AS-5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
1. AS-5 required that All items of income and expense which are recognised in a period should be included in the determination of net profit or loss for the period unless an AS requires or permits otherwise.
Liability for leave encashment accrued up to 31st March, is also an item of expense.
As per RBI Circular Banks are required to account for the liability arising out of leave encashment on retirement on an accrual basis. Auditors would be required to qualify their audit reports if the amount was not charged to the profit and loss account.
2. Depreciation on assets arising due to revaluation of assets is an expense and accordingly charging any part of depreciation directly to the capital reserves, without routing it through the profit and loss account, is a violation of AS 5
3. Depreciation is required to be provided with reference to the total value of fixed assets appearing in the account after revaluation.
However, for certain statutory purposes, dividends, managerial remuneration etc., only depreciation relatable to the historical cost of the fixed assets is to be provided out of the current profits of the company.
The additional depreciation relatable to revaluation may be adjusted against Revaluation Reserve by transfer to Profit and Loss Account and thereafter the company can transfer an amount equivalent to the additional depreciation from the Revaluation Reserve.
4. Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise, are not expected to recur frequently or regularly.
The company has disclosed the difference between the depreciation as per Schedule and as per residual life as an extraordinary item.
This is contrary to the definition of the term ‘extraordinary item’ given in AS 5 since permission to charge depreciation at rates which are lower than the rates provided in Schedule not received. The company required to charge depreciation at the rates specified in Schedule.
5. All losses on the sale of businesses may not be an extra- ordinary item. Therefore, the nature of the loss disclosed as an extra-ordinary item was required to be provided in the notes to accounts.
6. Prior Period Adjustment (Net) was shown under the head of Other Income without mentioning the nature of expenses.
AS-5 requires that the nature and amount of prior period items should be separately disclosed in the statement of profit and loss account in such a manner that their impact on the current profit or loss can be apparent.
7. Service tax paid by the company in respect of goods transportation and commissioning on clearing and forwarding. It is a part of the ordinary activities of the company and it does not make any difference that the amount was paid pursuant to a demand raised by the concerned authority. Amount as an extraordinary item is contrary to AS 5.
8. The deduction of excise duty from the closing stock value had the effect of an expense being deducted from the cost of the finished goods which should have been charged to the profit and loss account.
This is contrary to AS 5 which requires all expenses to be charged to the profit and loss account.
AS-6 Depreciation Accounting
1. In case of revaluation of fixed assets, depreciation on total revalued amount is required to be provided on one single basis, i.e., the remaining useful lives of assets concerned.
AS 6 requires that depreciation rates or useful lives of the assets should be disclosed, if they are different from the principal rates specified in the Schedule.
2. AS 6 requires that depreciation rates or the useful life of the assets should be disclosed, if they are different from the principal rates specified in the statute governing the enterprise.
3. AS-6 requires any deficiency or surplus arising from retrospective re-computation of depreciation should be adjusted in the statement of profit and loss.
Company has withdrawn an equivalent amount from the general reserves and credited the same to the profit and loss account, not the correct accounting treatment.
4. Depreciation is a measure of wearing out, consumption or loss of value of depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes.
Company was required to provide depreciation for the shutdown period also. Non-provision of depreciation for this period is contrary to AS 6.
AS-7 Construction Contracts
1. company had not made the required disclosures regarding Job in Progress, which lead to non-compliance of AS 7.
2. It may be noted AS-7 requires enterprise should disclose the following for contracts in progress at reporting date
- aggregate amount of costs incurred.
- recognised profits less recognised losses.
- amount of advances received and
- amount of retention.
AS-9 Revenue Recognition
1. AS-9 requires that the amount of Sales turnover should be disclosed Turnover less Excise Duty, sales should be net of excise duty on the face of Profit & Loss account.
2. AS-9 which is based on the accrual basis of accounting, requires that Dividends from investments should be recognised when the investor right to receive is established.
3. Revenue Recognition lays down the conditions of
- transfer of all significant risks and rewards of ownership to the buyer
- the seller retains no effective control of the goods transferred,
for recognition of revenue arising from the sale of goods.
With regard to recognition of the revenue arising from royalty and rent received, it should be recognised on an accrual basis in accordance with the terms of the relevant agreement.
AS-10 Fixed Assets
1. Additional depreciation which represents the depreciation on the increased value should be adjusted against the Revaluation Reserve through Profit and Loss Account.
2. Revaluation of Fixed Assets which provides that the company should provide the depreciation on the total book value of the fixed assets including the increased amount as a result of revaluation in the P&L Account.
Such transfer from Revaluation Reserve should be shown in the Profit and Loss Account separately and an appropriate note by way of disclosure would be desirable.
Also Read:
CAclubindia
