AS 5 – Notes

Ordinary activities:
These are activities undertaken in the normal course of business including other related activities
in which an entity engages in furtherance of or incidental to or arising from these activities.
Eg: Sales and purchase of goods, sales and purchase of fixed assets, payment of expenses,
payment of tax etc.

Extraordinary items:
These are income or expenses that are clearly distinct from ordinary activities and are not
expected to recur frequently.
Eg: Loss due to earthquake/fire/any other natural disaster, insurance claims etc.

Exceptional items:
These are incomes or expenses from ordinary activities but are of such nature, size or
incidence that their disclosure is relevant to explain the performance of the enterprise.

Eg:
a) Write down of inventory to NRV
b) Restructuring (covered in AS 29)
c) Disposal of fixed assets or any long term investments
d) Retrospective application of a changes in law
e) Legal settlements etc.

Prior period items:

These are incomes and expenses arising in the current year as a result of errors or omissions in
the preparation of the financial statements of one or more prior periods.

Note: AS 5 requires entities to disclose extraordinary items, exceptional items and prior period
items separately such that users are able to understand their impact on the current year profit or
loss.
Change in accounting estimates:
Any change in accounting estimate needs to be given a prospective effect (impact should be
accounted only from the year of change)
Eg: Change in depreciation method, useful life, residual value etc.
Entities are required to disclose the nature and the amount of a change in an accounting
estimate which has a material effect in current or subsequent periods.

Change in accounting policies:

Accounting policies are principles and methods of applying those principles adopted by an
enterprise in the preparation and presentation of financial statements.
An accounting policy can be changed only when (i) such change is required by AS; (ii) such
change is required by law or (iii) such changes would result in a more appropriate presentation of
the FS of the enterprise.
Any change in accounting policy should be given retrospective effect. However, if there are
specific transition procedures outlined in law of new AS, those should be followed.
However, adoption of an accounting policy for transactions which did not occur previously
doesn’t amount to change in accounting policy. (Refer illustration 4 in ISM)
Entities are required to disclose the nature and the amount of a change in an accounting policy
which has a material effect.
 AS 15 – Notes
Section 1: Introduction
1) Employee benefits can arise from:
a) Formal agreement between employer and employee
b) Legislative requirements
c) Informal practices that give rise to an obligation

2) Employees include part-time, full-time, casual and temporary employees. It also includes
directors and other managerial personnel. Indicators to identify employer-employee
relationship are as follows:
a. Existence of a contract of employment
b. Individuals are considered for legal and social security purposes.
c. Large amount of oversight or direction is being provided for an individual’s work.
d. Services are being performed at location specified by the employer.

3) In substance existence of contract of services as against contract for service is an indicator of

employer-employee relationship.
4) At times services rendered by an entity may in substance be services provided by employees
especially when such entity has no other clients or requires permission of employer to
provide services to any other clients.
5) Employee benefits may be paid to employees, their spouses, children, other dependents or to
third parties (like insurance company etc.). The crux is these benefits should have been paid
for the service rendered by the employees.
6) The core principle of the standard is employee cost should be recorded in the period in which
the employee has provided the corresponding service.
7) This standard doesn’t deal with accounting by employee benefit plans (trusts etc. created for
settling employee benefits)

Section 2: Short-term employee benefits (STEB)

1) Definition: These are employee benefits (other than post-employment and termination
benefits) that fall wholly due within 12 months after the end of the period in which the
employee has provided the service.
2) Accounting for STEB (other than compensated absences and profit-sharing plans): It
should be recognized as an:
a. Expense (unless any other AS allows capitalization)
b. Liability (reduced by payments made during the period. If payments made exceed
the expense, then the excess can be recorded as a prepayment to the extent that it
reduces future payments).
3) No need to discount or actuarially value STEBs.
4) Accounting for short term compensated absences (STCA):
a. Non-accumulating STCA: In this case unutilized leave cannot be carried
forward to the future periods. Hence it is accounted in the year in which absences
have occurred (generally there is no need for a separate entry for this).
b. Accumulating STCA: In this case unutilized leave can be carried forward to the
future periods. Such unutilized leave can either be encashed or availed in the
future. A liability and a corresponding expense should be recorded for the same in
the period in which we have rendered service without taking leave that is leading
to such unutilized leave balance.
c. The above provision for accumulating STCA needs to be recorded irrespective of
whether it is vesting (can be encashed) or non-vesting (can only be availed and
not encashed).
d. While measuring provision for non-vesting accumulating STCA, we can estimate
the possibility of certain employees not utilizing the unutilized leave or leaving
the entity before taking leave.

5) Accounting for short term profit sharing and bonus plans: It should be recognized as
an expense and a liability if the following conditions are satisfied:
a. There is a present obligation as a result of past events.
b. A reliable estimate of the obligation can be made (there is a formula, or the
amount can be estimated before the approval of the FS).

