STATUS OF ACCOUNTING STANDARDS ISSUED BY ICAI FOR NON-CORPORATES

Note 1:

In view of the applicability of the accounting standards and exemptions/relaxations for SMEs, the necessary modifications have been made in AS 3, AS 17, AS 18, AS 19, AS 20, AS 24 and AS 28, coming into effect in respect of accounting periods commencing on or after 1-4-2004. Relaxations for AS 29 are incorporated in the AS itself.

Note 2:

AS 4 – Contingencies and Events Occurring after the Balance Sheet Date – paras 1(a), 2.3.1, 4(4.1 to 4.4), 5(5.1 to 5.6), 6, 7 (7.1 to 7.3), 9.1 (relevant portion), 9.2, 10, 11, 12 and 16) stand withdrawn. Applicability of the proposed Accounting Standard on financial instruments, paragraphs which deal with contingencies would remain operational to the extent they cover impairment of assets not covered by other Accounting Standards. For example, provision for bad and doubtful debts.

Note 3:

Limited revision to AS 5 by adding para 33 effective for accounting periods commencing on or after 1-4-2001.

Note 4:

From the date of coming into operation of AS 26, the following stand withdrawn:

AS 8 – Accounting for Research and Development.

AS 6 – Depreciation Accounting only with respect to amortisation of intangible assets.

AS 10 – Accounting for Fixed Assets – paras 16.3 to 16.7, 37 and 38.

Note 5:

a. The revised AS 7 (2002) is applicable in respect of all contracts entered into during the accounting periods commencing on or after 1-4-2003; however, for contracts entered into prior to this date, AS 7 (1983) would continue to be applicable.

b. The revised AS 11 (2003) would supersede AS 11 (1994); however, accounting for transactions in foreign currencies entered into before the date the revised AS 11 (2003) comes into effect, i.e., 1-4-2004, AS 11 (1994) would continue to be applicable.

Note 6:

From the date of coming into operation of AS 16, the following stand withdrawn:

AS 10 – Accounting for Fixed Assets – paragraphs 9.2, 29 (except the first sentence).

Note 7:

Limited revision to AS 13 in para 2 effective for accounting periods commencing on or after 1-4-2002.

Note 8:

Limited revision to AS 14 in paras 23 and 42 effective for accounting periods commencing on or after 1-4-2004.

Note 9:

Exemptions and Relaxations for AS 15 (Revised)

1. Need not be accounted for on discounted basis (paras 46 and 139).

2. Determination of liability should be based on PUCM (discount rate provisions shall apply).

3. For recognition and measurement of liabilities under DBP, PUCM need not be applied. Some other rational methods can be applied.

4. Actuarial assumptions should be disclosed.

Note 10:

Limited revision to AS 18 in para 26 and insertion of para 27 effective for accounting periods commencing on or after 1-4-2003.

Note 11:

1. AS 19 – paras 22(c), (e) and (f); 25(a), (b) and (e); 37(a), (f) and (g); and 46(b), (d) and (e) with respect to disclosures, of AS 19 are not applicable to Level II and Level III enterprises.

2. AS 20 is applicable to Level II and Level III enterprises, if they disclose earnings per share. However, all the enterprises, including companies, which fall either in Level II or Level III, are not required to disclose diluted earnings per share and information required by para 48 of AS 20.

3. At present, in India, as no enterprise is required to present interim financial report within the meaning of AS 25, compliance with the disclosure and presentation requirements and measurement principles of AS 25 are applicable to certain Level I enterprises, for their interim financial results. At present, in any case, AS 25 is not mandatorily applicable to Level II and Level III enterprises except for companies whose shares are listed.

4. AS 29 – para 67 is not applicable to Level II enterprises and paras 66 and 67 are not applicable to Level III enterprises.

Note 12:

AS 21 is mandatory if an enterprise presents consolidated financial statements. In other words, the accounting standard does not mandate an enterprise to present consolidated financial statements but, if the enterprise presents consolidated financial statements for complying with the requirements of any statute or otherwise, it should prepare and present consolidated financial statements in accordance with AS 21.

Note 13:

AS 22 comes into effect in respect of accounting periods commencing on or after 1-4-2001. It is mandatory in nature for:

1. All the accounting periods commencing on or after 1-4-2001, in respect of the following:

1. Enterprises whose equity or debt securities are listed on a recognised stock exchange in India and enterprises that are in the process of issuing equity or debt securities that will be listed on a recognised stock exchange in India as evidenced by the board of directors’ resolution in this regard.

2. All the enterprises of a group, if the parent presents consolidated financial statements and the Accounting Standard is mandatory in nature in respect of any of the enterprises of that group in terms of (i) above.

2. All the accounting periods commencing on or after 1-4-2002, in respect of companies not covered by (a) above.

3. All the accounting periods commencing on or after 1-4-2003 (deferred to 1-4-2006) in respect of all other enterprises. (Refer July 2004 ICAI Journal).

Note 14:

AS 23 and AS 27 have come into effect in respect of accounting periods commencing on or after 1-4-2002. AS 23 and AS 27 are mandatory if an enterprise presents consolidated financial statements. In other words, if an enterprise presents consolidated financial statements, it should account for investments in associates in the consolidated financial statements in accordance with AS 23, AS 27 from the date of its coming into effect; i.e., 1-4-2002.

Note 15:

Limited revision to AS 25 in para 16 effective for accounting periods commencing on or after 1-4-2004. Para 29(c) and certain paragraphs of Appendix 3 have also been revised to omit the word "effective".

Note 16:

Limited revision to AS 26 in para 6 effective for accounting periods commencing on or after 1-4-2003.

Note 17:

Limited revision to AS 27 in para 6 and deletion of para 9 effective for accounting periods commencing on or after 1-4-2004.

Note 18:

1. Applicable only for accounting periods commencing on or after 1-4-2008.

2. Option to measure value in use on a reasonable estimate basis under para 121(g).

Note 19:

Limited revision to AS 20 in para 48 (and consequential in para 51) effective for accounting periods commencing on or after 1-4-2004.

Other Notes:

1. Applicability of Accounting Standards

1. Enterprises are classified into three categories, viz., Level I, Level II and Level III.

2. Level I enterprises are to comply fully with all the accounting standards;

3. Level II and Level III enterprises are considered as Small and Medium Sized Enterprises (SMEs). Level II and Level III enterprises are fully exempted from certain accounting standards, which primarily deal with disclosure requirements, given relaxations from certain disclosure requirements in respect of other accounting standards, which deal with recognition, measurement and disclosure requirements.

2. Criteria for classification of enterprises

1. Level I Enterprises Enterprises which fall in any one or more of the following categories, at any time during the accounting period:

1. Whose equity or debt securities are listed, whether in India or outside India.

2. Which are in the process of listing their equity or debt securities as evidenced by the board of directors’ resolution.

3. Banks including co-operative banks.

4. Financial Institutions.

5. Carrying on insurance business.

6. All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds ₹50 crores. Turnover does not include 'other income'.

7. vii. All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of ₹10 crore at any time during the accounting period.

8. viii. Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

2. Level II Enterprises

Enterprises which are not Level I but fall in one or more of the following categories:

1. All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds ₹40 lakhs but does not exceed ₹50 crores. Turnover does not include 'other income'.

2. All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of ₹1 crore but not in excess of ₹10 crores at any time during the accounting period.

3. Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

3. Level III Enterprises

Enterprises which are not covered under Level I and Level II.

3. Accounting Standards as applicable to different levels

IV. Note 2:

It may be noted that where a requirement of an accounting standard is different from the applicable law, requirements as per the law would prevail.

STATUS OF ACCOUNTING STANDARDS ISSUED BY ICAI FOR CORPORATES

NOTES

Note 1: It is not mandatory for SMCs. However, SMCs are encouraged to apply this standard.

Note 2 : As per the Notified AS, all portions of the Standard that deal with contingencies are applicable only to the extent not covered by other Accounting Standards prescribed by the Central Government.

Note 3: SMCs are given specific exemptions from the following specified paras of AS 15:

1. Paragraphs 11 to 16 of the Standard to the extent they deal with recognition and measurement of short-term accumulating compensated absences which are non-vesting (i.e., short-term accumulating compensated absences in respect of which employees are not entitled to cash payment for unused entitlement on leaving);

2. Paragraphs 46 and 139 of the Standard which deal with discounting of amounts that fall due more than 12 months after the balance sheet date;

3. Recognition and measurement principles laid down in paragraphs 50 to 116 and presentation and disclosure requirements laid down in paragraphs 117 to 123 of the Standard in respect of accounting for defined benefit plans. However, such companies should actuarially determine and provide for the accrued liability in respect of defined benefit plans by using the Projected Unit Credit Method and the discount rate used should be determined by reference to market yields at the balance sheet date on government bonds as per paragraph 78 of the Standard. Such companies should disclose actuarial assumptions as per paragraph 120(l) of the Standard; and

4. Recognition and measurement principles laid down in paragraphs 129 to 131 of the Standard in respect of accounting for other long-term employee benefits. However, such companies should actuarially determine and provide for the accrued liability in respect of other long-term employee benefits by using the Projected Unit Credit Method and the discount rate used should be determined by reference to market yields at the balance sheet date on government bonds as per paragraph 78 of the Standard.

Note 4 : SMCs are exempted from certain disclosure requirements of paragraphs 22(c), (e) and (f); 25(a), (b) and (e); 37(a) and (f); 46(b) and (d) of this standard.

Note 5: SMCs are not required to disclose diluted EPS both including and excluding extraordinary items.

Up to 31st March, 2014

Note 6: AS 21 is mandatory if an enterprise presents consolidated financial statements. In other words, the accounting standard does not mandate an enterprise to present consolidated financial statements but, if the enterprise presents consolidated financial statements for complying with the requirements of any statute or otherwise, it should prepare and present consolidated financial statements in accordance with AS 21.

With effect from 1st April, 2014

Note 7: AS 23 and AS 27 are mandatory if an enterprise presents consolidated financial statements. In other words, if an enterprise presents consolidated financial statements, it should account for investments in associates and joint ventures in the consolidated financial statements in accordance with AS 23 and AS 27 respectively.

Note 8:  SMCs are allowed to measure the 'value in use' on the basis of reasonable estimate thereof instead of computing the value in use by present value technique. Consequently, if an SMC chooses to measure the 'value in use' by not using the present value technique, the relevant provisions of AS 28, such as discount rate etc., would not be applicable to such an SMC. Further, such an SMC need not disclose the information required by paragraph 121(g) of the Standard.

Note 9 : AS 29, paragraphs 66 and 67 relating to disclosures are not applicable to SMCs.

Note 10 : In respect of accounting for transactions in foreign currencies entered into by the reporting enterprise itself or through its branches before the effective date of the notification prescribed in this standard under section 211 of Companies Act, 1956, the applicability of this standard would be determined on the basis of Accounting Standard (AS) 11 revised by ICAI in 2003

Note 11 : In respect of assets leased prior to the effective date of notification presenting this standard under section 211 of the Companies Act, 1956, the applicability of this Standard would be determined on the basis of the Accounting Standard (AS) 19, issued by ICAI in 2001.

STATUS OF ACCOUNTING STANDARD INTERPRETATIONS ISSUED BY THE ICAI FOR CORPORATES

This section provides a brief synopsis of the Notified AS and the AS issued by the ICAI. To the extent there are significant differences between the Notified AS and the AS, the same have been highlighted.

Accounting Standard 1: Disclosure of Accounting Policies

• Significant Accounting Policies followed in preparation and presentation of financial statements should form part thereof and be disclosed at one place in the financial statements.

• Any change in the accounting policies having a material effect in the current period or future periods should be disclosed. The amount by which any item in financial statements is affected by such change should be disclosed to the extent ascertainable. If the amount is not ascertainable, the fact should be indicated. Accounting policies adopted by enterprise should represent true and fair view of the financial statements.

• If fundamental assumptions (going concern, consistency and accrual) are not followed, fact to be disclosed.

• Major considerations governing selection and application of accounting policies are i) Prudence, ii) Substance over form and iii) Materiality.

• The ICAI has made announcement that till the issuance of Accounting Standards on (i) Financial Instruments : Presentation, (ii) Financial Instruments : Disclosures and (iii) Financial Instruments : Recognition and Measurement, an enterprise should provide information regarding the extent of risks to which an enterprise is exposed and as a minimum, make following disclosures in its financial statements:

1. Category-wise quantitative data about derivative instruments that are outstanding at the balance sheet date,

2. The purpose, viz. hedging or speculation, for which such derivative instruments have been acquired, and

3. The foreign currency exposures that are not hedged by a derivative instrument or otherwise.

This announcement is applicable in respect of financial statements for the accounting period(s) ending on or after March 31, 2006.

Accounting Standard 2: Valuation of Inventories

• This standard should be applied in accounting for inventories other than WIP arising under construction contracts, WIP of service providers, shares, debentures and financial instruments held as stock-in-trade, producers’ inventories of livestock, agricultural and forest products and mineral oils, ores and gases to the extent measured at net realisable value in accordance with well-established practices in those industries.

• Inventories are assets held for sale in the ordinary course of business, in the process of production of such sale, or in form of materials to be consumed in production process or rendering of services.

• Inventories do not include machinery spares which can be used with an item of fixed asset and whose use is irregular.

• Net realisable value is the estimated selling price less the estimated costs of completion and estimated costs necessary to make the sale.

• Cost of inventories should comprise all costs incurred for bringing the inventories to their present location and condition.

• Inventories should be valued at lower of cost and net realisable value. Generally, weighted average cost or FIFO method is used in cases where goods are ordinarily interchangeable.

