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Accounting Standards - Overview

Accountancy (Phase -I & II) Accounting standards

The paradigm shift in the economic environment in India during last few years has led to increasing attention being devoted to accounting standards as a means towards ensuring transparent financial reporting by corporates. Further, cross-border raising of huge amounts of capital has also generated considerable interest in the generally accepted accounting principles in advanced countries such as USA.

Rationale of Accounting Standards

Accounting Standards are formulated with a view to harmonise different accounting policies and practices in use within a country. The objective of Accounting Standards is, therefore, to reduce the accounting alternatives in the preparation of financial statements within the bounds of rationality, thereby ensuring comparability of financial statements of different enterprises with a view to provide meaningful information to various users of financial statements to enable them to make informed economic decisions.

International Harmonisation of Accounting Standards

Recognising the need for international harmonisation of accounting standards, in 1973, the International Accounting Standards Committee (IASC) was established. Recently the IASC has been restructured as International Accounting Standards Board (IASB). The objectives of IASC include promotion of the International Accounting Standards for worldwide acceptance and observance so that the accounting standards in different countries are harmonised. In recent years, need for international harmonisation of Accounting Standards followed in different countries has grown considerably as the cross-border transfers of capital are becoming increasingly common. Apart from cross-border transfers of capital the companies in order to raise resources globally are listing their securities on various stock exchanges over the financial statement of these companies are prepared on the basis of GAAP.

The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC, constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view to harmonise the diverse accounting policies and practices in use in India.

Present Status of Accounting Standards in India in harmonisation with the International Accounting Standard :

So far, 29 Indian Accounting Standards on the following subjects have been issued by the Institute:

AS1	Disclosure of Accounting Policies

AS 2	Valuation of Inventories
AS 3	Cash Flow Statements
AS 4	Contingencies and Events Occurring after the Balance Sheet
	Date
AS 5	Net Profit or Loss for the Period, Prior Period Items and
	Changes in Accounting Policies

AS 6	Depreciation Accounting
AS 7	Accounting for Construction Contracts (recently revised and titled
	as Construction Contracts)
AS 8	Accounting for Research and Development
AS 9	Revenue Recognition
AS 10	Accounting for Fixed Assets
AS 11	Accounting for the Effects of Changes in Foreign Exchange Rates
	(recently revised and titled as The Effects of Changes in Foreign
	Exchange Rates)
AS 12	Accounting for Government Grants
AS 13	Accounting for Investments
AS14	Accounting for Amalgamations
AS15	Accounting for Retirement Benefits in the Financial Statements
	of Employers
AS 16	Borrowing Costs
AS 17	Segment Reporting
AS 18	Related Party Disclosures
AS 19	Leases
AS 20	Earnings Per Share
AS 21	Consolidated Financial Statements
AS 22	Accounting for Taxes on Income
AS 23	Accounting for Investments in Associates in Consolidated
	Financial Statements
AS 24	Discontinuing Operations
AS 25	Interim Financial Reporting
AS 26	Intangible Assets
AS 27	Financial Reporting of Interests in Joint Ventures
AS 28	Impairment of Assets
AS 29	Provisions, Contingent Liabilities and Contingent Assets

Accounting Standards Applicable in India

AS - 1 Disclosure of Accounting Policies

Every company needs to disclose major accounting policies followed by it.
A review of major company’s balance sheet like that of NTPC, PGCIL, BSES, TATAs, AP Discoms, Kar Discoms show the policies followed by them. Compare between these policies to understand the deviation
Esp – look at asset capitalisation (diversity of views).

AS - 2 Valuation of Inventories

More applicable to manufacturing companies who deal in stock – item to be purchased or manufactured for resale thereof, with modification/value addition.
For Discoms, the standard is relevant to the extent of power purchase, stores, spares, loose tools, etc. required for maintenance of network.

AS - 3 Cash Flow Statement

As stated earlier, cash flow statement shows receipts and payments. Coupled with accrual accounting it helps in projecting the Enterprise’s cash flow from operations, resources used for meeting the obligations and liabilities.

This is generally shown under 3 heads:

(a)Operating activities – revenue producing activities (defined as non investing and financing also).
(b)Investing activities – disposal or investment in long term assets or investments.
(c)Financing activities – changes in the financing of the company including owners and lenders.

