CA - IPCC COURSE MATERIAL. Quality Education beyond your imagination...! ACCOUNTING STANDARDS IN ITS SIMPLEST FORM. - By CA RADHA MADAM

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1 CA - IPCC COURSE MATERIAL Quality Education beyond your imagination...! ACCOUNTING STANDARDS IN ITS SIMPLEST FORM - By CA RADHA MADAM DIRECTOR, MASTER MINDS Visit Mail : mastermindsinfo@ymail.com Page 1

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3 .1 for CA/CWA & MEC/CEC ACCOUNTING STANDARDS (GROUP-I) AS 1: DISCLOSURE OF ACCOUNTING POLICIES: MASTER MINDS OBJECTIVE: Better understanding of Financial statements by establishing the disclosure (including the manner) of significant accounting policies. NEED: As there are alternative accounting principles and methods of applying them exists. Accounting Policy Means Specific principles (e.g. value inventories at lower of cost and net realizable value) Methods of application (e.g. cost formulas i.e. FIFO, Weighted Average) Selection of Accounting Policies Fundamental Accounting Assumptions: Going concern Consistency Accrual Primary considerations: True and fair view of accounts prepared on that basis Prudence Substance over form Materiality DISCLOSURE: All significant accounting policies at one place as part of financial statements. Changes in accounting policies and the effect of the change on the financial statements (when change is permissible as prescribed by AS-5) If fundamental accounting assumptions going concern, consistency and accrual are not followed, disclose the fact. Change in accounting policy When the change has material effect in current period When the change has material effect in later period Disclose: a. The nature of change b. Financial effect of change on items of period to the extent ascertainable. c. Where the amount is not ascertainable in wholly or part then indicate this fact. Disclose: a. The nature of change b. The fact that changes in accounting policies has an effect in later period. IPCC_ Accounting Standards _ Flowcharts 3

4 Ph: /26 AS 2: VALUATION OF INVENTORIES: INVENTORIES (Includes, finished goods, work in progress, raw material, consumable, loose tools etc. Which are held for resale or consumption? VALUATION OF INVENTORIES: This will be valued at the lower of cost and net realizable value on item by item basis but in some cases may be done on group basis Cost Includes Purchase price + Freight duties and taxes + other expenditures directly attributable to acquisition + cost of conversion. (Director labour + allocated variable production overhead (based on actual capacity + allocated fixed production overhead. (Based on normal capacity) Cost Excludes Abnormal losses and wastages, Storage cost, Administrative expenses, selling and distribution cost, and interest & other borrowing cost. In case of finished goods: Sales value expected at balance sheet date less cost necessary to make the sale. Net Realisable Value In case of raw material or consumable: If finished product in which raw materials and supplies are used is sold at In case of WIP: It is sale value at balance sheet date less cost necessary to make the sale less estimated of completion. COST FORMULAS: FIFO, Weighted average, Standard cost, retail method, specific identification. LIFO not allowed. Cost or above cost, then inventories of raw material and supplies will be valued at cost. Below cost then NRV of that raw materials and supplies is equal to replacement price of raw materials or supplies. Specific Price Method (For goods which are not ordinarily inter - changeable and which are segregated for a specific purpose) For other Inventories FIFO or Weighted Average (Weighted Average can be calculated periodically or after receipt of every new lot) Standard cost method It takes into account normal level of consumption of material & supplies, labour, efficiency and capacity utilization. Retail method It is generally used in retail business when it is difficult to ascertain cost of individual item SPECIAL POINTS: Joint costs to be allocated on a rational and consistent basis, example relative sales value at split off point. In case of by products, deduct the NRV of by products from the cost of main products. IPCC_ Accounting Standards _ Flowcharts 4

5 .1 for CA/CWA & MEC/CEC AS 3: CASH FLOW STATEMENT MASTER MINDS CASH FLOW STATEMENT It shows inflow (receipt) & outflow (payment) of cash (cash in hand and at bank), and cash equivalents (short term highly liquid investments), classified into Operating cash flow Investing cash flow Financing cash flow Cash flow on principal revenue generating activity and those, which are not classified in investing and financing activity i.e. Extraordinary items, Income tax will be included. It will be presented by Direct or Indirect method. It includes cash flow on purchase and sale of fixed assets and investments and interest dividend and tax thereon, loans given & receiving back. It includes cash flow on raising and repayment of loans, debentures shares & interest, dividend and tax thereon. Copy Rights Reserved CAN BE CALCULATED BY To MASTER MINDS, Guntur Direct Method (Gross Base) Indirect Method (Net Base) INTEREST / DIVIDEND RECEIVED: By Financial companies treated as operating activity By other than financial companies From investment will be treated as investing activities. From short term investments classifying as cash equivalent should be considered as operating activity. On trade advances, operating receivables shall be treated as operating activities. PAID: On loans / debt is financing activity. On working capital loans / short term loans taken as operating activity. IPCC_ Accounting Standards _ Flowcharts 5

