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Accounting standards:
Introduction:Accounting Standards (ASs) are written policy documents issued by expert accounting body or
by government or other regulatory body covering the aspects of recognition, measurement,
presentation and disclosure of accounting transactions in the financial statements
...
Accounting Standards reduce the accounting alternatives in
the preparation of financial statements within the bounds of rationality, thereby ensuring
comparability of financial statements of different enterprises
...
The ICAI has taken significant initiatives in the setting and issuing procedure of
Accounting Standards to ensure that the standard-setting process is fully consultative and
transparent
...

The standard-setting procedure of Accounting Standards Board (ASB) can be briefly outlined as
follows:








Identification of broad areas by ASB for formulation of AS
...
The draft normally includes objective and scope of
the standard, definitions of the terms used in the standard, recognition and measurement
principles wherever applicable and presentation and disclosure requirements
...

Circulation of draft of accounting standard (after revision by ASB) to the Council members of
the ICAI and specified outside bodies such as Department of Company Affairs (DCA), Securities
and Exchange Board of India (SEBI), Comptroller and Auditor General of India (C&AG), Central
Board of Direct Taxes (CBDT), Standing Conference of Public Enterprises (SCOPE), etc
...

Meeting with the representatives of the specified outside bodies to ascertain their views on the
draft of the proposed accounting standard
...

Consideration of comments received on the exposure draft and finalization of the draft
accounting standard by the ASB for submission to the Council of the ICAI for its consideration
and approval for issuance
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Benefits and Limitations:
Accounting standards seek to describe the accounting principles, the valuation techniques and
the methods of applying the accounting principles in the preparation and presentation of
financial statements so that they may give a true and fair view
...
Standardisation of alternative accounting treatments: Standards reduce to a reasonable
extent or eliminate altogether confusing variations in the accounting treatments used to
prepare financial statements
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Requirements for additional disclosures: There are certain areas where important information
are not statutorily required to be disclosed
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3
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However, it
should be noted in this respect that differences in the institutions, traditions and legal systems
from one country to another give rise to differences in accounting standards adopted in
different countries
...
Difficulties in making choice between different treatments: Alternative solutions to certain
accounting problems may each have arguments to recommend them
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2
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3
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The standards are
required to be framed within the ambit of prevailing statutes
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International Financial Reporting Standards (IFRSs) are considered a "principles-based" set of
standards
...
Every
major nation is moving toward adopting them to some extent
...
So over the next few years, thousands of companies will adopt the international
standards
...
The increased use of IFRS is not limited to publiccompany listing requirements or statutory reporting
...


Adoption of IFRS in India
Increasingly, Indian accountants and businessmen feel the need for convergence with IFRS
...
Some Indian companies are
already listed on overseas stock exchanges and many more will list in the future
...

Also, the recent stream of overseas acquisitions by Indian companies makes a compelling case
for adoption of high quality standards to convince foreign enterprises about the financial
standing as also the disclosure and governance standards of Indian acquirers
...

In India, the Institute of Chartered Accountants of India (ICAI) is on the way towards
convergence of its Standards with Global Standards
...
Recognizing the
growing need of full convergence of Indian Accounting Standards with IFRSs, ICAI constituted a
Task Force to examine various issues involved
...
While formulating the Accounting Standards, ICAI
recognizes the legal and other conditions prevailing in India and makes deviations from the
corresponding IFRSs
...
However, at
present, the Accounting Standard Board in consultation with the Core Group, constituted by

the Ministry of Corporate Affairs (MCA) for convergence of Indian Accounting Standards with
International Financial Reporting Standards (IFRS), has decided that there will be two separate
sets of Accounting Standards viz
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These are the standards which are being converged by eliminating the
differences of the Indian Accounting Standards vis-à-vis IFRS
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AS-1: (Disclosure of accounting policies):
The objectives of issuing this standard are to promote a better understanding of the financial
statement by proper disclosure of the significant accounting policies
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Accounting policies refer to specific accounting principles and the methods of
applying those principles in the preparation and presentation of financial statements
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The choice of accounting policies
depends on the judgment of the management
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First, accounting standards cannot and do not cover all possible areas of accounting
and enterprises have the freedom of adopting any reasonable accounting policy in areas not
covered by a standard
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The accounting standards therefore permit more than one policy even in areas covered by it
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The qualitative characteristic of comparability of financial statements
therefore suffers due to diversity of accounting policies
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For these reasons, accounting standard 1 requires
enterprises to disclose accounting policies actually adopted by them in preparation of their
financial statements
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The purpose of Accounting Standard 1, Disclosure of Accounting Policies, is to promote better
understanding of financial statements by requiring disclosure of significant accounting policies
in orderly manner
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The standard also requires disclosure of changes in accounting policies such
that the users can compare financial statements of same enterprise for different accounting
periods
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1
...
Methods of depreciation
3
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Treatment of goodwill
5
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Treatment of expenditure during construction
7
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Valuation of fixed assets
9
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Valuations of investments
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As
per definition of AS-2, inventories mean the assets which are:


Held for sale in the ordinary course of business



In the process of production for sale



Held in form of materials or supplies to be consumed in the process of production
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AS-2 states that valuation of inventory
should be based on the lower of cost or net realizable value
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Net realizable value means the estimated price that can be realized in the ordinary course of
business, as reduced by the cost of completion and the cost of sale
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Generally, inventories are to be valued as per the FIFO, LIFO and Weighted average cost, but for
the items that are not ordinarily interchangeable and for goods and services produced for
specific projects, one should use the specific identification method
...
g
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Likewise, the cost of opening inventory is a part
of costs incurred in the previous accounting period that is brought forward to current
accounting period
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Such costs must be costs
of acquisition and costs that change either (i) the location of the inventory, e
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freight incurred
to carry the materials to factory or (ii) conditions of the inventory, e
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costs incurred to convert
the materials into finished stock
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g
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The valuation of inventory is crucial because of its direct impact in measuring profit/loss for an
accounting period
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The principle of prudence demands that no profit should be
anticipated while all foreseeable losses should be recognized
...

This Statement deals with the determination of such value, including the ascertainment of cost
of inventories and any write-down thereof to net realizable value
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held for sale in the ordinary course of business;
B
...
in the form of materials or supplies to be consumed in the production process or in the
rendering of services
...
Inventories
encompass goods purchased and held for resale, for example, merchandise purchased by a
retailer and held for resale, computer software held for resale, or land and other property held
for resale
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Inventories do not include machinery spares
which can be used only in connection with an item of fixed asset and whose use is expected to
be irregular; such machinery spares are accounted for in accordance with Accounting Standard
(AS) 10, Accounting for Fixed Assets4
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AS-6 defines depreciation as a
measure of the wearing out, consumption or other loss of value of a depreciable asset, arising
from use, through technology and market changes
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Once a method is followed, the same
should be used consistently
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Loss of value of depreciable assets
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It is a fall or decrease in the book value of depreciable fixed assets
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It is related to tangible fixed assets
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The fall in the book value of asset is due to constant use of such asset in business activities
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The fall of value is gradual, continuous and permanent
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Depreciation has no relationship with market value of assets
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Depreciation is a charge against the profit
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Depreciation cost is not an exact amount, it is to be estimated
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True results of operations
2
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Proper cost of the product
4
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Legal requirement
6
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Impact on tax liability
Where an asset, e
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machinery, generates revenue over more than one accounting period, the
matching principle demands that the cost of the asset be recognized over same number of
accounting periods
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Depreciation for an accounting period is the cost of assets
allocated to that accounting period
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This can happen for example, when the
asset has a terminal value or when the asset is revalued
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The depreciable value is historical cost ± Change in historical cost due to revaluation or
otherwise – terminal value expected on disposal of the asset
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e
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The cash thus retained in the business is
intended to be used for replacement of the depreciable asset
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For the purpose,
Schedule XIV of the Companies Act prescribes certain rates of depreciation
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Accounting standard 6, sets the broad principles for computation of depreciation without
prescribing any specific rate or method of depreciation
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In case of companies, the depreciation charged should be higher of (i) depreciation
under Companies Act (ii) depreciation as per AS 6
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4
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Depreciation
Depreciation is a measure of the wearing out, consumption or other loss of value of a
depreciable asset arising from use, effluxion of time or obsolescence through technology and
market changes
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Depreciation
includes amortization of assets whose useful life is predetermined
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Are expected to be used during more than one accounting period
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II
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Depreciation is not charged on land as the useful of land cannot be
determined, it is endless
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Are held by an enterprise for use in the production or supply of goods and services, for rental to
others, or for administrative purposes and not for the purpose of sale in the ordinary course of
business
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Depreciable Amount
Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for
historical cost in the financial statements, less the estimated residual value
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Assessment of depreciation and the amount to be charged in respect thereof in an accounting
period are usually based on the following three factors:
(i)
(ii)

