Accounting Standards - BY CA Abhishek Baradiya - 31.01.2021
Accounting Standards - BY CA Abhishek Baradiya - 31.01.2021
Accounting Standards - BY CA Abhishek Baradiya - 31.01.2021
ACCOUNTING STANDARDS
BY :
CA ABHISHEK BARADIYA
+91 91 1100 9522
CRITERIA FOR CLASSIFICATION OF ENTITIES
Entity
Non
Corporate
Corporate
•Equity or debt Securities - listed/in •Not Level I Entities •Not Level I Entities
process of listing on any stock •T/o > Rs. 1 crores <= Rs. 50 crore •Not Level II Entities
exchange - In India / Outside India (Immediately Preceding Accounting
•Banks (including co-operative banks), Year)
financial institutions or entities •Borrowings(Including Public Deposits)
carrying on insurance business > Rs. 1 crores <= Rs. 10 crore (At any
•T/o > Rs. 50 crores (Immediately time during Immediately Preceding
Preceding Accounting Year) Accounting Year)
•Borrowings(Including Public Deposits) •Holding and subsidiary entities of any
> Rs. 10 crores (At any time during of the above
Immediately Preceding Accounting
Year)
•Holding and subsidiary entities of any
of the above
Accounting Policies refer to the specific accounting principles and methods of applying those principles adopted by
the enterprise in the preparation and presentation of financial statements
The following are examples of the areas in which different accounting policies may be adopted by different
enterprises.
(a) Methods of depreciation, depletion and amortization (f) Valuation of investments
(b) Treatment of expenditure during construction (g) Treatment of Retirement benefits
(c) Conversion or translation of foreign currency items (h) Recognition of profit on long-term contracts
(d) Valuation of inventories (i) Valuation of fixed assets
(e) Treatment of goodwill (j) Treatment of contingent liabilities
The above list of examples is not intended to be exhaustive
CA. ABHISHEK BARADIYA | +91 91 1100 9522 | [email protected]
DISCLOSURE OF ACCOUNTING POLICIES
Exercise of prudence does not permit creation of hidden reserves by understating profits
and assets or by overstating liabilities and losses.
Any change in the accounting policies which has a material effect in the current period or
which is reasonably expected to have a material effect in later periods should be disclosed
In the case of a change in accounting policies which has a material effect in the current
period, the amount by which any item in the financial statements is affected by such change
should also be disclosed to the extent ascertainable.
Where such amount is not ascertainable, wholly or in part, the fact should be indicated.
A company has switched from FIFO to Wtd Avg Cost. If Closing Inventory by FIFO is
Rs. 5.00 lakhs and by Wtd Avg is Rs. 4.80 lakhs.
The change in accounting policy pulls down profit and Inventory by Rs. 20,000
The company can disclose the change in accounting policy as under
“The company values its investment at lower of Cost and NRV. Since NRV of all items
of inventory was higher than costs, the company valued its inventory at cost. In the
present year the company has changed to Wtd Avg Cost formula, which better
reflects the consumption pattern of inventory vis-à-vis earlier method of FIFO. The
change in policy has reduced profit and value of inventory by Rs. 20,000”
Inventories should be valued at the lower of cost and net realisable value
COST
costs of purchase,
costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.
NRV
Net realisable value is the
estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make the sale.
Cost of partly finished product at the end of 2019-20 is Rs.150. The product can be
finished next year by a further expenditure of Rs. 100. The finished product can be
sold at Rs. 250 subject to 4% brokerage on selling price.
Value o Inventory
SPECIFIC COST - The cost of inventories of items that are not ordinarily interchangeable and
goods or services produced and segregated for specific projects should be assigned by
specific identification of their individual costs
FIFO/WTD AVG COST - The cost of other inventories, should be assigned by using the first-in,
first-out (FIFO), or weighted average cost formula whichever reflects the fairest possible
approximation to the cost incurred in bringing the items of inventory to their present location
and condition.
CONTINGENCY
A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be
known or determined only on the occurrence, or non-occurrence, of one or more uncertain
future events.
EVENTS OCCURING AFTER BALANCE SHEET DATE
Events occurring after the balance sheet date are those significant events, both favourable
and unfavourable, that occur between the balance sheet date and the date on which the
financial statements are approved by the Board of Directors in the case of a company, and,
by the corresponding approving authority in the case of any other entity
CONTINGENCY LOSS
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.
The existence of a contingent loss should be disclosed in the financial statements if either of the
conditions is not met
CONTINGENCY GAIN
Contingent gains should not be recognised in the financial statements
A company follows April to March as its Financial Year. It recognises cheque dated
31st March or before, received from customers after balance sheet date but before
approval of BOD, BY Debiting Cheques in Hand and Crediting Debtors A/c.
The cheque in hand is shown in balance sheet as an item of cash and cash
equivalents.
All cheques presented to bank in the month of April and also realised in same month.
Even if cheques bear the date 31st March, cheques received after 31st March do not
represent any condition existing on balance sheet date. Thus collection of cheques
after balance sheet date is not an adjusting event, hence its recognition is not in line
with AS 4
➢ CONTINGENCIES -
❑ (a) the nature of the contingency;
❑ (b) the uncertainties which may affect the future outcome;
❑ (c) an estimate of the financial effect, or a statement that such an estimate cannot be made.
➢ EVENTS -
❑ (a) the nature of the event;
❑ (b) an estimate of the financial effect, or a statement that such an estimate cannot be made.
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.
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.
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.
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 Accounting Standard
requires or permits otherwise.
The net profit or loss for the period comprises the following components, each of
which should be disclosed on the face of the statement of profit and loss:
(a) profit or loss from ordinary activities; and
(b) extraordinary items
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.
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.
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.
Prior period items are normally included in the determination of net profit or loss for the
current period. An alternative approach is to show such items in the statement of profit and
loss after determination of current net profit or loss.
Mr. X purchased a new machine for Rs. 10 Lakhs, useful life also 10 years. Thus
depreciation was charged at 10% pa of Original Cost. i.e. Rs. 1 Lakh per year
After 5 years, when carrying amount was Rs. 5 lakhs, management realises that
machine can work for only 2 years.
Now machine will be depreciated at 2.50 lakhs per year for next 2 years.
This is not a case of Prior period item.
Rather it is change in Accounting Estimates
In the same example, let us say there is no change in useful life of machine after 5
years, but management by mistake, charge depreciation for 5th year as 60,000 [ 10%
of 6 lakhs ] instead of 1 lakhs [ 10% of 10 lakhs ] and in the next year decides to
charge depreciation of Rs. 1.40 lakhs
In this case 1 lakh will be the depreciation for current year and 40,000 will be
considered as prior period item