Accounting standard

Simplified
- CA Kaustubh Deshpande

CA Kaustubh Deshpande 1

 There are 45 Paragraphs
 Contents
 Objective
 Scope
 Definitions
 Foreign currency transaction-Initial
recognition, subsequent reporting and exchange
difference
 Integral and non-integral operations
 Forward Contracts
 Disclosure


 In order to include foreign currency
transactions and foreign operations in the
financial statements of an enterprise’s
reporting currency

 Therefore this standard should be applied for
 Accounting for transactions in foreign currency
 Translating the financial statement of foreign
operations


 Average rate- exchange rates in force during
a period

 Closing
rate- exchange rate at the balance
sheet date

 Foreigncurrency- currency other than
reporting currency


 Foreignoperation is a
subsidiary, associate, joint venture or branch
–the activities of which are conducted in a
country other than the country of the
reporting enterprise

 Monetary items are money held and assets
and liabilities to be received or paid in fixed
determinable amounts of money

 Reportingcurrency is the currency used in
presenting the financial statements

 Initial transaction should be recorded at the spot exchange
rate or average rate (week or month )

 Average rate cant be used if exchange rates significantly
fluctuate

 At subsequent Balance Sheet Date – Monetary items should
be reported using the closing rate. However where closing
rate is not reasonable or realistic –relevant monetary items
be reported in the reporting currency at the amount which
is likely to be realised or disburse.

 At subsequent Balance Sheet Date -Non-monetary items be
reported at historical cost which is derived by applying
the exchange rate at the date of transaction


 Exchange difference arising on settlement of
monetary asset is recognised in profit and
loss account
 Reporting monetary item at rates different
from those at which they were initially
recorded
 Exception to above is Net investment in Non-
integral foreign operations


 Classification of foreign operations (FO)
 Integral operations
 Non-integral operations

 Following are the indications that foreign
operation is non-integral
 The activities of FO are carried out with significant
autonomy
 Transaction with reporting enterprise are not high
 FO are financed mainly from its own operations
 Cost of material labour etc are settled in the local
currency
 Sales are mainly in foreign currencies
 There is an active local market

 Integral foreign operation-foreign operations
should be translated as mention above
(initial ,subsequent balance sheet)
 Exchange difference be accounted in profit
and loss account

 Non integral operations
 Asset and liabilities (monetary and non-
monetary)- Closing rate
 Income and expense- at the date of transaction
or average rate
 Exchange difference should be accumulated in
Foreign currency translation reserve till
disposal(FCTR)
 Equity and Surplus of profit and loss account be
reported at historical cost


 FCTRbalance on disposal of operation be
recognised in profit and loss account

 Changein classification of a Foreign
Operation
 Integral- Non integral: exchange difference
arising on the translation of non-monetary asset
at the date of reclassification- accumulated in
FCTR
 Non-integral Integral: translated amounts for
non-monetary items at the date of
reclassification are considered as historical cost
for the period and subsequent periods
 Accumulated exchange difference are carried in
balance sheet till the disposal of FO


 Gainsand losses on foreign currency
transactions and FO may have associated tax
effects – Accounting as per AS-22


 Forward contract means agreement to
exchange different currencies at a forward
rate
 Forward rate is exchange rate for exchange
of two currencies at a specified future date
 Forward Contract which is not intended for
trading or speculation purposes –premium or
discount should be amortised over period of
contract.
 Premium or discount is difference between
spot rate on the date of contract and
forward rate


 Forward contracts to which previous
conditions does not apply:
 Difference between the forward rate available at
the reporting date for the remaining maturity
and the contracted forward rate
 Difference is recognised in profit and loss
account
 No premium or discount is accounted


 Foreign exchange gain loss- Separate in
profit and loss
 FCTR in balance sheet along with
reconciliation with opening and closing
balance
 There is change in classification of significant
foreign operation:
 Nature of the change in classification
 The reason
 Impact on shareholders fund and profit and loss
account


 There are 34 paragraphs

 Contents
 Objective
 Scope
 Definitions
 Recognitions
 Re-assessment of unrecognised Deferred Tax Asset
(‘DTA)
 Measurement
 Review of DTA
 Presentation and disclosures
 Transitional Provisions


 Matching Concept
 The Objective of accounting taxes as per AS-22 is
to achieve or comply with matching concept

 Scope
 Determination of the amount of tax expense or
saving on income in respect of an accounting
period and its disclosure
 Whether it is applicable for domestic and foreign
taxes?