AS - 4 Contingencies and Events after Balance Sheet

Contingency : There could be certain conditions/situations existing on the Balance sheet date, for which the results will not be known on that date. The result of this condition would crystalise only if some other event occurs or not occurs. The result may end in loss or gain, for example, Sales tax demand on the balance sheet day, may or may not result in liability.
Measurement and Disclosure : Contingencies and events after balance sheet date are disclosed as such. If the event turn out to be a loss, then the loss should be provided for. Else (if it results in gains), then the same should not be accounted, till such gain is realised.
Events after Balance Sheet Date :Significant event(s) between Balance sheet date and the date on which the Board approves the balance sheet, may have an impact on the business and hence needs measurement and disclosure. Such events may result in favourable or unfavourable outcome. Major events affecting the course of a business including major fire, loss due to natural calamities, large scale network collapse etc., are to be adjusted for. These events may not have happened on the balance sheet day, but if happened before signing of the balance sheet, then they should be accounted for.

AS - 5 Prior Period and Extra-Ordinary Items

Part II of Schedule VI of the Companies Act requires Income and expenditure for a period in respect of ordinary activities of business. Special disclosures are required for items of prior period/extra-ordinary activities of business and treated as “below the line”. This allows for a better comparison across companies.

AS - 5 states separate disclosure for the following items:

(a)sale of fixed assets;
(b)disposal of long term investments;
(c)cost of restructuring;
(d)litigation settlements;
(e)provisions earlier made and reversed.

Prior period items are income or expenses which arise in the current as result of errors or omissions in a previous period – very infrequent in occurrence.

AS - 6 Depreciation Accounting

Depreciation is allocation of original cost of tangible fixed asset over its useful life. This is nothing but measurement of loss in value of fixed assets during the accounting period. This also provides current valuation in the balance sheet.

AS - 7 Construction Contracts

Construction contracts have been accounted for using either of the two popular accounting methods: (i) completed contract method or

(ii) percentage of completion method. As per completed contract method revenue from a construction contract is recognized when the work of the contract is wholly or substantially completed. On the other hand, percentage of completion method suggests to recognize revenue of contract in accordance with the stage of completion AS - 7 (Revised) has eliminated completed contract method of accounting.

Construction contracts: It is a contract specially negotiated for the construction of asset or a combination of assets. The combination of asset must be based on the inter-relation or inter-dependence in terms of their design, technology and function. It includes

(i) related services like service of the project managers and architects,

(ii) cost of destruction or restoration of assets and

(iii)restoration of environment. A contract may comprise of individual asset of the total project or it may be a group of contracts.

These contracts are classified into two types – (i) fixed price contract and (ii) cost plus contract. In a fixed price contract, the contractor agrees to a fixed contract price, or a fixed rate per unit of output which may include cost escalation. On the other hand, in a cost plus contract the contractor is reimbursed or allowed the defined cost plus a percentage of that cost or a fee.

AS - 8 Accounting for Research and Development

This standard will not be applicable to companies whose debt or equity securities are listed in the recognized stock exchanges in India or for the companies which are in the process of issuing debt or equity securities that will be listed in a recognized stock exchanges in India for expenses incurred on or after 1.4.2003. Also it is not applicable to the companies whose turnover for the accounting period 2003-04 exceeds Rs. 50 crore. Such companies have to follow AS-26 “Intangible Assets”.

As per AS-8 Research and Development costs can be deferred and amortized over the period during which the benefit of the research and development is expected to be generated on fulfillment of certain conditions :

Product or process is clearly defined;
Cost attributable to such product or process can be separately identified;
Management of the enterprise intends to produce or market or use product or process;
There is reasonable indication that current and projected R & D costs together with estimates production, selling and administration costs are likely to be covered by the related future revenue;
Adequate resource exists or expected to be available to complete the project and market the product or process.

In case the above-stated conditions are not fulfilled, R & D costs are expensed in the year, in which they are incurred. AS-8 is not applicable for expenses on research and development incurred on or after 1-4-2004.

AS - 9 Revenue Recognition

Revenue are gross inflow of cash or receivable or other consideration in course of ordinary activities of the company arising out of sale of goods, services from use of entity’s resources. Exclusions to the above are capital gains, unrealised holding gains, forex fluctuations, gain due to discharge of lesser value in an obligation.

Sale of goods is defined as the transfer of property rights to buyer and no significant uncertainty as regards consideration to be derived for such sale. Other income is defined as that which is not the sale of good e.g., interest received, sale of tenders, meter testing, providing service connections.

In case of receiving income form franchise (as envisaged in Electricity Act 2003 – franchise is the operator to whom a business right is transferred by an agreement within a geographical area with/without one time franchise fee), if it is one time fee, then it should be amortised over life of agreement. All other receipts from franchise is treated as regular income and accounted as such.

AS - 10 Accounting for Fixed Assets

Fixed asset is defined as an asset held with intention of being used to provide services or producing goods and is not held for sale in normal course of business.