Historical cost or other amount substituted for the historical cost of the depreciable asset when the
asset has been revalued;
Expected useful life of the depreciable asset; and (iii) Estimated residual value of the depreciable asset
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If it is considered that the original
estimate of useful life of an asset requires any revision, the unamortized depreciable amount of
the asset is charged to revenue over the revised remaining useful life
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Those
most commonly employed in industrial and commercial enterprises are the straight-line
method and the reducing balance method
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In respect
of depreciable assets which do not have material value, depreciation is often allocated fully in
the accounting period in which they are acquired, e
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books
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Straight Line Depreciation =

Cost of Asset-Scrap Value
Useful
Life

Depreciation Rate =

StraightLineDepreciation ´100
Cost of

This method of charging depreciation is recommended mostly for power generating units or for
the assets where danger of obsolesce is low
...

This method is highly recommended
mainly for

 manufacturing units though it is recommended
for most of the enterprises
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This statement is concerned with the recognition of revenue arising
in the course of ordinary activities of the enterprise, from;
Sales of goods;
Rendering of services;
Use of enterprise resources yielding interest, royalties and dividends;
As per the AS, revenue from sale or service transaction should be recognized when the
following conditions are satisfied, provided that at the time of execution, it is not unreasonable
to expect the ultimate collection
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In the case of sale of goods, the following conditions should be satisfied


The goods are transferred to the buyer for price, wherein all the significant risks and rewards of
ownership have been transferred to the buyer
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

No significant uncertainty exists regarding the amount of consideration that will be derived
from the sale of goods
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In the services the execution is measured either under the completed service contract method
or under the proportionate completion method, whichever relates revenue to the work carried
out
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Revenue arising from a use by others, of enterprise resources, yielding interest, royalties and
dividends, should only be recognized when no significant uncertainty as to its measurability or
collectability exists
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At certain stages in specific industries, such as when agricultural crops have been harvested or
mineral ores have been extracted, performance may be substantially complete prior to the
execution of the transaction generating revenue
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Such amounts,
while not revenue as defined in this Statement, are sometimes recognized in the statement of
profit and loss and appropriately described
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Sale of Goods
A key criterion for determining when to recognize revenue from a transaction involving the sale
of goods is that the seller has transferred the property in the goods to the buyer for a
consideration
...
However, there may be
situations where transfer of property in goods does not coincide with the transfer of significant
risks and rewards of ownership
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At certain stages in specific
industries, such as when agricultural crops have been harvested or mineral ores have been
extracted, performance may be substantially complete prior to the execution of the transaction
generating revenue
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Such amounts, while not revenue as
defined in this Statement, are sometimes recognized in the statement of profit and loss and
appropriately described
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Rendering of Services
Revenue from service transactions is usually recognized as the service is performed, either by
the proportionate completion method or by the completed service contract method
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Here performance consists of the execution of more than one act
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Completed service contract method is a method of accounting which recognizes revenue in the
statement of profit and loss only when the rendering of services under a contract is completed
or substantially completed
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Alternatively, services are performed in more than a single act, and the services yet to be
performed are so significant in relation to the transaction taken as a whole that performance
cannot be deemed to have been completed until the execution of those acts
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Interest, Royalties and Dividends
The use by others of such enterprise resources gives rise to:
A
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Revenue is
recognized on a time proportion basis taking into account the amount outstanding and the rate
applicable
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On

