IAS Standards and Accounting Policies

Accounting Standards:

Unit 2

International Accounting Standard
Committee (IASC- ested.1973):

Objectives of the Committee are:
Formulating, publishing and promoting
the use of the accounting standards
worldwide, and
To work for the improvement and
harmonization of regulations, accounting
standards and procedures relating to
financial

Importance of IAS:
Globalization of the economy and entered
the Indian organizations in to foreign
nations.
Foreign investors would give more
weightage to those organizations which
follow IAS.
If there is a conflict between the IAS and the
local standards or the local laws and
regulations, the local standards, laws and
regulations will prevail.

List of accounting standards
issued by the IASC is as below:
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 7 Cash Flow Statements
IAS 8 Net Profit or Loss for the Period,
Fundamental Errors and Changes in
Accounting Policies
IAS 10 Events after the Balance Sheet Date

IAS 11 Construction Contracts
IAS 12 Income Tax
IAS 14 Segment Reporting
IAS 15 Information Reflecting the Effects of
Change Prices
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 18 Revenue
IAS 19 Employee Benefits

IAS 20 Accounting for Government
Grants and Disclosure of Government
Assistance
IAS 21 The Effects of Changes in Foreign
Exchange Rates
IAS 22 Business Combinations
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosure
IAS 26 Accounting and Reporting by Retirement
Benefit Plans
IAS 27 Consolidated Financial Statements
IAS 28 Investments in Associates

IAS 29 Financial Reporting in Hyperinflationary
Economics
IAS 30 Disclosures in the Financial Statements of
Banks and Similar Financial Institutions
IAS 31 Financial Reporting of Interests in Joint
Ventures
IAS 32 Financial Instruments: Disclosures and
Presentations
IAS 33 Earnings per Share
IAS 34 Interim Financial Reporting
IAS 35 Discontinuing Operations

IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and
Measurement
IAS 40 Investment Property
IAS 41 Agriculture

Indian Accounting Standards:
The Institute of Chartered Accountants of
India constituted an Accounting Standards
Board (ASB) on 21st April, 1977.
Function: The ASB is to frame accounting
standards which are formally issued under
the authority of the Council of the Institute
of Chartered Accountants.
ASB takes in to consideration all aspects i.e.
applicable laws, customs, usages and
business environment.

Before formulating the standards normally
ASB holds discussion with the
representatives of the Govt., PSU, industry
and other organizations.

An exposure draft of the proposed standard
are prepared and issued for comments by
the members of the Institute and the public
at large.
After considering the comments received,
the draft of the proposed standard is
finalized by ASB and submitted to the
council which modifies it (if necessary) and
issues it under its authority.

Importance of Accounting
Standards:
Maintain the uniformity in their
presentation.
Recognition of Companies Amendment Act
2000. All the significant accounting policies
adopted in preparation of the BS and P & L
A/c should be disclosed in company’s BS
and if there is any difference from the
standard, that also should be disclosed along
with the reasons thereof and its financial
effect.

Incase the auditor fails to justify the
deviation the ICAI can take disciplinary
action against him on the ground of
professional misconduct.

Accounting Standards Issued by
ASB of the Institute of Chartered
Accountants of India.
There are 29 standards as below:
AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events occurring after
the Balance Sheet Date
AS 5 Net Profit or Loss for the Period, Prior
Period and Extraordinary Items and
Changes in Accounting Policies

AS 6 Depreciation Accounting

AS 7 Construction Contracts (Revised
Accounting Standard)
AS 8 Accounting for Research and Development

AS 9 Revenue Reorganization

AS 10 Accounting for Fixed Assets

AS 11 (Revised 2003), the effects of Changes in
Foreign Exchange Rate
AS 12 Accounting for Government Grants

AS 13 Accounting for Investments

AS 14 Accounting for Amalgamation

AS 15 Accounting for Retirement Benefits in the
Financial Statement of Employees
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosure
AS 19 Leases
AS 20 Earnings Per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for taxes on Income
AS 23 Accounting for Investments in Associates
in Consolidated Financial Statements
AS 24 Discounting Operations

AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interest in Joint
Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and
Contingent Assets

In addition to these, the ICAI has issued
statements, guidance notes, opinions,
Accounting Standard Interpretations,
General Clarifications and Background
material for seminars which seek to bring
about uniformity in corporate accounting
practices.

