Accounting Standards and Disclosure Requirements

1. Accounting Standards and Disclosure Requirements

2. Session Objectives • To give a brief about the different accounting standards to the participants including the Government Accounting Standards being developed by GASAB; • To discuss the major Accounting Standards of ICAI; • To explain the disclosure requirements in Financial Management

3. Introduction • Why? • To establish rules relating to recognition, measurement and disclosures for true, fair, transparent and comparable financial statements • What? • Set of pronouncement by various regulatory authorities

4. Different Accounting Standards • Formulated by Accounting Standard Boards • International Accounting Standards by US Securities & Exchange Commission • Australian Accounting Standards by AASB • Accounting Standards by ASB, Financial Reporting Council, UK • Indian Accounting Standards formulated by ICAI • Indian Government Accounting Standards by GASAB

5. Accounting Standards followed in India • ICAI Accounting standards are followed by all the Companies in India including PSUs. • These standards are mostly mandatory for the Companies • Disclosures may vary from Company to Company, depending on their declared accounting policies and subject to the mandatory Accounting Standards.

6. AS-1Disclosures of Accounting Policies • Disclosures of specific accounting principles and methods of their application in preparation and presentation of financial statements. • Should form part of the financial statements and be disclosed at one place

7. AS-2Valuation of inventories • Applicable to accounting of inventories other than WIP, stock-in-trade, inventories of livestock, agriculture, forest products and minerals • Inventories are valued at cost or net reliable value whichever is lower; Overheads are absorbed • Financial statements should disclose • the accounting policies adopted in measuring inventories (including cost formula used) • Totally carrying amount of inventories with appropriate classification

8. AS-3Cash Flow Statements • Enables users to evaluate changes in net assets of an enterprise and its financial structure as well as to effect the amounts and timings of cash flow • Should report • Cash flows during the period • Classified by operating, investing and financing activities

9. AS-4Contingencies and Events occurring after B/S date • Events that occur between the balance sheet date and the date of approval by the Board of Director/corresponding authority. • 2 types of events • Adjusting those providing further evidence of conditions on B/S date • Adjustments need to be made in the assets and liabilities • Non-adjusting indicative of events arising subsequent to B/S date

10. AS-5Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies • To prescribe the classification and disclosure of certain items in the statement of profit and loss • Disclosure include • Distinct depiction of prior items under relevant heads

11. AS-6Depreciation Accounting • Various disclosures required are: • Historical/analogous cost for each class for depreciable asset • Total Depreciation for the period for each class of asset • Related accumulated deprecation • Depreciation methods • Depreciation and written down values/lives

12. AS-7Construction Contracts • Arises because formulation of a construction contract and its execution usually fall in different accounting periods • Exception of AS-2 as profit on inventories is recognized in case of construction contracts • Disclosure requirements include: • Amount of contract revenue recognizable for the period • Methods used to determine the same, • Methods used to determine the stage of completion of the contract • Aggregate amount of net profits till date, advances received, retentions, • Balance amounts due to be shown as assets/liabilities

13. AS-9Revenue Recognition • Recognition of revenue from • Sale of goods • Rendering of services • Interest, royalty, dividend from resources • Not applicable in case of construction, lease-purchase, insurance contracts, government grants and such subsidies; • Disclosure must include • Postponement of revenue recognition apart from significant accounting policies

14. AS-10 • Not applicable in case of forests, livestock, plantations, minerals, real estate development • Disclosures include • Gross/net value of fixed assets at the beginning and end of accounting period with detailed workings • Revaluations, if any

15. AS-11Effects of Changes in Forex Rates • Recognition of exchange gains losses • Treatment of foreign operations • Forward exchange contracts for trading/speculation • Disclosure requirements • Amount of exchange differences included in net profit/loss for the period • Accumulation and reconciliation of net exchange differences

16. AS-12Accounting for Government Grants • Includes subsidies, cash incentives, duty drawbacks • Two approaches • Capital approach as part of shareholders’ funds Income approach-Taken into income • Disclosure requirements include the nature and extent of grants recognized in the financial statements and the policy thereto.

17. AS-13Accounting for Investments • To harmonise the accounting of various kinds of investments • Disclosure requirements include: • Carrying amount of investments and aggregate value of quoted and unquoted investments and accounting policy thereto • Classification of investments • Amounts included in P&L A/c • Restriction on rights of ownership, reliability of investments, remittance, etc.

18. AS-14Accounting for Amalgamations • For amalgamations and resultant goodwill and reserves • Disclosures include • All details of amalgamating companies and amalgamation procedure including sanctions, treatment of shares, value of assets, etc.

19. AS-15Employee Benefits • Required to prescribe the accounting and disclosure for employee benefit. An enterprise to recognize: • A liability when an employee has provided service in exchange for which employee benefits to be paid in the future; and • An expense when the enterprise consumes the economic benefit arising from service provided by an employee in exchange for employee benefits. • Disclosure of • All details and accounting policies pertaining to defined benefit plans • Actuarial gains/losses • Reconciliation of balances, • Returns on plan assets • Past service costs

20. AS-16Borrowing Costs • For accounting for borrowing costs including interest, commitment charges, amortisation of discounts etc., finance charges, exchange differences in r/o foreign currency borrowings • Financial Statements to disclose • Accounting policy for borrowing costs • Amount of borrowing costs capitalised

21. AS-17Segment Reporting • Information regarding different types of operational products and services of an entity • Disclosure is required • Only for reportable segments whose financial indicators are 10% or more than those of the entire entity • Detailed break up of all indicators • Any changes in segmental accounting policies • Information on types of products/services/geographical details • Some disclosures are recommendatory

22. AS-18Related Party Disclosures • Applicable for transactions between the reporting enterprise and it’s related parties • Disclosures include • Relations pertaining to control • Exact details about the relationships

23. AS-19Leases • For all assets are leased. Includes Operational Lease, Finance Lease and ‘Sale and Leaseback’ • Disclosure requirements to be made by both lessor and lessee • The gross carrying amount • Depreciation details • Loss and profit details • Lease details

24. AS-20Earnings Per Share (EPS) • Used to assess the profitability of an enterprise • The A.S. deals with determination and presenation of the same • Disclosures include • EPS details of each class of share on face of P&L a/c • Also in case of extraordinary item/class of share

25. AS-21Consolidated Financial Statements • Applicable for a group of Companies under a common parent • Lays down principles and procedures for preparation and presentation of a consolidated financial statement for the group as a whole to show: • Resources, obligations and results of the group as an entity

26. Other Accounting Standards (not discussed) • AS22: Accounting for deferred Taxes on Income • AS23: Accounting for Investments in Associates • AS24: Discontinuing Operations • AS25: Interim Financial Reporting • AS26: Intangible Assets • AS27: Financial Reporting of Interests in Joint Ventures • AS28: Impairment of Assets • AS29: Provisions, Contingent Liabilities and Contingent Assets

27. Assignment • A7_S20