Section 3: Post employee benefits (PEB)

1) Definition: These are employee benefits (other than termination benefits) that are
payable after completion of service.
2) Arrangements made by employer to settle PEBs are called as post employee benefit
plans. There are two types of post employee benefit plans:
a. Defined Contribution Plan (DCP): These are plans where the actuarial risk (risk
that the benefits will be more or less than expected) and investment risk (the
assets invested will be insufficient to settle the benefits).
b. Defined Benefit Plan (DBP): These are plans other than DCPs.
3) Accounting for DCPs: The contributions to be made are recorded as:
a. Expense (unless any other AS allows capitalization)
b. Liability (reduced by payments already made)
c. If any contribution is payable after 12 months, the same needs to be discounted.
d. No need of actuarial valuation.
4) Accounting for DBPs:
a. Balance sheet components:
i. Present value of DBO
ii. Less: Fair value of plan assets
iii. Less: Past service cost not yet recognized
b. P&L components:
i. Current service cost: Increase in DBO due to current year service by
employees.
ii. Interest cost: Increase in DBO due to accrual of interest. Discount rate to
be used is interest rate on government bonds for a similar term as at the
balance sheet date.
iii. Past service cost recognized: Change in DBO due to introduction or
alteration to post employee benefits. Can be an income or expense
depending on the change. Such cost is recorded over the vesting period.
iv. Expected return on plan assets: Interest, dividend and other revenue
from plan assets + realized and unrealized gain or loss on investments –
cost of administering the plan and taxes payable. Difference between
expected return and actual return is actuarial gain or loss on plan
assets.
v. Actuarial gain or loss on DBO and plan assets: It is the effect of change
in actuarial assumptions and difference between actuarial assumptions and
what has actually occurred. It should be recognized in P&L immediately
and should not be deferred.
vi. Gain or loss on settlement or curtailment
vii. P&L impact of limitation on net defined benefit asset: Net defined
benefit asset can be recognized only to the extent of benefit available in
the future in the form of refunds from the plan or reduction in
contributions to be made.
c. Curtailment: It refers to reduction in scope of post employee benefit plans (eg.:
reduction in number of employees due to discontinuance of plant etc.).
Curtailment may result in reduction of DBO and past service cost not yet
recognized which will be recognized as a gain in P&L.
d. Settlement: It occurs when an enterprise enters into a transaction that eliminates
all its future obligations to settle the employee benefits for current or prior period
services. Settlement may arise at the curtailment as well. Journal entry for
settlement is as follows:

Journal entry:

Defined benefit obligation a/c Dr. xxx

To bank a/c xxx

To Plan assets a/c xxx

To past service cost not yet recognized xxx

 e. Actuarial assumptions: These are the assumptions used in valuation of defined
benefit obligation and plan assets. Such assumptions should be mutually
compatible and unbiased. There are two types of assumptions which are as
follows:
i. Demographic assumptions: Assumptions about future characteristics of
the employees like mortality rate, employee attrition rate etc.
ii. Financial assumptions: Deals with items such as discount rate (nominal),
future salary levels, expected return on plan assets etc.

Defined benefit obligation a/c

To gain on curtailment xxx By balance b/d (opening balance) xxx
To plan assets (payment of benefits) xxx By current service cost xxx
To Actuarial gain xxx By interest cost xxx
To balance c/d (closing balance) xxx By past service cost (total amount) xxx
(closing balance is to be actuarially valued) By Actuarial loss xxx

Plan assets a/c

To balance b/d (opening balance) xxx By DBO (payment of benefits) xxx
To bank a/c (contributions made) xxx By Actuarial loss xxx
To expected return on plan assets xxx By balance c/d (closing balance) xxx
To Actuarial gain xxx (closing balance is to be actuarially valued)

Section 4: Other long term employee benefits (OLEB)

• Definition: These are employee benefits (other than post employee benefits and
termination benefits) which do not fall wholly due within 12 months after the end of the
period in which the employee has provided the service.
• Accounting of OLEB is similar to accounting for defined benefit obligation with the
exception that 100% of past service cost if any is recognized immediately in P&L without
any deferral over the vesting period.
Section 5: Termination benefits
• Definition: These are employee benefits arising as a result of either:
o An enterprise decision to terminate employment of an employee or;
o An employee’s decision to accept voluntary retirement.
• Termination benefits should be recognized only when:
o there is a present obligation as a result of past events;
o it is probable that there will be an outflow of resources embodying economic
benefits;
o a reliable estimate of the obligation can be made.
• Termination benefits should be recognized as an expense and liability immediately.
However, if such termination benefits fall due beyond 12 months after the BS date, they
should be discounted.
• If there is any uncertainty regarding the number of employees who will accept an offer of
voluntary retirement, there is a contingent liability which needs to be disclosed as per AS
29.
 AS 17 – Notes
Step 1: Identification of segment (business of geographical)
Definition of business segment (refer illustration 5 in page 4.57)
A distinguishable component of an enterprise that is engaged in providing an individual
product or service or a group of related products or services and that is subject to risks and
returns that are different from those of other business segments.
Factors to be considered in the identification of business segments:
a) Nature of product or service
b) Nature of production process
c) Type of customers
d) Methods of distribution of product or service
e) Nature of regulatory environment

Definition of geographical segment (refer PQ 7 and 8 in page 4.60)

A distinguishable component of an enterprise that is engaged in providing an products or
services within a particular economic environment and that is subject to risks and returns
that are different from those of other components operating in other economic
environments.
Factors to be considered in the identification of business segments:
a) Similarity of economic and political conditions
b) Relationships between operations in different geographical areas
c) Proximity of operations
d) Special risks associated with operating in a particular area
e) Exchange control regulations
f) Currency risks
A geographical segment can be a single country, a group of two or more countries or region
within a country.
Geographical segments can be of two types: (i) Geographical segment based on location of assets
and (ii) Geographical segment based on location of customers.
Definition of segment revenue
Segment revenue