AS 1, Disclosure of Accounting
Policies:
It deals with the disclosure of significant
accounting policies followed in preparing
and presenting financial statements.
Assumptions:
Going Concern
Consistency
Accrual

Nature of Accounting Policies:
The differing circumstances in which
enterprises operate in a situation of diverse
and complex economic activity make
alternative accounting principles and
methods of applying those principles
acceptable.

Areas in which Differing Accounting
Policies are Encountered:
Methods of depreciation,
depletion/reduction and amortization /paying
back
Treatment of expenditure during
construction
Conversion or translation of foreign
currency items

Valuation of inventories
Treatment of Goodwill
Valuation of Investments
Treatment of Retirement Benefits
Valuation of fixed assets
Treatment of contingent liabilities, etc.

The above list is not the exhaustive.

Considerations in the Selection of
Accounting Policies:
Financial statements should be prepared and
presented on the basis of such accounting
policies which should represent a true and
fair view of the state of affairs of the
enterprise as at the balance sheet date and of
the profit or loss for the period on that date.

For this purpose, the major considerations
governing the selection and application of
accounting polices are:

Prudence/Caution: In view of the
uncertainty attached to future events, profits
are not anticipated but recognized only
when realized though not necessarily in
cash.
Substance over Form: The accounting
treatment and presentation in financial
statements of transactions and events should
be governed by their substance/content and
not merely by the legal form.

Materiality: Financial statements should
disclose all material items i.e. items the
knowledge of which might influence the
decisions of the user of the financial
statements.

Disclosure of Accounting Policies:

All significant accounting policies adopted
in the preparation and presentation of
financial statements should be disclosed
and these should form part of the financial
statements.
Any change in an accounting policy which
has a material effect should be disclosed.

If the fundamental accounting assumptions
viz. going concern, consistency and accrual
are followed in financial statements,
specific disclosure is not required. If a
fundamental accounting assumption is not
followed, the fact should be disclosed.

AS 4
Contingencies and events occurring
after the Balance Sheet:
It deals with the treatment in financial
statements of a contingencies and events
occurring after the Balance Sheet Date.

It does not cover certain contingencies such
as: Liabilities of Life assurance and general
insurance enterprises arising from policies
issued;

Obligation under retirement benefit plans
and commitments arising from long-term
lease contracts in view of special
considerations applicable to them.

The term ‘Contingencies is restricted to
conditions or situations at the balance sheet
date, the financial effect of which is to be
determined by future events, which may or
may not occur.

Accounting Treatment of Contingent
Losses:

The estimated Amt. of a contingent loss to
be provided for in the financial statements
may be based on information referred to in
paragraph 4.4.
For conflicting and insufficient evidence for
estimation, then disclosure is made of the
existence and nature of the contingencies.

Accounting Treatment of
Contingent Gains:

Contingent gains are not recognized in
financial statements since their recognition
may result in the recognition of revenue,
which may never be realized. If the
realization of a gain is virtually certain,
then such gain is not a contingency and
accounting for the gain is appropriate.

Disclosure:

If a reliable estimate of the financial effect
can not be made, this fact is disclosed.

Events Occurring after the Balance
Sheet Date- between BS date and the
date on which it is approved by the
Board of Directors / approving
authority.

Events could be of two types:
Which provide further evidence of
conditions that existed at the Balance
Sheet date,(loss on a trade receivable A/c ,
which is confirmed by the insolvency of a
customers), and
Which are indicative of conditions that
arose subsequent to the BS (proposed &
declared dividend)

AS 5
Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting
Policies:

It came in to effect from 1.4.1996 issued in
November 1982.

Net Profit or Loss for the Period:
All items of income and expenses
(including extraordinary items and the
effects of changes in accounting estimates)
which are recognized in a period should be
included unless an Accounting Standards
requires or permits otherwise.

NP or Loss comprises the following
components, each of the which should be
disclosed on the face of the statement of
profit and loss;
Profit or loss from ordinary activities
and
Extraordinary items.

Ordinary Activities:
These are the activities which are
undertaken by an enterprise as part of its
business and such related activities in
which the enterprise engages in
furtherance of, incidental to, or arising
from, these activities.

Extraordinary items are income or
expenses that arise from events or
transactions that are clearly distinct from
the ordinary activities of the enterprise
and, therefore, are not expected to recur
frequently or regularly. E.g. natural
disaster

Prior Period Items are income or
expenses which arise in the current
period as a result of errors or omission in
the preparation of the financial
statements of one or more prior periods.

