81. What is a phantom stock option? How it is different from ESOP?

Ans. A phantom stock option or phantom equity plan is performance based plan
that provides the employee with a ghost or simulated ownership. The employee is
given notional shares at bench mark price with a right to exit at a future price
which could be the market or traded price or a price determined on the basis of a
pre decided valuation criteria. Therefore the company does not have to dilute its
equity. Companies that go for phantom stock option are either unlisted one or
listed companies that have pressure on equity dilution or promoter driven
companies which are averse to sharing equity. For example- DLF, Birla Sun Life,
Bajaj Alliance are examples of such companies who offer phantom stock option.

ESOP is employee stock option plan. The difference can be explained with the
help of an example- A stock option is given at Rs 120 with a vesting period of 1
year. At the end of one year if market price becomes Rs 300 per share, the option
will have a value of Rs 180.However if stock price becomes Rs 100 per share,
there is no value in the stock option. But if a phantom stock option is given
( phantom is usually given out at no or negligible cost), it would have made Rs
100 per share for employee in the scenario of market fall. Since the employee
would have made some cash instead of nothing ,phantom seems to be a better
option.

82. What do you mean by treasury stock?

Ans. Treasury stock arises when accompany merges a subsidiary into itself. For
instance, Reliance Industries limited, through four of its subsidiaries, held 46%
stake in IPCL. When IPCL merged into RIL, all IPCL shareholders got RIL shares.
RIL, being a shareholder through its subsidiaries, got its own shares. In most
developed markets like the USA& UK , companies extinguish their treasury stock
on allotment itself. This has the effect of reducing company’s equity , thus
boosting its earnings per share.

But several Indian companies have chosen to hold treasury stock. Promoters might
want greater control over their stock or might feel that their stocks are
undervalued. Or they might want to sell treasury stock , boost their profit figure
and use it for payment of dividend or fund expansion. For examples- Reliance
Industries Limited, M& M, BPCL, Jaypee Associate & United Spirits are holding
huge amount of treasury stock.

83. What do you mean by accounting cycle?

Ans. Accounting involves recording of transactions and events
in a manner that facilitates preparation an presentation of
financial statements. Accounting cycle refers to the cycle
starting with recording of opening entries (balance carried
forward from the previous reporting period) in the general
ledger and ends with the preparation of financial statements.
Following steps are required in the preparation of financial
statements-
 Recording of opening entries in the general ledger
 Recording transactions and events in the journal
(journalisation)
 Posting journal entries in appropriate accounts in the
general ledger
 Balancing the account of general ledger
 Preparing the trial balance
 Recording the adjustment entries
 Preparing the adjusted trial balance
 Recording closing entries to prepare financial statements

84. What is Adjusted Present Value Method?

Ans. Adjusted Present value is a capital budgeting method used

for levered firm. his method takes into account the tax shield
value associated with tax deduction for interest expense. It can
be expressed as

APV= NPV+ TD

APV= adjusted present value NPV= Net Present Value

T=Marginal corporate tax rate D= Total corporate debt TD=
Tax shield value
85. What is Appraisal Ratio?

Ans. Appraisal ratio is the ratio of alpha value of the asset to

residual standard deviation. This ratio measures risk free rate of
return of risky asset per unit of diversifiable risk.

86. What is balloon payment and balloon loan?

Ans. Balloon loan is a loan that requires small payments that

are inefficient to pay off the entire loan so that a large final
payment is necessary at termination.

Balloon payment is large final payment as when a loan is repaid

in installments. Most high quality bond issues establish
payments to the sinking fund that are not sufficient to redeem
the entire issue. As a consequence there is a possibility of a
large balloon payment at maturity. If a lease has a schedule of
payments that is very high at the start of the lease term and
thereafter very low then these early balloon payments would be
an evidence that the lease was being used to avoid taxes and not
for a legitimate business purpose.

87. What is Barrier Option?

Ans. An option that has a pay off depending upon whether at

some point during the life of the option, the price of the
underlying asset has moved pass a reference price. Examples
are knock in and knock out option.

Knock in option is an option in which there can only be a final

payoff if during a specified period of time , the price of the
underlying asset has reached a specified level. This is one of the
barrier option & it is attractive to some market participants
because they are less expensive than regular option.
Knock out option is an option in which there can only be a final
off if during a specified period of time , the price has not
reached a specified level. This is one of the barrier option & it
is attractive to some market participants because they are less
expensive than regular option.

88. What is Bill of Lading?

Ans. The bill of lading is a shipping document that governs

transportation of the shipper. Essentially it is a shipping
document that governs transportation of the exporter’s goods to
the importers. The seller submits the invoices and the bill of
lading to the correspondent bank. The bank in turn verifies the
paperwork and pays the seller. The correspondent bank then
sends the paperwork to the buyers bank which pays the
correspondent bank and sends the document to the buyer who
makes the payment.

89. What is CAMELS?

Ans. It refers to the regulatory rating system for bank

performance. C=Capital Adequacy Ratio, A= Asset quality,
M=Management quality, E= Earning quality or net interest
margin, L= liquidity, S= Sensitivity to market risk.

