-later than five years.
Total future minimum sublease payments
expected to be received
In addition to AS-10 & AS-6 :
For each class of asset
-the gross carrying amount
-the accumulated depreciation
-accumulated impairment loss at
balance sheet date
-depreciation impairment losses,
recognized/ reversed in P&L A/c.
Total contingent rent recognized as
income in P&L A/c. for the period.
Future MLP under non cancelable
leases in aggregate and for each of the
following period:
Operating Lease
LP charged to P&L alongwith MLP &
Contingent rent
Sub lease payment received or
receivable
General description of significant
leasing arrangements including :
-basis of contingent rent
-existence and terms of renewal or
purchase options and escalation
clauses
-restrictions imposed by lease
agreements
-not later than one year
-later than one year and not later
than five year later than five year
General description of significant
leasing arrangements.
Accounting policy in respect of
initial direct cost.


Sale and Lease Back Transactions
WHEN
Any surplus/deficiency in
sale proceeds be deferred
and amortised over the
lease term in proportion to
the depreciation

Any surplus/deficiency should be
recognized immediately except if the
sale price is below FV and be
compensated by future lease payments
should be deferred and amortised in
proportion lease payment.
If the value is less than the carrying
amount, difference should be
recognized immediately
Transaction results in operating
lease
Transactions results in
finance lease
Operating Lease :

(a) Sale at Fair value any P/L to be recognised
separately
Carrying value - 100
Fair Value - 150
Sales Value - 150
Since sale is at
fair value, there
is no impact of
lease back
package
Carrying value - 100
Fair Value - 150
Sales Value
-if Rs. 140 Profit Rs. 40
-If Rs. 90 Loss Rs. 10
P/L to be recognised
immediately except
- if loss is compensated
by future lease
payments below market
price
(b) Sales at below fair value
Carrying value - 100
Fair Value - 150
Sales Value - 160
Out of profit of Rs. 60/-
Rs. 10/- (i.e. over fair
value) to be amortised
and Rs. 50/- (i.e.
difference between fair
value & carrying value)
to be recognised
immediately
(c) Sales at below fair value
EARNING PER
SHARE

Objective
Applicability/Scope
Enterprises
Whose E/PES are listed
Which are disclosing EPS otherwise
Requirements applicable to CFS
Improve
comparison
Make EPS
more
compatible
Simplify
computation of
EPS
Potential Equity Shares (PES)
Financial Instrument / other contract, which
entitles / may entitle its holder to equity shares.
Financial Instruments (FI)
Contract giving rise to:
FA of one and FL or ES of another Enterprise
Financial Asset (FA)
Cash
Contractual right to receive cash
Contractual right to exchange FI
ES of other enterprise
Potential Equity Shares
Convertible Debt/Preference Shares
Share Warrant
Options
Contractual / Contingent Shares
What are
Basic EPS
Per share profit attributable to Existing Equity
Shareholders.
Diluted EPS
Per share profits attributable to Existing and
Potential Equity Share-holder.
Basic EPS How Measured
Division of Net Profit or Loss by Weighted
Average no. of ES outstanding
Earnings - Basic
Net Profit or Loss attributable to ES holders
Per Share Basic
Weighted Average no. of ES O/S during the period
Date of inclusion
* ES of different nominal values (with same division rights)
* Effect of Change in no. of ES without corresponding
change in resources otherwise than by conversion of PES for all
periods
* Bonus Shares / Share Split
Changes in No. of ES without corresponding change in resources
* Right Issue & Calculation of No. of ES
For all prior periods: No. of ES O/s multiplied by
FV per ES prior to right
Theoretical ex-rights FV per Share
Where the denominator is calculated by dividing (Total FV of all
ES prior to right + proceeds of right) by no. of ES O/s
after exercise of right.
Weighted Average no. of ES
-Includes shares from the date consideration is received
Inclusion in case of Amalgamation
AnP
AnM
From the date acquisition
From beginning of reporting
period
-Partly paid ES treated as fractions
-In case different rights shares equivalent no. of shares
-Contingent issue from the date conditions complied
-Adjustment for change in no. without corresponding change in
resources except conversion of PES such as
Bonus
Bonus element in right issue
Split/reverse split
-Bonus to be adjusted for all periods reported
-No. of shares in case right issue with bonus element
Share OS prior to right X (FV/Share prior to right)
Theoretical ex-right FV / share
Right Issue Example
Accounting Year Ending on 31.12.2001
No. of shares O/s Prior to Right (FV Rs. 21/-) 500000
Right Issue on 1.3.2001 (1 to 5) (Rs. 15/-) 100000
Theoratical ex-right FV come to Rs. 20/- as under :
(500000 x 21) + (100000 x 15)
500000 + 100000
Adjustment Factor (2120) = 1.05
Outstanding ES for the year :
(50000 x 1.05 x 212) + (600000 x 1012)
Preceding Years O/s shares shall also be adjusted.
Diluted EPS How Measured
Division of Net Profit or Loss by Weighted Average no. of ES O/s
both adjusted for dilutive PES
Net Profit or Loss
Attributable to ES holders including Dilutive PES i.e. after :
- Dividend (including tax) & Interest (after tax) on PES
- Other expense / income (after tax) attributable to PES
Weighted Average no. of ES
Weighted Avg. of total No. of ES including shares to be issued on
conversion of Dilutive PES deeming the same as converted in ES. PES
shall be deemed to have been so converted, in case such PES.
- issued earlier, at Beginning of the year.
- issue later, on the dated of issue of PES.
Diluted EPS Relevant Issues
Assumed exercise of dilutive option/PES
Proceeds at fair value
Difference in no. of shares issuable and shares would have been
issued at FV to be treated as without consideration
Option dilutive when results in issue at lower than FV
PES treated as dilutive only when leads to reduction in profit
Only dilutive PES Anti-dilutive to be ignored
Shares issued at FV treated as Anti-dilutive