• Specific Identification Method to be used when goods are not ordinarily interchangeable or have been segregated for specific projects.

• Disclose the accounting policies adopted, including the cost formula used, total carrying amount of inventories and its classification.

Also refer ASI 2 – deals with accounting of machinery spares.

The ASI 2 is incorporated in para 4 of Accounting Standard 2 of Companies (Accounting Standards) Rules, 2006.

Accounting Standard 3: Cash Flow Statements

• Prepare and present a cash flow statement for each period for which financial statements are prepared.

• A cash flow statement should report cash flows during the period classified by operating, investing and financial activities.

• Operating activities are the principal revenue producing activities of the enterprise other than investing or financing activities.

• Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

• Financing activities are activities that result in changes in the size and composition of the owner’s capital and borrowings of the enterprise.

• A cash flow statement for operating activities should be prepared by using either the direct method or the indirect method. For investing and financing activities, cash flows should be prepared using the direct method.

• Cash flows arising from transactions in a foreign currency should be recorded in the enterprise’s reporting currency by applying the exchange rate at the date of the cash flow.

• Investing and financing transactions that do not require the use of cash and cash equivalent balances should be excluded.

• An enterprise should disclose the components of cash and cash equivalents together with reconciliation of amounts as disclosed to amounts reported in the balance sheet.

• Cash comprises cash on hand and demand deposits with banks.

• Cash equivalent are short-term, highly liquid investment that are readily convertible into known amounts of cash and which are subject to an insignificant risks of changes in value.

• An enterprise should disclose together with a commentary by the management the amount of significant cash and cash equivalent balances held by it that are not available for use.

Accounting Standard 4: Contingencies and Events Occurring after the Balance Sheet Date

• A contingency is a condition or situation the ultimate outcome of which will be known or determined only on the occurrence or non-occurrence of uncertain future event/s.

• Events occurring after the balance sheet date are those significant events both favourable and unfavourable that occur between the balance sheet date and the date on which the financial statements are approved.

• Amount of a contingent loss should be provided for by a charge in P & L A/c if it is probable that future events will confirm that an asset has been impaired or a liability has been incurred as at the balance sheet date and a reasonable estimate of the amount of the loss can be made.

• Existence of contingent loss should be disclosed if above conditions are not met, unless the possibility of loss is remote.

• Contingent Gains, if any, not to be recognised in the financial statements.

• Material change in the position due to subsequent events be accounted or disclosed.

• Proposed or declared dividend for the period should be adjusted.

• Material event occurring after balance sheet date affecting the going concern assumption and financial position be appropriately dealt with in the accounts.

• Contingencies or events occurring after the balance sheet date and the estimate of the financial effect of the same should be disclosed.

• Assets and Liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to condition existing at the balance sheet date.

Post issuance of AS 29, AS 4 – Contingencies and Events Occurring after the balance sheet date – paras 1(a), 2.3.1, 4(4.1 to 4.4), 5(5.1 to 5.6), 6, 7 (7.1 to 7.3), 9.1 (relevant portion), 9.2, 10, 11, 12 and 16) stand withdrawn.

However, the above-mentioned paras of AS 4 are not withdrawn from Notified Accounting Standards.

Accounting Standard 5: Net Profit/Loss for the Period, Prior Period Items and Changes in Accounting Policies

• All items of income and expense which are recognised in a period should be included in determination of net profit or loss for the period unless an accounting standard requires or permits otherwise.

Ordinary activities are activities which are undertaken by an enterprise as part of its business and such related activities in which enterprise engaged in furtherance of, incidental to, or arising from these activities.

Extraordinary items are incomes and expenses that arise from events or transactions that are clearly distinct from ordinary activities of the enterprise and therefore are not expected to recur frequently or regularly.

Prior period items are incomes or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.

• Prior period, extraordinary items be separately disclosed in a manner that their impact on current profit or loss can be perceived. Nature and amount of significant items should be disclosed. Extraordinary items should be disclosed as a part of profit or loss for the period.

• Effect of a change in the accounting estimate should be included in the determination of net profit or loss in the period of change and also future periods if it is expected to affect future periods.

• Change in accounting policy, which has a material effect, should be disclosed. Impact and the adjustment arising out of material change should be disclosed in the period in which change is made. If the change does not have a material impact in the current period but is expected to have a material effect in future periods, the fact should be disclosed.

• Accounting policy may be changed only if required by statute or for compliance with an accounting standard or if the change would result in appropriate presentation of the financial statements.

• A change in accounting policy on the adoption of an accounting standard should be accounted for in accordance with the specific transitional provisions, if any, contained in that accounting standard.

Accounting Standard 6: Depreciation Accounting

• Standard does not apply to depreciation in respect of forests, plantations and similar regenerative natural resources, wasting assets including expenditure on exploration and extraction of minerals, oils, natural gas and similar non-regenerative resources, expenditure on research and development, goodwill and livestock. Special considerations apply to these assets.

• Allocate depreciable amount of a depreciable asset on systematic basis to each accounting year over useful life of asset.

• Useful life may be reviewed periodically after taking into consideration the expected physical wear and tear, obsolescence and legal or other limits on the use of the asset.

• Basis for providing depreciation must be consistently followed and disclosed. Any change to be quantified and disclosed.

• A change in method of depreciation be made only if required by statute, for compliance with an accounting standard or for appropriate presentation of the financial statements. Revision in method of depreciation be made from date of use. Change in method of charging depreciation is a change in accounting policy and be quantified and disclosed. A change in rate of depreciation is a change in accounting estimates.

• In cases of addition or extension which becomes integral part of the existing asset depreciation to be provided on adjusted figure prospectively over the residual useful life of the asset or at the rate applicable to the asset.

• Where the historical cost undergoes a change due to fluctuation in exchange rate, price adjustment, etc. depreciation on the revised unamortised amount should be provided over the balance useful life of the asset.

• On revaluation of asset depreciation should be based on revalued amount over balance useful life. Material impact on depreciation should be disclosed.

• Deficiency or surplus in case of disposal, destruction, demolition etc. be disclosed separately, if material.

• Historical cost, amount substituted for historical cost, depreciation for the year and accumulated depreciation should be disclosed.

• Depreciation method used should be disclosed. If rates applied are different from the rates specified in the governing statute then the rates and the useful life be also disclosed.

Accounting Standard 7 : Accounting for Construction Contracts (Revised 2002)

• The Standard is applicable in accounting of contracts in the books of contractor. It is to be noted that the Standard is not applicable for construction projects undertaken by the entity on its own behalf, e.g., a builder constructing flats to be sold. It is also not applicable to service contracts which are not related to construction of assets.

• Construction contract may be for construction of a single/ combination of inter-related or inter-dependent assets.

• A fixed price contract is a contract where contract price is fixed or per unit rate is fixed and in some cases subject to escalation clause.

• A cost plus contract is a contract in which contractor is reimbursed for allowable or defined cost plus percentage of these cost or a fixed fee.

• In a contract covering a number of assets, each asset is treated as a separate construction contract when there are:

  • Separate proposals;

  • Subject to separate negotiations and the contractor and customer is able to accept/reject that part of the contract;

o Identifiable cost and revenues of each asset.

• A group of contracts to be treated as a single construction contract when:
  • They are negotiated as a single package;
  • Contracts are closely inter-related with an overall profit margin; and
  • Contracts are performed concurrently or in a continuous sequence.
• Additional asset construction to be treated as separate construction contract when:
  • Assets differ significantly in design/technology/ function from original contract assets.
  • A price negotiated without regard to original contract price.
• Contract revenue comprises:
  • Initial amount, and
  • Variations in contract work, claims and incentive payments that will probably result in revenue and are capable of being reliably measured.
• Contract cost comprises of
  • Costs directly relating to specific contract.
  • Costs attributable and allocable to contract activity.
  • Other costs specifically chargeable to customer under the terms of contracts.

• Contract Revenue and Expenses to be recognised when outcome can be estimated reliably up to stage of completion on reporting date.

• In Fixed Price Contract outcome can be estimated reliably when:

  • Total contract revenue can be measured reliably;
  • It is probable that economic benefits will flow to the enterprise;
  • Contract cost and stage of completion can be measured reliably at reporting date; and
  • Contract costs are clearly identified and measured reliably for comparing actual costs with prior estimates.
• In cost plus contract outcome is estimated reliably when:
  • It is probable that economic benefits will flow to the enterprise; and
  • Contract cost whether reimbursable or not can be clearly identified and measured reliably.
• When outcome of a contract cannot be estimated reliably:
  • Revenue to the extent of which recovery of contract cost is probable should be recognised;
  • Contract cost should be recognised as an expense in the period in which they are incurred; and
  • All foreseen losses must be fully provided for.

• When uncertainties no longer exist, revenue and expenses to be recognised as mentioned above when outcomes can be estimated reliably.

• When it is probable that contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately.

• Change in estimate to be accounted for as per AS 5.

• An enterprise to disclose:

  • Contract revenue recognised in the period;
  • Method used to determine recognised contract revenue; and
  • Method used to determine the stage of completion of contracts in progress.
• For contracts in progress an enterprise should disclose:
  • The aggregate amount of costs incurred and recognised profits (less recognised losses) up to the reporting date;
  • Amount of advances received; and
  • Amount of retention.
• An enterprise should present:
  • Gross amount due from customers for contract work as an asset and
  • The gross amount due to customers for contract work as a liability.

Accounting Standard 8: Accounting for Research and Development

Note: In view of operation of AS 26, this Standard stands withdrawn.

Accounting Standard 9: Revenue Recognition

• Standard does not deal with revenue recognition aspects of revenue arising from construction contracts, hire-purchase and lease agreements, government grants and other similar subsidies and revenue of insurance companies from insurance contracts. Special considerations apply to these cases.

• Revenue from sales and services should be recognised at the time of sale of goods or rendering of services if collection is reasonably certain; i.e., when risks and rewards of ownership are transferred to the buyer and when effective control of the seller as the owner is lost.

• In case of rendering of services, revenue must be recognised either on completed service method or proportionate completion method by relating the revenue with work accomplished and certainty of consideration receivable.

• Interest is recognised on time basis, royalties on accrual and dividend when owner’s right to receive payment is established.

• Disclose circumstances in which revenue recognition has been postponed pending significant uncertainties.

Also refer ASI 14 (withdrawing GC 3/2002) deals with the manner of disclosure of excise duty in presentation of revenue from sales transactions (turnover).

In Accounting Standard 9 of Companies (Accounting Standards) Rules, ASI 14 is incorporated in (AS 9) "Revenue Recognition" as an explanation below para 10 as follows:

"In cases where revenue cycle of the entity involves collection of excise duty, the enterprise is required to disclose revenue at gross as reduced by excise amount thereby finally arriving at net sales on the face of the profit and loss account."

Accounting Standard 10: Accounting for Fixed Assets

• Fixed asset is an asset held for producing or providing goods and/or services and is not held for sale in the normal course of the business.

• Cost to include purchase price and attributable costs of bringing asset to its working condition for the intended use. It includes financing cost for period up to the date of readiness for use.

• Self-constructed assets are to be capitalised at costs that are specifically related to the asset and those which are allocable to the specific asset.

• Fixed asset acquired in exchange or part exchange should be recorded at fair market value or net book value of asset given up adjusted for balancing payment, cash receipt, etc. Fair market value is determined with reference to asset given up or asset acquired.

• When a fixed asset is revalued in a financial statement an entire class of assets should be revalued or the selection of assets for revaluation should be made on a systematic basis.

• Basis of revaluation should be disclosed.

• Increase in value on revaluation be credited to Revaluation Reserve while the decrease should be charged to P & L A/c.

• Goodwill should be accounted only when paid for.

• Assets acquired on hire purchase be recorded at cash value to be shown with appropriate note about ownership of the same. (Not applicable for assets acquired after 1st April, 2001 in view of AS 19 – Leases becoming effective).

• Gross and net book values at beginning and end of year showing additions, deletions and other movements, expenditure incurred in course of construction and revalued amount if any be disclosed.

• Assets should be eliminated from books on disposal/when of no utility value.

• Profit/Loss on disposal be recognised on disposal to P & L A/c.

Also refer ASI 2 which deals with accounting for machinery spares.

ASI 2 is incorporated in para 8.2 of Accounting Standard 10 of the Companies (Accounting Standards) Rules, 2006.

Accounting Standard 11: The Effects of Changes in Foreign Exchange Rates (Revised 2003)

• The Standard is applied in accounting for transactions in foreign currency, and translating financial statements of foreign operations. It also deals with accounting of forward exchange contract.

• Initial recognition of a foreign currency transaction shall be by applying the foreign currency exchange rate as on the date of transaction. In case of voluminous transactions, a weekly or a monthly average rate is permitted, if fluctuation during the period is not significant.

• At each balance sheet date, foreign currency monetary items such as cash, receivables, payables shall be reported at the closing exchange rates unless there are restrictions on remittances or it is not possible to effect an exchange of currency at that rate. In the latter case, it should be accounted at realisable rate in reporting currency. Non- monetary items such as fixed assets, investment in equity shares which are carried at historical cost shall be reported at the exchange rate on the date of transaction. Non- monetary items which are carried at fair value shall be reported at the exchange rate that existed when the value was determined.

• Exchange differences arising on the settlement of monetary items or on restatement of monetary items on each balance sheet date shall be recognised as expense or income in the period in which they arise.

• Exchange differences arising on monetary item which in substance, is net investment in a non-integral foreign operation (long-term loans) shall be credited to foreign currency translation reserve and shall be recognised as income or expense at the time of disposal of net investment.