90. What is Green Shoe Provision?

Ans. Some IPOs contain green shoe options named after one of
the first firms to include the provision in its underwriting
agreement. A green shoe provision gives the leading investment
bank the right to increase the number of shares sold in the IPO,
typically by 10 percent to 20 percent of the original offering.
This helps the investment bank satisfy more investors if
demand for an issue is particularly hot. This also gives
investment bank another way to increase their profits since they
earn the spread on any extra shares they sell.
91. What do you mean by filter rule?

Ans. Filter rule is a technical analysis technique stated as a rule

for buying or selling stock according to past price movement.
The filter rule is usually stated in the following way: purchase
the stock when it rises by x% from the previous low and hold it
declines by y% from the subsequent high. At this point, sell the
stock short. Filter rule is a timing strategy. They show the
investors when they should long in a security and when they
should sell short.

92. What do you mean by float creation?

Ans. Bankers define float as cash obligations that are in the

process of collection. Another way of computing the float is the
difference between the balance shown in a firm’s account or an
individual’s chequebook and the balance on the bank’s books.
It is assumed that on average a firm writes Rs 10000 worth of
cheques each day. If it takes five days for these cheques to clear
and be deducted from the bank’s account, the firm’s own
checking record will show a daily balance of Rs 50000 lower
than bank’s records. Conversely if the firm on average receives
Rs 10000 worth of cheques each day but deposits and clears
these cheques in only 3 days the firm’s book will show a
balance of Rs 30000 higher than the balance on bank’s records.
The difference between Rs 50000 negative float and Rs 30000
positive float is equal to Rs 20000 negative float which is called
firm’s net float.

Float management is an integral component of the cash

management system. There are five different types of floats-

 Invoicing float is the time it takes for a firm to bill

receivables. The efficiency of the company’s internal
accounting and billing procedures affect this type of
float.
 Mail float is the time the firm’s bill spends in the mail
on its way to the customer and the time the consumer’s
cheque spends in the mail on its way to the firm.
 Processing float is the time between a firm’s receipt of
payment and its deposit of cheque for collection.
 Collection float is the time from when the bank accepts
a cheque for deposit to when it makes the funds available
in the firm’s checking account.
 Disbursing float is the time between when a firm writes
a cheque on available bank account funds and when the
bank deducts the corresponding amount from the firm’s
bank balance.
The first four components of float hinder the firm’s
ability to turn collection items into cash: these are
examples of negative float. The fifth component
disbursing float is the positive float because it increases
the amount of cash the firm has to use.
93. What do you mean by real option?
Ans. Real option are those strategic elements in
investments that help creating flexibility of operations
or that have the potential of generating profitable
opportunities in the future for the firm. Real option
provides discretion to the mangers to take certain
investment decision without any obligation at a given
price. Real options are not confined to real assets only.
Patents, R &D and Brands etc are examples of assets that
they have a value to the owner. An investment in real
option consists of two values: the value of cash flows
from the project assets plus the value of any future
opportunity (option) arising from holding the asset.
 94. What do you mean by Pension fund?

Ans. Pension Fund Regulatory & Development Authority

(PFRDA) looks after the social security contribution for the
citizen. All Central & State Government Employees are
enjoying pension as the statutory benefit. Private organizations
are providing contributory provident fund to their employees
which will be handed over to them at the time of retirement.
Private organization is offering pension benefit apart from
Contributory Provident fund to attract the high profile
employees such as executive directors, Chief Executive
Officers of the company. In that case management of the
organization has to deposit certain amount of fund in the
pension account of the employee and with that amount, they
will purchase pension for the employee. PSUs are offering only
general provident Fund to the employee and instead of giving
Contributory provident fund, they purchase the pension for the
employee with the money that employer has deposited in the
pension account of the person.
LICI is offering deferred annuity scheme like Jeevan Suraksha,
Jeevan Dhara and Immediate annuity scheme like Jeevan
Akshay to all section of people independent of the fact whether
they are service holder, business man or carrying out
independent profession. The pension fund investor has the
multiple choices before him such as Pension for life, 5 years
certain payment and for rest of the life so long he survives, 10
years certain payment and for rest of the life so long he
survives, 15 years certain payment and for rest of the life so
long he survives, 20 years certain payment and for rest of the
life so long he survives, family pension, commutation of certain
amount of accumulated balance and return of purchase price of
pension . Depending on taste preference and risk appetite of the
investor, they can choose for any of the option which is
exclusively discretion of the pensioner. In the year 2010,
Government of India has designed new Pension scheme where
anybody between the age of 25 to 60 years can opt for it. When
the age of the individual will be less than 35 years, collected
amount will be invested 50% in share, 30% in corporate debt
and 20% of Government debt. In other extreme, when the age
of the individual is 60, 10% of the collected amount will go for
share market, 10% to corporate debt and 80% will go for
Government security. If anybody prefers to exit NPS before the
age of 60, the person will get 20% of the consolidated balance
in hand and remaining 80% will be used to purchase the annuity
scheme. Anybody who prefers to exit between the age of 60
and 70 years he will be able to get 60% of the accumulated
balance in hand and remaining 40% will be used to purchase
the annuity scheme.

