AS-1 — Disclosure of Accounting Policies
1. Significant Accounting Policies followed in preparation of accounts be disclosed at one place along with the financial statements.
2. Any change and financial impact of such change should be disclosed.
3. If fundamental assumptions (going concern, consistency and accrual) are not followed, the fact to be disclosed. Going concern assumption is assessed for a foreseeable period of one year.
4. Accounting Policies adopted by the enterprise should represent true and fair view of the state of affairs of the financial statements.
5. Major considerations governing selection and application of accounting policies are:
i) Prudence,
ii) Substance over form and
iii) Materiality.
Note — In relation to derivative contracts (e.g. foreign exchange forward contracts) the Institute interpreted on the principles of prudence that the loss (net), if any on each reporting date shall be provided through the statement of profit and loss account.
AS-2 — Valuation of Inventories (Revised)
The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
1. Inventories are valued at lower of cost or net realisable value. Specific identification method is required when goods are not ordinarily interchangeable. In other circumstances, the enterprise may adopt either weighted average cost method or FIFO methods whichever approximates the fairest possible approximisation of cost incurred. Standard Costing Method or Retail Inventory Method can be adopted only as a techniques of measurement provided where the results of these measurements approximates the results that would be arrived at after adopting specific identification method or weighted average method or FIFO method as may be apppcable to the circumstances.
2. The financial statements should disclose:
(a) the accounting policies adopted in measuring inventories, including the cost formula used; and
(b) the total carrying amount of inventories and its classification appropriate to the enterprise.
AS-3 — Cash Flow Statements
The standard sets out the requirement that where the cash flow statement is presented, it shall disclose a movement in "cash and cash equivalents" segregating various transactions into operating, investing and financing activity. It requires certain specific items to be addressed in the cash flows and certain supplemental disclosures for non-cash transactions.
Cash comprises cash on hand and demand deposits with banks.
Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
Cash flows are inflows and outflows of cash and cash equivalents.
Operating activities are the principal revenue-generating activities of the enterprise and other activities that are not investing or financing activities. Examples, cash receipts from the sale of goods and the rendering of services; cash receipts from royalties, fees, commissions and other revenue; cash payments to suppliers for goods and services; cash payments to and on behalf of employees.
Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Examples, cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalised research and development costs and self-constructed fixed assets; cash receipts from disposal of fixed assets (including intangibles); cash payments to acquire shares, warrants or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held for deapng or trading purposes).
Financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in the case of a company) and borrowings of the enterprise. Example, cash proceeds from issuing shares or other similar instruments; cash proceeds from issuing debentures, loans, notes, bonds, and other short- or long-term borrowings; and cash repayments of amounts borrowed.
Additionally certain items are required to be disclosed separately, like Income Tax, Dividends, etc.
The enterprise can choose either direct method or indirect method for presentation of its cash flows.
Cash flows arising from transactions in a foreign currency should be recorded in an enterprise’s reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the cash flow. A rate that approximates the actual rate may be used if the result is substantially the same as would arise if the rates at the dates of the cash flows were used. The effect of changes in exchange rates on cash and cash equivalents held in a foreign currency should be reported as a separate part of the reconciliation of the changes in cash and cash equivalents during the period.
AS-4 — Contingencies and Events Occurring after the Balance Sheet Date
Contingencies
1. The amount of a contingent loss should be provided for by a charge in the statement of profit and loss if it is probable that future events will confirm that, after taking into account any related probable recovery, an asset has been impaired or a liability has been incurred as at the balance sheet date, and a reasonable estimate of the amount of the resulting loss can be made.
2. The existence of a contingent loss should be disclosed in the financial statements if either of the conditions in above paragraph is not met, unless the possibility of a loss is remote.
3. Contingent gains should not be recognised in the financial statements.
Events occurring after the Balance Sheet Date
1. Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate.
2. Dividends stated to be in respect of the period covered by the financial statements, which are proposed or declared by the enterprise after the balance sheet date but before approval of the financial statements, should be adjusted.
3. Disclosure should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise.
Disclosure
1. If disclosure of contingencies is required by paragraph 11 of the Statement, the following information should be provided: the nature of the contingency, the uncertainties which may affect the future outcome, an estimate of the financial effect, or a statement that such an estimate cannot be made.
2. If disclosure of events occurring after the balance sheet date in the report of the approving authority is required by the Standard then it shall disclose; the nature of the event, an estimate of the financial effect, or a statement that such an estimate cannot be made.
AS-5 — Net Profit/Loss for the Period, Prior Period Items and Changes In Accounting Policies
Prominent definitions includes;
1. Ordinary activities are any activities which are undertaken by an enterprise as part of its business and such related activities in which the enterprise engages in furtherance of, incidental to, or arising from, these activities.
2. Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly.
3. Prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.
4. Accounting policies are the specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements.
Accounting treatment and disclosures
1. Ordinary Activities: When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.
2. Extraordinary Items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived.
3. Prior Period: The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived.
4. Accounting Estimate: The effect of a change in an accounting estimate should be included in the determination of net profit or loss in; (a) the period of the change, if the change affects the period only; or (b) the period of the change and future periods, if the change affects both.
5. Accounting Policy: Any change in an accounting policy which has a material effect should be disclosed. The impact of, and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such change is made, to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.
6. A change in accounting policy consequent upon the adoption of an Accounting Standard should be accounted for in accordance with the specific transitional provisions, if any, contained in that Accounting Standard. However, disclosures required by paragraph 32 of the Statement should be made unless the transitional provisions of any other Accounting Standard require alternative disclosures in this regard.
7. Where any policy was applied to immaterial items in any earlier period but the item is material in the current period, the change in accounting policy, if any, shall not be treated as a change in accounting policy and accordingly no disclosure is required e.g., gravity booked on cash basis in earlier period for relatively insignificant number of employees which in current period has become material and thus provided on basis of report of Actuary.
AS-6 — Depreciation Accounting
1. Allocate depreciable amount of a depreciable assets on systematic basis to each accounting year over useful life of asset, useful life may be reviewed periodically.
2. Basis must be consistently followed and disclosed. Any change to be quantified and disclosed.
3. Rates of depreciation should be disclosed.
4. A change in method followed be made only if required by the statute, compliance to Accounting Standard, appropriate preparation or presentation of the financial statement.
5. In cases of extension, revaluation or exchange fluctuation, depreciation to be provided on adjusted figure prospectively over the residual useful pfe of the asset.
6. Deficiency or surplus in case of transfer/change in method be disclosed.
7. Historical cost, depreciation for the year and accumulated depreciation be disclosed.
8. Revision in method of depreciation be made from date of use. Change in method of charging depreciation is change in accounting popcy be disclosed.
AS-7 — Accounting for Construction Contracts
1. It may be mentioned that the standard is applicable in accounting of contracts in the books of the contractor. It is not applicable for construction project undertaken by the entity on behalf of its own, for example, a builder constructing flats to be sold. It is also not applicable to Service Contracts which are not related to the construction of asset.
2. According to AS-7 (Revised) the enterprise should follow only percentage completion method.
3. Where in case the contract revenue or the stage of completion cannot be determined reliably, the cost incurred on the contract may be carried forward as work-in-progress. All foreseen losses must be fully provided for.
4. Under percentage of completion method, appropriate allowance for future contingencies shall be made.
5. WIP, receipt of progressive payments, advances, retentions, receivables and certain other items are required to be disclosed.
AS-8 — Accounting for Research and Development
1. Salaries, wages, personnel costs, depreciation, cost of materials and services, etc. related to research and development, payment to outside institutions, reasonable allocation of overhead costs and amortization of patents and licences be included in R & D cost, and be disclosed in Profit & Loss Account.
2. Such cost to be charged as an expense unless the product or process is separately identifiable. It may be then deferred for allocation in future years on systematic basis and to be separately disclosed in Balance Sheet and reviewed at the end of each accounting year. Once written off, it should not be reinstated.
It may be mentioned that the standard has been withdrawn w.e.f. 1-4-2004. The accounting provision of this standard are taken.
AS-9 — Revenue Recognition
Revenue from sales or service transactions should be recognised when the requirements as to performance as set out are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.
In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.
In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished.
Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service.
Revenue arising from the use of other enterprise resources yielding interest, royalties and dividends should only be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases:
(i) Interest: on a time proportion basis taking into account the amount outstanding and the rate applicable.
(ii) Royalties: on an accrual basis in accordance with the terms of the relevant agreement.
(iii) Dividends from investments in shares: when the owner’s right to receive payment is established.
Disclosure
In addition to the disclosures required by Accounting Standard 1 on ‘Disclosure of Accounting Policies’ (AS-1), an enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties.
In cases where revenue cycle of the entity involves collection of excise duty the enterprise is required to disclose revenue at gross as reduced by excise amount thereby finally arriving net sales on the face of the profit and loss account.
The standard is followed by an appendix that though is not part of the Standard, illustrate the application of the Standard to a number of commercial situation deals with various situations in an endeavour to assist in clarifying application of the Standard.
AS-10 — Accounting for Fixed Assets
1. The cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for its intended use.
2. Self-constructed asset shall be accounted at cost.
3. In case of exchange of asset, fair value of asset acquired or the net book value of asset given up whichever is more clearly evident shall be considered.
4. Revaluation is permitted provided it is done for the entire class of assets. The basis of revaluation should be disclosed.
5. Increase in value on revaluation shall be credited to Revaluation Reserve while the decrease should be charged to Profit and Loss Account.