If no. of ES or PES OS changes for the reason of issue of
bonus shares, split or consolidation:
Adjust Basic & Diluted EPS for all the period presented
Even when Change is after b/s date, these have to be adjusted
If per share calculation reflects change in no. of shares, fact to
be disclosed
Restatement
Presentation of Basic & Diluted EPS
For each class of ES
on face of P&L
equal prominence for all periods presented
even if negative
Amount used as numerator for basic/diluted alongwith
reconciliation
No. of shares for basic/diluted EPS used as denominator with
reconciliation thereof
Nominal value of shares with EPS
Example Effects of Share Options on Diluted EPS
Net Profit for the year 2001 Rs. 12,00,000
Weighted average number of equity shares outstanding during the year 2001 5,00,000 shares
Average fair value of one equity share during the year 2001 Rs. 20.00
Weighted average number of shares under option during the year 2001 1,00,000 shares
Exercise price for shares under option during the year 2001 Rs. 15.00
Earnings Shares EPS
Net profit for the year 2001 Rs. 12,00,000
Weighted average number of shares outstanding during year
2001
5,00,000
Basic EPS Rs. 2.40
Number of shares under option 1,00,000
Number of shares that would have been issued at fair value:
(1,00,000 X 15.0) / 20.00
* (75,000)
Diluted EPS Rs. 12,00,000 5,25,000 Rs. 2.29
* The earning have not been increased as the total number of shares has been increased only by the number of
shares (25,000) deemed for the purpose of the computation to have been issued for no consideration
Computation of EPS
Consolidated Financial
Statements
DOES NOT DEAL WITH:

-Amalgamations & their effects on consolidation
-goodwill arising out of amalgamation
-Accounting for investment in associates
-Accounting for investment in joint ventures

DEFINITIONS
Control
ownership, directly or indirectly through
subsidiaries, of more than half of voting
power
control over composition of board of
director/governing body.
Minority Interest
That part of net results and of net assets of subsidiary
attributable to interest not owned- directly or
indirectly, by the parent.
Minority interest in net assets:
- amount of equity
- share of movements in equity since
date relationship


SCOPE
Parent to present CFS;
consolidate all subsidiaries, domestic and foreign
other than
- Temporary control
(subsidiary held & acquired for disposal in near future.)
- severe long term restrictions on subsidiary which
significantly impair its ability to transfer funds to parent.
- Investment -as per Accounting Standard 13.
- Reasons for not consolidating -disclosed in CFS.
PROCEDURE
- Line by line, adding like items
- Cost to parent of investment & parents portion of equity
eliminated
- If Cost > Parents portion then Goodwill
If Cost < Parents portion then Capital Reserve
- Arrive at net income attributable to owners of parent after
adjusting minority interest
- Present minority interest in consolidated B/S separately
- Intragroup balance Intergroup transaction eliminated.
- Unrealisable losses from intragroup transactions
eliminated (dont eliminate when even cost cant be
recovered)
- Financial statement used in consolidation to be drawn
upto same reporting date.
- If not practicable - in any case difference between
reporting dates not be more than six months.
- Uniform accounting policies
(If not practicable, disclose fact)
- Investment in enterprises ceasing to be subsidiary- doesnt
become associate - Accounted as per Accounting Standard
13.
- Investment in subsidiary in parents separate financial
statement as per Accounting Standard 13.
Presentation
Parent which presents CFS should do so in addition to separate
financial statement
Disclosure