6 Ph: /26 AS 6: DEPRECIATION ACCOUNTING MEANING: Depreciation is a measure of wearing out, consumption or loss in value of depreciable asset arising from usage or passage of time and nothing but allocation of cost of asset over useful life of asset. Depreciable assets are those assets: Life of the asset should be more than one year. Having a limited useful life. Held by an enterprise and use in production or providing goods and services. t held for sale in the ordinary course of business. methods or rates prescribed by AS. (SLM or WDV is commonly followed method) Depreciable amount should be allocated systematically over its useful life. Change in Depreciation due to Change of method It is a change in Accounting Policy. Should be done Retrospectively Re-compute the depreciation from the installation date to till date by using new method. Finding the difference between the recomputed depreciation and accumulated depreciation. The difference may be surplus or deficit, transfer to Profit and loss account Change of life Balance (i.e. unamortized value) to be w/off in remaining revised life i.e. prospective effect. It is a change in Estimate. Change in cost (increase or decrease) of asset due to Revaluation/ Foreign exchange diff. Govt. grant / refund of Price / duty changes to be added or deducted from the outstanding book value. Revised balance to be written off prospectively over the remaining useful life of the asset. Addition or extension to an existing asset If it is an integral part of the existing asset Depreciable at same rate over remaining life of old asset. If it retains a separate identify. Then depreciate it independently IPCC_ Accounting Standards _ Flowcharts 6

7 .1 for CA/CWA & MEC/CEC A.S - 7: CONSTRUCTION CONTRACTS: MASTER MINDS AS 7 is applicable for accounting of construction contract in the books of contractor. (not applicable for accounts of contractee) Apart from normal construction contract, also covers: Contracts for rendering of services directly related to construction of the assets. Contracts for destruction or restoration of assets. Contracts for restoration of environment following demolition of assets. TYPES OF CONTRACTS Fixed Price contract Contract price or rate per unit of output is fixed (subject to escalation clause) Cost plus contract Revenue = Cost plus some percentage of profit on cost Contract Revenue Received and receivable and includes variation, claims, incentive, escalation, etc. when amount can be measured and it can be realized. Includes a) Specific costs to contract b) Directly attributable cost c) Common construction cost which can be allocated to contract d) Costs which are specifically reimbursable from the customer. Contract Cost Excludes a) General & administration cost b) Selling cost c) Research and development cost incurred in general d) Depreciation of idle Plant and Equipment. Whether outcome of contract can be estimated reliably Recognize revenue and cost in proportion to the work completed as a consequence proportionate profit will be recognised. Revenue should be recognized to the extent of cost incurred if it is realizable. Cost incurred will be charged to Profit and Loss account. That means profit will not be recognised. If estimated total contract cost exceeds the total revenue, the full loss should be immediately recognised as an expense. Irrespective of whether or not work has commenced, stage of completion of contract IPCC_ Accounting Standards _ Flowcharts 7

8 Ph: /26 SEGMENT AND COMBINING Does the contract cover only one asset? The contract covers a number of assets Have separate proposals been submitted for each asset? Has each assets been subject to separate negotiation? It is a part of a group of contracts? Have the parties been able to accept or reject that part of contract relation to each asset Is it negotiated as a single package? Costs and revenue of each asset can be identified? Are they so inter-related that they form a single project with overall profit margin? Treat all the assets comprised as a single contract Treat construction of each asset as a separate construction contract (Segmenting) Are they performed concurrently or in a continuous sequence? Treat the group of contracts as a single construction (combining) Apply AS 7 to each contract separately (don t combine) Copy Rights Reserved To MASTER MINDS, Guntur IPCC_ Accounting Standards _ Flowcharts 8