The NPS is superior than other pension schemes because it is

aiming to coverage the all workers of unorganized sector also
and this is the first time pension fund will have equity exposure
to a significant way. The minimum contribution per annum for
subscribing NPS is Rs 6000 which is affordable for poorer
section of the society.

95. What do you mean by the Greeks of the option?

Ans. Delta refers to the amount by which price of an
option changes due to change in one unit of price in the
underlying asset.
Gamma represents the amount by which delta value of
an option changes would move in response to a unit
change in the underlying asset price.
Theta is calculated by considering the time value of
option when all other parameters of pricing remain
constant. It is always negative as the time to maturity
approaches, option becomes less valuable.
Rho measures the change in the value of option with
respect to a unit change in interest rate.
Vega measures the rate of change of value of an option
with respect to the volatility of the underlying asset.
96. What is sweat equity share ?

Ans. The companies (amendment act1999) have

introduced a provision allowing issue of sweat equity
shares by a company to its directors or employees. Sweat
equity share means equity share issued by the company
to employees or directors at a discount or for
consideration other than cash for providing know how or
making available rights in the nature of intellectual
property rights or value additions by whatever name
called. The company may issue sweat equity shares of a
class of shares already issued if the following conditions
are fulfilled

 The issue of sweat equity shares is authorized by a

special resolution passed by the company in its
general meeting
 The resolution specifies the number of shares,
current market price, consideration, if any and
class or classes of directors or employees to whom
such equity shares will be issued.

97. What is Asset Liability Management of Banks?

Ans. ALM is a comprehensive and dynamic framework

for measuring, monitoring and managing the market risk
of a bank. It is the management of structure of balance
sheet (liabilities & asset) in such a way that the net
earnings from interest are maximized within the overall
risk preference (present & future) of the institutions. The
ALM functions extend to liquidity risk management,
management of market risk, trading risk management,
funding, capital planning, profit planning and growth
projection. Residual maturity is time period which a
particular asset or liability will still take to mature that is
become due for payment ( once at a time, say in case of a
term deposit or installments say in case of term loan).

Maturity buckets are different time intervals ( namely 1-

14 days, 15-28 days, 29-90 days, 91-180 days, 181-365
days, 1- 3 years,3- 5years and more than 5 years), in
which the value of a particular asset or liability is placed
depending upon its residual maturity.

When a particular maturity bucket, the amount of

liabilities or assets does not match, such position is called
mismatch position which creates liquidity surplus or
liquidity crunch position and depending on the interest
rate movement , such situation may be risky for banks.

The mismatches for cash flows for 1-14 days and 15-28
days buckets are to be kept to the minimum ( not to
exceed 20% of each of cash outflows from these
buckets).

98. What is reinsurance?

Ans. Reinsurance is a form of an insurance cover for the

insurance where several insurance companies come
together to issue one single risk. One entity ( Re-insurer)
takes all or part of the risk cover under a policy issued by
an insurance company in consideration of a premium
payment. It is similar to under writing where insurance
companies go in for reinsurance so that they could
protect themselves from the potential loss.

99. What is the difference between universal banking

and narrow banking?

Ans. Universal banking allows financial institutions and

banks to undertake all type of activities of banking or
development financing or activity associated with that
subject to compliance of statutory and other requirements
prescribed by RBI, Government and related legal acts.
These activities may include accepting deposits, granting
loans, investing in securities, credit card, project finance,
remittances, payment systems, project counseling,
merchant banking, foreign exchange operations and
insurance.

Narrow bank can be interpreted as the system of banking

under which a bank places its funds in risk free assets
with maturity period matching liability maturity profile
so that there is no problem relating to asset liability
mismatch and the quality of assets remaining intact
without leading to emergence of substandard assets. The
objective is reducing NPA as minimum as possible.

100. What is Financial Stability & Development

Council (FSDC)?

Ans. The government will soon form Financial Stability

& Development Council (FSDC) to ensure better
coordination, integration among the different regulatory
bodies. The purpose is to generate a common consensus
among all regulators in different policy prescription so
that there will be no scope for conflict of interest. But
similarly FSDC will ensure under any circumstances
regulators’ autonomy of operation will be fully protected.
The Government of India does not want to repeat the
same type (what happened between SEBI & IRDA over
ULIP) of dispute among the regulatory bodies as this
may give a wrong signal in the mind of investors. FSDC
will provide the regulators a common platform to settle
the disputed issues. The RBI will chair a subcommittee
of FSDC. The subcommittee will have all regulators and
senior Finance Ministry Officials as members and
Governor of RBI will act as the chair person, a structure
which is very familiar with High Level Coordination
Committee on Financial Markets.

101. What are the different accounting standards

issued by ICAI (Institute of Chartered Accountant of
India)?
Ans.

