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ACCOUNTING STANDARDS (GROUP-II)

AS – 4: Contingencies and events occurring after the Balance Sheet Date

Objective

To prescribe the accounting of contingencies and events, that take place


after the balance sheet date but before approval of financial Statements
by competent authority.

Scope

A provision relating to asset is covered by AS-4, but provision, as


shown in liability side of balance sheet is not covered by AS-4
(Covered by AS-29)

Contingencies other Events occurring


than covered by AS-29 after the balance sheet date

Conditions existing at Balance A


Sheet date Conditions not existing at
Balance Sheet date

Estimate the outcome


No accounting treatment
is required.

Contingent gain Contingent loss

Ignored
Probable losses Reasonably possible Remote

Chance of occurrence Chance is less than Chance of


is more than 50% probable but more occurrence is low

Provisions should Disclose by way


Ignore
be made of note

1. If there is no counter claim, full loss should be provided


2. If there is counter claim, the net amount should be provided

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EVENTS OCCURRING
A
AFTER THE BALANCE SHEET DATE

Does the event provide additional information materially affecting


the determination of amounts relating to conditions existing at the
No balance sheet date?

Yes
Does the event indicate that entity has Yes
ceased to be a going concern.

No
Does the law require adjustment to be Yes
made to assets / liability as at balance
sheet date? e.g. proposed dividend.

No
Non-adjusting event Adjusting event

No
a) If material, disclosure in Board of Adjustments require to figures of assets
Directors Report. and liabilities as at balance sheet date.
b) If immaterial, it is ignored.

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AS – 5: NET PROFIT / LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND
CHANGE IN ACCOUNTING POLICIES:

NET PROFIT OR LOSS WILL COMPRISE OF

1. Net profit or loss for the current 2. Prior period items are items which
period which includes all items of arise in earlier year as a result of
income and expenses recognized errors or omission committed in any
in a period. earlier years.

Separate disclosure of nature


Ordinary Activities are From Extraordinary Activity: and amount. Ensure that
It should be separately shown in the impact of current profit or loss
normally undertaken as part
Profit and Loss, each significant item can be clearly perceived
of business and incidental Eg: Understatement of
activities. be shown separately.
Eg: Loss due to earthquake, income or expenses due to
From ordinary Activity: attachment of property of enterprise. Mathematical mistakes.
Including effect of change in
 Accounting estimate 3. WHEN THERE IS A CHANGE IN ACCOUNTING POLICY
 Accounting policy (a) For Compliance of AS (b) For Compliance of Law or Statute
 If significant, effect and (c) For Better and appropriate presentation of financial statements.
nature of change should
be disclosed.

Yes No

Having material effect. Having no material effect.

In the current period Expected in future periods No need of disclosure

Disclosed in the period in which Disclosed in the period of making


change is adopted along with the change. Fact of change only
amount If amount not needs disclosure. No disclosure
ascertainable, that fact should be needed of amounts.

4.Change in accounting estimates:


♦ Neither a prior period item nor an extraordinary item.
♦ A change in estimated amount in any items of financial statements.
♦ When it is difficult distinguish between change in accounting policy and accounting estimates, treat
it as change in accounting estimate.
♦ Example: change in the amount of provision for bad debts, change in useful life of depreciable assets.

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AS-11 (REVISED 2003)
The Effect of changes in Foreign Exchange Rates

CATEGORY – 1 CATEGORY – 2 CATEGORY – 3

Foreign currency transactions like Foreign Operations like, Branch, Forward Exchange Contracts
buying and selling goods or services, Subsidiary, Associate and Joint ♦ Agreement between two parties to buy or sell
lending and borrowing in foreign Venture. foreign currencies.
currency and its settlement. ♦ Settlement will be done at a future date.