Includes: Excludes:
a) Revenue directly attributable to a segment a) Extraordinary items
b) Revenue that can be reasonably allocated b) Interest or dividend income unless segment’s
to segment. operations are of financial nature.
c) Inter-segment revenue c) Gain on sale of investment unless segment’s
operations are of financial nature.
Definition of segment expense
Segment expense

Includes: Excludes:
a) Expenses directly attributable to a segment a) Extraordinary items
b) Expenses that can be reasonably allocated b) Interest or dividend expense unless segment’s
to segment. operations are of financial nature.
c) Inter-segment expenses c) Loss on sale of investment unless segment’s
operations are of financial nature.
d) Income tax expense
e) General and admin expenses, head office
expenses and other expenses at company level

Segment result = Segment revenue – Segment expense

Definition of segment asset (refer PQ 6 in page 4.59)
Segment asset

Includes: Excludes:
a) Assets directly attributable to a segment a) Assets that generate interest or dividend income
b) Assets that can be reasonably allocated to if such interest or dividend income was not
segment. included in segment revenue.
b) Tax assets (current and deferred)
c) Assets used for general or head-office purposes.

Definition of segment liabilities

Segment liabilities

Includes: Excludes:
a) Liabilities directly attributable to a segment a) Liabilities on which interest expense is incurred
b) Liabilities that can be reasonably allocated if such interest expense was not included in
to segment. segment expense.
b) Tax liabilities (current and deferred)
Note 1: In case interest cost is included as a part of cost of inventories in accordance with AS
16, then interest expense should be included as a part of segment expense.
Note 2: Segments are generally identified based on management’s internal financial reporting
to CEO or board of directors. However, if such segments do not meet the definitions provided
in AS 17, then we have to look into the information reported to the next lower level of
management for identification of segments.

Step 2: Primary and secondary reporting formats

Segment (business or geographical) which represents dominant source of risks and rewards for
the entity will be primary segment and the other one will be secondary segment.

Step 3: Identification of reportable segments (refer illustration 1

(page 4.53), PQ9 to 11 (page 4.60)
From the primary segments, we have to identify the reportable segments based on the criteria
mentioned in AS 17.
Summary of criteria for identifying reportable segments:
Note 1: A segment that has satisfied 10% test in the previous reporting period will be
reportable segment for this year as well whether or not the 10% test has been satisfied.
Note 2: If a segment which has been identified as reportable segment in the current period,
then we have restate the preceeding period data as well to disclose that segment information
for the previous period.

Step 4: Disclosures for primary segments (refer illustration 4 in page 4.55

and PQ 12 in page 4.62)

Note: Segment revenue, result, assets and liabilities disclosed above should be reconciled to
numbers as per the financial statements.
Step 5: Disclosures for secondary segments
Case 1: If the primary segments are business segments.

Revenue from external customers of those Segment assets and capital expenditure of those
geographical segments based on location of geographical segments based on location of assets
customers whose external revenue is >=10% whose assets >=10% of total assets.
of company’s revenue

Case 2: If the primary segments are geographical segments

Following needs to be disclosed for those business segments whose external revenue is >=10%
of company’s revenue or whose assets >=10% of total assets
a) External revenue
b) Segment assets
c) Capital expenditure incurred during the year

Other points
a) Inter-segment transfers can be priced on any basis. However, basis of such pricing needs
to be disclosed in the financial statements. (refer illustration 2 in page 4.54)
b) Any changes in accounting policies materially affecting segment information should be
disclosed along with a description of nature of change and the financial effect of the
same.
c) Segment accounting policies should be in line with the accounting policies followed for
company’s financial statements.
d) Additional disclosure of information which is not in line with accounting policies used
for company’s financial statements can be disclosed if such information is reported
internally to the board and CEO and basis of measuring such information is disclosed in
the financial statements.
e) Entity should disclose type of products or services included within each business segment
and composition of each geographical segment.
f) If an entity prepares both standalone and consolidated financial statements, then segment
information disclosure is required only in consolidated financial statements.
g) AS 17 is applicable only to non-SMCs (non-corporates) and Level 1 entities (corporates).
 AS 18 – Notes
Definition of related party (definitive / exhaustive list)
a) Holding companies, subsidiaries and fellow subsidiaries
b) Associates, joint venture, investing party (associate) or venturer (joint venture)
c) Individuals having control or significant influence over the entity and relatives of such
individuals
d) Key Management Personnel (KMP) and their relatives
e) Entities over which persons mentioned in (c) and (d) is able to exercise significant
influence. This includes enterprises owned by directors or major shareholders and entities
that have common KMP.
Note: A party is considered to be related if any of the above are satisfied at anytime during the
reporting period.

Disclosure requirements under AS 18

a) Name of the related party
b) Description of the relationship
c) Description of nature of transactions
d) Volume of transactions either in terms of amount or proportion
e) Related party balances outstanding as at the balance sheet date along with provision for
doubtful debts on such balances if any
f) Amounts written off or written back in respect of balances due from / to related parties.
Note 1: Points (a) and (b) above should be disclosed whether or not transactions have taken
place in respect of parties related through control.
Note 2: Remuneration to KMP should be considered as a related party transaction.