March 31st when books will be closed, though interest has not fallen due but still interest for
the period January, February and March will be recognized on time basis
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Royalties: charges for the use of such assets as know-how, patents, trademarks and copyrights
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If agreement is signed for royalty payable on the basis of the number of copies of
the book published, it will be recognized on that basis only
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Dividends: rewards from the holding of investments in shares
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Unless company declare dividend on the
shares, it is not certain
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AS-10 (Accounting of Fixed Assets):
The objective of issuing these standards is to provide guidelines for the valuation and disclosure
of certain information relating to fixed assets owned by an enterprise, in its books of accounts
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Land, building and machinery are good examples of fixed assets
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Fixed assets should be shown in the balance sheet either at their historical cost or at their
revalued figures
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If revaluation is planned, an entire class of assets should be revalued or the selection of assets
for revaluation should be made in a systematic basis and the basis should be disclosed
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In case of revaluation, the increase in the value should be credited to the revaluation reserve
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4
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If there Is any amount
standing to the credit of the revaluation reserve account relating to the assets disposed
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In case of joint ownership of fixed assets, the enterprise share in such assets and the proportion
of original cost and accumulated depreciation, are to be disclosed in the balance sheet of the
enterprise
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In the case of goodwill, only the amount of purchased goodwill is to be shown
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7
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8
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AS-26 (Accounting for Intangible Assets):
As-26 has been created to prescribe the accounting treatment of intangible assets that are not
dealt with specifically, in some other accounting standards
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AS-26 has made this
mandatory
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Some of the
important terms used in these accounting standards
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Measurement of intangible assets:
1
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2
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Subsequent expenditures can
be added to the cost only if it is probable that such expenditures will generate future benefits
that are in excess of the original estimates
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An intangible asset is to be amortized over its useful life in the pattern in which the assets
economic benefits are consumed or on a straight line method
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The residual value of an intangible asset is to be taken as zero, unless a commitment to
purchase the asset or an active market exists
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Assets
held as stock in trade are not investments
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It also
states that for current investment, any reduction to the fair value and any reversals of such
reduction are to be included in the profit and loss statement
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However, when there is a decline, other than
temporary, in the value of a long term investment, the carrying amount is reduced to recognize
the decline and the resultant reduction in the carrying amount is charged to the profit and loss
account statement
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GAAP specifications
include definitions of concepts and principles, as well as industry-specific rules
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There is no universal GAAP standard and the specifics vary from one geographic location or
industry to another
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The Financial Accounting
Standards Board (FASB) stipulates GAAP overall and the Governmental Accounting Standards
Board (GASB) stipulates GAAP for state and local government
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Generally Accepted Accounting Principles (GAAP) refers to a widely accepted set of rules,
standards, conventions, and procedures for reporting financial info
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GAAP can be followed by all entities, including not-for-profit, publicly traded, closely held,
corporations, partnerships, sole proprietorships, etc
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In effect, publicly traded companies and
others required by law
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GAAP begins with four basic assumptions and also includes four principles and four
constraints
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There are also rules covering
many topics including but not limited to bad debts, inventory, depreciation, leases, pensions,
deferred taxes, intangible assets, bonds, equity, etc
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The four principles of accounting are Historical Cost, Full
Disclosure, Revenue Recognition and Matching
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Other important aspects of
accounting are Consistency and Stable Dollar
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Accounting principles may be defined as those rules of action or conduct, which are adopted
by the accountants, universally, while recording the transactions
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This objective can be achieved when there is certain common
agreement and compliance about the accounting principles
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Like all other professions, accounting has also developed its own
concepts and conventions
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“Accounting” is based on a number of rules or conventions, which have evolved over time
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Generally Accepted
Accounting Principles (GAAP) may be defined as those rules of action or conduct, which are
derived from experience and practice, and when they prove useful, they are accepted as
principles of accounting
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They are subject to change
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Generally Accepted Accounting Principles (GAAP) is a term used to describe, broadly, the
body of principles that governs the accounting for financial transactions underlying the
preparation of a set of financial statements
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Depreciation can be provided on fixed assets, either on
the basis of straight-line method or written down method
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Same financial data, if different methods are applied, shows different financial results
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There is no difference of opinion whether depreciation on fixed assets is to be provided or not
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International Financial Reporting Standards
(IFRS)
Guidelines and rules set by the International Accounting Standards Board (IASB) that companies
and organizations can follow when compiling financial statements
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Over 100 countries currently require or permit
companies to comply with IFRS standards
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Organizations in the United
States are required to use the Generally Accepted Accounting Principles (GAAP)
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A set of international accounting standards stating how particular types of transactions and
other events should be reported in financial statements
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International Financial Reporting Standards (IFRS) is a set of
accounting standards developed by an independent, not-for-profit organization called the
International Accounting Standards Board (IASB)
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IFRS provides general guidance for the preparation of
financial statements, rather than setting rules for industry-specific reporting
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Adopting a single set of world-wide standards will simplify
accounting procedures by allowing a company to use one reporting language throughout
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US GAAP
The Generally Accepted Accounting Principles in the US (US GAAP) refer to the accounting rules
used in United States to organize, present, and report financial statements for an assortment of
entities which include privately held and publicly traded companies, non-profit organizations,
and governments
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But theoretically, the term "GAAP" covers the entire accounting industry, rather than
only the US
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The provided info should be apt to be presented to creditors and potential investors in addition
to other users for making cogent decisions concerning investment, credit and similar financial
activities
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The provided info should be helpful to the creditors and potential investors in evaluating the
amounts, timing, and uncertainty of expected cash receipts
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The info should be related to economic resources, the claims to those resources, as well as the
changes occurring in them
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The provided info should be helpful in making financial and long-term decisions
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The information should be helpful in perking up the business performance
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The information should be helpful in maintaining records