List of all subsidiary name,
country of incorporation
proportion of ownership interest
Nature of relationship
Effect financial position at reporting date
Results for reporting period also
Names of subsidiary whose reporting date is different
ACCOUNTING FOR TAXES ON
INCOME

Objective
Determination
of Expenses and
Savings of Tax
in an
Accounting
Period
Matching of
Taxes with
Revenue
Eliminate
effect of
difference in
tax and book
profit
Prescribed
Treatment of
Taxes
APPLICABILITY/SCOPE
Mandatory from
1.4.2001
Enterprise whose equity/debt securities listed or
likely to be listed on recognized stock exchange
Enterprise of a group whose parent follow AS
22 in CFS
1.4.2002
All other companies whose securities are
not listed
1.4.2003
All other enterpirses
Introduction
Accrual A fundamental accounting assumption

Tax Expense Recognition Rule
Same Period of recognition of Revenue/ Expenses

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

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




Accounting income (loss)
Net profit or loss for a period, reported , before income tax expense/saving
Taxable income (tax loss)
Income/loss as per tax laws, on which tax is payable/recoverable
Tax expense (tax saving)
Current tax + Deferred tax
Current tax
Tax payable (recoverable) on income for a period
Deferred tax
Tax effect of timing differences.
Timing differences
Differences originating in one period capable of reversal in subsequent periods
Permanent differences
Differences which are not reversible subsequently
DEFERRED TAX EFFECT
Two type of differences
Permanent
No
Asset/Liability
Timing
Tax
Asset/Liability
RECOGNITION
Determine Net Profit or Loss after Tax
Expense/Saving
I f Timing Difference then
Deferred Tax Asset/Liability subject to prudence
In case unabsorbed Depreciation/Accumulated
Losses then DTA to the extent reasonably certain
future tax income will be available for setoff
Basis of
reasonable
certainty
Past records
Realistic estimates
MEASUREMENT
Current Tax
Deferred Tax
Assets/Liabilities
Example
I n case of I ndividual
(A.Y. 2001 2002 ) 10+ 20 + 30 = 60 Average : 60/3 = 20%
Use 20% for measuring DTA and DTL.
At rates as per current law
At rates which are enacted
or substantively enacted
In case of slab then average rate of tax
No Discounting
Re-assessment of Unrecognized Deferred
Tax Assets Annually

Review of DTA
- Carrying amount Annually
- Write up / Write down of DTA on the
basis of reasonable certainty
Set Off When
DTA/DTL
relates to
same Tax
Laws
Right
Legally
Enforceable

Presentation and
Disclosure
Current Tax
Deferred Tax
Intends to
settle A/L on
net basis
DTA/DTL
relates to same
Tax Law
Right Legally
Enforceable
OTHER DISCLOSURE
Nature of Evidences supporting recognition
Separately from Current Tax
Break up in major Components
Transitional Provision
First year of application Opening DTA/DTL to
be adjusted against Revenue Reserve
Example - DTL
Particulars Year 1 Year 2
Net Profit A/c 200 200
Dep. Adj. -50 +50
Tax Profit 150 250
Tax Effect @40% 80 80
Tax Payable @40% 60 100
Create/Reverse 20 (20)
DTL
Example DTA
Particulars Year 1 Year 2
Net Profit A/c 200 200
See 43B Adj. +50 -50
Tax Profit 250 150
Tax Effect @40% 80 80
Tax Payable @40% 100 60
Create/Reverse 20 (20)
DTL
Illustrative Timing Difference
Year 0 WDV
in A/c
100
Tax
WDV
100
A/c
Dep
Tax
Dep
Diff. Tax
Effect
Cum
effect
1 75 63 25 37 -12 -4.8 -4.8
2 56 40 19 23 -4 -1.6 -6.4
9 5 2 5 2 1 0.4 -1.2
10 1 1 4 1 3 1.2 0
99 99 0
Analysis of Timing Difference
1 A/c Income> Tax Income Tax Effect> Tax
Payable
DTL
2 A/c Income> Tax Income Tax Effect> Tax
Payable
DTA
3 A/c Income> Tax Loss-C/F Tax Effect, No Tax /
MAT
DTL /
DTA
4 A/c Loss< Tax Loss C/F Advtage. Less in
future
DTL
5 A/c Loss> Tax Loss C/F Advtage. More in
future
DTA
6 A/c Income, A/c Loss Tax Effect<Tax
Payable
DTA
Accounting for investment in
associates in consolidated
financial statements
DEFINITIONS
An Associate
Is an enterprise in which the investor has
significant influence and which is neither
a subsidiary nor a joint venture of the
investor.
Control
-The ownership, directly or indirectly through
subsidiaries, of more than one-half of the voting
power of an enterprise
-Control of the composition of the board of
directors /corresponding governing body
Significant influence
-power to participate in the financial and/or operating
policy decisions but not control over those policies.
Subsidiary
-enterprise that is controlled by another enterprise
(known as the parent).
Group
-parent and all its subsidiaries.
Equity
-residual interest in the assets of an enterprise after
deducting all its liabilities.
Consolidated Financial statements
financial statements of a group presented as those of a
single enterprise.
The equity method
method of accounting
the investment is initially recorded at cost,
identifying any goodwill/capital reserve
carrying amount of the investment is adjusted for the
post acquisition change in net assets.
The consolidated profit and loss reflects
the investors share of the results .
ACCOUNTING IN THE EQUITY METHOD