 Accounting income (loss)- Net Profit or loss
for a period, as reported

 Taxable
income (tax loss)- Income (loss)
determined in accordance with tax laws

 Currenttax -is the amount of income tax
payable (recoverable) determined as per tax
laws

 Deferred tax –tax effect of timing differences


 Timingdifference are those differences
between taxable income and accounting
income for a period that originate in one
period and capable of reversal in one or
more subsequent periods.

 Unabsorbed depreciation and carry forward
losses


 Taxexpense for the period should comprise
of Current tax and deferred tax

 Deferred tax should be recognised on all
timing differences.(Subject to para 15-18)

 Deferred tax in respect of timing differences
reversing during tax holiday periods is not to
be recognised

 FIFO to apply for above explanation


 Virtual Certainty-
 Convincing Evidence

 Reasonable certainty of realisation
 History
 Estimated profits

 Reassessment of DTA – At each Balance Sheet
date


 Taxrates and tax laws that have been
enacted or substantively enacted

 Incase tax is payable u/s 115JB –
Applicability of AS-22 ?

 Ifanswer is affirmative, which rates to be
applied for measurement of deferred tax as
per AS-22

 No discounting


Off set
 Legally enforceable right to set off

 Same governing taxation laws

 Otherwise Separate disclosure in balance sheet

Break-up of DTA and DTL in notes to accounts

Nature of the evidence supporting the virtual certainty


 Revenue reserve- Prior to the adoption of
this standard



 Contents
 Objective
 Scope
 Definitions
 Presentation
 Basic EPS
 Diluted EPS
 Restatement
 Disclosure


 All companies i.e. SME and Non SME

 However disclosure of Diluted EPS is not
mandatory for SME companies.

 Inthe consolidated financial statements EPS
should be presented on the basis of
consolidated information.

 Comparison of performance among different
enterprises and among different accounting
periods for same enterprise

 Anequity share is a share other than a
preference share.

 Preferenceshare is a share carrying
preferential rights

A potential equity share is a financial
instrument or other contract that entitles, or
may entitle, its holder to equity.


 present basic and diluted EPS for each class
of equity shares that has different right to
share in the net profit for the period.

 Itshould be presented on the face of the
statement of Profit and Loss account.

 Itshould be disclosed for all periods
presented.

 Negative EPS should also be disclosed


 Basic EPS
 Net profit or loss attributable to shareholders
 Weighted average number of equity shares
outstanding during the year
 Net profit or loss attributable to shareholder
should be after deducting preference dividends
and any attributable tax thereto
 If there are more than one class of equity
shares, net profit or loss for the period is
apportioned according to dividend rights


 Weighted average shares are weighted with
time factor

 Weighted average shares outstanding during
the period and for all periods be adjusted for
all events except potential equity
shares, that have changed the number of
equity shares outstanding, without a
corresponding change in resources


 Diluted EPS
 Net profit or loss attributable to shareholders
 Weighted average number of shares outstanding
during the period should be adjusted for the effect of
all dilutive potential equity shares.
 Net profit or loss attributable to shareholder means
adjusted to the extent of interest or dividend
accounted on potential equity share and its tax effect
 Allotment money pending is treated as dilutive
potential equity shares.
 Dilutive potential shares should be deemed to be
have been converted into equity at the beginning of
the period.


 EPSbefore and after extra-ordinary items
 Numerator
 Denominator
 Nominal value of share



 Contents
 Objective
 Scope
 Definitions
 Related Party issues
 Disclosures


 Disclosure of:
 Related party relationship
 Transaction between enterprise and related
party
 It is applicable to all reporting enterprise as also
to consolidated financial statements.


 Enterprises directly or indirectly under common
control with the reporting enterprise
 Associates and Joint ventures of the reporting
enterprise and the investing party or venturer
 Individuals owning directly or indirectly an
interest in the voting power of the reporting
enterprise and relatives of such individuals
 Key management personnel and relatives of such
person
 Enterprises over which any person mentioned in
above two points is able to have significant
influence.