6. Goodwill to be accounted only when paid for.
7. Assets acquired on hire purchase shall be recorded at its fair value.
8. Gross and net book values at beginning and end of year showing additions, deletions and other movements is required to be disclosed.
9. Assets should be eliminated from books on disposal or when of no utility value.
10. Profit/loss on disposal be recognised on disposal to Profit and Loss Account.
11. Machinery spares that can be used only in conjunction of specific asset shall be capitalised.
AS-11 (Revised) — Accounting for Effects of Changes in Foreign Exchange Rates
1. Applicable to all enterprises for which accounting period commences on or after 1-4-2004. It is applicable to transactions in foreign currency and translating financial statements of foreign subsidiary/branches.
2. Monetary items denominated in Foreign Currency shall be reported using closing rates.
3. Non monetary items carried in terms of historical cost in foreign currency shall be reported at the exchange rate on the date of the transaction.
4. Exchange differences shall be recognised as income/expenses in the period in which they arise except in case of fixed assets and differences on account of forward contracts.
5. Translation of foreign exchange transaction of revenue items except opening/closing inventories and depreciation shall be made by applying rate at the date of the transactions. For convenience purposes an average rate or weighted average rate may be used, provided it approximates the rate of exchange. Opening and closing inventories shall be translated at rates prevalent on opening and closing dates, respectively and depreciation amount shall be converted by applying the rate used for translation of the asset.
6. Translation gains and losses for branches/subsidiaries forming integral part of operations of the entity shall be accounted as stated in above. However translation gains and losses for non-integral operations shall be directly credited to reserves. It may be mentioned that that the method of arriving translation gains or losses shall be different from that stated above; i.e., all assets and liabilities are converted at closing rates and revenue items are converted at average rates, where it approximates the rates at the date of transactions. Integral foreign operation is a foreign operation, the activities of which are an integral foreign operation is a foreign operation, the activities of which are an integral part of those of the reporting enterprise.
7. Exchange differences arising on repayment of liabilities incurred for purchase of fixed assets shall be expensed through profit and loss account. {Note, in case of a Company (read as required by Schedule VI), where the fixed asset is purchased from outside India, the related exchange gains and loss, if any, are required to be capitapzed}. Also in case of a company, other exchange differences arising out of long-term monetary items can be initially deferred and later amortized over the period up to March 31, 2012 or the pfe of the related long-term monetary asset whichever is lower with corresponding adjustments in balance sheet through "Foreign Currency Monetary Item Translation Difference Account".
8. Gains or losses on accounting of forward contracts is recognised through profit and loss account (unless it relates to fixed assets as described in above for a Company).
9. However, measurement of gains or losses on forward contract depends upon the intention for which it is taken. Where it is not for trading or speculative purposes the premium/discount is amortised over the term of the contracts. Where these are held for either speculative or trading purposes, the gain or loss is arrived at each reporting date after comparing the FAIR VALUE of contract for its remaining term of maturity with the carrying amount at the reporting date.
10. Profit/Loss on cancellation or renewal of forward exchange contract shall be recognised as income/expenses of the respective period (unless it relates to fixed assets as described in above for a Company).
11. Amount of exchange difference included in Profit & Loss Account adjusted in carrying forward or amount of fixed assets or due to forward contracts recognised in Profit & Loss Account for one or more accounting period must be disclosed.
AS-12 — Accounting for Government Grants
1. Grants should not be recognised unless reasonably assured to be realised. Grants towards specific assets be presented as deduction from its gross value. Alternatively, be treated as deferred income in Profit & Loss Account on rational basis over the useful life of the asset when depreciable. For non-depreciable asset requiring fulfillment of any obligations, it be credited to Profit & Loss Account during the concerned period to fulfil obligations.
2. Balance of deferred income be disclosed appropriately as to promoter’s contribution, be credited to capital reserves and considered as shareholders’ funds
3. Grants in the form of non monetary assets given at concessional rate be accounted at their acquisition cost. Asset given free of cost be recorded at nominal value.
4. Grants receivable as compensation of losses/expenses incurred be recognised and disclosed in Profit & Loss Account in the year it is receivable and shown as extraordinary item if appropriately read with AS-5.
5. Contingency related to grant be treated in accordance with AS-4. Grants when become refundable, be shown as extraordinary item read with AS-5.
6. Grants related to revenue on becoming refundable be adjusted first against unamortised deferred credit balance of the grant and then be charged to Profit & Loss Account.
7. Grants against specific assets on becoming refundable be recorded by increasing the value of the respective assets or by reducing Capital Reserve/Deferred Income balance of the grant.
8. Grant to promoter’s contribution when refundable be reduced from the Capital Reserve.
9. Accounting policy adopted for grants including method of presentation, extent of recognition in financial statements, at concession/free of cost be disclosed.
Courtesy: ICAI Journals, Books
Aryan Singhania {Pallav}
CAclubindia