Key definitions
Related party transactions: Transfer of resources or obligations between related parties
regardless of whether or not the price is charged.
Control: Control means:
a) Ownership over more than 50% of voting power
b) Control over composition of board of directors or any corresponding governing body (non-
company)
c) Substantial interest in voting power (>=20%) and power to direct financial and / or operating
policies of the entity
Significant influence: Participation in the financial and / or operating policies of the enterprise
but not control of these policies. A party holding 20% or more voting power in the entity is
presumed to have significant influence unless proved otherwise. Similarly, a party having less
than 20% of voting power is presumed to not have significant influence unless proved otherwise.
Significant influence can be exercised through:
a) Representation on BoD
b) Participation in policy making process
c) Material inter-company transactions
d) Interchange of managerial personnel
e) Dependence on technical information
Key Management Personnel: Those persons who have the authority and responsibility for
planning, directing and controlling the activities of the reporting entity.
Example: Managing director, whole-time director, manager and any other person in accordance
with whose instructions the BoD is accustomed to act.
Note: Non-executive director is not a related party unless he/she satisfied the definition of
KMP.
Relative:
a) Spouse
b) Son
c) Daughter
d) Father
e) Mother
f) Sister
g) Brother
who may be expected to be influenced by or influence that individual in relation to his/her
dealings with the entity.
Joint control: It is contractually agreed sharing of power to govern financial and operating
policies of an economic activity.

Other points
a) Following are not deemed to be related parties:
a. Entities with common directors
b. A single customer, vendor, franchiser, distributor or general agent merely by
virtue of economic dependence
c. Providers of finance
d. Trade Unions
e. Public Utilities
f. Government departments and agencies
b) Related party disclosure requirements do not apply in circumstances where providing
such disclosures would conflict with the entity’s duty of confidentiality as required by the
statute. (Example – banks are obliged to maintain confidentiality in respect of
transactions with their customers)
c) No disclosure is required in consolidated financial statements in respect of intra-group
transactions.
d) No disclosure is required in FS of state-controlled enterprises with respect to related party
relationships and transactions with other state-controlled enterprises.
 AS 28 – Notes
Key terms used in the standard:
a) Carrying amount: Value of the asset as at the balance sheet date.
b) Recoverable amount: Higher of value in use and net selling price
c) Net Selling Price: Selling price – cost of disposal (incremental cost of
selling the asset excluding finance costs and income taxes).
d) Value in use (VIU): Present value of estimated future cash flows from
continuing use of the asset and from its disposal at the end of useful life.
e) Cash generating unit: Smallest identifiable group of assets that generates
cash flows that are independent of cash flows from other assets. (refer
example 1 and 2 in page 5.223)
Recognition of impairment loss for an asset (refer illustration 1 and 3):

a) If there are indicators that an asset is impaired, we need to put the asset to
put the asset to impairment test and estimate the recoverable amount.
b) If recoverable amount is less than carrying amount, then asset is impaired
and impairment loss needs to be recognized.
c) The impairment loss needs to be recognized in P&L. If the asset is revalued,
then charge it to revaluation reserve to the extent available. Excess loss
should be charged in P&L.
d) If impairment loss is greater than carrying amount, then a liability needs to
be recognized if required by another accounting standard.

Reversal of impairment loss:

a) If there are indicators that impairment loss has reduced, then estimate the
recoverable amount.
b) Case 1: If impairment loss was earlier charged to P&L, then the reversal
also should be recorded as income in P&L.
c) Case 2: If the impairment loss was earlier adjusted against revaluation
reserve, then add the reversal to revaluation reserve to that extent.
d) Revised carrying amount after reversal of impairment loss should not be
more than the amount had no impairment loss been charged.
Impairment loss for a CGU
a) If an individual asset cannot generate cash flows that is independent from
other assets and its VIU is different from its scrap value, then we have to
estimate recoverable of CGU.
b) In case of a CGU, impairment loss should first be charged against goodwill,
then the remaining loss needs to be charged to individual assets in the ratio
of their carrying amount.
c) After charging the impairment loss, the carrying amount of each assets
should not be reduced to below the higher of (i) NSP; (ii) VIU and (iii) Zero
d) Extra loss due to the above restriction needs to be charged to the remaining
assets.
Reversal of impairment loss for a CGU
a) First the impairment loss reversal needs to be allocated to assets other than
goodwill in the ratio of their carrying amounts.
b) Then the remaining loss needs to be allocated to goodwill if certain
conditions are satisfied.
c) After reversing the impairment loss, the carrying amount should not
increased above the lower of (i) recoverable amount and (ii) carrying amount
had there been no impairment.
d) Any extra reversal due to the above restriction needs to be allocated to other
assets.
Consideration related to goodwill and corporate assets (refer example in page
5.225):
a) In case goodwill and corporate assets can be allocated to a CGU on a
reasonable basis, then allocate them to CGUs and perform impairment test.
(bottom-up test)
b) In case goodwill and corporate assets cannot be allocated to any CGU, then
an entity needs to carry out both bottom-up and top-down test.
c) Impairment loss charged on goodwill can be reversed only if (i) impairment
loss was caused by a specific event that is not expected to recur and (ii)
Subsequent events have occurred reversed the effect of that event causing
impairment loss.
Key points on calculation of value in use:
a) Cash flows should be based on most recent budgets or forecasts for a
maximum period of 5 years. Beyond the period of 5 years cash flows are to
be estimated based on a constant / declining growth rate. Such growth rate
should not be more than the long-term industry growth rate.
b) Cash outflows relating to obligations that are already recorded on the
balance sheet date should not be considered.
c) Future cash flows from restructuring are not included in the estimation of
value in use unless the entity is committed to restructuring.
d) Any future capital expenditure that will enhance the capacity of the asset
should be excluded.
e) Discount rate used should be pre-tax rate that investors would expect from
any other asset having similar cash flows.
Other points:
a) Even assets that are used internally can also be a CGU if there is a market
for its output. Cash flows should be estimated based on market price of such
output.
b) We should always calculate carrying amount, value in use and NSP should
be calculated consistently. (refer example 3 in page 5.224)
c) Impairment loss in case of discontinuing operations:
a. Approval of a plan to discontinue certain operations may indicate that
the assets have been impaired.
b. If such operation is being sold as a group, then recoverable amount
needs to be calculated for the group as a whole as none of the
individual assets can generate cash flows on their own.
c. If the operation is being sold on a piecemeal basis, the calculate
recoverable amount for individual assets.
d. In case of abandonment of operations as well, recoverable amount
needs to be calculated for each asset separately.
d) Indicators of impairment:
a. External indicators:
i. Market value of the asset has declined.
ii. Significant changes have taken place in legal, economic or
technological environment or are expected to take place that
will affect the asset.
 iii. Increase in market rate of interest leading to increase in
discount rate.
iv. Carrying amount of net assets > Market capitalization
b. Internal indicators:
i. Evidence of obsolescence or physical damage of an asset.
ii. Significant changes have taken place in the manner in which an
asset is expected to be used (eg.: discontinuation of operations,
restructuring etc.)
iii. Evidence is available that performance of the asset is worse
than expected.
e) Indicators of reversal of impairment will be opposite to the above indicators
of impairment loss.
f) Whenever there is an indicator of impairment, then we have to review useful
life, residual value and depreciation method of an asset as per AS 10.
g) In case NSP of an asset cant be determined, then VIU will be the recoverable
amount.
h) In case of an asset that is held for disposal, VIU will not be materially
different from NSP, hence NSP can be taken as recoverable amount. (refer
example 4 in page 5.229)
 AS 29 – Notes
Section 1: Provisions
Definition of a provision: It is a liability which can be measured only by using a substantial
degree of estimation.
Definition of a liability: It is a present obligation arising out of past events the settlement of
which will require outflow of resources embodying economic benefits.
Definition of present obligation: an obligation which is considered probable (more likely than
not) based on the evidence as at the balance sheet date. (Probability of occurrence >50%)
Definition of possible obligation: an obligation which is not probable based on the evidence as
at the balance sheet date. (Probability of occurrence <= 50%)
Recognition criteria for a provision (all the conditions should be satisfied):
a) There is a present obligation arising out of past events (obligations or losses arising out
of future events without any connection with the past should not be recognized as a
provision)
b) It is probable that there will be outflow of resources.
c) A reliable estimate of the amount of obligation can be made.
Other points
a) When details of a new law which may lead to an obligation is yet to be finalized, then a
provision is required to be recognized for such obligation only when it is virtually
certain that the law will be enacted.
b) Only in extremely rare circumstances a reliable estimate of the obligation is not
possible as per AS 29.
c) A provision should not be discounted to is present value (except for provision for
decommissioning recognized as per AS 10). Discount rate to be used for discounting
provision for decommissioning should be a pre-tax rate.
d) Future events that may affect the amount of obligation can be considered in the
estimating the amount of provision.
e) Expected gain on disposal of assets should not be considered while creating a provision.
f) A provision should be used only for the purpose for which it has been created.
g) No provision is required to be created for future operating losses.

Section 2: Contingent liabilities

Definition of a contingent liability:
a) It is a possible obligation the settlement of which is dependent on one or more future
uncertain events not wholly within control of the entity.
 b) It is a present obligation which is not recognized as a provision because it fails to satisfy
either point (b) or (c) under recognition criteria for a provision.
Other points:
a) A contingent liability is not recorded in books of accounts but is only disclosed in the
financial statements.
b) There is no need to disclose as well if the possibility of outflow of resources is remote.
c) Where an entity is jointly and severally liable, then its share of liability will be
recognized as a provision and others share of liability will be disclosed as a
contingent liability.
d) Contingent liabilities need to be continually re-assessed and if it becomes probable that
there is an outflow of resources, then a provision is required to be recognized.

Section 3: Contingent assets

Definition of a contingent asset: It is a possible benefit arising from past events the existence
of which will be confirmed by one or more future uncertain events not wholly within the
control of the entity.
Other points:
a) An entity is allowed neither to recognize nor to disclose contingent assets in the
financial statements.
b) It can be disclosed in the boards’ report.
c) Contingent assets are assessed continually and once it becomes virtually certain that
inflow of economic benefits will arise, then the asset and related income can be
recognized.

Section 4: Reimbursements
a) A reimbursement asset should be recognized separately from the related obligation.
b) A reimbursement asset can be recognized only when it is virtually certain that it will be
received.