Cash flow and fund flow
The first two statements measure one aspect of performance of the business over a period of
time
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Funds flow statements report changes in a
business's working capital from its operations in a single time period, but have largely been
superseded by cash flow statements
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It explains the inflows (receipts) and outflows (disbursements) of cash over a
period of time
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The cash outflows may occur on account of purchase of goods, purchase
of assets, payment of loans loss on operations, payment of tax and dividend, etc
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A cash flow statement shows the cash
inflows and outflows which have already taken place during a past time period
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In other words, a cash budget is a projected cash flow statement
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The main components of Working Capital are:
Current Assets
1
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Receivables
3
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Payables
Net working capital is the total change in the business's working capital, calculated as total
change in current assets minus total change in current liabilities
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But the same would not be reflected in
the cash flow statement as it does not involve cash
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While a cash flow statement only shows the change in cash position of the business
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What is Included in a Cash Flow Statement?
The statement of cash flows uses information from the other two statements (Income
Statement and Balance Sheet) to indicate cash inflows and outflows
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Operating Activities
2
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Financing Activities
1
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Cash receipts from selling goods and services represent the inflows
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The operational expenditures
are considered as outflows for this section
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Dividends are considered as a part of financing
activity in financial accounting terms
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Investing Activities: Investing activities include transactions with assets, marketable
securities and credit instruments
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Purchasing property, plant and equipment or marketable
securities are considered as cash outflows
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Collections from these loans, however, are cash inflows
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Financing Activities: Financing activities on the statement of cash flows are much more
defined in nature
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The outflows
occur when a company repays loans, purchases treasury stock or pays dividends to
stockholders
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Table of Difference between Funds Flow Statement and Cash Flow Statement
Basis of
Difference

Funds Flow Statement

Cash Flow Statement

1
...
e
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concept i
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cash, which is only one of the
elements of working capital
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Source

Funds flow statement tells about the
various sources from where the funds
generated with various uses to which
they are put
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Usage

Funds flow statement is more useful Cash flow statement is useful in
in assessing the long-range financial understanding the short-term phenomena
strategy
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4
...

changes in working capital
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End Result Funds flow statement shows the Cash flow statement shows the causes the
causes of changes in net working changes in cash
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6
...
accrual basis are converted into cash
Accounting
basis
...


Advantages of Cash Flow Statement
1
...
So it is
important to make a cash flow report if one wants to know about the liquidity position of
the company
...
It helps the company in accurately projecting the future liquidity position of the company
enabling it arrange for any shortfall in money by arranging finance in advance and if there
is excess than it can help the company in earning extra return by deploying excess funds
...
It acts like a filter and is used by many analyst and investors to judge whether company has
prepared the financial statements properly or not because if there is any discrepancy in the
cash position as shown by balance sheet and the cash flow statement, it means that
statements are incorrect
...
Since it shows only cash position, it is not possible to deduce actual profit and loss of the
company by just looking at this statement
...
In isolation this is of no use and it requires other financial statements like balance sheet,
profit and loss etc…, and therefore limiting its use
...
The
advantages of such a financial statement are many fold
...
Funds flow statement reveals the net result of Business operations done by the company
during the year
...
In addition to the balance sheet, it serves as an additional reference for many interested
parties like analysts, creditors, suppliers, government to look into financial position of the
company
...
The Fund Flow Statement shows how the funds were raised from various sources and also
how those funds were deployed by a company, therefore it is a great tool for management
when it wants to know about where and from what sources funds were raised and also how
those funds got utilized into the business
...
It reveals the causes for the changes in liabilities and assets between the two balance sheet
dates therefore providing a detailed analysis of the balance sheet of the company
...
Funds flow statement helps the management in deciding its future course of plans and also
it acts as a control tool for the management
...
Funds flow statement should not be looked alone rather it should be used along with
balance sheet in order judge the financial position of the company in a better way
...

1
...

2
...

3
...
In simple words it presents the data in the financial statements
in systematic way and therefore many companies tend to avoid preparing funds flow
statements
...
Funds flow statement is basically historic in nature, that is it indicates what happened in the
past and it does not communicate anything about the future, only estimates can be made
based on the past data and therefore it cannot be used the management for taking decision
related to future

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