 A statute or regulator or a similar competent
authority governing -an enterprise prohibit the
enterprise to disclose certain information
which is required to be disclosed.

o No disclosure of intra group transactions in
Consolidated financial statements

o No disclosure of transactions between enterprise
controlled by different states


 Related party- one party has control or
significant influence over the other party
 Related party transaction – a transfer of
resources or obligation whether or not a
price is charged
 Control- ownership, control of the
composition of the board of
directors, Substantial interest
 Key management personnel- persons having
authority and responsibility for
planning, directing and controlling the
activities of reporting enterprise


 Relative-
in relation to individual means-
spouse, son, daughter, father, mother who
may be expected to influence.


 Names of the related parties
 Nature of the related party relationship
 Irrespective of whether or not there have
been transactions between related parties
 Nature of transaction
 Volume of transactions as an amount or
appropriate proportion
 Outstanding items pertaining to related
parties at the balance sheet date.
 Amounts written off or back in respect of
debts due from or to related parties



 Contents
 Objective
 Scope
 Intangible Asset
 Recognition and measurement
 Subsequent expenditure
 Amortisation


 Standard prescribes the accounting
treatment for intangible assets that are not
dealt by another accounting standard

 Itdoes not apply to a) Intangibles –Another
AS b) financial assets c) Mineral rights d)
Contract with policyholder- In insurance
companies e) expenditure in respect of
Termination benefits


 Intangible asset is an identifiable non-
monetary asset without physical substance
 An asset is a resource 1) controlled by
enterprise as a result of past events 2) from
which future economic benefits are expected
to flow.
 Research is original and planned investigation
with object of gaining new technical
knowledge
 Development is the application of research
findings to produce the intangible asset

 Amortisation is the systematic allocation of
the depreciable amount of an intangible
asset over its useful life.


 Software, patents, copyrights, Customer
list, marketing rights, motion film etc
 There could be cases where both tangible
and intangible elements exists and
inseparable.
 Whether AS-10 or AS-26 is applicable- Which
element is predominant
 Now ever items mentioned above may not
meet the definition of intangible


 Identifiable
– Separability is not necessary
condition for identifiable asset

 Future economic benefits

 Control-power to obtain future economic
benefits and restrict the access of others to
those resources.
Examples – 1) Marketing rights (Future benefits and
Copyright) 2) Skilled Staff (future benefits and
control?) 3) customer Contracts ?

 IA should be recognised only if : future economic
benefits will flow and cost of the asset can be
measured

 Separate acquisition- Purchase price including
other incidental expenses
 Acquisition as a part of amalgamation-
Amalgamation in the nature of purchase is
accounted as per AS-14. (Standard does not talk
about amalgamation in the nature of merger)
 Option I- Fair vale in active market, Option II-
ALP , Option III- Discounted future cash flows.
 If separate value cant be ascertained then it will
be included in goodwill


 Goodwill –Does not meet the definition of IA

 Other assets
 It should meet the basic requirements of IA and
measurement
 Therefore an enterprise classifies the generation
of the asset into a) research phase b)
development phase


 Expenditure incurred in this phase does not
qualify for capitalisation, so it should be
expensed .

 Reason:Research phase does not
demonstrate that an IA exists from which
future economic benefits are probable.

 Research activities means: obtaining new
knowledge, search for
alternatives, design, evaluation etc

 IA
arising from development phase should be
recognised if:
 Technical feasibility
 Intention to complete asset and use or sell it
 Future economic benefits
 Ability to measure the expenditure


 Objective – to prescribe accounting treatment of
borrowing costs.

 Scope –

• This standard should be applied in accounting of
borrowing costs

• This standard does not deal with actual or imputed
cost of owner’s equity, including preference share
capital not classified as a liability


 Borrowing Costs – interest and other costs incurred by
an entity in connection with borrowing of funds and
may include costs like interest and commitment
charges paid to bank, finance charges against finance
lease, exchange differences arising from foreign
currency borrowings, etc.

 Qualifying Asset – an asset that necessarily takes a
substantial period of time to get ready for its intended
use or sale. E.g. Manufacturing plants, power
generation facilities, investment properties. Assets
that are ready for intended use or sale when acquired
also are not qualifying assets


 The borrowing costs can be treated as follows –
1. Capitalize and include in the cost of the asset - if
the conditions for capitalizing are satisfied.