AS-1 Disclosure of accounting policies

An entity discloses accounting policies in one place
unless disclosure of accounting policies at different
places improves the presentation of financial statements.
Usually it is the first item of explanatory notes. The
requirement for disclosure of accounting policies aims at
improving the understanding of financial statements and
their comparability. Therefore only in rare situations,
disclosure of accounting policies at different places of
financial statements improves the presentation as
compared to the presentation in which accounting
policies are disclosed in one place.
 AS-2 Valuation of inventories
Inventory is most important non monetary current asset
that appears in the balance sheet. Inventories include
finished goods, work in progress, raw materials,
maintenance supplies and the consumable & loose tools.
The following are general principles of valuation of
inventories-
 Finished goods should be valued at the lower cost
and net realizable value
 Work in progress should be valued at the lower of
cost and net realizable value
 Raw materials and other supplies for use & raw
materials and other supplies for the production
should be valued at cost.
 However an item of raw material and other
supplies should be valued at replacement cost if
the price of the material had declined or the
decline indicates the cost of fished product will
exceed net realizable value.

The general principles of measuring inventories will

not be applicable

 Work in progress arising from construction

contracts
 Work in progress arising in the ordinary course
of business of service providers
 Shares, debentures and other financial
instruments held in stock in trade
 Producers’ inventories of livestock,
agricultural & forest produce and mineral oils,
ore and gases to the extent they are measurable
 at net realizable value in accordance with well
established practices in those industries.

AS-3 Cash flow statement

A cash flow statement presents a summary of
investment, dividend and financial decisions with a
focus on movements of cash and cash equivalents during
the reporting period.

Activity title Description

Operating Activities Principal revenue producing
activities of an enterprise.
They generally include the
transactions and other
events that enter into
determination of net
income.
Investing Activities Activities related to capital
expenditure, inter corporate
investments, acquisitions.
Receipt of dividend and
interest are investment
activities. Disposal of non
current assets are included
in investing activities
Financing Activities Financial activities relate to
transactions and activities
that change the capital
structure. They are
transaction with financiers
& payment of dividend and
interest are financing
activities.

AS-4 Contingencies or events after balance sheet date

 Management uses information and evidences available
until the financial statements are approved by board of directors
for making estimates of assets and liabilities at the balance
sheet date. Events that occur from the balance sheet date to the
date of approval of financial statements by board of directors
are known as events occurring after the balance sheet date.

Events occur after balance sheet date are of two types-

a) Adjusting events
b) Non Adjusting events

Events that provide additional evidence of conditions that

existed at the balance sheet date are adjusting events. An
enterprise adjusts recognition and measurement of assets and
liabilities at the balance sheet date based on evidence provided
by adjusting events. They improve the estimation by confirming
conditions existed at the balance sheet date.
Examples of adjusting events are-
 Insolvency of a customer, which improves the estimate of the
amount realizable from the customer
 Judgment pronounced by a court of law on an appeal pending
before it, which improves the estimate of liability arising from a
penalty imposed by the revenue department.
 The amount realized on sale of an item of finished goods which
improves the estimate of the realizable value of the finished
goods at the balance sheet date.

Events that are indicative of conditions that arose after the

balance sheet date are non adjusting events. The following are
examples of non adjusting events which should be disclosed in
board of director’s report :
 Major business combination after the balance sheet date
 Announcing a plan to discontinue an operation
 Major purchase or disposal of assets or acquisition of major
assets by Government
 Commencement of a major restructuring
 Major change in exchange rate
 Major change in tax rate
 Issuance of significant guarantee on behalf of third parties
 Commencement of major litigation arising of events that
occurred after the balance sheet date.

AS-5 Net profit or loss for the period

Trading account shows gross profit earned during the
reporting period and profit and loss account shows net
profit during the reporting period. Trading account is
debited with the opening stock of finished goods, cost of
goods manufactured ,purchase of finished goods and all
other expenses attributable to bringing the finished
goods to the condition and location of sales. The trading
account is credited with the amount of sales and closing
stock. The profit and loss account is credited with gross
profit, other operating income and extraordinary income.
It is debited with operating expenses, finance charges,
tax expenses and losses incurred during the period.