• The financial statements of an integral foreign operation shall be translated as if the transactions of the foreign operation had been those of the reporting enterprise; i.e., it is initially to be accounted at the exchange rate prevailing on the date of transaction.

• For incorporation of non-integral foreign operation, both monetary and non-monetary assets and liabilities should be translated at the closing rate as on the balance sheet date. The income and expenses should be translated at the exchange rates at the date of transactions. The resulting exchange differences should be accumulated in the foreign currency translation reserve until the disposal of net investment. Any goodwill or capital reserve on acquisition on non-integral financial operation is translated at the closing rate.

• In Consolidated Financial Statement (CFS) of the reporting enterprise, exchange difference arising on intra-group monetary items continues to be recognised as income or expense, unless the same is in substance an enterprise’s net investment in non-integral foreign operation.

• When the financial statements of non-integral foreign operations of a different date are used for CFS of the reporting enterprise, the assets and liabilities are translated at the exchange rate prevailing on the balance sheet date of the non-integral foreign operations. Further adjustments are to be made for significant movements in exchange rates up to the balance sheet date of the reporting enterprise.

• When there is a change in the classification of a foreign operation from integral to non-integral or vice versa, the translation procedures applicable to the revised classification should be applied from the date of reclassification.

• Exchange differences arising on translation shall be considered for deferred tax in accordance with AS 22.

• Forward Exchange Contract may be entered to establish the amount of the reporting currency required or available at the settlement date of the transaction or intended for trading or speculation. Where the contracts are not intended for trading or speculation purposes the premium or discount arising at the time of inception of the forward contract should be amortised as expense or income over the life of the contract. Further, exchange differences on such contracts should be recognised in the statement of profit and loss in the reporting period in which there is change in the exchange rates. Exchange difference on forward exchange contract is the difference between exchange rate at the reporting date and exchange difference at the date of inception of the contract for the underlying currency.

• Profit or loss arising on the renewal or cancellation of the forward contract should be recognised as income or expense for the period. A gain or loss on forward exchange contract intended for trading or speculation should be recognised in the statement of profit and loss for the period. Such gain or loss should be computed with reference to the difference between forward rate on the reporting date for the remaining maturity period of the contract and the contracted forward rate. This means that the forward contract is marked to market. For such contract, premium or discount is not recognised separately.

• Disclosure to be made for:

  • Amount of exchange difference included in statement of profit and loss.
  • Net exchange difference accumulated in Foreign Currency Translation Reserve.
  • In case of reclassification of significant foreign operation, the nature of the change, the reasons for the same and its impact on the share holders fund and the impact on the Net Profit and Loss for each period presented.
• Non-mandatory Disclosures can be made for foreign currency risk management policy.

In respect of accounting period commencing on or after 7th December, 2006 and ending on or before 31st March, 2020 at the option of the enterprise, exchange differences arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period or reported in previous financial statements in so far as they relate to the acquisition of a depreciable capital asset can be added to or deducted from the cost of the assets and shall be depreciated over the balance life of the assets and in other cases can be accumulated in a Foreign Currency Monetary Item Translation Difference Account and amortised over the balance period of such long-term assets/liability but not beyond 31st March, 2020 by recognition as income or expense in each of such period with the exception of exchange differences dealt with in accordance with paragraph 15 of AS 11.

• Such an option to be irrevocable and to be exercised retrospectively for such accounting period from the date of this transitional provision comes into force or the first date on which the concerned foreign currency monetary item is acquired whichever is later and applied to all such foreign currency monetary items.

• For the purpose of exercise of this option, an asset or a liability shall be designated as long-term foreign currency monetary item if the asset or liability is expressed in foreign currency and has a term of 12 months or more at the date of origination of asset or liability.

• Any difference pertaining to accounting period commencing on or after 7th December, 2006, previously recognised in the statement of profit and loss before the exercise of the option shall be reversed in so far as it relates to acquisition of depreciable capital asset by way of addition to or deduction from the cost of the asset and in other cases, by transfer to Foreign Currency Monetary Item Translation Difference Account, in both the cases by debit or credit, as the case may be, to the general reserve.

• If the option is exercised, disclosure shall be made of exercise of such option and the amount remaining to be amortised in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortised.

Accounting Standard 12: Accounting for Government Grants

• Grants can be in cash or in kind and may carry certain conditions to be complied with.

• Grants should not be recognised unless reasonably assured to be realised and the enterprise complies with the conditions attached to the grant.

• Grants towards specific assets should be deducted from its gross value. Alternatively, it can be treated as deferred income in the statement of profit and loss on rational basis over the useful life of the depreciable asset. Grants related to non-depreciable asset should be generally credited to Capital Reserves unless it stipulates fulfilment of certain obligations. In the latter case, the grant should be credited to the statement of profit and loss over a reasonable period. The deferred income balance to be shown separately in the financial statements.

• Grants of revenue nature to be recognised in the statement of profit and loss over the period to match with the related costs, which are intended to be compensated. Such grants can be treated as other income or can be reduced from the related expense.

• Grants by way of promoter’s contribution are to be credited to Capital Reserves and considered as part of share holders’funds.

• Grants in the form of non-monetary assets, given at concessional rate, shall be accounted at their acquisition cost. Asset given free of cost be recorded at nominal value.

• Grants receivable as compensation for losses/expenses incurred should be recognised and disclosed in the statement of profit and loss in the year it is receivable and shown as extraordinary item, if material in amount.

• Grants which become refundable, be shown as extraordinary items.

• Revenue grants when refundable should be first adjusted against unamortised deferred credit balance of the grant and the balance should be charged to the statement of profit and loss.

• Grants against specific assets on becoming refundable are recorded by increasing the value of the respective asset or by reducing Capital Reserve/Deferred income balance of the grant, as applicable. Any such increase in the value of the asset shall be depreciated prospectively over the residual useful life of the asset.

• Grant to promoters’ contribution which becomes refundable, should be reduced from Capital Reserves.

• Accounting policy adopted for grants including the method of presentation, extent of recognition in the financial statements, accounting of non-monetary assets given at concession/free of cost to be disclosed.

Accounting Standard 13: Accounting for Investments

• Current investments and long-term investments be disclosed distinctly with further sub-classification into government or trust securities, shares, debentures or bonds, investment properties, others unless it is required to be classified in other manner as per the statute governing the enterprise.

• Cost of investment to include acquisition charges, including brokerage, fees and duties.

• Investment properties should be accounted as long-term investments. It includes investment in land or building that are not intended to be occupied substantially for use by or in the operations of investing enterprise.

• Current investments be carried at lower of cost and fair value either on individual investment basis or by category of investment but not on global basis.

• Long-term investments be carried at cost. Provision for diminutions in value (other than temporary) to be made for each investment individually.

• If an investment is acquired by issue of shares/securities or in exchange of an asset, the cost of the investment is the fair value of the securities issued or the assets given up. Acquisition cost may be determined considering the fair value of the investments acquired.

• Changes in the carrying amount and the difference between the carrying amount and the net proceeds on disposal be charged or credited to the statement of profit and loss.

• Disclosure is required for the accounting policy adopted, classification of investments; profit/loss on disposal and changes in carrying amount of such investment.

• Significant restrictions on right of ownership, realisability of investments and remittance of income and proceeds of disposal thereof be disclosed.

• Disclosure should be made of aggregate amount of quoted and unquoted investments together with aggregate value of quoted investments.

• Disclosure to be made of income from long-term and current investment separately statement of profit and loss.

Accounting Standard 14: Accounting for Amalgamations

• Amalgamation in nature of merger be accounted for under Pooling of Interest Method and in nature of purchase be accounted for under Purchase Method.

• Under the Pooling of the Interest Method, assets, liabilities and reserves of the transferor company be recorded at existing carrying amount and in the same form as it was appearing in the books of the transferor.

• In case of conflicting accounting policies, a uniform policy be adopted on amalgamation. Effect on financial statement of such change in policy be reported as per AS 5.

• Difference between the amount recorded as share capital issued and the amount of capital of the transferor company should be adjusted in reserves.

• Under Purchase Method, all assets and liabilities of the transferor company be recorded at existing carrying amount or consideration be allocated to individual identifiable assets and liabilities on basis of fair values at date of amalgamation. The reserves of the transferor company shall lose their identity. The excess or shortfall of consideration over value of net assets be recognised as goodwill or capital reserve respectively.

• Any non-cash item included in the consideration on amalgamation should be accounted at fair value.

• In case the scheme of amalgamation sanctioned under the statute prescribes a treatment to be given to the transferor company reserves on amalgamation, same should be followed. However, a description of accounting treatment given to reserves and the reasons for following a treatment different from that prescribed in the AS is to be given. Also deviations between the two accounting treatments given to the reserves and the financial effect, if any, arising due to such deviation is to be disclosed.

• Disclosures to include effective date of amalgamation for accounting, the method of accounting followed, particulars of the scheme sanctioned.

• In case of amalgamation under the Pooling of Interest Method, the treatment given to the difference between the consideration and the value of the net identified assets acquired is to be disclosed. In case of amalgamation under the Purchase Method, the consideration and the treatment given to the difference compared to the value of the net identifiable assets acquired, including period of amortisation of goodwill arising on amalgamation is to be disclosed.

Accounting Standard 15 – Employee Benefits – Effective from accounting period commencing on or after 1st April, 2007.

• In case of corporates:
  • Applicable to all companies with certain specified relaxations available for SMCs
• In case of non-corporates:
  • Applicable to Level II & III enterprises (subject to certain relaxations provided), if number of persons employed is 50 or more.
  • For enterprises employing less than 50 persons, any method of accrual for accounting long-term employee benefits liability is allowed.

• Employee benefits are all forms of consideration given in exchange of services rendered by employees. Employee benefits include those provided under formal plan or as per informal practices which give rise to an obligation or required as per legislative requirements. These include performance bonus (payable within 12 months) and non-monetary benefits such as housing, car or subsidised goods or services to current employees, post-employment benefits, deferred compensation and termination benefits. Benefits provided to employees’ spouses, children, dependents, nominees are also covered.

• Short-term employee benefits should be recognised as an expense without discounting, unless permitted by other AS to be included as a cost of an asset.

• Cost of accumulating compensated absences is accounted on accrual basis and cost of non-accumulating compensated absences is accounted when the absences occur.

• Cost of profit sharing and bonus plans are accounted as an expense when the enterprise has a present obligation to make such payments as a result of past events and a reliable estimate of the obligation can be made. While estimating, probability of payment at a future date is also considered.

• Post-employment benefits can either be defined contribution plans, under which an enterprise’s obligation is limited to contribution agreed to be made and investment returns arising from such contribution, or defined benefit plans under which the enterprise’s obligation is to provide the agreed benefits. Under the later plans if actuarial or investment experience is worse than expected, obligation of the enterprise may get increased at subsequent dates.

• In case of a multi-employer plans, an enterprise should recognise its proportionate share of the obligation. If defined benefit cost cannot be reliably estimated it should recognise cost as if it were a defined contribution plan, with certain disclosures (in para 30).

• State Plans and Insured Benefits are generally Defined Contribution Plan.

• Cost of Defined Contribution Plan should be accounted as an expense on accrual basis. In case contribution does not fall due within 12 months from the balance sheet date, expense should be recognised for discounted liabilities.

• The obligation that arises from the enterprise’s informal practices should also be accounted with its obligation under the formal defined benefit plan.

• For balance sheet purpose, the amount to be recognised as a defined benefit liability is the present value of the defined benefit obligation reduced by (a) past service cost not recognised and (b) the fair value of the plan asset. An enterprise should determine the present value of defined benefit obligations (through actuarial valuation at intervals not exceeding three years) and the fair value of plan assets (on each balance sheet date) so that amount recognised in the financial statements do not differ materially from the liability required. In case of fair value of plan asset is higher than liability required, the present value of excess should be treated as an asset.

• For determining cost to be recognised in the statement of profit and loss for the defined benefit plan, following should be considered:

  • Current service cost
  • Interest cost
  • Expected return of any plan assets
  • Actuarial gains and losses
  • Past service cost
  • Effect of any curtailment or settlement
  • Surplus arising out of present value of plan asset being higher than obligation under the plan.
• Actuarial Assumptions comprise of following:
  • Mortality during and after employment
  • Employee Turnover
  • Plan members eligible for benefits
  • Claim rate under medical plans
  • The discount rate, based on market yields on Government bonds of relevant maturity
  • Future salary and benefits levels
  • In case of medical benefits, future medical costs (including administration cost, if material)
  • Rate of return expectation on plan assets.

• Actuarial gains/losses should be recognised in the statement of profit and loss as income/expenses.

• Past Service Cost arises due to introduction or changes in the defined benefit plan. It should be recognised in the statement of profit and loss over the period of vesting. Similarly, surplus on curtailment is recognised over the vesting period. However, for other long-term employee benefits, past service cost is recognised immediately.

• The expected return on plan assets is a component of current service cost. The difference between expected return and the actual return on plan assets is treated as an actuarial gain/loss, which is also recognised in the statement of profit and loss.

• An enterprise should disclose information by which users can evaluate the nature of its defined benefit plans and the financial effects of changes in those plans during the period. For disclosures requirement refer to paras 120 to 125 of the Standard.

• Termination benefits are accounted as a liability and expense only when the enterprise has a present obligation as a result of a past event, outflow of resources will be required to settle the obligation and a reliable estimate of it can be made. Where termination benefits fall due beyond 12 months period, the present value of liability needs to be worked out using the discount rate. If termination benefit amount is material, it should be disclosed separately as per AS 5 requirements..