2. Charge to Profit and Loss – If the borrowing costs
would have been avoided if expenditure on
Qualifying Asset had not been made

 Conditions for Capitalization of Borrowing Costs –
a. Qualifying Asset will give Future Economic Benefits
b. Costs to be capitalized can be measured reliably


 To the extent funds are borrowed specifically for the
purpose of obtaining a qualifying asset, amount of
borrowing costs should be capitalized and determined
in following manner –

i. Capitalization Rate = Actual Borrowing Costs

ii. Amount of Borrowing Cost = Actual Borrowing Cost
(less) Income on Temporary Investment of those
borrowings


 To the extent funds are borrowed generally and used
for obtaining qualifying asset, the amount of
borrowing cost eligible for capitalization will be
determined by applying a capitalization rate to the
expenditure on that asset.

 Capitalization Rate = Weighted Average of Borrowing
Costs

 The borrowing costs should not exceed actual costs
incurred


 Capitalization as a part of cost should commence
when ALL of the following conditions are satisfied –

1. Expenditure for the acquisition, construction or
production of a qualifying asset is being incurred

2. Borrowing costs are being incurred

3. Activities that are necessary to prepare the asset for
its intended use or sale are in progress


 Capitalization of Borrowing Costs should be suspended
when –
1. Extended periods in which active development is
interrupted
2. Natural Calamity has occurred
(flood, earthquake, etc.) which would hamper the
development of Qualifying Asset

 Capitalization is not normally suspended when
substantial technical or administrative work is being
carried out or temporary delay is a necessary part of
getting the asset ready

 Capitalization of Borrowing Costs should cease when –

1. Substantially all activities necessary to prepare the
Qualifying Asset for its intended use or sale are
complete
2. When the construction of a qualifying asset is
completed in parts and a completed part is capable
of being used while construction continues for the
other parts, capitalization of borrowing costs in
relation to a part should cease when substantially all
the activities necessary to prepare that part for its
intended use or sale are complete

 Financial statement should disclose –

1. The accounting policy adopted for borrowing
costs

2. The amount of borrowing costs capitalized
during the period



 Contents
 Objective
 Scope
 Definitions
 Short term employee benefits and recognition
 Post employment benefits
 Long term benefits
 Termination benefits


 Thestandard requires an enterprise to
recognise:
 A liability when an employee has provided
service in exchange for employee benefits to be
paid
 An expense when enterprise consumes the
economic benefit arising from service provided
by an employee in exchange for employee
benefits.


 Short term benefits plan

 Post employment benefit

 Long term employee benefits

 Termination benefits


 Employee benefits- consideration given by an
enterprise in exchange of service rendered
by employee
 Short term employee benefit- employee
benefits which fall due within twelve months
after the end of the period
 Post employment benefits- employee
benefits which are payable after the
completion of employment
 Long term employee benefits- Employee
benefits which do not fall due wholly within
twelve months after the end of the period


 Termination benefits: Benefits payable as a
result of either- terminate an employee’s
employment before the normal retirement
and VRS


 Examples: Salary, wages, performance
bonus, compensated absences (within
twelve), non monetary benefits (medical
care, cars, etc)

 Recognition:Undiscounted amount of short
term employee benefits to be paid in
exchange of services

 In case of non vesting compensated absences
( Only exemption to SMC)

 Post employment benefits are classified
 Defined contribution plan
 Obligation is limited to the amount that it agrees to
contribute to the fund
 Recognition: contribution payable to defined
contribution payable. However where contribution
so not fall due within 12 month its should be
discounted (Except SMC) as per para 78 (Market
yield on gov. bonds)

 Defined Benefit plan
 Obligation is to provide the agreed benefit to current
and former employees
 Recognition: Actuarial Valuation


 Example:Long term compensated
absences, long service benefits,
 Recognition: Actuarial valuation


 Recognition
 Enterprise has a present obligation as a result of
a past event
 Probable that an outflow
 Reliable estimate
 Where termination benefits fall due more than
12 months – It should be discounted as per para
78



 Contents
 Definitions
 Classification of investments
 Cost of investments
 Carrying amount of investments
 Disposal of investments
 Reclassification of investment


 Standard does not deal with

 1) recognition of interest, dividend

 2) Asset management companies, banks and
public financial institution


 Investments are assets held by an enterprise
for earning income by way of
dividend, interest etc.
 A Current investment –by nature readily
realisable and is intended to be held for not
more than one year
 A long term investment- other than current



