Accounting Assurance Standard (AAS) 1 to 29
- Disclosure of accounting policies
Accounting policies refer to specific accounting principles and the method of applying those principles adopted by the enterprises in preparation of financial statements. All significant accounting policies adopted should be disclosed at one place for better understanding of financial statement.
Depreciation: WDV or SLM method, Inventory: FIFO or LIFO or weighted average method.
Fundamental accounting assumption: Going Concern, Consistency & Accrual.
- Valuation of inventories
It consist of FG, WIP, RM and Spares & Consumables but does not include financial instruments, live stock, agricultural & forest product, mineral & WIP under construction contract. Valuation: at lower of landed cost and net realisable value.
- Cash flow statement
Cash flow statement explains cash flow (inflow & outflow) from operating, financial & investment activities.
Applicability: Listed Co. & Company having turnover > Rs. 50 crores in a F.Y.
Method: Direct Method - Gross receipt & payment to be disclosed.
Indirect Method - P&L is adjusted for the effects of non-cash transactions.
- Contingencies and events occurring after the balance sheet date
Applicability: Don’t apply to insurance company, lease contract & retirement benefits.
Contingencies: Any existing condition or situation which is not certain and result of which is not known on the B/S date, the result of which is know on happening or non- happening of any future event. Result may be gain or loss. Example: Guarantee, warranty claims, litigation.
Accounting treatment: Contingencies at the B/s date-
If expected outcome is gain, No accounting.
If expected outcome is loss, Create provision if loss is probable
Disclose as note if loss is reasonable
Ignore if loss is remote
No accounting treatment if contingencies occur after B/s date.
Events occurring after the balance sheet date: The event happening after B/s date but before approval of financial statement.
Accounting treatment: Provision for loss if the event relate to circumstances existing o the B/s date, if not no need for provision or disclosure by ay of note.
- Net profit or loss for the period, prior period items and change in accounting policies.
Profit or loss relating to any transaction of pervious year but occurring the current year or resulting due to change in accounting policy should be disclosed separately in the financial statement.
- Depreciation accounting
It is not applicable to forest, plantation, live stock, minerals wasting assets & goodwill.
- Construction contract
It is applicable to contractor not contractee. Only percentage of completion method is used for recognizing revenues & cost in the period in which work performed. If total contract cost exceeds total revenue, expected loss should be recognized as expense irrespective stage of completion of contract or whether or not work has commenced.
- Withdraw & included in ASS- 26
- Revenue recognition
Revenue from sale of goods or rendering of service should be recognized in the financial statement only when seller has transferred the ownership of goods & does not retain any effective control of ownership and there is no significant uncertainty in collection of consideration. If there is uncertainty than revenue should be recognized when there is certainty of collection.
This ASS is not applicable for revenue arising from government grant/subsidies, insurance, construction, hire purchase, and lease contract and gain on sale of fixed assets.
- Accounting for fixed assets
Fixed assets like land, building, machine & furniture should be valued at landed cost or revalued cost if revalued. When a fixed asset is revalued, entire class of assets should be revalued. If repair or improvement increase expected future benefits, it is to be capitalized otherwise to be charged off. Asset is to be capitalized after installation & commissioning.
- Effect of change in foreign exchange rates
Foreign currency transaction: In case of fixed assets exchange difference should be capitalized as required by the company Act while as per AS it should be charged off. In other case exchange difference should be charged off.
For valuation at the B/S date monetary items should be converted at closing rate while non- monetary item should be converted at the purchase rate.
Forward exchange contract: If contract for managing risk, exchange difference between exchange rate at inception & forward rate should be expensed over the tenor of contract but if contract for trading or speculation, no accounting treatment for premium or discount at the time of inception of contract but at the B/S date contract is valued at the current market rate and exchange difference is recognized in P&L a/c.
- Accounting for government grants
It means subsidies cash incentive but does not include government grant like tax holiday, sale tax exemption and government participation like investment by govt. as equity.