• Transitional Provisions

When enterprise adopts the revised standard for the first time, additional charge on account of change in a liability, compared to pre-revised AS 15, should be adjusted against revenue reserves and surplus.

Central Government has also issued the Companies (Accounting Standard) Amendment Rules, 2008 dealing with the transitional provision on AS 15.

Accounting Standard 16: Borrowing Costs

• Statement to be applied in accounting for borrowing costs.

• Statement does not deal with the actual or imputed cost of owner’s equity/preference capital.

• Borrowing costs that are directly attributable to the acquisition, construction or production of any qualifying asset (assets that takes a substantial period of time to get ready for its intended use or sale) should be capitalised. Generally, a period of 12 months is considered as a substantial period of time (ASI 1 Incorporated in (AS) 16 "Borrowing Costs" as an explanation below para 3.2).

• Borrowing costs may include:

• Interest and commitment charges on bank borrowings, other short-term and long-term borrowings.

• Amortisation of ancillary costs incurred in connection with the arrangement of borrowings.

• Amortisation of discounts or premium relating to borrowings.

• Finance charges in respect of assets acquired under finance leases or under other similar arrangements; and

• Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

• Income on the temporary investment of the borrowed funds be deducted from borrowing costs.

• In case of funds obtained generally and used for obtaining a qualifying asset, the borrowing cost to be capitalised is determined by applying weighted average of borrowing cost on outstanding borrowings, other than borrowings for obtaining qualifying asset.

• Capitalisation of borrowing cost should commence when expenditure for acquisition, construction or production is being incurred, borrowing costs are incurred and activities necessary to prepare the asset for its intended use or sale are in progress.

• Capitalisation of borrowing costs should be suspended during extended periods in which development is interrupted. When the expected cost of the qualifying asset exceeds its recoverable amount or Net Realisable Value, the carrying amount is written down.

• Capitalisation should cease when activity is completed substantially or if completed in parts, in respect of that part, all the activities for its intended use or sale are complete.

• Financial statements to disclose accounting policy adopted for borrowing cost and also the amount of borrowing costs capitalised during the period.

• In case exchange difference on foreign currency borrowings represent saving in interest, compared to interest rate for the local currency borrowings, it should be treated as part of interest cost for AS 16 (ASI 10 Incorporated in (AS) 16 "Borrowing Costs" as an explanation below para 4(e)).

Accounting Standard 17: Segment Reporting

• Requires reporting of financial information about different types of products and services an enterprise provides and different geographical areas in which it operates.

• A business segment is a distinguishable component of an enterprise providing a product or service or group of products or services that is subject to risks and returns that are different from other business segments.

• A geographical segment is distinguishable component of an enterprise providing products or services in a particular economic environment that is subject to risks and returns that are different from components operating in other economic environments.

• Internal organisational management structure, internal financial reporting system is normally the basis for identifying the segments.

• The dominant source and nature of risk and returns of an enterprise should govern whether its primary reporting format will be business segments or geographical segments.

• A business segment or geographical segment is a reportable segment if revenue from sales to external customers and from transactions with other segments exceeds 10% of total revenues (external and internal) of all segments; or segment result, whether profit or loss, is 10% or more of (i) combined result of all segments in profit or (ii) combined result of all segments in loss whichever is greater in absolute amount; or segment assets are 10% or more of all the assets of all the segments. If there is reportable segment in the preceding period (as per criteria), same shall be considered as reportable segment in the current year.

• If total external revenue attributable to reportable segment constitutes less than 75% of total revenues, additional segments should be identified, for reporting.

• Under primary reporting format for each reportable segment, the enterprise should disclose external and internal segment revenue, segment result, amount of segment assets and liabilities, cost of fixed assets acquired, depreciation, amortisation of assets and other non-cash expenses.

• Interest expense (on operating liabilities) identified to a particular segment (not of a financial nature) will not be included as part of segment expense. However, interest included in the cost of inventories (as per AS 16) is to be considered as a segment expense (ASI 22).

• Reconciliation between information about reportable segments and information in the financial statements of the enterprise is also to be provided.

• Secondary segment information is also required to be disclosed. This includes information about revenues, assets and cost of fixed assets acquired.

• When primary format is based on geographical segments, certain further disclosures are required.

• Disclosures are also required relating to intra-segment transfers and composition of the segment.

• No disclosure is required, if more than one business or geographical segment is not identified. However, the fact that there is only one ‘business segment’ and‘geographical segment’ should be disclosed by way of a note. (ASI 20 Revised Incorporated in (AS) 17 "Segment Information’’ (Re. AS 20) as an explanation below para 38).

• Where an enterprise prepares consolidated financial statements, segment information is required to be given only in the consolidated financial statement.

Accounting Standard 18: Related Party Disclosures

• The Standard deals with following related party relationships: (i) Enterprises that directly or indirectly control (through subsidiaries) or are controlled by or are under common control with the reporting enterprise; (ii) Associates, Joint Ventures of the reporting entity; Investing party or venturer in respect of which reporting enterprise is an associate or a joint venture; (iii) Individuals owning voting power giving control or significant influence; (iv) Key management personnel and their relatives; and (v) Enterprises over which any of the persons in (iii) or (iv) are able to exercise significant influence. Remuneration paid to key management personnel falls under the definition of a related party transaction (ASI 23 impliedly incorporated in AS 18 this is only a logical corollary flowing out of ASI 21 incorporated in (AS) 18 as an explanation below para 14.).

• Parties are considered related if one party has ability to control or exercise significant influence over the other party in making financial and/or operating decisions.

• Following are not considered related parties: (i) Two companies merely because of common director, (ii) Customer, supplier, franchiser, distributor or general agent merely by virtue of economic dependence; and (iii) Financiers, trade unions, public utilities, government departments and bodies merely by virtue of their normal dealings with the enterprise.

• Disclosure under the standard is not required in the following cases (i) If such disclosure conflicts with duty of confidentially under statute, duty cast by a regulator or a component authority; (ii) In consolidated financial statements in respect of intra-group transactions; and (iii) In case of state-controlled enterprises regarding related party relationships and transactions with other state-controlled enterprises.

• Relative (of an individual) means spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual in dealings with the reporting entity.

• Where there are transactions between the related parties following information is to be disclosed: name of the related party, nature of relationship, nature of transaction and its volume (as an amount or proportion), other elements of transaction if necessary for understanding, amount or appropriate proportion outstanding pertaining to related parties, provision for doubtful debts from related parties, amounts written off or written back in respect of debts due from or to related parties.

• Names of the related party and nature of related party relationship to be disclosed even where there are no transactions but the control exists.

• Items of similar nature may be aggregated by type of the related party. The type of related party for the purpose of aggregation of items of a similar nature implies related party relationships. Material transactions; i.e., more than 10% of related party transactions are not to be clubbed in an aggregated disclosure. The related party transactions which are not entered in the normal course of the business would ordinarily be considered material (ASI 13 Incorporated in (AS) 18 "Related Party Disclosures" as an explanation below para 26 and an explanation (a) below para 27).

• A non-executive director is not a key management personnel for the purpose of this standard. Unless:

  • He is in a position to exercise significant influence by virtue of owning an interest in the voting power or,
  • He is responsible and has the authority for directing and controlling the activities of the reporting enterprise. Mere participation in the policy decision making process will not attract AS 18. (ASI 21 incorporated in (AS) 18 "Related Party Disclosures" as an explanation below para 14).
• Under the Companies Act, 2013, the whole-time director(s), the chief financial officer and the company secretary are key management personnel.

Accounting Standard 19: Leases

• Applies in accounting for all leases other than leases to explore for or use natural resources, licensing agreements for items such as motion pictures films, video recordings, plays, etc. and lease for use of lands.

• A lease is classified as a finance lease or an operating lease.

• A finance lease is one where risks and rewards incident to the ownership are transferred substantially; otherwise it is an operating lease.

• Treatment in case of finance lease in the books of lessee:

At the inception, lease should be recognised as an asset and a liability at lower of fair value of leased asset and the present value of minimum lease payments (calculated on the basis of interest rate implicit in the lease or if not determinable, at lessee’s incremental borrowing rate).

Lease payments should be appropriated between finance charge and the reduction of outstanding liability so as to produce a constant periodic rate of interest on the balance of the liability.

Depreciation policy for leased asset should be consistent with that for other owned depreciable assets and to be calculated as per AS 6.

Disclosure should be made of assets acquired under finance lease, net carrying amount at the balance sheet date, total minimum lease payments at the balance sheet date and their present values for specified periods, reconciliation between total minimum lease payments at balance sheet date and their present value, contingent rent recognised as income, total of future minimum sub-lease payments expected to be received and general description of significant leasing arrangements.

•  Treatment in case of finance lease in the books of lessor:

The lessor should recognise the asset as a receivable equal to net investment in lease.

Finance income should be based on pattern reflecting a constant periodic return on net investment in lease.

Manufacturer/dealer lessor should recognise sales as outright sales. If artificially low interest rates quoted, profit should be calculated as if commercial rates of interest were charged. Initial direct costs should be expensed.

Disclosure should be made of total gross investment in lease and the present value of the minimum lease payments at specified periods, reconciliation between total gross investment in lease and the present value of minimum lease payments, unearned finance income, unguaranteed residual value accruing to the lessor, accumulated provision for uncollectible minimum lease payments receivable, contingent rent recognised, accounting policy adopted in respect of initial direct costs, general description of significant leasing arrangements.

• Treatment in case of operating lease in the books of the lessee :

Lease payments should be recognised as an expense on straight line basis over the lease term or other systematic basis, if appropriate.

Disclosure should be made of total future minimum lease payments for the specified periods, total future minimum sub-lease payments expected to be received, lease payments recognised in the statement of profit and loss with separate amount of minimum lease payments and contingent rents, sub-lease payments recognised in the statement of profit and loss, general description of significant leasing arrangements.

• Treatment in case of operating lease in the books of the lessor:

Lessors should present an asset given on lease under fixed assets and lease income should be recognised on a straight line basis over the lease term or other systematic basis, if appropriate.

Costs including depreciation should be recognised as an expense.

Initial direct costs are either deferred over lease term or recognised as expenses.

Disclosure should be made of carrying amount of the leased assets, accumulated depreciation and accumulated impairment loss, depreciation and impairment loss recognised or reversed for the period, future minimum lease payments in aggregate and for the specified periods, general description of the leasing arrangement and policy for initial costs.

• Sale and leaseback transactions

If the transaction of sale and lease back results in a finance lease, any excess or deficiency of sale proceeds over the carrying amount should be amortised over the lease term in proportion to depreciation of the leased assets.

If the transaction results in an operating lease and is at fair value, profit or loss should be recognised immediately. But if the sale price is below the fair value, any profit or loss should be recognised immediately; however, the loss which is compensated by future lease payments should be amortised in proportion to the lease payments over the period for which asset is expected to be used. If the sales price is above the fair value the excess over the fair value should be amortised.

In a transaction resulting in an operating lease, if the fair value is less than the carrying amount of the asset, the difference (loss) should be recognised immediately.

Accounting Standard 20: Earnings Per Share

• Focus is on denominator to be adopted for earnings per share (EPS) calculation.

• In case of enterprises presenting consolidated financial statements EPS to be calculated on the basis of consolidated information.

• Requirement is to present basic and diluted EPS on the face of the statement of profit and loss for each class of equity shares with equal prominence to all periods presented.

• EPS required to be presented even when negative.

• Basic EPS is calculated by dividing net profit or loss for the period attributable to equity share holders by weighted average of equity shares outstanding during the period. Basic & Diluted EPS to be computed on the basis of earnings excluding extraordinary items (net of tax expense). (Limited Revision w.e.f. 1-4-2004).

• Earnings attributable to equity share holders are after the preference dividend for the period and the attributable tax.

• The weighted average number of shares for all the periods presented is adjusted for bonus issue, share split and consolidation of shares. In case of rights issue at price lower than fair value, there is an embedded bonus element for which adjustment is made.

• For calculating diluted EPS, net profit or loss attributable to equity share holders and the weighted average number of shares are adjusted for the effects of dilutive potential equity shares (i.e., assuming conversion into equity of all dilutive potential equity).

• Potential equity shares are treated as dilutive when their conversion into equity would result in a reduction in profit per share from continuing operations.

• Effect of anti-dilutive potential equity share is ignored in calculating diluted EPS.

• In calculating diluted EPS, each issue of potential equity share is considered separately and in sequence from the most dilutive to the least dilutive.

• This is determined on the basis of earnings per incremental potential equity.

• If the number of equity shares or potential equity shares outstanding increases or decreases on account of bonus, splitting or consolidation during the year or after the balance sheet date but before the approval of financial statement, basic and diluted EPS are recalculated for all periods presented. The fact is also disclosed.

• Amounts of earnings used as numerator for computing basic and diluted EPS and their reconciliation with the statement of profit and loss are disclosed. Also, the weighted average number of equity shares used in calculating the basic EPS and diluted EPS and the reconciliation between the two EPS is to be disclosed.

• Nominal value of shares is disclosed along with EPS.

Accounting Standard 21: Consolidated Financial Statements

• To be applied in the preparation and presentation of consolidated financial statements (CFS) for a group of enterprises under the control of a parent. Section 129 of the Companies Act, requires any company having a subsidiary, an associate or a joint venture to prepare consolidated financial statements.

• Consolidated financial statements to be presented in addition to separate financial statements.

• Control means the ownership of more than one half of the voting power of an enterprise or control of composition of the Board of Directors or such other governing body.