Accounting Policies are the specific
accounting principles and the methods of
applying those principles adopted by an
enterprise in the preparation and
presentation of financial statements.

Profit or Loss from Ordinary
Activities:

If the activities are of such size, nature or
incidence that their disclosure is relevant to
explain the performance of the enterprise for
the period, the nature and amount of such
items should be disclosed separately.

Circumstances which may give rise to the
separate disclosure of items of income and
expense in accordance with paragraph 12
includes:
The write-down of inventories to net
realizable value as well as the reversal of
such write-downs;
A restructuring of the activities of an
enterprise and the reversal of any provisions
for the costs of restructuring;

Disposal of items of fixed assets;
Legislative changes having retrospective
application;
Litigation/ judicial proceeding settlements;
Other reversal of provisions.

Changes in Accounting Estimates:
Estimates may be needed for bad debts,
inventory obsolescence etc.
An estimate may have to be revised if
changes occur on which the estimate was
based.
If it is difficult to distinguish between a
change in accounting policy and a change in
an accounting estimate, the change is treated
as a change in an accounting estimate, with
proper disclosure.

Changes in Accounting Policies:
A change in an accounting policy should be
made only if the adoption of a different
accounting policy is required by statute or
for compliance with an accounting standard
or if it is considered that the change would
result in a more appropriate presentation of
the financial statements of the enterprise.
Any changes in an accounting policy which
has a material effect should be disclosed and
the impact of, the adjustments resulting from,
such change should be in the FSs of the
period in which such change is made.

AS 7
Accounting for Construction Contracts
Issued in December 1983 and made
compulsory after 1-4-2003.
Objective is to prescribe the accounting
treatment of revenue and costs associated
with construction contracts.
Scope: This statement should be applied
in accounting for construction contracts
in the financial statements of contractors.

A fixed price contract is a construction
contract in which the contractor agrees to a
fixed contract price, or a fixed rate per unit
of output, which in some cases is subject
to cost escalation clauses.
A cost plus contract is a construction
contract in which the contractor is
reimbursed for allowable or otherwise
defined costs, plus % of these costs or a
fixed fee.

Combining and segmenting
Construction Contracts:
When a contract covers a number of
assets, the construction of each asset
should be treated as a separate construction
contract when:
• Separate proposals have been submitted
for each asset

• Each asset has been subject to separate
negotiation and the contractor and customer
have been able to accept or reject that part
of the contract relating to each asset; and
• The costs and revenues of each asset can
be identified.

A group of contracts, whether with a
single customer or with several customers,
should be treated as a single construction
contract when:
the group of contract is negotiated as a
single package;
the contracts are so closely interrelated
that they are, in effect, part of a single
project with an overall profit margin; and
the contracts are performed
concurrently or in a continuous sequence.

Contract Revenue should comprise:
the initial amount of revenue agreed in
the contract; and
variations in contract work, claims and
incentives payments:
to the extent that is probable that they
will result in revenue; and
they are capable of being reliably
measured.

Contract Costs:
Contract cost should comprise:
1. Costs that relate directly to the specific
contract
2. Cost that are attributable to contract
activity in general and can be allocated to
the contract; and
3. Such other costs as are specifically
chargeable to the customer under the
terms of contract

Direct costs relate to a specific contract
are:
• Site labour cost, including site supervision
• Cost of material used in contract
• Depreciation of plant and equipment used on the
contract
• Cost of hiring plant & equipment
• Claims from third parties, etc.

Costs that may be attributable to contract
activity in general and can be allocated to
specific contracts are:
• Insurance
• Construction overheads, etc.

Recognition of Contract Revenue
and Expenses:

When the outcome of a construction
contract can be estimated reliably, contract
and costs associated with the construction
contract should be recognized as revenue
and expenses respectively by reference to
the stage of completion of the contract
activity at the reporting date. An expected
loss on the construction contract should be
recognized as an expenses immediately .

AS 11
The effects of Changes in Foreign Exchange
Rates:
Made mandatory after 1-4-2004 revised
2003 (1994).
Objective:
Transaction in foreign currencies or it may
have foreign operation.

Scope:
This statement should be applied:
• In accounting for transactions in foreign currencies;
and
• In translating the financial statements of foreign
operations.
•It does not specify in which an enterprise presents its
financial statements. Normally the enterprise uses the
currency of the country in which it is domiciled.
•This statement does not deal with exchange
differences arising from foreign currency borrowings
to the extent that they are regarded as an adjustment
to interest costs.