9 .1 for CA/CWA & MEC/CEC MASTER MINDS A.S 9: REVENUE RECOGNITION (WHEN TO ACCOUNT FOR INCOME / REVENUE): REVENUE RECOGNITION (WHEN TO ACCOUNT FOR INCOME / REVENUE) It covers Revenue (income) from sale of goods, rendering of services and Use of our resources by others. (Criteria for Revenue Recognition i.e. when to account it as income) It doesn t cover Revenue Recognition of Construction Contract AS 7 Hire purchase and Lease AS 19 Govt. Grants AS 12 Profit on sale / Revaluation of F.A AS 10 Exchange Rate difference AS 11 Extra-ordinary items etc. RECOGNITION OF REVENUE FROM SALE OF GOODS Performance should be completed It should be reasonably measurable It should be reasonably certain that collection will be made When significant risk and reward associated to ownership is transferred. Seller does not retain effective control of ownership of transferred goods If uncertainty exist then revenue recognition is postponed to next period and recognised when its becomes reasonably certain. If uncertainty arises after the initial recognition of revenue then it will not be reversed, only appropriate provision to cover losses will be made. RECOGNITION OF REVENUE WHEN DELIVERY OF GOODS SOLD SUBJECT BELOW CONDITIONS Nature When revenue is to be recognised 1. Sale on approval 2. Guaranteed Sales 3. Warrantee Sales 1. When buyer confirms his desires to buy such goods by communication. 2. as per the agreement of the sale or after reasonable period has expired 3. Immediately. But provision should be made to cover unexpired period of warranty. 4. Consignment Sales 4. When goods sold to third party 5. Special order and shipments 5. Goods are identified and ready for delivery IPCC_ Accounting Standards _ Flowcharts 9

10 Ph: /26 RECOGNITION OF REVENUE FROM SERVICES: RECOGNITION OF REVENUE FROM SERVICES Does it relate directly to construction of an asset? Does it consist of performance involving more than one act? Proportionate Completion method as per AS 9 Completed service method as per AS 9 AS 7 (not covered by AS - 9) percentage of completion method End EXAMPLES OF REVENUE RECOGNITION OF SERVICE S.NO NATURE OF SERVICE INCOME WHEN REVENUE IS TO BE RECOGNIZED METHOD ADOPTED 1. Installation fees other than incidental to the sale of a product Only when the equipment is installed and accepted by the customer. Completed Service Contract Method 2. Insurance agency commissions On the effective commencement of renewal dates of the related policies - do - 3. Media commission of advertising agencies When the related advertisement or commercial appears before the public and the necessary intimation is received by the agency. - do - 4. Production commission When the project is completed - do - 5. Revenue from artistic performances, banquets and other special events When the event takes place. When a subscription to a number of events is sold, the fee should be allocated to each event on a systematic and rational basis. - do - 6. Tuition Fees Over the period of instruction. Proportionate completion method. IPCC_ Accounting Standards _ Flowcharts 10

11 .1 for CA/CWA & MEC/CEC MASTER MINDS 7. Commitment facility or loan management fees which relate to continuing obligations or services Recognized over the life of the loan or facility having regard to to the amount of the obligation outstanding the nature of the services provided and the timing of the costs relating thereto. - do - 8 Commissions charged for arranging or granting loan or other facilities When a binding obligation has been entered into. - do - 9. Membership fee which permits only membership and all other services or products are paid for separately, or if there is a separate, or if there is a separate annual subscription When received Completed Service Contract Method 10. If the membership fee entitles the member to services or publications to be provided during the year On a systematic and rational basis having regard to the timing and nature of all services provided. Proportionate completion method. RECOGNITION OF REVENUE BY USE OF THE ENTERPRISE RESOURCES BY OTHERS ITEM OF REVENUE 1. Interest (charges for the use of cash resources or amounts due to the enterprise) 2. Royalties (charges for the use of such assets as know-how, patents, trade marks and copyrights) 3. Dividends from investments in shares (rewards from the holding of investments in shares) 4. Discount or premium on debt securities BASIS OF RECOGNITION On a time proportion basis taking into account the amount outstanding and the rate applicable On an accrual basis in accordance with the terms of the relevant agreement. When the owner s right to receive payment is established. (i.e. when dividend declared) Over the period to maturity in proportion to balance outstanding (Straight line basis) over the maturity period. Copy Rights Reserved To MASTER MINDS, Guntur IPCC_ Accounting Standards _ Flowcharts 11