AS-6 Depreciation Accounting

Depreciation is the measure of wearing out ,
consumption or other reduction in the useful life of
tangible fixed asset whether arising from use, affliction
of time or obsolescence through technological and
market changes.
Usually items of property, plant, equipment other than
land have a limited useful life. Therefore the
depreciation amount which is the cost if applicable, the
market value or current value reduced by the expected
residual value at the end of useful life, should be
allocated to reporting periods that are expected to benefit
from use of the asset. The allocation amount is
depreciation and is recognized as an expense in the profit
and loss account. The carrying amount of the asset is the
difference between the cost or if applicable the current
value and the amount of accumulated depreciation. The
carrying amount is termed as net book value.
In order to compute depreciation by straight line
method , it is necessary to identify the current value of
asset, estimated residual value and expected useful life
of the asset. The expected useful life might be shorter
than the expected economic life which in turn might be
shorter than the technical life of the asset. The technical
life of an asset presents the period over which it will be
able to produce intended goods and services. The
economic life represents the period over which asset will
be able to generate positive net cash flow. The useful life
of the asset depends on the strategy of organization.
There is another method which is known as reducing
balance method or accelerated depreciation method.
Under reducing balance method, the amount of
depreciation reduces over the years. Under this method a
fixed percentage is applied on the reducing balance
popularly known as written down value.
AS-7 Construction contract
The unique feature of construction contract is that the
date at which the contract activity is entered into and the
date when the activity is completed usually fall into
different accounting periods. Therefore the primary issue
in accounting for construction of contracts is the
allocation of contract revenue and contract costs to the
accounting period in which construction work is
performed.
Construction contract includes
 Contracts for the rendering of services which are
directly related to the construction of asset , for
example those for the services of project
managers and architects
 Contracts for destruction or restoration of assets
and the restoration of environment following the
demolition of assets.
 It may be fixed cost contract or cost plus contract
AS-8 Accounting of R &D
No asset is recognized from expenditure during the
research phase. An asset may be recognized from
developmental expenditure provided it can demonstrate
its ability and intention to complete developmental
project , its ability and intention to use the new product
or new process and the economic viability of new
product or new process. R &D is intangible asset and it
is shown in the asset side of balance sheetand capitalized
in a subsequent period.
AS-9 Revenue recognition
Revenue is the income that arises in the course of
ordinary activity of an enterprise. It is referred to by a
variety of different names including sales, fees, interest,
dividend and royalties. The primary issue of revenue
recognition is the timing of recognizing revenue in the
profit and loss account. Revenue can be defined as the
gross inflow of economic benefits during the period
arising in the course of ordinary activities of an
enterprise other than contribution from equity
participation, which increases the equity. An entity’s
revenue earning activities include selling of goods,
rendering of services, allowing others to use entity’s
resources yielding interest, royalties and dividend.
Inflow of economic benefit should not be recognized as
revenue if it involves corresponding recognition of
liabilities. An entity recognizes the liability when it
receives economic benefit on behalf of others or when it
receives economic benefit before the earning process is
complete. When an entity realizes sales tax from the
customer , it recognizes liability because it collects sales
tax on behalf of government. When a commission agent
sells goods, it recognizes a liability for the amount
payable to principal. Therefore in agency relationship,
the revenue is the amount of commission not the gross
amount received by the agent.
As a general principle, an enterprise recognizes revenue
when it receives cash, receivables or other consideration
in its own account.
Revenue is generally realized or realizable when all the
following criteria are fulfilled-
 There is a persuasive evidence that an
arrangement exists
 Delivery has occurred or services have been
rendered
 The seller’s price to the buyer is fixed and
determinable
 Collectability is reasonably ensured.
AS-10 Accounting for fixed assets
Fixed assets are assets held with an intention of being
used for the purpose of producing or providing gods and
services and is not held for sale in normal course of
business. Property, plant and equipments are example of
fixed assets. Intangible assets are also included in fixed
asset. Fixed assets are in nature of non current assets.

AS-11 The effect of change in foreign exchange rate

If the functional currency of a foreign operation is
different from the functional currency of the reporting
enterprise, the reporting enterprise translates the result
and financial position of that foreign operation into the
reporting currency using the following procedure
 The assets and liabilities both in monetary and non
monetary term should be translated using the
closing rate
 Income and expense items should be translated
using exchange rates at the dates of transaction
 The resulting exchange differences should be
recognized as a separate component of
equity( foreign currency translation reserve)

AS-12 Accounting for Government grant

Government grants or other types of Government
assistance are usually provided to enterprises to
encourage certain type of activities. No Government
grant will be recognized until there is a reasonable
assurance
 The enterprise will comply with the conditions
attached to them
 The grants will be received

The Government grant related to revenue should be

recognized as income over the periods necessary to
match them with the related costs which they are
intended to compensate on a systematic basis. They
should not be credited directly to shareholders’ interest.
Government grant other than those related to assets
should be recognized in the profit and loss account as
other income. If the grant is received for towards
compensation for expenses and losses incurred or
towards immediate financial support with no future
related cost, it should be recognized as the income of the
period in which it becomes receivable.