Average rate is the mean of the
exchange rates in force during a period.

Closing rate is the exchange rate at the
balance sheet date.
Exchange difference is the difference
resulting from reporting the same number
of units of a foreign currency in the
reporting currency at different exchange
rates.

Fair value is the amount for which an
asset could be exchanged, or a liability
settled, between knowledgeable, willing
parties in an arm’s length transaction.
Foreign currency is a currency other than
the reporting currency of an enterprise.
Foreign operation is a subsidiary,
associate, joint venture or branch of the
reporting enterprise, the activities of which
are based or conducted in a country other
than the country of the reporting enterprise.

Forward exchange contract means an
agreement to exchange different currencies
at a forward rate.
Forward rate is the specified exchange
rate for exchange of two currencies at a
specified future date.

Integral foreign operation is a operation,
the activities of which are an integral
/inherent part of those of the reporting
enterprise.

Monetary items are money held and assets
and liabilities to be received or paid in
fixed or determinable amounts of money,
e.g. cash, receivables, etc.
Net investment in a non-integral foreign
operation is the reporting enterprise’s
share in the net assets of that operation.
Non-integral foreign operation is a
foreign operation that is not an integral
foreign operation. Cost of labour, material
and other components paid or settled in the
local currency rather than in operating
currency.

Non-monetary items are assets and
liabilities other than monetary items e.g.
FA, inventories and investments, etc.

Reporting currency is the currency used
in presenting the financial statements.

Foreign currency transactions is a
transaction which is denominated in or
requires settlement in a foreign currency.

Reporting at Subsequent Balance Sheet
Dates:
At each balance sheet date:
• foreign currency monetary items
should be reported using the closing rate.
• non-monetary items which are carried in
terms of historical cost denominated in a
foreign currency should be reported using
the exchange rate at the date of the
transaction; and

• non-monetary items which are carried at
fair value or other similar valuation
denominated in a foreign currency should
be reported using the exchange rates that
existed when the values were determined.

Accounting Treatment of Government
Grants AS 12:
Capital Approach Vs. Income Approach:

Capital Approach: Grant is treated as part
of shareholders’ funds, as many Govt. grants
are in nature of promoters’ contribution i.e.
they are given with reference to the total
investment and they are not earned but present
an incentive provided by Govt. without related
costs.

Income Approach: Grant is taken to
income over one or more periods as
enterprise earns them through compliance
with their conditions and meeting the
envisaged obligations and income tax and
other taxes are charged against income.

It is fundamental to the income approach
that government grants be recognized in
the P & L A/c (Cr.-Other income) on a
systematic and rational basis over the
periods necessary to match them with the
related costs.

Recognition of Government Grants:

Govt. grants available to the enterprise are
considered for inclusion in accounts:
Where there is a reasonable assurance that
the enterprise will comply/follow with the
conditions attached to them; and
Where such benefits have been earned by
the enterprise and it is reasonably certain
that the ultimate collection will made.

Non-monetary Government Grants:
If the grant is in the form of non-monetary
assets e.g. land at confessional rates, it is
usual to account for such assets at their
acquisition cost, and if it is given free of
cost, is recorded at a nominal value.
Grants related to depreciable assets are
treated as deferred income and shown in
B/S after reserves & surplus but before
secured loans.

If the grants are of the nature of promoters’
contribution (e.g. central investment
subsidy scheme) and no payment is
ordinarily expected in respect thereof, the
grants are treated as capital reserve which
can be neither distributed as dividend nor
considered as deferred income.

AS 14
Accounting for Amalgamation:
Issued in 1983 and came into effect
(mandatory) on or after 1-4-1995.
This statement deals with accounting for
amalgamations and the treatment of any
resultant goodwill or reserves.

Transferor company means the company
which is amalgamated into another
company.
Transferee company means the company
into which a transferor company is
amalgamated.

Reserves means the portion of earnings,
receipts or other surplus of an enterprise
appropriated by the management for a
general or a specific purpose other than a
provision for depreciation or diminution in
the value of assets or for a known liability.

Methods of Accounting for
Amalgamations:
1.The pooling of interest method:
Under this method the assets,liabilities and
reserves of the transferor company are
recorded by the transferee company at
their existing carrying amounts and make
a uniform set of of accounting policies
following the amalgamation.