Section 5: Restructuring
a) Definition of restructuring: It is a program that is planned and controlled by
Management resulting in a material change in (i) scope of business or (ii) the manner in
which business is conducted.
b) Examples of restructuring:
a. Sale or termination of line of business
b. Relocation of business from one location to another
c. Change in management structure
d. Fundamental re-organisations that have a material affect on the company’s
operations.
 c) A provision for restructuring is recognized only when the recognition criteria for
provision is met. For instance, no obligation arises for sale of an operation unless there is
a binding sale agreement.
d) A restructuring provision should only consider direct costs required by restructuring.
No provision should be created for costs associated with ongoing / future operations of
the entity.
e) No provision is required to be created for costs related to (i) retraining staff; (ii)
marketing costs and (iii) investment in new systems or distribution networks. These costs
are related to future operations.
f) Gain on expected sale of assets is not considered while measuring restructuring
provision.

Section 6: Scope of the standard

AS 29 is not applicable to provisions, contingent liabilities or contingent assets arising out of:
a) Executory contracts (contracts yet to be executed or executed partially) except when
contracts are onerous (loss making contract).
b) Insurance contracts with policy holders.
c) Those covered by another accounting standard.
 Branch accounts
Debtors system – Branch a/c (prepared from HO perspective) - Nominal a/c
Particulars Amount Particulars Amount
To branch assets (opening assets) XXX By branch liabilities (opening liabilities) XXX
- Branch stock (including goods in - Branch creditors
transit) - Branch outstanding expenses
- Branch debtors - Branch stock reserve (if
- Branch furniture accounting is done at invoice
- Branch petty cash (including cash price)
in transit) - Branch manager commission
- Branch main cash (including cash payable
in transit)
- Branch prepaid expenses
To Goods sent to branch (goods sent by HO XXX By Goods sent to branch (goods returned by XXX
whether or not received by the branch) branch and received by HO)
To bank (branch expenses paid by HO) XXX By bank (remittances sent by branch and XXX
received by HO)
To bank (branch creditors paid by HO) XXX By goods sent to branch (removal of XXX
loading on goods sent to branch net of
returns)
To bank (branch fixed assets purchased by XXX By branch assets (closing assets) XXX
HO)
To cash (cash sent to branch to meet petty - Branch stock (including goods in
expenses) transit)
- Branch debtors
- Branch furniture
- Branch petty cash (including cash
in transit)
- Branch main cash (including cash
in transit)
- Branch prepaid expenses
To abnormal loss (removal of loading on By abnormal loss (if H&M method is XXX
abnormal loss) followed. If Tulsian method is followed
then no entry)
To branch liabilities (closing liabilities) XXX By general P&L (net loss – balancing XXX
figure)
- Branch creditors
- Branch outstanding expenses
- Branch stock reserve (if
accounting is done at invoice
price)
- Branch manager commission
payable
To general P&L (net profit – balancing XXX
figure)

Calculation of goods sent to branch

Particulars Amount
Goods sent by HO to branch XXX
Goods sent by one branch to another XXX
Calculation of goods returned by branch
Particulars Amount
Goods sent by branch and received by HO XXX
Goods sent by one branch to another XXX
Goods returned directly to HO by branch customers XXX

Calculation of remittances
Particulars Amount
Cash sales XXX
Cash received from debtors XXX
Cash sale of fixed assets XXX
Scrap value of normal and abnormal loss (if Tulsian method is followed) XXX
XXX
Less: Branch expenses paid by branch (XXX)
Less: Branch creditors paid by branch (XXX)
Less: Branch fixed assets purchased by branch (XXX)
Less: Cash purchases made by branch (XXX)
Less: Cash balance retained by the branch (XXX)
Remittances (cash sent by branch and received by HO) XXX
Note: If H&M method is followed for accounting abnormal loss, then scrap value of abnormal loss will be taken to
general P&L

Calculation of closing balance of goods transit (onward)

Particulars Amount
Opening onward goods in transit XXX
Add: Goods sent to branch by HO whether or not received by branch XXX
Less: Goods sent by HO and received by the branch during the year XXX

Calculation of closing balance of goods transit (inward)

Particulars Amount
Opening inward goods in transit XXX
Add: Goods returned by branch whether or not received by HO XXX
Less: Goods returned by branch and received by the HO during the year XXX

Memorandum ledger accounts (prepared to find out opening and closing balances of assets
and liabilities
1) Memorandum branch debtors
Particulars Amount Particulars Amount
Opening balance XXX Sales return XXX
Credit sales XXX Cash received XXX
Discount allowed XXX
Bad debts XXX
Closing balance XXX
 2) Memorandum branch creditors
Particulars Amount Particulars Amount
Discount received XXX Opening balance XXX
Purchases return XXX Credit purchases XXX
Cash paid XXX
Closing balance XXX

3) Memorandum branch stock

Particulars Amount Particulars Amount
Opening balance (including onwards and XXX Goods returned by branch and received by XXX
inwards transit) HO
Goods sent by HO XXX Sales (at cost price) XXX
Cash sales
Credit sales
Less: Sales return
Less: Gross profit
Normal loss at cost price XXX
Abnormal loss at cost price XXX
Closing balance XXX

4) Memorandum branch petty cash

Particulars Amount Particulars Amount
Opening balance (including cash in transit) XXX Petty expenses paid by branch XXX
Cash sent to branch XXX Closing balance XXX

5) Memorandum branch cash

Particulars Amount Particulars Amount
Opening balance (including cash in transit) XXX Branch expenses paid by branch XXX
Cash sales XXX Branch cash purchase XXX
Cash received XXX Branch fixed assets purchase XXX
Cash sales of fixed assets XXX Branch creditors paid
Scrap value of normal and abnormal loss XXX Remittances
Closing balance XXX

