Accounting standards

Accounting Standards

Presented by-Nirooj Fidin

-Priha Jha-Amrita Kumari

Importance of AS

O Smooth operations.O Protect investorsO Promotes transparencyO Assess business performance

Accounting Standard 10

O Deals with accounting of fixed assets so that users of the financial statements can discern information about a business’s investment in its property, plant and equipment and the changes in such investment.

O Does not cover assets held for sale, biological assets for agricultural activity, livestock, expenditure on real estate development, minerals and non-regenerative resources, and govt. grants, subsidies and assets under leasing.

Terminology

O Fixed Asset: An asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.

O Fair Market Value: It is the price agreed between knowledgeable and willing parties in an open and unrestricted market.

O Gross Book Value: It is the historical cost or the amount substitutes for historical cost. It is termed net book value, when shown as net of accumulated depreciation.

Identification of fixed assets

O Individually insignificant items may be aggregated for their value.

O Am item may be expensed even if it could have been included as fixed asset.

O Spares are usually credited to P/L statement unless only used in connection with the fixed asset.

O To improve accounting, items of fixed assets are treated separately, provided they are separable and has independent useful life.

Components of cost

O Consist of all the cost attributed to the asset in order to bring it to working condition for the intended purpose.

O Administration and other general overload expenses are excluded.

O All expenses incurred between completion of setting up asset and actual usage of asset for production are charged to P/L account.

O However, it is also referred sometimes as deferred revenue and is to be amortized within 3-5 years after commencement

Non-monetary consideration

O When a fixed asset is acquired in exchange of another asset, fair value of the asset which is more evident is to be considered.

O Similarly, the same is applicable in case of a fixed asset acquired in exchange of shares or securities of the business.

Improvement and repairs

O Confusion whether repair expenses ought to be added to the gross book value or P/L account.

O Only expenses that increases the benefits accrued from the asset is included in the gross book value.

O Also, the cost of addition or extension to an existing asset, which becomes integral to the asset is to be included in the gross book value.

O Any addition, which has a separate identity is to be accounted separately.

Amount substituted for historical costs

O Some costs of assets are valued in substitution for the historical costs.

O Usually done by appraisal and reference to current price.

O Either restate both gross book value and accumulated depreciation.

O Or restate the net book value by adding the net increase.

O Different methods for different items.O Increase is credited to owners’ interest as

revaluation reserves. Decrease is credited in P/L account.

Retirement and Disposal

O Retired items are state at their lower net book value and net realizable value and are shown separately.

O Gains or losses incurred on disposal is shown in the P/L statement.

O Difference between net disposal proceeds and net book value is credited to P/L statement in case of loss or transferred to general reserve in case of gain.

Special Assets and Cases

O GoodwillO Jointly owned fixed assetsO Fixed Assets on hire

DisclosureO Gross and net book value, including

acquisitions, disposal and other movements.O Expenditure incurred in course of construction

or acquisition.O Revalued amounts, method used, whether

outsourced.

Accounting Standard 20

Earnings per share

Objective

O To set principles for the determination & presentation of EPS.

O To improve comparison of performance amongst enterprises for the same period and amongst different accounting periods for the same enterprise.

Applicability

O Enterprises whose equity shares or potential equity share are listed on Recognized Stock Exchange.

O Other enterprises which disclose earnings per share in financial statements.

O In the case of consolidated financial statements it should be determined & presented based on consolidated information

Presentation Requirements (Disclosures)

An enterprise should present on the face of P&L Account.O Basic EPS w.r.t. equity sharesO Diluted EPS w.r.t. potential equity

shares

Potential equity share: A financial instrument or contract that entitles or may entitle, its holder to equity share e.g. O Convertible debentures or preference shares O Share warrants or options O Shares issuable upon satisfaction of certain

conditions

Presentation Requirements (Disclosures)

O Disclosure to be made for all periods presented.

O Both the amounts to be disclosed with equal prominence.

O The information is to be presented even if the amount disclosed are negative (a loss per share).

MeasurementBasic EPS = Net profit or loss for the period attributable to equity shareholders(A)/Weighted average no of equity share outstanding (B).

(A) = Net profit or loss for the period after deducting preference dividend & tax.(B) = Number of equity shares outstanding at the

beginning of the period, adjusted by the shares bought back or issued during the period

multiplied by the time weighting factor.

O Time weighting factor is the number of days for which the specific shares are outstanding as a proportion to total number of days in the period.

Measurement

Diluted EPS = Diluted net profit or loss for the period attributable to equity shareholders(C) /the weighted

average no of equity shares including shares issued on

conversion of all the dilutive potential equity shares

outstanding during the period (D).

Measurement of Diluted EPS

( C ) = Net profit or loss attributable to equity shares adjusted for the following net of tax:

any dividend on dilutive potential equity shares which has been deducted in arriving profit/loss.

any interest relating to dilutive potential equity shares

any other change in expense or income that would result from the conversion of dilutive potential equity shares.