2.The purchase method:
The transferee company accounts for the
amalgamation either by incorporating
the assets and liabilities at their existing
carrying amounts or by allocating the
consideration to individual identifiable
assets and liabilities of the transferor
company on the basis their fair values at
the date of amalgamation.

AS 15
AS on Retirement Benefits
Came into effect on or after 1.4.1995
This statement deals with retirement
benefits in the financial statements of
employers.
Retirement benefits consists of:
Provident Fund, Superannuation/Pension,
Gratuity, Leave encashment benefit on
retirement, Post-retirement health and
welfare schemes and other retirement
benefits.

Defined Contribution Schemes are
retirement benefit schemes under which
amounts to be paid as retirement benefits
are determined by contribution to a fund
together with earnings thereon.
Defined Benefit Schemes are retirement
benefit schemes under which amounts to
be paid as retirement benefits are
determinable usually by reference to
employee’s earnings and/or years of
service.

Actuary (someone who uses statistics to
calculate insurance premiums)
Actuarial valuation is the process used by
an actuary to estimate the present value of
benefits to be paid under a retirement
benefit schemes and the present values of
the scheme assets and, sometimes, of future
contribution.
Pay as you go is a method of recognizing
the cost of retirement benefits only at the
time payments are made to employees
on,or after, their retirement.

Accounting:
In respect of retirement benefits in the
form of PF and other defined contribution
schemes, the contribution payable by the
employer for a year is charged to the
statement of P& L A/c for the year.
If the benefits is funded through creation of
a trust, the cost incurred for the year is
determined actuarially. Many employers
undertake such valuations every year while
others undertake them once in three years.
Contribution is to be made annually during
the inter valuation period.

If the benefits is funded through a scheme
administered by an insurer, it is usually
considered necessary to obtain an actuarial
certificate or a confirmation from the
insurer that the contribution payable to the
insurer is the appropriate accrual of the
liability of the year. Less payment is
treated as liability and excess payment is
treated as pre-payment

US GAAP- US Generally Accepted
Accounting Principles:
It is established by the Financial Accounting
Standard Board (FASB) and the American
Institute of Certified Public Accountants
(AICPA)
Financial Statements include three reports:
• Income Statement
• Balance Sheet and
• Funds Flow Statement (not needed in India).

US GAAP provides the the principles for
financial accounting, management
accounting, and the Internal Revenue
Service for tax accounting purposes.
Difference between Indian Accounting
Standards and US GAAP.
Indian AS US GAAP
The accent/emphasis of the It is on disclosure and
IAS is on reporting. It is transparency. On the
not necessary to disclose contrary, it insists on
the portion of long term disclosing the portion of long-
debt which has an un term debt separately which
expired term to maturity of has an un expired term to
less than one year. maturity of less than one year.

Indian AS US GAAP
The accent/emphasis of the On the contrary, a lease
IAS is on form, e.g. in lease deal confers the
accounting, the depreciation depreciation benefit on
benefit is available to the the lease since the
lessor because in form a benefits of the productive
lease deal is not a sale. use of the asset rests with
the lessee.

Indian AS US GAAP
Companies provide On the contrary, it requires
depreciation as per SLM the company to make a
in the financial statement deferred tax liability
and WDV in the tax provision for the potential
statements, which enable loss as although it is a
them to get more pt. and current gain, in substance it
less tax. In the next year is offset by a future loss
this gain will translate which needs to be provided
into a potential loss since for today.
the available depreciation
will reduce. It is not
needed to disclose this
potential loss as it is a
current gain.

Other Major Differences Between US
GAAP and Indian GAAP.
No specific format is required for the
preparation of financial statement, as long as
they comply with the disclosure
requirements of US accounting standards.
Consolidation of group company accounts
is compulsory
Disclosure of EPS data is compulsory
Research & Development costs are
expenses as incurred

Investments in own shares is permitted. It
is shown as a reduction from shareholders
equity.
Revaluation of assets is not permitted.
Depreciation is over the useful economic
lives of assets. Depreciation and profit and
loss is based on historical costs.
Goodwill is treated as any other intangible
asset, and is capitalized and amortized. The
carry forward period is 40 years.
Financial leases are to be capitalized.

Cash flow statement is compulsory
Current and long term components of
assets and liabilities should be disclosed
separately. Current component normally
refers to one year of the period of the
operating cycle.
The concept of pre-operative expenses
does not exist.

IAS Standards and Accounting Policies

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