12 Ph: /26 AS 10: ACCOUNTING FOR FIXED ASSETS Fixed Assets: It is an asset, which is: - Used for the purpose of producing or providing goods and service. t held for Resale Used for more than one accounting period. Examples: Land Building Freehold Applicability: This is accounting standard is not applicable to the following items: Forests, plantations and similar regenerative natural resources. Wasting assets like minerals, oil, and natural gas. Expenditure on real estate development. Live stock. Valuation of Fixed assets Valued either at historical cost or revalued price. Valuation of Fixed assets in special cases Assets acquired on hire purchase terms: Cash price are as per AS-19. Cost of jointly held assets: Proportionate of amount of such jointly owned asset. Fixed assets acquired at consolidated price: Fair basis as per valuation by competent valuers. Improvement and repairs: After improvement and repairs expected future benefits from fixed assets If it Do not change - Charged to Profit and loss If it Change Included in Gross Book valued of Fixed Assets Paid in Cash: Directly attributable cost to bring at working condition Site preparation Delivery and handling cost Historical Cost Revalued Price Acquired Self constructed In exchange of asset (F.V = FAIR VALUE) Fixed Assets exchanged not similar F.V. of asset given up or F.V of asset acquired which ever is clearly evident. Fixed Assets exchanged are similar F.V. of asset acquired or given up which ever is clearly evident + / - consideration given or taken. Net book value + / - consideration given or taken Fixed Assets acquired in exchange of share or other securities F.V. of asset purchased or F.V. of shares or securities which ever is clearly evident. Such fixed asset, which was constructed by in-house efforts, is called self-constructed fixed asset. It includes Costs Directly related to the specific asset. Attributable to the construction activity should be allocated to the specific assets. Any internal profit included in the cost should be eliminated. Additions & Extentions If integral part of existing asset it is generally added to gross book value of existing assets. If separate identity and capable to be used after the disposal of existing asset it is accounted for separately. Disclosures Gross and net book values at the beginning and end of the year. Expenditure incurred. Revalued amount, method adopted, to Compute Revalued amount, and whether an external value has valued the fixed assets i.e. for revaluation. IPCC_Accounting Standards _ Flowcharts 12

13 .1 for CA/CWA & MEC/CEC MASTER MINDS ACCOUNTING STANDARDS (GROUP-II) AS 4: Contingencies and events occurring after the Balance Sheet Date Objective To prescribe the accounting of contingencies and events, that take place after the balance sheet date but before approval of financial Statements by competent authority. Scope A provision relating to asset is covered by AS-4, but provision, as shown in liability side of balance sheet is not covered by AS-4 (Covered by AS-29) Contingencies other than covered by AS-29 Events occurring after the balance sheet date Conditions existing at Balance Sheet date Conditions not existing at Balance Sheet date A Estimate the outcome accounting treatment is required. Contingent gain Contingent loss Ignored Probable losses Reasonably possible Remote Chance of occurrence is more than 50% Chance is less than probable but more Chance of occurrence is low Provisions should be made Disclose by way of note Ignore 1. If there is no counter claim, full loss should be provided 2. If there is counter claim, the net amount should be provided IPCC_Accounting Standards _ Flowcharts 13

14 Ph: /26 A EVENTS OCCURRING AFTER THE BALANCE SHEET DATE Does the event provide additional information materially affecting the determination of amounts relating to conditions existing at the balance sheet date? Does the event indicate that entity has ceased to be a going concern. Does the law require adjustment to be made to assets / liability as at balance sheet date? e.g. proposed dividend. n-adjusting event Adjusting event a) If material, disclosure in Board of Directors Report. b) If immaterial, it is ignored. Adjustments require to figures of assets and liabilities as at balance sheet date. Copy Rights Reserved To MASTER MINDS, Guntur IPCC_Accounting Standards _ Flowcharts 14

