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 ofAccounting 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:
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 ofAccounting 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:
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 deviatio.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 the
•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.
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.
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.
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 deviatio.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 the
•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.
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.
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
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.
(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.
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