Initial Valuation Treatment of Exchange


difference – Monetary - Integral Non – Integral Foreign For hedging For trading /
Recognition at Balance Operation (Treated as speculation:
Charged to P & L A/c foreign
Sheet Date separate enterprise) Premium /
Non-Monetary – Not Treated operation
as exchange difference but as same as for Translate all assets and discount No premium /
valuation difference charged foreign liabilities monetary as amortized over discount is

Record to Profit and Loss A/c
currency well as non-monetary at contract life. recognized
Transacti closing rate. Translate
transaction
on using Monetary Non- income and expenses at Exchange Gain or loss
spot rate Items Monetary the rate on the date of difference on balance
(weekly / transaction. recognized in sheet date
All exchange difference
Monthly the Profit and recognized to
Monetary items like Carried at fair s be carried to foreign

average Carried at Loss A/c of the Profit and
value currency translation
may be debtors, creditors, Historical cost period Loss being
reserve. Which will be
permitted) loans, etc. converted transferred to P & L only difference
Translate at
at closing rate will Continued at closing rate when net investment in Gain / loss on between rate
result into exchange the rate of its (date of balance non-integral operation is cancellation / contracted and
difference acquisition sheet) disposed off in part renewal taken to rate now
Eg: Inventory, or in full. Profit and Loss available.
Investments. A/c of the period
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ACCOUNTING FOR GOVERNMENT GRANTS – AS-12

Meaning: Exclusion from When to recognize Accounting


♦ Grant means Government Government treatment:
assisted by Grants Grants:
government 1. Tax holiday in In the nature
When there is of revenue
either cash or backward area reasonable
kind in return tax exemption assurance that
for past or in notified
future 1. Grant will be Related to
area. received and Deduct grant Credit profit and
compliance Fixed Assets
2. Investment by from related loss account on
with certain 2. The enterprise
Govt. as expenses (which systematic basis
conditions. will comply with
equity. intends to over periods
♦ Government attached
compensate) necessary to
means conditions, if any.
match it with
government or related costs.
government
agencies or
Monetary Grants Non-Monetary
similar bodies In the nature of promoters
(Related to fixed Assets) Grants:
either at local, contribution
national or (Grants in the form
of assets such as ♦ Credit capital reserve
international. ♦ Cannot be distributed as
land plant &
dividend or treated as deferred
income.
Depreciable F.A. Non-Depreciable F.A.

Deduct from If conditions attached to grant were fulfilled –


Deduct from Gross value assets Treated as deferred income and Credited to Capital reserve.
recognized in P & L on Gross value
in arriving its book value. Not fulfilled – Grants are credited to income over the
systematic and rational basis assets.
over useful life of assets. same period over which the cost of meeting such Cont…
conditions is charged to income.
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ACCOUNTING FOR GOVERNMENT GRANTS – AS-12

Refund of Govt. Grants


Grants in Special Cases (Treat it as an extraordinary item)

1. Related to Specific
Related to Revenue Assets Deducted from
gross value of asset –
Non-Monetary Contingencies Extraordinary item ♦ Amount of
grants If contingencies arises after Apply AS – 5 when grant is refund adjusted ♦ Refundable amount
♦ Asset given at grant has been recognize d awarded. against should be recorded by
concessional apply AS-4 (Revised) unamortized increasing the Book
rates - record at deferred govt. value of asset.
acquisition. grants if any. ♦ Depreciation to be
♦ Assets given
free of cost – ♦ Remaining provided prospectively.
record at As compensation balance 2. Treated as deferred
For giving
nominal value for expenses or charged to income:
immediate
losses incurred in ♦ Refundable amount
financial support P & L A/c
previous periods.
and not as an adjusted with
Relating to
incentive to promoters unamortized deferred
undertake contribution income
specific 3. Credited to Capital
Deduct from
expenditure. Reserve A/c:
capital reserve.
Refundable amount
adjusted to Capital
amount

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BORROWING COST – AS - 16

Meaning Accounting Amount to be capitalized


treatment
1. Borrowing cost
on qualifying
When to
Borrowing Cost – asset capitalized When funds
When funds capitalize.
♦ Interest and Qualifying Directly until ready to use borrowed
commitment charges attributable cost borrowed When it is
Asset- or sale. generally
♦ Amortization of specifically 1. Expenditure on likely to
An asset which Those costs that 2. Other borrowing result in
discount /premium on would have been 1. Borrowing qualifying asset
loans takes substantial cost charged to x Weighted future
avoided if the cost incurred
♦ Amortization of period of time to Profit & Loss A/c. Average rate of economic
expenditure on less interest
ancillary costs. get ready for its Borrowing benefits and
the qualifying on temporary Costs. (Other
♦ Financial charges in intended use or asset had not can be
case of financial lease investment of than specific
sale is called been made. reliably
♦ Exchange difference borrowed borrowings)
qualifying Asset. 2. Capitalized measured.
relating to foreign funds.
currency borrowings to amount should
extent of interest not exceed
variations. borrowing cost.