6) Memorandum branch furniture

Particulars Amount Particulars Amount
Opening balance XXX Cash received from sale of furniture XXX
Branch furniture purchased by HO XXX Depreciation XXX
Branch furniture purchased by branch XXX Loss on sale of furniture XXX
Profit on sale of furniture XXX
Closing balance XXX
Items that should not be taken to branch a/c as these are indirectly accounted
1. Cash sales
2. Credit sales
3. Bad debts
4. Discount allowed
5. Depreciation
6. Profit / loss on sale of branch assets
7. Branch expenses paid by branch
8. Cash purchases made by branch
9. Purchase return
10. Discount received

Stock and debtors system – ledger account formats

1) Branch stock a/c at invoice price
Particulars Amount Particulars Amount
To balance b/d (including onwards and XXX By goods sent to branch a/c – IP XXX
inwards transit) – IP
To goods sent to branch a/c – IP XXX By branch cash a/c - SP XXX
To branch debtors a/c - SP XXX By branch debtors a/c – SP XXX
To branch adjustment a/c (loading on goods XXX By Normal loss a/c - IP XXX
sent to branch net of returns)
To branch adjustment a/c (surplus) XXX By branch creditors a/c (purchase returns) XXX
To branch adjustment a/c (Excess of sales XXX By branch adjustment a/c (loading on XXX
price over invoice price) purchase returns)
By Abnormal loss a/c - IP XXX
By balance c/d (including onwards and XXX
inwards transit) – IP
Note: If surplus is material (rare situation), then loading will be credited to branch adjustment a/c and cost of such
surplus material will be credited to P&L as abnormal gain.

2) Branch debtors a/c

Particulars Amount Particulars Amount
To balance b/d XXX By branch cash a/c XXX
To branch stock a/c XXX By branch expenses a/c (bad debts and XXX
discount allowed)
By branch stock a/c XXX
By balance c/d XXX

3) Branch petty cash a/c

Particulars Amount Particulars Amount
To balance b/d XXX By branch expenses a/c XXX
To HO cash a/c XXX By balance c/d XXX
 4) Branch cash a/c
Particulars Amount Particulars Amount
To balance b/d (including cash in transit) XXX By branch expenses a/c XXX
To branch stock a/c (cash sales) XXX By branch assets a/c (purchase of assets) XXX
To branch debtors a/c (cash received from XXX By branch creditors a/c (payment to XXX
debtors) creditors)
To branch assets a/c (cash received from XXX By HO cash a/c (remittances) XXX
sale of assets)
By balance c/d (including cash in transit) XXX

5) Branch creditors a/c

Particulars Amount Particulars Amount
To branch cash a/c (payment to creditors) XXX By balance b/d XXX
To branch stock a/c (purchase returns) XXX By branch stock a/c (purchase of goods at XXX
cost price)
To branch P&L a/c (discount received) XXX
To balance c/d XXX

6) Branch fixed assets a/c

Particulars Amount Particulars Amount
To balance b/d XXX By branch cash a/c (sale value of fixed XXX
assets)
To branch cash a/c (purchase of assets) XXX By branch expenses (depreciation) XXX
To HO cash a/c (purchase of assets by HO) XXX By branch expenses a/c (loss on sale) XXX
To branch P&L a/c (profit on sale) XXX By balance c/d XXX

7) Branch expenses a/c

Particulars Amount Particulars Amount
To balance b/d (prepaid expenses as at the XXX By balance b/d (outstanding expenses as at XXX
beginning) the beginning)
To branch petty cash a/c (branch petty By branch P&L (expenses for the year) XXX
expenses paid by branch)
To branch cash a/c (branch expenses paid XXX
by branch)
To HO cash a/c (branch expenses paid by XXX
HO)
To branch debtors a/c (bad debts and XXX
discount allowed)
To branch assets a/c (loss on sale and XXX
depreciation)
To balance c/d (outstanding expenses as at XXX By balance c/d (prepaid expenses as at the
the end) end)
 8) Branch adjustment a/c
Particulars Amount Particulars Amount
To branch stock a/c (loading on purchase XXX By branch stock reserve a/c (loading on XXX
returns) opening stock)
To normal loss a/c (invoice price of normal XXX By branch stock a/c (loading on goods sent XXX
loss) to branch net of returns)
To abnormal loss a/c (loading included in XXX By branch stock a/c (Excess of sales price XXX
abnormal loss) over invoice price)
To branch P&L (gross profit) XXX
To branch stock reserve (loading on closing XXX
stock)

9) Branch P&L a/c

Particulars Amount Particulars Amount
To branch stock a/c (loading on purchase XXX By branch adjustment a/c (gross profit) XXX
returns)
To branch expenses a/c XXX By branch assets a/c (profit on sale) XXX
To abnormal loss a/c (if Tulsian method is XXX By branch creditors (discount received) XXX
followed)
To General P&L (transfer of profit) XXX By General P&L (transfer of loss) XXX

10) Normal loss a/c

Particulars Amount Particulars Amount
To branch stock a/c – IP of normal loss XXX By branch adjustment a/c XXX

11) Abnormal loss a/c

Particulars Amount Particulars Amount
To branch stock a/c – IP of Abnormal loss XXX By branch adjustment a/c (loading included XXX
in abnormal loss)
By branch P&L a/c (net loss after removal XXX
of loading)