Assets held on leases to be separately shown. Forex currency gain/loss resulting in increase/decrease in liability, either on payment or outstanding as on balance sheet date is to be adjusted in the original cost and the depreciation to be reworked. Contributions received from consumers against assets are recorded separately. Assets are recognised under gross value in the books of the company and depreciation is charged thereon. The consumer contribution should be credited to income in proportion to depreciation, year-on-year. Assets are recorded at historical cost i.e. cost of purchase, installation, capitalisation of interest, labour and overheads, loss/gain on foreign currency fluctuation (on loans borrowed for fixed costs only), improvements/repairs which extend the life of the asset beyond its existing useful life.

Financial Management On disposal or retirement of an asset, the loss or gain on disposal (sale value less the written down value) should be charged to the Profit and Loss account to the extent such gains or losses are do not exceed the actual. Fixed assets on hire purchase are recognised at cash value. Interest element included in purchase value (upto time asset is put to use is capitalised) and thereafter is charged to P&L account.

AS - 11 Accounting for Effects in Changes in Forex Rates

Foreign currency transaction should be recorded at the rate of exchange prevailing on the date of transaction (when the right or liability arises). On actual settlement, loss or gain should be accounted.

At the year-end, all assets/liabilities in foreign currency, should be recorded at the rate of exchange as on the date of balance sheet and loss/gain, if any, to be accounted in the balance sheet.

Loss/gain at settlement (if crosses over a balance sheet date), recognised in different accounting period:

e. g. Borrowing – at the transaction day rate of exchange.

Closing balance of loan as on the balance sheet date – rate of exchange as on balance sheet date.

Loans for fixed assets, rates as on acquisition of loan.

Forex fluctuations on payment of debt (loss/gain) added to the fixed asset. Loss/gain on restating using closing rate for the loan outstanding on the Balance sheet date, to be adjusted with the original cost. Any loss/gain due to forex forward contract is to be similarly adjusted.

AS - 12 Accounting for Government Grants

Government grants usually have certain conditions to be fulfilled by the recipients. In case these grants are capital in nature, then they are either deferred as income (over useful life of assets) or reduced from the asset value. Government grants in nature of promoter’s contribution treated as capital reserve and forms part of shareholder’s funds. In case of revenue grants these are routed into the P&L using the matching concept i.e. period in which costs are incurred, for which the grants are receivable.

AS - 13 Accounting for Investments

Part I of Schedule VI to the Companies Act, 1956, distinguishes investments in: Government securities, shares, debentures, bonds (separately), investment in subsidiary companies, etc. These are not fixed assets or current assets. Hence investments, even if readily tradable are to be included under investments.

AS 14 – Accounting Amalgamations

Amalgamations (or even de-mergers) or business combinations are accounted for as mergers or purchases. There are two methods of accounting:

(a) pooling of interest method; and (b) purchase method .

Pooling of Interest Method

(a)Transfer of all assets and liabilities;

(b)Acceptance of atleast 90% of the shareholders;

(c)Intention to carry on business;

(d)Non-adjustment of values except to the extent of aligning accounting policies.

Acquisition – Purchase Method

(a)Assets and liabilities are stated at their values or consideration is allocated in proportion to various assets and liabilities;

(b)Excess value of consideration over net asset value is treated as Goodwill (to be amortised) and reverse is capital reserve.

AS - 15 Accounting for Retirement benefits for Employees

Retirement benefits are to be paid for service rendered by employees either through provident fund, superannuation/pension, gratuity, leave encashment benefits, post-retirement health benefits and others.

Accounting records, on a systematic method, costs that are incurred in a period in the Profit and Loss account. On introduction of this accounting standard, past service costs (if not already accounted for) should be charged to P&L in the first year or charged over a period (usually over the expected working lives of employees).

Past service cost, like defined benefit (like gratuity) or defined contribution (like PF) is primarily determined by actuarial valuation. Current service cost, evaluation of the liability towards retirement benefit is also determined on actuarial valuation on a periodical basis. This liability is compared to the liability already provided for and the difference is charged to P/L account. In the periods intervening the actuarial valuation, companies use simple benchmark rule e.g. say 13% of employee costs.

In respect of past service, on corporatisation of SEBs, states like AP and Orissa etc; have accounted for the liability in the newly created companies, whereas Karnataka has elected ‘Pay-as-you-go’ method (by Government of Karnataka) and hence not accounted in the liabilities of the company.

AS - 16 Borrowing Costs

Borrowing cost is the interest on funds and other costs incurred in raising loans. Premium or discount arising out of borrowings does not form part of borrowing costs. Any asset which takes time to erect/install or put to use, qualifies as an asset on which interest during construction period can be capitalised, provided monies have been borrowed to finance the assets. All borrowings interest should be charged to P& L. In case, multiple type/ sources of loan have been borrowed for creation of multiple types of assets, then the amount that can be applied to a particular asset would be the weighted average of borrowing.