- Goodwill/capital reserve arising - included in the
carrying amount but disclosed separately.
- Intragroup balance Intergroup transaction eliminated.
- Unrealisable losses from intragroup transactions
eliminated (dont eliminate when even cost cant be
recovered)
- Investor ensure that Reporting date are same.

If not associate should prepare for the same date.
If, impracticable, different date statement can be used.
Investor - make adjustment for the effect of any
significant events between the dates.

- Uniform Accounting Polices
- investor recognize its share of results after
providing for preference dividend
- If Carrying Amount < = loss then reported at NIL
value and further loss is not booked

Exception
Additional losses are provided to the extent that the investor has
incurred obligation or made payments on behalf.
SIGNIFICANT INFLUENCE
An investor holds directly or indirectly 20% or more or less of
the voting power by this it is not evidenced that investor has
significant influence unless it can be clearly demonstrated.
The existence of significant influence is evidenced in following
ways:
-Representation on the BOD / corresponding governing body
-Participation in policy making processes.
-Material transactions
-Interchange of managerial personnel.
-Provision of essential technical information.
ACCOUNTING FOR INVESTMENTS


Accounted for under the equity method except.

Investment is acquired and held for subsequent
disposal in near future.
severe long-term restriction on associates
(Accounting should be as per AS-13.)
Accounting under equity method should discontinue
from the date that - it ceases to have significant influence.


- Disclosure required as per A S 4.
- Appropriate listing and description
- Investment disclosed as long term investment.
- Investors share in results disclosed separately.
- Investors share of any extraordinary / prior period
item should be disclosed separately.
- Associate having different Accounting Policy
- Name of the Associates -reporting date is different.


DISCONTINUING
OPERATIONS

Applies to all discontinuing operations of
an enterprise.
DEFINITIONS
Discontinuing Operation
is a component of an enterprise:
that the enterprise, pursuant to a single plan, is:
-disposing of substantially in its entirety
-disposing of piecemeal
-terminating through abandonment;
that represents a separate major line of business or
geographical area of operations; and
that can be distinguished operationally and for
financial reporting purposes.
Initial Disclosure Event
the occurrence of one of the following, whichever occurs
earlier:
the enterprise has entered into a binding sale
agreement for substantially all of the assets or
the enterprises BOD/governing body has both
- approved a detailed, formal plan for the
discontinuance and
- made an announcement of the plan.
RECOGNITION AND MEASUREMENT
On occurrence of initial disclosure event
the net realizable value of the assets should be estimated
if carrying amount < realisable value
the estimated loss - recognised
After initial recognition
-On every balance sheet date, till the discontinuance is
completed, estimate the net realisable value of assets and
recognise any additional loss or reversal of estimated loss.

-For any gain or loss that is recognized on the disposal
of assets or settlement of liabilities
-The amount of the pre-tax gain or loss
-Income tax expense relating to the gain or loss
-Net Selling Price


DISCLOSURE

Initial disclosure event till discontinuance is completed
* description
* the date and nature
* the date or period in which the discontinuance is completed
* the carrying amounts,of the total assets and the total liabilities
to be disposed of;
* the amounts of revenue, expenses, and pre-tax profit or
loss from ordinary activities during the current financial reporting
period, and the income tax expense
* the amounts of net cash flows.