Expenditure on Qualifying Asset. Commencement of Suspension of


Capitalization. Cessation of Capitalization:
Capitalization:
Conditions to be fulfilled. ♦ When substantially all
1. Activities to prepare the activities necessary to prepare
Includes: Excludes asset for its intended use
the asset for its intended use
1. Payment of 1. Progress should be in progress
or sale is completed
cash. payment 2. Borrowing cost incurred Not Suspended if
Suspended
2. Transfer of received 3. Expenditure incurred for Temporary delay is ♦ When Construction completed
acquisition /construction or If active necessary in part of in parts which is capable of
other asset 2. Grant received
towards cost production of qualifying development process to get asset being used, stop capitalization
3. Interest bearing
incurred. asset. is interrupted ready for its intended use for that part.
liabilities.
or sale

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AS–19: ACCOUNTING FOR LEASES
IF

The lessee will get the ownership of leased asset at the end of Yes
the lease term.

No

The lessee has an option to buy the leased asset at the end of the term, at Yes
price, less than expected F.V. on the date of exercise of option.

No

The lease term covers the major part of the life of asset Yes

No
Present value of MLPs substantially equals the asset fair value as
Yes
at the date of inception of the lease.

No

The asset given on lease to lessee is of specialized nature and Yes


can only be used by the lessee without major modification.

No
Operating lease
Finance lease

In the Books of lessee


♦ Recognize lease payments in profit and loss account. In the Books of lessee
♦ Pattern- straight line basis over lease term. ♦ Recognize as an asset and
liability.
♦ Initial recognization of asset
- at lower of F.V. and P.V of
In the Books of lessor MLP.
♦ Recognize as an asset ♦ Charge lease payment to
♦ Recognize lease income in Profit and Loss A/c using Profit and Loss A/c
straight line method. ♦ Provide Dep. as per AS-6
♦ Charge Depreciation as per AS-6

In the Books of lessor


♦ Recognize as “receivables”
at an amount equal to net
investment in the lease.
♦ Recognize lease income in
Profit and Loss A/c.
♦ Pattern: Constant periodic
return.

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SALE AND LEASE BACK
KEY TERMS TRABNSACTIONS

♦ Gross investment = MLP (in view of lessor) +


unguaranteed residual value. ♦ If lease back is finance lease.
♦ Net investment = Gross investment - Defer any excess or deficiency of
sale proceeds over carrying amount
unearned finance income and amortize it over lease term in
♦ Unguaranteed residual value = Gross proportion of dep. on leased asset.
investment – Present value of Gross
investment
♦ MLP in view of lessor = lease rentals + any
guaranteed R.V. (by or on behalf of lessee)
+ R.V. Guaranteed by third party.
♦ MLP in view of lessee = lease rentals + any If lease back is operating lease
guaranteed R.V. which is guaranteed by or (S.P = Selling Price, F.V = Fair Value, C.A
on behalf of lessee. = Carrying Amount)
♦ Implicit interest rate = discount rate that ♦ If S.P. = F.V : any profit or loss
makes P.V of gross investment just equal to recognize immediately.

Fair Value of leased asset. ♦ If S.P. < F.V

♦ Faire value of leased asset (at the inception


 C.A < S.P:– Profit:– Recognize
immediately
of lease = present value of Minimum lease
 C.A. > S.P:– Loss:– Recognize
payments (in view of lessor) + any
immediately
unguaranteed residual value according to
♦ If S.P. > F.V.
the lessor.
 If C.A. = F.V:– Profit:– amortize
♦ Guaranteed residual value (in respect of the profit over lease period.
lessee): such part of the R.V., which is  If C.A. < F.V:– to the extent of
guaranteed by or on behalf of the lessee. (S.P. – F.V):– Profit:– Defer the
♦ Guaranteed residual value (in respect of profit.
lessor) such part of the R.V., which is  If C.A. > F.V.
guaranteed by or on behalf of the lessee or To the extent of (C.A – F.V) :–
by an independent third party. Loss:– Recognize immediately
To the extent of (S.P. – F.V.) :–
profit:– should be amortized.