AS – 17 Segment Reporting

Applicable for enterprises listed or whose total turnover exceed Rs 50 crores. Generally license clauses, in case of distribution companies, requires business-wise reporting by Regulators. Even in case, where there is a single license for distribution and retail supply, many regulators have expressed views that the reporting should be separate for them to understand the value chain and transfer pricing.

AS – 18 Related Party Disclosure

Related parties, as specified in the Companies Act covers managers, directors, companies under same management and subsidiaries. AS 18 applies the rule for transaction between parties, one of whom has a control of ownership over the other or control over composition of Board of directors of the others or has control of substantial interest.

AS – 19 Accounting for Leases

Lease is an agreement conveying right to use for a period of time in return for rent. There are two types of leases:

(a) Financial – substantial transfer of risks and rewards of an asset Lessee owns the asset at the end of lease period Option to buy at the end of term at a price lower than market value Lease period covers major part of the life of asset At the inception, the lease rental covers substantial part of fair value Only Lessee can use it without major modifications

(b) Operational – other than financial lease

Initially SEBs sold and leased back assets, wherein the depreciation benefits were enjoyed by Lessor and SEBs enjoyed flow of funds. Initially leases were off-balance sheet, since no disclosure were required. Currently Lessee should recognise the financial lease (both asset and liability) in the books, at lower of :

(i) fair value of leased assets; and

(ii) present value of minimum lease payments using implicit interest rate (if implicit rate not available, then increment borrowing rate is to be used). Lessee depreciates lease asset (consistent with the AS 6 depreciation accounting) – over lease period, if ownership is not certain or over useful life.

ORIGIN OF TRANSACTIONS

Transactions are recorded in the books of account on the basis of evidence which are bills of purchase , invoices for sales, debit and credit notes , etc. These evidences being the basis of recording entry, are known as Source Documents.

Every Transaction has two aspects based upon dual aspect concept of concept of duality.

The two aspects are

Debit (Dr)
Credit (Cr)

Rules of debit and credit are applied to each transactions and a voucher is prepared before recording before in the books of original entry in chronological order

A transaction with one debit and one credit is a simple transaction and voucher prepared for such transaction is known as transaction voucher.

There are certain items, which has no documentary proof, such as petty expenses. In such case necessary voucher is prepared showing the necessary details.

VOUCHER –

Source Voucher
Accounting Voucher

SOURCE VOUCHER

Features of Source Voucher

1. It is a written document.

2. It is prepared on the basis of evidence of the transaction.

3. It contains an analysis of a transaction i.e. which account is to be debited and which is to be credited.

4. It is prepared by an accountant and countersigned by the authorized signatory.

TYPES OF SOURCE VOUCHER

CASH MEMO

Cash memo is the receipt which shows the sale of products or services in cash. It contains the authenticity of certain product's price sold by the supplier.

INVOICE OR BILL

An invoice, bill or tab is a commercial document issued by a seller to a buyer, relating to a sale transaction and indicating the products, quantities, and agreed prices for products or services the seller had provided the buyer. When the goods are sold on credit then it is issued in duplicate where one is given to the customer and other one is kept by the seller.

RECIEPT

When cash is received from the customer then receipt is issued in duplicate where original receipt is given to customer and duplicate is kept for the record.

PAY-IN SLIP

Pay-in-slip is used by banks when a customer deposits a cheque or cash in the bank. The slip has a counterfoil where the stamped copy is given to the customer for the record.

CHEQUE

A Cheque is a document which orders a bank to pay a particular amount of money from a person’s account to another individual’s or company’s account in whose name the cheque has been made or issued. The cheque is utilised to make safe, secure and convenient payments. It serves as a secure option since hard cash is not involved during the transfer process; hence the fear of loss or theft is minimized.

CREDIT NOTE

Credit notes act as a source document for the sales return journal. In other words the credit note is evidence of the reduction in sales.

DEBIT NOTE

Debit note acts as the Source document to the Purchase returns journal. In other words it is an evidence for the occurrence of a reduction in expenses.

ACCOUNTING VOUCHER

Accounting vouchers may be classified as cash vouchers, debit vouchers, credit vouchers, journal vouchers, etc.

A transaction with one debit and one credit is a simple transaction and the accounting vouchers prepared for such transaction is known as Transaction Voucher.

Voucher which records a transaction that entails multiple debits/credits and one credit/debit is called compound voucher. Compound voucher may be:

(a) Debit Voucher

(b) Credit Voucher;

The source vouchers are analyzed by accountant and he determines in which account or accounts are to be debited and credited.
“Accounting Voucher” is a written document containing an analysis of business transactions for accounting and recording purposes, prepared by the accountant on the basis of supporting vouchers and signed by another authorized person.