15 .1 for CA/CWA & MEC/CEC MASTER MINDS AS 5: NET PROFIT / LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGE IN ACCOUNTING POLICIES: NET PROFIT OR LOSS WILL COMPRISE OF 1. Net profit or loss for the current period which includes all items of income and expenses recognized in a period. 2. Prior period items are items which arise in earlier year as a result of errors or omission committed in any earlier years. Ordinary Activities are normally undertaken as part of business and incidental activities. From ordinary Activity: Including effect of change in Accounting estimate Accounting policy If significant, effect and nature of change should be disclosed. From Extraordinary Activity: It should be separately shown in the Profit and Loss, each significant item be shown separately. Eg: Loss due to earthquake, attachment of property of enterprise. Separate disclosure of nature and amount. Ensure that impact of current profit or loss can be clearly perceived Eg: Understatement of income or expenses due to Mathematical mistakes. 3. WHEN THERE IS A CHANGE IN ACCOUNTING POLICY (a) For Compliance of AS (b) For Compliance of Law or Statute (c) For Better and appropriate presentation of financial statements. Having material effect. Having no material effect. In the current period Expected in future periods need of disclosure Disclosed in the period in which change is adopted along with amount If amount not ascertainable, that fact should be Disclosed in the period of making the change. Fact of change only needs disclosure. disclosure needed of amounts. 4. Change in accounting estimates: Neither a prior period item nor an extraordinary item. A change in estimated amount in any items of financial statements. When it is difficult distinguish between change in accounting policy and accounting estimates, treat it as change in accounting estimate. Example: change in the amount of provision for bad debts, change in useful life of depreciable assets. IPCC_Accounting Standards _ Flowcharts 15

16 Ph: /26 AS-11 (REVISED 2003) The Effect of changes in Foreign Exchange Rates CATEGORY 1 CATEGORY 2 CATEGORY 3 Foreign currency transactions like buying and selling goods or services, lending and borrowing in foreign currency and its settlement. Foreign Operations like, Branch, Subsidiary, Associate and Joint Venture. Forward Exchange Contracts Agreement between two parties to buy or sell foreign currencies. Settlement will be done at a future date. Initial Recognition Record Transacti on using spot rate (weekly / Monthly average may be permitted) Valuation at Balance Sheet Date Monetary Items Monetary items like debtors, creditors, loans, etc. converted at closing rate will result into exchange difference Treatment of Exchange difference Monetary - Charged to P & L A/c n-monetary t Treated as exchange difference but as valuation difference charged to Profit and Loss A/c n- Monetary Carried at Historical cost Continued at the rate of its acquisition Integral foreign operation same as for foreign currency transaction Carried at fair value Translate at closing rate (date of balance sheet) Eg: Inventory, Investments. n Integral Foreign Operation (Treated as separate enterprise) Translate all assets and liabilities monetary as well as non-monetary at closing rate. Translate income and expenses at the rate on the date of transaction. All exchange difference s be carried to foreign currency translation reserve. Which will be transferred to P & L only when net investment in non-integral operation is disposed off in part or in full. For hedging Premium / discount amortized over contract life. Exchange difference recognized in the Profit and Loss A/c of the period Gain / loss on cancellation / renewal taken to Profit and Loss A/c of the period For trading / speculation: premium / discount is recognized Gain or loss on balance sheet date recognized to Profit and Loss being difference between rate contracted and rate now available. IPCC_Accounting Standards _ Flowcharts 16

17 .1 for CA/CWA & MEC/CEC MASTER MINDS ACCOUNTING FOR GOVERNMENT GRANTS AS-12 Meaning: Grant means assisted by government either cash or kind in return for past or future compliance with certain conditions. Government means government or government agencies or similar bodies either at local, national or international. Exclusion from Government Grants 1. Tax holiday in backward area tax exemption in notified area. 2. Investment by Govt. as equity. Depreciable F.A. When to recognize Government Grants: When there is reasonable assurance that 1. Grant will be received and 2. The enterprise will comply with attached conditions, if any. Monetary Grants (Related to fixed Assets) Accounting treatment: Related to Fixed Assets n-depreciable F.A. n-monetary Grants: (Grants in the form of assets such as land plant & In the nature of revenue Deduct grant from related expenses (which intends to compensate) Credit profit and loss account on systematic basis over periods necessary to match it with related costs. In the nature of promoters contribution Credit capital reserve Cannot be distributed as dividend or treated as deferred income. Deduct from Gross value assets in arriving its book value. Treated as deferred income and recognized in P & L on systematic and rational basis over useful life of assets. Deduct from Gross value assets. If conditions attached to grant were fulfilled Credited to Capital reserve. t fulfilled Grants are credited to income over the same period over which the cost of meeting such conditions is charged to income. IPCC_Accounting Standards _ Flowcharts 17 Cont