Initial disclosure event Dealt in accordance of AS-4.
When an enterprise disposes of assets or settles liabilities it should
include in its financial statements the net selling price.
Any significant change in the relating to the assets to be disposed
or liabilities to be settled and the events causing those changes.
Fact & effect, if an enterprises abandons or withdraws from a plan
that was previously reported as discontinuing operations.
in Interim Financial Reports describe any significant activities or
events and any significant changes
These Disclosures
either
in the notes to the FS
or
on the face of of the FS
Except
pre tax gain or loss recognised on the disposal of assets or
settlement of liabilities
shown on the face of the statement of P&L.
Restatement of prior periods
segregate continuing and discontinuing assets & liabilities,
revenue, expenses and cash flows.
DISCLOSURES
INTERIM FINANCIAL
REPORTING
Applicability And Scope
Enterprises, electing to prepare IFS
Does not mandate frequency of reporting
Requirements for cash flow applies as in annual FS
Effective from 1.4.2002
Objective
PRESCRIBE
+ minimum content
+Principles for
recognition and
measurement in a
complete or
condensed financial
statements
+ Timely and
reliable reporting for
better understanding
of the readers
Definitions
I nterim period
Reporting period
shorter than a full
financial year
I nterim financial
report
Financial report
containing
Complete/Condensed
set of FS for an
interim period
Minimum Components
Condensed
balance sheet
Condensed
statement of
profit and loss
Condensed
cash flow
statement
Selected
explanatory
notes
Use of complete sets of FS not prohibited.
Complete Financial Statement Condensed Financial Statements


Conform to the requirements as
applicable to Annual FS
Include Minimum each of headings or
Sub Headings as in Annual FS
Selected Explanatory Notes
Additional line items if omission
leads to a misleading impact

Forms and Contents
EPS where required to be presented as per AS 20
Selected Explanatory Notes
Explanations of the Events and transactions that are significant to an
understanding of the changes in the financial position and performance
since last reporting date.

Same accounting policies, if changed then description of nature/effect
Explanatory comments on seasonality of operations
Nature and amount of items which are unusual
nature and amount of changes in estimates
- Reported in prior interim periods of current financial year
- Reported in prior financial years
Issuances, buy-backs, repayments and restructuring of debt, E/PE
Dividends, aggregate or per share, separately for equity/others
Segment reporting as per AS-17
Effect of changes in composition of enterprise
Material changes in contingent liabilities
Other disclosures as required by the other AS
Periods of Interim Financial Statements


Balance Sheet
Cash Flow
Statement
P&L
Current interim period prepared upto year to date with
comparative figures of same period in preceding year
Recognize how to
measure, classify, or
disclose item in IFR
materiality should be
assessed
Separate IFR for final interim period may
not be prepared
Disclose
Significant changes in estimates
separately as per AS-5
Recognition And Measurement
Same accounting policies except changes taken place after the recent financial
statements
Seasonal or occasional revenues not to be anticipated or deferred
Unevenly incurred Costs should be anticipated or deferred only if, it is appropriate
to anticipate or defer the same at the end of financial year
Measurements and use of estimates should be such that all material financial
information relevant for understanding the financial position or performance are
disclosed
Change in accounting policy, should be made retrospectively from prior interim
periods year

INTANGIBLE ASSETS

Applicability
Expenditure incurred on intangible items during accounting
periods commencing on or after 1-4-2003
Mandatory for:
Enterprises- whose equity or debt securities listed/to be
listed on a recognised stock exchange
All other reporting enterprises,-turnover for the accounting
period exceeds Rs. 50 crores.
Other enterprises during accounting periods commencing
on or after 1-4-2004
Earlier application of the AS is encouraged.
After this Standard, the following stand
withdrawn :
AS - 8, Accounting for Research and Development;
AS-6, Depreciation Accounting, with respect to the amortisation
(depreciation) of intangible assets; and
AS - 10, Accounting for Fixed Assets - paragraphs 16.3 to 16.7,
37 and 38.
Objective
Accounting treatment for intangible assets not dealt in another AS
To recognise an intangible asset if certain criteria are met
Measure the carrying amount of intangible assets and disclosures
about intangible assets.
Scope

Not applied in accounting for:
+ that are covered by another AS
held by an enterprise for sale in the ordinary course of business
deferred tax assets
AS 19, Leases
goodwill arising on an amalgamation and on consolidation
+ financial assets;
+ mineral rights and expenditure on the exploration for, or development and
extraction of, minerals, oil, natural gas and similar non-regenerative
resources; and
+ arising in insurance enterprises from contracts with policyholders.
Intangible asset
identifiable non-monetary asset, without physical substance,
held for
use in the production or supply , for rental to others, for
administrative purposes.
Asset
a resource:
- controlled by an enterprise
- future economic benefits are expected
Amortisation
systematic allocation of the depreciable amount of an intangible
asset over its useful life.
Depreciable amount
cost less residual value.
Residual value
amount an enterprise expects to obtain at the end of assets useful life
Active Market
market where following conditions exist :
- the items are homogeneous;
- willing buyers and sellers can normally be found at any time;
- prices are available to the public.
Impairment Loss
carrying amount > recoverable amount.
Carrying amount
amount at which an asset is recognised in the balance sheet, net of
any accumulated amortisation /accumulated impairment losses
Recognition Criteria
recognised if:
- future economic benefits will flow to the enterprise
- the cost measured reliably.
assess the probability of future economic benefits will exist over the useful
life
measured initially at cost.
acquired separately- the cost measured reliably.
acquired in an amalgamation in the nature of purchase - is accounted for in
accordance with A S 14
by way of a Government Grant - at a nominal value or at the acquisition
cost
acquired in Exchanges of Assets- is determined in accordance with AS 10
Internally Generated Goodwill - not be recognized as an asset
Internally Generated Intangible Assets
Meets the criteria for recognition, classifies into:

RESEARCH PHASE

DEVELOPMENT PHASE


-intangible asset arising
from research should
not recognized
-Expenditure research
recognised as an expense

An intangible asset arising from development
recognised if demonstrate :
- the technical feasibility
- its intention to complete
- its ability to use or sell
- the existence of a market for the output
- the availability of adequate resources
- its ability to measure the expenditure

Recognition of an Expenses
Recognised as an expenses unless
- forms part of an intangible assets;
- item is acquired in an amalgamation in the nature
of purchase and cannot be recognized as an assets
- Past expenses not recognized as an assets
- Subsequent Expenses recognized as an Expenses
unless
it is for enabling the assets to earn future
benefit
attributed to the assets
Amortization
- Depreciable amount of an I.A. amortised on a systematic basis
- method reflect the pattern in which the economic benefits are consumed
- Period reviewed at least once in a year.

Residual Value
Assumed to be Zero unless there is an commitment by third or there exist an
active market.
Retirement/ Disposal
- eliminated from Balance Sheet.
- Gains or losses (i.e. diff. between net disposal proceed and carrying
amount)
Disclosure
For Each Intangible assets distinguishing between internally generated&
others
Gross and net carrying amount
Useful life Amortisation methods and rates
Reconciliation
Showing
Addition
Disposals
Amortisation
Impairment loss
Other Disclosure
-If amortised more than 10 years
reasons why? And factors
-Material information
-Title restricted
-commitments
Financial Reporting of
Interest in Joint Ventures
Scope / Status
Mandatory application in case of

Accounting for interest in
Joint Venture

Reporting of Assets, Liabilities,
Income and Expenses of Joint
Venture in SFS/CFS of
Venturers/Investors
Effective from 1.4.2002
Objective
SET OUT PRINCIPLES AND PROCEDURES FOR
Accounting of Interest
Reporting of Joint Venture Assets, Liabilities, Income and
Expenses in SFS
Joint Venture
Contractual arrangement to undertake an economic activity under
Joint Control
Joint Control
Contractually agreed sharing of control
Control
Power to govern financial and operating policies
Venturer
Party having Joint Control
Investor
Party having no joint Control
Proportionate Consolidation
Method of Accounting and Reporting share Jointly controlled
Entity in SFS.
Common Features
Bound by Contractual arrangement
Contractual Arrangement establishing Joint Control
Forms

Jointly
Controlled
Operations


Jointly
Controlled
Assets

Jointly
Controlled
Entity
Joint Control
Identifies Decision Areas
essential to Goal
Protective Rights and
Participative Rights
One Venturer as Operator
No significant influence
Agreement in writing
Contractual Arrangements with
Subsidiaries treated as Joint
Venture
Contractual Arrangement
Characteristics
Evidences
Contents
Contract
between
Venturers
Minutes of
Discussions
Arrangements
Incorporated in
Articles
By-Laws of
Joint Venture
Activity, Duration
and Reporting
Obligations
Appointment of
BoD/GB and
Voting rights of
Venturers
Capital
Contributions
Sharing of Output,
Income, Expenses
and Results
Characteristics
Use of Own Assets, Inventories,
incurring expenses,liabilities and
finance
No Separate Financial Statements

Recognition of interest in
Separate FS
Assets controls and liabilities incurs
Expenses incurred and share in
income from JV

Joint Ownership of Assets for common
economic benefit
Reflects economic reality and legal form
Limited Accounting records