 Current investment

 Long term investment

 Cost of Investment
 Cost plus acquisition charges
 Investment acquired in exchange of asset- Fair value
of asset given up
 Interest bearing investment- Pre-acquisition interest
and post-acquisition interest


 Long term investment
 At cost
 Other than temporary decline –recorded in Profit
and Loss account
 Reversal if revival of investment

 Current investment
 Lower of cost or fair value


 Netdifference on disposal of investment is
recorded in Profit and loss account.
 Sale proceeds
 Carrying cost


 Longterm to Current- transfer is made at
lower of carrying amount and cost on the
date of transfer

 Current to long term- transfer is made at the
lower of cost and fair vale on the date of
transfer


 Accounting policies- for carrying amount

 Separatedisclosure of income earned on
investment and profit or loss on disposal of
current and long term investment

 Significant restrictions on the right of
ownership

 Aggregateamount of quoted and un quoted
investment along with aggregate amount of
market value

 Costincurred for development of IA should
be identified and accounted

 Expenditure on an intangible item that was
initially recognised as an expense by
reporting enterprise in previous financial
statement should not be recognised as part
of the cost of an intangible asset at a later
date.


 Future economic benefits in excess of its
originally assessed standard of performance.
 Expenditure can be measured and attributed
to the cost.


 Usefullife
 Rebuttable presumption 10 years
 Hence if evidence for more than 10 years.



 Contents
 Scope
 Definitions
 Identifying an asset – Impairment
 Measurement of recoverable
 Net selling price
 Value in use
 Recognition and measurement of impairment loss
 Cash generating Units


 Standard does apply to:
 Inventories

 assets arising from construction contracts,

 Financial assets

 deferred tax asset


 Recoverable amount- Higher of an asset’s net
selling price and its value in use

 Valuein use is the present value of estimated
future cash flows from the use of an asset
and disposal

 SMChas an option not to calculate present
value for deriving the value in use.


 Net selling price is the amount obtainable from
the sale of an asset in an arms length transaction

 An impairment loss is the amount by which the
carrying amount of an asset exceeds its
recoverable amount.

 Cash generating unit is the smallest identifiable
group of assets that generates cash flows from
continuing use that are largely independent of
the cash inflows from other assets or group of
assets.

 At
each balance sheet date enterprise should
whether there is any indication that an asset
may be impaired.

 External information
 Assets market value has been declined
 Changes in technology, economics, legal
environment,
 Carrying amount of net assets is more than
market capitalisation


 Internal information
 Physical damage of asset or outdated
 Economic performance – based on internal
reproting


 Higher of Value in use or net selling price

 Net selling price
 Best evidence for net selling price
 Binding sale agreement
 Traded in active market- market price less cost of
disposal


 Value in use
 Estimate the future cash flows
 Cash flow projections should be based on reasonable
and supportable assumptions
 Cash flows should be based on recent financial budget
 Beyond the period covered by budget be estimated by
extrapolating the projections using growth rate
(Subsequent years)
 Cash inflows should consider the amount receivable
(payable) for disposal of asset at the end of its useful
life
 Apply discounting rate


 Futurecash flows should be estimated on
current conditions:
 Cash flows arising from restructuring or future
capital expenditure which will improve the asset
in its excess of its originally assessed standard
performance
 Cash flows should not include financing activity
and income tax receipts and payment
 As the discount rate is pre tax and should reflect
the time value of money hence above two points
should not be considered while determining
value in use. Discounting rate should also
consider the risk


 If the recoverable amount is less than its
carrying value , asset should be reduced to
its recoverable value.
 An impairment loss should be recognised as
an expense in the statement of Profit and
Loss account
 After accounting for impairment loss, the
depreciation charge for the asset should be
calculated on the assets revised carrying
amount.


 If an active market exists for the output produced by
an asset or a group of assets, this asset or group of
assets should be identified as a separate cash-
generating unit, even if some or all of the output is
used internally. If this is the case, management’s
best estimate of future market prices for the output
should be used:
 (a) in determining the value in use of this cash-
generating unit, when estimating the future cash
inflows that relate to the internal use of the output;
and
 (b) in determining the value in use of other cash-
generating units of the reporting enterprise, when
estimating the future cash outflows that relate to
the internal use of the output.

THANK YOU!


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