18 Ph: /26 ACCOUNTING FOR GOVERNMENT GRANTS AS-12 Grants in Special Cases Refund of Govt. Grants (Treat it as an extraordinary item) n-monetary grants Asset given at concessional rates - record at acquisition. Assets given free of cost record at nominal value Contingencies If contingencies arises after grant has been recognize d apply AS-4 (Revised) For giving immediate financial support and not as an incentive to undertake specific expenditure. As compensation for expenses or losses incurred in previous periods. Extraordinary item Apply AS 5 when grant is awarded. Relating to promoters contribution Deduct from capital reserve. Related to Revenue Amount of refund adjusted against unamortized deferred govt. grants if any. Remaining balance charged to P & L A/c 1. Related to Specific Assets Deducted from gross value of asset Refundable amount should be recorded by increasing the Book value of asset. Depreciation to be provided prospectively. 2. Treated as deferred income: Refundable amount adjusted with unamortized deferred income 3. Credited to Capital Reserve A/c: Refundable amount adjusted to Capital amount IPCC_Accounting Standards _ Flowcharts 18

19 .1 for CA/CWA & MEC/CEC MASTER MINDS BORROWING COST AS - 16 Borrowing Cost Interest and commitment charges Amortization of discount /premium on loans Amortization of ancillary costs. Financial charges in case of financial lease Exchange difference relating to foreign currency borrowings to extent of interest variations. Meaning Qualifying Asset- An asset which takes substantial period of time to get ready for its intended use or sale is called qualifying Asset. Directly attributable cost Those costs that would have been avoided if the expenditure on the qualifying asset had not been made. Accounting treatment 1. Borrowing cost on qualifying asset capitalized until ready to use or sale. 2. Other borrowing cost charged to Profit & Loss A/c. Amount to be capitalized When funds borrowed specifically 1. Borrowing cost incurred less interest on temporary investment of borrowed funds. When funds borrowed generally 1. Expenditure on qualifying asset x Weighted Average rate of Borrowing Costs. (Other than specific borrowings) 2. Capitalized amount should not exceed borrowing cost. When to capitalize. When it is likely to result in future economic benefits and can be reliably measured. Expenditure on Qualifying Asset. Includes: 1. Payment of cash. 2. Transfer of other asset 3. Interest bearing liabilities. Excludes 1. Progress payment received 2. Grant received towards cost incurred. Commencement of Capitalization. Conditions to be fulfilled. 1. Activities to prepare the asset for its intended use should be in progress 2. Borrowing cost incurred 3. Expenditure incurred for acquisition /construction or production of qualifying asset. Suspension of Capitalization: Suspended If active development is interrupted t Suspended if Temporary delay is necessary in part of process to get asset ready for its intended use or sale Cessation of Capitalization: When substantially all activities necessary to prepare the asset for its intended use or sale is completed When Construction completed in parts which is capable of being used, stop capitalization for that part. IPCC_Accounting Standards _ Flowcharts 19

20 Ph: /26 AS 19: ACCOUNTING FOR LEASES IF The lessee will get the ownership of leased asset at the end of the lease term. The lessee has an option to buy the leased asset at the end of the term, at price, less than expected F.V. on the date of exercise of option. The lease term covers the major part of the life of asset Present value of MLPs substantially equals the asset fair value as at the date of inception of the lease. The asset given on lease to lessee is of specialized nature and can only be used by the lessee without major modification. Operating lease Finance lease In the Books of lessee Recognize lease payments in profit and loss account. Pattern- straight line basis over lease term. In the Books of lessor Recognize as an asset Recognize lease income in Profit and Loss A/c using straight line method. Charge Depreciation as per AS-6 Copy Rights Reserved To MASTER MINDS, Guntur In the Books of lessee Recognize as an asset and liability. Initial recognization of asset - at lower of F.V. and P.V of MLP. Charge lease payment to Profit and Loss A/c Provide Dep. as per AS-6 In the Books of lessor Recognize as receivables at an amount equal to net investment in the lease. Recognize lease income in Profit and Loss A/c. Pattern: Constant periodic return. IPCC_ Accounting Standards _ Flowcharts 20