Recognition of interest Separate and
Consolidated FS:
Share in joint assets
Liabilities incurred individually
Liabilities incurred jointly
Income from sale or use of share of output
and expenses
Expenses incurred in Joint Venture
Jointly Control Assets
Jointly Control Operation
Common
No Separate Establishment,
Partnership or Other entity or
separate financial structure
Agreements for sharing Joint
revenue and expenses
May prepare accounts for
internal management reporting
purposes
Jointly Controlled Entities
Separate Establishment of Corporation, Partnership or Other entity
Controls Assets, incurs Liabilities and Expenses, Earns Income
Enter into Contracts in own name, raise finance
Venturers entitled to share in results
Own accounting Records and own FS
Involves features of both jointly controlled assets and operations
Recognition of Interest in
Separate Financial Statements
As per AS-13
Consolidated Financial Statements
As Per Proportionate Consolidation Method
Excepts where
Interest is likely to dispose of in near future
jointly controlled entity operates under severe long-term
restrictions that significantly, impair its ability to transfer funds
Accounted as per AS-13
Reflect substance and economic
reality not structure or form
Line wise Consolidation as per AS-21
No set off of legal right exist
Excess losses of investors to be
recognized by the venturers
Future profits , first absorbed by the
venturers to the extent of losses
Recognition of Goodwill/Capital
Reserve
Accounting Policies
Uniform, If not adjustment,
Where no adjustment then
disclose
Reporting Period
Consistent, statements drawn
to same date, if not adjustment,
where no adjustment
disclosure
Proportionate Consolidation Method
Discontinuance
When
Ceases control but retains,
either in whole or in part, its
interest
Entity operates under severe
long-term restrictions that
significantly impair its ability
to transfer funds
Other wise
AS-13orAS-23
Cost of Investment on the
date of discontinuance
Venturers share in net assets
adjusted with carrying amount of
Goodwill/Capital Reserve
Reporting Thereafter
Unilateral
Control As per AS
21
Venturer Contributes or
Sales assets to the Joint
Venture
Venturer Purchases Assets
from Joint Venture
If Significant risk and reward of
ownership transferred then
recognise
portion of Gain/Loss
attributable to interest of other
Venturers
full loss where evidence of
reduction in the net realizable
value/impairment loss exist
- Should not recognize its share
of profits/losses until resells
the assets to independent Party
- Recognize losses immediately
in case of net realizable value or
Impairment loss
Transaction Between a Venturer and Joint Venture
Transaction between Venturer and Joint Entity
Reporting Interests in FS of an Investor
No J oint Control:
a.) In CFS as per AS-13, AS-21 or AS-23 as appropriate
b.) In SFS as per AS-13
Operators of Joint Ventures
Should account for any fees in accordance
with AS-9
IN SFS
Full profit/loss
IN CFS
Same as Above
Disclosures
Common for separate and consolidated financial
statements
Commitments in respect of its
interests separately
Interests and share in commitments
incurred jointly
Share of commitments of the joint
ventures themselves.
Contingent liabilities to be disclose
separately unless probability of
loss is remote:
Interest and share in liabilities
incurred jointly
Share of liability of the Joint Ventures
themselves
Those, which arise as Venturer is
contingently liable for the liabilities of
other Venturers
Additional Disclosure in Separate
Financial Statement
Aggregate amounts of assets, liabilities,
income and expenses related to its
interest in the jointly controlled entities

-List Joint Ventures
-Description of Interest in Significant Joint
Ventures
-Proportion of ownership interest, name, country
of incorporation or residence in respect of Jointly
Controlled Entities


IMPAIRMENT OF
ASSETS
Applicability
In respect of expenditure incurred on intangible items during
accounting periods commencing on or after 1-4-2004
Mandatory for:
Enterprises- whose equity or debt securities listed /to
be listing on a recognised stock exchange
All other business reporting enterprises,-turnover for
the accounting period exceeds Rs. 50 crores.
Other enterprises during accounting periods
commencing on or after 1-4-2005
Earlier application of the Accounting Standard is
encouraged.
Objectives
prescribe the procedures to ensure that assets are carried at no more than their
recoverable amount
recognize an impairment loss
when an enterprise reverse an impairment loss and it prescribes certain
disclosures .
Scope
Applied in accounting for the impairment of all assets
other than
inventories
assets arising from construction contracts
financial assets, including investments
deferred tax assets
Applies to assets that are carried at cost / at revalued amounts
Definitions


Recoverable amount
higher of an asset's
net selling price
and its value in use
Value in use
present value of
estimated future cash
flows arise from the
continuing use of an
asset and from
its disposal at the end
Net selling price
amount obtainable from the
sale parties
less costs of disposal
Cost of Disposal
incremental costs for
disposal of an asset
Impairment loss
Amount by which the carrying amount of
an asset exceeds its recoverable amount.
Discount Rate
A pre-tax rate that reflect current market assessments of the time value
of money and the risks. not reflect risks for which future cash flow
estimates have been adjusted.
Carrying amount
Amount at which an asset is recognised in the balance sheet after
deducting any accumulated depreciation .
Cash-generating
Unit is the smallest identifiable group of assets that generates cash
inflows from continuing use that are largely independent of the cash
inflows from other assets .
Corporate assets
Assets other than goodwill that contribute to the future cash flows.
Identifying an Asset that May be Impaired
Impaired when
Carrying Amount > Recoverable Amount.
Assess at each balance sheet date whether any assets is impaired.
If yes