AS-13 Accounting for investment

Investment property is the property (land or building)
held to earn rentals or for capital appreciation or both
rather than for
 Use in the production or supply of goods and
services or for administrative purposes
 Sale in ordinary course of business
An enterprise initially recognizes an investment
property at cost. Transaction costs are included in
initial measurement. It may measure investment
properties using either cost model or the fair value
model. The fair value should reflect market
conditions at the balance sheet date.
If an entity uses the fair value model, a gain or
loss from change in the fair value is recognized in
profit or loss for the period in which it arises.
AS-14 Accounting for amalgamation
The term reconstruction is used where only one
company is involved and the right of shareholders and
/or creditors is varied. Amalgamation is used where two
or more companies join to form a new company or two
or more companies merge into existing company.
Accounting for amalgamation use the terms transferor
and the transferee to denote acquire and acquirer
respectively.
An amalgamation should be considered to be an
amalgamation in the nature of merger when all the
following conditions are satisfied
 All the assets and liabilities of the combining
companies become the assets and liabilities of the
combined company
  Shareholders holding not less than 90% of the face
value of equity shares of the combined companies
become the shareholder of the combined company
 The purchase consideration is wholly discharged
by the issue of equity shares except that cash may
be paid in respect of fractional shares
 The business of combining companies is intended
to be carried on by the combined company
o No adjustment is intended to be made to
the book value of net assets of combing
companies while incorporating the same in
the financial statement of the combined
company, except to ensure uniformity of
accounting policy.
AS- 15 Accounting for employee benefit
Share based payment is one of the component of the
total payment to the employee. An enterprise cannot
determine the fair value of services received.
Accordingly, an enterprise determines the value of
service indirectly by determining the fair value of shares
or options to acquire shares. Fair value of share is
determined at the measurement date based on the market
price if available, taking into consideration the terms and
conditions upon which those equity instruments were
granted.
For transactions with the employee, the measurement
date is grant date. Grant date is the date at which the
enterprise and employee agree to a share based payment
agreement. On the grant date, the enterprise confers on
the employee the right to equity instruments or other
assets provided the specified vesting conditions if they
are met.
Vest means to become an entitlement. On the vesting
date, the equity instrument vest on employee upon
satisfaction of any specified vesting conditions. The
period within which all vesting conditions are to be
satisfied is called vesting period. Vesting conditions
include service conditions which require the employee to
complete a specified period of service & performance
conditions which requires satisfied performance targets
to be met.
An enterprise recognizes payment under a equity settled
payment plan as an expense for the periods in which
services are rendered. An enterprise estimates the
number of shares or options to be issued ultimately at the
end of vesting period and allocates total expense over
the vesting period.
AS-16 Accounting for borrowing cost
Borrowing cost may include
 Interest & commitment charges on bank
borrowing and other short term& long term
borrowings
 Amortization of discounts or premium related to
borrowings
 Amortization of ancillary costs ( such as stamp
duty) incurred in connection with the arrangement
of borrowing
 Financial charges in respect of assets acquired
under finance leases or under any similar
arrangements
 Exchange differences arising from foreign
currency borrowing to the extent that they are
regarded as an adjustment to interest cost.

Borrowing cost that are directly attributable to the

acquisition, construction or production of a
qualifying asset is capitalized as part of the cost of
asset. Borrowing cost that is not eligible for
 capitalization is recognized as an expense in the
period in which it is incurred.

AS-17 Accounting for segmental reporting

An enterprise should disclose the following for each
primary reportable segment :
 Segment revenue , classified into external sales
and internal sales
 Segment result
 Total carrying amount of segment assets
 Total amount of segment liabilities
 Total capital expenditure incurred during the
period
 Depreciation & amortization in respect of segment
assets
 Total amount of significant non cash expenses
other than depreciation and amortization

If the primary format is business segments, the

enterprise should also give the following information

 Segment revenue from external customers by

geographical area based on the geographical
location of its customers for each
geographical segment whose revenue from
sales to external customers is 10% or more of
enterprise revenue
 The total carrying amount of segment assets
by geographical location of assets for each
geographical segment whose segment assets
are 10% or more of the total assets of all
geographical segments.
 Capital expenditure by geographical location
of assets for each geographical segment
 whose segment assets are 10% or more of the
total assets of all geographical segments.

AS-18 Related party disclosures

A party is related to an entity if
 Directly or indirectly , through one or more
intermediaries (subsidiaries) , the party controls or
is controlled by or is under control with the
reporting enterprise or has an interest in the
reporting enterprise that gives it a significant
influence over the reporting enterprise or has joint
control over the reporting enterprise
 The party is associate of the reporting enterprise
 The party is in joint venture in which the reporting
enterprise is a venture
 The party is a key management personnel of the
reporting enterprise or its parents
 The party is an enterprise that is controlled or
jointly controlled or significantly influenced by or
for which significant voting power in such
enterprises resides with , directly or indirectly
 The party is a post employment benefit plan for
the benefits of the employee of the reporting
enterprise that is related party for the reporting
enterprise
Disclosure of related party transaction is needed.
In the absence of disclosure relating to transaction
of related parties ,users incorrectly assume that
transactions reflected in financial statements are
consummated on an arm length’s basis between
independent parties.

AS-19 leases
  In case of financial lease, the lessee includes direct
costs incurred by it in the cost of asset recognized
in its financial statements
 In case of operating lease, the lessee recognizes
direct costs as an expense in its financial
statements for the period in which they are
incurred.
 In case of financial lease, the lessor other than
manufacturer or dealer lessor includes direct cost
incurred by it in receivables and allocate it against
finance income over the lease term. As-19 allows
an option to the lessor to recognize those costs
immediately as expense. Manufacturer or dealer
lessor recognizes direct cost incurred by it
immediately as expense.
 In case of operating lease, the lessor includes
direct cost incurred by it in the carrying amount of
the leased asset recognized in financial statements.
AS- 20 EPS
Earning per share stipulates principles for the
determination and presentation of per share earnings
which is calculated by dividing the net profit or loss for
the period attributable to equity shareholders by the
weighted average number of equity shares outstanding
during the period. Weighted average number of
outstanding shares should be adjusted for the effect of all
dilutive potential equity shares. A potential equity share
is a financial instrument or other contract that entitles or
may entitle its holders to equity shares. Example for
potential equity share is convertible debentures, share
options. These are considered dilutive because their
conversion to equity shares would decrease net profit per
share.
 AS-21 Consolidated financial statement
Preparation and presentation of consolidated financial
statement incorporates
 Goodwill or capital reserve is determined based on
investor’s share in the book value of equity
 Assets and liabilities of the subsidiaries are
included inn the consolidated balance sheet at
their book values
 Minority interest is calculated based on the book
value of net asset of subsidiary.