Measurement of Diluted EPS

(D) = Aggregate of (B) and the weighted average number of equity shares which would be issued on the conversion of all the dilutive potential equity shares into equity shares at the beginning of the period. (If issued during the period, from the date of issue).

O Dilutive Potential Equity shares shall be treated as such only when their conversion to equity shares would decrease net profits per shares from continuing ordinary operations.

O It shall be presumed that exercise of dilutive options shall be exercised. It shall also be assumed that issue of shares shall be at fair value and assumed proceeds shall be received.

ASI 12

Every company, required to give information under part IV of schedule VI to the Companies Act, 1956 to calculate and disclose EPS in accordance with AS 20, even if otherwise not applicable to it.

Accounting Standard 26

(accounting for Intangible Assets)

Introduction

O The Institute of Chartered Accountants of India (ICAI) has issued an accounting standard for intangible assets which will be mandatory for listed companies and for companies planning an initial public offer. As per the guideline, companies will have to report in their financial statements on expenses incurred on research and development, intellectual property rights, customer relations and brand development activities.

O Called AS 26, the accounting standard came into effect from April 1, 2003.

DefinitionDefinition of Intangible AssetsIntangible assets is:O Identifiable non monetary assetsO Without physical substanceO Held for use in production or supply of goods or

servicesO Examples: Licenses, Intellectual property rights,

Brand names, publishing titles, Computer software, Patents, copy rights, Motion picture licenses, Customers lists, Franchises, Mortgage services rights, Import quotas, Customer supplier relationships, Customer loyalty, Market share and marketing right

ObjectiveO The objective of this Statement is to

prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Accounting Standard.

O This Statement requires an enterprise to recognize an intangible asset if, and only if, certain criteria are met.

O The Statement also specifies how to measure the carrying amount of intangible assets and requires certain disclosures about intangible assets.

Scope

This Statement should be applied by all enterprises in accounting for intangible assets, except:

- Intangible assets that are covered by another Accounting Standard

- Financial assets; mineral rights and expenditure on the exploration for, or development and extraction of, minerals, oil, natural gas and similar non-regenerative resources; and intangible assets arising in insurance enterprises from contracts with policyholders.

Conditions for RecognitionO Identifiability :

Distinguishable from goodwill.

Enterprise can rent, sale, exchange or distribute the future economic benefits from assets without disposing the same

O Control :

Power to obtain future economic benefits.

Legal rights over the use of assets.

O Future economic benefits :

Revenue, cost savings or other benefits

flowing from the assets.

Cost of Intangible Assets

O Recognize if, and only if, Probability of flow of future economic benefits

Cost can be reliably measuredO Intangible Assets should be recognized only at cost.

O Separate acquisition : Recognize at cost of acquisitionO Cost of acquisition includes: Purchase price (net of any discounts, rebates etc) Non recoverable import duties and other taxes Direct expenses to make assets ready for intended use

Internally Generated Intangible Assets :O Goodwill : Not to be recognized as Intangible Asset as; Not an

identifiable resource controlled by the entity. O cost can not be measured reliably.

Internally Generated Intangible Assets

Others• Internal generation of Intangible Assets classified into two

phases: Research Phase• Recognize expenditure incurred during Research phase as an

expense. Development Phase• Recognize Intangible Assets if entity can demonstrate all the

following conditions:• Technical feasibility to complete the Intangible Assets so that it

will be available for use.• Intention and Availability of adequate technical, financial and

other resources to complete the assets.• Ability to use / sell it.• Demonstration of probable future economic benefits.• Ability to measure reliably the expenditure attributable to

Intangible Assets.

Cost: Cost of Internally generated Intangible Assets is

calculated from the time when the Intangible Assets first meet the recognition criteria till the asset becomes ready for use.

Amortisation : the systematic allocation of the depreciable amount of an intangible asset over its useful life.

O Period :O Amortise over the best estimated useful life of the asset.O Rebuttable presumption is that useful life can not

exceed more than 10 years.O Persuasive evidence required to justify useful life of

more than 10 years.O Straight Line Method is considered as most appropriate.

Disclosure Requirement

O Disclose for each class & separately for internally generated and others:

O Useful lives or amortization rate; Amortization method;

O Gross carrying amount & accumulated amortization.

O Reconciliation of carrying amount showing: Additions/ retirement and disposals; Impairment losses recognized/ reversed, if any Amortization recognized; Other changes in the carrying amount. Changes in accounting policy as per AS 5.

contd.

O Where useful life is more than ten years, the reasons thereof.

O Description, carrying amount and remaining period for an Intangible Assets of material amount.

O Details of Intangible Assets that are pledged or have other restrictions.

O Commitments for acquisition of Intangible Assets.O Research and Development expenses recognised

as expenses.O The entity is encouraged to give description of

fully amortized Intangible Assets, still in use.

Thank YouThat’s all folks.