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AS – 20 EPS (EARNING PER SHARE):

EPS (EARNING PER SHARE)

BASIC EPS DILUTED EPS


Profit available to equity share Diluted earnings / Revised WANES
holders (PAES) / Weighted Avg. No.
of Equity Shares (WANES)
WANES
♦ No. of shares (After adjustments for additions and
Earnings deletions during the period.
♦ Profit after tax less preference ♦ Weight = No. of days shares were outstanding the
dividend and dividend during the period (Timing)
distribution tax there on. TIMING:
♦ In case of more than one class ♦ Conversion of debt:- Date of conversion
of equity shares – distribute ♦ Settlement of liability:- Date of settlement
earnings in proportion of ♦ Acquisition of asset:- Recognition
dividend right for each class. ♦ Amalgamation in the nature of Purchase:- Date of
acquisition.
♦ Amalgamation in the nature of merger:- beginning of
reporting period.

Dilutive Potential Equity share Anti- Dilutive shares


Potential equity share is dilutive: if its Potential equity share is anti-dilutive:
inclusion reduces earning per share dilutive if its inclusion increases earnings
or increases loss per share per share or reduces loss per share

Dilutive EPS = Profit / W.Av. No. of shares Anti– dilutive shares to be ignored

Diluted Earnings Revised WANES + Weighted average of


PAES + Dividend along with distribution additional equity shares outstanding
tax on convertible preference shares assuming conversion.
previously deducted + Interest net of tax
effect charged on convertible debentures
or loans.

Potential shares for which proceeds have Potential shares for which proceeds shall be
already been received. Like convertible received in future. Like options
debenture, convertible preference shares,
application money received etc. Actual number of shares to be issued less
number of shares which can be issued
against the same proceeds if issued at
Number of equity share to be issued
average fair value. The balance is the share
against such potential shares to be issued for no consideration and it will be
considered. Profit shall be adjusted by included for calculating diluted EPS. Profit
interest, dividend and consequential tax may not require any adjustment for such
effect related to such potential share. potential equity shares.

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TREATMENT OF DIFFERENT TYPES OF SHARE / POTENTIAL SHARES
FOR CALCULATION OF BASIC EPS/ DILUTED EPS
(Note whatever is included for basic EPS gets automatically included for diluted EPS)

EQUITY SHARES APPEARING IN BONUS ISSUE, POTENTIAL EQUITY SHARES


THE BALANCE SHEET SHARE SPLIT
CONSOLIDATION
Convertible debenture / preference share
Fully paid
The weighted Usually at fair value, hence include it
Include from the date of issue from the date of issue for diluted EPS.
for basic EPS average number
of shares of all the Numbers to be calculated taking best
period reported conversion price from holders point. The
Calls in Arrears
including period interest, dividend tax and related exp. be
of above event adjusted in the earning.
If entitled for dividend, (even if the event
include for basic EPS. took place after
the balance sheet ESOP
If not entitled for dividend date but before
include for diluted EPS approval) be The deferred employee remuneration will
from the date call is due reinstated in the be included in assumed proceeds
just like option. If interest same proportion together with issue price. The rest
has been charged the (i.e. increased / treatment will be same as in option for
same will the adjusted decreased in the
from earning calculating diluted EPS.
same proportion)

Partly paid Optional / Share warrants

Include for basic EPS in proportion No. of shares under issue


to its entitlement for dividend. (-) the number derived by dividing the
expected proceeds by fair value of shares.
Uncalled on partly paid share Balance are the shares for no
consideration. Same will be included for
To be ignored
diluted EPS w.e.f. the date of issue, no
adjustment to be made in earnings.
Different nominal value
Share application money received
Different EPS be calculated if
(Excess application money to be
having different dividend rights
excluded)
otherwise convert all into same
nominal value term for basic EPS.
Money used in business
Right issue
If all necessary conditions are fulfilled
use it for basic EPS
Fair value per share immediatel y prior to right issue
Right Factor =
Theoritica l ex − right fair value per share
If conditions are not fulfilled use it for
Aggregatefair value of share immediately
diluted EPS like convertible debentures
prior to the exerciseof the rights + proceeds
from exerciseof the rights
Theoritical ex − right fair value = Money not so used (kept separately)
No. of shares outstanding immediately
after the right issue
Use it for diluted EPS like option