AS-22 Accounting for taxes on income

Tax expense for a period is the total of current tax and
deferred tax. Current tax is the amount of income tax
determined to be payable (recoverable) in
respect of taxable income (tax loss) for a period. Taxable
income or tax loss is the amount of the income (loss) for
a period, determined in accordance with the tax laws
based upon which income tax payable (recoverable) is
determined. Deferred tax liability arises because of
taxable temporary differences. Deferred tax is the
difference between closing net deferred tax liability and
the opening net deferred tax liability. Income tax allows
deduction of past losses and unabsorbed depreciation in
computing taxable income. Therefore deferred tax asset
arises from carried forward losses and unabsorbed
depreciation. An enterprise recognizes deferred tax asset
only if it is probable that it will earn enough profit in
future to take the advantage of the carried forward loss
and unabsorbed depreciation.
Deferred tax liability is a measure of undiscounted
amount. Therefore liability presented in the balance
sheet is higher than actual liability. Deferred tax liability
is presented separately in the balance sheet. Indian
GAAP requires that the deferred tax liability be
presented after the head of unsecured loan. Deferred tax
liability is an obligation of indefinite timing. For a
growing company which continuously growing invests
significant amount in depreciable assets, the liability
may reverse at all because tax law allows higher
depreciation in initial years. Therefore deferred tax
liability increases every subsequent year.

AS-23 Accounting for investment in associated

companies
Investment in associates is termed as trade investment.
Trade investments are classified as long term
investments and accordingly they are carried at cost
subject to provision or diminution in value that is not
temporary. A limited liability company should annex to
its balance sheet a statement of investments classifying
trade investments and other investments separately. The
statement should show particulars of investments
including the names of body corporate and the nature,
extent of investment.
AS-24 Discontinuing operation
A discontinuing operation is a component of an
enterprise that the enterprise, in pursuant of a single
plan, is disposing of substantially in its entirely or in
piecemeal or through abandonment. The component
represents a single major line of business or
geographical area of operation and can be distinguished
operationally and for financial reporting purposes.
Usually an enterprise disposes of a component by
demerger or spinning of ownership of the component to
enterprise’s shareholders or by selling assets and
liabilities individually or through abandonment.
An enterprise should disclose a single amount on the
face of the income statement comprising the total of
  The post tax profit or loss of discontinued
operations
 The post tax gain or loss recognized on the
measurement to fair value less cost to sell
 A description of discontinuing operation
 The business or geographical segment in which it
is operated
 The date or period in which discontinuance is
expected to be complete
 The carrying amount as of the balance sheet’s date
of the total assets and total liabilities to be
disposed of

AS-25 Interim financial reporting

A statute governing an enterprise or a regulator may require an

enterprise to prepare and present certain information at an
interim date
which may be different in form and/or content as required by
this Statement. In such a case, the recognition and measurement
principles as laid down in this Statement are applied in respect
of such information, unless otherwise specified in the statute or
by the regulator.
Interim period is a financial reporting period shorter than a full
financial year. Interim financial report means a financial report
containing either a complete set of financial statements or a set
of condensed financial statements for an interim period.

AS-26 Intangible assets

An intangible asset is an identifiable non monetary asset
without physical substance. An asset is identifiable if it
is separable from goodwill or it arises from contractual
or other legal rights.
An intangible asset received free of charge by way of
Government grant should be recorded as nominal value.
Unless there is an active market for intangible asset
acquired in an amalgamation in nature of purchase , the
cost initially recognized for the intangible asset should
be restricted an mount hat does not create or increase
any capital reserve arising at the date of amalgamation.
As -26 requires that after initial recognition, an
intangible asset should be carried at its cost less any
accumulated amortization and any accumulated
impairment losses.

AS-27 Financial reporting of interest in

Joint ventures
A firm is designated as associate only if the investor has
the power to significantly influence its operating &
financial decisions. The distinguishing feature in joint
venture is that it is a contractual agreement usually in
writing, in which two or more companies agree to work
together and accept joint control over some economic
activities. Activities that have no contractual agreement
to establish joint control is not joint venture. The
contractual arrangement deals with such matters as
 The activity, duration and reporting obligation of
the joint venture
 The appointment of board of directors of the joint
venture and the voting right of the venturers
 Capital contribution by venturers
 The sharing by the venturers of the output,
income, expense or results of joint venture.

AS- 28 Impairment of assets

An asset is impaired when its carrying amount exceeds
recoverable amounts. An impairment loss is the amount
by which the carrying amount of an asset exceeds its
recoverable amounts. Recoverable amount is the higher
of an asset’s net selling price ( fair value less cost to sell)
and its value in use. Value is use of an asset is the
present value of estimated future cash flows expected to
arise from the continuing use of the asset in its present
condition and from its disposal at the end of its useful
life.