• All subsidiaries, domestic and foreign to be consolidated except where control is intended to be temporary; i.e., intention at the time of investing is to dispose the relevant investment in the 'near future' or the subsidiary operates under severe long-term restrictions impairing transfer of funds to the parent. 'Near future' generally means not more than twelve months from the date of acquisition of relevant investments (ASI 8 Incorporated in (AS) 21 "Consolidated Financial Statements" as an explanation (b) below para 11. Also incorporated in (AS) 23 "Accounting for Investments in Associates in Consolidated Financial Statements" as an explanation below para 7 and in (AS) 27 "Financial Reporting of Interests in Joint Ventures" as explanation below para 28). Control is to be regarded as temporary when an enterprise holds shares as 'stock-in-trade' and has acquired and held with an intention to dispose them in the near future (ASI 25 Incorporated in (AS) 21 "Consolidated Financial Statements" as an explanation (a) below para II). Investments in subsidiary should be accounted in accordance.

• CFS normally includes consolidated balance sheet, consolidated statement of profit and loss, notes and other statements necessary for preparing a true and fair view.

• Consolidation to be done on a line by line basis by adding like items of assets, liabilities, income and expenses which involves:

Elimination of cost to the parent of its investment in each subsidiary and the parent’s portion of equity of each subsidiary at the date of investment. The difference to be treated as goodwill/capital reserve, as the case may be.

Minority interest in the net income to be adjusted against income of the group.

Minority interest in net assets to be shown separately as a liability.

Intra-group balances and intra-group transactions and resulting unrealised profits should be eliminated in full. Unrealised losses should also be eliminated unless cost cannot be recovered.

The tax expense (current tax and deferred tax) of the parent and its subsidiaries to be aggregated but not netted off and it is not required to recompute the tax expense in context of consolidated information (ASI 26 incorporated in (AS) 21 "Consolidated Financial Statements" as an explanation (a) below para 13).

The parent’s share in the post-acquisition reserves of a subsidiary is not required to be disclosed separately in the consolidated balance sheet. (ASI 28 incorporated in (AS) 21 "Consolidated Financial Statements" as an explanation below para 13 and in (AS) 27 "Financial Reporting of Interests in Joint Ventures as an explanation below para 32).

• Where two or more investments are made in a subsidiary, equity of the subsidiary to be generally determined on a step-by-step basis.

• Financial statements used in consolidation should be drawn up to the same reporting date. If reporting dates are different, adjustments for the effects of significant transactions/events between the two dates to be made.

• Consolidation should be prepared using same accounting policies. If the accounting policies followed are different, the fact should be disclosed together with proportion of such items.

• In the year in which parent subsidiary relationship ceases to exist, consolidation of the statement of profit and loss to be made up-to-date of cessation.

• Disclosure is to be of all subsidiaries giving name, country of incorporation or residence, proportion of ownership interest and voting power held, if different.

• Also nature of relationship between parent and subsidiary if parent does not own more than one half of voting power, effect of the acquisition and disposal of subsidiaries on the financial position, names of the subsidiaries whose reporting dates are different than that of the parent.

• When the consolidated statements are presented for the first time, figures for the previous year need not be given.

• Notes forming part of the separate financial statements of the parent enterprise and its subsidiaries which are material to represent a true and fair view are required to be included in the notes to the consolidated financial statements.

(ASI 15 incorporated in (AS) 21 "Consolidated Financial Statements" as an explanation below para 6).

Accounting Standard 22: Accounting for Taxes on Income

• Deferred tax should be recognised for all the timing differences, subject to the consideration of prudence in respect of deferred tax assets (DTA).

When enterprise has unabsorbed depreciation or carry forward tax losses, DTA to be recognised only if there is virtual certainty supported by convincing evidence of future taxable income. Unrecognised DTA to be reassessed at each balance sheet date. Virtual certainty refers to the fact that there is practically no doubt regarding the determination of availability of the future taxable income. Also, convincing evidence is required to support the judgment of virtual certainty (ASI 9 incorporated in (AS) 22 "Accounting for Taxes on Income" as an explanation below para 17).

• In respect of loss under the head Capital Gains, DTA shall be recognised only to the extent that there is a reasonable certainty of sufficient future taxable capital gain (ASI 4). DTA to be recognised on the amount, which is allowed as per the provisions of the Act; i.e., loss after considering the cost indexation as per the Income-tax Act.

• Treatment of deferred tax in case of Amalgamation (ASI 11 Not incorporated in Notified ASs).

• In case of amalgamation in nature of purchase, where identifiable assets/liabilities are accounted at the fair value and the carrying amount for tax purposes continue to be the same as that for the transferor enterprise, the difference between the values shall be treated as a permanent difference and hence it will not give rise to any deferred tax. The consequent difference in depreciation charge of the subsequent years shall also be treated as a permanent difference.

• The transferee company can recognise a DTA in respect of carry forward losses of the transferor enterprise, if conditions relating to prudence as per AS 22 are satisfied, though transferor enterprise would not have recognised such deferred tax assets on account of prudence. Accounting treatment will depend upon nature of amalgamation, which shall be as follows:

  • In case of amalgamation is in the nature of purchase and assets and liabilities are accounted at the fair value, DTA should be recognised at the time of amalgamation (subject to prudence).
  • In case of amalgamation is in the nature of purchase and assets and liabilities are accounted at their existing carrying value, DTA shall not be recognised at the time of amalgamation. However, if DTA gets recognised in the first year of amalgamation, the effect shall be through adjustment to goodwill/capital reserve.
  • In case of amalgamation is in the nature of merger, the deferred tax assets shall not be recognised at the time of amalgamation. However, if DTA gets recognised in the first year of amalgamation, the effect shall be given through revenue reserves.
  • In all the above if the DTA cannot be recognised by the first annual balance sheet following amalgamation, the corresponding effect of this recognition to be given in the statement of profit and loss.

• Tax expenses for the period, comprises current tax and deferred tax.

• Current tax [includes payment u/s. 115JB of the Act (ASI 6) incorporated in (AS) 22 "Accounting for Taxes on Income" as an explanation below para 21] should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates.

• Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date and should not be discounted to their present value. Deferred tax to be measured using the regular tax rates for companies that pay tax u/s. 115JB of the Act (ASI 6 incorporated in (AS) 22 "Accounting for Taxes on Income" as an explanation below para 21).

• DTA should be disclosed separately after the head 'Investments' and deferred tax liability (DTL) should be disclosed separately after the head 'Unsecured Loans' (ASI 7 incorporated in (AS) 22 "Accounting for Taxes on Income" as an explanation below para 30) in the balance sheet of the enterprise. Assets and liabilities to be netted off only when the enterprise has a legally enforceable right to set off and intends to settle on net basis.

• The break-up of deferred tax assets and deferred tax liabilities into major components of the respective balances should be disclosed in the notes to accounts.

• The nature of the evidence supporting the recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws.

• The deferred tax assets and liabilities in respect of timing differences which originate during the tax holiday period and reverse during the tax holiday period, should not be recognised to the extent deduction from the total income of an enterprise is allowed during the tax holiday period. However, if timing differences reverse after the tax holiday period, DTA and DTL should be recognised in the year in which the timing differences originate. Timing differences, which originate first, should be considered for reversal first (ASI 3) and (ASI 5 incorporated in (AS) 22 "Accounting for Taxes on Income" as an explanation below para 13).

• On the first occasion of applicability of this AS the enterprise should recognise, the deferred tax balance that has accumulated prior to the adoption of this Statement as deferred tax asset/liability with a corresponding credit / charge to the revenue reserves.

Accounting Standard 23: Accounting for Investments in Associates in Consolidated Financial Statements

• The Standard sets out principles and procedures for recognising in Consolidated Financial Statement the effect of investments in associates on the financial position and operating results of the group.

• Associates is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture or the investor.

• Significant influence (ordinarily having 20% or more of the voting power) is termed as power to participate in the financial/operating policy decisions but does not have control over such policies. The potential equity shares held by the investee should not be taken into account for determining the voting power of the investor. (ASI 18 incorporated in (AS) 23 "Accounting for Investments in Associates in Consolidated Financial Statements" as an explanation below para 4).

• Investment in associates is accounted in CFS as per equity method. The equity method is not applicable where the investment is acquired for temporary period (ASI 8 incorporated in (AS) 21 "Consolidated Financial Statements" as an explanation (b) below para 11). Also incorporated in (AS) 23 "Accounting for Investments in Associates in Consolidated Financial Statements" as an explanation below para 7 and in (AS) 27 "Financial Reporting of Interests in Joint Ventures" as explanation below para 28), i.e., intention at the time of investing is to dispose the relevant investment in the 'near future' or where associates operate under severe long-term restrictions. In these circumstances, the investment should be recognised as per AS 13. The use of equity method to be discontinued from the date when investor ceases to have significant influence in an associate.

• Provision for proposed dividend made by the associate in its financial statements, should not be considered for the computation of the investor’s share of the results of operations of the associate (ASI-16 incorporated in (AS) 23 "Accounting for Investments in Associates in Consolidated Financial Statements" as an explanation (b) below para 6).

• Goodwill/Capital Reserve on the acquisition of an associate should be separately disclosed under carrying amount of investments.

• Under the equity method, unrealised profit/losses resulting from the transaction between investor and associates should be eliminated to the extent of investor’s interest in the associates. However, unrealised losses should not be eliminated if cost of the assets cannot be recovered.

• If associate has outstanding preference shares held outside the group, preference dividends whether declared or not, be adjusted in arriving at the investors share of profit or loss.

• If investor’s share of losses of an associate equals or exceeds the carrying amount of the investment, the investor will discontinue its share of loss and will show its investment at nil value.

• Where an associate presents consolidated financial statement, the results and net assets of the associate’s CFS should be taken into account.

• Listing and description of associates including proportion of ownership interest and proportion of voting power should be disclosed in CFS.

• The investor’s share of profits or losses and any extraordinary or prior period items should be disclosed separately in CFS statement of profit and loss.

• If reporting dates or accounting policies of associates are different from that of financial statement of investor then the difference should be reported in the CFS.

• On the first occasion when investment in an associate is accounted for in CFS, the carrying amount of investment in the associate should be adjusted by using the equity method, from the date of acquisition, with the corresponding adjustment to the retained earnings in CFS.

Accounting Standard 24: Discontinuing Operations

• The standard requires an enterprise to segregate information about discontinuing operations from continuing ones and establishes principles for reporting information about discontinuing operations.

• A discontinuing operation is a component of an enterprise that the enterprise is, in pursuance to a single plan is – (a) disposing substantially in its entirety such as by selling the component in a single transaction or by demerger or spin off of the ownership of the component to the enterprises’ share holders; (b) disposing of piecemeal, such as by selling of the components assets and settling its liabilities individually or (c) terminating through abandonment separate line of business or geographical area of operations; can be distinguished operationally and for financial reporting purposes. All these three conditions need to be satisfied simultaneously.

• Initial Disclosure Event is the earliest occurrence of one of the following :–

1. Entering into binding sale agreement for substantially all of the assets attributable to the Discontinuing Operation.

2. Enterprise’s Governing body has approved a detailed, formal plan for the discontinuance and made announcement of the plan.

• The Standard does not establish any recognition and measurement principles. It requires an enterprise to follow principles established in other Accounting Standard for the purpose of changes in assets, liabilities, revenue, expenses, etc.

• An enterprise should include the following information in its financial statements beginning with the financial period in which the 'Initial Disclosure Event' occurs: (a) Description of discontinuing operation, (b) Segment in which it is reported as per AS 17, (c) Date and nature of Initial Disclosure Event, (d) Time by which the discontinuation is expected to be completed, (e) The carrying amounts of the assets to be disposed of, (f) Revenue, expenses, pre-tax profit/loss, income-tax in relation to the ordinary activities of identified discounting operations.

• On disposal of assets or settlement of liabilities, disclosure is required for gain/loss recognised on disposal/settlement and income-tax expenses thereto.

• On entering into binding contract for sale of assets, disclosure is required for Net Selling price after deducting expected disposal cost, the expected timing of cash flow and the carrying amount of assets on the balance sheet date.

• For period subsequent to initial disclosure event period, description of any significant changes in amount or timing of cash flow is required to be disclosed.

• The disclosures to continue up to the period in which the discontinuance is completed; i.e., discontinuance plan is substantially completed or abandoned.

• In case discontinuance plan is abandoned, the disclosure is required of this fact, reason therefor and its effect on the financial statements.

• All disclosures should be separately presented for each discontinuing operation.

• Disclosure of pre-tax profit/loss from ordinary activities of the discontinuing operation, income-tax expenses related thereto, pre-tax gain/loss recognised on the disposal/ settlement to be made on the face of profit and loss account.

• Comparative information for prior periods to be re-stated to segregate discontinuing operations.

• In the interim financial report, disclosure is required in accordance with AS 25 for any significant activities or event and any significant changes in the amount or timing of cash flows relating to disposal/settlement.

• In case the initial disclosure event occurs between the balance sheet date and the date on which the financial statements for that period are approved by the board of directors, disclosures required by Accounting Standards 4 are made.

Accounting Standard 25: Interim Financial Reporting

• Interim financial reports (IFR) are financial statements (complete or condensed) for an interim period that is shorter than a full financial year.

• IFR should include at a minimum a condensed balance sheet, condensed statement of profit and loss, cash flow and selected explanatory notes.

• IFR should include at least each of the heading and sub-headings that were included in the most recent annual financial statements.

• Earnings per share, if disclosed is to be calculated and presented as per AS 20.

