Accounting Standards

Lecture Outline -  

Accounting Standards ( Objective & Role) Accounting Standards in India

Procedure for issue Of Accounting Standards in India

AS-2 AS-2 AS-6 AS-6 Valuation Of Inventories- Disclosure Valuation Of Inventories ( notes ) Depreciation Accounting - Disclosure Depreciation Accounting ( notes )

   

Accounting Standards
( Objective & Role )


The Accounting Standards provide a framework and standard accounting policies so that the financial statements of diff enterprises become comparable Accounting standards are the rules in relation to recognition, measurement and disclosure of financial information in preparation of financial statements The basic objective of accounting standards is to standardize the accounting principles & policies with a view to bring a common approach in preparation of financial statements

Accounting Standards in India



Section 211 of Companies Act, 1956 requires that the Balance Sheet and Profit & Loss A/c of a Company shall comply with the Accounting Standards. These Accounting Standards are the standards as issued by the ICAI from time to time. In 1999, the Central Govt establish National Advisory Committee on Accounting Standards ( NACAS ). NACAS is required to advise the Central Govt on the formulation of Accounting Standards for adoption by companies under the Act. So, the position in India is that ICAI formulates Accounting Standards in line with the International Accounting Standards, & in consultation with NACAS, the Central Govt would prescribe these standards as applicable under the Companies Act, 1956.

Procedure for issue of Accounting Standards in India- 

 

The ASB to determine the broad areas in which Accounting standards needs to be formulated Opinion of study groups are incorporated ( members of ICAI & Others) Also holds dialogue with the representative of Govt, Public sector, Industry and other organizations. On the basis of recommendations of study groups ASB prepares & issue exposure draft for comments fr public at large & members of ICAI

Cont.


On the basis of comments recd th draft is finalized & submitted to the central council of ICAI Council considers th final draft of th proposed standard & modify it, if necessary in consultation with ASB Then th Accounting standard may be issued under the authority of Council of ICAI

AS-2 Valuation Of Inventories



Disclosure :The AS-2 requires that financial statements should disclose the following :The accounting policies adopted in measuring inventories, including the cost formula used, and The total carrying amount of inventories and its appropriate classification.

1)

2)

AS-2 Valuation Of Inventories--(notes)



Machinery spares held for use in fixed assets are not included in inventory In case of high production, the overheads should be allocated on the basis of actual production Storage cost, interest and borrowing costs are not included in valuation of inventories Warranty expenses to be incurred after completion of sale is a part of cost of inventory.

Cont.
 

 

Royalty based on production is part of cost of inventory but royalty based on sale is not. By-products are at net realizable value and may be shown separately or deducted from the cost of main products Excise duty, paid or payable, in respect of inventory of finished goods is a part of cost Inventories be valued at cost net CENVAT credit

Cont.


 

For buyer, the goods in transit are included in inventory, only if the risk and rewards of ownership have passed to him. If not, it is the inventory of the seller Materials given on loan is not an inventory. Rather it should be shown as Loans & Advances In case of joint products, the conversion costs are allocated between the products on a rational & consistent basis e g., sales value at split off stage Net realizable value should be estimated at each balance sheet date

AS-6 Depreciation Accounting



Disclosure :The following information should be disclosed in the financial statements: i) The historical cost or the revalued amount of each of depreciable assets ii) total depreciation for the period iii) the related accumulated depreciation iv) depreciation methods used v) depreciation rates or the useful lives of the assets.

AS-6 Depreciation Accounting

(notes)


Depreciation should be calculated & provided for in the Profit & Loss a/c, even if the asset remained idle during the year If the asset has been used only for a part of the year, depreciation should be calculated only for that period. If the assets are used for double/multiple shifts, the depreciation be calculated for the actual use of the asset

Cont.


Land & Building are separate assets, AS-6 does not apply to land which is a non-depreciable asset, unless the land has a limited useful life for the enterprise. Change in value of the land does not affect the amount of depreciation on building built on the land AS-6 does not gives the rates of depreciation. The companies in India are following the rates as given in the Schedule XIV as the minimum rates of depreciation. Higher rates may also be used.

Cont.


Depreciation should be charged even if the asset is kept in the best workable condition and/or its market value has gone up, because depreciation is charged as allocation of cost. Usually same method of depreciation is used for same group or class of asset. For diff classes, diff rates and methods can be used. Items costing below Rs. 5,000 each are generally written off in the year of purchase

Cont.


AS-6 is not applicable to land, live stock, mineral oils, plantation, forests, intangible assets etc Cost of leasehold land should be amortized over the lease period Recalculation of depreciation retrospectively should be made and adopted only in case of change of method of depreciation. In case there is a revaluation of asset or change in estimated useful life, depreciation amt should changed

Cont.


In case, additional depreciation has been charged to accommodate the change of method of depreciation with retrospective effect, equivalent amount may be transferred from the general reserve to current year Profit & Loss A/c, so that the current year profit remains unaffected.