Estimate the recoverable amount .
- In assessing an enterprise should consider the following
External sources of information Internal sources of information
-an asset's market value declined
-evidence is available of obsolescence
or physical damage
-significant changes with an adverse
effect in the technological, market,
economic or legal environment
-significant changes with an adverse
effect- changes include plans to
discontinue or restructure the operation
-market interest rates or other market
rates of return - increased
-economic performance of an asset is /
will be worse than expected
-the carrying amount is more than its
market capitalisation
Measurement of Recoverable Amount
- Not necessary to determine both an asset's net selling price and its
value in use.
- Possible to determine net selling price, even if an asset is not traded in an
active market.
- If an asset not traded in an active market, the recoverable amount may be
taken to be its value in use.
Recoverable amount - for an individual asset
If not possible recoverable amount is determined for the cash-generating unit to
which it belongs, unless
The asset's value in use can be
estimated to be close to its net
selling price and net
selling price can be determined.
Net selling price is higher than
its carrying amount
Either
Or
Net Selling Price
The best evidence is a
price in a binding sale
agreement adjusted
for incremental costs
If asset is traded in an
active market
market price less cost
of disposal
Based on best information
available, at the balance sheet
date
I f this not
I f both are not
available
Basis for Estimates of Future Cash Flows
Based on
-Reasonable and supportable assumptions
-The most recent financial budgets/forecasts
Composition of Estimates of Future Cash Flows
-Estimates of future cash flows should include:
projections of cash
inflows
projections of cash outflows
necessarily incurred for the
cash inflows
net cash flows-
on disposal of
assets
Estimates of future cash flows not include flows arise
from:
- a future restructuring which is not yet committed
- future capital expenditure for improving /
enhancing the asset
- cash inflows or outflows from financing activities;
- income tax receipts or payments.
Recognition and Measurement of an Impairment
Loss
RECOVERABLE AMOUNT < CARRYING AMOUNT
- Carrying amount of the asset reduced to its recoverable
amount.
Reduction is an impairment loss.
- recognised as an expense immediately,
- if revalued assets than according to AS-10
IMPAIRMENT LOSS > CARRYING AMOUNT
Recognise a liability if required by another AS
The depreciation charge adjusted in future periods to allocate the asset's
revised carrying amount less its residual value
Cash-Generating Units
Identification
If not possible to estimate the recoverable amount of the individual asset, an enterprise
should determine the recoverable amount of the cash-generating unit to which the asset
belongs.
Cash generating unit identified consistently from period to period

What is cash generating units?
Discussed in earlier slides
Goodwill
In testing cash generating unit for impairment
goodwill related to this cash-generating unit is identified in FS
Perform Bottom
Test
Whether carrying amount of goodwill can be
allocated on a reasonable and consistent basis
then, compare the recoverable amount to its
carrying amount
Perform Top-
Down Test
identify the smallest cash-generating unit to
which the carrying amount of goodwill can be
allocated on a reasonable and consistent basis
then, compare the recoverable amount of the
larger cash-generating unit to its carrying
amount
Corporate Assets
In testing a cash-generating unit for impairment identify all the corporate assets on these CA
-If carrying amount can allocated on a reasonable basis

If not

Impairment Loss for a Cash-Generating Unit
Allocated to reduce the carrying amount in the following order:




Carrying amount not reduced below the highest of
its net selling price
perform Top Down Test

perform Bottom Test
to goodwill allocated to
the cash-generating unit
then, to other assets unit
on a pro-rata basis
and
its value in use
zero.
Reversal of an Impairment Loss
Assess at each balance sheet date
There is any indication that an impairment loss recognised- may no longer exist
for this an enterprise should consider, as a minimum, of
External sources
of information
Internal sources
of information
the asset's market
value has increased
significant changes
with a favorable
effect environment
market interest rates
or other market rates
have decreased
significant changes that
includes capital expenditure
incurred on improvement
Better performance
evidence is available
Disclosure
:






An enterprise that applies AS-17 should disclose above for each
reportable segment
If amount of impairment loss or reversal of impairment loss material
to the FS then an entity should disclose:
For each type of assets
impairment losses recognized
reversal of impairment losses
impairment losses recognized against revaluation reserve
reversal of impairment losses against revaluation reserve

For an Individual Assets
As a whole
Event and circumstances
Amount
the nature; and the reportable
segment
For a cash generating unit-
description; amount; current and
former way of aggregating assets
Recoverable amount and basis


The main classes of
assets affected by
impairment
Events and circumstances