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AS – 26: INTANGIBLE ASSETS

Recognition criteria
Intangible Asset (I.A)
♦ Should have characteristics of asset
♦ Identifiable (separable)
♦ Non-monetary asset ♦ Future economic benefits
♦ Without physical substance ♦ Cost can be reliably measured

The process of R & D classified into 2 Initial measurement at cost


phases.
♦ Research phase: All expenses Direct Purchase
incurred are to be charged as Purchase price and all
expense as and when incurred. directly attributable costs
♦ Development phase: Expenses
are to be capitalized if and only
following conditions are met. Exchange of asset
Fair value of asset given up
 Technical feasibility of
completing I.A
 Availability of resources Government Grants
 Intension to complete and use I.A Nominal value (AS-12)
 Ability to use
 Probability that I.A. will generate
Through issue of securities
future economics benefits
The fair value of securities issued
(External market) or a fair value of intangible asset
 Expenses incurred can be acquired which ever is more
measured reliably clearly evident

Intangible asset is recognized in the


books of purchasing company though
it is not recognize in selling company
provided the amalgamation in the
nature of purchase (AS-14).

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SPECIAL POINTS

In some cases, the Subsequent Impairment loss Gain or loss on


enterprise incurred expenses on ♦ Impairment retirement /
expenditure but no intangible asset test is must, if disposal:
intangible asset is capitalize if  Asset not Recognize in
recognized Profit and Loss
♦ Subsequent available for
EXAMPLES Account
expenses use
♦ Employee training increase the  Amortizatio
expenses future n period
De-Recognition of
♦ Advertisement and economic exceeds 10 intangible asset
promotional benefits of years ♦ On disposal or
expenses intangibles ♦ When no
♦ Relocating ♦ Subsequent future
expenses expenses can economic
♦ Restructuring costs be attributed to benefits
cost and expected.
measured
reliably.

Amortization
♦ Carry the asset at cost less accumulated amortization and accumulated impairment loss.
♦ Useful life –“10 years” unless there is clear evidence of longer life
♦ Residual value – “Zero” unless commitment by third party to by at the end of useful life
♦ Method of amortization
 The benefit derived from the intangibles should be matched with the amortization expenses.
 If pattern of benefit is available – amortize as per pattern
 If no pattern is available – SLM should be followed.

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AS-29: PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
‘C’ means, it C
is continuing
process
Has a present obligation
arisen as a result of past
No
events?

Does a possible
Is it probable that an
obligation arise which will
outflow of economic
No be confirmed only on
resources will be needed No
occurrence or non-
to settle the obligation?
occurrence of one or
more future events not
Yes Can a reliable estimate No wholly within the
be made of the amount enterprise’s control?
of the obligation?
Yes
Recognise (i.e. make) a
provision Is possibility of loss / Yes
obligation remote?

Review the provision at


each Balance sheet date. No

Yes Is disclosure of same or


Liability results in outflow No all information as per para
of economic benefits. 69 expected to seriously
prejudice the position of
No
Yes the enterprise?

Use the Review the No


provision for the continued
No
liability and no
necessary Is it otherwise
other purposes. impracticable to make
all or any disclosures
Yes Found
required by para 69?
unnecessary? No
Does the
liability exceed Yes
Yes
the provision?
Reverse Do not recognize a State the fact that Neither
provision. Disclose non-disclosure provision nor
Adjust in Profit and 1. Disclose a contingent liability is due to disclosure
Loss / Cost of the general nature as per para 69 impracticability required
of dispute
asset, as the case 2. Do not
may be ! disclose
all or any
information
required as
per para 69.
3. State the fact
and reason for Review the position at
non-disclosure each balance Sheet date
4. Do not
recognize
a provision.
C
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