Grant may be monetary or non-monetary. Monetary grant may be reimbursement of any expenditure incurred and non-monetary may relate to fixed asset.
Accounting treatment: if grant is monetary, grant received should be recognized as other income over the period to match with the related cost or deduct from related expenditure incurred but if it is non-monetary, assets received as grant should be shown in book at nominal cost say Rs. 1. If conditions attached to grants have been fulfilled, grants should be credited to capital reserve a/c but if conditions are yet to be fulfilled, grant should be credited to other income and should be apportioned over the period during which related cost will be charged from income to fulfill the conditions and apportioned portion of grant should be shown as deferred govt. grant.
- Accounting for investment
It does not deal with Mutual fund, Venture Capital Fund, Insurance Company, Bank, PSUs, lease, interest or dividend & investment of retirement benefit.
Current investment is readily realisable & held not for more than 12 months. It is valued at lower of cost and realisable cost while long term investment is held for more than 12 months and valued at cost. If there is decline in value, carrying value of investment should be reduced by the decline but such decline should not be temporary.
- Accounting for amalgamation
It means one company acquires another company and acquired company is dissolved and its separate entity ceases to exist. This ASS is applicable only for accounting in the book of transferee company not transfer company.
- Accounting for retirement benefit in the financial statement of employers
Retirement benefits are Gratuity, PF, Gratuity, Leave Encashment & Pension etc.
Type of retirement benefit:
Defined contribution scheme- Amount paid to employee is based on contribution made to fund and accumulated income thereon. Like PF
Defined benefit scheme- Amount paid to employee is determined with reference to employee’s salary & length of service. Liability is determined by the actuarial valuation. Like gratuity, Pension, Leave Encashment etc.
- Borrowing cost
Borrowing cost means interest & other cost incurred to borrowing fund. Borrowing cost is capitalized only when fund is borrowed, borrowed cost is incurred, expenditure on acquisition, construction or production of qualifying assets is incurred & activities, to make the qualifying asset for its intended use, is in progress. Qualifying assets is one which takes substantial period of time to be ready for its intended use or sale. Borrowing cost incurred attributable to qualifying asset directly is eligible for capitalization while not attributable directly is capitalized at weighted average cost on expenditure incurred on that asset.
Amount of borrowing cost capitalized during a period should not exceed the amount of borrowing cost incurred during the period.
- Segment reporting
An enterprise deal in different product/services & operate in different geographical area. Different product/service & operating area are subject to different class of risk & return, thus segment reporting is required for better understanding of performance and to assess risk & return of the enterprises. There are two types of segment. 1. Business Segment & 2. Geographical Segment.
A segment is said to be reportable when: Segment revenue from sale to external customers and internal transfer is 10% or more than total external and internal revenue of all segments OR 10% or more of segment result (higher of total profit of all profit making segments and total loss of all loss making segments) OR as decided by the management OR additional segment ensuring that 75% of total external revenue is in the all reportable segments ignoring condition of 10% threshold limit.
If a segment is reportable in the previous year than it will continue to be reportable in the current year also even conditions of 10% threshold limit are not fulfilled in the current year.
- Related party disclosure
A related party is any party that controls or can significantly influence the management or operating policies of the company. Such relationship is said to exist between parent & subsidiary company, joint venture partners, investor and investee, associates & Key management personal & relatives etc. This AS requires disclosure of related party relationship & transaction between related parties.
- Accounting for lease
Lease is an agreement by which lessor gives the right to use an assets for a given period of time to the lessee on rent. Lease type: Financial lease & Operating lease. In financial lease lessor transfer all risk & rewards incidental to ownership of an asset to the leasee but not legal ownership. Asset is specially purchased for the use of leasee while in operating leasee, lessor retain all risk & rewards incidental to ownership.
This AS is not applicable to leasee for use of land, explore of mineral, motion picture, video recording, manuscripts, patents.
Accounting Treatment: In operating lease fixed amount paid monthly is debited/credited to P&L a/c while in financial lease amount paid consist of principle & interest. Interest is debited/credited to P&L a/c in proportion of outstanding lease liability. Leases asset & liability for lease is valued as lower of fair value of leased asset at the inception of lease or present value of minimum lease payment.