• Notes to include at least the following:

  • a statement on uniform accounting policies or any change therein.
  • explanatory comments about the seasonality of interim operations.
  • any unusual items (as per AS 5).
  • changes in estimates of amounts reported in prior interim periods/year, if material.
  • issuances, buy-backs repayments and restructuring of debt, equity and potential equity shares.
  • dividend for each class of equity shares.
  • segment reporting, if required as per AS 17.
  • any changes in composition of the enterprise.
  • material changes in contingent liabilities.
• Interim reports to include the following:
  • Balance sheet as of the end of current interim period and a comparative balance sheet as of the end of the preceding financial year.
  • Statements of Profit & Loss for current interim period and cumulative for current financial year to date and comparative statements of the previous year (current and year to date).
  • Cash flow statement cumulatively for the current financial year to date with a comparative statement of previous year (year to date)

• Interim measurements may rely on estimates.

• For final interim period separate report not necessary as annual statements are presented.

• Uniform accounting policies to be applied in interim and annual financial statements.

• Seasonal/occasional revenues and uneven costs to be anticipated or deferred only if appropriate to do so at the end of the financial year.

• Estimates to be measured in such a way that resulting information is reliable and all material information disclosed.

• In case of change of accounting policies, other than one for which transition is specified by an accounting standard, figures of prior interim periods of current financial year to be restated.

Note: The presentation and disclosure requirements contained in AS 25 are not required to be applied in respect of 'Interim financial results' – example, the one presented under Clause 41 of the Listing Agreement, since they do not meet the definition of 'interim financial report'. However, the recognition and measurement principles as per AS 25 should be applied. (ASI 27 not incorporated in Notified AS).

Accounting Standard 26: Intangible Assets

• Not applicable to intangibles covered by other AS, financial assets, mineral rights/expenditure on exploration, etc. and arising in insurance enterprises from contracts with policy holders. This AS is not applicable to expenditure in respect of termination benefits.

• An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. An asset is a resource:

  • controlled by an enterprise as a result of past events; and
  • from which future economic benefits are expected to flow to the enterprise.

• Useful life is period of time over which an asset is expected to be used or the number of production units expected to be obtained from the asset.

• Impairment loss is the amount by which the carrying amount exceeds its recoverable amount.

• An intangible asset to be recognised only if future economic benefits will flow and the cost of the asset can be measured reliably.

• Probability of future economic benefits to be assessed using reasonable and supportable assumptions.

• An intangible asset should be measured initially at cost.

• Internally generated goodwill, brands, mastheads, publishing titles, etc. should not be recognised as an asset.

• No intangible asset arising from research to be recognised and expenditure on research should be recognised as an expense, when incurred.

• An intangible asset arising from development to be recognised, if an enterprise can demonstrate its feasibility to complete, intention and ability to use or sell, generation of future economic benefits, and availability of resources for completion and ability to measure the expenditure.

• Expenditure on an intangible item that cannot be treated as an asset, should be recognised as an expense and treated as goodwill (capital reserve), in case of an amalgamation (AS 14).

• Treatment of expenditure (other than expenditure on VRS) incurred on intangible items, which do not meet the criteria of an 'intangible asset'.

• Expenditure, on an intangible item recognised as an expense should not form part of cost of an intangible asset at a later date.

• Subsequent expenditure to be added to cost only if is probable that the expenditure will generate future benefits in excess of the original estimates.

• An intangible asset should be carried at its cost less any accumulated amortisation and any accumulated impairment losses.

• An intangible asset should be amortised over its useful life on a systematic basis, to reflect the pattern in which the economic benefits are consumed or if the pattern cannot be determined reliably, on the straight line method.

• There is a rebuttable presumption for useful life of an intangible asset – not exceeding ten years from the date it is available for use. In case of intangible assets in form of legal rights, the useful life is not to exceed the period of the legal rights, unless renewable, which is virtually certain.

• Residual value to be taken as zero unless a commitment to purchase the asset or an active market exists.

• The amortisation period and method to be reviewed at each financial year end and any change to be accounted for as per AS 5.

• Any impairment loss to be recognised.

• The recoverable amount of each intangible asset to be estimated at each year end in case of an intangible asset which is not yet available for use and one which is amortised over a period exceeding ten years.

• An intangible asset to be derecognised on disposal or when no future economic benefits are expected from its use and gain or loss recognised.

• Disclosure for each class of intangibles, their useful lives, amortisation, amount and method, carrying amount (gross and net), accumulated amortisation, any additions, retirements, impairment losses recognised or reversed and any other change, distinguishing between internally generated and other intangible assets.

• In case of useful life of an intangible asset exceeding ten years, proper disclosure of the reasons for the same should be given.

• Research and Development expenditure recognised as expense to be disclosed.

Accounting Standard 27: Financial Reporting of Interests in Joint Ventures

• A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control.

In cases, wherein an enterprise by a contractual arrangement establishes joint control over an entity which is a subsidiary (as per AS 21) the entity is to be consolidated under AS 21 and is not to be treated as a joint venture as per this standard. The other venturer(s) may treat the same as a joint venture.

• Joint control is the contractually agreed sharing of control over an economic activity.

For evaluating joint control, one needs to consider whether the contractual arrangement provides protective rights or participative rights to the enterprise. The existence of participative rights would be evidence of joint control. With effect from 1-4-2004 this explanation is removed by Limited Revision to the Standard.

• Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefits from it.

• A venturer is a party to a joint venture and has joint control over that joint venture.

• An investor in a joint venture is a party to a joint venture and does not have joint control over that joint venture.

• Proportionate consolidation is a method of accounting and reporting whereby a venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as separate line items in the venturer’s financial statements. The venturer’s share in the post acquisition reserves of the jointly controlled entity should be shown separately under the relevant reserves in the consolidated financial statements (ASI 28 incorporated in (AS) 21 "Consolidated Financial Statements" as an explanation below para 13 and in (AS) 27 "Financial Reporting of Interests in Joint Ventures" as an explanation below para 32).

• Venturer to recognise in individual and consolidated financial statements its share of assets, liabilities, incomes and expenses in the jointly controlled operations and also in jointly controlled assets.

• In venturer’s separate financial statements, any interest in a jointly controlled entity to be accounted as an investment and AS 13 to be followed.

• In a venturer’s consolidated financial statements, interest in jointly controlled entity to be reported using proportionate consolidation except:

  • when interest is acquired and held with a view of disposal in near future to be considered as not more than 12 months from acquisition of relevant investments unless a longer period can be justified on the basis of facts and circumstances (ASI 8 incorporated in (AS) 21 "Consolidated Financial Statements" as an explanation (b) below para 11. Also incorporated in (AS) 23 "Accounting for Investments in Associates in Consolidated Financial Statements" as an explanation below para 7 and in (AS) 27 "Financial Reporting of Interests in Joint Ventures" as an explanation below para 28)
  • when severe long-term restrictions that impair the ability to transfer funds to the venturer exists.
  • in such cases interest to be accounted as investments as per AS 13.

The venturer’s share in the post-acquisition reserves of the jointly controlled entity should be shown separately under the relevant reserves in the consolidated financial statements (ASI 28 incorporated in (AS) 21 "Consolidated Financial Statements" as an explanation below para 13 and in (AS) 27 "Financial Reporting of Interests in Joint Ventures" as an explanation below para 32).

• A venturer to discontinue use of proportionate consolidation from the date
  • it ceases to have joint control (may retain interest)
  • use of proportionate consolidation is no longer appropriate.

In such cases, AS 21 to be followed if venturer becomes parent and in other cases, AS 13 and/or AS 23 to be followed.

• Cost in such cases is the venturer’s share in net assets on date of discontinuance of proportionate consolidation as adjusted with carrying amount of the relevant goodwill/ capital reserve recognised at the time of acquisition.

• In case of sale of assets by a venturer to the joint venture the venturer should recognise only that portion of gain or loss as attributable to the interests of the other venturers. Full loss to be booked in case of evidence of reduction in the net realisable value of current assets or on impairment loss.

• In case of purchase of assets by a venturer from a joint venture, the venturer should recognise its share of profit only on a resale of the asset to an independent party. Loss to be booked in case of reduction in net realisable value of current asset or impairment loss.

• In case of transactions between venturer and joint venture the above principles to be followed only in consolidated financial statements.

• Investor to follow AS 13, AS 21 and AS 23 as appropriate, for investments in joint ventures.

• Operators/Managers of joint ventures to account for fees as per AS 9.

• A venturer to disclose separately, in respect of the joint venture, contingent liabilities and capital commitments.

• A venturer to disclose list of joint ventures and interests in significant joint ventures.

• A venturer to disclose aggregate amounts of each of the assets, liabilities, income and expenses related to its interests in the jointly controlled entities.

Accounting Standard 28 : Impairment of Assets

• Applied in accounting for the impairment of all assets, other than:
  • inventories (AS 2);
  • assets arising from construction contracts (AS 7);
  • financial assets, including investments (AS 13);
  • deferred tax assets (AS 22).

• Recoverable amount is the higher of an asset’s net selling price and its value in use.

• Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

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

• Useful life is either:

  • the period of time over which an asset is expected to be used; or
  • the number of production or similar units expected to be obtained from the asset.

• A cash generating unit is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets.

• Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash generating unit under review and other cash generating units.

• An active market is a market where:

  • the items traded are homogeneous;
  • willing buyers and sellers can normally be found at any time; and
  • prices are available to the public.

• To assess at each balance sheet date whether there are any indication, external or internal as given in AS, that an asset may be impaired and estimate the recoverable amount of the asset.

• In measuring value in use:

  • cash flow projections should be based on assumptions that represent management’s best estimate of the set of economic conditions that will exist over the remaining useful life of the asset. Greater weight should be given to external evidence;
  • cash flow projections should be based on the most recent financial budgets/forecasts (maximum 5 years, unless longer period justified) that have been approved by management;
  • cash flow projections beyond the period covered by the most recent budgets/forecasts should be estimated by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate should not exceed the long-term average growth rate for the products, industries, or country or countries in which the enterprise operates, or for the market in which the asset is used, unless a higher rate can be justified.
• Estimates of future cash flows should include:
  • projections of cash inflows from the continuing use of the asset;
  • projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and that can be directly attributed, or allocated on a reasonable and consistent basis, to the asset; and
  • net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.
• Future cash flows should be estimated for the asset in its current condition. They should not include estimated future cash inflows or outflows that are expected to arise from:
  • a future restructuring to which an enterprise is not yet committed; or
  • future capital expenditure that will improve or enhance the asset in excess of its originally assessed standard of performance.
• Estimates of future cash flows should not include:
  • cash inflows or outflows from financing activities; or
  • income tax receipts or payments.

• The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life should be the amount that is expected to be obtained from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the estimated costs of disposal.

• The discount rate should be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset and should not reflect risks for which future cash flow estimates have been adjusted.

• An impairment loss should be recognised as an expense in the statement of profit and loss immediately. Impairment loss of a revalued asset should be treated as a revaluation decrease as per AS 10.

• If the estimated impairment loss is greater than the carrying amount of the asset, recognise a liability if, and only if, required by another AS.

• The depreciation/amortisation charge for the asset should be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value on a systematic basis over its remaining useful life.

• In case of any indication of impairment, the recoverable amount should be estimated for the individual asset. If it is not possible, determine the recoverable amount of the cash-generating unit to which the asset belongs.

• If an active market exists for the output produced by an asset or a group of assets, the same should be identified as a separate cash-generating unit, even if some or all of the output is used internally. In such case management’s best estimate for future market price of output should be used:

  • 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
  • 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.

• Cash-generating units should be identified consistently from period to period for the same asset or types of assets, unless a change is justified.

• The carrying amount of a cash-generating unit should be determined consistently with the way the recoverable amount of the cash-generating unit is determined.

• In testing a cash-generating unit for impairment, identify whether goodwill that relates to this unit is recognised in the financial statements. If this is the case, an enterprise should:

  • perform a 'bottom-up' test.
  • if, in the 'bottom-up' test, the carrying amount of goodwill could not be allocated on a reasonable and consistent basis to the cash-generating unit under review, the enterprise should also perform a 'top down' test.

• In testing a cash-generating unit for impairment, identify all the corporate assets that relate to the cash-generating unit under review. For each identified corporate asset, apply 'bottom-up' test or 'bottom-up' and 'top-down' test both as required.

• Impairment loss should be recognised for a cash-generating unit if, and only if, its recoverable amount is less than its carrying amount. The impairment loss should be allocated to reduce the carrying amount of the assets of the unit in the following order:

  • first, to goodwill allocated to the cash-generating unit (if any); and
  • then, to the other assets of the unit on a pro rata basis based on the carrying amount of each asset in the unit.

• These reductions in carrying amounts should be treated as impairment losses on individual assets and recognised either in the statement of profit and loss or as revaluation decrease as applicable.

• In allocating an impairment loss, the carrying amount of an asset should not be reduced below the highest of:

  • its net selling price (if determinable);
  • its value in use (if determinable); and
  • zero.

• The amount of the impairment loss that would otherwise have been allocated to the asset should be allocated to the other assets of the unit on a pro rata basis.

• A liability should be recognised for any remaining amount of an impairment loss for a cash-generating unit if, required by another AS.

• At each balance sheet date, if there are indications internal or external, that an impairment loss recognised for an asset in prior accounting periods, no longer exists/has decreased, then the recoverable amount of that asset to be estimated. For the same consider the following as minimum indications:

• An impairment loss recognised for an asset in prior accounting periods should be reversed if there is a change in the estimates of cash inflows, cash outflows or discount rates used to determine the asset’s recoverable amount since the last impairment loss was recognised. The carrying amount of the asset should be increased to its recoverable amount.