AS-29 Provision, contingent liability & assset

A contingent liability is
 A possible obligation that arises from past events
and whose existence will be confirmed only by the
occurrence or non occurrence of one or more
uncertain future events not wholly within the
control of enterprise or
 A present obligation that arises from past event
but is not recognized because a) it is not probable
that an outflow of resources embodying economic
benefits will be required to settle the organization
b) the amount of obligation cannot be measured
with sufficient reliability

The first type of contingent liability is more common.

It is only in rare situations that the amount of present
obligation cannot be measured with sufficient
reliability.

Example of first type contingent liabilities are claims

against the enterprise not acknowledged as debts,
uncalled liability on shares partly paid, statutory
liability under dispute and guarantees given in respect
of a third party. Contingent liabilities are not
recognized in the balance sheet. They are disclosed
by way of of notes below the balance sheet.
 For example – the revenue department of the
Government has imposed a penalty on the firm for
violation of a provision of income tax law. The firm
has preferred an appeal. If based on evidence and
legal opinion , the management estimates that it is
probable that he judgement of appellate authority will
be in its favour and it is less likely that the firm will
have to pay penalty, it will disclose the obligation as
a contingent liability instead of recognizing provision
for the same.

Just in contrary, for revenue department it will be a

contingent asset. If it wins the case, they will receive
an inflow from the firm as penalty.

AS-30 Financial instruments measurement &

recognition

A financial instrument is any contract that gives

rise to a financial asset of one entity and a financial
liability or equity instrument for another entity. A
derivative is a financial instrument or other
contract within the scope of this Standard with all
three of the following characteristics:
a) Its value changes in response to the change in a
specified interest rate, financial Instrument price,
commodity price, foreign exchange rate, index of
prices or rates, credit rating or credit index, or
other variable, provided in the case of a Non-
financial variable that the variable is not specific to
a party to the contract(sometimes called the
‘underlying’);
(b) It requires no initial net investment or an initial net
investment that is smaller than would be required for
other types of contracts that would be expected to have a
similar response to changes in market factors; and (c) it is
settled at a future date.
The amortized cost of a financial asset or financial
liability is the amount at which the financial asset or
financial liability is measured at initial recognition minus
principal repayments, plus or minus the cumulative
amortization using the effective interest method of any
difference between that initial amount and the maturity
amount, and minus any reduction (directly or through the
use of an allowance account) for impairment or un
collectability.
The effective interest method is a method of
calculating the amortized cost of a financial asset or a
financial liability (or group of financial assets or financial
liabilities) and of allocating the interest income or
interest expense over the relevant period.

AS- 31 Financial instruments presentation

A financial instrument is any contract that gives rise to a

financial asset of one entity and a financial liability or
equity instrument of another entity.
A financial asset is any asset that is:(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right:
(i) to receive cash or another financial asset from another
entity; or
(ii) to exchange financial assets or financial liabilities
with another entity under conditions that are potentially
favourable to the entity; or
(d) a contract that will or may be settled in the entity’s
own equity instruments and is
:(i) a non-derivative for which the entity is or may be
obliged to receive a variable number of the entity’s own
equity instruments; or
(ii) a derivative that will or may be settled other than by
the exchange of a fixed amount of cash or another
financial asset for a fixed number of the entity’s own
equity instruments. For this purpose the entity’s own
equity instruments do not include instruments that are
themselves contracts forthe future receipt or delivery of
the entity’s own equity instruments.
A financial liability is any liability that is:
(a) a contractual obligation:
(i) to deliver cash or another financial asset to
another entity; or
(ii) to exchange financial assets or financial
liabilities with another entity under conditions that
are potentially unfavourable to the entity; or
(b) a contract that will or may be settled in the
entity’s own equity instruments and is
(i) a non-derivative for which the entity is or may
be obliged to deliver a variable number of the
entity’s own equity instruments; or
(ii) a derivative that will or may be settled other
than by the exchange of a fixed amount of cash or
another financial asset for a fixed number of the
entity’s own equity instruments. For this purpose
the entity’s own equity instruments do not include
instruments that are themselves contracts for
the future receipt or delivery of the entity’s own
equity instruments.
An equity instrument is any contract that evidences
a residual interest in the assets of an entity after
deducting all of its liabilities.
Fair value is the amount for which an asset could
be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length
transaction.

AS- 32 Financial instruments disclosure

Transaction in financial instruments may result in an
enterprise assuming or transferring to another party
various type of risks. Financial risks are classified as
followed
 Market risk
Market risk is itself incorporates currency risks,
fair value interest risk, price risk.
 Credit risk
 Liquidity risk
 Cash flow interest risk

AS 32 requires adequate disclosure of risks

associated with each class of financial instruments. It
also requires among other information

 Risk management policies & hedging activities

 Terms, conditions and accounting policies for
each class of financial instrument
 Fair value of each class of financial asset and
financial liabilities