- Earning per share(EPS)
This AS is applicable to the companies whose equity shares are listed on stock exchange. There are two types of EPS: 1. Basic EPS & 2. Diluted EPS. Basic EPS is computed by dividing net profit & loss attributable to equity shareholder by the weighted average number of equity shares holders outstanding during the period. In case of diluted EPS net profit and average number of weighted equity share holders is after adjustment of diluted earning/equity shares. Diluted shares are those potential equity shares which entitles the holder to the right of equity shares like convertible debentures. Potential equity shares are diluted only if their conversion into equity shares reduces the EPS.
- Consolidated financial statements
This AS requires presentation of financial statement of parent & subsidiary company as a single economic entity. Investment of parent company in subsidiary company should not be temporary. Investment of parent should be valued at cost as per AS-13.
- Accounting for taxes on income
As per this AS income tax expense is computed on accrual basis not on payment basis. Income tax expense consists of current tax & deferred tax. Tax expense is computed using applicable tax rate on profit or loss computed as per company law while current tax is computed as per income tax Act. Deferred tax is the effect of temporary timing deference between tax expense & current tax is deferred tax (asset or liability). If timing difference is deferred tax liability, debit P&L a/c & credit deferred tax liability. If timing difference is deferred tax asset, debit deferred tax asset & credit P&L a/c. Deferred tax liability in current year result in deferred tax assets in subsequent years. If deferred tax asset not recognized in the current year due to insufficiency of profit, fact must be disclosed by way of note in the financial statement.
- Accounting for investment in associates in consolidated financial statements
This AS is applicable in case of company having significant influence in another company called associate company. Company must have control over 20% or more of voting power in associates company. Such investment in associated should not be temporary. In separate financial statement of investor, investment in associates is valued at cost as per AS-13.
- Discontinuing operations
This AS requires disclosure of information about the operations which company plan to discontinue rather than operations already discontinued. Like selling substantial part of business or machinery or disposing its liability etc.
- Interim financial reporting
Interim financial reporting means reporting of financial statements for a period less than one year say 3 months. It is required for better assessment of risk & performance and forecasting for subsequent period. Income & expense are recognized on accrual basis for the period from the first day of year to last date of interim period. Income tax expense is computed on income for interim period using weighted average annual effective income tax rate.
- Intangible assets
It means the assets not having physical substance and therefore can not be touched like- goodwill, patent, brand, license, trade mark, computer software, website cost and research & development etc. Intangible asset may be unidentified like- Goodwill or acquired identifiable like- Patent & Trade mark or internally generated like- Brand. If intangible asset can not be measure reliably, it should be charged to P&L a/c. this AS is not applicable for share issue exp. discount on issue of shares intangible in insurance contract, intangible asset covered by AS-14/19/21 & 22 and expenditure on exploration or development and extraction of mineral.
- Financial reporting of interest in joint venture
It means two or more parties inter into an agreement to work jointly having joint control to govern financial & operating policies of economic activities to earn profit from it. Every joint venturer has control not significant influence. There are three types of joint ventures 1. Joint Controlled operation- Joint venturers may carry out joint venture activities by side of their main business, 2. Joint controlled assets- joint venturers may purchase assets jointly for common use for all venturers or for letting to other & 3. Joint controlled entities- Joint venturers may form a separate entity to carry out activities jointly.
- Impairment of assets
Impairment mean carrying cost is less than recoverable amount. Recoverable amount is higher of net selling price or value in sue. Value in use means net present value of estimated future cash flow arising from use of asset + residual price at the end of useful life of the asset. Present value is calculated using discounted rate (pre tax rate). If an asset is grouped in a cash generating unit, individual asset can not be impaired until cash generating unit is impaired even recoverable amount is less than carrying amount for individual asset.
- Provision for contingent liabilities and contingent assets & Gurantee
!CA Sachin Gupta