• The increased carrying amount of an asset due to a reversal of an impairment loss should not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior accounting periods.

• A reversal of an impairment loss for an asset should be recognised as income immediately in the statement of profit and loss. In case of revalued assets, the same should be treated as a revaluation increase as per AS 10.

• After a reversal of an impairment loss, the depreciation (amortisation) charge for the asset should be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.

• A reversal of an impairment loss for a cash-generating unit should be allocated to increase the carrying amount of the assets of the unit in the following order:

  • first, assets other than goodwill on a pro rata basis based on the carrying amount of each asset in the unit; and
  • then, to goodwill allocated to the cash-generating unit, if the requirements of reversal of impairment loss of goodwill are met.

• These increases in carrying amounts should be treated as reversals of impairment losses for individual assets and recognised accordingly.

• In allocating a reversal of an impairment loss for a cash-generating unit, the carrying amount of an asset should not be increased above the lower of:

  • its recoverable amount (if determinable); and
  • the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior accounting periods.

• The amount of the reversal of the impairment loss that would otherwise have been allocated to the asset should be allocated to the other assets of the unit on a pro rata basis.

• An impairment loss recognised for goodwill should not be reversed in a subsequent period unless:

  • the impairment loss was caused by a specific external event of an exceptional nature that is not expected to recur; and
  • subsequent external events have occurred that reverse the effect of that event.
• For each class of assets, the financial statements should disclose:
  • the amount of impairment losses recognised in the statement of profit and loss during the period and the line item(s) of the statement of profit and loss in which those impairment losses are included;
  • the amount of reversals of impairment losses recognised in the statement of profit and loss during the period and the line item(s) of the statement of profit and loss in which those impairment losses are reversed;
  • the amount of impairment losses recognised directly against revaluation surplus during the period; and
  • the amount of reversals of impairment losses recognised directly in revaluation surplus during the period.
• An enterprise that applies AS 17, should disclose the following for each reportable segment based on an enterprise’s primary format (as defined in AS 17):
  • the amount of impairment losses recognised in the statement of profit and loss and directly against revaluation surplus during the period; and
  • the amount of reversals of impairment losses recognised in the statement of profit and loss and directly in revaluation surplus during the period.

• If an impairment loss for an individual asset or a cash-generating unit is recognised or reversed during the period and is material to the financial statements of the reporting enterprise as a whole, an enterprise should disclose the events and circumstances that led to the recognition or reversal of the impairment loss;

• the amount of the impairment loss recognised or reversed;

  • for an individual asset:
    • the nature of the asset; and
    • the reportable segment to which the asset belongs, based on the enterprise’s primary format (as per AS 17);
  • for a cash-generating unit:
    • a description of the cash-generating unit;
    • the amount of the impairment loss recognised or reversed by class of assets and by reportable segment based on the enterprise’s primary format (as defined in AS 17); and
    • if the aggregation of assets for identifying the cash-generating unit has changed since the previous estimate of the cashgenerating unit’s recoverable amount (if any), the enterprise should describe the current and former way of aggregating assets and the reasons for changing the way the cashgenerating unit is identified;
    • whether the recoverable amount of the asset (cash-generating unit) is its net selling price or its value in use;
    • if recoverable amount is net selling price, the basis used to determine net selling price; and
    • if recoverable amount is value in use, the discount rate used in the current estimate and previous estimate (if any) of value in use.
    • if impairment losses recognised (reversed) during the period are material in aggregate to the financial statements of the reporting enterprise as a whole, an enterprise should disclose a brief description of the following:
  • the main classes of assets affected by impairment losses (reversals of impairment losses) for which no information is disclosed; and
  • the main events and circumstances that led to the recognition (reversal) of these impairment losses for which no information is disclosed.
• As a transitional provision any impairment loss determined before this standard becomes mandatory should be adjusted against the opening balance of revenue reserve. Impairment losses on revalued assets to be adjusted against balance in revaluation reserve and excess, if any against the opening balance of revenue reserve.

Accounting Standard 29: Provisions, Contingent Liabilities and Contingent Assets

• This statement should be applied in accounting for provisions and contingent liabilities and in dealing with contingent assets, other than

o those financial instruments that are carried at fair value,

o those resulting from executory contracts except onerous contracts,

o those arising in insurance enterprises from contracts with policy-holders and

o those covered by another Accounting Standard.

• Provision is a liability, which can be measured only by using a substantial degree of estimation.

• Liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.

• Contingent Liability is –

  • a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or
  • a present obligation, but is not recognised because it is not probable that outflow of resources embodying economic benefits will be required (or is remote) for its settlement or a reliable estimate of the amount of the obligation cannot be made.

• Contingent asset is a possible asset that arises from past events, the existence of which will be confirmed only by the occurrences or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.

• A provision should be recognised when –

  • an enterprise has a present obligation as a result of a past event;
  • it is probable (more likely than not) that an outflow of resources will be required to settle the obligation; and
  • a reliable estimate can be made of the amount of the obligation.

• A contingent liability is not recognised in financial statements but is disclosed.

• A contingent asset is not recognised in financial statements.

• The amount of provision should be measure before tax at the best estimate of the expenditure required to settle the present obligation and should not be discounted to its present value.

• The risks and uncertainties that inevitably surround many events and circumstances should be taken into account in arriving at the best estimate of provision to avoid its under or over statement.

• Expected future events, which are likely to affect the amount required to settle an obligation, may be important in measuring provisions.

• Gains on the expected disposal of assets should not be taken into account in measuring a provision, even if the expected disposal is closely linked with the item requiring provision.

• Whenever all or part of the expenditure relevant to a provision is expected to be reimbursed by another party, the reimbursement should be recognised only on virtual certainty of its receipt. The reimbursement should be treated as a separate asset and should not exceed the amount of the provision. In the statement of profit and loss, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.

• Provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. The provision should be reversed, if it is no longer probable to result in a liability.

• A provision should be used only for expenditures for which the provision was originally recognised and not against a provision recognised for another purpose, so as not to conceal the impact of two different events.

• Provision should not be recognised for future operating losses, since it is not a liability nor does it meet the criteria for provisions.

• A restructuring provision should include only the direct expenditures, necessarily entailed by the restructuring and not associated with the ongoing activities of the enterprise.

• Disclosure

  • For each class of provision – the carrying amount at the beginning and end of the period; additional provisions made, amounts used and unused amounts reversed during the period.
  • Also for each class of provision – description of the nature of the obligation, the expected timing of any resulting outflows of economic benefits, the uncertainties about those outflows and the amount of any expected reimbursement (also stating the amount of any asset recognised thereof)
  • For each class of contingent liability – a brief description of its nature and where practicable, an estimate of its financial effect, the uncertainties relating to any outflow and the possibility of any reimbursement. If the information is not disclosed, being not practicable, the fact thereof is to be disclosed.
  • In extremely rare cases, disclosure of any information can be expected to seriously prejudice the position of the enterprise in a dispute with other parties; in such cases, the information need not be disclosed but the fact and reason for such non–disclosure along with the general nature of dispute should be disclosed.

Accounting Standard 30 : Financial Instruments: Recognition and Measurement

Introduction

AS 30 Financial Instruments: Recognition and Measurement comes into effect in respect of accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. This Accounting Standard will become mandatory in respect of accounting periods commencing on or after 1-4-2012 for all commercial, industrial and business entities except to a Small and Medium-sized Entity as defined below:

1. whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;

2. which is not a bank (including co-operative bank), financial institution or any entity carrying on insurance business;

3. whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year;

4. which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year; and

5. which is not a holding or subsidiary entity of an entity which is not a Small and Medium-sized entity.

For the above purpose an entity would qualify as a Small and Medium-sized Entity, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period.

From the date of this Standard becoming mandatory for the concerned entities, the following stand withdrawn:

1. Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date, to the extent it deals with contingencies 3.

2. Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates 4, to the extent it deals with the 'forward exchange contracts’.

3. Accounting Standard (AS) 13, Accounting for Investments, except to the extent it relates to accounting for investment properties.

From the date this Accounting Standard becomes recommendatory in nature, the following Guidance Notes issued by the Institute of Chartered Accountants of India, stand withdrawn:

1. Guidance Note on Guarantees & Counter Guarantees Given by the Companies.

2. Guidance Note on Accounting for Investments in the Financial Statements of Mutual Funds.

3. Guidance Note on Accounting for Securitisation.

4. Guidance Note on Accounting for Equity Index and Equity Stock Futures and

AS 30 prescribes principles for recognising and measuring all types of financial instruments except:

1. those interests in subsidiaries, associates and joint ventures that are accounted for under AS 21, AS 23 or AS 27.

2. rights and obligations under leases to which AS 19 applies. however:

• lease receivables recognised by a lessor are subject to the derecognition and impairment provisions of this standard;
• finance lease payables recognised by a lessee are subject to the derecognition provisions of this standard; and
• derivatives that are embedded in leases are subject to the embedded derivatives provisions of this standard.

3. employers’ rights and obligations under employee benefit plans to which AS 15 applies.

4. financial instruments issued by the entity that meet the definition of an equity instrument in AS 31 (including options and warrants). However, the holder of such equity instruments should apply this Standard to those instruments, unless they meet the exception in (a) above.

5. rights and obligations under insurance contracts which will be covered by proposed Accounting Standard on Insurance Contract, a contract that is within the scope of Accounting Standard on Insurance Contracts because it contains a discretionary participation feature. However, AS 30 applies to derivatives embedded in such a contract.

6. contracts for contingent consideration in a business combination. This exemption applies only to the acquirer.

7. contracts between an acquirer and a vendor in a business combination to buy or sell an acquiree at a future date.

8. loan commitments other than those that are designated as financial liabilities at fair value through profit or loss. An issuer of loan commitments should apply AS 29 to those loan commitments that are not within the scope of this standard. However, all loan commitments are subject to the derecognition provisions of this Standard.

9. financial instruments, contracts and obligations under share-based payment transactions, except certain contracts to buy or sell a non-financial item as noted below:

10. Contracts those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments. However, AS 30 does not apply to any such contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements.

2. Contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by exchanging financial instruments.

3. A written option to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments.

4. Paragraphs 68, 69 and 70 of this Standard, which should be applied to treasury shares, purchased, sold, issued or cancelled in connection with employee share option plans, employees share purchase plans, and all other share-based payment arrangements.

Recognition and derecognition

A financial asset or liability is recognised when the entity becomes a party to the instrument contract. A financial liability is derecognised when the liability is extinguished. A financial asset is derecognised when, and only when:

• The contractual rights to the cash flows from the asset expire; or

• The entity transfers substantially all the risks and rewards of ownership of the asset; or

• The entity transfers the asset, while retaining some of the risks and rewards of ownership, but no longer has control of the asset (i.e., the transferee has the ability to sell the asset). The risks and rewards retained are recognised as an asset.

Measurement

Financial assets and liabilities are initially recognised at fair value. Subsequent measurement depends on how the financial instrument is categorised:

At amortised cost using the effective interest method

• Held-to-maturity investments: Non-derivative financial assets with fixed or determinable payments and maturity that the entity has the positive intention and ability to hold to maturity.

• Loans and receivables: Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.

• Financial liabilities that are not held for trading and not designated at fair value through profit or loss.

At fair value

• At fair value through profit or loss: Financial asset or liability that is classified as held for trading, is a derivative or has been designated by the entity at inception as at fair value through profit or loss.

• Available-for-sale financial assets: Non-derivative financial assets that do not fall within any of the other categories. The unrealised movements in fair value are recognised in equity until disposal or sale, at which time, those unrealised movements from prior periods are recognised in profit or loss.

If there is objective evidence that a financial asset is impaired, the carrying amount of the asset is reduced and impairment loss is recognised. A financial asset carried at amortised cost is not carried at more than the present value of estimated future cash flows. An impairment loss on an available-for-sale asset that reduces the carrying amount below acquisition cost is recognised in profit or loss.

Hedge accounting

AS 30 provides for two kinds of hedge accounting, recognising that entities commonly hedge both the possibility of changes in cash flows; (i.e., a cash flow hedge) and the possibility of changes in fair value (i.e., a fair value hedge). Strict conditions must be met before hedge accounting is applied:

• There is formal designation and documentation of a hedge at inception.

• The hedge is expected to be highly effective (i.e., the hedging instrument is expected to almost fully offset changes in fair value or cash flows of the hedged item that are attributable to the hedged risk).

• Any forecast transaction being hedged is highly probable.

• Hedge effectiveness is reliably measurable (i.e., the fair value or cash flows of the hedged item and the fair value of the hedging instrument can be reliably measured).

• The hedge must be assessed on an ongoing basis and be highly effective.

When a fair value hedge exists, the fair value movements on the hedging instrument and the corresponding fair value movements on the hedged item are recognised in profit or loss. When a cash flow hedge exists, the fair value movements, on the part of the hedging instrument that is effective, are recognised in equity until such time as the hedged item affects profit or loss. Any ineffective portion of the fair value movement on the hedging instrument is recognised in profit or loss.

Embedded derivatives

AS 30 requires derivatives that are embedded in non-derivative contracts to be accounted for separately at fair value through profit or loss.