21 .1 for CA/CWA & MEC/CEC KEY TERMS MASTER MINDS SALE AND LEASE BACK TRABNSACTIONS Gross investment = MLP (in view of lessor) + unguaranteed residual value. Net investment = Gross investment - unearned finance income Unguaranteed residual value = Gross investment Present value of Gross investment MLP in view of lessor = lease rentals + any guaranteed R.V. (by or on behalf of lessee) + R.V. Guaranteed by third party. MLP in view of lessee = lease rentals + any guaranteed R.V. which is guaranteed by or on behalf of lessee. Implicit interest rate = discount rate that makes P.V of gross investment just equal to Fair Value of leased asset. Faire value of leased asset (at the inception of lease = present value of Minimum lease payments (in view of lessor) + any unguaranteed residual value according to the lessor. Guaranteed residual value (in respect of lessee): such part of the R.V., which is guaranteed by or on behalf of the lessee. Guaranteed residual value (in respect of lessor) such part of the R.V., which is guaranteed by or on behalf of the lessee or by an independent third party. If lease back is finance lease. Defer any excess or deficiency of sale proceeds over carrying amount and amortize it over lease term in proportion of dep. on leased asset. If lease back is operating lease (S.P = Selling Price, F.V = Fair Value, C.A = Carrying Amount) If S.P. = F.V : any profit or loss recognize immediately. If S.P. < F.V C.A < S.P: Profit: Recognize immediately C.A. > S.P: Loss: Recognize immediately If S.P. > F.V. If C.A. = F.V: Profit: amortize the profit over lease period. If C.A. < F.V: to the extent of (S.P. F.V): Profit: Defer the profit. If C.A. > F.V. To the extent of (C.A F.V) : Loss: Recognize immediately To the extent of (S.P. F.V.) : profit: should be amortized. Copy Rights Reserved To MASTER MINDS, Guntur IPCC_ Accounting Standards _ Flowcharts 21

22 Ph: /26 AS 20 EPS (EARNING PER SHARE): EPS (EARNING PER SHARE) BASIC EPS Profit available to equity share holders (PAES) / Weighted Avg.. of Equity Shares (WANES) Earnings Profit after tax less preference dividend and dividend distribution tax there on. In case of more than one class of equity shares distribute earnings in proportion of dividend right for each class. DILUTED EPS Diluted earnings / Revised WANES WANES. of shares (After adjustments for additions and deletions during the period. Weight =. of days shares were outstanding the during the period (Timing) TIMING: Conversion of debt:- Date of conversion Settlement of liability:- Date of settlement Acquisition of asset:- Recognition Amalgamation in the nature of Purchase:- Date of acquisition. Amalgamation in the nature of merger:- beginning of reporting period. Dilutive Potential Equity share Potential equity share is dilutive: if its inclusion reduces earning per share or increases loss per share Dilutive EPS = Profit / W.Av.. of shares Anti- Dilutive shares Potential equity share is anti-dilutive: dilutive if its inclusion increases earnings per share or reduces loss per share Anti dilutive shares to be ignored Diluted Earnings PAES + Dividend along with distribution tax on convertible preference shares previously deducted + Interest net of tax effect charged on convertible debentures or loans. Revised WANES + Weighted average of additional equity shares outstanding assuming conversion. Potential shares for which proceeds have already been received. Like convertible debenture, convertible preference shares, application money received etc. Number of equity share to be issued against such potential shares to be considered. Profit shall be adjusted by interest, dividend and consequential tax effect related to such potential share. Potential shares for which proceeds shall be received in future. Like options Actual number of shares to be issued less number of shares which can be issued against the same proceeds if issued at average fair value. The balance is the share issued for no consideration and it will be included for calculating diluted EPS. Profit may not require any adjustment for such potential equity shares. IPCC_ Accounting Standards _ Flowcharts 22

23 .1 for CA/CWA & MEC/CEC MASTER MINDS TREATMENT OF DIFFERENT TYPES OF SHARE / POTENTIAL SHARES FOR CALCULATION OF BASIC EPS/ DILUTED EPS (te whatever is included for basic EPS gets automatically included for diluted EPS) EQUITY SHARES APPEARING IN THE BALANCE SHEET Fully paid Include from the date of issue for basic EPS Calls in Arrears If entitled for dividend, include for basic EPS. If not entitled for dividend include for diluted EPS from the date call is due just like option. If interest has been charged the same will the adjusted from earning Partly paid BONUS ISSUE, SHARE SPLIT CONSOLIDATION The weighted average number of shares of all the period reported including period of above event (even if the event took place after the balance sheet date but before approval) be reinstated in the same proportion (i.e. increased / decreased in the same proportion) POTENTIAL EQUITY SHARES Convertible debenture / preference share Usually at fair value, hence include it from the date of issue for diluted EPS. Numbers to be calculated taking best conversion price from holders point. The interest, dividend tax and related exp. be adjusted in the earning. ESOP The deferred employee remuneration will be included in assumed proceeds together with issue price. The rest treatment will be same as in option for calculating diluted EPS. Optional / Share warrants Include for basic EPS in proportion to its entitlement for dividend. Uncalled on partly paid share To be ignored Different nominal value Different EPS be calculated if having different dividend rights otherwise convert all into same nominal value term for basic EPS. Right issue Fair value per share immediately prior to right issue Right Factor = Theoritical ex right fair value per share Aggregatefair valueof shareimmediatel y prior to the exerciseof therights+ proceeds from exerciseof therights Theoritical ex right fair value =.of shares outstanding immediatel y after theright issue. of shares under issue (-) the number derived by dividing the expected proceeds by fair value of shares. Balance are the shares for no consideration. Same will be included for diluted EPS w.e.f. the date of issue, no adjustment to be made in earnings. Share application money received (Excess application money to be excluded) Money used in business If all necessary conditions are fulfilled use it for basic EPS If conditions are not fulfilled use it for diluted EPS like convertible debentures Money not so used (kept separately) Use it for diluted EPS like option IPCC_ Accounting Standards _ Flowcharts 23