12) Goods sent to branch a/c

Particulars Amount Particulars Amount
To branch stock - cost price of goods XXX By branch stock a/c – cost price of goods XXX
returned sent
To purchases a/c XXX
 13) Branch stock reserve a/c
Particulars Amount Particulars Amount
To branch adjustment a/c (transfer of XXX By balance b/d (loading included in XXX
loading on opening stock) opening stock)
XXX By branch adjustment a/c (loading on XXX
closing stock)
To balance c/d XXX

Final accounts system – ledger account formats

1) Memorandum Branch trading a/c
Particulars Amount Particulars Amount
Opening stock (including stock in transit) XXX Sales (cash and credit) XXX
Goods sent to branch XXX Abnormal loss XXX
Less: Goods returned by branch received by
HO
Direct expenses XXX Scrap value of normal loss XXX
Gross profit XXX Closing stock XXX

2) Memorandum Branch P&L a/c

Particulars Amount Particulars Amount
Branch expenses paid by branch XXX Gross profit XXX
Branch expenses paid by HO XXX Discount received XXX
Depreciation and amortisation XXX Scrap value of abnormal loss XXX
Abnormal loss XXX
Bad debts XXX
Discount allowed XXX
Net profit XXX

3) Branch a/c (personal a/c) – not a memorandum ledger (perfect ledger a/c)
Particulars Amount Particulars Amount
To balance b/d (opening branch assets – XXX By goods sent to branch a/c (goods returned XXX
opening branch liabilities) by branch and received by HO)
To goods sent to branch a/c XXX By bank a/c (remittances) XXX
To bank a/c (expenses paid by HO) XXX By balance c/d (closing branch assets – XXX
closing branch liabilities)
To bank a/c (branch creditors paid by HO) XXX
To bank a/c (branch assets purchased by XXX
HO)
To cash a/c (petty expenses paid by HO) XXX
To General P&L (net profit) XXX
Note: Practically, values of branch assets and liabilities are calculated by preparing memorandum ledger accounts as
prepared under the debtors system to present in the company balance sheet.
 Wholesale price method – ledger account formats
1) Head office trading a/c
Particulars Amount Particulars Amount
To opening stock a/c XXX By sales a/c: XXX
- To customers (retail price)
- To own retail branches (wholesale
price)
- To other retail outlets (wholesale
price)
To purchases a/c XXX By closing stock a/c XXX
To HO P&L a/c XXX

2) Head office P&L a/c

Particulars Amount Particulars Amount
To Indirect expenses XXX By HO trading a/c XXX
To branch stock reserve (loading on closing XXX By branch stock reserve (loading on XXX
stock) opening stock)
To general P&L (net profit) XXX

3) Branch trading a/c

Particulars Amount Particulars Amount
To opening stock a/c XXX By sales a/c XXX
To goods sent to branch a/c XXX By abnormal loss a/c XXX
To branch P&L a/c XXX By closing stock a/c XXX

4) Branch P&L a/c

Particulars Amount Particulars Amount
To Indirect expenses XXX By branch trading a/c XXX
To abnormal loss a/c (If Tulsian method is XXX
followed, otherwise take abnormal loss to
general P&L)
To general P&L (net profit) XXX
Note: In case of sums with invoice price, we have to remove loading only on opening stock and closing stock. No
need to remove loading from goods sent to branch and abnormal loss.

Independent branches (important points)

a) Inter-branch transactions should always be routed through head office. A branch cannot
use ledger account of another branch.
b) Two platinum rules for accounting goods / cash in transit:
i. Goods / cash in transit should always be debited in original entry (not in reversal entry).
In the next year, goods / cash in transit entry should be reversed.
ii. Goods / cash in transit entries can be passed either in the books of head-office or in the
books of the branch (generally it is advisable to pass the entry in the books of
receiving entity).
 c) Even if branch fixed assets a/cs are maintained in the books of head office, depreciation
expenses should be charged only to branch P&L.

Methods of finding profit or loss of an independent branch

i) Separate final accounts method – Branch will prepare its own trading, P&L and BS in
its books and HO will pass entry in its books only for the final net profit of the branch.
Only net profit is incorporated in the books of HO.
ii) Abridged consolidation method – Branch will prepare its own trading and P&L a/c. The
balances will then be consolidated into HO books where company BS will be prepared.
In this method, not only net profit but even assets and liabilities of the branch will
be incorporated in the books of HO.
iii) Detailed consolidation method – Branch will only prepare its trial balance. Then all the
ledger accounts will be consolidated into HO books and HO will prepare branch trading,
and P&L and company BS.

Foreign branch (separate books will be maintained – independent branch)

a) Branches are of two types – integral (IFO) and non-integral (NIFO).
b) Trial balances of foreign branches will be translated into INR based on the following
exchange rates:
FS item IFO NIFO
Opening stock Opening rate Opening rate
Closing stock Closing rate Closing rate
Revenue items (expenses Average rate Average rate
and incomes except
depreciation and goods
received from HO)
Depreciation At the date of purchase of asset Average rate
Goods received from HO Take it from the HO books – Take it from the HO books – no
and HO a/c no need to convert need to convert
Fixed assets and other Original rate on the date of Closing rate
non-monetary items transaction
Other monetary assets Closing rate Closing rate
and liabilities
Treatment of difference P&L FCTR
in the TB