Accounting Standard 31 : Financial Instruments: Presentation

This Standard comes into effect in respect of accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. This Accounting Standard will become mandatory in respect of accounting periods commencing on or after 1-4-2012 for all commercial, industrial and business entities except to a Small and Medium-sized Entity as defined below:

1. whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;

2. which is not a bank (including co-operative bank), financial institution or any entity carrying on insurance business;

3. whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year;

4. which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year; and

5. which is not a holding or subsidiary entity of an entity which is not a small and medium-sized entity.

For the above purpose an entity would qualify as a Small and Medium-sized Entity, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period.

This Standard should be applied by all entities to all types of financial instruments except:

1. Accounted for in accordance with AS 21, AS 23, AS 27 However, in some cases, AS 21, AS 23 or AS 27 permits or requires an entity to account for an interest in a subsidiary, associate or joint venture using AS 30, in those cases, entities should apply the disclosure requirements in AS 21, AS 23 or AS 27 in addition to those in this Standard. Entities should also apply this Standard to all derivatives linked to interests in subsidiaries, associates or joint ventures.

2. Employers’ rights and obligations under employee benefit plans, to which AS 15, Employee Benefits, applies.

3. Contracts for contingent consideration in a business combination. This exemption applies only to the acquirer. The term 'Business combination' means the bringing together of separate entities or businesses into one reporting entity. At present, AS 14, deals with accounting for contingent consideration in an amalgamation, which is a form of business combination.

4. Rights and obligations under insurance contracts which will be covered by proposed Accounting Standard on Insurance Contract, a contract that is within the scope of Accounting Standard on Insurance Contracts because it contains a discretionary participation feature. However, AS 30 applies to derivatives embedded in such a contract.

5. Certain financial instruments and certain contracts and obligations under share based payments.

Financial instruments, contracts and obligations under sharebased payment transactions, except certain contracts to buy or sell a non-financial item as noted below:

1. Contracts those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments. However, AS 30 does not apply to any such contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements.

2. Contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by exchanging financial instruments.

3. A written option to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments.

4. Paragraphs 68, 69 and 70 of this Standard, which should be applied to treasury shares, purchased, sold, issued or cancelled in connection with employee share option plans, employees share purchase plans, and all other share-based payment arrangements

AS 31 applies to those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments. However, AS 30 does not apply to any such contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements.

Financial instruments are classified, from the perspective of the issuer, as financial assets, financial liabilities and equity instruments. Compound financial instruments may contain both a liability and an equity component.

Interests, dividends, losses and gains relating to financial liabilities are recognised as income or expense in profit or loss. Distributions to holders of equity instruments are debited directly to equity, net of any related income tax benefit.

Financial assets and financial liabilities are offset when and only when there is a legally enforceable right to set off and the entity intend to settle on a net basis.

AS 31 requires disclosure about factors that affect the amount, timing and certainty of an entity’s future cash flows relating to financial instruments and the accounting policies applied to those instruments. It also requires disclosure about the nature and extent of an entity’s use of financial instruments, the business purposes they serve, the risks associated with them, and management’s policies for controlling those risks.

The principles in AS 31 complement the principles for recognising and measuring financial assets and financial liabilities as given in AS 30.

Accounting Standard (AS) 32, Financial Instruments: Disclosures

The Standard comes into effect in respect of accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. This Accounting Standard will become mandatory in respect of accounting periods commencing on or after 1-4-2012 for all commercial, industrial and business entities except to a Small and Medium-sized Entity, as defined below:

1. whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;

2. which is not a bank (including a co-operative bank), financial institution or any entity carrying on insurance business;

3. whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year;

4. which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year; and

5. which is not a holding or subsidiary entity of an entity which is not a Small and Medium-sized Entity.

For the above purpose an entity would qualify as a Small and Medium-sized Entity, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period.

Scope

This Accounting Standard should be applied by all entities to all types of financial instruments, except:

1. those interests in subsidiaries, associates and joint ventures that are accounted for in accordance with AS 21, Consolidated Financial Statements and Accounting for Investment in Subsidiaries in Separate Financial Statements, AS 23, Accounting for Investments in Associates3, or AS 27, Financial Reporting of Interests in Joint Ventures. However, in some cases, AS 21, AS 23 or AS 27 permits or requires an entity to account for an interest in a subsidiary, associate or joint venture using Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement; in those cases, entities should apply the disclosure requirements in AS 21, AS 23 or AS 27 in addition to those in this Accounting Standard. Entities should also apply this Accounting Standard to all derivatives linked to interests in subsidiaries, associates or joint ventures unless the derivative meets the definition of an equity instrument in AS 31.

2. employers’ rights and obligations arising from employee benefit plans, to which AS 15, Employee Benefits, applies.

3. contracts for contingent consideration in a business combination. This exemption applies only to the acquirer.

4. insurance contracts as defined in Accounting Standard on Insurance Contracts. However, this Accounting Standard applies to derivatives that are embedded in insurance contracts if Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement, requires the entity to account for them separately. Moreover, an issuer should apply this Accounting Standard to financial guarantee contracts if the issuer applies AS 30 in recognising and measuring the contracts, but should apply the Accounting Standard on Insurance Contracts if the issuer elects, in accordance with the Accounting Standard on Insurance Contracts, to apply that Accounting Standard in recognising and measuring them.

5. financial instruments, contracts and obligations under share-based payment transactions except that this Accounting Standard applies to contracts within the scope of paragraphs 4 to 6 of AS 30.

This Accounting Standard applies to recognised and unrecognised financial instruments. Recognised financial instruments include financial assets and financial liabilities that are within the scope of AS 30. Unrecognised financial instruments include some financial instruments that, although outside the scope of AS 30, are within the scope of this Accounting Standard (such as some loan commitments).

This Accounting Standard applies to contracts to buy or sell a nonfinancial item that are within the scope of AS 30.

The Standard requires the entities to provide disclosures in their financial statements that enable users to evaluate:

1. the significance of financial instruments for the entity’s financial position and performance; and

2. the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks.

The principles in this Accounting Standard complement the principles for recognising, measuring and presenting financial assets and financial liabilities in Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement and Accounting Standard (AS) 31, Financial Instruments: Presentation

Disclosure

An entity should disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the reporting date.

Qualitative disclosures

For each type of risk arising from financial instruments, an entity should disclose:

1. the exposures to risk and how they arise;

2. its objectives, policies and processes for managing the risk and the methods used to measure the risk; and

3. any changes in (a) or (b) from the previous period.

Quantitative disclosures

For each type of risk arising from financial instruments, an entity should disclose:

1. summary quantitative data about its exposure to that risk at the reporting date. This disclosure should be based on the information provided internally to key management personnel of the entity (as defined in AS 18 Related Party Disclosures), for example the entity’s board of directors or chief executive officer.

2. the disclosures required under as mentioned in subsequent clauses, to the extent not provided in (a), unless the risk is not material

3. concentrations of risk if not apparent from (a) and (b).

If the quantitative data disclosed as at the reporting date are unrepresentative of an entity’s exposure to risk during the period, an entity should provide further information that is representative

Credit risk

An entity should disclose by class of financial instrument:

1. the amount that best represents its maximum exposure to credit risk at the reporting date without taking account of any collateral held or other credit enhancements (eg netting agreements that do not qualify for offset in accordance with AS 31);

2. in respect of the amount disclosed in (a), a description of collateral held as security and other credit enhancement;

3. information about the credit quality of financial assets that are neither past due nor impaired; and

4. the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated.

An entity should disclose by class of financial asset:

1. an analysis of the age of financial assets that are past due as at the reporting date but not impaired;

2. an analysis of financial assets that are individually determined to be impaired as at the reporting date, including the factors the entity considered in determining that they are impaired; and

3. for the amounts disclosed in (a) and (b), a description of collateral held by the entity as security and other credit enhancements and, unless impracticable, an estimate of their fair value.

Collateral and other credit enhancements obtained

When an entity obtains financial or non-financial assets during the period by taking possession of collateral it holds as security or calling on other credit enhancements (e.g. guarantees), and such assets meet the recognition criteria in other Standards, an entity should disclose:

1. the nature and carrying amount of the assets obtained; and

2. when the assets are not readily convertible into cash, its policies for disposing of such assets or for using them in its operations.

Liquidity risk

An entity should disclose:

1. a maturity analysis for financial liabilities that shows the remaining contractual maturities; and

2. a description of how it manages the liquidity risk inherent in (a).

Market risk

Sensitivity analysis

Unless an entity complies with sensitivity analysis as mentioned in subsequent clause, it should disclose:

1. a sensitivity analysis for each type of market risk to which the entity is exposed at the reporting date, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date;

2. the methods and assumptions used in preparing the sensitivity analysis; and

3. changes from the previous period in the methods and assumptions used, and the reasons for such changes.

If an entity prepares a sensitivity analysis, such as value-at-risk, that reflects interdependencies between risk variables (e.g. interest rates and exchange rates) and uses it to manage financial risks, it may use that sensitivity analysis in place of the analysis specified above. The entity should also disclose:

1. an explanation of the method used in preparing such a sensitivity analysis, and of the main parameters and assumptions underlying the data provided; and

2. an explanation of the objective of the method used and of limitations that may result in the information not fully reflecting the fair value of the assets and liabilities involved.

Other market risk disclosures

When the sensitivity analyses is disclosed as above are unrepresentative of a risk inherent in a financial instrument (for example because the year-end exposure does not reflect the exposure during the year), the entity should disclose that fact and the reason it believes the sensitivity analyses are unrepresentative.

Applicability of Accounting Standards in respect of period commencing on or after 7th December, 2006.

In exercise of the powers conferred by clause (a) of sub-section (1) of section 642 of the Companies Act, 1956 (1 of 1956), read with sub-section (3C) of section 211 and sub-section (1) of Section 210A of the said Act, the Central Government, in consultation with National Advisory Committee on Accounting Standards has notified the Companies (Accounting Standards) Rules, 2006.

According to these rules every company is required to comply with said rules in respect of accounting period commencing on or after 7th December, 2006. These rules divide the companies into two divisions:

1. Small and Medium sized companies (SMC); and

2. Non Small and Medium sized companies (Non SMC).

Small and Medium sized company means a company

1. whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;

2. which is not a bank, financial institution or an insurance company;

3. whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year;

4. which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year; and

5. which is not a holding or subsidiary company of a company which is not a small and medium-sized company

A company shall qualify as a Small and Medium sized Company, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period.

An existing company, which was previously not a Small and Medium sized Company (SMC) and subsequently becomes an SMC, shall not be qualified for exemption or relaxation in respect of Accounting Standards available to an SMC until the company remains an SMC for two consecutive accounting periods.

SMCs shall follow the following instructions while complying with Accounting Standards under these rules:-

The SMC which does not disclose certain information pursuant to the exemptions or relaxations given to it shall disclose (by way of a note to its financial statements) the fact that it is an SMC and has complied with the Accounting Standards insofar as they are applicable to an SMC on the following lines:

”The company is a Small and Medium sized Company (SMC) as defined in the General Instructions in respect of Accounting Standards notified under the Companies Act, 1956. Accordingly, the company has complied with the Accounting Standards as applicable to a Small and Medium sized Company”.

Where a company, being a SMC, has qualified for any exemption or relaxation previously but no longer qualifies for the relevant exemption or relaxation in the current accounting period, the relevant standards or requirements become applicable from the current period and the figures for the corresponding period of the previous accounting period need not be revised merely by reason of its having ceased to be an SMC. The fact that the company was an SMC in the previous period and it had availed of the exemptions or relaxations available to SMCs shall be disclosed in the notes to the financial statements.

If an SMC opts not to avail of the exemptions or relaxations available to an SMC in respect of any but not all of the Accounting Standards, it shall disclose the standard(s) in respect of which it has availed the exemption or relaxation.

If an SMC desires to disclose the information not required to be disclosed pursuant to the exemptions or relaxations available to the SMCs, it shall disclose that information in compliance with the relevant accounting standard.

The SMC may opt for availing certain exemptions or relaxations from compliance with the requirements prescribed in an Accounting Standard provided that such a partial exemption or relaxation and disclosure shall not be permitted to mislead any person or public.

The following are the major differences between the Notified AS under the Companies Act, 1956 and the AS, as issued by the ICAI:

• The relevant Accounting Standard Interpretations issued by the ICAI have been incorporated in the notified AS itself except ASI 12, ASI I23, ASI I27 and ASI I29.

• Notified AS has two levels of classification of companies being a Small and Medium sized Companies (SMC) and other than SMCs. The AS issued by the ICAI has three levels being Level 1, Level 2 and Level 3 enterprises.

• AS 18 is entirely applicable and mandatory to Level 1 enterprise and not applicable to Level 2 and Level 3 enterprises.

• The some of the requirements contained in the Preface to the AS issued by the ICAI have been incorporated as General Instructions in the rules containing the Notified AS.

• The ICAI from time to time issued notifications on amendments to the AS. Most of the amendments made by the ICAI have been incorporated as paragraph insertions / deletions in the Notified AS itself.

ICAI has come up with an announcement on 29th January, 2008 whereby it has been mentioned that the Institute intends to harmonise the two sets of standards prevailing and is proposing to come up with the following amendments in the AS issued by the ICAI:

• ICAI is going to issue Guidance Notes for ASIs; i.e., ASI 12, ASI 23, ASI 27, ASI 29 which are not incorporated in the Companies (Accounting Standards) Rules, 2006.

• The Council of ICAI decided to change the Accounting Standards issued by the ICAI in order to harmonise the language differences between the two sets of accounting standards.

The amended Accounting Standards are likely to be published in the Compendium of Accounting Standards.

For non-corporate entities, accounting standards as issued by the Institute of Chartered Accountants of India will continue to become applicable.