24 Ph: /26 AS 26: INTANGIBLE ASSETS Intangible Asset (I.A) Identifiable (separable) n-monetary asset Without physical substance Recognition criteria Should have characteristics of asset Future economic benefits Cost can be reliably measured The process of R & D classified into 2 phases. Research phase: All expenses incurred are to be charged as expense as and when incurred. Development phase: Expenses are to be capitalized if and only following conditions are met. Technical feasibility of completing I.A Availability of resources Intension to complete and use I.A Ability to use Probability that I.A. will generate future economics benefits (External market) Expenses incurred can be measured reliably Initial measurement at cost Direct Purchase Purchase price and all directly attributable costs Exchange of asset Fair value of asset given up Government Grants minal value (AS-12) Through issue of securities The fair value of securities issued or a fair value of intangible asset acquired which ever is more clearly evident Intangible asset is recognized in the books of purchasing company though it is not recognize in selling company provided the amalgamation in the nature of purchase (AS-14). Copy Rights Reserved To MASTER MINDS, Guntur IPCC_ Accounting Standards _ Flowcharts 24

25 .1 for CA/CWA & MEC/CEC MASTER MINDS SPECIAL POINTS In some cases, the enterprise incurred expenditure but no intangible asset is recognized EXAMPLES Employee training expenses Advertisement and promotional expenses Relocating expenses Restructuring costs Subsequent expenses on intangible asset capitalize if Subsequent expenses increase the future economic benefits of intangibles Subsequent expenses can be attributed to cost and measured reliably. Impairment loss Impairment test is must, if Asset not available for use Amortizatio n period exceeds 10 years Gain or loss on retirement / disposal: Recognize in Profit and Loss Account De-Recognition of intangible asset On disposal or When no future economic benefits expected. Amortization Carry the asset at cost less accumulated amortization and accumulated impairment loss. Useful life 10 years unless there is clear evidence of longer life Residual value Zero unless commitment by third party to by at the end of useful life Method of amortization The benefit derived from the intangibles should be matched with the amortization expenses. If pattern of benefit is available amortize as per pattern If no pattern is available SLM should be followed. Copy Rights Reserved To MASTER MINDS, Guntur IPCC_ Accounting Standards _ Flowcharts 25

26 Ph: /26 AS-29: PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS C means, it is continuing process C Has a present obligation arisen as a result of past events? Recognise (i.e. make) a provision Is it probable that an outflow of economic resources will be needed to settle the obligation? Can a reliable estimate be made of the amount of the obligation? Does a possible obligation arise which will be confirmed only on occurrence or nonoccurrence of one or more future events not wholly within the enterprise s control? Is possibility of loss / obligation remote? Review the provision at each Balance sheet date. Liability results in outflow of economic benefits. Is disclosure of same or all information as per para 69 expected to seriously prejudice the position of the enterprise? Use the provision for the liability and no other purposes. Does the liability exceed the provision? Review the continued necessary Found unnecessary? Reverse Do not recognize a provision. Disclose a contingent liability as per para 69 Is it otherwise impracticable to make all or any disclosures required by para 69? State the fact that non-disclosure is due to impracticability Neither provision nor disclosure required Adjust in Profit and 1. Disclose Loss / Cost of the general nature of dispute asset, as the case 2. Do not may be! disclose all or any information required as per para State the fact and reason for Review the position at non-disclosure each balance Sheet date 4. Do not recognize a provision. C IPCC_ Accounting Standards _ Flowcharts 26